Pickett v. Paine, 27636
| Citation | 230 Ga. 786,199 S.E.2d 223 |
| Decision Date | 21 June 1973 |
| Docket Number | No. 27636,27636 |
| Parties | Roscoe PICKETT et al. v. Leon PAINE, Jr. |
| Court | Georgia Supreme Court |
Arnall, Golden & Gregory, Ellis Arnall, Cleburne E. Gregory, Jr., Atlanta, for appellants.
Powell, Goldstein, Frazer & Murphy, Robert W. Patrick, Jr., Jerry B. Blackstock, Robert M. Travis, Atlanta, for appellee.
Syllabus Opinion by the Court
This action was originally commenced when Leon Paine, as sole minority shareholder and former officer of the corporations, Pico, Inc., and Calero, Inc., filed a complaint against Roscoe Pickett, as majority shareholder and president, joining as party defendants both Pico and Calero. The complaint as amended contained three separate claims for relief. Count 1 was in the nature of a derivative shareholder action brought in convormity with the Georgia Business Corporation Act (Code Ann. §§ 22-614, 22-615), seeking relief on behalf of the defendant corporations under Code Ann. § 22-714 for alleged fraudulent and unlawful misapplication and waste of corporate assets and property on the part of the defendant Pickett. In it there was alleged in part that as a result of various business negotiations Paine had severed his out-of-state employment and moved to Atlanta, Georgia, there to assist Pickett in the acquisition, development and sale of real estate. It was alleged Paine would share in the profits and be given an interest in the enterprise. This agreement was subsequently superseded by the incorporation of two real estate development corporations, Pico, Inc., and Calero, Inc., in which Paine acquired 10 and 25 percent shareholder interests, respectively, with Pickett retaining the remaining outstanding shares. The substantive allegations of fraud as committed by Pickett on the corporations were that as a result of a loan given by Wachovia Realty Investments to Pico and secured with property of the two corporations, the proceeds of such loan were utilized by Pickett for his own personal purposes, for payment of private debts and to acquire property in his own name. The specific allegations of fraud in this regard were that proceeds of the Wachovia loan were used by Pickett to satisfy mortgages on his own property and to procure in his own name certain property in Fulton County, Georgia, known as the Glenridge Drive or Fitts property. Other averments under Count 1 were that the defendant corporations had not kept books and records as required by the Georgia Business Corporation Act, that Pickett commingled corporate funds with those of his own without accounting to the corporations, and that this was in breach of a fiduciary duty owing the minority shareholder. Paine further asserted that he had made an earnest demand on the boards of directors of the corporations to recover the misapplied funds by appropriate action, that he had requested of the defendants that he be allowed to see various books and papers of the corporations and that he be given an accounting, but that these demands and requests had been refused in each instance. Under Count 1 Paine prayed for a general corporate accounting, for personal relief against the corporations and Pickett for sums alleged due and owing him, for costs and attorney fees, and for such relief as the court might deem appropriate.
Count 2 of the complaint was a claim for dissolution of the corporations under Code Ann. § 22-1317(a)(1)(B) and (D) based on the allegations of Pickett's fraud and waste of corporate assets as found in Count 1. Paine prayed for injunctive relief under Count 2 against transferring and disposing of corporate property, for the appointment of a liquidating receiver and for liquidation and distribution of corporate assets.
Count 3 was a claim against Pickett individually for a declaration of interest in and partition of various properties which Paine alleged he had assisted in the acquisition of pursuant to oral agreements with Pickett by which for services rendered he would be given a 10-percent interest in the properties. Such properties were described as the so-called Spieks and Bailey property in DeKalb County, certain Gilmer County property, and the Crews property in Fulton County, together with certain Cobb County property not now in issue on appeal. Under this count of the complaint, Paine asked for an accounting from Pickett, a declaration of his 10-percent interest in the properties and a partition of such properties according to his interest therein.
To the complaint the defendants answered with denials of the material allegations and after extensive discovery, the defendants filed for summary judgment as to each claim for relief. The trial court heard the matter on this motion and denied summary judgment as moved for, finding an evidentiary basis for submitting the case to a jury. The trial court has subsequently certified the case for appeal and the defendants below have now appealed to this court for review. Held: $1. Count 1 of the complaint is a derivative shareholder claim for relief on behalf of the corporations, Pico and Calero, for alleged misapplication and waste of corporate assets on the part of the majority shareholder and president of the corporations, Pickett. The claim is on behalf of both corporations because of the alleged fraudulent use of proceeds from a loan to Pico by Wachovia Realty Investments, such loan being secured in part with property of the corporation Calero. The prayer for relief under the count, however, includes a claim for personal judgment against Pickett and the corporations for sums alleged due and owing Paine. In the complaint and in argument before the court, this claim for personal recovery was indicated to be based on various oral agreements between Pickett and Paine by which Paine would be given an interest in the corporate properties, and, as appears from the evidence, was inserted because of the absence of any prior declaration of dividends by the corporations and the absence of any specific agreement between the parties specifying how the minority shareholder would participate in the profits of the corporations. The claim also relates to those asserted in Count 3 of the complaint with regard to properties not owned by the corporations but which were acquired as alleged for Pickett with the services of Paine and in which he seeks a declaration of interest. It relates as well to the efforts of Paine to realize his equity interest in the assets of the corporations through his claim for liquidation in Count 2 of the complaint.
As a general rule, a claim for misappropriation and waste of corporate assets by a director or officer of a corporation belongs to the corporation and not to its shareholders, and except in various rare circumstances, not applicable here, complaining shareholders will not be allowed to recover directly. See Kaplan's Nadler, Georgia Corporation Law, Sections 10-18 and 11-16 (1971) and Comment: Corporations-Shareholders' Derivative and Direct Actions-Individual Recovery, 35 N.C.L.Rev. 279 (1957). The Georgia Business Corporation Act, Code Ann. § 22-615(d), excepts in this regard only costs and attorney fees as may be incurred by the minority shareholder as a result of the derivative action. Any recovery, therefore, that may be had by the corporations as a result of the action may not be directly participated in by the minority shareholder. On the other hand, any profits of the corporations that may be due and owing Paine because of his minority shareholder interests can only be realized indirectly through the declaration of dividends or other corporate agreement by which such minority shareholder would be allowed a portion of the profits as perhaps related to his percentage interests in the corporations. However, the prayer for relief includes no request for a declaration of dividends, generally a matter of internal corporate discretion, and the agreements asserted as a basis for relief in this regard pertain only to the interests of Paine, as alleged and argued, in the properties themselves and not to the profits that may accrue to the corporations as a result of their acquisition and development. Furthermore, Paine's stock holdings in the corporations would insure him an equitable interest in the corporate properties themselves.
The appellee has asserted, however, that the court should look behind the corporate personality and allow direct recovery for Paine's interests in the corporate properties now owned and as may be recovered as a result of this action. This argument proceeds on the basis that Pickett is the alter ego of the corporations and that he has abused the corporate entities by so using them for his own personal purposes as to render them without separate existence. In the past, this court has been reluctant to disregard the corporate entity except where third parties were involved in dealing with the corporation and director or shareholder liability was in question, or where public policy might require looking beyond the corporate structure in the public interest. See Independent Bankers Ass'n v. Dunn, 230 Ga. 345, 197 S.E.2d 129 (1973). We are also not unmindful that we deal here with close corporations and that many of the management characteristics of such corporations do not always conform to prevailing corporate practices. As would appear to be existing here, the participants very often fail to hold shareholders' and directors' meetings and to distinguish between the two, they neglect to keep books and records or to keep them properly, they fail to maintain a separate bank account for the corporation, and they often do business by resolution and do not go through the procedure of authorizing expenditures such as salaries. See O'Neal, Close Corporations, §§ 1.07 and 8.02 (1971 Ed.) The consequences of such corporate behavior may result in a loss of limited liability and render the participants personally liable for the...
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