Opinion ID: 1036966
Heading Depth: 2
Heading Rank: 1

Heading: Holdings Waived Its Right to Rescission.

Text: The Swift defendants argue that the district court should have granted a judgment as a matter of law in their favor on the claim for rescission for two reasons. First, the Swift defendants rely on the decision of the Supreme Court of Georgia in Novare Group, Inc. v. Sarif, 718 S.E.2d 304, 308 (Ga. 2011), to argue that Holdings cannot sue for the failure of Swift to fulfill a future promise and that Holdings agreed in the subscription agreement that it would not sue Swift for a failure to attain the sales projections. Second, the Swift defendants argue that Holdings waived its right to rescission when it affirmed its agreements with the Swift defendants after it became aware of the alleged fraud. Because we conclude that Holdings waived its right to rescission when it demanded and received a capital contribution from Swift after Holdings became aware of the alleged fraud, we need not reach the argument of the Swift defendants that the decision of the Supreme Court of Georgia in Sarif bars the claim for rescission based on fraudulent inducement. 13 Case: 12-11863 Date Filed: 08/09/2013 Page: 14 of 22 A party who has knowledge of fraud that gives rise to a claim for rescission cannot, after he becomes aware of that fraud, act as if the contract is not rescinded: Where a party who is entitled to rescind a contract on ground of fraud or false representations, and who has full knowledge of the material circumstances of the case, freely and advisedly does anything which amounts to a recognition of the transaction, or acts in a manner inconsistent with a repudiation of the contract, such conduct amounts to acquiescence, and, though originally impeachable, the contract becomes unimpeachable in equity. If a party to a contract seeks to avoid it on the ground of fraud or mistake, he must, upon discovery of the facts, at once announce his purpose and adhere to it. Otherwise he cannot avoid or rescind such contract. Brooks v. Hooks, 144 S.E.2d 96, 100 (Ga. 1965) (quoting Gibson v. Alford, 132 S.E. 442, 445 (Ga. 1926)). Under Georgia law, whether a party has waived its right to rescind an agreement is ordinarily a question of fact for the jury to decide, Akins v. Couch, 518 S.E.2d 674, 675 (Ga. 1999), but where “the facts and circumstances essential to the waiver issue are clearly established[,] waiver becomes a question of law,” Forsyth Cnty. v. Waterscape Servs., LLC, 694 S.E.2d 102, 110 (Ga. Ct. App. 2010) (quoting Mauldin v. Weinstock, 411 S.E.2d 370, 374 (Ga. 1991)). We agree with the Swift defendants that, as a matter of law, Holdings waived its right to rescission. Holdings acknowledges that Tracy Sayers testified that he learned of the fraud of the Swift defendants in early 2008. And Larry Galbraith testified that he believed Holdings had been defrauded in May 2008. Holdings alleged in its complaint that it demanded rescission from the Swift 14 Case: 12-11863 Date Filed: 08/09/2013 Page: 15 of 22 defendants at the board meeting of the joint venture on May 9, 2008. And Holdings describes the board meeting on May 9, 2008, as the meeting in which it “informed [the Swift] [d]efendants in no uncertain terms that it needed a ‘divorce’ from Swift Galey . . . .” Holdings acknowledges that it “specifically outlined the various fraudulent acts that [the Swift] [d]efendants committed in the inducement of the joint venture” during the board meeting on September 3, 2008. But Holdings also freely admits that it invoked a provision of the operating agreement in 2009 when it demanded that both it and Swift make separate capital contributions of $750,000 to the joint venture. There is no dispute then that Holdings discovered the alleged fraud, demanded rescission of the agreement in 2008, and then demanded and accepted a capital contribution from Swift in 2009 under the terms of that same agreement. See Hill v. Fed. Trade Comm’n., 124 F.2d 104, 106 (5th Cir. 1941). When Holdings relied on the agreement to demand and accept the capital contribution in 2009, it waived its right to rescission. “[A]n attempt to continue to operate [a venture] and to do so in a profitable manner” when a party seeks to rescind the sale of that venture is “totally incompatible with contract rescission” and constitutes a waiver of the right to rescission. Orion Capital Partners, L.P. v. Westinghouse Elec. Corp., 478 S.E.2d 382, 385 (Ga. Ct. App. 1996); see also Brooks, 144 S.E.2d at 100 (explaining that when a party entitled to rescind a 15 Case: 12-11863 Date Filed: 08/09/2013 Page: 16 of 22 contract “freely and advisedly does anything which amounts to a recognition of the transaction, or acts in a manner inconsistent with a repudiation of the contract, such conduct amounts to acquiescence,” and the party cannot rescind the contract on grounds of fraud). Because invoking an agreement to obtain a contractual benefit is “incompatible with contract rescission,” Holdings waived the right to sue the Swift defendants for rescission. See Orion Capital, 478 S.E.2d at 385. Holdings argues that we cannot disturb the finding by the jury that it did not waive its right to rescission, but “facts judicially admitted are facts established not only beyond the need of evidence to prove them, but beyond the power of evidence to controvert them.” Hill, 124 F.2d at 106. Holdings concedes that it was aware of the fraud that gave rise to its claim for fraudulent inducement by 2008 and that it demanded and accepted the capital contributions from Swift in 2009. The finding by the jury that Holdings did not waive its right to rescission is foreclosed by the legal effect of the unequivocal concessions of Holdings (in its complaint and brief) that it demanded the capital contribution after becoming aware of the alleged fraud by the Swift defendants. These concessions, which are consistent with the undisputed evidence at trial, are “no longer [] fact[s] in issue.” Id. Given these facts, Holdings waived its right to rescission as a matter of law. Holdings also argues that, under the tender rule of Georgia law, its demand that Swift make the capital contribution was not an action inconsistent with its 16 Case: 12-11863 Date Filed: 08/09/2013 Page: 17 of 22 earlier discovery of fraud and demand for rescission, but we disagree. Under ordinary circumstances, “[o]ne who seeks rescission of a contract for fraud must restore or offer to restore the consideration received thereunder, as a condition precedent to bringing the action.” Crews v. Cisco Bros. Ford-Mercury, Inc., 411 S.E.2d 518, 519 (Ga. Ct. App. 1991). But “restoration by the purchaser is not an absolute rule,” id., and a party need not “restore or tender back the benefits received under the contract” if he can “show a sufficient reason for not doing so,” id. For example, the party claiming rescission “need not tender back what he is entitled to keep, and need not offer to restore where the defrauding party has made restoration impossible, or when to do so would be unreasonable.” Id. But this rule, as the Swift defendants argue, has nothing to do with the application of the doctrine of waiver in this case. Holdings relies on our decision in Vivid Investments, Inc. v. Best Western Inn-Forsyth, Ltd., 991 F.2d 690 (11th Cir. 1993), to support its argument, but that decision is inapposite. In Vivid, the purchaser in a real estate contract sought rescission of the contract, but did not tender the property back to the seller. Id. at 692. We held that a factual dispute existed about whether the purchaser was required to tender the property. Id. at 693. The purchaser had argued that it was not required to tender the property because the tender “would be an abandonment of its investment and because the [property] is the security for debt owed by [the 17 Case: 12-11863 Date Filed: 08/09/2013 Page: 18 of 22 purchaser] to third parties.” Id. Holdings argues that the capital contribution of Swift was necessary because the joint venture was in dire financial straits and Holdings otherwise would have been forced to “abandon[ ] its investment,” see id., but Holdings misreads Vivid and the tender rule, which concern only whether a purchaser must return property it has already received from the seller, not whether a party may demand new investments under the terms of a contract after it has demanded rescission. Although the tender rule does not require a party to return all of the property it has received when doing so would be impossible, the tender rule did not permit Holdings to make a new investment in the joint venture and demand that Swift comply with future obligations under the operating agreement. B. Swift Was Not a Manager of the Joint Venture and Did Not Owe Holdings Any Fiduciary Duties. Swift also argues that it was not a manager of the joint venture and, as a matter of law, did not owe Holdings any fiduciary duties. “To support a claim of breach of fiduciary duty, a plaintiff must prove the existence of such duty. . . .” Wright v. Apartment Inv. & Mgmt. Co., 726 S.E.2d 779, 787 (Ga. Ct. App. 2012). The Georgia Limited Liability Company Act, O.C.G.A §§ 14-11-100–1109, establishes as follows that, where a limited liability company vests its management in a manager, a member of the limited liability company who is not a manager owes no duties to the company or other members: 18 Case: 12-11863 Date Filed: 08/09/2013 Page: 19 of 22 Except as otherwise provided in the articles of organization or a written operating agreement, a person who is a member of a limited liability company in which management is vested in one or more managers, and who is not a manager, shall have no duties to the limited liability company or to the other members solely by reason of acting in his or her capacity as a member. Id. § 14-11-305(1). Unless there is an operating agreement to the contrary, “management of the business and affairs of the limited liability company shall be vested in the members. . . .” Id. § 14-11-304(a); see also id. § 14-11-304(b) (“If the articles of organization or a written operating agreement vests management of the limited liability company in one or more managers, then such persons shall have such right and authority to manage the business and affairs of the limited liability company.”). And, under Georgia law, courts read written operating agreements that form limited liability companies “to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.” Id. § 14-11-1107(b). “Although the parties may impose such duties in the operating agreement or articles of organization,” the plain language of the Georgia statute establishes “that non-managing members in manager-managed [limited liability companies] owe no duties to the [company] or other members.” ULQ, LLC v. Meder, 666 S.E.2d 713, 721 (Ga. Ct. App. 2008). Holdings argues that Swift owes it fiduciary duties because it was a manager of the joint venture, but the terms of the operating agreement of the joint venture provide that Swift is only a member, not a manager, of the joint venture. See id. 19 Case: 12-11863 Date Filed: 08/09/2013 Page: 20 of 22 The operating agreement explains as follows that the management power of the joint venture will be vested in the managers: Except for situations in which the approval of the Members is expressly required by the Articles of Organization or by this Operating Agreement or by nonwaivable provisions of applicable law, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company’s business. At any time when there is more than one Manager, no one Manager may take any action permitted to be taken by the Managers, unless the action has been approved by a majority of the Managers. Along with vesting the management power in the managers, the operating agreement states that there were to be eight managers of the joint venture and that Swift and Holdings were to appoint four managers each. Based on the terms of the operating agreement, Swift is not a manager of the joint venture. Although Swift had the authority to appoint four managers for the joint venture and at least theoretically could have appointed itself, see O.C.G.A. § 14-11-304(b)(2) (stating that managers of a limited liability company need not be “natural persons”), there is no allegation in the pleadings or evidence in this record that Swift appointed itself as a manager of the joint venture. Although the district court ruled that the authority of Swift to appoint four managers gave it “de facto control” over the board of managers, Georgia law forecloses that reasoning. Unless otherwise provided by an operating agreement, a 20 Case: 12-11863 Date Filed: 08/09/2013 Page: 21 of 22 “manager” of a Georgia limited liability company “[s]hall be designated, appointed, elected, removed, or replaced by the approval of more than one half by number of the members.” Id. § 14-11-304(b)(1). In other words, Georgia law presumes that managers will be appointed by the members of a limited liability company. Georgia law also states that “a person who is a member of a limited liability company in which management is vested in one or more managers, and who is not a manager, shall have no duties to the limited liability company or to the other members solely by reason of acting in his or her capacity as a member.” Id. § 14-11-305(1) (emphasis added). Because Georgia law presumes that members will appoint the managers of a limited liability company, the act of a member appointing a manager cannot give rise to a fiduciary duty. Holdings cites Internal Medicine Alliance, LLC v. Budell, 659 S.E.2d 668 (Ga. Ct. App. 2008), for the proposition that the status of “manager” is not limited to the designation in an operating agreement, but that decision does not control this appeal. Unlike this appeal, Budell did not involve a written operating agreement. See id. at 670 (“Notably, [the parties] never entered into a written operating agreement for [the limited liability company].”). In this appeal, the operating agreement controls the terms of management and provides that only the eight members of the board of managers manage the joint venture. Where management power of a limited liability company “is vested in one or more managers,” a 21 Case: 12-11863 Date Filed: 08/09/2013 Page: 22 of 22 member who is not a manager has “no duties to the limited liability company or to the other members solely by reason of acting in his or her capacity as a member,” O.C.G.A. § 14-11-305(1), and the operating agreement of the joint venture establishes that Swift is not a manager of the joint venture.