[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
MAY 22, 2009
No. 06-10715
THOMAS K. KAHN
________________________ 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 22, 2009)
Before EDMONDSON, Chief Judge, TJOFLAT and GIBSON,* Circuit Judges.
TJOFLAT, Circuit Judge:
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 a set 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 same set 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 he 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
*
Honorable John R. Gibson, United States Circuit Judge for the Eighth Circuit, sitting by
designation.
2
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,
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
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.
3
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
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 now appeals the district court’s decision rejecting its claims. Z cross-
appeals the court’s denial of sanctions under the PSLRA. On X’s appeal, we
dismiss part of X’s claims for lack of subject matter jurisdiction and affirm the
district court’s judgment as to the remainder. On Z’s cross appeal, we conclude
that Z is entitled to sanctions and therefore remand the case for their imposition.
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.3 Part II canvasses the
litigation as it evolved in state court and spread to federal court; describes the state
3
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. Harris v.
Coweta County,406 F.3d 1307, 1312 (11th Cir. 2005), rev’d on other grounds, Scott v. Harris,
127 S. Ct. 1769 (2007).
4
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, and part VII concludes.
I.
A.
X is DynaVision Group, LLC (“DynaVision”)4 and its principal owners,
Jimmy Ledford, Larry O’Dell, and Bryan Walker.5 Y is Brenda Smith, Robert
Thomas, and Bryan Owenby. Z is Shelby Peeples.
4
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.
5
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, ownership rights in 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”).
5
In July 1998, Paul Walker, Bryan Walker’s father, approached Smith,
Thomas, and Owenby, 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, Owenby, and Paul Walker formed
Signature Hospitality Carpets, LLC (“Signature”), dividing the company’s
interests equally between DynaVision on one hand and Smith, Thomas, and
Owenby on the other.6
Under Signature’s operating agreement, Smith, Thomas, and Owenby
managed the company, and DynaVision provided the capital.7 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
6
Smith, Thomas, and Owenby decided to share equal ownership of their one-half interest
in Signature; thus, each owned one sixth of Signature.
7
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 Owenby entered into the operating agreement under which
Smith, Thomas, and Owenby commenced running the company on July 9, 1998. This initial
agreement is not part of the record.
6
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”).8
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 Owenby entered
into a new operating agreement (“Operating Agreement” or “Agreement”), on
May 6, 1999. The Agreement referred to Smith, Thomas, Owenby, and
DynaVision as Signature’s “Members,” and Smith, Thomas, and Owenby as the
“Active Members.”9 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
8
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.
9
The district court, in its order granting summary judgment, used the term “Active
Members” to refer to Smith, Thomas, and Owenby 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.
7
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 Owenby was the
vice-president of manufacturing.10 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.11 In
10
Smith, Thomas, and Owenby 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.
11
The no-solicitation clause appears in Article Ten of the Agreement, “Employment of
Active Member; Restrictive Covenant; Non-Solicitation; No Publication of Confidential
Information,” as Section 10.4. It reads, in pertinent part, as follows:
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, section 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 nohow to compete with Signature. In this
opinion, we therefore treat section 10.4 as applying only to the Active Members.
8
reality, the clause applied only to the Active Members, since they were the ones
who possessed Signature’s customer contacts.12
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
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
12
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.
9
Active Members formed another limited liability company, Signature Leasing,
LLC (“Leasing”), with Ledford, O’Dell, and Bryan Walker.13 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.14 Once the building was equipped
to manufacture carpets, Signature moved in.15
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.16 In October 2001, Signature
asked FNBC for a loan that would pay off its FNBC loans and the balance due on
13
Smith, Thomas, and Owenby owned 50% of Leasing in equal shares; Ledford, O’Dell,
and Walker owned 50%, presumably in equal shares.
14
According to Trammel on deposition in the state court case, Smith, Thomas, Owenby,
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.
15
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.
16
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.
10
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, Owenby, Ledford, and O’Dell (the
“Guarantors”) would sign the note and thus guarantee its payment.17 Signature
and the Guarantors agreed to these conditions, the bank’s board approved the loan,
and Trammel proceeded to prepare for the closing.
Trammel’s first task was to have FNBC’s counsel, Todd McCain,18 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.
17
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 14.
18
McCain was the principal attorney in the McCain Law Firm, located in Dalton.
11
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.19 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 debt was worthless.
Something had to be done, so Trammel called McCain.20 In mid-January 2002,
McCain sent Trammel the document needed to solve the problem, a warranty deed
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 others Guarantors, and Smith did.
19
The note and deed to secure debt were not made part of the record before the district
court and thus are not before us.
20
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.
12
Smith, Thomas, and Owenby 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.21
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.
21
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.
13
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.22
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.23 The
three men met at least once during December to discuss the possible sale of
Signature.24 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
22
Both men testified to this effect on deposition in the state court case and in the district
court proceeding now under review.
23
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.”
24
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 8.
14
between $10-12 million.25 They designated Paul Walker to represent them in
negotiations with Peeples. Later that day, Paul Walker, Thomas, and Owenby 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 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
25
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.
15
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
DynaVision’s interest.26 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.27 The Active Members would remain as managers of
Signature under five-year employment contracts, with annual salaries starting at
26
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.”
27
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.
16
$160,000 and increasing each year and possible bonuses based on Signature’s
performance.28
The letter contained sections entitled “Confidentiality” and “No Discussions
with Others.” The “Confidentiality” section provided, in pertinent part:
[N]one 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].
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
28
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.
17
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
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 Section 9.5 of the Operating Agreement. The Put and Call informed
18
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.”29
29
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?
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.
19
On February 22, DynaVision's lawyer, H. Greely Joiner, Jr.,30 wrote a letter
to the Active Members stating that because Section 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
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
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. . . .
30
Joiner is a sole practitioner and owner of H. Greely Joiner, LLC.
20
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.31
31
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 [Owenby]”?
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.
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
21
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
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 more than just the money, its 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?
22
Faced with this dilemma, DynaVision’s principals looked 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
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
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.
23
fall into Peeples’s hands.32 Ledford stressed “the dynamics of what might happen
should a . . . company like [Signature] fall into the hands of . . . the Peeples
family.”33 But Thomas was not persuaded, nor was anyone else.34 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
Call. Motivated by these suspicions, Walker confronted Peeples directly. Peeples
denied any involvement.35 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.
32
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.
33
The quotation is taken from Ledford’s testimony on deposition in the state court case.
34
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.
35
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.
24
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
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,
25
execute and convey the interests of Dyna-Vision in Signature . . . to Smith,
Thomas, and Owenby . . . .” 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.36
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
36
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, Thomas,
and Owenby, 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 Owenby.
26
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 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.”
27
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
Members, as owners of all of Signature, caused the transfer of Signature’s assets
to Peeples for $5.75 million.37 Of that amount, $2.25 million went directly to the
37
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,
28
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
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 complaint38 was
they transferred Signature’s assets to PFLC, LLC.
38
DynaVision amended its complaint on December 27, 2002. Our references to the
complaint are to the amended complaint.
29
framed in four counts and asserted six claims, all on behalf of the plaintiffs both
individually and collectively.39 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 claim40 was that Leasing, and Ledford, O’Dell, Smith, Thomas, and
Owenby 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 claim41 was that Smith induced Ledford
and O’Dell to execute the warranty deed by falsely representing that FNBC needed
a corrective document without warning that the document was in fact a warranty
deed. The third claim42 was that Smith and the Active Members breached their
fiduciary duties to Leasing, causing Leasing to lose the value of the Green Road
39
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.
40
We place plaintiffs’ claims in an order different from the order in which they appear in
several of the counts of the complaint. The first claim appears in Count One.
41
This claim appeared in Count Two. The complaint implied, if not alleged, that
Thomas and Owenby were vicariously responsible 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.
42
This claim appeared in Count Four.
30
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 claim43 was that
Signature, Smith, Thomas, and Owenby 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.44 The fifth claim,45 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 claim46 alleged that by failing to disclose their discussions
and final arrangements with Peeples, the Active Members breached fiduciary
43
This claim appeared in Count Three.
44
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.
45
This claim appeared in Count Two.
46
This claim appeared in Count Four.
31
duties imposed by the Operating Agreement,47 the Georgia Limited Liability
47
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 Section 9.2 of Article Nine of the Operating Agreement, entitled “Right of First
Refusal,” and two of its parts, Sections 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 Section 9.2.1; hence, they did
not notify DynaVision of the discussions. Accordingly, to prevail on their sixth claim based on
Sections 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 Section 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
Section 9.2.3 of the Operating Agreement. That is, DynaVision would have purchased the
Active Members’ interests pursuant to Section 9.2.3 instead of selling its interest pursuant to the
Section 9.5 Put and Call provision.
32
Company Act,48 and Georgia common law.
On August 13, 2003, after the parties had joined the issues,49 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.50
Plaintiffs represented that they had not learned of Peeples’s involvement until the
day before, August 12, when they took Owenby’s deposition and Owenby testified
that Peeples had provided the funds to enable the Active Members to trigger the
Put and Call.51
48
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.
49
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.
50
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.
51
Defendants deposed Ledford on the same day, August 12.
33
The state court heard oral argument on the motion on September 25, 2003,
after discovery had closed.52 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.
52
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.
34
Plaintiffs moved the court to reconsider its ruling. The court denied their
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 [Plaintiff’s] 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 Peeples, PFLC, LLC, and Internal Management, Inc. in the
United States District Court for the Northern District of Georgia.53 The complaint
53
We are unable to discern from the allegations of plaintiffs’ complaint the nature of the
claims asserted, if any, against PFLC, LLC and Internal Management, Inc. We assume that they
were made parties defendant 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 has not been forthcoming, and because plaintiffs do not contend on appeal
that the district court erred in denying relief against those two defendants, we omit further
35
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.
reference to them.
36
We begin this process with Count One, which alleged three violations of the
federal securities laws.54 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 section 10(b) of the Securities
Exchange Act of 1934 (the “1934 Act”) and Rule 10b-5(b) promulgated
54
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 Sections 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.
37
thereunder.55 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 section 10(b) and
55
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), makes it unlawful:
To use or employ, in connection with the purchase or sale of any security
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 section 10(b) and 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 section 10(b). Though the
text of the Securities Exchange Act does not provide for a private cause of action for section
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., ___ U.S.
___, 128 S. Ct. 761, 768, 169 L. Ed. 2d 627 (2008) (citations omitted). In this opinion, we refer
to the section 10(b) and Rules 10b-5(a) and (b) claims in this case as claims under Rules 10b-5(a)
and/or (b).
38
Rule 10b-5(b) as a “controlling person” under section 20(a) of the 1934 Act.56
Specifically, 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 section 10(b) and Rule
10b-5(a).
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.”57
56
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
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.
57
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
39
Finally, the plaintiffs alleged that the misrepresentations, omissions, and
scheme described in Count One caused DynaVision to sell its interests and suffer
injury.58 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.59
Counts Two through Five alleged causes of action under Georgia common
law and statutory provisions.60 Count Two, “Violation of the Georgia Securities
Act,” alleged that the same conduct that gave rise to the Count One claims for
Defendants employed a scheme, device, and artifice to defraud that, in fact, operated as a fraud
upon DynaVision.”
58
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.
59
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.”
60
These counts, like Counts Six and Seven, incorporated by reference all antecedent
allegations of the complaint.
40
relief rendered Peeples liable to plaintiffs under the Georgia securities laws.61
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, and (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
61
Plaintiffs alleged a violation of the Georgia Securities Act, O.C.G.A. § 10-5-12(a)(2).
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).
41
that the “[d]efendants have acted in bad faith and have been stubbornly litigious
and caused Plaintiffs unnecessary trouble or expense.”
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.62
62
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.
42
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
43
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.63
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
63
As to that aspect of the first claim, the court concluded that unresolved material issues
of fact precluded summary judgment.
44
default fiduciary duties are trumped by an operating agreement,64 Ledford, 618
S.E.2d at 636,65 the court explained that Signature’s Operating Agreement allowed
the Active Members to obtain Peeples’s assistance in funding the Put and Call.
Citing Section 7.3 of the Operating Agreement, which authorized the Active
64
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 48, 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).
65
The Ledford court explained the basis for this policy:
[t]he 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).
45
Members to “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 Members’ 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 Section 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
46
into [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 634.
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’s 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. . . .
Consequently, they could not prove causation or damages, which
were essential to their fraud claims.
Id. at 634-35.
47
The court then addressed the plaintiffs’ second claim, that Smith, and thus
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
48
they had moved the court of appeals for reconsideration. On July 28, 2005, the
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’ 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
49
correct the multitude of legal and factual errors contained in that
opinion.66
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.67 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.68 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,69 and Count Five, that Peeples tortiously
66
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.
67
On December 2, the district court ordered counsel to inform it instanter of the supreme
court’s disposition of the motion.
68
The court entered a final judgment for Peeples the same day.
69
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.
50
interfered with the Active Members’ business relationship with DynaVision. The
court 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.70
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
70
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.
51
plaintiffs and their counsel for failing to comply with Rule 11. He also requested
sanctions for the Count One claims pursuant to 28 U.S.C. § 1927 and the district
court’s inherent power.71
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.
71
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.
52
6.
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 section 20(a) of the 1934 Act and Rules 10b-
5(a) and (b). Plaintiffs’ brief presents no argument in support of their section
20(a) and Rule 10b-5(a) claims,72 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.73 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
72
The district court did not address explicitly DynaVision’s Rule 10b-5(a) claim.
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 plaintiffs’ Rule 10b-5(a) claim itself as
having been abandoned.
73
We likewise deem abandoned plaintiffs’ Georgia securities law claims that mirror the
section 20(a) and Rule 10b-5(a) claims. See O.C.G.A. § 10-5-12(a)(2)(A)-(C).
53
the handling of the Green Road Property.74 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 jurisdiction over
plaintiffs’ Count One 10b-5(b) claims.75 Next, we move to plaintiffs’ Count Four
aiding and abetting claims. After that, we take up the PSLRA sanctions issues.
III.
Before we assess the merits of plaintiffs’ Rule 10b-5(b) claims, we address a
threshold question: whether we have subject matter jurisdiction, under 28 U.S.C. §
133176 and 15 U.S.C. § 78aa,77 to entertain the claims. Hernandez v. Att’y Gen.,
74
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 Peeples was providing the $3.5 million the
Active Members needed to close the purchase of DynaVision’s interest.
75
What we say about the merits of the Count One claims applies to plaintiffs’ Count Two
Georgia securities law 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. . . .”).
76
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.”
77
Section 78aa states, in pertinent part: “The district courts . . . shall have exclusive
jurisdiction of violations of this chapter 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.”
54
513 F.3d 1336, 1339 (11th Cir. 2008) (“[W]e must inquire into subject matter
jurisdiction sua sponte whenever it may be lacking.”).
We find the answer to that question in two Supreme Court decisions, Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d
539 (1975), and Bell v. Hood, 327 U.S. 678, 66 S. Ct. 773, 90 L. Ed. 939 (1946).
Under Blue Chip Stamps, a plaintiff must be a purchaser or seller of a security to
have a private cause of action under Rule 10b-5. Here, one seller, DynaVision,
sold, at most, one security, a fifty-percent interest in Signature. Accordingly,
DynaVision, as the seller of a security, had standing to sue Peeples under Rule
10b-5. Ledford, O’Dell, Walker, and Leasing (“co-plaintiffs”) did not.78
The district court should have recognized this at the time it considered and
ruled on Peeples’s motion to dismiss the complaint.79 After concluding that co-
78
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 are 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.
79
See Fed. R. Civ. P. 12(b)(6). Peeples’s motion was addressed to plaintiffs’ entire
complaint. 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. The memorandum did not
argue that co-plaintiffs were barred from suing under Rule 10b-5 because they were not sellers of
a security.
55
plaintiffs failed to state a claim under Rule 10b-5, the court should have moved to
the question of whether to dismiss their claims for want of subject matter
jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure.80 Bell v.
Hood holds that “a suit may sometimes be dismissed for want of jurisdiction
where the alleged claim under the Constitution or federal statutes clearly appears
to be immaterial and made solely for the purpose of obtaining jurisdiction or
where such a claim is wholly insubstantial and frivolous.” 372 U.S. at 682-83, 66
S. Ct. at 776. (emphasis added.). 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 a 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.” Id. Moreover, no amendment of the complaint could possibly have
cured its patent, and fatal, deficiency, that co-plaintiffs lacked standing to sue. In
80
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. at 682, 66 S. Ct. at 682.
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.
56
such an extreme case, the district court abused its discretion in failing to dismiss
co-plaintiffs’ Count One claims for want of jurisdiction.
Co-plaintiffs’ inability to invoke the district court’s jurisdiction under 28
U.S.C. § 1331 and 15 U.S.C. § 78aa for Count One did not foreclose their right to
litigate the claims asserted in Counts Two through Seven. Despite the fact that
Counts Two through Seven do not implicate a federal question, they are joined in
the case by a series of jurisdictional steps. First, because DynaVision sold a
security, the district court had jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. §
78aa to adjudicate DynaVision’s Count One securities fraud claims. Second, the
court therefore had supplemental jurisdiction under 28 U.S.C. § 136781 to
adjudicate any other claims DynaVision had against Peeples that were “so related
to” the Count One claims that they formed part of “the same case or
controversy.”82 DynaVision’s claims in Counts Two through Seven, given the
81
The complaint alleged that the district court had jurisdiction over all non-federal
claims plaintiffs were asserting under “the principles of pendent and ancillary jurisdiction” and
contained no reference to 28 U.S.C. § 1367, the provisions of which had superceded pendent and
ancillary jurisdiction.
82
Section 1367 states, in pertinent part:
(a) . . . in 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.
Counts Two through Seven incorporated by reference the federal securities fraud claims
57
manner in which the complaint presented them,83 appear to have been so related to
DynaVision’s Count One’s allegations, that they formed part of the same case or
controversy described in Count One.84 Finally, Rule 20 of the Federal Rules of
Civil Procedure authorized co-plaintiffs to join DynaVision as plaintiffs in Counts
Two through Seven since their claims arose out of “the same transaction,
occurrence, or series of transactions or occurrences” forming the predicate for
asserted in Count One, and Counts Three through Seven incorporated the claims of all
antecedent counts. 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 the Count One claims from Counts Two through Seven, and, moreover, struck from
Counts Three through Seven all claims incorporated by reference.
83
See supra part II.B.1.
84
As indicated supra part II.B.1, Count Three contained two “Conspiracy to Defraud”
claims, one brought by DynaVision and the other by Leasing. The Leasing claim appears to fall
without the court’s section 1367 supplemental jurisdiction. 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 without the court’s section 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.
58
DynaVision’s claims.85 Except as to Count One, therefore, we have jurisdiction to
consider co-plaintiffs’ claims.86
IV.
With jurisdiction established, we now turn to plaintiffs’ remaining securities
fraud and aiding and abetting claims. We address these claims in turn, affirming
the district court’s grant of summary judgment for Peeples.
A.
In a typical section 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,
85
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.
86
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. 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.
59
(5) economic loss, and (6) loss causation. Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, __ U.S. __, 128 S. Ct. 761, 768, 169 L. Ed. 2d 627 (2008).87
To establish a genuine issue of material fact as to the reliance element,88
plaintiffs89 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
87
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 sua sponte.
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.
88
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 Properties, Inc., 116 F.3d 1441, 1447 (11th Cir.
1997); see also Dura Pharmaceuticals, 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 claim and is “often
referred to in cases involving public securities markets (fraud-on-the-market cases) as
‘transaction causation’”).
89
We refer to all five plaintiffs. Our Bell v. Hood jurisdictional ruling that struck co-
plaintiffs’ claims from Count One has no effect on their Count Two claims under the Georgia
Securities Act.
60
DynaVision’s principals reasonably relied on the statements,90 and that because of
that reliance, the principals caused DynaVision “to engage in the transaction in
question.” Robbins v. Koger Properties, 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 (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
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
90
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
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 purposes, express the same element.
61
[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 . . . .91
B.
To obtain a reversal of the district court’s resolution of the reliance issue,
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
91
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.
62
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
inference that DynaVision would have elected to purchase the Active Members’s
63
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. Owenby 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
hospitality industry and thus capable of attracting a considerable volume of
business.
64
By their own admission in depositions taken in the state court case and in
this case,92 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.”93 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.
In addition to this testimony, DynaVision’s principals’ conduct towards the
Active Members spoke volumes about how important the principals felt it was to
92
This testimony appears in the question and answer format appearing supra note 31.
93
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.
65
keep the Active Members in the company, at least until the principals themselves
decided to sell.94 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, Section 10.4 of the Agreement would preclude that Member from
competing with Signature for a period of one year.95 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
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 Section 9.5 Put and
94
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 47. 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.
95
See supra note 11.
66
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;96 consequently, the Active Members would have to borrow
the money to fund any buy-out.97 Obtaining a conventional loan from a bank or
96
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.
97
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?
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?
67
other lending 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.98 As a practical matter, then, the only way the Active Members could
attempt a buy out DynaVision’s interest would be to find someone like
Peeples—someone willing to advance the purchase price on the condition that,
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.
98
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 47, 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.
68
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].”99
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,
required that the representations be made.100 If Krevolin had agreed, he would
have advised his clients that they could not honestly make such
99
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.
100
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.
69
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 the Active Members did not abandon the Put and Call had gone for
naught. Joiner informed Ledford of Krevolin’s response, and, after considering
70
DynaVision’s options,101 Ledford instructed Joiner to go forward with the closing
on April 30, as previously agreed.102
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
manufacturers Ledford and O’Dell contacted, Mohawk Carpets and Clay Miller
Carpets, expressed no interest in buying Signature, even if doing so meant keeping
101
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.
102
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 Section 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.
71
the firm out of Peeples’s hands.103 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 hospitality market and, at the same time, keep Peeples out. Plaintiffs argue:
103
See supra part I.B.
72
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
acquired the company.104 In actuality, Peeples paid around $6 million to acquire
104
See supra part I.B.
73
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 contracts105 to the amount he actually paid for Signature’s assets.106
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.107 Consequently, the bonuses are
105
These agreements are set out in the text supra part I.D.
106
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 supra note 28.
107
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
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
74
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.108 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
telling them that Peeples offered $10 million for the company. Instead, plaintiffs’
Employee [in bonuses] shall be one [$1.6 million].”
108
In the state court case against the Active Members and Signature, plaintiffs claimed
that it was not until August 12, 2003, when they took Owenby’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.
75
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.109 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.110 Had they opted to buy instead, they would have assumed the risk that
109
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.
110
Ledford and O’Dell were not entitled to such release. The Section 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 Ownby. 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,
to satisfy any obligations they may have incurred on Signature’s behalf in the process of carrying
on the company’s business.
76
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,111 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
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
111
The deposition testimony they gave in state court is part of the record here.
77
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 Section 9.1 of
the Operating Agreement, which precludes a Member from pledging an interest in
78
Signature as collateral for a loan.112 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.113 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 Section 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 Section 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).
112
See supra note 98.
113
Peeples was aware of Section 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.
79
The allegation that DynaVision’s principals would have rejected the Put and
Call had they suspected a violation of Section 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.114 Plaintiffs’
response on summary judgment does contain a factual statement that the Active
Members pledged their interests in disregard of Section 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.115
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.
114
The plaintiffs also failed to raise this argument at any time during the state court
litigation.
115
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 Section 9.1 without any reference to a reliance
argument.
80
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 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 Section 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
81
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,
and given what we have said thus far in this opinion, we think it appropriate to say
a word about the reach of Section 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, Section 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.116 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 Section 9.1 breach. Nor could
DynaVision have used the pledge as the basis for a lawsuit against the breaching
Active Member.117
116
If, prior to accepting the collateral, the lender knew that Section 9.1 treated the pledge
as void, whether the lender would prevail in a contest with DynaVision would be questionable.
117
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 Section 9.2 of Article 9, the “Right of First Refusal”
provision. Section 9.2 was “plainly intended to prevent outsiders from buying into [Signature].
82
V.
We now address what remains of plaintiffs’ Count Four claims that Peeples
aided and abetted Smith, Thomas, and Owenby in breaching their fiduciary duties
to Leasing and, separately, to Ledford and O’Dell as Members of Leasing.118
Plaintiffs argue that Peeples aided and abetted two separate breaches of the
obligation Smith, Thomas, and Owenby 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
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
Section 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.
118
As indicated supra part II.B.1, Count Four alleged that Peeples aided and abetted
Smith, Thomas, and Owenby 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’
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.
83
would exercise under similar circumstances.”119 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.
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
Owenby 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
119
See supra note 48, 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 Owenby were responsible for Smith’s conduct since the
complaint alleged that they were co-conspirators.
84
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.120
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
Technology, Inc. v. FreightCheck, LLC, 633 S.E.2d 373 (Ga. Ct. App. 2006), that
such an aiding and abetting claim is cognizable.121
In light of the court of appeals decision in that case, we assume for purposes
of this case that the obligation section 14-11-305 imposes on limited liability
company members and managers is, as plaintiffs’ contend, a “fiduciary duty,” and
120
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.
121
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).
85
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 Owenby breached the obligations they
assumed under section 14-11-305 as members and managers of Leasing.
B.
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
86
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,122 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 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
Owenby sign Signature’s note, and thus guarantee its payment and (2) that
Signature, joined by Ledford, O’Dell, Smith, Thomas, and Owenby, give the bank
a deed to secure debt on the Green Road Property.123 This meant that if Leasing
held title to the property, it would have to convey the property to Signature so that
122
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, Owenby, Ledford, and O’Dell
had signed the note and guaranteed its payment. See supra note 14.
123
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.
87
Signature, in turn, could deed the property unencumbered to FNBC to secure the
loan. Ledford and 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.
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
88
the bank would not be worthless.124 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
Owenby 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 Owenby 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
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
124
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.
89
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 section 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 Owenby induced the bank to loan Signature $911,000 on the
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
90
liability for Leasing’s non-payment of the debt, and, at the same time, depriving
Signature of the full value of the loan.125
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
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
125
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 Owenby were acting as members of Leasing as well as on behalf of Signature.
91
obtaining money.126 Ledford and O’Dell might be subject to prosecution even if
they intended to repay Signature’s $911,000 loan.127
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 section 14-11-305 obligation to Leasing,
Ledford, and O’Dell. She did precisely what she and the others had promised the
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 Owenby to accede to Paul Walker and Ledford’s demand that they cause
Signature to convey the Green Road Property to Leasing.128 According to
126
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).
127
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.”).
128
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
92
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
section 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 section 14-11-305 obligated the Active
Members to cause Signature to transfer the 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.
DynaVision became obligated by operation of Section 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.
93
Peeples argues that the district court abused its discretion in refusing to
sanction plaintiffs and their attorneys under the PSLRA for prosecuting the federal
securities laws claims in this case.129 The PSLRA required the district court, after
disposing of those claims, 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.”130 15 U.S.C. § 78u-4(c)(1). Rule 11(b), at the time the
district court ruled on sanctions, stated, 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,–
129
Peeples contends that the district court’s December 22, 2005 order denying plaintiffs’s
claims makes it clear that plaintiffs’ federal securities law claims were baseless at the time they
were brought.
130
15 U.S.C. § 78u-4 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 requirement of
Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint . . . .
(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 . . . , the court shall impose
sanctions on such party or attorney in accordance with Rule 11 . . . .
94
(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 non-frivolous 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 after notice and a reasonable opportunity to respond, the court
determines that subdivision (b) has been violated, the court may . . . impose an
appropriate sanction upon the attorneys, law firms, or parties that have violated
subdivision (b) or are responsible for the violation.”131 Fed. R. Civ. P. 11(c)
131
This language is from the version of Rule 11 in effect when the district court made its
sanctions rulings on March 21, 2006. The present version of Rule 11, effective December 1,
2007, contains this statement after the word “violation”: “Absent exceptional circumstances, a
law firm must be held jointly responsible for a violation committed by its partner, associate, or
employee.” Fed. R. Civ. P. 11(c)(1).
The current version of Rule 11, with the exception of the above-quoted language and
some stylistic changes, was adopted in 1993. The Advisory Committee’s notes 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
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
95
(2006). 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).
With this background in mind, our discussion of the PSLRA sanctions
issues proceeds as follows. First, we recall briefly the federal securities law claims
the complaint presented and why the court denied them. Next, we visit the
findings of fact the district court made in support of its holding that plaintiffs’
counsel satisfied the requirements of Rule 11(b). We determine that the court’s
findings of fact are inadequate but that a remand for further findings is
unnecessary because the record is sufficient to enable us to assess counsel’s
performance. We make that assessment under the objective standard that governs
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.
96
the review of Rule 11(b) compliance,132 and we conclude that the district court was
compelled to find that counsel failed to comply with the requirements of the rule.
A.
The federal securities law claims were presented initially in Count One and
thereafter in Counts Two through Seven, each of which incorporated 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 the Count One claims. Count One alleged the following:
First, Peeples’s 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 statements133 and, as a result, caused DynaVision
to sell its interest in Signature. This rendered Peeples liable to plaintiffs under
Rule 10b-5(b).
132
Rule 11 incorporates an objective standard. 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
Publications, Inc., 784 F.2d 1581, 1583 (11th Cir. 1986) (holding 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,
3112 (2d Cir. 1993) (“[T]he applicable test is whether a reasonably competent lawyer would
have acted similarly.”).
133
DynaVision’s principals say that they also relied on Peeples’s similar statement to
Paul Walker after the February 8, 2002 Put and Call issued.
97
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 section 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 are “doing this on our own” and for the
Active Members’ failure to disclose the January 21, 2002 letter of intent and
Peeples 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 Rule 10b-5(b) claim based on Peeples’s false
statements because the statements played no role in DynaVision’s decision to
98
sell.134 It denied the section 20(a) 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. Finally, the court denied the Rule 10b-5(a) claim without
explication.
B.
Although it rejected the Count One claims, the district court declined to
impose sanctions because
[the] 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 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.135
134
As indicated supra part II.B.6, plaintiffs abandoned their appeal of the district court’s
disposition of the Count One claims for relief under section 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 filing them.
135
The district court buttressed its decision by amending its order granting Peeples
summary judgment to add the following findings of fact, which relate to the four subdivisions of
Rule 11(b):
(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
99
In assessing counsel’s compliance with Rule 11(b), the district court failed
explicitly to recognize that each of the five plaintiffs had sought relief under
section 20(a) and Rules 10b-5(a) and (b) and that Count One therefore presented a
total of fifteen claims in all. Instead, the court bunched the fifteen claims together
and considered them as a whole.136 This is precisely how plaintiffs’ counsel
handled the claims in drafting the complaint: They bunched the federal securities
fraud claims together137 along 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, O.C.G.A. § 14-11-305, and Georgia
common law, and conspired with Peeples to defraud plaintiffs.
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; and
(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.
136
In the Brief of Cross-Appellees and Reply Brief of Appellants (“Answer Brief”), in
arguing that we should uphold the district court’s denial of sanctions, plaintiffs’ counsel likewise
bunched plaintiffs’ claims together, treating them as a whole.
137
See supra note 54 and accompanying text.
100
When faced with incomplete findings of fact, we ordinarily vacate the
district court’s decision and remand the case for further findings, unless the record
has been developed in such a way that the material facts are clear. Here, the
material facts are clear, and further findings are thus unnecessary. We therefore
proceed to assess counsel’s compliance with Rule 11(b) with respect to each
plaintiff’s claims. In doing so, we are mindful that a PSLRA sanctions
proceeding, like a hearing held pursuant to Rule 11(c), is, in essence, a bench trial,
except that, under the PSLRA, the district court has the burden of assessing
counsel’s performance on its own initiative. 15 U.S.C. § 78u-4(c)(1). That a party
has or has not moved the court to impose sanctions pursuant to Rule 11 is of no
moment.
C.
By the time plaintiffs’ counsel filed the complaint in this case, they were
privy to all of the facts needed to determine whether they could establish any of
the claims Count One alleged. Counsel had acquired those facts initially from
their clients. Thereafter, during discovery in the state court case, they learned of
the details of Peeples’s dealings with the Active Members, including the
negotiations that led to the $3.5 million loan. They also learned of the Asset
101
Purchase Agreement and the employment contracts that the Active Members
entered into with Peeples and PFLC, LLC, respectively.
In assessing counsel’s compliance with Rule 11(b)’s requirements, the
district court also had become privy to the facts underpinning the Count One
claims. In addition to the deposition testimony taken under the federal discovery
rules, the court had all of the testimony and exhibits that had been presented to the
state court and had a bearing on the Count One claims. Finally, the court had the
benefit of what plaintiffs’ counsel presented in arguing that Peeples should be held
answerable in damages under section 20(a) and Rules 10b-5(a) and (b).
Accordingly, when it took Peeples’s motion for summary judgment under
advisement and, later, when it conducted its Rule 11(b) assessment of plaintiffs’
counsel’s performance, the district court was as well acquainted with this
historical background as plaintiffs’ counsel were when they filed the complaint in
this case. The court was well equipped to determine whether counsel’s factual
allegations had the evidentiary support required by Rule 11(b)(3). The court was
equally equipped to determine whether, in the language of Rule 11(b)(2), the
Count One claims were “warranted by existing law.”138
138
Plaintiffs’counsel have never contended that they brought any of the Count One
claims in an attempt to obtain an “extension, modification, or reversal of existing law or the
establishment of new law.” See Fed. R. Civ. P. 11(b)(2) (2006). Rather, they have asserted
102
1.
As noted above, the court, in assessing counsel’s Rule 11(b) compliance,
did not isolate the claims of each plaintiff; instead, it treated the claims as if they
had been brought by one plaintiff. This was error. The court should have
examined each claim of each plaintiff; had it done so, it would have concluded
that the securities fraud claims of DynaVision’s co-plaintiffs’ were patently
frivolous, as we hold supra part III. A reasonably competent attorney would have
reached the same conclusion. When counsel filed the complaint in this case, they
certified that co-plaintiffs’ claims had legal and evidentiary support, as required by
Rule 11(b)(2) and (3). They did so in manifest disregard of the Rule and, for that,
the court should have imposed sanctions.
2.
This brings us to DynaVision’s claims brought under section 20(a) and
Rules 10b-5(a) and (b). In part IV, we analyzed the evidence bearing on the
reliance element of the Rule 10b-5(b) claim. Plaintiffs claimed the reliance
element was satisfied because but for Peeples’s denial of involvement in the Put
and Call, DynaVision would have purchased the Active Members’ interests. We,
throughout that, under existing law, plaintiffs’ Count One claims were cognizable under section
20(a) and Rules 10b-5(a) and (b).
103
however, agreed with the district court that, as a matter of law, Peeples’s denial
played no role in DynaVision’s decision to forego the purchase. A reasonably
competent attorney fully aware of the information plaintiffs had provided their
attorneys and the evidence adduced in state court, including the damaging
admissions Paul Walker, Ledford, and O’Dell had made on deposition, would not
have filed this Rule 10b-5(b) claim. Plaintiffs’ counsel nevertheless certified that
the factual allegation that DynaVision opted not to purchase the Active Members’
interests because it relied on Peeples’s misrepresentations had evidentiary support.
Counsel made the certification knowing that the allegation lacked evidentiary
support and that the claim would fail. For that, sanctions should have been
imposed.
Plaintiffs’ attorneys argue that Section 9.1 of the Operating Agreement
provided an adequate factual and legal basis for the Rule 10b-5(b) claim. They
contend that if Peeples had admitted that he was loaning the Active Members the
$3.5 million they needed to close, DynaVision’s principals would have (1)
concluded that the Active Members had pledged their interests as collateral for the
loan and thereby breached Section 9.1 of the Operating Agreement, (2) rejected
the Put and Call, and (3) obtained declaratory or injunctive relief barring the
104
Active Members from enforcing the Put and Call.139 This would have enabled
DynaVision to maintain its fifty percent interest in what plaintiffs claimed to be a
$10 million company.140
Count One, however, did not allege that Peeples’s misrepresentations kept
DynaVision from going to court and obtaining declaratory or injunctive relief so
that it could maintain the status quo ante.141 What plaintiffs’ counsel seems to be
139
In the Answer Brief, plaintiffs’ counsel repeat what they told the district court during
the post-judgment PSLRA proceeding: Peeples’s “misrepresentations . . . prevented the plaintiffs
from discovering facts that would have allowed them to forestall the forced sale of their interests
in [Signature].” Answer Brief at 8. Had they known that Peeples was loaning the Active
Members the $3.5 million they needed to purchase DynaVision’s interest, “the plaintiffs . . .
could have used state court remedies to block the put and call. . . . . The record indicates that the
plaintiffs would have done just that.” Id. at 19. “The plaintiffs likely would have obtained
injunctive relief based on the Active Members’ pledge of their interests in violation of the
[Signature] Operating Agreement.” Id. at 20.
140
As counsel state in the Answer Brief, plaintiffs would have “challenged” the Put and
Call “to maintain DynaVision’s ownership in a company that they valued as at least $10 million
at the time. Because they did not want to take $3.5 million for an asset they believe to worth
more, the plaintiffs would have” gone to court. And, having obtained a ruling nullifying the Put
and Call, they would have “pursued . . . several other avenues of relief against the Active
Members, principally the right of first refusal.” Brief at 20.
141
As indicated supra parts I.C and IV.B.1, Joiner’s April 11 letter to Krevolin revealed
that Joiner and DynaVision’s principals had given considerable thought to resisting the Put and
Call and, if necessary, obtaining a court order declaring it “null and void” on the ground that the
Active Members had breached Section 9.1 of the Operating Agreement. DynaVision’s principals
knew that the Active Members lacked the resources to fund the $3.5 million purchase price and
therefore had to borrow the money – if not from Peeples, then from some other person or a
lending institution. Peeples’s denial that he was providing the funds was therefore immaterial;
whether he, another person, or a lending institution was providing the money, DynaVision’s
principals knew that the Active Members would be obtaining a loan and more than likely
pledging their interests in Signature as collateral. When, in his April 16 letter replying to
Joiner’s letter of April 11, Krevolin called Joiner’s bluff and stated that the Active Members
would take Joiner’s clients to court if DynaVision refused to close, DynaVision’s principals
105
saying, then, is that they could have presented a claim they did not bring and that,
because the claim they did not bring had merit, they satisfied Rule 11(b)’s
concerns.142 Such an argument could not serve as a justification for suing Peeples
under the federal securities laws.
3.
Plaintiffs’ brief on appeal does not challenge the district court’s adverse
dispositions of the claims DynaVision brought under section 20(a) and Rule 10b-
5(a).143 Therefore, as for those dispositions, the appeal is deemed abandoned and
the district court is affirmed. This does not relieve us, however, of the task of
determining whether, in filing and prosecuting the section 20(a) and Rule 10b-5(a)
claims, counsel disregarded Rule 11(b)’s requirements.
We first examine DynaVision’s section 20(a) claim—that the Active
Members, while under Peeples’s control, breached a fiduciary duty to the
plaintiffs. This claim had two parts. The first part asserted that the Active
Members breached a fiduciary duty by failing to disclose the contents of the
chose to take the $3.5 million that was lying on the table and sue later.
142
In the Answer Brief, counsel refer to Rule 10b-5(b) twice, but do so in the context of
the claim they did not bring – that Peeples’s misrepresentations kept plaintiffs from taking the
Active Members to court. Brief at 13, 18. The Answer Brief contains no reference to section
20(a) and Rule 10b-5(a).
143
See supra note 72 and accompanying text.
106
January 21 letter and Peeples’s offer. Because Peeples controlled the Active
Members at the time of the breach, he became secondarily or derivatively liable to
DynaVision. The second part asserted that Peeples was liable, as a controlling
person, for Smith’s we are “doing this on our own” statement, a misrepresentation
actionable under Rule 10b-5(b) because it caused DynaVision to forego
purchasing the Active Members’s interests.144
We determine whether a reasonably competent attorney would have brought
this two-part section 20(a) claim against Peeples by considering first whether
Peeples was a controlling person as defined by section 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 primarily liability.”
Brown v. Enstar Group, 84 F.3d 393, 396 (11th Cir. 1996).145 In the situation at
hand, “at the time the entity violated the securities laws” refers to February 8,
144
See supra part II.B.1.
145
To state a section 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); see also Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 296,
113 S. Ct. 2085, 2091, 124 L. Ed. 2d 194 (1993).
107
2002, when Smith uttered the we are “doing it on our own” statement. “[T]he
entity primarily liable” refers to Smith and, because she allegedly spoke for
Thomas and Owenby, the Active Members.
DynaVision posited that the following pieces of evidence established that
Peeples controlled the Active Members’ behavior in managing Signature and in
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. 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.
108
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.
A reasonably competent attorney would have rejected the idea that Peeples
was a controlling person and, for that reason alone, would not have filed the Count
One section 20(a) claim against Peeples. Even if Peeples had been a controlling
person, however, the Active Members never breached any fiduciary duty, and
Peeples therefore could not be secondarily liable.
The argument that the Active Members breached a fiduciary duty, like the
argument that Peeples was a controlling person, lacked any legal or evidentiary
support. Smith’s “doing it on our own” statement was not actionable under Rule
10b-5(b)146 because it had nothing to do with DynaVision’s decision to sell its
146
Smith’s statement could not be actionable under Rules 10b-5(a) and (c), and
plaintiffs’ counsel has not contended that it was.
109
interest in Signature rather than purchase the Active Members’ interests.147 Absent
Smith’s primary liability under Rule 10b-5(b), Peeples could not be held
secondarily liable under section 20(a).
Similarly, reasonably competent counsel would have concluded that there
was no support for the allegation that the Active Members had fiduciary a duty to
disclose the January 21 letter and Peeples’s “offer.” Such a disclosure is not
required by Georgia common law, the Limited Liability Act, the Operating
Agreement, or 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 635-36.148
Reasonably competent counsel would therefore have concluded that Rule 10b-5
jurisprudence provided no support for the fiduciary duty DynaVision asserts.
147
The district court held as a matter of law that Smith’s statement had no causative
relationship to DynaVision’s decision to sell its interest. The court obviously felt that her
statement had far less probative value with respect to the “reliance” element of a Rule 10b-5(b)
claim than Peeples’s misrepresentations, which failed the reliance test as a matter of law.
148
See supra part II.B.3. Although the court of appeals did not address the question of
whether the common law imposed the fiduciary duty plaintiffs asserted, it is obvious that the
Limited Liability Act, which explicitly addresses the duties managers of a limited liability
companies owe the company and its members, superceded whatever the common law may have
prescribed. In any event, plaintiffs’ counsel cited nothing to the contrary to the district court or to
this court on appeal.
110
DynaVision argues that, under the Supreme Court’s decisions in Affiliated
Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741
(1972), and its progeny, e.g., Chiarella v. United States, 445 U.S. 222, 100 S. Ct.
1108, 63 L. Ed. 2d 348 (1980), the Active Members were fiduciaries and that their
silence—their failure to disclose the gist of their discussions and arrangements
with Peeples—rendered them liable under Rule 10b-5. These cases are inapposite.
It is true, as the Chiarella Court stated, that
[A]dministrative and judicial interpretations have established that
silence in connection with the purchase or sale of securities may
operate as a fraud actionable under § 10(b) [of the 1934 Act] despite
the absence of statutory language or legislative history specifically
addressing the legality of nondisclosure. But such liability is
premised on a duty to disclose arising from a relationship of trust and
confidence between parties to a transaction. Application of a duty to
disclose prior to trading guarantees that corporate insiders, who have
an obligation to place the shareholder’s welfare before their own, will
not benefit personally through fraudulent use of material, nonpublic
information.
445 U.S. at 230, 100 S. Ct. at 1115-16.
A reading of the Operating Agreement makes it clear, however, that the
Active Members, vis-a-vis DynaVision, were not akin to corporate insiders;149 nor
149
The Active Members were not the functional equivalent of corporate insiders who
“‘take advantage of [inside] information by trading without disclosure.’” Securities and
Exchange Commission v. Adler, 137 F.3d 1325, 1333 (11th Cir. 1998) (quoting Chiarella, 445
U.S. at 228, 100 S. Ct. at 1114).
111
was DynaVision like a corporation shareholder. Signature’s six-person Board of
Directors was divided equally between the Active Members and DynaVision. The
Active Members appointed themselves; DynaVision filled only one of its spots,
appointing its accountant, Staten, and left the other two vacant. This did not give
the Active Members the upper hand because the Agreement specified that the
Board had to approve “all” of Signature’s “actions,” which meant that, if the
Active Members agreed to an action, Staten had to agree too, or that action could
not be taken. In short, DynaVision had an equal voice in the conduct of
Signature’s affairs and unlimited access to Signature’s business records and
financial information.
DynaVision suggests that by engaging in secret negotiations with Peeples
and involving him in the Put and Call, the Active Members became the equivalent
of company insiders and therefore assumed a duty of disclosure.150 The Georgia
Court of Appeals rejected this idea with the observation that Section 7.3 of the
Operating Agreement “allow[ed] the Active Members to negotiate with Peeples
150
Plaintiffs attribute significance to the fact that on January 9, 2002, after Peeples
rejected Paul Walker’s consecutive offers to sell Signature—first for $12 million, then for $10
million—and then asked Walker for permission to meet separately with the Active Members,
Walker, speaking for DynaVision’s principals, told him that he could meet with them only once.
DynaVision’s principals “trusted” Peeples to abide by Walker’s instruction, and assuming that
Peeples communicated the instruction to the Active Members, they, too, were trusted. This,
however, could not have turned the Active Members into fiduciaries.
112
for the purpose of obtaining financing to fund their buy-out of DynaVision’s
interest.” Ledford, 618 S.E.2d at 636.151
If Section 7.3 did not make it clear that the Active Members could negotiate
with Peeples in secret, however, Section 9.2, entitled “Right of First Refusal,”
did.152 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 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. The notice would,
in turn, trigger the other Members’ right of first refusal.
In the scenario before us, the Active Members exercised their right to
negotiate with Peeples in secret. Peeples made an offer, but it was not an offer to
purchase the Active Members’ interests and thus did not trigger an obligation to
notify DynaVision. Even if we were to assume that Peeples made an offer
(evidenced by the January 21 letter of intent and the other pieces of evidence
151
See also supra part II.B.3.
152
The relevant provisions of Section 9.2, Sections 9.2.1 and 9.2.3, are set out supra note
47.
113
plaintiffs cite), the Active Members’ failure to disclose it to DynaVision would not
render the Active Members amenable to suit under Rule 10b-5, for they would not
have breached a fiduciary duty. Perhaps DynaVision could sue them for breach of
contract, but it evidently declined to bring that cause of action in Ledford v.
Smith.153
In sum, DynaVision’s section 20(a) claim was baseless on two grounds: (1)
Peeples was not a controlling person, and (2) neither Smith nor the Active
Members could have been held primarily liable under Rule10b-5. A reasonably
competent attorney, aware of the evidence at plaintiffs’ counsel’s disposal prior to
filing suit, would have recognized this and declined to prosecute the claim.
4.
Having concluded our analysis of the section 20(a) claim, we turn to the
claim DynaVision brought under Rule 10b-5(a). Rule 10b-5(a) proscribes a
“device, 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,
153
As noted supra part II.A, in the sixth claim of their complaint in Ledford v. Smith,
the Active Members’ failure to disclose provided the basis for alleging a breach of fiduciary duty.
114
misrepresented a material fact on which the plaintiff relied to his detriment.154 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’s interest. DynaVision’s
Rule10b-5(a) claim had no foundation in the evidence. The district court rejected
the claim without discussion, because none was required. The court should have
gone one step further and found that counsel ignored Rule 11(b)(3)’s admonition
in bringing it.
For the foregoing reasons, we conclude that a reasonably competent
attorney would not have filed and prosecuted DynaVision’s Count One claims
because the attorney could not certify that the claims had the evidentiary support
required by Rule11(b)(3), or the Count One claims of co-plaintiffs because the
attorney could not certify that those claims had the evidentiary support required by
Rule 11(b)(3) and were warranted by existing law.155 The district court was
154
See supra part IV.A.
155
Furthermore, although the preceding discussion focuses on the securities fraud claims
brought against Peeples, the record contains nothing to support plaintiffs’ securities fraud claims
brought against the other two defendants, PFLC, LLC and Internal Management, Inc. See supra
note 53. The complete absence of evidentiary support for these claims provides an additional
basis for sanctions.
115
therefore required by the PSLRA to sanction plaintiffs’ counsel, H. Greely Joiner,
LLC., and H. Lamar Mixon, David G.H. Brackett, and their law firm, Bondurant,
Mixon & Elmore, LLP.
5.
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 at 1117–18.156 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,” it would have been “foolish,” to elect the Put and Call
option to purchase the Active Members’ interests.157 These were straightforward,
damaging admissions. The decision of these laymen to file suit and to continue on
to the end here was made on the advice of counsel. That said, we find no basis for
imposing monetary sanctions on plaintiffs.
156
As indicated in the text 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).
157
See supra notes 29, 95, 96 and accompanying text.
116
The PSLRA presumes that “for substantial failure of any complaint to
comply with any requirement of Rule 11(b) . . . [the appropriate sanction] is an
award to the opposing party of the reasonable attorneys’ fees and other expenses
incurred in the action.” 15 U.S.C. § 78u-4(c)(3)(A)(ii).158 On receipt of our
mandate, the district court shall determine the attorney’s fees and expenses to
Peeples incurred in defending the Count One claims.
VII.
The judgment of the district court disposing of plaintiffs’ claims in favor of
Peeples is AFFIRMED. The district court’s order on sanctions is REVERSED,
and the case is REMANDED for the imposition of sanctions on plaintiffs’ Count
One claims.
SO ORDERED.
158
This presumption may be rebutted upon proof by the attorney against whom sanctions
are imposed that “the award of attorneys’ fees and other expenses will impose an unreasonable
burden on that party or attorney and would be unjust, and the failure to make such an award
would not impose a greater burden on the party in whose favor sanctions are to be imposed.” 15
U.S.C. § 78u-4(c)(3)(B)(i).
117
EDMONDSON, Chief Judge concurring in the result in part and dissenting in part:
I concur in the result affirming summary judgment in favor of Defendants. But I
cannot agree that Plaintiffs’ lawyers must be sanctioned. I do not think that all Plaintiffs
sought relief for securities fraud in the complaint; I instead read the complaint to assert
those claims only on behalf of Plaintiff DynaVision Group, LLC: the undisputed seller of
the security at issue here. Nor do I accept that no “reasonably competent lawyer” standing
in the shoes of Plaintiffs’ lawyers would have brought the claims for securities fraud. The
claims could have seemed arguable at the time Plaintiffs sued Defendants in federal court:
for example, no court had then ruled on the damaging effect of Plaintiffs’ testimony in the
related state case. Furthermore, it is important that the district court denied sanctions. As
a matter of doctrine, we must afford the district court some deference about sanctions.
See Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1448
(11th Cir. 1998) (“The decision whether to impose Rule 11 sanctions is left to the district
court’s sound discretion.”). Because I see no abuse of discretion in the decision of the
district court declining to sanction Plaintiffs’ lawyers, I dissent from the part of today’s
decision that concludes otherwise.
I would affirm the whole judgment – including the denial of sanctions – of the
district court.
118