2006 Annual Review Of Case Law Developments In Georgia Corporate And Business Organization Law - Part One

Corporate and business organization issues arose in a variety of contexts in 2006 – business acquisitions, shareholder suits, statutory schemes such as CERCLA and RICO, and professional liability litigation. The decisions handed down last year concern business and nonprofit corporations, limited liability companies, partnerships and joint ventures. Some decisions deal with matters of first impression or resolve issues long in question, while others confirm the application of settled principles of law. The Georgia courts broke new ground on aiding and abetting breaches of fiduciary duty, claims for wrongful deprivation of an equity interest in a corporation, LLC disassociation proceedings, and common law liability for violations of the Georgia Securities Act of 1973 after the statute of limitations has expired on statutory claims. Other decisions dealt with such issues as third party beneficiary rights in the sale of a business, exclusivity of dissenters’ rights, direct versus derivative actions, piercing the corporate veil and associational standing of nonprofit corporations. We consider it useful to survey all the cases that have come to our attention, because it provides a more complete picture of the state of the law and an opportunity to assess how the courts are viewing and handling matters of corporate and business organization law. To summarize these developments briefly:

A. Business Corporations. In Insight Technology, Inc. v. FreightCheck, LLC, 280 Ga. App. 19, 633 S.E.2d 373 (2006), the Georgia Court of Appeals partially resolved the long-standing question of whether Georgia recognizes claims for aiding and abetting a breach of fiduciary duty by holding that secondary actors may be held liable when they "procure" the fiduciary’s wrongdoing. The Court of Appeals in Haskins. v. Haskins, 278 Ga. App. 514, 629 S.E.2d 504 (2006), reaffirmed the exclusivity of the dissenting shareholder provisions of the Georgia Business Corporation Code. In Monterrey Mexican Restaurant of Wise, Inc. v. Leon, ___ S.E.2d ___, 2006 WL 3333769 (Ga. App., Nov. 17, 2006), the Court of Appeals recognized a new claim for wrongful deprivation of an interest in a corporation where the plaintiff could not recover for conversion because the corporation failed to issue a certificate for the plaintiff’s shares. In Kent v. A.O. White, Jr., 279 Ga. App. 563, 631 S.E.2d 782 (2006), the Georgia Court of Appeals held that a professional corporation does not cease to exist as a corporation upon conversion to a business corporation. The Georgia Supreme Court held in Chattowah Open Land Trust, Inc. v. Jones, 281 Ga. 97, 636 S.E.2d 523 (2006) that corporate powers do not include the power to serve as a fiduciary; only individuals and entities with authorization from the Georgia Department of Banking and Finance can serve as fiduciaries. In Williams General Corp. v. Stone, 280 Ga. 631, 632 S.E.2d 376 (2006), the Georgia Supreme Court held a corporation is a "person" under Georgia’s Racketeer Influenced and Corrupt Organizations Act and that a corporation can be found to have conspired with its officers and be held liable under RICO for treble damages.

B. Nonprofit Corporations. In Bolden v. Barton, 280 Ga. 702, 632 S.E.2d 148 (2006), the Georgia Supreme Court held that a court has jurisdiction to determine church membership when ordering a vote by such members to settle a controversy regarding the church’s property. Atlanta Taxicab Co. Owners Ass’n, Inc. v. City of Atlanta, ___ Ga. ___, 638 S.E.2d 307, (2006) and Ouachita Watch League v. Jacobs, 463 F.3d 1163 (11th Cir. 2006), review the rules for associational standing through which a nonprofit corporation or association can sue on behalf of its members.

C. Limited Liability Companies. In Sayers v. Artistic Kitchen Design LLC, 280 Ga. App. 223, 633 S.E.2d 619 (2006), the Georgia Court of Appeals, in a matter of first impression, treating the statutory procedures for judicial "disassociation" as a form of termination, held that under O.C.G.A. § 14-11- 601.1(b)(4)(D) of the Georgia Limited Liability Company Act, an LLC member would not be disassociated from the LLC merely by filing a petition for the disassociation of another member. In Patel v. Patel, 280 Ga. 292, 627 S.E.2d 21 (2006), the Georgia Supreme Court confirmed its reluctance to place business organizations into receivership absent extraordinary circumstances by applying that rule in the limited liability company context. Limited liability company issues were also addressed in several of the other specific areas of business organization litigation discussed below.

D. Partnerships. In Nationwide Mortgage Services, Inc. v. Troy Langley Construction, Inc., 280 Ga. App. 539, 634 S.E. 2d 502 (2006), the Court of Appeals held that a partnership agreement did not become invalid merely because one of its partners was a yet unformed LLC; instead, the individuals signing a partnership agreement on behalf of the unformed LLC become partners in their individual capacities. In Yun v. Um, 277 Ga. App. 477, 627 S.E.2d 49 (2006), the Court of Appeals overturned a trial court’s finding that a partnership existed between two persons operating a business where the record indicated that only the plaintiff had an ownership interest in the business, he assumed all its liabilities, there was no written partnership agreement, and no evidence that the business was operated as a partnership. The Court of Appeals in Kellett v. Kumar, 281 Ga. App. 120, 635 S.E.2d 310 (2006) upheld a jury verdict awarding a minority limited partner $1.6 million in damages for the wrongful withdrawal and substitution of a corporate general partner and merging the partnership into a publicly-held corporation without the minority’s consent.

E. Joint Ventures. In two decisions regarding joint ventures, Kitchens v. Brusman, 280 Ga. App. 163, 633 S.E.2d 585 (2006), the Georgia Court of Appeals reaffirmed that a joint venture is only created where two or more parties combine their property, labor, or both, in a for-profit, joint enterprise, where all parties have mutual control and Hillis v. Equifax Consumer Services, Inc., 237 F.R.D. 491 (N.D. Ga. 2006), the federal district court held that "the essential elements of a joint venture are (1) a pooling of action; (2) a joint undertaking for profit; and (3) rights of mutual control," found a joint venture on the facts, and confirmed that the acts of one "joint adventurer" are binding on the other.

F. Derivative and Individual Shareholder Actions. The Court in Southwest Health and Wellness LLC v. Work, ___ S.E. 2d ___, 2006 WL 3422970, (Ga. App., Nov. 29, 2006), held that the claims of minority members of an LLC for breach of the LLC’s operating agreement, fraud, misuse of corporate assets, unjust enrichment and "violations of the Patriot Act" were all derivative claims. Litigation fees and expenses were awarded under O.C.G.A. § 14-2-746 in Hantz v. Belyew, 2006 WL 3266508 (N.D. Ga., Nov. 8, 2006) against plaintiffs who sought to assert direct or derivative claims after their equity interests were extinguished in a bankruptcy reorganization. Argentum International, LLC v. Woods, 280 Ga. App. 440, 634 S.E.2d 195 (2006) sustained as direct claims for common law fraud brought by equity investors and debenture holders who alleged that they were misled both to purchase and then to retain securities in a limited liability company, rejecting arguments that investors failed to perform due diligence. In Douglas v. Bigley, 278 Ga. App. 117, 628 S.E.2d 199 (2006), the Court of Appeals considered common law claims of breach of fiduciary duty, fraud and illegality of contracts based on alleged securities laws violations, holding that the failure to register securities under the Georgia Securities Act of 1973 could support claims of breach of fiduciary duty and fraud, but did not render the contracts illegal and unenforceable. In Davis v. Johnson, 280 Ga. App. 318, 634 S.E.2d 108 (2006), the Court of Appeals upheld a jury verdict finding no securities fraud under the Georgia Securities Act of 1973, but reversed the jury’s award of attorney fees based on a finding that the plaintiffs should not have discovered alleged securities fraud during the limitations period.

G. Alter Ego Liability; Piercing the Corporate Veil. In Milk v. Total Pay and HR Solutions, Inc., 280 Ga. App. 449, 634 S.E.2d 208 (2006), the Georgia Court of Appeals outlined the difficulty of holding an individual LLC member responsible for the debts of an LLC. Accord DaimlerChrysler Financial Services Americas LLC v. Nathan Mobley Chrysler, Dodge, Jeep, Inc., 2006 WL 3762087 (S.D. Ga., Dec. 20, 2006) (corporation held not alter ego of owner where misappropriated inventory proceeds were used to pay corporate, not personal liabilities). The Georgia Supreme Court in Solomon v. Barnett, 281 Ga. 130, 636 S.E.2d 541 (2006) held that reinstatement of administratively dissolved corporations, though usually retroactive in effect, may not protect from alter ego liability if subject to equitable estoppel. In Atlanta Gas Light Co. v. UGI Utilities, Inc., 463 F.3d 1201 (11th Cir. 2006), the Eleventh Circuit Court of Appeals held that the corporate veil can be pierced to hold a parent corporation liable for a subsidiary’s liability in contribution under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and addressed the circumstances under which the parent can be held liable under CERCLA as an operator of the subsidiary’s facility. By contrast, in Dearth v. Collins, 441 F.3d 931 (11th Cir. 2006), cert. denied, ___ U.S. ___, 127 S. Ct. 153 (2006), the Eleventh Circuit held the alter ego doctrine inapplicable in Title VII of the Civil Rights Act of 1964. Finally, in Pate v. Pate, 280 Ga. 796, 631 S.E.2d 103 (2006), the Supreme Court affirmed a ruling that income assigned by a divorced husband to his wholly-owned professional corporation could be reached to enforce child support payments, but rejected the husband’s argument that the ruling represented impermissible reverse piercing of the corporate veil.

H. Transactional Cases. The Georgia Court of Appeals in Kaesemeyer v. Angiogenix, Inc., 278 Ga. App. 434, 629 S.E.2d 22 (2006), held that a non-party to an asset purchase agreement lacked standing as a third party beneficiary to assert a breach of contract claim against parties to the agreement, citing the "clear, unambiguous language" of the agreement. Similarly, in Hilliard v. SunTrust Bank, et al., 277 Ga. App. 544, 627 S.E.2d 77 (2006), the Georgia Court of Appeals held that a potential, but not intended, beneficiary of a limited partnership agreement lacks standing to enforce the agreement. In Lovell v. Thomas, 279 Ga. App. 696, 632 S.E.2d 456 (2006), the Georgia Court of Appeals upheld a secured lender’s rights to collect attorney’s fees incurred in redeeming and selling re-pledged securities. Goobich v. Waters, 2006 WL 3095394 (Ga. App., Nov. 1, 2006) held that a binding letter of intent was enforceable notwithstanding the fact that it was subject to execution of final documents. In another sale of business dispute, Park v. Fortune Partner, Inc., 279 Ga. App. 268, 630 S.E.2d 871 (2006), promissory notes given by the purchasers were enforced on finding that objections to title were waived by a resale of the business.

I. Professional liability in the sale of businesses and corporate transactions. In 2006, the Georgia Court of Appeals decided three cases involving claims against attorneys in sale of business and corporate transactions. First, in Cleveland Campers, Inc. v. R. Thad McCormack, P.C., 280 Ga. App. 900, 635 S.E. 2d 274 (2006), the Court affirmed the trial court’s ruling that no attorney-client relationship existed between sellers of a business and the attorney for the buyers, holding that legal advice or assistance must be sought from an attorney in order for an attorney-client relationship to exist. Second, in All Business Corporation v. Choi, 280 Ga. App. 618, 634 S.E.2d 400 (2006), the Court held that an attorney acting as an escrow agent in the sale of a business does not owe a third party secured creditor any duty with regard to the proceeds of sale when the attorney has no actual or constructive notice of the creditor’s lien on a debtor’s property. Third, Graivier v. Dreger & McClelland, 280 Ga. App. 74, 633 S.E.2d 406 (2006) upheld claims for attorney malpractice against a lawyer serving as counsel for two LLC members in drafting the LLC agreement.

J. Representation of business entities by counsel in litigation. In Winzer v. EHCA Dunwoody, LLC, 277 Ga. App. 710, 627 S.E.2d 426 (2006), the Georgia Court of Appeals extended the Supreme Court’s holding in Eckles v. Atlanta Technology Group, 267 Ga. 801, 485 S.E.2d 22 (1997), and held that limited liability companies, like corporations, cannot appear pro se before a court of record, but must be represented by a licensed attorney. Five months later, the Court of Appeals in Sterling, Winchester & Long, LLC v. Loyd, 280 Ga. App. 416, 634 S.E.2d 188 (2006) reaffirmed its holding in Winzer. In Largo Villas Homeowners’ Association v. Bunce, 279 Ga. App. 524, 631 S.E.2d 731 (2006), the Court of Appeals ruled that the failure by a pro se corporate litigant to hire counsel within the time ordered by the court must be willful to entitle the other party to sanctions.

Insight Technology, Inc. v. FreightCheck, LLC addressed a long-standing question of whether plaintiffs in Georgia are allowed to pursue claims for aiding and abetting a breach of fiduciary duty. The Insight Technology decision is significant because it provides the clearest precedent to date that, in the context of breaches of fiduciary duties by corporate officers and directors, secondary actors may be held liable under some circumstances for their participation in the fiduciary’s wrongdoing.

Aiding and abetting is one of the well-established means through which a person may become a party to a crime,¹ requiring both wrongful intent and assistance or "helping" in the criminal activity. See Glenn v. State, 278 Ga. 291, 294, 602 S.E.2d 577, 580 (2004). There is no statutory provision that attaches civil liability to "aiding and abetting," however. In Insight Technology, rather than resolving the question of whether knowing assistance can result in tort liability, the Georgia Court of Appeals resorted to a different theory of secondary civil liability, namely "procuring" a wrongful act, for which there is express statutory authority under O.C.G.A. § 51-12-30:

The Court of Appeals held that regardless of whether denominated "aiding and abetting a breach of fiduciary duty," "procuring a breach of fiduciary duty," or "tortious interference with a fiduciary relationship," Georgia law authorizes a plaintiff to recover for such a claim upon proof of the following elements: (1) through improper action or wrongful conduct and without privilege, the defendant acted to procure a breach of the primary wrongdoer’s fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a fiduciary duty, the defendant acted purposely and with malice and the intent to injure; (3) the defendant’s wrongful conduct procured a breach of the primary wrongdoer’s fiduciary duty; and (4) the defendant’s tortious conduct proximately caused damage to the plaintiff.

Insight Technology, Inc. ("Insight"), an internet-based freight load matching service incorporated in Delaware,² filed suit against the defendants for breach of fiduciary duty, misappropriation of trade secrets, misappropriation of corporate opportunities, and fraud. Insight alleged that its former president, Darren Brewer, during his employment with Insight, embarked upon a competing venture with the majority shareholder and "managing member" of an Insight competitor, GetLoaded.com, LLC. Brewer and Patrick Hull, GetLoaded’s majority shareholder, both created limited liability companies in which they were the sole members. The co-defendants’ corporations then became 50% members in FreightCheck LLC ("FreightCheck") and used that company to compete with Insight. Brewer attempted to continue his employment at Insight, while building up its newly-created competitor, FreightCheck. Evidence showed that Brewer managed Insight and FreightCheck simultaneously, had Insight employees perform work for FreightCheck and eventually hired those employees at FreightCheck.

The plaintiff alleged, among other things, that Hull, GetLoaded and FreightCheck aided and abetted a breach of fiduciary duty. The trial court granted those defendants’ motions for summary judgment as to all claims.

On appeal, the Court of Appeals addressed Insight’s contention that Georgia law provides for a claim of aiding and abetting a breach of fiduciary duty. Noting that prior Georgia decisions had declined to recognize such a theory of tort liability, see, e.g., Monroe v. Board of Regents of University System of Georgia, 268 Ga. App. 659, 664-665(2), 602 S.E.2d 219 (2004),³ the Court stated that it had to "look beyond the designation" given to the claim by the plaintiff and determine whether Insight’s complaint stated a claim which is allowable under Georgia law." Citing Rome Industries, Inc. v. Jonsson, 202 Ga. App. 682, 415 S.E.2d 651 (1992), the Court noted that it had explicitly acknowledged a cause of action for procuring a breach of fiduciary duty based on O.C.G.A. § 51-12-30. The Court ultimately held that Insight had adduced evidence from which a jury could infer that Hull, acting as agent of both FreightCheck and GetLoaded, tortiously procured Brewer’s breach of his fiduciary duty, damaging Insight.

Insight Technology appears to be the first case to attempt to reconcile Georgia’s existing case law that had declined to recognize a cause of action for "aiding and abetting" a breach of fiduciary duty, with the cited authorities supporting a cause of action for "procuring" certain torts. While the decision is undoubtedly important in litigation challenging the actions of secondary actors in the corporate management context (including attorneys, accountants and other professionals), the impact of the ruling may be tempered somewhat by the high standards of proof enumerated in the opinion, particularly as to the defendant’s state of mind⁴ and role in causing the breach of fiduciary duty to occur⁵ that a plaintiff must show in order to prevail on such a claim.⁶

In Haskins v. Haskins, the Georgia Court of Appeals upheld the exclusivity of the dissenting shareholder provisions of the Georgia Business Corporation Code and dismissed alleged derivative and direct claims asserted by a minority shareholder complaining of a bank holding company’s reverse stock split. Drewey E. Haskins III ("Haskins III") brought claims against Joseph M. Haskins and Catoosa Bancshares, Inc. ("CBI"), among others, for damage to CBI, damage caused to him by the managing shareholders’ breach of their fiduciary duty, and for conversion. Haskins III, a shareholder of CBI, asserted both direct claims and claims brought derivatively on behalf of CBI. Prior to the events giving rise to the suit, Haskins III was involved in litigation in Tennessee with his brother, Joseph Haskins, over the disposition of shares of stock left to Joseph Haskins by their father pursuant to his will.

While the Tennessee action was still pending, the CBI Board of Directors amended the articles of incorporation to force a 4,000 to one reverse stock split. Rather than issue fractional shares, a payment of $467 would be made for each old share of CBI stock. After receiving notice of the reverse stock split, Haskins III filed suit to enjoin the split. The trial court first issued a temporary restraining order, but later dissolved the order. Immediately thereafter, the reverse stock split was approved. Its effect was to make Joseph Haskins the only CBI shareholder, with Haskins III reduced to owning a fractional share that was subject to redemption for cash. Notice of the reverse split was sent to Haskins III under O.C.G.A. § 14-2- 1322 along with an offer to pay $427 for each old share he owned. Haskins III rejected the offer and sought to determine the fair market value of his shares under O.C.G.A. § 14-2-1330. CBI paid over $2.5 million into the registry of the court, which Haskins III later withdrew as payment in full for his shares of stock. At that time, the defendants moved for summary judgment, contending that Haskins III’s surrender of his shares in exchange for the $2.5 million eliminated his standing to bring a derivative action and that any special injury that Haskins III suffered must be addressed in a dissenting shareholder proceeding. The trial court granted the defendants’ motion for summary judgment and Haskins III appealed.

The Court of Appeals affirmed the summary judgment for defendants and held that Haskins III lacked standing to bring a derivative action and that his direct claims regarding the reverse stock split were nothing more that a dispute over the price of his stock. The Court held that Haskins III’s surrender of his old shares to CBI clearly removed his standing to sue derivatively because he could no longer comply with the "commenced or maintained" requirement contained in O.C.G.A. § 14-2-741 that the derivative plaintiff be a shareholder when the litigation was commenced and throughout the pendency of the litigation. Turning to Haskins III’s direct action, the Court cited Georgia Supreme Court precedent holding that the appraisal process provided for in "O.C.G.A. 14-2-1302(b) is the exclusive remedy when the dispute is essentially about the price of the stock" and that the case could only be maintained as a direct action if the case was more than a dispute over the stock price. Examining Haskins III’s complaint for special injuries, the Court found that Haskins III’s allegation that his brother’s self-dealing and breach of fiduciary duty would have affected the value of CBI stock in general and not just shares held by Haskins III. Accordingly, the Court affirmed the trial court’s grant of summary judgment on Haskins III’s direct action as well.

In Monterrey Mexican Restaurant of Wise, Inc. v. Leon, ___ S.E.2d ___, 2006 WL 3333769 (Ga. App., Nov. 17, 2006), the Georgia Court of Appeals held that a claim for conversion does not lie under Georgia law when shareholders, who have not been issued certificates for their shares, are wrongfully deprived of their interests in a corporation. Monterrey Restaurant of Wise, Inc. was formed as a Georgia corporation by three men in 1995 to operate a restaurant in Wise, Georgia. Each of the men was to receive 1,000 shares, but no corporate records, including any stock certificates, were ever executed to reflect this arrangement.

In 1998, the plaintiff left the corporation and the corporation’s bookkeeper was instructed that he no longer owned any stock in Monterrey. The bookkeeper changed the corporate records to that effect. When the plaintiff learned that he was no longer listed as a shareholder, he sued the corporation and the remaining two shareholders for, among other things, conversion of his stock. The trial court ruled in the plaintiff’s favor on the conversion claim. The Georgia Court of Appeals disagreed, holding that there could be no valid claim for conversion because there were no tangible stock certificates showing the plaintiff’s interest in the corporation. In so holding, the Court affirmed its prior rulings that "conversion is not available as a cause of action with respect to intangible property representing an interest in a business," citing Southern Cellular Telephone v. Banks, 208 Ga. App. 286, 431 S.E.2d 115 (1993). The Court held as a matter of first impression, however, that because the evidence reflected that Hector did in fact own an interest, he had a valid claim for "tortious deprivation of an interest in a corporation," expressly recognizing a claim under Section 242(2) of the Restatement (Second) of Torts:

Because this right of action depends upon the fact that the intangible rights involved Monterrey Mexican Restaurant are "of the kind customarily merged in a document" which can be converted, decision leaves unresolved the question whether and when there can be tortious deprivation of uncertificated interests in limited liability companies or limited partnerships. O.C.G.A. § 14-11-501, for instance, states that articles of organization and operating agreements "may" provide that a limited liability company interest "may" be evidenced by a certificate. Notably, Article 8 of the Uniform Commercial Code provides that an interest in a limited liability company or limited partnership is not a "security" within the meaning of the UCC unless it is publicly traded, it is a share in a mutual fund, or unless "its terms expressly provide that it is a security governed by this article." O.C.G.A. § 11-8-103(c).

Among other rulings, the Court in Monterrey Mexican Restaurant also held that the plaintiff’s claims were not barred by the now repealed statute of frauds in UCC Article 8, former O.C.G.A. § 11-8-319, because the plaintiff’s claims were based on ownership of shares in the corporation, not a contract to purchase shares. It also held one of the remaining shareholders to be liable for breach of fiduciary duty because, despite his ownership of only a third of the company’s stock, he "acted as the controlling shareholder," as well as owing fiduciary duties as president and a director of the company.

In Kent v. A.O. White, Jr., the Georgia Court of Appeals held that a professional corporation does not cease to exist as a corporation upon conversion to a business corporation. A.O. White, Jr., P.C., a consulting engineering firm, brought suit against the defendant, an attorney, for breach of contract, fraudulent transfers, punitive damages, and attorneys’ fees following a dispute over the payment of an expert witness fee. The defendant was found liable and the trial court awarded damages. On appeal, the Court of Appeals affirmed liability, but reversed as to the amount of damages. Several rounds of appeals and remanded proceedings ensued. In this appeal, the defendant claimed that the trial court improperly allowed A.O. White, Jr., Inc. to be substituted for the original plaintiff A.O. White, Jr., P.C. following the death of A.O. White, the company’s professional engineer. The defendant argued that at the time of White’s death, A.O. White, P.C. ceased existence as a professional corporation and could not continue operations as a new business corporation, A.O. White, Inc., but instead could only continue in existence for the purpose of liquidation. The Court of Appeals found this ground for appeal to be without merit, citing to the Georgia Supreme Court’s holding in Sherrer v. Hale, 248 Ga. 793, 285 S.E.2d 714 (1982), that "a professional corporation does not cease to be a corporation upon being converted . . . to a business corporation."

The Chattowah Open Land Trust case involves the bequest of property "to Chattowah Open Land Trust, Inc., for qualified conservation purposes, as described in Section 170(h) of the Internal Revenue Code of 1986," with further statements of intent by the testatrix that she wanted to bequeath her property "to an organization which will maintain the property in perpetuity exclusively for conservation purposes." When the executors tendered a deed to Chattowah Open Land Trust as trustee of a charitable trust, Chattowah refused the deed, taking the position that the bequest was an outright conveyance of the property. The trial court held, and the Supreme Court affirmed, that the will created a trust, despite the lack of any specific reference to a "trust" or "trustee."

Because Chattowah had rejected the trust deed, the trial court also appointed the Cobb County Board of Commissioners to act as "successor trustee." On this point, the Supreme Court held that it was not error to deny Chattowah’s arguments that it should be permitted to serve as trustee of the trust. The Court stated that "[i]t is undisputed that Chattowah does not have the power to act as a trustee in Georgia," 2006 WL 2930434 *3, noting that the evidence showed that Chattowah "had not received approval from the Georgia Department of Banking and Finance to act as a trust company. See O.C.G.A. § 7-1-392, et seq." 2006 WL 2930434 *3 and n.3. See also O.C.G.A. §§ 7-1-4(21) and -(40), 7-1-5, 7-1-310, 7-1-394(a)(7) and -(d). Thus, for a Georgia business corporation to serve as trustee, it must obtain trust powers under the Financial Institutions Code of Georgia and authorization by the Department of Banking and Finance.

In Williams General Corp. v. Stone, the Georgia Supreme Court clarified the definition of the word "person" under Georgia’s Racketeer Influenced and Corrupt Organizations Act ("RICO") and held a corporation is indeed a RICO "person" and that a corporation can be found to have conspired with its officers and be held liable under RICO for treble damages.

Williams General Corp. brought claims against its former employee and his new employer (Stone and Stone Cold Chemical) for, among other claims, violation of and conspiracy to violate Georgia’s RICO Act. The underlying question in the case was whether or not Stone Cold Chemical could be held liable for RICO violations. The answer to that question hinged on whether or not the word "person" as used in the RICO statutes included a corporation.

The case has a long procedural history. It had been before the Georgia Supreme Court twice previously. In this appeal, reversing the Court of Appeals, the Georgia Supreme Court found that the word "person" as used in the RICO statutes does include a corporate entity. The Court’s decision was based on the fact that in the definitional section for the entire Georgia Code, O.C.G.A. § 1-3-3(14), and in O.C.G.A. § 16-1-3, the definitional section of Title 16, Georgia’s criminal code, which includes the RICO statutes, the word "person" is defined expressly to include corporations.⁷

In Bolden v. Barton, the Georgia Supreme Court held that a court has jurisdiction to determine church membership when ordering a vote by such members to settle a controversy regarding the church’s property. The plaintiff, a church member, originally filed suit seeking removal of the acting pastor of Bethlehem Missionary Baptist Church, an unincorporated association. The trial court granted an injunction ordering the Church members to hold an election to determine whether the pastor should be removed. The defendant appealed and the Supreme Court reversed, stating that the trial court had no subject matter jurisdiction over the case. On remand, the plaintiff filed an amended complaint which alleged that there was a current dispute over who had the right to control the Church’s property. The trial court held that the complaint, as amended, brought the matter properly within its subject matter jurisdiction and once again ordered the membership of the Church to hold an election to determine who would exercise control over the Church’s property.

On appeal, the defendant argued that the relief granted by the trial court was outside of the court’s subject matter jurisdiction, even after the filing of the amended complaint, because the trial court had determined and listed which individuals were qualified as members of the Church and therefore were eligible to vote in the Church election. Addressing this point, the Court noted that religious bodies are free to make their own decisions, without state interference, in matters of church government, faith and doctrine. However, when the property rights of a church are involved and the suit is brought on behalf of a majority of the congregation, courts of equity do have jurisdiction. The Court further held that the amended complaint was brought on behalf of the membership of the Church and the election was specifically ordered to resolve property issues. The Court held that the nature of the election necessitated the trial court’s determination of who was a member, and thus was eligible to vote, and did not interfere with any aspect of the Church’s doctrine or religious organization. To hold otherwise would effectively remove courts of equity from any involvement in a congregational dispute involving a church’s property. Chief Justice Sears filed a concurring opinion in which she commented on the limited scope of the ruling: "[w]hile it is proper for courts to determine church membership for the limited purpose of determining eligibility to vote on a litigated property dispute, it is plainly improper for courts to resolve disputes over church membership in general."

In Atlanta Taxicab Co. Owners Ass’n, Inc. v. City of Atlanta, the Georgia Supreme Court held that the Atlanta Taxicab Company Owners Association, Inc., a Georgia nonprofit corporation, had associational standing to challenge the constitutionality of a city ordinance on behalf of its members. The Association filed suit against the City of Atlanta seeking damages and a declaration that various sections of the Atlanta City Code that regulate the taxicab industry imposed an unconstitutional residency requirement.⁸

The trial court determined that the Association had standing to challenge the residency requirement in accordance with Aldridge v. Ga. Hospitality & Travel Assn., 251 Ga. 234, 304 S.E.2d 708 (1983) (adopting a three-part test formulated in Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 341, 97 S. Ct. 2434, 2440, 53 L.Ed.2d 383 (1976)). As stated in Aldridge, "an association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit." 251 Ga. at 236(1). The Georgia Supreme Court found that (1) every member of the Association was affected by the residency requirement, and thus, each member could sue in his or her own right; (2) the removal of the impediment to sale or lease a CPNC to a non-resident of Georgia was relevant to the Association’s purpose; and (3) since the residency requirement has a common adverse impact on the Association’s collective membership, participation of the individual members was not required to determine the merits of the claim. Atlanta Taxicab Co. Owners Ass’n, Inc., 2006 WL 3438081 at *3. Further, the Court stated that "[s]tanding does not require a showing that any particular individual member of the Association has already suffered an actual injury by being prevented from consummating the sale or lease of a CPNC to a non-resident." Id. Two justices dissented from the majority opinion, specifically finding that the Association failed to satisfy the "minimum constitutional standing requirements because the Association did not allege a single fact or ‘concrete or particularized’ injury that would establish standing to bring a Commerce Clause challenge." Id. at *11.

In Ouachita Watch League v. Jacobs, the Eleventh Circuit held that a coalition of environmental groups (collectively, "Ouachita") had associational standing to bring suit against the U.S. Forest Service on behalf of its members to challenge the Forest Service’s amendments to certain forest plans as violating governing regional vegetation management impact statements ("VMEIS"), the National Environmental Policy Act, and the National Forest Management Act. The Forest Service argued that Ouachita lacked standing, a claim that it raised for the first time on appeal. The Court held otherwise, applying the rules for associational standing.⁹ The Court noted, "[s]o long as one party has standing, other parties may remain in the suit without a standing injury." Id. All Ouachita needed to establish associational standing was one person in each of the three regions covered by the VMEISs who could establish standing. The Court found that Ouachita easily met this requirement; its declarations indicated that "many of its plaintiffs use and will continue to use the forests in the three regions covered by the VMEISs…for recreation and, in some cases, for their livelihoods." Id. at 1171.

In Sayers v. Artistic Kitchen Design LLC, the Georgia Court of Appeals, in a matter of first impression, interpreted O.C.G.A. § 14-11-601.1(b)(4)(D) of the Georgia Limited Liability Company Act, holding that a member of an LLC could not be disassociated from the LLC merely by filing a petition for the disassociation of another member.

In the case, two families created an LLC, and later, one family, the Landaus, filed a petition for reorganization to divest the other family, the Sayerses, of their membership interest. The Landaus invoked O.C.G.A. § 14-11-601.1(b)(5) which results in disassociation if a petition for reorganization is brought against a member and is not dismissed within 120 days after commencement.

The Sayerses attempted to turn the proceeding on its head, arguing that the Landaus did not have standing to bring the petition for reorganization because when they filed their petition for reorganization, under Section 601.1(b)(4)(D), the Landaus themselves became disassociated from the LLC. The Court rejected this argument.

Section 14-11 601.1(b)(4)(D) states in relevant part that a person ceases to be a member when "the member…files a petition or answer seeking for the member any reorganization…." (emphasis supplied).¹⁰ The Sayerses argued that because the Landaus filed the petition, they then ceased to be members. The Court determined that such a reading of § 14-11-601.1 would lead to an absurd result, because if the filing of a petition to attempt to remove another member meant that the filing member would itself become dissociated, the entire process would break down and the disassociation statute would be useless for members. Instead, the Court found that if a member files a petition for reorganization to remove itself, then it becomes disassociated, but if the member files a petition for reorganization to remove another member, the filing member is not dissociated merely upon filing of the petition.

In Patel v. Patel, the Georgia Supreme Court reinforced its reluctance to place companies under receivership absent extenuating circumstances. The plaintiff brought an action alleging fraud and conversion and seeking an injunction, an accounting, and other relief. The plaintiff alleged that an LLC member had signed over his membership interest to the plaintiff, but the members of the LLC denied the validity of the assignment and refused to allow the plaintiff to participate in the LLC.

In connection with his lawsuit, the plaintiff sought the appointment of a receiver while the litigation was pending. The trial court denied the motion and the Supreme Court affirmed, stating that a receiver will be appointed only if it appears that the defendant is insolvent or if there is reason to believe that the defendants are mismanaging or wasting assets that are the subject of the litigation. The Court in the Patel case found that neither of those circumstances was present. The Court found that while the other members of the LLC refused to allow the plaintiff to participate in the LLC, receiverships are not intended to remedy issues of ownership. The Court rejected the plaintiff’s argument that he should be regarded as a creditor, if not a shareholder of the business, holding that unsecured creditors are only entitled to obtain appointment of receivers in "extraordinary circumstances." Because the defendants were not proven to be insolvent or to be mismanaging, wasting or misappropriating the assets of the LLC in which the plaintiff claimed an equitable interest, the trial court properly refused to appoint a receiver.

In Nationwide Mortgage Services, Inc. v. Troy Langley Construction, Inc., the Georgia Court of Appeals held that an unformed LLC differs from a dissolved one, and individuals signing a partnership agreement on behalf of an unformed LLC become partners in their individual capacities. The Court further held that a partnership agreement does not become invalid merely by virtue of the fact that one of its identified partners is an unformed corporation, even where the agreement provides that the partnership is automatically dissolved by the dissolution of one of the corporate partners.

The case involved a suit by a demolition company, Troy Langley Construction, Inc. against a corporate property owner, Nationwide Mortgage Services, Inc., seeking payment for its work in demolishing apartment buildings on Nationwide’s property. Nationwide counterclaimed that it never authorized the work. The work was authorized, instead, by the managing partner of a partnership whose existence, authority and rights to the property were in dispute.

The record revealed that Nationwide entered into a lease purchase agreement to sell the property to VentureCap Development, Inc., which planned to finance and develop the property. When VentureCap was unable to obtain financing, Nationwide’s two sole officers and shareholders decided to form an LLC that would partner with VentureCap as a vehicle for obtaining the financing. They reserved a name for the LLC, Perry Limited, LLC, through the Secretary of State’s office. However, the LLC was never formed. Despite this, the two officers, acting in their capacity as members of the unformed LLC, entered into a written partnership agreement with VentureCap. The corporate property owner was not a party to the partnership agreement and the property was never transferred to VentureCap or the partnership. However, VentureCap, purporting to be the owner of the property and the "primary managing partner" of the newlyformed partnership, contracted with the demolition company, which then demolished the existing apartments on the property.

A threshold issue was whether the corporate owner could be bound to the partnership agreement signed by its president on behalf of the unformed LLC. The Court held that it could not, stating that the owner "has its own legal identity distinct from [that of the officers]" and would not be bound by actions taken by its officers in their private capacities. The Court nonetheless found that even if the owner was not a party to the partnership agreement, factual issues remained as to whether the owner had authorized VentureCap to contract with the demolishing company. As to the partnership, the Court found that despite the officers’ failure to form the LLC, the partnership agreement that they signed on behalf of the LLC with VentureCap was effective to create a partnership, but because they signed on behalf of a non-existing entity, the Court held that they were personally bound by the partnership agreement.

In Yun v. Um, the Court of Appeals overturned a trial court’s finding that a partnership existed between two persons operating a business where the record indicated that only the plaintiff had an ownership interest in the business, he assumed all the liabilities of the business, there was no written partnership agreement, and there was no evidence that the business was operated as a partnership under the meaning set forth in O.C.G.A. § 14-8-1 et seq. Yun, the owner of a liquor store sued Yi, the store manager, for breach of contract and conversion after Yi allegedly transferred funds from the store’s business checking account after the store was sold. Yi claimed that the two were partners and that he was simply taking his 50% share of the sale proceeds. However, there was no partnership agreement. Yi’s name did not appear on any of the documents relating to the purchase of the store. Notably, Yi had invested $100,000 of his funds, and was entitled to receive a certain portion of the profits in the course of the store’s operations. The Court did not find this to be evidence of the existence of a partnership, but rather, only evidence of a debtor-creditor relationship. The Court focused instead on O.C.G.A. § 14-8-8, establishing standards for determining when property is partnership property. The Court concluded that the store was bought in Yun’s individual name with his personal funds, not with any partnership funds. Furthermore, only Yun’s name appeared on the sale documents and only Yun was liable for its debts, obligations and liabilities. Under these circumstances the trial court erred in finding that there was a partnership between Yun and Yi and that the liquor store was partnership property.

In Kellett v. Kumar, a former general partner and majority limited partner appealed a jury verdict awarding the minority limited partner $1.6 million in damages for wrongfully withdrawing and substituting a corporate general partner and merging the partnership into a publicly-held corporation without the consent of the plaintiff. In a previous, unpublished opinion, the Georgia Court of Appeals had affirmed a summary judgment ruling for the plaintiff that the partnership had been dissolved by the general partner’s withdrawal and substitution. Among the issues in this appeal was the damages awarded, which the plaintiff’s expert had calculated at $4.1 million by valuing the plaintiff’s interest in the partnership on the date of dissolution and calculating the return that they could have received on it. The Court held that the jury’s award of a lesser number unsupported by any specific testimony or documentary evidence was subject to challenge since it was within the range of the damages shown. The Court also upheld the trial court’s admission of evidence of the defendant’s involvement in similar litigation on the ground that it was relevant to demonstrate the defendant’s course of conduct.

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