Appeal by plaintiff from order of dismissal entered 7 June
1999 by Judge Jack A. Thompson in Cumberland County Superior Court.
Heard in the Court of Appeals 25 August 2000.
Garris Neil Yarborough for plaintiff-appellant.
Beaver Holt Richardson Sternlicht Burge & Glazier, P.A., by
Lonnie M. Player, Jr., and Gregory B. Thompson for defendant-
appellees.
McGEE, Judge.
The issue in this case is whether the trial court erred in
dismissing plaintiff's claims pursuant to N.C. Gen. Stat. § 1A-1,
Rule 12(b)(6) for failure to satisfy the shareholder derivative
action demand requirement of N.C. Gen. Stat. § 55-7-42. Plaintiff alleges in his complaint that he, an employe
e of the
City of Raeford's utility department with some residential
construction experience, formed a company along with defendants
Eddie and Harold Brock, realtors, to build and sell residential
houses. The three named their corporation Allen & Brock
Construction Company, Inc. (A&B) and funded it with $10,000 from
plaintiff, $5,000 from defendant Harold Brock, and $5,000 from
defendant Brock Realty, Inc., the real estate business run by
defendants Eddie and Harold Brock. The stock in A&B was owned
fifty percent by plaintiff and fifty percent by defendant Brock
Realty. The officers of the corporation were plaintiff as
president, defendant Eddie Brock as vice-president, and defendant
Harold Brock as secretary/treasurer. A checking account for A&B
was opened and both plaintiff and defendant Eddie Brock were
authorized to sign checks. Although plaintiff and defendants Eddie
and Harold Brock did not promise to devote their exclusive time and
talents to A&B, each agreed to devote "sweat equity" to the
corporation, and as field supervisor and general contractor for
A&B's construction projects, plaintiff gave up his job with the
City of Raeford.
Plaintiff alleges that defendants Eddie and Harold Brock
controlled the company books and internal management, and that
plaintiff relied on defendant Harold Brock when he told plaintiff
that A&B needed additional funds. Plaintiff therefore agreed to
co-guarantee with defendant Harold Brock a series of loans to A&B
made by defendant Marlene Ferrera. Plaintiff subsequently became
concerned about the management of A&B and demanded to see the checkregister maintained by defendants Eddie and Harold Brock. After
examining the check register, plaintiff became convinced that
defendants Eddie and Harold Brock and defendant Ferrera had
conspired to divert corporate opportunities from A&B to their own
benefit.
Plaintiff alleges he demanded $50,000 in individual
compensation for injuries to A&B in a letter written by plaintiff's
attorney on 12 August 1998 to defendants Eddie and Harold Brock and
defendant Brock Realty. Defendants Eddie and Harold Brock
responded on 21 August 1998 denying plaintiff's claims and raising
allegations of their own against plaintiff. Defendants' letter was
signed by defendants Eddie and Harold Brock in their individual
capacities, and by defendant Harold Brock as president of defendant
Brock Realty.
Plaintiff filed a complaint against defendants on 2 November
1998 seeking four claims for relief, on behalf of both himself and
A&B: (1) a declaratory judgment that his personal guarantee on the
loans from defendant Ferrera was unenforceable; (2) recovery for
civil conspiracy by all of the defendants; (3) recovery for breach
of the fiduciary duty owed by defendants Eddie and Harold Brock to
A&B; and (4) recovery for unfair and deceptive trade practices by
all of the defendants. The trial court dismissed plaintiff's
claims on 7 June 1999 pursuant to N.C. Gen. Stat. § 1A-1, Rule
12(b)(6) for failure to state a claim upon which relief could be
granted. Plaintiff appeals.
I.
[1]Plaintiff's four claims for relief were each raised asboth individual claims and as shareholder derivative clai
ms brought
in the name of A&B. We begin by examining the shareholder
derivative action demand requirements of N.C. Gen. Stat. § 55-7-42
(1999). We find that plaintiff did not satisfy those requirements,
and we affirm the trial court's dismissal of plaintiff's derivative
claims.
N.C. Gen. Stat. § 1A-1, Rule 12(b)(6) (1999) "'generally
precludes dismissal except in those instances where the face of the
complaint discloses some insurmountable bar to recovery.'"
Sutton
v. Duke, 277 N.C. 94, 102, 176 S.E.2d 161, 166 (1970) (citation
omitted). A plaintiff's failure to fulfill the statutory
requirements for bringing a shareholder derivative action would be
one such insurmountable bar.
See Roney v. Joyner, 86 N.C. App. 81,
356 S.E.2d 401 (1987).
N.C. Gen. Stat. § 55-7-42 states:
No shareholder may commence a derivative
proceeding until:
(1) A written demand
has been made upon the
corporation to take suitable action; and
(2) 90 days have exp
ired from the date the
demand was made unless, prior to the
expiration of the 90 days, the
shareholder was notified that the
corporation rejected the demand, or
unless irreparable injury to the
corporation would result by waiting for
the expiration of the 90-day period.
N.C. Gen. Stat. § 55-7-42 replaced the former N.C. Gen. Stat. § 55-
7-40(b) (1990) (repealed), which stated, in principal part:
(b) The complaint [in a shareholder
derivative action] shall allege with
particularity the efforts, if any, made by the
plaintiff to obtain the action he desires from
the directors or comparable authority and thereasons for his failure to obtain the action
or for not making the effort.
N.C. Gen. Stat. § 55-7-40(b) replaced in 1989 the former N.C. Gen.
Stat. § 55-55(b) (1982), which was identical to the above quoted
portion of N.C. Gen. Stat. § 55-7-40(b).
N.C. Gen. Stat. § 55-55(b) was a codification of prior North
Carolina case law which required a shareholder to exhaust his
intracorporate remedies through a demand upon the corporation to
take suitable action before the shareholder could file a derivative
action.
See Alford v. Shaw, 320 N.C. 465, 471, 358 S.E.2d 323, 327
(1987). However, that prior case law recognized that
[a]n equitable exception to the demand
requirement may be invoked when the directors
who are in control of the corporation are the
same ones (or under the control of the same
ones) as were initially responsible for the
breaches of duty alleged. In such case, the
demand of a shareholder upon directors to sue
themselves or their principals would be futile
and as such is not required for the
maintenance of the action.
Id. at 471-72, 358 S.E.2d at 327 (citations omitted). Thus, under
N.C. Gen. Stat. § 55-55(b), demand was required, unless the
futility exception was met.
Plaintiff contends that the futility exception remains valid
law under the present N.C. Gen. Stat. § 55-7-42. If he were
correct, a failure by plaintiff to follow the demand requirements
of N.C. Gen. Stat. § 55-7-42 might have been excused. However, we
have previously held that the enactment of N.C. Gen. Stat. § 55-7-
42 abolished the futility exception under North Carolina law.
In statutory construction, "[t]he basic rule is to ascertainand effectuate the intent of the legislative body.
The best
indicia of that intent are the language of the statute . . . the
spirit of the act and what the act seeks to accomplish."
Concrete
Co. v. Board of Commissioners, 299 N.C. 620, 629, 265 S.E.2d 379,
385 (1980) (citations omitted). In its enactment of N.C. Gen.
Stat. § 55-7-42, the General Assembly chose to state explicitly the
requirement for demand in shareholder derivative actions and the
limits of that requirement. Our Court has recently held that the
1995 revision of N.C. Gen. Stat. § 55-7-42 "has eliminated the
futility exception to the demand requirement."
Norman v. Nash
Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d 248
(2000); a
ccord Dunn v. Ceccarelli, 227 Ga. App. 505, 489 S.E.2d 563
(1997) (considering OCGA § 14-2-742, a statute virtually identical
to N.C. Gen. Stat. § 55-7-42). In
Norman, we cited a quote from a
leading North Carolina corporation law commentator that "the 1995
amendment was necessary because the futility exception 'caused
excessive and unnecessary litigation on a preliminary point, which
was the principal reason for repealing the futility exception rule
and adopting a universal-demand rule.'"
Norman, 140 N.C. App. at
411, 537 S.E.2d at 262 (quoting Russell M. Robinson, II,
Robinson
on North Carolina Corporation Law § 17-3 at 340 (5th ed. 1995)).
Alternately, plaintiff argues that the demand requirement of
N.C. Gen. Stat. § 55-7-42 was satisfied by the letter he sent to
defendants Eddie and Harold Brock and defendant Brock Realty, and
by their written response rejecting his allegations. However, theresponse from defendants Eddie and Harold Brock and defendant Brock
Realty cannot satisfy the rejection requirement of N.C. Gen. Stat.
§ 55-7-42 because it was not a rejection
by the corporation.
Defendants Eddie and Harold Brock and defendant Brock Realty,
although respectively directors and a shareholder of A&B, did not
sign the response letter in those corporate capacities. Plaintiff
does not allege that defendants Eddie and Harold Brock and
defendant Brock Realty held actual or apparent authority to bind
A&B through their individual signatures. The principles of agency
therefore dictate that the corporation did not act to reject
plaintiff's demand.
See, e.g., Rowe v. Franklin County, 318 N.C.
344, 349 S.E.2d 65 (1986).
Failing a rejection by the corporation, N.C. Gen. Stat. § 55-
7-42 requires that a complaint be filed no fewer than ninety days
after demand is made, unless irreparable injury would occur to the
corporation. Plaintiff alleged no threat of irreparable injury to
A&B upon filing his complaint. The letter to defendants Eddie and
Harold Brock and defendant Brock Realty was dated 12 August and
plaintiff's complaint was filed 2 November, eighty-two days later.
Thus plaintiff failed to satisfy the demand requirements imposed by
N.C. Gen. Stat. § 55-7-42, regardless of whether the 12 August
letter was sufficient to serve as a written demand upon the
corporation. The trial court did not err in dismissing plaintiff's
derivative claims.
II.
[2]We next determine whether plaintiff's complaint supports
any individual claims. The general rule is that a shareholder ofa corporation may not recover individually for injury to the
corporation that results in diminution of the value of the
corporation's stock.
See Barger v. McCoy Hillard & Parks, 346 N.C.
650, 658, 488 S.E.2d 215, 219 (1997)
. Similarly, a guarantor of a
corporation's debts cannot recover individually for injury to the
corporation.
See id. at 661, 488 S.E.2d at 221. However,
[i]ndividual actions may be prosecuted . . .
if the [shareholder or] guarantor can show
either (1) that the wrongdoer owed him a
special duty, or (2) that the injury suffered
by the [shareholder or] guarantor is personal
to him and distinct from the injury sustained
by the [other shareholders (in the case of a
shareholder) or the] corporation itself.
Id.
The injuries alleged by plaintiff include: plaintiff's $10,000
capital contribution and his labor contribution in giving up his
"secure government job" as investments in the creation of A&B; the
losses to A&B caused by defendants' usurpations of corporate
opportunities, breaches of fiduciary duty and misrepresentations to
plaintiff; and plaintiff's personal liability for the guarantees he
signed for A&B loans from defendant Ferrera. The losses suffered
by A&B injured plaintiff only insofar as the value of plaintiff's
stock in A&B fell and were therefore not a personal injury to
plaintiff. Similarly, plaintiff's investment in A&B was in
exchange for shares in A&B, and thus plaintiff lost the investment
only because the shares lost value. Not even plaintiff's liability
for his personal guarantees is a personal injury, for
one who pays a personally guaranteed corporate
debt has not suffered an injury separate anddistinct from that of the corporation because
he is "made whole if the corporation recovers;
and so the rule has the salutary effect of
preventing the double counting of damages."
Barger v. McCoy Hillard & Parks, 120 N.C. App. 326, 334, 462 S.E.2d
252, 258,
reh'g in part, 122 N.C. App. 391, 469 S.E.2d 593,
aff'd
346 N.C. 650, 488 S.E.2d 215 (1997) (citations omitted).
Plaintiff must therefore show that he was owed a special duty
as a shareholder or as a guarantor in order to recover
individually. Our Court held in
Howell v. Fisher, 49 N.C. App.
488, 272 S.E.2d 19 (1981) that negligent misrepresentation by a
third party which induced plaintiffs to become shareholders created
such a special duty. Applying the same rule, our Supreme Court
held in
Barger that negligent misrepresentation by a third party
that induced plaintiffs to personally guarantee a corporation's
loans likewise created such a special duty. However, while our
Court held in
Norman v. Nash Johnson & Sons' Farms, supra, that the
fiduciary duty owed to a minority shareholder by a majority
shareholder may satisfy the special duty requirement of
Barger,
plaintiff was a fifty percent owner of A&B and hence was not a
minority shareholder.
We conclude that plaintiff has alleged in his complaint two
grounds for relief upon which individual recovery is possible: (1)
plaintiff's claim that defendants' wrongful acts induced plaintiff
to invest in A&B when it was formed, allowing recovery of that
investment; and (2) plaintiff's claim that defendants' wrongful
acts induced him to personally guarantee A&B's loans.
III.
Having established that certain injuries alleged by plaintiff
could support an individual recovery, we must examine each of
plaintiff's individual claims to determine if any were dismissed in
error.
A.
[3]Plaintiff's first individual claim for relief seeks a
declaratory judgment that his personal guaranty is unenforceable.
As described in Part II above, plaintiff has an individual cause of
action against defendant Ferrera insofar as the alleged wrongful
behavior under which he seeks to invalidate the guaranty in fact
induced him to sign the guaranty.
A motion to dismiss under N.C. Gen. Stat. § 1A-1 Rule 12(b)(6)
"is seldom an appropriate pleading in actions for declaratory
judgments, and . . . is allowed only when the record clearly shows
that there is no basis for declaratory relief as when the complaint
does not allege an actual, genuine existing controversy."
Consumers Power v. Power Co., 285 N.C. 434, 439, 206 S.E.2d 178,
182 (1974) (citations omitted). An actual controversy exists in
this case because defendant Ferrera has demanded, under the terms
of the guaranty, repayment by plaintiff of defendant Ferrera's
loans to A&B. "There can be no doubt that litigation [is]
forthcoming. Certainly plaintiff should not be required to await
suit, perhaps indefinitely[.]"
Insurance Co. v. Bank, 11 N.C. App.
444, 449, 181 S.E.2d 799, 803 (1971).
Defendant Ferrera contends that a declaratory judgment is
unavailable where, as here, plaintiff seeks to have his personalguaranty declared invalid instead of merely interpreted by the
court. However, our Court has stated that a trial court "certainly
may determine the validity and enforceability of a contract under
the Declaratory Judgment Act. To interpret this Act otherwise
would render it useless."
Bueltel v. Lumber Mut. Ins. Co., 134
N.C. App. 626, 630, 518 S.E.2d 205, 208,
disc. review denied, 351
N.C. 186, 541 S.E.2d 709 (1999). Plaintiff's first individual
claim for relief was dismissed in error.
B.
[4]Plaintiff's second individual claim for relief alleges a
civil conspiracy among the defendants to defraud both plaintiff and
A&B. As described in Part II above, plaintiff is entitled to
relief for his initial investment in A&B if defendants' alleged
wrongful behavior in fact induced him to provide that initial
investment. Thus plaintiff's second claim for relief, to the
extent of his original investment in A&B, states a valid individual
cause of action and was dismissed in error.
C.
[5]Plaintiff's third individual claim for relief is based on
the fiduciary duty owed by defendants Eddie and Harold Brock to
A&B. Because plaintiff alleges no breach of fiduciary duty owed to
him personally in his capacity as a shareholder or as a guarantor
of the corporation's loans, the claim is entirely derivative and,
under Part I above, the trial court did not err in dismissing it.
See Barger, supra.
D.
[6]Plaintiff's fourth individual claim for relief alleges
that defendants' actions constituted unfair and deceptive trade
practices. "In order to establish a violation of N.C.G.S. §
75-1.1, a plaintiff must show: (1) an unfair or deceptive act or
practice, (2) in or affecting commerce, and (3) which proximately
caused injury to plaintiffs."
Gray v. N.C. Ins. Underwriting
Ass'n, 352 N.C. 61, 68, 529 S.E.2d 676, 681 (2000) (citation
omitted). Plaintiff alleges no present monetary injury due to his
personal guaranty of loans to A&B, and he therefore cannot recover
under N.C. Gen. Stat. § 75-1.1.
See Mayton v. Hiatt's Used Cars,
45 N.C. App. 206, 262 S.E.2d 860 (1980).
With respect to plaintiff's initial investment in A&B, our
Supreme Court has held that securities transactions do not satisfy
the "in or affecting commerce" requirement of N.C. Gen. Stat. § 75-
1.1.
See HAJMM Co. v. House of Raeford Farms, 328 N.C. 578, 594-
95, 403 S.E.2d 483, 493 (1991). Plaintiff's initial investment was
provided in exchange for fifty percent of the stock of A&B and was
thus part of a security transaction.
See Stancil v. Stancil, 326
N.C. 766, 768, 392 S.E.2d 373, 375 (1990) (defining stock in a
closely-held corporation as a "security"). Plaintiff therefore has
no individual grounds to pursue a claim of unfair and deceptive
trade practices against defendants, and we accordingly affirm the
trial court's dismissal of plaintiff's fourth claim for relief.
In review, we affirm the trial court's dismissal of
plaintiff's derivative claims for relief, as well as plaintiff's
third and fourth individual claims for relief. The trial courterred in dismissing plaintiff's first and second individual claims
for relief. We therefore affirm in part, reverse in part, and
remand to the trial court for further proceedings consistent with
this opinion.
Affirmed in part, reversed in part and remanded.
Judges WYNN and TIMMONS-GOODSON concur.
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