Holland v. Buck Mountain Prop. Owners Ass’n, Inc., 2020 NCBC 90.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION WILKES COUNTY 18 CVS 954
BRIAN HOLLAND; and HARRY BRIZUELA, derivatively on behalf of Buck Mountain Property Owners Association, Inc.,
Plaintiffs,
v. ORDER AND OPINION ON THE DANA WARREN and JOSEF BATH, PARTIES’ CROSS MOTIONS FOR SUMMARY JUDGMENT Defendants,
v.
BUCK MOUNTAIN PROPERTY OWNERS ASSOCIATION, INC.,
Nominal Defendant.
1. THIS MATTER is before the Court on Plaintiffs Brian Holland and
Harry Brizuela’s (collectively, “Plaintiffs”) Motion for Summary Judgment, (ECF No.
27), and Defendants Dana Warren (“Warren”) and Josef Bath’s (“Bath”; collectively,
“Defendants”) Motion for Summary Judgment, (ECF No. 29), (collectively, the
“Motions”) made pursuant to Rule 56 of the North Carolina Rules of Civil Procedure
(“Rule(s)”). Having considered the Motions, supporting briefs, and attached exhibits,
as well as arguments of counsel, the Motions are GRANTED in part and DENIED in
part. Thurman, Wilson, Boutwell & Galvin, P.A. by Thomas J. Thurman and Alexander W. Warner for Plaintiffs.
Cranfill Sumner & Hartzog LLP by Meredith FitzGibbon Hamilton and Patrick H. Flanagan for Defendants.
Gale, Senior Judge.
I. INTRODUCTION
2. Plaintiffs are members of Buck Mountain Property Owners Association
(the “Association” or the “POA”) and seek relief for what they contend were breaches
of fiduciary duty by Defendants when engaging in improper interested transactions
with the POA while they served as members of its governing Board of Directors (the
“Board”). Defendants contend that the transactions were proper, were entered into
for the POA’s interest rather than their personal interests, and were either approved
by or later ratified by a disinterested Board consistent with N.C.G.S § 55A-8-31.
Plaintiffs claim that the Board had no authority either to approve or ratify the
transactions because they were not authorized by the Association’s bylaws pursuant
to N.C.G.S. § 47F-3-118(c), even if otherwise potentially proper under N.C.G.S.
Chapter 55, Article 8.
3. Plaintiffs and Defendants each seek summary judgment following the
close of discovery. For the following reasons, the Court determines that, with the
exception of one challenged transaction, neither party is entitled to summary
judgment on the current record. As to that one transaction, Defendants are entitled
to summary judgment. II. PROCEDURAL HISTORY
4. Plaintiffs initiated this action on August 17, 2018. (Compl., ECF No. 3.)
This matter was designated as a mandatory complex business case by order of Chief
Justice Mark Martin on November 14, 2018, (ECF No. 1), and assigned to the
undersigned on November 15, 2018, (ECF No. 2).
5. Plaintiffs, with leave of court, filed an Amended Complaint on March 6,
2019. (Am. Compl., ECF No. 19.) Following the completion of discovery, Plaintiffs
and Defendants each filed their Motions for Summary Judgment. (Pls.’ Mot. Summ.
J., ECF No. 27; Defs.’ Mot. Summ. J., ECF No. 29.)
6. The Motions have been fully briefed, the Court has heard oral argument,
and the Motions are ripe for determination.
III. FACTUAL BACKGROUND
7. The Court does not make findings of fact when ruling upon a motion for
summary judgment. Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C. App. 138,
142, 215 S.E.2d 162, 164–65 (1975). The Court summarizes matters of record to
provide context for its ruling.
8. Buck Mountain is a community in Wilkes County, North Carolina. (N.C.
Sec’y State Search, Ex. A, ECF No. 27.1; Decl. Covenants & Conditions, Ex. B, ECF
No. 27.1.) Warren and Bath were at relevant times members of the POA Board.
Warren was elected in 2014, (Dep. Dana Warren 9:9–11 [hereinafter “Dep. Warren”]) 1, and Bath in 2016, (Dep. Josef Bath 9:3–4 [hereinafter “Dep. Bath”]). 2
Warren also served as the POA’s president at all relevant times. (Dep. Warren
102:22–23.)
9. The Complaint challenges multiple transactions between Warren, Bath,
and the Board, each of which is described below.
A. Easements to Enable the Emergency Access Road
10. Buck Mountain originally had only one entrance that occasionally
flooded and prevented emergency access to the community. (Aff. Pat Dale ¶ 5, ECF
No. 30.7.) In early 2016, the Board discussed obtaining an emergency road that would
provide the community and emergency services with a second point of access on and
off the mountain. (Dep. Warren 17:12–23; Aff. Pat Dale ¶ 5.) At that time, property
owners within the community were unwilling to provide the necessary easements.
(Bd. Mins. May 21, 2016, Ex. I, ECF No. 27.3.)
11. In November 2016, the POA learned that lots Deer Run Lot 52 (“Lot 52”)
and Deer Run Lot 54 (“Lot 54”) were subject to foreclosure proceedings. Lot 52
adjoined a proposed route for an emergency access road. (Dep. Warren 25:16–28:11.)
Warren testified that the Association’s sole interest in Lot 52 would be for an
easement and the POA’s ability to resell the lot was uncertain because of statutory
requirements that any such sale would require a supermajority vote of all Association
members. (Dep. Warren 26:11–29:1.) The POA ultimately decided not to bid on the
1 Excerpts from Volume I of the deposition of Warren are located at ECF Nos. 27.2 and 34.1.
2 Excerpts from the deposition of Bath are located at ECF Nos. 27.3 and 30.5. property at the foreclosure sale. (See Bd. Mins. Nov. 19, 2016, Ex H, ECF No. 27.3.)
During the POA discussions, Warren inquired whether the Board would grant “an
individual” a three-year moratorium on POA dues should that individual purchase
Lot 52 and grant the POA an easement, which idea some directors then
“kicked . . . around[,]” although no Board vote on that issue was taken at that time.
(Dep. Warren 29:4–30:10.)
12. On December 15, 2016, Warren purchased both Lot 52 and Lot 54 for
$6,000 and $4,800 respectively. (Deer Run Deeds, Ex. L, ECF No. 27.5.) Two days
after the purchase, the POA voted to approve a three-year moratorium on dues for
Lot 52 while the POA continued to discuss possible routes for an emergency road,
with the provision that during this period Warren would make no improvements
unrelated to the emergency access road. (Bd. Mins. Dec. 17, 2016, Ex. J, ECF No.
27.4.) The Board records show that the Board knew that Lot 52 “was purchased at
auction by Dana Warren.” (Bd. Mins. Dec. 17, 2016.) Warren abstained from voting.
(Bd. Mins. Dec. 17, 2016.) The other four Board members present voted to approve
the moratorium. (Bd. Mins. Dec. 17, 2016.) The POA did not charge Warren dues on
Lot 52 from 2017 through 2019. (Dep. Dana Warren Volume II 98:16–19 [hereinafter
“Dep. Warren II”].) 3
13. Warren also met with Paul Breeden (“Breeden”) who owned an
approximately eighteen-acre tract of land lying between the Buck Mountain
community and U.S. Highway 421, through which the proposed emergency road route
3 Excerpts from Volume II of the Warren deposition Warren are located at ECF Nos. 27.4 and
30.14. traversing Lot 52 would run (the “eighteen-acre tract” or the “Breeden Tract”). (Dep.
Warren 36:9–37:1.) Warren testified that he sought to purchase the Breeden Tract
“simply to get an easement across it for the association[,]” (Dep. Warren 37:14–15),
but also planned to “get [his] money back out of it[,]” hoping to at least break even as
to the purchase of the eighteen-acre tract while potentially earning a profit regarding
his purchase of the two Deer Run lots. (Dep. Warren 37:15–16; 154:17–19). In
January 2017, Warren agreed to purchase the Breeden Tract and a deed was recorded
on February 17, 2017. (Dep. Warren 36:2–37:4; N.C. Gen. Warranty Deed, Ex. L.
ECF No. 27.5.)
14. Warren considered several different projects for the Breeden Tract,
including building a restaurant or a bar. (Dep. Warren 37:21–38:25.) He ultimately
settled on building single-family homes. (Dep. Warren 87:2–89:8.)
15. Board minutes do not reflect any discussion Warren had with the Board
in advance of his purchasing the Breeden Tract although Warren was “confident that
the board was aware of all of [his] steps, including that [he] was going to talk
to . . . [Breeden] to understand how to gain an easement on the 18-acre tract,”
whether “negotiating directly with him just for an easement . . . or purchasing the lot
and granting the easement back to the association” “[b]ecause that is the habit of how
[he] operate[s].” (Dep. Warren 69:7–17.)
16. In March 2017, the POA approved construction for the emergency access
road that would run across Lot 52 and the eighteen-acre tract to US 421. The Board
authorized Warren to execute any necessary easements. (Bd. Mins. Mar. 4, 2017, Ex. P, ECF No. 27.6.) Of the five board members present, Warren abstained and the
remaining four directors, including Bath, approved the plan. (Bd. Mins. Mar. 4,
2017.) The minutes reflect that “the Board of Directors [was] aware that two of the
tracts of land through which the road will pass [were] owner [sic] by the
President . . . , and the Board [was] confident that the private purchase of these tracts
was undertaken by the President to obtain access on behalf of the association[.]” (Bd.
Mins. Mar. 4, 2017.) Warren subsequently conveyed an easement to the POA across
portions of both Lot 52 and the Breeden Tract, and the POA agreed to construct and
maintain the road for at least ten years (the “Easement Agreement”). (Right Way
Agreement & Deed Easement, Ex. Q, ECF No. 27.6.) Construction was completed by
August 2017 at a total cost of $147,880.29, which came from the POA’s budget and
reserves. (Bd. Mins. Aug. 12, 2017, Ex. S, ECF No. 27.6; Dep. POA 17:16–18:4.) 4
17. Warren first approached Bath about a construction project involving
Lots 52 and 54 in November 2017. (Dep. Bath 34:15–35:23.) On December 1, 2017
and January 13, 2018, Bath signed two promissory notes investing a total of $100,000
in the construction project and agreeing to share profits and risks with Warren
through Warren’s company, Warren Point, Inc. (collectively, “Profit Sharing
Agreement”). (Promissory Note & Profit Sharing Agreement, Ex. V [hereinafter
“Profit Sharing Agreement”], ECF No. 27.9.) The record includes no evidence that
Bath was aware of any such potential project when the Board voted in December 2016
and March 2017 to approve the dues waiver for Lot 52 and the easements across Lot
4 Excerpts from the Rule 30(b)(6) deposition of the POA are located at ECF Nos. 27.7 and
30.1. 52 and the Breeden Tract. There is no evidence that Warren and Bath later discussed
their construction project with the Board, and there is no record indication that the
Board became aware that through this project Bath had become connected with
Warren’s company, Warren Point, Inc. Defendants listed Lots 52 and 54 for $34,000
and $29,400 and constructed homes on them. (Lazy Bear Homes Listings, Ex. M,
18. In August 2018, the POA modified the Easement Agreement to provide
that the POA would only pay for half of the maintenance if more than one house was
built on the “fire road that ran through the 18 acres,” and to require that the owners
of any such residences assume responsibility for paying the other half. (Dep. POA
107:11–24.)
B. The Lawrimore Tract and Friends of Buck Mountain
19. In March 2017, Warren received a call from a realtor notifying him that
an approximately twenty-three-acre tract of land adjoining the Buck Mountain
community and owned by a Ms. Lawrimore (the “Lawrimore Tract”) was available for
sale at $2,000 per acre. (Dep. Warren 101:25–02:7; Dep. Warren II 17:12–18:15.) The
record does not reflect that Warren advised the Board of the realtor’s call or that the
Board itself considered purchasing the tract from Ms. Lawrimore. Warren signed an
offer to purchase the tract and then attempted to find others to invest with him in
the purchase. (Dep. Warren 102:11–17.)
20. Warren formed Friends of Buck Mountain (“FOBM”) in July 2017 as a
“philanthropic” corporate entity, which was owned in part by Warren, Bath, and Connie Thomas (“Thomas”), the wife of POA Board member Bridgett Wells. (Dep.
Warren 100:3–16, 101:8–11, 102:20–22; Def.’s First Suppl. Resps. Pls.’ First Set of
Interrogs. & Reqs. Produc. Docs. Def. Warren, Ex Y, ECF No. 27.9; Dep. Brian
Holland 75:11–12, ECF No. 30.11.) Bath testified that when he invested in FOBM,
he was not sure whether the entity would keep the tract or ultimately sell it, (Dep.
Bath 88:10–89:7), but that any profit achieved from the purchase would be given to
the POA, (Dep. Bath 94:2–14).
21. On July 31, 2017, FOBM purchased the Lawrimore Tract for $47,500.
(N.C. Gen. Warranty Deed, Ex. AA, ECF No. 27.10.) The upper portion of the tract
was only accessible by all-terrain vehicles. FOBM separately purchased a lot for
$32,000 across which it granted the POA an easement allowing members access to
the top of the Lawrimore Tract by car. (Dep. Warren 106:1–09:5.)
22. In November 2017, Warren approached the Board regarding its possible
purchase of the Lawrimore Tract from FOBM. (Dep. Warren II 20:20–21:8.) Warren
testified that he had disclosed his membership in FOBM to the Board, but had not
disclosed other owners, including Thomas and Bath, because doing so might
“hamstring [him] and [his] ability to raise money on behalf of the association in the
future.” (Dep. Warren II 29:17–31:22; Dep. Bath 92:9–21.) At least one director “was
aware that Dana Warren was the primary member of [FOBM],” and two others were
aware that Mr. Warren and Mr. Bath were both members of FOBM. (Aff. Robert
Ferguson ¶ 10, ECF No. 30.8; Aff. Bridget Wells ¶ 10, ECF No. 30.6; Dep. Brenda
Pue-Gilchrist 52:12–19, Ex. BB [hereinafter “Dep. Pue-Gilchrist”], ECF No. 27.10.) 23. In January 2018, the Board voted to purchase a portion of the
Lawrimore Tract presented at the per acre price FOBM had paid. (Bd. Mins. Jan. 20,
2018, Ex. CC, ECF No. 27.10.) The proposal passed with approval by four of the six
directors present, including Bath and Wells. (Bd. Mins. Jan. 20, 2018.) Of the two
remaining directors, Warren abstained from voting and one director opposed the
transaction. (Bd. Mins. Jan. 20, 2018.)
24. The POA bylaws require a second vote for this type of purchase.
(Bylaws, Ex. U, ECF No. 27.8.) The Board again voted in favor of the transaction on
March 17, 2018, with Warren and Bath abstaining and five other directors, including
Wells, voting in favor. (Aff. Robert Ferguson ¶ 10; Dep. Bath 178:8–20; Bd. Mins.
Mar. 17, 2018, Ex. D, ECF No. 30.8.)
25. The POA then closed on its purchase of the portion of the Lawrimore,
paying $40,200 plus approximately $7,600 representing the expenses FOBM had
incurred beyond its purchase price on lot improvements. (Contract Sale & Purchase
Real Estate, Ex DD [hereinafter “Lawrimore Contract”], ECF No. 27.11.) The POA’s
purchase included less than the entire twenty-three acres FOBM had initially
acquired. (Lawrimore Contract.) FOBM members carved out a portion of the
Lawrimore Tract in order to allow FOBM the possibility to recover its purchase of the
additional lot necessary to afford POA members access to the top of the Lawrimore
Tract. (Dep. Warren II 25:5–7.) FOBM retained approximately three acres of the
Lawrimore Tract, which was the only portion of the tract on which a house could
“realistical[ly]” be built, considering road access issues. (Dep. Bath 104:4–23; Dep. Warren 107:20–09:2.) FOBM contemplated subdividing the three retained acres into
three separate lots for future sale. (Dep. Bath 97:3–15; Dep. Warren 107:20–109:5.)
26. The relevant deed to the POA included a map and represented that
FOBM was selling approximately twenty acres of the approximately twenty-three
acres it owned. (See Lawrimore Contract.) The Board minutes do not otherwise
indicate whether the Board was aware of the FOBM’s plan for the three-acre tract it
was retaining. Warren testified that FOBM “would have talked about” the fact that
“only a parcel” of the twenty-three acres would go to the POA, as purchasing the
separate lot at market price and granting an easement through it “would, in
[FOBM’s] opinion, substantially, have reduced the ability to resell” the lot. (Dep.
Warren II 24:13–22.)
C. Contract with EH Services
27. For several years, the POA retained Ed Harrison (“Harrison”) to do
various work in the Buck Mountain Community. (Aff. Bridget Wells ¶ 11). Harrison
had extensive knowledge of the community and was involved in designing its road
system. (Aff. Ed Harrison ¶¶ 5–7 [hereinafter “Aff. Harrison”], ECF No. 30.13).
Harrison also participated in determining the best route for, and then constructing,
the emergency access road. (Aff. Harrison ¶ 18.)
28. At some point, Warren formed EH Services, an entity owned by Warren
Point, Inc., to assist Harrison in financing contracting equipment. (Dep. Warren
130:16–21; 133:24–35:22.) EH Services contracted with the POA, and EH Services in turn paid Harrison for his services, the financed equipment, and other business-
related expenses. (Dep. Warren 135:15–22.)
29. Board records include an unsigned and undated Related Party
Acknowledgement (“RPA”) which states that Warren owns EH Services through
Warren Point, Inc., that he will often direct Harrison’s work, and that the Board
approves use of EH Services. (Related Party Acknowledgement, Ex HH [hereinafter
“RPA”], EC No. 27.12.) The Board discussed the RPA in January 2018. (Aff. Bridget
Wells ¶ 12; Aff. Pat Dale ¶ 17; Aff. Robert Ferguson ¶ 12.) At least one director “was
informed that EH Services was a d/b/a of Warren Point, Inc.” (Aff. Robert Ferguson
¶ 12.) However, one board member testified that she did not know that EH Services
was one of Warren’s companies. (Dep. Pue-Gilchrist 111:16–112:12.) Board records
do not document whether the Board ultimately approved the RPA, although two
members recalled having voted in favor of it. (Aff. Bridget Wells ¶ 12; Aff. Pat Dale
¶ 17.)
30. Invoices indicate that EH Services performed work for the POA in
December of 2017, in advance of the Board’s discussion of the RPA in January 2018
and its subsequent payments to EH Services. (EH Services Invoice, Ex. GG, ECF No.
27.11.) EH Services’ invoice for December services was dated January 15, 2018.
(POA Invoices, Ex. FF, ECF No. 27.11.) The record does not document when that
invoice was paid. D. The Voluntary Paving Project
31. Plaintiffs complain that the POA improperly approved and Warren
improperly committed the POA to excessive debt in connection with a community
paving project.
32. In 2017, the POA approved a paving project (the “Voluntary Paving
Project”) which required lot owners to pay for paving they wanted done in the
community. (Voluntary Pavement Policy, Ex. II, ECF No. 27.12.) This project was
to be funded “by members on a voluntary basis,” (Strategic Improvement Project, Ex.
JJ, ECF No. 27.12), and was implemented in response to strong member interest,
(Bd. Mins. Mar. 17, 2018). The Board “had been approached to ask for private
donations[.].” (Dep. Pue-Gilchrist 96:10–13.) The Board later noted that “[s]everal
members of the community have agreed to a special assessment to pay for a portion
of the project cost, as did a similar group in 2017 when the Board funded a portion of
paving [in another area.]” (Bd. Mins. Mar. 17, 2018.)
33. In or around March 2018, a group of POA members solicited donations
from the community and raised approximately $141,500.00. (Dep. Pue-Gilchrist
93:12–95:24; Dep. POA 56:7–10.)
34. The record includes an undated document, unanimously approved by
seven Board members, including Warren and Bath, which authorized Warren to
procure a bank loan to supplement the project’s funding that would be “favorable to
the association with maximum annual payments not exceeding the budgeted annual
road reserve contribution of $74,000 in road reserves and a term not exceeding six years[,]” with a total estimated cost not to exceed $350,000. (Strategic Improvement
Project.)
35. In July 2018, Warren obtained a loan for the POA for $350,000 with
annual payments of $58,333.33. (Great State Bank Loan Agreement, Ex. KK.
[hereinafter “Loan Agreement”], ECF No. 27.12.) Monthly interest payments
commenced in September 2018, five annual payments beginning March 2019, and a
final balloon payment due in March 2024. (Loan Agreement.)
36. As of December 2018, the POA’s reserve account contained $39,983.54.
(Statement Fin. Position, Ex. 6, ECF No. 33.1.)
E. The Board’s Ratification of Property Transactions
37. Plaintiffs’ lawsuit was filed in August 2018. (See Compl.) In April 2019,
the Board ratified “all actions of Dana Warren and Josef Bath related to the fire road
and [the Lawrimore Tract].” (Bd. Mins. Apr. 20, 2019, Ex. E, ECF No. 30.7;
Resolution Buck Mountain Prop. Owners Ass’n Supp. Actions Dana Warren & Josef
Bath, Ex. F [hereinafter “Resolution”], ECF No. 30.7.)
38. The Resolution stated that “the Board of Directors was aware of Dana
Warren’s actions related to the creation of the fire road and supported his actions in
obtaining property near the subdivision[,]” “the actions of Mr. Warren have been
undertaken with the knowledge and support of the Board of Directors,” and the POA
“reaffirms and ratifies all actions of Dana Warren and Josef Bath related to the fire
road and the [Lawrimore Tract].” (Resolution.) Of the six directors present, Warren and Bath abstained, and Wells was among the remaining four who voted in favor of
the Resolution. (Bd. Mins. Apr. 20, 2019.)
IV. STANDARD OF REVIEW
39. Summary judgment is proper “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that any party is entitled to a
judgment as a matter of law.” N.C.G.S. § 1A-1, Rule 56(c). “Summary judgment is
improper if any material fact is subject to dispute.” Culler v. Hamlett, 148 N.C. App.
389, 391, 559 S.E.2d 192, 194 (2002). The movant bears the burden of proving the
lack of a triable issue. Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707 (2001).
Once the movant has met that burden, the burden shifts to the nonmoving party to
produce a forecast of evidence that demonstrates facts showing that it can establish
a prima facie case at trial. Austin Maint. & Constr., Inc. v. Crowder Constr. Co., 224
N.C. App. 401, 407, 742 S.E.2d 535, 540 (2012). The Court must view the evidence in
the light most favorable to, and draw any reasonable inferences in favor of, the
nonmoving party. Gaynoe v. First Union Corp., 153 N.C. App. 750, 753, 571 S.E.2d
24, 26 (2002).
V. ANALYSIS
40. Plaintiffs contend that Defendants (i) breached their fiduciary duties
under N.C.G.S. § 55A-8-30(a) and N.C.G.S. § 47F-3-118(c), (Br. Supp. Pls.’ Mot.
Summ. J. 10, 14 [hereinafter “Pls.’ Br.”], ECF No. 28), which (ii) constitutes
constructive fraud by “t[aking] advantage of their positions of trust and confidence in order to bring about transactions that benefitted themselves[,]” (Am. Compl. ¶ 56;
Pls.’ Br. 18). Defendants contend that a disinterested board approved each
transaction, and that the transactions were pursued for the benefit of the POA rather
than for improper personal benefit, precluding any finding of constructive fraud.
(Mem. Law. Supp. Defs.’ Mot. Summ. J. 12, 18 [hereinafter “Defs.’ Br.”], ECF No. 30;
Resp. Opp’n Pls.’ Mot. Summ. J. 8, 15 [hereinafter “Defs.’ Br. Opp’n”], ECF No. 32.)
A. Breach of Fiduciary Duty
(1) The Applicable Statutory Standard(s)
41. To the Court’s knowledge, this case presents an issue of first impression
as to the interplay of two statutory provisions defining the duty of a director of a
property association board when engaging in a conflict-of-interest transaction.
42. Section 55A-8-30(a) defines standards of conduct for directors of all non-
profit corporations. In general, a director of a North Carolina corporation shall
discharge his duties “[in] good faith,” “[w]ith the care an ordinarily prudent person in
a like position would exercise under similar circumstances,” and “[i]n a manner the
director reasonably believes to be in the best interest of the corporation.” N.C.G.S. §
55A-8-30(a). Special rules apply when a director enters into a conflict-of-interest
transaction with the corporation. See, e.g., Ehmann v. Medflow, Inc., 2017 NCBC
LEXIS 88, at *45 (N.C. Super. Ct. Sept. 26, 2017) (“Conflict-of-interest transactions
between a corporation and its officers or directors have long been subject to special
rules.”); Meiselman v. Meiselman, 309 N.C. 279, 308, 307 S.E.2d 551, 568 (1983) (“The
rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.” (quoting Guth v. Loft, Inc.,
23 Del. Ch. 255, 270, 5 A. 2d 503, 510 (1939)); see also Russel M. Robinson, II,
Robinson on North Carolina Corporation Law § 15.01[1], at 15-3 (7th ed. 2019).
43. Section 55A, Article 8 provides certain safe harbors for conflict-of-
interest transactions, one of which allows a conflict-of-interest transaction when it is
approved by a majority of a disinterested board fully informed as to the material facts
of the transaction, including the director’s interest in it. N.C.G.S. § 55A-8-31(a)(1).
The statute has been interpreted to authorize a board to ratify past transactions. See
N.C.G.S. § 55A-8-31(a)(1); Robinson, supra, § 17.07[3], at 17-30 (“[A]n improper act
or transaction that is the basis of a derivative claim can be cured retroactively[.]”).
44. Section 47F-3-118(c) is specific to planned communities and provides:
In addition to the limitations of Article 8 of Chapter 55A of the General Statutes, no financial payments, including payments made in the form of goods and services, may be made to any officer or member of the association’s executive board or to a business, business associate, or relative of an officer or member of the executive board, except as expressly provided for in the bylaws or in payments for services or expenses paid on behalf of the association which are approved in advance by the executive board.
This section is titled “[a]ssociation records” and is found in Article 3 of North
Carolina’s Planned Community Act. See id.
45. Plaintiffs contend that this statute reflects a strong public policy against
transactions between a director and a planned community except in very limited
circumstances, prohibiting some transactions that would otherwise be allowable
under Chapter 55, Article 8. (See Pls.’ Br. 11.) Pursuant to this construction,
Plaintiffs contend that a payment for a property interest, such as the challenged easements, moratorium on dues, and the Lawrimore Tract purchase, could not be
retroactively approved the Board if they were not contemplated by the POA’s bylaws.
Plaintiffs do not expressly address in their Motion whether a Board could
retroactively approve a conflict-of-interest transaction that is otherwise allowable by
a planned community’s bylaws. As to the EH Services, Plaintiffs contend that
although transactions in goods or services may be allowable, any payment prior to
the Board’s approval in January 2019 was improper, and as to payments thereafter,
the record does not support any finding that the Board approved the EH Services
contract after being fully informed as to Warren and Bath’s conflict of interest
through EH Services’ parent Warren Point, Inc. (See generally Pls.’ Br.)
46. The Court must give meaning to the statutory language that Section
47F-3-103 is “[i]n addition to the limitations in Article 8 of Chapter 55A.” See State
v. Johnson, 246 N.C. App. 139, 145, 783 S.E.2d 21, 26 (2016) (“Our Supreme Court
has stated ‘a statute should not be interpreted in a manner which would render any
of its words superfluous.’ ” (quoting State v. Coffey, 336 N.C. 412, 417, 444 S.E.2d 431,
434 (1994)). “In matters of statutory construction, our primary task is to ensure that
the purpose of the legislature, the legislative intent, is accomplished.” Electric Supply
Co. v. Swain Electrical Co., 328 N.C. 651, 656, 403 S.E.2d 291, 294 (1991) (citing Hunt
v. Reinsurance Facility, 302 N.C. 274, 288, 275 S.E.2d 399, 405 (1981)). “Where the
language of a statute is clear and unambiguous, there is no room for judicial
construction and the courts must construe the statute using its plain meaning.”
Burgess v. Your House of Raleigh, Inc., 326 N.C. 205, 209, 388 S.E.2d 134, 136 (1990), and “a statute must be construed, if possible, so as to give effect to every provision,”
id. at 216, 388 S.E.2d at 140 (quoting Jolly v. Wright, 300 N.C. 83, 86, 265 S.E.2d 135,
139 (1980)).
47. Plaintiffs contend that the language means that the legislature intended
to draw “a clear, bright-line rule” that disfavors transactions between a director and
a planned community, (Pls.’ Br. 11), and that “it is impossible to fit this transaction
into these [statutory] requirements, (Pls.’ Br. 13.) Defendants reject such a limited
construction but have not themselves offered a cogent, persuasive argument as to
how Section 47F-3-118(c) should not be read to impose limitations “in addition to”
and therefore more restrictive than the provisions of Chapter 55A, Article 8.
48. The Court concludes that neither party has proposed an appropriate
guiding principle that demands summary judgment in its favor. The Court cannot,
as Defendants invite, simply disregard the limiting statutory language and uphold
the Board’s ratification of the property transactions where it can find no authority for
the transactions in the POA’s current bylaws. However, the Court is also not
persuaded that the legislature intended to tie a planned community Board’s hands so
tightly as to preclude its ability to approve an interested-director transaction that
clearly advances its interest, so long as it does so after being fully informed. Section
47F-3-118(c) does not prohibit such transactions outright. To the contrary, it
expressly contemplates that such transactions may be approved by a planned
community’s bylaws. 49. Here, the POA’s bylaws provide that the Board can amend them.
(Bylaws.) Section 47F-3-118(c) is silent as to whether a Board can retroactively
amend bylaws in order to achieve the equivalent of ratification pursuant to Section
55A-8-31. 5
50. The Court notes that an overly strict bright-line rule could work against
a planned community’s interest by discouraging a director to take action in the face
of an emergency—such as, for example, personally incurring expense or liability on
the community’s behalf in a weather-related emergency when any hope of repayment
would be barred because exigent circumstances did not allow for advance board
approval.
(2) The Transactions
51. The Court turns to its examination of the challenged transactions under
both Section 55A-8-30 and Section 47F-3-118(c) with these considerations in mind.
a. The Emergency Access Road
52. The Court concludes that the evidence is clear that Warren was an
interested party in this transaction. See N.C.G.S. § 55A-8-31(b). However, the
evidence does not compel a finding that Bath was an interested party at the time the
Board granted the moratorium on POA dues and purchased the easements related to
5 The record does not reflect whether the Board was aware of Section 47F 3-118(c)’s limitation
when it voted to ratify the property transactions involving Warren and Bath, or, if so, whether it considered amending the bylaws retroactively in order to approve the transactions. The POA’s Bylaws provide that “[t]hese Bylaws may be altered, amended or repealed and new Bylaws may be adopted by a majority vote of the Board of Directors present at any regular or special meeting.” (Bylaws.) The Court expresses no opinion on whether any such amendment could be applied retroactively and that issue is not presently before the Court. Lot 52, as Bath’s joining with Warren in the construction project involving Lot 52 did
not occur until after the Board’s decision had been made. (See Dep. Bath 34:15–35:23;
Bd. Mins. Dec. 17, 2016; Right Way Agreement & Deed Easement; Bd. Mins. Mar. 4,
2017.)
53. The Court further concludes that the uncontested record demonstrates
that the Board’s approval of the transactions with Warren related to the emergency
access road would satisfy the statutory safe harbor requirements of N.C.G.S. § 55A-
8-31(a)(1). The Board was aware of Warren’s interest and, specifically, that Warren
owned both Lot 52 and the eighteen-acre tract when approving both the moratorium
and the Easement Agreement. In particular, the Board knew that Lot 52 “was
purchased at auction by Dana Warren[,]” (Bd. Mins. Dec. 17, 2016), and “the Board
of Directors [was] aware that two of the tracts of land through which the road will
pass [were] owner [sic] by [Warren][,]” (Bd. Mins. Mar. 4, 2017). A majority of board
members voted to approve both the moratorium and the Easement Agreement, with
Warren abstaining. 6 (Bd. Mins. Dec. 17, 2016; Bd. Mins. Mar. 4, 2017.)
54. The critical issue, then, is whether the transactions with Warren
concerning Lot 52 are prohibited by Section 47F-3-118(c), which the Court has
concluded imposes restrictions beyond those imposed by Chapter 55, Article 8. These
6 The Court rejects Plaintiffs’ contention that Wells’ vote should not be considered for any
transaction because she is married to Thomas who later became a member of FOBM. (See Pls.’ Br. Supp. 15 n.6.) See, e.g., Geitner v. Mullins, 182 N.C. App. 585, 591, 643 S.E.2d 435, 439 (2007) (“The General Assembly clearly and unequivocally did not define a director as having a conflict of interest solely based upon a familial relationship in N.C.[G.S.] § 55-8- 31.”) Plaintiffs have offered no other evidence that might support Wells being disqualified as an interested director. transactions were not for “goods or services,” even though the Board approved them
in advance. However, the Court has been unable to discern any provision in the
POA’s bylaws that contemplated these transactions. While the Board attempted to
ratify the transactions, it does not appear it did so by considering a retroactive
amendment of the POA’s bylaws.
55. The Court concludes that absent such an amendment, the transactions
are not permitted by Section 47F-3-118(c).
b. The Lawrimore Tract
56. In connection with the Lawrimore Tract, Plaintiffs contend that
Defendants breached their fiduciary duties by “creat[ing] a private LLC[,]” “[r]ather
than conducting business as the Board . . . to purchase additional greenspace,” had a
“personal financial interest” in the transaction, and “unilaterally withheld the most
valuable piece of the Lawrimore Tract for their company and have attempted to profit
off of it.” (Pls.’ Br. 14–15.) Defendants contend that the POA’s purchase of the
Lawrimore Tract was both approved by the Board before the purchase was closed and
was ratified after the fact. (See Reply Pls.’ Resp. Opp’n Defs.’ Mot. Summ. J. 9, ECF
No. 34.)
57. The Court first considers the transaction pursuant to Section 55-8-31
and concludes that there are unresolved questions of fact as to whether a
disinterested board was fully informed before voting to approve the POA’s purchase
of its portion of the Lawrimore Tract. 58. Both Warren and Bath had an interest in the transaction as members
of FOBM. See N.C.G.S. § 55A-8-31(b). Warren disclosed his membership in FOBM
to the Board; Bath did not. (Dep. Warren II 29:17–30:16; Dep. Bath 92:9–21.) At
least some directors were aware that Warren and Bath were members of FOBM prior
to voting on the purchase. (Aff. Robert Ferguson ¶ 10; Aff. Bridget Wells ¶ 10; Dep.
Pue-Gilchrist 52:12–19.) But Warren was adamant that he did not disclose who the
other members of FOBM were to protect them as future potential contributors for
other matters benefiting the community. (Dep. Warren II 30:13–31:22.) Board
records do not reflect any member’s knowledge of Bath’s membership in FOBM. (See
Bd. Mins. Jan. 20, 2018; Bd. Mins. Mar. 17, 2018.)
59. Second, the record does not compel a finding that Board members voting
to approve the transaction were fully informed either that FOBM withheld three
acres of the tract or, if they were so informed, as to the relative value of those three
acres to other portions of the tract. (See Dep. Warren 107:20–09:2; Dep. Bath 104:4–
23; Bd. Mins. Jan. 20, 2018.) Furthermore, while Plaintiffs’ allegations had been
stated in detail in the complaint before the Board voted to ratify the transaction, the
record does not demonstrate whether Board members voting to ratify had read the
complaint or had been informed as to its content. (See Resolution.) Warren testified
that FOBM “would have talked about” the fact that “only a parcel” of the twenty-
three acres would go to the POA. (Dep. Warren II 24:13–22), but Board minutes do
not reflect such consideration. 60. As to the validity of the transaction pursuant to Section 47F-3-118(c),
the Court again notes that it is unable to discern any provision of the POA’s bylaws,
in place at the time of the transaction or added thereafter, that authorizes this
transaction.
61. In sum, the Court finds that contested material issues of fact preclude
summary judgment in favor of any party as to this transaction.
c. EH Services
62. The EH Services contract does involve a contract for services that an
informed disinterested board could approve pursuant to Section 47F-3-118(c), so long
as the approval was in advance of payment. The issue is whether an informed
disinterested board voted to approve the payments to EH Services.
63. Invoices show that Harrison began doing work in December of 2017, (EH
Services Invoice), but it was not invoiced until January 15, 2018, (POA Invoices). The
record indicates that the POA’s use of EH Services was presented to the Board in
January 2018, and that the earliest date of potentially effective Board approval was
January 20, 2018. (Aff. Bridget Wells ¶ 12; Aff. Pat Dale ¶ 17, ECF No. 30.7; Aff.
Robert Ferguson ¶ 12.) It is not entirely clear, but it appears the first payment was
likely after January 20, 2018.
64. However, the record does not compel a finding either that the Board
actually voted to approve the contract or that the Board members were fully advised
as to the interest that both Warren and Bath had in the transaction because of their
interest in EH Services’ parent Warren Point, Inc. The RPA, assuming it was approved, discloses Warren’s interest in EH Services but does not disclose that Bath
now had an interest in Warren Point, Inc. through Defendants’ Profit Sharing
Agreement. Additionally, while two directors recall voting in favor of the transaction,
there is no definitive evidence indicating that a contract with or payment to EH
Services was ultimately approved by a majority of disinterested directors. (Aff.
Bridget Wells ¶ 12; Aff. Pat Dale ¶ 17; see Dep. POA 106:11–18.) At least one director
testified that she did not know that EH Services was owned by Warren, (Dep. Pue-
Gilchrist at 111:16–112:12), and the record affords some uncertainty as to what Board
members may have ultimately known of Bath’s involvement with EH Services. (See
Aff. Bridget Wells ¶ 12; Aff. Pat Dale ¶ 17; Dep. POA 106:11–18; Dep. Pue-Gilchrist
at 111:16–112:12; RPA.)
65. These disputed material issues of fact preclude summary judgment for
any party as to the EH Services contract.
d. The Voluntary Paving Project
66. Plaintiffs have not challenged the Voluntary Paving Project as a conflict-
of-interest transaction. (Pls.’ Br. 9–10.) Instead, Plaintiffs claim that the $141,500
raised for the project was “well short of the total project cost” and that directors voting
in favor of a $350,000 bank loan breached their fiduciary duty to the community.
(Pls.’ Br. 10.) Plaintiffs’ specific attack is on Warren’s having secured the bank loan
pursuant to the POA’s improper approval.
67. Plaintiffs have not made claims against all Board members. It is unclear
how Plaintiffs expect to prove that individual liability should flow to Warren or Bath where the loan is within the parameters expressly approved by the Board. The Court
further notes that the business judgment rule presents a hurdle the Plaintiffs have
not overcome.
68. As stated in Robinson on North Carolina Corporation Law,
[The business judgment rule] operates primarily as a rule of evidence or judicial review and creates, first, an initial evidentiary presumption that in making a decision the directors acted with due care (i.e., on an informed basis) and in good faith in the honest belief that their action was in the best interest of the corporation, and second, absent rebuttal of the initial presumption, a powerful substantive presumption that a decision by a loyal and informed board will not be overturned by a court unless it cannot be attributed to any rational business purpose.
Robinson, supra, § 14.06, at 14-19.
69. “A plaintiff may overcome the presumption with proof that [the
directors] ‘failed to act (1) in good faith, (2) in the honest belief that the action taken
was in the best interest of the company or (3) on an informed basis.’ ” Blythe v. Bell,
2013 NCBC LEXIS 7, at *39 (N.C. Super. Ct. Feb. 4, 2013) (quoting Technik v.
WinWholesale Inc., 2012 NCBC LEXIS 5, at *32 (N.C. Super. Ct. Jan. 13, 2012)).
70. Here, Plaintiffs have produced evidence that in 2017, the POA adopted
the Voluntary Paving Project in response to member interest. (Voluntary Pavement
Policy.) The policy provided that “[t]he costs of preparing the surface for
pavement . . . would be borne by the association.” (Voluntary Pavement Policy.) A
group of POA members thereafter solicited donations from the community and raised
approximately $141,500.00. (Dep. Pue-Gilchrist 93:12–95:24; Dep. POA 56:7–10.)
71. Plaintiffs’ own evidence is that the POA authorized Warren to procure a
bank loan “to secure financing favorable to the association with maximum annual payments not exceeding the budgeted annual road reserve contribution of $74,000 in
road reserves and a term not exceeding six years.” (Strategic Improvement Project.)
Plaintiffs have provided the loan documents, indicating that the POA obtained a loan
in July 2018 for a term less than six years with annual payments at $58,333.33.
(Loan Agreement.)
72. The Court concludes that, as a matter of law, Plaintiffs’ evidence is not
adequate to overcome the initial presumption that protects both the Board and
Warren acting at its direction. “To rebut th[e] [business judgment rule] presumption,
a plaintiff must present ‘more than bare allegations of breaches of fiduciary duties on
the part of directors.’ ” Maurer v. Maurer, 2013 NCBC LEXIS 41, at *16 (N.C. Super.
Ct. Aug. 23, 2013) (quoting Wachovia Capital Partners, 2007 NCBC LEXIS 7, at *23).
“[T]he business judgment rule is ‘process oriented’ rather than a simple exercise of
an after the fact ‘objective’ evaluation.” Id. (quoting State v. Custard, 2010 NCBC
LEXIS 9, at *57–58 (N.C. Super. Ct. Mar. 19, 2010)). The fact that Plaintiffs have a
contrary view that the paving was too expensive does not support moving their claim
forward.
73. The Court therefore concludes that summary judgment is proper for
Defendants as to the Voluntary Paving Project.
B. Plaintiffs’ Potential Remedies
74. Defendants’ Motion seeks summary judgment that Plaintiffs cannot
recover damages on a claim for constructive fraud or for punitive damages. The Court
determines that its further consideration of whether Plaintiffs are entitled to submit an issue to the jury based on constructive fraud should be deferred until it determines
whether Plaintiffs have first presented evidence adequate to support a finding of a
breach of fiduciary duty. As to punitive damages, while it is not persuaded that the
record will ultimately be adequate to withstand a motion for directed verdict, the
Court defers its further consideration until Plaintiffs have presented to the fact finder
their evidence as to liability in the first instance.
VI. CONCLUSION
75. For the foregoing reasons, the Court DENIES the Motions as to all
claims other than the Voluntary Pavement Project and GRANTS Defendants’ Motion
as to that claim.
IT IS SO ORDERED, this the 15th day of December, 2020.
/s/ James L. Gale James L. Gale Senior Business Court Judge