10. Administrative Dissolution: Foster v. Clayton County Judicial Circuit of the State of Georgia, et al., 2007 WL 569851 (N.D. Ga., February 20, 2007); Williams v. Martin Lakes Condominium Association, Inc., 284 Ga. App. 569, 644 S.E.2d 424 (2007)
In Foster v. Clayton County Judicial Circuit of the State of Georgia, et al., 2007 WL 569851 (N.D. Ga., February 20, 2007), the United States District Court for the Northern District of Georgia denied relief against an administratively dissolved corporation because under Georgia law it could only conduct business activities that are necessary to wind up and liquidate its business and affairs. O.C.G.A. § 14-2- 1421(c).12
The plaintiff, a convicted prisoner, sued Center for Prisoners’ Legal Assistance, P.C. (“CPLA”), an administratively dissolved Georgia corporation, to obtain assistance in overturning his conviction. CPLA failed to answer the complaint and default was entered against it. The plaintiff asked the Court to enter a default judgment ordering CPLA 1) to hire counsel on his behalf to defend him in a yet-to-be-filed state habeas corpus action, and 2) to pay all costs associated with that action and his criminal appeal pending in the 11th Circuit. The Court rejected the plaintiff’s request because, as an administratively dissolved corporation, CPLA was barred by O.C.G.A. § 14-2-1421 from performing the services that the Plaintiff asked the Court to order.
Although not expressly stated in the opinion, the necessary implication of the ruling is that the relief requested was not in furtherance of winding up and liquidating the corporation and thus fell outside the limited scope of the business which an administratively dissolved corporation is permitted to conduct.
In Williams v. Martin Lakes Condominium Association, Inc., 284 Ga. App. 569, 644 S.E.2d 424 (2007), the Georgia Court of Appeals, in what it denoted a matter of first impression, addressed the issue of whether a nonprofit corporation that has been administratively dissolved, but later reinstated, has the capacity to bring legal action during the period of its dissolution.
In Georgia, a nonprofit corporation can be administratively dissolved by the Secretary of State pursuant to O.C.G.A. § 14-3-1421. The most common reason for administrative dissolution is the corporation’s failure to file its annual report with the Secretary of State. The corporation can file for reinstatement by following the procedures set out in O.C.G.A. § 14-3-1422. There is no time limit on the period during which a dissolved corporation can apply for reinstatement. O.C.G.A. § 14-3-1422(d) provides:
"When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred."
In Williams, Martin Lakes Condominium Association, Inc. ("Martin Lakes") was administratively dissolved in 1993, but its corporate charter was reinstated in 2000. In 1999, Martin Lakes filed suit against Williams, a condominium owner, to recover past-due fees and assessments. Williams argued that Martin Lakes did not have the legal capacity to bring legal action in 1999 because the corporation was dissolved at that time.
The Court of Appeals disagreed, stating that reinstatement of an administratively dissolved corporation validates the corporation’s existence and privileges back to the date of the dissolution. Thus, under Georgia law, a reinstated corporation effectively does have the capacity to bring legal action during the period of time between its dissolution and reinstatement, no matter how long that period lasts.
The Georgia Business Corporation Code provisions for reinstatement of administratively dissolved corporations in O.C.G.A. § 14-2-1422 are identical with those of the Georgia Nonprofit Corporation Code, so it is likely that this decision will be considered as authority in interpreting § 14-2-1422.
11. Service of Process under O.C.G.A. § 14-2-504: B&B Quick Lube, Inc. v. G&K Services Company, 283 Ga. App. 299, 641 S.E.2d 198 (2007)
In B&B Quick Lube, Inc. v. G&K Services Company, 283 Ga. App. 299, 641 S.E.2d 198 (2007), the Georgia Court of Appeals upheld service of process under O.C.G.A. § 14-2-504, the special statutory provision in the Georgia Business Corporation Code for service of process on corporations, as an alternative to O.C.G.A. § 9-11-4, the Georgia Civil Practice Act’s rule on service of process.
G&K Services Company sued B&B Quick Lube, Incorporated for breach of contract. G&K employed the Fulton County Sheriff to serve process on B&B’s registered agent at the address listed with the Secretary of State. The Sheriff unsuccessfully attempted service on B&B three times at that address. G&K proceeded to mail copies of the complaint via certified mail to B&B at the same address and thereafter obtained confirmation that the package had been received.
B&B failed to respond to the complaint, and G&K obtained default judgment. B&B appealed the default judgment arguing that service of process was ineffective in two ways: (1) G&K did not act with reasonable diligence in attempting to serve B&B’s registered agent, and (2) an employee, rather than a corporate officer, received the complaint when it was mailed to B&B.
The Court of Appeals disagreed with B&B, holding that process was sufficient pursuant to O.C.G.A. § 14- 2-504. Section 14-2-504, the Georgia Business Corporation Code’s service of process statute, is an alternative to O.C.G.A. § 9-11-4, the Civil Practice Act’s service of process statute. Typically, plaintiffs serve process on a Georgia corporation pursuant to O.C.G.A. § 9-11-4(e)(1), under which a plaintiff must serve process on the president or an officer, secretary, managing agent, cashier or other agent of the corporation. If such service cannot be effected, O.C.G.A. § 9-11-4(e)(1) provides that the Secretary of State is the corporation’s agent for service of process. By contrast, O.C.G.A. § 14-2-504(b) authorizes service of process via registered, certified, or statutory overnight mail where a Georgia corporation does not have a registered agent or where the plaintiff, after exercising reasonable diligence, cannot serve the corporation at its listed address. O.C.G.A. § 14-2-504 provides an alternative, permissible way to serve process on a Georgia corporation.
The Court of Appeals in B&B held that G&K’s three service attempts at B&B’s listed address constituted "reasonable diligence" under O.C.G.A. § 14-2-504(b). The Court further held that under O.C.G.A. § 14- 2-504(b), statutorily mailed service is effective even when received by an employee because this statute does not require receipt by a registered agent or a corporate officer.
12. Disputes over Stock Ownership or Investments. Wright v. AFLAC, Inc., 283 Ga. App. 890, 643 S.E.2d 233 (2007)
In Wright v. AFLAC, Inc., 283 Ga. App. 890, 643 S.E.2d 233 (2007), the Georgia Court of Appeals addressed the evidentiary requirements of proving stock ownership where the stock has been transformed over time due to changes in entity control.
The plaintiffs brought action against AFLAC, Inc., claiming that stock they purchased from a salesman in 1957 had transformed, over the years, into AFLAC stock. The Wrights testified that they "believed" their stock was now AFLAC stock because a friend, who had purchased stock from the same salesman in the 1950s, informed them that her stock had been converted into AFLAC stock. The Georgia Court of Appeals upheld the trial court’s grant of summary judgment for AFLAC, because the Wrights’ mere "speculation" was not sufficient to create a triable issue on whether the stock they purchased in 1957 had been transformed into AFLAC stock.
The significance of the Wright decision is that, if the Wrights had presented evidence sufficient to create an issue of fact, AFLAC would then have had the burden to prove that the Wrights’ stock had not transformed into AFLAC stock. Georgia statutory law places an affirmative duty on corporations to maintain stock ownership records in an appropriate manner; the records must be maintained in "a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each." O.C.G.A. § 14-2-1601(c).
B. PARTNERSHIPS
13. Limited Partner Remedies for General Partner’s Misappropriation of Partnership Property: Bloomfield v. Bloomfield, 282 Ga. 108, 646 S.E.2d 207 (2007)
Bloomfield v. Bloomfield, 282 Ga. 108, 646 S.E.2d 207 (2007). In this divorce action, the Supreme Court of Georgia found that trusts established for the benefit of the parties’ three children were inappropriately awarded direct ownership interests in real property transferred out of a family limited partnership in which the trusts were limited partners. The children’s trusts were entitled to cash compensation for the value of the property, instead.
The wife’s father originally purchased a Ponte Vedra home and placed it into a family limited partnership as the partnership’s sole asset. The wife’s father then gave limited partnership interests to the wife, her siblings and trusts for the benefit of her children. The wife’s father also gave his 1% controlling interest as general partner of the partnership to the husband. Husband and wife bought out the limited partnership interests of the wife’s siblings, but not the interests of their children’s trusts. The husband later transferred the property into the couple’s names jointly, without paying the partnership for the property. The husband admitted in his testimony that his children’s trust should be compensated for their partnership interest. The trial court awarded the trusts a pro rata interest in the transferred property.
The Court began by noting that under O.C.G.A. § 14-9-701, the limited partnership interests were personal property and did not convey a direct interest in the assets of the partnership. The partnership documents stated that "[n]o partner shall have the right to demand property other than cash in return for his contribution to the partnership," which is in accordance with O.C.G.A. § 14-9-605. The partnership agreement also provided that upon sale or transfers of the real property interest, limited partners were entitled to the proceeds. The Court found that under both the Georgia statute and the partnership agreement, the children’s trusts are entitled to cash compensation, not an ownership interest in the transferred real property. There did not appear to be any question about whether the husband was able to pay the partnership for the value of the property. Perhaps for that reason, the Court did not consider the question of whether the trial court in an appropriate case could grant specific equitable relief with regard to the property.
14. Breach of Fiduciary Duty in Purchase of Limited Partnership Interest: French v. Sellers, 2007 WL 891306 (M.D. Ga., Mar. 21, 2007)
In French v. Sellers, 2007 WL 891306 (M.D. Ga., Mar. 21, 2007), the United States District Court for the Middle District of Georgia denied summary judgment to a general partner and majority interest-holder of a limited liability limited partnership on claims of breach of fiduciary duty and fraud, finding that there were issues of material fact as to whether the general partner had made material misrepresentations or omissions in connection with his purchase of a limited partnership unit for $15,000 when he was currently in negotiations to sell the limited partnership for what eventually amounted to $180,000 per limited partnership unit.
Barry Sellers was the general partner and majority interest holder in Wilkinson Kaolin Associates, LLLP ("WKA").13 In 1982, he sold a one-unit limited partnership interest to Flora French for $32,500. Between 1982 and 2002, Sellers sent information to French and other investors that "painted a decidedly mixed picture" of the partnership’s finances, both in the past and with regard to future prospects.
Beginning in 2001, Sellers was interested in expanding or selling WKA, and he hired an investment banker to evaluate the value of the business. He obtained a valuation and offered the business for sale in early 2002 and had received two offers by August of 2002 to purchase the business for between $10 million and $14 million. In November of 2002, French, who knew nothing of Sellers’ plans for the business, decided to sell her partnership unit. She had her husband call Sellers to discuss the feasibility of a sale. Sellers allegedly told Mr. French that he was not sure whether there was any market for the unit. He did not mention anything about selling the business or the offers and later that day forwarded an "Assignment of Limited Partnership Unit" to French to sign. The agreement indicated that French was assigning her unit to Sellers’ wife for $15,000. It also contained language indicating that Sellers had hired an investment banker to "examine the feasibility of partnership sale, expansion, or acquisition," that the parties had agreed that the $15,000 price was not necessarily indicative of the fair market value of the unit and that the unit "may in the future become more valuable."
Approximately one year after French sold her unit to Sellers’ wife, Sellers sold WKA for $27,150,000. This amounted to approximately $180,000 per limited share. French sued, claiming, inter alia, securities fraud violating Rule 10b-5, material misrepresentation, fraud, and breach of fiduciary duty. The Court rejected arguments that the acknowledgements in the assignment agreement rendered the information regarding the Sellers’ efforts to sell the business and the offers he had received immaterial. The Court held that there were issues of material fact as to whether Sellers’ nondisclosures misled French as to the value of her unit and its marketability.
15. Partnership Buy-Sell Agreements Bankruptcy: In re Newlin, 370 B.R. 870 (Bankr. M.D. Ga., June 29, 2007)
In In re Newlin, 370 B.R. 870 (Bankr. M.D. Ga., June 29, 2007), the Bankruptcy Court for the Middle District of Georgia held that a trustee who did not act to assume a partnership agreement within the sixtyday period set by the Bankruptcy Code had no authority to force the debtor partner to withdraw from the partnership or to force the remaining partner to purchase the debtor partner’s interest, finding that the mandatory purchase right was an executory portion of the contract.
The debtor in the bankruptcy case was a dentist, Dr. Newlin, who owned a one-half interest in a professional partnership, Newlin & Winchester Partners ("N&W"), a Georgia general partnership. Dr. Newlin had created the partnership by a written agreement with Dr. Winchester in 1999, when Dr. Newlin sold Dr. Winchester a one-half interest in his dental practice for $347,500. The withdrawal provision in the partnership agreement provided that when one partner issued a notice of withdrawal, the other partner had to purchase the withdrawing partner’s interest in the partnership within between 180 and 240 days. The agreement contained a formula for calculating the amount to be paid.
In 2004, Dr. Newlin filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which was converted into a claim under Chapter 7 in 2006. In the Spring of 2006, the trustee sent a letter to Dr. Winchester purporting to withdraw Dr. Newlin from the partnership and attempting to force Dr. Winchester to purchase Dr. Newlin’s interest. Dr. Newlin strongly objected to this action and threatened the trustee with litigation. Eventually, the trustee and Dr. Newlin entered into an agreement that Dr. Newlin himself would purchase the interest from the bankruptcy estate for $35,000. A creditor of the estate, Columbus Bank & Trust Co. ("CB&T"), filed an objection to the trustee’s motion to sell the partnership interest. The issue was whether the proposed sale was in the best interest of the estate. The Bankruptcy Court found that it was not.
A threshold question was whether the trustee had the authority to withdraw Dr. Newlin from the partnership and to require Dr. Winchester to follow the mandatory withdrawal "buy-out" as set forth in the partnership agreement. The Court first had to determine whether the partnership agreement was executory under the Bankruptcy Code. If a trustee does not assume an executory contract of the debtor within sixty days after the bankruptcy petition is filed, then the contract is deemed rejected. Here, the trustee did nothing to assume the partnership agreement within the sixty-day time frame.
A previous decision had held that partnerships should be viewed as a combination of property interests in the profits of the partnership and an executory contract with respect to the governance of the partnership. CB&T argued that the exercise of the mandatory purchase right did not relate to the management of the property, rather it was related to the sale of a property right. However, the Court held that it was subject to the executory contract limitations in the Bankruptcy Code because it was a right reserved to an acting partner in the partnership and was a managerial right. Because the mandatory withdrawal provision of the agreement was part of an executory contract, which the trustee did not assume, the trustee was not permitted to enforce that provision.
Since the trustee had no authority to either withdraw Dr. Newlin from the partnership or to compel Dr. Winchester to purchase Dr. Newlin’s interest, the trustee instead had to prove that the sale to Dr. Newlin for $35,000 was in the best interest of the bankruptcy estate. Based on evidence that as late as 2004, Dr. Newlin had estimated the value of his interest in the partnership to be $500,000, the Court held that the trustee had not carried her burden of proving that the proposed sale to Dr. Newlin was in the best interests of the estate. Therefore, the Court sustained CB&T’s objection to the trustee’s motion to sell to Dr. Newlin.
16. Derivative Suits by Limited Partners in an ULPA Limited Partnership: Hendry v. Wells, 286 Ga. App. 774, 650 S.E.2d 338 (2007)
In Hendry v. Wells, 286 Ga. App. 774, 650 S.E.2d 338 (2007), the Georgia Court of Appeals held that limited partners in a limited partnership governed by the Uniform Limited Partnership Act ("ULPA"), O.C.G.A. §§ 14-9A-1, et seq. did not have standing to assert certain claims because they were derivative in nature.14 The nature of the injury determines whether a claim by limited partners against the general partners is derivative or personal. Since the limited partners had not sought to sue derivatively, the Court did not decide whether ULPA, which does not contain a statutory derivative action provision, permits limited partners to sue derivatively.
Class B limited partners of a Georgia limited partnership sued the general partners and the partnership itself. The defendants argued that some of the claims were derivative in nature, not direct claims on which the limited partners could sue individually or as a class. The trial court concluded that the "special injury" rule that determines whether corporate shareholder claims are derivative or direct applies equally to limited partners attempting to bring a direct claim against a general partner. The Court of Appeals looked to various provisions of ULPA in deciding the issue, although the statute, unlike RULPA, does not contain provisions expressly authorizing derivative actions by limited partners.15 The Court noted that limited partners have contract rights and that general partners owe fiduciary duties to limited partners. The Court examined the nature of injury claimed and the relief sought. It held that when the claim is one that would benefit the limited partners and not the partnership as a whole, then it is not a derivative claim and can be brought by the limited partners in their individual capacity.
The Court held that the limited partners could bring a claim against the general partners alleging that the general partners blocked the settlement of an earlier lawsuit which would have been yielded payments to the Class B limited partners. Because, as the Court viewed it, the limited partners and not the partnership suffered the resulting injury, that claim was not derivative in nature and the limited partners could bring the action directly. The Court held that the limited partners could also bring a claim based on a 2002 consent solicitation and involving an injury to their right to receive compensation because it, too, was not an injury to the partnership itself and therefore not derivative. A third claim brought by the limited partners, based on a 2005 consent solicitation, involved the general partners’ dishonoring a promise to waive outstanding management fees owed to an affiliate of the general partners, if a majority supported a partnership agreement amendment. The general partners claimed that the partnership agreement required unanimous consent of the Class A partners which prevented the arrangement from going forward. The Court held that this claim could not be brought by the limited partners directly because it involved a contractual relationship between the limited partnership and a third party, namely the management company affiliate. Therefore, any successful resolution would inure to the benefit of the entire partnership and hence the claim was derivative in nature.
However, the Court did not decide whether ULPA, which as noted lacks a statutory derivative action provision, actually permits limited partners to sue derivatively, since the limited partners did not purport to assert any claims derivatively. The Court also ruled on several statute of limitations issues of significance discussed below.16
17. Existence of Partnerships or Joint Ventures: Ellison v. Hill, ___ Ga. App. ___, 654 S.E.2d 158 (2007); Optimum Techs., Inc. v. Henkel Consumer Adhesives, Inc., 496 F.3d 1231 (11th Cir. 2007)
Ellison v. Hill, ___ Ga. App. ___, 654 S.E.2d 158 (2007), ruled that it is not necessary to offer expert evidence of profitability in accordance with generally accepted accounting principles in order to establish a claim to a share of partnership profits. In that case, Darrell Ellison and Allen Hill formed a used car business, with Ellison providing the capital and Hill responsible for the day-to-day management of the business. Following Ellison’s death, Hill presented a claim against his estate, claiming that the business had been a partnership and that he was entitled to one half of the profits. The estate moved for summary judgment, claiming that there were no profits to share. It filed affidavits from certified public accountants, who testified that they had examined and recast the balance sheet of the business in accordance with generally accepted accounting principles and found that the business had a negative equity.17 Hill offered his own testimony as manager stating that internal and tax records showed the business to be operating profitably and having a positive net worth. The Georgia Court of Appeals rejected the estate’s argument that Hill was required to offer expert testimony on the issue of the business’s profitability or that profitability must be proved in accordance with GAAP. It held that Hill’s familiarity as manager with records and accounts of the business entitled him to testify on personal knowledge, and that his testimony raised an issue of fact precluding summary judgment.
In Optimum Techs., Inc. v. Henkel Consumer Adhesives, Inc., 496 F.3d 1231 (11th Cir. 2007), the United States Court of Appeals for the Eleventh Circuit held that a duty to disclose material facts arises only when there is a confidential relationship, and because no confidential relationship existed between a manufacturer and distributor, the distributor was not liable for breach of fiduciary duty, breach of confidentiality, or fraudulent concealment. The Court rejected the plaintiff’s claims that a partnership or joint venture existed between the parties.
Optimum Technologies, Inc. ("Optimum") was a closely-held family business that developed an adhesive product called "Lok-Lift" to prevent rugs from slipping on floors. In 1993, Henkel Consumer Adhesives, Inc. ("HCA") entered into an oral agreement with Optimum to market and distribute the Lok-Lift product to retailers. Under the agreement, HCA promised to purchase Lok-Lift from Optimum and was given the exclusive right to sell and distribute the product to retailers. Optimum and HCA worked together to design the packaging for the Lok-Lift product.
Several years after this agreement was made, HCA began to develop its own adhesive product similar to Lok-Lift called "Hold-It For Rugs". In 2002, HCA notified Optimum that it would be making changes to the Lok-Lift packaging and that Optimum should not order any more packaging without HCA’s approval. In late 2002, HCA began shipping the Hold-It product to retailers in packaging similar to the Lok-Lift packaging and using the same UPC code, bar code and item number as the Lok-Lift product.
Optimum sued HCA for nine counts, including breach of fiduciary duty, breach of confidential relationship and fraudulent concealment. The district court held that there was no confidential relationship between HCA and Optimum, and, thus, there was no duty on HCA’s part to disclose information related to its development and distribution of Hold-It. The court found there could be no fraudulent concealment without a confidential relationship, so it granted summary judgment to HCA on all three claims.
Optimum argued on appeal that there was a confidential relationship going beyond the manufacturerdistributor relationship, a relationship more in the nature of a joint venture or legal partnership. The Eleventh Circuit disagreed, finding that there was nothing more than an informal business agreement between the parties. There was no legal partnership because there was no profit-sharing agreement, nor did HCA have any right to control Optimum’s business or vice versa. Because there was no confidential relationship, there was no fiduciary duty to disclose material information. Therefore, the district court’s grant of summary judgment to HCA was proper.
18. Partnership Contract and Agency Issues. Leevers v. Bilberry, 2007 WL 315344 (M.D. Ga. Jan. 31, 2007); Dalton Point, L.P. v. Regions Bank, Inc., 287 Ga. App. 468, 651 S.E.2d 549 (2007).
In Leevers v. Bilberry, 2007 WL 315344 (M.D. Ga. Jan. 31, 2007), the United States District Court for the Middle District of Georgia held that a company, which contracted to manage a partnership’s property and which became the partnership’s largest creditor, was not under agency principles bound by an arbitration clause contained in the partnership agreement and could not be compelled to participate in an arbitration proceeding between the partners.
John Leevers and Leonard Bilberry formed a partnership in 1997 called Foxchase Limited Liability Limited Partnership ("Foxchase"). The partnership agreement contained an arbitration clause for any disputes arising between the Partners. A few years earlier, the partners had personally purchased land that included a golf course constructed by Bilberry Golf, Inc. and after executing the partnership agreement, they transferred their personal interests in this property to Foxchase.
The partners contracted with Bilberry Golf to rebuild the golf course and to assume management of the property from 1996 to 2000. At the time, Leonard Bilberry was a 50% owner of Bilberry Golf, and his brother Lee owned the other half. Lee purchased his brother’s interest in Bilberry Golf in 2000 and was thereafter Bilberry Golf’s sole owner and President. During Bilberry Golf’s management term, Foxchase was unprofitable and Bilberry Golf provided over $2 million in operating loans, causing it to become Foxchase’s largest creditor. Leevers eventually sought to dissolve the Foxchase partnership and sought to submit the dispute to arbitration. Bilberry Golf was added as a party to the arbitration, but objected because it was not a party to the arbitration agreement.
Leevers argued that even though Bilberry Golf was not a party to the arbitration agreement, it could be compelled under agency principles to participate in the arbitration. The Court disagreed, holding that neither Leevers nor Bilberry were agents of Bilberry Golf, nor was there anything but a contractual relationship between Bilberry and Foxchase. The Court held that while Bilberry Golf may have been an agent of Foxchase as to management of the property, the contractual agreement between Foxchase and Bilberry did not create an agency relationship between the individual partners and Bilberry Golf such that Bilberry Golf would be bound by a partnership agreement signed by the partners only. Therefore, Bilberry Golf was not compelled to join the arbitration.
In Dalton Point, L.P. v. Regions Bank, Inc., 287 Ga. App. 468, 651 S.E.2d 549 (2007), the Georgia Court of Appeals held that a limited partnership was bound to the scope of its "corporate" bank resolution, despite arguments that the authorized transactions could involve breaches of fiduciary duty. The plaintiff, Dalton Point, sued Regions Bank for the money its bookkeeper embezzled from the limited partnership's bank account. Dalton Point’s signature card for its bank account with Regions Bank was signed by a Dalton Point limited partner, Ronald Ralston and its bookkeeper, Patricia Page. Limited partner Ralston and bookkeeper Page also signed Dalton's Certificate of Resolution which was filed with the Bank authorizing the Bank to honor "all drafts, checks, or other items . . . . or transfer . . . even though drawn, endorsed or otherwise payable to [Ralston or Page]." The Resolution also provided that the Bank "need make no inquiry concerning such withdrawals." Dalton Point alleged that the Bank had notice that the bookkeeper was breaching her fiduciary duties to the limited partnership. It argued that the Bank was not entitled to rely on the Corporate Resolution because it was an unenforceable disclaimer of its responsibilities to act in good faith. The trial court granted Bank’s motion summary judgment holding that the Corporate Resolution, the signatory card, and O.C.G.A. § 11-4-406 barred Dalton Point’s claims. The Court of Appeals affirmed, ruling that the Bank was a holder in due course of the disputed items. The Court, also found, citing Freese v. Regions Bank, 284 Ga. App. 717, 644 S.E.2d 549 (2007) that the Resolution was not "unenforceable" because it did not "disclaim the bank's obligations of good faith; it simply provide[d] the framework within which the bank was allowed to operate." It is not clear from the opinion whether the parties raised or the Court considered the issue of why the signatures of a limited partner and a bookkeeper to a limited partnership’s Corporate Resolution were sufficient to bind the limited partnership.18
C. LIMITED LIABILITY COMPANIES.
Unlike in the last two years, there have not been any Georgia appellate decisions in 2007 to date addressing issues specific to limited liability companies. The following two decisions could be read to have possible implications for Georgia LLCs.
19. Fiduciary Duties of LLC Officers, Directors and Majority Members: Megel v. Donaldson, ___ S.E.2d ___, 2007 WL 4126886 (Ga. App., Nov. 21, 2007)
Megel v. Donaldson, ___ S.E.2d ___, 2007 WL 4126886 (Ga. App., Nov. 21, 2007) involved claims of breach of fiduciary duty and fraud by investors against the developer of a senior citizen living facility project in Senoia, Georgia, that failed because of the refusal of local authorities to rezone the property. The investors, who purchased a 30% interest in an LLC, claimed that the developer breached fiduciary duties owed as "corporate officers, directors, majority shareholders, or otherwise" by using investment funds for living expenses and to fund his investment in another venture. The Court rejected these claims because the investors were found to have executed a development contract that specifically mentioned the use of investor funds for "salaries (general or normal household living expenses)" and imposed no restrictions on the funds paid out as salary. The Court held that there was no fiduciary duty between the developer and the investors, because "[t]he transaction in this case was a business transaction in which the responsibilities of the parties were defined explicitly in the Agreement." The Court did not mention the LLC’s operating agreement, discuss how the development agreement governed the developer’s duties as majority member or manager of the LLC, or whether the development agreement satisfied provisions under O.C.G.A. § 14-11-305 permitting limitations of liability if set forth "in the articles of organization or a written operating agreement." The plaintiffs’ claims for conversion, fraud and rescission were held to be barred by the merger clause of the development agreement and the plaintiffs’ waived any right to rescind because they did not assert a claim for rescission until they filed an amended complaint.
20. LLC Direct versus Derivative Actions: In re Wheland Foundry, LLC, 2007 WL 2934869 (Bkrtcy. E.D. Tenn., Oct. 5, 2007)
A recent Tennessee bankruptcy court decision addressed the issue whether claims asserted by two members of a Georgia limited liability company against the third member, were direct claims that could be maintained outside of the LLC’s bankruptcy proceedings or were derivative claims belonging to the debtor and hence property of the bankruptcy estate. In re Wheland Foundry, LLC, 2007 WL 2934869 (Bkrtcy. E.D. Tenn., Oct. 5, 2007). Using a special injury analysis, the Court decided that, as a matter of Georgia law, the members’ claims for breach of fiduciary duty and usurpation of a corporate opportunity were derivative in nature and therefore belonged to the debtor LLC. The plaintiffs attempted to invoke the exception to derivative standing under Thomas v. Dickson, 250 Ga. 772, 301 S.E.2d 49 (1983) that permits direct actions where all interested parties are parties or their interests are adequately represented in the proceeding. The Court found that exception inapplicable because there were numerous unpaid creditors who would be benefited by a recovery by the LLC. The Court next analyzed the members’ claims for misrepresentation. It held one misrepresentation claim to be derivative where the alleged injury was the loss of the plaintiffs’ interest and their capital contributions in the debtor, which the Court characterized as injuries stemming from the debtor’s bankruptcy affecting both members and creditors. It held that the members did allege special injury in other claims for misrepresentation and in claims for tortious interference with the members’ contractual relations with the debtor.
D. OTHER ISSUES – STATUTE OF LIMITATIONS, BUSINESS RECORDS, PIERCING THE CORPORATE VEIL, INSURANCE ISSUES, RICO, THE GEORGIA SECURITIES ACT, PROFESSIONAL LIABILITY AND UNDOCUMENTED INVESTMENTS
21. Statutes of Limitations for Breach of Fiduciary Duty and Tolling of Limitations on Fiduciary Claims: Hamburger v. PFM Capital Mgmt., Inc., 286 Ga. App. 382, 649 S.E.2d 779 (2007); Cochran Mill Assocs. v. Stephens, 648 S.E.2d 764, 2007 WL 1933098 (Ga. App., July 3, 2007); Hendry v. Wells, 286 Ga. App. 774, 650 S.E.2d 338 (2007); In re Pac One, Inc., 2007 WL 2083817 (N.D. Ga., July 17, 2007)
Decisions handed down in July 2007 on the statute of limitations for breach of fiduciary claims in the business organization and investment contexts showed a lack of established principles or analysis and in one area produced conflicting Georgia Court of Appeals decisions.
In Hamburger v. PFM Capital Mgmt., Inc., 286 Ga. App. 382, 649 S.E.2d 779 (2007), the Georgia Court of Appeals addressed whether a four-year or six-year statute of limitations applies to breach of fiduciary duty claims against an investment adviser. The Court found it unnecessary to decide the issue because most of the plaintiff’s claims were barred because suit was brought more than six years after the claims arose, while her remaining claim was not barred because it were filed within four years of occurrence.
Hamburger retained PFM Capital Management, Inc. ("PFM"), an investment advisor, in early 1998 to manage her assets, much of which consisted of Coca-Cola Company stock.. The agreement gave PFM authority to execute stock trades without Hamburger’s express permission, but PFM had also signed a statement of objectives providing that "good diversification will be a key ongoing objective." PFM sent Hamburger quarterly account statements. The statements reflected significant losses between February 1998 and October 1998. They also showed that between July 1, 1998 and January 1, 1999, the percentage of her IRA invested in Coca-Cola stock had decreased only 19%, from 81% to 60%. By August, 2001, Hamburger’s IRA had lost over $600,000, and she terminated her agreements with PFM. In January 2005, Hamburger sued PFM for breach of fiduciary duty, breach of contract, negligence, fraud, and intentional infliction of emotional distress.
For breach of fiduciary duty claims based on PFM’s alleged failure to diversify her account and risky stock purchases, the trial court found those claims time-barred regardless of whether the applicable limitation period is four years or six years. The Court of Appeals cited conflicting authority whether the applicable period for breach of fiduciary duty claims is the 6-year statute of limitations for written contracts in O.C.G.A. § 9-3-24 and or the 4-year statute of limitations for injury as personalty in § 9-3-31. 286 Ga. App. at 386 n.16. The Court affirmed, however, because Hamburger was unable to point to any evidence that these actions had taken place after January 1999. The remaining claim for breach of fiduciary duty was based on her allegation that PFM began charging management fees sometime between March 31, 2001 and June 20, 2001 on stock that it had reclassified as unmanaged. Because this reclassification occurred within four years of the filing of the claim, the Court found that it was not time-barred by either a fouryear or six-year statute.
The Court also held that the statutes of limitations for Hamburger’s claims were not tolled by fraud. There was no evidence that PFM concealed information or defrauded Hamburger, causing her to be deterred or barred from bringing her claims. The quarterly statements made her aware of facts concerning her claims as early as 1998.
Finally, Hamburger argued that because PFM undertook a continuing duty to manage her assets, her causes of action did not begin to accrue until 2001, when she terminated the business relationship. She based her argument on Barnes v. Turner, 278 Ga. 788, 606 S.E.2d 849 (2004), a legal malpractice case recognizing a continuing duty where the plaintiff’s attorney who helped file UCC statements to perfect his client’s security interest in a promissory note, failed to tell the plaintiff that the filing would expire and needed to be renewed. The Georgia Supreme Court held that the statute of limitations accrued when the lawyer failed to renew the filing statement on his client’s behalf, rather than when the UCC statements were originally filed. Here, the Court distinguished Barnes as inapplicable to Hamburger’s non-legal malpractice claim, finding that the Georgia Supreme Court limited Barnes to its facts.
In Cochran Mill Assocs. v. Stephens, 286 Ga. App. 241, 648 S.E.2d 764 (2007), the Georgia Court of Appeals affirmed the trial court’s ruling that a partnership’s claims for breach of fiduciary duty, fraud, and RICO violations against its former managing general partner were barred by their respective statutes of limitations. Citing O.C.G.A. § 9-3-24 – the statute of limitations for written contracts – the Court held that the limitations period for the general partner’s breach of fiduciary duty is six years.
Cochran Mill Associates ("CMA") was a partnership formed to purchase land in South Fulton County. The managing partner of CMA was John Stephens, who was also the managing partner of three other similar partnerships. Stephens assisted Jose Oviedo, an individual co-partner in two of Stephens’ other partnerships, in personally purchasing land in late 1988. Two months before Oviedo’s purchase closed, Stephens offered prospective investors an investment opportunity in the land Oviedo was purchasing. The investors who decided to invest became partners in CMA, which then purchased the land from Oviedo. The land did not increase in value as was expected, Stephens was replaced as managing general partner and eventually CMA sued Stephens for various claims including breach of fiduciary duty, fraud, and RICO violations. Stephens had never told the investors about the Oviedo purchase, nor that Oviedo had purchased the land for some $1,175 less per acre only two months before Oviedo sold it to the partnership.
One issue was whether Stephens’ failure to disclose the Oviedo purchase constituted fraudulent concealment under O.C.G.A § 9-3-96 sufficient to toll the statute of limitations. The Court explained that where a confidential relationship exists, such as between a partnership and its managing partner, the duty of the plaintiff to investigate whether there is fraudulent concealment is lessened, and the duty of the defendant to disclose fraud is heightened. However, the plaintiff still has the burden to prove that there was fraud that caused the plaintiff to be barred or deterred from bringing suit within the regular statutory period. The Court determined that there was no evidence that Stephens fraudulently or intentionally withheld information that he had a duty to disclose from the partners regarding the land deal. It also concluded that Stephens’ actions did not deter any of the partners from pursuing possible claims against him on behalf of the partnership. The Court indicated that because individual partners were put on notice as early as 1990 that Stephens may have been mismanaging funds or that they had possibly paid too much for the land, the partnership was put on notice of possible claims much earlier than four years before bringing the claim. Although the partners may have had a lesser duty to investigate for fraud due to a fiduciary relationship with Stephens, the duty was not entirely extinguished. Because the partners, with ordinary diligence, could have discovered possible claims of mismanagement in early 1990, the Court held that the statute of limitations was not tolled, and therefore the present fraud claims were time-barred. The Court did not explain how notice to the non-management partners was imputed to the partnership.
The Court’s holding that the contract statute of limitations applies to breach of fiduciary duty claims was made with no analysis or discussion. The Court cites as its only decisional authority Crosby v. Kendall, 247 Ga. App. 843, 848(2)(c), 545 S.E.2d 385 (2001), (also cited in Hamburger, above) which concerned the liability of an escrow agent for breach of fiduciary duty claims arising out of the escrow agreement. The Court may have viewed the partnership as a creature of contract. However, there were no claims that the managing partner breached the partnership agreement and no discussion regarding whether the breach of fiduciary duty claims in some way arose out of a contractual relationship.
By contrast, Hendry v. Wells, 286 Ga. App. 774, 650 S.E.2d 338 (2007), supra, also a partnership case that was decided seven days after Cochran Mills, reached a conflicting result on the statute of limitations applicable to breach of fiduciary duty claims.
The Georgia Court of Appeals in Hendry applied the 4-year statute of limitations for injury to personal property in O.C.G.A. § 9-3-31 to the limited partners’ breach of fiduciary claims against the partnership and its general partners. The Hendry v. Wells opinion did not cite any decisional authority for selecting the 4-year limitations period or give any reason for its selection. It also did not reflect any awareness of the Cochran Mills decision.
The Hendry decision did address in considerable detail the issue of whether the statute of limitations had been tolled with respect to any of the claims. The limited partners based one of their fraud claims on the allegation that the Class B investors were duped into investing by false sales materials. The Georgia Court of Appeals held that while this kind of fraud can toll the statute of limitations, it will not do so if other information is available that can alert the plaintiffs to the truth. Here, the partnership agreement controlled and was available to investors both before and after the partnership was formed. The partnership agreement contained the correct information regarding distribution of land sale proceeds, and the Court held that the investors had a duty to read and understand it. The fact that the language was complicated did not excuse the investors from that duty. Therefore, because the fraud occurred thirteen years before the claim was filed, the Court held that the statute of limitations had run. It was not tolled 28 even if the sales materials contained false statements because the Class B investors were alerted to the truth by the partnership agreement.
The Court made a significant ruling on the point when a fiduciary duty of disclosure attaches. The plaintiffs argued that the defendants as fiduciaries owed disclosure duties and that, as beneficiaries of those duties, the plaintiffs’ obligation of due diligence was a less stringent one. The Court observed, "The fiduciary duty between the parties arose at the time that the limited partners entered into the partnership, not before. . . . Prior to that time, the limited partners had a duty to read the Partnership Agreement before signing it." 650 S.E.2d. at 343-44 (citations omitted). The Court held further that the limited partners had possession of enough information regarding the facts on which their claims were based to prevent the statute of limitations from being tolled. The Court also rejected the argument that "the Partnership Agreement was so complicated that it was too difficult for them to recognize the that the general partners were misleading them about its contents." The Court found no basis for an exception to the duty-to-read based on the complexity of the contract.
The Class B partners claimed that they had not filed suit earlier because the general partners sent several communications throughout the thirteen-year period perpetuating the alleged fraud. The Class B partners claimed that in these communications, the general partners reiterated the false statements contained in the sales materials, which contradicted the truth in the partnership agreement. It was not until 2000 that the general partners admitted that the distribution of land sale proceeds was inequitable in regard to the Class B investors and proposed an amendment to the partnership agreement providing for the Class B investors to receive distributions equal to those of the Class A investors. In 2002, the partnership announced it could not get the necessary votes to approve the amendment. In 2004, the plaintiffs filed suit. The plaintiffs argued that the statute of limitations was tolled under a continuing tort theory, alleging that they were damaged every day following the communications sent by the partnership indicating that the distribution procedure in the sales materials was accurate. They also contended that the misstatements in the continuing communications prevented them from discovering the truth until June 2000. The trial court rejected these arguments and the Court of Appeals affirmed, finding that, as the plaintiffs themselves alleged, their damages began in 1987 when the first communication was sent. It held that the continuing tort theory was inapplicable, citing Mercer University v. National Gypsum Co., 258 Ga. 365, 366, 368 S.E.2d 732 (1988) as confining that theory to personal injury cases. 650 S.E.2d at 344 n.2. It also cited the rule that the fraud giving rise to a claim does not necessarily constitute fraud sufficient to toll the statute of limitations. Because the plaintiffs possessed adequate notice, the claims for breach of fiduciary duty based on the misinformation were barred by the four-year statute of limitations.
Finally, in In re Pac One, Inc., 2007 WL 2083817 (N.D. Ga., July 17, 2007), – a case involving a Georgia corporation, not a partnership – the United States District Court for the Northern District of Georgia held that all of plaintiff’s claims, including claims for breach of fiduciary duty and breach of contract, were subject to a four-year statute of limitations period and were time-barred, except for a claim for fraud where the statute was tolled until discovery of the fraud.
The bankruptcy trustee for Pac One, Inc. filed suit against Pac One’s parent corporation Packaging Acquisition Corporation ("PAC"), PAC’s stockholders, including affiliates of Cravy, Green & Whaley ("CGW") that were controlling shareholders of PAC or Pac One, and individual directors of Pac One and PAC. The trustee alleged that PAC and CGW controlled Pac One’s Board of Directors. PAC and CGW officers were appointed as directors of Pac One. PAC, CGW and their designee directors misused Pac One’s corporate form, causing it to become insolvent by October 2000. The trustee filed claims for negligence and gross negligence, breach of fiduciary duty, fraud, and breach of contract. These claims were based on the trustee’s allegations that the defendants artificially inflated Pac One’s credit standing to obtain loans to continue to pay their salaries and pay money under contracts that benefited the corporate defendants. The defendants filed a motion to dismiss, in response to which the plaintiff filed a proposed Second Amended Complaint. The Court held that even if the proposed amendments to the complaint were allowed, it would still be subject to dismissal and granted the defendants’ motion to dismiss.
The main issue in the case was whether the plaintiff had filed its claims within the appropriate statutes of limitations. The Bankruptcy Code provides for a minimum statutory period of two years from the filing of the bankruptcy petition for filing any claims on behalf of the estate, regardless of whether other state statutes of limitations apply. However, if the state statute of limitations would not end until after two years from the date of filing the bankruptcy petition, the plaintiff has that additional time in which to file any claims. Here, the plaintiff filed suit almost four years after the bankruptcy petition was filed.
The Court applied the four-year statute of limitations to the negligence, misrepresentation and fraud claims, in accordance with O.C.G.A. § 9-3-31 and § 9-3-32. The plaintiff argued that a ten-year statute of limitations should apply to his breach of fiduciary duty claims, attempting, according to the Court, to use equitable principles of confidential relationships as a path the 10-year statute of limitations in O.C.G.A. § 9-3-27, which is limited to executors, administrators and guardians. The Court rejected this argument. Acknowledging that there is no specific statute of limitations for breach of fiduciary duty claims, the Court found that because the nature of the injury was economic damage to personalty, the four-year statute would apply to the claims against the controlling shareholders. The breach of fiduciary duty claims alleged against the directors appeared to fall within O.C.G.A. § 14-2-831,19 so the Court found that the four-year limitation period in that statute governed the director liability claims.
The plaintiff then argued that the statute of limitations should be tolled for three different reasons: (1) no one was capable of suing on the claims until the bankruptcy petition was filed in 2001, (2) the defendants fraudulently concealed the existence of the claims, and (3) the damages were not certain until the bankruptcy petition was filed. The Court wholly rejected the first and third arguments, finding that even though it may have been unlikely for Pac One to sue the defendants before the filing of the bankruptcy petition, it was not impossible,20 and the trustee merely stood in the shoes of the debtor. Because Pac One knew of the allegations well before it filed for bankruptcy, the Court found that the statute was not tolled. Similarly, the Court held that the statute was not tolled by the uncertainty of the total damages because Pac One knew that it was economically damaged - even if it did not know the exact extent - at the latest by the date of its insolvency in October of 2000.
Finally, the plaintiff asserted a breach of contract claims based on an employment agreement with Pac One’s chief financial officer that was alleged to create a fiduciary relationship and to give rise to obligations of faithful performance by the CFO and duties of supervision by the directors. The trustee argued that the six-year statute of limitations for a breach of written contract applied to that claim. The Court noted that when a contract is partly in parol, the six-year period does not apply. The Court held that the contract was partly in parol because the written contract did not embody the entire agreement alleged. The contract merely established a fiduciary relationship between Pac One and the CFO. It said nothing about the manner in which he was required to carry out his duties. Because part of the agreement was not embodied in the writing, the contract was partly in parol, and the Court applied a four-year statute of limitations, presumably the statute of limitations for open accounts, oral contracts and implied contracts in O.C.G.A. § 9-3-25.
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