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Stewart v. McDonald

Court of Appeals of Georgia, Fifth Division

June 28, 2018

STEWART
v.
McDONALD.

          ELLINGTON, P. J., MCFADDEN, P. J. and RAY, J.

          McFadden, Presiding Judge.

         Robert J. Stewart filed this lawsuit against attorney Gus McDonald for legal malpractice, among other things. Stewart claimed that, as a result of that malpractice, he had suffered financial loss in connection with the 2010 sale of a business which he had formed in 2001 with Chip Smith. A Rabun County jury returned a $392, 000 verdict in favor of Stewart, but the superior court granted McDonald's motion for judgment notwithstanding the verdict. Stewart appeals from that order as well as the trial court's grant of McDonald's motion for a directed verdict on Stewart's other claims.

         Because Stewart presented evidence to create a jury question on his claim of legal malpractice, the trial court erred in granting McDonald's motion for judgment notwithstanding the verdict on the claim. Any error in the grant of a directed verdict on Stewart's breach of fiduciary duty and fraud claims, which duplicate the legal malpractice claim, was harmless, given our reversal of the grant of the motion for judgment notwithstanding the verdict on the malpractice claim. Finally, the jury should have been allowed to consider Stewart's claims for attorney fees and punitive damages. So we reverse the judgment and remand the case with direction.

         1. Factual background.

         In his complaint, Stewart asserted claims against McDonald for, inter alia, fraud, breach of fiduciary duty, and legal malpractice. He sought compensatory damages, punitive damages, and attorney fees. Stewart claimed that his lawyer, McDonald, conspired with Stewart's business partner, Chip Smith, to defraud him out of his "fair share of the proceeds of the sale of a company that Stewart and Smith jointly owned." Stewart asserted that McDonald's negligence damaged him by depriving him of economic benefits that he was entitled to by virtue of his "equal ownership" position in the company. McDonald denied these claims, arguing at trial that he was not Stewart's lawyer, that he only agreed to help Stewart and Smith reduce to paper a sale that the two had already negotiated with the company's buyer, and that he did not cause any of Stewart's alleged damages.

         During the trial, the trial court granted McDonald's motion for a directed verdict on all but Stewart's legal malpractice claim. After the jury returned a verdict for $392, 000 in Stewart's favor, the trial court granted McDonald's motion for a judgment notwithstanding the verdict based on its determination that Stewart had failed to present evidence that McDonald's negligence was the proximate cause of his claimed damages. For the following reasons, we disagree.

On appeal from a trial court's rulings on motions for directed verdict and judgment notwithstanding the verdict, we review and resolve the evidence and any doubts or ambiguities in favor of the verdict; directed verdicts and judgments notwithstanding the verdict are not proper unless there is no conflict in the evidence as to any material issue and the evidence introduced, with all reasonable deductions therefrom, demands a certain verdict.

Vol Repairs II v. Knighten, 322 Ga.App. 416, 417 (745 S.E.2d 673) (2013) (citations and punctuation omitted). So viewed, the record shows as follows.

         Stewart and Smith form CES. In 1996, Smith worked as the fitness director at the Atlanta Athletic Club and he had a side business training athletes. Smith approached Stewart about working with him as a strength trainer, and he offered him a position at the Atlanta Athletic Club. The two later left the Atlanta Athletic Club and, in 2001, formed Competitive Edge Sports, LLC ("CES"). The company's operating agreement provided that Smith had a 51 percent, controlling interest in the company and that Stewart owned the remaining 49 percent.

         CES's operating agreement did not address whether CES, Smith, or Stewart owned any intellectual property. At trial, Smith testified that he was the sole owner of the intellectual property used by CES. He elaborated that he created and continuously owned all of the intellectual property used by CES, including a logo, a unique training system, a training manual, and various pieces of athletic equipment. Smith presented evidence showing that at some point, he obtained patents, trademarks, and copyrights in the intellectual property.

         Stewart, however, testified at trial that everything used in the business - including the intellectual property - belonged to CES. Stewart introduced evidence that the agreed 51-49 split was intended to reflect a fair allocation of the value of the company, based on his and Smith's complimentary efforts and contributions, including Smith's contribution of the company's logo. He explained that although he and Smith each had developed his own training system prior to forming CES, when they "got together, all of that changed and became a whole new system with both parts being added into it." He testified that while they were operating CES, there were no patents or trademarks; that they had used their logo from the beginning, although they refined it over time; and that they and their staff jointly wrote the training manuals that Smith ultimately turned into a copyrighted book.

         In 2007, CES was having financial difficulties, and Smith and Stewart began looking for ways to improve the company's cash flow. They spoke with two businessmen about franchising CES and its training methods. The businessmen testified at trial that they were assured by both Smith and Stewart that Smith was the sole owner of the intellectual property used by CES. Stewart, however, denied saying that he had no interest in any of CES's intellectual property. He explained that, because the costs of constructing weight rooms made it too expensive to license the weightlifting component of the program, which was Stewart's speciality, the discussions concerned only the running component of the CES training program, Smith's speciality. In any event, Smith and Stewart abandoned the negotiations and decided to pursue a sale of CES instead.

         CES Holdings acquires CES. Shortly after ending the franchising negotiations, Smith and Stewart struck a deal with Todd Robison, an international business consultant, to get the funds necessary to keep the company operating. Robison testified that he organized a group of investors to purchase CES outright from Smith and Stewart through a company that he had formed for that purpose, CES Holdings. Robison's immediate goal was to provide CES Holdings with an infusion of operating capital. Thereafter, he would find other investors to acquire CES Holdings from the investors who bought CES.

         On September 8, 2008, CES Holdings entered into a binding letter of intent with CES for the asset acquisition and purchase of CES, a document signed by both Smith and Stewart. The letter of intent expressly provided that the terms outlined in the agreement "are binding" on both parties and that they would be memorialized in a forthcoming "Definitive Agreement." The parties also agreed that the attorney acting as "outside advisor" concerning the sale, Chad Speck, represented all parties to the agreement and that all parties acknowledged, consented to, and waived any conflict of interest that counsel had with the parties.

         In the 2008 agreement, CES Holdings promised to assume CES's debts and to pay Stewart and Smith $100, 000 each for their membership interest in the company, to be paid in installments. CES Holdings retained Smith and Stewart as independent contractors and promised to pay them a salary, benefits, and other compensation, including 20 percent of the profits of CES Holdings. Both Stewart and Smith were also given the option to buy equity positions in CES Holdings. The 2008 agreement between CES and CES Holdings did not address the ownership of any intellectual property, other than to note that CES Holdings would continue to purchase any equipment invented by Smith. Robison testified that the 2008 agreement was silent on the issue of ownership of intellectual property because he had determined that Smith, not CES, owned all of the intellectual property relevant to the transaction.

         The 2008 agreement did, however, address intellectual property as it pertained to licensing agreements. It provided that all existing licensing agreements between CES Holdings and CES would be void and that only those licensing agreements that either Smith or Stewart entered into with CES Holdings would remain in effect. CES Holdings later entered into a separate licensing agreement with Smith for the use of intellectual property, including the CES logo, equipment, the training system, and written materials. Smith also purchased a 10 percent equity position in CES Holdings, which was memorialized in a separate agreement as well. Defendant McDonald was not involved in negotiating or drafting any of these agreements.

         CES Performance acquires CES Holdings. While Robison looked for investors to acquire CES Holdings, CES Holdings made the agreed installment payments to Smith and Stewart for their membership interests in CES and began retiring CES's debts. Robison, as the chief executive officer of CES Holdings, offered to sell the company to a group of Texas investors in exchange for $3 million.

         In late 2009, after a series of negotiations between Robison and the Texas investors, CES Performance ("CESP") was created to acquire CES Holdings. CESP agreed to assume and ratify all of the contractual obligations of CES Holdings. Robison sold his shares in the company and "exited the picture." Shortly thereafter, CESP's attorney began drafting the definitive agreements memorializing the sale of CES to CESP in accordance with the terms his client gave him. He did not complete drafting the documents, as he was informed that McDonald would be taking over.

         In 2009, before McDonald's involvement, Smith renegotiated his employment contract with CESP. Smith testified that he also spoke with Todd Leake, the chief executive officer of CESP, in January 2010 concerning the definitive agreement with CESP and the terms of his compensation. Smith said that, since he was still owed money from CES Holdings for licensing fees and equipment sales, he asked Leake to modify his definitive agreement to compensate him with additional CESP stock in lieu of the money owed. An April 8, 2010 email from CESP's attorney to McDonald confirmed that

CES Performance and [Smith] have been negotiating issues relating to [Smith's] compensation, license agreements, and equipment sales. In those negotiations, CES Performance has agreed to grant [Smith] a 10 percent equity interest in the company. The 10 percent granted to [Smith] in these negotiations plus the effective 10 percent he ...

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