Opinion ID: 1265485
Heading Depth: 1
Heading Rank: 1

Heading: Breach of Directors' Fiduciary Duty

Text: The breach of directors' fiduciary duty theory rests on these propositions: (1) the shareholders' agreement relied on bound General Aviation, as a corporation, to its terms, one of which was to earmark a portion of the $10,000 stock sale proceeds for plaintiff's benefit; (2) the individual defendants as directors of the corporation had a fiduciary duty to plaintiff to see that these corporate funds were so earmarked and duly paid to her; (3) by failing to so earmark these funds and applying them to other purposes, albeit for proper corporate purposes, these defendants breached this fiduciary duty. The Court of Appeals rejected this theory; it concluded that the first proposition on which the theory rests was invalid since, as a matter of law, the corporation could not be bound by the shareholders' agreement. The Court of Appeals said, [I]n order for a trust to be created in the capital obtained from issuing stock, the corporation itself must agree to hold the capital in trust for creditors. 40 N.C.App. at 351, 253 S.E.2d at 12. Defendants argue to us that since the corporation itself did not sign the agreement, the agreement cannot bind the corporation. Therefore they, as directors of the corporation, had no fiduciary duty to apply the funds in accordance with the agreement. Indeed defendants argue boldly to this Court that the agreement insofar as it requires the funds to be earmarked for plaintiff is illusory, binding neither them nor the corporation to its terms; therefore, plaintiff cannot enforce it. Plaintiff, however, alleges that at the time of the agreement, Freeman and Croom were the sole shareholders and were officers and directors of the corporation. Pursuant to the terms of the agreement itself, the Coluccis, Freeman, and Croom became sole shareholders and directors. We think under these circumstances plaintiff may prove the corporation bound by the agreement, notwithstanding that the corporation itself was not a signatory thereto. Under some circumstances, the action of all the shareholders of a close corporation bind the corporation even if the corporation is considered to be a legal entity separate from the shareholders. A corporation is ordinarily bound by acts of its shareholders and directors only when they act as a body in regular session or under authority conferred at a duly constituted meeting. Park Terrace, Inc. v. Phoenix Indemnity Co., 241 N.C. 473, 478, 85 S.E.2d 677, 680 (1955), on rehearing, 243 N.C. 595, 91 S.E.2d 584 (1956). Nevertheless, `[t]he contracts of the sole shareholder, or all the shareholders, will bind the corporation in modern law, although not made by the authority of the board of directors, since they are the only persons beneficially interested, aside from corporate creditors. If they do not distinguish between corporate business and their individual affairs, or waive formalities established for their benefit, there is no reason why the courts should insist on such formalities. The contract of the owners of all shares will be regarded as binding on the corporation if so intended.' [2] Philadelphia Life Insurance Co. v. Crosland-Cullen Co., 234 F.2d 780, 783 (4th Cir. 1956), quoting Ballentine on Corporations § 126, p. 296. [3] See also Wall v. Colvard, Inc., 268 N.C. 43, 149 S.E.2d 559 (1966); 18 Am. Jur.2d, Corporations § 485 (1965). See generally Latty, A Conceptualistic Tangle and the One- or Two-Man Corporation, 34 N.C. L.Rev. 471 (1956). In Brewer v. First National Bank of Danville, 202 Va. 807, 120 S.E.2d 273 (1961), plaintiff's action against a corporation was based on a shareholder's agreement to pay plaintiff $40 per week for life. The corporation was a family business, all the shares of which were originally owned by plaintiff. The agreement in question was executed between plaintiff and members of her family as a part of a transaction for the sale of plaintiff's stock to the family members. The agreement was signed by plaintiff and by each subsequent shareholder. Payment was made by the corporation pursuant to the agreement from 1955 to 1959. The Virginia Supreme Court held: Ordinarily a corporation is bound only by actions taken at a duly constituted meeting of the board of directors. Where, however, shareholders, officers, and directors of a family or close corporation ignore such formalities and conduct business informally, such actions are nonetheless binding on the corporation. The agreement called for the corporation to make the payments to plaintiff; it was bound to do so. The policy of this state as declared in its Business Corporation Act is to permit the shareholders in a close corporation to bind the corporation under appropriate circumstances. Subsections (b) and (c) of G.S. 55-73 provide, in part, as follows: (b) Except in cases where the shares of the corporation are at the time or subsequently become generally traded in the markets . . . no written agreement to which all of the shareholders have actually assented . . . and which relates to any phase of the affairs of the corporation, whether to the management of its business or division of its profits or otherwise, shall be invalid as between the parties thereto, on the ground that it is an attempt by the parties thereto to treat the corporation as if it were a partnership or to arrange their relationships in a manner that would be appropriate only between partners. . . . (c) An agreement between all or less than all of the shareholders, whether solely between themselves or between one or more of them and a party who is not a shareholder, is not invalid, as between the parties thereto, on the ground that it so relates to the conduct of the affairs of the corporation as to interfere with the discretion of the board of directors, but the making of such an agreement shall impose upon the shareholders who are parties thereto the liability for managerial acts that is imposed by this Chapter upon directors.  (Emphasis supplied.) These provisions are designed to permit the management of close corporations by shareholders thereof who act by other than normal corporate procedures. Such actions by the shareholders, if so intended, must perforce bind the corporation. The shareholders who participate therein have the same liability for managerial acts that is imposed. . . upon directors. G.S. 55-73(c). See generally Latty, The Close Corporation and the New North Carolina Business Corporation Act. 34 N.C.L.Rev. 432 (1956). The corporation may likewise be bound by this agreement under a principle of agency law: ratification. The facts alleged which may trigger its application are: After execution of the shareholder's agreement, General Aviation itself issued 6,000 shares of stock to the Coluccis for which it received $10,000. By accepting the benefits of the agreement, the corporation might have made the agreement its own and become bound by it even if initially the agreement would not have bound the corporation. The binding effect of an agent's acts does not, however, necessarily depend upon the existence of authority in the agent at the time the act was done. It is fundamental that acts performed by an agent beyond the scope of his authority, and even acts performed by one who in point of fact is not an agent, but who assumes to act as an agent, may, if they could lawfully have been delegated, be ratified by the principal or by one in whose behalf they are assumed to be done. As applied to the law of agency, ratification is the affirmance by a person of a prior act which did not bind him, but which was done or professed to be done on his account, whereby the act is given effect as to some or all persons, as if originally authorized. Jones v. Bank of Chapel Hill, 214 N.C. 794, 798, 1 S.E.2d 135, 137 (1939). The jury may find ratification from any course of conduct on the part of the principal which reasonably tends to show an intention on his part to ratify the agent's unauthorized acts. 3 Am.Jur.2d, Agency § 162. `It is what a party does, and not what he may actually intend, that fixes or ascertains his rights under the law. He cannot do one thing and intend another, and very different and inconsistent, thing. The law will presume that he intended the legal consequences of what he does, or, in other words, that his intention accords in all respects with the nature of his act.' Carolina Equipment & Parts Co. v. Anders, 265 N.C. 393, 401, 144 S.E.2d 252, 258 (1965). `The defendant will not be permitted to repudiate the act of its agent as being beyond the scope of his authority, and at the same time accept the benefits arising from what he has done while acting in its behalf. [Citation omitted.] It is a rule too well established to admit of debate that if a principal, with full knowledge of the material facts, takes and retains the benefits of an unauthorized act of his agent, he thereby ratifies such act, and with the benefits he must necessarily accept the burdens incident thereto or which naturally result therefrom. The substance of ratification is confirmation after conduct. [Citation omitted.] It is also a settled principle of ratification that the principal must ratify the whole of his agent's unauthorized act or not at all. He cannot accept its benefits and repudiate its burdens. Maxwell v. Proctor & Gamble Distributing Co., 204 N.C. 309, 318, 168 S.E. 403, 407 (1933). See also Brinson v. Mill Supply Co., 219 N.C. 505, 14 S.E.2d 509 (1941); Morris v. Basnight, 179 N.C. 298, 102 S.E. 389 (1920); Anderson v. American Suburban Corp., 155 N.C. 131, 71 S.E. 211 (1911). The Court of Appeals concluded that none of the signatories to the agreement even purported to act for the corporation. . . . 40 N.C.App. at 351-52, 253 S.E.2d at 12. We believe plaintiff might be able to prove otherwise. First, G.S. 55-73, discussed above, permits the shareholders of a close corporation to conduct the business of the corporation. Second, the agreement itself requires the corporation to issue 6,000 shares of its stock for which it was to receive $10,000. Inasmuch as the agreement requires corporate action, plaintiff might prove that its signatories in executing it were purporting to act for the corporation whose action was to be required. The corporation, by accepting the benefits of the transaction intended to and did, in fact, ratify the agreement. It thereby became bound by the agreement. If, then, plaintiff can prove General Aviation bound by the shareholders' agreement, she may also prove it was bound to earmark, or hold in special trust, for her the sum of $5,402.50, a part of the $10,000 proceeds derived from the issuance of 6,000 shares of General Aviation's stock. Defendants argue: (1) the language of the agreement is insufficient to establish a trust, (2) there was no intent to establish a trust, and (3) a corporation cannot legally establish such a trust because it amounts to a preference of one general creditor over another. We believe the language of the agreement is not, on its face, insufficient in law to establish a trust for plaintiff's benefit. [N]o particular words are necessary to create a trust if the purpose to create is evident. YWCA of Asheville v. Morgan, 281 N.C. 485, 490, 189 S.E.2d 169, 172 (1972). If it appears that the intention is that the property be held or dealt with for the benefit of another, a court of equity will affix to it the character of trust. Stephens v. Clark, 211 N.C. 84, 88, 189 S.E. 191, 194 (1937). Whether a trust was created depends on the parties' intent, but that intent is to be ascertained primarily from the language of the written document itself in light of surrounding facts and circumstances. Citizens National Bank v. Home For Children, 280 N.C. 354, 185 S.E.2d 836 (1972); Campbell v. Jordan, 274 N.C. 233, 162 S.E.2d 545 (1968); McCain v. Womble, 265 N.C. 640, 144 S.E.2d 857 (1965); In re Will of Wilson, 260 N.C. 482, 133 S.E.2d 189 (1963). A party to a contract may not, by asserting that he did not mean what he said, obtain an interpretation contrary to the express language of the contract. Fidelity & Casualty Co. of N. Y. v. Nello L. Teer Co., 250 N.C. 547, 109 S.E.2d 171 (1959). That this language is contained in a shareholders' agreement does not change the rules of construction. As stated in Blount v. Taft, 295 N.C. 472, 484, 246 S.E.2d 763, 771 (1978): Since consensual arrangements among shareholders are agreements  the products of negotiationthey should be construed and enforced like any other contract so as to give effect to the intent of the parties as expressed in their agreements, unless they `violate the express charter or statutory provision, contemplate an illegal object, involve . . . fraud, oppression or wrong against other stockholders, or are made in consideration of a private benefit to the promisor.' Defendants rely on this language from Wilson v. Crab Orchard Development Co., 276 N.C. 198, 209, 171 S.E.2d 873, 881 (1970): There is, however, at least, serious doubt that a corporation may make a valid contract to hold in trust for specified persons, or a specified group of persons, to whom it is not otherwise obligated, the capital it receives in exchange for its issuance of its own stock, so as to defeat the rights of its own creditors and of transferees of such stock therein. Plaintiff, however, was one to whom General Aviation was otherwise obligated. Plaintiff may prove, further, that no rights of other creditors would have been defeated by General Aviation's compliance with the agreement. See Wall v. Colvard, supra, 268 N.C. 43, 49, 149 S.E.2d 559, 564, where the Court noted: In a number of jurisdictions `the sole stockholder or the stockholders by unanimous action may do as they choose with the corporation's assets provided the interest of its creditors are not affected.' 18 Am.Jur.2d, Corporations § 487 (1965) and cases therein cited. So far as the record discloses, except for the conditional vendors of the cash register and truck, plaintiff was the corporation's only creditor at the time the mortgage in suit was given. Whether any preference to plaintiff, moreover, was such as to defeat the rights of other creditors may depend on General Aviation's solvency at the time of the agreement's consummation. G.S. 23-1 et seq ; Flowers v. American Agricultural Chemical Company, 199 N.C. 456, 154 S.E. 736 (1930); see also Commissioner of Banks v. Turnage, 202 N.C. 485, 163 S.E. 451 (1932); Cowan v. Dale, 189 N.C. 684, 128 S.E. 155 (1925). If plaintiff can thus prove that General Aviation held $5,402.50 as trustee under a special trust for her benefit, she may then rely finally on the last of the three propositions to show a breach of directors' fiduciary duty. Directors of a corporation are trustees of property of the corporation for the benefit of the corporate creditors as well as shareholders. It is their duty to administer the trust . . . for the mutual benefit of all parties interested . . . Pender v. Speight, 159 N.C. 612, 615, 75 S.E. 851, 852 (1912); see also Anthony v. Jeffress, 172 N.C. 378, 90 S.E. 414 (1916). North Carolina adheres to the `trust fund doctrine,' which means, in a sense, that the assets of a corporation are regarded as a trust fund, and the officers and directors occupy a fiduciary position in respect to stockholders and creditors, which charges them with the preservation and proper distribution of those assets. Underwood v. Stafford, 270 N.C. 700, 702, 155 S.E.2d 211, 212 (1967). And directors are liable for the misapplication of funds held in trust by the corporation, where they knew or ought to have known thereof. . . . Directors who mingle money collected for another with the funds of the corporation, in violation of the instruction of the owner, or who knowingly permit their subordinates to do so, whereby the fund is lost, are personally liable therefor. Minnis v. Sharpe, 198 N.C. 364, 367, 151 S.E. 735, 737 (1930). Neither is the corporation a necessary party plaintiff because of the holding in Underwood v. Stafford, supra . There the action was by a corporate creditor against four individuals who were officers, directors and shareholders of the corporate debtor. The complaint alleged defendants had defrauded corporate creditors by appropriating to themselves corporate assets. This Court held that since the allegations claimed wrongs against the corporation itself, it was the duty of the corporation, primarily, to enforce defendants' obligations; therefore, the corporation was a necessary party plaintiff. The Court noted, however, 270 N.C. at 703, 155 S.E.2d at 213: If the cause of action were founded on injuries peculiar or personal to plaintiff himself, so that any recovery would not pass to the corporation and indirectly to other creditors, the cause of action could have been properly asserted by plaintiff; however, where the alleged breach or injuries are based on duties owed to the corporation and not to any particular creditor or stockholder, the creditor or stockholder cannot maintain the action without a demand on the corporation, or its receiver if insolvent, to bring the suit and a refusal to do so, and a joinder of the corporation as a party. Plaintiff here claims injury peculiar or personal to herself. She does not claim injury to the corporation. Apparently all proceeds of the $10,000 stock issue were used for legitimate corporate purposes. Plaintiff claims only a violation by the directors of the special trust for her benefit upon which she alleges a portion of these funds were held.