Business Associations

• Publication year: 2017

Business Associations

Edward P. Bonapfel

E. Bowen Reichert Shoemaker

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Business Associations

by Edward P. Bonapfel^*

and E. Bowen Reichert Shoemaker^**

I. Introduction

This Article surveys notable cases in the areas of corporate, limited-liability company (LLC), partnership, agency, and joint-venture law decided between June 1, 2016 and May 31, 2017 by the Georgia Supreme Court, the Georgia Court of Appeals, and the United States district courts in Georgia.¹

II. Issues of First Impression

In S.D.E., Inc. v. Finley,² the Georgia Court of Appeals held that a McDonald's shift manager could properly be served with a complaint against the franchisee's corporation.³ The plaintiff slipped at one of the corporation's restaurants and sued the corporation, serving the shift manager at the restaurant via the local sheriff's office. The shift manager accepted service and put the papers to the side, apparently never notifying the franchisee corporation that it had been served. The franchisee corporation did not answer, and the trial court entered a

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$250,000 default judgment in favor of the plaintiff.⁴ The franchisee corporation appealed, and the court of appeals affirmed.⁵

Section 9-11-4(e)(1)⁶ of the Official Code of Georgia Annotated (O.C.G.A.) permits service upon a Georgia corporation "by delivering a copy of the summons attached to a copy of the complaint . . . to the president or other officer of such corporation or foreign corporation, a managing agent thereof, or a registered agent thereof."⁷ A managing agent is further defined as "a person employed by a corporation or a foreign corporation who is at an office or facility in this state and who has managerial or supervisory authority for" the corporation.⁸

The Georgia Court of Appeals reviewed the facts developed during discovery and concluded that the shift manager qualified as someone with "managerial or supervisory authority," and thus, service was proper.⁹ Specifically, the court relied on the facts that the shift manager: (1) handled customer complaints; (2) was responsible for the "quality of the food, service, cleanliness and safety of the premises"; (3) tracked inventory and waste; and (4) made bank deposits.¹⁰ The court also relied on the fact that another shift manager accepted service and successfully gave the documents to a supervisor.¹¹ The court seemed particularly persuaded by the last fact, writing that "given that another shift manager had also been served and had successfully transmitted the summons and complaint to a corporate officer, there was also evidence that it was anticipated that someone in that position would be served as an agent of the corporate principal."¹² In light of Finley, companies doing business in Georgia should ensure proper procedures are in place for the receipt of legal service and other notices.

III. Noteworthy Cases

A. Liability for Successor Companies

In Sager v. Ivy Falls Plantation Homeowners' Ass'n,¹³ a homeowner sued a homeowners' association seeking a declaratory judgment that the

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homeowners' association could not collect association dues from her.¹⁴ After building a subdivision, the developer incorporated a homeowners' association and recorded covenants for each lot owner. The homeowners' association was dissolved in July 2005. In October 2006, two residents incorporated a new homeowners' association under the same name. The plaintiff purchased property in the subdivision in 2010 and, in 2014, the new homeowners' association attempted to collect dues. The plaintiff sued, and following a hearing, the trial court held that the new homeowners' association was a successor-in-interest to the old homeowners' association based on the "continuity of interest" test.¹⁵

The Georgia Court of Appeals reversed.¹⁶ The court reviewed the case law behind the continuity of interest test and noted that in most instances the successor assumed the original obligations of the predecessor and usually involved a vote of the membership.¹⁷ However, in Sager, "there ha[d] been no transfer of any assets, no vote to incorporate the New Association, nor any other act taken by a majority of purported members with respect to the New Association."¹⁸ Further, "the record contain[ed] no evidence that the New Association took any action to complete the organization process, elect new board members or officers, or adopt new bylaws regarding governance and dues collection authority."¹⁹

B. Limited-Liability Companies and Managing Member Liability to Limited-Liability Company Members

In Practice Benefits, LLC v. Entera Holdings, LLC,²⁰ Practice Benefits was a member of Entera. After Entera took actions to the alleged detriment of Practice Benefits, including a distribution to all other members of the LLC, Practice Benefits sued Entera and its managing member alleging breach of contract and breach of fiduciary duty. The trial court granted both defendants' motions to dismiss, holding that the

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claims against the managing member were derivative in nature and that Entera was not a party to the operating agreement.²¹

With respect to Entera, the Georgia Court of Appeals reversed the judgment in Entera's favor and held that LLCs are bound by the terms of their operating agreements.²² Specifically, O.C.G.A. § 14-11-101(18)²³ states that an LLC "is bound by its operating agreement whether or not the limited liability company executes the operating agreement."²⁴ The court of appeals also rejected the managing member's argument that the breach of fiduciary claim against him was derivative in nature.²⁵ The court acknowledged the general rule that breach of fiduciary duty claims should be brought in derivative suits against the company.²⁶ However, an exception exists if a plaintiff alleges a "special injury" that is unique to the shareholder.²⁷ An allegation of a violation of the operating agreement's requirement of a pro rata distribution was a sufficient special injury to survive a motion to dismiss argument that the claim was derivative in nature.²⁸

C. Rights and Interests of Limited-Liability Company Members

In Veterans Parkway Developers, LLC v. RMW Development Fund II, LLC,²⁹ the Georgia Supreme Court held that a member of an LLC could not obtain injunctive relief against the LLC to prevent it from making improvements to real property owned by the LLC. Veterans Parkway and RMW formed an LLC to own an apartment complex in Columbus. Veterans Parkway owned 25% of the LLC and was the managing member, while RMW held a 75% interest. Veterans Parkway proposed building a second entrance to the apartment complex, to which RMW objected and filed suit—eventually moving the trial court for an interlocutory injunction to stop the project. The trial court granted the injunction and RMW appealed.³⁰

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The Georgia Supreme Court recognized the general principle that real property can be sufficiently unique to support equitable remedies, including injunctions.³¹ But a member's interest in an LLC "is itself only a personal property interest; a member's stake in a[n] LLC is not an interest in real property or an interest in any specific property of the LLC."³² Thus, without an interest in the land, RMW could not seek injunctive relief "based upon a claim that the land was threatened with harm."³³ The court also noted that RMW had an adequate remedy at law such that injunctive relief was inappropriate.³⁴ Accordingly, the supreme court reversed the injunction.³⁵

In Perry Golf Course Development, LLC v. Columbia Residential, LLC,³⁶ the Georgia Court of Appeals addressed the issue of whether an arbitration clause was still binding where a previously-binding operating agreement had been...