Patel v. 2602 Deerfield, LLC., A18A1232

CourtUnited States Court of Appeals (Georgia)
Writing for the CourtDillard, Chief Judge.
Citation819 S.E.2d 527
Parties PATEL et al. v. 2602 DEERFIELD, LLC.
Decision Date02 October 2018
Docket NumberA18A1232

819 S.E.2d 527

PATEL et al.


Court of Appeals of Georgia.

October 2, 2018
Reconsideration Denied October 30, 2018

819 S.E.2d 529

Edward R. Collier, Dawson, Peter Alexander Durham, Newnan, for Appellant.

Jason Alloy, Vincent Robert Russo Jr., Richard L. Robbins, Craig Grayson Kunkes, Atlanta, for Appellee.

Dillard, Chief Judge.

A group of shareholders, operating as Southeastern Hospitality Management, Inc. ("Southeastern"), purchased a tract of commercial property in Albany, Georgia, that included a distressed hotel. Approximately one year later, Southeastern sold the property to South Georgia Partners, LLC ("SGP"). Thereafter, 2602 Deerfield, LLC ("Deerfield"), a Southeastern shareholder, and Deerfield’s owners, Rajendra Patel and Savan Patel, filed suit against, among others, Southeastern shareholders Milan Patel, Umang Patel, and SGP. Specifically, the plaintiffs alleged that Milan and Umang failed to disclose to the other Southeastern shareholders the existence of a valuable lease on the property or their interest in SGP, resulting in Southeastern selling the property to SGP for less than it was worth.1 The plaintiffs asserted numerous causes of action, including claims for breach of fiduciary duty, breach of the duty of loyalty, and fraud. Thereafter, the defendants filed a motion for summary judgment, arguing that the plaintiffs should have brought their claims in a derivative action on behalf of Southeastern, rather than as a direct action. But the trial court denied in part this motion, and the defendants appealed. For the reasons set forth infra , we reverse.

Viewed in the light most favorable to the plaintiffs (i.e. , the nonmoving parties),2 the record shows that Rajendra was a friend and business associate of Milan’s father. In 2010, Rajendra, and his son, Savan—both residents of New Jersey—decided to purchase a note, secured by a 4.6-acre tract of commercial property in Albany, Georgia, containing a then-closed hotel. Savan and Rajendra decided to buy the note with Milan and Umang, business partners who first became friends in college. The note was initially purchased for

819 S.E.2d 530

just over $880,000 by a different entity owned by Savan and Rajendra, but it was later transferred to Southeastern, an "open" Georgia corporation. With regard to the note, Savan and Rajendra were responsible for providing 50 percent of the capital, which they did through Deerfield, a corporation in which they were shareholders. Likewise, Milan and Umang were responsible for providing the other 50 percent of the capital. Milan and Umang each contributed a portion of the capital themselves, and they raised the rest of the money from their family and close friends. Ultimately, Southeastern was owned by the following shareholders: Deerfield; Milan; Umang; Umang’s father-in-law, Rajesh Desai; Umang’s grandfather, Vallabhbhai Patel;3 Milan’s father-in-law, Sudhir Patel; and Milan and Umang’s friends, Sunil Nair, Chirag Patel, and Rahul Patel. Milan and Umang unilaterally made themselves officers of Southeastern, which followed no corporate formalities and had no operating agreement. And, because they lived in Georgia, Milan and Umang handled the corporation’s day-to-day operations.

The Southeastern shareholders’ plan was to "maximize" the property’s value, either by opening and operating the closed hotel or finding other commercial tenants. To that end, Southeastern obtained a deed in lieu of foreclosure on the property, and it briefly reopened the hotel in May 2011. Meanwhile, Savan, Rajendra, and Milan sought tenants and other business opportunities for the property. But in the spring of 2011, Milan and Umang told Savan and Rajendra that they had not been able to locate any tenants and they recommended that Southeastern sell the property.

In August 2011, Milan, acting on behalf of Southeastern, signed a purchase and sale agreement to transfer the property to SGP for $1,600,000. Umang represented to Savan and Rajendra that SGP was comprised of "a group of doctors from Columbus, Georgia." But in fact, Umang organized SGP. And initially, Umang owned 100 percent of SGP; but he later transferred two-thirds of his interest to Milan.

Shortly after Southeastern committed to the purchase and sale agreement with SGP, Milan signed a 30-year lease on behalf of the corporation to develop an Olive Garden restaurant on the property. At the closing, with Milan and Umang acting on behalf of both Southeastern and SGP, Southeastern assigned its interest in the Olive Garden lease to SGP. And ultimately, on February 14, 2012, the day after Umang transferred part of his interest in SGP to Milan, SGP purchased the property for $1,550,000. According to evidence adduced by the plaintiffs, however, at the time of the 2012 sale, the property was actually worth $3,500,000.4

Thereafter, Umang and Milan transferred their entire interests in SGP to their wives and other family members—including a five percent interest to each of their fathers-in-law, Rajesh and Sudhir. Despite the transfer, Milan and Umang continued to manage SGP, handling the day-to-day operations. Then, in 2014, Milan and Umang subdivided the property and created Dawson Road Partners, LLC ("DRP") to hold the then-vacant land, while SGP continued to hold the portion of the property containing the Olive Garden restaurant. The same people who own SGP, including Rajesh and Sudhir, also own DRP. And as with SGP, Milan and Umang manage DRP.

In September 2015, the plaintiffs—Deerfield, Rajendra, and Savan—filed suit against Milan, Umang, SGP, and DRP, asserting numerous claims, including claims for breach of fiduciary duty, breach of the duty of loyalty, fraud, conspiracy, fraudulent transfer, state RICO violations, punitive damages, and attorney fees. Specifically, the plaintiffs allege that Milan and Umang, inter alia , failed to inform them of and made affirmative misrepresentations regarding the Olive Garden lease and their interest in SGP prior to the sale of the property. Initially, Southeastern was also a plaintiff, but it subsequently dismissed its claims against the defendants.5

819 S.E.2d 531

Discovery ensued, during which evidence was adduced that Sudhir and Rajesh, Milan and Umang’s fathers-in-law, were satisfied with their investments in Southeastern, had no concerns regarding Milan and Umang’s management of the company, and would not sue Milan and Umang over the investment. Likewise, Sunil Nair, one of the other nonparty shareholders, was also satisfied with his investment in Southeastern. Sunil later partnered with Milan and Umang in another business venture and testified in a deposition that he believed they were honest.

One of the other nonparty shareholders, Rahul—who also had other business deals with Milan—testified at his deposition that he received no updates about the property development and knew nothing about the Olive Garden lease. Nevertheless, he trusted Milan and was pleased with the return on his investment in Southeastern. And while he did not believe that Milan and Umang lied to him or caused him any damage, Rahul did not have a clear understanding of the lawsuit. Indeed, at the time of his deposition in October 2016, Rahul had not consulted with a lawyer or made a decision regarding whether to join the suit as a plaintiff.

Chirag, the final nonparty shareholder, was still involved in a different business deal with Umang at the time of his December 2016 deposition Chirag testified that, initially, he trusted Umang and Milan and expressed no dissatisfaction with the return on his investment in Southeastern because "[he] had no clue about anything." He later learned of the Olive Garden lease and asked Umang about it. Suffice it to say, Chirag was not happy that Umang had failed to disclose the lease earlier, but he figured, "I got what I got for it and I’m happy with it and I moved on with it." But when Chirag learned of the lawsuit, he was shocked, upset, and became concerned that he lost money on the venture because the property should have been sold at a higher price. In that regard, Chirag explained that "if there was money left on the table and I didn’t receive it, I need to get that money." Moreover, if the plaintiffs were going to recover damages, Chirag did not want to be left out. And when asked if Umang had ever communicated anything to him that he believed to be false, Chirag replied that he was told the property was priced at $1,600,000, and that Umang failed to disclose his own investment in SGP.

At time of his deposition, Chirag had not spoken to an attorney, but he said, "I’m still weighing my options on what I want to do at this moment.... [W]hen I do make the decision, I will seek my own counsel and figure out things on my own, whatever I need to do." In addition to the deposition testimony detailed supra , Sunil, Rahul, and Chirag also filed affidavits, in which they averred that they had "not ruled out the possibility of filing a lawsuit" against Milan and Umang. In contrast to Rajesh and Sudhir, the other nonparty shareholders were not given an opportunity to purchase any interest in SGP.

Based on the foregoing evidence, the defendants filed a motion for summary judgment, arguing, inter alia , that the plaintiffs were asserting impermissible direct claims. The defendants also asserted...

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