By: Ashley Oldfield and Austin Webber
In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 83 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: receivership; N.C.G.S. § 1-507.6; Rule 12(b)(1); Rule 12(h)(3); subject matter jurisdiction
This action represents a long-running group of cases involving numerous parties. On 28 April 2016, the Court appointed a Receiver for JDPW Trust and contemporaneously approved a settlement between the Receiver and Plaintiff NFI, which settlement allowed, inter alia, NFI’s $2.1 million claim against JDPW Trust. Eight years later, Defendant Harris moved to dismiss NFI’s claim for lack of subject matter jurisdiction.
Relying on N.C.G.S. § 1-507.6, which provides that “all claims against an insolvent corporation must be presented to the receiver,” Harris argued that because NFI did not re-assert its claim after the Receiver was appointed, the Court never obtained jurisdiction over the claim and therefore the Court’s approval of the claim was void. The Court disagreed and denied the motion. There was no dispute that the Court had subject matter jurisdiction over the claim when the action was initially filed; thus, since a court retains jurisdiction once acquired, the subsequent appointment of the Receiver did not divest the Court of jurisdiction. Harris’s other contentions were similarly without merit. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 84 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: Rule 54(b); motion for reconsideration; clear error
This action represents a long-running group of cases involving numerous parties. Here, Defendant Harris moved for reconsideration, pursuant to Rule 54(b), of various rulings made by the Court in orders entered in 2016 and 2022. Harris argued that the rulings constituted clear error.
The Court denied the motion, concluding that Harris’s arguments were merely a repackaging of previous arguments that the Court had already considered and rejected. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 85 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: accounting proceeding; master in equity; right to a jury trial; North Carolina Constitution
This action represents a long-running group of cases involving numerous parties. As relevant here, the Court had previously determined that Defendant Doug Harris had breached his fiduciary duty as trustee of JDPW and ordered him to provide an accounting. After Harris filed his accounting, the Court noticed an evidentiary hearing in which it would sit as a master in equity to consider the accounting and the objections thereto. Here, the Court addressed Harris’s contention that he was entitled to a jury trial on all factual issues remaining in the cases, including in the accounting proceeding.
With regard to the accounting proceeding, the Court rejected Harris’s argument that he was entitled to a jury trial under the North Carolina Constitution. The North Carolina Supreme Court has long held that the constitutional right to a jury trial exists only where it existed at the time the Constitution was adopted in 1868. Since the right to a jury trial in an accounting proceeding did not exist in 1868, Harris did not have a constitutional right to a jury trial now.
Regarding the remaining “issues,” the Court also determined that a jury trial was not warranted because the issues raised were either irrelevant, immaterial, or had already been decided by settlement or on summary judgment. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 86 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: foreclosure proceeding; power of sale; deed of trust; clerk of court; valid debt; N.C.G.S. § 45-21; de novo hearing; statute of limitations; holder in due course
This action represents a long-running group of cases involving numerous parties. As relevant here, the JDPW Receiver previously initiated a non-judicial foreclosure proceeding to exercise the power of sale in a deed of trust on the Castle McCulloch Property which secured a promissory note held by JDPW. Following a hearing, the clerk of court entered an order denying foreclosure on the ground that the Receiver did not hold a valid debt. The Receiver appealed and the Court held a de novo evidentiary hearing.
The Court concluded that JDPW had satisfied the criteria to establish a prima facie right to foreclose under N.C.G.S. § 45-21. Historic Castle McCulloch LLC (“HCM”), the owner of the Castle McCulloch Property, opposed the foreclosure. HCM first argued that the 2012 payment to the bank on behalf of JDPW paid off, rather than purchased, the note. The Court found that the documentary evidence did not support this argument. HCM also argued that the foreclosure was barred by the 10-year statute of limitations for foreclosure by power of sale because the foreclosure action was not filed until more than ten years after the note transactions at issue. The Court disagreed. To qualify as a holder in due course of an instrument, the holder must take the instrument in good faith. Since the transactions involving the instruments were undertaken by Doug Harris (the initial trustee for JDPW) for the benefit of himself and his brother, rather than for JDPW’s benefit, the Court concluded that there was no holder in due course of the instruments until the Court set aside certain transactions in 2021. Thus, the commencement of the foreclosure action in 2023 was within the statute of limitations because the statute of limitations did not run while there was no good faith holder of the instruments. HCM’s remaining arguments were equitable based and therefore not properly considered in a foreclosure proceeding.
Accordingly, the Court reversed the clerk of court and authorized the foreclosure to proceed. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 87 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: accounting; master in equity; breach of duty as trustee; damages; final judgment
This action represents a long-running group of cases involving numerous parties. As relevant here, the Court had previously determined that Defendant Doug Harris had breached his fiduciary duty as trustee of JDPW and ordered him to provide an accounting. Harris thereafter filed his accounting, which effectively stated that while he was trustee, JDPW did not hold any funds or property, had no receipts or income, and made no disbursements. The JDPW Receiver and the Nivison Parties objected to the accounting, contending that Harris failed to account for four notes obtained by JDPW. The Court conducted an evidentiary hearing in which it sat as a master in equity to consider the accounting and the objections thereto.
The Court entered findings of fact as follows: 1) that in 2012, JDPW, acting through its trustee Doug Harris, purchased four notes (the CM Note and the CCSEA Notes) from the bank, which purchase was funded by a loan from the Nivison Parties; 2) that Doug Harris never intended to (and made no effort to) collect on the notes for the benefit of JDPW, but instead intended to use his position as trustee of JDPW over the notes, the other instruments, and the collateral for the benefit of his brother and his brother’s companies; 3) that Doug Harris thereafter transferred the CM Note and related documents and collateral to his brother, pursuant to which JDPW lost all rights thereto but remained obligated on the loan from the Nivison Parties; and 4) that Doug Harris failed to account for these transactions in his accounting. The Court concluded that Doug Harris’s actions described above were a breach of his duty to JDPW, that these actions damaged JDPW, and that Doug Harris failed to properly account for JDPW’s assets during the time he was trustee. The Court adopted one of the Receiver’s proposed damages theories and entered judgment against Doug Harris for approximately $7 million. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 88 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: summary judgment; notice pleading; aiding and abetting breach of fiduciary duty; agency relationship
This action represents a long-running group of cases involving numerous parties. Here, the Court addressed the Castle McCulloch Defendants’ motion for summary judgment on paragraph 504 of the JDPW Receiver’s 8th cross claim and the Receiver’s motion for summary judgment on several of JDPW’s cross claims which purportedly sought to hold the Castle McCulloch Defendants liable for Doug Harris’s breach of fiduciary duty as trustee of JDPW.
Regarding JDPW’s fourth and sixth cross claims, which sought relief based on Doug Harris’s breach of duty as trustee, the Court denied summary judgment because those cross claims failed to mention the Castle McCulloch Defendants and therefore failed to put them on notice of their potential liability.
Regarding paragraph 504 of JDPW’s eighth cross claim, which sought to hold the Castle McCulloch Defendants liable for aiding and abetting Doug Harris’s breach of duty, the Court granted the Castle McCulloch Defendants’ motion and dismissed the claim with prejudice. First, North Carolina does not recognize a claim for aiding and abetting a breach of fiduciary duty. And second, notwithstanding the Receiver’s arguments to the contrary, the allegations that the Castle McCulloch Defendants aided Doug Harris and accepted benefits from his breach were not sufficient to allege an agency relationship by which liability could attach to the Castle McCulloch Defendants.
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Cherry v. Mauck, 2024 NCBC Order 75 (N.C. Super. Ct. Dec. 18, 2024) (Conrad, J.)
Key Terms: preliminary injunction; breach of contract; LLC operating agreement; unauthorized distribution; unclean hands
This case arose out of management disputes in two family businesses, AJAL Investments, LLC and C-Gas, LLC. As relevant here, in 2013 and pursuant to the companies’ operating agreements, Plaintiff Jay Cherry and Defendant Armistead Mauck agreed that the companies would make regular distributions to their families. However, after Armistead continued making distributions after Jay withdrew his consent, Plaintiffs filed suit and moved for a preliminary injunction seeking to bar Armistead from making future distributions and to force him to return the unauthorized distributions.
The Court granted the motion. The Court held that Plaintiffs were likely to succeed on the merits of their claim for breach of the companies’ operating agreements. Both operating agreements gave the members the right to decide when and whether to distribute company cash, and absent approval of a majority of the members, the managers of each respective company had no authority to make distributions. The Court rejected Armistead’s argument that majority approval to distribute company cash was established in 2013, and that the parties must continue distributing company cash accordingly until a vote of the majority of members altered this arrangement. As the Court explained, consent at one time is not consent for all time; under the operating agreements, Plaintiffs had the right to veto any proposed distributions at any time.
The Court also held that Plaintiffs had shown a likelihood of irreparable harm because without an injunction, Armistead would continue to make unauthorized distributions depriving Plaintiffs of their contractual rights to participate in management decisions. Additionally, the nature of such unauthorized distributions was of such a continuous and frequent recurrence that no reasonable redress could be had in a court of law. Lastly, the Court held that the grant of an injunction outweighed any potential harm to Armistead. While Plaintiffs may have unclean hands based on other conduct, the harm caused was not personal to Armistead, and the defense of unclean hands is only available to a party injured by the alleged wrongful conduct.
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Gordon v. Gordon Recyclers, Inc., 2024 NCBC Order 76 (N.C. Super. Ct. Dec. 18, 2024) (Davis, J.)
Key Terms: preliminary injunction; irreparable harm; shareholder meeting; notice of meeting; non-voting shareholder rights; articles of incorporation; bylaws; N.C.G.S. § 55-2-06
Plaintiff is a non-voting minority shareholder in Defendants GRI and GII. After Defendants refused to provide Plaintiff with either notice of, or the opportunity to attend, shareholders’ meetings, Plaintiff brought suit seeking a judgment declaring his rights as a shareholder regarding meetings. Plaintiff moved for a preliminary injunction enjoining Defendants from holding shareholder meetings unless they provided notice to Plaintiff and allowed him to attend.
Defendants opposed the injunctive relief arguing that their bylaws made clear that only voting shareholders are entitled to notice and attendance regarding shareholder meetings. Because N.C.G.S. § 55-2-06(b) only allows bylaws to contain provisions which are “not inconsistent with law or the articles of incorporation,” the Court began by examining the articles of incorporation and bylaws of each company. Regarding GRI, although the bylaws only required that notice of meetings be given to voting shareholders, the articles of incorporation provided that the rights of shareholders were identical in all respects, except as to voting. Accordingly, since the articles of incorporation provided non-voting shareholders the same right to receive notice of, and attend, meetings as a voting shareholder, any provision in the bylaws purporting to take away such right could not be given effect. In contrast, since GII’s articles of incorporation did not provide for identical rights among shareholders and its bylaws were not otherwise inconsistent with law, the bylaw provision requiring notice only to voting shareholders controlled. Thus, Plaintiff had shown a likelihood of success on the merits as to GRI, but not as to GII.
The Court next determined that Plaintiff had met his burden to show irreparable harm. Plaintiff’s receipt of the desired information regarding GRI’s financial condition was not a valid substitute for attending shareholders’ meetings. And, once Plaintiff was denied the right to attend the next meeting, that right would be gone forever.
Lastly, the Court concluded that the balancing of the equities weighed in favor of injunctive relief and dispensed with any bond requirement. Plaintiff had shown that a denial of his right to attend GRI shareholders’ meetings during the pendency of the litigation would irreparably deprive him of a right he appeared entitled to possess and GRI failed to show any harm it would incur as a result of an injunction.
For the foregoing reasons, the Court granted the injunction as against GRI.
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Posted 12/31/24
By: Rachel Brinson, Ashley Oldfield, and Natalie Kutcher
Howard v. IOMAXIS, LLC, 2024 NCBC 76 (N.C. Super. Ct. Nov. 27, 2024) (Earp, J.)
Key Terms: motion to dismiss; Rule 12(b)(6); Rule 12(b)(2); Rule 12(b)(1); specific jurisdiction; corporate successors; successor jurisdiction; standing; breach of contract; breach of covenant of good faith and fair dealing; fraud; UVTA
As previously summarized here, this action involves a dispute between the Ronald E. Howard Revocable Trust (a purported 51% economic interest holder in IOMAXIS) and the IOMAXIS members regarding the Trust’s right to the economic benefits from its interest. The Court considered the Defendants’ motions to dismiss challenging the Court’s jurisdiction over two of the parties, the Plaintiffs’ standing, and the sufficiency of the claims pleaded.
12(b)(2)
The Court first addressed Burleson and Five Insight’s motion to dismiss for lack of personal jurisdiction. The burden was on Plaintiff to establish the Court’s personal jurisdiction over the parties by a preponderance of the evidence.
Burleson. Determining that jurisdiction over Burleson depended on his own contacts with North Carolina, whether in his individual or corporate capacity and utilizing the Calder effects test, the Court concluded that the nature of Burleson’s contacts, the connection between those contacts and the harm the Plaintiff, a North Carolina trust, allegedly suffered and continues to suffer, and North Carolina’s interest in protecting its citizens from tortious acts, were sufficient to satisfy due process requirements and to subject Burleson to the jurisdiction of the Court. The Court denied Burleson’s motion to dismiss on personal jurisdiction grounds.
Five Insights. Five Insights contended that the Court lacked jurisdiction over it because it is a Delaware limited liability company without systematic or continuous connections to North Carolina. Plaintiffs responded that the Court had specific jurisdiction over Five Insights because each of IOMAXIS’s owners traded his ownership interest for an ownership interest in Five Insights, effectively making Five Insights IOMAXIS’s successor-in-interest. Therefore, Plaintiffs argued, IOMAXIS’s contacts with the state of North Carolina should be imputed to Five Insights.
Holding that Five Insights exercised control over IOMAXIS’s assets and was profiting from them to the exclusion of the North Carolina Trust, the Court determined Five Insights was subject both to personal jurisdiction under a successor theory and based on the factors of the Calder effects test. The Court therefore denied its motion to dismiss based on personal jurisdiction.
12(b)(1)
Because the Court considered matters outside the pleadings in reaching its decision on the motion to dismiss for lack of standing, the Court analyzed the motion pursuant to Rule 12(b)(1) rather than 12(b)(6). In short, Moving Defendants argued that the Trust lacked standing to sue because (a) newly discovered evidence establishes that the Texas Operating Agreement, not the North Carolina Operating Agreement, controlled, and (b) the Estate’s transfer of Mr. Howard’s interest to the Trust in accordance with the terms of Mr. Howard’s Will was not ratified by Buhr, IOMAXIS’s manager, in accordance with the Texas Operating Agreement. With respect to the N.C. Operating Agreement, the Moving Defendants’ standing argument reprises arguments the Court had previously considered and rejected. The newly discovered evidence did not change that result. Accordingly, the Court denied the motion to dismiss challenging Plaintiff’s standing, determining that Plaintiff had sufficiently alleged standing based on the evidence currently before the Court.
12(b)(6)
Breach of Buy-Sell Agreement. Finding that failure to timely exercise the purchase option in the N.C. Operating Agreement terminated the buy-sell provision and therefore such a provision could not then be breached, the Court held that Plaintiffs failed to state a claim to the extent Plaintiffs alleged that IOMAXIS and/or its members breached the buy-sell provisions of the N.C. Operating Agreement by failing to give timely notice of their election to exercise an option to purchase Mr. Howard’s interest. The Court granted the motion to this extent, but denied it with respect to the alleged breach by IOMAXIS to retain RSM to value Mr. Howard’s interest pursuant to the N.C. Operating Agreement.
Good Faith and Fair Dealing. The Court further found that Plaintiffs’ allegations that IOMAXIS failed to pay distributions to the Trust as an economic interest holder and instead improperly paid the Trust’s share of distributions to the IOMAXIS Defendants supported a claim for breach of the implied covenant of good faith and fair dealing in the N.C. Operating Agreement.
Fraudulent Concealment. IOMAXIS argued that the Trust’s fraudulent concealment claim should be dismissed because (1) the Trust has not sufficiently alleged a duty to disclose or detrimental reliance; and (2) the Trust lacks standing to assert fraud claims because they are derivative in nature. Plaintiffs responded that this Court has already determined that the fraudulent concealment claim is direct, not derivative, and that the allegations in the Second Amended Complaint sufficiently plead both a duty to disclose and detrimental reliance. Finding that Plaintiffs alleged that the Trust had been harmed, not IOMAXIS itself or other defendants claiming an interest in IOMAXIS, and that Plaintiffs sufficiently pleaded a duty to disclose, the Court denied the motion to dismiss the fraudulent concealment claim.
UVTA. Since there were no allegations that any of the IOMAXIS Defendants or Five Insights were located in North Carolina when an allegedly voidable transfer was made or obligation incurred, the Court found that the allegations did not establish that they were debtors under the North Carolina UVTA and therefore dismissed the claim (except as to Defendant Spade because the complaint alleged he was a North Carolina resident during the relevant period).
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VIP Universal Med. Ins. Grp., Ltd v. Trinity Comput. Servs., Inc., 2024 NCBC 77 (N.C. Super. Ct. Dec. 5, 2024) (Earp, J.)
Key Terms: motion for judgment on the pleadings; Rule 12(c); breach of contract; software agreement; negligence; punitive damages; attorneys’ fees; declaratory judgment
The parties entered into a contract wherein Defendant was to provide a certain on-line clinical workflow system to Plaintiff in exchange for payment. Dissatisfied with many aspects of Defendant’s software services, Plaintiff terminated the contract and filed this action. Following the hearing on Defendant’s motion for judgment on the pleadings, Plaintiff voluntarily dismissed certain claims, leaving the Court only to determine the claims set forth below.
Negligence, Punitive Damages, Attorneys’ Fees. Plaintiff conceded it did not assert a claim for negligence therefore the Court denied the motion as moot. Since Plaintiff had voluntarily dismissed its tort claims, the Court found any claims for punitive damages without merit. Lastly, the Court denied Defendant’s motion with respect to Plaintiff’s request for attorneys’ fees finding dismissal premature.
Declaratory Judgment. Plaintiff’s declaratory judgment claim sought a declaration that the Termination Fee set forth in the contract was not owed because (1) Defendant materially breached the contract and (2) it was an unenforceable penalty and not a permissible liquidated damages clause. The Court determined that the plain language of the contract established that the Termination Fee is triggered only when Defendant has not breached the agreement, but Plaintiff nevertheless wishes to be released from its contractual obligations. The Court found that Plaintiff stated a claim for declaratory judgment to the extent it seeks a declaration that the Termination Fee is not owed due to Defendant’s material breach of contract and denied Defendant’s motion related thereto. However, finding that the Termination Fee provision was not intended to be a liquidated damages provision at all, let alone an unenforceable one, the Court granted Defendant’s motion relating to the declaratory judgment claim to that extent.
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Stein v. MH Master Holdings, LLLP, 2024 NCBC 78 (N.C. Super. Ct. Dec. 6, 2024) (Earp, J.)
Key Terms: motion to dismiss; attorneys’ fees; sovereign immunity; Rule 12(b)(2); personal jurisdiction; waiver of sovereign immunity; advisory opinion; declaratory judgment; defensive mirror
The Attorney General brought this action on behalf of and in the name of Dogwood Health Trust, a nonprofit corporation, relating to an asset purchase agreement memorializing Defendant’s acquisition of Mission Health, a hospital system serving western North Carolina. Pursuant to the APA, the Attorney General was granted contractual enforcement rights under certain circumstances and filed this action alleging that Defendant violated the APA by failing to provide the requisite level of emergency and trauma care and oncology services. Defendant filed counterclaims seeking opposite declaratory judgments. Plaintiff moved to dismiss the counterclaims for lack of jurisdiction on sovereign immunity grounds and moved to dismiss Defendant’s request for attorneys’ fees pursuant to Rule 12(b)(6).
Defendant argued sovereign immunity did not apply because the Attorney General brought this action as a third-party beneficiary to the APA rather than in his official capacity as North Carolina’s chief law enforcement officer. The Court disagreed, finding that Mr. Stein has been sued in his official capacity and was entitled to sovereign immunity, unless that immunity had been waived. Finding no express waiver of sovereign immunity, the Court analyzed an implicit waiver of sovereign immunity by the State becoming a signatory to a private contract. Finding that the State has not undertaken an obligation that it was trying to avoid by claiming immunity from suit in this case, the Court found no implicit waiver of immunity resulting from the contract. The Court also rejected Defendant’s arguments that sovereign immunity was waived because the claims at issue sought declarations of the parties’ rights and obligations under the APA. The Court determined that the Defendant’s declaratory judgment counterclaims were mere denials of Plaintiff’s claims and attempts to elicit improper advisory opinions from the Court. The Court granted Plaintiff’s motion to dismiss Defendant’s counterclaims on the basis of sovereign immunity and lack of in personam jurisdiction.
Plaintiff also sought dismissal of Defendant’s request for attorneys’ fees pursuant to Rule 12(b)(6); however, the Court determined that the issue was not ripe for determination at this stage of the proceedings and denied dismissal.
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Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St.
Louis, Inc. v. Window World, Inc., 2024 NCBC 79 (N.C. Super. Ct. Nov. 26, 2024) (Bledsoe, C.J.)
Key Terms: cross motions for summary judgment; choice of law; declaratory judgment; franchisee; franchise agreement; licensing agreement; recission; franchise disclosure laws; fraud; continuing wrong doctrine; Franchise Rule; negligent misrepresentation; Federal Trade Commission Act; contract reformation; unfair and deceptive trade practices; N.C.G.S. § 75-1.1; lex loci; fraudulent transfer; N.C.G.S. §§ 39-23.4(a)(1) and 39-23.4(a)(2); piercing the corporate veil; damages calculations
Plaintiffs, franchisees of Defendant Window World (“WW”) brought suit in 2015, alleging, inter alia, WW’s fraudulent concealment of information relating to its status as a franchise. Defendants sought summary judgment on Plaintiffs’ causes of action for two declaratory judgments regarding the agreements between the parties, fraud, and negligent misrepresentation. Plaintiffs, in their cross-motion, sought offensive summary judgment on their negligent misrepresentation and fraud-based claims.
Fraud. Plaintiffs allege that WW failed to disclose, and in fact concealed, information from Plaintiffs to induce them to operate as Window World franchisees, assume debt owed by prior franchisees, continue to operate as WW franchisees, pay substantial amounts advertising WW trademarks, and make purchases from various suppliers. Plaintiffs contended WW committed fraud in at least five distinct ways:
(1) grossly misrepresenting the royalties or ‘rebates’ Plaintiffs would pay through WW-designated suppliers to WW to do business as WW dealers;
The Court granted summary judgment in favor of Defendants as to those Plaintiffs which failed to provide substantial evidence of a false representation of a material fact relating to the rebate amount. As to the other Plaintiffs, the Court found that they had met their burden to survive summary judgment by providing substantial evidence to support a conclusion that WW misrepresented the rebate amounts these Plaintiffs would pay to Window World, that such misrepresentations were material and intentional, and that a reasonable factfinder could conclude Plaintiffs were harmed in an amount equal to the difference between the rebates promised and the rebates paid. The Court also denied summary judgment based on the statute of limitations finding that a genuine issue remained regarding when Plaintiffs discovered the fraud.
(2) falsely promising that Plaintiffs would receive best pricing on the products they purchased from WW-designated suppliers;
Similarly to the previous theory, the Court granted summary judgment against those Plaintiffs who failed to forecast substantial evidence that Defendants made a false representation concerning best pricing. The Court otherwise denied the cross-motions for summary judgment on this theory, finding triable issues of fact. The Court also largely denied Defendants’ motion related to the statute of limitations finding that Plaintiffs provided substantial evidence that most of them did not discover the facts constituting fraud as it relates to best pricing until after the lawsuit was filed.
(3) knowingly concealing material facts it was legally-bound to disclose under franchise and other law;
Considering the continuing wrong doctrine’s impact on the statute of limitations, the Court found, as it did at the motion to dismiss stage, that Plaintiffs provided substantial evidence to support a finding that many of WW’s wrongful acts are demonstrably continued wrongs, most particularly WW’s repeated breaches of its pricing and rebate promises. Thus, Defendants’ motion on statute of limitation grounds was denied. The Court otherwise denied the cross-motions as well; although Plaintiffs provided substantial evidence that WW made incomplete and inaccurate disclosures, material issues of fact remained.
(4) falsely disclaiming application of franchise law in the licensing agreements it presented to Plaintiffs to sign after June 2008; and
The Court granted Defendants’ motion as it pertained to this theory because the facts were clear that the disclaimer did not factor into any Plaintiff’s decision to join or remain a part of the Window World system since they all conceded that they either did not read the Licensing Agreements, did not seek legal advice, or did not understand what it meant to be a franchisee.
(5) in 2009, misrepresenting increases in the already-fraudulent rebates Plaintiffs paid.
The Court granted Defendants’ motion as it pertained to this theory because Plaintiffs failed to produce substantial evidence explaining what injury purportedly follows from the alleged misrepresentation.
Negligent Misrepresentation. The Court dismissed this claim because it was solely based upon a failure to disclose information and not on an affirmative misrepresentation, as required to state a negligent misrepresentation claim. The Court further rejected Plaintiffs’ arguments in their briefing that their fraud theories applied to their negligent misrepresentation claim because they did not assert those affirmative misrepresentation theories in any of their three complaints.
Declaratory Judgment. Plaintiffs sought two declaratory judgments: first, that all prior written Licensing Agreements between the parties were null, invalid, and unenforceable against Plaintiffs; and second, that they have the right to continue to operate on the same terms established by the parties’ course of dealings that existed independent of any prior written Licensing Agreements or Franchise Agreement.
Plaintiffs alleged several theories for their first D/J claim: 1) that the written agreements were unenforceable because the object of the agreement was illegal and the enforcement of them would be against public policy as expressed in the Franchise Disclosure Rule; 2) they were unenforceable because they were induced by fraud; and 3) they were unenforceable because they arose from adhesionary contracts. The Court disagreed with Plaintiffs’ first theories, concluding that a violation of the disclosure requirements of the Rule did not provide the basis to render a subsequent agreement void as illegal or contrary to public policy, because to do so would essentially allow a plaintiff to circumvent the bar on private actions to enforce the FTCA and create a private right of action under section 5. Regarding the second theory, the Court had already determined that genuine issues of material fact existed regarding whether Plaintiffs were fraudulently induced to contract with WW. Regarding the third theory, the Court concluded that there were competing proofs concerning procedural and substantive unconscionability regarding the Licensing Agreements that could not be resolved on summary judgment and must be resolved by a jury. Accordingly, the Court granted Defendants’ motion and dismissed the first declaratory judgment claim to the extent it was based on Plaintiffs’ illegality and public policy theories, but otherwise denied it.
As to the second D/J claim, the Court denied summary judgment because genuine issues of material fact existed at least regarding whether the written agreements were null, invalid, and unenforceable because they were induced by WW’s fraud.
Reformation and Injunction. Plaintiffs sought various injunctive relief and to reform the prior Licensing Agreements and Franchise Agreements to reflect the actual meeting of the minds between the parties as reflected in the parties’ course of dealings. Defendants argued that the written agreements were enforceable as a matter of law and controlled the parties’ relationship. The Court found that Plaintiffs offered sufficient evidence to show at least a genuine issue of material fact as to each element of their claim for reformation and injunction and denied Defendants’ motion for summary judgment on these claims.
Breach of Contract. Finding sufficient evidence of the parties’ competing views that either the written agreements or the oral agreements and course of dealings formed the contract between the parties and sufficient evidence of Defendants’ breach of the contractual best pricing promise, the Court denied Defendants’ motion for summary judgment on the breach of contract claims except as to the Jones/Shumate Plaintiffs, which it granted.
Breach of Covenant of Good Faith and Fair Dealing. The Court denied Defendants’ motion on Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing in the same manner and to the same extent as the Court denied Defendants’ motion on Plaintiffs’ breach of contract claim, and granted them to the same extent as against the Jones/Shumate Plaintiffs.
Unjust Enrichment. Defendants argued that they were entitled to summary judgment on Plaintiffs’ unjust enrichment claim due to the existence of an express contract. However, since Plaintiffs had provided substantial evidence that the written Licensing Agreements were induced by Window World’s fraud and thereby void and unenforceable and since genuine issues of material fact remained concerning whether a valid contract, whether it be oral or written, was in effect between the parties, the Court determined summary judgment was inappropriate.
Unfair and Deceptive Trade Practices. Applying the lex loci test and finding that Plaintiffs failed to provide evidence of injury or business operations in North Carolina as required to prevail on a NC UDTP claim, the Court granted summary judgment for Ms. Whitworth and Defendants, and denied summary judgment for Plaintiffs, on Plaintiffs’ section 75-1.1 claim.
Fraudulent Transfer. Plaintiffs alleged that WW transferred all its intellectual property assets, including but not limited to WW trademarks, to an insider, WWI, with the intent to hinder, delay or defraud Plaintiffs, and other current or future creditors and therefore that Plaintiffs were entitled to avoidance of WW’s transfers to WWI to the extent necessary to satisfy Plaintiff’s claims. Finding that the Non-Tolling Plaintiffs’ fraudulent transfer claims were barred by the statute of repose and not permitting those Plaintiffs to raise a new theory of their fraudulent transfer claim at the summary judgment stage, the Court entered summary judgment against the Non-Tolling Plaintiffs on their fraudulent transfer claims under section 39-23.4(a)(1).
As to the Tolling Plaintiffs fraudulent transfer claims, the Court found that they had provided sufficient evidence to permit a reasonable jury to conclude that the 2010 Transfer was made with intent to hinder, delay, or defraud any creditor of the debtor and thus in violation of section 39-23.4(a)(1). The Court further determined that a genuine dispute of material fact remained as to whether WW received a reasonably equivalent value in exchange for the 2010 Transfer and whether WW’s remaining assets were ‘unreasonably small’ at the time of the transfer. Thus, the Court denied the cross motions for summary judgment on the Tolling Plaintiffs’ fraudulent transfer claims under sections 39-23.4(a)(1) and (2).
Alter Ego/Piercing the Corporate Veil. Plaintiffs contended that 1) Window World and Window World I were alter egos; and 2) they were entitled to pierce the corporate veil between Ms. Whitworth and Window World. Finding that Plaintiffs had produced sufficient evidence at the summary judgment stage to sustain their claim that Window World and WWI were alter egos, the Court denied the parties’ cross-motions on Plaintiffs’ claim that Window World and WWI are alter egos and on the Tolling Plaintiffs’ claims against WWI under sections 39-23.4(a)(1) and (a)(2).
Finding that Plaintiffs failed to product substantial evidence of complete domination over Window World or the other disputed transactions by Ms. Whitworth, and that Defendants offered undisputed evidence that she did not have complete dominion over Window World, the Court granted Defendants’ motion and dismissed Plaintiffs’ veil piercing claim against Ms. Whitworth. Accordingly, the Court found that the Tolling Plaintiffs’ claims against Ms. Whitworth under sections 39-23.4(a)(1) and (a)(2) claims were time-barred by the applicable statute of repose.
Plaintiffs’ Damages Calculations. The Court denied Plaintiffs’ offensive summary judgment motion on their alleged rebate overpayment and best pricing damages because they had not met their burden of proof and shown no gaps or inconsistencies in their evidence. Plaintiffs’ testimony varied significantly concerning the rebate and best pricing representations and how Plaintiffs understood those representations.
Defendants’ Counterclaims. Plaintiffs sought summary judgment on each of Defendants’ counterclaims seeking declarations regarding the Licensing Agreements. Having already determined the existence of genuine issues of material fact precluding summary judgment for any party on the validity and enforceability of the Licensing Agreements, the Court denied Plaintiffs’ summary judgment motion on Defendants’ counterclaims.
WW’s and Ms. Whitworth’s Additional Defenses. Determining that Defendants did not address Plaintiffs’ arguments with respect to Defendants’ affirmative defenses that Plaintiff attacked in its summary judgment briefing, the Court granted Plaintiffs’ motion with respect thereto.
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Pathos Ethos, Inc. v. Braintap Inc., 2024 NCBC 80 (N.C. Super. Ct. Dec. 9, 2024) (Davis, J.)
Key Terms: motion to dismiss; Rule 12(b)(6); Rule 12(b)(1); subject matter jurisdiction; exclusive jurisdiction; Del. Code Ann. tit. 8, § 205; Delaware Court of Chancery; UDTPA; Securities Exemption; breach of contract; aggravating circumstances
Plaintiff Pathos Ethos, Inc. and Defendant Braintap Inc. entered into various contracts wherein Pathos was to perform certain product development and software engineering services related to Braintap’s mobile application. Disputes arose among the parties and Pathos brought this action. Here, the Court considered the Plaintiff’s and Third-Party Defendant’s motions to dismiss challenging Braintap’s counterclaims and third-party claims for lack of subject matter jurisdiction. Plaintiff also moved to dismiss Defendant’s counterclaim for unfair and deceptive trade practices pursuant to Rule 12(b)(6).
12(b)(1). Braintap is a Delaware corporation and Pathos and Third-Party Defendant, Zaldastani, Braintap’s former CEO, argued that the Court lacks subject matter jurisdiction over Braintap’s claims for declaratory judgment and breach of fiduciary duty because Delaware’s Court of Chancery possesses exclusive jurisdiction over such claims pursuant to Del. Code Ann. tit. 8, § 205. Pathos and Zaldastani argued that Braintap’s claims are subject to § 205(e) because they require a judicial determination as to the alleged invalidity of corporate acts by a Delaware corporation within the scope of § 205(a). The Court found that the Delaware statute was inapplicable because (1) no claims were brought under the statute or Delaware law in general, (2) the statute itself indicates the Court of Chancery’s exclusive jurisdiction only over claims brought in Delaware courts, and (3) exclusive jurisdiction in Delaware would violate the Full Faith and Credit Clause of the Constitution. Thus, the Court denied the motions to dismiss based on lack of subject matter jurisdiction.
12(b)(6). The Court found that Braintap’s UDTP claim failed to the extent it was based on the alleged issuance to Pathos of shares or equity in Braintap because securities transactions are not in or affecting commerce for purposes of the UDTPA. Furthermore, the remainder of the claim failed because it concerned Pathos’s performance of its various contracts with Braintap, and there were no allegations of substantial aggravating circumstances as required to sustain an action under the UDTPA.
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Talley v. Earth Fare 2020, Inc., 2024 NCBC 81 (N.C. Super. Ct. Dec. 12, 2024) (Robinson, J.)
Key Terms: new trial; JNOV; Rule 59(a); inconsistent affirmative defenses; unjust enrichment; breach of contract; Wage and Hour Act; jury instructions; misstatement of law
After a trial, the jury found against Plaintiff on his breach of contract and Wage and Hour Act claims but found for Plaintiff on his unjust enrichment claim. Defendants moved for JNOV on the unjust enrichment claim and Plaintiff moved for JNOV, or alternatively a new trial, on his breach of contract and WHA claims.
Defendants’ JNOV Motion. At trial, the jury found that Defendant Hulsing was unjustly enriched by the services rendered by Plaintiff and awarded Plaintiff $195,000 to be paid by Hulsing. Defendants sought JNOV on the unjust enrichment claim, arguing that Hulsing could not be unjustly enriched by Plaintiff’s services because Plaintiff was expressly employed to perform those very tasks. Plaintiff argued that since Defendants had asserted in their answer that Plaintiff was not employed by Defendants, they should be judicially estopped from taking an inconsistent position now. The Court rejected this argument because Defendants were permitted under Rule 8(e)(2) to assert inconsistent affirmative defenses. Nevertheless, the Court determined that the jury’s verdict was sufficiently supported by evidence that Plaintiff rendered services to Hulsing with the expectation that he would receive additional compensation separate from his base salary. Accordingly, Defendants’ JNOV motion was denied.
Plaintiff’s JNOV Motion. At trial, the jury found that Defendants did not enter into any agreement with Plaintiff and therefore did not reach Plaintiff’s WHA claim. Plaintiff sought JNOV on his breach of contract and WHA claims arguing that there was conclusive evidence at trial of an agreement between the parties. The Court disagreed, finding that the jury’s conclusion to the contrary was well supported by the evidence presented. Thus, Plaintiff’s JNOV motion was denied.
Plaintiff’s Motion for a New Trial. Plaintiff argued that he was entitled to a new trial on his breach of contract claim because 1) there was insufficient evidence to support the verdict against Plaintiff; 2) the jury was likely confused by Defendants’ counsel’s misstatement of law during closing arguments; and 3) the Court did not include Plaintiff’s requested instruction to the jury. The Court rejected all three arguments. First, there was sufficient evidence to support the jury’s conclusion that either there was no additional agreement or even if there was, it was not breached. Second, Plaintiff’s failure to specify or properly document an objection to Defendants’ closing argument precluded his requested relief on this basis. Third, although the Court did not give the exact instruction Plaintiff requested, the instruction given to the jury was, in substance, the same. Plaintiff also sought a new trial on his WHA claim, contending that the Court gave an incorrect instruction on the law because the WHA does not require the employee to prove the existence of a contract for the employee to be entitled to unpaid wages. The Court disagreed, concluding that plaintiff was justly compensated for the work he contracted to perform and the jury determined that there was no other agreement for additional compensation.
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Mary Annette, LLC v. Crider, 2024 NCBC 82 (N.C. Super. Ct. Dec. 13, 2024) (Conrad, J.)
Key Terms: summary judgment; misrepresentation; fraud; reasonable reliance; reformation; breach of contract; merger; quiet title; conversion
This case arose out of disputes concerning the creation, ownership, and management of Plaintiff Mary Annette, LLC, which was formed to develop a resort property as a planned unit development. The parties in this action are Mary Annette’s three entity-members and their principals. Defendants’ counterclaims are primarily based on allegations that Plaintiffs deceived Defendant Terri Crider regarding the creation and funding of Mary Annette and breached various oral agreements. Plaintiffs moved for summary judgment on Defendants’ counterclaims.
Intentional Misrepresentation and Fraud. Defendants based their fraud counterclaim on two alleged misrepresentations relating to the funding to buy a third-party’s interest in the property and pay for the development. However, because the undisputed evidence established that Terri was fully aware of the funding terms at the time she signed the closing documents, she could not have reasonably relied on any earlier, contrary representations. Further, Plaintiffs’ alleged statement that “they would make things right” was not sufficiently definite to support a fraud claim. Accordingly, the Court granted summary judgment against Defendants on their fraud counterclaim.
Reformation. The Court also granted summary judgment against Defendants on their reformation claim, which sought to reform Mary Annette’s operating agreement regarding the allocation of membership interests. The undisputed evidence showed that Terri received a copy of the agreement and had a free and fair opportunity to review it, but ultimately signed without reading it. Thus, there was no basis for reformation.
Breach of Contract. Defendants alleged that Plaintiffs breached an oral contract regarding 1) funding the development and dividing the proceeds; 2) Terri’s right to rent the individual units until they were sold; and 3) who would hold title to the real property. Regarding the funding and proceeds, the Court determined that these were plainly within the subject matter of the operating agreement and therefore any oral agreement with different terms would have merged into the operating agreement pursuant to its merger clause. The remaining issues, however, were outside the subject matter of the operating agreement or were not foreclosed by the merger clause. Therefore, summary judgment was denied in part and granted in part on this claim.
Quiet Title. Defendants sought to quiet title to the individual units that make up the development. Having already determined in a previous order that the ownership of the units was a live issue in the case with genuine issues of material fact, the Court denied summary judgment on this claim.
Conversion. Defendants alleged conversion of personal property that Terri used in her vacation rental business. Because Plaintiffs presented no evidence to support summary judgment, the motion was denied as to this claim.
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Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St.
Louis, Inc. v. Window World, Inc., 2024 NCBC Order 71 (N.C. Super. Ct. Nov. 27, 2024) (Bledsoe, C.J.)
Key Terms: motion to seal; trade secrets; confidential and proprietary business information
The Window World Defendants filed various motions seeking to seal or partially seal certain documents and exhibits that were filed in connection with the parties’ summary judgment motions and allegedly containing (i) trade secrets; (ii) other confidential and proprietary business information; (iii) sensitive personal and family matters; (iv) inadvertently produced banking information; and (v) other miscellaneous exhibits.
The Court denied as moot the motions as to those exhibits which WW no longer wished to seal and which no other party or interested non-party sought to maintain under seal. The Court deferred ruling on the motions as to those exhibits which WW no longer wished to seal but which other parties or interested non-parties did seek to maintain under seal. The Court contemporaneously entered orders addressing those parties’ and interested non-parties’ motions to seal. Turning to the remaining exhibits and documents, the Court considered each of the above-mentioned categories of information and granted the motions, determining that sealing was appropriate as to each.
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Wilmington Tr. v. TM Northlake Mall, L.P., 2024 NCBC Order 72 (N.C. Super. Ct. Dec. 10, 2024) (Conrad, J.)
Key Terms: receivership; personal liability; immunity; leave to maintain claims
Spinoso Real Estate Group has served as the general receiver for Defendant in this action since 2021. The receivership order provides that no one may sue Spinoso with respect to the receivership absent the Court’s permission. Nevertheless, earlier this year, two non-parties sued Spinoso, in its official and personal capacity, in Mecklenburg County Superior Court without getting the Court’s permission. After Spinoso moved to dismiss their claims on that basis, they moved for leave to maintain their claims. Spinoso opposed the motion.
The Court denied the motion with regards to their claims for ordinary negligence and premises liability against Spinoso in its personal capacity because the receivership order expressly immunized Spinoso from personal liability for all but gross negligence.
The Court otherwise granted the motion because the claimants had no other way to seek relief since a claims process had yet to be established and any delay may jeopardize their right to seek relief in the future due to the statute of limitations. Further, the tort actions were recently designated to the Business Court, eliminating the possibility that the claimants would have an unfair advantage over other claimants by litigating in a different forum.
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Window World of Baton Rouge, LLC v. Window World, Inc; Window World of St. Louis, Inc. v. Window World, Inc., 2024 NCBC Order 73 (N.C. Super. Ct. Dec. 12, 2024) (Bledsoe, C.J.)
Key Terms: Rule 54(b); Rule 60; sua sponte; amendment of previous order
This matter was before the Court sua sponte pursuant to Rules 54(b) and 60 to reconsider certain portions of the Court’s recently-filed order on the parties cross-motions for partial summary judgment (summarized above). The Rules allow a judge to correct or otherwise revise an order prior to entry of final judgment. After careful review, the Court determined it was necessary to amend certain paragraphs to clarify that Plaintiffs had advanced multiple theories of breach of contract liability and to reflect that all of those theories would proceed to trial except for certain Plaintiffs’ claims based on the superior wholesale pricing theory and the undisclosed C pricing theory.
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Howard v. IOMAXIS, LLC, 2024 NCBC Order 74 (N.C. Super. Ct. Dec. 17, 2024) (Earp, J.)
Key Terms: receivership; extension; N.C.G.S § 1-507.30(b)
As summarized here, this case arises from a dispute between the Ronald E. Howard Revocable Trust (a purported 51% economic interest holder in IOMAXIS) and members of IOMAXIS regarding the Trust’s right to economic benefits from its interest. During discovery, allegations relating to the propriety of certain transfers made by IOMAXIS were raised by the Trust. A receiver was appointed by the Court on January 25, 2024 and tasked with investigating the whereabouts of certain assets, the reason for their transfers, and maintaining the status quo of IOMAXIS’ financial affairs. The receiver filed a motion to (i) extend the term of the receivership and (ii) compel production of information.
The Court granted the motion in full. The Court noted that the six reports filed by the receiver during the initial receivership detailed that the receiver had been unable to obtain the information sought from IOMAXIS in a timely manner, or had failed to receive the information at all. The receiver further reported that it was unable to complete its Court-assigned duties as a result of the general uncooperativeness of IOMAXIS’ representatives. IOMAXIS countered that it was the receiver, rather than IOMAXIS, who refused to cooperate. The Court noted that regardless of “where the fault lies,” the receiver’s duties had yet to be fulfilled, and millions of dollars in transfers from IOMAXIS remained unaccounted for. The receiver further raised concerns about the management of IOMAXIS, which warranted further investigation of the company.
The Court extended the receivership on a month-to-month basis, to be revisited after six months. At the end of that six-month period, the receiver shall either: (a) file a final report and request discharge; or (b) file a status report identifying the reasons the receivership should be continued. The Court further ordered the IOMAXIS parties to fully comply with N.C.G.S § 1-507.30(b), and reasonably cooperate with the receiver in the administration of the receivership. The Court enjoined the IOMAXIS parties from knowingly interfering with the receiver’s duties. Lastly, the Court ordered the IOMAXIS parties to provide the receiver with certain information and documents requested by the receiver, which had yet to be produced.
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Philip Morris USA, Inc. v. N.C. Department of Revenue, 2024 N.C. LEXIS 972, 2024 WL 5101173 (2024) (Barringer, J.)
Key Terms: reversed; contested tax case; N.C.G.S. § 105-130.45; cigarettes; export credits; “credit allowed”; statutory interpretation
As summarized here, the Business Court previously held that N.C.G.S. § 105-130.45, which governs certain tax credits available to manufacturers of cigarettes for exportation (“Export Credits”), unambiguously limited the amount of Export Credit which could be generated in any one year to $6 million. Accordingly, the Business Court found that Philip Morris had improperly claimed excess Export Credits, carried forward from 2005 and 2006, on its 2013 and 2014 tax returns. Philip Morris appealed.
The Supreme Court reversed and remanded. The Court held that the use of “credit allowed” in subsections (b) and (c) was inconsistent and created an ambiguity. Considering the term’s technical use and understanding, the Court adopted an interpretation of “credit allowed” in subsection (c) as the amount of credit which may be claimed in a tax year. Employing the “whole text” canon, the Court determined the plain meaning of “credit allowed” in subsection (b) to be the amount of credit which may be generated in a tax year. Further, the Department’s current contrary position was inconsistent with its prior representations and actions, which Philip Morris was entitled to rely on.
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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 12/18/24
By: Ashley Oldfield and Austin Webber