Curtis v. Barnet,
2011 NCBC 24.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF
JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG 10 CVS 21196
KEVIN CURTIS, Derivatively and on
Behalf of Nominal Defendant DUKE
ENERGY CORPORATION,
Plaintiff,
v.
WILLIAM BARNET, III, G. ALEX
BERNHARDT, SR., MICHAEL G.
BROWNING, ANN MAYNARD GRAY, ORDER & OPINION
JAMES H. HANCE, JR., JAMES T.
RHODES, and JAMES E. ROGERS,
Defendants,
and
DUKE ENERGY CORPORATION,
Nominal Defendant.
Jackson & McGee, LLP by Gary W. Jackson and Barroway Topaz Kessler
Meltzer & Check, LLP by Eric Zagar for Plaintiff Kevin Curtis.
McGuireWoods LLP by Douglas W. Ey, Jr. and Sidley Austin LLC by Steven
M. Bierman, Dorothy J. Spenner, and Jackie A. Lu for Defendants.
Murphy, Judge.
{1} THIS MATTER is before the Court upon Defendants’ Motion to
Dismiss Plaintiff’s Shareholder Derivative Complaint. Defendants allege that
Plaintiff’s Complaint should be dismissed because: (1) it is time barred under the
applicable statute of limitations; (2) it fails to state a claim upon which relief can be
granted; and (3) Plaintiff’s failure to make a pre-suit demand is not excused.
{2} The Court decides the Motion without a hearing pursuant to Rule 15.4
of the General Rules of Practice and Procedure for the North Carolina Business
Court.
{3} After considering the Complaint, the Motion, and the briefs and
submissions of the parties, the Court GRANTS Defendants’ Motion to Dismiss
Plaintiff’s Shareholder Derivative Complaint, in its entirety.
I.
PROCEDURAL HISTORY
{4} On October 14, 2010, Plaintiff Kevin Curtis filed a Shareholder
Derivative Complaint on behalf of Nominal Defendant Duke Energy Corporation
(“Duke Energy”) against certain individual members of Duke Energy’s Board of
Directors (“Defendants”).
{5} This matter was transferred to the North Carolina Business Court as a
mandatory complex business case on January 5, 2011, and subsequently assigned to
me on January 7, 2011.
{6} On February 14, 2011, Defendants jointly filed their Motion to Dismiss
with supporting brief alleging and contending that Plaintiff’s Complaint should be
dismissed because: (1) it is time barred under the applicable statute of limitations;
(2) it fails to state a claim upon which relief can be granted; and (3) Plaintiff’s
failure to make a pre-suit demand is not excused.
{7} Plaintiff filed his responsive brief in opposition to Defendants’ Motion
to Dismiss on March 31, 2011, to which Defendants filed their reply on April 20,
2011.
II.
FACTS
{8} Prior to September 2006, Crescent Resources, LLC (“Crescent”) was a
wholly owned subsidiary of Duke Energy. Compl. ¶ 19.
{9} In September 2006, Duke Energy’s Board of Directors approved a
series of transactions, hereinafter collectively referred to as the “Crescent
Transaction.”
{10} The Crescent Transaction involved Crescent borrowing approximately
$1.225 billion from third-party lenders, which the Defendants knew was more debt
than Crescent could reasonably service.
{11} Crescent then transferred $1.187 billion of the loan proceeds to Duke
Energy.
{12} In addition to the $1.225 billion borrowed from third-party lenders, the
Crescent Transaction also required Crescent to assume $215 million of Duke
Energy’s guaranty liabilities. Compl. ¶ 21.
{13} Plaintiff contends that the Crescent Transaction ultimately forced
Crescent into insolvency and, as a consequence, a committee of Crescent’s creditors
filed a lawsuit against Duke Energy and certain of its employees to recover the
$1.187 billion that was fraudulently transferred to Duke Energy.
{14} Plaintiff further contends that by approving the Crescent Transaction,
the Defendants breached their fiduciary duties of loyalty and good faith, resulting
in damages to Duke Energy.
{15} Duke Energy’s Form 10-Q filed with the Securities and Exchange
Commission (“SEC”) on November 9, 2006, described the Crescent Transaction, in
part, as follows:
On September 7, 2006, an indirect wholly owned subsidiary of
Duke Energy closed an agreement to create a joint venture of
Crescent (the Crescent JV) with Morgan Stanley Real Estate
Fund V U.S., L.P. (collectively the “MS Members”). The joint
venture, Crescent, and Crescent’s subsidiaries entered into a
credit agreement with third party lenders under which Crescent
borrowed approximately $1.23 billion, of which approximately
$1.19 billion was immediately distributed to Duke Energy.
Immediately following the debt transaction, the MS Members
collectively acquired 49% membership interest in the Crescent
JV from Duke Energy for a purchase price of approximately
$415 million. The MS Members 49% interest reflects a 2%
interest in the Crescent JV issued by the joint venture to the
President and Chief Executive Officer of Crescent. Accordingly,
Duke Energy has an effective 50% ownership in the equity of the
Crescent JV for financial reporting purposes. Compl. ¶ 20.
{16} Defendants allegedly valued Crescent at more than $1.7 billion despite
indications on both Crescent’s and Duke Energy’s books that Crescent’s principal
assets were valued at only $1.2 billion. Compl. ¶ 25.
{17} By the beginning of 2007, a few months after the Crescent Transaction
closed, Crescent was already having trouble generating sufficient earnings to
service its debt. Compl. ¶ 27.
{18} By the second quarter of 2007, Crescent fell so far below its required
earnings coverage ratio that the lenders imposed a “cash trap,” requiring Crescent
and its subsidiaries to pledge their deposit accounts to the lenders. By the third
quarter of 2007, Crescent and its subsidiaries were forced to grant liens on their
real estate properties to their lenders. Compl. ¶¶ 27-28.
{19} In June 2009, Crescent filed for bankruptcy in the United States
Bankruptcy Court for the Western District of Texas (“Bankruptcy Court”), and in
May 2010, the Bankruptcy Court confirmed Crescent’s plan of reorganization, which
established the Crescent Resources Litigation Trust (“Litigation Trust”) to pursue
claims against Duke Energy for fraudulent transfer in connection with the Crescent
Transaction. Compl. ¶ 30.
{20} In his complaint, Plaintiff contends that, in breach of their fiduciary
duties of loyalty and good faith, Defendants knew that:
a. Crescent received nothing of value in exchange for the
transfer to Duke Energy of the $1.187 billion of loan
proceeds;
b. Crescent had insufficient assets and earnings to service the debt
they forced Crescent to incur, and thus Crescent would be
rendered insolvent as a result of the Crescent Transaction; and
c. the sole purpose of the Crescent Transaction was to funnel cash
to Duke Energy at the expense of Crescent and its creditors.
Compl. ¶¶ 32-33.
III.
ARGUMENT
A.
LEGAL STANDARD
{21} Pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil
Procedure, a claim should be dismissed if: (1) no law exists to support the claim; (2)
sufficient facts to make out a valid claim are absent; or (3) facts are disclosed that
will necessarily defeat the claim. See Perry v. Carolina Builders Corp., 128 N.C.
App. 143, 146,
493 S.E.2d 814, 816 (1997).
{22} In ruling on a 12(b)(6) motion to dismiss, the Court must accept all
well pleaded factual allegations as true, but the Court does not have to accept as
true legal conclusions, unwarranted deductions of fact, or unreasonable inferences.
See Strickland v. Hedrick, 194 N.C. App. 1, 20,
669 S.E.2d 61, 73 (2008).
{23} “A statute of limitations defense may properly be asserted in a N.C.R.
Civ. P. 12(b)(6) motion to dismiss if it appears on the face of the complaint that such
a statute bars the claim.” Horton v. Carolina Medicorp, 344 N.C. 133, 136,
472
S.E.2d 778, 780 (1996) (internal quotation omitted). Once the defendant raises a
statute of limitations defense, the burden of showing that the action was timely
filed is on the plaintiff, who must show that the relevant statute of limitations has
not expired. Id.; see also Shepard v. Ocwen Fed. Bank, FSB,
172 N.C. App. 475,
478,
617 S.E.2d 61, 63 (2005); Ventriglia v. Deese,
194 N.C. App. 344, 350-51,
669
S.E.2d 817, 821 (2008).
B.
ANALYSIS
1.
STATUTE OF LIMITATIONS
{24} Pursuant to Section 55-7-47 of the North Carolina General Statutes 1 ,
Plaintiff contends that “the laws of the jurisdiction of incorporation” (in this case,
Delaware) govern the statute of limitations relating to this matter. N.C. Gen. Stat.
§ 55-7-47 (2011).
{25} The Court agrees with Plaintiff and concludes that because Duke
Energy is a Delaware corporation (Compl. ¶ 8), Delaware law governs this matter.
{26} “A three-year statute of limitations applies in Delaware to claims
arising from a promise, including claims for breach of fiduciary duty and fraud.”
Del. Code Ann. tit. 10, § 8106(a)(2011); Sunrise Ventures, LLC v. Rehoboth Canal
Ventures, LLC, No. 4119-VCS,
2010 Del. Ch. LEXIS 22, *24 (Del. Ch. Jan. 27, 2010)
(internal quotations omitted).
{27} “Under Delaware law, a plaintiff's cause of action accrues at the
moment of the wrongful act – not when the harmful effects of the act are felt – even
if the plaintiff is unaware of the wrong.” In re Coca-Cola Enters., Inc. S'holders
Litig., No. 1927-CC, 2007 Del. Ch. LEXIS 147, *18 (Del. Ch. Oct. 17, 2007).
1 Section 55-7-47 of the North Carolina General Statutes provides that “[i]n any derivative
proceeding in the right of a foreign corporation, the matters covered by this Part shall be
governed by the laws of the jurisdiction of incorporation of the foreign corporation . . . .”
N.C. Gen. Stat. § 55-7-47 (2011). The North Carolina legislature has defined a “foreign
corporation” as “a corporation for profit incorporated under a law other than the law of this
State.”
N.C. Gen. Stat. § 55-1-40(10) (2011).
{28} However, [w]hen a complaint asserts a claim that is on its face barred
by the statute of limitations, the plaintiffs bear the burden of pleading specific facts
demonstrating that the statute was tolled. Id. at *24.
{29} “Equitable tolling will toll the statute of limitations for claims of
wrongful self-dealing . . . where a plaintiff reasonably relies on the competence and
good faith of a fiduciary.” Id. Equitable tolling or any other theory, however,
cannot toll the statute of limitations “beyond the point at which the plaintiff had
actual knowledge or should have been aware of the facts giving rise to the wrong.”
Id. at *25.
{30} In the case at bar, the Court concludes that Plaintiff’s claims for
breach of fiduciary duty, as asserted in the Complaint, are subject to Delaware’s
three-year statute of limitations that “accrue[d] at the moment of the wrongful act,
even if plaintiff is unaware of the wrong.” In re Coca-Cola, 2007 Del. Ch. LEXIS
147, * 18 (internal quotations omitted). Therefore, the time at which the harmful
effects were felt is irrelevant.
Id.
{31} The “wrongful act” from which Plaintiff’s claim arises was the Board’s
approval of the Crescent Transaction on September 7, 2006. Compl. ¶¶ 3, 20.
Plaintiff filed his Verified Complaint on October 14, 2010, more than four years
after the alleged wrongful act.
{32} Plaintiff contends that, under Delaware law, the statute of limitations
is subject to the “time of discovery” rule, and cites Morton v. Sky Nails, 884 A.2d
480 (Del. 2005) in support of their position. Morton provides that “under the time of
discovery rule, the statute of limitations does not begin to run until a party knows
or has reason to know that he/she has been injured.” Morton,
884 A.2d at 481
(applying the “time of discovery” rule to limitations on personal injury tort claims,
but not to breach of fiduciary duty claims).
{33} Even if the Court applied the “time of discovery” rule in this case, only
“injuries or conditions which are inherently unknowable [to a blamelessly ignorant
plaintiff] postpone the commencement of the statute-of-limitations period until the
victim discovered or should have discovered the wrong.” Hodges v. Smith, 517 A.2d
299, 300 (1986). Moreover, “[t]he determination of whether or not a suit is barred
by the statute of limitations depends upon whether the condition which is the
product of the alleged negligence was inherently unknowable, and, if so, when
plaintiffs knew or should have known of the condition.”
Id. at 301.
{34} Here, Plaintiff neither pleads specific facts of wrongful self-dealing,
demonstrating that the statute of limitations has or should be tolled, nor does
Plaintiff establish itself as the blamelessly ignorant party that sustained an
“inherently unknowable” injury.
{35} Notwithstanding the specific reference in the Complaint to Duke
Energy’s November 9, 2006 public SEC filing 2 that sets forth the salient terms of
the Crescent Transaction (Compl. ¶ 20), Plaintiff unequivocally alleges in the
Complaint that by the beginning of 2007, and no later than the second quarter of
2 The Securities and Exchange Commission (“SEC”) maintains public records such as
registration statements and reports filed by regulated companies that are available through
the public reference facilities located at SEC Headquarters and also at the SEC website,
http://www.sec.gov.
2007, Crescent was in serious financial trouble (Compl. ¶ 27). The second quarter of
2007, which the Court interprets to be the months of April, May and June, would be
the latest point at which Plaintiff either had actual knowledge or was effectively put
on notice of the circumstances giving rise to the alleged wrongful act. Compl. ¶ 27.
{36} Whether the Court finds that the wrongful act occurred at the
completion of the Crescent Transaction in September 2006, or by the end of the
second quarter of 2007, as alleged in the Complaint, the outcome remains the same.
{37} Under Delaware law, Plaintiff’s claim of breach of fiduciary duty is
subject to a three-year statute of limitations, which began to run in September
2006, or, at the very latest, by the end of the second quarter of 2007. Applying
either time frame, Plaintiff filed his Complaint more than three years after the
applicable statute of limitations began to run.
{38} Further, the Complaint failed to plead specific facts of any theory
demonstrating a tolling of the period of limitations. Accordingly, the Court
concludes that Plaintiff did not file his Complaint in a timely manner.
2.
ALTERNATIVE CLAIMS
{39} Because the Court concludes that Plaintiff failed to file his Complaint
before the expiration of the applicable statute of limitations, the Court need not
consider Defendants’ alternative claims for dismissal.
IV.
CONCLUSION
{40} The Court GRANTS Defendants’ Motion to Dismiss Plaintiff’s claims
for Defendants’ breaches of fiduciary duty on the grounds that Plaintiff failed to file
his Complaint within the applicable three-year statute of limitations pursuant to
Delaware law.
{41} For the reasons noted above, it is hereby ORDERED that Plaintiff’s
Complaint is dismissed in its entirety, with prejudice.
This 22nd day of July, 2011.
