Southland Propane, Inc. v. McWhorter

• Decision Date: 22 November 2011
• Docket Number: No. A11A1235.,A11A1235.
• Parties: SOUTHLAND PROPANE, INC. et al. v. McWHORTER.
• Court: Georgia Court of Appeals

11 FCDR 3925

312 Ga.App. 812

720 S.E.2d 270

SOUTHLAND PROPANE, INC. et al.

v.McWHORTER.

No. A11A1235.

Court of Appeals of Georgia.

Nov. 22, 2011.

Waldrep, Mullins & Callahan, Neal Joseph Callahan, Columbus, for appellants.

Kam & Ebersbach, Michael George Kam, Newnan, Charles Madden Cork III, for appellee.

DILLARD, Judge.

In 1994, Charles Arrington and Benny McWhorter formed LaGrange Propane Services, Inc. (“LPS”) as a closely held corporation. Arrington and McWhorter operated LPS until 2004, when Arrington terminated McWhorter's employment and foreclosed on all of LPS's assets. Thereafter, McWhorter sued Arrington, Arrington's three sons, and Southland Propane, Inc. (the new company that Arrington and his sons had formed) (collectively “defendants”), alleging damages based on numerous claims, including defendants' conversion of his corporate interests, defamation, breach of fiduciary duty, fraud, and intentional infliction of emotional distress. Following a trial, the jury rendered a verdict in favor of McWhorter on several of his claims, awarding him compensatory and punitive damages, and the trial court entered judgment accordingly. Defendants now appeal, arguing that the trial court erred in (1) allowing McWhorter to bring a direct action, instead of a derivative action on behalf of LPS, as to the claims pertaining to his corporate interests; (2) denying defendants' motion for judgment notwithstanding the verdict (j.n.o.v.) as to McWhorter's claims for conversion, fraud, breach of fiduciary duty, and intentional infliction of emotional distress; (3) denying a challenge to McWhorter's expert witness; (4) admitting prejudicial evidence; and (5) allowing punitive damages. For the reasons set forth infra, we conclude that the trial court's error in allowing McWhorter to bring a direct action on his corporate-interest claims and denying defendants' motion for j.n.o.v. as to McWhorter's intentional-infliction-of-emotional-distress claim requires reversal as to those claims and as to the award of punitive damages. Nevertheless, because the jury's verdict in McWhorter's favor on his defamation claim—which defendants do not appeal—can support an award of punitive damages, we remand the case for further proceedings consistent with this opinion.

At the outset, we note that “[o]n appeal from the denial of a motion for a directed verdict or for j.n.o.v., we construe the evidence in the light most favorable to the party opposing the motion, and the standard of review is whether there is any evidence to support the jury's verdict.” ¹ However, “[w]e review questions of law de novo, applying the plain legal error standard of review.” ²

So viewed, the record shows that McWhorter, who was married to Charles Arrington's sister, had worked in the propane business for over 20 years. In 1994, Arrington and McWhorter decided to start their own propane business, resulting in the incorporation of LPS. The company was created pursuant to a plan in which Arrington would provide the initial financing, own 51 percent of the stock, and act as the CEO and president. McWhorter, on the other hand, would own 49 percent of the stock, act as treasurer, and handle the day-to-day operations of the company.

Arrington initially contributed approximately $100,000 in startup funds, and LPS operated out of property that Arrington owned and for which it paid Arrington rent. Later, LPS moved to another property owned by Arrington and his wife. To facilitate this move, Arrington's wife transferred her half interest in the property to McWhorter, after which he and Arrington took out a loan from a local bank, which was secured by the property, in order to finance the construction of the company's office and plant buildings. The construction of these buildings was completed by Mid–South Mechanical, which was a company wholly owned by Arrington, and the property was then leased to LPS.

Over the course of the next several years, Arrington allegedly loaned over $600,000 to LPS. During this same period of time, Arrington and McWhorter also financed the company by issuing numerous promissory notes to Arrington and his sons, David, Mike, and Greg, for loans they had provided to LPS after obtaining their own loans that were secured by various properties they respectively owned. Several of these notes were obtained so that LPS could finance United Heating and Air (“UHA”), which was a company that Arrington and McWhorter incorporated in early 2002 in an attempt to create a business that would generate income during the warmer months of the year when propane sales diminished. However, UHA was never financially successful, and it ultimately ceased operations in December 2002 after LPS foreclosed on its assets.

Throughout LPS's existence, both Arrington and McWhorter regularly used company funds to pay for personal expenses. For instance, McWhorter made nondescript payments to his wife (Arrington's sister), who was not employed by LPS, for a short period of time and allowed his daughter, who did work for LPS, to use company funds to have her home painted and car repaired. McWhorter also used LPS funds, with Arrington's approval, to build a lake on his property and make various and sundry improvements to his home. Similarly, Arrington used company funds for miscellaneous personal expenses, including purchasing automobiles for his wife and son's use. In addition, although Arrington only sporadically paid himself a salary, he regularly wrote checks to himself using company funds, and at some point in time, he authorized the use of LPS funds to pay his wife and son small salaries.

In 2003, Arrington and McWhorter's personal and business relationship began to sour due to McWhorter's failing marriage to Arrington's sister, which ended in divorce later that same year. During the course of the divorce proceedings, McWhorter's counsel opined that LPS's debts outweighed its assets. At that same time, Arrington offered to purchase McWhorter's stock in LPS for $200,000. And although McWhorter was initially receptive to this offer, the potential deal was scuttled when McWhorter maintained that he would attempt to seek employment with another propane business and adamantly refused to sign a noncompete clause that Arrington made a condition of any such settlement.

On April 21, 2004, Arrington and his corporate counsel confronted McWhorter at LPS's office, accused him of misappropriating corporate funds, terminated his employment, and ordered him to immediately leave the premises. Additionally, Arrington reported his suspicions concerning McWhorter to the sheriff's department, and shortly thereafter, further reported his suspicion that McWhorter had forged company checks to various vendors so that he could pocket the funds for his own personal use. McWhorter was eventually arrested on forgery charges, but he was never incarcerated, and the charges were quickly dropped after the district attorney determined that there was not enough evidence to prosecute. Nevertheless, Arrington informed the local newspaper as to McWhorter's arrest in an attempt to have it publicized, and he prominently displayed a copy of McWhorter's booking photograph at LPS's office.

A few months later, Arrington and his sons foreclosed on LPS's assets to cover its various debts and then used the proceeds to form Southland Propane, Inc. Arrington also attempted to collect on a promissory note for approximately $198,000, which McWhorter had purportedly signed but which he maintained was a forgery.

Thereafter, McWhorter filed suit against Arrington, his three sons, and Southland Propane, alleging claims of defamation and tortious interference with business and contractual relationships. Arrington then filed suit against McWhorter to collect on the $198,000 promissory note. Three years later, McWhorter amended his complaint to allege additional claims of conversion, breach of fiduciary duty, fraud, wrongful discharge, slander of title, malicious prosecution, and intentional infliction of emotional distress. The parties then conducted extensive discovery, but following its conclusion, neither McWhorter nor the defendants filed any motions for summary judgment or even a pretrial order. Instead, the parties proceeded directly to trial, which lasted nine days.

After McWhorter presented his case, the defendants moved for a directed verdict on all of his claims, individually, based on a lack of evidence. The defendants also argued, alternatively, that the claims pertaining to McWhorter's interest in LPS should be dismissed because McWhorter failed to file a derivative action. The trial court denied this motion. And while the trial court granted a directed verdict in the defendants' favor as to McWhorter's claims for tortious interference, wrongful discharge, slander of title, and malicious prosecution, it denied their motion as to all remaining claims, including McWhorter's claim for punitive damages.

At the conclusion of the trial, the jury returned a verdict in McWhorter's favor and awarded him $600,000 against all defendants for the conversion claim; $25,000 against Arrington and two of his sons, David and Greg, for the defamation claim; $100,000 against Arrington for the breach-of-fiduciary-duty claim; $250,000 against Arrington for the fraud claim; and $250,000 against Arrington for the intentional-infliction-of-emotional-distress claim. The jury also found in McWhorter's favor as to Arrington's attempt to collect on the $198,000 promissory note. In addition, the jury found that Arrington acted with a specific intent to cause McWhorter harm and, thus, awarded him $225,000 in punitive damages. Subsequently, the trial court issued a judgment affirming the jury's verdict. Defendants then filed a motion for j.n.o.v., which the trial court denied after conducting a hearing on the matter. This appeal follows.

1. Defendants contend that the trial court erred in denying their motion for j.n.o.v.,...