Georgia Bankruptcy Blog

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... 

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.

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?

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 --

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.