In a recent Tennessee Court of Appeals decision, the Court pierced the corporate veil and affirmed an award of damages, including punitive damages, against the corporation's sole shareholder. In Dog House Investments, LLC v. Teal Properties, Inc., et al., Defendant corporation was the Lessor of real property owned by Lessor's sole shareholder to the Plaintiff dog "camp." After the property was damaged in the 2011 Nashville flood, Lessor's sole shareholder refused to fix the building (as was required by the Lease) and pocketed the insurance proceeds that were supposed to be used for such repairs. Defendant corporation apparently had no assets, no purpose, and no operations other than to collect rent and distribute it to its sole shareholder.

The Court of Appeals upheld the trial court's determination that there was no arms-length transaction between the sole shareholder and the corporation, and that it was, in fact, his alter ego. The Court affirmed the full amount of the judgment against the sole shareholder, including pre-judgment interest and punitive damages.

In Tennessee, it is tempting to hold income-producing property in one's individual name and therefore avoid paying franchise tax on the property, which tax would otherwise be owed if the property was owned by a limited liability entity (such as a corporation, LLC or limited partnership). The Defendants in the Dog House case found out the hard way, however, that this ownership structure can be problematic. Lessors who consult with an experienced attorney regarding ownership and liability issues may be able to save themselves unnecessary trips to the dog house!

David M. Elliott has been practicing business law at Grant, Konvalinka & Harrison, P.C. for over 17 years, including providing strategic counsel with regard to business formation, capitalization, operation and mergers and acquisitions. He enjoys helping clients buy and sell assets and businesses.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.