Aaf–mcquay Inc. v. Willis.

• Decision Date: 04 March 2011
• Docket Number: No. A10A2271.,A10A2271.
• Citation: 308 Ga.App. 203,707 S.E.2d 508
• Parties: AAF–McQUAY, INC.v.WILLIS.
• Court: Georgia Court of Appeals

308 Ga.App. 203

707 S.E.2d 508

11 FCDR 620

AAF–McQUAY, INC.

v.WILLIS.

No. A10A2271.

Court of Appeals of Georgia.

March 4, 2011.

Howick, Westfall, McBryan & Kaplan, Michael Corey Kaplan, Susan Lee Howick, Atlanta, for appellant.Beal & Blitch, James Daniel Blitch IV, Atlanta, for appellee.BARNES, Presiding Judge.

This case involves a dispute over a partnership that originally had three partners: AAF–McQuay, Inc. d/b/a McQuay International (“McQuay”), T.W. Ruskin, and Larry R. Willis. McQuay subsequently transferred its interest in the Partnership to Ruskin and another individual, and Willis ceased having any involvement with the affairs of the partnership. Willis then brought this action against McQuay, alleging, among other things, that McQuay had breached the partnership agreement, had breached its fiduciary duties toward him as a partner, and had exhibited wilful and wanton misconduct that would justify an award of punitive damages. McQuay answered, raised multiple affirmative defenses, and counterclaimed on several grounds, including that Willis had breached a guaranty agreement and was liable for attorney fees under OCGA § 13–6–11. In a detailed order on cross-motions for summary judgment, the trial court granted Willis's motion for partial summary judgment in its entirety and denied McQuay's motion for summary judgment against Willis in its entirety. McQuay now appeals, asserting myriad enumerations of error in the trial court's summary judgment order. For the reasons discussed below, we conclude that the trial court erred in granting summary judgment to Willis on his claim that McQuay violated Section 7.08(b) of the partnership agreement, since a genuine issue of material fact exists over whether Willis waived his right to invoke, or was equitably estopped from invoking, that section. We affirm in all other respects.

1. McQuay contends that the trial court erred in denying its motion for summary judgment on Willis's claims for breach of the partnership agreement, breach of fiduciary duty, and punitive damages.¹ We disagree.

When reviewing the grant or denial of a motion for summary judgment, this Court conducts a de novo review of the law and the evidence. To prevail at summary judgment, the moving party must demonstrate that there is no genuine issue of material fact and that the undisputed facts, viewed in the light most favorable to the nonmoving party, warrant judgment as a matter of law.(Footnotes omitted.) Smith v. Gordon, 266 Ga.App. 814(1), 598 S.E.2d 92 (2004). See OCGA § 9–11–56(c). Guided by these principles, we turn to the record in the present case.

Formation and Financing of the Partnership. The record reflects that McQuay is a global corporation that manufactures, sells, and services heating, ventilating, and air-conditioning (“HVAC”) products for the commercial market. In its United States operations, McQuay has a business model that varies from state to state. Its sales business is handled primarily through independent representatives who report to regional sales managers who work for McQuay. Likewise, its service business is mostly operated by entities owned by McQuay. However, in a few states, McQuay has formed joint ventures with local partners in the belief that its business would grow more rapidly under local leadership than if it were 100 percent owned by McQuay.

Georgia was one of the markets in which McQuay chose to pursue a partnership model. In May 1998, McQuay entered into a limited liability partnership agreement with Ruskin and Willis to sell and service McQuay HVAC equipment in Georgia (the “Partnership Agreement”), thereby forming McQuay of Georgia, LLP (the “Partnership”). In connection with forming the Partnership, McQuay agreed to transfer to the Partnership its service and warranty work for its HVAC products sold in Georgia (the “Service Business”).

Pursuant to the Partnership Agreement, McQuay held a 50 percent interest in the Partnership, Willis held a 25 percent interest, and Ruskin held a 25 percent interest. At the inception of the Partnership, McQuay made a capital contribution of $250,000 and paid the sum of $75,000 each to Ruskin and Willis. Ruskin and Willis in turn each made capital contributions in the sum of $50,000.

Ruskin was appointed as president and Willis as executive vice president of the Partnership. Ruskin and Willis were the “sweat equity partners” who provided the day-to-day management of the Partnership.

In contrast, McQuay served as the “investment banking partner” that financed the operations of the Partnership through a series of loans, including a $500,000 loan for a working capital line of credit memorialized in a promissory note executed by the Partnership (the “Note”). Willis executed a guaranty agreement for the loan, guaranteeing payment of the loan up to the amount of $125,000 or 25 percent of the unpaid obligations, whichever was less (the “Guaranty”). The loan subsequently was modified twice to increase the original principal sum to $600,000, evidencing additional advances made by McQuay. The modified loan was memorialized in the Second Amended and Restated Promissory Note executed by the Partnership (the “Second Amended Note”). In connection with the Second Amended Note, Willis executed an amended guaranty agreement (the “Amended Guaranty”).

From its inception, the Partnership had difficulty making payments to McQuay for its loan obligations. Throughout 2000 and 2001, the Partnership had cash flow problems, and several large accounts receivable were not fully collected, which had a substantial impact on the financial condition of the Partnership. Ruskin and Willis argued that these problems were caused in part by McQuay, which they alleged had failed to provide the Partnership with the technical and other related support services required by the Partnership Agreement, and had routinely failed to adequately compensate the Partnership for its performance of warranty service work. In addition, the operation of the Partnership suffered as a result of dissension between Ruskin and Willis, and from “internal resistance” that the Partnership experienced from service personnel within McQuay. Ultimately, the Partnership defaulted in the payment of all of its loan obligations to McQuay.

As a result of the Partnership's default on its loan obligations, McQuay sent letters to the Partnership demanding full payment and threatening to take possession of the collateral. Despite these threats, McQuay did not pursue legal action on the loans or the loan guarantees. According to McQuay, this was because its ultimate goal was to make the Partnership more profitable and to turn it into a viable business. In contrast, Willis alleged that McQuay had developed a long-term plan to get out of the Partnership and to obtain sole ownership of the Service Business, and that it used the demand letters as part of an effort to “hammer” Ruskin and Willis and squeeze them out of the Service Business. The evidence relied upon by Willis in this regard is discussed below.²

The 2002 McQuay Strategy Document. Willis relied upon a 2002 internal strategy document produced by McQuay during discovery to show McQuay's long-term plan regarding the Partnership and Service Business. In the document, McQuay noted that while the Partnership had $17 million in sales, it nonetheless had “negative retained earnings,” was “not generating cash,” and was “limited on further growth without additional cash.” McQuay further noted that the Partnership was overdue on its various loan obligations and that “McQuay does not have operating control.” Consequently, McQuay proposed that it take steps to obtain a majority ownership interest in the Partnership so that it could establish “control of the company.” The document concluded by stating: “Ultimate objective is to divest the sales company and retain ownership of the service business (3–5 years).”

The Service Business Demand Letter. In February 2002, McQuay began having internal discussions about how a demand letter concerning nonpayment of one of several outstanding loans to the Partnership could be used to pressure Ruskin and Willis into accepting a proposed restructuring of the Partnership. The loan at issue was memorialized in the Working Capital Promissory Note, and the collateral for the loan consisted of the assets of the Service Business. In a series of internal e-mails, McQuay discussed hand-delivering the demand letter for maximum effect and using the letter as a “hammer” to put Ruskin and Willis “on their heals [sic] [and] cause them to embrace the proposal.”

Consistent with this internal e-mail discussion, in May 2002, McQuay hand-delivered a demand letter to Ruskin following a dinner meeting in Atlanta. The letter informed Ruskin that the Working Capital Promissory Note was in default and that McQuay would enforce payment, including taking possession of the collateral and collecting attorney fees and other costs, if the entire amount was not paid in ten days. When Willis learned of the demand letter the next day, he was “shocked.” Ultimately, McQuay never pursued legal action regarding the Working Capital Promissory Note, despite the threat contained in the demand letter.

The June and October 2002 Proposals. Approximately one month after the hand-delivery of the demand letter, McQuay made a formal proposal to Ruskin and Willis, dated June 14, 2002, to restructure the Partnership so that it would have a majority ownership interest (the “June Proposal”). A few months later, a second, similar restructuring proposal, dated October 21, 2002, was presented to Ruskin and Willis (the “October Proposal”). According to Willis, several representatives of McQuay warned him that if he did not agree to the proposed restructuring, McQuay would “blow up the business” and sue him to enforce his obligations under the Amended Guaranty.

The December 2002 Partnership Valuation. In conjunction with its restructuring...