Ga. Commercial Stores, Inc. v. Forsman

• Decision Date: 10 August 2017
• Docket Number: A17A0727, A17A0728.
• Citation: 803 S.E.2d 805
• Parties: GEORGIA COMMERCIAL STORES, INC. v. FORSMAN. Forsman v. Georgia Commercial Stores, Inc.
• Court: Georgia Court of Appeals

342 Ga.App. 542

803 S.E.2d 805

GEORGIA COMMERCIAL STORES, INC.

v.FORSMAN.

Forsman

v.Georgia Commercial Stores, Inc.

A17A0727, A17A0728.

Court of Appeals of Georgia.

August 10, 2017

Bruce B. Weddell, Atlanta, for Appellant in A17A0727.

James Michael Johnson, Atlanta, for Appellee in A17A0727.

Sherri G. Buda, James Michael Johnson, Atlanta, for Appellant in A17A0728.

Bruce B. Weddell, Atlanta, for Appellee in A17A0728.

Barnes, Presiding Judge.

Georgia Commercial Stores, Inc. ("Georgia Commercial") is a judgment creditor of Pargar, LLC, an insolvent company. Daniel T. Forsman was the managing member of Pargar who controlled its day-to-day operations. Unable to collect on its debt from Pargar, Georgia Commercial sued Forsman to recover an alleged preferential payment that Forsman authorized Pargar to make to himself when Pargar was insolvent and faced foreclosure on all of its assets. Georgia Commercial alleged several causes of action against Forsman, including breach of fiduciary duty and violation of Georgia's Uniform Fraudulent Transfers Act, OCGA § 18-2-70 et seq. ("UFTA").¹ The trial court granted summary judgment to Forsman and denied it to Georgia Commercial on the latter's breach of fiduciary duty claim. The trial court denied summary judgment to Forsman on Georgia Commercial's UFTA claim. The parties now appeal the summary judgment rulings in these companion cases.

In Case No. A17A0727, we conclude that genuine issues of material fact exist as to whether Forsman breached his fiduciary duty to conserve and manage the assets of Pargar in trust for its creditors by causing Pargar to pay him $239,011 when the company was insolvent and faced foreclosure on all of its assets. Accordingly, we reverse the trial court's grant of summary judgment to Forsman on Georgia Commercial's breach of fiduciary duty claim, and we affirm the trial court's denial of summary judgment to Georgia Commercial on that claim. In Case No. A17A0728, we conclude that genuine issues of material fact exist as to whether the $239,011 payment to Forsman was made with the intent to defraud Pargar's creditors and therefore affirm the trial court's denial of summary judgment to Forsman on Georgia Commercial's UFTA claim.

Summary judgment is appropriate only if the pleadings and evidence "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." OCGA § 9-11-56 (c).

Summary judgments enjoy no presumption of correctness on appeal, and an appellate court must satisfy itself de novo that the requirements of OCGA § 9-11-56 (c) have been met. In our de novo review of the grant or denial of a motion for summary judgment, we must view the evidence, and all reasonable inferences drawn therefrom, in the light most favorable to the nonmovant.

(Citation and punctuation omitted.) Essien v. CitiMortgage , 335 Ga. App. 727, 728, 781 S.E.2d 599 (2016).

So viewed, the record reflects that Pargar was a Georgia limited liability company formed in December 1998. Pargar had two members, Forsman and the Prudential Real Estate Financial Services of America, Inc. ("Prudential"), with Prudential controlling a majority of the membership interests. Forsman, a certified public accountant with significant prior experience as a controller and chief financial officer, managed Pargar's day-to-day operations and served as its sole Director, President, Treasurer, and Secretary. Prudential, however, had to approve all of Pargar's significant financial transactions.

Upon its formation, Pargar purchased an existing realty company that was valued at over $16 million. Pargar funded the purchase in part through an $11,750,000 loan obtained from Prudential. The Prudential loan was secured by a first priority blanket security interest in all of Pargar's assets and a pledge of all of Pargar's membership interests not already owned by Prudential. The Prudential loan had an original maturity date of December 31, 2005, which was later extended to June 30, 2012. Pargar also later obtained a $250,000 loan from Forsman pursuant to an unsecured promissory note.

During 2007, Pargar entered into a written lease agreement to rent certain property in Dunwoody for a period of 10 years, with a lease termination date of July 31, 2017. Georgia Commercial subsequently purchased the property, assumed the lease, and became Pargar's landlord.

Several years later, when the Prudential loan to Pargar matured on June 30, 2012, Pargar was unable to repay it. Pargar's financial records reflect that it was insolvent both on a "going concern" basis because it was unable to repay all of its debts as they matured and on a "balance sheet" basis because its debts exceeded the fair valuation of its assets. According to Pargar's financial records, the total value of Pargar's assets was $7,223,403, but it still owed $8,496,012 on the Prudential loan.

During this same time period in 2012, Forsman, acting in his capacity as Pargar's managing member, had Pargar pay him $239,011 to satisfy the outstanding balance of the unsecured loan he had previously extended to the company. The payment to Forsman was made with the knowledge and approval of Prudential.

In March 2013, when the Prudential loan remained unpaid and Pargar's insolvent financial condition remained unchanged, Prudential foreclosed on its first priority security interest in Pargar's assets and on Forsman's membership interest in Pargar. Prudential then sold Pargar's remaining assets and began winding down the company's affairs.

Pargar made monthly lease payments to Georgia Commercial through March 2013 when Prudential conducted the foreclosure, but Pargar defaulted on its payments to Georgia Commercial from that point forward and vacated the leased property. Georgia Commercial was notified of Prudential's foreclosure and sale of Pargar's assets, but not of the $239,011 payment made to Forsman.

Georgia Commercial sued Pargar for the rent due for the remaining term of the lease and obtained a judgment against Pargar in the principal amount of $1,051,702, plus interest. During post-judgment discovery, Georgia Commercial first learned of the $239,011 that Pargar paid to Forsman in 2012 based on his previous loan to the company.

Georgia Commercial subsequently filed the instant action against Forsman, contending that Georgia Commercial had been unable to collect on its judgment against Pargar in part because of the allegedly improper $239,011 payment to Forsman that occurred when Pargar was insolvent and foreclosure on its assets was imminent. Georgia Commercial sought imposition of a constructive trust and disgorgement of the $239,011 from Forsman, and it alleged multiple causes of action against him in its complaint, as amended, including breach of fiduciary duty and intentional fraudulent transfer in violation of the UFTA.

After the parties filed cross-motions for summary judgment, the trial court granted summary judgment to Forsman and denied it to Georgia Commercial on the latter's breach of fiduciary duty claim, concluding that Georgia Commercial had failed to prove a sufficient causal connection between the alleged breach and its alleged injury.² The trial court denied summary judgment to Forsman on Georgia Commercial's UFTA claim for intentional fraudulent conveyance, concluding that genuine issues of material fact existed as to whether the payment to Forsman in 2012 was made with the actual intent to hinder, delay, or defraud Pargar's creditors. These appeals followed.³

Case No. A17A0727

1. Georgia Commercial contends that the trial court erred in granting Forsman's motion for summary judgment, and denying Georgia Commercial's cross-motion for summary judgment, on Georgia Commercial's breach of fiduciary duty claim. Because genuine issues of material fact exist that preclude the grant of summary judgment to either party, the trial court erred in granting summary judgment in favor of Forsman on Georgia Commercial's claim for breach of fiduciary duty.

To support a claim for breach of fiduciary duty, a plaintiff must prove the existence of such a duty, the breach of that duty, and injury proximately caused by the breach. Engelman v. Kessler , 340 Ga. App. 239, 246 (2), 797 S.E.2d 160 (2017).

A fiduciary confidential relationship arises where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc. Such relationship may be created by law, contract, or the facts of a particular case.

(Citation and punctuation omitted.) Megel v. Donaldson , 288 Ga. App. 510, 515-516 (5), 654 S.E.2d 656 (2007). See OCGA § 23-2-58.

"In a solvent, going concern, directors are the agents or fiduciaries of the corporation, not of its creditors." McEwen v. Kelly , 140 Ga. 720, 724 (3), 79 S.E. 777 (1913). In contrast, when a company becomes insolvent, "the directors stand in a trust relation toward creditors." Id. See Bank Leumi-Le-Israel v. Sunbelt Indus. , 485 F.Supp. 556, 559 (S.D. Ga. 1980) ("In the case of an insolvent corporation, the directors and officers stand as trustees of corporate properties for the benefit of creditors[.]"). Hence, "the directors of an insolvent corporation, who originally stood in a fiduciary relation to the company, become placed in a fiduciary relation to its creditors." (Citation and punctuation omitted.) Lowry Banking Co. v. Empire Lumber Co. , 91 Ga. 624, 631, 17 S.E. 968 (1893).

Relevant here is that Georgia courts have recognized that the managing officers and directors of a corporation are charged with the duty of conserving and managing the remaining assets of an insolvent corporation in trust for the creditors. Accordingly, when a corporation becomes insolvent its directors are bound to manage the remaining assets for the benefits of its creditors, and cannot in any manner use

...