Norman v. NASH JOHNSON & SONS'FARMS, INC., No. COA99-857.

• Decision Date: 07 November 2000
• Docket Number: No. COA99-857.
• Citation: 140 NC App. 390,537 S.E.2d 248
• Court: North Carolina Court of Appeals
• Parties: Mary Johnson NORMAN, Carol Nash Norman Hare, Ralph W. Norman, Jr. Ralph W. Norman, III, Ralph W. Norman, Jr., as Guardian Ad Litem for Caroline E. Norman, Ralph W. Norman, Jr., as Guardian Ad Litem for Anne R. Norman, Ralph W. Norman, Jr., as Guardian Ad Litem for Mary Catherine Norman, David F. Norman, David F. Norman, as Guardian Ad Litem for Walter L. Norman, David F. Norman, as Guardian Ad Litem for Lauren T. Norman, Mary Susan Norman Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for William D. Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for Joshua W. Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for Matthew C. Duncan, Geraldine Johnson Cashwell, J. Steven Cashwell, and Elizabeth Ann Cashwell Gaskill, Plaintiffs-Appellants, v. NASH JOHNSON & SONS' FARMS, INC., House of Raeford Farms, Inc., House of Raeford Farms of Michigan, Inc., Johnson Breeders, Inc., E. Marvin Johnson, Robert Cowan Johnson, Mary Anna Johnson Carr Peak, Dennis N. Beasley, Diane Carol Johnson Beasley, Privateer Farms, Inc., and Johnson Investment Partnership, Defendants-Appellees.

537 S.E.2d 248

140 NC App. 390

Mary Johnson NORMAN, Carol Nash Norman Hare, Ralph W. Norman, Jr. Ralph W. Norman, III, Ralph W. Norman, Jr., as Guardian Ad Litem for Caroline E. Norman, Ralph W. Norman, Jr., as Guardian Ad Litem for Anne R. Norman, Ralph W. Norman, Jr., as Guardian Ad Litem for Mary Catherine Norman, David F. Norman, David F. Norman, as Guardian Ad Litem for Walter L. Norman, David F. Norman, as Guardian Ad Litem for Lauren T. Norman, Mary Susan Norman Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for William D. Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for Joshua W. Duncan, Mary Susan Norman Duncan as Guardian Ad Litem for Matthew C. Duncan, Geraldine Johnson Cashwell, J. Steven Cashwell, and Elizabeth Ann Cashwell Gaskill, Plaintiffs-Appellants, v. NASH JOHNSON & SONS' FARMS, INC., House of Raeford Farms, Inc., House of Raeford Farms of Michigan, Inc., Johnson Breeders, Inc., E. Marvin Johnson, Robert Cowan Johnson, Mary Anna Johnson Carr Peak, Dennis N. Beasley, Diane Carol Johnson Beasley, Privateer Farms, Inc., and Johnson Investment Partnership, Defendants-Appellees.

No. COA99-857.

Court of Appeals of North Carolina.

November 7, 2000.

James, McElroy & Diehl, P.A., by G. Russell Kornegay, III, J. Mitchell Aberman, Katherine Line Thompson Kelly and Ann L. Hester, Charlotte, for plaintiff-appellants.

Jordan Price Wall Gray Jones & Carlton, PLLC, by Henry W. Jones, Jr., Paul T. Flick, C. Marshall Lindsay and Emily W. Eisele, Raleigh, for Nash Johnson & Sons' Farms, Inc., House of Raeford Farms, Inc., House of Raeford Farms of Michigan, Inc., Johnson Breeders, Inc., E. Marvin Johnson, Robert Cowan Johnson, Mary Anna Johnson Carr Peak, Dennis N. Beasley and Diane Carol Johnson, defendant-appellees.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by James T. Williams, Jr., James C. Adams, II, and Derek J. Allen, Greensboro, for Johnson Investment Partnership, defendant-appellee.

HORTON, Judge.

Plaintiffs appeal from the Rule 12(b)(6) dismissal of their claims by the trial court. In reviewing the action of the trial court, we are to liberally construe the complaint and determine whether, as a matter of law, the allegations of the complaint, taken as true, are sufficient to state some legally recognized claim or claims upon which relief may be granted to plaintiffs. Harris v. NCNB, 85 N.C.App. 669, 670, 355 S.E.2d 838, 840 (1987). While the well-pled allegations of the complaint are taken as true, conclusions of law or "unwarranted deductions of fact" are not deemed admitted. Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161, 163 (1970).

Plaintiffs contend the trial court erred in (I) concluding that all allegations of wrongdoing in plaintiffs' amended complaint are derivative, not individual, in nature; (II) dismissing plaintiffs' derivative claims for failure to comply with statutory requirements; (III) concluding that some of plaintiffs' causes of action fail to state a claim; and (IV) denying plaintiffs' motion to amend their complaint.

I. Plaintiffs' Individual Claims

Plaintiffs contend the trial court erred in concluding that allegations of wrongdoing in plaintiffs' first amended complaint are derivative, not individual, in nature. A "derivative proceeding" is a civil action brought by a shareholder "in the right of" a corporation, N.C. Gen.Stat. § 55-7-40.1 (1999), while an individual action is one a shareholder brings to enforce a right which belongs to him personally. See Way v. Sea Food Co., 184 N.C. 171, 174, 113 S.E. 781, 782 (1922). Russell M. Robinson, II, Robinson On North Carolina Corporation Law § 17-2(a) at 333 (5th ed.1995) (the distinction is drawn in terms of whose right is being enforced). It is not always easy to distinguish between a right of the corporation and a right belonging to an individual shareholder. "[T]he same wrongful conduct can give rise to both derivative and direct [individual] claims, for which courts have sometimes allowed shareholders to maintain derivative and direct actions simultaneously." Id. (footnotes omitted).

Here, plaintiffs alleged both individual and derivative claims for constructive trust and an accounting, breach of fiduciary duty, conversion, civil conspiracy, unfair and deceptive trade practices, and quantum meruit. The trial court dismissed all of plaintiffs' individual claims for the stated reasons that "[a]ll allegations of wrongdoing alleged in the Plaintiffs' Complaint and First Amended Complaint are derivative in nature and fail to fall within recognized exceptions to the general rule as stated in Barger v. McCoy, Hilliard [sic] & Parks, 346 N.C. 650, [488 S.E.2d 215 (1997)]." Although Barger states the North Carolina rule with regard to circumstances under which an individual shareholder of a corporation may bring an action against a third party whose conduct has given rise to a cause of action in favor of the corporation, it does not address the issue raised in this case: under what circumstances may minority shareholders in a closely held corporation properly assert individual claims on their own behalf in an action against the majority shareholders who control the corporation?

As a general rule, shareholders have no right to bring actions "in their [individual] name[s] to enforce causes of action accruing to the corporation[,]" Fulton v. Talbert, 255 N.C. 183, 185, 120 S.E.2d 410, 412 (1961), but must assert such claims derivatively on behalf of the corporation. Robinson § 17-2(a) at 333. A correct characterization of the shareholder's action as derivative or individual may be crucial, as there are certain mandatory procedural and pleading requirements for a derivative action. F.H. O'Neal & R. Thompson, O'Neal's Oppression of Minority Shareholders § 7:07 (2d ed. 2000), p. 52. Some procedural restrictions proceed from concerns about prevention of a multiplicity of lawsuits and concern over "who should properly speak for the corporation." Id. Other restrictions arise from concerns that derivative actions will be misused by "`self-selected advocate[s]' pursuing individual gain rather than the interests of the corporation or the shareholders as a group, bringing costly and potentially meritless `strike suits.'" Id.

Thus, for example, a shareholder who brings a derivative action in North Carolina must show that he or she "[f]airly and adequately represents the interests of the corporation in enforcing the right of the corporation[,]" N.C. Gen.Stat. § 55-7-41 (1999), and may not commence the action until written demand on the corporation's directors has been made and the statutory period has elapsed. N.C. Gen.Stat. § 55-7-42 (1999). Further, the corporation may then determine by a majority vote of "independent" directors that maintenance of the derivative action "is not in the best interest of the corporation." N.C. Gen.Stat. § 55-7-44(a)(b)(1) (1999). "Independent" directors may include persons who have been nominated or elected by persons who are defendants in the derivative action, persons who are themselves defendants in the derivative action, and persons who approve of the act being challenged. N.C. Gen.Stat. § 55-7-44(c)(1)(2)(3) (1999). "If the corporation commences an inquiry into the allegations set forth in the demand or complaint, the court may stay a derivative proceeding for a period of time the court deems appropriate." N.C. Gen.Stat. § 55-7-43 (1999). Finally, the derivative suit may not be settled without the approval of the court. N.C. Gen.Stat. § 55-7-45(a) (1999). It is of obvious importance to the parties that the recovery in a derivative action goes to the corporation, not to the plaintiff personally. Outen v. Mical, 118 N.C.App. 263, 266, 454 S.E.2d 883, 885 (1995). Finally, the successful litigant in a derivative action may be awarded attorneys' fees by the court, N.C. Gen.Stat. § 55-7-46(1) (1999), while the plaintiff in an individual action bears his own fees. See Miller v. Ruth's of North Carolina, Inc., 68 N.C.App. 40, 313 S.E.2d 849,

disc. review denied, 311 N.C. 760, 321 S.E.2d 140 (1984). Thus, derivative litigation is obviously more unwieldy and inspires more litigation of ancillary issues than an individual action by plaintiff minority shareholders.

Prior to the enactment of our statutory scheme with regard to derivative proceedings, it is not always clear from our decisional law whether an action was instituted as an individual or derivative suit. Robinson discusses a group of cases decided in 1896, which involved the insolvent Bank of Hanover, where our Supreme Court allowed depositors to sue the directors of the insolvent Bank both for publishing false statements about the Bank's financial condition which induced them to make deposits—apparently an individual cause of action—and for mismanagement which resulted in the insolvency—clearly a derivative cause of action. Tate v. Bates, 118 N.C. 287, 24 S.E. 482 (1896); Solomon v. Bates, 118 N.C. 311, 24 S.E. 478 (1896); and Caldwell v. Bates, 118 N.C. 323, 24 S.E. 481 (1896). Robinson § 17-2 at 335. The Supreme Court did not characterize the Bates actions as individual or derivative, although later cases arising from corporate insolvency clearly make the distinction. See, for example, Douglass v. Dawson, 190 N.C. 458, 130 S.E. 195 (1925) (where the bank allegedly became insolvent through mismanagement by the directors, the wrong was to the corporation; and an action against the directors was derivative in nature, requiring a demand on the receiver prior to bringing the action).

Both our statutory and case law recognize a number of instances in which a shareholder may bring an individual claim:

1. to enforce his right to inspect the corporate books and records;

2. to recover a dividend already declared, or any other amount actually due him from the corporation on his shares or otherwise;

3. to compel the declaration of dividends;

4. to compel an involuntary dissolution;

5. to enjoin an ultra vires act by the

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