Seraph Garrison, LLC v. Garrison

• Decision Date: 19 April 2016
• Docket Number: No. COA14–1166.,COA14–1166.
• Citation: 787 S.E.2d 398
• Court: North Carolina Court of Appeals
• Parties: SERAPH GARRISON, LLC, derivatively on behalf of GARRISON ENTERPRISES, INC., Plaintiff, v. Cameron GARRISON, Defendant, v. Garrison Enterprises, Inc., Nominal Defendant.

787 S.E.2d 398

SERAPH GARRISON, LLC, derivatively on behalf of GARRISON ENTERPRISES, INC., Plaintiff,

v.Cameron GARRISON, Defendant,

v.Garrison Enterprises, Inc., Nominal Defendant.

No. COA14–1166.

Court of Appeals of North Carolina.

April 19, 2016.

Hamilton Stephens Steele & Martin, PLLC, Charlotte, by Mark R. Kutny and Erik M. Rosenwood, and Bryan Cave LLP, by Nicole J. Wade (admittee pro hac vice), for plaintiff-appellant.

No brief filed for defendant-appellee.

CALABRIA, Judge.

Seraph Garrison, LLC (“plaintiff”) appeals from an order and judgment denying its claims, which were brought derivatively and on behalf of Garrison Enterprises, Inc. (“GEI” or “the corporation”), against Cameron Garrison (“defendant”). For the reasons that follow, we affirm in part, reverse in part, and remand for further proceedings.

I. Background

GEI, a North Carolina corporation, was founded by defendant in July 2000. The corporation primarily worked with government entities to supply health inspection software for the input of data for various types of restaurants and government agencies; it also sold software and data related to restaurant inspections, and other types of inspections, to private companies. Defendant was President and CEO of GEI from its founding until the corporation's board of directors (the “Board”) terminated his employment in December 2010. During this time period, defendant's father, mother, sister, and three brothers were employed at GEI. In his role as President and CEO, defendant was tasked with ensuring that all required tax payments on behalf of GEO were made to the United States Department of Revenue and the North Carolina Department of Revenue. Defendant was also responsible for making contributions to GEI's 401(k) Plan.

On 20 December 2010, plaintiff, a Georgia limited liability company and shareholder of GEI, sent a demand letter to GEI's Board requesting an investigation regarding, inter alia, defendant's “potential breaches of fiduciary duty.” Three days later, the Board terminated defendant's employment with GEI but it refused to take further action against him. Responding to the Board's refusal, plaintiff instituted a derivative action on behalf of GEI to recover losses that purportedly resulted from defendant's conduct during his tenure as President and CEO. In its verified complaint, which was filed in Mecklenburg County on 22 July 2011, plaintiff alleged that defendant breached his fiduciary duties to GEI, committed actual fraud against the corporation, and engaged in unfair and deceptive trade practices.

Specifically, plaintiff alleged that for “various periods beginning in 2008 and ending in 2010,” defendant stopped remitting payroll taxes to the federal and North Carolina state governments. Plaintiff further alleged that defendant failed to make required contributions to GEI's 401(k) Plan from February 2008 until his termination in December 2010. Finally, plaintiff alleged that defendant deceived the Board by misrepresenting the terms of a licensing contract he negotiated with Ecolab, a company that sells cleaning supplies to the hospitality, food service, and health care industries. Based on these allegations, plaintiff sought to recover damages based on unjust enrichment and the imposition of resulting and constructive trusts. Plaintiff also sought punitive damages.

Subsequently, the case was designated as a complex business case and assigned to Judge Calvin E. Murphy, Special Superior Court Judge for Complex Business Cases. On 23 November 2011, defendant filed an answer and counterclaims. When the matter came on for trial in June 2014, defendant failed to appear. As a result, Judge Murphy conducted a bench trial, where plaintiff presented testimony from Rahul Saxena (“Saxena”), who became GEI's interim President and CEO upon defendant's termination, and Paul Saltzman (“Saltzman”), who the trial court designated an expert in business valuation, income tax, and accounting. After trial, the court entered an order and judgment that granted plaintiff's claim for breach of fiduciary duty based on defendant's misrepresentations regarding the Ecolab contract. However, all of plaintiff's remaining claims were denied, and no damages were awarded on any claims.¹ The trial court Plaintiff appeals.

II. Analysis

A. Standard of Review

“The standard of review on appeal from a judgment entered after a non-jury trial is whether there is competent evidence to support the trial court's findings of fact and whether the findings support the conclusions of law and ensuing judgment.” Cartin v. Harrison, 151 N.C.App. 697, 699, 567 S.E.2d 174, 176 (2002) (quotations omitted). “Where such competent evidence exists, this Court is bound by the trial court's findings of fact even if there is also other evidence in the record that would sustain findings to the contrary.” Willen v. Hewson, 174 N.C.App. 714, 718, 622 S.E.2d 187, 190 (2005) (citation omitted). The trial court's conclusions of law, however, are subject to de novo review. Id. (citation omitted).

B. Plaintiff's Claims For Unfair And Deceptive Trade Practices

As an initial matter we note that the trial court denied plaintiff's unfair and deceptive trade practices claim based on its conclusion that N.C. Gen.Stat. § 75–1.1 did not apply to this case. We agree with this conclusion. See White v. Thompson, 364 N.C. 47, 53, 691 S.E.2d 676, 680 (2010) (finding section 75–1.1 inapplicable to the internal conduct of a single business). Furthermore, since defendant does not challenge the court's conclusion on appeal, he has abandoned the issue. N.C.R.App. P. 28(b)(6) (2015) (“Issues not presented in a party's brief, or in support of which no reason or argument is stated, will be taken as abandoned.”). Thus, we affirm the trial court's denial of plaintiff's unfair and deceptive trade practices claim.

C. Plaintiff's Claims For Breach of Fiduciary Duty and Fraud

Before addressing plaintiff's fiduciary duty and fraud claims, we begin by noting some principles that should animate any judicial evaluation of corporate conduct. First, under North Carolina law, corporate officers with discretionary authority must discharge their duties:

(1) In good faith;

(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

(3) In a manner he reasonably believes to be in the best interests of the corporation.

N.C. Gen.Stat. § 55–8–42(a) (2015). Corporate directors are charged with the same standard of conduct. Id. § 55–8–30(a)(1)–(3). Although the word “fiduciary” is not used in these provisions, the Official Comment to section 55–8–30 explains “there is no intent to change North Carolina law in this area. The decision not to bring forward the language ... in former [N.C. Gen. Stat.] § 55–35[—which provided that officers and directors stand in a fiduciary relation ‘to the corporation and to its shareholder’—]is not intended to modify in any way the duty of directors recognized under the former law.” Consequently, the earlier cases that examine and delineate the duties of directors and officers continue to be effective.

Under these cases, corporate directors and officers act in a fiduciary capacity in the sense that they owe the corporation the duties of loyalty and due care. Belk v. Belk's Dep't Store, Inc., 250 N.C. 99, 103, 108 S.E.2d 131, 135 (1959) (recognizing a director's “duty to honestly exercise[ ]” his powers “for the benefit of the corporation and all of its shareholders”); Loy v. Lorm Corp., 52 N.C.App. 428, 436, 278 S.E.2d 897, 903 (1981) ( “Directors owe a duty of fidelity and due care in the management of a corporation and must exercise their authority solely for the benefit of the corporation and all its shareholders.”); Pierce Concrete, Inc. v. Cannon Realty & Const. Co., 77 N.C.App. 411, 413–14, 335 S.E.2d 30, 31 (1985) (declaring that the fiduciary duty corporate officers owe to North Carolina corporations “is a high one”).

Subdivision 55–8–42(a)(2) outlines the standard by which an officer's duty of care is measured. Its specific language—in a “like a position” and “under similar circumstances”—acknowledges officers' that responsibilities will vary from corporation to corporation. The same holds true for the corporate decision-making processes that are employed. Even so, subdivision 55–8–42(a)(2) also imposes an affirmative duty on officers: it requires them to assume an active and direct role in the matters that are under their authority. Anthony v. Jeffress, 172 N.C. 378, 379, 90 S.E. 414, 415 (1916) (considering it “immaterial whether the [directors] were cognizant of the ... company['s insolvency] or not [when they declared a dividend]. The law charges them with actual knowledge of its financial condition, and holds them responsible for damages sustained by stockholders and creditors by reason of their negligence, fraud, or deceit.”); F–F Milling Co. v. Sutton, 9 N.C.App. 181, 184, 175 S.E.2d 746, 748 (1970) (stating that corporate directors in North Carolina may be held personally liable for, inter alia, gross neglect of their duties and mismanagement).

Subdivision 55–8–42(a)(3) codifies the requirement that an officer always discharge the responsibilities of the office “with undivided loyalty” to the corporation. Meiselman v. Meiselman, 309 N.C. 279, 307, 307 S.E.2d 551, 568 (1983). The corporate law duty of loyalty also imposes an affirmative obligation: a fiduciary must strive to advance the best interests of the corporation. In re The Walt Disney Co. Derivative Litig., 2004 WL 2050138, at *5 n. 49 (Del.Ch. Sept. 10, 2004) (stating that the duty of loyalty “has been consistently defined as ‘broad and encompassing,’ demanding of a director ‘the most scrupulous observance.’ To that end, a director may not allow his self-interest to jeopardize his unyielding obligations to the corporation and its shareholders”) (citation omitted).

Second, while subsection 55–8–42(a) requires an officer to act in good faith, this concept...