We have written previously on disputes between shareholders in corporations, or members in LLCs.  See Challenges in Bringing Shareholder Claims, April 4, 2022; A Primer on Intra-Corporate Disputes, May 10, 2021.  In its recent decision in Kelly v. Nolan, 2022 N.C.D.C. 37, 21 CVS 2015 (July 19, 2022), the North Carolina Business Court, Judge Davis, was presented with a typical minority shareholder v. majority shareholder dispute.  The opinion is instructive for anyone holding shares in a small corporation. 

         A.  FACTS.

The plaintiffs, Kelly and Daughtry, each owned 10% of the shares in Piedmont Foot Clinic, P. A.  The defendants, Nolan and Hauser, each owned 40%.  The plaintiffs alleged that the defendants had conspired against them and engaged in various wrongful conduct, including using and selling equipment that belonged to them; improperly allocating corporate expenses to them; and paying corporate monies to non-working family members. 

The plaintiff-minority shareholders made claims against the defendant-majority shareholders for breach of fiduciary duty, breach of contract, breach of the implied duty of good faith and fair dealing, conversion, unfair trade practices, fraud and civil conspiracy. 

         B. BREACH OF FIDUCIARY DUTY.

This is the main claim when you have a case involving minority shareholders.  Normally, a breach of fiduciary claim should be brought as a “derivative” claim, on behalf of the corporation itself, rather than as a claim by an individual shareholder.  However, under North Carolina law, where there is a “special duty,” an individual shareholder may bring a breach of fiduciary duty claim.  One such “special duty” that North Carolina courts have recognized is the fiduciary duty owed by majority shareholders to minority shareholders in close corporations.  To that end, North Carolina courts allow minority shareholders to bring individual claims, on their own behalf, against majority shareholders for breach of fiduciary duty, even where a derivative action on behalf of the corporation would otherwise have been proper. 

In addition, the Business Court has recognized that a fiduciary duty can arise where two shareholders - - each of whom lack a majority ownership interest on their own - - act together to form a majority interest collectively, at the expense of the other minority shareholders.  In Kelly v. Nolan, the plaintiffs alleged that the two defendants together owned 80% of the company’s shares.  In addition, they alleged that the defendants served as the sole officers of the company, possessed complete control over the company, and conspired to breach their fiduciary duties to the minority shareholders.  The Business Court concluded that those allegations sufficiently alleged the existence of a fiduciary duty in breach of that duty, and accordingly denied the defendants’ Motion to Dismiss the breach of fiduciary duty claim.

          C. BREACH OF CONTRACT.

To state a claim for breach of contract, a complaint must allege (1) the existence of a contract between the plaintiff and the defendant; (2) the specific provisions of the contract were breached; (3) the facts constituting the breach; and (4) damages resulting to the plaintiff from the breach. 

In Kelly v. Nolan, the contract at issue was a shareholder agreement for the company.  However, the provision of that contract that allegedly was breached contained no actual obligations on anyone - - rather, it simply recited the desires and intentions of the parties.  Because the provision was simply a recital as to the overall purpose of the agreement, rather than something that set forth actual obligations of the parties, it could not be breached.  Accordingly, the Business Court dismissed the breach of contract claim.

           D. IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING.

In North Carolina, all contracts contain an “implied” duty of good faith and fair dealing.  In other words, all contracts contain a duty of good faith and fair dealing, regardless of whether that duty is expressly set forth in the contract.  However, where a party’s claim for breach of the implied covenant of good faith and fair dealing is based upon the same acts as their claim for breach of contract, the breach of implied covenant claim is treated as “part and parcel” of the breach of contract claim. 

Therefore, where a plaintiff fails to allege an actual breach of contract’s express terms, he is also precluded from asserting a claim for breach of the implied covenant of good faith and fair dealing in the same contract.  In this case, the claim for breach of the implied covenant of good faith and fair dealing was based on the same conduct as the failed breach of contract claim, and accordingly the Court dismissed the claim for breach of the implied covenant of good faith and fair dealing.

              E. CONVERSION.

There are two essential elements of a conversion claim in North Carolina:  (1) ownership of the thing that was converted in the plaintiff; and (2) wrongful possession or conversion of that thing by the defendant.  In Kelly v. Nolan, the Business Court found that the conversion claim as pled was impermissibly vague, because the Court could not tell from the Complaint which of the plaintiffs was alleged to own the specific property that allegedly had been converted by the defendants, nor could it discern the precise acts of conversion being alleged, when those acts occurred, and whether they were effectuated by the defendants or by the company.  Accordingly, the Business Court dismissed the conversion claim.

               F. UNFAIR TRADE PRACTICES.

To state a claim for unfair trade practices under §75-1.1, a plaintiff must allege (1) an unfair or deceptive act or practice; (2) in or affecting commerce; which (3) proximately causes injury to the plaintiff.  As we have noted in previous posts, actions are not “in or affecting commerce” if they arise completely within the dealings of a single entity. 

Chapter 75 is not focused on the internal conduct of individuals within a single market participant, that is, within a single business.  The Business Court has frequently dismissed unfair trade practices claims on this ground, and it did so once again in Kelly v. Nolan, because the wrongful acts alleged by the plaintiffs related to an internal business dispute between the shareholders of a single corporation. 

The essence of the allegations in the complaint was that the defendants authorized improper payments from the corporation to themselves and their family members, inflated the corporation’s expenses, and withheld money and assets belonging to the plaintiffs.  The fact that that conduct may have had indirect consequences outside the company, for example on patients or consumers, was irrelevant.  The indirect involvement of other market participants is not sufficient to trigger liability under Chapter 75.

             G.  FRAUD. 

To state a claim for fraud, a plaintiff must allege the following:

1.             A false representation or concealment of a material fact;
2.             Reasonably calculated to deceive;
3.             Made with the intent to deceive;
4.             Which does in fact in deceive;
5.             Resulting in damage to the injured party. 

Rule 9 (b) of the North Carolina Rules of Civil Procedure provides that claims for fraud must be alleged “with particularity.”  This means that when pleading a claim for fraud, a plaintiff must allege the time, place and content of the fraudulent representation, the identity of the person making the representation, and what was obtained as a result of the fraudulent acts or representations.

In Kelly v. Nolan, the allegations were too general to meet the particularity pleading requirement.  The plaintiffs alleged that the “defendants” (plural) made “false and intentionally misleading statements” on “multiple occasions” to “plaintiffs” (plural) during a period of several years.  The allegations were vague as to who made the statements, to whom the statements were made, the substance of the statements, and the dates that the statements were made.  Accordingly, the Business Court found that the plaintiffs had not adequately pled a fraud claim with particularity, and dismissed that claim.

             H. Civil Conspiracy. 

The last claim at issue in Kelly v. Nolan was a claim for civil conspiracy.  A complaint sufficiently states a claim for civil conspiracy when it alleges (1) a conspiracy; (2) wrongful acts done by certain of the alleged conspirators in furtherance of that conspiracy; and (3) injury as a result of that conspiracy.  A claim for civil conspiracy is not a standalone claim by itself, and therefore must be based on a properly pled underlying claim, such as fraud or breach of fiduciary duty. 

In Kelly v. Nolan, the defendants argued that the plaintiffs had failed to adequately plead that an agreement existed between the defendants and that if all the other claims were dismissed, there would be no underlying claim left to serve as the basis for the civil conspiracy claim.  However, the complaint contained allegations that for a period of several years the defendants, as majority shareholders and officers of the company, had conducted meetings, conversations and other communications in which they developed a plan to deny plaintiffs from receiving a fair share of the profits and income of the corporation.  Taking those statements as true, as is required on a motion to dismiss, the Business Court found that they sufficiently alleged an agreement between the defendants to engage in unlawful conduct towards the plaintiffs.  And, while the defendants were correct that the claim for civil conspiracy could not stand by itself, the Court denied the motion to dismiss the breach of fiduciary duty claim, and a civil conspiracy claim predicated on a breach of fiduciary claim is sufficient to survive a motion to dismiss.  Accordingly, the Court denied the Motion to Dismiss on the claim for civil conspiracy.

              I.  Practice Pointers.

•                     If you are a minority shareholder in a close corporation in North Carolina, the majority shareholders owe you fiduciary duties, and you may bring those claims individually, on behalf of yourself, in addition to bringing them derivatively, on behalf of the corporation. 
•                     If you are looking at bringing claims in the intra-corporate context, you need to carefully review the law on which claims are derivative (in other words, they can be brought only on behalf of the corporation) and which claims are direct (that is, they can be brought individually).  If the claims are derivative, you will likely need to comply with the written pre-suit demand requirements in Chapter 55 (for corporations) or Chapter 57 (for LLCs).
•                     If you want to plead a claim for breach of contract, you need to identify the specific contractual duty that the other party allegedly breached.  Parts of the contract that simply express desires and intentions, without containing any actual obligations, will not suffice.  Moreover, if your breach of contract claim fails, then any breach of the implied duty of good faith and fair dealing will likely fail as well.
•                     Similarly, if you want to allege a claim for conversion, you need to specify ownership of the property that allegedly was converted, the acts of conversion that took place, when those acts occurred, and who committed those acts. 
•                     In pleading the claim for fraud, you need to specify the time, place, and content of the allegedly fraudulent representation, who made the representation, and what was obtained as a result of the representation.  General allegations that do not specify who made the representation, such as “defendants” will not suffice.  Similarly, general accusations that someone made “false and misleading statements” on “multiple occasions” do not suffice.  You must specify who made the statements, to whom the statements were made, the substance of the statements, and the dates that the statements were made. 
•                     Finally, be careful of unfair trade practices claims in the intra-corporate context.  Plaintiffs like unfair trade practices claims because they raise the possibility of treble damages and attorneys’ fee awards.  But courts in North Carolina are very reluctant to allow unfair trade practices claims to proceed when the wrongful acts alleged relate primarily to an internal business dispute between the shareholders or members in a single entity, because those claims do not meet the “in or affecting commerce” requirement within the meaning of Chapter 75.