N.C. Business Court Opinions, June 7, 2023 – June 20, 2023

Loray Mill Devs., LLC v. Camden Loray Mill Phase I, LLC, 2023 NCBC 41 (N.C. Super. Ct. Jun. 12, 2023) (Bledsoe, C.J.)

Key Terms: partial summary judgment; motion for reconsideration; Rule 60(b); Rule 54(b); declaratory judgment; statute of limitations

After Plaintiffs filed suit on April 5, 2021, Defendants answered and asserted counterclaims seeking, inter alia, a declaratory judgment regarding the extent of Defendant’s ownership interest in several of the Plaintiff entities and the amount, timing, and conditions precedent for Plaintiffs’ payment of a development fee to Defendants. After the parties filed cross-motions for summary judgment, the Court issued its original order concluding that Defendants’ claims for breach of contract, declaratory judgment, and breach of fiduciary duty were time-barred to the extent they were based on conduct occurring before April 5, 2018. Thereafter, the Court sua sponte issued an amended order, which, in effect, allowed that portion of the Defendants’ declaratory judgment claim seeking to establish the parties’ ownership interest in the various entities to survive summary judgment, whether premised on events before or after April 5, 2018. Plaintiffs moved for reconsideration under Rules 54(b) and 60(b), contending that these changes constituted clear error.

The Court denied the motion to the extent it sought relief under Rule 60(b), because Rule 60 applies only to final orders, not interlocutory orders, such as a ruling on partial summary judgment. However, the Court granted the motion under Rule 54(b). Declaratory judgment claims are subject to the same statute of limitations that govern the substantive right that is most closely associated with the declaration that is being sought. Thus, because Defendants’ declaratory judgment claim rested on alleged breaches of contract and fiduciary duties, it was subject to a three-year statute of limitations and therefore barred as to conduct occurring before April 5, 2018. Accordingly, the Court’s conclusion in the original order was correct and its conclusion to the contrary in the amended order was clear error.

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Davis v. Davis Funeral Serv. Inc., 2023 NCBC 42 (N.C. Super. Ct. Jun. 12, 2023) (Conrad, J.)

Key Terms: summary judgment; breach of fiduciary duty; N.C. Wage and Hour Act

Plaintiff sued his former employer alleging that he was unfairly ousted as president. Defendant countered with allegations of self-dealing and other misconduct by Plaintiff, as well as third-party claims against Tedder, another former employee. Tedder counterclaimed and subsequently moved for summary judgment on all claims.

Defendant’s Claims. At the hearing, Defendant abandoned all of its claims against Tedder except for the portion of a claim for breach of fiduciary duty based on allegations that Tedder had bought a car from the Defendant for below-market value. The Court granted summary judgment in Tedder’s favor, determining that at the time she negotiated the car purchase, she was not an employee of Defendant, let alone a fiduciary. Further, even if she became a corporate officer when she was later elected secretary of the board, she had no duty to renegotiate the existing agreement.

Tedder’s Counterclaims. Tedder’s counterclaims for breach of her employment agreement and violation of the Wage and Hour Act were based on Defendant’s failure to pay Tedder’s November 2021 wages on time after terminating her employment. The Court determined that there was no genuine dispute as to liability, but a dispute of fact existed as to whether Defendant acted in good faith and had reasonable grounds for believing that its conduct did not violate the statute. Accordingly, the Court granted Tedder summary judgment as to liability but not as to the amount of her damages.

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New Restoration & Recovery Servs., LLC v. Dragonfly Pond Works, 2023 NCBC 43 (N.C. Super. Ct. Jun. 15, 2023) (Bledsoe, C.J.)

Key Terms: 12(b)(6) motion to dismiss; misappropriation of trade secrets; tortious interference with contract; nondisclosure agreement; tortious interference with prospective economic advantage; malice; unjust enrichment; indirect benefit; UDTPA; civil conspiracy

After its former employee allegedly shared confidential information with a competitor in violation of a nondisclosure agreement, Plaintiff brought suit against the competitor. Defendant moved to dismiss all claims under Rule 12(b)(6).

Misappropriation of Trade Secrets. The Court first determined that Plaintiff’s description of its trade secrets as customer contact information, bid proposals, client-specific pricing spreadsheets, and project completion summaries sufficiently identified the trade secrets at issue. Further, the Court rejected Defendant’s argument that the material could not constitute trade secrets because it was shared with third parties—namely, the clients themselves. The Court also determined that Plaintiff’s allegations that it had required the employee to sign an NDA and repeatedly attempted to reinforce the confidentiality obligations were sufficient to constitute reasonable efforts to maintain the secrecy of the trade secrets. Thus, the trade secrets claim survived dismissal.

Tortious Interference with Contract. The Court dismissed this claim, concluding that Plaintiff had not adequately alleged that Defendant knew of the employee’s NDA. Plaintiff’s allegation that Defendant had reviewed a settlement agreement between Plaintiff and the employee, which vaguely referenced nondisclosure agreements, was insufficient to impute knowledge of the NDA to Defendant.

Tortious Interference with Prospective Economic Advantage. The Court rejected Defendant’s challenge to the malice element of this claims based on Plaintiff’s allegations that Defendant competed through unlawful means—misappropriation of trade secrets.

Unjust Enrichment. Defendant contended that an unjust enrichment claim requires a conferral of the benefit directly from a plaintiff to a defendant and that here, any benefits that Defendant received came from an unaffiliated third party (the former employee). Surveying case law from North Carolina and around the country, the Court rejected this argument and concluded that Plaintiff had adequately alleged an unjust enrichment claim based on Defendant receiving and using a measurable benefit, albeit indirectly through a third party.

Unfair and Deceptive Trade Practices. The Court dismissed this claim to the extent it was based on the tortious interference with contract claim, but denied the motion to the extent the claim was based on Plaintiff’s surviving trade secrets claim.

Civil Conspiracy. The Court also denied dismissal of this claim due to the survival of the underlying trade secrets claim.

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Norment v. Rabon, 2023 NCBC Order 32 (N.C. Super Ct. June 16, 2023) (Davis, J.)

Key Terms: order dissolving preliminary injunction

Following the parties’ filing a stipulation of dismissal with prejudice as to all claims, the Court, on its own motion, entered an order dissolving the preliminary injunction previously issued in the case and directed the clerk of court to return the cash bond posted by Plaintiff.

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Rel. Ins., Inc. v. Pilot Risk Mgmt. Consulting, LLC, 2023 NCBC Order 33 (N.C. Super. Ct. June 19, 2023) (Davis, J.)

Key Terms: BCR 10.9; discovery dispute; interrogatories; identification of trade secrets

Pursuant to Business Court Rule 10.9, the Defendants submitted a discovery dispute to the Court arising from their contention that one of Plaintiffs’ interrogatory responses was inadequate. The interrogatory requested Plaintiffs to “Describe and identify any and all alleged trade secrets allegedly misappropriated by each of the Defendants, and identify all documents, communications and electronic data related to such misappropriation.” Plaintiffs responded with a number of objections, referred Defendants to various documents previously produced, and listed several categories of documents as examples of the trade secrets allegedly misappropriated.

The Court first determined that because Defendants’ misappropriation of trade secrets was at the heart of Plaintiffs’ claims, the interrogatory was a proper attempt by Defendants to obtain discoverable information. Further, the Court determined that the present response was inadequate—the Defendants were entitled to have Plaintiffs provide a definitive list of all trade secrets allegedly misappropriated and an identification of all non-privileged documents evidencing such misappropriation. Accordingly, the Court ordered the Plaintiffs to supplement their response.

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Bradford Aquatic Grp., LLC v. Barber, 2023 NCBC Order 34 (N.C. Super. Ct. June 19, 2023) (Bledsoe, C.J.)

Key Terms: order on designation; untimely; N.C.G.S. § 7A-45.4(d)(3)

The Court determined that Defendant’s notice of designation was untimely because it was not filed within thirty days of Defendant accepting service of the complaint, as required by N.C.G.S. § 7A-45.4(d)(3). Accordingly, designation was improper.

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Howard v. IOMAXIS, LLC, 2023 N.C. LEXIS 426 (N.C. 2023) (Dietz, J.)

Key Terms: attorney-client privilege; corporate counsel; joint representation; waiver; Bevill test; competent evidence standard

Prior to this lawsuit, the law firm Holland & Knight represented IOMAXIS in connection with general corporate matters pursuant to an engagement letter. Following initiation of the lawsuit, Holland & Knight executed a second engagement letter encompassing the litigation. Under this engagement letter, Holland & Knight agreed to jointly represent IOMAXIS and its individual corporate members, whom were named defendants. After the relationship between the members deteriorated, one of them (Hurysh) sought to bring crossclaims against the others and to use a recording he had secretly made of a call between the members and a Holland & Knight attorney. IOMAXIS moved for a protective order, asserting that it held the exclusive attorney-client privilege over the call and that Hurysh could not waive it. The Business Court found that the legal advice given on the call was made under the second, joint representation engagement letter, and therefore, Hurysh held the attorney-client privilege and could waive it.

IOMAXIS appealed, arguing that the trial court should not have used the traditional test for privilege but should instead have used the Bevill test to determine whether a corporate officer personally holds a privilege over communications with corporate counsel. Under the Bevill test, which has been adopted by other state and federal courts, corporate officers asserting personal privilege claims must show (1) that they approached the corporate counsel for the purpose of seeking legal advice, (2) that when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities, (3) that counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise, (4) that their conversations with counsel were confidential, and (5) that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company. The Court endorsed the test but found that it was inapplicable to the facts at hand since the Business Court found that Holland & Knight was acting as joint defense counsel, and not as corporate counsel, during the call. This finding was supported by competent evidence and thus had to be accepted by the Court under the applicable standard of review. Accordingly, the Court affirmed the decision of the Business Court.

The Court concluded by summarizing the steps that corporations and their counsel can take to avoid factual disputes over the scope of counsel’s legal advice.

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Potts v. KEL, LLC, 2023 N.C. LEXIS 427 (N.C. 2023) (per curiam)

Key Terms: motion for a new trial; motion for judgment notwithstanding the verdict; fraud; punitive damages

This lawsuit arose out of a dispute between Potts and Rives, as co-owners of Steel Tube, Inc., relating to alleged fraud and self-dealing by Rives. A trial was eventually conducted, resulting in a jury verdict against Rives and another entity. They moved for a new trial and for judgment notwithstanding the verdict, which were denied by the trial court. Upon appeal, the North Carolina Supreme Court affirmed the decision of the trial court for the reasons stated in the trial court’s order and opinion.

By: Ashley Oldfield and Grace Kinley

To subscribe to RCD’s Business Court Blast, email Ashley Oldfield at aoldfield@rcdlaw.net.

The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.

Posted 06/21/23

N.C. Business Court Opinions, May 24, 2023 – June 6, 2023

Brakebush Bros., Inc. v. Certain Underwriters at Lloyd’s of London – Novae 2007 Syndicate Subscribing to Pol’y No. 93PRX17F157, 2023 NCBC 37 (N.C. Super. Ct. May 30, 2023) (Davis, J.)

Key Terms: summary judgment; fire insurance; N.C.G.S. § 58-44-16; fraud

In 2018, Brakebush acquired a chicken processing plant which had recently suffered a fire. The plant’s primary insurer paid out its policy limit of $20 million for the fire damage; Brakebush, however, sought additional coverage under its eight excess policies. After a dispute arose regarding the excess insurance, Brakebush brought suit against the excess insurers seeking, inter alia, a declaratory judgment regarding the insurers’ obligations. Defendants filed counterclaims alleging that Brakebush had fraudulently submitted a fire insurance claim seeking proceeds that grossly exceeded the value of the actual damage in order to fund expansion and upgrades of the plant. Brakebush moved for summary judgment on these counterclaims.

Upon review of the evidence in the summary judgment record, the Court concluded that a factual dispute existed regarding whether Brakebush deliberately claimed entitlement to insurance proceeds as part of its fire loss claim for costs unrelated to fire damage. Accordingly, the Court denied Brakebush’s motion for summary judgment.

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Caliber Packaging & Equip., LLC v. Swaringen, 2023 NCBC 38 (N.C. Super. Ct. May 31, 2023) (Earp, J.)

Key Terms: civil liability for theft; N.C.G.S. § 1-538.2; unjust enrichment; misappropriation of trade secrets

Plaintiffs brought suit against a former employee, alleging that she had misappropriated Plainitffs’ confidential and trade secret information and then leveraged that information to entice employment offers and financial rewards. Defendant moved to dismiss the claims for civil liability for theft by an employee and unjust enrichment.

Civil Liability for Theft. Plaintiffs alleged that Defendant committed employee larceny and embezzlement and was therefore liable for damages pursuant to N.C.G.S. § 1-538.2, which permits an employer to pursue a civil claim for damages against an employee who commits an act punishable under certain statutes. Defendant argued that because there is no reference to intellectual property such as confidential information or trade secrets in the underlying criminal statutes, § 1-538.2 was not intended to cover theft of intellectual property. The Court determined that confidential and trade secret information in its tangible form constitute chattels belonging to the employer, and the predicate crimes cover theft of chattels. Since Plaintiff alleged that Defendant stole information in the form of paper invoices, the Court denied Defendant’s motion to dismiss this claim.

Unjust Enrichment. Plaintiffs alleged that Defendant was unjustly enriched when she exchanged the confidential information she received from Plaintiffs for employment opportunities and financial rewards. The Court, however, found that these benefits identified by Plaintiffs were not ones that they conferred on Defendant; rather, the benefits were the gains of her misconduct. Accordingly, the Court granted Defendant’s motion to dismiss this claim.

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N.C. Dep’t of Revenue v. Wireless Ctr. Of NC, Inc., 2023 NCBC 39 (N.C. Super. Ct. Jun. 2, 2023) (Robinson, J.)

Key Terms: Department of Revenue; contested tax case; North Carolina Sales and Use Tax Act; N.C.G.S. § 105-164.4

Wireless Center petitioned for a contested tax case hearing after the N.C. Department of Revenue issued its determination that Wireless Center, a retailer of cell phone products and services, owed over $500,000 in unpaid sales taxes for products known as “Real Time Replenishments” (“RTRs”) for tax years 2016-18. Following the hearing, the N.C. Office of Administrative Hearings entered its Final Decision which (1) remanded the assessment for Period I because although Wireless Center had failed to collect and remit tax on RTRs during Period I, the Department had over-assessed the tax bill; and (2) reversed the assessment for Period II because the Department failed to show that Boost (of which Wireless Center was an independent contractor) had not paid the taxes on behalf of Wireless Center for Period II. The parties cross-petitioned for judicial review.

First, the Court found that the RTRs, regardless of how they were classified by Boost, were taxable under the North Carolina Sales and Use Tax Act (“SUTA”). Moreover, pursuant to both the agreement between Boost and Wireless Center and SUTA, Wireless Center was a “retailer” subject to taxation at all relevant times.

Second, the Court found that due to the absence of records establishing the payment of its tax liability, Wireless Center was unable to overcome the initial presumption that the tax assessment for Period II was correct. Accordingly, the Court reversed the OAH and upheld the tax assessment for Period II.

Finally, the Court found that the unrebutted evidence clearly demonstrated that the Department had properly credited Wireless Center for the tax it already remitted, and therefore, the Department had not over-assessed for Period I. Consequently, the Court reversed the OAH and upheld the tax assessment for Period I.

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Bivins v. Pacheco, 2023 NCBC 40 (N.C. Super. Ct. Jun. 2, 2023) (Earp, J.)

Key Terms: standing; Barger exceptions; dissolution; N.C.G.S. § 57D-6-02(2); statute of limitations; discovery rule; constructive fraud; fraud; Rule 9(b); fraudulent conveyance; motion for a more definite statement

In 2015, the Bivens and the Pachecos formed two LLCs (KJ Launch and KJ Endeavors) to own and operate a trampoline park. Each of the individuals owned twenty-five percent of KJ Launch, while two additional entities, controlled by the Bivens and the Pachecos respectively, each owned fifty percent of KJ Endeavors. After discovering financial irregularities, the Bivens brought suit alleging direct and indirect claims, including that the misconduct of Jennifer Pacheco, who had served as bookkeeper for the business, triggered the involuntary withdrawal of Jennifer and her company. Defendants moved to dismiss and alternatively, sought a more definitive statement.

Standing. Defendants moved to dismiss Plaintiffs’ direct claims for lack of standing under the Barger rule. Upon consideration of the four “direct” claims, the Court disagreed and denied the motion. First, with regards to breach of the operating agreements, the Court found that Jennifer’s alleged acceptance of her ex-husband’s membership interest in KJ Launch without giving Plaintiffs an opportunity to purchase the interest impacted only Plaintiffs and accordingly gave Plaintiffs a direct claim. Second, the Court found that Plaintiffs had standing to assert the four direct claims, which sought a judgment that Defendants breached the operating agreements and thereby triggered certain rights, because parties to an operating agreement have standing to seek a declaration of rights under the agreement. Third, Plaintiffs had standing as current LLC members to seek dissolution under N.C.G.S. § 57D-6-02(2).

Statute of Limitations. The Court denied Defendants’ motion to dismiss based on statutes of limitations because although the complaint alleged that the improper transfers occurred outside of the statute of limitations, it was silent as to when Plaintiffs discovered the wrongdoing. The Court also identified an unenumerated constructive fraud claim and determined that it fell well within the ten-year statute of limitations.

Rule 9(b). The Court dismissed the fraud claim to the extent it was based upon certain undated transactions and a promissory misrepresentation because Plaintiffs had failed to satisfy Rule 9(b)’s particularity requirements. The Court also dismissed the fraudulent conveyance claim for the same reason and because Plaintiffs did not plead that Defendants were debtors or that Plaintiffs were creditors as required by the Uniform Voidable Transactions Act.

Motion for More Definitive Statement. The Court denied Defendant’s motion for a more definite statement after determining that the surviving claims met the requirements of Rule 8 and enabled Defendant to conduct the necessary discovery.

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Kelly v. Nolan, 2023 NCBC Order 31 (N.C. Super. Ct. June 6, 2023) (Davis, J.)

Key Terms: subpoenas duces tecum; BCR 10.4(a); discovery

On 31 May 2023, Defendants emailed the Court identifying an unresolved discovery dispute regarding three subpoenas duces tecum served by Plaintiffs on third-party financial institutions—Wells Fargo, Suntrust/Truist Bank, and Southern Bank. All three subpoenas purported to require the production of certain documents at the office of Plaintiffs’ counsel on 9 June 2023. Defendants requested that the subpoenas be quashed because they were served on or after the last day of the discovery period in the case and were therefore untimely.

The Court held a WebEx conference and ruled that the three subpoenas were untimely and not served in compliance with Business Court Rule 10.4(a), which requires each party to ensure that discovery will be completed within the time period provided in the case management order. Therefore, the Court ordered that the three subpoenas at issue be quashed. The Court further directed counsel for Plaintiffs to serve a copy of this order upon Wells Fargo, Suntrust/Truist Bank, and Southern Bank immediately and inform them that they are not required to comply with the subpoenas.

By: Rachel Brinson and Grace Kinley

To subscribe to RCD’s Business Court Blast, email Ashley Oldfield at aoldfield@rcdlaw.net.

The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.

Posted 06/07/23