Raymond James Capital Partners , 248 N.C. App. 574 ( 2016 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA15-746
Filed: 2 August 2016
Caldwell County, No. 14 CVS 1250
RAYMOND JAMES CAPITAL PARTNERS, L.P., Plaintiff
v.
HAZEL HAYES, Defendant
Appeal by plaintiff from order entered 23 February 2015 by Judge Robert C.
Ervin in Caldwell County Superior Court. Heard in the Court of Appeals 2 December
2015.
Sigmon, Clark, Mackie, Hanvey & Ferrell, P.A., by Forrest A. Ferrell and Amber
Reinhardt Mueggenburg, for plaintiff-appellant.
Tin, Fulton, Walker & Owen, PLLC, by Sam McGee, for defendant-appellee.
CALABRIA, Judge.
Raymond James Capital Partners, L.P. (“plaintiff”) appeals from an order
granting Hazel Hayes’ (“defendant”) motion to dismiss all claims asserted against
her. We affirm.
I. Background
Plaintiff was a majority shareholder of Albion Medical Holdings, Inc.
(“Albion”), a closely held corporation. Defendant was a minority shareholder of
Albion. Greer Laboratories, Inc. (“Greer”)—a North Carolina corporation and wholly-
owned subsidiary of Albion—employed defendant for approximately forty-five years.
RAYMOND JAMES CAPITAL PARTNERS V. HAYES
Opinion of the Court
In 2005, defendant became Assistant Controller of Greer. Her job responsibilities
included “performing monthly bank reconciliations, maintaining the general ledger,
reviewing accounting entries and maintaining physical possession over Greer’s
manual checks.”
In 2013, Albion, and by extension, Greer, were sold pursuant to a Stock
Purchase Agreement. A business valuation method known as EBIDTA (Earnings
Before Interest, Taxes, Depreciation, and Amortization) was used to calculate the
purchase price. Albion was sold for 13.5 times the trailing twelve-month EBITDA.
In addition, any excess cash of Albion was to be allocated to shareholders in the form
of dividends or a pre-closing distribution. After the sale occurred, defendant
continued to work as Greer’s Assistant Controller until she retired in September
2014.
Soon after defendant’s retirement, Greer uncovered evidence that indicated
she had issued manual checks to herself and falsely recorded the funds as payments
to banks and vendors in the general corporate ledger. After being confronted with
this evidence, defendant allegedly admitted to embezzling funds from Greer
beginning in May 2013; however, the results of an internal investigation suggested
that the fraudulent check scheme dated back to 2004.
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Opinion of the Court
Consequently, on 7 November 2014, plaintiff filed a verified complaint1 against
defendant in Caldwell County Superior Court. Plaintiff alleged claims of
embezzlement, conversion, fraud, breach of fiduciary duty, constructive fraud, unfair
and deceptive trade practices, and a violation of North Carolina’s Racketeer
Influenced and Corrupt Organizations Act (“RICO”). According to plaintiff’s
allegations, defendant embezzled approximately $839,878.00 from Greer. The
verified complaint also contained a motion for a temporary restraining order and a
preliminary injunction. The trial court subsequently entered a preliminary
injunction against defendant prohibiting her from, inter alia, selling, conveying, or
liquidating her assets in order to protect plaintiff’s “ability to collect upon any
judgment it obtain[ed] in th[e] case.” Defendant responded by filing an answer and
motion to dismiss pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil
Procedure for failure to state a claim based, in part, on plaintiff’s lack of standing to
bring individual claims against defendant. After a hearing on the Rule 12(b)(6)
motion, the trial court entered an order on 23 February 2015 granting defendant’s
motion to dismiss as to all claims. Plaintiff appeals.
II. Standard of Review
1 Greer also filed an action against defendant in Caldwell County but a settlement was
eventually reached in that case. For reasons not contained in the record, none of Albion’s shareholders
were parties to that action.
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RAYMOND JAMES CAPITAL PARTNERS V. HAYES
Opinion of the Court
Plaintiff contends the trial court erred in granting defendant’s motion to
dismiss under Rule 12(b)(6) for failure to state any claim upon which relief could be
granted. We disagree.
The standard of review of an order granting a 12(b)(6)
motion is whether the complaint states a claim for which
relief can be granted under some legal theory when the
complaint is liberally construed and all the allegations
included therein are taken as true. On a motion to dismiss,
the complaint’s material factual allegations are taken as
true. Legal conclusions, however, are not entitled to a
presumption of validity. Dismissal is proper when one of
the following three conditions is satisfied: (1) the
complaint on its face reveals that no law supports the
plaintiff’s claim; (2) the complaint on its face reveals the
absence of facts sufficient to make a good claim; or (3) the
complaint discloses some fact that necessarily defeats the
plaintiff’s claim.
Wells Fargo Bank, N.A. v. Corneal, __ N.C. App. __, __, 767 S.E.2d 374, 377 (2014)
(citation omitted). Ultimately, this Court “conducts a de novo review of the pleadings
to determine their legal sufficiency and to determine whether the trial court’s ruling
on the motion to dismiss was correct.” Page v. Lexington Ins. Co., 177 N.C. App. 246,
248, 628 S.E.2d 427, 428 (2006) (citation, quotation marks, and brackets omitted).
III. Shareholder Actions
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Opinion of the Court
Plaintiff, as a shareholder of Albion, seeks to bring individual causes of action
against defendant, a former officer of Greer,2 to recover for losses related to plaintiff’s
investment and the reduction of certain dividends as well as pre-distribution
payments to which it was purportedly entitled.
Under North Carolina law, corporate officers with discretionary authority
must discharge their duties in good faith, with due care, and in a manner they believe
to be in the corporation’s best interests. N.C. Gen. Stat. § 55-8-42(a) (2015); see also
id. § 55-8-30(a) (2015) (same with respect to corporate directors). When these
fiduciary duties are breached, the issue of whether the resulting injuries should be
litigated in an individual or a derivative action arises. “A derivative proceeding is a
civil action brought . . . in the right of a corporation, . . . while an individual action is
. . . [brought] to enforce a right which belongs to [a plaintiff] personally.” Morris v.
Thomas, 161 N.C. App. 680, 684, 589 S.E.2d 419, 422 (2003) (citation and internal
quotation marks omitted). “Shareholders . . . of corporations generally may not bring
individual actions to recover what they consider their share of the damages suffered
by the corporation.” Barger v. McCoy Hillard & Parks, 346 N.C. 650, 660, 488 S.E.2d
215, 220-21 (1997) (citations and quotation marks omitted). A similar, “well-
established general rule is that shareholders cannot pursue individual causes of
2 We note that defendant does not concede that she was actually an officer of Greer. The trial
court also questioned plaintiff’s characterization of defendant as a corporate officer. In any event,
since the essence of the verified complaint is that defendant was an officer and that she owed specific
fiduciary duties to plaintiff, we assume for purposes of this appeal that defendant was an officer.
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RAYMOND JAMES CAPITAL PARTNERS V. HAYES
Opinion of the Court
action against third parties for wrongs or injuries to the corporation that result in the
diminution or destruction of the value of their stock.” Id. at 658, 488 S.E.2d at 219
(citations omitted). Since the loss of an investment “ ‘is [typically] identical to the
injury suffered by’ the corporate entity as a whole[,]” claims arising from injuries to
the corporation are properly asserted in derivative suits. Green v. Freeman, 367 N.C.
136, 144, 749 S.E.2d 262, 269 (2013) (citation omitted); Russell M. Robinson, II,
Robinson on North Carolina Corporation Law § 17.01 et seq. (7th ed. 2015)
(explaining that corporate shareholders may normally enforce a claim that belongs to
the corporation only through a derivative suit brought on behalf of the corporation).
A suit against corporate officers or directors for breach of fiduciary duty is
“[o]ne of the clearest examples of a derivative action. . . .” Id. at § 17.02[1]. As
explained by the United States Supreme Court, shareholder derivative suits exist to
remedy “those situations where the management through fraud, neglect of duty or
other cause declines to take the proper and necessary steps to assert the rights which
the corporation has.” Meyer v. Fleming, 327 U.S. 161, 167, 90 L. Ed. 595, 600 (1946).
The general prohibition against individual shareholder suits is
understandable, for “the duties, the breaches of which constitute the ground of
action, are duties to the corporation, considered as a legal entity, and not duties to
any particular [share]holder.” Coble v. Beall, 130 N.C. 533, 536, 41 S.E. 793, 794
(1902). Thus, “any damages [recovered from derivative suits] flow back to the
corporation, not to the individual shareholders bringing the action.” Green, 367 N.C.
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Opinion of the Court
at 142, 749 S.E.2d at 268. Furthermore, the procedural requirements for derivative
suits protect shareholders and the corporation itself by avoiding a “multiplicity of
lawsuits,” by limiting “who should properly speak for the corporation[,]” and by
preventing “self-selected advocate[s] pursuing individual gain rather than the
interests of the corporation or the shareholders as a group, [from] bringing costly and
potentially meritless strike suits.” Norman v. Nash Johnson & Sons’ Farms, Inc.,
140 N.C. App. 390, 396, 537 S.E.2d 248, 253 (2000) (citation and internal quotation
marks omitted). Given these principles, a shareholder generally has no standing to
bring individual actions against a corporation. Standing, which “is a necessary
prerequisite to a court’s proper exercise of subject matter jurisdiction[,]” generally
refers “to a party’s right to have . . . the merits of [its] dispute” decided by a judicial
tribunal. Neuse River Found., Inc. v. Smithfield Foods, Inc., 155 N.C. App. 110, 113,
574 S.E.2d 48, 51-52 (2002) (citations omitted).
Nevertheless, a “shareholder may maintain an individual action against a
third party for an injury that directly affects the shareholder, even if the corporation
also has a cause of action arising from the same wrong,” under two circumstances:
(1) where “the wrongdoer owed [the shareholder] a special duty[,]” and (2) where the
shareholder suffered a personal injury—one that is “separate and distinct from the
injury sustained by the other shareholders or the corporation itself.” Barger, 346 N.C.
at 659, 488 S.E.2d at 219 (citation omitted). Accordingly, an evaluation of [plaintiff’s]
standing in this matter requires an analysis of: (1) [plaintiff’s] alleged injury, and (2)
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Opinion of the Court
the relationship between [plaintiff] and defendant[] with respect to each claim.”
Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 335, 525
S.E.2d 441, 444 (2000).
A. Special Duty
All of plaintiff’s claims for relief are based on the same core of operative facts,
to wit: that defendant recorded false transactions in Greer’s ledger and
misappropriated corporate funds for her own personal gain. However, plaintiff
insists that Albion existed merely as a holding company for its subsidiaries, which
included Greer.3 Based on this characterization, plaintiff argues that defendant owed
it a “special duty” individually. Specifically, plaintiff contends that “[d]ue to
[d]efendant’s position, authority[,] and familiarity with the financial affairs of Greer,
[she] owed a heightened duty to shareholders [of Albion] to act in good faith and with
due care with regards to said financial affairs.” We disagree.
In Barger, our Supreme Court explained and illustrated the special duty
exception as follows:
The special duty may arise from contract or otherwise. To
support the right to an individual lawsuit, the duty must
be one that the alleged wrongdoer owed directly to the
3 We note that plaintiff asks us to ignore the corporate form relevant to this case. As the trial
court pointed out, the duties that defendant allegedly owed would run to the shareholders of Greer,
which was Albion itself. According to the trial court, the duties would not run to defendants as
shareholders of Albion. Plaintiff has not cited any case law supporting the general proposition that
North Carolina courts disregard the separate existence of a parent corporation and its wholly-owned
subsidiary. Apart from cases presenting circumstances that would justify veil piercing or a conclusion
that a wholly-owned subsidiary was its parent’s agent, the trial court’s analysis appears to be sound.
In any event, for purposes of this appeal, we assume that any duties defendant may have owed to
Greer flowed directly to the shareholders of Albion.
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Opinion of the Court
shareholder as an individual. The existence of a special
duty thus would be established by facts showing that
defendants owed a duty to plaintiffs that was personal to
plaintiffs as shareholders and was separate and distinct
from the duty defendants owed the corporation. A special
duty therefore has been found when the wrongful actions
of a party induced an individual to become a shareholder;
when a party violated its fiduciary duty to the shareholder;
when the party performed individualized services directly
for the shareholder; and when a party undertook to advise
shareholders independently of the corporation.
Id. at 659, 488 S.E.2d at 220 (citations omitted). The Barger Court then explained:
“This list is illustrative; it is not an exclusive list of all factual situations in which a
special duty may be found.” Id. Despite this qualification, the special duty exception
clearly requires an articulation of some duty owed to a plaintiff that is distinct from
the general fiduciary duties directors and officers owe to the corporation.
In the instant case, the special, or heightened, duties identified by plaintiff do
not support its purported right to seek individual recovery in a direct action against
defendant. The verified complaint alleges that (1) shareholders in a closely held
corporation owe a fiduciary duty to one another, and (2) officers owe a fiduciary duty
to shareholders. Unfortunately for plaintiff, the former is a misstatement of North
Carolina corporation law and the latter fails to meet the threshold set out in Barger.
“As a general rule, shareholders do not owe a fiduciary duty to each other or to
the corporation.” Freese v. Smith, 110 N.C. App. 28, 37, 428 S.E.2d 841, 847 (1993)
(citation omitted). However, “[a]n exception to this rule is that a controlling
shareholder owes a fiduciary duty to minority shareholders.” Kaplan v. O.K. Techs.,
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RAYMOND JAMES CAPITAL PARTNERS V. HAYES
Opinion of the Court
L.L.C., 196 N.C. App. 469, 473, 675 S.E.2d 133, 137 (2009). To that end, our courts
have extended special protections to minority shareholders in closely held
corporations. See, e.g., Norman, 140 N.C. App. at 407, 537 S.E.2d at 260 (noting that
North Carolina’s “cases have consistently held that majority shareholders in a close
corporation owe a ‘special duty’ and obligation of good faith to minority
shareholders”). However, plaintiff was not a minority shareholder of Greer; it was a
majority shareholder in Albion.
Furthermore, while corporate officers generally “owe a fiduciary duty to the
corporation and [its] shareholders[,]” T-WOL Acquisition Co. v. ECDG South, LLC,
220 N.C. App. 189, 208, 725 S.E.2d 605, 617 (2012) (emphasis added), the breach of
that duty rarely creates an individual cause of action. See Keener Lumber Co. v.
Perry, 149 N.C. App. 19, 26, 560 S.E.2d 817, 822 (2002) (“Under North Carolina law,
directors of a corporation generally owe a fiduciary duty to the corporation, and where
it is alleged that directors have breached this duty, the action is properly maintained
by the corporation rather than any individual creditor or stockholder.”) (citation
omitted). As the commentary to section 55-8-30 explains, the prior version of the law
“provided that officers and directors stand in a fiduciary relation ‘to the corporation
and its shareholders,’ ” but the amended version does not reference a fiduciary duty
to shareholders. Our Supreme Court has recognized that this amendment was
intended “ ‘to avoid an interpretation [of section 55-8-30] . . . that would give
shareholders a direct right of action on claims that should be asserted derivatively[.]’ ”
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Opinion of the Court
Green, 367 N.C. at 141, 749 S.E.2d at 268 (quoting N.C. Gen. Stat. § 55-8-30 (2011)).
When the fiduciary duties of due care, loyalty, and good faith are breached, a
shareholder may sue the offending director or officer in a derivative action. N.C. Gen.
Stat. § 55-7-41 (2015).
Here, all of plaintiff’s causes of action are based upon defendant’s violation of
her core fiduciary duties to the corporation (Greer). As a result, plaintiff has failed
to allege any duty that was individualized or otherwise “special.” Absent from the
verified complaint is any allegation that plaintiff was a party to a contract with
defendant that created distinct duties personal to plaintiff, or that defendant induced
plaintiff to become a shareholder. There is also no allegation that defendant advised
or dealt with plaintiff outside of the officer-shareholder relationship. In fact, there is
no indication that plaintiff and defendant had particular dealings with each other in
any context. Green, 367 N.C. at 143-44, 749 S.E.2d at 269 (holding that the special
duty exception did not apply where “the most contact plaintiffs had with [the
defendant] was seeing her a handful of times and saying nothing more than “ ‘hello’ ”).
Although the Barger scenarios are not exclusive, this case does not present a situation
where the recognition of a special duty would be proper or justified.
In sum, plaintiff has not “set forth any allegations which, even taken as true,
support a special duty between it and defendant[].” Energy Investors, 351 N.C. at
336, 525 S.E.2d at 444.
B. Separate and Distinct Injury
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Opinion of the Court
Plaintiff next argues that its injuries were “separate and distinct” from those
suffered by Greer and that, therefore, its individual claims fall under the second
Barger exception. Once again, we disagree.
To proceed under the second, special injury exception to the general rule
against individual actions, a plaintiff must allege an injury “peculiar and personal”
to itself as a shareholder. Barger, 346 N.C. at 659, 488 S.E.2d at 220. Specifically, a
plaintiff must show that its particular injury was “separate and distinct from the
injury sustained by the other shareholders or the corporation itself.” Id. at 659, 488
S.E.2d at 219.
As to plaintiff’s claim for embezzlement, the verified complaint contains the
following statements of injury and damages:
28. [Defendant’s] actions as set forth herein resulted in the
diminution in value of Albion’s stock and the decrease in
the purchase price of Albion.
29. [Defendant’s] actions as set forth herein further
resulted in the decrease in the value of excess cash
available for distribution either as dividends or a pre-
closing distribution to [plaintiff] and the other shareholders
of Albion.
(Emphasis added). The verified complaint is replete with virtually identical
allegations as to each of plaintiff’s additional causes of action. Plaintiff’s arguments
on appeal are also consistently couched in terms of injuries sustained by it and “the
shareholders.” Thus, by plaintiff’s own account, it has not suffered a unique, personal
injury. Given the nature of its allegations at the trial level and its arguments on
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Opinion of the Court
appeal, plaintiff has failed to show that its injury is separate and distinct from that
suffered by other shareholders.
Furthermore, the heart of plaintiff’s verified complaint is that it and Albion’s
other shareholders received inadequate—or more precisely, reduced—payments
based upon the diminution of the value of their shares. Yet the alleged reduction in
distributions or dividends is directly tied to a decrease in Albion’s shares: plaintiff
ultimately lost the full benefit of its investment only because Albion’s shares in Greer
lost value. Consequently, any reduced payments received by plaintiff were likewise
received by all other shareholders.
Nevertheless, plaintiff contends that its injury is separate and distinct from
that suffered by Greer because Greer was never entitled to “(1) the multiplied amount
constituting the purchase price pursuant to the Stock Purchase Agreement, (2) the
pre-closing distribution amount, or (3) yearly dividends.” This argument ignores that
the allegedly embezzled funds were taken directly from Greer’s corporate coffers. As
a result, plaintiff is simply positing a distinction without a difference: plaintiff’s
claims for reduced payments are based upon its ownership of shares, and these claims
derive from the same underlying injury suffered by the corporation itself. Since
plaintiff’s losses are inextricably linked to the value of its investment, the appropriate
reasoning is as follows: (1) defendant’s embezzlement of Greer’s funds reduced the
value of all shares held in Albion and (2) caused Greer and Albion to be purchased for
a reduced price, which (3) resulted in plaintiff’s and the other shareholders’
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Opinion of the Court
diminished compensation after the sale. Consequently, plaintiff’s injury for reduced
payments is the functional equivalent of a claim for diminution of the value of shares
held by all of Albion’s shareholders. See, e.g., Energy Investors, 351 N.C. at 336, 525
S.E.2d at 444 (finding no individualized injury where the plaintiff’s “injury [was] the
loss of its investment, which is identical to the injury suffered by other limited
partners and by the partnership as a whole”); Barger, 346 N.C. at 659, 488 S.E.2d at
220 (“The only injury plaintiffs as shareholders allege is the diminution or destruction
of the value of their shares as the result of defendants’ negligent or fraudulent
misrepresentations of TFH’s financial status. This is precisely the injury suffered by
the corporation itself.”). Thus, plaintiff has failed to allege any injury that is separate
and distinct from the harm suffered by Greer or all of Albion’s shareholders
collectively.
IV. Conclusion
Plaintiff’s individual claims, derivative in nature, do not fall under either one
of the Barger exceptions to the general rule prohibiting individual shareholder suits.
Therefore, plaintiff lacks standing to maintain a direct action seeking individual
recovery against defendant. Accordingly, the trial court properly granted defendant’s
motion to dismiss all claims against her.
AFFIRMED.
Judges ELMORE and ZACHARY concur.
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