N.C. Business Court Opinions, May 10, 2023 – May 23, 2023

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

N.C. Business Court Opinions, April 26, 2023 – May 9, 2023

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 19^th/early 20^th 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

N.C. Business Court Opinions, April 12, 2023 – April 25, 2023

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

N.C. Business Court Opinions, March 29, 2023 – April 11, 2023

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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Cunningham v. Waff, 2023 NCBC Order 23 (N.C. Super. Ct. April 10, 2023) (Bledsoe, C.J.)

Key Terms: order on designation; N.C.G.S. § 7A-45.4(a); incompetency proceeding; forecasted defense

In this Order on Designation, the Court determined that a case arising from an incompetency proceeding did not qualify as a mandatory complex business case under N.C.G.S. § 7A-45.4(a)(1). After being appointed the guardian of his father (David), Plaintiff brought suit alleging that Defendants had taken advantage of David’s diminished mental capacity to extract millions of dollars in financial and material benefits from David through David’s purchase of a beach house. The beach house was titled to an LLC, in which one of the individual Defendants claimed an ownership interest.

Defendants filed a notice of designation, asserting that the case involves issues regarding “how to allocate the assets of [the LLC] in a dispute regarding membership and corporate rights in a limited liability company.” The Court rejected this argument, though, because the resolution of those issues required only “a straightforward application of contract law.”

Defendants also asserted that designation was proper because the Court would need to determine if Plaintiff had standing to bring an action on behalf of David, since the LLC Act provides that a person ceases to be a member of an LLC once adjudicated incompetent. Conceding that this may constitute a dispute involving the law governing LLCs, the Court nevertheless concluded that designation was improper because designation must be based on a pleading, not a forecasted defense.

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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

N.C. Business Court Opinions, March 15, 2023 – March 28, 2023

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