CONE v. BLUE GEM, INC., 2023 NCBC 74

STATE OF NORTH CAROLINA
GUILFORD COUNTY
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
22 CVS 8287
ALAN W. (“A”) CONE, JR. and LOUIS
(“BILLY”) CONE individually and
derivatively on behalf of BLUE GEM,
INC.,
Plaintiffs,
v.
BLUE GEM, INC.; STEPHEN B.
CONE; and ELAINE BULLUCK,
Defendants.
ORDER AND OPINION ON
DEFENDANTS’ MOTIONS FOR
EXPENSES
1. 	THIS MATTER is before the Court on two motions for payment of
expenses filed by Defendants, (the “Motions”), (ECF Nos. 58, 61).1
2. 	Defendants Stephen B. Cone (“Steve”) and Elaine Bulluck (“Bunny”)
seek recovery of reasonable expenses, including attorneys’ fees, from Plaintiffs
pursuant to N.C.G.S. § 55-7-46(2) and (3). Alternatively, Steve and Bunny seek court-
ordered indemnification pursuant to N.C.G.S. § 55-8-54.
1 Plaintiffs filed a single, consolidated brief in support of their own motion to dismiss their
derivative claim and in opposition to Defendants’ Motions. (Pls.’ Reply Supp. Mot. Dismiss
and Resp. Opp. Defs.’ Motions for Costs, ECF No. 63.) They then filed a Motion for Leave to
File Surreply Brief in opposition to the Defendants’ reply briefs. (Pls.’ Mot. Leave File
Surreply Br., ECF No. 66.) 	Defendants responded by filing briefs opposing Plaintiffs’
surreply. (Blue Gem’s Mem. Resp. Pls.’ Mot Leave File Surreply Br., ECF No. 72; Cone and
Bulluck’s Resp. Opp. Pls.’ Mot. Leave File Surreply Br., ECF No. 73.) In its discretion, the
Court GRANTS Plaintiffs’ Motion for Leave to File Surreply and has considered Plaintiffs’
Surreply, which was submitted as Exhibit A to their motion (ECF No. 66.1), in making the
determinations herein.
Cone v. Blue Gem, Inc., 2023 NCBC 74.

3. 	Similarly, Defendant Blue Gem, Inc. (“Blue Gem”) seeks to recover from
Plaintiffs 	its 	reasonable 	expenses, 	including 	attorneys’ 	fees, 	pursuant 	to
N.C.G.S. § 55-7-46(2) and (3). Blue Gem also seeks an order taxing Plaintiffs, jointly
and severally, with any amount it is required to indemnify Steve and Bunny.
4. 	Having 	considered 	the 	Motions, 	the 	related 	briefing, 	and 	other
appropriate matters of record, the Court hereby GRANTS in part and DENIES in
part Steve and Bunny’s motion, DENIES Blue Gem’s motion, and taxes Steve and
Bunny’s reasonable expenses, including attorney’s fees, incurred in defending against
the derivative claim against Plaintiffs.2
Brooks, 	Pierce, 	McLendon, 	Humphrey 	& 	Leonard 	LLP, 	by 	Clinton
Shepperd Morse and Amanda Hawkins, for Plaintiffs Alan W. (“A”) Cone,
Jr. and Louis (“Billy”) Cone.
Block, Crouch, Keeter, Behm & Sayed, by Christopher K. Behm, for
Defendant Blue Gem, Inc.
Ward and Smith, P.A., by Jenna F. Butler and Joseph Anthony Schouten,
for Defendants Stephen B. Cone and Elaine Bulluck.
Earp, Judge.
I. 	BACKGROUND
5. 	Plaintiffs, 	shareholders 	in 	Blue 	Gem, 	a 	closely-held 	corporation,
initiated 	this 	action 	on 	25 	October 	2022 	with 	the 	filing 	of 	their 	Complaint,
(ECF No. 3.) 	After designation to the Business Court, Plaintiffs filed an Amended
Complaint on 12 December 2022, asserting a direct claim against Blue Gem for
2 The Court determines, in its discretion, that oral argument will not aid in its decision and
issues this ruling without a hearing pursuant to BCR 7.4.

judicial dissolution and a derivative claim against Steve and Bunny for breach of
fiduciary duty, (ECF No. 11).
6. 	Each Defendant moved to dismiss the Amended Complaint. (Blue Gem’s
Mot. Dismiss First Am. Compl. for Jud. Dissol., ECF No. 20; Stephen B. Cone’s and
Elaine Bulluck’s Corrected Mot. Dismiss, ECF No. 22). The Court held a hearing on
those motions on 11 April 2023. (Not. of Hr’g, ECF No. 50.)
7. 	On 9 August 2023, following an unsuccessful mediation but prior to the
Court’s ruling on Defendants’ Motions to Dismiss, Plaintiffs filed their own motion in
which they sought a voluntary dismissal without prejudice of their case in its entirety,
including their derivative claim for breach of fiduciary duty. (Mot. Dismiss Without
Prejudice [“Pls.’ Mot. to Dismiss”], ECF No. 55.)3 Pursuant to N.C.G.S. § 55-7-45, the
Court’s approval was required to effect a dismissal of the derivative claim.
8. 	On 13 October 2023, the Court entered an Order and Opinion dismissing
the 	Plaintiffs’ 	derivative 	claim 	for 	breach 	of 	fiduciary 	duty 	with 	prejudice,
acknowledging 	Plaintiffs’ 	voluntary 	dismissal 	of 	the 	dissolution 	claim 	without
prejudice, and taxing Plaintiffs with the costs of the action pursuant to Rule 41(d) of
3 Accompanying Plaintiffs’ Motion to Dismiss was an unsworn letter to the Court from
Plaintiffs. (Pls.’ Mot. to Dismiss, Ex. A [“Pls.’ Letter”], ECF No. 55.1.) In the letter, Plaintiffs
represented to the Court, among other things, that when filing this action, they were
“unaware that the precedents set in family law were so thoroughly irrelevant to a case
brought to trial in business court” and that “a precedent set in a family courtroom is not
relevant to a precedent set in a business courtroom.” 	They asserted that because the
Business Court is “guided by Business Court precedence [sic]” this Court is “incapable of
dealing with [their claims].” (Pls.’ Letter pp. 1-2.) They also stated that they had decided to
dismiss the case because of its financial impact and emotional toll. 	(Pls.’ Letter pp. 1-2.)
Because the letter was unsworn, however, the Court does not consider it with respect to the
Motions.

the North Carolina Rules of Civil Procedure. (Order and Opinion on Mots. Dismiss,
ECF No. 71.)
9. 	Following dismissal of the action, each Defendant seeks to recover
expenses, including attorneys’ fees.
III. 	FINDINGS OF FACT4
10. 	Plaintiffs (Alan “A” Cone and Louis “Billy” Cone) and the individual
Defendants (Elaine “Bunny” Bulluck and Stephen B. “Steve” Cone) are siblings who
inherited stock in their father’s company, Blue Gem, Inc. 	(“Blue Gem” or the
“Company”).5
11. 	Steve owns 29.748 percent of the voting stock of Blue Gem and serves
as a director of the Company, as well as its President. Bunny owns 23.146 percent of
the voting stock of Blue Gem and serves as a director of the Company. 	Together,
Steve and Bunny own a majority interest in Blue Gem.
12. 	A Cone and Billy each own 23.146 percent of the voting stock of Blue
Gem. Billy is also a director.
13. 	A Cone and Billy complain that, because Blue Gem is organized as a C
corporation, its income is taxed both at the corporate level and again at the
4 To the extent the Court’s findings of fact are more properly considered conclusions of law or
vice versa, the finding or conclusion may be properly reclassified. N.C. State Bar v. Key, 189
N.C. App. 80, 88 (2008) (“[C]lassification of an item within [an] order is not determinative,
and, when necessary, the appellate court can reclassify an item before applying the
appropriate standard of review.”).
5 The Court’s findings are derived from facts that are alleged in the Amended Complaint
and not contested by Defendants in their Motions to Dismiss.

shareholder level when paid out as dividends. Because they disagree with Steve and
Bunny on the best course to reduce this tax burden, they want to redeem their shares
at what they consider to be “fair value.” To them, fair value does not involve minority
or illiquidity discounts.
14. 	Alternatively, A Cone and Billy have proposed that Blue Gem spin off
some of its assets to a new entity to be owned by them.
15. 	Steve and Bunny disagree with A Cone and Billy’s proposals and have
voted against them.
16. 	The parties initially took steps toward converting Blue Gem from a C to
an S Corporation, but A Cone and Billy have now made it clear that they will not
agree to such a conversion because they have concluded that they no longer wish to
be in business with Steve and Bunny.
17. 	After Steve and Bunny did not agree to Plaintiffs’ proposals either to sell
their interests without discounts or for a “tax-free spin-off,” A Cone and Billy filed
this action asserting a derivative claim against Steve and Bunny for breach of
fiduciary duty, as well as a claim against Blue Gem for judicial dissolution.
II. 	CONCLUSIONS OF LAW
18. 	Pursuant to N.C.G.S. § 55-7-46, upon the termination of a derivative
proceeding, a court may:
(2) Order the plaintiff to pay any defendant’s reasonable expenses,
including attorneys’ fees, incurred in defending the proceeding if it finds
that the proceeding was commenced or maintained without reasonable
cause or for an improper purpose; or

(3) Order a party to pay an opposing party’s reasonable expenses,
including attorneys’ fees, incurred as a result of the filing of a pleading,
motion, or other paper, if the court, after reasonable inquiry, finds that
the pleading, motion, or other paper was not well grounded in fact or
was not warranted by existing law or a good faith argument for the
extension, modification, or reversal of existing law, and that it was
interposed for an improper purpose, such as to harass or to cause
unnecessary delay or needless increase in the cost of litigation.
N.C.G.S. § 55-7-46(2), (3).
19. 	With respect to Section 55-7-46(2), “[a]n improper purpose is ‘any
purpose other than one to vindicate rights . . . or to put claims of right to a proper
test.’ ” 	Ekren v. K&E Real Estate Invs., LLC, 2014 NCBC LEXIS 57, at *14 (N.C.
Super. Ct. Nov. 10, 2014) (quoting Coventry Woods Neighborhood Ass’n v. City of
Charlotte, 213 N.C. App. 236, 241 (2011)). 	The Court assesses Plaintiffs’ objective
behavior in view of the totality of the circumstances when determining whether an
improper purpose exists. Id.
20. 	A derivative suit is filed for an improper purpose if it is “instituted more
with a view to obtaining a settlement favorable to the plaintiff and his attorney than
to righting a wrong to the corporation.” An Official Comment to the statute refers to
such an action as a “strike suit.” N.C.G.S. § 55-7-40, Official Comment.6
21. 	As for Section 55-7-46(3), a well-respected treatise states that “the
grounds for an order of payment . . . are the same as the basis for the payment of
expenses under Rule 11 of the Rules of Civil Procedure and apply to any document
6 Although Official Comments are not binding because they have not been enacted into law,
“they were included with the printing of the statute and are, therefore, relevant in construing
the intent of the statute.” Miller v. First Bank, 206 N.C. App. 166, 171 (2010).

filed at any time in the action.” Russell M. Robinson, II, Robinson on North Carolina
Corporation Law § 17.10.
22. 	However, there is a subtle distinction. Rule 11 sanctions may be based
on factual insufficiency, legal insufficiency, or improper purpose, whereas Section 55-
7-46(3) requires factual or legal sufficiency and improper purpose. 	Cf. Ekren, 2014
NCBC LEXIS 57, at *12 (“in contrast to Rule 11, [under § 57D-8-05(3)] the Court
must find that Defendant . . . filed the document for an ‘improper purpose’ in addition
to finding that same document ‘was not well grounded in fact or was not warranted
by existing law’ ”) (citing N.C.G.S. § 57D-8-05(3)). 	However, “whether or not a
pleading has a foundation in fact or is well grounded in law will often influence the
determination of the signer’s purpose.” 	Coventry Woods Neighborhood Ass’n, 213
N.C. App. at 242 (quoting In re Kunstler, 914 F.2d 505, 518 (4th Cir. 1990)).
23. 	Defendants contend they are entitled to reasonable expenses, including
attorneys’ fees, pursuant to N.C.G.S. § 55-7-46(2) because Plaintiffs’ action is an
impermissible “strike suit” filed for an improper purpose. They argue that the action
was commenced and maintained, not to remedy a wrong to Blue Gem, but “to coerce
[Steve and Bunny] into a buyout of Plaintiffs’ shares at an unwarranted premium.”
(Mem. Supp. Defs.’ Stephen B. Cone’s and Elaine Bulluck’s Mot. Payment of Expenses
[“Steve and Bunny’s Br. Supp.”] 12-13, 16, ECF No. 59; Def. Blue Gem’s Mem. Supp.
Mot. for Recovery of Reasonable Expenses, Including Attys’ Fees (N.C. Gen. Stat. §§
55-7-46(1) and (2)) [“Blue Gem’s Br. Supp.”] 10, ECF No. 62.)

24. 	Defendants also argue that Plaintiffs brought their derivative claim
without reasonable cause. 	While the case law interpreting this phrase is scant, in
Sutton v. Sutton, this Court concluded that where plaintiff lacked standing and the
complaint was “on its face . . . seriously deficient and subject to dismissal on several
grounds,” plaintiff had commenced and maintained the action “without reasonable
cause.” 	Sutton v. Sutton, 2011 NCBC LEXIS 44, at **6-7 (N.C. Super. Ct. Nov. 22,
2011); cf. McMillan v. Ryan Jackson Props., LLC, 232 N.C. App. 35, 41 (2014)
(construing “without reasonable cause” in N.C.G.S. § 55A-7-40 to mean there is “no
‘reasonable belief’’ in a ‘sound chance’ that the claim could be sustained.”) (citation
omitted).
25. 	In addition, Defendants contend that the derivative claim in this action
was (a) not well-grounded in fact or warranted by either existing law or a good faith
argument for the modification or reversal of existing law, and (b) interposed for an
improper purpose. 	Consequently, they seek their reasonable expenses, including
attorneys’ fees, for Plaintiffs’ alleged violation of Section 55-7-46(3). (Defs.’ Stephen
B. Cone’s and Elaine Bulluck’s Mot. Payment of Expenses or, in the Alternative, for
Indemnification [“Steve and Bunny’s Motion”] 5-6, ECF No. 58; Def. Blue Gem’s Mot.
for Recovery of Reasonable Expenses, including Attys’ Fees (N.C. Gen. Stat. §§ 55-7-
46(2) and (3)) [“Blue Gem’s Mot. for Expenses”] 1-2, ECF No. 61.)
26. 	In their Amended Complaint, Plaintiffs alleged that Steve and Bunny
violated a fiduciary duty to Blue Gem by allowing it to remain a C corporation,
resulting in “double taxation” of income. But the record reveals that the underlying

reason for Plaintiffs’ decision to file their derivative claim is that Steve and Bunny,
as directors and owners of a combined majority interest in Blue Gem, have declined
to agree either (a) to redeem Plaintiffs’ shares without minority and illiquidity
discounts; or (b) to a “tax free” spin-off of Blue Gem assets to a new entity owned by
Plaintiffs. 	Meanwhile, Plaintiffs themselves have rejected the option of converting
Blue Gem to an S corporation as a way of resolving the tax issue because they do not
want to remain in business with their siblings. The Court concludes, therefore, that
Plaintiffs want to reduce taxes, but only through a mechanism that will allow them
to exit the company for what they consider to be fair value.
27. 	The Court has addressed the insufficiency of Plaintiffs’ derivative claim
for breach of fiduciary duty in its earlier motion to dismiss ruling and incorporates
its analysis here. See Cone v. Blue Gem, 2023 NCBC LEXIS 127 (N.C. Super. Ct. Oct.
13, 2023), (ECF No. 71.) 	In short, the Court concludes that (1) it is not a breach of
fiduciary duty for Steve and Bunny to continue Blue Gem as a C corporation; (2) the
facts alleged with respect to Steve and Bunny’s decisions not to adopt Plaintiffs’ exit
proposals are insufficient to overcome the business judgment rule; and (3) the totality
of the circumstances reveals that the true purpose for the breach of fiduciary duty
derivative claim was to pressure Steve and Bunny into voting for a proposal that
would allow Plaintiffs to exit the company while maximizing the value of their
interests.
28. 	Accordingly, 	pursuant 	to 	Section 	55-7-46(2), 	the 	Court, 	having
concluded that Plaintiffs’ derivative claim was brought for an improper purpose,

GRANTS in part Steve and Bunny’s motion. 	The Court orders Plaintiffs to pay
Steve and Bunny’s reasonable expenses, including attorneys’ fees, incurred to defend
against the derivative claim for breach of fiduciary duty, the only claim stated against
them. In all other respects, Steve and Bunny’s motion is DENIED.7
29. 	As for Blue Gem’s Motion, the only claim asserted against it was a direct
claim for dissolution. 	The company itself was not a defendant in a derivative
proceeding. 	Therefore, Blue Gem itself has no basis upon which to seek recovery of
expenses pursuant to Section 55-7-46 (2) or (3).
III. 	CONCLUSION
30. 	WHEREFORE, the Court, in the exercise of its discretion, ORDERS
as follows:
a. 	Plaintiffs’ 	Motion 	for 	Leave 	to 	File 	Surreply, 	(ECF 	No. 	66.1), 	is
GRANTED.
b. 	Defendants Stephen B. Cone’s and Elaine Bulluck’s Motion for Payment
of Expenses, or in the alternative, for Indemnification, (ECF No. 58), is
GRANTED in part and DENIED in part such that Plaintiffs shall
pay Steve and Bunny’s reasonable expenses, including attorneys’ fees,
incurred to defend against the derivative claim for breach of fiduciary
duty. In all other respects, the motion is DENIED.
7 Because the Court concludes that Plaintiffs should be taxed with Steve and Bunny’s
reasonable expenses incurred in defending against the derivative claim pursuant to N.C.G.S
§ 55-7-46(2) and (3), it does not reach Bunny and Steve’s alternative argument for court-
ordered indemnification pursuant to N.C.G.S. § 55-8-54.

c. 	Defendant 	Blue 	Gem, 	Inc.’s 	Motion 	for 	Recovery 	of 	Reasonable
Expenses, Including Attorneys’ Fees, (ECF No. 61), is DENIED.
d. 	By 7 December 2023, Steve and Bunny shall file a petition with
affidavits and other supporting materials sufficient to allow the Court
to make findings with respect to the amount and reasonableness of the
expenses assessed.
e. 	By 29 December 2023, Plaintiffs may file their response to the petition.
f. 	No reply will be permitted absent further order of the Court.
IT IS SO ORDERED, this 7th day of November, 2023.
/s/ Julianna Theall Earp
Julianna Theall Earp
Special Superior Court Judge
for Complex Business Cases