Snyder v. Freeman

• Decision Date: 03 June 1980
• Docket Number: No. 26,26
• Citation: 266 S.E.2d 593,300 N.C. 204
• Parties: Phyllis H. SNYDER v. George K. FREEMAN, Jr.; Douglas L. Croom; John Colucci, Jr.; John Colucci III; Woodrow Pridgen; Aeronautics, Inc.; and Paul DaSan Martino.
• Court: North Carolina Supreme Court

Page 593

266 S.E.2d 593

300 N.C. 204

Phyllis H. SNYDER v. George K. FREEMAN, Jr.; Douglas L. Croom; John Colucci, Jr. John Colucci III; Woodrow Pridgen; Aeronautics Inc.; and Paul DaSan Martino.

No. 26.

Supreme Court of North Carolina.

June 3, 1980.

Franklin L. Block, Wilmington, for plaintiff-appellant.

Freeman, Edwards & Vinson by George K. Freeman, Jr., Goldsboro, for defendant-appellee George K. Freeman, Jr.

Rountree & Newton by J. Harold Seagle and George Rountree, III, Wilmington, for defendant-appellees John Colucci, Jr., John Colucci III, and Aeronautics, Inc.

EXUM, Justice.

This is an action against the shareholders, officers and directors of General Aviation, Inc., in their individual capacities for breach of an agreement to which only they, individually, are signatories. That part of the agreement relied on provides for the earmarking for the benefit of plaintiff as creditor of the corporation some of the proceeds of the sale of capital stock of General Aviation pursuant to other provisions in the agreement. The question presented is whether defendants can be liable to plaintiff in their individual capacities when the funds so earmarked for the plaintiff's benefit have not been paid to her but have, apparently, been used for other corporate purposes. The Court of Appeals concluded that they could not and, therefore, the complaint failed to state a claim upon which relief could be granted. We disagree and reverse.

Plaintiff alleges in substance as follows: Before 3 February 1967 she was an employee of General Aviation and had loaned it $4,602.50. On 3 February 1967, therefore, General Aviation was indebted to her for this amount plus interest. The corporation also owed her $800.00 plus interest for back salary earned. Defendants Freeman and Croom were at these times officers, directors, and sole shareholders of the corporation. On 3 February 1967, Freeman and Croom contracted in writing with defendants Colucci that the latter would pay General Aviation the sum of $10,000 for a 50 percent interest in the corporation to be evidenced by the issuance of 6000 shares of its stock. Plaintiff attaches this written agreement to the complaint and incorporates it therein. General Aviation is not a signatory to the agreement and there is nothing on the face thereof which indicates that the individual signatories are acting for the corporation. Section 3(b) of the agreement provides that upon its consummation plaintiff "shall resign from the Board of Directors of General Aviation and (defendants Freeman and Croom) shall elect to the board to fill her vacancy Mr. John Colucci III or his designee." Section 3(c) provides:

"Out of monies coming in to the corporation from the sale of 6,000 shares of stock to the parties of the second part or their designee, the corporation shall pay salaries accrued to Mrs. Snyder in the amount of approximate (sic) $800.00, a note payable for equipment (a Pepsi-Cola drink machine) in the amount of approximately $150.20, the following notes payable to Mrs. Anne T. Freeman in the amount of $1,286.86 plus interest and to Mrs. Phyllis Snyder in the amount of $4,602.50 plus interest; accrued Federal Taxes in the amount of $2,742.06 (It is understood that George K. Freeman, Jr., has already paid said Federal Taxes in said amount and that the check will be made to reimburse him); and the balance of such monies to be paid against outstanding accounts payable as revealed by an audit of the company dated November 30, 1966, done and prepared by Norborne G. Smith, Jr., Certified Public Accountant of Goldsboro, North Carolina."

Plaintiff further alleges: after the execution of the agreement and pursuant thereto the Coluccis paid $10,000 to General Aviation, received 6000 shares of its stock, and "became officers and/or directors of the corporation." Defendants, however, have "failed to pay the plaintiff the funds owing her" in accordance with the agreement. Rather defendants "injustifiably dissipated said funds for other purposes." Plaintiff withheld making prior formal demand for payment because she feared she would lose her job if she did so. On 30 June 1975 General Aviation ceased doing business and was from that date "defunked (sic) and without assets." Subsequently plaintiff unsuccessfully demanded payment of the corporate and individual defendants.

The complaint, filed on 2 February 1977, seeks damages of $5,402.50 plus interest against defendants individually, jointly and severally. General Aviation was not made a party to the action. All defendants except Croom answered. Two defenses asserted are failure of the complaint to state a claim upon which relief can be granted and the three year statute of limitations. Judge Rouse, on 28 November 1977, after hearing, ordered that the complaint be dismissed "for failing to state a cause of action against the Defendants and in the alternative, if a cause of action is stated, that the same is barred by the statute of limitations." The Court of Appeals affirmed the dismissal for failure to state a claim but vacated that part of the order grounded on the statute of limitations.

We agree with the Court of Appeals' conclusion that Judge Rouse's dismissal on the ground of the statute of limitations was, in effect, the entry of summary judgment inasmuch as matters outside the pleadings must have been considered by him. Kessing v. National Mortgage Corp., 278 N.C. 523, 180 S.E.2d 823 (1971). Although the three year statute of limitations is applicable, there is, as the Court of Appeals noted, "a question of fact remaining as to when the breach occurred and the statute of limitations began to run." 40 N.C.App. at 353, 253 S.E.2d at 13. Summary judgment on the basis of the statute of limitations is, therefore, not appropriate. We also agree that no claim has been stated against defendant Aeronautics, Inc. ¹ We disagree, however, with the Court of Appeals' determination that the complaint was properly dismissed for failure to state a claim under Rule 12(b)(6) as to defendants Colucci, Freeman, and Croom.

" 'A (complaint) may be dismissed on motion if clearly without any merit; and this want of merit may consist in an absence of law to support a claim of the sort made, or of facts sufficient to make a good claim, or in the disclosure of some fact which will necessarily defeat the claim.' But a complaint should not be dismissed for insufficiency unless it appears to a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim." Sutton v. Duke, 277 N.C. 94, 1020-3, 176 S.E.2d 161, 166 (1970), quoting Moore, Federal Practice, § 12.08 (1968). (Emphasis original.) "The function of a motion to dismiss is to test the law of a claim, not the facts which support it." White v. White, 296 N.C. 661, 667, 252 S.E.2d 698, 702 (1979).

The question is, then, whether under any set of facts which plaintiff may be able to prove relevant to the agreement on which she relies, there is some legal theory available by which she can establish liability against defendants Coluccis, Croom, and Freeman in their individual capacities. We think there are at least three such theories: (1) breach of trust by defendants as directors of General Aviation; (2) breach of an implied contract between defendants as shareholders of General Aviation and plaintiff; and (3) breach of an implied contract by defendants as shareholders of General Aviation and the corporation to which plaintiff is a third-party beneficiary.

Breach of Directors' Fiduciary Duty

The breach of directors' fiduciary duty theory rests on these propositions: (1) the shareholders' agreement relied on bound General Aviation, as a corporation, to its terms, one of which was to earmark a portion of the $10,000 stock sale proceeds for plaintiff's benefit; (2) the individual defendants as directors of the corporation had a fiduciary duty to plaintiff to see that these corporate funds were so earmarked and duly paid to her; (3) by failing to so earmark these funds and applying them to other purposes, albeit for proper corporate purposes, these defendants breached this fiduciary duty. The Court of Appeals rejected this theory; it concluded that the first proposition on which the theory rests was invalid since, as a matter of law, the corporation could not be bound by the shareholders' agreement. The Court of Appeals said, "(I)n order for a trust to be created in the capital obtained from issuing stock, the corporation itself must agree to hold the capital in trust for creditors." 40 N.C.App. at 351, 253 S.E.2d at 12. Defendants argue to us that since the corporation itself did not sign the agreement, the agreement cannot bind the corporation. Therefore they, as directors of the corporation, had no fiduciary duty to apply the funds in accordance with the agreement. Indeed defendants argue boldly to this Court that the agreement insofar as it requires the funds to be earmarked for plaintiff is illusory, binding neither them nor the corporation to its terms; therefore, plaintiff cannot enforce it.

Plaintiff, however, alleges that at the time of the agreement, Freeman and Croom were the sole shareholders and were officers and directors of the corporation. Pursuant to the terms of the agreement itself, the Coluccis, Freeman, and Croom became sole shareholders and directors. We think under these circumstances plaintiff may prove the corporation bound by the agreement, notwithstanding that the corporation itself was not a signatory thereto.

Under some circumstances, the action of all the shareholders of a close corporation bind the corporation even if the corporation is considered to be a legal entity separate from the shareholders. A corporation is ordinarily bound by acts of its shareholders and directors "only when they act as a body in regular session or under authority conferred at a duly constituted meeting." Park Terrace, Inc. v. Phoenix Indemnity...