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Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., 2023 NCBC 72 (N.C. Super. Ct. Oct. 18, 2023) (Davis, J.)
Key Terms: summary judgment; limited partnership; general partner; breach of limited partnership agreement; implied covenant of good faith and fair dealing; breach of fiduciary duty
This action involves a limited partnership dispute relating to Fayetteville Ambulatory Surgery Center Limited Partnership (“Fayetteville ASC”), which had Cape Fear Valley ASC as its General Partner and twelve Limited Partners, including Cape Fear Valley ASC, Cumberland County Hospital System, Village ASA, and Michael Woodcock. In April 2019, Cumberland County Hospital System conveyed, pursuant to a Contribution Agreement, its Limited Partner Units to Cape Fear Valley ASC and, pursuant to an Equity Purchase Agreement, purchased 100% of the equity of Cape Fear Valley ASC (the “April Transactions”). Thus, upon the completion of these transactions, Cumberland County Hospital System purported to own 100% of the equity of Cape Fear Valley ASC and to indirectly own 100% of the General Partner Units and approximately 44% of the Limited Partner Units of Fayetteville ASC. Woodcock filed suit alleging, inter alia, that the transactions violated Fayetteville ASC’s limited partnership agreement (the “LPA”). Defendants moved for summary judgment on all remaining claims and Woodcock moved for summary judgment on his breach of contract claim.
Woodcock contended that the April Transactions violated Sections 15.9 and 14.5 of the LPA. Section 15.9 prohibited any transaction which would result in any Limited Partner or any successor of a Limited Partner owning more than 20% of the stock of the General Partner or its affiliates. Woodcock argued that Section 15.9 prevented Cumberland County Hospital System, as a Limited Partner or as a successor to a Limited Partner, from acquiring more than 20% of the equity interest of Cape Fear Valley ASC. The Court rejected this argument. First, Cumberland County Hospital System was not a Limited Partner at the time it acquired the equity of Cape Fear Valley ASC since it had divested itself of its LP Units prior to the transaction. Second, it was not a successor to a Limited Partner because, even if it could exercise authority over the LP Units owned by Cape Fear Valley ASC, it was not the direct owner of the LP Units and thus it could not be said to have “stepped into the shoes” of Cape Fear Valley ASC. Accordingly, the Court determined that the April Transactions did not violate Section 15.9 of the LPA.
Section 14.5 of the LPA prohibited Cape Fear Valley ASC or its affiliates from engaging or investing in the business of a surgical center or related medical facility (a “Competitive Facility”) in areas from which Fayetteville ASC derived its business. Woodcock argued that Cumberland County Hospital System became an affiliate of Cape Fear Valley ASC through the April Transactions and thus could not compete against Fayetteville ASC by engaging in the business of a Competitive Facility. In response, Defendants argued that their hospitals do not compete with ambulatory surgical centers and thus there was no violation and, even if a violation did occur, the General Partner and the necessary two-thirds in interest of the Limited Partners had retroactively ratified the April Transactions. The Court was skeptical that the hospitals could not qualify as Competitive Facilities since they performed outpatient surgeries; however, it agreed with Defendants that the April Transactions had been properly ratified through a subsequent amendment and consent agreement. Accordingly, the Court granted summary judgment to Defendants on Woodcock’s breach of contract claim.
The Court also dismissed Woodcock’s claim for breach of the implied covenant of good faith and fair dealing since it was based on the same acts as his claim for breach of contract. Similarly, in light of the Court’s entry of summary judgment on Woodcock’s breach of contract claim, the Court granted Defendants summary judgment on Woodcock’s breach of fiduciary duty and declaratory judgment claims since they were based on the alleged invalidity of the April Transactions.
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Davis v. Davis Funeral Serv., Inc., 2023 NCBC 73 (N.C. Super. Ct. Oct. 25, 2023) (Conrad, J.)
Key Terms: breach of contract; unpaid wages; statute of limitations; unjust enrichment; quantum meruit; summary judgment
Plaintiff sued his former employer, Davis Funeral Service, and its officers, the Morgans and Tillman, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, quantum meruit, and unjust enrichment, all based on the company’s alleged failure to pay him his full wages beginning in 2018. Plaintiff also asserted a claim for defamation based on statements Tillman allegedly made after Plaintiff’s departure. Defendants moved for summary judgment on these claims.
The Court granted summary judgment in favor of the Morgans because the Morgans did not have any personal involvement in any alleged misconduct and officers are not liable for a corporation’s acts merely by virtue of their office.
The Court also granted summary judgment in Davis Funeral Service’s favor on the breach of contract claim to the extent it was based on failure to pay wages that became due beyond the three-year statute of limitations since each unpaid installment is its own breach subject to the statute of limitations.
The Court denied summary judgment on the unjust enrichment and quantum meruit claims as an express contract, or its terms, had yet to be established. The Court also denied summary judgment on the defamation claim as Davis Funeral Service had abandoned its arguments on this claim at the hearing.
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Cumberland Cnty. Hosp. Sys., Inc. v. Woodcock, 2023 NCBC Order 51 (N.C. Super. Ct. Oct. 24, 2023) (Davis, J.)
Key Terms: motion to amend complaint; Rule 15; uncontested
As summarized here, this case involves a dispute between the owners of Woodcock Custom Vision regarding the company’s management. Here, Plaintiff moved to file an amended complaint that adds a new defendant and asserts new claims, including various derivative claims. Defendants did not file any response to the motion and thus did not meet their burden of showing any basis for denial. Accordingly, the Court granted the motion to amend.
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Caliber Packaging & Equip., LLC v. Swaringen, 2023 NCBC Order 52 (N.C. Super. Ct. Oct. 25, 2023) (Earp, J.)
Key Terms: motion to amend; Rule 15; futility; summary judgment standard; Rule 12(b)(6) standard; North Carolina’s Electronic Surveillance Act, N.C.G.S. § 15A-287 et seq.
As summarized here, this case involves a dispute between Plaintiffs and their former employee who allegedly misappropriated trade secrets and other confidential information. During discovery, Plaintiffs produced two audio recordings of conversations between Defendant and third-parties which were recorded while Defendant was an employee. Defendant then moved to amend her answer to add a counterclaim for violation of North Carolina’s Electronic Surveillance Act, N.C.G.S. § 15A-287 et seq, which prohibits the willful interception of communications without the consent of at least one party to the conversation. Plaintiffs opposed the amendment on the grounds of futility and filed a supporting affidavit which contradicted Defendant’s proposed allegations. Although the Court acknowledged that a motion to amend could be denied on futility grounds due to the proposed claim being subject to summary judgment, the Court found that Plaintiffs had failed to demonstrate that were no genuine issues of material fact regarding the claim. In addition, the Court determined that Defendant had successfully pleaded a claim under the more commonly used Rule 12(b)(6) analysis. First, Defendant had alleged sufficient facts to show a reasonable expectation of privacy in her office where the conversations were recorded. Second, the Court disagreed with Plaintiffs’ contention that the recordings were justified and therefore not willful. Case law in which otherwise illegal interceptions were found to be justified turned on whether public safety was implicated, which was not at issue here. Accordingly, the Court granted the motion to amend.
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Davis v. Davis Funeral Serv., Inc., 2023 NCBC Order 53 (N.C. Super. Ct. Oct. 25, 2023) (Conrad, J.)
Key Terms: motion to amend complaint; motion for reconsideration; undue delay; prejudice
Plaintiff sought partial reconsideration of the Court’s previous order denying his motion to amend his complaint due to undue delay and futility. The Court denied the motion for reconsideration. Even though Plaintiff had “slimmed down” its proposed amendments and eliminated the futile claim, the amendments were still untimely (being submitted sixteen months after the original complaint had been filed, over two months after the close of discovery, and over one month since Defendant moved for summary judgment) and would cause Defendant substantial prejudice since they would double the size of the complaint, introduce a new theory of liability, and change the measure of damages.
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Howard v. IOMAXIS, LLC, 2023 NCBC Order 54 (N.C. Super. Ct. Oct. 30, 2023) (Earp, J.)
Key Terms: motion to seal; BCR 5; competitive advantage; confidential; public interest; relevance
This order addresses two motions to seal. Regarding the first, Defendant IOMAXIS filed (provisionally under seal) a transcript of a July 2020 telephone conference and a motion to seal the transcript in its entirety, arguing that information in the transcript would harm its competitive advantage, was confidential commercial information, and was irrelevant to the case. The Court denied the motion because 1) IOMAXIS did not specifically explain how disclosure would harm its competitive advantage or identify which portions, if disclosed, would result in harm, and 2) the public’s interest in disclosure was strong because the transcript contained discussion of various operating agreements and financial matters which were at issue in the case.
In the second, Plaintiffs sought leave to file under seal portions of their amended motion to appoint receiver and supporting materials, based on IOMAXIS’s designation of certain of the materials as confidential. IOMAXIS argued that the materials should remain sealed because they were not relevant to the motion or underlying claims. The Court disagreed, concluding that the materials were directly relevant to Plaintiffs’ fraud-based claims. Accordingly, the Court denied the motion, with the exception of one document which contained the financial terms of a sale.
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McKnight v. Wakefield Missionary Baptist Church, Inc., 2023 N.C. LEXIS 783, 2023 WL 6933326 (N.C. 2023) (per curiam)
Key Terms: appeal; affirmed; trade name infringement; permanent injunction; costs; N.C.G.S. §§ 6-1, 6-20; N.C.G.S. § 7A-305(d)
This suit involved, in part, a dispute between Wakefield Missionary Baptist Church, Inc. (“WMBC, Inc.”) and a number of estranged church members over the use of the name “Wakefield Missionary Baptist Church.” In February 2022, the Business Court entered an order granting summary judgment to WMBC, Inc. on its counterclaim for trade name infringement. It subsequently entered a permanent injunction and final order enjoining the estranged members from using the name Wake Missionary Baptist Church and an order awarding costs to WMBC, Inc., pursuant to N.C.G.S. §§ 6-1, 6-20, and 7A-305(d). The estranged members appealed from all three orders; however, the N.C. Supreme Court previously dismissed all issues arising from the summary judgment order. Here, the Court affirmed, per curiam, the permanent injunction and final order and the order awarding costs.
By: Ashley B. Oldfield
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 10/31/23
Karriker v. Harpoon Holdings, L.P., 2023 NCBC 67 (N.C. Super. Ct. Oct. 6, 2023) (Conrad, J.)
Key Terms: motion to strike; motion to seal; Rule 12(f)
Defendant moved to dismiss the complaint and then subsequently moved to either strike or seal a draft version of its Amended and Restated Limited Partnership Agreement which Plaintiff had attached as an exhibit in opposition to the dismissal motion. Before the Court ruled on the motion to dismiss, Plaintiff filed an amended complaint thereby mooting the motion to dismiss.
The Court denied the Rule 12(f) motion to strike because Rule 12(f) was inapplicable to the Draft LPA since the Draft LPA was not contained in any pleading, but rather was submitted as an exhibit in opposition to the motion to dismiss, and regardless, the Court never considered the document since the motion to dismiss was denied as moot.
The Court did, however, grant the motion to seal the Draft LPA based on Defendant’s argument that it contained sensitive information about employment and ownership incentives, investor rights, and internal corporate governance. Moreover, it was unlikely to be considered by the Court in the future as it had no bearing on disputed issues following the filing of the amended complaint, and, therefore, the public’s interest was negligible.
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Harris Teeter Supermarkets, Inc. v. Ace Am. Ins. Co., 2023 NCBC 68 (N.C. Super. Ct. Oct. 10, 2023) (Robinson, J.)
Key Terms: insurance coverage; opioid epidemic; Rule 12(b)(2); personal jurisdiction; Mallory v. Norfolk Southern Railway Co.; registration requirements; N.C.G.S. § 58-21-100; N.C.G.S. § 58-16-30; service of process; Commissioner of Insurance; Rule 12(b)(6); declaratory judgment action; forum shopping; N.C.G.S. § 1-75.12; discretionary stay
This lawsuit is primarily an insurance coverage dispute concerning whether Defendants, insurance companies that issued policies to Plaintiffs, owe coverage to Plaintiffs with respect to nearly 800 underlying lawsuits seeking damages related to injuries allegedly caused by Plaintiffs’ distribution and dispensing of opioid drugs. Plaintiffs are two Ohio entities (the “Kroger Plaintiffs”) and two North Carolina entities (the “Harris Teeter Plaintiffs”). Following the Ohio Supreme Court’s decision in September 2022 holding that governmental entities suing for alleged economic loss sustained by their citizens caused by the opioid epidemic were not seeking damages because of “bodily injury,” several of the insurers filed the Ohio Insurance Action seeking declarations that they were not required to provide coverage to the Kroger Plaintiffs for underlying opioid litigation. Shortly after, Plaintiffs filed the present action. Defendants moved to dismiss for lack of personal jurisdiction and under the North Carolina Declaratory Judgment Act and moved to stay the case.
The Court first addressed the motion to dismiss for lack of personal jurisdiction brought by the PJ Moving Defendants. Taking into consideration 1) the U.S. Supreme Court’s recent decision in Mallory v. Norfolk Southern Railway Co., which held that the Pennsylvania law at issue permitted Pennsylvania’s state courts to exercise general personal jurisdiction over a registered foreign corporation because the foreign corporation had submitted to suit there by completing the mandatory statutory registration procedures, and 2) North Carolina’s insurance statutes which set forth requirements for foreign insurance companies to be admitted and authorized to do business in North Carolina, the Court concluded that the exercise of personal jurisdiction over Defendants was proper. Regarding all of the PJ Moving Defendants except AXIS, the Court found that they had submitted to suit in North Carolina by completing the statutorily required registration procedures, including filing an instrument appointing the Commissioner of Insurance as their agent to accept service of process. Regarding AXIS, which the Court separately considered because it is a surplus lines insurance company subject to different licensing requirements than the other PJ Moving Defendants, the Court concluded that under N.C.G.S. § 58-21-100, surplus line insurers are subject to suit in North Carolina for causes of action arising in the state under any surplus lines insurance contract made by that insurer, so long as service of process is made upon the Commissioner pursuant to N.C.G.S. § 58-16-30. Because AXIS had designated the Commissioner as its agent for service of process in its policy and had, in fact, accepted service of process for the lawsuit through the Commissioner, it had consented to the exercise of general personal jurisdiction over it by North Carolina courts. Accordingly, the motion to dismiss for lack of personal jurisdiction was denied.
Defendants also argued that the action should be dismissed under Rule 12(b)(6) and pursuant to the Court’s discretionary authority to dismiss declaratory judgment claims under N.C.G.S. § 1-257 because the Kroger Plaintiffs’ filing of this action constituted forum shopping. As to the Kroger Plaintiffs, the Court agreed. The filing of the action appeared to be an attempt by them to avoid their home state of Ohio and adverse precedent there even though the Ohio Insurance Action addressed the same issues, was first filed, and remained pending. Thus, the Court granted the motion to dismiss as it related to the Kroger Plaintiffs. However, the Court disagreed as to the Harris Teeter Plaintiffs. The Harris Teeter Plaintiffs are at home in North Carolina and the determination of their rights under their insurance policies is not at issue in the Ohio Insurance Action, to which they are not a party. Thus, the motion to dismiss was denied as to the Harris Teeter Plaintiffs.
Lastly, Defendants sought a discretionary stay of the action pursuant to N.C.G.S. § 1-75.12 in favor of the Ohio Insurance Action. This motion was denied as moot with regards to the Kroger Plaintiffs since their claims were dismissed. As to the Harris Teeter Plaintiffs, the Court determined, after weighing the applicable Lawyers Mutual factors, that a stay was not warranted or reasonable. The Harris Teeter Plaintiffs’ election of home forum was entitled to great deference, North Carolina and its residents have a strong interest in having the suit decided here, and it was reasonably possible that the Court would have to apply North Carolina law. Based on these factors and the Defendants’ failure to show that continuing the case in North Carolina would work a substantial injustice on them, the Court denied the motion to stay.
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Mary Annette, LLC v. Crider, 2023 NCBC 69 (N.C. Super. Ct. Oct. 11, 2023) (Conrad, J.)
Key Terms: motion for summary judgment; quite title; real property; offensive summary judgment; conclusions of law; superior court judge; overrule; deeds; ambiguity; extrinsic evidence
This case arises out of disputes concerning the creation, ownership, and management of Plaintiff Mary Annette, LLC. Defendants moved for summary judgment on their quiet title claim, in which they contended that the Crider siblings’ transfer of certain real property parcels to Mary Annette transferred only the common area surrounding cabins and RV spots within the perimeter of tract C-4, not the cabins and RV spots themselves.
Prior to this case’s designation to the business court, Mary Annette was granted a preliminary injunction barring the Crider siblings from handling rentals on tract C-4. In ruling on the preliminary injunction, the superior court judge found that Mary Annette had purchased all cabins and RV spots within tract C-4 from the Crider siblings. Mary Annette therefore argued here that the Court was bound by the superior court judge’s order. The Court disagreed, concluding that the determination by the superior court judge regarding the ownership of the property was a finding of fact, which the Court was not bound by. Nevertheless, because the deed was ambiguous and there was conflicting extrinsic evidence regarding the Crider siblings’ intent, the Court denied the motion for summary judgment.
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Cone v. Blue Gem, Inc., 2023 NCBC 70 (N.C. Super. Ct. Oct. 13, 2023) (Earp, J.)
Key Terms: motion to dismiss; judicial dissolution; majority control; shareholders; corporate waste; C corporation; redemption; deadlock; taxes; breach of fiduciary duty; derivative claim; voluntary dismissal; bad faith; Rule 41; business judgment rule; prejudice
Plaintiffs, shareholders in a family-owned corporation, filed this action seeking a judicial dissolution of the business and asserting a derivative claim for breach of fiduciary duty. After Defendants moved to dismiss, Plaintiffs also filed a motion to dismiss without prejudice.
Pursuant to Rule 41(a) and absent any showing of bad faith by Plaintiffs in filing the dismissal, the Court granted the dismissal of the judicial dissolution claim without prejudice. However, the Court rejected Plaintiffs’ request that each side bear its own costs since Rule 41(d) mandates that a plaintiff dismissing under Rule 41(a) be taxed with the costs of the action.
The Court separately addressed the breach of fiduciary duty claim because N.C.G.S. § 55-7-45(a) requires court approval for dismissal of derivative claims. All parties agreed to dismissal; however, Defendants argued that any dismissal should be with prejudice because 1) Plaintiffs did not allege sufficient facts to show that they had complied with the pre-suit demand requirement and 2) the complaint lacked factual support for Plaintiffs’ conclusion that the individual defendants had acted in bad faith or in self-interest and therefore the business judgment rule controlled. The Court concluded that Plaintiffs had sufficiently alleged compliance with the demand requirement by attaching the derivative demand itself to the complaint. Nevertheless, the Court determined that Plaintiffs’ complaint failed to adequately allege facts to support their conclusory statements regarding the individual defendants. Thus, the Court granted Defendants’ motion and dismissed the claim with prejudice.
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Trail Creek Invs. LLC v. Warren Oil Holding Co., 2023 NCBC 71 (N.C. Super. Ct. Oct. 13, 2023) (Davis, J.)
Key Terms: motion to amend; second amended complaint; disclosure; fraud; environmental liabilities; civil conspiracy; indemnification; Rule 15; latent ambiguity; timeliness; futility; prejudice; relation back; statute of limitations
Having previously dismissed certain of Plaintiff’s claims without prejudice, the Court considered Plaintiff’s Renewed Motion for Leave to File Second Amended Complaint. Plaintiff sought first to replead its fraud and civil conspiracy claims with beefed-up allegations, including a more detailed list of the environmental regulations allegedly violated by Defendants, and second, to add allegations regarding a purported latent ambiguity in the purchase agreement at issue. Defendants opposed the amendments on the grounds of undue delay, prejudice, and futility.
Regarding the first group of proposed amendments, the Court found that there was no undue delay since the motion to amend was filed only forty-three days after the claims were dismissed. Further, the Court found that there was no prejudice resulting from the amendments because the claims were not new theories but had been pleaded in the original complaint. Lastly, the Court determined that the claims were not futile as they had been alleged with sufficient particularity and the Court could not make a definitive ruling at this time on whether the claims “related back” to the filing of the original complaint. Accordingly, the Court granted Plaintiff’s motion to amend as to its new claims for fraud and civil conspiracy and their accompanying allegations.
Regarding the second group of proposed amendments, Plaintiff sought to allege that the indemnification provisions at issue contained a latent ambiguity and therefore, parol evidence concerning the parties’ negotiations and contemporaneous understanding of the meaning of the provisions should be considered. However, because Plaintiff had not sought leave to allege an ambiguity in the purchase agreement until 356 days after the initial filing of the lawsuit and had previously taken a contrary position, the Court concluded that Plaintiff’s delay was excessive. The Court also concluded that Plaintiff had failed to show the existence of a latent ambiguity under North Carolina law. Thus, the motion was denied as to these amendments.
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Lafayette Vill. Pub, LLC v. Burnham, 2023 NCBC Order 48 (N.C. Super. Ct. Oct. 3, 2023) (Davis, J.)
Key Terms: voluntary dismissal; derivative claims; court approval; N.C.G.S. § 57D-8-04(a)
Pursuant to the North Carolina LLC Act, a plaintiff cannot dismiss or settle a derivative claim without the approval of the Court. Plaintiff here filed a notice of voluntary dismissal of its individual and derivative claims. The Court, on its own motion, ordered Plaintiff to file a motion to approve the dismissal of the derivative claims and supporting brief explaining why dismissal is in the best interest of the company.
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Chi v. N. Riverfront Marina & Hotel LLLP; Feng v. N. Riverfront Marina & Hotel LLLP, 2023 NCBC Order 49 (N.C. Super. Ct. Oct. 4, 2023) (Earp, J.)
Key Terms: motion to dismiss; unperfected appeal; interlocutory appeal; Appellate Rule 3; Appellate Rule 25; Rule 58; BCR 3.8; timely notice of appeal
After the Court entered an order partially granted Defendants’ motion to dismiss on July 27, 2023, certain of the Plaintiffs electronically filed notices of appeal on August 25, 2023, on the Business Court’s docket. However, none of the Plaintiffs ever filed a notice of appeal with the Clerk of Superior Court of New Hanover County, the county of venue. Defendants moved to dismiss the appeals, arguing that the notices of appeal were not timely filed with the clerk of court within thirty days after entry of the dismissal order in violation of Appellate Rule 3. The Court agreed and dismissed the appeals, finding that Appellate Rule 3 is jurisdictional and non-waivable and thus, failure to file a notice of appeal with the clerk of court of the county of venue within the time prescribed in Appellate Rule 3 is fatal to the appeal.
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Airtron, Inc. v. Bentley, 2023 NCBC Order 50 (N.C. Super. Ct. Oct. 5, 2023) (Conrad, J.)
Key Terms: motion to compel; discovery dispute; BCR 10.9; motion for sanctions; Rule 37(b); pro se litigant; judicial estoppel
Following several discovery conferences with the Court, a failed settlement agreement, and incomplete discovery responses from Defendant Heinrich, Plaintiff Airtron sought not only complete discovery responses but also an order shifting some of its attorney’s fees to Heinrich, striking his answer, and entering a default judgment against him. Airtron also requested that the Court enforce the parties’ settlement agreement based on principles of judicial estoppel.
The Court found that Heinrich’s responses to Plaintiff’s discovery requests were incomplete, his objections untimely and nonresponsive, and violative of the Court’s order to provide full and complete responses to Airtron’s interrogatories and document requests. Despite Heinrich’s deficient responses, the Court found his noncompliance was more likely due to his “unfamiliarity with civil litigation as a nonlawyer rather than truly willful disobedience” and declined to impose the severe sanctions of striking his answer and entering default judgment against him. The Court, however, did enter an order (1) requiring Heinrich to supplement his discovery responses; (2) permitting Airtron to depose Heinrich again following receipt of his supplemental responses; and (3) requiring Heinrich to reimburse Airtron for certain reasonable expenses that it incurred in preparing for and attending the discovery hearing on October 2, 2023.
Regarding the settlement agreement, the Court determined that pursuant to the terms of the agreement, it was rendered null and void by Heinrich’s failure to execute a confession of judgment. Thus, there was no settlement agreement for the Court to enforce.
By Rachel E. Brinson
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 10/17/23
Visionary Ed. Tech. Holdings Grp., Inc. v. Issuer Direct Corp., 2023 NCBC 65 (N.C. Super. Ct. Sept. 22, 2023) (Conrad, J.)
Key Terms: N.C. Gen. Stat. § 25-8-403; security transfer; appropriate person; standing; transfer agent; security registration
This action is a sister case to a case pending in Canada in which Fan Zhou, the majority shareholder of Visionary Education Technology Holdings Group, Inc., sued two former directors, You Bun Chan and Thomas Traves, for breach of contract and sought the return of Visionary’s shares which had previously been transferred to Chan and Traves. Zhou and Visionary filed the present case in North Carolina against Visionary’s transfer agent, Issuer Direct Corporation, seeking, first, an order barring Issuer Direct from removing restrictions on the shares and registering a transfer if and when Chan and Traves make such a request, and, second, a declaration that Issuer Direct cannot be liable to Chan and Traves for refusing to register a transfer.
The Court determined that Plaintiffs did not have standing to seek their requested relief under N.C. Gen. Stat. § 25-8-403. Section 25-8-403 allows an “appropriate person” to demand that an issuer’s transfer agent not register transfer of a security. “Appropriate person” is defined as the security’s registered owner. Because Visionary Education and Zhou were not the registered owners of the shares at issue, they did not have standing to seek relief under N.C. Gen. Stat. § 25-8-403, and, therefore, the Court did not have jurisdiction to grant such relief. The Court dismissed the complaint without prejudice. The Court did not rule on whether an issuer could enforce restrictions on share transfers through other contractual or statutory means.
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Husqvarna Pro Prods., Inc. v. Robin Autopilot Holdings, LLC, 2023 NCBC 66 (N.C. Super. Ct. Sept. 22, 2023) (Bledsoe, C.J.)
Key Terms: motion to dismiss; Rule 12(b)(6); Rule 12(h)(3); declaratory judgment; actual case or controversy; non-competition agreement; operating agreement; anticipatory breach
Husqvarna Products (collectively with Husqvarna Business, the “Husqvarna Parties”) specializes in outdoor power equipment, including robotic lawnmowers. Robin Autopilot (collectively with Robin Technologies, the “Robin Parties”) sells or rents robots to subscribers. Seeking to form a business relationship, Husqvarna Products and Robin Technologies entered into a non-disclosure agreement, followed by Robin Autopilot and Husqvarna Business entering into the Original Admission Agreement, whereby the Husqvarna Parties would contribute capital and robotics, parts, and accessories to Robin Autopilot through a separate Supply Agreement, and, in return, Husqvarna Business would be admitted as a member of Robin Autopilot and permitted to fill one seat on Robin Autopilot’s board of managers. The Original Admission Agreement included a non-solicitation provision, which prohibited Husqvarna from soliciting two businesses for a certain period. Robin Autopilot subsequently entered into an Amended Operating Agreement which allowed its members to engage in competitive business ventures. Following certain disputes, the Husqvarna Parties and the Robin Parties entered into a Settlement Agreement, and Husqvarna Business and Robin Autopilot entered into an Amended Admission Agreement and a Note Purchase Agreement.
The dispute underlying this litigation arose when Husqvarna Products began pursuing sales of its robotic products to professional users directly. After Robin Autopilot’s CEO sent a memo to the Husqvarna Parties objecting to this practice, the Husqvarna Parties filed suit against the Robin Parties and certain of Robin Autopilot’s members (the “Member Defendants”), asserting claims for a declaratory judgment regarding the parties’ rights under the various agreements; anticipatory breach of the Settlement Agreement and Note Purchase Agreement; and breach of the Supply Agreement. Robin Technologies and the Member Defendants moved to dismiss pursuant to Rules 12(b)(6) and 12(h)(3).
The Court first addressed Plaintiffs’ claims for a declaration that the Admission and Operating Agreements did not restrict their right to sell their products directly to third-parties. The Member Defendants and Robin Technologies contended that because they were not signatories to either agreement and their interests were unaffected by the declarations sought, the “actual case or controversy” requirement for a declaratory judgment action was not met and the claims should be dismissed. The Court agreed as to the Admission Agreements as a declaration of rights under those agreements would not impact any interests of the Member Defendants or Robin Technologies. That the Member Defendants disagreed with the Husqvarna Parties’ position was irrelevant because a mere difference of opinion does not constitute a controversy under the Declaratory Judgment Act. The Court also agreed that with respect to the Operating Agreement, the claim should be dismissed against Robin Technologies because it was not a member of Robin Autopilot and thus had no rights under the Operating Agreement. However, the Court disagreed with regard to the Member Defendants, since as members of Robin Autopilot, a determination of Husqvarna Business’s rights to compete under the Operating Agreement would necessarily determine the Member Defendants’ rights to compete as well.
Turning to the other agreements, the Court dismissed the declaratory judgment claims against Robin Technologies relating to the Supply Agreement and the Note Purchase Agreement as Robin Technologies was not a party to either and had no interests thereunder. The motion was denied, however, with respect to the Settlement Agreement, as Robin Technologies was a signatory to, and had continuing obligations under, the agreement.
Lastly, Robin Technologies sought dismissal of the claim for anticipatory breach of the Settlement Agreement, contending that since the claim was based on the memo from Robin Autopilot’s CEO, it did not show a refusal to perform by Robin Technologies. The Court disagreed. The complaint alleged that the memo’s author was the CEO of both companies, that Robin Technologies’ watermark appeared throughout the memo, and that the memo’s signature line identified the author as “CEO | Robin Technologies.” These allegations were sufficient at the 12(b)(6) stage to show that the memo was sent on behalf of both companies.
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Cutter v. Vojnovic, 2023 NCBC Order 45 (N.C. Super. Ct. Sept. 20, 2023) (Bledsoe, C.J.)
Key Terms: BCR 10.9; discovery dispute; discovery period; deposition; BCR 10.4
This order addresses a Business Court Rule 10.9 dispute. Plaintiff noticed a 30(b)(6) deposition of Defendant for February 2023. All parties appeared, but rather than taking the deposition, Plaintiff opted to engage in settlement negotiations. The discovery period expired in March with neither side seeking an extension. After settlement negotiations failed, Plaintiff served an amended notice for a 30(b)(6) deposition of Defendant. Defendant objected, contending that the notice was untimely and improper. Plaintiff responded that the parties had agreed to reconvene the deposition if settlement negotiations were unsuccessful.
The Court denied Plaintiff’s request to take the deposition and struck the notice. Although parties may agree to conduct discovery after the discovery deadline, BCR 10.4(d) prohibits the Court from entertaining a motion to compel or a motion for sanctions in connection with that discovery unless the parties have sought an order allowing the discovery.
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Truist Fin. Corp. v. Rocco, 2023 NCBC Order 46 (N.C. Super. Ct. Sept. 20, 2023) (Bledsoe, C.J.)
Key Terms: Rule 15(a); amendment as of right; responsive pleading; motion to dismiss
This order addresses whether Rule 15(a) precludes a plaintiff’s amendment as of right after any defendant files a responsive pleading. Plaintiffs had filed suit against Colliers Mortgage Holdings, LLC and certain Executives previously employed by Plaintiffs. Both Colliers and the Executives moved to dismiss; however, the Executives also filed an answer. Plaintiffs then filed an amended complaint as of right against Colliers, while simultaneously seeking leave to amend against the Executives (and asking for leave to amend against Colliers if the Court determined that they could not amend as of right). Colliers challenged Plaintiffs’ right to amend as of right.
While noting that federal courts have often reached a contrary conclusion, the Court determined that under North Carolina precedent, a plaintiff’s right to amend is cut off after any defendant files a responsive pleading. Accordingly, Plaintiffs’ amended complaint was void and without legal effect because Plaintiffs’ right to amend as of right was cut off by the Executives’ filing of an answer. Nevertheless, the Court ruled that in the interests of judicial efficiency and economy, the motion to amend was granted as to all Defendants, without prejudice to Defendants’ right to seek dismissal under Rule 12. The motions to dismiss the original complaint were denied as moot.
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Anderson v. Beresni, 2023 NCBC Order 47 (N.C. Super. Ct. Sept. 22, 2023) (Davis, J.)
Key Terms: Nonprofit Corporation Act; N.C. Gen. Stat. § 55A-7-40(d); derivative action; settlement; consent motion to approve settlement and dismissal; property owners association
Plaintiffs, members of a property owners association operating under North Carolina’s Nonprofit Corporation Act, had brought a derivative action against current and former members of the association’s board of directors and the declarant asserting that the board had failed to invoice the declarant for lot assessments allegedly owed. After reaching a settlement agreement, the parties, pursuant to N.C. Gen. Stat. § 55A-7-40(d), sought approval from the Court of the settlement and dismissal of the derivative claims.
The Court noted that the balancing factors typically applied to approval of the settlement of derivative claims in the context a for-profit corporation—balancing 1) any legitimate corporate claims against 2) the corporation’s best interests—were equally applicable to a non-profit corporation. Applying these factors and noting the risk, uncertainty, and significant expense of continued litigation, the Court granted the motion, determining that the proposed settlement was in the best interest of the association and its members, and was fair, reasonable, and adequate in all respects.
By: Natalie E. Kutcher
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 10/03/23
North Carolina ex rel. Stein v. MV Realty PBC, LLC, 2023 NCBC 59 (N.C. Super. Ct. Aug. 30, 2023) (Davis, J.)
Key Terms: homeowner; listing agreement; preliminary injunction; House Bill 422; N.C.G.S. § 93A-85.2; covenant running with the land; UDTPA; liquidated damages; unenforceable penalty; notice of lis pendens; lien
The Attorney General brought suit against MV Realty asserting statutory claims for unfair or deceptive trade practices, unlawful telephone solicitation practices, unfair debt collection practices, and usurious lending practices, all based on the Homeowner Benefit Agreement (“HBA”) program which MV Realty markets to North Carolina homeowners. Under the program, MV Realty offers homeowners an immediate cash payment in exchange for the homeowners entering into an HBA, which grants MV Realty the exclusive right to serve as the homeowner’s listing agent if they decide to sell their home. Under the terms of the HBA, the agreement is binding on the homeowner and their heirs for forty years and, if breached, entitles MV Realty to an Early Termination Fee (“ETF”) of 3% of the fair market value of the home. The HBA further provides that its obligations constitute covenants running with the land and any amounts owed thereunder due to breach are secured by a security interest in and lien against the home. The State sought a preliminary injunction and submitted various exhibits in support thereof, including fourteen affidavits by homeowners claiming to have been misled by the program.
The Court began by noting that the newly enacted N.C.G.S. § 93A-85.2, which effectively prohibits MV Realty from entering into new HBAs with North Carolina homeowners going forward, did not govern the Court’s determination of whether the State was entitled to an injunction regarding MV Realty’s enforcement of existing HBAs. Turning to the State’s arguments, the Court first determined that the State had shown a reasonable likelihood of success on the merits regarding its argument that the ETF was an unlawful, and therefore unenforceable, penalty. Second, the Court found that the State was likely to succeed on its UDTP claim as to those aspects of the HBA program which created a cloud on the title of homeowners, namely the recordation of a memorandum of the HBA and the filing of a notice of lis pendens. Third, the Court concluded that the State had shown a likelihood of success on its claim that the MV Realty program possessed a capacity to deceive, and had in fact deceived, homeowners because the HBA did not sufficiently put homeowners on notice regarding a potential lien or the ramifications of recordation of the memorandum, which in any event was likely unlawful. For all of these reasons, the Court concluded that even under previous North Carolina law, the State was entitled to a preliminary injunction because it had adequately shown a likelihood of success on the merits of its UDTP claim and that the act or practice complained of adversely affected the public interest.
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United Therapeutics Corp. v. Liquidia Techs., Inc., 2023 NCBC 60 (N.C. Super. Ct. Aug. 31, 2023) (Earp, J.)
Key Terms: motion to reconsider; Rule 54(b); clear error; motion to amend; undue delay; unfair prejudice
In a previous opinion, discussed here, the Court granted in part and denied in part Plaintiff’s motion to amend its complaint a second time. Plaintiff moved the Court to reconsider its ruling and permit Plaintiff to amend its complaint to add a declaratory judgment claim with respect to Defendant Roscigno’s employment agreements.
Rejecting Plaintiff’s argument that amendment should always be allowed unless some material prejudice is demonstrated, the Court denied the motion. Plaintiff had offered no reasonable explanation for its delay in asserting the new declaratory judgment claim. Moreover, as the Court had previously found, the proposed claim would increase the stakes of the litigation and likely require additional discovery, thereby unfairly prejudicing Defendants.
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Gvest Real Est., LLC v. JS Real Est. Invs., LLC, 2023 NCBC 61 (N.C. Super. Ct. Sept. 12, 2023) (Conrad, J.)
Key Terms: summary judgment; declaratory judgment; corporate records; moot; fiduciary duty; majority member; fraudulent inducement; alter ego liability; punitive damages; UDTPA; in or affecting commerce; capital raising
In this dispute arising from a business relationship gone bad, the three members of Yards at NoDa, LLC, with Gvest on one side and JS Real Estate and TR Real Estate on the other, asserted competing claims relating to corporate governance issues, breach of fiduciary duties, and fraud. Both sides moved for summary judgment.
Defendants’ Motion for Summary Judgment
Gvest’s Claim for Declaratory Judgment. Gvest sought a declaratory judgment that it was the sole member of Yards at NoDa due to JS Real Estate’s and TR Real Estate’s previous attempts to transfer their membership rights. However, since Gvest had not offered any evidence to show that the requirements of Yards at Noda’s operating agreement to transfer membership had been satisfied, any attempted transfer was null and void. Accordingly, the Court granted summary judgment to Defendants on this claim.
Gvest’s Demand for Corporate Records. The Court dismissed as moot Gvest’s claims seeking to enforce its contractual and statutory rights to corporate records because the evidence showed that Gvest had already received all requested documents.
Gvest’s Claims for Breach of Fiduciary Duty and Constructive Fraud. Rejecting Gvest’s argument that JS Real Estate’s and TR Real Estate’s collective ownership of 75% of Yards at NoDa created a fiduciary duty owed to Gvest as the minority member, the Court concluded that Gvest had not shown a genuine issue of material fact regarding the existence of a fiduciary relationship and therefore granted summary judgment to Defendants on these claims.
Gvest’s Claims for Fraudulent Inducement and Negligent Misrepresentation. The Court granted Defendants summary judgment on these claims because Gvest failed to come forth with evidence to controvert Defendants’ evidence that the alleged misrepresentations were, in fact, true and that Gvest had not reasonably relied on any misrepresentation.
Gvest’s Claims for Alter Ego Liability and Punitive Damages. Because summary judgment had been entered on all of Gvest’s other claims, the Court also entered summary judgment on Gvest’s claims for alter ego liability and punitive damages since neither can stand alone.
Gvest’s Motion for Summary Judgment
Defendants’ Claim for Breach of Fiduciary Duty. The Court granted Gvest summary judgment on this claim as to all Defendants except Yards at NoDa. Regarding Yards at NoDa, a genuine issue of material fact existed as to whether Gee (Gvest’s principal), as the alter ego of Gvest, acted in bad faith or was grossly negligent in his duties as manager.
Defendants’ Claim for Fraudulent Inducement. The Court denied Gvest summary judgment on Defendants’ claim that Gvest had fraudulently induced them to invest in Yards at NoDa. Although the Court agreed with Gvest that some of Defendants’ allegations could not form the basis of the claim, it declined to consider Gvest’s arguments regarding other allegations because Gvest failed to make the arguments in its opening brief.
Defendants’ Claim for Unfair or Deceptive Trade Practices. The Court granted Gvest summary judgment on this claim because the alleged misconduct involved raising capital for Yards at NoDa and was therefore not in or affecting commerce.
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Mauck v. Cherry Oil Co., 2023 NCBC 62 (N.C. Super. Ct. Sept. 15, 2023) (Davis, J.)
Key Terms: summary judgment; breach of fiduciary duty; put/call provision; shareholders’ agreement; breach of contract; notice of shareholders’ meeting; N.C. Gen. Stat. § 55-1-41(c)
This action concerns a dispute among family members over the management and future direction of their business, Cherry Oil. Plaintiffs, the minority shareholders, alleged that the Cherrys, the majority shareholders, had engaged in various misconduct in the management of Cherry Oil. During the course of the dispute, Cherry Oil called the shares of Plaintiffs pursuant to the put/call provision in the Shareholders’ Agreement. After a number of Plaintiffs’ claims were dismissed at the Rule 12(b) stage, Defendants moved for summary judgment on Plaintiffs’ remaining claims and asked for the Court to supervise the process for finalizing the purchase of the Plaintiffs’ shares.
Breach of Fiduciary Duty. The Court had previously determined that the Cherrys, as majority shareholders, owed a fiduciary duty to the Plaintiffs, as minority shareholders. Here, however, the Court determined that the Plaintiffs had failed to offer sufficient evidence regarding breach of that duty to survive summary judgment. Based on the protections of the put/call provision in the Shareholders’ Agreement, the Court rejected the Plaintiffs’ argument that taking away their management roles within Cherry Oil frustrated their reasonable expectations. The Court also determined that any actions taken by Defendants relating to the Plaintiffs’ status as employees or officers could not serve as the basis for a breach of fiduciary duty claim arising from the Plaintiffs’ status as minority shareholders. Finally, the Court concluded that there was insufficient evidence in the record to support the Plaintiffs’ assertions that Defendants had hid corporate records, improperly refused to issue a dividend, and relied on the Plaintiffs’ personal guaranties without permission. Accordingly, the Court granted Defendants’ summary judgment on this claim.
Breach of Contract. The Plaintiffs initially alleged that Defendants breached the Shareholders’ Agreement by failing to take the steps necessary to close the purchase of their shares under the put/call provision. However, in opposing summary judgment, the Plaintiffs contended that their breach of contract claim was actually based on no valid call vote ever taking place due to a failure to provide sufficient notice of the meeting and the failure to establish a price prior to the call. The Court concluded that the claim failed on any of those theories. First, the record showed that it was the Plaintiffs, not the Defendants, who were primarily responsible for any lack of progress on closing the transaction. Second, the Court concluded that notice of the shareholders meeting was sufficient because N.C. Gen. Stat. § 55-1-41(c), which provides that written notice is effective when deposited in the mail, superseded the provision in Cherry Oil’s bylaws that notice was not effective unless delivered not less than ten days before the meeting. Third, the Court determined that the language of the Shareholders’ Agreement did not support the Plaintiffs’ argument that the valuation of their shares was a condition precedent to the call vote. Accordingly, the Court granted Defendants’ summary judgment on this claim.
Motion for Supervision. Acknowledging that it would eventually need to resolve the parties’ dispute regarding the call process, the Court deferred ruling on the motion for supervision to allow the parties to submit new briefs now that the motion for summary judgment had been decided.
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Spivey v. Smith, 2023 NCBC 63 (N.C. Super. Ct. Sept. 18, 2023) (Earp, J.)
Key Terms: judgment on the pleadings; Rule 12(c); breach of fiduciary duty; reverse veil piercing; fraud; Rule 9(b); constructive fraud; statute of limitations; discovery rule; standing; Rule 12(b)(1); Barger exceptions; marital trust; constructive trust
This action involves a dispute between Plaintiff Spivey and the co-owner of Spivey’s late husband’s trucking business. Spivey is the widow of Thomas Spivey, who founded Inman Trucking, Inc. At some point in the company’s history, Thomas Spivey hired Defendant Smith. In 1984, Thomas Spivey formed Inman Management, Inc., an entity that retains ownership of the trucks used by Inman Trucking. Spivey is the sole owner of a company called KS Transportation, LLC, which owns one truck. Smith is the sole owner of a company called Desparado, Inc. Upon Thomas Spivey’s death, Spivey inherited 75% of Inman Management through a marital trust, while Smith owned the remaining 25%. During the last years of Thomas Spivey’s life, Smith took over operations of Inman Trucking and Inman Management. Following Thomas Spivey’s death, Smith formed Inman Transportation, LLC, which was owned by Smith (51%) and Spivey (49%). Spivey alleges that Smith took steps to seize control of the businesses and render her ownership interests worthless. Additionally, Spivey alleges that Smith either used KS’s truck without paying KS, or refused to use the truck to damage Spivey, its sole owner. Spivey also alleges that Smith siphoned off Inman Management’s assets to Desparado. Kathy Spivey and KS Transportation filed suit against Smith, the Inman entities, and Desparado, alleging breach of fiduciary duty and fraud against all parties. Defendants moved for judgment on the pleadings and dismissal for lack of standing.
Breach of Fiduciary Duty. The Court summarily granted the motion for judgment on the pleadings as to the breach of fiduciary duty claims by KS against the Inman entities, as the complaint did not allege that these entities owed KS a fiduciary duty. The Court also granted the motion as to the claims by Spivey against the Inman entities, on the basis that a corporation does not owe fiduciary duties to its shareholders, nor do managers or officers of an LLC owe a fiduciary duty to the LLC’s members. However, the Court denied the motion as to Spivey’s breach of fiduciary duty claim against Smith with regards to Inman Management. The Court concluded that despite the fact that Smith was the minority shareholder, the facts alleged regarding Smith’s control and Spivey’s poor health were sufficient to show a de facto fiduciary relationship at this stage. Spivey’s claim against Smith with regards to Inman Transportation also survived because the complaint sufficiently alleged that Smith was in control of the company based on his majority voting interest and management position. Lastly, the Court addressed Spivey’s attempt to assert a breach of fiduciary duty claim against Desparado based on a reverse veil piercing theory. The Court concluded that Spivey failed to allege any of the factors North Carolina courts consider when determining whether a party has enough control to pierce the corporate veil. Thus, the motion was granted as to Desparado.
Fraud. The Court granted the motion as to Plaintiffs’ claim for affirmative fraud, as the complaint’s allegations failed to meet the heightened pleading standard required under Rule 9(b). The Court also granted the motion as to KS’s claim for fraudulent concealment against Smith, as KS failed to allege that Smith owed it a duty to disclose. However, the Court denied the motion as to Spivey’s fraudulent concealment claim against Smith, as Spivey sufficiently alleged that Smith had a duty to disclose as a fiduciary and had prevented her from discovering fraudulent conduct to her detriment.
Statute of Limitations. Defendants challenged Plaintiffs’ claims on the basis that the suit was filed after the statute of limitations had run. The Court rejected this argument, as the discovery rule applied to both the fiduciary duty and fraud claims, pursuant to which the statute of limitations did not begin to run until Spivey knew, or should have known, that her rights had been violated. In addition, the Court determined that Spivey had sufficiently alleged a constructive fraud claim, even though not labelled as such, which was subject to a ten-year statute of limitations.
Standing. Pursuant to Rule 12(b)(1), Defendants challenged Spiveys’ standing to bring claims: (1) directly, versus derivatively; and (2) as the beneficiary of a marital trust. The Court held that Spivey possessed standing to sue directly, rather than derivatively, because she alleged a breach of fiduciary duty as well as a harm that is separate and distinct from that suffered by other shareholders. Secondly, the Court held that the complaint’s allegations support the conclusion that Spivey has standing to sue as the real party in interest, as she claims to be “a majority owner by virtue of a marital trust.” The complaint also lacked any allegation that a third-party trustee controlled her interest at any time.
Constructive Trust. Lastly, the Court granted Defendants’ motion to dismiss Spivey’s claim for a constructive trust, as a constructive trust is a remedy, not a claim.
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Wright v. LoRusso, 2023 NCBC 64 (N.C. Super. Ct. Sept. 19, 2023) (Conrad, J.)
Key Terms: summary judgment; minority member; majority member; derivative claim; limited liability company; operating agreement; fraud; negligent misrepresentation; breach of contract; breach of fiduciary duty
Cinch.Skirt and its minority members asserted more than a dozen direct and derivative claims against the LLC’s majority member and manager based on her alleged abuse of her positions. Defendant moved for summary judgment on some, but not all, of Plaintiffs’ claims.
Unjust Enrichment and Punitive Damages. – The Court summarily denied summary judgment on Plaintiffs’ claims for unjust enrichment and punitive damages because the Defendant’s brief did not address those claims.
Fraud and Negligent Misrepresentation. – These claims, based on allegations of self-dealing and misuse of company funds, were brought both as derivative and direct claims. In her opening brief, Defendant challenged the allegation that she improperly paid herself a distribution by presenting deposition testimony from Plaintiffs in which they admitted that she legitimately earned the payment. Because Plaintiffs failed to provide contradictory evidence or controvert Defendant’s characterization of their testimony, the Court found no genuine issue of material fact regarding the payment, and granted Defendant’s motion to the extent that the claims were based on the payment. The Court declined to consider additional arguments raised in Defendant’s reply brief and therefore denied the motion as to these claims in all other respects.
Breach of Contract – Plaintiffs asserted direct and derivative claims for numerous breaches of the purchase agreement, the operating agreement, and certain oral agreements. Regarding the purchase agreement, the Court agreed with the Defendant that since she was not a party to the agreement, having only signed it as a representative of the LLC, she could not be held liable for any breach. Regarding the operating agreement, the Court denied the motion as to the breaches which Defendant failed to address beyond a single conclusory sentence. As to an alleged breach related to the termination of Plaintiff Stansell from his position with the LLC, the Court found that there was an issue of fact as to Stansell’s role at the company and whether Defendant had the unilateral authority to terminate him. Accordingly, the Court denied the motion as to this breach as well. Regarding breaches of two “oral agreements” made at member meetings, Defendant argued the agreements were invalid due to a provision of the operating agreement which prohibited oral operating agreements. The Court was unpersuaded because Defendant did not explain why the agreements were not permissible member actions, and, in any event, some evidence existed that the agreements had been memorialized in writing. Thus, the Court denied the motion as to the oral agreements.
Breach of Fiduciary Duty – Defendant moved for summary judgment on both the direct and derivative claims for breach of fiduciary duty; however, because Defendant did not brief the derivative claim, the Court denied the motion as to it. As to the direct claim, the Court agreed with Defendant that she did not owe a fiduciary duty to the Plaintiffs, who were minority members. Although Defendant held a numerical majority interest, she did not have a controlling interest due to various protections in the operating agreement. Similarly, her position as manager did not create a fiduciary duty due to the safeguards in the operating agreement. Accordingly, the Court granted the motion as to the direct claim for breach of fiduciary duty.
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Caliber Packaging & Equip., LLC v. Swaringen, 2023 NCBC Order 42 (N.C. Super. Ct. Sept. 8, 2023) (Earp, J.)
Key Terms: subpoena duces tecum; Rule 45; motion to quash; motion for a protective order
Plaintiffs and its former affiliate Prism are competitors in the industrial packaging industry. After the entities parted ways, Plaintiffs sued Defendant Swaringen, a former employee, for taking their trade secret information allegedly with the purpose of using it to entice prospective employers, including Prism. In response to a subpoena duces tecum served on it, Prism objected and moved to quash and for a protective order.
Prism first argued that the requests were unduly burdensome because Plaintiffs had not exhausted other means of obtaining the information and because of the effort required to respond. The Court determined that since the other potential sources of information were adverse to Plaintiffs, or potentially unreliable, Plaintiffs should not be required to exhaust other sources of information before seeking it from Prism. Prism also failed to show that responding to the requests would unduly burden it with regards to time, effort, or expense; however, the Court found that the burden on Prism to produce certain confidential business information outweighed Plaintiffs’ need for the information, at least on the present record.
Prism also argued that the requests were irrelevant to the case and were instead being sought for use in pending litigation in Illinois. The Court rejected this argument, finding that the requests were reasonable given the factual allegations.
Lastly, Prism argued that because it had entered into a joint defense agreement with Swaringen, certain requested documents, namely documents regarding the payment of Swaringen’s legal fees and any indemnity agreements, were protected by the attorney-client privilege or the work product doctrine. Noting that fee agreements are not automatically protected by attorney-client privilege, the Court advised that should Prism take the position that content within a joint defense agreement was privileged, it would need to produce a privilege log.
Accordingly, the Court denied Prism’s motion except with respect to the requests that sought confidential business information.
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North Carolina ex rel. Stein v. MV Realty PBC, LLC, 2023 NCBC Order 43 (N.C. Super. Ct. Sept. 18, 2023) (Davis, J.)
Key Terms: preliminary injunction; homeowner benefit agreement; early termination fee; termination of memoranda; cancellation of lis pendens
On August 30, 2023, the Court granted the State’s motion for a preliminary injunction but deferred setting out the specific terms of the injunctive relief to allow the parties an opportunity to submit proposed orders and supporting briefs. This order sets out the terms of the relief as follows: Defendants are immediately enjoined from 1) recording any memorandums of HBAs entered into prior to August 24, 2023; 2) asserting that MV Realty holds a valid lien or other interest based on an HBA; 3) recovering any ETF or penalty relating to an HBA; 4) filing or indexing a lis pendens on any property subject to an HBA; and 5) commencing or continuing any legal action to enforce an ETF or interest arising from an HBA. The Court further ordered that the Defendants shall record terminations of any memoranda filed on properties based on an HBA and file cancellations of all lis pendens filed on properties based on an HBA.
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Found. Bldg. Materials, LLC v. Conking & Calabrese, Co., 2023 NCBC Order 44 (N.C. Super. Ct. Sept. 19, 2023) (Earp, J.)
Key Terms: temporary restraining order; emergency relief; speculation; expedited discovery
On July 10, 2023, Defendants answered Plaintiff’s complaint against them and filed counterclaims and a third-party complaint. On September 15, Defendants moved for a temporary restraining order and a preliminary injunction, and sought expedited discovery.
The Court denied the TRO motion, because 1) Defendants’ several-month delay in seeking relief undercut their claim that there was an immediate need for emergency relief; and 2) their affidavits did not provide a sufficient evidentiary basis for a TRO because they were based on speculation and hearsay. The Court also denied Defendants’ motion for expedited discovery finding that there was no justification for expediting discovery based on the record currently before the Court.
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Value Health Solutions, Inc. v. Pharmaceutical Research Assoc., Inc., 2023 N.C. LEXIS 585, 2023 WL 5658848 (N.C. 2023) (Barringer, J.)
Key Terms: negligent misrepresentation; Rule 9(b); heightened pleading; fraud; 12(b)(6); summary judgment; APA; implied covenant of good faith and fair dealing; UDTPA; aggravating circumstances; motion to amend; discovery dispute; BCR 10.9; dissent
Plaintiff VHS is a software company, founded by Plaintiff Parthasarathy, which developed software applications for use in the clinical trial process. Defendants entered into an asset purchase agreement to acquire the software, under which additional contingent payments would be made if certain milestones were met. Following a dispute regarding payments under the APA, Plaintiffs brought suit alleging breach of the APA and various fraud-based claims. After all claims were disposed of, Plaintiffs appealed to the North Carolina Supreme Court from several orders of the Business Court.
12(b)(6) Dismissals. The Court first addressed the order dismissing Plaintiffs’ fraud- and misrepresentation-based claims. The fraud by omission and promissory fraud claims were properly dismissed because, although briefed, they were not pleaded in the amended complaint. The pre-APA fraud and fraudulent inducement claims were also properly dismissed because the amended complaint did not specify the time, place, and content of the misrepresentations, or who specifically made them. Finally, the Court agreed with the line of decisions from both the Business Court and North Carolina’s federal courts that negligent misrepresentation claims must meet the heightened pleading standard of Rule 9(b). Since Plaintiffs had failed to do so, this claim was properly dismissed as well.
Summary Judgment. Turning to the trial court’s order granting summary judgment to Defendants on Plaintiffs’ claims for breach of the APA, the Court, applying Delaware law, affirmed in part and reversed in part. The Plaintiffs had claimed that Defendants breached the implied covenant of good faith and fair dealing by failing to reasonably determine completion of certain milestones set forth in the APA. The Court, however, affirmed summary judgment in this regard because there was no “contractual gap” regarding these milestones and thus the implied covenant was inapplicable. Nonetheless, the Court reversed with regard to breach of other express provisions, finding that there was a genuine issue of material fact.
As to Plaintiffs’ claims of intentional misrepresentation and fraudulent inducement based on representations made in the LOI, the Court affirmed summary judgment in favor of Defendants because the LOI was non-binding, contemplated a more complete future agreement, and expressly disclaimed any reliance on its contents. The Court also affirmed summary judgment in Defendants’ favor on Plaintiffs’ claims of intentional misrepresentation and fraudulent inducement based on PRA’s post-APA statements regarding possible amendments to the APA. Although the parties did not ultimately reach an agreement regarding the amendments, Plaintiffs failed to present sufficient evidence that PRA knew the statements were false at the time they were made. Finally, the Court affirmed summary judgment in favor of Defendants on Plaintiffs’ UDTPA claims which alleged that Defendants violated the UDTPA by negotiating the APA under false pretenses, interfering with the APA milestones, and terminating Parthasarathy’s employment. The Court agreed with the trial court that there was insufficient support for a finding of “substantial aggravating circumstances” to elevate any breach of contract to an unfair trade practice or of egregious conduct to overcome the presumption against UDTPA claims in an employer-employee context.
Motion to Amend. The Court affirmed the trial court’ denial of Plaintiffs’ second motion to amend the complaint, concluding that the trial court had plentiful justification for denying the motion, including that the Plaintiffs had previously amended their complaint, the amendment contained extensive revisions, discovery had closed, and the parties had already fully briefed the motion to dismiss the first amended complaint.
Discovery. Lastly, the Court addressed Plaintiffs’ discovery request, which the trial court had found unduly burdensome. The Court affirmed, rejecting Plaintiffs’ argument that the trial court had improperly converted their emailed request for assistance with a discovery dispute pursuant to BCR 10.9 into a motion to compel. The Court noted, however, that given the Court’s partial reversal of the summary judgment order, additional discovery may be necessary on remand.
Dissent in Part. Two Justices dissented in part with regards to the applicability of Rule 9(b) to negligent misrepresentation claims and the applicability of the implied covenant of good faith and fair dealing to the breach of contract claims.
By: Natalie E. Kutcher, Rachel E. Brinson, and Ashley B. Oldfield
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 09/20/23
Atkinson v. Lexington Cmty. Ass’n, 2023 NCBC 58 (N.C. Super. Ct. Aug. 16, 2023) (Conrad, J.)
Key Terms: Planned Community Act; motion for judgment on the pleadings; Rule 12(c); declaratory judgment; declaration; standing; third-party complaint; moot
After being sued in a dispute regarding recovery of earnest money, the Association filed a third-party complaint against its president, Rankin, alleging breach of fiduciary duties. Rankin counterclaimed seeking, inter alia, a declaratory judgment that the Association had no authority to institute the action against him because it did not receive member approval as required by its governing declaration. Rankin filed a motion for judgment on the pleadings on his declaratory judgment claim.
The Court agreed with Rankin and found that the declaration required the Association to obtain membership approval before asserting third-party claims against Rankin. Because the Association failed to do so and the exemption for claims to enforce the declaration was inapplicable, its claims against Rankin were barred. The Court granted Rankin’s motion for judgment on the pleadings with respect to all claims asserted against him but dismissed the claims without prejudice because the Association could obtain member approval to refile. The Court then concluded that Rankin’s claim for declaratory judgment was mooted by the dismissal of the claims against him.
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Campbell Sales Grp., Inc. v. Niroflex by Jiufeng Furniture, LLC, 2023 NCBC Order 38 (N.C. Super. Ct. Aug. 11, 2023) (Davis, J.)
Key Terms: motion in limine; evidence; lost profits damages; proximate cause; loss of reputation damages; admissibility; unfair or deceptive trade practices
Prior to the commencement of a jury trial set for August 21, 2023, Defendants filed two motions in limine relating to Plaintiff’s damages evidence on its UDTPA claim.
Defendants’ first motion in limine sought to prevent Plaintiff from presenting evidence of, or claiming entitlement to, lost profits damages because, Defendants argued, the damages Plaintiff suffered were not proximately caused by Defendants’ conduct and were too speculative. The Court agreed and granted the motion, concluding that Plaintiff’s lost profits damages were not proximately caused by Defendants’ conduct because it was Plaintiff who chose to discontinue its relationship with Genfine rather than Genfine refusing to sell its products through Plaintiff anymore. The Court hypothesized that a lost profits argument based on the profits Plaintiff lost by not being the exclusive retailer of Genfine furniture might have been viable, but that it was too late to now assert such a theory.
Defendants’ second motion in limine sought to prevent Plaintiff from presenting evidence of, or claiming entitlement to, damages from reputational harm. The Court granted this motion as well, noting first that Plaintiff had failed to cite any North Carolina case in which reputational damages were awarded in a business dispute, and concluding that even if such damages were potentially recoverable, Plaintiff’s apparent reputational damages were too speculative and its supporting evidence deficient.
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Moose v. Allegacy Fed. Credit Union, 2023 NCBC Order 39 (N.C. Super. Ct. Aug. 21, 2023) (Conrad, J.)
Key Terms: motion to approve settlement; pre-certification class action; class claims; putative class; due process; public interest; indicia of abuse; settlement agreement
Plaintiff Moose brought individual and class claims against Defendant for assessing overdraft fees for certain debit-card transactions. No class had yet been certified in the case despite its pendency for almost three years. Nevertheless, having reached a settlement, the parties jointly moved for an order approving dismissal of Moose’s individual claims with prejudice and the putative class claims without prejudice.
The Court began by explaining that to guard against potential abuse of the class-action mechanism, a trial court must not only approve class-wide settlements, but must also conduct a limited inquiry where a named plaintiff has reached an individual settlement and is seeking a voluntary dismissal of a pre-certification class-action complaint. Upon review of the proposed settlement here, the Court was not persuaded by the parties “practical considerations” for settlement and found numerous indicia of abuse. Among them, the Plaintiff and her counsel would receive a settlement payment “several hundred times” the amount of the Plaintiff’s individual alleged damages and significantly more than she could have reasonably expected to recover through ordinary litigation.
Additionally, Moose herself would receive less than five percent of the total settlement amount while her counsel would receive the remainder. The Court was also concerned that the settlement could prejudice the absent class members since it did not address tolling or the effect of the statute of limitations on the class members’ claims.
For these reasons, the Court declined to approve the parties’ settlement agreement in its proposed form and ordered that they (1) file their settlement agreement publicly, (2) provide supplemental information to the Court including class size, the potential cost to notify the class of the settlement, an estimate of damages, and counsel’s billing rates and hours, and (3) attend an in-person hearing for all counsel of record, including out-of-state counsel who had not moved to appear pro hac vice, to discuss certification of the class.
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Rorie v. Charlotte-Mecklenburg Hosp. Auth., 2023 NCBC Order 40 (N.C. Super. Ct. Aug. 21, 2023) (Conrad, J.)
Key Terms: motion to voluntarily dismiss; class action; precertification; prejudice; putative class
Plaintiff initiated a class action alleging that Defendant improperly disclosed the private health information of its patients through third-party tracking technology embedded in its website and asserted claims both individually and on behalf of all others similarly situated. Following Defendant’s motion to dismiss Plaintiff’s amended complaint, Plaintiff filed a notice of voluntary dismissal without prejudice.
The Court has a duty to ensure putative class members will not be prejudiced by the voluntary dismissal of a class-action complaint and therefore has to approve such a dismissal.
After conducting its limited review, the Court here found that neither the Plaintiff nor her counsel would gain from the dismissal of her individual or class claims and that the decision to dismiss the claims was instead based on the Plaintiff’s belief of the unlikelihood of success of her claims following review of the Defendant’s motion to dismiss. The Court also found that the dismissal would not harm putative class members because it was without prejudice and would not prevent putative class members from filing their own individual or class claims in the future.
Therefore, the Court approved the dismissal of Plaintiff’s claims without prejudice.
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Mary Annette, LLC v. Crider, 2023 NCBC Order 41 (N.C. Super. Ct. Aug. 24, 2023) (Conrad, J.)
Key Terms: motion to compel; BCR 10.9; discovery dispute; Rule 34; requests for production of documents; attorneys’ fees; Rule 37; BCR 10.1; ESI protocol
Following compliance with Business Court Rule 10.9’s discovery dispute requirements, and with permission of the Court, Defendants filed a motion to compel regarding their requests for production. Defendants argued that Plaintiffs had failed to timely, completely, and competently respond to their requests.
Since Plaintiffs had not objected to any of the requests, the only issue was whether their production of documents was complete and properly formatted. Under Rule 34, which applied because the parties had not agreed to an ESI protocol, Plaintiffs were required to identify the form they intended to use for production, which they failed to do. Moreover, they then provided Defendants a cloud-based folder followed by a physical USB drive which “may or may not” contain the same files. The Court thus concluded that Plaintiffs production was incomplete and ordered Plaintiffs to produce all of the requested documents in a form agreeable to both sides. However, the Court denied Defendants’ related request that Plaintiffs produce an income and expense ledger that was not already in existence.
The Court also determined that Defendants, pursuant to Rule 37(a)(4), were entitled to their reasonable expenses, including attorneys’ fees, incurred in pursuing their motion to compel since Plaintiffs had failed to timely respond or comply with Rule 34 and had provided no justification for their noncompliance.
By: Rachel E. Brinson
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 08/30/23
Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 50 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: primary insurance coverage; excess insurance coverage; nuisance lawsuit; hog farm; cause test
Beginning in 2013, Plaintiffs were named defendants in multiple nuisance lawsuits, in which neighboring property owners alleged physical property invasion and loss of use and enjoyment of their land due to Plaintiffs’ hog farming operations. After five “bellwether” trials in federal court resulted in verdicts for the property owners, Plaintiffs reached a global settlement with all of the property owners. Plaintiffs then sued their various primary and excess insurance providers, alleging that the insurers should be held liable for the amounts Plaintiffs paid to defend and settle the nuisance lawsuits.
As the policies require an “accident” to occur for coverage to apply, Defendants XL Insurance America, Inc. and XL Specialty Insurance Company moved for partial summary judgment seeking a ruling that, assuming a jury would find the nuisance lawsuits were caused by an “accident” under the terms of the policies, the nuisance lawsuits arose from multiple “accidents” as opposed to a single “accident.” The ruling on this issue would determine whether the XL Defendants, who were excess insurers, would be liable for any payment, as multiple “accidents” would require the primary coverage to be exhausted for each accident before the XL Defendants’ obligations arose.
The Court denied the XL Defendants’ motion, holding that the claims brought under the nuisance lawsuits resulted from a single “accident” under the “cause” test set forth in Gaston Cty. Dyeing Mach. Co. v. Northfield Ins. Co., which permits the utilization of proximate cause in cases where there is no single one-time event giving rise to injury. The Court held that the nuisance lawsuits’ claims arose from a single “accident,” since the claims “stemmed from central, uniform policies and procedures decided upon and implemented by Plaintiffs in operating their farms” and the injuries “did not materially vary based on differences in the various farms owned or operated by Plaintiffs.”
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Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 51 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: nuisance lawsuit; hog farm; insurance; duty to defend; defense costs; allocation
This opinion, arising from the same case addressed above in Opinion No. 50, was issued in response to Defendant ACE American Insurance Company’s motion for partial summary judgment on the issue of defense costs allocation. In prior summary judgment rulings, the Court held that (1) ACE breached its duty to defend Plaintiffs in the nuisance lawsuits; and (2) as a result of that breach, ACE is estopped from asserting coverage defenses in its policy. However, the Court had not addressed the issue of how the award of the defense costs would be allocated.
ACE first argued that, despite the Court’s prior ruling that ACE is estopped from asserting coverage defenses, it is still entitled to challenge the reasonableness of the defense costs incurred by Plaintiffs. Noting that North Carolina’s present case law only states that an insurer is obligated to pay the insured for “reasonable” defense costs when the duty to defend has been breached and finding no persuasive authority to the contrary, the Court agreed with ACE and granted the motion on this issue.
ACE’s second argument related to the allocation of Plaintiffs’ defense costs. In its prior ruling, the Court held that both ACE and Old Republic Insurance Company breached their duty to defend Plaintiffs in the nuisance lawsuits. ORIC subsequently settled all claims Plaintiffs asserted against it. ACE argued that all defense costs should be allocated among all triggered policy years and further allocated between primary coverage for each triggered policy year. In response, Plaintiffs contended that ACE is liable for all of Plaintiffs’ defenses costs not reimbursed by ORIC up to ACE’s 50% share. The Court agreed and denied ACE’s motion as to the allocation method, holding that ACE is liable for a 50% share of Plaintiffs’ reasonable defense costs from the nuisance lawsuits, subject to any credit ACE may be entitled to based on ORIC’s contributions.
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Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 52 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: hog farm; nuisance lawsuit; indemnity allocation; pro rata method; all sum method
This opinion, arising from the same case addressed above in Opinion Nos. 50 and 51, addresses Defendants ACE American Insurance Company, Ace Property & Casualty Insurance Company and Great American Insurance Company of New York’s (collectively, “Certain Insurers”) Amended Motion for Partial Summary Judgment on the Issue of Indemnity Allocation, as well as Defendants XL Insurance America, Inc. (“XLIA”) and XL Specialty Insurance Company’s (“XL Specialty”) Amended Motion for Summary Judgment on Indemnity Allocation Issues. Both motions address the common issue of which method should be utilized to properly allocate indemnity liability for the injuries giving rise to the nuisance lawsuits, when such injuries span multiple policy periods.
In Certain Insurers’ Motion, the respective defendants argued for the application of the “pro rata method,” in which any indemnity amounts Plaintiffs may recover would be allocated among the applicable insurers pro rata based on the amount of time each insurer provided coverage to Plaintiffs. Plaintiffs, relying on a different provision in the policies, argued for an “all sum method,” in which the insurers would be liable for “any continuation, change, or resumption” of injuries occurring inside the policy period. Applying the methodology used by the Supreme Court in Radiator Specialty Co. v. Arrowood Indem. Co., the Court determined that the policies in question did not contain the requisite language to merit the application of the “all sum method.” The Court granted the Certain Insurer’s Motion, holding that the “pro rata” method was the appropriate method for calculating indemnification allocation.
In the XL Motion, XL Specialty argued that its policy provides no coverage, as Defendant American Guarantee & Liability Insurance Company would be exclusively liable for excess coverage indemnification as a result of its continuing coverage provision. Finding this argument inconsistent with the Court’s analysis of the Certain Insured’s Motion and subsequent application of the “pro rata method,” the Court rejected XL Specialty’s argument. XLIA proposed a similar argument to XL Specialty, in that the various insurance policies held by Plaintiffs “telescoped” in a manner that resulted in the higher-tiered policies absorbing any potential liability. The Court likewise rejected this argument and denied the XL Motion in full.
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Langley v. Autocraft, Inc., 2023 NCBC 53 (N.C. Super. Ct. Aug. 7, 2023) (Earp, J.)
Key Terms: motion for judgment on the pleadings; Rule 12(c); breach of fiduciary duty; constructive fraud; unfair or deceptive trade practices; employee/employer relationship
Plaintiff Langley, while employed by Defendant Autocraft, started a competing business, LBM. Autocraft terminated Langley’s employment upon discovery of his competing business activities. Langley sued Autocraft for breach of his employment agreement and Autocraft counterclaimed against Langley and LBM for breach of fiduciary duty, constructive fraud, and unfair or deceptive trade practices. Langley and LBM moved for judgment on the pleadings with respect to Autocraft’s counterclaims.
The Court dismissed the claim for breach of fiduciary duty because Autocraft’s allegations fell short of alleging the necessary domination and control by Langley, who was at most a high-lever manager, to establish a de facto fiduciary relationship. Further, since no fiduciary relationship existed, the Court also dismissed the constructive fraud claim.
Regarding unfair or deceptive trade practices, the Court found that Langley’s alleged misconduct was not in or affecting commerce because the wrongs only affected Autocraft and not external market participants. LBM’s involvement did not transform the misconduct into an unfair or deceptive trade practice that affected commerce since LBM was merely used as an instrument to facilitate harm within Autocraft. Thus, this claim was dismissed as well.
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Lineage Logistics, LLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2023 NCBC 54 (N.C. Super. Ct. Aug. 10, 2023) (Bledsoe, C.J.)
Key Terms: duty to defend; indemnification; additional insured; ripeness; mootness; Rule 12(b)(1); Rule 12(b)(6); N.C.G.S. § 22B-1
This case arose from an incident that occurred at Plaintiff Lineage’s food storage facility, which caused one death and significant loss of products, along with other damages, which resulted in Lineage and its contractor, Plaintiff Primus, being named in a number of underlying actions. Following the incident, Plaintiffs sought defense and indemnification from the applicable insurers. After some of the insurers refused to acknowledge their alleged duties, Plaintiffs brought suit. Defendants moved to dismiss under Rules 12(b)(1), (6), and (7).
Lineage’s Declaratory Judgment Claims against Travelers. Lineage sought a declaratory judgment that Travelers owes it duties of defense and indemnification, and that Lineage is an additional insured under the Travelers Policies. Because Travelers had already agreed to defend Lineage (albeit with a reservation of rights), the Court determined that the duty to defend claim was moot as to present claims and not ripe as to future claims. Similarly, the indemnification claim was not ripe because it depended on the outcome of the ongoing underlying actions. Lineage’s additional insured status claim was also moot because Travelers had already recognized Lineage as an additional insured and any attempt to prospectively bind Travelers to this recognition was not ripe. Accordingly, the Court dismissed these declaratory judgment claims without prejudice.
Lineage’s Breach of Contract Claim against Travelers. Lineage alleged that Travelers had breached its duties to defend and to indemnify under the Travelers Policies. However, since Travelers began defending Lineage after the lawsuit commenced, the Court dismissed this aspect of the claim. The Court also dismissed the claim as to indemnification because Lineage had not alleged a determination that the obligation arose because of acts or omissions of Primus or Republic (the subcontractor) which was necessary under the applicable policy language.
Primus’s Declaratory Judgment Claims against Travelers. Primus sought a declaratory judgment that Travelers owes it duties of defense and indemnification, and that Primus is an additional insured under the Travelers-Republic Policy. The Court dismissed these claims without prejudice for the same reasons it dismissed Lineage’s parallel claims.
Lineage’s Indemnification and Breach of Contract Claims against Republic. Republic argued that Lineage’s claims for breach of its indemnification clause and for a declaratory judgment regarding the same should be dismissed as not ripe because its indemnity obligations were contingent on a yet-to-be-made factual determination that Republic was responsible for the claims and losses for which Lineage sought indemnification. However, the Court rejected this argument because the indemnity clause expressly stated that Republic’s indemnity obligations activated in response to an alleged act or omission and Lineage had adequately alleged that Republic was responsible for the losses. Republic also argued that the indemnity clause was contrary to public policy as expressed by N.C.G.S. § 22B-1, which prohibits a party to a construction contract from indemnifying a second party for damages caused by the second party’s own negligence. The Court acknowledged that two portions of the indemnity clause could potentially violate § 22B-1 but determined that the troublesome phrases could be severed. Thus, the motion to dismiss was denied as to these claims.
Lineage’s Tortious Interference with Contract Claim against Republic. Lineage alleged that it had negotiated a settlement with an insurer under which the insurer would pay out its policy limits to Lineage, but that Republic had caused the insurer to withdraw from the settlement and instead pay its limits to Republic. Republic argued, and the Court agreed, that the claim failed because Republic was a party to the contract at issue, and a party generally cannot interfere with its own contract. Moreover, the claim did not qualify for the malice exception to this general rule, since Lineage had not alleged that Republic acted without an economic motive or through the commission of an independent wrongful act. Accordingly, the Court dismissed this claim.
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Wijewickrama v. Christian, 2023 NCBC 55 (N.C. Super. Ct. Aug. 11, 2023) (Bledsoe, C.J.)
Key Terms: co-counsel agreement; attorney’s fees; breach of contract; breach of fiduciary duty; motion to dismiss; declaratory judgment; pleading standards; motion to strike; economic loss rule; specific performance
This case arises from a contentious fee dispute between four attorneys over fees obtained from a series of lawsuits against the Cherokee County Department of Social Services (as relevant here, the Hogan, Cordell, and Simonds cases). In 2017, Wijewickrama, Jackson, Moore, and Christian entered into a written Co-Counsel Agreement to govern the division of the fees and workload associated with the CCDSS lawsuits. Pursuant to the Agreement, each attorney would contribute to the representation, and any fees collected would be split equally amongst the four. The Agreement contained an “opt-out” provision, which permitted each attorney to “opt out at any time during the course of the litigation, appeal or other proceeding.” Following an attorney’s decision to opt-out, the attorney would be entitled to a billable rate of $300 per hour for each hour spent on the case.
After a $4.6 million jury verdict against CCDSS in the Hogan case in May 2021, the Cordell cases were settled for substantial sums and settlement negotiations began in the Simonds case. Around that time, Christian began experiencing personal, health, and financial difficulties, which eventually led to Wijewickrama and Moore confronting Christian and informing him that he would not receive compensation regarding the Simonds case. Christian withdrew from the Simonds case which later settled for $42 million. After receiving a letter from Christian demanding a ¼ share of the fees from the Simonds case, Wijewickrama, Jackson, and Moore instituted this suit alleging claims for breach of fiduciary duty and breach of contract and seeking a declaratory judgment and specific performance. Christian moved to strike and to dismiss and filed counterclaims, which Plaintiff also moved to dismiss.
Defendant’s Motion to Dismiss. The Court first rejected Defendant’s argument that Plaintiffs had failed to allege breach of contract with adequate specificity since Rule 8(a)(1) does not require heightened pleading and the complaint adequately pleaded breach by non-performance and repudiation. The Court also concluded that Plaintiffs had adequately pleaded their alternative claim for specific performance.
Regarding Plaintiffs’ claim for breach of fiduciary duty, the Court found that not only had Plaintiffs alleged that the Co-Counsel Agreement was a joint venture or partnership agreement, which would create a fiduciary relationship as a matter of law, but also that Defendant had admitted the same in his answer and therefore the existence of a fiduciary relationship was deemed admitted. However, the Court nonetheless dismissed the claim because any damages suffered by Plaintiffs arose from a breach of the Agreement, and not from any fiduciary relationship, and therefore the claim was barred by the economic loss rule.
Plaintiffs’ Motion to Dismiss. Plaintiffs moved to dismiss Defendant’s counterclaims for breach of contract and breach of fiduciary duty relating to the loss of prospective fees in the Hogan case. The Court granted the motion, determining as a matter of first impression in North Carolina that co-counsel have neither “a fiduciary duty to protect one another’s prospective interests in a fee” nor a “cause of action against one another for prospective fees lost.”
Defendant’s Motion to Strike. Defendant moved to strike those allegations that discussed his demand letter, bankruptcy proceeding, and personal behavior. The Court denied the motion as to the demand letter and bankruptcy proceeding, which could possibly have a bearing on the case, but granted it as to his personal behavior because the specific language used was immaterial and inflammatory. The Court directed that this language be replaced with “scandalous personal conduct.”
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Kearey Builders, Inc. v. Galleries@NoDa, LLC, 2023 NCBC 56 (N.C. Super. Ct. Aug. 14, 2023) (Robinson, J.)
Key Terms: breach of contract; motion to stay; arbitration; motion to dismiss; tortious interference with contract
This dispute arose out of an agreement Plaintiff Keary Builders, a general contractor, entered into with Defendant Galleries@NoDa, LLC, the developer, to construct a mixed-use building containing condominiums and retail space. Defendant Studio Fusion served as the architect and interior designer on the project. Studio Fusion’s duties included administrating the Agreement and issuing certificates for payment and substantial completion. After a dispute over payment under the Agreement, Plaintifff brought eight claims against Galleries and a ninth claim for tortious interference with contract against Defendant Studio Fusion, alleging that Studio Fusion induced Galleries to breach the Agreement by refusing to issue the requisite certificate of substantial completion. In response, Studio Fusion moved to dismiss Plaintiff’s ninth claim. Plaintiff then sought to stay the proceedings in favor of arbitration.
The Court granted Plaintiff’s motion to stay on the grounds that the Agreement contained an arbitration provision that specifically referenced and incorporated the AAA Construction Industry Arbitration Rules. The Court noted that the AAA Rules establish that the arbitrator “shall have the power to rule on his or her own jurisdiction.” Finding that the parties to the Agreement chose to delegate questions of substantive arbitrability to the arbitrator, the Court ordered Plaintiff’s first eight claims to arbitration and stayed the case pending the arbitrator’s decision.
As Studio Fusion was not a party to the Agreement, and therefore not subject to the Agreement’s arbitration provision, the Court ruled on Studio Fusion’s motion to dismiss Plaintiff’s ninth claim. The Court granted Studio Fusion’s motion to dismiss, on the basis that the complaint did not sufficiently plead factual allegations that Studio Fusion intentionally induced Galleries to breach the relevant agreements.
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Vill. at Motts Landing Homeowners’ Assoc. v. Aftew Props. LLC, 2023 NCBC 57 (N.C. Super. Ct. Aug. 14, 2023) (Conrad, J.)
Key Terms: pickleball; motion to dismiss; planned community; declaration; homeowners’ association; breach of fiduciary duty; business judgment rule; breach of contract; implied covenant of good faith and fair dealing; negligent construction; breach of implied warranty of workmanlike construction; easement
The homeowners’ association of a planned community sued, among other defendants, the Sobols (three former board members) and Aftew Properties (the community’s developer) related to alleged defects in the construction of the community’s common areas and mismanagement by the board members. The Sobols are the two principals of Aftew, and their daughter. The Sobols and Aftew each moved to dismiss Plaintiff’s claims.
The Sobols’ Motion to Dismiss—Breach of Fiduciary Duty. The Association alleged that the Sobols, as officers and directors, owed it fiduciary duties, which they breached by favoring Aftew’s interests over the Association’s by failing to maintain records and collect reserve funds, and by accepting defective common elements conveyed by Aftew. The Sobols argued that neither the declaration nor the governing statutes imposed express duties upon them to collect reserve funds or supervise the construction of common elements. The Court, however, found that the officers and directors of homeowners’ associations and other nonprofit corporations owe duties of care and loyalty and that construed liberally the complaint sufficiently alleged that the Sobols engaged in self-dealing and “intentionally took actions to benefit Aftew—and, thus, themselves—at the Association’s expense.” Moreover, the Sobols were not shielded by the business judgment rule because their actions were self-interested. Accordingly, the Court denied the Sobols’ motion to dismiss.
Aftew’s Motion to Dismiss—Breach of Fiduciary Duty. The Complaint alleged that Aftew breached fiduciary duties arising from the special confidence that Association placed in it during its period of developer control. Guided by common-law principles, the Court agreed, finding that the Association sufficiently alleged that the authority granted to Aftew by the declaration placed it “in a position of dominance over the Association” so that “members of the Association had no choice but to rely on Aftew to protect their interests” thereby supporting the existence of a fiduciary relationship. Thus, the Court denied Aftew’s motion to dismiss the claim for breach of fiduciary duty.
Aftew’s Motion to Dismiss—Breach of Contract. Aftew argued, and the Court agreed, that the alleged misconduct by Aftew was not governed by, and therefore could not be breaches of, the declaration. Further, because the claim for breach of the implied covenant of good faith and fair dealing was premised on the same conduct as the claim for breach of contract, that claim fell with the breach of contract claim.
Aftew’s Motion to Dismiss—Negligent Construction and Implied Warranty of Workmanlike Construction. The Association claimed that Aftew negligently constructed various common elements of the community and that Aftew breached the implied warranty of workmanlike construction regarding the community’s pickleball courts. Aftew argued that these claims should be dismissed because it did not perform the construction of the common areas itself but rather hired contractors to perform the work. The Court noted that “any person responsible for supervising a construction project is subject to being held liable on a negligent construction theory” and that similar rules apply to implied warranties to extend liability to other who are actively involved in the construction. Since the Complaint sufficiently alleged that Aftew participated in the construction of certain common elements and retained the right to supervise its contractors, the Court denied the motion to dismiss.
Aftew’s Motion to Dismiss—Demand for Easement Proceeds. The Court granted Aftew’s motion to dismiss the Association’s demand for proceeds from an easement on a recreation area in the community because, as the Association admitted, Aftew owns the recreation area and had not conveyed it to the Association.
By: Natalie Kutcher
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 08/16/23
Chi v. N. Riverfront Marina & Hotel LLLP; Feng v. N. Riverfront Marina & Hotel, LLLP, 2023 NCBC 47 (N.C. Super. Ct. July 27, 2023) (Earp, J.)
Key Terms: partnership; fraud; negligent misrepresentation; N.C.G.S. § 78A-8; statute of limitations; equitable tolling; Rule 9(b); conversion; breach of fiduciary duty; gross mismanagement; breach of contract; unjust enrichment; inspection demand; N.C.G.S. § 59-305; N.C.G.S. § 59-106(b)
After their investments in Defendant NRMH failed to provide the allegedly promised return, Plaintiffs brought suit asserting various claims related to purported misrepresentations. Defendants moved to dismiss all claims.
Fraud, Negligent Misrepresentation, and Violation of N.C.G.S. § 78A-8. The Court determined that, even taking into account the discovery rule, these claims were barred against certain Defendants by a three-year statute of limitation. However, as to other Defendants, the Court found that the statute of limitations had been tolled by equitable estoppel due to these Defendants’ representations which delayed Plaintiffs from filing suit. Nonetheless, the Court dismissed the claims because Plaintiffs failed to specify the misrepresentations made by each Defendant separately and therefore did not satisfy Rule 9(b)’s heightened pleading requirements. The Court also elected to dismiss these claims with prejudice because Plaintiffs had repeatedly failed to cure the deficiencies despite the Court’s directions.
Conversion. The Court determined that a three-year statute of limitations, running from the date the unauthorized exercise of ownership occurred, applied and therefore barred the claims, except as to those Defendants which Plaintiffs had sufficiently pleaded that the statute should be tolled.
Breach of Fiduciary Duty and Gross Mismanagement. The Court held that while NRHM’s general partner owed a de jure fiduciary duty to Plaintiffs, they did not have standing to bring a direct claim against the general partner under either of the Barger exceptions. As for the remaining Defendants, Plaintiffs’ allegations did not sufficiently allege the requisite domination and control to establish a de facto fiduciary duty and thus the claim failed. The Court also dismissed Plaintiffs’ claims of gross mismanagement as Plaintiffs did not have standing.
Breach of Contract. The Court dismissed Plaintiff’s breach of contract claims against those Defendants who were not a party to the contracts. The Court also dismissed the claims to the extent they were contradicted by the complaint’s allegations and exhibits. However, the Court upheld some of Plaintiff’s breach of contract claims and agreed that the statute of limitations should be equitably tolled as to those claims.
Unjust Enrichment. The Court dismissed this claim because the allegations did not fit the claim—Plaintiffs alleged that they provided investment capital to NRMH that was then used by multiple other companies. Since Plaintiffs did not allege that they agreed to the transfers with the expectation of receiving a benefit, the claim failed.
Records Demand. The Court determined that the nine Plaintiffs who had previously sent a demand letter requesting inspection of partnership records had adequately stated a claim for violation of their rights under N.C.G.S. § 59-305 and § 59-106(b).
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Harris v. Ten Oaks Mgmt., LLC, 2023 NCBC 48 (N.C. Super. Ct. July 31, 2023) (Conrad, J.)
Key Terms: summary judgment; contract interpretation; plain meaning; genuine issue of material fact
Under his employment agreement with Defendant Ten Oaks, Plaintiff Harris was entitled to different incentive compensation depending on whether he “sourced” a deal or just assisted with project management. After his employment ended, a dispute arose regarding what compensation Harris was entitled to regarding a particular deal. Plaintiff brought suit for breach of his employment contract and both sides subsequently moved for summary judgment.
The Court denied Harris’s motion as it presented a new theory of the case that had not been pleaded. Moreover, the Court denied Harris’s request to amend the complaint to fit his new theory as a summary judgment brief was not the appropriate means to make such a request and, in any event, the request was untimely.
The Court also denied Ten Oaks’ motion. Although the Court agreed with Ten Oaks regarding the plain meaning of the term “source” in the employment contract at issue (and rejected Harris’s request to inject his subjective understanding into the meaning), the Court determined that there were genuine issues of material fact as to who sourced the deal.
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Weaver, Bennett & Bland, P.A. v. Villmer, 2023 NCBC 49 (N.C. Super. Ct. July 31, 2023) (Robinson, J.)
Key Terms: law firm; fraud; duty of disclosure; breach of contract; consideration; tortious interference with contract; facilitation of fraud; attorney fraudulent practices; N.C.G.S. § 84-13; constructive trust; disgorgement; punitive damages
Defendants are two former partners and officers of Plaintiff Weaver Bennet & Bland, who left WBB and started a competing law firm, taking several of WBB’s attorneys and clients with them. After a dispute arose regarding how the parties would split fees for contingent fee cases worked on by both firms, WBB filed suit. Defendants moved to dismiss several of the claims.
Fraud. The Court found that WBB had adequately alleged claims for fraudulent misrepresentation and fraudulent omission based on the individual Defendants’ failure to disclose their plans to leave the firm. However, the Court dismissed the claim as against the new firm since the complaint did not allege that it had a duty of disclosure to WBB.
Breach of Contract. Defendants argued that WBB’s claim for breach of a contract to split attorneys’ fees should be dismissed because WBB failed to allege valid consideration. The Court, however, determined that the complaint’s allegations did not call into question the issue of consideration and therefore, the Court found it unnecessary to consider it at the 12(b)(6) stage.
Tortious Interference with Contract. The Court denied dismissal of WBB’s claim that Defendants had tortiously interfered with the employment contracts of WBB’s associate attorneys. WBB’s allegations that Defendants met with the associates to convince them to leave WBB was sufficient to allege inducement. Further, the complaint did not reveal any legitimate business purpose for their conduct since Defendants were not outsiders to the employment contracts and were acting for their own benefit.
Facilitation of Fraud. The Court dismissed this claim as it was duplicative of WBB’s civil conspiracy claim.
Attorney Fraudulent Practices under N.C.G.S. § 84-13. WBB sought, under N.C.G.S. § 84-13, to subject Defendants to double damages for its fraud-based claims. The Court, however, determined that the statute governed the relationship between attorneys and clients and was thus inapplicable here.
Remedies. The Court denied dismissal of WBB’s requests for a constructive trust, disgorgement, and punitive damages as those had been properly re-framed as remedies in the amended complaint.
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United Therapeutics Corp. v. Liquidia Techs., Inc., 2023 NCBC Order 36 (N.C. Super. Ct. July 20, 2023) (Earp, J.)
Key Terms: motion to amend; undue prejudice; delay
Over nineteenth months after filing suit, Plaintiff United Therapeutics Corporation moved to amend its complaint to add parties, claims, and factual allegations. Defendants opposed the amendments.
The Court permitted the addition of UTC’s subsidiary as a plaintiff since its addition was not a surprise and would not delay the case. However, the Court rejected the addition of new defendants because UTC did not provide a satisfactory reason for its delay in adding parties it was long aware of and their addition would extend the litigation and unduly prejudice Defendants. For similar reasons, the Court also denied the motion to add claims against Defendant Roscigno, expand the existing UDTPA claim, and add a declaratory judgment claim. However, the Court granted UTC’s motion to add allegations based on recently produced discovery because UTC moved promptly to amend, and the proposed amendments did not fundamentally change the nature of the claims against Defendants.
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Harris v. Ten Oaks Mgmt., LLC, 2023 NCBC Order 37 (N.C. Super. Ct. July 31, 2023) (Conrad, J.)
Key Terms: motion to seal; BCR 5; BCR 7; noncompliance
This order addresses five motions to seal filed in connection with the parties’ motions for summary judgment.
The Court began by addressing the parties’ failures to comply with BCR Rules 5 and 7 regarding motions to seal. First, the parties repeatedly filed the same exhibits despite BCR 7.5’s direction to cite to the docket location of previously filed materials. Second, the parties also filed many of their supporting materials as omnibus electronic files containing groups of documents making it difficult for the Court to review and to seal or unseal filed materials in a targeted way. The Court’s preference is for supporting exhibits to be filed as separate documents attached to a “lead document.” Third, the parties failed to comply with the consultation requirements of BCR 5.2(b)(6) and 7.3 or failed to provide opposing counsel with sufficient time to review. Fourth, the parties did not comply with BCR 5.2’s requirements that adequate non-confidential descriptions of the documents at issue be provided in the motion and that a public version of the provisionally sealed documents with appropriate redactions also be filed.
Turning to the merits of the motions, the Court first determined that Plaintiff’s 2020 bank statements did not warrant sealing in their entirety because the unredacted portions did not reveal sensitive or personal information. Next, the Court considered Defendant’s request to seal documents that it contended contained sensitive business and personal information (including personal email addresses) or that discussed the terms of Plaintiff’s departure from Defendant. The Court concluded that Defendant had failed to meet its burden to show that any of the materials were confidential or that their disclosure would result in harm. As to the email addresses, the Court noted that email addresses are not considered personal identifying information under N.C.G.S. § 132-1.10(d) and Defendant had not provided any authority to the contrary. The Court then determined that several exhibits containing information about a third-party should be sealed for the time-being since they had limited public interest and included information that the third-party may consider confidential.
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 08/02/23
Found. Bldg. Materials, LLC v. Conking & Calabrese, Co., 2023 NCBC 46 (N.C. Super. Ct. July 7, 2023) (Earp, J.)
Key Terms: temporary restraining order; expedited discovery; misappropriation of trade secrets; preliminary injunction; irreparable harm; balance of equities
Plaintiff Foundation Building Materials, LLC (FBM) filed a complaint alleging that its former employees had resigned to start the North Carolina office of a competing company and in doing so are using FBM’s trade secrets. FBM simultaneously moved for a TRO, which was granted, and a preliminary injunction, both relating to the alleged misappropriation of trade secrets. Following expedited discovery, the Court heard the motion for a preliminary injunction and granted it in part and denied it in part.
The Court first determined that of the seven categories of information alleged to be trade secrets, FBM was only likely to succeed on the misappropriation of trade secrets claim as to three of the categories because, based on the evidence presented, the remaining categories either did not appear to be trade secrets or had not been misappropriated.
Regarding irreparable injury, the Court concluded that FBM was still susceptible to irreparable harm from improper use of two of the categories of information, but, as for the third category, any potential harm had already occurred and therefore a preliminary injunction was not appropriate in that regard.
Finally, the Court concluded that the equities weighed in favor of granting a preliminary injunction regarding the remaining two categories because failure to do so could deprive FBM of its competitive advantage, while Defendants would suffer little or no injury if the injunction were issued.
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Chi v. N. Riverfront Marina and Hotel LLLP; Feng v. N. Riverfront Marina and Hotel LLLP, 2023 NCBC Order 35 (N.C. Super Ct. July 11, 2023) (Earp, J.)
Key Terms: attendance at mediation; impasse; sanctions; N.C.G.S. 7A-38.1
Pursuant to case management orders entered by the Court, a two-day mediation, involving the parties in both actions, occurred by Zoom in May 2023. However, only eight of the nineteen plaintiffs participated on the first day and none participated on the second day, although their counsel appeared to convey an impasse. After learning that the defendants intended to move for sanctions for plaintiffs’ failure to appear, counsel for plaintiffs offered to pay the full mediator’s fee and reimburse defendants’ reasonable attorneys’ fees. The defendants rejected these offers and filed a motion for sanctions.
By statute and the rules governing mediated settlement conferences, parties to an action must attend mediation and are subject to sanctions for failure to do so without good cause. Moreover, only the mediator has the authority to declare an impasse. Accordingly, since the plaintiffs had not shown good cause for not attending the mediation, the Court granted the motion and ordered the plaintiffs to pay defendants’ attorneys’ fees for the mediation.
By: Natalie Kutcher 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 07/19/23
Vanguard Pai Lung, LLC v. Moody, 2023 NCBC 44 (N.C. Super. Ct. Jun. 27, 2023) (Conrad, J.)
Key Terms: self-dealing; judgment notwithstanding the verdict; motion for a new trial; motion to amend the judgment; Rule 59(e); jury instructions; fraud; circumstantial evidence; waiver of issues; conversion; embezzlement; UDTPA; in or affecting commerce; double damages; punitive damages
In this action, Vanguard and its majority member Pai Lung alleged that Defendant William Moody engaged in self-dealing and other misconduct through his position as manager and president of Vanguard and through using Defendants Nova Trading (Vanguard’s minority member) and Nova Wingate, both of which were solely owned by Moody. Following a jury verdict of over $3 million in favor of Plaintiffs, Defendants moved for judgment notwithstanding the verdict, for a new trial, and to alter or amend the judgment.
Fraud. The Court rejected Defendants’ argument that there was insufficient evidence of intent to deceive because 1) they failed to preserve the issue since it was not part of their motion for a directed verdict at trial; 2) they failed to comply with the Court’s briefing rules by not citing to the record; and 3) Plaintiffs’ circumstantial evidence of intent was sufficient to support the jury’s verdict.
Conversion. Defendants contended that there was insufficient evidence to support the jury’s award for conversion of money and other property because Plaintiffs did not identify the converted money and did not show that Moody himself possessed any of the converted property. However, the Court found that these arguments were waived since they were not raised at trial, and, in any event, there was sufficient evidence on both points to submit the issue to the jury.
Embezzlement. The Court found that Defendants’ two-sentence argument concerning Moody’s liability for embezzlement was conclusory, procedurally defective, and meritless and thus denied the motion as to the embezzlement claim.
Unfair and Deceptive Trade Practices Under Section 75-1.1. Plaintiffs’ UDTPA claim concerned a lease agreement between Vanguard and Nova Wingate, which Moody signed on behalf of Vanguard as its president and on behalf of Nova Wingate as its sole member. Defendants argued that any misconduct regarding the lease was internal and therefore not in or affecting commerce. The Court agreed—since Nova Wingate was a shell company that Moody used to channel money to himself and conceal misconduct, the unfairness did not concern the regular interactions of separate market participants but instead occurred in interactions between the principals of Vanguard. Accordingly, the Court granted the motion for JNOV as to the UDTPA claim.
Motion for New Trial. Defendants contended that the differing damages award for unjust enrichment and unfair and deceptive trade practices were contradictory and amounted to double recovery since they were based on the same underlying conduct. However, since the Court set aside the UDTPA verdict any potential inconsistency or double recovery was moot. Further, the Court found that the two claims were not identical and thus there was no contradiction. Defendants also argued that the damages award for conversion was excessive because it included amounts converted by Defendants that were outside the limitations period. The Court rejected this argument because it had correctly instructed the jury to limit its award to damages incurred during the limitations period and the jury is presumed to have followed the Court’s instruction. Finally, the Court rejected Defendants’ argument that the verdict was against the greater weight of the evidence because they had not remotely shown that the verdict was so exceptional that it resulted in a miscarriage of justice.
Motion to Alter or Amend the Judgment. Defendants moved to amend the judgment under Rule 59(e) to include a single $50,000 award for punitive damages arguing that the entity Defendants could not be separately liable for punitive damages because the jury found that they were alter egos of Moody with no independent identities. The Court denied this motion because 1) Defendants had waived the issue by not objecting at trial to the Court’s instruction on punitive damages; and 2) the jury had found all three Defendants liable on theories of alter-ego liability and direct liability.
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Cumberland Cnty. Hosp. Sys., Inc. v. Woodcock, 2023 NCBC 45 (N.C. Super. Ct. Jun. 27, 2023) (Davis, J.)
Key Terms: requests for admission; summary judgment; discovery; case management order; BCR 10.4
Plaintiff and Defendant Michael Woodcock are the two members of Defendant WCV. In its complaint, Plaintiff asserted both individual and derivative claims based largely on alleged misconduct by Woodcock. Following the Court’s dismissal of the derivative claims in a previous order (discussed here), WCV moved for a protective order and declaratory judgment seeking an order from the Court that WCV was not required to respond to Plaintiff’s discovery requests and declaring that WCV was no longer a party due to the dismissal of the derivative claims. In addition, Plaintiff moved for partial summary judgment against Woodcock based on his failure to respond to requests for admission and, in turn, Woodcock moved to withdraw and amend the deemed admissions.
The Court first granted Woodcock’s motion to withdraw and amend based on confusion over whether Woodcock was actually served with the requests for admission and Plaintiff’s failure to show that it would be prejudiced by Woodcock being allowed to serve responses. Since Plaintiff’s
motion for partial summary judgment was predicated on the deemed admissions, the Court denied the motion without prejudice.
Regarding WCV’s motion, the Court clarified that since two of Plaintiff’s individual claims were asserted against WCV, the claims were still pending against WCV and, accordingly, WCV remained a party and was required to respond to the discovery requests. The Court also rejected WCV’s argument that the discovery requests were invalid because they were served before the entry of the case management order—BCR 10.4 expressly provides that parties may begin discovery prior to entry of a CMO.
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 07/04/23
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
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
Trail Creek Invs. LLC v. Warren Oil Holding Co., 2023 NCBC 36 (N.C. Super. Ct. May 9, 2023) (Davis, J.)
Key Terms: environmental liabilities; motion to strike; Rule 12(b)(6); breach of fiduciary duty; constructive fraud; statute of limitations; negligent misrepresentation; economic loss rule; fraud; Rule 9(b); breach of contract; breach of confidentiality agreement; obstruction of justice; civil conspiracy; rescission; N.C. Securities Act; primary liability; secondary liability
In 2016, Plaintiff Trail Creek Investments purchased Warren Oil Company LLC and related entities pursuant to an equity interest purchase agreement (“EIPA”). After subsequently discovering serious environmental compliance issues with the companies, Plaintiffs brought suit against the sellers (and certain individuals involved in the sale) alleging numerous claims based largely on Defendants’ failure to disclose the environmental liabilities prior to the sale. Defendants moved to dismiss.
The Court first addressed Plaintiffs’ motion to strike certain exhibits which Defendants had submitted in support of their motion to dismiss. The Court granted the motion as to exhibits that were not expressly referenced in the Complaint but denied it as to those that were.
Statute of Limitations. Defendants contended that several of Plaintiffs’ claims were barred by their statutes of limitations. However, because a dispute of fact existed as to when Plaintiffs knew, or should have known, the key facts upon which the claims were based, the Court denied dismissal on this basis.
Breach of Fiduciary Duty. Plaintiffs alleged that the individual Defendants, each of whom were connected to Warren Oil prior to the sale and subsequently served on its board, breached their fiduciary duties as board members by failing to disclose the environmental liabilities. Because Warren Oil’s operating agreement was not attached to the complaint, the Court relied on the default rule that LLC managers owe a fiduciary duty to the LLC and determined that Plaintiffs had sufficiently alleged the existence of a fiduciary duty and a breach thereof.
Constructive Fraud. Having determined that Plaintiffs had adequately alleged breach of fiduciary duty, the Court turned to the “personal benefit” prong of constructive fraud and determined that, while Plaintiffs’ allegation that the individual Defendants had gained the benefit of continued employment and bonuses was insufficient, their allegation that two of the individuals had received portions of released escrow funds was sufficient to sustain the claim as to them.
Negligent Misrepresentation. The Court granted dismissal on this claim, concluding that it was barred by the economic loss rule. The claim arose from Defendants’ allegedly false representations of environmental compliance that were expressly contained in the EIPA – the breach of which also formed the basis for Plaintiffs’ breach of contract claim.
Fraud. The Court also dismissed the fraud claim, determining that many of the allegations were too general to satisfy Rule 9(b). Among other deficiencies, the complaint frequently attributed statements and actions to “Defendants” collectively rather than attributing them to specific persons and was impermissibly vague as to the specifics of the misrepresentations and omissions.
Rescission. The Court dismissed the rescission claim because rescission is a remedy not a standalone claim. However, it declined, at this stage, to bar Plaintiffs from seeking rescission as a remedy if warranted.
Securities Act. Plaintiffs asserted claims for violation of the N.C. Securities Act under theories of both primary and secondary liability. The Court dismissed the primary liability claim because Plaintiffs failed to plead the circumstances with the particularity required by rule 9(b). Consequently, the Court also dismissed the secondary liability claim because it must be accompanied by a primary liability claim.
Breach of Confidentiality Agreements. Plaintiffs claimed that Defendants breached two confidentiality agreements by disclosing confidential information to third parties whose interests were adverse to Plaintiffs’ interests. The Court granted Defendants’ motion to dismiss as to this claim because the claim was devoid of any details of the alleged breach.
Obstruction of Justice. The Court determined that Plaintiffs’ bare-bones allegations that “Defendants” obstructed justice by deleting and destroying emails was insufficient to state a claim.
Civil Conspiracy. The Court dismissed this claim because the Plaintiffs failed to make clear which of the numerous Defendants were alleged to have engaged in a conspiracy.
Breach of Contract. Plaintiffs’ breach of contract claim was based, in part, on Defendants’ failure to indemnify Plaintiffs as required by the EIPA. Defendants sought a ruling from the Court as to the correct construction of the EIPA’s indemnification provisions. However, because Plaintiffs had since moved to amend their complaint to add allegations relevant to this issue, the Court elected to defer ruling on the issue at this time.
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Preston v. HomeTrust Bancshares, Inc., 2023 NCBC Order 30 (N.C. Super. Ct. May 10, 2023) (Robinson, J).
Key Terms: putative class action; voluntary dismissal; Rule 41(a)(1); Rule 23(c)
After filing a putative class action in February 2023, Plaintiff filed a notice of voluntary dismissal without prejudice pursuant to Rule 41(a)(1). The Court noted that where, as here, dismissal is sought before a class is certified, Rule 23(c) requires the trial court to conduct a limited inquiry into the circumstances of the dismissal to determine (1) whether the parties have abused the class-action mechanism for personal gain, and (2) whether the dismissal will prejudice absent putative class members. Because it was unclear from the filing whether the decision to dismiss the action was a unilateral decision by Plaintiff or the result of negotiation with Defendant’s agents or others, the Court directed the Plaintiff to file a statement explaining her decision in conformity with the elements previously set forth set forth in Rickenbaugh v. Power Home Solar, LLC.
By: Natalie Kutcher 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 05/24/23
Davis v. HCA Healthcare, Inc., 2023 NCBC 32 (N.C. Super. Ct. April 27, 2023) (Davis, J.)
Key Terms: restraint of trade; monopoly maintenance; monopoly leverage; monopoly acquisition; attempted monopoly; healthcare; outpatient services; inpatient services
Plaintiffs initially filed suit alleging various monopoly and restraint of trade claims against Defendants, who operate a hospital system in and around Asheville. In a previous order, discussed here, the Court dismissed the monopoly claims without prejudice. Plaintiffs then filed an amended complaint reasserting their monopoly claims and alleging that Defendants used their market power to coerce commercial health insurers to include provisions in their health insurance contracts which allowed Defendants to not only maintain their existing monopoly regarding inpatient services in the Asheville region, but also extend it to additional markets in western North Carolina. Defendants moved to dismiss all of the monopolization and attempted monopolization claims.
A monopolization claim must allege 1) the possession of monopoly power in the relevant market, and 2) willful acquisition or maintenance of that power separate from growth or development due to superior product, business acumen, or historic accident.
Monopoly Maintenance. The Court determined that Plaintiffs’ new allegations that Defendants had used the restraints in the insurance contracts to maintain their existing monopoly over inpatient services in the Asheville region were sufficient and thus denied dismissal.
Monopoly Leveraging. Plaintiffs alleged that Defendants had used their existing monopoly in the Asheville region inpatient services market to gain monopolies in the inpatient services market in the outlying regions and the outpatient services markets in both the Asheville region and the outlying regions. Regarding the outlying regions inpatient services market, the Court concluded that Plaintiffs’ new allegations regarding Defendants’ market share for this market were sufficient and thus denied dismissal as to the claim for this market. However, the Court granted dismissal as to the outpatient services market in both the Asheville region and the outlying regions because Plaintiffs had failed to sufficiently allege Defendants’ market share or that Defendants had the ability to control prices in those markets.
Attempted Monopolization. The Court’s conclusions mirrored those of the actual monopolization claims—the motion was denied as to the inpatient services market in the outlying regions, but granted as to the outpatient services markets in the Asheville region and the outlying regions.
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N.C. Dep’t of Revenue v. Philip Morris USA, Inc., 2023 NCBC 33 (N.C. Super. Ct. May 3, 2023) (Earp, J.)
Key Terms: N.C.G.S. § 105-122; franchise tax; capital base; constitutional challenge; dormant commerce clause; subject matter jurisdiction; Office of Administrative Hearings
Under N.C.G.S. § 105-122, Defendant was required to pay an annual franchise tax for the privilege of doing business in North Carolina. For tax years 2012 through 2014, Defendant used its “Capital Base” to calculate its tax due. Capital Base is determined by totaling the company’s issued and outstanding capital stock, surplus, and undivided profits and then applying various adjustments. Upon conducting an audit of Defendant’s franchise tax liability for these years, NCDOR determined that Defendant had improperly adjusted its Capital Base resulting in an underreporting of its tax liability, and, consequently, owed over $300,000. Defendant challenged this determination with the Office of Administrative Hearings, arguing that section 105-122(b)’s differing treatment of affiliate receivables violated the dormant commerce clause of the U.S. Constitution and was therefore unconstitutional as applied to Defendant. After determining that the OAH had jurisdiction over as-applied challenges, the administrative law judge agreed with Defendant, granted summary judgment in its favor, and reversed and rescinded NCDOR’s determination. NCDOR petitioned for judicial review, challenging both the OAH’s jurisdiction and the merits of the decision.
NCDOR argued that the statute requires the OAH to dismiss any case in which the sole issue is the constitutionality of a statute, regardless of whether the challenge is facial or as-applied. The Court agreed. Constitutional challenges to tax statutes must be heard by the Business Court, but only after the statutory requirements are met, including the requirement that the OAH dismiss the case for lack of jurisdiction. Moreover, a contrary interpretation of the statute would not only violate the basic tenets of statutory construction and legislative intent, but also create fundamental uncertainty since there is no clear-cut test to distinguish facial challenges from as-applied challenges. The Court found the two cases cited by Defendant unpersuasive because they involved both constitutional and misapplication issues and reached the Court on appeals from summary judgment rulings that involved misapplication.
The Court also held that even if the OAH has jurisdiction to determine as-applied constitutional challenges, it could not have decided this case because the challenge here was a facial one as reflected by the remedy ordered by the ALJ. A party’s characterization of the issue as an as-applied challenge is not conclusive of the court’s jurisdiction.
Accordingly, the Court reversed the ALJ’s decision and remanded the matter with instructions to dismiss the case for lack of subject matter jurisdiction.
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Wright v. LoRusso, 2023 NCBC 34 (N.C. Super. Ct. May 4, 2023) (Conrad, J.)
Key Terms: offensive summary judgment; premature; pending discovery; BCR 7.7
Plaintiffs, the minority members of an LLC, brought suit against Defendant Krista LoRusso, alleging that she had abused her position as the LLC’s majority member. While discovery was ongoing, Plaintiffs moved for partial summary judgment on their direct claim for declaratory judgment regarding whether a buy-sell event had been triggered under the LLC’s operating agreement by Defendant’s alleged misconduct.
The Court denied the motion. Not only was the motion premature due to pending discovery, but Plaintiffs had also failed to meet the higher burden required for offensive summary judgment. Specifically, their key evidence—a letter from their expert—was unsworn and thus inadmissible, and the Plaintiffs’ affidavits, although admissible, were vague and contradicted by Defendant’s affidavit. Finally, Plaintiffs’ reply brief contained new arguments and new evidence, which the Court declined to consider under Business Court Rule 7.7.
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Columbus Life Ins. Co. v. Wells Fargo Bank, N.A., 2023 NCBC 35 (N.C. Super. Ct. May 4, 2023) (Davis, J.)
Key Terms: life insurance policy; wagering contract; STOLI policy; public policy
At issue in this case is whether a life insurance policy taken out by the named insured on his own life solely for the purpose of later selling it to investors is void as an unlawful wagering contract under North Carolina law. In 2005, Dr. Trevathan, with the assistance of an insurance producer named Chesson, was issued a life insurance policy by Plaintiff. Dr. Trevathan’s stated intention was to sell the policy to make additional money. To fund the initial premiums, Dr. Trevathan obtained a non-recourse premium finance loan from a third-party, with the options, upon the loan’s maturity in two years, to 1) surrender the policy to the lender in satisfaction of the loan; 2) pay off the loan and retain the policy; or 3) sell the policy and use the proceeds to pay off the loan. Dr. Trevathan sold the policy and paid off the loan in 2007. Five years later, the policy was sold to Defendant, with the beneficiary designation being changed to Defendant as well. However, Plaintiff did not disclose to Defendant that it suspected that the policy was a “stranger-oriented life insurance” (“STOLI”) policy. In 2021, Plaintiff initiated this action seeking declarations that the policy is unenforceable as an illegal wagering contract or due to the lack of an insurable interest. Defendant answered, asserting that the policy is valid, or in the alternative, asserting a counterclaim for return of premiums. Both parties moved for summary judgment.
The Court began by noting that, although numerous courts across the country have addressed the validity of STOLI policies in the last two decades, North Carolina’s appellate courts have not had occasion to address such issues in recent years. However, in the late 19th/early 20th century, North Carolina’s Supreme Court decided a line of cases involving whether a life insurance policy was void as an unlawful wagering contract. Based on its review of these cases, the Court articulated the following rule: a life insurance policy is “void as a wagering contract only where there is evidence of an agreement—prior to the policy’s issuance—that the policy would be assigned to a third party and that the third party participated in that agreement.” Here, there was no evidence that any of the ultimate assignees had any involvement relating to the policy until well after the policy’s issuance. Thus, the Court held that the policy was valid and enforceable and granted summary judgment in favor of Defendant.
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Auto Club Grp. v. Frosch Int’l Travel, LLC, 2023 NCBC Order 27 (N.C. Super. Ct. May 3, 2023) (Robinson, J.)
Key Terms: attorneys’ fees; Rule 11; sanctions; N.C.G.S. § 6-21.5; justiciable issue; N.C.G.S. § 66-156; trade secrets; bad faith; N.C.G.S. § 75-1.1; UDTPA; frivolous; malicious; Rule 41(d); costs
Plaintiffs filed suit alleging claims for conversion, violations of the Trade Secrets Protection Act, and violations of the Unfair and Deceptive Trade Practices Act, based on contentions that Defendants had orchestrated the hiring of Plaintiffs’ travel agents and caused those agents to provide Defendants with Plaintiffs’ trade secrets and other confidential information. The action was voluntarily dismissed without prejudice and then re-filed without the TSPA claim. Defendants moved for an award of costs, attorneys’ fees, and sanctions against Plaintiffs pursuant to various rules and statutes.
Rule 11. Defendants sought sanctions under both the factual sufficiency and improper purpose prongs of Rule 11. Regarding factual sufficiency, the Court determined that the complaint was facially plausible because it showed that Plaintiffs had undertaken a reasonable inquiry into the facts and reasonably believed their position was well-grounded in fact. Regarding improper purpose, the Court found that an objective analysis of the complaint demonstrated that its purpose was to vindicate Plaintiffs’ rights. Defendants also contended that the affidavits it provided from the travel agents were sufficient to disprove Plaintiffs’ claims and thus maintaining the suit thereafter was improper. However, later testimony from one of the agents which contradicted her affidavit demonstrated otherwise. Thus, sanctions under Rule 11 were denied.
N.C.G.S. § 66-154. This section allows attorneys’ fees if a claim for misappropriation of trade secrets is made in bad faith. Defendants argued that the TSPA claim was made in bad faith because Plaintiffs 1) continued the action after receiving the agents’ affidavits; 2) could not show that Defendant received any trade secrets; 3) did not seek a TRO or preliminary injunction; and 4) did not re-file the TSPA claim. The Court did not find this sufficient to show bad faith, especially since the agents’ affidavits were contradicted by later testimony. Thus, attorneys’ fees pursuant to N.C.G.S. § 66-154 were denied.
N.C.G.S. § 75-16.1. This section allows attorneys’ fees for a UDTPA claim if the plaintiff knew the action was frivolous and malicious. For the reasons already stated, the Court could not conclude that the claim was frivolous. Moreover, Defendants’ assertion that Plaintiffs acted maliciously by bringing claims against a competitor with a “rapidly growing business” was insufficient to show that Plaintiffs brought the claim without just cause or as a result of ill will. The Court denied attorneys’ fees pursuant to N.C.G.S. § 75-16.1.
N.C.G.S. § 6-21.5. This section allows attorneys’ fees for the prevailing party if there was a complete absence of a justiciable issue of law or fact raised by the losing party in any pleading. However, as already discussed, the evidence showed that justiciable issues existed when the suit was filed and continued to exist throughout the litigation. Thus, attorneys’ fees pursuant to N.C.G.S. § 6-21.5 were denied.
Rule 41(d). The Court granted the motion under this Rule, which provides for the award of certain costs when an action is dismissed under Rule 41(a). Plaintiffs had previously tendered a check for the applicable costs to Defendants which was rejected. Accordingly, the Court ordered that Plaintiffs deposit the amount with the Clerk of Court for the benefit of Defendants.
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Wright v. LoRusso, 2023 NCBC Order 28 (N.C. Super. Ct. May 4, 2023) (Conrad, J.)
Key Terms: BCR 7.5; BCR 7.8; word limit; pinpoint citations; summary judgment
Before the end of discovery in this case, the Individual Plaintiffs filed a partial motion for summary judgment. They then filed two more summary judgment motions, each with an accompanying brief, as well as a separate document entitled Statement of Undisputed Material Facts. The Court determined that these actions violated Business Court Rule 7.8, which prohibits parties from attempting to circumvent applicable word limits by filing multiple motions and incorporating one document into another. Moreover, the briefs also violated Rule 7.5 because they did not include pinpoint citations to the record. Noting that the Individual Plaintiffs had failed to comply with procedural rules throughout the case, the Court struck the second and third motions and the accompanying documents without leave to re-file them.
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McManus v. Dry, 2023 NCBC Order 29 (N.C. Super. Ct. May 5, 2023) (Bledsoe, C.J.)
Key Terms: attorneys’ fees; Rule 1.5 factors; hourly rate; class action settlement
As discussed here, the parties had previously reached a class action settlement agreement which the Court approved, reserving, however, the request for attorneys’ fees and expenses pending supplemental briefing. The Court now addressed that request.
The reasonableness of a fee award is governed by Rule 1.5 of the Rules of Professional Conduct, which provides eight factors for consideration. The Court addressed each in turn.
The first factor weighed in favor of the award as the time expended by counsel was reasonable and the case involved complex and novel questions regarding digital privacy which required high legal skill to resolve. The second factor weighed against as there was no evidence that Plaintiffs’ counsels’ work on this case precluded other work.
In considering the third factor—the fee customarily charged in the locality—the Court first determined that the relevant locality was North Carolina, not the national plaintiffs’ data breach bar at large. The Court then surveyed recently approved hourly rates, which ranged from $250 to $600, but also acknowledged that hourly rates have been on the rise. In light of that, and the complex and novel area of the law at issue in the case, the Court concluded that hourly rates ranging from $575 to $700 for the partners and of $350 for the associates were reasonable.
The fourth factor also weighed in favor because Plaintiffs’ counsel had achieved a favorable settlement for the class. There was no evidence before the Court regarding the fifth (time limitations), sixth (nature of professional relationship with the client), or eighth (nature of the attorneys’ fee arrangement) factors, thus these weighed neither for nor against the award. The seventh factor also weighed in favor as Plaintiffs’ counsel all had extensive experience in data breach class actions. Lastly, the Court noted that the settlement class had received notice of the request but no member had objected.
Accordingly, the Court determined that, overall, the Rule 1.5 factors weighed in favor of the award and therefore approved the payment of attorneys’ fees and expenses with the stated adjustments to the hourly rates.
By: Ashley B. Oldfield
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 05/09/23
Blue Cross & Blue Shield of N.C. v. MH Master Holdings, LLLP, 2023 NCBC 31 (N.C. Super. Ct. April 4, 2023) (Bledsoe, C.J.)
Key Terms: motion to dismiss; health insurance reimbursements; statute of limitations; contractually abridged limitations period
In October 2022, Plaintiff Blue Cross & Blue Shield of North Carolina brought suit to recover certain overpayments it had made in 2018 and 2019 for claims submitted by Defendant McDowell, a hospital system in Marion, North Carolina. However, the parties had entered into an agreement which provided that neither party could recover an overpayment from the other any later than two years after the payment in question was made. Defendants moved to dismiss, arguing that this provision barred Plaintiff’s claims.
The Court began by noting that parties to a contract are allowed to shorten the applicable statute of limitations under North Carolina law. The Court then turned to the language of the provision at issue and concluded it unambiguously provided that, absent fraud, neither party could recover an overpayment any later than two years after the payment. Since the overpayments were made in 2018 and 2019, but the suit was not brought until 2022, the plain language of the agreement barred Plaintiff’s suit.
The Court was unpersuaded by Plaintiff’s arguments that the terms of the agreement were ambiguous as applied and that the Court’s previous decision in Frye Reg’l Med. Ctr., Inc. v. Blue Cross Blue Shield of N.C., Inc., which addressed a materially identical agreement, required contract clauses shortening statute of limitations periods to explicitly refer to the filing of lawsuits in order to be enforceable. Accordingly, the Court granted the motion and dismissed the action with prejudice.
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North Carolina ex rel. Stein v. MV Realty PBC, LLC, 2023 NCBC Order 25 (N.C. Super. Ct. April 12, 2023) (Bledsoe, C.J.)
Key Terms: order on designation; N.C.G.S. § 7A-45.4(a)(1); N.C.G.S. § 7A-45.4(a)(3); N.C.G.S. § 7A-45.4(b)(2)); unfair debt collection practices; unfair or deceptive lending practices; unfair and deceptive trade practices; telephone solicitations; antitrust law; amount in controversy
After Plaintiff filed suit asserting claims for unfair debt collection practices, unfair or deceptive lending practices, unfair and deceptive trade practices, and violations of the prohibitions regarding telephone solicitations, the corporate defendants filed a notice of designation pursuant to N.C.G.S. §§ 7A-45.4(a)(1), (a)(3), and (b)(2).
(a)(1) – Defendants argued that designation was proper under § 7A-45.4(a)(1) (disputes involving the law governing LLCs) because Plaintiff sought to pierce the limited liability veil. The Court rejected this contention, however, because a claim for piercing the corporate veil, standing alone, is insufficient to support mandatory complex business case designation and the claims did not otherwise implicate the law governing LLCs.
(a)(3) – Defendants also argued that designation was proper under § 7A-45.4(a)(3) (disputes involving antitrust law including disputes arising under Chapter 75) because the case involved a material dispute arising under the North Carolina Telephone Solicitations Act, which is a dispute arising under Chapter 75. The Court again disagreed, because while Chapter 75 encompasses both antitrust and consumer protection law, section (a)(3) makes clear that only those actions involving antitrust law qualify for designation. Since Plaintiff’s claim involved consumer protection law, not antitrust law, designation under (a)(3) was not proper.
(b)(2) – Lastly, Defendants argued that designation was proper under § 7A-45.4(b)(2) (actions described in sections (a)(1)-(5) or (8) in which the amount in controversy is at least $5 million based on the pleadings) because Plaintiff’s claims had the potential to exceed $5 million. However, the Court determined that designation was improper under this section as well because 1) the Court had already concluded that no basis for designation existed under sections (a)(1) or (a)(3) and 2) the Complaint did not seek relief in an amount equal to or in excess of $5 million.
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Campbell Sales Grp., Inc. v. Niroflex by Jiufeng Furniture, LLC, 2023 NCBC Order 26 (N.C. Super. Ct. April 20, 2023) (Davis, J.)
Key Terms: motion to stay; enforcement of judgment; partial summary judgment; certification; final judgment; Rule 54(b); Rule 62; interlocutory orders; substantial right doctrine; discretion; inherent authority
In a previous order, discussed here, the Court denied summary judgment on Plaintiff’s claims, but granted partial summary judgment in favor of Defendant Genfine on its counterclaims, and thereafter, entered a judgment in Genfine’s favor in an amount in excess of $500,000. After Genfine began taking steps to enforce the judgment, Plaintiff moved to stay its enforcement, arguing that 1) immediate enforcement proceedings were not legally proper because the Court did not certify the judgment as a “final judgment” pursuant to Rule 54(b), and 2) alternatively, the Court should enter a discretionary stay pending resolution of Plaintiff’s remaining claims at trial and entry of a final judgment.
Upon review of Rule 54, which governs judgments upon multiple claims or involving multiple parties; Rule 62 which governs the issuance of a stay of proceedings to enforce a judgment; and the rules governing the appeal of interlocutory orders, the Court concluded that the judgment was immediately appealable as an interlocutory order affecting a substantial right because it granted a specific monetary sum to one party from another party. However, no case law from North Carolina’s appellate courts squarely resolved the issue of whether immediate appealability rendered the judgment immediately enforceable where the order has not been certified as a final judgment under Rule 54(b).
Without clear appellate guidance and without deciding if the judgment was immediately enforceable, the Court concluded that any enforcement proceedings should be subject to a discretionary stay pursuant to Rule 62(g) or, in the alternative, pursuant to the Court’s inherent authority to enter orders necessary for the proper administration of justice. The Court further determined that no bond would be required of Plaintiff related to the stay order.
By Rachel E. Brinson
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 04/25/23
Shaver v. Walker, 2023 NCBC 27 (N.C. Super. Ct. Mar. 31, 2023) (Earp, J.)
Key Terms: stock options; motion to dismiss; Rule 12(b)(6); Rule 9(b); fraud; breach of fiduciary duty; constructive fraud; negligent misrepresentation
Plaintiff brought suit against Vadum, Inc. (his employer) and Walker (his brother-in-law and the owner/CEO of Vadum), alleging that Defendants tricked him into losing his right to equity in Vadum by making misrepresentations regarding exercising his vested stock options. Specifically, Plaintiff alleged that Defendants told Plaintiff that: (a) There was no monetary benefit to exercising the options before an initial public offering; (b) The options could not be exercised at that point, because the “paperwork needed to be fixed”; (c) Plaintiff should not worry, because the options would not expire, and the company would fix the situation; (d) Exercising the options would make tax matters too complex; and (e) Plaintiff should “trust [him].” In his Complaint, Plaintiff asserted claims against Vadum and Walker for fraud and against Walker only for breach of fiduciary duty, constructive fraud, and negligent misrepresentation. Defendants moved to dismiss Plaintiff’s claims pursuant to Rules 12(b)(6) and 9(b).
Regarding the fraud claim, Defendants argued that the claim should be dismissed because: (1) the alleged misrepresentations were opinions or legal positions, not statements of material fact; (2) Plaintiff’s reliance was not reasonable; and (3) an intent to deceive was not adequately alleged because the misrepresentations were just inadvertently unfulfilled promises. The Court, however, determined that: (1) the alleged misrepresentations were sufficiently definite and specific to constitute representations of fact which were material to Plaintiff’s decision not to exercise his options; (2) the allegations could support a jury’s conclusion that Plaintiff’s reliance was reasonable due to Defendants’ superior knowledge; and (3) an intent to deceive, which can be averred generally, was sufficiently pleaded, and the misrepresentations were not merely broken promises but false and misleading statements. Accordingly, the Court denied the motion as to the fraud claim.
Regarding the breach of fiduciary duty and constructive fraud claims, Plaintiff argued that he had alleged a de facto fiduciary relationship between Walker and himself based on a combination of their familial and employment relationships. The Court disagreed, noting that, unlike the plaintiffs in the proffered caselaw, Plaintiff had not demonstrated a significant power imbalance since Plaintiff was a capable professional who was not dominated to the point of being essentially helpless in Walker’s hands. Thus, with no fiduciary relationship, these claims were dismissed.
Regarding the negligent misrepresentation claim, the Court rejected Defendants’ argument that, since Walker did not owe Plaintiff a fiduciary duty, he did not owe Plaintiff a duty of reasonable care. While Walker had no duty to speak, a duty to exercise reasonable care arose when he chose to do so. Therefore, the Court denied the motion as to the negligent misrepresentation claim.
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McCabe v. N.C. Dep’t of Revenue, 2023 NCBC 28 (N.C. Super. Ct. April 3, 2023) (Conrad, J.)
Key Terms: tax credit; solar energy project; partnership; bona fide partner; disguised sale; administrative law
Plaintiffs, a married couple, sought judicial review of an administrative decision from the North Carolina Department of Revenue, which resulted in the disallowance of an income tax credit Plaintiffs claimed in 2014.
In 2014, Plaintiffs invested in several solar energy projects through a partnership organized by Monarch Tax Credits, LLC. Plaintiffs then claimed a share of the tax credits generated by the projects on their joint income tax return. Because Plaintiffs could not offset more than 50% of their state income tax liability with tax credit, they claimed less than their full allocation from the partnership fund in 2014, but were able to carry forward the remaining credit to their 2015 tax return.
In 2018, the NCDOR audited Plaintiffs’ 2014 tax return and issued a proposed assessment based on the Official Auditor’s report that disallowed Plaintiffs’ claimed share of tax credit. Upon review, the NCDOR upheld the assessment, reasoning that Plaintiffs were not “bona fide partners” since they would not be characterized as such under federal income tax law, or alternatively, that Plaintiffs’ investment “amounted to a disguised sale” and was unlawful. Plaintiffs contested the assessment again, and an administrative law judge granted summary judgment in the NCDOR’s favor. Plaintiffs paid the assessment and then petitioned for judicial review.
The Court first reviewed the ALJ’s rulings on two disputed matters: (1) whether the partnership amounted to an unlawful “disguised sale”; and (2) whether federal tax doctrine applied to state income tax. The Court held that the partnership investment was not an unlawful “disguised sale,” as Plaintiffs acquired membership interest in a limited liability company that legitimately qualified for tax credit. Finding no statutory basis to disallow tax credits legitimately earned by a partnership and then passed through to its partners, the Court held that it was error to disallow Plaintiffs’ tax credits on the basis of an unlawful “disguised sale.” Second, the Court held that federal tax doctrines were not applicable to the state statutes at issue. The Court noted that, “when the General Assembly intends to adopt provisions or definitions from other sources of law into a statute, it does so by clear and specific reference.” Finding no specific reference in the statute at issue, the Court concluded that the NCDOR’s use of federal tax law in determining Plaintiffs were not “bona fide partners” was in error.
The Court further found that there were no genuine issues of material fact concerning the amount of credit Plaintiffs were entitled to claim. The Court overruled the NCDOR’s filed exceptions to the ALJ’s report, finding any error in the ALJ’s evidentiary ruling to be harmless. The Court granted Plaintiff’s petition, vacated the ALJ’s final decision, and remanded the matter with direction to grant summary judgment in Plaintiffs’ favor.
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N.C. Farm Bureau Mut. Ins. Co. v. N.C. Dep’t of Revenue, 2023 NCBC 29 (N.C. Super. Ct. April 3, 2023) (Conrad, J.)
Key Terms: tax credit; partnership; bona fide partner; disguised sale; administrative law
This opinion, issued in tandem with McCabe v. N.C. Dep’t of Revenue, involves the same subject matter and dispute regarding the allowance of tax credits generated from a partnership.
As in McCabe, Plaintiff invested in a tiered partnership fund for solar energy projects (the “Partnership”). Between 2014 and 2016, Plaintiff invested nearly $27 million in the Partnerships and received tax credit allocations in the amount of $37.8 million. Plaintiff was audited by the North Carolina Department of Revenue (“NCDOR”) in 2018. Following the audit, the NCDOR issued a proposed assessment of approximately $24 million in additional taxes, penalties, and interest on the basis that Plaintiff did not qualify as a “bona fide partner” under federal tax law. Following a Department Review that upheld the proposed assessment, Plaintiff filed a petition for a contested hearing before an Administrative Law Judge (“ALJ”). The ALJ granted summary judgment in favor of the NCDOR, finding that Plaintiff “did not meet the criteria” for claiming a tax credit under state law because it “did not construct, purchase, or lease renewable energy property.” Plaintiff paid the assessment and petitioned for judicial review.
The Court vacated the ALJ’s ruling and remanded with direction to grant summary judgment in Plaintiff’s favor. The Court determined that the ALJ mistook the criteria for earning tax credit with those for allocating tax credit. As the Partnership legitimately qualified for tax credit, Plaintiff was entitled to its share of the tax credits generated by the Partnership. The Court further held that federal tax law’s definition of a “bona fide partner” was not applicable to the state tax statute at issue, as the General Assembly had chosen not to reference any federal statute. Finally, the Court echoed its sentiments in McCabe that the “disguised sale” exception did not apply. The Court overruled the NCDOR’s filed exceptions with the ALJ’s ruling, finding the NCDOR did not meet its burden to show an abuse of discretion.
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F-L Legacy Owner, LLC v. Legacy at Jordan Lake Homeowners Ass’n, 2023 NCBC 30 (N.C. Super. Ct. April 3, 2023) (Bledsoe, C.J.)
Key Terms: breach of fiduciary duty; self-interested transaction; entire fairness; accounting; homeowner’s association; motion to dismiss; Rule 12(b)(6)
This dispute arose from the governance of a HOA by board members appointed by the community’s developer, F-L Legacy Owner, LLC, during the developer’s “control period.” These directors were also directors and officers of Freehold, the parent company of F-L Legacy. According to the HOA, the directors caused the HOA to incur budget deficits and then eliminated those deficits by borrowing funds from F-L Legacy pursuant to six promissory notes. After F-L Legacy sued the HOA to recover on the notes, the HOA counterclaimed asserting, inter alia, claims against each director for breach of fiduciary duty and a claim for an accounting, which Defendants moved to dismiss.
Regarding the breach of fiduciary duty claims, the HOA asserted that the directors breached their fiduciary duties to the HOA by acting to further Freehold’s interests at the expense of the HOA. The directors responded that their actions complied with the Declaration and benefitted the HOA and thus were “entirely fair.” Noting that even if the conduct was permitted by the Declaration, the directors must still act in good faith and avoid self-dealing, the Court concluded that the HOA’s allegations were sufficient to show that the directors engaged in self-dealing and conflict of interest transactions. Since all of the directors were interested in the transactions, the transactions have to pass the “entire fairness” test, for which the burden of persuasion shifts to those defending the transaction. As the directors failed to show that, based on the HOA’s pleading, the transactions at issue were “entirely fair” as a matter of law, the HOA’s claims survived dismissal.
The Court, however, dismissed the claim for an accounting, since an accounting is a remedy, not an independent cause of action, but did so without prejudice to the HOA’s right to pursue the equitable accounting remedy, to the extent one or more of its causes of action warranted such relief.
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McManus v. Dry, 2023 NCBC Order 19 (N.C. Super. Ct. Mar. 29, 2023) (Bledsoe, C.J.)
Key Terms: class action; personally identifiable information; opt-out; settlement approval
Plaintiffs moved for final approval of a class action settlement relating to allegations that Defendant failed to safeguard and protect the personally identifiable information of its current and former clients, thereby causing injury to the Plaintiffs and the settlement classes. The Court had previously entered an order granting preliminary approval of the class action settlement. Thereafter, twelve potential settlement class members submitted opt-out requests during the opt-out period, but no objections to the settlement were filed. After review of the settlement and all relevant documents and arguments, the Court held that the terms of the settlement agreement were fair, reasonable, and adequate, and granted final approval.
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Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., 2023 NCBC Order 20 (N.C. Super. Ct. April 3, 2023) (Davis, J.)
Key Terms: attorneys’ fees; costs; hourly rates; reasonableness; Rule 1.5 of the Rules of Professional Conduct
The Court previously granted Defendants’ motion to compel, ordered Plaintiff to pay Defendants’ reasonable expenses, including attorneys’ fees, relating to the motion, and directed Defendants to file a fee petition and supporting documentation. Defendants petitioned for $111,625.00 in attorneys’ fees based on 214 hours of work performed by counsel.
Following briefing by both parties, the Court analyzed the fee petition using the factors outlined under Rule 1.5 of the Revised Rules of Professional Conduct. The Court held that the rates charged by Defendants’ counsel were in excess of the hourly rates typically approved by the Court, and consequently reduced three of the attorneys’ hourly rates. The Court also reduced two excessive time entries; eliminated two entries, which were beyond the scope of Defendants’ Motion to Compel; and eliminated two entries which were too vague to render a reasonableness determination. The Court found that the remaining Rule 1.5 factors merited the award of attorneys’ fees. Accordingly, the Court awarded Defendants $85,237.50.
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Husqvarna Pro. Prods., Inc. v. Robin Autopilot Holdings, LLC, 2023 NCBC Order 21 (N.C. Super. Ct. April 5, 2023) (Bledsoe, C.J.)
Key Terms: designation; mandatory complex business case
In this Order on Designation, the Court determined that the case was not properly designated as a mandatory complex business case. The Court noted that the dispute, which arose from a series of agreements, “requires only a straightforward application of contract law principles and does not implicate the law governing limited liability companies.” The Court rejected the designation and returned the case to the Superior Court of Judicial District 26 “so that the action may be treated as any other civil action” wherein the parties could “pursue designation as a Rule 2.1 exceptional case.”
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Vitaform, Inc. v. Aeroflow, Inc., 2023 NCBC Order 22 (N.C. Super. Ct. April 6, 2023) (Bledsoe, C.J.)
Key Terms: motion in limine; Rule 402; irrelevant; Rule 403; unfairly prejudicial; Rule 602; personal knowledge
This case, previously discussed here and here, involves a dispute over Defendants’ alleged use and appropriation of Plaintiff’s business plan relating to post-partum compression garments. In this order, the Court addressed five motions in limine by Defendants and one motion in limine by Plaintiff.
In Defendants’ Motion 1, Defendants argued that any reference to the impact of the litigation on Plaintiff’s principal (Don Francisco) or to the facilities which manufactured Plaintiff’s garments as “Don’s Factories” should be prohibited as irrelevant and unfairly prejudicial. The Court agreed, concluding that the impact on Francisco was irrelevant since he was not a party to the suit and would be unfairly prejudicial since it would tend to create sympathy in the jury for Plaintiff. For similar reasons, the manufacturing facilities could not be referred to as Don’s Factories since Francisco did not have any legal interest in them.
Defendants’ Motion 2 sought to prevent Plaintiff from introducing documents which Defendants contended relate solely to Plaintiff’s dismissed claims or excluded theory of damages. However, since the surviving claims stemmed from the same factual background (the “July Phone Call”) as the dismissed claims, the Court concluded that the majority of the documents were relevant to the remaining claims and admissible. Thus, the Court denied Motion 2 except as to documents specifically noted, but emphasized that Plaintiff would not be permitted to use the documents to elicit testimony or make arguments regarding Plaintiff’s actual damages.
Defendants’ Motion 3 sought to exclude, pursuant to Rule 602, the testimony of five witnesses Defendants contended lack personal knowledge of the underlying events. The Court denied Motion 3 as to three of the witnesses since although they did not participate in the July Phone Call, they nonetheless had personal knowledge of relevant surrounding events. The Court granted in part and denied in part Motion 3 as to testimony from Defendant’s CFO, thereby prohibiting the CFO’s testimony relating to Plaintiff’s actual damages but allowing his testimony about Defendant’s conscious acceptance of Plaintiff’s business plan and about Defendants’ net worth and revenues. The Court also granted Motion 3 to the extent it sought to exclude testimony from Defendant’s CEO, as Plaintiff had not offered evidence that Defendant’s CEO had any knowledge of the relevant events.
The Court granted Defendants’ Motion 4 to the extent it related to 1) characterizing Plaintiff’s business plan as a trade secret, confidential, or proprietary; 2) characterizing Defendants’ acts as stealing or illegal; and 3) witnesses (other than Francisco) characterizing Defendants’ acts as unethical or immoral, but denied Motion 4 to the extent it related to 1) Francisco’s characterization of Defendants’ acts as unethical or immoral; and 2) characterizing Defendants’ actions as copying.
The Court also granted Defendants’ Motion 5, which sought to prevent Plaintiff from offering evidence of any other lawsuits involving Defendants.
At the hearing on Plaintiff’s motion to exclude the de bene esse deposition of one of Defendants’ witnesses, Plaintiff’s counsel conceded that Defendants’ position was correct. Accordingly, the Court denied the motion.
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McNew v. Fletcher Hosp., Inc., 2023 NCBC Order 24 (N.C. Super. Ct. April 6, 2023) (Bledsoe, C.J.)
Key Terms: Rule 23(c); class action; voluntary dismissal; pre-certification settlement
Plaintiff, an individual proceeding pro se, instituted a class action suit against Defendant Fletcher Hospital, Inc. At the time this Order was issued, no class had been certified. After a settlement between the parties was reached, Defendant filed a Motion for Approval of Dismissal of Plaintiff’s Alleged Class Action Claims.
As no class had been certified in the suit, Rule 23(c) did not require the parties to obtain judicial approval before obtaining a voluntary dismissal, but did require the Court to conduct a limited inquiry into the circumstances of the pre-certification dismissal. This inquiry requires the court to determine: (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members.
Upon review of the motion, the parties’ settlement agreement, and the record, the Court determined that the parties had litigated in good faith and had not benefitted from any abuse of the class-action mechanism. Moreover, the dismissal would not prejudice absent class members because the settlement agreement did not bind any non-parties. Accordingly, the Court approved the voluntary dismissal of the action and dismissed it with prejudice.
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Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., No. 376A21 (N.C. 2023) (Barringer, J.)
Key Terms: appeal; attorneys’ fees; Rule 41(d); N.C.G.S. § 6-21.5; unchallenged findings and conclusions; affirmed
In this appeal, Plaintiffs challenged the Business Court’s orders granting Defendants’ motion for attorneys’ fees under N.C.R. Civ. P. 41(d) pursuant to N.C.G.S. § 6-21.5 and awarding $599,262.00 in attorneys’ fees. The Court held that the findings of facts and conclusions of law entered by the Business Court, which were unchallenged on appeal, were sufficient to support the order of attorneys’ fees. Plaintiffs’ arguments—that the Business Court erred by allowing attorneys’ fees without finding that Plaintiffs’ voluntarily dismissed their action in bad faith; Plaintiffs’ advanced a claim supported by a good faith argument for an extension, modification, or reversal of law; and the Business Court abused its discretion by allowing attorneys’ fees when it had previously directed Plaintiffs to continue with discovery—all failed or were not preserved. Accordingly, the Business Court’s orders were affirmed.
By Natalie E. Kutcher
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 04/12/23
Relation Ins., Inc. v. Pilot Risk Mgmt. Consulting, LLC, 2023 NCBC 21 (N.C. Super. Ct. Mar. 16, 2023) (Davis, J.)
Key Terms: 30(b)(6) deposition; errata sheet; Rule 30(e)
After deposing Plaintiffs’ corporate representative, Jonathan Cooper, pursuant to Rule 30(b)(6), Defendants received an errata sheet for Cooper’s deposition transcript which contained seventy-six changes to Cooper’s testimony. Defendants moved to strike the changes in the errata sheet because they substantially contradicted or modified Cooper’s sworn deposition testimony.
The Court concluded that, under existing law, no basis existed to grant the motion to strike. While a few federal courts have refused to allow changes on an errata sheet that contradict the witness’s testimony, no North Carolina court has adopted this view. In fact, on at least two prior occasions, the Business Court has held that Rule 30(e) places no limits on a deponent’s ability to change his prior deposition testimony on an errata sheet. Nevertheless, the Court also determined that under the circumstances, certain safeguards were necessary, namely 1) Defendants were permitted to re-depose Cooper at Plaintiffs’ expense regarding the changes and the reasons for them; 2) Cooper’s original responses would remain part of the record and could be used for impeachment or other purposes; and 3) Defendants could challenge the substantive changes to the extent Plaintiffs sought to use them at summary judgment.
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Cumberland Cnty. Hosp. Sys., Inc. v. Woodcock, 2023 NCBC 22 (N.C. Super. Ct. Mar. 21, 2023) (Davis, J.)
Key Terms: derivative standing; demand; Barger rule; special injury exception; fiduciary duty; majority member; constructive fraud
In this action, Plaintiff, the minority member of WCV, brought individual and derivative claims against WCV and its majority member and manager, Woodcock, arising out of Woodcock’s alleged failure to pay appropriate distributions and comply with WCV’s operating agreement. Defendants moved to dismiss pursuant to Rules 12(b)(1) and 12(b)(6).
Regarding Plaintiff’s standing to bring claims on behalf of WCV, the Court determined that Plaintiff had failed to comply with the demand requirements in N.C. Gen. Stat. § 57D-8-01(a)(2) for two reasons. First, Plaintiff did not wait ninety days after its demand to file suit. Although Plaintiff asserted the “irreparable injury” exception to this requirement, its complaint (and failure to seek a TRO or preliminary injunction) showed that any injurious conduct was not imminent. Plaintiff also argued that its failure to comply with the ninety-day requirement was moot since more than ninety days had now passed. The Court, however, rejected this argument since it would thwart the legislature’s intent and effectively render the ninety-day requirement meaningless in most cases. Second, the Court determined that the demand itself was insufficient because its focus was to protect Plaintiff’s interest, not the company’s. Moreover, while Plaintiff had attached a draft complaint to its demand, this was not a substitute for a demand that the company take appropriate and tangible action. Accordingly, the Court concluded that Plaintiff did not have standing to assert derivative claims and dismissed those claims without prejudice.
Plaintiff’s standing to assert individual claims fared better. Although under the Barger rule members cannot bring individual actions to recover their share of damages suffered by the company, the special injury exception to the rule was satisfied by Plaintiff’s allegations that Woodcock had 1) thwarted Plaintiff’s ability to receive distributions, and 2) refused to comply with provisions of the operating agreement to Plaintiff’s detriment. Thus, the Court denied the 12(b)(1) motion as to Plaintiff’s individual claims.
Regarding the individual breach of fiduciary claim, the Court assessed whether Woodcock owed Plaintiff fiduciary duties as either a manager or as the majority member of WCV. Since WCV’s operating agreement expressly provided that managers did not owe fiduciary duties to members, the Court dismissed the claim to the extent it was based on Woodcock’s actions as a manager. However, Plaintiff had sufficiently alleged that Woodcock used his position as majority member to assert absolute control over WCV such that he owed a fiduciary duty to Plaintiff as the minority member. Plaintiff also alleged that Woodcock breached this duty; therefore, the Court denied dismissal of the claim to the extent it was based on Woodcock’s actions as the controlling majority member.
Finally, the Court also denied dismissal of the constructive fraud claim since Defendants did not contend that Plaintiff had failed to adequately allege the claim, but only that such a claim was not viable where, as here, monetary damages were adequate compensation, which, the Court explained, was a misapprehension of the law and not a valid basis for dismissal.
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Prometheus Grp. Enters., LLC v. Gibson, 2023 NCBC 23 (N.C. Super. Ct. Mar. 21, 2023) (Earp, J.)
Key Terms: breach of contract; non-compete; non-solicitation; non-disclosure; blue-pencil; tortious interference with contract; legal malice; misappropriation of trade secrets; UDTPA; aggravating circumstances; preliminary injunction
In this action, Plaintiff brought suit against its former employee, Gibson, and his new employer, Prospecta Software, alleging claims for breach of contract based on non-compete, non-solicitation, and non-disclosure provisions in Gibson’s employment agreement and for misappropriation of trade secrets and tortious interference with contract. Plaintiff also sought a preliminary injunction. Defendants moved to dismiss all claims.
Beginning with the breach of contract claim, the Court addressed each provision in turn. The non-compete provision was overbroad and unenforceable because it effectively prohibited Gibson from taking a wholly unrelated position with any business, or the affiliate of any business, located anywhere in the world, that provided asset management products. The Court declined to blue-pencil either the geographical restriction (because the list of locations was joined by the conjunctive “and”) or the word “indirectly” (because the provision’s structure did not clearly establish the drafter’s intention that the word be used alternatively). The non-solicitation provision was also unenforceable because it extended to customers and prospective customers with whom Gibson had no contact or even knowledge of. However, since non-disclosure provisions are not considered a restraint on trade and therefore not subject to the same level of scrutiny, the Court concluded that the allegations regarding Gibson’s breach thereof were sufficient, even though stated upon information and belief. Accordingly, the Court dismissed the breach of contract claim to the extent it was based on breach of the non-compete or non-solicitation provisions but denied dismissal to the extent the claim was based on breach of the non-disclosure provision.
As for the tortious interference with contract claim, the Court determined that, absent supporting facts, Plaintiff’s conclusory allegation that “Prospecta [] knowingly induced Gibson to violate his [Employment] Agreement with [Plaintiff] without justification” was insufficient to satisfy the pleading requirements for intentional inducement and legal malice.
Regarding the misappropriation of trade secrets claim, the Court first determined that Plaintiff’s allegations of a compilation of confidential information housed in Salesforce was sufficient to plead the existence of a trade secret. However, the Court nonetheless dismissed the claim because Plaintiff’s allegations that Gibson had access to the trade secrets and was now working in a nearly identical role were insufficient to allege actual misappropriation.
The Court also dismissed the UDTPA claim since the misappropriation and tortious interference claims were dismissed and Plaintiff did not allege the aggravating circumstances necessary to elevate a breach of contract to an unfair or deceptive trade practice.
Finally, the Court denied the motion for a preliminary injunction, concluding that neither the bare-bones allegations of the Complaint nor the evidence presented satisfied Plaintiff’s burden to establish a likelihood of success on the merits of the sole remaining claim or that it was likely to sustain irreparable loss absent an injunction.
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Baker v. Hobart Fin. Grp., Inc., 2023 NCBC 24 (N.C. Super. Ct. Mar. 22, 2023) (Robinson, J.)
Key Terms: Rule 12(e); motion for a more definite statement; and/or
Plaintiffs, ten individuals or couples, brought suit against seven defendants alleging seven causes of action. Their amended complaint contained seventy-seven pages of detailed factual allegations; however, the remaining seven pages setting forth their causes of action lacked clarity because, among other reasons, they did not specify which plaintiffs brought which claims against which defendants. Although Defendants moved to dismiss under Rules 12(b)(6) and 9(b), the Court treated the motion as a motion for a more definite statement under Rule 12(e) and ordered Plaintiffs to file a second amended complaint to clarify their claims. The Court specifically instructed Plaintiffs to avoid using “and/or” as it made the Court’s analysis of the fraud-based claims particularly difficult.
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Reason v. Barfield, 2023 NCBC 25 (N.C. Super. Ct. Mar. 24, 2023) (Earp, J.)
Key Terms: judgment on the pleadings; joint venture; declaratory judgment; breach of contract; unjust enrichment
This suit arose from an alleged joint venture between the parties to purchase and sell certain properties. Plaintiffs brought claims for a declaratory judgment regarding the joint venture agreement, breach of contract, and unjust enrichment based on allegations that Defendant Barfield refused to abide by the terms of their agreement to divide profits from the venture. Defendants sought judgment on the pleadings pursuant to Rule 12(c).
Regarding the claim for a declaratory judgment, the Court rejected Defendants’ argument that Plaintiffs had failed to plead the existence of either a partnership or joint venture. Noting that partnerships and joint ventures are governed by substantially the same rules, the Court determined that the Plaintiffs had satisfied the pleading requirements, namely agreement to share the financial repercussions of the venture and shared ownership and control of the business. That Plaintiffs did not specifically allege that they agreed to share losses did not warrant dismissal at this stage of the case. Thus, the motion was denied as to the declaratory judgment claim.
The Court also denied the motion as to the breach of contract claim, concluding that Plaintiffs’ allegations that Barfield breached his promise to share the profits of the venture were sufficient.
Lastly, the Court denied the motion as to the unjust enrichment claim, noting that courts generally decline to address such claims at the Rule 12 stage if a viable breach of contract claim exists as it did here. Moreover, Plaintiffs had adequately alleged each element of the claim.
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Loyd v. Griffin, 2023 NCBC 26 (N.C. Super. Ct. Mar. 27, 2023) (Robinson, J.)
Key Terms: summary judgment; UDTPA; in or affecting commerce; breach of contract; nominal damages; fraud; breach of fiduciary duty; business judgment rule; constructive fraud; conversion; unjust enrichment
This case arose out of Plaintiff’s and Defendant Griffin’s insurance agencies (LIA and GIA, respectively), the merger of the businesses, and various agreements relating to the business relationship. After GIA terminated Plaintiff for issuing false certificates of insurance (COIs), Plaintiff filed suit against Griffin and GIA, to which they responded with various counterclaims. The parties moved for summary judgment on all claims.
UDTPA. Defendant’s UDTPA claim was based on Plaintiff’s issuance of false COIs. Since this claim concerned Plaintiff’s conduct and its impact on GIA, it was an internal business dispute not in or affecting commerce. Accordingly, the Court dismissed the claim.
Breach of Contract – June 2018 Shareholders Agreement. Defendants sought specific performance of the June 2018 Shareholders Agreement requiring Plaintiff to sell his shares in GIA. However, a factual dispute existed as to whether, and to what extent, that agreement had been modified. Thus, the Court denied summary judgment.
Fraud. Defendants alleged that Plaintiff committed fraud in the Merger Agreement by representing that he and LIA were in compliance with applicable law despite Plaintiff wrongfully issuing false COIs. In response, Plaintiff argued that he could not be individually liable for false statements made by LIA. The Court rejected this argument; however, it nonetheless dismissed the claim because the evidence in the record showed that LIA did not issue any false COIs. Rather, all of the COIs in the record were issued by GIA and, therefore, Loyd’s representations were not false.
Breach of Contract – Merger Agreement. Defendants also alleged that Plaintiff’s false representations in the Merger Agreement constituted a breach contract. However, as with the fraud claim, Plaintiff’s representations were not false because the record evidence showed that LIA did not issue any false COIs. Thus, the Court dismissed this claim as well.
Breach of Contract – Associate Agent Agreement. Plaintiff argued that he was entitled to summary judgment on this claim because Defendants had not offered evidence of any damages. The Court denied summary judgment, though, because proof of damages is not an element of a claim for breach of contract. Even absent actual damages, Defendants could be entitled to nominal damages.
Fiduciary Claims against Defendant Griffin. Plaintiff brought breach of fiduciary duty and constructive fraud claims against Griffin based on fiduciary duties owed to Plaintiff as both a partner and a minority shareholder. The Court dismissed the claims to the extent they were based on a partnership relationship because there was insufficient evidence of such a relationship. The Court otherwise denied summary judgment because a factual dispute existed as to Griffin’s status as the majority shareholder.
Fiduciary Claims against Plaintiff. Defendants alleged a breach of fiduciary duty claim based on Plaintiff directing employees to issue false COIs in breach of his fiduciary duties as an officer of GIA. Plaintiff countered that his actions were done in good faith and in what he believed to be the best interests of GIA. Due to these disputed issues and a question of the weight of the related evidence, the Court denied summary judgment on this claim.
Conversion. Plaintiff’s conversion claim was based on allegations that Defendants took and transferred Loyd’s GIA shares without authorization. However, because there was a genuine issue of material fact regarding whether an agreement existed authorizing such a transfer, the Court denied summary judgment.
Unjust Enrichment. The Court denied summary judgment as to this claim because it rested on the same evidence as the conversion claim, which also survived summary judgment.
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Blueprint 2020 Opportunity Zone Fund, LLLP v. 10 Acad. St. QOZB I, LLC, 2023 NCBC Order 17 (N.C. Super. Ct. Mar. 9, 2023) (Bledsoe, C.J.)
Key Terms: appointment of a receiver; Receivership Act; LLC Act; inherent authority; self-dealing; information requests
Plaintiffs are two of the three members of Defendant, which was formed in 2019 to develop certain property in South Carolina. In 2021, Plaintiffs were informed that Defendant had paid a $2 million deposit to an affiliate of Defendant’s manager for the proposed purchase of certain land, but that the deposit had been forfeited because Defendant had not completed the purchase by the deadline. Having had no prior knowledge of the transaction, Plaintiffs demanded the return of the deposit, an accounting of all agreements between Defendant and the manager’s affiliate, and various other information regarding Defendant’s business. These requests were largely refused resulting in Plaintiffs’ filing of the present lawsuit and motion for appointment of a receiver pursuant to the North Carolina Commercial Receivership Act, the dissolution procedures of the North Carolina Limited Liability Company Act, and the Court’s inherent authority and equitable powers. Based on the substantial evidence offered by Plaintiffs that 1) Defendant’s manager had engaged in improper self-dealing and breached the Operating Agreement; 2) Defendant’s cash assets had been dramatically reduced without satisfactory explanation; and 3) Plaintiff’s requests for information which they are entitled to under the Operating Agreement had been unfulfilled, the Court concluded that the appointment of a receiver was necessary to investigate and review the disputed matters, to account for and pursue recovery of the $2 million deposit and any other improperly used assets, and to produce the requested information to Plaintiffs. Accordingly, the Court appointed a receiver for Defendant and set forth the terms of the receivership.
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Weddle v. WakeMed Health & Hospitals, 2023 NCBC Order 18 (N.C. Super. Ct. Mar. 22, 2023) (Bledsoe, C.J.)
Key Terms: prior pending action doctrine; abatement; stay; putative class members; judicial economy
Plaintiffs, two patients of Defendant, brought a putative class action based on the alleged unauthorized collection and improper use of their personal health information. Defendant moved to abate or, alternatively, stay the action under the prior pending action doctrine based on a previously filed putative class action pending in federal court.
Under the prior pending action doctrine, a second action should be abated if another, first-filed action is pending involving a substantial identity as to parties, subject matter, issues involved, and relief demanded. Here, the Court determined that the parties in the two actions were not substantially similar for two reasons. First, no class had been certified yet in either action; thus, only the named class representatives were plaintiffs and there was no overlap between the named plaintiffs in the two actions. Second, even if the putative class members in the two actions could be considered parties, there would potentially be a sub-class of individuals who would be class members in the present case but not the federal case. Accordingly, the Court could not determine as a matter of law that the two classes were substantially similar and, therefore, abatement would be improper. Nevertheless, the Court ordered that the case be stayed indefinitely because 1) the two cases were related; 2) there was a significant risk of conflicting rulings between the Court and the federal court; and 3) a stay would serve the interests of judicial economy. The Court further ordered that the parties file a joint status report every sixty days or in the event of any major development in the federal case.
By Ashley B. Oldfield
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 03/28/23
For the eleventh consecutive year, Chambers USA has recognized Rayburn Cooper & Durham and its attorneys. Chambers USA gives its top Band 1 rating in North Carolina to the firm’s bankruptcy practice, stating that RCD is “[w]idely regarded as a leading firm for debtor-side bankruptcy work, acting for companies in financial difficulties on recapitalizations, workouts and other insolvency work” and is “[r]egularly retained on some of the most significant matters in North Carolina.”
“Interviewees confirm that this is ‘the preeminent debtor practice,’ citing its ‘excellent reputation as a boutique debtor-focused restructuring firm.’”
Richard Rayburn, first ranked in Chambers USA 2007, “is highly renowned for his representation of debtors in bankruptcy litigation and workouts. Interviewees confirm his ‘great reputation,’ labeling him ‘the best’ in this space.”
Of counsel Albert Durham, first ranked in Chambers USA in 2009, is “recognized for his longstanding debtor-side practice. He remains a key point of contact for distressed companies in court proceedings and financing restructuring.”
RCD is one of the smallest law firms in North Carolina to receive accolades from the independent research publisher Chambers and Partners, considered to be among the most prestigious of law firm rating organizations.
The Chambers USA directory is published annually by UK-based Chambers and Partners. The independent guide is compiled by a team of more than 140 researchers based on interviews with lawyers and clients throughout the United States.
Individual lawyers are ranked on the basis of their legal knowledge and experience, their ability, their effectiveness, and their client-service. In addition to these qualities, rankings of practices areas are based on the effectiveness and capability of the department as a whole – its strength and depth.
Posted 06/06/17
The North Carolina Bar Association’s Bankruptcy Section has recognized RCD attorney Al Durham with its Lifetime Achievement Award.
The award, which recognizes Al’s service to and leadership within the Bankruptcy Bar, was presented at the 39th Annual Bankruptcy Institute in New Bern, NC on November 18, 2016. The Lifetime Achievement Award recognizes a bankruptcy practitioner who, for not less than 25 years, has contributed to the betterment of the NCBA Bankruptcy Section and the profession and who has set an aspiring example for those who follow.
Al has practiced bankruptcy law, appearing in the Bankruptcy Courts of North Carolina, South Carolina and Delaware, for over forty years. Al served as the president of the NCBA’s Bankruptcy Section from 1990-91. He has been a Certified Specialist in Business and Consumer Bankruptcy Law since 1987, the first year the NC Bar certified specialists in these fields.
“Our attorneys regularly benefit from Al’s exceptional knowledge of the Bankruptcy Code and related case law, his untiring dedication to his clients, his attention to detail, and his commitment to civility among members of the bar,” said Rick Rayburn, RCD’s managing shareholder. “Dozens of North Carolina attorneys count Al as a mentor and a friend – someone they trust for his exceptional analytical skills, unmatched treasure trove of cases and articles, and unfailing willingness to share his knowledge. Al is a true stalwart of the North Carolina Bankruptcy Bar.”
Al Durham represents debtors in business workouts and financial reorganizations and trustees, debtors, creditors, and creditors’ committees in business bankruptcies under Chapter 7 or 11 of the Bankruptcy Code. He also assists with restructuring financing and/or operations outside a formal court proceeding for financially distressed businesses.
RCD is proud that Al’s peers have recognized him with this singular honor.
Posted 12/20/16
Shelley Abel, a member of RCD’s Bankruptcy practice group, is scheduled to speak on November 18, 2016, at the North Carolina Bar Association’s 39th Annual Bankruptcy Institute, a continuing legal education program, held this year in New Bern, NC. Shelley and her co-presenters, Terri Gardner of Nelson Mullins Riley & Scarborough, LLP and Jennifer Lyday of Waldrep LLP, will speak on Icing on the Cake or Adding Insult to Injury? – The Secured Lender’s Right to Default Interest and Attorneys’ Fees. Get more information and register to attend this event at http://gateway.ncbar.org/store/seminar/seminar.php?seminar=75210.
Posted 11/11/16
A principle of landlord-tenant law is the power of the tenant to transfer all or part of its lease unless the lease includes provisions that limit that power. The law of assignments and subleases seeks to strike a balance between the tenant’s interest in the alienability of its legal rights under the lease and the landlord’s interest in having a desirable and financially responsible occupant.
Click here to continue reading this article by Dave Melin.
Posted 11/10/16
U.S. News & World Report and Best Lawyers in America included Rayburn Cooper & Durham, P.A. in their “Best Law Firms®” list in the Charlotte metropolitan area for 2017. Following an annual evaluation, U.S. News Media Group awarded RCD rankings in the following practice areas.
– Corporate Law
– Bankruptcy and Creditor Debtor Rights /Insolvency and Reorganization Law
Also ranked in:
– Commercial Litigation
The U.S. News – Best Lawyers “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. To be eligible for a ranking in a particular practice area and metro region, a law firm must have at least one lawyer who is included in Best Lawyers in that particular practice area and metro. For more information, please visit bestlawfirms.usnews.com.
Posted 11/02/16
The Best Lawyers in America® recognized Rayburn Cooper & Durham attorneys in its 2017 edition.
Rick Rayburn is listed by Best Lawyers in the areas of: 
– Corporate Law,
– Bet-the-Company Litigation,
– Commercial Litigation, and
– Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law.
Rayburn has served as the managing shareholder of Rayburn Cooper & Durham for over 30 years. He represents business enterprises and individuals in a wide variety of financial transactions and commercial disputes including corporate and commercial litigation, financial restructurings, business reorganizations, workouts, executive employment contracts and disputes, shareholder disputes, business formations, venture capital infusions, private and public securities offerings, mergers, acquisitions, joint ventures, divestitures, refinancings, and recapitalizations.
Al Durham is listed in the area of Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law. Durham represents debtors in business workouts and financial reorganizations and trustees, debtors, creditors, and creditors’ committees in business bankruptcies under Chapter 7 or 11 of the Bankruptcy Code. He also works with restructuring financing and/or operations outside a formal court proceeding for financially distressed business entities.
Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Over 83,000 leading attorneys globally are eligible to vote, and Best Lawyers has received more than 13 million votes to date on the legal abilities of other lawyers based on their specific practice areas around the world. For the 2017 Edition of The Best Lawyers in America©, 7.3 million votes were analyzed, which resulted in almost 55,000 leading lawyers being included in the new edition. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”
About Rayburn Cooper & Durham, P.A. (RCD)
For more than 35 years, Rayburn Cooper & Durham has served both businesses and individuals with bankruptcy and financial restructuring, business litigation and general corporate matters. The attorneys within the firm have extensive experience and provide creative solutions to help clients establish their enterprises, grow and prosper and also protect their rights, assets, and interests. Recognizing the unique needs of their clients, RCD does not represent large banks or financial institutions. RCD – The way forward. www.rcdlaw.net
Posted 08/23/16
For the tenth consecutive year, Chambers USA has recognized Rayburn Cooper & Durham and its attorneys. Chambers USA gives its top Band 1 rating in North Carolina to the firm’s bankruptcy practice, stating that RCD is “[w]idely regarded as a leading firm for debtor-side bankruptcy work, acting for companies in financial difficulties on recapitalizations, workouts and other insolvency work” and is “[r]egularly sighted on some of the most significant matters in North Carolina.”
“‘Rick Rayburn and his team are extraordinary.’”
Richard Rayburn, first ranked in Chambers USA 2007, “is a hugely experienced attorney who is described by sources as a ‘fantastic lawyer’ for bankruptcy work.”
Of counsel Albert Durham, first ranked in Chambers USA in 2009, is “a seasoned practitioner with a wealth of experience representing debtors in the gamut of bankruptcy and restructuring work.”
RCD is one of the smallest law firms in North Carolina to receive accolades from the independent research publisher Chambers and Partners, considered to be among the most prestigious of law firm rating organizations.
The Chambers USA directory is published annually by UK-based Chambers and Partners. The independent guide is compiled by a team of more than 140 researchers based on interviews with lawyers and clients throughout the United States.
Individual lawyers are ranked on the basis of their legal knowledge and experience, their ability, their effectiveness, and their client-service. In addition to these qualities, rankings of practices areas are based on the effectiveness and capability of the department as a whole – its strength and depth.
Posted 06/06/16
Practice in the bankruptcy arena for long enough and you will inevitably run across the following, vexing, situation: debtor files a plan; party in interest objects to a plan provision; Bankruptcy Court sustains the objection and denies confirmation; debtor refuses to go forward with a plan that conforms to the Bankruptcy Court’s ruling, fervently believing that the Bankruptcy Court “got it wrong,” and wants to seek appellate review on the issue. What should a debtor do in this situation?
Click here to continue reading this article by Jack Miller and Michelle Earp.
Posted 06/01/16
North Carolina Lawyer’s Weekly featured a North Carolina Business Court order in favor of RCD’s client involving an unusual question of law involving injunctions of foreign proceedings. This cover story for the May 9, 2016, edition is available here. A full copy of the Court’s opinion is available here.
Ross Fulton, a RCD shareholder, serves as lead counsel for TCG Consulting Partners. Fulton focuses his litigation practice on commercial and business disputes.
Posted 05/09/16
