Single Business Enterprise Theory f/k/a Amalgamation

October 23, 2018 - Sarah P. Spruill

Last summer, the South Carolina Supreme Court formally adopted the doctrine of amalgamation in Pertuis v. Front Roe Restaurants, Inc., 423 S.C. 640, 817 S.E.2d 273 (2018), clarifying years of opinions on the subject from the Court of Appeals.  In adopting the doctrine, the Court expressed a preference for the term “single business enterprise theory.” 

The Court defined the theory as follows:

We formally recognize today this single business enterprise theory, and in doing so, we acknowledge that corporations are often formed for the purpose of shielding shareholders from individual liability; there is nothing remotely nefarious in doing that. For this reason, the single business enterprise theory requires a showing of more than the various entities' operations are intertwined. Combining multiple corporate entities into a single business enterprise requires further evidence of bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities' legal distinctions.

In Pertuis, the Court found that the party seeking to amalgamate corporate interests had not met his burden because there was not evidence of “bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities' legal distinctions” as required under the new test.

The Court of Appeals has now issued two opinions applying Pertuis.  In each, it found that the elements for finding a single business enterprise had been met.  In Walbeck v. The I'On Co., LLC, No. 2015-001590, 2018 WL 3748668 (S.C. Ct. App. Aug. 8, 2018), the Court found that the following evidence was sufficient: 

  • Appellants' common employees and principals acted in concert to profit at the expense of the HOA's members. The intertwining of the operations of Appellants' entities undoubtedly facilitated this behavior, making it fundamentally unfair to assign liability to any one or more of these entities to the exclusion of the others. For example, in 1998 and 1999, the I'On Group, then known as Civitas, negotiated with a neighboring subdivision's developer for the sale of access rights to the Community Dock and the boat ramp on Lot CV-6, although the rights were owned by the I'On Company at the time. This occurred without the knowledge of the HOA's members. In 2000, the I'On Company transferred lot CV-6 to the I'On Club, LLC, for inadequate consideration ($5.00) before it was ultimately sold.
  • This intertwining also played a role in the March 2009 representation to the HOA's management company that the I'On Company would deed the Community Dock on lot CV-6 to the HOA when, in fact, the I'On Club owned lot CV-6. Besenfelder's other communications likewise show that he referred to the various entities interchangeably. Also preceding the sale of lot CV-6 to Russo was Thomas Graham's secret expression of a desire to “capitalize [the] potential value” of the Community Dock. The realization of Graham's intent through the sale to Russo, in addition to the 1999 sale of access rights, placed the HOA's members in a position of having to compete with non-members for access to the disputed property. In other words, the secret sale of access rights to a neighboring subdivision's developer as well as the surprise sale of ownership to Russo benefitted Appellants at the expense of the HOA's members.

On October 10, the Court of Appeals again found the test had been met in Stoneledge at Lake Keowee Owners' Assoc., Inc. v. IMK Dev. Co.  There, the evidence showed:

  • The managing shareholder, Bill Cox, testified IMK was created to hold title to the Stoneledge project. "Marick Home Builders was to provide the construction at their cost, and [Integrys Keowee] provided the investment. And we did the books for IMK. And the agreement was we would split the profits."
  • IMK had no business other than the development of Stoneledge. Cox was a managing member of both Integrys Keowee and IMK; Integrys Keowee and Marick each owned 50 percent of IMK. Cox was also a partner in Integrys Holdings, a software company.
  • Some of the Stoneledge salespeople—representatives of IMK—were housed in the Integrys Holding office. 
  • In the eyes of the HOA members, IMK, Marick, and the individual investor parties serving on the HOA board were one and the same. Stoneledge property owner Robert White testified, "I.M.K., to me, in terms of the faces of the folks that were part of I.M.K. were Rick Thoennes and his son and Tim Roberson." White and his wife communicated with IMK regarding their "quite hefty list of punch list items."
  • Further, Marick's principal and license holder, had at least constructive knowledge of the pervasive construction defects that plagued the project, but was nevertheless directly involved in IMK and Marick's marketing and sale of the units. Given that Marick's and IMK's profits were entirely dependent on IMK's ability to sell the units, their operations were clearly in pursuit of a common business purpose, albeit to the detriment of the HOA members.

For more information on the Single Business Enterprise Theory, please join us at one of our upcoming Corporate Law for Accountants seminars. Visit our Events page for details. 

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