Polygenex Intern., Inc. v. Polyzen, Inc.

• Decision Date: 18 May 1999
• Docket Number: No. COA98-908.,COA98-908.
• Citation: 515 S.E.2d 457,133 NC App. 245
• Court: North Carolina Court of Appeals
• Parties: POLYGENEX INTERNATIONAL, INC., Plaintiff, v. POLYZEN, INC. and Tilak M. Shah, Defendants.

515 S.E.2d 457

133 NC App. 245

POLYGENEX INTERNATIONAL, INC., Plaintiff, v. POLYZEN, INC. and Tilak M. Shah, Defendants.

No. COA98-908.

Court of Appeals of North Carolina.

May 18, 1999.

Howard, Stallings, Story, Wyche, From & Hutson, P.A., by Scott A. Miskimon and Jenna B. Thomas, Raleigh, for plaintiff-appellant.

Kilpatrick Stockton, LLP, by Donald J. Harris and M. Gray Styers, Jr., Raleigh, for defendant-appellees.

EAGLES, Chief Judge.

We first note that on 28 January 1999, McGarry petitioned this Court for writ of certiorari pursuant to Rule 21 of the N.C. R.App. Proc. The petition for writ of certiorari is granted.

We next consider whether the trial court committed reversible error by sanctioning McGarry pursuant to Rule 11. McGarry first argues that the order should be vacated as to him on the grounds that he was deprived of his federal and state constitutional due process rights. Additionally, McGarry argues that "[u]nder the plain and unambiguous language of Rule 11, sanctions apply only to attorneys and parties ... But there is nothing in the language of Rule 11 that suggests a non-party corporate officer who verifies a complaint on behalf of his company may be sanctioned along with the corporation." McGarry asserts that the Record shows he was never a party to the litigation, that he was not subject to the jurisdiction of the court, and that he was not provided notice or an opportunity to be heard in his individual capacity at the hearing. Accordingly, McGarry argues that there was no legal basis for sanctioning him. Alternatively, McGarry argues that the trial court made no findings of fact and entered no conclusions of law regarding whether McGarry made a reasonable inquiry into the facts, believed that his position was well-grounded in fact, or in verifying the complaint, acted with an improper purpose. McGarry contends that all the findings of fact and conclusions of law were directed exclusively at Polygenex. Accordingly, McGarry asserts that the order is fatally defective as to him and should be vacated.

We find McGarry's arguments persuasive and vacate the order as to McGarry. "`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.'" Griffin v. Griffin, 348 N.C. 278, 280, 500 S.E.2d 437, 438 (1998)(quoting McDonald's Corp. v. Dwyer, 338 N.C. 445, 448, 450 S.E.2d 888, 891 (1994)). Here, McGarry was individually sanctioned and ordered to pay attorneys' fees and costs even though he was not a party to the litigation. Stevens v. Nimocks, 82 N.C.App. 350, 346 S.E.2d 180,cert. denied,318 N.C. 511, 349 S.E.2d 873 (1986) is analogous. In Stevens, the defendant verified the answer in an action against a partnership in his capacity as a partner. The plaintiff sought to subject the defendant to Rule 11 liability in his individual capacity. This Court determined that "[a]ctual notice of a suit against the partnership will not cure the requirement that a partner must be served with a summons to be held individually liable." Id. at 352-53, 346 S.E.2d at 181 (citing Shelton v. Fairley, 72 N.C.App. 1, 3-4, 323 S.E.2d 410, 413 (1984),disc. review denied, 320 N.C. 634, 360 S.E.2d 94 (1987); Blue Ridge Electric Membership Corp. v. Grannis Brothers, 231 N.C. 716, 720, 58 S.E.2d 748, 751-52 (1950) (general appearance on behalf of a purported corporation cannot be construed as a general appearance on behalf of a partnership, none of whose members are a party to the action)). McGarry's verification of the complaint was in his capacity as a corporate officer and was not in his individual capacity. This verification was not sufficient to subject McGarry to individual liability pursuant to Rule 11. Accordingly, we hold that because McGarry was not a party to the action and was never served with summons, McGarry was not given the necessary notice and opportunity to be heard and therefore, and as to him, the Order amounted to an unconstitutional deprivation of his due process rights under both the state and federal constitutions. The order is vacated as to McGarry.

We next consider whether the trial court committed reversible error by sanctioning plaintiff corporation pursuant to Rule 11.

The trial court's decision to impose or not to impose mandatory sanctions under N.C.G.S. § 1A-1, Rule 11(a) is reviewable de novo as a legal issue. In the de novo review, the appellate court will determine (1) whether the trial court's conclusions of law support its judgment or determination, (2) whether the trial court's conclusions of law are supported by its findings of fact, and (3) whether the findings of fact are supported by a sufficiency of the evidence. If the appellate court makes these three determinations in the affirmative, it must uphold the trial court's decision to impose or deny the imposition of mandatory sanctions under N.C.G.S. § 1A-1, Rule 11(a).

Turner v. Duke University, 325 N.C. 152, 165, 381 S.E.2d 706, 714 (1989). Plaintiff first argues that the sanctions entered against plaintiff were based upon the perjured testimony of defendant Shah. Plaintiff argues that Shah's perjury can be proven by a copy of a flyer sent out by Polyzen which plaintiff contends "deceptively states" "`Nothing has changed but the name'" and uses Polygenex' name throughout the text of the advertisement. The advertisement is dated after the separation agreement went into effect and was allegedly sent to Polygenex' customers and vendors. Plaintiff argues that Polyzen was clearly using the advertisement to trade on Polygenex' name and that the advertisement gives the impression that the two companies remain associated with each other. Plaintiff additionally argues that Shah's perjury can be proven by unrefuted evidence that Polyzen contacted Polygenex' customers and had Polygenex' accounts changed over into Polyzen's name. Plaintiff accordingly argues that this evidence contradicts the trial court's findings of fact that neither defendants nor its agents made false or misleading statements, never infringed plaintiff's trademark, and never made inappropriate or false communications with plaintiff's customers.

Plaintiff next argues that the trial court erred in concluding that the complaint was not well-grounded in law. There is a two-part legal analysis to determine whether a complaint is well-grounded in law. "This approach looks first to the facial plausibility of the pleading and only then, if the pleading is implausible under existing law, to the issue of `whether to the best of the signer's knowledge, information, and belief formed after reasonable inquiry, the complaint was warranted by the existing law.'" Bryson v. Sullivan, 330 N.C. 644, 661, 412 S.E.2d 327, 336 (1992)(quoting dePasquale v. O'Rahilly, 102 N.C.App. 240, 246, 401 S.E.2d 827, 830 (1991)). Pursuant to that analysis, plaintiff first argues that the complaint states a cause of action for breach of contract. Plaintiff argues that the Agreement here calls for a corporate separation, and "implicit" in the Agreement is that the companies would be separate entities, that Polyzen would take no action to disturb the customer and vendor relationships retained by Polygenex, and Polyzen would not trade on the goodwill nor misappropriate the Polygenex tradename. Plaintiff contends that the Advertisement demonstrates a blatant violation of the Agreement. Additionally, plaintiff argues that defendants contacted utilities and vendors and had accounts changed into Polyzen's name, and that this interference with business relationships violated "both the letter and spirit of the Agreement." Plaintiff next argues that the allegations that Polyzen interfered with plaintiff's contractual relationships are facially plausible and state a cause of action for tortious interference with contract. Third, plaintiff argues that based on the Advertisement, plaintiff's cause of action for infringement of the tradename of Polygenex is well-grounded in law. Fourth, plaintiff argues that the allegation of tortious interference with contract, plus the aggravating factors that defendants "hijack[ed]" its vendor relationships and falsely communicated with plaintiff's customers, support the cause of action for unfair and deceptive trade practices. Plaintiff finally argues that damages would be inadequate, and that the complaint states a cause of action for injunctive relief. Accordingly, plaintiff argues that the complaint is facially plausible and that no further inquiry is required. Alternatively, plaintiff argues that the allegations were warranted by existing law or a good faith extension, modification or reversal of existing law.

Plaintiff next argues that it undertook a reasonable inquiry into the facts which shows that the complaint was well-grounded in fact. Plaintiff argues that their inquiry showed that defendants illegally obtained and opened plaintiff's mail and that plaintiff made demands upon defendants for an explanation, but that defendants refused to respond. Plaintiff contends that it was justified in believing that there was an attack on their operations by defendants. Additionally, plaintiff argues that there is a fatal defect in the trial court's order because the trial court made no finding of fact on the issue of whether plaintiff undertook a reasonable inquiry into the facts.

Finally, plaintiff argues that there was no evidence to support the trial court's finding of fact and conclusion of law that the complaint was interposed for an improper purpose. Plaintiff asserts that "[t]he need to do discovery in an unfair competition case is obvious, for the defendant will be far more likely to know the scope and effect of his actions than will the plaintiff." Plaintiff contends that it should not have to wait without acting until it has unequivocal proof of all damages suffered as a result of defendant's actions. Accordingl...