Summary
In Burgess v. Burgess, 205 N.C.App. 325, 698 S.E.2d 666 (2010), the plaintiff filed an action in superior court alleging, inter alia, "breach of fiduciary duties, inspection, and accounting" related to a business, Burgess & Associates, that had been jointly owned by the plaintiff and her husband ("the defendant") during their marriage.
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No. COA09-825
Filed 20 July 2010
Appeal by defendants from order entered 24 March 2009 by Judge John L. Holshouser, Jr., in Rowan County Superior Court. Heard in the Court of Appeals 19 November 2009.
Womble Carlyle Sandridge Rice, PLLC, by Mark P. Henriques and Sarah A. Motley, for plaintiff-appellee. Ferguson, Scarbrough, Hayes, Hawkins DeMay, P.A., by Edwin H. Ferguson, Jr., and James R. DeMay, for defendant-appellants.
Rowan County No. 08 CVS 2482.
James Thomas Burgess, Jr. ("James"), and Burgess Associates, Inc. (collectively "defendants"), appeal the trial court's order denying defendants' motion to dismiss for lack of subject matter jurisdiction under Rule 12(h)(3). In the motion, defendants argued that Cathy Burgess's ("plaintiff's") shareholder suit regarding Burgess Associates was precluded by N.C. Gen. Stat. § 7A-244 (2009), which vests the district court with proper jurisdiction for matters concerning equitable distribution. After careful review, we affirm in part and reverse in part.
I. BACKGROUND
James and plaintiff were married on 1 June 1996 in Rowan County, North Carolina. After ten years of marriage, the parties separated on 2 October 2006. On 13 October 2006, plaintiff instituted an action against James for divorce from bed and board and equitable distribution of marital property pursuant to Chapter 50 of our General Statutes in Rowan County District Court.
Plaintiff and James each own 50% of the shares of a residential contracting company, Burgess Associates, Inc. James serves as sole director and president, and plaintiff serves as corporate secretary. In her divorce complaint, plaintiff requested "exclusive possession and full use" of Burgess Associates pending an equitable distribution of the company.
On 11 July 2008, plaintiff wrote a letter to James in his capacity as president of Burgess Associates. In the letter, plaintiff requested an inspection of Burgess Associates' records and books. James refused plaintiff's request, and on 25 July 2008, plaintiff filed a shareholder action (1) demanding an inspection of the books; (2) asking for an accounting; (3) seeking damages for breach of fiduciary duties in excess of $10,000; and (4) requesting that James be divested of his shares in the corporation as an alternative equitable remedy. With respect to the damages claim for James' alleged breach of fiduciary duties, plaintiff asked for recovery "on behalf of the corporation as a shareholder."
On 13 March 2009, defendants filed a motion to dismiss plaintiff's shareholder suit for lack of subject matter jurisdiction. In the motion, defendants argued that plaintiff had already invoked the jurisdiction of the district court over the ownership of Burgess Associates. Defendants contended that the district court's jurisdiction included plaintiff's claims for inspection of books, an accounting, and damages for breach of fiduciary duties. The superior court entered an order denying defendants' motion to dismiss on 24 March 2009. Defendants thereafter applied for a writ of certiorari to this Court under Rule 21 of the North Carolina Rules of Appellate Procedure, and the writ was granted on 15 May 2009.
II. ANALYSIS A. Jurisdiction and Standard of Review
We review a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12 of the North Carolina Rules of Civil Procedure de novo. See Harper v. City of Asheville, 160 N.C. App. 209, 215, 585 S.E.2d 240, 244 (2003). Under the de novo standard of review, this Court "considers the matter anew and freely substitutes its own judgment for that of the [trial court]." In re Appeal of the Greens of Pine Glen Ltd. P'ship, 356 N.C. 642, 647, 576 S.E.2d 316, 319 (2003) (citing Mann Media, Inc. v. Randolph Cty. Planning Bd., 356 N.C. 1, 13, 565 S.E.2d 9, 17 (2002)). This case is properly before this Court on a writ of certiorari. N.C.R. App. P. 21(a)(1) (2009) (certiorari available as to otherwise interlocutory orders of the trial court).
B. Subject Matter Jurisdiction
Defendants contend that the shares of Burgess Associates are marital property between James and plaintiff, and that the district court's jurisdiction to divide the parties' shares has already been invoked by the equitable distribution action. Relying on our holdings in Garrison v. Garrison, 90 N.C. App. 670, 369 S.E.2d 628 (1988) and Hudson Int'l, Inc. v. Hudson, 145 N.C. App. 631, 550 S.E.2d 571 (2001), defendants argue that this disposition strips the superior court of subject matter jurisdiction over plaintiff's shareholder action.
We agree that the scope of the district court's jurisdiction in the equitable distribution action includes plaintiff's superior court claim for divestiture of James' shares. However, given that the district court is barred by statute from hearing plaintiffs' derivative action, we conclude that the superior court properly found that it retained jurisdiction over plaintiff's causes of action for breach of fiduciary duties, accounting, and inspection of the corporate books.
Jurisdiction is "the power to hear and to determine a legal controversy; to inquire into the facts, apply the law, and to render and enforce a judgment." High v. Pearce, 220 N.C. 266, 271, 17 S.E.2d 108, 112 (1941) (citation and internal quotation marks omitted); State v. Batdorf, 293 N.C. 486, 493, 238 S.E.2d 497, 502 (1977) ("Jurisdictional issues . . . relate to the authority of a tribunal to adjudicate the questions it is called upon to decide."). "Subject matter jurisdiction, a threshold requirement for a court to hear and adjudicate a controversy brought before it, is conferred upon the courts by either the North Carolina Constitution or by statute." In re M.B., 179 N.C. App. 572, 574, 635 S.E.2d 8, 10 (2006) (citations and internal quotation marks omitted). "It is fundamental that a court cannot create jurisdiction where none exists." McClure v. County of Jackson, 185 N.C. App. 462, 471, 648 S.E.2d 546, 551 (2007). "Subject matter jurisdiction cannot be conferred by consent or waiver, and the issue of subject matter jurisdiction may be raised for the first time on appeal." In re H.L.A.D., 184 N.C. App. 381, 385, 646 S.E.2d 425, 429 (2007), aff'd, 362 N.C. 170, 655 S.E.2d 712 (2008).
If a trial court has "exclusive jurisdiction," the court has the "`power to adjudicate an action or class of actions to the exclusion of all other courts[.]'" In re H.L.A.D., 184 N.C. App. at 386, 646 S.E.2d at 430 (quoting Black's Law Dictionary 869 (8th ed. 2004)). "`[O]riginal jurisdiction' means `[a] court's power to hear and decide a matter before any other court can review the matter[.]'" Id. at 386-87, 646 S.E.2d at 430 (citation omitted). "Continuing jurisdiction" is defined as "`[a] court's power to retain jurisdiction over a matter after entering a judgment, allowing the court to modify its previous rulings or orders.'" Id. at 387, 646 S.E.2d at 430 (quoting Black's Law Dictionary 868 (8th ed. 2004)).
In the cases cited by defendant regarding subject matter jurisdiction, Garrison and Hudson, the district court's powers were first invoked under section 7A-244 as to a portion of marital property, and this Court concluded in each case that the superior court lacked subject matter jurisdiction to enter orders involving the same marital property. See Garrison, 90 N.C. App. at 670, 369 S.E.2d at 628 (partition action to divide marital home improperly brought in superior court where the marital home was already part of a pending equitable distribution claim); Hudson, 145 N.C. App. at 631, 550 S.E.2d at 571 (declaratory action brought in superior court by third parties concerning ownership of real property that was the subject of a prior equitable distribution action in district court held properly dismissed); cf. McKoy v. McKoy, ___ N.C. App. ___, 689 S.E.2d 590 (2010) (where the clerk of superior court previously obtained jurisdiction over guardianship of incompetent adult under Chapter 35A, the district court was barred from entering subsequent custody order concerning same incompetent adult under Chapter 50).
At the core of Garrison and Hudson were two principles: (1) the same property was the subject of both the superior and district court actions, and (2) the relief sought and available was similar in each suit. Contra Sparks v. Peacock, 129 N.C. App. 640, 500 S.E.2d 116 (1998) (husband's suit against wife for default on joint promissory notes properly brought in superior court where no equitable distribution action was pending); Diggs v. Diggs, 116 N.C. App. 95, 446 S.E.2d 873 (1994) (distinguishing Garrison, partition action properly filed in superior court where jurisdiction of district court not yet invoked on same real property). In Sparks, the same disposition as Garrison and Hudson would have been presented if an equitable distribution action had been pending in district court prior to the husband's suit in superior court. Sparks, 129 N.C. App. at 640-41, 500 S.E.2d at 117. However, because the joint promissory notes were not subject to both an equitable distribution action as to who was liable for payment and a concurrent superior court action for contribution, this Court held that the superior court action was proper. Id. at 641, 500 S.E.2d at 117 ("It is of critical importance to this case that there is not an equitable distribution action currently pending between the parties.").
In these cases, the district court's subject matter jurisdiction was limited to the real property in dispute. See 3 Suzanne Reynolds and Jacqueline Kane Connors, 3 Lee's North Carolina Family Law § 12.107, at 12-313,-314 (5th ed. 2002) ("If a party has invoked the jurisdiction of the court in equitable distribution, it is the only court that has jurisdiction over the property. . . . As long as there is a close relationship between the parties in the two actions, the prior action in district court for equitable distribution precludes jurisdiction over the property in superior court."). (Emphasis added.)
Applying these principles to this case, defendants contend that plaintiff's shareholder claims can be adequately addressed through the action pending in district court because: (1) the inspection and accounting requests can be handled through discovery in the equitable distribution action; (2) the claim for breach of fiduciary duties can be addressed as a distributional factor under N.C. Gen. Stat. § 50-20(c)(11a) (2009); (3) plaintiff's equitable claim for divestiture of James' shares in Burgess Associates in the derivative suit is the same claim awaiting disposition in plaintiff's equitable distribution action; and (4) plaintiff will not be prejudiced by the dismissal of her shareholder suit, since plaintiff may seek to join Burgess Associates in the equitable distribution action. These contentions require this Court to examine the scope of the equitable distribution statutes to determine whether plaintiff's shareholder suit can be subsumed into the equitable distribution action.
When distributing marital property, the trial court shall consider the "[a]cts of either party to maintain, preserve, develop, or expand; or to waste, neglect, devalue or convert the marital property or divisible property, or both, during the period after separation of the parties and before the time of distribution." N.C.G.S. § 50-20(c)(11a).
In an equitable distribution action, the district court is empowered to "determine what is the marital property and divisible property and shall provide for an equitable distribution of the marital property and divisible property between the parties in accordance with the provisions of this section." N.C. Gen. Stat. § 50-20(a) (2009). The purpose of the Equitable Distribution Act is "to divide property equitably, based upon the relative positions of the parties at the time of divorce, rather than on what they may have intended when the property was acquired." Mims v. Mims, 305 N.C. 41, 54, 286 S.E.2d 779, 788 (1982).
Under section 50-20, "the trial court is required to conduct a three-step analysis: 1) identification of marital and separate property; 2) determination of the net market value of the marital property as of the date of separation; and 3) division of the property between the parties." Estate of Nelson v. Nelson, 179 N.C. App. 166, 168, 633 S.E.2d 124, 126-27 (2006), aff'd, 361 N.C. 346, 643 S.E.2d 587 (2007). The district court is instructed by the General Assembly to effectuate an "equal" distribution, unless such a distribution of the property "is not equitable" under the circumstances. N.C.G.S. § 50-20(c). In making an unequal allocation of property, the district court is required to consider the factors listed within subsection (c) of N.C.G.S. § 50-20. Id.
Under the broad scope of our equitable distribution statutes, it is clear that plaintiff's equitable claim for divestiture of James' shares is squarely addressed in her equitable distribution action. Plaintiff has already invoked the powers of the district court to divide the shares of Burgess Associates, and plaintiff may not use her shareholder suit as an end-around to obtaining sole ownership of the company. To the extent the trial court allowed plaintiff to pursue an equitable divestiture of James' shares in her shareholder derivative suit, we reverse the trial court's order.
We do not, however, reach the same conclusion on plaintiff's derivative claims for breach of fiduciary duties, inspection, and accounting.
1. Breach of Fiduciary Duties
In her divorce action, plaintiff seeks "exclusive possession and full use" of Burgess Associates prior to an order of equitable distribution being entered, and otherwise only requests "a reasonable and fair portion of the marital property" as to a final decision on equitable distribution. The sole parties in the action are plaintiff and James, and the relevant property at issue are the shares that each party has in Burgess Associates. If plaintiff is successful, the most she can acquire is the relief she has sought in her equitable distribution complaint: a "reasonable and fair portion" of the available shares in Burgess Associates pursuant to section 50-20.
By contrast, plaintiff's derivative claim in her shareholder suit does not concern the division of marital property, and instead she asserts a separate claim for relief, outside the scope of section 50-20 and on behalf of the corporation, in superior court. Burgess Associates is a separate legal entity, recognized as distinct from the holders of its shares, Lumber Co. v. Hunt, 251 N.C. 624, 627, 112 S.E.2d 132, 134 (1960); and though plaintiff and James are in the midst of their divorce, the company continues to exist as a corporation owned and managed by its shareholders. This legal principle entitles plaintiff to bring a shareholder derivative suit "in the right of" Burgess Associates in order to assert the corporation's rights, and recover damages on behalf of the corporation for James' alleged breaches of the duties of good faith and due care. N.C. Gen. Stat. § 55-7-40.1(1) (2009). As part of this cause of action, plaintiff is entitled to relief that she is barred from seeking in the equitable distribution action: a jury trial. Kiser v. Kiser, 325 N.C. 502, 511, 385 S.E.2d 487, 492 (1989) (holding that no jury trial is available in an equitable distribution action but is available in a shareholder derivative suit). In her shareholder complaint, plaintiff has requested a jury trial for her claims concerning breach of fiduciary duties.
Though plaintiff alleges in the shareholder complaint that James has breached his fiduciary duties to both plaintiff individually and Burgess Associates, the record shows that plaintiff's complaint is brought pursuant to N.C.G.S. 55-7-40, which solely authorizes shareholder actions on behalf of the corporation. See N.C.G.S. §§ 55-7-40, 55-7-40.1. Moreover, in Outen v. Mical, this Court held that a 50% shareholder may not receive individual damages against another 50% shareholder for, inter alia, breach of fiduciary duties. 118 N.C. App. 263, 267, 454 S.E.2d 883, 886 (1995); see generally Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 17.02[3], at 17-10 (2009). Thus, even though this issue is not before us, it appears that plaintiff is precluded from seeking individual damages in her derivative suit as a matter of law.
It is apparent that if plaintiff is successful in her equitable distribution action, she can only receive a portion of the issued shares of Burgess Associates, along with any other marital or divisible property she may be awarded in the trial court's discretion. Should she prove that she is entitled to an unequal distribution, she may, at the most, receive a larger portion of marital or divisible property as an offset — property which she assisted in contributing to the marriage. See N.C.G.S. § 50-20; Nelson, 179 N.C. App. at 168, 633 S.E.2d at 126-27. She would not be entitled to any of James' separate property. See id.
In stark comparison, if plaintiff is successful in prosecuting her derivative suit for breach of the duties of good faith and due care, she may obtain a judgment against James in the right of the company in excess of $10,000 from a jury verdict. The judgment would be against James in his individual capacity, and Burgess Associates would be able to enforce the judgment against James' separate property. Despite the breadth and variety of the factors in section 50-20, there is no similarity between the relief sought in plaintiff's equitable distribution action and the derivative suit. In particular, plaintiff sets out several factual allegations in the shareholder suit predating James' and plaintiff's separation. Were we to follow defendants' suggestion to lump the derivative suit here into subsection (11a) of N.C.G.S. § 50-20(c), those allegations would not be available to plaintiff in the distribution of marital property. N.C.G.S. § 50-20(c)(11a) (only waste or neglect occurring "during the period after separation of the parties and before the time of distribution" considered in making an unequal distribution) (emphasis added). Even if pre-separation acts could be considered pursuant to N.C. Gen. Stat. § 50-20(c)(12) (allowing consideration of "[a]ny other factor which the court finds to be just and proper," the district court cannot, as we have already noted, reach James' separate property in equitable distribution. Moreover, if Burgess Associates was added as a party to the equitable distribution action, plaintiff's right to relief would not be expanded to include the type of relief sought in the derivative suit. Contra Hudson, 145 N.C. App. at 638, 550 S.E.2d at 575 ("We note that dismissal of such actions without prejudice further allows litigants to then intervene in the pending district court action by virtue of Rule 24 of our Rules of Civil Procedure.").
The district court in this case does not, and more importantly, cannot, obtain jurisdiction over plaintiff's shareholder derivative suit by statute. N.C.G.S. § 55-7-40. Even if the district court could obtain jurisdiction over plaintiff's derivative suit, it cannot grant plaintiff the relief she has sought. Kiser, 325 N.C. at 511, 385 S.E.2d at 492. Thus, retention of plaintiff's cause of action for breach of the duties of good faith and due care was proper by the superior court.
We note further that there is no overlap in this case, as a matter of law, between plaintiff's status as a wife and plaintiff's status as a shareholder. Just because plaintiff has exercised her rights in one capacity does not necessarily prelude the exercise of separate rights in another capacity. We accordingly limit our analysis of plaintiff's claims to an examination of subject matter jurisdiction — the context in which they were challenged in defendants' motion to dismiss.
2. Accounting
An accounting is "[a] rendition of an account, either voluntarily or by court order. The term frequently refers to the report of all items of property, income, and expenses prepared by a personal representative, trustee, or guardian and given to heirs, beneficiaries or the probate court." Black's Law Dictionary 22 (9th ed. 2009). An accounting is an equitable remedy sometimes pled in claims of breach of fiduciary duty. See, e.g., Toomer v. Branch Banking Tr. Co., 171 N.C. App. 58, 70, 614 S.E.2d 328, 337 (2005) ("Plaintiffs sought an accounting as an equitable remedy for the alleged breaches of fiduciary duty and constructive fraud."). Our Supreme Court has said:
All fiduciaries may be compelled by appropriate proceeding to account for their handling of properties committed to their care. When the fiduciary is an executor, administrator, collector, or personal representative of a deceased, he may, at the instance of an interested party, be compelled to account by special proceeding or civil action, G.S. 28-122 and 147; or the court which appointed him may, ex mero motu, compel a proper accounting by attachment for contempt, G.S. 28-118.
Lichtenfels v. Bank, 260 N.C. 146, 148-49, 132 S.E.2d 360, 362 (1963).
Here, given that plaintiff's claim for accounting is inextricably tied to her claim for breach of fiduciary duties, the superior court correctly concluded that it had subject matter jurisdiction over this claim as well.
3. Inspection
As to the claim for inspection in the shareholder suit, defendants claim that plaintiff has brought her shareholder action as a tactical strategy to gain an advantage in the divorce suit. If this is true, the superior court has the power to dismiss or stay this claim, because prior to allowing plaintiff's claim for inspection the superior court must find: (1) the " demand is made in good faith and for a proper purpose; (2) [plaintiff] describes with reasonable particularity h[er] purpose and the records [s]he desires to inspect; and (3) [t]he records are directly connected with h[er] purpose." N.C. Gen. Stat. § 55-16-02(c)(1)-(3) (2009) (emphasis added); see N.C.G.S. § 55-16-04(b). If plaintiff is indeed bringing her inspection claim for an improper purpose, defendants will have ample opportunity to present their concerns pursuant to sections 55-16-02 and 55-16-04, which we think is a sufficient safeguard to any abuses that may be present from a possible overlap in discovery as to plaintiff's shareholder suit and equitable distribution action. As it stands, we see no reason in the instant action to inhibit the procedures set in place for the quick resolution of disputes in a corporate setting pursuant to Chapter 55, especially when inspection of the books would likely be germane to plaintiff's cause of action for breach of fiduciary duties. Furthermore, since plaintiff's claim does not involve a competing claim to marital property that is already under consideration in the equitable distribution action.
III. CONCLUSION
Since the superior court is the only court with subject matter jurisdiction over plaintiff's shareholder suit, we hold that the superior court properly concluded that it had subject matter jurisdiction over plaintiff's causes of action for inspection, accounting, and breach of fiduciary duties. However, given the nature of the relief sought and the prior equitable distribution action pending, the superior court erred in exercising subject matter jurisdiction over the claim for equitable divestiture of James' shares in plaintiff's shareholder suit. Accordingly, we affirm in part, reverse in part, and remand this case for further proceedings not inconsistent with this opinion.
Affirmed in part and reversed in part and remanded.
Judge ERVIN concurs.
Judge STROUD concurs in part and dissents in part with separate opinion.