Business Associations
| Publication year | 2014 |
Business Associations
Crystal J. Clark
Kristi K. North
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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, 2013 and May 31, 2014 by the Georgia Supreme Court, the Georgia Court of Appeals, the United States Court of Appeals for the Eleventh Circuit, and the United States district courts located in Georgia.1
A. Questioned Application of the Business Judgment Rule
During this survey period, the United States District Court for the Northern District of Georgia and the United States Court of Appeals for the Eleventh Circuit each certified questions to the Georgia Supreme Court regarding whether the business judgment rule precludes ordinary negligence claims against bank officers and directors. In FDIC v. Loudermilk,2 the district court acknowledged that other federal courts
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in the district "have uniformly applied the business judgment rule to protect bank officers and directors," but it "respectfully disagree[d]."3 The court pointed to policy reasons to explain why the business judgment rule should not be applied to bank officers and directors sued by the Federal Deposit Insurance Corporation (FDIC).4
The court also cited section 7-1-490 of the Official Code of Georgia Annotated (O.C.G.A.),5 which sets forth "the ordinary negligence standard of care applicable to bank officers and directors."6 As a result, the court denied the defendants' motion to dismiss and certified the unsettled issue of law to the Georgia Supreme Court.7
In FDIC v. Skow,8 the Eleventh Circuit also questioned the interaction of the business judgment rule with O.C.G.A. § 7-1-490.9 With "no clear controlling precedent from the Supreme Court of Georgia," the court certified its questions to the Georgia Supreme Court.10 The supreme court heard oral arguments in connection with the certified questions from Loudermilk on April 21, 2014, and Skow on May 19, 2014.11 The impact of the court's decision could be quite far reaching. In addition to impacting the potential liability of Georgia's bank officers and directors, it is likely to have implications for the liability of other officers and directors as well.
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B. Application of Attorney-Client Privilege
For the first time, the supreme court addressed the parameters of attorney-client privilege in the context of communications between a law firm and its in-house counsel in a legal malpractice lawsuit.12 In St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C.,13 St. Simons Waterfront, LLC (SSW) sued Hunter, Maclean, Exley & Dunn, P.C. (Hunter Maclean), alleging legal malpractice stemming from Hunter Maclean's representation of SSW in a commercial real estate venture. When Hunter Maclean learned that it might be sued by SSW, it informed its in-house general counsel about the potential lawsuit. The in-house general counsel interviewed the attorneys who had been involved in the representation of SSW. At the same time, Hunter Maclean continued to represent SSW in real estate closings.14
After SSW brought suit, it sought the production of communications between Hunter Maclean and its in-house general counsel. The trial court held that any privilege the communications might have had was nullified due to the conflict of interest that had developed between Hunter Maclean and SSW.15 According to the trial court, a conflict of interest existed because Hunter Maclean had "engaged in efforts to defend itself against SSW while simultaneously continuing to represent SSW, without advising SSW of the conflict."16 The trial court concluded that "the conflict between the involved attorneys and SSW must be imputed to [the in-house general counsel] under Rule 1.10 of the Georgia Rules of Professional Conduct; and that any privilege within the firm was negated by this conflict of interest."17
The Georgia Court of Appeals reviewed other jurisdictions' approaches to the issue and then developed its own framework in which to analyze the case. The Georgia Supreme Court granted certiorari.18 In considering the issue, the court determined that the best approach is "to analyze the privilege issue ... as we would in any other lawsuit in which the privilege is asserted."19 Accordingly, the court stated that attorney-
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client privilege attaches in the in-house general counsel context when "(1) there is an attorney-client relationship; (2) the communications in question relate to matters on which legal advice was sought; (3) the communications have been maintained in confidence; and (4) no exceptions to privilege are applicable."20
For the first requirement-estabhshing an attorney-client relation-ship-the court stated that a law firm must, as a factual matter, establish that "the firm's in-house counsel was actually acting in that capacity with regard to anticipated legal action against the firm."21 To establish an attorney-client relationship in the in-house general counsel context, law firms should consider (1) adopting billing procedures that reflect that the firm itself is a client; (2) maintaining a separate file for communications pertaining to the representation; and (3) maintaining a full-time general counsel.22 Disagreeing with the trial court's holding that the conflict of interest impacted the attorney-client privilege detennination, the court opined that "the potential existence of an imputed conflict of interest between in-house counsel and the firm client is not a persuasive basis for abrogating the attorney-client privilege between in-house counsel and the firm's attorneys."23
Regarding the second requirement-that the communications relate to the purpose for which legal advice was sought-discussions with in-house counsel should involve "matters within the scope of the attorneys' employment with the firm."24 Regarding the third requirement-that the communications remain confidential-only attorneys associated with the case at issue should be involved in the communications with the in-house counsel.25
Finally, to establish the attorney-client privilege, there must not be an applicable exception to the privilege.26 In this regard, the court declined to adopt a "fiduciary duty" exception in the law firm in-house counsel context.27 The court rejected "the notion that the attorney's
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duty of loyalty [to his or her client] should automatically trump the privilege."28
Law firms now have specific guidance with respect to preserving the attorney-client privilege in connection with communications with their own in-house general counsels.
A. Stock Transfer Restrictions
In Mossy Dell, Inc. v. AB&T National Bank (In re Beauchamp),29 the United States District Court for the Middle District of Georgia held that the stock-transfer restrictions listed under O.C.G.A. § 14-2-627(d)30 are exhaustive, and any transfer restrictions not consistent with this statute are impermissible.31 In In re Beauchamp, a corporation's articles of incorporation prohibited the transfer of any shares for a period of ten years. Once the ten-year period had expired, the corporation's shares could only be transferred to the shareholders' lineal descendants. A creditor of one of the shareholders obtained a judgment against the shareholder, whereby his shares were confiscated and sold at a public sale to that creditor. As purchaser of the shares, the creditor demanded that the corporation issue a new stock certificate recognizing the purchaser as the owner of the shares. This lawsuit ensued.32
Based on a plain language interpretation of O.C.G.A. § 14-2-627(d), the district court determined that (1) "subsection (d) lists the permissible mechanisms that may be used by a transfer restriction" and (2) "all mechanisms not listed are impermissible."33 In applying the statute to the case at hand, the court determined that the ten-year transfer restriction was unreasonable, did not fit within one of the categories set forth in O.C.G.A. § 14-2-627(d), and was unenforceable.34
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With respect to the family-related transfer restriction, the court determined that it was an acceptable mechanism for restricting transfers because it fit within O.C.G.A. § 14-2-627(d)(4), which permits prohibiting "transfer of the restricted shares to designated persons or classes of persons."35 The court noted that O.C.G.A. § 14-2-627(d)(4) does not require a corporation to provide "an avenue for every shareholder to realize the value of his or her shares" because such a requirement would threaten the corporation's ability to restrict transfer to certain persons or classes of persons.36 In sum, stock transfer restrictions must fall within one of the categories listed under O.C.G.A. § 14-2-627(d).
B. Clarifications Regarding Standards of Care
In Rollins v. Rollins,37 the Georgia Supreme Court reversed the holding of the court of appeals regarding the appropriate standard of care owed by directors of corporations when such corporations are held within trusts and such directors are trustees of such trusts.38 In Rollins, certain family trusts held a minority interest in corporate family entities. The trustees were alleged to have engaged in mismanagement of the trusts. The court of appeals determined that a heightened, trustee-level fiduciary standard applied to the case at issue.39
In reversing the court of appeals, the supreme court stated, "Although that holding may be appropriate as a general rule, it is inappropriate in this case both because the cardinal rule in trust law is that the intention of the settlor is to be followed, . . . and...
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