Corporations--shareholder derivative claim--breach of fiduciary
duty--foreclosure sale
The trial court did not err by granting partial summary
judgment in favor of defendant corporate officers and directors
on plaintiff's shareholder derivative claim based on defendants'
alleged breach of fiduciary duty by purchasing the corporation's
property at a foreclosure sale and by not previously informing
plaintiff that they intended to bid on the property at the
foreclosure sale, because: (1) the corporation was in no position
to financially take advantage of the opportunity to purchase the
property at the foreclosure sale, nor did it have the means to
stop the foreclosure sale; (2) defendant president of the
corporation attempted to find a way for the corporation to take
advantage of the opportunity by soliciting banks for loans, but
failed; (3) plaintiff and the corporation were notified of the
foreclosure sale; and (4) defendants as guarantors on the note
were acting in their individual capacity in bidding at the
foreclosure sale based on their personal liability.
John Haworth for plaintiff-appellant.
Pete Bradley for defendants-appellees.
WALKER, Judge.
Defendant corporation, The Four Hunters, Inc. (Four Hunters),
was in the furniture business. Its shares of stock were split two-
thirds to defendant Kenneth J. Howard (Mr. Howard) and one-third to
plaintiff. Mr. Howard was the president, chief executive officer
and a member of the board of directors of Four Hunters. Defendant
Joyce M. Howard (Ms. Howard), the wife of Mr. Howard, was thesecretary/treasurer and also a member of the board of directors.
The plaintiff was the remaining member of the board of directors.
Four Hunters owned two and one-half acres of property which
contained a 35,000 square foot office, manufacturing and warehouse
facility. This property was pledged as security for two separate
mortgages--the first mortgage with NationsBank (currently Bank of
America) and the second with High Point Bank & Trust. Mr. Howard
personally guaranteed the note with High Point Bank & Trust and
plaintiff personally guaranteed the note with NationsBank. On 17
August 1997, High Point Bank & Trust began foreclosure proceedings
to protect its interest because NationsBank was already foreclosing
on the same property.
On 27 August 1997, the board of directors and the corporate
counsel met to discuss options in the face of the foreclosures.
They ultimately determined that the board recommend to the
shareholders that Four Hunters voluntarily dissolve. There was a
shareholders meeting on 8 September 1997 of which plaintiff had
notice although he declined to attend. Mr. Howard, as majority
shareholder, voted to follow the recommendations of the board to
voluntarily dissolve Four Hunters.
High Point Bank & Trust held the foreclosure sale of the
property on 10 October 1997. As a personal guarantor on the note,
Mr. Howard bid on the property at the sale to protect his interest.
Mr. and Ms. Howard purchased the property, subject to the
NationsBank mortgage, using a personal loan from High Point Bank &
Trust to pay off the purchase price and both outstanding mortgages.
Mr. and Ms. Howard then leased the property back to Four Huntersfor a few months and subsequently leased it to another party. The
Articles of Dissolution of Four Hunters were filed on 4 December
1997 with the Secretary of State.
On 24 March 1998, plaintiff filed suit against Mr. and Ms.
Howard for breach of fiduciary duties which was dismissed without
prejudice for failure to properly serve Four Hunters, a necessary
party. On 11 February 2000, plaintiff filed the present action
alleging both a shareholder derivative claim and an individual
claim for breach of fiduciary duties, for usurping a corporate
opportunity and for unfair and deceptive trade practices. Mr. and
Ms. Howard counterclaimed alleging breach of fiduciary duty by the
plaintiff.
Plaintiff moved for partial summary judgment as to the
shareholder derivative claim. Simultaneously, he moved for
dismissal of defendants' counterclaim. The trial court ruled there
were no issues of fact as to the shareholder derivative claim and
granted partial summary judgment for Mr. and Ms. Howard.
Plaintiff's motion to dismiss the counterclaim was denied.
Plaintiff appeals the partial summary judgment in favor of the
defendants and the denial of his motion to dismiss the
counterclaim.
Plaintiff contends that Mr. and Ms. Howard breached their
fiduciary duty by purchasing the property at the foreclosure sale
and by not previously informing the plaintiff that they intended to
bid on the property at the foreclosure sale. Mr. and Ms. Howard
admit they stand in a fiduciary relationship with Four Hunters and
the plaintiff. However, they contend that their purchase of theproperty as individuals is valid because the transaction was fair
to Four Hunters.
Both NationsBank and High Point Bank & Trust had begun
foreclosure proceedings. On 27 August 1997, the board of
directors, including plaintiff and defendants, met to discuss both
pending foreclosures. Mr. Howard informed the plaintiff that
NationsBank, High Point Bank & Trust, and Bank of North Carolina
had all denied Four Hunters' applications for loans which would
have stopped the foreclosure proceedings. At this point, the
plaintiff refused to personally guarantee a loan to the
corporation. Therefore, the board of directors voted at this
meeting to recommend to the shareholders that Four Hunters
voluntarily dissolve. The shareholders, in a separate meeting,
voted to follow that recommendation.
Because the defendants are officers and directors, they have
a fiduciary duty to Four Hunters. “A transaction with the
corporation in which a director of the corporation has a direct or
indirect interest” is a “conflict of interest transaction” and
usually voidable by the corporation. N.C. Gen. Stat. § 55-8-31(a)
(1999). However, “[a] conflict of interest transaction is not
voidable by the corporation solely because of the director's
interest in the transaction if any one of the following is true:
. . . (3) The transaction was fair to the corporation.” Id. The
official commentary to the statute states: “The fairness of a
transaction for purposes of section 8.31 should be evaluated on the
basis of the facts and circumstances as they were known or should
have been known at the time the transaction was entered into.” N.C. Gen. Stat. § 55-8-31 replaced the form
er N.C. Gen. Stat.
§ 55-30(b). In Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d
551 (1983), our Supreme Court noted that N.C. Gen. Stat. § 55-30(b)
was a statutory standard which codified the law regarding
fiduciaries taking advantage of corporate opportunities. Meiselman
set out six “recurring circumstances” to which our courts should
look to determine whether a corporate opportunity has been usurped.
Meiselman, 309 N.C. at 310, 307 S.E.2d at 569. They are:
1) the ability, financial or otherwise, of
the corporation to take advantage of the
opportunity;
2) whether the corporation engaged in prior
negotiations for the opportunity;
3) whether the corporate director or officer
was made aware of the opportunity by virtue of
his or her fiduciary position;
4) whether the existence of the opportunity
was disclosed to the corporation;
5) whether the corporation rejected the
opportunity; and
6) whether the corporate facilities were used
to acquire the opportunity.
Id.
The “opportunity” here was to purchase the property of Four
Hunters at the foreclosure sale. Four Hunters was in no position
financially to take advantage of this opportunity. It did not have
the means to stop the foreclosure sale. Mr. Howard, as a director,
officer, and shareholder, attempted to find a way for Four Hunters
to take advantage of the opportunity by soliciting banks for loans
but failed. Plaintiff and Four Hunters were notified of theforeclosure sale.
Although they had knowledge of the foreclosure sale because of
their fiduciary positions, the defendants also had a personal
interest in the foreclosure sale. Mr. Howard was a personal
guarantor on the High Point Bank & Trust note and would be
personally liable if the foreclosure sale did not bring sufficient
funds to pay off the outstanding loan. Plaintiff also had
knowledge of the foreclosure sale prior to the sale taking place.
Because Mr. and Ms. Howard were acting in their individual capacity
in bidding at the foreclosure sale, we find there was no breach of
fiduciary duty by the Howards in their failure to notify the
plaintiff that they intended to bid on the property.
All of the facts in the record establish that the foreclosure
sales by NationsBank and High Point Bank & Trust were going
forward. Four Hunters did not have the financial ability to stop
the High Point Bank & Trust foreclosure sale. As a guarantor on
the note, Mr. Howard had a personal interest in purchasing the
property. Applying the Meiselman factors to all of the facts
attendant to the purchase of the property by the defendants at
foreclosure, we agree with the trial court that the defendants did
not breach their fiduciary duty to Four Hunters.
The trial court did not err in granting partial summary
judgment in favor of the defendants on plaintiff's shareholder
derivative claim. In view of the fact that the individual claims
of the plaintiff still exist, we decline to address the denial of
the plaintiff's motion to dismiss the counterclaim of the
defendants against the plaintiff in his individual capacity. Affirmed.
Judges MARTIN and TYSON concur.
*** Converted from WordPerfect ***