Schwartzbach v. Apple Baking Co.

426 S.E.2d 438 (1993)

109 N.C. App. 216

Gary SCHWARTZBACH, Plaintiff-Appellee, v. APPLE BAKING COMPANY, Defendant-Appellant.

No. 9119SC786.

Court of Appeals of North Carolina.

March 2, 1993.

*439 Kluttz, Hamlin, Reamer, Blankenship and Kluttz by Malcolm B. Blankenship, Jr., Salisbury, for plaintiff-appellee.

Ferguson, Stein, Watt, Wallas, Adkins & Gresham, P.A. by James E. Ferguson, II, Charlotte, for defendant-appellant.

WELLS, Judge.

In one of its assignments of error, defendant contends that the trial court erred by not granting its motion for judgment notwithstanding the verdict as to plaintiff's claim. We agree, and reverse that part of the trial judgment below. N.C.Gen.Stat. § 1A-1, Rule 50(b)(1) of the Rules of Civil Procedure provides that a motion for judgment notwithstanding the verdict "shall be granted if it appears that the motion for directed verdict could properly have been granted." The test for allowing a motion for judgment notwithstanding the verdict is essentially the same as that for allowing a motion for directed verdict. Dickinson v. Pake, 284 N.C. 576, 201 S.E.2d 897 (1974). A motion by a defendant for a directed verdict under N.C.Gen.Stat. § 1A-1 Rule 50(a) of the Rules of Civil Procedure tests the legal sufficiency of the evidence to take the case to the jury and support a verdict for the plaintiff. Manganello v. Permastone, Inc., 291 N.C. 666, 231 S.E.2d 678 (1977); see also Eifler v. Pyles, 94 N.C.App. 349, 380 S.E.2d 149 (1989). On such a motion, the plaintiff's evidence must be taken as true and the evidence must be considered in the light most favorable to the plaintiff, giving the plaintiff the benefit of every reasonable inference to be drawn therefrom. Id. A directed verdict for the defendant is not properly allowed unless it appears as a matter of law that a recovery cannot be had by the plaintiff upon any view of the facts that the evidence reasonably tends to establish. Id.

The "agreement" on which plaintiff's claim was founded was a resolution adopted at a special meeting of defendant's "Board of Directors" on 1 August 1988. As we have noted earlier, at that time plaintiff was the sole director of the defendant corporation. The resolution read as follows:

*440 A special meeting of the Board of Directors was held at the office on August 1, 1988 at 11:00 A.M. It was agreed that if Gary Schwartzbach should be removed as president, all his company stock must be bought by the Corporation at $1,000.00 each within thirty days of his removal. He will also receive six months severance pay. The meeting was adjourned, as there was no further business. Gary Schwartzbach

On 1 August 1988, the existing Business Corporation Act contained the following provisions:[1]

N.C.Gen.Stat. § 55-30 Director's Adverse Interest.

(b) No corporate transaction in which a director has an adverse interest is either void or voidable, if: (1) With knowledge on the part of the other directors of such adverse interest, the transaction is approved in good faith by a majority, not less than two, of the disinterested directors present even though less than a quorum, irrespective of the participation of the adversely interested director in the approval, or if (2) After full disclosure of all the material facts to all the shareholders, the transaction is specifically approved by the vote of a majority or by the written consent of all the voting shares other than those owned or controlled by the adversely interested directors, or if (3) The adversely interested party proves that the transaction was just and reasonable to the corporation at the time when entered into or approved. In the case of compensation paid or voted for services of a director as director or as officer or employee the standard of what is "just and reasonable" is what would be paid for such services at arm's length under competitive conditions.

It is undisputed that plaintiff, the sole director at the time of the contested transaction, did not comply with either subsection (1) or (2) with respect to the transaction. Therefore, the only manner in which plaintiff could enforce the otherwise voidable transaction would be to satisfy the requirements of subsection (3).

It has long been the generally prevailing rule throughout the various courts of the United States and our State that directors and officers of a business corporation in charge of its management are, in the performance of their official duties, under obligations of trust to the corporation or its stockholders and must act in good faith and for the interest of the corporation or its stockholders. See 18B AmJur2d, Corporations, § 1684. North Carolina law has been consistent with this rule. See e.g. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323 (1987); Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983); Fulton v. Talbert, 255 N.C. 183, 120 S.E.2d 410 (1961). At the time the case at bar arose, G.S. § 55-35 spoke very plainly on this aspect of our law of corporations:

§ 55-35 Duty of Directors and Officers to Corporation. Officers and directors shall be deemed to stand in a fiduciary relation to the corporation and to its shareholders and shall discharge the duties of their respective positions in good faith, and with that diligence and care which ordinarily prudent men would exercise under similar circumstances in like positions.

Speaking more directly to the specific transaction in this case, one leading authority has generally analyzed and explained the law of this State, as follows. Prior to the enactment of G.S. § 55-30(b), the applicable common law rule governing transactions between directors and officers and their corporations was one of presumptive invalidity, due to the good faith and undivided loyalty required of such persons serving the corporation in their fiduciary capacity. See Robinson on North Carolina Corporation Law, 3rd Ed., § 12-11 and *441 § 12-13. The purpose of the enactment of G.S. § 55-30(b) was to clarify the previously uncodified rules relating to transactions of interested directors. Id. § 12-11. Those seeking to sustain such a transaction must prove that it was openly and fairly made. Id.

In interpreting the provisions of G.S. § 55-30(b)(3), the 4th Circuit Court stated the rule as follows:

It is a settled rule that a corporate officer acts in a fiduciary capacity and cannot profit at the expense of the corporation.... [T]he adversely influenced party must prove that the transaction was fair, just, and reasonable when entered into. Smith v. Robinson, 343 F.2d 793 (4th Cir.1965).

Plaintiff's evidence in support of his claim included the resolution of 1 August 1988 and testimony from plaintiff relating to previous stock sales. The resolution on its face obviously cannot be said to be fair, just, or reasonable to the defendant under elemental principles of contract law; this transaction simply does not constitute an "agreement." The resolution does not reflect any consideration flowing to defendant, no promise by plaintiff to sell his shares to defendant, no forbearance in the form of a promise not to sell his shares to others, and no giving up by plaintiff of any benefit. Under this resolution, defendant would be forced to buy at a fixed price. Plaintiff would not be required to sell at any price.

On its face, the resolution purports to establish a value on plaintiff's stock at some then undetermined time in the future, a time at which it could not then be possible to predict or establish the value of plaintiff's stock. The only evidence plaintiff offered to support his version of the value of his stock were past transactions, sales which took place in 1984 (original subscriptions for $1,000 per share) and several instances where investors paid $1,000 a share in 1986. Plaintiff's opinionthat the "value" the defendant was receiving consisted of his shares comprising 17 percent of the company's stocksis meaningless in the context of the requirements of the statute.

We hold as a matter of law that plaintiff failed to carry his burden of showing the subject transaction to be just and reasonable to defendant, and we reverse that part of the judgment.

Defendant's Counterclaim

In its last assignment of error, defendant corporation brings forward the trial court's refusal to instruct the jury that a finding against plaintiff on defendant's counterclaim concerning the $7,500 bonus he awarded himself necessarily dictated a finding of a breach of fiduciary duty and fraud as a matter of law. Defendant specifically takes exception to the trial court's instruction to the jury to award punitive damages only if they found aggravating circumstances. Defendant contends that plaintiff's failure to withstand G.S. § 55-30's "just and reasonable" test should lead to an assessment of punitive damages as a matter of law.

While there is arguable support for defendant's contention that a breach of a fiduciary duty is fraud as a matter of law,[2] we are unwilling to hold that every time a director is unable to carry his burden of proof in a G.S. § 55-30(b) analysis, he is automatically subject to punitive damages. A director might be biased in his assessment of the fairness of a self-dealing transaction, and therefore his acts could fail to withstand G.S. § 55-30's "just and reasonable" analysis. Such evidence would not necessarily qualify as being the type of reckless or intentional behavior which would justify punitive damages. For that reason, we hold that an award of punitive damages is not an automatic right of a party who successfully establishes the invalidity of an adversely interested director's transaction under G.S. § 55-30, and that the trial court correctly instructed the jury to find aggravating circumstances *442 before awarding punitive damages in this case.

Plaintiff's Cross Appeal

In his purported cross appeal, plaintiff attempts to challenge the jury verdict awarding defendant the return of a $7,500 bonus that plaintiff awarded to himself as president of the company. Plaintiff has not perfected appeal from the judgment below, but attempts to bring forward this question under a "cross-assignment of error." This is not permissible. See Rule 10 of the North Carolina Rules of Appellate Procedure.

As to the plaintiff's recovery on his claim, the judgment below is reversed.

As to defendant's recovery on its counterclaim, no error.

ORR and GREENE, JJ., concur.

NOTES

[1] Chapter 55 of the General Statutes has been completely rewritten and recodified effective 1 July 1990.

[2] See Stone v. Martin, 85 N.C.App. 410, 355 S.E.2d 255, disc. rev. denied, 320 N.C. 638, 360 S.E.2d 105 (1987).