Finley v. Brown,
2017 NCBC 78.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 17 CVS 2812
ALBERT EARLE FINLEY, III,
individually and derivatively on
behalf of the A.E. FINLEY
FOUNDATION, INC.,
Plaintiff,
v.
ROBERT C. BROWN; ALTON E.
HOWARD; CHARLES D.
NOTTINGHAM, III; WALTER ORDER AND OPINION ON
NOTTINGHAM; and JOSH STEIN, DEFENDANTS’ MOTIONS TO
Attorney General of the State of DISMISS AND SCHEDULING ORDER
North Carolina,
Defendants,
v.
A.E. FINLEY FOUNDATION, INC.,
Nominal Defendant.
1. THIS MATTER is before the Court upon Defendants Robert C. Brown,
Alton E. Howard, Charles D. Nottingham, III, and Walter Nottingham’s
(collectively “Director Defendants”) Motion to Dismiss and Nominal Defendant
A.E. Finley Foundation, Inc.’s (the “Foundation”) Motion to Dismiss (collectively,
the “Motions”) in the above-captioned case (collectively, Director Defendants and
the Foundation, “Defendants”).
2. Having considered the Motions, briefs in support of and in opposition to
the Motions, and the arguments of counsel at the hearing on the Motions on June
29, 2017, the Court DENIES Defendants’ Motions to Dismiss Plaintiff’s derivative
claims and DEFERS ruling on Defendants’ Motions to Dismiss Plaintiff’s direct
claim for enforcement of charitable gifts for the reasons set forth herein.
Womble Carlyle Sandridge & Rice, LLP, by Pressly M. Millen and
Elizabeth K. Arias, for Plaintiff Albert Earle Finley, III, individually and
derivatively on behalf of the A.E. Finley Foundation, Inc.
Manning, Fulton & Skinner, P.A., by Michael T. Medford, for Defendants
Robert C. Brown, Alton E. Howard, Charles D. Nottingham, III, and
Walter Nottingham.
Kilpatrick Law Group, PLLC, by Thomas Chen Kilpatrick, for Nominal
Defendant A.E. Finley Foundation, Inc.
North Carolina Department of Justice, by Jennifer T. Harrod, for
Defendant Josh Stein, Attorney General of the State of North Carolina.
Bledsoe, Judge.
I.
PROCEDURAL HISTORY
3. Plaintiff Albert Earle Finley, III (“Plaintiff”) filed this action on March 6,
2017, asserting claims against the Director Defendants (i) derivatively on behalf of
the Foundation under N.C. Gen. Stat. § 55A-7-40, (ECF No. 1 at 1), for alleged breach
of fiduciary duty, gross mismanagement of the Foundation, and unjust enrichment,
entitling the Foundation to damages, removal of the Director Defendants from the
Foundation Board of Directors, and injunctive relief prohibiting Plaintiff’s removal
from the Foundation Board, (ECF No. 1 at 17–20), and (ii) directly for specific
enforcement of Albert Earle Finley’s (“Mr. Finley”) charitable gifts to the Foundation
under N.C. Gen. Stat. § 36C-4-405.1(b), (ECF No. 1 at ¶¶ 1, 63).
4. On March 28, 2017, the above-captioned case was designated a mandatory
complex business case under N.C. Gen. Stat. § 7A-45.4(b) by Order of Chief Justice
Mark R. Martin, (ECF No. 5), and assigned to the undersigned that same day by
Order of Chief Business Court Judge James L. Gale, (ECF No. 6).
5. The Director Defendants subsequently moved to dismiss Plaintiff’s
Complaint on April 7, 2017 under both Rules 12(b)(1) and 12(b)(6) of the North
Carolina Rules of Civil Procedure. (ECF No. 13.) The Foundation, incorporating the
arguments of the Director Defendants, also moved to dismiss Plaintiff’s Complaint on
May 8, 2017. (ECF No. 22.)
6. The Attorney General of North Carolina (the “Attorney General”) filed a
brief opposing the Motions on May 30, 2017, (ECF No. 24), as did Plaintiff on May 31,
2017, (ECF No. 25). The Director Defendants filed a consolidated reply in support of
the Motions on June 12, 2017. (ECF No. 28.)
7. The Court held a hearing on the Motions on June 29, 2017, at which all
parties were represented by counsel.
8. The Motions are now ripe for resolution.
II.
FACTUAL BACKGROUND
9. The Court states the following facts, drawing all reasonable inferences in
favor of Plaintiff, only for purposes of ruling on the Motions.
10. The Foundation is a North Carolina corporation, operating as a private
charitable foundation, created by Mr. Finley in 1957 for the purpose of supporting
charitable organizations and programs with financial distributions. (ECF No. 1 at
¶¶ 5, 18.) Mr. Finley gave gifts to the Foundation during his lifetime, (ECF No. 1 at
¶ 61), and named the Foundation as the primary beneficiary of his estate in his Last
Will and Testament dated July 16, 1986 (the “Will”), (ECF No. 1 at ¶ 18).1
11. Plaintiff is one of five directors of the Foundation’s board of directors (the
“Board” or “Board of Directors”). (ECF No. 1 at ¶ 6.) The other four directors of the
Foundation are the Director Defendants—Robert C. Brown (“Brown”), (ECF No. 1 at
¶ 7), Alton E. Howard (“Howard”), (ECF No. 1 at ¶ 8), Charles D. Nottingham, III,
(ECF No. 1 at ¶ 9), and Walter Nottingham, (ECF No. 1 at ¶ 10). Brown has also
served as the President of the Foundation since October 10, 1986. (ECF No. 1 at ¶
7.)
12. Plaintiff alleges that the Director Defendants have breached their fiduciary
duties to the Foundation, grossly mismanaged the Foundation, and unjustly enriched
themselves, (ECF No. 1 at ¶¶ 38–55), by, among other things, failing to prudently
manage the assets of the Foundation, incurring unnecessary expenses, paying
themselves excessive compensation, and dishonoring Mr. Finley’s intent as the donor
of charitable gifts to the Foundation, (ECF No. 1 at ¶¶ 15–16). As a result of these
alleged actions, Plaintiff seeks damages on behalf of the Foundation, removal of the
Director Defendants from the Foundation’s Board, and an order prohibiting the
1 The Will is attached as Exhibit A to the Complaint and is expressly incorporated into the
Complaint. (ECF No. 1 at ¶ 18.) See Schlieper v. Johnson, 195 N.C. App. 257, 261,
672
S.E.2d 548, 551 (2009).
Director Defendants from removing Plaintiff from the Board. (ECF No. 1 at ¶¶ 44,
51, 55–59.)
13. Plaintiff further alleges that:
Plaintiff did not make any demand on [Director] Defendants or the
Board of the Foundation to institute this action because such demand
would have been a futile, wasteful and useless act, particularly for the
following reasons:
a. Each of the [Director] Defendants is fully aware of and actively
participated in the alleged acts constituting breach. [Director]
Defendants were aware of all compensation paid to themselves and
Foundation employees. [Director] Defendants were aware of all other
operating expenses paid out of Foundation assets. [Director]
Defendants were aware of and participated in the decision to allow
Defendant Brown to self-manage over $16 million of the Foundation’s
assets. [Director] Defendants were aware of and allowed Defendant
Brown to invest over $12 million of Foundation assets in two stocks.
[Director] Defendants were aware of and refused to address the fact that
their actions were sending the Foundation down a path toward sunsetting. Thus, [Director] Defendants permitted and condoned the
unlawful practices described herein and any demand upon them to
correct their breach of duties would have been futile.
b. [Director] Defendants control the Board and their own
compensation. As such, [Director] Defendants will not institute this
action against themselves as to do so would jeopardize each [Director]
Defendant’s own personal financial compensation.
c. The sole professional occupation of Defendant Brown is his
employment with the Foundation, pursuant to which he received and
continues to receive substantial and excessive monetary compensation.
In addition, the sole professional occupation of Defendant Brown’s
daughter, Jill Adams, is her employment with the Foundation.
Likewise, the sole professional occupation of Defendant Howard’s
daughter-in-law, Lesa Howard, is her employment with the Foundation.
Accordingly, Defendants Brown and Howard are not disinterested and
independent and would not institute this action as it would jeopardize
the personal financial compensation of Defendant Brown and
Defendants Brown’s and Howard’s family members.
d. Furthermore, [Director] Defendants comprise a majority of the
Board of Directors of the Foundation. Each participated in the wrongs
complained of herein and, therefore, each breached the fiduciary duties
that he owed to the Foundation and is potentially liable for damages.
Thus, [Director] Defendants cannot exercise independent objective
judgment in deciding whether to bring this action or whether to
vigorously prosecute this action because [Director] Defendants would
have to sue themselves which they will not do, thereby excusing
demand.
e. The acts complained of constitute violations of fiduciary duties
owed by the Foundation’s directors and officers and these acts are
incapable of ratification.
f. If Plaintiff had made a demand on [Director] Defendants to
institute this action, [Director] Defendants would have removed
Plaintiff as director, thereby depriving him of standing to institute the
action himself. Such a result would have effectively prevented any
action to correct the breach of duties committed by [Director]
Defendants from ever being filed. Despite this fact, Plaintiff did bring
all of the acts complained of herein to the attention of [Director]
Defendants at various Board meetings. Indeed, Plaintiff has attempted
for over one year to get the Board to lower expenses, reduce
compensation, become better diversified and employ professional
managers. [Director] Defendants were unwilling to take any action.
Making further demand on [Director] Defendants would have been
futile.
(ECF No. 1 at ¶ 37.)
14. Plaintiff further asserts that, as an “interested party,” he may maintain a
proceeding to enforce the charitable gifts made by Mr. Finley to the Foundation under
N.C. Gen. Stat. § 36C-4-405.1(b). (ECF No. 1 at ¶¶ 1, 63.)
III.
LEGAL STANDARD
15. Defendants’ Motions challenge the adequacy of Plaintiff’s pre-suit demand
in asserting his derivative claims and Plaintiff’s standing to bring a direct claim. As
this Court has recognized, “[t]he challenge to the adequacy of any pre-suit demand is,
inter alia, a challenge to the Court’s subject matter jurisdiction over the derivative
claims.” Petty v. Morris, 2014 NCBC LEXIS 67, at *4 (N.C. Super. Ct. Dec. 16, 2014)
(Gale, J.). “Standing is a necessary prerequisite to a court’s proper exercise of subject
matter jurisdiction,” Neuse River Found., Inc. v. Smithfield Foods, Inc.,
155 N.C. App.
110, 113,
574 S.E.2d 48, 51 (2002), and “standing arguments can be presented under
both Rule 12(b)(1) and Rule 12(b)(6),” Sykes v. Health Solutions, Inc.,
2013 NCBC
LEXIS 55 at *8 (N.C. Super. Ct. Dec. 5, 2013) (citing Teague v. Bayer AG,
195 N.C.
App. 18, 22–23,
671 S.E.2d 550, 554 (2009); Meadows v. Iredell County,
187 N.C. App.
785, 787,
653 S.E.2d 925, 928 (2007)).
16. In ruling on a motion to dismiss for lack of standing pursuant to Rule
12(b)(1), the Court may consider matters outside the pleadings in determining
whether subject matter jurisdiction exists. Keith v. Wallerich,
201 N.C. App. 550,
554,
687 S.E.2d 299, 302 (2009) (citing Tart v. Walker,
38 N.C. App. 500, 502,
248
S.E.2d 736, 737 (1978)). Here, however, the Complaint is the only matter of record
before the Court relevant to the Motions. Accordingly, the Motions are properly
considered under the standard of review for motions brought under Rule 12(b)(6). See
DiCesare v. Charlotte-Mecklenburg Hosp. Auth.,
2017 NCBC LEXIS 33, at *20 (N.C.
Super. Ct. Apr. 11, 2017) (Robinson, J.) (citing Munger v. State,
202 N.C. App. 404,
410,
689 S.E.2d 230, 235 (2010)).
17. In ruling on a motion to dismiss under Rule 12(b)(6), the Court considers
“whether the pleadings, when taken as true, are legally sufficient to satisfy the
elements of at least some legally recognized claim.” Arroyo v. Scottie’s Prof’l Window
Cleaning, Inc.,
120 N.C. App. 154, 158,
461 S.E.2d 13, 16 (1995). The Court construes
the pleading liberally and generally accepts all allegations as true. Laster v. Francis,
199 N.C. App. 572, 577,
681 S.E.2d 858, 862 (2009). Furthermore, “a complaint
should not be dismissed for insufficiency unless it appears to a certainty that plaintiff
is entitled to no relief under any state of facts which could be proved in support of the
claim.” Sutton v. Duke,
277 N.C. 94, 103,
176 S.E.2d 161, 166 (1970) (emphasis
omitted).
18. Where the pleading refers to and depends on certain documents, the Court
may consider those documents without converting the motion into one for summary
judgment under Rule 56. See Schlieper,
195 N.C. App. at 261,
672 S.E.2d at 551. At
the same time, the Court may not consider materials that are not mentioned,
contained, or attached in or to the pleading; otherwise, a Rule 12(b)(6) motion will be
converted into a Rule 56 motion and subject to its standards of consideration and
review. Fowler v. Williamson,
39 N.C. App. 715, 717,
251 S.E.2d 889, 890−91 (1979).
19. Dismissal pursuant to a Rule 12(b)(6) motion is proper “(1) when the
complaint on its face reveals that no law supports plaintiff’s claim; (2) when the
complaint reveals on its face the absence of fact sufficient to make a good claim; [or]
(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s
claim.” Oates v. JAG, Inc.,
314 N.C. 276, 278,
333 S.E.2d 222, 224 (1985) (citing
Forbis v. Honeycutt,
301 N.C. 699, 701,
273 S.E.2d 240, 241(1981); Schloss Outdoor
Advert. Co. v. City of Charlotte,
50 N.C. App. 150, 152,
272 S.E. 2d 920, 922 (1980)).
20. The Court is not required “to accept as true allegations that are merely
conclusory, unwarranted deductions of fact, or unreasonable inferences.” Good Hope
Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266, 274,
620
S.E.2d 873, 880 (2005) (citation omitted). A “trial court can reject allegations that
are contradicted by the documents attached, specifically referred to, or incorporated
by reference in the complaint.” Laster,
199 N.C. App. at 577,
681 S.E.2d at 862. The
Court may also ignore a party’s legal conclusions set forth in its pleading. McCrann
v. Pinehurst, LLC,
225 N.C. App. 368, 377,
737 S.E.2d 771, 777 (2013).
IV.
ANALYSIS
21. Defendants move to dismiss the Complaint under Rules 12(b)(1) and 12(b)(6)
because (i) Plaintiff failed to plead allegations sufficient to meet the requirements for
bringing derivative claims under the North Carolina Nonprofit Corporation Act, N.C.
Gen. Stat. § 55A-7-40(b), and (ii) Plaintiff does not have standing to assert claims in
his individual capacity. (Director Defs.’ Br. Supp. Mot. Dismiss 2, 10, ECF No. 13;
Foundation’s Br. Supp. Mot. Dismiss 3, ECF No. 22.)
A. Derivative claims on behalf of the Foundation.
22. Defendants argue that the Complaint must be dismissed because Plaintiff
fails to allege with particularity the efforts that were made by Plaintiff to “obtain a
change in the disputed corporate policies and practices before bringing suit” as
required under N.C. Gen. Stat. § 55A-7-40(b). (ECF No. 13 at 6–7.) Plaintiff argues
in response that section 55A-7-40(b) does not require dismissal for failure to allege
such efforts because the statute contains a demand futility exception, which Plaintiff
has satisfied. (Pl.’s Resp. Opp. Mot. Dismiss 9–10, ECF No. 25; see also Att’y
General’s Br. Opp. Mot. Dismiss 10–11, ECF No. 24.)
23. Plaintiff maintains that he has met the demand futility exception by
pleading that it would be futile to ask the Board to sue themselves because the facts,
as alleged, show that the Board “is under the control of the guilty parties.” (ECF No.
25 at 11 (quoting Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390,
409,
537 S.E.2d 248, 261 (2000).) Defendants contend, however, that Plaintiff’s
allegations are insufficient and argue that the statute requires Plaintiff to make
“specific and particularized demands to the Board for the desired changes in
corporate policies and practices before reaching the point where he wanted to file
suit.” (Director Defs.’ Reply 8–9, ECF No. 28.)
24. The North Carolina Nonprofit Corporation Act currently provides, in
relevant part, as follows:
(a) An action may be brought in a superior court of this State, which
shall have exclusive original jurisdiction over actions brought
hereunder, in the right of any domestic or foreign [nonprofit] corporation
by any member or director . . . .
(b) The complaint shall allege with particularity the efforts, if any, made
by the plaintiff to obtain the action the plaintiff desires from the
directors or comparable authority and the reasons for the plaintiff's
failure to obtain the action or for not making the effort.
N.C. Gen. Stat. § 55A-7-40(a), (b) (2015) (emphasis added).
25. This language is nearly identical to the language used in the North Carolina
Business Corporation Act (“BCA”) prior to the BCA’s 1995 amendments. Indeed,
until the 1995 amendments, the BCA provided, in relevant part, as follows:
(a) An action may be brought in the superior court of this State, which
shall have exclusive original jurisdiction over actions brought
hereunder, in the right of any domestic or foreign corporation by a
shareholder or holder of a beneficial interest in shares of such
corporation . . . .
(b) The complaint shall allege with particularity the efforts, if any, made
by the plaintiff to obtain the action he desires from the directors or
comparable authority and the reasons for his failure to obtain the action
or for not making the effort.
N.C. Gen. Stat. § 55-7-40(a), (b) (1994) (emphasis added).
26. The North Carolina Court of Appeals has construed subsection b of section
55-7-40 in the pre-1995 BCA as “recogniz[ing] an equitable exception excusing a
shareholder from making demand where demand would be futile.” Norman,
140 N.C.
App. at 408,
537 S.E.2d at 261 (citing Roney v. Joyner,
86 N.C. App. 81, 84,
356 S.E.2d
401, 403 (1987)). The court observed that the futility exception was “grounded in the
ancient principle that the law does not require a person to do a vain, or futile, act.”
Id. at 408,
537 S.E.2d at 261 (citing Seaboard Air Line R.R. v. Atl. Coast Line R.R.,
240 N.C. 495, 515,
82 S.E.2d 771, 785 (1954)).
27. Having recognized this exception, the Court of Appeals has elaborated that,
under the pre-1995 BCA,
[a] demand for action by the directors is unnecessary only when the
complaint alleges with particularity facts indicating that such a demand
would be futile. Particular facts that excuse a shareholder from
demanding action by the board of directors before suing to enforce a
corporate right include . . . those that indicate corruption or bad faith by
the directors, such as self-dealing or self-interest, fraud, or conflict of
interest.
Roney, 86 N.C. App. at 84,
356 S.E.2d at 403 (citing Hill v. Erwin Mills, Inc.,
239 N.C.
437,
80 S.E.2d 358 (1954); Loy v. Lorm Corp.,
52 N.C. App. 428,
278 S.E.2d 897 (1981);
Swenson v. Thibaut,
39 N.C. App. 77,
250 S.E.2d 279 (1978)); see also Norman,
140
N.C. App. at 409,
537 S.E.2d at 261 (holding that the futility exception under the pre-
1995 BCA arises when “corporate management is under control of the guilty parties
. . . since the guilty parties would not comply with the request” (quoting Murphy v.
City of Greensboro,
190 N.C. 268, 275–76,
129 S.E. 614, 617–19 (1925))).
28. The Court concludes that the concerns giving rise to the demand futility
exception under the pre-1995 BCA are equally applicable in the context of a nonprofit
corporation like the Foundation here. Thus, because the pre-1995 version of
section 55-7-40(b) is identical in all material respects to current section 55A-7-40(b)2
and has been interpreted by our appellate courts to allow a demand futility exception,
the Court concludes that section 55A-7-40(b) similarly excuses a demand when a
plaintiff’s complaint alleges “with particularity facts indicating that such a demand
would be futile.” Roney,
86 N.C. App. at 84,
356 S.E.2d at 403.
29. Here, Plaintiff alleges that demand on the Foundation’s Board to institute
this action “would have been futile” because (i) the Director Defendants constituted
a majority of the Board and “actively participated in the alleged acts constituting
breach”; (ii) Plaintiff’s requested relief would have jeopardized the Director
2 See North Carolina Comments, N.C. Gen. Stat. § 55A-7-40 (stating that the North Carolina
Nonprofit Corporation Act “is based in large part upon the [pre-1995 BCA]. . . . and, where
appropriate, incorporates the substance of the [pre-1995 BCA]”).
Defendants’ “personal financial compensation” and “the personal financial
compensation of. . . [their] family members[,]”; and (iii) making demand to institute
suit would have subjected Plaintiff to likely removal as a director, thus depriving him
of standing to sue on behalf of the Foundation and, therefore, to commence this action.
(ECF No. 1 at ¶ 37.) See Morris v. Thomas,
161 N.C. App. 680, 685,
589 S.E.2d 419,
423 (2003) (holding that N.C. Gen. Stat. 55A-7-40(a) does not extend standing to
former directors).
30. Plaintiff premises his allegations of self-interest and conflict of interest on
his factual assertions that (i) the Director Defendants control and constitute a
majority of the Board; (ii) they “actively participated in the alleged acts constituting
breach”; (iii) these acts “potentially [subject the Director Defendants to] liabil[ity] for
damages”; and (iv) the Director Defendants “control . . . their own compensation” and
the compensation of Foundation employees, which include Defendant Brown and
relatives of Defendants Brown and Howard. (ECF No. 1 at ¶ 37.)
31. Because these factual allegations support a conclusion to a reasonable
certainty that the Director Defendants would refuse to cause the Foundation to bring
suit against themselves, the Court concludes that Plaintiff’s allegations are
consistent with North Carolina decisions permitting application of the demand
futility exception under the pre-1995 BCA and satisfy Plaintiff’s obligation to explain
the reasons for not making demand as required under section 55A-7-40(b). See Coble
v. Beall,
130 N.C. 533, 536,
41 S.E. 793, 794 (1902) (holding that where “the facts as
alleged show that the defendants charged with a wrongdoing . . . constituted a
majority of the directors . . . , so that a refusal of the managing body, if requested, to
bring suit in the name of the corporation, may be informed with reasonable certainty,
then an action by a stockholder may be maintained without alleging or proving any
notice, request, demand or express refusal.”); see also Swenson, 39 N.C. App. at 102–
103,
250 S.E.2d at 295 (demand futility found where director defendants constituted
board majority); Loy,
52 N.C. App. at 436,
278 S.E.2d at 903 (same).3
32. Defendants further contend that even if Plaintiff can show that demand to
the Board to institute this action would have been futile, section 55A-7-40(b) still
imposes on Plaintiff an obligation to attempt to reform the corporate policies he
challenges and to plead the substance of those attempts. The Court disagrees.
33. First, Defendants ignore the plain language of the statute, which requires
that the pleading allege with particularity either (i) the demand made and the
“reasons for [the] failure to obtain the action” or that (ii) no demand was made and
the “reasons . . . for not making the effort.” N.C. Gen. Stat. § 55A-7-40(b). Defendants’
construction seeks to impose a pleading requirement not present in the statute. See,
e.g., Carrington v. Brown, 136 N.C. App. 554, 558,
525 S.E.2d 230, 234 (2010) (“Where
the language of a statute is clear and unambiguous, there is no room for judicial
construction and the courts must give it its plain and definite meaning, and are
without power to interpolate, or superimpose, provisions and limitations not
contained therein.”) (quotation and citation omitted).,
3 Plaintiff’s allegation that Board demand would have likely resulted in his retaliatory
removal as a director, with resulting loss of standing to bring his derivative claims, provides
further support for the Court’s conclusion that Plaintiff has satisfied the requirements of
section 55A-7-40(b).
34. Further, to support their position, Defendants rely on Judge McGuire’s
decision in Dillard/Goldsboro Alumni & Friends v. Smith, 2016 NCBC LEXIS 35
(N.C. Super. Ct. Apr. 27, 2016), arguing that Smith requires “specific and
particularized pre-suit demands.” (ECF No. 13 at 7.) The Smith decision, however,
addresses the particularity that is required when a demand is made—not, as here,
when demand is sought to be excused on grounds of futility.
2016 NCBC LEXIS 35,
at *14, 17.
35. Finally, Plaintiff seeks, as the Foundation’s relief, monetary damages from,
and removal of, the Director Defendants, not changes in the Foundation’s corporate
policies and practices, such as a reduction in the Foundation’s expenses and director
compensation. Contrary to Defendants’ contentions, the specific statutory language
at issue—identical in both pre-1995 section 55-7-40(b) and current section 55A-7-
40(b)—does not require a plaintiff to attempt to reform the corporate policies that
gave rise to the plaintiff’s derivative claim for breach of fiduciary duty, and to plead
the substance of those attempts, where, as here, the plaintiff has not sought reform
of those corporate policies through the derivative litigation. See Greene v. Shoemaker,
1998 NCBC LEXIS 4, at *9 (N.C. Super. Ct. Sept. 24, 1998) (noting under the current
BCA that “[i]n determining whether the demand requirement has been met the Court
must compare the derivative claims asserted in a complaint against the specific
demands a plaintiff has made prior to filing suit.”).
36. Accordingly, for the reasons set forth above, the Court concludes that
Plaintiff has satisfied the demand futility exception under section 55A-7-40(b) and
thus that Defendants’ Motions to Dismiss Plaintiff’s derivative claims for failure to
make timely demand should be denied.
B. Direct claim.
37. Plaintiff claims that he has the right to bring a direct claim against the
Director Defendants as an “interested party” under N.C. Gen. Stat. § 36C-4-405.1(b)4
to enforce Mr. Finley’s charitable gifts to the Foundation. (ECF No. 1 at ¶¶ 1, 60.)
He contends that (i) the Will set forth conditions in Articles II and III to which the
Foundation should be required to abide, (ECF No. 25 at 7–8), and, (ii) the Director
Defendants violated the intent of Mr. Finley’s charitable gift—i.e., that the gift be
used for charitable purposes—by mismanaging the gift through improper
4
Section 36C-4-405.1 is titled “Enforcement of charitable gift or trust” and provides, in
relevant part, as follows:
(a) The settlor of a charitable trust, the Attorney General, the district
attorney, a beneficiary, or any other interested party may maintain a
proceeding to enforce a charitable trust, including the following:
(1) A proceeding to require a trustee to make a selection as may be
necessary to establish the charitable beneficiaries or purposes for which the
trust was established, as provided in subdivisions (d)(1) and (d)(2) of G.S. 36C-
4-405;
(2) A proceeding for breach of fiduciary duty if there is reason to
believe that the trust property has been mismanaged through negligence or
fraud; and
(3) A proceeding for an accounting of the trustee's administration of
the trust.
(b) The donor of a charitable gift, the Attorney General, the district
attorney, or any other interested party may maintain a proceeding to enforce
the gift, including a proceeding to require the recipient of the gift to make a
selection as may be necessary to establish the charitable beneficiaries or
purposes for which the gift was intended, as provided in subdivisions (d)(1) and
(d)(2) of G.S. 36C-4-405.
N.C. Gen. Stat. § 36C-4-405.1.
expenditures and investments, (ECF No. 25 at 8). Plaintiff premises his claim to be
an “interested party” on his status as a Foundation director and as Mr. Finley’s
grandson. (ECF No. 1 at ¶ 63; ECF No. 25 at 8.)
38. It appears to the Court that resolution of Defendants’ Motions to Dismiss
Plaintiff’s direct claim will require an examination of N.C. Gen. Stat. § 36C-4-
405.1(b)—a statute enacted in 2005—and that statute’s potential application to
charitable gifts. While the 2005 amendments to Chapter 36C squarely address their
application to then-existing trusts, the parties did not address, and it is not clear from
the face of the statute, whether section 36C-4-405.1(b) permits an “interested party”
to enforce charitable gifts, like Mr. Finley’s gifts at issue here, which were completed
prior to the statute’s enactment.
39. As a result, the Court elects to defer ruling on Defendants’ Motions to
Dismiss Plaintiff’s direct claim seeking enforcement of Mr. Finley’s charitable gifts
and, as provided below, orders the parties to consider and brief whether N.C. Gen.
Stat. § 36C-4-405.1(b) applies to charitable gifts completed prior to that section’s
enactment, including whether N.C. Gen. Stat. § 36C-11-1106, entitled Application to
Existing Relationships, applies to charitable gifts.
V.
CONCLUSION
40. Based on the foregoing, the Court hereby ORDERS the following:
a. The Court DENIES Defendants’ Motions to Dismiss Plaintiff’s
derivative claims;
b. The Court DEFERS consideration of Defendants’ Motions to Dismiss
Plaintiff’s direct claim under N.C. Gen. Stat. § 36C-4-405.1(b) to permit
an opportunity for supplemental briefing; and
c. The Court ORDERS supplemental briefing as follows:
i. Plaintiff, the Director Defendants, the Foundation, and the
Attorney General shall each file a brief of no more than 4,000
words no later than October 11, 20175 addressing whether N.C.
Gen. Stat. § 36C-4-405.1(b) applies to charitable gifts completed
prior to that section’s enactment, including whether N.C. Gen.
Stat. § 36C-11-1106, entitled Application to Existing
Relationships, applies to charitable gifts.
ii. Plaintiff, the Director Defendants, the Foundation, and the
Attorney General may each file a response to the initial briefs of
no more than 2,000 words no later than October 23, 2017.
iii. The Court will determine at a later date whether a further
hearing on the Motions is necessary.
SO ORDERED, this the 1st day of September, 2017.
/s/ Louis A. Bledsoe, III
Louis A. Bledsoe, III
Special Superior Court Judge
for Complex Business Cases
5 The Court has scheduled supplemental briefing to commence fourteen (14) days after the
expiration of the discovery stay in this case on September 27, 2017.
