N.C. Business Court Opinions, March 1, 2023 – March 14, 2023

North Carolina ex rel. Stein v. EIDP, Inc., 2023 NCBC 18 (N.C. Super. Ct. Mar. 2, 2023) (Robinson, J.)

Key Terms: motion to dismiss; Rule 12(b)(6); contamination; chemical manufacturing; DuPont; PFAS; pollution; negligence; trespass; public nuisance; fraud; res judicata; consent order; statutes of limitations; nullum tempus

In this action, the State of North Carolina brought claims for negligence, trespass, public nuisance, and fraud against various DuPont-related entities arising from the alleged contamination of North Carolina’s air, land, and water through Defendants’ chemical manufacturing operations at Fayetteville Works. Defendants moved to dismiss pursuant to Rule 12(b)(6), asserting that Plaintiff’s claims are barred by the doctrine of res judicata, the relevant statutes of limitations, and failure to state a claim.

Defendants first argued that Plaintiff’s claims are barred by res judicata due to a consent order entered in a previous lawsuit between the N.C. Division of Environmental Quality and two of the present defendants, which contained many of the same core factual allegations. The Court rejected this argument due to the express language of the consent order which stated that it was not to be a determination on the merits of any factual allegations or legal claims in the action. Since there was no final judgment on the merits, res judicata could not apply.

Next, Defendants argued that all of Plaintiff’s claims were barred by the three-year statute of limitations. In response, Plaintiff contended that the doctrine of nullum tempus prevented the relevant statutes of limitations from running against it. Absent express statutory language to the contrary, the doctrine of nullum tempus effectively tolls an otherwise applicable statute of limitations if the State is acting in its governmental, rather than proprietary, capacity. Noting that the North Carolina Supreme Court has held that the State acts in its governmental capacity when “promoting or protecting the health, safety, security, or general welfare of its citizens,” the Court agreed with Plaintiff that it was acting in its governmental capacity by bringing suit to recover costs associated with abatement of the alleged contamination. Accordingly, the applicable statutes of limitations were tolled by the doctrine of nullum tempus.

Regarding the common law negligence claim, the Court rejected Defendants’ argument that they owed no common law duties to Plaintiff but instead only owed duties arising under North Carolina’s environment control statutes. The Court concluded that the relevant statutes did not specifically abrogate common law actions, and, therefore, Plaintiff could bring a properly-pleaded claim for common law negligence. Since the complaint adequately alleged that certain Defendants did not exercise ordinary care in manufacturing and discharging PFAS, the Court denied the motion to dismiss the negligence claim.

The Court also rejected a similar argument regarding the public nuisance claim and found that Plaintiff’s allegation that the contamination is subversive of public order and affects the citizens of North Carolina at large was sufficient to survive dismissal at the 12(b)(6) stage.

Regarding the trespass claim, the Court concluded that, contrary to Defendants’ arguments, Plaintiff did not have to have an exclusive possessory interest in the resources at issue in order to state a claim. Since Plaintiff had alleged that it possesses and holds in trust certain land, water, and air for the benefit of the public, it had sufficiently alleged trespass even though said resources were also used by North Carolina citizens.

As to fraudulent concealment, Defendants first contended that they had no duty to disclose the information allegedly concealed. The Court determined that allegations of false statements made by one or more of the Defendants regarding the health effects of certain chemicals constituted affirmative actions to conceal material facts from the State and thus gave rise to a duty to disclose.

Defendants also argued that Plaintiff did not sufficiently allege reasonable reliance. However, since the Complaint alleged that the studies that put Defendants on notice that PFAS threatened human health were internal studies to which Plaintiff did not have access until at least 2016, Plaintiff had sufficiently alleged reasonable reliance. Finally, Defendants argued that the complaint failed to allege fraudulent concealment with particularity because it grouped certain Defendants together despite them having responsibility for Fayetteville Works at different times. The Court disagreed based on the complaint’s detailed allegations regarding the ownership of the facility and the chemicals produced there. Thus, the fraudulent concealment claim survived.

Lastly, Defendants argued that the fraudulent transfer claim should be dismissed because it was wholly dependent on the viability of Plaintiff’s claims for negligence, trespass, nuisance, and fraud. Since those claims survived, the fraudulent transfer claim survived as well.

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States Mortg. Co. Inc. v. Bond, 2023 NCBC 19 (N.C. Super. Ct. Mar. 6, 2023) (Earp, J.)

Key Terms: motion to dismiss; Rule 12(b)(6); motion to amend; Rule 15; mortgage brokerage; proprietary customer information; misappropriation of trade secrets; breach of fiduciary duties; unfair and deceptive trade practices; permanent injunction

Plaintiff States Mortgage Company Inc. filed suit against two former employees and each of their new business entities alleging, inter alia, that the former employees took Plaintiff’s propriety customer information, specifically a master customer spreadsheet, and used it in their new businesses. Defendants Mark Bond and LKN Capital Mortgage, Inc. (“Bond Defendants”) moved to dismiss all claims, and Plaintiff moved to amend its complaint. Because the test for futility for a motion to amend mirrors the test for a motion to dismiss, the Court addressed the claims as stated in the proposed amended complaint.

Misappropriation of Trade Secrets. Plaintiff’s trade secret misappropriation claim arose from Defendants’ alleged taking and use of Plaintiff’s master customer spreadsheet. The Bond Defendants argued that Plaintiff failed 1) to identify the trade secret with particularity, 2) to allege facts showing that it protected the secrecy of any information, and 3) to adequately specify how the alleged misappropriation occurred. The Court rejected each of these arguments. First, the Court found that Plaintiff’s allegations describing the spreadsheet as a compilation of customer information acquired over years of doing business was sufficient to identify the alleged trade secret at issue. Second, the Court found that Plaintiff had minimally met the pleading requirements to show reasonable efforts to maintain the spreadsheet’s secrecy. Although nondisclosure agreements and employment policies are often used to safeguard alleged proprietary business information, North Carolina law does not require their use to satisfy the “reasonable efforts” requirement of the North Carolina Trade Secret Protection Act. Third, Plaintiff had sufficiently pleaded misappropriation by alleging, inter alia, that defendants had used a co-worker’s computer or coerced the co-worker herself to provide the spreadsheet and transfer it to defendant’s personal computer. Accordingly, the motion to dismiss the claim for misappropriation of trade secrets was denied.

Breach of Fiduciary Duty. Plaintiff based its breach of fiduciary duty claim on allegations that the former employee defendants owed fiduciary duties to Plaintiff as employees. Since a fiduciary relationship does not arise between an employee and employer by operation of law, the Court considered whether a de facto fiduciary relationship existed. Based on the facts alleged, the Court found that neither man was in a position of such power that Plaintiff would have been subjugated to his improper influence or dominion. Accordingly, no fiduciary relationship existed and the Court dismissed the claim.

Unfair and Deceptive Trade Practices. The Bond Defendants sought dismissal of the UDTPA claim based on their argument that the underlying trade secret misappropriation claim failed. However, since that claim survived and could support liability under the UDTPA, the Court denied dismissal of the UDTPA claim.

Permanent Injunction. Noting that injunctions are remedies, not independent causes of action, the Court dismissed the “claim” for a permanent injunction, but without prejudice to Plaintiff’s ability to pursue injunctive relief if warranted.

Motion to Amend. Having already determined that the proposed amendments to the trade secrets misappropriation claim were not futile, the Court was also unpersuaded by arguments that the Plaintiff’s proposed amendments were irreconcilable with its prior pleadings. Thus, the Court granted the Plaintiff’s motion to amend, consistent with its rulings on the motion to dismiss.

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Vitaform, Inc. v. Aeroflow, Inc., 2023 NCBC 20A (N.C. Super. Ct. Mar. 13, 2023) (Bledsoe, CJ.)

Key Terms: motion to exclude experts; expert report; expert witness; motion in limine; discovery; relevance; Daubert; Rule 702

Vitaform, Inc., a designer and manufacturer of post-partum compression garments, filed suit against Aeroflow, Inc. and its subsidiary, based on its contention that Aeroflow wrongfully revealed Plaintiff’s confidential information and trade secrets to Aeroflow’s subsidiary, which unfairly allowed the subsidiary to compete with Plaintiff. In a previous opinion, the Court dismissed most of Plaintiff’s claims, including claims for misappropriation of trade secrets and breach of the covenant of good faith and fair dealing, such that four claims, largely relating to a specific phone call in which Aeroflow allegedly promised to maintain the confidentiality of Plaintiff’s business plan, remained to proceed to trial. Following various discovery disputes, motions, and sanctions, Plaintiff withdrew its previous expert witness designations and designated a single expert witness for damages. Thereafter, Defendants designated a rebuttal expert and each party moved to exclude the other’s expert witness.

Analyzing the Defendants’ motion to exclude under Rule 702 of the North Carolina Rules of Evidence and the Daubert standard, the Court agreed with Defendants that Plaintiff’s expert’s opinions were both irrelevant and unreliable. Since Plaintiff’s expert premised his damages analysis either upon claims already dismissed or, as to the surviving claims, using methodologies properly applied to the dismissed claims, such opinions were inherently irrelevant under the Daubert standard. The expert’s opinions were also inherently unreliable under Rule 702 because of the improper methodology used. Thus, the expert’s opinions were excluded.

Additionally, the Court concluded that Plaintiff should not be permitted to offer an alternative theory of damages at such a late stage in the litigation (trial scheduled in five weeks). Since Plaintiff had represented to Defendants for over a year that all of its damages evidence would come from its expert alone, it could not now introduce new theories or evidence of damages not previously disclosed. The Court noted, however, that its decision was without prejudice to Plaintiff’s right to seek nominal and punitive damages at trial.

Finally, the Court also excluded Defendant’s rebuttal witness since testimony from a rebuttal expert that attacks another, already-excluded expert is inherently irrelevant.

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Loyd v. Griffin, 2023 NCBC Order 12 (N.C. Super. Ct. Mar. 6, 2023) (Robinson, J.)

Key Terms: motion to exclude expert witness; Rule 56(e); motion to supplement; joint appendix; BCR 7.11; Rule 702; Daubert; reliability; admissibility

Defendants retained an expert witness to opine on the damages Defendants suffered due to Plaintiff’s alleged misconduct. Plaintiff moved to exclude Defendants’ expert’s opinions and testimony from consideration on summary judgment. In response, Defendants moved to supplement the record with damages evidence in the event their expert was excluded.

Since Plaintiff only challenged the reliability of the expert’s testimony, the Court focused solely on the three prongs of the reliability test. First, the Court concluded that the information upon which the expert based his opinion—which was the same as the information before the Court on summary judgment—was sufficient for the applicable damages analysis. Second, the Court determined that the expert’s opinions were based on reliable methods given the expert’s independent testing to ensure accuracy of the information he relied on, the probative value of the letters of intent, his stated methodology, and the widespread usage of such calculations in the industry. Any question relating to the factual basis of his opinions, such as whether the facts he received were qualitatively reliable, goes to the weight to be given the opinion by the factfinder, not the admissibility of the opinion. Third, as to application of the methodology to the facts, the Court concluded that any dispute goes to the testimony’s weight and was better left to the trier of fact.

Thus, the Court denied the Motion to Exclude and consequently denied the Defendants’ Motion to Supplement as moot.

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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2023 NCBC Order 13 (N.C. Super. Ct. Mar. 9, 2023) (Bledsoe, C.J.)

Key Terms: receiver; accounting; objection; trust; legal interest; standing

This order addresses the objection of McDaniel, a non-party who was previously permitted to intervene in the action, to the receiver’s accounting for JDPW Trust. McDaniel’s objection claimed that the receiver engaged in various forms of misconduct in a conspiracy with the receiver’s attorneys. The Court overruled the objection and denied McDaniel’s request for a hearing to examine the receiver, concluding that most of the objection was divorced from any matter in which McDaniel had a legal interest, and that the remainder either misread the receiver’s report or constituted an improper attempt to re-litigate issues already decided.

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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2023 NCBC Order 14 (N.C. Super. Ct. Mar. 9, 2023) (Bledsoe, C.J.)

Key Terms: receiver; interim report; objection; trust; standing; beneficiary

This order addresses the objections of Defendant Harris and intervenor McDaniel to the receiver’s interim report for JDPW Trust. Regarding Harris’s objection, the Court determined that Harris lacked standing to object because he was not a beneficiary of the Trust, but merely a former trustee of the Trust with no other legal relationship with the Trust. The Court determined that McDaniel lacked standing to object as well, because he was neither a beneficiary of the Trust nor in a legal relationship with the Trust. Moreover, McDaniel improperly attempted to use the objection to raise collateral issues unrelated to the report in question and to re-litigate matters already decided. Accordingly, the Court overruled both objections and denied the objectors’ concurrent requests for a hearing to examine the receiver.

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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2023 NCBC Order 15 (N.C. Super. Ct. Mar. 9, 2023) (Bledsoe, C.J.)

Key Terms: sua sponte order; Rule 11; Rule 12; sanctions; abusive language; invective; ad hominem; contempt; professional conduct; BCR 7.5

Following orders overruling certain objections to a receiver’s report, the Court sua sponte entered this order to address the inflammatory rhetoric contained in the objections and to put the objector on notice that any further similar conduct may result in the imposition of sanctions and/or the initiation of contempt or other proceedings. The Court found that the objections were replete with personal vitriol against the receiver and other parties in this case, ad hominem attacks against the receiver and others, and egregious accusations of misconduct against others with virtually no citations to evidence, the developed record, or to applicable law, all of which impugned the other parties and detracted from the dignity of the courts and the judicial process.

Noting that the objector’s pro se status did not protect him from the rules of conduct that bind attorneys, including Rule 11 of the Rules of Civil Procedure and Rule 12 of the General Rules of Practice, the Court ordered the objector to cease and desist further abusive filings or oral advocacy before the Court and to adhere to BCR 7.5 (which requires pinpoint citations in motions and briefs) but did not at this time order the objector to show cause as to why he should not be sanctioned.

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Oxendine v. Lumbee Tribe Holdings, Inc., 2023 NCBC Order 16 (N.C. Super. Ct. Mar. 14, 2023) (Bledsoe, C.J.)

Key Terms: determination order; injunctive relief pending arbitration; mandatory complex business case; notice of designation; N.C.G.S. § 7A-45.4(a)(1); contract law

Plaintiff moved for injunctive relief pending arbitration, seeking to enjoin Defendant from exercising a buyout option prior to arbitration. Defendant filed a notice of designation under N.C.G.S. § 7A-45.4(a)(1), which allows for designation if the action involves a material issue related to disputes involving the law governing limited liability companies. Assuming without deciding that a motion seeking injunctive relief under North Carolina’s arbitration act constituted a pleading for purposes of Business Court designation, the Court concluded that although the relief requested may involve a determination of the parties’ rights under Defendant’s operating agreement, it would nonetheless require only a straightforward application of contract law principles and thus did not implicate the law governing limited liability companies as required by N.C.G.S. § 7A45.4(a)(1). Therefore, the Court determined that the action should not proceed as a mandatory complex business case.

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 03/15/23

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

Conservation Station, Inc. v. Bolesky, 2023 NCBC 14 (N.C. Super. Ct. Feb. 17, 2023) (Robinson, J.)

Key Terms: entry of default; good cause; motion to dismiss; 12(b)(6); pro se litigant

After Plaintiff filed suit in Wake County Superior Court, Defendant Bolesky, appearing pro se, filed a motion to dismiss, which was denied. The matter was subsequently designated to the Business Court. When Bolesky still had not filed an answer nearly two months after designation,

Plaintiff filed a motion for entry of default, a copy of which was delivered to Bolesky by mail. When Bolesky did not respond by the deadline, the Court ordered Plaintiff to provide the Court with information regarding Bolesky’s involvement in the case. Following a review of this information, the Court entered default against Bolesky.

Bolesky then moved to set aside the entry of default and to dismiss under Rule 12(b)(6). In his motion, Bolesky stated his failure to timely respond was due to his “excusable ignorance of the law and deadlines for filings as a Pro Se litigant.” The Court denied Bolesky’s motion to set aside, concluding that Bolesky had failed to show the necessary good cause. The Court highlighted that Bolesky was put on notice of Plaintiff’s motion for entry of default when he received a copy in the mail and was specifically advised of this during a case management conference a few days later. The Court noted that Bolesky “was bound, as a pro se litigant, to be aware of and abide by the Rules of Civil Procedure and to comply with filing deadlines.”

The Court also denied Bolesky’s motion to dismiss, as Bolesky had previously filed a motion to dismiss which had been heard and decided by the Wake County Superior Court.

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Intersal, Inc. v. Wilson, 2023 NCBC 15 (N.C. Super. Ct. Feb. 23, 2023) (Earp, J.)

Key Terms: pirate ship; breach of contract; summary judgment; media rights; affirmative defense; law of the case doctrine; judicial estoppel; collateral estoppel

This dispute arises from a series of agreements between Plaintiff and the North Carolina Department of Natural and Cultural Resources (“DNCR”) covering the discovery, promotion, and preservation of two ships that sunk off the North Carolina coast in the eighteenth-century. In the mid-1990s, DNCR issued Plaintiff permits to search for the Queen Anne’s Revenge (“QAR”), the flagship of the infamous pirate Blackbeard, and the El Salvador, a Spanish merchant vessel. The wreckage sites of the QAR and El Salvador were located in 1996 and 1998, respectively.

In 1998, Plaintiff and DNCR entered into an agreement regarding the research and preservation of the QAR’s artifacts (the “1998 Agreement”). After fifteen years, the working relationship between Plaintiff and the DNCR hit stormy seas. Plaintiff filed a petition with the Office of Administrative Hearings (“OAH”) related to the numerous disputes between the parties, resulting in a new agreement in 2013 (the “2013 Agreement”). In the 2013 Agreement, which expressly superseded the 1998 Agreement, Plaintiff relinquished its rights to any coins or precious metals recovered from the QAR in exchange for a “more streamlined” renewal process for its El Salvador Permit and the right to certain promotion/media opportunities with respect to the QAR project. Less than a week after the execution of the 2013 Agreement, the DNCR participated with the U.S. Coast Guard in raising five of the QAR’s cannons. The DNCR failed to inform Plaintiff of this event, denying Plaintiff the opportunity to film the event or place restrictions upon third-party media companies in attendance. DNCR subsequently published media without Plaintiff’s watermark and allowed access to the QAR site without seeking Plaintiff’s consent. In 2015, the DNCR terminated Plaintiff’s El Salvador permit.

Plaintiff filed suit against DNCR and other state agencies (“Defendants”) in 2015 for breach of both the 1998 Agreement and the 2013 Agreement. After a dismissal of Plaintiff’s claims and subsequent partial reversal and remand by the North Carolina Supreme Court, both parties moved for summary judgment. Plaintiff moved for partial summary judgment seeking: (1) to establish as a matter of law that two of Defendants’ affirmative defenses were barred; and (2) a declaratory judgment that Defendants breached specific paragraphs of the 2013 Agreement relating to media access and rights. Defendants moved for summary judgment on Plaintiffs’ two breach of contract claims.

The Court granted Plaintiff’s motion in part, determining that Defendants’ second affirmative defense (that the 2013 Agreement was illegal and void as against public policy) and ninth affirmative defense (to the extent Defendants contend the terms of the 2013 Agreement are unenforceable) were barred by the law of the case doctrine and judicial estoppel, as the Supreme Court had already affirmed the trial court’s determination that the 2013 Agreement was a novation of the 1998 Agreement, and neither party had challenged the validity of the 2013 Agreement before the Supreme Court. The Court also granted Plaintiff’s request for a declaratory judgment in part, but only in relation to DNCR’s posting on the internet of non-commercial media of the QAR after the effective date of the 2013 Agreement.

The Court partially granted Defendants’ motion for summary judgement on Plaintiff’s first breach of contract claim insofar as Plaintiff’s claims asserted breaches of the 2013 Agreement for DNCR’s production of media in response to public records requests predating the 2013 Agreement’s effective date. Defendant’s motion for summary judgment on Plaintiff’s second breach of contract claim, which related to the termination of the El Salvador permit, was granted based on collateral estoppel, as an OAH administrative judge had previously determined that renewing the permit was not in the State’s best interest.

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Mary Annette, LLC v. Crider, 2023 NCBC 16 (N.C. Super. Ct. Feb. 23, 2023) (Conrad, J.)

 Key Terms: motion to dismiss; breach of contract; operating agreement; breach of fiduciary duty; controlling member; UDTPA; in or affecting commerce; fraud; reformation

This lawsuit arises out of disputes relating to the creation, ownership, and management of Mary Annette, LLC (“MA”). MA’s operating agreement named three one-third members: Twilight Developments, Inc., Ozzie 1, LLC, and Mountain Girl Ventures, LLC. The lawsuit originated when MA filed a complaint against Terri Lynn Crider, the sole owner of Mountain Girl, alleging that Crider improperly held herself out to be an officer and agent of MA, then refused to hand over company records and accounts. The lawsuit was later expanded to incorporate all MA members MA, as well as those members’ owners in their individual capacity. Crider and Mountain Girl asserted seven counterclaims, which Plaintiffs moved to dismiss in full.

The Court summarily denied Plaintiffs’ motion to dismiss the quiet title and conversion counterclaims, as Plaintiffs had failed to advance any arguments directed to those counterclaims.

The Court also denied Plaintiffs’ motion to dismiss the breach of contract counterclaim, as Plaintiffs’ arguments focused solely on the operating agreement and failed to properly address the existence of an oral agreement alleged by Defendants. The Court declined to consider Plaintiffs’ argument that the operating agreement’s merger clause extinguished any pre-existing oral argument, as the argument had not been previously presented to the Court and was therefore untimely.

The Court granted Plaintiffs’ motion as to the fiduciary duty counterclaim, as Defendants failed to allege that Plaintiffs owed them a fiduciary duty. Although Defendants argued that a controlling member may owe fiduciary duties to minority members, the counterclaim’s allegations showed that Defendant Mountain Girl was the controlling member of MA, not the other way around.

The Court denied Plaintiffs’ motion to dismiss the fraud counterclaim, due to the scattershot, conclusory, and undeveloped nature of Plaintiffs’ arguments. Plaintiffs had failed to cite specific statements in their arguments claiming lack of specificity or failure to allege misrepresentation. Moreover, Plaintiffs’ arguments regarding the economic loss rule and lack of standing suggested a misunderstanding of the allegations and were inapplicable.

As to Defendants’ counterclaim to reform the operating agreement, the Court dismissed the counterclaim as to Crider, since she was not a party to the operating agreement but denied it as to Mountain Girl as Plaintiffs “raise[d] no arguments as to why Mountain Girl’s claim should be dismissed.”

Lastly, the Court dismissed the section 75-1.1 counterclaim, because the alleged misconduct concerned either the capitalization of MA or matters of internal governance and was therefore not in or affecting commerce.

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MarketPlace 4 Ins., LLC v. Vaughn, 2023 NCBC 17 (N.C. Super. Ct. Feb. 24, 2023) (Davis, J.)

 Key Terms: judgment on the pleadings; restrictive covenants; misappropriation of trade secrets; UDTPA; tortious interference with contract; tortious interference with prospective economic advantage; computer trespass; vicarious liability

Plaintiff, which owns and operates independent insurance agencies, acquired all assets of the Gilliam Agency (including restrictive covenants between it and its employees), another insurance company, through an asset purchase agreement (the “APA”). Certain Gilliam Agency employees became employees of Plaintiff after the acquisition, including Defendant Jeffrey Vaughn. Less than a year later, Vaughn resigned and began working for Defendant Guidelight Insurance Solutions, Inc. Upon discovering that Vaughn was accessing Plaintiff’s computer database and using Plaintiff’s confidential information to solicit its customers, Plaintiff filed suit against Vaughn and Guidelight, basing its claims against Guidelight largely on a theory of vicarious liability. Defendants each filed separate motions for judgment on the pleadings, seeking dismissal of all claims against them.

Breach of Contract (Vaughn). Plaintiff’s breach of contract claims were based on restrictive covenants in an agreement entered into between Vaughn and his former employer, the Gilliam Agency. Because restrictive covenants transferred pursuant to an asset purchase agreement begin to run from the date of execution of the asset purchase agreement, the Court dismissed Plaintiff’s breach of contract claims to the extent they were based on breaches of non-solicitation covenants  that occurred after the one-year restricted period of the covenants expired. The Court also determined that the two non-solicitation provisions were overbroad because they encompassed customers of Nationwide that had never done business with the Gilliam Agency. The Court dismissed the claim as to the first provision, but deferred a final decision on the second because it was potentially subject to blue-pencilling. Lastly, as to Vaughn’s alleged breaches for disclosure of confidential information, the Court dismissed the claim to the extent it was based on Vaughn’s alleged disclosure of Plaintiff’s confidential information, because the APA only permitted Plaintiff to enforce the confidentiality provisions relating to information that belonged to the Gilliam Agency.

Misappropriation of Trade Secrets (Vaughn). Vaughn argued that Plaintiff had failed to sufficiently allege the existence of trade secrets, reasonable protective measures, or actual misappropriation. After comparing Plaintiff’s allegations to existing caselaw, the Court rejected Vaughn’s arguments and denied dismissal.

Computer Trespass (Vaughn). The Court denied the motion as to this statutory claim, determining that Plaintiff had adequately alleged that Vaughn had accessed its computer database without authority and had done so with the requisite intent.

Tortious Interference with Contract (Vaughn). Vaughn argued that this claim should be dismissed because 1) Plaintiff did not allege that any of its customers actually breached their contracts; and 2) any interference was justified because Vaughn was acting as a business competitor. As to the first argument, the Court explained that actual breach is not a required element of the claim; the plaintiff must merely allege wrongful interference. As to the second, the Court emphasized that the “without justification” is satisfied where, as here, the complaint alleges defendant’s interference involved unlawful means, such as misappropriation of trade secrets. Accordingly, dismissal of this claim was denied.

Tortious Interference with Prospective Economic Advantage (Vaughn). The Court dismissed this claim as Plaintiff did not allege the loss of any specific contractual opportunity.

UDTPA (Vaughn). The Court denied the motion as to this claim, based on the survival of Plaintiff’s claims for misappropriation of trade secrets and tortious interference with contract.

Tortious Interference with Contract (Guidelight). As for the direct claim, the Court granted dismissal because the complaint did not allege any inducement by Guidelight itself, rather than by Vaughn. The Court, however, denied dismissal of the vicarious liability claim, determining that Plaintiff had sufficiently alleged that Guidelight ratified Vaughn’s actions by not taking any action against him when it learned of his conduct.

Tortious Interference with Prospective Economic Advantage (Guidelight). The Court dismissed the direct claim because Plaintiff did not allege that Guidelight caused the loss of any specific contractual opportunity. The Court also dismissed the vicarious liability claim since the underlying tort claim against Vaughn had failed.

UDTPA (Guidelight). Because the Court determined that the UDTPA claim against Vaughn survived and the law allows for vicarious liability for unfair and deceptive trade practices, the Court denied dismissal of this claim.

Misappropriation of Trade Secrets (Guidelight). Pointing to persuasive caselaw from other jurisdictions, the Court rejected Guidelight’s argument that North Carolina does not permit vicarious liability principles to be applied to statutory claims unless authorized by the legislature. Thus, this claim premised on vicarious liability survived.

Computer Trespass (Guidelight). Lastly, the Court declined to recognize a vicarious liability claim for computer trespass because the text of N.C.G.S. § 14-458, a criminal statute, suggested a legislative intent to limit civil liability to the specific persons who intentionally violated the statutory provisions. As the statute only applies to the trespass itself, and not the improper use of information accessed through the trespassing, the Court dismissed Plaintiff’s claim against Guidelight.

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Futures Grp, Inc., v. Brosnan, 2023 NCBC ORDER 11 (N.C. Super. Ct. Feb. 24, 2023) (Earp, J.)

 Key Terms: advancement

This order follows the Court’s prior order granting partial summary judgment and ordering advancement. Following the parties’ inability to agree on the amount of the advanceable expenses already incurred or a procedure for ongoing advancements, the Court issued this order outlining the advancement procedure, and limiting the scope of advanceable expenses.

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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 03/01/23

N.C. Business Court Opinions, February 1, 2023 – February 14, 2023

Downing v. Cycle Holdings, Inc., 2023 NCBC 10 (N.C. Super. Ct. Feb. 1, 2023) (Davis, J.)

Key Terms: N.C.G.S. § 55-16-02(h); inspection rights; voting agreement; Delaware law

Plaintiff, a shareholder of Defendant Cycle Holdings, filed this action seeking an order allowing him to inspect the corporate records of Defendant Cycle Labs, in which Cycle Holdings held shares. At issue on the parties’ cross-motions for partial summary judgment was whether Cycle Holdings had the power to determine a majority of Cycle Labs’ directors for purposes of N.C.G.S. § 55-16-02(h). Under that provision, a qualified shareholder of a corporation that has the power to determine a majority of directors of another corporation has inspection rights as to the other corporation. The parties disputed whether Cycle Holdings had this power due to a voting agreement between Cycle Labs and its shareholders, which purported to require that Cycle Holdings vote its shares in such a way that it did not, in fact, have the power to determine a majority of Cycle Labs’ directors. Plaintiff asserted that the voting agreement was invalid because any change to Cycle Holdings’ voting rights could only be effectuated through an amendment to Cycle Labs’ certificate of incorporation. Defendants contended that the voting agreement did not conflict with the certificate of incorporation and only contained permissible restrictions on how Cycle Holdings would exercise its voting rights.

Applying Delaware law (since Cycle Labs was a Delaware corporation), the Court determined that the voting agreement did not impermissibly take away Cycle Holdings’ voting power, but instead simply constrained the manner in which it could exercise that power. Thus, under Delaware law, the voting agreement was valid and therefore Cycle Holdings did not have the power to determine a majority of Cycle Labs’ directors for purposes of N.C.G.S. § 55-16-02.

Maxwell Foods, LLC v. Smithfield Foods, Inc., 2023 NCBC 11 (N.C. Super. Ct. Feb. 3, 2023) (Conrad, J.)

Key Terms: output contract; most-favored-nation clause; breach of price term; notice pleading; fraudulent concealment; duty to disclose; estoppel; statute of limitations

Since 1994, Plaintiff Maxwell supplied swine to Defendant Smithfield under an output contract and related documents which included a most-favored-nation clause. Maxwell filed suit alleging various breaches of the parties’ agreements, including violating the most-favored-nation clause. After discovery, Maxwell amended its complaint, adding claims for breach of price term and fraudulent concealment of breaches of the most-favored-nation clause. Smithfield moved to dismiss these claims.

Regarding fraudulent concealment, the Court dismissed this claim after determining that Maxwell did not allege that Smithfield had any duty to disclose. The parties’ contractual relationship did not give rise to such a duty. Moreover, Maxwell failed to adequately allege facts showing affirmative acts of concealment which would have given rise to the duty. Although Maxwell alleged several false statements by Smithfield, each lacked the necessary particularity or were otherwise insufficient.

In its complaint, Maxwell alleged that Smithfield was estopped, due to its fraud, from asserting the statute of limitations defense to Maxwell’s claim for breach of the most-favored-nation clause. In response, Smithfield argued that estoppel failed due to the dismissal of the fraud claim and, therefore, the statute of limitations barred Maxwell’s claim for breach of the most-favored-nation clause to the extent it was based on conduct occurring before 2016. The Court declined to undertake an allegation-by-allegation application of the statute of limitations and suggested that such a dispute would be better suited for summary judgment.

Regarding breach of price term, Smithfield asserted that the claim should be dismissed because it did not allege the specific provisions of the agreement that were breached. The Court rejected this argument, concluding that Maxwell had satisfied North Carolina’s notice pleading requirements by alleging the existence of a contract, which was attached to the complaint as an exhibit, and that Smithfield had breached that contract by underpaying.

Loray Mills Devs., LLC v. Camden Loray Mill Phase 1, LLC, 2023 NCBC 12 (N.C. Super. Ct. Feb. 7, 2023) (Bledsoe, C.J.)

Key Terms: summary judgment; statute of limitations; breach of contract; declaratory judgment; continuing wrong doctrine; equitable estoppel; discovery rule; breach of fiduciary duty; constructive fraud; derivative claim; economic loss rule; conversion; intangible interest; unjust enrichment; civil conspiracy

This case involves a dispute between the two principal owners of the Loray Mill project, an urban revitalization and historic preservation project in Gastonia. Plaintiff JBS and Defendant Camden entered into substantially identical operating agreements for various entities formed as part of the project. Each operating agreement permitted JBS to make a capital call for an additional contribution under certain circumstances, and to the extent any member failed to make an additional distribution, permitted any other member to make the additional contribution and treat it either as a loan or, if certain requirements were met, a capital contribution. After JBS made a number of capital calls which Camden did not participate in, a dispute arose regarding the effect the capital calls had on Camden’s ownership interest in the various entities. Plaintiffs brought suit for a declaratory judgment and for breach of contract and Defendants counterclaimed asserting twelve claims. Both sides moved for summary judgment.

Declaratory Judgment Claims. After determining that Georgia law applied to two of the operating agreements and both Georgia and North Carolina law applied to a third, the Court turned to Defendants’ arguments that the capital calls did not dilute their interests because they were inconsistent with the terms of the operating agreements and, as to one entity, were not made specifically for that entity. The Court rejected these arguments because of conflicting evidence and arguments regarding the meaning and interpretation of certain terms and provisions in the operating agreements and whether the parties’ course of conduct modified the operating agreements. Accordingly, summary judgment was denied.

Plaintiffs’ Breach of Contract Claim. Because this claim appeared to depend upon the parties’ competing claims for declaratory judgments, which the Court had already concluded must be resolved at trial, the Court denied Defendants’ motion for summary judgment.

Defendants’ Breach of Contract and Breach of Fiduciary Duty Counterclaims (pre-April 2018). Plaintiffs argued that these claims were barred by a three-year statute of limitations based on undisputed evidence that Defendants were on notice of the alleged breaches more than three years before the counterclaims were filed. In response, Defendants relied upon the continuing wrong doctrine, the discovery rule, and equitable estoppel principles to argue that their counterclaims should survive. The Court rejected each defense in turn. The continuing wrong doctrine did not apply because each of the alleged breach involved separate discrete acts. The discovery rule also did not save the claims because the evidence showed that Defendants were sufficiently aware of the alleged misconduct well before they claimed they were. Finally, equitable estoppel did not apply because the evidence showed that Defendants were put on inquiry as to the truth but did not seek additional information. Accordingly, the Court found that the statute of limitations barred these counterclaims and granted Plaintiffs’ motion for summary judgment.

Defendants’ Breach of Contract and Declaratory Judgment Counterclaims (post-April 2018). The Court determined that issues of fact remained on these claims and denied summary judgment.

Defendants’ Breach of Fiduciary Duty and Constructive Fraud Counterclaims against JBS. As for Defendants’ derivative counterclaims based on the capital calls, the Court determined that because the counterclaims only sought to remedy Defendants’ own injuries, they were direct rather than derivative claims, and therefore, Defendants did not have standing to bring them. As for Defendants’ derivative and direct counterclaims based on JBS’s payment of unbudgeted expenses, the Court concluded that JBS’s fiduciary duties arose from the operating agreements; thus the counterclaims were barred by the economic loss doctrine.

Defendants’ Conversion Counterclaim. The Court dismissed this claim because it was based on conversion of tax credits, which are an intangible interest not subject to a claim for conversion.

Defendants’ Unjust Enrichment Counterclaim. The Court dismissed this claim based on the parties’ agreement that the operating agreements governed their contract claims.

Defendants’ Civil Conspiracy Counterclaim. Lastly, the Court dismissed this claim because it was based on the same conduct as the counterclaims for breach of fiduciary duty and constructive fraud, which were also dismissed.

BIOMILQ, Inc. v. Guiliano, 2023 NCBC 13 (N.C. Super. Ct. Feb. 10, 2023) (Robinson, J.)

Key Terms: motion to dismiss; equitable distribution; misappropriation of trade secrets; trademark infringement; UDTPA; trespass to chattels; patent ownership; subject matter jurisdiction; stay

This action arose from a dispute between the parties regarding certain human cell-cultured technologies and products. The dispute focuses on Defendant Guiliano’s conduct in February 2022, when he photographed pages of a BIOMILQ-issued notebook containing trade secret and confidential information, which was in the custody of Dr. Strickland, a BIOMILQ employee. Defendants moved to dismiss all claims under Rule 12(b)(6).

Misappropriation of Trade Secrets. BIOMILQ alleged that Guiliano misappropriated its trade secrets when he entered Strickland’s home, to which he had access, and took pictures of information in her notebook. The Court, however, dismissed the claim, concluding that BIOMILQ had not sufficiently alleged reasonable steps to maintain the secrecy of the trade secrets, since the complaint only made general statements about how the notebooks were treated.

Common Law Trademark Infringement. Analyzing this claim under federal law standards regarding infringement claims of unregistered trademarks, the Court denied dismissal, finding that BIOMILQ had adequately pleaded that it had valid rights in the BIOMILQ mark and that Defendants’ use of it was likely to cause confusion among consumers.

Unfair and Deceptive Trade Practices. Pursuant to N.C.G.S. § 80-11–13, the Court denied dismissal to the extent this claim relied on BIOMILQ’s common law trademark infringement claim. However, to the extent the claim relied on the dismissed misappropriation of trade secrets claim, it was dismissed as well.

Common Law Unfair Competition. Applying the same analysis as for the UDTPA claim, this claim survived to the extent it was based on the trademark infringement claim.

Trespass to Chattels. The Court found that BIOMILQ had adequately pleaded the first element–actual or constructive possession–based on Strickland’s custody of the notebook while an employee of BIOMILQ. Nonetheless, the claim was dismissed as BIOMILQ had not adequately alleged the second element–unauthorized, unlawful interference with or dispossession of the property. That information within the notebook may have been devalued by Guiliano’s access was not sufficient.

Declaratory Judgments. The Court denied dismissal as to the declaratory judgment claim regarding BIOMILQ’s ownership rights in certain trademarks and other information finding that an actual controversy had been alleged. The Court also denied dismissal as to the declaratory judgment claim regarding the parties’ rights to use the subject matter of certain patents. Although federal courts have exclusive jurisdiction over claims arising under federal patent law, the question of who owns patent rights is a state law issue when the ownership dispute is based on contract, rather than inventorship. Here, BIOMILQ alleged an actual controversy regarding ownership of the patents based on Strickland’s assignment of rights to Plaintiff; thus, the Court had subject matter jurisdiction over the claim and determined that an actual controversy had been sufficiently alleged.

Chi v. N. Riverfront Marina & Hotel, LLLP, 2023 NCBC Order 8 (N.C. Super. Ct. Feb. 7, 2023) (Earp, J.)

Key Terms: stipulation extending deadline; BCR 4.1; BCR 7.6

The parties filed a stipulation purporting to extend the time for Plaintiffs to respond to Defendants’ motions to dismiss. The Court struck the stipulation, explaining that BCR 4.1(e) only allows parties to enter binding stipulations for deadlines set by the North Carolina Rules of Civil Procedure. It does not allow the parties to stipulate to extensions of deadlines established by the Court’s orders or the Business Court Rules, including BCR 7.6 which governs the time frame for filing responsive briefs.

Futures Grp., Inc. v. Brosnan, 2023 NCBC Order 9 (N.C. Super. Ct. Feb. 10, 2023) (Earp, J.)

Key Terms: spousal privilege; N.C.G.S. § 8-56; standing; competent evidence; BCR 7.2

Futures Group and Geoff Cramer, its founder, sued Denis Brosnan, the father of Cramer’s ex-wife Aimee, for disputes arising from their business dealings. In opposition to Brosnan’s motion for partial summary judgment, Futures submitted an affidavit from Cramer, attached to which were audio recordings of four conversations Cramer had with Aimee while they were married. Aimee objected to two of the recordings based on spousal privilege and moved for a protective order.

The Court first determined that Aimee, even as a non-party, has standing to seek protection because she holds a personal privilege in her confidential marital communications which gives her the necessary personal stake in a justiciable controversy.

After conducting an in camera review of the conversations, the Court addressed each in turn. Regarding the first, the Court identified specific portions which were plainly not intended to be confidential because Aimee was largely acting as a messenger relaying information from her father to her husband. Such statements were not protected by the spousal privilege. The remaining portions, however, were private communications made in the confidence of the marital relationship and were therefore protected.

Regarding the second conversation, the Court determined that even though some of the same topics might have also been discussed with Brosnan at other times, Aimee nevertheless considered her statements to be confidential communications with her husband, and therefore, the entire conversation was protected by the spousal privilege.

Accordingly, the Court granted Aimee’s motion in part and ordered that the portions of the conversations protected by the spousal privilege remain under seal and not be considered competent evidence in the case.

Brosnan had also moved for a protective order but had purported to “incorporate by reference” Aimee’s brief rather than submitting his own. The Court summarily denied this motion pursuant to BCR 7.2.

Shah v. Ahmed, 2023 NCBC Order 10 (N.C. Super. Ct. Feb. 13, 2023) (Bledsoe, C.J.)

Key Terms: order on designation; contemporaneous filing

Plaintiffs filed the complaint in this action in November 2022 but did not file a notice of designation until February 2023. Accordingly, designation as a mandatory complex business case under N.C.G.S. § 7A-45.4(a) was improper because Plaintiffs did not comply with the contemporaneous filing requirement of 7A-45.4(d)(1).

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 02/15/23

N.C. Business Court Opinions, January 18, 2023 – January 31, 2023

Futures Grp., Inc. v. Brosnan, 2023 NCBC 4 (N.C. Super. Ct. Jan. 19, 2023) (Earp, J.)

Key Terms: indemnification; advancement; partial summary judgment; choice of law; internal affairs doctrine; Delaware law; former director

Defendant, a former director of Plaintiff The Futures Group, Inc. (“Futures”), filed a motion for partial summary judgment on his counterclaim for advancement of litigation expenses. Because advancement is an internal governance matter and Futures is a Delaware corporation, the Court applied the substantive law of Delaware to the issue of advancement.

Despite Plaintiffs’ argument that pursuant to a Delaware statute, actions for advancement and indemnification can only be brought in the Delaware Chancery Court, the Court held that Plaintiffs misconstrued the statute in question and that the Court does have jurisdiction to hear and decide this action. The Court further held that 8 Delaware Code § 145(j) creates a default continuation rule, absent express language in a corporation’s bylaws to the contrary, that a director’s right to advancement continues after his or her status as a director ends. The Futures bylaws contain no such express provision and therefore the Court held Defendant’s right to advancement vested at the time of his actions as a director and did not end when he was removed as a director. The Court also held that Plaintiffs’ accusations of wrongdoings against Defendant did not alleviate it of its obligation to advance his expenses.

The Court granted Defendant’s motion for partial summary judgment and ordered Futures to advance Defendant’s expenses in accordance with its bylaws.

Innovare, Ltd. v. SciTeck Diagnostics, Inc., 2023 NCBC 5 (N.C. Super. Ct. Jan. 19, 2023) (Davis, J.)

Key Terms: motion to amend; motion to dismiss; breach of contract; breach of implied covenant of good faith and fair dealing; conversion; unjust enrichment; unfair competition; fraud; Rule 9(b); Lanham Act; UDTPA; motion to strike

This case arose out of a distributorship agreement between Plaintiff Innovare and Defendant Sciteck, who manufactured COVID-19 test strips for which Defendant was seeking Emergency Use Authorization (EUA) from the FDA. Both parties asserted various claims against each other, with Defendant’s counterclaims focusing on Plaintiff allegedly using the test strips outside the bounds of the EUA approval process. After Plaintiff moved to dismiss the counterclaims and strike Defendant’s affirmative defenses, Defendant moved to amend.

Regarding the motion to amend, the Court determined that it should not be denied on the basis of undue delay based on Defendant’s representation that certain new allegations which are relevant to the proposed amendments had only been discovered after the filing of the initial counterclaims. As to futility, the Court elected to consider both the original counterclaims and the proposed amended counterclaims under the motion to dismiss since the parties had fully briefed both.

Turning to the counterclaims, the Court first concluded that the breach of contract counterclaim survived in part and that, therefore, the counterclaim for breach of implied covenant of good faith and fair dealing also survived. However, since the counterclaims plainly alleged the existence of a contract and did not allege damages beyond those recoverable under a breach of contract theory, the unjust enrichment counterclaim failed.

The Court also dismissed the conversion counterclaim because Defendant did not allege that Plaintiff acquired the test strips illegally or that a demand for their return was made; the common law unfair competition counterclaim because Defendant did not allege that the parties were business competitors; and the fraud counterclaim because the allegations were too general to meet Rule 9(b)’s heightened pleading standard.

As to the Lanham Act counterclaim, the Court concluded that Defendant’s allegations that Plaintiff had exceeded the scope of the distributorship agreement by allowing the test strips to be sold to third-parties despite the absence of FDA approval, and that such conduct caused damages—including reputational injury—to Defendant, were sufficient to state a claim. Since trademark infringement can constitute an unfair or deceptive trade practice, the UDTPA counterclaim also survived.

Turning to Plaintiff’s motion to strike Defendant’s 49 affirmative defenses, the Court agreed that the number of affirmative defenses was excessive, but only struck the three which Plaintiff had specifically identified were improper.

Carolina Med. Partners, PLLC v. Shah, 2023 NCBC 6 (N.C. Super. Ct. Jan. 24, 2023) (Conrad, J.)

Key Terms: unfair and deceptive trade practices; Rule 12(b)(6); choice of law; learned profession exemption

Plaintiffs Nimish Patel and Shephali Patel are practicing physicians who previously owned and operated more than half a dozen businesses with Defendant Amit Shah, including Palmetto Medical Group, LLC. After their professional relationship eroded, the parties participated in a mediation resulting in a Practice Separation Agreement, which provided a framework for the division of their business interests and included a North Carolina choice of law clause. After Shah allegedly breached the Agreement, the Patels filed suit for breaches of the Agreement, fraud, and unfair and deceptive trade practices, all largely based on Shah’s alleged actions to deceptively influence patients’ choice of provider. Defendants moved to dismiss Plaintiffs’ unfair and deceptive trade practices claim.

Plaintiffs argued that both South Carolina and North Carolina law applied to the unfair and deceptive trade practices claim. However, the Court rejected the application of South Carolina law because the Agreement expressly provided that North Carolina law would govern the interpretation and implementation of the Agreement, and the complaint did not allege any extracontractual conduct.

Turning to North Carolina law, the Court determined that Defendants’ alleged conduct fell “comfortably” within the statute’s “learned profession” exemption, as Defendants were members of a learned profession, and the conduct was “directly related to providing patient care.” Thus, the Court dismissed Plaintiffs’ claim for unfair and deceptive trade practices.

Cutter v. Vojnovic, 2023 NCBC 7 (N.C. Super. Ct. Jan. 24, 2023) (Bledsoe, C.J.)

Key Terms: motion for judgment on the pleadings; Rule 12(c); standing; derivative claims; common law general partnership; constructive trust; misappropriation of business opportunity

In this action, Plaintiff Cutter alleged that he and Defendant Vojnovic were general partners in a common law partnership formed to purchase several hot dog businesses, but that Vojnovic thereafter created a separate entity (Defendant Holdings) and misappropriated this opportunity. Plaintiff brought suit, alleging a host of claims both directly and derivatively on behalf of the general partnership. Defendants moved for judgment on the pleadings.

Addressing first the derivative claims, the Court agreed with Defendants that, absent contract or consent, North Carolina law does not permit a general partner to bring a claim derivatively on behalf of the general partnership against another general partner. Therefore, the Court dismissed Cutter’s derivative claims against Vojnovic.

Turning to the direct claims, the Court dismissed the tortious interference with prospective economic advantage claim because Cutter failed to allege specific facts to support his claim. In particular, the Court found that Cutter failed to allege facts showing how Defendants diverted the opportunity or what they did to wrongfully interfere.

The Court also dismissed Cutter’s claim for misappropriation of business opportunity against Vojnovic finding that it was unnecessarily duplicative of Cutter’s breach of fiduciary duty claim because misappropriation of business opportunity is a subspecies of the fiduciary duty of loyalty.

Lastly, because a constructive trust is not a standalone claim, the Court dismissed this claim, but did so without prejudice to Cutter’s right to pursue a constructive trust as a remedy against both Defendants if justified.

rFactr, Inc. v. McDowell, 2023 NCBC 8 (N.C. Super. Ct. Jan. 27, 2023) (Bledsoe, C.J.)

Key Terms: motion to strike; summary judgment; tortious interference; causation; breach of fiduciary duty; UDTPA; in or affecting commerce; defamation per se

This case arose after Jackson National terminated contract negotiations with rFactr, after receiving a call from Caroline McDowell, the wife of rFactr director Chris McDowell, in which Caroline told Jackson National that rFactr was financially unstable (the Call). rFactr and two individual directors/owners filed suit against the McDowells based on the Call, and the McDowells counterclaimed. A number of the parties’ claims were previously disposed of on summary judgment motions and the case was set for trial, but after new information came to light, Defendants moved for summary judgment on Plaintiffs’ remaining claims.

The Court first addressed Defendants’ motion to strike the Gomez Declaration filed in opposition to summary judgment. Defendants argued that Gomez made unauthorized statements on behalf of Jackson National, that he lacked personal knowledge, and that his statements were inadmissible hearsay. The Court disagreed and denied the motion with the exception of Gomez’s statement that Jackson National and rFactr reached a “meeting of the minds” on the terms of a proposed contract. Such a statement was a legal conclusion to which a witness cannot testify.

Turning to the claims, the Court denied summary judgment as to the tortious interference claim against Caroline, concluding that the close proximity of the Call and Jackson National’s decision to discontinue contract negotiations was sufficient circumstantial evidence of causation. However, the Court granted summary judgment in favor of Chris because there was no evidence that Chris knew of or was involved in the Call, and evidence that Chris’s laxity permitted Caroline to gain the information that led to the Call was insufficient to show he acted in concert with her.

The Court also denied summary judgment on the breach of fiduciary duty claim against Chris as an rFactr director for not adequately protecting rFactr’s confidential information from Caroline because there was conflicting evidence on whether and to what extent he knew of her activities.

On the UDTPA claims, the Court denied summary judgment as to Caroline on the same grounds as the tortious interference claim, but granted it in favor of Chris because his actions took place solely within the company and thus were not in or affecting commerce.

Lastly, the Court addressed the individual plaintiffs’ slander per se claims against Caroline and Chris. The Court denied the motion regarding Caroline’s statement that the individuals were under investigation for arson because there was evidence that Caroline failed to exercise reasonable care to ascertain its truth, but otherwise granted summary judgment in Caroline’s favor because the remaining statements were either true or not defamatory on their face. The Court also granted summary judgment in favor of Chris since he was not involved in making the statements.

N.C. Dep’t of Revenue v. FSC II, LLC, 2023 NCBC 9 (N.C. Sup. Ct. Jan. 30, 2023) (Davis, J.)

Key Terms: sales and use tax; mill machinery exemption; Department of Revenue

This matter arises from a dispute between Petitioner, the North Carolina Department of Revenue and Respondent, FSC II, LLC, regarding FSC’s qualification for the Mill Machinery Exemption under the North Carolina Sales and Use Tax Act. FSC, who operated primarily as a contractor, regularly purchased raw materials to create hot mix asphalt (“HMA”) for its projects. Any HMA left over from FSC’s projects was regularly sold by FSC to third parties. Based on this, FSC argued that it qualified for the Mill Machinery Exemption and was entitled to a lower privilege tax on its raw materials rather than the higher sales or use tax. The Department of Revenue sought back-taxes from FSC for sales and use tax. The Office of Administrative Hearings granted summary judgment to FSC in an administrative proceeding, concluding that FSC’s use of the raw materials it purchased to produce HMA constituted “manufacturing” under the Act. The Department of Revenue appealed.

The Court upheld the OAH’s final decision, finding that FSC qualified as a manufacturer under the Mill Machinery Exemption. Using language from Supreme Court cases interpreting the definition of “manufacturing,” the Court determined that FSC’s production of HMA qualified as manufacturing as it involved “the producing of a new article or use or ornament by the application of skill and labor to the raw materials of which it is composed.”

Cent. Carolina Surgical Eye Assocs., P.A. v. Matthews, 2023 NCBC Order 2 (N.C. Super. Ct. Jan. 18, 2023) (Bledsoe, C.J.)

Key Terms: attorneys’ fees; unfair and deceptive trade practices; punitive damages; frivolous or malicious actions; N.C.G.S. § 75-16.1; N.C.G.S. § 1D-45; Rule 41; time-barred

Plaintiff first filed its complaint in 2015 but moved to dismiss the action in 2020 pursuant to Rule 41(a). Plaintiff refiled in 2021 alleging similar causes of action but adding several new claims as well. Upon Defendant’s motion for judgment on the pleadings, the Court found that Plaintiff’s new claim for unfair and deceptive trade practices was barred by the statute of limitations and that the tolling provision of Rule 41 was not applicable thereto. The Court also dismissed Plaintiff’s breach of fiduciary duty claim to the extent it was based on allegations newly made in the 2021 Complaint, and Plaintiff’s “claim” for punitive damages to the extent that it was a standalone claim and based on the dismissed claims. Defendant Matthews then filed a motion for attorneys’ fees pursuant to N.C.G.S. §§ 75-16.1 and 1D-45.

Despite having dismissed the UDTPA and punitive damages claims, the Court held that neither claim was frivolous and/or malicious under Sections 75-16.1 and 1D-45. The Court relied on the extensive briefs and arguments presented by the parties in support of and opposition to the claims during the motion for judgment on the pleadings and found that even though the Court ruled against Plaintiff with respect to these claims, they had not been brought intentionally without just cause or excuse or as a result of ill will. Therefore, the Court denied Defendant’s motion for attorneys’ fees.

Curo Health Servs., LLC v. Havnaer, 2023 NCBC Order 3 (N.C. Super. Ct. Jan. 19, 2023) (Bledsoe, C.J.)

Key Terms: determination order, N.C.G.S. § 7A-45.4(a)(8); order on designation; trade secrets

Pursuant to a determination order from the Supreme Court, the Court addressed whether the action was properly designated as a mandatory complex business case pursuant to N.C.G.S. § 7A-45.4(a)(8), which permits designation if the action involves a material issue related to disputes involving trade secrets. The Court determined that while the complaint alleged the misuse of plaintiff’s confidential information, it did not allege that such information constituted a trade secret or otherwise assert a claim for trade secret misappropriation. Accordingly, designation was improper.

Chi v. N. Riverfront Marina & Hotel, LLLP, 2023 NCBC ORDER 4 (N.C. Super. Ct. Jan. 20, 2023) (Earp, J.)

Key Terms: motion to seal; trade secret protection; waiver; redaction; confidentiality

Plaintiffs in this matter filed two motions seeking to file under seal in their entirety the verified complaint, first amended verified complaint, second amended verified complaint and supporting exhibits, despite the information having already been on the public record for over a year. Because Defendants were the designating party seeking confidentiality, the Court had previously directed them to provide information sufficient for the Court to determine if sealing was warranted.

In response, Defendants argued that Plaintiffs’ pleadings and certain exhibits should be sealed in their entirety because they contained proprietary trade secret information that could be of value to Defendant’s competitors. However, because Defendants did not seek to place their answer or counterclaims under seal, despite those pleadings containing the same information, the Court held that any trade secret protection over the information at issue had been lost and Defendants had waived the ability to assert confidentiality of those materials going forward. Thus, the Court denied the motions but ordered, sua sponte, that the unredacted exhibits containing personal information be sealed and that the parties promptly re-file them with proper redactions.

CitiSculpt Fund Servs., LLC v. Blueprint 2020 Opportunity Zone Fund, LLLP, 2023 NCBC Order 5 (N.C. Super. Ct. Jan. 24, 2023) (Bledsoe, C.J.)

Key Terms: sua sponte; redaction; motion to seal; gatekeeper; public interest; BCR 5

Defendant Blueprint filed a motion to dismiss and supporting affidavits. Without filing the documents provisionally under seal accompanied by a motion to seal as contemplated by Business Court Rule 5, Defendant unilaterally redacted portions of the affidavits it filed in an attempt to “avoid additional motions practice regarding sealing.”

The Court, sua sponte, held that this was procedurally improper and if allowed, would prevent the Court from performing its gatekeeper role of protecting the public interest by keeping court records open to inspection of the public. The determination of whether documents should be filed under seal is within the discretion of the trial court. Therefore, the Court order that Defendant file a motion to seal and file unredacted version of the documents provisionally under seal pending the Court’s ruling on Defendant’s motion to seal.

DS & T II, Inc. v. D & E Tax & Accounting, Inc., 2023 NCBC Order 6 (N.C. Super. Ct. Jan. 25, 2023) (Earp, J.)

Key Terms: attorneys’ fees; N.C.G.S. § 1D-45; punitive damages; frivolous; N.C.G.S. § 6-21.5; absence of a justiciable issue; Rule 11

This litigation involved the business relationship between two accountants, Mohamed Elbahrawi and the late Julio Dibbi. Plaintiffs consist of a corporation owned and operated by Dibbi during his lifetime and his executor, Somerville, who is also the trustee of his testamentary trust. Plaintiffs asserted nine causes of action based on Elbahrawi’s allegedly improper use of Dibbi’s client list and other business assets. Defendants’ motion to dismiss the complaint in its entirety was previously granted and Defendants then moved for attorneys’ fees under various statutes.

The Court granted the motion for attorneys’ fees under N.C.G.S. § 6-21.5 based on Plaintiffs’ persistence in litigating their claims despite notice that the claims were untimely or otherwise unsupported by law.

The Court also granted the motion for attorneys’ fees under N.C.G.S. § 1D-45, concluding that Plaintiffs’ claim for punitive damages was frivolous.

Finally, the Court granted the Rule 11 motion to the extent it was based on the failure of Plaintiffs’ counsel to investigate the facts regarding Plaintiff Somerville’s standing as executor and trustee. However, the Court, in its discretion, otherwise denied the Rule 11 motion, concluding that Plaintiffs’ counsel genuinely believed that the pleadings were well-grounded in fact and law and that the fees awarded under § 6-21.5 and § 1D-45 were sufficient to remedy the harm done.

Accordingly, the Court ordered Plaintiffs’ counsel to pay the reasonable attorneys’ fees incurred by Defendants regarding the standing issue and ordered Plaintiffs to pay the remaining reasonable attorneys’ fees incurred regarding the claims asserted in the amended complaint.

Campbell Sales Grp., Inc. v. Niroflex by Jiufeng Furniture, LLC, 2023 NCBC ORDER 7 (N.C. Super. Ct. Jan. 23, 2023) (Davis, J.)

Key Terms: summary judgment; breach of contract; damages; pre-judgment interest

The Court had previously granted summary judgment in Defendants’ favor on Defendants’ counterclaims for breach of contract. Following the Court’s decision, the Court ordered the parties to submit supplemental briefs addressing damages. In their supplemental briefing, the parties’ only material dispute was concerning the applicable date of breach for the purpose of calculating pre-judgment interest.

Defendants argued that the applicable date of breach could be determined by the invoices submitted to the Court, which reflected the estimated date of shipment for unpaid products. Plaintiff argued that Defendants failed to satisfy its burden at the summary judgment stage, based on the fact that the evidence did not reflect that the products were actually shipped on the date of the invoice. Thus, Plaintiff requested that the Court exercise its discretion to use the filing date of Defendants’ counterclaims as the date upon which interest began to accrue.

The Court rejected Plaintiff’s argument, noting that Plaintiffs had not offered any evidence that would tend to show that the estimated shipping dates contained on Defendants’ invoices were inaccurate. Finding that Defendants had satisfied their burden of proof, the Court ordered that pre-judgment interest would be applied from the date of the estimated shipment contained in Defendants’ invoices.

By Rachel E. Brinson, Natalie Kutcher, 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 02/01/23

N.C. Business Court Opinions, January 4, 2023 – January 17, 2023

IQVIA, Inc. v. Cir. Clinical Sols., Inc., 2023 NCBC 1 (N.C. Super. Ct. Jan. 6, 2023) (Conrad, J.)

Key Terms: restrictive covenants; tortious interference with contract; unfair and deceptive trade practices; motion to dismiss; failure of consideration; evidence outside the pleadings; choice of law; public policy

This action arises after a high-level employee of IQVIA, Inc., Dana Edwards, left IQVIA and joined Circuit Clinical Solutions as its Chief Commercial Officer. IQVIA complains that Circuit Clinical induced Edwards to breach her noncompete and nondisclosure obligations to IQVIA. Circuit Clinical moved to dismiss arguing that the terms of the noncompete and nondisclosure agreement were unenforceable due to a failure of consideration.

Circuit Clinical argued that each of the alleged bases for consideration for Edwards’ noncompete agreement—continued employment, continued access to confidential information, and an equity award of restricted stock units—was illusory under North Carolina law. Although, the noncompete and nondisclosure agreement contained a Delaware choice of law provision, Circuit Clinical argued that the Court should instead apply North Carolina law for public policy reasons. To show that the equity award was illusory consideration under North Carolina law, Circuit Clinical offered a document titled “Award Agreement.” The Court declined to consider this outside document, which was neither the subject of nor referred to in the complaint, noting the fundamental rule that evidence outside the pleadings cannot be considered on a Rule 12(b)(6) motion. Nothing within the complaint itself suggested the equity award was illusory under Delaware or North Carolina law.

Regarding the choice of law argument, the Court held that, even assuming that application of Delaware law would be contrary to the public policy of North Carolina, Circuit Clinical had failed to show that North Carolina had a materially greater interest in the issue than Delaware and that North Carolina law would apply absent the choice of law provision, both requisite determinations which were better suited for summary judgment. Accordingly, the Court denied Circuit Clinical’s motion to dismiss.

Merrell v. Smith, 2023 NCBC 2 (N.C. Super. Ct. Jan. 11, 2023) (Robinson, J.)

Key Terms: summary judgment; insider information; breach of fiduciary duty; fraud by omission and concealment; fraud in the inducement; constructive fraud; negligent misrepresentation; North Carolina securities fraud; civil conspiracy

These cases arose out of an alleged fraudulent scheme carried out by Richard Siskey with the assistance of Defendants Mike and Jennifer Smith. Plaintiffs, former members of Carolina Beer & Beverage Group, LLC (“CBB”), brought suit alleging that Mike Smith, co-founder and holder at all times of at least 50% of the membership interests in CBB, and his wife, Jennifer Smith, shared insider information with Siskey, thereby enabling Siskey to purchase Plaintiffs’ interests, and then profit greatly from the merger of CBB nearly three years later in 2010.

After extensive discovery, the Smiths moved for summary judgment seeking dismissal of all remaining claims against them. For the following reasons, the Court granted the motions, dismissing with prejudice all claims against the Smiths.

Breach of Fiduciary Duty: Managers of an LLC owe fiduciary duties to the LLC, not its members. Plaintiffs did not bring a derivative claim on behalf of CBB alleging that Mike Smith breached his fiduciary duties as a manager. Members of an LLC also do not generally owe fiduciary duties to each other. The Court found it unlikely that any exception to this general rule applied to Mike Smith and even if he did owe fiduciary duties to the other members, the evidence did not support a breach of those duties. Jennifer Smith as a 1099 employee of CBB also did not meet the exceptional circumstances that must exist to create a fiduciary relationship between her and CBB’s members.

Fraud by Omission and Concealment: Fraud by omission and concealment can only arise when the plaintiff establishes that the defendant had a duty to disclose material information to plaintiff, or otherwise had a duty to speak. The Court found that Plaintiffs had failed to forecast any evidence demonstrating that Jennifer Smith had a duty to speak. Plaintiffs’ claim for fraud by omission and concealment against Mike Smith also failed because (1) any underlying breach of fiduciary duty claims had been dismissed, and (2) Mike Smith, in an October 1, 2007 letter to all CBB’s members, and prior to the sale to Siskey of any of Plaintiffs’ interests, disclosed and discussed the subject of a potential sale of CBB. Plaintiffs offered no evidence of other material information that Mike Smith may have disclosed to Siskey but not to them.

Fraud in the Inducement: Fraud in the inducement requires a false representation or concealment of material fact reasonably calculated to deceive made with the intent to deceive. The Court found that here Mike Smith disclosed substantially the same information to Siskey and to Plaintiffs prior to the sale of any of Plaintiffs’ interests and, moreover, Mike Smith and CBB demonstrated their transparency by informing all members of the potential sale via the October 1 letter. Plaintiffs also made no effort to discover the truth through reasonable diligence.

Constructive Fraud: A claim for constructive fraud requires plaintiffs to forecast evidence showing a relationship of trust and confidence and that the defendant took advantage of that position of trust in order to benefit himself. As to Jennifer Smith, the Court held that since it already found no fiduciary duty between her and Plaintiffs existed, that no position of trust and confidence existed either. Plaintiffs’ claims against Mike Smith failed, regardless of whether or not they could demonstrate a position of trust and confidence existed, because Plaintiffs offered no evidence that the Mike Smith benefited himself through his alleged misconduct.

Negligent Misrepresentation: Again, Plaintiffs failed to demonstrate that they justifiably relied on any alleged misrepresentations made by the Smiths as evidenced by their failure to investigate or inquire about any such misrepresentations related to CBB or its potential sale.

North Carolina Securities Fraud: Plaintiffs’ claims for securities fraud were barred by the applicable statute of limitations—no later than five years after the sale or contract of sale. The last sale of a Plaintiff’s membership interest in CBB was made in March 2008. The first lawsuit was not commenced until 2019.

Civil Conspiracy: Civil conspiracy is not an independent cause of action. Because all underlying claims of unlawful conduct against the Smiths were dismissed, none remained to support a claim for civil conspiracy. Moreover, Plaintiffs offered no evidence of an agreement between the Smiths and Siskey to engage in unlawful conduct.

McGriff Ins. Servs., Inc. v. Hudson, 2023 NCBC 3 (N.C. Super. Ct. Jan. 17, 2023) (Earp, J.)

Key Terms: motion to amend; motion to dismiss; employment agreement; restrictive covenants; interference with business; justifiable interference; misappropriation of trade secrets; UDTP; non-solicit; blue pencil

In this case, Plaintiff McGriff Insurance Services brought suit against Hudson (a former employee) and One Digital, Hudson’s new business, based on Hudson’s alleged violations of non-solicitation provisions in his employment agreement with McGriff. Hudson counterclaimed, contending that McGriff has interfered with his new business. Before the Court were Defendants’ motions to dismiss the complaint, Plaintiff’s motion to dismiss the counterclaims, and Plaintiff’s motion to amend the complaint to add Stetson, another former McGriff employee.

Hudson argued that the restrictive covenants are unenforceable against him and Stetson due to lack of consideration and because they are not sufficiently tailored to protect McGriff’s legitimate business interests. The Court disagreed and found that Hudson’s original offer of employment was sufficient to support continuing non-solicit obligations because the employment relationship renewed automatically each year and thus the contractual relationship between the parties was never broken. Regarding the breadth of the non-solicit provisions, the Court found that the employee non-solicit was narrowly drawn to protect McGriff’s legitimate interests, but that the customer non-solicit was partially overbroad due to potentially unrestricted time and the breadth of business activities covered. However, because the troublesome clause was distinctly separable, the Court exercised its discretion to blue pencil the provision so that it would be reasonably tailored to protect McGriff’s legitimate interests.

The Court granted McGriff’s Motion for Leave to Amend Complaint with respect to its breach of contract claim as to Hudson and denied Defendants’ corresponding motions to dismiss McGriff’s breach of contract claim with respect to the Hudson Employment Agreement.

As to Plaintiff’s Motion to Amend to add Defendant Stetson, the Court reviewed Stetson’s employment contract. Again, Defendants argued lack of consideration for the non-solicitation provisions of Stetson’s contract because she merely became eligible to receive an alleged discretionary bonus in exchange for agreeing to the restrictive covenants. The Court found that although Stetson’s contract omits a description of the bonus plan, there is no indication that such a plan did not yet exist, or that the bonus was discretionary. Consequently, the Court found that McGriff adequately pled that consideration in the form of eligibility for a bonus exists. The Court blue penciled the same language out of Stetson’s agreement and granted McGriff’s motion to amend its complaint to add a breach of contract claim against Stetson.

The Court found that the allegations of McGriff’s proposed amended complaint were sufficient to state a claim for misappropriation of trade secrets against all three defendants because despite Defendants’ arguments, McGriff does not have to prove that the listed documents and information constitute trade secrets. It must merely allege what it contends constitutes a trade secret sufficiently to allow the Defendants to understand that which they are accused of misappropriating. Additionally, McGriff alleges that Hudson, with the help of Stetson, has disclosed and used the trade secrets to benefit OneDigital, which in turn gave OneDigital an unfair competitive advantage. The Court held that these allegations were sufficient to survive both a Rule 12(b)(6) sufficiency challenge and a futility challenge under Rule 15. The Court granted Plaintiff’s motion to amend the misappropriation of trade secrets claim and denied Defendants’ corresponding motions to dismiss.

As to the tortious interference with contract claims, the Court focused on the fourth element of such a claim, whether Defendants had legal justification for allegedly inducing Hudson and Stetson to violate their contracts. The Court notes that competition in business constitutes justifiable interference in another’s business relations and is not actionable so long as it is carried on in furtherance of one’s own interests and by means that are lawful. However, if the Defendants were found to have misappropriated Plaintiff’s trade secrets, then the interference would be unlawful and unjustifiable. The Court granted Plaintiff’s motion to amend the tortious interference with contract claim and denied Defendants’ corresponding motions to dismiss.

The Court held that the from the face of the proposed amended complaint, it was not possible to discern whether McGriff alleges that it was deprived of contractual relationships that would otherwise have occurred but for Hudson’s alleged interference. Therefore, to the extent McGriff’s motion to amend sought to assert a claim for tortious interference with respect to the pharmacy proposals, it was denied. The motion to amend as to tortious interference with prospective business relations was otherwise granted and the Defendants’ corresponding motions to dismiss were denied.

Because the tortious interference and misappropriate claims survived, McGriff’s unfair and deceptive trade practices claims survived as well.

In his counterclaims for tortious interference with prospective economic advantage and unfair trade practices, Hudson alleged that a McGriff executive represented to a customer that Hudson had a non-compete and therefore the customer stayed with McGriff. The Court held that the issue is whether the executive’s statement was protected by the competitor privilege and thus, the counterclaims’ survival depends on whether the customer non-solicitation provision in Hudson’s Employment Agreement is, in fact, enforceable. Accordingly, the Court denied Plaintiff’s motion to dismiss Defendants’ counterclaims.

Winner’s Mktg., Inc. v. Cavazos, 2023 NCBC Order 1 (N.C. Super. Ct. Jan. 6, 2023) (Bledsoe, C.J.)

Key Terms: motion to exclude expert testimony; Rule 702; grey games; Daubert standard; gaming law; judicial appraisal

Plaintiffs are two entities, identically named, but formed in different states, North Carolina and Delaware. In June 2021, the Plaintiffs merged, with the Delaware corporation being the surviving entity. Defendant dissented to the merger and objected to surviving Delaware-organized Plaintiff’s valuation and payout of his shares in the North Carolina entity. Plaintiffs filed the present action seeking a judicial appraisal of the fair market value of Defendant’s shares.

Plaintiff produces and leases gaming devices that are unregulated and of unsettled legality in some states including North Carolina and Texas, from which the majority of Plaintiff’s revenue derives. In unregulated markets, such gaming devices are known as “grey games.” Plaintiff retained an expert witness, Jenson, to opine on the industry risk to grey games and thus assist in the valuation of the Defendant’s shares as of the merger date. Defendant moved to exclude Jenson as an expert witness and to strike his expert report and testimony.

Defendant challenged Jenson’s testimony and opinions under Rules of Evidence 702, 401, 402, and 403. After conducting a fact-specific analysis and application of the Daubert test, the Court held that Jenson’s testimony and report satisfied the first two prongs of the Daubert test and exercised its discretion to rule on the reliability of Jenson’s testimony following the presentation of evidence at trial. The Court also held that Jenson’s report was not duplicative or contradictory to another of Plaintiffs’ expert witnesses. The Court held that Jenson will be permitted to testify at trial and permitted Defendant to designate one additional rebuttal expert witness at trial. The Court deferred further ruling on the motion until at or after trial.

Bradshaw v. Maiden, 2022-NCCOA-917 (Jackson, J.)

Key Terms: N.C.G.S. 7A-27(a)(2); effective date; 12(b)(6); matters outside the pleadings; summary judgment; gross negligence; negligence misrepresentation; Securities Act secondary liability

This suit commenced in 2014 when Plaintiffs—several investors in a hedge fund run by Defendant Maiden—brought suit against Maiden, Maiden Capital, LLC, and SS&C (the fund’s administrator) for claims arising out of Plaintiffs’ injuries from investing in the fund. In 2015, the Business Court granted a 12(b)(6) dismissal, in part, of Plaintiffs’ claim against SS&C for gross negligence. In 2020, the Business Court granted summary judgment to SS&C on Plaintiffs’ remaining claims. Once the remaining claims involving the other parties were disposed of, Plaintiffs appealed the orders dismissing their claims against SS&C.  Appeal to the Court of Appeals rather than the Supreme Court was appropriate because the action was designated as a mandatory complex business case prior to the effective date of the amendments to N.C.G.S. [section] 7A-27(a)(2), which provide a direct right of appeal to the Supreme Court from a judgment of the Business Court.

On appeal, the Court affirmed for the reasons stated in the orders of the Business Court.

In a lengthy separate opinion, Judge Murphy concurred in affirming dismissal of Plaintiff’s claims for grossly negligent misrepresentation, civil conspiracy, and aiding and abetting constructive fraud, but dissented as to the majority’s affirmance of dismissal of the claims for negligence, gross negligence, negligent misrepresentation, Securities Act secondary liability, and punitive damages.

By 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 01/18/23

N.C. Business Court Opinions, December 21, 2022 – January 3, 2023

Brown v. Onslow Bay Marine Grp., LLC, 2022 NCBC 84 (N.C. Super. Ct. Dec. 22, 2022) (Robinson, J.)

Key Terms: summary judgment; attorneys’ fees; notice; N.C.G.S. 6-21.2(5); promissory note; royalties

This action arose out of a dispute over three loans made by Plaintiff Brown to Defendant OBMG, evidenced by promissory notes in the amounts of $50,000.00, $100,000.00, and $300,000.00, each with substantially similar terms. Brown sued for breach of each note and sought to recover sums due and owing and attorneys’ fees. OBMG moved for summary judgment on all claims.

Regarding the $50,000.00 and $100,000.00 promissory notes, the Court concluded that there was no material dispute that the principal and interest had been repaid in full and granted OBMG summary judgment thereon. However, the Court found that a factual dispute remained related to the payment of royalties under both the $50,000.00 and $100,000.00 promissory notes and denied OBMG’s summary judgment motion related thereto. As to the $300,000 note, the Court denied summary judgment because the parties disputed whether or not there has been a default under the $300,000 note, an oral modification thereof, and the amount and payment of royalties due thereunder.

The Court granted OBMG summary judgment as to the claims for attorneys’ fees finding that Brown had failed to comply with the notice requirements of N.C.G.S. 6-21.2(5) because in his demands related to the $50,000.00 and $100,000.00 promissory notes he stated that the amount due under the notes was “to be determined” which the Court found insufficient and Plaintiff stated that the outstanding amount must be “made” not “paid” and therefore did not adequately notify OBMG that payment was required to avoid liability for attorneys’ fees. The notice in the $300,000.00 note was also found insufficient for using the word “made” instead of “paid.”

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 01/04/23

N.C. Business Court Opinions, December 7, 2022–December 20, 2022

Futures Grp., Inc. v. Brosnan, 2022 NCBC 79 (N.C. Super. Ct. Dec. 7, 2022) (Earp, J.)

Key Terms: 12(b)(6); motion to dismiss; breach of contract; promissory note

Plaintiff, a technology and consulting services company, borrowed $800,000.00 from Defendant in exchange for a convertible revolving promissory note. Defendant made additional loans to Plaintiff pursuant to the note, and the note’s principal eventually rose to $1,500,000.00. The parties subsequently modified the note to increase the maximum principal and convert $915,000 of the then-existing principal into shares of Plaintiff’s Class A Common Stock. This modification did not change the provision that the unpaid principal balance would be automatically converted to shares upon the maturity date. After a dispute arose regarding the stock issuance and debt owed under the note, Plaintiff filed suit against Defendant. Defendant counterclaimed.

Plaintiff moved to dismiss Defendant’s first and second counterclaims based on the three-year statute of limitations applicable to contracts. Defendant’s first counterclaim requested a declaratory judgment holding that the debt under the note was automatically converted to stock and instructing Plaintiff to issue the stock accordingly. Defendant’s second counterclaim requested, in the alternative, monetary damages for Plaintiff’s breach of the note.

Plaintiff argued that Defendant knew, or should have known, of Plaintiff’s breach under the note upon the note’s maturity date of January 31, 2010. Defendant responded that the provision requiring the conversion of the debt to stock was self-executing, and he was not made aware of Plaintiff’s rejection of his ownership rights until December 2020. Defendant also argued that Plaintiff had acknowledged its debt under N.C. Gen. Stat. §1-26, and therefore revived it, within the three years preceding the filing of Defendant’s counterclaims. The Court rejected Defendant’s argument that Plaintiff’s communications met the statutory requirements for revival of the debt. However, the Court noted that a dismissal under 12(b)(6) would only be appropriate if Defendant’s allegations could only lead to a conclusion that Defendant knew or should have known of the breach more than three years before filing his counterclaims. Finding that Defendant had sufficiently pleaded that he did not know, nor should have known, that the debt conversion did not occur in 2010, the Court denied Plaintiff’s motion to dismiss to permit the record to develop more fully.

James H.Q. Davis Tr. v. JHD Props., LLC, 2022 NCBC 80 (N.C. Super. Ct. Dec. 9, 2022) (Bledsoe, C.J.)

Key Terms: estate planning; trusts; judicial dissolution; N.C. Gen. Stat. § 57D-6-02; motion to dismiss

This lawsuit arose from disputes regarding the estate planning vehicles established by Dr. James H. Davis. Dr. Davis created two limited liability companies, JHD Properties, LLC and Berry Hill Properties LLC, and established a trust for each of his four sons. These four trusts are the only members of both LLCs, and each trust holds an equal 25% equity interest in each LLC. After a disagreement arose regarding the management of the LLCs and their sole asset (undeveloped property), two of the trusts (“Plaintiffs”) filed suit for judicial dissolution of the LLCs under N.C. Gen. Stat. § 57D-6-02(2)(i). A third trust (the “Charles Trust”) intervened and filed a 12(b)(6) motion to dismiss on the basis that Plaintiffs: (1) failed to state the “business” of the LLCs in explicit terms in the complaint; and (2) failed to plead the requisite level of dysfunction required for dissolution.

The Court rejected the Charles Trust’s first argument at the outset, noting North Carolina’s “forgiving notice pleading standard in most instances.” Drawing all reasonable inferences in Plaintiffs’ favor, the Court held that the stated business of the LLCs was to maximize the return of the LLCs’ only asset, the property. The Court also rejected the Charles Trust’s second argument, as the cases relied upon by the Charles Trust were decided under different procedural postures which permitted more evaluation of fact. The Court held that under the statute, the term “practicable” meant “feasible” not simply “possible.” Using this definition to determine the requisite pleading of “dysfunction” in the complaint, the Court held that Plaintiffs had sufficiently pleaded a claim for judicial dissolution and denied the Charles Trust’s motion to dismiss in full.

Brown v. Onslow Bay Marine Grp., LLC, 2022 NCBC 81 (N.C. Super. Ct. Dec. 12, 2022) (Robinson, J.)

Key Terms: inspection demand; motion to compel; N.C. Gen. Stat. § 57D-3-04; summary judgment

Plaintiffs, minority members of Defendant, sent an inspection demand to Defendant pursuant to N.C. Gen. Stat. § 57D-3-04(a)(5) on the basis that Plaintiffs “ha[ve] concerns as to the current state of affairs” of Defendant. Defendant provided some, but not all, of the requested documents. Plaintiffs filed suit to compel Defendant to produce the remaining requested records.

Following discovery, Defendant moved for summary judgment, arguing that Plaintiffs’ request was void for failure to comport with N.C. Gen. Stat. § 57D-3-04(e) since Plaintiffs asked for the records to be sent electronically or by mail rather than by inspection. Noting that Defendant had repeatedly produced documents by mail without objection for over five months, the Court concluded that Defendant had waived that objection.

Defendant also argued that it had fully fulfilled its obligations under the request and could not produce a specific document requested by Plaintiffs because it did not exist. The Court held that § 57D-3-04 did not create an independent cause of action for Plaintiffs to obtain a jury determination regarding whether a document exists and who possesses the document. As Defendant had filed sworn testimony stating that the document does not exist, the Court found no triable issue of fact to proceed. Finally, the Court held that the documents withheld by Defendant were outside the scope of N.C. Gen. Stat. § 57D-3-04, and Defendant was therefore not required to produce them. The Court granted Defendant summary judgment to the extent that it sought judgment that Defendant had fully complied with its obligations under the statute. The Court left the issue of costs to be determined at a later date.

JCG & Assocs., LLC v. Disaster Am. USA, LLC, 2022 NCBC 82 (N.C. Super. Ct. Dec. 12, 2022) (Conrad, J.)

Key Terms: order to show cause; sanctions

Following a hearing to show cause, the Court issued this order imposing sanctions against Defendants for failure to comply with the Business Court Rules and various court orders. After filing an answer and counterclaims to Plaintiffs’ complaint, Defendants repeatedly failed to acknowledge or respond to communications from Plaintiffs and failed to follow the Court’s pretrial scheduling order. The corporate defendants additionally failed to appoint legal counsel and failed to comply with the Court’s two orders to do so. Defendants failed to file briefs in response to at least three motions and failed to comply with at least seven orders in the eighteen months preceding this opinion.

Finding that the Defendants had “not taken even the most basic steps necessary to participate in this case,” the Court determined that severe sanctions were warranted. Under its inherent authority, the Court struck Defendants’ answer and affirmative defenses, dismissed Defendants’ third-party claims, and entered default judgment against Defendants. The Court reserved the issue of damages for a later hearing.

Merrell v. Smith, 2022 NCBC 83 (N.C. Super. Ct. Dec. 13, 2022) (Robinson, J.)

Key Terms: fiduciary duties; LLC; summary judgment

This Order addresses motions for summary judgment in four corresponding cases, all stemming from the alleged fraudulent scheme conducted by Richard C. Siskey, Mike Smith, and Jennifer Smith. The four Plaintiffs, all former members of Carolina Beverage Group, LLC (“CBB”), moved for summary judgment on the issue of whether Mike Smith owed Plaintiffs a fiduciary duty due to his majority ownership (fifty-two percent) in CBB. Plaintiffs allege that Mike Smith breached his fiduciary duty by providing Richard C. Siskey inside information regarding the interest of third-parties in buying CBB that was not provided to Plaintiffs, and allowing Plaintiffs to sell their units in CBB to Siskey without that knowledge.

The Court denied Plaintiffs’ motions, as they failed to demonstrate that Mike Smith owed them a fiduciary duty. The Court noted that the rights and duties of LLC members are governed by the LLC’s operating agreement. Absent an affirmative duty established under the operating agreement, the Plaintiffs were required to demonstrate that Mike Smith had possessed sufficient control of CBB to warrant the imposition of fiduciary duties.

The Court applied the four Vanguard factors to determine whether Mike Smith exercised sufficient control, which are: (1) control over the LLC’s board of directors; (2) the ability to dissolve the LLC; (3) the ability to put the LLC into bankruptcy and (4) the ability to amend the LLC’s operating agreement without approval from other members. In regard to the unit sales prior to 2007, the Court noted that the operating agreement explicitly precluded Mike Smith from taking certain actions without the approval of either 100% or 75% of the members, provided the members access to a broad category of records, and required 65% membership approval for a member to sell their ownership interest. Following the 2007 amendment to CBB’s operating agreement, Mike Smith had the unilateral power to amend the operating agreement, but the remaining language of the amendment indicated that he did not “effectively contro[l]” CBB. Noting that North Carolina’s courts have cautioned against the broad application of fiduciary duties, the Court concluded that Plaintiffs had failed to establish as a matter of law that Mike Smith owed Plaintiffs a fiduciary duty.

Talley v. Earth Fare 2020, Inc., 2022 NCBC Order 69 (N.C. Super. Ct. Dec. 12, 2022) (Bledsoe, C.J.)

Key Terms: mandatory complex business case designation; objection; N.C. Gen. Stat. § 7A-45.4(a)(2); securities

Plaintiff filed suit asserting claims arising from a dispute between Plaintiff and a former business partner regarding Plaintiff’s compensation and filed a notice of designation pursuant to N.C.G.S. § 7A-45.4(a)(2) which encompasses disputes involving securities. Defendants objected to designation as a mandatory complex business case arguing that the securities at issue were tangential to Plaintiff’s claims, which sound in contract. The Court disagreed, finding that the claims asserted would require the Court to determine whether, and under what circumstances, Plaintiff was entitled to certain stock; thus, since the “acquisition, disposition, transfer, existence, or characteristics of the securities” were at issue, designation was proper under section 7A-45.4(a)(2).

Flexible Funding Liab. Co. v. Graham Cnty. Land Co., 2022 NCBC Order 70 (N.C. Super. Ct. Dec. 16, 2022) (Conrad, J.)

Key Terms: receivership; public auction; disposition of proceeds; default judgment; writ of execution; gamesmanship

The receiver for Graham County Land Company (“GCLC”) filed an emergency motion for further direction regarding the disposition of auction proceeds from National Civil, LLC (“National”), a limited liability company in which GCLC held a majority membership. After GCLC went into receivership to wind up the company’s affairs, its receiver moved for an order authorizing him to hold a public auction of GCLC’s assets, including National’s property. The Court approved this motion, with the condition that the proceeds from the sale of National’s property be held in trust and disbursed only upon Court approval. The receiver conducted this auction.

Plaintiff and Volvo Financial Services (“Volvo”) subsequently moved for, and received, a default judgment against National in a separate proceeding. GCLC’s receiver reported that he and National’s minority member had agreed to dissolve the company and wind up its affairs. GCLC’s receiver was granted an order authorizing him to solicit creditor claims and distribute the proceeds from National’s assets accordingly. No parties filed an objection to the notice.

Volvo thereafter took steps to execute its judgment against National, including issuing a notice of levy on GCLC’s receiver. The Court ordered that GCLC’s receiver should disregard the Notice of Levy, as it interfered with the receiver’s duties and was procedurally defective. Noting Volvo’s gamesmanship throughout the receivership, the Court enjoined Volvo from any further interference with the receiver’s duties and ordered GCLC’s receiver to submit a proposed plan of distribution for the Court’s review.

Quad Graphics, Inc. v. N.C. Department of Revenue, 2022-NCSC-133 (Morgan, J.)

Key Terms: Commerce Clause; sales tax; use tax, interstate commerce; due process; substantial nexus

The N.C. Department of Revenue appealed from a decision of the Business Court, which concluded that the sale of goods produced out-of-state by Wisconsin-based Petitioner and shipped to its customers in North Carolina lacked a sufficient nexus to North Carolina for the imposition of state sales tax under the Commerce Clause in light of SCOTUS’s decision in McLeod v. J.E. Dilworth Co.

The Supreme Court of North Carolina began with an overview of Dilworth, which held that the Commerce Clause barred a state from imposing a sales tax on sales which were consummated out-of-state, even though the goods sold were delivered to customers within the taxing state. SCOTUS subsequently upheld this “free trade” philosophy in Freeman v. Hewit and Spector Motor Serv. v. O’Connor. However, in Complete Auto Transit, Inc. v. Brady, SCOTUS expressly overruled Freeman and Spector and adopted a four-part test for determining the constitutionality of a state tax imposed on interstate commerce: to survive a Commerce Clause challenge, the tax must apply to an activity with a substantial nexus with the taxing state, be fairly apportioned, not discriminate against interstate commerce, and be fairly related to the services provided by the state.

The Court then turned to South Dakota v. Wayfair, Inc., in which SCOTUS overruled precedent which had incorporated a physical presence requirement into the substantial nexus prong of the Complete Auto test and held that South Dakota’s sales tax regime satisfied that prong. After the Wayfair decision, North Carolina, along with many other states, incorporated into its tax regime certain aspects of South Dakota’s law that SCOTUS had seemingly approved. The Court also noted that, even prior to Wayfair, many aspects of North Carolina’s and South Dakota’s tax regimes were already nearly identical because both were members in the Streamlined Sales and Use Tax Agreement and thus used the same definitions and sourcing principles.

Therefore, under the Wayfair precedent, the Court applied the Complete Auto test to North Carolina’s sales tax regime to determine its constitutionality. First, the Court held that there was a substantial nexus because, during the relevant time period, Petitioner had employed a sales representative within North Carolina and processed approximately $20 million worth of orders for delivery in the state. Second, the fair apportionment prong was satisfied since due to the destination-based taxing and other safeguards that most states, including North Carolina, employed, the sales would not be subject to taxation by more than one state. Third, the Court held that the tax was nondiscriminatory because North Carolina imposes the same sales tax on all purchases made for delivery in North Carolina regardless of the origin of the goods or location of the seller. Fourth, the fair relation prong was met because the tax simply required interstate taxpayers to pay their “fair share” of ordinary public services that aided their in-state business activities. Finally, the Court held that the tax did not offend the Due Process Clause because Petitioner was substantially engaged in business in North Carolina and therefore had fair warning that its activities may be subject to North Carolina’s jurisdiction.

In conclusion, the Court held that Dilworth’s formalism doctrine had not survived subsequent SCOTUS decisions. Accordingly, the Court reversed the Business Court’s order and opinion and held that the sales tax at issue was constitutional under the Complete Auto test.

The dissent argued that Dilworth had not been overruled and that under its rule, the transactions at issue here had occurred outside of North Carolina and thus did not have the required transactional nexus with the state to satisfy the Commerce Clause.

By Natalie E. Kutcher 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 12/21/22

N.C. Business Court Opinions, November 23, 2022 – December 6, 2022

Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St. Louis, Inc. v. Window World, Inc., 2022 NCBC 72 (N.C. Super. Ct. Nov. 10, 2022) (Bledsoe, C.J.)

Key Terms: franchise; attorney-client privilege; crime-fraud exception; ex parte testimony; sanctions; adverse jury instructions; work-product doctrine

Plaintiffs, franchisees of Defendant Window World (“WW”), brought suit in 2015, alleging, inter alia, WW’s fraudulent concealment of information relating to its status as a franchise. In 2018, a discovery dispute arose regarding WW’s withholding of documents based on attorney-client privilege and the work-product doctrine. The Court entered an order addressing the discovery matters, which was appealed and subsequently affirmed. Thereafter, a number of issues arose from the implementation of the order resulting in the filing of the present motions.

The Court first addressed WW’s motion to allow the ex parte testimony of WW’s outside franchise attorney in further opposition to Plaintiffs’ crime-fraud motion. The Court denied the motion, concluding that WW had provided no persuasive reason it should be permitted to belatedly supplement the record contrary to BCR 7.5.

Next, the Court considered Plaintiffs’ renewed motion for disclosure of WW’s privileged communications based on the crime-fraud exception. Plaintiffs argued that WW’s newly produced documents, together with prior evidence, established by a preponderance of the evidence that WW and Vannoy (WW’s in-house counsel) knowingly perpetrated a fraud against Plaintiffs by inducing them to sign licensing agreements that falsely disclaimed a franchise relationship. The Court, however, declined to apply the crime-fraud exception because Plaintiffs did not produce any evidence that Vannoy was involved in soliciting Plaintiffs to enter into licensing agreements after the pertinent date.

Regarding Plaintiffs’ request for sanctions for alleged misrepresentations by WW and Vannoy, the Court denied the request as related to statements that WW was not aware it was a franchise system, but granted the request as related to Vannoy’s statements regarding franchise-related work she performed. The Court rejected Defendants’ attempt to distinguish legal advice from legal services and found, by a preponderance of the evidence, that Vannoy had testified falsely on these matters. The Court awarded sanctions consisting of adverse jury instructions related to Vannoy and attorneys’ fees and costs related to the motions.

Lastly, the Court addressed Plaintiffs’ motion to compel which asked the Court to conduct an in camera review and compel the production of certain documents withheld or redacted by WW. Looking first at emails sent by Vannoy to gather information for WW’s franchise disclosure document, the Court determined that the communications were privileged because they were sent by Vannoy acting either as in-house counsel performing legal services or as a client preparing to meet with outside counsel. Turning to seven documents produced by WW’s outside counsel, the Court determined that five of the documents were protected by attorney-client privilege and the remaining two were protected by the work-product doctrine because they were prepared in anticipation of earlier potential litigation with state regulators and Plaintiffs had failed to demonstrate a substantial need for the documents. As for the remaining documents withheld, the Court concluded that they were all privileged, with the exception of two documents to the extent they were published to third-parties.

McFee v. Presley, 2022 NCBC 73 (N.C. Super. Ct. Nov. 29, 2022) (Conrad, J.)

Key Terms: default judgment; Rule 55; N.C.G.S. § 1-75.11; fiduciary relationship; conversion; intangible interests; UDTPA; in or affecting commerce; fraudulent transfer; unjust enrichment; indirect benefit

Plaintiffs brought suit against several entities and individuals for their conduct relating to Plaintiff McFee’s employment with and membership interest in Defendant CPP. After the Court entered default against four of the six Defendants, Plaintiffs moved for default judgment. Noting first that the default judgment procedural requirements of Rule 55 and N.C.G.S. § 1-75.11 had been met, the Court turned to whether the allegations in the complaint, even though deemed admitted by entry of default, were sufficient to state a claim.

Regarding Plaintiffs’ breach of fiduciary duty and constructive fraud claims, the Court denied default judgment, concluding that the complaint did not allege the existence of a fiduciary relationship between McFee, as an employee and former member of CPP, and Defendant Stacks, as an officer of CPP.

The Court also denied default judgment as to Plaintiffs’ conversion claim, concluding that McFee’s intellectual property rights, membership interest, and expectancy interest in proceeds from the sale of CPP’s assets were all intangible interests not subject to a claim for conversion.

Default judgment on Plaintiffs’ UDTPA claim was denied as well because the alleged conduct related solely to internal disputes involving CPP, its officers, and McFee (an employee and minority owner) and thus was not in or affecting commerce.

As for Plaintiffs’ claim for fraudulent transfer under N.C.G.S. § 39-23.4, the Court granted default judgment against CPP based on allegations that McFee was a creditor of CPP, that CPP was on notice of McFee’s claim through her filing of previous lawsuits, that CPP transferred substantially all of its assets, that CPP concealed the transfers; and that the assets were transferred with fraudulent intent. However, default judgment was denied as to the remaining defaulting Defendants as there were no allegations that Plaintiffs were creditors of those parties.

Finally, the Court granted default judgment against all defaulting Defendants on the claim for unjust enrichment based on the direct and indirect benefits Defendants received by retaining McFee’s intellectual property and share of the proceeds from the sale of CPP’s assets.

Tribike Transp., LLC v. Essick, 2022 NCBC 74 (N.C. Super. Ct. Nov. 30, 2022) (Conrad, J.)

Key Terms: misappropriation of trade secrets; breach of contract; promise; tortious interference; fraud; unjust enrichment; civil conspiracy; unfair competition

Plaintiff brought suit against two former employees, Essick and Cosgrove, and their new competing venture, for various claims arising from the alleged misappropriation of Plaintiff’s business plan and other confidential information. Defendants moved to dismiss all claims.

Regarding misappropriation of trade secrets, Defendants asserted that Plaintiff’s business plan was not protectable as a trade secret and that Plaintiff had not adequately alleged acts of misappropriation. The Court disagreed, concluding that Plaintiff’s allegations regarding the components of the business plan, that the business plan was confidential, unique to Plaintiff, and not readily ascertainable or able to be derived from public information, and acts of misappropriation “compare[d] favorably” with allegations found sufficient under Rule 12(b)(6) in other cases.

Regarding breach of contract and tortious interference claims as to Essick, Defendants acknowledged a valid contract but asserted that the allegations established that Essick could not have breached the contract. The Court rejected this argument, concluding that Plaintiff had met the minimal pleading requirements for breach.

As for the same claims regarding Cosgrove, Defendants argued that Cosgrove’s promise to keep the business plan a secret was not a valid contract because it lacked consideration. However, the Court held that the allegation that Plaintiff would provide Cosgrove with new confidential information in exchange for his promise was sufficient.

The Court also rejected Defendants’ challenge to the inducement and intent to deceive elements of Plaintiff’s fraud claim and to the in or affecting commerce element of Plaintiff’s unfair competition claims.

Regarding the unjust enrichment claim, the Court found that the allegation that Cosgrove fraudulently promised to keep the business plan confidential to gain access to new information was sufficient to state a claim.

Finally, the Court found that the civil conspiracy claim also survived as the complaint sufficiently alleged the identity of the conspirators, the timeframe of the conspiracy, and its purpose.

Campbell Sales Grp., Inc. v. Niroflex by Jiufeng Furniture, LLC, 2022 NCBC 75 (N.C. Super. Ct. Dec. 5, 2022) (Davis, J.)

Key Terms: oral agreement; statute of frauds; specially manufactured goods exception; misappropriation of trade secrets; breach of confidence; unjust enrichment; measurable benefit; conversion; UDTPA; civil conspiracy; piercing the corporate veil; preliminary injunction

Plaintiff, a North Carolina furniture distributor, brought suit against Defendant Genfine, a furniture manufacturer, and related entities and individuals, alleging numerous claims arising from the breach of an alleged exclusivity agreement governing Plaintiff and Genfine’s course of dealing. Defendants moved for summary judgment on all claims, including their counterclaims, and also requested that a previously granted preliminary injunction be dissolved.

The Court granted summary judgment for Defendants on Plaintiff’s claim that Genfine had breached an oral exclusivity agreement with Plaintiff. The Court concluded that none of the communications between the parties were sufficient to satisfy the statute of frauds. Plaintiff’s argument that the agreement was subject to the “specially manufactured goods” exception failed because the record showed that Genfine was willing and able to sell the furniture to other buyers. Moreover, Plaintiff’s argument was undercut by the fact that it had obtained a preliminary injunction to prevent Genfine from selling the furniture to others.

The Court also granted summary judgment for Defendants on Plaintiff’s claim for misappropriation of trade secrets because Plaintiff failed to show reasonable efforts to protect the secrecy of its information.

Next, the Court granted summary judgment for Defendants on Plaintiff’s breach of confidence claim as it failed to cite any case law recognizing such a claim and on Plaintiff’s unjust enrichment claim because the type of benefit upon which Plaintiff relied (the opportunity for new business relationships) was not a sufficiently measurable benefit.

The Court then denied summary judgment on Plaintiff’s conversion claim, which was based on Genfine’s failure to release furniture for which Plaintiff has paid, noting, however, that the claim may have been more appropriately brought as a breach of contract claim.

The Court also denied summary judgment on Plaintiff’s UDTP claim based on evidence of a number of allegedly deceptive statements and acts by Defendants. Plaintiff’s civil conspiracy claim also survived in conjunction with the UDTP claim.

The Court, however, rejected Plaintiff’s request to pierce the corporate veil of Defendant Niroflex because Plaintiff failed to provide evidence rebutting testimony that Niroflex was not controlled by Genfine.

Lastly, the Court granted summary judgment in Genfine’s favor on its own breach of contract claim, which was based on Plaintiff’s failure to pay for goods shipped to it. Plaintiff’s argument that the goods were non-conforming based on violation of the alleged exclusivity agreement failed since the Court had already ruled that no enforceable exclusivity agreement existed.

Turning to the motion to dissolve the preliminary injunction, the Court first noted that the injunction had been based on a likelihood of success on Plaintiff’s breach of contract claim which has now been dismissed. Even assuming Plaintiff could show a likelihood of success on any remaining claims, it failed to show that dissolving the injunction would cause irreparable harm. Thus, the Court granted the motion to dissolve the injunction but deferred ruling on Genfine’s request that the $100,000 bond posted by Plaintiff be forfeited to Genfine.

Howard v. IOMAXIS, LLC, 2022 NCBC 76 (N.C. Super. Ct. Dec. 5, 2022) (Earp, J.)

Key Terms: operating agreement; membership interest; economic interest; buy-sell; equitable accounting; specific performance; declaratory judgment

This case arose following the death of Ronald Howard, who owned a 51% interest in IOMAXIS, LLC. His interest was passed to his Estate and then to a Trust. Following disputes regarding the rights of the Trust with respect to its interest in IOMAXIS, the co-trustees brought suit seeking, inter alia, a declaratory judgment and an accounting.

In response, IOMAXIS argued that any attempt by the Estate to transfer its economic interest to the Trust failed because it did not comply with the company’s operating agreement, and, therefore, the Trust did not have standing to bring the action. The Trust responded that it had clearly identified an interest in IOMAXIS which was assigned to it and that allegations regarding the method of transfer were unnecessary. Acknowledging that the complaint did not explain how the transfer occurred, the Court nonetheless considered the three possible avenues for transfer and concluded that under any one of them, the Trust would become a transferee of an interest in IOMAXIS and thus had standing.

IOMAXIS also sought an order precluding the remedy of specific performance of the buy-sell provisions of the operating agreement. However, because the terms of the operating agreement were ambiguous, the Court determined that it could not rule out, at this stage, an interpretation of the agreement that would support specific performance.

In addition, IOMAXIS sought dismissal of the Trust’s demand for an accounting, arguing that the Trust had not asserted an underlying claim to support an accounting or that it lacked an adequate remedy at law. The Court disagreed and denied the motion, except to the extent the accounting demand was made on the part of the Estate, which was not a party to the action.

Lastly, the Court clarified that the individual defendants were only named as to the first three claims because of the statutory requirement that any person with an interest that would be affected by a declaratory judgment must be made a party to the declaratory judgment action.

Brakebush Bros., Inc. v. Certain Underwriters at Lloyds of London, 2022 NCBC 77 (N.C Super. Ct. Dec. 5, 2022) (Davis, J.)

Key Terms: insurance claim; statutory fraud; N.C.G.S. § 58-44-16(f)(2); heightened pleading requirements; motion to strike

In this suit, Plaintiffs Brakebush and Raeford sued a number of insurance companies over the amount of Brakebush’s insurance claims following a fire at a chicken plant. The insurance companies counterclaimed, seeking, inter alia, a declaratory judgment that the insurance policies were void due to Brakebush’s violation of N.C.G.S. § 58-44-16(f)(2) by fraudulently submitting a claim for insurance proceeds for amounts well beyond the actual damage to the plant. Plaintiffs moved to dismiss the counterclaims under Rule 12(b)(6) and to strike Defendants’ fraud-related affirmative defenses.

The Court began by noting that while a common law fraud claim has additional elements, a claim for statutory fraud under N.C.G.S. § 58-44-16(f)(2) only requires three: 1) a false statement; 2) that was knowingly and willfully made; and 3) that was material. Finding these elements sufficiently pleaded, the Court turned to Brakebush’s argument that the claim was also subject to the heightened pleading requirements of N.C. R. Civ. P. 9(b). However, the Court did not decide the issue, because it found that the counterclaims were pleaded with sufficient particularity even if Rule 9(b) applied. Accordingly, the Court denied the motion to dismiss the declaratory judgment claim.

Because Brakebush’s motion to dismiss the other counterclaims and motion to strike hinged on dismissal of the declaratory judgment claim, the Court denied these motions as well.

McClure v. Ghost Town in the Sky, LLC, 2022 NCBC 78 (N.C. Super. Ct. Dec. 5, 2022) (Conrad, J.)

Key Terms: operating agreement; membership interest; economic interest

Defendants are two limited liability companies whose original members were Alaska Presley and Coastal Development, LLC. Both LLCs have similar operating agreements which provide that upon Presley’s death all of her membership interest would pass to Plaintiff. Other provisions of the operating agreement provided for transfers more generally. Following Presley’s death, Plaintiff sought to assert her membership rights by requesting books, records, and other financial information. After these requests were denied by Coastal Development, Plaintiff brought suit to dissolve the LLCs and wind up their affairs. Defendants moved to dismiss, asserting that, pursuant to the terms of the operating agreement, Plaintiff had only an economic interest, not membership rights and, therefore, could not seek dissolution.

The Court disagreed, noting that the operating agreements unambiguously provided that Plaintiff would succeed to all of Presley’s membership interest upon Presley’s death. The other provisions governing transfers which required member consent were irrelevant to the facts at hand since they specifically stated that they were subject to the aforementioned terms. Accordingly, the Court concluded that Plaintiff was a member of the two LLCs and denied the motion to dismiss

Nerko, L.L.C. v. Blue Bridge Benefits LLC, 2022 NCBC Order 66 (N.C. Super. Ct. Nov. 28, 2022) (Robinson, J.)

Key Terms: receivership; proof of claim; Bankruptcy Code; burden of proof

The Court had previously appointed a receiver for Defendant Blue Bridge Benefits LLC (“BBB”) and entered an order establishing a claims process which required creditors asserting claims against BBB to submit a proof of claim form to the receiver. Thereafter, the receiver investigated the claims asserted, including one for $69,000, and notified the parties of his intent to pay the $69,000 claim. Plaintiff Nerko, L.L.C. objected.

Noting that the N.C. Commercial Receivership Act establishes the process for objections and allowances of claims in a receivership but does not provide a framework for the presentation of evidence and burden of proof, the Court turned to the Bankruptcy Code for guidance and adopted the burden-shifting framework set forth in 11 U.S.C. § 502 and Bankruptcy Rule 9017. Applying this framework, the Court overruled and denied Nerko’s objection, concluding that Nerko had failed to satisfy its burden of proof necessary to overcome the presumption of validity of the claim where, as here, the claim was properly filed and found to be valid by the receiver.

JaniSource LLC v. ChannelAdvisor Corp., 2022 NCBC Order 67 (N.C. Super. Ct. Nov. 30, 2022) (Bledsoe, C.J.)

Key Terms: notice of designation; contemporaneous filing; N.C.G.S. § 7A-45.4(d)(1); order on designation

Plaintiffs did not file a notice of designation until over a month after filing their complaint. Accordingly, the Court determined that the action was not properly designated as a mandatory complex business case because the notice was not filed contemporaneously with the complaint as required by N.C.G.S. § 7A-45.4(d)(1). The order was without prejudice to the right of any other party to seek designation as appropriate.

Shenzhen Ruobilin Network Tech. Co. v. ChannelAdvisor Corp., 2022 NCBC Order 68 (N.C. Super. Ct. Nov. 30, 2022) (Bledsoe, C.J.)

Key Terms: notice of designation; contemporaneous filing; N.C.G.S. § 7A-45.4(d)(1); order on designation

Plaintiffs did not file a notice of designation until over a month after filing their complaint. Accordingly, the Court determined that the action was not properly designated as a mandatory complex business case because the notice was not filed contemporaneously with the complaint as required by N.C.G.S. § 7A-45.4(d)(1). The order was without prejudice to the right of any other party to seek designation as appropriate.

By Ashley B. Oldfield

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.

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

Posted 12/07/22

N.C. Business Court Opinions, November 9, 2022 – November 22, 2022

Kelly v. Metro. Life Ins. Co., 2022 NCBC 70 (N.C. Super. Ct. Nov. 14, 2022) (Robinson, J.)

Key Terms: automatic stay; summary judgment; Ponzi scheme; securities; fraud by omission; concealment; independent contractor; duty to speak; reasonable reliance; respondeat superior

This case arose out of an alleged Ponzi scheme operated by Richard Siskey (deceased), who was, for a period of time, a MetLife employee. Plaintiff had engaged Siskey and his business partner Phillips, another former MetLife employee, as a securities broker, investment advisor, and/or insurance agent. Plaintiff brought 9 claims against Phillips and two MetLife entities, a number of which were previously dismissed pursuant to 12(b)(1) and 12(b)(6). In 2020, Phillips filed a Chapter 13 bankruptcy and the case was stayed as to him. The MetLife Defendants subsequently moved for summary judgment on the remaining claims for fraud by omission, negligent supervision, and negligent misrepresentation and professional negligence under a theory of respondeat superior.

As to the fraud by omission claim, the Court found that MetLife had no duty to speak as a fiduciary relationship did not exist between it and the Plaintiff. Moreover, the Plaintiff could not show reasonable reliance because he failed to investigate Siskey’s past disciplinary history, despite being on notice of it.

As to the negligent supervision claim, the Court found that Plaintiff had failed to put forth sufficient evidence to create a jury issue with respect to the nexus proof requirement that the injury was reasonably foreseeable by the MetLife Defendants.

As to the vicarious liability claims for negligent misrepresentation and professional negligence, the Court found that these claims failed because Siskey and Phillips were independent contractors of MetLife at the time of the complained of conduct and therefore respondeat superior did not apply. Furthermore, even if they had been employees, the claims would fail on other bases as well.

Accordingly, the Court granted the motion and dismissed all claims with prejudice.

N.C. Dep’t of Revenue v. Integon Nat’l Ins. Co., 2022 NCBC 71 (N.C. Super. Ct. Nov. 22, 2022) (Earp, J.)

Key Terms: motion to dismiss; subject matter jurisdiction; Rule (12(b)(1); standing; judicial review; final agency determination; N.C.G.S. § 150B-43; motion to strike; tax credit; admission; mootness

Immediately before a hearing on cross-summary judgment motions before the Office of Administrative Hearings, the Parties, the N.C. Department of Revenue (“Department”) and Integon (“Taxpayer”), submitted a consent order requesting dismissal with prejudice to the administrative law judge (“ALJ”) after the Department withdrew its final determination holding that the Taxpayer could not claim the tax credit at issue and agreed to issue a refund to the Taxpayer. Instead, the ALJ granted the Taxpayer’s summary judgment motion finding that the Department’s proposed order, which was not entered, contained an admission as to the correctness of the Taxpayer’s legal position. The Department sought judicial review.

The Court held that the withdrawal of the final determination by the Department did not deprive the ALJ of subject matter jurisdiction but instead raised the issue of mootness. The Court held that the Department did have standing as an aggrieved party to seek judicial review of the ALJ’s ruling and remanded the case to the ALJ to consider the issue of mootness or otherwise conduct a hearing on the Parties’ cross-motions for summary judgment.

Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St.

Louis, Inc. v. Window World, Inc., 2022 NCBC Order 62 (N.C. Super. Ct. Nov. 11, 2022) (Bledsoe, C.J.)

Key Terms: motion to seal; attorney-client privilege; work-product doctrine; proprietary business information; mistake; billing records; crime-fraud exception; privilege logs

The Court denied Defendants’ motions to seal exhibits that consisted of emails between Defendants’ in-house counsel and Defendants’ executives, directors, and counsel involved in the litigation because the Court found that any potentially privileged information had been redacted. The Court also denied Defendants’ motions to seal various privilege logs it had compiled because the content of the quoted descriptions appeared unredacted elsewhere in the briefs and the Court found privilege logs do not qualify as attorney work-product. The Court granted Defendants’ motion to seal as to certain consulting contracts and executive severance agreements because Defendants had a strong interest in preserving the confidentiality of its proprietary and trade secret information, and Defendants’ proposed redactions were appropriately limited. The Court allowed Defendants to provide supplemental briefing as to sealing exhibits filed by mistake and granted the motion to seal portions of attorney billing records that described confidential settlement communications, governance matters, and personal matters related to individuals associated with Defendants.

McManus v. Dry, 2022 NCBC Order 65 (N.C. Super. Ct. Nov. 16, 2022) (Bledsoe, C.J.)

Key Terms: class action; class settlement agreement; cyberattack; personally identifiable information

Upon preliminary review, the Court found that the proposed Settlement Agreement was negotiated at arms-length and was fair, reasonable, adequate, and in the best interests of the Settlement Classes to warrant providing Notice of the Settlement to the Settlement Classes and accordingly preliminarily approved the unopposed motion for class settlement agreement which would settle the case and result in dismissal with prejudice.

Bucci v. Burns, 2022 NCBC Order 63 (N.C. Super. Ct. Nov. 17, 2022) (Conrad, J.)

Key Terms: attorneys’ fees; N.C.G.S. § 6-21.5; costs; N.C.G.S. § 7A-305(d)

Defendant moved to recover costs and attorneys’ fees against two remaining plaintiffs after partially prevailing at summary judgment and settling with five other plaintiffs. The Court awarded but offset costs because Defendant prevailed against some plaintiffs but benefited from settling with certain other plaintiffs and avoiding trial. The Court based award on number of plaintiffs who actively participated in litigation. The Court awarded attorneys’ fees in its discretion because of a complete lack of judiciable issue of law or fact and apportioned fees among the two plaintiffs based on estimated time spent related specifically to defending against their claims and the motions to recover attorneys’ fees.

Auto Club Grp. v. Frosch Int’l Travel LLC, 2022 NCBC Order 64 (N.C. Super. Ct. Nov. 21, 2022) (Bledsoe, C.J.)

Key Terms: notice of designation; N.C.G.S. § 7A-45.4(a)(8); opposition; trade secret dispute

Plaintiffs had initiated a prior action against Defendant Frosch which included a claim for violation of the N.C. Trade Secrets Protection Act. The action was properly designated a mandatory complex business case but was then dismissed without prejudice after mediation failed. Plaintiffs immediately filed the present action against Frosch and three individuals but did not reassert the trade secrets violation claim. Frosch nonetheless filed a notice of designation contending the case involved a trade secret dispute under N.C.G.S. § 7A-45.4(a)(8). Defendants argued that the current lawsuit was merely a maneuver to avoid Business Court designation since it involved essentially the same subject matter and allegations as the previous action. The Court rejected this argument noting that a plaintiff is master of its complaint and has freedom to choose what claims to bring. Accordingly, the Court found that designation was inappropriate because the complaint did not involve material issues involving trade secrets, made no claim for misappropriation of trade secrets, and did not allege that the confidential information purportedly taken by Defendant constituted trade secrets. The claims involved only misuse of confidential or proprietary information.

By Rachel E. Brinson

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.

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

Posted 11/23/22

N.C. Business Court Opinions, October 26, 2022 – November 8, 2022

North Carolina ex rel. Stein v. Bowen, 2022 NCBC 64 (N.C. Super. Ct. Oct. 27, 2022) (Conrad, J.)

Key Terms: personal jurisdiction; minimum contacts; specific jurisdiction; motion to dismiss

Following the settlement of its 2019 lawsuit against JUUL Labs, Inc., the State of North Carolina filed suit against five officers and directors of JUUL Labs, Inc. individually (“Defendants”). In its complaint, the State alleged that Defendants engaged in unfair and deceptive trade practices under N.C. Gen. Stat. § 75-1.1 “in the course of supervising and directing the marketing of JUUL’s e-cigarette devices and flavored nicotine inserts.” Defendants moved to dismiss for lack of personal jurisdiction and failure to state a claim for relief.

After receiving evidence from the Defendants relating to the Defendants’ contacts with the forum, the Court granted the Defendants’ motion to dismiss for lack of personal jurisdiction. Specifically, the Court held that the State failed to show that Defendants had sufficient minimum contacts or purposefully availed themselves of conducting activities in the forum. The Court held that the State’s allegations, which contained generalized allegations about the Defendants collectively, were facially deficient and failed to address each individual Defendant’s contacts within the state. Noting that the State’s allegations attempted to attribute the corporation’s activities within the state to the individual Defendants, the Court emphasized that “jurisdiction over the individual officers [and directors] of a corporation cannot be predicated merely upon jurisdiction over the corporation.” The Court also noted that the Defendants’ actions were geared towards national marketing campaigns and did not target the State of North Carolina specifically.

Vitaform, Inc. v. Aeroflow, Inc., 2022 NCBC 65 (N.C. Super. Ct. Oct. 27, 2022) (Bledsoe, C.J.)

Key Terms: misappropriation of trade secrets; fraud; fraudulent concealment; summary judgment; UDTPA

Plaintiff Vitaform, Inc., a designer and manufacturer of post-partum compression garments, filed suit against Defendant Aeroflow, Inc., a nationwide Durable Medical Equipment (“DME”) distributor. Plaintiff designed compression garments specifically for post-partum recovery that qualified as a DME for health insurance purposes. After working with one of Defendant’s subsidiary regional distributors, Plaintiff entered into an oral agreement with Defendant on July 19, 2018 to distribute the products nationally and process the related insurance claims (the “July 19 Call”). Plaintiff agreed to provide Defendant with its products, marketing material, and insurance coding information in exchange for payment of shipments received. In its complaint, Plaintiff alleged its business information was only provided on the basis that Defendant would maintain its confidentiality. Plaintiff alleged that Defendant used the information obtained from Plaintiff to design a competing product through Defendant’s wholly-owned subsidiary, which Defendant eventually began to distribute to customers in place of Plaintiff’s product.

Following the dismissal of four of Plaintiff’s claims and two of Defendant’s counterclaims, Defendant moved for summary judgment on Plaintiff’s remaining claims of: (i) trade secret misappropriation; (ii) breach of the duty of good faith and fair dealing; (iii) fraud and fraudulent concealment in relation to the July 19 Call; (iv) common law unfair competition and violations of the UDTPA and Lanham Act; (v) common law unfair competition and violations of the UDTPA in relation to the July 19 Call; and (vi) unjust enrichment.

The Court granted Defendant’s motion as to Plaintiff’s trade secret claim, on the basis that Plaintiff’s unpatented product design specifications and business model information were publicly available and readily ascertainable, and Plaintiff failed to make reasonable efforts to maintain secrecy. Plaintiff’s breach of the duty of good faith and fair dealing was dismissed by the Court on the grounds that Plaintiff failed to present facts sufficiently specific to warrant a finding that Plaintiff and Defendant entered into an enforceable oral confidentiality agreement during the July 19 Call.

Defendant’s motion was denied as to Plaintiff’s fraud and fraudulent concealment claims, as the Court held that the evidence created an issue of fact as to whether Defendant made fraudulent misrepresentations on the July 19 Call and fraudulently concealed its intent to use Plaintiff’s business model in the following weeks.

The Court granted Defendant’s motion as to Plaintiff’s Lanham Act, unfair competition, and UDTPA claims (except to the extent the unfair competition and UDTPA claims were based on the July 19 Calls). In addressing Plaintiff’s Lanham Act claim, the Court held that Defendant did not falsely designate the origin of its product and did not create customer confusion by indicating to customers that they would be receiving Plaintiff’s product rather than Defendants. The court likewise found that Plaintiff had failed to create an issue of triable fact for its unfairness and UDTPA claims, as it did not proffer evidence that Defendant had designated its shipped products as coming from a specific supplier and sent appropriately branded products. The Court denied Defendant’s motion as to Plaintiff’s unjust enrichment and punitive damages claims, as Plaintiff had presented sufficient evidence of Defendant’s “wrongful” conduct.

Anderson v. Beresni, 2022 NCBC ORDER 59 (N.C. Super. Ct. Oct. 27, 2022) (Davis, J.)

Key Terms: preliminary injunction, TRO; mediation; homeowners’ association

Plaintiffs are property owners in a planned community called Mystic Lands and members of the Mystic Lands Property Owners’ Association (the “Association”). Plaintiffs, on behalf of the Association, filed suit against current and former members of the Association’s board of directors for breach of fiduciary duty related to the board of directors’ failure to collect assessments from the declarant for property owned in the community. Plaintiffs also sought preliminary and permanent injunctive relief. A temporary restraining order was entered in August 2022, enjoining the board of directors from participating in any mediation or settlement discussions with the property owners owing assessments without Plaintiffs’ participation.

The Court denied Plaintiff’s motion for a preliminary injunction on the basis that Plaintiffs failed to demonstrate irreparable harm. Specifically, the Court noted that Plaintiffs failed to show that they lacked an adequate remedy at law, such as monetary damages, that would make the Associate whole if Plaintiffs succeeded in the underlying suit.

Hartsell v. Mindpath Care Ctrs., N.C., PLLC, 2022 NCBC 66 (N.C. Super. Ct. Nov. 2, 2022) (Earp, J.)

Key Terms: breach of fiduciary duty; constructive fraud; motion to dismiss

Defendant Mindpath operates as a mental and behavioral healthcare organization. Plaintiff, a nurse practitioner, signed an operating agreement and participating provider agreement to become a member, minority interest holder, and employee of Mindpath in 2001. Mindpath’s majority interest holder (“Yvonne”) shared ownership with Mindpath’s president (“Stanley”) in MISO, LLC, a company Mindpath used for billing services. In her complaint, Plaintiff alleged that Defendants deducted funds owed to Plaintiff pursuant to the operating agreement, concealed the terms of Mindpath’s “insider transactions” with MISO, refused to redeem Plaintiff’s ownership interest in Mindpath when requested, and refused to permit Plaintiff to access Mindpath’s records.

Defendants filed a motion to dismiss Plaintiff’s claims for: (i) breach of fiduciary duty against Stanley for failure to redeem Plaintiff’s membership interest; (ii) breach of fiduciary duty against Stanley and Yvonne for self-dealing transactions with MISO; and (iii) constructive fraud against all defendants. Noting that no de jure fiduciary duty existed between the parties, the Court held that each claim’s survival depended upon a finding that a de facto fiduciary existed in each situation respectively. The Court concluded that Plaintiff failed to sufficiently allege that Stanley or Yvonne exercised sufficient dominion or control over Mindpath to warrant the imposition of fiduciary duties to Plaintiff. The Court likewise held that no fiduciary duties were owed to Plaintiff by Mindpath or MISO. As Plaintiff failed to allege the existence of a fiduciary duty, the Court granted Defendant’s motion in full.

Lee v. McDowell, 2022 NCBC ORDER 60 (N.C. Super. Ct. Nov. 2, 2022) (Bledsoe, C.J.)

Key Terms: shareholder notice; proposed settlement agreement

This order stems from an opposed proposed settlement agreement to resolve Plaintiffs’ individual and derivative claims for breach of fiduciary duty. The Court held that notice to the Plaintiff corporation’s shareholders of the proposed settlement was not required under statute, as it was within the Plaintiff corporation’s best interest to approve the settlement.

Gallaher v. Ciszek, 2022 NCBC 67 (N.C. Super. Ct. Nov. 4, 2022) (Bledsoe, C.J.)

Key Terms: breach of contract; employment agreement; Wage and Hour Act; piercing corporate veil

Plaintiffs, former employees of Defendant Cape Fear Neonatology Services, P.A. (“Cape Fear Neo”), filed suit against Cape Fear Neo for breach of their employment contracts and violations of the North Carolina Wage and Hour Act (“NCWHA”) for unilaterally reducing Plaintiffs’ salaries and withholding bonuses. Plaintiffs also requested the Court to pierce Cape Fear Neo’s corporate veil and hold its owner, Defendant Ciszek, personally liable on both claims. Defendants filed a counterclaim for breach of contract. Both sides moved for summary judgment.

On the breach of contract claim, the Court determined that Cape Fear Neo had breached its employment agreements with Plaintiffs by unilaterally reducing Plaintiffs’ salaries. However, after analyzing the parties’ conduct using the Wheeler elements, the Court held that this breach had been waived by Plaintiffs, who continued their employment with Cape Neo after receiving notice of the breach. Noting that North Carolina is an at-will employment state, the Court interpreted Plaintiffs’ continued employment with Cape Fear Neo to constitute a waiver. The Court also held that no breach occurred as to the withholding of year-end bonuses, as the employment contracts’ language did not give Plaintiffs a right to year-end bonuses for the years at issue.

The Court held that Cape Fear Neo violated the NCWHA by failing to tender prior notice of Plaintiffs’ salary reduction as required under N.C. Gen. Stat. § 95-25.13(3). Plaintiffs did not receive notice of the salary reduction until the first reduced paycheck was received with a memo line noting the payment reflected an alteration in salary payments. The Court entered judgment in favor of Plaintiffs for the amount of unpaid salary withheld during that pay period, and awarded Plaintiffs liquidated damages pursuant to statute. However, the Court further held that Plaintiffs received the requisite statutory notice on the day the first reduced paycheck was received, and no subsequent violation of the NCWHA occurred. No costs or attorneys’ fees were awarded. The Court concluded that Cape Fear Neo’s withholding of annual bonuses did not violate the NCWHA, as the employment contract did not create a calculable bonus formula, and consequently dismissed Plaintiffs’ NCWHA claim as it related to the unpaid bonuses.

The Court employed the instrumentality test to determine that piercing the corporate veil was appropriate in this situation and held Defendant Ciszek personally liable for the judgments entered against Cape Fear Neo. Defendants’ counterclaim for breach of contract was dismissed.

Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., 2022 NCBC 68 (N.C. Super. Ct. Nov. 7, 2022) (Davis, J.)

Key Terms: judgment on the pleadings; declaratory judgment; standing

The Court ruled on two motions for partial judgment on the pleadings related to claims surrounding the validity of an equity purchase agreement. Plaintiff was a limited partner of Fayetteville Ambulatory Surgery Center, L.P. (“FASC”). The general partner of FASC, NSC Fayetteville, Inc. (“NSCF”), was a wholly-owned subsidiary of National Surgery Centers, LLC (“NSC”), which itself was a wholly-owned subsidiary of Surgical Care Affiliates, LLC (“SCA”). Through two separate but related transactions, Defendant Cumberland County Hospital System, Inc. (“CCHS”), acquired 100% of NSCF’s equity, and through that ownership, owned 100% of the general partner units of FASC. Plaintiff, on behalf of himself and the other limited partners of FASC, filed suit to challenge the validity of these transactions.

Defendants filed a motion for partial judgment on the pleadings related to Plaintiff’s standing to assert individual claims. The Court ruled in Defendants’ favor on Plaintiff’s claims for breach of contract, tortious interference with contractual relationship, and civil conspiracy. The Court reasoned that since FASC was not a party to either of the transactions at issue, Plaintiff lacked standing.

The Court denied Defendants’ motion as to Plaintiff’s eighth claim for tortious interference with contractual relationship against SCA, as this claim was not based upon the equity transactions, but rather a Cash Management Agreement that bound FASC. As FASC was bound by the agreement, Plaintiff maintained standing to assert this claim. The Court also denied Defendants’ motion as to Plaintiff’s individual claim for declaratory judgment.

Lastly, the Court dismissed Plaintiff’s claim for punitive damages, noting that North Carolina does not recognize an independent cause of action for punitive damages. The Court dismissed this claim without prejudice to Plaintiffs’ right to seek punitive damages for his remaining claims to the extent such damages would be recoverable under North Carolina law.

Aspen Specialty Ins. Co. v. Nucor Corp., 2022 NCBC 69 (N.C. Super. Ct. Nov. 8, 2022) (Earp, J.)

Key Terms: summary judgment; Rule 30(b)(6) deposition; evidential admission v. judicial admission; motion to amend complaint; UDTPA

This case arose from an industrial incident that occurred at an iron ore processing facility owned by Defendant Nucor Corp. Plaintiffs are two groups of insurers, each of which sought a declaratory judgment regarding whether their policies covered the losses incurred by Nucor. Following certain discovery, Nucor moved for partial summary judgment and to amend its complaint.

Regarding summary judgment, Nucor asserted that the testimony of one of the insurer’s Rule 30(b)(6) deponent contained admissions that established as a matter of law that certain policy provisions and allegations in the complaint could not be the basis for the denial of Nucor’s claim. The Court disagreed, finding that the deponent’s testimony was not sufficiently deliberate and unequivocal to constitute a judicial admission warranting summary judgment.

Regarding the motion to amend, Nucor sought to add a UDTPA claim premised on unfair claim settlement practices as defined in N.C.G.S. § 58-63-15(11). Despite Nucor’s years-long delay in adding this claim, the Court did not find undue delay or undue prejudice. However, it did find that the part of the proposed UDTPA claim based on misrepresentation was futile because it did not allege reasonable reliance. The remaining portions of the claim were sufficient and the Court, therefore, granted the motion to amend in part.

Sneed v. Sneed, 2022 NCBC ORDER 61 (N.C. Super. Ct. Nov. 8, 2022) (Earp, J.)

Key Terms: receivership; corporate dissolution

The Court approved a consent order providing for the judicial dissolution of three corporations owned by separated spouses. Pursuant to the consent order, the Court appointed a receiver to protect and manage the assets of the three corporations pending a resolution of the equitable distribution proceedings in their marriage dissolution case.

North Carolina ex rel. Stein v. E. I. Du Pont de Nemours & Co., 2022-NCSC-110 (Earls, J.)

Key Terms: personal jurisdiction; specific jurisdiction; corporate restructuring; successor liability

In an opinion addressing a lawsuit by North Carolina relating to Old Dupont for its alleged release of harmful chemicals into the environment and a corporate restructuring by Old Dupont, the N.C. Supreme Court held Defendants that were Delaware holding companies were subject to personal jurisdiction in North Carolina because the successor entities expressly assumed Old Dupont’s liabilities for the chemicals at issue, including the liabilities arising in North Carolina, even though the successors themselves had no direct contact with North Carolina. The Court also noted that Old Dupont engaged in the corporate restructuring to fraudulently deprive its creditors of judicial recourse, serving as a second independent ground to exercise personal jurisdiction over the successor entities. Accordingly, the Court affirmed the order and opinion by Business Court Judge Michael Robinson, which had denied a motion to dismiss for lack of personal jurisdiction.

By Natalie Kutcher and Matthew Tomsic

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.

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

Posted 11/09/22

N.C. Business Court Opinions, October 12, 2022 – October 25, 2022

United Therapeutics Corp. v. Liquidia Techs., Inc., 2022 NCBC 59 (N.C. Super Ct. Oct. 13, 2022) (Earp, J.)

Key Terms: trade secret misappropriation; UDTPA; in or affecting commerce; Rule 12(b)(6)

Plaintiff, a biotech company, brought suit against Roscigno (a former executive) and Liquidia (a competing biotech company) for misappropriation of trade secrets and unfair and deceptive trade practices arising from Roscigno’s alleged taking of trade secrets and confidential information relating to the development of certain medical treatments. Defendants moved to dismiss all claims.

Regarding the misappropriation claim, the Court concluded that Plaintiff’s allegations describing the types of information it contended constituted trade secrets and identifying the specific documents in which the trade secrets could be found were sufficient to identify the trade secrets at issue. Moreover, the Court concluded that Plaintiff had sufficiently pleaded misappropriation based on its allegations that Roscigno had access to the trade secrets, transferred and used them after his employment ended, and carried them to Liquidia, and that Liquidia had the trade secrets in its possession as evidenced by its production of the trade secrets during discovery in separation litigation.

Regarding the UDTPA claim, Liquidia argued that because the medical treatment was not yet commercially available, the alleged misappropriation was not “in or affecting commerce.” The Court rejected this narrow interpretation of the statute, determining that allegations regarding the transfer of trade secrets between competing companies regarding the development of products that are on the market or are intended for the market satisfied the UDTPA pleading requirements.

Accordingly, the Court denied the motion to dismiss as to both claims.

Clue Prop. Dev., LLC v. Switzenbaum & Assocs., Inc., 2022 NCBC 60 (N.C Super. Ct. Oct. 14, 2022) (Robinson, J.)

Key Terms: Rule 12(b)(6); breach of contract; damages; defined term; Rule 12(e); more definite statement

Plaintiffs filed suit alleging numerous claims arising from agreements between the parties to purchase and transfer certain property for residential development. Defendants moved to dismiss the Complaint, or in the alternative, for a more definite statement.

Defendants sought dismissal based largely on the Complaint’s definition of “Clue” as including both Plaintiff Clue Property Development (“Clue”) and an alleged predecessor entity Cue Property Development (“CUE”), which, according to Defendants, undermined the damages allegations in Claim 4 and tainted the whole Complaint. After determining that Claim 4 had sufficiently alleged a breach of contract despite the defect in the damages allegation, the Court turned to the effect of the defined term on the Complaint as a whole. The Court held that Plaintiffs had sufficiently alleged successorship for Rule 12(b) purposes because despite not alleging specific facts showing successorship, it appeared that Plaintiffs may be able to prove some facts which would support such a finding. Thus, the Court denied the motion to dismiss the Complaint.

The Court did, however, grant the motion for a more definite statement, due to the Complaint’s failure to sufficiently identify which entity was damaged and by what conduct.

Chambers v. Moses H. Cone Mem’l Hosp., 2022 NCBC 61 (N.C. Super. Ct. Oct. 19, 2022) (Conrad, J.)

Key Terms: class certification; non-opt-out class; actual notice; due process; class action settlement approval; attorneys’ fees

After Plaintiff received a $14,000 bill from Defendant Moses Cone for an emergency appendectomy, Plaintiff filed suit in 2012 alleging that Defendants had overcharged him and a class of other self-pay patients who received emergency care. Following ten years of litigation, all that remained was a class declaratory judgment claim seeking a declaration that Moses Cone’s form contract included an open price term, that it may not bill self-pay patients at Chargemaster rates, and that it is entitled only to the reasonable value of its services. The parties agreed to a proposed settlement in April 2022 which provided, among other things, that each class member would receive a fifty percent reduction of his original bill. This settlement was preliminarily approved by the Court in June. After notice was given to putative class members, Plaintiff filed unopposed motions for final approval and for $75,000 in attorneys’ fees.

The Court first approved the class, finding that the requirements of Rule 23 of the North Carolina Rules of Civil Procedure were satisfied. Although not all class members received actual notice due to mailings returned undeliverable, the Court concluded that this did not violate due process under the circumstances. Moreover, given that only declaratory relief was at issue, a non-opt-out class was appropriate to avoid unnecessary inconsistencies and compromises in future litigation.

The Court also approved the settlement, finding it fair, reasonable, adequate, and in the best interests of the class, especially considering the uncertainty and expense of continued litigation.

Regarding the request for attorneys’ fees, the Court applied the eight factors identified in Rule 1.5 of the Rules of Professional Conduct and determined that $75,000 was fair and reasonable. Plaintiffs’ counsel had expended nearly 450 hours in litigating the case, which was reasonable given the length and complexity of the litigation. At counsel’s ordinary billing rates, the combined value would have been $196,670. A discounted award of $75,000 would yield an implied average rate of $168/hour, which was well within the rates customarily charged in North Carolina.

PHE, Inc. v. Dolinksy, 2022 NCBC 62 (N.C. Super. Ct. Oct. 19, 2022) (Davis, J.)

Key Terms: estate; executor; fiduciary duty; economic loss rule; declaratory judgment; no actual dispute

After one of its shareholders passed away, Plaintiff sought to purchase the decedent’s shares of the company from his Estate, pursuant to the terms of its Shareholders’ Agreement and the decedent’s Will. When the Estate’s executor failed to deliver the shares, Plaintiff filed suit for breach of the Shareholders’ Agreement and breach of fiduciary duty under the Will and for declaratory judgments regarding the Shareholders’ Agreement and the Will. Defendant moved to dismiss Plaintiff’s will-based claims.

In its breach of fiduciary duty claim, Plaintiff alleged that Defendant owed it a statutory fiduciary duty under N.C.G.S. § 28A-13-2, as well as a general duty to comply with the terms of the Will. In response, Defendant argued that the claim must be dismissed because 1) Plaintiff is essentially a creditor of the Estate and thus is not in the class of persons legally authorized to bring such a claim; and 2) the economic loss rule bars a tort claim because the parties’ obligations are governed exclusively by the Shareholders’ Agreement. The Court declined to address the first argument but agreed with the second—because nothing in the Will changed the relationship between the Parties established by the Agreement, the tort claim could not exist independently from the contract claim and was, therefore, barred by the economic loss rule.

For similar reasons, the Court also dismissed the will-based declaratory judgment claim. Since the Court could not identify any legally permissible construction of the Will that would alter the contractual duties under the Agreement, no actual dispute existed to warrant a declaratory judgment regarding the Will.

BlueSky Restoration Contractors, LLC v. Brown, 2022 NCBC 63 (N.C. Super. Ct. Oct. 20, 2022) (Robinson, J.)

Key Terms: Rule 12(c); judgment on the pleadings; merger; restrictive covenants; Delaware law; claim for punitive damages

Plaintiff BlueSky Restoration filed suit against Brown, a former employee, for allegedly breaching several agreements containing restrictive covenants. Brown counterclaimed and filed a third-party complaint against BlueSky HoldCo (BlueSky Restoration’s parent company), who, in turn, filed third-party counterclaims against Brown. Brown moved for judgment on the pleadings under Rule 12(c) as to various claims. At the outset, the Court determined that, pursuant to the choice of law provisions in the agreements, Delaware law applied to substantive issues.

First, Brown argued that the restrictive covenants in the LLC Agreement and LP Agreement were no longer enforceable due to a corporate merger, or, in the alternative, that the restrictive covenants were overbroad and unenforceable as a matter of law. Regarding merger, the Court found that there was no evidence properly before the Court on a Rule 12(c) motion which indicated that the Plaintiffs intended to release Brown from the restrictive covenants in the LLC Agreement. As to the LP Agreement, the Court rejected Brown’s merger argument based on language in certain merger documents which indicated that the LP Agreement’s restrictive covenants survived the merger. Regarding the enforceability of the restrictive covenants, the Court went through the elements under Delaware law and concluded that the covenants were not overbroad as a matter of law. Plaintiffs had sufficiently alleged that the covenants protected a legitimate economic interest, and issues of fact remained regarding the reasonableness of the time and territorial restrictions.

Second, Brown argued that the non-solicitation provision in the 2017 Agreement had expired on his last day of employment due to BlueSky Restoration’s failure to pay a required severance payment. The Court rejected this argument because the plain language of the 2017 Agreement provided that the severance payment requirement did not apply to the non-solicitation provision.

Having found that the breach of contract claims survived dismissal, the Court also denied Brown’s request for dismissal of the claims for injunctive relief and for a declaratory judgment regarding the enforceability of the LP Agreement. However, the Court granted dismissal of BlueSky Restoration’s claim for punitive damages, as punitive damages are a remedy, not a stand-alone claim.

Anderson v. Beresni, 2022 NCBC Order 58 (N.C Super. Ct. Oct. 25, 2022) (Davis, J.)

Key Terms: BCR 7.8; arguments incorporated by reference; nominal defendant; crossclaim

On its own motion, the Court entered an order striking Defendants’ brief in support of their motion to dismiss for violation of BCR 7.8, which prohibits incorporating by reference arguments made in another brief. The Court directed Defendants to file an amended brief within ten days. The Court also directed the parties to include in their briefs a discussion of whether a nominal defendant in a derivative action is permitted to assert a crossclaim.

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 10/26/22

N.C. Business Court Opinions, September 14, 2022 – September 27, 2022

Total Merch. Servs., LLC v. TMS NC, Inc., 2022 NCBC 51 (N.C. Super. Ct. Sept. 19, 2022) (Bledsoe, C.J.)

Key Terms: sanctions; show cause hearing; preliminary injunction; attorneys’ fees

In a previous order entered August 30, 2022, the Court concluded that sanctions should be awarded against Defendants for their egregious conduct, including improperly removing the case to federal court, refusing to respond to discovery requests for fifteen months, taking an improper interlocutory appeal of the Preliminary Injunction Order, “stubbornly and willfully” refusing to comply with the Preliminary Injunction, making false representations to the Court, and refusing to timely comply with the Order to Compel.  In that order, the Court ordered Defendants to appear and show cause why the Court should not enter sanctions, including striking Defendants’ answer, affirmative defenses, and remaining counterclaims.  At the show cause hearing, Defendants argued that their actions did not constitute a violation of the Preliminary Injunction Order, they had misunderstood the Preliminary Injunction Order’s terms, and any violations of the Preliminary Injunction Order were de minimis.  The Court rejected Defendants’ three arguments.

Pursuant to its inherent authority and Rule 41(b), the Court struck Defendants’ Answer, including all affirmative defenses and counterclaims, and ordered entry of default against Defendants. The Court also ordered Defendants to pay Plaintiff’s reasonable expenses and attorneys’ fees incurred during the sanctions process but reserved the issue of Plaintiff’s damages and further attorneys’ fees for a future order.

Davis v. HCA Healthcare, Inc., 2022 NCBC 52 (N.C. Super. Ct. Sept. 19, 2022) (Davis, J.)

Key Terms: antitrust; class action; motion to dismiss; standing; monopoly; restraint of trade; indirect purchaser

Plaintiffs filed a class action lawsuit against Defendants, a group of hospitals and health systems in and around Buncombe County, alleging antitrust claims.  Specifically, Plaintiffs allege that Defendants have engaged in unlawful restraint of trade by: (i) possessing a monopoly over inpatient medical services in Asheville, North Carolina; and (ii) unlawfully seeking to maintain and extend this monopoly into adjacent counties by coercing commercial health insurers to include Defendants’ smaller facilities in their networks.  Plaintiffs, a group of residents from western North Carolina, claim damages in the form of higher healthcare costs as a result of Defendants’ antitrust violations. Defendants filed a Motion to Dismiss, arguing that Plaintiffs lacked standing pursuant to Rule 12(b)(1) and failed to state a claim pursuant to Rule 12(b)(6).

Defendants’ argument for dismissal under 12(b)(1) was premised upon federal case law barring indirect purchasers from asserting antitrust claims under federal antitrust law. The Court rejected Defendants’ argument, noting that North Carolina precedent has explicitly established the right of indirect purchasers to maintain standing under N.C. Gen. Stat. § 75-16, and denied Defendants’ Motion to Dismiss pursuant to Rule 12(b)(1).  After engaging in an analysis of the pleadings, the Court granted Defendants’ Motion to Dismiss pursuant to Rule 12(b)(6) on five of Plaintiff’s six claims, leaving only Plaintiff’s claim for restraint of trade.

McNew v. Fletcher Hosp., Inc., 2022 NCBC 53 (N.C. Super. Ct. Sept. 20, 2022) (Bledsoe, C.J.)

Key Terms: class action; UDTPA; learned profession exemption; motion to dismiss; fiduciary duty; constructive fraud

Plaintiff filed a class action lawsuit against Defendant hospital, alleging that Defendant engaged in “surprise billing” by charging patients amounts in excess of both its published rates and local and national market rates. Plaintiff pursued individual and class claims against Defendant for (i) violation of North Carolina’s Unfair and Deceptive Trade Practices Act, (ii) breach of fiduciary duty, (iii) constructive fraud, and (iv) breach of contract.  Defendant moved to dismiss all claims pursuant to Rule 12(b)(6).  At the motion hearing, Defendant conceded that Plaintiff sufficiently pleaded his claim for breach of contract and withdrew its Motion as to that claim.

The Court granted dismissal of the breach of fiduciary duty claim, holding that the de jure fiduciary duty Plaintiff sought to impose on Defendant was not applicable to the allegations presented in the Complaint, which arose from Defendants’ billing practices.  The Court noted that the fiduciary duty imposed upon physicians stems from the physician’s “special knowledge and skill in diagnosing and treating injuries, which the patient lacks.”  Conversely, the billing relationship is one of debtor and creditor, which does not constitute a de jure fiduciary relationship under North Carolina law. The Court further held that Plaintiff had presented insufficient factual allegations to impose a de facto fiduciary duty upon the hospital.  As Plaintiff failed to establish a fiduciary duty, the Court dismissed his constructive fraud claim as well. The Court also dismissed Plaintiff’s UDTPA claim, holding that it was precluded by the learned profession exemption applied to the healthcare field.

Univ. of N.C. at Chapel Hill v. Vesta Therapeutics, Inc., 2022 NCBC 54 (N.C. Super. Ct. Sept. 21, 2022) (Conrad, J.)

Key Terms: breach of contract; license agreement; motion to dismiss; Rule 13(d); State Tort Claims Act; constitutional claim

Plaintiff filed a breach of contract action against Defendants alleging Defendants breached a sponsorship research agreement with Plaintiff by failing to provide funding.  Plaintiff also asserted a claim against Defendants for breach of their licensing agreement with Plaintiff for Plaintiff’s stem cell technology.   Defendants counterclaimed, alleging that Plaintiff failed to perform the required research under the sponsorship agreement, destroyed evidence of its inactivity, disclosed confidential information to a foreign government, improperly disposed of samples, and interfered with commercialization efforts.  Plaintiff moved to dismiss Defendants’ constitutional and negligence-based counterclaims.

The Court held that Defendants’ constitutional counterclaim, which derived from Article I Section 19 of the North Carolina Constitution, could not be asserted against the State or its agencies unless Defendants “lacked any sort of state remedy.”  The Court held that Defendants’ contractual claims provided an adequate remedy under state law and, consequently, granted dismissal of Defendants’ constitutional counterclaim.

Regarding Defendants’ negligence-based counterclaim, the Court held that the State Tort Claims Act, which requires aggrieved parties to bring their claims against State institutions within the exclusive and original jurisdiction of the Industrial Commission, barred Defendants’ counterclaim.  Defendants argued that an exception to the State Tort Claims Act, permitting third-party claims against a state agency in superior court, also applied to counterclaims.  Noting that Rule 13(d) of the North Carolina Rules of Civil Procedure stresses that the Rules “shall not be construed to enlarge beyond the limits fixed by law the right to assert counterclaims” against a state agency, the Court rejected Defendants’ argument and granted dismissal of the negligence-based counterclaim.

Ehmann v. Medflow, Inc., 2022 NCBC 55 (N.C. Super. Ct. Sept. 12, 2022) (Robinson, J.)

Key Terms: breach of contract; UDTPA; motion to dismiss; fraud; successor liability; veil-piercing; instrumentality rule; civil conspiracy; intracorporate immunity; Wage and Hour Act; Retaliatory Discrimination Act; tortious retaliation

In this case, Plaintiff had served as CEO of Defendant Medflow during the time that Medflow was acquired by Defendant Lindberg. Following this acquisition, Plaintiff requested from Medflow certain payments which became due under Plaintiff’s employment Agreement. After Medflow refused to make the payments and terminated Plaintiff, Plaintiff brought suit against Lindberg, Medflow, and a host of related entities, alleging eleven claims. Defendants moved to dismiss pursuant to Rule 12(b)(6). In a previous order, the Court had denied the motion insofar as it attacked the claim for breach of contract. The Court now addressed the remaining claims.

Regarding the veil piercing claim, the Court denied dismissal, concluding that the instrumentality rule could be used to extend liability to affiliated entities, not just stockholders, and that the Complaint had adequately alleged facts to show Lindberg’s complete domination over the entity Defendants that caused injury to Plaintiff.

As to the civil conspiracy claim, Defendants argued that it was barred by the intracorporate immunity doctrine. Plaintiff responded that 1) the conspiracy involved unrelated co-conspirators; 2) North Carolina law does not extend the doctrine to commonly-owned affiliates; and 3) the “independent personal stake” exception allows the claim to proceed. The Court agreed with Defendants and dismissed the claim, concluding that the Complaint failed to adequately allege that any outsiders were co-conspirators, that, pursuant to the Fourth Circuit’s reasoning, intracorporate immunity does apply to commonly-owned affiliates; and that personal liability under the Wage and Hour Act is not wholly separable from the corporate benefit Defendants obtained and thus did not qualify for the independent personal stake exception.

The Court denied dismissal of the N.C. Wage and Hour Act claim, determining that the Complaint adequately alleged that Plaintiff was owed payments which qualified as wages under the Act and that Defendants, including the affiliates, qualified as employers under the “economic reality” test.

Plaintiff also alleged violation of the N.C. Retaliatory Employment Discrimination Act, claiming that he was retaliated against after filing complaints with the Department of Labor and receiving right-to-sue letters against certain Defendants. The Court found these allegations sufficient to survive dismissal as to the Defendants for whom Plaintiff had received right-to-sue letters but dismissed the claim as to the remaining Defendants.

In addition, the Court dismissed Plaintiff’s “tortious retaliation” claim, which the Court construed as a wrongful discharge claim, because such a claim arises only in the context of employment at will and Plaintiff was instead a contract employee.

Defendants also sought dismissal of the UDTPA claim because the claim related solely to Plaintiff’s employment relationship and thus did not affect commerce. The Court rejected this argument concluding that allegations of a fraudulent transfer scheme between multiple companies, even though they were all owned indirectly by the same person, satisfied the requirements under UDTPA.

Finally, the Court dismissed the constructive trust claim because such a claim is not a standalone claim but denied dismissal of the claims for successor liability, fraud, and violation of the UVTA.

Bourgeois v. Lapelusa, 2022 NCBC 56 (N.C. Sup. Ct. Sept. 23, 2022) (Earp, J.)

Key Terms: motion to dismiss; LLC; fiduciary duties; judicial dissolution; conversion; unjust enrichment; conversion to economic interest holder; Rules of Professional Conduct

This case arises from a dispute amongst members of a limited liability company following the merger of two separate limited liability companies.   Plaintiffs Bourgeois and Pitbox Auto Sales, LLC filed suit against Bourgeois’ former business partners, claiming that Defendants breached their fiduciary duties, converted funds to their own benefit, and were unjustly enriched by their actions.  Plaintiffs also sought injunctive relief and judicial dissolution of the entity resulting from the merger, Defendant The Pit Box, LLC.   Defendants collectively moved under 12(b)(6) to dismiss Plaintiffs’ claims for breach of fiduciary, judicial dissolution, conversion, unjust enrichment, and injunctive relief.  Defendant Stevenson individually moved under 12(b)(6) to dismiss Plaintiff’s conversion to economic interest holder claim.  Plaintiffs also filed a Motion to Amend their Complaint.

The Court dismissed Plaintiffs’ breach of fiduciary duty claim, noting that members of an LLC traditionally do not owe one another fiduciary duties absent a contractual agreement to impose such duties.  The Court also held that Plaintiffs failed to allege facts warranting the imposition of de facto fiduciary duties.  The Court denied dismissal of the judicial dissolution claim, as Plaintiffs sufficiently pleaded allegations that, if true, would warrant a judicial dissolution and thus dismissal would be “premature.”  Plaintiff’s claims for conversion were dismissed without prejudice, as the Complaint failed to allege that Defendants had acquired payments wrongfully, or that Plaintiffs had requested the payment to be returned, and therefore failed to plead a critical element of conversion.  The Court dismissed Plaintiffs’ claim for unjust enrichment against the entity defendants, as the Complaint only contained allegations of the individual defendants’ wrongful use of payments, and not the entities.  Plaintiffs’ claim for unjust enrichment against the individual defendants was upheld. In light of Plaintiffs’ remaining unjust enrichment claim, the Court also upheld Plaintiffs’ injunctive relief claim, as “foreclosing injunctive relief would be premature.”

Defendant Stevenson’s Motion to Dismiss Plaintiffs’ conversion to economic interest holder was granted by the Court, as Plaintiffs failed to cite any law in favor of the claim. Plaintiffs alleged that Stevenson, an attorney, had a conflict of interest in his membership with the LLC and violated the “Canon of Ethics” for attorneys.  The Court rejected Plaintiff’s argument, noting that North Carolina’s Rules of Professional Conduct cannot be used to establish civil liability.

Finally, the Court denied Plaintiffs’ Motion to Amend the Complaint, on the basis that the claims attempted in the proposed amendment were futile for lack of standing.

Halikierra Cmty. Servs. LLC v. N.C. Dep’t of Health & Hum. Servs., 2022 NCBC 57A (N.C. Super. Ct. Sept. 27, 2022) (Robinson, J.)

Key Terms: unfair and deceptive trade practices; due process; summary judgment; constitutional challenge; equal protection

Plaintiff, a home health provider servicing Medicaid-eligible beneficiaries, filed suit against Defendants North Carolina Department of Health and Human Services (“DHHS”), the Medical Review of North Carolina, Inc. d/b/a The Carolinas Center for Medical Excellence (“CCME”), and two individuals working for or on behalf of the DHHS (the “Individual Defendants” and collectively with DHHS and CCME, “Defendants”).    In the Complaint, Plaintiff alleged that the DHHS violated Plaintiff’s due process rights under the North Carolina Constitution by arbitrarily placing it on prepayment review, a strenuous audit procedure employed when DHHS detects aberrant billing practices, which ultimately led to the closure of Plaintiff’s business.  Plaintiff also alleged that CCME and the Individual Defendants violated North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”) by conspiring against it.  Plaintiff sought compensatory and punitive damages from all Defendants.  In a previous order, the Court dismissed Plaintiff’s facial constitutional challenges against the DHHS and fraud claim against CCME.  The Defendants moved for summary judgment on the remaining claims.

The Court granted summary judgment in Defendant’s favor as to the remaining constitutional claims.  While the Court noted that Plaintiff’s due process claim was permissible, as no adequate remedy existed under state late, the Court ruled that Plaintiff failed to create a genuine issue of material fact regarding whether the DHHS’ actions were arbitrary or capricious.  The Court also granted summary judgment in Defendants’ favor on Plaintiff’s equal protection claim, as Plaintiff failed to establish a genuine issue of material fact regarding DHHS’ selection of Plaintiff for the prepayment review program.

In addition, the Court granted summary judgment in CCME’s favor regarding the UDTPA claims, as Plaintiff had not presented evidence that CCME, as a third-party prepayment review vendor for the DHHS, acted unfairly or deceptively.  The Court dismissed Plaintiff’s UDTPA claims against the Individual Defendants sua sponte, on the basis that Plaintiffs’ allegations against the Individual Defendants arose during the course of the Individual Defendants’ work as representatives of the State and, as such, the Court lacked subject matter jurisdiction.   As no viable underlying claims against CCME or the Individual Defendants existed, the Court granted summary judgment in favor of the Defendants on Plaintiff’s civil conspiracy claim.

IQVIA, Inc. v. Cir. Clinical Sols., Inc., 2022 NCBC ORDER 53 (N.C. Super. Ct. Sept. 14, 2022) (Conrad, J.)

Key Terms: restrictive covenants; temporary restraining order; motion to stay; forum shopping

Plaintiff filed suit against Defendant alleging that Defendant induced a former employee of Plaintiff to breach her employment agreement.  Eight months prior to the filing of this suit, Plaintiff filed a separate lawsuit against the former employee for breach of contract and moved for a temporary restraining order to enforce the restrictive covenants of her employment agreement. In this suit, Plaintiff moved for expedited discovery, while Defendant moved to stay the proceedings pending the resolution of Plaintiff’s lawsuit against the former employee, or in the alternative, dismiss Plaintiff’s claims.

Noting that the two lawsuits are “clearly interrelated,” the Court granted Defendant’s Motion to Stay, and deferred Defendant’s request to dismiss Plaintiff’s claims.  The Court reasoned that permitting this second action to proceed would be a waste of judicial resources, and risks inviting judge and forum shopping in future cases.  Plaintiff’s Motion for Expedited Discovery was consequently denied.

Miriam Equities, LLC v. LB-UBS 2007-C2 Millstream Rd., LLC, 2022 NCBC ORDER 54 (N.C. Super. Ct. July 8, 2022) (Earp, J.)

Key Terms: attorneys’ fees; N.C. Gen. Stat. § 6-21.6(c); prevailing party

In this Order, the Court awarded expenses and attorneys’ fees to the prevailing party.  Following summary judgment, the Court concluded that the Defendant was the prevailing party in the litigation and conducted an analysis of the costs and fees submitted by Defendant.  Employing the list of relevant factors contained in N.C. Gen. Stat. § 6-21.6(c), the Court focused on the following factors: (1) the amount in controversy; (2) the reasonableness of the time and labor expended, and the billing rates charged by the attorneys; (3) the novelty and difficulty of the questions raised in the action; (4) the skill required to perform properly the legal services rendered; (5) the extent to which the party seeking attorneys’ fees prevailed in the action; and (6) the terms of the business contract. The Court noted that the billing rates of the attorneys and paralegals were somewhat higher than the rates customarily charged in North Carolina and adjusted the rates accordingly. The Court also encouraged counsel to not submit materials in block-billed format when requesting attorneys’ fees.

CPI Sec. Sys., Inc. v. Chapman, 2022 NCBC ORDER 55 (N.C. Super. Ct. Sept. 26, 2022) (Conrad, J.)

Key Terms: preliminary injunction; noncompete; non solicitation; trade secrets

The Court granted Plaintiff’s Motion for Preliminary Injunction against Defendant Chapman, a former General Manager of Plaintiff, in this trade secret case.  Based on largely undisputed evidence, Chapman met with his present employer on the same date as his resignation from Plaintiff. The following day, Chapman downloaded an assortment of Plaintiff’s files to a USB, including one file reflecting tens of thousands of transactions showing more than five years’ of Plaintiff’s customer purchase history. Following the filing of this lawsuit, Chapman began destroying evidence of his actions, including deleting text messages with his current employer and deleting emails from his personal email account. Chapman did not dispute that the information taken from Plaintiff was confidential or that the confidentiality clause in his employment agreement is valid.

Finding that Plaintiff’s “likelihood of success …. is uncontested” and the likelihood of irreparable harm “is just as clear,” the Court entered an Order enjoining Defendant Chapman from using or disclosing Plaintiff’s confidential information during the pendency of the litigation or soliciting any customer listed in the files he removed from Plaintiff’s possession.

By Natalie E. Kutcher

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 09/28/22

N.C. Business Court Opinions, August 31, 2022 – September 13, 2022

Brenner v. Hound Ears Club, Inc., 2022 NCBC 47 (N.C. Super. Ct. Sept. 1, 2022) (Bledsoe, C.J.)

Key Terms: voluntary association; bylaws; Nonprofit Corporation Act

Defendant is a non-profit corporation which owns and operates a private club for the purpose of running a gated subdivision with amenities. Property owners and non-property owners comprise the Club’s equity membership. The Club’s bylaws permit the Club’s Board of Directors to assess dues and fees on equity members to fund the amenities. The bylaws also permit the Board to amend the bylaws, without approval of the members, with certain restrictions. After the Board adopted a new fee structure which assessed fees against non-property-owning equity members, Plaintiffs brought suit, alleging breach of the bylaws and seeking a declaratory judgment. Following the Defendant’s answer, the parties brought cross-motions for judgment on the pleadings.

Plaintiffs argued that the new fee structure created new classes of membership and constituted a procedurally defective bylaw amendment. Applying traditional rules of contract interpretation, the Court concluded that the creation of new membership classes was a proper exercise of the Board’s powers under the bylaws, not an amendment. Plaintiffs also argued that the assessments violated the North Carolina Nonprofit Corporation Act (the “Act”). The Court rejected this argument, concluding that the plain language in the bylaws expressly allowed the Board to assess fees against any new membership class. Moreover, because the obligations of each class were consistent within each class, there was no violation of the Act’s proscription against unequal treatment. Accordingly, the Court dismissed the action with prejudice.

Vanguard Pai Lung, LLC v. Moody, 2022 NCBC 48 (N.C. Super. Ct. Aug. 31, 2022) (Conrad, J.)

Key Terms: judicial dissolution; minority member; attorneys’ fees; N.C.G.S. 1-538.2(a)

Following a jury trial which resulted in a verdict for Plaintiffs, the parties submitted two issues for the Court’s resolution before entry of judgment: 1) Plaintiffs’ motion for costs and attorneys’ fees, and 2) Defendant Nova Trading’s motion for judicial dissolution of Plaintiff Vanguard.

Regarding the first motion, Plaintiffs sought costs pursuant to N.C.G.S. §§ 6-1, 7A-305(d) and over $2.5 million in attorneys’ fees pursuant to N.C.G.S. § 1-538.2(a). The Court granted the unopposed request for costs but denied, without prejudice, Plaintiffs’ request for attorneys’ fees. The Court determined that Plaintiffs’ request for attorneys’ fees was deficient because 1) only Vanguard, not the other Plaintiff, had any basis to request attorneys’ fees under the statute; 2) the statute only authorized attorneys’ fees relating to an embezzlement claim, and Vanguard had not shown that the other claims in the case were inextricably interwoven with its embezzlement claim; 3) the hourly billing rates of Vanguard’s out-of-state attorneys were unreasonable compared to rates customarily charged in North Carolina; and 4) Vanguard did not submit any billing records.

Regarding the second motion, Nova Trading, the minority member of Vanguard, argued that acrimony between Vanguard’s members made it impossible to conduct Vanguard’s business going forward and that Nova Trading was powerless within Vanguard and needed dissolution to protect its rights. The Court held that these arguments were meritless and denied the motion. Not only had Nova Trading failed to cite any supporting evidence (in violation of the Business Court Rules), but Plaintiffs’ evidence showed that Vanguard was operating and profitable. Moreover, Nova Trading was not powerless; it had all the rights it had bargained for and agreed to when it signed the operating agreement. Finally, dissolution would frustrate the jury’s verdict, which provided that Plaintiffs had not breached the operating agreement.

Forsythe v. N.C. Dep’t of Revenue, 2022 NCBC 49A (N.C. Super Ct. Sept. 9, 2022) (Bledsoe, C.J.)

Key Terms: contested tax case; subject matter jurisdiction; Business Court designation; sovereign immunity

Petitioners initiated a contested tax case in the Office of Administrative Hearings (“OAH”), challenging Respondent’s denial of their request for a refund of certain taxes and raising a constitutional challenge to a tax statute. After dismissal of their case by the OAH, Petitioners filed a Petition for Judicial Review in Wake County Superior Court raising the same issues. The statutes that governed the Petition, N.C.G.S. §§ 105-241.116, 105-241.17, both require that a taxpayer comply with the mandatory business case designation procedures in N.C.G.S § 7A-45.4(b)-(f), which are jurisdictional. Here, Petitioners did not comply with the statute as they filed their notice of designation 29 days after filing their petition, rather than contemporaneously with the petition as required by section 7A-45.4(d). Given that the State only waived sovereign immunity to the extent the statutory requirements were met, Petitioners’ noncompliance divested the Court of subject matter jurisdiction to hear the case. Moreover, because section 7A-45.4(b)(1) mandated that such an action could only proceed as a mandatory complex business case before a Business Court Judge, no other forum was available to Petitioners. Thus, the Court dismissed the Petition with prejudice since Petitioners could not cure their procedural default or proceed in any other forum.

Lafayette Vill. Pub, LLC v. Burnham, 2022 NCBC 50 (N.C. Super. Ct. Sept. 12, 2022) (Davis, J.)

Key Terms: UDTP; in or affecting commerce; LLC; minority member; fiduciary duty

An LLC and two of its members, who collectively own a majority interest in the LLC, brought individual and derivative claims against a minority member of the LLC for breach of fiduciary duty, constructive fraud, accounting, and unfair and deceptive trade practices. Defendant moved to dismiss the UDTP claim arguing that the alleged actions were not in or affecting commerce because they were based solely on intracompany dealings. Plaintiffs countered that the conduct was in or affecting commerce because it affected the LLC’s employees and the Defendant had potentially misused government sponsored disaster loans. After reviewing recent case law, the Court rejected Plaintiffs’ arguments and granted dismissal of the UDTP claim, finding that the indirect effects of Defendant’s conduct on commerce were too attenuated to satisfy the “in or affecting commerce” prong of a UDTP claim. Defendant also moved to dismiss the individual claims for breach of fiduciary duty and constructive fraud based on a lack of fiduciary duty between him and the other members of the LLC. The Court agreed and dismissed both claims, concluding that Plaintiffs failed to plead specific allegations of control by Defendant sufficient to satisfy the test articulated in Corwin v. British Am. Tobacco PLC for whether a minority shareholder owes a fiduciary duty to other shareholders.

In re Se. Eye Ctr. (Pending Matters); In re Se Eye Ctr. (Judgments), 2022 NCBC Order 52 (N.C. Super. Ct. Feb. 17, 2022) (Bledsoe, C.J.)

Key Terms: stay pending appeal; inherent authority

The Court, sua sponte, addressed whether the recent filing of notices of appeal regarding several orders warranted postponing the scheduled trial. The parties disagreed as to whether the appeals barred further action under N.C.G.S. § 1-294 but agreed nonetheless that, for practical reasons, the trial should be continued and other deadlines suspended. Without deciding whether the appeals stayed the action, the Court, pursuant to its inherent authority to manage its docket, agreed and ordered the scheduled trial cancelled and certain case management deadlines suspended.

*This order was entered on February 17, 2022 but not designated as an Order of Significance until September 12, 2022.

By Ashley B. Oldfield

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 09/14/22

N.C. Business Court Opinions, August 17, 2022 – August 30, 2022

KNC Techs., LLC v. Tutton, 2022 NCBC Order 50 (N.C. Super. Ct. Aug. 17, 2022) (Davis, J.)

Key Terms: Rule 38; Rule 39; right to jury trial; waiver

Upon its own motion, the Court addressed whether a jury trial was appropriate. Neither party had requested a jury trial in their pleadings or within ten days following service of the last pleading, as required by Rule 38(b) of the North Carolina Rules of Civil Procedure; accordingly, the parties had waived their right to a jury trial per Rule 38(d). Although Rule 39(b) grants a court the discretion to order a jury trial even when the right has been waived, the Court declined to do so here and denied Plaintiff’s belated request for a jury trial.

Chi v. N. Riverfront Marina & Hotel LLLP, 2022 NCBC 46 (N.C. Super. Ct. Aug. 24, 2022) (Earp, J.)

Key Terms: Rule 12(b)(6); BCR 5; breach of contract; litigation privilege; confidentiality; waiver

Plaintiffs and Defendant Wilmington Riverfront entered into a partnership agreement to form Defendant NRMH for investing in developing riverfront property. After the investment failed to provide the allegedly promised returns, Plaintiffs brought suit, attaching to their complaint various partnership documents, including the partnership agreement and a subscription agreement. Defendants asserted a counterclaim for breach of contract alleging that Plaintiffs violated the confidentiality provisions in the agreements by disclosing confidential information about the partnership in public filings in the present lawsuit. Plaintiffs moved to dismiss, arguing that Defendants allegations were conclusory and therefore failed to state a claim; that their disclosures were protected by “litigation privilege”; and that Defendants had waived their right to pursue a claim because they included the same documents with their counterclaim. The Court denied the motion, concluding that 1) the Defendants had satisfied the minimal pleading requirements for a breach of contract claim; 2) Plaintiffs had failed to provide any North Carolina authority regarding a litigation privilege as argued here, and Business Court Rule 5 provides a mechanism for filing documents under seal; and 3) the waiver argument failed because the complaint did not allege that Defendants were bound by the confidentiality provisions, and, moreover, Defendants’ disclosure came after Plaintiffs had already disclosed the same material.

Total Merch. Servs., LLC v. TMS NC, Inc., 2022 NCBC Order 51 (N.C. Super. Ct. Aug. 30, 2022) (Bledsoe, C.J.)

Key Terms: sanctions; inherent authority; discovery violations; interlocutory appeal; preliminary injunction

This case arose from Defendants’ alleged breach of an exclusive sales agreement and Plaintiff’s attempts to enforce its inspection rights pursuant to the agreement. Over a year after filing the case, Plaintiff moved for sanctions due to Defendants’ discovery conduct and failure to comply with a Preliminary Injunction Order and a Compel Order. The Court detailed the Defendants’ conduct over the past year, which included improperly removing the case to federal court; refusing to respond to discovery requests for nearly fifteen months; taking an improper interlocutory appeal of the Preliminary Injunction Order; stubbornly and willfully failing to comply with the Preliminary Injunction Order; and failing to timely comply with the Compel Order. After reviewing its inherent authority to impose sanctions for a party’s misconduct, the Court concluded that sanctions should be awarded against Defendants for their egregious conduct; however, the Court deferred entry of the sanctions and ordered Defendants (and a non-party owner of Defendant TMS NC, Inc.) to appear and show cause why the Court should not enter sanctions, in addition to attorneys’ fees and costs, up to and including striking Defendants’ answer, affirmative defenses, and remaining counterclaims.

By: Ashley B. Oldfield

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 08/31/22