N.C. Business Court Opinions, November 23, 2022 – December 6, 2022
Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St. Louis, Inc. v. Window World, Inc., 2022 NCBC 72 (N.C. Super. Ct. Nov. 10, 2022) (Bledsoe, C.J.)
Key Terms: franchise; attorney-client privilege; crime-fraud exception; ex parte testimony; sanctions; adverse jury instructions; work-product doctrine
Plaintiffs, franchisees of Defendant Window World (“WW”), brought suit in 2015, alleging, inter alia, WW’s fraudulent concealment of information relating to its status as a franchise. In 2018, a discovery dispute arose regarding WW’s withholding of documents based on attorney-client privilege and the work-product doctrine. The Court entered an order addressing the discovery matters, which was appealed and subsequently affirmed. Thereafter, a number of issues arose from the implementation of the order resulting in the filing of the present motions.
The Court first addressed WW’s motion to allow the ex parte testimony of WW’s outside franchise attorney in further opposition to Plaintiffs’ crime-fraud motion. The Court denied the motion, concluding that WW had provided no persuasive reason it should be permitted to belatedly supplement the record contrary to BCR 7.5.
Next, the Court considered Plaintiffs’ renewed motion for disclosure of WW’s privileged communications based on the crime-fraud exception. Plaintiffs argued that WW’s newly produced documents, together with prior evidence, established by a preponderance of the evidence that WW and Vannoy (WW’s in-house counsel) knowingly perpetrated a fraud against Plaintiffs by inducing them to sign licensing agreements that falsely disclaimed a franchise relationship. The Court, however, declined to apply the crime-fraud exception because Plaintiffs did not produce any evidence that Vannoy was involved in soliciting Plaintiffs to enter into licensing agreements after the pertinent date.
Regarding Plaintiffs’ request for sanctions for alleged misrepresentations by WW and Vannoy, the Court denied the request as related to statements that WW was not aware it was a franchise system, but granted the request as related to Vannoy’s statements regarding franchise-related work she performed. The Court rejected Defendants’ attempt to distinguish legal advice from legal services and found, by a preponderance of the evidence, that Vannoy had testified falsely on these matters. The Court awarded sanctions consisting of adverse jury instructions related to Vannoy and attorneys’ fees and costs related to the motions.
Lastly, the Court addressed Plaintiffs’ motion to compel which asked the Court to conduct an in camera review and compel the production of certain documents withheld or redacted by WW. Looking first at emails sent by Vannoy to gather information for WW’s franchise disclosure document, the Court determined that the communications were privileged because they were sent by Vannoy acting either as in-house counsel performing legal services or as a client preparing to meet with outside counsel. Turning to seven documents produced by WW’s outside counsel, the Court determined that five of the documents were protected by attorney-client privilege and the remaining two were protected by the work-product doctrine because they were prepared in anticipation of earlier potential litigation with state regulators and Plaintiffs had failed to demonstrate a substantial need for the documents. As for the remaining documents withheld, the Court concluded that they were all privileged, with the exception of two documents to the extent they were published to third-parties.
McFee v. Presley, 2022 NCBC 73 (N.C. Super. Ct. Nov. 29, 2022) (Conrad, J.)
Key Terms: default judgment; Rule 55; N.C.G.S. § 1-75.11; fiduciary relationship; conversion; intangible interests; UDTPA; in or affecting commerce; fraudulent transfer; unjust enrichment; indirect benefit
Plaintiffs brought suit against several entities and individuals for their conduct relating to Plaintiff McFee’s employment with and membership interest in Defendant CPP. After the Court entered default against four of the six Defendants, Plaintiffs moved for default judgment. Noting first that the default judgment procedural requirements of Rule 55 and N.C.G.S. § 1-75.11 had been met, the Court turned to whether the allegations in the complaint, even though deemed admitted by entry of default, were sufficient to state a claim.
Regarding Plaintiffs’ breach of fiduciary duty and constructive fraud claims, the Court denied default judgment, concluding that the complaint did not allege the existence of a fiduciary relationship between McFee, as an employee and former member of CPP, and Defendant Stacks, as an officer of CPP.
The Court also denied default judgment as to Plaintiffs’ conversion claim, concluding that McFee’s intellectual property rights, membership interest, and expectancy interest in proceeds from the sale of CPP’s assets were all intangible interests not subject to a claim for conversion.
Default judgment on Plaintiffs’ UDTPA claim was denied as well because the alleged conduct related solely to internal disputes involving CPP, its officers, and McFee (an employee and minority owner) and thus was not in or affecting commerce.
As for Plaintiffs’ claim for fraudulent transfer under N.C.G.S. § 39-23.4, the Court granted default judgment against CPP based on allegations that McFee was a creditor of CPP, that CPP was on notice of McFee’s claim through her filing of previous lawsuits, that CPP transferred substantially all of its assets, that CPP concealed the transfers; and that the assets were transferred with fraudulent intent. However, default judgment was denied as to the remaining defaulting Defendants as there were no allegations that Plaintiffs were creditors of those parties.
Finally, the Court granted default judgment against all defaulting Defendants on the claim for unjust enrichment based on the direct and indirect benefits Defendants received by retaining McFee’s intellectual property and share of the proceeds from the sale of CPP’s assets.
Tribike Transp., LLC v. Essick, 2022 NCBC 74 (N.C. Super. Ct. Nov. 30, 2022) (Conrad, J.)
Key Terms: misappropriation of trade secrets; breach of contract; promise; tortious interference; fraud; unjust enrichment; civil conspiracy; unfair competition
Plaintiff brought suit against two former employees, Essick and Cosgrove, and their new competing venture, for various claims arising from the alleged misappropriation of Plaintiff’s business plan and other confidential information. Defendants moved to dismiss all claims.
Regarding misappropriation of trade secrets, Defendants asserted that Plaintiff’s business plan was not protectable as a trade secret and that Plaintiff had not adequately alleged acts of misappropriation. The Court disagreed, concluding that Plaintiff’s allegations regarding the components of the business plan, that the business plan was confidential, unique to Plaintiff, and not readily ascertainable or able to be derived from public information, and acts of misappropriation “compare[d] favorably” with allegations found sufficient under Rule 12(b)(6) in other cases.
Regarding breach of contract and tortious interference claims as to Essick, Defendants acknowledged a valid contract but asserted that the allegations established that Essick could not have breached the contract. The Court rejected this argument, concluding that Plaintiff had met the minimal pleading requirements for breach.
As for the same claims regarding Cosgrove, Defendants argued that Cosgrove’s promise to keep the business plan a secret was not a valid contract because it lacked consideration. However, the Court held that the allegation that Plaintiff would provide Cosgrove with new confidential information in exchange for his promise was sufficient.
The Court also rejected Defendants’ challenge to the inducement and intent to deceive elements of Plaintiff’s fraud claim and to the in or affecting commerce element of Plaintiff’s unfair competition claims.
Regarding the unjust enrichment claim, the Court found that the allegation that Cosgrove fraudulently promised to keep the business plan confidential to gain access to new information was sufficient to state a claim.
Finally, the Court found that the civil conspiracy claim also survived as the complaint sufficiently alleged the identity of the conspirators, the timeframe of the conspiracy, and its purpose.
Campbell Sales Grp., Inc. v. Niroflex by Jiufeng Furniture, LLC, 2022 NCBC 75 (N.C. Super. Ct. Dec. 5, 2022) (Davis, J.)
Key Terms: oral agreement; statute of frauds; specially manufactured goods exception; misappropriation of trade secrets; breach of confidence; unjust enrichment; measurable benefit; conversion; UDTPA; civil conspiracy; piercing the corporate veil; preliminary injunction
Plaintiff, a North Carolina furniture distributor, brought suit against Defendant Genfine, a furniture manufacturer, and related entities and individuals, alleging numerous claims arising from the breach of an alleged exclusivity agreement governing Plaintiff and Genfine’s course of dealing. Defendants moved for summary judgment on all claims, including their counterclaims, and also requested that a previously granted preliminary injunction be dissolved.
The Court granted summary judgment for Defendants on Plaintiff’s claim that Genfine had breached an oral exclusivity agreement with Plaintiff. The Court concluded that none of the communications between the parties were sufficient to satisfy the statute of frauds. Plaintiff’s argument that the agreement was subject to the “specially manufactured goods” exception failed because the record showed that Genfine was willing and able to sell the furniture to other buyers. Moreover, Plaintiff’s argument was undercut by the fact that it had obtained a preliminary injunction to prevent Genfine from selling the furniture to others.
The Court also granted summary judgment for Defendants on Plaintiff’s claim for misappropriation of trade secrets because Plaintiff failed to show reasonable efforts to protect the secrecy of its information.
Next, the Court granted summary judgment for Defendants on Plaintiff’s breach of confidence claim as it failed to cite any case law recognizing such a claim and on Plaintiff’s unjust enrichment claim because the type of benefit upon which Plaintiff relied (the opportunity for new business relationships) was not a sufficiently measurable benefit.
The Court then denied summary judgment on Plaintiff’s conversion claim, which was based on Genfine’s failure to release furniture for which Plaintiff has paid, noting, however, that the claim may have been more appropriately brought as a breach of contract claim.
The Court also denied summary judgment on Plaintiff’s UDTP claim based on evidence of a number of allegedly deceptive statements and acts by Defendants. Plaintiff’s civil conspiracy claim also survived in conjunction with the UDTP claim.
The Court, however, rejected Plaintiff’s request to pierce the corporate veil of Defendant Niroflex because Plaintiff failed to provide evidence rebutting testimony that Niroflex was not controlled by Genfine.
Lastly, the Court granted summary judgment in Genfine’s favor on its own breach of contract claim, which was based on Plaintiff’s failure to pay for goods shipped to it. Plaintiff’s argument that the goods were non-conforming based on violation of the alleged exclusivity agreement failed since the Court had already ruled that no enforceable exclusivity agreement existed.
Turning to the motion to dissolve the preliminary injunction, the Court first noted that the injunction had been based on a likelihood of success on Plaintiff’s breach of contract claim which has now been dismissed. Even assuming Plaintiff could show a likelihood of success on any remaining claims, it failed to show that dissolving the injunction would cause irreparable harm. Thus, the Court granted the motion to dissolve the injunction but deferred ruling on Genfine’s request that the $100,000 bond posted by Plaintiff be forfeited to Genfine.
Howard v. IOMAXIS, LLC, 2022 NCBC 76 (N.C. Super. Ct. Dec. 5, 2022) (Earp, J.)
Key Terms: operating agreement; membership interest; economic interest; buy-sell; equitable accounting; specific performance; declaratory judgment
This case arose following the death of Ronald Howard, who owned a 51% interest in IOMAXIS, LLC. His interest was passed to his Estate and then to a Trust. Following disputes regarding the rights of the Trust with respect to its interest in IOMAXIS, the co-trustees brought suit seeking, inter alia, a declaratory judgment and an accounting.
In response, IOMAXIS argued that any attempt by the Estate to transfer its economic interest to the Trust failed because it did not comply with the company’s operating agreement, and, therefore, the Trust did not have standing to bring the action. The Trust responded that it had clearly identified an interest in IOMAXIS which was assigned to it and that allegations regarding the method of transfer were unnecessary. Acknowledging that the complaint did not explain how the transfer occurred, the Court nonetheless considered the three possible avenues for transfer and concluded that under any one of them, the Trust would become a transferee of an interest in IOMAXIS and thus had standing.
IOMAXIS also sought an order precluding the remedy of specific performance of the buy-sell provisions of the operating agreement. However, because the terms of the operating agreement were ambiguous, the Court determined that it could not rule out, at this stage, an interpretation of the agreement that would support specific performance.
In addition, IOMAXIS sought dismissal of the Trust’s demand for an accounting, arguing that the Trust had not asserted an underlying claim to support an accounting or that it lacked an adequate remedy at law. The Court disagreed and denied the motion, except to the extent the accounting demand was made on the part of the Estate, which was not a party to the action.
Lastly, the Court clarified that the individual defendants were only named as to the first three claims because of the statutory requirement that any person with an interest that would be affected by a declaratory judgment must be made a party to the declaratory judgment action.
Brakebush Bros., Inc. v. Certain Underwriters at Lloyds of London, 2022 NCBC 77 (N.C Super. Ct. Dec. 5, 2022) (Davis, J.)
Key Terms: insurance claim; statutory fraud; N.C.G.S. § 58-44-16(f)(2); heightened pleading requirements; motion to strike
In this suit, Plaintiffs Brakebush and Raeford sued a number of insurance companies over the amount of Brakebush’s insurance claims following a fire at a chicken plant. The insurance companies counterclaimed, seeking, inter alia, a declaratory judgment that the insurance policies were void due to Brakebush’s violation of N.C.G.S. § 58-44-16(f)(2) by fraudulently submitting a claim for insurance proceeds for amounts well beyond the actual damage to the plant. Plaintiffs moved to dismiss the counterclaims under Rule 12(b)(6) and to strike Defendants’ fraud-related affirmative defenses.
The Court began by noting that while a common law fraud claim has additional elements, a claim for statutory fraud under N.C.G.S. § 58-44-16(f)(2) only requires three: 1) a false statement; 2) that was knowingly and willfully made; and 3) that was material. Finding these elements sufficiently pleaded, the Court turned to Brakebush’s argument that the claim was also subject to the heightened pleading requirements of N.C. R. Civ. P. 9(b). However, the Court did not decide the issue, because it found that the counterclaims were pleaded with sufficient particularity even if Rule 9(b) applied. Accordingly, the Court denied the motion to dismiss the declaratory judgment claim.
Because Brakebush’s motion to dismiss the other counterclaims and motion to strike hinged on dismissal of the declaratory judgment claim, the Court denied these motions as well.
McClure v. Ghost Town in the Sky, LLC, 2022 NCBC 78 (N.C. Super. Ct. Dec. 5, 2022) (Conrad, J.)
Key Terms: operating agreement; membership interest; economic interest
Defendants are two limited liability companies whose original members were Alaska Presley and Coastal Development, LLC. Both LLCs have similar operating agreements which provide that upon Presley’s death all of her membership interest would pass to Plaintiff. Other provisions of the operating agreement provided for transfers more generally. Following Presley’s death, Plaintiff sought to assert her membership rights by requesting books, records, and other financial information. After these requests were denied by Coastal Development, Plaintiff brought suit to dissolve the LLCs and wind up their affairs. Defendants moved to dismiss, asserting that, pursuant to the terms of the operating agreement, Plaintiff had only an economic interest, not membership rights and, therefore, could not seek dissolution.
The Court disagreed, noting that the operating agreements unambiguously provided that Plaintiff would succeed to all of Presley’s membership interest upon Presley’s death. The other provisions governing transfers which required member consent were irrelevant to the facts at hand since they specifically stated that they were subject to the aforementioned terms. Accordingly, the Court concluded that Plaintiff was a member of the two LLCs and denied the motion to dismiss
Nerko, L.L.C. v. Blue Bridge Benefits LLC, 2022 NCBC Order 66 (N.C. Super. Ct. Nov. 28, 2022) (Robinson, J.)
Key Terms: receivership; proof of claim; Bankruptcy Code; burden of proof
The Court had previously appointed a receiver for Defendant Blue Bridge Benefits LLC (“BBB”) and entered an order establishing a claims process which required creditors asserting claims against BBB to submit a proof of claim form to the receiver. Thereafter, the receiver investigated the claims asserted, including one for $69,000, and notified the parties of his intent to pay the $69,000 claim. Plaintiff Nerko, L.L.C. objected.
Noting that the N.C. Commercial Receivership Act establishes the process for objections and allowances of claims in a receivership but does not provide a framework for the presentation of evidence and burden of proof, the Court turned to the Bankruptcy Code for guidance and adopted the burden-shifting framework set forth in 11 U.S.C. § 502 and Bankruptcy Rule 9017. Applying this framework, the Court overruled and denied Nerko’s objection, concluding that Nerko had failed to satisfy its burden of proof necessary to overcome the presumption of validity of the claim where, as here, the claim was properly filed and found to be valid by the receiver.
JaniSource LLC v. ChannelAdvisor Corp., 2022 NCBC Order 67 (N.C. Super. Ct. Nov. 30, 2022) (Bledsoe, C.J.)
Key Terms: notice of designation; contemporaneous filing; N.C.G.S. § 7A-45.4(d)(1); order on designation
Plaintiffs did not file a notice of designation until over a month after filing their complaint. Accordingly, the Court determined that the action was not properly designated as a mandatory complex business case because the notice was not filed contemporaneously with the complaint as required by N.C.G.S. § 7A-45.4(d)(1). The order was without prejudice to the right of any other party to seek designation as appropriate.
Shenzhen Ruobilin Network Tech. Co. v. ChannelAdvisor Corp., 2022 NCBC Order 68 (N.C. Super. Ct. Nov. 30, 2022) (Bledsoe, C.J.)
Key Terms: notice of designation; contemporaneous filing; N.C.G.S. § 7A-45.4(d)(1); order on designation
Plaintiffs did not file a notice of designation until over a month after filing their complaint. Accordingly, the Court determined that the action was not properly designated as a mandatory complex business case because the notice was not filed contemporaneously with the complaint as required by N.C.G.S. § 7A-45.4(d)(1). The order was without prejudice to the right of any other party to seek designation as appropriate.
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.
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