22. The Business Records Exception to the Hearsay Rule: Ishak v. First Flag Bank, 283 Ga. App. 517, 642 S.E.2d 143 (2007); Walter R. Thomas Assocs., Inc. v. Media Dynamite, Inc., 284 Ga. App. 413, 643 S.E.2d 883 (2007); Boyd v. Calvary Portfolio Services, Inc., 285 Ga. App. 390, 646 S.E.2d 496 (2007); Jenkins v. Sallie Mae, Inc., 286 Ga. App. 502, 649 S.E.2d 802 (2007)
Last year saw several useful, although not ground-breaking, decisions on the use of business records as evidence.
In Ishak v. First Flag Bank, 283 Ga. App. 517, 642 S.E.2d 143 (2007), the Georgia Court of Appeals upheld a trial court's decision to allow a plaintiff bank to enter a defendant debtor's loan history report into evidence under O.C.G.A. § 24-3-14, Georgia's Business Records Act (the "Act").
First Flag Bank (the "Bank") issued a construction loan to Ishak's company, and Ishak personally guaranteed the loan. When the company defaulted and Ishak refused to pay the balance, the Bank sued both Ishak and his company. To prove damages, the Bank sought to introduce a copy of the loan history report on of the construction loan. The trial court granted summary judgment for the Bank, and Ishak appealed, arguing that the Bank failed to lay the proper foundation for the admission of the loan history report.
The Act creates an exception to the hearsay rule permitting qualified business writings or recordings to be admitted into evidence. A party seeking to introduce business records under the Act must establish two foundational requirements through the testimony of a person familiar with the business' method of keeping records: that the record was kept in the regular course of business and that it was the regular course of the business to make the record at or reasonably near the time of the event recorded. The purpose of the exception is to "allow the determination of records without the necessity of producing all the various clerical personnel who made the entries." Dowling v. Jones-Logan Co., 123 Ga. App. 380, 381, 181 S.E.2d 75, 77 (1971). Additionally, O.C.G.A. § 24-3-14(d) mandates that the exception be liberally interpreted and applied.
In Ishak, the Court of Appeals held that the Bank satisfied the Act's foundational requirements for the admission of the loan history reports through the affidavits attached to its motion for summary judgment. The Bank president testified that the Bank kept "the loan history reports in its ordinary course of business," satisfying the first foundational requirement. Also, because the reports themselves contained each transaction's entry and effective date, the Bank satisfied the second requirement.
The Act creates a hearsay exception for trustworthy documents and recordings used regularly in the course of a business. The rationale for the exception is that where businesses rely on the accuracy of their records in the conduct of their business, the records should be considered trustworthy. Because loan history reports are critical to the operation of banks and financial institutions, they are considered reliable and also admissible at trial when the proper foundation is laid. Ishak is an important decision for banks seeking to recover unpaid balances on defaulted loans because it explicitly authorizes the admission of loan history reports into evidence as proof of damages.
In Walter R. Thomas Assocs., Inc. v. Media Dynamite, Inc., 284 Ga. App. 413, 643 S.E.2d 883 (2007), the Georgia Court of Appeals held that invoices from a third-party company can be admissible as business records when kept in the regular course of business of the invoiced company and when an appropriate foundation is laid even though the invoiced company did not itself prepare the invoices. Media Dynamite, Inc. ("MD") sued Walter R. Thomas Associates, Inc. ("WRT"), alleging that MD had not been paid for its services in accordance with an oral contract. According to MD, the contract had provided for MD to arrange for the placement of WRT advertisements with different television stations. In support of its motion for summary judgment, MD presented invoices it received from certain television stations, arguing that these invoices showed the amount of payment owed to MD by WRT. WRT argued that the invoices were not admissible as business records because they were generated by the television stations and not MD itself. WRT claimed, therefore, that MD's witness did not lay a proper foundation for their admissibility.
The Court of Appeals disagreed and held that the invoices were admissible as business records of MD because they were prepared by the television stations for the purpose of billing MD and in accordance with the agreement between the stations and MD. MD then stored them as its own business records, making an affidavit from MD's president an appropriate foundation for the invoices to be admissible as business records. The Court held that summaries of the invoices were admissible, too, even though prepared after litigation began, because summaries of business records are admissible even if the summaries are not business records themselves.
In Boyd v. Calvary Portfolio Services, Inc., 285 Ga. App. 390, 646 S.E.2d 496 (2007), the Court of Appeals, based on business records evidence obtained from a predecessor in interest, affirmed the lower court's grant of creditor's motion for summary judgment in a suit to recover the deficiency on a finance contract for a vehicle that was repossessed and sold at auction.
The borrower's finance contract was assigned to AmeriCredit Financial Services, Inc., who then sold the account to Calvary Portfolio Services, Inc. Calvary sought to recover the deficiency balance. Calvary filed a motion for summary judgment, supported by affidavits from two of its employees. The affidavits attached documents reflecting various transactions among Boyd, AmeriCredit and Calvary. Defendant contended that the affidavits were based on hearsay. Citing Jackson v. State, 209 Ga. App. 217, 219(1), 433 S.E.2d 655 (1993) and Walter R. Thomas Assoc. v. Media Dynamite, 284 Ga. App. 413, 416, 643 S.E.2d 883 (2007), supra, the Court held that the "routine, factual documents" that the plaintiff acquired from a predecessor became its own business records and were thus admissible under the Business Record Act (O.C.G.A. § 24-3-14(b)). It does not appear from the opinion that the defendant challenged the authenticity of the records, the plaintiff's acquisition of the records, its treatment of the records as part of its own business records after acquiring them or the accuracy of their contents.
As in the Boyd case, in Jenkins v. Sallie Mae, Inc., 286 Ga. App. 502, 649 S.E.2d 802 (2007), the Georgia Court of Appeals addressed application of the business records exception to the hearsay rule to a transferred credit obligation and found that loan records received and maintained by a company that purchased a loan from the loan originator were admissible as loan purchaser's business records.
The defendant had executed six promissory notes between 1984 and 1987 to secure student loans to finance his law school education. After paying off some of the consolidated loans by 1991, he defaulted on the remaining loans, which had been purchased from the original lenders by Sallie Mae, Inc. ("Sallie Mae").
The defendant argued that the trial court erred in allowing a Sallie Mae witness who maintained the lender's records to lay the foundation for the admissibility of loan records, claiming that because the loans did not originate with Sallie Mae, the witness lacked personal knowledge. The Court of Appeals held that the loan records were admissible and a proper foundation had been laid because the Sallie Mae witness testified that she maintained the loan files, she was familiar with the records and the record-keeping procedures, that they were kept in the regular course of business and that they were made at or near the time that Sallie Mae received the documents. She also testified as to how the records of Sallie Mae's predecessors in interest became Sallie Mae business records. Therefore, the loan documents were admissible as business records of Sallie Mae, and a proper foundation for their admission was laid by the witness.
23. Piercing the Corporate Veil; Aiding and Abetting Fraud; Joint Venture Liability: The Powell Co., Inc. v. McGarey Group, LLC, 2007 WL 951759 (N.D. Ga., Mar. 28, 2007); BMC-The Benchmark Mgmt. Co. v. Ceebraid-Signal Corp., 2007 WL 2126272 (N.D. Ga., July 23, 2007); Adams v. Unum Life Ins. Co. of America, 2007 WL 2681729 (N.D. Ga. Sept. 10, 2007); Matson v. Noble Investment Group, LLC, ___ S.E.2d ___, 2007 WL 4200950 (Ga. App., Nov. 29, 2007); Horton Homes, Inc. v. Bandy, 2007 WL 4571251 (M.D. Ala., Dec. 26, 2007); Lollis v. Turner, ___ Ga. App. ___, 654 S.E.2d 229 (2007)
In The Powell Co., Inc. v. McGarey Group, LLC, 2007 WL 951759 (N.D. Ga., March 28, 2007) the United States District Court for the Northern District of Georgia found that it would be inappropriate to pierce the corporate veil of a company when there is no evidence that the shareholders disregarded the corporate entity, that the company was an "alter ego" of the shareholders, or that honoring the separate existence of the corporate entity would promote injustice or perpetrate fraud.
The suit arose from a subcontract between leasing agents with regard to the Atlantic Station project in Atlanta. After the project terminated, the subcontractor filed suit against the primary leasing agent, an LLC, claiming, inter alia, breach of the compensation terms of the contract, fraud, misrepresentation, and seeking to pierce the LLC's "corporate" veil. The District Court held that to pierce the corporate veil, the plaintiff must prove either that: (1) the shareholders disregarded the corporate entity, (2) there is a lack of separate personality between the shareholders and the corporation due to unified interests and ownership, or (3) adherence to the doctrine of a corporate entity would promote injustice or perpetrate fraud. The Court held that the subcontractor was unable to prove any of these, and declined to pierce the LLC's corporate veil. In reaching its decision, the Court cited to the LLC's of being properly formed, filing its own tax returns, maintaining insurance for itself, having salaried employees who receive benefits, and holding a separate business address from its members.21
In BMC-The Benchmark Mgmt. Co. v. Ceebraid-Signal Corp., 2007 WL 2126272 (N.D. Ga., July 23, 2007), the United States District Court for the Northern District of Georgia declined to recognize a claim for aiding and abetting fraud and granted summary judgment to the defendant on the plaintiff's claim to pierce the corporate veil because there was no evidence that the defendant ignored corporate distinctions or intended to confuse or commingle them.
BMC-The Benchmark Management Company ("BMC") operated the Georgian Terrace Hotel in Atlanta under a long-term management agreement with AGL Investments No. 2 Limited Partnership, the owner of the Hotel. In 2004, the Ceebraid Acquisition Corporation ("CAC") agreed to purchase the hotel. As part of the purchase agreement, CAC was allowed to assign the agreement, which it eventually did, to CSC Georgian Terrace Limited Partnership ("CSC"). The principals of CSC and CAC, Adam and Richard Schlesinger, were also the principals of several other companies (collectively with CAC and CSC, "the Ceebraid Defendants"). The Ceebraid Defendants wanted BMC to continue to manage the hotel for six months after the purchase before it the hotel was closed for long renovations. BMC wanted a longer-term management agreement.
The Chief Development Officer of BMC and Richard Schlesinger, who served as the president of Ceebraid-Signal Corp., entered into a "Letter Agreement" in November 2004 that provided for BMC to manage the hotel after the closing of the purchase for six months. The Agreement stated that it was "contingent on the acquisition of the property by Ceebraid-Signal." It also provided that both parties intended to negotiate a long-term management agreement for the property for a term of at least five years.
Despite the Letter Agreement, before the closing of the purchase of the hotel, the Ceebraid Defendants began to negotiate with other hotel management companies with regard to managing the hotel. Just before the closing, Ceebraid's counsel asked BMC to sign a subordination agreement that provided that Ceebraid-Signal had executed the Letter Agreement as an agent for CAC. BMC signed the subordination agreement. Four days later, on March 18, 2005, CSC, a separate legal entity formed by the Ceebraid Defendants,22 purchased the hotel.
Shortly after the closing, Richard Schlesinger informed BMC that Ceebraid did not intend to use BMC as its management company for more than four months following the closing. BMC argued that the Letter Agreement was still in place and continued to manage the Hotel. One month later, Schlesinger informed BMC that the Letter Agreement was not effective as to CSC because it was executed by BMC and Ceebraid-Signal and was contingent upon Ceebraid-Signal's acquiring the hotel. Schlesinger claimed that because CSC had acquired the hotel, the agreement between Ceebraid-Signal and BMC was not binding upon CSC. BMC ceased its management duties and filed suit against Ceebraid for fraud, civil conspiracy, aiding and abetting fraud, unjust enrichment and breach of contract.
With regard to the aiding and abetting fraud claim, the Court declined to recognize it as a separate tort under Georgia law. BMC argued that under O.C.G.A. § 51-12-30,23 aiding and abetting fraud was a viable claim in Georgia. Though recognizing that Georgia courts have allowed causes of action for aiding and abetting in a wide array of civil cases, and even acknowledging that the Georgia Court of Appeals implicitly recognized the existence of this claim, the Court here declined to recognize it, citing the fact that no Georgia court has explicitly recognized aiding and abetting fraud as a viable theory of tort liability.24
With regard to the unjust enrichment claim, BMC argued that the Court should pierce the corporate veils of the Ceebraid Defendants and hold them liable for the unjust enrichment CSC received from the alleged breach of the Letter Agreement. The Court recognized that the standard for piercing the corporate veil is high in Georgia, and found that BMC had produced no evidence of abuse of the corporate form. Because there was no factual basis to pierce the corporate veil, the Court held that the Ceebraid Defendants, except for CSC, were entitled to summary judgment on the unjust enrichment claim.
Adams v. Unum Life Ins. Co. of America, 508 F. Supp. 2d 1302 (N.D. Ga. 2007) discusses the elements necessary to pierce the corporate veil and hold a parent liable for a subsidiary's obligations under Georgia law. The District Court for the Northern District of Georgia held that to meet the burden, the plaintiff must show that the subsidiary company is insolvent and would not have sufficient assets to satisfy any judgment, if held liable. The plaintiff must also show that it would defeat justice or allow the subsidiary company to evade its contractual responsibilities, if the subsidiary were regarded as a separate corporation.
There, the plaintiff sued Unum Life Ins. Co. ("Unum Life"), a wholly owned subsidiary of UnumProvident Co. ("UnumProvident"), alleging that the parent company, UnumProvident, was the mere alter ego of Unum Life or was engaged in a joint venture, and should be held liable for Unum Life's wrongful denial of her disability claim. The Court found that Unum Life had sufficient assets to pay any potential judgment against it, and that the plaintiff had not met the burden of showing that justice would be defeated if the Court recognized its separate corporate form. Therefore, it held that UnumProvident was not liable as the alter ego of Unum Life.
The Court also rejected the plaintiff's theory that parent and subsidiary should be treated as joint venturers, based on alleged mutual control and sharing of profits, with the parent corporation to be held jointly liable for the subsidiary's obligations. The Court noted that under Georgia law both joint venturers may be held jointly liable for one joint venturer's negligence, but that principle was inapplicable, since the plaintiff's claims were contractual in nature.
The Court of Appeals in Matson v. Noble Investment Group, LLC, ___ S.E.2d ___, 2007 WL 4200950 (Ga. App., Nov. 29, 2007) held that a parent-subsidiary relationship by itself is not sufficient to raise an issue of fact as to agency, joint venture or piercing the corporate veil, nor is notice of a lawsuit imputed from subsidiary to parent for purposes of the statute of limitations. It also ruled that uncertified copies of computer printouts of corporate information from the Georgia Secretary of State's website, attached to an affidavit by counsel, were not properly authenticated to be admissible for purposes of summary judgment.
Horton Homes, Inc. v. Bandy, 2007 WL 4571251 (M.D. Ala., Dec. 26, 2007) involved a suit by Horton Homes, Inc., a Georgia producer of manufactured homes, to enjoin an arbitration brought against it because it was not a party to the arbitration agreement. The arbitration was brought by a manufactured home purchaser against Horton Homes and H&S Homes, LLC, its wholly-owned LLC sales subsidiary that was a party to the agreement. The Court denied the injunction, holding that the parent company could be required to arbitrate because there was evidence that would authorize the jury to pierce the corporate veil of the LLC sales subsidiary. The Court held the law of the state of incorporation governed the corporate veil issue. It found that Horton Homes could be held to be the alter ego of H&S Homes under Georgia law, based on the facts, among others, that in its business operations, H&S held itself out to the public as being "Horton Homes" and that after another manufactured home purchaser had recovered a substantial arbitration award against H&S, Horton Homes sued H&S to collect on inter-corporate debts and recovered a $22,003,000 default judgment against H&S, leaving it unable to satisfy the arbitration award.
Finally, in Lollis v. Turner, ___ Ga. App. ___, 654 S.E.2d 229 (2007), the Georgia Court of Appeals held that a suit against clerk of court for improperly releasing funds from the registry of court was without merit because the funds belonged to corporation, not to individual against whom the plaintiff had recovered a judgment, and Georgia does not recognize "outsider reverse veil-piercing."
24. D&O Insurance – Rescission and Exclusions: Executive Risk Indem., Inc. v. AFC Enterprises, Inc., 2007 WL 2791117 (N.D. Ga. Sept. 26, 2007); Fireman's Fund Ins. Co. v. University of Georgia Athletic Assn., Inc., ___ Ga. ___, 654 S.E.2d 207 (2007)
In Executive Risk Indemnity, Inc. v. AFC Enterprises, Inc., 2007 WL 2791117 (N.D. Ga. Sept. 26, 2007), following a bench trial, the Court issued findings of fact and conclusions of law rejecting the claim by Executive Risk Indemnity, Inc., a director and officer liability insurer, that AFC Enterprises, Inc., the insured company, had failed to respond truthfully to questions asked by insurance underwriters during the process of renewing its policy. The Court granted judgment to AFC for policy limits.
The policy renewal occurred during a period in 2002 and 2003 when AFC changed auditors and its new auditors were taking the position that AFC should change the way in which it accounted for the impairment of "long-lived assets." Because existing coverage was being renewed, the application required no warranties, and AFC's chief executive officer was only required to certify that the statements in the application, including financial statements incorporated into the application, were true "to the best of his knowledge and belief." Shortly after the renewal policy became effective, AFC announced that it would restate its financial statements for 2001 and the first three quarters of 2002. That announcement was followed immediately by both class and derivative actions.
The Court painstakingly analyzed the factual circumstances of the policy renewal and the parallel development of AFC's 2002 audit. Executive Risk conceded that there were no misrepresentations in the renewal application, but contended that AFC's chief financial officer had not disclosed the accounting issues during a meeting with Executive Risk's underwriters. It also contended that AFC had an obligation under the terms of the application form to correct any statements that became inaccurate during the renewal process. The Court found, however, that the CEO was not aware of the likelihood of a restatement at the time he signed the renewal application, that the CFO was not aware of it at the time of the underwriters meeting, that the decision to reaudit the financial statements did not occur until days after the renewal policy became effective, and that AFC had no duty to correct because there were no statements in the application that had become inaccurate once the decision to restate was made. The Court also found that months later, after the restatement was announced and litigation ensued, the insurer formally executed and issued the policy. On these facts, the Court held that Executive Risk did not have a right to rescind and AFC was entitled to an award of policy limits. Given Executive Risks refusal to honor the policy, it was not entitled to invoke policy provisions allocating between covered and non-covered risks. Finally, the Court rejected a contention by Executive Risk that, by mutual mistake, it had issued $10,000,000 in additional limits to insure AFC's obligation to indemnify its investment bankers, who had also been sued in the shareholder actions.
In Fireman's Fund Insurance Co. v. University of Georgia Athletic Assn., Inc., ___ Ga. ___, 654 S.E.2d 207 (2007), the Georgia Court of Appeals considered the duty of an insurer under a nonprofit organization director and officer liability policy to defend claims that the organization and one of its employees had breached their fiduciary duty and acted negligently in administering a disability insurance program when they failed to secure insurance requested by a student athlete who was subsequently injured and disabled. The Court rejected the insurer's arguments that coverage was barred by two exclusions, one for claims based on the failure to effect or maintain insurance and the other for claims based upon bodily injury. The Court found, for purposes of determining whether there was a duty to defend, that the failure to maintain insurance exclusion was ambiguous, and under established Georgia insurance law precedent should be strictly construed against the insurer because the clause could be interpreted as intended to prevent using the D&O policy to substitute for other types insurance that the organization should obtain to cover risks outside the normal scope of a D&O policy. The bodily injury exclusion was held inapplicable because of the attenuated connection between the alleged breach of fiduciary duty and the plaintiff's injury.25
25. The Georgia Securities Act of 1973 – Administrative Appeal Filing Procedures: Slater v. Cox, 287 Ga. App. 738, 653 S.E.2d 58 (2007)
In Slater v. Cox, 287 Ga. App. 738, 653 S.E.2d 58 (2007), the Georgia Court of Appeals held that the specific 20-day filing deadline in the Georgia Securities Act governed an appeal from an adverse administrative ruling by the Georgia Securities Commissioner to the Superior Court, rather than the 30-day period provided in the Georgia Administrative Procedures Act.
The Commissioner of Securities had issued a cease and desist order and imposed a civil penalty against Beverly Slater. She appealed to the Superior Court of Fulton County. The Superior Court dismissed her appeal as untimely. She then appealed to the Georgia Court of Appeals.
The issue was whether the deadline to file her appeal in the Superior Court was 20 days or 30 days. Under O.C.G.A. § 10-5-17, the Georgia Securities Act imposes a twenty-day deadline in which to file an appeal from any order of the Commissioner of Securities. The Georgia Administrative Procedures Act, which provides a thirty-day deadline in which to file petitions for review of a final decision of any state agency in superior court.
The Court of Appeals held that the trial court did not err by applying the twenty-day deadline because in a previous case, Village Centers v. DeKalb County, 248 Ga. 177, 180 n.3, 271 S.E.2d 522 (1981) the Georgia Supreme Court had listed a predecessor of O.C.G.A. § 10-5-17 as an example of statutes that shortened the more general thirty-day time period under the Georgia Administrative Procedures Act.
The Court of Appeals denied Appellant's motion for reconsideration. A certiorari petition currently is pending.
26. Georgia RICO: Scouten v. Amerisave Mortgage Corp., 284 Ga. App. 242, 643 S.E.2d 759 (2007)
In Scouten v. Amerisave Mortgage Corp., 284 Ga. App. 242, 643 S.E.2d 759 (2007), the Georgia Court of Appeals held that an ex-employee cannot recover damages for employer retaliation under Georgia's Racketeer Influenced and Corrupt Organizations Act ("Georgia RICO").
Scouten alleged that his former employer, Amerisave, violated both Georgia RICO and O.C.G.A. § 16-10- 93 by engaging in fraudulent solicitation practices and then firing Scouten for his refusal to participate in a cover-up of such practices. The trial court dismissed both Scouten's claims and the Georgia Court of Appeals affirmed. First, the Court of Appeals stated that a person seeking to assert a claim under Georgia RICO must prove that his or her injury flowed directly from the underlying offense. Scouten failed to satisfy this requirement because Amerisave's alleged fraudulent scheme was directed at potential customers, not at employees or at Scouten personally. Second, Scouten's claim that Amerisave violated O.C.G.A. § 16-10-93, unlawfully attempting to influence a witness, failed because Scouten did not specifically allege that Amerisave threatened to fire him if he did not participate in the cover-up.
Scoutan's certiorari petition was granted and the case is currently pending in the Georgia Supreme Court.
27. Litigation of Corporate Transactions – Professional Liability; Third Party Beneficiary Standing and Purchase Price Adjustments : Paul v. Smith, Gambrell & Russell, 283 Ga. App. 584, 642 S.E.2d 217 (2007); Duvall v. Galt Med. Corp., 2007 WL 4207792 (N.D. Cal., Nov. 27, 2007); Automated Print Inc. v. Edgar, ___ S.E.2d ___, 2007 WL 3293254 (Ga. App., Nov. 8, 2007)
In Paul v. Smith, Gambrell & Russell, 283 Ga. App. 584, 642 S.E.2d 217 (2007), the Georgia Court of Appeals addressed whether a client's review of a negligently-drafted merger document is a complete defense to a legal malpractice action.
The plaintiffs in Paul (the "Pauls") sued the law firm that served as their counsel in transactions involving the formation and restructuring of several corporate entities. The Pauls and their former business partner, Ralph Destito, were shareholders in two corporations, Catspaw, Inc. (CPI) and Recording Studio, Inc. (RSI). Without obtaining Destito's approval, the Pauls, with the firm's assistance, merged CPI into RSI. As a result of their failure to obtain Destito's consent, the Pauls were later ordered to pay a million dollar judgment to Destito. The Pauls then sued the firm for legal malpractice to recover the sums they paid to Destito, claiming (1) that the firm negligently prepared the Pauls to testify at trial in Destito's suit against them, and (2) that the firm was negligent in preparing the merger documents in connection with the CPI/RSI merger.
The Firm moved for summary judgment on both claims: The Court of Appeals affirmed the trial court's grant of summary judgment to the firm on the issue of whether it was negligent in preparing the Pauls for trial because the Pauls failed to prove causation. An action for legal malpractice requires a showing that "but for" the attorney's negligence, the outcome of the underlying lawsuit would have been different. The Pauls simply failed to make such a showing as to their trial testimony in the Destito case.
The Court of Appeals affirmed the trial court's denial of summary judgment on the claim for negligence in preparing merger documents. Georgia law requires the approval of all shareholders for a merger that is not submitted to shareholder vote at a duly called shareholders meeting. Thus, in order for CPI to legally merge into RSI, both the Pauls and Destito were required to sign the consent resolution prepared by the firm. The firm admitted it knew that unanimous shareholder consent was required for a shareholder action without a meeting. The firm also knew that Destito was an RSI shareholder since it kept all of RSI's corporate documents. The firm, however, did not include a signature line for Destito in the consent resolution because the Pauls said that they had consulted with Destito and he was no longer interested in the corporation.
The Pauls argued that the firm's failure to inform them of the legal consequences of merging without Destito's approval constituted malpractice. The firm, on the other hand, argued that the rule from Berman v. Rubin, 138 Ga. App. 849, 227 S.E.2d 802 (1976), applied. Berman stands for the proposition that an attorney cannot be held liable for malpractice based on an alleged misrepresentation of a document where a competent client read and signed the document, and the document's meaning was plain, obvious, and did not require legal explanation. Id. at 855, 227 S.E.2d at 802. The Court of Appeals acknowledged that the Pauls knew that they were not the only shareholders of RSI when they signed the consent resolution, but held that there were issues of fact for a jury on whether the Pauls understood the legal ramifications of attempting to merge the companies without the consent of all shareholders. Thus, the Court of Appeals affirmed the trial court's denial of summary judgment on the second claim.
In Duvall v. Galt Med. Corp., 2007 WL 4207792 (N.D. Cal., Nov. 27, 2007), a former employee of a corporation claiming to hold vested stock options that had been repeatedly promised him sued when his stock options were not included in a purchase of 100% of the corporation's stock. He was held not to have standing as a third-party beneficiary to sue the acquiring company where the Stock Purchase Agreement, governed by Georgia law, expressly denied third party rights and contained a merger clause.
The Georgia Court of appeals in Automated Print Inc. v. Edgar, ___ S.E.2d ___, 2007 WL 3293254 (Ga. App., Nov. 8, 2007), held that stock purchase price adjustment provisions in a promissory note given in stock purchase were held not to be a matter of set-off or recoupment and thus did not require the defendant to plead an affirmative defense or counterclaim. The price adjustment provisions affected the amount due under the note and were thus part of the plaintiff's case. The trial court thus erred in barring the defendant from offering evidence on the occurrence of price adjustment events.
28. Equity Investment or Loan: Marcum v. Gardner, 283 Ga. App. 453, 641 S.E.2d 678 (2007)
In Marcum v. Gardner, 283 Ga. App. 453, 641 S.E.2d 678 (2007), the Georgia Court of Appeals pointed out the difficulty in determining whether money provided to a business is an equity investment or a loan when the parties do not follow a formal process to document the transaction properly.
In Marcum, Marcum gave Gardner a check for $50,000 that was made payable to DG Productions, LLC, a limited liability company that was solely owned by Gardner "for tax purposes." The memo section of the check identified the payment as "1/3 investment on Dan Gardner." Marcum later sued Gardner to recover the amount. Gardner argued that the check was a partial payment of an "investment" in Gardner's music career and was to be used in connection with the production of his album. Marcum, however, argued that it was a "loan" of money to Gardner on the condition that the two would agree upon an acceptable written contract granting Marcum a security interest. No such agreement was ever signed. Gardner's agent, Kurtz, who negotiated the payment with Marcum, characterized the $50,000 as a "conditional investment" that was to be repaid if no agreement were reached.
The trial court granted summary judgment for Gardner, reasoning that because Marcum wrote the word "investment" on the check and Gardner believed the payment was such, the parties intended for the $50,000 to be an investment, not a loan. The Court of Appeals rejected this reasoning, holding that summary judgment was improper in this case because there was conflicting evidence presented on whether the payment was an investment or a loan. The Court did not explain what the finding of an "investment" would actually entail other than to imply that it would not entitle Marcum to repayment of his money.
Marcum exemplifies the difficulty that can arise when parties do not clearly document their agreement in transferring funds for use in business enterprises. There appears to be no tests or rules that enable a court to decide the issue as a matter of law. Where the facts are disputed, the issue of whether money provided to a business is an investment or a loan is for the trier of fact to decide.
29. Successor Liability of Manufacturers: First Support Services, Inc. v. Trevino, ___ S.E.2d ___, 2007 WL 3407720 (Ga. App., Nov. 16, 2007)
In First Support Services, Inc. v. Trevino, ___ S.E.2d ___, 2007 WL 3407720 (Ga. App., Nov. 16, 2007), the Georgia Court of Appeals held that the purchaser of a manufacturer of allegedly defective aircraft maintenance "wing stand" was not strictly liable as "successor corporation" for purposes of O.C.G.A. §§ 51-1-11(b)(1). The plaintiff's only evidence – namely, that the corporation retained some employees of the acquired manufacturer and changed its name to the manufacturer's name – was held insufficient. There was no evidence of a merger, assumption of liabilities, commonality of ownership, an attempt to commit fraud or any of the other factors recognized as a basis for finding liability as a successor corporation.
Footnotes:
1 By contrast, the Delaware courts have long held directors to a less stringent gross negligence standard of care. See Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
2 Directors' liability for damages for negligence can be eliminated by inclusion of exculpatory language in the articles of incorporation, O.C.G.A. § 14-2-202(b)(4), but there is no similar provision for exculpation of officers. Officers, as well as Directors, can receive protection from negligence claims through indemnification provisions. See O.C.G.A. §§ 14-2-856(a) and -(b), 14-2-857(a) and 14-2-859(f).
3 The court also fails to discuss any of the case law from other Model Act states, which is divided on whether the language currently in O.C.G.A. § 14-2-830 imposes liability for ordinary negligence. See FDIC v. Stahl, 89 F.3d 1510, 1516 (11th Cir. 1996) (interpreting former Florida law with wording similar to § 14-2-830 to impose liability for simple negligence). There is also no mention of unpublished conflicting Georgia federal court decisions on the issue. Compare RTC v. Artley, Civ. Action No. CV492-209 (S.D. Ga. 1993) (unpublished) (holding Georgia directors to an ordinary negligence standard under Georgia law), rev'd. on other grounds, 28 F.3d 1099 (11th Cir. 1994); with Medserv Corporation v. Nemnom, Civ. Action No. 1:95-cv- 0462-TWT (N.D. Ga., Sept. 23, 1997) (unpublished) ("It has been held that an action for breach of fiduciary duty by a corporate officer requires a showing of more than mere negligence or careless performance of his duties," citing Mansfield Hardwood Lumber Co. v. Johnson, 268 F.2d 317 (5th Cir. 1959) (applying Louisiana law)).
4 The case also had an extended pre-trial history. The defendants initially removed the case to federal court, arguing that because the plaintiff owned a large portion of his shares through an employee stock ownership plan, his Georgia law claims were preempted by ERISA and the case was required to be litigated in federal court. The district court denied Ervast's motion to return the case to state court, but the federal court of appeals disagreed, holding that Ervast's claims involved the state law duty of a majority shareholder to disclose material information to a minority shareholder selling his shares and was not preempted by ERISA. Ervast v. Flexible Products Co., 346 F.3d 1007 (11th Cir. 2003), cert. denied, 543 U.S. 808, 125 S. Ct. 30, 160 L. Ed. 2d 10 (2004).
5 A review of the appellate briefs shows that the standard of care issue under § 14-2-842 had not been raised by the parties in the Rosenfeld appeal. The issue instead was the question whether the phrase "all due care and diligence" set a more exacting standard than § 14-2-842. The Flexible Products Co. decision was handed down after the briefing in Rosenfeld was complete. There was no oral argument in Rosenfeld.
6 Compare Resolution Trust Corp. v. Hecht, 818 F. Supp. 894 (D. Md. 1992) (gross negligence standard of care), and In re Integrated Resources, Inc., 147 B.R. 650 (S.D.N.Y. 1992) (gross negligence standard of care), with Resolution Trust Corp. v. Rahn, 854 F. Supp. 480 (W.D. Mich. 1994) (simple negligence standard of care), and Theriot v. Bourg, 691 So. 2d 213 (La. Ct. App. 1997) (simple negligence standard of care).
7 Former Ga. Code Ann. § 22-713 provided: "Directors and officers shall discharge the duties of their respective positions in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions." (Ga. L. 1968, p. 565). See Boddy v. Theiling, 129 Ga. App. 273, 276, 199 S.E.2d 379, 382 (1973). Former O.C.G.A. § 14-2-152.1, Ga. L. 1987, p. 849 § 1, enacted in 1987, deleted the references to "diligence" and "skill" for actions occurring after July 1, 1987. See cmt. (i) to § 14-2-152.1
8 Under F.R. App. P 32.1(a), the U.S. Courts of Appeal cannot restrict the citation of unpublished decisions that are issued after January 1, 2007. Eleventh Circuit Local Rule 36-2 states that "[u]npublished opinions are not considered binding precedent, but they may be cited as persuasive authority."
9 The Court did not mention the Georgia Securities Act of 1973 by name or cite any specific provision of the Act.
10 The Court relied on GCA Strategic Inv. Fund v. Joseph Charles & Assocs., ___ Ga. App. ___, 537 S.E.2d 677 (2000) in holding that "Georgia securities fraud claims" require scienter, proximate cause and the exercise of due diligence by the plaintiff. See also Keogler v. Krasnoff, 268 Ga. App. 250, 601 S.E.2d 788 (2004).
11 Jarrell's plans to conduct business through his own company fell through and he went to work for Newco instead.
12 "A corporation administratively dissolved continues its corporate existence but may not carry on any business except that necessary to wind up and liquidate its business and affairs under Code Section 14-2-1405. Winding up the business of a corporation administratively dissolved may include the corporation's proceeding, at any time after the effective date of the administrative dissolution, (1) in accordance with Code Section 14-2-1406 to notify known claimants, and (2) to mail or deliver, with accompanying payment of the cost of publication, a notice containing the information specified in subsection (b) of Code Section 14-2-1407 for publication in accordance with subsection (b) of Code Section 14-2-1403.1. Upon such notice, claims against the administratively dissolved corporation will be limited as specified in Code Sections 14-2-1406 and 14-2-1407, respectively."
13 WKA was probably converted to a limited liability limited partnership after the enactment of O.C.G.A. §§ 14-8-62, et seq. in 1997, authorizing LLLP elections.
14 Currently formed limited partnerships and older partnerships which have chosen to opt in are governed by the Revised Uniform Limited Partnership Act ("RULPA"), O.C.G.A. §§ 14-9-100, et seq.
15 The Georgia Civil Practice Act does not contain a general provision for derivative actions similar to F.R. Civ. P. 23.1. When the Georgia Legislature revised Georgia's class action rules in 2003, it deleted former O.C.G.A. § 9-11-23(b), a derivative action provision referring to "shareholders" of incorporated and unincorporated "associations." Unlike the derivative provisions in the GBCC, the Nonprofit Corporation Code and LLC Code, both former Rule § 9-11-23(b) and currently RULPA permit commencement of a derivative action without a demand upon the managing directors, trustees or general partners if there is a basis for excusing it. Compare O.C.G.A. §§ 14-2-742, 14-3-742 and 14-11-801(2) with § 14-9-1001 and former § 9-11-23(b).
16 The Court held that the limited partners' breach of fiduciary duty claims were governed by a 4-year statute of limitations and held that even though there is actionable fraud when a fiduciary fails to disclose material facts, the statute of limitations is not tolled by that fraud when the plaintiff has proper notice of information necessary to determine the truth. See below, Part E.
17 The partnership business was run through a corporation, but the ownership of the corporation and the relationship between the two entities' finances are not explained.
18 Compare McKenna v. Capital Resource Partners, IV, L.P., 286 Ga. App. 828, 650 S.E.2d 580 (2007) (addressing the authority of a controlling shareholder to reach an agreement binding on a corporation).
19 This section governs derivative proceedings by corporations or shareholders against their directors and provides for a fouryear statute of limitations.
20 The Court rejected this tolling theory on the ground that the trustee failed to cite any authority supporting it. In fact, the Eleventh Circuit has addressed and rejected the theory, based on the concept of "adverse domination," holding that it was not recognized under Georgia law. Resolution Trust Corp. v. Artley, 28 F.3d 1099 (11th Cir. 1994).
21 The Court did not cite the section of the Georgia LLC Code dealing with observance of formalities, O.C.G.A. § 14-11-314: "The failure of a limited liability company to observe formalities relating to the exercise of its powers or the management of its business and affairs is not a ground for imposing personal liability on a member, manager, agent, or employee of the limited liability company for liabilities of the limited liability company." We have not found any decision citing this provision
22 Later in the case, the Court describes Ceebraid-Signal as the parent company of CSC.
23 This provision provides: "[i]n all cases, a person who maliciously procures an injury to be done to another, whether an actionable wrong or a breach of contract, is a joint wrongdoer and may be subject to an action either alone or jointly with the person who actually committed the injury."
24 The Court last year in Insight Technology, Inc. v. FreightCheck, LLC, 280 Ga. App. 19, 633 S.E.2d 373 (2006), upheld a claim for secondary liability under § 51-12-30 for malicious procurement of a breach of fiduciary duty by a corporate officer.
25 Of possible interest in the general liability insurance area is the Georgia Court of Appeals' decision in Shafe v. American States Insurance Co., 288 Ga. App. 315, 653 S.E.2d 870 (2007), ruling that the defendant had no advertising injury coverage under his commercial general liability policy for the plaintiff's claims for the defendant's allegedly wrongful use a marketing program that the they jointly owned. The Court found that the plaintiff's claims were stated "in terms of one business partner forcing the other to account for and pay profits owed" and no misappropriation of property was possible because the defendant's co-ownership conferred rights to use the program.
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