JS Real Estate Invs. LLC v. Gee Real Estate, LLC, 2017 NCBC 102.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 15 CVS 22232
JS REAL ESTATE INVESTMENTS LLC, a Delaware Limited Liability Company,
Plaintiff, ORDER AND OPINION v. ON MOTIONS FOR PARTIAL SUMMARY JUDGMENT GEE REAL ESTATE, LLC, a North Carolina Limited Liability Company; and RAYMOND M. GEE,
Defendants.
1. This case is one of several related cases arising from business dealings
between James Shaw and Raymond Gee. In 2014, Shaw and Gee agreed to end their
business relationship and divide their interests. As part of that agreement, they
decided to continue the operations of two property management companies jointly
owned by Plaintiff JS Real Estate Investments LLC (“JS Real Estate”) and Defendant
Gee Real Estate, LLC. It was further agreed that Gee and Gee Real Estate would
manage these assets and that the companies’ proceeds would be shared equally by JS
Real Estate and Gee Real Estate.
2. According to JS Real Estate, Defendants have failed to honor the agreement.
It contends that Defendants restructured the companies’ business affairs and
siphoned away the proceeds through self-dealing. Defendants deny any wrongdoing
and contend that their actions were consistent with the parties’ agreement and their
management responsibilities. 3. JS Real Estate has moved for partial summary judgment on its claim for
breach of contract, and Defendants have moved for partial summary judgment on the
claims for breach of fiduciary duty, constructive fraud, and unfair or deceptive trade
practices. Having considered all relevant matters of record, the Court DENIES JS
Real Estate’s motion and GRANTS in part and DENIES in part Defendants’
motion.
Robinson, Bradshaw & Hinson, P.A., by Julian H. Wright, Jr. and, Stuart L. Pratt, for Plaintiff.
Baucom, Claytor, Benton, Morgan & Wood P.A., by Rex C. Morgan, for Defendants.
Conrad, Judge. I. BACKGROUND
4. The Court does not make findings of fact in ruling on motions for summary
judgment. The following background, drawn from the evidence submitted in support
of and opposition to the parties’ motions, is intended to provide context for the Court’s
analysis and ruling.
5. Shaw and Gee, college acquaintances in the 1980s, reconnected after the
2008 recession. (Gee Aff. ¶ 3, ECF No. 60.) They engaged in a flurry of business
deals, including real estate investments, through several jointly owned companies.
(See, e.g., Dissolution and Separation Agreement pp.1–4 [“Separation Agreement”],
ECF No. 49 Ex. A.)
6. This dispute concerns investments in two properties leased to the United
States Department of Veterans Affairs (“VA”). In 2010, Shaw and Gee purchased the Middletown VA Community Based Medical Clinic, a “medical facility” in Middletown,
Ohio that “was subject to a 20 year lease to the” VA. (Gee Aff. ¶¶ 6–7.) In 2011, they
purchased a second property in Smyrna, Tennessee that was “being used as a
Consolidated Patient Account Center” and was also “subject to a 20 year lease with
the” VA. (Gee Aff. ¶ 10.) Shaw and Gee formed Middletown VA, LLC and Smyrna
VA, LLC to own the properties. (See Gee Aff. ¶¶ 7, 11; Shaw Aff. ¶¶ 2–3, ECF No. 49
Ex. B.)
7. In separate transactions in 2012 and 2013, Middletown VA and Smyrna VA
(along with the underlying VA facilities) were sold to third parties. (See Gee Aff. ¶¶ 7,
11; Shaw Aff. ¶¶ 3–4.) According to Gee, the new owners purchased the properties
as a means to receive tax benefits but did not want to “participate in the management,
operation or maintenance” of the VA buildings. (Gee Aff. ¶ 8; see also Gee Aff. ¶ 11.)
Shaw and Gee agreed to continue providing asset and property management services,
and they created two new entities for that purpose—Middletown VA Management,
LLC and Smyrna VA Management, LLC (collectively, “Management Companies”).
(Gee Aff. ¶¶ 8, 11, 13; Shaw Aff. ¶¶ 3–4.) Gee Real Estate, a company owned by Gee,
and JS Real Estate, a company owned by Shaw, are equal members of each of the
Management Companies, which are both organized under the laws of Delaware. (Gee
Aff. ¶¶ 2, 8, 11; Shaw Aff. ¶ 2.)
8. To memorialize the arrangement, Middletown VA (now owned by a third
party) and Middletown VA Management entered into an Advisory and Services Asset
Management Agreement. (Advisory and Services Asset Mgmt. Agreement [“Middletown Mgmt. Agreement”], ECF No. 49 Ex. D.) As relevant here, Middletown
VA Management receives a “Management Fee” equal to all excess cash flow generated
by the property in a given fiscal year. (Middletown Mgmt. Agreement ¶ 3.1.) Smyrna
VA Management entered into a substantially similar agreement with Smyrna VA.
(Advisory and Services Asset Mgmt. Agreement ¶ 3.1 [“Smyrna Mgmt. Agreement”],
ECF No. 49 Ex. F.)
9. The Management Companies have no employees and, as a result, rely on
other companies to carry out their day-to-day management obligations. (Gee Aff.
¶ 14; Gee Dep. Tr. II 195:10–196:8, ECF No. 60.) Before April 2014, Smyrna VA
Management relied on Gvest Partners LLC, a company equally owned by Shaw and
Gee, to perform both property and asset management. (See Gee Aff. ¶¶ 15–16, 22;
Shaw Aff. ¶ 6.) During the same period, Middletown VA Management engaged Gvest
Partners to perform asset management services, but property management was
provided by Neyer Property Management, LLC (“Neyer”). (See Gee Aff. ¶¶ 6, 7.)
10. The record as to the fiscal operations of the Management Companies during
this period is unclear. The parties appear to agree that the Management Companies
made no distributions to JS Real Estate and Gee Real Estate. (Gee Aff. ¶ 28; Shaw
Aff. ¶ 6.) In his affidavit, Shaw states that the excess cash flow received by the
Management Companies was paid to Gvest Partners and divided equally between
Shaw and Gee. (See Shaw Aff. ¶ 6.) Other evidence suggests that Gvest Partners
and Neyer also received compensation for their services directly from the property
owners. (See Gee Aff. ¶ 16.) 11. In April 2014, Shaw and Gee decided to part ways. They executed a
Dissolution and Separation Agreement (“Separation Agreement”) for the purpose of
“separat[ing] from each other” and “dividing their respective interests.” (Separation
Agreement p.1.) The Separation Agreement states that the Management Companies
will “continue their current business affairs”; that “[p]roceeds from such business
affairs shall be equally shared by” JS Real Estate and Gee Real Estate; and that Gee
and Gee Real Estate “will manage these assets.” (Separation Agreement ¶ IV.)
12. Shaw and Gee further agreed to dissolve Gvest Partners. (Separation
Agreement ¶ II.) As of the date of the Separation Agreement, Gvest Partners stopped
providing management services to the Management Companies. (See Gee Aff. ¶ 18.)
13. Following execution of the Separation Agreement, Defendants exercised
their managerial authority and replaced Gvest Partners and Neyer with Gvest
Capital, LLC, a company owned by Gee. (Gee Aff. ¶ 22; Gee Dep. Tr. I 233:16–233:25,
ECF No. 49 Ex. C.) Gvest Capital now performs all “asset and property management
obligations under the Middletown and Smyrna Advisory Agreements.” (Gee Aff.
¶¶ 22.) In return, Gvest Capital receives a total of $17,000 per month in fixed fees
from Middletown VA and Smyrna VA. These fees are set forth in a series of property
and asset management agreements executed by Gee in March 2015 and backdated to
April 2014. (Gee Aff. ¶¶ 24–26; Middletown Management Agreement, ECF No. 50
Ex. K; Smyrna Management Agreement Sch. B, ECF No. 50 Ex. L.)
14. According to JS Real Estate, these new agreements improperly restructure
the business affairs of the Management Companies in violation of the Separation Agreement. Gvest Capital’s fees are treated as operating expenses and, as a result,
are paid before the Management Companies can receive any excess cash flow. (Shaw
Aff. ¶ 7; Excerpts from 2010 Escrow Agreement, ECF No. 50 Ex. I; Excerpts from
2011 Escrow Agreement, ECF No. 50 Ex. J; Gee Dep. Tr. I 303:5–303:9.) Shaw states
that the amount of Gvest Capital’s fees, which includes a profit, has “reduced or
eliminated the excess cash flow” that would otherwise be paid to the Management
Companies and, in turn, distributed between JS Real Estate and Gee Real Estate.
(Shaw Aff. ¶ 8; see also Gee Dep. Tr. IV 430:6–430:11, ECF No. 68.1 Ex. B.) Since
2014, the Management Companies have not made any distributions to JS Real Estate
or Gee Real Estate. (Shaw Aff. ¶ 9; Broadbooks Aff. ¶ 8, ECF No. 60.)
15. In this action, JS Real Estate is pursuing claims for breach of contract,
breach of fiduciary duty, constructive fraud, and unfair or deceptive trade practices.
(Compl., ECF No. 1.) On June 2, 2017, after the close of discovery, the parties filed
cross-motions for partial summary judgment. (Pl.’s Mot. for Partial Summ. J., ECF
No. 47; Defs.’ Mot. for Partial Summ. J., ECF No. 51.) The Court held a hearing on
both motions on August 31, 2017, at which all parties were represented by counsel.
(Notice of Hearing, ECF No. 67.) The motions are ripe for resolution.
II. ANALYSIS
16. Summary judgment is appropriate “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that any party is entitled to a
judgment as a matter of law.” N.C. R. Civ. P. 56(c). In deciding a motion for summary judgment, the Court views the evidence “in the light most favorable to the non-
mov[ant],” taking the non-movant’s evidence as true and drawing inferences in its
favor. Furr v. K-Mart Corp., 142 N.C. App. 325, 327, 543 S.E.2d 166, 168 (2001).
17. The moving party “bears the initial burden of demonstrating the absence of
a genuine issue of material fact.” Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571,
579, 573 S.E.2d 118, 124 (2002). If the moving party carries this burden, the
responding party “may not rest upon the mere allegations or denials of his
pleading[s],” Khashman v. Khashman, No. COA16-765, 2017 N.C. App. LEXIS 715,
at *15 (N.C. Ct. App. 2017) (unpublished), but must instead “come forward with
specific facts establishing the presence of a genuine factual dispute for trial,” Liberty
Mut. Ins. Co., 356 N.C. at 579, 573 S.E.2d at 124. A “genuine issue” exists when “‘it
is supported by substantial evidence,’ which is that amount of relevant evidence
necessary to persuade a reasonable mind to accept a conclusion.” Id. (citation
omitted) (quoting DeWitt v. Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140,
146 (2002)).
A. Plaintiff’s Motion
18. JS Real Estate seeks summary judgment as to its claim for breach of
contract. A party establishes that a breach of contract has occurred when (1) a valid
contract exists and (2) a term of the contract is breached. See Poor v. Hill, 138 N.C.
App. 19, 26, 530 S.E.2d 838, 843 (2000). Here, the parties agree that the Separation
Agreement is a valid contract but disagree over whether any term was breached. (Mem. in Supp. of Pl.’s Mot. for Partial Summ. J. 10, 12 [“Pl.’s Mem. in Supp.”], ECF
No. 48; Defs.’ Br. in Opp. 8, ECF No. 59.)
19. “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). “[H]owever, if the terms employed are subject to more than one reasonable
meaning, the interpretation of the contract is a jury question.” Robertson v. Hartman,
90 N.C. App. 250, 252–53, 368 S.E.2d 199, 200 (1988). 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).
20. JS Real Estate contends that Defendants breached two related terms of the
Separation Agreement. (Pl.’s Mem. in Supp. 12–14.) The first is the parties’ “desire
to have” the Management Companies “continue their current business affairs.”
(Separation Agreement ¶ IV.) The second states that “[p]roceeds from such business
affairs shall be equally shared by” JS Real Estate and Gee Real Estate. (Separation
Agreement ¶ IV.) According to JS Real Estate, this language is “clear and
unambiguous”: the Management Companies were to “maintain without interruption”
their current business affairs, and JS Real Estate and Gee Real Estate “agreed to
equally split the money generated from managing the Middletown and Smyrna
properties.” (Pl.’s Br. in Supp. 11, 13, 14.)
21. The Court disagrees. In the context of the Separation Agreement, it is
unclear what the parties meant by the Management Companies’ “current business affairs” and how to “continue” them. Before April 2014 (the date of the Separation
Agreement), Gvest Partners performed most asset and property management
services for the Middletown and Smyrna properties. (Gee Aff. ¶ 22.) But the
Separation Agreement expressly dissolved Gvest Partners. (Separation Agreement
p.1.) In other words, the Separation Agreement requires the Management
Companies to “continue their current business affairs” while also eliminating the
entity that facilitated those business affairs. The surrounding text, which gives some
measure of discretion to Gee as manager of the assets, provides no way for the Court
to resolve this built-in ambiguity as a matter of law.
22. JS Real Estate insists that summary judgment is appropriate because, even
viewing the evidence in a light most favorable to Defendants, the actions taken by
Defendants after April 2014 “fundamentally altered” the Management Companies’
affairs. (Pl.’s Br. in Supp. 15.) In his affidavit, Shaw states that “all of the cash flow
from the VA properties was equally shared between” JS Real Estate and Gee Real
Estate before April 2014 because the money was “invested . . . in Gvest Partners,”
which “they owned equally.” (Shaw Aff. ¶ 6.) JS Real Estate contends that
Defendants upset the status quo by replacing Gvest Partners with Gvest Capital (an
entity solely owned by Gee). JS Real Estate further asserts that the management
fees paid to Gvest Capital decreased or eliminated the cash flow that the
Management Companies should have received under their agreements with the
property owners. (See Shaw Aff. ¶ 8.) As a result, JS Real Estate contends,
Defendants “intercepted” the Management Companies’ proceeds, and no proceeds have been distributed to JS Real Estate or Gee Real Estate since April 2014. (Pl.’s
Br. in Supp. 12, 14.)
23. The record is not so one-sided. Although Defendants acknowledge that no
distributions have been made since Gvest Partners was dissolved, they point to
evidence showing that the Management Companies have accumulated roughly
$170,000 that is ready for distribution. (See Gee Aff. ¶ 29, Ex. D; Broadbooks Aff.
¶¶ 3, 7.) In his affidavit, Gee states JS Real Estate has known about these funds
since 2015 yet failed to respond to the notice, thereby delaying disbursement. (See
Gee Aff. ¶ 29.) Defendants also note that the Management Companies have never
made distributions, including during the period before the Separation Agreement.
(See Gee Aff. ¶ 28.)
24. Furthermore, the Separation Agreement does not expressly prohibit
Defendants from engaging Gvest Capital to perform asset and property management
services. The decision to replace Gvest Partners with Gvest Capital, and whether it
is a breach of the agreement, must be evaluated in light of the pre-April 2014
arrangement with Gvest Partners, the dissolution of Gvest Partners, and the
managerial discretion vested in Defendants, among other factors. Defendants have
offered evidence that Gvest Capital’s fees are not excessive, (see Cantrell Aff. ¶¶ 8D–
F, ECF No. 60), and that the direct payments received from the property owners are
similar to those received by Gvest Partners “on an ad hoc basis” before April 2014,
(Gee Aff. ¶ 16; see also Gee Aff. ¶ 28). In addition, JS Real Estate acknowledges that
“the actual, legitimate costs associated with providing the asset and property management services” are “appropriate expenses to be paid before distributions.”
(Pl.’s Reply 7, ECF No. 68.) A jury could reasonably credit Defendants’ evidence and
conclude that the arrangement with Gvest Capital does not breach the Separation
Agreement.
25. To be sure, Defendants’ decision to use the services of an entity controlled
by Gee in lieu of a third-party vendor is not immune from criticism by JS Real Estate
at trial. So too for the amount of Gvest Capital’s fees. Nevertheless, in view of the
ambiguity in the contract language and the disputed evidence in the record, it is a
jury question whether Defendants’ conduct following the dissolution of Gvest
Partners is a continuation of the Management Companies’ business affairs and
whether the proceeds are being equally shared as contemplated by the Separation
Agreement. Therefore, the Court denies JS Real Estate’s motion.
B. Defendants’ Motion
26. Defendants seek summary judgment, first, on JS Real Estate’s claims for
breach of fiduciary duty and constructive fraud and, second, on its claim for unfair or
deceptive trade practices. (Defs.’ Mot. for Partial Summ. J.) The Court addresses
these arguments in turn.
1. Breach of Fiduciary Duty and Constructive Fraud
27. The claims for breach of fiduciary duty and constructive fraud are premised
largely on the same allegations underlying the claim for breach of contract:
Defendants’ alleged self-dealing in directing asset and property management fees to
Gvest Capital, thereby reducing or eliminating proceeds that otherwise would have been shared with JS Real Estate. Defendants contend that the claims should
therefore be dismissed as superfluous because they “are nothing more than different
articulations of the breach of contract claim.” (Defs.’ Br. in Supp. 13, ECF No. 51.)
28. The parties agree that Delaware law governs these claims, which concern
the relationships between the members and managers of two Delaware LLCs. (Defs.’
Br. in Supp. 10–11; Pl.’s Br. in Opp. 11, ECF No. 56.) Accordingly, the Court applies
Delaware law. See Worley v. Moore, 2017 NCBC LEXIS 15, at *67 (N.C. Super. Ct.
Feb. 28, 2017) (applying Delaware law to claims for breach of fiduciary duty and
constructive fraud “under the internal affairs doctrine”).
29. Delaware courts stress “the primacy of contract law over fiduciary law in
matters involving . . . contractual rights and obligations.” Gale v. Bershad, No. 15714,
1998 Del. Ch. LEXIS 37, at *23 (Del. Ch. Mar. 3, 1998). As the Delaware Supreme
Court has explained, “where a dispute arises from obligations that are expressly
addressed by contract, that dispute will be treated as a breach of contract claim.”
Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010). Related fiduciary claims are
deemed “superfluous.” Id. Thus, under Delaware law, “a contractual claim will
preclude a fiduciary claim,” so long as “the duty sought to be enforced arises from the
parties’ contractual relationship.” Solow v. Aspect Res., LLC, No. 20397, 2004 Del.
Ch. LEXIS 151, at *4 (Del. Ch. Oct. 19, 2004); see also Madison Realty Co. v. AG ISA,
LLC, No. 18094, 2001 Del. Ch. LEXIS 37, at *19–20 (Del. Ch. Apr. 17, 2001) (holding
dismissal of fiduciary claim appropriate where the alleged wrongdoing was “already
addressed by a breach of contract claim”). 30. Defendants interpret this case law broadly. They contend that, “[u]nder
Delaware law, if a claim for breach of contract and breach of fiduciary duty arise from
the same underlying conduct or nucleus of operative facts, the fiduciary claims are
considered ‘duplicative’ and are subject to dismissal.” (Defs.’ Br. in Supp. 12
(emphasis added).) Thus, they contend, summary judgment is appropriate because
JS Real Estate’s claims for breach of fiduciary duty and constructive fraud are based
on the same conduct as the breach-of-contract claim. (Defs.’ Br. in Supp. 9.)
31. The Delaware Court of Chancery has rejected this “expansive view.” PT
China LLC v. PT Korea LLC, No. 4456-VCN, 2010 Del. Ch. LEXIS 38, at *27 (Del.
Ch. Feb. 26, 2010). The question is not “whether the fiduciary and contractual claims
are based on the same facts.” Id. It is instead “whether there exists an independent
basis for the fiduciary duty claims apart from the contractual claims, even if both are
related to the same or similar conduct.” Id.; see also id. at *27 n.34; McBeth v. Porges,
171 F. Supp. 3d 216, 232 (S.D.N.Y. 2016).
32. JS Real Estate’s claims satisfy this standard. The source of Defendants’
fiduciary duty is not the Separation Agreement; rather, it arises from Defendants’
status as managers of the Management Companies and their relationship with JS
Real Estate as one of the companies’ members. As JS Real Estate observes, Delaware
law imposes traditional fiduciary duties on the manager of a limited liability
company, including the duties of loyalty and care owed to the company’s members.
See CelestialRX Investments, LLC v. Krivulka, No. 11733-VCG, 2017 Del. Ch. LEXIS
22, at *43–44 & n.223 (Del. Ch. Jan. 31, 2017); see also Del. Code Ann. tit. 6, § 18- 1104 (“In any case not provided for in this chapter, the rules of law and equity,
including the rules of law and equity relating to fiduciary duties and the law
merchant, shall govern.”). These traditional duties exist so long as “the limited
liability company agreement does not opt out of fiduciary duties.” McKenna v. Singer,
No. 11371-VCMR, 2017 Del. Ch. LEXIS 138, at *41 (Del. Ch. July 31, 2017). Here,
the record contains no indication that the parties “contractually limited the fiduciary
duties they owed to each other” in the operating agreements for the Management
Companies. PT China, 2010 Del. Ch. LEXIS 38, at *31.
33. Accordingly, JS Real Estate has offered sufficient evidence of an
independent, non-contractual basis for its claims for breach of fiduciary duty and
constructive fraud. The Court denies Defendants’ motion for summary judgment as
to these claims.
2. Section 75-1.1
34. Section 75-1.1 of the North Carolina General Statutes declares “unfair or
deceptive acts or practices in or affecting commerce” unlawful. To prevail on a section
75-1.1 claim, a plaintiff must show that “(1) [the] defendant committed an unfair or
deceptive act or practice, (2) the action in question was in or affecting commerce, and
(3) the act proximately caused injury to the plaintiff.” Dalton v. Camp, 353 N.C. 647,
656, 548 S.E.2d 704, 711 (2001). The parties’ dispute centers on the second element:
whether Defendants’ alleged acts were in or affecting commerce. (Defs.’ Br. in Supp.
10.) 35. Commerce is defined to include “all business activities.” N.C. Gen. Stat.
§ 75-1.1(b). This broad phrase “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.” HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594, 403
S.E.2d 483, 493 (1991). It is not intended “to regulate purely internal business
operations.” White v. Thompson, 364 N.C. 47, 48, 691 S.E.2d 676, 676 (2010). Put
another way, the General Assembly drafted section 75-1.1 to be broad enough “to
regulate a business’s regular interactions with other market participants” but not so
broad as to capture conduct “solely related to the internal operations” of a business.
Id. at 51–52, 691 S.E.2d at 679.
36. Two binding appellate decisions are directly relevant here. In Sara Lee
Corp. v. Carter, the North Carolina Supreme Court held that an employee violated
section 75-1.1 by “engag[ing] in self-dealing business activities wherein he sold
computer parts and services to his employer from companies owned by him.” 351
N.C. 27, 32–33, 519 S.E.2d 308, 311 (1999). According to the Supreme Court, the
employee and his employer “clearly engaged in buyer-seller relations in a business
setting.” Id. at 33, 519 S.E.2d at 312. On that basis, the Court expressly held that
the self-dealing transactions were in or affecting commerce. See id.
37. A decade later, the Supreme Court revisited the subject in White, a case
arising from a dispute between business partners. See 364 N.C. at 48, 691 S.E.2d at
677. The plaintiffs alleged, among other things, that the defendant formed a separate business and diverted work to his new business and away from the partnership. See
id. at 50, 691 S.E.2d at 678. The Court concluded that the defendant “breached his
fiduciary duty as a partner in this single market participant” and therefore “unfairly
and deceptively interacted only with his partners.” Id. at 53–54, 691 S.E.2d at 680.
This conduct, which “occurred completely within” the partnership, was not in or
affecting commerce. Id. at 54, 691 S.E.2d at 680.
38. Defendants, relying on White, argue that their alleged actions “are all
encompassed within the rubric of the management and ownership of” the
Management Companies. (Defs.’ Reply 9, ECF No. 70; see also Defs.’ Br in Supp. 14–
15, 17.) Although JS Real Estate “may have claims relating to the division of
company proceeds,” Defendants contend, such claims “arise from the intra-company
relationship between Plaintiff and the Defendants.” (Defs.’ Br. in Supp. 18.)
39. JS Real Estate counters that Sara Lee controls because Defendants’
“misconduct involved commercial interactions with their outside business, Gvest
Capital, which is a separate market participant from” the Management Companies.
(Pl.’s Br. in Opp. 15.) JS Real Estate further contends that some of Defendants’
wrongdoing—specifically, accepting a reimbursement for an engineer that Gvest
Capital never provided—affected other market participants, including the property
owners and the VA. (See Pl.’s Br. in Opp. 15–16.)
40. The Court concludes that White controls and compels summary judgment in
Defendants’ favor. By its nature, this dispute does not concern the regular
interactions of separate market participants. Rather, it is a dispute between members of the Management Companies over the companies’ internal management
and the members’ right to receive distributions—that is, whether Defendants
deprived JS Real Estate of an appropriate share of the proceeds received by (or that
should have been received by) the Management Companies. (See Compl. ¶¶ 90, 99.)
Accordingly, the unfairness of Defendants’ conduct, if any, “occurred in interaction
among the” members of the LLCs. White, 364 N.C. at 53, 691 S.E.2d at 680.
41. The fact that Defendants channeled management fees to Gvest Capital, an
outside entity, does not change the fundamental character of the dispute. These
alleged actions, even if true, “are more properly classified as the misappropriation of
corporate funds within a single entity rather than commercial transactions between
separate market participants ‘in or affecting commerce.’” Alexander v. Alexander, 792
S.E.2d 901, 905 (N.C. Ct. App. 2016). Indeed, White itself involved a partner’s breach
of fiduciary duty by diverting work to his own business and away from the
partnership. See 364 N.C. at 53, 691 S.E.2d at 680; see also RCJJ, LLC v. RCWIL
Enters., LLC, 2016 NCBC LEXIS 46, at *50 (N.C. Super. Ct. June 20, 2016) (“In
White, the defendant’s diversion of work opportunities and payments occurred after
the defendant had formed and was working on behalf of his new, competing
business.”).
42. Likewise, the “tangential involvement” of the property owners and the VA
also does not mean that Defendants’ acts were in or affecting commerce. Polyquest,
Inc. v. Vestar Corp., LLC, No. 7:13-CV-23-F, 2014 U.S. Dist. LEXIS 14905, at *35
(E.D.N.C. Feb. 6, 2014). “The Supreme Court’s refusal in White to allow indirect involvement of other market participants to trigger liability under Section 75-1.1
forecloses” that argument. Powell v. Dunn, 2014 NCBC LEXIS 3, at *10, 11 (N.C.
Super. Ct. Jan. 28, 2014) (granting motion to dismiss).
43. Thus, viewing the evidence in a light most favorable to JS Real Estate, the
section 75-1.1 claim does not concern a dispute between market participants but
instead a dispute between the “co-owners of” the Management Companies. McKee v.
James, 2014 NCBC LEXIS 74, at *42 (N.C. Super. Ct. Dec. 31, 2014) (granting
summary judgment); see also Chisum v. Campagna, 2017 NCBC LEXIS 102, at *35–
37 (N.C. Super. Ct. Nov. 7, 2017) (granting motion to dismiss). Defendants are
therefore entitled to summary judgment.
III. CONCLUSION
44. For these reasons, the Court DENIES JS Real Estate’s motion.
45. The Court GRANTS in part Defendants’ motion. Defendants are entitled
to judgment as a matter of law that they did not violate section 75-1.1. In all other
respects, the motion is DENIED.
This the 9th day of November, 2017.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases