Loy v. Lorm Corp., 801SC771

• Decision Date: 16 June 1981
• Docket Number: No. 801SC771,801SC771
• Citation: 278 S.E.2d 897,52 N.C.App. 428
• Parties: Neil E. LOY, Plaintiff, v. LORM CORPORATION, Marl Corporation, L. W. Mitchell, Alice H. Minges, and Roy W.Wescott, Defendants.
• Court: North Carolina Court of Appeals

Page 897

278 S.E.2d 897

52 N.C.App. 428

Neil E. LOY, Plaintiff, v. LORM CORPORATION, Marl Corporation, L. W. Mitchell, Alice H Minges, and Roy W.Wescott, Defendants.

No. 801SC771.

Court of Appeals of North Carolina.

June 16, 1981.

Leroy, Wells, Shaw, Hornthal, Riley & Shearin by Norman W. Shearin, Jr., and Roy A. Archbell, Jr., Kitty Hawk, for plaintiff-appellant.

Aldridge, Seawell & Khoury by Christopher L. Seawell, Manteo, for defendants-appellees.

BECTON, Judge.

At the outset, it is important to emphasize that Lorm and Marl were closely-held corporations in which all three defendants were shareholders, directors and officers. The two corporations were formed at the same time with the same purpose to establish the Port O' Call Restaurant. ² The corporations had interlocking directorates with the three defendants firmly in control of both corporations. Plaintiff sued the three defendants in their capacities as shareholders, directors and officers of both corporations. Because of the multiple relationships shared by the three defendants with the two corporations, references to all of the defendants in the pleadings and testimony are difficult, but not impossible, to keep straight. However inartfully the pleadings are drawn, the complaint does sufficiently allege a claim for relief against the three individual defendants, against Lorm and against Marl.

I

Loy's first assignment of error is that the trial court committed error by directing a verdict for the three defendants at the close of the plaintiff's evidence. It is a well-established rule of law in North Carolina that:

(i)n passing upon such a motion (for directed verdict), the court must consider the evidence in the light most favorable to the non-movant. (Citation omitted.) That is, the evidence in favor of the non-movant must be deemed true, all conflicts in the evidence must be resolved in his favor and he is entitled to the benefit of every inference reasonably to be drawn in his favor.

Summey v. Cauthen, 283 N.C. 640, 647, 197 S.E.2d 549, 554 (1973); see also Cutts v. Casey, 278 N.C. 390, 180 S.E.2d 297 (1971). After considering the evidence in the light most favorable to the non-movant (in this case the plaintiff, Loy), the trial court should deny the motion for directed verdict if "it finds 'any evidence more than a scintilla' to support plaintiff's prima facie case in all its constituent elements." Hunt v. Montgomery Ward & Co., 49 N.C.App. 638, 640, 272 S.E.2d 357, 360 (1980) quoting 2 McIntosh, North Carolina Practice and Procedure 2d, § 1488.15 (Phillips Supp.1970). In reviewing a trial court's decision to grant a directed verdict, an appellate court must ask itself the same question presented to the trial court, "namely, whether the evidence, when considered in the light most favorable to plaintiff, was sufficient for submission to the jury." Kelly v. Harvester Co., 278 N.C. 153, 157, 179 S.E.2d 396, 397 (1971); Hunt v. Montgomery Ward & Co. With our scope and standard of review established, we turn to plaintiff's legal arguments.

In ruling on the motion for directed verdict made by the three defendants in their capacity as shareholders in Lorm, the trial court decreed that:

3. The Defendants' motion for directed verdict on Plaintiff's claim for individual damages is allowed.

4. The Defendants' motion for directed verdict on the ground that Plaintiff's evidence is insufficient as a matter of law to make out a case against the Defendants is allowed.

It is conceded by the three defendants that in North Carolina majority shareholders owe a fiduciary duty and obligation of good faith to minority shareholders as well as to the corporation. As stated by the North Carolina Supreme Court:

(t)he devolution of unlimited power imposes on holders of the majority of the stock a correlative duty, the duty of a fiduciary or agent, to the holders of the minority of the stock, who can act only through them--the duty to exercise good faith, care, and diligence to make the property of the corporation produce the largest possible amount, to protect the interests of the holders of the minority of the stock, and to secure and pay over to them their just proportion of the income and of the proceeds of the corporate property.... It is the fact of control of the common property held and exercised, and not the particular means by which or manner in which the control is exercised, that creates the fiduciary obligation on the part of the majority stockholders in a corporation for the minority holders. Actual fraud or mismanagement, therefore, is not essential to the application of the rule.

Gaines v. Manufacturing Co., 234 N.C. 340, 344-45, 67 S.E.2d 350, 353 (1951); see also Robinson, North Carolina Corporation Law and Practice, § 9-11 at 196 and 198 n.6 (2d ed. 1974). It is also well established in North Carolina, and acknowledged by the three defendants, that once a minority shareholder challenges the fairness of the actions taken by the majority, the burden shifts to the majority to establish that its actions were in all respects inherently fair to the minority and undertaken in good faith. Hill v. Erwin Mills, Inc., 239 N.C. 437, 444, 80 S.E.2d 358, 363 (1954); Robinson, supra, at §§ 9-12, 12-5.

The three defendants take the position that the plaintiff's own evidence established the fairness of their dealings with Lorm. Our review of the record, however, does not support this position, nor does it support the trial court's order of directed verdict. Loy alleged, and sought to prove, that the three defendants breached their fiduciary duty (1) by having their separate corporation, Marl, charge Lorm with unreasonably high rents in an effort to extract profits from Lorm, and (2) by dissipating the assets of Lorm to themselves through Bar--a corporation which they owned and operated. While Loy's evidence may not have established that the rents charged to Lorm were unreasonable, he did, in our opinion, present a prima facie case that the assets of Lorm were drained from Lorm by the three defendants without Loy sharing proportionately as a shareholder.

At trial, Loy presented plenary evidence that the assets ³ of Lorm in 1976 totaled approximately $100,000 to $120,000; that these assets were transferred, without consideration, to Bar--a company owned by the three defendants; that this transfer was completed without a board of directors meeting and without notice to Loy; and that Loy realized no benefit as a minority shareholder from this transfer of assets. Loy's expert witness--Jack Adams, a certified public accountant testified:

I do have an opinion of good will which was attributable to Lorm Corporation, trading as Port O'Call Restaurant as of January 1, 1976. Based on the tax returns for the years that you mentioned were provided to me, I would have to estimate that the good will for Lorm Corporation would be between $100,000 and $120,000, based on my opinion.

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In my opinion the fair market value of Neil E. Loy's stock in Lorm Corporation (25% stock interest), trading as Port O'Call Restaurant, on January 1, 1976, based on my estimate of the net book value of Lorm Corporation, the net book value was a thousand dollars for twenty-five percent and then the good will of twenty-five to thirty thousand dollars would give a fair market value of twenty-six to thirty-one thousand dollars.

Moreover, Adams' analysis of Lorm's and Bar's tax returns revealed that:

In examining PX-1, which is a 1976 tax return for Bar, Inc., on the analysis of retained earnings for the year, it shows an increase to retained earnings for (assets) donated from Lorm Corporation $334.00. As to what that means, after seeing the Lorm Corporation tax return and Lorm shows a property distribution of that same amount, it would appear to me that it was property that was transferred from Lorm Corporation to Bar Corporation during 1976.

Loy testified that he never received any money from the transfer of Lorm's assets, nor did he ever receive any notification of a Lorm shareholders' meeting after he resigned as the manager of Port O' Call Restaurant. Defendant Billy Mitchell substantially corroborated this testimony when he was called as an adverse witness by Loy. Mitchell said:

Prior to transferring the assets of Lorm Corporation to Bar, Inc., we did not notify Mr. Loy that this transfer was about to take place. We did not have a directors meeting of Lorm Corporation before this donation of assets was made. We did not have a meeting of shareholders before this transfer was made. Lorm Corporation has never had a written lease agreement with Marl Corporation. As to the status of Lorm Corporation today, I would presume it is inactive because it didn't pay its state filings. In other words, it died a natural death.

The Business Corporation Act, Chapter 55 of the North Carolina General Statutes, mandates that fundamental changes in a corporation be made by vote of all the shareholders. ⁴ Corporate mergers and transfers of all the assets of a corporation in particular are required to be approved by a vote of all the shareholders. Moreover, "(t)he directors of the transferor corporation must adopt a resolution recommending the transfer and directing its submission to a vote at a meeting of shareholders. Written notice of the meeting must be given to each shareholder of record in the usual manner; ..." Robinson, supra, at § 25-3. See G.S. 55-112(c)(1) & (2). Failure to conform to these mandates of the statute constitutes a breach of a director's fiduciary duty as well as a breach of the majority stockholders' duty to the minority.

Based on the evidence presented then, Loy made out a prima facie case that the three defendants breached the fiduciary duty owed to him as minority shareholder in Lorm. In making out such a case, the burden shifted to the three defendants to establish in defense that the...