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