Georgia Bankruptcy Blog

In CML V, LLC v. Bax, No. 735, 2010 (Del. Supr. Sept. 2, 2011) (click here for .pdf of opinion), the Delaware Supreme Court addressed the questions of whether a creditor can file a derivative action against a limited liability company.   Plaintiff CML asserted the following derivative claims against the present and former members of JetDirect Aviation Holdings, LLC:

(1) the individual defendants breached their duty of care by approving the late 2007 acquisitions (of other entities) without informing themselves of JetDirect’s true financial condition,

(2) the individual defendants acted in bad faith by consciously failing to implement and monitor an adequate system of internal controls and—with respect to one specific individual defendant—hiding critical information from the board, and

(3) certain individual defendants breached their duty of loyalty by benefitting from self interested asset sales upon JetDirect’s asset liquidation in 2008.

 The defendant managers sought dismissal of the derivative claims on the grounds that CML, as a creditor, did not have standing.  The Court of Chancery dismissed the claims and CML appealed.  On appeal, the Delaware Supreme Court affirmed.

The central provision at issue is 6 Del. C. § 18-1002, entitled “Proper plaintiff.” That provision reads:

In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and:
(1)  At the time of the transaction of which the plaintiff complains;
or
(2)  The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction.

This provision is unambiguous on its face; therefore, its plain language controls...

Because section 18-1002 is unambiguous, is susceptible of only one reasonable interpretation, and does not yield an absurd or unreasonable result, we apply its plain language. Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC—creditors do not. Therefore, section 18-1002 precludes CML from suing derivatively, and the Vice Chancellor properly granted the motion to dismiss.

The Delaware Court was not persuaded that LLCs should be compared with corporations:

CML contends that this result is absurd because, given the policy underlying derivative standing, there should be no difference between LLCs and corporations. CML argues that unless the Court of Chancery can vest creditors of insolvent LLCs with derivative standing in equity, there will exist no stakeholders with incentive to enforce fiduciary duties through legal action. CML may be correct that in insolvency creditors become the ultimate risk bearers in LLCs. But, the General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing. The General Assembly is well suited to make that policy choice and we must honor that choice. In this respect, it is hardly absurd for the General Assembly to design a system promoting maximum business entity diversity. Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.

Professor Larry Ribstein has a thorough analysis of the case at his Truth on the Market Blog. 

How does this case apply in Georgia, if at all, since Georgia and most other states look to decisions of Delaware Courts for corporate matters?  The rule is essentially the same in Georgia. O.C.G.A. § 14-11-801  (2011) provides the following:

A member may commence a derivative action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met:

(1) Either management of the limited liability company is vested in a manager or managers who have the sole authority to cause the limited liability company to sue in its own right or management of the limited liability company is vested in the members but the plaintiff does not have the authority to cause the limited liability company to sue in its own right under the provisions of the articles of organization or a written operating agreement;

(2) The plaintiff has made written demand on those managers or those members with such authority requesting that such managers or such members take suitable action;

(3) Ninety days have expired from the date the demand was made unless the member has earlier been notified that the demand has been rejected by the limited liability company or unless irreparable injury to the limited liability company would result by waiting for the expiration of the 90 day period;

(4) The plaintiff (A) is a member of the limited liability company at the time of bringing the action, and (B) was a member of the limited liability company at the time of the transaction of which he or she complains, or his or her status as a member of the limited liability company has devolved upon him or her by operation of law from a person who was a member at the time of the transaction; and

(5) The plaintiff fairly and adequately represents the interests of the limited liability company in enforcing the right of the limited liability company.

(emphasis added).  See also Ledford v. Smith, 274 Ga. App. 714 (Ga. Ct. App. 2005) (company that was not member did not have derivative standing).

 

In this prior post, I discussed a ruling by Judge Massey, wherein he ruled in favor of a Chapter 7 Trustee who sought to set aside a security deed that did not contain the appropriate signature of an unofficial witness. Gordon v. Wells Fargo, Adv. No. 08-6612, 430 B.R. 287 (December 10, 2009) (click here for the opinion). U.S. Bank (the successor-in-interest to Wells Fargo) appealed the decision to the District Court, which in turn certified the question to the Supreme Court of Georgia.

The Georgia Supreme Court, on March 25, 2011, entered an opinion affirming the reasoning and holding of Judge Massey, and in favor of the Chapter 7 Trustee.   U.S. Bank National Assoc. v. Gordon, No S10Q1564 (Ga. March 25, 2011) (click here for the opinion).  This ruling will benefit Trustees and homeowners who seek to nullify defective security deeds.

The primary issue is the interpretation of the 1995 amendments to O.C.G.A. § 44-14-33. The amended statute (Ga. Laws 1995, p. 1076) reads as follows:

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgment of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness. In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

The 1995 amendment added the second sentence. Judge Massey held that the statute, when read as a whole, means that a mortgage must be properly attested or acknowledged before it can be duly filed and serve as constructive notice:

A "duly" filed and recorded mortgage is obviously one that a clerk is authorized by law to record. The second sentence of § 44-14-33 must be read in light of the first sentence, which instructs clerks to "admit" a mortgage to record only if it is attested or acknowledged by an authorized officer and one additional witness. It is the appearance of the appropriate signatures on the deed that permits the clerk to record an attested deed. An unattested or partially attested deed, even if recorded, cannot provide constructive notice because it cannot be "duly filed, recorded and indexed.

The Georgia Supreme Court agreed. The certified question was "whether the 1995 Amendment means that, in the absence of fraud, a security deed that is actually filed and recorded, and accurately indexed, on the appropriate county land records provides constructive notice to subsequent bona fide purchasers, where the security deed contains the grantor’s signature but lacks both an official and unofficial attestation (i.e., lacks attestation by a notary public and also an unofficial witness)."

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The State of Georgia is among the national leaders in banks closed by state and federal agencies.  So far in 2011, six Georgia banks have been closed, with the latest two being Habersham Bank and Citizens Bank of Effingham.  Since late 2008, when the banking crisis hit, a total of fifty seven Georgia banks have been closed.  Friday afternoons have become a death watch in the Georgia banking industry, as closings are generally announced on Friday afternoons.  Many of the holding companies related to these banks have chosen to file Chapter 7 bankruptcy petitions as a way to wind up the affairs of the entities.

It is no surprise that legal disputes have arisen in the last several weeks, as the FDIC, and in come cases Chapter 7 Trustees, have pursued various causes of action against officers, directors, and professionals employed by the banks.  In some cases, there has been a dispute between bankruptcy trustees and the FDIC over who owns the claims (which could be the subject of another post). 

Here are only a few of the many recent cases filed against officers, directors and professionals of closed banks.  Whether the lawsuits ultimately lead to recoveries for the creditors of the bankruptcy entities, or replenishes the reserves of the FDIC remains to be seen.

Silverton Financial Services, Inc., by and through its Chapter 7 Trustee, Jeffrey K. Kerr, v. Porter Keadle Moore, LLP, Inserra and Bryan, Case No. 2010-CV-199891 (filed December 29, 2010, Superior Court of Fulton County, Georgia (click here for the Complaint).. Silverton Bank, a "banker's bank" rather than a bank that did business with the public, is Georgia's largest bank failure to date.  It failed in early 2009, although at one point it was metro-Atlanta's second largest bank with $2.9 billion in assets. 

In June 2009, Silverton Financial Services, Inc. ("SFSI"), the holding company of Silverton Bank and other entities, filed a Chapter 7 petition in the Northern District of Georgia.  In the 148 page Fulton County lawsuit, the plaintiff trustee alleges that SFSI's accounting firm and lead audit partner breached their duties to SFSI, and that SFSI's chief executive officer breached his fiduciary duties as an officer and director of the company.   The complaint seeks $57 million in damages.

Scarver, as Ch. 7 Trustee of Haven Trust Bancorp., Inc. v. Desai, et al., Adv No. 11-5105 (N.D.Ga. filed February 22, 2011) (click here for complaint) and Scarver, as Ch. 7 Trustee of Haven Trust Bancorp., Inc. v. Patel, et al., Adv N. 11-5103 (N.D. Ga. filed February 22, 2011) (click here for complaint).    Haven Trust Bancorp. was the holding company whose sole asset was its ownership interest in Haven Trust Bank, which was closed by the FDIC in December 2008.  On February 23, 2009, Haven Trust Bancorp filed a Chapter 7 petition.   In these lawsuits, the Trustee is suing to recover fraudulent transfers to insiders of the debtor entity, including the payment of the insiders' personal income tax obligations. The Complaints also reference the scathing FDIC report on Haven Trust Bank, as discussed in this AJC article.

Other related Haven Trust cases include a complaint filed by shareholders against Haven Trust officers and directors.  Patel v. Patel, et al, Civil Action No. 09-cv-03684 (N.D. Ga. filed December 31, 2009) (click here for complaint).  The case was dismissed in this January 14, 2011 Order.

FDIC, as Receiver for Neighborhood Community Bank v. Smith Welch & Brittain, LLP, Civil Action No. 11-cv-00372 (N.D.Ga filed February 7, 2011) (click here for complaint).  The FDIC sued a law firm for the closed Neighborhood Community Bank for negligence in the handling of loan transactions.  Click here for an AJC article on the lawsuit and click here for an article in the Atlanta Business Chronicle.  Other lawsuits have been filed in Georgia against other law firms that the FDIC claims caused losses to the closed banks.

 FDIC, as Receiver for Integrity Bank, v. Skow, et al., Civil Action No. 11-cv-00111 (N.D. Ga. filed January 14, 2011) (click here for complaint).  The FDIC in this lawsuit seeks to recover over $70 million in losses related to loans approved by Integrity Bank's officers and directors.  The FDIC alleges that the losses were due to the negligence and breaches of fiduciary duties of the insiders.  Defendants include Jack Murphy, a state senator.  This lawsuit is discussed in more detail in an article in the Atlanta Journal and an article in the Atlanta Business Chronicle. 

 

By: Scott B. Riddle, Esq.

Vibratech, Inc. v. Frost, et al., 2008 WL 1704091 (Ga. App. March 27, 2008).

Although this Georgia Court of Appeals opinion involves a bankruptcy issue, it is more important for the discussion and holding on personal jurisdiction.  This case indicates that a defendant can be hauled into Georgia Courts based on its placing products in the "stream of commerce" that reaches Georgia, or placing products in the stream of commerce to third parties outside of Georgia, who themselves place the products in the stream of commerce that reaches Georgia.   The basic facts are as follows:

This lawsuit arises out of the crash of a Cessna twin engine aircraft in the vicinity of Apison, Tennessee on December 2, 2004, resulting in the death of the pilot and four passengers. The aircraft was owned by the Georgia Cumberland Conference of Seventh-Day Adventists (GCCSA). The GCCSA and the estates of the five decedents filed these lawsuits in Gwinnett County against multiple defendants including Vibratech. The plaintiffs allege that Vibratech negligently manufactured the plane's viscous damper, a mechanism designed to reduce engine vibration, which was installed in the aircraft's left engine.


Vibratech was a Delaware corporation with its principal place of business in Alden, New York, but is now defunct, with no officers, directors or employees. The corporation filed for bankruptcy protection on July 18, 2003, approximately 18 months before the accident. The company never maintained a certificate of authority to conduct business in the State of Georgia and did not carry out business operations in the state. Vibratech sold the damper at issue in this case to Teledyne Continental Motors, Inc. (TCM), a Delaware company with its principal place of business in Mobile, Alabama. Vibratech sold the damper “FOB Seller's Plant” in Alden New York, and TCM installed the damper in a rebuilt Cessna engine. The GCCSA purchased the engine through Air Power, Inc., a third-party Texas company, on April 9, 2001. TCM shipped the engine at Air Power's instruction to L & M Aircraft in Rome, Georgia for installation in GCCSA's airplane.

(bold emphasis added)

Vibratech did not answer the lawsuit and a default judgment was entered. However, Vibratech was an additional insured on a policy held by TCM.  At  at some point, TCM began providing a defense to Vibratech, and Vibratech moved to open the default as a matter of right and dismiss the case for, inter alia, lack of personal jurisdiction.

Vibratech argued that the trial court lacked personal jurisdiction over it because the company never transacted any business in the State of Georgia, in that it had no office, took no orders, made no sales, delivered no products and solicited no business here. In rejecting this argument, the trial court found that in Innovative Clinical & Consulting Servs. v. First Nat'l Bank, 279 Ga. 672 (620 S.E.2d 352) (2005), the Georgia Supreme Court construed subsection (1) of the Georgia long-arm statute to extend jurisdiction to the maximum limits permitted by procedural due process. OCGA § 9-10-91(1). The trial court determined that Vibratech's activities in placing its dampers into the stream of commerce by manufacturing, selling and delivering them for resale were sufficient to satisfy the requirements of due process and to confer jurisdiction over the company. Vibratech counters, however, even under the Innovative Clinical 's expanded interpretation of subsection (1), the language of the statute requires more than merely putting merchandise into the stream of commerce; it still requires the actual transaction of business by the defendant in Georgia.

 The Court's analysis, after the jump... 

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By: Scott B. Riddle, Esq. 

Huffman v. Armenia, Case Nos. A06A2105; A06A2106; A07A0616, 2007 Ga. App. LEXIS 325 (Ga. App. March 20, 2007).  

In a prior post, I discussed a case that held that a debtor entity may file a Bankruptcy petition even when a Receiver has been appointed by the state court.  While I do not know that there is much dispute over the fact that federal Bankruptcy law pre-empts state law, and therefore, the appointment of receivers, but what happens when the officers or directors of the entity attempt to file a Bankruptcy petition without the appropriate authorization of the Board? The Georgia Court of Appeals provides and answer.  Footnote 3 identifies the issue -

Huffman also argues that the trial court erred in finding him in contempt because the corporation (HELP) was entitled to file for bankruptcy and the court lacked the authority to prevent HELP from doing so. Huffman’s argument misses the point. The issue is not whether the court improperly tried to prevent the corporation (or the receiver on its behalf) from filing for bankruptcy. Instead, the issue is whether Huffman violated the TRO by acting unilaterally in filing the unauthorized, pro se petition on behalf of the corporation.

The background facts are as follows:

Appellees ...  are minority shareholders of Home & Equity Loan Products, Inc. ("HELP"). Appellant David Huffman is the chairman and president of HELP and a member of the corporation’s board of directors. On December 20, 2005, the appellees filed a verified complaint, directly and derivatively on behalf of the corporation, against HELP’s board of directors for, inter alia, breach of fiduciary duty, gross negligence, fraud, civil RICO, and misappropriation of corporate opportunities. The same day, the appellees filed an emergency motion for a temporary restraining order and for the appointment of a receiver to assume control of HELP and another business, Dream Avenue Mortgage Corporation ("Dream Avenue"), which is owned by Huffman.

On January 6, 2006, the trial court conducted a hearing on the appellees’ motions. Huffman appeared pro se at the hearing. During the hearing, the court made a verbal ruling appointing a receiver for HELP and Dream Avenue, requiring the HELP directors to cooperate with the receiver, and prohibiting the directors from transferring any corporate assets, doing anything that would deplete the assets, or interfering with the business of HELP and Dream Avenue. On January 19, 2006, the court issued a written order appointing the receiver and restraining Huffman and the other HELP directors from "misappropriating, converting, transferring, or otherwise using or depleting" the assets of HELP (hereinafter, the "TRO").

Notwithstanding the entry of the TRO and appointment of a Receiver, Huffman filed a pro se Chapter 7 Bankruptcy Petition on behalf of HELP. The Petition did not inclide a Board authorization or schedules.

2Although Huffman’s appellate briefs repeatedly claim that HELP’s board of directors unanimously voted to authorize the filing of the bankruptcy petition and signed a resolution to that effect before the petition was filed, there is no evidence in the record to support of these statements and, in fact, the evidence contradicts these statements.

Appellees then filed a Motion for Contempt in Superior Court -

On January 26, 2006, the trial court conducted a motion hearing, during which it found that Huffman filed the bankruptcy petition in a "deliberate attempt to destroy" the appellees’ lawsuit and, as a result, was in willful contempt of the TRO. The court told Huffman that he could purge himself of the contempt by immediately filing a motion to dismiss the bankruptcy petition.

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By: Scott B. Riddle, Esq.  

In a prior post, I noted that the Georgia Court of Appeals had recognized a cause of action for aiding and abetting breach of fiduciary duty.  You can review that post for lengthy excerpts from the opinion in Insight Technology, Inc. v. Freightcheck, Inc., No. A06-0710, Ga. App. LEXIS 738, 2006 WL 1679391 (Ga. App. June 20, 2006), including the reasoning of the court in recognizing the claim.  The Georgia Supreme Court has subsequently denied cert in the case.

In this post, I focus specifically on the actual elements of the claim identified by the Court of Appeals.  These elements are --

In summary, regardless of whether denominated "aiding and abetting a breach of fiduciary duty," "procuring a breach of fiduciary duty," or "tortious interference with a fiduciary relationship," Georgia law authorizes a plaintiff to recover upon proof of the following elements: (1) through improper action or wrongful conduct and without privilege, the defendant acted to procure n12 a breach of the primary wrongdoer's fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a fiduciary duty, the defendant acted purposely and with malice and the intent to injure; n13 (3) the defendant's wrongful conduct procured a breach of the primary wrongdoer's fiduciary duty; and (4) the defendant's tortious conduct proximately caused damage to the plaintiff.

Clearly, the Court equated aiding and abetting breach of fiduciary duty with tortious interference with fiduciary duty and in doing so included the requirement (or affirmative defense) that the offending party act without privilege.  Does the inclusion of this element, brought over from tortious interference claims, make sense and is it workable?

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In Roy v. Garden Ridge, LP, Case No. A06-A-2065 (December 5, 2006), plaintiffs filed a personal injury suit against the defendant.  The defendant subsequently filed a Chapter 11 Bankruptcy petition, staying the tort case. Defendant's plan of reorganization was confirmed.  Defendant then filed a motion for summary judgment in state court on the grounds that the confirmed plan discharged the plaintiffs' tort claims.  The trial court granted summary judgment and the plaintiffs appealed.

The Court of Appeals affirmed.  Pursuant to 11 USC § 1141 and § 524(a), the plan discharged the tort claim and a discharge injunction was automatically issued. The plaintiffs argued that the discharge injunction should not be given effect because they were not provided notice of the bar date for filing claims, in violation of their due process rights.  The court, however, held that Bankruptcy law preempted state law and the trial court could not dissolve the discharge injunction even if the plaintiffs' due process rights were violated.  The plaintiffs would have to pursue that remedy in Bankruptcy Court.

The court also held that the trial court had concurrent jurisdiction to determine whether the plaintiffs' claims were within the cope of the discharge injunction.  However, the plaintiffs did not dispute that their claim was within the scope of the injunction.

Hill v. Green Tree Servicing, Inc., A06--0530, 2006 Ga. App. LEXIS 771 (Ga. App June 26, 2006) - Prior to this action,  Borrower, the owner of a residential mobile home, had asserted a claim against Conseco Financial Services in Conseco's Chapter 11 bankruptcy case.  The Borrower ultimately settled the proceeding, agreeing on a general unsecured claim of $88,113.60 and releasing all other claims against Conseco.  The Borrower ultimately received $24,671.81 under Conseco's Plan of Reorganization.

Fast forward... Borrower still owes Green Tree, which purchased some of Conseco's assets including Borrower's loan, and the loan is in default.  Green Tree seeks a writ of possession in state court and Borrower defends that he is entitled to a recoupment of the amount left unpaid by Conseco, because Green Tree stood in the shoes of Conseco.

The court disagreed.  Noting that Borrower's claim was more in the nature of set-off, the Court found that the Borrower had expressly released all claims against Conseco in the bankruptcy settlement.  Thus, they gave up their right to assert the amount of their unpaid settlement as a set-off or recoupment. 

In a significant corporate governance case, the Georgia Court of Appeals officially recognized a claim of aiding and abetting breach of fiduciary duty.  Federal courts have recently dismissed such claims because, they believed, Georgia state courts would not recognize such a cause of action.  See Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir. January 30, 2006); Laddin v. Edwards, 2006 U.S. Dist. LEXIS 30356 (N.D Ga. 2006) ("The Court of Appeals also held that Georgia courts have not recognized a cause of action for aiding and abetting a breach of fiduciary duties." The Court can say with some confidence that the Defendants are entitled to summary judgment on this claim.")


In Insight Technology, Inc. v. Freightcheck, Inc., No. A06-0710, Ga. App. LEXIS 738, 2006 WL 1679391 (Ga. App. June 20, 2006), the president of the plaintiff (a freight factoring business) and another individual who owned a competing business got together and formed yet another business that competed with the plaintiff. The president used the same software for the new business, used employees of the plaintiff, and even located the new business' offices in the same building so he could manage both operations. The president also secretly copyrighted the software he developed for the plaintiff's business and licensed it to plaintiff and the new company. The plaintiff's majority owner found out, fired the plaintiff and filed a lawsuit against the former president, the competing business, and the other owner of the competing business. The claims included aiding and abetting breach of fiduciary duty.

The Court of Apeals first backed off a prior case in which it appeared to hold that a claim for aiding and abetting was not recognized --

The trial court concluded that Georgia has never recognized a claim for aiding and abetting a breach of fiduciary duty, citing Monroe v. Board of Regents of University System of Georgia, 268 Ga. App. 659, 664-665 (2) (602 SE2d 219) (2004). In opposing Insight's appeal, Hull, GetLoaded, and FreightCheck contend in addition that, even if Georgia law recognizes such a claim, they cannot be liable because they did not owe any duty to Insight which could form the basis of a tort. In Monroe, we declined to recognize a claim for "aiding and abetting a breach of fiduciary duty" on the record then before us. Id. at 665 (2). Because the plaintiff in Monroe "failed to assert such a claim in either his original complaint or by later amendment," however, our holding did not (and could not) reach the issue of whether such a claim is allowable under Georgia law.

The Court then discussed the basis for, and elements of, the newly recognized claim --

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Yet another lesson that divorce decrees do not bind creditors, or trump a bankruptcy discharge -

In McGahee v. Rogers, No.  06A0885, 2006 Ga. LEXIS 674 (Ga. July 13, 2006), the husband
was liable for certain joint debts pursuant to the divorce decree. 

The final decree incorporated a settlement agreement pursuant to which neither party received alimony. However, the agreement did address the joint marital debts, and specified that each party would assume the obligation to pay certain of them and would indemnify and hold the other harmless for those that he or she assumed. The debts for which McGahee assumed responsibility included one owed to the Internal Revenue Service and another for the loan secured by a car to which he took title and possession. The tax liability was incurred when McGahee withdrew money from his IRA, but failed to include the withdrawn amount as income on the joint return which he and Ms. Rogers filed. The money from the IRA was used for household expenses and other items.

The husband then filed a Chapter 7 and received a general discharge, and the IRS and creditor went after the wife for payment of the debts at issue.  The wife filed a motion for criminal contempt against the husband for his alleged failure to comply with the divorce decree.  The husband defended on the basis that the debts were discharged, although no specific determination was made by the Bankruptcy Court. 

The court, under its concurrent jurisdiction, held that the debts were discharged under Section 523(a)(5) --

Ms. Rogers contends that the debts are not dischargeable because they were not secured by any property and were incurred for necessities, such as living expenses and an automobile, which constitute support. However, the underlying nature of the debts themselves does not have any legal consequence. The controlling issue is whether, at the time the settlement agreement was reached, the parties intended that McGahee's assumption of the obligation to pay the debts constitute an element of support for Ms. Rogers. As to that issue, the undisputed evidence demands a finding that they did not have that intent. Instead, the debt allocation was a element of the division of their marital property.

With respect to the attorneys fees awarded by the trial court, "McGahee [Husband] was justified in maintaining a "stubborn stance" with regard to his discharge in bankruptcy defense, since, for the reasons discussed in Division 1, he was entitled to prevail on that defense. "

Judicial Estoppel; Standing

Lee v. Owenby & Assoc., Inc. 2006 Ga. App. LEXIS 604 (May 17, 2006)

Prior to filing bankruptcy, the debtor asserted claims against his landlord. After his filing, the trustee entered an appearance in the state action on behalf of the debtor's estate, and dismissed without prejudice the claims against the landlord. After the bankruptcy case was closed, the debtor attempted to reassert the same claims in state court, arguing that the trustee only represented the estate's interest and not the debtor's interest in the claims. Therefore, after the bankruptcy case was closed, debtor argued, the claims could be asserted by him.

The Court of Appeals dismissed the debtor's case. The legal action was property of the estate and the trustee, who was in debtor's privy and the real party in interest, dismissed the counterclaims. Therefore, there was a final adjudication of the case. Moreover, the trustee did not abandon any claims back to the debtor.

Federal Judicial Estoppel

Benton v. Benton, 2006 Ga. LEXIS 241, No. 06-A-0605 (GA April 25, 2006).

The husband and wife were involved in a pending divorce action, wherein the wife had asked for alimony and a division of property, when the wife filed a Chapter 7 petition. Her Statement of Financial Affairs identified the divorce action, but she did not list any entitlement to alimony, maintenance, support or property settlements in Schedule B, Personal Property. The husband moved for summary judgment in state court based on federal judicial estoppel, which motion was denied. The wife then moved to re-open her bankruptcy case and amend Schedule B. Her motion was unopposed and granted.

On appeal, the Georgia Supreme Court affirmed, holding that estoppel was inapplicable where a party successfully amended a bankruptcy petition to include the claim. The wife disclosed the pending case, and it was within the discretion of the trial court to determine whether the wife acted with diligence in amending her petition to include her claim for support. Courts should also be hesitant to invoke federal judicial estoppel to defeat a spouse's right to support and an equitable division of property.

11 U.S.C. §727(a)(2); Fraudulent Conveyance; Collateral Estoppel

Playnation Play Systems, Inc. v. Hammer, 277 Ga. App. 675 (February 20, 2006).

Prior to filing for bankruptcy, the debtor transferred property after a state court judgment was entered against him. Debtor then filed a Chapter 7 petition and the creditor challenged his discharge pursuant to §727(a)(2) (transfer of property within one year with the actual intent to hinder, delay or defraud creditors). After a trial, the Bankruptcy Court ruled in favor of the creditor and the debtor was denied a discharge.

The creditor subsequently filed a lawsuit in state court requesting that the court set aside the fraudulent conveyance and award damages and attorneys fees pursuant to O.C.G.A. §18-2-22 (applicable to causes of action that arose prior to the repeal of §18-2-22 and the enactment of the Uniform Fraudulent Conveyance act on July 1, 2002). The creditor filed a motion for summary judgment, arguing that the Bankruptcy Court judgment precluded re-litigation of the fraud claims. The trial court denied the motion and the creditor appealed. The Court of appeals reversed, finding an "identity of issues" between §727(a)(2) and former O.C.G.A. §18-2-22.

Judicial Estoppel

Collections of Life & Heritage, Inc. v. Gaston-Thacker, GP, 277 Ga. App. 402 (January 27, 2006).

The creditor obtained a judgment and writ of fieri facias against the debtor. The debtor filed an action to set aside the writ on the grounds that debt was not listed as an asset in the bankruptcy case filed by one of the creditor's two partners. The trial court held that judicial estoppel was not applicable, and the debtor appealed.

The Court of Appeals affirmed. It was not the creditor who filed for bankruptcy, but one of its partners. Additionally, the bankrupt partner informed the trustee of the existence of the claim and the trustee concluded that the claim did not have a significant impact on the bankruptcy estate.

11 U.S.C. 727; Standing

Thornton v. Mankovitch, 277 Ga. App. 221 (January 12, 2006).

The debtor corporation was pursuing a claim against the US Postal Service when an involuntary bankruptcy petition was filed against it. A trustee was appointed, and the attorney who previously represented the debtor and its principal in the USPS litigation was appointed special counsel to pursue the USPS claim, which was the sole asset of the estate. The trustee sought approval to settle the claim and the lawyer, on behalf of the debtor, objected. The Bankruptcy Court approved the settlement, and the debtor and its principal filed a lawsuit alleging malpractice against the lawyer. The grounds for the claim were that the lawyer settled the USPS claim without permission and for an amount not in their best interests. The lawyer moved for summary judgment on the grounds that it was the trustee who settled the USPS claim, and not the lawyer. The trial court granted the motion as to the debtor's principal but denied the motion as to the debtor company.

The Court of Appeals reversed, holding that the lawyer was entitled to summary judgment against both parties. Upon the filing of a Chapter 7, a corporation becomes "defunct," which is akin to a dissolved corporation, and has no existence outside of the bankruptcy estate. It "ceases to exist." Therefore, it did not have standing to pursue the claim against the lawyer. The claim that the lawyer had a conflict of interest by representing both the debtor and estate was without merit because upon the filing, the estate became the only real party in interest. Moreover, the trustee was the only party who could represent the debtor, and "there is no residue remaining in the corporation which would entitle the debtor to be represented by someone other than the … trustee." Finally, there was no evidence that they were damaged by any alleged conflict of interest.

Judicial Estoppel

Battle v. Liberty Mutual Fire Ins. Co., 276 Ga. App. 434 (November 3, 2005)

The plaintiff filed suit against the insurance company seeking payment for property damage sustained in 2002. The insurance company moved for summary judgment based upon the plaintiff's failure to list the property as an asset in his 1995 bankruptcy case. The trial court granted the motion, finding that the plaintiff was judicially estopped from seeking reimbursement for damage to property not listed in his schedules. The Georgia Court of Appeals affirmed.