North Carolina Business Litigation Report

Pro Se Defendant Wins Trial On Breach Of Fiduciary Duty Claims In Business Court

When I was a young pup preparing to go to court against the uncommon adversary who was proceeding without a lawyer, I would joke that "I hope I don't lose."  Luckily, I never did.

But the Plaintiff in Seraph Garrison, LLC v. Garrison, 2014 NCBC 28, didn't have the same good luck.  It lost a case, following trial by Judge Murphy, to a Defendant who had no lawyer and didn't even bother to appear for trial.

Defendant Garrison was the CEO and a member of the Board of Directors of Garrison Enterprises, Inc.  He was sued derivatively for breaching his fiduciary duty to the corporation.  The alleged breaches included:

  • failing to pay payroll taxes due from the corporation.
  • failing to make 401(k) contributions.
  • executing a significant contract with an outside vendor without obtaining Board approval.

All of these things were uncontested at trial, but the defalcating Defendant escaped without any liability without even appearing at trial.  How so?

Judge Murphy said that:

Plaintiff has failed to present evidence that Defendant’s decision not to pay payroll taxes and 401(k) contributions was not in good faith, beneath the standard of care an ordinarily prudent person in a like position would exercise under similar circumstances, or not in a manner Defendant reasonably believed to be in the best interests [of[ the corporation.

Op. ¶38.

The evidence was that the corporation was in a cash crunch, and the Defendant had chosen to pay employees rather than the IRS obligations in order to keep the business running.

And as to the unapproved contract,  the Judge said that there was"insufficient evidence before the Court to support a finding that Defendant was obligated to seek approval before entering into contracts on behalf of" the corporation.  Op. ¶41.

But the Court found that the Defendant had breached his fiduciary duty by misleading the Board on the contents of the contract.  He had presented the Board with a previous unexecuted draft of the contract which was more favorable than the one he ended up actually signing.  No damages were awarded for this breach, because the Court ruled that the Board had not relied on the misrepresentation.

In any event, this unrepresented Defendant escaped scot-free.  There was no showing of the Board relying on his misrepresentation to its detriment.

Just a caution:  If you are thinking that you can proceed without a lawyer in the Business Court because of this case, you are wrong.  Don't do it.  But to be fair to this Plaintiff, who lost against a pro se rival, it was more than good luck for the Defendant.  He was represented by counsel until his lawyer withdrew, shortly before trial.

 

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Mack Sperling
Brooks Pierce, LLP
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