Year In Review: 2005 Case Law Developments In Georgia Corporate And Business Organization Law - Part Two

In Waverly Hall Baptist Church, Inc. v. Branham, No. A05A0893, 2005 WL 3046523 (Ga. App., Nov. 15, 2005), the Georgia Court of Appeals further defined the scope of a court’s jurisdiction in church governance matters, with reference both to the Georgia Nonprofit Code and to principles of noninterference with the exercise of religious freedom.

In 2004, a group of members of the congregational Waverly Hall Baptist Church filed suit against the church, three deacons and the pastor, alleging that the pastor was improperly elected, that the members were being thwarted in efforts to remove certain deacons, that a school affiliated with the church was being mismanaged, and that the pastor and deacons had improperly added members to the church to solidify their control. The plaintiffs asked for a myriad of relief, including a restraining order and a determination of church membership. The trial court, citing nonprofit law, ordered that a meeting, consisting of members admitted before the disputes arose, be held to determine issues raised by the lawsuits and enjoined the defendants from admitting new members. The church appealed. The Court of Appeals affirmed certain rulings of the trial court, but reversed others.

The Court began by noting that while it lacked jurisdiction to inquire into religious matters, it could hear disputes that did not involve an excessive intrusion upon religious matters. The Court then cited Bolden v. Barton, 278 Ga. 831 (2005), a recent decision by the Georgia Supreme Court involving an unincorporated church, holding that a dispute entirely focused on the continued service of the pastor, without more, could not be heard by the courts. The Bolden case reiterated the established principle that courts should not involve themselves in doctrinal issues, but can adjudicate property rights of religious institutions. In contrast, the Waverly Hall complaint did not expressly allege that the current pastor should not serve, but instead challenged the church’s unwillingness to hold a new vote. The Court found no bar against such a suit and held that allegations in the complaint reflecting a dispute over church property sufficed to provide jurisdiction. The fact that certain issues were beyond the trial court’s power did not prevent it from adjudicating the issues over which jurisdiction was permissible.

The church further argued jurisdiction was improper because the dispute could not be resolved using neutral principles of law. The opinion notes that the Georgia Nonprofit Corporation Code can govern certain disputes in religious institutions. The Court focused on the church’s bylaws, which it treated as contractual in nature. It sided with the appellants on the members’ efforts to remove the deacons. Citing the exclusively spiritually-focused duties of the deacons set forth in the church’s bylaws and the vesting of management authority in officers, the Court held that neutral principles of law could not be used in this aspect of the dispute and that the trial court abused its discretion in treating the deacons as directors subject to dismissal under the Nonprofit Code. However, the appeals court upheld the order requiring the church to hold a meeting pursuant to the bylaws and the Nonprofit Code, finding no impermissible religious entanglement.

The appeals court then considered a number of issues relating to church membership, attempting to draw a fine line between permissible and impermissible judicial involvement. It is a requirement for jurisdiction that cases involving congregational churches be brought on behalf of a majority of members. Under the circumstances, where the eligibility of many of the members was questioned and only a small number had voted for the pastor, and giving effect to requirements in the bylaws that members, to be qualified as such, must actively participate in church, the appeals court refused to overturn the lower court’s conclusion that the twenty-six plaintiffs constituted a majority of the membership sufficient to file suit.

However, for reasons that are somewhat unclear, the appeals court reversed the trial court’s ruling that all of the nearly 200 members of record would be eligible to vote at the meeting it ordered. Although acknowledging that the church’s bylaws were to be construed by ordinary contract principles, the Court found that the failure to define certain terms of membership qualification in the bylaws rendered it unable to determine membership without impermissibly delving into internal church procedures. In contrast, considering allegations that certain members, including the pastor, were not properly admitted, the appeals court held that the trial court could determine from church documents whether members were properly admitted.

Finally, the appeals court considered two challenges regarding voting rights. First, it held that the trial court abused its discretion in issuing a temporary restraining order prohibiting the admission or termination of new church members, finding that it violated freedom of religion to impose such limits. Second, the Court upheld a finding that the church had obstructed the plaintiffs’ attempts to call a church meeting, citing provisions in the bylaws authorizing them to do so.

The Waverly Hall decision illustrates that Georgia courts must treat disputes involving religious institutions with great care, sorting out methodically which issues are amenable to judicial consideration and which are not. The result of that examination will often depend on the church’s bylaws, and in particular, whether they are susceptible to interpretation and enforcement in accordance with "neutral" contractual principles, without intruding on religious doctrines and practices. The decision also illustrates how difficult the courts’ task can be in practice.¹⁰

Both parties have filed petitions for certiorari to the Georgia Supreme Court. That court has not, at the time of this writing, decided whether to hear the case.

In Stoker v. Bellemeade, LLC, 272 Ga. App. 817, 615 S.E.2d 1 (2005), the Georgia Court of Appeals, sitting en banc, held that in a closely held LLC, a breach of fiduciary duty claim could be brought directly by a member without a showing of special, individualized injury. However, the Court, relying in part on language in the LLC operating agreement, found that no breach occurred and upheld the grant of summary judgment in favor of the defendants.

Plaintiffs, a developer and his company, agreed to form several LLCs with owners, managers and developers of a large tract of land in Houston County. The LLCs were formed to develop various parcels of the tract for residential purposes. Stoker claimed that the other member of the LLCs, Westbury Properties, Inc., orally agreed to allow Stoker to participate in the future residential and commercial development of the property to induce him to join the LLCs. Subsequently, Stoker and the LLCs were allegedly excluded from participating in the tract’s commercial development.

Stoker, therefore, filed suit against Westbury for unjust enrichment, breach of contract, usurping LLC opportunities and other breaches of fiduciary duty and defamation.

With regard to the breach of fiduciary duty claims, the Stoker decision makes a significant contribution to Georgia law in its discussion regarding standing in LLC governance litigation. The Court reiterated the general rule in the corporate context that a shareholder suit seeking to recover damages for breach of fiduciary duty must be brought as a derivative suit on behalf of the corporation. A shareholder has standing to bring a direct action if the suit alleges some kind of special injury or a wrong involving a shareholder’s contractual right. The Court articulated these policy reasons as follows:

The Court found that those principles should apply in the context of suits involving closely-held LLCs as well. However, in the context of a closely-held corporation and closely-held LLCs, if the circumstances show that the policy reasons for the general rule favoring derivative suits do not apply, a direct action is permitted.

Turning to the case at hand, the Court found that there was no reason to require Stoker to bring the action as a derivative suit because none of the policy reasons for requiring an action to be brought derivatively applied. It noted that as to each of the two-member LLCs involved in the case, the plaintiff was one of the members and the defendant the other; thus all interested parties were before the Court. There was no evidence that creditors needed protection. Given the lack of any market in the LLCs’ membership interests, an increase in share value would not be adequate compensation. Furthermore, routing the recovery through the LLC would mean that the defendants would benefit from the recovery.

In the process of reaching its decision, the Court clarified the law regarding derivative actions in the close corporation context by considering and rejecting an argument that the rule permitting direct actions in close corporations applies only to statutory close corporations created under O.C.G.A. § 14-2-901.¹¹ The Court cited past decisions allowing direct actions where there was no evidence that the corporation involved was formed as a statutory close corporation. The Court recognized that two of its decisions had suggested that the direct action exception applied only to statutory close corporations; it overruled those two decisions.¹²

The Court ultimately found that summary judgment should be granted on Stoker’s breach of fiduciary duty claims. The Court cited O.C.G.A. § 14-11-305(4)(A) and stated that "the LLC members were free to adopt contractual provisions to control, expand, or eliminate duties otherwise set forth under the LLC Act." It noted that the LLC operating agreements contained a provision permitting members to pursue other opportunities, "even if the business or activity competes" with the LLC.¹³ The Court also rejected claims that Westbury, who bore primary responsibility to supervise construction, had failed to prevent cost overruns, relying in part on exculpatory language in the operating agreements stating:

The Court in reaching its decision emphasized the right of LLC members to exercise their statutory rights to determine the scope of their duties to each other.

The Georgia Court of Appeals decision in Alimenta (US), Inc. v. Oil Seed South, LLC, ___ Ga. App. ___, 622 S.E.2d 363, 2005 WL 2323345 (Ga. App. Sept. 23, 2005), involved a dispute between members of a joint venture LLC, Mid Georgia Processing, LLC, that they formed to construct and operate a cottonseed oil plant. The managing member, Alimenta (US), Inc. advanced loans to Mid Georgia not matched by Oil Seed South, LLC, that were converted to capital contributions. It sought to collect half of these advances from Oil Seed South and its principals under indemnification provisions in the operating agreement and personal guarantees of the principals. The defendants counterclaimed for fraud in the inducement and breach of fiduciary duty based on conduct, not specified in the Court of Appeals’ opinion, that occurred at least in part before the operating agreement was signed. The trial court entered summary judgment against both the plaintiff and the defendants on their respective claims.

The Court of Appeals affirmed. In addressing Alimenta’s indemnification claim, the Court held that the indemnification obligation applied to third party liabilities Alimenta incurred, not member loans it made to the LLC. The Court disposed of the defendants’ fraud claims by holding them barred by a merger clause in the LLC’s operating agreement.

As in the Bellemeade case discussed above, the Court rejected breach of fiduciary duty claims in part by enforcing contractual provisions in the operating agreement waiving conflicts of interest and permitting members to compete with the LLC. In enforcing the provisions of the LLC agreement over conflicting provisions of the Georgia Limited Liability Company Code, it held that where language of an LLC operating agreement is more specific than the statutory provisions, the operating agreement prevails. This decision is of limited utility as precedent because of the Court’s omission of information regarding the facts underlying the counterclaim and the lack of any analysis of the legal principles applied, but it further exemplifies the appellate courts’ willingness to enforce LLC agreements as written and to give full effect to waiver of conflict provisions.

The decisions in the partnership area concerned the formation of general partnerships – whether a partnership, as opposed to a joint venture, was formed and whether the agreement reached by the putative partners was sufficient complete to create a partnership. No 2005 Georgia appellate decisions regarding Georgia’s Revised Uniform Limited Partnership Act came to our attention.

In Accolades Apartments, L.P. v. Fulton County, 279 Ga. 257, 612 S.E.2d 284 (2005), the Georgia Supreme Court held that a publicly-filed statement of partnership is conclusive evidence that a partnership exists and that, accordingly, as a partnership the defendant could not be held liable and its assets could not be reached by a judgment entered against one of the individual partners.

Consolidated Equities Corporation ("CEC") owned certain real property in Fulton County. In 1987, CEC transferred the property to Accolades Apartments Joint Venture ("AJV"), a venture between John Hancock Mutual Insurance Company and CEC. In 1993, AJV executed a quitclaim deed in favor of John Hancock. In 1995, John Hancock transferred the property by special warranty deed to a separate entity, Accolades Apartments, L.P. ("Accolades"). Four years later, in April 1999, Accolades filed a "Statement of Partnership of Accolades Apartments Joint Venture" in Fulton County. This statement provided in pertinent part:

In the meantime, in 1998, the property had been condemned by Fulton County, which paid $200,000 as compensation for the taking. Creditors of CEC, one of the "partners" in AJV and Accolades, sought to enforce their post-1987 judgment liens on the Accolades’ condemnation proceeds to satisfy their outstanding judgments. Accolades claimed that the joint venture was a partnership and that the funds were partnership property and therefore outside the reach of CEC creditors. In a prior appeal, the Georgia Supreme Court had decided that joint ventures could be separate legal entities whose property would be beyond the reach of a joint venturer’s creditors. Accolades Apartments, L.P. v. Fulton County, 274 Ga. 28, 549 S.E.2d 348 (2001).

On remand from the first appeal, the Court of Appeals found that AJV’s Certificate of Partnership was only "some evidence" that a partnership exists, that the court must determine the "actual business relationship" and subsequently upheld the trial court’s decision, finding that no partnership existed.¹⁴ The Supreme Court reversed these rulings, finding that the Certificate of Partnership was conclusive evidence of the existence of a partnership.

In its holding, the Court reaffirmed that a partnership can be formed by express or implied agreement and that the statement of partnership is a form of express agreement. The Court stated that "there is no discernable reason for parties to execute and publicly file such a document other than to agree among themselves, and to put third parties on notice, that they are in fact a partnership. . . ." The Court further found support from the Uniform Partnership Act, which provides that any property included in a recorded statement of partnership is presumed to be partnership property. It also found that its position best supported the policy goal of adding certainty to publicly-filed documents. The Court did not address the question of how the 1999 filing of the statement of partnership could affect the transactions and events that took place years earlier.

In Antoskow & Assoc., LLC. v. Gregory, No. A05A1626, 2005 WL 3416300 (Ga. App., Dec. 14, 2005), the Georgia Court of Appeals held that the defendant’s agreement with the plaintiff to form a partnership to hold certain real property was sufficient consideration to support the contract awarding the defendant an interest in the real property.

Christopher Antoskow, as owner of Antoskow, LLC., and Carolyn Gregory entered into a contract purporting to convey to Gregory a percentage of ownership in certain real property that varied, depending on the status of their romantic relationship. The contract stated that Gregory would receive "a percentage as a partner in ownership of this property" (emphasis added) and that upon sale of the property Gregory would receive her applicable percentage of the total sales price of the property.

In September 2002 Antoskow, LLC entered into a contract to sell the real property, subject to the aforementioned agreement. He was unable to close the sale because a title search disclosed an order providing Antoskow could not sell, encumber, or otherwise dispose of property owned by Gregory. Antoskow filed suit seeking a declaratory judgment that Ms. Gregory did not own an interest in the property and that the partnership contract was unenforceable for lack of consideration flowing from Ms. Gregory. The trial court granted summary judgment for Ms. Gregory and denied it to Antoskow.

In affirming, the Georgia Court of Appeals stated that the true test in determining whether a partnership has been created is the intention of the parties. The Court held that the contract unambiguously stated that Ms. Gregory was a partner in ownership of the real property and her assent to partnership itself was sufficient consideration to form a valid partnership, because allowing oneself to be held out as a partner binds the partner to partnership contracts. ¹⁵ The Court also looked to Accolades Apartments, L.P. v. Fulton County, discussed above, where the Georgia Supreme Court held that "[w]here parties distinctly agree among themselves to become partners, there is no reason why the law should not take them at their word, even though an agreement falls short of the facts from which the law would otherwise have inferred a partnership." 279 Ga. at 259 (2005).

The appellant has filed a motion for rehearing, which at this writing has not been decided.

In Wnuk v. Doyle, A06A0023, 2005 WL 3149139 (Ga. App. Nov., 23, 2005), the Georgia Court of Appeals reached a somewhat different result from the Antoskow & Assoc., LLC. v. Gregory case, holding the omission of an agreed-upon specified monetary contribution from an alleged oral partnership agreement rendered the alleged verbal agreement too indefinite to be enforced.

Leta Doyle and Larry Garner were joint fifty-percent owners of property. However, Garner decided to sell his one-half interest in the land and signed a contract of sale with the plaintiff, Carol Wnuk, contingent upon financing. Doyle agreed to assist Wnuk in obtaining financing. Wnuk alleged that while working together to obtain the financing, she and Doyle entered into an oral partnership agreement to develop the property. However, Wnuk admitted that there was never any discussion concerning her financial contribution for her fifty-percent partnership interest. When the financing was not obtained by a May 13, 2003 deadline, the contract of sale terminated. Doyle later formed a limited liability company with other parties, and the LLC purchased Garner’s interest in the property.

Wnuk brought suit against Doyle, among others, alleging that Doyle breached the alleged oral partnership agreement between them. The trial court granted Doyle summary judgment and Wnuk appealed. The Georgia Court of Appeals noted Wnuk’s admission that there was never any discussion in the alleged oral partnership agreement regarding the amount of monetary contribution that Wnuk would have to make to the partnership. The Court held that the omitted monetary contribution was an essential term of contract, without it the agreement lacked consideration and its omission rendered the oral partnership agreement too indefinite to enforce. The Court did not mention the principle that validated the partnership agreement in Antoskow, namely, that "assent to partnership" alone provides sufficient consideration to support a partnership agreement.

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