Valerie Humphreys v. Stuart Breakstone ( 2000 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
February 18, 2000 Session
VALERIE HUMPHREYS v. STUART BREAKSTONE, Individually and
MORTON & BREAKSTONE, Jointly and Individually.
An Appeal from the Circuit Court for Shelby County
No. 93506-2 T.D. W. Michael Maloan, Chancellor
No. W1999-02502-COA-R3-CV - Filed January 30, 2001
This is a legal malpractice action. The plaintiff is the majority shareholder of a corporation as well
as a member of the corporation’s board of directors. The defendant attorney and law firm
represented the corporation. The plaintiff sued the defendant for professional malpractice,
negligence, collusion, and interference in economic development, arising out of the defendant’s
representation of the corporation. The trial court held that the plaintiff did not have standing to bring
a derivative suit in her own name since all of the alleged injuries were suffered by the corporation,
not the plaintiff. We affirm, finding that a derivative suit to address injuries to a corporation must
be filed in the name of the corporation, and that an individual shareholder may not sue pro se on
behalf of the corporation.
Tenn. R. App. P. 3; Judgment of the Circuit Court is affirmed.
HOLLY KIRBY LILLARD, J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J.,
and ALAN E. HIGHERS, J. joined.
Valerie Humphreys, Tulsa Oklahoma, Pro Se.
Stuart Breakstone, Memphis, Tennessee, for the Appellees, Stuart Breakstone and Morton &
Breakstone
OPINION
The Plaintiff/Appellant Valerie Humphreys (“Humphreys”) is majority stockholder and a
member of the board of directors of Covenant Environmental Technologies, Inc. (“Covenant”).
Covenant retained as corporate counsel the Defendant/Appellee Stuart Breakstone and his law firm,
Defendant/Appellee Morton & Breakstone (collectively “Breakstone”). On March 13, 1998,
Humphreys filed a lawsuit against Breakstone alleging professional malpractice, negligence,
collusion, misrepresentation, and interference with economic development. These claims arose from
Breakstone’s representation of Covenant. Humphreys alleged that Breakstone repeatedly failed to
respond to motions in a timely manner, intentionally misplaced pertinent exhibits, and deliberately
colluded with opposing parties, and that these actions led to several judgments against Covenant.
Humphreys also asserted that Breakstone accepted a judgment against Covenant without the
authorization of the Covenant board; failed to keep Humphreys informed of all actions relating to
Covenant; damaged Covenant’s credit profile by misrepresenting the number of suits pending against
the corporation to its board of directors and auditors; failed to account for the retainer he received;
misrepresented his expertise; failed to prepare a promissory note, resulting in a judgment lien against
Covenant; and failed to take action to release a judgment lien against Covenant, even though there
was evidence that the judgment had already been satisfied.
On April 24, 1998, Breakstone filed a motion to dismiss for failure to state a claim upon
which relief could be granted pursuant to Rule 12.02(6) of the Tennessee Rules of Civil Procedure.
The motion to dismiss, however, was erroneously filed under a different case name. This error was
not discovered until approximately 6 months later, after Humphreys filed a motion for default
judgment based on Breakstone’s alleged failure to respond.
The trial court denied Humphreys’ motion for default judgment, since Breakstone’s motion
to dismiss was filed prior to the motion for default judgment. The trial court held that, even though
the motion to dismiss had been filed erroneously and late, it was within the trial court’s discretion
not to grant default judgment when an affirmative pleading is filed prior to the motion for default.
The trial court then addressed Breakstone’s motion to dismiss. It found that Humphreys’ lawsuit
sought redress only for injuries to Covenant. On this basis, the trial court granted Breakstone’s
motion to dismiss, concluding that Humphreys’ complaint failed to comply with Tennessee Code
Annotated § 48-17-401, which requires that a shareholder derivative suit be filed in the name of the
corporation and that the complaint either allege that a demand was made on the corporation’s board
of directors and that the demand was refused or ignored, or allege the reason why the shareholder
did not make the demand. From this order, Humphreys now appeals.
On appeal, Humphreys argues that the trial court erred in construing Tennessee Code
Annotated § 48-17-401 to require that a derivative suit be filed in the name of the corporation and
to require verification that a demand for action on the board of directors was made and denied, or
that the shareholder assert in the complaint why the demand was not made. Humphreys contends
that an individual shareholder of a corporation may bring a derivative suit in her own name for
injuries to the corporation. She further contends that verification that Covenant’s board of directors
denied a demand for action is not required when such a demand would have been futile.
Breakstone argues that the trial court properly dismissed Humphreys’ complaint. Breakstone
asserts that Humphreys was not the proper party to the suit, because all of the injuries alleged were
to Covenant. Breakstone maintains that Humphreys may not bring the suit pro se because the
corporation, and not Humphreys, is the true party in interest.
A motion to dismiss for failure to state a claim tests the legal sufficiency of the plaintiff’s
claim. Riggs v. Burson, 941 S.W.2d 44, 47 (Tenn. 1997). The grant of a motion to dismiss may be
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affirmed only if the allegations in the plaintiff’s complaint, even if taken as true, fail to state a claim
upon which the plaintiff would be entitled to relief. Stein v. Davidson Hotel Co., 945 S.W.2d 714,
716 (Tenn. 1997). Therefore, in reviewing a trial court’s grant of a motion to dismiss, all factual
allegations are taken as true, and the trial court’s conclusions of law are reviewed de novo on the
record with no presumption of correctness. Doe v. Sundquist, 2 S.W.3d 919, 922 (Tenn. 1999).
On appeal Humphreys first asserts that she may bring a derivative suit, in her name, as a
shareholder in Covenant. Tennessee Code Annotated § 48-17-401(1995) states in pertinent part:
Procedure in derivative proceedings. – (a) A person may not commence a proceeding
in the right of a domestic or foreign corporation unless the person was a shareholder
of the corporation when the transaction complained of occurred or unless the person
became a shareholder through transfer by operation of law from one who was a
shareholder at that time.
(b) A complaint in a proceeding brought in the right of a corporation must be verified
and allege with particularity the demand made, if any, to obtain action by the board
of directors and either that the demand was refused or ignored or why the person did
not make the demand. . . .
Thus, a derivative suit may be brought by an individual shareholder on behalf of a corporation to
redress injuries to the corporation. Id.
Although an individual shareholder may bring a derivative suit to redress injuries to a
corporation, the claims asserted in the suit belong to the corporation, not the individual shareholder,
whose rights are merely derivative and may be asserted only through the corporation. See Third
Nat’l Bank v. Celebrate Yourself Productions, Inc., 807 S.W.2d 704, 707-08 ( Tenn. Ct. App.
1990) ( citing Commercial Credit Development Co. v. Scottish Inns, Inc., 69 F.R.D. 110, 117 (E.D.
Tenn. 1975)). Consequently, a derivative suit cannot be maintained by a shareholder in her own
name but must be brought in the name of the corporation. Id. In this case, the harm alleged in the
complaint consists of acts of negligence committed against Covenant by Breakstone as corporate
counsel. Any injury suffered by Humphreys, as a shareholder in Covenant, is derivative and may
be asserted only through the corporation.
In addition to filing the lawsuit in her own name, Humphreys signed the complaint and seeks
to act pro se in this lawsuit. A pleading in a lawsuit must be signed by an attorney of record or by
the party to the lawsuit. Old Hickory Eng. & Mach. Co. v. Henry, 937 S.W.2d 782, 785 (Tenn.
1996). A corporation is an artificial entity, separate from the corporation’s officers and shareholders.
Id. Consequently, Tennessee statutes which permit a party to a lawsuit to represent himself in the
lawsuit are not applicable to corporations; a corporation cannot file a lawsuit pro se. Id. Since the
preparation and filing of a lawsuit requires the judgment of a lawyer and constitutes the practice of
law, allowing a shareholder to sign a complaint filed on the corporation’s behalf would amount to
permitting the shareholder to represent the corporation on a legal matter. Id. To do so would be a
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direct violation of the rules of our Supreme Court, which prohibit any person from engaging in the
practice of law without a license. Id. at 786. Thus, a non-lawyer agent, such as a shareholder, may
not represent a corporation in court proceedings. Id.Because Humphreys may not act as legal representative for Covenant, the original complaint
was not signed by a party or by an attorney of record. Therefore, under Rule 11 of the Tennessee
Rules of Civil Procedure, the complaint was, in essence, unsigned. See Old Hickory Eng., 937
S.W.2d at 786. Under Rule 11, “any unsigned paper shall be stricken unless omission of the
signature is corrected promptly after being called to the attention of the attorney or party.” Id.(quoting Tenn. R. Civ. P. 11 (1995)). Humphreys was notified of the deficiency of her complaint
by Breakstone’s motion to dismiss. No steps have ever been taken to remedy the defect. Therefore,
the complaint must be stricken, and the trial court did not err in granting Breakstone’s motion to
dismiss.
The decision of the trial court is affirmed. Costs are assessed against the Appellant, Valerie
Humphreys, and her surety, for which execution may issue if necessary.
___________________________________
HOLLY K. LILLARD, JUDGE
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