Appeal by plaintiffs from order entered on or about 7 January
2008 by Judge Albert Diaz in Mecklenburg County Superior Court.
Heard in the Court of Appeals 20 November 2008.
Jackson & McGee, LLP, by Sam McGee, for plaintiff-appellants.
Hamilton Moon Stephens Steele & Martin, PLLC, by Jackson N.
Steele and Mark R. Kutny, for defendant-appellants The J.S.
Proctor Company, LLC, and Anna Jones Proctor as Executor of
the Estate of John S. Proctor, Jr.
K&L Gates LLP, by John H. Culver, III and Glenn E.
Ketner, III, for defendant-appellee Paul Leonard.
STROUD, Judge.
Plaintiffs appeal from the order dismissing their complaint
with prejudice pursuant to Rule 12(b)(6) for failure to state a
claim upon which relief may be granted. The dispositive question
is whether a limited partner can bring suit in his personalcapacity for injuries to the partnership when he does not
sufficiently allege a special duty or a separate and distinct
injury. Because we conclude that he cannot, we affirm.
I. Background
Plaintiffs' complaint, which must be “taken as true” at this
stage of the proceedings,
Rowlette v. State, ___ N.C. App. ___,
___, 656 S.E.2d 619, 621,
disc. review denied and appeal dismissed,
362 N.C. 474, 666 S.E.2d 487 (2008), alleged: Tryon Hills
Associates (“the partnership”) was formed as a limited partnership
on 27 July 1983 for the purpose of owning and operating Tryon Hills
Apartments (“the apartment complex”). At formation, E. Reed Gaskin
was the sole limited partner; John Crosland Company, John S.
Procter, Jr. and Paul R. Leonard, Jr. were the general partners.
In August 1983, E. Reed Gaskin transferred thirty percent of his
interest in the partnership to Anthony William Packer (10%), Lewis
R. Gaskin (5%), John L. Sullivan, Jr. (5%), Larry D. Estes (5%),
and John A. Thompson, Jr. (5%). The J.S. Proctor Company, LLC, was
hired to manage the apartment complex. John Crosland Company
withdrew as a general partner prior to the events giving rise to
the lawsuit. (R 7) E. Reed Gaskin died in 2003; his partnership
interest remained in his estate.
Revenues for the apartment complex began to decline in 2004.
The limited partners recommended that the general partners take
steps to reduce expenses but the general partners did not do so.
In August 2005 the partnership discontinued making mortgage
payments on the apartment complex. The mortgage note was sold toCompass Partners on 21 June 2006. The partnership provided Compass
Partners with a deed in lieu of foreclosure on 1 August 2006.
On 16 May 2007 plaintiffs filed a complaint in Superior Court,
Mecklenburg County. The complaint alleged that the general
partners in the partnership, defendants Paul R. Leonard, Jr. and
John S. Procter, Jr.
(See footnote 1)
injured plaintiffs by breach of fiduciary
duty, negligence, breach of contract, and constructive fraud.
Specifically, the complaint alleged that Proctor and Leonard
[1] operat[ed] Tryon Hills in a manner
calculated to enrich Defendant The J.S.
Proctor Company, LLC, at the expense of
Plaintiffs; [2] discontinu[ed] mortgage
payments in or about August 2005; [3]
conceal[ed] from Plaintiffs their
discontinuation of mortgage payments for a
period of approximately nine months; [4]
fail[ed] to take steps available to ensure
that the assets of Tryon Hills were protected
and maximized; [5] enter[ed] into continuing
negotiations for months with a party who on
the most superficial inquiries, would have
been shown to have no ability to purchase the
property; and [6] fail[ed] to explore or
pursue available options to protect
Plaintiffs' interest in Tryon Hills.
The complaint further alleged that the same acts and injuries were
attributable to the negligence of corporate defendant The J.S.
Proctor Company, LLC. The complaint sought compensatory and
punitive damages.
On 20 June 2007, The J.S. Procter Company, LLC, and the
executors of the estate of John S. Proctor, Jr. (collectively “the
Proctor defendants”) moved to dismiss the action pursuant to Rule12(b)(6), alleging that plaintiffs lacked standing to bring the
action and alternatively that defendant The J.S. Proctor Company,
LLC, owed no duty to plaintiffs. The case was designated as a
complex business case on 29 June 2007. Defendant Leonard moved to
dismiss on 30 July 2007. The trial court granted both motions to
dismiss on or about 7 January 2008.
(See footnote 2)
Plaintiffs appeal.
II. Standard of Review
“The standard of review on a motion to dismiss under Rule
12(b)(6) is whether, if all the plaintiff's allegations are taken
as true, the plaintiff is entitled to recover under some legal
theory.”
Rowlette, ___ N.C. App. at ___, 656 S.E.2d at 621
(citation and quotation marks omitted). When a plaintiff's
standing to bring suit is challenged in a 12(b)(6) motion this
Court reviews
de novo.
Marriott v. Chatham County, ___ N.C. App.
___, ___, 654 S.E.2d 13, 16 (2007);
see also Energy Investors Fund,
L.P. v. Metric Constructors, Inc., 351 N.C. 331, 337, 525 S.E.2d
441, 445 (2000) (“Since [the limited partner] cannot maintain an
action in its own capacity, it lacks standing and has failed to
state a claim upon which relief may be granted.”).
III. Analysis
The general rule of partner standing to sue individually is
stated in
Energy Investors: “It is settled law in this State that
one partner may not sue in his own name, and for his benefit, upon
a cause of action in favor of a partnership.” 351 N.C. at 336_37,525 S.E.2d at 445 (citation and quotation marks omitted). The rule
includes a cause of action against other partners in the
partnership,
Jackson v. Marshall, 140 N.C. App. 504, 508, 537
S.E.2d 232, 235 (2000),
disc. review denied, 353 N.C. 375, 547
S.E.2d 10 (2001), as well as a cause of action against an unrelated
third party,
Energy Investors, 351 N.C. at 336_37, 525 S.E.2d at
445. “The
only two exceptions to this rule are: (1) a plaintiff
alleges an injury 'separate and distinct' to himself, or (2) the
injuries arise out of a 'special duty' running from the alleged
wrongdoer to the plaintiff.”
(See footnote 3)
351 N.C. at 335, 525 S.E.2d at 444
(emphasis added) (recognizing the two exceptions in a suit brought
by a limited partner and citing
Barger v. McCoy Hillard & Parks,
346 N.C. 650, 660, 488 S.E.2d 215, 220 (1997), which recognized the
same two exceptions in a suit brought by shareholders in a
corporation).A. The Purported “Additional Exception” of
Norman
Plaintiffs first contend despite the general rule and the
recognition of only two exceptions in
Energy Investors, that
Norman
v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 537 S.E.2d
248 (2000), recognized “[a]n additional exception to the general
rule[,]” which plaintiffs call the “closely held exception.”
Plaintiffs further contend that “[b]y adopting and applying this
exception, the
Norman court relied upon two primary considerations:
(1) the closely held nature of the company, and (2) the domination
of the company by the defendants and resulting powerlessness of the
plaintiffs.” Plaintiffs then reason that because the partnership
sub judice is a closely held partnership, and because plaintiffs
are powerless within the partnership, they should be able to
maintain this action in their own names and for their own benefit.
We disagree with plaintiffs' interpretation of
Norman and
consequently with their conclusion that
Norman grants them standing
to bring this action.
Plaintiff is correct in stating
Norman purports to create an
additional exception:
Generally speaking, our decision[] in . .
.
Barger parallel[s] the majority view among
our sister states that a shareholder can
maintain an individual action against a third
party only if he can show a special
relationship with the wrongdoer
and also show
an injury peculiar to himself. During the
last quarter of the Twentieth Century,
however, there has been an “evolution” in the
development of, and protection for, the rights
of minority shareholders in closely held
corporations.
140 N.C. App. at 398-99, 537 S.E.2d at 255 (citation omitted and
emphasis added);
see also Bagdon v. Bridgestone/Firestone, Inc.,
916 F.2d 379, 383_84 (7th Cir. 1990) (“[A] few . . . states, ha[ve]
expanded the “special injury” doctrine into a general exception for
closely held corporations . . . . [but] not all states have joined
the parade.”),
cert. denied, 500 U.S. 952, 114 L. Ed. 2d 710
(1991).
We first note that
Norman misstated
Barger, which held that
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, if the
shareholder can show [1] that the wrongdoer
owed him a special duty
or [2] that the injury
suffered by the shareholder is separate and
distinct from the injury sustained by the
other shareholders or the corporation itself.
346 N.C. at 658-59, 488 S.E.2d at 219 (emphasis added). Second,
this Court could not have and did not create “an additional
exception” in light of the North Carolina Supreme Court's clear
holding in
Energy Investors, decided only eight months before
Norman, that there are
only two exceptions to the general rule of
partner standing to bring an individual action. 351 N.C. at 335,
525 S.E.2d at 444.
Finally, and most important,
Norman expressly found standing
to bring an individual lawsuit on its facts based not on the
“evolution” of minority shareholder protection, but based squarely
on one of the two exceptions to the shareholder/limited partner
standing rule found in
Energy Investors and
Barger: Even if we assume, however, that
plaintiffs must show that they have standing
to maintain a direct action against the
business defendants under the rule set out in
. . .
Barger, and the recent decision of our
Supreme Court in
Energy Investors Fund, we
hold that plaintiffs have alleged facts which
bring them within the requirements of those
cases.
. . . .
[P]laintiffs['] . . . allegations are
sufficient to give rise to a fiduciary
relationship between plaintiffs and the
defendants and
establish that defendants owed
plaintiffs a “special duty” within the meaning
of the
Barger decision.
Norman, 140 N.C. App. at 406_07, 537 S.E.2d at 259_60 (citations
omitted and emphasis added).
We therefore conclude that
Norman's extensive discussion of
the closely held nature of the company and the powerlessness of the
minority shareholders offers tools for a careful examination of the
particular facts of a case to determine if a special duty or
distinct injury exists within the meaning of
Barger and
Energy
Investors rather than “an additional exception.”
In examining the facts to find that a special duty was owed by
majority shareholders to those in the minority,
Norman relied on
the presence of two indicators of powerlessness: (1) the
difficulty faced by minority shareholders in dissolving the entity,
either because of legal impediments to dissolving the corporation
or because of the complex relationships involved in a family
business; and (2) whether recovery would be left in control of the
alleged wrongdoers. 140 N.C. App. at 404_05, 537 S.E.2d at 258_59. Because there were only six limited partners, the “closely
held” nature of the limited partnership
sub judice is undeniable.
However, beyond that fact, the limited partnership
sub judice has
little factual similarity to the closely held corporation in
Norman. The complaint
sub judice does not allege and the record
does not reflect that plaintiffs hold only a minority of shares in
the limited partnership. Rather, plaintiffs collectively own
ninety percent (90%) of the shares in the limited partnership.
Furthermore, while defendants, as the general partners, do
control the “board of directors,”
see Energy Investors, 351 N.C. at
334_35, 525 S.E.2d at 443_44 (equating limited partners to
corporate shareholders and general partners to corporate directors
for the purpose of applying the rule of partner standing),
plaintiffs are not “powerless.” Even though the partnership
agreement
sub judice expressly forbids the limited partners from
withdrawing, the agreement also gave the limited partners the right
to convert their limited partnership interests into general
partnership interests, which may participate in the management of
the business or withdraw from the partnership under certain
conditions.
There is also no evidence
sub judice that plaintiffs and
defendants are in a family business where “close relationships . .
. [have] tragically br[oken] down[.]” 140 N.C. App. at 404, 537
S.E.2d at 258. While some of the plaintiffs appear related to
other plaintiffs, and some defendants appear to be related to other
defendants, there is no evidence in the record which suggests thatany family relationship existed between plaintiffs and defendants.
The record therefore does not show that plaintiffs are in the
minority, or powerless to withdraw from the entity or to
participate in any recovery from the lawsuit.
Additionally,
Norman cautioned that even if a special duty
might otherwise be found to exist based on majority ownership in a
closely held corporation, a court should consider the potential
impact of a direct or individual lawsuit on third-party creditors,
and the potential impact of such a suit on the legal system, i.e.,
danger of multiple lawsuits, before concluding that a plaintiff has
standing to sue individually. 140 N.C. App. at 406, 537 S.E.2d at
259. There is no evidence in the record which tends to show that
creditors of the partnership would not be prejudiced if the lawsuit
went forward and resulted in recovery by plaintiffs rather than the
partnership. To the contrary, the complaint alleges that the
partnership is in “dire financial condition” and in default on its
obligations, implying that creditors of the partnership might go
unpaid if plaintiffs received the benefit of any judgment against
the general partners of the partnership. Finally, there is a
danger of multiple lawsuits in the case
sub judice, as the
partnership and two partners who hold ten percent (10%) of the
limited partnership shares are not parties to the lawsuit.
In sum, plaintiffs have not alleged facts consistent with the
Norman analysis by which we could conclude that plaintiffs were
owed a “special duty” by defendants sufficient to convey standing.
Accordingly, this argument is without merit.B. Contractual Duties
Plaintiffs argue that even if the
Norman “exception” does not
apply, a special duty arises from two contractual agreements
plaintiffs entered into with defendants: (1) “each limited partner
appointed each general partner as its 'true and lawful attorney in
fact' with regard to certain partnership functions[;]” and (2)
“[t]he partnership agreement and the amendments thereto . . .
govern the details of the management of the partnership and
constitute a contract between the general and limited partners.
This contract creates contractual duties as contemplated by
Barger[.]”
Plaintiffs reliance on
Barger is misplaced, as the type of
contractual duties created in this case are not distinct from those
in any limited partnership.
To support the right to an individual lawsuit,
the duty must be one that the alleged
wrongdoer owed directly to the 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.
Barger, 346 N.C. at 659, 488 S.E.2d at 220 (citation omitted and
emphasis added).
The power of attorney granted in the partnership agreement
gave the general partners authority to “execute, sign, acknowledge,
deliver and file” certain documents related to the partnership.
There is no duty in the power of attorney grant which is not owed
to the partnership. Furthermore, absent a specific statutoryexception not relevant
sub judice, “
[e]very partner is an agent of
the partnership for the purpose of its business[.]” N.C. Gen.
Stat. § 59-39(a) (2007) (emphasis added);
see also N.C. Gen. Stat.
§ 59-403(a) (2007) (“Except as provided in this Article or in the
partnership agreement, a general partner of a limited partnership
has the rights and powers . . . of a partner in a partnership
without limited partners.”). Contrary to plaintiffs' argument, the
general partners' duty as plaintiffs' attorneys in fact was exactly
the same as the duty owed the partnership _ to conduct the business
of the partnership. To hold that a contractual provision
appointing the general partners as legal agents or attorneys in
fact with regard to certain partnership functions creates a
“special duty” would expand the exception to the point that it
would entirely swallow the rule. We decline plaintiffs' invitation
to do so.
Likewise, every limited partnership is based on an agreement
or contract between the partners.
See N.C. Gen. Stat. § 59-102(7)
(2007) (“'Limited partner' means a person who has been admitted to
a limited partnership as a limited partner in accordance with the
partnership agreement.”); N.C. Gen. Stat. § 59-102(10) (2007)
(“'Partnership agreement' means any valid agreement of the partners
as to the affairs of a limited partnership, the conduct of its
business, and the responsibilities and rights of its partners. The
term 'partnership agreement' includes any written or oral
agreement, whether or not the agreement is set forth in a document
referred to by the partners as a 'partnership agreement[.]'”). Tohold that the existence of a partnership agreement creates a
“special duty” would also expand the exception to the point that it
would entirely swallow the rule. This argument is overruled.
C. Separate and Distinct Injury
Defendants further rely on
Norman to argue that when a
complaint alleges that “individual defendants and the business
entities they control[led] divert[ed] assets and business
opportunities from the Company to the business defendants (and
thereby to the individual defendants) and thus enrich[ed]
themselves at the expense of the Company and the plaintiffs[,]” 140
N.C. App. at 408, 537 S.E.2d at 260, plaintiffs have alleged a
separate and distinct injury sufficient to give them standing to
pursue their claims individually. However, because we concluded
supra that the existence of a special duty was dispositive in
Norman, we also must conclude that the above-quoted statement is
non-binding
dicta unnecessary to the disposition of the case.
Instead, this issue is controlled by
Energy Investors which states:
[A]n injury is peculiar or personal to the
shareholder if a legal basis exists to support
plaintiffs' allegations of an individual loss,
separate and distinct from any damage suffered
by the corporation. In applying this rule of
shareholder law to that of limited
partnerships, we find that the complaint shows
[the limited partner plaintiff's] injury is
the loss of its investment, which is identical
to the injury suffered by the other limited
partners and by the partnership as a whole. .
. . [H]opes for profits are hardly unique.
351 N.C. at 335_36, 525 S.E.2d at 444 (citations, brackets in
original and quotation marks omitted; emphasis added). Furthermore
Jackson v. Marshall, a case decided by this Court on the same dayas
Norman, stated “[t]he question is not whether the [limited
partner] plaintiff is in a less favorable position than the general
partner, but whether the plaintiff is in a less favorable position
when compared to all other limited partners.” 140 N.C. App. at
509, 537 S.E.2d at 235.
All the injuries complained of by plaintiffs _ (1) operation
of the apartment complex in a manner calculated to enrich Defendant
The J.S. Proctor Company, [LLC,] at the expense of Plaintiffs; (2)
discontinuation of mortgage payments which led to loss of the
partnership's primary asset; (3) concealment of the discontinuation
of mortgage payments; (4) failure to ensure that the assets of the
apartment complex _ were protected and maximized; (5) failure to be
diligent to quickly find a buyer for the apartment complex, and (6)
failure to protect the value of plaintiffs' investment in the
apartment complex would have equally affected all of the limited
partners, not just plaintiffs. Plaintiffs alleged no facts which
would support the existence of an injury to themselves apart from
diminution in the value of their investment, a circumstance which
would have similarly affected the partnership and all the partners,
both limited and general.
Jackson, 140 N.C. App. at 509, 537
S.E.2d at 235;
See also Barger, 346 N.C. at 659, 488 S.E.2d at 220
(“[D]iminution or destruction of the value of their shares as the
result of defendants' negligent or fraudulent misrepresentations of
[the corporation's] financial status. . . . is
precisely the injury
suffered by the corporation itself.” (Emphasis added.)).
D. The J.S. Proctor Company, LLC
Plaintiffs lastly contend that they may bring an individual
suit against The J.S. Proctor Company based on their ability to
bring suit against the other defendants, because The J.S. Proctor
company is “inextricably wedded” to the other defendants. We
disagree.
The general rule of partner standing is the same regardless of
whether the plaintiff is seeking to recover from another partner
within the partnership, or a third party unrelated to the
partnership.
Compare Barger 346 N.C. at 658_59, 488 S.E.2d at
219_20 (shareholders sued third-party accounting firm),
and Energy
Investors, 351 N.C. at 336_37, 525 S.E.2d at 445 (limited partner
sued third-party vendor),
with Jackson, 140 N.C. App. at 508, 537
S.E.2d at 235 (limited partner sued general partner). In the case
sub judice, the complaint alleges exactly the same duty and exactly
the same injury against the third party management company as
against the general partners. For the same reasons that plaintiffs
have no standing to bring a suit against the general partners, they
have no standing to bring a suit against the third party management
company, whether the management company is “inextricably wedded” to
the general partners or not.
IV. Conclusion
Plaintiffs' complaint alleged no special duty or separate and
distinct injury to themselves. Therefore, we hold that they lacked
standing to bring their suit in their own names and for their own
benefit. Accordingly, the trial court's order dismissingplaintiffs' complaint for failure to state a claim for which relief
may be granted is affirmed.
AFFIRMED.
Judges CALABRIA and STEELMAN concur.
Footnote: 1