Cushing v. Cohen, s. A13A0736

CourtUnited States Court of Appeals (Georgia)
Citation746 S.E.2d 898,323 Ga.App. 497
Docket NumberNos. A13A0736,A13A0820.,s. A13A0736
PartiesCUSHING v. COHEN, et al. Scheinfeld, et al. v. Cushing.
Decision Date16 July 2013

323 Ga.App. 497
746 S.E.2d 898

CUSHING
v.
COHEN, et al.
Scheinfeld, et al.
v.
Cushing.

Nos. A13A0736, A13A0820.

Court of Appeals of Georgia.

July 16, 2013.


[746 S.E.2d 901]


Ernest Tyron Brown, H. Lane Young II, Atlanta, Robert B. Gilbreath, for Appellant.

John C. Porter Jr., Brian N. Smiley, David John Hungeling, Atlanta, R. Wayne Byrd, Art Justice, for Appellee.


BARNES, Presiding Judge.

[323 Ga.App. 497]These two cases involve different plaintiffs and opposing trial court rulings but the same defendants and the same three financial instruments. The issue in both appeals is whether these instruments were securities under Georgia law or simply investments in a common venture. The plaintiffs contend that the investments were unregistered securities and that they are entitled to the return of the money they invested. The defendants contend that the investments were simply real estate development loans for which the plaintiffs must bear the loss. For the reasons that follow, we conclude that the financial instruments at issue here are securities under the Georgia Securities Act of 1973, OCGA § 10–5–1 et seq.

The plaintiffs in both of these cases sued attorney Charles M. Cushing, Palmetto Capital Corporation, and Mary Alice Ruben, as the executor of James Ruben's estate, as trustee and beneficiary of the James Ruben Jr. Trust, and individually. They alleged that the financial instruments they purchased that were related to three real estate development loans were unregistered securities, and sought the return of their investments.

[323 Ga.App. 498]In Case No. A13A0736, the trial judge determined that the financial instruments were securities under the Georgia Securities Act of 1973. Cushing appeals the trial judge's grant of summary judgment to the plaintiffs on the securities issue and other rulings related to the statute of limitations, tolling, release, breach of fiduciary duty, and derivative claims. In Case No. A13A0820, a different trial judge held that the financial instruments were not securities but simply commercial loans. Those plaintiffs appeal the trial court's grant of summary judgment to Cushing on the securities issue.

“On appeal from the grant or denial of a motion for summary judgment, we conduct a de novo review of the law and evidence, viewing the evidence in the light most favorable to the nonmovant, to determine whether a genuine issue of material fact exists and whether the moving party was entitled to judgment as a matter of law.” (Citation omitted.) Golden Atlanta Site Dev. v. Nahai, 299 Ga.App. 646, 649(2), 683 S.E.2d 166 (2009).

So viewed, the record establishes that in the 1990's, James Ruben began putting together real estate development loans that were made up of contributions from a number of people. Initially the borrowers issued promissory notes and security deeds that named every investor, but as the deals became larger with more investors, Ruben hired the law firm of Cushing and Morris to incorporate Palmetto Capital Corporation in 1993. Ruben could then have the borrowers issue the notes and deeds to Palmetto, and when the loan was paid off Ruben would not have to obtain each investor's signature to cancel the deeds to secure debt.

James Ruben, Charles Cushing, and another attorney at the firm were the original three shareholders, but Cushing and the other attorney sold their interest in the corporation to Mary Alice Ruben in August 1998. Cushing was Palmetto's secretary and registered agent from 2003 to 2008. The corporation minutes reflect that Palmetto's board of

[746 S.E.2d 902]

directors repeatedly authorized Cushing in his capacity “as general counsel, vice-president of the Corporation” to execute documents necessary to complete transactions. In June 2003, Cushing executed an “incumbency certificate” verifying his title and other corporate documentation for the benefit of a real estate buyer and title company.

Ruben reviewed 20 to 40 investment deals before finding one “he would even think twice about.” When Ruben found a deal he was interested in, he asked some of his more sophisticated investors to look at the property and perform other due diligence, for which they [323 Ga.App. 499]received a fee.1 Ruben would then talk to the potential borrower, and if they reached an agreement, Ruben emailed details of the proposal to his list of investors and invited them to participate. His messages would include details about the property that would secure the loan, the identity of the borrower, and the terms of the loan.

Once Ruben had a sufficient number of subscribers to meet his monetary goal, he would direct them to send their investment to the law firm, which held the funds in escrow, prepared the closing documentation, then closed the deal. The borrowers gave Palmetto promissory notes and security deeds to the real property purchased with the loans, and Palmetto in turn issued unsecured promissory notes to the investors. Ruben received up to three percent of the total loan for putting the deals together and Palmetto received one percent for servicing the loans.

The developers generally made monthly interest-only payments to Palmetto for two or three years and then repaid the principle in a balloon payment. Palmetto paid the investors their proportionate share of the monthly payments and sent the investors monthly email updates about the projects. The investors received their principle back when the developers made a balloon payment at the end of the loan period.

In 2003, a financial advisor for one of the investors asked Ruben whether the promissory notes were actually securities. In response to questions from Ruben, Cushing hired an expert in securities law to obtain a legal opinion about whether these investments were securities under state and federal law. The expert concluded that it was “highly likely that a court would deems these loan participations to be securities.” He further opined that, because Ruben was a corporate officer, his transactions were illegal because he was paying himself commissions but was not registered as a securities dealer or salesperson under OCGA § 10–5–2(25).

In response to the expert's opinion that these financial transactions were securities, Ruben advised Cushing that he would not make any more loans until the security issue was settled and asked what Palmetto could do to become compliant with securities laws. Cushing prepared a “Securities Analysis” memo, advising Ruben that, while Palmetto could seek to qualify for a “private placement” exemption from securities laws, the fees the investors paid to Palmetto might affect the company's ability to qualify for such an exemption. He also [323 Ga.App. 500]advised Ruben that the fees he and Palmetto received would “run afoul” of the registration requirements for a securities salesperson and broker, concluding that the structure of the deals presented insurmountable problems in any attempt to obtain an exemption from securities registration requirements. Cushing recommended that Ruben leave the structure “as is” and rely on the two-year statute of limitation as protection against future securities claims.

In 2004, Palmetto began what Ruben called a “leverage[d] lending program,” pooling investors' money with money Palmetto borrowed directly from a commercial bank. Palmetto then loaned the pooled money to high-risk developers at an interest rate higher than the bank's rate. The difference between the interest the developers paid Palmetto and the interest Palmetto paid to the bank—the “spread”—allowed Palmetto to deliver high returns to the investors.

[746 S.E.2d 903]

Palmetto made three loans which are at issue here, combining $14,900,000 from 141 individual investors with $25,138,000 from Nexity Bank to finance the loans through a shell corporation. The Riverside loan for $20,488,000 ($4,358,900 of which was from investors) closed in April 2005, the Bartow loan for $3,050,000 ($1,600,000 from investors) closed in March 2006, and the Fairburn loan for $16,500,000 ($8,250,000 from investors) closed in July 2006.

For each project, the developer gave Palmetto a single promissory note and a deed to secure the debt, and Palmetto entered into a “secured participation agreement” with the bank, giving the bank a first priority perfected security interest in the deed to secure debt and in the loan proceeds that the developers paid Palmetto. Palmetto gave each investor a promissory note confirming his or her percentage of the total loan.

Rather than telling the investors that Palmetto had borrowed the money from the bank and the developers had borrowed money from Palmetto, Palmetto misinformed the investors. Palmetto told them that the bank had made direct loans to the developers, secured by first-priority security deeds, and that Palmetto had separately loaned the investors' money to the developers, secured by second priority deeds. Mary Alice Ruben testified that James Ruben did not tell the investors about the existence of Palmetto's secured participation agreement with Nexity Bank because he thought the investors “did not understand participation agreements.”

James Ruben died in March 2007. All three developers defaulted on their loans in 2007, which caused Palmetto to default on the payments due to the investors. Palmetto and some of the plaintiffs in Case No. A13A0736 entered into tolling agreements and some of those plaintiffs released some of their claims, although whether they released only the bank or the bank and the other defendants is [323 Ga.App. 501]disputed. One suit was filed by seven members of the Cohen family, both minors and adults.2 The other suit was filed by an individual, a corporation, and a trustee,3 all of which were closely involved in multiple real estate transactions with Palmetto for many years.

In Case No. A13A0736, the trial judge granted summary judgment to the minor plaintiffs on all three notes on the issue of whether the notes were securities, granted summary...

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11 cases
  • Coen v. Aptean, Inc.
    • United States
    • Georgia Court of Appeals
    • June 4, 2018
    ...liability cannot be enlarged in a renewal action, the renewal action need not be identical to the first one." Cushing v. Cohen , 323 Ga. App. 497, 507 (3), 746 S.E.2d 898 (2013). What is required is that the new action "be substantially the same both as to the cause of action and as to the ......
  • Davis v. State
    • United States
    • Georgia Court of Appeals
    • July 16, 2013
  • Boudreaux v. Moritz D. Holloway, D. Duston Tapley, Jr., Tidal Water Props., Inc. (In re Holloway)
    • United States
    • U.S. Bankruptcy Court — Southern District of Georgia
    • March 31, 2015
    ...joint venturers who join together to achieve a common business goal may owe a fiduciary duty to one another. Cushing v. Cohen, 746 S.E.2d 898, 908 (Ga. Ct. App. 2013). The existence of a fiduciary duty is a question of fact. Id. When the joint venture was started Debtor held legal title to ......
  • Ohai v. Delta Cmty. Credit Union (In re Ohai)
    • United States
    • U.S. Bankruptcy Court — Northern District of Georgia
    • August 23, 2023
    ... ... participates in it, or personally takes part in the ... commission of the tort. Id. (citing Cushing v ... Cohen , 323 Ga.App. 497 (2013); Dave Lucas Co. v ... Lewis , 293 Ga.App. 288 (2008); BTL Com Ltd. v ... Vachon , 278 ... ...
  • Request a trial to view additional results
1 books & journal articles
  • 2013 Georgia Corporation and Business Organization Case Law Developments
    • United States
    • State Bar of Georgia Georgia Bar Journal No. 19-6, April 2014
    • Invalid date
    ...was invalid because it was not authorized by the corporation's board of directors as required by its bylaws. In Cushing v. Cohen, 323 Ga. App. 497, 746 S.E.2d 898 (2013), the Court of Appeals held that unsecured promissory notes given to investors in connection with a "leveraged lending pro......

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