Opinion
No. 1:02cv92-T
October 10, 2002
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon the motion of defendants B. Dale Stancil, the Sugar Mountain Irrevocable Trust, and the B. Dale Stancil Irrevocable Trust (the "individual and trust defendants") to dismiss. Having carefully considered that motion and reviewed the pleadings, the undersigned enters the following findings, conclusions, and recommendation.
FINDINGS AND CONCLUSIONS I. Background
This action was first filed in state court, but was dismissed without prejudice prior to the state court deciding a then-pending motion for summary judgment. Plaintiffs contend that during the course of discovery in state court, they uncovered information which has led them to conclude that Sugar Mountain Resort, Inc., ("the resort") was being operated as a mere undercapitalized instrumentality of the individual and trust defendants, so as to avoid exposure to substantial verdicts, such as the one they anticipate in this case. Further, plaintiffs contend that the potential compensatory damages on their simple negligence claim alone well exceed the resort's $1,000,000 policy limits and that the resort does not have assets to cover such a judgment. According to the plaintiffs, the individual and trust defendants have siphoned off any profits of the resort, leaving such high-risk business perpetually underfunded.
The individual and trust defendants have moved to dismiss under Rule 12(b)(6), Federal Rules of Civil Procedure, contending that the statute of limitations and Rule 9(b) (concerning the pleading of fraud) prevent plaintiffs from proceeding against them. For the reasons discussed below, the undersigned will recommend that the pending motion to dismiss be denied and that this matter be calendared for an initial pretrial conference as soon as possible.
II. Motion-to-Dismiss Standard
The individual and trust defendants have moved for dismissal pursuant to Rule 12(b), Federal Rules of Civil Procedure, contending that plaintiffs have failed to state a cognizable claim. Rule 12(b) authorizes dismissal based upon a dispositive issue of law. Neitzke v. Williams, 490 U.S. 319, 109 S.Ct. 1827, 1832 (1989); Hishon v. King Spalding, 467 U.S. 69, 73 (1984); Conley v. Gibson, 355 U.S. 41 (1957). As the Court discussed in Neitzke:
This procedure [for dismissal], operating on the assumption that the factual allegations in the complaint are true, streamlines litigation by dispensing with needless discovery and fact finding. Nothing in Rule 12(b)(6) confines its sweep to claims of law which are obviously insupportable. On the contrary, if as a matter of law "it is clear that no relief could be granted under any set of facts . . . a claim must be dismissed, without regard to whether it is based on outlandish legal theory . . . . What Rule 12(b)(6) does not countenance are dismissals based on a judge's disbelief of a complaint's factual allegations."
Id., at 1832 (citation omitted). For the limited purpose of making a recommendation as to disposition of the pending motion, the undersigned has accepted as true the facts alleged by plaintiffs in the complaint and viewed them in a light most favorable to plaintiffs.
III. Discussion
The moving defendants contend that plaintiffs' claims against them are barred on the face of the complaint, inasmuch they were first sued four-and-one-half years after the alleged accident. Under a Rule 15 relation-back theory, there is no doubt but that plaintiffs could have attempted to bring such defendants into the state case upon discovery of information leading to the alter-ego claim against them. The question presented to this court is whether a party can, after discovering information that would form the basis for amendment of a complaint, dismiss a matter in state court and later refile such original and further claims against additional parties in federal court through the state one-year savings provision.
Review of North Carolina law, which governs the one-year savings provision contained in Rule 41, North Carolina Rules of Civil Procedure, appears to save the original claims asserted in the first action, as well as claims that are derivative. Staley v. Lingerfelt, 134 N.C. App. 294, cert. denied, 351 N.C. 109 (1999). Here, plaintiffs argue that the claims asserted against the moving defendants are derivative of the claims plaintiffs asserted against the resort. In reply, the moving defendants argue that plaintiffs are asserting a claim for fraud, the statute of limitations on such a claim is three years from discovery, and the filing in this court is time-barred. See Chapter 1-52(9), N.C. Gen. Stat.
Sitting with diversity jurisdiction, this court looks to North Carolina law to resolve the issue presented. Erie Railroad v. Tomkins, 304 U.S. 64, 78 (1938) (in diversity case, federal courts apply substantive provisions of state law); Guaranty Trust Co. v. York, 326 U.S. 99, 108 (1945) ("federal court adjudicating a state-created right solely because of the diversity of citizenship of the parties is for that purpose, in effect, only another court of the State"). In North Carolina,
[t]o benefit from the one year extension of the statute of limitation, the second action must be "substantially the same, involving the same parties, the same cause of action, and the same right. . . ."
Cherokee Ins. Co. v. R/I, Inc., 97 N.C. App. 295, 297 (citation omitted), disc. review denied, 326 N.C. 594 (1990). The most complete explanation of the breadth and scope of the state's one-year savings provision is found in Renegar v. R.J. Reynolds Tobacco Co., 145 N.C. App. 78 (2001), in which the state appellate court held, as follows:
In Stanford v. Owens, 76 N.C. App. 284, 332 S.E.2d 730, disc. review denied, 314 N.C. 670, 336 S.E.2d 402 (1985), a claim of fraud, first alleged during re-filing of a previously voluntarily dismissed negligence claim, was held to have been time-barred by the statute of limitations. The plaintiffs maintained the fraud claim was properly filed within one year of the dismissal in that it
ha[d] in effect been before the court all along, since it rest[ed] upon somewhat the same allegations that were made in support of the negligent misrepresentation claim when the action was first filed. . . .
Id. at 289, 332 S.E.2d at 733. This Court disagreed, concluding that "[a] claim for fraud is fundamentally different from a claim for negligence," id., and that plaintiff's original allegations of negligence "did not in effect or otherwise," id., allege fraud.
In Staley v. Lingerfelt, 134 N.C. App. 294, 517 S.E.2d 392, this Court considered the circumstance wherein the plaintiffs' first complaint [filed 4 August 1995] arose out of the [collision] on 11 June 1993, but alleged on a section 1983 claim and a claim of loss of consortium. Id. at 298, 517 S.E.2d at 395. Plaintiffs subsequently voluntarily dismissed that action and thereafter instituted an action 5 September 1995 alleging the two original claims as well as claims of assault and battery, false arrest and imprisonment, malicious prosecution, intentional infliction of emotional distress, negligent infliction of emotional distress, trespass by a public officer, violations of the North Carolina Constitution, and a claim for punitive damages.
Id. at 296, 517 S.E.2d at 394.
This Court held the latter claims, filed within one year after voluntarily dismissal of the first complaint but outside the applicable limitations period, did not fall within the one year savings provision of North Carolina Rule 41(a)(1) and thus were barred. Id. at 299, 517 S.E.2d at 396. We reasoned that
[a]lthough the claims [in plaintiffs' second complaint] ar[o]se from the same events as the section 1983 and loss of consortium claims, defendants were not placed on notice that they would be asked to defend these claims within the time required by the statute of limitations.
Id.
In the case sub judice, the claims set forth in plaintiff's federal and state actions arose from the same event, his discharge by RJR. However, the claim of wrongful discharge alleged in the state action and the federal statutory and constitutional claims alleged in the federal action each constitute "independent cause[s] of action with unique elements which must be proven by plaintiff," id., and RJR thus was not placed on notice by plaintiff's federal action that it would be asked to defend plaintiff's state wrongful discharge claim "within the time required by the statute of limitations," id. In short, plaintiff's state action thus was not "based on the same claims," G.S. § 1A-1, Rule 41(a)(1), alleged in his federal action.
Id. at 84-86. Under North Carolina law, it would appear that a substantive claim for fraud is not derivative of a claim of negligence.
While the complaint is not a model of clarity, the undersigned cannot find that plaintiffs are attempting to allege a substantive claim of fraud. Instead, it would appear that plaintiffs are alleging that any liability of the resort, for negligence, should be imputed to the individual and trust defendants under an alter-ego theory. To the extent fraud has been alleged, it has been asserted in the context of proving that additional parties should be liable because the corporate defendant that was earlier sued in merely an alter ego.
This leads to an additional issue raised in Renegar — whether the savings provision allows suit against additional defendants. Unlike truly distinct parties, it is plaintiffs' contention that the defendants in the first suit are the same as those in this matter, inasmuch as the corporate entity is a guise for the individual and trust defendants. Without doubt, evidence of fraudulent conduct of corporate affairs can lead a finder of fact to pierce the corporate veil and extend liability to the principals, such as individuals and trusts. The undersigned, however, cannot see that plaintiffs are asserting any separate cause of action for fraud, but have merely inexactly pleaded their alter-ego claim. In Cunningham v. Rendezvous, Inc., 699 F.2d 676 (4th Cir 1983), the Court of Appeals for the Fourth Circuit provides:
The factors to be considered in piercing the corporate veil are set forth in DeWitt Truck Brokers, Inc. v. Flemming Fruit Company, 540 F.2d 681 (4th Cir. 1976), and require little elaboration here. It is enough to note that in DeWitt, we explicitly held that fraud is not a prerequisite to a finding to disregard the corporate entity. Id. at 684-85; Federal Deposit Insurance Corp. v. Sea Pines Co., 692 F.2d 973 (4th Cir. 1982). Rather, DeWitt stated the following standard for piercing the corporate veil:
The conclusion to disregard the corporate entity may not, however, rest on a single factor, whether undercapitalization, disregard of corporation's formalities, or what-not, but must involve a number of such factors; in addition, it must present an element of injustice or fundamental unfairness.
540 F.2d 687 (emphasis supplied). Thus, it is clear under DeWitt that the corporate veil may be pierced in appropriate circumstances even in the absence of fraud or wrongdoing. See Sea Pines, supra, and cases cited therein.
Id. at 680; accord Glenn v. Wagner, 313 N.C. 450, 458 (1985). The undersigned finds that plaintiffs' alter-ego claim is derivative, rather than substantive, in that damages do not extend from such a claim, but are entirely dependent upon plaintiffs proving the underlying claims of negligence. The alter-ego claim simply attempts to bring before this court additional parties, who, plaintiffs appear to contend, are the real parties controlling the resort and who had actual notice of this suit from inception.
To the extent that any substantive claim for fraud has been asserted, such a nonderivative claim would be barred, as the moving defendants argue, and the undersigned will recommend that any such claim be dismissed. On the other hand, any factual allegation of "fraud" made in support of an alter-ego claim is not governed by the period of limitations and may be alleged and later proffered as part of the totality of the evidence plaintiffs may wish to present on the issue of whether the resort was the alter ego of the individual and trust defendants. The court agrees with some of defendants' argument, i.e., that it will be hard to show fraud where the land transactions were made upon the public record; however, the weight of the evidence is not an issue under Rule 12, but should be preserved for either summary judgment or directed verdict. In determining whether plaintiffs have stated an alter-ego claim, they have alleged not only fraud, but undercapitalization, domination, depletion of assets, and maintenance of an inadequate liability policy.
RECOMMENDATION
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that the motion of defendants B. Dale Stancil, the Sugar Mountain Irrevocable Trust, and the B. Dale Stancil Irrevocable Trust to dismiss (#10) be ALLOWED only insofar as the district court finds that a substantive claim of fraud has been asserted, but that such motion be otherwise DENIED to the extent plaintiffs have asserted a derivative alter-ego claim.
The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986); United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984). This 10th day of October, 2002.