If a Building Falls Down But Nobody Hears It, Does It Make a Sound?

Posted by William J. Piercy on

In Nationwide Mortgage Services, Inc. v. Troy Langley Construction, Inc., 280 Ga. App. 539 (2006), Nationwide was a “hard money lender” in the business of making loans secured by residential properties.  Nationwide also rehabilitated and resold the properties that it acquired, often through the foreclosure process.  Nationwide’s two shareholders were Roberts and Jockisch, who also served as the company’s president and vice president, respectively.

In 2000, Nationwide entered into an agreement to lease and ultimately sell to VentureCap, a property (the “Property”) located on Perry Boulevard in Atlanta, Georgia consisting of 17 apartment buildings.  VentureCap’s original plan was to acquire the Property, demolish the existing structures, and to construct luxury townhomes. In furtherance of this plan, VentureCap made application with the City of Atlanta to demolish the buildings.  In that application, VentureCap represented that it owned the Property despite the fact that title had not yet (and indeed never did) transferred from Nationwide.  The City granted VentureCap a demolition permit.  However, it was unable to obtain financing for the demolition and redevelopment of the Property.

Without this financing, VentureCap was unable to make the lease payments or to purchase the Property from Nationwide.  Further, VentureCap’s demolition permit expired six months after it had been issued. Rather than sue VentureCap for breach of contract, Nationwide’s shareholders, Roberts and Jockisch approached VentureCap’s president, Boyd, and proposed a partnership arrangement whereby Roberts and Jockisch could form a new entity, Perry Limited, LLC (“Perry”).  Perry would then form a partnership with VentureCap for the demolition, redevelopment, and sale of the Property as a luxury townhome development.  VentureCap agreed.

Although Roberts and Jockisch never actually incorporated Perry, they did reserve its name with the Georgia Secretary of State both signed a Partnership Agreement as “Partner in Perry Limited.”  Boyd signed the Partnership Agreement on behalf of VentureCap.  The Partnership Agreement identified VentureCap as the “primary managing partner” of the partnership and Perry as the “secondary managing partner.”

As Roberts and Jockisch understood it, the partnership was to serve as a vehicle for obtaining institutional financing for the redevelopment of the Property.  Roberts and Jockisch further understood that the Property would not be demolished or redeveloped until financing was obtained.   Alternatively, VentureCap and its president, Boyd, understood that the execution of the Partnership Agreement authorized the project to move forward without further delay.

Based on that understanding, VentureCap entered into a contract with Troy Langley Construction, Inc. (“Langley”) to demolish the buildings on the Property.  Langley promptly did so despite the fact that VentureCap’s demolition permit had (a) long since expired; and (b) improperly identified VentureCap as the owner of the Property.

Despite the involvement of Roberts and Jockisch, the Partnership was unable to secure financing to pay for the demoltion or the property.

Unpaid for the work it performed, Langley recorded a claim of lien against the Property and ultimately filed suit against VentureCap, Roberts, Jockisch, and Nationwide.  For its part, Nationwide counterclaimed back against Langley arguing not only that it (Nationwide) did not owe Langley anything for the demolition work because Nationwide did not contract with Langley for that work, but also that Langley was liable to Nationwide for demolishing its buildings.  Langley moved for and was granted summary judgment as to Nationwide’s counterclaim.

Nationwide appealed.  The Georgia Court of Appeals reversed the trial court, finding that a trial was necessary to determine whether VentureCap had authority to bind Roberts, Jockisch or Nationwide to the demo contract with Langley.  In so ruling, the Court found some evidence that Nationwide was aware of, and perhaps tacitly consented to, the demolition work performed by Langley.  The route by which the Court of Appeals arrived at that result required some legal gymnastics.

First, the Court undertook to determine the identity of the partners to Partnership Agreement.  As an initial matter, the Court determined that Nationwide was not a partner under the Partnership Agreement.  Although both of Nationwide’s shareholders signed the Partnership Agreement, they purported to do so on behalf of Perry, and not on behalf of not Nationwide.  In so ruling, the Court noted that  “a corporation is not generally bound by the acts of its officers undertaken in their private capacities.  Thus, Nationwide was not directly bound by the provisions of the partnership agreement.”  However, this did not end the inquiry.  The Court believed the Partnership Agreement relevant to whether VentureCap had the authority to contract with Langley for the demolition work on Nationwide’s property.

Although the Partnership Agreement purports to be between VentureCap and Perry, the Court found that the actual partners were VentureCap, Roberts, and Jockisch.  In so ruling, the Court cited to the well- established doctrine that where an individual signs a contract on behalf of a non-existent business entity, the individual becomes personally obligated and liable for the obligations purportedly assumed by the entity in the contract.  “An undertaking by an individual in a fictitious or trade name is the obligation of the individual.”  Rather than invalidating the Partnership Agreement, the Court merely determined that Roberts and Jockisch were substituted in place of Perry as partners to that Agreement.

The Court then cited to the well established law that as a general rule, a partner has the power to bind a partnership by entering into contracts in pursuit of the partnership’s business, “unless the partner so acting has in fact no authority to act for the partnership in the particular matter”  Finding no such limitation on VentureCap’s authority, the Court found that there existed evidence that VentureCap may have been able to bind its partners, Roberts and Jockish, to the obligations of the demo contract with Langley.”

From there, the Court turned to the question of whether Nationwide could be bound by the obligations which may be imposed upon that its shareholders under the Partnership Agreement.   In analyzing the facts of the case, the Court determined that there existed some evidence to indicate that Nationwide ratified or at least tacitly consented to VentureCap’s contract with Langley for the demolition of the Property.  The Court noted that “[a] presumption of ratification can arise from slight acts of confirmation, or from mere silence or acquiescence, or where the principal receives and holds the fruits of the agent’s act[s]” and further that “[r]atification may occur if a business entity accepts the benefits of an act done by another on its behalf, although that person had no actual or apparent authority to act for the business.”

The Court found the context in which the Partnership Agreement was signed important.  Initially, Nationwide was supposed to lease and ultimately sell the Property to VentureCap.  Because Nationwide was paying high interest rates to carry the Property while leasing it to VentureCap, Roberts and Jockisch determined it expedient to find a way to salvage the transaction when VentureCap’s purchase money financing fell through.  Because Nationwide could not sell the Property outright, it considered developing the property in order to pay off the first mortgage and make additional income as a developer.  Thus, the formation of the partnership arose out of discussions between Boyd, representing VentureCap, and Jockisch and Roberts, acting on behalf of Nationwide’s interests.

In connection with that partnership, Jockisch and Roberts allowed VentureCap to take steps, including pursuing public and commercial financing, in furtherance of the project, which Jockisch, at least, understood would require the demolition of the existing structures on the Property. Jockisch had a number of discussions with Boyd regarding his efforts, and Boyd provided him with documentation regarding his plans for the project.  Moreover, there was disputed evidence that Jockisch and Roberts had visited the site during the demolition process and took no action to halt the process.  While Nationwide denies that its officers were aware of VentureCap’s plans to demolish the property until the process was completed, the evidence shows that Nationwide continued to work with Boyd to develop the Property even after learning of the demolition.  Moreover, for approximately one year-until Langley filed its complaint, Nationwide took no action to seek recovery or redress for its demolished Property.  Weighing all this, the Court determined that there existed sufficient evidence of a factual issue as to whether Nationwide acquiesced in and/or later ratified VentureCap’s actions in contracting with Langley such that a trial on that issue was necessary.