NEW STAR REALTY, INC.
v.
JUNGANG PRI USA, LLC.
BARNES, P. J., MCMILLIAN and REESE, JJ.
Barnes, Presiding Judge.
New
Star Realty & Investment, Inc. ("New Star
Georgia") was a franchisee of New Star Realty, Inc.
("New Star California"), a residential and
commercial real estate and investment business. After the
owner and president of New Star Georgia misappropriated
escrow funds intended as earnest money for a commercial real
estate transaction, Jungang PRI USA, LLC
("Jungang") sued multiple defendants, including New
Star California, for negligence and its attorney fees and
expenses. Jungang asserted that New Star California was
vicariously liable for the acts and omissions of New Star
Georgia under theories of actual and apparent agency. Jungang
further asserted that New Star California was directly liable
for its negligent failure to properly screen and select the
franchise owner and office manager of New Star Georgia, to
provide adequate education and training to New Star Georgia,
and to properly supervise New Star Georgia's handling of
its escrow account.
Following
a trial, the jury returned a verdict in favor of Jungang on
its negligence claim against New Star California,
apportioning 12.5 percent of the fault to New Star California
and the remainder of the percentage of fault among other
parties. The jury also awarded Jungang its attorney fees and
expenses. The trial court thereafter entered judgment in
favor of Jungang on its claims for negligence and attorney
fees and denied New Star California's motion for judgment
notwithstanding the verdict ("j. n. o. v."). On
appeal, New Star California contends that the trial court
erred in denying its motion for j. n. o. v. because there
were no evidentiary or legal grounds for holding it liable
for the loss of the escrow funds under theories of actual
agency, apparent agency, or direct negligence.[1]
For the
reasons discussed more fully below, we conclude that there
was no evidence to support finding New Star California
vicariously liable under an actual agency theory in light of
its franchise relationship with New Star Georgia and its lack
of supervisory control over the latter's daily
operations. Nor was there evidence sufficient to hold New
Star California vicariously liable under an apparent agency
theory, given that Jungang failed to show that it justifiably
relied on the apparent agency relationship and that its
reliance led to its injury. Lastly, New Star California could
not be held liable under a direct negligence theory because
Jungang failed to show the existence of a legal duty that
would support such a claim in this context. Accordingly, we
reverse the trial court's denial of New Star
California's motion for j. n. o. v. and remand with the
direction that the trial court enter judgment in favor of New
Star California on Jungang's claims for negligence and
attorney fees.
"On
appeal from the denial of a motion . . . for j. n. o. v., we
construe the evidence in the light most favorable to the
party opposing the motion, and the standard of review is
whether there is any evidence to support the jury's
verdict." (Citation and punctuation omitted.) Legacy
Academy v. Doles-Smith Enterprises, 337 Ga.App. 575, 576
(789 S.E.2d 194) (2016). So viewed, the evidence showed that
New Star California was a real estate company organized in
California that was well-known in the Korean-American
community. New Star California was owned by Christopher Nam,
and the chief executive officer ("CEO") position
alternated between Nam and his wife. New Star California had
offices throughout the United States that were either
directly owned by the company or were structured as
franchises.
In
2006, New Star California entered into a franchise agreement
with New Star Georgia. The franchise agreement granted New
Star Georgia the exclusive right in Georgia to use New Star
California's brand name, logo, and proprietary business
system in representing clients in commercial and residential
real estate transactions. The agreement further provided that
New Star California would provide marketing and advertising
support to New Star Georgia, would provide referrals to New
Star Georgia through its franchisee network, and would permit
New Star Georgia to use its website for an additional user
fee. Although the agreement also stated that New Star
California would visit "every area once every year"
to hold a convention and seminar for education purposes, a
subsequent paragraph of the agreement stated that,
"[c]onsidering the differences in the state laws of
California and Georgia[, ] scheduled education will not be
implemented" and specific requests for education instead
would have to be made by New Star Georgia.
The
franchise agreement required New Star Georgia to pay New Star
California a franchise initiation fee. New Star Georgia also
had to pay New Star California a royalty for real properties
that it sold, and it was obligated to comply with the
articles of incorporation and bylaws of New Star California.
New Star California was authorized to audit New Star
Georgia's books periodically to verify that all
contractual fees had been correctly determined, and New Star
Georgia had to periodically report its real estate
transactions to New Star California. However, the agreement
provided that New Star California was "not responsible
for the financial loss and legal damages of the business
owned by [New Star Georgia]" and that "all
responsibilities of [New Star Georgia's] business
operation including legal damages, E&O responsibilities,
etc. shall be the responsibility of [New Star Georgia]."
The
franchise agreement had an initial five year term, subject to
automatic renewal for additional terms unless terminated by
one of the parties. New Star California also reserved the
right to change the terms of the franchise agreement upon six
months advance notice, but if the parties could not
"come to terms" regarding the change, the agreement
would be terminated. New Star Georgia also had the right to
terminate the agreement if certain notice requirements were
met.
At its
peak, New Star Georgia had approximately 50 real estate
agents. One of the top-selling agents was Jueun Yeo, who also
served as New Star Georgia's senior vice president. In
addition to her positions at New Star Georgia, Yeo had a
small ownership interest in and was a managing member of a
real estate investment company, Jungang. Jungang's other
owners were Yeo's brother, who lived in Korea, and a
company affiliated with Yeo's brother.
Jeongha
Lee was the owner and president of New Star Georgia. In
November 2007, during a New Star Georgia office meeting, Lee
informed Yeo and several other agents that a 150 acre parcel
of land across from the Kia Motor plant in West Point,
Georgia, was on sale for $23.5 million. Lee advised Yeo and
the other agents that the land was a good opportunity for
development. Lee also told Nam, the owner of New Star
California, about the West Point investment opportunity when
he attended the annual holiday meeting with other franchise
owners in California in December 2007, and Lee gave an update
to Nam when he visited Georgia in March 2008.
After
investigating the West Point property, Yeo talked with her
brother, who agreed with her that Jungang should invest in
the deal. Yeo, acting as the buyer's agent for Jungang,
learned from Lee that the draft purchase and sale agreement
for the West Point property required an earnest money deposit
of $1 million and that the closing of the deal was set to
occur in the first week of January 2008. On November 26,
2007, Lee wrote Jungang regarding the need for an earnest
money deposit before the closing, representing that
"[t]his is to assure you that your money will be
securely deposited in our escrow account. We have about 45
days left before closing. If any reason, we don't close
on this project for what so ever reason it will be fully
refundable to you." Lee later added a postscript
stating, "The earnest money can not be transferred to
any other account without Jungang PRI USA's
approval." On November 26, 2007, Lee also sent an e-mail
to Yeo which, as translated from the Korean language,
provided that: "The contract fund of 1 Million dollars
will be kept at our trust account for safety and security,
and for about 45 days of contract period, I repeat that the
contract fund will be returned. Since the trust account is
safe, (you) don't need to worry about anything
else." Based on those assurances from Lee, on November
29, 2007, Jungang, through Yeo, wired the $1 million in
earnest money to New Star Georgia's escrow account. At
the time of the wire transfer, a purchase and sale agreement
for the West Point property had not been executed, but Yeo
trusted Lee when he said that the deal would either close or
the wired escrow funds would be returned.
Paul
Rohrabaugh, who was the licensed qualifying broker for New
Star Georgia in November and December 2007, [2] was responsible
for ensuring that the company was in compliance with Georgia
real estate law.[3] An expert in the field of commercial real
estate, including broker responsibilities and handling of
escrow funds, testified that the qualifying broker is
responsible for the real estate firm's escrow account and
that, if another person had the authority to write checks
from the account, an ordinarily careful broker also would
want to be a signatory and would implement procedures for
ensuring that escrow account disbursements were proper. In
the case of New Star Georgia, however, Rohrabaugh was not a
required signatory on the escrow account, and he did not
establish or implement any policies related to the account.
After
transferring $1 million of Jungang's funds into the
escrow account, Yeo never received a copy of a purchase and
sale agreement from the seller, and the closing did not occur
by January 2008. Yeo asked Lee regularly about the status of
the deal, which Lee maintained had been delayed, and in June
2008, Yeo asked Lee for the return of Jungang's earnest
money. Lee assured her that the deal would close.
Subsequently, after Yeo asked again for the return of
Jungang's funds, Lee told her that the deal would close
by August 31, 2008. Yeo spoke with her brother, who advised
that they could wait until then for the deal to close.
Meanwhile,
unbeknownst to Yeo, Lee had transferred all of the earnest
money out of the escrow account in December 2007 and then had
spent the funds on a "land development deal."
Rohrabaugh was unaware of the $1 million in earnest money
transferred in and out of the escrow account. Rohrabaugh
never reviewed the bank statements that reflected the
transactions, and he did not ask questions about the escrow
account because he believed that New Star Georgia's
office manager was overseeing the account.
Yeo
acknowledged at trial that, by August 2008, Lee had informed
her that the escrow funds were "gone." Yeo
testified that she was initially shocked by Lee's
revelation, but that she came to the conclusion that he must
be bluffing in an effort to keep Jungang in the deal because,
she testified, "there is a broker who's taking care
of the escrow account." Additionally, on August 13,
2008, Yeo executed a new agreement on behalf of Jungang
regarding the West Point property, but with Lee in his
personal capacity rather than with New Star Georgia. Under
the new agreement, "the ownership of the whole
project" would be restructured, and Yeo would receive 40
percent of the listing agent's commission and the entire
buyer's agent commission if the closing on the West Point
property occurred, and Jungang ultimately would own 20
percent of the project as an investor. The new agreement
provided that it would be "null and void" if the
closing on the West Point property did not occur by August
31, 2008.
The
deal did not close in August 2008. Yeo spoke by phone with
Nam and his wife in California and complained to them that
Lee had removed Jungang's funds from the escrow account
without permission. Nam called Lee in August or September
2008 to inquire about the escrow account and advised him that
he should return the funds to Jungang. Lee responded that he
would handle the problem.
Yeo
sent Nam an e-mail on December 8, 2008, again explaining the
situation with the escrow account. On December 14, 2008, Nam
forwarded Yeo's email to the director of franchise
operations with the message: "Find out what this is
about. Don't hurt people's feelings[.] Also don't
reveal who did this." New Star California subsequently
terminated its franchise agreement with New Star Georgia at
the end of 2008, and New Star Georgia thereafter ceased all
business operations.
Jungang's
attorney sent a demand letter to New Star Georgia for the
return of the escrow funds. However, Jungang's money was
never returned, and Lee was later convicted of felony theft
by taking, sentenced to a term of ten years in confinement,
and ordered to pay $1 million in restitution to Jungang. As
of the underlying trial date, Lee had not paid the ordered
restitution.
On
November 18, 2011, Jungang filed a complaint, which it later
amended, against several defendants, including Rohrabaugh,
New Star Georgia, and New Star California. Jungang asserted
various causes of action against New Star California,
including negligence, and sought $1 million in damages for
the unreturned escrow funds as well as attorney fees and
expenses of litigation under OCGA § 13-6-11. At the
ensuing jury trial, Jungang alleged that New Star California
was vicariously liable for the negligence of New Star Georgia
relating to the escrow funds under theories of actual and
apparent agency. Jungang also alleged that New Star
California was directly liable for its negligent failure to
adequately screen and select Lee as the franchise owner of
New Star Georgia, to ...