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Archive for July, 2012

Georgia Court Raises Standard for Whistleblower Actions

Posted on: July 30th, 2012

By: Kelly Morrison

The Georgia Court of Appeals, in Fulton County v. Colon,  recently issued a ruling on whistleblower lawsuits, which may significantly narrow the scope of actions that can be brought against governmental entities by disgruntled employees. 

The Court of Appeals held that whistle-blower protection is limited to complaints which are related to a state-funded program or operation under the jurisdiction of the public employer. 

This opinion increases the burden on would-be plaintiffs, by forcing them to point to complaints related to a program that is funded at least in part by the state, instead of making generalized allegations of fraud, waste, or abuse.

Federal Court Changes Liability Standard for Georgia’s Directors and Officers

Posted on: July 30th, 2012

By: Mary Anne Ackourey and Kelly Morrision

In the wake of the mortgage housing crisis, more banks have failed in Georgia than in any other state.  A reflection of this troubling statistic is that a number of cases have been filed by the Federal Deposit Insurance Corporation (FDIC) against bank officers and directors.  These cases allege personal liability due to their alleged breach of fiduciary duty.

In a recent ruling, FDIC v. Skow, et al., Northern District of Georgia Judge Steve C. Jones took advantage of the proliferation of FDIC litigation to clarify Georgia’s Directors and Officers (D&O) liability standards for breach of duty claims.  These claims arise not only in the context of bank failures, but also in cases of bankruptcy, when a company is sold, or when a business decision is alleged to have lost the shareholders substantial stock value.

After summarizing the case law interpreting the business judgment rule under Georgia law, Judge Jones found that directors and officers are shielded from liability for “ordinary negligence”—which encompasses claims that directors or officers were “careless” or “lackadaisical” in the performance of their duties.

Specifically, Judge Jones noted that Georgia’s business judgment rule, “affords an officer the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion.” Thus, “allegations amounting to mere negligence, carelessness or ‘lackadaisical performance’ are insufficient.”   Finding this principle determinative, the court held that claims against directors and officers for ordinary negligence, as well as claims for breach of fiduciary duty based on ordinary negligence, are precluded by the business judgment rule under Georgia law.

Judge Jones also held, however, that the business judgment rule does not protect “grossly negligent” acts and omissions by directors and officers.  The Court noted that the legal definition of “gross negligence” is arcane and unhelpful, referencing “the common sense” exercised by even an “inattentive man.”  Importantly, Judge Jones’ opinion clarified that gross negligence, in a business judgment rule context, is fairly synonymous with illegal conduct. 

For instance, in the case before Judge Jones, the FDIC alleged the directors and officers instituted lending policies which directly circumvented Georgia law regarding lending limits.  Indeed, several of these allegations already have led to federal criminal charges, to which two former directors have entered a guilty plea.

This holding is important for directors and officers of any bank or corporation, as it sets out conduct that cannot form the basis of a typical D&O suit, and therefore are subject to a motion to dismiss.  Cases dismissed through an early motion of this type avoid the expense and hassle associated with lengthy litigation.  Although in this case, some claims survived because of the alleged illegal conduct of the officers and directors (which stated a claim for “gross negligence”), the case makes clear there is a relatively high bar to bring such a claim.  The standard articulated by Judge Jones offers an argument to officers and directors in future cases that their case should be dismissed, because their conduct did not approach the criminal ambit of “gross negligence,” and demonstrated at most, a lack of care protected by the business judgment rule.

Extreme Limits of Protected Speech for “Symbolic” Nudity?

Posted on: July 23rd, 2012

By: Sun Choy

A Portland judge recently ruled that a man who stripped naked at an airport to protest TSA screening is not guilty of indecent exposure charges, because “symbolic” nudity is protected free speech under Oregon law.  As reported by The Portland Mercury, “the judge determined that [the defendant’s] derobing was a legitimate protest.”  I question whether such conduct is protected speech under federal law, because public nudity is generally not protected under the First Amendment.  With the acquittal, however, I would not be surprised if the man pursued a civil claim against the arresting officer(s).  While the sensational nature of the case grabbed national headlines, it should serve as a reminder that law enforcement officers need to carefully consider whether the First Amendment protection of free speech is implicated before making an arrest.

Georgia Court of Appeals: General Conditions Costs and Interest Cannot Be Included in Claim of Lien

Posted on: July 12th, 2012

By: Kamy Molavi

On July 11, 2012, the Georgia Court of Appeals issued an opinion in the case of 182 Tenth, LLC v. Manhattan Construction Company (2012 WL 2819414).  The Court ruled that “items of general conditions costs described in the payment applications were not lienable because they were not labor, services, or materials which actually went into and became a part of the property.”  The Court based its decision on an interpretation of prior case law to the effect that liens apply only to “work and material or machinery [which] have increased the value of the realty by becoming a part thereof.”

Further, the Court found that “interest due on the unpaid payment applications was not a lienable item.”  Previously, the Court had held that interest may be recoverable.

The case related to a contract for the construction of a condominium complex.  The parties to the contract were Manhattan Construction Company and 182 Tenth, LLC, which was not the owner of the property.  Manhattan received some payment for its work under the contract, but apparently it stopped work after seven (7) of its applications for payment, in the combined amount of $2,126,148, were unpaid.  Manhattan obtained a default judgment against 182 Tenth, LLC for $4,886,606, which included $2,126,148 for unpaid amounts due under the contract.

The Court of Appeals ruled that the amount of the default judgment merely provided a maximum amount for the lien, and shifted the burden to the owner to prove that the default judgment included an amount that was not lienable.  Surprisingly, the Court nonetheless held that, “[e]ven though the amount of Manhattan’s judgment against [the property owner] was proved and not contested, this was not conclusive or prima facie proof of Manhattan’s right to a lien in the full amount of the judgment. The burden remained on Manhattan to prove the lien amount to which it was entitled by producing evidence of lienable items included in the judgment against [the property owner].”  Presumably, at the end of that sentence the Court intended to refer to the judgment against 182 Tenth, LLC.  The Court went on to exclude from the claim of lien those amounts it attributed to general conditions costs.

This case has significant implications.  If it is not challenged and overturned, a general contractor will not be able to rely on the agreed amount of its contract to file a mechanics lien in Georgia.  It will be required to parse the amount owed under the contract to exclude general conditions costs and possibly other amounts.  Moreover, there is no apparent basis to exclude subcontractors from this outcome.  The implications for construction managers could be monumental.

Although the Court did not address certain other costs, the logic upon which the opinion was founded could suggest there is no lien for the contractor’s profit or for other costs such as testing, safety, engineering services, preparation of shop drawings, and the like.  Items such as freight and vendor discounts may be questioned.  This is because those costs, although traditionally included in the contract price, may not constitute “work and material or machinery [that] increased the value of the realty by becoming a part thereof,” according to the Court.

Georgia Court of Appeals: General Conditions Costs and Interest Cannot Be Included in Claim of Lien

Posted on: July 12th, 2012

By Kamy Molavi

On July 11, 2012, the Georgia Court of Appeals issued an opinion in the case of182 Tenth, LLC v. Manhattan Construction Company (2012 WL 2819414).  The Court ruled that “items of general conditions costs described in the payment applications were not lienable because they were not labor, services, or materials which actually went into and became a part of the property.”  The Court based its decision on an interpretation of prior case law to the effect that liens apply only to “work and material or machinery [which] have increased the value of the realty by becoming a part thereof.”  (more…)