Business Associations
| Publication year | 2016 |
Business Associations
Edward P. Bonapfel
E. Bowen Reichert Shoemaker
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This Article surveys notable cases in the areas of corporate, limited liability company, partnership, agency, and joint venture law decided between June 1, 2015 and May 31, 2016, by the Georgia Supreme Court, the Georgia Court of Appeals, and the United States district courts located in Georgia.1
A. Piercing the Corporate Veil Among Corporations with Identical Ownership
In Cobra 4 Enterprises v. Powell-Newman,2 the Georgia Court of Appeals held that a plaintiff cannot pierce the corporate veil between sibling corporations that share a common ownership.3 The plaintiff in Cobra 4 Enterprises was injured in an automobile accident with a truck that was leased to Yellow Ribbon Tree Experts (Yellow Ribbon).4 The plaintiff,
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along with her husband, sued the truck driver, Yellow Ribbon, and Yellow Ribbon's owner, Gary Robertson. In addition, the plaintiffs sued the owner of the truck involved in the accident, Cobra 4 Enterprises (Cobra 4), also owned by Gary Robertson. The trial court rejected Cobra 4's motion for summary judgment on vicarious liability because, inter alia, the evidence supported the plaintiffs' alter ego theory that Cobra 4 could be vicariously liable because of its shared ownership with Yellow Ribbon by Robertson. After the summary judgment ruling, all parties except Cobra 4 settled the lawsuit.5 Cobra 4 renewed its motion for summary judgment, arguing that if it was an alter ego, then "it was an agent of Yellow Ribbon and therefore a party" to the settlement.6 The trial court denied Cobra 4's motion and an appeal followed.7
Cobra 4 argued that the trial court erred in finding a factual question for the jury on whether it was Yellow Ribbon's alter ego.8 The court of appeals discussed the equitable doctrine of piercing the corporate veil and noted that "sole ownership by one person is not a factor" in that consideration.9 "Where there is no evidence that the corporate arrangement is a sham that was designed to defeat justice, perpetuate fraud, or evade statutory, contractual, or tort liability, the issue of alter ego liability is not a jury question."10
The court of appeals admonished Robertson for underfunding and underinsuring his entities and for ignoring corporate formalities.11 Thus, the plaintiffs could have pierced the companies' corporate veils; but the plaintiffs settled their claims with Robertson.12 The court recognized that "Georgia courts have never applied the alter ego doctrine to impose liability" on sibling corporations by piercing the corporate veil.13 Nonetheless, the court examined the corporate activities of Yellow Ribbon and Cobra 4 and concluded "there was no evidence that the two companies
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were interchangeable entities."14 Thus, while there was some evidence of overlap between the entities, the court found "no basis to extend the alter ego doctrine to cover sibling companies."15
B. Recovery of Nuisance Damages by an LLC
In Oglethorpe Power Corp. v. Estate of Forrister,16 the Georgia Court of Appeals held that a non-resident limited liability company (LLC) property owner could recover nuisance damages.17 Paradise Lost, LLC (Paradise Lost) owned land near a power plant. As a result of noise coming from the engines at the power plant, Paradise Lost brought claims against the plant for "discomfort and annoyance." Before trial, a motion in limine was filed seeking to bar evidence of nuisance damages on the grounds that Paradise Lost did not "occupy" the property. The movants argued nuisance damages should not be awarded to an LLC in the same way that Georgia law forbids corporations from receiving damages for intentional infliction of emotional distress. The trial court agreed and disallowed Paradise Lost's claim for nuisance damages. Paradise Lost appealed the decision.18
On appeal, the court of appeals first distinguished nuisance damages from damages associated with the infliction of emotional distress.19 Specifically, the court noted that "'discomfort and annoyance' in the context of nuisance is not a species of emotional distress, but a distinct element of nuisance damages."20
Next, after determining that "discomfort and annoyance" could be considered an appropriate basis for nuisance damages, the court was faced with the task of determining whether an LLC could recover that type of damage.21 The court drew a parallel to Baltimore & Potomac Railroad Co. v. Fifth Baptist Church,22 where the United States Supreme Court determined that a church was eligible for nuisance damages.23 The Su-
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preme Court stated "[p]rivate corporations are but associations of individuals united for some common purpose" and, therefore, could recover nuisance damages.24 Thus, the court determined that an LLC could bring a cause of action for "'discomfort and annoyance' affecting the use of its property for the purposes intended by its members and those they permit to join them."25
A. "Mere Continuation" Liability for Successor Companies
In Dan J. Sheehan Co. v. Fairlawn on Jones Condominium Ass'n,26 a construction company sued a homeowners association to recover for work performed at the condominium complex.27 After the construction company brought suit against the homeowners association, the homeowners formed a new entity—ostensibly to conform to the Georgia Condominium Act—and transferred all responsibility to a successor condominium association. Neither the construction company nor the trial court was made aware of the transfer. The construction company won a verdict against the homeowners association and judgment was entered, but both associations refused to satisfy the judgment. The construction company then sued both associations, who ultimately moved for summary judgment and prevailed. The construction company appealed.28
The construction company argued that the successor association was a mere continuation of the homeowners association and was therefore subject to successor liability. The Georgia Court of Appeals agreed.29 The court applied the equitable doctrine of corporate continuity to find that the condominium association was a "mere continuation of the predecessor" association.30 Here, the court held that the condominium association had the same purpose, property, board of directors, officers, unit owners,
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location, registered office, and authority as the prior corporation.31 In short "nothing changed except the name."32 Thus, judgment was reversed for the homeowners and condominium associations.33
B. An Action to Dissolve the LLC Does Not Disassociate the Member
In Crumpton v. Vick's Mobile Homes, LLC,34 the Georgia Court of Appeals interpreted section 14-11-601.1(b) of the Official Code of Georgia Annotated ( O.C.G.A.),35 which governs the cessation of membership in a limited liability company.36 In Crumpton, a brother and sister inherited a mobile home park from their father and formed two LLCs to own and manage the park.37 The sister, Sharon, filed a "Petition for Equitable Relief, Accounting, and Dissolution" against the LLCs and her brother, Raymond.38 Raymond moved for judgment on the pleadings, arguing that Sharon's petition for dissolution disassociated her as a member under O.C.G.A. § 14-11-601.1(b)(4)(D).39 This section of the LLC Chapter of the Georgia Code provides for the removal of a member of an LLC where the member, contrary to the operating agreement or without the other members' consent, "files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation."40 The trial court granted Raymond's motion, concluding that the Code establishes a "default rule" that a member seeking reorganization ceases to be a member.41
The court of appeals disagreed.42 The court examined the entirety of subsection (b) of O.C.G.A. § 14-11-601.1 to determine the meaning of "for the member."43 Subsection (b) "recites a list of actions" that an LLC member may do "that result in a change of that member's own status so as to render the member unable to continue as a member of the company."44
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The actions include: (1) "events that only occur to an individual";45 (2) events that "either an individual or an artificial person" could do;46 and (3) "actions more proper to an artificial person."47 The actions at issue in Crumpton fell into the latter category.48 The court held that a consistent reading of the subsection "requires that 'for the member' in subsection (b)(4)(D) refers to an action by or against the member affecting that member."49 Therefore, the trial court erred when it held that a member's petition to dissolve the LLC disassociates the member from the LLC.50
C. Resignation of a Registered Agent Effective Thirty-One Days After Secretary of State's Receipt
The Georgia Court of Appeals was asked in STL Management Consultants, LLC v. Manhattan Leasing Enterprises, Ltd51 to determine which date controls in a conflict between the day the Secretary of State "receives" the resignation of a corporation's registered agent for service of process and the date when the resignation is stamped "filed" by the Secretary's office. The court held that receipt by the Secretary's office controls, and that the resignation "was filed on the date it was received by the Secretary."52
Section 14-11-209(d)53 of the Georgia Code provides that an LLC's registered agent's resignation is effective on the "thirty-first day after the date on which the statement of resignation was filed."54 The plaintiff sued the defendants when the defendants defaulted on a lease agreement. The plaintiff served an LLC defendant through its registered agent on April 2, 2013, and won a default when the defendant failed to answer.
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