Barger v. McCoy Hillard & Parks

• Decision Date: 03 October 1995
• Docket Number: No. COA94-876,COA94-876
• Citation: 120 N.C.App. 326,462 S.E.2d 252
• Court: North Carolina Court of Appeals
• Parties: Jerry H. BARGER, H. Wayne Kennerly, and Harry G. Young, Jr., Plaintiffs, v. McCOY HILLARD & PARKS, A North Carolina General Partnership, David R. McCoy, Michael W. Hillard, Brent H. Parks and Sheila Lee, Defendants.

Page 252

462 S.E.2d 252

120 N.C.App. 326

Jerry H. BARGER, H. Wayne Kennerly, and Harry G. Young, Jr. Plaintiffs, v. McCOY HILLARD & PARKS, A North Carolina General Partnership David R. McCoy, Michael W. Hillard, Brent H. Parks and Sheila Lee, Defendants.

No. COA94-876.

Court of Appeals of North Carolina.

Oct. 3, 1995.

Caudle & Spears, P.A. by Thad A. Throneburg and Jeffrey L. Helms, Charlotte, for plaintiffs-appellants.

Hedrick, Eatman, Gardner & Kincheloe by Hatcher Kincheloe and L. Kristin King, Charlotte, for defendants-appellees.

JOHN C. MARTIN, Judge.

Plaintiffs' sole assignment of error is that the trial court erred in granting defendants' motion for summary judgment. Plaintiffs argue that there are genuine issues of material fact and that defendants were not entitled to judgment as a matter of law. We affirm the order of the trial court, except as to plaintiffs' claim of constructive fraudulent misrepresentation. As to that claim, we reverse summary judgment and remand to the trial court.

Our analysis in this case turns on the nature of plaintiffs' claimed injuries. Because of defendants' alleged breach of contract and negligent and fraudulent misrepresentations, plaintiffs have sought recovery for: (1) the loss of the value of their stock in TFH, and (2) their personal obligations to lenders on individually guaranteed debts of TFH. We address these two claims separately.

I.

Contending that defendants' alleged malfeasance directly and proximately resulted in the bankruptcy of TFH, and the loss of all present and future value in their shares of TFH stock, plaintiffs argue that they are entitled to bring this action in a personal capacity, despite the fact that TFH may also have a cause of action against defendants. We do not agree.

In general, shareholders do not have individual causes of action against third persons for wrongs or injuries to the corporation that result in depreciation or destruction of the value of their stock. Process Components, Inc. v. Baltimore Aircoil, 89 N.C.App. 649, 366 S.E.2d 907 (1988). "The only exception is where the injury to individual stockholders results from a special duty [which is] owed to the stockholder by the wrongdoer and [has] an origin independent of plaintiff's status as stockholder." Id. at 655-56, 366 S.E.2d at 912, citing Howell v. Fisher, 49 N.C.App. 488, 272 S.E.2d 19 (1980), disc. review denied, 302 N.C. 218, 277 S.E.2d 69 (1981). See Smith Setzer & Sons, Inc. v. S.C. Procurement Review Panel, 20 F.3d 1311 (4th Cir.1994).

This Court recognized in Howell, supra, that shareholders may maintain individual claims when they are able to allege a loss peculiar to themselves by reason of some special circumstances or special relationship to the wrongdoers. In such a case, "the corporation is not a necessary party ... since any damages recovered do not pass to the corporation or indirectly to its creditors." Howell, 49 N.C.App. at 492, 272 S.E.2d at 23.

In Howell, the plaintiff stockholders' suit was dismissed for failure to join the corporation as a necessary party. In that case we determined that the plaintiffs' claims for breach of contract were properly dismissed as there were no allegations that the plaintiffs were intended third party beneficiaries of the contract. Nevertheless, we reversed the trial court and held that the plaintiffs had a personal cause of action "for negligent misrepresentations made to them before they were stockholders for the purpose of inducing their investment." Id. at 498, 272 S.E.2d at 26.

Relying on Howell, plaintiffs contend they were intended third party beneficiaries of the contracts between TFH and defendants, and, therefore, the loss of the value of their shares is injury "peculiar and personal" to them. Plaintiffs likewise claim personal injury for this loss due to defendants' alleged negligent and fraudulent misrepresentations. However, plaintiffs' reliance on Howell is misplaced.

In order for shareholders to bring a personal action against a party contracting with their corporation, " '[t]he real test is ... whether the contracting parties intended that a third person should receive a benefit which might be enforced in the courts.' " Howell, 49 N.C.App. at 493, 272 S.E.2d at 23, quoting Vogel v. Reed Supply Co., 277 N.C. 119, 128, 177 S.E.2d 273, 279 (1970). The contract must have been entered into for plaintiffs' direct benefit. Id.

In ruling on a motion for summary judgment, the trial court must view the evidence in the light most favorable to the non-moving party, who is entitled to the benefit of all favorable inferences that may reasonably be drawn from the facts proffered. Averitt v. Rozier, 119 N.C.App. 216, 458 S.E.2d 26 (1995). Though plaintiffs have alleged that TFH's contracts with defendants were for plaintiffs' direct benefit, the evidentiary materials in the record before the court, viewed in the light most favorable to plaintiffs, do not support such allegations. Indeed, the evidence shows the alleged contracts were entered into at periodic shareholder/director meetings for the sole benefit of TFH. Such contracts would have benefitted plaintiffs only indirectly. Any loss in the value of plaintiffs' shares as a result of defendants' breach of these alleged contracts was not a loss peculiar to each individual plaintiff, but rather "caused loss to stockholders and creditors generally." Jordan v. Hartness, 230 N.C. 718, 719, 55 S.E.2d 484, 485 (1949). Therefore, these claims must be asserted by TFH or by plaintiffs in a derivative suit on behalf of TFH. The trial court properly granted summary judgment in favor of defendants as to plaintiffs' personal third party beneficiary claims.

As to the claims that defendants' alleged misrepresentations caused the loss in the value of plaintiffs' shares, a loss "peculiar or personal" to the stockholders is still required for an action without the corporation as a necessary party. It is clear in North Carolina that a plaintiff shareholder must suffer damage distinct and independent from that suffered by the corporation and shareholders generally. McPhail v. Wilson, 733 F.Supp. 1011 (W.D.N.C.1990); Howell, 49 N.C.App. at 498, 272 S.E.2d at 26. As seen in Howell, this has been limited to actions wherein the plaintiffs were induced to purchase their initial shares in the corporation based on the misrepresentations of the defendant. In the present case, however, plaintiffs were already shareholders at the time of any alleged negligent or fraudulent misrepresentations. In addition, damages suffered due to any such misrepresentations were damages to the corporation generally, i.e., bankruptcy and the ensuing destruction of the value of their stock.

Thus, plaintiffs' claims for relief for the loss in the value of their shares as a result of defendants' breach of contract and misrepresentations are actionable only on behalf of TFH, and may not be brought personally by plaintiffs. The trial court properly granted summary judgment for defendants on these issues.

II.

Plaintiffs also contend they personally guaranteed loans made to TFH based on defendants' representations as to TFH's financial viability. Plaintiffs maintain that a fiduciary relationship existed creating a special duty owed by defendants to plaintiffs individually. Plaintiffs argue they are entitled to recover personal damages for defendants' alleged breach of contract and negligent and fraudulent misrepresentations, as a result of which plaintiffs contend they were required to pay the personally guaranteed corporate debt.

Whether an injury to a corporation can also be a separate and distinct injury to a personal guarantor of corporate debt is apparently an issue of first impression in North Carolina. Nevertheless, a consensus on this question has emerged from the decisions of many courts.

[I]t is also generally accepted that guarantors of a corporation's debt, even if those guarantors are also stockholders, do not have standing to bring an action if the only harm suffered is derivative of the harm the corporation suffered. (Citations omitted.)

These general principles, however, are not without certain exceptions. One such exception exists where there is a special duty such as a contractual duty or fiduciary relationship between the wrongdoer and the shareholder. (Citations omitted.) Similarly, an individual shareholder or officer may bring an action directly against a third party where he has pled an injury separate and distinct from that incurred by the corporation.

Chrysler Credit Corp. v. B.J.M., Jr., Inc., 834 F.Supp. 813, 838-39 (E.D.Pa.1993). Accord: Hengel, Inc. v. Hot 'N Now, Inc., 825 F.Supp. 1311 (N.D.Ill.1993); Taha v. Engstrand, 987 F.2d 505 (8th Cir.1993); Hershman's, Inc. v. Sachs-Dolmar Div., 89 Ohio App.3d 74, 623 N.E.2d 617 (1993); Pepe v. GMAC, 254 N.J.Super. 662, 604 A.2d 194, cert. denied, 130 N.J. 11, 611 A.2d 650 (1992); Around the World Importing, Inc. v. Mercantile, 795 S.W.2d 85 (Mo.App.1990); Walstad v. Norwest Bank of Great Falls, 240 Mont. 322, 783 P.2d 1325 (1989); Wells Fargo Ag Credit Corp. v. Batterman, 229 Neb. 15, 424 N.W.2d 870 (1988); United States v. Palmer, 578 F.2d 144 (5th Cir.1978); Sacks v. American Fletcher Nat. Bank & Trust Co., 258 Ind. 189, 279 N.E.2d 807 (1972); Buschmann v. Professional Men's Association, 405 F.2d 659 (7th Cir.1969).

This general rule corresponds with North Carolina's present law governing shareholders' individual actions arising from corporate injuries. See Outen v. Mical, 118 N.C.App. 263, 454 S.E.2d 883 (1995). We have no difficulty in extending this rule to personal guarantors of corporate debt. Absent some special duty between the wrongdoer and the guarantor, or some injury separate and distinct from that of the corporation, the injury suffered by a guarantor is derivative of the corporation and does not give rise to an individual cause of action personal to the guarantor.

Plaintiffs here claim both an injury...