Wood v. Golden

Filing 10

ORDER denying Defendant's 2 Motion to Dismiss; granting Defendant's 6 Motion to Compel; and denying Defendant's 7 Motion for Attorneys' Fees and Expenses. Plaintiff shall have 14 days from the date of this Order to file an a mended complaint consistent with this Order, in an attempt to plead fraud with particularity. Plaintiff is ORDERED to file his Initial Disclosures and serve on Defendant a draft of the Joint Proposed Planning Report within 14 days of the entry of this Order. Signed by Judge Richard W. Story on 06/23/2011. (dfb)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
NEWNAN DIVISION
DAVID WOOD, individually and
derivatively on behalf of
AESTHETIC DENTAL ARTS,
INC.,
Plaintiff,
v.
JOHN GOLDEN,
Defendant.

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CIVIL ACTION NO.
3:10-CV-147-RWS

ORDER
This case comes before the Court on Defendant’s Motion to Dismiss [2],
Defendant’s Motion to Compel [6], and Defendant’s Motion for Attorneys’
Fees and Expenses [7]. After considering the record, the Court enters the
following Order.
Background
In January 1992, Plaintiff moved to Georgia to begin working with
Defendant at Aesthetic Dental Arts, Inc. (“Aesthetic” or “Corporation”). (Dkt.
[1-2] at ¶ 7). Defendant made Plaintiff a partner in the Corporation in 1993.
(Id. at ¶ 8). Plaintiff contends that at all times relevant to this action, he and

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Defendant owned equal shares of the Corporation. (Id. at ¶ 2). Plaintiff
contends that from January 2007 to February 2010 he was the CEO of the
Corporation. (Id. at ¶¶ 9,10). On February 18, 2010, the Corporation held an
annual shareholders meeting, at which Plaintiff alleges Defendant elected
himself President, CEO, and CFO, and also named himself as the registered
agent of the Corporation. (Id. at ¶¶ 14-15).
Following this election, Defendant began the process of dissolving the
Corporation, and on March 11, 2010, acting as CEO of the Corporation, he
executed Articles of Dissolution. (Id. at ¶¶ 16-17). On March 18, 2010, the
Secretary of State issued a Certification of Dissolution of the Corporation. (Id.
at ¶ 18). The following day, Defendant created Golden Dental Laboratory LLC
(“GDL”), which operates at the Corporation’s former place of business,
employs the Corporation’s former employees, and uses the same equipment
used by the Corporation. (Id. at ¶¶ 19, 21-23).
Plaintiff asserts that Defendant, through his actions in dissolving the
Corporation and establishing GDL, breached his fiduciary duties of loyalty,
good faith, and fair dealing to the Corporation and intentionally defrauded
Plaintiff. (Id. at ¶¶ 24-25, 35-50). Plaintiff has styled the case as being brought
on behalf of himself individually and derivatively on behalf of Aesthetic. The
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Complaint states that the action is being brought “derivatively for the benefit of
the Corporation.” (Dkt. [1-2] at ¶ 31).
Discussion
I.

Defendant’s Motion to Dismiss
A.

Motion to Dismiss Standard

Federal Rule of Civil Procedure 8(a)(2) requires that a pleading contain a
“short and plain statement of the claim showing that the pleader is entitled to
relief.” While this pleading standard does not require “detailed factual
allegations,” “labels and conclusions” or “a formulaic recitation of the elements
of a cause of action will not do.” Ashcroft v. Iqbal, 556 U.S. ----, 129 S. Ct.
1937, 1949, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). In order to
withstand a motion to dismiss, “a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Id. (quoting Twombly, 550 U.S. at 570). A complaint is plausible on its face
when the plaintiff pleads factual content necessary for the court to draw the
reasonable inference that the defendant is liable for the conduct alleged. Id.
At the motion to dismiss stage, “all well-pleaded facts are accepted as
true, and the reasonable inferences therefrom are construed in the light most
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favorable to the plaintiff.” Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273
n.1 (11th Cir. 1999). However, the same does not apply to legal conclusions set
forth in the complaint. Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1260
(11th Cir. 2009) (citing Iqbal, 129 S. Ct. at 1949). “Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not
suffice.” Iqbal, 129 S. Ct. at 1949. The court does not need to “accept as true a
legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at 555.
B.

Plaintiff’s Claims

Defendant contends that Plaintiff’s Complaint should be dismissed
because: (1) “Plaintiff lacks standing to pursue this action because of Plaintiff’s
failure to comply with O.C.G.A. § 14-2-742”; (2) Plaintiff has not plead fraud
with particularity; and (3) Plaintiff fails to state any individual, rather than
derivative claims. (Dkt. [2-1] at 1). For the reasons stated below, Defendant’s
Motion to Dismiss [2] is DENIED.
i.

Plaintiff’s ability to assert his claims against Defendant.

O.C.G.A. § 14-2-742 states that: “A shareholder may not commence a
derivative proceeding until: (1) A written demand has been made upon the
corporation to take suitable action; and (2) Ninety days have expired from the
date the demand was made . . . .” Defendant contends that Plaintiff has failed to
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make the demand required by Georgia law, and therefore he lacks standing to
bring his claims against Defendant as a shareholder in a derivative proceeding.
Plaintiff contends that letters he sent to Defendant satisfy the requirement of
O.C.G.A. § 14-2-742. The Court does not find that the letters constitute a
“written demand” for “the corporation to take suitable action” as required by
the statute, therefore Plaintiff has failed to meet the requirements of O.C.G.A. §
14-2-742 necessary to assert a derivative claim. However, this determination is
not dispositive, because for the reasons discussed below, under the facts of this
action a direct rather than derivative action is proper.
“The general rule in the corporate context is that a shareholder suit
seeking to recover damages for breach of fiduciary duties owed to the
corporation must be brought as a derivative suit on behalf of the corporation.”
Stoker v. Bellmeade, LLC, 615 S.E.2d 1, 7 (Ga. Ct. App. 2005) (citation
omitted), rev’d in part on other grounds by Bellemead, LLC v. Stoker, 631
S.E.2d 693 (Ga. 2006). “A shareholder has standing to bring a direct action,
seeking recovery on behalf of the shareholder individually, only if the suit
alleges a special injury separate and distinct from that suffered by other
shareholders, or alleges a wrong involving a shareholder contractual right
existing apart from any right of the corporation.” Id. (citation omitted).
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“However, even where the allegations of the complaint do not show standing to
assert a direct action, a direct action may nevertheless be proper in the context
of a closely held corporation where the circumstances show that the reasons for
the general rule requiring a derivative suit do not apply.”1 Id. (citations
omitted). The Supreme Court of Georgia in Thomas v. Dickson, 301 S.E. 2d
49, 51 (Ga. 1983), has noted that when the reasons for requiring a derivative
suit do not exist, the general rule need not apply. The reasons for requiring
derivative suits in the ordinary corporate context are (1) to prevent a
multiplicity of suits by shareholders; (2) to protect corporate creditors by
ensuring that the recovery goes to the corporation; (3) to protect the interest of
all the shareholders by ensuring that the recovery goes to the corporation; and
(4) to adequately compensate injured shareholders by increasing their share
values. Id.
In Thomas, the court held that the reasons for requiring a derivative
action were not present. Id. In that case, the plaintiff was the only injured
shareholder, thus there was no concern about a multiplicity of lawsuits. Id. The

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Direct actions may be proper when circumstances show that the reasons
underpinning derivative suits are not applicable, even if the corporate entity at issue
has not been created as a statutory close corporation. Telcom Cost Consulting, Inc. v.
Warren, 621 S.E.2d 864, 868 (Ga. Ct. App. 2005).
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plaintiff in that action would also not be adequately compensated by a corporate
recovery. Id. The court noted that the potential benefit for a shareholder of a
corporate recovery is the increase in share value, but since there is not a market
for the shares of a closely held corporation, this rationale did not apply to the
plaintiff. Id. Similarly, in Stoker, the court also found that the reasons for
requiring a derivative action did not exist, and therefore the trial court had
correctly held that the plaintiff had standing to assert claims directly. 615
S.E.2d at 8. In Stoker, the court held that there was no risk of multiple suits in
an action concerning two-member LLCs, nor would the suit prejudice the rights
of the other member. Id.
As was the case in Thomas and Stoker, the reasons for requiring Plaintiff
to bring a derivative action do not exist in this action. The Corporation had
only two shareholders–Plaintiff and Defendant–therefore, there is no risk of
multiple suits. With both shareholders as parties to this action, there is no risk
that Plaintiff’s action will prejudice any shareholder not a party to the action.
Finally, there is no indication in the record that any creditor concerns
necessitate a derivative, rather than direct, action. Therefore, Plaintiff may
assert his claims in a direct action. Also, Plaintiff’s claims, whether styled as an
individual claim or derivative claim, can be appropriately brought against
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Defendant as a direct action. See Phoenix Airline Servs., Inc. v. Metro Airlines,
Inc., 397 S.E.2d 699, 701 (Ga. 1990) (citations omitted) (“The determination
[of whether a claim is direct or derivative] is made by looking to what the
pleader alleged. It is the nature of the wrong alleged and not the pleader’s
designation or stated intention that controls the court’s decision.”).
ii.

Plaintiff’s pleading of fraud.

Count IV of Plaintiff’s Complaint set forth a claim for fraud. It asserts
that “Plaintiff was fraudulently induced by Defendant to remain as a
stockholder of the corporation through the dissolution of the Corporation,” and
that Defendant had “represented to Plaintiff that he would represent the best
interests of the Corporation and its shareholders.” (Dkt. [1-2] at ¶¶ 62, 63).
The Court agrees with Defendant that the Complaint contains “nothing stating
[specifically] how the Defendant induced the Plaintiff to do or not do anything.”
(Dkt. [2-1] (internal punctuation and quotation omitted)). Federal Rule of Civil
Procedure 9(b) requires a party to “state with particularity the circumstances
constituting fraud.” Plaintiff has failed to do so. Nonetheless, the Court will
allow Plaintiff an opportunity amend his Complaint to attempt to plead fraud
with the necessary particularity. Following the filing of an amended complaint,

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Defendant may renew his motion to dismiss Plaintiff’s claim of fraud if
Defendant contends it is not adequately plead.
II.

Defendant’s Motion to Compel and Motion for Attorneys’ Fees
Defendant seeks attorneys’ fees pursuant to O.C.G.A. § 14-2-746(2)

which states that upon termination of a derivative proceeding the court may
“[o]rder the plaintiff to pay any defendant’s reasonable expenses (including
attorneys’ fees) incurred in defending the proceeding if it finds that the
proceeding was commenced or maintained without reasonable cause or for an
improper purpose.” The Court does not find that the suit was commenced
without reasonable cause or for an improper purpose. Therefore, Defendants’
Motion for Attorneys’ Fees [7] is DENIED.
Defendant also asks the Court to compel Plaintiff to make the disclosures
required by Federal Rule of Civil Procedure 26(a)(1) and provide a draft of the
Joint Preliminary Planning Report. Defendant’s Motion [6] is unopposed and is
GRANTED. Plaintiff is ORDERED to file his Initial Disclosures and serve on
Defendant a draft of the Joint Proposed Planning Report within 14 days of the
entry of this Order.

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Conclusion
For the aforementioned reasons, Defendant’s Motion to Dismiss [2] is
DENIED, Defendant’s Motion to Compel [6] is GRANTED, and Defendant’s
Motion for Attorneys’ Fees and Expenses [7] is DENIED. Plaintiff shall have
14 days from the date of this Order to file an amended complaint consistent
with this Order, in an attempt to plead fraud with particularity. Plaintiff is
ORDERED to file his Initial Disclosures and serve on Defendant a draft of the
Joint Proposed Planning Report within 14 days of the entry of this Order.
SO ORDERED, this 23rd day of June, 2011.

_______________________________
RICHARD W. STORY
UNITED STATES DISTRICT JUDGE

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