Ledford v. Peeples

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
MAY 6, 2010
No. 06-10715
JOHN LEY
________________________
CLERK

D. C. Docket No. 04-00005-CV-HLM-4

JIMMY LEDFORD,
LARRY O'DELL,
BRYAN WALKER,
DYNAVISION GROUP, LLC,
SIGNATURE LEASING, LLC,

Plaintiffs-Appellants
Cross-Appellees,

versus

SHELBY PEEPLES, JR.,
PFLC, LLC,
INTERNAL MANAGEMENT, INC.,

Defendants-Appellees
Cross-Appellants.

________________________

Appeals from the United States District Court
for the Northern District of Georgia
_________________________
(May 6, 2010)
Before TJOFLAT, EDMONDSON and GIBSON,* Circuit Judges.

TJOFLAT, Circuit Judge:

ON PETITION FOR REHEARING

In our original disposition of the appeal and cross-appeal in this federal

securities fraud case, Ledford v. Peeples, 568 F.3d 1258 (11th Cir. 2009), we

affirmed the district court’s dismissal of plaintiffs’ claims on summary judgment

and reversed the court’s refusal to grant the defendants sanctions against plaintiffs’

attorneys under the Private Securities Litigation Reform Act, directing that

sanctions be imposed by the district court on remand. Plaintiffs have petitioned the

court for rehearing, contending that we applied the wrong standard in reviewing

the district court’s sanctions decision and erred in mandating that sanctions be

imposed. After considering the plaintiffs’ petition for rehearing and the parties’

subsequent submissions, we grant the petition in part and deny it in part.

The opinion that follows replicates the original opinion in parts I, II, IV, and

V. Part III, which addresses the district court’s subject matter jurisdiction, and part

VI, which addresses sanctions issues, are modified.

*
Honorable John R. Gibson, United States Circuit Judge for the Eighth Circuit, sitting by
designation.
 In this case, two parties, X and Y, each owned a fifty percent interest in a

limited liability company that manufactured and sold carpets. X provided the

financing; Y ran the company and marketed its product. The parties had a buy-sell

agreement that enabled either party to buy out the other at any time by offering to

purchase the other’s interest in the company at an offered price. After receiving an

offer, the offeree would have thirty days in which to accept the offer or elect to

purchase the offeror’s interest at the offered price.

Y offered to purchase X’s interest for $3.5 million. X demanded to know

whether Y would be borrowing the funds from Z, who earlier had expressed an

interest in purchasing the company. Y said that neither Z nor anyone else would be

providing the money. X asked Z if it was financing Y; Z said no.

X, unable to operate the factory and market its product without Y or

someone with Y’s expertise, had to sell and therefore accepted Y’s offer. Prior to

the date set for the closing, however, X told Y that it would not go forward with

the closing unless Y represented that no third party was providing the funds to pay

X. Y responded that it had no obligation to disclose the source of its funds and that

X was bound by contract to transfer its interest to Y unconditionally. X tacitly

agreed by appearing at the closing and transferring its interest to Y.

X subsequently learned that Z had provided the purchase price and,

3
following the closing, had acquired the factory’s assets and hired Y to run the

business. After discovering Z’s involvement, X took Y to court. In a complaint

filed in state court, X alleged that Y breached a fiduciary duty to tell it that Z had

financed the purchase of its interest, and moreover, that Y’s failure to disclose Z’s

involvement fraudulently induced X to sell its interest to Y.1 X also brought suit

against Z in federal district court, the case now before us, claiming that Z violated

federal securities law, state securities law, and state common law by denying

involvement in the transaction and causing X to sell its interest to Y.

X lost both cases on summary judgment.2 Both courts concluded that Y’s

alleged misrepresentation about Z’s involvement in the buy-out did not cause X to

sell its interest. Rather, X sold because it was in X’s economic self-interest to do

so. X needed Y’s skills; had X purchased Y’s interest, it would have had no one to

run the carpet factory or to market its product. X therefore had no economically

viable option but to sell.

After the district court granted Z summary judgment, Z moved the court to

1
Invoking the same fiduciary duty and fraudulent inducement theories, X also claimed that Y
had wrongfully obtained the parcel of real estate on which the carpet factory was located.
2
X lost its state case with the exception of a claim against Y involving the real estate referred to
supra note 1. That claim is still pending in state court.

4
sanction X and its counsel under the Private Securities Litigation Reform Act

(“PSLRA”), Rule 11 of the Federal Rules of Civil Procedure, 28 U.S.C. § 1927,

and the court’s inherent power on the grounds that X neither produced, nor at any

time had available, any evidence to support its allegation that Z’s conduct caused it

to sell its interest rather than buy Y’s interest. The court denied Z’s motion.

X appealed the district court’s decision rejecting its claims. Z cross-

appealed the court’s denial of sanctions under the PSLRA. We initially disposed

of these appeals in our decision issued on May 22, 2009. See Ledford v. Peeples,

568 F.3d 1258 (11th Cir. 2009). Following X’s Petition for Panel Rehearing and

Rehearing En Banc,3 we issue this opinion.4 On X’s appeal, we dismiss part of X’s

claims for lack of subject matter jurisdiction and affirm the district court’s

3
In our original disposition of the appeals, we dismissed some of X’s claims for lack of subject
matter jurisdiction and affirmed the district court’s judgment as to the remainder. We also
concluded that Z was entitled to sanctions on a number of X’s claims pursuant to Fed. R. Civ. P.
11(b)(2) and (3) and remanded the case for their imposition. In X’s Petition for Panel Rehearing
and Rehearing En Banc, X claimed error in our disposition of the sanctions. We initially denied
this petition, but this opinion withdraws that denial and in effect grants panel rehearing. In the
interim, we asked the parties to submit letter briefs on the issues of whether (1) under the
PSLRA, the court of appeals, like the district court, has the responsibility to assess whether
sanctions are warranted under each of the subparts of Rule 11(b) or is constrained to the parties’
definition of the scope of the 11(b) issues on appeal, and (2) sanctions pursuant to 11(b)(2)
would be appropriate in this case. This opinion reflects our consideration of the parties’ letter
briefs.
4
Aside from the discussion of Z’s cross-appeal of the court’s denial of sanctions under the
PSLRA in part VI, infra, which we revised in light of X’s Petition for Panel Rehearing and
Rehearing En Banc, this opinion is materially the same as the May 22, 2009, opinion. The
section on jurisdiction in part III, infra, has also been modified, but not materially.

5
judgment as to the remainder. On Z’s cross appeal, we conclude that Z is entitled

to sanctions on some of X’s claims and that the district court needs to make

reviewable findings on other of X’s claims. This opinion is organized as follows.

Part I identifies X, Y, and Z and sets out the events that have given rise to this

controversy.5 Part II canvasses the litigation as it evolved in state court and spread

to federal court; describes the state trial and appellate courts’ disposition of X’s

claims against Y and the district court’s disposition of X’s claims against Z; and,

after that, delineates the issues that X’s appeal to this court presents. Part III

addresses sua sponte whether the district court had jurisdiction to hear some of the

federal securities law claims X brought against Z and concludes that it did not.

Part IV assesses the merits of X’s appeal as to the remaining securities law claims.

Part V examines X’s claim that Z aided and abetted Y’s breaches of fiduciary duty

towards X. Part VI explains why the district court should have sanctioned X’s

counsel for bringing some of X’s claims and remands to the district court to make

reviewable findings on other of X’s claims. Part VII concludes.

I.

5
In doing so, we are mindful that we are reviewing a summary judgment. Thus, the facts we
recite in portraying the relevant events are those established by the evidence, taken in the light
most favorable to the non-movant, X, and the inferences reasonably drawn therefrom. Watkins
v. Ford Motor Co., 190 F.3d 1213, 1216 (11th Cir. 1999).

6
 A.

X is DynaVision Group, LLC (“DynaVision”)6 and its principal owners,

Jimmy Ledford, Larry O’Dell, and Bryan Walker.7 Y is Brenda Smith, Robert

Thomas, and Bryan Ownbey. Z is Shelby Peeples.

In July 1998, Paul Walker, Bryan Walker’s father, approached Smith,

Thomas, and Ownbey, experienced managers in the carpet manufacturing industry

in Dalton, Georgia, with the idea of forming a company to manufacture and sell

carpets to hotels, motels, restaurants, and others engaged in the hospitality

business. Soon thereafter, Smith, Thomas, Ownbey, and Paul Walker formed

Signature Hospitality Carpets, LLC (“Signature”), dividing the company’s interests

equally between DynaVision on one hand and Smith, Thomas, and Ownbey on the

other.8

6
DynaVision and the other LLCs involved in this case were organized under the Georgia
Limited Liability Company Act, O.C.G.A. §§ 14-11-100, et seq.
7
Ledford, O’Dell, and Walker each owned 29% of DynaVision. Lamar Dixon and Dan Bowen
owned the remaining 13% but had no active participation in the events that gave rise to the
litigation at hand. Under Georgia law, the ownership rights of the members of a limited liability
company are referred to as interests, rather than shares, which indicate ownership rights in a
corporation. See O.C.G.A. § 14-11-101 (defining “[l]imited liability company interest” as “a
member’s share of the profits and losses of a limited liability company and a member's right to
receive distributions”); O.C.G.A. § 14-2-140 (defining “shares” as the “units into which the
proprietary interests in a corporation are divided”).
8
Smith, Thomas, and Ownbey decided to share equal ownership of their one-half interest in
Signature; thus, each owned one sixth of Signature.

7
 Under Signature’s operating agreement, Smith, Thomas, and Ownbey

managed the company, and DynaVision provided the capital.9 Signature sold

carpet to hospitality customers—mainly through contacts that Smith, who was well

respected in the industry, had previously established—and arranged for

manufacturers in the Dalton area to fill the orders. DynaVision provided the funds

that Signature needed to pay the manufacturers by establishing a $200,000 line of

credit at a bank near Dalton, the First National Bank of Chatworth (“FNBC”).10

Signature initially operated out of rented office space; once the company

established itself as a going concern, however, its owners decided to find their own

manufacturing plant. Anticipating that they would be able to acquire a suitable site

in the Dalton area, DynaVision, Smith, Thomas, and Ownbey entered into a new

operating agreement (the “Operating Agreement” or “Agreement”), on May 6,

1999. The Agreement referred to Smith, Thomas, Ownbey, and DynaVision as

Signature’s “Members,” and Smith, Thomas, and Ownbey as the “Active

9
The Georgia Limited Liability Company Act defines an “Operating Agreement” as “any
agreement, written or oral, as to the conduct of the business and affairs of a limited liability
company that is binding upon all of the members.” O.C.G.A. § 14-11-101. Signature,
DynaVision, Smith, Thomas, and Ownbey entered into the operating agreement under which
Smith, Thomas, and Ownbey commenced running the company on July 9, 1998. This initial
agreement is not part of the record.
10
Ledford and O’Dell, who managed DynaVision’s affairs, arranged for the line of credit. Paul
Walker, who had formed DynaVision, played a limited role in its affairs. He looked after his son
Bryan’s interest in the company, and frequently spoke for Ledford and O’Dell as well as Bryan.

8
Members.”11 It created a six-member Board of Directors, with three directors

appointed by DynaVision and three by the Active Members. The Active Members

appointed themselves; DynaVision appointed its accountant, Edward Staten, and

left two of its seats vacant. The Operating Agreement required the Board to

unanimously authorize all of Signature’s actions. This meant that DynaVision,

through Staten, could have blocked any action the Active Members wanted to take.

The Board rarely met, however, face to face or otherwise, so the Active Members

ran Signature’s operations without objection.

Under the Agreement, Smith was the company’s president and the person in

charge of marketing, Thomas was the vice-president of sales, and Ownbey was the

vice-president of manufacturing.12 A non-solicitation clause provided that if a

Member sold his or her interest, that member could not for one year thereafter

“call, solicit, or fulfill orders” from “customers or prospects” of Signature.13 In

11
The district court, in its order granting summary judgment, used the term “Active Members”
to refer to Smith, Thomas, and Ownbey in the aggregate, and both sides have continued the use
of this term in briefing the case to this court. We adopt this use of this term for the remainder of
this opinion.
12
Smith, Thomas, and Ownbey worked for Signature in these capacities as full-time employees,
terminable at will on the vote of four Board members. Since the Board had but four members,
there was no likelihood that the employment of an Active Member would be terminated unless
DynaVision completely filled the three Board positions it controlled.
13
The non-solicitation clause appears in Article Ten of the Agreement, “Employment of Active
Member; Restrictive Covenant; Non-Solicitation; No Publication of Confidential Information,”
as § 10.4. It reads, in pertinent part, as follows:

9
reality, the clause applied only to the Active Members, since they were the ones

who possessed Signature’s customer contacts.14

The Agreement also contained a buy-sell provision, which is at the center of

the present controversy. This provision is contained in Article Nine of the

Agreement, entitled “Transfer and Assignment of Member Interests.” Section 9.5,

“Mandatory Put and Call,” reads as follows:

At any time Dyna-Vision or the Active Members by majority vote
within that group, may set a price per percentage Interest and give
written notice of that price to the other group, (the “Notice of Offer to
Sell or Purchase”). The Members receiving the Notice of Offer to Sell
or Purchase shall have thirty (30) calendar days to decide whether to
sell all their Interest at that price or to purchase all the Interest of the
group giving Notice of Offer to Sell or Purchase at the Price set forth
in the Notice of Offer to Sell or Purchase. If the Members receiving

No Solicitation of Company Employees or Customers. In the event a Member
sells his Interest in the Company, the Member . . . for a period of one (1) year
after the sale of the Interest, shall not . . . call, solicit or fulfill orders from
customers or prospects who have been contacted by the Company within twenty-
four (24) months prior to the sale of the Interest . . . for the purpose of inducing
those customers or prospects to cease doing business with the Company or to
induce those customers to do business with another in competition with the
business of the Company. . . .

On its face, § 10.4 appears to apply to DynaVision as well as the Active Members. In reality, it
applied only to the Active Members. DynaVision had no contact with Signature’s customers
and, if it sold its interest, lacked the know-how to compete with Signature. In this opinion, we
therefore treat § 10.4 as applying only to the Active Members.
14
DynaVision needed the non-solicitation clause to protect its investment. Without the clause,
the Active Members, especially Smith, who had most if not all of the customer contacts, could
leave the company and immediately compete with Signature, thereby substantially depreciating
the value of DynaVision’s interest in Signature.

10
 the Notice of Offer to Sell or Purchase fail to make an election . . . ,
the Members receiving the Notice of Offer to Sell or Purchase shall
have to sell their Interest at the price set forth in the Notice of Offer to
Sell or Purchase.

Following the execution of the Operating Agreement, the parties located a

site for Signature’s manufacturing plant and offices on Green Road in Chatsworth,

Georgia, a short distance from Dalton. To purchase the site, which included a

building that could be converted to accommodate Signature’s requirements, the

Active Members formed another limited liability company, Signature Leasing,

LLC (“Leasing”), with Ledford, O’Dell, and Bryan Walker.15 On October 19,

1999, Leasing purchased the property (“Green Road Property”) with the proceeds

of a $630,000 loan from Dalton Whitfield Bank. Bank employee Cynthia Trammel

managed the paperwork for the loan.16 Once the building was equipped to

manufacture carpets, Signature moved in.17

15
Smith, Thomas, and Ownbey owned 50% of Leasing in equal shares; Ledford, O’Dell, and
Walker owned 50%, presumably in equal shares.
16
According to Trammel on deposition in the state court case, Smith, Thomas, Ownbey,
Ledford, and O’Dell, whom the bank considered to be Leasing’s principal owners, signed the
note and thereby guaranteed Leasing’s loan. Bryan Walker owned the same interest in Leasing
as Ledford and O’Dell. Why he was not required to sign the note and guarantee the loan is not
clear from the record. There is an inference, however, that Paul Walker had a significant
relationship with the bank and that the bank, acceding to his wishes, was willing to make the
loan without Bryan Walker’s participation.
17
Leasing did not give Signature a formal lease for the property. According to Ledford on
deposition in the state court case, Signature paid Leasing each month for use of the property, but
he did not indicate the amount of the payments.

11
 Signature then looked to FNBC for working capital. Over a period of

several months following its occupancy of the Green Road Property, Signature

received several unsecured loans from the bank.18 In October 2001, Signature

asked FNBC for a loan that would pay off its FNBC loans and the balance due on

the Dalton Whitfield Bank loan and provide Signature with additional working

capital. In total, Signature needed $911,000.

At Signature’s request, Trammel, who had moved from Dalton Whitfield

Bank to FNBC the year before, handled the transaction. Trammel informed

Signature that, subject to the approval of the FNBC’s board of directors, the bank

would make the loan on the following conditions: Signature would give the bank a

deed to secure debt on the Green Road Property and Signature’s carpet-

manufacturing machines; Smith, Thomas, Ownbey, Ledford, and O’Dell (the

“Guarantors”) would sign the note and thus guarantee its payment.19 Signature and

the Guarantors agreed to these conditions, the bank’s board approved the loan, and

18
Although the notes Signature gave the bank were neither made part of the record nor
published via witness testimony, we infer that they were unsecured. We draw this inference
because the bank significantly lowered the interest rate it was charging Signature when it
refinanced Signature’s debt with a loan secured by a deed to secure debt on the Green Road
Property.
19
Trammel apparently agreed to leave Bryan Walker out of the transaction for the same reason
he was not required to sign the note for the $630,000 loan the Dalton Whitfield Bank made to
Leasing so it could purchase the Green Road Property. See supra note 16.

12
Trammel proceeded to prepare for the closing.

Trammel’s first task was to have FNBC’s counsel, Todd McCain,20 examine

the title to the Green Road Property. After examining the title, McCain sent

Trammel an opinion indicating that Leasing, not Signature, owned the Green Road

Property. Signature therefore could not give the bank a deed to secure the debt

with the property unless and until Leasing conveyed the property to Signature.

Trammel overlooked the need for the conveyance, and the loan closed on

October 24, 2001 without Leasing having conveyed the property to Signature.

Therefore, as part of this transaction, Signature gave FNBC a deed to secure debt

for real property it did not own.21 A month or so later, Trammel happened to read

McCain’s opinion, noted that Leasing, not Signature, owned the Green Road

Property, and realized that Signature’s deed to secure the debt was worthless.

Something had to be done, so Trammel called McCain.22 In mid-January 2002,

McCain sent Trammel the document needed to solve the problem, a warranty deed

20
McCain was the principal attorney in the McCain Law Firm, located in Dalton.
21
The note and deed to secure debt were not made part of the record before the district court and
thus are not before us.
22
Trammel spoke to McCain’s secretary in his absence. Trammel’s testimony on deposition in
the state court case is muddled as to precisely what Trammel said to the secretary. What is clear
is that, in response to Trammel’s call, McCain’s office sent Trammel a warranty deed, which
would convey the property from Leasing to Signature, for Leasing’s execution.

13
conveying the Green Road Property from Leasing to Signature.

Trammel then contacted Smith, informing her that she and the other

Guarantors would have to return to the bank and sign a “document” that had been

neglected at the closing. The document was the warranty deed, although Trammel

did not explain the document’s significance to Smith at that time. Trammel asked

that Smith pass along this message to the other Guarantors, which Smith did.

Smith, Thomas, and Ownbey promptly went to the bank and signed the

document before a notary public, Angela Garland, and in the presence of a witness,

Trammel. Smith read the document, which bore the heading “Warranty Deed,”

and recognized its significance—that Leasing was conveying the Green Road

Property to Signature to satisfy one of the conditions on which the bank had made

the loan.

Ledford and O’Dell did not appear to sign the document, so Trammel asked

Smith to remind them to do so. Smith thereupon called Ledford and asked him to

go to the bank and sign what she described as “a document that had been left out of

the closing.” She did not inform Ledford of the document’s legal significance.23

23
Ledford, apparently curious about why he needed to sign a document at the bank, called
Trammel after his conversation with Smith. Trammel told him that there was some “paperwork”
that needed to be signed. She did not inform Ledford of the paperwork’s legal significance, and
Leford made no further inquiry on this point.

14
Smith also asked Ledford to contact O’Dell and remind him to sign the document.

Ledford did so, and, in early February, he and O’Dell separately went to the bank

and signed the warranty deed, also before Garland and Trammel. Trammel

forwarded the executed warranty deed to the McCain firm, which filed it with the

Clerk of the Murray County Superior Court on February 7, 2002.

Ledford and O’Dell insist that they did not know that they were signing a

warranty deed; moreover, they claim that they had no understanding of the legal

significance of a warranty deed and would not have signed the instrument had they

known that it transferred the Green Road Property to Signature.24

B.

In December 2001, Shelby Peeples, a Dalton businessman with interests in

the carpet-manufacturing industry, contacted Paul Walker and Ledford and

expressed an interest in purchasing Signature. Paul Walker, Ledford, and Peeples

had been involved in several business ventures and were on friendly terms.25 The

three men met at least once during December to discuss the possible sale of

24
Both men testified to this effect on deposition in the state court case and in the district court
proceeding now under review.
25
The Peeples and Walker families had strong personal ties. Bryan Walker, on deposition in the
state court case, testified that “the Peeples are like family to me, and Shelby’s son is my best
friend and has been forever.”

15
Signature.26 At some point, Walker informed the Active Members that Peeples had

shown an interest in purchasing Signature.

On January 9, 2002, Paul Walker, Ledford, O’Dell and the Active Members

met and agreed to offer Signature and the Green Road Property to Peeples for

between $10–12 million.27 They designated Paul Walker to represent them in

negotiations with Peeples. Later that day, Paul Walker, Thomas, and Ownbey met

with Peeples and some of his associates. Walker informed Peeples that the Green

Road Property was owned by a separate company but offered to sell both Signature

and the property for $12 million. Peeples rejected the offer. Walker countered

with an offer of $10 million. Peeples rejected that offer as well. Peeples then

asked Walker if he could meet separately with him and, after that, with the Active

Members. Walker said yes but that Peeples could meet with the Active Members

only once. Walker, having made that point clear, met with Peeples to discuss the

matter. Peeples offered him $2 million for DynaVision’s interest. Walker

apparently felt insulted, so Peeples increased the offer to $2.5 million. Walker

26
In these and subsequent meetings involving the disposition of Signature or the Green Road
Property, Paul Walker acted for his son Bryan. He also appeared to speak for O’Dell in his
absence. See supra note 10.
27
The $10–12 million figure was based on the Active Members’, Walker’s, and O’Dell’s off-
hand evaluation of the worth of the company absent a formal appraisal. Ledford believed the
company was worth more and opposed selling the company.

16
rejected it out of hand, and the discussion ended.

As January wore on, Walker met with Peeples once or twice a week to

discuss some business ventures in which they were involved. During some of their

meetings, Walker asked Peeples whether he had been negotiating with the Active

Members. Peeples said no, but his denial was false. Peeples and the Active

Members had been meeting all along to discuss ways that Peeples could acquire

DynaVision’s interest in Signature without dealing directly with DynaVision.

Moreover, with the assistance of his lawyer, Peeples had memorialized the

substance of his discussions with the Active Members in a letter, which he faxed to

the Active Members on January 21.

The letter mapped out the steps that Peeples and the Active Members would

take. First, the Active Members would acquire DynaVision’s interest in Signature

using the Mandatory Put and Call provision of the Operating Agreement.

According to the letter, “on terms and conditions to be set forth in a definitive,

legally binding, written agreement, . . . a company owned or controlled by . . .

Peeples” would loan $3.5 million to the Active Members “for the purpose of

enabling the Active Members to complete the acquisition of the DynaVision

Interest.” This loan would be made after the Active Members acquired

17
DynaVision’s interest.28 Next, Peeples would purchase all of Signature’s assets

from the Active Members, forgive the $3.5 million loan, and pay the Active

Members $3 million.29 The Active Members would remain as managers of

Signature under five-year employment contracts, with annual salaries starting at

$160,000 and increasing each year and possible bonuses based on Signature’s

performance.30

The letter contained sections entitled “Confidentiality” and “No Discussions

with Others.” The “Confidentiality” section provided, in pertinent part:

None of the parties hereto will . . . (1) disclose or publicize in any
manner (except as may be required by applicable law) that discussions
relating to matters covered [in this letter] or the Loan or the
Acquisition are taking place between or among the Active Members,
the Peeples Group, Signature and/or Buyer, or (2) reveal the terms or
proposed terms of either this Letter or the Loan . . . to any person or
entity other than representatives [of Peeples who would be conducting
a due diligence investigation into Signature after the Active Members
purchased DynaVision’s interest].

28
The loan would be secured by “a first priority security interest in . . . all of the issued and
outstanding interests in Signature [and] a security interest in and to all assets of Signature.”
29
The Active Members arrived at the $3 million price for their interest and the $3.5 million price
for DynaVision’s interest based on their unappraised evaluation of Signature’s worth.

30
The bonus, to be shared equally amongst the Active Members, would “equal . . . twenty
percent (20%) of the amount by which the net pre-tax profits of [Signature] exceeded One
Million Five Hundred Thousand Dollars ($1,500,000) on an annual basis.” In 2001, Signature
paid the Active Members around $130,000 per year. Under the Operating Agreement, they were
eligible for collective bonuses of 20% of all of Signature’s yearly profits, if between
$500,000–$1,000,000, and 25%, if between $1,000,000–$2,000,000.

18
The “No Discussion” section stated, again in pertinent part:

[N]one of the Active Members . . . will, directly or indirectly (i)
negotiate or discuss with any other person or entity any transaction
involving any business combination involving Signature, or (ii) solicit
. . . negotiate . . . or accept any offer, bid or proposal from any other
person or entity respecting any transactions involving a sale of assets
of Signature (except for sales of property in the ordinary course of
business) or any other business combination involving Signature, or
(iii) disclose or reveal . . . [information related to Signature’s financial
condition or methods and plans of operations], other than in the
ordinary course of business, to any person or entity not a party to this
Letter in connection with the type of transactions described in clauses
(i) and (ii) above . . . . In addition, the Active Members will
immediately cease and cause to be terminated any previously
undertaken or ongoing . . . negotiations with any other person or entity
with respect to any transaction of the type described in the preceding
clauses (i) and (ii) above.

The letter stated additionally that, “to the extent of any conflict in the

provisions of this Letter and the provisions of the Signature Operating Agreement,

the provisions of the Signature Operating Agreement shall prevail and the

conflicting provision(s) of this Letter shall be void and of no effect whatsoever.”

After the Active Members received the letter, they continued their

negotiations with Peeples, which, toward the end of January or early February, led

to a verbal understanding. As indicated in the January 21 letter, Peeples would

loan the Active Members $3.5 million to purchase DynaVision’s interests. If the

purchase materialized, the Active Members would cause Signature to sell its assets

19
to Peeples.

On February 8, Smith summoned Ledford and O’Dell to discuss tensions

between Ledford and O’Dell and the Active Members. Toward the end of this

meeting, Smith presented Ledford and O’Dell with the Mandatory Put and Call

pursuant to § 9.5 of the Operating Agreement. The Put and Call informed

DynaVision that the Active Members would purchase its interest in Signature for

$3.5 million unless DynaVision opted to purchase the Active Members’ interests

for $3.5 million within thirty days. The Put and Call also stated that if DynaVision

elected to purchase the Active Members’ interests, it would release the Active

Members from their obligations under the Operating Agreement’s non-solicitation

clause. Ledford asked Smith whether Peeples or anyone else would be providing

the purchase price. Smith’s reply, according to Ledford, was that we “are doing

this on our own.”31

31
Ledford recalled his and O’Dell’s reaction to Smith’s presentation of the Put and Call in
testifying on deposition in the state court case:

HORST [Counsel for the Active Members]: So they [the Active Members] talked
to you about these Crescent Extrusions invoices, and then after that discussion,
they hand you the February 8th put-and-call letter?
LEDFORD: Well, it was — Larry [O’Dell] and I were sitting at the table, and
Brenda [Smith] said something to the effect, “we may as well do this now,” or
something. I don’t know. She was standing at that corner of her desk and she
handed the put-and-call to us. I don’t know if we had stopped discussing the
Crescent invoices. I don’t know if we had resolved any — I don’t know. I just
know that we discussed that and then we got the put-and-call.
HORST: What was your reaction when you got the put-and-call?

20
 On February 22, DynaVision's lawyer, H. Greely Joiner, Jr.,32 wrote a letter

to the Active Members stating that because § 9.5 of the Operating Agreement

precluded the imposition of conditions on a Put and Call, DynaVision would not

honor the Put and Call with the non-solicitation clause condition. The Active

Members tacitly agreed. On February 25, they presented DynaVision with a new

Put and Call at the same price, $3.5 million, but without the requirement that

DynaVision void the non-solicitation clause. Paul Walker and DynaVision treated

this Put and Call as valid.

DynaVision’s principals were not pleased. They wanted Signature to

continue on, under the Active Members’ management, because they believed that

in time the company would become increasingly profitable. Nonetheless, they

LEDFORD: I was shocked.
HORST: Why?
LEDFORD: I thought we had a good partnership.
HORST: What did you say to her when you got it?
LEDFORD: Well, after we read it, I asked if there was anybody else involved or a
third party funding it, and she said “No, this is us. We’re doing this on our own.”
I said, “Is there any chance that this could be undone?” And I think Larry
[O’Dell] made the comment that “This partnership is over with.” . . . .
HORST: What else did Mr. O’Dell say at that meeting other than “This
partnership is over with?”
LEDFORD: I don’t recall.
HORST: Didn’t he say something to the effect that, “Oh, hell, Jim [Ledford], you
know who’s funding this and he’s going to screw us”?
LEDFORD: He could’ve said something about that. I’m sure we had a real good
idea who was funding it. . . .
32
Joiner is a sole practitioner and owner of H. Greely Joiner, LLC.

21
recognized that they had two options—buy or sell—and thirty days to decide.

They did not want to sell because, as the prices ($12 million and $10 million) Paul

Walker quoted to Peeples in January indicated, they believed their half-interest in

Signature was worth substantially more than $3.5 million. But they did not want to

buy either because they lacked the contacts in the hospitality industry necessary to

enable them to market Signature’s products with any measure of success. Without

the Active Members—particularly Smith, with her extensive contacts in the

hospitality industry—DynaVision’s principals knew they could not operate

Signature at a profit.33 Faced with this dilemma, DynaVision’s principals looked
33
Ledford, O’Dell, and Paul Walker all made statements to this effect on deposition in the state
court case and, later, in the district court in this case. In his deposition in the state court case,
Ledford testified:

HORST: At any time did you say, “Hey, I'll kick in $1 million or $100,000 or
some other amount if we can get some other people to kick in some money to buy out
Bob [Thomas], Brenda [Smith] and Bryan [Ownbey]”?
LEDFORD: We discussed — we discussed that, but the first thing was marketing.
If we had marketing, we would have done — if we could have secured people to
do the marketing, we would have been interested.
HORST: So you needed people who could run the business like Bob, Brenda and
Bryan had?
LEDFORD: We needed people that could run the business, yes, sir.
HORST: Because you within Dynavision didn’t have the competency or the skill
set to run Signature Hospitality?
LEDFORD: I didn’t have the experience with the customer base, no sir.

In his deposition in the district court case, Ledford testified:

SINKFIELD [Counsel for Peeples]: . . . it was marketing help that was the key
factor in your decision to sell rather than buy. Is that a fair statement?
LEDFORD: Had we been able to retain Brenda, we would have purchased the
company.

22
 SINKFIELD: Is it fair to say that marketing help was the key factor in your
decision to sell rather than buy?
LEDFORD: The lack of a marketing group forced us to sell the company.

In his deposition in the state court case, O’Dell testified:

HORST: Now, Dynavision had the money to pay three and a half million dollars
to the active members, didn’t it?
O'DELL: I could have got the money
HORST: Why didn’t you . . . .
O'DELL: Without an operating group, a managing group, that would be most
foolish on my part, in my decision or my opinion.
...
HORST: So you didn’t think that if Dynavision bought out Bob, Brenda, and
Bryan, you guys would have the ability to compete with them?
O’DELL: Not without qualified people in that field, no.
HORST: The Dynavision people were not qualified people in that field?
O’DELL: No, they weren’t.

In his deposition in the district court case, O’Dell testified:

SINKFIELD: You are running out of time, correct?
O'DELL: Uh-huh.
SINKFIELD: Now, if you bought out the Active Members for 3.5 to give yourself
time to complete [a deal with a potential third-party buyer for $8 million], that's
what, about a million dollars differential . . . . that you could make just on turning
it over . . . did you ever consider doing that?
O'DELL: Well, that would have been a heck of a gamble to take. I mean, you
could have, obviously, looked at it that way and thought well, I'll maximize this in
another 30 days or 60 days but that would have been a gamble you were taking. I
could have been left with a company without any managers, without anyone that
knew anything about marketing. No, that was — that — I don't think that was an
option we could take. . . .
SINKFIELD: You thought about, but you did not want to take the risk of buying
the Active Members' interest on the potential that you could turn it and either
make a profit or find somebody who could run it in time to keep it from going
under. Is that a fair statement?
O'DELL: Correct.

In his deposition in the state court case, Walker testified:

HORST: Well, if you thought the company was worth more than the put-and-call

23
for an immediate buyer who would be willing to pay $10 million for the company.

If they could find a buyer willing to pay as much as $8.5 million, they would opt

to buy out the Active Members for $3.5 million. The $5 million they would net

was what they thought their half of Signature was worth.

Ledford and O’Dell contacted three firms, Mohawk Carpets, Clay Miller

offer, were you interested in trying to find somebody to lend you the money or for
DynaVision to raise the money to buy out the company?
WALKER: We would have had to have found a marketing group to replace the
existing marketing group. So its [sic] more than just the money, its [sic] a matter
of also finding a group that can continue to grow the company.
HORST: You needed to find a marketing group because Dynavision did not have
anybody that was associated with it that had the skill set that Bob, Brenda, and
Bryan did; correct
WALKER: That is correct . . . .
HORST: So if you thought the offer that the active members made on February
8th of three and a half million dollars was too low, why didn't Dynavision buy the
active members out of Signature Hospitality?
WALKER: I don't think that a marketing group could be found in the short period
that they had to look for one.

In his deposition in the district court case, Walker testified:

SINKFIELD: So to your knowledge, one, you did not seek to borrow money, get
a core investor, or anyone to assist you in buying out the Active Members Group;
is that correct? You didn't personally do that?
WALKER: No.
SINKFIELD: Why not?
WALKER: There is no need to buy out the Active Members without a marketing
group. The ability to obtain a marketing group first was necessary, since none of
the Active — none of the Dyna-Vision Group were a part of the everyday
management or marketing of Signature Hospitality.
SINKFIELD: Is there any other reason they you did not personally seek a
financial source to assist you in buying out the Active Members' interest?
WALKER: That would have been the only reason.

24
Carpets, and Matel Carpets, in their search for a buyer. They initially proposed a

$10 million price for Signature, eventually lowering the price to $8.5 million as the

thirty-day Put and Call period drew to a close. As part of his pitch to sell

Signature, Ledford told Jerry Thomas, Matel’s owner, that Thomas ought to buy

Signature to protect his company from Signature’s competition should Signature

fall into Peeples’s hands.34 Ledford stressed “the dynamics of what might happen

should a . . . company like [Signature] fall into the hands of . . . the Peeples

family.”35 But Thomas was not persuaded, nor was anyone else.36 With time

running out, Ledford asked Smith if she would be willing to stay on and run the

company if he and the others bought the Active Members’ interests. Smith was not

interested.

Paul Walker and DynaVision’s principals discussed among themselves the

possibility that Peeples had financed the Active Members’ February 25 Put and

34
Ledford and O’Dell identified the persons they contacted and spoke to at these three firms.
The record does not disclose what was said during the conversations with Mohawk and Clay
Miller; all that the record reveals is what was said in conversation with Jerry Thomas at Matel.
We infer that in making their sales pitches to Mohawk and Clay Miller, Ledford and O’Dell
urged them to consider purchasing Signature in order to avoid competition from Peeples.
35
The quotation is taken from Ledford’s testimony on deposition in the state court case.
36
Thomas considered the possibility of buying Signature if the Active Members remained with
the company, so he met with them to explore that possibility. They were not interested, so he
abandoned the idea.

25
Call. Motivated by these suspicions, Walker confronted Peeples directly. Peeples

denied any involvement.37 At one point, Walker warned Peeples that if he was

involved, he would not be getting the Green Road Property, because Leasing

owned it, not Signature.

C.

On March 27, the thirty-day election period provided by the Put and Call

expired. DynaVision had not exercised its option to purchase the Active Members’

interests within the election period; consequently, it had to sell its interest for the

$3.5 million Put and Call price. On March 28, DynaVision and the Active

Members began to negotiate the finer terms of the sale.

A few days later, Joiner, presumably representing Ledford, O’Dell, and

Bryan Walker as one-half owners of Leasing, asked Smith if he could draw up a

lease for the Green Road Property between Leasing, as lessor, and Signature, as

lessee. Smith responded that Signature, not Leasing, owned the property. Joiner

checked the title and discovered the warranty deed from Leasing to Signature that

had been recorded on February 7. Paul Walker and Ledford then demanded that

the Active Members consent to a conveyance of the property back to Leasing. The

37
Paul Walker also had previously suspected that Peeples was behind the Active Members’
February 8 Put and Call and confronted him. Peeples had denied any involvement.

26
Active Members refused, explaining that it had been everyone’s intent to transfer

the property to Signature so that Signature could go forward with the FNBC loan

transaction; Signature had to have title to the property in order to give the bank a

valid deed to secure debt.

Meanwhile, at a meeting of DynaVision’s members, the members

unanimously adopted resolutions authorizing O’Dell and Ledford to “negotiate,

execute and convey the interests of Dyna-Vision in Signature . . . to Smith,

Thomas, and Ownbey . . . .” The resolutions went on to allow O’Dell and Ledford

to set certain conditions on the conveyance including:

the repayment of all loans due any [DynaVision] member or any
affiliate of any member; the release of all [DynaVision] members
from any guarantees issued on behalf of Signature to any financial
institution or vendor; the repayment of any and all funds due Dyna-
Vision by Signature with respect to any distributions which had not
been authorized by the Board of Directors of Signature; and a long-
term Lease Agreement between Signature and Leasing, with a
minimum term of five (5) years at a rental rate of $11,000 per month
plus taxes, insurance, maintenance and repair.

The minutes of this meeting indicate that DynaVision’s members knew that the

transaction would close on April 30. They provided that because O’Dell,

DynaVision’s chairman, would be out of town that day, Ledford would act for

DynaVision in his place.38
38
The minutes also reflect that Ledford, O’Dell, and Bryan Walker simultaneously held a
meeting of Leasing’s members to discuss the status of the Green Road Property. Smith,

27
 After this meeting adjourned, Ledford and O’Dell met with Joiner and

spelled out several conditions the Active Members would have to meet before

closing. Joiner informed the Active Members of these conditions in an April 11

letter to their attorney, Douglas Krevolin. One called for the Active Members and

DynaVision to execute an agreement Joiner had drafted and enclosed in his letter.

The agreement contained the following covenant, presumably designed to smoke

out the Active Members’ involvement with Peeples:

[e]ach Assignee [i.e., Active Member] does hereby represent and
warrant to the Assignor [i.e., DynaVision] that such Assignee has
acquired the Interest from the Assignor for investments solely for said
Assignee’s own account . . . without any intention of conveying . . .
any portion of such Assignee’s Interest, and without the financial
participation of any other Person in acquiring the Assignee’s Interest.

Another condition required the conveyance of the Green Road Property from

Signature to Leasing.

Krevolin responded to Joiner’s April 11 letter with a letter dated April 16.

He informed Joiner that the Active Members would not consent to either of the two

conditions. Responding to the threat implicit in Joiner’s letter—that DynaVision

would not close if the Active Members refused to represent that they were

Thomas, and Ownbey, Leasing’s other members, who collectively owned 50% of Leasing, were
not present. Although Leasing’s Operating Agreement is not part of the record, we assume that
the terms of the agreement did not authorize Ledford, O’Dell, and Walker to call a meeting of
Leasing’s members without notifying Smith, Thomas, and Ownbey.

28
acquiring DynaVision’s interest without the financial participation of a third

party—Krevolin said this: “If your client is not willing to proceed with the closing

in accordance with the terms of the Operating Agreement, the Active Members

may have no alternative but to seek a court order compelling it to close.”

Joiner informed Ledford of what Krevolin had written and the position that

the Active Members would take if DynaVision refused to close, and Ledford

instructed Joiner to proceed with the closing on April 30.

D.

In late April, prior to the closing, the Active Members signed two

promissory notes and a collateral agreement. In the collateral agreement, entitled

“Collateral Assignment of Membership Interest,” they pledged, “as record and

beneficial” owner of Signature, all of their ownership interest in Signature as

collateral for a loan of $3.5 million from PFLC, LLC and a loan of $855,000 from

Internal Management, Inc., both companies owned by Peeples. The proceeds of

these loans were to be used, respectively, to pay for DynaVision’s interest in

Signature and to pay the balance due, $855,000, on the loan FNBC had made to

Signature the previous October.

At some point between the April 30 closing and May 7, the Active Members

and Peeples signed an Asset Purchase Agreement pursuant to which the Active

29
Members, as owners of all of Signature, caused the transfer of Signature’s assets to

Peeples for $5.75 million.39 Of that amount, $2.25 million went directly to the

Active Members, and $3.5 million served to cancel the loan Peeples had made to

enable them to buy out DynaVision. The agreement also contained Peeples’s

promise to indemnify the Active Members for any expenses, including those

arising from litigation, they might incur as a result of the transfer of the Green

Road Property from Leasing to Signature.

Contemporaneous with the execution of the Asset Purchase Agreement,

PFLC, LLC entered into six-year employment contracts with the Active Members,

their compensation to consist of $118,000 signing bonuses, initial salaries of

$160,000 per year, annual salary increases of $10,000, and bonuses if Signature

made over $1.5 million in pre-tax profits in a calendar year.

II.

A.

On November 15, 2002, DynaVision, Ledford, O’Dell, Bryan Walker, and

Leasing filed suit for equitable and legal relief against the Active Members and

39
None of the exhibits in the record evidence the disposition the Active Members made, if any,
of their interests in Signature after they acquired DynaVision’s interest. The testimony taken as a
whole, however, creates the inference that at some point following the acquisition, they
transferred Signature’s assets to PFLC, LLC.

30
Signature in the Superior Court of Murray County, Georgia. The plaintiffs all

retained Joiner as counsel, along with H. Lamar Mixon and David G. H. Brackett,

two partners in Bondurant, Mixon and Elmore, LLP. Their complaint40 was framed

in four counts and asserted six claims, all on behalf of the plaintiffs both

individually and collectively.41 Four claims were based on Leasing’s conveyance

of the Green Road Property to Signature; two involved the transfer of

DynaVision’s interest in Signature to the Active Members. We begin with the

claims regarding the Green Road Property.

The first claim42 was that Leasing, and Ledford, O’Dell, Smith, Thomas, and

Ownbey as owners of interests in Leasing, mistakenly executed the warranty deed

conveying the Green Road Property to Signature and thus were entitled to a

rescission of that transaction. The second claim 43 was that Smith induced Ledford

and O’Dell to execute the warranty deed by falsely representing that FNBC needed

40
DynaVision amended its complaint on December 27, 2002. Our references to the complaint
are to the amended complaint.
41
Although the complaint is not clear on this point, we assume that each plaintiff asserted each
of the claims we describe, such that the complaint contained 30 causes of action in all.
42
We place plaintiffs’ claims in an order different from the order in which they appear in the
complaint. The first claim appears in Count One.
43
This claim appeared in Count Two. The complaint implied, if not alleged, that Thomas and
Ownbey were vicariously responsible for Smith’s conduct, as described in claims two and five.
For relief on this and the remaining claims described infra, plaintiffs sought compensatory and
punitive damages.

31
a corrective document without warning that the document was in fact a warranty

deed. The third claim44 was that Smith and the Active Members breached their

fiduciary duties to Leasing, causing Leasing to lose the value of the Green Road

Property, on two occasions—when Smith induced Ledford and O’Dell to sign the

warranty deed under false pretenses and when the Active Members refused to

cause Signature to return the property to Leasing. The fourth claim 45 was that

Signature, Smith, Thomas, and Ownbey were unjustly enriched by the acquisition

of the Green Road Property.

The fifth and sixth claims involved the transfer of DynaVision’s interest in

Signature.46 The fifth claim,47 a fraud claim, alleged that upon presenting the

conditional Put and Call on February 8, 2002, Smith falsely stated that the Active

Members were “doing this on our own,” intentionally inducing DynaVision to sell

its interest. The sixth claim48 alleged that by failing to disclose their discussions

44
This claim appeared in Count Four.
45
This claim appeared in Count Three.
46
We describe these claims in the text as the Murray County Superior Court and the Georgia
Court of Appeals, in Ledford v. Smith, 618 S.E.2d 627 (Ga. Ct. App. 2005), framed the claims in
their final dispositions.
47
This claim appeared in Count Two.
48
This claim appeared in Count Four.

32
and final arrangements with Peeples, the Active Members breached fiduciary

duties imposed by the Operating Agreement,49 the Georgia Limited Liability
49
Plaintiffs’ theory that the Active Members had a fiduciary duty under the Operating
Agreement to disclose their final arrangement with Peeples, and that they breached that duty, is
based on § 9.2 of Article Nine of the Operating Agreement, entitled “Right of First Refusal,” and
two of its parts, §§ 9.2.1 and 9.2.3. These two sections state:

9.2.1 Notice of Intended Disposition. No Member in the Company
may sell less than all their Interest, and in the event a Member
receives a bona fide offer from any person in an arms length
transaction to purchase all of the Interest which they own in the
Company and if the person receiving the offer of purchase desires
to sell all the Interest that is the subject of the offer, notice of the
desire to sell the Interest shall be given in writing to the other
Members and the terms of the offer, which notice shall include the
price offered, the name of the offeror, and the payment terms (the
“Notice of Intended Disposition”).

9.2.3 Option to Purchase – Sale by Active Member other than Dyna-Vision.
Dyna-Vision shall have the right to purchase all of the . . .
Interest[s] to be sold at the same price and under the same terms
and conditions as described in the [Active Members’] Notice of
Intended Disposition. The election to purchase by Dyna-Vision
shall be exercised by giving written notice to [the Active]
Members within . . . thirty (30) calendar days after receipt of [the
Notice of Intended Disposition].

The Active Members did not consider their discussions with Peeples and his offer to loan
them the funds to acquire DynaVision’s interest as a “bona fide offer” to purchase their interests
in Signature so as to require them to notify DynaVision pursuant to § 9.2.1; hence, they did not
notify DynaVision of the discussions. Accordingly, to prevail on their sixth claim based on §§
9.2.1 and 9.2.3, plaintiffs would have to prove that, prior to March 27 (when DynaVision
became obligated to sell its interest), Peeples made the Active Members a bona fide offer to
purchase their interests at a set price and on set terms, that they “desire[d] to sell” their interests
to Peeples, that § 9.2.1 therefore obligated them to notify DynaVision of the offer, that their
failure to notify DynaVision breached that obligation, and that but for the breach, DynaVision
would have exercised its right of first refusal and bought the Active Members’ interests at the
price and on the terms indicated in Peeples’s offer. Under this scenario, the Active Members’
February 25 Put and Call would become a nullity, replaced by the triggering of § 9.2.3 of the
Operating Agreement. That is, DynaVision would have purchased the Active Members’
interests pursuant to § 9.2.3 instead of selling its interest pursuant to the § 9.5 Put and Call

33
Company Act,50 and Georgia common law.

On August 13, 2003, after the parties had joined the issues,51 plaintiffs

moved the state court for leave to amend their complaint to add Peeples and his

two companies, PFLC, LLC and Internal Management, Inc., as co-defendants.52

Plaintiffs represented that they had not learned of Peeples’s involvement until the

day before, August 12, when they took Ownbey’s deposition and Ownbey testified

that Peeples had provided the funds to enable the Active Members to trigger the

Put and Call.53

provision.
50
The Act imposes a general duty of loyalty on the members and managers of a limited liability
company but does not explicitly create a duty to disclose particular facts. O.C.G.A. § 14-11-305
describes this duty as follows:

In managing the business or affairs of a limited liability company:
(1) A member or manager shall act in a manner he or she believes in good faith to
be in the best interests of the limited liability company and with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances. A member or manager is not liable to the limited liability
company, its members, or its managers for any action taken in managing the
business or affairs of the limited liability company if he or she performs the duties
of his or her office in compliance with this Code section.
51
Defendants’ answers are not in the record. We infer from what is in the record, and in the
Georgia Court of Appeals opinion in Ledford v. Smith, that the Active Members denied the
allegations underpinning plaintiffs’ several causes of action.
52
Neither plaintiffs’ motion for leave to amend nor the proposed amended complaint are in the
record. The record does include, though, the superior court’s October 29, 2003 order denying
plaintiffs’ motion, and that order addresses the argument plaintiffs made in support of the
motion.
53
Defendants deposed Ledford on the same day, August 12.

34
 The state court heard oral argument on the motion on September 25, 2003,

after discovery had closed.54 It denied the motion on October 29, 2003, concluding

that DynaVision “knew or should have known” at the time it filed its complaint

that Peeples was “involved.” In its order, the court noted that plaintiffs, in their

complaint, had alleged that a third party had been involved in negotiations with the

Active Members and DynaVision in early January 2002 over a possible purchase

of Signature, but that these negotiations were unsuccessful. Further, they had

alleged, “upon information and belief,” that a third party had financed the Active

Members’ acquisition of DynaVision’s interest in Signature and, after the Active

Members had DynaVison’s interest in hand, had purchased Signature’s assets. In

addition, Ledford had deposed that he knew that Peeples was involved in the

January negotiations. It should have been obvious to DynaVision that since

Peeples was involved in the January negotiations, he was the party that likely

financed the Active Members and purchased Signature. In addition, the court

reasoned, adding Peeples as a party at that late stage of the litigation, after

discovery had closed, would cause Peeples undue prejudice.

Plaintiffs moved the court to reconsider its ruling. The court denied their

54
Discovery closed on September 7, 2003. The discovery included the taking of the depositions
of Peeples, the Active Members, DynaVision’s principals, and Paul Walker.

35
motion on March 8, 2004. In its order, the court was highly critical of plaintiffs’

delay in attempting to join Peeples as a party defendant:

[As a result of Ledford’s deposition testimony] the Court [in its
October 29 order] concluded that the Plaintiffs knew of the
involvement of the Peeples Group, at the time the original Complaint
was filed . . . . The Plaintiffs then waited nine months, until August
13, 2003, before filing for leave to amend. The Plaintiffs had
carefully waited until after the deposition of Shelby Peeples [on June
27, 2003] and until after the close of discovery to have their motion
heard [on September 25, 2003]. In making the October 2003 ruling,
this Court determined that the Plaintiffs engaged in a deliberate
scheme to delay joinder without excuse or justification. Therefore,
the Court finds that the [Plaintiffs’] failure to offer evidence of excuse
or justification is an independent reason that the Plaintiffs’ Motion
[for Reconsideration] should be denied.

B.

1.

On January 7, 2004, while their motion for reconsideration was pending in

state court, plaintiffs, still represented by Joiner, Mixon, and Brackett, brought the

instant lawsuit against Peeples55 in the United States District Court for the Northern

55
In addition to Peeples, the plaintiffs sued PFLC, LLC and Internal Management, Inc. We are
unable to discern from the allegations of plaintiffs’ complaint the nature of the claims asserted, if
any, against those two entities. We assume they were named as defendants solely for purposes
of declaratory or equitable relief involving the title to the Green Road Property or the status of
DynaVision’s former interest in Signature. Because such relief was not forthcoming, and
because plaintiffs do not contend on appeal that the district court erred in denying relief against
PFLC, LLC and Internal Management, Inc., we omit further reference to them.

36
District of Georgia.56 The complaint was framed in 116 paragraphs and seven

counts. Each count incorporated by reference each preceding count, such that

Count Seven amalgamated and asserted all of the claims of the preceding counts.

Plaintiffs’ complaint is a “shotgun” pleading in that it lumps multiple claims

together in one count and, moreover, appears to support a specific, discrete claim

with allegations that are immaterial to that claim. See, e.g., Byrne v. Nezhat, 261

F.3d 1075, 1128-32 (11th Cir. 2001). When faced with a complaint like the one

here, in which the counts incorporate by reference all previous allegations and

counts, the district court must cull through the allegations, identify the claims, and,

as to each claim identified, select the allegations that appear to be germane to the

claim. This task can be avoided if the defendant moves the court for a more

definite statement or if the court, acting on its own initiative, orders a repleader.

In this case, Peeples did not move the court for a more definite statement,

nor did the court require one on its own initiative. Consequently, it is left to this

panel to identify in the first instance what plaintiffs were claiming. We do so by

proceeding allegation by allegation and count by count, weeding out and

disregarding as extraneous the allegations that have no bearing on a claim.

56
Plaintiffs invoked the district court’s subject matter jurisdiction to entertain their federal
securities law claims under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa.

37
 We begin this process with Count One, which alleged three violations of the

federal securities laws.57 First, after the Put and Call offers of both February 8 and

February 25, Peeples denied any involvement in the Active Members’ plan to

acquire DynaVision’s interest, thereby violating § 10(b) of the Securities Exchange

Act of 1934 (the “1934 Act”) and Rule 10b-5(b) promulgated thereunder.58
57
Count One incorporated by reference the first eighty-one paragraphs of the complaint. Those
paragraphs alleged, in substance and not in the order we indicate, that (1) on February 8, 2002,
Smith falsely told Ledford and O’Dell that the Active Members, in issuing the Put and Call,
were “doing this on our own” and that no third party was involved; (2) on several occasions
between February 8 and March 27, 2002, Peeples falsely told Paul Walker and/or Ledford that
he was not involved in the Active Members’ issuance of the Put and Call; (3) the statements
made in (1) and (2) above were made with the intent to induce detrimental reliance; (4) plaintiffs
did in fact rely on these statements to their economic detriment; (5) Peeples and the Active
Members conspired to defraud DynaVision of its interest in Signature by making these
statements and by failing to disclose the terms of the January 21 letter and the Asset Purchase
Agreement; (6) Peeples is liable for the Active Members’ fraudulent conduct because he
controlled such conduct within the meaning of 15 U.S.C. § 78t under the terms of the January
21, 2002, letter and the Asset Purchase Agreement; (7) Peeples is liable for the Active Members’
fraudulent conduct under the doctrine of respondeat superior; (8) the Active Members breached
their obligations to DynaVision under §§ 9.1 and 9.2.1 of the Operating Agreement by not
informing plaintiffs that Peeples was funding the February 8 Put and Call and that he had offered
to purchase Signature’s assets from the Active Members; (9) Peeples is liable for this breach as
the Active Members’ co-conspirator and/or aider and abettor; (10) the Active Members breached
their fiduciary duty to plaintiffs by not revealing that Peeples was providing the funds for their
acquisition of DynaVision’s interest in Signature and had agreed to purchase Signature’s assets
following their acquisition; (11) Peeples is liable for this breach under the doctrine of respondeat
superior, as a co-conspirator, and as an aider and abettor; (12) the Active Members, acting under
Peeples’s control and direction or in conspiracy with him, fraudulently induced Ledford and
O’Dell to execute the warranty deed by which Leasing conveyed the Green Road Property to
Signature; (13) the Active Members, acting under Peeples’s control and direction or in
conspiracy with him, breached their fiduciary duty to plaintiffs by not informing Ledford and
O’Dell that the instrument they signed at FNBC was a warranty deed and of the legal
consequences that would adhere to their signing it.
58
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), makes it unlawful

[t]o use or employ, in connection with the purchase or sale of any security

38
Second, Peeples “directly or indirectly control[led] the activities of the Active

Members” using the “Confidentiality” and “No Discussions with Others”

provisions of the January 21 letter, the “secret discussions” of January and

February 2002, and the Asset Purchase Agreement. As such, Peeples was

responsible for the Active Members’ conduct in violation of § 10(b) and Rule 10b-

5(b) as a “controlling person” under § 20(a) of the 1934 Act.59 Specifically,
registered on a national securities exchange or any security not so registered, or
any securities-based swap agreement (as defined in section 206B of the Gramm-
Leach-Bliley Act [15 U.S.C.S. § 78c note]), any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as the Commission
may prescribe as necessary or appropriate in the public interest or for the
protection of investors.

Rule 10b-5, 17 C.F.R. § 240.10b-5, was promulgated under § 10(b). Rule 10b-5 provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase or
sale of any security.

“Rule 10b-5 encompasses only conduct already prohibited by § 10(b). Though the text
of the Securities Exchange Act does not provide for a private cause of action for § 10(b)
violations, the [Supreme] Court has found a right of action implied in the words of the statute
and [Rule 10b-5].” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157,
128 S. Ct. 761, 768, 169 L. Ed. 2d 627 (2008) (citations omitted). In this opinion, we refer to the
§ 10(b) and Rules 10b-5(a) and (b) claims in this case as claims under Rules 10b-5(a) and/or (b).
59
Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), provides:

Every person who, directly or indirectly, controls any person liable under any

39
Peeples was responsible for Smith’s statement that we are “doing this on our own”

and the Active Members’ breach of their fiduciary duty to DynaVision. Third,

Peeples and the Active Members engaged in a “scheme, device, and artifice to

defraud” DynaVision, in violation of § 10(b) and Rule 10b-5(a).60

In support of their 10b-5(a) claim, plaintiffs, in their opposition to Peeples’s

motion for summary judgment, identified three components of the “scheme”: (1)

Peeples and the Active Members agreed not to disclose their negotiations, as

evidenced by the January 21 letter; (2) Peeples and the Active Members used the

Put and Call provision “to improperly exclude DynaVision from participating in

the sale of [Signature] to Peeples”; and (3) Peeples and the Active Members

collaborated to “deceive the individual Plaintiffs into signing [the] Warranty

Deed.”61

Finally, the plaintiffs alleged that the misrepresentations, omissions, and

provision of this chapter or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same extent as such controlled person
to any person to whom such controlled person is liable, unless the controlling
person acted in good faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
60
See supra note 58.
61
The complaint, in contrast to what plaintiffs stated in their opposition to Peeples’s motion for
summary judgment, simply averred that “[t]hrough the activities described above, the
Defendants employed a scheme, device, and artifice to defraud that, in fact, operated as a fraud
upon DynaVision.”

40
scheme described in Count One caused DynaVision to sell its interests and suffer

injury.62 Paragraph 64 of the district court complaint stated:

Based upon the false and misleading information concerning
[Signature] and the source of funding for the buy/sell offers, which
had been provided by the Active Members and Defendants, and in
reliance on their misrepresentations that there was no offer to
purchase [Signature] outstanding, DynaVision chose to sell its interest
in [Signature], rather than purchase the interest of the [Active
Members]. As a result, in late March 2002, DynaVision became
contractually required to sell its interest in [Signature] to the Active
Members pursuant to the terms of the [Signature] Operating
Agreement.63

Counts Two through Five alleged causes of action under Georgia common

law and statutory provisions.64 Count Two, “Violation of the Georgia Securities

Act,” alleged that the same conduct that gave rise to the Count One claims for

62
The plaintiffs described the Active Members’ misrepresentations made by Smith, the scheme
to defraud, and the manner in which these wrongs caused injury in almost the same way they had
done so in state court.
63
Similarly, paragraph 90 of the district court complaint stated: “DynaVision relied on
the [Active Members’] misrepresentations. DynaVision made its decision to sell under
the put and call based on the false representations that there were no outstanding offers to
purchase [Signature] and, in particular, no offers from a strategic purchaser such as the
Defendants.” Although paragraphs 64 and 90 refer to statements made by the Active
Members, the only conceivably actionable statement in the evidence is Smith’s February
8 statement to Ledford and O’Dell that the Active Members were “doing this on our
own.”
64
These counts, like Counts Six and Seven, incorporated by reference all antecedent allegations
of the complaint. The complaint alleged that the district court had jurisdiction to entertain these
claims under the doctrines of “pendent” and “ancillary” jurisdiction. See infra note 89.

41
relief rendered Peeples liable to plaintiffs under the Georgia securities laws.65

Count Three, “Conspiracy to Defraud,” alleged that Peeples conspired with the

Active Members to (1) fraudulently induce DynaVision to sell its interest in

Signature and (2) fraudulently induce Leasing to convey the Green Road Property

to Signature. Count Four, “Aiding and Abetting Breach of Fiduciary Duties,”

alleged that the Active Members, aided and abetted by Peeples, breached the

following duties: (1) the fiduciary duty to DynaVision to inform it that Peeples

was supporting the February 25 Put and Call, (2) the fiduciary duty to Leasing, and

Ledford and O’Dell as Leasing’s part owners, to inform them that the document

they signed at FNBC was a warranty deed, and (3) the fiduciary duty to Leasing to

cause Signature to convey the property back to Leasing. Count Five, “Tortious

Interference with Business Relations,” alleged that Peeples tortiously interfered

with the Active Members’ business relations with DynaVision. Count Six,

“Attorneys’ Fees,” sought plaintiffs’ expenses, including attorney’s fees, incurred

in prosecuting Counts One through Five. Count Seven, “Punitive Damages,”

sought punitive damages as to each of plaintiffs’ claims on the ground that

65
Plaintiffs alleged a violation of the Georgia Securities Act, O.C.G.A. § 10-5-12(a)(2) (2005).
Section 10-5-12 is “Georgia's equivalent of Rule 10b-5. A plaintiff must prove essentially the
same elements under the state provision as he must prove under the federal provision.” Pelletier
v. Zweifel, 921 F.2d 1465, 1511 (11th Cir. 1991).

42
Peeples’s “conduct” “was willful, wanton and . . . would raise a presumption of

conscious indifference to consequences.”

On March 9, 2004, the day after the state court refused to reconsider its

October 29, 2003, order denying plaintiffs’ motion for leave to join Peeples as a

party defendant, Peeples moved the district court to dismiss plaintiffs’ complaint.

Alternatively, he requested that the district court stay further proceedings pending

the state court’s resolution of Ledford v. Smith. He requested a stay because the

Active Members had moved the state court for summary judgment, which, if

granted, could settle through issue preclusion some of the factual issues involved in

plaintiffs’ district court claims. The state court heard argument on the summary

judgment motions on April 1, 2004. On May 17, 2004, the district court denied

Peeples’s motion to dismiss and, alternatively, for a stay. On June 6, 2004, Peeples

answered plaintiffs’ complaint.66

66
Peeples’s answer responded to each of the complaint’s 116 paragraphs, admitting or denying
the allegations of the paragraph or stating that the defendant was without knowledge sufficient to
form a belief as to the truth of the allegations. The answer also contained twenty-nine
“defenses,” in three categories: (1) four were affirmative defenses either asserting or implying
that the complaint failed to state a claim for relief; (2) six were confession and avoidance
defenses; and (3) nineteen constituted general denials. The answer was a shotgun pleading in the
sense that many of the defenses in the first two categories failed to identify the claim or claims
for relief to which they were responding. This, coupled with the shotgun manner in which
plaintiffs chose to frame their complaint, may explain why the district court waited until the case
was submitted on motion for summary judgment to attempt to sort out the parties’ claims and
defenses.

43
 2.

On May 18, 2004, the state court ruled on the pending motions for summary

judgment. It granted defendants summary judgment on the fourth and fifth claims

and on the sixth claim in part. It denied summary judgment on the first, second

and third claims and on the sixth claim in part on the ground that material issues of

fact remained to be litigated. Regarding the sixth claim, the court found that the

Active Members had a fiduciary duty to inform DynaVision of Peeples’s

involvement under the Limited Liability Company Act and Georgia common law,

but not under the Operating Agreement.

Plaintiffs appealed the court’s dismissal of the fifth claim, that the Active

Members fraudulently induced DynaVision to part with its interest in Signature.

The Active Members cross-appealed the court’s disposition of the first claim, that

Leasing conveyed the Green Road Property due to mutual mistake; the second

claim, that Smith fraudulently induced the transfer of the Green Road Property to

Signature by misrepresenting the warranty deed; and part of the sixth claim, that

the Active Members breached a fiduciary duty to inform DynaVision of Peeples’s

participation. Plaintiffs did not appeal the court’s disposition of their fourth claim,

unjust enrichment through the transfer of the Green Road Property, and the Active

Members did not appeal the court’s denial of summary judgment on plaintiff’s

44
third claim, that the Active Members had breached a fiduciary duty to Leasing,

O’Dell, and Ledford with respect to the transfer of the Green Road Property.

While these appeals were pending in the Georgia Court of Appeals, the district

court set February 26, 2005 as the discovery deadline.

3.

On July 12, 2005, the Georgia Court of Appeals handed down its decision.

Ledford v. Smith, 618 S.E.2d 627 (Ga. Ct. App. 2005). The court affirmed the

summary judgment for the Active Members on plaintiffs’ fifth claim, reversed the

denial of summary judgment on plaintiff's second claim (effectively granting the

Active Members judgment on that claim), and reversed part of the sixth claim.

After the decision, only the plaintiffs’ first claim, which alleged that Leasing

conveyed the Green Road Property because of mutual mistake, survived.67

The court of appeals explained why it held for the Active Members on all

but plaintiffs’ first claim. It began with plaintiffs’ sixth claim, that the Active

Members had a fiduciary duty under the Limited Liability Company Act and

common law to disclose their negotiations with Peeples. After observing that

67
As to that aspect of the first claim, the court concluded that unresolved material issues of fact
precluded summary judgment.

45
default fiduciary duties are trumped by an operating agreement,68 Ledford, 618

S.E.2d at 636,69 the court explained that Signature’s Operating Agreement allowed

the Active Members to obtain Peeples’s assistance in funding the Put and Call.

Citing § 7.3 of the Operating Agreement, which authorized the Active Members to

68
O.C.G.A. § 14-11-305(1), which imposes a general duty of loyalty on the managers of a
limited liability company, see supra note 50, is subject to modification as follows:

(4) To the extent that, pursuant to paragraph (1) of this Code section or otherwise
at law or in equity, a member or manager has duties (including fiduciary duties)
and liabilities relating thereto to a limited liability company or to another member
or manager:
(A) The member’s or manager’s duties and liabilities may be expanded,
restricted, or eliminated by provisions in . . . a written operating agreement;
provided, however, that no such provision shall eliminate or limit the liability of a
member or manager:
(i) For intentional misconduct or a knowing violation of law; or
(ii) For any transaction for which the person received a personal benefit in
violation or breach or any provision of a written operating agreement; and
(B) The member or manager shall have no liability to the limited liability
company or to any other member or manager for his or her good faith reliance on
the provisions of a written operating agreement, including, without limitation,
provisions thereof that relate to the scope of duties (including fiduciary duties) of
members and managers.

O.C.G.A. § 14-11-305(4) (emphasis added).
69
The Ledford court explained the basis for this policy:

The contractual flexibility provided in [O.C.G.A. § 14-11-305] is consistent with
O.C.G.A. § 14-11-1107(b) of the [Limited Liability Company] Act which
provides that: “It is the policy of this state with respect to limited liability
companies to give maximum effect to the principle of freedom of contract and to
the enforceability of operating agreements.”

Ledford, 618 S.E.2d at 636 (quotation omitted).

46
“engage in all . . . other business ventures . . . but no Active Member shall engage

in businesses similar to the business of the [Signature] by competing with the

business of the Company,” the court reasoned that:

This provision gave the Active Members wide latitude to engage in all
other business activities except those “similar to the business of”
[Signature], that is, a “competing” carpet company. The provision was
broad enough to allow the Active Members to negotiate with Peeples
for the purpose of obtaining financing to fund their buy-out of Dyna-
Vision’s interest in [Signature]. This activity did not “compete” with
[Signature]; thus, it did not fall within the exception. Any fiduciary
duty of disclosure that the Active Member’s [sic] may have owed
Dyna-Vision with respect to such a business arrangement was
eliminated by the terms of an operating agreement that allowed the
business activity which occurred. See Stoker v. Bellemeade, 272
Ga.App. at 824, 615 S.E.2d 1 (members of an LLC did not breach
fiduciary duties by participating in other allegedly competing real
estate developments because operating agreement allowed them to do
so).

Ledford, 618 S.E.2d at 636.

The court also rejected plaintiffs’ argument that the Operating Agreement’s

Right of First Refusal provision in § 9.2.1 created a fiduciary duty that required the

Active Members to disclose their intention to sell Signature's assets to Peeples.

The court explained:

As the superior court correctly concluded, this provision was plainly
“intended to prevent outsiders from buying into [Signature]. In this
way, the Members maintained control over who their business
‘partners’ were to be.” Because the Active Members’ proposed buy-
out of Dyna-Vision’s interest would not allow a third party to buy into

47
 [Signature] and become Dyna-Vision's business partner, the purpose
of the right of first refusal was not implicated. Therefore, [Section]
9.2.1 did not require the Active Members to disclose to Dyna-Vision
how it intended to finance its buy-out offer.

Id. at 633–34.

Turning to plaintiffs’ fifth claim, that the Active Members fraudulently

induced DynaVision to sell its interest, the court held that summary judgment was

appropriate because the Active Members’ failure to inform DynaVision of their

deal with Peeples did not cause DynaVision’s decision to sell. Once the Active

Members invoked the Operating Agreement’s Put and Call provision, DynaVision,

by its principals’ own deposition testimony, had no feasible option but to sell its

interests. As the court observed:

Moreover, both Ledford and O’Dell deposed that, even if they could
have raised the money to buy out the Active Members, owning
[Signature] without the Active Members would have been “foolish”
and “made no sense” because the Active Members were the heart of
[Signature’s] value. As O’Dell admitted “we didn’t really have a
choice . . . . We didn’t have a management group . . . . The day the
put and call came in, I wouldn’t give two cents for finding a group to
replace them.” Because Peeples’ involvement did not affect the value
of the Active Members’ interest, it was immaterial. Or, stated
differently, [plaintiffs] cannot show that they suffered any damage as
a result of their alleged reliance on the Active Members affirmative
misrepresentation that Peeples was not involved in the buy-out.

Id. at 634–35.

The court then addressed the plaintiffs’ second claim, that Smith, and thus

48
the Active Members, fraudulently induced Leasing to sign the warranty deed at

FNBC by asking Ledford and O’Dell to sign the deed without disclosing the nature

of the document. Because it found no evidence of misrepresentation, the court

concluded that on this claim, the Active Members were entitled to summary

judgment. It held:

In this case, the evidence shows that FNBC, on its own initiative,
drafted the warranty deed and asked all the parties to the loan closing
to sign this “corrective paper.” Although Ledford and O'Dell contend
they signed the document because Smith asked them to do so, the
evidence only shows that Smith was relaying the bank's request. There
is no evidence in the record that Smith caused the deed to be drafted,
acted in concert with the bank, or misrepresented or concealed the
document’s nature. In fact, it appears from the record that Smith was
as ignorant of the document’s significance as Ledford and O’Dell.
Under these circumstances, we see no evidence of a fraudulent
statement or the concealment of a material fact that Smith was under a
duty to disclose.

Id. at 636–37.

4.

On July 15, 2005, shortly after the Georgia Court of Appeals’s opinion

issued, Peeples’s counsel sent a letter to plaintiffs’ counsel, requesting that

plaintiffs dismiss all claims against Peeples. On July 25, plaintiffs’ counsel

responded, stating that nothing in the court’s opinion warranted dismissal and that

they had moved the court of appeals for reconsideration. On July 28, 2005, the

49
motion for reconsideration was denied. On August 1, Peeples’s counsel again

wrote plaintiffs’ counsel, asking that plaintiffs agree to a stay of proceedings in the

district court. Plaintiffs’ counsel rejected that request the next day; they planned to

petition the Supreme Court of Georgia for a writ of certiorari.

On September 22, Peeples moved the district court for summary judgment

on all of plaintiffs’ claims. In the brief accompanying the motion, Peeples cited the

court of appeals’s Ledford decision and stated:

Should the Georgia Supreme Court deny Plaintiffs’ petition for
certiorari or affirm the Georgia Court of Appeals’ order, then
Plaintiffs’ derivative liability claims in the federal action are
collaterally estopped. In the absence of affirmance or denial, the
reasoning of the Georgia Court of Appeals, the applicable Georgia law
as cited, and the conclusions reached on the undisputed facts as
present in this case are instructive and may be considered by this
Court.

On October 31, plaintiffs’ counsel responded to this statement in their brief

in opposition to Peeples’s motion for summary judgment:

As an initial matter, throughout their brief, the Defendants refer to an
Opinion of the Georgia Court of Appeals in a state court proceeding
between the Plaintiffs and the Active Members . . . . The state court
case has no effect on the central securities fraud claims in this action;
the opinion is not binding on this Court. Furthermore, a petition for
certiorari has been filed with the Georgia Supreme Court seeking to
correct the multitude of legal and factual errors contained in that

50
 opinion.70

On November 18, the Georgia Supreme Court denied plaintiffs’ petition for

certiorari review in the state court case. Ten days later, plaintiffs moved the Court

to reconsider its decision.71 The court denied plaintiffs’ motion on December 16.

The denial operated to make the court of appeals’s Ledford decision binding

authority on matters of Georgia law. See Lexington Developers, Inc. v. O’Neal

Const. Co., Inc., 238 S.E.2d 770, 770–771 (Ga. Ct. App. 1977).

On December 22, the district court, in a comprehensive sixty-eight page

order, granted Peeples’s motion for summary judgment on all of plaintiffs’

claims.72 Using the doctrine of collateral estoppel, the court disposed of Count

Three, that Peeples conspired with the Active Members to defraud DynaVision into

selling its interest in Signature,73 and Count Five, that Peeples tortiously interfered

with the Active Members’ business relationship with DynaVision. The court

70
Peeples’s counsel responded to this position on November 30, adhering to what they
had stated in People’s September 22 brief and informing the district court that the
Georgia Supreme Court had denied certiorari review.
71
On December 2, the district court ordered counsel to inform it instanter of the supreme court’s
disposition of the motion.
72
The court entered a final judgment for Peeples the same day.
73
The court granted Peeples summary judgment on the Count Three claims that he had
conspired with the Active Members fraudulently to induce Leasing to convey the Green Road
Property to Signature on the ground that plaintiffs abandoned that claim by failing to support it
in their brief in opposition to Peeples’s motion for summary judgment.

51
rejected plaintiffs’ Count Four claims, that Peeples aided and abetted the Active

Members’ breach of fiduciary duties, on the ground that Georgia law did not

recognize such claims. The court disposed of Counts One and Two, charging

Peeples with securities fraud, on the grounds that plaintiffs failed to demonstrate a

genuine issue of material fact as to the several elements of those claims.74

5.

On January 9, 2006, Peeples moved the district court pursuant to Rule 59(e)

of the Federal Rules of Civil Procedure to alter and amend its judgment. He

argued that, with respect to plaintiffs’ federal securities law claims in Count One,

the court had failed to issue the findings required under the PSLRA. The PSLRA

requires a district court, upon final adjudication of a federal securities law claim, to

“include in the record specific findings regarding compliance by each party and

each attorney representing any party with each requirement of Rule 11(b) of the

Federal Rules of Civil Procedure as to any complaint, responsive pleading, or

dispositive motion.” 15 U.S.C. § 78u-4(c)(1). Peeples urged the court to sanction

plaintiffs and their counsel for failing to comply with Rule 11. He also requested

74
Although the district court’s December 22 order made no explicit reference to Counts Six and
Seven, the court’s disposition of Counts One, Two, and Four and its invocation of the doctrine of
collateral estoppel to dispose of Counts Three and Five implicitly disposed of those two counts,
which sought, respectively, attorney’s fees and punitive damages.

52
sanctions for the Count One claims pursuant to 28 U.S.C. § 1927 and the district

court’s inherent power.75

Plaintiffs and their attorneys filed separate responses to Peeples’s request for

attorney’s fees and expenses under the PSLRA. Plaintiffs, represented in the

matter of sanctions by new attorneys, claimed that they did not misrepresent the

historical facts to counsel, did not advise counsel regarding the law, and were not

responsible for the manner in which counsel litigated the case. Relying on our

decision in Byrne v. Nezhat, 261 F.3d 1075 (11th Cir. 2001), plaintiffs averred that

sanctions against them would not be appropriate. In their separate response,

plaintiffs’ attorneys asserted, in essence, that a reasonably competent attorney

would have recognized that the claims set out in Count One of the complaint were

cognizable under the federal securities laws.

On March 21, 2006, the district court granted Peeples’s motion to the extent

that it sought PSLRA findings, but refused to sanction plaintiffs or their counsel,

finding that they had acted in compliance with Rule 11 in pleading and prosecuting

their case.

6.

75
Peeples did not move the court to imposes sanctions under Rule 11(b), § 1927, or the court’s
inherent power with respect to plaintiffs’ prosecution of Counts Two through Seven of the
complaint.

53
 All five plaintiffs now appeal the district court’s disposition of each of their

claims. Their brief, however, presents no argument as to Counts Three and Five

through Seven. We therefore treat as abandoned their appeal of the district court’s

disposition of those counts. We also treat as abandoned the appeal of the court’s

disposition of plaintiffs’ claims under two of the federal securities laws. As noted,

Count One contained claims under § 20(a) of the 1934 Act and Rules 10b-5(a) and

(b). Plaintiffs’ brief presents no argument in support of their § 20(a) and Rule 10b-

5(a) claims,76 and, as in the case of Counts Three and Five through Seven, we deem

the appeal of the court’s disposition of those claims to have been abandoned.77

Accordingly, what remains are plaintiffs’ Count One claims under Rule 10b-5(b);

their Count Two claims under the comparable Georgia securities law provision;

and part of their Count Four claim, that Peeples aided and abetted the Active

Members’ breach of their fiduciary duty regarding the handling of the Green Road

76
The district court did not address explicitly DynaVision’s Count One Rule 10b-5(a) claim,
and plaintiffs’ initial brief in this appeal contains no argument in support of the Rule 10b-5(a)
claim qua claim. Instead, the brief refers to a “scheme,” which forms the basis of a Rule 10b-
5(a) claim, in arguing that there was a genuine issue of material fact as to the “reliance” element
of Count One’s Rule 10b-5(b) claim. We therefore treat Count One’s Rule 10b-5(a) claim as
having been abandoned.
77
We likewise deem abandoned plaintiffs’ Count Two state law claims that mirror the § 20(a)
and Rule 10b-5(a) claims. See O.C.G.A. § 10-5-12(a)(2)(A)–(C).

54
Property.78 Peeples cross-appeals the district court’s refusal to sanction plaintiffs

and their counsel as required by the PSLRA for prosecuting Count One of the

complaint.

Our review proceeds as follows. We first consider our subject matter

jurisdiction over plaintiffs’ Count One 10b-5(b) claims.79 Next, we move to

plaintiffs’ Count Four aiding and abetting claims. After that, we take up the

PSLRA sanctions issues.

III.

Our first task is to consider whether the district court had subject matter

jurisdiction to entertain the Count One claims—specifically, the Rule 10b-5(b)

claims that remain—under 28 U.S.C. § 133180 and 15 U.S.C. § 78aa.81 See

78
Plaintiffs did not brief, and therefore abandoned, the issue of whether the district court erred
in dismissing the claim that Peeples aided and abetted the Active Members’ breach of a fiduciary
duty to inform DynaVision’s principals that he was providing the $3.5 million the Active
Members needed to close the purchase of DynaVision’s interest.
79
What we say about the merits of the Count One claims applies to the Count Two claims. See
GCA Strategic Inv. Fund, Ltd. v. Joseph Charles & Assocs., Inc., 537 S.E.2d 677, 682 (Ga. Ct.
App. 2000) (“To evaluate a claim of securities fraud under OCGA § 10-5-12(a), we look to the
similar elements a plaintiff must allege under section 10(b) of the Securities Act of 1934. . . .”).
80
Section 1331 states: “The district courts shall have original jurisdiction of all civil actions
arising under the Constitution, laws, or treaties of the United States.”
81
Section 78aa states, in pertinent part:

55
Hernandez v. U.S. Attorney Gen., 513 F.3d 1336, 1339 (11th Cir. 2008) (“[W]e

must inquire into subject matter jurisdiction sua sponte whenever it may be

lacking.”). Those claims were brought by DynaVision and four other plaintiffs:

Leasing, Jimmy Ledford, Larry O’Dell, and Bryan Walker (the “co-plaintiffs”).

The question here is whether the court had jurisdiction to litigate the Count One

claims of all five plaintiffs. We find the answer to the question in Supreme Court

precedent.

Under Blue Chip Stamps v. Manor Drug Stores, a plaintiff must be a

purchaser or seller of a security to have a private cause of action under Rule 10b-5.

421 U.S. 723, 730–31, 95 S. Ct. 1917, 1922–23, 44 L. Ed. 2d 539 (1975).82

According to the allegations of the complaint and the relevant deposition

The district courts . . . shall have exclusive jurisdiction of violations of [the
Securities and Exchange Act of 1934] or the rules and regulations thereunder, and
of all suits in equity and actions at law brought to enforce any liability or duty
created by this chapter or the rules and regulations thereunder.
82
See also Smith v. Ayres, 845 F.2d 1360, 1364 (5th Cir. 1988) (noting that the district court
could have alternatively dismissed plaintiff’s individual securities-fraud claim because he “did
not buy or sell anything”; the “fact that he was a stockholder in a corporation that may have
bought or sold [was] not sufficient to give him standing in an individual capacity”); Rathborne v.
Rathborne, 683 F.2d 914, 919 & n.16 (5th Cir. 1982) (holding that only a corporation had
standing to bring a direct 10b-5 action; the “shareholder-plaintiff [did] not” because he was “not
a party to the transaction and therefore was not an actual purchaser or seller of securities”).

56
testimony, there was but one seller, DynaVision. It sold one security, its fifty-

percent interest in Signature. DynaVision, as the seller of a security, therefore had

standing to sue Peeples under Rule 10b-5(b). Co-plaintiffs did not.83

The district court should have recognized this at the time it considered and

ruled on Peeples’s motion to dismiss the complaint.84 If not then, it should have

recognized co-plaintiffs’ lack of standing when it took Peeples’s motion for

summary judgment under advisement. After concluding that co-plaintiffs failed to

satisfy Blue Chip Stamps’ requirement, the court should have moved to the

question of whether to dismiss their claims for want of subject matter jurisdiction

83
Ledford, O’Dell, and Walker alleged, albeit by implication, that the loss DynaVision
sustained as a result of Peeples’s securities fraud violations was passed on to them through their
ownership interests in DynaVision, in that the loss diminished the value of their interests. In
other words, they were like the shareholders of a corporation that sold securities it owned in
reliance on a third party misrepresentation made in violation Rule 10b-5(b) and who, as a result,
incurred a loss. Under Blue Chip Stamps, however, such derivative injury to shareholders is not
directly compensable under Rule 10b-5. 421 U.S. at 737-38, 95 S. Ct. at 1926.
84
See Fed. R. Civ. P. 12(b)(6). Peeples’s motion was addressed to plaintiffs’ entire complaint
and assumed that all of the plaintiffs were prosecuting Count One. As for the Count One claims,
the memorandum of law accompanying the motion argued that DynaVision’s sale of its interest
to the Active Members was not a “securities transaction” and, therefore, Peeples’s alleged
misrepresentations were not made “in connection with” the purchase or sale of a security as
required by Rule 10b-5(b). The memorandum did not argue that co-plaintiffs were barred from
suing under Rule 10b-5(b) because they were not sellers of a security; nor did the memorandum
argue that because co-plaintiffs were not sellers, the court should have dismissed them from
Count One pursuant to Fed. R. Civ. P. 12(b)(1).

57
under Rule 12(b)(1) of the Federal Rules of Civil Procedure.85 Federal jurisdiction

may be defeated when the alleged federal claim “‘clearly appears to be immaterial

and made solely for the purpose of obtaining jurisdiction or where such a claim is

wholly insubstantial and frivolous.’” Steel Co. v. Citizens for a Better Env’t, 523

U.S. 83, 89, 118 S. Ct. 1003, 1010, 140 L. Ed. 2d 210 (1998) (quoting Bell v.

Hood 327 U.S. at 682–83, 66 S. Ct. at 776) (emphasis added).86 The word “may”

implies that the dismissal of a claim for want of jurisdiction is committed to the

sound discretion of the district court. But, just as in any instance where the district

court has discretion, that discretion can be abused. Here, co-plaintiffs’ federal

securities fraud claims were plainly and indisputably frivolous. They were, in the

Supreme Court’s words, “so patently without merit as to justify . . . the court’s

dismissal for want of jurisdiction.” Bell, 327 U.S. at 683, 66 S. Ct. at 776.

Co-plaintiffs’ inability to invoke the district court’s jurisdiction under 28

85
The defense of lack of subject matter jurisdiction is never waived. “If the court determines at
any time that it lacks subject-matter jurisdiction, the court must dismiss the action.” Fed. R. Civ.
P. 12(h)(3). Prior to considering the question of whether to dismiss the claims for want of
jurisdiction, the court had to “assume jurisdiction to decide whether the allegations state a cause
of action on which the court [could] grant relief.” Bell v. Hood, 327 U.S. 678, 682, 66 S. Ct.
773, 776, 90 L. Ed. 939 (1946). The district court did so here. Its determination that co-
plaintiffs had stated a case for Rule 10b-5 relief eliminated the necessity of considering whether
jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa was lacking.
86
This principle originated in Bell v. Hood and we therefore associate it with that case
throughout this opinion.

58
U.S.C. § 1331 and 15 U.S.C. § 78aa for Count One, however, did not foreclose

their right to litigate the claims asserted in Counts Two through Seven. Despite the

fact that Counts Two through Seven did not implicate a federal question, these

counts were joined in the case by a series of jurisdictional steps.87 First, because

DynaVision sold a security, the district court had subject matter jurisdiction under

28 U.S.C. § 1331 and 15 U.S.C. § 78aa to adjudicate DynaVision’s Count One

securities fraud claim. Second, since the court had “original jurisdiction” under

those two statutes, it had supplemental jurisdiction under 28 U.S.C. § 1367 88 to

adjudicate any other claims DynaVision had against Peeples that were “so related

87
The steps laid out below were not taken as a matter of record by plaintiffs’ counsel, nor do
they appear to have been recognized by Peeples’ counsel or the district court. As far as counsel
for the parties and the court were concerned, no jurisdictional or procedural obstacles precluded
the court from entertaining on the merits all of the claims co-plaintiffs and DynaVision
presented.
88
Section 1367(a) states, in pertinent part:

[I]n any civil action of which the district courts have original jurisdiction, the
district courts shall have supplemental jurisdiction over all other claims that are
so related to claims in the action within such original jurisdiction that they form
part of the same case or controversy under Article III of the United States
Constitution.

Each count in the complaint incorporated all of the prior counts’ allegations and claims;
for example, Count Seven included the claims of Counts One through Count Six. See supra part
II.B.1. The Count One claims were not culled out of Counts Two through Seven by the court on
its own initiative or via a motion by Peeples for a more definite statement. Our discussion in the
text proceeds under the assumption that the district court struck from each count all of the prior
claims incorporated by reference.

59
to” the Count One claims that they formed part of “the same case or controversy.”

Id.89 DynaVision’s claims in Counts Two through Seven, given the manner in

which the complaint presented them,90 appear to have been so related to

DynaVision’s Count One allegations that they arguably formed part of the same

case or controversy described in Count One.91 Finally, Rule 20 of the Federal

Rules of Civil Procedure may have authorized co-plaintiffs to join DynaVision as

plaintiffs in Counts Two through Seven on the theory that their claims arose out of

“the same transaction, occurrence, or series of transactions or occurrences”

89
As stated in note 64, supra, plaintiffs founded the district court’s subject matter jurisdiction
over their non-federal claims on pendent claim jurisdiction and ancillary jurisdiction. The
complaint contained no reference to 28 U.S.C. § 1367, which had superceded pendent claim
jurisdiction and ancillary jurisdiction. See Palmer v. Hosp. Auth. of Randolph County, 22 F.3d
1559, 1563 n.3 (11th Cir. 1994) (“Formerly known as pendent and ancillary jurisdiction, such
grounds for the exercise of federal subject matter jurisdiction have now been codified in 28
U.S.C. § 1367.”). Notwithstanding the lack of a reference to § 1367, that section did provide the
district court with jurisdiction to entertain most of plaintiffs’ state law claims. We therefore
proceed accordingly.
90
See supra part II.B.1.
91
As indicated supra part II.B.1, both DynaVision and Leasing brought “Conspiracy to
Defraud” claims in Count Three. The Leasing claim, relating to the Green Road Property,
appears to fall outside the court’s § 1367 supplemental jurisdiction because it is not “so related”
to the claims over which the court has original jurisdiction that it “form[s] part of the same case
or controversy.” Count Four also contained two “Aiding and Abetting” claims, one brought by
DynaVision and the other by Leasing, Ledford, and O’Dell. The Leasing, Ledford, and O’Dell
claim, like Leasing’s Count Three claim, appears to fall outside the court’s § 1367 jurisdiction.
Peeples did not object to the court’s entertainment of these non-supplemental jurisdiction claims.
Due to this and the shotgun nature of the complaint’s allegations, we decline to explore the
matter further.

60
forming the predicate for DynaVision’s claims.92 Except as to Count One,

therefore, we have jurisdiction to consider co-plaintiffs’ claims.93

IV.

With jurisdiction established, we now turn to plaintiffs’ remaining securities

fraud and aiding and abetting claims. We address these claims in sequence,

affirming the district court’s grant of summary judgment for Peeples.

A.

In a typical § 10(b) civil action for a violation of Rule 10b-5(b), a plaintiff

must prove (1) a material misrepresentation or omission by the defendant, (2)

scienter, (3) a connection between the misrepresentation or omission and the

purchase or sale of a security, (4) reliance upon the misrepresentation or omission,

(5) economic loss, and (6) loss causation. Stoneridge Inv. Partners, LLC v.

92
Rule 20, as it existed at the time plaintiffs filed their complaint, stated, in pertinent part:

(a) Permissive Joinder. All persons may join in one action as plaintiffs if they
assert any right to relief jointly, severally, or in the alternative in respect of or
arising out of the same transaction, occurrence, or series of transactions or
occurrences and if any question of law or fact common to all these persons will
arise in the action.
93
The Georgia securities law cases have adopted Blue Chip Stamps’s holding that only a buyer
or seller of a security has standing to sue under Georgia’s version of Rule 10b-5. See Mack v.
Smith, 344 S.E.2d 474, 475 (Ga. Ct. App. 1986); cf. Bell v. Sasser, 520 S.E.2d 287, 292 (Ga. Ct.
App. 1999). Co-plaintiffs’ Count Two claims fail under Fed. R. Civ. P. 12(b)(6) because co-
plaintiffs were not involved in the sale of a security.

61
Scientific-Atlanta, 552 U.S. 148, 157, 128 S. Ct. 761, 768, 169 L. Ed. 2d 627

(2008).94

To establish a genuine issue of material fact as to the reliance element,95

plaintiffs96 had to present evidence that, in conversations with Paul Walker, Peeples

stated that he was not involved in the Active Members’ attempt to acquire

DynaVision’s interest in Signature, that his statements were false, that

94
The literal definition of a security under the 1934 Securities and Exchange Act, as codified in
15 U.S.C. §78c(a)(10), does not include an interest in a limited liability company. See Nelson v.
Stahl, 173 F. Supp. 2d 153, 164 (S.D.N.Y. 2001) (“The Exchange Act’s definition of security
does not refer to membership interests in limited liability companies.”). Nonetheless, plaintiffs
asserted in their complaint and in briefing to the district court that DynaVision’s interest in
Signature was a security. Peeples did not question this assertion, nor did the district court
analyze this issue on its own initiative.
Our independent research of this issue indicates that whether DynaVision’s interest could
be considered a security is problematic. We are satisfied, however, that plaintiffs’ allegation that
DynaVision’s interest was a security passes the threshold test set forth in Bell v. Hood. See
Williamson v. Tucker, 645 F.2d 404, 416 (5th Cir. May 1981) (holding that the plaintiff’s
allegation that joint venture interests were securities was not so obviously frivolous as to fail the
low jurisdictional bar in Bell v. Hood). In the absence of any briefing on this issue by the
parties and in light of our resolution of plaintiffs' Rule 10b-5(b) claims in favor of Peeples, we
see no need to decide whether DynaVision’s interest was a security.
95
The district court used the term “transaction causation” in referring to the reliance element.
That terminology is irrelevant, as “[t]ransaction causation” is no more than “another way of
describing reliance.” Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997); see
also Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–342, 125 S. Ct. 1627, 1631 (2005)
(explaining that reliance is one of the elements of a Rule 10b-5(b) claim and is “often referred to
in cases involving public securities markets (fraud-on-the-market cases) as ‘transaction
causation’”).
96
We refer to all five plaintiffs. Our Bell v. Hood jurisdictional ruling that struck co-plaintiffs’
claims from Count One had no effect on the district court’s jurisdiction to entertain the Count
Two claims under the Georgia Securities Act.

62
DynaVision’s principals reasonably relied on the statements,97 and that because of

that reliance, the principals caused DynaVision “to engage in the transaction in

question.” Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)

(quotation omitted). Put another way, plaintiffs had to demonstrate that but for

Peeples’s statements, DynaVision would not have sold its interest but, instead,

would have bought the Active Members’ interests. Huddleston v. Herman &

MacLean, 640 F.2d 534, 549 (5th Cir. Mar. 1981), rev’d on other grounds, 459

U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983) (“Reliance is a causa sine qua

non, a type of ‘but for’ requirement: had the investor known the truth he would not

have acted.”).

After carefully considering the evidence before it, the district court

concluded that no genuine issue of material fact existed as to this element:

Peeples’s denial of any involvement in the Active Members’ plan did not cause

DynaVision to sell its interest. The court explained:

The evidence in the record, viewed in the light most favorable to
Plaintiffs, shows that Plaintiffs themselves did not have the necessary

97
In an action for damages under Rule 10b-5(b) based on the defendant’s misrepresentation, the
plaintiff must show that he “reasonably relied on and was injured by the misstatement.” Pelletier
v. Zweifel, 921 F. 2d 1465, 1510 (11th Cir. 1991). In the Rule 10b-5(b) context, we have used
the words “justifiably relied” as the equivalent of “reasonably relied.” E.g., Bruschi v. Brown,
876 F.2d 1526, 1528 (11th Cir. 1989). Thus, “reasonably” and “justifiably,” for Rule 10b-5(b)
purposes, express the same element.

63
 experience, marketing skills, and expertise to run [Signature] in the
absence of the Active Members, and that Plaintiffs’ attempts to obtain
a management group and necessary personnel to work with
[Signature] were unsuccessful. Plaintiffs themselves testified that it
would be foolish or risky to purchase the Active Members’ interests in
[Signature] without having a management group or marketing group
in place to replace the Active Members. Although Plaintiffs
summarily contend that they would have acted differently if they had
known of Defendant Peeples’ involvement, that summary and
conclusory contention is not sufficient to allow Plaintiffs to avoid
summary judgment. Indeed, knowledge of Defendant Peeples’s
involvement would not have changed the fact that Plaintiffs did not
have the necessary experience, marketing skills, and expertise to run
[Signature], and that Plaintiffs’ attempts to obtain a management
group and necessary personnel to work with [Signature] were
unsuccessful. The failure to disclose Defendant Peeples’ involvement
thus did not cause Plaintiffs’ decision to sell Plaintiff DynaVision’s
interest under the February 25, 2002, Put and Call . . . .98

B.

To obtain a reversal of the district court’s resolution of the reliance issue,

98
This is essentially verbatim what the Georgia Court of Appeals said in Ledford, that
DynaVision would have sold its interest notwithstanding Peeples’s involvement.
Ledford, 618 S.E.2d at 634–35; see also supra part II.B.2. The court of appeals, after
considering the evidence in the light most favorable to plaintiffs, inferred this ultimate
fact because the evidence pointed to the fact as a matter of law. The question for the
district court was whether it should invoke the doctrine of collateral estoppel and
conclusively rely on the court of appeals’statement of ultimate fact in determining
whether, in resolving plaintiffs’ Rule 10b-5(b) claim (and the comparable Georgia
securities law claim), DynaVision’s principals would have sold DynaVision’s interest
notwithstanding Peeples’s denial of involvement. The district court invoked the doctrine
in deciding plaintiffs’ claims in Counts Three and Five, but not in deciding any of the
factual issues involved in plaintiffs’ federal and state securities laws claims. We decline
to consider the doctrine’s application to those claims as a matter of efficiency since the
parties have not briefed the issue.

64
plaintiffs must satisfy us that the evidence in the record creates a jury issue as to

whether DynaVision would have purchased the Active Members’ interests, rather

than sell its interest, had Peeples told Paul Walker and Ledford that he was

providing the Active Members the $3.5 million they needed to close the

transaction. There is no direct evidence that DynaVision would have elected to

buy the Active Members’ interests had Peeples admitted that he was providing the

money. Because there is no direct evidence that DynaVision would have elected to

buy, we ask whether such election can be inferred from the record. Specifically,

we ask whether it can be inferred as an ultimate fact from the subsidiary,

circumstantial facts shown by the evidence, viewed in the light most favorable to

plaintiffs.

Plaintiffs argue that circumstantial facts sufficient to create the inference are

present. Peeples argues that they are not, that the circumstantial facts create the

contrary inference: DynaVision sold because doing so was in the economic self-

interest of its principals, and it would not have elected to buy even if it had known

of Peeples’s involvement.

In assessing these opposing positions, our first task is to identify the

circumstantial facts that the evidence establishes as a matter of law. Once that is

done, we determine whether it would have been permissible for a jury to draw the

65
inference that DynaVision would have elected to purchase the Active Members’s

interests had it known that Peeples was providing the $3.5 million that enabled the

Active Members to close.

The evidence discloses three sets of circumstantial facts, with inferences

flowing from each set. We summarize each set in the headings of the following

subparts and conclude that, as a matter of law, DynaVision’s principals would have

sold even if they had known about Peeples’s involvement.

1.

DynaVision lacked the expertise necessary to operate Signature’s factory and

market Signature’s product. Consequently, if the Active Members left, there

would be no one to run the company, and Signature’s value would rapidly decline.

There is no dispute regarding the roles that DynaVision’s principals and the

Active Members performed for Signature. The principals functioned as

Signature’s financiers. By establishing the $200,000 line of credit, they were able

to provide Signature with the funds required to start the business and pay the bills

until carpet sales generated enough income to cover the company’s operating

expenses. The Active Members were the managers of the enterprise. Ownbey and

Thomas handled the manufacturing and sales. Smith, the company’s president,

was in charge of marketing, since she was well and favorably known in the

66
hospitality industry and thus capable of attracting a considerable volume of

business.

By their own admission in depositions taken in the state court case and in

this case,99 DynaVision’s principals could not, themselves, replace the Active

Members, most notably Smith, for the principals had no experience in

manufacturing carpet and were virtually incapable of marketing Signature’s

products. Ledford testified that the principals had no “experience with [the]

customer base” and therefore could not run the company. He emphasized Smith’s

key role in marketing Signature’s products, stating that “had we been able to retain

Brenda, we would have purchased the company.”100 Paul Walker said that “none of

the DynaVision Group were a part of the everyday management or marketing of

Signature” and that this “was [the] only reason” why DynaVision did not elect to

purchase the Active Members’ interest after the Put and Call issued. O’Dell

admitted that DynaVision’s principals were not qualified to run the company.

99
This testimony appears in the question and answer format appearing in note 33 supra.
100
The expert opinion testimony DynaVision proffered to the district court concerning
Signature’s value buttressed the fact that Signature’s value was tied to the Active Members’
management, marketing skills, and good will. DynaVision’s expert, in estimating that Signature
was worth $14 million, assumed not only that the Active Members would remain with the
company but also that Smith would increase her ownership interest in Signature to the point that
the firm would qualify as minority owned, and therefore receive additional
revenue—presumably from sales set aside for minority-owned entities. The expert provided no
estimation as to Signature’s value without the Active Members’ presence.

67
 In addition to this testimony, DynaVision’s principals’ conduct towards the

Active Members spoke volumes about how important the principals felt it was to

keep the Active Members in the company, at least until the principals themselves

decided to sell.101 The principals included in the Operating Agreement a provision

that made it highly unlikely that the Active Members would leave Signature before

the principals were ready to sell. If an Active Member sold his or her interest in

the company, § 10.4 of the Agreement would preclude that Member from

competing with Signature for a period of one year.102 Because they were not

financially independent, the Active Members would presumably need to find other

employment in the carpet business upon leaving the company. Lying idle for a

year would be burdensome, and an Active Member would therefore think twice

before leaving Signature.

The principals also included a provision to make it hard for the Active

101
Under the “Right of First Refusal” provision of the Operating Agreement, if DynaVision’s
principals obtained a bona fide offer to sell DynaVision’s interest in Signature, and they desired
to sell the interest, they would have to notify the Active Members who, in turn, would have the
right to purchase DynaVision’s interest at the price set in the bona fide offer. See supra note 49.
Oddly enough, this right of first refusal would not be triggered if DynaVision’s principals
received a bona fide offer to sell their interests in DynaVision and decided to accept it. In other
words, DynaVision’s principals could sell their interests in Signature in two ways: (1) causing
DynaVision to sell its interest in Signature, which would trigger the Active Members’ Right of
First Refusal; or (2) selling their interests in DynaVision, which would not.
102
See supra note 13.

68
Members to buy out DynaVision before DynaVision was ready to sell. Section 9.1

of the Operating Agreement addressed the possibility that the Active Members

might attempt to buy DynaVision’s interest pursuant to the § 9.5 Put and Call

provision. DynaVision’s principals knew the Active Members lacked the personal

resources sufficient to make an offer that DynaVision’ principals would be tempted

to accept;103 consequently, the Active Members would have to borrow the money to

fund any buy-out.104 Obtaining a conventional loan from a bank or other lending

103
In Ledford’s state court deposition, he testified as follows:

HORST: Did it make any difference to you whether there was a third party
involved in funding Bob, Brenda, and Bryan’s offer to purchase Dynavision . . . .
LEDFORD: Yes, it would make a difference to me.
HORST: Why?
LEDFORD: Because if Bob, Brenda, and Bryan didn’t have financial backing
from them, I don’t think they could have bought our interest and I don’t think this
whole thing would have come up.
104
In Ledford’s district court deposition, he testified as follows:

SINKFIELD: Do you know whether collectively and without help from a third
person in some form or the other they had the resources to pay three-and-a-half
million dollars for the Dyna-Vision interest?
LEDFORD: No, sir, I don’t know.
SINKFIELD: You don’t know one way or
the other . . . . Did you have any opinion on
the subject at the time?
LEDFORD: At the time we received the Put and Call . . . I had an opinion, yes,
sir.
SINKFIELD: And what was that opinion?
LEDFORD: That they probably could not.
SINKFIELD: And based on that opinion, how did you think they would pay for
the Dyna-Vision interest if y’all decided not to buy them out?
LEDFORD: I didn’t know.
SINKFIELD: Did you have an opinion as to what they would have to do?

69
institution would require collateral, and the only collateral they had of significant

value was their individual interests in Signature. Section 9.1, however, barred the

Active Members from pledging their interests to a lending institution.105 As a
LEDFORD: Well, I assumed if they bought us out . . . they would . . . have to
borrow the money. If they couldn’t do that, they would have to get the money
from someone else.

In Walker’s district court deposition, he testified as follows:

SINKFIELD: So you knew [the Active Members] had to have funding from [an
outside] source, is that correct?
WALKER: If they closed the deal, yes.
SINKFIELD: And you knew, to the best of your knowledge, that they did not
have sufficient resources among themselves to do it without outside funding; is
that correct?
WALKER: I would say with suspicion, they didn’t have. But to my initial
knowledge, no.
SINKFIELD: But to the best information you had told you they couldn’t fund it
without outside help. Is that correct?
WALKER: To the best information I had, yes.
105
Section 9.1 of Article 9 of the Operating Agreement, “Restrictions on Transfers and
Encumbrances,” states, in pertinent part:

The Members have . . . agreed that, without the express written consent of the
Company and all other Members in the Company, they will not transfer, assign,
sell, pledge, encumber, hypothecate . . . any of their Interests . . . except strictly in
accordance with the terms and requirements of the this Agreement, the same
being exhaustive of all methods and means by which such [Interests] may be
transferred. Any purported transfer in violation of any provision herein shall be
void and of no effect, and shall not operate to transfer any title or interest to the
purported transferee.

Like the Right of First Refusal Provision, supra note 49, this restriction had an uneven effect.
Although the Active Members would have to obtain DynaVision’s consent in order to pledge
their interests in Signature as collateral for a loan, DynaVision’s principals, namely Ledford,
O’Dell, and Walker, would not have to obtain the Active Members’ consent in order to pledge
their interests in DynaVision—and, indirectly, their interests in Signature—as collateral for a
loan. The Active Members’ consent would be necessary only if DynaVision itself wanted to
pledge its interest in Signature as collateral for a loan it was obtaining.

70
practical matter, then, the only way the Active Members could attempt a buy-out of

DynaVision’s interest would be to find someone like Peeples—someone willing to

advance the purchase price on the condition that, after acquiring DynaVision’s

interest, the Active Members would sell him all or part of the business and agree to

stay on and run the company.

Joiner revealed how indispensable the Active Members were to Signature’s

value in the letter he wrote to Krevolin on April 11, 2002, nineteen days before the

closing was to take place. In the letter, Joiner informed Krevolin that DynaVision

would refuse to close unless the Active Members signed a new agreement with

DynaVision and, as required by that new agreement, represented in writing that

they were acquiring DynaVision’s interest “solely for [their] own account . . .

without the financial participation of [a third party].”106

Although Joiner pointed to nothing in the Operating Agreement that would

require the Active Members to make these representations, he or his clients

apparently thought Krevolin would agree that the Agreement, read as a whole,

106
Joiner was probably following Ledford’s instructions. DynaVision’s principals had
authorized Ledford to “negotiate, execute, and convey the interests of” DynaVision to the Active
Members “on such terms and conditions and [he] deem[ed] equitable and just.” See supra part
I.C. The representation called for by the new agreement was one of the “terms and conditions”
Ledford insisted on; if not, Joiner thought it up on his own.

71
required that the representations be made.107 If Krevolin had agreed, he would have

advised his clients that they could not honestly make such misrepresentations

without inviting DynaVision to claim fraud. See McFarland v. Kim, 275 S.E.2d

364, 366 (Ga. Ct. App. 1980) (holding that misrepresentations about present state

of mind are actionable as fraud). The misrepresentations would also have given

DynaVision an affirmative defense in the event the Active Members sued for

specific performance. Defending an action for fraud or countering an affirmative

defense in a suit for specific performance would be expensive and could be very

unpleasant; Joiner apparently thought Krevolin would therefore advise his clients

to abandon their plans and continue to manage Signature in partnership with

DynaVision.

Krevolin’s response, in a letter to Joiner dated April 16, was brief: The

Active Members would not make the representations Joiner’s letter was seeking,

and moreover, if DynaVision refused to close, the Active Members would take it to

court. As far as the Active Members were concerned, their business relationship

with DynaVision’s principals was at an end. The principals’ threat of litigation if

107
Neither of plaintiffs’ briefs on appeal mentions the new agreement Joiner sent Krevolin in his
April 11 letter. Consequently, we do not know whether plaintiffs’ counsel discovered something
in the Operating Agreement that would have justified Joiner’s demand that the Active Members
make the representations that the new agreement, if executed, would have called for.

72
the Active Members did not abandon the Put and Call had gone for naught. Joiner

informed Ledford of Krevolin’s response, and, after considering DynaVision’s

options,108 Ledford instructed Joiner to go forward with the closing on April 30, as

previously agreed.109

2.

DynaVision’s principals could not have persuaded the Active Members to remain

with the company, obtained a management team to replace them, or located a buyer

for Signature, even if Peeples admitted his involvement.

DynaVision’s principals have conceded that they were unable to persuade

the Active Members or Smith individually to remain with Signature and that they

were unsuccessful in finding a suitable management team to replace them. They

likewise have conceded that they had no success in locating a carpet company or

an investor willing to purchase the company. Two of the three carpet

108
DynaVision’s principals had two options. One was to close the deal and take the $3.5
million on the table. If they wanted to sue the Active Members, they could do that later—and
they eventually did. The other option was to refuse to close and defend the Active Members’
expected suit for specific performance. We infer that they eschewed this option because it was
less attractive economically.
109
The record does not reveal what Joiner and Ledford said to one another after Joiner received
Krevolin’s letter. We infer that they decided that DynaVision had no basis for refusing to
transfer its interest to the Active Members; the § 9.5 Put and Call provision of the Operating
Agreement required them to capitulate. On April 25, Joiner wrote Krevolin and acknowledged
that the transaction would close on April 30. His letter made no reference of Krevolin’s
rejection of his demands regarding the representations and the Green Road Property.

73
manufacturers Ledford and O’Dell contacted, Mohawk Carpets and Clay Miller

Carpets, expressed no interest in buying Signature, even if doing so meant keeping

the firm out of Peeples’s hands.110 Jerry Thomas of Matel Carpets expressed

interest but only if Smith and the other Active Members would be willing to stay

with Signature, which they were not.

In their brief to us, however, plaintiffs argue that Ledford and O’Dell would

have been able to find a buyer for $8.5 million if Peeples had simply admitted his

involvement in the Put and Call. With a buyer’s commitment in hand, DynaVision

would have then purchased the Active Members’ interest for $3.5 million and

reaped a $5 million profit.

Plaintiffs explain that once Peeples admitted his involvement, DynaVision’s

principals would have discovered that he agreed to pay $10 million for Signature

(including $3.5 million to DynaVision). Ledford and O’Dell would have then had

two excellent selling points when offering Signature to Mohawk, Clay Miller, and

Matel. First, because Peeples was going to pay $10 million for Signature, their

asking price of $8.5 million was not only reasonable, it was an exceptional bargain.

Second, Peeples saw Signature as an effective way to reach the hospitality

industry. By buying Signature, Peeples’s competitors could gain entry to the

110
See supra part I.B.

74
hospitality market and, at the same time, keep Peeples out. Plaintiffs argue:

Had [DynaVision] known the truth, DynaVision’s chances of finding
a buyer willing to pay more than $7 million for [Signature] would
have increased dramatically.
....
Potential buyers and investors would certainly view the [Active
Members’] agreement to sell [Signature] for $10 million to the
Peeples Group as material. Thus, those contacted by DynaVision
during the [thirty-day] election period may have acted differently,
themselves, had they known of the agreement between the Peeples
Group and the Active Members. Such knowledge may have increased
their assessment of the value of the company or validated the value
mentioned by DynaVision. Moreover, knowledge of a strategic
acquisition by Shelby Peeples might have inspired those with
marketing experience to assist DynaVision in order to maintain their
competitive advantage. Knowledge of the truth could have enabled
DynaVision to find a purchaser and/or marketing group for
[Signature].

Appellants’ Br. at 39–40.

Several flaws in plaintiffs’ argument are immediately obvious. First, there is

no support in the record for the statement that Peeples agreed to pay the Active

Members $10 million for Signature at any time, let alone during the thirty-day

election period. The most Peeples ever offered for Signature was roughly $6.5

million. In the January 21 letter of intent, Peeples discussed loaning the Active

Members $3.5 million to enable them to purchase DynaVision’s interest and then

forgiving the loan and paying them $3 million for Signature’s assets once they

75
acquired the company.111 In actuality, Peeples paid around $6 million to acquire

Signature. Following the closing, he forgave the $3.5 million loan he had given

the Active Members and paid $2.25 million for Signature’s assets. He lowered the

price upon discovering an error in the company’s books.

To arrive at the $10 million figure, plaintiffs add the bonuses Peeples

agreed to pay the Active Members under the Asset Purchase Agreement and

employment contracts112 to the amount he actually paid for Signature’s assets.113

The amount of these bonuses, however, was contingent on Signature’s future

performance; the Active Members would only be eligible if Signature made a

profit above a certain amount on a yearly basis.114 Consequently, the bonuses are

111
See supra part I.B.
112
These agreements are set out in the text in part I.D, supra.
113
The Plaintiffs’ brief states:

The defendants purchased the assets of [Signature] for consideration that was
valued at over $10 million at the time of their agreement. . . . The bonuses in the
Asset Purchase Agreement, which are capped at $5 million, combined with the
direct payments to the Active Members and the forgiveness of the loan used to
buy out DynaVision, exceeds $10 million.

There is no reference in the Asset Purchase Agreement to any bonuses “capped at $5 million,” so
we assume plaintiffs refer to the bonus provisions referred to in note 30, supra.
114
The Asset Purchase Agreement states:

In addition to the base salary, each of the Active Members shall be entitled to an
annual bonus, equal to twenty percent (20%) of the amount by which the net pre-
tax profits of [Peeples] exceed One Million Five Hundred Thousand Dollars on an

76
not part of Peeples’s payment for Signature; they are simply part of the Active

Members’ compensation arrangements for their continued service with the

company.

Second, plaintiffs have not explained how they would have learned of the

price Peeples intended to pay for Signature.115 According to the Georgia Court of

Appeals, the Active Members had no obligation under the Operating Agreement to

reveal the details of their plan. Ledford, 618 S.E.2d at 633–36. If Paul Walker had

asked about these details, Peeples’s response would therefore undoubtedly have

been that it was none of his business. This is essentially what Krevolin told Joiner

when Joiner demanded that the Active Members represent prior to closing that they

were purchasing DynaVision’s interest “solely for [their] own account” and

“without the financial participation of any other Person,” meaning without

Peeples’s participation.

Plaintiffs would therefore not have been able to lure potential buyers by

annual basis: provided, however (a) shortfalls in annual net pre-tax profits shall
be carried forward to succeeding years . . . .

The employment contracts add the caveat that “the maximum amount payable by Employer to
Employee [in bonuses] shall be one [$1.6 million].”
115
In the state court case against the Active Members and Signature, plaintiffs claimed that it
was not until August 12, 2003, when they took Ownbey’s deposition, that they learned of the
price Peeples paid for Signature and the terms of his employment arrangement with the Active
Members. The next day, they moved the court for leave to amend their complaint to add Peeples
as a party defendant. See supra part II.A.

77
telling them that Peeples offered $10 million for the company. Instead, plaintiffs’

best selling pitch was the one they actually used: Peeples was going to acquire

Signature, and Peeples’s competitors would benefit economically if they stepped

in, bought the company, and kept it from falling into Peeples’s hands.

3.

The principals had to choose between purchasing the Active Members’ interest and

risking the loss of their investment or selling their interest for a $3.5 million profit.

DynaVision’s principals had thirty days to decide whether to buy or sell.

They opted to sell and received a $3.5 million profit, an extraordinary return on

their initial investment.116 Ledford and O’Dell also received the release of their

obligation to FNBC to guarantee payment of the $911,000 loan the bank had given

Signature.117 Had they opted to buy instead, they would have assumed the risk that

116
The record indicates that only a small initial investment was made. DynaVision’s principals
(1) obtained the $200,000 line of credit FNBC gave Signature when it commenced operations,
(2) guaranteed, in part, the $630,000 loan the Dalton Whitfield Bank gave Leasing to purchase
the Green Road Property in October 1999, and (3) guaranteed, in part, the $911,000 loan FNBC
gave Signature on October 24, 2001. See supra part I.A.
117
Ledford and O’Dell were not entitled to such release. The § 9.5 Mandatory Put and Call
provision specified that the “sale [of DynaVision’s interest] shall be for cash at closing, but all
loans from and guaranties executed by the selling Members must be paid in full and released
prior to closing.” The Operating Agreement defines “Members” as DynaVision, Smith, Thomas,
and Ownbey. See supra part I.A. Ledford and O’Dell were members of DynaVision, but were
not Members within the meaning of the above language. Their personal guarantees should have
remained in force. Were DynaVision to have bought the Active Members’ interests instead of
selling out, in addition to paying the Active Members $3.5 million in cash, it would have been
required to obtain their release as guarantors of FNBC’s $911,000 loan to Signature and, further,

78
the company would have to close down unless they found a management team to

run it. Moreover, without a management team, they would have had great

difficulty selling the company. Potential buyers, knowing that Signature’s value

was diminishing, perhaps exponentially, would have been able to simply stand by

and wait for the day when the principals had no alternative but to take whatever

price they could get.

Faced with these alternatives, DynaVision’s principals had to choose the one

that satisfied their economic self-interest: They had to sell. As the Georgia Court

of Appeals, drawing on what Ledford and O’Dell had to say on deposition,118

observed:

Either the Active Members’ interest in [Signature] was worth $3.5
million to Dyna-Vision or it was not. The fact that Peeples financed
the offer could not have materially affected Dyna-Vision's decision-
making with respect to [Signature’s] value, because if Dyna-Vision
chose to buy the Active Member's interest, it could not force Peeples
(or any other prospective buyer) to buy [Signature] for a fixed price.
And there is no evidence in the record that Dyna-Vision had an
interested buyer or that [Signature] had any value to any other
prospective buyer. Moreover, both Ledford and O'Dell deposed that,
even if they could have raised the money to buy out the Active
Members, owning [Signature] without the Active Members would
have been “foolish” and “made no sense” because the Active

to satisfy any obligations they may have incurred on Signature’s behalf in the process of carrying
on the company’s business.
118
The deposition testimony they gave in state court is part of the record here.

79
 Members were the heart of [Signature’s] value. As O'Dell admitted
“we didn’t really have a choice. . . . We didn’t have a management
group. . . . The day the put and call came in, I wouldn't give two cents
for finding a group to replace them.” Because Peeples’ involvement
did not affect the value of the Active Members’ interest, it was
immaterial.

Ledford, 618 S.E.2d at 634–35.

We began this discussion by stating that to obtain a reversal of the district

court’s determination that they failed to create a jury issue as to the reliance

element of their Rule 10b-5(b) claims, plaintiffs had to convince the court that the

evidence, considered in the light most favorable to them, yielded circumstantial

facts from which a jury reasonably could infer that if Peeples had not denied his

involvement in the Put and Call, DynaVision’s principals would have purchased

the Active Members’ interest. Peeples contends that the evidence establishes

circumstantial facts that yield but one inference: DynaVision’s principals had no

option but to sell. We agree. Peeples’s misrepresentations played no causative

role in the DynaVision principals’ decision to sell to the Active Members.

C.

Perhaps realizing the futility of the arguments they have advanced, plaintiffs

present an argument that they failed to present to the district court while it was

considering the merits of their claims. The argument is founded on § 9.1 of the

80
Operating Agreement, which precludes a Member from pledging an interest in

Signature as collateral for a loan.119 Plaintiffs contend that the Active Members

breached this provision by pledging their interests in Signature as collateral for the

$3.5 million loan they obtained from Peeples.120 They did not know about the

pledge prior to the April 30 closing, they represent, but would have suspected it

had Peeples admitted that he was behind the Put and Call. DynaVision now argues

that had it suspected that the Active Members had pledged their interests in

violation of § 9.1, it would have rejected the Put and Call. Then, if the Active

Members sued for specific performance, it would have asserted the breach of § 9.1

as an affirmative defense, citing the Georgia principle of equity—that “a party

seeking specific performance of a contract must show substantial compliance with

his part of the agreement, and the breach of a material condition will bar a decree

of specific performance.” Saine v. Clark, 219 S.E.2d 407, 408–09 (Ga. 1975).

The allegation that DynaVision’s principals would have rejected the Put and

119
See supra note 105.
120
Peeples was aware of § 9.1's prohibition against the Active Members pledging their interests
as collateral for a loan. In his January 21, 2002, letter to the Active Members, see supra part I.A,
he stated that, “to the extent of any conflict in the provisions of this Letter and the provisions of
the Signature Operating Agreement, the provisions of the Signature Operating Agreement shall
prevail and the conflicting provision(s) of this Letter shall be void and of no effect whatsoever.”
In other words, if DynaVision should have claimed that the Active Members had pledged their
interests in Signature as collateral for the $3.5 million loan, Peeples would have treated the loan
as unsecured.

81
Call had they suspected a violation of § 9.1 does not appear in plaintiffs’ complaint

as part of the Count One federal securities law claims. Nor was it made in

plaintiffs’ response to Peeples’s motion for summary judgment.121 Plaintiffs’

response on summary judgment does contain a factual statement that the Active

Members pledged their interests in disregard of § 9.1. This statement, however,

was not made as part of plaintiffs’ argument on the reliance element—plaintiffs did

not assert that but for Peeples’s misrepresentations, DynaVision would have

elected to purchase the Active Members’ interest.122 Moreover, in its order

granting Peeples summary judgment, the district court made no reference to the

argument plaintiffs now present, and the plaintiffs did not move the court pursuant

to Rule 59(e) to reconsider its decision on the ground that it had overlooked the

argument.

The argument appeared for the first time in plaintiffs’ response to Peeples’s

post-judgment motion for PSLRA sanctions. Peeples, in his motion, argued that

plaintiffs lacked a factual basis to assert that DynaVision’s principals relied to their

121
The plaintiffs also failed to raise this argument at any time during the state court litigation.
122
During oral argument before this panel, Peeples’s attorney told the court that plaintiffs’
counsel was presenting a reliance argument he had not presented to the district court. Plaintiffs’
counsel disagreed, and cited a page in plaintiffs’ response to Peeples’s motion for summary
judgment where counsel said the argument appeared. The page contains the factual statement
that the Active Members breached § 9.1 without any reference to a reliance argument.

82
detriment on Peeples’s misrepresentations. Then, plaintiffs finally argued that had

they known about the misrepresentations, they would have rejected the Put and

Call and refused to close. If the Active Members sued, they would have pled the

breach of § 9.1 as an affirmative defense. The court’s order denying Peeples’s

motion for sanctions, however, made no reference to this argument.

It requires no citation of authority to say that, except when we invoke the

“plain error doctrine,” which rarely applies in civil cases, we do not consider

arguments raised for the first time on appeal. A mere recitation of the underlying

facts, furthermore, is insufficient to preserve an argument; the argument itself must

have been made below. See City of Nephi v. Fed. Energy Regulatory Comm’n,

147 F.3d 929, 933 n.9 (D.C. Cir. 1998) (holding that a party does not preserve an

argument for appellate review by “merely informing the [district] court in the

statement of facts in its opening brief [of the factual basis for the claim]”); Wasco

Products, Inc. v. Southwall Tech., Inc., 166 Fed. App’x 910, 911 (9th Cir. 2006)

(unpublished) (“Although [the argument was] stated in a statement of facts, it was

never argued and never ruled upon. Without any proffered explanation for this

default, the argument is waived.”). Here, plaintiffs did not use the factual

statement in arguing the reliance issue.

Because we are reversing the district court’s rulings on the sanctions issues,

83
and given what we have said thus far in this opinion, we think it appropriate to say

a word about the reach of § 9.1. Even if an Active Member had attempted to

pledge of his or her interest in Signature as collateral for a loan without the consent

of DynaVision and the other Active Members, § 9.1 would have rendered the

pledge “void and of no effect.” If the lender attempted to seize the interest in

Signature to satisfy the debt, DynaVision and the other Active Members could

claim that the pledge was void.123 If the Active Member paid the loan, however,

and no seizure occurred, DynaVision and the other Active Members could not have

suffered injury on account of any § 9.1 breach. Nor could DynaVision have used

the pledge as the basis for a lawsuit against the breaching Active Member.124

V.

We now address what remains of plaintiffs’ Count Four claims that Peeples

123
If, prior to accepting the collateral, the lender knew that § 9.1 treated the pledge as void,
whether the lender would prevail in a contest with DynaVision would be questionable.
124
To be sure, the Operating Agreement was structured so as to prevent either side, DynaVision
or the Active Members, from selling its interest in Signature to a third party if the other side
objected. The Georgia Court of Appeals made this observation in Ledford, in commenting on
the purpose behind § 9.2 of Article 9, the “Right of First Refusal” provision. Section 9.2 was
“plainly intended to prevent outsiders from buying into [Signature]. In this way, the Members
maintained control over who their business partners were to be.” 618 S.E.2d at 633. However,
once the Active Members invoked the Put and Call provision of § 9.5 and DynaVision did not
elect within 30 days to purchase their interests, “the right of first refusal provisions of the
Operating Agreement [became] moot since DynaVision [was] no longer . . . an owner in
[Signature] possessing a right of first refusal.” Ledford, 618 S.E.2d at 633. The court of
appeals’s analysis of the Operating Agreement’s structure is straightforward and comports with
logic and common sense. It should not have come as a surprise to plaintiffs’ counsel.

84
aided and abetted Smith, Thomas, and Ownbey in breaching their fiduciary duties

to Leasing and, separately, to Ledford and O’Dell as Members of Leasing.125

Plaintiffs argue that Peeples aided and abetted two separate breaches of the

obligation Smith, Thomas, and Ownbey assumed under the Limited Liability

Company Act, O.C.G.A. § 14-11-305(1), as members and managers of Leasing, to

“act in a manner” that they “believe[ed] in good faith to be in the best interests” of

the company and “with the care an ordinarily prudent person in a like position

would exercise under similar circumstances.”126 We affirm the district court’s

dismissal of the claims and hold that Peeples could not have aided and abetted a

breach of fiduciary duty because, as a matter of law, no such breach occurred.

A.

125
As indicated in part II.B.1, supra, Count Four alleged that Peeples aided and abetted Smith,
Thomas, and Ownbey in breaching two of their fiduciary duties: to inform the plaintiffs that
Peeples was supporting their Put and Call and to transfer the Green Road Property back to
Leasing. Here, plaintiffs do not challenge the district court’s reliance on the court of appeals’s
holding in Ledford v. Smith that the Active Members had no fiduciary duty to inform
DynaVision of Peeples’s involvement. Also, DynaVision obviously cannot state a Count Four
claim about the Green Road Property because DynaVision did not hold an interest in Leasing or
the Green Road Property and, therefore, could have suffered no injury by the alleged breach of
any fiduciary duty in connection with the transfer of that property. Accordingly, the district
court properly dismissed DynaVision’s Count Four claim relating to the Green Road Property.
126
See supra note 50, for the full text of O.C.G.A. § 14-11-305(1). Leasing’s operating
agreement is not part of the record in this case. We assume arguendo that an operating
agreement existed and that Smith, as Leasing’s president, assumed the duties the statute
imposed. We also assume that Thomas and Ownbey were responsible for Smith’s conduct since
the complaint alleged that they were co-conspirators.

85
 In support of their aiding and abetting claim, plaintiffs allege two separate

breaches of fiduciary obligation. First, they contend that Smith breached her

fiduciary duty by failing to inform Ledford and O’Dell that the document they

signed before Cynthia Trammel at FNBC was a warranty deed. Had Smith

disclosed the nature of the document to Ledford and O’Dell, plaintiffs submit, they

would not have signed it. Second, plaintiffs contend that Smith, Thomas, and

Ownbey breached their fiduciary duties to Leasing, Ledford, and O’Dell by

refusing to convey the Green Road Property back to Leasing, pursuant to Paul

Walker’s demands, after the warranty deed was signed but before the sale of

DynaVision’s interest closed. Plaintiffs argue that Peeples aided and abetted these

breaches so that the Active Members would be in a position to give him title to the

Green Road Property after acquiring DynaVision’s interest.127

The district court, concluding that Georgia did not recognize a cause of

action for aiding and abetting the breach of a fiduciary duty, dismissed plaintiffs’

claims. The Georgia Court of Appeals subsequently held, however, in Insight

127
As proof that Peeples induced Smith and the Active Members to commit these statutory
breaches, plaintiffs point to Peeples’s January 21 letter of intent to the Active Members, which
plaintiffs describe in their initial brief on appeal as a “contract[] to purchase the Green Road
Property as part of the assets of [Signature]” and the promise Peeples made in the Asset
Purchase Agreement to indemnify the Active Members for any expenses they might incur if held
liable for refusing to accede to Paul Walker and Ledford’s demand that Signature transfer the
property back to Leasing.

86
Techs., Inc. v. FreightCheck, LLC, 633 S.E.2d 373 (Ga. Ct. App. 2006), that such

an aiding and abetting claim is cognizable.128

In light of the court of appeals decision in that case, we assume for purposes

of this case that the obligation § 14-11-305 imposes on limited liability company

members and managers is, as plaintiffs’ contend, a “fiduciary duty,” and we

therefore proceed to the merits of plaintiffs’ aiding and abetting claims. As

indicated above, plaintiffs’ claims are founded on two distinct breaches of their

statutory obligation. The breaches have to have occurred; otherwise, Peeples

cannot be held liable for aiding and abetting. We therefore determine whether, as a

threshold matter, a jury reasonably could find, as plaintiffs allege, that Smith and,

subsequently, Smith, Thomas, and Ownbey breached the obligations they assumed

under § 14-11-305 as members and managers of Leasing.

B.

128
The elements of the claim are:

(1) through improper action or wrongful conduct and without privilege, the
defendant acted to procure 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;
(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.

Insight Technologies, Inc. v. FreightCheck, LLC, 633 S.E.2d 373, 379 (Ga. Ct. App. 2006). at
379.

87
 We begin with plaintiffs’ argument that Smith should have explained the

significance of the warranty deed that Ledford and O’Dell signed before Cynthia

Trammel at FNBC. To analyze this argument, we proceed through the explanation

that, according to the plaintiffs, Smith should have given in order to fulfill her

fiduciary obligations. We then conclude that, as a matter of law, such an

explanation would not have caused the plaintiffs to act differently than they

actually did.

Smith’s explanation, to be complete and leave no stone unturned, would

have taken Ledford and O’Dell back to October 2001, when Ledford, O’Dell, and

the Active Members applied to FNBC for a loan on behalf of Signature. That loan

was intended to pay off Signature’s current loans at FNBC, pay off the balance due

on the note Leasing gave the Dalton Whitfield Bank,129 and provide Signature with

additional working capital. Signature needed in excess of $900,000 to accomplish

all of this.

Smith would have reminded Ledford and O’Dell that Cynthia Trammel—the

FNBC officer who processed their loan application and, before that, handled the

loan they had obtained from the Dalton Whitfield Bank for Leasing—had to

129
The note was in the principal amount of $630,000, the sum of money Leasing needed, and
used, to purchase the Green Road Property. Smith, Thomas, Ownbey, Ledford, and O’Dell had
signed the note and guaranteed its payment. See supra note 16.

88
submit their application to FNBC’s board of directors for approval. She would

also have explained that the board approved the loan subject to certain conditions,

among them (1) that Ledford, O’Dell, Smith, Thomas, and Ownbey sign

Signature’s note, and thus guarantee its payment and (2) that Signature, joined by

Ledford, O’Dell, Smith, Thomas, and Ownbey, give the bank a deed to secure debt

on the Green Road Property.130 This meant that if Leasing held title to the property,

it would have to convey the property to Signature so that Signature, in turn, could

deed the property unencumbered to FNBC to secure the loan. Ledford, O’Dell,

and the Active Members had agreed to these conditions.

Next, Smith would have explained that Trammel, having obtained their

consent to these conditions, took the steps necessary to close the transaction. One

was to have the bank’s lawyer, Todd McCain, conduct a title search of the Green

Road Property. McCain conducted a search, issued an opinion, and delivered it to

Trammel. The opinion stated that title to the property was held by Leasing and that

Signature could not give the bank a deed to secure debt unless Leasing deeded the

property to Signature before the loan closed.

130
In handling the $630,000 Leasing loan at the Dalton Whitfield Bank, Trammel required the
same five individuals sign the note and guarantee its payment. The inference is that they were
responsible for Signature’s business affairs to the same extent they were responsible for
Leasing’s affairs.

89
 Smith would have gone on to say that the closing went as planned except

that Signature gave the bank a deed to secure debt on property it did not own;

Leasing had neglected to convey the Green Road Property to Signature. Trammel

had overlooked McCain’s caveat that the conveyance occur prior to closing. Her

failure to obtain the necessary warranty deed from Leasing to Signature did not

come to light until later, when she read McCain’s opinion letter.

Upon reading McCain’s letter, Trammel realized that she had to obtain a

deed from Leasing to Signature so that the deed to secure debt Signature had given

the bank would not be worthless.131 To solve the problem, Trammel called

McCain’s office, and it prepared the warranty deed at issue. Trammel then called

Smith. She told Smith that a “document” needed to complete the loan closing had

to be signed and asked her to come to the bank with Ledford, O’Dell, Thomas, and

Ownbey for that purpose. Smith immediately informed the others of Trammel’s

request. A day or so later, she arrived at the bank with Thomas and Ownbey and

signed the document, the warranty deed, before a notary and a witness. When

Ledford and O’Dell failed to appear, Trammel called Smith again. Smith, in turn,

called Ledford, who contacted O’Dell, and they, too, signed the deed, before the

131
The record does not contain a copy of the deed to secure debt Ledford, O’Dell and the others
gave the bank; thus, we do not know whether, in signing it, they expressly warranted that
Signature was giving the bank title to property it owned.

90
same notary and witness. At that time, plaintiffs argue, Smith should have

informed them that the document was a warranty deed.

The position plaintiffs have taken throughout this litigation is that

notwithstanding a full explanation by Smith—that Leasing had to convey the

Green Road Property to Signature so that the $911,000 loan could go

through—Ledford and Smith would not have signed the “document.” We question

whether Ledford and O’Dell would have refused to sign after Smith informed

Trammel of their noncompliance, Trammel referred the matter to the bank’s

lawyer, McCain, and McCain contacted Ledford and O’Dell’s lawyer. Ledford

and O’Dell’s lawyer would have informed them of the legal consequences that

might flow if they still refused to accede to the conveyance of the Green Road

Property to Signature. In any event, what counsel would have had to say has a

bearing on whether, in the final analysis, Smith’s failure to tell Ledford and O’Dell

that the “document” they were to sign was a warranty deed constituted a breach of

Smith’s § 14-11-305 obligation to “act in a manner . . . she believes in good faith

to be in the best interests of” Leasing and its members, “with the care an ordinarily

prudent person in a like position would exercise.”

McCain would have told Ledford and O’Dell’s lawyer that Ledford, O’Dell,

Smith, Thomas, and Ownbey induced the bank to loan Signature $911,000 on the

91
condition that Signature give the bank a deed to secure debt on the Green Road

Property. To do that, Signature would have to possess clear title to the property.

Although the bank insisted that these five individuals guarantee the payment of the

loan by co-signing Signature’s note, their guarantee was not enough; the bank

needed collateral in the form of a deed to secure debt from Signature. Another

reason why the bank needed this additional security is that part of the $911,000

loan would be used to pay off Leasing’s debt to the Dalton Whitfield Bank, thereby

relieving Leasing’s guarantors, including Ledford and O’Dell, of potential liability

for Leasing’s non-payment of the debt, and, at the same time, depriving Signature

of the full value of the loan.132

McCain would have then observed that, in executing Signature’s deed to

secure debt, Ledford and O’Dell represented that Signature owned the property, on

the surface a false representation. If making such representation was intentional, as

their current position seems to imply, they obtained the bank’s funds under false

pretenses. And, moreover, Leasing lined its pockets, and the guarantors of

132
The record does not indicate the balance due on Leasing’s $630,000 note to the Dalton
Whitfield Bank. An inescapable inference is that the payoff consumed a goodly portion of the
amount due on that note and that Signature would be deprived of the benefit of the payoff unless
it owned the Green Road Property. Also inescapable is the inference that in inducing the FNBC
to make the loan on the conditions its board of directors dictated, Ledford, O’Dell, Smith,
Thomas, and Ownbey were acting as members of Leasing as well as on behalf of Signature.

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Leasing’s debt to the Dalton Whitfield Bank were relieved of potential liability, at

Signature and FNBC’s expense. McCain would inform Ledford and O’Dell’s

counsel of the elements of the federal bank fraud statute, 18 U.S.C. § 1344, that

according to the Eleventh Circuit Court of Appeals, in United States v. De La

Mata, 266 F.3d 1275, 1298 (11th Cir. 2001), makes it a crime to knowingly make

materially false representations to a federally insured bank for the purpose of

obtaining money.133 Ledford and O’Dell might be subject to prosecution even if

they intended to repay Signature’s $911,000 loan.134

Given the representations Smith and the others made to induce the FNBC to

make the Signature loan and the benefit that inured to Leasing and its guarantors

when its note to the Dalton Whitfield Bank was paid off, we fail to discern how

Smith could be said to have breached her § 14-11-305 obligation to Leasing,

Ledford, and O’Dell. She did precisely what she and the others had promised the

133
Although the record does not reveal that FNBC was insured by the Federal Deposit Insurance
Corporation, the probability is that it was. And if not, Ledford and O’Dell would be amenable to
prosecution under Georgia law for theft by deception. See, e.g., O.C.G.A. § 16-8-3; Gentry v.
State, 414 S.E.2d 696, 697 (Ga. Ct. App. 1992).
134
See United States v. Hollis, 971 F.2d 1441, 1452 (10th Cir. 1992) (holding that a “person
violates the bank fraud statute when he knowingly executes a scheme to obtain money from a
financial institution by means of false or fraudulent representations . . . . [I]f a defendant
knowingly provided materially false information in order to induce the loan, the crime is
complete, and it is irrelevant whether or not he intended to repay or was capable of repaying
it.”).

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bank they would do. In sum, plaintiffs failed to establish a breach on Smith’s part

and, as a result, failed to make out a case of aiding and abetting against Peeples.

C.

This brings us to the second alleged breach, the refusal of Smith, Thomas,

and Ownbey to accede to Paul Walker and Ledford’s demand that they cause

Signature to convey the Green Road Property to Leasing.135 According to

plaintiffs, O.C.G.A. § 14-11-305 obligated the Active Members, as members or

managers of Leasing, to make the conveyance. Plaintiffs ignore the fact that § 14-

11-305 actually obligated the Active Members, as managers of Signature, not to do

that: if they had made the conveyance, the Active Members would, in effect, have

given Leasing the part of the $911,000 FNBC loan proceeds Signature used to pay

off Leasing’s note to the Dalton Whitfield Bank while gaining Signature nothing in

return. Given our disposition of the first breach, it would be inconsistent to hold

that § 14-11-305 obligated the Active Members to cause Signature to transfer the

135
Walker and Ledford made this demand on behalf of Ledford, O’Dell, and Bryan Walker, qua
Leasing members, after the Put and Call’s 30-day election period ended and DynaVision became
obligated by operation of § 9.5 of the Operating Agreement to transfer its interest in Signature to
the Active Members. If this were not the case, and DynaVision maintained its interest in
Signature until the April 30, 2002, closing, the Active Members could not have complied with
Walker and Ledford’s demand; Signature could not have conveyed the Green Road Property to
Leasing unless DynaVision’s representative on Signature’s board of directors, Edward Staten,
consented to the conveyance. His consent might be problematic since not all of DynaVision’s
members were members of Leasing as well.

94
property back to Leasing. The second breach therefore fails as a foundation for

plaintiffs’ second aiding and abetting claim against Peeples.

The district court, had it entertained Count Four on the merits, would have

been required to grant Peeples summary judgment. We accordingly affirm its

judgment dismissing the count for failure to state a claim for relief.

VI.

A.

In his cross-appeal, Peeples argues that the district court abused its

discretion in refusing to sanction plaintiffs and their attorneys under the PSLRA

for filing and prosecuting the federal securities law claims in this case.136 The

PSLRA requires the district court, upon final adjudication of the action, to make

“specific findings regarding compliance by each party and each attorney . . . with

each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any

complaint, responsive pleading, or dispositive motion.”137 15 U.S.C. § 78u-4(c)(1).
136
Peeples contends that the district court’s December 22, 2005, summary judgment order
rejecting plaintiffs’ claims necessarily makes it clear that plaintiffs’ Count One federal securities
law claims were baseless at the time they were brought.
137
15 U.S.C. § 78u-4(c) states in pertinent part:

(c) Sanctions for abusive litigation
(1) Mandatory review by court
In any private action arising under this chapter, upon final adjudication of the
action, the court shall include in the record specific findings regarding
compliance by each party and each attorney representing any party with each

95
The district court makes these findings as it normally would do under Rule 11. See

Citibank Global Mkts., Inc. v. Rodriguez Santana, 573 F.3d 17, 32 (1st Cir. 2009)

(“[T]he PSLRA . . . does not alter the standards used to judge compliance with

Rule 11.”); Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186

F.3d 157, 167 (2d Cir. 1999) (“The PSLRA thus does not in any way purport to

alter the substantive standards for finding a violation of Rule 11 . . . .”). Rule 11(b)

(as written at the time the district court ruled) states, in pertinent part:

(b) Representations to Court. By presenting to the court (whether
by signing, filing, submitting, or later advocating) a pleading, written
motion, or other paper, an attorney . . . is certifying that to the best of
of the person’s knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to
harass or to cause unnecessary delay or needless increase in the cost
of litigation;
(2) the claims . . . and other legal contentions therein are warranted
by existing law or by a nonfrivolous argument for the extension,
modification, or reversal of existing law or the establishment of new
law;
(3) the allegations and other factual contentions have evidentiary
support or, if specifically so identified, are likely to have evidentiary
support after a reasonable opportunity for further investigation or
discovery . . . .

If the district court finds that a party or attorney violated any of these

requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any
complaint . . . .

96
provisions, it must impose sanctions.138 15 U.S.C. § 78u-4(c)(2). The PSLRA thus

strips the district court of its discretion to excuse a Rule 11 violation. This differs

from the ordinary Rule 11 context, where the district court retains discretion to

excuse an attorney’s negligence, mistake, or incompetence and elect not to impose

sanctions;139 Rule 11(c) provides that sanctions may be imposed “upon the

attorneys, law firms, or parties that have violated subdivision (b) or are responsible

for the violation.”140 Fed. R. Civ. P. 11(c) (2006).141

138
15 U.S.C. § 78u-4(c) states, in pertinent part:

(2) Mandatory sanctions
If the court makes a finding under paragraph (1) that a party or attorney violated
any requirement of Rule 11(b) . . . as to any complaint, responsive pleading, or
dispositive motion, the court shall impose sanctions on such party or attorney in
accordance with Rule 11 . . . . Prior to making a finding that any party or attorney
has violated Rule 11 . . . the court shall give such party or attorney notice and an
opportunity to respond.
139
This discretion derives from Rule 11’s plain text: “If, after notice and a reasonable
opportunity to respond, the court determines that subdivision (b) has been violated, the court
may . . . impose an appropriate sanction on the attorneys, law firms, or parties . . . .” Fed. R. Civ.
P. 11(c)(1) (2006) (emphasis added).
140
The court may not, however, award monetary sanctions against a represented party for a
subdivision (b)(2) violation. Fed. R. Civ. P. 11(c)(2)(A) (2006).
141
The quoted language is from the version of Rule 11 in effect when the district court made its
sanctions rulings on March 21, 2006. Rule 11 also provided that “[a]bsent exceptional
circumstances, a law firm must be held jointly responsible for a violation committed by its
partners, associates, and employees.” Fed. R. Civ. P. 11(c)(1)(A) (2006).
The current version of Rule 11 has been materially the same since its amendment in
1993. The Advisory Committee’s notes to the 1993 amendments state:

The sanction should be imposed on the persons—whether attorneys, law
firms, or parties—who have violated the rule or who may be determined to be

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 B.

We now explain how the district court should conduct its sanctions

assessment and how we review its sanctions decision. The district court is tasked

with making “specific findings” regarding attorney compliance with Rule 11(b)’s

requirements.142 The standard for measuring such compliance is an objective

responsible for the violation. The person signing, filing, submitting, or
advocating a document has a nondelegable responsibility to the court, and in most
situations is the person to be sanctioned for a violation. Absent exceptional
circumstances, a law firm is to be held also responsible when, as a result of a
motion under subdivision (c)(1)(A), one of its partners, associates, or employees
is determined to have violated the rule. Since such a motion may be filed only if
the offending paper is not withdrawn or corrected within 21 days after service of
the motion, it is appropriate that the law firm ordinarily be viewed as jointly
responsible under established principles of agency. This provision is designed to
remove the restrictions of the former rule. Cf. Pavelic & LeFlore v. Marvel
Entertainment Group, 493 U.S. 120 (1989) (1983 version of Rule 11 does not
permit sanctions against law firm of attorney signing groundless complaint).
The revision permits the court to consider whether other attorneys in the
firm, co-counsel, other law firms, or the party itself should be held accountable
for their part in causing a violation. When appropriate, the court can make an
additional inquiry in order to determine whether the sanction should be imposed
on such persons, firms, or parties either in addition to or, in unusual
circumstances, instead of the person actually making the presentation to the court.
For example, such an inquiry may be appropriate in cases involving governmental
agencies or other institutional parties that frequently impose substantial
restrictions on the discretion of individual attorneys employed by it.
142
The district court must make findings regarding all of plaintiffs’ counsel. H. Greely Joiner,
LLC is listed as counsel on plaintiffs’ complaint, though no counsel from the firm signed the
complaint. In their sanctions briefing to the district court and their Petition for Rehearing,
plaintiffs argue that H. Greely Joiner, LLC’s involvement was limited; thus, their counsel should
not be subject to sanctions. On remand, the district court must consider the extent of H. Greely
Joiner, LLC’s involvement with the lawsuit and decide whether sanctioning counsel would be
appropriate.
In addition to assessing plaintiffs’ counsel’s compliance with Rule 11(b), the district
court is required to assess the parties’ compliance as well. Because we find no basis for
sanctioning the parties, the ensuing discussion focuses on plaintiffs’ counsel’s compliance.

98
standard: what a reasonably competent attorney would have done under the

circumstances.143

In the case at hand, the PSLRA required the district court to determine

whether plaintiffs’ attorneys violated Rule 11(b) by certifying, “after an inquiry

reasonable under the circumstances,” that Count One’s federal securities law

claims were “not being presented for any improper purpose,” Fed. R. Civ. P.

11(b)(1), were “warranted by existing law or by a nonfrivolous argument for [a

change in the] law,” Fed. R. Civ. P. 11(b)(2), and “h[ad] evidentiary support,” Fed.

R. Civ. P. 11(b)(3).144 Ordinarily, compliance determinations are made in a

proceeding akin to a bench trial; after entertaining the parties’ submissions and

argument of counsel, the court enters “specific findings” “in the record” regarding

counsel’s performance. 15 U.S.C. § 78u-4(c)(1).145 These “specific findings” are

143
Kaplan v. DaimlerChrysler, A.G., 331 F.3d 1251, 1255 (11th Cir. 2003); Donaldson v. Clark,
819 F.2d 1551, 1556 (11th Cir. 1987) (en banc) (“Rule 11 as amended incorporates an objective
standard”); Hashemi v. Campaigner Publ’ns, Inc., 784 F.2d 1581, 1583 (11th Cir. 1986) (noting
that Rule 11 incorporates an objective standard that is more stringent than the original good-faith
formula that the district courts applied prior to the 1983 amendment); Paganucci v. City of New
York, 993 F.2d 310, 312 (2d Cir. 1993) (“[T]he applicable test is whether a reasonably
competent attorney would have acted similarly.”).
144
See supra page 96 for the pertinent text of Rule 11(b).
145
The § 78u-4(c)(1) proceeding to determine the parties’ and their attorney’s compliance with
Rule 11(b) is not an adversary proceeding in the sense that it is initiated on the motion of, say,
the prevailing party. Rather, the proceeding is initiated by the court. The prevailing party will
nevertheless be advocating for the imposition of sanctions, and the court will be focusing on the

99
the functional equivalent of what Federal Rule of Civil Procedure 52(a)(1)

designates as findings of fact and conclusions of law 146 and are necessary for

meaningful appellate review of the district court’s sanctions decision. In this case,

the district court did not conduct a bench-trial type of proceeding. Rather, after

Peeples moved the court to alter or amend its judgment, see Fed. R. Civ. P. 59(e),

on the ground, among others, that the court had not made its PSLRA Rule 11(b)

compliance determinations, the court requested the parties to brief the PSLRA

issues and rendered its sanctions decision on the basis of the parties’ briefs,

without oral argument.

We review the court’s sanctions decision, which is founded on the “specific

findings,” for abuse of discretion. See Cooter & Gell v. Hartmax Corp., 496 U.S.

384, 409 110 S. Ct. 2447, 2463, 110 L. Ed. 2d 359 (1990) (“[A]n appellate court

explanation of the losing party and its attorneys of why they did not violate the Rule. We have
found no reported PSLRA decision that addresses the question of who has the burden of proof in
a § 78u-4(c)(1) proceeding. What is clear, however, is the court’s obligation to enter into the
record “specific findings” regarding the parties’ and their attorney’s Rule 11(b) compliance. It is
obvious that, to make such findings, the court must conduct a productive inquiry, though holding
a hearing is not required.
146
Rule 52(a)(1) states, in pertinent part:

In an action tried on the facts without a jury . . . the court must find the facts
specially and state its conclusions of law separately. The findings and
conclusions may be stated on the record after the close of the evidence or may
appeal in an opinion or memorandum of decision filed by the court.

100
should review the district court’s decision in a Rule 11 proceeding for an abuse of

discretion.”); Kaplan v. DaimlerChrysler, A.G., 331 F.3d 1251, 1255 (11th Cir.

2003) (“We review Rule 11 sanctions under the abuse-of-discretion standard.”).

“A district court would necessarily abuse its discretion if it based its ruling on an

erroneous view of the law or on a clearly erroneous assessment of the evidence.”

McGregor v. Bd. of Comm’rs of Palm Beach County, 956 F.2d 1017, 1022 (11th

Cir. 1992) (quoting Cooter & Gell, 496 U.S. at 405, 110 S. Ct. at 2461).

We pause here to elucidate the meaning of abuse of discretion review in the

PSLRA context. We find it helpful to explain how abuse of discretion review

differs from de novo review.

By definition . . . under the abuse of discretion standard of review
there will be occasions in which we affirm the district court even
though we would have gone the other way had it been our call. That
is how an abuse of discretion standard differs from a de novo standard
of review. As we have stated previously, the abuse of discretion
standard allows “a range of choice for the district court, so long as that
choice does not constitute a clear error of judgment.”

United States v. Frazier, 387 F.3d 1244, 1259 (11th Cir. 2004) (en banc) (quoting

Rasbury v. I.R.S., 24 F.3d 159, 168 (11th Cir. 1994)). “The application of an

abuse-of-discretion review recognizes the range of possible conclusions the trial

judge may reach.” Id. Therefore, when reviewing the elements of a district court’s

decision of whether to impose sanctions, the relevant question is not whether we

101
would have come to the same decision if deciding the issue in the first instance.

The relevant inquiry, rather, is whether the district court’s decision was tenable, or,

we might say, “in the ballpark” of permissible outcomes.

When deciding to impose sanctions under Rule 11(b)(1) and (b)(3), the

ballpark will usually be larger than the ballpark in a Rule 11(b)(2) determination.

That is because Rule 11(b)(1) and (b)(3) determinations are usually more fact-

based and may involve credibility assessments.147 In a Rule 11(b)(2)

determination, where the only issue is whether the asserted claim is warranted by

existing law, the size of the ballpark will depend on how clear the substantive law

is.148 Where the substantive law is very clear as to when a particular claim is

permissible, the district court is more constrained in deciding whether the claim is

warranted by existing law. In some cases, the law will be so clear that the district

court can only decide the question one way without abusing its discretion.

We provide an example to illustrate these points. Suppose a district court

grants a Rule 12(b)(6) motion to dismiss a claim, but declines to find a violation of

147
On appeal, we review whether the district court’s findings of fact were “clearly erroneous”
and whether the court’s legal rulings were based on “an erroneous view of the law.” See Cooter
& Gell, 496 U.S. at 405, 110 S. Ct. at 2461.
148
The Rule 11(b)(2) determination is whether counsel’s view of the law supporting the
plaintiff’s claim is tenable—a legal rather than a factual determination. There may be wider
discretion in deciding what is tenable in a Rule 11(b)(2) decision regarding whether counsel’s
argument for a change in the law was nonfrivolous.

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Rule 11(b)(2). The plaintiff appeals the Rule 12(b)(6) dismissal, and the defendant

cross-appeals the denial of Rule 11(b)(2) sanctions. In the plaintiff’s appeal,

applying the de novo standard of review, we affirm the Rule 12(b)(6) dismissal

because there is no legal support for the claim. In the defendant’s cross-appeal,

applying the abuse of discretion standard, we affirm the denial of sanctions

because the district court’s Rule 11(b)(2) compliance finding was in the ballpark of

permissible outcomes. If, however, the law governing the plaintiff’s claim was

well-settled, and clearly precluded the claim, the ballpark would be very small. If,

under those circumstances, we concluded that the plaintiff’s, and thus the district

court’s, view of the law was untenable, we would reverse the district court’s

sanctions ruling and remand the case for the imposition of an appropriate sanction.

C.

1.

In the case at hand, the district court found no merit in any of the Count One

claims and therefore granted Peeples’s motion for summary judgment. Although

those claims lacked merit, the court declined to impose sanctions because

the Court cannot conclude that the position taken by the Plaintiffs and
their counsel was unreasonable or in bad faith. Other evidence in the
record . . . permitted Plaintiffs and their counsel to present reasonable,
good faith arguments that Plaintiffs acted as they did based on
Defendant’s conduct, and that Plaintiffs consequently had satisfied the

103
 causation and reliance elements of their securities law claims. The
Court therefore cannot determine that Plaintiffs and their counsel
lacked a reasonable basis in fact for filing this action, or that Plaintiffs
and their counsel knew or should have known that they lacked a
reasonable basis in fact.

The district court buttressed its decision by amending its order granting

Peeples summary judgment to add the following findings of fact, which relate to

three of Rule 11(b)’s subdivisions:

(1) Plaintiffs and their counsel did not present this action for any improper
purpose, such as to harass or to cause unnecessary delay or needless increase
in the cost of litigation;
(2) The claims and legal contentions presented by Plaintiffs and their counsel
in this action were warranted by existing law or by a nonfrivolous argument
for the extension, modification, or reversal of existing law or the
establishment of new law;
(3) The allegations and other factual contentions presented by Plaintiffs and
their counsel had evidentiary support or were likely to have evidentiary
support after a reasonable opportunity for further investigation or discovery .
. . .149

The findings and conclusions quoted above do not measure up to the specific

findings required by the PSLRA and are inadequate for appellate review. We say

this for several reasons. First, the court’s statement that “the Court cannot

149
The court’s order also referred to the fourth Rule 11(b) subdivision, with this statement: “(4)
Any denials of factual contentions made by Plaintiffs and their counsel were warranted on the
evidence or were reasonably based on a lack of information or belief.” The court did not cite
“any denials of factual contentions made by Plaintiffs and their counsel” so we assume that the
court was referring to the defendants’ answer to plaintiffs’ complaint.

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conclude that the position taken by the Plaintiffs and their counsel was

unreasonable or in bad faith” and that “it therefore cannot determine that Plaintiffs

and their counsel lacked a reasonable basis in fact for filing this action” appears to

be a statement that the party with the burden of proof failed to adduce sufficient

evidence to warrant a finding of noncompliance with Rule 11(b).150 The statement

is a legal conclusion, not a finding of fact. Moreover, the court does not lay out the

facts on which the conclusion is based. Second, the court refers to “other evidence

in the record” that presumably supported plaintiffs’ and their attorney’s legal and

factual theories, but it does not identify that evidence. Third, the statements

relating to Rule 11(b)’s subdivisions are mere conclusions, composed mainly in the

subdivisions’ words.

Specifically on (b)(2), the court, after rejecting plaintiffs’ Count One claims

on the merits, finds that the claims “were warranted by existing law or by a

nonfrivolous argument for the extension, modification, or reversal of existing law

or the establishment of new law.” The court does not explain why it granted

summary judgment on plaintiff’s claims but found that they “were warranted by

existing law.” Was it that the claims were tenable, but that the court had a

150
The court appears to have saddled Peeples with the burden of proving that a reasonably
competent attorney would not have brought plaintiffs’ Count One claims because he could not
have certified compliance with Rule 11(b)(1), (2), and (3).

105
narrower view of the law than other jurists of reason might have? As for the

possibility that plaintiffs were advancing a “nonfrivolous argument” for a change

in the law, we note that nowhere in the record—before the district court or this

court—did plaintiffs contend that they presented their Count One claims in an

effort to extend, modify, or reverse existing law or to establish new law, nor did the

court advance that argument for them.

2.

When a district court’s findings of fact and conclusions of law do little more

than restate the elements of the applicable statute, we ordinarily vacate the decision

and remand the case for further findings and conclusions. See, e.g., Tilton v.

Playboy Entm’t Group, Inc., 554 F.3d 1371, 1379 (11th Cir. 2009) (“Because the

district court did not articulate the reasoning behind its decision to deny Tilton’s

request for attorney’s fees, we remand to the district court to make appropriate

factual findings or to provide a reason for declining to award attorney’s fees.”);

Serra Chevrolet, Inc. v. Gen. Motors Corp., 446 F.3d 1137, 1152 (11th Cir. 2006)

(remanding and instructing the district court to “provide a rationale” and a “record

of its reasons” for any fine imposed as a sanction under Rule 37, sufficient to

“afford meaningful review”). We use the word “ordinarily” because a remand is

not necessary in all cases; in some cases, the record on appeal may be sufficiently

106
developed to enable us to adjudicate the merits of the appeal. Here, the merits turn

on whether a reasonably competent attorney could have filed and prosecuted the

Count One claims without violating Rule 11(b). If the record establishes

conclusively that a reasonably competent attorney could have done so, our review

would end there; the district court’s decision denying sanctions could not have

constituted an abuse of discretion. By the same token, if the record establishes

conclusively that no reasonably competent attorney could have filed and

prosecuted any of those claims, the district court’s decision denying sanctions

would have constituted an abuse of discretion.151 In that case, we would reverse the

district court’s decision with respect to the claims a reasonably competent attorney

could not have presented and remand the case for the imposition of sanctions. See

Pelletier v. Zweifel, 921 F.2d 1465, 1514 n.87 (11th Cir. 1991) (concluding that a

remand is unnecessary when the record “demonstrates beyond any question that

Rule 11 sanctions are in order”). Still, a remand for “specific findings” would be

in order as to the Rule 11 issues incapable of appellate review.

D.

1.

151
By conclusively, we mean that we can deduce from the record that any decision by a district
court not to impose sanctions would constitute an abuse of discretion.

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 In assessing plaintiffs’ attorneys’ compliance with Rule 11(b), the district

court failed explicitly to recognize that each of the five plaintiffs had sought relief

against Peeples in Count One under three theories of liability, for violations of

Rules 10b-5(a) and (b) and § 20(a). Count One therefore presented a total of

fifteen claims. Instead of treating Count One as presenting fifteen separate claims,

the district court bunched the fifteen claims together and considered them as a

whole. This is precisely how plaintiffs’ counsel drafted the complaint: counsel

bunched the federal securities fraud claims together152 with allegations that the

Active Members, in failing to disclose their arrangements with Peeples, breached

the fiduciary duties imposed on them by the Operating Agreement and conspired

with Peeples to defraud plaintiffs.

The district court also failed to analyze the Count One claims under each of

the subparts of Rule 11. As noted, the PSLRA requires the district court to

“include in the record specific findings regarding compliance by each party and

each attorney representing any party with each requirement of Rule 11(b) . . . .” 15

U.S.C. § 78u-4(c)(1) (emphasis added). Because the court is mandated to conduct

this Rule 11 assessment, that a party has or has not moved the court to impose

sanctions under the PSLRA, on the ground, for example, that opposing counsel

152
See supra note 57 and accompanying text.

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failed to comply with a certain subpart of Rule 11, is of no moment.153 In sum, in

this case, the district court was obligated to consider each of Count One’s fifteen

securities claims—the Rules 10b-5(a) and (b) and § 20(a) claims for all five

plaintiffs—for compliance with each subpart of Rule 11(b).

2.

Before we consider the merits of Peeples’s challenge to the district court’s

sanctions decision, we recall briefly what Peeples allegedly did to render himself

liable to plaintiffs under Rules 10b-5(a) and (b) and § 20(a) and why the district

court granted him summary judgment.154

First, Peeples falsely stated that he was not involved in the Put and Call that

the Active Members issued on February 25, 2002. DynaVision’s principals

reasonably relied on these false statements155 and, as a result, caused DynaVision to

153
The PSLRA gives the parties and counsel advance notice that, at the conclusion of the case,
the court will determine whether the parties and their counsel complied with Rule 11’s
requirements. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 579 F.3d 143, 152 (2d Cir. 2009)
(“By virtue of this statutory notice, consideration of sanctions in the PSLRA context can never
be sua sponte and can never come as a surprise, because Congress, not the court, has prompted
and mandated a Rule 11 finding.”).
154
As noted in part II.B.1, supra, the federal securities law claims were presented initially in
Count One and thereafter in Counts Two through Seven, each of those counts incorporating by
reference all of the complaint’s preceding allegations, including, of course, Count One. For ease
of discussion, we refer to this seven-count assertion of plaintiffs’ federal securities law claims as
Count One.
155
DynaVision’s principals say that they also relied on Peeples’s similar statement to Paul
Walker after the February 8, 2002, Put and Call (which subsequently was aborted) issued.

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sell its interest in Signature. This rendered Peeples liable to plaintiffs under Rule

10b-5(b).

Second, Peeples “directly or indirectly controlled the activities of the Active

Members” in their management of Signature’s affairs. This was evidenced by his

January 21, 2002, letter of intent, the “secret discussions” he had with the Active

Members prior to the issuance of the February 25 Put and Call, and the Asset

Purchase Agreement he entered into with them after they acquired DynaVision’s

interest. He thereby became liable, as a “controlling person” under § 20(a) of the

1934 Act, for the false statement Brenda Smith made to Ledford and O’Dell on

February 8 that the Active Members were “doing this on our own,” a Rule 10b-

5(b) violation, and for the Active Members’ failure to disclose the January 21,

2002 letter of intent and Peeples’s offer to purchase Signature.

Third, the Active Members, in violation of Rule 10b-5(a), engaged in a

“scheme, device, and artifice to defraud” DynaVision. Smith made the we are

“doing this on our own” statement pursuant to the scheme, and Peeples, as a

participant in the scheme, became vicariously liable for her statement and for the

Active Members’ failure to disclose the January 21 letter of intent and Peeples’s

offer.

The district court denied the first claim based on Peeples’s false statements

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because the statements played no role in DynaVision’s decision to sell.156 The

court denied the second claim because DynaVision’s principals did not rely on

Smith’s February 8 we are “doing this on our own” statement in electing to sell

DynaVision’s interest and because, as the Georgia Court of Appeals held in

Ledford v. Smith, the Active Members had no duty to disclose their arrangement

with Peeples. The court denied the third claim without elucidation.

In their petition for rehearing, plaintiffs contend that their attorneys should

not be sanctioned for joining co-plaintiffs with DynaVision as Count One plaintiffs

because a fair reading of the complaint reveals that DynaVision brought that count

alone. Such a reading is reasonable, plaintiffs maintain, because DynaVision was

the only plaintiff that owned a membership interest in Signature and therefore the

only seller. Plaintiffs note, moreover, that, in moving the district court for

sanctions, Peeples did not argue that sanctions were appropriate because co-

156
As indicated in part II.B.6, supra, plaintiffs abandoned their appeal of the district court’s
disposition of the Count One claims for relief under § 20(a) and Rule 10b-5(a). Nonetheless,
since we are reviewing the district court’s refusal to impose sanctions for plaintiffs’ prosecution
of those claims, we must determine whether plaintiffs’ counsel satisfied Rule 11(b)’s
requirements in presenting them.

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plaintiffs lacked standing to sue under Rule 10b-5(a) and (b) and § 20(a).157 That is,

Peeples’s counsel did not read Count One as having been brought by co-plaintiffs as

well as DynaVision; otherwise, counsel would have sought sanctions for having

done so. The notion that co-plaintiffs did not join DynaVision in prosecuting the

Count One claims—that DynaVision is the sole Count One plaintiff—is, in our

view, untenable. We say this for several reasons.

First, in drafting the complaint, plaintiffs’ counsel named co-plaintiffs as

plaintiffs in every count. They apparently did this to enable the court to entertain

co-plaintiffs’ state law claims in Counts Two through Seven—in the exercise of its

pendent claim jurisdiction.158 Given the limitations of pendent claim jurisdiction,

co-plaintiffs could not prosecute their state law claims unless they joined

DynaVision in prosecuting the Count One federal securities law claims.159

157
In their petition for rehearing, plaintiffs state: “Count One is reasonably construed as limited
to DynaVision, which sold its interest. Count One refers to DynaVision 11 times, and any
ambiguity as to which plaintiff asserts Count One is resolved by ¶¶ 90-92). Tellingly,
defendants did not move for sanctions on this basis.” (Citations omitted.)
158
Plaintiffs’ counsel were apparently unaware of the fact the enactment of 28 U.S.C. § 1367
eliminated pendent claim jurisdiction and ancillary jurisdiction. See supra note 89 .
159
As previously indicated, plaintiffs invoked 28 U.S.C. § 1331 and 15 U.S.C. § 78aa as the
jurisdictional bases for their Count One federal securities law claims and the doctrines of
pendent and ancillary jurisdiction as the jurisdictional bases for their Counts Two through Seven
state law claims. The doctrine of pendent jurisdiction enabled a federal district court to hear a

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 Second, until they filed their petition for rehearing, plaintiffs’ submissions to

the district court and this court belied the notion that co-plaintiffs were not Count

One plaintiffs. Although Count One sought damages for DynaVision, the plural

term “plaintiffs” was used to identify the parties to Count One, which alleged that

“plaintiffs” relied on Peeples’s and the Active Members’ representations in causing

DynaVision to sell its interest in Signature.160 In Count Six, “[p]laintiffs” sought

the recovery of “their” expenses, including attorney’s fees, incurred in prosecuting

state law claim, over which it lacked jurisdiction, when joined with a related federal claim, over
which it had jurisdiction, if the two claims arose out of the same event or connected series of
events. See United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 116 L. Ed.
2d 218 (1966). Thus, if co-plaintiffs were joined with DynaVision in Count One, the court
would have jurisdiction to entertain co-plaintiffs’ claims in Counts Two through Seven to the
extent that they arose out of the same event or series of events that gave rise to Count One’s Rule
10b-5(a) and (b) and § 20(a) claims. The doctrine of ancillary jurisdiction was somewhat like
pendent jurisdiction, but instead of supporting a plaintiff’s state law claim that was pendent to a
claim arising under federal law, the doctrine supported jurisdiction over claims interposed by
parties other than the plaintiff. See Federman v. Empire Fire & Marine Ins. Co., 597 F.2d 798,
810 (2d Cir. 1979) (“[W]hen, subsequent to the filing of the complaint, a party other than the
original plaintiff injects state claims into a controversy as counterclaims, cross-claims, or
third-party claims, such claims fall within the court’s ancillary jurisdiction rather than its
pendent jurisdiction.”). Given plaintiffs’ counsel’s objective—to provide the district court with
a jurisdictional base for co-plaintiffs’ state law claims—they should have invoked § 1367, not
the doctrine of ancillary jurisdiction.
160
For example, the following statements appear in Count One: “The Plaintiffs reincorporate
herein by reference . . . .”; “The securities fraud described herein ultimately financially rewarded
the Defendants, at the expense of the Plaintiffs . . . .”; and “These misrepresentations and failures
to disclose by the Active Members were made with scienter and relied upon by the Plaintiffs to
their detriment.”

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Count One, as well as Counts Two through Five; in Count Seven, “[p]laintiffs”

sought punitive damages in Counts One through Five on the ground that Peeples’s

“conduct” “was willful, wanton and . . . would raise a presumption of conscious

indifference to consequences.”

Third, Peeples’s counsel, in prosecuting Peeples’s motion to dismiss and

motion for summary judgment, and the district court, in denying the motion to

dismiss and granting the motion for summary judgment, treated all plaintiffs as

prosecuting Count One. The statement that “Plaintiffs have alleged that the

Defendants are primary violators of two subsections of 10b-5” appears in plaintiffs’

responses to both of Peeples’s motions (emphasis added).161

Fourth, in their opening brief on appeal, plaintiffs frame the federal securities

law issues as applying to and being appealed by multiple “plaintiffs.”

Having establish that co-plaintiffs were parties to the federal securities

claims, we proceed to address the merits of these claims. To prevail on Count One,

co-plaintiffs had to prove that they were sellers of a security—DynaVision’s

161
Similarly, the district court, in granting Peeples’ motion for summary judgment, consistently
referred to the securities claims as “[p]laintiff’s Rule 10b-5 claim” and “[p]laintiffs’ control
person liability claim.”

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membership interest in Signature—as required by Blue Chip Stamps.162 They could

not prove that. It is therefore beyond doubt that a reasonably competent attorney

could not have certified that co-plaintiffs’ Count One claims satisfied the Rule

11(b)(2) and (3) requirements. We therefore reverse the district court’s decision to

the extent that it failed to sanction plaintiffs’ counsel for prosecuting Count One on

co-plaintiffs’ behalf and remand the case for the imposition of sanctions pursuant to

the PSLRA, 15 U.S.C. § 78u-4(c)(2).

3.

We turn now to DynaVision’s claims, beginning with its Rule 10b-5(b)

claim. The district court found, and we have agreed, that, as a matter of law,

DynaVision’s Rule 10b-5(b) claim failed because Peeples’s denial of involvement

in the Put and Call played no role in DynaVision’s decision to forego the purchase

of the Active Members’s interest. The district court nonetheless found that

sanctions were not warranted because “evidence in the record also permitted

Plaintiffs and their counsel to present reasonable, good faith arguments that

162
See Part III, supra.

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Plaintiffs acted as they did based on Defendants’ conduct.”163 As we have observed,

the district court did not identify that evidence. Hence, we cannot know whether

the facts the evidence yielded could have “permitted . . . counsel to present

reasonable, good faith arguments” for asserting the Count One claims. We

therefore vacate the district court’s sanctions decision with instructions that the

district court identify the evidence it was referring to and explain how that evidence

justified the plaintiffs’ counsel’s filing of DynaVision’s Count One claims. In

doing so, the court is limited to the evidence as it existed at the time it denied

sanctions, examining the information plaintiffs’ counsel were privy to at the time

they filed the complaint.164

4.

We next address DynaVision’s § 20(a) claim—that Peeples, as a control

163
The district court erred in utilizing the “good faith” standard in assessing Rule 11(b)
compliance. As indicated in note 143, supra, the good faith standard was abolished with the
1983 amendment to Rule 11.
164
This information would of course include the information plaintiffs provided counsel prior to
the filing of Ledford v. Smith in the Murray County Superior Court and the information
disclosed during the prosecution of that case, including that furnished on deposition by Paul
Walker, Ledford, and O’Dell.
If the district court is satisfied that a Rule 11(b) violation did not occur with the filing of
the complaint, it must consider whether, in light of the information plaintiffs’ counsel
subsequently acquired, they should have abandoned any of the Count One claims.

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person of the Active Members, was liable for the Active Members’ violation of the

1934 Act. In order to succeed on this claim, DynaVision had to prove both that the

Active Members violated the 1934 Act and that Peeples controlled the Active

Members in committing the violation. DynaVision asserted two underlying

violations of Rule 10b-5(b) by the Active Members for which Peeples was

derivatively liable: first, the Active Members’ failure to disclose the contents of the

January 21 letter and Peeples’s offer, and second, Smith’s misrepresentation that

they were “doing this on our own.”

We have no difficulty in concluding that the Active Members did not commit

an underlying securities law violation; however, the district court must consider on

remand whether a reasonably competent attorney could have made that claim.165

165
Smith’s “doing this on our own” statement was not actionable under Rule 10b-5(b) because it
had nothing to do with DynaVision’s decision to sell its interest in Signature rather than
purchase the Active Members’ interests. Absent Smith’s primary liability under Rule 10b-5(b),
Peeples could not be held secondarily liable under § 20(a). Likewise, the Active Members did
not have a duty to disclose the January 21 letter and Peeples’s “offer.” Such a disclosure is not
required by Rule 10b-5. In Ledford v. Smith, the Georgia Court of Appeals rejected the
argument that the Limited Liability Act and/or the Operating Agreement required the Active
Members, as fiduciaries, to disclose their pre–Put and Call negotiations or understandings with
Peeples. 618 S.E. 2d at 635–36. Moreover, § 9.2 of the Operating Agreement, entitled “Right of
First Refusal,” made clear that the Active Members could negotiate with Peeples in secret.
Section 9.2 gave a Member the right to receive a “bona fide offer” from a third party to purchase
the Member’s interest without informing the other Members of the offer. If a Member had the
right to receive an offer, it also had the right to solicit an offer and, in doing so, to negotiate with
the third party in secret. The Member’s duty to inform the other Members of an offer would not

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Likewise, we have no difficulty concluding that Peeples was not a controlling

person under § 20(a).

In this circuit, a defendant is liable as a controlling person under
section 20(a) if he or she “had the power to control the general affairs
of the entity primarily liable at the time the entity violated the
securities laws . . . [and] had the requisite power to directly or
indirectly control or influence the specific corporate policy which
resulted in the primary liability.”

Brown v. Enstar Group, 84 F.3d 393, 396 (11th Cir. 1996) (quoting Brown v.

Mendel, 864 F. Supp. 1138, 1145 (M.D. Ala. 1994)).166 In the situation at hand, “at

the time the entity violated the securities laws” refers to February 8, 2002, when

Smith uttered the we are “doing this on our own” statement. The “entity primarily

liable” refers to Smith and, because she allegedly spoke for Thomas and Ownbey,

the Active Members.

DynaVision posited that the following pieces of evidence established that

Peeples controlled the Active Members’ behavior in managing Signature and in

arise unless and until the Member “desire[d]” to accept the offer, at which point the Member
would have to notify the other Members of the offer.
166
To state a § 20(a) claim, the plaintiff must establish that the defendant “had the power to
control the general business affairs” of the controlled person, and “‘had the requisite power to
directly or indirectly control or influence the specific corporate policy which resulted in the
primary liability’” of the controlled person. Theoharous v. Fong, 256 F.3d 1219, 1227 (11th Cir.
2001) (quoting Brown v. Enstar Group, 84 F.3d 393, 396 (11th Cir. 1996)).

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dealing with DynaVision: (1) the January 21 letter of intent; (2) the “secret

discussions” with the Active Members in January and February of that year; and (3)

the Asset Purchase Agreement made after the Active Members acquired

DynaVision’s interest. While we have no difficulty concluding that none of this

evidence established control,167 the district court, on remand, must nonetheless

consider whether a reasonably competent attorney could have brought a federal

securities claim relying on this evidence to prove control.

5.

Having concluded our analysis of the § 20(a) claim, we turn to the claim

DynaVision brought under Rule 10b-5(a). Rule 10b-5(a) proscribes a “device,

167
The Asset Purchase Agreement was circumstantial proof of the non-binding discussions
Peeples had with the Active Members before they issued the Put and Call, but it did not make
him a controlling person at the time the Active Members committed the acts that allegedly
rendered them primarily liable under Rule 10b-5. Neither did the secret discussions. The
problem with relying on the January 21 letter of intent is the caveat appearing at the end of the
letter: “to the extent of any conflict in the provisions of this Letter and the provisions of the
Signature Operating Agreement, the provisions of the Signature Operating Agreement shall
prevail and the conflicting provision(s) of this Letter shall be void and of no effect whatsoever.”
Peeples’s lawyers drafted this language. They had read the Operating Agreement and were
especially sensitive to its provisions. They were particularly attuned to the affirmative
obligations that the Agreement imposed on the Active Members and the extent to which it
restricted their activity—for example, to the prohibition on the Active Members pledging their
interests in Signature as collateral for a loan. The caveat served to ensure that nothing Peeples
had written, or that the parties had discussed, could be considered as interfering with the Active
Members’ obligations to Signature and its Members. Peeples’s lawyers wanted to avoid
exposing their client, and the Active Members as well, to litigation.

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scheme, or artifice to defraud.” To recover under this rule, the plaintiff must show

not only that the defendant concocted a plan to defraud, but that the plan was

successful—that is, that the defendant, acting with scienter, misrepresented a

material fact on which the plaintiff relied to his detriment.168 See Ziemba v.

Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001). The misrepresentations

DynaVision relied on to establish this claim were those Peeples and Smith made.

They were not actionable because DynaVision did not rely on them in electing not

to purchase the Active Members’ interest. DynaVision’s Rule 10b-5(a) claim had

no foundation in the evidence. The district court rejected the claim without

discussion, because none was required. The court now must go one step further and

examine whether counsel ignored Rule 11’s admonitions in bringing it.

E.

We now consider whether the district court should have sanctioned plaintiffs

as well as their attorneys. A plaintiff is subject to monetary sanctions if the plaintiff

misrepresented the facts alleged in the complaint. See Byrne v. Nezhat, 261 F.3d

168
See supra part IV.A.

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1075, 1117-18 (11th Cir. 2001).169 In this case, we assume that what the individual

plaintiffs and Paul Walker told plaintiffs’ counsel prior to filing suit was essentially

what they stated on deposition in state court and repeated on deposition in the

district court, to-wit: DynaVision chose to sell its interest because it would have

“made no sense” and been “foolish” to elect the Put and Call option and purchase

the Active Members’ interests.170 These were straightforward, damaging

admissions. The decision of these laymen to file suit and to continue on to the end

was made on the advice of counsel. That said, we find no basis for imposing

monetary sanctions on plaintiffs.

VII.

For the reasons set out herein, we AFFIRM the district court’s judgment

granting defendants’ motion for summary judgment. We AFFIRM the district

court’s sanctions order to the extent that it denies PSLRA sanctions against

plaintiffs. We VACATE the sanctions order regarding the imposition of sanctions

169
As indicated in note 139, supra, under the version of Rule 11 in effect at the time the district
court made its sanctions rulings, monetary sanctions could not be awarded against a represented
party for a violation of Rule 11(b)(2).
170
See supra notes 31, 103, 104 and accompanying text.

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against plaintiffs’ attorneys, however, and REMAND the case with the following

instructions: (1) the court shall impose sanctions against plaintiffs’ attorneys for

filing and prosecuting the Count One claims on behalf of co-plaintiffs;171 and (2) the

court shall determine whether plaintiffs’ attorneys should be sanctioned for filing

and prosecuting the Count One Rule 10b-5(a) and (b) and 20(a) claims on behalf of

DynaVision in accordance with part VI of this opinion.

SO ORDERED.

171
The court must determine, in accordance with note 142, supra, whether H. Greely Joiner,
LLC should be sanctioned.

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EDMONDSON, Circuit Judge, concurring in the result in part and dissenting in

part.

I would grant the Petition for Rehearing to the degree it deals with sanctions.

I would affirm the whole judgment, including the denial of sanctions.

123