ALETA A. TRAUGER, District Judge.
The origin of this case lies in a series of loans made by the plaintiff, Alfred K. Nippert, Jr. to KCA Enterprises, Inc. ("KCA"), a company formed by the defendant, James R. Jackson ("Jim Jackson"). After obtaining the proceeds from these loans, KCA, which was in the business of selling officially licensed merchandise, generated strong sales revenues but only managed to make one loan payment to the plaintiff. Eventually, the plaintiff brought a lawsuit against KCA in an Ohio federal court and obtained an agreed judgment. KCA, however, did not make any payments in satisfaction of this judgment and instead filed for bankruptcy.
The plaintiff commenced this action on November 6, 2009. He named as defendants: (1) Jim Jackson individually and doing business as Stonewall Farm; (2) Jackson, Denney, and Davis, Inc. ("JDD"), an insurance agency located in Ashland City, Tennessee, which, until January 20, 2010, was controlled by Jim Jackson; and (3) Jackson Place, Inc. ("Jackson Place"), a Tennessee corporation that Jim Jackson controlled until November 30, 2007. One week prior to the commencement of trial, the plaintiff reached a settlement with Mr. Jackson. The plaintiff asserts that the remaining defendants, JDD and Jackson Place, are liable for participating in a civil conspiracy to defraud him. In the alternative, he seeks to pierce the corporate veils of JDD and Jackson Place in reverse, so as to hold them accountable for the actions of their former shareholder, Jim Jackson.
The court conducted a two-day bench trial of this case on November 8-9, 2011. In accordance with Rule 52 of the Federal Rules of Civil Procedure, the court sets forth herein its findings of fact and conclusions of law.
On July 23, 1999, Jim Jackson formed KCA, a company that he named after his three children: Kyle, Chad, and Ashley.
The plaintiff, an Ohio resident, but who at the time maintained a law office in Ashland City, Tennessee, met Jim Jackson through a mutual friend, Corky Richard Albright. (Tr. at 240-41.) After getting to know Mr. Jackson and learning about KCA, he decided to make a series of loans to the company. (Id.) Thus, from April 18, 2000 to January 10, 2003, the plaintiff loaned a total of $1,696,000 to KCA. (See Plaintiff Exhibit 1.) Each loan was memorialized by the execution of a Demand Promissory Note signed by Jim Jackson, as president of KCA. (Id.) According to the plaintiff, the purpose of these loans was to grow KCA to take its business to the next level. (Tr. at 241.) Although initially the plaintiff was not a KCA shareholder, he later obtained a 30% share in KCA's stock. Mr. Jackson remained the majority shareholder, possessing 51% of KCA's shares,
Once the plaintiff began to loan funds to KCA, the company started to grow and generate higher sales revenues. (Tr. at 82, 89, 96, 241; Plaintiff Exhibit 14.) Indeed, KCA eventually moved to a new office, began to supply a broader range of licensed products, and became a vendor to Wal-Mart. (Tr. at 82, 95, 97, 241.) Despite experiencing this expansion and growth, KCA made only one loan payment to the plaintiff, in the amount of $100,000, toward the end of 2001. (Id. at 107, 243.)
Sometime after he began loaning money to KCA, the plaintiff requested Jim Jackson to provide him with financial information about the company.
Having failed to receive any additional payments from KCA, the plaintiff ultimately brought suit against the company in the United States District Court for the Southern District of Ohio on June 11, 2007, and obtained an agreed judgment in the amount of $2,933,459.17 on November 14, 2008.
At the time the plaintiff loaned funds to KCA, Jim Jackson controlled the operations of two other entities: JDD and Jackson Place. JDD is an insurance agency located in Ashland City, Tennessee and was co-founded by Jim Jackson, Leon Denney, and Faye Davis on May 24, 1988. (Tr. at 74-75; Plaintiff Exhibit 7.) At the time of its formation, Mr. Jackson possessed a 1/3 ownership interest in JDD, although eventually he obtained sole ownership of the agency.
Jackson Place was formed on April 17, 1989 and currently owns and operates a commercial building located on Main Street in Ashland City, Tennessee. (Tr. at 204; Plaintiff Exhibits 8 and 9.) JDD is a current tenant of Jackson Place and has been at all relevant times.
During the time period in which Jim Jackson was in control, KCA, JDD, and Jackson Place failed to observe certain corporate formalities. For instance, Mr. Jackson issued shares of KCA stock to his three children and to his then brother-in-law
In its early years, KCA shared office space with JDD in the building owned by Jackson Place.
While Jim Jackson controlled KCA, the company paid for his and his family members' personal expenses. It also transferred funds to both JDD and Jackson Place. Some of these funds transfers were made during the time period when the plaintiff was making his loans to KCA, and all of them were made at Jim Jackson's sole discretion.
Jim Jackson caused KCA to make payments for a variety of personal expenses. For instance, KCA made car payments for Angela Jackson's BMW convertible and paid her personal cell phone bills. (Tr. at 119-120; Plaintiff Exhibit 29; Plaintiff Exhibit 31 at 84-85.) KCA also paid for Mr. Jackson's 2006 Dodge Ram and for services performed by individuals who worked at his horse farm.
During the course of its existence, KCA also wrote $77,835 in checks to JDD. (Tr. at 126; Plaintiff Exhibit 29.) The memo lines of the checks show that a sizable portion of these funds constituted loans by KCA to JDD or repayments by KCA of loans previously made by JDD.
As for the remaining checks written by KCA to JDD, many appeared to be reimbursements for various office expenses, including shipping and postage charges, phone and fax charges, and office supplies. (Plaintiff Exhibit 29.) Others appeared to be insurance payments, bill payments, and reimbursements for American Express charges.
Beginning in 2005, KCA also wrote checks to Jackson Place that ultimately totaled $53,632. These checks constituted repayments of a loan Jackson Place made to KCA. On January 29, 2003, Jackson Place obtained first and second mortgages on the building it owned in Ashland City. (Defendant Exhibit 1.) One of these mortgages was for $150,000, the proceeds of which Jackson Place then loaned to KCA, so that KCA could make a payment to its supplier. (Tr. at 213, 216-17, 379.) In 2005, while Angela and Jim Jackson were in the midst of finalizing their divorce, both mortgages were combined and refinanced. (Id. at 219, 379.) Angela Jackson testified that she believed that KCA was making payments on the $150,000 mortgage directly to the bank before the refinancing. (Id. at 379-81.) However, once the mortgages were refinanced, KCA began to make monthly payments to Jackson Place for the note held by the bank.
Just over two months after the plaintiff filed the instant action, Jim and Angela Jackson signed an Agreed Order, whereby Mr. Jackson agreed to transfer all of his shares in JDD stock to his ex-wife in satisfaction of certain financial obligations he had incurred pursuant to the parties' Marital Dissolution Agreement and Amended Marital Dissolution Agreement. (Plaintiff Exhibit 9.) The sum of these obligations totaled $358,299.25. (Id.) For her part, Angela Jackson agreed to accept all of her ex-husband's shares of JDD stock in full satisfaction of those financial obligations and acknowledged that the value of the JDD stock was impaired by the debts and liabilities of the agency. (Id.)
During the time period leading up to the entry of the Agreed Order, there was a pending state court contempt petition brought by Ms. Jackson arising out of Mr.
Toward the end of 2009, while this petition was still pending, Ms. Jackson began to talk to her attorney at the time, Dan Huffstutter, about the possibility of obtaining JDD's stock. (Tr. at 194-95.) She testified that she sought JDD's shares because she believed it would help her keep the Jackson Place building and also preserve JDD for Kyle Jackson.
Before being presented with the Agreed Order, Jim Jackson contemplated selling his shares in JDD to his son, Kyle Jackson. (Plaintiff Exhibit 24.) On December 1, 2009, Mr. Jackson e-mailed Bob Harlan, an attorney who had previously represented KCA in its bankruptcy case, to ask some questions in light of the plaintiff's recently filed civil suit. (Id.) In particular, Mr. Jackson revealed that he was nearly insolvent and asked whether filing a bankruptcy petition pursuant to Chapter 7 of the United States Bankruptcy Code would relieve him of any potential exposure from the plaintiff's suit. (Id.) In addition, he asked whether selling JDD to his son would be prohibited if he received a legitimate value for the sale. (Id.) As to this latter question, Mr. Harlan advised that "[i]t is not a good idea to transfer assets before a bankruptcy because it gives the appearance the asset has value and you are putting that value out of reach of the creditors. Even if that is not true, it is hard to dispel that appearance." (Id.)
Within a couple of weeks of this email exchange, Mr. Huffstutter, JDD and Jackson Place's current counsel held a meeting at Mr. Huffstutter's office with both Jim and Kyle Jackson where Mr. Huffstutter presented them with a draft of the Agreed Order and explained its contents.
On December 16, 2009, Jim Jackson emailed Mr. Huffstutter, as well as his own attorney, David Wolf, primarily to express that he required additional time to fully understand the implications of the proposed stock transfer. (Plaintiff Exhibit 25.) Mr. Huffstutter responded that same day and expressed his concern that time was running out for Mr. Jackson to transfer his JDD shares. (Id.) He added that the Agreed Order appeared to be what was in the best interests of Kyle Jackson. (Id.) The next day, Jim Jackson wrote back to Mr. Huffstutter, acknowledging that, even with their disagreements, both he and Angela Jackson "would agree that to preserve Kyle's future is paramount at
On December 29, 2009, Mr. Huffstutter responded via email to a series of questions posed by Jim Jackson concerning the Agreed Order.
(Id.)
The next day, Mr. Huffstutter responded to an email from Jim Jackson recounting a hostile conversation Mr. Jackson had with his ex-wife concerning JDD's inability to pay its rent to Jackson Place. (Plaintiff Exhibit 25.) In that email, Mr. Jackson stated that the conversation with his ex-wife left him not wanting to take any action that may benefit her. (Id.) After explaining that Angela Jackson had to receive, among other things, timely rent payments from JDD in order for her to carry the note on the building, Mr. Huffstutter stated that Ms. Jackson would have already evicted JDD, had it not been for the prospect of Kyle Jackson being placed in a position to continue JDD, subject to getting past the plaintiff's claims. (Id.) He added that the Agreed Order represented the only slim hope of preserving JDD for Kyle Jackson, which was getting slimmer with each passing day. (Id.) According to Mr. Huffstutter, Jim Jackson's actions were central to determining JDD's future prospects, which he stated were very grim, given the plaintiff's lawsuit. (Id.) Mr.
(Id.)
As previously noted, Jim Jackson also discussed the Agreed Order with his son, Kyle Jackson. (Tr. at 35, 142-43.) Kyle Jackson believed that the Agreed Order would give him an opportunity to run the agency and attempt to save it from its financial struggles. (Id. at 36.) At the time, he was concerned that he was not going to have a job at JDD, given the way things were going at the agency. (Id. at 65.) He testified that, "for my own purpose[,] I wanted to run the company[,] because it wasn't going to be around much longer." (Tr. at 36.) He added that "my only objective ... was to save that company for myself and my four children. That's it." (Id. at 37-38.) He also believed that the Agreed Order would help JDD avoid any potential fallout from the lawsuit filed by the plaintiff. (Id. at 40-41.) Thus, he attempted to persuade his father to sign the Agreed Order. (Id. at 42.) These attempts are captured in a series of emails exchanged between Kyle and Jim Jackson during the early part of January 2010.
For instance, on January 5, 2010, Kyle Jackson emailed his father to inform him that he spoke with Angela Jackson and Mr. Huffstutter about the Agreed Order. (Plaintiff Exhibit 26.) Among other things,
Three days later, on January 8, 2010, Kyle Jackson emailed his father to recount another conversation he had with Mr. Huffstutter and wrote that, according to Mr. Huffstutter, a judgment would constitute "the end of JDD," and the plaintiff would be able to seize and sell any of JDD's assets. (Plaintiff Exhibit 26.) He also noted how Mr. Huffstutter kept repeating that the chances of the Agreed
Jim Jackson responded the next day and remarked that the points Mr. Huffstutter made to Kyle Jackson essentially rehashed what was said to both of them at the prior meeting held at Mr. Huffstutter's office. (Plaintiff Exhibit 26.) While he did not know whether to believe Mr. Huffstutter, Jim Jackson stated that, for the sake of the agency and its employees' job security, it was not worth it for him to continue on at JDD. (Id.) He told his son that he was relying on him to get him through the transition, so that he could avoid declaring bankruptcy for as long as possible. (Id.) At the end of his email, Jim Jackson told his son to get him to a comfort zone, so that he could sign the Agreed Order. (Id.)
Before agreeing to transfer his shares of JDD stock, Jim Jackson emailed Mr. Harlan and asked him about the impact of the plaintiff getting a judgment against JDD. (Plaintiff Exhibit 24.) Among other things, Jim Jackson asked whether the plaintiff would be able to sell the agency, even if Mr. Jackson still owned all of its shares. (Id.) He also informed Mr. Harlan of the proposed Agreed Order and outlined its basic terms.
On the following day, Jim and Angela Jackson signed the Agreed Order. At trial, Mr. Jackson testified that he agreed to the stock transfer to settle the pending issues in his divorce and to preserve JDD for Kyle Jackson. (Tr. at 160-61.) Following the entry of the Agreed Order, Kyle Jackson assumed management responsibilities over JDD. (Id. at 32.) On August 18, 2010, almost seven months after transferring his JDD shares, Jim Jackson filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Tennessee.
As some of the previous emails indicated, JDD was experiencing financial difficulties during the time frame when Jim and Angela Jackson were considering the Agreed Order. (Tr. at 36, 140-41, 198.) The agency was in debt in the amount of approximately $80,000 and was out of trust with several of its insurance providers.
On November 1, 2011, one week before the beginning of this bench trial, the plaintiff signed a Settlement Agreement with Jim Jackson. (Plaintiff Exhibit 27.) Pursuant to the agreement's terms, the plaintiff dismissed his claims in this lawsuit against Mr. Jackson with prejudice. (Id.) Jim Jackson also agreed to stipulate to a Judgment and Order of Nondischargeability in the amount of $750,000 pursuant to 11 U.S.C. § 523(a)(6), which was entered in the Adversary Proceeding of his bankruptcy case on November 3, 2011.
The plaintiff contends that JDD and Jackson Place are liable for participating in a civil conspiracy to defraud him. Alternatively, he argues that the court should pierce the corporate veils of JDD and Jackson Place in reverse, so as to hold them accountable for the actions of their former shareholder, Jim Jackson. The court will address each of the plaintiff's claims in turn.
The plaintiff argues that JDD and Jackson Place were participants in two different conspiracies to defraud him. First, the plaintiff contends that KCA, JDD, and Jackson Place conspired, each through their agent Jim Jackson, to have KCA transfer $131,467 in funds to JDD and Jackson Place. He also contends that JDD conspired with Angela and Jim Jackson, through its employee Kyle Jackson, to create the transaction through which Jim Jackson transferred his JDD shares to Ms. Jackson in an attempt to avoid a judgment by the plaintiff against the agency.
A civil conspiracy requires "a combination of two or more persons who, each having the intent and knowledge of the other's intent, accomplish by concert an unlawful purpose, or accomplish a lawful purpose by unlawful means, which results in damage to the plaintiff." Trau-Med of Am., Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 703 (Tenn.2002). Stated differently, the elements of a civil conspiracy claim are: "(1) a common design between two or more persons, (2) to accomplish by concerted action an unlawful purpose, or a lawful purpose by unlawful means, (3) an overt act in furtherance of the conspiracy, and (4) resulting injury." Kincaid v. SouthTrust Bank, 221 S.W.3d 32, 38 (Tenn.Ct.App.2006). If a conspiracy is found, "each conspirator is liable for the damages resulting from the wrongful acts of all co-conspirators in carrying out the common scheme." Trau-Med, 71 S.W.3d at 703. In Tennessee, it is well-established that a corporation is capable of extra-corporate conspiracy, whereby it becomes vicariously liable for the acts of its
However, participation in a civil conspiracy is not, by itself, an actionable tort. Stanfill v. Hardney, No. M2004-02768-COA-R3-CV, 2007 WL 2827498, at *7 (Tenn.Ct.App. Sept. 27, 2007). Rather, a civil conspiracy claim requires "the existence of an underlying tort or wrongful act committed by one or more of the conspirators in furtherance of the conspiracy." Id. (citing Forrester v. Stockstill, 869 S.W.2d 328, 330 (Tenn.1994); Tenn. Publ'g Co. v. Fitzhugh, 165 Tenn. 1, 52 S.W.2d 157, 158 (1932); Levy v. Franks, 159 S.W.3d 66, 82 (Tenn.Ct.App.2004)). Here, the plaintiff argues that the transactions underlying each of the conspiracies constituted fraudulent conveyances under Tennessee's Uniform Fraudulent Transfer Act ("UFTA"), Tenn.Code Ann. § 66-3-301 et seq. In particular, he argues that the aforementioned transactions violate sections 66-3-305(a)(1) and 66-3-306(a) and (b) of the UFTA.
Section 66-3-305(a)(1) of the UFTA provides, in pertinent part, that "[a] transfer made ... by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made ..., if the debtor made the transfer... [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor." Tenn.Code Ann. § 66-3-305(a)(1) (2004). In determining whether there is actual intent, a court may consider, among other factors, whether:
Tenn.Code Ann. § 66-3-305(b) (2004).
Section 66-3-306 outlines the circumstances under which a transfer shall be deemed fraudulent and provides that:
Tenn. Code Ann. § 66-3-306 (2004). Thus, this section addresses constructive fraud. Unlike cases involving actual fraud, a finding of intent is not required in order
The plaintiff claims that a violation of section 66-3-306 can form the underlying basis for his civil conspiracy claim. Thus, he is essentially arguing that JDD and Jackson Place can be held liable for conspiring to commit constructive fraud. Yet, a civil conspiracy requires that the alleged conspirators possess the specific intent to commit an unlawful act or a lawful act by unlawful means. Since constructive fraud requires no intent to deceive, the court fails to see how a person can conspire to commit constructive fraud. While no Tennessee court has decided the issue, one has remarked that "some states have held that conspiracy to commit constructive fraud is a legal impossibility because one cannot conspire to commit a[n] [act] for which he does not have the intent [to commit.]" Kincaid, 221 S.W.3d at 39 n. 8 (concluding that it was unnecessary to reach the issue of whether the plaintiff's conspiracy to commit constructive fraud claim was a legal impossibility because it was deficient for other reasons). One of the cases cited in Kincaid, Juhl v. Airington, 936 S.W.2d 640, 644 (Tex.1996), concluded that an individual could not conspire to be negligent, "[b]ecause negligence by definition is not an intentional wrong[,]" and a "civil conspiracy requires specific intent to agree to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means." Id. (quotation marks and citations omitted). The court finds that this reasoning is equally applicable in the context of constructive fraud. Accordingly, the court concludes that a violation of section 66-3-306 cannot form the underlying basis for the plaintiff's civil conspiracy claim.
The court is thus left with the task of determining whether JDD and Jackson Place can be held liable for participating in a conspiracy to actually defraud the plaintiff under section 66-3-305(a)(1) of the UFTA. Again, the plaintiff has identified two different types of transfers that he claims are fraudulent under this section. The first category consists of numerous funds transfers from KCA to both JDD and Jackson Place totaling $131,467. The second category consists of a single transfer, that is, Jim Jackson's transfer of JDD shares to Angela Jackson pursuant to the Agreed Order entered on January 20, 2010.
At the sole discretion of its president, Jim Jackson, KCA wrote checks totaling $77,835 to JDD, an entity which Mr. Jackson controlled until he signed the Agreed Order. The plaintiff claims, albeit without much elaboration, that all of these funds transfers were made in furtherance of an overarching scheme devised by Jim Jackson, as the president of KCA, JDD, and Jackson Place, to defraud him, a creditor of KCA.
KCA began writing checks to JDD in 1999, before the plaintiff even made his first loan, and continued doing so until sometime in 2008. The memo lines on the
In advancing his claim, the plaintiff has made no attempt to explain how any of the 46 checks written by KCA to JDD over the span of approximately 8 years each constituted a fraudulent transfer. Instead, he simply argues that all of these individual transfers, taken in the aggregate, were made with an actual intent to defraud him. This is confirmed by the testimony of his expert, Glenn W. Perdue, who testified that, in arriving at the $77,835 figure, he simply added together all of the checks written by KCA to JDD without reviewing the descriptions on each check's memo line. (Tr. at 341-42.) In addition, with the exception of arguing that all of KCA's transfers were made to an insider (JDD),
Beginning in 2005, Jim Jackson also caused KCA to write checks to Jackson Place that totaled $53,632. Again, without offering many details, the plaintiff claims that each of these funds transfers was made in furtherance of a conspiracy between KCA, JDD, and Jackson Place to defraud him. Because the evidence in the record does not establish that any of these transfers was fraudulent, the plaintiff's civil conspiracy claim as to these transfers must also fail.
Here again, with the exception of arguing that all of the transfers were made to an insider
The evidence therefore demonstrates that these transfers to Jackson Place were not made by KCA with the actual intent to
In sum, the court concludes that none of the funds transfers made by KCA to JDD and Jackson Place totaling $131,467 were fraudulent under the UFTA. Without an underlying tortious or wrongful act, there can be no actionable claim for civil conspiracy. Stanfill, 2007 WL 2827498, at *7. Accordingly, the plaintiff's civil conspiracy claim must fail as it pertains to KCA's funds transfers to JDD and Jackson Place.
The plaintiff next argues that JDD conspired with Jim and Angela Jackson to defraud him by helping create the transaction outlined in the Agreed Order. In particular, he contends that JDD acted through its employee, Kyle Jackson.
However, the evidence in the record demonstrates that Kyle Jackson was not acting on behalf of JDD when he was communicating with Jim and Angela Jackson about the stock transfer. His testimony establishes that he participated in the discussions concerning the Agreed Order in his personal capacity and outside the scope of his employment as a JDD insurance agent. Indeed, at the time of these
There is also no evidence showing that Kyle Jackson was acting pursuant to any other authority, outside of his role as a JDD insurance agent, to bind the agency when he participated in discussions concerning the plan to transfer Jim Jackson's shares of stock to Angela Jackson. Indeed, the plaintiff has not shown that Kyle Jackson possessed any such authority. While it is true that, beginning in 2007, JDD's annual reports with the Tennessee Secretary of State listed Kyle Jackson as a Vice President of the agency, he testified that the designation was meaningless and that Jim Jackson ran JDD until the entry of the Agreed Order on January 20, 2010. (Plaintiff Exhibit 7; Tr. at 33.) In his settlement with the plaintiff, Jim Jackson himself represented that he was the president and sole officer of JDD from the late-1990s until January 20, 2010. (Plaintiff Exhibit 27.) Although the annual reports also listed Kyle Jackson as a member of the Board of Directors beginning in 2007, that designation was equally meaningless, given that JDD never held Board of Directors meetings after Jim Jackson assumed sole ownership of the agency. Having found that Kyle Jackson did not act on behalf of the agency when discussing the details of the proposed Agreed Order, the court concludes that the plaintiff's civil conspiracy claim, as it pertains to the JDD stock transfer, must fail.
In reaching this conclusion, the court acknowledges that the circumstances surrounding the JDD stock transfer cast suspicion on the transaction. Among other things, Jim Jackson signed the Agreed Order and transferred all of his shares of JDD stock to his ex-wife just over two months after the plaintiff brought the present lawsuit. A little over one month after being sued, he was presented with a plan by his ex-wife's attorney to protect JDD from a potential judgment by the plaintiff that would correspondingly solve many of the issues in his divorce and hopefully preserve the agency for the benefit of his son, Kyle Jackson. Both Jim and Angela Jackson acknowledged that preserving their son's future at JDD was very important to them. At the time he learned about this plan, Jim Jackson was nearly insolvent and understood that he would be left with nothing but his farm if he signed the Agreed Order. For his part, Kyle Jackson understood that the Agreed Order was an attempt to avoid the plaintiff and any judgment he may obtain against JDD, and he communicated that understanding to his father. Jim Jackson had his own questions concerning the impact of a potential judgment by the plaintiff against JDD and directed those inquiries to a former KCA attorney the day before he signed the Agreed Order.
The plaintiff seeks to hold JDD and Jackson Place accountable for the actions taken by Jim Jackson as a former shareholder of both companies. Specifically, the plaintiff argues that JDD and Jackson Place should be held liable for the following actions taken by Mr. Jackson: (1) causing KCA to transfer funds to JDD and Jackson Place; and (2) transferring JDD's shares to Angela Jackson pursuant to the Agreed Order. JDD and Jackson Place contend that the plaintiff's reverse piercing claim cannot succeed because it is not viable under Tennessee law.
Under Tennessee law, to pierce the corporate veil, "a court must be convinced that the separate corporate entity is a sham or a dummy or that disregarding the separate corporate entity is necessary to accomplish justice." CAO Holdings, Inc. v. Trost, 333 S.W.3d 73, 88-89 (Tenn. 2010) (quotation marks and citations omitted). The typical veil piercing claim involves the creditor of a corporation attempting to pierce its veil to reach the assets of the individual or individuals who control the corporation. Nadler v. Mountain Valley Chapel Bus. Trust, No. E2003-00848-COA-R3-CV, 2004 WL 1488544, at *4 (Tenn.Ct.App. June 30, 2004). However, sometimes creditors seek to "reverse pierce" or "`hold a corporation accountable for actions of its shareholders.'" Id. (quoting Mfrs. Consolidation Serv., Inc. v. Rodell, 42 S.W.3d 846, 866-67, n. 12 (Tenn. Ct.App.2000)). The Tennessee Supreme Court has only recognized the concept of reverse piercing in the context of a parent/subsidiary relationship. See Cont'l Bankers Life Ins. Co. of the South v. Bank of Alamo, 578 S.W.2d 625, 632-33 (Tenn. 1979). While the Tennessee Court of Appeals has addressed the concept of reverse piercing in the corporation/shareholder context, it has never adopted it. Nadler, 2004 WL 1488544, at *4; See also Starnes Family Office, LLC v. McCullar, 765 F.Supp.2d 1036, 1050 (W.D.Tenn.2011) (applying Tennessee law and concluding that, "[o]utside the parent-subsidiary context, there is no authority for piercing the corporate veil in reverse."); Hartford Fire Ins. Co. v. CMC Constr. Co., 2010 WL 3338581, at *24 (E.D.Tenn. Aug. 24, 2010) ("The Tennessee Court of Appeals has declined to extend the `reverse piercing' doctrine to the corporation/shareholder context.").
The plaintiff's argument is without merit. The Tennessee Code defines a subsidiary as "a corporation more than fifty percent (50%) of whose outstanding voting shares are owned by its parent and/or the parent's other wholly-owned subsidiaries." Tenn.Code Ann. § 48-11-201 (2002). However, the alleged parent here, JDD, never owned any KCA shares. Therefore, KCA was not a subsidiary of JDD, and the plaintiff's reverse piercing claim must accordingly fail.
For the reasons discussed herein, judgment will be entered for the defendants, Jackson, Denney and Davis, Inc. and Jackson Place, Inc.
An appropriate order will enter.
The plaintiff acknowledged that he could have requested Jim Jackson to provide him with reports concerning the company's financial health but that such reports were not meaningful without the underlying raw data concerning KCA's expenditures. (Tr. at 249.) This information would have helped the plaintiff's accountant determine how KCA coded its expenses. (Id.) The plaintiff also testified that Jim Jackson made only one trip to Cincinnati and was accompanied by Doug Hammond. (Id. at 247.)
However, the effective date of the UFTA was July 1, 2003, and many of the transfers from KCA to JDD were made prior to that date. The statutory scheme in place prior to the UFTA's enactment incorporated a burden-shifting framework applied by courts at common law. Hickman, 2007 WL 2892788, at *3-4. Under that framework, the presence of one or more "badges of fraud" raised a presumption of fraud and shifted the burden of disproving fraud to the defendant. Nadler v. Mountain Valley Chapel Bus. Trust, No. E2003-00848-COA-R3-CV, 2004 WL 1488544, at *2 (Tenn.Ct.App. June 30, 2004).
Yet, even applying this framework here, the court's conclusion would remain the same. Here again, with the exception of arguing that all of the transfers were made to an insider, the plaintiff has failed to show how each transfer from KCA to JDD triggered any other badges of fraud. See Nadler, 2004 WL 1488544, at *2 (noting that, when "[a] family or friendship relationship exist[s] between the transferor and the transferee," it constitutes a badge of fraud). However, despite the presence of at least one badge of fraud surrounding these transactions, JDD has shown that the transfers made to it by KCA were not fraudulent.
