North Carolina Business Litigation Report

State ex re. Long v. Custard, 2007 NCBC 26 (N.C. Super. Ct. Aug. 8, 2007)(Tennille)

The North Carolina Insurance Commissioner sued the defendants, shareholders of insurance carriers in liquidation, for breach of fiduciary duty. Defendants moved to dismiss, claiming that the claims were barred by the statute of limitations at the time of the filing of the petition for liquidation. The Court found the statute of limitations for breach of fiduciary duty to be the three year statute contained in N.C.G.S. §1-52(2).

The Court held that "[a]n ambiguous, ill-defined limitations period for breach of the standards of conduct for directors and officers would have a chilling effect on the willingness of individuals to serve in those capacities, and as such would be an unsound public policy." Thus, all breaches of fiduciary duty occuring more than three years before the filing of the petition for liquidation were barred by the statute of limitations.

The plaintiff argued that the statute should be tolled pursuant to the "adverse domination," doctrine, a theory the Court found was not recognized in North Carolina. The Court stated that it would not apply the doctrine in any event, because it tolled only claims based on a breach of the duty of loyalty like decisions made on the basis of self-interest, and that the claims before it were limited to claims for negligent management. There is no cause of action in North Carolina for negligent management.

As the Court put it, "[n]o rational business person would sit on the board of an insurance company if they were personally liable if the company's decision with respect to underwriting or investment proved faulty." Some of the decisions challenged here -- to enter a particular market and to write a particular kind of policy -- were "quintessential decisions subject to the business judgment rule."

Plaintiff was entitled to go forward on its claim that the defendants had submitted false or misleading financial statements to the Department of Insurance, as such conduct would violate the defendants' fiduciary duties to their policyholders.

Unfair trade practice claims based on the false financials, and the defendants' alleged increased underwriting activity for their own personal gain, also survived the motion to dismiss.

Full Opinion

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Mack Sperling
Brooks Pierce, LLP
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