Stone v. McClam

Annotate this Case

257 S.E.2d 78 (1979)

42 N.C. App. 393

D. Linwood STONE and J. A. Stone v. Marvin McCLAM, C. E. Smith, Norman Sanders, William R. Hocutt, and FCX, Inc.

No. 7810SC590.

Court of Appeals of North Carolina.

July 31, 1979.

*83 Boyce, Mitchell, Burns & Smith by G. Eugene Boyce, Robert E. Smith, Lacy M. Presnell III, and James M. Day, Raleigh, for plaintiffs, appellants and appellees.

Sanford, Cannon, Adams & McCullough by J. Allen Adams, William H. McCullough, Charles C. Meeker and Nancy Bentson Essex, Raleigh, for defendants, appellants and appellees.


By its answer to the first issue, the jury has established that defendants did not procure the execution of the 5 March 1975 Agreement and Release by any fraudulent representation. Thus, no issue as to actual fraud remains in this case, and the essential question presented by defendants' appeal is whether the evidence was sufficient to warrant submission of the second issue to the jury. We find the evidence insufficient to support a jury finding that any fiduciary relationship existed between the parties with respect to the 5 March 1975 transaction such as to cast the burden on defendants of proving that they acted in good faith therein. Accordingly, we sustain defendants' assignments of error directed to the denial of their motions for a directed verdict on the second issue, and we reverse the judgment granting plaintiffs recovery of actual and punitive damages.

It is, of course, true that "[w]here a transferee of property stands in a confidential or fiduciary relationship to the transferor, it is the duty of the transferee to exercise the utmost good faith in the transaction and to disclose to the transferor all material facts relating thereto and his failure to do so constitutes fraud." Link v. Link, 278 N.C. 181, 192, 179 S.E.2d 697, 704 (1971). In such a case the burden is on the transferee to show that he acted fairly and in good faith. McNeill v. McNeill, 223 N.C. 178, 25 S.E.2d 615 (1943); Smith v. Moore, 149 N.C. 185, 62 S.E. 892 (1908). Before that burden may properly be placed upon the transferee, however, there must first be a finding, supported by adequate evidence, that a confidential or fiduciary relationship existed between the parties with respect to the transaction which is brought into question. It is for failure of the evidence on this issue that we reverse the judgment for plaintiffs in the present case.

At one time our Supreme Court was careful to limit the constructive fraud doctrine, with its shift to the defendant of the burden of proving fairness and good faith, to "only `the known and definite fiduciary relations,' by which one person is put in the power of another." Lee v. Pearce, 68 N.C. 76, 87 (1873). By way of illustration, but being careful to point out that there may be other instances, the court in that case listed the following: (1) Trustee and cestui que trust dealing in reference to the trust fund; (2) Attorney and client, in respect to the matter wherein the relationship exists; (3) Guardian and ward, just after the ward arrives at age; and (4) A general agent and his principal where the agent has the entire management of the principal's affairs. In a much more recent case our court stated that "[t]he relation may exist under a variety of circumstances; it exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence." Abbitt v. Gregory, 201 N.C. 577, 598, 160 S.E. 896, 906 (1931). Even when we apply this much broader concept, we find the evidence in the present case insufficient to support a finding that a fiduciary relationship existed between the defendants and the plaintiffs with respect to the 5 March 1975 transaction.

Examining the evidence as it relates to the relationship which existed between the parties on 5 March 1975, the first and most obvious aspect of the relationship shown is that plaintiffs were on that date, contingently at least, indebted to FCX on their guaranties of the obligations of Stone *84 Bros. and that plaintiffs' contingent liability was secured by a pledge of their stock in Stone Bros. to McCullough as trustee under the 4 March 1969 Stock Pledge Agreement. It is settled, however, that "[t]here is no fiduciary relation between a creditor and his debtor, by which it can be said that the latter is in the power of the former. . . Nor does the fact that the debtor has conveyed property to a third person to secure his creditor establish any fiduciary relation between him and such creditor." Simpson v. Fry, 194 N.C. 623, 627, 140 S.E. 295, 297 (1927); accord, Curry v. Andrews, 230 N.C. 531, 53 S.E.2d 542 (1949). Thus, the debtor-creditor relationship between plaintiffs and FCX did not in itself create any fiduciary relationship between plaintiffs and defendants in this action.

The other obvious aspect of the relationship which existed between the parties on 5 March 1975 is that the defendants Smith, Sanders, and Hocutt (all of whom were admittedly acting on behalf of FCX) were the officers and directors of Stone Bros. in which plaintiffs were the stockholders. There can be no question that officers and directors of a corporation stand in a fiduciary relation to the corporation and its shareholders with respect to the management of the business and assets of the corporation. G.S. 55-35. It should be noted, however, that in this case no contention is made, nor was the slightest shred of evidence introduced which suggests, that any of the defendants did anything wrong in connection with the management of the business of Stone Bros. or in connection with the disposition of its assets. Indeed, it is precisely because the defendants may ultimately have succeeded in making a favorable disposition of a portion of those assets, being Stone Bros.'s 25% stock interest in Raeford, that this litigation came into being. The question presented by this appeal thus becomes narrowed to whether, under the circumstances of this case, the defendants Smith, Sanders, and Hocutt, as officers and directors of Stone Bros., occupied a fiduciary relationship toward plaintiffs with respect to the acquisition from plaintiffs of their stock in Stone Bros. in the 5 March 1975 transaction.

This Court, in Lazenby v. Godwin, 40 N.C.App. 487, 253 S.E.2d 489 (1979), has recently had occasion to examine the principles of law applicable to determining whether a director of a corporation stands in a fiduciary relationship to a shareholder with respect to the acquisition of the shareholder's stock. In a scholarly opinion by Clark, Judge, in which the pertinent authorities are discussed and analysed, this Court adopted the view that, under special circumstances, a director of a corporation may stand in a fiduciary relation to a shareholder in the acquisition of the shareholder's stock. In that case the Court found sufficient evidence of such special circumstances, in this connection stressing the evidence showing that the defendant in that case had managed the corporation since its inception in 1950, that although plaintiffs were technically codirectors there had been no regular directors meetings, that plaintiffs did not take part in the management of the corporation but placed their trust in the business skill and judgment of the defendant, and that plaintiffs did not have equal access with the defendant to the information needed to make a fair appraisal of the value of their shares. No such evidence has been presented in the present case. On the contrary, all of the evidence in the present case shows that plaintiffs had actively managed the corporation since its inception, that they continued in such active management in the capacity as officers and directors until less than four months prior to 5 March 1975, and that on that date the plaintiff D. Linwood Stone was still actively engaged on a daily basis as an employee. Thus, plaintiffs were intimately familiar with all of the assets and business of their corporation. As to the particular asset which it appears may ultimately have the most value, the 25% stock interest in Raeford, plaintiffs were in an especially favorable position to have full access to all information relevant to its value. Not only had they been connected with Raeford since its founding, but they were still on its board of directors on 5 March 1975, and the plaintiff D. Linwood Stone had attended the most recent meeting of that board held on 25 *85 February 1975 when the possibility of selling all assets of Raeford to a cooperative was discussed. Plaintiffs here, unlike the plaintiffs in Lazenby, had equal or better access than did defendants to all information pertinent to determining the fair value of their shares. In this case we find no evidence of such special circumstances which would give rise to placing defendants in a fiduciary relationship toward plaintiffs in connection with the transfer of their stock in Stone Bros. on 5 March 1975.

In passing, we note that defendant FCX may not actually realize any profit, but may ultimately experience a loss, as a result of its dealings with plaintiffs and with their corporation. While on paper the sale of the 25% interest in Raeford would appear most favorable, the biggest part of the purchase price was not paid in cash but by a note subordinated to other obligations and by a revolving fund certificate. Neither of these can be paid in cash unless the purchaser, House of Raeford, has many years of profitable operations. The evidence in this case shows that at the time of trial this had not occurred.

In defendants' appeal, they also assign error to the court's refusal to grant FCX's motion for a directed verdict on its counterclaims against the plaintiffs. As to this, suffice it to say that on the issues raised by the counterclaims, as to which FCX bore the burden of proof, we find no such admissions by the plaintiffs of all essential facts as would warrant directing verdict against them. We find no error in the court's ruling in this regard.


In their appeal plaintiffs contend that the court erred in failing to enter judgment for treble the amount of damages awarded by the jury, for attorney fees, and for payment of interest from 5 March 1975 on the amount of actual damages awarded by the jury. Since all questions thus sought to be raised are based on the assumption that the jury's award of actual damages was correct, an assumption which in view of our holding on defendants' appeal is not well founded, we find it unnecessary to discuss the questions presented by plaintiffs' appeal.

The judgment appealed from is


HEDRICK and CARLTON, JJ., concur.