Title: Energy Investors Fund L.P. v. Metric Constructors, Inc

State: north-carolina

Issuer: North Carolina Supreme Court

Document:

IN THE SUPREME COURT OF NORTH CAROLINA
No. 333A99
FILED: 3 MARCH 2000
ENERGY INVESTORS FUND, L.P.
v.
METRIC CONSTRUCTORS, INC., KVAERNER ASA, KVAERNER ENVIRONMENTAL
TECHNOLOGIES, INC., METRIC/KVAERNER FAYETTEVILLE, J.V.,
J.A. JONES, INC., and LOCKWOOD GREENE ENGINEERS, INC.
Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of
a divided panel of the Court of Appeals, ___ N.C. App. ___, 516
S.E.2d 399 (1999), affirming an order entered 10 February 1998 by
Jenkins, J., in Superior Court, Cumberland County.  Heard in the
Supreme Court 17 November 1999.
Adams Kleemeier Hagan Hannah & Fouts, by W. Winburne King,
III, and R. Harper Heckman; and Gadsby & Hannah LLP, by
Richard K. Allen and Michael B. Donahue, for plaintiff-
appellant.
Moore & Van Allen, PLLC, by Gregory J. Murphy and Alan W.
Pope; and Beaver, Holt, Richardson, Sternlicht, Burge &
Glazier, P.A., by H. Gerald Beaver, for defendant-appellees
Metric Constructors, Inc.; Kvaerner ASA; Kvaerner
Environmental Technologies, Inc.; Metric/Kvaerner
Fayetteville, J.V.; and J.A. Jones, Inc.
Murray, Craven, Inman & McCauley, L.L.P., by Richard T.
Craven, for defendant-appellee Lockwood Greene Engineers,
Inc.
FREEMAN, Justice.
Plaintiff Energy Investors Fund, L.P. (EIF), is a limited
partner in BCH Energy Limited Partnership (BCH), a limited
partnership organized under the laws of the State of Delaware. 
BCH is the owner/developer of a waste-to-energy project in North
Carolina.  EIF’s complaint alleges that during 1992 and 1993, BCH
solicited bids from various sources to plan, construct and
operate a facility (Project) in Cumberland and Bladen counties
that would receive waste, incinerate it, and thereby generate
steam and electricity.  EIF alleges that defendants made oral and
written representations to BCH that they had the staff,
resources, experience and expertise to design and manage the
Project in accordance with BCH’s specifications.  These alleged
representations were made after the formation of BCH, but before
EIF had invested funds in the Project.  EIF claims that it
reasonably and justifiably relied on these representations in
investing $16,076,655 in the development of the Project, and that
defendants knew or should have known of such reliance.  EIF
further contends that defendants’ representations were false and
inaccurate, resulting in the Project’s failure and loss of EIF’s
investment, because: (1) defendants did not, in fact, possess the
abilities, capabilities and experience they professed to have,
and (2) they designed and constructed the facility in a negligent
fashion.  As a result of the Project’s failure, EIF has asserted
claims against defendants for negligence, negligent
misrepresentation, and breach of warranty.
The trial court dismissed all claims pursuant to N.C.G.S. §
1A-1, Rule 12(b)(6) (failure to state a claim upon which relief
can be granted), Rule 12(b)(7) (failure to join a necessary
party), Rule 17 (failure to join a real party in interest), and
Rule 19 (failure to join those united in interest as plaintiffs
or defendants).  In doing so, the trial court concluded that
plaintiff “lack[ed] standing to assert claims against Defendants
for negligence, negligent misrepresentation and breach of
warranty,” and that “[p]laintiff has failed to state a claim upon
which relief may be granted.”  EIF appealed, and the Court of
Appeals affirmed.
EIF, as a limited partner of BCH, seeks to bring individual
causes of action against the defendants to recover for the loss
of its equity investment.  We note this issue is one of first
impression in North Carolina.  Other jurisdictions which have
considered this question have looked to the law of corporations
for guidance and have analogized the role of a limited partner to
that of a shareholder of a corporation.  In 1953, the New York
Court of Appeals held that “[l]imited partnerships were unknown
to the common law and, like corporations, are ‘creature[s] of
statute,’ Lanier v. Bowdoin, 282 N.Y. 32, 38, 24 N.E.2d 732, 735
[(1939)].  Statutes permitting limited partnerships are intended
to encourage investment in business enterprise by affording to a
limited partner a position analogous to that of a corporate
shareholder.”  Ruzicka v. Rager, 305 N.Y. 191, 197-98, 111 N.E.2d
878, 881 (1953).
In Klebanow v. N.Y. Produce Exch., 344 F.2d 294, 297 (2d
Cir. 1965), the Second Circuit of the United States Court of
Appeals declared:
[I]n the main, a limited partner is more like a
shareholder, often expecting a share of the profits,
subordinated to general creditors, having some control
over direction of the enterprise by his veto on the
admission of new partners, and able to examine books
and “have on demand true and full information of all
things affecting the partnership . . . .”  See N.Y.
Partnership Law §§ 98, 99, 112.  That the limited
partner is immune to personal liability for partnership
debts save for his original investment, is not thought
to be an “owner” of partnership property, and does not
manage the business may distinguish him from general
partners but strengthens his resemblance to the
stockholder; and even as to his preference in
dissolution, he resembles the preferred stockholder.
To like effect, the Chancery Court of Delaware, generally
recognized as an authority in the interpretation of business law,
has affirmed the proposition that shareholders and limited
partners hold similar positions within their respective entities. 
Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15
(Del. Ch. 1992).  The Chancellor in Litman relied on the holding
of Strain v. Seven Hills Assocs., 75 A.D.2d 360, 370, 429
N.Y.S.2d 424, 431 (1980), which equated the status of corporate
shareholders and corporate directors to that existing between
limited partners and general partners.
Scholars have also analogized the role of a limited partner
to that of a shareholder because
[l]imited partnerships resemble corporations in various
ways.  Formalities of creation are much alike.  Both
forms of organization can attract investment capital by
offering limited liability with roughly similar effects
in limited partnerships and corporations.  Limited
liability necessitates some rules to protect corporate
creditors.  It facilitates passive ownership -- a
separation of ownership from control -- that permits
some efficiencies as well as poses some risks from
delegated management.  Thus, limited partners are
somewhat analogous to shareholders . . . .  Information
rights and fiduciary duties owed to limited partners
are similar to those owed to shareholders.  Limited
partners, like shareholders, may bring derivative suits
on behalf of the business entity against errant
management.  Limited partner interests are generally
treated like corporate shares in the securities laws.
III Alan R. Bromberg & Larry E. Libstein, Bromberg and Libstein
on Partnership § 11.01(c) (Supp. 1999-2); see also Moore v. Simon
Enters., 919 F. Supp. 1007, 1012 (N.D. Tex. 1995).
While it is true that a partner and shareholder are treated
differently for tax purposes, see Donroy, Ltd. v. United States,
196 F. Supp. 54, 59 (N.D. Cal. 1961), aff’d, 301 F.2d 200 (9th
Cir. 1962), their duties are still analogous.  As such, we
conclude that the Court of Appeals properly equated the status of
limited partners in a partnership to the relationship that exists
between corporate shareholders and the corporation.  Having so
concluded, we now turn to the North Carolina law of corporate
shareholders for the legal principles applicable to this case.
In Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d
215 (1997), this Court held that the plaintiff shareholders could
not assert claims against a third party for the loss of their
equity investment in the corporation.  Id. at 660, 488 S.E.2d at
220.  In doing so, this Court endorsed the “well-established
general rule . . . that shareholders cannot pursue individual
causes of action against third parties for wrongs or injuries to
the corporation that result in the diminution or destruction of
the value of their stock.”  Id. at 650, 488 S.E.2d at 219.  The
only two exceptions to this rule are:  (1) a plaintiff alleges an
injury “separate and distinct” to himself, or (2) the injuries
arise out of a “special duty” running from the alleged wrongdoer
to the plaintiff.  Id.  Therefore, unless EIF fits into one of
these two exceptions, it has no standing to bring this action.
Accordingly, an evaluation of EIF’s standing in this matter
requires an analysis of: (1) EIF’s alleged injury, and (2) the
relationship between EIF and defendants with respect to each
claim.  In so doing, it appears that EIF’s injury is not distinct
from the injuries suffered by BCH and other limited partners. 
This Court has stated that “[a]n injury is peculiar or personal
to the shareholder if ‘a legal basis exists to support
plaintiffs’ allegations of an individual loss, separate and
distinct from any damage suffered by the corporation.’”  Id. at
659, 488 S.E.2d at 220 (quoting Howell v. Fisher, 49 N.C. App.
488, 492, 272 S.E.2d 19, 23 (1980), disc. rev. denied, 302 N.C.
218, 277 S.E.2d 69 (1981)).  In applying this rule of shareholder
law to that of limited partnerships, we find that the complaint
shows EIF’s injury is the loss of its investment, which is
identical to the injury suffered by the other limited partners
and by the partnership as a whole.  EIF did not invest its funds
directly and independently in the Project.  Rather, EIF invested
in the BCH partnership.  Obviously EIF would not have invested in
BCH if it believed the Project would be unprofitable, but hopes
for profits are hardly unique.  That EIF invested an amount
different from other limited partners hardly makes for an
“individual injury.”  The complaint does not allege a basis
demonstrating that the investment, and thus the injury, is
peculiar or personal to the limited partner, EIF.
Further, EIF has alleged no relationship creating a special
duty owed to it by defendants.  This Court has previously held
that the existence of a special duty could be established by
facts showing that defendants owed a duty to plaintiff that was
personal to plaintiffs as shareholders and was separate and
distinct from the duty defendants owed the corporation.  Barger,
346 N.C. at 659, 488 S.E.2d at 220.  In the instant case, EIF was
already a limited partner in BCH before its alleged
communications with defendants, so defendants could not have
induced EIF to become a limited partner.  Nor has EIF alleged any
individualized services performed for it by defendants. 
Defendants were communicating with EIF in its capacity as a
limited partner, not as an entity separate and distinct from the
BCH limited partnership.  In fact, the complaint alleges
defendants “communicated with, among others, representatives of
EIF”; “intended EIF, among others, to rely on such
representations”; and made “representations intended for the
Projects’ investors, including but not limited to EIF.” 
(Emphasis added.)  Nowhere in the complaint does EIF allege facts
from which one might reasonably infer a relationship existed
outside of the partnership sufficient to create a duty between
defendants and EIF.  EIF fails to set forth any allegations
which, even taken as true, support a special duty between it and
defendants or that support a peculiar or personal injury when
compared to the injury suffered by other limited partners. 
Therefore, EIF lacks standing in its individual capacity to
assert claims which belong to the limited partnership and which
have been asserted and pursued by the limited partnership. 
We disagree with EIF’s contention that it has a right to
bring a direct action against defendants.  “It is settled law in
this State that one partner may not sue in his own name, and for
his benefit, upon a cause of action in favor of a partnership.” 
Godwin v. Vinson, 251 N.C. 326, 327, 111 S.E.2d 180, 181 (1959). 
EIF’s premise lies in the fact that defendants’ alleged
statements were made for the purpose of inducing EIF to invest in
the Project.  Even if this were true, as the complaint shows, any
representations were made not to EIF individually, but to the
limited partnership as a whole.  Therefore, any action brought
against defendants must be brought by the partnership.
A lack of standing may be challenged by motion to dismiss
for failure to state a claim upon which relief may be granted. 
See, e.g., Krauss v. Wayne County DSS, 347 N.C. 371, 373, 493
S.E.2d 428, 430 (1997) (a Rule 12(b)(6) motion was made on the
basis that the plaintiff did not have standing).  Rule 12(b)(6)
“generally precludes dismissal except in those instances where
the face of the complaint discloses some insurmountable bar to
recovery.”  Sutton v. Duke, 277 N.C. 94, 102, 176 S.E.2d 161, 166
(1970).  In the instant case, EIF is not the real party in
interest.  “‘A real party in interest is a party who is benefited
or injured by the judgment in the case.  An interest which
warrants making a person a party is not an interest in the action
involved merely, but some interest in the subject-matter of the
litigation.’”  Parnell v. Nationwide Mut. Ins. Co., 263 N.C. 445,
448-49, 139 S.E.2d 723, 726 (1965) (quoting Choate Rental Co. v.
Justice, 211 N.C. 54, 55, 188 S.E. 609, 610 (1936)).  Thus, the
real party in interest is the party who by substantive law has
the legal right to enforce the claim in question.  BCH is the
real party in interest to bring this action.  Further, we note
that during oral arguments, the parties conceded that BCH and 
defendants are presently in arbitration.  Since EIF cannot
maintain an action in its own capacity, it lacks standing and has
failed to state a claim upon which relief may be granted.
Although EIF contends in its negligence claim that
defendants breached a duty of care to EIF in its design,
fabrication, and construction of the material handling components
of the Project, these alleged injuries arose out of work done
pursuant to a contract between BCH and defendants.  No facts are
alleged that would support a finding of a duty which runs from
defendants solely to EIF rather than to BCH.  While a common law
duty of care may arise out of contractual obligations assumed
with another party, our case law clearly provides that those
obligations must result from some actual working relationship
between a plaintiff and defendant.  Davidson & Jones, Inc. v. New
Hanover County, 41 N.C. App. 661, 667, 255 S.E.2d 580, 584, disc.
rev. denied, 298 N.C. 295, 259 S.E.2d 911 (1979).  In the instant
case, EIF was merely an individual, passive investor in BCH.  EIF
fails to allege anywhere that it had an ongoing working
relationship with any of the defendants which gives rise to any
duty.  Therefore, the trial court correctly held that the
complaint did not state a claim for negligence.
EIF’s claim for negligent misrepresentation also fails in
that EIF has not alleged or established a special relationship
with defendants which supports standing to bring a direct claim. 
Barger, 346 N.C. at 659, 488 S.E.2d at 220.  In the instant case,
EIF’s complaint does not explain how defendants had a special
duty to EIF at the time of the representation when: 
(1) defendants did not yet have a contract with BCH, and (2) EIF
was already a limited partner.  Rather, EIF’s complaint shows
that it was already a limited partner in BCH at the time of the
alleged misrepresentations, that BCH solicited the requested
information, and that defendants’ negotiations were not with EIF
individually, but with BCH.  Absent some indication whereby
defendants directly solicited EIF with the intent to induce its
participation in BCH, EIF has failed to allege the existence of a
legally cognizable duty of care which runs from defendants to
EIF.
As for EIF’s claim for breach of warranty, it too must fail
in that the complaint has not alleged contractual privity between
EIF and defendants, nor does it allege that any warranty was
addressed to it as an “ultimate consumer or user.”  See Kinlaw v.
Long Mfg. N.C., Inc., 298 N.C. 494, 259 S.E.2d 552 (1979). 
Furthermore, when a claim is only for economic loss, as with
EIF’s claims, the general rule is that privity is required to
assert a claim for breach of an implied warranty involving only
economic loss.  2000 Watermark Ass’n v. Celotex Corp., 784 F.2d
1183, 1185 (4th Cir. 1986); Gregory v. Atrium Door & Window Co.,
106 N.C. App. 142, 144, 415 S.E.2d 574, 575 (1992).  Therefore,
EIF’s claim for breach of warranty was properly dismissed.
For the foregoing reasons, the decision of the Court of
Appeals is affirmed.
AFFIRMED.