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).

           

 

Judge Jolly didn’t base the fees on the claimed “improper purpose” of Mrs. Sutton, even though her ex-husband’s lawyers said that she had filed the lawsuit as a part of a "personal vendetta against her ex-husband.”

He rested his discretionary award of $22, 751.08 in fees on his conclusion that the action had been “commenced and maintained . . .  without reasonable cause,” (Op. ¶18), because the Plaintiff “clearly lacked standing.” Adding a little bit of salt to the wound, Judge Jolly said that the “Complaint, on its face, [was] seriously deficient and subject to dismissal on several grounds “ Id.

Unfortunately, the file for this case isn’t on the Business Court’s website so I can’t make any observations of how “seriously deficient”  the Complaint was. It would also have been interesting to see the basis on which Mrs. Sutton opposed the Motion to Dismiss since there doesn’t appear from the Order for there to have been any.  She didn't oppose the Motion for the award of fees.

I hope you all have a great Thanksgiving. I’m shutting down for the holiday, and am looking forward to having my youngest child, my son Dash, here with me for Thanksgiving. So don’t look for anything from this blog until next week.

 

 

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