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Tort/Negligence – Corporate Officer – Civil Practice – Collateral Estoppel – D&O Insurance

USA Trouser, S.A. de C.V. v. Williams (Lawyers Weekly No. 020-051-16, 29 pp.) (James Gale, C.J.) 2016 NCBC 54

Holding: Since corporate directors owe a fiduciary duty to creditors under circumstances amounting to dissolution of the corporation, plaintiff may be able to prove that the defendant-corporate president owed a fiduciary duty to plaintiff (a textile manufacturer that was convinced to ship socks to a failing corporation and was never paid for them) if plaintiff can prove that the corporation was in the process of winding up or dissolution.

The defendant-president’s motion to dismiss is granted in part and denied in part. The court dismisses plaintiff’s claims against the defendant-insurer and its affiliate.

Even though the defendant-corporate president was not a party to plaintiff’s previously filed federal lawsuit, since other corporate officers and directors were named as defendants, plaintiff had a full and fair opportunity during the federal lawsuit to litigate the issues related to any liability of the corporation’s officers and directors. Furthermore, a final default judgment was entered into against the corporation in the federal lawsuit. The federal judge’s discussion and findings make clear that issues plaintiff now raises against the corporate president were actually litigated and were necessary to the district court’s decision. Therefore, the corporate president has proved the elements of collateral estoppel in general.

With regard to plaintiff’s breach of fiduciary duty and constructive fraud claims, the federal judge noted that directors owe a fiduciary duty to creditors under circumstances amounting to a dissolution of the corporation. The effect of the federal judgments is to limit any fiduciary duty that the corporate president might owe to plaintiff to such a duty that might exist if plaintiff can prove that the corporation was in the process of winding up or dissolution.

The forced liquidation of the corporation’s assets and the distribution of the proceeds to the corporation’s primary lender could not form the basis of a breach because, even after the fiduciary duty arises, directors of a corporation may prefer secured creditors over unsecured creditors by paying all debts to the former before paying any debts to the latter. Therefore, plaintiff’s breach of fiduciary duty and constructive fraud claims are limited to the extent of plaintiff’s ability to prove that the corporation was in the process of winding up or dissolution, which may create a creditor–director fiduciary relationship between the president and plaintiff. Further, the corporation’s decision to pay its secured creditors before paying plaintiff, as a matter of law, cannot constitute a breach of that duty.

Plaintiff’s fraudulent concealment claim is premised on the president’s concealment of the corporation’s financial status from plaintiff. Plaintiff alleges that it would have stopped shipping socks to the corporation had it known of its tenuous financial status. There has been no federal decision on this issue, so collateral estoppel does not apply.

Plaintiff also alleges that the president failed to perform the duties required by G.S. §§ 55-7-01, 55-14-05, and 55-14-06; however, these duties were owed to the corporation, not to plaintiff. The federal judge dismissed such a claim against the corporation’s other officers and directors, and this holding is binding against plaintiff.

The complaint does not allege that the president personally made any affirmative representation to plaintiff. The complaint’s allegations are insufficient to state a claim for fraud or negligent misrepresentation.

Although the complaint alleges a relationship between defendant Navigators Insurance Co. and defendant Navigators Management Co., plaintiff fails to explain why this relationship leads to Navigators Management’s liability for bad-faith claims settlement practices or unfair trade practices. The court grants Navigators Management’s motion to dismiss.

The complaint alleges that Navigators (referred to collectively) conspired with the now-defunct corporation’s officers and directors by failing to represent the corporation in previously filed federal litigation, leading to a default judgment against the corporation. Plaintiff has not alleged facts indicating that the corporation, its president, or Navigators owed a duty to disclose to plaintiff any material facts pertaining to the federal litigation or that Navigators had any involvement in the corporation’s dissolution. Plaintiff alleges no statements made by any of the defendants during the relevant period upon which a claim for affirmative fraud might rest. Accordingly, plaintiff has failed to adequately allege the underlying fraudulent conduct required to state a claim for conspiracy to defraud against Navigators.

Plaintiff was neither the insured nor an intended third-party beneficiary of the corporation’s insurance policies. The court is not aware of any policy justification that would require a court to deem that a company’s general liability or directors-and-officers liability insurance coverage inures to the direct benefit of injured trade creditors like plaintiff. Plaintiff’s unfair trade practices claim against Navigators is not a recognized claim in North Carolina.

Finally, the allegations upon which plaintiff premises its conspiracy claim against the president may fairly be grouped into two categories: (1) actions that the president undertook in concert with the corporation and its other officers and directors to an end that ultimately harmed plaintiff, and (2) actions that the president undertook with Navigators to avoid paying the default judgment that plaintiff obtained in the federal lawsuit. The doctrine of intracorporate immunity bars claims based on the first category of allegations. Any conspiracy claim based on the second category of allegations fails for the same reasons that the court has determined that the conspiracy claim against Navigators fails.

Motions granted in part and denied in part.

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