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1. Appeal and Error_appealability_appointment or denial of receiver
The appointment or denial of a receiver is a matter of discretion under current
jurisprudence, to be reviewed under statutes dealing with interlocutory appeals, which allow an
immediate appeal for the loss of substantial rights.
2. Appeal and Error_appealability_denial of appointment of receiver_substantial
rights
The denial of plaintiffs' motion for appointment of a receiver was immediately
appealable. Plaintiffs' right to preservation of assets and corporate opportunities of the company
founded by plaintiff Barnes and defendant Wanda Kochhar (Precision) was substantially affected
by the denial of a receiver. The failure to appoint a receiver for questions involving the
management of a related company (Outcomes) to which Kochhar allegedly transferred
Precision's corporate opportunities did not involve a substantial right since plaintiffs are not
shareholders of Outcomes.
3. Receivership_appointment_not established as matter of right
The appointment or denial of a receiver is within the discretion of the court. Plaintiffs
were not entitled to a receiver as a matter of law even if they had, as they argued, established that
defendant Kochhar had usurped corporate opportunities.
Bishop, Capitano & Moss, P.A., by J. Daniel Bishop, for
plaintiffs-appellants.
Arthur A. Vreeland for defendants-appellees Anil Kochhar and
ODIS, L.L.C.
Guthrie, Davis, Henderson & Staton, P.L.L.C., by Dennis L.
Guthrie and Kevin W. Tydings, for defendants-appellees Wanda
Monical Kochhar and Outcomes, Inc.
CALABRIA, Judge.
Elizabeth S. Barnes (“Barnes”) and Kathryn Ann Clary (“Clary”)
(collectively “plaintiffs”) appeal from an order denying their
motions for partial summary judgment and appointment of a receiver.
We affirm.
In their complaint, plaintiffs alleged the following facts
pertinent to this appeal:
5. Barnes approached [Wanda Monical Kochhar
(“Kochhar”)] in October 2000 to seek her
advice about starting a business to engage in
furnishing nurse-conducted medical record
abstracting/investigating and reporting
services for Managed Care Organizations (MCOs)
and Pharma companies in connection with HEDIS
and Health Outcome Studies. HEDIS studies are
performed annually by MCOs for the purpose of
becoming/remaining competitive within their
market and/or acquiring and then maintaining
national accreditation. . . .
6. Working together, Barnes and Kochhar
identified the requirements for starting such
a business. Kochhar suggested that $100,000
of startup capital would be required, and
expressed interest in being involved in such a
business with Barnes, but made it clear that
she would not furnish any capital. Barnes and
another prospective owner raised from
relatives and/or personally furnished $100,000
of operating capital to fund the business,
which they decided to name Precision
Abstractions. Of the $100,000 total, Clary
provided $30,000 in the form of a loan.
Kochhar undertook to form Precision
Abstractions as a North Carolina corporation,
which it remains at the filing of this
complaint. Kochhar, Barnes[,] and Cathy
Donnelly each received one-third of the
originally issued shares of Precision
Abstractions' stock.
7. The new business met with considerable
success from its inception, generating
approximately $350,000 in revenues in the
first season. . . . In general, Kochhar
furnished sales and administrative services
and Barnes managed operations. Donnelly actedas one of the Company's nurse-abstractors.
8. After the company's first season, Donnelly
withdrew in a negotiated buyout.
9. Also at the conclusion of the company's
first season, Precision Abstractions repaid
all outstanding loans, with interest. This
included Clary's loan of $30,000. Immediately
thereafter, however, Clary reinvested the
$30,000 by purchasing from Kochhar and Barnes
shares equal to five percent of nonvoting
stock of Precision Abstractions. . . .
10. As of July 2001, following Donnelly's
withdrawal, Kochhar and Barnes each held 50%
of the voting shares of Precision
Abstractions. They also each owned 47.5
percent of nonvoting shares, with Clary owning
five percent. Since August 2001, Kochhar has
held the titles of president and secretary of
the corporation, and Barnes has been vice
president and assistant secretary. Kochhar
and Barnes have also been Precision
Abstractions' sole directors.
11. From the commencement of Precision
Abstractions' operations, Barnes trusted
Kochhar to tend to such executive management
matters on behalf of Precision Abstractions
as maintaining internal accounting and
procuring outside professional services
because Kochhar claimed and possessed greater
experience and knowledge of such matters.
With respect to sales functions, Barnes
participated in limited ways, but again
trusted Kochhar to handle the responsibility
in accordance with their general division of
labor. Barnes expected Kochhar to conduct all
of her activities with due regard for and
loyalty to Precision Abstractions. She also
expected, by virtue of her half-ownership of
the voting shares and her equal representation
on the Board of Directors, to be consulted,
fully informed, and asked to consent to any
transaction effecting a material change in
Precision Abstractions' business.
12. In May 2001, without any advance notice
to Barnes, Kochhar . . . formed another North
Carolina corporation under the name Monical
and Associates, Inc. In July 2001, ostensiblyfor purposes of managing taxable income,
Kochhar stated to Barnes that Monical and
Associates would “enter into an agreement with
Precision to provide management and
development services for 2001.” Kochhar told
Barnes that “Monical and Associates” was a
trade name she had used for years for
consulting. Kochhar did not disclose that the
business had been newly incorporated.
13. Kochhar represented that by contracting
to prepay fees to Monical and Associates for
management and sales services for the next
HEDIS season, Precision Abstractions could
minimize taxable income resulting from the
completed 2000-2001 season. Otherwise,
Kochhar explained, greater taxable income
would be imputed to Barnes and Kochhar because
Precision Abstractions had elected Subchapter
S status under the Internal Revenue Code.
14. In an e-mail, Kochhar also suggested that
an agreement be reached in the following year
“with Precision for subcontracting nurses.”
Barnes was not asked for her consent to this
proposal at this time or thereafter and, to
her knowledge, an early draft of a services
agreement with Monical and Associates was
never finalized or executed. Nevertheless,
Kochhar assured Barnes that the arrangement
she contemplated would return to Precision
Abstractions “a fair profit margin to be
distributed to the partners on a pro rata
basis.” Barnes is unaware of any express
agreement under which Precision Abstractions
subcontracted nursing services to Monical and
Associates or vice versa.
15. In August 2001, following discussions
about the need for a more recognizable trade
name, Kochhar presented to Barnes the name
“Outcomes,” together with logo artwork.
Kochhar suggested that Precision Abstractions'
services be sold under the Outcomes name.
Barnes understood Kochhar's proposal as a
branding concept to promote the business of
Precision Abstractions. Barnes thought the
trade name was a good idea and had no notice
or understanding that it would be used in any
way other than to promote the business and
best interests of Precision Abstractions.
16. Upon information and belief, Kochhar used
the name Outcomes to promote HEDIS-related
services rendered by Precision Abstractions
and contracted under that name for the
rendition of such services. Unbeknownst to
Barnes at that time, however, Kochhar had
caused Monical and Associates to change its
corporate name to Outcomes on August 1, 2001.
17. In late 2001, Kochhar made reference in
one or more writings to the notion that she
shared ownership of Precision Abstractions
with Barnes and Clary, but that she owned
Outcomes herself. When Barnes challenged or
questioned such statements, Kochhar claimed to
mean only that Outcomes was the entity through
which she engaged in her consulting practice
independent of the nurse-abstracting business.
18. In Precision Abstractions' second season,
concluding in June 2002, upon information and
belief, HEDIS-related revenues were
approximately $750,000. Kochhar, who lived
and conducted her business activities in
Charlotte, maintained exclusive knowledge and
control of the receipt and disposition of
revenues and accounting therefor. Barnes, who
lived and worked in Kentucky with periodic
visits to Charlotte, received no reports or
data concerning the results of operations of
either Precision Abstractions or Outcomes in
the second season until June 2003. At that
time, Barnes received from Kochhar copies of
income tax returns prepared for Precision
Abstractions, reporting its revenues for 2002
at slightly in excess of $300,000.
Accordingly, upon information and belief,
approximately $450,000 of HEDIS-related
revenues for the second season were paid over
to or retained by Outcomes. Barnes was not
advised or consulted concerning any allocation
of revenues as between Precision Abstractions
and Outcomes, nor was she given an opportunity
to approve or disapprove any payment or
diversion of funds to Outcomes.
19. For the third season, end[ing] in June
2003, upon information and belief, Kochhar
caused client contracts again to be made in
the name of Outcomes for the services provided
by Precision Abstractions. Upon information
and belief, HEDIS-related revenues ofapproximately $3.5 million were anticipated
based upon third-season contracts.
20. Although Kochhar and Barnes remained
officers and directors of Precision
Abstractions, Kochhar also referred to Barnes
in written communications as holding various
executive offices of Outcomes. When Barnes
inquired of Kochhar the meaning of such
designations, Kochhar assured her that they
were only for the purpose of presenting a
proper marketing image and otherwise
insignificant. Barnes was unconcerned with
titles, but generally expected the right to
participate in and to exercise equal voice in
all significant management decisions of the
business. Kochhar generally appeared to
accord Barnes such status, informing her of
proposed actions and abandoning some that
Barnes resisted.
. . .
22. Increasingly throughout Fall 2002,
however, Kochhar began adopting a
condescending and progressively unilateralist
tone in e-mail communications with Barnes. . .
. Kochhar also then designated her husband,
Anil Kochhar, as CEO and president of
Outcomes, and instructed Barnes that she would
report to him. Kochhar also paid compensation
to her daughter, who was a full-time student,
and did not, to Barnes' knowledge, render
substantial services to the business. Kochhar
did not ask for or receive Barnes' consent for
these actions.
23. Barnes confronted Kochhar about these
actions in December 2002. At that time,
Kochhar told Barnes that Outcomes was her
company with its own Board of Directors to
which Barnes did not belong. Barnes asked
Kochhar how Precision Abstractions' interests
would be protected if that were true. Kochhar
assured her that they would be.
24. For the duration of the third-season
HEDIS work, Barnes performed her
responsibilities and awaited the fulfillment
of Kochhar's promise to protect the interests
of Precision Abstractions. Finally, in early
June 2003, Kochhar told Barnes that she
believed their partnership was not working out and that she was going to dissolve the
relationship between Outcomes and Precision
Abstractions. She invited Barnes to buy out
her interest in Precision Abstractions. She
requested Barnes' consent and prompt response.
Before receiving any response, Kochhar
instructed an attorney whom she had selected
for Precision Abstractions that she and Barnes
had agreed in principle to dissolve Precision
Abstractions and requested documents be
prepared for signature.
25. By letter dated June 13, 2003, Kochhar
sent Barnes a letter stating, “effective
immediately, Outcomes, Inc. is terminating its
business relationship(s) with Precision
Abstractions, Inc.,” and demanding return of
“information proprietary to Outcomes.”
Kochhar also transmitted proposed shareholders
and directors consents for the dissolution of
Precision Abstractions and the 2002 internal
financial reports, tax returns and K-1's for
Precision Abstractions referenced previously.
Barnes has not agreed to Precision
Abstractions' dissolution nor executed the
proposed shareholders/directors consents.
26. Kochhar has failed to consult with Barnes
or obtain her consent for any allocation of
revenues among Outcomes and Precision
Abstractions in respect of the second and
third HEDIS seasons. Upon information and
belief, Kochhar has caused Outcomes to retain
substantially all of the profits from these
business activities.
27. After preliminary communications in
opposition to these actions were ignored,
Barnes, through counsel, made demand upon
Kochhar, in her capacity as officer and
director of Precision Abstractions to initiate
and cooperate in all respects with all
available actions to restore to Precision
Abstractions the benefit of all corporate
opportunities unlawfully usurped by her for
the benefit of Outcomes. . . .
Based on these allegations, on 7 November 2003, plaintiffs
filed a complaint against Kochhar, Outcomes, Inc., and Precision
Abstractions, Inc. (collectively “defendants”), with claims forrelief based upon, inter alia, fraud, usurpation of corporate
opportunities, fraudulent conveyances, and unfair and deceptive
trade practices. In the complaint, plaintiffs also claimed that
Outcomes is an alter ego of Precision Abstractions, and plaintiffs
sought restitution, a resulting trust, and a constructive trust.
Defendants filed a counterclaim, claiming breach of fiduciary
duties by Barnes, and requested judicial dissolution of Precision
Abstractions, Inc. as well as recovery of reasonable expenses
including counsel fees. On 4 August 2004, plaintiffs filed
motions, inter alia, for appointment of a receiver for Outcomes
(See footnote 1)
and to amend the complaint in order to join as additional
defendants Anil Kochhar and ODIS, LLC. Appellees consented to the
amended complaint. On 28 March 2005, plaintiffs renewed the motion
for appointment of a receiver, and the trial court denied the
motion on 16 June 2005. Plaintiffs gave notice of appeal from the
denial of the appointment of a receiver on 18 July 2005.
Defendants subsequently filed motions to dismiss the appeal as
interlocutory.
[1] Plaintiffs argue the denial of an appointment of a
receiver is not interlocutory and direct this Court to our Supreme
Court's holding in Jones v. Thorne, 80 N.C. 72 (1879). In Thorne,our Supreme Court reviewed and affirmed an order denying a
receiver; thus, when an appellant appealed the subsequent
appointment of a receiver on the same underlying facts, our Supreme
Court held the previous determination was res adjudicata. Id., 80
N.C. at 75. In that case, our Supreme Court stated the rule,
“granting or refusing an order for . . . the appointment of a
receiver is not a mere matter of discretion in the judge, and
either party dissatisfied with his ruling may have it reviewed
[immediately].” Id., 80 N.C. at 75. Our Supreme Court made this,
now dated, statement in 1879 prior to our General Assembly's
passage of statutes specifically dealing with the issue of
interlocutory appeals. See N.C. Gen. Stat. §§ 1A-1, Rule 54(b); 1-
277(a); 7A-27(d)(1) (2005). Additionally, under our current
jurisprudence, when properly on appeal, we review orders concerning
appointment or denial of a receiver under an abuse of discretion
standard. Williams v. Liggett, 113 N.C. App. 812, 815, 440 S.E.2d
331, 333 (1994). In other words, the denial or appointment of a
receiver is now “a mere matter of discretion.” See Thorne, supra.
Because of these jurisprudential changes, we revisit the issue
of whether, on these facts, the denial of an appointment of a
receiver is interlocutory under current statutory law as
interpreted by our courts.
(See footnote 2)
“An interlocutory order is one madeduring the pendency of an action, which does not dispose of the
case, but leaves it for further action by the trial court in order
to settle and determine the entire controversy.” Little v.
Stogner, 140 N.C. App. 380, 382, 536 S.E.2d 334, 336 (2000)
(internal quotations omitted). “Generally, there is no right of
immediate appeal from an interlocutory order.” Abe v. Westview
Capital, 130 N.C. App. 332, 334, 502 S.E.2d 879, 881 (1998).
However, an interlocutory order can be immediately appealed by
either of two methods. N.C. Dept. of Transp. v. Page, 119 N.C.
App. 730, 734, 460 S.E.2d 332, 334 (1995). First, an interlocutory
order can be appealed pursuant to N.C. Gen. Stat. § 1A-1, Rule
54(b) (2005) if the trial court certifies the case for appeal and
judgment is final as to some but not all claims. Id. Second,
under N.C. Gen. Stat. §§ 1-277(a) and 7A-27(d)(1) an interlocutory
order can be immediately appealed if the trial court's holding: 1)
deprives an appellant of a substantial right that would be lost
without immediate appellate review, 2) “[i]n effect determines the
action and prevents judgment from which appeal might be taken,” 3)
“[d]iscontinues the action,” or 4) “[g]rants or refuses a new
trial.” Lamb v. Lamb, 92 N.C. App. 680, 683, 375 S.E.2d 685, 686
(1989) (citations omitted). We consider whether plaintiffs have established a substantial
right. In determining whether an issue affects a “substantial
right,” our Supreme Court has stated that “the 'substantial right'
test for appealability of interlocutory orders is more easily
stated than applied.” Waters, 294 N.C. at 208, 240 S.E.2d at 343.
Our courts apply a two-part test in determining whether a
substantial right exists: 1) that the right in question qualifies
as “substantial” and 2) that, absent immediate appeal, the right
will be “lost, prejudiced or less than adequately protected by
exception to entry of the interlocutory order.” “A 'substantial
right' is 'a legal right affecting or involving a matter of
substance as distinguished from matters of form: a right materially
affecting those interests which a man is entitled to have preserved
and protected by law: a material right.'” Schout v. Schout, 140
N.C. App. 722, 725, 538 S.E.2d 213, 215 (2000). “It is usually
necessary to resolve the question [of whether there is a
substantial right] in each case by considering the particular facts
of that case and the procedural context in which the order from
which appeal is sought was entered.” Waters, 294 N.C. at 208, 240
S.E.2d at 343.
[2] Plaintiffs claim that a substantial right is at issue
because
despite being holder of 50% of the voting
shares of Precision, [Plaintiff Barnes] has
suffered complete and continuing impairment of
her right to participate in the management of
its corporate business and opportunities and
to veto corporate decisions since Defendant
Wanda Kochhar physically locked her out of the
corporate offices and severed the relationshipbetween Precision and Outcomes, Inc., to which
Kochhar had transferred all of Precision's
business opportunities.
In support of their argument that they have proven a substantial
right based on impaired ability to manage, plaintiffs cite Action
Community Television Broadcasting Network, Inc. v. Livesay, 151
N.C. App. 125, 129, 564 S.E.2d 566, 569 (2002), which recognized “a
shareholder's ability to manage his or her own closely held
corporation is significant.” However, on the facts of this case,
plaintiff Kochhar has lost no substantial right to the management
of Outcomes since plaintiffs are not shareholders of Outcomes and
have no right to manage Outcomes; rather, plaintiffs are
shareholders of Precision.
Plaintiffs also argue that a substantial right exists because
“by virtue of Kochhar's control (through Outcomes) over all of the
assets and business opportunities that originated with Precision,
such property is subject to risk of loss or further removal.”
Specifically, plaintiffs allege,
The continuing series of transactions in this
case have already caused injuries and threaten
to cause more. Large and increasing officer
salaries, transfers of intellectual property
rights and other assets, undertaking of debt
and lease obligations, new business ventures,
the prospect of business entanglements (such
as grants of equity interests), the removal of
[Outcomes's] corporate headquarters from this
State, and the individual defendants'
exclusive control over ongoing revenues and
profits all threaten irreversible injuries to
[plaintiffs].
Plaintiffs report, as examples: 1) While paying Precision no
profit, Kochhar hired Anil Kochhar and her daughter (who was afull-time student) to work at Outcomes for salaries of $200,000 and
$138,000 respectively; 2) “[a]fter Kochhar's receipt of a
derivative demand preliminary to the filing of this action in 2003,
Outcomes transferred ownership of custom software developed with
revenues from Precision's business opportunities to a new limited
liability company, ODIS, LLC [which is owned by Kochhar's husband,
Anil Kochhar],” and plaintiffs allege that Outcomes then licensed
back the software for an annual fee more than four times the sale
price; 3) “[a]ll of Outcomes's investments were financed with cash
from HEDIS revenues and proceeds of a line of credit secured by
Outcomes's receivables and HEDIS contract rights”; and 4) “Outcomes
. . . bought over $316,000 of equipment and leased equipment worth
another $211,792 [using what are alleged to be Precision's
assets].”
Based on the facts of this case, we hold that plaintiffs'
right to preservation of what they allege are Precision's assets
and corporate opportunities has been substantially affected by the
trial court's denial of the appointment of a receiver. See Schout,
140 N.C. App. at 726, 538 S.E.2d at 216 (recognizing that
preservation of assets, on those facts by a custodian for a
client's benefit, can be a substantial right). Plaintiffs have
also shown, absent immediate appellate review, that these
substantial rights will be “lost, prejudiced or be less than
adequately protected.” Id., 140 N.C. App. at 725, 538 S.E.2d at
215 (recognizing irreparable harm when a party could dispose of all
or most of the assets before this matter comes to a full and finalresolution). Although Outcomes is currently a solvent corporation,
plaintiffs have provided concrete examples of irreparable harm
including the depletion of assets that allegedly belong to
Precision, the transfers of proprietary software allegedly
developed with Precision's assets, the creation of lease agreements
allegedly financed through Precision's assets, and purchases by
Outcomes secured by Precision's assets. Accordingly, on these
facts, in light of the alleged relationship between Precision and
Outcomes, including the fact that the alleged assets of Precision
may be in the hands of a faithless fiduciary, plaintiffs have
established a substantial right to preservation of what are alleged
to be Precision's assets.
[3] Holding that the trial court's denial of an appointment of
a receiver can be immediately appealed on these facts, we next
consider whether the trial court properly denied the appointment of
a receiver. A receiver may be appointed by a trial court both
pursuant to statute and the trial court's inherent authority.
Lowder, 301 N.C. at 577, 273 S.E.2d at 256. North Carolina General
Statutes § 1-502 (2005) states, in applicable part,
A receiver may be appointed_
(1) Before judgment, on the application of
either party, when he establishes an apparent
right to property which is the subject of the
action and in the possession of an adverse
party, and the property or its rents and
profits are in danger of being lost, or
materially injured or impaired; except in
cases where judgment upon failure to answer
may be had on application to the court.
(Emphasis added). Additionally, this Court has held, “the Supreme
Court indicated that a court of equity has the 'inherent power toappoint a receiver, notwithstanding specific statutory
authorization.'” Liggett, 113 N.C. App. at 816, 440 S.E.2d at 333.
On appeal from the appointment or denial of a receiver, we review
the trial court's determination under an abuse of discretion
standard. Liggett, 113 N.C. App. at 815, 440 S.E.2d at 333.
Plaintiffs initially argue that they “showed entitlement to a
receiver by establishing as a matter of law that defendant Kochhar
usurped corporate opportunities and that her defenses are legally
insufficient.” We reject this argument because even assuming
arguendo that plaintiffs had established that defendant Kochhar had
usurped corporate opportunities as a matter of law,
(See footnote 3)
this would not
necessarily result in entitlement to a receiver. Rather,
appointment of a receiver is within the discretion of the trial
court. Murphy v. Murphy, 261 N.C. 95, 101, 134 S.E.2d 148, 153
(1964) (standing for the proposition that receivership is a harsh
remedy that will be granted only in the absence of another safe or
expedient remedy). See also Liggett, 113 N.C. App. at 816, 440
S.E.2d at 333 (stating “a receiver should be appointed for a going,
solvent corporation only in rare and drastic situations”).
Accordingly, we hold that plaintiffs' first argument on appeal is
without merit.
We next consider plaintiffs' second argument that “a receiver
should have been appointed.” This second argument is based onplaintiffs' first argument that they established liability as a
matter of law and thus a receiver must have been appointed. Having
previously rejected this argument, we likewise hold that
plaintiffs' second argument on appeal is without merit.
Plaintiffs have failed to argue their remaining assignments of
error on appeal, and we deem them abandoned pursuant to N.C. R.
App. P. 28(b)(6) (2006).
Affirmed.
Judges BRYANT and ELMORE concur.
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