Opinion ID: 553321
Heading Depth: 2
Heading Rank: 4

Heading: The Pelletier/Hurst Group Transaction.

Text: 19 1. Pelletier Negotiates to Obtain the Hurst Group's Stock and Culpepper's Control of House of Travel. 20 In early December 1984, Pelletier heard from Culpepper and others that House of Travel was in serious financial trouble and that the Hurst Group wanted to sell its interest in the company. (Culpepper did not know that the Hurst Group had sold its shares to TI.) Pelletier, who owned a local travel agency, Travel Agency Group, believed that House of Travel, which still enjoyed an excellent reputation in the Atlanta area, had great potential and would be a good investment. 14 21 Pelletier promptly contacted the Hurst Group and found that it was willing to sell its shares. He did not want to acquire a minority interest in the company (the Hurst Group ostensibly held 40%, and Culpepper 50%, of House of Travel's shares), however, unless he could also acquire from Culpepper the power to manage the company's finances and day-to-day operations--powers that Culpepper possessed as House of Travel's president. He therefore asked Culpepper whether Culpepper would be willing to transfer such powers to him if Pelletier bought the Hurst Group's shares and obtained additional capital for the company. Pelletier thought that Culpepper would agree to do this because Culpepper had said that he was fed up with the Hurst Group's practice of using company funds to pay their personal obligations and wanted them out. 15 Pelletier also asked Culpepper whether he would agree to a neutral board of three directors, consisting of Pelletier, Culpepper, and an independent third party chosen by them. 16 (Apparently, Pelletier, unlike the Hursts, did not believe that the affirmative vote of all three directors was necessary for the board to act. He later changed his mind, though, concluding that to neutralize Culpepper's vote the board of directors would have to be increased to four. See infra p. 1478.) 22 Culpepper indicated a willingness to do these things, and Pelletier said that he would have his attorney draw up a management agreement, reducing their understanding to writing. Following his discussion with Culpepper, Pelletier gave his notes of the discussion to Frank M. Conner III, an associate with the Alston & Bird law firm in Atlanta, and instructed Conner to draft a written agreement that would accomplish his objective. 23 2. Pelletier Buys the Hurst Group's Stock. 24 On December 29, Pelletier acquired the Hurst Group's interest in House of Travel, pursuant to a stock purchase agreement Conner drafted and the parties signed that day. The agreement recited that, upon its execution, Pelletier became the owner of the Hurst Group's House of Travel stock. In payment for the stock, Pelletier gave the Hurst Group $10,000 in cash, a check for $82,600, which the Hurst Group was to hold in escrow until January 15, 1985, and a promissory note in the sum of $50,000, payable on January 15, 1986. Pelletier, in turn, received the following: an affidavit executed by William Charles Hurst (in whose name the stock certificate for the Hurst Group's shares had been held) stating that House of Travel should issue a new stock certificate to Pelletier to indicate his acquisition of the Hurst Group's interest in the company; 17 the resignations of the two Hursts from their positions as officers and directors of House of Travel; and the Hurst Group's promise to use its best efforts to obtain releases for House of Travel from certain debts. It was agreed that Pelletier would not deliver the Hursts' resignations to the company, and the resignations would remain secret, until Pelletier had entered into a written management agreement with Culpepper. 25 Finally, in a subsidiary agreement, which, for obvious reasons, was not to be disclosed to Culpepper, the Hurst Group agreed to use its best efforts in pursuing its state court claim against Culpepper for the specific performance of their October 7, 1983 stock purchase agreement, and to allow Pelletier to select the lawyer to represent the Hurst Group in prosecuting the case. If, in that case, the Hurst Group obtained a decree requiring Culpepper to tender his House of Travel shares to the Hurst Group, then Pelletier would purchase these shares from the Hurst Group for $1000. 18 26 Pelletier wanted the subsidiary agreement as a means of protection; he did not trust Culpepper and, as he later testified when deposed in this case, he might [have been] foolish [to] think[ ] that it was going to be so easy to get Culpepper to agree to what he already agreed to; in other words, to get it on paper. Thus, by gaining control over the Hurst Group's prosecution of its suit against Culpepper and, if the suit was successful, an additional 40% of House of Travel's outstanding shares, Pelletier minimized the negative consequences of Culpepper's refusal to agree on paper. 27 3. Pelletier Fails to Gain Control. 28 With the stock purchase agreement and the secret subsidiary agreement in hand, Pelletier and Conner met with Culpepper on January 8, 1985, at Conner's law office, to discuss the management agreement Conner had drafted at Pelletier's request. Zweifel, whose law firm, Lokey & Bowden, represented House of Travel, attended the meeting to advise Culpepper whether the agreement Pelletier would be presenting would serve House of Travel's best interests and, further, would be consistent with the company's charter and bylaws. Pelletier had never met, or even heard of, Zweifel and thought that Zweifel was there to represent Culpepper. We accept Pelletier's interpretation of Zweifel's role for purposes of deciding this appeal: at the meeting, Zweifel acted as counsel for both Culpepper and House of Travel. 29 Zweifel arrived at Conner's office ahead of Culpepper and Pelletier, and Conner handed him a draft of the agreement Pelletier had asked him to prepare. Zweifel read the draft and told Conner (before Culpepper and Pelletier appeared) that Culpepper would never sign the agreement. For one thing, the draft provided no consideration flowing from Pelletier either directly or indirectly (through House of Travel) to Culpepper. 30 Conner's draft, in its preamble, stated that Pelletier was in the process of consummating the acquisition of [the Hurst Group's] stock, but that [p]rior to consummating the acquisition of the [Hurst Group's stock], it [was] necessary for Pelletier to enter into an agreement with Culpepper, i.e., the agreement Conner had drafted. This quoted language indicated, falsely, that Pelletier had not yet purchased the Hurst Group's stock; actually, as we have noted, Pelletier had bought the stock ten days earlier, on December 29, 1984, pursuant to the stock purchase agreement Conner, himself, had prepared. 19 31 As soon as Pelletier and Culpepper arrived at Conner's office, Pelletier made his presentation. He predicted an optimistic future for House of Travel if Culpepper signed the management agreement Conner had drafted and if Pelletier's purchase of the Hurst Group's stock went through. Pelletier knew, of course, that he had already bought that stock, 20 but he wanted Culpepper, and Zweifel, to believe that his deal with the Hurst Group was still in the negotiation stage. 21 After Pelletier finished his presentation, he summarized the management agreement Conner had prepared. Zweifel then commented on the document. He said, quite bluntly, that the proposed agreement was not what [House of] Travel needed. At this point, Culpepper said that he wanted to confer privately with Zweifel, and they withdrew to another room. There, Zweifel advised Culpepper not to sign the document, explaining that the agreement was one-sided: Pelletier would not be obligated to do anything for Culpepper or the company. 22 Culpepper decided to follow Zweifel's advice, and they returned to Conner's office and informed Pelletier and Conner that their negotiations had ended. At this point, Pelletier abandoned his efforts to get a management agreement from Culpepper; to accomplish his objective, the managerial control of the company, Pelletier would use the courts--in particular, the courts' power to issue injunctions and temporary restraining orders. 32 4. Pelletier Goes to Court to Gain Control. 33 On January 9, the day after Culpepper refused to sign the contract Conner had prepared, Pelletier wrote Peter Q. Bassett, one of the partners in Conner's law firm who specialized in litigation. Attached to Pelletier's letter were a series of exhibits, including Pelletier's December 29, 1984 stock purchase agreement with the Hurst Group and a statement entitled: Facts Regarding Buckhead House of Travel. The letter and the exhibits, collectively, informed Bassett that Pelletier had purchased the Hurst Group's House of Travel stock on December 29, 1984; that Culpepper had induced Pelletier to purchase the stock by telling Pelletier that, if Pelletier bought the Hurst Group's stock, he would be willing to give him control over the financial affairs of the company and its day-to-day operations; that Pelletier had Conner prepare a formal agreement to this effect; and that when Conner presented the agreement to Culpepper on January 8, 1985, Culpepper refused to sign it. The letter and exhibits also informed Bassett of the suit the Hurst Group had brought against Culpepper in state court, seeking the specific performance of Culpepper's contractual obligation to sell it 40 of his House of Travel shares, and that the Hurst Group had given Pelletier the right to control the prosecution of that suit with a lawyer of his choice. 34 In his letter, Pelletier instructed Bassett to proceed in this matter as aggressively and expeditiously as possible, and to consider the following courses of action. First, Pelletier instructed Bassett to consider instituting a judicial proceeding to have a receiver immediately appointed to take over House of Travel's operations. Alternatively, Bassett was to consider asking the court to appoint a Provisional Director for the company. This would give the company four directors--Culpepper, Charles and Leon Hurst, whose resignations Pelletier told Bassett to sit on so that they could continue to function as Pelletier's nominees, and the provisional director, who presumably would side with the Hursts, thus giving Pelletier the 75% vote he thought House of Travel's bylaws required before the board of directors could act. 23 Second, Pelletier instructed Bassett to consider bringing on behalf of Langston, not Pelletier, a shareholders' derivative action against Culpepper on grounds of misfeasance and R.I.C.O. (if we can substantiate any criminal acts). Third, Pelletier instructed Bassett to [c]ommence depositions immediately in the Hurst Group's suit against Culpepper for specific performance. In giving Bassett this instruction, Pelletier was apparently exercising the right the Hurst Group had given him in the December 29 subsidiary agreement to control the prosecution of that suit. 35 Fourth, and finally, Pelletier instructed Bassett, as economic pressure, to have several of [House of Travel's] corporate lenders place [it] in default. Pelletier thought that this might cause Culpepper to accede to his demands. Pelletier added that making Culpepper deal with [the Hursts and Robinson] is probably the greatest pressure we can place on Culpepper. Economic pressures would come a close second. 36 On the same day, January 9, that Pelletier was instructing Bassett on how to proceed against Culpepper, Conner was communicating with Zweifel by telephone. Conner called Zweifel to inform him that Pelletier had purchased the Hurst Group's interest in House of Travel. 24 He took Zweifel by surprise; Zweifel thought that Culpepper's refusal to sign the management agreement Conner had presented to him on January 8 had caused Pelletier to abandon his plan to purchase the Hurst Group's stock. 37 After informing Zweifel that Pelletier had acquired the Hurst Group's interest, Conner asked Zweifel to issue Pelletier a stock certificate for his 40 shares. Conner told Zweifel that he did not have the Hurst Group's stock certificate; William Charles Hurst had lost it. Conner said that Hurst had given him an affidavit, stating that he had lost the certificate, and asked Zweifel whether he would honor the affidavit and issue Pelletier a certificate. Zweifel said that he would if Conner would write him a letter confirming that this stock transaction had taken place and enclosing Hurst's affidavit. Conner wrote Zweifel the next day, January 10, as requested. 38 A day or so after Zweifel received Conner's letter and Hurst's affidavit, he prepared a new certificate in Pelletier's name and asked Leon Hurst, House of Travel's secretary, to sign it. Leon Hurst told Zweifel to mail the certificate to his attorney, Brant Jackson, and stated that he would sign the certificate at Jackson's office and deliver it to Pelletier. On January 15, Zweifel drafted a letter to Jackson, stating that he was forwarding a House of Travel stock certificate to him at Leon Hurst's request, but the next day, before Zweifel could mail the letter, Bassett called him to say that he had just filed suit (which the parties, and therefore we, refer to as the shareholders' derivative suit) in the Superior Court of Fulton County, Georgia, against House of Travel, Culpepper, and the two Hursts. The plaintiffs, Bassett said, were Pelletier and Langston. 39 Bassett's complaint contained six claims for relief. Three of these were claims Pelletier had instructed Bassett to pursue: count one of the complaint requested, on behalf of both plaintiffs, the appointment of a receiver pursuant to Ga.Code Ann. Sec. 9-8-1 (1982); 25 count two requested, again on behalf of both plaintiffs, the appointment of a provisional director pursuant to Ga.Code Ann. Secs. 14-2-940, -941 (1989); 26 and count three, a shareholders' derivative claim brought only by Langston, sought money damages against Culpepper for violations of the Georgia RICO statutes, Ga.Code Ann. Secs. 16-14-1 to -15 (1988). Of the remaining counts, which were lodged against Culpepper alone, one count sought money damages for both plaintiffs on the ground that Culpepper had breached fiduciary duties and other duties owed by Culpepper as shareholder and President, to Plaintiffs. The second count sought money damages for Pelletier for Culpepper's breach of an oral promise he had made to Pelletier, prior to Pelletier's December 29, 1984 acquisition of the Hurst Group's House of Travel stock, to transfer to Pelletier complete financial control of House of Travel and supervisory responsibility over its employees. The third count sought money damages for Pelletier on the ground that Culpepper never intended to perform the oral promise referred to in the preceding count and thereby fraudulently induced Pelletier to purchase the Hurst Group's stock. 40 In addition to the relief described above, Bassett's complaint asked for a temporary restraining order against Culpepper, requiring that Culpepper maintain the status quo in House of Travel's day-to-day operations and that he make the company's books and records available for inspection by the company's officers, directors, and shareholders. The complaint also prayed that the court convert the temporary restraining order into a preliminary and, then, a permanent injunction. 41 Meanwhile, Pelletier apparently had second thoughts on who should prosecute the Hurst Group's specific performance action against Culpepper--Bassett or another attorney. Pelletier decided that a different attorney should handle that case, and on January 13, 1985, he contacted Herbert P. Schlanger. Pelletier told Schlanger about the case and that the Hurst Group, by contract, had given him the right to prosecute its claim against Culpepper with an attorney of his choice. Pelletier wanted Schlanger to handle the prosecution of the case. He explained that the Hurst Group would remain in the case as the party plaintiff, but only as his, Pelletier's, nominee--Pelletier, not the Hurst Group, would be Schlanger's client and would pay all of Schlanger's fees and expenses. Schlanger accepted the assignment. 42 The next day, Pelletier contacted Schlanger again, to tell him that Bassett would soon (on January 16) be filing a shareholders' derivative suit against Culpepper and House of Travel and that William and Leon Hurst would be named as co-defendants in the case. Pelletier explained that he and Langston were bringing the suit; he also explained that they would be seeking no relief of any kind against the Hursts. 27 Rather, Culpepper was their target; by having the Hursts in the case as cooperating parties defendant, they could bring more pressure on Culpepper. Pelletier asked Schlanger if he would file an appearance in the case as counsel for the Hursts and, at the same time, represent his, Pelletier's, interests in the matter. Schlanger said that he would take on this additional assignment, and for the next three and a half months, i.e., until the prosecution of the suit was stayed automatically by House of Travel's commencement of chapter 11 proceedings in the bankruptcy court, Schlanger, while ostensibly representing the Hursts, followed Pelletier's instructions and represented his interests. As Pelletier later testified on deposition in the instant case, he paid all of the fees Schlanger charged and the expenses he incurred in representing the Hursts; he and Schlanger maintained the same attorney-client relationship during the prosecution of the shareholders' derivative suit against Culpepper that they maintained during the prosecution of the Hurst Group's suit against Culpepper. In short, according to Pelletier, the Hursts were to take whatever steps were necessary to accomplish his objectives. 43 Following his conversation with Pelletier, and before Bassett filed his suit, Schlanger decided that it might be a good tactical move for Pelletier if the Hurst Group sued Culpepper in federal court for securities fraud. 28 He discussed the idea with Pelletier and one of the Hursts, and they agreed that Schlanger should file the suit. Proceeding with great haste, Schlanger drafted a complaint and showed it to Bassett--to ensure that [he] was not misstating the facts as [they] knew them at the time. Bassett found no misstatements, and, on January 16, the same day Bassett brought the shareholders' derivative action in state court, Schlanger filed suit in the federal district court in Atlanta: he named the Hurst Group as plaintiff and Culpepper as defendant. Schlanger also moved the district court to issue a temporary restraining order--an order that contained the same provisions as the temporary restraining order Bassett was simultaneously requesting the state court to issue. 44 Schlanger based his complaint, which was framed in one count, on the same transaction that gave rise to the Hurst Group's specific performance action against Culpepper, i.e., the Hurst Group's October 7, 1983 contract with Culpepper and Langston for the purchase of 80% of House of Travel's shares of common stock. Schlanger did not, however, seek Culpepper's performance of that contract; rather, he sought the recovery of money damages under 15 U.S.C. Secs. 77l (1), (2), 77q(a), and 78j(b) (1988) and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1990). 29 Schlanger alleged, in his complaint, that Culpepper, at the time he entered into the agreement, fraudulently misrepresented that he intended to discharge the obligations he was assuming and thereby induced the Hurst Group to purchase Langston's House of Travel shares. Schlanger alleged that Culpepper's conduct violated the federal securities laws and rendered him answerable to the Hurst Group for money damages under those laws. 45 The complaints in Bassett's and Schlanger's suits were filed at about the same time on January 16, around 9:00 a.m.; by 9:15 a.m., Bassett had the temporary restraining order he had prayed for in his complaint. At this point Bassett called Zweifel to say that he had just sued House of Travel, Culpepper, and the Hursts in state court and had obtained a temporary restraining order, which, among other things, prevented Culpepper from altering or removing House of Travel business documents or selling or encumbering its assets except in the ordinary course of business. During the conversation, he and Zweifel discussed the possibility of substituting a consent decree for the temporary restraining order and decided to meet later in the day to explore the possibility further. 46 They met shortly before noon; Schlanger and Culpepper joined them. The meeting, which went until late in the afternoon, resulted in a consent decree, incorporating the provisions of the temporary restraining order and describing the House of Travel records Culpepper was to produce and how he was to produce them. In exchange for the consent decree, Schlanger agreed not to pursue his request for a temporary restraining order in the federal district court, and he informed the district court that he no longer needed the order. (According to the clerk's docket sheet for the case, Schlanger told the court that the case had been settled. When, thereafter, he failed promptly to dismiss the case, the court dismissed it sua sponte without prejudice.) 47 As soon as the meeting ended, the attorneys submitted the consent decree, which had been signed by Bassett (on behalf of Pelletier and Langston), Schlanger (on behalf of the Hursts), Zweifel (on behalf of House of Travel), and Culpepper, to the superior court judge who had issued the temporary restraining order. The judge approved the decree, and it took effect that day. 48 The next morning, January 17, Schlanger, Pelletier, Leon Hurst, and Pelham Robinson appeared at House of Travel's office to examine the company's records. After a brief conversation with Culpepper and Zweifel, they began their examination. Schlanger asked to see the company's accounts receivable and several other documents, many of which would reveal the identity of most of House of Travel's clients, and Zweifel objected. Pelletier owned a competing travel agency, and Zweifel believed that to permit Pelletier access to these documents would be to disclose House of Travel's trade secrets, something he was not prepared to do. Schlanger announced that he would have the superior court settle the matter, and later in the day, he, Bassett, Zweifel, and Hamilton Lokey and Gerald Handley (partners of Zweifel's) appeared before the judge who had signed the consent decree. After hearing from counsel, the judge concluded that Culpepper and House of Travel had not been complying with the consent decree and directed them to obey it. The judge, however, understood Zweifel's concern that Pelletier not obtain the identity of House of Travel's clients, and, in the handwritten order he issued following the hearing, he provided that the names of the clients be redacted from the company's records before the records were produced for examination. The following morning, the examination of the records continued without further dispute. 49 The next significant events took place on January 25. First, Bassett amended the complaint in the shareholders' derivative suit to add a count seeking the liquidation of House of Travel pursuant to Ga.Code Ann. Sec. 14-2-1430 (1989). Bassett alleged that the company's three directors were hopelessly deadlocked, i.e., neither faction on the board, Culpepper or the two Hursts, was able to muster the 75% affirmative vote the company's bylaws required for the directors to act; that the appointment of a provisional director, pursuant to Ga.Code Ann. Sec. 14-2-941, would not alleviate the situation; that House of Travel's management, i.e., Culpepper, was wasting the company's assets; and that unless the company were liquidated, its shareholders would lose what equity they still had in the company. Bassett requested the appointment of a receiver to accomplish the liquidation. 50 Second, Schlanger, having appeared as counsel for the Hurst Group in its specific performance action against Culpepper, noticed Culpepper's deposition in that case for February 4, 1985. Schlanger used the Hurst Group's right to depose Culpepper in that case as a means of interrogating him in the two suits that had been brought on January 16--the state court shareholders' derivative suit and the federal court securities fraud suit. 30 (Both the Georgia and federal procedural rules, which dictated when the deposition of a defendant could be taken, prohibited the taking of Culpepper's deposition in those two cases for thirty days from the date, January 16, the complaints were filed unless leave of court were obtained. 31 By using the specific performance action as the vehicle for noticing Culpepper's deposition, Schlanger was able to circumvent these prohibitions.) 51 Third, Zweifel, as House of Travel's counsel, responded to Pelletier's demand that Zweifel issue him a stock certificate for the House of Travel shares he had purchased from the Hurst Group on December 29, 1984. Zweifel did so by writing Pelletier, in care of his attorney, Bassett, and, also, William Charles Hurst, in care of his attorney, Schlanger. The two letters were identical, and advised Pelletier and Hurst that a new certificate would not issue for the following reasons: (1) the allegations of the complaints in the Hurst Group's state and federal court suits against Culpepper for specific performance and for securities fraud, respectively, raised the question whether the Hurst Group actually owned any House of Travel stock, i.e., whether Culpepper's allegedly fraudulent conduct on October 7, 1983, had, in effect, vitiated the Hurst Group's purchase of Langston's shares in the company; (2) assuming that it acquired the stock, the Hurst Group had pledged the stock to Langston as security for a $26,000 promissory note, and, according to House of Travel's corporate minute book, the pledge was still in effect--Zweifel advised that until Langston assured him that the stock had been released from the pledge, he could not issue a new certificate; (3) before a new certificate could issue, William Charles Hurst would have to produce his stock certificate or, in lieu thereof, as required by Ga.Code Ann. Sec. 11-8-405(2)(b) (1982), a bond, issued by a commercial surety, in the amount of $150,000--approximately the price Pelletier paid the Hurst Group for its shares--indemnifying House of Travel for any damages it might sustain for wrongfully issuing a certificate to Pelletier; (4) the Hurst Group's certificate contained a legend which indicated that the shares represented by the certificate could not be sold or transferred unless a registration statement was filed as prescribed by federal law or the sale or transfer was exempt from registration under both federal and state law. Zweifel advised that he would not issue Pelletier a certificate unless the Hurst Group and Pelletier demonstrated that a registration statement had been filed or that the sale was exempt from registration. 52 The same day, January 25, Zweifel sent Schlanger copies of the letters he had written to Pelletier and William Charles Hurst. In the cover letter accompanying the copies, he told Schlanger that, given the uncertainty as to who owned the 40 shares at issue--Langston, the Hurst Group, or Pelletier 32 --he would not permit Pelletier or the Hursts to examine any of House of Travel's records. Zweifel added that if Schlanger insisted on such examination, he would seek direction from the superior court in the form of a clarification of the consent decree the court had signed; he indicated that he was willing to appear before the court at Schlanger's convenience. Schlanger promptly moved the superior court to hold House of Travel and Culpepper in contempt, for refusing to comply with the consent decree, and requested an emergency hearing on the matter. The hearing was never held. 53 Sometime between January 25--when he amended the complaint in the shareholders' derivative suit to seek the appointment of a receiver and the liquidation of House of Travel--and February 4, Bassett discovered that he had erred in concluding that a simple majority of House of Travel's three directors could not amend the company's bylaw that required 75% of the directors to agree before the board of directors could act. Bassett had overlooked the Georgia statute that gave a simple majority of a corporation's directors the power to amend a company bylaw that imposed a supermajority voting requirement for board action. See Ga.Code Ann. Sec. 14-2-1022(a)(2) and supra note 9. Given this statute, Bassett concluded that the two Hursts could override Culpepper's negative vote and change House of Travel's bylaws to provide that a simple majority of directors could exercise the board's powers. In short, the Hursts could strip Culpepper of his president's role, manage the company for Pelletier, and possibly make the liquidation of the company unnecessary. Bassett promptly shared his discovery with Schlanger, and they agreed that the Hursts, speaking through Schlanger, would immediately call a special meeting of House of Travel's board of directors. 33 54 On February 4, Schlanger, acting for the Hursts (and, through them, Pelletier), wrote Culpepper's and House of Travel's attorneys--Nicholas P. Chilivis, whom Culpepper had recently retained, and Zweifel--and requested that Culpepper, as company president, schedule a special meeting of the board at a time no later than February 11 for the purposes of, among other things, (1) amending the company's bylaws to change the 75% supermajority voting requirement to a simple majority voting requirement; (2) discharging the company's officers and appointing new officers; and (3) discharging the company's counsel (Lokey & Bowden), and retaining new counsel. A day or two later, Schlanger, Chilivis, and Zweifel agreed that a special meeting would take place on February 8, instead of February 11, but it was postponed to enable Pelletier and Culpepper, and their attorneys, to discuss the possibility of a settlement. They were unable to reach a settlement, and on February 11 Schlanger wrote Chilivis and Zweifel again, asking them to reschedule the board meeting for a time no later than February 15. Gerald Handley, a Lokey & Bowden partner who had been assisting Zweifel in the House of Travel matters, responded: he told Schlanger that a settlement was still possible and asked for more time. Schlanger declined to give it and, moreover, treated Handley's response as a refusal by Culpepper to reschedule the board meeting. The company's bylaws provided that, if the president refused to call a special meeting when requested by a director, any two directors could do so. On February 12, drawing on this provision, the Hursts, acting through Schlanger, noticed a special meeting for 3:00 p.m. on February 15 at the Lokey & Bowden law office. 55 The meeting took place as scheduled, but it lasted only a few minutes. Schlanger, who came with the Hursts, wanted the meeting recorded, so he brought a court reporter. Zweifel, who was there with Culpepper, objected to the court reporter's and Schlanger's presence. When the reporter and Schlanger left the room, the meeting began. Leon Hurst moved that paragraph 3.10 of the bylaws--the 75% supermajority provision--be amended to permit the board to act on a simple majority vote. William Charles Hurst seconded the motion, and it passed, Culpepper voting no. According to some corporate minutes Schlanger later prepared (based on what the Hursts told him), Leon Hurst then moved that the meeting be adjourned in accordance with paragraph 3.13 of the bylaws ... until 4:30 p.m. at the offices of Herbert P. Schlanger. The motion carried (on the Hursts' vote), and the meeting adjourned. At this point, Schlanger returned to the room and stated that the meeting would continue at his office with or without Culpepper and Zweifel and that the court reporter would be present to record the meeting. Culpepper and Zweifel attended the meeting, under protest. 56 The meeting resumed at 5:00 p.m.; the Hursts, Culpepper, and Zweifel were present. As the first order of business, Leon Hurst moved that the board invite Schlanger and Bassett to join the meeting. William Charles Hurst seconded the motion, it passed, Culpepper voting against it, and Schlanger and Bassett entered the room. Next, Leon Hurst moved that the court reporter join them. The motion passed, Culpepper again voting no. After the court reporter entered the room and began transcribing what took place, Culpepper objected to any further proceedings on the ground that the meeting had been improperly called. In his view, because the meeting at the Lokey & Bowden law office had been adjourned, it could not be resumed without three days' notice, as provided in the bylaws; consequently, any action taken at that time would be null and void. The Hursts ignored Culpepper's objection and proceeded with the agenda set forth in the written notice they had given Culpepper on February 12. Turning to that agenda, the Hursts, over Culpepper's negative vote, (1) replaced themselves as the company's vice president and secretary/treasurer with James Lurwig; (2) gave Lurwig most of Culpepper's authority as company president; and (3) replaced Lokey & Bowden with Cofer, Beauchamp, Hawes & Harrold as counsel for the company. 34 57 Following these events of February 15, a potential purchaser of House of Travel's assets appeared on the scene and for three weeks--until it became apparent that a deal could not be made--the parties put aside their differences. On March 10, hostilities resumed--at a board of directors meeting. All three directors were present, together with their attorneys--Gary P. Bunch 35 representing Culpepper and Schlanger representing the Hursts (and therefore Pelletier). Bassett also attended the meeting--to protect Pelletier's interests. The agenda was the same as the agenda set forth in the Hursts' notice of the February 15 board meeting. Over Culpepper's negative vote, the Hursts ratified the actions taken on February 15, and they went one step further: they fired Culpepper as company president and gave the office to James Lurwig. 58 On March 12, James Lurwig had his first contact with House of Travel's employees. He visited the company's Buckhead office, where most of the employees were stationed, introduced himself as the new president, and, after indicating what he expected from them, asked for their cooperation. Schlanger and Pelletier were present when Lurwig addressed the employees; the record, however, does not indicate what their participation, if any, may have been. During Lurwig's meeting with the employees, either Culpepper or Bunch made a telephone call to the Buckhead office. The receptionist took the call and, when the meeting was over, told her co-employees that Culpepper wanted to see them at the company's branch office in Smyrna. Several employees went to the branch office and met with Culpepper and Bunch. They returned late that afternoon. Lurwig was still there. They told him that they would not feel comfortable working for him, picked up their belongings, and left. 36 59 Sometime during the afternoon of March 12, Bunch telephoned Donald Rickertsen, a lawyer who specialized in bankruptcy matters. House of Travel's financial condition had been deteriorating, and the litigation pending against the company was threatening to put it under. Bunch thought that a chapter 11 reorganization might benefit the company and wanted Rickertsen's advice. After a brief conversation, they decided that a meeting that evening with Culpepper and Zweifel would be helpful. 60 They met at Zweifel's office, and Culpepper and Zweifel briefed Rickertsen on House of Travel's recent history. Zweifel advised Rickertsen that, as far as he was concerned, Culpepper was still the company's president and that his firm was still its counsel. Zweifel, of course, knew that House of Travel's board of directors had fired Culpepper on March 10; he felt, however, that the board's action was invalid. In his view, nothing the board had done at the behest of the Hursts had any validity. He considered the Hursts--who owned no interest in the company--to be Pelletier's nominees. As such, they had not been functioning as independent directors, as the law required. 37 61 After he had been briefed, Rickertsen concluded that chapter 11 proceedings would benefit House of Travel and that Culpepper, as its president, could authorize the filing of a chapter 11 petition. Acting as Culpepper directed, Rickertsen filed the petition the following day, March 13. 62 Also on March 12, TI's attorneys notified the Hurst Group by letter that TI was rescinding the stock sale agreement it had made with the Hurst Group on November 1, 1984. The letter contained an acknowledgment for the members of the Hurst Group to sign, indicating that TI had rescinded the agreement, and the attorneys asked them to sign it. On March 26, the Hursts and Robinson signed the acknowledgment, as TI had requested; TI's president, in turn, executed an assignment, which sold, assigned, and transferred the 40 shares of House of Travel stock TI had purchased on November 1, 1984, back to William Charles Hurst. 63 By admitting in writing that TI had purchased its House of Travel stock on November 1, 1984, and that TI had maintained ownership of the stock until it rescinded the purchase on March 26, 1985, the Hurst Group effectively acknowledged that it had no House of Travel stock to sell Pelletier on December 29, 1984. Pelletier had already paid the Hurst Group $142,600 for the stock ($10,000 in cash on December 29, 1984, a check for $82,600, which the Hurst Group was to hold until January 15, 1985, and a $50,000 promissory note due on January 15, 1986), and, moreover, Pelletier, representing himself as a House of Travel stockholder, had filed the shareholders' derivative suit in the state superior court. The Hurst Group had a serious problem on its hands. What if Pelletier or Schlanger, who owed his allegiance to Pelletier, found out about the TI transaction? At the very least, Pelletier would want his money back. 64 The record does not indicate when, if ever, the Hursts or Pelham Robinson informed Pelletier or Schlanger that they had no House of Travel stock to sell on December 29, 1984; all we know is that Zweifel discovered this fact in the fall of 1987, while he and his law firm were defending the suit Schlanger had brought against them on behalf of Pelletier on January 23, 1986--charging them with having breached the fiduciary duties they owed Pelletier as a House of Travel shareholder. 65 Meanwhile, Schlanger--apparently believing that Culpepper, who was still holding himself out as the firm's president despite the board's action of March 10, had convinced House of Travel's employees to leave their posts--turned once again to the courts for relief; this time, he chose the shareholders' derivative suit Bassett had filed for Pelletier and Langston against Culpepper, House of Travel, and the Hursts on January 16. On March 13, Schlanger, appearing as the Hursts' attorney, filed a cross-claim against Culpepper, seeking compensatory and punitive damages, a declaratory judgment, and preliminary and permanent injunctive relief. Schlanger alleged that, on March 10, 1985, the Hursts, constituting two-thirds of House of Travel's board of directors, had amended the company's bylaws to provide that the board of directors could act on a simple majority vote of its members (rather than the previously required supermajority vote); that, once the bylaws were amended, the board, acting on the Hursts' votes, discharged Culpepper as the company's president; that Culpepper refused to acknowledge the board's action and continued to exercise the authority of the office; that Culpepper was wasting the company's assets in a variety of ways; and that, unless restrained by an injunctive order, he would continue to injure the company. Schlanger asked the court to declare valid the bylaw amendment and Culpepper's discharge, and to enjoin Culpepper from holding himself out as House of Travel's president. Schlanger also asked for compensatory and punitive damages for the injury Culpepper had inflicted on the company. 66 As soon as he filed his cross-claim, Schlanger moved the court for a temporary restraining order, to prevent Culpepper from interfering with House of Travel's day-to-day operations. Schlanger scheduled a hearing on his motion for 2:00 p.m. that day, March 13, before the superior court judge presiding over the case, and immediately notified all counsel of record--serving them by hand copies of the notice of hearing, the Hursts' cross-claim, and their motion for a temporary restraining order. 67 The hearing was held as scheduled. Present were five attorneys: Schlanger (representing the Hursts), Bassett (representing Pelletier and Langston), Bunch (representing Culpepper), and Lokey and Handley of Lokey & Bowden (representing House of Travel). Schlanger outlined the facts he had recited in the Hursts' cross-claim and their motion for temporary restraining order. 68 5. The Bankruptcy Court Takes Control. 69 While Schlanger and the other attorneys were addressing the superior court, Rickertsen was at the federal courthouse in Atlanta; at 4:41 p.m., he filed a chapter 11 petition for House of Travel. Moments later, the superior court judge announced that he was granting the relief Schlanger was seeking, and would enter a formal written order in the morning. Shortly thereafter, Rickertsen called the judge, informed the judge that he had just filed a chapter 11 petition on behalf of House of Travel, and said that the Hursts' application for a temporary restraining order had been stayed. At that moment, the prosecution of all of Pelletier's, and Langston's, claims in that case ceased. (A few months later, after he sold his House of Travel stock to Elite Travel, Inc., Pelletier dismissed the suit with prejudice.) 70 The next day, March 14, Cofer, Beauchamp, Hawes & Harrold, having been employed by the Hursts as House of Travel's new counsel, moved the bankruptcy court to dismiss the petition Rickertsen had filed. Schlanger, appearing for the Hursts, joined in the motion. The movants alleged that the petition had been filed without House of Travel's authorization; they represented that Culpepper, who had signed the petition as the company's president, did not occupy that office at the time, and thus had no authority to speak for the company. Before the bankruptcy court could rule on the motion, the parties--Pelletier, Langston, the Hursts, and Culpepper--and Rickertsen, acting as reorganization counsel for the debtor, agreed that the Hursts would ratify the filing of the petition. They also agreed that Lurwig would manage the day-to-day operations of House of Travel as debtor-in-possession. After they reduced their agreement to writing, the Hursts ratified the filing of the petition, and the bankruptcy court rejected as moot the motion to dismiss the chapter 11 proceedings. 71