2017 Georgia Corporation and Business Organization Case Law Developments

Publication year2018
2017 Georgia Corporation and Business Organization Case Law Developments
Vol. 23, No. 6 Pg. 42
Georgia Bar Journal
April, 2018

2017 Georgia Corporation and Business Organization Case Law Developments

This article presents an overview from a survey of Georgia corporate and business organization case law developments in 2017. The full version of the survey, contains a more in-depth discussion and analysis of each case (https://www.bryancave.com/en/thought-leadership/now-available-survey-of-2017-georgia-corporate-and-business-1.html). 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 author only and not Bryan Cave LLP.


This article catalogs decisions handed down in 2017 by Georgia state and federal courts addressing questions of Georgia corporate and business organization law. It includes both decisions with significant precedential value and others dealing with more mundane questions of law as to which there is little settled authority in Georgia. Even those cases in which the courts applied well-settled principles serve as a useful indication of trends in corporate and business organization disputes.

The year 2017 saw two notable decisions in the area of shareholder derivative and class actions, one granting a corporation's motion to dismiss a derivative suit based on the results of a special litigation committee investigation, the other upholding the denial of class certification on the grounds that the proposed class representative could not adequately represent the class. In addition, the Georgia appellate courts addressed matters of first impression regarding the duties of managing members of insolvent limited liability companies, as well as whether business entities can bring claims based on injuries typically thought to be personal in nature, such as intentional infliction of emotional distress. There were also a number of decisions interpreting the 2013 amendments to the Civil Practice Act's provisions for service of process on a corporation.

The decisions are organized first by entity type—those specific to business corporations, limited liability companies and partnerships. The remaining sections of the survey deal with (1) transactional issues potentially applicable to all forms of business organizations, and (2) litigation issues that are common to all business forms, including secondary liability, jurisdiction and venue, evidence questions and insurance issues.

Review of Decisions

Duties and Liabilities of Corporate Directors, Officers and Employees

The Northern District of Georgia dismissed a shareholder derivative action involving directors and officers of SunTrust, granting SunTrust's motion to dismiss the lawsuit based on a determination by a special committee of its board that the claims lacked merit and should not be pursued. The decision, in a case styled LR Trust on behalf of SunTrust Banks, Inc. v. Rogers, 270 F. Supp. 3d 1364 (N.D. Ga. 2017), is one of the most extensive opinions to date addressing the dismissal of shareholder derivative actions under O.C.G.A. § 142-744, and it serves as a useful guide to the sorts of issues that are (and are not) litigated when a corporation moves to dismiss under the statute. In response to a shareholder demand letter, SunTrust formed a "demand review committee" to investigate the shareholder's allegations. The committee submitted a comprehensive report of its investigation, in which it determined that no actionable conduct had occurred and that it would not be in the best interest of SunTrust to pursue claims based on the shareholder's allegations. SunTrust thereafter moved to dismiss a lawsuit brought by the shareholder based on the allegations that formed the basis for the demand. Under O.C.G.A. § 14-2-744, a court's consideration of a motion to dismiss is limited to evaluating the independence of the committee and the reasonableness of its investigation. The court found that the members of SunTrust's demand review committee were sufficiently independent and that the committee conducted a thorough, good faith investigation, and therefore granted the motion to dismiss. The plaintiff has appealed the decision to the Eleventh Circuit.

Other decisions involving director and officer liability issues in 2017 include HCC Insurance Holdings, Inc. v. Flowers, 237 F. Supp. 3d 1341 (N.D. Ga. 2017), in which the Northern District addressed a breach of fiduciary duty claim based on an officer's plans to start a competing company while still employed by the corporation. The court granted summary judgment in favor of the defendant, holding that while the officer may have made preliminary plans to form a new business, there was no evidence that he acted upon those plans while he was employed by the plaintiff. In In re Alpha Protective Services, 570 B.R. 888 (Bankr. M.D. Ga. 2017), the Bankruptcy Court for the Middle District of Georgia held that the fact that a director advanced money to a corporation to help it make payroll did not establish as a matter of law that the director had "reasonable cause" to believe that the company was insolvent, and found that the director's testimony denying that he knew about the company's tax debts was sufficient to create a triable issue of fact. Finally, in Lynchar, Inc. v. Colonial Oil Iniustries, Inc., 341 Ga. App. 489, 801 S.E.2d 576 (2017), the Court of Appeals of Georgia held that a guaranty was unenforceable against two shareholders of a corporation who executed the guaranty, because it did not correctly identify the name of the corporation that was the principal debtor.

Limited Liability Company Developments

The year 2017 saw a number of notable decisions involving LLC issues. In Georgia Commercial Stores, Inc. v. Forsman, 342 Ga. App. 542, 803 S.E.2d 805 (2017), the Court of Appeals of Georgia held that managing members of an insolvent LLC owe common law fiduciary duties to the LLC's creditors, similar to those owed by directors of an insolvent Georgia corporation. As a result, an LLC's creditors may bring a common law breach of fiduciary duty action against the managing members for their failure to conserve and manage the LLC's assets for the benefit of creditors. Georgia courts have long recognized such a duty in the corporate context, but it was an open question whether managing members of insolvent LLCs were under a similar duty not to engage in preferential transactions. The Court of Appeals held that it was only logical that LLC managing members be treated the same as corporate directors...

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