Song v. eGPS Sol. I, Inc.

• Docket Number: A23A1458
• Decision Date: 28 March 2024
• Citation: 899 S.E.2d 530
• Parties: SONG v. EGPS SOLUTIONS I, INC., et al.
• Court: Georgia Court of Appeals

899 S.E.2d 530

SONG

v.EGPS SOLUTIONS I, INC., et al.

A23A1458

Court of Appeals of Georgia.

March 12, 2024

Reconsideration Denied March 28, 2024

Thomas Christopher Grant, Robert J. Kaufman, Kevin Kucharz, for Appellant.

Neil Louis Wilcove, Matthew D. Friedlander, Christopher O’Neil Brock, Atlanta, David S. Lipscomb, Lawrenceville, Harold T. Daniel Jr., Elizabeth J. Marquardtt, for Appellee.

Hodges, Judge.

In this derivative and breach of fiduciary duty action, Huiming Song appeals orders by the Superior Court of Gwinnett County granting Champion Instruments, LLC’s motion to dismiss Song’s derivative action, and eGPS Solutions I, Inc. and Travis Pruitt’s motion for summary judgment as to Song’s claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and breach of contract.In five separate enumerations of error, Song contends that the trial court erred, generally, by concluding that: (1) Champion’s special litigation committee was an independent body; and (2) there are no genuine issues of material fact precluding eGPS’s and Pruitt’s motion for summary judgment.For the following reasons, we affirm in part and reverse in part.¹

When viewed under the summary judgment standard,² the record reveals the following: Pruitt owned a majority interest and Lonnie Sears owned a minority interest in eGPS, which sells surveying equipment and supplies.In 2010, Pruitt, Sears, Song, and one other person formed Champion, a Georgia limited liability company, for the purpose of purchasing surveying instruments in China and acting as a wholesaler to eGPS and other dealers.Champion purchased equipment from China using Song’s connections.In 2012, the fourth original member sold his entire interest in Champion to Song.Thus, Champion ultimately had three members: Pruitt, who owned 41.2 percent through a trust; Song, who owned 41.2 percent; and Sears, who owned 17.6 percent.

Champion’s Operating Agreement required each member and manager to "act in a manner he believes in good faith to be in the best interest of [Champion] and with the care an ordinarily prudent person in a like position would exercise under similar circumstances."The Agreement further provided that no member or manager would be liable to Champion or any other member for "any actions or course of conduct taken in good faith and reasonably believed to be in the best interests of [Champion], or for errors of judgment…."Rather, members and managers "shall only be liable for willful misconduct, gross negligence, willful breach of his obligations under this Operating Agreement, or other willful or grossly negligent breach of fiduciary duty."

The members unanimously elected Pruitt to serve as Champion’s sole manager who, under the Operating Agreement, had "full and complete power, authority, and discretion to take such action for and on behalf of [Champion], and in its name, as the Managers deem necessary or appropriate to carry out the purposes for which [Champion] was organized."This power was limited in the Operating Agreement by requiring "the approval of all or a portion of the Members" if the manager were to, as is relevant to this case: "do any act in contravention of this Operating Agreement"; "do any act that would make it impossible to carry on the ordinary business of [Champion]"; or "cause the Company to sell, exchange, lease, convey or otherwise transfer all or any substantial part of the assets of [Champion], other than in the ordinary course of business."

For nearly all of Champion’s existence, eGPS was its single largest customer.Since Champion had no office space, warehouses, or employees of its own, eGPS assisted in these departments to minimize Champion’s overhead, including by providing accounting staff.In fact, "[w]ithout sales to and other support of eGPS, Champion would never have gotten off the ground and would not have survived."

Champion often gave discounts to customers based on their purchased volume, ranging from 25 percent to a maximum discount of 40 percent.Pruitt, as sole manager, had the discretion to set these discounts as part of the ordinary course of business.With eGPS being one of Champion's largest clients, and a high-volume purchaser, it received a 40% discount.But in 2016, Pruitt learned that Champion’s competitors were offering discounts up to 50%, and he believed eGPS should be given an additional 10% discount since eGPS was Champion’s highest volume client.Thus, Pruitt authorized a discount increase from 40% to 50% to eGPS, which was made retroactive to 2010.

By 2017, eGPS had accrued a significant accounts receivable in excess of $300,000 owed to Champion.However, Pruitt unilat- erally issued credit memoranda to eGPS, reducing eGPS’s obligation to Champion to approximately $19,000 and increasing Champion’s net annual loss from $575 to over $300,000 for the 2017 fiscal year.While this loss was borne by all three of Champion’s members equally, the credit to eGPS benefitted Pruitt and Sears, as majority and minority interest holders in eGPS.

In addition to his interest in Champion, Song was the founder and general manager of manufacturer Shanghai HowayGIS Infotech Co., Ltd.("Howay"), which was formed in 2011 and used by Champion.The record shows that in 2011 or 2012, Song began contacting Champion’s dealers and offering to sell Howay products at a lower price than Champion’s.In 2016, Pruitt discovered that Song was talking with Champion’s dealers and promoting Howay, potentially poaching Champion’s clients.Sears asked Song to stop, and Song refused.At some point in 2016, Song offered to broker a deal for the sale of part or all of Champion, and in 2017he told at least one of Champion’s dealers that Champion would be closing that year.In late 2016 and throughout 2017, a major Champion dealer, Tri-Global Technologies, began purchasing directly from Howay after being solicited by Song.

In 2018, Champion issued a capital call in which Pruitt and Sears made contributions, but Song did not.Around this time, Pruitt offered to buy Song’s interest in Champion, but Song never accepted the offer.While Champion was winding down operations and selling inventory, it continued operating and made a profit in 2018.In 2019, Song refused to contribute to another Champion capital call.

[1] In January 2019, Song filed a derivative action against Pruitt and eGPS, but because he failed to send a written demand notice, the complaint was dismissed without prejudice in February 2019.In May 2019, Champion filed a suit in the State Court of Gwinnett County against Song alleging breach of contractual duties³ due to Song poaching Champion’s clients.⁴Thereafter, in August 2019, Song re-filed his action in the Superior Court of Gwinnett County, asserting two derivative claims, a direct breach of contract claim against Pruitt, and a petition for judicial dissolution as to Champion.

In response, Champion held a meeting in October 2019 to create a Special Litigation Committee("SLC") to investigate Song’s claims.Timothy Graves and Benjamin Jordan were appointed to the committee by a two-to-one vote with Song voting by proxy against the appointment.Neither Graves nor Jordan had been employed by Champion, had business dealings with Champion, or had a relationship with Song, Pruitt, or Sears.Jordan resigned for health reasons in December 2019, and Benjamin Easterlin was appointed in January 2020 by Pruitt and Sears; although Song was given notice of the election meeting, he did not attend.Easterlin also had not been employed by Champion, had no business dealings with Champion, and had no relationship with Song, Pruitt, or Sears.

As part of its investigation, the SLC conducted multiple interviews and reviewed hundreds of pages of financial records and other documents.During Pruitt’s interview, he admitted that he issued the credit memoranda to eGPS because he believed Song was stealing customers from Champion.He also admitted to "run[ning][Champion] into the ground" to avoid distributing capital to Song.⁵

Harold Daniel, Jr., who was retained and represented Champion in the lawsuits, supported and provided assistance in the SLC investigation.Both Easterlin and Graves knew of Daniel but had no current business relationship with him, and the SLC "came to a decision without any outside influence or input."However, according to Easterlin, he"relayed the conclusions of the Special Litigation Committee to Mr. Daniel, who drafted the SLC Report at [Easterlin’s] direction and with input and guidance from both [Easterlin] and Mr. Graves."⁶

The SLC issued a thorough, 18-page report on September 9, 2020, nine months after it began the investigation.The SLC determined that "Mr. Pruitt conducted himself in accordance with reasonable exercise of business judgement [sic] … and that he acted diligently and in good faith in overseeing and acting in what he reasonably believed to be in the best interests of [Champion] and its Members."The committee also found that "as sole Manager of the Company, [Mr. Pruitt] had the power to set prices and discounts, including the issuance of credit memorandums … to eGPS[,]" and due to the "unique relationship between Champion and eGPS … Mr. Pruitt did not have a conflict of interest in his actions as Manager of Champion as they related to eGPS."Based on these findings, the SLC also concluded that "eGPS did not aid and abet a breach."While the committee found that there was no breach of duty, the SLC did note that "Pruitt and Sears received indirect benefits from the issuance of the credit memorandums because they were shareholders of eGPS."As a result, the SLC recommended "reinstating accounts receivable of eGPS in the aggregate total of $305,059.38."Finally, the Committee recommended that Champion be voluntarily dissolved after the litigation matters terminated.

In September 2020, Champion moved to dismiss Song’s derivative complaint based on the SLC recommendation; Song responded on ...