568 F.3d 1258 (11th Cir. 2009), 06-10715, Ledford v. Peeples

Docket Nº:06-10715.
Citation:568 F.3d 1258
Opinion Judge:TJOFLAT, Circuit Judge:
Party Name:Jimmy LEDFORD, Larry O'Dell, Bryan Walker, Dynavision Group LLC, Signature Leasing, LLC, Plaintiffs-Appellants Cross-Appellees, v. Shelby PEEPLES, Jr., PFLC, LLC, Internal Management, Inc., Defendants-Appellees Cross-Appellants.
Attorney:H. Lamar Mixson, David G.H. Brackett, Bondurant, Mixson & Elmore, LLP, Atlanta, GA, for Plaintiffs-Appellants Cross-Apppellees. Richard H. Sinkfield, Catherine M. Bennett, Shara Garwood Sanders, Rogers & Hardin, LLP, Atlanta, GA, for Defendants-Appellees Cross-Appellants.
Judge Panel:Before EDMONDSON, Chief Judge, and TJOFLAT and GIBSON,[*] Circuit Judges.
Case Date:May 22, 2009
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit
 
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568 F.3d 1258 (11th Cir. 2009)

Jimmy LEDFORD, Larry O'Dell, Bryan Walker, Dynavision Group LLC, Signature Leasing, LLC, Plaintiffs-Appellants Cross-Appellees,

v.

Shelby PEEPLES, Jr., PFLC, LLC, Internal Management, Inc., Defendants-Appellees Cross-Appellants.

No. 06-10715.

United States Court of Appeals, Eleventh Circuit.

May 22, 2009

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H. Lamar Mixson, David G.H. Brackett, Bondurant, Mixson & Elmore, LLP, Atlanta, GA, for Plaintiffs-Appellants Cross-Apppellees.

Richard H. Sinkfield, Catherine M. Bennett, Shara Garwood Sanders, Rogers & Hardin, LLP, Atlanta, GA, for Defendants-Appellees Cross-Appellants.

Appeals from the United States District Court for the Northern District of Georgia.

Before EDMONDSON, Chief Judge, and TJOFLAT and GIBSON,[*] Circuit Judges.

TJOFLAT, Circuit Judge:

In this case, two parties, X and Y, each owned a fifty percent interest in a limited liability company that manufactured and sold carpets. X provided the financing; Y ran the company and marketed its product. The parties had a buy-sell agreement that enabled either party to buy out the other at any time by offering to purchase the other's interest in the company at a set price. After receiving an offer, the offeree would have thirty days in which to accept the offer or elect to purchase the offeror's interest at the same set price.

Y offered to purchase X's interest for $3.5 million. X demanded to know whether Y would be borrowing the funds from Z, who earlier had expressed an interest in purchasing the company. Y said that neither Z nor anyone else would be providing the money. X asked Z if he was financing Y; Z said no.

X, unable to operate the factory and market its product without Y or someone with Y's expertise, had to sell and therefore accepted Y's offer. Prior to the date

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set for the closing, however, X told Y that it would not go forward with the closing unless Y represented that no third party was providing the funds to pay X. Y responded that it had no obligation to disclose the source of its funds and that X was bound by contract to transfer its interest to Y unconditionally. X tacitly agreed by appearing at the closing and transferring its interest to Y.

X subsequently learned that Z had provided the purchase price and, following the closing, had acquired the factory's assets and hired Y to run the business. After discovering Z's involvement, X took Y to court. In a complaint filed in state court, X alleged that Y breached a fiduciary duty to tell it that Z had financed the purchase of its interest, and moreover, that Y's failure to disclose Z's involvement fraudulently induced X to sell its interest to Y.1 X also brought suit against Z in federal district court, the case now before us, claiming that Z violated federal securities law, state securities law, and state common law by denying involvement in the transaction and causing X to sell its interest to Y.

X lost both cases on summary judgment.2 Both courts concluded that Y's alleged misrepresentation about Z's involvement in the buy-out did not cause X to sell its interest. Rather, X sold because it was in X's economic self-interest to do so. X needed Y's skills; had X purchased Y's interest, it would have had no one to run the carpet factory or to market its product. X therefore had no economically viable option but to sell.

After the district court granted Z summary judgment, Z moved the court to sanction X and its counsel under the Private Securities Litigation Reform Act (" PSLRA" ), Rule 11 of the Federal Rules of Civil Procedure, 28 U.S.C. § 1927, and the court's inherent power on the grounds that X neither produced, nor at any time had available, any evidence to support its allegation that Z's conduct caused it to sell its interest rather than buy Y's interest. The court denied Z's motion.

X now appeals the district court's decision rejecting its claims. Z cross-appeals the court's denial of sanctions under the PSLRA. On X's appeal, we dismiss part of X's claims for lack of subject matter jurisdiction and affirm the district court's judgment as to the remainder. On Z's cross appeal, we conclude that Z is entitled to sanctions and therefore remand the case for their imposition.

This opinion is organized as follows. Part I identifies X, Y, and Z and sets out the events that have given rise to this controversy.3 Part II canvasses the litigation as it evolved in state court and spread to federal court; describes the state trial and appellate courts' disposition of X's claims against Y and the district court's disposition of X's claims against Z; and, after that, delineates the issues that X's appeal to this court presents. Part III addresses sua sponte whether the district court had jurisdiction to hear some of the federal securities law claims X brought

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against Z and concludes that it did not. Part IV assesses the merits of X's appeal as to the remaining securities law claims. Part V examines X's claim that Z aided and abetted Y's breaches of fiduciary duty towards X. Part VI explains why the district court should have sanctioned X's counsel, and part VII concludes.

I.

A.

X is DynaVision Group, LLC (" DynaVision" )4 and its principal owners, Jimmy Ledford, Larry O'Dell, and Bryan Walker.5 Y is Brenda Smith, Robert Thomas, and Bryan Owenby. Z is Shelby Peeples.

In July 1998, Paul Walker, Bryan Walker's father, approached Smith, Thomas, and Owenby, experienced managers in the carpet manufacturing industry in Dalton, Georgia, with the idea of forming a company to manufacture and sell carpets to hotels, motels, restaurants, and others engaged in the hospitality business. Soon thereafter, Smith, Thomas, Owenby, and Paul Walker formed Signature Hospitality Carpets, LLC (" Signature" ), dividing the company's interests equally between DynaVision on one hand and Smith, Thomas, and Owenby on the other.6

Under Signature's operating agreement, Smith, Thomas, and Owenby managed the company, and DynaVision provided the capital.7 Signature sold carpet to hospitality customers-mainly through contacts that Smith, who was well respected in the industry, had previously established-and arranged for manufacturers in the Dalton area to fill the orders. DynaVision provided the funds that Signature needed to pay the manufacturers by establishing a $200,000 line of credit at a bank near Dalton, the First National Bank of Chatworth (" FNBC" ).8

Signature initially operated out of rented office space; once the company established itself as a going concern, however, its owners decided to find their own manufacturing plant. Anticipating that they would be able to acquire a suitable site in the Dalton area, DynaVision, Smith, Thomas, and Owenby entered into a new

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operating agreement (" Operating Agreement" or " Agreement" ), on May 6, 1999. The Agreement referred to Smith, Thomas, Owenby, and DynaVision as Signature's " Members," and Smith, Thomas, and Owenby as the " Active Members." 9 It created a six-member Board of Directors, with three directors appointed by DynaVision and three by the Active Members. The Active Members appointed themselves; DynaVision appointed its accountant, Edward Staten, and left two of its seats vacant. The Operating Agreement required the Board to unanimously authorize all of Signature's actions. This meant that DynaVision, through Staten, could have blocked any action the Active Members wanted to take. The Board rarely met, however, face to face or otherwise, so the Active Members ran Signature's operations without objection.

Under the Agreement, Smith was the company's president and the person in charge of marketing, Thomas was the vice-president of sales, and Owenby was the vice-president of manufacturing.10 A non-solicitation clause provided that if a Member sold his or her interest, that member could not for one year thereafter " call, solicit, or fulfill orders" from " customers or prospects" of Signature.11 In reality, the clause applied only to the Active Members, since they were the ones who possessed Signature's customer contacts. 12

The Agreement also contained a buy-sell provision, which is at the center of the present controversy. This provision is contained in Article Nine of the Agreement, entitled " Transfer and Assignment of Member Interests." Section 9.5, " Mandatory Put and Call," reads as follows:

At any time Dyna-Vision or the Active Members by majority vote within that group, may set a price per percentage Interest and give written notice of that price to the other group, (the " Notice of Offer to Sell or Purchase" ). The Members receiving the Notice of Offer to Sell

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or Purchase shall have thirty (30) calendar days to decide whether to sell all their Interest at that price or to purchase all the Interest of the group giving Notice of Offer to Sell or Purchase at the Price set forth in the Notice of Offer to Sell or Purchase. If the Members receiving the Notice of Offer to Sell or Purchase fail to make an election ..., the Members receiving the Notice of Offer to Sell or Purchase shall have to sell their Interest at the price set forth in the Notice of Offer to Sell or Purchase.

Following the execution of the Operating Agreement, the parties located a site for Signature's manufacturing plant and offices on Green Road in Chatsworth, Georgia, a short distance from Dalton. To purchase the site, which included a building that could be converted to accommodate Signature's requirements, the Active Members formed another limited liability company, Signature Leasing, LLC (" Leasing" ), with Ledford...

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