2007 Corporate And Business Organization Case Law Developments, Part 1

Limited Liability Companies. Megel v. Donaldson, ___ S.E.2d ___, 2007 WL 4126886 (Ga. App., Nov. 21, 2007) rejected claims of breach of fiduciary duty against a majority member of a limited liability company because a development agreement among the members precluded fiduciary duties from arising. A Tennessee bankruptcy court decision, In re Wheland Foundry, LLC, 2007 WL 2934869 (Bkrtcy. E.D. Tenn., Oct. 5, 2007), addressed whether two LLC members' claims against a third were direct or derivative, applying Georgia's special injury rule and finding Georgia's direct action exception for closely held entities to be inapplicable.

Statute of Limitations for Breach of Fiduciary Duty. In four cases handed down in July 2007, Hamburger v. PFM Capital Mgmt., Inc., 286 Ga. App. 382, 649 S.E.2d 779 (2007); Cochran Mill Assocs. v. Stephens, 286 Ga. App. 241, 648 S.E.2d 764, (2007); Hendry v. Wells, 286 Ga. App. 774, 650 S.E.2d 328 (2007); In re Pac One, Inc., 2007 WL 2083817 (N.D. Ga., July 17, 2007), the courts addressed statutes of limitations for breaches of fiduciary duty in corporate and partnership contexts, reaching conflicting results as to the applicable limitations period for partnership fiduciary breaches.

Business Records. In four cases the Georgia Court of Appeals has addressed the admissibility of documents under the Georgia Business Records Act. In Ishak v. First Flag Bank, 283 Ga. App. 517, 642 S.E.2d 143 (2007) permitting a loan summary to be introduced through an officer who did not prepare it, in Walter R. Thomas Assocs., Inc. v. Media Dynamite, Inc., 284 Ga. App. 413, 643 S.E.2d 883 (2007) allowing invoices from a third party vendor to be treated as the recipient's business records, and in Boyd v. Calvary Portfolio Services, Inc., 285 Ga. App. 390, 646 S.E.2d 496 (2007) and Jenkins v. Sallie Mae, Inc., 286 Ga. App. 502, 649 S.E.2d 802 (2007), permitting introduction of loan records from predecessor lenders.

Corporate Veil Decisions. The decisions of Powell Co. v. McGarey Group, LLC, 2007 WL 951759 (N.D. Ga., March 28, 2007), BMC-The Benchmark Mgmt. Co. v. Ceebraid-Signal Corp., 2007 WL 5 2126272 (N.D. Ga., July 23, 2007) and Adams v. Unum Life Ins. Co. of America, 2007 WL 2681729 (N.D. Ga., Sept. 10, 2007) rejected efforts to pierce the corporate veil for lack of evidence. The BMC-The Benchmark Mgmt. Co. decision also declined to recognize the theory of aiding and abetting fraud as viable under Georgia law. The Adams case rejected a joint venture basis for liability. Horton Homes, Inc. v. Bandy, 2007 WL 4571251 (M.D. Ala., Dec. 26, 2007) addressed veil-piercing in the context of arbitration agreements and Lollis v. Turner, ___ Ga. App. ___, 654 S.E.2d 229 (2007) refused to permit "outsider reverse veil-piercing."

Insurance Issues. In Executive Risk Indemnity, Inc. v. AFC Enterprises, Inc., 2007 WL 2791117 (N.D. Ga., Sept. 26, 2007), the court rejected a director and officer liability insurer's efforts to rescind its policy. The Court of Appeals in Fireman's Fund Ins. Co. v. University of Georgia Athletic Assn., Inc., ___ Ga. ___, 654 S.E.2d 207 (2007), held that exclusions in a nonprofit corporation D&O insurance policy for failure to effect or maintain insurance and for bodily injury did not bar coverage for the organization's failure to obtain disability insurance for a student athlete.

Transactional Cases. The decision in Paul v. Smith, Gambrell & Russell, 283 Ga. App. 584, 642 S.E.2d 217 (2007), concerns a duty-to read-defense in a legal malpractice action involving the unanimity needed for a shareholders consent to a merger. Duvall v. Galt Med. Corp., 2007 WL 4207792 (N.D. Cal., Nov. 27, 2007) rejected third party beneficiary claims against an acquiring company by a former employee whose promised stock options were not included in the acquisition. In Automated Print Inc. v. Edgar, ___ S.E.2d ___, 2007 WL 3293254 (Ga. App., Nov. 8, 2007), stock purchase price adjustment provisions in a promissory note were held not to be a matter of setoff or recoupment and evidence should have been allowed of events requiring the price to be adjusted.

Other Issues. The Court of Appeals in Slater v. Cox, 287 Ga. App. 738, 653 S.E.2d 58 (2007) decided the applicable deadline for filing an appeal to superior court from an administrative ruling by the Georgia Securities Commissioner is the 20-day period specified in O.C.G.A. § 10-5-17, not the 30-day period allowed under Georgia's Administrative Procedure Act.

In Scouten v. Amerisave Mortgage Corp., 284 Ga. App. 242, 643 S.E.2d 759 (2007), the Court of Appeals denied standing under Georgia's RICO statute to a whistle-blower who was not directly injured by the alleged predicate acts.

In Marcum v. Gardner, 283 Ga. App. 453, 641 S.E.2d 678 (2007), a dispute regarding whether a transaction was intended as an investment or a loan, the Georgia Court of Appeals held that a check denoted as a "1/3 investment" did not decide the character of the transaction, given testimony that it was intended to be a loan.

Finally, in First Support Services, Inc. v. Trevino, ___ S.E.2d ___, 2007 WL 3407720 (Ga. App., Nov. 16, 2007), the Georgia Court of Appeals held that the purchaser of a manufacturer was not strictly liable as a "successor corporation" for purposes of O.C.G.A. § 51-1-11(b)(1) because there was no evidence of a merger, assumption of liabilities, commonality of ownership or attempt to commit fraud.

II. Discussion of Case Law Developments

A. CORPORATIONS

1. Standard of Care for Corporate Officers and Directors: Flexible Products Co. v. Ervast, 284 Ga. App. 178, 643 S.E.2d 560 (2007) and Rosenfeld v. Rosenfeld, 286 Ga. App. 61, 648 S.E.2d 399 (2007)

In Flexible Products Co. v. Ervast, 284 Ga. App. 178, 643 S.E.2d 560 (2007), the Georgia Court of Appeals took a major step in resolving the uncertainty regarding the standard of care for officers and directors of Georgia corporations, holding as a matter of first impression that under the business judgment rule and Georgia's statutory provisions on directors' and officers' duties, they cannot be held liable for ordinary negligence.

The Court reasoned: Georgia's business judgment rule relieves officers and directors from liability for acts or omissions taken in good faith compliance with their corporate duties. OCGA §§ 14-2-830(d) and 14-2- 842(d). Such rule forecloses liability in officers and directors for ordinary negligence in discharging their duties. See OCGA §§ 14-2-830(a)(2) and 14-2-842(a)(2) (allowing officers and directors to discharge their duties under an ordinarily prudent man standard to the extent they reasonably rely on the advice of counsel, without independent knowledge, rendering such reliance unwarranted). "[O]rdinary negligence or negligence is what an ordinarily prudent man would do under the same circumstances...." Western & A.R. Co. v. Vaughan, 113 Ga. 354, 38 S.E. 851 (1901). Given that officers and directors thus are protected from liability for ordinary negligence, the trial court erred in refusing to direct a verdict for Flexible on Ervast's ordinary negligence claim.

284 Ga. App. at 181, 643 S.E.2d at 565.

This ruling is an important one. The uncertainty regarding the standard of care has represented an unresolved issue in Georgia corporate governance litigation for decades,¹ and a subcommittee of the Corporate Code Revision Committee of the Business Law Section of the State Bar has been attempting for several years to decide how best to address it legislatively.²

Because of the Court's abbreviated treatment of the issue, the Flexible Products Co. decision raises a lot of questions. For example, although basing its decision in part on the business judgment rule, the Court does not distinguish between claims based on board decisions and claims based on alleged failures by directors to monitor company affairs and supervise management. Instead, it categorically states that officers and directors are protected from liability for ordinary negligence, leaving the implication that it is adopting a gross negligence standard of care across the board. The decision appears to equate the common law business judgment rule with the statutory protection from liability for directors who meet the statutory standard of care, when the drafters of O.C.G.A. § 14-2-830 were careful to state that they were not codifying the business judgment rule. See Comment to § 14-2-830.³ In fact, the language quoted above comprises almost the Court's entire discussion of the issue. Still, this is one of the most important decisions to come down from the Georgia appellate courts in the corporate governance area for many years.

The case arises out of Flexible Products Co.'s purchase of a terminated employee's stock pursuant to a mandatory repurchase obligation. The plaintiff asserted that the Company should have disclosed pending merger discussions because it would have increased the value of his stock. The Court of Appeals' decision followed a jury trial, a plaintiff's verdict and judgment against Flexible Products Co. and two of its officers for $2,729,691, which the Court reversed, ordering a new trial.⁴

In addition to its ruling on the standard of care, the Flexible Products Co. opinion is also noteworthy for other rulings, particularly:

• The Court held that the company had a common law duty to the plaintiff shareholder to disclose its pending merger discussions, even when purchasing his stock pursuant to a mandatory repurchase obligation, because the plaintiff had the option to decide when to sell his shares back to the company over an extended period of time after his termination.
• There was also an important ruling that expert testimony should not have been permitted on the issue of the "materiality" of the undisclosed information concerning merger discussions. The decision on materiality is to be reserved for the jury.
• The opinion also dealt with corporate directors' statutory reliance defense, specifically upholding the express statutory right of corporate directors and officers to rely on advice of counsel under O.C.G.A. §§ 14-2-830(b)(2) and 14-2-842(b)(2).

However, the key ruling is the one on the standard of care, in which the Court held that corporate officers cannot be held liable for ordinary negligence as a matter of law.

On May 24, 2007 another Georgia Court of Appeals panel in another case reached exactly the opposite conclusion. Rosenfeld v. Rosenfeld, 286 Ga. App. 61, 648 S.E.2d 399 (2007). Here is the Court's ruling on the issue in Rosenfeld, in its entirety and verbatim:

In his seventh enumeration of error, the husband contends that the court erred in charging the jury that a corporate officer's fiduciary duty towards the corporation and its shareholders required him to exercise "all due care and diligence." He argues that the relevant standard of care found in OCGA § 14-2-842(a)(2) is a lesser standard, requiring the officer to act "[w]ith the care an ordinarily prudent person in a like position would exercise under similar circumstances."

We hold that there is no meaningful difference between the two standards. The latter standard essentially sets forth the ordinary diligence or negligence standard referenced in OCGA § 51-1-2 ("ordinary diligence is that degree of care which is exercised by ordinarily prudent persons under the same or similar circumstances"), which has been held to require the defendant to exercise "all due care and diligence." Atlantic Coast Line R. Co. v. Anderson.[FN19] Indeed, even in this case, the court first charged the standard as worded in OCGA § 14-2-842 (care of ordinarily prudent person) and then simply explained this standard further as referring to "all due care and diligence." We discern no error.

FN19. Atlantic Coast Line R. Co. v. Anderson, 75 Ga. App. 829, 834(3) (44 S.E.2d 576) (1947).

The Rosenfeld case involved a dispute between a divorced couple concerning, among other things, a close corporation, the assets of which both parties had used for personal expenses prior to the divorce. After the divorce, the husband allegedly "continued to use those assets for his personal use thereafter to her exclusion." Id. at *3. The husband appealed from a judgment on an adverse jury verdict, which the Court of Appeals affirmed.

The Rosenfeld opinion and the Court's reasoning on the standard of care issue are notable in several respects. First, there is no mention of the Flexible Products Co. decision. Rosenfeld creates a conflict that either the Court of Appeals or the Georgia Supreme Court must resolve.⁵

Second, the Court does not appear to have even considered whether the standard of care might be gross negligence, rather than ordinary negligence. Instead, the issue appears to be whether the standard is ordinary negligence or something even more stringent.

Third, the Court sets the standard of care by reference to a statutory definition of "ordinary diligence" and "ordinary negligence" from the Georgia Code's Title 51, which provides general principles governing Georgia tort law for matters ranging from traffic accidents, slip and fall cases, and products liability to financial transactions. The Court did not consider whether the governance of a business corporation's internal affairs, the roles, responsibilities and relationships of officers and directors, and shareholder expectations of profits and entrepreneurial risk-taking do not require more latitude than the law of stoplights, banana peels, flammable fabrics and dishonored checks affords.

Fourth, there is no recognition that the statutory formulation of the duties and standard of care for Georgia corporate officers and directors, O.C.G.A. §§ 14-2-730 and 14-2-842, was adapted not from Title 51, but rather from outside the Georgia Code altogether. It derives, instead, from the Model Business Corporation Act. The opinion also reflects no consideration of the judicial interpretations of this language by courts in other Model Act states, albeit with varying results.⁶

Fifth, the Court reintroduces the concept of "diligence" into the standard of care, a concept discarded by the Georgia Legislature when it amended the 1968 Georgia Business Corporation Code in 1987.⁷

Sixth and finally, there is no mention of the deference to be accorded to director and officer decisionmaking under the business judgment rule, a factor considered important by the Court in setting the standard of care in the Flexible Products Co. case.

At the author's request, one of the counsel in Rosenfeld brought the Flexible Products Co. decision to the attention of the Rosenfeld panel, suggesting that its opinion be modified so that it would not conflict with Flexible Products Co. The Rosenfeld panel rejected that suggestion, arguing that the cases were factually distinguishable and strongly adhering to its original position. The conflict, however, is in the pure statements of law in these two decisions, so factual distinctions are, in the author's judgment, irrelevant. The panel's supplemental opinion on rehearing stated:

Appellee Mary K. Rosenfeld has also suggested to this Court that we ought to revise Division 7 of our opinion, in which we address a jury charge regarding a corporate officer's fiduciary duty towards the corporation and its shareholders. OCGA § 14-2-842 (a) (2) sets forth this duty statutorily as requiring an officer to exercise "the care an ordinarily prudent person in like position would exercise under similar circumstances." Citing Flexible Products Co. v. Ervast, the wife argues that the standard of care is not ordinary diligence and that an officer need only act in good faith to avoid liability.

This is inaccurate. OCGA § 14-2-842 (a), which governs, requires that to avoid liability, an officer must act in good faith ("[i]n a manner he believes in good faith to be in the best interests of the corporation") and with due care ("[w]ith the care an ordinarily prudent person in a like position would exercise under similar circumstances"). See Parks v. Multimedia Technologies. As we state in our opinion above, this due care is in all material respects identical to the ordinary diligence defined in OCGA § 51-1-2 ("ordinary diligence is that degree of care which is exercised by ordinarily prudent persons under the same or similar circumstances"). Flexible Products, supra, is distinguishable on its facts and is inapplicable. Accordingly, the appellee's suggestion to revise the opinion is also denied.

(Internal footnotes omitted.)

Because the Rosenfeld opinion was not unanimous, it is physical precedent only. Rule 33(a), Rules of the Court of Appeals of Georgia. The panel's adamant unwillingness to defer to another panel's binding precedent, however, indicates that there are judges in the Court of Appeals who strongly support a simple negligence standard and would be prepared to do so if the issue were presented en banc there. The statutory definitions and equations involving ordinary prudence, diligence, care and negligence in § 51-1- 2 were not considered in Flexible Products Co.

The standard of care required of officers and directors is a pervasive issue that affects every single Georgia business corporation and every aspect of its management in every area of its business and affairs. It is not merely an abstract matter of corporate governance and accountability, but an issue of very practical significance. Simply put, if the standard of care is ordinary negligence, corporate officers and directors would be more likely to be held personally liable for losses that the corporation or its shareholders suffer.

A petition for certiorari in Rosenfeld to the Georgia Supreme Court was denied on September 10, 2007, leaving the conflict between Rosenfeld and Flexible Products Co. unresolved, but with the Flexible Products Co. under the Court of Appeals' rules the only binding one, at least for the present.

2. Business Judgment Rule, Principal Place of Business and Georgia Securities Fraud: TSG Water Resources, Inc. v. D'Alba & Donovan, Certified Publ. Accountants, P.C., 2007 WL 4455386 (11th Cir., Dec. 20, 2007)

In an unpublished decision, the United States Court of Appeals for the Eleventh Circuit in TSG Water Resources, Inc. v. D'Alba & Donovan, Certified Pub. Accountants, P.C., 2007 WL 4455386 (11th Cir., Dec. 20, 2007) (not published in the Federal Reporter) addressed application of the business judgment rule to a Georgia corporate officer, along with other issues of interest – the test for corporate citizenship for diversity jurisdiction, and issues of reasonable reliance and scienter for common law fraud and fraud under the Georgia securities laws.⁸

In TSG, a Georgia corporation and certain of its investors sued its chief financial officer and auditing firm for errors in financial statements that allegedly caused the board of directors to believe that the corporation's business model was working and that cash flow problems were temporary. As a result, the board failed to take prompt remedial action, and both inside and outside investors made additional investments in the corporation. The plaintiffs asserted claims for breach of fiduciary duty, common law fraud, Georgia securities fraud, and breach of contract against both defendants and professional liability and negligence claims against the auditor.

The District Court granted summary judgment to the CFO on all claims and granted the auditing firm's motion for summary judgment as to all but the professional liability claims. The District Court set aside a jury verdict against the auditor based on an exculpatory clause in its engagement agreement. The 11th Circuit reversed the CFO's summary judgment, but affirmed the judgments in favor of the auditor.

In addressing diversity jurisdiction, the Court reviewed the "total activities test" followed by the 11th Circuit in determining the state in which a corporation's principal place of business is located, which, along with the state of incorporation, is a state in which a corporation is held to be a citizen. The "total activities test" entails a "somewhat subjective" comparison by the district court of the results of (i) a "place of activities" analysis, i.e., the location of most of the corporation's production and sales and (ii) the identification of its "nerve center," i.e., its corporate offices. The Court upheld the District Court's finding that the corporation's principal place of business was in Georgia.

On the breach of fiduciary duty claim, the District Court found that the CFO was entitled to rely on the auditor and was protected by the business judgment rule. The Appellate Court reversed, holding that the fact that the CFO consulted with outside experts was not by itself dispositive and that material issues of fact existed both as to his reliance on the auditor and as to whether he "abused his discretion" or acted in bad faith in failing to disclose the accounting errors to the Board after they came to light.

The District Court also granted summary judgment to both defendants on the common law fraud and securities fraud claims,⁹ finding that there was no evidence of justifiable reliance, intent, or proximate cause.¹⁰ The Court of Appeals reversed as to the CFO, holding that material issues of fact remained as to all three factors. The Court differentiated between scienter for common law fraud and under the Georgia securities laws, finding that common law fraud required an affirmative intent to deceive, while severe recklessness would suffice for scienter under the Georgia securities laws.

3. Breach of Fiduciary Duty – Competition and Corporate Opportunity: Impreglon, Inc. v. Newco Enterprises, Inc., and W. Curt Jarrell, 2007 WL 1020834 (N.D. Ga., March 30, 2007); Lou Robustelli Mktg. Servs., Inc. v. Robustelli, 286 Ga. App. 816, 650 S.E.2d 326, (2007); Hilb, Rogal & Hamilton Co. of Atlanta, Inc. v. Holley, 284 Ga. App. 591, 644 S.E.2d 862 (2007)

In three decisions in 2007, the courts addressed corporate fiduciary duties in the litigation involving claims of misappropriation of corporate opportunities and confidential business information by departing personnel.

In Impreglon, Inc. v. Newco Enterprises, Inc. and W. Curt Jarrell, 2007 WL 1020834 (N.D. Ga., March 30, 2007), Impreglon, a Georgia corporation, sued Newco Enterprises and its employee, Curt Jarrell, for breach of fiduciary duty. Newco was a significant customer of Impreglon, and Jarrell was formerly Impreglon's President and CEO. While still employed by Impreglon, Jarrell discussed with Newco the possibility of joining Newco, formed a company of his own that would compete with Impreglon, and obtained written assurances from Newco that his new company, instead of Impreglon, would receive Newco's business upon his leaving Impreglon.¹¹

Impreglon filed a motion for summary judgment as to liability, which the Court granted in part. The Court noted that fiduciary obligations do not serve as an "absolute bar" to competition between an officer and corporation (citing Gresham & Associates, Inc. v. Strainese, 265 Ga. App. 559, 595 S.E. 2d 82, 84 (2004)), and merely planning to enter a competing business is not a breach of fiduciary duty. The Defendant's extensive negotiations with Newco regarding his employment, incorporation of a new company to compete with Impreglon, and his extensive discussion of various lease options were "mere preparation for competition," that did not rise to the level of a breach of fiduciary duty. However, his attempts to secure the business of Impreglon's customers during his employment with Impreglon constituted a breach of Mr. Jarrell's fiduciary duty as a matter of law.

Similarly, the Lou Robustelli Mktg. Servs., Inc. v. Robustelli, 286 Ga. App. 816, 650 S.E.2d 326 (2007), the Georgia Court of Appeals held that a former employee of a family business, who served as president, owed and violated fiduciary duties to the company upon resigning, but that the former employee's wife, who only performed clerical work for the company and was not an officer, director or agent of the company, did not.

The defendants worked for a Georgia affiliate of a Connecticut-based family company. The husband served as president of the affiliate corporation and the wife performing clerical work for the business, but was neither an officer, director nor agent of the company. They were alleged to have converted funds and taken a customer list on leaving the company.

The Georgia Court of Appeals upheld the jury's verdict that the husband had breached his fiduciary duties and converted company property. The Court also upheld the jury's verdict against wife for conversion. However, it reversed the verdict against her for breach of fiduciary duty because she was not an officer, director, or agent of the company. The Court determined she was not an agent because she lacked the authority to create binding obligations on behalf of the company by contracting with third parties.

In Hilb, Rogal & Hamilton Co. of Atlanta, Inc. v. Holley, 284 Ga. App. 591, 644 S.E.2d 862 (2007), the Georgia Court of Appeals held that material issues of fact existed as to whether a corporate vice president owed a fiduciary duty to a former employer and whether he breached that duty and a duty of loyalty by failing to tell the employer of an acquisition opportunity and disclosing it to a competitor instead. As its sole legal authority, the Court cited Tronitec, Inc. v. Shealy, 249 Ga. App. 442, 452(8), 547 S.E.2d 749 (2001), overruled on other grounds, Williams Gen. Corp. v. Stone, 279 Ga. 428, 614 S.E.2d 758 (2005), a decision holding that at-will employees could have fiduciary duties if they have the power to bind the corporation. While not stated in the opinion, the inescapable implication of the decision is that officer status does not necessarily carry with it fiduciary duties and that the touchstone is the same for agency, namely, whether the officer has authority to bind the corporation.

Contracting authority understandable should carry with it fiduciary duties, but that is only one of the responsibilities with which corporate officers may be entrusted. To focus narrowly on contracting authority or even decision-making power, in the author's opinion, would be to ignore other critical functions, e.g., advisory, custodial or supervisory roles, in which corporations must place trust and confidence in their officers.

4. Representative Capacities and Individual Liabilities: Keane v. Annice Heygood Trevitt Support Trust, 285 Ga. App. 155, 645 S.E.2d 641 (2007); Clay v. Oxendine, 285 Ga. App. 50, 645 S.E.2d 553 (2007)

In Keane v. Annice Heygood Trevitt Support Trust, 285 Ga. App. 155, 645 S.E.2d 641 (2007), the Georgia Court of Appeals held that a guarantor of a corporate debt cannot sign the guarantee agreement in a "representative capacity" as a shareholder or director of the corporation.

Keane, a shareholder and director of DQDAL, Inc., signed a guarantee of a promissory note in which Keane promised to pay DQDAL's obligations to the plaintiff Trust in the event that DQDAL failed to do so. The Trust filed suit when Keane did not honor the guaranty.

Keane argued that he was not personally liable under the Guaranty because he signed it in a representative capacity as (1) a shareholder of DQDAL, and alternatively, (2) a director of the corporation. The Court of Appeals upheld the trial court's grant of summary judgment for the Trust, rejecting both of Keane's arguments. First, the court of appeals rejected Keane's argument that he signed the guaranty in his capacity as a shareholder, expressing doubts that any contract can be signed "by one in the lone capacity of a shareholder." Second, the Court rejected Keane's argument that he signed the guaranty in his capacity as a director, reasoning that the guaranty would be rendered worthless if Keane signed it as a director, because the corporation was already liable for the debt under the promissory note and would be guaranteeing its own indebtedness.

In Clay v. Oxendine, 285 Ga. App. 50, 645 S.E.2d 553 (2007), the Georgia Court of Appeals held that a cash advance business' "sale/leaseback" program violated the Georgia anti-payday lending statute and the Georgia Industrial Loan Act, and held the corporate officers personally liable for participating in the program's activities. It rejected the officers' arguments that their conduct constituted the actions of the corporation for which they should not be held personally liable.

John Oxendine, the Industrial Loan Commissioner for the State of Georgia, sued several individuals and corporations for alleged violations of the anti-payday lending statute, O.C.G.A. § 16-17-1, and the Georgia Industrial Loan Act, O.C.G.A. § 7-3-1. A 2002 state investigation that found that the defendants were engaging in illegal payday lending. In response to a change in the law in 2004, the defendants began engaging in "sale/leaseback" transactions with their customers. The Court determined that the "sale/leaseback" program was in fact a sham to disguise an illegal payday loan scheme.

The Court held that the individual defendants "took part in, specifically directed, participated or cooperated in the payday lending activities." Id. at 58, 645 S.E.2d at 559. The Court rejected the individual defendants' efforts to shield themselves from liability by claiming that their acts were acts of the corporations and not their own personal actions. It determined that they were personally liable for liable for the payday lending violations because they controlled and dominated the corporations.

5. Executive Compensation and Agreements: Hinely v. Alliance Metals, Inc. of Atlanta, 285 Ga. App. 230, 645 S.E.2d 584 (2007)

In Hinely v. Alliance Metals, Inc. of Atlanta, 285 Ga. App. 230, 645 S.E.2d 584 (2007), a case involving parallel state and federal proceedings, the Georgia Court of Appeals addressed claims that a company founder and president asserted against his former employer and its acquirer for allegedly breaching his employment agreement by engaging in illegal price-fixing in violation of federal antitrust laws. The executive claimed that the illegal conduct prevented him from performing his duties without participating in the wrongdoing. He notified the United States Justice Department, and the owner of the acquiring company eventually pleaded guilty to criminal antitrust violations. After experiencing an allegedly retaliatory reduction in his responsibilities, the plaintiff resigned and filed suit in the State Court of Fulton County for breach of contract, fraudulent inducement, tortious interference with a contract and breach of the implied covenant of good faith and fair dealing.

The former employer responded by filing suit in federal court claiming that the executive, after leaving the company, committed trademark violations and breached a non-competition agreement. The executive defended the federal claims based on the illegal conduct alleged in his state action which he argued barred the company from enforcing his employment contract. The federal courts held in favor of the former employer on both claims, Alliance Metals v. Hinely Indus., 1998 WL 34300554 (N.D. Ga., Feb. 19, 1998), aff'd, 222 F.3d 895 (11th Cir. 2000). Considering defenses of collateral estoppel and res judicata, the Georgia Court of Appeals found, however, that certain breach of contract issues could be re-litigated because the federal courts' ruling was reached in a preliminary injunction order, not in a final judgment. Res judicata did not apply because the plaintiff had filed his state court action first and he had only raised the breach of contract claim in the federal case as a voluntary defense and not a compulsory counterclaim.

Claims dealing with calculations of incentive compensation, however, were barred by the plaintiff's failure to submit them to arbitration as the employment contract required. The trial court rejected the executive's pivotal argument that the former employer breached the employment contract by engaging in the alleged illegal scheme; it held that the plaintiff could have continued to perform his job without violating the law and also held that the employment contract itself was not illegal and void. The Court of Appeals noted these rulings, but did not express agreement or disagreement.

6. Contract, Authority and Agency Issues: McKenna v. Capital Res. Partners, IV, L.P., 286 Ga. App. 828, 650 S.E.2d 580 (2007); Huffman v. Armenia, 284 Ga. App. 822, 645 S.E.2d 23 (2007)

In McKenna v. Capital Res. Partners, IV, L.P., 286 Ga. App. 828, 650 S.E.2d 580 (2007), a private equity dispute, the Georgia Court of Appeals reversed a summary judgment entered against the plaintiff minority shareholders of Loyaltyworks, Inc., a Georgia corporation, who were seeking to enforce an alleged oral agreement with the majority shareholder to purchase their shares. The Court found that there were issues of material fact regarding whether a representative of Loyaltyworks' majority shareholder had apparent authority to bind the corporation to the transaction which required Loyaltyworks to cancel a promissory note owed by one of the minority shareholders, when Loyaltyworks' board of directors had never approved the cancellation. The Court also found that there were issues of material fact as to (a) whether the majority shareholder had entered into a binding agreement to purchase the minority shares when a letter beginning the negotiations expressly conditioned the enforceability of any deal on the execution of a written agreement, and (b) whether the changes requested by minority shareholders' counsel to a draft of the stock purchase contract were material changes indicating the lack of agreement on essential terms.

When the majority shareholder decided to back out of the deal, the minority shareholders sued to enforce the alleged oral agreement to sell their shares and to cancel the shareholder note. Loyaltyworks denied that it had agreed to the settlement or that the majority shareholder's representative had authority to bind it to the oral agreement. It counterclaimed on the promissory note, arguing that it had never agreed to cancel it.

The Georgia Court of Appeals found material issues of fact as to whether the stock purchase agreement was contingent on executing a written agreement, and if not, whether the parties had a binding oral agreement that contained all material terms. The Court also found a dispute as to whether the majority shareholder's representative had authority to bind Loyaltyworks or to speak for Loyaltyworks board of directors of based on his position as a managing partner of the majority shareholder. With respect to cancellation of the shareholder note the Court stated, "That the board never actually voted on the issue is not dispositive, especially as Jenks changed his mind about buying the plaintiffs' stock." This statement necessarily implies that the majority shareholder's representative could have bound Loyaltyworks, without board approval, to cancel the note. Compare O.C.G.A. § 14-2-621(b) and -(c) (board may authorize acceptance of notes as consideration for issuance of stock, but must determine that consideration is adequate).

In Huffman v. Armenia, 284 Ga. App. 822, 645 S.E.2d 23 (2007), the Court of Appeals affirmed civil contempt citations against a corporate president, where the president attempted to thwart a temporary restraining order and receivership appointment obtained by minority shareholders by his pro se filing of a bankruptcy petition on behalf of the corporation that had not been authorized in advance by the corporation's board of directors. The Court noted that the president as a non-lawyer "lacked the capacity" to file the bankruptcy petition on behalf of the corporation. The Court rejected the argument that any order barring access to federal bankruptcy proceedings is invalid because the TRO did not prevent any authorized party from pursuing bankruptcy protection and because the president's filing had been improper and unauthorized.

7. Shareholder Buy-Sell Agreement Valuation Issue: Barton v. Barton, 281 Ga. 565, 639 S.E. 2d 481 (2007)

In Barton v. Barton, 281 Ga. 565, 639 S.E. 2d 481 (2007), the Georgia Supreme Court, in a matter of first impression, addressed the issue of whether in valuing the stock of a closely-held corporation for purposes of dividing marital property, the Court is bound by the value established in a buy-sell provision of a shareholder agreement.

In Barton, the trial court had adopted the decision of an arbitrator dividing the marital assets. The husband appealed, claiming error in the division of marital property, specifically his 50% interest in a closely-held corporation. The buy-sell provision of the stockholder agreement provided that in the event of any of the triggering events, the other shareholder had the right to purchase the husband's stock at a price to be determined by a formula. Under the formula, the stock would have been valued at $342,000. However, the arbitrator valued the stock at $508,000 based on a fair market valuation. The Supreme Court affirmed the trial court's decision to adopt the Arbitrator's decision. The Court recognized the split of authority in other states on the issue. It adopted the majority view that the value established in the buy15 sell agreement of a closely-held corporation is not binding on the non-shareholder spouse who has not signed the buy-sell agreement.

8. Direct versus Derivative Actions and Exclusivity of Appraisal Remedy under Delaware Law: Suzie Schutt Irrevocable Family Trust v. NAC Holding, Inc., 283 Ga. App. 834, 642 S.E.2d 872 (2007); Fansler Foundation v. American Realty Investors, Inc., 2007 WL 2695630 (E.D. Cal., Sept. 11, 2007).

In Suzie Schutt Irrevocable Family Trust v. NAC Holding, Inc., 283 Ga. App. 834, 642 S.E.2d 872 (2007), the Georgia Court of Appeals held that a shareholder's sole remedy under section 253 of the Delaware General Corporation Law, the short-form merger statute, is an appraisal hearing before the Delaware Court of Chancery.

Delaware's short-form merger statute allows a parent corporation to merge with one of its subsidiaries without shareholder approval where the parent owns at least 90% of the subsidiary's stock. The defendant shareholders in the present case owned 99.76% of NAC Holding, Inc.'s ("NAC") stock. They effected a section 253 merger of NAC with its parent corporation, El Dorado, offering NAC's minority shareholders one cent per share. The minority shareholders filed a motion to enjoin the merger, but the trial court denied the request because the shareholders' "core concern" was their dissatisfaction with the amount NAC offered for each share.

The Georgia Court of Appeals affirmed the trial court's decision, holding that, pursuant to section 253(d), the shareholders had only one remedy: an appraisal hearing before the Delaware Court of Chancery. Further, the shareholders' failure to seek an appraisal hearing in the method prescribed by the Delaware General Corporation Law and their lack of standing to assert either direct or derivative claims against NAC left them without any remedy. See DEL. CODE. ANN. tit. 8, § 262 (2007). The part of the Court's ruling on exclusivity of Delaware Chancery Court jurisdiction may be erroneous, however, since the statute can be read merely to require that within Delaware, the Chancery Court, rather than the Superior Court, has jurisdiction over an appraisal proceeding.

A California federal district court in Fansler Foundation v. American Realty Investors, Inc., 2007 WL 2695630 (E.D. Cal., Sept. 11, 2007), denied a motion for partial summary judgment based on the defendants' efforts to characterize the plaintiffs' claims as dissenters' claims for fair value. Plaintiff was a non-profit charitable foundation that sold its interest in four hotel properties to American Realty Trust ("ART") in exchange for cash and convertible preferred Series F stock of ART. In 1999, ART merged with an affiliate through the creation of a holding company, American Realty Investors, Inc. ("ARI"). The Plaintiff foundation eventually approved the merger and received Series A convertible, preferred stock of ARI in exchange for its existing ART preferred stock. When ARI began to delay making the required dividend payments, the foundation sued, alleging that it was fraudulently induced to approve the merger by ARI's promise to list the ARI Series A shares on the New York Stock Exchange. ARI defended, arguing that the suit was merely Plaintiff's belated attempt to exercise its dissenters' rights to receive "fair value" for a merger that had already happened, in violation of the 3-year statute of limitations in O.C.G.A. § 14-2- 1332. The Court held that the "gravamen" of the suit was in reality an action for fraudulently inducing the foundation not to exercise its rights. The Court went on to note that even if the "gravamen" of the suit were the exercise of dissenters' rights, it was not barred under Georgia law because the Plaintiffs had set forth facts evidencing that its approval of the merger was procured through fraud.

9. Nonprofit Corporation Board Election: Nyugen v. Tran, 287 Ga. App. 888, 652 S.E.2d 881 (2007)

The Georgia Court of Appeals in Nyugen v. Tran, 287 Ga. App. 888, 652 S.E.2d 881 (2007) provisionally upheld the validity of an election of a board of directors by the membership of a Georgia nonprofit corporation where, at the time of the election, the corporation lacked officers, directors and bylaws through which a meeting of the membership could be called. The case involved a battle for control over a Buddhist temple. The faction in control had held a meeting of the congregation at which a meeting of members was scheduled. They provided notice of the meeting to the temple's entire membership. A majority of the membership attended the meeting and unanimously elected the faction leaders as the new Board. The trial court found the meeting and election to have been validly conducted and entered an interlocutory injunction barring the insurgent faction's representatives from holding themselves out as authorized to act for the temple. The Court of Appeals reviewed the provisions of the Georgia Nonprofit Corporation Code requiring an annual meeting, O.C.G.A. § 14-3-701, and the provisions for calling special meetings of members, O.C.G.A. § 14-3-702. The Court noted that there was no express statutory procedure for members to call a meeting unless authorized by the bylaws or unless a written demand is delivered to a corporate officer – neither of which conditions existed at the time the meeting was called. Finding the notice of the meeting to be adequate and noting the attendance by a majority of members and the unanimity of the election, the Court of Appeals upheld the validity of the election for purposes of the interlocutory injunction, pointing out that the decision was not final.

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