On May 10, 2019, the North Carolina Supreme Court issued its opinion in Piazza v. Kirkbride. See Piazza v. Kirkbride, 827 S.E.2d 479 (2019). The Court declined to resolve important issues under the North Carolina Securities Act, instead ruling that defendant Gregory Brannon had failed to properly preserve his challenge to the trial court’s jury instructions. In the trial court and on appeal, defendant Brannon argued that trial court’s failure to instruct the jury on the “director safe harbor” provision of the North Carolina Business Corporation Act, N.C. Gen. Stat. § 55-8-30(d), entitled him to a new trial. Brannon claimed that at the time of the securities sales to the plaintiffs he was a director of the issuer, Neogence Enterprises, and was therefore protected from liability under the director safe harbor statute.
The North Carolina Court of Appeals affirmed the trial court’s ruling. The Supreme Court affirmed the Court of Appeals decision but on different grounds. The Supreme Court declined to rule on the merits of Brannon’s challenges because, according the Court, Brannon did not properly request the safe harbor jury instruction at trial. Accordingly, the Court of Appeals ruling stands as the only North Carolina appellate court decision on the relationship between the director safe harbor provision and the civil liability standard of the North Carolina Securities Act.
Trial Court Proceedings
On October 10, 2012, plaintiffs Lawrence Piazza and Salvatore Lampuri filed a complaint against defendants David Kirkbride, Gregory Brannon, and Robert Rice in Wake County Superior Court. Plaintiffs sought to recover damages from the defendants based on alleged violations of the North Carolina Securities Act. On November 25, 2013, the court entered an order granting summary judgment in favor of Mr. Kirkbride. The issues between plaintiffs and the remaining defendants, Brannon and Rice, were tried to a jury to determine whether plaintiffs were entitled to recover damages under N.C.G.S. § 78A-56(a), the civil liability provision of the North Carolina Securities Act.
The jury found that defendant Brannon made material false or misleading statements or omissions in soliciting the offer and sale of securities to plaintiffs Piazza and Lampuri and that plaintiffs were unaware of the false, misleading, or omitted facts. The jury also found that Brannon had failed to carry his burden of proving that he did not know, and in the exercise of reasonable care could not have known, that his statements to the two plaintiffs were false or misleading.
On the other hand, the jury exonerated defendant Rice by finding that he had not made any false or misleading statements to plaintiffs. The Court entered judgment on the jury’s verdict that Brannon was liable to Piazza and Lampuri for compensatory damages and ordered Brannon to pay interest and plaintiffs’ attorney fees and costs. Subsequently, the trial court denied Brannon’s motion for a judgment notwithstanding the verdict or, in the alternative, for a new trial.
The Court of Appeals Ruling
Brannon appealed the final judgment and the denial of his post-trial motion. The Court of Appeals affirmed the trial court’s judgment in an opinion dated April 5, 2016. See Piazza v. Kirkbride, 246 N.C.App. 576 (2016). Chief Judge Linda McGee concurred with the opinion written by Judge Robert Hunter, Jr. Judge John M. Tyson wrote a separate opinion in which he concurred in part and dissented in part.
The Court of Appeals majority made the following rulings: (1) Proof of scienter was not required to establish a claim of liability under N.C.G.S. § 78A-56(a)(2), (2) Brannon could be held liable as an offeror or seller of securities, even though he did not own the securities sold to plaintiffs, (3) Brannon failed to carry his burden of proving the reasonable care defense, that he did not know and in the exercise of reasonable care could not have known of the untruth or omission, (4) Brannon, as an director of Neogence, was not entitled to the protection of the “director safe harbor” statute, and (5) Brannon was not entitled to relief based on the jury verdict that he was liable but Rice was not.
The more interesting issues, and the subjects of the dissenting opinion, are questions related to the possible application of the “director safe harbor” statue and the effect of the inconsistent verdicts as to defendants Brannon and Rice.
The North Carolina Business Corporation Act, N.C.G.S. § 55-1-01, et seq., contains a statute that was referred to by the Court of Appeals as the “director safe harbor” provision. It provides:
55–8–30 General standards for directors
(a) A director shall discharge his duties as a director,
including his duties as a member of a committee:
(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) In a manner he reasonably believes to be in the best interests of the corporation.
(b) In discharging his duties a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
(1) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
(2) Legal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence; or
(3) A committee of the board of directors of which he is not a member if the director reasonably believes the committee merits confidence.
(c) A director is not entitled to the benefit of subsection (b) if he has actual knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.
(d) A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section. The duties of a director weighing a change of control situation shall not be any different, nor the standard of care any higher, than otherwise provided in this section.
(e) A director’s personal liability for monetary damages for breach of a duty as a director may be limited or eliminated only to the extent permitted in G.S. 55–2–02(b)(3), and a director may be entitled to indemnification against liability and expenses pursuant to Part 5 of Article 8 of this Chapter.
N.C.G.S. § 55–8–30. Under this statute, “directors of a corporation are required to act in good faith, with due care, and in a manner they reasonably believe to be in the best interests of the corporation.” Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013) (citing N.C. Gen. Stat. § 55–8–30). When a director breaches one or more of those fiduciary duties, a shareholder may bring a derivative action on behalf of the corporation for injury to the corporation. Id. 367 N.C. at 141, 749 S.E.2d at 268 (citing N.C. Gen. Stat. § 55–7–40).
The Court of Appeals pointed out that the Corporation Act provides a defense to a derivative claim brought against a director who was discharging his director duties, but the director safe harbor does not provide a defense if he was not acting in his role as a director. According to the Court of Appeals, the jury found that Brannon was liable for the misrepresentations and omissions he made in the offer and sale of securities to plaintiffs. As such, Brannon’s liability was not predicated on his role as a director of Neogence. The Court of Appeals then went on to distinguish the Fourth Circuit Court of Appeals decision in Dellastatious v. Williams, 242 F.3d 191 (2001), a case brought under the Securities Exchange Act of 1934 and the “control person” provision of the Virginia Securities Act.
The Court of Appeals found that Dellastatious was markedly different from the case before it. First, Brannon had never pleaded the director safe harbor statute as an affirmative defense in his answer or raised it in his motion for summary judgment. Rather, he raised the defense for the first time when moving for a directed verdict and again when the parties were presenting proposed instructions to be given to the jury. Therefore, even if the director safe harbor provided a defense, which the Court ruled it did not, Brannon waived the defense by not raising it in any of his pretrial pleadings.
The Court of Appeals noted several distinctions between Dellastatitous and Brannon’s case. First, Brannon was sued under the primary liability provision of the North Carolina Securities Act, N.C.G.S. § 78A-56(a), rather than under the “control person” provision, N.C.G.S. § 78A-56(c). Second, the misrepresentations in Dellastratious were contained in securities offering documents prepared and reviewed by the issuer’s officers, directors, and legal counsel. In contrast, Brannon made direct misrepresentations to plaintiffs through verbal statements and written documents that had been not been prepared or approved by company officials. Third, the “control person” claims at issue in Dellastratious revolved around the defendant’s status as a director of the issuer. In contrast, plaintiffs Kirkbride and Lampuri did not allege that the issuer had made misrepresentations or omissions in offering documents or prospectuses or that Brannon’s misrepresentations were “collectively and formally approved by Neogence’s board.”
Regarding the jury’s inconsistent treatment of defendants Brannon and Rice, the Court of Appeals noted that, under North Carolina case law, “[i]t is the jury’s function to weigh evidence and to determine the credibility of witnesses . . . and the trial court should set a jury verdict only in those exceptional situations where the verdict . . . will result in a miscarriage of justice.” 246 N.C. App. at 611, 785 S.E.2d at 711 (citing Strum v. Greenville Timberline, LLC, 186 N.C.App. 662, 667, 652 S.E.2d 307, 310 (2007)). The Court of Appeals held that a jury verdict imposing liability on one of two defendants is not a “miscarriage of justice” when one defendant testifies in support of his reasonable care defense while the other defendant remains silent and offers no evidence and fails to carry his burden. In such circumstances, the trial court did not abuse its discretion when it refused to set aside the jury verdict, to enter judgment notwithstanding the verdict, or to grant a new trial.
Judge Tyson, in his dissent, expressed his view that the director safe harbor rule is a defense to liability under N.C.G.S. § 78A-56(a) and that the trial court should have granted Brannon a new trial based on the inconsistent jury verdicts. According to Judge Tyson, the trial court should have given the jury the instruction Brannon requested on the director safe harbor statute. Regarding the jury’s inconsistent treatment of Brannon and Rice, Judge Tyson’s view of the evidence is that the statements Brannon and Rice made to Piazza “were identical in time and content,” which rendered the verdicts holding Brannon liable but absolving Rice “so contradictory as to invalidate the judgment.” However, Judge Tyson agreed with the majority that Brannon failed to meet his high burden on appeal to show that the trial court abused its discretion by denying Brannon a new trial based on the apparently inconsistent verdicts.
The Supreme Court Decision
Three years later, the North Carolina Supreme Court affirmed the decision, but on narrower grounds than the Court of Appeals. See Piazza v. Kirkbride, 827 S.E.2d 479 (2019). Justice Samuel J. Ervin, IV wrote the majority opinion. Justices Anita Earls and Mark Davis did not participate in the consideration or decision of the case, presumably because they were not members of the Court at the time the case was argued. Justice Paul Newby filed a dissent. Thus, the majority opinion had the affirmative votes of only four of the seven justices.
The Supreme Court ruled that the trial court did not abuse its discretion by denying Brannon a new trial based on the inconsistent verdicts, that Branon did not properly preserve his challenge to the lack of the director safe harbor jury instruction, and that Brannon invited the erroneous finding of liability that might have resulted from the jury instructions.
The Supreme Court, after a painstaking review of the evidence presented at trial, found “ample justification for a jury decision to treat Mr. Rice differently with respect to the issue of whether to treat defendant [Brannon] and Mr. Rice differently” with respect to the issue of whether either had made materially false and misleading statements to the plaintiffs. 827 S.E.2d at 491. Accordingly, the trial court did not abuse its discretion by denying Brannon’s request for a new trial on that issue.
The Supreme Court noted that defendant Brannon had failed to preserve a challenge to the trial court’s failure to give an explicit “safe harbor” instruction to the jury for purposes of appellate review. According to the Court, the written instruction submitted for the trial court’s consideration “contained a great deal of information that was totally irrelevant to the issues that were actually before the trial court and the jury in this case.” 827 S.E.2d at 496. Furthermore, defendant’s proposed instruction improperly placed the burden on the plaintiffs, rather than the defendant, to prove the safe harbor defense. The Court noted that the proposed instruction did not require the jury to make a preliminary finding that Brannon was acting as a director at the time, rather than in some other capacity, when he made the challenged statements to plaintiffs. Thus, the Court ruled, “we cannot conclude that defendant submitted a sufficiently accurate written request for the delivery of a ‘safe harbor’ instruction to properly preserve the issue of the trial court’s failure to deliver such an instruction to the jury for purposes of appellate review.”
Regarding Brannon’s argument that he cannot be held liable under Section 78A-56(a)(2) unless the issuer, Neogence, was also found to be a primary violator, the Supreme Court noted that Brannon had proposed a written request for instructions on the issue of primary liability that was identical to the request proposed by the defendant. As a result, Brannon had nothing to complain about because the trial court gave the instruction he requested because “[t]his Court has ‘consistently denied appellate review to [parties] who have attempted to assign error to the granting of their own requests.’” 827 S.E.2d at 599, citing State v. Wilkinson, 244 N.C. 198, 213, 474 S.E.2d 375, 383 (1995).
Justice Newby’s dissent argues that Brannon should have been granted a new trial due to the inconsistent verdicts. Justice Newby agreed with Judge Tyson that Brannon’s statements to plaintiffs were “materially the same as those of Rice.” Justice Newby also opined that because Brannon was a corporate director he was entitled to the director safe harbor instruction, which was adequately requested by Brannon’s counsel.
It is unfortunate that six and one-half years of litigation, including reviews by both of North Carolina’s appellate courts, resulted in no definitive guidance on several important questions about the meaning of the North Carolina Securities Act’s civil liability provisions. Those questions include whether a stock promoter may be held liable as a section 78A-56(a)(2) “seller” if the promoter did not own the securities that were sold, whether a seller may be held liable under N.C.G.S. § 78A-56(a)(2) in the absence of a finding of scienter, and whether the Corporation Act’s director safe harbor provision is relevant. Unfortunately, the resolution of those issues will have to wait.
© Andrew Whiteman 2019