In March, the concept of nominal damages (often just a single dollar awarded to a plaintiff to represent a defendant’s liability in the absence of actual damages) took center stage at the highest courts of both the country and this state. The results in both courts placed a potential value on nominal damages that far exceeds a single dollar.
On March 8, the Supreme Court of the United States issued an opinion holding that a request for nominal damages alone is sufficient to keep a plaintiff’s cause of action for a constitutional violation alive, even if there is no allegation of actual damage and the challenged law or policy has been discontinued. See Uzuegbunam v. Preczewski. The decision was notable for a number of reasons, including that it marked the first time in his fifteen years on the Court that Chief Justice Roberts issued a solo dissent. (In full disclosure, co-author of this blog post Patrick Kane co-authored an amicus brief in that case on behalf of a group of local government advocacy groups.) Thus, it is now settled that plaintiffs alleging a past constitutional harm need not have suffered any actual damages, and need not have the specter of further constitutional harm, in order to pursue a ruling from a court as to whether their constitutional rights were in fact violated. The possibility of nominal damages satisfies the redressability requirement of standing and prevents mootness.
A week after Uzuegbunam was released, the Supreme Court of North Carolina in Chisum v. Campagna tackled its own nominal damages question, but in the realm of commercial torts. Specifically, the Court considered whether state-law claims for breach of fiduciary duty and constructive fraud can be supported by nominal damages alone. In a seventy-page opinion covering a variety of intracompany disputes and a substantial number of claims and counterclaims, the Court held in the affirmative: a plaintiff does not need to prove actual damages to succeed—and get punitive damages to boot—on a claim for either breach of fiduciary duty or constructive fraud. Nominal damages alone will suffice. However, just as the U.S. Supreme Court’s opinion in Uzuegbunam left some questions unanswered (e.g., Can a facial challenge to the constitutionality of a law that was never applied against the plaintiff, and has since been repealed, avoid mootness on the basis of nominal damages alone? Can a government defendant moot a case by paying the nominal damages into the Court?), the Supreme Court of North Carolina’s opinion in Chisum also furthers some interesting discussion on the nominal damages front.
At its core, Chisum was a dispute concerning ownership interests in three limited liability companies. The plaintiff, Mr. Chisum, claimed that the defendants, who were also members of the LLCs, systematically froze him out of the companies’ meetings and extinguished his interests in all three LLCs. In 2016, plaintiff sued to ascertain the status of his membership interests in the three LLCs. He also brought several other claims against the defendants, including direct and derivative claims for breach of fiduciary duty and constructive fraud. The defendants successfully moved to dismiss the plaintiff’s direct claims, leaving only the derivative claims to proceed to trial. At trial, the jury separately considered the breach of fiduciary duty and constructive fraud claims as to each of the LLCs. Of significance to the appeal, the jury found that with respect to one of the LLCs, Judges Road, the defendants had taken advantage of their position of trust and confidence in a way that benefitted themselves (encompassing the substantive elements of the claims for breach of fiduciary duty and constructive fraud). However, the jury also affirmatively found that Judges Road had not suffered any actual damages from the defendants’ tortious acts. Instead, the jury awarded only nominal damages of $1.00—but then tacked on $600,000.00 in punitive damages.
Following the jury verdict, the defendants filed post-trial motions arguing, in part, that judgment should be entered in their favor with respect to the derivative claims for breach of fiduciary duty and constructive fraud because plaintiff failed to prove actual damages arising from those claims. Additionally, the defendants argued that without proof of actual damages, the jury could not award punitive damages. The trial court denied the post-trial motions.
Both parties appealed to the State Supreme Court – plaintiff appealing the trial court’s early dismissal of his direct claims, and the defendants appealing the final judgment finding derivative liability for those same torts—breach of fiduciary duty and constructive fraud. (There were a number of other issues appealed as well; this post focuses only on the two above.)
The Court’s opinion addressed these issues in reverse order, first resolving the defendants’ appeal of the final judgment, and later adjudicating plaintiff’s appeal of the pre-trial dismissal of his direct claims.
The defendants asserted that because there was no record evidence that Judges Road had suffered actual damages, an essential element of the tort claims was lacking and therefore plaintiff (suing derivatively on behalf of that LLC) could not prevail. According to the defendants, nominal damages alone could not support those claims.
The Supreme Court disagreed. The Court acknowledged that the issue of whether a plaintiff must prove actual damages to succeed on a breach of fiduciary duty or constructive fraud claim was one of first impression for the Court, but noted that the North Carolina Court of Appeals had addressed the issue several times. Those lower appellate court opinions had all concluded that nominal damages alone were sufficient to support not only a finding of liability on those claims, but some of those decisions had also held that nominal damages were a sufficient peg upon which a jury could hang punitive damages. In affirming the trial court’s denial of the defendants’ post-trial motions, the Supreme Court stated:
We adopt the reasoning of the Court of Appeals and hold that potential liability for nominal damages is sufficient to establish the validity of claims for breach of fiduciary duty and constructive fraud and can support an award of punitive damages. Aside from the fact that nothing in the prior decisions of this Court indicated that proof of actual injury is necessary in order to support a claim for breach of fiduciary duty or constructive fraud, we see no basis for treating the incurrence of nominal damages as a second-class legal citizen in this context, particularly given that such damages do reflect the existence of a legal harm and the fact that the policy of North Carolina is to discourage breaches of fiduciary duty and acts of constructive fraud.
In so holding, the Court pronounced a rule of law for North Carolina that actual damages are not a necessary element of breach of fiduciary duty or constructive fraud claims; the nominal damages that are attendant to any alleged breach or constructive fraud are sufficient for those claims to proceed to a jury and will allow a jury to award punitive damages.
After addressing some additional issues, the Court then reached plaintiff’s challenge to the Rule 12(b)(6) dismissal of his individual claims. Plaintiff argued that the dismissal was improper because the claims were authorized by Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 324 (1997).
[As a bit of background, shareholders of corporations or members of LLCs typically do not have standing to pursue direct, individual causes of action against third parties for injuries suffered by the entity. Instead, the shareholder/member may usually only bring claims derivatively on behalf of the entity. In Barger, however, the State Supreme Court carved out two main exceptions to this rule, thus giving shareholders/members the potential ability to pursue certain direct claims. Under Barger and its progeny, a shareholder may bring a direct claim against a third party for an injury that directly affects the shareholder if (1) the third party owed the shareholder a special duty; or (2) the shareholder’s injury was separate and distinct from any injury the entity itself sustained. Here, plaintiff argued that the latter exception was applicable to his claims because the defendants, among other things, attempted to freeze him out of the LLCs and he therefore had an injury separate and apart from the claims of the LLC.]
But the Court never reached a Barger analysis. Instead, the Court identified a more fundamental problem with plaintiff’s direct claims: he failed to allege any “legally cognizable injury” to support his breach of fiduciary duty or constructive fraud claims to begin with. The Court noted:
to successfully assert a claim for breach of fiduciary duty, a plaintiff must show that: (1) defendants owed the plaintiff a fiduciary duty; (2) the defendant breached that fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury to the plaintiff. Similarly, the assertion of a successful constructive fraud claim requires a plaintiff to show that he or she sufferance an injury proximately caused by a defendant’s [acts].
Upon review of plaintiff’s allegations, the Court concluded that his “breach of fiduciary duty and constructive fraud claims fail because of his failure to demonstrate that he sustained a legally cognizable injury.” Thus, because he did not “show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud,” the Court held that it need not address whether that alleged injury was separate and apart from the damages suffered by the LLCs (i.e., the Barger analysis), and affirmed the trial court’s dismissal.
The Court’s ruling on this issue is seemingly straightforward: if a plaintiff does not allege injury or damage from a defendant’s alleged breach of fiduciary duty or act of constructive fraud, then the claim must fail. So the question arises: how does that ruling interact with the Court’s earlier holding on the derivative claims? In rejecting the defendants’ argument that the trial court should have entered judgment in their favor because plaintiff proved no actual damages, the Court unequivocally held that actual damages are not required for a breach of fiduciary duty or constructive fraud claim—nominal damages alone suffice. Thus, why would plaintiff’s lack of injury doom his direct claims? Couldn’t plaintiff at least recover nominal damages if he could prove the defendants’ breach and/or constructive fraud? After all, the Court held that nominal damages were available on the derivative claims for the same torts and that those nominal damages represented the “legal harm” that existed from the defendants’ alleged acts. But as to the direct claims, the Court held that plaintiff had not alleged a “legally cognizable injury.”
The opinion’s language makes this issue even more thought-provoking. The Court stated that “in attempting to demonstrate the existence of the requisite injury,” plaintiff claimed that the defendants had attempted to “freeze him out of the LLCs, conducted sham capital calls, acted as if he was no longer a member of the LLCs, and treated him in a manner inconsistent with his status as a member of [the LLCs].” The Court then explained that “instead of showing the existence of a legally cognizable injury, the facts upon which [plaintiff] relies simply describe the steps that the [defendants] took to deprive [plaintiff] of his ownership interests…and do not show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud.”
But what specifically is the “requisite injury” and/or “sort of injury” necessary to support these claims? If one reads the earlier holding on the derivative claims to mean that no injury is necessary to support these claims, then one could argue that the alleged acts supporting the direct claims are harmful in their own right, and give rise to nominal damages. And if that were so, the acts the defendants allegedly took to deprive plaintiff of his ownership interests, if determined to be a breach of fiduciary duty and/or constructive fraud, would entitle him to nominal damages and the claims arguably should have survived dismissal.
So how are these rulings reconciled? One possible theory is that the potential contradiction can be explained by the distinction between direct claims of an individual and derivative claims of a business entity. Perhaps the Court felt that plaintiff’s purported allegations of damages or legal harm were really harms felt by the LLCs themselves, and thus not “legally cognizable” to support any direct claims by a shareholder like plaintiff. Then again, that rationale is reminiscent of the Barger analysis, and the Court expressly disclaimed performing that analysis: “Since [plaintiff] has failed to establish a legally cognizable injury as the result of the [defendants’] conduct, we need not determine whether any injury that [plaintiff] might have suffered was separate and apart from any injury suffered by [the LLCs]”.
Or does the explanation perhaps lie in the standard of review for a pleading versus a jury determination? After all, nominal damages historically developed in part as a legal fiction to be awarded after a jury found a defendant liable for the acts alleged, but found no actual damages. Does Chisum follow that path by holding that a plaintiff asserting North Carolina state law claims of breach of fiduciary duty and constructive fraud still must allege actual damages to get those claims to trial, but nominal damages can support a jury verdict (and be a peg upon which punitive damages are hung) if those alleged actual damages ultimately are not proved at trial? Under this theory, the availability of nominal damages saved the derivative claims in Chisum because there had been allegations of actual damages to get the claims before the jury, but the possibility of nominal damages could not save plaintiff’s direct claims from a motion to dismiss when there were no actual damages alleged to have been caused by the torts from the outset.
Finally, what does this decision mean for future cases with claims of breach of fiduciary duty and constructive fraud outside of the corporate setting—can those claims proceed even in the absence of any actual damages and on the basis of nominal damages alone? If you have thoughts on any of this, we’d love to hear them in the comments section below.
**Note: After the issuance of the Chisum opinion, the defendants moved the Supreme Court for rehearing, but that request was not based on the issues above—it was based on whether plaintiff’s declaratory judgment claims regarding the LLCs’ operating agreements were barred by the applicable statute of limitations (the Court had held that they were not). The motion for rehearing was denied.
–Patrick Kane and Ashley Chandler
[This post is cross-posted on Fox Rothschild’s North Carolina Appellate Practice Blog]