TSG Water Resources, Inc. v. D'Alba & Donovan Certified Public Accountants, P.C.

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________________ COURT OF APPEALS
U.S.
ELEVENTH CIRCUIT
December 20, 2007
No. 06-11803 THOMAS K. KAHN
________________________________ CLERK
D.C. Docket No. 02-00258-CV-4
TSG WATER RESOURCES, INC. (TSG),
TSG TECHNOLOGIES, INC., et al.,
Plaintiffs-
Counter-Defendants
Appellants,
versus
D’ALBA & DONOVAN CERTIFIED
PUBLIC ACCOUNTANTS, P.C.
Defendant-
Counter-Claimant
Appellee,
MORRIS BENCINI,
Defendant-Appellee.
_______________________________
Appeal from the United States District Court
for the Southern District of Georgia
_______________________________
(December 20, 2007)
Before CARNES and BARKETT, Circuit Judges, and COHN,* District Judge.
PER CURIAM:
This appeal was brought following entry of final judgment against Plaintiffs
TSG Water Resources, Inc., et al. After considering the issues on appeal, we
reverse in part, affirm in part, and remand the case for further proceedings.
I. Background
TSG Tech, a wholly owned subsidiary of TSG Water, is a company that
builds and sometimes operates water treatment facilities. The issues in this case
relate to the preparation and auditing of TSG Tech’s financial statements for the
year 2000 and subsequent actions taken by its board members and other investors
allegedly in reliance on those statements.
As of the year 2000, TSG Tech was being run by president James Walker,
who is not a party to this action, and a small number of officers. Appellee Morris
Bencini was hired as the Chief Financial Officer of the company in 1999, and was
responsible for preparing monthly and quarterly financial statements for the
company’s management, board of directors, and investors, including the financial
statements for the year 2000, as well as attending meetings of the board of
*
The Honorable James I. Cohn, United States District Judge for the Southern District of
Florida, sitting by designation.
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directors and answering questions about financial matters. Bencini was also
responsible for any attempts to acquire or merge with other companies, including
arranging financing for these acquisitions or mergers. Appellee D’Alba &
Donovan Certified Public Accountants, P.C. (“D&D”) was hired to conduct an
audit of the year 2000 financial statements.
Due to a number of accounting errors, discussed in greater detail below, the
financial statements for the year 2000 significantly overstated the financial health
of the company and incorrectly indicated that it had turned a profit for the first
time in its history. The company’s cash flow situation reached a crisis point in
June 2001, and the board of directors was forced to decide whether to let the
company fail or to invest more capital. Believing the cash flow problems to be
short-term in nature, allegedly because of the positive outcome in the previous
year represented in the financial statements, several members of the board of
directors invested money themselves, and solicited outside investments from
friends and family members totaling over $1.45 million. When the accounting
errors were later discovered, and the true financial state of the company revealed,
the board of directors took steps to dilute Walker’s majority interest and remove
him as president.
II. Procedural History
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The case was originally filed in federal court, but was voluntarily dismissed
and re-filed in state court. The Complaint alleged claims of breach of fiduciary
duty, fraud, securities fraud, and breach of contract against both D&D and
Bencini. In addition, the Complaint alleged claims of professional negligence,
ordinary/gross negligence, and negligent retention and supervision against D&D.
Defendants D&D and Bencini removed the case to the United States District Court
for the Southern District of Georgia, asserting diversity jurisdiction. The District
Court denied Appellants’ Motion to Remand, finding that TSG Tech was a
resident of Georgia for purposes of diversity jurisdiction.
Appellees each filed separate Motions for Summary Judgment. The District
Court issued an Order before the trial granting Bencini’s Motion in its entirety and
D&D’s Motion in part, leaving only the claims against D&D of professional
negligence, ordinary and/or gross negligence, and breach of contract for trial.
Following the trial, the jury reached a verdict in favor of TSG in the total amount
of $317,000, less 10% for contributory negligence. However, upon a renewed
Motion for Judgment as a Matter of Law, the District Court found that the
exculpatory language contained in the engagement letter was valid and barred
TSG’s remaining claims, and the Court entered final judgment in favor of D&D.
Appellants then filed the instant appeal.
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III. Jurisdiction of the District Court
On appeal to this Court, Appellants first contend that the District Court
lacked jurisdiction over the case and should not have denied their Motion to
Remand. The District Court found that Georgia was TSG Tech’s principal place
of business and state of incorporation, and denied the Motion to Remand.
Appellants contend on appeal that TSG Tech’s principal place of business is
Florida. Thus, Appellants argue, because Bencini is also a resident of Florida,
there was no complete diversity, and the District Court erred in denying the
Motion to Remand.
We review rulings on the subject-matter jurisdiction of the District Court de
novo. MacGinnitie v. Hobbs Group, 420 F.3d 1234, 1239 (11th Cir. 2005);
Williams v. Best Buy Co., 269 F.3d 1316, 1317 (11th Cir. 2001). A clearly
erroneous standard of review is not applied to findings of fact that are premised
upon an erroneous view of controlling legal principles. Johnson v. Uncle Ben’s,
628 F.2d 419, 422 (5th Cir. 1980). The District Court’s factual findings regarding
a company’s principal place of business, however, are subject to a clearly
erroneous standard of review. Id.; Vill. Fair Shopping Ctr Co. v. Sam Broadhead
Trust, 588 F.2d 431, 434 (5th Cir. 1979). We examine the subject matter
jurisdiction of the trial court as a threshold matter before considering the merits of
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the appeal. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998).
Complete diversity requires that no defendant in a diversity action be a
citizen of the same state as any plaintiff. 28 U.S.C. § 1332; Carden v. Arkoma
Assocs., 494 U.S. 185, 187 (1990). For purposes of diversity jurisdiction, a
corporation is a citizen of both the state in which it is incorporated and the state in
which it has its principal place of business. 28 U.S.C. § 1332(c). The legal
standard used in this Circuit to determine a company’s principal place of business
for purposes of diversity jurisdiction is the “total activities” test. MacGinnitie,
420 F.3d at 1239; Toms v. Country Quality Meats, Inc., 610 F.2d 313, 315 (5th
Cir. 1980). The “total activities test” is a combination of the “place of activities”
test and the “nerve center” test used in other circuits. MacGinnitie, 420 F.3d at
1239. Under the “place of activities” test, the location where most of the
company’s sales or production takes place is typically determined to be its
principal place of business. Id. Under the “nerve center” test, the location of the
company’s corporate offices is usually determined to be its principal place of
business. Id. When the results of these two tests differ, under the “total activities”
test, the district court must conduct a “somewhat subjective analysis” to choose
between the two results. Id. Eleventh Circuit cases have held that where a
company’s activities are not concentrated in one place, a district court may place
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greater emphasis on the “nerve center” test when determining principal place of
business. MacGinnitie, 420 F.3d at 1239 (interpreting Sweet Pea Marine, Ltd. v.
APJ Marine, Inc., 411 F.3d 1242, 1248 (11th Cir. 2005)).
Appellants argue that the District Court placed inappropriate weight on the
“nerve center” factors because the physical activities of the company were
concentrated in Florida, not diffused throughout the Caribbean as the District
Court concluded. Upon review of the District Court’s Order, it appears that the
Court considered all the facts and made adequate findings to support its ruling. In
reciting the facts of the case, the Court stated that “on any given project, TSG
Tech does all of its design and engineering, much of its purchasing and most of its
fabrication in Gainesville [Florida].” (Order Denying Remand, p. 5.) However,
the Court also noted that “many of the water and waste water treatment plants that
TSG Tech operates are in the Caribbean” and “in 2002, most of TSG Tech’s
revenue came from work in the Caribbean.” (Id. at 3.) Ultimately, the Court
found that “while TSG Tech comes into contact with the public in Florida, many
of the daily activities of TSG Tech occur in Florida, and TSG Tech maintains its
tangible assets in Florida, the activity which occurs in Georgia is more
significant.” (Id. at 7.) Thus, the District Court clearly articulated its finding that
many of TSG Tech’s activities, though not a majority of them, were carried on in
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Florida. In light of the holding in MacGinnitie, this finding by the District Court
is adequate to support the conclusion that the “nerve center” factors should have
greater weight in the determination of the principal place of business.
Furthermore, the record before the District Court contained substantial
evidence of TSG’s activities in Georgia that supports the Court’s ruling. TSG
Tech’s corporate records, banking records, accounting records, and original
contracts are maintained at the Savannah, Georgia headquarters of its parent
company, TSG Water. TSG Water directs the activities of TSG Tech and other
subsidiaries from the Georgia headquarters. The decision-makers for TSG Tech,
including its directors and two of its officers, are also located in Georgia. Only
one of the four officers is located in Florida, and the TSG Tech board of directors
has never met in Florida. The payroll, insurance, and accounts payable for TSG
Tech are controlled and directed by the Georgia office, which also prepares
financial statements and invoices. The accounting and legal professionals used by
TSG Tech are also located in Georgia. Additionally, TSG Tech’s primary
operating bank account is located in Georgia, and all the signatories to the account
are persons located in Georgia. On this record, and with greater emphasis properly
placed on the “nerve center” factors pursuant to MacGinnitie, the District Court’s
finding that TSG Tech’s principal place of business was in Georgia is not clearly
8
erroneous. Thus, the District Court’s denial of the Motion to Remand is affirmed.
IV. Summary Judgment
Appellants also appeal the District Court’s grant of summary judgment in
favor of Appellee Bencini on the breach of fiduciary duty claim and in favor of
Appellees Bencini and D&D on the fraud, securities fraud, and negligence claims.
We review de novo the District Court’s grant of summary judgment, and apply the
same legal standard as the District Court. Watkins v. Ford Motor Co., 190 F.3d
1213, 1216 (11th Cir. 1999). The District Court may grant summary judgment “if
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of
law.” Fed. R. Civ. P. 56(c).
The District Court granted summary judgment in favor of Appellee Bencini
on the breach of fiduciary duty claim, basing its ruling on the business judgment
rule, and granted summary judgment in favor of Appellees Bencini and D&D on
the fraud, securities fraud, and negligence claims.
A. Business Judgment Rule and the Breach of Fiduciary Duty Claim
In granting summary judgment in favor of Bencini on the breach of
fiduciary duty claim, the District Court concluded that Bencini was protected by
9
the business judgment rule. Appellants contend, on appeal, that a genuine issue of
material fact exists as to whether Bencini acted fraudulently, in bad faith, or in an
abuse of his discretion. “The business judgment rule protects directors and
officers from liability when they make good faith business decisions in an
informed and deliberate manner.” In re Munford, Inc., 98 F.3d 604, 611 (11th Cir.
1996). The presumption is that they have acted “on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the
company.” Cottle v. Storer Commc’n, Inc., 849 F.2d 570, 575 (11th Cir. 1988).
Unless this presumption is rebutted, they cannot be held personally liable for
managerial decisions. Stepak ex rel. Southern Co. v. Addison, 20 F.3d 398, 403
(11th Cir. 1994). However, officers may be held liable where they engage in
fraud, bad faith, or an abuse of discretion. Cottle, 849 F.2d at 574. To survive a
motion for summary judgment, a plaintiff “must allege specific facts that show a
genuine issue of material fact concerning fraud, bad faith or abuse of discretion.”
Id. at 575.
The core of Plaintiffs’ claims against Bencini are the accounting errors he
made in preparing the financial statements and his failure to advise the board of
directors about those errors. Throughout the year 2000, Bencini provided
financial statements to management that showed the company was earning a profit.
10
The consolidated financial statements for the entire year 2000 showed a profit of
over $38,000, making it the first year in which the company had ever shown a
year-end profit. Bencini engaged Appellee D&D to conduct an audit of these
year-end financial statements, and on April 27, 2001, D&D issued its report that
the company had earned an even greater profit of $68,926. Based on this
information, the board and management concluded that TSG Tech had “turned a
corner” financially.
Subsequent review, however, revealed that a number of accounting errors
contained in the year-end reports resulted in a major over-statement of the
company’s financial well-being. These included:
1. Failure to follow percentage of completion rule, resulting in the
entire projected profit for the Burnt Store project being
included in a single year;
2. Booking of a deferred tax asset without adequate evidence that
the company would likely be profitable in the near future, as
required;
3. Improperly allowing capitalization of marketing costs;
4. Failing to account for the company’s liability for 401(k)
contributions;
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5. Capitalizing costs for development of vessel prototypes despite
the fact that the prototypes underwent destructive testing and,
thus, could not be added to inventory;
6. Failing to account for a tax liability to the United States Virgin
Islands.
By May 2001, Bencini discovered that TSG was experiencing a cash flow
problem, and reexamined the accounting for the previous year. He discussed the
accounting errors with personnel at D&D, and informed TSG Tech’s president,
James Walker, of the impending cash flow problem, but did not warn the board of
directors or any investors. The annual meeting of directors and shareholders was
held on May 22, 2001, at which Walker told the attendees that the company had
“turned the corner” financially after becoming profitable for the first time in 2000.
Bencini remained silent at this meeting.
In early June 2001, the threat of a lien on the Burnt Store project forced the
directors to make prompt decisions regarding whether to invest additional capital.
The board of directors convened a meeting at which Bencini was not present. At
this meeting, Walker provided explanations for the cash shortfall, and presented
the directors with a cash flow spreadsheet that Bencini had prepared showing that
the company could break even that year if it obtained certain projects and the
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proposed investments were made. The spreadsheets also showed monthly
overhead expenses totaling $250,000, which Appellants allege is actually
understated by approximately $80,000 per month. Several of the board members
and other investors invested varying amounts of money totaling over $1.45 million
in June and July 2001.
The District Court concluded that the business judgment rule protected
Bencini’s discretionary decisions regarding the accounting treatment applied to
accurate core financial data in the year 2000 statements. The Court noted that no
allegations of self-dealing on the part of Bencini had been made, and concluded
that Bencini had discharged his duty to act in an informed and deliberate manner,
as required by the business judgment rule, by relying on outside accounting
experts. However, consulting with outside experts alone is not enough to satisfy
the requirements of the business judgment rule. The cases cited by the District
Court, and by Appellees in their briefs, stand only for the proposition that such
consultation weighs in favor of a finding that the officer did not act in bad faith or
abuse his discretion. In Munford, the court stated that “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.,” and concludes that applying the business judgment rule, the directors
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satisfied their duties. Munford, 98 F.3d at 611. The Munford court considered the
totality of the facts in the case, not just the fact that the directors consulted with
outside professionals, and the holding of the case is not based solely on the
consultation. Similarly, in Cottle, the court reasoned that “the fact that the board
did consult [an outside financial advisor] simply weighs in favor of finding that
the directors did not abuse their discretion.” 849 F.2d at 578. The simple fact that
Bencini consulted with D&D is, therefore, not determinative.
Furthermore, the allegations and evidence in this case do create a disputed
issue of material fact as to whether Bencini acted fraudulently, in bad faith, or in
an abuse of his discretion. Contrary to the District Court’s statement that no
allegations of self-dealing had been made, Appellants have presented evidence
that could indicate collusion between Bencini and D&D, including Bencini’s prior
relationships with individual accountants at D&D. Appellants have also presented
evidence indicating that Bencini had much to gain from misrepresenting the
financial health of the company. Even if Bencini did not act in bad faith, a
genuine issue of material fact exists as to whether he abused his discretion in
applying the incorrect accounting treatment and then not informing the board of
directors of the error. The record shows that Bencini was aware of the
inaccuracies sometime in May 2001, but he remained silent at a board meeting on
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May 22, 2001. Although he left the company on short notice soon after this
meeting, Bencini also prepared cash flow spreadsheets that were used specifically
for the purpose of facilitating the board’s decision regarding the company’s cash
flow crisis, and these spreadsheets allegedly understated overhead costs by
approximately $80,000 per month. These facts, at a minimum, demonstrate a
genuine issue of material fact as to whether Bencini acted in bad faith or abused
his discretion and are sufficient to defeat a motion for summary judgment.
Therefore, the District Court’s grant of summary judgment to Appellee Bencini on
the breach of fiduciary duty claim is reversed.
B. Fraud and Securities Fraud Claims
The District Court also granted summary judgment in favor of both Bencini
and D&D on the fraud and securities fraud claims, concluding that there was
inadequate evidence in the record to support findings of proximate cause,
justifiable reliance, or intent. Appellants appeal this Order, arguing that the record
contained genuine issues of material fact regarding these issues.
The tort of fraud has five elements: (1) false representation by a defendant;
(2) scienter; (3) intention to induce the plaintiff to act or refrain from acting in
reliance upon the representation; (4) justifiable reliance by the plaintiff upon the
representation; and (5) damage to the plaintiff directly and proximately caused by
15
the reliance. Middleton v. Troy Young Realty, Inc., 572 S.E.2d 334, 336 (Ga. Ct.
App. 2002).
Securities fraud under Georgia law also has five elements: (1) a
misstatement or omission, (2) of a material fact, (3) made with scienter, (4) on
which the plaintiff relied, (5) that proximately caused his injury. GCA Strategic
Inv. Fund v. Joseph Charles & Assocs., 537 S.E.2d 677, 682 (Ga. Ct. App. 2000).
“Misrepresentations are not actionable unless the complaining party was justified
in relying thereon in the exercise of common prudence and diligence.” Id.
1. Proximate Cause
Proximate cause is ordinarily a factual determination to be made by the jury,
but “plain and indisputable cases may be decided by the court as a matter of law.”
Thomas v. Food Lion, LLC, 570 S.E.2d 18, 21 (Ga. Ct. App. 2002). In
determining whether or not summary judgment is appropriate, courts must
consider “whether the causal connection between the defendant’s conduct and the
injury is too remote for the law to countenance a recovery.” Id. The District Court
in this case concluded that “this is one of those plain and indisputable cases”
where no reasonable jury could find proximate cause. The Court’s analysis
focused on the company’s major financial problems, which were known to the
plaintiff investors before they chose to make major “last ditch effort” loans to save
16
the company. The Court reasoned that the cause of the investors’ injuries was the
combination of the company’s extremely high expenses, lack of major income
generation, and poor management by Walker, not any misrepresentations made by
Bencini.
Although Walker’s poor management and the company’s high operating
expenses certainly caused the company to reach a crisis point in June 2001, it is
the subsequent decisions of the board members and investors, in reliance on
Bencini’s representations, and the following consequences that form the basis of
the Complaint in this action. Appellants do not argue that the company would not
have faced a financial crisis absent the alleged misrepresentations, they argue that
the crisis would have been addressed differently and more effectively had they
been given accurate financial statements. The record contains testimony from
TSG’s directors that had they known the 2000 financial statements were incorrect,
they would have done in the summer of 2001 what they actually did do later in the
year when they discovered the errors: take control from Walker, fire him, and cut
payroll and expenses to save the company money. Furthermore, the year-end
profit shown in the erroneous accounting statements for the year 2000 provided
strong evidence to the board that the basic business model of the company was a
good one, and that any financial problems were temporary in nature. The
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individual investors testified that their decisions to invest further in the company
would have been very different had they known that the financial statements were
inaccurate and that the business model was not, in fact, working.
The District Court characterized the board members’ testimony as a mere
“belief” that Walker would have lost control of the company earlier than he did,
and stressed that evidence showing that an affiant “believes” something to be true
is insufficient to defeat summary judgment. See Pace v. Capobianco, 283 F.3d
1275, 1278-79 (11th Cir. 2002). However, in light of the evidence that the board
did, in fact, remove Walker later in 2001, once the errors were discovered, it is
difficult to see how this testimony can be considered to be a mere “belief.” Given
this evidence in the record, we cannot agree with the District Court that it is “plain
and indisputable” that proximate causation could not have been established.
2. Justifiable Reliance
Claims for both fraud and securities fraud require a finding of justifiable
reliance under Georgia law. To show justifiable reliance on the misrepresented
information in support of a securities fraud claim, a plaintiff “must show that ‘with
the exercise of reasonable diligence [it] still could not have discovered the truth
behind the fraudulent omission or misrepresentation.’” GCA Strategic Inv. Fund,
537 S.E.2d at 464. To show justifiable reliance to support a common law fraud
18
claim, a plaintiff must “prove that it exercised due care to discover the fraud.” Id.
The fundamental principle on this issue is that “misrepresentations are not
actionable unless the complaining party was justified in relying thereon in the
exercise of common prudence and diligence.” Id. “While questions of due
diligence often must be resolved by the trier of fact, that is not always the case.
One may fail to exercise due diligence as a matter of law.” Fowler v. Overby, 478
S.E.2d 919, 921 (Ga. Ct. App. 1996).
The District Court concluded that the investor plaintiffs, both those from
within the company’s board of directors and the outside investors,1 could not show
justifiable reliance as a matter of law. In reaching this conclusion, the Court
considered a Georgia Court of Appeals case that explained that “an investment
decision based solely or primarily on an accountant’s audit report would be, in
most cases, difficult to justify.” White v. BDO Seidman, LLP, 549 S.E.2d 490,
494 (Ga. Ct. App. 2001). The Court considered the evidence that the inside
investors were present at the June 2001 meeting and knew the dire financial
situation of the company. The Court concluded that, at a minimum, the negative
1
We, like the District Court, differentiate between “inside” and “outside” investors. The
“inside” investors are Directors of the company who also invested – Donald Mayer, Paul
Steward, and Jonathan Sprague. The “outside” investors are friends and family members of
Mayer who invested but were not otherwise involved with the company – Robert Bolz, John
Bolz, William Holden, and OGM Family Limited Partnership.
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information about the company’s financial health should have put the inside
investors on notice that they should “further explore the financial health of TSG
before making any more investments in the company.” (Order Granting Summary
Judgment, p. 18.)
Based on White, we agree with the District Court that the investors cannot
maintain the fraud claims against D&D because they were not justified in relying
solely on D&D’s audit report. However, we cannot reach the same conclusion
with respect to the claims against Bencini. Unlike the situation presented in
White, these investors did not rely solely on the financial statements in deciding to
make their investments. These investors testified that they considered all the
financial information presented to them, and relied on the financial statements for
the purpose of evaluating whether the company was fundamentally “broken” or
the cash crisis was merely a short-term problem that could and should be remedied
with further investments. To that end, they looked to the 2000 financial
statements and relied upon them to the extent that they established that the
company had shown a profit in the recent past. Their reliance on the financial
statements as an accurate representation of the financial health of the company in
2000 was even more justifiable in light of the representations made by Walker at
the May 2001 board meeting that the company had “turned the corner,” to which
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Bencini did not object. In sum, the inside investors testified that they relied on the
2000 financial statements to gauge the severity of the crisis that arose in the
summer of 2001and to make decisions about how to address that crisis. In a
footnote, the Court noted that it “finds unpersuasive Plaintiffs’ attempts to
characterize TSG’s June 2001 severe cash flow problem as a short-term cash
shortfall.” (Order, p. 17.) This statement, however, appears to be a simple factual
determination that the Court may not make at the summary judgment stage, where
the facts must be construed in favor of the non-moving party. Given the evidence
in the record, there appears to have been a genuine issue of material fact regarding
justifiable reliance, and summary judgment on this basis was improper as to the
claims against Bencini.
The outside investors, however, are in a distinctly different position from
the inside investors who actually reviewed and relied upon the financial
statements. The District Court concluded that the outside investors did not
reasonably rely on the 2000 financial statements. The evidence in the record is not
disputed on this point, and shows that these outside investors did not rely on any
financial statements, but rather relied on the representations of Mayer, one of the
inside investors who was privy to the information as discussed above. This type
of “indirect reliance” was clearly rejected in White, where the Georgia Court of
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Appeals held that Georgia law does not permit indirect reliance to substitute for
proof of actual reliance. 549 S.E. at 493. Accordingly, we affirm the District
Court’s entry of summary judgment on the fraud claims as to the outside investors.
3. Intent
To prove a claim for fraud, a plaintiff must show intent to mislead. “A
misrepresentation is intended to deceive where there is intent that the
representation be acted upon by the other party.” Petzelt v. Tewes, 581 S.E.2d
345, 347 (Ga. Ct. App. 2003). Proof of fraud is typically not susceptible of direct
proof, and so circumstantial evidence must be used to establish fraudulent intent.
Id. Thus, “it is peculiarly the province of the jury to pass on these circumstances
showing fraud. Except in plain and indisputable cases, scienter in actions based
on fraud is an issue of fact for jury determination.” Id.
The District Court concluded that “there is no evidence to support the claim
that Bencini and D&D knew that the Financial Statements would be used in
connection with an offer to sell securities in TSG or that the Investor Plaintiffs
would be solicited for investment capital.” (Order Granting Summary Judgment,
p. 21.) Contrary to Appellants’ arguments, a showing of recklessness under a
theory of constructive fraud does not provide an alternate theory on which
Appellants’ common law fraud claim may be based. Constructive fraud is “not
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creative of any independent right of action for damages in tort in favor of the
injured party; but [the misrepresentations] may support an action in equity to
rescind a contract so induced.” Penn Mut. Life Ins. Co. v. Taggart, 144 S.E. 400,
402 (Ga. Ct. App. 1928). Because Appellants seek to recover money damages in
this action, this theory is inapplicable, and Appellants may not satisfy the intent
element of their fraud claim with evidence of recklessness.
However, a showing of severe recklessness is adequate to support
Appellants’ claims for securities fraud. Although common law fraud in Georgia
requires a showing that the misrepresentations were made with the intention and
purpose of deceiving the plaintiff, securities fraud under Georgia law requires only
that plaintiffs show that the representations were made with scienter. The United
States Supreme Court has left open the question of whether scienter in the context
of securities fraud can consist of not only intent, but also recklessness. See Ernst
& Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The Eleventh Circuit,
however, has concluded that a showing of “severe recklessness” can satisfy the
scienter requirement in a securities fraud case. McDonald v. Alan Bush Brokerage
Co., 863 F.2d 809, 814 (11th Cir. 1989).2 Thus, the District Court’s blanket
2
Although Ernst & Ernst and McDonald both involve federal claims for securities fraud,
they are instructive here. “[T]o evaluate a claim for securities fraud under [Georgia statutory
law], we look to the similar elements a plaintiff must allege under section 10(b) of the Securities
23
finding that the record contained no evidence to show that D&D and Bencini
actually intended to deceive the investors fails to differentiate between the two
materially different state of mind standards in claims for fraud and claims for
securities fraud. In addition to actual intent, severe recklessness would also be
adequate to satisfy the scienter requirement in a claim for securities fraud.
“‘Severe recklessness is limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even inexcusable negligence,
but an extreme departure from the standards of ordinary care, and that present a
danger of misleading buyers or sellers which is either known to the defendant or is
so obvious that the defendant must have been aware of it.’” McDonald, 863 F.2d
at 814 (quoting Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961-62 (5th Cir.
1981)).
We must now consider whether adequate evidence existed in the record to
create a genuine issue of material fact as to the intent requirement for Appellants’
fraud claim and the scienter requirement for Appellants’ securities fraud claim.
Appellants argue that the sheer magnitude, number, and nature of the errors could
give rise to a reasonable inference that Bencini intended to conceal the true
financial condition of the company and mislead them. They also point to an email
Act of 1934.” GCA Strategic Inv. Fund, 537 S.E.2d at 682.
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from Bencini to an accountant at D&D wherein he advises D&D that TSG was
attempting to acquire other businesses and would need as much as $50 million to
complete these desired acquisitions, of which $3 million to $10 million could be
raised through the sale of stock. This email indicates that as of February 2000,
when the email was sent, both Bencini and D&D were aware that significant
efforts to obtain capital would be forthcoming, and this evidence could also
support an inference that they intended to manipulate the accounting figures to
appeal to potential investors. The record in this case also shows that capital had
been raised from investments by the directors in the past, and so a jury could also
infer from this that D&D and Bencini knew the directors could be called upon to
invest again in the future. Although these pieces of evidence, taken individually,
may not provide adequate evidentiary support on the element of intent, taken
together they could support a reasonable inference by a jury that Bencini intended
to mislead investors. At the very least, this evidence could support a finding that
Bencini’s errors and subsequent failure to correct the board members’ impression
of the company’s financial health constituted severe recklessness. On this record,
we conclude that adequate evidence existed to preclude summary judgment on the
element of intent as to both the common law fraud and securities fraud claims.
V. Judgment as a Matter of Law Based on Exculpatory Clause
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Appellants also argue that the District Court erred in granting judgment as a
matter of law in favor of D&D on the claims of professional negligence, ordinary
and/or gross negligence, and breach of contract following the trial. The Court
based its decision on the exculpatory language contained in D&D’s engagement
letter, concluding that this language barred the claims raised against D&D as a
matter of law. The language on which the Court relied states that D&D is released
from liability for any consequential, indirect, lost profit, or similar damages
relating to D&D’s services, except where those damages were the result of willful
misconduct or fraud. (Order Granting D&D’s Renewed Motion for Judgment as a
Matter of Law, p. 2.) Because the Court had previously entered summary
judgment in favor of D&D on the fraud claims, and the jury’s verdict was based on
negligence, the Court concluded that this clause barred recovery.
We review de novo the District Court’s grant of judgment as a matter of law
under Federal Rule of Civil Procedure 50, using the same standard as the District
Court. Cleveland v. Home Shopping Network, 369 F.3d 1189, 1192 (11th Cir.
2004). Judgment as a matter of law is appropriate “where there is no legally
sufficient evidentiary basis for a reasonable jury to find for that party on that
issue.” Id. We must review all the evidence in the record and draw all reasonable
inferences in favor of the nonmoving party. Id. “Credibility determinations, the
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weighing of the evidence, and the drawing of legitimate inferences from the facts
are jury functions, not those of a judge.” Id. (quoting Reeves v. Sanderson
Plumbing Prods., 530 U.S. 133, 150 (2000)).
Appellants argue on appeal that it was error for the District Court to uphold
and apply the exculpatory clause because it violates public policy. “Contracts may
be avoided by the courts as against public policy only in cases free from doubt and
where the injury to the public is clear.” Emory Univ. Porubiansky, 282 S.E.2d
903, 904-905 (Ga. 1981) (citing Phenix Ins. Co. v. Clay, 28 S.E. 853 (Ga. 1897)).
However, Appellants point to no case in Georgia holding that an exculpatory
clause in an engagement letter from an accounting firm is violative of public
policy. Rather, they analogize to other types of professionals, such as medical or
dental professionals, who courts have held may not shield themselves from
liability with an exculpatory clause. See Porubiansky, 282 S.E.2d at 905; Olson v.
Molzen, 558 S.W.2d 429, 430 (Tenn. 1977). Appellants argue that, like doctors
and dentists, accountants must be licensed in Georgia, and that the state has a valid
interest in assuring that licensed accountants comport with the standards of care
established for the profession. Further, they argue that the separate common law
duty owed by D&D to the Appellants, arising apart from its contractual
obligations, is unique to licensed professionals and supports a conclusion that they
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may not contract out of their obligation to exercise reasonable care.
However, this Court is not persuaded that the duties of an accountant are
analogous to the duties of a medical or dental professional. In fact, courts within
this Circuit have concluded that an exculpatory clause in a contract may be
enforced, even where the contracting party, a securities broker, is a professional
regulated by the state. Barton v. Peterson, 733 F. Supp. 1482, 1489 (N.D. Ga.
1990). In that case, the court emphasized that “the service is not one of practical
necessity, nor are brokers generally willing to perform their services for any
member of the public.” Id. The court further reasoned that the parties were not of
such unequal bargaining power to make the contract a contract of adhesion. Id.
Likewise, in the instant case, Appellee D&D is a firm of financial professionals
who provide accounting services to sophisticated clients with equal bargaining
power. Unlike medical or dental services, accounting services are not a practical
necessity. Furthermore, as D&D points out, there exists no state statute that
specifies a duty of care for accountants, as there is for medical professionals.
Given these distinct differences, we agree with the District Court that an
exculpatory clause in a contract for the services of an accounting professional is
enforceable.
Even if, as a general rule, exculpatory language eliminating the duty of care
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for accountants was unenforceable as a matter of public policy, the particular
exculpatory clause at issue in this case would still be enforceable. This is because
the exculpatory language used by D&D in its engagement letter does not eliminate
the duty of care, or preclude legal action against D&D entirely, it simply limits the
type of damages that may be sought. The Porubiansky decision, in fact, explicitly
left the door open to the possibility that even medical or dental professionals could
limit liability in some ways, “agree[ing] that because the clinic is part of a teaching
facility it may require that prospective patients waive the right to insist on
complete treatment.” 282 S.E.2d at 904. Thus, we agree with the District Court
that the exculpatory language in D&D’s engagement letter does not violate public
policy and should be enforced. The District Court’s entry of judgment as a matter
of law in favor of Appellee D&D on the claims of professional negligence,
ordinary and/or gross negligence, and breach of contract is affirmed.
VI. Attorneys’ Fees, Prejudgment Interest, and Correction of Final
Judgment
Finally, Appellants appeal the District Court’s denial of attorneys’ fees
incurred in proving that D&D was negligent in auditing the Burnt Store financials,
denial of TSG’s request for pre-judgment interest, and award of attorneys’ fees
and costs to Bencini. The decision whether or not to award attorneys’ fees based
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on D&D’s refusal to stipulate is within the discretion of the District Court, and we
find no abuse of discretion in this instance. Additionally, the issue of prejudgment
interest is now moot in light of our affirmance of the District Court’s entry of
judgment as a matter of law in favor of D&D. Thus, these two orders of the
District Court are affirmed. However, in light of our partial reversal of the order
of summary judgment entered in favor of Bencini, we reverse the District Court’s
entry of Final Judgment in favor of Bencini for attorney’s fees and costs, and
remand the matter to the District Court for further proceedings.
VII. Conclusion
For the foregoing reasons, the District Court’s denial of the plaintiff’s
motion to remand this case to state court is AFFIRMED. The District Court’s
Order Granting Summary Judgment in favor of Bencini and D&D is VACATED
in part as to the breach of fiduciary duty claim of all plaintiffs against Bencini, and
the fraud and securities fraud claims of TSG and the inside investors against
Bencini. These claims are REMANDED to the District Court for further
proceedings consistent with this opinion. The District Court’s Order granting
judgment as a matter of law in favor of D&D on the claims of professional
negligence, ordinary and/or gross negligence, and breach of contract is
AFFIRMED. The District Court’s Order denying the plaintiffs’ request for
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attorneys’ fees and prejudgment interest is AFFIRMED. The District Court’s
entry of final judgment in favor of Bencini for attorneys’ fees and costs is
VACATED and remanded to the District Court for further proceedings consistent
with this opinion.
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