Tindall v. H&S Homes, LLC et al
Filing
280
ORDER denying in part 168 Motion for Summary Judgment. The Court will RESERVE RULING on the sufficiency of Plaintiffs evidence, and that portion of Defendants motion shall be administratively DISMISSED; denying in relevant part 172 Motion for Hearing; denying in relevant part 178 Motion for Hearing. Ordered by Judge C. Ashley Royal on 11/18/2011 (lap)
THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
MACON DIVISION
TERRY CARTRETTE TINDALL,
:
:
Plaintiff,
:
v.
:
Civil Action
:
No. 5:10‐CV‐044(CAR)
H & S HOMES, LLC, et. al.,
:
:
Defendants.
:
_____________________________________
ORDER ON HORTON DEFENDANTS’ MOTION FOR PARTIAL
SUMMARY JUDGMENT ON STATE LAW PREFERENCE CLAIM
Currently before the Court is the Horton Defendants’ “Motion for Partial
Summary Judgment Respecting Plaintiff’s Allegations of a State Law Preference Claimʺ
[Doc. 168]. Through this Motion, Defendants essentially conduct a fishing expedition to
determine the exact basis for “The Preference” claim asserted in Plaintiff’s Complaint.
In her Response to Defendants’ Motion, Plaintiff explains that her claim titled
“The Preference” is in fact a claim for “breach of trust” against the members and
managers of Defendant H&S Homes, specifically Defendants N. Dudley Horton Jr. and
Horton Homes, Inc. Plaintiff contends that these Defendants improperly used their
position with H&S Homes for the purpose of preferring themselves over any creditor
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and thereby breached a duty owed to Plaintiff under Georgia law. See Ware v. Rankin,
97 Ga. App. 837, 839, 104 S.E.2d 555 (1958).
The only relevant issue, therefore, is whether Defendants are entitled to summary
judgment on the claims brought under this theory. For the reasons discussed below,
Defendants have failed to persuade the Court that Plaintiff’s claim is not one recognized
by Georgia law or that it is time‐barred. To that extent, the present Motion is DENIED.
STANDARD OF REVIEW
Summary judgment must be granted if “there is no genuine issue as to any
material fact and . . . the movant is entitled to judgment as a matter of law.” Fed. R. Civ.
P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d
265 (1986); Johnson v. Clifton, 74 F.3d 1087, 1090 (11th Cir. 1996).
On a motion for summary judgment, the moving party “always bears the initial
responsibility of informing the district court of the basis for its motion, and identifying
those portions of the pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, which it believes demonstrate the absence of a
genuine issue of material fact” and that entitle it to a judgment as a matter of law.
Celotex, 477 U.S. at 323. If the moving party discharges this burden, the burden shifts
to the nonmoving party to go beyond the pleadings and present specific evidence
showing that there is a genuine issue of material fact (i.e., evidence that would support a
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jury verdict) or that the moving party is not entitled to a judgment as a matter of law.
Avirgan v. Hull, 932 F.2d 1572, 1577 (11th Cir. 1991); see Fed. R. Civ. P. 56(e); Celotex,
477 U.S. at 324 26. This evidence must consist of more than mere conclusory allegations
or legal conclusions. See Avirgan, 932 F.2d at 1577.
DISCUSSION
This Motion arises from allegations included in paragraphs 63 through 70 of
Plaintiffs’ original Complaint [Doc. 1]. These paragraphs essentially allege that
Defendants H&S Homes, Dudley Horton, and Horton Homes, L.L.C., unlawfully
conspired to transfer (and did transfer) the remaining assets of an insolvent H&S Homes
for the purpose of preferring and benefitting Horton subsidiaries to the detriment of
Plaintiff and other creditors. Plaintiff asserts that this was accomplished through the
payment of vast sums of money (exceeding $8 million) to Horton Homes and through
the transfer of H&S property to Horton subsidiaries for less than adequate consideration.
According to the Complaint, the members and managers of H&S Homes
(specifically Dudley Horton, Jr. and Horton Homes, Inc.) were, by operation of law, “the
fiduciaries and trustees of the property of H&S for the benefit of its creditors including
Plaintiff” when all of the challenged transfers were made. (Compl. at ¶ 65). Plaintiff
thus contends that Defendants “should be required to disgorge th[ese] preference[s] and
repay to H&S a sum sufficient to [satisfy her] judgment . . . .” (Id. at ¶ 70).
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Defendants were apparently unable to discern the exact nature of the claim stated
in these paragraphs and now move for partial summary judgment because (1) Plaintiff
has failed to state a claim recognized by federal or state law; (2) Plaintiff claims are
barred by the statute of limitations; and (3) Plaintiff’s claims are not supported by
sufficient evidence. Defendants, however, have failed to persuade the Court that
Plaintiff’s claims are not recognized by Georgia law or that they are otherwise
time‐barred. To that extent and for the reasons discussed below, Defendants’ Motion is
DENIED. The Court will reserve ruling on the sufficiency of Plaintiff’s evidence.
I.
Plaintiff’s Substantive Claim
As discussed above, Plaintiff’s Complaint alleges that Defendants “were by,
operation of law, the fiduciaries and trustees of the property of H&S for the benefit of its
creditors including Plaintiff” and that they wrongfully disposed of the H&S assets in a
way which benefited and preferred the interests of Horton Homes, Dudley Horton, and
the Horton subsidiaries to the detriment of H&S creditors.
On summary judgment, Defendants contend that Plaintiff may not prevail on any
claim arising from these allegations. According to Defendants, Georgia law does not
recognize a “preference” claim. Defendants assume, therefore, that Plaintiff has
improperly asserted either (1) a claim under federal bankruptcy law; (2) a fraudulent
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transfer claim under O.C.G.A. § 18‐2‐75(b); or (3) a “sub silentio” claim under O.C.G.A. §
14‐2‐640 and O.C.G.A. § 14‐2‐832.
In her Response, Plaintiff shows that much of Defendants’ Motion is moot, as she
never attempted to state any of those claims. Plaintiff further shows that, despite
Defendants’ firm assertion to the contrary, Georgia law has long recognized the type of
common law “preference claim” stated in her Complaint.
Georgia courts have, indeed, recognized that the managing officers and directors
of a corporation “are charged with the duty of conserving and managing the remaining
assets [of an insolvent corporation] in trust for the creditors.” In re Pharr‐Luke, 259 B.R.
426, 430 (S.D. Ga. 2000) (citing Ware v. Rankin, 97 Ga. App. 837, 839, 104 S.E.2d 555
(1958)). This trust or quasi‐trust relationship between the officers of a corporation and
its creditors requires that the debts of creditors be given preference over the corporate
debts owed to officers and directors of an insolvent corporation. See McEwen v. Kelly,
140 Ga. 720, 720, 79 S.E. 777 (1913).
In other words, “[t]he officers of the corporation [have a] duty to apply [the assets
of an insolvent corporation] primarily to the payment of the debts of the corporation”
and may not “apply such proceeds to the payment of existing debts owing to them
individually . . . .” Fountain v. Burke, 160 Ga. App. 262, 262, 287 S.E.2d 39 (1981); Ware,
97 Ga. App. at 839 (“[O]fficers and directors may not . . . use their position for the
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purpose of preferring themselves over any creditor . . . .”). Thus, corporate officers may
not “give preference to existing debts which the corporation owed to other persons, and
for which such officers were primarily liable,” unless the payments or preferences are
“made in the performance of [an] agreement . . . entered into at or prior to the time when
the liabilities were incurred, or before the insolvency of the corporation.” Fountain, 160
Ga. App. at 262 (citing Tatum v. Leigh, 136 Ga. 791), 72 S.E. 236 (1911)). “In the same
way, the sole owner and president of . . . [a] corporation [may] not, after the
corporation [becomes] insolvent, seize all its remaining assets and apply them to a debt
owed by the corporation to himself personally, thereby rendering it incapable of paying
its other business debts.” Id. An officer, manager, or director is also obviously
prohibited from intentionally misappropriating or giving away corporate assets “so that
creditors are prevented from collecting their debts.” McEwen, 140 Ga. at 720.
Of course, “the officers and directors of an insolvent corporation may prefer one
creditor over another and may pay a debt which is due . . . , even though the effect of the
payment is to reduce assets available to other creditors . . . .” Ware, 97 Ga. App. at 838.
However, “any scheme or device the purpose of which is to indemnify [the owners,
officers, or directors of a corporation] against loss, whether as creditors or as endorsers
of notes given by the corporation or otherwise, constitutes legal fraud.” Id. at 839.
Creditors thus “have a right to sue the officers and directors of the corporation” when
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this type of misconduct occurs. McEwen, 140 Ga. at 720; Hickman v. Hyzer, 261 Ga. 38,
40, 401 S.E.2d 738 (1991) (“The abuse of this duty gives rise to an action against the
directors to recover sums improperly paid out by the corporation.”); see also Ware, 97
Ga. App. at 839 (“The test is the intent or purpose which induced the making of the
payment or the giving of the security.”).
And so, it does appear that Plaintiff may bring a claim asserting that Defendants
breached a duty still recognized by Georgia common law, which required them hold
H&S property in trust for the benefit of H&S creditors. See Fountain, 160 Ga. App. at
262; McEwen, 140 Ga. at 720; see also Hickman v. Hyzer, 261 Ga. 38, 401 S.E.2d 738
(1991). Indeed, Defendants did not dispute whether Georgia law recognizes Plaintiff’s
claim after her Response was filed. The Court finds, therefore, that Plaintiff has
brought a claim recognized by Georgia law.
II.
Statute of Limitations
Defendants next contend that, even if Plaintiff has stated a viable claim, it is
nonetheless time‐barred. According to Defendants, Plaintiff’s claim mirrors either (1) a
fraudulent transfer claim brought under O.C.G.A. §18‐2‐75(b) or (2) a claim against a
corporate director for rescission of improper distributions to shareholders under
O.C.G.A. § 14‐2‐832. The statute of limitations is one year for claims brought under §
18‐2‐75(b) and two years for claims brought under O.C.G.A. § 14‐2‐832. See O.C.G.A.§
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18‐2‐79(3); O.C.G.A. § 14‐2‐832(c). Defendants thus argue that, in either case, the
relevant limitations period for Plaintiff’s claims has tolled. The Court, however, is not
persuaded that either of these limitation periods is applicable to Plaintiff’s claim.
O.C.G.A. § 18‐2‐75(b), a provision of Georgia’s Uniform Fraudulent Transfers Act
(“UFTA”), provides that a transfer is fraudulent if it “was made to an insider for an
antecedent debt, the debtor was insolvent at that time, and the insider had reasonable
cause to believe that the debtor was insolvent.” Id. Plaintiff’s present claim does not
allege that the transfers were fraudulent under UFTA. Plaintiff alleges, in relevant part,
that Defendants breached their duty to hold the corporate assets in trust for the creditors
when they applied the proceeds from the sale of H&S assets primarily to the payment of
existing debts owing to themselves. See Fountain, 160 Ga. App. at 262.
Defendants’ actions, of course, may also be viewed as an improper transfer of
assets to an insider for an antecedent debt, actionable under O.C.G.A.§ 18‐2‐75(b). Even
so, nothing in that statute demands that it be the sole cause of action when a transfer to
an insider is made under the guise of an antecedent debt. Plaintiff’s breach of trust
claim is separate and distinct from any fraudulent transfer claim, and is, as a result, not
barred by UFTA’s one‐year statute of limitation as Defendants assert.
In the alternative, Defendants argue that the two‐year statute of limitation for
claims brought pursuant to O.C.G.A. § 14‐2‐832(a) is applicable to Plaintiff’s present
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claims because this code section is the contemporary version of the statute construed by
the Georgia cases Plaintiff cites in support of her claim. See Ware, 97 Ga. App. at 837‐38
(construing the 1933 version of Ga. Code Ann. § 22‐709).
However, a claim for breach of duty brought pursuant to O.C.G.A. § 14‐2‐832 is
significantly different from the breach of duty defined in the early Georgia cases. Those
cases construed the rule that
Directors primarily represent the corporation and its stockholders, but
when the corporation becomes insolvent they are bound to manage the
remaining assets for the benefit of its creditors, and cannot in any manner
use their powers for the purpose of obtaining a preference or advantage to
themselves.
Ware, 97 Ga. App. 837 (citing Ga. Code Ann. § 22‐709). Though codified at one time,
the rule actually originated in common law long before its codification in 1933. See id.
at 837‐38 (citing Lowry Banking Co. v. Empire Lumber Co., 91 Ga. 624, 624, 17 S.E. 968
(1893)); see also Atlas Tack Co. v. Exchange Bank of Macon, 111 Ga. 703, 36 S.E. 939, 940
(1900) (holding that directors of an insolvent corporation are trustees of corporate
funds). The scope of the rule was later extended by Georgia courts, so as to impose a
similar duty on managing officers and sole‐owners of a corporation. See Ware, 97 Ga.
App. at 838 (recognizing that managing officers of a corporation occupy the same
fiduciary position as directors); Fountain, 160 Ga. App. at 262 (explaining that the sole
owner and president of a corporation owed similar duty to creditors).
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O.C.G.A. § 14‐2‐832, in contrast, provides only for a cause of action against a
corporate director who votes or assents to a distribution to shareholders in violation of the
Georgia Business Corporations Code or the articles of incorporation if it is established
that he did not perform his duties in compliance with the statutory standards for
directors. O.C.G.A. § 14‐2‐832(a). 1 The statute makes no reference to the rights of
creditors, and only discusses liability for distributions to shareholders. See id. The
statute also only allows for liability to be imposed upon directors; it does not provide a
cause of action for breach of duty against managers, officers, or owners of a corporation
as is recognized by common law. Id.
It is undisputed that Plaintiff has not brought a claim pursuant to O.C.G.A. §
14‐2‐832. Plaintiff’s claim is based upon the Georgia law charging directors, managers,
officers, and sole owners of a corporation “with the duty of conserving and managing
the remaining assets in trust for the creditors when the corporation becomes insolvent.”
In re Pharr‐Luke, 259 B.R. at 430 (emphasis added). As shown above, a creditor’s cause
of action for breach of duty predates O.C.G.A. § 14‐2‐832 and is broader than the cause of
1 The statute provides: “A director who votes for or assents to a distribution made in violation
of Code Section 14‐2‐640 or the articles of incorporation is personally liable to the corporation for
the amount of the distribution that exceeds what could have been distributed without violating
Code Section 14‐2‐640 or the articles of incorporation if it is established that he did not perform
his duties in compliance with Code Section 14‐2‐830. . . .”
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action against directors provided by provisions of the Georgia Business Corporations
Code, past and present. See O.C.G.A. § 14‐2‐832; Deft.’s Reply at pp. 3‐4 (discussing the
statutory history of O.C.G.A. § 14‐2‐832); see also Lisa A. Zakolski, Ga. Jurisprudence:
Corporations, Vol. 6, § 5.39 (updated Sept. 2011) (referencing the different claims that can
be made against a director for breach of duty). Plaintiff’s claim is thus not subject to the
limitations of O.C.G.A. § 14‐2‐832.
Plaintiff contends that her claim is, instead, subject to the statute of limitations for
breach of trust claims provided in O.C.G.A. § 53‐12‐307. This statute actually provides
two limitation periods. O.C.G.A. § 53‐12‐307(a). It first provides that, if a trust
beneficiary received a written report providing him with notice of a possible claim for
breach of trust, the claim must be brought within two‐years of the date the report was
received. Id. If, however, the circumstance is one in which no written report would be
received, the claim may be brought “within six years after the beneficiary discovered, or
reasonably should have discovered, the subject of such claim.” Id.
Obviously, the current situation is not one in which a written report would have
been received by H&S creditors. Thus, Plaintiff contends that her “breach of trust”
claim has a six‐year statute of limitation. See id. Defendants do not offer any argument
in response explaining why this six‐year statute of limitation should not be applied to
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Plaintiff’s claims. (See Deft.s’ Reply [Doc. 240] at pp. 2‐6).2 It indeed appears that the
statute of limitations for a creditor’s claim against the officers and directors of an
insolvent corporation for “breach of trust” should be six years. Defendants have thus
failed to meet their burden of showing that Plaintiff’s present claims are barred by the
relevant statute of limitations.
III.
Sufficiency of the Evidence
Defendants’ final attack on Plaintiff’s claims challenges the sufficiency of
Plaintiff’s evidence. The issue raised by Defendants is whether Plaintiff is able to prove
that H&S assets were in fact purchased by Horton subsidiaries for less than their actual
value. This very same argument, however, is also the basis of another one of the
Horton Defendants’ motions for partial summary judgment, which has not yet been
considered by the Court. Because the issue is more fully briefed in the other motion, the
Court finds that it is more appropriately addressed in an order on that motion rather
than the motion at bar. The Court will thus decline to address the matter here.
However, if the Court rules in Defendants’ favor after considering their “Motion
for Summary Judgment on Ninth Defense: Transfers Were Made for Reasonably
2 To the contrary, Defendants show that former provisions of the Georgia Business Corporations
Code which made a director liable to creditors for improper distributions to shareholders
(former Ga. Code Ann. § 22‐715; O.C.G.A. § 14‐2‐832), had the same statute of limitations as a
claim for breach of trust when no written report is made, six years. (See Deft.s’ Reply at pp. 3‐4).
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Equivalent Value” [Doc. 165], Defendants may file a renewed motion on this issue
within twenty‐one (21) days of the Court’s Order on that motion. At that time, the
Court may also request additional briefs explaining why such finding would foreclose
Plaintiff’s breach of trust claims.3 In the event Defendants choose not to renew their
motion, the Court will assume that their arguments are waived.
Otherwise, the Court finds that Defendants have failed to demonstrate that they
are entitled to summary judgment on “The Preference” claim. Defendants’ Motion for
Partial Summary Judgment on Plaintiff’s State Law Preference Claim is accordingly
DENIED in relevant part.
CONCLUSION
Defendants have failed to persuade the Court that Plaintiff’s claims are not
recognized by Georgia law or that they are time‐barred. To that extent, the present
Motion [Doc. 168] is DENIED. The Court will RESERVE RULING on the sufficiency of
3 A finding as to the value of the assets sold would likely have no bearing on Plaintiff’s
claims arising from the alleged $8 million cash transfers from H&S to Horton Homes. It may also
have little or no effect on Plaintiff’s breach of trust claims arising from the sale of assets. Though
such evidence would be relevant to her claim, it seems that Plaintiff does not necessarily have to
prove that the assets were undervalued to prevail on her breach of trust claim. Plaintiff only has
to prove that Defendants breached their duty to conserve and manage the remaining assets in
trust for her and other creditors when H&S became insolvent. If Plaintiff is successful in
proving that Defendants disposed of the assets, preferring their own interests over the rights of
the H&S creditors, Defendants may be required by law and/or equity to repay H&S a sum
sufficient to satisfy Plaintiff’s judgment. See Ware, 97 Ga. App. at 838‐839.
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Plaintiff’s evidence, as discussed herein, and that portion of Defendants’ motion shall be
administratively DISMISSED. However, Defendants may renew their motion, as
appropriate, after the Court considers and rules upon their “Motion for Summary
Judgment on Ninth Defense: Transfers Were Made for Reasonably Equivalent Value”
[Doc. 165]. The Court may also allow the parties to file additional briefs at that time.
With respect to the issues decided herein, the Court finds that the arguments were
sufficiently briefed and that no hearing is required. The parties’ Motions for Oral
Argument [172 & 178] are, therefore, also DENIED in relevant part.
SO ORDERED this 18th day of November, 2011.
S/ C. Ashley Royal
C. ASHLEY ROYAL, CHIEF JUDGE
UNITED STATES DISTRICT COURT
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