Family Feuds and Circuit Splits: a Clash Between Corporate Cousins Causes the Eleventh Circuit to Revisit the "long-lost" Burford Abstention Doctrine

• Jurisdiction: United States,Federal
• Publication year: 2022
• Citation: Vol. 73 No. 3

Family Feuds and Circuit Splits: A Clash Between Corporate Cousins Causes the Eleventh Circuit to Revisit the "Long-Lost" Burford Abstention Doctrine

William Wheeler

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Family Feuds and Circuit Splits: A Clash Between Corporate Cousins Causes the Eleventh Circuit to Revisit the "Long-Lost" Burford Abstention Doctrine

William Wheeler^*

"The law hath not been dead, though it hath slept." — William Shakespeare¹

I. Introduction

Corporate litigation is often a highly complex process. The rules and regulations surrounding shareholder demands, derivative lawsuits, review committees, and corporate dissolution create a convoluted procedural web that can be exceedingly difficult to untangle. Due to this complexity, federal court is an attractive choice for many civil litigants; federal forums have predictable and established rules of procedure and federal judges tend to have more time to give each case individualized consideration. These factors can accelerate and smooth the litigation process. However, throughout the last two decades, litigants in corporate dissolution actions have had no choice but to seek relief in state courts, as there were no federal forums available for petitioners seeking corporate dissolution.²

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Recently, the United States Court of Appeals for the Eleventh Circuit's decision in Deal v. Tugalo Gas Co., Inc.³ opened the doors of federal courthouses in Georgia, Alabama, and Florida to petitioners seeking corporate dissolution. Deals holding rejects the traditional application of the "Burford abstention" doctrine⁴ and creates a circuit split with the United States Courts of Appeal for the Second and Sixth Circuits.

II. Factual Background

Tugalo Gas Company (Tugalo) is a small, family-owned corporation in Toccoa, Georgia.⁵ Tugalo is a closely-held corporation; excluding the shares in the corporate treasury, there are 471 outstanding shares held by six people, most of whom are related.⁶ The familial parties in Deal were ensnarled in a legal dispute over corporate finances for nearly nine years before the matter reached the Eleventh Circuit.⁷ In 2012, the Appellant/Plaintiff, William Deal, made a shareholder demand to the Tugalo Board of Directors, pursuant to Georgia law,⁸ through his limited liability company, EGD Holdings (EGD).⁹ In his shareholder demand, Deal alleged that the Appellee/Defendant, Gilmer, was impermissibly using corporate resources in three distinct ways: (1) by having Tugalo employees complete work on Gilmer's private property

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for Gilmer's private benefit; (2) by using company money to pay for Gilmer's personal bills and expenses; and (3) by personally receiving payments from property leasing agreements between Gilmer and Tugalo.¹⁰

After making the shareholder demand, Deal, again through EGD, filed a civil action in the United States District Court for the Northern District of Georgia against Gilmer, which raised claims that his cousin had breached his fiduciary duties as Tugalo's President and majority shareholder.¹¹ The trial court found that Deal's civil action failed to allege a special injury, and thus granted Defendant Gilmer's motion to dismiss.¹²

Deal, determined to prevail over his cousin in a court of law, made a second shareholder demand in March of 2017, raising the same allegations as the 2012 demand letter, but with additional assertions of misconduct committed by other members of Tugalo's Board of Directors.¹³ The Tugalo Board of Directors created a Demand Review Committee (DRC) to conduct an internal investigation into Deal's allegations.¹⁴ The DRC reviewed the matter and determined that "a shareholder derivative action was not in Tugalo's best interest."¹⁵

Following the DRC's decision to take no further action regarding Deal's claims, Deal filed suit again in the Northern District of Georgia.¹⁶ Deal raised the same issues about Gilmer's alleged corporate waste and added claims that the appended defendants—Sarah Gilmer Payne, Etheldra Gilmer, Bruce Stancil, Jr., Ray Crenshaw, and Lewis Smith—all either assisted with or acquiesced in Gilmer's improper use of corporate finances.¹⁷ In his action, Deal asserted a laundry list of claims, alleging a wide range of misconduct including multiple breaches of fiduciary duties, fraud, and conspiracy.¹⁸

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Upon notice of Deal's lawsuit, the Tugalo Board of Directors appointed a Litigation Review Committee (LRC) to "investigate, review, and analyze" the claims Deal raised in his Complaint.¹⁹ Tugalo's LRC came to the same conclusion as the DRC in the preceding action and informed the Tugalo Board of Directors that a derivative shareholder action was against the "best interest" of Tugalo.²⁰

Upon the recommendation of the LRC, the defendants filed a motion to dismiss Deal's Complaint, alleging: (1) that Deal's claims were barred by various statutes of limitations; (2) that a direct shareholder action was not appropriate for Deal's derivative claims;²¹ and (3) that Deal's allegations did not comport with Federal Rules of Civil Procedure, Rule 9(b).²²

Regarding the statute of limitations issue raised by defendants, the district court held that "dismissal is only appropriate on a statute of limitations defense if it is 'apparent from the face of the complaint' that the claim is time-barred."²³ The district court held that the statute of limitations defense was not apparent prima facie and denied the defendants' motion to dismiss based on this defense.²⁴

The defendants moved to dismiss Count VII, which asserted that all defendants were liable for "wrongful distributions."²⁵ Under Georgia law, any "[D]irector who votes for or assents to a distribution made in violation of [the law] . . . is personally liable to the corporation for the amount of the distribution that exceeds what could have been

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distributed without [committing a statutory violation]."²⁶ The district court found that the actions described in Deal's allegations did not rise to the level of "unlawful distributions," as the Tugalo Board of Directors did not vote for, nor assent to, the transferring of money to shareholders.²⁷ Thus, the court granted defendants' motion to dismiss Count VII partially.²⁸ Due to tolling issues, the court denied dismissal of the specific allegation of wrongful distribution pertinent to defendant, Bruce Stancil, Jr.²⁹

The defendants moved for dismissal of every Count except Counts III, IV, V, VIII, XII,³⁰ asserting that these allegations raised by Deal in the Counts were derivative, and therefore, improper in a direct action and should instead be pursued in a derivative suit.³¹

The district court found that Deal failed to demonstrate any substantial reason the general rule regarding derivative actions should not apply to his claims.³² Furthermore, Deal failed to establish that he had suffered a "specific injury," because, if his allegations were proven to be true, the damages Deal suffered were proportional to the damages suffered by the other shareholder defendants; any harm that Deal suffered was neither personal nor unique.³³ Consequently, the defendants' motions to dismiss the derivative claims were granted.³⁴

The defendants alleged that Count III, Deal's claim of fraud, failed to comport with the Federal Rules of Civil Procedure and should be dismissed.³⁵ The district court held that Deal's seventy-five-page Complaint, and the attached documents, met the heightened pleading standard set forth by Rule 9(b) and that dismissal was improper for Count III.³⁶

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The district court declined to issue a decision for the remaining equitable counts in Deal's Complaint: the judicial dissolution, an accounting based on the alleged fiduciary improprieties, and Deal's allegations of the improper disbursement of benefits.³⁷ It abstained from adjudicating these equitable claims under the Burford abstention doctrine and ruled in favor of Tugalo on all remaining counts.³⁸ This decision prompted Deal to file an appeal to the Eleventh Circuit.³⁹

Although the Burford abstention doctrine affords federal courts the ability to decline adjudicating certain cases, even if subject matter jurisdiction is satisfied, the Eleventh Circuit held that the district court's decision to abstain under the Burford abstention doctrine was improper, and that the district court should have adjudicated the case.⁴⁰

III. Legal Background

A. Shareholder Petitions in Georgia

1. Shareholder Demands

Long before Deal's suit reached the Eleventh Circuit, it started as a shareholder demand.⁴¹ Under O.C.G.A. § 14-2-742, before a shareholder can file a derivative suit, they must first make a written demand on the corporation "to take suitable action."⁴² After receiving the written demand, a corporation can choose to either pursue or decline litigation.⁴³ If the shareholder chooses to file a derivative suit after the corporation declines litigation, the corporation may move to dismiss the suit following good faith investigation by a special committee of independent directors.⁴⁴

During the district court proceedings, the defendants successfully moved for dismissal of over half of Deal's claims, as the court found the claims to be derivative.⁴⁵

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2. Derivative Suits

In Georgia, generally, claims regarding the misappropriation of corporate assets and breaches of fiduciary duty must be handled via shareholder derivative suits.⁴⁶ Derivative suits are required for such claims to prevent a deluge of lawsuits filed by shareholders, to protect corporate shareholders, and to properly compensate injured shareholders.⁴⁷ The decision of whether a claim is direct as opposed to derivative is made by the court, which will look to "what the pleader alleged."⁴⁸

Georgia courts recognize two exceptions to the general rule. First, courts can allow a shareholder to pursue claims of breached fiduciary duty and misappropriation of corporate assets through direct actions if the shareholder has suffered a special injury, and, second...