Opinion
No. COA10-570
Filed 16 August 2011 This case not for publication
Appeal by Defendants Global Supply Logistics, Inc.; Stanford "Ron" Banks; Greg Kirchner; Robert Malzacher; and Martin Banks from judgment entered 29 September 2009 by Judge Timothy S. Kincaid in Mecklenburg County Superior Court. Heard in the Court of Appeals 1 December 2010.
The Bray Law Firm, PLLC, by William P. Bray and Matthew C. O. Cameron, for plaintiff-appellees. James, McElroy Diehl, P.A., by Preston O. Odom III and John R. Buric, for defendant-appellants.
Mecklenburg County No. 08 CVS 10480.
Defendants Global Supply Logistics, Inc. (GSL); Stanford "Ron" Banks; Greg Kirchner; Robert Malzacher; and Martin Banks appeal from an order entered by the trial court granting summary judgment and default judgment against Defendants and in favor of Plaintiffs Robert Consoli; Brad Decker; Mike Vanek; and E E Partners, LLC. In their amended complaint, Plaintiffs, who were minority shareholders in GSL, alleged ten claims against Defendants stemming from various acts and omissions arising from the operation of GSL. On appeal, Defendants contend that the trial court erred by: (1) granting summary judgment in favor of Plaintiffs; (2) awarding attorney's fees to Plaintiffs; and (3) entering default against Kirchner and Malzacher. After careful consideration of Defendants' challenges to the trial court's order in light of the record and the applicable law, we conclude that the trial court's order should be affirmed in part and reversed and remanded in part.
The Refrigerated Logistics Group, LLC ("RLG") did not appeal the trial court's order.
I. Factual Background
On 5 May 2008, Plaintiffs filed an amended complaint against Defendants seeking (1) reimbursement for funds Plaintiffs paid to Defendants pursuant to a shareholder subscription agreement; (2) compensatory and punitive damages; (3) an accounting and the dissolution of GSL; (4) the entry of an order appointing Plaintiff
Consoli to be the receiver of GSL for the purpose of winding up its affairs; (5) the imposition of a constructive trust applicable to RLG's assets in order to ensure the reimbursement of funds provided by Plaintiffs that were wrongfully converted or diverted from GSL; and (6) the costs, including attorney's fees. In seeking relief from Defendants, Plaintiffs relied on claims sounding in fraudulent inducement, negligent misrepresentation, breach of fiduciary duty, breach of duty to minority shareholders, breach of contract, their right to an accounting and inspection of the corporate records of GSL, piercing the corporate veil, judicial dissolution of GSL, the imposition of a constructive trust, unjust enrichment, and punitive damages.
Defendants Ron Banks, Martin Banks, and Kirchner filed separate answers in response to the allegations of Plaintiffs' amended complaint. An entry of default was made against RLG on 22 December 2008 in light of its failure to answer Plaintiffs' amended complaint. On 29 April 2009, counsel representing GSL, Ron Banks, Martin Banks, Malzacher, and Kirchner were allowed to withdraw. GSL and Malzacher never filed an answer to Plaintiffs' amended complaint. However, prior to withdrawing, counsel for GSL filed a motion to dismiss Plaintiffs' amended complaint pursuant to N.C. Gen. Stat. § 1A-1, Rule 12(b)(6).
On 6 August 2009, eleven days before the case was set for trial, Plaintiffs filed a motion seeking the entry of summary judgment in their favor, a motion for the entry of default judgment against RLG, and a motion for an entry of default against Malzacher. After the trial was continued, Plaintiffs' motions were eventually scheduled for hearing on 28 September 2009. On 18 September 2009, Plaintiffs filed a motion for the entry of default judgment against Kirchner. At the 28 September 2009 hearing, Plaintiffs' motions were heard by the trial court. Ron Banks, Martin Banks, and Malzacher appeared at the hearing pro se; Kirchner failed to appear; and GSL and RLG were not represented by counsel. At the hearing, Plaintiffs urged the trial court to grant all of their motions. Ron Banks, Martin Banks, and Malzacher made statements contradicting Plaintiffs' evidence. However, none of them contested the timeliness of Plaintiffs' motions or raised any issue about the proper measure of damages. At the conclusion of the hearing, the trial court granted Plaintiffs' motions and entered an order to that effect on 29 September 2009. Defendants noted an appeal to this Court from the trial court's order.
Plaintiffs abandoned their claims for an accounting and inspection of corporate records, a judicial dissolution of GSL, and punitive damages before the trial court.
II. Legal Analysis A. Preserved Arguments
As a preliminary matter, we must determine which of Defendants' arguments are properly preserved for our review. In seeking relief on appeal, Defendants argue that: (1) the trial court lacked authority to hear Plaintiffs' motions because they were not filed in a timely manner; (2) the trial court's decision regarding the issue of liability lacks adequate evidentiary support; (3) Plaintiffs failed to adduce sufficient relevant evidence in support of their claim for damages; (4) the trial court lacked statutory authority to award attorney's fees to Plaintiffs; (5) the trial court's attorney's fees award is not supported by adequate findings of fact or competent evidence; (6) an entry of default was erroneously made against Kirchner; and (7) the trial court erroneously entered a default judgment against Malzacher. We will now examine the extent to which each of Defendants' claims has been properly preserved for appellate review.
According to N.C.R. App. P. 10(a)(1):
In order to preserve an issue for appellate review, a party must have presented to the trial court a timely request, objection, or motion, stating the specific grounds for the ruling the party desired the court to make if the specific grounds were not apparent from the context. It is also necessary for the complaining party to obtain a ruling upon the party's request, objection, or motion. Any such issue that was properly preserved for review by action of counsel taken during the course of proceedings in the trial tribunal by objection noted or which by rule or law was deemed preserved or taken without any such action, including, but not limited to, whether the judgment is supported by the verdict or by the findings of fact and conclusions of law, whether the court had jurisdiction over the subject matter, and whether a criminal charge is sufficient in law, may be made the basis of an issue presented on appeal.
As a result, subject to certain limited exceptions that are not applicable here, Defendants had to present the issue in question to the trial court and obtain a ruling concerning that issue in order to preserve the issue for appellate review.
A careful examination of the record reveals no indication that Defendants raised any issue concerning the timeliness of Plaintiffs' motions before the trial court. Instead, the record reflects that, during the hearing concerning Plaintiffs' motions, Ron Banks requested a short delay in order to allow the attorney who had formerly represented him, and who had previously been allowed to withdraw, an opportunity to speak. The trial court never addressed this request before ruling on Plaintiffs' motions, and Defendants have not challenged the trial court's failure to do so on appeal.
In their notice of appeal, Defendants allude to the fact that the trial court administrator denied a written request for a continuance made by Martin Banks and Malzacher. Defendants have not, however, challenged this determination before this Court and have, for that reason, abandoned any challenge that they might otherwise have made to this decision. N.C.R. App. P. 28(a) (stating that "[t]he scope of review on appeal is limited to issues so presented in the several briefs" and that "[i]ssues not presented and discussed in a party's brief are deemed abandoned").
As a result, since the issue of the timeliness of Plaintiffs' motions does not appear to have been raised before or addressed by the trial court, none of Defendants' timeliness-related challenges to the trial court's order have been properly preserved for purposes of appellate review.
We reach a similar conclusion with respect to Defendants' challenge to that portion of the trial court's order making an entry of default against Kirchner. "The entry of default by the clerk is not a final judgment and it is not appealable. It is an interlocutory act looking toward the subsequent entry of a final judgment by default." Looper v. Looper, 51 N.C. App. 569, 570, 277 S.E.2d 78, 79 (1981) (citation omitted). As we read the record, no default judgment was ever entered against Kirchner. Instead, the trial court simply granted summary judgment against Kirchner in the 29 September 2009 order. Under this set of circumstances, any attempt to appeal from an entry of default would be tantamount to allowing an appeal from an unappealable interlocutory order. Travco Hotels v. Piedmont Natural Gas Co., 332 N.C. 288, 291, 420 S.E.2d 426, 428 (1992) (stating that "there is no right of immediate appeal from interlocutory orders and judgments") (citing Goldston v. American Motors Corp., 326 N.C. 723, 725, 392 S.E.2d 735, 736 (1990)); see also Autec, Inc. v. Southlake Holdings, LLC., 171 N.C. App. 147, 149, 613 S.E.2d 727, 729 (2005) (stating that "[t]he entry of default is interlocutory in nature and is not a final judicial action" and that, "[g]enerally, there is no right to appeal from an interlocutory order") (citations omitted). Thus, the extent to which default was properly entered against Kirchner is not before us on appeal.
Finally, we conclude that Defendants have not properly preserved their challenge to the trial court's determinations with respect to the damage issue. At bottom, Defendants' challenge to the trial court's damage award rests on the assertion that the trial court utilized an incorrect measure of damages. As this Court has previously held, a failure on the part of a party to challenge the moving party's showing with respect to the issue of damages before the trial court in the course of a hearing held in connection with a summary judgment motion means that any challenge to the trial court's damage decision has not been properly preserved for appellate review. Centura Bank v. Winters, 159 N.C. App. 456, 460, 583 S.E.2d 723, 725 (2003) (refusing to consider a challenge to the commercial reasonableness of a particular vehicle sale upon which the plaintiff relied in support of its damage claim on the grounds that no such challenge had been raised before the trial court). As a result, we conclude that Defendants' damage-related challenges to the trial court's order are not properly before us either. With the exception of the issues outlined above, however, we believe that Defendants' challenges to the trial court's order have been properly preserved for purposes of appellate review and will proceed to consider them on the merits.
B. Substantive Legal Issues 1. Summary Judgment a. Standard of Review
A trial court properly grants summary judgment when, viewing the evidence in the light most favorable to the non-moving party, "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law." N.C.R. Civ. P. 56(c); see also S.B. Simmons Landscaping Excavating, Inc. v. Boggs, 192 N.C. App. 155, 163-64, 665 S.E.2d 147, 152 (2008). "[S]ummary judgment, by definition, is always based on two underlying questions of law: (1) whether there is a genuine issue of material fact and (2) whether the moving party is entitled to judgment[.]" Ellis v. Williams, 319 N.C. 413, 415, 355 S.E.2d 479, 481 (1987) (citations omitted). "A genuine issue of material fact has been defined as one in which `the facts alleged are such as to constitute a legal defense or are of such nature as to affect the result of the action, or if the resolution of the issue is so essential that the party against whom it is resolved may not prevail[.]'" Smith v. Smith, 65 N.C. App. 139, 142, 308 S.E.2d 504, 506 (1983) (citation omitted). "When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response . . . must set forth specific facts showing that there is a genuine issue for trial." N.C.R. Civ. P. 56(e).
"On appeal, review of summary judgment is necessarily limited to whether the trial court's conclusions [concerning the questions] of law [described above] were correct ones." Ellis, 319 N.C. at 415, 355 S.E.2d 481. For that reason, "[o]ur review is limited to whether, on the face of the record proper, summary judgment was appropriately entered" or if genuine issues of material fact remain to be decided. Vernon, Vernon, Wooten, Brown, Andrews, P.A. v. Miller, 73 N.C. App. 295, 297, 326 S.E.2d 316, 319 (1985). An order granting summary judgment is subject to de novo review on appeal. Falk Integrated Technologies, Inc. v. Stack, 132 N.C. App. 807, 809, 513 S.E.2d 572, 574 (1999). "Under a de novo review, the 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). In reviewing a summary judgment order, this Court "may only consider the pleadings and other filings that were before the trial court[, and a party] is not permitted on appeal to advance new theories or raise new issues[.]" Hoisington v. ZT-Winston-Salem Assocs., 133 N.C. App. 485, 490, 516 S.E.2d 176, 180 (1999), disc. review and cert. improvidently allowed, 351 N.C. 342, 525 S.E.2d 173 (2000). "`If the granting of summary judgment can be sustained on any grounds, it should be affirmed on appeal. If the correct result has been reached, the judgment will not be disturbed even though the trial court may not have assigned the correct reason for the judgment entered.'" Harter v. Vernon, 139 N.C. App. 85, 95, 532 S.E.2d 836, 842 (quoting Shore v. Brown, 324 N.C. 427, 428, 378 S.E.2d 778, 779 (1989)), disc. review denied, 353 N.C. 263, 546 S.E.2d 97 (2000), cert. denied, 532 U.S. 1022, 149 L. Ed. 2d 757, 121 S. Ct. 1962 (2001). We must now carefully examine the materials submitted in support of Plaintiffs' request for summary judgment in order to determine whether the trial court's decision to grant summary judgment in Plaintiffs' favor had the requisite record support.
As a result of the fact that Defendants did not offer any affidavits, verified pleadings, or other documentary evidence at the hearing held in connection with Plaintiffs' request for the entry of summary judgment, our review is limited to determining whether Plaintiffs' evidentiary forecast was sufficient to support the entry of judgment in favor of Plaintiffs as a matter of law.
b. Analysis
The only evidence that Plaintiffs offered in support of their request for the entry of summary judgment in their favor with respect to the issue of liability was their verified amended complaint. In their amended complaint, Plaintiffs asserted claims for fraudulent inducement, negligent misrepresentation, breach of the fiduciary duty owed by corporate directors and officers, breach of duty to minority shareholders, breach of contract, and piercing the corporate veil. On appeal, Defendants contend that Plaintiffs failed to forecast sufficient evidence to support a finding of liability on any of these grounds. We agree in part and disagree in part.
The amended complaint asserts that:
34. GSL is in the [food service] distribution and temperature-controlled storage business.
35. From the inception of GSL and even prior to its incorporation, Defendant Ron Banks claimed to have various contacts within the [food service] distribution business.
36. From the inception of GSL and even prior to its incorporation, Defendant Ron Banks claimed to have the necessary knowledge and experience to start and grow the business of GSL.
37. The December 2005 Business Plan of GSL was created to attract investors to GSL.
. . . .
40. The Business Plan was prepared, in whole or in part, by Defendant Ron Banks.
41. The Business Plan was prepared, in whole or in part, by Defendant Greg Kirchner.
42. The Business Plan represented that for calendar year 2006 GSL's Chicago, Illinois facility would realize $25.5 million dollars in revenue with a gross profit of $2.9 million dollars. . . .
. . . .
44. Exhibit 3 acknowledges that, in consideration for entering into such Subscription Agreement, Plaintiff Decker reviewed, became familiar with and thus relied upon the Business Plan which was provided to Plaintiff Decker prior to his execution of the Subscription Agreement. . . .
. . . .
46. Exhibit 4 acknowledges that, in consideration for entering into such Subscription Agreement, Plaintiff E E reviewed, became familiar with and thus relied upon the Business Plan which was provided to Plaintiff E E prior to its execution of the Subscription Agreement. . . .
47. In particular, as is shown in the handwriting on Exhibit 4, Plaintiff E E specifically and unequivocally stated in the Subscription Agreement that it had not been provided with a current profit and loss statement or balance sheet for GSL and that it was making its purchase of stock per the Subscription Agreement "primarily on [Ron] Banks/Greg Kirchner, their industry knowledge and integrity." . . .
48. Thus, Plaintiff E E, in its Subscription Agreement made specific reference to its reliance upon the representations of Defendants Ron Banks and Kirchner and their purported industry knowledge and purported integrity, in addition to relying on the Business Plan.
49. In entering into the Shareholders' Agreement, the Subscription Agreements and all related corporate documents including the Articles of Incorporation, the Bylaws, and the Preambles and Resolutions, the Plaintiffs relied to their detriment upon the representations of Defendants Ron Banks and Kirchner including representations contained with the Business Plan and other representations, inter alia, Defendants Ron Banks' and Kirchner's representations as to their experience levels, expertise and contacts within the food service industry, the level and amount of business Defendants Ron Banks and Kirchner could bring to GSL and the number of pallets that GSL would be taking over from Atlas in Chicago, Illinois.
50. Furthermore, Defendants Ron Banks, Kirchner and thus GSL represented that the actions of the corporation would be run in accordance with the terms as set out in the corporate documents.
51. Yet Defendants Ron Banks, Kirchner and thus GSL had no intention of complying with the required corporate formalities as delineated in the corporate documents and agreements or with any other corporate formalities required by the laws of the State of North Carolina.
52. Rather, Defendants Ron Banks, Kirchner and thus GSL always intended to run GSL as Defendants Ron Banks and Kirchner wanted, without regard to the promises and agreements made in the various corporate documents and agreements.
53. Defendants Ron Banks, Kirchner and thus GSL omitted from telling the Plaintiffs that they had no intention of complying with the required corporate formalities as delineated in the corporate documents and agreements.
54. At no time did Defendants Ron Banks or Kirchner inform the Plaintiffs that they always intended to pay themselves salaries regardless of whether such salaries were approved in accordance with the corporate documents and formalities.
55. At no time did Defendants Ron Banks or Kirchner inform the Plaintiffs that they always intended to pay themselves amounts loaned by Ron Banks and Kirchner to GSL regardless of corporate authorization required by the corporate documents, regardless of the effect on GSL or the remaining shareholders or directors and regardless of the overall best interests of GSL.
56. Defendants Ron Banks and Greg Kirchner fully intended that the Plaintiffs would rely upon their various misrepresentations, omissions and false promises in agreeing to invest in and become shareholders of GSL.
57. Defendants Ron Banks and Greg Kirchner knew their various representations and promises to the Plaintiffs were false when made.
58. As a result of the Plaintiffs' detrimental reliance on the knowingly false representations, promises and omissions of Defendants Ron Banks and Greg Kirchner, the Plaintiffs all invested the following amounts in GSL:
a. Plaintiff Consoli $100,000.00;
b. Plaintiff Decker $320,000.00;
c. Plaintiff [E E] $500,000.00; and
d. Plaintiff Vanek $500,000,00.
59. Additionally, throughout the time that Plaintiffs were shareholders in GSL, the Officer and Director Defendants intentionally misled the Plaintiffs regarding the operations of GSL with knowingly false statements and representations about the operations of GSL.
60. Moreover, throughout the time that Plaintiffs were shareholders in GSL, the Officer and Director Defendants intentionally misled the Plaintiffs regarding the profits of GSL with knowingly false statements and representations about the profits.
61. Throughout the time that Plaintiffs were shareholders in GSL, the Officer and Director Defendants also intentionally misled the Plaintiffs regarding the committed business of GSL including but not limited to the purported business of Unipro, Performance Food Group and Compass with knowingly false statements and representations about such allegedly committed business.
. . . .
79. The GSL Bylaws require that an annual shareholders meeting be held. . . .
80. However, no such annual meeting of GSL shareholders has ever been held.
81. The Bylaws require that Directors be appointed to the Board at the annual shareholders meeting
82. Section 2.5 of the Bylaws requires that notice be given to all shareholders of such actions as a sale of all the assets of GSL[.]
83. The Bylaws require that the compensation of all officers of GSL is to be "fixed by the Board of Directors and no officer shall serve the Corporation in any other capacity and receive compensation therefor[e] unless such additional compensation is authorized by the Board of Directors." . . .
84. There have been no corporate documents of GSL enacted by the Board of Directors nor any minutes of any meetings of the Board of Directors indicating that the Board of Directors of GSL at any time fixed or authorized compensation for any officer.
. . . .
104. Exhibit 11 states that the affirmative vote of eighty (80%) percent of the issued and outstanding shares of the Corporation's common stock is required for the "issuance of additional shares of any class of Corporation stock" and for any "sale, lease, mortgage or other transfer of all or substantially all of the assets of the Corporation." See Exhibit 11.
. . . .
108. In or around March of 2008, GSL officers, including Defendants Ron Banks and Malzacher, made various misrepresentations to the shareholders and directors of GSL regarding alleged arrangements that they had made with Carolina Premier Bank to establish a line of credit for GSL.
109. The representations of Defendants Ron Banks and Malzacher were made with the intent to induce the Plaintiffs to infuse yet additional money for the benefit of GSL.
110. These representations were knowingly false when made, as the Defendant Officers and Directors had not secured any such line of credit prior to making representations regarding the same to the Plaintiffs.
111. Defendants['] actions in making such misrepresentations to the Plaintiffs constituted bad faith actions in breach of their fiduciary duties to the Plaintiffs.
112. In or around this same period of time in March of 2008, the Plaintiffs presented the Defendants with various alternative proposals for the operation of GSL.
113. However, Defendants Ron Banks, Malzacher and Kirchner, purporting to act on behalf of GSL, unilaterally and without any corporate authority, authorization or resolution from the Board of Directors or otherwise, refused alternatives proposed by the Plaintiffs and, as detailed herein below, shut down GSL instead.
114. Defendants Ron Banks, Malzacher and Kirchner, purporting to act on behalf of GSL but without any authority to do so, attempted to set the terms of what corporate entity GSL proposed with regard to future operations and capital of GSL.
115. In March of 2008 the Directors of GSL — Defendants Ron Banks and Kirchner and Plaintiffs Consoli, Decker and E E — were deadlocked as to the operation of GSL.
116. In March of 2008 no eighty percent (80%) shareholder block was able to or did break the deadlock of the Directors.
117. Yet, on or about April 4, 2008, without the authorization or consent of the shareholders or of the Board of Directors and without any resolution having been issued by the Board of Directors or the shareholders, the Officer and Director Defendants shut down all existing operations of GSL. . . .
118. With the shutting down of the only existing ongoing operation of GSL, the Defendants effectively and without any authorization or consent shut down all business of GSL in April of 2008.
119. With the shutting down of the only existing ongoing operation of GSL in April of 2008, the Defendants effectively and without any authorization disposed of and/or diverted all or substantially all of the assets of GSL.
120. The Officer and Director Defendants acted in bad faith and without the best interest of GSL in shutting down all existing operations on April 4, 2008.
121. The Officer and Director Defendants acted in their own self-interest with regard to the shutting down of all GSL operations in April of 2008.
The extent to which the trial court properly granted summary judgment in favor of Plaintiffs depends on the extent, if any, to which the allegations in the verified amended complaint adequately support such a result.
As part of their attack upon the lawfulness of the trial court's rulings, Defendants challenge the adequacy of Plaintiffs' amended complaint to support Plaintiffs' request for summary judgment. According to Defendants, Plaintiffs' amended complaint contained considerable material that was not based on the affiant's personal knowledge, included inadmissible and speculative assertions, and constituted inadmissible conclusions of law. Defendants contend that, once this inadmissible evidence is disregarded, the trial court's decision to grant summary judgment in favor of Plaintiffs lacks adequate record support.
As Defendants correctly note, "[a]ffidavits supporting a motion for summary judgment must `be made on personal knowledge.'" Hylton v. Koontz, 138 N.C. App. 629, 634, 532 S.E.2d 252, 256 (2000) (quoting N.C.R. Civ. P. 56(e)), disc. review denied, 353 N.C. 373, 546 S.E.2d 603 (2001). "Although a Rule 56 affidavit need not state specifically it is based on `personal knowledge,' its content and context must show its material parts are founded on the affiant's personal knowledge[.]" Id. (citations omitted). "Our courts have held affirmations based on `personal awareness,' `information and belief,' and what the affiant `thinks,' do not comply with the `personal knowledge' requirement of Rule 56(e)." Id. (citations omitted). Any conclusions of law contained in an affidavit should also be disregarded. See Lemon v. Combs, 164 N.C. App. 615, 622, 596 S.E.2d 344, 349 (2004). We will keep these fundamental legal principles in mind as we review the sufficiency of Plaintiffs' evidentiary forecast, proceeding on a claim by claim basis.
i. Fraud in the Inducement
"`The essential elements of fraud [in the inducement] are: (1) [f]alse representation or concealment of a material fact, (2) reasonably calculated to deceive, (3) made with intent to deceive, (4) which does in fact deceive, (5) resulting in damage to the injured party.'" Media Network v. Long Haymes Carr, Inc., 197 N.C. App. 433, 453, 678 S.E.2d 671, 684 (2009) (quoting Rowan County Bd. of Educ. v. U.S. Gypsum Co., 332 N.C. 1, 17, 418 S.E.2d 648, 658 (1992)). As a general proposition, the representation upon which a fraud claim rests must "be definite and specific" and involve "[a] subsisting or ascertainable fact, as distinguished from a matter of opinion or representation relating to future prospects[.]" Ragsdale v. Kennedy, 286 N.C. 130, 139, 209 S.E.2d 494, 500 (1974) (citing City of New Bern v. White, 251 N.C. 65, 68, 110 S.E.2d 446, 448 (1959); Brewer v. Union Central Life Insurance Co., 214 N.C. 554, 557, 200 S.E. 1, 3 (1938); and Cash Register Co. v. Townsend, 137 N.C. 652, 655, 50 S.E. 306, 307 (1905)). An "intentional deceit" is an "indispensable element of . . . a claim for relief sounding in fraud." Watts v. Cumberland County Hospital System, Inc., 317 N.C. 110, 118, 343 S.E.2d 879, 885 (1986) (citation omitted); see also Myers Chapman, Inc. v. Evans, 323 N.C. 559, 568, 374 S.E.2d 385, 391 (1988) (stating that, "[w]ithout the element of intent to deceive, the required scienter for fraud is not present"). Although "[a]llegations of fraud do not readily lend themselves to resolution by way of summary judgment because a cause of action based on fraud usually requires the determination of a litigant's state of mind," "the issue of fraud may be summarily adjudicated when it is clearly established that there is no genuine issue of material fact." Johnson v. Phoenix Mutual Life Insurance Co., 300 N.C. 247, 260, 266 S.E.2d 610, 619 (1980) (citations omitted) ( disapproved on other grounds in Myers Chapman, 323 N.C. at 569, 374 S.E.2d at 391-92).
Plaintiffs' fraud in the inducement claim was asserted against GSL, Ron Banks, and Kirchner.
Plaintiffs assert that they were induced to engage in two different transactions as the result of fraud: (1) the signing of the initial contract and (2) the making of a further investment in GSL in March of 2008. With respect to the signing of the original contract, the amended complaint fails to assert that GSL, Ron Banks, or Kirchner made any specific misrepresentation that induced Plaintiffs to invest in GSL. Simply put, Plaintiffs' evidentiary forecast fails to specify the exact nature of the misrepresentations allegedly made by Ron Banks and Kirchner regarding their experience and ability to manage GSL and cause it to grow. In other words, the amended complaint fails to detail what misrepresentation Ron Banks and Kirchner actually made to Plaintiffs in order to induce them to make their original investment in GSL and the reason that the representation in question was misleading. Although the amended complaint does state that GSL, Ron Banks, and Kirchner made false statements concerning the experience and competence of Ron Banks and Kirchner, the record is completely devoid of any indication as to what those representations consisted of or what about those statements was false. Moreover, even though the amended complaint alleges that Ron Banks and Kirchner did not intend to comply with various corporate formalities, the language of the amended complaint is devoid of any specific factual assertion that tends to support this allegation or to show that this failure to comply with required corporate formalities occurred because of an intent to defraud. As a result, the factual assertions contained in the amended complaint are not sufficient to support an award of summary judgment in connection with Plaintiffs' fraudulent inducement claim relating to Plaintiffs' original investment in GSL.
We reach a different conclusion with respect to Plaintiffs' claim relating to the additional investment that Plaintiffs made in GSL in March of 2008. The amended complaint specifically states that Ron Banks and Kirchner claimed to have secured a line of credit for GSL without having actually made such an arrangement. In reliance on this representation, Plaintiffs made a further investment in GSL which they lost when GSL was shut down. The necessary intent to deceive, along with the required deceptive intent, can reasonably be inferred from the circumstances asserted in the amended complaint. As a result, Plaintiffs adequately supported their claim for fraudulent inducement relating to the additional investment that Plaintiffs made in GSL in March 2008.
ii. Negligent Misrepresentation
"It has long been held in North Carolina that `[t]he tort of negligent misrepresentation occurs when (1) a party justifiably relies, (2) to his detriment, (3) on information prepared without reasonable care, (4) by one who owed the relying party a duty of care.'" Simms v. Prudential Life Ins. Co. of. Am., 140 N.C. App. 529, 532, 537 S.E.2d 237, 240 (2000) (quoting Raritan River Steel Co. v. Cherry, Bekaert Holland, 322 N.C. 200, 206, 367 S.E.2d 609, 612 (1988)), disc. review denied, 353 N.C. 381, 547 S.E.2d 18 (2001). "In negligent misrepresentation cases, `whether liability accrues is highly fact-dependent, with the question of whether a duty is owed a particular plaintiff being of paramount importance.' As such, summary judgment is seldom appropriate in these types of cases." Marcus Bros. Textiles, Inc. v. Price Waterhouse, LLP, 350 N.C. 214, 220, 513 S.E.2d 320, 325 (1999) (quoting Logan, N.C. Torts § 25.30, at 551). However, this Court held in Howell v. Fisher, 49 N.C. App. 488, 272 S.E.2d 19 (1980), disc. review denied, 302 N.C. 218, 277 S.E.2d 69 (1981), that "negligent misrepresentation by a third party which induced plaintiffs to become shareholders created such a special duty." Allen ex rel. Allen Brock Const. Co., Inc. v. Ferrera, 141 N.C. App. 284, 290-91, 540 S.E.2d 761, 766 (2000). As a result, the ultimate issue that must be addressed in connection with Plaintiffs' negligent misrepresentation claim is whether the evidentiary forecast submitted by Plaintiffs establishes that they justifiably and detrimentally relied on representations made in the absence of reasonable care.
Plaintiffs' negligent misrepresentation claim was asserted against GSL, Ron Banks, and Kirchner.
A careful review of the assertions in the amended complaint causes us to reach a result similar to the one that we reached in connection with Plaintiffs' fraudulent inducement claim. The amended complaint simply does not state that Defendants made any specific inaccurate or misleading representation in order to induce Plaintiffs' original investment decision. Although the amended complaint states that GSL, Ron Banks, and Kirchner made false representations concerning the experience and competence of Ron Banks and Kirchner, the record is completely devoid of any indication as to what those representations consisted of or what errors were contained in those statements. In addition, the amended complaint does not explain how Plaintiffs could have known Defendants' intentions concerning the alleged intention to disregard required corporate formalities. As a result, the trial court erroneously granted summary judgment in Plaintiffs' favor with respect to that portion of their negligent misrepresentation claim relating to Plaintiffs' initial investment in GSL.
As we noted in connection with our analysis of Plaintiffs' fraudulent inducement claim, however, the amended complaint does assert, with respect to the additional investment that Plaintiffs made in GSL in March 2008, that GSL, Ron Banks, and Kirchner made representations concerning the availability of a nonexistent line of credit. GSL, Ron Banks, and Kirchner owed a duty to Plaintiffs to refrain from making misleading representations regarding this additional investment. As a result, the trial court properly granted summary judgment in Plaintiffs' favor with respect to this aspect of Plaintiffs' negligent misrepresentation claim.
Defendants have not challenged the extent to which any representations that GSL, Ron Banks, and Kirchner may have made to Plaintiffs were made negligently, rather than intentionally, so we need not address this issue.
iii. Breach of Fiduciary Duty
"Under North Carolina law, directors of a corporation generally owe a fiduciary duty to the corporation, and where it is alleged that directors have breached this duty, the action is properly maintained by the corporation rather than any individual creditor or stockholder." Governors Club, Inc. v. Governors Club Ltd. P'ship, 152 N.C. App. 240, 248, 567 S.E.2d 781, 786-87 (2002) (emphasis omitted) (citations omitted), aff'd per curiam, 357 N.C. 46, 577 S.E.2d 620 (2003). As a general rule, "the right to sue officers of a corporation for mismanagement is in the corporation. Relief must be sought through the corporation or in an action to which it is a party." Parrish v. Brantley, 256 N.C. 541, 544, 124 S.E.2d 533, 536 (1962). "Procedurally, the . . . plaintiffs must first seek to obtain their remedy within the corporation itself, unless such demand would be futile." Alford v. Shaw, 72 N.C. App. 537, 539-40, 324 S.E.2d 878, 881 (1985), aff'd, 320 N.C. 465, 358 S.E.2d 323 (1987). As a result, claims predicated on alleged misconduct by the officers or directors of a corporation must generally be brought on behalf of the corporate entity rather than on behalf of individual shareholders.
Plaintiffs actually asserted two breach of fiduciary duty claims in the amended complaint, the first of which was labeled "Breach of Fiduciary Duties of Directors and Officers" and was asserted against Martin Banks, Ron Banks, Kirchner, and Malzacher and the second of which was labeled "Breach of Duty to Minority Shareholders" and was asserted against Ron Banks, Martin Banks, and Kirchner. As a result of the similarity between the two claims, we will review Defendants' challenges to the trial court's decision to grant summary judgment by addressing both claims in conjunction with each other.
This general principal does not, however, apply to litigation challenging the conduct of the officers and directors of a closely-held corporation brought by minority shareholders. In Norman v. Nash Johnson Sons' Farms, Inc., 140 N.C. App. 390, 405, 537 S.E.2d 248, 259 (2000), disc. review denied, 353 N.C. 378, 547 S.E.2d 14 (2001), this Court held that "minority shareholders in a closely held corporation who allege wrongful conduct and corruption against the majority shareholders in the corporation may bring an individual action against those shareholders, in addition to maintaining a derivative action on behalf of the corporation." As a result of the fact that GSL was clearly a closely-held corporation and that Defendants were clearly majority shareholders, Plaintiffs had the right to bring claims against GSL's officers and directors on their own behalf, rather than derivatively on behalf of GSL.
In the amended complaint, Plaintiffs alleged that Ron Banks, Martin Banks, Kirchner, and Malzacher disregarded corporate formalities, transferred the assets of GSL to another entity while acting in bad faith, and shutting down GSL despite having no authority to do so. More particularly, Plaintiffs asserted that an 80% majority vote was needed to transfer substantially all of GSL's assets to another entity and that Ron Banks, Martin Banks, Kirchner, and Malzacher effectuated such a transfer to another entity in April 2008 without obtaining approval from the required shareholder supermajority. As a result of the fact that such claims must be brought against corporate officers and directors and the fact that the factual statements, as compared to legal conclusions, in the amended complaint do not suffice to establish that Martin Banks and Malzacher are either actual or de facto officers in GSL, Lemon, 164 N.C. App. at 622, 596 S.E.2d at 349 (stating that any conclusions of law contained in an affidavit should be disregarded in determining whether to grant or deny summary judgment), the trial court erred by entering summary judgment against Martin Banks and Malzacher with respect to these breach of fiduciary duty claims. In addition, Plaintiffs' assertions are not sufficient to establish that Ron Banks and Kirchner are liable to Plaintiffs for breach of fiduciary duty. Although the amended complaint adequately asserts facts tending to show that Ron Banks and Kirchner acted in such a manner as to effectively shut GSL down without complying with the necessary corporate formalities, the record contains no evidence tending to show facts, as compared to assertions made on "information and belief" or similar indications of a lack of personal knowledge, establishing that Ron Banks and Kirchner acted without good faith and for the purpose of deriving an improper benefit. As a result, the trial court erred by granting summary judgment in favor of Plaintiffs in connection with their breach of fiduciary duty claims.
The amended complaint alleges "upon information and belief" that the assets of GSL were transferred to RLG — an LLC associated with Ron Banks, Martin Banks, Malzacher, and Kirchner. However, since assertions made on "information and belief" are not properly considered in connection with deciding a summary judgment motion, we have not considered this statement in the course of our review of the trial court's ruling.
iv. Breach of Contract
Next, Defendants challenge Plaintiffs' breach of contract claim, arguing that the only contract between the parties was the Shareholders' Agreement and that Plaintiffs have not alleged any violation of that document. Although Plaintiffs argue that there has been a clear breach of the Shareholders' Agreement, they have not specified the exact nature of that breach in their complaint or in their brief before this Court. It is certainly true that the burden of showing error lies with Defendants. However, it is not our duty to comb through a voluminous record like the one before us in this case for the purpose of constructing arguments in favor of either party. As a result, given the complete absence of any allegation in the amended complaint or any citation to any portion of the record specifying either the exact provision of any contract between the parties that Defendants violated or the manner in which Defendants violated this contractual provision, we conclude that the trial court erred by granting summary judgment in favor of Plaintiffs with respect to this breach of contract claim.
Plaintiffs' breach of contract claim has been asserted against GSL, Ron Banks, Martin Banks, and Kirchner.
v. Piercing the Corporate Veil
Finally, according to well-established North Carolina law, a court should "`disregard the corporate form' and `pierce the corporate veil' where an individual exercises actual control over a corporation, operating it as a mere instrumentality or tool." Becker v. Graber Builders, Inc., 149 N.C. App. 787, 790, 561 S.E.2d 905, 908 (2002) (citing Postell v. B D Construction Co., 105 N.C. App. 1, 11, 411 S.E.2d 413, 419, disc. review denied, 331 N.C. 286, 417 S.E.2d 253 (1992)). The Supreme Court has "enumerated three elements which support" a decision to pierce the corporate veil in reliance on the instrumentality rule:
Plaintiffs have asserted their "veil-piercing" claim against Ron Banks, Martin Banks, Kirchner, and Malzacher.
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practices in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own.
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights.
(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
Glenn v. Wagner, 313 N.C. 450, 454-55, 329 S.E.2d 326, 330 (1985) (quoting B-W Acceptance Corp. v. Spencer, 268 N.C. 1, 9, 149 S.E.2d 570, 576 (1966). Aside from the fact that the record does not contain sufficient facts, as compared to legal assertions, to establish that Martin Banks and Malzacher were officers or directors of GSL, the amended complaint contains nothing more than generalized assertions that any of the Defendants against whom this "veil-piercing" claim has been asserted engaged in any specific act sufficient to show the requisite degree of control over GSL's activities. As a result, the trial court erred by granting summary judgment in favor of Plaintiffs with respect to this "veil-piercing" claim.
vi. Conclusion
We conclude that the trial court properly granted summary judgment against GSL, Ron Banks, and Kirchner with respect to Plaintiffs' claims for fraudulent inducement and negligent misrepresentation in so far as they relate to the additional investment Plaintiffs made in GSL in March 2008. With respect to the remaining claims, however, we conclude that the trial court erred by granting summary judgment in favor of Plaintiffs. As a result of the fact that the trial court's decision with respect to the issue of damages stemmed from its decision to grant summary judgment in favor of Plaintiffs with respect to all aspects of each claim and since our decision to reverse the trial court's decision to grant summary judgment with respect to almost all of the claims asserted in Plaintiffs' amended complaint affects the amount of damages for which Defendants are liable, we conclude that the trial court's damage-related decision must be reversed as well and that this case should be remanded to the Mecklenburg County Superior Court for further proceedings not inconsistent with this opinion, including a determination of the appropriate amount of damages that should be awarded to Plaintiffs based upon those portions of their fraud in the inducement and negligent misrepresentation claims that have withstood Defendants' challenges on appeal.
2. Default Judgment Against Malzacher
In addition, Defendants contend that the trial court erroneously entered judgment by default against Malzacher on the grounds that the initial entry of default was made in violation of the applicable local rules; that Plaintiffs' motion for the entry of default judgment was not filed in a timely manner as required by the applicable local rules; that the evidence submitted at the time that Plaintiffs sought an entry of default against Malzacher did not support the trial court's decision; and that the trial court utilized an impermissible measure of damages. As a result of the fact that Malzacher did not preserve his challenge to any violations of the local rules that might have led to the entry of judgment by default against him and any error by the trial court involving reliance on an incorrect measure of damages, we have previously held that these contentions are not properly before us. In addition, although we have held that the factual assertions in the amended complaint did not suffice to support the entry of summary judgment against Malzacher on either the breach of fiduciary duty or piercing the corporate veil claims, the only ones that have been asserted against him, we believe that the allegations of Plaintiffs' complaint were sufficient to state a claim for relief against Malzacher with respect to both claims. Lowe's of Raleigh, Inc. v. Worlds, 4 N.C. App. 293, 295, 166 S.E.2d 517, 518 (1969) (stating that "[a] complaint which fails to state a cause of action is not sufficient to support a default judgment for plaintiff"); see also Hunter v. Spaulding, 97 N.C. App. 372, 377, 388 S.E.2d 630, 634 (1990). However, since the materials submitted in support of Plaintiffs' request for summary judgment do not include a specific damage amount for which Malzacher is liable in connection with the two claims asserted against him, we must reverse the trial court's decision to enter default judgment against
Malzacher on the damages issue and remand this case to the trial court for further proceedings sufficient to properly resolve that issue.
3. Attorney's Fees
Finally, Defendants argue that the trial court lacked statutory authority to enter an award of attorney's fees in Plaintiffs' favor. We agree.
"`The general rule in this State is that, in the absence of statutory authority therefor, a court may not include an allowance of attorneys' fees as part of the costs recoverable by the successful party to an action or proceeding.'" Custom Molders, Inc. v. American Yard Products, Inc., 342 N.C. 133, 141, 463 S.E.2d 199, 204 (1995) (quoting In re King, 281 N.C. 533, 540, 189 S.E.2d 158, 162 (1972)). In an effort to demonstrate that the trial court's attorney's fee award has the requisite statutory support, Plaintiffs direct our attention to the Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1 et seq. In reliance on our decision in Media Network, Plaintiffs claim that their fraud in the inducement claim provides adequate support of an award of attorney's fees based upon N.C. Gen. Stat. § 75-16.1.
In Media Network, the plaintiff asserted claims against the defendants for breach of contract, misappropriation of trade secrets, fraud, negligent misrepresentation, tortious interference with contract, trespass to chattels, and unfair and deceptive trade practices. Media Network, 197 N.C. App. at 445, 678 S.E.2d at 680. The trial court dismissed all of the plaintiff's claims prior to trial except for the plaintiff's breach of contract and unfair and deceptive trade practices claims. Id. At the conclusion of the trial, the jury returned a verdict in favor of the plaintiff with respect to the unfair and deceptive trade practices claim. Id. at 446-47, 678 S.E.2d at 680. In affirming the trial court's decision to deny the defendant's motion for judgment notwithstanding the verdict directed toward the unfair and deceptive trade practices claim, we observed that "[t]he Business Court [correctly] concluded that plaintiff's claim `smacks of fraud in the inducement'" and that "[p]roof of fraud in the inducement necessarily constitutes a violation of Chapter 75 and shifts the burden of proof from the plaintiff to the defendant, which must then prove that it is exempt from Chapter 75's provisions." Id. at 453, 678 S.E.2d at 684.
Plaintiffs' reliance on Media Network is misplaced. As our opinion clearly indicates, Media Network addressed the merits of the plaintiff's unfair and deceptive trade practices claim. Although allegations "smacking" of fraud in the inducement may be sufficient to support a claim brought pursuant to N.C. Gen. Stat. § 75-1.1, that determination should not obscure the fact that attorney's fees are only available pursuant to N.C. Gen. Stat. § 75-16.1 in the event that a claim is successfully prosecuted pursuant to the Unfair and
Deceptive Trade Practices Act. No such claim was asserted, much less successfully prosecuted, in this case. As a result, since the trial court's decision to award attorney's fees is not supported by N.C. Gen. Stat. § 75-16.1 or any other statutory provision, we conclude that the trial court erred by granting Plaintiffs' request for an award of attorney's fees.
III. Conclusion
Thus, for the reasons set forth above, we partially affirm the trial court's decision to grant summary judgment against GSL, Ron Banks, and Kirchner with respect to the fraudulent inducement and negligent misrepresentation claims and the trial court's decision to enter default judgment on the issue of liability against Malzacher. On the other hand, we reverse the remainder of the trial court's summary judgment determinations and the trial court's decision to enter default judgment against Malzacher on the issue of damages and remand this case to the Mecklenburg County Superior Court for further proceedings not inconsistent with this opinion.
AFFIRMED IN PART AND REVERSED AND REMANDED IN PART.
Chief Judge MARTIN and Judge McGEE concur.
Report per Rule 30(e).