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Dividing Interest: Closely-Held Businesses

by Benjamin N. Neece, Attorney

A great aspect of living in the triad area is the rich history of successful businesses that put down roots in the community and prospered over the years.  Greensboro is home to very familiar brands such as Wrangler and Volvo, and right down the road is High Point, which is known for being one of the largest home furnishing manufacturing areas in the country.  Business and industry have been drawn to the area for years, and a growing population provides ample opportunity for entrepreneurs of all sizes to flourish.  Some of the area’s most vital businesses are ones defined as “closely-held,” or more commonly referred to as, “Mom and Pop” businesses.  Unfortunately, sometimes, Mom and Pop do not see eye-to-eye, which may jeopardize the future of these businesses.

In Equitable Distribution cases where family-owned businesses are in controversy, it must always be remembered that companies are considered individual legal entities with individual legal interests, even in circumstances where the only company officials consist of the individuals who are going through divorce proceedings.  As an individual legal entity with separate interests apart from the individual interests of the estranged parties to the divorce, these businesses must be treated with particular care as the outcomes of divorce proceedings may drastically affect the interests of the business.  Luckily, the law provides mechanisms to protect such interests.

Under Rule 19 of the North Carolina Rules of Civil Procedure, these businesses may be defined as a “necessary party” to the lawsuit.  North Carolina case Geoghagan v. Geoghagan, provides a great illustration as to how the court approaches and analyzes these situations.  A “necessary party” is a party that is “so vitally interested in the controversy involved in the action that a valid judgment cannot be rendered in the action completely and finally determining the controversy with [its] presence as a party.”  Booker v. Everhart, 240 S.E. 2d 360, 365-66 (1978).  The Court has further described a necessary party as “one whose interest will be directly affected by the outcome of the litigation.” Begley v. Employment Security Comm.,274 S.E.2d 370, 375 (1981).  What this means is that if a judgment in an equitable distribution case will affect the interest of these businesses, these businesses MUST be joined in the lawsuit before a judgment is rendered.  Where a separate legal entity was not made a party to an action, the [trial] court does not have the authority to order that entity to act. Campbell v. Campbell, 773 S.E.2d 93, 96. To do so otherwise would be to subject these individual legal entities to binding legal outcomes without first being afforded due process which is a protected right under the Constitution of the United States.

In adhering to this rule, it is not always apparent at the outset of all equitable distribution proceedings that a business’s separate legal interests will be affected by a judgment at the conclusion of the proceedings.  It may not become apparent until enforcing the judgment that businesses owned by the parties to the lawsuit and excluded from the proceedings are experiencing unexpected and unintended effects.  When there is an absence of necessary parties [to a lawsuit], the trial court should correct the defect “ex mero motu” (meaning upon the court’s own motion to correct the error to prevent injustice); because where a judgment is rendered which is determinative of a claim arising in an action in which necessary parties have not been joined is null and void. Boone v Rogers, 708 S.E.2d 103, 105. In such a situation, the court will have to essentially turn back the clock and hear the case again with the necessary party properly joined.  This error is one that anyone who owns a business and is navigating an equitable distribution case should carefully avoid as the cost of overlooking such may result in extensive time and financial costs.