Bdm Invs. v. Lenhil, Inc.

BDM Invs. v. Lenhil, Inc., 2014 NCBC 32.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF BRUNSWICK 11 CVS 449

BDM INVESTMENTS, )
)
Plaintiff, )
)
v. )
)
LENHIL, INC.; LENNON HILLS, )
LLC; JUDITH T. HOLLINGSWORTH )
in her official capacity as EXECUTRIX )
of the ESTATE OF GLENN ) ORDER AND OPINION
HOLLINGSWORTH; EDWIN L. )
BURNETT, III; VIABLE CORP.; )
GARY LAWRENCE; KEITH )
MEYERS; MEYERS APPRAISAL )
SERVICES, LLC; and DANIEL )
HILLA, III, )
)
Defendants. )
)

{1} THIS MATTER is before the court on Defendants Lenhil, Inc., Lennon
Hills, LLC, Edwin L. Burnett, III, Viable Corp., and Daniel Hilla, III’s (collectively
“Lennon Hills Defendants”) Motion for Summary Judgment as to Plaintiff’s Claim
for Piercing the Corporate Veil (“Motion”). For the reasons stated below, the Motion
is GRANTED.

Bowden & Gardner, P.C. by Edwin W. Bowden for Plaintiff BDM
Investments.

Hodges & Coxe, P.C. by C. Wes Hodges, II and Sarah Reamer Buzzard for
Defendants Lenhil, Inc., Lennon Hills, L.L.C., Edwin L. Burnett, III, Viable
Corp., and Daniel Hilla, III.
I. FACTUAL AND PROCEDURAL BACKGROUND

{2} Past opinions of this court provide a more detailed summary of the
facts and allegations in this case. See generally BDM Invs. v. Lenhil, Inc., 2014
NCBC LEXIS 6 (N.C. Super. Ct. Mar. 20, 2014); BDM Invs. v. Lenhil, Inc., 2012
NCBC LEXIS 7 (N.C. Super. Ct. Jan. 18, 2012). In sum, Defendant Viable Corp.
(“Viable”) employed Glenn Hollingsworth (“Hollingsworth”). Hollingsworth
approached Defendant Edwin L. Burnett, III (“Burnett”), the sole shareholder of
Viable, and indicated that he had identified some purchasers for lots in the Lennon
Hills subdivision, which had been developed by another entity, Defendant Lenhil,
Inc. (“Lenhil”), in which Burnett had an ownership interest. Burnett indicated that
he would “take care of” Hollingsworth if he delivered buyers, one of whom was
Plaintiff BDM Investments (“BDM”). BDM contends that Hollingsworth served as
its agent in the transaction and that he failed to disclose his relationship with
Lenhil, Burnett, or Viable. When BDM purchased lots from Lenhil, Viable, through
the use of Burnett’s real estate license, received half of the sales commission from
the transaction. Viable then paid Hollingsworth a “consultation fee” equal to the
sales commission it received. In its March 20, 2014 Order, the court concluded that
these facts stated a number of claims against Hollingsworth. The court then
granted BDM leave to amend its complaint to state claims against Viable, Lenhil,
and Lennon Hills, LLC for respondeat superior liability arising out of
Hollingsworth’s acts.
{3} After the March 20, 2014 Order, the Parties disagreed over whether
BDM’s claim for piercing the corporate veil survived that Order or the court’s prior
Order on various motions to dismiss, as neither Party had briefed the issue in their
summary judgment filings. After determining that the veil-piercing claim remained
in the case, the court granted the Lennon Hills Defendants leave to file a motion for
summary judgment directed at that claim. The Motion has been fully briefed, a
hearing was held, and the Motion is ripe for disposition.
{4} The court does not make findings of fact when ruling on a motion for
summary judgment. See Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C.
App. 138, 142, 215 S.E.2d 162, 164–65 (1975). It is, however, appropriate for the
court to describe the undisputed facts or lack of facts the record discloses in order to
provide context for the court’s ruling on the motion. The court believes the
following facts are either uncontested or, if contested, have been construed in favor
of the party opposing the Motion.

A. Lennon Hills, LLC and Lenhil, Inc.

{5} Defendant Lennon Hills, LLC is a member-managed North Carolina
limited liability company that was organized on June 14, 2005. (Hilla Aff. ¶ 3.)
Burnett owns a fifty percent membership interest in Lennon Hills, LLC, and
Defendant Daniel Hilla, III (“Hilla”) owns the remaining fifty percent membership
interest. (Hilla Aff. ¶ 3.) Burnett and Hilla are the only managers of Lennon Hills,
LLC. (Hilla Aff. ¶ 3.)
{6} Lenhil was incorporated on June 14, 2005, the same day Lennon Hills,
LLC was organized. (Hilla Aff. ¶ 4.) Burnett and Hilla are the only shareholders in
Lenhil, and each owns fifty percent of Lenhil’s shares. (Hilla Aff. ¶ 4.) Burnett and
Hilla are both directors of Lenhil, and Hilla is its President. (Hilla Aff. ¶ 4.)
{7} From their respective inceptions, Lennon Hills, LLC and Lenhil have
maintained separate bank accounts, books, and records. (Hilla Aff. ¶ 9.) They have
not commingled funds and have each filed their own separate tax returns. (Hilla
Aff. ¶ 9.) Lennon Hills, LLC has a written operating agreement by which it abides.
(Hilla Aff. ¶ 10.) Lenhil has maintained a corporate book that contains its
organizational documents, bylaws, and minutes of shareholders and directors
meetings. (Hilla Aff. ¶ 10.) Plaintiff has forecast no evidence to the contrary as to
the failure to comply with corporate formalities.
{8} Lennon Hills, LLC and Lenhil were formed for the purpose of
developing the Lennon Hills subdivision. (Hilla Aff. ¶ 5.) Lennon Hills, LLC
acquired the property for the subdivision, then deeded it to Lenhil. (Hilla Aff. ¶ 6.)
In return, Lenhil granted Lennon Hills, LLC a deed of trust representing the fair
market value of the developed individual lots and townhome pads in the
subdivision. (Hilla Aff. ¶ 6.) As individual lots were sold, the particular property
sold was released from the lien of the deed of trust. (Hilla Aff. ¶ 6.) Lenhil acquired
financing in its own name for the development of the subdivision, contracted in its
own name with contractors for construction projects related to the subdivision’s
development, and contracted in its own name with purchasers of lots in the
subdivision, including BDM. (Hilla Aff. ¶ 8.)
{9} Lenhil is the entity that has developed the subdivision. (Hilla Aff. ¶
11.) Burnett and Hilla, as the shareholders, directors, and officers of Lenhil, have
conducted regular meetings to discuss the subdivision’s development and jointly
made decisions with respect to the subdivision’s development. (Hilla Aff. ¶ 11.)

B. Viable Corp.

{10} Viable was incorporated in North Carolina on October 18, 1996.
(Burnett Aff. ¶ 4.) Since its inception, Burnett has been the sole shareholder and an
officer and director of Viable. (Burnett Aff. ¶ 4.) Burnett and his wife are currently
the only officers and directors of Viable. (Burnett Aff. ¶ 4.) Burnett has conducted
many of his business activities not involving other business partners through
Viable. (Burnett Aff. ¶ 7.) Viable has owned property and served as a real estate
management company for properties owned by other business entities with which
Burnett was involved. (Burnett Aff. ¶ 7.) Also, because Viable, through Burnett,
has held a North Carolina real estate license, it has occasionally received
commissions on the sale of properties owned by businesses with which Burnett has
been involved. (Burnett Aff. ¶ 7.) Since its inception, Viable has maintained its
own bank accounts, books, and records. (Burnett Aff. ¶ 7.) It has maintained its
own funds, filed its own tax returns, and maintained a corporate book containing its
organizational documents, bylaws, and minutes of shareholders and directors
meetings. (Burnett Aff. ¶ 7.) Plaintiff has forecast no evidence to the contrary as to
the failure to comply with corporate formalities.
II. ANALYSIS

{11} Summary judgment is proper when the pleadings, depositions,
answers to interrogatories, admissions, and affidavits show that no genuine issue as
to any material fact exists and that the movant is entitled to judgment as a matter
of law. N.C. R. Civ. P. 56(c); Andresen v. Progress Energy, Inc., 204 N.C. App. 182,
184, 696 S.E.2d 159, 160–61 (2010). The moving party must demonstrate the
absence of a triable issue and does so either: “(1) by showing that an essential
element of the opposing party’s claim is nonexistent; or (2) [by] demonstrating that
the opposing party cannot produce evidence sufficient to support an essential
element of the claim or overcome an affirmative defense which would work to bar its
claim.” Wilhelm v. City of Fayetteville, 121 N.C. App. 87, 90, 464 S.E.2d 299, 300
(1995) (citing Roumillat v. Simplistic Enters., Inc., 331 N.C. 57, 414 S.E.2d 339
(1992)). If the moving party carries this burden, the non-moving party “must
‘produce a forecast of evidence demonstrating that the [non-moving party] will be
able to make out at least a prima facie case at trial.’” Roumillat, 331 N.C. at 63, 414
S.E.2d at 342 (quoting Collingwood v. Gen. Elec. Real Estate Equities, Inc., 324
N.C. 63, 66, 376 S.E.2d 425, 427 (1989)); Rankin v. Food Lion, 210 N.C. App. 213,
217, 706 S.E.2d 310, 313–14 (2011); see also N.C. R. Civ. P. 56(e) (“[Non-moving
party] must set forth specific facts showing that there is a genuine issue for trial.”).
This forecast “may not rest upon the mere allegations or denials of [a] pleading,”
N.C. R. Civ. P. 56(e), nor may it rest upon unsworn affidavits or other inadmissible
materials, see Rankin, 210 N.C. App. at 218–22, 706 S.E.2d at 314–16 (affirming
summary judgment where only inadmissible, unauthenticated documents and no
affidavits or sworn testimony were submitted in response to summary judgment
motion).
{12} As a general rule, “a corporation is treated as distinct from its
shareholders.” State ex rel. Cooper v. Ridgeway Brands Mfg., LLC, 362 N.C. 431,
438, 666 S.E.2d 107, 112 (2008); see also N.C. Gen. Stat § 55-6-22(b) (2013)
(providing limited liability for corporate shareholders); N.C. Gen Stat § 57D-3-30
(providing limited liability for interest owners, managers, and company officials of
LLCs). “[P]roceeding beyond the corporate form is a strong step: ‘Like lightning, it
is rare [and] severe[.]’” Ridgeway Brands Mfg., LLC, 332 N.C. at 439, 666 S.E.2d at
112 (alteration in original) (quoting Frank H. Easterbrook & Daniel R. Fischel,
Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89, 89 (1985)).
“Nevertheless, in a few instances, exceptions to the general rule of corporate
insularity may be made when applying the corporate fiction would accomplish some
fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable
claim.” Id. at 439, 666 S.E.2d at 112–13.
{13} The “instrumentality rule” permits disregard of the corporate form to
impose liability on shareholders “[if] the corporation is so operated that it is a mere
instrumentality or alter ego of the sole or dominant shareholder and a shield for his
activities in violation of the declared public policy or statute of the State.” E. Mkt.
St. Square, Inc. v. Tycorp Pizza IV, Inc., 175 N.C. App. 628, 633, 625 S.E.2d 191,
196 (2006) (quoting Henderson v. Sec. Mortg. & Fin. Co., 273 N.C. 253, 260, 160
S.E.2d 39, 44 (1968) (emphasis in original)). Under the instrumentality rule,
Plaintiff must satisfy three elements:
(1) Control, not mere majority or complete stock control,
but complete domination, not only of finances, but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetrate the violation of a
statutory or other positive legal duty, or a dishonest and
unjust act in contravention of [a] plaintiff’s legal rights;
and
(3) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.

Green v. Freeman, __ N.C. __, __, 749 S.E.2d 262, 270 (2013).
{14} In determining whether the first element has been satisfied, the court
considers the following factors: “Inadequate capitalization . . .; Non-compliance with
corporate formalities; . . . Complete domination and control of the corporation so
that it has no independent identity; and . . . Excessive fragmentation of a single
enterprise into separate corporations.” Timber Integrated Invs., LLC v. Welch, __
N.C. App. __, __, 737 S.E.2d 809, 818 (2013). Other factors relevant to the first
element include “non-payment of dividends, insolvency of the debtor corporation,
siphoning of funds by the dominant shareholder, non-function of other officers or
directors, [and] absence of corporate records.” Id. (alteration in original) (quoting
Glenn v. Wagner, 313 N.C. 450, 458, 329 S.E.2d 326, 332 (1985)) (internal quotation
marks omitted). The fact that a business entity is closely held or held by a single
owner is not sufficient to show control adequate to pierce the corporate veil. See
Henderson, 273 N.C. at 260, 160 S.E.2d at 44 (1968) (“The mere fact that one person
. . . owns all of the stock of a corporation does not make its acts the acts of the
stockholder so as to impose liability therefor upon him.”).
{15} Through its veil-piercing claim, BDM seeks to impose personal liability
on Burnett and Hilla for damages caused by Hollingsworth’s actions taken while he
was acting as an agent for Lenhil, Lennon Hills, LLC, or Viable.

A. Lennon Hills, LLC and Lenhil, Inc.

{16} In addition to Plaintiff’s failure to forecast evidence to the contrary, the
Lennon Hills Defendants have presented substantial evidence indicating that
Lennon Hills, LLC and Lenhil were adequately capitalized, maintained books and
records, and complied with corporate formalities. Lenhil acquired financing in its
own name for the development of the subdivision, contracted in its own name with
contractors for construction projects related to the subdivision’s development, and
contracted in its own name with purchasers of lots in the subdivision. Both entities
have maintained their own records and bank accounts and filed their own
individual tax returns. Defendants contend, and the court agrees, that the only
evidence of Burnett and Hilla’s alleged complete and total domination of the entities
is the fact that they are the only shareholders and members of Lenhil and Lennon
Hills, LLC.
{17} The Lennon Hills Defendants, as the parties moving for summary
judgment, have satisfied their initial burden of showing that BDM cannot present
substantial evidence of the first element of its veil-piercing claim. Accordingly, the
burden shifts to Plaintiff to produce a forecast of evidence showing, with
particularity, how it will be able to produce a prima facie case in support of this first
element.
{18} BDM contends that Hilla and Burnett completely dominated Lennon
Hills, LLC and Lenhil, and apparently contend that this control is adequate to
support piercing the corporate veil. In support of this contention, BDM points
predominantly to the business structure used by Hilla and Burnett in creating
Lennon Hills, LLC and Lenhil to develop the subdivision, the fact that Burnett and
Hilla are the sole owners of each entity, and the fact that Burnett and Hilla both
knew Hollingsworth was going to solicit buyers for lots in Lennon Hills. BDM has
not presented any evidence of Burnett or Hilla commingling corporate or LLC
funds, failing to observe corporate formalities, or undercapitalizing either entity.
BDM also has not presented evidence that Burnett and Hilla completely dominated
Lennon Hills, LLC or Lenhil such that either entity no longer had an independent
identity. The fact that an entity is solely owned or closely held, without more, is
insufficient evidence of control rising to the level of “complete domination” required
by the instrumentality rule’s first element. BDM has not forecast evidence of such
control, and the court must grant summary judgment on BDM’s veil-piercing claim
to the extent that it concerns piercing the veils of Lenhil or Lennon Hills, LLC to
impose personal liability on Burnett or Hilla.

B. Viable Corp.

{19} The Lennon Hills Defendants contend that there is no evidence of
Burnett, the sole shareholder of Viable, using any control of that entity to commit
any wrongdoing that caused BDM’s injury.1 That wrongdoing, if proven at trial,
would be Hollingsworth’s failure to disclose his relationship with the Lennon Hills
Defendants to BDM. The court has already concluded that BDM may seek recovery
against Hollingsworth’s estate and Lenhil, Lennon Hills, LLC, and/or Viable, on the
basis of respondeat superior through proof of Hollingsworth’s agency, for this non-
disclosure. However, the Lennon Hills Defendants have satisfied their burden of
showing that BDM cannot present substantial evidence of the second and third
elements of its veil-piercing claim. Accordingly, the burden shifts to BDM to
produce a forecast of evidence showing, with particularity, how it will be able to
produce a prima facie case in support of this claim.
{20} In response, BDM primarily contends that Burnett should face liability
because, as the sole shareholder and primary officer of Viable, he knew
Hollingsworth would solicit buyers, that he benefited from that activity as Viable’s
sole shareholder, and that he considered any benefit to Viable was also his personal
benefit. This contention, along with others advanced by BDM when invoking its
imprecise equitable arguments, does not show how Burnett’s control or domination
of Viable, even if proven, was used to commit a wrongdoing that caused BDM’s
injury. Accordingly, the court grants the Lennon Hills Defendants’ Motion as to
BDM’s veil-piercing claim to the extent that it concerns piercing the veil of Viable to
impose liability on Burnett.

1 The court assumes, without deciding, that BDM has forecast sufficient evidence of Burnett’s control

of Viable to preclude summary judgment for Burnett if the issue of control was the only disputed
issue. As to Viable, however, BDM’s claim also fails with regard to the second and third elements of
the instrumentality rule, which require that the control be used to commit some wrongdoing that
caused the plaintiff’s injury.
III. CONCLUSION

{21} For the foregoing reasons, Defendants Lenhil, Inc., Lennon Hills, LLC,
Edwin L. Burnett, III, Viable Corp., and Daniel Hilla, III’s Motion for Summary
Judgment as to Plaintiff’s Claim for Piercing the Corporate Veil is GRANTED, and
that claim is DISMISSED WITH PREJUDICE. No other claims remain against
Defendants Edwin L. Burnett, III or Daniel Hilla, III, and they are dismissed from
this action. The court will by separate order set this matter for trial.

IT IS SO ORDERED this 21st day of July, 2014.