Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)

The Court found that plaintiff was an inadequate representative to lead a derivative action.  A derivative action plaintiff has fiduciary obligations to the company on whose behalf he brings a suit.  This plaintiff had no experience in litigation, no involvement in the suit, and only a small stake in the company.  On the point of plaintiff's minimal stock ownership, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff's lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."

The plaintiff was sanctioned by the Court, as were his lawyers, for violating Rule 1.4 of the Rules of Professional Conduct by failing to properly inform their client. The Court also found that the firm had failed in its "duty to know its client" and to "have confidence in the client's knowledge and ability to fulfill his or her fiduciary duties." Instead, the firm had "borrowed" the plaintiff's name, "treated the lawsuit as its own," and made all litigation decisions without input from their supposed client.  The lawyers had also failed to obtain pro hac admission from the Business Court before arguing the motion for sanctions.

The Court also noted the obligations of local counsel in representing a derivative action plaintiff.  It held that "the Court does not believe that it is the primary duty of local counsel to know and communicate with a client who has an established relationship with out-of-state counsel to the same extent as the primary counsel. The local lawyer's role is more limited, and local counsel should be able to rely on primary out-of-state counsel to communicate with the client. Where local counsel signs pleadings and briefs, they are representing to the Court that the positions taken therein have merit and that Rule 11 has been followed. Local counsel would be well advised to consider as a practical matter some of the things a court might consider in reviewing the pleadings. Is there a real plaintiff capable of fulfilling his or her fiduciary duties? Is the complaint being filed in a race to the courthouse? Are the allegations based on known facts or media stories? Has there been any effort to review the books and records of the company to support demand futility claims? Are the claims meritorious, and are there allegations that would support a finding that red flags existed to warrant board action in a derivative case? Is there clear precedent supporting or contrary to the positions taken?"

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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