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
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