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

In Kitchens v. Brusman, 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. The plaintiff’s wife visited Southern Regional Medical Center in October 1997 for a biopsy which was performed by a doctor employed by an entity referred to as "South Suburban." Pursuant to a contractual arrangement, South Suburban performed all pathological services for the hospital. The biopsy incorrectly determined that the tumor was not malignant. The plaintiff’s wife was diagnosed with late stage cancer in October 1999, and she died a year later.

The plaintiff brought suit on his own behalf for the wrongful death of his wife and on behalf of his wife’s estate for her pain and suffering, alleging that the doctor misdiagnosed his wife’s original condition in 1997. The plaintiff included the hospital as a defendant alleging that the hospital and South Suburban operated the pathology lab as a joint venture and, therefore, the hospital was responsible for Dr. Brusman’s actions. The trial court granted summary judgment to the defendants after determining that the plaintiff failed to file suit within the statute of limitations. On appeal, the Court reversed on the issue of statute of limitations, then considered the issue of whether the hospital and South Suburban operated the pathology lab as a joint venture. For the applicable principles, the Court cited to the Georgia Supreme Court’s holding in Rossi v. Oxley, 269 Ga. 82, 83, 495 S.E.2d 39 (1998), which stated that "a joint venture arises where two or more parties combine their property or labor, or both, in a joint undertaking for profit, with rights of mutual control." The element of mutual control is essential to the existence of a joint venture.

Examining the facts of the case, the Court concluded that the hospital and South Suburban were not engaged in a joint venture because the contract between the two specifically provided "that the hospital did not have, and could not exercise, any control or direction over the manner in which independent-contractor pathologists provided pathology services." Furthermore, the contract provided that South Suburban was responsible for recruiting, contracting, scheduling, compensating and supervising all pathology services. Since the hospital had no control over the pathology lab, the Court held that the hospital and South Suburban were not operating as a joint venture and affirmed the trial court’s grant of summary judgment for the hospital.

Hillis v. Equifax Consumer Services, Inc. was brought as a proposed class action alleging that a credit information and repair service, "Score Power," offered jointly by Equifax and Fair Isaac, Inc. violated the Credit Repair Organizations Act, 15 U.S.C. 1679 et seq. In a lengthy order denying both class certification and the plaintiff’s motion for partial summary judgment, the Court briefly addressed and ruled on the plaintiff’s contention that the relationship between Equifax and Fair Isaac was a joint venture.

The Court began by noting that in a joint venture the acts of one "joint adventurer" are binding on the other. The Court stated 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." Id. at *19, citing Kissun v. Humana, Inc., 267 Ga. 419, 420, 479 S.E.2d 751 (1997). The Court examined the agreement between Equifax and Fair Isaac setting up the Score Power program (not set forth in the opinion) and found that all elements were present, including "some element of mutual control."

F. Derivative Actions and Individual Shareholder and Investor Claims.

In this case, minority members of Southwest Doctors Group, LLC ("SDG") directly sued the majority members of the limited liability company for, among other allegations, breach of SDG’s operating agreement, fraud, misuse of corporate assets, unjust enrichment and "violations of the Patriot Act." The dispute centered on efforts by the majority members to obtain permanent financing for Southwest Hospital which SDG had purchased out of bankruptcy. The trial court entered a judgment on the pleadings, dismissing the complaint on the ground that claims should have been brought derivatively, not directly. The Court of Appeals affirmed.

The Court of Appeals acknowledged the general rule that a shareholder seeking to recover misappropriated corporate funds may bring only derivate actions, citing Matthews v. Tele-Systems, 240 Ga. App. 871, 525 S.E.2d 413 (1999) and Haskins v. Haskins, 278 Ga. App. 514, 629 S.E.2d 504 (2006). Shareholders may bring direct actions when they allege "more than a wrong done to the corporation, either a separate and distinct injury from that suffered by other shareholders or a wrong derived from a contract right existing independently of any right of the corporation," citing Dunn v. Ceccarelli, 227 Ga. App. 505, 489 S.E.2d 563 (1997) (physical precedent only) and Grace Brothers, Ltd. v. Farley Industries, 264 Ga. 817, 450 S.E.2d 814 (1995).

The plaintiffs alleged a variety of claims and injuries, which they argued all resulted from the defendants’ "breach of a fiduciary duty to disclose." The Court found the plaintiffs’ allegations insufficient to show a special injury, requiring factual allegations, not just generalized assertions:

Id. at *5 (emphasis added). Relying on In re Tri-Star Pictures, 634 A.2d 319 (Del. 1993), the appellants contended that allegations of usurpation of voting rights and dilution of shares constituted separate and distinct injuries entitling them to direct action. The Court distinguished Tri-Star, because the majority had diluted minority shareholders by increasing their own interest, whereas here "all the shareholders were diminished in proportion to their ownership by the selling of interests to new shareholders."¹¹

The appellant also argued in alternative that even in the absence of a special injury, they could rely on the exception to derivative action requirements established under Georgia law for minority shareholders of close corporations, which was held applicable last year to LLCs in Stoker v. Bellemeade, LLC, 272 Ga. App. 817, 615 S.E.2d 1 (2005), rev’d in part on other grounds, and Bellemeade, LLC v. Stoker, 280 Ga. 635, 631 S.E.2d 693 (2006). The Court in Stoker relied on Thomas v. Dickson, 250 Ga. 772, 301 S.E.2d 49 (1983) as setting forth the conditions when close corporation minority shareholders can file direct actions, namely when a derivative action would not serve its purposes, i.e., would not be necessary to: (1) prevent multiple shareholder suits, (2) protect corporate creditors by ensuring that the recovery goes to the corporation; (3) protect the interest of all the shareholders by ensuring that recoveries by the individual shareholders do not prejudice other shareholders, and (4) compensate injured shareholders by increasing their share values. In this case, there were two shareholders who were not parties to the litigation and the record did not support appellant’s allegation that "the two shareholders were given the opportunity to participate in these proceedings and chose not to." The Court also appeared to suggest that the plaintiffs might have been able to pursue a direct action if they had satisfied "at least one of the four criteria in Thomas," id. at *7, however, this language is dicta, since the Court found that the plaintiffs failed to satisfy any of the Thomas criteria, thus the close corporation exception did not apply.

In Hantz v. Belyew, the United States District Court for the Northern District of Georgia ruled on and granted motions under O.C.G.A. § 14-2-746 to recover attorney’s fees and expenses by defendants who had succeeded earlier in obtaining dismissal of a derivative action. The plaintiffs were shareholders of a Florida corporation which had gone through a bankruptcy reorganization. In dismissing the complaint, the District Court had held, among other things, that the plaintiffs’ claims were derivative and because their stock holdings had been extinguished in the bankruptcy, the plaintiffs failed to meet the requirement of continuous ownership necessary to maintain a derivative action. It rejected the plaintiffs’ argument that, as in merger disputes, the involuntary nature of the termination of minority shareholders’ interest should excuse the fact that they were no longer shareholders. These rulings were affirmed on appeal.¹² On remand, the District Court held that prevailing defendants were not required to demonstrate that the plaintiffs had pursued their claims in bad faith or with an improper motive. Section 14-2-746 authorizes an award of litigation costs not only where the claims are pursued "for an improper purpose," but also where they are pursued "without reasonable cause." The Court did not explain why § 14-2-746, as provision of the Georgia Business Corporation Code, governed the rights to attorney’s fees and litigation costs, when Florida law governed the plaintiffs’ standing to sue on behalf of the Florida corporation in which they had been shareholders.

The Argentum International, LLC v. Woods case involved claims for fraud brought by equity investors and debenture holders who purchased securities in a limited liability company formed to own and exploit a patent for a silver nylon wound dressing. A business plan used to sell the securities represented that the company owned the patent. The investors claimed that while the company’s securities were being sold, the inventor decided to transfer the patent out of the company. His intentions and efforts were not disclosed to investors, even though the company made a repurchase offer, accompanied by a private placement memorandum, in order to cure federal and state securities laws violations involved in the issuance of the debentures. The inventor made repeated assurances that promises in the business plan would be honored and the investors did not accept the debenture repurchase offer or rescind their equity purchases.

Appealing from an adverse jury verdict, the defendants contended, among other things, that the debenture holders could only sue under their contracts, that the equity investors’ fraud and conspiracy claims were derivative in nature, and that the investors had failed to perform due diligence. Rejecting each of these claims, the Court of Appeals found that the investors had presented evidence supporting the conclusion that the investors "were fraudulently induced into making and keeping their investments." The Court held that the debenture holders under general fraud principles could affirm their debentures and still sue for fraud. The equity investors’ claims, the Court ruled, were "different from and more than the wrong to the corporation," (quoting from William Goldberg & Co. v. Cohen, 219 Ga. App. 628, 68, 466 S.E.2d 872 (1995)) and were hence direct, not derivative in nature. The Court also found sufficient evidence of due diligence by some investors and their inability through due diligence to discover the fraud to entitle all investors to reach the jury. It also held that the inventor as a member of the board of managers owed fiduciary duties that relieved the equity investors from exercising due diligence. As to a co-defendant who joined the company after the plaintiffs purchased their securities and who contended that he had made no representations to the plaintiffs, the Court stated that "[A]nyone, after a conspiracy is formed, who knows of its existence and purposes and joins therein, becomes as much a party thereto as if he had been an original member," quoting Grainger v. Jackson, 122 Ga. App. 12, 128, 176 S.E.2d 279 (1970).¹³ The Argentum International case is notable for recognizing – although not expressly noting – a holding claim, i.e., a claim for fraudulently inducing investors to retain securities.¹⁴

In Douglas v. Bigley, the Georgia Court of Appeals considered common law claims of breach of fiduciary duty, fraud and illegality of contracts, holding that in the context of a confidential relationship, the failure to register securities under Georgia’s securities laws could support claims of breach of fiduciary duty and fraud, but, curiously, did not render the contracts illegal and unenforceable.

The plaintiff, Angela Bigley, alleged that she was induced to invest in contracts to fund personal injury cases by the defendant Michael Douglas, whom she considered to be a close friend. Douglas, a principal of Future Litigation Funding of Georgia, Inc. ("FLF"), claimed to have the ability to select cases likely to be profitable. Evidence introduced at trial showed that the defendants controlled the selection of cases in which to invest and managed the way in which the plaintiff’s funds were spent, while giving only minimal information to the plaintiff about the cases. In response to Bigley’s inquiries, Douglas assured her that the litigation funding investments were legal.

After becoming dissatisfied with her investments and concerned again about their legality, Bigley contacted the Georgia Secretary of State. The Secretary of State found violations of the registration requirements of the Georgia Securities Act and issued a cease and desist order. The order was prospective only; it did not address the plaintiff’s contracts or require the defendant to do anything with respect to them.

Bigley sued defendants for breach of fiduciary duty, fraud and breach of contract and the jury found the defendants liable on all three claims.¹⁵ The Court of Appeals held that the evidence, the relationship between the parties and the plaintiff’s dependence on the defendants’ selection and management of cases, supported a finding that the defendants owed fiduciary duties to the plaintiff. It also found that the evidence supported the plaintiff’s breach of fiduciary duty and fraud claims, because the plaintiff was assured of the legality of the contracts, but was able to show that the litigation funding company violated the registration requirements of the Georgia securities laws and charged usurious interest rates on some of the funding agreements. While misrepresentations of law are generally not actionable, that rule is relaxed in the fiduciary context. On the other hand, the Court overturned the verdict for breach of contract, finding that the defendants adequately disclosed – and the plaintiff understood – the risks involved in investing in litigation. More importantly, the Court held that the contracts were not unenforceable and subject to rescission, despite the violations of the securities and usury laws.

The Court’s treatment of the securities registration violations should be of significance to both litigators and corporate lawyers. Ms. Bigley contended that she was entitled to rescind her litigation funding contracts, because they were securities illegally sold in violation of the Georgia Securities Act.¹⁶ The Court of Appeals rejected this argument holding that the defense of illegality did not apply because the object of the contracts was not illegal and could be accomplished without a violation of law, the securities could have been sold legally, if they had been registered, and the failure to register could have been remedied.¹⁷

In Davis v. Johnson, the Georgia Court of Appeals, interpreting a verdict, held that the jury’s finding that the plaintiffs should not have discovered alleged securities fraud during the limitations period could not support an award of attorney fees under the Georgia Securities Act of 1973 where the jury also found no securities fraud.

The plaintiffs brought securities fraud, common law fraud, breach of fiduciary duty and breach of contract claims arising from the defendants’ acquisition of the plaintiffs’ trucking company. In the deal, the plaintiffs received cash and restricted stock in Transit Group, Inc. ("TGI"), the acquiring corporation, with the number of shares of stock tied to the price of TGI’s NASDAQ-traded shares. The plaintiffs filed suit after TGI filed for bankruptcy. The plaintiffs alleged that the defendants fraudulently concealed other, differently-priced, pre-acquisition restricted stock transactions that, had they been disclosed, would have caused the plaintiffs to forego the transaction. The plaintiffs sought attorney fees on two bases: O.C.G.A. § 10-5-14(a), which allows a plaintiff to recover attorney fees on a finding of securities fraud, and O.C.G.A. § 13-6-11, Georgia’s "bad faith" attorney fee statute. The defendants argued that the plaintiffs were sophisticated business people, were advised by counsel, and had been put on notice of the other restricted stock transactions through both specific disclosures and publicly-available SEC filings.

At trial, the jury returned a verdict finding that the defendants were not liable on any of the plaintiffs’ substantive claims, including their securities fraud claim, but awarded the plaintiffs attorney’s fees. The Georgia Court of Appeals denied the plaintiffs’ appeal finding that there was sufficient evidence of notice of the other transactions in TGI restricted shares to support the defense verdict.

The jury had awarded the plaintiffs attorney’s fees, finding that the plaintiffs should not have discovered the alleged securities fraud during the limitations period. The plaintiffs contended that the jury’s negative answer on the securities fraud discovery question implied that there had been a violation. The Court rejected this argument, holding that it was plainly contradicted by the jury’s finding that the defendants were not liable for securities fraud, and that it was illogical to conclude that the jury could have based its award of attorney fees on the securities fraud claim it rejected.

In Milk v. Total Pay and HR Solutions, Inc., the Georgia Court of Appeals outlined the difficulty of holding individual LLC members responsible for the debts of an LLC. Total Pay and HR Solutions, Inc. ("Total Pay"), a payroll process service company, sued an LLC and its sole managing member for payments owed. In the trial court, the LLC consented to a default judgment against it and the trial court entered summary judgment against the managing member. The court reversed summary judgment against the managing member finding that there was insufficient evidence that the managing member could be held personally liable for the debts of the LLC.

The Court provided several reasons for its conclusion. First, the contract entered between the LLC and Total Pay was not signed by the managing member in any capacity, either individually or as managing member. The Court stated that "great caution" should be exercised by the Court before disregarding a corporate entity. Second, the Court found that without a joint interest between the LLC and member, no admission of the LLC could be used against the member. Total Pay claimed that because the LLC dissolved before its operating agreement was executed, the managing member could be held personally liable for the debts of the LLC. During the LLC’s deposition, it admitted that the LLC was dissolved before its operating agreement was executed. The managing member, however, testified that the LLC had not yet been dissolved and produced a copy of the operating agreement. In any case, an LLC is formed when its articles are filed with the Secretary of State, not when an operating agreement is signed. Third, the Court found no evidence to support the plaintiff’s claims that the managing member had undercapitalized the LLC and thus should not be protected by the corporate veil. The Court stated that the veil would not be pierced because of undercapitalization unless evidence existed showing that the member intended to undercapitalize the LLC to avoid future debts at the time the capitalization occurred. Here, there was no such evidence. Finally, the Court summarily rejected the plaintiff’s claims that the managing member should be held personally liable for the LLC’s debts because he participated in fraud committed by the LLC. The Court noted that if a member participates or cooperates in a tort committed by an LLC or directs such acts by an LLC, then the member can be held personally liable, but found that there was an issue of fact on that point.

In this case, DaimlerChrysler sued a dealership for diverting trust funds from the sale of inventory under a floor plan financing arrangement. It sought to hold the dealership’s owner personally liable for the dealership’s breach of trust, arguing that he had abused the corporate form. The Court stated that the standard for determining that a corporation is the alter ego of its shareholders or officers is "difficult to meet" and that the courts must proceed with great caution in disregarding the corporate entity. The court found that the Dealership’s use of trust funds to pay other company obligations was insufficient by itself to warrant piercing the corporate veil, noting the there was no evidence that the owner used the funds to satisfy his personal debts.

This is a long-running appellate case involving the effect of corporate reinstatement of three administratively dissolved corporations in Delaware and Georgia on the personal liability of the principal who purported to enter into agreements and transact business in the names and on behalf of the dissolved corporations. The plaintiff sought to pierce the corporate veil of the corporations. The defendant reinstated the corporations, arguing that the reinstatement related back under 8 Del. Code § 312(e) and Fulton Paper Co. v. Reeves, 212 Ga. App. 314, 441 S.E.2d 881 (1994), and shielded him from personal liability. The Court of Appeals and Supreme Court both considered the defense of reinstatement to be open to attack under principles of equitable estoppel, compare Solomon v. Barnett, 269 Ga. App. 779, 605 S.E.2d 599 (2004) with Solomon v. Barnett, 281 Ga. 10, 636 S.E.2d 541 (2006). The two appellate courts do not mention the particular factual contentions that the plaintiff argued gave rise to estoppel, but it took a couple of trips between the two courts to sort out which party had the burden on summary judgment, given numerous issues of fact reportedly in the record.

In Atlanta Gas Light Co. v. UGI Utilities, Inc., the Eleventh Circuit Court of Appeals held that a parent corporation could be held liable for a subsidiary’s liability in contribution under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), if the corporate veil can be pierced. Applying the principles established by the U.S. Supreme Court in United States v. Bestfoods, 524 U.S. 51, 118 S. Ct. 1876, 141 L.Ed.2d 43 (1998), the Court of Appeals stated that to hold a parent company liable under CERCLA as an operator, the plaintiff must prove that the parent as operator must have managed, directed, or conducted operations specifically related to pollution. The Court distinguished between managing the affairs of the subsidiary and managing the facility that produced the CERCLA violations.

Overlapping officers and directors and the existence of a management contract are not sufficient to impose CERCLA operator liability on a parent corporation. In fact, under Bestfoods, so long as corporate formalities are being observed, parent company officers and directors who also serve at the subsidiary level are presumed to be acting in their capacity as subsidiary officers and directors when handling management responsibilities for the subsidiary.

In Dearth v. Collins, the Eleventh Circuit held as a matter of first impression in this Circuit that alter ego theories of liability are unavailable in a case under Title VII of the Civil Rights Act of 1964. The plaintiff sued her employer for sexual harassment and added the employer’s president, director and sole shareholder as a defendant. Given prior 11th Circuit rulings that Title VII liability is restricted to the "employer," as well as 7th Circuit authority, Worth v. Tyer, 276 F.3d 249, 262 (7th Cir. 2001), the Court held that plaintiffs may not use the alter ego theory to impose liability on individuals who are not employers. The Court went on to hold that the plaintiff did not offer evidence that would have justified alter ego liability under Georgia law, citing McLean v. Continental Wingate Co., 212 Ga. App. 356, 359, 442 S.E.2d 276, 279 (1994) and stating the rule as follows:

In Pate v. Pate, the Supreme Court determined that child support payments could be paid out of income assigned by a divorced husband to a wholly-owned professional corporation formed by the husband. In the process the Court considered, but rejected, the appellant-husband’s argument that the trial court’s ruling represented impermissible reverse piercing of the corporate veil. This action was brought by the wife against the former husband for breach of their divorce settlement agreement, which had provided that the husband would pay to the wife 25% of his monthly gross income until their children reached age 21. The husband, a doctor, formed a professional corporation to which he assigned all sums received by him in connection with his services. The corporation paid wages not only to the husband, but to his new wife as well. The husband then calculated his child support obligations based on the wages he received from the corporation as reflected on his W-2, rather than the gross income assigned to the corporation. The trial court found the husband to be in violation of the divorce settlement agreement, and the Court of Appeals affirmed. The Supreme Court found that for child support purposes, gross income includes all income received from the professional corporation, less reasonable expenses, and is not limited to wages noted on the W-2 form. In its holding, the Court rejected an argument that the case was controlled by Acree v. McMahan, 276 Ga. 880, 585 S.E.2d 873 (2003), in which the Supreme Court had declined to adopt the doctrine of "reverse veil piercing" as a new theory of liability. The Court found Acree inapplicable and held the trial court’s decision was authorized under O.C.G.A. § 19-6-35(b), which enables a child support recipient to use fraudulent conveyance laws to void certain transactions designed to circumvent child support obligations.

In Kaesemeyer v. Angiogenix, Inc., the Georgia Court of Appeals held that a non-party to an asset purchase agreement lacked standing to bring a breach of contract claim against the parties to that agreement, citing the "clear, unambiguous language" of that agreement. In so doing, the Court affirmed the trial court’s grant of summary judgment in favor of the defendants in a breach of contract claim brought by a research scientist and principal of a corporation whose assets and liabilities the defendant purchased.

The plaintiff was the principal of co-defendant NitrOSystems. NitrOSystems executed a conditional promissory note to pay the plaintiff for his work in developing pharmaceutical patents. The note contained a condition that it would become due and payable one year from the date of the U.S. Food and Drug Administration’s ("FDA") approval of a certain pharmaceutical compound described in the note. In 2002, the defendant Angiogenix, Inc. ("Angiogenix") entered into an agreement to purchase certain assets and liabilities from NitrOSystems. The promissory note between NitrOSystems and the plaintiff was listed as an assumed liability in the schedules accompanying the asset purchase agreement. However, the agreement provided, in relevant part, that "no other person shall have any right, benefit or obligation under this Agreement as a third party beneficiary or otherwise."

In 2003, when an unrelated pharmaceutical company (Merck & Co., Inc.) obtained FDA approval to add new labeling information to its product (Zocor), even though Angiogenix was not involved in or affected by the approval of that product, the plaintiff took the position that his right to payment had been triggered and thereby sought payment from Angiogenix, under the NitrOSystems asset purchase agreement. Angiogenix refused to pay on the ground that the condition precedent for payment of the note had not occurred. The plaintiff sued both Angiogenix and NitrOSystems for breach of contract. The plaintiff admitted that the condition precedent as described in the original promissory note had not occurred, but he nonetheless argued that the schedule to the asset purchase agreement, which described the condition precedent differently than did the original note, modified the note.

On appeal, the Court rejected the plaintiff’s argument that the incorporation of his promissory note into the asset purchase agreement conferred third-party beneficiary rights on him. The Court found that the explicit language in the agreement foreclosing the possibility of any third-party beneficiary rights "clearly and unambiguously" expressed the intent of the contracting parties and deprived the plaintiff of standing. The Court noted that the agreement contained a merger clause, which foreclosed parol evidence varying the agreement. The Court also held that even if it were assumed that the plaintiff did have standing as a thirdparty beneficiary to the asset purchase agreement, and even if it were assumed that the asset purchase agreement modified the original promissory note, the facts in the record indicated that the condition precedent triggering Angiogenix’s obligation to pay on the promissory note had not occurred.

In Hilliard v. SunTrust Bank, the Georgia Court of Appeals held that a potential, but not intended, beneficiary of a partnership agreement lacks standing to enforce the agreement. The case was a declaratory action in which the plaintiff, a beneficiary of her father’s estate, sought to enforce restrictions on the transfer of partnership interests contained in a limited partnership agreement to which her father had been a party. In 1991 the testator executed his will leaving all his property to a trust for the benefit of the daughter. A 1997 codicil, however, directed that the testator’s interests in three restaurant businesses should go to his siblings at his death. The daughter sued seeking a declaration that this provision of the codicil was void on the ground that it conflicted with a series of pre-existing agreements between the testator and his siblings, which required that on a partner’s death his interest in the businesses would be purchased by the general partner. The Court did not address the daughter’s assertion on its merits, however, because it found that the daughter lacked standing to enforce these agreements. The Court cited the principle that "[i]n order for a third party to have standing to enforce a contract as its beneficiary, ‘it must clearly appear from the contract that it was intended for his benefit. The mere fact that he would benefit from performance of the agreement isn’t alone sufficient.’" The Court noted that the plaintiff’s potential interest derived from her father and his breach of the agreements divested her of that interest. The Court held that she thus lacked standing to assert claims under the limited partnership agreement.

In Lovell v. Thomas, the Georgia Court of Appeals construed a set of integrated loan documents providing for recovery of attorney’s fees in the event of collection of the debt, held that the lender was not required under O.C.G.A. § 13-1-11 to file suit and was not required under the loan documents to show that redeeming re-pledged collateral securing the debt involved "some kind of lawyer activity" in order to establish his entitlement to attorneys’ fees. The Court also held that the issue of whether a borrower received notice of a lender’s intention to seek attorney fees is a question for the jury, where the borrower rebuts the presumption that the notice was received.

The case involved a default on a loan secured by shares of stock. The lender (Lovell) obtained a loan from a commercial bank (Regions Bank) and then re-lent the funds to the borrowers (the Thomases), who used the funds to purchase the stock. The borrowers pledged their stock to the lender who re-pledged it to the bank. Upon default, the lender redeemed the stock from the bank and sold it, and retained the portion consisting of principal, interest, late fees and nearly $100,000 in "expenses and attorneys fees." The borrower contended that the lender was not entitled to retain attorney fees because (1) the promissory note required him to institute legal proceedings before becoming entitled to fees; and (2) he failed to substantially comply with the notice requirements of O.C.G.A. § 13-1-11, which governs the collection of attorney fees in enforcement of debts. The trial court held that the lender was entitled to attorney’s fees only if the act of redeeming the collateral involved "some kind of lawyer activity, such as a foreclosure or some other act than as provided in the Security Agreement itself."

On appeal, the Court, applying general principles of contract construction, held that the five documents comprising the parties’ agreement – the loan agreement, promissory note, a guaranty, and two stock pledge agreements – must be read together. Interpreted as a whole, the documents did not support the borrowers’ argument that the loan agreement was superseded by the other four documents. Thus, as provided in the loan agreement, the Court held that the lender did not have to file suit before he was entitled to collect attorney fees, even if other documents had requirements that differed. The Court also reversed the trial court’s ruling that the lender was not entitled to attorney fees merely for redeeming the collateral. The lender redeemed the collateral only after the borrowers defaulted, and as the Court noted, the trial transcript showed that attorneys "played a role" in selling the collateral and paying off the debt. The Court remanded for a determination by the jury whether the lender had provided the borrowers with notice of his intent to collect attorney fees, as required by O.C.G.A. § 13-1-11, since the borrowers testified that they had not received the notice.

Goobich v. Waters involved a suit by a proposed purchaser for specific performance of an agreement to sell Outdoor Environments, Inc., a nursery business. The purchaser and the sellers had executed a non-binding letter of intent that they converted, by later addendum, into a binding contract, subject to the preparation and execution of a definitive agreement. The Court of Appeals reversed the trial court’s summary judgment for the sellers, finding that the letter of intent contained all essential terms. It held that the future obligation to execute closing documents was not a condition precedent to the existence of a valid contract, but only to the duty of the parties to render performance.

This suit represents an effort by sellers of a dry cleaning business to collect on promissory notes received in the transaction from the purchasers. Much of the litigation centered upon a "sham" management agreement that the parties entered into when it was discovered that the sale would violate a contract that the seller had with the original owner of the business. The Georgia Court of Appeals rejected the purchasers’ contentions that the management agreement represented a novation of the promissory notes. The Court found that the defendants, by operating the business, making payments on the notes and then re-selling the business to yet another owner, had waived their claims regarding the management agreement, questions of title and other aspects of the sellers’ performance. The Court reversed the trial court’s $200,000 reduction in the purchasers’ obligations because of the sellers’ alleged "unclean hands." The Court of Appeals held that equitable defense was inapplicable to a claim at law on the promissory notes.

In Cleveland Campers, Inc. v. R. Thad McCormack, P.C., the Georgia Court of Appeals 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 attorneyclient relationship to exist. In 2000, the plaintiffs sold their business. The Court found that the defendant never told the plaintiffs that he was representing them in the transaction, although he also never said that he was representing only the buyers. The Court held that there was no evidence of an attorney-client relationship between the plaintiffs and the defendant. The Court found no evidence that the plaintiffs sought legal advice or assistance from the defendant or that the defendant offered any legal advice. Further, the Court noted that the plaintiffs never communicated to the defendant that they would rely on him for legal advice related to the transaction, and additionally, they did not pay him any legal fees. Quoting Guillebeau v. Jenkins, 182 Ga. App. 225, 231(1), 355 S.E.2d 453 (1987), the Court held that "[a]n attorneyclient relationship cannot be created unilaterally in the mind of a would-be client; a reasonable belief is required." The Court went on to distinguish this case from three prior cases in which it had found the existence of attorney-client relationships, noting that the plaintiffs in the other three cases had sought legal advice or assistance from the defendant attorneys and that those attorneys had offered legal advice in return.

In All Business Corporation v. Choi, the Georgia Court of Appeals 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. The Court held that even where the attorney is in possession of funds, the attorney does not owe a fiduciary duty to an unforeseeable third party, nor does he commit conversion if he lacks actual or constructive knowledge of a third party’s alleged entitlement to proceeds in the attorney’s possession.

The defendant-attorney served as the escrow agent in the sale of a business, CCO Check Cashing.¹⁸ Prior to the sale, the plaintiff, a finance company that had made loans to the seller, attempted to perfect a security interest in the assets of CCO, but incorrectly listed the name of the debtor and the business. The CCO sale agreement stated that the buyer and seller expressly understood that the defendant would not conduct a general docket or UCC search of the business. The agreement also provided that the parties acknowledged that the defendant was only acting as an escrow agent in the sale and not representing either party, and was making no representations regarding the advisability of the transaction. Evidence showed that the defendant actually did conduct a UCC record search which did not turn up the erroneously-filed financing statement, and asked the seller if there were any liens on the business, to which the seller responded that there were none. When the defendant learned of the plaintiffs’ security interest, he offered the remaining proceeds to plaintiff’s principal, who rejected the offer. The defendant later received a fax from plaintiff’s legal counsel demanding immediate possession of the funds representing the proceeds of the sale of the business. By this time, the defendant had already disbursed the sale proceeds to the seller.

On appeal, the Court found no evidence that the defendant owed a duty to the plaintiff to discover the security interest prior to the closing. The Court also addressed other theories of recovery. The Court stated that an action for breach of trust cannot lie absent evidence of a fiduciary duty. The Court found that no fiduciary relationship existed, noting that the defendant did not undertake to provide information to either party to the sale concerning the status of any liens on the business. In addressing the plaintiff’s conversion claim, the Court expressed skepticism about whether the security interest was properly perfected due to errors that prevented the defendant from having constructive notice of the lien and determined that the defendant was unaware of the plaintiff’s security interest. The Court held that the defendant’s lack of both actual and constructive knowledge of the lien prevented the plaintiff from recovering against him on a theory of conversion.

In Graivier v. Dreger & McClelland, a plastic surgeon, his professional corporation and his wife, who was an officer in the professional corporation, sued the attorney who drafted an operating agreement for an LLC formed with an oral surgeon to manage a surgical facility. The attorney had represented both the plastic surgeon’s professional corporation and the oral surgeon in preparing the agreement. The plaintiff claimed that the two surgeons had agreed to bill and collect the fees from their own respective practices separately, and that the LLC’s revenues were to be limited to fees paid by third parties who used the facility. The oral surgeon later took the position that the LLC was entitled to receive the fees from the members’ practices as well as revenues from third-party users. The dispute between the surgeons over the fee provisions in the LLC agreement led to litigation, in which the plastic surgeon ultimately prevailed. There were other disputes between the two doctors, litigation and a bankruptcy proceeding relating to a reciprocal buy-out provision. The plaintiff sued for all the costs and losses incurred in his disputes with his LLC co-member, the oral surgeon. The trial court granted a summary judgment for the law firm. The Georgia Court of Appeals reversed on the plaintiff’s claim for alleged malpractice in drafting the fee provision of the LLC operating agreement, holding that there was an issue of fact as to the attorney’s negligence in drafting the agreement, that the client’s failure to review the agreement and find the error did not bar his claim as a matter of law and that he could recover damages for the costs incurred in the litigation with the oral surgeon over the fee provision. The Court affirmed summary judgment against the plaintiff on his claims for the losses and expenses incurred in other disputes with the oral surgeon, finding them too remote, speculative and not proximately caused by the alleged malpractice. The Court also rejected on proximate cause grounds the plaintiff’s claims that the attorney had an undisclosed conflict of interest, because he had a pre-existing personal and professional relationship with the oral surgeon and sided with and testified on behalf of the oral surgeon throughout the underlying litigation. Finally, the Court rejected a malpractice claim by the plaintiff’s wife, holding that the attorney did not have an attorney-client relationship with her and that she had no right to rely on his advice, distinguishing cases in which the attorney’s representation concerned transactions between officers or shareholders and the corporate client.

In Winzer v. EHCA Dunwoody, LLC, 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.

EHCA Dunwoody, LLC, brought suit against Northside Medical Care Center, LLC, a medical practice organized as a limited liability company, for unpaid rent. Although the defendant was represented by two separate attorneys prior to trial, both attorneys withdrew and the defendant was represented by one of its members at a bench trial in DeKalb County State Court. After the trial court ruled in favor of the plaintiff, a member of the defendant LLC filed a notice of appeal with the Georgia Court of Appeals. The Court of Appeals declined to hear the appeal because the member was not an attorney. The trial court granted a motion to dismiss the appeal. An attorney then filed a notice of appearance for the defendant and appealed the dismissal.

The Court of Appeals affirmed the dismissal and specifically extended the Supreme Court of Georgia’s earlier holding in Eckles, which was limited to corporations, to make clear that LLCs must be represented by counsel in Georgia courts of record. The Court reasoned that there are many similarities between limited liability companies and corporations, most notably, that LLC members are insulated from personal liability for the LLC’s actions just as shareholders are insulated from a corporation’s liabilities. Accordingly, allowing an LLC member to represent the LLC in a court of record would be tantamount to allowing a layman to engage in the unlicensed practice of law.

In Sterling, Winchester & Long, LLC v. Loyd, the Georgia Court of Appeals reaffirmed its holding of five months earlier in Winzer that a limited liability company must be represented by an attorney in a court of

record. The plaintiff brought suit against Sterling, Winchester & Long, LLC, and the LLC answered by filing a pro se answer. The Court granted the plaintiff’s motion to strike the LLC’s answer and entered default judgment for the plaintiff. Citing its recent decision in Winzer v. EHCA Dunwoody, LLC, 627 S.E.2d 426, 277 Ga. App. 710 (2006), the Court held that LLCs must be represented by a licensed attorney in a court of record and affirmed.

In Largo Villas Homeowners’ Association v. Bunce, the Georgia Court of Appeals again visited the issue of business entity pro se representation, ruling that the failure by a pro se corporate litigant to hire counsel within the time ordered by the court must be willful.

The Largo Villas Homeowners’ Association sued an association member, Bunce, for $522.50 in unpaid monthly dues and late fees. It filed the suit in magistrate court where it was not required to be represented by counsel.¹⁹ The defendant counterclaimed and filed a motion seeking to have the case transferred to Superior Court on the grounds that both parties were seeking equitable relief. The magistrate court granted the motion. The defendant then filed a motion in superior court requiring the plaintiff to be represented by counsel. The superior court granted the defendant’s motion and held that the plaintiff must have counsel file a notice of appearance within thirty (30) days. The plaintiff failed to file its notice of appearance of counsel within the court’s deadline, and four days later the defendant moved to strike the plaintiff’s complaint and its answer to defendant’s counterclaim and for default judgment. Counsel for the plaintiff filed a notice of appearance two days later. The superior court held that the plaintiff had failed to prove "excusable neglect," the standard for opening a default under Rule 55 of the Civil Practice Act, O.C.G.A. § 9-11-55, and granted the defendant’s motion to strike the plaintiff’s pleadings.

The Court of Appeals reversed, finding that the demanding "excusable neglect" standard was inapplicable and inappropriate. A decision to strike the plaintiff’s pleadings is a drastic sanction that is only warranted if the plaintiff’s refusal to comply is "willful." Accordingly, the Court held that a hearing, with notice, should be held to determine whether the plaintiff’s failure to comply with an order to appear with counsel was willful, since willfulness was not obvious and undeniable in this case.

Notably, the plaintiff homeowners’ association was originally formed as an unincorporated association. The Court of Appeals pointed out that the rule in Eckles v. Atlanta Technology Group, 267 Ga. 801, 485 S.E.2d 22 (1997), requiring corporations to be represented by an attorney, does not apply to unincorporated associations. Having apparently later incorporated, the plaintiff was required to be represented by counsel.

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