Wheeler v. Wheeler

Wheeler v. Wheeler, 2018 NCBC 117.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

MECKLENBURG COUNTY 17 CVS 16248

CHRISTOPHER GRAY WHEELER,

Plaintiff,

v.

(REDACTED) ORDER AND OPINION

JOSEPH GRAY WHEELER; SCOTT ON PLAINTIFF’S MOTION FOR

A. MOE; and YALE CAROLINAS, PRELMINARY INJUNCTION*

INC. d/b/a WHEELER MATERIAL

HANDLING, INC.,

Defendants.

1. An officer and director’s right under North Carolina law to advancement of

costs and attorneys’ fees needed to defend himself in a lawsuit brought by his

corporate employer claiming corporate misconduct has never been addressed by our

appellate courts.1 In this action, Plaintiff contends that, because his former corporate

employer included a provision in its by-laws requiring the corporation to advance

such costs and fees, he is entitled to a mandatory injunction requiring the corporate

*

Recognizing that this Order and Opinion cites and discusses the subject matter of

documents that the Court has previously allowed to remain filed under seal in this case, this

Order and Opinion is filed under seal at ECF No. 135. This public version of the Order and

Opinion redacts those portions of the Order and Opinion claimed to be confidential.

1 The Court is aware of one case in which our appellate courts have dealt with the issue of

advancement. See Swenson v. Thibaut, 39 N.C. App. 77, 115–16, 250 S.E.2d 279, 303 (1978),

cert. denied and appeal dismissed, 296 N.C. 740, 254 S.E.2d 181 (1979). In that case,

however, which was decided under the 1955 version of the North Carolina Business

Corporation Act, minority shareholder plaintiffs moved to enjoin a corporation from

continuing to advance fees to a director defendant. See id. Conversely here, this case involves

an officer/director who seeks an injunction requiring the corporation to advance fees under

the corporation’s by-laws after the corporation refused to do so.

defendant to pay his expenses incurred in defending claims against him by the

corporation.

2. Plaintiff Christopher Gray Wheeler (“Gray”) filed his Motion for

Preliminary Injunction (the “Motion”) on August 15, 2018. (ECF No. 95 [“Mot.”].)

Having considered the affidavits, briefs, arguments of counsel at the hearing on the

Motion, and supporting materials presented to the Court, the Court makes the

following findings of fact and conclusions of law for the limited purpose of resolving

the Motion, without prejudice to making contrary or different findings and

conclusions in subsequent orders. See Lohrmann v. Iredell Mem’l Hosp., Inc., 174

N.C. App. 63, 75, 620 S.E.2d 258, 265 (2005) (“It is well settled that findings of fact

made during a preliminary injunction proceeding are not binding upon a court at a

trial on the merits.”).

3. For the reasons stated herein, the Court DENIES the Motion.

Cadwalader, Wickersham & Taft LLP, by Jonathan M. Watkins, Aaron

C. Lang, Nathan M. Bull, and Hyungjoo Han, for Plaintiff.

Nexsen Pruet, PLLC, by James C. Smith, Kathleen D.B. Burchette, and

Samantha K. Lloyd, for Defendant Joseph Gray Wheeler.

Robinson, Bradshaw & Hinson, P.A., by John R. Wester, D. Blaine

Sanders, and Lucas Anderson, for Defendants Scott A. Moe and Yale

Carolinas, Inc.

Robinson, Judge.

I. FINDINGS OF FACT

4. Yale Carolinas, Inc. (“YCI” or the “Company”) is a private, closely held

corporation organized under the laws of North Carolina with its principal place of

business in Charlotte, North Carolina. (Suppl. Am. Compl. ¶ 6, ECF No. 94 [“Am.

Compl.”]; Am. Answer & Countercl. of Yale Carolinas, Inc. & Answer of Scott A. Moe

¶ 6, ECF No. 98 [“Answer”/“Litigation Counterclaims”]; see ECF No. 56.3.) YCI

currently has three shareholders: Defendant Joseph Gray Wheeler (“Joe”), Gray, and

Defendant Scott A. Moe (“Scott” and, collectively with, YCI and Joe, “Defendants”).

(Am. Compl. ¶ 6; Answer ¶ 6.) YCI is in the business of selling, renting, servicing,

and providing parts for “material-handling equipment such as forklifts, scissor lifts,

personnel carriers, fuel cells, batteries and chargers, and refueling systems.” (Am.

Compl. ¶ 6; Answer ¶ 6.)

5. Joe is the majority and controlling shareholder of YCI, owning 51.19% of

the Company’s stock. (Am. Compl. ¶ 4; Answer ¶ 4.) In addition, Joe serves as

Chairman of the Company’s Board of Directors (the “Board”) and as the Company’s

Chief Executive Officer. (Am. Compl. ¶ 4; Answer ¶ 4.) Joe is Gray’s father. (Am.

Compl. ¶ 4; Answer ¶ 4.)

6. Gray joined YCI in 2004 as its Controller/CFO and was promoted to Vice

President of Operations in 2005. (Am. Compl. ¶ 3; Answer ¶ 3.) From 2009 until the

end of 2016, Gray served as YCI’s President. (Am. Compl. ¶ 3; Answer ¶ 3.) Gray

owns 33.45% of YCI’s stock. (Am. ¶ Compl. 3; Answer ¶ 3.) Gray became a member

of the Board in 2005.2 (Am. Compl. ¶ 3; Answer ¶ 3.)

2 The parties dispute whether Gray continues to serve as a director of YCI.

Gray alleges that

he continues to serve on the Board. (Am. Compl. ¶ 3.) YCI asserts that the Board removed

Gray as a director in 2017. (Answer ¶ 3.) For reasons made clear below, Gray’s current

status as a director of YCI is immaterial to the question of whether he is entitled to

advancement.

7. Scott worked as an account manager for YCI from 1989 to 1994, was then

rehired by Joe in 2003, and later promoted to Vice President of Sales. (See Am.

Compl. ¶ 5; see Answer ¶ 5.) Scott was promoted to President of YCI in 2017. (Am.

Compl. ¶ 5; Answer ¶ 5.) Scott owns 15.36% of the Company’s stock. (Am. Compl. ¶

5; Answer ¶ 5.)

8. Upon becoming a shareholder of YCI, on April 18, 2005, Gray executed an

Addendum to the Buy Sell Agreement of Yale Carolinas, Inc., agreeing to be bound

by the Buy/Sell Agreement of Yale Carolinas, Inc., effective as of November 8, 1998

(the “Buy/Sell Agreement”). (Litigation Countercl. Ex. C; see Litigation Countercl.

Ex. B [“Buy/Sell Agreement”].) The Buy/Sell Agreement provides that if any

shareholder of YCI who is also an employee is terminated for cause, the shareholder

“shall offer to sell all of his [shares]” at either an agreed upon price or at book value.

(Buy/Sell Agreement ¶¶ 3–4.)

9. In November 2016, Gray notified Joe and Scott of his desire to “transition

out of the company” over an extended period. (Am. Compl ¶ 58; see Answer ¶ 58.)

Ultimately, Gray resigned as President of YCI, effective December 31, 2016, although

he continued to receive his base salary through January 31, 2017. (See Consent of

Directors of Yale Carolinas, Inc. to Action Without a Meeting 1, ECF No. 106.2

[“Resolutions”].)

10. Prior to his resignation, Gray sent an e-mail to Joe on December 28, 2016

agreeing to a buy-out of his shares at book value, which Gray estimated to be in the

“$3.5m-$4m range, give or take” (the “December 28 Agreement”). (Litigation

Countercl. Ex. A, at 1 [“December 28 Agreement”].) Defendants allege that they

tendered the first payment for the purchase of Gray’s shares in March 2017, but that

Gray refused to accept the payment. (Litigation Countercl. ¶ 34.)

11. Six months later, Gray initiated this action naming YCI and Joe as

defendants. (See generally Compl., ECF No. 4.) That same day, Gray designated this

action as a mandatory complex business case under section 7A-45.4(a) of the North

Carolina General Statutes, (ECF No. 5), and it was designated by order of Chief

Justice Mark Martin of the Supreme Court of North Carolina dated September 5,

2017, (ECF No. 3), and assigned to the Honorable Louis A. Bledsoe, III by order of

then-Chief Business Court Judge James L. Gale on September 6, 2017, (ECF No. 2).

This action was reassigned to the undersigned on November 8, 2017. (ECF No. 15.)

12. In the Complaint (subsequently amended), Gray asserted claims for breach

of fiduciary duty, constructive fraud, unfair or deceptive trade practices under N.C.

Gen. Stat. § 75-1.1,3 and judicial dissolution of YCI. (Compl. 36–43.) Gray bases

these claims on Joe’s alleged disloyalty, self-dealing, and abuse of his position as

majority shareholder of YCI. (See Compl. ¶¶ 72, 79, 85, 92.)

13. Pursuant to a joint stipulation of Gray, YCI, and Joe, Gray filed his

Amended Complaint on January 18, 2018, which added Scott as a party to some but

not all of Gray’s claims. (ECF No. 38.)

3 On April 25, 2018, this Court dismissed with prejudice Gray’s claim for unfair or deceptive

trade practices. Wheeler v. Wheeler, 2018 NCBC LEXIS 38, at *14 (N.C. Super. Ct. Apr. 25,

2018).

14. At about the same time Gray initiated this action, he initiated arbitration

proceedings against Joe and YCI, later adding Scott as a party to the arbitration,

captioned Wheeler v. Wheeler, Moe & Yale Carolinas, Inc., AAA Case No. 01-17-0005-

2453 (the “Arbitration”). (ECF No. 79.1.) Gray bases his claims in the Arbitration on

many of the same allegations in this action, and seeks there to vindicate his rights

under the Buy/Sell Agreement. (See generally ECF No. 79.1.)

15. On November 6, 2017, YCI asserted counterclaims against Gray in this

action, (ECF No. 14), and, on February 16, 2018, asserted counterclaims in the

Arbitration, (ECF No. 82.2), both subsequently amended. In this action, YCI asserts

claims against Gray for breach of contract, conversion, fraud, breach of fiduciary duty,

civil remedy for larceny and embezzlement, and multiple claims for declaratory

judgment. (See Litigation Countercl. 21–25.) YCI asserts nearly identical

counterclaims against Gray in the Arbitration. (See Second Am. Answer of Yale

Carolinas, Inc. & Scott Anthony Moe to Am. Demand for Arbitration & Am.

Countercl. 12–16, ECF No. 96.1 [“Arbitration Countercl.”].)

16. The counterclaims for conversion, fraud, breach of fiduciary duty, and civil

remedy for larceny and embezzlement, in both this action and the Arbitration, are

premised on allegations that Gray, as President of YCI, secretly increased his

compensation without Board approval and/or jeopardized YCI’s relationship with its

principal supplier Hyster-Yale Group (“HYG”) by, among other things, insulting

HYG’s President. (Arbitration Countercl. ¶¶ 51, 55–56, 59–60, 64–66, 69–72;

Litigation Countercl. ¶¶ 51, 55–56, 59–60, 64–66, 69–72.) YCI’s first claim in the

Arbitration (second claim for declaratory judgment in this action) seeks a declaration

that, due to Gray’s alleged misconduct, his termination was “for cause” under the

Buy/Sell Agreement and an order directing Gray “to offer all of his shares to YCI at

book value” under the Buy/Sell Agreement. (Arbitration Countercl. ¶ 40; Litigation

Countercl. ¶ 49; see Resolutions 1 (“[B]e it resolved that [YCI] hereby determines that

[Gray’s] voluntary resignation shall be treated as a termination ‘for cause.’”).)

17. YCI’s claim for breach of contract, in the Arbitration and this action, alleges

that Gray “breached the December 28 Agreement by rejecting YCI’s tender of the first

payment for the shares and by refusing to tender his shares to YCI.” (Arbitration

Countercl. ¶ 45; Litigation Countercl. ¶ 42.) YCI’s second claim for declaratory

judgment in the Arbitration (first claim for declaratory judgment in this action) seeks

a declaration requiring Gray “to tender his shares to YCI in exchange for their book

value” under the December 28 Agreement. (Arbitration Countercl. ¶ 49; Litigation

Countercl. ¶ 46.)

18. By letter dated February 5, 2018, Gray, through his counsel, demanded that

YCI advance his reasonable expenses incurred in defending against YCI’s

counterclaims in both this action and the Arbitration, pursuant to Article X of the

Amended and Restated Bylaws of Yale Carolinas, Inc., effective as of April 15, 1991

(the “Bylaws”). (Scott Aff. Ex. A, at 1–2, ECF No. 80.1 [“Demand”]; Scott Aff. Ex. B,

at art. X, §§ 1–2 [“Bylaws”].)

19. Article X of YCI’s Bylaws lays out the indemnification and advancement

rights of directors, officers, employees, and agents of YCI. Article X, Section 1 defines

the scope of the indemnification right and provides, in pertinent part, that:

[a]ny person who at any time serves or has served as a director, officer,

agent or employee of the corporation . . . shall have a right to be

indemnified by the corporation to the fullest extent permitted by law

against (a) reasonable expenses, including reasonable attorneys’ fees,

actually incurred by him in connection with any threatened, pending or

completed action, suit or proceeding (and any appeal thereof), whether

civil, criminal, administrative, investigative or arbitrative, and whether

or not brought by or on behalf of the corporation, seeking to hold him

liable by reason of the fact that he is or was acting in such capacity, and

(b) reasonable payments made by him in satisfaction of any judgment,

money decree, fine, . . . penalty or settlement for which he may have

become liable in any such action, suit or proceeding.

(Bylaws art. X, § 1.)

20. Article X, Section 2 concerns advance payment of fees incurred by a person

within the scope of Section 1 and provides that:

[e]xpenses incurred by such person shall be paid in advance of the final

disposition of such investigation, action, suit or proceeding upon receipt

of an undertaking by or on behalf of such person to repay such amount

unless it shall ultimately be determined that he is entitled to be

indemnified by the corporation.

(Bylaws art. X, § 2.)

21. Pursuant to Article X, Section 2 of the Bylaws, and as a part of his February

5, 2018 communication, Gray provided a written undertaking, promising to “repay

the amount that he is paid in advance of the final disposition of the [counterclaims in

this action and the Arbitration] unless it is ultimately determined that he is entitled

to be indemnified” by YCI. (Demand 2; see Bylaws art. X, § 2.)

22. By letter dated February 12, 2018, Scott responded on behalf of the YCI

Board, denying Gray’s Demand. (Scott Aff. Ex. C [“Demand Denial”].) YCI asserted

three bases for the denial. First, Scott claimed that YCI had determined that the

counterclaims related to the December 28 Agreement do not arise out of Gray’s status

as a former officer and director of YCI but, rather, arise out of his status as a

shareholder of YCI. (Demand Denial 1.) Accordingly, YCI concluded these are not

claims for which Gray may be indemnified under the Bylaws. (Demand Denial 1.)

23. Second, Scott advised Gray that YCI denied his request for advancement

because YCI brought the counterclaims, which it contends may be compulsory, “only

in response to the litigation [Gray] initiated.” (Demand Denial 2.) YCI concluded

that its counterclaims “are not an ‘action, suit or proceeding’ for which the board

intended, or North Carolina law allows, advancement of fees.” (Demand Denial 2

(quoting Bylaws art. X, §§ 1, 2).)

24. Finally, Scott claimed that, because the Bylaws provide for indemnification

“to the fullest extent permitted by law[,]” YCI determined it could not indemnify

Gray, pursuant to N.C. Gen. Stat. § 55-8-57(a), for “activities which were at the time

taken known or believed by him to be clearly in conflict with the best interest of the

corporation.” (Demand Denial 1 (quoting Bylaws art. X, § 1; N.C. Gen. Stat. § 55-8-

57(a)).) Having concluded that Gray “knew what he was doing, both when he secretly

raised his compensation and also when he insulted [HYG,]” YCI determined that

Gray’s alleged conduct makes him ineligible for indemnification. (Demand Denial 1–

2.) YCI then concluded that the same reasoning applies to advancement, thus

“prohibit[ing] [YCI] from advancing fees to [Gray] to defend such actions.” (Demand

Denial 2.)

25. Nearly three months after receiving YCI’s denial letter, on May 2, 2018,

Gray filed a motion to supplement his Amended Complaint to add, inter alia, a claim

for advancement (the “Motion to Supplement”). (ECF No. 73.) Defendants opposed

the Motion to Supplement, and briefing ensued. (See ECF Nos. 79, 80, 82, 83.)

26. Following Defendants’ withdrawal of their opposition to the Motion to

Supplement on August 2, 2018 (ECF No. 91), the Court entered an order on August

2, 2018 granting the Motion to Supplement (the “Order”). (Order Following

Stipulations & Extending Case Management Deadlines ¶ 6(B), ECF No. 93 [“Order”].)

The Order also stayed YCI’s counterclaims in this action pending a resolution of the

nearly identical counterclaims in the Arbitration. (Order ¶ 6(A).) The Arbitration

hearing in which the counterclaims will be decided was scheduled to take place from

November 7 to November 9, 2018.

27. Gray filed his Supplemental Amended Complaint on August 3, 2018,

asserting a claim for advancement. (Am. Compl. 55–56.) Gray styles his claim for

advancement as one for “Breach of Bylaws” against all Defendants. (Am. Compl. 55.)

Gray alleges that, under the Bylaws, he is entitled to mandatory advancement of

reasonable expenses, including attorneys’ fees, incurred in defending against the

counterclaims that arise out of his alleged conduct “in his capacity as an employee,

officer and director” of YCI. (Am. Compl. ¶¶ 130–31.) He alleges that YCI has

violated the Bylaws by refusing to advance his reasonable expenses, including

reasonable attorneys’ fees. (Am. Compl. ¶ 134.) Defendants deny the allegations

related to Gray’s claim for advancement, except that Defendants admit that “YCI’s

counterclaims against Gray . . . arise from his misconduct as a shareholder, employee,

officer and director of YCI.” (Answer ¶¶ 131–36.)

28. As of October 15, 2018, Gray had incurred [REDACTED] in legal fees in

defending against YCI’s counterclaims in this action and the Arbitration. (Watkins

Aff. ¶ 14, ECF No. 116.) [REDACTED]. (Gray Aff. ¶¶ 11, 15, ECF No. 117.) YCI’s

refusal to advance Gray’s defense costs has prevented Gray “from taking a more

aggressive approach toward the use of more costly expert witnesses.” (Gray Aff. ¶

16.)

29. Gray filed the Motion on August 15, 2018, almost two weeks after filing his

Supplemental Amended Complaint. The Motion asks the Court to enter a

preliminary injunction ordering Defendants to advance Gray his reasonable expenses

already incurred in defending against the counterclaims in this action and the

Arbitration and to continue to pay such fees until a final disposition of the

counterclaims in both proceedings. (Mot. 1–2.)

30. Defendants filed their brief in opposition to the Motion on September 15,

2018, and Gray elected to forgo filing a reply brief in support. The Court held a

hearing on the Motion on October 3, 2018 by video conference in which counsel for all

parties participated.

31. Following the hearing, on October 5, 2018, the Court entered an order

allowing Gray and Defendants each to file opening supplemental briefs by October

15, 2018 and response supplemental briefs by October 22, 2018. (ECF No. 112.) Gray

and Defendants filed briefs on those dates accordingly.

32. The Motion is now ripe for resolution.

II. CONCLUSIONS OF LAW

33. Under Rule 65 of the North Carolina Rules of Civil Procedure (“Rule(s)”),

the Court has discretion to issue a preliminary injunction. See N.C. Gen. Stat. § 1A-

1, Rule 65(a)–(b) cmt. “The purpose of a preliminary injunction is ordinarily to

preserve the status quo pending trial on the merits.” A.E.P. Indus., Inc. v. McClure,

308 N.C. 393, 400, 302 S.E.2d 754, 759 (1983) (citation and quotation marks omitted).

The issuance of a preliminary injunction, “is a matter of discretion to be exercised by

the hearing judge after a careful balancing of the equities.” State ex rel. Edminsten

v. Fayetteville St. Christian Sch., 299 N.C. 351, 357, 261 S.E.2d 908, 913 (1980).

34. A preliminary injunction is appropriate only where “a plaintiff is able to

show a likelihood of success on the merits of his case” and “is likely to sustain

irreparable loss in the absence of an injunction, or if, in the opinion of the Court,

issuance is necessary for the protection of a plaintiff’s rights during the course of

litigation.” A.E.P. Indus., 308 N.C. at 401, 302 S.E.2d at 759–60 (emphasis omitted)

(citations and quotation marks omitted).

35. “The law recognizes a distinction, however, between prohibitory and

mandatory injunctions.” Auto. Dealer Res., Inc. v. Occidental Life Ins. Co., 15 N.C.

App. 634, 639, 190 S.E.2d 729, 732 (1972). “A prohibitory injunction seeks to preserve

the status quo, until the rights of the parties can be determined, by restraining the

party enjoined from doing particular acts.” Id. (citing Clinard v. Lambeth, 234 N.C.

410, 418, 67 S.E.2d 452, 458 (1951)). In contrast, “[a] mandatory injunction is

intended to restore a status quo and to that end requires a party to perform a positive

act.” Id. A mandatory injunction “will ordinarily be granted only where the injury is

immediate, pressing, irreparable, and clearly established.” Id. (citing State Highway

& Pub. Works Comm’n. v. Brown, 238 N.C. 293, 296, 77 S.E.2d 483, 782 (1953)).

“[T]he court has jurisdiction to issue a preliminary mandatory injunction where the

case is urgent and the right is clear[.]” Id. (citation and quotation marks omitted).

36. Here, YCI has denied Gray’s Demand and is not currently advancing Gray

the expenses incurred in defending against YCI’s counterclaims. (See Demand Denial

2.) Gray seeks an order from the Court requiring YCI (1) to pay Gray “any and all

reasonable expenses (including reasonable attorneys’ fees) incurred” in defending

against the counterclaims, and (2) to “continue to promptly pay all reasonable

expenses (including reasonable attorneys’ fees) until the entry of a final and complete

judgment” on the counterclaims. (Mot. 1–2.) Accordingly, Gray asks the Court to

order YCI to perform a positive act that would not preserve the status quo but, rather,

would restore it. See Auto. Dealer Res., 15 N.C. App. at 639, 190 S.E.2d at 732.

Therefore, the Court concludes that the more exacting standard applicable to

mandatory injunctions applies to the Motion.

37. Thus, as to the first preliminary injunction requirement, Gray must

demonstrate that he has a clear right to advancement. See id. As to the second

requirement, Gray must show that he has “no adequate remedy at law and [that]

irreparable harm will result if the injunction is not granted.” Vest v. Easley, 145 N.C.

App. 70, 76, 549 S.E.2d 568, 574 (2001). In addition to irreparability, the harm must

be “immediate, pressing, . . . and clearly established.” Auto. Dealer Res., 15 N.C. App.

at 639, 190 S.E.2d at 732.

38. “North Carolina courts have held that in assessing the . . . preliminary

injunction factors, the trial judge ‘should engage in a balancing process, weighing

potential harm to the plaintiff if the injunction is not issued against the potential

harm to the defendant if injunctive relief is granted.’” Nat’l Surgery Ctr. Holdings,

Inc. v. Surgical Inst. of Viewmont, LLC, 2016 NCBC LEXIS 41, at *8 (N.C. Super. Ct.

May 12, 2016) (quoting Williams v. Greene, 36 N.C. App. 80, 86, 243 S.E.2d 156, 160

(1978)).

39. The Court has carefully weighed the factual averments made by Gray and

Defendants and the records, evidence, and documents provided to the Court in order

to determine whether Gray has demonstrated entitlement to a preliminary

mandatory injunction.

A. Gray Has Demonstrated a Likelihood of Success on the Merits

40. The Court’s initial inquiry on Gray’s Motion is whether he has shown a

clear right to advancement and, thus, a likelihood of success on the merits of his claim

for the same. See A.E.P. Indus., 308 N.C. at 401, 302 S.E.2d at 759–60; Auto. Dealer

Res., 15 N.C. App. at 639, 190 S.E.2d at 732.

1. Indemnification and Advancement Under North Carolina

Law and YCI’s Bylaws

41. By statute, a North Carolina corporation may, and in some instances must,

indemnify its current and former officers and directors made a party to a proceeding

because of their status as an officer or director. See N.C. Gen. Stat. §§ 55-8-51, 55-8-

52, 55-8-56.

[A] corporation may indemnify an individual made a party to a

proceeding because he is or was a director against liability incurred in

the proceeding if: (1) [h]e conducted himself in good faith; and (2) [h]e

reasonably believed (i) in the case of conduct in his official capacity with

the corporation, that his conduct was in its best interest; and (ii) in all

other cases, that his conduct was at least not opposed to its best

interests[. . . .]

Id. § 55-8-51(a). However, a corporation may not indemnify a director under section

55-8-51(a) “[i]n connection with a proceeding by or in the right of the corporation in

which the director was adjudged liable to the corporation” or “[i]n connection with

any other proceeding charging improper benefit to him, whether or not involving

action in his official capacity, in which he was adjudged liable on the basis that

personal benefit was improperly received by him.” Id. § 55-8-51(d).

42. Additionally, a director has a mandatory right to indemnification, unless

the corporation’s articles of incorporation provide otherwise, where the director “was

wholly successful, on the merits or otherwise, in the defense of any proceeding to

which he was a party because he is or was a director of the corporation against

reasonable expenses incurred by him in connection with the proceeding.” Id. § 55-8-

52.

43. As a corollary to indemnification, North Carolina statutes provide for

permissive advancement.

Expenses incurred by a director in defending a proceeding may be paid

by the corporation in advance of the final disposition of such

proceeding as authorized by the board of directors in the specific case

or as authorized or required under any provision in the articles of

incorporation or bylaws . . . upon receipt of an undertaking by or on

behalf of the director to repay such amount unless it shall ultimately be

determined that he is entitled to be indemnified by the corporation

against such expenses.

Id. § 55-8-53 (emphasis added).

44. Section 55-8-56 extends the mandatory indemnification and permissive

advancement rights of directors of a North Carolina corporation to officers,

employees, and agents of the corporation. Id. § 55-8-56 (“Unless a corporation’s

articles of incorporation provide otherwise: (1) [a]n officer of the corporation is

entitled to mandatory indemnification under [section 55-8-52] . . . to the same extent

as a director; [and] (2) [t]he corporation may indemnify and advance expenses . . . to

an officer, employee, or agent of the corporation to the same extent as to a director[.]”)

45. Furthermore, a corporation may provide its directors, officers, and

employees with rights to indemnification and advancement in its articles of

incorporation or by-laws. Id. §§ 55-8-56(3), 55-8-57(a). There are, however, limits on

the extent to which a corporation may indemnify its directors, officers, and employees

in its by-laws. Specifically, “a corporation may not indemnify or agree to indemnify

a person [in its by-laws] against liability or expenses he may incur on account of his

activities which were at the time taken known or believed by him to be clearly in

conflict with the bests interests of the corporation.” Id. § 55-8-57(a).

46. North Carolina’s statutory scheme for indemnification and advancement

serves to promote this State’s “public policy . . . [of] enabl[ing] corporations organized

[in North Carolina] to attract and maintain responsible, qualified directors, officers,

employees and agents, and, to that end, to permit corporations organized [in North

Carolina] to allocate the risk of personal liability of directors, officers, employees and

agents through indemnification[.]” Id. § 55-8-50(a).

47. Under the auspices of this statutory scheme, YCI’s Bylaws provide, in

certain circumstances, for both mandatory indemnification and mandatory

advancement. Article X, Section 1 of the Bylaws defines the class of individuals who

have a right to indemnification under the Bylaws and the scope of that right. The

right to indemnification extends to: (1) “[a]ny person who at any time serves or has

served as a director, officer, agent or employee of the corporation”; (2) who incurs

“reasonable expenses, including attorneys’ fees”; (3) “in connection with any

threatened, pending or completed action, suit or proceeding”; (4) “whether civil,

criminal, administrative, investigative or arbitrative”; (5) “whether or not brought by

or on behalf of the corporation”; and (6) where the proceedings seek “to hold [the

director or officer] liable by reason of the fact that he is or was acting in such

capacity[.]” (Bylaws art X, § 1.) Any person satisfying all of these criteria “shall have

a right to be indemnified by the corporation to the fullest extent permitted by law.”

(Bylaws art. X, § 1.)

48. Article X, Section 2 of the Bylaws provides that:

[e]xpenses incurred by such person shall be paid in advance of the final

disposition of such investigation, action, suit or proceeding upon receipt

of an undertaking by or on behalf of such person to repay such amount

unless it shall ultimately be determined that he is entitled to be

indemnified by the corporation.

(Bylaws art. X, § 2 (emphasis added).)

2. Interpretation of YCI’s Bylaws

49. The parties’ dispute over Gray’s entitlement to advancement derives

primarily from their competing interpretations of the Bylaws’ indemnification and

advancement provisions. “A corporation’s by-laws are a contract between the

corporation and its members.” Dillard/Goldsboro Alumni & Friends, Inc. v. Smith,

2016 NCBC LEXIS 34, at *34 (N.C. Super. Ct. Apr. 28, 2016) (citing Crider v. Jones

Island Club, Inc., 147 N.C. App. 262, 267, 54 S.E.2d 863, 866 (2001)); see also Hilco

Transp., Inc. v. Atkins, 2016 NCBC LEXIS 5, at *28 (N.C. Super. Ct. 2016) (“A

corporation’s bylaws are treated like a contract.”). Therefore, the Court must

interpret these provisions of the Bylaws following well-settled rules of contract

interpretation to determine whether Gray has shown a likelihood of success on his

claim for advancement.

50. “[T]he various terms of the [contract] are to be harmoniously construed and,

if possible, every word and every provision is to be given effect.” In re Foreclosure of

a Deed of Trust, 210 N.C. App. 409, 415, 708 S.E.2d 174, 178 (2011) (second alteration

in original) (citation and quotation marks omitted). The Court must “interpret a

contract according to the intent of the parties to the contract, unless such intent is

contrary to law.” Buetel v. Lumber Mut. Ins. Co., 134 N.C. App. 626, 631, 518 S.E.2d

205, 209 (1999). “If the plain language of a contract is clear, the intention of the

parties is inferred from the words of the contract.” Walton v. City of Raleigh, 342

N.C. 879, 881, 467 S.E.2d 410, 411 (1996).

51. As an initial matter, the parties do not dispute that the Bylaws are a valid

and binding contract. Nor do they dispute that the language “shall have a right to be

indemnified” and “shall be paid in advance” renders the indemnification and

advancement rights under the Bylaws mandatory if other required conditions are

met. (Bylaws art. X, §§ 1, 2.) Therefore, the Court concludes that the Bylaws

constitute a valid contract and provide for mandatory indemnification and

advancement rights to persons covered under Article X, Section 1. See Internet E.,

Inc. v. Duro Commc’ns, Inc., 146 N.C. App. 401, 405–06, 553 S.E.2d 84, 87 (2001)

(holding that “shall” renders a provision of a contract mandatory).

52. According to Gray, his entitlement to advancement under the Bylaws is

clear and straightforward: he is a former officer and director of YCI now defending

claims brought against him by YCI in both this action and the Arbitration; the claims

seek to hold him liable for his conduct in his capacities as officer and director; and in

defending against these claims, he has actually incurred, and continues to incur,

expenses. Therefore, Gray contends he satisfies the criteria set forth in Article X,

Section 1 of the Bylaws. (See Pl.’s Mem. Supp. Pl.’s Mot. for Prelim. Inj. 8–10, ECF

No. 96 [“Pl.’s Mem. Supp.”].) Further, Gray argues, these expenses must be paid by

YCI in advance of a final disposition of the claims upon his providing an

“undertaking,”4 which he has done. (Pl.’s Mem. Supp.10.) Because YCI has refused

4 The term “undertaking” refers to the statutory requirement that a party seeking

advancement of defense fees must sign a writing committing to pay the advanced funds back

to advance Gray his reasonable expenses, Gray contends YCI has breached the

Bylaws. (Pl.’s Mem. Supp. 10.)

53. Defendants respond that Gray is not entitled to advancement for three

reasons. First, Defendants contend that the nature of Gray’s conduct—that he took

action that he knew or believed not to be in the best interest of the corporation—

eliminates his entitlement to indemnification. (See Defs.’ Br. Opp’n to Pl.’s Mot. for

Prelim. Inj. 11–12, ECF No. 106 [“Defs.’ Br. Opp’n”]; Defs.’ Suppl. Br. Opp’n to Pl.’s

Mot for Prelim. Inj. 4–9, ECF No. 113 [“Defs.’ First Suppl. Br.”]; Defs.’ Second Suppl.

Br. Opp’n to Pl.’s Mot. for Prelim. Inj. 3–8, ECF No. 121 [“Defs.’ Second Suppl. Br.”].)

Because Defendants contend that the Bylaws condition advancement on an officer or

director’s eligibility for indemnification, Gray, they argue, is not entitled to

advancement. (See Defs.’ Second Suppl. Br. 8–9.) Second, Defendants contend that

not all of the counterclaims in this litigation or the Arbitration were brought by YCI

“by reason of the fact” that Gray served as an officer and director of YCI. (Defs.’ Br.

Opp’n 9–10.) Third, YCI contends that, in defending against counterclaims, Gray is

not defending against an “action, suit or proceeding” as YCI intended the applicable

language in its Bylaws to be interpreted. (See Defs.’ Br. Opp’n 11, 13–14; Defs.’ First

Suppl. Br. 3–4.)

54. The Court addresses each of these arguments in turn.

to the corporation if it is ultimately determined that the party obtaining advancement is not

entitled to indemnity. See N.C. Gen. Stat. § 55-8-53.

a. The Relationship Between Indemnification and

Advancement

55. The key dispute concerning Gray’s right to advancement concerns the

parties’ competing conceptions of the relationship between indemnification and

advancement under the Bylaws.

56. In denying Gray’s Demand, YCI stated that, because the Bylaws mandate

advancement “to the fullest extent permitted by law[,]” YCI could not indemnify

Gray, pursuant to section 55-8-57(a), for “activities which were at the time taken

known or believed by him to be clearly in conflict with the best interest of the

corporation.” (Demand Denial 1 (quoting Bylaws art. X, § 1; N.C. Gen. Stat. § 55-8-

57(a)).) Having concluded that Gray “knew what he was doing, both when he secretly

raised his compensation and also when he insulted [HYG,]” YCI determined that

Gray’s alleged conduct makes him ineligible for indemnification. (Demand Denial 1–

2.) YCI then concluded that the same reasoning applies to advancement and “also

prohibits [YCI] from advancing fees to [Gray] to defend such actions.” (Demand

Denial 2.)

57. The case law on indemnification, advancement, and the relationship

between the two is underdeveloped in North Carolina. Delaware courts, however,

have addressed these issues in numerous decisions. North Carolina courts frequently

look to Delaware law for guidance on legal issues such as those in dispute here. See

Ehrenhaus v. Baker, 216 N.C. App. 59, 85, 717 S.E.2d 9, 27 (2011); Ehrenhaus v.

Baker, 2008 NCBC LEXIS 21, at *27 n.19 (N.C. Super. Ct. Dec. 5, 2008).

58. The Delaware Supreme Court has held that “[a]lthough the right[s] to

indemnification and advancement are correlative, they are separate and distinct legal

actions.” Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005). Generally, “[t]he

right to advancement is not dependent on the right to indemnification.” Id. (citing

Citadel Holding Corp. v. Roven, 603 A.2d 818, 822 (Del. 1992)). As the Delaware

Court of Chancery has explained:

[i]ndemnification is the right to be reimbursed for all out of pocket

expenses and losses caused by an underlying claim. The right is

typically subject to a requirement that the indemnitee have acted in

good faith and in a manner that he reasonably believed was in the best

interests of the company. As a result, an indemnification dispute

generally cannot be resolved until after the merits of the underlying

controversy are decided because the good faith standard requires a

factual inquiry into the events that gave rise to the lawsuit.

Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 586 (Del. Ch. 2006)

(internal citations omitted).

59. Advancement, however, is in certain respects narrower than

indemnification and in certain respects broader:

[a]dvancement, by contrast, is a right whereby a potential indemnitee

has the ability to force the company to pay his litigation expense as they

are incurred regardless of whether he will ultimately be entitled to

indemnification. Advancement is typically not conditioned on a finding

that the party seeking advancement has met any standard of conduct.

A grant of advancement rights is essentially a decision to advance credit

to the company’s officers and directors because the officer or director

must repay all sums advanced to him if it is later determined that he is

not entitled to be indemnified.

Id. at 586–87 (internal citations omitted).

60. The plain language of the Bylaws’ advancement provision is in accord with

the Delaware courts’ conception of indemnification and advancement as related but

importantly distinct rights. Article X, Section 2 mentions indemnification only in the

context of providing an undertaking, the receipt of which is clearly a condition for

advancement. (Bylaws art. X, § 2 (conditioning advancement “upon receipt of an

undertaking by or on behalf of such person to repay such amount unless it shall

ultimately be determined that he is entitled to be indemnified by the corporation.”

(emphasis added)).) The use of “ultimately be determined that he is entitled to be

indemnified” suggests that the determination must be made after the merits of the

claims for which a person seeks advancement are decided. Factors relevant to that

determination include whether the director or officer in question knew or believed his

actions “to be clearly in conflict with the best interest of the corporation.” N.C. Gen.

Stat. § 55-8-57(a). Under Delaware law, these state-of-mind factors “require[] a

factual inquiry into the events that gave rise to the lawsuit[,]” Majkowski, 913 A.2d

at 586–87 (internal citations omitted), which will occur at the final stage of the

litigation.

61. The Bylaws’ advancement provision mandates that a covered person’s

litigation expenses are to be pre-paid by the corporation prior to “the final disposition”

of the action. (Bylaws art. X, § 2.) 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. See Majkowski, 913 A.2d at 586–87.

62. Applying ordinary rules of contract interpretation, the Bylaws’

advancement provision cannot be read to condition the right to advancement on a

predetermination of a person’s ultimate entitlement to indemnification. Defendants’

contrary interpretation of the Bylaws improperly conditions a person’s entitlement to

advancement on a finding that the person is also entitled to indemnification.

63. Furthermore, Defendants’ interpretation leads to untenable consequences.

If YCI may determine in advance of a final disposition that the person seeking

advancement will not ultimately be entitled to indemnity, it would render the

advancement provision’s undertaking requirement meaningless. As Gray points out,

under such an interpretation, “there would never be any uncertainty as to whether

advanced expenses were subject to indemnification because this determination

already would have occurred, and there would never be a need for an undertaking.”

(Pl.’s Suppl. Mem. Supp. Pl.’s Mot. for Prelim. Inj. 13, ECF No. 115 [“Pl.’s First Suppl.

Br.”].) The Court declines to adopt an interpretation of the Bylaws that would render

key provisions void. See In re Foreclosure of a Deed of Trust, 210 N.C. App. at 415,

708 S.E.2d at 178 (“[T]he various terms of the [contract] are to be harmoniously

construed and, if possible, every word and every provision is to be given effect.”

(second alteration in original) (citation and internal quotation marks omitted)).

64. Defendants’ interpretation also appears to be inconsistent with North

Carolina’s mandatory indemnification statute. N.C. Gen. Stat. § 55-8-52 provides

that a director has a mandatory right to indemnification, irrespective of

indemnification rights provided for in a corporation’s by-laws, where the director “was

wholly successful, on the merits or otherwise, in the defense of any proceeding to

which he was a party because he is or was a director of the corporation[.]” Defendants’

interpretation of the Bylaws allows for the possibility that YCI may predetermine, on

the basis of its allegations against an adverse director, that the director is not entitled

to indemnification; thereby deny that director advancement prior to a final

disposition of the action; and, yet, if the director is wholly successful, YCI would be

required to indemnify him for the very expenses YCI refused to advance on the basis

of the director’s purported lack of entitlement to indemnity. The Court cannot

endorse an interpretation of the Bylaws that allows for such an untenable result.

The Court must “interpret a contract according to the intent of the parties to the

contract, unless such intent is contrary to law.” Buetel, 134 N.C. App. at 631, 518

S.E.2d at 209.

65. Accordingly, the Court rejects Defendants’ interpretation of the Bylaws and

concludes that the advancement provision does not condition advancement on or

allow for a determination by YCI that the person seeking advancement is ultimately

entitled to indemnification.

66. This is not to say, however, that the right to advancement under the Bylaws

is completely divorced from the right to indemnification. Specifically, the Bylaws

require that the person requesting advancement must at least have the possibility of

indemnification. Article X, Section 1 defines those individuals as “[a]ny person who

at any time serves or has served as a director officer, agent or employee of the

corporation” and who incurs “reasonable expenses, including reasonable attorneys’

fees, . . . in connection with any . . . action, suit or proceeding . . . seeking to hold [that

person] liable by reason of the fact that he is or was acting in such capacity[.]”

(Bylaws art. X, § 1.)

67. These requirements place clear limits on the right to indemnification, and

“[i]t would make little sense to construe the [Bylaws’] advancement provision to

provide advancement for claims for which” persons could not possibly be indemnified.

NAMS Holdings, LLC v. Reece, 2018 NCBC LEXIS 32, at *23 (N.C. Super. Ct. Apr.

16, 2018).5 Such claims include those which are not brought “by reason of the fact”

that the person was acting in their official, corporate capacity. See, e.g., Charney v.

Am. Apparel, Inc., 2015 Del. Ch. LEXIS 238, at *47–56 (Del. Ch. Sept. 11, 2015);

Bernstein v. TractManager, Inc., 953 A.2d 1003, 1016–17 (Del. Ch. 2007); Weaver v.

ZeniMax Media, Inc., 2004 Del. Ch. LEXIS 10, at *12–18 (Del. Ch. Jan. 30, 2004); see

also infra Part II.A.2.b.

68. The Court thus concludes that the Bylaws provide a mandatory right to

advancement of reasonable expenses, including reasonable attorneys’ fees, to (1) any

person who is a current or former director, officer, employee, or agent of YCI; (2) who

incurs such expenses in connection with any pending action, suit, or proceeding; (3)

which action, suit, or proceeding seeks to hold the person liable by reason of the fact

that he is or was acting in his capacity as a director, officer, employee, or agent; and

(4) who provides an undertaking to repay such advanced expenses unless it is

5 This Court, in NAMS Holdings, considered a party’s right to advancement under Delaware

law in a Rule 12(b)(6) context. NAMS Holdings, 2018 NCBC LEXIS 32, at *5–7.

ultimately determined following a final disposition of the action, suit, or proceeding

that he is not entitled to be indemnified by YCI.

b. “By Reason of the Fact”

69. As an additional ground for denying Gray’s Demand, YCI noted that at least

some of its counterclaims were brought based on Gray’s breach of the December 28

Agreement to sell his shares for book value. (Demand Denial 1.) YCI determined,

and argues here, that such claims arise, not by reason of the fact that Gray was an

officer or director of YCI, but rather by reason of the fact that Gray is a shareholder

of YCI. (Demand Denial 1.)

70. Gray does not appear to dispute that the claims relating to his alleged

breach of the December 28 Agreement were not brought by reason of the fact that he

was an officer or director of YCI. (See Pl.’s Mem. Supp. 14–16.) Nor does it appear

that Defendants challenge Gray’s contention that YCI’s remaining counterclaims,

related to his allegedly unauthorized increases in compensation and his insults of

HYG’s President, were brought by reason of the fact that Gray was an officer and

director of YCI. (Defs.’ Br. Opp’n 9; see also Answer ¶ 132.)

71. The Bylaws limit the possibility for indemnification of expenses, and

correspondingly the advancement of expenses, to those claims brought “by reason of

the fact” that an officer or director “was acting in such capacity[.]” (Bylaws art. X, §

1.) The Bylaws’ “by reason of the fact” language is also found in Delaware’s

indemnification statute. See Del. Code Ann. tit. 8, § 145(a)–(b). Accordingly, the

Court finds Delaware law construing the “by reason of the fact” requirement

instructive for interpreting this identical language in the Bylaws.

72. “Delaware courts have construed the ‘by reason of the fact’ requirement

broadly but not ‘so broadly as to encompass every suit brought against an officer or

director.’” NAMS Holdings, 2018 NCBC LEXIS 32, at *8 (quoting Weaver, 2004 Del.

Ch. LEXIS 10, at *9–10). “[I]n order for one to be deemed a party to a proceeding ‘by

reason of the fact’ of one’s corporate position, there must be a ‘causal connection or

nexus’ between the underlying proceedings and ‘the corporate function or “official

[corporate] capacity.”’” Homestore, 888 A.2d at 213 (second alteration in original)

(quoting Perconti v. Thornton Oil Corp., 2002 Del. Ch. LEXIS 51, at *12–21 (Del. Ch.

May 3, 2002)). “The requisite connection is established ‘if the corporate powers were

used or necessary for the commission of the alleged misconduct.’” Paolino v. Mace

Sec. Int’l, Inc., 985 A.2d 392, 406 (Del. Ch. 2009) (quoting Bernstein, Inc., 953 A.2d at

1011). “Delaware courts typically determine whether there is a ‘causal connection’

by ‘examining the pleadings in the underlying litigation . . . .’” Charney, 2015 Del.

Ch. LEXIS 238, at *48 (omission in original) (quoting Holley v. Nipro Diagnostics,

Inc., 2014 Del. Ch. LEXIS 268, at *23 (Del. Ch. Dec. 23, 2014)).

73. YCI alleges that the December 28 Agreement obligates Gray to sell his

shares to YCI for a price determined under the Buy/Sell Agreement—book value.

(Arbitration Countercl. ¶ 30; Litigation Countercl. ¶ 30.) YCI’s claim for breach of

contract, in the Arbitration and this action, alleges that Gray “breached the December

28 Agreement by rejecting YCI’s tender of the first payment for the shares and by

refusing to tender his shares to YCI.” (Arbitration Countercl. ¶ 45; Litigation

Countercl. ¶ 42.) YCI’s second claim for declaratory judgment in the Arbitration (first

claim for declaratory judgment in this action) seeks a declaration requiring Gray “to

tender his shares to YCI in exchange for their book value” under the December 28

Agreement. (Arbitration Countercl. ¶ 49; Litigation Countercl. ¶ 46.) As alleged,

Gray’s refusal to sell his shares or accept YCI’s tender of the first payment for the

shares implicates his status as a shareholder of YCI alone and lacks a causal

connection to his status as an officer, director, or employee of YCI. See Homestore,

888 A.2d at 213.

74. Therefore, the Court concludes that the counterclaims arising from Gray’s

alleged breach of the December 28 Agreement, as alleged in both this action and the

Arbitration, are not brought by reason of the fact that Gray was an officer or director

of YCI. Accordingly, Gray is not eligible for advancement or indemnification for these

claims.

75. YCI’s compensation-related counterclaims and those related to Gray’s

alleged conduct toward HYG, however, implicate Gray’s role as an officer, director,

and employee of YCI. The allegations underlying YCI’s counterclaims for conversion,

fraud, breach of officer’s and director’s duties, and civil remedy for larceny and

embezzlement all center on Gray’s alleged conduct as President in secretly increasing

his compensation and/or jeopardizing YCI’s relationship with HYG. (Arbitration

Countercl. ¶¶ 51, 55–56, 59–60, 64–66, 69–72; Litigation Countercl. ¶¶ 51, 55–56,

59–60, 64–66, 69–72.) As alleged, Gray’s “corporate powers were used or [were]

necessary for the commission of the alleged misconduct[,]” Paolino, 985 A.2d at 406

(citation and quotation marks omitted), and the requisite causal connection exists

between these counterclaims and Gray’s corporate capacity.

76. YCI’s first claim for declaratory judgment in the Arbitration (second claim

for declaratory judgment in this action) seeks a declaration that YCI’s termination of

Gray was “for cause” under the Buy/Sell Agreement and an order directing Gray “to

offer all of his shares to YCI at book value” under the Buy/Sell Agreement.

(Arbitration Countercl. ¶ 40; Litigation Countercl. ¶ 49.) Although these

counterclaims reference the Buy/Sell Agreement, which Gray entered into as a

shareholder of YCI, the company seeks the declaration “[b]ased on the misconduct

described above”—namely, the same conduct underlying YCI’s claims for conversion,

fraud, breach of officer’s and director’s duties, and civil remedy for larceny and

embezzlement. (Arbitration Countercl. ¶ 40; Litigation Countercl. ¶ 49.) Because

the Court has concluded those claims were brought by reason of Gray’s corporate

capacity, the Court also concludes that the requisite causal connection exists between

YCI’s claim for declaratory judgment that Gray was terminated for cause and Gray’s

corporate capacity.

77. Therefore, YCI’s counterclaims in this action and in the Arbitration for

conversion, fraud, breach of officer’s and director’s duties, and civil remedy for larceny

and embezzlement, and its first claim for declaratory judgment in the Arbitration

(second claim for declaratory judgment in this action) (the “Advanceable

Counterclaims”) are claims for which Gray is eligible for indemnification. Thus, he

has a right to advancement of reasonable expenses, including reasonable attorneys’

fees, incurred in defending against these claims, but only these claims.

c. YCI’s Counterclaims Are an “Action, Suit or

Proceeding” Under the Bylaws

78. Finally, YCI denied Gray’s request for advancement because it brought the

Advanceable Counterclaims, which it contends may be compulsory, “only in response

to the litigation [Gray] initiated.” (Demand Denial 2.) YCI concluded, accordingly,

and argues here, that its Advanceable Counterclaims “are not an ‘action, suit or

proceeding’ for which the board intended, or North Carolina law allows, advancement

of fees.” (Demand Denial 2.) In other words, Defendants contend that, even if

advancement is not conditioned on Gray’s ultimate entitlement to indemnification,

his Demand was properly denied because he seeks advancement of expenses incurred

in defending counterclaims.

79. Gray contends that, under neither the Bylaws nor North Carolina law, is

advancement of expenses limited “only [to] first-filed claims, but not counterclaims.”

(Pl.’s Mem. Supp. 16.) He contends that the Bylaws are devoid of any language

excluding counterclaims from an “action, suit or proceeding” in either Article X,

Section 1 or Section 2. (Pl.’s Mem. Supp. 16 (quoting Bylaws art X, §§ 1, 2).)

80. The Court agrees with Gray and finds no support for Defendants’ position

in the Bylaws, in the decisions of our appellate courts, or in North Carolina’s statutory

scheme for indemnification and advancement in Chapter 55. The plain language of

the Bylaws’ indemnification provision provides for mandatory indemnification

related to “any threatened, pending or completed action, suit or proceeding . . .

whether civil . . . or arbitrative, and whether or not brought by or on behalf of the

corporation, seeking to hold [an officer or director] liable by reason of the fact that his

is was acting in such capacity[.]” (Bylaws art. X, § 1 (emphasis added).) This

expansive provision contains no language excluding counterclaims, compulsory or

not, from the scope of the indemnification right. Rather, the “action, suit or

proceeding” simply must be one that “seek[s] to hold [an officer or director] liable by

reason of the fact that he was acting in such capacity[.]” (Bylaws art. X, § 1.) YCI

clearly seeks to hold Gray liable for the Advanceable Counterclaims, and the

Advanceable Counterclaims were brought by reason of the fact that Gray served as

an officer, director, and employee of the company.

81. The language of the provision is clear, and the Court concludes—YCI’s

contentions regarding its intent notwithstanding—that the Advanceable

Counterclaims constitute an “action, suit or proceeding” under the Bylaws’

indemnification provision. See Walton, 342 N.C. at 881, 467 S.E.2d at 411; see also

Paolino, 985 A.2d at 399–401 (rejecting argument that plaintiff was not “defending”

against company’s counterclaims and holding that plaintiff was entitled to

advancement of fees incurred in defending against counterclaims).

82. The Bylaws’ advancement provision simply refers back to the category of

claims for which an officer and director has a right to indemnity. (Bylaws art. X, § 2

(“Expenses incurred by such person shall be paid in advance of the final disposition

of such . . . action, suit or proceeding[.]” (emphasis added)).) Because the Court has

concluded that the indemnification provision applies to counterclaims as well as first-

filed claims, the Court concludes that expenses incurred in defending against the

Advanceable Counterclaims fall within the Bylaws’ advancement and

indemnification provisions.

* * *

83. In sum, the Court concludes that Gray has shown a likelihood of success on

the merits of his claim for advancement and that his contractual “right [to

advancement] is clear[.]” Auto. Dealer Res., 15 N.C. App. at 639, 190 S.E.2d at 732.

Specifically, the Court concludes that: (1) Gray has served as an officer, director, and

employee of YCI; (2) Gray is defending against the Advanceable Counterclaims, by

which YCI seeks to hold him liable by reason of the fact that he served in such

capacities; (3) the Bylaws mandate the advancement of Gray’s reasonable expenses

incurred in defending against the Advanceable Counterclaims; and (4) Gray provided

an undertaking to repay any advanced fees in the event he is ultimately determined

not to be entitled to indemnification. Gray has, accordingly, satisfied all the

requirements under the Bylaws to receive advancement, but YCI has denied him the

advancement he is owed under the Bylaws. Therefore, Gray has satisfied the first

requirement for the issuance of a preliminary mandatory injunction ordering that

advancement be made.

B. Gray Has Not Demonstrated Irreparable Harm

84. Even where a movant has shown a likelihood of success on the merits of the

underlying claim, he is only “entitled to injunctive relief when there is no adequate

remedy at law and irreparable harm will result if the injunction is not granted.” Vest,

145 N.C. App. at 76, 549 S.E.2d at 574. Given the mandatory nature of the relief

Gray seeks, he must show that the injury is “immediate, pressing, irreparable, and

clearly established.” Auto. Dealer Res., 15 N.C. App. at 639, 190 S.E.2d at 732.

85. In the course of arguing and briefing the Motion, Gray has taken a variety

of positions with respect to his showing of irreparable harm. At the hearing on the

Motion, he argued that, in the context of a preliminary injunction to enforce

advancement rights, he need not make a showing of irreparable harm, North

Carolina’s well-settled preliminary injunction standard notwithstanding.

Defendants respond that advancement does not change the required analysis, and

that Gray “must show an immediate, pressing, irreparable, and clearly established

injury to entitle him” to a preliminary injunction ordering the payment of funds by

YCI. (Defs.’ First Suppl. Br. 9–10 (quoting Auto. Dealer Res., 15 N.C. App. at 639,

190 S.E.2d at 732); see Defs.’ Second Suppl. Br. 2.)

86. Gray does not cite to any North Carolina case applying North Carolina law

holding that, in the context of a claim for advancement, the issuance of a preliminary

injunction does not require a showing of irreparable harm. The omission of any such

citation is for good reason—whether, and under what circumstances, a court should

issue a preliminary injunction ordering a corporation to advance a plaintiff his or her

reasonable expenses incurred in litigation appears to be an issue of first impression

in North Carolina.

87. Delaware law is similarly underdeveloped in this area—again, for good

reason. By Delaware statute, the Delaware Court of Chancery, unlike this Court, has

exclusive jurisdiction to hear all actions for advancement and “may summarily

determine a corporation’s obligation to advance expenses (including attorneys’ fees).”

Del. Code Ann. tit. 8, § 145(k). Accordingly, in Delaware, most disputes concerning

advancement are decided either in separate, stand-alone proceedings and/or on

summary judgment, not by means of a preliminary injunction. See, e.g., Holley, 2014

Del. Ch. LEXIS 268, at *23; Weaver, 2004 Del. Ch. LEXIS 10, at *7–8, 30; Morgan v.

Grace, 2003 Del. Ch. LEXIS 113, at *16 (Del. Ch. Oct. 29, 2003); Reddy v. Elec. Data

Sys. Corp., 2002 Del. Ch. LEXIS 69, at *30 (June 18, 2002); Lipson v. Supercuts, Inc.,

1996 Del. Ch. LEXIS 108, at *1, 8 (Del. Ch. Sept. 10, 1996). Questions of irreparable

harm in the advancement context, therefore, rarely arise under Delaware law.

88. In at least one case, however, the Delaware Court of Chancery discussed a

claim for advancement on a preliminary injunction motion. See Emerging Eur.

Growth Fund, L.P. v. Figlus, 2013 Del. Ch. LEXIS 80, at *1, 35–36 (Del. Ch. Mar. 28,

2013). In Figlus, the plaintiffs requested advancement along with their motion for

a preliminary injunction to prevent the defendant from disclosing confidential

information. Id. at 35. The court noted that “[w]ith regard to [p]laintiffs’ request for

advancement . . . there has been no showing of potential irreparable harm.” Id.

Rather, the court held that “the evidence adduced thus far demonstrates that Figlus

could not mount his defense if [he was] forced to advance [p]laintiffs’ attorneys’ fees.”

Id. Figlus suggests that, even though Delaware has a specialized proceeding for

hearing claims for advancement, when a movant seeks advancement by means of a

preliminary injunction, Delaware courts do not stray from the standard requirements

for such an injunction, including a showing of irreparable harm.

89. The Court concludes that corporate advancement does not require or

authorize a departure from the well-settled jurisprudence of this State concerning the

requirements for the grant of a preliminary injunction. Although the law of North

Carolina may not be well developed as to advancement, it is well developed on the

proof elements necessary to obtain preliminary injunctive relief. Those elements,

particularly where the requested injunction is mandatory, include a requirement that

the movant “clearly establish” that he will suffer immediate, pressing, and

irreparable harm. Auto. Dealer Res., 15 N.C. App. at 638, 190 S.E.2d at 732.

90. Turning then to Gray’s evidence of irreparable harm, Gray first contends

that the mere denial of his contractual right to advancement constitutes per se

irreparable harm. (Pl.’s First Suppl. Br. 14–15; Pl.’s Resp. Suppl. Mem. Supp. Pl.’s

Mot. for Prelim. Inj. 6–7, ECF No. 123 [“Pl.’s Second Suppl. Br.”].)

91. Relying on authority from Delaware and elsewhere, Gray argues that the

value of the right to advancement, in contrast to the right to indemnification, is

forever lost if that right is not vindicated during the course of the litigation. See

Tafeen v. Homestore, Inc., 2005 Del. Ch. LEXIS 77, at *8 (Del. Ch. May 26, 2005)

(“[A]dvancement must be made promptly, otherwise its benefit is forever lost because

the failure to advance fees affects the counsel the director may choose and litigation

strategy that the executive or director will be able to afford.”), aff’d, 886 A.2d 502

(Del. 2005); see also Westar Energy, Inc. v. Lake, 552 F.3d 1215, 1225 (10th Cir. 2009)

(“If a corporation withholds advances, the right will be irretrievably lost at the

conclusion of the litigation, because at that point the officer will only be entitled to

indemnity.”); Roller Bearing Indus. v. Paul, 2010 U.S. Dist. LEXIS 28935, at *19

(W.D. Ky. 2010) (“We conclude that [defendant] has adequately shown a probability

of irreparable harm in the form of the loss of his contractual right to advancement.”);

In re Worldcom, Inc. Sec. Litig., 354 F. Supp. 2d 455, 469 (S.D.N.Y. 2005) (“The failure

to receive defense costs when they are incurred constitutes an immediate and direct

injury.” (citation and internal quotation marks omitted)).

92. The Court is not persuaded by this non-binding authority that denial of

advancement is per se irreparable harm sufficient to justify mandatory injunctive

relief. Under the Bylaws, the right to advancement is a contractual right to receive

periodic payments prior to a certain date—the date of the final disposition of the

claims for which the litigant is entitled to advancement. The loss of that contractual

right results, first, in the loss of money, and a request for advancement via a motion

for preliminary injunction seeks the payment of money to remedy the loss. Generally,

our courts have held that where an injury may be compensated by the payment of

monetary damages, the injury is not irreparable, and an injunction should not issue.

See Bd. of Light & Water Comm’rs v. Parkwood Sanitary Dist., 49 N.C. App. 421, 424,

271 S.E.2d 402, 404 (1980) (“An injury is considered irreparable when money alone

cannot compensate for it.” (citation and quotation marks omitted)); see also Crawford

v. Univ. of N.C., 440 F. Supp. 1047, 1058 (M.D.N.C. 1977) (“A [mandatory] injunction

should not work so as to give a party the full relief which he seeks on the merits,

especially when the order would require the payment of money.”). Gray has not

demonstrated why the Court should view an injunction ordering payments on a

contract for advancement differently from the issuance of an injunction on any other

contract for the periodic payment of money by a certain date, such as a lease or

promissory note.

93. Furthermore, the contention that the advancement right “will be

irretrievably lost at the conclusion of the litigation, because at that point the officer

will only be entitled to indemnity[,]” Westar Energy, 552 F.3d at 1225, bears on

whether a movant has an adequate remedy at law, not on irreparable harm.

Although the lack of an adequate remedy at law is required to obtain equitable relief,

the movant must also show irreparable harm. See Vest, 145 N.C. App. at 76, 549

S.E.2d a 574 (“A plaintiff is entitled to injunctive relief when there is no adequate

remedy at law and irreparable harm will result if the injunction is not granted.”

(emphasis added)).

94. The Court concludes that the mere denial of advancement does not, in and

of itself, constitute irreparable harm. The Court does not conclude, however, that the

denial of advancement may never constitute irreparable harm. Rather, here, Gray

must clearly establish that, as a consequence of a denial of the Motion, and, thus, his

failure to receive advancement, he is likely to suffer an actual injury that is

“immediate, pressing, [and] irreparable[.]” Auto. Dealer Res., 15 N.C. App. at 639,

190 S.E.2d at 732.

95. Gray argues that he has, in fact, suffered, and will continue to suffer, actual

irreparable injury because YCI’s denial of advancement has affected his litigation

strategy, and, absent advancement, he “lacks the funds to continue effectively

defending himself.” (Pl.’s First Suppl. Br. 15–16; see Pl.’s Second Suppl. Br. 7.)

Defendants respond that Gray has failed to present evidence satisfying this standard,

and, instead, the evidence and history of this action and the Arbitration show that

Gray’s defense of the Advanceable Counterclaims has not been hampered by YCI’s

denial of advancement. (Defs.’ Br. Opp’n 14–16; Defs.’ First Suppl. Br. 11–16; Defs.’

Second Suppl. Br. 2–3.)

96. Gray, through the affidavit of his counsel, represents that, as of October 15,

2018, he had incurred a total of [REDACTED] in legal fees in defending against YCI’s

counterclaims. (Watkins Aff. ¶ 14.) The Court notes that the amount represented is

for all counterclaims raised by YCI in this action and the Arbitration, and not simply

the Advanceable Counterclaims. (See Watkins Aff. ¶¶ 4–5 (referring to the

“substantial amount of work” performed in “defending Gray against Defendants’

seven counterclaims” (emphasis added)).) On the basis of Gray’s counsel’s sworn

statement, the Court cannot determine the amount of fees incurred in defending

against those counterclaims for which Gray has a right to advancement.

97. Regardless, Gray has submitted no evidence showing that he has been

unable to pay these fees as they became and become due. Gray asserts only that

paying the fees in the absence of advancement “has greatly strained [his] family’s

financial resources and imposed incalculable stress on [his] family.” (Gray Aff. ¶ 6.)

98. As to future expenses Gray will incur in this action and the Arbitration, he

avers that he does “not have available funds or the financial ability to pay those fees”

[REDACTED]. (Gray Aff. ¶¶ 11, 15.) Gray also asserts that YCI’s failure to advance

fees “has impacted [his] trial strategy, such as by preventing [him] from taking a more

aggressive approach toward the use of more costly expert witnesses.” (Gray Aff. ¶

16.)

99. The Court does not believe that the record evidence clearly establishes that

Gray will suffer immediate, pressing, irreparable harm in the absence of an

injunction ordering advancement. Although Gray 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. For instance, he does not state that he is unable to obtain loans

or borrow against any of his illiquid assets to pay his legal fees as they become due.

100. Additionally, the Court concludes that Gray has not clearly shown that

failure to receive advancement has impacted his litigation strategy. At no point does

he assert that his counsel have threatened to withdraw if YCI does not advance his

attorneys’ fees. On the contrary, the evidence of record shows that Gray, through his

counsel, has vigorously defended against the Advanceable Counterclaims for nearly

a year, including in the Arbitration in which those claims will be decided. Indeed,

the only evidence before the Court that Gray’s litigation strategy has been impacted

due to YCI’s denial of advancement, even if believed, is Gray’s non-specific statement

that he has not been able to take a more aggressive approach with expert witnesses.

(Gray Aff. ¶ 16.) Crucially, Gray does not allege that any expert witnesses are

necessary for his defense of the Advanceable Counterclaims, as opposed to the

prosecution of his own claims in this action or the Arbitration. 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. Finally, on this point, Gray similarly fails to identify who the “more

costly expert witnesses” are, the claims on which they would testify, and how this

testimony might improve Gray’s chances of ultimate success in defense of the

Advanceable Counterclaims. (Gray Aff. ¶ 16.) 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.

101. Therefore, Gray has not clearly established that the harm he will suffer

absent the relief he seeks, if any, is immediate, pressing and irreparable. See Auto.

Dealer Res., 15 N.C. App. at 639, 190 S.E.2d at 732. Accordingly, the Court, in its

discretion, concludes that Gray has not made the requisite showing required for the

issuance of a preliminary mandatory injunction. See A.E.P. Indus., 308 N.C. at 401,

302 S.E.2d at 759–60 (requiring a showing of both likelihood of success on the merits

and irreparable harm for the issuance of a preliminary injunction); Auto. Dealer Res.,

15 N.C. App. at 639, 190 S.E.2d at 732 (holding that the movant’s burden is greater

where the injunctive relief sought is mandatory). As a result, the Court concludes

that the Motion must be denied.

III. CONCLUSION

102. THEREFORE, for the reasons set forth above, the Court, in the exercise

of its discretion, hereby DENIES the Motion.

SO ORDERED, this the 15th day of November, 2018.

/s/ Michael L. Robinson

Michael L. Robinson

Special Superior Court Judge

for Complex Business Cases