N.C. Business Court Opinions, May 8, 2024 – May 21, 2024
Atl. Coast Conf. v. Bd. of Trs. of Fla. State Univ., 2024 NCBC 31 (N.C. Super. Ct. May 10, 2024) (Bledsoe, C.J.)
Key Terms: automatic stay; appeal; interlocutory appeal; N.C. Gen. Stat. § 1-294
As summarized here, the Court previously denied Defendant’s motion to dismiss under Rule 12(b)(2), ruling that Defendant had waived its sovereign immunity to suit in North Carolina and was therefore subject to personal jurisdiction in the Court. Defendant appealed the Court’s 12(b)(2) ruling to the North Carolina Supreme Court. Thereafter, the Court ordered the parties to submit a status report regarding the effect of N.C. Gen. Stat. § 1-294 on the case.
While both parties agreed that the denial of Defendant’s 12(b)(2) motion to dismiss was immediately appealable, Plaintiff argued that the Court retained jurisdiction to require the parties to close the pleadings and proceed with discovery pending the appeal. Defendant, on the other hand, argued that N.C. Gen. Stat. § 1-294 required an automatic stay of all proceedings, because the matter on appeal would determine if Defendant could “even be sued in North Carolina.”
The Court noted that North Carolina’s courts routinely impose or enforce an automatic stay under N.C. Gen. Stat. § 1-294 when an interlocutory appeal is filed after the denial of a motion to dismiss on personal jurisdiction. As the issue on appeal was the Court’s jurisdiction over a party to the case, and not a separable or divisible claim, the Court determined that it was divested of jurisdiction and entered a stay of all proceedings, including discovery, pending the Supreme Court’s resolution of the appeal.
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Merz Pharm., LLC v. Thomas, 2024 NCBC 32 (N.C. Super. Ct. May 15, 2024) (Davis, J.)
Key Terms: preliminary injunction; misappropriation of trade secrets; confidentiality agreement; nonsolicitation provision; botulinum toxin; Economic Espionage Act
This order arises from Plaintiff’s motion for a preliminary injunction against its former employee, Defendant Thomas. Plaintiff is a pharmaceutical company that sells Xeomin, a botulinum toxin injection, primarily to government agencies. Defendant previously held the title of Director of Government and Federal Accounts with Plaintiff. At the onset of his employment with Plaintiff, Defendant signed an agreement containing confidentiality and nonsolicitation provisions. After Plaintiff terminated Defendant’s employment, it discovered that Defendant had transferred over 500 files containing “confidential” information to a thumb drive on the day of, or shortly after, his termination. Defendant began employment with one of Plaintiff’s competitors several weeks later. Plaintiff filed suit alleging various claims relating to Defendant’s alleged breaches of his employment agreement. Following expedited discovery, Plaintiff moved for a preliminary injunction to enjoin Defendant from: (a) accessing or using Plaintiff’s trade secrets; and (b) violating the confidentiality and nonsolicitation provisions of his employment agreement.
Beginning with Plaintiff’s claims for misappropriation of trade secrets and breach of the confidentiality provisions of the agreement, which the Court treated in tandem because they overlapped factually, the Court first concluded that the information taken by Defendant was protected under the employment agreement, and qualified, at least in part, as trade secrets under North Carolina law. The Court rejected Defendant’s argument that the information taken was subject to a safe harbor provision in the agreement, which provided immunity under the Economic Espionage Act of 1996, noting that most of the documents taken by Defendant were unrelated to Plaintiff’s alleged misconduct, and that Defendant had not provided the documents to an attorney prior to deleting them from the thumb drive. For these reasons, the Court concluded that Plaintiff had met its burden of showing a likelihood of success on the merits of these claims. The Court was also satisfied that Plaintiff had shown the likelihood of irreparable competitive harm to Plaintiff if an injunction was not issued and that such harm outweighed any potential harm to Defendant. As such, the Court granted Plaintiff’s motion for a preliminary injunction as to its confidential information and trade secrets.
The Court reached a different conclusion as to breach of the nonsolicitation provision, finding that Plaintiff had failed to show that it would suffer irreparable harm absent an injunction. Plaintiff partially premised its argument for irreparable harm on the possibility of Daxxify—the competitive drug offered by Defendant’s current employer—receiving formulary coverage under the VA National Formulary. However, during the briefing process for this motion, Daxxify obtained formulary coverage and therefore such “harm” had already occurred. Plaintiff’s remaining argument, that Defendant’s actions could result in Daxxify receiving preferential coverage at the expense of Plaintiff’s drug, was unpersuasive to the Court. After reviewing affidavits submitted by the parties, the Court concluded that no enhanced formulary coverage existed under the VHA for botulinum toxins, and no preferential treatment would arise. The Court therefore denied Plaintiff’s motion for a preliminary injunction as to the nonsolicitation provision.
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McClure v. Ghost Town in the Sky, LLC, 2024 NCBC 33 (N.C. Super. Ct. May 16, 2024) (Conrad, J.)
Key Terms: involuntary dissolution; operating agreement; winding-down; motion to strike; summary judgment; western-themed amusement park; litigation by ambush
This opinion arises from Plaintiff’s motion for summary judgment and to strike certain exhibits submitted by Defendant from the record. In 2020, Alaska Presley and Coastal Development LLC created Ghost Town in the Sky, LLC, with the goal of redeveloping a defunct western-themed amusement park owned by Presley. Presley and Coastal Development entered into a written operating agreement, whereby Coastal Development’s principal would act as manager with broad authority to handle all of the day-to-day operations of the LLC. Presley passed away in 2022, and her 50% membership interest in Ghost Town in the Sky was inherited by her niece, Plaintiff McClure. After reviewing the company’s books and records, McClure attempted to sell her interest in Ghost Town in the Sky to Coastal. After negotiations over the sale failed, McClure initiated the present action, seeking to dissolve Ghost Town in the Sky and wind up its affairs pursuant to N.C Gen. Stat. § 57D-06-02(02).
The Court noted that involuntary dissolution is an “extraordinary” equitable remedy, only appropriate when a member can show that “it is not practicable to conduct the LLC’s business in conformance with the operating agreement” or that liquidation is necessary to preserve the interests of the members. Plaintiff argued that involuntary dissolution was warranted due to the company’s lack of income, financing, or the ability to pay its property taxes. The Court rejected Plaintiff’s argument, noting that Ghost Town in the Sky was a young corporation with a valuable asset, and which was presently carrying out its contracted purpose of owning and managing real property. The Court also noted that the company’s “inability” to pay its property taxes stemmed from a disagreement between the members over who would bear the cost. Plaintiff’s arguments for liquidation were likewise rejected by the Court as she had not shown that her expectations had been frustrated or that her membership rights were actively being suppressed. The Court denied Plaintiff’s motion for summary judgment and granted Ghost Town in the Sky’s motion for summary judgment against her.
The Court also denied as moot Plaintiff’s motion to strike certain evidence submitted by Ghost Town in the Sky as the Court did not consider any of the evidence in deciding the motion for summary judgment. The Court noted, however, that Ghost Town in the Sky’s failure to identify witnesses and otherwise introduce evidence not previously disclosed was tantamount to litigation by ambush and was not appropriate.
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Compass Tax Servs. LLC v. Karki, 2024 NCBC 34 (N.C. Super. Ct. May 20, 2024) (Robinson, J.)
Key Terms: franchise sale; sales agreement; fraud; breach of fiduciary duty; UDTPA; breach of contract; condition precedent; duty of good faith and fair dealing
This lawsuit arose out of Defendant Karki’s sale of five Liberty Tax franchises to Plaintiffs. Plaintiffs alleged that Defendant breached their sales agreement by failing to transfer the franchises, while Defendant counterclaimed that Plaintiffs breached the sales agreement by failing to pay sums owed under the sales agreement and that Plaintiff Lamichhane made misrepresentations regarding his intent when entering into the sale agreement and breached his fiduciary duty as majority owner and manager of Compass Tax Services. Plaintiffs moved for summary judgment on most of the counterclaims and Defendant moved for summary judgment on Plaintiff’s claims and for affirmative summary judgment on his breach of contract claim.
Defendant’s Fraud Claim. The Court denied summary judgment on this claim as Defendant had submitted sufficient evidence to raise an issue of material fact as to whether the individual Plaintiffs had acted with fraudulent intent when entering in the sales agreement.
Defendant’s Claims for Breach of Fiduciary Duty and Constructive Fraud. Because Plaintiffs did not challenge Defendant’s contention that Lamichhane owed him a fiduciary duty, the Court focused solely on the issue of breach. The Court first determined that to the extent Defendant’s claim arose from Plaintiffs’ failure to meet its obligations under the sales agreement, the claim failed because it arose from contractual obligations rather than from any fiduciary relationship. However, to the extent the claim was based on Lamichhane’s alleged use of the franchises and their assets for his own benefit, the claim survived summary judgment as a genuine issue of material fact remained based on evidence that Lamicchhane may have paid himself excessive management fees.
Defendant’s Claim for Violation of the UDTPA. Because Plaintiffs’ only argument for dismissal of the UDTPA claim was that it was just a “repackaging” of Defendant’s other claims, the Court limited its analysis to this argument and determined that the claim survived because the underlying claims had survived, at least in part, and could support a claim under the UDTPA.
Breach of Contract. Defendant sought summary judgment on the parties’ respective breach of contract claims arising from the sales agreement. Defendant asserted that Plaintiffs breached the sales agreement by failing to pay the amount due thereunder in May 2022, while Plaintiffs asserted that Defendant breached the sales agreement by failing to facilitate the transfer of the franchises. The Court concluded that it was undisputed that Plaintiffs had failed to make the required payment and also determined that there were no conditions precedent to their obligation to perform. Accordingly, the Court granted summary judgment in favor of Defendant on its breach of contract claim to the extent the motion sought to establish the failure to pay. However, a genuine issue of material fact remained regarding who was obligated to make the payment and therefore summary judgment was denied in that regard. The Court also granted summary judgment in Defendant’s favor on Plaintiff’s breach of contract claim because Plaintiffs’ breach by failing to make the required payment had relieved Defendant of any pending obligations regarding transfer of the franchises.
Plaintiffs’ Claim for Breach of the Duty of Good Faith and Fair Dealing. Since this claim was based on Defendant’s alleged failure to facilitate the transfer of the franchises and the Court had already granted summary judgment in Defendant’s favor on that issue, the Court dismissed this claim as well.
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Fairleigh v. Wegner, 2024 NCBC Order 33 (N.C. Super. Ct. May 9, 2024) (Davis, J.)
Key Terms: preliminary injunction; operating agreement; default; limited liability company
This order arises from Plaintiff Ken Fairleigh’s motion for preliminary injunction. Fairleigh is a 24.5% owner of Defendant Secure Ventures Group, LLC, an entity established to own and lease three condominiums. Fairleigh is also the trustee of Plaintiff Louise Robertson’s trust, which owns an additional 24.5% interest in the company. Defendant Wegner owns the remaining 51% interest in Secure Ventures and operates as the company’s sole manager. Pursuant to the operating agreement, the income from the properties was to be used to fund Secure Venture’s distributions to Fairleigh, the Trust, and Wegner.
After the company’s distribution payments ceased in August 2023 and Wegner failed to provide Fairleigh with Secure Ventures’ books and financial records which Fairleigh had requested to inspect, Fairleigh filed suit, claiming (1) breach of contract; (2) breach of fiduciary duty; (3) accounting/access to company records; (4) declaratory judgment; and (5) dissolution of the company. Wegner then began to provide Fairleigh with financial documents. Fairleigh also moved for a preliminary injunction requesting the Court to remove Wegner as manager of Secure Ventures, and designating Fairleigh as manager in his place. Fairleigh alleged that the records produced reflected an event of default under the operating agreement. Specifically, that two of Secure Ventures’ tenants were paying reduced or modified rent without prior approval the members. Pursuant to the operating agreement, Wegner’s voting rights would be suspended in the event of a default.
The Court denied Fairleigh’s motion on the basis that he failed to show the likelihood of success on the merits. With the evidence available, the Court determined that Fairleigh was unlikely to prevail on his argument that the operating agreement’s default provision had been triggered. The Court heavily based this determination on Wegner’s testimony that Fairleigh had provided verbal approval for the tenants’ reduced rent. As Fairleigh did not show a likelihood of success on the merits, the Court did not analyze any argument for irreparable harm.
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Blusky Restoration Contractors, LLC v. Brown, 2024 NCBC Order 34 (N.C. Super. Ct. May 13, 2024) (Robinson, J.)
Key Terms: interlocutory appeal; substantial right; motion to stay; order striking defense; attorney-client privilege
After Defendant filed a notice of appeal in response to the Court’s order striking Defendant’s “good faith defense,” Defendant moved to stay all proceedings pending the appeal.
As an appeal from an interlocutory order which does not affect a substantial right does not divest a trial court of its jurisdiction, the Court performed a two-part test to determine if a substantial right was affected by the appealed order. Defendant argued that a substantial right was affected, as the Order striking his defense implicated his “right to raise and protect the attorney-client privilege.” The Court rejected this argument, noting that it had not yet issued an order or opinion on the parties’ cross-motions for summary judgment, that Defendant’s reliance on counsel was not the primary issue in the case, and that Defendant had a number of defenses and arguments remaining in the action. Further, even if a substantial right was at issue, Defendant had not shown that deprivation of the right would work injury to him if not corrected before appeal from a final judgment. Accordingly, the Court denied the motion to stay.
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James H.Q. Davis Tr. v. JHD Props., LLC, 2024 NCBC Order 35 (N.C. Super. Ct. May 15, 2024) (Bledsoe, C.J.)
Key Terms: appeal; writ of supersedeas; stay pending appeal; judicial dissolution
As summarized here, the Court previously granted Plaintiffs’ motion for summary judgment on their claim for judicial dissolution of JHD Properties and informed the parties that a separate order would be forthcoming to schedule a conference to establish the process for the dissolution. After Defendant filed a notice of appeal of the Court’s summary judgment order to the N.C. Court of Appeals, the Court determined that it had not been divested of jurisdiction by Defendant’s appeal (because it was not filed with the N.C. Supreme Court as required by statute) and could proceed with the dissolution of the two LLCs. Defendant subsequently filed a petition for writ of supersedeas pursuant to Appellate Rule 23, which the Supreme Court granted. Noting that the purpose of a writ of supersedeas is to preserve the status quo, the Court determined that any action to implement the summary judgment order, such as appointing a receiver, would violate the stay, and it therefore stayed all activities to implement the summary judgment order until resolution of the appeal.
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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.