Where There’s a Will, There’s a Way . . . but Not Where There’s Also a Contract
On 19 October 2022, Judge Mark A. Davis issued an order and opinion in PHE v. Dolinsky that addressed two novel questions for North Carolina courts that were “suitable for a law school exam.” Those novel questions considered: “(1) who is entitled to sue the executor of an estate on a claim for breach of fiduciary duty; and (2) the circumstances under which the economic loss rule bars such a claim.”
The case arose out of a unique blend of obligations under contract and imposed by a last will and testament.
Philip D. Harvey served as President of PHE, Inc. and owned stock in the company. While serving as President, in October 2000, Mr. Harvey signed an Amended and Restated Shareholders’ Agreement (“Agreement”). The Agreement provided that the Shareholders “believe it is in their best interest to restrict each Shareholder’s right to dispose of any shares of Common Stock. . . upon the occurrence of. . . (ii) a Shareholder’s death.” The Agreement provided that the Shareholders “believe it is in their best interest to provide for the redemption or purchase of the Shares” when such an event takes place.
Mr. Harvey executed his Last Will and Testament (“Will”) in August 2018. Mr. Harvey’s Will provided that to the extent his estate included stock in a corporation that is governed by a stockholder agreement, “my Executor is directed to sell such stock or other interest in accordance with those agreements and transfer the net proceeds, including cash and notes to the beneficiaries herein.” Mr. Harvey passed away on 2 December 2021, leaving his entire estate to his widow. Alan M. Dolinsky was eventually appointed as the executor of Mr. Harvey’s estate.
After Mr. Harvey passed, PHE attempted to buy back Mr. Harvey’s shares in PHE, but Mr. Dolinksy refused. In the resulting lawsuit, PHE argued that Mr. Dolinksy owed PHE a statutory fiduciary duty and a general duty to comply with the Will.
Mr. Dolinsky argued that his duties under the Agreement were distinct from his fiduciary duty under the Will. Mr. Dolinsky further argued that PHE’s will-based claims must be dismissed because: (1) PHE is not within the class of persons legally authorized to bring a claim for breach of fiduciary duty, and (2) “the economic loss rule bars such a tort claim because the parties’ obligations are governed exclusively by a contract—the Agreement.” Ultimately, the court granted Mr. Dolinsky’s motion to dismiss the wills-based claims as well as a declaratory judgment claim.
Although the court was intrigued by the argument, the court declined to answer the question of whether PHE was within the class of persons sufficiently interested in the estate to assert a breach of fiduciary duty claim because the tort claim was foreclosed by the economic loss rule.
The court was unpersuaded by PHE’s argument that a distinct duty arises out of the Will such that the “economic loss rule” would not apply. In North Carolina, the “economic loss rule” largely bars recovery in tort damages arising from a breach of contract. A tort claim would be viable if the plaintiff alleged a duty owed by the defendant that is separate and distinct from any owed under contract. The court determined that in this case, “it simply cannot be said that PHE’s will-based breach of fiduciary duty claim is the sort of standalone tort claim that could exist independently from its contractual claim.”
Rather, the court concluded that PHE’s claims, and potential remedies, were all contractual in nature and not based in tort.
We will continue to monitor this case for developments.
If you have questions about this blog post, please contact Katie Cusack at (828)252-5555.