Gwaltney v. Gwaltney, 2017 NCBC 12.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF GUILFORD 16 CVS 7063
DOUGLAS E. GWALTNEY, Individually ) and Derivatively on Behalf of LITTLE ) CREEK ELECTRONICS INC., ) Plaintiff, ) ) v. ) ORDER ON PLAINTIFF’S ) MOTION TO DISQUALIFY JAMES A. GWALTNEY, MICHAEL S. ) COUNSEL GREEN, and LITTLE CREEK ) ELECTRONICS INC., ) Defendants. )
THIS MATTER comes before the Court on Plaintiff’s Motion to Disqualify
Counsel for Little Creek Electronics, Inc. (“Little Creek”) and to Dismiss or Strike
Defendant’s Pleadings (“Plaintiff’s Motion to Disqualify”). Plaintiff seeks to
disqualify Harry G. Gordon and the Gordon Law Offices (collectively, “Gordon”)
from representing the corporate Defendant, Little Creek, in this lawsuit, and to
strike those pleadings filed to-date by Gordon on behalf of Little Creek in this
action.
THE COURT, having carefully considered the Motion, the briefs and
evidentiary materials filed in support of and in opposition to the Motion, and other
appropriate matters of record, concludes, in its discretion, that the Motion should be
GRANTED for the reasons set forth below. A. Factual and Procedural Background.
1. Little Creek is a North Carolina corporation with its principal place of
business in Guilford County, North Carolina. Plaintiff Douglas E. Gwaltney
(“Douglas” or “Plaintiff”) and Defendants James A. Gwaltney (“James”) and Michael
S. Green (“Green”) are each one-third shareholders in Little Creek and are the three
members of Little Creek’s Board of Directors (“Board”).
2. In 1999, Little Creek adopted a set of written “By-Laws of Little Creek
Electronics, Inc.” (“1999 By-Laws”). The 1999 By-Laws provide the Board with
broad authority to manage the business of Little Creek. The 1999 By-Laws provide,
in relevant part, as follows:
Section 3.1. General Powers. The business and affairs of the Corporation shall be managed by its board of directors [.] Without limiting this general power, the board shall have the power and authority to (i) select and remove all officers, agents, and employees, prescribe their duties and fix their compensation; . . . (iv) borrow and incur indebtedness for corporate purposes . . .
3. On December 3, 2009, Douglas, James, and Green, acting as both the
shareholders and Board of Little Creek, unanimously consented to amend the 1999
By-Laws and adopted an amended set of by-laws (“Amended By-Laws”).1 The
Amended By-Laws provided that “One hundred percent (100%) of the directors shall
constitute a quorum” of the Board for purposes of conducting business, and that
“[t]he act of 100% of the directors present at meeting at which a quorum is present
shall be the act of the board of directors.” (Am. By-Laws §§ 3.7, 3.8.) Accordingly,
1 The Amended By-Laws are attached to the Verified Complaint as Exhibit A. the Amended By-Laws require the unanimous agreement of Douglas, James, and
Green to act on behalf of Little Creek.
4. The Amended By-Laws similarly provided that 100% of the
outstanding shares of Little Creek constituted a quorum for purposes of shareholder
action, and that “[t]he vote of the holders of one hundred percent (100%) of the
shares present and entitled to vote at any duly organized meeting shall decide any
question.” (Am. By-Laws §§ 2.8, 2.10.)
5. Finally, the Amended By-Laws provided that they could be “altered,
amended, or repealed, and new bylaws . . . adopted only by the vote of 100% of the
directors.” (Am. By-Laws § 9.1.)
6. In early 2016, Douglas became embroiled in a dispute with James and
Green over certain actions taken by James and Green without his involvement or
consent. Douglas retained an attorney, Robert Boydoh, Jr. (“Boydoh”), to represent
him. James and Green retained Gordon to represent them in the dispute.
7. During the Spring and early Summer of 2016, Boydoh and Gordon
corresponded on behalf of their respective clients in an effort to resolve the dispute.
(Boydoh Aff. (10/26/16) ¶¶ 7-11, Exs. A-C; Ver. Compl., Ex. C.) Douglas alleges that
during this period James and Green seized control of Little Creek and excluded him
from participation in the corporation’s management. (Ver. Compl. ¶ 25.) 8. On August 24, 2016, Douglas filed a Verified Complaint in Guilford
County Superior Court.2 In the Verified Complaint, Douglas raised individual
claims against James and Green for breach of the Amended By-Laws and their
refusal to produce Little Creek’s corporate books and records to him. The Verified
Complaint also raised individual claims by Douglas, and expressly raised derivative
claims on behalf of Little Creek, against James and Green for breach of fiduciary
duty and for removal of James and Green as directors pursuant to N.C. Gen. Stat. §
55-8-09 (hereinafter, references to the North Carolina General Statutes will be to
“G.S.”). Finally, Douglas sought to recover punitive damages from “Defendants,”
and requested injunctive relief prohibiting James and Green from acting on behalf
of Little Creek.
9. On August 24, 2016, Boydoh sent Gordon a courtesy copy of the
Verified Complaint and asked Gordon to accept service of the Complaint on behalf
of James and Green. (Boydoh Aff. (10/26/16) ¶ 13, Ex. D.) Boydoh also asked Gordon
to have James accept service for Little Creek as Little Creek’s registered agent
“since Little Creek is only a nominal party and would need separate representation,
if any, in the litigation.” (Id.)
10. On August 31, 2016, Gordon sent Boydoh a signed Acceptance of
Service of Complaint (“Acceptance”). (Id. ¶ 14, Ex. E.) In the Acceptance, Gordon
purported to accept service on behalf of Little Creek as “counsel for Defendant Little
2 On August 24, 2016, Plaintiff also filed a notice of designation to the North Carolina Business Court. The Chief Justice of the North Carolina Supreme Court entered an order designating this matter as a complex business case. Creek.” (Id.). James and Green accepted service in their capacities as individual
Defendants.
11. On September 1, 2016, Boydoh sent Gordon an email informing
Gordon that he could not be hired by Little Creek without the unanimous approval
of the Board. (Id. ¶ 15, Ex. G.) On September 2, 2016, Gordon responded to Boydoh
and claimed to be representing Little Creek. (Id. ¶ 16, Ex. H.)
12. On September 23, 2016, Gordon filed with this Court on behalf of Little
Creek an Answer, Affirmative Defenses, and Counterclaims (“Answer”). In the
Answer, Gordon purports to make substantive responses to the allegations in the
Verified Complaint and raises affirmative defenses on behalf of Little Creek. The
Answer also makes counterclaims for Little Creek against Douglas for declaratory
judgment; breach of the Amended By-Laws3; conversion; breach of fiduciary duty,
constructive fraud and removal of a director; abuse of process4; and attorneys’ fees.
13. On September 23, 2016, Gordon also filed on behalf of Little Creek a
Motion to Disqualify Plaintiff’s Counsel. On January 4, 2017, the Court issued an
Order denying the motion to disqualify Plaintiff’s counsel.
14. On October 31, 2016, Green filed, and on November 1, 2016, James
filed, Answers containing affirmative defenses and counterclaims against Douglas.
Despite claiming that they are each proceeding pro se, James’ and Green’s Answers
3 Oddly, Gordon also has asserted as an affirmative defense that Little Creek and Douglas
were not parties to “any valid contract.” (Answer, “Sixth Defense”.) 4 This counterclaim appears to be based on Plaintiff using a Guilford County Sheriff’s
Deputy to serve the summons and Verified Complaint on Green at Little Creek’s offices and on James at his home. are virtually identical in all regards to the Answer filed by Gordon on behalf of
Little Creek.
15. On November 15, 2016, Douglas filed Plaintiff’s Motion to Disqualify.
Gordon subsequently responded in opposition to the Plaintiff’s Motion to Disqualify
on behalf of Little Creek, and Douglas filed a reply in support. Plaintiff’s Motion to
Disqualify is now ripe for determination.
B. Analysis and Discussion.
16. Plaintiff moves to disqualify Gordon from representing Little Creek,
and to have the Court strike Little Creek’s pleadings, on two primary grounds5:
a. James and Green lacked authority to retain Gordon to represent Little
Creek because under the Amended By-Laws such action required the
unanimous approval of James, Green, and Douglas; and,
b. Little Creek is a nominal party only to this action and lacks standing to
defend itself against the derivative claims raised by Douglas in this
lawsuit.
The Court will address these grounds in turn.
17. “Decisions regarding whether to disqualify counsel are within the
discretion of the trial judge and, absent an abuse of discretion, a trial judge’s ruling
5 Plaintiff also moves to disqualify Gordon on the grounds that he is prohibited from simultaneously representing Little Creek and James and Green in this lawsuit by North Carolina Rules of Professional Conduct 1.7 and 1.13(g). Plaintiff contends that despite James’ and Green’s claims that they are representing themselves pro se, the nearly identical nature of the “filed motions and pleadings confirm that opposing counsel is attempting to represent both Little Creek” and James and Green. (Pl.’s Br. Supp. Mot. Disqualify 18.) Since the Court concludes that Gordon must be disqualified from representing Little Creek for other reasons, it need not reach this issue. on a motion to disqualify will not be disturbed on appeal.” Sisk v. Transylvania
Cmty. Hosp., Inc., 364 N.C. 172, 179, 695 S.E.2d 429, 434 (2010) (quoting Travco
Hotels, Inc. v. Piedmont Natural Gas Co., 332 N.C. 288, 295, 420 S.E.2d 426, 430
(1992)).
A. James and Green lacked authority under the Amended By-Laws to retain Gordon as counsel for Little Creek.
18. Plaintiff contends that hiring counsel to represent Little Creek is a
corporate action that required the unanimous consent of all three directors
pursuant to the Amended By-Laws. Section 3.1 of the Amended By-Laws provides
the Board with broad authority to manage “[t]he business and affairs of the
Corporation,” including the specific authority “to [ ] select and remove all [ ], agents,
and employees” and “incur indebtedness for corporate purposes.” Sections 3.7 and
3.8 unambiguously require the unanimous consent and agreement of Douglas,
James, and Green to act for Little Creek.
19. Plaintiff relies on this Court’s decision in Battles v. Bywater, LLC,
2014 NCBC LEXIS 54, *6-7 (N.C. Super. Ct. 2014) in support of its argument. In
Battles, the plaintiff Chad A. Battles (“Battles”) and James Rogers (“Rogers”) were
each 50% owners and member-managers of two separate LLCs, Bywater and
Agiqua (collectively “the LLCs”). Id. at *1-2. Bywater had a written operating
agreement that required majority approval of the members to take action for the
corporation. Id. at *13-15. Agiqua did not have an operating agreement. Id. at *2.
Battles and Rogers got into a dispute regarding the management of the businesses,
and Rogers hired the Asheville Law Group (“ALG”) to represent him in the dispute. Id. at *3-4. Subsequently, Battles filed a lawsuit against the LLCs alleging
“numerous conflicts regarding the management and operation” of both companies
and seeking judicial dissolution and the appointment of a receiver. Id. at *4-5. In
response, Rogers terminated ALG as his personal counsel and hired them on behalf
of the corporate defendants to defend the lawsuit and assert counterclaims against
the plaintiff. Id. at *5. Battles moved to disqualify ALG because Rogers lacked
authority to hire counsel for the LLCs. Battles, 2014 NCBC LEXIS 54 at *5.
20. In Battles, the Honorable Louis Bledsoe granted the motion to
disqualify ALG from representing the LLCs, holding that Bywater’s operating
agreement and the North Carolina Limited Liability Company Act required
majority consent of the members to retain counsel for the corporations. Id. at *13-
17. In addition, the court struck all filings submitted by ALG on behalf of both
corporate defendants. Id. at *17. In reaching its conclusions, the Court cited to
holdings from other jurisdictions reaching similar results. Id. at *16 (citing
Maitland v. Int’l Registries, LLC, 2008 Del. Ch. LEXIS 70, at *4-5 (Del. Ch. June 6,
2008); Caplash v. Rochester Oral & Maxillofacial Surgery Assoc., LLC, 20 Misc. 3d
1104[A], 867 N.Y.S.2d 15, 2008 N.Y. Misc. LEXIS 3519, 2008 NY Slip Op 51216[U]
(2008)).
21. The holding in Battles appears to be applicable to the facts presented
in this case. The Amended By-Laws place the management of the Company in the
Board, and requires unanimous approval of the three directors to act for Little
Creek. The decision to engage an outside attorney to represent the company in a lawsuit is certainly the type of act that falls within the Board’s authority, and
accordingly requires unanimous consent of all three directors.
22. Additionally, without limiting the Board’s “general power,” the
Amended By-Laws specifically provide the Board authority to “select . . . agents,
and employees, [and] prescribe their duties and fix their compensation” and to
“incur indebtedness for corporate purposes.” (Am. By-Laws § 3.1.) The selection, or
employment, of an attorney to represent the company would appear to fall under
these provisions. In addition, Little Creek undoubtedly is “incur[ring] indebtedness”
for the legal services of Gordon, which also requires board action. Battles, 2014
NCBC LEXIS 54, *13-15 (finding that the decision to retain counsel “caused
Bywater to incur debt ‘other than in the ordinary course of business,’” an act
specifically requiring majority approval of the members under Bywater’s operating
agreement).
23. Little Creek contends that the unanimity requirement imposed by
sections 3.7 and 3.8 of the Amended By-Laws was not intended to apply to any
board action other than an attempt by two of the directors to “oust” the third from
the Company. (Little Creek’s Br. Resp. Mot. Disqualify 1, 6.) Little Creek supports
this contention with affidavit testimony from James and Green. (James Aff.
(12/5/16) ¶ 8; Green Aff. (12/5/16) ¶ 5.) The language of sections 3.7 and 3.8,
however, is unambiguous in requiring unanimous approval of all three directors to
take action for Little Creek, and parol evidence is not admissible to vary or explain
unambiguous language in a written agreement. Parol evidence may be introduced to interpret the contract only when its language is subject to more than one
interpretation or its construction results in an ambiguity. Root v. Allstate Ins. Co.,
272 N.C. 580, 587-88, 158 S.E.2d 829, 835 (1968); Thompson v. First Citizens Bank
& Trust Co., 151 N.C. App. 704, 709, 567 S.E.2d 184, 188 (2002) (“Generally,
the parol evidence rule prohibits the admission of evidence to contradict or add to
the terms of a clear and unambiguous contract.”). Accordingly, Little Creek cannot
attempt to provide its interpretation of sections 3.7 and 3.8 through affidavit
evidence.
24. Little Creek also argues that the unanimity requirement imposed by
the Amended By-Laws “[w]as revised and limited by oral agreement and conduct.”
(Little Creek’s Br. Resp. Mot. Disqualify 24.) Little Creek contends that despite the
express language of sections 3.7 and 3.8, the three directors have acted for Little
Creek on a majority basis, and that this effectively amended the Amended By-Laws.
(Id. 22-24.) This argument also fails because the Amended By-Laws constituted a
shareholder agreement that could only be amended by the procedure expressly
provided for in the Amended By-Laws.
25. “Bylaws which are unanimously enacted by all the shareholders of a
corporation are also shareholders’ agreements” and fall within the meaning of a
“shareholder agreement” as that term is used in the North Carolina Corporations
Act. Blount v. Taft, 295 N.C. 472, 484, 246 S.E.2d 763, 771 (1978). “Since
consensual arrangements among shareholders are agreements -- the products of
negotiation -- they should be construed and enforced like any other contract so as to give effect to the intent of the parties as expressed in their agreements.” Id. “[A]
shareholders’ agreement may not be altered or terminated except as provided by the
agreement, or by all parties, or by operation of law” and common law rules
regarding amendment of agreements apply only “[i]n the absence of a valid
provision in the charter or bylaws controlling amendment . . . .” Id. at 486, 246
S.E.2d at 772. Following these principles, the Court in Blount held that when a
corporation’s bylaws constitute a shareholders’ agreement, such an agreement may
be amended only as provided in those bylaws:
We hold, therefore, that if a shareholders’ agreement is made a part of the charter or bylaws it will be subject to amendment as provided therein or, in the absence of an internal provision governing amendments, as provided by the statutory norms.
Id. at 487, 246 S.E.2d at 772 (emphasis added).
26. The Amended By-Laws were adopted unanimously by Douglas, James,
and Green as Little Creek’s shareholders and are a “shareholder agreement.” The
Amended By-Laws require any further amendments be approved by the unanimous
vote of the directors at a “regular or special meeting” of the Board. (Am. By-Laws §
9.1.) Little Creek has not presented evidence, and does not contend, that the Board
held a meeting at which it proposed and voted on an amendment that modified the
requirement of unanimous consent of the directors to act for the corporation.
Rather, Little Creek’s evidence, at best, suggests that Douglas, James, and Green
may have acted inconsistently with the unanimity requirements on some occasions in taking certain corporate actions. This conduct was not effective to amend sections
3.7 and 3.8.
27. The Court concludes that pursuant to the Amended By-Laws, in order
for Little Creek to retain an attorney to represent the corporation in this lawsuit,
the unanimous consent of all three directors is required. James and Green, acting
alone as two members of the Board, did not have authority to retain Gordon on
behalf of Little Creek. Plaintiff’s Motion to Disqualify should be GRANTED.
B. Little Creek is a Nominal Defendant only and lacks standing to defend on the merits.
28. Plaintiff also moves the Court to dismiss or strike Little Creek’s
“filings” in this action on the grounds that Little Creek is a nominal defendant in
this action and cannot defend against Plaintiff’s derivative claims on the merits. 6
Little Creek contends that Plaintiff’s claims are not derivative, but rather the
personal claims of Douglas against Little Creek, and that Little Creek has standing
to defend itself against these claims.
29. In North Carolina “[a] corporation is, beyond question, a necessary
party to any litigation brought derivatively in its name, and is customarily
captioned a nominal defendant.” Swenson v. Thibaut, 39 N.C. App. 77, 98, 250
S.E.2d 279, 293 (1978) (citing Underwood v. Stafford, 270 N.C. 700, 704, 155 S.E. 2d
211, 213 (1967)). In Swenson, the Court recognized that:
6 Plaintiff apparently contends that Little Creek’s lack of standing to defend the claims is
further grounds to disqualify Gordon from representing Little Creek. (Pl.’s Br. Supp. Mot. Disqualify 17.) Plaintiff, however, does not explain how the lack of standing would be grounds for disqualification of counsel, and the Court will confine its consideration of Plaintiff’s argument to the question of whether pleadings filed on behalf of Little Creek should be stricken or dismissed. The anomaly of a corporation, in whose name and right a derivative action is brought, being allowed to defend itself against itself is apparent. It is particularly apparent in the situation, such as is found in the instant case, where the alleged wrongdoers are in control of the corporation.
....
[W]e hold that in an action, brought by a minority shareholder derivatively in the name and right of a corporation, to enforce rights or to seek redress accruing to the corporation, that corporation will be deemed for purposes of the litigation to be aligned as a party plaintiff (except to the extent that the corporation is an actual defendant as to an issue in the action) although for purposes of form it is designated as a nominal defendant. Accordingly, the corporation . . . may not defend itself against the derivative action on the merits and must limit its defenses, if any, to the pretrial matters proper to it. Where a corporation seeks to extend its defenses beyond those areas in which it may properly conduct them, dismissal will lie against it.
Id. at 99-101, 250 S.E.2d at 294; accord Thomas v. McMahon, 2015 NCBC LEXIS
67, *1, n. 1 (N.C. Super. Ct. 2015).7
7 In Swenson, the Court recognized limited exceptions to the rule that a corporation may not defend a derivative action on the merits:
In some situations, the corporation in whose interest the derivative action is purportedly brought will have interests adverse to those of the nominal plaintiffs bringing the action derivatively, and will of necessity be more than a nominal defendant. Such situations would include an action to enjoin the performance of a contract by the corporation, to appoint a receiver, to interfere with a corporate reorganization or to interfere with internal management where there is no allegation of fraud or bad faith . . . . Additionally, certain defenses which are properly asserted before trial on the merits of the action are peculiar to the corporation alone, and may be properly raised only by the nominal defendant who, for purposes of those matters, ceases to be a nominal defendant and becomes an actual party defendant. These defenses would include the lack of standing of the plaintiffs to sue derivatively for reasons of insufficient representation of shareholders 30. Here, Douglas has styled his lawsuit as one pursuing both individual
and derivative claims, has alleged that he is proceeding pursuant to G.S. § 55-7-40,
and alleged the prerequisites to filing a derivative action. (Ver. Compl. ¶¶ 27-29, 55-
60.) Douglas alleges that James and Green, acting as directors and shareholders,
inter alia, terminated Little Creek’s CEO and COO and gave him a severance
payment without the authorization of the directors or shareholders, took control of
Little Creek’s management without the authorization of the directors or
shareholders, expended corporate funds without the authorization of the directors
or shareholders, took possession of Little Creek’s books and records and refused
Douglas’ requests for access to those records, and caused a substantial decline in
Little Creek’s sales and profits (Id. ¶¶ 17-20, 25, 26, 30-32.) The Verified Complaint
raises claims for breach of the Amended By-Laws and breach of fiduciary duty
against James and Green, and seeks compensatory and punitive damages from
James and Green. Plaintiff also raises claims for access to Little Creek’s corporate
records and for the removal of James and Green as directors.
31. “One of the clearest examples of a derivative action is a suit against
the officers or directors of a corporation for mismanagement of its affairs
constituting a breach of their fiduciary obligations to the corporation.” Russell M.
Robinson, II, Robinson on North Carolina Corporation Law § 17.02[1] (7th ed.
2015). “[U]nder North Carolina law a cause of action for a director’s breach of [ ]
and a failure on plaintiffs’ part to make a demand upon the board of directors.
39 N.C. App. at 100, 250 S.E.2d at 294. Little Creek has not raised any of the grounds for exception in this case. fiduciary duties . . . accrues to the corporation and not to the individual
shareholder.” Gusinsky v. Flanders Corp., 2013 NCBC LEXIS 43, *12 (N.C. Super.
Ct. 2013). Thus, an action must be brought derivatively on behalf of the corporation
against its directors for corporate mismanagement, dissipating corporate assets, or
for the wrongful withdrawal and use of corporate assets. Goodwin v. Whitener, 262
N.C. 582, 583-84, 138 S.E.2d 232, 233-34 (1964) (holding that “[a] claim of
mismanagement exists in favor of the corporation”).
32. Little Creek argues that Douglas “is actually suing Little Creek on
multiple Claims for Relief for compensatory and punitive damages in excess of
$25,000.” (Little Creek’s Br. Resp. Mot. Disqualify 14.) Little Creek’s argument
appears to be based on Plaintiff’s inartful drafting of certain allegations in the
Verified Complaint in which Plaintiff claims he “is entitled to recover damages of
and from Defendants. ” (Id. 15-16; emphasis added.) Little Creek’s position is that
since Plaintiff has used “Defendants,” instead of explicitly alleging that it seeks
certain damages only from James and Green, Douglas must be seeking damages
from Little Creek since Little Creek is styled as a defendant in the action. Little
Creek’s contention is without merit.
33. First, Plaintiff was required to name Little Creek as a Defendant for
purposes of pursuing his claim for removal of James and Green as directors of Little
Creek. G.S. § 55-8-09(c) (“If shareholders commence a proceeding under subsection
(a), they shall make the corporation a party defendant.”). Plaintiff also was required
to name Little Creek as a nominal defendant in this action. Swenson, 39 N.C. App. at 98, 250 S.E.2d at 293 (“A corporation is . . . a necessary party to any litigation
brought derivatively in its name, and is customarily captioned a nominal
defendant.”). In addition, the Verified Complaint expressly identified James and
Green as “Defendant[s]” and Little Creek as a “Nominal Plaintiff/Defendant.” (Ver.
Compl. ¶¶ 2-4.)
34. Little Creek also argues that Douglas must be seeking damages from
Little Creek because “[a] shareholder may not both sue ‘on behalf of’ a corporation
and simultaneously sue the corporation for compensatory and punitive damages in
the same suit.” (Little Creek’s Br. Resp. Mot. Disqualify 14.) Little Creek
apparently contends that since Douglas brings individual claims in this action
seeking damages for himself, he cannot also attempt to recover damages
derivatively. Little Creek is incorrect in this assertion.
35. A shareholder, under limited circumstances, may maintain a direct,
individual action for an injury that directly affects the shareholder, even if the
corporation also has a claim for relief arising from the same wrong. Barger v.
McCoy Hillard & Parks, 346 N.C. 650, 659, 488 S.E.2d 215, 219 (1997); Norman v.
Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 395-96, 537 S.E.2d 248, 253
(2000). In order to do so, the shareholder must show (a) that he was owed a special
duty by the wrongdoer or (b) that the injury suffered by the shareholder is separate
and distinct from that sustained by other shareholders or the corporation
itself. Barger, 346 N.C. at 658-59, 488 S.E.2d at 219. Shareholders may maintain
derivative and individual actions simultaneously in the same litigation. Norman, 140 N.C. App. at 406, 537 S.E.2d at 259 (“Plaintiffs may properly pursue their
claims against the individual defendants both as individual and as derivative
claims.”). Douglas’ pursuit of damages from James and Green does not foreclose the
derivative claims he raises in this lawsuit.
36. Little Creek has improperly attempted to defend the derivative claims
raised by Plaintiff on the merits. Little Creek’s Answer purports to raise 25
affirmative defenses on behalf of the corporation, and denies Plaintiff’s allegations
of misconduct and mismanagement by James and Green. (Little Creek’s Answer ¶¶
17-20, 25, 26, 30-32.) This is not the proper role of the corporation when faced with
allegations of the type in this action. Swenson, 39 N.C. App. at 99, 250 S.E.2d at
293-94 (“The rule . . . is to the effect that where directors are charged with
misconduct in office and are sought to be held accountable, the corporation is
required to take and maintain a wholly neutral position, taking sides neither with
the complainant nor with the defending director,” quoting with approval Solimine
v. Hollander, 129 N.J. Eq. 264, 266-67, 19 A. 2d 344, 345-46 (1941)).
37. The Court concludes that Little Creek does not have standing to
defend the derivative claims raised by Plaintiff in this action, and that, in the
Court’s discretion, Plaintiff’s motion to dismiss or strike pleadings filed on behalf of
Little Creek should be GRANTED, and that Little Creek’s Answer should be
STRICKEN.8
8 The Court concludes that Little Creek’s Motion to Disqualify Plaintiff’s Counsel, which the
Court already has decided, was the type of pre-trial matter that could properly be raised by Little Creek as a nominal Defendant. Swenson, 39 N.C. App. at 100, 250 S.E.2d at 294. THEREFORE, IT IS ORDERED that:
1. The Motion to Disqualify is GRANTED, and Harry G. Gordon and the
Gordon Law Offices are disqualified from representing the corporate
Defendant, Little Creek, in this lawsuit.
2. The Motion to Disqualify also is GRANTED to the extent it seeks to
dismiss or strike the pleadings filed on behalf of Little Creek. Little
Creek’s Answer is hereby STRICKEN.
This the 8th day of February, 2017.
/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge For Complex Business Cases
Accordingly, that motion and the briefs filed on behalf of Little Creek in support of the motion shall not be stricken.