Dunn Holdings I, Inc. v. Confluent Health LLC, 2018 NCBC 89.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF WAKE 17 CVS 9321
DUNN HOLDINGS I, INC. (previously DUNN PHYSICAL THERAPY, INC.), a North Carolina corporation, Individually and Derivatively on behalf of BREAKTHROUGH CARY PT, LLC; CHRISTOPHER F. DUNN; and ORDER AND OPINION ON THERESA M. DUNN, DEFENDANTS’ MOTION TO DISMISS Plaintiffs, SECOND AMENDED COMPLAINT
v.
CONFLUENT HEALTH LLC, a Delaware limited liability company; LAURENCE N. BENZ, Manager of Breakthrough Cary PT, LLC; BREAKTHROUGH CARY PT, LLC, a North Carolina limited liability company; MARK F. WHEELER; JEFFREY HATHAWAY; and BREAKTHROUGH PHYSICAL THERAPY, INC.,
Defendants.
THIS MATTER comes before the Court on Defendants Confluent Health LLC;
Laurence N. Benz; Breakthrough Cary PT, LLC; Mark F. Wheeler; Jeffrey Hathaway;
and Breakthrough Physical Therapy, Inc.’s (collectively, “Defendants”) Motion to
Dismiss (“Motion”; ECF No. 48).
THE COURT, having considered the Motion, the briefs in support of and in
opposition to the Motion, the exhibits attached to the Second Amended Complaint
and the briefs, the arguments of counsel at the hearing, and other appropriate
matters of record, concludes that the Motion should be GRANTED, in part, and
DENIED, in part, for the reasons set forth below. Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, by J. Mitchell Armbruster for Plaintiffs Dunn Holdings I, Inc.; Christopher Dunn; and Theresa Dunn.
Stites & Harbison PLLC, by Chadwick A. McTighe (pro hac vice) and Timothy D. Thompson (pro hac vice), and Robinson, Bradshaw & Hinson, P.A., by Edward F. Hennessey, IV for Defendants Confluent Health LLC; Laurence N. Benz; Breakthrough Cary PT, LLC; Mark F. Wheeler; Jeffrey Hathaway; and Breakthrough Physical Therapy, Inc.
McGuire, Judge.
FACTS AND PROCEDURAL BACKGROUND
1. The Court does not make findings of fact on motions to dismiss under
Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. N.C.G.S. § 1A-1, Rule
12(b)(6) (hereinafter, the North Carolina Rules of Civil Procedure will be referred to
as “Rule(s)”). The Court only recites those facts included in the Second Amended
Complaint that are relevant to the Court’s determination of the Motion. See, e.g.,
Concrete Serv. Corp. v. Inv’rs Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758
(1986).
2. In 1998, Christopher Dunn (“Christopher”) and Theresa Dunn
(“Theresa”) (collectively, “the Dunns”) founded Dunn Physical Therapy, Inc., which
later became Dunn Holdings I, Inc. (Dunn Physical Therapy, Inc., and Dunn Holdings
I, Inc. are collectively referred to as “Dunn PT”). (2d Am. Compl., ECF No. 36.2, at
¶ 1.) Dunn PT operated four physical therapy offices in Wake County, North
Carolina. (Id. at ¶ 26.) 3. Laurence N. Benz (“Benz”) owned PT Development, LLC, which itself
owned several physical therapy practices in North Carolina and across the country.
(Id. at ¶¶ 14, 28.)
4. Mark D. Wheeler and Jeffrey Hathaway (“Hathaway”) are former
members of PT Development, LLC. (Id. at ¶¶ 17, 18.)
A. The Sales Transaction and financing of the sale
5. In 2014, the Dunns began to negotiate with Benz about Benz purchasing
a majority interest in Dunn PT. Benz told the Dunns that PT Development, LLC’s
business model is to buy a majority stake in successful physical therapy practices but
allow the original founders to continue to manage the practices with the support and
experience of PT Development, LLC. (Id. at ¶ 24.) Benz also explained that PT
Development, LLC provided all administrative services for a competitive fee, such
that overall expenses would be reduced because multiple practices would be sharing
expenses and realizing economies of scale. (Id. at ¶ 25.)
6. In June 2014, the Dunns sold 80% of Dunn PT to a Kentucky limited
liability company established by Benz called PT Development Cary, LLC (“PTD
Cary”). Benz also created a Kentucky limited liability company called Breakthrough
Cary PT, LLC (“Breakthrough Cary”) and contributed the 80% interest in Dunn PT
to Breakthrough Cary. The Dunns then contributed their remaining 20% of Dunn
PT to Breakthrough Cary (the sale of Dunn PT’s interest and the contribution of its
remaining 20% interest to Breakthrough Cary hereinafter is referred to as the “Sales
Transaction”). Consequently, after the transaction was completed, PTD Cary and Dunn PT were the two members of Breakthrough Cary, with PTD Cary owning an
80% interest and Dunn PT owning a 20% interest. (Id. at ¶¶ 29–30.) On June 2,
2014, PTD Cary and Dunn PT executed an Operating Agreement for Breakthrough
Cary (“Operating Agreement”). (ECF No. 50.1.) The Operating Agreement named
Benz as the manager of Breakthrough Cary.
7. Benz financed a portion of the purchase price paid to the Dunns through
a Seller Note payable from Breakthrough Cary to Dunn PT (the “Acquisition Debt”).
(Id. at ¶ 33.) The Dunns expressed concern that the Acquisition Debt would be paid
back directly out of Breakthrough Cary’s profits, meaning that 20% of the debt would
be paid by the Dunns, and told Benz that they did not want “to be in the position of
‘paying themselves.’” (Id. at ¶¶ 33–35.) Benz assured the Dunns that the debt would
be paid “‘below the line’ and, accordingly, would not have any effect on their
distributions or the value of their interest in [Breakthrough Cary].” (Id. at ¶ 36.)
Based on Benz’s assurances, the Dunns agreed to go forward with the sale. (Id.)
However, Plaintiffs allege that Benz ultimately did not pay the debt “below the line,”
but instead used Dunn PT’s share of Breakthrough Cary’s profits to repay the
Acquisition Debt. (Id. at ¶ 4.)
B. Failure to make distributions and the Distribution Agreement
8. During negotiation of the Sales Transaction, the Dunns sought
assurances from Benz that they would receive regular distributions from
Breakthrough Cary. (Id. at ¶¶ 41, 43.) The Operating Agreement gave Benz, as
manager, the discretion to make distributions once Breakthrough Cary had cash reserves of 1.5 times the company’s monthly expenses. (Id. at ¶ 42.) Benz “assured
the Dunns that he planned to make regular distributions once the cash reserve
threshold was met” and that they “could expect to start receiving distributions in or
around the sixth month following the closing of the sale.” (Id. at ¶¶ 44–45.) Plaintiffs
allege that because the Acquisition Debt was paid out of Breakthrough Cary’s profits
and not “below the line,” the company never met the cash reserve requirements and
never paid distributions. (Id. at ¶ 46.)
9. In July 2016, in response to the Dunns’ complaints about the lack of
distributions, Hathaway sent an email to Christopher memorializing an agreement
(the “Distribution Agreement”) under which Christopher would receive quarterly
distributions from Breakthrough Cary. (ECF No. 36.2, Ex. B.) The email stated as
follows:
You had asked me to put in writing the mechanics or agreement on your distribution from BreakThrough Cary. Below is an outline – pretty simple! Christopher Dunn Distribution Agreement: Starting in Q2 2016 Distributions from BreakThrough Cary will be as follows: 1. At the end of each quarter the EBIDTA after OHA will be calculated taking out the debt costs (interest, etc.) from the sale of Dunn PT to BT Cary. 2. Assuming there are no losses to be made up from the previous quarters (initially starting with Q1 2016) then 20% of the net profits will be paid to Christopher Dunn[.]
Let me know if you have any concerns or questions.
Jeff Jeffrey W. Hathaway, PT, DPT Proactive/Breakthrough PT/Confluent Health
(Id.) 10. Breakthrough Cary subsequently paid the Dunns distributions for the
second and third quarters of 2016 but did not make any further distributions. (ECF
No. 36.2, at ¶ 51.)
C. The Roll-up Transaction and Dunn PT’s “Tag-along Rights”
11. In October 2014, PTD Cary notified the Dunns that PTD Cary intended
to participate in a reorganization, whereby PTD Cary’s 80% ownership interest in
Breakthrough Cary would be transferred to Confluent Health, LLC (“Confluent”), an
entity that Benz substantially owns. (Id. at ¶ 91.) In exchange, the owners of PTD
Cary would receive ownership interests in Confluent (hereinafter the “Roll-up
Transaction”). (Id.)
12. Plaintiffs allege that under Breakthrough Cary’s Operating Agreement,
Dunn PT also had the right to participate in the Roll-up Transaction (the “Tag-along
Rights”). (Id. at ¶¶ 91–96.) The Operating Agreement provides that:
If [the Seller] proposes to transfer in a sale . . . Membership Interests representing fifty percent (50%) or more of the then outstanding Membership Interests of the Company . . . then the other Members (collectively, the ‘Tag-Along Sellers’) shall have the right . . . to require the proposed purchaser(s) to purchase from such Tag-Along Sellers their Membership Interest(s) . . . at the same price per unit and upon the same terms as offered by the [purchaser(s)].
(ECF No. 50.1, at § 18.1.) Dunn PT’s Tag-along Rights as the Tag-Along Sellers were
triggered under the Operating Agreement when the Seller (PTD Cary) sought to
transfer its 80% interest in Breakthrough Cary to Confluent. 13. The Dunns notified Benz that Dunn PT wished to sell its interest in
Breakthrough Cary to Confluent pursuant to the Tag-along Rights. Benz eventually
agreed to offer Dunn PT a right to participate in the Roll-up Transaction, but only to
transfer 50% of its membership in Breakthrough Cary to Confluent, and in a manner
that Plaintiffs allege “deeply devalued” Dunn PT’s interest in Breakthrough Cary.
(Id. at ¶¶ 94–96.) Dunn PT did not accept the offer. Nevertheless, on December 22,
2014, Dunn PT executed an “Acknowledgment and Consent” authorizing PTD Cary
to distribute its membership interests to Benz, Hathaway, and Wheeler, and the
contribution of their membership interests to Confluent. (“Acknowledgment and
Consent,” ECF No. 50.6.)
14. Following the Roll-up Transaction, Confluent became an 80% owner of
Breakthrough Cary.
D. Management Services Agreement and improper expenses charged to Breakthrough Cary
15. Contemporaneously with the Sales Transaction, “Benz, on behalf of both
PT Development and Breakthrough Cary, executed a Management Services
Agreement pursuant to which PT Development was to provide certain administrative
and management services to Breakthrough Cary, including without limitation,
certain accounting, billing, collections, marketing, and human resources services in
exchange for a monthly management fee equal to 7% of the Company’s gross
collections.” (ECF No. 36.2, at ¶ 56.) 16. Plaintiffs allege that despite their complaints, Benz and Confluent have
regularly charged Breakthrough Cary for expenses that are not Breakthrough Cary’s
responsibility and should not have been charged to the company. (Id. at ¶¶ 57–80.)
E. Interference with Christopher’s management of Breakthrough Cary
17. As part of the Sales Transaction, Christopher executed an employment
agreement with Breakthrough Physical Therapy, Inc. (“Employment Agreement”).
(Id. at ¶ 160; Empl. Agreement, ECF No. 50.5.) Under Article 14 of the Operating
Agreement, Benz, as manager, is to manage the business and affairs of the Company.
(ECF No. 36.2, at ¶ 158.) Although Benz served as manager of Breakthrough Cary,
Benz promised that Christopher would continue to manage the day-to-day operations
of the physical therapy practice and delegated to Christopher those management
responsibilities. (Id. at ¶¶ 32, 160.) Despite Benz’s promise, however, Hathaway
began “assert[ing] himself more and more directly” into the management of
Breakthrough Cary to “usurp Christopher’s day to day management responsibilities
and authority.” (Id. at ¶¶ 82, 84.) Hathaway changed the name of Breakthrough
Cary’s locations from “Dunn Physical Therapy” to “Breakthrough Physical Therapy,”
and in July 2017, Hathaway informed Christopher that he had been the CEO of
Breakthrough Cary since 2015. (Id. at ¶¶ 88, 90.)
F. The Non-compete Agreements
18. In conjunction with the Sales Transaction, Breakthrough Cary entered
into Noncompetition, Nonsolicitation, and Nondisclosure Agreements with
Christopher and Theresa (the “Non-compete Agreements”). (Id. at ¶¶ 164–75; ECF Nos. 50.3 and 50.4.) The Non-compete Agreements restrict Christopher and Theresa
from having any relationship whatsoever with a physical therapy business for a
period of five years following execution of the agreements and in a territory
encompassing a 25 mile radius around Breakthrough Cary’s office locations. (ECF
No. 36.2, at ¶¶ 168–69.) The Employment Agreement also contains a non-compete
provision placing similar restrictions on Christopher. (Id. at ¶ 165.) Plaintiffs now
allege that the restrictions are overbroad and unenforceable.
G. Procedural history
19. Plaintiffs filed their first Complaint in this matter on July 28, 2017.
(ECF No. 3.) Plaintiffs subsequently filed an Amended Complaint on November 6,
2017. (ECF No. 7.) Defendants moved to dismiss the Amended Complaint on
December 1, 2017 (ECF No. 16), and the motion became ripe on January 11, 2018.
(ECF No. 45.)
20. On December 22, 2017, Plaintiffs filed a Motion to Amend Complaint.
(ECF No. 36.) The Court granted the Motion to Amend Complaint on January 30,
2018 and deemed the Second Amended Complaint to have been filed and served upon
Defendants on January 30, 2018. (ECF No. 47.) The Second Amended Complaint
alleges claims for: breaches of contract; breach of fiduciary duty; judicial dissolution;
appointment of a receiver; declaratory judgment declaring the Non-compete
Agreements invalid; unfair and deceptive trade practices; constructive fraud; and
fraud. (ECF No. 36.2, at ¶¶ 127–98.) 21. On March 1, 2018, Defendants filed the Motion. (ECF No. 48.)
Defendants move to dismiss under Rules 12(b)(1) and 12(b)(6). (Id.) On March 26,
2018, Plaintiffs filed a response to the Motion (ECF No. 52), and Defendants filed
their reply on April 9, 2018 (ECF No. 54). The Court subsequently held a hearing on
the Motion. During the hearing, the Court directed the parties to file supplemental
briefing on the issue of whether Plaintiffs adequately alleged that Confluent is a
successor to PTD Cary for purposes of imposing liability on Confluent. The parties
subsequently filed the supplemental briefs. (Defs.’ Suppl. Br., ECF No. 57; Pls.’
Suppl. Br., ECF No. 58.) The Motion is now ripe for resolution.
ANALYSIS
A. Standards of review
22. Dismissal under Rule 12(b)(1) is proper “[i]f a party does not have
standing to bring a claim [because] a court has no subject matter jurisdiction to hear
the claim.” Estate of Apple v. Commercial Courier Express, Inc., 168 N.C. App. 175,
177, 607 S.E.2d 14, 16 (2005). When considering a motion to dismiss for lack of
standing, the Court must “view the allegations as true and the supporting record in
the light most favorable to the non-moving party.” Mangum v. Raleigh Bd. of
Adjustment, 362 N.C. 640, 644, 669 S.E.2d 279, 283 (2008).
23. The burden is on the party invoking jurisdiction to establish standing.
Marriot v. Chatham Cty., 187 N.C. App. 491, 494, 654 S.E.2d 13, 16 (2007). The Court
will only grant a Rule 12(b)(1) motion “if the material jurisdictional facts are not in
dispute and the moving party is entitled to a judgment as a matter of law.” Wilkie v. Stanley, 2011 NCBC LEXIS 11, *10 (N.C. Super. Ct. Apr. 20, 2011) (citing Southstar
Funding, L.L.C. v. Warren, Perry & Anthony, P.L.L.C., 445 F. Supp. 2d 583, 584
(E.D.N.C. 2006)).
24. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court’s
inquiry is “whether, as a matter of law, the allegations of the [C]omplaint, treated as
true, are sufficient to state a claim upon which relief may be granted under some
legal theory, whether properly labeled or not.” Harris v. NCNB Nat’l Bank, 85 N.C.
App. 669, 670, 355 S.E.2d 838, 840 (1987). North Carolina is a notice pleading state.
See, e.g., Feltman v. City of Wilson, 238 N.C. App. 246, 252, 767 S.E.2d 615, 620 (2014)
(quoting Wake Cty. v. Hotels.com, L.P., 235 N.C. App. 633, 646, 762 S.E.2d 477, 486
(2014)). “Under notice pleading, a statement of claim is adequate if it gives sufficient
notice of the claim asserted to enable the adverse party to answer and prepare for
trial, to allow for the application of the doctrine of res judicata, and to show the type
of case brought.” Id.
25. Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the
complaint on its face reveals that no law supports plaintiff’s claim; (2) when the
complaint reveals on its face the absence of fact sufficient to make a good claim; [or]
(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s
claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224 (1985). In deciding
a motion to dismiss, the Court must construe the Complaint liberally and accept all
well-pleaded allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681
S.E.2d 858, 862 (2009). The Court, however, is not required “to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or
unreasonable inferences.” Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human
Servs., 174 N.C. App. 266, 274, 620 S.E.2d 873, 880 (2005) (citations and quotation
marks omitted). In addition, the Court may consider documents that are the subject
of Plaintiff’s Complaint and to which the Complaint specifically refers. Oberlin
Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001).
B. Successor liability
26. As an initial matter, Defendants argue that Plaintiffs cannot make
claims against Confluent as the successor to PTD Cary because PTD Cary is now
dissolved and Confluent is not a successor in interest to PTD Cary. (ECF No. 57, at
p. 2.) Plaintiffs, however, argue that Confluent is the legal successor in interest to
PTD Cary and that, in any event, Plaintiffs are permitted to sue former members of
a dissolved LLC under Kentucky law.1 (ECF No. 58, at pp. 4, 7.)
27. Under Kentucky law, “[i]t is generally accepted . . . that a corporation
which purchases another corporation does not assume the payment of any debts or
liabilities of the corporation which it has purchased.” Pearson v. Nat’l Feeding Sys.,
90 S.W.3d 46, 49 (Ky. 2002) (citing Am. Railway Express Co. v. Commonwealth, 228
S.W. 433, 436–37 (Ky. 1920)). However, there are four exceptions to this rule:
(1) where the purchaser expressly or impliedly agrees to assume such debts or other liabilities; (2) where the transaction amounts to a consolidation or merger of the seller and purchaser; (3) where the purchasing corporation is merely a continuation of the selling corporation; or (4)
1 PTD Cary was created under Kentucky law. (ECF No. 36.2, at ¶ 2.) The parties both make their arguments regarding successor liability referencing Kentucky law. (ECF No. 57, at pp. 2–3; ECF No. 58, at pp. 4, 6–7.) where the transaction is entered into fraudulently in order to escape liability for such debts.
Id.
28. Plaintiffs have not alleged, and neither party contends, that PTD Cary
“sold” its assets to Confluent. Rather, Plaintiffs allege, and Defendants do not
dispute, that PTD Cary transferred its ownership interest to Confluent in what
Plaintiffs describe as a “roll-up.” (ECF No. 36.2, at ¶ 31.) The Acknowledgment and
Consent in which the parties consented to the transfer states that PTD Cary
“distribute[d]” its interest to the members (Benz, Hathaway, and Wheeler), and the
members “contribute[d]” the interests in PTD Cary to Confluent “in exchange for
limited liability company interests in Confluent.” (ECF 57.1, at p. 1.) The allegations
do not suggest an arms-length purchase of PTD Cary by Confluent, but rather a
restricting of PTD Cary’s ownership interest in Breakthrough Cary between close
business associates.
29. In addition, Plaintiffs expressly allege that Confluent is a “successor” to
PTD Cary’s membership interest in Breakthrough Cary. (ECF No. 36.2, at ¶¶ 13,
133.) Plaintiffs also contend that the provisions of the Operating Agreement
regarding transfers of membership interests strongly support the notion that
Confluent should be considered a successor for purposes of the claims raised in this
lawsuit. (ECF No. 58, at pp. 2–3.) Section 16.1 of the Operating Agreement, entitled
“Restrictions on Transfer,” provides in relevant part as follows:
The Transfer of an Interest pursuant to this Article 16, or otherwise, shall not release the assigning Member from such Member’s obligations under this Agreement unless the transferee of such Interest is approved by the vote of Members holding all of the Participating Percentages as a substituted Member, and the approved assignee assumes in writing the obligations of the assigning Member. The approved Transfer pursuant to this paragraph 16.1 shall confer upon the assignee the right to become a substituted Member, in the following manner and subject to the following conditions: . . .
(iv) Each assignee shall agree in writing to be subject to and bound by the terms of this Agreement as if originally a party to this Agreement.
(ECF No. 50.1, at § 16.1) (emphasis added). Plaintiffs argue that this language either
expressly or impliedly, creates successor liability obligations on Confluent as the
transferee of PTD Cary. (ECF No. 58, at pp. 2–3.)
30. Finally, Plaintiffs argue that the allegations in the Second Amended
Complaint support the conclusion that the transfer of PTD Cary’s interests to
Confluent amounted to a consolidation of merger and that Confluent’s ownership of
the interest was a mere continuation of PTD Cary’s interest. (Id. at pp. 4–5.) Indeed,
the allegations do not suggest that Breakthrough Cary’s operations changed in any
significant way after the transfer of membership interest.
31. The Court concludes that, at this early stage of the proceedings,
Plaintiffs have adequately alleged that Confluent is the successor to PTD Cary for
purposes of imposing liability on Confluent. Accordingly, the Court need not address
at this time Plaintiffs’ allegations concerning the potential individual liability of
Benz, Hathaway, and Wheeler. C. Standing to bring direct and derivative claims
32. Plaintiffs allege that Confluent breached fiduciary duties to Dunn PT
and committed constructive fraud “by engaging in self-dealing and engaging in
financial transactions and accounting decisions which have benefited Defendants
Confluent and/or Benz to the detriment of Plaintiff Dunn PT,” (ECF No. 36.2, at
¶142), and by making misrepresentations that the acquisition debt would be kept
“below the line’ and “regarding distributions, expenses, acquisition indebtedness
treatment, and other matters.” (Id. at ¶¶ 184–85, 193.) Plaintiffs further allege that
“to the extent Dunn PT can only recover on [these] claim[s] derivatively” the claims
are “also asserted as [ ] derivative claim[s].” (Id. at ¶¶ 146, 187.) Defendants argue
that Dunn PT’s claims for breach of fiduciary duty and constructive fraud against
Confluent should be dismissed pursuant to Rule 12(b)(1) because Dunn PT lacks
standing to pursue those claims directly or derivatively on behalf of Breakthrough
Cary. Defendants contend that Dunn PT has failed to allege direct claims against
Confluent and that Dunn PT did not make a proper derivative demand that would
enable them to assert the claims derivatively. (Mem. Supp. Defs.’ Mot. Dismiss Pls.’
Second Am. Compl., ECF No. 49, at pp. 14–16.)
33. Defendants argue that the alleged actions of Confluent can only have
harmed Breakthrough Cary, “with any harm to [Dunn PT] flowing from its
membership interest in Breakthrough Cary.” (Id. at p. 14.) Any harm to Dunn
Holdings could “give rise only to claims by Breakthrough Cary, and so any possible
claim would be derivative.” (Id. at p. 6.) Plaintiffs counter that Confluent owed Dunn PT a fiduciary duty as majority, controlling member of Breakthrough Cary, and that
Dunn PT is permitted to bring an individual action against Confluent for breaches of
that duty. (ECF No. 52, at p. 16.)
34. Under North Carolina law, a controlling member of an LLC owes a
fiduciary duty to minority members. Kaplan v. O.K. Techs., L.L.C., 196 N.C. App.
469, 473, 675 S.E.2d 133, 137 (2009); Plasman v. Decca Furniture (USA), Inc., 2016
NCBC LEXIS 80, *25–26 (N.C. Super. Ct. Oct. 21, 2016) (holding that defendant, as
a majority member of the LLC, owed a fiduciary duty to plaintiff, a minority member
of the LLC); see also Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App.
390, 405, 537 S.E.2d 248, 259 (2000) (“[M]inority shareholders in a closely held
corporation who allege wrongful conduct and corruption against the majority
shareholders in the corporation may bring an individual action against those
shareholders, in addition to maintaining a derivative action on behalf of the
corporation.”) Plaintiffs allege that Confluent had an 80% ownership interest in
Breakthrough Cary, and was “the controlling majority member of [Breakthrough
Cary].” (ECF No. 36.2, at ¶¶ 2, 118.) Therefore, Plaintiffs have alleged Confluent
owed Dunn PT a fiduciary duty, and Dunn PT may pursue its own individual claims
for breach of fiduciary duty and constructive fraud against Confluent.
35. Defendants also assert that Plaintiffs did not make a proper derivative
demand on Breakthrough Cary that would enable Dunn PT to bring its claims for
breach of fiduciary duty or constructive fraud. Since Plaintiffs plead the derivative
claims only in the alternative, and the Court already has concluded that Dunn PT may pursue direct claims for breach of fiduciary duty and constructive fraud, the
Court need not address Defendants’ argument.
36. Defendants’ Motion to Dismiss Plaintiffs’ claims for breach of fiduciary
duty and constructive fraud should be DENIED to the extent those claims allege
direct, non-derivative claims. In addition, Plaintiffs’ claims for breach of fiduciary
duty and constructive fraud should be DISMISSED AS MOOT to the extent those
claims allege derivative claims.
D. First Claim for Relief: Breach of Contract – Tag-Along Rights
37. In their First Claim for Relief, Plaintiffs allege that Confluent breached
the Operating Agreement regarding the Tag-along Rights. Plaintiffs allege that
“[t]he Confluent Roll-up in October 2014 triggered Dunn PT’s Tag-along Rights under
the Operating Agreement, and Benz and PTD Cary (now Confluent) breached the
Operating Agreement by not allowing Dunn PT to fully participate in the Roll-up at
the fair value of their equity stake, which it would have done if permitted.” (Id. at
¶ 129.) Defendants contend that this claim should be dismissed because (a) Dunn PT
waived any breaches of the Operating Agreement by signing the Acknowledgment
and Consent allowing the transfer of PTD Cary’s interest to Confluent, (ECF No. 49,
at pp. 8–9), and (b) Plaintiffs have not alleged a breach because Dunn PT’s only
remedy for Confluent’s refusal to purchase Dunn PT’s interests was to invoke Section
18.2 of the Operating Agreement blocking PTD Cary’s transfer of its interests to
Confluent. (Id. at pp. 9–10.) Plaintiffs, on the other hand, argue that (a) the Court
cannot consider the Acknowledgment and Consent because it is not expressly referenced in the Second Amended Complaint; (b) Defendants’ waiver argument is
not properly considered on a motion to dismiss under Rule 12(b)(6); and (c) Plaintiff
has sufficiently alleged a breach of the Tag-along Rights. (ECF No. 52, at pp. 9–13.)
38. As a preliminary matter, the Court concludes that it can properly
consider the Acknowledgment and Consent in deciding the Motion. Although
Plaintiffs do not expressly refer to the Acknowledgment and Consent in their
allegations, the Roll-up Transaction is one of the primary transactions that is the
subject of the claims in this lawsuit. Oberlin Capital, L.P., 147 N.C. App. at 60, 554
S.E.2d at 847 (the “consideration of a contract which is the subject matter of an action
does not expand the scope of a 12(b)(6) hearing and does not create justifiable surprise
in the nonmoving party.”).
39. The Court also believes that it can properly consider Defendants’ waiver
defense under the circumstances of this case. Although there is North Carolina case
law suggesting that it may not be proper to consider an affirmative defense on a
motion to dismiss under Rule 12(b)(6) motion, see Brooks Distributing Co v. Push, 91
N.C. App. 715, 723–24, 373 S.E.2d 300, 305 (Cozort, J., dissenting), rev’d per curiam
324 N.C. 326, 378 S.E.2d 31 (1989), more recent cases have permitted consideration
of statute of limitations defenses raised by motion to dismiss. Johnson v. North
Carolina DOT, 107 N.C. App. 63, 66–67, 418 S.E.2d 700, 702 (1992) (“Absent a
showing of prejudice, an affirmative defense may be raised by a Rule 12(b)(6) motion
to dismiss.”); Carlisle v. Keith, 169 N.C. App. 674, 687, 614 S.E.2d 542, 551 (2005)
(“This Court has held that a trial court may consider a statute of limitations defense, though not raised in a motion to dismiss, when the non-movant has not been
surprised and has full opportunity to argue and present evidence on the affirmative
defense.” (citations and quotation marks omitted)). Plaintiffs do not argue that they
are prejudiced by Defendants’ waiver argument, and they cannot be surprised by a
defense based on the Acknowledgment and Consent, to which Dunn PT is a party.
Under the circumstances of this case, the Court concludes that it is appropriate to
consider Defendants’ argument that Plaintiffs waived the claim for breach of the Tag-
along Rights.
40. The Supreme Court of North Carolina has held that
It is well established that a written contract may be waived, and the provisions in a contract may be waived. A waiver takes place where a man dispenses with the performance of something which he has a right to exact. A party may excuse performance expressly or by conduct which naturally and justly leads the other party to believe that performance is dispensed with. There can be no waiver unless so intended by one party, and so understood by the other, or one party has so acted as to mislead the other. It is a question of intent, which may be inferred from a party’s conduct. Intent is an operation of the mind and should be proven and found as a fact and is rarely to be inferred as a matter of law.
Harris & Harris Constr. Co. v. Crain & Denbo, Inc., 256 N.C. 110, 118–19, 123 S.E.2d
590, 596 (1962) (citation omitted).
41. Defendants argue that Dunn PT expressly waived its claim for breach
of the Tag-along Rights in the Operating Agreement by executing the
Acknowledgment and Consent, which contained the following provision:
Each of the Company and its members and manager hereby irrevocably waives on a one-time basis (a) any purchase options, rights of first refusal or similar rights that may arise or that may have otherwise arisen under the Operating Agreement or otherwise to purchase the PTD Cary Interest as a result of the transactions described above, and (b) any noncompliance with the terms of the Operating Agreement resulting from the foregoing.
(ECF No. 57.1, at p. 1.) Plaintiffs make several arguments in response. First,
Plaintiffs contend that the referenced language does not explicitly waive the Tag-
along Rights contained in Article 18 of the Operating Agreement, and is most
reasonably interpreted as applying only to claims on non-compliance with Article 16
involving transfers of interest. (ECF No. 52, at p. 10.) Plaintiffs also argue that the
Acknowledgment and Consent does not reference any consideration provided to
Plaintiffs and therefore cannot alter their rights under the Operating Agreement.
(Id.) The Court does not find these arguments persuasive. The language in the
Acknowledgment and Consent expressly waives “any noncompliance with the terms
of the Operating Agreement,” and is broad enough to encompass potential claims
regarding Tag-along Rights without express mention of those rights. In addition,
Plaintiffs have not directed the Court to any North Carolina precedent holding that
a contractual right can only be waived in exchange for consideration. To the contrary,
the law provides that a person can waive contract rights by words or conduct that
“naturally leads the other party to believe that the right has been intentionally given
up.” Phoenix Ltd. P’ship v. Simpson, 201 N.C. App. 493, 500, 688 S.E.2d 717, 722
(2009) (citations and quotation marks omitted).
42. Plaintiffs also argue that since a waiver involves a question of intent, it
is ill-suited to resolution on a motion to dismiss. (ECF No. 52, at pp. 10–11.) Plaintiffs note that “the Roll-up [T]ransaction [ ] includes many documents, e-mails, and other
communications” that may bear on whether PT Dunn intended to waive it rights. (Id.
at p. 10.) The Acknowledgment and Consent does not contain a merger clause
purporting to limit its terms to the written provisions of the documents. Accordingly,
there may exist other documents and communications surrounding the execution of
the Acknowledgment and Consent that would inform the interpretation of the waiver
provision.
43. The Court concludes that it is premature at this stage of the case to
decide Defendants’ waiver defense. Discovery may yield additional information
regarding Dunn PT’s intent in executing the Acknowledgment and Consent.
44. Finally, Defendants contend Plaintiffs do not allege a claim for breach
of the Tag-along Rights because Dunn PT’s only recourse for Confluent’s refusal to
purchase Dunn PT’s membership interests in the Roll-up Transaction was to block
PTD Cary’s transfer of its interests to Confluent pursuant to Section 18.2 of the
Operating Agreement. Plaintiffs do not directly respond to Defendants’ argument,
but instead contend they have adequately alleged a claim for breach of contract to
survive dismissal. A breach of contract claim requires that the plaintiff allege (1) the
existence of a valid contract and (2) a breach of the terms of that contract. Poor v.
Hill, 138 N.C. App. 19, 26, 530 S.E.2d 838, 843 (2000). Plaintiffs have adequately
alleged, and Defendants do not dispute, that the Operating Agreement was a valid
contract. Plaintiffs have also alleged a breach of the Operating Agreement. (ECF
No. 5, at ¶ 129.) Accordingly, the Court concludes that Plaintiffs have properly pled a claim for breach of the Operating Agreement regarding the Tag-along Rights.
Highland Paving Co. v. First Bank, 227 N.C. App. 36, 40, 742 S.E.2d 287, 291 (2013)
(“The elements of a claim for breach of contract are (1) existence of a valid contract
and (2) breach of the terms of the contract. This Court has held that where the
complaint alleges each of these elements, it is error to dismiss a breach of contract
claim under N.C. Gen. Stat. § 1A-1, Rule 12(b)(6).” (citations and quotation marks
omitted)).
45. Defendants’ motion to dismiss the claim for breach of the Tag-along
Rights in the Operating Agreement should be DENIED.
E. Second Claim for Relief: Breach of Contract – Distributions
46. In their Second Claim for Relief, Plaintiffs allege that Confluent
breached the Distribution Agreement by failing to pay any further distributions to
Dunn PT after making distributions for the second and third quarters of 2016. (ECF
No. 36.2, at ¶¶ 134–38.)
47. Defendants move to dismiss the Second Claim for Relief. Defendants
contend that Breakthrough Cary’s Operating Agreement gives Benz, as manager, the
sole discretion to determine whether to make distributions. (ECF No. 49, at pp. 11–
12.) Defendants argue that the Distribution Agreement is not a valid amendment of
the Operating Agreement, which requires the written and unanimous approval of
Breakthrough Cary’s members, and Hathaway is not a member of Breakthrough
Cary. (Id. at p. 12.) Finally, Defendants argue that even if Breakthrough Cary,
through Hathaway, entered into a valid agreement to make distributions, Plaintiffs allege that Confluent is the party in breach of the Distribution Agreement. (Id. at p.
13.)
48. The Operating Agreement states that distributions other than tax
distributions “shall be distributed to the Members at such time or times and in such
amounts as determined by the Manager in its sole discretion.” (ECF No. 50.1, at
§ 9.1.) The Operating Agreement also provides that “[a]ny amendments to this
Agreement . . . shall be in writing and unanimously approved by all members.” (Id.
at § 22.12.) Plaintiffs contend that the Distribution Agreement is a valid amendment
to the Operating Agreement, altering the manager’s discretion in making
distributions, because the Distribution Agreement is in writing and is signed by
Hathaway on behalf of Confluent and Breakthrough Cary. (ECF No. 52, at p. 13.)
The Court disagrees. First, even if the Distribution Agreement constitutes a
sufficient “writing,” it is not signed by Dunn PT as required by the Operating
Agreement. Second, the Distribution Agreement does not purport to be a formal
amendment to the Operating Agreement and does not make reference to the
Operating Agreement, much less to Section 9.1 governing distributions. The
allegations do not support Plaintiffs’ position that the Distribution Agreement was
an amendment to the Operating Agreement, or that breach of the Distribution
Agreement is a breach of the Operating Agreement.
49. Plaintiffs have, however, adequately alleged that the Distribution
Agreement is a separate and valid contract between Dunn PT, or Christopher
individually, and Confluent. (ECF No. 36.2, at ¶¶ 50–52, 134, 138.) Defendants do not argue that Dunn PT or Christopher and Confluent could not enter into
agreements separate from and additional to the Operating Agreement. In addition,
Plaintiffs allege that Confluent acknowledged the validity of the Distribution
Agreement by paying the agreed upon distributions for two quarters.
50. Defendants also argue that Confluent cannot be liable for this alleged
breach because it is Breakthrough Cary, not Confluent, that is responsible for paying
distributions to its members. (ECF No. 49, at p. 13.) Plaintiffs argue that Hathaway
signed the new agreement on behalf of both Breakthrough Cary and Confluent, and
because Plaintiffs have alleged that Confluent is the controlling member of
Breakthrough Cary, Confluent is essentially the one responsible for making
distributions under the new agreement. (ECF No. 52, at pp. 14–15.) At the motion
to dismiss stage, the Court accepts these allegations as sufficient to state a breach of
the new agreement by Confluent, the controlling member of Breakthrough Cary.
51. Even though Plaintiffs have not adequately alleged a breach of the
Operating Agreement regarding distributions, they have alleged a breach of the
Distribution Agreement. Defendants’ motion to dismiss Plaintiffs’ claim for breach
of contract regarding the failure to make distributions under the Distribution
Agreement is DENIED.
F. Fourth and Fifth Claims for Relief: Oppression and Judicial Dissolution, and Appointment of Receiver
52. In their Fourth Claim for Relief, Plaintiffs seek a judicial dissolution of
Breakthrough Cary under N.C. Gen. Stat. § 57D-6-02 (hereinafter, “G.S.”). In their
Fifth Claim for Relief, Plaintiffs seek the appointment of a receiver over Breakthrough Cary under G.S. § 57D-6-04 to oversee the dissolution. Plaintiffs allege
that dissolution is necessary because “[u]nder the present circumstances, it is not
practicable to continue to conduct the business of Breakthrough Cary in conformance
with the Operating Agreement and Chapter 57D of the North Carolina General
Statutes.” (ECF No. 36.2, at ¶ 149.) Plaintiffs allege that a “receiver is necessary to
protect the interest of the minority member Plaintiff, to prevent the continued
allocation of inappropriate expenses to Breakthrough Cary, to provide for
distributions as agreed upon by the members, to conduct an accounting, and for other
appropriate relief.” (Id. at ¶ 156.)
53. Defendants seek dismissal of the claims for dissolution and appointment
of a receiver contending that the allegations do not support dissolution and the
remedies are “improper and unnecessary.” (ECF No. 49, at p. 17.)
54. G.S. § 57D-6-02 provides that “[t]he superior court may dissolve an LLC
in a proceeding brought by . . . [a] member, if it is established that (i) it is not
practicable to conduct the LLC’s business in conformance with the operating
agreement and this Chapter or (ii) liquidation of the LLC is necessary to protect the
rights and interests of the member.” Plaintiffs’ allegations are more than sufficient
to support the requested relief on grounds that it is not practicable to conduct the
LLC’s business given the parties’ disputes and their current relationship. Plaintiffs
also allege improprieties by Confluent and Benz that would support the claim that
dissolution is necessary to protect Dunn PT’s interests. Defendants’ motion to dismiss Plaintiffs’ requests for judicial dissolution and appointment of a receiver
should be DENIED.
G. Sixth Claim for Relief: Breach of Contract – Management of Company
55. In their Sixth Claim for Relief, Plaintiffs allege that Defendants
breached the Operating Agreement by appointing Hathaway as CEO of
Breakthrough Cary. Plaintiffs claim that Benz, as manager, delegated to Christopher
the responsibility for the day-to-day operations of Breakthrough Cary and that the
purported appointment of Hathaway impaired Christopher’s ability to conduct those
operations. (ECF No. 36.2, at ¶¶ 160, 162.)
56. The Operating Agreement provides that Benz, as manager, “shall be
entitled to delegate certain duties to another person pursuant to the terms of a
management agreement entered into by and between such party and [Breakthrough
Cary].” (ECF No. 50.1, at § 14.3.) The Operating Agreement places no specific
restriction on the persons to whom Benz can delegate duties or the particular duties
he can delegate. In addition, G.S. § 57D-3-22 provides general authority to a manager
of a limited liability company to “delegate authority to act on behalf of the LLC to
persons other than managers.”
57. Plaintiffs argue that the Operating Agreement “does not provide for the
appointment of a Chief Executive Officer” because the Operating Agreement only
states that the manager may delegate certain duties to “another person,” not multiple
people, and those duties had already been delegated to Christopher. (ECF No. 36.2,
at ¶ 161; ECF No. 52, at pp. 20–21.) Defendants contend that this is a misinterpretation of the Operating Agreement, which simply authorizes the manager
to delegate certain duties to whomever he chooses pursuant to a “management
agreement.” (ECF No. 50.1, at § 14.3.) Defendants further note that Plaintiffs have
alleged that Christopher was not bestowed his duties pursuant to a “management
agreement,” but rather pursuant to an employment agreement. (ECF No. 36.2, at
¶ 160; ECF No. 49, at p. 20.)
58. The Court agrees with Defendants’ arguments. The Court concludes
that the language of the Operating Agreement does not preclude the manager from
delegating duties to one or more persons under Section 14.3. Nonetheless, even if
Section 14.3 were to be read as only allowing for delegation to one other person
pursuant to a management agreement, Plaintiffs have only alleged that Christopher
signed an employment agreement, not a management agreement. (ECF No. 36.2, at
¶ 160.) Defendants’ Motion to Dismiss Plaintiffs’ claim for breach of contract
regarding the management of the company is GRANTED.
H. Seventh Claim for Relief: Declaratory Judgment
59. Plaintiffs’ Seventh Claim for Relief seeks a declaratory judgment
declaring that the non-compete restrictions in the Non-compete Agreements and the
Employment Agreement are unenforceable because they are overbroad as to time,
geographic territory, and the scope of activities from which Christopher and Theresa
are restricted. (ECF No. 36.2, at ¶¶ 164–75.) Defendants move to dismiss this claim
arguing that the non-compete provisions are valid, reasonable, and enforceable under North Carolina law and therefore the claim should be dismissed. (ECF No. 49, at pp.
20–22.)
60. A covenant not to compete related to the purchase of a business will be
enforced if it is (1) “necessary to protect the legitimate interest of the purchaser”; (2)
“reasonable with respect to both time and territory”; and (3) “if it does not interfere
with the interest of the public.” Beverage Sys. of the Carolinas LLC v. Assoc. Bev.
Repair LLC, 368 N.C. 693, 698, 784 S.E.2d 457, 461 (2016). North Carolina courts
will enforce a covenant not to compete entered into as part of an employment contract
if it is: “(1) in writing; (2) reasonable as to [the] terms, time, and territory; (3) made a
part of the employment contract; (4) based on valuable consideration; and (5) not
against public policy.” Triangle Leasing Co. v. McMahon, 327 N.C. 224, 228, 393
S.E.2d 854, 857 (1990); United Labs., Inc. v. Kuykendall, 322 N.C. 643, 649–50, 370
S.E.2d 375, 380 (1988). “The reasonableness of a non-competition covenant is a
matter of law for the court to decide.” Medical Staffing Network, Inc. v. Ridgway, 194
N.C. App. 649, 655, 670 S.E.2d 321, 327 (2009); Sandhills Home Care, L.L.C. v.
Companion Home Care - Unimed, Inc., 2016 NCBC LEXIS 61, *13 (N.C. Super. Ct.
Aug. 1, 2016).
61. To plead a valid claim for declaratory judgment, a plaintiff must
plead “all facts necessary to disclose the existence of an actual controversy between
the parties to the action with regard to their respective rights and duties.” Lide v.
Mears, 231 N.C. 111, 118, 56 S.E.2d 404, 409 (1949). The Court concludes that
Plaintiffs have alleged the existence of an actual controversy between the parties over the enforceability of the non-compete restrictions sufficient to support a claim for
declaratory judgment at the motion to dismiss stage. Defendants’ motion to dismiss
Plaintiff’s claim for declaratory judgment should be DENIED.
I. Tenth Claim for Relief: Fraud
62. In their Tenth Claim for Relief, Plaintiffs allege that Benz and Confluent
made various fraudulent representations to the Dunns. (ECF No. 36.2, at ¶¶ 190–
98.) Plaintiffs make these claims as direct claims and, alternatively, as derivative
claims. (Id. at ¶ 197.)
63. In order to state a claim for fraud, a plaintiff must allege: “(1) False
representation or concealment of a material fact, (2) reasonably calculated to deceive,
(3) made with intent to deceive, (4) which does in fact deceive, (5) resulting in damage
to the injured party.” Ragsdale v. Kennedy, 286 N.C. 130, 138, 209 S.E.2d 494, 500
(1974).
64. The Dunns allege that Benz represented that the Acquisition Debt
would be kept “below the line” so that the Dunns would not be paying themselves for
any of the debt. (ECF No. 36.2, at ¶¶ 192–93.) Plaintiffs further allege that at the
time Benz made the representations, he did not intend to honor them. (Id. at ¶ 191.)
65. Plaintiffs also allege that Benz and Confluent represented that they
would “act in the best interest” of Breakthrough Cary, and that “Benz/Confluent and
Jeff Hathaway promised to start making regular distributions to Dunn PT in July
2016 . . . but later abandoned that agreement,” and that Defendants promised to resolve various accounting and expense issues but have failed to do so. (Id. at ¶¶ 192,
194–95.)
66. Defendants first argue that Plaintiffs’ fraud claim should be dismissed
because the claim is derivative in nature, and Plaintiffs did not properly bring a
derivative claim. (ECF No. 49, at p. 24.) With regard to the fraud claim based on
Benz’s promise that the Acquisition Debt would be kept “below the line,” the Court
disagrees. “There are two major, often overlapping, exceptions to the general rule
that a shareholder cannot sue for injuries to his corporation: (1) where there is a
special duty, such as a contractual duty, between the wrongdoer and the shareholder,
and (2) where the shareholder suffered an injury separate and distinct from that
suffered by other shareholders.” Barger v. McCoy Hillard & Parks, 346 N.C. 650,
658-659, 488 S.E.2d 215, 219-220 (1997) (citations and quotation marks omitted).
Plaintiffs allege that they were induced into the Sales Transaction and becoming
members in Breakthrough Cary and would not have sold their interests in Dunn PT
but for Benz’s misrepresentation. (ECF No. 36.2, at ¶ 193.) Plaintiffs’ allegations
state a direct claim under the special duty or separate injury exceptions. Norman v.
Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 398, 537 S.E.2d 248, 254–55
(2000) (“[O]ur appellate courts allow shareholders to bring individual actions against
third parties who induce them to make corporate investments which prove to be
worthless.”); Energy Investors Fund, L.P. v. Metric Constr., Inc., 133 N.C. App. 522,
524, 516 S.E.2d 399, 401 (1999) (“Special duties [under Barger] have been found
when, for instance, a third party . . . induced the shareholder to buy stock in the first place . . . .”); see also Spoor v. Barth, 244 N.C. App. 670, 684, 781 S.E.2d 627, 636–37
(2016) (finding that plaintiff had standing to sue defendants directly because they
were fraudulently induced into investing in a corporation, which constituted an injury
“separate and distinct” from the other shareholders); Newton v. Barth, 788 S.E.2d
653, 659–61, 2016 N.C. App. LEXIS 776, *11–19 (2016) (same). Defendants’
argument that Plaintiffs’ claim for fraud based on Benz’s misrepresentation about
the treatment of the Acquisition Debt must fail.
67. With regard to Plaintiffs’ fraud claim based on the failure to receive
distributions under the Distribution Agreement, there is no allegation that the failure
to make distributions to Dunn PT resulted in any harm to Breakthrough Cary that
would give rise to a claim by the LLC. Plaintiffs’ claim for fraud based on the failure
to pay distributions under the Distribution Agreement is not a derivative claim, but
instead is an individual claim belonging to Dunn PT or Christopher.
68. Plaintiffs’ allegations that Benz promised that Confluent would act in
the best interests of Breakthrough Cary and promised to resolve the expense issues
is simply a repackaging of their claims for breach of fiduciary duty and constructive
fraud and do not state separate claims for fraud.
69. Plaintiffs have adequately pleaded claims for fraud regarding Benz’s
representation that the Acquisition Debt would be paid “below the line” and based on
the failure to pay distributions under the Distribution Agreement. Defendants’
motion to dismiss Plaintiffs’ claim for fraud based on these allegations should be
DENIED. Defendants’ motion to dismiss Plaintiffs’ claim for fraud based on the allegations that Benz promised that Confluent would act in the best interests of
Breakthrough Cary and promised to resolve the expense issues should be GRANTED.
J. Eighth Claim for Relief: Unfair and Deceptive Trade Practices
70. Plaintiffs’ Eighth Claim for Relief alleges that Defendants “engaged in
unfair or deceptive acts in or affecting commerce, in violation of [G.S.] § 75-1.1.” (ECF
No. 36.2, at ¶ 177.) Plaintiffs allege that
Benz and Confluent have developed a business model of “partnering” with smaller practices with promises of growth, support, and reduced expenses, only to saddle their “partners” with excessive and inappropriate expenses (to the benefit of Confluent/Benz). These practices reduce the alleged value of the partners’ shares, and then allow Confluent to buy out the partners at an artificially low valuation.
(Id. at ¶ 180.) Although the Second Amended Complaint is less than clear about
which specific wrongful acts by Defendants form the basis of the unfair and deceptive
practices, the Court concludes that the claim is premised on Benz’s alleged
misrepresentations to the Dunns during the negotiations of the Sales Transaction.
71. “To establish a prima facie case of unfair and deceptive trade practices,
a plaintiff must show that (1) the defendant committed an unfair or deceptive act or
practice, (2) the act was in or affecting commerce, and (3) the act proximately caused
injury to the plaintiff.” White v. Consol. Planning, Inc., 166 N.C. App. 283, 303, 603
S.E.2d 147, 161 (2004). “Plaintiff[s] must first establish that [D]efendants’ conduct
was ‘in or affecting commerce’ before the question of unfairness or deception arises.”
HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 592, 403 S.E.2d 483, 492
(1991). The phrase “‘business activities’ [ ] connotes the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase and sale
of goods, or whatever other activities the business regularly engages in and for which
it is organized.” White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010)
(citations and quotation marks omitted); Alexander v. Alexander, 792 S.E.2d 901, 904,
2016 N.C. App. LEXIS 1252, *7 (N.C. Ct. App. Dec. 6, 2016).
72. “With the [UDTPA] our General Assembly sought to prohibit unfair or
deceptive conduct in interactions between different market participants. The
General Assembly did not intend for the Act to regulate purely internal business
operations.” White, 364 N.C. at 47–48, 691 S.E.2d at 676 (holding that conduct
between partners in a business, even when the conduct involves multiple business
entities owned by the partners, is nonetheless internal to a single market
participant). “The [UDTPA] is not focused on the internal conduct of individuals
within a single market participant, that is, within a single business. . . . As a result,
any unfair or deceptive conduct contained solely within a single business is not
covered by the Act.” Id. at 53, 691 S.E.2d at 680; see also Weaver Inv. Co. v. Pressly
Dev. Assocs., 234 N.C. App. 645, 654, 760 S.E.2d 755, 761 (2014) (dismissing plaintiff's
UDTPA claim because “defendants’ misconduct within the confines of the partnership
was not ‘in or affecting commerce’”).
73. The Court determines whether the alleged unfair or deceptive acts are
“in or affecting commerce” as a matter of law. See Walker v. Fleetwood Homes of N.C.,
Inc., 362 N.C. 63, 71, 653 S.E.2d 393, 399 (2007); Urquhart v. Trenkelbach, 2017
NCBC LEXIS 12, *10 (N.C. Super. Ct. Feb. 8, 2017). 74. Defendants argue that Plaintiffs cannot maintain their claim for unfair
and deceptive trade practices because the alleged conduct is related to internal
business operations. (ECF No. 49, at p. 22.) Plaintiffs counter, and the Court agrees,
that the Second Amended Complaint does not allege facts that solely relate to the
internal operations of Breakthrough Cary, but rather to interactions between market
participants Benz and his businesses and Dunn PT. At this stage, the allegations are
sufficient to support a claim that the conduct was in or affecting commerce.
Defendants’ motion to dismiss Plaintiffs’ claim for unfair and deceptive trade
practices is DENIED.
THEREFORE, IT IS ORDERED that Defendants’ Motion to Dismiss is
GRANTED, in part, and DENIED, in part, as follows:
75. Defendants’ Motion to Dismiss Plaintiffs’ Sixth Claim for Relief is
GRANTED.
76. Defendants’ Motion to Dismiss Plaintiffs’ First, Fourth, Fifth, Seventh,
and Eighth Claims for Relief is DENIED.
77. Defendants’ Motion to Dismiss Plaintiffs’ Second Claim for Relief is
DENIED to the extent it alleges breach of contract regarding the failure to make
distributions under the Distribution Agreement. Defendants’ Motion to Dismiss
Plaintiffs’ Second Claim for Relief is GRANTED to the extent it alleges breach of
contract regarding the failure to make distributions under the Operating Agreement.
78. Defendants’ Motion to Dismiss Plaintiffs’ Third and Ninth Claims for
Relief is DENIED to the extent those claims allege direct, non-derivative claims. In addition, Plaintiffs’ Third and Ninth Claims for Relief are DISMISSED WITHOUT
PREJUDICE AS MOOT to the extent those claims allege derivative claims.
79. Defendants’ Motion to Dismiss Plaintiffs’ Tenth Claim for Relief is
DENIED to the extent it alleges fraud based on Benz’s representations that the
Acquisition Debt would be paid “below the line” and to the extent it alleges failure to
pay distributions under the Distribution Agreement. Defendants’ Motion to Dismiss
Plaintiffs’ Tenth Claim for Relief is GRANTED to the extent it alleges fraud based on
the allegations that Benz promised that he and Confluent would act in the best
interests of Breakthrough Cary and promised to resolve the expense issues.
SO ORDERED, this the 24th day of August, 2018.
/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases