2014 Georgia Corporation and Business Organization Case Law Developments
| Citation | Vol. 20 No. 6 Pg. 0026 |
| Pages | 0026 |
| Publication year | 2015 |
by Thomas S. Richey and Michael P. Carey
This article presents an overview from a survey of Georgia corporate and business organization case law developments in 2014. The full version of the survey, which can be downloaded or printed at http://www.bryancave.com/2014-ga-survey/, contains a more in-depth discussion and analysis of each case. This article is not intended as legal advice for any specific person or circumstance, but rather a general treatment of the topics discussed. The views and opinions expressed in this article are those of the authors only and not Bryan Cave LLP.
This article catalogs case law developments dealing with Georgia corporate and business organization law issues handed down to date during 2014 by Georgia state and federal courts. Several of 2014's decisions have significant precedential value. Others address less momentous questions of law as to which there is little settled authority. Even those cases in which the courts applied well-settled principles are instructive for the types of claims and issues that are currently being litigated in corporate and business organization disputes and how the courts are dealing with them.
In 2014, the Supreme Court of Georgia issued a significant decision of first impression expounding on the business judgment rule and its relationship to the standard of care for directors and officers of Georgia banks and corporations. Other rulings handed down in 2014 involved the interpretation of buy-sell clauses in shareholder agreements and the valuation of corporate stock as a marital asset; the transfer of assets by operation of law in corporate mergers; the interpretation and enforcement of corporate bylaws and LLC operating agreements; and decisions on partnership formation and judicial dissolution. There were multiple decisions concerning the rights and liabilities of corporate officers and directors, partners, and LLC managers and members throughout the year. The 11th Circuit Court of Appeals addressed the enforceability of the insured-versus-insured exclusion in director and officer liability insurance policies. Other decisions in the litigation context concerned the effect of a failure to observe corporate formalities on a nonprofit corporation's capacity to sue; the close corporation exception to derivative action requirements; the rule against reverse piercing of the corporate veil; the determination of insider status for purposes of the Uniform Fraudulent Transfer Act; the nondischargeability of claims for misappropriation of business opportunities; the fiduciary shield doctrine; the business records exception to the hearsay rule; corporate receiverships—and much more. The article also covers several 2014 decisions from the Fulton County Business Court ruling on some of these same issues.
The decisions are organized first by entity type—those specific to business corporations, nonprofit corporations, limited liability companies and partnerships. The remaining sections of the article deal with (1) transactional issues potentially applicable to all forms of business organizations, and (2) litigation issues, including secondary liability, jurisdiction and venue, evidence questions and insurance issues.
Duties and Liabilities of Corporate Directors, Officers and Employees
The year 2014 brought a landmark decision by the Supreme Court of Georgia recognizing the business judgment rule and explaining its impact on ordinary negligence claims against directors and officers that are premised on alleged violations of statutory standards of care. In FDIC v. Loudermilk, 295 Ga. 579, 761 S.E.2d 332 (2014), a unanimous Supreme Court held that the business judgment rule exists in Georgia and protects good faith decisions made by directors and officers from later challenges to the wisdom of those decisions. The Court explained, however, that the business judgment rule does not necessarily insulate directors and officers from liability for ordinary negligence where a lack of due care in the decision-making process is alleged. Shortly after Loudermilk was decided, the Court reiterated its holding, once again unanimously, in FDIC v. Skow, 295 Ga. 747, 763 S.E.2d 879 (2014). In light of Loudermilk and Skow, it is now clear that claims alleging a lack of due care in the decision-making process may overcome the business judgment rule even if they sound in ordinary negligence, while claims that do nothing more than challenge the wisdom of a corporate decision or act can only overcome the business judgment rule upon a showing of fraud, bad faith or an abuse of discretion.
Both Loudermilk and Skow came to the Supreme Court on certified questions: Loudermilk from the
Northern District of Georgia and Skow from the 11th Circuit. They are both cases brought by the FDIC as receiver for banks that failed during the financial crisis. The FDIC alleges that the defendants, who are former directors and officers of the failed banks, were negligent and grossly negligent and breached fiduciary duties to the banks. Specifically, the FDIC alleges that the defendants negligently approved loans that violated principles of sound lending as well as the bank's internal loan policies, in furtherance of an unsustainable aggressive growth strategy. The FDIC's ordinary negligence claims are based on a section of the Financial Institutions Code of Georgia, O.C.G.A. § 7-1490, which provides that bank directors "shall discharge their duties in good faith and with that diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions." Section 7-1-490 is substantially similar to the Georgia Business Corporations Code's standards of care applicable to directors and officers (O.C.G.A. §§ 14-2-830 and 14-2842), as well as the standards applicable to Georgia nonprofit corporations and limited liability companies. Recognizing this, the Supreme Court made it clear that its holding applied broadly to claims involving corporate fiduciaries and was not confined to the banking context.
The Court did not decide whether the specific claims before it—i.e., the FDIC's allegations that the defendants negligently approved loans or that they sought to grow the banks too aggressively—could be brought as ordinary negligence claims. It will be up to lower courts to determine what sorts of negligence allegations are sufficiently process-oriented to be viable.
In another major decision dealing with a standard of care question, the Supreme Court decided in Rollins v. Rollins, 294 Ga. 711, 755 S.E.2d 727 (2014), that when trustees also serve as directors or managers of business entities in which the trusts hold minority interests, their conduct as corporate fiduciaries should be evaluated under corporate law principles rather than trust law principles. This suggests that persons acting in the dual role of trustee of a trust and director of a corporation can avail themselves of the business judgment rule when acting on behalf of the corporation. The Rollins case returned to the Court of Appeals, which then determined that it was unclear from the record whether the defendants' acts were undertaken as trustees or as managing partners of the family partnerships. See Rollins v. Rollins, 329 Ga. App. 768, 766 S.E.2d 162 (2014). Notably, since certain of the business entities were partnerships rather than corporations, the Court of Appeals briefly considered whether the principles that had just been announced by the Supreme Court in Loudermilk were applicable to managing partners in a partnership. The Court ultimately did not answer the question but instead remanded the case to the trial court to resolve the remaining questions of fact.
The courts heard a variety of other cases dealing with the conduct and liabilities of corporate directors and officers in 2014. In Georgia Department of Revenue v. Moore, 328 Ga. App. 350, 762 S.E.2d 184 (2014), the court addressed the nature of an officer's liability for the corporation's unpaid sales and use taxes as a...
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