Source: https://itsjustbusiness.foxrothschild.com/page/4/
Timestamp: 2020-08-06 13:18:59
Document Index: 739606534

Matched Legal Cases: ['§ 55', '§ 55', '§ 55', '§ 55', '§ 55', '§ 55', '§ 55', '§ 66', '§ 66', '§ 75', '§ 75', '§ 7']

It’s Just Business | Page 4 of 6 | North Carolina Business Court Decisions | Fox Rothschild LLP
By Matthew Krueger-Andes on September 16, 2019
Posted in Judge Bledsoe, Mergers
N.C. Business Court Addresses the Scope of a Judicial Appraisal Proceeding
In Reynolds American Inc. v. Third Motion Equities Master Fund Ltd. et al., 2019 NCBC 35 (N.C. Super. Ct. June 4, 2019), the Business Court considered the scope of a judicial appraisal proceeding under G.S. § 55-13-30. The defendants, who owned stock in the plaintiff company, dissented from a merger involving the plaintiff and sought to have their interest bought out at fair value. Navigating an issue of first impression, Chief Judge Bledsoe held that whether the defendants had perfected their appraisal rights was a question beyond the scope of the proceeding and, accordingly, would not be considered at trial.
A judicial appraisal proceeding is limited in scope under G.S. § 55-13-30.
The question whether dissenting shareholders have perfected their appraisal rights is outside the scope of the proceeding, and will not be addressed by the Court, at least not where the issue is first raised after summary judgment.
A corporation seeking to contest perfection should specifically request in their complaint a declaratory judgment that certain dissenting shareholders have not properly perfected their appraisal rights.
It all started when British American Tobacco p.l.c. (“BAT”) sought to increase its (already 42% indirect) ownership interest in Reynolds American, Inc. (“RAI”) by acquiring the balance of RAI’s outstanding common stock. Compl. ¶ 26.
Following extensive negotiations, the RAI shareholders voted overwhelmingly in favor of the acquisition, whereby the RAI shareholders would receive, in exchange for their RAI shares, “Merger Consideration” consisting of a mix of BAT shares and cash. Compl. ¶¶ 31, 36.
Not all RAI shareholders were on board with the acquisition, though. Instead of carrying forth their investment in RAI through an equity interest in BAT, a number of “dissenting” shareholders decided it was time to cash out.
The dissenting RAI shareholders thus exercised their appraisal rights pursuant to G.S. § 55-13-21, initiating a detailed process aimed to compensate the dissenters for the “fair value” of their shares.
The question then became, of course: What is the fair value of the RAI shares?
RAI estimated the fair value of the shares at $59.64, and sought to pay each dissenting shareholder accordingly. Reynolds American Inc., 2019 NCBC 35 ¶¶ 5-6. The dissenting shareholders (not surprisingly) disagreed with RAI’s valuation, and instead offered their own valuations ranging from $81.21 to $94.33 per share. Id. ¶ 7.
This disagreement prompted RAI to institute a proceeding under G.S. § 55-13-30, essentially asking the Court to resolve the parties’ dispute over the fair value of the dissenters’ RAI shares. Id. ¶ 8.
Once in the Business Court, the parties staked out their competing positions as to what they deemed “fair value” of the RAI stock. The difference in their valuations stemmed largely from disagreement over the “controlling date” for the valuation: Was it the date that the merger was announced that should be used to value the shares (as RAI argued), or was it the closing date of the merger that should control (as the dissenters argued)? Id. ¶ 8; CMO, ECF No. 33, p. 3-6.
As the case approached trial, RAI shifted focus to a different issue. RAI argued (in its pre-trial submissions) that certain dissenting shareholders had never perfected their appraisal rights, and therefore were not proper parties to the proceeding. These dissenters should be dismissed from the case, according to RAI, unless they could prove at trial that they had, in fact, perfected their appraisal rights (i.e., the burden was on the dissenters to make this showing). Id. ¶ 11.
The dissenters disagreed. They countered that “through filings or conduct in this litigation, [RAI] had admitted or waived its right to contest [the dissenters’] entitlement to appraisal.” Id. ¶ 14. Basically, RAI had conceded perfection when it instituted the appraisal proceeding, the scope of which was limited to determining the fair value of the dissenters’ shares. (The dissenters also disagreed that it was their burden to prove perfection.)
Addressing the issue on its own motion, and noting the late stage at which the “perfection” issue had been raised (after summary judgment and just prior to trial), the Court did not analyze the issue as one of “waiver.” Instead, the Court simply asked: Is the issue of perfection within the scope of a judicial appraisal proceeding? Put differently, was the dissenters’ perfection of (or failure to perfect) their appraisal rights a “relevant” issue for trial? Id. ¶ 16.
The answer, the Court concluded, was “no.”
The Court reasoned that perfection was not relevant to a judicial appraisal proceeding brought under G.S. § 55-13-30 because, first, the plain language of the statute did not allow the Court to consider it. Id. ¶¶ 26–28 (“There is no language in this subsection allowing or requiring a review of a dissenting shareholder’s entitlement to appraisal. The lack of such a provision is consistent throughout the statute.”).
But “[m]ost importantly,” according to the Court, the statute contemplates only two possible outcomes – and both involve the dissenting shareholders recovering a judgment. Id. ¶ 29. The dissenters are “entitled” to a judgment, and the question is simply the “form” of the judgment, which “depends upon whether the dissenter is (i) a shareholder that has already received a payment consistent with the corporation’s estimate fair value or (ii) a shareholder ‘for which the corporation elected to withhold payment under G.S 55-13-27.’” Id. (quoting G.S. § 55-13-30(e)). In short, there is “no third option” under the statute “whereby the corporation may obtain a judgment declaring certain shareholders are not entitled to appraisal after failing to perfect their appraisal rights.” Id.
The Court rejected RAI’s argument that perfection was a requirement “inherent” to (and therefore within the scope of) a judicial appraisal proceeding. The Court reasoned that although G.S. § 55-13-21(c) provides that a shareholder who votes in favor of a proposed corporate action “is not entitled to payment under this Article,” “only sections 55-13-30 and 55-13-31 deal directly with the subject matter of a judicial appraisal action, the trial court’s jurisdiction over that action, the required parties for such an action, and the relief the trail court may provide.” Id. ¶ 32. The more specific provision (section 55-13-30) and its clear instruction regarding the dissenters’ entitlement to a judgment in an appraisal proceeding therefore controlled. Id.
The Court also considered RAI’s (rather compelling) argument that:
“without a requirement that dissenting shareholders prove their entitlement to appraisal rights…, section 55-13-30 puts corporations in an impossible position of choosing to either comply with the procedures laid out by [the NC statutes] and bring a claim for judicial appraisal under section 55-13-30, thereby forfeiting the right to challenge a shareholders’ entitlement to appraisal, or to take a gamble by asserting that a shareholder is not entitled to appraisal, thereby risking any negative consequences that might follow should the corporation be incorrect, all without the benefit of discovery.” Id. ¶ 39.
The Court did not completely disagree with this line of reasoning, but observed that it was the function of the General Assembly, not the Court, “to make decisions based on such policy concerns.” Id. ¶ 40. Likewise, the Court declined to adopt the two-step process utilized by the Delaware Chancery Court – whereby the court first determined perfection, and proceeded second to determine fair value only if perfection was met. Id. ¶ 40. While noting that there was “much to commend about the clarity and simplicity offered by Delaware’s statute,” the Court reiterated that it could not “ignore the lack of any such statutory provision in North Carolina’s Business Corporation Act, nor [could] it create one on its own.” Id.
Finally, the Court further rested its decision on the fact that RAI never requested a judicial determination as to the dissenter’s appraisal rights. RAI had simply filed a “Complaint for Judicial Appraisal” seeking a determination as to the fair value of the dissenters’ shares, and “did not seek a judicial determination or declaration that [the dissenters] failed to perfect their appraisal rights and did not forecast [the dissenters’] perfection of rights as an issue for judicial determination in the parties’ Case Management Order.” Id. ¶ 45. Nor had RAI amended its complaint, after the issue of perfection was raised, to include a request for declaratory judgment as to the dissenters’ appraisal rights. Id. ¶ 46. Thus, even assuming that the statute allowed the Court to address the issue of perfection, “RAI’s failure to bring a claim for declaratory judgment, request other relief, or even plead facts showing the existence of a controversy as to [the dissenters’] perfection of appraisal rights would still place a determination regarding the [dissenters’] right to participate in this proceeding beyond the scope of the present case.” Id. ¶ 47 (citing N.C. R. Civ. P. 57 and N.C. R. Civ. P. 8(a)(1)).
In sum, based on the statute, the pleadings, and the late stage at which “perfection” had been raised, the issue of whether the dissenters had perfected their appraisal rights was outside the limited scope of the judicial appraisal proceeding. As such, any evidence relating to perfection was “irrelevant” and inadmissible at trial.
A Worldwide Covenant not to Compete May Someday Merit a Preliminary Injunction, but it Won’t Likely Come Soon in the N.C. Business Court.
By Bradley M. Risinger on September 8, 2019
Posted in Judge Conrad, Non-compete, Trade Secrets
Sometimes when seeking a trail of breadcrumbs to help unwind a twisty problem, one finds the whole loaf, instead. So it was for the N.C. Business Court in granting a preliminary injunction on a claim for misappropriation of trade secrets in Biesse America, Inc. v. Dominici, 2019 NCBC 50 (N.C. Super. Ct. Aug. 19, 2019). See Order and Opinion.
Trade Secret Misappropriation cannot be remedied by return of confidential information. N.C. Gen. Stat. § 66-155 is violated when a defendant acquires information it knew (or should know) is a trade secret.
A geographically unbounded covenant not to compete is not dead on arrival, but showing its rational tie to the employer’s business and the employee’s job is a “tall order.” 2019 NCBC 50 at ¶43.
Shortly before leaving a job with Plaintiff, Defendant Dominici “began making unusual requests for documents” containing confidential information, including sensitive purchase order forms, price lists and negotiated discounts. Id. at ¶10. In entering a temporary restraining order, the Court ordered the return of that information; Dominici complied, and also produced thousands of other electronic files to his former employer. Id. at ¶15.
Contained in that bevy of confidential information was a conveniently labeled “Opportunities” spreadsheet created by Dominici that recorded dozens of Plaintiff’s perceived business opportunities in the Pacific Northwest, an area Dominici did not supervise for Biesse but where he was expected to work for his new employer, Defendant SCM Group North America, Inc. Id. at ¶17. While the Court concluded such information was unneeded for Dominici’s work with Plaintiff, “it “had self-evident value for his next job.” Id. at ¶28. A tart footnote sealed the analysis:
As best the Court can tell, Dominici’s position is that he never intended to contact these customers but instead identified them so that he would know which customers not to contact during his employment with SCM America. Nothing in the record lends credence to this alleged motive[.] (emphasis in original).
Id. at n.1. Placing special emphasis on the purloined “opportunity” information, as well as another self-created “Masterfile” spreadsheet that contained Plaintiff’s stock inventory and sales price information, the Court found “substantial evidence” that Dominici acquired and used Plaintiff’s trade secrets in violation of N.C. Gen. Stat. § 66-155, and entered a preliminary injunction. Id. at ¶¶16, 32.
Dominici and his new employer argued that any harm to Plaintiff had been “cured” by the return of Plaintiff’s information in conjunction with the TRO, but the Court demurred, stating that “[t]his is simply not the law.” Noting the long-term effects associated with misappropriations, the Court affirmed the necessity of a preliminary injunction given Dominici’s acquisition of the information with intent to compete. Id. at ¶34.
Judge Conrad’s resolute findings on misappropriation did not color the Court’s plain rejection of a non-compete clause in Dominici’s employment agreement with Plaintiff. The Court found the clause had no geographic restrictions, essentially making it a worldwide covenant. The opinion noted that neither the Plaintiff, nor the Court of its own inquiry, had identified “any case in which a North Carolina court has granted a preliminary injunction to enforce a worldwide covenant not to compete.” Id. at ¶¶42-43. The Court found that the non-compete clause’s short duration of six months did not sufficiently balance its “boundless territorial scope.” Id. at ¶45.
The Court did not reach the issue of whether the non-solicitation clause was unenforceable. While the case’s early record was replete with references to Dominici’s acquisition of Plaintiff’s information with the intent to compete against it, the Court denied a preliminary injunction because “there is no evidence that Dominici has solicited [Plaintiff’s] customers.” Id. at ¶38.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP. He maintains a commercial litigation practice that frequently involves business disputes before the North Carolina Business Court, and the state’s federal and state trial courts.
Don’t Fence Me In Again
By Craig Turner on September 6, 2019
Posted in Closely Held Business, Derivative Actions, Judge Conrad, Standing
N.C. Business Court Refuses to Allow Member-Managers to Assert Contract Claims Belonging to their LLC.
In its second opinion in Bennett v. Bennett, 2019 NCBC 45 (N.C. Super. Ct. Aug. 6, 2019), the Business Court denied Plaintiff Bert Bennett’s motion to dismiss a breach of contract claim by an LLC, but granted his motion to dismiss the same claim by three of its member-managers for lack of standing – even though the individuals were parties to the contract at issue. See Order and Opinion.
A Takeaway:
A member of an LLC who is a party to an Operating Agreement lacks standing to sue for its breach when the legal injury asserted belongs solely to the LLC.
This case involves a dispute between sibling members of Bennett Linville Farm, LLC (“Bennett Farm”), a real estate company created to facilitate estate planning of the parties’ parents. Plaintiff Bert Bennett (along with Terry Bennett, who is no longer a party) alleged that Defendants Graham, Ann, and Jim Bennett gained control of the company to the exclusion of the other sibling members, and nearly all actions they took were unauthorized. A prior post describes the nature of Plaintiffs’ claims. See Don’t Fence Me In (Aug. 12, 2019).
Through counterclaims, Defendants Graham, Ann, and Jim Bennett allege the following: they are the managers of Bennett Farm; a majority of the managers may order capital contributions from the company’s members pursuant to its Operating Agreement; the managers authorized seven capital calls over a two-year period; Plaintiff Bert’s total share of the contribution was about $380,000; and Bert failed to pay it. These individual member-managers (and the LLC under their direction) seek an order directing Bert’s capital payment to Bennett Farm.
The Court questioned whether it had subject matter jurisdiction over the member-managers’ claim. The general rule is that members of an LLC cannot pursue individual causes of action against third parties for wrongs or injuries to the company. Op. ⁋ 4 (citing Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 335 (2000)).
Defendants Graham, Ann, and Jim argued they have standing to enforce the Operating Agreement because they are parties to it.
In response, the Court looked to the terms of the Operating Agreement alleged to be in force. It makes clear that members who fail to make required capital contributions are to be liable “to the Company.” Op. ⁋ 5.
While the Court noted that some operating agreements may be crafted to support actionable individual claims like these, Op. n.3, this Operating Agreement did not do so. It dismissed the member-managers’ individual claims. The company’s breach of contract claim survived dismissal.
N.C. Business Court Remains Suspicious of a Chapter 75 Claim Involving Internal Corporate Strife, But Allows the Claim to Survive the Pleadings Stage
By Bradley M. Risinger on September 2, 2019
Posted in Judge McGuire, Unfair & Deceptive Trade Practice
The Business Court tentatively waded back into its well-settled case law that tends to scold litigants who try to convert internal company disputes into unfair trade practice claims in Constr. Managers, Inc. v. Amory, 2019 NCBC 31, 2019 WL 2167311 (N.C. Super. Ct. May 17, 2019). In doing so, the Court denied much of the defendant’s motion to dismiss the Amended Complaint. See Order and Opinion.
The Business Court still thinks that a Chapter 75 claim is not the right vehicle for addressing shareholder disputes, disagreements among company members and other issues of internal management or strife.
The Court is likely to continue its vigilance policing Chapter 75 counts so that cases are not unnecessarily burdened by illusory claims that threaten great damages.
Only limited factual allegations that allege events beyond the confines of a single market participant may be needed to meet the “in or affecting commerce” standard.
The defendant provided accounting and bookkeeping functions for an integrated set of plaintiffs that were in the business of building, leasing, and managing clinics for the U.S. Department of Veterans Affairs. Id. at ¶¶ 2-3, 13. Before leaving to join a construction consulting firm, the Amended Complaint alleges Amory downloaded a raft of confidential and trade secret information and emailed some to one of plaintiffs’ former employees. Id. at ¶¶ 15, 17-18.
Plaintiffs’ claim under N.C. Gen. Stat. § 75-1.1 led the court to confront an issue it has addressed repeatedly in the last several years: is the conduct alleged “in or affecting commerce,” as required by the statute, or is it an “intra-company feud about internal operations” for which there is other, more appropriate legal recourse. Brewster v. Powell Bail Bonding, Inc., 2018 NCBC 74, 2018 WL 3603023, at *6 (N.C. Super. Ct. July 26, 2018) (Judge Conrad). See Order and Opinion. Construction Managers, Brewster and a host of other Business Court opinions have examined the issue within the North Carolina Supreme Court’s guidance in White v. Thompson, 691 S.E.2d 676, 679-680 (N.C. 2010) that § 75-1.1 regulates “a business’s regular interactions with other market participants” and not the “internal conduct of individuals within a single market participant.”
Plaintiffs complained that Amory was using their trade secrets to compete against them, but failed to describe how he was competing, and failed to assert that Amory had disclosed trade secrets to his new employer. Construction Managers, at ¶ 80. Moreover, plaintiffs essentially conceded that their fears about improper competition were prospective. Amory, plaintiffs claimed, “could begin to unfairly compete” with them, and was “preparing to cause” them significant damages by using the illegally obtained information. Id. at ¶ 81. The Court even found that plaintiffs’ general allegations of competition didn’t allege specific facts that were sufficient, under White, to remove it from fact patterns “contained solely within a single business.” Id. at ¶ 82.
Yet, the Court “reluctantly conclude[d]” that as a matter of notice pleading, the Chapter 75 claim survived a motion to dismiss because it was “barely sufficient to provide Amory with sufficient notice of the nature of the claim to withstand Amory’s motion to dismiss.” Id. at ¶ 83. Thus, the Court held that it was sufficient under Chapter 75 for the plaintiffs to claim – generally – that Amory was unfairly competing against them, without alleging facts regarding any of “the events or transactions which produced the claim to enable the adverse party to understand the nature of it and the basis for it[.]” Spoor v. Barth, 811 S.E.2d 609, 612 (N.C. Ct. App. 2018).
Construction Managers is a tenuous fit in the Business Court’s “in or affecting commerce” jurisprudence. The Court has regularly dismissed Chapter 75 claims that purport to center on shareholder disputes, disagreements among company members and other issues of internal management or strife. Conflating these events into unfair trade practice claims is, the Court has held, “a regrettable trend in North Carolina business litigation.” Brewster, 2018 WL 3603023 at *6. Indeed, the Court has gone out of its way to intentionally put a fine a point on the point:
By now, the message should be clear: section 75-1.1 plays no role in resolving these internal corporate disputes. Yet time and time again, section 75-1.1 appears where it does not belong, with consequences that are significant and unhealthy. The routine addition of section 75-1.1 claims in these cases invites avoidable motion practice – driving up the cost of litigation, taxing the resources of the Court, and exposing the plaintiff to a potential award of attorney fees under section 75-16.1. It also impedes settlement discussions by introducing remedies (including treble damages) that would otherwise be unavailable, thereby distorting the parties’ incentives and their perceived risks.
Id. at *7. Construction Managers cites the letter of the Court’s Chapter 75 doctrine on the types of claims it feels are within the statute, but slightly disclaims its spirit. Here, the barest pleading nudge by the plaintiffs – unsupported by facts regarding defendant Amory’s purported competition against them – was enough to survive characterization as an “internal business matter” that would doom an unfair trade practice claim. It’s by no means a Chapter 75 doctrinal sea change for the Court, but it foretells a decision or two down the line that address attempts to salvage wounded claims with the “notice pleading” life raft extended in Construction Managers.
N.C. Business Court Affirms the Assignability of MedPay Benefits to Treating Hospitals and Reminds Litigants to Direct Appeals to the Proper Court
By Bradley M. Risinger on August 27, 2019
Posted in Appeals, Health Care, Judge Gale
In a series of recent opinions in Justice v. Mission Hospital, Inc., the Business Court dismissed claims that MedPay benefits were improperly routed to a treating hospital, dismissed the appeal of the dismissal, and dismissed the appeal of the dismissal of the appeal. First, the Court dismissed a purported class action on behalf of the Plaintiffs who complained that the medical payments coverage (“MedPay”) under their automobile insurance policy was improperly directed to the hospital where they were treated, rather than to them. See 2019 NCBC 21 (N.C. Super. Ct. Mar. 27, 2019). Second ,after the Plaintiffs directed their Notice of Appeal to the Court of Appeals instead of the North Carolina Supreme Court (as required by statute), the Court reluctantly reaffirmed its 2018 ruling in a similarly postured case that a trial court does not have authority to address such a jurisdictional defect. The Plaintiffs’ misdirected appeal was dismissed, with their only recourse to seek discretionary review from the Supreme Court. See 2019 NCBC 36 (N.C. Super. Ct. Jun. 5, 2019). Third, Plaintiffs timely appealed the Court’s dismissal of its first appeal, and the Business Court dismissed it, too, finding that the Court of Appeals was not vested with jurisdiction in such circumstance. See 19 NCBC 52 (N.C. Super. Ct. Aug. 21, 2019).
The Business Court holds that MedPay benefits may appropriately be considered “health insurance” and can be assigned to a treating entity.
The Business Court reaffirmed that clients and counsel need to be vigilant about directing appeals to the North Carolina Supreme Court in cases filed after October 1, 2014.
Plaintiffs were involved in an automobile accident, and were brought to defendant Mission Hospital for treatment. 19 NCBC 21 at ¶7. As part of a Consent to Treatment/Financial Agreement executed contemporaneously with treatment, the Plaintiffs assigned all “liability and health insurance benefits” to the provider. Id. at ¶10. The carrier paid out three checks to the provider constituting the limits of the subject MedPay. Id. at ¶14. The Plaintiffs objected that these payments were made without them being consulted. Even if their obligations to the provider exceeded the MedPay, Plaintiffs felt the money was theirs to control and pay out, if they chose, at their discretion. Id. at ¶30.
The Court ruled that the MedPay benefits were “unambiguously” assigned under the agreement executed by the Plaintiffs. Id. at ¶35. The Court was unable to conclude that MedPay could be considered “liability insurance” under the Agreement, but it had no trouble deciding that it was “clearly and unambiguously” considered “health insurance.” Id. at ¶41. As the Court noted, “MedPay coverage is first-party coverage where one seeks to provide coverage for injury irrespective of fault and liability.” Id.
Plaintiffs also contended they could not assign their MedPay payments because of an anti-assignment clause in their policy with the insurance carrier. The Court noted this was an issue of first impression in North Carolina as it related to MedPay. Id. at ¶49. The Court dismissed the challenge because such clauses are interpreted to benefit the carrier, and do not prevent assignments after a loss has occurred. Id.
The Court did not tread new ground in dismissing Plaintiffs’ misdirected appeal. Indeed, it took “no pleasure in doing so.” 19 NCBC 36 at ¶19. But, N.C. Gen. Stat. § 7A-27(a)(2) requires appeals from final judgments in cases designated as a mandatory complex business case to be directed to the North Carolina Supreme Court, not the Court of Appeals. Judge Gale did the analytical work on the issue the previous year in Zloop, Inc. v. Parker Poe Adams & Bernstein. See 2018 NCBC 39 (N.C. Super. Ct. Apr. 30, 2018). Citing his opinion in Zloop, Inc., Judge Gale put it frankly: “The Court here again concludes it must dismiss the appeal, even though the jurisdictional defect was clearly inadvertent and the record would allow for no finding that Defendant was surprised as to the matter being appealed from or otherwise suffered prejudice.” 19 NCBC 36 at ¶2.
This issue has attracted attention and discussion in the state’s appellate Bar. Our colleagues at the North Carolina Appellate Practice Blog have discussed the application of Rule 3 of the North Carolina Rules of Appellate Procedure, if it should be amended, and whether the Notice of Appeal rule interpreted and applied in these cases is truly jurisdictional. See Zloops! Another Rule 3 Dismissal (June 6, 2019); When Is a Deadline or Other Requirement for Filing a Notice of Appeal Jurisdictional? (State Edition) (May 3, 2018).
Plaintiffs’ second appeal challenged whether the Court had the authority “to dismiss a second appeal that seeks appellate review of its earlier order dismissing a first appeal.” 19 NCBC 52 at ¶4. In an exchange worthy of a fancy flow chart:
Plaintiffs argued that App. Rule 25 only applies to instances of untimely appeal filings; and
The Business Court held that Court of Appeals cases deciding issues of untimely filings under App. Rule 25 compelled a finding that no appellate jurisdiction vests from a notice of appeal of an order dismissing an appeal.
Id. at ¶¶5-8. As in last year’s Zloop decision, the Court found that “where a record on appeal has not been filed, the trial court has power to dismiss a timely notice of appeal that is jurisdictionally defective.” Id. at ¶10.
By Craig Turner on August 14, 2019
Posted in Amended Pleadings, Business Court Designation, Equitable Estoppel, Fraudulent Misrepresentation, Illegal Contracts, Judge Robinson, Motion to Strike, Negligent Misrepresentation, Partnership Agreement, Rule 41 Dismissal, Subject Matter Jurisdiction
Mr. Rabinowitz (Plaintiff) and Ms. Suvillaga (Defendant) carried on a romantic relationship for about ten years. They began a dating in Spring Valley, New York in 2006. When Ms. Suvillaga got a job about two hours away, Mr. Rabinowitz purchased an apartment for Ms. Suvillaga to use. Ms. Suvillaga paid for rent and utilities.
In 2015, Mr. Rabinowitz wanted to move to North Carolina. After the couple ventured to Wilmington to tour homes, Mr. Rabinowitz purchased one. He allegedly told Ms. Suvillaga that after the move, she would not have to work again, she could live with him forever, and he would leave her money and the Wilmington property in his will. Ms. Suvillaga quit her job, and the couple moved south. Ms. Suvillaga alleged that the parties “expressly formed a contract that obligated [them] to act as if they were married,” but, after the move, Mr. Rabinowitz ended the relationship abruptly.
Thanks to Ashley Oldfield, Fox Rothschild summer associate, for her work on this post.
By Craig Turner on August 12, 2019
Posted in Closely Held Business, Dissolution, Fiduciary Duties, Judge Conrad, Meiselman Duties, Standing
N.C. Business Court Declines to Impose Fiduciary Duties among Sibling Managers of an LLC and Declines to Extend Any “Control Group” Exception to LLCs, but allows Dissolution Claim to Survive, which Creates a Possible Ruling on Meiselman’s application to LLCs.
In Bennett v. Bennett, 2019 NCBC 18 (N.C. Super. Ct. Mar. 15, 2019), Judge Conrad considered a dispute between two groups of six siblings who are current or former members of family-owned real estate company. The case pits Plaintiffs Bert and Terry Bennett against four of their siblings, Defendants Graham, Ann, Jim, and Louise Bennett, for their alleged improper actions concerning Bennett Linville Farm, LLC (“Bennett Farm”), which the parties formed with their parents to facilitate the latter’s estate planning. The Court granted the controlling group’s motions to dismiss certain breach of fiduciary duty claims and constructive fraud claims, but denied the group’s motions to dismiss a claim for judicial dissolution. See Order and Opinion.
Infringement of an LLC member’s voting rights (including the right to elect managers and the residual right to vote in the absence of proper managers) is a distinct harm and supports a direct claim against fellow members.
Dilution of an LLC member’s relative ownership interest is a distinct harm to the member which can confer standing.
Judge Conrad held that a group of minority LLC members alleged to exercise control of the company did not owe fiduciary duties to minority members, and he is reluctant to grant such rights when minority members fail to include them in the operating agreement.
Judge Conrad did not dismiss an LLC member’s assertion of Meiselman claims in the LLC context because it would be “prudent” (at this juncture) to address the issue after discovery.
Plaintiffs allege that Defendants Graham, Ann, and Jim gained control of the company to the exclusion of the other sibling members and nearly all actions they took were unauthorized. Plaintiffs assert direct claims against Defendants Graham, Ann, and Jim, alleging they conspired to control the company; that they fraudulently amended the operating agreement to consolidate their control; and that they engaged in unauthorized activity. Defendants Graham, Ann, and Jim moved to dismiss, challenging Plaintiffs’ standing and the merits of their claims. Plaintiffs dismissed their monetary demands against Louise, but kept her in the case as a necessary party.
For years, the siblings owned an equal share of Bennett Farm. The Plaintiffs alleged that the limited liability company was designed to be member managed. The original Operating Agreement, however, required management by certain managers listed on its Schedule II, or by others elected by the membership. Plaintiffs allege the Operating Agreement included no Schedule II when executed, and no managers were ever elected. They further allege that Defendants Graham and Ann were later listed on a document labeled as Schedule II, but without membership approval.
Amended Operating Agreement
Plaintiffs allege that in 2010, Defendants Graham, Ann, and Jim amended the Operating Agreement without the knowledge of the other members, and made significant changes. The Amended Operating Agreement:
designated Jim as a third manager,
authorized the managers to make capital calls without member consent, and
permitted Bennett Farm to redeem any member’s interest upon the consent of members owning at least 75% of the company.
While Plaintiffs acknowledged that they executed the signature page for the Amended Operating Agreement, they allege they did so without seeing the document and as a result of brother Graham’s trickery.
In 2012, the Bennett parents’ ownership interest in Bennett Farms passed to their children, leaving the six siblings in sole ownership. Thereafter, a seventh Bennett sibling (John) granted Bennett Farm a right of first refusal to his 35-acre tract at the request of Defendants Graham, Ann, and Jim. When he requested termination of the right, conflict erupted.
Plaintiffs Bert and Terry (together with Nominal Defendant Louise) claimed they knew nothing of Bennett Farm’s purported acquisition of brother John’s property right, but they would have granted it. Defendants Graham, Ann, and Jim disagreed and, “claiming managerial authority, decided to exercise and enforce the right of first refusal even in the absence of majority approval of the members.” Op. ⁋ 10.
Plaintiffs allege that Defendants Graham, Ann, and Jim used the controversy to force sister Plaintiff Terry out. Graham allegedly informed Terry that she would have to make a capital contribution of over $100,000, or she could sell her interest to the other siblings. Terry alleges she could afford a capital contribution only with access to a trust fund, for which Defendant Ann served as trustee. Ann allegedly refused to assure Terry that she could dip into the fund for the contribution. Thereafter, Terry sold her interest to the five sibling owners remaining.
Nominal Defendant Louise (allegedly weary from the conflict) sold her ownership interest to the remaining sibling owners in 2018, giving Defendants Graham, Ann, and Jim a combined 80% of the company, and leaving Plaintiff Bert with the remaining 20%.
Plaintiffs Bert and Terry alleged that Defendants Graham, Ann, and Jim breached their fiduciary duties to them as fellow LLC members. Defendants argue Plaintiffs lack standing and the claim lacks merit.
Plaintiffs Alleged Sufficient Distinct Harm to Confer Standing.
The Court held that Plaintiffs Bert and Terry alleged distinct injuries so as to confer standing.
Barger v. McCoy Hillard & Parks, 36 N.C. 650, 658 (1997), provides the rules for shareholder standing for corporations. These rules apply “equally to LLCs.” Op. ⁋ 24. While normally, “shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution … of the value of their stock,” Barger’s exceptions allow direct claims when members are owed a special duty, or if the injury is separate and distinct from the harm to other shareholders or to the corporation. Op. ⁋ 24 (citing Barger, 36 N.C. at 659).
Plaintiffs alleged that Defendants deprived them of their voting rights, which include the right to elect managers and the residual right to vote in the absence of proper managers. The Court held that infringement of the voting right is a distinct harm and the subject of a direct claim.
Plaintiffs alleged additional harm to support standing. Plaintiff Terry properly alleged distinct harm caused by Defendant Graham’s alleged wrongful inducement that she sell her ownership interest. Plaintiff Bert properly alleged distinct harm caused by the alleged improper sale of Nominal Defendant Louise’s membership interest, which diluted Bert’s relative share. Op. ⁋ 27 (citing Corwin v. British Am. Tobacco PLC, 821 S.E.2d 729, 735-36 (N.C. 2018) (corporations case)). (See Blog Post Smoke ’em if You Got ’em, dated June 2, 2019).
Plaintiff Alleged Insufficient Facts to Impose a Fiduciary Duty.
While Plaintiffs had standing, their claims based on Defendants’ corporate actions failed on the merits.
Fiduciary Duties Excluded By Operating Agreement
Generally, LLC members do not owe fiduciary duties to each other or to the company. Perhaps because of that rule (and because the original Operating Agreement disclaimed fiduciary duties concerning its members), Plaintiffs based their claim on other factors: the sibling relationship and their disparate business acumen.
The Court had no trouble dispensing with the claim. The Court questioned whether a fiduciary duty could attach in light of the original Operating Agreement’s express language precluding it. But, the Court did not have to decide that issue because the allegations failed to show the requisite control needed. Under North Carolina law, a fiduciary duty can arise only when one party “holds all the cards.” Op. ⁋ 32. As no individual sibling was alleged to wield all the power in the company, no fiduciary duty could attach. Id.
No Control Group Exception for LLCs
You may wonder: could the collective interest of the Defendant siblings form a control group that owes a fiduciary duty to a minority member? When Terry liquidated her membership interest, Defendants Graham, Ann, and Jim together owned more than 50% of the company. They could use their collective interest against Plaintiff Bert, a minority owner.
The Business Court has recognized the possibility that multiple minority shareholders in a corporation who act in concert to control the corporation may owe a duty to a minority shareholder. See, e.g., Brewster v. Powell Bail Bonding, Inc., 2018 NCBC 74, *19-32 (N.C. Super. Ct. Jul. 26, 2018) (Judge Conrad).
(In Brewster, Judge Conrad cited the Court of Appeals decision in Corwin v. British Am. Tobacco PLC, in which the Court determined that a minority shareholder of a corporation exercising actual control may owe a fiduciary duty to other shareholders. See 796 S.E.2d 324 (N.C. Ct. App. 2016). When the North Carolina Supreme Court considered the issue in the Corwin appeal, it left the matter undecided. (See Blog Post Smoke ’em if You Got ’em, dated June 2, 2019).)
Judge Conrad noted that some recent Business Court cases “have stated that a holder of a majority interest who exercises control over the LLC owes a fiduciary duty to minority interest members.” Op. ⁋ 35 (citing Fiske v. Kieffer, 2016 NCBC 22, ⁋ 35) (N.C. Super. Ct. Mar. 9, 2016) (emphasis added) (Judge McGuire)). But, he also noted that the “scope of the [control group] exception … remains unsettled” and that “[t]his Court has cautioned against a broad application because of the fundamental differences between LLCs and corporations.” Id. Minority members of LLCs have “much greater” ability to negotiate for protections in the operating agreement. Id. Thus, “this Court has routinely refused to extend the control group exception to LLCs.” Id.
Judge Conrad was unwilling to grant such a right here. He determined that Defendants Graham, Ann, and Jim owed no fiduciary duty to Plaintiffs for their actions related to Bennett Farm.
Plaintiffs also seek judicial dissolution of Bennett Farm. They argue it is not practicable to conduct business in conformance with the operating agreement and governing statutes, and liquidation is necessary to protect their rights and interests. They seek dissolution based on the frustration of their reasonable expectations (rights enjoyed by shareholders of closely held corporations). See Meiselman v. Meiselman, 309 N.C. 279, 299 (1983).
The Court held that Plaintiff Terry lacks standing to seek the remedy because she is no longer a member of Bennett Farm.
But, Plaintiff Bert remains a member. If he develops evidentiary support for his claims, a jury might face “thorny questions” about the company’s ability to bring itself into compliance with its operating agreement after a decade of what would be unlawful management. The Court did not state whether Meiselman’s dissolution standards would apply to LLCs. It decided it would be “prudent” (at this juncture) to address the issue after discovery. Op. ⁋ 70 (citing Pure Body Studios Charlotte, LLC v. Crnalic, 2017 NCBC LEXIS 98 ⁋ 27-8 (N.C. Super. Ct. Oct. 18, 2017) (Judge Robinson)).
This leaves open the possibility that the Court could apply Meiselman in the LLC context.
Love May Make a Subaru a Subaru, but Title is Still Required to Claim It.
By Bradley M. Risinger on August 5, 2019
Posted in Defenses, Fraudulent Conveyance, Judge Bledsoe, Judgment on the Pleadings
N.C. Business Court Rejects Novel Fraudulent Conveyance Defense Which Offered Up Assets of Allegedly Drained Entity.
The N.C. Business Court has issued three rulings this summer on the pleadings in Willard v. Barger, 19 CvS 182 (Davie County). See 2019 NCBC 42; 2019 NCBC 33; 2019 NCBC 30. Most recently, the Court granted Plaintiffs’ Rule 12(c) motion on a cleverly worded affirmative defense that attempted to navigate around Plaintiffs’ claims for fraudulent conveyance. See 2019 NCBC 42 at ¶¶4-5.
The Business Court did not hesitate to grant judgment on an affirmative defense cast as a narrative that failed to meet what the Court viewed as the substance of Plaintiffs’ claim.
The two proper methods to challenge the sufficiency of an affirmative defense are a motion for judgment on the pleadings under Rule 12(c) and a motion to strike under Rule 12(f).
The Court rejected a conversion claim brought by a party that did not own the asset allegedly held improperly by the opponent.
The Complaint alleged a business arrangement under which Charles Willard and Tracy Barnes formed and owned Tracy Barnes Blimp Works, LLC (“Barnes Blimp Works”), a venture in which Willard would ultimately assume 100 percent ownership after Barnes died. After a disagreement and failed attempt to buy out Willard, allegedly, Barnes and a colleague impermissibly transferred the assets of Barnes Blimp Works to a new entity, Blimp Works, Inc. (“BW”), to Willard’s detriment.
Defendants asserted as an affirmative defense that after Barnes’ death, the Defendants offered to deliver to Willard the assets of Barnes Blimp Works which Willard claims were fraudulently converted. Moreover, Barnes Blimp Works was “hopelessly insolvent.”
Plaintiffs sought judgment on the defense under Rules 12(c) and 12(b)(6). The Court determined that Rule 12(b)(6) did not apply. But, Rule 12(c) was proper to challenge an affirmative defense (as is Rule 12(f)).
In granting the Plaintiffs judgment as to the defense, the Court noted that Defendants’ position “misses the point” of Plaintiffs’ claim that Barnes and his partner impermissibly transferred the assets of Barnes Blimp Works to an entity in which Plaintiff Willard had no interest. Id. at ¶¶ 10-11. Defendants’ heads I win, tails you lose offer of Barnes Blimp Works’ existing assets failed to confront, the Court said, that “Plaintiffs seek to recover from Defendants any assets that [it] previously possessed but which were fraudulently conveyed … without adequate consideration.” Id. at ¶11 (emphasis added).
Earlier in the year, the Court denied Plaintiffs’ Motion for a More Definitive Statement of Defendants’ Second Counterclaim (2019 NCBC 30) and granted Plaintiffs’ Motion to Dismiss Defendants’ Conversion claim (2019 NCBC 33).
In a May 14, 2019 order, the Court allowed a six-paragraph counterclaim to survive, which alleged that the decedent defendant had advanced in excess of $300,000 in loans to one of the Plaintiffs. Plaintiffs’ lament that the claim failed to allege an immediate right of payment or written evidence of the loan was unavailing, the Court found, under the liberal pleading requirements of Rule 8. 19 NCBC 30 at ¶¶ 4, 11. The fact that the Plaintiff answered the counterclaim contemporaneously with its motion to further define it, showed it “was able to sufficiently comprehend” the counterclaim. Id. at ¶11.
In a May 29, 2019 ruling, the Court dismissed what amounted to Defendants’ misdirected counterclaim for recovery of a 2014 Subaru automobile (19 NCBC 33). The decedent Defendant’s Estate moved to recover the car, but conceded in a pleading that the car was actually owned by Defendant BW. Id. at ¶12. The Court found it unavailing that the estate controlled all of the shares of BW. That, the Court said, “may give the Estate the practical ability to control BW’s affairs, including the disposition of BW’s assets, but ownership in BW’s shares does not equate to direct ownership in BW’s assets.” Id. at ¶14. Thus, it may be love that makes a Subaru a Subaru, but it is still undisputed title that allows you to claim it.