Howard Industries, Inc. v. BADW Group, LLC (RLJ2)
Filing
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MEMORANDUM AND OPINION finding that Howard Industries fails to establish that the record is without genuine issues of material fact relating to its claim. Howard Industries 43 Motion for Summary Judgment is therefore DENIED. Signed by District Judge R Leon Jordan on 5/9/2018. (MDG)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
GREENEVILLE DIVISION
HOWARD INDUSTRIES, INC.,
Plaintiff,
v.
BADW GROUP, LLC, and
BRANDON WALDROP, Individually,
Defendants.
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No. 2:16-CV-168
MEMORANDUM OPINION
This matter is before the Court on Plaintiff’s Motion for Summary Judgment
[doc. 43], Plaintiff’s Brief Supporting the Motion [doc. 44], Plaintiff’s Statement of
Material Facts [doc. 45], Defendant’s Responses [docs. 47 & 49], and Plaintiff’s Reply
[doc. 51]. For the reasons herein, the Court will deny Plaintiff’s motion.
I.
BACKGROUND
After acquiring approximately ten years of experience in the commercial lighting
industry, Defendant Brandon Waldrop “decided to pursue a dream” of his and established
his own lighting business, Defendant BADW Group, LLC, in 2014. [Waldrop Aff., doc.
47-2, ¶¶ 2–3]. Mr. Waldrop managed BADW from his home as an ecommerce business—
that is, a business that operates electronically on the internet. [Waldrop Dep., doc. 52-1, at
20:13–14; Waldrop Resp., doc. 47-1, at 3; Waldrop Aff. ¶ 10].1 He was BADW’s sole
1
Pincites to the record refer to the electronic page numbers.
member. [BADW Interrog. Resp., doc. 44-2, at 2]. To finance BADW’s start-up, he
borrowed $20,000 from two erstwhile business associates, whom he eventually paid back
in full. [Waldrop Dep. at 20:15–25; 21:1–5; 21:23–24].
He began promoting BADW with Google AdWords, an online marketing service.
[Waldrop Aff. ¶ 7; Waldrop Dep. at 73:5–10; 88:19–24]. According to BADW, Google
bills its advertisers on a “cost-per-click basis,” which means that it charges them for each
time someone clicks an advertisement, whether that person does or does not purchase the
product. [Waldrop Aff. ¶ 7]. Mr. Waldrop relied on merchant cash advances—a type of
loan for which BADW’s receivables served as collateral—to pay for this service, as an
investment in BADW’s long-term growth. [Waldrop Dep. at 24:8–13; 26:1–7; Waldrop
Resp. at 3, 7, 8; Waldrop Aff. ¶ 10].
In 2014, BADW entered into a contractual relationship with Plaintiff Howard
Industries, Inc. [Waldrop Aff. ¶ 4]. BADW did not maintain its own inventory of lighting
products, so once it received a customer’s order and payment, it arranged for Howard
Industries to ship the product to the customer. [Id.; Waldrop Dep. at 18:11–25; 19:1–23;
95:9–25]. In 2014, BADW amassed $127,903 in gross sales, and it shared a portion of
those proceeds with Howard Industries. [BADW Interrog. Resp. at 2; Waldrop Aff. ¶ 5].
In 2015 and 2016, BADW’s gross sales were higher, totaling $1,837,089 and $1,635,090,
respectively. [BADW Interrog. Resp. at 2]. BADW also shared this revenue with Howard
Industries. [Waldrop Aff. ¶ 5].
Throughout BADW’s existence, Mr. Waldrop paid some of his personal expenses
by using funds from BADW’s bank account, [Waldrop Dep. at 74:16–19; Waldrop Resp.
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at 2, 5; Waldrop Aff. ¶ 10], and at times he compensated himself with BADW’s funds for
the labor he put into building the company, [Waldrop Dep. at 69:1–16]. For instance, he
paid himself with a portion of BADW’s $20,000 start-up loan, as compensation for the
time he devoted to setting up BADW’s website. [Id.; Waldrop Resp. at 3; Waldrop Aff.
¶ 10]. He also periodically spent BADW’s funds on gasoline and meals, used them to pay
his phone bills and make purchases at retail stores, and expended them on his mortgage,
lawn-care service, and funerary expenses for his pet. [BADW Account Statement, doc. 551, at 22–23, 27; Waldrop Dep. at 51:17–25; 52:1–6; 54:2–5; 75:19–23; 80:16–21].
Although BADW’s sales exceeded a million dollars in 2015 and in 2016, BADW
began to experience serious financial distress behind the scenes, which caused it to endure
net losses in those years and soured its relationship with Howard Industries. [Waldrop
Resp. at 4; Waldrop Aff. ¶¶ 6–8, 10]. In 2015, BADW began receiving complaints of
undelivered orders from its customers. [Waldrop Aff. ¶ 6]. Howard Industries proceeded
to mail a letter to BADW, stating that “unforeseen issues and product shortage” were
resulting in “delays in shipping [BADW’s] purchase orders.” [Delay Letter, doc. 47-3, at
1]. In addition to complaining to BADW, unhappy customers posted negative online
reviews, which hurt BADW’s reputation. [Waldrop Aff. ¶ 6]. Mr. Waldrop even received
threats from some customers. [Waldrop Dep. at 81:12–14]. The unfilled orders became so
numerous that Shopify—an ecommerce platform that BADW used to track sales—froze
its online account. [Waldrop Aff. ¶ 6]. In an effort to refund BADW’s customers for the
unfilled orders, Mr. Waldrop withdrew sums of money from BADW’s bank account and
mailed cashier’s checks to them. [Waldrop Dep. at 72:6–18; 81:11–14].
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Around this same time, Mr. Waldrop also learned from his bank that Google had
recently been billing BADW tens of thousands of dollars—and sometimes hundreds of
thousands of dollars—per month for its AdWords service. [Waldrop ¶ 8]. On some days,
the charges eclipsed $13,000. [Waldrop Dep. at 73:5–8]. Mr. Waldrop concluded that a
possible competitor had tried to sabotage BADW by continually clicking on BADW’s ads
to cause the charges to skyrocket. [Waldrop Aff. ¶ 8]. As BADW’s operating costs
multiplied, sales revenue dropped, and customers clamored for refunds, Mr. Waldrop
borrowed over a hundred thousand dollars in merchant cash advances. [Waldrop Dep. at
85:3:1–18; 85:24–25; 86:1–11]. Although he notified Howard Industries of BADW’s
problem with Google and requested the relaxation of their contract while he attempted to
resolve this problem, Howard Industries declined his request. [Waldrop Aff. ¶ 8]. He
ultimately determined that BADW could not recover financially, and he decided to shutter
the company. [Id. ¶ 9].
Howard Industries has now brought suit in this Court against Mr. Waldrop and
BADW, alleging claims for (1) an unpaid sworn account of $384,314.88 in lighting
products, (2) breach of contract, and (3) misconduct on Mr. Waldrop’s part that entitles it
to pierce BADW’s corporate veil, [Am. Compl, doc. 25, at 3–4]. Howard Industries now
moves for summary judgment only on the third claim, piercing the corporate veil. [Pl.’s
Mot. Summ. J. at 1, 3]. Howard Industries asserts that this claim is the only remaining
matter that requires resolution in this case, [id. at 1], and it bases this assertion on an order
in which Magistrate Judge Corker recognized that “it appears the only remaining issue in
this case is whether piercing the corporate veil is appropriate,” [Order, doc. 24, at 3]. But
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in the Pretrial Order [doc. 57]—which, by the parties’ own terms, amends and supplants
the pleadings—Mr. Waldrop disputes Howard Industries’ right to hold him personally
liable. [Id. ¶ D.12]. The Pretrial Order governs the parties’ positions at this stage in the
litigation—not the original Complaint [doc. 1], which was the active pleading of record at
the time Judge Corker issued his order. See Permasteelisa CS Corp. v. Airolite Co., No.
2:06-cv-569, 2008 WL 2491747, at *3 (S.D. Ohio June 18, 2008) (observing that “[t]he
purpose of a Final Pretrial Order is to conclusively fix the issues that remain to be
litigated”). Besides, the Court has neither granted any dispositive motion nor received a
notice of settlement concerning any of the claims. If this case does progress to trial, the
parties will therefore litigate the range of issues relevant to all the claims, not merely the
lone issue of whether the corporate veil is pregnable, which the Court will now address in
relation to summary judgment.
II.
LEGAL STANDARD
Summary judgment is proper when the moving party shows, or “point[s] out to the
district court,” Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986), that the record—the
admissions, affidavits, answers to interrogatories, declarations, depositions, or other
materials—is without a genuine issue of material fact and that the moving party is entitled
to judgment as a matter of law, Fed. R. Civ. P. 56(a), (c). The moving party has the initial
burden of identifying the basis for summary judgment and the portions of the record that
lack genuine issues of material fact. Celotex, 477 U.S. at 323. The moving party discharges
that burden by showing “an absence of evidence to support the nonmoving party’s” claim
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or defense, id. at 325, at which point the nonmoving party, to survive summary judgment,
must identify facts in the record that create a genuine issue of material fact, id. at 324.
Not just any factual dispute will defeat a motion for summary judgment—the
requirement is “that there be no genuine issue of material fact.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). A fact is “material” if it may affect the outcome of the case
under the applicable substantive law, id., and an issue is “genuine” if the evidence is “such
that a reasonable jury could return a verdict for the nonmoving party.” Id. In short, the
inquiry is whether the record contains evidence that “presents a sufficient disagreement to
require submission to the jury or whether it is so one-sided that one party must prevail as
a matter of law.” Id. at 251–52. When ruling on a motion for summary judgment, a court
must view the facts and draw all reasonable inferences in the light most favorable to the
nonmoving party. Scott v. Harris, 550 U.S. 372, 378 (2007). “[T]he judge’s function is not
himself to weigh the evidence and determine the truth of the matter but to determine
whether there is a genuine issue for trial.” Anderson, 477 U.S. at 249. A court may also
resolve pure questions of law on a motion for summary judgment. See Hill v. Homeward
Residential, Inc., 799 F.3d 544, 550 (6th Cir. 2015).
III. ANALYSIS
“As a general rule, members, owners, employees or other agents of a Tennessee
limited liability company have no personal liability for the debts or obligations of the
company.” Edmunds v. Delta Partners, LLC, 403 S.W.3d 812, 828–29 (Tenn. Ct. App.
2012) (quotation omitted)); see Tenn. Code Ann. §§ 48-217-101(a)(1), 48-249-
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114(a)(1)(B). This general rule in Tennessee originates from the “strong presumption”
that a corporation is a separate legal entity, distinct from those individuals who comprise
the corporation. Dolle v. Fisher, No. E2003-02356-COA-R3-CV, 2005 WL 2051288, at
*5 (Tenn. Ct. App. Aug. 26, 2005) (quotation omitted). A party can overcome this strong
presumption and hold the individuals behind the corporation liable for a debt—a process
known as piercing the corporate veil—when that corporation lacks funds to pay the debt
because of misconduct in the corporate hierarchy. Pamperin v. Streamline Mfg., Inc., 276
S.W.3d 428, 437 (Tenn. Ct. App. 2008). The doctrine of piercing the corporate veil applies
not only to corporations but also to limited liability companies. Edmunds, 403 S.W.3d at
828.
Tennessee courts apply an eleven-factor test when determining whether to pierce
the corporate veil:
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.
Rogers v. Louisville Land Co., 367 S.W.3d 196, 215 (Tenn. 2012) (quoting FDIC v. Allen,
584 F. Supp. 386, 397 (E.D. Tenn. 1984)). No single factor is dispositive in and of itself;
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rather, “courts will rely upon a combination of factors in deciding the issue.” Edmunds,
403 S.W.3d at 830 (quotation omitted); see Dolle, 2005 WL 2051288 at *5 (“[W]e must
keep in mind that no single factor is conclusive and each case ‘must be decided on its own
unique set of facts.’” (quotation omitted)). A court’s decision to permit a party to pierce
the corporate veil should be relatively rare, arising only in “extreme circumstances to
prevent the use of a corporate entity to defraud or perform illegal acts.” Pamperin, 276
S.W.3d at 437 (citations omitted); see Edmunds, 403 S.W.3d at 829 (“The principle of
piercing the fiction of the corporate veil is to be applied with great caution and not
precipitately, since there is a presumption of corporate regularity.” (quotation omitted)).
A. Fraud and Factors 8, 10, and 11
In arguing against the presumption of corporate regularity, Howard Industries
batches factors 8, 10, and 11 into one group, raising a specter of misconduct by claiming
that Mr. Waldrop improperly transferred BADW’s assets to himself—to the detriment of
its creditors. [Pl.’s Br. at 13–15]. To support this theory of misconduct, Howard Industries
relies on Tenn. Code Ann. subsection 66-3-305(a), which concerns fraudulent transfers:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to
a creditor, whether the creditor’s claim arose before or after the transfer
was made or the obligation was incurred, if the debtor made the transfer
or incurred the obligation:
(1) Without receiving a reasonably equivalent value in exchange for the
transfer or obligation, and the debtor:
(A) Was engaged or was about to engage in a business or a transaction
for which the remaining assets of the debtor were unreasonably small
in relation to the business or transaction[.]
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Under this statute, Howard Industries maintains that Mr. Waldrop acted fraudulently
because he began purchasing $384,314.88 in lighting products while BADW was on the
brink of insolvency. [Pl.’s Br. at 13]. In this vein, it notes that when it demanded payment
in May 2016, BADW had an account balance of only $11,834.16. [Id. at 5, 13]. But in
response, Mr. Waldrop creates a genuine issue of material fact as to the question of fraud
under Tenn. Code Ann. subsection 66-3-305(a), citing evidence establishing that BADW
had over $435,000 in its account when it began purchasing the lighting products and that
its funds evaporated only after Google automatically withdrew the bulk of them in a few
months. [Waldrop Resp. at 5; Waldrop. Aff. ¶ 10].
Although Howard Industries tries to advance its theory of misconduct by arguing
that BADW’s paucity of funds meant that BADW was “wildly overextended and
undercapitalized,” it ignores the elephant in the room—not mentioning the unmistakable
role that it played in BADW’s financial collapse. [Pl.’s Br. at 5]. BADW operated partly,
if not largely, on cash flow—more specifically, sales revenue. Howard Industries’ failure
to deliver the lighting products to BADW’s customers led to an ebb, if not a standstill, in
its cash flow. Indeed, Mr. Waldrop’s evidence establishes that Howard Industries’ failure
to provide BADW’s customers with their orders had severe effects on BADW’s sales
revenue, [see Waldrop Aff. ¶ 6; Waldrop Dep. 96:1–4], and BADW’s out-of-pocket
reparations for Howard Industries’ shortcomings undoubtedly contributed to BADW’s
paltry bottom line. By refusing to acknowledge this fact—much less account for it in any
meaningful way—Howard Industries makes little headway toward summary judgment. Cf.
Int’l Union, United Auto., Aerospace & Agric. Implement v. Aguirre, 410 F.3d 297, 303
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(6th Cir. 2005) (“The mere fact that the company ceased operation without being able to
pay all of its debts is, of course, not the sort of injustice contemplated [in the veil-piercing
analysis].” (quotation omitted)).
And while Mr. Waldrop concedes, as he must, that he relied on BADW’s funds
to pay some of his living expenses, the record does not indicate that he looted BADW for
his personal benefit. [Waldrop Resp. at 5; Waldrop. Aff. ¶ 10]. He insists that he did not
pay for “trips, vacations or extravagances of any nature” with BADW’s funds, [Waldrop
Resp. at 5; Waldrop. Aff. ¶ 10]—an assertion that Howard Industries does not dispute. He
maintains that he allocated to himself the amount “absolutely needed at that point in time
to pay bills, food, shelter and so forth,” [Waldrop Dep. at 50:15–17]—$36,000 per year,
based on his approximation, [id. at 50:22–25; 51:1–4]. Although Mr. Waldrop’s assertion
that he paid only for absolute necessities is dubious in light of his purchases at various
retail stores and other places,2 he attests that his limited use of BADW’s funds was
nevertheless “permitted by law.” [Id. at 74:19].
Generally, the members of a limited liability company are entitled to a fair or
reasonable distribution of the company’s assets, unless a distribution of assets would make
the company unable to pay its debts. Tenn. Code Ann. §§ 48-236-101, 48-236-105(a)–(b);
see Tenn. Code Ann. §§ 48-220-101, 48-249-304 (providing for the distribution of profits
to the members of a limited liability company). An analysis for piercing the corporate veil
Mr. Waldrop, however, testified that he “frequently” entertained vendors and clients at
restaurants, in an attempt to draw business to BADW, and that he often used BADW’s funds for
this purpose—not to eat out casually. [Waldrop Dep. at 52:6].
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therefore requires courts to assess whether a member’s use of the company’s assets is “to
the detriment of . . . [the company’s] creditors,” Pamperin, 276 S.W.3d at 440, so that the
member rendered the company unable to satisfy its debts, Oceanics Schs., Inc. v. Barbour,
112 S.W.3d 135, 141–42 (Tenn. Ct. App. 2003); see Edmunds, 403 S.W.3d at 833 (noting
that piercing the corporate veil may be appropriate if a member “improperly distribute[s]”
the company’s assets to himself (emphasis added) (citation omitted)).
Despite Mr. Waldrop’s use of BADW’s funds and BADW’s accrual of debt in
merchant cash advances, the record illustrates that Howard Industries still received
hundreds of thousands, if not millions, of dollars in revenue from BADW during their
partnership. [Waldrop Aff. ¶ 5]. Indeed, for most of BADW’s lifespan, BADW appears to
have paid its debts to Howard Industries with a steady revenue stream. Howard Industries
raised no quarrel with BADW until 2016,3 when a confluence of events broke BADW’s
back: (1) Howard Industries’ failure to ship products to BADW’s clients and (2) Google’s
large-scale billing of BADW’s account. When viewing all the facts and drawing all
reasonable inferences in Mr. Waldrop’s and BADW’s favor, the Court concludes that the
upcoming bench trial could establish that these events—and not efforts on Mr. Waldrop’s
part to mine BADW’s assets—precipitated BADW’s inability to pay any debts it might
have owed to Howard Industries. Under Tenn. Code Ann. subsection 66-3-305(a), and the
relevant factors of the eleven-factor test, genuine issues of material fact therefore exist in
the record and warrant a trial.
As late as January 2016, Howard Industries even informed BADW that “[w]e value your
business.” [Delay Letter at 1].
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B. Additional Factors
Under the remaining factors, Howard Industries argues that “the total overlap”
between Mr. Waldrop’s finances and BADW’s finances “clearly establishes that Waldrop
treated BADW as an instrumentality or conduit” for his own affairs, rather than as an
independent entity. [Pl.’s Br. at 17]. But its contention that a “total overlap” existed
between Mr. Waldrop’s funds and BADW’s funds is an exaggeration, for the reasons that
the Court has already identified. And although Howard Industries also asks the Court to
take issue with the fact that “Waldrop was the sole owner and employee of BADW,” [id.],
this fact alone does not defeat the presumption of corporate regularity, Edmunds, 403
S.W.3d at 831 (“[T]he fact that a shareholder exercises complete dominion and control
over a corporation alone is insufficient to justify piercing the corporate veil[.]” (citations
omitted)). Having reviewed more than half of the eleven factors at this point, and finding
none that favor piercing BADW’s corporate veil, the Court will end its analysis here.
IV. CONCLUSION
As the movant for summary judgment, Howard Industries fails to establish that the
record is without genuine issues of material fact relating to its claim. Howard Industries
Motion for Summary Judgment [doc. 43] is therefore DENIED.
IT IS SO ORDERED.
ENTER:
s/ Leon Jordan
United States District Judge
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