Allen ex rel. Allen & Brock v. Ferrera

• Decision Date: 29 December 2000
• Docket Number: No. 99-1253.,99-1253.
• Citation: 540 S.E.2d 761,141 NC App. 284
• Court: North Carolina Court of Appeals
• Parties: Jimmy ALLEN, individually and as a Director of Allen & Brock Construction, Inc. on Behalf of ALLEN & BROCK CONSTRUCTION COMPANY, INC., Plaintiff-Appellant, v. Marlene FERRERA, J. Harold Brock, Eddie T. Brock, Jr., Brock Realty, Inc. and Allen & Brock Construction Company, Inc., Defendant-Appellees.

540 S.E.2d 761

141 NC App. 284

Jimmy ALLEN, individually and as a Director of Allen & Brock Construction, Inc. on Behalf of ALLEN & BROCK CONSTRUCTION COMPANY, INC., Plaintiff-Appellant, v. Marlene FERRERA, J. Harold Brock, Eddie T. Brock, Jr., Brock Realty, Inc. and Allen & Brock Construction Company, Inc., Defendant-Appellees.

No. 99-1253.

Court of Appeals of North Carolina.

December 29, 2000.

Garris Neil Yarborough, Fayetteville, for plaintiff-appellant.

Beaver Holt Richardson Sternlicht Burge & Glazier, P.A., by Lonnie M. Player, Jr., Fayetteville, and Gregory B. Thompson, Raeford, 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 employee 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 check register 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.

Plaintiff's four claims for relief were each raised as both individual claims and as shareholder derivative claims 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 expired 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 the reasons 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 ascertain and 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., ___ N.C.App. ____, 537 S.E.2d 248 (2000); accord 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.'" Nash, ___ N.C.App. at ____, 537 S.E.2d at 262.

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, the response 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...