Did It Need To Be In Writing?

Surratt v. Brown, 2015 NCBC 72, decided last week by the Business Court, involved an oral partnership to open and operate tattoo parlors throughout North Carolina.

Plaintiff and Defendant entered into an partnership (without any written agreement) to open a tattoo parlor in Winston-Salem.  Defendant Brown was to finance the business for a 30% share of the profits; Plaintiff Surratt was to open and operate the business for a 70% share.

The parties later orally agreed to expand their tattooing business by opening additional retail locations in which they would each have a 50% interest.  The new shops, according to Plaintiff, were to carry the "name. concept, design, and intellectual property developed" by Plaintiff in connection with the first store.  Op. ¶28.

Over the next few years, Defendant Brown opened several new new North Carolina tattoo shops: in Greensboro, Greenville, Jacksonville, and Fayetteville.  Surratt sued Brown over the new stores, alleging that he was entitled to an ownership interest in them.

Did The Agreement Need To Be In Writing?

Even if you are fascinated by tattoos, there is not much of interest in the Surratt decision.  It's mostly about whether Plaintiff's claims were barred by the statute of limitations, but there are a couple of interesting tidbits about Section 75-4 of the General Statutes, which requires that certain types of contract be in writing, and also one about conversion.  That statute says that:

No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory.

N.C. Gen. Stat. §75-4 (emphasis added).

The Defendant said that the claimed unwritten promise that he would not open other tattoo shops in North Carolina was unenforceable per Section 75-4 because it limited his right to be in the tattoo business in North Carolina.

Judge Gale, relying on a Fourth Circuit decision, said that:

where an oral agreement merely concerns the use of intellectual property, section 75-4 may not apply so long as other terms do not 'substantially' limit the party's right to do business.

Op. ¶31 (citing Ashley Furniture Indus. v. Sangiacomo, N.A., 187 F.3d 363, 378 (4th Cir. 1999)).

Judge Gale observed that "Plaintiff's narrowed description of the agreement does not prohibit [the Defendant] from operating in the tattoo and piercing industry without [the Plaintiff] so long as [the Defendant] does not utilize the name, concept, or related intellectual property created pursuant and subject to the agreements between the parties."  Op. ¶32.

Given the early stage of the case (this was a Motion to Dismiss), Judge Gale ruled that it was "premature to determine whether the agreement under which Plaintiff seeks to recover must be in writing in order to be enforceable."  Op.  ¶32.

You Cannot Convert A Partnership Interest

On Plaintiff's conversion claim, which asserted that the Defendant had converted the profits of the Partnership as well as Plaintiff's Partnership interest and his management rights, Judge Gale wrote that:

[a[lthough the law is unclear as to the dividing line between tangible and intangible property in some instances, it is clear that only goods and personal property are subject to a conversion claim: intangible interests, such as business opportunities or expectancy interests are not subject to conversion.

Op. ¶33 (emphasis added).

The Judge ruled that only the property interests of profits and distributions were subject to a conversion claim.  Thus, Plaintiff's conversion claim for "his right to partnership property, his business interest in the LLC/Partnership, and his right to participate in management of the LLC/Partnership" was intangible and not an appropriate conversion claim.  Op. ¶34.

 

 

 

Hotels.com And Other Online Travel Vendors Don't Have To Pay Occupancy Taxes To North Carolina Counties

It's hard to like the result in Wake County v. Hotels.com, LP, 2012 NCBC 61.  The case is a consolidation of cases brought by several North Carolina counties (Mecklenburg, Wake, Dare, and Buncombe) against Hotels.com and other internet travel sites (like Orbitz.com, priceline.com, and travelocity.com).  Hotels.com, the first named Defendant, is an online booking service that promises the lowest available rates for a multitude of hotels.

The NC County Plaintiffs allege that Hotels.com and the other Defendants contract with hotels for rooms at a discounted rate, and then sell the rooms to consumers at a higher rate.  Their beef is over the non-payment by hotels.com of the Occupancy Tax ordinarily paid by hoteliers.  They allege that Hotels.com and the other Defendants charge their customers for tax at the higher rate at which the hotels actually sell the room, but then only remit taxes based on the discounted rate they pay the hotel operator.

What happens to the difference?  Hotels.com and the other Defendants pocket it.  Shouldn't they pay the excess collected to the counties or the North Carolina Department of Revenue?  The Counties thought so.

But the upshot of Judge Murphy's decision in the Wake County case is that the Counties had no cause of action against the Defendants.  He granted summary judgment in favor of the Defendants.

The why of it took 30 pages of statutory analysis of North Carolina's taxation scheme.  The Occupancy Tax is not contained in the General Statutes.  Instead, the General Assembly passed statutes authorizing counties to levy an Occupancy Tax.  The counties levy the Occupancy Tax via resolutions or ordinances.

So the cases turned on the counties' ordinances, and upon whom they placed the obligation to collect the tax.  In Mecklenburg and Wake Counties, it was the "operator of a taxable establishment."  In Dare and Buncombe Counties, it was the "operator of a business subject to a room occupancy tax."

Judge Murphy concluded that the Defendants were not responsible for collecting the Occupancy Tax.  If you are curious about how he reached that conclusion -- and you must be a state taxation junkie if you are -- you can read about it in Paragraphs 33 through 53 of the Opinion.

Other Interesting Things About This Opinion

For those of you who aren't enamored  by the Occupancy Tax, you might find interesting Judge Murphy's discussion of Rule 8 of the North Carolina Rules of Civil Procedure and his disposition of a conversion claim.

 

 Rule 8

Rule 8 is titled "general rules of pleadings."  It requires that a pleading 'give[] sufficient notice 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 . . . ."  Op. Par. 58 (quoting Sutton v. Duke, 277 N.C. 94, 104, 176 S.E.2d 161, 167 (1970)).

The County Plaintiffs said that their complaints set forth a theory of liability that the Defendants had contractually undertaken to collect the Occupancy Tax and were therefore liable to pay it.  Judge Murphy disagreed, stating that:

the Court can not find any allegation within the Complaints that would provide sufficient notice to Defendants that Plaintiffs' claims were based on a theory that Defendants were liable for collection of the Tax because of the contracts Defendants entered into with the hotel providers.  Accordingly, the Court concludes that Plaintiffs failed to provide 'sufficient notice 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.'

Op. Par. 60.

About The Conversion Claim

You might think that this case is tailor made for a conversion claim.  As Judge Murphy observed "[w]hen a plaintiff has alleged the wrongful possession of money, courts have held that 'the general rule is hat "money may be the subject of an action for conversion only when it is capable of being identified and described."'" (quoting Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 723 S.E.2d 744, 747 (N.C. 2012).

The thing that tripped up the counties' conversion claim was their inability to identify the funds which they said had been converted.  Judge Murphy didn't buy that an allegation of a difference between the amount of Occupancy Tax taken by the Defendants and the amount remitted was a sufficient identification. 

He placed an almost impossible burden on the Counties, suggesting that they point to evidence "that identifies: (1) the accounts from which the allegedly converted funds were derived, (2) the accounts to which he funds were transferred, or (3) the specific amounts that were sent and received."  Op. 85.

There's no telling how much money the Counties contend was withheld from them -- the Opinion doesn't say -- but it's undoubtedly enough to make an appeal worthwhile.

The Fourth Circuit has weighed in on a similar dispute, in a case brought against Hotels.com and other Internet sites by Pitt County.  I wrote about that way back when (in January 2009).