Restaurant of Hattiesburg, LLC, et al. v. Hotel & Restaurant Supply, Inc.


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Docket Number: 2010-CA-01843-COA
Court of Appeals: Opinion Link
Opinion Date: 03-06-2012
Opinion Author: Maxwell, J.
Holding: Affirmed in part, reversed and remanded in part.
Additional Case Information: Topic: Corporations - Limited liability company - Piercing the veil - Section 37-29-305(1) - Second suit - Res judicata - Collateral estoppel - Statute of limitations - Section 15-1-43 - Necessary parties - M.R.C.P. 19(a)
Judge(s) Concurring: Lee, C.J., Griffis, P.J., Ishee, Roberts and Fair, JJ.
Concur in Part, Concur in Result 1: Irving, P.J., Barnes and Russell, JJ., concur in part and in the result.
Procedural History: Summary Judgment
Nature of the Case: CIVIL - OTHER
Trial Court: Date of Trial Judgment: 11-01-2010
Appealed from: Lamar County Circuit Court
Judge: Prentiss Harrell
Disposition: DENIED APPELLANTS’ MOTION FOR SUMMARY JUDGMENT; GRANTED APPELLEE’S MOTION FOR SUMMARY JUDGMENT
Case Number: 2009-200
  Party Name: Attorney Name:   Brief(s) Available:
Appellant: Restaurant of Hattiesburg, LLC, Jim Schafer and Courtney Brick




 L. CLARK HICKS JR., R. LANE DOSSETT



  
  • Appellant #1 Brief
    		•
    Appellee: Hotel & Restaurant Supply, Inc. STEPHEN B. JACKSON  
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    Topic: Corporations - Limited liability company - Piercing the veil - Section 37-29-305(1) - Second suit - Res judicata - Collateral estoppel - Statute of limitations - Section 15-1-43 - Necessary parties - M.R.C.P. 19(a)
    Summary of the Facts: In 2005, Jim Schafer and Courtney Brick opened multiple restaurants operating as Copeland’s franchises, based on Al Copeland’s original restaurant in New Orleans. Schafer and Brick formed three separate LLCs: (1) Restaurant of Hattiesburg to operate a Copeland’s in Hattiesburg, (2) Restaurant of Jackson to operate a Copeland’s in Jackson, and (3) SouthEastern to manage the accounting and payroll of both restaurants. Restaurant of Jackson was unsuccessful. It closed the Jackson Copeland’s in the spring of 2006, owing Hotel and Restaurant Supply, Inc. (HRS) $29,000 plus thousands in service charges. Sometime later, Restaurant of Hattiesburg ceased operating a Copeland’s franchise and re-opened under a different name. In September 2006, HRS sued Restaurant of Jackson, SouthEastern, and “John Does 1 though 10.” In October 2007, the Lamar County Circuit Court granted HRS summary judgment based on the undisputed purchase orders. The circuit court found Restaurant of Jackson and SouthEastern jointly liable to HRS for the $36,816.64 debt. To collect the debt, HRS obtained a writ of garnishment on SouthEastern’s bank account—only to discover the account contained $36 and change, with no additional income flowing into the account. HRS initiated post-judgment discovery. HRS propounded interrogatories, which went unanswered. It then filed a motion to compel, which the circuit court granted and ordered the judgment debtors pay $750 to HRS for the costs of filing the motion. Finally, HRS scheduled a judgment-debtor exam, requesting specific financial records be brought to the exam. Brick appeared on behalf of Restaurant of Jackson and SouthEastern but did not bring any financial documents. After Brick’s deposition, HRS moved to reopen its lawsuit against Restaurant of Jackson and SouthEastern to add Restaurant of Hattiesburg, Schafer, and Brick as parties. The circuit court denied the motion because the judgment in that case was final. In November 2008, HRS sued Restaurant of Hattiesburg, Schafer, and Brick. HRS requested the court “pierce the veil” of SouthEastern and Restaurant of Jackson and hold the three new defendants jointly and severally liable for the judgment debt. In January 2010, HRS moved for summary judgment, arguing Restaurant of Jackson and SouthEastern did not observe corporate formalities and commingled assets. Restaurant of Hattiesburg, Schafer, and Brick filed their own motion for summary judgment. The circuit court denied Restaurant of Hattiesburg, Shafer, and Brick’s motion for summary judgment but granted summary judgment in favor of HRS. It held that Restaurant of Hattiesburg, Schafer, and Brick were jointly and severally liable for: the $750 granted for reasonable expenses for compelling post-judgment discovery in the first suit, the $36,816.64 judgment against Restaurant Jackson and SouthEastern, $8,500 in attorney’s fees, plus eight percent interest from the date of the judgment in the first suit. Restaurant of Hattiesburg, Schafer, and Brick appeal.
    Summary of Opinion Analysis: Issue 1: Piercing the veil Both parties assert traditional corporate-veil-piercing law controls. The circuit court applied the three-prong test from Gray v. Edgewater Landing, Inc., 541 So. 2d 1044 (Miss. 1989), to pierce the veils of the two LLCs, Restaurant of Jackson and SouthEastern. Under Gray, for a court to disregard the corporate entity and expose shareholders to liability, the complaining party must show some frustration of contractual expectations regarding the party to whom he looked for performance; the flagrant disregard of corporate formalities by the defendant corporation and its principals; and a demonstration of fraud or other equivalent misfeasance on the part of the corporate shareholder. While an LLC is a different type of legal entity than a corporation, commentators agree that for purposes of piercing the corporate veil, an LLC would be treated like a corporation. Section 37-29-305(1) of the Mississippi Limited Liability Company Act provides that an LLC member cannot be individually liable for an LLC’s debt by reason of being a member. Thus, to pierce the veil of an LLC the complaining party must prove LLC membership as well as some frustration of contractual expectations, flagrant disregard of LLC formalities by the LLC members, and fraud or misfeasance by the LLC member. The first Gray prong addresses which person or business entity HRS expected to pay for the restaurant supplies. Merely because the UCC governs when the contract was formed does not mean a UCC seller can circumvent the limited liability of the entity to which it tendered the goods. As an incorporated business, HRS could appreciate the distinction between an individual and an LLC. There is no evidence HRS believed it was selling restaurant goods to Schafer and Brick as individuals. While the evidence showed HRS did list “Copeland’s Franchise” on its initial invoices, Restaurant of Jackson requested HRS change the name of the account to “Restaurant of Jackson, LLC.” So any initial confusion about the limited liability of the account holder was cleared up with this change. At this point, HRS, without seeking a personal guarantee from Schafer or Brick, continued to tender goods to Restaurant of Jackson, which it knew to be an LLC. Because the circuit court erred in finding HRS undisputably showed its contractual expectations were frustrated, the case is reversed and remanded for further proceedings. Failure to show that undisputed facts establish the first Gray prong is reason alone to reverse summary judgment. However, the circuit court also erred in holding Brick’s failure to produce financial records at the judgment-debtor hearing undisputably proved a flagrant failure to keep LLC records. The third prong ultimately comes down to Restaurant of Hattiesburg’s opening its own bank account, which occurred the same month the circuit court denied its motion to reconsider the judgment against it. The circuit court held Restaurant of Hattiesburg’s opening of this account was “a volitional act to divert funds” from HRS. However, this holding is based solely on a factual conclusion. Thus, it is inappropriate for summary judgment. Issue 2: Second suit Restaurant of Hattiesburg, Schafer, and Brick argue that the case should be reversed and rendered because of: the bars of res judicata and collateral estoppel, the bars of the statute of limitations and laches, and HRS’s failure to join Restaurant of Jackson and SouthEastern as defendants in the second suit. These procedural objections boil down to the questions of whether Mississippi permits a second, subsequent veil-piercing action and if so, when the second suit must be filed and who must be named as defendants. In almost all the corporate-veil-piercing cases in Mississippi, the plaintiff brought the underlying contract or tort claim in the same action as the veil-piercing claim. But Mississippi law has not required a plaintiff to do so. Thus, a second suit is permissible. Once an underlying judgment is obtained against the corporation or LLC, the judgment debtor corporation or LLC does not have to be named in the second suit. The statute of limitations for the second suit begins to run from the date the judgment is rendered in the first suit. Res judicata does not bar HRS’s veil-piercing claim, because there is no identity of the cause of action. The facts and circumstances HRS asserted to support its claim for payment in the first suit are not the same as those asserted in support of its veil-piercing claim. The only issue actually litigated in the first suit was Restaurant of Jackson and SouthEastern’s liability for the entire amount of HRS’s invoices plus services charges. Collateral estoppel, as applied in the second suit, merely prevents Restaurant of Hattiesburg, Schafer, and Brick from denying Restaurant of Jackson and SouthEastern are liable for the underlying judgment debt. With regard to the statute of limitations, HRS’s veil-piercing claim was not a direct action to recover on the open account but instead a derivative action based on the judgment against Restaurant of Jackson and SouthEastern. Because the purpose of HRS’s subsequent veil-piercing action is to collect the judgment debt, the seven-year statute of limitations found in section 15-1-43 applies and does not bar HRS’s 2009 suit. Restaurant of Hattiesburg, Schafer, and Brick argue Restaurant of Jackson and SouthEastern were “necessary and indispensable parties” under M.R.C.P. 19(a) in the second suit and HRS’s failure to name them as defendants is fatal to its claim. Restaurant of Jackson and SouthEastern already have a final judgment against them for the debt. This issue was not appealed. So even if they had been named in the second suit, they would be estopped from denying their liability. Because the issue in the second suit is Restaurant of Hattiesburg, Schafer, and Brick’s liability for the judgment debt, HRS included all necessary parties in its veil-piercing action.


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