Schwartzbach v. Apple Baking Co.
| Decision Date | 02 March 1993 |
| Docket Number | No. 9119SC786,9119SC786 |
| Citation | 426 S.E.2d 438,109 N.C.App. 216 |
| Court | North Carolina Court of Appeals |
| Parties | Gary SCHWARTZBACH, Plaintiff-Appellee, v. APPLE BAKING COMPANY, Defendant-Appellant. |
Kluttz, Hamlin, Reamer, Blankenship and Kluttz by Malcolm B. Blankenship, Jr., Salisbury, for plaintiff-appellee.
Ferguson, Stein, Watt, Wallas, Adkins & Gresham, P.A. by James E. Ferguson, II, Charlotte, for defendant-appellant.
In one of its assignments of error, defendant contends that the trial court erred by not granting its motion for judgment notwithstanding the verdict as to plaintiff's claim. We agree, and reverse that part of the trial judgment below. N.C.Gen.Stat. § 1A-1, Rule 50(b)(1) of the Rules of Civil Procedure provides that a motion for judgment notwithstanding the verdict "shall be granted if it appears that the motion for directed verdict could properly have been granted." The test for allowing a motion for judgment notwithstanding the verdict is essentially the same as that for allowing a motion for directed verdict. Dickinson v. Pake, 284 N.C. 576, 201 S.E.2d 897 (1974). A motion by a defendant for a directed verdict under N.C.Gen.Stat. § 1A-1 Rule 50(a) of the Rules of Civil Procedure tests the legal sufficiency of the evidence to take the case to the jury and support a verdict for the plaintiff. Manganello v. Permastone, Inc., 291 N.C. 666, 231 S.E.2d 678 (1977); see also Eifler v. Pyles, 94 N.C.App. 349, 380 S.E.2d 149 (1989). On such a motion, the plaintiff's evidence must be taken as true and the evidence must be considered in the light most favorable to the plaintiff, giving the plaintiff the benefit of every reasonable inference to be drawn therefrom. Id. A directed verdict for the defendant is not properly allowed unless it appears as a matter of law that a recovery cannot be had by the plaintiff upon any view of the facts that the evidence reasonably tends to establish. Id.
The "agreement" on which plaintiff's claim was founded was a resolution adopted at a special meeting of defendant's "Board of Directors" on 1 August 1988. As we have noted earlier, at that time plaintiff was the sole director of the defendant corporation. The resolution read as follows:
A special meeting of the Board of Directors was held at the office on August 1, 1988 at 11:00 A.M.
It was agreed that if Gary Schwartzbach should be removed as president, all his company stock must be bought by the Corporation at $1,000.00 each within thirty days of his removal. He will also receive six months severance pay.
The meeting was adjourned, as there was no further business.
On 1 August 1988, the existing Business Corporation Act contained the following provisions: 1
N.C.Gen.Stat. § 55-30 Director's Adverse Interest.
(b) No corporate transaction in which a director has an adverse interest is either void or voidable, if:
(1) With knowledge on the part of the other directors of such adverse interest, the transaction is approved in good faith by a majority, not less than two, of the disinterested directors present even though less than a quorum, irrespective of the participation of the adversely interested director in the approval, or if
(2) After full disclosure of all the material facts to all the shareholders, the transaction is specifically approved by the vote of a majority or by the written consent of all the voting shares other than those owned or controlled by the adversely interested directors, or if
(3) The adversely interested party proves that the transaction was just and reasonable to the corporation at the time when entered into or approved. In the case of compensation paid or voted for services of a director as director or as officer or employee the standard of what is "just and reasonable" is what would be paid for such services at arm's length under competitive conditions.
It is undisputed that plaintiff, the sole director at the time of the contested transaction, did not comply with either subsection (1) or (2) with respect to the transaction. Therefore, the only manner in which plaintiff could enforce the otherwise voidable transaction would be to satisfy the requirements of subsection (3).
It has long been the generally prevailing rule throughout the various courts of the United States and our State that directors and officers of a business corporation in charge of its management are, in the performance of their official duties, under obligations of trust to the corporation or its stockholders and must act in good faith and for the interest of the corporation or its stockholders. See 18B AmJur2d, Corporations, § 1684. North Carolina law has been consistent with this rule. See e.g. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323 (1987); Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983); Fulton v. Talbert, 255 N.C. 183, 120 S.E.2d 410 (1961). At the time the case at bar arose, G.S. § 55-35 spoke very plainly on this aspect of our law of corporations:
§ 55-35 Duty of Directors and Officers to Corporation.
Officers and directors shall be deemed to stand in a fiduciary relation to the corporation and to its shareholders and shall discharge the duties of their respective positions in good faith, and with that diligence and care which ordinarily prudent men would exercise under similar circumstances in like positions.
Speaking more directly to the specific transaction in this case, one leading authority has generally analyzed and explained the law of this State, as follows. Prior to the enactment of G.S. § 55-30(b), the applicable common law rule governing transactions between directors and officers and their corporations was one of presumptive invalidity, due to the good faith and undivided loyalty required of such persons serving the corporation in their fiduciary capacity. See Robinson on North Carolina Corporation Law, 3rd Ed., § 12-11 and § 12-13. The purpose of the enactment of G.S. § 55-30(b) was to clarify the previously uncodified rules relating to transactions of interested directors. Id. § 12-11. Those seeking to sustain such a transaction must prove that it was openly and fairly made. Id.
In interpreting the provisions of G.S. § 55-30(b)(3), the 4th Circuit Court stated the rule as follows:
It is a settled rule that a corporate officer acts in a fiduciary capacity and cannot profit at the expense of the corporation.... [T]he adversely influenced party must prove that the transaction was fair, just, and reasonable when entered into. Smith v. Robinson, 343 F.2d 793 (4th Cir.1965).
Plaintiff's evidence in support of his claim included the resolution of 1 August 1988 and testimony from plaintiff relating to previous stock sales. The resolution on its face obviously cannot be said to be fair, just, or reasonable to the defendant under elemental principles of contract law; this transaction simply does not constitute an "agreement." The resolution does not reflect any consideration flowing to defendant, no promise by plaintiff to sell his shares to defendant, no forbearance in the form of a promise not to sell his shares to others, and no...
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