N.C. Business Court Opinions, December 18, 2024 – January 1, 2025
By: Ashley Oldfield and Austin Webber
In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 83 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: receivership; N.C.G.S. § 1-507.6; Rule 12(b)(1); Rule 12(h)(3); subject matter jurisdiction
This action represents a long-running group of cases involving numerous parties. On 28 April 2016, the Court appointed a Receiver for JDPW Trust and contemporaneously approved a settlement between the Receiver and Plaintiff NFI, which settlement allowed, inter alia, NFI’s $2.1 million claim against JDPW Trust. Eight years later, Defendant Harris moved to dismiss NFI’s claim for lack of subject matter jurisdiction.
Relying on N.C.G.S. § 1-507.6, which provides that “all claims against an insolvent corporation must be presented to the receiver,” Harris argued that because NFI did not re-assert its claim after the Receiver was appointed, the Court never obtained jurisdiction over the claim and therefore the Court’s approval of the claim was void. The Court disagreed and denied the motion. There was no dispute that the Court had subject matter jurisdiction over the claim when the action was initially filed; thus, since a court retains jurisdiction once acquired, the subsequent appointment of the Receiver did not divest the Court of jurisdiction. Harris’s other contentions were similarly without merit. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 84 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: Rule 54(b); motion for reconsideration; clear error
This action represents a long-running group of cases involving numerous parties. Here, Defendant Harris moved for reconsideration, pursuant to Rule 54(b), of various rulings made by the Court in orders entered in 2016 and 2022. Harris argued that the rulings constituted clear error.
The Court denied the motion, concluding that Harris’s arguments were merely a repackaging of previous arguments that the Court had already considered and rejected. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments), 2024 NCBC 85 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: accounting proceeding; master in equity; right to a jury trial; North Carolina Constitution
This action represents a long-running group of cases involving numerous parties. As relevant here, the Court had previously determined that Defendant Doug Harris had breached his fiduciary duty as trustee of JDPW and ordered him to provide an accounting. After Harris filed his accounting, the Court noticed an evidentiary hearing in which it would sit as a master in equity to consider the accounting and the objections thereto. Here, the Court addressed Harris’s contention that he was entitled to a jury trial on all factual issues remaining in the cases, including in the accounting proceeding.
With regard to the accounting proceeding, the Court rejected Harris’s argument that he was entitled to a jury trial under the North Carolina Constitution. The North Carolina Supreme Court has long held that the constitutional right to a jury trial exists only where it existed at the time the Constitution was adopted in 1868. Since the right to a jury trial in an accounting proceeding did not exist in 1868, Harris did not have a constitutional right to a jury trial now.
Regarding the remaining “issues,” the Court also determined that a jury trial was not warranted because the issues raised were either irrelevant, immaterial, or had already been decided by settlement or on summary judgment. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 86 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: foreclosure proceeding; power of sale; deed of trust; clerk of court; valid debt; N.C.G.S. § 45-21; de novo hearing; statute of limitations; holder in due course
This action represents a long-running group of cases involving numerous parties. As relevant here, the JDPW Receiver previously initiated a non-judicial foreclosure proceeding to exercise the power of sale in a deed of trust on the Castle McCulloch Property which secured a promissory note held by JDPW. Following a hearing, the clerk of court entered an order denying foreclosure on the ground that the Receiver did not hold a valid debt. The Receiver appealed and the Court held a de novo evidentiary hearing.
The Court concluded that JDPW had satisfied the criteria to establish a prima facie right to foreclose under N.C.G.S. § 45-21. Historic Castle McCulloch LLC (“HCM”), the owner of the Castle McCulloch Property, opposed the foreclosure. HCM first argued that the 2012 payment to the bank on behalf of JDPW paid off, rather than purchased, the note. The Court found that the documentary evidence did not support this argument. HCM also argued that the foreclosure was barred by the 10-year statute of limitations for foreclosure by power of sale because the foreclosure action was not filed until more than ten years after the note transactions at issue. The Court disagreed. To qualify as a holder in due course of an instrument, the holder must take the instrument in good faith. Since the transactions involving the instruments were undertaken by Doug Harris (the initial trustee for JDPW) for the benefit of himself and his brother, rather than for JDPW’s benefit, the Court concluded that there was no holder in due course of the instruments until the Court set aside certain transactions in 2021. Thus, the commencement of the foreclosure action in 2023 was within the statute of limitations because the statute of limitations did not run while there was no good faith holder of the instruments. HCM’s remaining arguments were equitable based and therefore not properly considered in a foreclosure proceeding.
Accordingly, the Court reversed the clerk of court and authorized the foreclosure to proceed. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 87 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: accounting; master in equity; breach of duty as trustee; damages; final judgment
This action represents a long-running group of cases involving numerous parties. As relevant here, the Court had previously determined that Defendant Doug Harris had breached his fiduciary duty as trustee of JDPW and ordered him to provide an accounting. Harris thereafter filed his accounting, which effectively stated that while he was trustee, JDPW did not hold any funds or property, had no receipts or income, and made no disbursements. The JDPW Receiver and the Nivison Parties objected to the accounting, contending that Harris failed to account for four notes obtained by JDPW. The Court conducted an evidentiary hearing in which it sat as a master in equity to consider the accounting and the objections thereto.
The Court entered findings of fact as follows: 1) that in 2012, JDPW, acting through its trustee Doug Harris, purchased four notes (the CM Note and the CCSEA Notes) from the bank, which purchase was funded by a loan from the Nivison Parties; 2) that Doug Harris never intended to (and made no effort to) collect on the notes for the benefit of JDPW, but instead intended to use his position as trustee of JDPW over the notes, the other instruments, and the collateral for the benefit of his brother and his brother’s companies; 3) that Doug Harris thereafter transferred the CM Note and related documents and collateral to his brother, pursuant to which JDPW lost all rights thereto but remained obligated on the loan from the Nivison Parties; and 4) that Doug Harris failed to account for these transactions in his accounting. The Court concluded that Doug Harris’s actions described above were a breach of his duty to JDPW, that these actions damaged JDPW, and that Doug Harris failed to properly account for JDPW’s assets during the time he was trustee. The Court adopted one of the Receiver’s proposed damages theories and entered judgment against Doug Harris for approximately $7 million. The Court certified the order as a final judgment pursuant to Rule 54(b) to permit immediate appellate review.
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In re Se. Eye Ctr. (Pending Matters); In re Se. Eye Ctr. (Judgments); In re The Foreclosure of Deed of Tr. Executed by Historic Castle McCulloch, LLC Dated September 30, 2004, 2024 NCBC 88 (N.C. Super. Ct. Dec. 19, 2024) (Bledsoe, C.J.)
Key Terms: summary judgment; notice pleading; aiding and abetting breach of fiduciary duty; agency relationship
This action represents a long-running group of cases involving numerous parties. Here, the Court addressed the Castle McCulloch Defendants’ motion for summary judgment on paragraph 504 of the JDPW Receiver’s 8th cross claim and the Receiver’s motion for summary judgment on several of JDPW’s cross claims which purportedly sought to hold the Castle McCulloch Defendants liable for Doug Harris’s breach of fiduciary duty as trustee of JDPW.
Regarding JDPW’s fourth and sixth cross claims, which sought relief based on Doug Harris’s breach of duty as trustee, the Court denied summary judgment because those cross claims failed to mention the Castle McCulloch Defendants and therefore failed to put them on notice of their potential liability.
Regarding paragraph 504 of JDPW’s eighth cross claim, which sought to hold the Castle McCulloch Defendants liable for aiding and abetting Doug Harris’s breach of duty, the Court granted the Castle McCulloch Defendants’ motion and dismissed the claim with prejudice. First, North Carolina does not recognize a claim for aiding and abetting a breach of fiduciary duty. And second, notwithstanding the Receiver’s arguments to the contrary, the allegations that the Castle McCulloch Defendants aided Doug Harris and accepted benefits from his breach were not sufficient to allege an agency relationship by which liability could attach to the Castle McCulloch Defendants.
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Cherry v. Mauck, 2024 NCBC Order 75 (N.C. Super. Ct. Dec. 18, 2024) (Conrad, J.)
Key Terms: preliminary injunction; breach of contract; LLC operating agreement; unauthorized distribution; unclean hands
This case arose out of management disputes in two family businesses, AJAL Investments, LLC and C-Gas, LLC. As relevant here, in 2013 and pursuant to the companies’ operating agreements, Plaintiff Jay Cherry and Defendant Armistead Mauck agreed that the companies would make regular distributions to their families. However, after Armistead continued making distributions after Jay withdrew his consent, Plaintiffs filed suit and moved for a preliminary injunction seeking to bar Armistead from making future distributions and to force him to return the unauthorized distributions.
The Court granted the motion. The Court held that Plaintiffs were likely to succeed on the merits of their claim for breach of the companies’ operating agreements. Both operating agreements gave the members the right to decide when and whether to distribute company cash, and absent approval of a majority of the members, the managers of each respective company had no authority to make distributions. The Court rejected Armistead’s argument that majority approval to distribute company cash was established in 2013, and that the parties must continue distributing company cash accordingly until a vote of the majority of members altered this arrangement. As the Court explained, consent at one time is not consent for all time; under the operating agreements, Plaintiffs had the right to veto any proposed distributions at any time.
The Court also held that Plaintiffs had shown a likelihood of irreparable harm because without an injunction, Armistead would continue to make unauthorized distributions depriving Plaintiffs of their contractual rights to participate in management decisions. Additionally, the nature of such unauthorized distributions was of such a continuous and frequent recurrence that no reasonable redress could be had in a court of law. Lastly, the Court held that the grant of an injunction outweighed any potential harm to Armistead. While Plaintiffs may have unclean hands based on other conduct, the harm caused was not personal to Armistead, and the defense of unclean hands is only available to a party injured by the alleged wrongful conduct.
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Gordon v. Gordon Recyclers, Inc., 2024 NCBC Order 76 (N.C. Super. Ct. Dec. 18, 2024) (Davis, J.)
Key Terms: preliminary injunction; irreparable harm; shareholder meeting; notice of meeting; non-voting shareholder rights; articles of incorporation; bylaws; N.C.G.S. § 55-2-06
Plaintiff is a non-voting minority shareholder in Defendants GRI and GII. After Defendants refused to provide Plaintiff with either notice of, or the opportunity to attend, shareholders’ meetings, Plaintiff brought suit seeking a judgment declaring his rights as a shareholder regarding meetings. Plaintiff moved for a preliminary injunction enjoining Defendants from holding shareholder meetings unless they provided notice to Plaintiff and allowed him to attend.
Defendants opposed the injunctive relief arguing that their bylaws made clear that only voting shareholders are entitled to notice and attendance regarding shareholder meetings. Because N.C.G.S. § 55-2-06(b) only allows bylaws to contain provisions which are “not inconsistent with law or the articles of incorporation,” the Court began by examining the articles of incorporation and bylaws of each company. Regarding GRI, although the bylaws only required that notice of meetings be given to voting shareholders, the articles of incorporation provided that the rights of shareholders were identical in all respects, except as to voting. Accordingly, since the articles of incorporation provided non-voting shareholders the same right to receive notice of, and attend, meetings as a voting shareholder, any provision in the bylaws purporting to take away such right could not be given effect. In contrast, since GII’s articles of incorporation did not provide for identical rights among shareholders and its bylaws were not otherwise inconsistent with law, the bylaw provision requiring notice only to voting shareholders controlled. Thus, Plaintiff had shown a likelihood of success on the merits as to GRI, but not as to GII.
The Court next determined that Plaintiff had met his burden to show irreparable harm. Plaintiff’s receipt of the desired information regarding GRI’s financial condition was not a valid substitute for attending shareholders’ meetings. And, once Plaintiff was denied the right to attend the next meeting, that right would be gone forever.
Lastly, the Court concluded that the balancing of the equities weighed in favor of injunctive relief and dispensed with any bond requirement. Plaintiff had shown that a denial of his right to attend GRI shareholders’ meetings during the pendency of the litigation would irreparably deprive him of a right he appeared entitled to possess and GRI failed to show any harm it would incur as a result of an injunction.
For the foregoing reasons, the Court granted the injunction as against GRI.
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