Munford v. Valuation Research Corp. (In Re Munford, Inc.) , 98 F.3d 604 ( 1996 )

United States Court of Appeals,
Eleventh Circuit.
No. 94-9046.
Matter of MUNFORD, INC., a/k/a Majik Market, Debtor.
Danné Brokaw MUNFORD, as Executrix of the Estate of Dillard
Munford; James M. Carroll; Russell Fellows; Joseph W. Hardin;
Jay Rubel; Winston M. Blount; Herbert J. Dickson; James L.
Ferguson; Robert M. Gardiner; Richard K. Leblond; Andrall E.
Pearson; S.B. Rymer, Jr., Shearson Lehman Brothers, Inc.; DFA
Investment Dimensions Group, Inc.; State Street Bank & Trust
Company; PNC Bank, National Association; Boston Safe Deposit and
Trust Company, Plaintiffs-Appellees,
v.
VALUATION RESEARCH CORPORATION, Defendant,
Munford, Inc., Defendant-Appellant.
Oct. 28, 1996.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:94-00348-CV-GET), G. Ernest Tidwell,
Chief Judge.
Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and
MILLS*, District Judge.
PER CURIAM:
As a matter of first impression in this circuit, we hold that
11 U.S.C. § 546(e) does not bar the trustee in bankruptcy from
avoiding payments the debtor corporation made to its shareholders
in a leveraged buy-out.
FACTS
In August 1987, Dillard Munford, the founder and chief
executive officer of Munford, Inc., suggested to Munford, Inc.'s
board of directors (the board) that it sell Munford, Inc. At that
*
Honorable Richard Mills, U.S. District Judge for the
Central District of Illinois, sitting by designation.
time, Munford, Inc., a public company, operated three specialty
retailer stores: Majik Market, a chain of convenience stores;
World Bazaar, a chain of stores specializing in imported goods;
and Lee Ward's Creative Crafts, an arts and crafts chain. Munford,
Inc. also owned a majority interest in United Refrigerator
Services, Inc. (URS). Based on Dillard Munford's suggestion, the
board retained Shearson Lehman Brothers (Shearson) to evaluate
Munford, Inc.'s financial viability and its fair market value.
Following this evaluation, Shearson would make recommendations
regarding how to best maximize shareholder value in the event the
board decided to sell Munford, Inc.
In September 1987, Shearson presented a written report to the
board identifying several selling options. Shearson, for example,
opined that a sale of all of Munford's common stock would afford
Munford, Inc. the most desirable means of maximizing shareholder
value while preserving its financial viability. In contrast,
Shearson disfavored a leverage buy-out (LBO) or a leverage
recapitalization opining that Munford, Inc. would need all of its
internally generated cash flow to fund growth. Consequently,
Shearson believed that Munford, Inc. could not carry the heavy debt
load associated with a leverage transaction. After reviewing
Shearson's report, the board authorized Shearson to prepare an
offering memorandum and solicit potential purchasers for Munford,
Inc. During this same period of time, Munford, Inc. executed
severance contracts with senior officers Dillard Munford, Russell
C. Fellows, and James M. Carroll agreeing to pay these officers
severance pay in yearly installments upon the closing of the sale
of Munford, Inc. In exchange, these officers promised to continue
their employment with Munford, Inc. until it secured a purchaser.
Despite Shearson's aggressive efforts to solicit potential
purchasers of Munford, Inc., no one offered to purchase all of
Munford, Inc.'s common stock. Faced with this reality, the board
began considering LBO offers.
In January 1988, Deutschman & Co. offered to purchase Munford
Inc.'s stock in an LBO. In February 1988, the board tentatively
agreed to sell Munford, Inc. to Deutschman, but Deutschman withdrew
its offer on March 3, 1988, after performing a due diligence
examination. On May 2, 1988, Munford, Inc. sold its Lee Ward's
stores to Prudential Bache because it had failed to secure a single
purchaser for Lee Ward's stock. Later that month, the board
received an offer from the Panfida Group to purchase its Majik and
World Bazaar stores for $18.50 per share. On May 23 the board met
with its lawyers and Shearson's representatives to consider the
Panfida Group's offer. At that meeting, Munford Inc.'s lawyers
advised the board that they had consulted with Citicorp and
Citicorp confirmed its willingness to work with the Panfida Group.
Shearson also advised the board that the Panfida Group had the
backing of a company with assets in excess of $60 million. In
addition, Shearson's representative stated that he was favorably
impressed with the Panfida Group's ability to obtain financing. On
June 1, 1988, Phillip Handy, the spokesperson for the Panfida
Group, met with the board to discuss the proposal. During the
meeting, Handy informed the board that the Panfida Group had
purchased 291,177 shares of Munford, Inc. stock as evidence of its
commitment to purchase Munford, Inc. Handy also noted that the
Panfida Group intended to put additional capital into the company;
however, he also advised the board that Panfida's equity
participation would only be as much as Citibank required to finance
the purchase.
On June 17, Munford, Inc. sold its stock in URS for $45.5
million and used the proceeds to pay company debt. Also during the
month of June, the Panfida Group and Citicorp began a due diligence
examination of Munford Inc.'s business records. After discovering
potential environmental liability at some of the Majik stores, the
Panfida Group decided to reduce its purchase price from $18.50 a
share to $17 a share. The board approved the Panfida Group's new
offering price and the proposed merger agreement. The proposed
merger agreement required the Panfida Group to create Alabama
Acquisition Corporation (AAC) and a subsidiary, Alabama Merger
Corporation (AMC). The merger agreement also required the Panfida
Group through AAC or AMC to deposit the funds necessary to purchase
Munford Inc.'s outstanding stock with Citizens & Southern Trust
Company, a financial institution within the securities clearance
and settlement system.
Prior to finalizing the merger plan, AAC warranted to the
board that the post-merger Munford, Inc. would remain solvent,
would have a reasonable amount of working capital, and would have
the ability to pay its debts as they came due. After receiving
this assurance, Munford, Inc.'s lawyers prepared a detailed proxy
statement for Munford, Inc.'s 3,100 shareholders outlining the
merger agreement.1 On October 18, 1988, the shareholders approved
the merger plan. As provided in the merger agreement, each share
of common stock was converted into the right to receive the merger
price of $17 per share and extinguished the shareholders' ownership
interest in Munford, Inc. The Panfida Group retired the 291,177
shares it purchased prior to the LBO merger without payment. The
sale of Munford, Inc. to the Panfida Group closed on November 29,
1988. Thirteen months after the LBO transaction, on January 2,
1990, the post-Munford Corporation filed a Chapter 11 case in
bankruptcy court.
PROCEDURAL HISTORY
On June 17, 1991, Munford, Inc. filed an adversary proceeding
in bankruptcy court in the Northern District of Georgia on behalf
of itself and unsecured creditors pursuant to 11 U.S.C. §§ 544(b)
and 1107(a) (1988), seeking to recover LBO payments made to
Munford, Inc.'s shareholders, severance payments made to Munford,
Inc.'s officers and damages against directors, officers, and
Shearson for breach of fiduciary obligations to Munford, Inc.
In Count I of Munford, Inc.'s complaint, it asserts fraudulent
conveyance claims against two of Munford, Inc.'s largest former
shareholders, the DFA Investment Dimensions Group, Inc. and
Trustees of the DFA Group Trust. In Count I, Munford, Inc. also
asserts fraudulent conveyance claims against former directors and
officers who received payments for their Munford, Inc. shares in
1
Munford, Inc.'s shareholders had no dissenter's rights of
appraisal under O.C.G.A. § 14-2-250(d)(2) (1988), because Munford
listed its shares on the New York Stock Exchange and because more
than 2,000 shareholders held the stock.
the LBO.2 In Counts II and IV, Munford, Inc. asserts breach of
fiduciary duty, negligence, mismanagement, and waste of corporate
assets claims against the officers and directors. In Count III,
Munford, Inc. asserts that the directors violated Georgia's share
repurchase and distribution statutes in approving the LBO
transaction. In Count V, Munford, Inc. asserts that the severance
payments made to Dillard Munford, Fellows, and Carroll constituted
fraudulent conveyances. In Count VI, Munford, Inc. claims that
Shearson breached its fiduciary duty. Finally, in Count IX
Munford, Inc. claims that Shearson aided and abetted the directors
and officers' alleged breaches of fiduciary duty.
The shareholders, directors, officers, and Shearson
(collectively appellees) filed motions for summary judgment
contending that each of Munford, Inc.'s claims failed as a matter
of law. On April 5, 1994, the bankruptcy court filed its proposed
findings of fact and conclusions of law recommending that the
district court grant Shearson's motion for summary judgment. In a
separate proposed findings of fact and conclusion of law, the
bankruptcy court recommended that the district court deny the
shareholders, officers, and directors' motions for summary
judgment. The district court adopted the bankruptcy court's
recommendation in part granting summary judgment in favor of
2
Count I specifically asserts claims against Dillard
Munford, chief executive officer; Russell C. Fellows, president
and chief operating officer; James M. Carroll, vice president
and secretary; Joseph W. Harden, vice president and treasurer;
and J.E. Rubel. Count I also asserts claims against directors
Dillard Munford, Fellows, Robert M. Gardiner, Richard K. LeBlond,
II, Herbert J. Dickson, Winston M. Blount, S.B. Rymer, Jr.,
Andrall E. Pearson, and James L. Ferguson.
Shearson. The district court also adopted the bankruptcy court's
recommendation with respect to Count III and denied the directors'
motion for summary judgment on the distribution statute claim. The
district court, however, rejected the bankruptcy court's
recommendation as to Munford, Inc.'s claims against the
shareholders, directors, and officers with respect to Counts I, II,
and IV, and granted summary judgment on those counts on August 4,
1994.
On August 26, 1994, the district court amended its order,
pursuant to Federal Rules of Civil Procedure 54(b), and entered
final judgment to allow this appeal to proceed. Munford, Inc. now
appeals the district court's grant of summary judgment in favor of
the shareholders, officers, and directors on Counts I, II, and IV.
Munford, Inc. also appeals the district court's granting of summary
judgment in favor of Shearson on Count IX and has abandoned its
claims under Count VI.3
CONTENTIONS
Munford, Inc. raises four contentions. First, Munford, Inc.,
contends that the district court erred in concluding that the LBO
payment shareholders received for their shares constituted a
settlement payment within the meaning of 11 U.S.C. § 546(e).
Second, Munford, Inc., contends that the district court erred in
concluding that its breach of fiduciary duties, negligence,
mismanagement, and waste of corporate asset claims against the
3
The directors also appeal the district court's denial of
their motion for summary judgment on Munford, Inc.'s share
repurchase and distribution claim (Count III) in Case No. 94-
9216.
directors and officers failed as a matter of law. Specifically,
Munford, Inc. argues that sufficient evidence supports its claim
that the directors and officers failed to fulfill their fiduciary
obligations to evaluate the proposed LBO merger agreement. Third,
Munford, Inc. contends that the severance payments made to its
officers lacked consideration; therefore, the district court erred
when it concluded that the payments did not constitute a fraudulent
conveyance under Georgia law. And finally, Munford, Inc. contends
that the district court erred in granting summary judgment in favor
of Shearson on its aiding and abetting breach of fiduciary duty
claim because Georgia courts would recognize this claim.
Appellees contend that the district court properly granted
summary judgment in their favor on each of the claims.
ISSUES
We address the following issues: (1) whether the LBO payments
received in exchange for shares constituted a settlement payment
within the meaning of section 546(e); (2) whether the district
court erred in granting summary judgment in favor of the officers
and directors on Munford, Inc.'s claims of breach of fiduciary
duty, negligence, mismanagement, and waste of corporate assets;
(3) whether Munford, Inc.'s severance payments to its officers
constituted fraudulent conveyances under Georgia law; and (4)
whether the district court erred in granting summary judgment in
favor of Shearson on Munford, Inc.'s aiding and abetting claims.
DISCUSSION
A. LBO Payments
We review the grant of summary judgment de novo. Orlando
Helicopter Airways v. United States, 75 F.3d 622, 624 (11th
Cir.1996). Summary judgment is appropriate where no genuine issues
of material fact exist and the moving party is entitled to judgment
as a matter of law. Canadyne-Georgia Corp. v. Continental Ins.
Co., 999 F.2d 1547, 1554 (11th Cir.1993).
Pursuant to 11 U.S.C. § 544(b), a trustee in bankruptcy or
the debtor acting as trustee may avoid any transfer of property of
the debtor that is voidable under the applicable state law unless
otherwise stated in the Bankruptcy Code. 11 U.S.C. § 544(b).
Section 544(b) is commonly referred to as the "strong arm" clause.
One exception to the trustee's avoidance power exists under section
546(e). Section 546(e) states in pertinent part:
Notwithstanding section 544 ... of this title, the trustee may
not avoid a transfer that is ... [a] settlement payment, as
defined in section 741(8) of this title, made by or to a
commodity broker, forward contract merchant, stockbroker,
financial institution, or securities clearing agency, that is
made before the commencement of the case, except under section
548(a)(1) of this title.
11 U.S.C. § 546(e) (1988). Congress enacted section 546(e) "to
minimize the displacement caused in the commodities and securities
market in the event of a major bankruptcy affecting those
industries." H.R.Rep. No. 97-420, 97th Cong., 2d Sess. 1 (1982),
U.S.Code Cong. & Admin.News 583. With the passage of section
546(e), "Congress [also] sought to "promote customer confidence in
commodity markets generally' via "the protection of commodity
market stability.' " Kaiser Steel Corp. v. Charles Schwab & Co.,
913 F.2d 846, 849 (10th Cir.1990) (quoting Sen. R. No. 989, 95th
Cong., 2d Sess. 8 (1978)).
In this case, the district court entered summary judgment in
favor of the shareholders on Munford, Inc.'s fraudulent conveyance
claim finding that the LBO payments Munford, Inc. made to the
shareholders constituted settlement payments within the meaning of
section 741(8). See 11 U.S.C. § 741(8). Consequently, the
district court held that 11 U.S.C. § 546(e) did not authorize a
bankruptcy trustee or a debtor in possession acting as trustee to
avoid such transfers under state law because the shareholders
received their settlement payments from Citizens & Southern Trust
Company, a financial institution. On appeal, Munford, Inc.
contends that the district court erred in concluding that the LBO
payments the shareholders received for their shares constituted
settlement payments for purposes of section 546(e).
Section 741(8) defines "settlement payment" as "a preliminary
settlement payment, a partial settlement payment, an interim
settlement payment, a settlement payment on account, a final
settlement payment, or any other similar payment commonly used in
securities trade. " 11 U.S.C. § 741(8) (1988) (emphasis added).
Munford, Inc. does not argue that LBO payments are uncommon.
Rather, it urges this court to define settlement payments in the
context of LBOs narrowly, asserting that LBO mergers are
essentially private transactions between the merging companies and
their existing shareholders and therefore do not sufficiently
involve the securities settlement and clearance system. Munford,
Inc. notes that this LBO merger did not use the clearance and
settlement system to match buyers with sellers of securities,
account for the transaction, or guarantee the transaction.
Munford, Inc. asserts that the settlement and clearance system was
simply used to convey the LBO payments to the tendering
shareholders. Munford, Inc. further argues that characterizing the
LBO payments as settlement payments does not advance the goal of
protecting the clearance and settlement system because LBO
transactions do not utilize the entire clearance and settlement
system.4 Finally, Munford asserts that construing the LBO payments
as settlement payments wholly frustrates the remedial goal of
fraudulent conveyance law and the fair treatment of unsecured
creditors. The shareholders, on the other hand, contend that
construing section 546(e) to apply to the LBO payments promotes
investor confidence in the securities market. To hold otherwise,
the shareholders argue, would undermine all mergers or acquisitions
of public companies.
The court concludes that whether the LBO payments qualify as
section 546(e) settlement payments is not dispositive of the
dispute—in fact, the court will presume that the LBO payments were
settlement payments. Although the payments were presumptively
settlement payments, section 546(e) is not applicable unless the
transfer (or settlement payment) was "made by or to a commodity
broker, forward contract merchant, stockbroker, financial
institution, or securities clearing agency." 11 U.S.C. § 546(e).
4
In support of its position, Munford, Inc. cites Wieboldt
Stores, Inc. v. Schottenstein, 131 B.R. 655 (N.D.Ill.1991). In
Wieboldt, the district court held that LBO payments do not
constitute a settlement payment within the meaning of the Code,
reasoning that permitting avoidance of LBO payments posed no
significant threat to the clearance and settlement system in the
securities industry. Wieboldt, 131 B.R. at 664-65. We reject
the reasoning of Wieboldt finding that even granting trustees
avoidance powers under limited circumstances in the LBO context
has the potential to lessen confidence in the commodity market as
a whole.
Here, the transfers/payments were made by Munford to shareholders.
None of the entities listed in section 546(e)— i.e., a commodity
broker, forward contract merchant, stockbroker, financial
institution, or a securities clearing agency—made or received a
transfer/payment. Thus, section 546(e) is not applicable.
True, a section 546(e) financial institution was presumptively
involved in this transaction. But the bank here was nothing more
than an intermediary or conduit. Funds were deposited with the
bank and when the bank received the shares from the selling
shareholders, it sent funds to them in exchange. The bank never
acquired a beneficial interest in either the funds or the shares.
Importantly, a trustee may only avoid a transfer to a
"transferee." See 11 U.S.C. § 550. Since the bank never acquired
a beneficial interest in the funds, it was not a "transferee" in
the LBO transaction. See In re Chase & Sanborn Corp., 848 F.2d
1196, 1200 (11th Cir.1988) ("When banks receive money for the sole
purpose of depositing it into a customer's account ... the bank
never has actual control of the funds and is not a § 550
transferee."). Rather, the shareholders were the only
"transferees" of the funds here. And, of course, section 546(e)
offers no protection from the trustees avoiding powers to
shareholders; rather, section 546(e) protects only commodity
brokers, forward contract merchants, stockbrokers, financial
institutions, and securities clearing agencies. Accordingly,
regardless of whether the payments qualify as settlement payments,
section 546(e) is not applicable since the LBO transaction did not
involve a transfer to one of the listed protected entities.5 We
conclude that the district court erred with respect to this issue
and reverse.
B. Breach of Fiduciary Duty and Related Claims
We next address Munford, Inc.'s contention that the district
court erred in granting summary judgment in favor of the officers
and directors on Munford, Inc.'s claims of breach of fiduciary
duty, negligence, mismanagement, and waste of corporate assets.
Section 14-2-152.1(a)(1) of the Georgia Code requires
directors and officers of companies to discharge their duties in
good faith and with the care of an ordinary prudent person.
Munford, Inc. contends that the district court erred in concluding
that no disputed material facts existed as to whether the directors
and officers discharged their duties in good faith and with the
care of an ordinary prudent person. Specifically, Munford, Inc.,
argues that substantial evidence supports its contention that the
directors and officers approved the LBO without considering the
economic effect of the transaction upon the corporation in
violation of section 14-2-152.1(a)(1). In support of this
argument, Munford, Inc. makes two assertions. First, Munford, Inc.
asserts that the officers and directors disregarded Shearson's
September 1987 written report disfavoring LBO transactions.6
5
For a discussion of this issue, see In re Healthco Int'l
Inc. v. Hicks, Muse & Co., Inc., 195 B.R. 971, 981-83
(Bankr.D.Mass.1996).
6
In that report, Shearson opined that Munford, Inc. needed
all of its internally generated cash flow to fund growth and
could not be able to finance increased leverage resulting from
financial restructuring.
Second, Munford, Inc. asserts that officers and directors
disregarded Deutschman's reasons for refusing to proceed with its
planned purchase of Munford, Inc.
In addition, Munford, Inc. argues that Article 9 of its
Articles of Incorporation creates a private right of action on
behalf of creditors independent of section 14-2-152.1(a)(1).
Munford, Inc. notes that Article 9 requires the directors and
officers to give due consideration to " "the extent to which the
assets of the corporation will be used' for financing and "the
social, legal, and economic effects of the transaction on the
employees, customers, and other constituents of the corporation.'
" Based on this language, Munford, Inc. asserts that directors and
officers have a higher duty of care than imposed under state law.
The directors and officers contend that they discharged their
duties in good faith and with the care of an ordinary prudent
person. The directors and officers also argue that they made an
informed judgment when they decided to accept Panfida's LBO
proposal. They stress that they hired Shearson to perform a
financial assessment of Munford, Inc., consulted attorneys
regarding their duties to the company, including their duties under
the Articles of Incorporation throughout their decision-making
process, and that at all times during their service to Munford,
Inc., the company was solvent. They therefore argue that in
deciding whether to sell Munford, Inc. they had an unqualified duty
to maximize shareholder value. With respect to Munford, Inc.'s
post-LBO financial stability, the directors and officers argue that
Citicorp's decision to finance the LBO merger and AAC's
warranty—that post-LBO Munford, Inc. would remain solvent, have a
reasonable amount of working capital, and have ability to pay its
debt—led them to believe that Munford, Inc. could carry the heavy
load associated with a leveraged transaction. Finally, the
directors and officers contend that Article 9 did not establish a
fiduciary duty greater than under state law or create a private
right of action on behalf of creditors. Although Article 9
provides that directors give due consideration to social, legal,
and economic effects of a transaction on employees, customers, and
other constituents of the corporation, the directors and officers
argue that this provision does not identify creditors as persons to
whom due consideration is owed. The directors and officers
therefore argue that a constituency's interest is only relevant
when the consideration of the constituency also benefits the
shareholders.
In determining whether directors and officers have satisfied
their statutory duty, Georgia courts apply the business judgment
rule. See Millsap v. American Family Corp., 208 Ga.App. 230, 430
S.E.2d 385, 388 (1993). The business judgment rule protects
directors and officers from liability when they make good faith
business decisions in an informed and deliberate manner. Cottle v.
Storer Communication, Inc., 849 F.2d 570, 575 (11th Cir.1988). In
this case, the record is replete with evidence that the directors
and officers consulted legal and financial experts throughout the
solicitation and negotiation for a purchaser for Munford, Inc.
Applying the business judgment rule, we conclude that the directors
and officers satisfied their duties under section 14-2-152.1(a)(1).
Because Munford, Inc. has failed to present any binding legal
authority to support its contention that Article 9 creates a cause
of action independent of Georgia law, we reject this argument.
Accordingly, we affirm the district court's grant of summary
judgment on this issue.
C. Severance Contracts
The district court also granted summary judgment in favor of
the officers and directors on Munford, Inc.'s fraudulent conveyance
claims. In its complaint, Munford, Inc. alleged that the severance
payments it made to Dillard Munford, Fellows and Carroll lacked
consideration, and therefore constituted fraudulent conveyances
under Georgia law.7 In order for Munford, Inc. to establish a
fraudulent conveyance claim under Georgia law, it must show: (1)
a conveyance of property; (2) valuable consideration; and (3)
that it was insolvent at the time of the conveyance or that the
conveyance rendered it insolvent. Brown, 317 S.E.2d at 183.
The district court entered summary judgment finding that
valuable consideration in the form of the officers' promises to
continue employment through the closing of the sale of Munford,
Inc. supported the severance payments. Munford, Inc. contends that
the district court erred in concluding that Munford, Inc. received
7
Section 18-2-22 of the Georgia Code provides:
The following acts by debtors shall be fraudulent in
law against creditors and others and as to them shall
be null and void ... every voluntary deed or conveyance
not for a valuable consideration made by a debtor who
is insolvent at the time of the conveyance.
Brown v. Citizens & Southern National Bank, 253 Ga. 119, 317
S.E.2d 180, 183 (1984) (quoting O.C.G.A. § 18-2-22(3))
(emphasis added).
valuable consideration in exchange for the severance contracts.
Munford, Inc. argues that Dillard Munford's testimony refutes the
finding that Dillard Munford's promise constituted valuable
consideration because he stated in his deposition testimony that he
would have remained with the company through closing in spite of
his severance contract. Based on this admission, Munford, Inc.
asserts that all of the severance payments constituted gifts
rewarding these officers for past services for which they had
already been paid.
Dillard Munford, Fellows, and Carroll respond to Munford,
Inc.'s arguments asserting that their existing severance contracts
each arose due to preexisting severance contracts executed in 1979
or earlier. They also argue that their continued services to the
company—beginning with Munford, Inc.'s search in 1987 for a single
purchaser for its outstanding stock and ending in 1988 when
Munford, Inc. closed the LBO transaction with the Panfida
Group—provided sufficient consideration for the severance payments.
Specifically, they argue that they provided general corporate
management services, advice, strategy, and guidance to Munford,
Inc. during the relevant period.
We conclude that Munford, Inc.'s argument lacks merit.
Georgia courts hold that "valuable consideration is founded on
money or something convertible into money, or having value in
money." Stokes v. McRae, 247 Ga. 658, 278 S.E.2d 393, 394 (1981).
Georgia case law also clearly states that, "[c]ontinued performance
under a terminable at-will contract furnishes sufficient
consideration for the promise of additional severance pay." Royal
Crown Companies, Inc. v. McMahon, 183 Ga.App. 543, 359 S.E.2d 379,
381 (1987). We note that this rule of law leads to a just result
in this case. If Munford, Inc. had not entered into the severance
payment contract and these officers left Munford, Inc. prior to the
closing of the LBO, Munford, Inc.'s efforts to sell its stock to a
single purchaser probably would have been frustrated. Also,
Munford, Inc. would have been without recourse against these
officers because Munford, Inc. employed these officers as employees
at-will. The severance contracts giving rise to the severance
payments, however, provided Munford, Inc. with the assurance that
the officers would not leave without providing Munford, Inc.
recourse in the event their leaving frustrated its plans to sell
its stock to a single purchaser. We therefore find that this
assurance constituted valuable consideration. Accordingly, we
affirm the district court's grant of summary judgment on this
claim.
D. The "Aiding and Abetting" Claim
The last issue we address is whether the district court erred
in concluding that Munford, Inc.'s claim of aiding and abetting a
breach of fiduciary duty against Shearson failed as a matter of
law. Munford, Inc. urges this court to recognize a cause of action
for aiding and abetting a breach of fiduciary duty under Georgia
state law, arguing that Georgia courts would recognize the tort of
aiding and abetting a breach of fiduciary duty. Such an action,
Munford, Inc. contends, would require a showing of (1) a fiduciary
duty on the part of the primary wrongdoer, (2) a breach of
fiduciary duty, (3) the knowledge of the breach by the alleged
aider and abettor, and (4) the aider and abettor's substantial
assistance or encouragement of the wrongdoing. Munford, Inc.
argues that it has satisfied this showing. Specifically, Munford,
Inc. alleges that Shearson aided and abetted the directors' and
officers' breach of fiduciary duty when it provided a fairness
opinion concerning the Panfida Group's offering price enabling the
LBO transaction to go forward. It also asserts that Shearson,
based upon its 1987 report, knew that LBO was not financially
prudent for Munford, Inc. and knew that Munford, Inc.'s financial
condition continued to deteriorate. In support of its argument
that this court should recognize an aiding and abetting action,
Munford, Inc. notes that Georgia courts have acknowledged an aiding
and abetting cause of action in torts involving violence, the sale
of unregistered securities, breaches of covenants with employment
contracts, and fraudulent conveyances. In response, Shearson
argues that the district court correctly held that the "imposition
of aider and abettor liability for breaches of fiduciary duty
essentially extends fiduciary obligations beyond the scope of the
confidential or special relationship" on which the directors' and
officers' obligations are based.
In the absence of state law, we are "obliged to resolve the
issue of law as the Georgia state court would." Imperial
Enterprises, Inc. v. Fireman's Fund Ins. Co., 535 F.2d 287, 290
(5th Cir.1976). In this case, we decline to extend aider and
abettor liability to breaches of fiduciary duty concluding that
Georgia courts would not recognize such a cause of action. To hold
otherwise, as the district court found, would enlarge the fiduciary
obligations beyond the scope of a confidential or special
relationship. It is important to note that in this case Munford,
Inc. does not claim that Shearson failed to fully advise Munford,
Inc. of the potential risk of the LBO. The board, after
considering the risk Shearson identified, decided to proceed with
the LBO despite Shearson's initial caution to them. Moreover, the
board directed Shearson to conduct a fairness report with respect
to Panfida's offer. Shearson issued this report as directed.
Munford, Inc. now seeks to hold Shearson liable for performing its
task competently and with full disclosure. Even assuming that
Georgia courts will someday recognize a cause of action for aider
and abettor liability in the context of a breach of fiduciary duty
claim, the facts in this case do not warrant its creation now.
CONCLUSION
For the foregoing reasons, we reverse the district court's
grant of summary judgment in favor of the shareholders on Munford,
Inc.'s fraudulent conveyance claim. We affirm summary judgment on
the remaining claims.
AFFIRMED in part; REVERSED in part; and REMANDED for further
proceedings.
HATCHETT, Chief Judge, concurring in part and dissenting in
part.
I agree with the majority opinion insofar as it concludes that
the district court did not err in granting the directors, officers
and Shearson summary judgment. I do not agree, however, with the
majority's holding that the district court erred in granting the
shareholders summary judgment.
Section 546(e) precludes the trustee in bankruptcy from
avoiding settlement payments made by or to a financial institution,
commodity broker, forward contract merchant, stockbroker, or
securities clearing agency unless the debtor company made such
payments with the "actual intent to hinder, delay or defraud"
creditors. 11 U.S.C. § 548(a)(1); see also 11 U.S.C. § 546(e).
In this case, Munford, Inc. deposited funds to purchase its
outstanding stock with Citizens & Southern Trust Company, a
financial institution. Citizens & Southern Trust Company then made
settlement payments to the shareholders for their stock. Munford,
Inc., acting as trustee, filed this action seeking to avoid the
payments Citizens & Southern Trust Company made to the
shareholders. The district court granted summary judgment in favor
of the shareholders concluding that section 546(e) barred the
avoidance of settlement payments "made by" a financial institution.
In reversing the grant of summary judgment, the majority holds
that whether the LBO payments qualify as settlement payments under
section 546(e) is not dispositive on the issue of whether a trustee
in bankruptcy can avoid such transfers under state law. Instead,
the majority concludes that the dispositive issue is whether the
financial institution acquired a beneficial interest in the
settlement payments. I believe the majority, rather than require
Munford, Inc. to prove "actual intent to hinder, delay or defraud"
its creditors, chose to disregard the plain language of section
546(e) in order to create a new exception to its application.
Because I believe that LBO payments made to shareholders constitute
settlement payments for purposes of section 546(e) and that section
546(e) only permits a trustee in bankruptcy to avoid settlement
payments made to shareholders by a financial institution when such
payments are made with the actual intent to hinder, delay or
defraud creditors, I respectfully dissent.