My favorite multi-volume treatise is Words and Phrases. If you don’t know it, it is a super-legal dictionary that collects cases from every jurisdiction defining … well, frequently used words and phrases. Since business litigation often turns on the definition of a word or a term that the drafters left undefined, I have a thoroughly
November 2011
Expensive Lesson From The Business Court For Derivative Action Plaintiff Whose Case Was Dismissed
It’s hard to call a client and have to tell her that the case you filed for her was dismissed. But it must be even harder to tell a client that she now has to pay the defendant for his legal fees in winning the dismissal. And think how much worse that would be if the defendant were her ex-husband. And it’s even worse if it’s Thanksgiving!
That hasn’t happened to me (at least not yet), and I hope it hasn’t happened to you, but it is the phone call that the lawyers representing Jane Sutton in Sutton v. Sutton, 2011 NCBC 43 probably had to make after Judge Jolly’s ruling in her case on the Tuesday before Thanksgiving.
Jane Sutton became a shareholder in her husband’s business, Sutton’s Tree Service, Inc. during their marriage. She filed a derivative action against her ex-husband on behalf of the corporation for conversion, breach of fiduciary duty and the “improper filing of income tax returns.” Op. ¶1.
There were two fatal flaws in this turkey of a lawsuit which led to its dismissal. The first was that there had been no demand on the corporation to take the action against Mr. Sutton. Section 55-7-42 makes a demand a precondition to the filing of a derivative action. It says:
No shareholder may commence a derivative proceeding until:
(1) A written demand has been made upon the corporation to take suitable action; and
2) 90 days have expired from the date the demand was made unless, prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90‑day period.
There’s also a statutory requirement that the person filing the derivative action must have been “a shareholder of the corporation at the time of the act or omission complained of….” N.C. Gen Stat. §55-7-41(1). He or she must also be able to “[f]airly and adequately represent[] the interests of the corporation in enforcing the right of the corporation.” Id. At 55-7-41(2).
The second fatal flaw was that in addition to not making a demand, Mrs. Sutton hadn’t been a shareholder of the corporation since her divorce from Mr. Sutton, which was undoubtedly before the alleged misconduct had taken place. There had been a Consent Judgment by which Mrs. Sutton had “surrendered to Defendant any and all interest she had in the Corporation.” Op. ¶11.
Judge Jolly said that her lack of ownership was established as a matter of res judicata and collateral estoppel, since the “Consent Judgment constitutes a valid, final judgment determining the respective rights of Plaintiff and Defendant regarding ownership of the Corporation.” She therefore had no standing to maintain the suit, and Judge Jolly ordered that it be dismissed,
So what about the fees, you are wondering. The statute on fees in derivative actions says that “On termination of the derivative proceeding, the court may:. . . Order the plaintiff to pay any defendant’s reasonable expenses, including attorneys’ fees, incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.” N.C. Gen. Stat. 55-7-46(2).
Business Court Strikes “Impertinent” Reply To Counterclaim
Have you ever filed a reply to a counterclaim where your reply was 89 pages long and to which you attached more than 200 pages of exhibits? I think you probably haven’t, but the Plaintiff in the Business Court case Fountain v. Fountain Powerboats, Inc. did. When the Defendant made a Motion to Strike the …
The New And Improved Federal Rules Of Evidence
If you are trying a case in in federal court after December 1, 2011, you’d better bring a new copy of the Federal Rules of Evidence. Don’t lose any sleep, because the substance of the Rules hasn’t changed, they’ve only been “restyled.” This reworking of the FRE was aimed at making the Rules more consistent…
A Covenant Not To Compete Cornucopia From The Business Court
On Friday, the Business Court issued an opinion on a number of covenant not to compete issues, in Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC 41. The Defendants were former employees of the Plaintiff, which had acquired the company for which they had worked. The Defendants had executed non-competition and confidentiality agreements in…
North Carolina Court of Appeals Tosses Alienation of Affection Case
The North Carolina Court of Appeals sent a pretty clear message last Tuesday to out of state citizens filing claims for alienation of affection in North Carolina courts. The message was don’t file your lawsuit here, even though North Carolina is one of the few states in the country that hasn’t abolished that tort.…