West v. West

Decision Date30 September 1992
Docket NumberCiv. A. No. 1:88-CV-1577-JOF.
Citation825 F. Supp. 1033
PartiesArthur Davidson WEST, Individually and in the Name and Right of West Lumber Company, West Enterprises, Inc., and West Equipment Company, Plaintiff, v. Charles B. WEST, West Lumber Company, West Enterprises, Inc., and West Equipment Company, Defendants.
CourtU.S. District Court — Northern District of Georgia

COPYRIGHT MATERIAL OMITTED

Harmon White Caldwell, Jr., Johnson & Montgomery, Alex D. McLennan, Jr., Wade H. Watson, III, Fellows, Johnson, Davis & LaBriola, Atlanta, GA, for plaintiff.

Frank L. Wilson, III, Richard Walton Wilson, Jr., Peterson, Dillard, Young, Self & Asselin, Carey P. DeDeyn, Elizabeth Vranicar Tanis, Sutherland, Asbill & Brennan, Atlanta, GA, for defendants.

ORDER

FORRESTER, District Judge.

This matter is before the court on plaintiff's motion for leave to file a third amended complaint; plaintiff Arthur Davidson West's motion for partial summary judgment concerning the affirmative defenses of set-off, estoppel and unclean hands; Defendants West Equipment Company, West Enterprises, Inc., West Lumber Company, and Charles B. West's cross motion for summary judgment concerning affirmative defenses; defendants' motion for summary judgment as to counts one and two, direct recovery claims; and defendants' partial motion for summary judgment as to counts three and four, derivative recovery claims.

I. BACKGROUND

This shareholder action resulted from the falling out of a father and son. The father, Charles B. West, Sr., reorganized the family assets and now runs and controls the family businesses and has established a complex corporate and trust structure in order to provide for his five children upon his retirement. As part of this close corporation system, each sibling has a primary interest in one of the five principal West family corporations. The son, Arthur Davidson West, was a favored member of the family, receiving support from the father and the family corporations which he controlled. Eventually, due to the son's serious financial difficulties resulting from the failure of various business ventures, the father cut the son off from receiving the use, support and benefits from the assets of the family corporations which his other siblings received. After a failed attempt at reconciliation, this suit followed.

The primary issues involved in this dispute require the court to determine whether the plaintiff comes into court with unclean hands due to his past participation in the same types of acts which he relies on in support of his complaint; whether Georgia law permits a direct recovery to the shareholder on the facts present; whether federal or state law governs the bringing of a derivative action pursuant to Federal Rule of Civil Procedure 23.1; and whether under Georgia law plaintiff has standing to sue on behalf of various of the West family corporations, where plaintiff is not a direct shareholder of record.

The purpose for these reorganizations, which began in 1974, allegedly was to ensure Charles, Sr.'s control of the West family corporations, allow him to name all directors and to appoint the officers for each West family corporation. Charles, Sr. is the chairman of the board of each West family corporation. Plaintiff argues that Charles, Sr. has acted to squeeze out or oppress plaintiff as a minority shareholder. The alleged purpose of this squeeze-out "is to deny the minority shareholder a fair return on his ownership interest in the corporation or force the minority shareholder to sell his stock to the controlling shareholder for less than its true value or both."

Defendants argue that they have never denied plaintiff a fair return on his ownership interests in the West family corporations, and, in fact, plaintiff has used his West ownership interests on numerous occasions for personal gain. Defendants note that there are no buy-sell agreements, shareholder agreements, by-law provisions or other arrangements which would restrict the sale or transfer of plaintiff's stock interest in the various West family corporations. "Each stockholder of these corporations is free to sell or otherwise transfer his or her shares without restraint to any person for any price or consideration." Plaintiff has on previous occasions freely transferred shares of his West family corporations stock to other persons and on two occasions has transferred and assigned to lending institutions shares of West Lumber Company stock owned by the plaintiff as security for loans. These loans totaled several hundred thousand dollars and were used in connection with plaintiff's personal business ventures, allegedly unrelated to any West corporation activity. Other than the aforementioned transactions, it appears that plaintiff has made no effort to sell his ownership interest in the West family corporation.

Three motions for summary judgment are currently pending before the court.1 Plaintiff has moved for summary judgment concerning the affirmative defenses of set-off, estoppel and unclean hands asserted by the defendants. Defendants have also moved for summary judgment concerning the affirmative defenses of set-off, estoppel and unclean hands. The defendants have also filed a motion seeking partial judgment as to counts one and two of plaintiff's complaint based on a judgment on the merits concerning a number of transactions which plaintiff alleges represent fraudulent conveyances of corporate assets in his complaint.

Subsequent to the filing of the parties' original motion for summary judgment concerning affirmative defenses, the parties agreed as to plaintiff's liabilities regarding the issue of set-off.2 As of January 31, 1989, plaintiff acknowledges owing the various defendants approximately a total of $597,781, including principal and interest, for various transactions taken on plaintiff's behalf by various West corporate entities.3 The parties have agreed that no other transactions requiring set-off would be considered or raised. Thus, the court considers the issue of the set-off affirmative defense settled.

The court finds that the interests of equity dictate that plaintiff be barred from seeking a direct recovery from defendants because he has received significant personal benefit to the detriment of various West family corporations from his participation in substantially similar transactions and, therefore, comes into court with unclean hands. Nonetheless, the interests of fairness also dictate that plaintiff, who has acknowledged the personal benefits he has received from the West corporate entities in the past, be permitted to pursue derivative relief on behalf of the corporations in which he has an interest. Should the underlying transactions at issue be found to be fraudulent transfers or a wasting of corporate assets, this remedy permits the corporations to be made whole and all shareholders to receive their pro rata share of these benefits, without affecting the organization, operation or structure of the corporate entities. Because the court has found that plaintiff is barred from seeking a direct recovery, the court need not address the issue of the permissibility of direct recovery relief on the facts present under Georgia law.

Concerning the applicability of federal or state law to the issue of standing in a shareholder derivative suit, the court finds that where the claims are based on state substantive law, as is the case here, state law applies. Therefore, plaintiff must be a shareholder of record to pursue his derivative claims. Nonetheless, the court finds that the existing law in this circuit and for the State of Georgia permits shareholders to initiate multiple derivative actions. This outcome is particularly appropriate where, as here, the ownership and control of the various corporations at issue are centrally held by the same entity. Therefore, plaintiff may sue on behalf of all West family corporations where he is a direct or derivative shareholder of record.

A. Summary of Contentions

Plaintiff Arthur Davidson West brings a shareholder derivative suit pursuant to the 1982 Georgia Business Corporation Code, O.C.G.A. ? 14-2-101, et seq.4, seeking both direct and derivative monetary relief along with equitable relief for alleged breach of fiduciary duties on the part of three corporations in which the plaintiff owns stock?€”West Lumber Company, West Enterprises, Inc., and West Equipment Company?€”as a result of the waste, fraud, mismanagement, and misappropriation of the corporation's assets.5

Pursuant to plaintiff's amended complaint and subsequent letter amendments, plaintiff has alleged approximately fifty-two specific transactions or events representing the alleged misuse and waste of corporate assets. Defendants, as part of their affirmative defense, have cited fifteen similar transactions in which plaintiff was a participant. All the transactions in question can essentially be grouped into three types: transactions involving real property, loan transactions, and personal or employee services or expenses transactions. The time frame for the transactions discussed in plaintiff's complaint runs from January 1, 1985 to July 25, 1988, the date plaintiff's complaint was filed. The time frame for the transactions referred to by the defendants in support of their affirmative defenses runs from 1972 to May 1987.

In count one of plaintiff's amended complaint, plaintiff seeks an accounting of the books and records for the West family corporations6 and a direct recovery of money damages against Charles B. West, Sr., for his alleged breach of duty in exercising his position as chairman of the West family corporations.7 In count two plaintiff seeks the forced liquidation of the appropriate West family corporations8 or in the alternative to have the court direct the West family corporations or Charles B. West, Sr., to purchase all outstanding stock owned by plaintiff in the West family corporations...

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2 cases
  • Boone v. Corestaff Support Servs., Inc.
    • United States
    • U.S. District Court — Northern District of Georgia
    • 17 Octubre 2011
    ...192 (1977). “Unclean hands generally prevents the court from even considering the merits of plaintiff's claims.” West v. West, 825 F.Supp. 1033, 1049 (N.D.Ga.1992) (citation omitted). To establish the defense of unclean hands, a defendant must: “First, ... demonstrate that the plaintiff's w......
  • Boone v. Corestaff Support Serv. Inc.
    • United States
    • U.S. District Court — Northern District of Georgia
    • 3 Agosto 2011
    ...99, 105 (1977). "Unclean hands generally prevents the court from even considering the merits of plaintiff's claims." West v. West, 825 F. Supp. 1033, 1049 (N.D. Ga. 1992) (citation omitted). To establish the defense of unclean hands, a defendant must:"First, . . . demonstrate that the plain......

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