Egelhof ex rel. Red Hat, Inc. v. Szulik

• Citation: 668 S.E.2d 367
• Decision Date: 18 November 2008
• Docket Number: No. COA08-452.,COA08-452.
• Court: Court of Appeal of North Carolina (US)
• Parties: Andrew EGELHOF, Derivatively on Behalf of RED HAT, INC., Plaintiff, v. Matthew J. SZULIK, Kevin B. Thompson, Paul J. Cormier, Timothy J. Buckley, Mark H. Webbink, Alex Pinchev, Robert F. Young, Eugene J. McDonald, F. Selby Wellman, Marye A. Fox, William S. Kaiser, Dr. Steve Albrecht and H. Hugh Shelton, Defendants.

668 S.E.2d 367

Andrew EGELHOF, Derivatively on Behalf of RED HAT, INC., Plaintiff, v. Matthew J. SZULIK, Kevin B. Thompson, Paul J. Cormier, Timothy J. Buckley, Mark H. Webbink, Alex Pinchev, Robert F. Young, Eugene J. McDonald, F. Selby Wellman, Marye A. Fox, William S. Kaiser, Dr. Steve Albrecht and H. Hugh Shelton, Defendants.

No. COA08-452.

Court of Appeals of North Carolina.

November 18, 2008.

Appeal by plaintiff and plaintiff's out-of-state counsel and cross-appeal by defendants from order entered on or after 4 February 2008 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 25 September 2008.

Manning, Fulton & Skinner, P.A., by Michael T. Medford, Raleigh, for plaintiff Andrew Egelhof.

Womble Carlyle Sandridge & Rice, P.L.L.C., by Pressly M. Millen and Sean E. Andrussier, Raleigh, for defendants.

Everett, Gaskins, Hancock & Stevens, L.L.P., by E.D. Gaskins, Jr. and Louis E. Wooten, III, Raleigh, for appellants Brian J. Robbins, Jeffrey P. Fink, Steven R. Wedeking and Robbins Umeda & Fink, L.L.P.

TYSON, Judge.

Andrew Egelhof ("plaintiff") and his out-of-state counsel, Jeffrey P. Fink, Brian J. Robbins, Steven R. Wedeking, and the law firm of Robbins Umeda & Fink, LLP (collectively, "plaintiff's counsel") appeal from order entered, which: (1) imposed sanctions on plaintiff and plaintiff's counsel and (2) failed to award Matthew J. Szulik, Kevin B. Thompson, Paul J. Cormier, Timothy J. Buckley, Mark H. Webbink, Alex Pinchev, Robert F. Young, Eugene J. McDonald, F. Selby Wellman, Marye A. Fox, William S. Kaiser, Dr. Steve Albrecht, and H. Hugh Shelton (collectively, "defendants") attorneys' fees and expenses. Defendants cross-appeal the denial of attorneys' fees as sanctions. We affirm in part and reverse in part.

I. Background

On 18 August 2004, plaintiff filed a Verified Shareholder Derivative Complaint against defendants on behalf of Red Hat, Inc. ("Red Hat"). Plaintiff alleged defendants: (1) engaged in insider trading; (2) breached their fiduciary duty; (3) abused their control of Red Hat; (4) grossly mismanaged Red Hat; (5) wasted valuable corporate assets; and (6) were unjustly enriched. On 29 December 2004, the case was designated as a complex business case and transferred to the special superior court for complex business cases. Defendants moved to dismiss the complaint on 27 June 2005 and alleged: (1) the complaint failed to adequately plead demand futility under Delaware law and (2) all counts should be dismissed pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(6).

Plaintiff amended his complaint on 21 July 2005. Defendants moved to dismiss the amended complaint on 29 September 2005. In its order filed 13 March 2006, the trial court granted defendants' motion to dismiss with prejudice "on the grounds that the Amended Complaint does not establish demand futility under Delaware law and because [plaintiff] is no longer a shareholder and thus lacks standing to pursue this action." Plaintiff failed to appeal the trial court's grant of defendants' motion to dismiss.

On 25 April 2006, defendants filed a motion for attorneys' fees pursuant to N.C. Gen.Stat. § 1A-1, Rule 11 and N.C. Gen.Stat. § 6-21.5. Defendants alleged: (1) "[p]laintiff filed his claim when it was neither well grounded in fact nor warranted by existing law[]" and (2) "there was a complete absence of a justiciable issue of either law or fact raised by [p]laintiff in his pleadings." After a hearing on 9 June 2006, the trial court ordered defendants to depose plaintiff. Plaintiff was deposed on 13 July 2006. Counsel for both plaintiff and defendants were present and participated in the deposition.

The trial court entered its final order on defendants' motion for attorneys' fees on 4 February 2008. The trial court's order: (1) prohibited plaintiff from acting as a shareholder derivative plaintiff or a class action representative in the state courts of North Carolina for a period of five years; (2) required Mr. Fink to pay pro hac vice fees; (3) prohibited plaintiff's counsel from appearing pro hac vice in the state courts of North Carolina for a period of five years; and (4) denied defendants' motion for attorney fees and expenses. Plaintiff and plaintiff's counsel appeal. Defendants cross-appeal.

II. Issues

Plaintiff and plaintiff's counsel argue the trial court erred when it imposed non-monetary sanctions. On cross-appeal, defendants argue the trial court erred when it failed to award attorneys' fees.

III. Plaintiff's and Plaintiff's Counsel's Appeal

Plaintiff and plaintiff's counsel argue the trial court erred when it imposed non-monetary sanctions: (1) without notice or hearing; (2) when plaintiff and plaintiff's counsel did not sign the amended complaint; and (3) were based upon unsupported findings of fact.

A. Due Process

"Notice and an opportunity to be heard prior to depriving a person of his property are essential elements of due process of law which is guaranteed by the Fourteenth Amendment of the United States Constitution and Article 1, section 17, of the North Carolina Constitution." McDonald's Corp. v. Dwyer, 338 N.C. 445, 448, 450 S.E.2d 888, 891 (1994). "It is not adequate for the notice to say only that sanctions are proposed. The bases for the sanctions must be alleged." Griffin v. Griffin, 348 N.C. 278, 280, 500 S.E.2d 437, 439 (1998) (citing Taylor v. Taylor Prods. Inc., 105 N.C.App. 620, 629, 414 S.E.2d 568, 575 (1992), overruled on other grounds by Brooks v. Giesey, 334 N.C. 303, 317, 432 S.E.2d 339, 347 (1993)). "In order to pass constitutional muster, the person against whom sanctions are to be imposed must be advised in advance of the charges against him." Id.

Plaintiff and plaintiff's counsel cite Gagliardi v. McWilliams for the proposition that due process requires a party to be put on notice of the type of sanctions that could possibly be ordered by the trial court. 834 F.2d 81 (3rd Cir.1987). In Gagliardi, the United States Court of Appeals for the Third Circuit vacated the district court's order and stated:

The general request for "other appropriate relief" was insufficient notice to Gagliardi, who was proceeding pro se, of the possibility that his resort to the courts would be precluded without initial scrutiny by the district court. Even an experienced attorney would not have expected this type of injunctive sanction without some more specific notice.

834 F.2d at 83.

Neither our Supreme Court nor this Court have required a party, against whom statutory sanctions have been sought, to be put on notice of the specific type of sanctions, which may be ordered. North Carolina has consistently required only: (1) notice of the bases of the sanctions and (2) an opportunity to be heard. See Griffin, 348 N.C. at 280, 500 S.E.2d at 439; see also Wilson v. Wilson, 183 N.C.App. 267, 271, 644 S.E.2d 379, 382, disc. rev. denied, 362 N.C. 92, 657 S.E.2d 32 (2007); Dunn v. Canoy, 180 N.C.App. 30, 40, 636 S.E.2d 243, 250 (2006), disc. rev. denied, 361 N.C. 351, 645 S.E.2d 766 (2007); Megremis v. Megremis, 179 N.C.App. 174, 178-79, 633 S.E.2d 117, 121 (2006); Zaliagiris v. Zaliagiris, 164 N.C.App. 602, 609, 596 S.E.2d 285, 290 (2004), disc. rev. denied, 359 N.C. 643, 617 S.E.2d 662 (2005).

Here, defendants' 25 April 2006 motion for attorney fees stated:

Defendants ... respectfully move for the entry of an order awarding to Defendants their reasonable attorneys' fees for services rendered by their attorneys in defense of this action pursuant to the following statutory authority:

a. N.C. Gen.Stat. § 1A-1 (Rule 11 of the North Carolina Rules of Civil Procedure) on the grounds that Plaintiff filed his claim when it was neither well grounded in fact nor warranted by existing law; and

b. N.C.G.S. § 6-21.5 on the grounds that there was a complete absence of a justiciable issue of either law or fact raised by Plaintiff in his pleadings.

(Emphasis supplied). Plaintiff subsequently submitted a memorandum of law in opposition to defendants' motion for attorneys' fees. On 9 June 2006, the trial court conducted a hearing on defendants' motion for attorneys' fees. The trial court's order filed on or about 12 June 2006 ordered defendants to depose plaintiff and stated:

The scope of the deposition may include, but is not limited to: (1) [plaintiff]'s ownership of stock in Red Hat ... and any other connection or involvement he may had had with Red Hat ..., (2) his involvement with this litigation, including how he came to be involved and the extent of his knowledge of the proceedings in this litigation, (3) his involvement as plaintiff in any other shareholder derivative or class action litigation, (4) the general nature of any litigation in which he has been represented by Robbins, Umeda & Fink, (5) his connection with any lawyers, employees or agents of Robbins, Umeda & Fink, (6) any fee agreement or expectation of compensation he had with Robbins, Umeda & Fink in connection with this litigation, (7) his general work experience and educational background, (8) any criminal record which would impact his suitability to represent the corporation in this shareholder derivative action, and (9) the reasons for and timing of his selling his stock and abandoning his position in this litigation. Except as provided above he shall not be subject to examination about his personal life or finances. Nor shall he be required to disclose any substantive advice on legal issues provided in connection with his status as a shareholder derivative plaintiff by Robbins, Umeda & Fink. Any such communications that would be subject to the attorney client privilege shall not be the subject of examination.

Plaintiff and plaintiff's counsel were given notice of the "bases" of the alleged sanctions against them and were given an opportunity to present arguments and testimony on their behalf. Plaintiff's and plaintiff's counsel's due process rights were fully protected. Griffin, 348 N.C. at 280, 500 S.E.2d at...