A former officer and director of a private, closely held business is not entitled to the advancement of his legal fees and costs pursuant to the company’s bylaws where he failed to demonstrate that irreparable harm would result without advancement, the North Carolina Business Court has ruled.
The former president of Yale Carolinas, Inc., Christopher Gray Wheeler, was one of three shareholders at the company, along with his father, Joseph Gray Wheeler, and Scott A. Moe, the current president.
After 12 years at YCI, Christopher notified the other shareholders of his desire to transition out of the company. But a few months later Christopher sued YCI and his father, and eventually Moe, asserting claims for breach of fiduciary duty, constructive fraud, unfair or deceptive trade practices, and judicial dissolution of the company. The case was designated as a mandatory complex business case and sent to the Business Court.
YCI countersued, alleging breach of contract, conversion, fraud, breach of fiduciary duty, and civil remedy for larceny and embezzlement based on allegations that Christopher secretly increased his compensation without approval of the board of trustees and jeopardized YCI’s relationship with a principal supplier.
Pointing to YCI’s bylaws, Christopher then demanded the company advance his reasonable expenses incurred in defense against YCI’s counterclaims. The company declined, and Christopher filed a motion for a preliminary injunction.
Acknowledging the decision as a matter of first impression in the state, Judge Michael Robinson denied the motion.
“The Court does not believe that the record evidence clearly establishes that [Christopher] will suffer immediate, pressing, irreparable harm in the absence of an injunction ordering advancement,” Robinson said. “Although [Christopher] asserts that, absent advancement, he will be unable to afford his legal fees going forward unless he were to liquidate certain assets, he provides no evidence that options short of liquidation are unavailable to him.”
A likelihood of success…
To obtain a preliminary injunction advancing his fees and costs, Christopher had a two-part burden, Robinson explained: to demonstrate that he had a clear right to advancement and, second, that he had no adequate remedy at law and that irreparable harm would result if the injunction was not granted.
Tackling the first question, Robinson found no roadblocks under North Carolina law and recognized that YCI’s bylaws were a valid contract providing for advancement and indemnification rights to covered persons.
The defendants argued that Christopher eliminated his entitlement to advancement based on their allegations that he took actions that he knew or believed not to be in the best interest of the corporation. They also told the court that not all of the counterclaims in the litigation were brought by YCI by reason of the fact Christopher served as an officer and director and argued that he was not defending an “action, suit or proceeding” as the bylaws required for advancement.
Robinson disagreed with the defendants that the advancement provision should be read to condition the right to advancement on a predetermination of an individual’s ultimate entitlement to indemnification.
“Conditioning the right to advancement on the consideration of factors relevant to determining a person’s ultimate entitlement to indemnification conflates the possibility of indemnity with ultimate entitlement to indemnity and improperly blurs the line between the distinct rights of indemnification and advancement,” Robinson wrote.
Robinson did agree that some of the counterclaims for which Christopher sought advancement weren’t relevant to his position as an officer or director, making him ineligible for advancement or indemnification on those claims. He also rejected the defendants’ argument that the counterclaims were not an “action, suit or proceeding” per the bylaws, as the provision clearly stated it must be one that seeks “to hold [an officer or director] liable by reason of the fact that he was acting in such capacity,” and contained no exclusion for counterclaims.
“In sum, the Court concludes that [Christopher] has shown a likelihood of success on the merits of his claim for advancement and that his contractual ‘right [to advancement] is clear,’” Robinson wrote.
…But no irreparable harm
Despite Christopher’s success on the first requirement for a preliminary injunction ordering advancement, Robinson concluded he fell short on the need to demonstrate irreparable harm.
“[T]he mere denial of advancement does not, in and of itself, constitute irreparable harm,” Robinson said, and Christopher’s position that the denial affected his litigation strategy and left him unable to continue effectively defending himself was insufficient.
For example, Christopher did not state that he was unable to obtain loans or borrow against any of his illiquid assets to pay his legal fees as they become due, Robinson said, and the only evidence he provided with regard to litigation strategy was a desire to take a “more aggressive” approach with expert witnesses.
“Crucially, [Christopher] does not allege that any expert witnesses are necessary for his defense of the Advanceable Counterclaims … Nor does he explain how a ‘more aggressive’ (and apparently expensive) approach toward experts would materially improve his chances of success in defending the Advanceable Counterclaims,” Robinson wrote. “The Court, therefore, cannot conclude, on this record, that denying his request for advancement would actually impact his defense of the claims for which he is entitled to advancement.”
Jonathan Watkins of Cadwalader, Wickersham & Taft in Charlotte represented Christopher Wheeler. He declined to comment on the case.
John “Buddy” Wester of Robinson, Bradshaw in Charlotte represented the defendants. He said that although motions for preliminary injunctions are intensely fact-specific, the ruling provides guidance on the legal principles to apply in similar situations going forward, a real benefit as no case law previously existed in North Carolina.
Robinson’s analysis “offers a fine road map for future cases evaluating advancement,” Wester said.
He expressed some disappointment with the court’s finding that Christopher was entitled to advancement on the merits, given that the counterclaims filed by the defendants were compulsory. “Advancing funds to a litigant who has, by our proof, taken unauthorized funds from the company should set this apart from the usual posture of a claim for entitlement to advancement,” Wester said. “This is not your ordinary counterclaim.”
The 42-page decision is Wheeler v. Wheeler (Lawyers Weekly No. 020-095-018). The full text of the opinion is available online at nclawyersweekly.com.