Background
William Mullally, Lewis Lester Sr., and Robert Colvin formed CU Capital Market Solutions, LLC (“CMS”) to provide consulting services to credit unions, including loan participation opportunities. Each member held approximately one-third of the company’s Class A Units. The CMS operating agreement contained restrictive covenants and was governed by Georgia law. This was the case’s second appearance before the Court of Appeals, after the court previously affirmed a trial court finding that the restrictive covenants were valid and enforceable against Mullally.
On remand, a jury found that Mullally breached the operating agreement, breached his fiduciary duty, and made negligent misrepresentations to his partners. The evidence showed that while still employed by CMS, Mullally solicited CMS customers for his own side businesses, used a CMS employee to prepare invoices for those businesses, and falsely represented to his partners that a “pipeline” of closed deals would soon bring revenue to CMS — when in fact the funds were flowing to Mullally’s competing ventures. The jury awarded a total of $1,932,817.45 in damages. Mullally appealed the denial of his motions for directed verdict and judgment notwithstanding the verdict.
The Court’s Holding
The Court of Appeals affirmed the jury’s verdict on all counts. On breach of contract, Mullally argued CMS failed to prove damages with sufficient certainty, contending the evidence showed only lost revenue rather than lost profits. The court disagreed, holding that substantial evidence supported the damages award. CMS’s expert forensic accountant conducted a thorough regression analysis of revenue patterns before and after Mullally’s departure, and testifying witnesses established that CMS’s operating costs remained relatively constant. Under Georgia’s “any evidence” standard for reviewing a JNOV denial, the evidence was sufficient.
On breach of fiduciary duty, the court rejected Mullally’s argument that the operating agreement’s waiver provision eliminated his fiduciary obligations. The provision — which disclaimed fiduciary duties for any “Member or Manager” — did not, by its plain terms, apply to duties arising from Mullally’s role as director, officer, or employee of CMS. And regardless of his role, the jury could find that Mullally breached his contractual obligation of good faith and fair dealing by secretly competing with CMS using company resources and employees.
On negligent misrepresentation, the court found that Mullally’s false assurances about incoming revenue, made while he was actually diverting deals to his own competing business, forced CMS to raise capital from other sources. This evidence sufficiently supported the jury’s verdict.
Key Takeaways
- Georgia LLC operating agreements that waive fiduciary duties for “Members” or “Managers” do not necessarily eliminate duties arising from a member’s role as an officer, director, or employee of the company.
- A forensic accountant’s regression analysis of revenue patterns can provide sufficient evidence to support a breach-of-contract damages award, even where operating costs are not precisely segregated.
- An LLC member who solicits company customers for competing ventures while still employed, and misrepresents future revenue prospects to partners, may face liability on contract, fiduciary, and negligent misrepresentation theories simultaneously.
Why It Matters
This decision provides important guidance for Georgia LLC practitioners on the limits of fiduciary duty waivers in operating agreements. The court’s distinction between duties owed as a “Member or Manager” and duties arising from employment or officer roles suggests that practitioners drafting such waivers need to be precise about which capacities are covered. A blanket waiver referencing membership status may not shield conduct undertaken in an officer or employee capacity.
The nearly $2 million verdict also underscores the serious financial exposure facing LLC members who engage in self-dealing. For Atlanta commercial litigators, the case illustrates how breach of contract, fiduciary duty, and negligent misrepresentation claims can be layered to capture different aspects of the same course of disloyal conduct — and that juries may be receptive to substantial damages awards where the evidence shows systematic diversion of business opportunities.