Court Opinion

ID: 2719243
Source: CourtListenerOpinion
Date Created: 2014-08-20 14:04:30.5824+00
Date Added: 2024-06-11T10:02:29.206471
License: Public Domain

THE STATE OF SOUTH CAROLINA 

                        In The Supreme Court 

           Clifford C. Hansen, Respondent/Appellant,

           v.

           Fields Company, LLC; Beechwood Advisory Group,
           Inc.; Beechwood Development Group of South Carolina,
           LLC; and Beechwood Development Group, Inc.,
           Defendants,

           Of whom Beechwood Development Group of South
           Carolina, LLC, is the Appellant/Respondent.

           Appellate Case No. 2011-190886

                      Appeal from Charleston County
            The Honorable Kristi L. Harrington, Circuit Court Judge

                             Opinion No. 27436 

                Heard February 4, 2014 – Filed August 20, 2014 

                                REVERSED

           Tanya A. Gee, Manton M. Grier, Jr., and Val H. Stieglitz,
           III, all of Nexsen Pruet, LLC, of Columbia, for
           Appellant/Respondent.

           William E. Hopkins, Jr., of Hopkins Law Firms, LLC, of
           Pawleys Island, for Respondent/Appellant.

        JUSTICE HEARN: At its simplest, this appeal concerns whether a limited
liability company (LLC) may be held liable for the actions of a promoter and
whether any evidence to support such liability was presented here. We reverse and
hold the circuit court erred in denying the directed verdict on the issue of liability
because there was no evidence on which a jury could hold the defendant
Beechwood Development Group of South Carolina, LLC (Appellant) liable.

                 FACTUAL/PROCEDURAL BACKGROUND

       The events giving rise to this lawsuit involve numerous individuals and
corporate entities and are particularly fact-intensive. Prior to recounting those
facts in detail, briefly, the facts are these: Clifford Hansen, the plaintiff, was
introduced to Robert Fields and through Fields engaged the services of Beechwood
Advisory Group, Inc. (Advisory Group) to assist him in procuring capital in order
to purchase a water bottling company in South Carolina. Fields and Hansen
worked together toward this goal until Fields disavowed any obligation to Hansen
and effectively cut him out of the deal. In doing so, Fields found investors, formed
Appellant, and purchased the water bottling company. Hansen sued Appellant for
the actions of Fields and his various corporate entities, and following the denial of
Appellant's motion for a directed verdict, a jury returned a verdict in favor of
Hansen.

       In much greater detail, the facts are as follows. Hansen, an entrepreneur,
sought to purchase Hickory Springs Water Company, Inc. (Water Company) in
Elloree, South Carolina. He met with the company's owner, George Milner, and
thereafter, Milner produced a letter of understanding setting forth initial terms for
the purchase. Hansen created Carolina Springs Bottling, LLC as the entity that
would purchase Water Company, and because he did not have the necessary capital
to close the deal, he approached Fields about locating investors and financing for
him. Fields was a Charleston businessman who was involved in and acted on
behalf of a number of corporate entities including Advisory Group which was
owned by Fields, Dennis Byrd, Andrew Easter, and Richard Gregg.

      Advisory Group agreed to represent Hansen in procuring capital and
produced a letter of understanding to that effect dated December 16, 2003, which
Fields signed on behalf of the corporation. The agreement provided that Advisory
Group would assist Hansen in securing capital and financing the purchase.
However, on January 12, 2004, Advisory Group terminated its representation of
Hansen and informed him that it reserved the right to purchase Water Company.1
During that same week, the four partners of Advisory Group—Fields, Byrd, Gregg,
and Easter—created a new corporation, Beechwood Development Group, Inc.
(Development Group), whose purpose was to purchase the water company.

       Despite the letter and his knowledge that Fields, Byrd, Gregg, and Easter
had set up a new corporate entity for the purpose of purchasing Water Company,
Hansen approached Fields about the possibility of his wealthy friend from Texas,
David Hunt, investing in the deal. Hansen and Fields then executed a second
agreement whereby Advisory Group again committed to assist Hansen in finding
capital.2 Hansen would compensate Advisory Group in the amount of $100,000
for those services. It also provided that in the deal, Hunt would own 75% and
Hansen would own 25% of the resulting company, Carolina Springs Bottling,
LLC. Carolina Springs Bottling, LLC would own 100% of Carolina Springs
Bottling, Inc. which would be the entity that owned the springs and bottling
facility.3

      Several weeks after flying to Texas to meet with Hunt, Fields sent an e-mail
to Patrick Cobb, a business acquaintance, soliciting interest in the deal. Fields
signed the e-mail as "Partner, Beechwood Advisory Group, Inc." and attached an
"Executive Summary" for Carolina Springs Bottling, Inc. The Executive Summary
mentioned Hansen in three respects. The cover page provided contact information
for "Clifford Hansen" and "Robert Fields, Beechwood Advisory Group." It also
described the proposed management team of Carolina Springs Bottling, Inc. as
including Hansen as chief executive officer and listed Hansen as a member of the
board of directors.

      Three days later, Fields e-mailed Cobb with a new purpose, signing as
"Partner, Beechwood Advisory Group." He proposed a new deal in which Hunt
would own 60% of the equity, "Beechwood" would own 15%, another investor
would own 15%, and 10% would "be for the owner/operator (Hansen) on an earn
in basis." About this time, Fields and Hansen's relationship became strained.

1
  Advisory Group had previously informed Hansen that he failed to pay as required
by the agreement and if he did not meet the requirements of the agreement within a
week, it would cease representing him.
2
  More specifically, Advisory Group agreed to secure capital from Hunt, advise
Hansen on negotiations with Milner, and assist in obtaining bank financing.
3
  Although the agreement consistently referred to Advisory Group, Fields indicated
by his signature that he executed it on behalf of Development Group.
Viewing the facts in the light most favorable to Hansen as we must, Hansen
realized Fields was working to acquire the water company to his exclusion.
Hansen thus began working on his own to secure financing.4

        On May 26, Fields sent Hansen a letter on behalf of Advisory Group stating
that it had "terminated any representation on [his] behalf." By this time, Hansen's
letter of understanding with the water company's owner had long since expired.
Hansen sent Milner a proposed new letter of understanding, but Milner did not sign
it.

     On July 7, Hickory Springs Water, LLC was incorporated. The entity's
members were Appellant and Greenbax Enterprises, Inc., with Appellant owning a
48% interest and Greenbax owning a 52% interest.

      On July 12, Appellant was formed. The members of the LLC were
Development Group which owned a 43.5% interest, ACC Ventures, LLC which
owned a 41.5% interest, and TDTF Partnership which owned a 15% interest. ACC
Ventures was an LLC operated by Cobb and owned by him and his three sons.
ACC Ventures committed to the deal in July. TDTF Partnership was a partnership
between George Finnegan and James Felder. Finnegan met Fields in March of
2004 and became involved in the deal in May.

      Hickory Springs Water, LLC ultimately purchased Water Company. At the
closing, Fields was present on behalf of Appellant.

       Hansen brought suit against Fields Company, LLC; Advisory Group;
Development Group; and Appellant. He asserted the defendants were all jointly
and severally liable for breach of fiduciary duty, breach of contract, breach of
contract accompanied by a fraudulent act, misrepresentation, conversion, and
interference with prospective contractual relations. Prior to trial, he settled his
claims against Advisory Group and potential claims against Gregg and Byrd.
Fields Company, LLC and Development Group did not file an answer and
ultimately defaulted. Appellant proceeded to trial.

4
  Hansen applied for a bank loan in his effort to secure financing. The bank
requested financial information for Water Company in order to decide whether to
approve the loan. Hansen had previously either prepared or obtained financial
documents from Milner and then provided those documents to Fields. Due to a
computer crash, Hansen lost the documents and contacted Fields seeking copies.
Fields responded to his request by rejecting the idea of bank financing and refusing
to provide the documents.
       Following the close of Hansen's case, Appellant moved for a directed verdict
on all causes of action, arguing the allegedly wrongful acts were all committed by
Fields, Advisory Group, and Development Group, and it should not be held liable
for those other parties' acts. The circuit court denied the motion, concluding there
was evidence from which a jury could find that Appellant ratified the conduct of
the other parties.

      The circuit court permitted a bifurcated jury deliberation whereby the jury
would first determine liability on all claims. If the jury found Appellant liable on
any of the claims, Hansen would then have to elect a cause of action. The jury
would then determine Hansen's damages.

      The jury returned a liability verdict for Hansen on all causes of action.
Thereafter, Hansen elected to proceed on his interference with prospective
contractual relations claim, and the jury returned a damages verdict in the amount
of $1,189,408. The trial court granted Appellant's motion for a set off and reduced
the verdict by $130,000, the amount of Hansen's settlement with the other
defendants.

      The parties filed cross-appeals, and this Court certified the case pursuant to
Rule 204(b), SCACR.

                                LAW/ANALYSIS
        Appellant appeals the denial of its motion for a directed verdict on all of
Hansen's claims, asserting there was no evidence from which a jury could conclude
that it is liable to Hansen. The parties do not dispute that Appellant did not breach
any contract with Hansen, nor did it act tortiously towards him. Rather, Hansen's
theory of the case depends on Appellant being liable for its promoters'—
specifically Fields' and his related entities'—acts.5

        The first step in resolving this case is determining if and when a limited
liability company can be held liable for its promoter's pre-incorporation contracts
or torts, issues of first impression in South Carolina. Turning first to a corporate
entity's liability for preformation contracts, we adopt the prevailing rule that
"[b]ecause a corporation cannot have agents, contract for itself, or be contracted

5
  A promoter of a corporate entity is a person who acts to organize the entity by
preparing it to transact business and establishing it. See Bivens v. Watkins, 313
S.C. 228, 233 n.5, 437 S.E.2d 132, 135 n.5 (Ct. App. 1993) ("[P]ersons who plan
or organize a corporation are 'promoters.'").
with prior to its incorporation, it is not liable on any contracts that a promoter
makes for its benefit prior to incorporation unless it assumes the obligation by its
own act after incorporation . . . ." 18 Am. Jur. 2d Corporations § 123 (2014); see
also Duray Dev., LLC v. Perrin, 792 N.W.2d 749, 755 (Mich. Ct. App. 2010)
(applying the rule to a limited liability company); JCL Props., LLC v. Equity Land
Developers, LLC, 958 N.Y.S.2d 433, 434 (N.Y. App. Div. 2013) (applying the rule
to a limited liability company).

       While initially not liable for a promoter's contracts, a corporation may
become liable for a promoter's preformation contract either through expressly
ratifying the contract or through implicitly ratifying it by accepting its benefits
with full knowledge of its terms. See, e.g., Lorillard Tobacco Co. v. Am. Legacy
Found., 903 A.2d 728, 745 (Del. 2006) ("'[I]f the subsequently formed corporation
expressly adopts the preincorporation agreement or implicitly adopts it by
accepting its benefits with knowledge of its terms, the corporation is bound by it.'"
(quoting Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 350 (Del.
Ch. 2003)); Yost v. Early, 589 A.2d 1291, 1300 (Md. Ct. Spec. App. 1991) ("If the
corporation ratifies the contract or accepts its benefits with full knowledge of the
circumstances of their acquisition, however, the corporation is bound by the
contract's obligations.") (internal quotation omitted); Fortune Furniture Mfg. Co. v.
Mid-South Plastic Fabric Co., 310 So. 2d 725, 727 (Miss. 1975) ("The general rule
is that a contract made by promoters with a view towards incorporation will be
binding upon the corporation if it accepts benefits of the contract with the full
knowledge of the terms of the contract."); 18 Am. Jur. 2d Corporations § 123 ("A
corporation may after its organization become liable on preliminary contracts made
by its promoters by expressly adopting such contracts or by receiving the benefits
from them . . . .").

       Here, the directed verdict should have been granted as to Hansen's contract
claims because he failed to present any evidence from which a jury could find that
Appellant ratified any contract with Hansen.6 There was no evidence that
Appellant expressly ratified any preformation contract. There also was no
evidence to show that Appellant benefited from or accepted any benefits of Fields'
or his related entities' contracts with Hansen. The contracts Hansen entered into

6
  Hansen failed to point to any particular contract and articulate how it was
expressly or impliedly ratified. Rather, Hansen relies on broad and conclusory
contentions that Appellant "sought to and did, in fact, ratify all of the actions,
agreements, representations, contracts and warranties made by Fields in
furtherance of their purchase of [Water Company] . . . ."
with Advisory Group and Development Group dealt with those entities finding
capital for him in order to enable him to purchase Water Company. Appellant
wanted to purchase Water Company and was a competitor in that respect.
Therefore, Appellant could not and did not benefit from any efforts to find capital
for Hansen. Thus, because there was no evidence from which a jury could find
that Appellant expressly or impliedly ratified any contract with Hansen, the
directed verdict should have been granted as to Hansen's contractual claims.

       Turning to Hansen's tort claims, for the preformation torts of a corporate
entity's promoter, the rule among those jurisdictions that have considered the issue
is that a "corporation is not liable for torts that its promoters committed before it
came into existence." 1A William M. Fletcher et al., Fletcher Cyclopedia of the
Law of Corporations § 218 (perm. ed., rev. vol. 2010); see also Arch Aluminum &
Glass Co. v. Haney, 964 So. 2d 228, 234 (Fla. Dist. Ct. App. 2007) (rejecting the
plaintiff's tort claim against a corporation for the acts of its promoters on the basis
of the rule that a corporation is not liable for the tortious acts of its promoters);
Nilavar v. Osborn, 711 N.E.2d 726, 740 (Ohio Ct. App. 1998) ("[A] corporation
cannot be held liable for the acts of a promoter that were performed before the
corporation's existence."); Fisk v. Leith, 3 P.2d 535, 535 (Or. 1931) (holding a
corporation cannot be held liable for the acts of its promoter undertaken prior to
the corporation's existence); Edmunds v. Sanders, 2 S.W.3d 697, 704 (Tex. App.
1999) ("Normally, a corporation which has no legal existence at the time of an
incident cannot be liable for that incident."). Hansen has not cited, nor have we
found, any authority applying a different rule. Additionally, three policy concerns
lead us to conclude that it is the proper rule. First, there is no agency relationship
between a promoter and a non-existent corporate entity. Second, the individual
tortfeasor—the promoter—is still liable for any tort he committed and thus, the
injured party is not denied recourse for the wrong suffered. To the extent the
promoter owns a portion of the corporate entity, the injured party could use that
interest to satisfy any judgment against the promoter. Additionally, other members
of the corporate entity could potentially be held liable under a conspiracy theory if
they knew of and aided in the tort. See Peoples Fed. Sav. & Loan Ass'n of S.C. v.
Res. Planning Corp., 358 S.C. 460, 470, 596 S.E.2d 51, 56–57 (2004) ("A civil
conspiracy is a combination of two or more parties joined for the purpose of
injuring the plaintiff and thereby causing special damage."). Third, a contrary rule
would permit innocent investors to be financially harmed due to tortious conduct
they neither aided nor were aware of and therefore, may stifle investment by
causing potential investors to fear that a corporation will be held liable for tortious
conduct of which it had no knowledge. Accordingly, we adopt the rule that a
corporation is not liable in tort for the preformation acts of its promoter.7

      Because a corporation is not liable for the preformation acts of its promoter,
Appellant cannot be liable in tort for Fields' or his related entities' preformation
acts. Thus, the circuit court should have granted the motion for a directed verdict.

                                   CONCLUSION
       Because Hansen failed to present any evidence Appellant ratified Fields' or
his related entities' contracts, Appellant was entitled to a directed verdict on the
contract claims. Additionally, consistent with the prevailing rule elsewhere, we
hold Appellant was not liable for any torts committed by its promoters.
Accordingly, we hold the circuit court erred in denying Appellant's motion for a
directed verdict and reverse.8

TOAL, C.J., PLEICONES, BEATTY and KITTREDGE, JJ., concur.

7
  Although inapplicable here because there is no evidence Appellant ratified Fields'
conduct, we recognize there are exceptions to this rule. See Nanodetex Corp. v.
Defiant Techs., 349 F. App'x 312, 322 (10th Cir. 2009) ("[C]orporations are
usually prevented from retaining the benefits of wrongful conduct while escaping
liability for it."); 18 C.J.S. Corporations § 104 ("A corporation is not liable for the
fraud, negligence, or other torts of its promoters or corporators prior to its creation,
unless it has in some way rendered itself liable by its own act after acquiring
corporate existence.").
8
  Because our resolution of this issue is dispositive, we need not reach Hansen's
arguments or the other issues raised by Appellant. See Futch v. McAllister Towing
of Georgetown, Inc., 335 S.C. 598, 613, 518 S.E.2d 591, 598 (1999) (holding an
appellate court need not address remaining issues when the disposition of a prior
issue is dispositive).