Business Associations - Paul A. Quiros, Lynn S. Scott, and William B. Shearer Iii

• Publication year: 2006

Business Associationsby Paul A. Quiros^* Lynn S. Scott^** and William B. Shearer III^***

This Article surveys noteworthy cases in the areas of corporate, partnership, and limited liability company law decided during the survey period¹ 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. This Article also summarizes enactments at the 2006 Session of the Georgia General Assembly to the Official Code of Georgia Annotated ("O.C.G.A.") with respect to commerce, corporation, partnership, and associations law.²

I. CORPORATIONS

A. Piercing the Corporate Veil

1. Eleventh Circuit Affirms Holding that Corporation Is Allowed to Pierce Its Own Corporate Veil for Claim Against Former Principal in Bankruptcy. In Baillie Lumber Co. v. Thompson,³ the Eleventh Circuit Court of Appeals affirmed the 2004 holding by the United States District Court for the Middle District of Georgia that an alter ego claim against a corporation's principal was a cause of action rightly belonging to a creditor group as a whole, rather than a specific creditor.⁴ As a result, the corporation's bankruptcy estate properly included the alter ego claim, and individual creditors were prohibited from pursuing causes of action outside of the corporation's bankruptcy with respect to the allegations presented in the alter ego claim.⁵

In 2004 the Eleventh Circuit Court of Appeals held that an alter ego claim was common to all creditors but was not convinced that a Georgia corporation could bring an alter ego claim against itself and certified the issue to the Georgia Supreme Court.⁶ On April 26, 2005, the Georgia Supreme Court held that (1) Georgia law will allow a representative of a debtor corporation to pursue an alter ego claim against the corporation's former principal and (2) a former principal "found liable under an alter ego theory should be liable for the entirety of the corporation's debt."⁷ Based on the Georgia Supreme Court's opinion, the Eleventh Circuit Court of Appeals held that the alter ego action by the corporation's bankruptcy estate against the principal is allowed under Georgia law.⁸ The court also confirmed that the alter ego action is property of the bankruptcy estate and subject to the automatic stay of the bankruptcy court that would prevent individual claims by creditors or shareholders outside of the corporation's bankruptcy proceedings.⁹

2. Individual Liability Under Alter Ego Doctrine Is Not Permissible Under Title VII Claim. In Dearth v. Collins,¹⁰ the Eleventh Circuit Court of Appeals held that the alter ego doctrine did not permit individual liability to be imposed under Title VII of the Civil Rights Act of 1964 ("Title VII") against a president, director, and sole shareholder of an employer.¹¹ While the case primarily addressed relief under Title VII, Dearth reinforced Georgia law with respect to the alter ego doctrine.¹²

Brandi M. Dearth, a former employee of Info Pro Group, Inc. ("Info Pro"), sued Richard L. Collins, Info Pro's president, director, and sole shareholder, asserting that he repeatedly made sexual advances towards her and violated Title VII. Dearth argued that even if, as a general matter, individual employees may not be held liable under Title VII, the Eleventh Circuit Court of Appeals should make an exception to the rule based on application of the alter ego doctrine by piercing the corporate veil under Georgia law.¹³

The Eleventh Circuit Court of Appeals rejected Dearth's position for two reasons.¹⁴ First, nothing in Title VII supports a claim that individual capacity liability can be imposed on the basis of the alter ego doctrine.¹⁵ Second, and more importantly, the Eleventh Circuit Court of Appeals concluded that Dearth failed, as a matter oflaw, to establish that Collins was in fact Info Pro's alter ego.¹⁶ In reaching its decision, the court outlined three essential elements required to pierce the corporate veil under the theory of alter ego doctrine in Georgia:

"[T]o establish the alter ego doctrine it must be shown (1) that the stockholders' disregard of the corporate entity made it a mere instrumentality for the transaction of their own affairs; (2) that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist; and (3) to adhere to the doctrine of corporate entity would promote injustice or protect fraud."¹⁷

Dearth presented no evidence that Collins disregarded the corporate form, that he used Info Pro to transact his own affairs, or that he hid behind the corporate form of Info Pro to protect fraudulent behavior.¹⁸ The court held that "adherence to the doctrine of corporate entity in this case does not promote injustice or protect fraud."¹⁹ Moreover, the court stated that "[t]he problem with the 'alter ego' theory [of individual liability in Title VII cases] is that it seeks to impose liability upon shareholders without a showing of fraud or injustice."²⁰ Because Georgia law expressly requires a showing of fraud or injustice, the court rejected Dearth's argument that she should be allowed to sue and recover against Collins individually under Title VII.²¹

B. Miscellaneous

1. Reverse Stock Split Resulting in Redemption of Shareholder Does Not Create Special Injury Authorizing Direct Action In Haskins v. Haskins,²² the Georgia Court of Appeals affirmed the trial court's grant of summary judgment in favor of Catoosa Bancshares, Inc. ("CBI") and Joseph M. Haskins, Rebecca Haskins, and A. Russell Friberg, Jr. (collectively, the "CBI Defendants") relating to claims for breach of fiduciary duties, conversion, and oppression of minority shareholders.²³ At the heart of the issues in Haskins was the claim by Drewry E. Haskins III ("Haskins III") that he incurred a special injury separate and distinct from other shareholders and was thereby authorized to bring a direct action against CBI.²⁴ The Georgia Court of Appeals disagreed with Haskins III and affirmed the trial court's grant of summary judgment in favor of CBI and the CBI Defendants.²⁵ CBI was a closely-held corporation but not a statutory close corpora-tion.²⁶ Drewry E. Haskins, Jr. ("Haskins Jr."), Haskins III, Joseph Haskins (Haskins Jr.'s second son), A. Russell Friberg, Jr., various members of the Haskins family, and a trust—created for estate planning purposes—held all outstanding shares of CBI. Haskins Jr. founded and controlled CBI prior to his death, and while Joseph Haskins assumed leadership roles at CBI and was elected to the board of directors ofCBI, Haskins Jr. became estranged from Haskins III. Under the terms of Haskins Jr.'s will at the time of his death, all of Haskins Jr.'s stock in CBI was transferred to Joseph Haskins. Notwithstanding the terms of the will, Haskins III claimed that he had an oral agreement with his father to inherit the stock and filed for a temporary restraining order to prohibit the transfer of shares to Joseph Haskins. In addition to the case in Georgia, Haskins III initiated litigation in Tennessee with respect to his claim that he had an oral agreement with his father to receive his stock in CBI. The Tennessee claim, which related to the probate of Haskins, Jr.'s will, was not part of the litigation addressed by the Georgia Court of Appeals.²⁷ The trial court initially granted the temporary restraining order but later permitted the transfer to Joseph Haskins. As a result of the transfer, Joseph Haskins owned the majority of the outstanding shares of CBI.²⁸

After the transfer of Haskins Jr.'s shares to Joseph Haskins, CBI's board of directors authorized a four thousand to one reverse stock split. In connection with the reverse stock split, the authorized shares of stock in CBI were reduced from 200,000 shares to fifty shares. At the time of the reverse stock split, the only shareholder with more than 4000 shares was Joseph Haskins. Because Haskins III held less than 4000 shares, his shares, along with the shares of all shareholders other than Joseph Haskins, were to be exchanged for cash in the amount of $427 per share.²⁹

Haskins III argued that he should have been able to maintain a direct action because he suffered special damages.³⁰ The Georgia Court of Appeals disagreed and held that the case was simply about the fair market value of the shares.³¹ Once the court of appeals concluded that the case was limited to the mere valuation of the shares, the Georgia Supreme Court's holding in Grace Brothers, Ltd. v. Farley Industries, Inc.³² made it clear "that the statutory appraisal remedy in O.C.G.A. [section] 14-2-1302(b) . . . is the exclusive remedy."³³ In quoting the Georgia Supreme Court, the Georgia Court of Appeals emphasized that " '[a] remedy beyond the statutory procedure is not available where the shareholder's objection is essentially a complaint regarding the price which he receives for his shares.'"³⁴

Despite his varied claims, Haskins III never claimed that CBI's board of directors failed to comply with the Georgia Business Corporations Code³⁵ or CBI's governing documents, nor did Haskins III claim that the actions were taken by fraudulent or deceptive means.³⁶ Instead, Haskins III alleged that: "(1) [CBI] acted even though the issue concerning the ownership of the stock raised by his reliance on the alleged promise by his father was unresolved; (2) [CBI] redeemed Joseph Haskins's shares to which [Haskins III] claims ownership; and (3) the proposed reverse stock split would freeze out minority shareholders."³⁷ The court concluded that Haskins III's "complaint [was] replete with general allegations that he has suffered injuries separate and apart from the other shareholders, but his allegations [did] not demonstrate how this [was] true."³⁸ Pending resolution of the litigation in Tennessee regarding rightful ownership of Haskins Jr.'s shares, the Georgia Court of Appeals held that Haskins III's...