Brown v. Secor, 2017 NCBC 65.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION CLEVELAND COUNTY 16 CVS 608
DOUGLAS BROWN,
Plaintiff,
v.
ARTHUR D. SECOR; SECOR ORDER AND OPINION GROUP, LLC; JOSEPH ON RULE 12 MOTIONS AND CHRISTOPHER ROSSO; ROSSO GROUP, LLC; and SOUTHGROUP DISCOVERY MOTIONS REAL ESTATE MARKETING, LLC,
Defendants.
1. In May 2013, Plaintiff Douglas Brown and Defendant Arthur Secor entered
into an oral agreement in which Brown would invest in Secor’s real estate deals.
Three deals and three years later, Brown brought this suit, alleging that his $2
million investment has vanished. Brown contends that Secor, Defendant Joseph
Rosso (Secor’s business partner), and several entities controlled by Secor and Rosso
are liable for a host of wrongs from breach of contract to fraud to securities violations.
Brown also seeks a declaratory judgment regarding his alleged membership interest
in Defendant Southgroup Real Estate Marketing, LLC (“Southgroup”).
2. This Order addresses six pending motions. Defendants jointly moved for
judgment on the pleadings under Rule 12(c) of the North Carolina Rules of Civil
Procedure, seeking dismissal of all claims except breach of contract (“Rule 12(c)
Motion”). Rosso and Defendant Secor Group, LLC (“Secor Group”) additionally moved
to dismiss the claim for breach of contract under Rule 12(b)(6) (“Rule 12(b)(6)
Motion”). Finally, after engaging in the procedure set forth in Rule 10.9 of the General Rules of Practice and Procedure for the North Carolina Business Court
(“BCR”), and after having been given permission by the Court to do so, the parties
filed cross-motions as to two discovery disputes: Brown filed two motions to compel
the production of certain documents and information (“Motions to Compel”), and
Defendants cross-moved for a protective order (“Motions for Protective Order”).
3. Having considered the parties’ filings and arguments, the Court GRANTS
the Rule 12(b)(6) Motion, GRANTS in part and DENIES in part the Rule 12(c)
Motion, GRANTS in part and DENIES in part the Motions to Compel, and
GRANTS in part and DENIES in part the Motions for Protective Order.
Gray, Layton, Kersh, Solomon, Furr & Smith, P.A. by Michael L. Carpenter and Marshall P. Walker for Plaintiff.
Parker Poe Adams & Bernstein LLP by Morgan H. Rogers and Eric A. Frick for Defendants.
Conrad, Judge. I. BACKGROUND
A. Factual History
4. The Court does not make findings of fact in deciding motions filed under
Rule 12(b)(6) or Rule 12(c). The following factual summary is drawn from relevant
allegations in the pleadings and the attached exhibits.
5. Secor and Rosso are businessmen and residents of Mecklenburg County,
North Carolina. (Am. Compl. ¶¶ 2, 4.) Secor is the principal owner and manager of
Secor Group, and Rosso is the principal owner and manager of Defendant Rosso Group, LLC (“Rosso Group”). (Am. Compl. ¶¶ 3, 5.) Secor and Rosso also do business
using the name LW Land, which is not an incorporated entity. (Am. Compl. ¶ 7.)
6. In early 2013, Secor met with Brown for the purpose of soliciting Brown’s
investment in certain real estate deals. (See Am. Compl. ¶¶ 1, 8.) Secor represented
that he had many investors in various properties he was marketing or developing.
(Am. Compl. ¶ 9.) Rosso did not attend the meeting, and Rosso’s relationship with
Secor was not discussed. (Am. Compl. ¶¶ 8–9; see also Am. Compl. ¶ 16.)
7. A further meeting resulted in an oral agreement in which Brown promised
to finance real estate investments to be held by Southgroup, another entity controlled
by Secor. (See Am. Compl. ¶ 11.) According to Brown, he and Secor agreed to split
any profits from the real estate investments “50/50 at the time of sale” after Brown
“received a return of his principal investment plus six percent (6%) interest.” (Am.
Compl. ¶ 11; see also Am. Compl. ¶ 47.)
8. Defendants admit there was an oral agreement but disagree with Brown
over its terms. (See Am. Answer ¶ 11.) Among other things, they allege that “Brown
promised to provide the funding for all of Secor Group’s and Southgroup’s land
acquisitions.” (Am. Countercls. ¶ 18.)
9. Between May 13 and June 27, 2013, Brown made five fund transfers totaling
$1,799,488.17 for the purpose of acquiring real property in the name of Southgroup.
(See Am. Compl. ¶¶ 12, 16, 18.) The first two transfers related to a North Carolina
property called Black Bear Falls. (Am. Compl. ¶ 12.) Brown alleges Secor failed to
disclose at the time of the oral agreement that Secor was buying out his former investors and that Black Bear Falls was subject to a $300,000 mortgage. (Am. Compl.
¶ 13.) The next two transfers related to property in Ashe County, North Carolina
(Am. Compl. ¶ 14), and the final transfer related to a development in Georgia called
Nature’s Courtyard (Am. Compl. ¶ 15). Apart from one $50,000 transfer made to LW
Land, each transfer of funds was made to a law firm involved in the respective real
estate transactions. (See Am. Compl. ¶¶ 12–16.)
10. After June 27, 2013, Brown refused to make further advances without
“documentation of the relationship between the parties.” (Am. Compl. ¶ 19.) Brown
also alleges that, around this time, he met with Rosso “for the first time during an
additional solicitation of funds.” (Am. Compl. ¶ 16.)
11. In response to Brown’s concerns, Secor “personally represented” that the
Nature’s Courtyard property would be sold the next month “‘at a substantial profit.’”
(Am. Compl. ¶ 20(a).) Secor also sent Brown two documents. The first, a “Marketing
Summary” for LW Land, stated that Nature’s Courtyard would be sold by August 17,
2013, for between $990,000 and $1,320,000, contingent on an additional transfer of
$300,000 from Brown. (Am. Compl. ¶ 20(b).) The second document was a
membership interest purchase agreement (“MIPA”), which was signed by Secor on
behalf of Southgroup and backdated to the date Brown first advanced funds. (See
Am. Compl. ¶ 20; see also Am. Compl. Ex. A [“MIPA”].)
12. The parties sharply dispute the terms and effect of the MIPA. As relevant,
Southgroup is identified as “the Seller” and represents that it owns a 100%
membership interest in “the Company,” which is not named but is defined as “a single-purpose entity established for the development of” Black Bear Falls and other
real property, including Nature’s Courtyard. (MIPA p.1.) Southgroup agreed to
transfer this membership interest to Brown, who is identified as “the Buyer.” (MIPA
¶ 1.) Brown interprets these provisions to mean that Southgroup is both “the Seller”
and “the Company,” such that the MIPA transferred to him a 100% membership
interest in Southgroup. (Am. Compl. ¶¶ 17, 20–21.)
13. Defendants interpret the MIPA to state that Southgroup and “the Company”
are separate entities. (See Am. Answer ¶ 21A; see also Am. Compl. ¶ 45.) Defendants
also allege that the MIPA, though signed by Brown and Secor, never became
operative. (Am. Answer ¶ 21D.) According to Defendants, the MIPA would have
become effective only in the event of a default under the terms of a separate
memorandum of understanding between Brown and Secor. (Am. Countercls. ¶¶ 19,
24, 31(b).) Defendants and Brown agree that no memorandum of understanding was
ever signed. (See Am. Countercls. ¶¶ 32, 34; Reply ¶¶ 32, 34.)
14. After receiving these documents from Secor, Brown made two further fund
transfers. He first wired $100,000 to LW Land on July 5, 2013 for Black Bear Falls.
(See Am. Compl. ¶ 22(a).) Then, on July 23, 2013, Brown wired an additional
$300,000 to LW Land for marketing and clean-up costs for Nature’s Courtyard. (See
Am. Compl. ¶ 22(b).)
15. A partial sale of Nature’s Courtyard took place on August 17, 2013 (as LW
Land’s brochure stated) but returned no more than $600,000 (less than LW Land
forecast). (See Am. Compl. ¶¶ 20(b), 23–24.) Brown alleges that Secor falsely represented that only marketing costs were recovered from the sale. (Am. Compl.
¶¶ 23–25.) Brown further alleges that he did not receive any proceeds, either directly
or through his alleged membership interest in Southgroup. (Am. Compl. ¶ 35.)
16. After the Nature’s Courtyard sale, Brown inquired about the properties
throughout the remainder of 2013 and 2014 but received little information. (See Am.
Compl. ¶¶ 26, 30, 32.) It does not appear that Black Bear Falls was ever sold, but on
January 14, 2015, the Ashe County property sold for $1,670,000. (See Am. Compl.
¶ 33.) Brown first learned of the sale some 11 months after it took place and, again,
received no proceeds. (See Am. Compl. ¶¶ 32–33, 41.) He alleges that Secor
transferred more than $1 million in proceeds from the sale to Secor Group. (Am.
Compl. ¶ 41.)
17. Through counsel, Brown requested access to Southgroup’s books in
December 2015 and January 2016. (See Am. Compl. ¶ 38.) The request was refused
on the ground that Brown does not hold any membership interest in Southgroup. (See
Am. Compl. ¶¶ 39–40.) According to Brown, Defendants’ counsel also “indicated that
all the proceeds from the sales are gone.” (Am. Compl. ¶ 36.)
B. Procedural History
18. Brown filed his original complaint on April 15, 2016, alleging fraud and
seeking to enforce his rights as an alleged owner of Southgroup. After filing their
answer, Defendants filed an initial motion for judgment on the pleadings on
November 23, 2016, and Brown moved to amend his complaint on January 6, 2017.
After a hearing on both motions, the Court granted in part the motion to amend and denied the Rule 12(c) motion as moot, without prejudice to Defendants’ ability to
challenge the amended complaint through a subsequent Rule 12 motion. (Order on
Pl.’s Mot. to Am. Compl. and Defs.’ Mot. for J. on the Pleads. ¶ 10(a)–(c).)
19. The amended complaint, filed March 2, 2017, asserts 12 causes of action:
breach of contract (as to all Defendants except Rosso Group); a demand for documents
and an accounting of Southgroup; breach of fiduciary duty and constructive fraud (as
to Secor); declaratory judgment regarding the membership of Southgroup; a claim for
distributions from Southgroup; unjust enrichment; fraud; failure to register a
security; securities fraud; constructive trust; unfair or deceptive trade practices; and
conspiracy. Defendants answered the amended complaint and filed counterclaims on
March 16, 2017, with Brown’s reply following on March 24, 2017.
20. The Court held a BCR 10.9 teleconference on March 17, 2017, during which
the parties addressed discovery disputes relating to Brown’s requests for, among
other things, banking records, tax returns, agreements used by Defendants in
transactions with other investors, and the identification of other investors. The Court
authorized Brown to file a motion to compel as to the latter three categories of
information but ordered the parties to continue conferring regarding Defendants’
banking records.
21. On April 3, 2017, Defendants jointly filed their renewed Rule 12(c) Motion,
seeking judgment on the pleadings as to all claims except for breach of contract.
Rosso and Secor Group additionally filed the Rule 12(b)(6) Motion as to the breach of
contract claim. Brown also filed his first motion to compel, and Defendants cross- moved for a protective order. These motions are fully briefed and were addressed at
a hearing on May 3, 2017.
22. During the May 3 hearing, Brown’s counsel reported that the parties had
reached an impasse regarding Defendants’ banking records and requested
authorization to file a second motion to compel. The Court requested a proposed
briefing schedule from the parties, which was submitted and adopted on June 6, 2017.
The second motion to compel and Defendants’ second cross-motion for protective
order were fully briefed on July 17, 2017. The Court elects to decide these later
motions without another hearing. See BCR 7.4.
II. THE RULE 12 MOTIONS
23. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the
complaint.” Concrete Serv. Corp. v. Investors Grp., Inc., 79 N.C. App. 678, 681, 340
S.E.2d 755, 758 (1986). “Dismissal of a complaint under Rule 12(b)(6) is proper when
one of the following three conditions is satisfied: (1) when the complaint on its face
reveals that no law supports plaintiff’s claim; (2) when the complaint on its face
reveals the absence of fact sufficient to make a good claim; (3) when some fact
disclosed in the complaint necessarily defeats plaintiff’s claim.” Jackson v.
Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743, 745 (1986).
24. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded
allegations of the complaint as true and view the facts and permissible inferences “in
the light most favorable to” the non-moving party. Ford v. Peaches Entm’t Corp., 83
N.C. App. 155, 156, 349 S.E.2d 82, 83 (1986); see also Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161, 163 (1970). “[T]he court is not required to accept as true any
conclusions of law or unwarranted deductions of fact.” Oberlin Capital, L.P. v. Slavin,
147 N.C. App. 52, 56, 554 S.E.2d 840, 844 (2001).
25. “The standard of review for a Rule 12(c) motion is the same as for a motion
to dismiss under Rule 12(b)(6).” Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC
LEXIS 42, at *19 (N.C. Super. Ct. Nov. 3, 2011). “A motion for judgment on the
pleadings is the proper procedure when all the material allegations of fact are
admitted in the pleadings and only questions of law remain. When the pleadings do
not resolve all the factual issues, judgment on the pleadings is generally
inappropriate.” Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974).
26. The Court may consider documents “attached to and incorporated within”
the pleadings without converting a Rule 12(b)(6) or Rule 12(c) motion into one for
summary judgment. Weaver v. St. Joseph of the Pines, Inc., 187 N.C. App. 198, 204,
652 S.E.2d 701, 707 (2007).
A. Claims Against Rosso Group
27. At the outset, the Court grants judgment on the pleadings as to all claims
against Rosso Group. Defendants correctly observe that Brown “does not reference
at any time in the Complaint any actions by Rosso Group.” (Defs.’ Br. in Supp. of
Mot. for Partial J. on the Pleads. 14 [“Defs.’ Nov. 23 Br.”].) Brown’s responsive
briefing is conspicuously silent on the point. There is no apparent basis for Rosso
Group to be a defendant in this action, and the Court therefore dismisses the claims
asserted against it with prejudice. B. Breach of Contract
28. Brown alleges that he upheld his end of an oral agreement to finance Secor’s
real estate investments but that Defendants (except Rosso Group) breached the
agreement by failing to pay him any proceeds from the transactions. (See Am. Compl.
¶¶ 49–50.) In their Rule 12(b)(6) Motion, Rosso and Secor Group argue that the
amended complaint does not allege they were parties to that agreement. (See Br. in
Supp. of Mot. to Dismiss Pl.’s First Claim for Relief 2.)
29. Brown first contends that the motion is procedurally improper because, in
allowing Brown to amend his complaint, the Court concluded that the claim for
breach of contract was not futile. (See Pl.’s Br. in Opp. to Mot. to Dismiss Pl.’s First
Claim for Relief 2.) Not so. The Court held that Brown’s “allegation of breach does
not, on this record, appear to be incapable of surviving a motion to dismiss” but
expressly granted the motion to amend “without prejudice to Defendants’ right to
challenge the amended complaint through a Rule 12 motion.” (Order on Pl.’s Mot. to
Am. Compl. and Defs.’ Mot. for J. on the Pleads. ¶¶ 5, 10(c).) The Rule 12(b)(6) Motion
is properly before the Court. See Simply the Best Movers, LLC v. Marrins’ Moving
Sys., Ltd., 2016 NCBC LEXIS 28, at *5–6 (N.C. Super. Ct. Apr. 6, 2016) (noting that
“futility standard under Rule 15 is essentially the same standard used in reviewing
a motion to dismiss under Rule 12(b)(6)” but courts have “liberal discretion to find
that an amendment lacks futility”).
30. Indeed, the Rule 12(b)(6) Motion has merit. A claim for breach of contract
requires the “existence of a valid contract.” Carcano v. JBSS, LLC, 200 N.C. App. 162, 168, 684 S.E.2d 41, 47 (2009) (quoting Poor v. Hill, 138 N.C. App. 19, 26, 530
S.E.2d 838, 843 (2000)). When a defendant is “not a party to the contract,” then “as
a matter of law he cannot be held liable for any breach that may have occurred.”
Canady v. Mann, 107 N.C. App. 252, 259, 419 S.E.2d 597, 601 (1992).
31. At no point does the amended complaint name Rosso or Secor Group as
parties to the oral agreement. It alleges that, “[a]fter much negotiation, [Brown] and
Secor agreed upon a business relationship in which [Brown] would finance certain
real estate investments to be held in” Southgroup, and “[Brown] and Secor” would
split any profits after a return of Brown’s principal investment plus interest. (Am.
Compl. ¶ 11.) The only other description of the agreement is in paragraph 47, which
refers to the agreement “as aforesaid”—a clear reference to paragraph 11. (Am.
Compl. ¶ 47.) Neither paragraph mentions Rosso or Secor Group; there is no
allegation that either made any promises or received any consideration; and there is
no allegation that Secor acted on behalf of one or both. In fact, Brown alleges that he
first met Rosso after entering into the oral agreement. (See Am. Compl. ¶ 16.)
32. The Court has considered Brown’s arguments and finds them unpersuasive.
Rosso’s participation in the real estate transactions as broker does not make him a
contractual party. (See Am. Compl. ¶ 10.) Nor can Brown contend that Secor Group
is a party to the agreement based on Defendants’ allegation, in their amended
counterclaims, that Brown orally “promised to provide the funding for all of Secor
Group’s and Southgroup’s land acquisitions.” (Am. Countercls. ¶ 18.) The allegation appears nowhere in the complaint, and Brown specifically denies making the funding
promise. (See Am. Compl. ¶ 48; Reply ¶ 18.)
33. The Court therefore grants the Rule 12(b)(6) Motion. The claim for breach
of contract, to the extent asserted against Rosso and Secor Group, is dismissed with
prejudice.
C. Declaratory Judgment
34. The declaratory judgment claim concerns Brown’s rights and interests with
respect to Southgroup. Specifically, Brown alleges that he holds a 100% membership
interest in Southgroup and all the rights associated with that interest. (See Am.
Compl. ¶¶ 65–66.) Defendants move for judgment on the pleadings that Brown is not
a member of Southgroup. (See Defs.’ Nov. 23 Br. 1; Defs.’ Br. in Supp. of Renewed
Mot. for Partial J. on the Pleads. 2 [“Defs.’ Apr. 3 Br.”].)
35. This dispute concerns the meaning of terms in the MIPA and therefore
presents a question of contract interpretation. “When the language of a written
contract is plain and unambiguous, the contract must be interpreted as written and
the parties are bound by its terms.” Atl. & E. Carolina Ry. Co. v. Wheatly Oil Co.,
163 N.C. App. 748, 752, 594 S.E.2d 425, 429 (2004). Whether a contractual term is
ambiguous is a question of law. See, e.g., Wachovia Bank Nat’l Ass’n v. Superior
Constr. Corp., 213 N.C. App. 341, 349, 718 S.E.2d 160, 165 (2011).
36. On its face, the MIPA is an agreement between Brown (“the Buyer”),
Southgroup (“the Seller”), and Secor as manager of Southgroup. (MIPA p.1.) In the
recitals, Secor represents that he “owns all of the outstanding equity membership interest in [Southgroup],” and Southgroup represents that it owns a 100%
membership interest in an unnamed entity identified as “the Company.” (MIPA p.1;
see also MIPA ¶¶ 4(a), 5(a).) Southgroup “transfers” to Brown “all of [Southgroup’s]
right, title and interest in and to the Membership Interest” in the Company for the
sum of ten dollars. (MIPA p.1, ¶¶ 1, 2.)
37. There is no plausible way to construe this language to mean that Brown
obtained a membership interest in Southgroup, as he contends. Brown’s
interpretation—that Southgroup is both “the Seller” and “the Company”—is a
nonstarter. The MIPA expressly treats “Seller” and “Company” as different entities
throughout. It defines the terms differently (MIPA p.1) and imposes distinct
obligations on each (see MIPA ¶¶ 4, 6). Indeed, in paragraph 6, “the Company” makes
representations and warranties to Southgroup, which would make little sense if they
were one and the same. (See MIPA ¶ 6.)
38. The MIPA further states that Secor owns Southgroup and Southgroup owns
the Company. (See MIPA p.1.) Brown’s interpretation would render these
statements incoherent: first, that Southgroup claims to own a 100% membership
interest in itself; and second, that Secor and Southgroup each claim to own an
undivided interest in the same piece of personal property. Neither would make sense.
See N.C. Gen. Stat. § 57D-2-01(a) (“An LLC is an entity distinct from its interest
owners.”); N.C. Gen. Stat. § 57D-5-01 (“An ownership interest [in an LLC] is personal
property.”). 39. This is not to say that the MIPA is a model of clarity—it isn’t. The
“Company” is not named, and Defendants do not name the entity in their briefs. Yet
the MIPA’s plain language makes clear that, whatever else “the Company” could be,
it is not Southgroup. Brown’s insistence that the MIPA must be construed against
Secor as the drafter is therefore misplaced. (See Pl.’s Br. in Opp’n to Defs.’ Mot. for
Partial J. on the Pleads.3 [“Pl.’s Dec. 16 Br.”].) This rule of construction applies only
in a contest between reasonable alternatives, and Brown’s interpretation is not
reasonable. See 11 Williston on Contracts § 32:12 (4th ed.) (“[I]t is only when,
consistent with the general rules of contract interpretation, the meaning proposed by
the nondrafter . . . is reasonable. . . that the rule of contra proferentem is properly
invoked.” (collecting cases)).
40. As a matter of law, Brown does not hold a membership interest in
Southgroup, and he is not entitled to a declaration to that effect. The Court therefore
grants judgment on the pleadings as to the claim for declaratory judgment. The Court
need not address Defendants’ alternative argument that the MIPA never became
operative. (See Defs.’ Nov. 23 Br. 4–5.)
D. Demand for Documents and Accounting and Claim for Distributions
41. The resolution of Brown’s declaratory judgment claim also requires
dismissal of his claims demanding documents, an accounting, and distributions from
Southgroup. (See Am. Compl. ¶¶ 52–55, 67–68.) Brown may not assert claims based
on a membership interest in Southgroup, which he does not possess. See N.C. Gen.
Stat. § 57D-1-03(9) (only “an interest owner in respect of the interest owner’s ownership interest” entitled to distribution); N.C. Gen. Stat. § 57D-3-04(a) to (f)
(limiting information rights to “member[s], manager[s], or other company official[s]”).
Accordingly, the Court grants the Rule 12(c) Motion as to these claims.
E. Breach of Fiduciary Duty and Constructive Fraud
42. Brown’s third claim for relief is a combined claim for breach of fiduciary duty
and constructive fraud. (See Am. Compl. ¶¶ 56–62.) Brown asserts this claim against
Secor only, alleging that Secor, as manager of Southgroup, owed fiduciary duties to
Brown and to Southgroup. (See Am. Compl. ¶¶ 57–58.) The amended complaint
alleges that Secor breached these duties by engaging in self-dealing and diverting
Southgroup’s distributions from Brown to himself. (See Am. Compl. ¶¶ 60–61.)
43. Although Brown has pleaded them together, breach of fiduciary duty and
constructive fraud are distinct causes of action. See White v. Consolidated Planning,
Inc., 166 N.C. App. 283, 294, 603 S.E.2d 147, 156 (2004). An essential element of
each is the existence of a fiduciary relationship. See Dalton v. Camp, 353 N.C. 647,
651, 548 S.E.2d 704, 707 (2001) (fiduciary duty); Crumley & Assocs., P.C. v. Charles
Peed & Assocs., P.A., 219 N.C. App. 615, 620, 730 S.E.2d 763, 767 (2012) (constructive
fraud).
44. As pleaded, Brown has not sufficiently alleged the existence of a fiduciary
relationship with Secor. Brown’s claims are based entirely on duties allegedly owed
by Secor as manager of Southgroup. (See Am. Compl. ¶¶ 57–61.) Having concluded
that Brown has no membership interest in Southgroup, the Court further concludes
that he may not assert a fiduciary relationship based on that non-existent membership interest, whether individually or derivatively. See N.C. Gen Stat. § 57D-
8-01(a) (plaintiff to derivative suit must, among other things, be a member of the
LLC); Kaplan v. O.K. Techs., LLC, 196 N.C. App. 469, 473–74, 675 S.E.2d 133, 137
(2009) (manager of LLC does not owe a fiduciary duty to members solely on basis of
role as manager).
45. In his briefing, Brown asserts a second, independent theory: that Secor owed
him a fiduciary duty as a seller of securities. (See Pl.’s Dec. 16 Br. 14; Pl.’s Br. in
Opp’n to Defs.’ Renewed Mot. for J. on the Pleads. 8 [“Apr. 14 Br.”].) This argument
omits any citation to the original or amended complaints, and the Court finds no
allegations that serve to provide adequate notice to Secor of a claim on this basis. The
requirement to liberally construe the complaint is not an invitation to rewrite it.
46. Accordingly, the Court grants the Rule 12(c) Motion as to the claim for
breach of fiduciary duty and constructive fraud.
F. Unjust Enrichment
47. Brown’s claim for unjust enrichment is based on “his payments to or for the
benefit of” Southgroup. (Am. Compl. ¶ 70.) Defendants argue this claim necessarily
fails because Brown alleges “that the MIPA was an effective contract” and the
existence of an express agreement precludes an unjust enrichment claim. (Defs.’ Nov.
23 Br. 8.)
48. Defendants’ argument is misplaced. A plaintiff is entitled to assert an
unjust enrichment claim in the alternative. This is especially true here where the
parties contest the scope and effect of the MIPA (as well as the oral agreement) and the Court has concluded that the MIPA does not transfer to Brown a membership
interest in Southgroup. The Court denies the Rule 12(c) Motion as to the claim for
unjust enrichment. See, e.g., Krawiec v. Manly, 2016 NCBC LEXIS 7, at *31 (N.C.
Super. Ct. Jan. 22, 2016).
G. Fraud
49. Brown asserts his claim for fraud against all Defendants. To state a claim,
Brown must allege “(a) a false representation or concealment of a material past or
existing fact; (b) that was reasonably calculated to deceive; (c) that was made with an
intent to deceive; (d) that did in fact deceive, i.e., was relied upon and (e) resulted in
damage to the injured party.” Shamoon v. Turkow, 2011 NCBC LEXIS 47, at *10
(N.C. Super. Ct. Dec. 6, 2011) (citing State Props., LLC v. Ray, 155 N.C. App. 65, 72,
574 S.E.2d 180, 186 (2002)).
50. Defendants raise two arguments. First, they object to the allegation that
“Defendants’ provision of the MIPA . . . to secure additional funds from Brown was a
fraud in the inducement” (Am. Compl. ¶ 76), contending that the allegation is
conclusory. (See Defs.’ Nov. 23 Br. 10.) Second, they argue that Brown has not
sufficiently alleged reasonable reliance on the provision of the MIPA (because he
knew its terms), on the alleged concealment of the relationship between Secor and
Rosso (because he was aware of it), or on the alleged concealment of the debt on Black
Bear Falls (because he did not investigate it). (See Defs.’ Nov. 23 Br. 10–12.) 51. The Court concludes that Brown has alleged facts sufficient to state a claim
for fraud. Defendants’ arguments, even if correct, overlook numerous allegations in
the amended complaint.
52. For example, the amended complaint alleges that Secor represented to
Brown that he would receive proceeds from the sale of properties acquired by
Southgroup and that Secor did not intend to abide by that agreement at the time he
made it. (Am. Compl. ¶¶ 10–12, 20(b), 24, 78.) The amended complaint further
alleges that (1) Brown relied on the representation by providing more than $2 million
in funds (Am. Compl. ¶¶ 18, 22, 35, 50); (2) two properties were sold for substantial
sums (Am. Compl. ¶¶ 22, 35, 50); (3) Secor Group received more than $1 million from
the sales (Am. Compl. ¶¶ 41, 43); and (4) Brown has not received any proceeds (Am.
Compl. ¶¶ 23–25, 32–33). These allegations are sufficient to survive a Rule 12
motion. See, e.g., Priest v. Coch, 2013 NCBC LEXIS 6, at *19–20 (N.C. Super. Ct.
Jan. 25, 2013) (denying Rule 12(b)(6) motion as to fraud claim where it was alleged
that defendants “did not intend to pay” at time of contracting).
53. The amended complaint further alleges affirmative misrepresentations that
were designed to induce, and did induce, Brown to make additional fund transfers.
For example, (1) Secor sent Brown a “Marketing Summary” from LW Land, which
forecast a sale of as much as $1.3 million (Am. Compl. ¶ 20(b)); (2) Secor and Rosso
are partners in LW Land (Am. Compl. ¶¶ 7, 16; see also Am. Compl. ¶ 37); (3) Brown
provided $400,000 in funds to LW Land based on these representations (Am. Compl.
¶ 22); (4) the Nature’s Courtyard property sold for much less than forecast (see Am. Compl. ¶¶ 24–25); and (5) Brown has not received proceeds from the sales (Am.
Compl. ¶ 35). These allegations, although not stated with crystal clarity, are
“minimally sufficient” to state a claim. Holcomb v. Landquest Ltd. Liab. Co., 2017
NCBC LEXIS 36, at *21 (N.C. Super. Ct. Apr. 21, 2017); see also Shamoon, 2011
NCBC LEXIS 47, at *10–12 (finding question of material fact as to whether defendant
knew representations were false).
54. For these reasons, the Court denies the Rule 12(c) Motion as to the claim for
fraud (except as to Rosso Group, as noted above). For the same reason, the Court also
denies the motion as to the conspiracy claim, which Defendants seek to dismiss solely
on the ground that the underlying fraud claim should be dismissed. (Defs.’ Apr. 3 Br.
4.) Because the fraud claim survives, so too does the claim for conspiracy. See Nye v.
Oates, 96 N.C. App. 343, 346–47, 385 S.E.2d 529, 531 (1989) (holding that precedent
“permits one defrauded to recover from anyone who facilitated the fraud by agreeing
for it to be accomplished”).
H. Securities Fraud
55. Brown contends that the alleged fraud also constitutes securities fraud
under the North Carolina Securities Act. See N.C. Gen. Stat. § 78A-8. Defendants
argue that Brown has not alleged the existence of any securities.
56. The North Carolina Securities Act defines the term “security” broadly. As
relevant, a security may include an “investment contract” or a “certificate of interest
or participation in any profit-sharing agreement.” N.C. Gen. Stat. § 78A-2(11); see
also Blue Ridge Pediatric & Adolescent Med., Inc. v. First Colony Healthcare, LLC, 2012 NCBC LEXIS 52, at *25 (N.C. Super. Ct. Oct. 3, 2012). In interpreting this
language, North Carolina courts are guided by federal law, which applies a functional
approach. See N.C. Gen. Stat. § 78A-64 (noting statutory purpose to “coordinate the
interpretation . . . of this Chapter with the related federal regulation”).
57. Brown first alleges that the oral agreement between Brown and Secor is an
"investment contract” as defined in N.C. Gen. Stat. § 78A-2(11). According to the
amended complaint, under this agreement, Brown “invested his money, in a common
enterprise, and was led to expect profits solely from the efforts of others.” (Am.
Compl. ¶ 82.) This allegation is sufficient to survive a Rule 12 motion. See S.E.C. v.
W.J. Howey Co., 328 U.S. 293, 301 (1946) (finding a security based on the “investment
of money in a common enterprise with profits to come solely from the efforts of
others”); see also NNN Durham Office Portfolio 1, LLC v. Grubb & Ellis Co., 2016
NCBC LEXIS 95, at *44 (N.C. Super. Ct. Dec. 5, 2016).
58. Brown also alleges that the membership interest transferred via the
MIPA—whether for Southgroup or some other entity—“may also constitute a security
under North Carolina law.” (Am. Compl. ¶ 83.) Determining whether an interest in
an LLC is a security requires “‘case-by-case analysis into the ‘economic realities’ of
the underlying transaction.” U.S. v. Leonard, 529 F.3d 83, 89 (2d Cir. 2008)
((citations omitted)); see also Robinson v. Glynn, 349 F.3d 166, 170 (4th Cir. 2003)
(looking to “economic reality” of investment scheme); see also NNN Durham Office
Portfolio 1, 2016 NCBC LEXIS 95, at *50. Liberally construing the amended
complaint, Brown purported to purchase an interest in a manager-managed LLC, the fortunes of which would be determined by the abilities of its manager, Secor. (See
MIPA p.1; see also Am. Compl. ¶ 21(b),(d).) For purposes of this motion, the amended
complaint sufficiently alleges the existence of a security.
59. Defendants also reiterate their arguments that the amended complaint does
not sufficiently allege fraud. (See Defs.’ Apr. 3 Br. 3.) For the reasons stated above,
the Court disagrees.
60. Accordingly, the Court denies the Rule 12(c) Motion as to the claim for
securities fraud (other than as to Rosso Group).
I. Failure to Register a Security
61. Brown asserts that Defendants violated N.C. Gen. Stat. § 78A-24 by failing
to register the oral agreement and the MIPA as securities. (See Am. Compl. ¶¶ 81–
85.) Defendants contend this claim is barred by the statute of limitations, which
prohibits claims brought “more than two years after the sale or contract of sale” of
the security at issue. N.C. Gen. Stat. § 78A-56(f).
62. A court may grant judgment on the pleadings in favor of a defendant who
asserts the statute of limitations as a defense “when, and only when, all the facts
necessary to establish the limitation are alleged or admitted.” Flexolite Electrical v.
Gilliam, 55 N.C. App. 86, 87–88, 284 S.E.2d 523, 524 (1981). In other words, “on a
motion for judgment on the pleadings, dismissal is proper only if it appears on the
face of the complaint that the plaintiff filed outside the limitations period.” Benson
v. Barefoot, 148 N.C. App. 394, 396–97, 559 S.E.2d 244, 246 (2002). 63. Here, as to both the oral agreement and the MIPA, it is clear from the face
of the amended complaint that Brown filed his claim outside the two-year limitations
period. The amended complaint alleges that Brown and Secor entered into the oral
agreement in May 2013, and it alleges that Secor sent the MIPA to Brown in July
2013. (See Am. Compl. ¶¶ 11–12, 20(c).) Both dates are more than two years prior
to the filing of the original complaint on April 15, 2016, which is the earliest filing
date Brown could conceivably rely on.
64. Brown’s briefs are silent regarding the oral agreement. (See generally Pl.’s
Reply Br. in Supp. of Mot. to Amend Compl. 5–7; Pl.’s Apr. 14 Br. 9.) Accordingly, he
has offered no basis to avoid the statute of limitations as to that agreement.
65. As to the MIPA, Brown does not identify any supporting allegations in the
amended complaint. Instead, he argues that Defendants created a factual dispute as
to the beginning of the limitations period by asserting in their amended
counterclaims that the MIPA did not become effective in July 2013. (See Pl.’s Apr. 14
Br. 9.) The Court disagrees. Defendants’ position is that the MIPA was intended to
become effective only in the event of a default under the terms of a separate
memorandum of understanding, which Brown admits he and Secor never executed.
(See Am. Countercls. ¶¶ 31(b), 32, 34; Reply ¶¶ 31, 32, 34.) Accordingly, the claim is
either time-barred (under the facts alleged in the complaint), or the MIPA resulted
in no sale and was not subject to a registration requirement (under the facts alleged
in the counterclaims). 66. The Court grants the Rule 12(c) Motion as to the claim for failure to register
a security. The Court does not address Defendants’ alternative argument that the
oral agreement and the MIPA were exempt from registration under N.C. Gen. Stat.
§ 78A-17(5) and (9).
J. Unfair or Deceptive Trade Practices
67. Defendants invoke the well-settled rule that a mere breach of contract does
not constitute an unfair or deceptive trade practice under N.C. Gen. Stat. § 75-1.1.
See Branch Banking & Trust Co. v. Thompson, 107 N.C. App. 53, 62, 418 S.E.2d 694,
700 (1992). Fraud, however, may constitute a section 75-1.1 violation. See, e.g.,
Hardy v. Toler, 288 N.C. 303, 309, 218 S.E.2d 342, 346 (1975) (fraud a deceptive
practice); Forest2Market, Inc. v. Arcogent, Inc., 2016 NCBC LEXIS 3, at *14 (N.C.
Super. Ct. Jan. 5, 2016) (aggravating circumstances include “fraudulent
inducements”). Having concluded that Brown’s fraud claim survives Rule 12, the
Court also concludes that Brown has, at this stage, stated a claim for unfair or
deceptive trade practices.
K. Constructive Trust
68. A constructive trust is a remedy, not a cause of action. See Weatherford v.
Keenan, 128 N.C. App. 178, 179, 493 S.E.2d 812, 813 (1997). Accordingly, for
purposes of clarity, the Court grants the Rule 12(c) Motion to the extent it seeks
dismissal of the purported cause of action for constructive trust. The Court renders
this decision without prejudice to Brown’s ability to pursue the equitable remedy of a
constructive trust based on his remaining legal claims, including his claim for fraud. See Roper v. Edwards, 323 N.C. 461, 465, 373 S.E.2d 423, 425 (1988) (describing
constructive trust as an equitable remedy “to prevent the unjust enrichment of the
holder of . . . an interest in[] property which such holder acquired through fraud”).
III. THE DISCOVERY MOTIONS
69. “[O]rders regarding discovery matters are within the discretion of the trial
court and will not be upset on appeal absent a showing of abuse of that
discretion.” Wachovia Bank v. Clean River Corp., 178 N.C. App. 528, 531, 631 S.E.2d
879, 882 (2006) (quoting Nationwide Mut. Fire Ins. Co. v. Bourlon, 172 N.C. App. 595,
601, 617 S.E.2d 40, 45 (2005)). Here, Brown’s Motions to Compel request production
of four categories of information: (1) Defendants’ initial and amended tax returns for
2012 to 2015; (2) Defendants’ banking records for 2012 to present; (3) the names of
third-party investors; and (4) documents used by Defendants in transactions with
other investors.
A. Legal Standard
70. In general, “[p]arties may obtain discovery regarding any matter, not
privileged, which is relevant to the subject matter involved in the pending action.”
N.C. R. Civ. Pro. 26(b)(1). “The test of relevancy under Rule 26 is not, of course, the
stringent test required at trial. The rule is designed to allow discovery of any
information ‘reasonably calculated to lead to the discovery of admissible evidence.’”
Willis v. Duke Power Co., 291 N.C. 19, 32, 229 S.E.2d 191, 200 (1976) (quoting N.C.
R. Civ. Pro. 26(b)); accord Wachovia Capital Partners, LLC v. Frank Harvey Inv.
Family L.P., 2007 NCBC LEXIS 7, at *48 (N.C. Super. Ct. Mar. 5, 2007). 71. Nevertheless, a party seeking discovery is “not entitled to a fishing
expedition to locate it.” Dworsky v. Travelers Ins. Co., 49 N.C. App. 446, 448, 271
S.E.2d 522, 524 (1980). A court may enter a discretionary protective order “even as
to relevant material” after balancing “[o]ne party’s need for information . . . against
the likelihood of an undue burden [being] imposed upon the other.” Willis, 291 N.C.
at 34, 229 S.E.2d at 200.
B. Tax Returns
72. Brown requests production of tax returns for each Defendant from 2012 to
2015. Defendants produced redacted versions of Southgroup’s initial filing for 2014
and Secor Group’s amended returns for 2013 and 2014. They have objected to
providing any other returns and to removing the redactions.
73. The Court agrees that Defendants’ 2012 tax returns and Rosso Group’s
returns for any year are not relevant. The events giving rise to this action first began
in 2013, and the relevant real estate transactions occurred in late 2013 and early
2015. (See Am. Compl. ¶¶ 11, 12, 23, 33.) As to Rosso Group, the Court has dismissed
all claims against the company, which apparently was not even formed until 2015.
(See Am. Countercls. ¶ 5.) Brown is not entitled to 2012 tax returns for any Defendant
or for Rosso Group’s tax returns for any year.
74. Defendants’ other relevance objections are not supported. Brown contends
that he invested $2.2 million to be used in Southgroup’s land acquisitions, expecting
to receive a return of his principal plus half the profits. He further contends that
Secor and Rosso (through LW Land) concealed transactions disposing of the real estate in 2013 and 2015 and then diverted the proceeds to Secor Group, without
paying any proceeds to Brown. (See, e.g., Am. Compl. ¶¶ 7, 22, 36, 41.) Whether and
how Defendants accounted for these transactions in their 2013 to 2015 tax returns is
plainly relevant. See Transatlantic Healthcare, LLC v. Alpha Constr. of the Triad,
Inc., 2017 NCBC LEXIS 21, at *38–39 (N.C. Super. Ct. Mar. 9, 2017) (granting motion
to compel tax records). Any change in the reporting of these transactions between
initial and amended filings would be equally relevant.
75. There remains an issue regarding whether Defendants may redact the tax
returns by removing information they deem irrelevant. The Court is not aware of
any North Carolina precedent addressing the propriety of unilateral redactions for
relevance, but federal courts frequently hold that “relevance-based redactions are
disfavored.” Wellin v. Wellin, No. 2:13-cv-1831-DCN, 2015 U.S. Dist. LEXIS 132485,
at *18 (D.S.C. Sept. 30, 2015) (collecting cases).
76. The Court agrees with the reasoning of these decisions. “It is a rare
document that contains only relevant information.” Bartholomew v. Avalon Capital
Group, Inc., 278 F.R.D. 441, 451–52 (D. Minn. 2011). A producing party should not
“decide unilaterally what context is necessary . . . and what might be useless to the
case.” Evon v. Law Offices of Sidney Mickell, No. S–09–0760, 2010 U.S. Dist. LEXIS
20666, at *5 n. 1 (E.D. Cal. Feb. 3, 2010); see also Scranton Products, Inc. v. Bobrick
Washroom Equipment, Inc., 190 F.Supp.3d 419, 436–38 (M.D. Pa. 2016); Kipperman
v. Onex Corp., 260 F.R.D. 682, 693 (N.D. Ga. 2009). This is especially so when there is a protective order in place to shield any sensitive information. See Evon, 2010 U.S.
Dist. LEXIS 20666, at *5 n. 1.
77. The discretion to make unilateral redactions would incentivize parties to
hide “as much as they dare.” Burris v. Versa Prods., 2013 U.S. Dist. LEXIS 21851, at
*10 (D. Minn. Feb. 19, 2013). That, in turn, would give rise to “suspicion that relevant
material harmful to the producing party has been obscured,” along with “tend[ing] to
make documents confusing or difficult to use.” Bonnell v. Carnival Corp, CASE NO.
13-22265-CIV-WILLIAMS/GOODMAN, 2014 U.S. Dist. LEXIS 22459, at *8 (S.D. Fla.
2014) (quoting In re Medeva Securities Litigation, Master File No. 93-4376-
Kn(AJWx), 1995 U.S. Dist. LEXIS 21895, at *8 (C.D. Cal. 1995)). Indeed, there is “no
better way to ensure that a motion to compel will be filed than to unilaterally black
out large portions of documents as the human mind is naturally curious.” David v.
Alphin, No. 3:07cv11, 2010 U.S. Dist. LEXIS 144275, at *23 (W.D.N.C. Mar. 30,
2010).
78. The suspicions are heightened in this case where Brown contends
Defendants stole more than $2 million from him, concealed the transactions, and are
now hiding the wrongdoing behind large-scale redactions of relevant documents.
Matters are not helped by Defendants’ narrow understanding of the standard for
relevance. (See Defs.’ Br. in Supp. Mot. for Prot. Order and in Opp’n to Pl.’s Mot. to
Compel Discovery 3–4 [“Defs.’ Tax Br.”]; Defs.’ Br. in Supp. Mot. for Prot. Order and
in Opp’n to Pl.’s Mot. to Compel Discovery (Banking Records) 1–3 [“Defs.’ Banking
Br.”].) Taking into account that the parties have agreed to a Consent Protective Order, the Court is persuaded that Defendants’ unilateral redactions for relevance
are not appropriate.
79. For all these reasons, Defendants, except Rosso Group, must produce tax
returns for 2013 through 2015 within their possession, custody, or control. These
include Southgroup’s 2013 return, the original 2013 and 2014 returns for Secor
Group, the 2015 returns for Secor Group and Southgroup, and the returns for Secor
and Rosso for each year. Defendants shall not make any substantive redactions but
may redact confidential identifying information, such as social security numbers,
taxpayer identification numbers, and employer identification numbers. Defendants
shall also produce unredacted versions of the tax returns produced to date.
80. To the extent any returns do not exist or have not yet been filed, Defendants
shall certify to that effect and produce copies of the relevant extensions. (Defs.’ Tax
Br. 6 (stating that 2015 returns “have not been filed because they have received
extensions of time”).) To the extent Defendants do not possess the documents but
have “the legal right to obtain the documents on demand,” they shall do so. Lowd v.
Reynolds, 205 N.C. App. 208, 214, 695 S.E.2d 479, 484 (2010) (quoting Pugh v. Pugh,
113 N.C. App. 375, 380–81, 438 S.E.2d 214, 218 (1994)). The Court rejects
Defendants’ argument that they are not required to obtain tax returns from the
Internal Revenue Service under 26 U.S.C. § 6103. See United States v. All Assets
Held at Bank Julius Baer & Co., 142 F.Supp.3d 37, 45–46 (D.D.C 2015) (holding that
section 6103 “only regulates disclosure of tax returns by the IRS, not private
litigants,” and “the weight of case authority similarly holds that section 6103 did not enact a limitation on civil discovery” (collecting cases)); see also In re Pedestrian
Walkway, 173 N.C. App. 237, 242–43, 618 S.E.2d 819, 823 (2005) (noting order
requiring party to obtain tax returns from IRS and compelling their production).
C. Information Related to Other Deals
81. Brown requests two types of information related to other deals made by
Defendants. First, he seeks the production of all Membership Interest Purchase
Agreements entered into between Defendants and other investors. Second, he
requests that Defendants identify, in interrogatory responses, their other investors,
including both investors in the real estate at issue in this litigation and prior
investors in similar transactions.
82. The Court denies the motion to compel as to any Membership Interest
Purchase Agreements. The Court has held that Brown is not a member of Southgroup
under the terms of the MIPA he and Secor signed. In the absence of claims based on
that membership, the production of similar agreements does not appear reasonably
likely to lead to the discovery of admissible evidence.
83. The identification of Defendants’ other investors, however, could be
relevant. Defendants have alleged, for example, that Brown “promised to provide the
funding for all of Secor Group’s and Southgroup’s land acquisitions”—that is, Brown
was the exclusive source of funding. (Am. Countercls. ¶ 18.) They further allege that
Brown breached this promise by failing to fund a development called Sanctuary Cove.
(Am. Countercls. ¶ 67.) If Defendants had other investors during this time, it could be relevant to the issue of exclusivity and perhaps to mitigation of damages. (See Am.
Countercls. ¶ 18; Reply 10.)
84. Defendants state that they have no names to report because there were no
third-party investors “involved in Black Bear Falls, New River, or Nature’s
Courtyard.” (Defs.’ Tax Br. 12.) It is unclear, however, whether Defendants were
involved in deals with other investors for other properties at this time. If they were,
that would be relevant, at a minimum, to the alleged exclusive funding agreement
with Brown. Accordingly, Defendants shall supplement their interrogatory responses
to identify any investors in transactions after May 2013—that is, during the period
of the alleged funding agreement with Brown. If there are no such investors, they
shall supplement their responses to say so.
85. Brown is not entitled, however, to discovery regarding all investors Secor
and Rosso have ever had. This litigation concerns a limited time period and specific
agreements and transactions. The Court is not persuaded that Defendants’ investor
relationships prior to the agreement between Brown and Secor have any bearing on
this litigation.
86. The Court acknowledges Defendants’ concern that Brown will harass the
other investors and “will disclose the information.” (Defs.’ Tax Br. 8; see also Defs.’
Tax Br. 1, 7, 12.) These “concerns are not a proper reason to fail to produce relevant
information.” Balfour Beatty Rail, Inc. v. Vaccarello, 3:06-cv-551-J-20MCR, 2007
U.S. Dist. LEXIS 3581 (M.D. Fla., Jan. 18, 2007) (citing Fed. R. Civ. Pro. 26(c)).
Moreover, the parties’ Consent Protective Order states that any information produced during discovery “shall be used solely and exclusively for the purposes of prosecuting
or defending this Litigation, and shall not be used by a Party for any other purposes.”
(Consent Protective Order ¶ 2.)
D. Banking Records
87. Brown seeks all banking records for each Defendant—including the
personal records of Secor and Rosso—from 2012 to present. Defendants produced
records for Secor Group from January 2013 to January 2017, but the records are
heavily redacted. Defendants refused to produce any other records, including the
records of “ACRE,” which is simply another name for Secor Group.
88. This dispute is perplexing. It is clear from the record—including the initial
Business Court Rule 10.9 proceedings and the subsequent motion to compel—that
the real issue concerns Secor Group’s banking records. There is no dispute that funds
and expenses for the real estate transactions flowed through Secor Group, in part
because Southgroup does not have its own bank account. Pre-motion correspondence
between the parties reflects this: Defendants agreed to produce some banking records
for Secor Group, and Brown’s counsel expressed hope that these records would
provide most of the needed information. The parties’ current all-or-nothing positions
are untenable.
89. The Court concludes, first, that bank records from 2012 and bank records
for Rosso Group are not relevant. Brown maintains that records from 2012 are
relevant to assessing damages and to assessing Defendants’ “business model.” (Br.
in Supp. of Pl.’s Mot. to Compel Discovery (Banking Records) 11–12 [“Pl.’s Banking Br.”].) The connection is tenuous and unconvincing, and the Court denies the motion
to compel as to these records.
90. Second, the Court reiterates that relevance-based redactions are disfavored.
See Wellin, 2015 U.S. Dist. LEXIS 132485, at *18. Even if producing parties were
entitled to unilaterally determine what context is important and what is not, this
would not be such a circumstance. Secor Group’s bank accounts may reveal expenses
associated with the relevant properties, the disposition of proceeds from their sales,
and transactions with other investors during the period of the alleged funding
promise. Moreover, Secor Group’s account was apparently used for the transactions
of Southgroup and ACRE, adding to the need for transparency. Accordingly,
Defendants shall provide unredacted copies of the information already produced as
to Secor Group.
91. Third, Defendants’ basis for withholding the records of ACRE on relevance
grounds is unpersuasive. ACRE is another name for Secor Group, and there is no
dispute that ACRE received commissions and played a role in at least some of the
real estate transactions. (Defs.’ Banking Br. 7; see also Defs.’ Banking Br. 8; Defs.’
Tax Br. 3.) Defendants shall produce the requested information for the account
associated with ACRE.
92. Fourth, Brown is not entitled to the banking records of the individual
defendants, Secor and Rosso, which are highly likely to contain vast amounts of
irrelevant, personal information. Brown’s basis for making such an overbroad,
intrusive request appears to be a belief that funds deposited with Secor Group were ultimately distributed to Secor and Rosso. The banking records of Secor Group and
the tax records of the individuals provide adequate, targeted discovery for this
purpose. Balancing Brown’s minimal need for these records against their likely
irrelevance and the burden to Secor and Rosso, the Court denies the motion to compel
as to these records and grants the cross-motion for protective order.
IV. CONCLUSION
93. The Court GRANTS Rosso and Secor Group’s Rule 12(b)(6) Motion. The
claim for breach of contract against these parties is DISMISSED with prejudice.
94. The Court GRANTS in part Defendants’ Rule 12(c) Motion as follows:
a. All claims against Rosso Group are DISMISSED with prejudice.
b. Brown is not entitled to a declaration that he is a member of Southgroup,
and judgment on the pleadings is GRANTED in favor of Defendants as to
this claim.
c. The claims for an accounting, distribution, breach of fiduciary duty and
constructive fraud, and failure to register a security are DISMISSED with
d. In all other respects, the Rule 12(c) Motion is DENIED.
95. The Court GRANTS in part the Motions to Compel and GRANTS in part
the Motions for Protective Order as follows:
a. Defendants, except Rosso Group, shall produce unredacted copies of tax
returns for 2013 to 2015 within their possession, custody, or control. To the
extent such returns do not exist, each Defendant shall certify to that effect. To the extent Defendants must obtain any returns from the relevant
governmental authority, they shall do so. As needed, Defendants shall
produce the returns, certify their non-existence, or initiate an appropriate
request to obtain them (and provide Brown a copy of the request) within
two weeks of this Order.
b. Secor Group and ACRE shall produce unredacted copies of all responsive
banking records from May 2013 to January 2017 within their possession,
custody, or control, within two weeks of this Order. Brown is not entitled
to the personal banking records of Secor and Rosso or to the records of Rosso
Group.
c. Defendants, except Rosso Group, shall supplement their interrogatory
responses to identify all entities and individuals with whom they had an
investment relationship during the period of the alleged funding promise.
Brown is not entitled to receive the names of investors who entered into an
investment relationship with Defendants prior to the date of the alleged
funding promise.
d. Brown is not entitled to the production of Defendants’ agreements with
e. The Court determines, in its discretion, that the parties shall bear their
own costs.
f. Except as stated, the Motions to Compel and Motions for Protective Order
are DENIED. This the 28th day of July 2017.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases