TMX Finance, LLC v. Goldsmith, 352 Ga. App. 190 (Ct. Ap. Ga. 2019).
Ousted owners of ICOT Holdings, LLC and ICOT Hearing (collectively, “ICOT”) filed a direct action against Young, a guarantor and former co-member of ICOT, in addition to his web of companies, alleging breach of a limited liability company’s operating agreement, breach of fiduciary duty, fraud, among other claims. The defendants filed a motion to dismiss the plaintiff’s complaint or, in the alternative, for judgment on the pleadings. The trial court entered orders denying the defendants’ respective motions and the defendants appealed.
Prior to the incidents at issue in this case, the plaintiffs, Goldsmith and Jue, together held a majority interest in ICOT. In August 2015, Young began personally lending money to ICOT. Knowing that the goal of the plaintiffs was to sell ICOT to a third-party for tens or hundreds of millions of dollars in the near term, Young repeatedly told plaintiffs to continue to grow at a rapid pace and assured them that he would provide more funding. On March 16, 2016, ICOT entered into a restructuring agreement under which Young loaned additional funds to ICOT and guaranteed two bank loans. In connection with the restructuring, the parties also executed an Amended and Restated Operating Agreement for ICOT and memorialized a Membership Interest and Purchase Option Agreement, whereby Young acquired the power to appoint one of three members of the board of ICOT, purchased membership units from several minority members of ICOT as well as from Goldsmith and also obtained one-year options to purchase additional units from several minority members and from Goldsmith. Following the restructuring, the plaintiffs still retained their controlling interest in ICOT.
The plaintiffs alleged that subsequent to the restructuring, Young devised a scheme to obtain a controlling interest in ICOT, not by legitimately exercising his options but by causing a funding crisis at an opportune moment. For example, plaintiffs alleged that Young (i) derailed two reputable capital providers from providing funds to ICOT so that Young could use ICOT’s ongoing cash needs as leverage, (ii) delayed a prospective sale of ICOT for $100-$250 million because the plaintiffs still had a majority interest in the business, (iii) agreed to guarantee a line of credit necessary to continue operating the business but refused to sign the guarantee, (iv) brought in his personnel from his other companies under false pretenses of inspecting ICOT’s books and operations, but for the real purpose of learning ICOT’s operations for an upcoming takeover, and (v) wrongfully appointed his acquaintance to the board of managers by misrepresenting to plaintiffs that the bank providing the line of credit required that specific appointment. After all these incidents, Young and his acquaintance voted in favor of removing Jue from the board of managers and diluted the plaintiffs’ membership interests in ICOT by issuing a capital call without adequately noticing the plaintiffs of their ability to contribute pro rata. After Young obtained a majority interest in ICOT, he allegedly brought in the same personnel who had previously inspected ICOT’s books and operations to run ICOT for him. The plaintiffs subsequently filed the direct action against the defendants.
The Court of Appeals affirmed most of the trial court’s rulings dismissing the defendant’s motion to dismiss. With respect to the plaintiffs’ right to bring a direct action, the court held that, although generally the dilution of shares and voting power does not constitute a separate and distinct injury required to bring a direct action, interest holders may maintain a direct action for redress of wrongs constituting a direct fraud upon them. The court also found that the plaintiffs’ adequately alleged facts showing that the defendant carried out an opportunistic scheme to oust the owners by creating a funding crisis via the facts alleged above, and affirmed, for the most part, the trial court’s dismissal of the defendant’s motion to dismiss. The court reversed only the trial court’s ruling with respect to the plaintiffs claim for breach of the Membership Interest and Purchase Option Agreement on the basis that a plain reading of the agreement reflected that the agreement did not exchange the purchase options for Young’s compliance with ICON’s operating agreement (even though the plaintiff sufficiently alleged facts showing Young breached the operating agreement), but for cash and the defendants’ agreement to fund a line of credit (which the plaintiff did not allege was breached).
Contributed by Jeff Dutson of King & Spaulding LLP