Court Opinion

ID: 9855571
Source: CourtListenerOpinion
Date Created: 2023-09-24 06:27:30.165933+00
Date Added: 2024-06-11T09:36:13.232067
License: Public Domain

Miller, Judge.
Pine Creek, LLC (Pine Creek) appeals from the trial court’s partial grant of summary judgment to Pine Mount, LLC (Pine Mount) on Pine Mount’s third defense to this dissenter’s rights action initiated by Pine Creek pursuant to OCGA § 14-11-1001 et seq., the Dissenters’ Rights Article of the Georgia Limited Liability Company Act (the Act).-
Pine Creek asserts four enumerations of error. The first and fourth are that the trial court erred in granting summary judgment to Pine Mount on its third defense and that the trial court erred in denying Pine Creek’s motion to strike or dismiss Pine Mount’s third defense. Both obviously address the same issue. The second enumeration is that the trial court erred in concluding that Pine Creek violated the Operating Agreement, one of the legal bases upon which the trial court granted summary judgment on the third defense. The third enumeration is that the trial court erred in dismissing the petition to allow Pine Mount to pursue a private right of action for damages, because Pine Creek’s limited liability action complied with all relevant statutory and contractual requirements, the converse of the second enumeration of error. In summary, there are two issues before the Court: (1) whether the trial court erred in concluding that the Operating Agreement was violated, and (2) whether the trial court erred in granting summary judgment on Pine Mount’s third defense, thereby allowing its pursuit of causes of action other than dissenters’ rights.
In reviewing the grant or denial of a motion for summary judgment, we apply a de novo standard of review and consider the evidence with all reasonable inferences therefrom in favor of the party opposing summary judgment.1
So viewed, the evidence was that, from 1984 until the formation of Pine Creek on June 2, 1997, Philip Browning, Jr. (Browning) had held, through various entities, a contract or option to purchase approximately 153 acres located near the Interstate 85 and Old Peachtree Road interchange in Gwinnett County, an area of burgeoning growth and development. In the spring of 1997, nearing the expiration of the option on the property, Madison Ventures, Ltd. and John D. Stephens agreed with Pine Mount (an entity owned by Browning) to form a limited liability company to be known as Pine Creek, LLC, which company would purchase as its sole asset the 153 acres. The parties agreed Pine Mount would have a 25 percent inter*35est in Pine Creek, Madison Ventures a 37.5 percent interest, and Stephens a 37.5 percent interest. Madison Ventures and Stephens were each putting up $2.25 million to close on the property. On June 2, 1997, the parties executed an Operating Agreement for Pine Creek.
On August 27, 1997, John Stephens transferred his 37.5 percent interest in Pine Creek to Stephens, Inc. Madison Ventures consented to this transfer, but Pine Mount (Browning) was not aware of the transfer. Although acknowledging that he was listed as an individual in and signed the Operating Agreement as an individual, Stephens contended that it was a mistake. According to him, the $2.25 million put into Pine Creek came from Stephens, Inc., and the corporation was to have been the member of Pine Creek.
On September 12, 1997, Madison Ventures transferred its 37.5 percent interest in Pine Creek to Stephens, Inc., without advising Pine Mount. The purpose of the transfer was to allow Pine Creek to have part of the property rezoned without the controversy associated with Madison Ventures’ owner. On June 30, 1998, Stephens, Inc. transferred this 37.5 percent interest back to Madison Ventures, again without Pine Mount’s knowledge.
On July 7, 1998, Pine Creek closed the sale of the 153 acres to M. D. Hodges for over $10 million, thereby triggering Pine Mount’s right to dissent under OCGA § 14-11-1002 (a) (2).2 The sale was completed without calling a meeting of all members of Pine Creek, without a vote of the membership, and without the consent of Browning and Pine Mount.
Pine Creek immediately sent a notice of the sale to Pine Mount. Pine Mount disagreed with selling the property outright and wanted to develop it instead. Pine Mount also disagreed with the sale price and responded with its demand for payment of $4.4 million as the fair value of its 25 percent membership interest. In response, on September 18, 1998, Pine Creek filed its petition to determine the fair value of Pine Mount’s membership interest in Pine Creek, pursuant to OCGA § 14-11-1011 (a).
OCGA § 14-11-1002 (b) states in part:
A member entitled to dissent and obtain payment for his or her membership interest. . . may not challenge the limited liability company action creating his or her entitlement unless the limited liability company action fails to comply with procedural requirements of this chapter ... or the written operating agreement. . . .
*36Section 6.1.1.3 of the Pine Creek Operating Agreement provides that “[n]o Person may Transfer all or any portion of or any interest or rights in the Person’s Membership Rights or Interest, unless . . . the Transfer will not result in the termination of the Company pursuant to [IRS] Code Section 708.” Section 6.1.3 further provides:
The Transfer of any Membership Rights or Interests in violation of the prohibition contained in this Section 6.1 shall be deemed invalid, null and void, and of no force or effect. Any Person to whom Membership Rights are attempted to be transferred in violation of this Section shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, act as an agent of the Company, receive distributions from the Company or have any other rights in or with respect to the Membership Rights.
Pine Mount asserted as its third defense to the petition the failure of Pine Creek and its other members to comply with the procedural requirements of the Act and with the terms of the Operating Agreement, specifically Section 6.1.1.3, i.e., the breach of the prohibition against transfers that would result in the termination of Pine Creek under tax code 26 USC § 708 for tax purposes (which Pine Mount claimed occurred as a result of the September 1997 Madison Ventures’ transfer to Stephens, Inc.).
The pertinent subsections of 26 USC § 708 state:
(a) General rule. For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated. (b) Termination. (1) General rule. For purposes of subsection (a), a partnership shall be considered as terminated only if — . . . (B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.3
The crux of Pine Mount’s argument in its third defense is that the Stephens to Stephens, Inc. August 1997 transfer of 37.5 percent interest combined with the Madison Ventures to Stephens, Inc. September 1997 transfer to produce transfers exceeding 50 percent within 12 months, which under § 708 terminated Pine Creek for tax purposes. Thus, Pine Mount argues, under the Operating Agreement *37the second transfer was not only invalid,4 but also precluded Stephens, Inc. from voting its pre-existing 37.5 percent in favor of the property sale. Since Stephens, Inc. did not have the two-thirds vote needed under the Operating Agreement to effectuate a sale of Pine Creek’s sole asset,5 Pine Mount concludes that the Act was not triggered so as restrict its remedy to a dissenters’ rights valuation proceeding.
This reasoning, also advanced by the dissent, hinges on the multi-tiered conclusion that there are no fact issues as to whether (1) the transfer of Madison Ventures’ interest to Stephens, Inc. was truly a transfer of dominion and control of Madison Ventures’ interest in Pine Creek, (2) the combination of the two transfers completely invalidated the ability of Stephens, Inc. (or for that matter John Stephens) to vote any interests whatsoever in favor of the sale of the property, and (3) the consent of Madison Ventures, John Stephens, and Stephens, Inc. to the sale of property must all be ignored. We hold that fact disputes exist with regard to these issues. As the failure of any one link in this chain would require a trial, summary judgment was inappropriate. Indeed, there are factual and legal issues as to whether the Operating Agreement was violated and therefore as to whether the Dissenters’ Rights Article6 was triggered. Summary judgment was accordingly inappropriate, and a finder of fact should be allowed to consider the matter in an evidentiary trial.
Specific examples of disputed issues include at least the following. First, to conclude that the property sale was not in accordance with the Operating Agreement, Pine Mount posits that the transfer of Madison Ventures’ 37.5 percent interest to Stephens, Inc. in September 1997 was a transfer that for tax purposes under 26 USC § 708 was a sale or exchange of more than 50 percent of interest in Pine Creek within 12 months (when combined with the August 1997 transfer of John Stephens’ 37.5 percent interest to Stephens, Inc.). Based on this conclusion, Pine Mount contends that the Madison Ventures’ transfer terminated Pine Creek, thus violating Section 6.1.1.3 of the Operating Agreement.
The flaw in this analysis is that “[t]o be recognized for tax purposes, a transfer of a partnership interest must vest dominion and *38control in the transferee.”7 Here, notwithstanding its transfer of interests, Madison Ventures retained (1) the right to receive any and all cash and other distributions of assets from Pine Creek, (2) the right to use such cash or distributions to pay debts owed to it by Stephens, Inc. or other debts of Pine Creek, (3) the right to prevent, by withholding consent in its sole and unfettered discretion, Stephens, Inc.’s sale or assignment of the 37.5 percent interest to another party, and (4) control over Stephens, Inc.’s voting rights with respect to the 153 acres. Thus, there is a question of fact as to whether a transfer, so structured, vested dominion and control in Stephens, Inc.
Even assuming this was not a disputed fact issue, a second issue is whether under the Operating Agreement, the transfer of Madison Ventures’ 37.5 percent interest to Stephens, Inc. completely invalidated Stephens, Inc.’s ability to vote its pre-existing 37.5 percent interest (received from John Stephens) that it held before the Madison Ventures’ transfer. Section 6.1.1.3 of the Operating Agreement appears to invalidate only those voting rights that were wrongfully transferred (i.e., that were transferred such that Pine Creek was terminated for tax purposes).8 This would pertain only to the second transfer — the Madison Ventures’ transfer — which (when combined with prior transfers) exceeded the 50 percent rule of § 708 of the tax code.
The importance of this conclusion is that despite the alleged invalidity of the Madison Ventures’ transfer, Stephens, Inc. retained the right to vote its pre-existing 37.5 percent interest. Since Madison Ventures also approved the sale of the 153 acres, then even if the transfer of Madison Ventures’ interest was invalid (and Madison Ventures thus retained its 37.5 percent interest), the votes in favor of the sale were still 75 percent — more than enough to approve the transfer even without Pine Mount’s votes. Indeed, even if Stephens, Inc.’s receipt of interests from John Stephens was somehow invalid, the fact that John Stephens himself approved the sale would mean that regardless of which of these three parties held jointly or individually the 75 percent in interests, the written approval of all three to the sale would meet the two-thirds requirement of the Operating Agreement in any case.
In light of these factual and legal issues, we reverse summary judgment so as to allow the trier of fact to determine the merits of the petition.

*39
Judgment reversed. Ruffin, Barnes and Ellington, JJ., concur. Andrews, R J, Johnson, P. J, and Eldridge, J., dissent.

 Birnbrey, Minsk & Minsk v. Yirga, 244 Ga. App. 726 (535 SE2d 792) (2000).

 All parties agree that Hodges, a bona fide purchaser for value without notice, obtained legal title to the property. See Virginia Highland Civic Assn. v. Paces Properties, 250 Ga. App. 72, 74 (550 SE2d 128) (2001).

 If an entity does not meet the definition of “corporation” under 26 CFR § 301.7701-2, it may elect to be treated as a partnership for federal tax purposes. 26 CFR § 301.7701-3. There is no dispute that Pine Creek was treated as a partnership for federal tax purposes, making 26 USC § 708 applicable.

 Section 6.1 of the Operating Agreement provides that any person to whom membership rights are attempted to be transferred in violation of this section loses the right to “vote on matters coming before the Members, participate in the management of the Company, act as an agent of the Company, receive distributions ... or have any.other rights in or with respect to the Membership Rights.”

 Under Section 5.1.3.1 of the Operating Agreement, the sale of substantially all of the assets of Pine Creek was required to be approved by “no less than two-thirds (2/3) of the Percentages then held by Members.”

 OCGA § 14-11-1001 et seq.

 Pflugradt v. United States, 310 F2d 412, 416 (7th Cir. 1962).

 “Any Person to whom Membership Rights are attempted to be transferred in violation of this Section shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, act as an agent of the Company, receive distributions from the Company or have any other rights in or with respect to the Membership Rights.” (Emphasis supplied.)