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New Star Realty, Inc. v. Jungang Pri USA, LLC

Court of Appeals of Georgia, First Division

June 22, 2018


          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 ...

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