Lawsuit accuses new Ga. Appeals Court judge of conflict of interest
James Holloway, 81, says he’s lost his $2.7 million investment in the rental company that owns The Gardens on Whispering Pines in Albany, Ga. JOHNNY EDWARDS / JREDWARDS@AJC.COM
By Johnny Edwards, The Atlanta Journal-Constitution
ALBANY, Ga. — When Ken Hodges takes a seat on the Georgia Court of Appeals next year, he’ll play a role in setting legal standards statewide. But a court case boiling over in this south Georgia city has raised questions about his own ethical standards as an attorney.
The case involves a bitter dispute between business partners over control of an apartment complex. Hodges got involved when a Superior Court judge put the business into receivership and appointed him receiver, allowing Hodges to take over day-to-day operations in place of the majority shareholder of the company that owned the complex.
Trouble was, Hodges had already been involved in the dispute as an attorney, having represented one of the other business owners in a stock transaction less than a year earlier. That stock sale, and the questionable financial dealings of Hodges’ former client, set off the feud that led to the receivership.
Yet Hodges decided he had no conflict of interest, and the judge who appointed him agreed. Hodges and the judge brushed off repeated calls by an angry partner for Hodges to recuse himself, case records show. Now the attorney faces a legal maelstrom in his own back yard, just as he’s preparing to assume statewide office next year, and while he’s serving as president of the State Bar of Georgia.
Hodges, who won a hotly contested race in May for an open Appeals Court seat, is being sued by one of the business partners for millions of dollars in damages, accused of mismanaging the rental company and taking on what should have been a neutral role despite a conflict.
“I still don’t see a problem,” Hodges said in a March deposition in the case. “I didn’t care who owned the property. I was there to manage the property.”
The judge-elect agreed to a phone interview for this story, but then his attorney said he was unavailable because he’s recuperating from shoulder surgery.
John Rogers, hired by Hodges’ malpractice insurer, said his client tried to salvage a business on the verge of failure, to protect the investors. There was no conflict of interest, he said, because Hodges’ job was to marshal and protect company assets, not get involved in the discord among the three owners. And Hodges disclosed his prior role to Dougherty County Chief Judge Willie Lockette, who appointed him.
“He has maintained from the beginning, he’s never told a judge no,” Rogers said. “And I think that just goes to being a south Georgia attorney.”
Neither Georgia law nor state bar rules lay out any parameters for who can serve as a receiver. Both federal and state court judges have the power to appoint them, typically when a company has fallen into such chaos that investors could lose their stakes.
However, judges usually bring in disinterested parties for the role — either attorneys or certified public accountants — so that no one can accuse an officer of the court of playing favorites, said Jack Williams, a Georgia State University law school professor who teaches bankruptcy law and business reorganization.
“We could use a needlessly crude tool here: Could the attorney have been the judge?” said the professor, who hasn’t reviewed Holloway’s case but spoke to the scenario. “We would have a serious problem with that situation, yet he is an extension of the judge, as the receiver.”
Friends and foes
Majority shareholder James Holloway filed the lawsuit against Hodges, saying in serving as the receiver, the attorney had no idea how to manage an apartment complex and ran it into the ground.
Holloway said the two-year debacle has him facing possible bankruptcy. He’s lost his $2.7 million investment, and he’s being sued by Wells Fargo for $14 million, after mortgage payments fell behind.
“He made a total wreck out of a good business,” Holloway, 81, said of Hodges, who was still managing the apartments when he starting campaigning for the Court of Appeals.
But Hodges’ attorney said that within months of taking over the company, Hodges discovered serious problems, including mounting debt, account shortages and renters’ security deposits not being properly held in a trust account.
“The utilities were on the verge of being cut off because they were perpetually late on payments,” Rogers said. “The insurance was lapsing. Garbage disposal was behind on payments — actually that service was shut off. Ad valorem taxes were behind on payments.”
With cash running short, the three partners, including Holloway, refused to put up money needed for mortgage payments, Rogers said.
By then, the three were locked in a heated battle over who owned the property. The court case involves a complicated web of shifting alliances, backbiting, ruined friendships and back-and-forth allegations of stealing from the company.
The three men had been in business together for two decades, starting when they purchased and renovated a blue-collar apartment complex that had been washed out in the great Flint River flood of 1994.
The deal started to fall apart when partner Stephen Bacon — who declined to comment for this story — began pulling money out of the company, court filings by Holloway’s attorney allege. According to deposition testimony, Bacon’s partners say they discovered he was running credit cards through company accounts to loan himself monthly cash, and that he was padding payments to vendors and pocketing the difference. One vendor sued the company, claiming Bacon shorted him.
Then the other two partners found out Bacon had sold his one-third interest for $51,000 to a new investor – a man with a lengthy criminal record that includes deposit account fraud, income tax evasion and commercial gambling – who wanted to take Bacon’s place as third partner.
Holloway and the other partner balked, asserting that the company’s bylaws required Bacon to first offer the shares to them. So Bacon agreed to sell his shares to them for $200,000, and he hired Ken Hodges to represent him in the transaction.
It’s unclear from court records if or how Bacon’s first sale was unwound. But Bacon’s agreement to sell instead to his partners wasn’t the end of the dispute.
Holloway took out a loan and paid the full sum. Fearing that he was being cut out, the other partner, Geoffrey Gray, formed an alliance with the man who paid $51,000 and was demanding a stake in the company. They filed an emergency complaint describing the conundrum and seeking a receiver. The two also accused Holloway of siphoning money out of the company, court records say.
In August 2016, Hodges got a call from a state senator who’d been hired as an attorney by Gray. If they could convince a judge to appoint a receiver, Sen. John Kennedy, R-Macon, asked Hodges, would he take the job?
Hodges, who knew about the ownership tug-of-war at that point, told him yes.
Judge Lockette held an emergency hearing on the complaint, agreeing to appoint Hodges, with whom he’d worked closely over the 12 years that Hodges served as Dougherty County’s district attorney.
Holloway wasn’t aware of the hearing. When he learned of it, within days his attorney was on the phone to the judge, to Hodges and to other attorneys in the case, objecting to Hodges’ appointment as receiver.
Columbus attorney Neal Howard, who represents the investor who claims he lost his $51,000, said he saw nothing wrong with the appointment. At that point, he notes, Hodges’ former client wasn’t a partner in the business anymore.
“I know that when it comes to Albany, Ga., Ken Hodges is considered a very honorable public figure,” Howard said. “So that’s why I think Judge Lockette chose him.”
Holloway’s attorney, Johnny Spurlin, has alleged Hodges did more than just disregard a conflict. In court filings and hearings, he has claimed Hodges was handpicked by the other side and took steps as receiver to help their cause.
“That’s what they wanted, to take control of the companies,” Spurlin told the AJC. “Once they got that order appointing Ken, they had control of it.”
Sen. Kennedy agreed to speak to the AJC but didn’t return subsequent messages.
Four months after the emergency hearing, Judge Lockette held another hearing to decide whether to continue the receivership. One issue was whether Hodges had a conflict of interest.
Under questioning from Holloway’s attorney, Hodges downplayed his interactions with Bacon, saying the transaction in which he represented Bacon had nothing to do with matters in front of him as receiver.
Holloway’s attorney also asked Hodges if he was aware before the $200,000 sale that his client had previously sold the same shares for $51,000.
“At some point I learned it,” Hodges said, “but certainly not when I was … facilitating a transaction that I thought was a legitimate transaction for Mr. Bacon to sell his stock to Mr. Gray and Mr. Holloway.”
Lockette ruled to keep the receivership in place.
Hodges made that same assertion again in a March deposition, saying he only learned about the previous sale “after the closing.” Holloway’s attorney then showed Hodges records from the transaction that referenced the prior sale. Hodges conceded that he had counseled his client to sign those records, so he must have been aware. “Apparently so,” Hodges answered.
Hodges’ attorney, Rogers, told the AJC that Hodges wasn’t changing his story or withholding information from the judge. In the hearing, he said, Hodges was answering that he didn’t know the dollar amount of the prior sale price when he conducted the second sale, not that he wasn’t aware of the first sale at all.
“When you’re in a hearing, and you have no paperwork in front of you, and you’re being asked questions by an attorney, and you’re going clearly on recollection, things can get confusing,” Rogers said.
Deposition testimony also brought up another potential conflict of interest. Months before the receivership began, Bacon consulted with Hodges for help setting up a corporation, and Hodges’ firm did the work.
Holloway contends in court filings that because of Hodges’ ties to Bacon, instead of pursuing Bacon for money he might have owed the company, Hodges conferred with Bacon as an expert on the business.
Holloway’s attorney said Hodges also helped his former client by paying $10,000 in company money to the vendor who claimed Bacon stiffed him.
As the dispute dragged on, Holloway’s attorney asked Lockette to recuse himself from the case, saying the judge’s relationship with Hodges clouded his judgment.
Lockette denied that but agreed to step aside. The judge declined to comment for this story.
Judge L.A. “Buster” McConnell replaced Lockette. Emails in the case file show that at one point, McConnell also raised a concern about Hodges serving as receiver when he had represented an ex-partner in the business.
“Mr. Hodges, please state under oath the circumstances surrounding your appointment,” McConnell told Hodges in a November 2017 email. “Also state what your personal and professional relationship was with Mr. Bacon. If you had represented him in the past on this case or any other case, you probably should have refused the appointment.
“Otherwise,” McConnell added, “it could taint your entire involvement in the case.”
In a lengthy reply, Hodges said he took the job at a reduced rate, accepting it only because Lockette had asked him to, and that he had no conflict.
Hodges’ role as receiver ended after the three parties signed a consent order in hopes of salvaging the company.
But the bank filed suit, calling the debt. The apartments are now in control of a new receiver, requested by Wells Fargo.
No trial date has been set in Holloway’s lawsuit against Hodges. Bacon, Gray and the other investor are also defendants in that suit.
The situation shows why attorneys should avoid getting involved in matters where a former client might be considered an adversary, said Clark Cunningham, a professor of legal ethics at Georgia State University College of Law. As a receiver, the attorney could be faced with a duty to go after the assets of someone whose holdings he’s familiar with as his ex-attorney, said Cunningham, who also commented for this story in general terms, not speaking directly about the case.
“If an attorney in this type of situation asked for my advice before becoming the receiver, my advice would be don’t accept it,” the professor said.