Qos Networks Ltd. v. Warburg, Pincus & Co., A07A2264.

• Decision Date: 14 November 2008
• Docket Number: No. A07A2264.,A07A2264.
• Citation: 669 S.E.2d 536,294 Ga. App. 528
• Parties: QOS NETWORKS LIMITED et al. v. WARBURG, PINCUS & COMPANY et al.
• Court: Georgia Court of Appeals

669 S.E.2d 536

294 Ga. App. 528

QOS NETWORKS LIMITED et al. v. WARBURG, PINCUS & COMPANY et al.

No. A07A2264.

Court of Appeals of Georgia.

November 14, 2008.

George Martin Geeslin, Atlanta, for Appellants.

Wagner, Johnston & Rosenthal, Michael S. Rosenthal, Sandy Springs, for Appellees.

BARNES, Chief Judge.

Appellant QoS Networks Limited, an Irish telecommunications company, filed suit in Cobb County against Warburg, Pincus & Company, a private equity investment company, for fraud, breach of fiduciary duty, promissory estoppel, and tortious interference with contract. QOS shareholders also sued Warburg in New York, and the New York trial court ruled first, granting summary judgment to Warburg in a decision affirmed by the New York appellate court in O'Neill v. Warburg, Pincus & Co., 39 A.D.3d 281, 833 N.Y.S.2d 461 (2007). The trial court in this action then granted summary judgment to Warburg on res judicata grounds. QOS appeals, arguing that the New York court decision did not reach the merits and therefore did not foreclose action on this suit. Because the New York courts considered both the standing issue and the merits, the trial court did not err in granting summary judgment to the defendants on grounds of res judicata.

In 2000, Warburg invested $30 million into QOS, a corporation formed in 1999 to develop a new type of global telecommunications service provider. QOS ran out of money and ultimately filed for bankruptcy in August 2001, then filed suit in Georgia against Warburg, its related entities,¹ and four individuals² for promissory estoppel, breach of fiduciary duty, tortious interference, and fraud. All of the defendants denied liability, and three of them (Warburg, Glanville, and Italia) also counterclaimed against QOS and filed a third-party complaint against QOS directors Michael Keane, Lawrence O'Neill, and James Valentine, alleging fraud and negligent misrepresentation.

Meanwhile, Warburg filed suit in New York against Keane, O'Neill, and Valentine for defaulting on promissory notes the three men signed when they borrowed money from Warburg to purchase stock in QOS. These three men subsequently sued Warburg in New York in their capacity as QOS shareholders ("Management Shareholders"), asserting breach of fiduciary duty, fraud, and tortious interference in an almost verbatim copy of the Georgia complaint, but using different counsel.

In yet another action, 24 Non-Management Shareholders sued Warburg separately in New York, asserting the same three causes of action, represented by the same counsel as the Management Shareholders and again using an almost verbatim copy of the Georgia complaint. The Management and Non-Management shareholders' New York actions were eventually consolidated, and in February 2005, the New York trial court granted Warburg's motion to dismiss the fraud claims, holding that the shareholders' basic complaint—that the value of their stock had diminished—was derivative in nature and thus had to be brought on behalf of QOS instead of by the stockholders individually. Further, the court held, even if the shareholders had standing to sue individually, they could not establish that they reasonably relied on Warburg's alleged promises to provide additional funding because the express terms of the parties' contracts said otherwise.

In January 2006, the New York court granted summary judgment to Warburg on the shareholders' damages claims for lost profits because as a start-up company, QOS had no profit history. In February 2006, the New York court granted summary judgment to Warburg on the remaining claims, holding that the shareholders lacked standing to sue because their claim belonged to the company, not to them individually. Additionally, the court held, Warburg exercised its bargained-for contract right in voting against the proposed capital restructuring and in the absence of evidence it acted for an illegitimate purpose or in bad faith, its conduct could not constitute a breach of fiduciary duty. The court also found that the shareholders failed to produce evidence to support their breach of contract claims.

In October 2006, the trial court in this case ruled on 16 pending motions and in a thorough, well-reasoned order, granted summary judgment to Warburg because the claims against it were barred by res judicata. The court also granted summary judgment to QOS director Hendrickson, holding that QOS's claims against him were barred by collateral estoppel.

After QOS filed its notice of appeal but before the appeal was docketed in this court, in April 2007 the Appellate Division of the Supreme Court of New York affirmed the trial court's grant of summary judgment to Warburg against the QOS shareholders. O'Neill v. Warburg, supra, 39 A.D.3d at 283, 833 N.Y.S.2d 461. The appellate court held that the trial court properly decided the procedural matter of standing and agreed that the shareholders failed to establish a claim for breach of fiduciary duty. Id. The New York appellate court also affirmed the summary judgment to Warburg on the shareholders' claims for lost profits and breach of duty to act in good faith, claims based on Warburg's previous lawsuits brought after the three Management Shareholders defaulted on their loan agreements. Id. at 282, 833 N.Y.S.2d 461.

In those actions, Warburg successfully obtained judgments against the investors to recover the money it lent them to buy QOS stock. The trial court in those actions found that the investors had received the benefit of their bargain under the agreements and had to repay the loans. The appellate court in those cases agreed with the trial court that the investors failed to establish that Warburg breached its implied duty of good faith after they defaulted on their loans. Warburg, Pincus Equity Partners v. O'Neill, 11 A.D.3d 327, 783 N.Y.S.2d 354 (2004); Warburg, Pincus Equity Partners v. Keane, 22 A.D.3d 321, 802 N.Y.S.2d 420 (2005).³

QOS contends in this appeal that the trial court in this case erred in ruling that its claims were barred by the principles of res judicata. It argues that the Georgia action was filed by the corporation, which had the right to bring the direct action against Warburg, and the New York action was filed by the shareholders, who did not have that right and whose claims were dismissed "on the procedural basis that only the corporation has the right to bring the claim." Barring the corporation's action based on the shareholders' case, it says, "produces the curious result that no one can bring this action." This argument seems inviting in its simplicity, but the problem for QOS is that the New York courts considered more than just the standing issue. Both the trial and appellate courts also reviewed the evidence to determine whether questions of fact existed on the shareholders' fraud, breach of fiduciary duty, breach of contract, and damages claims and entered conclusions of law that were affirmed by the New York appellate court.

Warburg responds that under both Georgia and New York law, if an opinion states alternative reasoning, either of which may sustain the holding, both reasoning are equally authoritative.

1. QOS's claims against Warburg. "Res judicata prevents a plaintiff from instituting a second complaint against a defendant on a claim that has already been brought, after having previously been adjudged not to be entitled to the recovery sought on that claim." (Footnote omitted.) Roth v. Gulf Atlantic Media, etc., 244 Ga. App. 677, 678(1), 536 S.E.2d 577 (2000). The fundamental elements of res judicata are: (a) the parties are identical; (b) the causes of action are identical; and (c) the prior adjudication was made on the merits by a court of competent jurisdiction. Brown v. J.H. Harvey Co., 268 Ga.App. 322, 324(3), 601 S.E.2d 808 (2004). Additionally, for the principle to apply, the party against whom the doctrine is raised must have had a full and fair opportunity to litigate the issues in the first action. Fowler v. Vineyard, 261 Ga. 454, 455-456(1), 405 S.E.2d 678 (1991).

When a grant of summary judgment in another suit is relied upon to support a plea of res judicata, we must examine the basis of the prior summary judgment. If that summary judgment actually adjudicated the merits, this court will sustain the plea of res judicata, but if the summary judgment did not adjudicate the merits, then this court will deny the plea. Robinson v. Starr, 197 Ga.App. 440, 441(1), 398 S.E.2d 714 (1990).

(a) Identical parties. "The term `party' to an action includes all who are directly interested in the subject matter, and who have a right to make defense, control the pleadings, examine and cross-examine witnesses, and appeal from the judgment. [Cits.]" State Bar of Ga. v. Beazley, 256 Ga. 561, 563(1)(b), 350 S.E.2d 422 (1986).

Although QOS is the named plaintiff in this action and the shareholders were the named plaintiffs in the New York action, the Management Shareholders constitute QOS's board of directors and control all of the QOS stock. They hired and directed both Georgia and New York counsel and were instrumental in instigating the Non-Management Shareholders to file suit. They chose to litigate in both forums, and cannot now obtain a second bite at the apple by contending that their interests were not fairly represented here.

Further, the record establishes that QOS declined to be made a formal party to the New York action, refusing to accept service of Warburg's third-party complaint and opposing Warburg's motion to consolidate one of the promissory note actions with the shareholders' action against it, even though it sought to be added as a party to that action. Further, when Warburg instituted the first of its three separate New York actions against the Management Shareholders seeking repayment under a promissory note, its counsel offered to consolidate those actions in Georgia, but the shareholders declined, instead filing their own suit in that...