Court of Appeals Discusses Applicability of O.C.G.A. §§ 9-11-37 (a)(4) and (b)(2) to Non-Parties

The Court of Appeals clarified that O.C.G.A. § 9-11-37 (a) (4), which authorizes an award of attorney’s fees in connection with a motion to compel discovery, applies to nonparties, however, O.C.G.A. § 9-11-37 (b) (2), which authorizes an award of attorney’s fees as sanctions for violating discovery orders, does not apply to nonparties. NRD Partners II, L.P. v. Quadre Investments, L.P., A22A0595, 2022 WL 2383704 (July 1, 2022).

FACTS:

In NRD Partners, the defendant, Quadre, served requests to produce documents on nonparty NRD. Id. at *1. NRD objected to the scope of the request. Id. In July 2019, Quadre filed a motion to compel. Id. After briefing and a hearing on that motion, the trial court ordered NRD to produce documents by September 23, 2019. Id. at *2. However, that order, which was seemingly prepared by both parties, narrowed the documents ordered to be compelled from that which was requested to be compelled. Id. Quadre then filed a motion for compel against NRD stating they did not timely comply with the trial Court’s Order compelling documents. Id. On February 5, 2020, the trial court ordered NRD to supplement its production. Id. Quadre filed two more supplemental briefs in support of its motion for contempt after NRD continued to disobey the trial court’s order. Id. In September 2020, the trial court awarded attorney’s fees under both O.C.G.A. § 9-11-37 (a) (4) and O.C.G.A. § 9-11-37 (b) (2). Id.

LAW & ANALYSIS

NRD argued on appeal that O.C.G.A. § 9-11-37 (a) (4) and O.C.G.A. § 9-11-37 (b) (2) do not allow for attorney’s fees to be granted against non-parties.

Generally, “an award of attorney fees in Georgia must be authorized by statute or contract.” Bishop v. Goins, 305 Ga. 310, 311, 824 S.E.2d 369 (2019). “Inasmuch as attorney fees generally were not recoverable at common law, a statute authorizing the recovery of such fees is strictly construed.” Reeves v. Upson Regional Med. Center, 315 Ga. App. 582, 586 (2) n. 7, 726 S.E.2d 544 (2012); See also Bishop, 305 Ga. at 311, 824 S.E.2d 369.

O.C.G.A. § 9-11-37 (a) (4) and O.C.G.A. § 9-11-37 (b) (2) deal with the consequences of a failure to permit discovery. Rule 37 (a) authorizes a party to seek a court order compelling discovery. Rule 37 (b) gives a trial court a range of sanctions to be imposed when a 37 (a) order is violated.” Mayer v. Interstate Fire Ins. Co., 243 Ga. 436, 438 (2), 254 S.E.2d 825 (1979).

O.C.G.A. 9-11-37 (b) (2)

OCGA § 9-11-37 (b) (2) permits a trial court, in certain situations, to impose sanctions, including attorney fees, for noncompliance with a discovery order. It specifically identifies three categories of parties or persons who may be subject to such sanctions: (1) “a party,” (2) “an officer, director, or managing agent of a party,” or (3) “a person designated under paragraph (6) of subsection (b) of Code Section 9-11-30 or subsection (a) of Code Section 9-11-31 to testify on behalf of a party[.]” O.C.G.A. § 9-11-37 (b) (2).

The Court of Appeals relying on a 1993 case found that O.C.G.A. § 9-11-37 (b) (2) must be read “in the natural and most obvious import of its language without resorting to subtle and force construction for the purpose of either limiting or extending its operation.” Allstate Ins. Co. v. Reynolds, 210 Ga. App. 318, 318-319, 436 S.E.2d 56 (1993). Because the award of attorney’s fees under that statute is only permitted against three categories of persons and “persons” is not one of them, a non-party cannot be ordered to pay fees under that statute. Id.; NRD Partners II, L.P., 2022 WL 2383704 at *4.

The court instructed that the ruling did not find that no contempt order could be issued against a non-party, however O.C.G.A. § 9-11-37 (b) (2) did not give the trial court that power. Further, Judge McFadden emphasized that only the legislature could make the statute say anything other than the express language as currently written.

As a result of this finding, the court vacated and remanded the attorney’s fees under this statute.

O.C.G.A. 37 (a) (4)

Under O.C.G.A. § 9-11-37 (a) (2), a party may move to compel discovery responses to a document request under O.C.G.A. § 9-11-34. NRD Partners II, L.P., 2022 WL 2383704 at *4. The requirements for production of documents under OCGA § 9-11-34 apply to nonparties as well as parties to the litigation. O.C.G.A. § 9-11-34 (c); See also Sechler Family Partnership v. Prime Group, 255 Ga. App. 854, 856-857 (2), 567 S.E.2d 24 (2002).

O.C.G.A. § 9-11-37 (a) (4) permits a trial court to award reasonable expenses, including attorney fees, incurred in connection with a motion to compel discovery brought under OCGA § 9-11-37 (a) (2). It imposes different criteria for the award depending upon whether the motion to compel is granted (OCGA § 9-11-37 (a) (4) (A)), denied (OCGA § 9-11-37 (a) (4) (B)), or granted in part and denied in part (OCGA § 9-11-37 (a) (4) (C)).

Here, the Court of Appeals vacated and remanded again, however, not because the rule does not apply to nonparties but rather because the narrowing of the motion to compel order from the actual request in the motion to compel may have been a grant in part, which would not allow for attorneys fees.

Practice Tip: Verify Your Complaint If Seeking an Injunction

The Georgia Court of Appeals reminded litigants to verify your complaint if you seek an injunction in a trial court. Parnell v. Sherman & Hemstreet, Inc., A22A0069, 2022 WL 2070942 (June 9, 2022).

The failure to file a verified complaint “can be amended and does not subject the injunction to dismissal if it was supported by evidence; [but] [an] unverified petition [requesting injunctive relief] must be supported by other satisfactory proofs, i.e., affidavit, deposition, or oral testimony.” BEA Sys., Inc. v. WebMethods, Inc., 265 Ga. App. 503, 504, 595 S.E.2d 87 (2004); see OCGA § 9-10-110 (“Petitions for a restraining order, injunction, receiver, or other extraordinary equitable relief shall be verified positively by the petitioner or supported by other satisfactory proofs.”); Bracewell v. Cook, 192 Ga. 678, 678 (2), 16 S.E.2d 432 (1941).

A verification of the motion for temporary injunction is normally sufficient, however, in Parnell, the movant stated that he "do[es] hereby swear and attest that the facts set forth in the above Verified Motion for [an] Injunction and Temporary Restraining Order are true and correct to the best of [his] knowledge.” (emphasis in original). Parnell, 2022 WL 2070942 at *5.

Further the Supreme Court of Georgia has held that a verification "that the allegations contained therein are true and correct to the best of his information and belief" is not a positive verification. Carter v. Hayes, 214 Ga. 782, 782 (2), 107 S.E.2d 799 (1959); Wright v. Wheatley, 210 Ga. 35, 36 (2), 77 S.E.2d 435 (1953); Grizzel v. Grizzel, 188 Ga. 418, 422 (2), 3 S.E.2d 649 (1939); Byrd v. Prudential Ins. Co., 182 Ga. 800, 800, 187 S.E. 1 (1936).

The Court of Appeals vacated the court's grant of injunctive relief and remanded the case to decide whether the petition supported the motion by other satisfactory proofs. Parnell, 2022 WL 2070942 at *6.

Likewise, the Court of Appeals found that the Defendant that was pleaded as a "stranger" to the contract for tortious interference purposes was not actually a stranger because as a real estate agency that hired an agent with a prior employment agreement with plaintiff, which contained non-compete and non-solicit provisions, the defendant "had a legitimate financial interest in Parnell potential violating the agreement by inducing [plaintiff's] clients or potential clients to move their business from [plaintiff] to [defendant]." Id. at *8. (emphasis added)

Court of Appeals Refuses to Expand Corporate Continuation Doctrine and De Facto Merger Doctrine

The Court of Appeals offered guidance on the corporate continuation doctrine finding that the factors as stated at common law are the only factors to be considered, and that equitable considerations beyond those elements are not properly considered by a court. Pop 3 Ravinia, LLC v. Embark Holdco Management, LLC, A22A0127, 2022 WL 2234985 at *1 (June 22, 2022). Further, the Court of Appeals refused to expand the de facto merger doctrine by allowing debt forgiveness to be considered as a transfer of stock. Id. at *7.

The facts of the case, as with most cases involving the corporate continuation doctrine, are dense and convoluted. In its simplest form, Access Insurance Holdings, Inc, as tenant, entered into an agreement with CRT Ravinia, LLC, as landlord. Id. at *1. In 2016, CRT Ravinia, LLC assigned its interest to Pop 3 Ravinia, LLC (“Pop 3”), appellant. Id. That same year Access Insurance Holdings, Inc. assigned its interest to Access Holdco Management, LLC (“Access Holdco”). Id. Access Holdco administers policies and claims for insurance carriers. Id. Most of the policies Access Holdco serviced were issued by a single affiliated insurance carrier, Access Insurance Company. Id. In March 2018, Access Insurance Company was placed into a receivership and enjoined from selling insurance. Id. Access Holdco lost its primary source of revenue and defaulted on $55 million in secured debt. Id.

Access Holdco’s majority owner, private equity firm Altamont Capital Partners, LLC (“Altamont”), believed they could salvage its investment by purchasing the debt at the right price. Id. at *2. In May 2018, Altamont’s subsidiary, ACP Insurance Finance, Inc (“ACP”) purchased Access Holdco’s debt. Id. ACP, owned by Altamont, demanded over $21 million in debt payments from Access Holdco, owned by Altamont, after this purchase. Id.

In August 2018, Access Holdco initiated an assignment for the benefit of creditors in the Delaware Chancery Court (after converting from a Georgia LLC to a Delaware LLC). Id. Access Holdco then assigned its assets to fiduciary entities (“ABC Entities”), which in turn filed assignments for the benefit of creditors in the Delaware Chancery Court. Id. On the same day that the assignments for the benefit of creditors petition was filed, ABC Entities transferred Access Holdco’s assets to a newly formed company called Embark Holdco Management, LLC (“Embark”), the appellee. Id. Embark was wholly owned by Altamont albeit through four other corporate transfers/entities. Id.

HOLDING:

Pop 3 argued that Embark is liable for the rent owed by Access Holdco under successor liability as a result of the corporate continuation doctrine or the de facto merger doctrine. The Court narrowed the elements of the corporate continuation doctrine and found that a jury could conclude that Embark was a mere continuation of Access Holdco, however, because of how the sale of assets was conducted, there was no de facto merger. Id. at *7, *8.

CORPORATE CONTINUATION DOCTRINE:

The general rule is that a corporation does not become a successor simply from buying another corporation’s assets. Carswell v. Nat’l Exchange Bank, 165 Ga. 351 (4) (140 SE 755) (1927). The Georgia Supreme Court has listed four common-law exceptions to this general rule, which most jurisdictions recognize. Bullington v. Union Tool Corp., 254 Ga. 283, 284 (328 SE2d 726) (1985); Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1456 (IV) (11th Cir. 1985). Under these exceptions, a purchasing corporation is a successor liable for the seller’s debts if “(1) there is an agreement to assume liabilities; (2) the transaction is, in fact, a merger; (3) the transaction is a fraudulent attempt to avoid liabilities; or (4) the purchaser is a mere continuation of the predecessor corporation.” Bullington, 254 Ga. at 284. Accord Wilson v. Wernowsky, 355 Ga. App. 834, 845 (3) (846 SE2d 101) (2020).

The common law continuation doctrine arises when “the new corporation assumes the liabilities of the old corporation when the new corporation, with the same or similar owners, continues the old corporation’s business.” Johnson-Battle Lumber Co. v. Emanuel Lumber Co., 33 Ga. App. 517, 517 (126 SE 861) (1925). The Georgia Court of Appeals has said that the doctrine applies when the old and new corporations share both (a) “a substantial identity of ownership” and (b) “a complete identity of the objects, assets, shareholders, and directors.” Dan J. Sheehan Co. v. Fairlawn on Jones Condo. Ass’n, Inc., 334 Ga. App. 595, 597 (1) (780 SE2d 35) (2015) (cleaned up); accord Wilson, 355 Ga. App. at 845 (3).

A “substantial identity of ownership” does not require complete identity and may involve merely “some” identity of ownership. Bullington, 254 Ga. at 284. In Georgia, courts have found a substantial identity of ownership where the new corporation succeeded to the assets of a partnership, even though only three of the four partners were stockholders in the new corporation. Pet Care Professional Ctr., Inc. v. BellSouth Advertising & Publ’g Corp., 219 Ga. App. 117, 118 (1) (464 SE2d 249) (1995). Similarly, courts have held that this element was satisfied where the new entity, an LLC, was formed by one of two members in the old LLC. Wilson, 355 Ga. App. at 845-46 (3).

On the facts above, Access Holdco and Embark have a substantial identity of ownership. Both entities have the same parent company. Specifically Altamont owned two-thirds of Access Holdco and all of Embark.

The identity-of-assets-and-objects element gets at whether the new company is running a business that just looks something like the old company’s business (not enough), as opposed to continuing to run the old’s company business. See Dan J. Sheehan Co., 334 Ga. App. at 597 (1). To assess this element, courts have compared things like the old and new entities’ operations, assets, employees, management, location, vendors, and clients. See Wilson, 355 Ga. App. at 845-46 (3)

Again, on the facts above, the asset transfer resulted in a seamless continuation of Access Holdco’s business, unencumbered by certain liabilities, including those under the least at issue in the litigation. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *5. Embark was conducting the exact same business using the same assets, including computers, historical records, and email accounts as Access Holdco. Id. The management team at Embark was identical to Access Holdco as were the employees and personal, whose titles and seniority carried over from the old company. Id. Lastly, Embark carried on relationships with the same vendors as Access Holdco. Id.

Ultimately, the Court of Appeals therefore found that the trial court’s passing reference to the two elements above was an error. Id. Likewise, the inclusion of “other factors” by the trial court was an error. Id. Ultimately, no other factors are to be considered and the two elements above are the only considerations for a court. Id. This finding was based on an examination of every Georgia case applying the doctrine and finding that only the two elements were considered. See, e.g., Wilson, 355 Ga. App. at 845-46 (3); Dan J. Sheehan Co., 334 Ga. App. at 597-98 (1); First Support Svcs., Inc. v. Trevino, 288 Ga. App. 850, 853-54 (655 SE2d 627) (2007); Perimeter Realty v. GAPI, Inc., 243 Ga. App. 584, 593 (5) (c), (533 SE2d 136) (2000); Pet Care, 219 Ga. App. at 118 (1); Ney-Copeland & Assocs., Inc. v. Tag Poly Bags, Inc., 154 Ga. App. 256, 256 (267 SE2d 862) (1980); Johnson-Battle Lumber Co., 33 Ga. App. at 517. See also In re Acme, 484 B.R. at 491

Lastly, Embark attempted to make the argument that since Access Holdco was insolvent at the time of the transfer, there was no prejudice to Pop 3. The Court of Appeals rejected this argument and found that successor liability is not rejected based on insolvency. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *6.

DE FACTO MERGER DOCTRINE:

The Georgia Court of Appeals has described a de facto merger as one company being “absorbed” into another. See Perimeter Realty, 243 Ga. App. at 593 (5) (c). Four elements are required to establish a de facto merger: (1) a continuation of the seller corporation’s enterprise, which involves “a continuity of management, personnel, physical location, assets, and general business operations”; (2) “a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, [which] ultimately com[es] to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation”; (3) the cessation and dissolution of the seller corporation “as soon as legally and practically possible”; and (4) the assumption by the purchaser of “those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.” Id. (citation omitted); accord Howard v. APAC-Ga., Inc., 192 Ga. App. 49, 50 (383 SE2d 617) (1989). The second element “established if the buyer pays for the assets with its own stock and that stock ends up being held by the shareholders of the seller, so that it becomes a constituent part of the buyer.” Perimeter Realty, 243 Ga. App. at 593 (5) (c) (internal citations omitted).

The Court of Appeals found that Pop 3 failed on the second element because there was no transfer of stock as the consideration paid for Access Holdco’s assets was debt forgiveness. Pop 3 Ravinia, LLC, 2022 WL 2234985 at *7. The Court of Appeals reasoned that if they allowed the debt forgiveness to satisfy the second element they would be collapsing the de facto merger test into the continuation doctrine. Id. The Court rejected merging the two doctrines and found that Pop 3 failed under the de facto merger doctrine. Id.