Davis v. Ben O'Callaghan Co.

• Decision Date: 04 January 1977
• Docket Number: No. 31476,31476
• Citation: 232 S.E.2d 53,238 Ga. 218
• Parties: Bruce R. DAVIS v. BEN O'CALLAGHAN COMPANY.
• Court: Georgia Supreme Court

Page 53

232 S.E.2d 53

238 Ga. 218

Bruce R. DAVIS v. BEN O'CALLAGHAN COMPANY.

No. 31476.

Supreme Court of Georgia.

Jan. 4, 1977.

Rehearing Denied Jan. 27, 1977.

Glenville Haldi, Cotton, Katz & White, J. Timothy White, J. Michael Lamberth, Atlanta, for appellant.

Lipshutz, Zusmann, Sikes, Pritchard & Cohen, Winston H. Morriss, Atlanta, for appellee.

INGRAM, Justice.

We granted certiorari in this case to determine whether a judgment creditor of a corporation could bring an action for his own benefit against a corporate officer or director under Code Ann. § 22-714 (Rev.1970), and, if so, whether punitive damages are allowable in such an action.

The plaintiff Ben O'Callaghan Company, is a judgment creditor of Security Development and Investment Company. O'Callaghan was unable to obtain satisfaction of its judgment against Security and sued the defendant Bruce R. Davis, a major shareholder, officer and director of Security and transferee of its sole asset. The trial court directed a verdict in favor of O'Callaghan under Code Ann. § 22-714 for $40,000 actual damages and the jury returned an award of $10,000 in punitive damages. For the reasons hereafter stated, we affirm the directed verdict but reverse the punitive damages award.

A brief statement of the facts is essential to an understanding of the legal issues presented. The corporation involved here, Security Development and Investment Company, was a prime contractor and Ben O'Callaghan Company was a subcontractor for the construction of an apartment complex in Atlanta, Georgia. A one-half undivided interest in the apartment complex was owned by the defendant Davis and other directors and officers of Security in their individual capacities. They conveyed the property to Security and Security reconveyed to Davis. The purchase price was $225,000. After also purchasing the undivided interests of the other parties, Davis became the sole owner of the apartments.

O'Callaghan had installed air conditioning and heating units in the apartment complex and a dispute arose as to the quality of work performed. An accord was reached in the amount of $36,500 and Security executed to O'Callaghan a promissory note for that amount. In addition, O'Callaghan filed a materialmen's lien on the premises. The purchase agreement between Security and Davis required that $40,000 of the purchase price would be placed in the hands of an escrow agent 'for payment of lien of Ben O'Callaghan Co.' O'Callaghan was unable to establish its materialmen's lien for procedural reasons. The escrow agent released the $40,000 to Davis. O'Callaghan obtained a judgment against Security on the promissory note in the principal sum of $36,500, plus costs, interest and attorney fees. But, apparently, O'Callaghan was unable to satisfy its judgment against Security. O'Callaghan then sued Davis for the $40,000, plus $200,000 punitive damages, alleging that Davis' failure to expend the $40,000 previously in escrow to pay the O'Callaghan debt constituted waste of a corporate asset in contravention of Code Ann. § 22-714, a transfer in fraud of creditor's rights, and additionally, that Davis became liable to O'Callaghan as a trustee ex maleficio of the funds.

Code Ann. § 22-714 sets out broad guidelines as to when actions may be brought against directors and officers for wrongs suffered by the corporation. See subsection (a)(1-3). Subsection (a) expressly directs that the judgment procured be 'for the benefit of the corporation.' Subsection (b) contains an enumeration of the parties entitled to sue under this section. See 7 Ga.State Bar Jnl. 277-Liability of Corporate Directors and Officers (and Shareholders) Under the Georgia Business Corporation Code, by David S. Baker, Feb., 1971. Since the relief provided for in Code § 22-714 is 'for the benefit of the corporation', and since actions under that section are for wrongs suffered by the corporation (see Comments), we conclude that generally actions by judgment creditors against officers or directors under § 22-714 must be brought derivatively.

The comments to § 22-714 state that this section is based upon New York Business Corporation Law, § 720. The New York cases do hold that under that section and its predecessors a judgment creditor of a corporation may maintain a direct action against an officer or director. See Trionics Research Sales Corp. v. Nautec Corp., 28 A.D.2d 644, 280 N.Y.S.2d 630 (1967); Lazar v. Towne House Restaurant Corp., Sup., 142 N.Y.S.2d 315 (1955); Brown Packing Co. v. Lewis, 185 Misc. 445, 58 N.Y.S.2d 443 (1943); Buttles v. Smith, 281 N.Y. 226, 22 N.E.2d 350 (1939); Whalen v. Strong, 230 App.Div. 617, 246 N.Y.S. 40 (1930); Buckley v. United Cloak etc., Co., 155 A.D. 735, 140 N.Y.S. 953 (1913), aff'd. 214 N.Y. 679, 108 N.E. 1090 (1915); Steele v. Isman, 164 App.Div. 146, 149 N.Y.S. 488 (1914).

However, the New York cases require the judgment creditor to have execution of his judgment against the corporation returned unsatisfied as a prerequisite to such an action. The action must also be maintained for the benefit of all judgment creditors of the corporation unless it is shown that there are not any others. In addition, it is significant that these corresponding provisions of New York's corporation law do not contain the requirement that judgments procured thereunder be for the benefit of the corporation, as does Code Ann. § 22-714.

In support of the argument that § 22-714 allows a judgment creditor to proceed directly for his own benefit, appellee places major reliance upon the wording of subsection (b). That subsection, which contains an enumeration of the parties entitled to sue under § 22-714, states that, 'An action may be brought for the relief provided in this section, and in the provisions of section 22-715 relating to the liability of directors in certain cases, by the corporation, or a receiver, trustee in bankruptcy, officer, director or judgment creditor thereof, or by a shareholder in accordance with sections 22-614 and 22-615 relating to derivative actions.'

Appellee argues that § 22-714 requires only shareholders to bring a derivative action, and, therefore, by negative implication judgment creditors may bring an action for their own benefit. We construe the statutory language to mean that a judgment creditor must generally sue for the benefit of the corporation, that is, derivatively, but need not comply with all of the procedural requirements which must be satisfied in shareholder derivative actions under § 22-615 of the Business Corporation Code and § 81A-123(b) of the Civil Practice Act.

After having recognized the general rule that judgment creditors must sue derivatively under § 22-714, we acknowledge that there are exceptions to the rule and hold that this case is such an exception. Although not clearly defined, there are several classes of cases in which...