Unfair & Deceptive Practices

The managing member and president of an LLC could not be liable for tortious interference with contract for firing the Plaintff. "A party to a contract, including the party’s managing agent, cannot be liable for wrongful interference of the contract." The defendant was not an outsider to the contract, and therefore could not be liable for wrongful interference for firing the Plaintiff

The Court dismissed Plaintiff’s unfair and deceptive practices claim, ruling that it was outside the scope of the statute because it involved securities claims and employer-employee relations.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

The Business Court, relying on the Court of Appeals decision in White v. Thompson, dismissed an unfair and deceptive practices claim brought by an LLC member who claimed that another member and manager had usurped Company opportunities and converted Company assets.  It held that there was no assertion that the defendant’s "actions had any impact in the broader marketplace" and that dismissal was therefore appropriate.

Full Opinion

A parent corporation can, under certain circumstances, be liable for the actions of its subsidiary under a conspiracy theory, notwithstanding the doctrine of intracorporate immunity.

This opinion summarizes prior law in North Carolina — consisting of six cases — addressing the doctrine of intracorporate immunity in the context of a claim for civil conspiracy under North Carolina law. 

The Court nevertheless dismissed the claim in this case, stating that 

"if plaintiffs were allowed to sue parent entities whenever the decision to cause a subsidiary to act in a certain manner originated with the parent, it ‘would increase litigation costs and deter the use of subsidiaries, even when there is a legitimate purpose for doing so and there is no wrong to others in being forced to look only to the subsidiary for relief.’"

The Court also dismissed an unfair and deceptive practices claim, even though Plaintiff had alleged that the Defendants had never intended to honor the contract at issue.  The Court said the Plaintiff had failed to allege any facts in its Complaint to support this assertion, and that it was "nothing more than an ‘unwarranted deduction[] of fact’ that the Court need not accept."

Judge Diaz also rejected other arguments by the Plaintiff that it said would support an unfair and deceptive practices claim, including arguments that (1) the Defendants had owed fiduciary duties to the Plaintiff, (2) the Defendants had "inequitably asserted their position of power over Plaintiff," and (3) the unilateral price increases amounted to conversion.

The Court ruled that there was nothing before it other than a breach of contract, and it relied on settled law that "a mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under" the unfair and deceptive practices statute. 

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

The Court dismissed unfair and deceptive trade practice claims in a dispute among doctors based on the "learned profession" exemption and because the dispute was not "in commerce." 

Plaintiff alleged that her partners had forced her out of their medical practice.  Judge Tennille (in a very short order), held that "North Carolina Appellate Courts have historically broadly interpreted the learned profession exemptions to the North Carolina Unfair and Deceptive Trade Practice Act, and the courts have also narrowly defined the definition of commerce for internal disputes between professionals."

Full Opinion

Complaint

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Defendants’ contention was that they were entitled to reformation of a contract because a page was inadvertently left out of the asset purchase agreement.  The missing page detailed long term liabilities which Defendants claimed the Plaintiff was obligated to pay.  Defendants argued that the failure to pay constituted a violation of the accompanying Promissory Note and Security Agreement, and relieved them from their obligations under their non-compete agreements.

The Motion for Judgment on the Pleadings filed by the Plaintiff asserted that even if reformation was allowed, the only remedy for Defendants was for Plaintiffs to pay the liabilities listed on the missing page.  Judge Diaz held:

The Court disagrees. While there is a strong presumption in favor of correctness of an instrument as written, Hice, 301 N.C. at 651, 273 S.E.2d at 270, a “court’s principle [sic] objective is to determine the intent of the parties to the agreement.” Holshouser v. Shaner Hotel Group Props. One Ltd. P’ship, 134 N.C. App. 391, 397, 518 S.E.2d 17, 23 (1999).’

Moreover, when a court reforms an instrument, the general rule is that ‘”[t]he rights of the parties are measured by the instrument as originally intended, and the effect of the reformation, as a whole, is to give all the parties all the rights to which they are equitably entitled under the instrument that they intended to execute.” 66 Am. Jur. 2d Reformation of Instruments § 9 (2007) (citing Gurske v. Strate, 87 N.W.2d 703 (Neb. 1958)).

Thus, if Defendants establish by clear, cogent and convincing evidence that, because of a mutual mistake, the APA does not reflect the true intention of the parties at the original date of execution with respect to the long-term liabilities to be assumed by Plaintiff, they would be entitled to (1) have the agreement judicially reformed to correct the mistake, and (2) seek full relief for Plaintiff’s alleged breach of the APA and related contract documents. Long, 178 N.C. at 506, 101 S.E. at 13 (stating that when reformation is granted, the court not only corrects the contract as written, but enforces it in its amended form).

The Court dismissed an unfair and deceptive practices claim by one of the Defendants, who asserted that the Plaintiff had diverted funds rendering the Plaintiff unable to meet its contractual obligations to him.  The Court held that "A-1’s alleged accounting misdeeds arguably relate to matters of internal corporate governance, which are insufficient to sustain a UDTPA claim."  The Court further held that the claim was nothing more than one for breach of contract, stating "it does not matter that the purported breach resulted from A-1’s alleged accounting irregularities, as that fact alone is insufficient to elevate a contract dispute into an UDTPA claim."

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

The Business Court dismissed on a Motion for Judgment on the Pleadings an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

The Business Court held that the conduct involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently ‘in or affecting commerce’ to sustain an UDTPA claim."  Op. at 16.

A defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Claims seeking judicial dissolution of the LLCs survived.  Judge Diaz found that Plaintiffs’ allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC’s assets."  Op. at 11. He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants’ pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants’ rights and interests in the LLCs.

Op. at 12.

The Court also held that CDC’s claim for breach of a construction contract could proceed even though CDC was not licensed as a general contractor.  CDC’s contract called for some work that required a general contractor’s license, and some that didn’t.  Judge Diaz held that:

Although the Court’s research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  The contract extended to matters for which a license wasn’t necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

This was a dispute between insurance agents and an insurer for which they had sold policies.

Plaintiff asserted that the Court had personal jurisdiction over a parent company with an indirect subsidiary in North Carolina based on the alter ego doctrine.  The Court held that "if [the parent] has dominated and controlled. . . a second tier subsidiary doing business in North Carolina, to the extent that the corporate veil may be pierced, such action would justify assertion of jurisdiction over the parent."  Although the Court found the allegations of dominance to be somewhat vague and ambiguous, it found that there were questions of fact whether the corporate veil could be pierced, and denied the motion, suggesting that it be renewed at a later date.  The Court observed that "it will not be sufficient for plaintiffs to establish only a parent-subsidiary relationship and some involvement in the subsidiary’s business by the parent. The burden will be much heavier."

The Court dismissed, based on lack of personal jurisdiction, claims against several officers of one of the corporate defenants.  It held "plaintiffs may not assert jurisdictionover a corporate agent without some affirmative act committed in his individual official capacity," which the Court found to be lacking.  The Court found that it did have jurisdiction over one of the officers, who had been alleged to have made misrepresentations to the Plaintiffs while at a meeting in North Carolina. 

Also dismissed was a negligence claim, because the Court found that duties of the parties to be defined by their contract.  The Court noted the narrow circumstances under which North Carolina recognizes a claim for negligent breach of contract, and held that allowing such a claim would "open this particular tort to all parties to a contract."

Claims for tortious interference with contract were also dismissed, because Defendant’s conduct in notifying insurance policyholders that Defendant would be exiting the insurance business and that they should find new insurance had a legitimate business purpose. 

The Court found insufficient aggravating circumstances to make out an unfair and deceptive practices claim, and dismissed that claim as well.

Full Opinion

The Court dismissed the derivative claim of a minority shareholder who alleged that the majority shareholders of the corporation had breached their fiduciary duty to the minority shareholders by failing to make distributions, failing to investigate allegations on that subject, and terminating the minority shareholder’s employment. 

The Court held that this was not a proper derivative claim, because the shareholder had not alleged a cause of action belonging to the corporation or a remedy to which the corporation would be entitled.

The Court further found that even if the claim was derivative, that the minority shareholder did not fairly represent the corporation as required by North Carolina General Statute § 55-7-41(2).  The Court held:

The North Carolina Court of Appeals has applied the federal standard for determining when a shareholder “may fairly and adequately represent a corporation.” Robbins v. Tweetsie R.R., 126 N.C. App. 572, 579, 486 S.E.2d 453, 456, rev. denied, 347 N.C. 402, 494 S.E.2d 418 (1997). The federal standard uses a case by case analysis of whether a shareholder qualifies to represent the corporation. Id. (citations omitted). In Robbins, the court discussed the facts surrounding the plaintiff to conclude that plaintiff was not a suitable shareholder to bring a derivative suit. Id. at 579–80. Before the court addressed the facts of Robbins, it specifically set out that “a minority shareholder, who has uppermost a personal agenda rather than the best interests of the corporation, would [not] have standing to file and maintain a shareholder derivative action.” Id. at 578.

The Court held that the minority shareholder had a personal agenda that affected his ability to adequately represent the bests interests of the corporation. 

The Court also dismissed the shareholder’s unfair and deceptive practices claim because the shareholder was a physician and the Court found the learned profession exception to applied.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

A minority member (Kaplan) of a limited liability company, who was the LLC’s only source of funds and who controlled the LLC’s checkbook, did not have fiduciary duties to the LLC and its other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan’s position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC’s Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Summary judgment was granted on Defendant’s claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan.  As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate."  (Op. at 14).

Last, the Court granted summary judgment on Defendant’s unfair and deceptive practices claim.  The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders.  Commerce is not affected by the parties’ inability to work together as an LLC."  (Op. at 14).

Full Opinion

Plaintiff’s Brief In Support Of Motion For Summary Judgment

Defendants’ Brief In Opposition To Motion For Summary Judgment

Plaintiff’s Reply Brief In Support Of Motion For Summary Judgment

The plaintiff corporation claimed that the defendant, one of its former directors, had made false statements which interfered with its initial public offering.  The director claimed that he was entitled to defend claims made against him for breach of fiduciary duty based on the business judgment rule.  The Court held that "such conduct, even if well-motivated, does not constitute the type of ‘business decision’ the business judgment rule is meant to insulate."

In determining choice of law, the Court looked to the place of the corporation’s incorporation, per the internal affairs doctrine. 

The Court allowed fiduciary duty claims to proceed against a former employer.  The Court noted that "an employer-employee relationship is not generally a fiduciary relationship," but held that this determination involved a fact-intensive inquiry, and denied a Motion to Dismiss. 

The Court dismissed unfair and deceptive practices claims against the defendants.  It held that all of plaintiff’s claimed injuries related to the failed IPO, and that "the IPO, which is clearly a securities transaction, is beyond the scope of Chapter 75."

The Court let stand claims for aiding and abetting breach of fiduciary duty.

Full Opinion

Bowen’s Brief in Support of Motion to Dismiss

Atwood’s Brief in Support of Motion to Dismiss

Voyager’s Brief in Opposition to Motion to Dismiss