Sale of Ownership Interest In Company Does Not Remove Liability Under Personal Guaranty

The Georgia Court of Appeals enforced a personal guarantee against two individuals, one of which sold his economic interest in the company subject to the breached agreement, after the company defaulted on a lease. Sage Atlanta Properties, Ltd. v. Diner Grp. of Georgia, LLC, No. A21A1128, 2021 WL 3087570, at *2 (Ga. Ct. App. July 22, 2021). The Court held that a personal guaranty will remain enforceable after a renewal of the lease agreement even if one of the individuals personally guaranteeing the agreement is no longer associated with the entity under agreement. Id. The relevant language of the identical guaranties stated:

THIS GUARANTY SHALL CONTINUE IN FULL FORCE AND EFFECT DURING THE TERM OF THE LEASE AND FOR ANY RENEWAL OR EXTENSION THEREOF, AND SHALL NOT BE AFFECTED BY ANY MODIFICATIONS, CHANGES, ALTERATIONS OR REVISIONS TO THE LEASE

In Georgia, a party may consent in advance to the conduct of future transactions and will not be heard to claim his own discharge upon the occurrence of that conduct. Bank South v. Grizzle, 218 Ga. App. 462, 462 (2), 462 S.E.2d 170 (1995) (citation and punctuation omitted). The guaranties bind the guarantors to the renewal of the lease, and they cannot claim that the renewal discharged them. Sage Atlanta 2021 WL 3087570, at *3 citing Bank South, 218 Ga. App. at 462. Specifically, a guarantor is liable for a subsequent lease renewal if it consented in a guaranty to "modifications, extensions, [and] amendments" of the lease. Id. citing Southeastern Hose v. Prudential Ins. Co., 167 Ga. App. 356, 357-358 (2), 306 S.E.2d 308 (1983).

The Court also rejected the guarantors' argument that the renewal was a novation because the guarantors explicitly agreed that the guaranties would continue in full force and effect during any renewals of the lease and that the guaranties would not be affected by any modifications, changes, alterations, or revisions to the lease. Id. citing Builders Development Corp. v. Hughes Supply, 242 Ga. App. 244, 245, 529 S.E.2d 388 (2000).

While the Court did not directly discuss the legal significance of the fact that one of the individuals that personally guaranteed the agreement had sold his interest to a third party individual (who happened to be the individual that signed the lease renewal), the Court notes the fact that he had sold his shares. Acknowledging the fact without further discussion indicates that a guarantors' sale of his or her ownership interest is of no significance to future enforcement against that guarantor upon a breach if the guaranty survives the renewal, modification, alteration, etc.

You Must Serve Every Known Address You Have Or Risk Default Being Set Aside

A trial court in Georgia set aside a default judgment stating, (1) that service was insufficient, and (2) that the court had wide discretion within the same term of court to do so where a plaintiff party did not attempt service on every known address of the defendant. Utilicom Supply Assocs., LLC v. Terra Tech, Inc., No. A21A0225, 2021 WL 2765945, at *1 (Ga. Ct. App. July 2, 2021). The Court of Appeals affirmed the decision based on the discretion of a trial court to set aside its own judgments, however, the court of appeals did not discuss whether service was sufficient.

Under Georgia law, a trial court’s power to set aside its own judgments during the same term of court is extensive:

A court has plenary control of its judgments, orders, and decrees during the term at which they are rendered, and may amend, correct, modify, or supplement them, for cause appearing, or may, to promote justice, revise, supersede, revoke, or vacate them, as may, in its discretion seem necessary.

(Citation and punctuation omitted.) Lemcon USA Corporation v. Icon Technology Consulting, Inc., 301 Ga. 888, 891, 804 S.E.2d 347 (2017); see Pope v. Pope, 277 Ga. 333, 334, 588 S.E.2d 736 (2003) (“During the term in which a judgment is entered, a trial court has plenary control over it and has the discretion to set aside the judgment. . . for the purpose of promoting justice.”)

While the discretion to set aside a judgment is not without limits and should be exercised for some meritorious reason, it is within the trial court’s discretion to determine what amounts to a meritorious reason for that purpose. Pope, 277 Ga. at 334, 588 S.E.2d 736 (internal citations omitted); see also Holcomb v. Trax, Inc., 138 Ga. App. 105, 107, 225 S.E.2d 468 (1976) (noting further that the question is not whether the order contains a “meritorious reason,” but whether any “meritorious reason” is shown in the record).

The facts in the record of Utilicom Supply Assocs., show that on March 2018, Terra Tech - the defendant - submitted a credit application form to establish an account with Utilicom. Utilicom Supply Assocs., LLC, 2021 WL 2765945 at *1. This application contained a North Carolina address. Id. Throughout the parties' relationship, Utilicom shipped materials to and billed Terra Tech at the North Carolina address. Id. A year after entering into the agreement, in June 2019, Utilicom sued Terra Tech for a breach of contract claim related to the credit application and the supply of materials sent to the North Carolina address. Id. Terra Tech's most recent annual filing with the Georgia Secretary of State listed a specific address in Cumming, Georgia as the location of its principal office and registered agent, however, service was attempted at that location and neither the registered agent nor the company were actually located there. Id. Utilicom, therefore filed a proof of service with the trial court stating that substituted service has been perfected on Georgia's Secretary of State pursuant to O.C.G.A § 9-11-4(e)(1), which states:

(1)(A) If the action is against a corporation incorporated or domesticated under the laws of this state or a foreign corporation authorized to transact business in this state, to the president or other officer of such corporation or foreign corporation, a managing agent thereof, or a registered agent thereof, provided that when for any reason service cannot be had in such manner, the Secretary of State shall be an agent of such corporation or foreign corporation upon whom any process, notice, or demand may be served. Service on the Secretary of State of any such process, notice, or demand shall be made by delivering to and leaving with him or her or with any other person or persons designated by the Secretary of State to receive such service a copy of such process, notice, or demand, along with a copy of the affidavit to be submitted to the court pursuant to this Code section. The plaintiff or the plaintiff's attorney shall certify in writing to the Secretary of State that he or she has forwarded by registered mail or statutory overnight delivery such process, service, or demand to the last registered office or registered agent listed on the records of the Secretary of State, that service cannot be effected at such office, and that it therefore appears that such corporation or foreign corporation has failed either to maintain a registered office or to appoint a registered agent in this state. Further, if it appears from such certification that there is a last known address of a known officer of such corporation or foreign corporation outside this state, the plaintiff shall, in addition to and after such service upon the Secretary of State, mail or cause to be mailed to the known officer at the address by registered or certified mail or statutory overnight delivery a copy of the summons and a copy of the complaint. Any such service by certification to the Secretary of State shall be answerable not more than 30 days from the date the Secretary of State receives such certification.

Utilicom also argued that they properly served Terra Tech via the Georgia Business Corporation Code, O.C.G.A. § 14-2-504, which states:

(b) If a corporation has no registered agent or the agent cannot with reasonable diligence be served, the corporation may be served by registered or certified mail or statutory overnight delivery, return receipt requested, addressed to the secretary of the corporation at its principal office. Service is perfected under this subsection at the earliest of:

(1) The date the corporation receives the mail;

(2) The date shown on the return receipt, if signed on behalf of the corporation; or

(3) Five days after its deposit in the mail, as evidenced by the postmark, if mailed postage prepaid and correctly addressed.

That same statutory framework defines “principal office” as "the office in or out of this state so designated in the annual registration where the principal executive offices of a domestic or foreign corporation are located." O.C.G.A. § 14-2-140(22).

The majority states that service was not perfected under O.C.G.A. § 9-11-4(e) because no attempt was made to mail service to the North Carolina address. However, the majority punts the question of service under the Georgia Business Corporation Code. Utilicom argues that it did attempt to serve the principal place of business pursuant to O.C.G.A. § 14-2-5-4 because the principal place of business as defined in the Georgia statute is the Cumming, Georgia address, not the North Carolina address. Again, the Court of Appeals did not speak to this statute, so while the express terms of the statute make clear that it would be sufficient service, the Court did not rule as such.

The majority opinion ultimately stated that regardless of what service was attempted, since Utilicom knew a "last known" address in North Carolina, they should have attempted service there. Since Utilicom did not, the judgment could be set aside in the interests of justice relying on the proposition that cases should be decided on their merits not via default judgment. Utilicom Supply Assocs., LLC, 2021 WL 2765945 at *3.

The dissent by Judge McFadden points out that service was sufficient pursuant to the express language of the statute and the Court should not have the power to set aside properly issued judgments. The takeaway from this case is muddled between the majority and dissent opinion, however, when serving anyone after this case, if you have an out of state address, you should attempt service at that address.

Spoliation Is A Question To Be Decided By Judge Prior to Trial, Not at Charge Conference Mid-Trial

The Georgia Court of Appeals decided that a trial judge erred in instructing the jury on spoliation of evidence that effectively made the question whether spoliation occurred a fact question for the jury to decide, after several of defendant's witnesses testified at trial that they had watched video surveillance footage that was not produced to the Plaintiff.

“Spoliation refers to the destruction or failure to preserve evidence that is necessary to contemplated or pending litigation.” (Citation omitted.) AMLI Residential Properties. v. Ga. Power Co., 293 Ga. App. 358, 361 (1), 667 S.E.2d 150 (2008). Among the possible sanctions for spoliation is a jury instruction that allows an adverse inference that the lost or destroyed evidence would have been harmful to the party in control of the evidence. Anthem Cos. v. Wills, 305 Ga. 313, 316 (2), 823 S.E.2d 781 (2019). Georgia appellate courts have cautioned that this jury instruction is a “severe sanction,” Cooper Tire & Rubber Co. v. Koch, 303 Ga. 336, 343 (2), 812 S.E.2d 256 (2018), to be generally reserved for intentional destruction of material evidence. Id. at 343 (2) (d), 812 S.E.2d 256; Creek House Seafood & Grill, LLC v. Provatas, 358 Ga. App. 727, 731 (2), 856 S.E.2d 335 (2021) (recognizing that the adverse inference jury charge should be reserved for “exceptional cases”).

The Court of Appeals reiterated that spoliation of evidence is not a fact the jury gets to find by an inference. Instead, whether spoliation occurred is a question to be decided by the Court prior to trial. Hillman v. ALDI, Inc., 349 Ga. App. 432, 443-444 (3), 825 S.E.2d 870 (2019)(recognizing that the party suspecting spoliation was required to obtain a ruling from trial court prior to making spoliation argument to jury).

Prior to charging the jury on spoliation, the trial court must determine “whether spoliation occurred, whether the spoliator acted in bad faith, the importance of the compromised evidence, and so on.” Demere Marsh Assoc., LLC v. Boatright Roofing & Gen. Contracting, Inc., 343 Ga. App. 235, 248 (4), 808 S.E.2d 1 (2017). Once a trial court has determined that spoliation has occurred, the court should weigh the following five factors when deciding the appropriate penalty:

(1) whether the party seeking sanctions was prejudiced as a result of the destroyed evidence; (2) whether the prejudice could be cured; (3) the practical importance of the evidence; (4) whether the destroying party acted in good or bad faith; and (5) the potential for abuse if any expert testimony about the destroyed evidence was not excluded.

(Citation and punctuation omitted.)Creek House Seafood & Grill, 358 Ga. App. at 730 (2), 856 S.E.2d 335.

Ultimately, because there was no evidentiary hearing regarding the video that defendant failed to produce, no request for sanctions, and no motion or request for a spoliation inference, the Court could not allow the charge to the jury without making the legal determination that spoliation occurred prior. The concurrence by Judge Miller noted the fact (left out by the majority) that one of the witnesses who testified in front of the jury that certain parts of the video surveillance footage was not included to the Plaintiff had stated the same fact in his/her deposition while discovery was still open. Judge Miller highlights to future litigants that after this deposition the Plaintiff should have moved to compel and sought a spoliation determination at that point, not mid-trial during the charge conference.