Denim North America Holdings, LLC et al v. Swift Textiles, LLC et al
Filing
74
ORDER granting in part and denying in part 40 Motion for Summary Judgment; denying 42 Motion to Dismiss; denying 50 Motion to Strike. Ordered by Judge Clay D. Land on 09/08/2011. (CGC)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
DENIM
LLC,
NORTH
AMERICA
HOLDINGS, *
*
Plaintiff,
*
vs.
CASE NO. 4:10-CV-45 (CDL)
*
SWIFT TEXTILES, LLC,
GALEY & LORD, LLC, and
PATRIARCH PARTNERS, LLC,
*
*
Defendants.
*
O R D E R
This action arises from a dispute between Plaintiff Denim
North
America
Holdings,
Defendants
Swift
(―Galey‖),
and
LLC
Textiles,
(―Holdings‖
LLC
Patriarch
(―Swift‖),
Partners,
(collectively, ―Defendants‖).
or
―Plaintiff‖)
Lord,
and
Galey
&
LLC
LLC
(―Patriarch‖)
Holdings and Defendants entered
into a business venture to manufacture and sell denim textile
products through a limited liability company called Denim North
America, LLC (―DNA‖).
Swift.
it
to
DNA was jointly owned by Holdings and
Holdings contends that Defendants fraudulently induced
enter
the
venture
and
then
breached
fiduciary
duties
relating to that business relationship.
Defendants filed three motions that are presently pending
before
the
Court.
First,
Defendants
contend
that
Holdings
destroyed certain email correspondence that is relevant to the
claims and defenses in this action.
Defendants assert that the
destruction of the emails amounts to spoliation of evidence, and
they seek dismissal of the Complaint as a sanction.
to
Dismiss
or
for
Spoliation
of
Defendants
seek
claims.
an
Evidence
Adverse
(ECF
summary
Inference
No.
judgment
42).
as
Against
In
to
Defs.‘ Mot.
the
all
for
alternative,
of
Defs.‘ Mot. for Summ. J. (ECF No. 40).
Pl.
Plaintiff‘s
In support of
their motion for summary judgment, Defendants ask the Court to
draw an adverse inference regarding the destroyed emails and
also move to strike an affidavit of Larry Galbraith based on its
inconsistency
with
his
prior
deposition
testimony
and
its
failure to comply with Federal Rule of Evidence 1006 regarding
summary or compilation evidence.
Defs.‘ Mot. to Strike (ECF No.
50).
For
the
reasons
that
follow,
the
Court
finds
that
the
emails were not destroyed in bad faith; therefore, Defendants‘
Motion to Dismiss or for an Adverse Inference Against Plaintiff
for Spoliation of Evidence (ECF No. 42) is denied.
finds
that
the
affidavit
of
Larry
Galbraith
The Court
should
not
stricken, so the Motion to Strike (ECF No. 50) is denied.
be
The
Court finds that Defendants‘ Motion for Summary Judgment (ECF
No.
40)
should
Specifically,
the
be
granted
Court
in
finds
part
that
and
genuine
denied
factual
in
part.
disputes
exist as to Plaintiff‘s claims for fraudulent inducement based
2
on Defendants‘ sales projections and for breach of fiduciary
duty arising from Defendants‘ competition against Plaintiff and
Defendants‘
termination
of
its
sales
staff.
Therefore,
Defendants‘ motion for summary judgment is denied as to those
claims.
The
Court
dispute
exists
as
finds,
to
however,
Plaintiff‘s
that
no
genuine
fraudulent
factual
inducement
claim
based on Defendants‘ concealment of Swift‘s financial condition
or
Plaintiff‘s
certain
breach
foreign
of
fiduciary
ventures.
duty
Therefore,
claim
arising
summary
from
judgment
is
granted as to those claims.
The Court will first address Defendants‘ motion to dismiss
for
spoliation
of
evidence,
followed
by
a
discussion
of
Defendants‘ motion to strike and motion for summary judgment.
MOTION TO DISMISS
Defendants seek dismissal of this action as a sanction for
Plaintiff‘s
destruction
critical
the
to
claims
of
and
emails
defenses
Defendants
in
this
contend
case.
In
are
the
alternative, Defendants argue that an adverse inference should
be drawn against Holdings in the consideration of Defendants‘
summary judgment motion based upon this alleged spoliation of
evidence.
It is undisputed that Holdings does not have a document
retention policy with respect to emails.
that
Plaintiff‘s
witnesses—Larry
3
It is also undisputed
Galbraith,
Monte
Galbraith,
George Jeter, Jack Pezold and Tracy Sayers—each had a routine
practice
of
deleting
most
emails
within
a
short
time
of
receiving them, rarely retained emails longer than three months,
and only retained electronic or hard copies of emails if they
thought the emails were important.
Finally, it is undisputed
that Plaintiff‘s witnesses did not modify these processes after
they reasonably anticipated this litigation in either 2007 or
2008.
As a result, Holdings was unable to produce these emails,
which Defendants contend are potentially critical to Plaintiff‘s
own case, during discovery.
Under Federal Rule of Civil Procedure 37, the Court may
sanction a party for destroying evidence.
the
imposition
of
spoliation
Federal law ―governs
sanctions,‖
though
determination is also informed by Georgia law.
Chrysler
Corp.,
427
F.3d
939,
944
(11th
the
Court‘s
Flury v. Daimler
Cir.
2005).
In
determining the proper sanction for spoliation, the Court must
consider ―(1) whether the defendant was prejudiced as a result
of the destruction of evidence; (2) whether the prejudice could
be cured; (3) the practical importance of the evidence; [and]
(4) whether the plaintiff acted in good or bad faith.‖1
945.
Id. at
In general, an adverse inference is drawn from a party‘s
failure to preserve evidence ―‗only when the absence of that
1
It is undisputed that the fifth Flury factor—―the potential for abuse
if expert testimony about the evidence was not excluded‖—is not at
issue here.
4
evidence is predicated on bad faith.‘‖
Cox v. Target Corp., 351
F. App‘x 381, 383 (11th Cir. 2009) (per curiam) (quoting Bashir
v. Amtrak, 119 F.3d 929, 931 (11th Cir. 1997) (per curiam)).
Also, under Federal Rule of Civil Procedure 37(e), ―[a]bsent
exceptional
under
circumstances,
these
rules
electronically
on
stored
a
a
court
may
party
information
routine,
good-faith
system.‖
for
failing
lost
present
employees
record
destroyed
the
of
supports
emails
an
impose
as
a
sanctions
to
provide
result
a
in
finding
the
business unmotivated by any bad faith.
Dismiss
3
nn.6
&
7
(summarizing
electronic
of
the
Fed. R. Civ. P. 37(e).
The
operation
not
information
that
ordinary
Holdings‘
course
of
E.g., Defs.‘ Mot. to
testimony
of
Plaintiff‘s
witnesses, who generally stated that they had a regular practice
of deleting emails unless they thought they would need to refer
to them later).
contrary.
Defendants have produced no evidence to the
Accordingly, the Court finds that sanctions are not
appropriate.
Therefore, Defendants‘ Motion to Dismiss or in the
Alternative Apply an Adverse Inference (ECF No. 42) is denied.
MOTION TO STRIKE
In opposition to Defendants‘ motion for summary judgment,
Plaintiff relies upon the third affidavit of Larry Galbraith
(―Galbraith
Affidavit‖).
Defendants
affidavit.
Defs.‘ Mot. to Strike 3rd Galbraith Aff., ECF No.
5
seek
to
strike
that
50.
Therefore, the Court must
decide
Defendants‘ Motion to
Strike (ECF No. 50) before addressing Defendant‘s Motion for
Summary Judgment.
In his third affidavit, Galbraith included a report that is
an assimilation of DNA sales invoices and differentiates between
sales of higher margin and lower margin denim products. Pl.‘s
Resp. to Defs.‘ Mot. for Summ. J. [hereinafter Pl.‘s Resp.] Ex.
44, Galbraith 3d Aff. ¶ 4, ECF No. 44-44 [hereinafter Galbraith
Aff.].
The purpose of this report is to demonstrate that Swift
produced a significantly lower sales volume of higher margin
denim product than it projected over the first five quarters of
the joint venture and that the overall sales volume was mainly
lower margin denim product.
The following background explains the importance of this
affidavit.
DNA sold two main types of denim during the first
five quarters of the joint venture: Swift styles, which were
higher margin products, and DNA styles, which were lower margin
products.
Holdings contends that it suffered damages because
Defendants did not market the Swift styles as they promised to
do, so the bulk of product DNA manufactured and sold during the
first five quarters of the joint venture was the lower priced
6
DNA style denim.2
Although Swift maintained inventory records
that tracked inventory by style and by buyer, those records were
lost due to a power outage.
It is undisputed that Holdings
representative Larry Galbraith testified at his deposition that
DNA‘s records did not distinguish between sales of higher margin
Swift denim and lower margin DNA denim.
Defendants relied on
that testimony in their summary judgment motion, arguing that
Holdings
had
produced
no
evidence
that
distinguished
between
sales of higher margin Swift denim and lower margin DNA denim.
Defendants cannot seriously dispute, however, that, prior
to
Galbraith‘s
Defendants
the
30(b)(6)
sales
deposition,
records
produce the Affidavit.
that
Holdings
Galbraith
produced
later
used
to
to
See Pl.‘s Resp. to Defs.‘ Mot. to Strike
Ex. A, Letter from M. Mullin to H. Richard 2, Apr. 14, 2011, ECF
No.
51-1
(notifying
Defendants
that
DNA
had
―thousands
and
thousands of invoices and other documentary details of product
sold‖ dating back to 2006 and offering Defendants an opportunity
to
review
them).
It
is
undisputed
that
Defendants
did
not
review those documents.
Defendants
contend
that
Galbraith
Affidavit
for
prepared
for
deposition
his
two
the
Court
reasons:
2
as
(1)
the
should
strike
Galbraith
30(b)(6)
was
the
not
corporate
DNA has dramatically reduced the amount of Swift style denim it
produces, and the vast majority of its production is now focused on
DNA styles. Galbraith Aff. ¶ 13 & Ex. B.
7
representative of Holdings; and (2) the Galbraith Affidavit does
not meet the requirements of Federal Rule of Evidence 1006 for
summary exhibits.
It
30(b)(6)
is
Neither contention is persuasive.
undisputed
corporate
L. Galbraith
that
Galbraith
representatives
Dep.
24:1-11,
ECF
on
No.
was
one
the
59.
of
topic
At
Plaintiff‘s
of
his
damages.
deposition,
Galbraith explained that although DNA‘s quarterly reports did
not differentiate between sales of Swift style product and sales
of DNA style denim after 2006, id. at 99:21-100:11, he also
stated that he could go back and reconstruct it and ―break it
down by style,‖ id. at 119:13-22.
what Galbraith did.
After the deposition, that is
Galbraith Aff. ¶ 4.
Assuming that Larry Galbraith was not adequately prepared
for
his
30(b)(6)
finds that his
striking
the
attributable
sympathetic
deposition
alleged
Defendants‘
Galbraith‘s
appeal
this
sales
issue,
the
Court
lack of preparation does not justify
Affidavit.
to
on
when
lack
one
of
complaints
of
preparation
considers
that
prejudice
lose
their
Holdings
had
previously produced (or agreed to make available) the underlying
evidence—the
sales
Affidavit.
The
records—that
Court
does
not
formed
the
diminish
the
basis
for
importance
the
of
complying with Federal Rule of Evidence 1006, which requires
that
the
evidence
underlying
summary
exhibits
be
identified.
Under the circumstances here, however, the Court finds that any
8
non-compliance
does
not
warrant
the
disregarding the evidence altogether.
serious
sanction
of
Accordingly, the Court
declines to strike the Affidavit on this basis.
Prior to trial, Holdings must strictly comply with Federal
Rule of Evidence 1006.
Holdings
shall
Within seven days of today‘s Order,
specifically
identify
which
documents
are
supportive of the testimony provided in Galbraith‘s Affidavit
and shall permit Defendants to inspect those documents prior to
the pretrial conference in this case.
chose
to
do
so,
they
shall
be
Moreover, if Defendants
permitted
to
continue
the
deposition of Larry Galbraith prior to trial to examine him on
the issues raised by this summary evidence.
SUMMARY JUDGMENT STANDARD
Summary judgment may be granted only ―if the movant shows
that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.‖
Civ. P.
56(a).
Fed. R.
In determining whether a genuine dispute of
material fact exists to defeat a motion for summary judgment,
the evidence is viewed in the light most favorable to the party
opposing summary judgment, drawing all justifiable inferences in
the opposing party=s favor.
U.S. 242, 255 (1986).
Anderson v. Liberty Lobby, Inc., 477
A fact is material if it is relevant or
necessary to the outcome of the suit.
9
Id. at 248.
A factual
dispute is genuine if the evidence would allow a reasonable jury
to return a verdict for the nonmoving party.
Id.
FACTUAL BACKGROUND
Viewed in the light most favorable to Plaintiff, the record
reveals the following.
Unless otherwise noted, the facts are
undisputed.
I.
Defendants’ Background
Swift is the denim manufacturing division of Galey, a twill
manufacturer.
Galey was purchased with investment funds managed
by Patriarch.
Lynn Tilton is CEO of Patriarch, and she is also
the sole member of Galey.
By 2006, Swift had closed all but one of its U.S. denim
production
facilities,
and
Swift‘s
only
U.S.-based
denim
production facility was its Boland plant in Columbus, Georgia.
The Boland plant produced approximately 30 dye-shades of premium
denim
and
200
to
250
styles.
These
styles
innovative, unique, and difficult to make.
were
considered
Swift sold its denim
to premier customers for an average price of $3.50 per yard.
Swift, however, determined that it could no longer operate the
Boland plant at a profit, and it decided to reduce or eliminate
its U.S. production footprint.
At the time, Swift was in a
joint venture in Mexico called Swift Denim Hidalgo that produced
lower priced denim.
Swift also had plans to build a new denim
10
facility
in
China
as
part
of
a
joint
venture
with
Lucky
Textiles.
Prior
to
the
DNA
joint
problems and declining sales.
venture,
Swift
had
liquidity
E.g., Pl.‘s Resp. Ex. 9, Email
from R. Annas to L. Tilton, Mar. 12, 2006, ECF No. 44-9; Id. Ex.
13, Email from J. Murray to J. Heldrich, July 6, 2006, ECF No.
44-13.
Swift sought additional funding from Patriarch but was
told to start looking for other sources of cash.
Id. Ex. 12,
Email from L. Tilton to L. Himes, June 19, 2006, ECF No. 44-12.
Defendants believed that it would be risky to close the
Boland plant without having another way to produce its high
quality denim.
E.g., id. 44-15, Email from R. Annas to L.
Tilton, ECF No. 44-15 at 1-2 (stating that closing Boland ―would
wreck‖ some of Swift‘s customers and that Swift Denim Hidalgo
was not yet capable of making the Boland products).
Defendants
believed that a possible solution to this problem would be to
enter a joint venture with DNA.
Under Defendants‘ plan, Swift
would contribute equipment but no cash, and if the joint venture
lost steam, Swift ―would simply walk away.‖
Id. Ex. 16, Email
from R. Annas to L. Tilton, May 26, 2006, ECF No. 44-16 at 1.
II.
DNA’s Background
DNA manufactures denim in Columbus, Georgia.
Prior to the
joint venture, DNA had a capacity of approximately 20 million
yards of denim per year.
In 2006, DNA produced approximately 14
11
million yards of denim.
DNA did not produce as many dye-shades
or styles as Swift produced at the Boland plant, and DNA‘s denim
sold at a lower price than Swift‘s.
Before the joint venture between Holdings and Swift, DNA‘s
principals were George Jeter and John Pezold.
are the principals of Holdings.
Jeter and Pezold
Pezold owns Pezold Management
Associates (―Pemanco‖), which operates numerous businesses in
Columbus.
Tracy Sayers is a longtime employee of Pemanco, and
during the relevant timeframe he served as an executive vice
president.
Larry Galbraith is president and CEO of DNA, and by
2006 he had 30 years of experience in the denim industry.
III. The Negotiations
In May of 2006, John Heldrich, who was then CEO of Swift,
called
Larry
between
Galbraith
Swift
and
about
DNA.
a
After
possible
that
business
phone
transaction
call,
there
were
several meetings that included Heldrich of Swift, Jim Murray of
Galey, and Larry Galbraith, Monte Galbraith and Tracy Sayers of
DNA.
Tilton did not attend those initial meetings.
In June of 2006, the parties met in New York for two days
to
negotiate
an
agreement.
The
meeting
included
Heldrich,
Murray, Sayers and Larry Galbraith.
Al Blalock and Larry Himes
of
attended
Swift
meeting.
also
attended.
Tilton
portions
of
the
Patriarch‘s Robert Annas attended the meeting but did
not participate in the negotiations.
12
The essential terms of the
deal were negotiated by Sayers on behalf of DNA and Tilton and
Himes on behalf of Swift, Galey, and Patriarch.
Dep. 288:11-290:8, ECF No. 53.
E.g., Sayers
The parties memorialized in a
term sheet the terms agreed upon during the June 2006 meeting.
Negotiations continued after that meeting.
Id. 290:22-291:18.
The term sheet was executed by Sayers on behalf of Holdings and
Heldrich on behalf of Swift.
No one from Patriarch signed the
term sheet.
IV.
The Deal
After the parties executed the term sheet, they negotiated
the
deal
documents,
including
a
Subscription
Agreement,
a
Manufacturing and Supply Agreement and an Operating Agreement.
Both sides were represented by counsel during the negotiations,
and the final deal documents were executed in September 2006.
During
the
negotiations,
Holdings
requested
that
Swift
provide certain financial information before the execution of
the
transaction
documents.
Also,
under
the
Subscription
Agreement, Swift agreed to provide its financial records upon
request.
Defs.‘
Statement
of
Undisputed
Material
Facts
[hereinafter Defs.‘ SMF] Ex. 13, Subscription Agreement § 4.04,
ECF No. 41-13 at 28 [hereinafter Subscription Agreement].
refused
these
requests,
telling
statements were not ready.
Holdings
that
the
Swift
financial
Holdings executed the transaction
13
documents
without
receiving
the
financial
statements.
E.g.,
Sayers Dep. 248:4-14.
The goal of the deal was to transition some of Swift‘s 30
million yards of denim sales at higher prices to DNA‘s facility—
pushing out DNA‘s lower margin sales—and to run DNA‘s facility
at full capacity, manufacturing approximately 20 million yards
of
denim
per
year.
Under
the
terms
of
the
Subscription
Agreement, Swift Purchased a 50% interest in DNA, and the other
half of DNA was owned by Holdings.
Swift was to move its denim
production into the DNA plant and sell the denim produced by
DNA.
As a result of the deal, Swift and Holdings each became
members of DNA.
The Operating Agreement provided that DNA would
be managed by a board of eight managers.
Operating
Agreement
§§
2.01
&
2.02,
[hereinafter Operating Agreement].
Defs.‘ SMF Ex. 14,
ECF
No.
the
event
of
a
vacancy,
Swift
at
12
Four of the managers are
appointed by Swift, and four are appointed by DNA.
In
41-14
appoints
Id. § 2.02.
replacements
for
Swift-appointed managers, and Holdings appoints replacements for
Holdings-appointed managers.
16.
Id. § 2.10, ECF No. 41-14 at 15-
No manager is permitted to take any action unless the
action has been approved by at least a majority of the managers.
Id. § 2.01, ECF No. 41-14 at 12.
14
Swift
valued
at
contributed
$2.35
contributions
for
110
Picanol
looms,
million. 3
Swift
volume
mix
and
which
also
the
parties
had
two
deemed
enhancements,
and
contributions together were valued at $4.88 million.
those
The mix
enhancement was a credit to Swift for bringing higher-margin
customers to DNA, and the volume enhancement was a credit for
the additional volume of sales Swift would bring to DNA.
undisputed
that
the
mix
and
volume
enhancements
significant part of Swift‘s consideration for the deal.4
It is
were
a
C.f.,
Defs.‘ SMF Ex. 24, Email from J. Murray to T. Sayers ¶ 13, Aug.
9, 2009, ECF No. 41-24 at 4 (acknowledging that Swift‘s $4.88
million credit had to be ―earned through future performance‖).
Holdings contributed DNA‘s balance sheet, as well as a deemed
efficiency enhancement, which was a credit for DNA‘s ability to
manufacture denim at a lower cost.
The Manufacturing Agreement required DNA to pay 3% of its
gross sales to Swift as ―its reasonable share of Swift‘s costs
associated
with
world-wide
Product
3
sales,
marketing,
According to Holdings, Defendants pushed the Picanol looms on
Holdings, insisting that DNA needed the looms to make the Swift
products. L. Galbraith Dep. 126:7-13. According to Larry Galbraith,
however, the looms were not necessary because they did not bring any
new capability to DNA.
Id. at 126:15-18; accord Pl.‘s Resp. Ex. 34,
Email from T. Driver to B. George, May 21, 2008, ECF NO. 44-34.
4
Defendants point out that Swift was entitled to a ―Preferred
Distribution‖ only if Swift met certain earnings and price-per-yard
targets. Operating Agreement § 6.06(b), ECF No. 14-14 at 26. It is
undisputed that Swift did not meet the requirements for such a
distribution.
There is no evidence that Swift had to meet such
requirements to receive regular dividends.
15
merchandising,
customer
direction/development,
technical
and
support,
samples.‖
and
Defs.‘
SMF
Product
Ex.
15,
Manufacturing Agreement § 3.2, ECF No. 41-15 at 3 [hereinafter
Manufacturing Agreement].
V.
The Transition
Before
marketing
the
transaction
personnel
operational
and
closed,
DNA‘s
operational
the
transition
with
discussed
marketing
personnel.
In
one
and
Swift‘s
meeting,
DNA‘s
Monte Galbraith met with Swift‘s Rick Waide to discuss what
products DNA would sell.
Swift planned to transition thirty-
five styles from the Boland facility to DNA‘s facility.
Later,
that number was revised downward to approximately twenty-seven
styles.
Monte Galbraith did not help Swift put together sales
forecasts or projections of what products would be sold.
M.
Galbraith Dep. 114:10-115:1, ECF No. 61.
Under the transition
plan,
director
Monte
Galbraith
jeanswear division.
became
a
managing
of
Swift‘s
The Swift jeanswear sales force, which was
a blended team of Swift and DNA personnel, reported to Monte
Galbraith, who in turn reported to Waide.
Id. at 49:10-50:12.
Waide handled ―wrapping up the Boland side of the business,‖
while Monte Galbraith, working closely with Waide, focused the
day-to-day operations.
Id. at 50:8-22, 59:8-20.
DNA‘s sales
force was responsible for selling denim produced at the DNA
facility in Columbus, as well as the denim produced at Swift
16
Denim Hidalgo and the Lucky Textiles facility in China once it
became operational.
Id. at 54:21-56:9.
After the transaction closed in September 2006, Swift began
to transition its production from the Boland plant to DNA‘s
facility.
The Picanol looms were installed in DNA‘s facility.5
DNA spent $857,500 to install the Picanol looms and also spent
an additional $142,500 for equipment that was necessary to make
the Picanol looms operational.
Galbraith Aff. ¶ 15.
DNA also
hired and trained employees to run the new looms on the 24/7
schedule DNA anticipated running, at a cost of $507,559.6
Id.
DNA‘s Tsudakoma looms were sold for $1 million, and DNA paid
Swift $857,500 of the proceeds.
$801,500 in dividends to Swift.
A
number
of
Swift
Id.
¶ 16.
DNA
also paid
Id. ¶ 15.
employees
went
facility to facilitate the transition.
to
work
at
the
DNA
DNA‘s Larry Galbraith
was responsible for operational aspects of the transition, and
he worked with Swift‘s John Heldrich on shade matching trials.7
If the shade was not quite right, Heldrich‘s approach was to
―work with the customer and get them to work with the wash in
5
Again, according to Larry Galbraith, DNA did not need the new looms
because they did not bring any new capability to DNA.
L. Galbraith
Dep. 126:15-18; accord Pl.‘s Resp. Ex. 34, Email from T. Driver to B.
George, May 21, 2008, ECF NO. 44-34.
6
After five months of running the 24/7 operation, DNA reverted back to
its previous manufacturing schedule ―due to lack of sales.‖
L.
Galbraith Dep. 39:10-21.
7
In mid-2007, Larry Galbraith was named chief operating officer of
Swift Galey.
L. Galbraith Dep. 164:10-16 (stating that Galbraith
filled the COO position until Swift Galey could find someone).
17
the laundry,‖ which they did, for the most part.
Dep. 102:23-103:21.
―fairly smooth.‖
L. Galbraith
According to Holdings, the transition was
Id. at 107:4-6.
There was, however, some
difficulty matching some of the shades, and it is undisputed
that there were at least a hundred shade matching trials.
According to Swift, some of the ―high margin . . . type
programs‖
were
lost
―based
on
inability
to
perfectly
match
shades.‖
Heldrich Dep. Ex. 90, Email from J. Heldrich to L.
Tilton, Mar. 29, 2007, ECF No. 64-1 at 67; accord Heldrich Dep.
67:18-68:11
Guess).
(stating
that
DNA
lost
business
with
Lucky
and
It is not clear from the present record how significant
these losses were.
VI.
Defendants’ Sales Projections
Swift‘s Rick Waide developed the sales projections for the
first five quarters after the transaction‘s closing date.
were several different projections.
to the Subscription Agreement.
There
Two of them were attached
Subscription Agreement Schedule
4.10, Project FM Qtrly Sales & Margin Forecast at SG00025078 to
SG00025083,
projections,
ECF
41-13
which
at
assumed
187
a
to
192.
capacity
The
of
first
20
million
set
of
yards,
projected that DNA would produce 1.275 million yards of denim
styles
that
were
designed
for
the
joint
venture
(―Swift
product‖) and sell it for $4.45 million in the fourth quarter of
2006 and that DNA would produce 15.55 million yards of Swift
18
product in 2007 and sell it for $55 million.
to SG00025080.
Id. at SG00025078
The second set of projections, which assumed a
capacity of 23.5 million yards, projected that DNA would produce
1.275
million
yards
of
Swift
product
and
sell
it
for
$4.45
million in the fourth quarter of 2006 and that DNA would produce
18.15 million yards of Swift product in 2007 and sell it for
$64.4 million.
Id. at SG00025081 to SG00025083.
In a different
projection, Defendants projected that DNA would operate at full
capacity to produce 22 million yards of Swift product at a price
of $3.27 a yard, for more than $70 million in revenue.
Sayers
Dep. 154:2-16, 258:21-260:17; Sayers Dep. Ex. 47, ECF No. 58-5
at 40.
It is undisputed that Holdings requested that Defendants
guarantee
the
refused.
It is also undisputed that Holdings understood that
Defendants
sales
refused
projections
to
in
guarantee
writing,
the
sales
but
Defendants
projections
in
writing.
The Subscription Agreement stated that the projections set
forth
in
Schedule
4.10
were
based
on
assumptions
that
were
―beyond the control of‖ Swift, and were ―subject to risks and
uncertainties.‖
29.
could
Subscription Agreement § 4.10, ECF No. 41-13 at
It also stated that there were ―possible developments that
cause
forecasted.‖
actual
Id.
results
to
differ
materially
from
those
In the Manufacturing Agreement, Swift and
Galey agreed ―to use commercially reasonable good faith efforts
19
to achieve the sales projections set forth in Schedule 4.10 of
the Subscription Agreement‖ but also stated that the agreement
was ―subject to various factors, conditions and assumptions‖ out
of their control.
at 2.
Manufacturing Agreement § 2.4, ECF No. 41-15
The Manufacturing Agreement also provided that Swift and
Galey made ―no assurances‖ that the sales projections would be
achieved.
along
Id.
with
The Subscription Agreement also stated that it,
the
schedules,
exhibits
and
other
subscription
documents, constituted the entire agreement among the parties
and superseded all prior agreements.
12.10,
ECF
Subscription Agreement §
41-13
at
56.
stated
Agreement
No.
Likewise,
that
it
constituted
the
the
Manufacturing
―entire
agreement
between the Parties hereto with regard to the subject matter
hereof.‖
Manufacturing Agreement § 9.9, ECF No. 41-15 at 10.
VII. Swift’s Inventory
It is undisputed that the Manufacturing Agreement permitted
Swift to continue manufacturing its own product for 60 days from
the closing date and that it would be permitted to complete work
in
process
at
closing date.
the
date
of
closing
within
90
days
from
the
Manufacturing Agreement § 2.3, ECF 41-15 at 2.
Holdings assumed that Swift would only produce product to fill
existing orders.
L. Galbraith Dep. 166:8-20.
It is undisputed that Holdings knew that Swift had some
denim inventory when the transaction documents were executed.
20
It is also undisputed that Holdings knew that Swift planned to
sell any inventory it had on hand as of the date of the closing.
Holdings, however, did not know how much inventory Swift had.
When
Larry
Galbraith
toured
the
Boland
plant,
approximately 200,000 to 300,000 yards of denim.
25.
he
saw
Id. at 162:20-
Swift also had a large warehouse in Columbus, but it is not
clear from the present record whether anyone from Holdings knew
how much inventory Swift stored there.
According to Defendants,
Swift had approximately 4 million yards of inventory when the
transaction documents were executed.
Waide Dep. 30:4-16, ECF
No. 70.
Other evidence suggests, however, that the Swift‘s
inventory
was
million range.
much
higher—in
the
10.5
million
yard
or
$30
Murray Dep. 185:10-18, ECF No. 65; Id. Ex. 100,
Galey & Lord, LLC Balance Sheet, ECF No. 65-1 at 6; Pl.‘s Resp.
Ex. 27, Email from J. Heldrich to L. Tilton, Jan. 4, 2007, ECF
No. 44-27 at 3; see also Pl.‘s Resp. Ex. 14, Email from R. Annas
to L. Tilton, June 6, 2006, ECF No. 44-14 at 3 (stating that
Swift had approximately $36 million in inventory as of June
2006).
VIII.
Post-Transition Sales
During fourth quarter 2006, DNA sold 259,000 yards of Swift
product—styles
that
were
developed
for
the
joint
venture—for
―just under a million dollars,‖ plus 3.2 million yards of the
21
DNA denim styles (―DNA legacy product‖) for $8.8 million.
L.
Galbraith Dep. 99:23-100:4; accord Galbraith Aff. ¶ 10.
During 2007 and 2008, DNA gained momentum and set records
in terms of yards shipped and yards invoiced.
In 2007, DNA sold
a total of 6.6 million yards of Swift product, including 1.7
million yards of denim outside the projected styles.
Id. ¶ 13.
Swift did not produce any sales orders for seventeen of the
twenty-seven Swift product styles that were to be produced by
DNA.
Id. ¶ 12.
During the same year, DNA sold a total of 11.6
million yards of DNA legacy product.
Id. Ex. B.
In all, DNA‘s
sales for 2007 totaled approximately $59 million.
average
price
per
yard
in
2007
was
$3.12,
Id.
which
DNA‘s
was
an
improvement over its average price per yard in 2006 ($2.81),
2005 ($3.03), and 2004 ($2.74).
During late 2006 and early 2007, Swift was in the process
of shutting and liquidating the Boland plant, and as part of
that
process,
inventory.
Swift
attempted
to
sell
its
remaining
denim
For example, during the fourth quarter of 2006,
Swift ―billed six million yards for $16.4 million.‖
Pl.‘s Resp.
Ex. 27, Email from J. Heldrich to L. Tilton, Jan. 4, 2007, ECF
No. 44-27 at 3 (also noting that Swift planned to sell its
―remaining 4.5 million yards of inventory‖).
Defendants contend
that Swift did not sell the denim in competition with DNA and
that
the
inventory
was
primarily
22
sold
abroad,
but
there
is
evidence that the sales were domestic and that they adversely
impacted sales of denim produced by DNA because Swift undercut
DNA‘s price.
Pl.‘s Resp. Ex. 26, Email from J. Murray to L.
Tilton, Dec. 21, 2006, ECF No. 44-26 (stating that Swift had
―identified
$600,000
of
additional
billings,‖
that
Swift
was
―working on an additional $1 million—the vast majority going to
domestic customers,‖ and that ―Rick Waide has developed a clever
approach to pressure customers to take the inventory and . . .
is running hard to make it happen‖); Pl.‘s Resp. Ex. 28, Email
from
R.
Annas
to
L.
Tilton,
Mar.
16,
2007,
ECF
No.
44-28
(stating that wind-down of Boland inventory ―impacted DNA to
some
extent
as
current
customers
bleed
off
Boland
inventory
first‖); Pl.‘s Resp. Ex. 29, Email from G. Bird to E. Ricci,
Oct. 9, 2008, ECF No. 44-29 (stating that Swift‘s ―inventories
were not fully disclosed‖ by Swift and that the ―market was
flooded with lower cost [Swift product] resulting in capacity
reduction‖); c.f. Pl.‘s Resp. Ex. 25, Email from J. Murray to L.
Tilton, Sept. 13, 2006, ECF No. 44-25 (stating that Swift was
trying ―aggressively‖ to move blocks of inventory by putting
―additional pressure on customers‖ and that Swift would ―offer
deals‖ if necessary).
In April or May of 2008, the interim CEO of Swift Galey
told Larry Galbraith that Swift Galey was going to terminate its
sales staff—both twill and denim—because ―they could no longer
23
afford
to
pay
them.‖
L.
Galbraith
Dep.
13:16-14:3.
Galbraith transitioned the sales team to DNA.
of the denim sales‖ team.
Larry
He retained ―most
Id. at 14:3-7, 15:4-15.
After the
transition, DNA stopped paying the 3% marketing fee to Swift.
Id. at 181:19-21.
IX.
The Foreign Ventures
At the time of the DNA transaction, Swift was involved in a
joint venture in China with Lucky Textiles, as well as a joint
venture in Mexico called Swift Denim Hidalgo.
It is undisputed
that Holdings did not request that the deal terms include a
guarantee
that
any
foreign
facilities,
such
venture or the Lucky facility, be kept open.
as
the
Hidalgo
Nonetheless, DNA‘s
business plan of transitioning to production of higher margin
denim depended on Swift having low cost suppliers to produce low
margin product.
Tilton,
May
22,
Pl.‘s Resp. Ex. 37, Email from B. George to L.
2008,
ECF
No.
44-37.
Without
a
low
cost
supplier, DNA could not offer a full range of products to its
major larger customers.
Id.
A.
Lucky Denim Facility
The
Chinese
joint
venture
with
construction of a new denim facility.
Lucky
Textiles
involved
The construction required
funding from Swift; Swift received a loan from Patriarch to pay
for the construction.
Tilton Dep. 68:15-69:13, 72:25-74:1, ECF
24
No. 63.
Construction of the Lucky denim facility was complete
by November 2007.
In March 2008, Bob George was named interim CEO of Swift,
and he recommended that Swift exit the Lucky
Although
Swift
had
made
a
substantial
joint venture.
investment
in
Lucky—
through its loan from Patriarch—George concluded that the joint
venture had ―broken down‖ because Lucky was ―not reporting or
sharing information.‖
ceased
―active
producing
E.g., Tilton Dep. 166:25-167:12.
management‖
denim,
and
the
of
Lucky
venture
―ownership is still there.‖
B.
Swift
is
2008.
Lucky
―ongoing,‖
is
and
now
Swift‘s
Id. 164:3-9.
Swift Denim Hidalgo
The
in
Swift
Denim
plant in Mexico.
Hidalgo
joint
venture
involved
a
denim
Larry Galbraith investigated the Swift Denim
Hidalgo venture, and his purpose was to try to understand the
cost structure and cash flow.
According to Galbraith, Hidalgo
was ―losing a substantial amount of money.‖
143:4-5.
L. Galbraith Dep.
During his investigation, Galbraith met several times
with Solomon and Gabriel Helfon, who ran the Hidalgo facility.
Id. 143:19-144:2.
was
not
According to Galbraith, the Hidalgo venture
profitable;
rather,
it
was
―toast‖
because
of
a
―combination of . . . bad performance‖ and a large loan Hidalgo
took.
Id. at 146:23-148:4 (noting that ―it was a very poor
decision on everyone‘s part at that time to make that loan‖).
25
DISCUSSION
After the Court‘s ruling on Defendants‘ previously filed
Motion to Dismiss, the following claims remained:
Plaintiff‘s
claim that Defendants fraudulently induced it to enter into this
venture and its claim that Defendants violated fiduciary duties
owed to it.
Denim N. Am. Holdings, LLC v. Swift Textiles, LLC,
No. 4:10-cv-45 (CDL), 2011 WL 318127, at *14 (M.D. Ga. Jan. 28,
2011) [hereinafter MTD Order].
completed,
Defendants
Now that discovery has been
maintain
that
Holdings
has
failed
to
produce any evidence to create a genuine fact dispute as to
these remaining claims.
Accordingly, Defendants argue that they
are entitled to summary judgment.
As discussed below, the Court
finds genuine factual disputes exist as to the following claims:
(1)
Plaintiff‘s
Defendants‘
sales
fraudulent
inducement
projections;
and
(2)
claim
predicated
Plaintiff‘s
upon
breach
of
fiduciary duty claim based on Swift‘s sales made in competition
with DNA and Swift‘s termination of its sales staff.
Therefore,
Defendants‘ motion for summary judgment is denied as to these
claims.
The Court grants summary judgment to Defendants on the
following claims:
(1) Plaintiff‘s fraudulent inducement claim
predicated upon concealment of Defendant‘s financial condition;
and (2) Plaintiff‘s breach of fiduciary claim based upon the
foreign ventures.
26
I.
Fraudulent Inducement Claims
Holdings
Holdings
to
claims
enter
that
the
Defendants
joint
venture
fraudulently
with
induced
Defendants
by
misrepresenting (1) what volume of higher margin denim orders
Swift would produce (―sales projection theory‖) and (2) that
Swift
would
provide
which
Holdings
Swift
had
its
could
financial
discover
(―financial
the
records
records
large
to
Holdings,
amount
theory‖).
To
of
from
inventory
recover
on
a
fraudulent inducement claim, Holdings must show: ―(1) a false
representation or omission of a material fact; (2) scienter; (3)
intention to induce the party claiming fraud to act or refrain
from
acting;
(4)
justifiable
reliance;
and
(5)
damages.‖
Argentum Int’l, LLC v. Woods, 280 Ga. App. 440, 443, 634 S.E.2d
195, 200 (2006) (internal quotation marks omitted).
A.
Fraudulent Inducement Claim Based on Sales Projections
Defendants
contend
that
the
fraudulent
inducement
claim
based on the sales projections theory fails for several reasons:
(1)
Holdings
should
be
bound
to
disclaimers
regarding
the
accuracy of the sales projections in the transaction documents
because it failed to seek timely rescission of the agreement;
(2) it was unreasonable as a matter of law for Holdings to rely
on the future sales projections; and (3) the evidence does not
support such a claim.
The Court addresses each argument in
turn.
27
1.
Timeliness of Rescission
First, Defendants contend that Plaintiff‘s Sales Projection
Claim fails as a matter of law because the transaction documents
expressly
disclaimed
projections.
(stating
any
reliance
on
the
accuracy
of
those
Manufacturing Agreement § 2.4, ECF No. 41-15 at 2
that
Swift
and
Galey
agreed
―to
use
commercially
reasonable good faith efforts to achieve the sales projections
set forth in Schedule 4.10 of the Subscription Agreement‖ and
that the agreement was ―subject to various factors, conditions
and assumptions‖ out of their control).
rejected
claim
this
for
disclaimer
argument,
rescission
finding
of
provisions
the
in
that
The Court previously
―Holdings
Subscription
that
agreement
has
stated
Agreement,
do
not
so
a
any
preclude
Holdings‘s fraudulent inducement claims as a matter of law.‖
MTD Order at *14 (Jan. 28, 2011) [hereinafter MTD Order]. But
now
Defendants
contend,
based
on
a
recent
Georgia
Court
of
Appeals opinion, that Holdings did not timely seek rescission.
―As a general rule, Georgia law requires a [party] seeking
rescission of a contract on the ground of fraud to restore or
offer
to
restore
the
consideration
therefore
as
a
condition
precedent to bringing the action.‖ Vivid Invs., Inc. v. Best
Western Inn-Forsyth, Ltd., 991 F.2d 690, 692 (11th Cir. 1993)
(internal quotation marks omitted).
Georgia law also requires a
plaintiff seeking rescission to do so ―promptly‖ upon discovery
28
of the fraud.
O.C.G.A. § 13-4-60.
Generally, an attempt to
seek rescission contemporaneously with the filing of a lawsuit
is insufficiently prompt under Georgia law. See, e.g., Nexus
Servs., Inc. v. Manning Tronics, Inc., 201 Ga. App. 255, 255,
410 S.E.2d 810, 811 (1991) (stating that ―the rule requiring one
who seeks the rescission of a contract on the ground of fraud to
restore, or offer to restore, the consideration received, as a
condition precedent to bringing the action, is settled in this
State‖)
(internal
quotation
marks
omitted);
accord
Megel
v.
Donaldson, 288 Ga. App. 510, 515, 654 S.E.2d 656, 661 (2007)
(noting that a party alleging fraudulent inducement has ―two
options: (1) affirm the contract and sue for damages from the
fraud or breach; or (2) promptly rescind the contract and sue in
tort for fraud‖) (internal quotation marks omitted).
Here, Holdings did not seek rescission of the Subscription
Agreement
or
Operating
Agreement
before
filing
this
action.
Compl. ¶¶ 141-42. Georgia, however, recognizes an exception to
the tender rule when tender would be impossible or unreasonable.
See, e.g., Orion Capital Partners, L.P. v. Westinghouse Elec.
Corp.,
223
Ga.
App.
539,
543,
478
S.E.2d
382,
385
(1996)
(stating defrauded party ―need not offer to restore where the
defrauding party has made restoration impossible, or when to do
so would be unreasonable‖).
In denying Defendants‘ motion to
dismiss on this point, the Court found that ―‗[a]t the very
29
least, [Holdings] has raised factual issues concerning whether
requiring tender would be reasonable under the circumstances.‘‖
MTD
Order
at
*
13
(alterations
in
original)
(quoting
Vivid
Invs., Inc., 991 F.2d at 692-93).
Defendants now contend that a recent case, Weinstock v.
Novare Group, Inc., 309 Ga. App. 351, 710 S.E.2d 150 (2011),
stands for the proposition that a party‘s contention that tender
would be impossible or unreasonable does not excuse its failure
to timely seek rescission.
That contention is incorrect.
In
Weinstock, two condominium purchasers alleged that the seller
fraudulently induced them into purchasing the condominiums by
marketing them as having spectacular city views while intending
to block those same views by later constructing another building
on an adjacent lot.
at 153.
Weinstock, 306 Ga. App. at 352, 710 S.E.2d
The trial court granted summary judgment to the seller,
and the Georgia Court of Appeals affirmed,
holding that the
purchasers did not timely rescind their purchases and therefore
could not rely on representations that were not made in their
purchase
contract.
Id.
at
354-56,
710
S.E.2d
at
154-55.
Critical to the court‘s holding was that the purchasers ―did not
attempt to rescind the purchase contract before filing suit, nor
did they raise a rescission claim contemporaneously therewith.‖
Id. at 354, 710 S.E.2d 154.
Almost a year after filing their
original complaint, the purchasers amended their complaint to
30
add a prayer to rescind the purchase contract.
Id.
The court
found that the amendment was too late because, in general, ―a
claim
for
damages
unaccompanied
by
a
claim
for
rescission
operates as an election to affirm the underlying contract.‖
Id.
Finally, the court stated in a footnote that even if tender was
not required because it was impossible or unreasonable, that did
not
excuse
the
purchasers‘
unreasonable
delay—one
year
after
filing the complaint—in electing the remedy of rescission. Id.
at 356 n.5, 710 S.E.2d at 155 n.5.
Latching
onto
the
language
of
that
footnote,
Defendants
contend that Weinstock–contrary to settled law–stands for the
broad proposition that even if tender would be impossible or
unreasonable, that does not excuse a party‘s failure to timely
seek
rescission.
Here,
unlike
in
Weinstock,
Holdings
made
a
claim for rescission in its original complaint. Compl. ¶¶ 13344. Therefore, the actual holding in Weinstock is inapplicable.
Defendants attempt to bridge their argument‘s analytical
gap by claiming, based on Orion Capital Partners, that Holdings
affirmed the contracts by engaging in management decisions and
continuing to operate the company.8
This argument is likewise
unpersuasive.
In Orion Capital Partners, the purchaser of a dog
food
sued
company
the
seller
for
8
fraudulent
inducement
and
Defendants cited a number of other cases in support of this
proposition.
They are distinguishable from this case for the same
reasons Orion Capital Partners is distinguishable.
31
rescission. Orion Capital Partners, 223 Ga. App. at 539, 478
S.E.2d at 383. The trial court granted summary judgment in favor
of the defendants and the Georgia Court of Appeals affirmed,
finding that there was no basis for excusing the plaintiff‘s
seven month delay in seeking rescission after discovering the
fraud.
found
Id. at 543, 478 S.E.2d at 385.
that
decisions
the
plaintiff
that
were
engaged
in
inconsistent
The Court of Appeals
a
series
with
of
management
contract
rescission
because they were an attempt to continue operating the company
in a profitable manner.
Id.
Moreover, there was no claim that
rescission would have been impossible or unreasonable.
Plaintiff‘s
Orion
Capital
actions
Partners,
here
are
the
plaintiff
company from the defendant.
completely
Id.
dissimilar.
purchased
an
In
entire
Here, Holdings sold only part of
its business to Swift and entered into the DNA joint venture.
The plaintiff Orion Capital Partners could have simply tendered
the company back to the seller, but Holdings did not have that
option.
Instead, after Swift
arguably
walked away from the
joint venture, Holdings was left to operate DNA as it had before
the joint venture. Therefore, Plaintiff‘s management decisions
and
continued
operation
of
DNA
are
not
inconsistent
with
rescission.
For
all
of
these
reasons,
the
Court
concludes
that
a
genuine fact dispute exists as to whether Holdings timely sought
32
rescission.
Accordingly,
the
fraudulent
inducement
claim
premised on the sales projection theory does not fail based on
this argument.
2.
Reliance on Future Sales Projections
Defendants
claim
premised
also
on
contend
the
sales
that
the
projection
fraudulent
theory
inducement
fails
because
Holdings could not rely on future sales projections as a matter
of
law.
It
is
well
settled
that
―[i]n
most
circumstances,
actionable fraud cannot be predicated on a promise contained in
a contract because the promise is to perform some act in the
future, and [n]ormally, fraud cannot be predicated on statements
which are in the nature of promises as to future events.‖
BTL
COM Ltd. v. Vachon, 278 Ga. App. 256, 258, 628 S.E.2d 690, 694
(2006) (second alteration in original) (internal quotation marks
omitted).
―An exception to the general rule exists where a
promise as to future events is made with a present intent not to
perform or where the promisor knows that the future event will
not take place.‖9 Id. (internal quotation marks omitted).
9
Defendants contend that the BTL COM Ltd. exception only relates to
the scienter element of fraud. Defendants are correct that BTL COM
Ltd. did not address whether the plaintiff reasonably relied on the
alleged misrepresentations.
BTL COM Ltd., 278 Ga. App. at 258 n.2,
628 S.E.2d at 693 n.2 (―The issue[] of whether BTL reasonably relied
on the representations contained in the Agreement . . . [is] not
properly before us in this appeal.‖). But the courts have not limited
the BTL COM Ltd. exception to the scienter element of fraud.
See,
e.g., TechBios, Inc. v. Champagne, 301 Ga. App. 592, 594-95, 688
S.E.2d 378, 381 (2009).
In TechBios, the court reversed the trial
court‘s dismissal of a fraud claim based on a promise as to future
33
Here,
Holdings
contends
that
its
fraudulent
inducement
claim can be premised on a representation as to a future event–
the sales projections–because there is evidence that Defendants
knew when they made the projections that the sales would not be
achieved as promised.
The only Georgia appellate court opinion Defendants cited
in support of their position that Holdings cannot reasonably
rely on future sales projections
is
Marler v. Dancing Water
Lakes, Inc., 167 Ga. App. 99, 305 S.E.2d 876 (1983).
In Marler,
the Georgia Court of Appeals stated the rule as:
[W]here
the
representation
consists
of
general
commendations or mere expressions of opinion, hope,
expectation, and the like, and where it relates to
matters which from their nature, situation, or time,
can not be supposed to be within the knowledge or
under the power of the party making the statement, the
party to whom it is made is not justified in relying
upon it and assuming it to be true; he is bound to
make inquiry and examination for himself so as to
ascertain the truth.
167
Ga.
(internal
App.
at
quotation
100,
305
marks
S.E.2d
omitted).
at
877
This
(emphasis
rule
makes
added)
sense
because if the party making the statement lacks knowledge of or
power over the matter, he cannot have a present intent not to
events where ―it was possible for [plaintiff] to introduce evidence
showing that the alleged false representations were made with a
present intent not to perform, were designed to induce TechBios to act
or refrain from acting, and resulted in damage to TechBios as a result
of its justifiable reliance.‖ Id. (emphasis added). And Defendants
have not explained how their contention – that a plaintiff can never
reasonably rely on a representation as to future events – can stand
with the BTL COM Ltd. exception which allows plaintiffs to prove
scienter in relation to representations as to future events.
34
perform or knowledge that the future event will not take place.
In
contrast,
relate
to
here,
subject
Plaintiff‘s
matter–the
fraudulent
future
inducement
sales
claims
projections–that
Defendants had both knowledge of and power over.
Therefore, a
genuine fact dispute remains as to whether Holdings reasonably
relied on the future sales projections. Accordingly, Plaintiff‘s
fraudulent inducement claim premised on the sales projections
does not fail based on this argument.
3.
Evidence Supporting Sales Projections Theory
Defendants also argue that the evidence does not support a
fraudulent
theory.
inducement
claim
premised
on
the
sales
projection
Defendants argue that (1) DNA met or exceeded the sales
projections
in
the
Subscription
Agreement;
(2)
there
is
no
evidence Defendants knew that the sales projections were false
when they were made; and (3) the lack of sales were DNA‘s fault
because of the problems with shade matching.
As
discussed
projection,
above,
Defendants
under
the
projected
most
that
conservative
DNA
would
sell
sales
1.275
million yards of Swift product in fourth quarter 2006 for a
total of $4.45 million and that DNA would sell 15.55 million
yards of Swift product in 2007 for a total of $55 million.
Based
on
reasonable
Galbraith‘s
factfinder
affidavit,
could
also
conclude
missed these marks by a wide margin.
35
that
discussed
DNA‘s
above,
actual
a
sales
According to Galbraith,
DNA only sold 259,343 yards of Swift product in fourth quarter
2006,
for
a
projection.
total
of
$993,185—approximately
Galbraith Aff. Ex. B.
20%
of
the
In 2007, DNA only sold 6.6
million yards of Swift product for a total of $24 million—a
little more than 40% of the lowest projection.
Id.
Defendants
pointed to no evidence from which the Court can find as a matter
of law that the shade matching issues caused these problems,
particularly after production ramped up in 2007.
The Court also
cannot conclude as a matter of law that Defendants did not know
the
sales
projections
discussed
above,
conclude
that
for
were
false
example,
Defendants
a
when
they
reasonable
stockpiled
were
made.
factfinder
inventory
As
could
before
the
transaction and intended to offer deals to sell the inventory
after the transaction.
From this, a factfinder could reasonably
infer
did
that
Defendants
not
intend
to
follow
through
on
promises to sell the DNA-manufactured Swift product.
For all of these reasons, the Court finds that the evidence
viewed
in
fraudulent
theory.
the
light
inducement
most
favorable
to
claim
premised
on
Holdings
the
sales
supports
a
projection
Accordingly, Defendants are not entitled to summary
judgment on this claim.10
10
In a footnote, Defendants summarily argue that the claims against
Galey and Patriarch should be dismissed because Holdings failed to
present evidence that they made oral or written representations
regarding the sales presentations. As discussed above, however, there
is sufficient evidence from which a reasonable factfinder could
36
B.
Fraudulent Inducement Claim Based on Concealment of
Financial Condition
The fraudulent inducement claim premised on the financial
records theory appears to be based on Defendants‘ failure to
provide
despite
certain
financial
repeated
information
about
from
Holdings
representation
contractual
requests
that
they
information to Holdings.
Swift
and
would
and
Galey
Defendants‘
provide
the
Defendants are entitled to summary
judgment on this claim.
In Bogle v. Bragg, 248 Ga. App. 632, 548 S.E.2d 396 (2001)
a
mining
industry
executive
alleged
that
a
mining
company‘s
employees fraudulently induced him into purchasing stock in the
company
by
misrepresentation
making
before
misrepresentations,
the
deal
closed
including
that
―a
a
[mining
company] financial statement would be ready in a few days and
that [the executive] would receive it in due course.‖
248 Ga. App. at 633-34, 548 S.E.2d at 399.
Bogle,
In affirming summary
judgment for the mining company, the Georgia Court of Appeals
found that even though the mining company represented that it
would provide financial statements, ―it was [the executive‘s]
choice to proceed with the [transaction] without them.‖ Id. at
636, 548 S.E.2d at 401.
Given that it was ―an arm‘s length
transaction between persons experienced in the mining business‖
conclude that Galey
decision to propose
surrounding the deal.
and
the
Patriarch personnel
joint venture and
37
participated in the
in the negotiations
where there was no special duty to make disclosures, the court
found that the mining company‘s failure to produce the promised
financial
statements
inducement.
did
not
support
a
claim
for
fraudulent
Id. at 636-37, 548 S.E.2d at 401.
Here, as in Bogle, Defendants promised Holdings financial
statements that they never produced.
was
[Plaintiff‘s]
without them.‖
choice
to
Further, as in Bogle, ―it
proceed
with
the
[transaction]
Bogle, 248 Ga. App. at 636, 548 S.E.2d at 401.
Holdings does not contend that Defendants had any other special
duty to make disclosures.
it
was
fraudulently
Defendants‘
Holdings
promise
chose
to
Therefore Holdings cannot now claim
induced
into
to
produce
proceed
with
the
joint
financial
the
venture
statements
transaction
knowing
by
when
that
Defendants had not produced the promised financial statements.
For all of these reasons, Defendants are entitled to summary
judgment
on
the
fraudulent
inducement
claim
premised
on
the
financial records theory.
II.
Fiduciary Duty Claims
Holdings also makes a claim against Swift for breach of
fiduciary
claim
duty.
fails
as
Defendants
a
matter
Holdings a fiduciary duty.
contend
of
law
that
because
the
fiduciary
Swift
did
not
duty
owe
Defendants further argue that even
if Swift did have a fiduciary duty to Holdings, there is no
evidence of a breach of fiduciary duty.
38
As discussed below, the
Court
concludes
that
there
is
a
genuine
fact
dispute
as
to
whether Swift owed Holdings a fiduciary duty, and there is also
a fact dispute as to whether Swift breached that duty.
A.
Did Swift Owe a Fiduciary Duty to Holdings?
Under Georgia law, a managing member of a limited liability
company
owes
a
fiduciary
duty
to
its
fellow
members.
O.C.G.A. § 14-11-305(1) (―In managing the business or affairs of
a limited liability company[, 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[.]‖); accord ULQ, LLC
v. Meder, 293 Ga. App. 176, 184, 666 S.E.2d 713, 720 (2008).
However,
―a
person
who
is
a
member
of
a
limited
liability
company in which management is vested in one or more managers,
and who is not a manager, shall have no duties to the limited
liability company or to the other members solely by reason of
acting in his or her capacity as a member.‖ O.C.G.A. § 14-11305(1); accord Meder, 293 Ga. App. at 184-85, 666 S.E.2d at 72021.
Swift and Holdings are both members of DNA.
above, under
As discussed
the Operating Agreement, DNA is managed by its
members through a board of eight managers.
Four managers are
appointed by Holdings, and four are appointed by Swift.
No
manager is permitted to take any action unless the action has
been approved by at least a majority of the managers.
39
Swift argues that it owes Holdings no fiduciary duty in
connection with DNA because it was a ―non-managing‖ member of
DNA.
Although Swift admits it appointed managers that managed
DNA,
Swift
maintains
that
it
was
not
a
manager.
Holdings
responds that Swift managed DNA through its appointed managers.
The
critical
question
for
the
Court
is
whether
Swift‘s
appointment of four of DNA‘s eight managers means that Swift
itself was a managing member of DNA.
Generally,
non-member
managers
of
a
Georgia
LLC
are
―designated, appointed, [or] elected . . . by the approval of
more than one half by number of the members.‖ OCGA § 14-11304(b)(1).
Swift
to
Here,
appoint
appointed—without
though,
four
the
Operating
managers—and
Plaintiff‘s
Agreement
replace
approval.
the
permitted
managers
Moreover,
under
it
the
Operating Agreement, no manager is permitted to take any action
unless the action has been approved by at least a majority of
the
managers.
Therefore,
Swift‘s
ability
to
appoint
four
managers gave it de facto control of the DNA board of managers.
That control creates a genuine fact dispute as to whether Swift
was a managing member of DNA and therefore owed fiduciary duties
to Holdings.11
The next question is whether there is a fact
dispute as to whether Swift breached those duties.
11
The Court previously observed that Swift‘s contention that it did
not manage DNA ―is somewhat disingenuous given that [Swift‘s] argument
40
B.
Did Swift Breach its Fiduciary Duty to Holdings?
Holdings contends that Swift breached its fiduciary duty to
Holdings in three ways: (1) selling denim in competition with
DNA, (2) terminating the DNA sales force, and (3) by closing its
foreign manufacturing facilities.
1.
Sales in Competition with DNA
Defendants argue that there is no evidence that Swift‘s
sales of its inventory were in competition with DNA.
Defendants
point out that Swift‘s inventory sales were anticipated.
As
discussed above, while it is undisputed that Holdings knew that
Swift planned to sell any inventory it had on hand as of the
date
of
millions
the
of
Holdings.
inventory
closing,
yards
of
Although
abroad
and
there
is
also
evidence
inventory
that
it
Defendants
not
in
did
contend
that
not
that
competition
Swift
had
disclose
to
Swift
with
DNA,
sold
there
the
is
evidence that the sales were domestic and that they adversely
impacted sales of denim produced by DNA because Swift undercut
DNA‘s price and flooded the market with its inventory.
For all
of
on
these
fiduciary
reasons,
duty
summary
claim
judgment
based
on
is
not
Swift‘s
warranted
competing
sales
the
of
inventory.
in support of its motion to dismiss DNA as a party in this action,
which the Court accepted, was based upon the fact that the Swiftappointed managers had not approved the filing of the action by DNA.‖
MTD Order at *7 n.5.
41
2.
Sales Force Termination
Holdings also claims that Swift breached its fiduciary duty
by terminating its sales personnel.
As discussed above, there
is evidence that Swift was responsible for the marketing and
sales
of
DNA‘s
products
and
that
a
large
part
of
Swift‘s
consideration for the joint venture was its ability to sell
DNA‘s product.
Swift contends that there was no breach because
Holdings requested that the sales force be transferred to DNA.
As
discussed
above,
however,
there
is
evidence
that
Swift
planned to terminate the sales staff, and that is why Larry
Galbraith decided to transition the denim sales team to DNA.
Based
on
dispute
all
exists
of
as
this,
to
the
the
Court
finds
fiduciary
that
duty
a
genuine
claim
fact
premised
on
Swift‘s termination of its sales staff.
C.
Foreign Ventures
Holdings
fiduciary
summarily
duties
to
manufacturing plants.
argues
Holdings
that
by
Defendants
closing
its
two
breached
foreign
The undisputed evidence shows that Swift
Denim Hidalgo was losing money because it was performing badly
and
was
overleveraged.
Holdings
presented
no
evidence
that
Swift Denim Hidalgo was not actually failing or that Defendants
intentionally caused it to fail.
It is unclear to the Court how
Defendants breached a fiduciary duty by deciding not to pour
more money into a failing plant.
42
It is likewise unclear how Defendants breached a fiduciary
duty to Holdings with regard to the Lucky facility in China.
Holdings argues that Defendants sabotaged the Lucky facility,
and
Plaintiff‘s
theory
is
premised
Defendants closed the Lucky facility.
on
its
argument
that
The undisputed evidence,
however, is that the Lucky facility did not close, that it is
actually producing denim, and that it is still owned by Swift.
For these reasons, the Court finds that Holdings has failed to
demonstrate a jury question with regard to the foreign joint
ventures.
III. Damages
Defendants argue that even if there is evidence to support
claims of fraudulent inducement and breach of fiduciary duty,
the
claims
still
fail
because
Holdings
has
not
presented
evidence that it was damaged by Defendants‘ actions and has not
presented an expert on damages.
Holdings has, however, pointed
to evidence of: (1) how much denim DNA sold by style (Swift vs.
DNA); (2) Swift‘s inventory sales; (3) the pricing of the denim;
and (4) the cost of installing the Picanol looms, training the
staff
on
them,
transaction.
and
Damage
other
costs
to Holdings
and
payments
related
to
the
may be calculated based on
these factors, and the Court cannot conclude as a matter of law
that these calculations would be so complicated that a jury or
the Court could not understand them without expert testimony.
43
CONCLUSION
As discussed above, Defendants‘ Motion for Summary Judgment
(ECF No. 40) is granted in part and denied in part.
Defendants‘
motion is denied as to the following claims: (1) Plaintiff‘s
fraudulent inducement claim predicated upon Defendants‘
sales
projections and (2) Plaintiff‘s breach of fiduciary duty claim
based on Swift‘s sales made in competition with DNA and Swift‘s
termination of its sales staff.
Defendants‘ motion for summary
judgment is granted as to the following claims:
(1) Plaintiff‘s
fraudulent
concealment
inducement
claim
predicated
upon
of
Defendant‘s financial condition; and (2) Plaintiff‘s breach of
fiduciary
duty
claim
based
upon
the
foreign
ventures.
Defendants‘ Motion to Dismiss or for an Adverse Inference (ECF
No. 42) is denied, as is Defendants‘ Motion to Strike (ECF No.
50).
IT IS SO ORDERED, this 8th day of September, 2011.
S/Clay D. Land
CLAY D. LAND
UNITED STATES DISTRICT JUDGE
44
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