Akin v. PAFEC Ltd.

• Decision Date: 02 June 1993
• Docket Number: No. 92-8822,92-8822
• Citation: 991 F.2d 1550
• Parties: J.E. AKIN, Pryntha Akin, Individually as minority stockholders and on behalf of themselves and all other stockholders of PAFEC Engineering Consultants, Inc., a Tennessee corporation, PAFEC Engineering Consultants, Inc., A Tennessee corporation, Plaintiffs-Appellants, v. PAFEC LIMITED, an English Limited Partnership of the United Kingdom, PAFEC CAE Ltd, an English Limited Partnership of the United Kingdom, PAFEC Incorporated, a Georgia Corporation, Richard D. Henshell, and Thomas V. Baudry, individually, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1550

991 F.2d 1550

J.E. AKIN, Pryntha Akin, Individually as minority stockholders and on behalf of themselves and all other stockholders of PAFEC Engineering Consultants, Inc., a Tennessee corporation, PAFEC Engineering Consultants, Inc A Tennessee corporation, Plaintiffs-Appellants, v. PAFEC LIMITED, an English Limited Partnership of the United Kingdom, PAFEC CAE Ltd, an English Limited Partnership of the United Kingdom, PAFEC Incorporated, a Georgia Corporation, Richard D. Henshell, and Thomas V. Baudry individually, Defendants-Appellees.

No. 92-8822.

United States Court of Appeals Eleventh Circuit.

June 2, 1993.

John Phillip MacNaughton, Swift Currie McGhee & Hiers, Alfred L. Mullins, Jr., Cashin Mortin & Mullins, Atlanta, GA, David Todd Markle, John Christopher Clark, Cecil D. Meek, Jr., Haynes Meek Summers & Mabry, Knoxville, TN, for plaintiffs-appellants.

William J. Berg, Kitchens Kelley Gaynes, P.C., Mark Alan Kelley, Atlanta, GA, James S. Tipton, Jr., Gentry Tipton Webb & Little, Knoxville, TN, Luther J. Carroll, III, Gray Gilliland & Gold, Atlanta, GA, Caesar Stair, Bernstein Stair & McAdams, Knoxville, TN, Leroy Penn Spell, Jr., Craft & Spell, Atlanta, GA, for defendants-appellees.

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

Before FAY, Circuit Judge, JOHNSON, Senior Circuit Judge, and MERHIGE ^*, Senior District Judge.

JOHNSON, Senior Circuit Judge:

Dr. J.E. and Pryntha Akin appeal an order of the United States District Court of the Northern District of Georgia granting summary judgment against them. The Akins brought suit against Richard D. Henshell, PAFEC Ltd., PAFEC CAE Ltd., and PAFEC, Inc. alleging various theories of liability in connection with the demise of a Tennessee corporation in which the Akins were 48% shareholders. The district court held that all of the Akins' claims were barred under Georgia's doctrine of res judicata. For the reasons that follow, we reverse the district court's entry of judgment on the Akins' breach of fiduciary duty claims, but affirm the district court's grant of summary judgment on the other causes of action raised by the Akins in their complaint.

I. STATEMENT OF THE CASE

A. Background Facts ¹

In 1978, Dr. J.E. Akin, then an engineering professor at the University of Tennessee, entered into an agreement with PAFEC Ltd. ("PAFEC"), a British company that develops and markets scientific software, under which PAFEC agreed to grant a license to market PAFEC software in North America to a corporation to be formed by Dr. Akin. Dr. Akin persuaded his wife, Pryntha Akin, and another couple, Dr. and Mrs. Dewey, to invest in setting up the corporation to receive the PAFEC marketing license. Together, the Akins and the Deweys incorporated PAFEC Engineering Consultants, Inc. ("PEC") under Tennessee law in March of 1979. At the time of incorporation, the Akins received 60% and the Deweys received 40% of PEC's outstanding stock.

Shortly after PEC's incorporation, and in accordance with the agreement between PAFEC and Dr. Akin, PAFEC and PEC executed a licensing agreement making PEC the sole authorized dealer of PAFEC software in North America. In return for the license, PEC agreed to pay PAFEC a specified royalty fee on each completed sale. Pursuant to this agreement, PEC began marketing PAFEC software in the United States.

PAFEC and PEC's business relationship continued without significant incident until April 1981, when PAFEC came to the conclusion that PEC was not being run in a businesslike fashion. To protect its interests in PEC's performance, PAFEC demanded that the Deweys and the Akins offer PAFEC some measure of influence over PEC activities. In response to PAFEC's demands, PEC agreed to renegotiate the agreement governing the parties' relationship. In June 1981, PAFEC and PEC executed a new agreement under which PEC agreed to sell 120 shares of its stock to PAFEC, giving PAFEC a 48% interest in PEC. In addition, PAFEC obtained the right to designate a representative on PEC's board of directors. PAFEC chose one of its own directors, the defendant-appellee Richard D. Henshell, to serve as its representative on the PEC board.

In return for the control the Akins and the Deweys relinquished by agreeing to PAFEC's stock purchase and board representation, the Akins assert that PAFEC orally promised to provide PEC with needed capital by (1) reducing royalty fees, (2) converting PEC's royalty payment structure so that PEC's royalty debt would accrue and be payable only on demand, and (3) agreeing to defer any demand for payment of the accrued royalties until PEC achieved a positive net worth and financial stability. PAFEC denies that it made any such promise, and points out that the written agreement between PAFEC and PEC, which provides that it embodies the "entire agreement" between the parties, does not include any provision modifying PEC's royalty payment obligations.

After PAFEC's purchase of PEC stock in June 1981, the Akins and the Deweys shared a combined 52% interest in PEC. In July 1982, the Akins consolidated all of this interest under their own control by buying out the Deweys' shares in PEC. PAFEC objected to the Akins' stock purchase on the grounds that the purchase violated PEC's corporate charter as well as a separate written agreement between PAFEC and Dr. Akin. To prevent the Akins from taking majority control of PEC, PAFEC loaned enough money to PEC employee Thomas Baudry so that he could exercise his option to purchase PEC stock in order to buy the minimum number of shares necessary to reduce the Akins back to the level of minority shareholders.

The Akins claim that as a shareholder, Baudry aligned himself with PAFEC, in effect giving PAFEC majority shareholder control over PEC's activities. According to the Akins, PAFEC used this control to operate PEC exclusively for its own benefit and without regard for PEC's own welfare. Although the Akins continued to hold 48% of PEC's stock and Dr. Akin continued to serve on PEC's board of directors, the Akins claim that they were increasingly cut off from PEC's decision making process.

In June 1983, the Akins moved to Houston, Texas, so that Dr. Akin could assume a position as head of the mechanical engineering department at Rice University. Shortly thereafter, PEC transferred its corporate headquarters to Atlanta, Georgia. Once in Atlanta, PAFEC's representatives at PEC allegedly ignored Dr. Akin's repeated calls and letters requesting information about PEC operations, and PAFEC and director Henshell allegedly began dispensing with the periodic shareholder and board of directors meetings mandated by PEC's corporate charter.

In early 1984, the tensions in the Akins' relationship with PAFEC erupted in a confrontation over PAFEC's proposal to convert some of PEC's royalty debt into PEC equity. Dr. Akin opposed the proposal and threatened to sue PAFEC and its representatives at PEC if the proposal was carried out. ² The threat of litigation eventually caused PAFEC to abandon its proposal. However, the experience led PAFEC and Henshell to conclude that Dr. Akin's involvement in PEC was becoming an intolerable annoyance. By the spring of 1984, representatives of PAFEC and PEC began discussing options for minimizing or eliminating Dr. Akin's involvement in PEC's business operations. After considering several possible courses of action, it was ultimately decided that the best method of eliminating Dr. Akin's influence would be for PAFEC to call PEC's royalty accounts due, extinguish PEC's assets to pay the debt, and then transfer PEC's sales operations to a new company without Dr. Akin's involvement.

In January 1985, Henshell began laying the groundwork for the plan when he caused PAFEC's corporate parent, the defendant-appellee PAFEC CAE Ltd. ("PAFEC CAE"), to incorporate a wholly-owned subsidiary called PAFEC, Inc. ("PINC") under Georgia law. ³ According to the Akins, PINC was created for the express purpose of taking over PEC's assets and operations when PAFEC called PEC's debt due. Although PINC was registered as a wholly-owned subsidiary of PAFEC CAE, Henshell charged the costs associated with PINC's incorporation to PEC.

On March 3, 1985, PAFEC demanded immediate payment of all outstanding royalty debt from PEC. On April 8, 1985, PAFEC followed up its demand by filing suit against PEC in Georgia state court for payment of the debt. Although the Akins assert that PEC had valid defenses to PAFEC's demand for payment, PEC elected not to appear in court to defend itself against PAFEC's claim. On June 12, 1985, the Georgia state court entered a default judgment against PEC in the amount of $791,372.71.

Following the default judgment, PAFEC and PEC executed a voluntary levy under which PEC turned over all its tangible and intangible assets to PAFEC in partial payment on the judgment. PAFEC assigned all of PEC's former assets to PAFEC CAE, which in turn transferred the assets to PINC. PINC then took over PEC's operations in PEC's former location with all of PEC's former employees.

The Akins were not notified of PAFEC's demand for payment or of the subsequent lawsuit until after final judgment was entered against PEC. ⁴ The Akins learned of the default judgment on July 9, 1985, when Dr. Akin telephoned PEC and the recipient of the call announced the company as PINC. When Dr. Akin inquired why the telephone had been answered in that manner, he was informed of the default judgment and subsequent levy. This lawsuit followed.

B. Procedural History

On January 20, 1987, the Akins filed a complaint in Tennessee state court against Henshell, PAFEC, PAFEC CAE, and PINC for an accounting, a restoration of PEC's assets, and legal damages. ⁵ The complaint asserted that the defendants were liable to the Akins in both their individual and shareholder capacities for breaches of various fiduciary duties, breach of contract, and unjust enrichment. The defendants...