New Decision Discussing Alter Ego-Law in Tennessee

A new decision of the Tennessee Court of Appeals, Southern Steel & Concrete, Inc. v. Southern Steel & Construction, Inc.,  No. W2020-00475-COA-R3-CV (Tenn. Ct. App. Apr. 14, 2022), summarizes Tennessee’s law on alter ego issues.

Here is some key language from the opinion (all of the language in bold is quoted from the opinion):

           In Oceanics Schools, Inc. v. Barbour, 112 S.W.3d 135, 145 (Tenn. Ct. App. 2003),this Court provided a “blueprint of factors” to be considered when addressing an alter ego issue. Boles v. Nat’l Dev. Co. Inc., 175 S.W.3d 226, 245 (Tenn. Ct. App. 2005). We explained that blueprint as follows:

As we learn from Oceanics, one starts with the premise that “[a] corporation is presumptively treated as a distinct entity, separate from its shareholders, officers, and directors.” Oceanics, 112 S.W.3d at 140 (quoting Schlater v. Haynie, 833 S.W.2d [919,] 925 [(Tenn. Ct. App. 1991)]). However, a corporation’s separate identity may be disregarded or pierced “upon a showing that it is a sham or a dummy or where necessary to accomplish justice.” Oceanics, 112 S.W.3d at 140 (citing Schlater, 833 S.W.2d at 925). A corporation’s identity should be disregarded “with great caution and not precipitately.” Schlater, 833 S.W.2d at 925. Whether to disregard the corporate fiction depends on the special circumstances of each case, Oceanics, 112 S.W.3d at 140, and “the matter is particularly within the province of the trial court.” Electric Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 526 (Tenn.1985). No one factor is conclusive in determining whether or not to disregard a corporate entity; rather, courts should rely upon a combination of factors in deciding such an issue. Schlater, 833 S.W.2d at 925 (citing 18 Am. Jur. 2d
Corporations § 48, p. 847, n. 41-42 (1985)).

Id. Moreover, we have explained that “[b]y suitable evidence, it may be established that separate corporations should be treated as a single entity.” Smith v. Hi-Speed, Inc., 536S.W.3d 458, 482 n.12 (Tenn. Ct. App. 2016) (quoting Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc., 908 S.W.2d 211, 213 (Tenn. Ct. App. 1995)).

              Tennessee courts have consistently relied upon the factors promogulated in FDIC v. Allen, 584 F. Supp. 386, 397 (E.D. Tenn. 1984) to determine whether a corporation’s separate legal identity should be ignored. CAO Holdings, Inc. v. Trost, 333 S.W.3d 73, 88-89 (Tenn. 2010) (footnote omitted); see, e.g., Pamperin v. Streamline Mfg., Inc., 276 S.W.3d 428, 438 (Tenn. Ct. App. 2008); Altice v. NATS, Inc., No. M2007-00212-COAR3-CV, 2008 WL 1744571, at *2-3 (Tenn. Ct. App. Apr. 15, 2008). “Tennessee cases nearly uniformly consider the Allen factors in determining this issue.” F&M Mktg. Servs., Inc. v. Christenberry Trucking & Farm, Inc., No. E2015-00266-COA-R3-CV, 2015 WL 6122872, at *5 (Tenn. Ct. App. Oct. 19, 2015) (citations omitted). The district court in Allen explained that:

Factors to be considered in determining whether to disregard the corporate
veil include not only whether the entity has been used to work a fraud or
injustice in contravention of public policy, but also: (1) whether there was a
failure to collect paid in capital; (2) whether the corporation was grossly
undercapitalized; (3) the nonissuance of stock certificates; (4) the sole
ownership of stock by one individual; (5) the use of the same office or
business location; (6) the employment of the same employees or attorneys;
(7) the use of the corporation as an instrumentality or business conduit for
an individual or another corporation; (8) the diversion of corporate assets
by or to a stockholder or other entity to the detriment of creditors, or the      manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms[-]length relationships among related entities.

Allen, 584 F. Supp. at 397 (citations omitted and emphasis added).

Id. at 11-13 (footnote omitted).

The Court of Appeals affirmed the trial court’s ruling that SS Concrete was the “other self” of SS Construction, albeit on relying on the above-quoted case law rather than the law applied by the trial court.

Tennessee tort lawyers are occasionally required to consider alter ego-issues.  This recent decision is a good place to begin legal research on Tennessee law on the topic.

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