Ward v. Fsc I, LLC

2016 NCBC 91

• Court: North Carolina Business Court
• Decided: December 2, 2016
• Docket: 16-CVS-274
• Status: Published

Opinion

Ward v. FSC I, LLC, 2016 NCBC 91.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF JOHNSTON 16 CVS 274

TODD WARD and TERRY KALLAM, ) Derivatively on Behalf of the ) RIVERWOOD ATHLETIC CLUB ) COMMUNITY ASSOCIATION, INC., ) Plaintiffs, ) ) AMENDED OPINION v. ) AND ORDER ) FSC I, LLC, FRED SMITH COMPANY, ) FRED J. SMITH, JR., and REID M. ) SMITH, ) Defendants. )

THIS MATTER comes before the Court following the filing of the Report of the

Independent Investigation Committee (“Committee”) on behalf of the Riverwood

Athletic Club Community Association, Inc. (“Report”). On August 3, 2016, the Court

held a hearing on the Report.

THE COURT, having considered the Report, briefs in support of and opposition

to the Report, the arguments of counsel and other appropriate matters of record

FINDS and CONCLUDES that the Report should be adopted and this action should

be discontinued and DISMISSED with prejudice.

INTRODUCTION

1. This is a derivative lawsuit filed by two members of the Riverwood

Athletic Club Community Association, Inc. (“RACCA”), a nonprofit community

association under the North Carolina Nonprofit Corporation Act, N.C. Gen. Stat. §§

55A-1-01 et seq. RACCA contracted with the Fred Smith Company (“FSC”) to provide

certain amenities to the community, as well as management and maintenance services to RACCA. Under the contract, FSC collected fees directly from RACCA

members for the amenities and services it provided. In this action, Plaintiffs claim

that FSC breached the contract by collecting fees from members to which FSC was

not entitled, and that FSC converted those fees to its own use. Plaintiffs also claim

that Reid Smith, an officer and member of the board of directors of RACCA, breached

a fiduciary duty to RACCA by failing to prevent FSC from collecting fees to which it

was not entitled and by failing to maintain and utilize RACCA’s funds in the best

interests of RACCA.

2. After the lawsuit was filed, RACCA moved the Court to stay the action

and approve appointment of an independent committee to determine whether it was

in the best interest of RACCA to pursue the claims in the lawsuit. The Court stayed

the action and approved appointment of the Committee. The Committee completed

an investigation and filed the Report with the Court. The Committee determined that

pursuing the derivative claims raised by Plaintiffs was not in the best interest of

RACCA. Accordingly, pursuant to N.C. Gen. Stat. § 55A-7-40, the Court must now

determine whether this action should be continued or should be dismissed.

FACTUAL AND PROCEDURAL BACKGROUND

3. Plaintiffs Todd Ward (“Ward”) and Terry Kallam (collectively

“Plaintiffs”) are members of RACCA, a non-profit corporation serving as the

community association for the Riverwood community in Johnston County, North

Carolina. RACCA was formed in July, 2001, pursuant to the Declaration of

Covenants, Conditions and Restrictions for Riverwood Athletic Club (“Covenants”), in which Defendant Fred Smith Company is alleged to have been one of the

declarants.1 Pursuant to the Covenants, residents of Riverwood are provided with

memberships in an on-site club and provided access to other full service athletic,

swim, and golf clubs affiliated with other Fred Smith communities in the Triangle.

The Covenants require the members of RACCA, including Plaintiffs, to pay club

membership fees in the form of homeowners assessments.

4. On or about January 1, 2011, RACCA and FSC entered into the

Community Association Management, Common Area Maintenance, Sports Club and

Maintenance Free Neighborhood Agreement (“Service Agreement”; Defs. Answers

Exhs. A.) Under the Service Agreement, FSC provides management services to

RACCA including financial services such as invoicing and recording of assessments

(“Management Services”), maintenance of common areas (“CAM Services”), and

enhanced maintenance for certain “maintenance free” townhome neighborhoods

(“MFN Services”). The Service Agreement also required FSN to provide residents

with the club memberships in the on-site and other FSC affiliated clubs in exchange

for a membership fee (“Amenities Fee”). FSC was entitled, pursuant to the Service

Agreement, to fees for the services and club memberships as follows:

8. MANAGEMENT SERVICES, CAM SERVICES, AND AMENITIES FEE. In consideration for the Management Services, CAM Services and Amenities, RACCA agrees to pay FSC:

a. For the period between January 1, 2011 and December 31, 2011, the sum of

1 Defendant FSC I, LLC is alleged to have done business as Fred Smith Company at all times

relevant to the allegations in the Complaint. i. An amount equal to the total number of Units2 multiplied by Fifty-Five and No/100 Dollars ($55.00); and

ii. An amount equal to the total number of currently or previously inhabited residential structures in the Community where the Owner or Owners of said residential structures have opted out of a Bronze Membership in the Club in writing multiplied by Thirty and No/100 Dollars ($30.00); and

b. For each annual period beginning January 1, 2012, and thereafter, an amount equal to or greater than the amount referenced in paragraph 8(a) above mutually agreed between the Board and FSC.3

All such amounts shall be due and payable on the 1st day of each month; provided, however, FSC shall have the right to collect and retain the fees set forth herein directly from the Owners.

9. MFN SERVICES FEE. In consideration for the MFN Services, RACCA agrees to pay FSC:

a. For the period between January 1, 2011, and December 31, 2011, an amount equal to the total number of occupied Units in the MF Neighborhoods multiplied by Forty-Five and No/100 Dollars ($45.00); and

b. For each annual period beginning January 1, 2012, and thereafter, an amount equal to or greater than the amount referenced in paragraph 9(a) above mutually agreed to between the Board and FSC.4

All such amounts shall be due and payable on the 1st day of each month; provided, however, FSC shall have the right to collect and retain the fees set forth herein directly from the Owners.

2 The Service Agreement defines a “Unit” as “a ‘currently or previously inhabited

residential structure in the Community, including but not limited to any MF Neighborhood Unit, but saving and excepting a Unit where the Owner or Owners of said Unit have opted out of the Bronze Membership in the Club in writing.’” 3 The amounts collected pursuant to 8(a)(i) increased to $56.00 in 2012, $57.00 in 2013, and

$58.00 in 2014 and 2015. 4 The amounts collected pursuant to 9(a) increased to $46.00 in 2012, and $47.00 in 2013,

2014 and 2015. (Service Agreement ¶¶ 8–9.) Pursuant to the Service Agreement, FSC collected the

assessments due to RACCA directly from the homeowners and retained them to pay

the fees for the services and club memberships.

5. FSC’s collection of assessments from members of RACCA under the

Service Agreement forms the basis of this action. Plaintiffs contend that under the

terms of the Service Agreement, FSC was only entitled to collect a single, annual

payment in the amounts specified, but instead collected these payments on a monthly

basis, resulting in a significant overpayment. Specifically, Plaintiffs allege the

following:

The Service Agreement calls for payment by RACCA to FSC based on an annual basis. For instance, for the period January 1, 2011 and December 31, 2011, FSC is entitled to $55.00 per Unit such that if there are 1,000 Units, FSC is entitled to $55,000 for the year. Upon information and belief, FSC has collected from RACCA, and converted to its use, an amount equal to $55.00 per Unit per month thus resulting in payments to FSC in amounts that were 12 times the amounts due pursuant to the Service Agreement.

(Compl. ¶ 25(b).)

6. Plaintiffs also contended that FSC has collected fees for unimproved lots

in a manner not permitted by the Service Agreement. Specifically, Plaintiffs contend

that FSC was only entitled to payment from RACCA under the Service Agreement

for lots containing a residential structure as follows:

Within the Riverwood community, certain lots may or may not contain residential structures. Owners of lots that do not contain residential structures still pay dues to RACCA pursuant to the Covenants provided that one year has elapsed since the date of the lot purchase. However, pursuant to the Service Agreement, FSC is entitled to collected fees only from lots that contain a residential structure which are defined as a “Unit” in the Service Agreement. Despite not being entitled to collect fees for the unimproved lots, upon information and belief, FSC has collected fees from RACCA and the members of RACCA for the unimproved lots.

(Id. ¶ 25(a).)

7. Plaintiffs allege that prior to filing this action they brought these issues

to the attention of RACCA and its Board of Directors and requested that RACCA

investigate the possible overpayment of fees to FSC. On August 31, 2015, Ward’s

attorney sent a letter to RACCA and its Board of Directors, stating in pertinent part

as follows:

On behalf of Mr. Ward, and pursuant to the North Carolina Nonprofit Corporation Act including N.C. Gen. Stat. §55A-7-40, we are hereby kindly requesting that RACCA and its board of directors take all available steps and actions to recover funds improperly paid to, or converted by, FSC I, LLC dba Fred Smith Company (“FSC”). Specifically, Mr. Ward contends that FSC has collected funds on behalf of RACCA and converted these funds to the use of FSC under the purported authority of an agreement commonly known as the Community Association Management, Common Area Maintenance, Sports Club and Maintenance Free Neighborhood Agreement (“Service Agreement”). Mr. Ward contends that the amounts paid to FSC or collected by FSC exceed the contract amounts set forth in the Service Agreement and that RACCA has suffered harm as a result.

(RACCA’s Mot. Stay Proceedings, Ex. A.)

8. The demand letter requested a response by RACCA within thirty days,

and also requested an inspection of RACCA’s records. (Id.)

9. On September 30, 2015, RACCA, through counsel, notified Ward’s

attorney that the RACCA Board of Directors would form an independent committee

to investigate the issues raised in the August 31 letter and would conduct an audit of

RACCA’s finances. (RACCA’s Mot. Stay Proceedings, Ex. B.) In response, Plaintiffs sent a follow-up letter requesting the results of RACCA’s investigation by November

13, 2015, due to concerns regarding the running of the statute of limitations. On

November 9, 2015, RACCA notified counsel for Plaintiffs that the committee had not

yet met due to scheduling conflicts, and Plaintiffs requested that the results of any

investigation be submitted by November 30, 2015.

10. In the course of its investigation, the investigative committee sought to

retain a forensic accountant to audit the accounts of RACCA. Ultimately, the

investigative committee was forced to retain a second accountant after a potential

conflict of interest was discovered with the first accountant hired. On December 15,

2015, RACCA notified Ward’s attorney that the audit was expected to be completed

by the end of January 2016. Nevertheless, on January 27, 2016, before receiving the

results of the audit, Plaintiffs filed their Complaint. Based on RACCA’s contention

that the allegations in the Complaint differed from the concerns raised in the demand

letter, the investigative committee put the investigation “on hold,” pending further

direction of the Court.5 (RACCA’s Mot. Stay Proceedings ¶ 19.)

11. On April 1, 2016, RACCA filed a Motion to Intervene and a Motion to

Stay/Motion to Appoint Committee (“Motion to Stay”). In the Motion to Stay, RACCA

requested that the Court stay this action pursuant to N.C. Gen. Stat. § 55A-7-40(b)

(hereinafter references to the North Carolina General Statues will be to “G.S.”) to

5 Before putting the investigation on hold, however, the committee discovered a discrepancy

between the Covenants and the Service Agreement and determined that RACCA had been paying fees to FSC for certain unimproved lots for which RACCA did not owe a fee. Based on this discovery, FSC reimbursed RACCA for improperly collected fees in the amount of approximately $24,200. The reimbursement was related only to the fees alleged in paragraph 25(a) of the Complaint, and not the fees alleged in paragraph 25(b). allow the investigation of Plaintiffs’ claims to be completed, and that the independent

committee previously appointed by RACCA be approved by the Court to complete the

investigation. On April 18, 2016, Plaintiffs filed a response opposing the Motion to

Stay. On May 11, 2016, following a hearing, the Court entered an order approving

appointment of the Committee and staying this matter to allow the Committee to

conclude its investigation and report the results to the Court. The Court also held in

abeyance RACCA’s Motion to Intervene.

12. On May 13, 2016, RACCA filed a Motion to Substitute seeking to replace

one member of the Committee with a new member based on a conflict of interest that

had developed for one of the original Committee members. Neither Plaintiffs nor

Defendants opposed the Motion to Substitute, and on May 16, 2016, the Court

granted the motion.

13. On July 13, 2016, RACCA filed the Report. The Report was prepared by

RACCA’s counsel and verified by each of the three members of the Committee. The

Report was twelve written pages in length and accompanied by numerous sworn

affidavits, written responses to the Committee’s inquiries, and other relevant

documentation. The Report stated that the “sole, remaining question in dispute is

(sic) the allegations made by Plaintiffs that the provisions of paragraph 8 and 9 of the

Service Agreement provide for payment to FSC of (sic) an annual rather than monthly

basis” and framed its task as determining “whether [the Committee] believed the

Plaintiffs’ Claims were valid, or likely to prevail, and whether it was in the best interest of the members to expend the Association’s funds to pursue those claims.”

(Report 5-6.)

14. In making its determination, the Committee interpreted the language

of the Service Agreement based on the intentions of the parties and by the course of

dealing between the parties under the Service Agreement. The Committee reviewed

affidavits from Fred Smith, Jr., on behalf of FSC, and from the three individuals who

comprised the RACCA Board of Directors at the time the Service Agreement was

executed and approved by the Board. All four witnesses testified by affidavit that

they intended that the fees called for under sections 8 and 9 of the Service Agreement

were to be paid on a monthly, rather than an annual, basis. The Committee also

considered evidence that established that since the execution of the Service

Agreement, FSC had collected and RACCA had paid, the required fees on a monthly

basis. The Committee also received evidence that “the previous version of the Service

Agreement in 2006 was substantially identical and the parties always conducted

themselves in accordance with an interpretation that provided for monthly payments

of the management fees.” (Report 10-11). The Committee also considered the fees paid

by residents of surrounding communities for similar services and amenities, and

determined that the fees paid by members of RACCA, even when considered on a

monthly basis, were substantially lower than fees paid in other communities. (Id. 11-

12.) Based on its investigation, the Committee determined that “it is not in the best

interest of [RACCA] to pursue the claims proffered by Plaintiffs in this case.” (Id. 12.) 15. On July 15, 2016, Plaintiffs filed their Response to Filing of Committee

Investigative Report, in which they request that the Court reject the Report and the

Committee’s recommendation that this action not proceed. Plaintiffs contend that the

Report was improperly prepared by RACCA and its counsel and not by the

Committee, that FSC did not provide the Committee with any “financial records”,

that the Committee’s request for information to Plaintiff’s was inadequate, and that

the Report made “flawed” legal arguments and relied on inadmissible, extrinsic

evidence in interpreting the Service Agreement

16. Based on these contentions, Plaintiffs request that this Court disregard

the Report, deny RACCA’s Motion to Intervene, and allow this case to proceed on the

Complaint as-filed. In response, Defendants also filed their respective positions on

the Report, in each case requesting that the Report be adopted and this action be

dismissed based upon the Committee’s conclusions.

DISCUSSION

17. This matter is before the Court pursuant to G.S. § 55A-7-40(c), which

provides as follows:

Upon motion of the corporation, the court may appoint a committee composed of two or more disinterested directors or other disinterested persons, acceptable to the corporation, to determine whether it is in the best interest of the corporation to pursue a particular legal right or remedy. The committee shall report its findings to the court. After considering the report and any other relevant evidence, the court shall determine whether the proceeding should be continued.

18. The Committee reached the conclusion that pursuing the legal rights

and remedies being sought by Plaintiffs in this lawsuit was not in the best interests of the corporation. Accordingly, the Court believes the issue that must be decided is

whether the Committee properly reached this conclusion. Unfortunately, neither the

statute nor our appellate case law provide express guidance as to the standard to be

applied by the Court in making this decision.

19. Defendants argue that the Court should apply the standard provided for

in the parallel provision of North Carolina’s Business Corporation Act, G.S. § 55-1-01

et seq. Under the Business Corporation Act, a court “shall dismiss a derivative

proceeding on motion of the corporation” if an independent quorum of directors or an

independent committee appointed by the directors or by the court “determines in good

faith after conducting a reasonable inquiry upon which its conclusions are based that

the maintenance of the derivative proceeding is not in the best interest of the

corporation.” G.S. § 55-7-44(a). If the Court applies the standard suggested by

Defendants in deciding whether a committee has fulfilled its duty a court must

determine (a) whether the directors or committee were independent, (b) whether it

conducted a reasonable inquiry, and (c) whether the determination was made in good

faith. Borchardt v. King, 2015 U.S. Dist. LEXIS 10604, *21 (M.D.N.C. January 29,

2015); Madvig v. Gaither, 461 F. Supp. 2d 398, 404 (W.D.N.C. 2006).

20. In the absence of appellate interpretation of the comparable provisions

in Chapter 55A, Defendants urge the Court to adopt the same standard in considering

the Report under G.S. § 55A-7-40(c). Plaintiffs have not provided any argument

regarding the standard to be applied by the Court to such review. 21. The Court concludes that the three factor standard applied to review of

an investigation by an independent committee conducted under G.S. § 55-7-44 is the

proper standard to apply in an action under G.S. § 55A-7-40. While the language

employed in the two statutes is not identical, the purpose of the provisions appears

to be the same. Section 55A-7-40 incorporates many of the rights and obligations

regarding derivative actions that are provided in Article 7 of Chapter 55 (G.S. §§ 55-

7-40 – 47). Both the Business Corporation Act and the Nonprofit Corporation Act

permit the corporation to conduct an investigation regarding the claims made by the

plaintiff in a derivative action, permit the corporation to seek a stay of a derivative

action to conduct an investigation, and authorize a court to appoint independent

persons to conduct an investigation. Both statutes provide the corporation or

independent committee must determine whether pursuing the derivative claims are

“in the best interest of the corporation” and for a court to dismiss the derivative action

based on the committee’s determination. While G.S. § 55A-7-40 does not expressly

state that an investigative committee must reach its conclusions in good faith and

after a reasonable inquiry as does G.S. § 55-7-44, the Court sees no reason why a

different standard should apply simply because RACCA is a nonprofit corporation.

To the contrary, a recent decision of the North Carolina Court of Appeals addressing

the standing of members of a property owners association under G.S. § 55A-7-40 to

bring a derivative action against a nonprofit corporation analyzed that issue under

the same principles applicable to for-profit corporations. Anderson v. Seascape at

Holden Plantation, LLC, 773 S.E.2d 78 (N.C. Ct. App. 2015). Accordingly, the Court will review the Committee’s conclusion applying the same three criteria applied

under G.S. § 55-7-44.

a. Independence.

22. Plaintiffs did not challenge the independence of any the Committee

members in response to the Motion to Stay or the Motion to Substitute, and have not

argued or presented any evidence that the members had any interests or affiliations

that would compromise or call into question their independence. To the contrary, the

representations regarding the independence of the Committee members provided to

the Court at the time each of the members was approved to serve on the Committee

are unrebutted. The Court concludes that that the Committee was independent.

23. Although they do not challenge the independence of the Committee

members, Plaintiffs contend that the Report was not actually prepared by the

Committee but rather that the Report was prepared by RACCA. Plaintiffs, however,

offer no evidence in support of this bald assertion. (Pls.’ Response to Report 1-2.)

RACCA counsel’s involvement in the preparation and submission of the Report,

which was verified by each Committee member, is not grounds for disregarding the

Report or its conclusions, and has been permitted in a variety of other cases. See, e.g.,

Madvig, 461 F.Supp. 2d at 408 (finding no conflict where special investigation

committee used the same counsel that previously represented corporate audit

committee in SEC investigation). Aside from noting that RACCA’s counsel assisted

the Committee, Plaintiffs do not suggest, and nothing in the record shows, that

RACCA counsel exerted any undue or improper influence over the outcome of the Report, or otherwise interfered with the Committee’s purpose. Accordingly, this

argument is without merit.

b. Reasonable Inquiry.

24. The Court next must determine whether the Committee conducted a

reasonable inquiry into the issues before it. “What constitutes a reasonable inquiry

is judged from the magnitude of the issue raised. To be reasonable, the inquiry must

be commensurate in scope with the nature of the issues raised by the

complainant.” Id. at 407 (citing Russell M. Robinson, II, Robinson on North Carolina

Corporation Law, § 17.08 (2005).). The issue considered by the Committee was a

relatively narrow one: Did FSC breach the Service Agreement by collecting fees from

RACCA to which it was not entitled under the Agreement?

25. With regard to the issue of whether the Service Agreement required the

payment of monthly or annual fees, the Report and the evidence before the Court

establishes that the Committee made inquiries of and requested information from the

parties to the Service Agreement, FSC and RACCA. The Committee obtained and

considered information by way of sworn affidavits from the signatories to the Service

Agreement and the RACCA directors who approved the Service Agreement regarding

the parties’ intentions in entering into, and their course of dealing under, the Service

Agreement. The Committee also obtained affidavit evidence from the parties

regarding their course of dealing under the immediately preceding agreement that

was in effect from 2006 until 2011. All of the evidence was that the parties intended the fees to be paid monthly, and not annually, and that the fees had been paid on a

monthly basis under both the Service Agreement and the predecessor agreement.

26. The Report and evidence before the Court also shows that the

Committee considered the fees paid by members of other, local community

associations for comparable amenities and services, and determined that the monthly

fees being paid by RACCA were less than the fees paid by those other associations.

27. With regard to the payment of certain fees for unimproved lots, the

Committee reviewed and compared the language in the Covenants and the language

in the Separation Agreement and determined that FSC had collected fees for

unimproved lots to which it was not entitled. The Committee obtained sworn

affidavits from FSC that provided a detailed summary of the overpayments. As noted

above, based on this information, FSC repaid to RACCA approximately $24,200 in

fees improperly charged and collected for the unimproved lots.

c. Good Faith.

28. The “question about whether the special committee acted in good faith

is different from a question about the special committee's independence, but the

issues often relate to the same facts.” Borchardt, 2015 U.S. Dist. LEXIS 10604 at *37

(citing Swenson v. Thibaut, 39 N.C. App. 77, 107, 250 S.E.2d 279, 298 (1978)). “To

determine whether the special committee acted in ‘good faith,’ a court is to look to

‘the spirit and sincerity with which the investigation was conducted, rather than the

reasonableness of its procedures on the basis for its conclusions.’” Borchardt, 2015

U.S. Dist. LEXIS 10604, at *34-35. “Of course, merely conducting an investigation as a sham or pretext for papering over a predetermined outcome would not be in good

faith.” Id. at *35-37.

29. There is no evidence in the record that the Committee conducted the

investigation or made its determination in bad faith. Id. at *38 (no evidence that

special committee had “made statements or taken actions that might demonstrate …

bad faith.”). To the contrary, the thoroughness of its inquiry supports the conclusion

that the investigation was done in good faith. Madvig, 461 F. Supp. 2d at 409

(evidence that investigative committee “interviewed witnesses it considered relevant

to the allegations, secured written statements from others, [and] closely reviewed the

transactions [at issue]” establishes “thorough consideration of the potential causes of

action Ingles might have had against defendants.”).

d. Plaintiffs’ Response to Report.

30. Plaintiffs have not specifically framed their arguments in response to

the Report as challenges to the reasonableness of the Committee’s investigation or its

good faith. Nevertheless, Plaintiffs first contend that the investigation is flawed

because the Committee “conclude[ed] that Plaintiffs’ claims in this case are not worth

pursuing” despite the fact that FSC did not produce “a single financial record.” (Pls.

Resp. to Report 2.) Plaintiffs, however, offer no explanation of what specific records

they believe should have been reviewed by the Committee, or how those records would

have impacted the Committee’s decision. The primary issue before the Committee

was whether FSC had breached the Service Agreement by collecting fees on a

monthly, rather than an annual, basis and the Committee properly focused its efforts on determining the correct interpretation of the applicable language in the Service

Agreement. FSC’s “financial records” would not have aided the Committee’s

investigation of this issue.

31. Plaintiffs also contend that the Committee did not “properly” make a

request to Plaintiffs for information that they might possess bearing on the

investigation. (Pls. Resp. to Report 2-3.) It appears to be undisputed that on June 7,

2016, RACCA’s counsel, on behalf of the Committee, sent an email with a 21 page

attachment to counsel for the parties involved in this lawsuit. The attachment

contained letters to counsel making requests for information from the parties. The

two page letter to Plaintiffs’ counsel was the last two pages of the 21 page attachment,

and Plaintiffs’ counsel inadvertently did not see the letter and did not provide a

response. Again, however, Plaintiffs have not explained how the failure to receive

the letter impacted the Committee’s investigation. In fact, Plaintiffs admitted that

they did not have any of the information requested by the Committee in the

overlooked letter. (Id. 3.)

32. Finally, Plaintiffs argue that the Committee’s “legal arguments … are

flawed” because the Committee considered extrinsic evidence in the form of affidavits

about the parties intent in determining the meaning of the terms of the Separation

Agreement. (Id. 3-4.). Plaintiffs contend that consideration of evidence of the parties’

intent is only permitted when the “contract terms are deemed by the court to be

ambiguous”, and since there has been no such finding by the Court here, the affidavits

should be “inadmissible.” (Id. 4.) As Defendants correctly point out, however, there is nothing in the language of G.S. § 55A-7-40 that would suggest that a corporate

investigative committee is bound by the rules of evidence applicable to courts, and

Plaintiffs have not provided authority to support such a conclusion.

33. Ultimately, after considering the Report and the other evidence, the

Court concludes that the Committee’s investigation was reasonable under the

circumstances, and was conducted in good faith by disinterested individuals. Given

the issues raised by Plaintiffs’ derivative claims, the Court concludes that the

Committee reached a reasonable determination that it is not in the best interest of

the corporation to pursue the claims alleged by Plaintiffs in this lawsuit. Based on

the foregoing, the Court concludes that this action should not continue and should be

DISMISSED. 6

e. Attorneys’ Fees.

34. G.S. § 55A-7-40(e) provides in pertinent part that “[i]f the action on

behalf of the corporation is successful, in whole or in part, whether by means of a

compromise and settlement or by a judgment, the court may award the plaintiff the

reasonable expenses of maintaining the action, including reasonable attorneys' fees,

…” (emphasis added). The record establishes that Plaintiffs obtained a benefit for

6 To the extent Plaintiffs contend that the Court does not have authority to dismiss their

derivative claims, (Pls.’ Resp. to Report 5,) the Court disagrees. Although the Nonprofit Corporations Act does not contain an express provision for a nonprofit corporation to make a motion to dismiss comparable to that in the Business Corporation Act, G.S. § 55-7-44(a), the Court concludes that the language of G.S. § 55A-7-40(c) is most reasonably read as conferring the same right to dismiss, after review of the corporation’s or committee’s report, as is provided by the Business Corporation Act. Indeed, the language “[a]fter considering the report and any other relevant evidence, the court shall determine whether the proceeding should be continued” would appear to have no meaning at all, and be superfluous, if it does not confer such authority. RACCA from raising their claims in the form of the approximately $24,200 in

repayments RACCA received from FSC for FSC’s improper collection of fees for

unimproved lots. Accordingly, the Court concludes that Plaintiffs are entitle to an

award of reasonable attorneys’ fees pursuant to G.S. § 55A-7-40(e) for the benefit they

obtained for RACCA. Plaintiffs’ counsel shall file with the Court an appropriate

affidavit addressing the factors properly considered by the Court in making an award,

e.g. Ge Betz, Inc. v. Conrad, 231 N.C. App. 214, 244, 752 S.E.2d 634, 655 (2013), with

supporting records so that the Court can determine the amount of such fees, which

will be awarded in a separate order.

THEREFORE, it is ORDERED:

1. That based on the Report of the Committee this action is discontinued and

DISMISSED with prejudice.

2. RACCA’s Motion to Intervene is DENIED as moot.

3. The Court shall make an award of attorneys’ fees to Plaintiffs by separate

order.

4. This Amended Opinion and Order SUPERSEDES this Court’s Order

issued in this matter earlier today, and that Order hereby is

WITHDRAWN.

SO ORDERED, this the 2nd day of December, 2016.

/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases