Duty of Care. J. R. Mullins, the sole director and shareholder of the Food Stores of South Carolina, Inc (FSSC), opened two Sav-A-Lot grocery stores in Myrtle Beach. He then established another corporation, Food Stores of Greenville (FSG), and opened a

Question

Sav-A-Lot store in the Greenville community. Mullins was also FSG's sole shareholder and director. He instructed FSG's vice president to place Sav-A-Lot advertisements with the Greenville News-Piedmont, which was owned by Multimedia Publishing of South Carolina, Inc The two Myrtle Beach stores were later closed and their inventory transferred to the Greenville store. FSG then transferred $144,000 to Mullins and other of his corporations—purportedly to repay debts owed by FSG. When the Greenville Sav-A-Lot closed following this transfer, Multimedia was left unpaid for the advertising services that it had provided to FSG. Mullins claimed that he had relinquished management of FSG to others and did not know that Multimedia had not been paid. Can Mullins, as corporate director and sole shareholder of FSG, avoid liability for the debts of the FSG corporation when he was on notice that the advertising had been ordered from Multimedia? Is Mullins's statement that he did not know of the debt tantamount to neg-ligence and a breach of his duties as a director? Should Mullins have inquired into whether the Multimedia account had been paid? Discuss these issues and whether Mullins should escape liability for the Multimedia debt.

Answer 1

Duty of care
The trial court pierced the veil of the corporation to hold Mullins liable, and Mullins appealed. The appellate court affirmed the decision of the trial court, holding that knowledge of the advertising account gained by Mullins in his capacity as director of the FSG was sufficient to put him on inquiry, so that he was aware of the newspaper's claim against FSG for purposes of piercing the corporate veil, and any knowledge imputed to Mullins in his capacity as director could be charged to him as an individual. The court explained that "when a person has notice of facts as are sufficient to put him on inquiry, and those facts, if pursued with due diligence, would lead to knowledge of other facts, he must be presumed to have knowledge of the undisclosed facts. In accordance with this standard, we hold that a person is ‘aware' of a claim against the corporation * * * if he has notice of facts which, if pursued with due diligence, would lead to knowledge of the claim." The court also reasoned that "Mullins's claim that he lacked knowledge because he left the management of FSG to others is the equivalent of urging his own negligence and dereliction of duty as a defense." Finally, the court pointed out that "[w]hatever knowledge a party acquired as director, he will be presumed to have as a private individual." Reasoned the court, "The essence of the fairness test is simply that an individual businessman cannot be allowed to hide from the normal consequences of carefree entrepreneuring by doing so through a corporate shell."