It would serve no useful purpose to reiterate the postulates set forth by this Court in the case of DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir.1976), since the District Court found that a sufficient number of the factors to pierce the corporate veil were present except the existence of injustice or fundamental unfairness.

The District Court found as a fact, inter alia, the following:

(1) Point South, Inc. was a subsidiary corporation of Sea Pines Company. Sea Pines Company owns 90% of Point South, Inc.

(2) Point South, Inc. is a South Carolina corporation.

(3) Sea Pines Company is a Georgia corporation principally operating in South Carolina.

(4) Point South, Inc. and Sea Pines Company had common directors and officers.

(5) Point South, Inc. adhered to corporate formalities.

(6) Point South, Inc. was financed in large part by Sea Pines Company.

(7) Sea Pines Company paid the salaries and expenses of Point South, Inc. with the expectation that they would be reimbursed.

(8) Sea Pines Company caused the property owned by Point South, Inc. to be mortgaged for the benefit of Sea Pines Company.

(9) During the period in question, the executives and officers of Point South, Inc. did not act independently of those of Sea Pines Company.

(10) AB & T made a loan to Point South, Inc. for the construction of a reception center. Point South, Inc. sold the property to Point South Company, a limited partnership, and leased it back. The payments on the lease were guaranteed by Sea Pines Company.

(11) AB & T continued to advance money for the reception center to Point South, Inc. until 1974 when the advances were made directly to Point South Company for interest only.

The District Court refused, however, to hold the parent stockholder liable for the debts of Point South, Inc. to AB & T. The Court's rationale centered upon the knowledge that AB & T had or should have had concerning the control which the parent exerted over the subsidiary. The District Court found that AB&T knew or reasonably should have known of the stock ownership of the subsidiary, as well as the common board of directors. In addition, the Court held that the Bank should have known that the subsidiary was undercapitalized and essentially the alter ego of Sea Pines at the time it made the initial loan to Point South, Inc. The District Court concluded that there was no deceit or fraud by either Point South, Inc. or Sea Pines Company and, therefore, there was no fundamental unfairness or injustice.

We reverse the Court inasmuch as we find that the actions of Point South, Inc. and Sea Pines Company were fundamentally unfair to AB & T, a creditor of Point South, Inc. and predecessor in interest to the plaintiff/appellant, FDIC.

The District Court misconstrued this Court's decision in DeWitt, supra. In that case, this Court found fundamental unfairness as a predicate to piercing the corporate veil; however, fundamental unfairness did not necessarily require the existence of fraud and deceit. Id. Thus, in the absence of fraud and deceit, injustice or fundamental unfairness can exist, and where they so exist courts have reluctantly and cautiously pierced the corporation's protective veil. DeWitt, supra. See also Anderson v. Abbott, 321 U.S. 349, 64 S. Ct. 531, 88 L. Ed. 793 (1944); Krivo Industrial Supply Co. v. National Distill. & Chemical Corp., 483 F.2d 1098 (5th Cir.1973); Duplane Corp. v. Deering Milliken, Inc., 444 F. Supp. 648 (D.S.C.1977).

In order to understand the basis for such, we must delineate the duties of directors. In Koehler v. Black River Falls Iron Co., 67 U.S. (2 Black) 715, 720, 17 L. Ed. 339 (1862), the Court said that directors "hold a place of trust and by accepting the trust are obliged to execute it with fidelity, not for their own benefit, but for the common benefit of the stockholders of the corporation." Further, the Supreme Court has stated that "[t]he relation of the directors to corporations is of such a fiduciary nature that transactions between boards having common members are regarded as jealously by the law as are personal dealings between a director and his corporation ..." and that those transactions must be shown to be fair in order to maintain the transaction. Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599, 41 S. Ct. 209, 212, 65 L. Ed. 425 (1921).

However, when the corporation becomes insolvent, the fiduciary duty of the directors shifts from the stockholders to the creditors.

The law by the great weight of authority seems to be settled that when a corporation becomes insolvent, or in a failing condition, the officers and directors no longer represent the stockholders, but by the fact of insolvency, become trustees for the creditors, and that they cannot by transfer of its property or payment of cash, prefer themselves or other creditors .... Davis v. Woolf, 147 F.2d 629, 633 (4th Cir.1945). See also Alexander, et al v. Hillman, 296 U.S. 222, 56 S. Ct. 204, 80 L. Ed. 192 (1935).

In this case, the common directors had to have known by February, 1974, that Point South, Inc. was insolvent.5 On October 6, 1974, while Point South was insolvent, its directors mortgaged the only unencumbered piece of property owned by the subsidiary (which was worth $350,000) for the debts of the parent. Sea Pines Company indicated that it credited the subsidiary's account $8,000 in consideration for the mortgage. In essence, the subsidiary mortgaged its property to secure and to pay for the loans of the parent. This was in no way beneficial to the subsidiary.

It is difficult to materially distinguish this incident from the decision of Koehler v. Black River Falls Iron Co., supra. There, the corporate officers placed a mortgage on the property of the corporation at a time when it was insolvent in order to secure the debts owed to themselves. The Court held as follows, supra, 67 U.S. (2 Black) at 720:

Instead of honestly endeavoring to effect a loan of money, advantageously, for the benefit of the corporation, these directors, in violation of their duty, and in betrayal of their trust, secured their own debts, to the injury of the stockholders and creditors. Directors cannot thus deal with the important interests entrusted to their management.

Here, the common directors were violating their duty by securing the debts of their only viable master, the parent, to the detriment of the creditor, plaintiff herein.

This is not the sole transaction with which we are concerned which was fundamentally unfair and unjust. In May, 1975, when Point South, Inc. was virtually $2 million in debt and insolvent, the board of directors of the subsidiary caused the sale and leaseback to be canceled. Point South, Inc. repurchased the property and canceled the $55,000 note due to the subsidiary by the partnership. This transaction also canceled the guarantee by the parent to the partnership of the subsidiary's rent.

At oral argument, counsel for Sea Pines Company was asked for whose benefit did the cancellation of the sale and leaseback and the repurchase of the property occur. Counsel admitted there was no benefit to the insolvent subsidiary but rather the cancellation and repurchase was for the sole benefit of the parent.

Each of these transactions clearly shows that the board of directors of the insolvent corporation was using that corporation and its assets for the benefit of the parent, Sea Pines Company, and not for the subsidiary. The parent, through the interlocking boards of directors, manipulated the assets, property and liabilities of the subsidiary. The directors violated the fiduciary duty owed to the creditors of the insolvent Point South, Inc. These two transactions clearly indicate fundamental unfairness and injustice.

The District Court had concluded that AB & T knew of the common directorships and should have known of the undercapitalization at the time it made the loan.6 We feel that there was no evidence to indicate that AB & T knew or should have known that the directors would breach their fiduciary duties by stripping the subsidiary of its assets, when it became insolvent, for the benefit of the parent. It is these unjust and fundamentally unfair acts, not just the interlocking directorships and undercapitalization which causes us to set aside the corporate cloak. DeWitt, supra; Cf., Bernardin, Inc. v. Midland Oil Corp., 520 F.2d 771 (7th Cir.1975) (absence of fraud and deceit where the parent unjustly stripped the insolvent subsidiary of its assets). We find that the acts of Point South, Inc. and Sea Pines Company mentioned herein were fundamentally unfair and the determination of the District Court to the contrary is REVERSED.

The decision of the District Court is REVERSED AND REMANDED in order that the District Court may enter judgment for the plaintiff against Sea Pines Company for the deficiency, interest and costs, and determine if the plaintiff is or should be entitled to attorney's fees.

REVERSED AND REMANDED.