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The Childs Law Firm Blog

Aiding and Abetting a Breach of Fiduciary Duty

Posted & filed under Fiduciary Duty, Limited Liability Company (or LLC).

home-imageA common claim in litigation between and among business owners and a business is a breach of fiduciary duty claim.  A claim for breach of fiduciary duty requires proof of the existence of a fiduciary duty, breach of that duty, and damage proximately caused by the breach.  Importantly, there must be a “fiduciary duty.” For example, a manager in a manager-managed limited liability company generally owes fiduciary duties to the LLC’s members.

Sometimes, however, a wrongdoer does not owe a fiduciary duty to the business owner harmed by the breach of fiduciary duty.  Fortunately, the law may provide a remedy if this individual procured the breach of fiduciary duty.  Although less common, Georgia law recognizes a claim for aiding and abetting a breach of fiduciary duty (i.e., procuring a breach of fiduciary duty) if a plaintiff can show that the wrongdoer engaged in wrongful conduct without privilege (which it had no right to engage in) to procure a breach of the fiduciary’s duty to the plaintiff; that the wrongdoer knew the fiduciary owed a fiduciary duty to the plaintiff but purposely intended to injure the plaintiff; the wrongdoer’s conduct actually procured the breach of the fiduciary’s duty; and the wrongdoer’s conduct proximately caused damage to the plaintiff.  In such cases where a third party intentionally induces an individual owing fiduciary duties to another to breach those duties, the third party (even though he does not himself owe any fiduciary duties to the plaintiff) can be held liable to the plaintiff. This gives the plaintiff an additional avenue of recovery for his damage.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

 

Go Ahead and Get Creative in Your LLC Operating Agreement

Posted & filed under Limited Liability Company (or LLC), Ownership Interest.

columnsWhile many business owners choose to structure their business as a limited liability company, not all business owners are aware of all of the advantages associated with LLCs.  One such advantage is flexibility.  Generally, it is the policy of Georgia’s LLC Act to enforce the terms of an LLC’s operating agreement. This allows business owners to be creative and customize their operating agreement for their business. An example of one such creative provision that was upheld and enforced in a recent Georgia case, Davis v. VCP South, LLC, involved a provision that gave each member of the LLC, following the death of the other member, the option to purchase the deceased member’s interest at a price determined by the company’s certified public accountant. The Court found that the intent of the members was clear in authorizing the company’s CPA to determine the purchase price and the Court enforced the operating agreement. Because Georgia courts are likely to enforce legal terms in an LLC’s operating agreement, business owners should carefully consider whether their current operating agreement reflects the true terms of their “deal” and consider adding creative terms that are unique to their business.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Who is the “Client” for Purposes of the Attorney-Client Privilege?

Posted & filed under Ownership Interest.

SJP_1423v1Although the attorney-client privilege protects your communications with your attorney when your attorney represents you individually, if an attorney is engaged to represent your corporation (for which you are an officer or director), your communications with “your” attorney are unlikely to be protected from the corporation’s other officers and directors. This concept is illustrated by a recent Delaware case which found that a corporate defendant could not invoke the attorney-client privilege to block an individual director from obtaining allegedly privileged attorney-client materials.  Thus, it is important that you determine at the outset of your representation whether you want “your” attorney to represent you, individually, or your corporation.  If the client is the corporation, even if legal advice is rendered to the corporation through you, you and the corporation’s other directors and officers are likely to be considered a “joint client,” and your communications with the attorney (subject to certain exceptions) may be disclosed to the other “joint client” directors and officers.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

The Necessity of Good Faith

Posted & filed under Ownership Interest.

home-imageThe law is filled with references to “good faith” and the requirement that parties deal with each other in “good faith,” but many business owners may not understand the significance of this doctrine.  A pending Delaware case demonstrates the importance of good faith.  In this case, the Delaware court was faced with the question of whether a limited partnership acted in good faith when it removed its general partner for failing to produce audited financial statements within 120 day after the end of the fiscal year.  The limited partnerships claimed that it acted in good faith because the managing partner continuously failed to complete the limited partnership’s audited financial statements within the required 120 day time period.  However, the general partner argued that the limited partnership exceeded its authority and was unable to prove that its decision to remove the general partner was made in good faith.   Specifically, the general partner argued that there was no misconduct, due to the bad real estate market it was necessary to produce delayed financial statements, and there had been years of delayed financial statements.  While the Delaware Supreme Court is expected to issue an opinion in the next couple of months, this case indicates the significance of the doctrine of good faith.  It is of utmost importance that business owners always act in good faith.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Breach of Fiduciary Duty Claims May Proceed Against Resigned Directors

Posted & filed under Fiduciary Duty.

columnsAre you a shareholder who suspects one or more directors of a corporation have breached their fiduciary duties to you, but feel that you have no recourse because they have resigned?  If so, you may be in luck.  A recent Delaware case found that a company’s directors can still be held personally liable for acting in bad faith and failing to exercise oversight of the corporation, even after they resign from the Board.  Thus, directors cannot automatically exonerate themselves by resigning.  While Georgia law is not identical to Delaware law, Delaware is an innovative leader in corporate law, and this case could represent a hopeful trend for shareholders seeking recourse against directors who resign when facing trouble.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

What to do when your business partner steals from the business

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

SJP_1423v1Many business owners in business disputes with their partners find themselves in such situations after learning that their business partners are or have been stealing from the business. There are a variety of civil claims that business owners and sometimes the business itself may be able to assert against their partner for improperly taking money from the business. While this post will briefly highlight some of these claims, whether a particular claim is applicable (as well as the likelihood of success) depends on the facts and circumstances of each unique case.

A commonly asserted claim in this situation is conversion. However, if what was allegedly stolen was money, a claim for conversion only exists if the money is part of a specific, separate, identifiable fund (i.e., money clearly allocated for a particular fund or purpose). Additionally, specific stolen checks can support a claim for conversion. Next, to establish a claim for conversion, a plaintiff generally needs to establish that the plaintiff owns the property or has the right to possess the property, the defendant currently possesses the property, the plaintiff demands that the defendant return the property, the defendant refuses to return the property, and how much the property is worth. A few of these elements, however, can be tricky. For example, a plaintiff does not have to make a demand when the defendant unlawfully obtained the property.

Other potential claims include misappropriation and breach of fiduciary duty against the partner stealing from the business. Claims for misappropriation of funds are often easier to establish than a claim for conversion, as a plaintiff only needs to establish that the funds were supposed to be used for a particular purpose, the funds were wrongfully taken by the defendant, and the plaintiff has been damaged by loss of the funds. Likewise, to establish a claim for breach of fiduciary duty, the plaintiff needs to show the existence of a fiduciary duty, breach of that duty, and damages proximately caused by the breach. A fiduciary relationship usually exists between partners.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Protect Yourself from A Court Piercing Your Company’s “Corporate Veil” and Holding You Personally Liable

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

home-imageOne of the primary reasons that business owners form a corporation or an LLC for their business is to protect themselves from potential personal liability. While this can be a successful strategy, if a business owner ignores the separateness of the corporation or LLC in order to perpetrate fraud or avoid responsibility, or if the entity is undercapitalized (when the company does not have enough capital to support the ordinary business debts) in an attempt to avoid future debts, courts may pierce the “corporate veil” and come after the individual business owners.

The idea of piercing the “corporate veil” is generally applied to remedy injustices that arise when a party has abused the corporate form in order to defeat justice, perpetrate fraud, or to evade contractual or tort responsibility. Courts pierce the corporate veil under this theory when the business is a mere vehicle for the owner to transact his own affairs so that there is such unity of interest and ownership that the separate personalities of the business and its owners no longer exist. Courts also pierce the corporate veil based on undercapitalization. For undercapitalization to pierce the corporate veil, however, there must also be evidence of an intent at the time of the capitalization to improperly avoid future debts of the entity.

There is no exact formula that determines when a court will pierce a company’s corporate veil and hold an individual business owner liable for the company’s debts because the applicability of this doctrine depends on the facts and circumstances of each case. However, complying with the following may help protect individual business owners from the company’s liabilities.

• Ensure that all letterhead, stationary, invoices, and other documents state the company’s name.
• Hold company out to the public/ third parties as a separate and distinct entity from the individual business owners.
• Open and maintain a separate bank account for the company.
• Do not commingle or confuse any of the company’s assets with the business owners’ personal assets.
• Adequately capitalize the company enough to carry the normal strains and debts upon it. It is important that the company is and remains solvent. (Solvency is when the company’s assets exceed its liabilities).
• Sign all business documents in a representative capacity on behalf of the company.
• Title all business assets in the company’s name.
• Observe all corporate formalities of the company and keep written records of compliance with those formalities. For examples, do not commingle or confuse the company’s records with your personal records, file annual registrations with the Secretary of State, obtain an Employer Identification Number (EIN) for the company, pay all taxes and license fees for the company (e.g., payroll taxes, business license, county tax), have owner meetings and document those meetings in minutes.
• Maintain the company’s office at a location/address separate from your home.

While the above factors may help prevent a court from piercing the “corporate veil” of a company and holding the individual business owners liable, it is important to remember that there is no exact formula that determines with precision when the court will pierce a company’s corporate veil and hold its owners liable for the debts of the company.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

A Litigant’s Ability to Recover Attorney’s Fees

Posted & filed under Litigation.

columnsA common question we receive from clients considering filing a lawsuit (or who have been sued) is if they can recover their attorney’s fees and costs when they win. Generally, under Georgia law, the answer to this question is ‘no.” There are, however, certain instances when attorney’s fees may be awarded.

The most successful attorney’s fees claims are those based on contractual attorney’s fees. Some contracts contain “prevailing party attorney fees” provisions. Under these provisions, if there is a dispute over the contract at issue, the party that wins may be entitled to his attorney’s fees. Thus, if your lawsuit involves a breach of contract, the first place to look is the contract.

Litigants often see a separate count for attorney’s fees asserted in a lawsuit under O.C.G. A.§ 13-6-11. A plaintiff in Georgia can recoup their attorney’s fees under this code section when a defendant has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble or expense. To have a strong claim for 13-6-11 fees based on bad faith, any such bad faith conduct must arise out of the transaction that caused the lawsuit (not a defendant’s conduct in defending a lawsuit). If there is any legitimate controversy present in the lawsuit (i.e., if the defendant can come up with some reasonable argument or defense), courts are unlikely to find a defendant stubbornly litigious. While these fees are not usually easy to get, this is a potential source of fees in extreme cases.

Another Georgia statute, O.C.G.A. § 9-15-14, may provide litigants an ability to recover their attorney’s fees if a court finds that the opposing attorney or party brought or defended a lawsuit that lacked any “substantial justification” whatsoever or if such attorney or party unnecessarily expanded the litigation by improper conduct (i.e., abusing the discovery procedures). A lawsuit lacks “substantial justification” when it is substantially frivolous, groundless, or vexatious. In such cases, courts may award reasonable attorney’s fees.

At the end of the day, in business disputes, absent an attorney’s fees provision in a contract, litigants should not expect to recover the cost of their attorney. While both O.C.G.A. §§ 13-6-11 and 9-15-14 sound like promising ways to shift the burden of litigation to the opposing party, both statutes are intended to apply to the limited circumstances of bad faith and improper conduct.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Statutory Gap Fillers in Limited Liability Companies

Posted & filed under Limited Liability Company (or LLC), Ownership Interest.

SJP_1423v1Many business owners who are anxious to start a new business venture may quickly form a limited liability company in an attempt to protect themselves from liability. Many such owners, however, in haste to start their business, fail to enter into a comprehensive operating agreement (if one is entered into at all). If these business owners later get into a dispute with one another, and their operating agreement (if they have one) is silent as to an issue in dispute, statutory “gap fillers” come in to fill the gaps in the members’ agreement. This article will discuss a few of the many gap fillers that may apply to LLCs.

In regards to management, the gap fillers provide that LLCs are managed by its members (i.e., its owners). In order to be manager managed, on the other hand, there must be a provision in the LLC’s articles of organization or operating agreement providing for a manager managed LLC. This is significant because in manager managed LLCs, the owners who are not managers have no fiduciary duties to the LLC or its other owners solely by reason of being a member of the LLC.

The gap fillers provide that voting shall be one vote per member (for member managed LLCs) or one vote per manager (for manager managed LLCs) and that generally, a majority of the members or managers is needed to decide any matter about the business and affairs of the LLC. The gap fillers further provide that some matters require unanimous consent/vote of the members. These consist of the dissolution of the LLC, a merger of the LLC, the sale, exchange, lease, or other transfer of all or substantially all of the assets of the LLC, the admission of new members to the LLC, an amendment to the articles of organization or operating agreement, actions to reduce or eliminate an obligation to make a capital contribution, actions to approve distributions before dissolution, and an action to continue an LLC.

The statutory gap fillers for LLCs also include specific requirements for member and manager meetings. For example, two days notice of any meeting is required, manager meetings may be called by any manager, member meetings may be called by at least twenty-five percent of the members, a majority of the managers for a manager meeting (and a majority of the members for a member meeting) constitutes a quorum, and if a quorum is present, the act of a majority is needed to take action on any matter where a vote is required.

It should be reiterated, however, that generally, these gap fillers only apply unless otherwise agreed by the members/managers in the LLC’s articles of organization or an operating agreement.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Corporate Officers’ Joint & Several Liability for Corporate Sales Tax

Posted & filed under Corporation, Ownership Interest.

home-imageIf you are a corporate officer, beware, as you may be responsible for your corporation’s unpaid sales and use taxes. In a recent Georgia Court of Appeals case, Georgia Department of Revenue v. Moore, No. A12A0216, 2014 WL 3610795 (July 16, 2014), the majority shareholder of a corporation paid the corporation’s sales and use taxes. Thereafter, in the majority shareholder’s refund action, the Georgia Department of Revenue voluntarily refunded a portion of the tax payment to the majority shareholder. While the corporation’s other officer was not a party to the refund action, the Georgia Department of Revenue sought to recoup the refunded portion of the taxes from the corporation’s other corporate officer. The Court found that as “responsible persons” (i.e., an officer or employee of a corporation (or member/manager/employee of LLC or partner or employee of a limited liability partnership) who has control or supervision of collecting taxes, and who willfully fails to collect the taxes, truthfully account for and pay amounts owed, or who willfully attempts to evade a tax obligation, shall be personally liable for the unpaid amount), both the majority owner (that first paid the taxes) and the corporate officer (who did not originally pay the taxes) were jointly and severally obligated to pay the corporation’s sales and use taxes. The Court found that under Georgia law, a jointly and severally liable person is not a “necessary” party to a lawsuit involving another jointly and severally liable person. As a result, the Court held that because the corporate officer who did not originally pay the corporation’s taxes was not a “necessary” party to the refund action, the Georgia Department of Revenue could still pursue such officer for the additional amount of taxes refunded (even though the corporate officer was not a party to the refund action). As this case illustrates, corporate officers and other responsible persons need to be aware that they could be held personally liable for their company’s unpaid sales and use taxes.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner