N.C. Business Court Opinions, December 6, 2023 – December 19, 2023
Am. Circuits, Inc. v. Bayatronics, LLC, 2023 NCBC 84 (N.C. Super. Ct. Dec. 8, 2023) (Robinson, J.)
Key Terms: summary judgment; misappropriation of trade secrets; UDTPA; unjust enrichment; punitive damages; civil conspiracy
This dispute arose from Defendant Patel’s resignation from ACI, and his alleged misappropriation of ACI’s trade secrets for use at Bayatronics, a competing business which he co-founded while still an ACI employee. ACI brought suit against Bayatronics and its members. Following completion of discovery, Defendants moved for summary judgment on all claims.
Misappropriation of Trade Secrets. The Court first addressed the three groups of alleged trade secrets provided by ACI to determine whether a trade secret had been sufficiently identified. From the first group, the Court concluded that one file identified—a customer list—could be a trade secret because it included qualitative information regarding the products manufactured for each customer and their potential revenue, which was not readily available through other sources. Regarding the second group, ACI had failed to identify any specific files for the Court to consider. Thus, the Court granted the motion as to these broadly defined categories of files. The third group, however, passed muster as the complaint specifically provided the name of each file, its content, how it was developed and used by ACI, and its value to competitors. The Court next considered the protective measures taken by ACI—requiring all employees to sign employment agreements with a confidentiality provision and maintaining the alleged trade secrets on a password-protected server—and could not conclude that those efforts were unreasonable as a matter of law. Lastly, the Court concluded that the forensic evidence was sufficient to create an inference of misappropriation, but only as to Bayatronics and one of its co-founders, Mr. Warriner. Accordingly, the claim against them survived summary judgment but was dismissed as to the other defendants.
UDTPA. The Court denied the motion to the extent it was based on ACI’s surviving misappropriation of trade secrets claim against Mr. Warriner and Bayatronics but granted it as to the other parties.
Civil Conspiracy. Although the surviving misappropriation of trade secrets claim could serve as the underlying tort for civil conspiracy, ACI’s circumstantial evidence of an unlawful agreement did not rise above mere suspicion or conjecture and therefore the claim was dismissed.
Unjust Enrichment. ACI argued that it had conferred the benefit of access to its confidential information on Patel and that the Bayatronic Defendants had been unjustly enriched by obtaining the benefit of that confidential information through their conspiracy. The Court, however, rejected this argument and dismissed the claim. The evidence showed, at most, that Patel had taken or retained confidential information which the Bayatronic Defendants ultimately received. It did not show that ACI had voluntarily conferred a benefit on the Bayatronic Defendants.
Punitive Damages. Noting that punitive damages are not a standalone claim, the Court granted the motion as to the claim for punitive damages without prejudice to ACI’s ability to seek punitive damages for conduct which may later be found to meet the statutory requirements of N.C.G.S. § 1D-15.
Conservation Station, Inc. v. Bolesky, 2023 NCBC 85 (N.C. Super. Ct. Dec. 12, 2023) (Robinson, J.)
Key Terms: entry of default; bench trial; breach of fiduciary duty; constructive fraud; lost profits; punitive damages; fraud; conversion; intangible assets; tracing; tortious interference with prospective economic advantage; UDTPA; in or affecting commerce
Plaintiff CSI brought suit against its former employee/officer Bolesky and his new competing business CTS, asserting a number of claims arising from Bolesky’s alleged misconduct in running CSI. Following entry of default against Defendants, the Court proceeded to a bench trial at which Bolesky represented himself and CTS did not appear. This opinion constitutes the Court’s final judgment. Although entry of default renders the factual allegations admitted, it does not necessarily establish liability as the Court must still determine whether the allegations are sufficient to state a claim for relief.
Breach of Fiduciary Duty and Constructive Fraud. The Court concluded that CSI had sufficiently alleged that 1) Bolesky owed CSI a fiduciary duty as an officer; 2) Bolesky had breached that duty by, among other things, converting CSI’s business assets, failing to file CSI’s tax returns, and neglecting CSI’s supplier relationships; 3) Bolesky sought to benefit himself through these actions; and 4) CSI had been significantly damaged by Bolesky’s misconduct. CSI requested over $8 million in actual damages based on lost profits. However, because CSI’s lost profits calculations were too speculative, the Court determined that CSI was only entitled to recover $200,000 from the Defendants, jointly and severally, for these claims. The Court also awarded $600,000 in punitive damages based on evidence that Bolesky’s breaches of his fiduciary duty were carefully calculated and intended to destroy CSI’s ability to compete in the market.
Fraud. CSI’s first fraud claim was based on its allegation that Bolesky had made a material misrepresentation of fact when he stated under oath in a previous proceeding that he did not know whether he would use his new business, CTS, to engage in the same type of business as CSI. The Court concluded that CSI was not entitled to recovery on this claim because the complaint did not include allegations of how such statement was reasonably calculated to deceive. CSI’s second fraud claim was based on its allegation that Bolesky had made material misrepresentations to CSI’s customers regarding the relationship between CSI and CTS. The Court found this claim insufficient as well because the complaint did not allege the time, place, and content of the fraudulent representations.
Conversion. CSI alleged that Defendants had converted CSI’s funds, accounts receivable, distributorship rights, business relationships with customers, and good will. The Court concluded that this claim failed. Intangible interests, such as distributorship rights, business relationships, and good will, cannot form the basis of a conversion claim. In addition, a claim for conversion of money requires the funds in question to be specifically traced and identified, which CSI failed to do.
Tortious Interference. CSI’s claim for tortious interference with prospective economic advantage failed because CSI did not identify any specific contract which would have resulted but for Defendants’ alleged tortious interference.
UDTPA. CSI’s UDTPA claim failed because Bolesky’s formation of CTS and usurpation of CSI’s corporate opportunities was not in or affecting commerce; rather, CTS was formed and used as an instrument to facilitate harm within CSI.
Emrich Enters. LLC v. Hornwood Inc., 2023 NCBC 86 (N.C. Super. Ct. Dec. 14, 2023) (Robinson, J.)
Key Terms: judgment notwithstanding the verdict; motion for a new trial; operating agreement; waiver of fiduciary duties; direct claim; standing; punitive damages; breach of contract
In this action, Emrich Enterprises, the minority member of Triangle, brought claims individually, and derivatively on behalf of Triangle, against Hornwood, Inc., the majority member of Triangle, arising from Hornwood’s alleged breach of Triangle’s governing documents and of fiduciary duties owed to Emrich and Triangle. After a seven-day trial, the jury found that Hornwood had breached its fiduciary duties on various bases and awarded damages. Following entry of final judgment, Hornwood moved for judgment notwithstanding the verdict and for a new trial.
Triangle’s Fiduciary Duty Claims Against Hornwood. Hornwood moved for JNOV regarding Triangle’s fiduciary duty claims on the basis that Triangle’s operating agreement eliminated Hornwood’s liability for such duties. The Court agreed and further concluded that duties owed under other sections of the agreement were contractual, not fiduciary, in nature. Thus, since the jury’s determination that Hornwood owed Triangle fiduciary duties was legally unsubstantiated, the Court granted the JNOV motion on these claims and amended the judgment accordingly.
Hornwood’s Self-Interested Transactions. Based on its conclusion that there was no evidence that Hornwood owed, and breached, fiduciary duties to Triangle, the Court granted the JNOV motion and amended the judgment with regards to the jury’s finding that Hornwood had engaged in self-interested transactions and the jury’s resulting award of compensatory damages. Due to this amendment, the Court also amended the judgment to reinstate Issue 11, which it had previously stricken as duplicative. The Court determined that JNOV was not appropriate on Issue 11 but allowed Hornwood leave to move for a new trial on that issue.
Emrich’s Direct Claims Against Hornwood. At trial, the jury found that Hornwood, as majority member of Triangle, breached fiduciary duties owed to Emrich by working with another entity and threatening to cease manufacturing for Triangle. In support of its JNOV motion, Hornwood argued that Emrich did not have standing to bring direct claims. The Court disagreed, concluding that Emrich, as a minority member of Triangle, had standing to bring direct claims against Hornwood, the majority member. In addition, the jury’s award of damages in differing amounts to Emrich and Triangle for the same conduct showed that Emrich suffered injuries distinct from those suffered by Triangle. Nevertheless, the Court granted the JNOV motion with regard to the claim arising from Hornwood’s threat to cease manufacturing because no fiduciary duty was owed to Emrich under the joint venture agreement.
Hornwood’s Breach of Contract. The Court determined that there was ample evidence at trial to support the jury’s finding that Hornwood had breached Section 4.4 of the Triangle operating agreement. Thus, the Court denied the JNOV motion as to this claim.
Triangle’s Punitive Damages. The Court granted JNOV with regards to the jury’s award of punitive damages. Since Triangle’s only surviving claims were breach of contract claims and the Court had determined that the jury’s findings regarding underlying torts which would have warranted punitive damages were unsupported by the evidence, there was no legal basis for punitive damages.
Motion for a New Trial or to Amend Judgment. Hornwood moved to amend the final judgment award for its breach of Section 4.4 of the Operating Agreement, arguing that the award was inconsistent with the jury’s award of nominal damages to Triangle for similar conduct, was unsupported by the greater weight of the evidence, and excessive. The Court disagreed and denied the motion. The verdict was not inconsistent as the jury could have relied on different evidence when awarding damages for separate claims. Moreover, based on the evidence presented the jury’s award was reasonable and not against the greater weight of the evidence.
Blueprint 2020 Opportunity Zone Fund, LLLP v. 10 Acad. St. QOZB I, LLC, 2023 NCBC 87 (N.C. Super. Ct. Dec. 15, 2023) (Bledsoe, C.J.)
Key Terms: receivership; subject matter jurisdiction; in rem; in personam; sale of real property; free and clear; lease; N.C.G.S. § 1-507.41; N.C.G.S. § 1-507.46(c); N.C.G.S. § 1-507.45(g)(2); balancing of equities
As summarized here, the Court previously appointed a receiver over Defendant QOZB. Thereafter, the Receiver filed a motion seeking authority to sell, free and clear of all liens and encumbrances, a piece of property in South Carolina currently encumbered by several parking leases. A number of parties opposed the motion.
The Opposing Parties first argued that the Court did not have subject matter jurisdiction to authorize the Receiver to sell property located in South Carolina. The Court rejected this argument. Although the Court did not have in rem jurisdiction to transfer title itself, it could exercise its in personam jurisdiction to authorize the Receiver to take appropriate steps to effectuate the sale.
The Opposing Parties then argued that, pursuant to N.C.G.S. § 1-507.41, the Receiver needed to obtain an ancillary receivership in South Carolina before exercising control over the property. This argument failed as well because the statute’s language regarding foreign receiverships was permissive rather than mandatory.
The Opposing Parties next argued that N.C.G.S. § 1-507.46(c) restricts a receiver’s power to effect sales to those that are free and clear of liens but not of other types of encumbrances, and that this provision preempts all other statutes and common law principles regarding the sale of receivership property. The Court again disagreed. It determined that the statute’s plain language only addressed a receiver’s authority to engage in sales made “free and clear of all liens and rights of redemption and claims of exemption,” but did not address or create a restriction on a receiver’s authority to sell free and clear of other encumbrances. Moreover, the Commercial Receivership Act expressly provides that other statutory and common law supplement its provisions unless explicitly displaced. Since North Carolina law has long held that a receiver has the power to sell property free and clear of all encumbrances, it followed that if the legislature intended to change the common law, it would have expressly said so.
The Court next concluded that the Receiver did not have the authority to reject the current parking lease as an executory contract pursuant to N.C.G.S. § 1-507.45(g)(2) because the statute expressly prohibited a receiver from rejecting an unexpired lease of real property under which the debtor is the landlord and the receiver was appointed at the request of a person other than the mortgagee—which were the facts at hand here. Nevertheless, the Court concluded that the parking leases were void under South Carolina law. First, the current parking lease was void because it was supported by grossly inadequate consideration and accompanied by various “inequitable incidents.” Second, the remaining parking leases were void due to fatal defects, including that the lessor did not have rights to the leased property, the parent lease was invalid, and the same party was on both sides of the transaction.
Based on the above, and the balancing of the equities, the Court granted the motion, approved the proposed sale contract, and authorized the Receiver to effectuate the sale and transfer the property free and clear of all liens and other encumbrances, including the parking leases.
Bank of Am. N.A. v. Klaussner Furniture Indus., Inc., 2023 NCBC Order 66 (N.C. Super. Ct. 15, 2023) (Robinson, J.)
Key Terms: receivership; attorneys’ fees; application for compensation; reasonableness; hourly rate; N.C.G.S. § 1-507.31(b)
This order addressed K&L Gates’ first monthly application for payment of attorneys’ fees and expenses as counsel to the Receiver for Klaussner Furniture. In determining the reasonableness of the compensation requested, the Court considered the factors set forth in N.C.G.S. § 1-507.31(b), including the value of the debtors’ assets, the number and amount of the debtors’ creditors, the time and labor expended, the billing rates charged, the novelty and complexity of the receivership, and rates previously found reasonable in similar circumstances. Although acknowledging that K&L Gates had provided high-level performance, the Court ultimately determined that the rates needed to be adjusted. Accordingly, the Court granted the application in part and permitted the Receiver to remit to K&L Gates compensation at the rates set forth by the Court. However, the Court denied the motion as to payment of expenses because the application did not include any specific information or itemization for the costs incurred.
Clearview Ltd., LLC v. Fife, 2023 NCBC Order 67 (N.C. Super. Ct. Dec. 18, 2023) (Bledsoe, C.J.)
Key Terms: order on designation; mandatory complex business case; N.C.G.S. § 7A-45.4(a)(8); amended complaint; trade secrets; confidential or proprietary information
This action arose out of a dispute between Plaintiff and two of its former employees. Plaintiff asserted claims for breach of contract, unfair and deceptive trade practices, unfair competition, civil conspiracy, and tortious interference with contract. Shortly after filing suit, Plaintiff filed an amended complaint asserting the same claims but modifying the factual allegations, including removal of references to trade secrets. Thereafter, Defendants filed a notice of designation under N.C.G.S. § 7A-45.4(a)(8), which permits designation in disputes involving trade secrets. Defendants argued that designation was proper despite the removal of references to trade secrets because the nature of the action had not changed. The Court disagreed, noting that it had never construed section 7A-45.4(a)(8) so broadly as to permit designation based on claims involving generalized confidential or proprietary information. Accordingly, since the allegations of the amended complaint only involved misuse of generalized proprietary information, designation was improper.
By: Ashley Oldfield
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