N.C. Business Court Opinions, March 29, 2023 – April 11, 2023
Shaver v. Walker, 2023 NCBC 27 (N.C. Super. Ct. Mar. 31, 2023) (Earp, J.)
Key Terms: stock options; motion to dismiss; Rule 12(b)(6); Rule 9(b); fraud; breach of fiduciary duty; constructive fraud; negligent misrepresentation
Plaintiff brought suit against Vadum, Inc. (his employer) and Walker (his brother-in-law and the owner/CEO of Vadum), alleging that Defendants tricked him into losing his right to equity in Vadum by making misrepresentations regarding exercising his vested stock options. Specifically, Plaintiff alleged that Defendants told Plaintiff that: (a) There was no monetary benefit to exercising the options before an initial public offering; (b) The options could not be exercised at that point, because the “paperwork needed to be fixed”; (c) Plaintiff should not worry, because the options would not expire, and the company would fix the situation; (d) Exercising the options would make tax matters too complex; and (e) Plaintiff should “trust [him].” In his Complaint, Plaintiff asserted claims against Vadum and Walker for fraud and against Walker only for breach of fiduciary duty, constructive fraud, and negligent misrepresentation. Defendants moved to dismiss Plaintiff’s claims pursuant to Rules 12(b)(6) and 9(b).
Regarding the fraud claim, Defendants argued that the claim should be dismissed because: (1) the alleged misrepresentations were opinions or legal positions, not statements of material fact; (2) Plaintiff’s reliance was not reasonable; and (3) an intent to deceive was not adequately alleged because the misrepresentations were just inadvertently unfulfilled promises. The Court, however, determined that: (1) the alleged misrepresentations were sufficiently definite and specific to constitute representations of fact which were material to Plaintiff’s decision not to exercise his options; (2) the allegations could support a jury’s conclusion that Plaintiff’s reliance was reasonable due to Defendants’ superior knowledge; and (3) an intent to deceive, which can be averred generally, was sufficiently pleaded, and the misrepresentations were not merely broken promises but false and misleading statements. Accordingly, the Court denied the motion as to the fraud claim.
Regarding the breach of fiduciary duty and constructive fraud claims, Plaintiff argued that he had alleged a de facto fiduciary relationship between Walker and himself based on a combination of their familial and employment relationships. The Court disagreed, noting that, unlike the plaintiffs in the proffered caselaw, Plaintiff had not demonstrated a significant power imbalance since Plaintiff was a capable professional who was not dominated to the point of being essentially helpless in Walker’s hands. Thus, with no fiduciary relationship, these claims were dismissed.
Regarding the negligent misrepresentation claim, the Court rejected Defendants’ argument that, since Walker did not owe Plaintiff a fiduciary duty, he did not owe Plaintiff a duty of reasonable care. While Walker had no duty to speak, a duty to exercise reasonable care arose when he chose to do so. Therefore, the Court denied the motion as to the negligent misrepresentation claim.
McCabe v. N.C. Dep’t of Revenue, 2023 NCBC 28 (N.C. Super. Ct. April 3, 2023) (Conrad, J.)
Key Terms: tax credit; solar energy project; partnership; bona fide partner; disguised sale; administrative law
Plaintiffs, a married couple, sought judicial review of an administrative decision from the North Carolina Department of Revenue, which resulted in the disallowance of an income tax credit Plaintiffs claimed in 2014.
In 2014, Plaintiffs invested in several solar energy projects through a partnership organized by Monarch Tax Credits, LLC. Plaintiffs then claimed a share of the tax credits generated by the projects on their joint income tax return. Because Plaintiffs could not offset more than 50% of their state income tax liability with tax credit, they claimed less than their full allocation from the partnership fund in 2014, but were able to carry forward the remaining credit to their 2015 tax return.
In 2018, the NCDOR audited Plaintiffs’ 2014 tax return and issued a proposed assessment based on the Official Auditor’s report that disallowed Plaintiffs’ claimed share of tax credit. Upon review, the NCDOR upheld the assessment, reasoning that Plaintiffs were not “bona fide partners” since they would not be characterized as such under federal income tax law, or alternatively, that Plaintiffs’ investment “amounted to a disguised sale” and was unlawful. Plaintiffs contested the assessment again, and an administrative law judge granted summary judgment in the NCDOR’s favor. Plaintiffs paid the assessment and then petitioned for judicial review.
The Court first reviewed the ALJ’s rulings on two disputed matters: (1) whether the partnership amounted to an unlawful “disguised sale”; and (2) whether federal tax doctrine applied to state income tax. The Court held that the partnership investment was not an unlawful “disguised sale,” as Plaintiffs acquired membership interest in a limited liability company that legitimately qualified for tax credit. Finding no statutory basis to disallow tax credits legitimately earned by a partnership and then passed through to its partners, the Court held that it was error to disallow Plaintiffs’ tax credits on the basis of an unlawful “disguised sale.” Second, the Court held that federal tax doctrines were not applicable to the state statutes at issue. The Court noted that, “when the General Assembly intends to adopt provisions or definitions from other sources of law into a statute, it does so by clear and specific reference.” Finding no specific reference in the statute at issue, the Court concluded that the NCDOR’s use of federal tax law in determining Plaintiffs were not “bona fide partners” was in error.
The Court further found that there were no genuine issues of material fact concerning the amount of credit Plaintiffs were entitled to claim. The Court overruled the NCDOR’s filed exceptions to the ALJ’s report, finding any error in the ALJ’s evidentiary ruling to be harmless. The Court granted Plaintiff’s petition, vacated the ALJ’s final decision, and remanded the matter with direction to grant summary judgment in Plaintiffs’ favor.
N.C. Farm Bureau Mut. Ins. Co. v. N.C. Dep’t of Revenue, 2023 NCBC 29 (N.C. Super. Ct. April 3, 2023) (Conrad, J.)
Key Terms: tax credit; partnership; bona fide partner; disguised sale; administrative law
This opinion, issued in tandem with McCabe v. N.C. Dep’t of Revenue, involves the same subject matter and dispute regarding the allowance of tax credits generated from a partnership.
As in McCabe, Plaintiff invested in a tiered partnership fund for solar energy projects (the “Partnership”). Between 2014 and 2016, Plaintiff invested nearly $27 million in the Partnerships and received tax credit allocations in the amount of $37.8 million. Plaintiff was audited by the North Carolina Department of Revenue (“NCDOR”) in 2018. Following the audit, the NCDOR issued a proposed assessment of approximately $24 million in additional taxes, penalties, and interest on the basis that Plaintiff did not qualify as a “bona fide partner” under federal tax law. Following a Department Review that upheld the proposed assessment, Plaintiff filed a petition for a contested hearing before an Administrative Law Judge (“ALJ”). The ALJ granted summary judgment in favor of the NCDOR, finding that Plaintiff “did not meet the criteria” for claiming a tax credit under state law because it “did not construct, purchase, or lease renewable energy property.” Plaintiff paid the assessment and petitioned for judicial review.
The Court vacated the ALJ’s ruling and remanded with direction to grant summary judgment in Plaintiff’s favor. The Court determined that the ALJ mistook the criteria for earning tax credit with those for allocating tax credit. As the Partnership legitimately qualified for tax credit, Plaintiff was entitled to its share of the tax credits generated by the Partnership. The Court further held that federal tax law’s definition of a “bona fide partner” was not applicable to the state tax statute at issue, as the General Assembly had chosen not to reference any federal statute. Finally, the Court echoed its sentiments in McCabe that the “disguised sale” exception did not apply. The Court overruled the NCDOR’s filed exceptions with the ALJ’s ruling, finding the NCDOR did not meet its burden to show an abuse of discretion.
F-L Legacy Owner, LLC v. Legacy at Jordan Lake Homeowners Ass’n, 2023 NCBC 30 (N.C. Super. Ct. April 3, 2023) (Bledsoe, C.J.)
Key Terms: breach of fiduciary duty; self-interested transaction; entire fairness; accounting; homeowner’s association; motion to dismiss; Rule 12(b)(6)
This dispute arose from the governance of a HOA by board members appointed by the community’s developer, F-L Legacy Owner, LLC, during the developer’s “control period.” These directors were also directors and officers of Freehold, the parent company of F-L Legacy. According to the HOA, the directors caused the HOA to incur budget deficits and then eliminated those deficits by borrowing funds from F-L Legacy pursuant to six promissory notes. After F-L Legacy sued the HOA to recover on the notes, the HOA counterclaimed asserting, inter alia, claims against each director for breach of fiduciary duty and a claim for an accounting, which Defendants moved to dismiss.
Regarding the breach of fiduciary duty claims, the HOA asserted that the directors breached their fiduciary duties to the HOA by acting to further Freehold’s interests at the expense of the HOA. The directors responded that their actions complied with the Declaration and benefitted the HOA and thus were “entirely fair.” Noting that even if the conduct was permitted by the Declaration, the directors must still act in good faith and avoid self-dealing, the Court concluded that the HOA’s allegations were sufficient to show that the directors engaged in self-dealing and conflict of interest transactions. Since all of the directors were interested in the transactions, the transactions have to pass the “entire fairness” test, for which the burden of persuasion shifts to those defending the transaction. As the directors failed to show that, based on the HOA’s pleading, the transactions at issue were “entirely fair” as a matter of law, the HOA’s claims survived dismissal.
The Court, however, dismissed the claim for an accounting, since an accounting is a remedy, not an independent cause of action, but did so without prejudice to the HOA’s right to pursue the equitable accounting remedy, to the extent one or more of its causes of action warranted such relief.
McManus v. Dry, 2023 NCBC Order 19 (N.C. Super. Ct. Mar. 29, 2023) (Bledsoe, C.J.)
Key Terms: class action; personally identifiable information; opt-out; settlement approval
Plaintiffs moved for final approval of a class action settlement relating to allegations that Defendant failed to safeguard and protect the personally identifiable information of its current and former clients, thereby causing injury to the Plaintiffs and the settlement classes. The Court had previously entered an order granting preliminary approval of the class action settlement. Thereafter, twelve potential settlement class members submitted opt-out requests during the opt-out period, but no objections to the settlement were filed. After review of the settlement and all relevant documents and arguments, the Court held that the terms of the settlement agreement were fair, reasonable, and adequate, and granted final approval.
Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., 2023 NCBC Order 20 (N.C. Super. Ct. April 3, 2023) (Davis, J.)
Key Terms: attorneys’ fees; costs; hourly rates; reasonableness; Rule 1.5 of the Rules of Professional Conduct
The Court previously granted Defendants’ motion to compel, ordered Plaintiff to pay Defendants’ reasonable expenses, including attorneys’ fees, relating to the motion, and directed Defendants to file a fee petition and supporting documentation. Defendants petitioned for $111,625.00 in attorneys’ fees based on 214 hours of work performed by counsel.
Following briefing by both parties, the Court analyzed the fee petition using the factors outlined under Rule 1.5 of the Revised Rules of Professional Conduct. The Court held that the rates charged by Defendants’ counsel were in excess of the hourly rates typically approved by the Court, and consequently reduced three of the attorneys’ hourly rates. The Court also reduced two excessive time entries; eliminated two entries, which were beyond the scope of Defendants’ Motion to Compel; and eliminated two entries which were too vague to render a reasonableness determination. The Court found that the remaining Rule 1.5 factors merited the award of attorneys’ fees. Accordingly, the Court awarded Defendants $85,237.50.
Husqvarna Pro. Prods., Inc. v. Robin Autopilot Holdings, LLC, 2023 NCBC Order 21 (N.C. Super. Ct. April 5, 2023) (Bledsoe, C.J.)
Key Terms: designation; mandatory complex business case
In this Order on Designation, the Court determined that the case was not properly designated as a mandatory complex business case. The Court noted that the dispute, which arose from a series of agreements, “requires only a straightforward application of contract law principles and does not implicate the law governing limited liability companies.” The Court rejected the designation and returned the case to the Superior Court of Judicial District 26 “so that the action may be treated as any other civil action” wherein the parties could “pursue designation as a Rule 2.1 exceptional case.”
Vitaform, Inc. v. Aeroflow, Inc., 2023 NCBC Order 22 (N.C. Super. Ct. April 6, 2023) (Bledsoe, C.J.)
Key Terms: motion in limine; Rule 402; irrelevant; Rule 403; unfairly prejudicial; Rule 602; personal knowledge
This case, previously discussed here and here, involves a dispute over Defendants’ alleged use and appropriation of Plaintiff’s business plan relating to post-partum compression garments. In this order, the Court addressed five motions in limine by Defendants and one motion in limine by Plaintiff.
In Defendants’ Motion 1, Defendants argued that any reference to the impact of the litigation on Plaintiff’s principal (Don Francisco) or to the facilities which manufactured Plaintiff’s garments as “Don’s Factories” should be prohibited as irrelevant and unfairly prejudicial. The Court agreed, concluding that the impact on Francisco was irrelevant since he was not a party to the suit and would be unfairly prejudicial since it would tend to create sympathy in the jury for Plaintiff. For similar reasons, the manufacturing facilities could not be referred to as Don’s Factories since Francisco did not have any legal interest in them.
Defendants’ Motion 2 sought to prevent Plaintiff from introducing documents which Defendants contended relate solely to Plaintiff’s dismissed claims or excluded theory of damages. However, since the surviving claims stemmed from the same factual background (the “July Phone Call”) as the dismissed claims, the Court concluded that the majority of the documents were relevant to the remaining claims and admissible. Thus, the Court denied Motion 2 except as to documents specifically noted, but emphasized that Plaintiff would not be permitted to use the documents to elicit testimony or make arguments regarding Plaintiff’s actual damages.
Defendants’ Motion 3 sought to exclude, pursuant to Rule 602, the testimony of five witnesses Defendants contended lack personal knowledge of the underlying events. The Court denied Motion 3 as to three of the witnesses since although they did not participate in the July Phone Call, they nonetheless had personal knowledge of relevant surrounding events. The Court granted in part and denied in part Motion 3 as to testimony from Defendant’s CFO, thereby prohibiting the CFO’s testimony relating to Plaintiff’s actual damages but allowing his testimony about Defendant’s conscious acceptance of Plaintiff’s business plan and about Defendants’ net worth and revenues. The Court also granted Motion 3 to the extent it sought to exclude testimony from Defendant’s CEO, as Plaintiff had not offered evidence that Defendant’s CEO had any knowledge of the relevant events.
The Court granted Defendants’ Motion 4 to the extent it related to 1) characterizing Plaintiff’s business plan as a trade secret, confidential, or proprietary; 2) characterizing Defendants’ acts as stealing or illegal; and 3) witnesses (other than Francisco) characterizing Defendants’ acts as unethical or immoral, but denied Motion 4 to the extent it related to 1) Francisco’s characterization of Defendants’ acts as unethical or immoral; and 2) characterizing Defendants’ actions as copying.
The Court also granted Defendants’ Motion 5, which sought to prevent Plaintiff from offering evidence of any other lawsuits involving Defendants.
At the hearing on Plaintiff’s motion to exclude the de bene esse deposition of one of Defendants’ witnesses, Plaintiff’s counsel conceded that Defendants’ position was correct. Accordingly, the Court denied the motion.
Cunningham v. Waff, 2023 NCBC Order 23 (N.C. Super. Ct. April 10, 2023) (Bledsoe, C.J.)
Key Terms: order on designation; N.C.G.S. § 7A-45.4(a); incompetency proceeding; forecasted defense
In this Order on Designation, the Court determined that a case arising from an incompetency proceeding did not qualify as a mandatory complex business case under N.C.G.S. § 7A-45.4(a)(1). After being appointed the guardian of his father (David), Plaintiff brought suit alleging that Defendants had taken advantage of David’s diminished mental capacity to extract millions of dollars in financial and material benefits from David through David’s purchase of a beach house. The beach house was titled to an LLC, in which Defendant Carolyn Waff claimed an ownership interest.
Defendants filed a notice of designation, asserting that the case involves issues regarding “how to allocate the assets of [the LLC] in a dispute regarding membership and corporate rights in a limited liability company.” The Court rejected this argument, though, because the resolution of those issues required only “a straightforward application of contract law.”
Defendants also asserted that designation was proper because the Court would need to determine if Plaintiff had standing to bring an action on behalf of David, since the LLC Act provides that a person ceases to be a member of an LLC once adjudicated incompetent. Conceding that this may constitute a dispute involving the law governing LLCs, the Court nevertheless concluded that designation was improper because designation must be based on a pleading, not a forecasted defense.
McNew v. Fletcher Hosp., Inc., 2023 NCBC Order 24 (N.C. Super. Ct. April 6, 2023) (Bledsoe, C.J.)
Key Terms: Rule 23(c); class action; voluntary dismissal; pre-certification settlement
Plaintiff, an individual proceeding pro se, instituted a class action suit against Defendant Fletcher Hospital, Inc. At the time this Order was issued, no class had been certified. After a settlement between the parties was reached, Defendant filed a Motion for Approval of Dismissal of Plaintiff’s Alleged Class Action Claims.
As no class had been certified in the suit, Rule 23(c) did not require the parties to obtain judicial approval before obtaining a voluntary dismissal, but did require the Court to conduct a limited inquiry into the circumstances of the pre-certification dismissal. This inquiry requires the court to determine: (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members.
Upon review of the motion, the parties’ settlement agreement, and the record, the Court determined that the parties had litigated in good faith and had not benefitted from any abuse of the class-action mechanism. Moreover, the dismissal would not prejudice absent class members because the settlement agreement did not bind any non-parties. Accordingly, the Court approved the voluntary dismissal of the action and dismissed it with prejudice.
Woodcock v. Cumberland Cnty. Hosp. Sys., Inc., No. 376A21 (N.C. 2023) (Barringer, J.)
Key Terms: appeal; attorneys’ fees; Rule 41(d); N.C.G.S. § 6-21.5; unchallenged findings and conclusions; affirmed
In this appeal, Plaintiffs challenged the Business Court’s orders granting Defendants’ motion for attorneys’ fees under N.C.R. Civ. P. 41(d) pursuant to N.C.G.S. § 6-21.5 and awarding $599,262.00 in attorneys’ fees. The Court held that the findings of facts and conclusions of law entered by the Business Court, which were unchallenged on appeal, were sufficient to support the order of attorneys’ fees. Plaintiffs’ arguments—that the Business Court erred by allowing attorneys’ fees without finding that Plaintiffs’ voluntarily dismissed their action in bad faith; Plaintiffs’ advanced a claim supported by a good faith argument for an extension, modification, or reversal of law; and the Business Court abused its discretion by allowing attorneys’ fees when it had previously directed Plaintiffs to continue with discovery—all failed or were not preserved. Accordingly, the Business Court’s orders were affirmed.
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