Kelly v. Nolan, 2022 NCBC 37.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION HARNETT COUNTY 21 CVS 2015
JOEL KELLY, DPM, individually and as former partner and minority shareholder in Piedmont Foot Clinic, P.A.; ELIZABETH BASS DAUGHTRY, DPM, individually and as former partner and minority shareholder in Piedmont Foot Clinic, P.A., and as owner of Dunn Foot and Ankle Center, P.A.; and DUNN FOOT AND ANKLE CENTER, P.A., ORDER AND OPINION ON Plaintiffs, DEFENDANTS’ MOTION TO DISMISS v. AMENDED COMPLAINT JASON NOLAN, DPM, individually and as former partner and majority shareholder in Piedmont Foot Clinic, P.A.; and RICHARD HAUSER, DPM, individually and as former partner and majority shareholder in Piedmont Foot Clinic, P.A.,
Defendants.
THIS MATTER comes before the Court on Defendants’ Motion to Dismiss
Amended Complaint. (“Motion to Dismiss,” or “Motion,” ECF No. 16.)
THE COURT, having considered the Motion, the briefs of the parties, the
arguments of counsel, and all applicable matters of record, CONCLUDES that the
Motion should be GRANTED, in part, and DENIED, in part, for the reasons set forth
below.
Timothy C. Morris, PA, by Timothy C. Morris, and the Buzzard Law Firm, by Robert A. Buzzard and Tracy A. Berry, for Plaintiffs Joel Kelly, DPM; Elizabeth B. Daughtry, DPM; and Dunn Foot and Ankle Center, P.A.
Adams, Howell, Sizemore & Adams, P.A., by Ryan J. Adams and Jeremy Jackson, for Defendants Jason Nolan, DPM; and Richard Hauser, DPM. Davis, Judge.
INTRODUCTION
1. This action involves various claims by two minority shareholders in a
professional corporation against the majority shareholders of the company. With
regard to the present motion, the Court must determine whether Plaintiffs’ claims in
their Amended Complaint (ECF No. 11) are subject to dismissal for lack of standing
pursuant to Rule 12(b)(1) of the North Carolina Rules of Civil Procedure and for
failure to state a claim upon which relief can be granted based on Rule 12(b)(6).
2. The Court notes that its job has been made more difficult by the fact
that the Amended Complaint at times fails to specify which claims are being asserted
on behalf of which of the named Plaintiffs. Similarly, throughout the Amended
Complaint, the two Defendants—Jason Nolan and Richard Hauser—are referred to
generically as “Defendants” without any attempt made to differentiate between them
as to the acts alleged therein.
FACTUAL AND PROCEDURAL BACKGROUND
3. 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 and instead recites
pertinent facts contained in Plaintiffs’ Amended Complaint and in documents
attached to, referred to, or incorporated by reference in the Amended Complaint that
are relevant to the Court’s determination of the Motion.
4. Plaintiffs Joel Kelly and Elizabeth Bass Daughtry (collectively, the
“Individual Plaintiffs”), along with Defendants Nolan and Hauser (collectively, “Defendants”)—all physicians of podiatric medicine—were shareholders in a
professional corporation, Piedmont Foot Clinic, P.A. (“Piedmont”), from 1 January
2017 until 28 February 2020. 1 In 2020, Piedmont was sold to U.S. Foot and Ankle
Specialists, LLC (“USFAS”), Foot and Ankle Specialists of the Mid-Atlantic, LLC
(“FASMA”), and U.S. Foot and Ankle Specialists Holdings, LLC (“USFASH”). 2 (ECF
No. 3, at ¶¶ 1–6, 10–12, 35.)
5. Kelly and Daughtry were each ten percent (10%) shareholders of
Piedmont. 3 (Id. at ¶¶ 17, 19–20.) Defendants—Nolan and Hauser—owned the
remaining eighty percent (80%) interest in Piedmont, each owning forty percent
(40%) of the total shares. (Id. at ¶ 18.) Nolan served as Vice President and Secretary
of Piedmont, and Hauser served as President and Treasurer. (Id. at ¶ 37.)
6. Generally, the Amended Complaint alleges that since January 2017,
Defendants Nolan and Hauser have conspired and engaged in various wrongful
conduct toward the Individual Plaintiffs. (Id. at ¶ 67.) These alleged wrongful acts
relate to three topics: (a) Piedmont’s use and subsequent sale of equipment belonging
to a separate entity, Plaintiff Dunn Foot and Ankle Center, P.A. (“Dunn Foot”) that
was owned by Daughtry; (b) the allocation among the Shareholders of certain
disputed expenses of Piedmont; and (c) certain issues relating to the proceeds of the
1 Throughout this Opinion, Kelly, Daughtry, Nolan, and Hauser are at times referred to
collectively as the “Shareholders.”
2 USFAS, FASMA, and USFASH are not parties to this lawsuit.
3 Prior to becoming shareholders of Piedmont, Kelly and Daughtry worked for Piedmont as
associates. (ECF No. 3, at ¶¶ 19–20.) sale of Piedmont. Plaintiffs’ allegations pertaining to these topics are set out more
fully below.
7. Prior to joining Piedmont, Daughtry was the sole owner of Dunn Foot.
(Id. at ¶ 20.) Piedmont acquired Dunn Foot in 2015, after which Daughtry began
working for Piedmont as an associate. (Id. at ¶¶ 21, 24.)
8. As part of her practice at Dunn Foot, Daughtry “owned all the
equipment necessary to practice podiatric medicine including a client management
system, charts, and equipment, including five (5) podiatry exam tables and chairs, a
casting table, all surgical equipment, an X-Ray unit and processor, and all office
furniture and office supplies.” (Id. at ¶ 25.) Plaintiffs assert that the “total value of
the equipment [ ] Daughtry owned at the time Piedmont acquired her practice was
approximately one hundred thousand dollars ($100,000.00).” (Id. at ¶ 26.)
9. Plaintiffs allege that a “Piedmont-Bass Daughtry agreement” regarding
the purchase of Dunn Foot by Piedmont contained the following provision:
[Daughtry] would begin practicing as an associate with Piedmont, and Piedmont would pay her salary as an associate, Piedmont would assume all administrative duties of the office, and the equipment would remain the property of Dunn Foot until she was paid for them [sic] by Piedmont while [ ] Daughtry personally assumed any personal debt associated with Dunn Foot in addition to making personal payments for access to Dunn Foot [ ] to maintain records at a personal cost to [ ] Daughtry of two hundred fourteen dollars ($214.00) per month.
(Id. at ¶ 27 (emphasis added).)
10. Despite this provision, Plaintiffs allege, Daughtry has “[a]t no time prior
to or after becoming a shareholder . . . [been] compensated by Piedmont for her
equipment.” (Id. at ¶ 30.) Furthermore, Plaintiffs assert that as a part of the eventual sale of Piedmont, this equipment was listed as an asset of Piedmont. (Id. at
¶ 58.)
11. Plaintiffs also allege the existence of an agreement between the
Shareholders “that expenses would be shared equally in spite of the disparate
ownership percentages and the [Shareholders] would keep the profits that they
brought to the business after deducting business expenses.” (Id. at ¶ 36.) Piedmont’s
bylaws “required a majority of shareholders to agree on most matters,” and therefore
Kelly and Daughtry—as minority shareholders—were unable “to vote [that] their
expenses [ ] be proportioned according to their ownership percentage” (instead of
being shared equally among the Shareholders). (Id. at ¶ 38.)
12. Consequently, from 2017 through 2020, Kelly and Daughtry were
required to share equally in certain expenses that they contend were not valid
business expenses of Piedmont. (Id. at ¶¶ 39–52.) These expenses included: salaries
and benefits paid by Piedmont to Defendants’ family members despite the fact that
these family members did not perform any work for Piedmont (id. at ¶¶ 39–52);
Nolan’s purchase of season tickets to the Carolina Hurricanes for the 2018–2020
seasons, which Plaintiffs allege were solely for Nolan’s personal use (id. at ¶ 54);
“fraudulently inflated . . . fees for physician licensing and dues, continued medical
education fees, accounting fees, and advertising fees” (id. at ¶ 55); and “doctor
management fees and staff management fees” that Defendants paid to themselves.
(id. at ¶ 56). 13. For example, in 2019, Plaintiffs allege that
without the knowledge or consent of the [Individual Plaintiffs], [ ] Nolan’s spouse was paid a salary of two hundred forty-five thousand dollars ($245,000.00) and received a 401K contribution of nineteen thousand dollars ($19,000.00) from Piedmont as an employee despite not performing any work for the practice during said period, while said expenses were shared equally by [the Individual Plaintiffs] as part of the total employee expenses despite said expense not being a valid business expense.
[W]ithout the knowledge or consent of the [Individual Plaintiffs], [ ] Nolan’s son was paid a salary of nineteen thousand nine hundred ninety-five dollars ($19,995.00) from Piedmont despite not doing any actual work for the practice, and said expense was shared equally by [the Individual Plaintiffs] as part of the total employee expenses despite said expense not being a valid business expense.
[W]ithout the knowledge or consent of the [Individual Plaintiffs], [ ] Hauser’s spouse was paid a salary of one hundred sixty thousand three hundred ninety-five dollars ($160,395.000), received a 401K contribution of twenty-five thousand dollars ($25,000), and was provided a dental insurance coverage contribution of one thousand five hundred nine dollars and four cents ($1,509.04), received a health savings account contribution of seven thousand eight hundred dollars ($7,800.00), received a medical insurance contribution of eleven thousand six hundred eighty-eight dollars and fifty-six cents ($11,688.56); and received a vision insurance contribution of two hundred thirty dollars and thirty-six cents ($230.36) from Piedmont despite not doing any work for the practice during said period, while said expenses were shared equally by [the Individual Plaintiffs] as part of the total employee expense despite said expense not being a valid business expense.
(Id. at ¶¶ 46–48.)
14. In 2017, Nolan and Hauser bought out another existing shareholder of
Piedmont, Robert Lenfesty. (Id. at ¶¶ 21, 29.) The Shareholders all agreed to be
equally liable on a loan taken out to facilitate this buy-out in the amount of
$1,146,334.26. (Id. at ¶ 32.) The “note [was] paid in full as of the date of” the sale of Piedmont on 28 February 2020. (Id. at ¶¶ 32–33.) The Individual Plaintiffs allege
that they “bore an equal share” of this debt “in spite of only owning ten percent [ ]
respectively in Piedmont.” (Id. at ¶ 34.)
15. On 28 February 2020, Piedmont was sold to USFAS, FASMA, and
USFASH. (Id. at ¶ 58.) Plaintiffs allege that after Piedmont was sold, “[D]efendants
refused to divide the proceeds of the sale pursuant to each member’s respective
percentage of shares[.]” (Id. at ¶ 59.)
16. Plaintiffs filed an original Complaint in this action on 23 September
2021. (ECF No. 3.) On 29 October 2021, this case was designated a mandatory
complex business case and assigned to the undersigned. (ECF Nos. 1, 2.)
17. On 20 December 2021, Plaintiffs filed an Amended Complaint. (ECF
No. 11.) The Amended Complaint contains seven claims against Defendants: (1)
breach of the covenant of good faith and fair dealing; (2) civil conspiracy; (3) breach
of contract; (4) conversion; (5) breach of fiduciary duty; (6) unfair and deceptive trade
practices (“UDTP”); and (7) fraud. (Id. at ¶¶ 72–110.)
18. On 19 January 2022, Defendants filed the present Motion to Dismiss as
to all claims asserted in the Amended Complaint. (ECF No. 16.)
19. The Court held a hearing on the Motion to Dismiss on 5 May 2022. The
Motion is now ripe for decision.
LEGAL STANDARD
20. “Standing is a necessary prerequisite to a court’s proper exercise of
subject matter jurisdiction.” In re A.S.M.R., 375 N.C. 539, 542 (2020) (cleaned up). Rule 12(b)(1) requires the dismissal of any action “based upon a trial court’s lack of
jurisdiction over the subject matter of the claim.” N.C. R. Civ. P. 12(b)(1). 4 The
plaintiff bears the burden of establishing subject matter jurisdiction. See Harper v.
City of Asheville, 160 N.C. App. 209, 217 (2003). In ruling on a motion to dismiss for
lack of standing pursuant to Rule 12(b)(1), the Court “may consider matters outside
the pleadings” in determining whether subject matter jurisdiction exists, Harris v.
Matthews, 361 N.C. 265, 271 (2007), and must “view the allegations [of the complaint]
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 (2008).
21. “A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of
the complaint by presenting the question whether, as a matter of law, the allegations
of the complaint, treated as true, are sufficient to state a claim upon which relief can
be granted under some recognized legal theory.” Forsyth Mem’l Hosp., Inc. v.
Armstrong World Indus., Inc., 336 N.C. 438, 442 (1994) (cleaned up). In ruling on a
motion to dismiss under Rule 12(b)(6), the Court may only consider the complaint and
any “documents attached, specifically referred to, or incorporated by reference in the
complaint,” Laster v. Francis, 199 N.C. App. 572, 577 (2009); see also Moch v. A.M.
Pappas & Assocs., LLC, 251 N.C. App. 198, 206 (2016); Oberlin Capital, L.P. v. Slavin,
147 N.C. App. 52, 60 (2001), and must view the allegations in the complaint “in the
light most favorable to the non-moving party[,]” Christenbury Eye Ctr., P.A. v.
4 The Court notes that “[a] plaintiff’s standing to assert its claims may be challenged under
either Rule 12(b)(1) or Rule 12(b)(6)[.]” Raja v. Patel, 2017 NCBC LEXIS 25, at *11 (N.C. Super. Ct. Mar. 23, 2017). Medflow, Inc., 370 N.C. 1, 5 (2017) (citation omitted). “It is well-established that
dismissal pursuant to Rule 12(b)(6) is proper when (1) the complaint on its face
reveals that no law supports the plaintiff’s claim; (2) the complaint on its face reveals
the absence of facts sufficient to make a good claim; or (3) the complaint discloses
some fact that necessarily defeats the plaintiff’s claim.” Corwin v. British Am.
Tobacco PLC, 371 N.C. 605, 615 (2018) (cleaned up).
ANALYSIS
22. At the outset, the Court notes that following the filing of Defendants’
Motion to Dismiss, Plaintiffs filed a notice stating that “Plaintiffs hereby voluntarily
dismiss only the derivative claim pursuant to Rule 41(a) of the North Carolina Rules
of Civil Procedure without prejudice.” (ECF No. 25.) Although the caption of the
Amended Complaint lists Piedmont as both an additional plaintiff and as a nominal
defendant, the Court observes that the Amended Complaint does not state which
claim(s) were intended to be asserted derivatively. In any event, the parties agreed
at the 5 May 2022 hearing that, as a result of the voluntary dismissal, no derivative
claims currently exist. 5 Therefore, to the extent Defendants’ Motion to Dismiss seeks
dismissal of any derivative claims asserted by Plaintiffs, the Motion is DENIED as
MOOT.
5 Accordingly, the Court has amended the case caption to reflect the absence of any derivative
claims. The parties are directed to use this new caption going forward on all future filings unless any new amended complaint filed by Plaintiffs necessitates additional changes to the caption. A. Breach of Fiduciary Duty
23. Defendants’ argument based on lack of standing is directed toward
Plaintiffs’ claim for breach of fiduciary duty against Nolan and Hauser as majority
shareholders and officers of Piedmont. (ECF No. 11, at ¶¶ 96–100.) Accordingly, the
Court will address this argument first.
24. In this claim, Plaintiffs assert that “Defendants owed a fiduciary duty
to Plaintiffs” and breached said fiduciary duties by “embezzl[ing] [ ] business funds
for their own personal use”; “[p]aying their family members a yearly salary and
benefits despite them not actually working for Piedmont”; “[f]orcing Plaintiff[s] to
equally share in [ ] fraudulent business expenses”; “[s]elling . . . Daughtry’s
equipment”; “not paying the minority [shareholders] their fair share of the proceeds
from the sale of Piedmont”; and “paying themselves management fees . . . without the
knowledge and consent of Plaintiffs.” (ECF No. 11, at ¶¶ 98–99.)
25. It is well-settled that “[t]o establish a claim for breach of fiduciary duty,
a plaintiff must show that: (1) the defendant owed the plaintiff a fiduciary duty; (2)
the defendant breached that fiduciary duty; and (3) the breach of fiduciary duty was
a proximate cause of the injury to the plaintiff.” Thus, “to make out a claim for breach
of a fiduciary duty, plaintiffs must first allege facts that, taken as true, demonstrate
that a fiduciary relationship existed between the parties.” Sykes v. Health Network
Sols., Inc., 372 N.C. 326, 339–40 (2019).
26. Defendants contend that Plaintiffs’ breach of fiduciary duty claim
should be dismissed pursuant to Rule 12(b)(1) because “caselaw dictates that breach of fiduciary duty claims should be brought as derivative claims” rather than
individual claims. (ECF No. 17, at p. 14.) Defendants appear to be basing this
argument on the body of case law in North Carolina generally requiring claims by
shareholders alleging harm to the corporation itself to be brought derivatively. See,
e.g., Barger v. McCoy Hillard & Parks, 346 N.C. 650, 660 (1997) (explaining that
corporate shareholders “generally may not bring individual actions to recover what
they consider their share of the damages suffered by the corporation”).
27. In Barger, however, our Supreme Court set out two exceptions to the
general rule:
(1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, and (2) where the shareholder suffered injury separate and distinct from that suffered by other shareholders.
346 N.C. at 658.
28. One such “special duty” that our appellate courts have recognized is the
fiduciary duty owed by majority shareholders to minority shareholders in close
corporations. See Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390,
407 (2000) (“[O]ur cases have consistently held that majority shareholders in a close
corporation owe a ‘special duty’ and obligation of good faith to minority
shareholders.”); see also Raymond James Capital Partners, L.P. v. Hayes, 248 N.C.
App. 574, 579–80 (2016) (“[A] controlling shareholder owes a fiduciary duty to
minority shareholders” and “a special duty exists when a party violates its fiduciary
duties to the shareholder”). To that end, North Carolina courts have allowed minority
shareholders to bring individual claims against majority shareholders for breach of their fiduciary duties even where a derivative action would otherwise have been
appropriate. See, e.g., Norman, 140 N.C. App. at 406–08 (“[W]e hold that under the
circumstances of this case, the plaintiff minority shareholders . . . may maintain their
individual actions against the majority shareholders . . . , including the allegation of
diversion of corporate assets and opportunities.”).
29. Moreover, this Court has recognized that such a fiduciary duty can arise
where two shareholders—each lacking a majority ownership interest on their own—
act together to form a majority interest collectively at the expense of other minority
shareholders:
Corporate shareholders generally do not owe a fiduciary duty to one another. See Freese v. Smith, 110 N.C. App. 28, 37 [ . . . ] (1993). But there is an exception: a controlling shareholder owes a fiduciary duty to protect the interest of minority shareholders. Gaines v. Long Mfg. Co., 234 N.C. 340, 344–45 [ . . . ] (1951). Typically, a controlling shareholder is a majority shareholder (or a group of shareholders with an aggregate majority interest acting in concert). See id. at 345 [ . . . ] (citing S. Pac. Co. v. Bogart, 250 U.S. 483, 487–88 [ . . . ] (1919); Loy v. Lorm Corp., 52 N.C. App. 428, 432 [ . . . ] (1981).
Brewster v. Powell Bail Bonding, Inc., 2018 NCBC LEXIS 76, at *10 (N.C. Super. Ct.
July 26, 2018) (emphasis added); see also Flynn v. Pierce, 2020 NCBC LEXIS 149, at
**10–11 (N.C. Super. Ct. Dec. 22, 2020) (allowing minority shareholders to pursue
claims against shareholders who collectively owned 98% of the corporation’s shares).
30. Here, Plaintiffs have alleged that Nolan and Hauser together owned
80% of Piedmont’s shares. Moreover, they have also asserted that Nolan and Hauser
(a) served as the sole officers of Piedmont; (b) possessed “complete control” over Piedmont; and (c) conspired to breach their fiduciary duties to Kelly and Daughtry.
(ECF No. 11, at ¶¶ 18, 37, 39–53.)
31. The Court concludes that these assertions sufficiently allege the
existence of a fiduciary duty for purposes of Plaintiffs’ individual claim for breach of
fiduciary duty against Nolan and Hauser.
32. Therefore, Defendants’ Motion to Dismiss based on Rule 12(b)(1) is
DENIED with regard to Plaintiffs’ claim for breach of fiduciary duty.
B. Breach of Contract
33. Plaintiffs have also alleged a claim for breach of contract against Nolan
and Hauser. (ECF No. 11, at ¶¶ 84–90.) To state a claim for breach of contract, the
complaint must allege “(1) the existence of a contract between plaintiff and defendant,
(2) the specific provisions breached, (3) the facts constituting the breach, and (4) the
amount of damages resulting to plaintiff from such breach.” Intersal, Inc. v.
Hamilton, 373 N.C. 89, 109 (2019) (cleaned up).
34. Although no contract was attached to Plaintiffs’ Amended Complaint, it
is clear that the document Plaintiffs are relying upon with regard to this claim is the
Shareholder Agreement for Piedmont. (“Shareholder Agreement,” ECF No. 17, at pp.
52–73.) Because the Shareholder Agreement is referred to (and quoted in part) in the
Amended Complaint, the Court is allowed to consider this document, which is
attached to Defendants’ brief in support of their Motion to Dismiss. See Oberlin, 147
N.C. App. at 60 (stating that the “court may properly consider documents which are the subject of plaintiff’s complaint and to which the complaint specifically refers even
though they are presented by the defendant”). 6
35. The specific provision within the Shareholder Agreement that serves as
the basis for Plaintiffs’ breach of contract claim is Section C of the “Recitals” section
at the beginning of the document, which states as follows:
The parties hereto desire and intend, among other things, to provide for the ongoing rights of the Shareholders and future disposition of the Shares, to encourage the harmonious and successful management and control of the Corporation and to prevent interference with the orderly conduct of the business of the Corporation, and do hereby execute this Agreement for such purposes.
(“Section C,” ECF No. 17, at p. 52.)
36. Defendants contend that the breach of contract claim should be
dismissed because (a) Section C “creates no duties and requires no performance”; and
(b) Plaintiffs have failed to allege a breach of any term in the Shareholder Agreement.
(ECF No. 17, at p. 10.)
37. Plaintiffs allege that Nolan and Hauser have breached Section C by
engaging in the following conduct: “fraudulent and wrongful business deductions”;
“paying their family members a yearly salary and benefits despite them not actually
working for Piedmont”; “forcing Plaintiffs to equally share in [ ] fraudulent business
expenses”; “selling Plaintiff [ ] Daughtry’s equipment”; “intentionally not paying
[Plaintiffs] their fair share of the proceeds from the sale of Piedmont”; “pa[ying]
themselves management fees . . . without the knowledge and consent of Plaintiffs”;
6 At the 5 May 2022 hearing, the parties agreed that the Court can properly consider the
Shareholder Agreement in deciding the present Motion. “t[aking] actions and m[aking] decisions without holding the appropriate meetings
with the other shareholders”; and “caus[ing] discord between the Shareholders and
prevent[ing] the successful management of Piedmont[.]” (ECF No. 11, at ¶¶ 86(a)–
(i).)
38. The fatal defect in Plaintiffs’ argument is that Section C does not contain
any actual contractual obligations sufficient to form the basis for a breach of contract
claim. Instead, it is merely a recital as to the overall purpose of the Shareholder
Agreement. Moreover, Plaintiffs have failed to point to any other specific provisions
of the Shareholder Agreement that would support Plaintiffs’ breach of contract claim.
At the hearing, Plaintiffs’ counsel raised the possibility that other contracts may have
existed between the parties. However, the Shareholder Agreement is the only specific
contract pled in the Amended Complaint as the basis for Plaintiffs’ breach of contract
claim, and the Amended Complaint does not identify any other existing agreements.
39. Accordingly, the Court concludes that Defendants’ Motion to Dismiss is
GRANTED as to Plaintiffs’ breach of contract claim, and this claim is DISMISSED
without prejudice. See Charlotte Motor Speedway, LLC v. County of Cabarrus, 230
N.C. App. 1, 9 (2013) (affirming trial court’s dismissal of breach of contract claim
where complaint and documents incorporated therein “necessarily defeat” the claim).
C. Breach of Implied Duty of Good Faith and Fair Dealing
40. Plaintiffs have also brought a claim for breach of the covenant of good
faith and fair dealing. (ECF No. 11, at ¶¶ 72–76.) Under North Carolina law, every
enforceable contract contains an underlying implied covenant of good faith and fair dealing “that neither party will do anything which injures the right of the other to
receive the benefits of the agreement.” Bicycle Transit Auth., Inc. v. Bell, 314 N.C.
219, 228 (1985).
As a general proposition, where a party’s claim for breach of the implied covenant of good faith and fair dealing is based upon the same acts as its claim for breach of contract, we treat the former claim as “part and parcel” of the latter.” In other words, if a plaintiff brings a breach of contract claim and a claim for breach of the covenant of good faith and fair dealing based on the same facts, the two causes of action are treated as one and the same.
Eye Dialogue LLC v. Party Reflections, Inc., 2020 NCBC LEXIS 90, at **19 (N.C.
Super. Ct. July 28, 2020) (cleaned up) (quoting Cordaro v. Harrington Bank, FSB,
260 N.C. App. 26, 38–39 (2018)).
41. Accordingly, North Carolina courts have held that where a plaintiff
cannot show an actual breach of a contract’s express terms, it is precluded from also
asserting a claim for breach of the implied covenant of good faith and fair dealing in
that same contract. See Cordaro, 260 N.C. App. at 38–39 (holding that “the invalidity
of [plaintiff’s] breach of contract claim is . . . fatal to his claim for breach of the implied
covenant of good faith and fair dealing” where its basis was “identical to the basis for
his breach of contract claim”); Eye Dialogue LLC, 2020 NCBC LEXIS 90 at **20–21
(dismissing breach of contract claim and, therefore, also dismissing claim for breach
of the implied covenant of good faith and fair dealing to the extent it was “supported
by the same factual underpinnings”); see also Suntrust Bank v. Bryant/Sutphin
Props., LLC, 222 N.C. App. 821, 833 (2012) (“As the jury determined that plaintiff did not breach any of its contracts with defendants, it would be illogical for this Court to
conclude that plaintiff somehow breached implied terms of the same contracts.”).
42. Here, the basis for Plaintiffs’ claim that Nolan and Hauser breached the
implied covenant of good faith and fair dealing is identical to the basis for their breach
of contract claim, which the Court has dismissed. Accordingly, as in Suntrust Bank,
it would be “illogical” to find that Plaintiffs have adequately alleged a breach of
implied terms in that same contract. See 222 N.C. App. at 833. Therefore,
Defendants’ Motion to Dismiss is GRANTED as to Plaintiffs’ claim for breach of the
implied covenant of good faith and fair dealing, and this claim is DISMISSED without
prejudice.
D. Conversion
43. In addition, the Amended Complaint contains a claim for conversion in
which Plaintiffs allege that “Defendants converted the income and profits from
Piedmont . . . and the equipment of Dunn Foot[.]” (ECF No. 11, at ¶¶ 91–95.)7
44. Our Supreme Court has stated that “the tort of conversion is well
defined as an unauthorized assumption and exercise of the right of ownership over
goods or personal chattels belonging to another, to the alteration of their condition or
the exclusion of an owner’s rights.” Variety Wholesalers, Inc. v. Salem Logistics
Traffic Servs., LLC, 365 N.C. 520, 523 (2012) (cleaned up). “There are, in effect, two
essential elements of a conversion claim: ownership in the plaintiff and wrongful
7 As noted above, Dunn Foot is also named as a Plaintiff in this case. Presumably, the conversion claim (that is, the portion of the claim alleging the conversion of equipment owned by Dunn Foot) is the only claim in the Amended Complaint asserted on behalf of Dunn Foot. possession or conversion by the defendant.” Id. (citing Gadson v. Toney, 69 N.C. App.
244, 246 (1984)).
45. In the Amended Complaint, Plaintiffs allege, in part, the following:
At all times that Plaintiffs were owners and shareholders of Piedmont, they were entitled to, and the lawful owners of their income and profits of Piedmont, and Plaintiff [ ] Daughtry, as the owner of Dunn Foot, was the established and known owner of the equipment that came from the Dunn Foot Office.
Defendants converted the income and profits from Piedmont, the lawful property of the Plaintiffs, and the equipment of Dunn Foot through fraud, deception, misrepresentations, and by refusing to return or pay for the property upon the request of Plaintiffs . . . .
Defendants exercised control over the Plaintiffs’ property and deprived the Plaintiffs of their property by giving the property to the family members of the Defendants and selling it to FASMA. At the time the Defendants gave the property of the Plaintiffs to their family members and FASMA, they knew that the property did not belong to them and that their actions would deprive the Plaintiffs of their property.
(ECF No. 11, at ¶¶ 92–94.)
46. Defendants contend that the conversion claim should be dismissed
because the Amended Complaint fails to clearly allege (a) who is the legal owner of
the Dunn Foot equipment (Dunn Foot or Daughtry); (b) when any conversion of the
Dunn Foot equipment took place; (c) who is alleged to have exercised control of the
Dunn Foot equipment (Nolan, Hauser, or Piedmont); and (d) how any alleged
conversion of income and profits would be attributable to Nolan or Hauser rather
than Piedmont itself—given the nature of the acts of conversion alleged in the
Amended Complaint. (ECF No. 17, at pp. 11–14.) 47. The Court concludes that the conversion claim, as currently pled, is
impermissibly vague. It is difficult to tell which of the Plaintiffs is alleged to actually
own the specific property forming the basis for this claim. It is likewise hard to
discern from Plaintiffs’ allegations the precise acts of conversion being alleged, when
those acts occurred, and whether they were effectuated by the Defendants or
Piedmont.
48. Therefore, Defendants’ Motion to Dismiss is GRANTED as to Plaintiffs’
claim for conversion, and this claim is DISMISSED without prejudice.
E. UDTP
49. Plaintiffs also allege a claim for UDTP under the North Carolina Unfair
and Deceptive Trade Practices Act, N.C.G.S. § 75-1.1 et seq. (“UDTPA”). (ECF No.
11, at ¶¶ 101–05.)
50. To successfully state a UDTP claim, a plaintiff must allege “(1) an unfair
or deceptive act or practice, (2) in or affecting commerce, and (3) which proximately
caused injury to plaintiffs.” Walker v. Fleetwood Homes of N.C., Inc., 362 N.C. 63,
71–72 (2007) (quoting Gray v. N.C. Ins. Underwriting Ass’n, 352 N.C. 61, 68 (2000)).
51. In seeking dismissal of Plaintiffs’ UDTP claim, Defendants focus solely
on the second element, arguing that the claim should be dismissed because Plaintiffs’
allegations of unfair and deceptive conduct are not “in or affecting commerce” in that
the Amended Complaint “arises completely within the corporate dealings of
Piedmont[.]” (ECF No. 17, at pp. 15–16.) Conversely, Plaintiffs contend that the
conduct alleged did, in fact, affect commerce because it involved “multiple companies, multiple persons, patients and even public sporting event payments.” 8 (ECF No. 23,
at p. 17.)
52. Our Supreme Court has stated that despite the expansive definition of
commerce contained in Chapter 75, “the [UDTPA] is not focused on the internal
conduct of individuals within a single market participant, that is, within a single
business.” White v. Thompson, 364 N.C. 47, 53 (2010) (holding that defendant’s
conduct fell outside the scope of the UDTPA where he “unfairly and deceptively
interacted only with his partners” and where “his conduct occurred completely within
the . . . partnership”); see also Alexander v. Alexander, 250 N.C. App. 511, 515 (2016)
(holding that defendant’s misappropriation of corporate funds “for the benefit of
himself and his family members are more properly classified as the misappropriation
of funds within a single entity rather than commercial transactions between separate
market participants ‘in or affecting commerce’ ”).
53. On several occasions, this Court has dismissed UDTP claims on this
ground. See, e.g., Poluka v. Willette, 2021 NCBC LEXIS 105, at **13–21 (N.C. Super.
Ct. Dec. 2, 2021) (dismissing UDTP claim where allegations of majority member’s
“improper payments” to family members and wrongful acts regarding LLC’s
management were “simply another example of an internal dispute between members
of a single company”); Botanisol Holdings II, LLC v. Propheter, 2021 NCBC LEXIS
94, at **24–28 (N.C. Super. Ct. Oct. 18, 2021) (dismissing UDTP claim where
8 In the Amended Complaint, Plaintiffs allege that Defendants’ wrongful “acts and omissions”
are “in and affecting commerce in that multiple businesses were involved.” (ECF No. 11, at ¶ 102.) allegations of member’s diversion of opportunities away from original LLC to his new
LLC were not “in or affecting commerce” because “the focus of the deception was on
[the original entity]”); Potts v. KEL, LLC, 2018 NCBC LEXIS 24, at **12–16 (N.C.
Super. Ct. Mar. 27, 2018) (dismissing UDTP claim where allegations of shareholder’s
funneling of money belonging to corporation toward entities owned by the
shareholder and his family were not “in or affecting commerce” because “the
unfairness of these actions, if any, inheres in the relationship between [the plaintiff
and defendant] as co-owners of” a single market participant); JS Real Estate Invs.
LLC v. Gee Real Estate, LLC, 2017 NCBC LEXIS 104, *17–22 (N.C. Super. Ct. Nov.
9, 2017) (dismissing UDTP claim where “[b]y its nature, th[e] dispute [did] not
concern the regular interactions of separate market participants” but rather involved
the members’ dispute “over the companies’ internal management and the members’
right to receive distributions.”).
54. Plaintiffs attempt to rebut Defendants’ argument on this issue by
stating the following in their brief in opposition to Defendants’ Motion to Dismiss:
In Sara Lee [Corp. v. Carter, 351 N.C. 27 (1999)], the Court noted the importance of the role that pricing has in the marketplace. Here, the same logic applies. Piedmont is a consumer/patient driven business. Expense of such business will necessarily impact prices to the consumer/patient. Illegitimate expenses passed along to Plaintiffs, which would necessarily come in to play in assessing charges to consumers/patient[s], thereby clearly bringing the matter within the commerce prong for UDTP claims. Furthermore, you would also necessarily have an interaction with health insurers. Lastly, you also have the interaction and effect on the purchase price and negotiation with three distinct companies who purchased Piedmont.
(ECF No. 23, at pp. 16–17.) 55. The Court is unpersuaded by Plaintiffs’ argument. As in the cases cited
above, the Court similarly concludes that the wrongful acts alleged by Plaintiffs here
primarily relate to an internal business dispute between shareholders of a single
corporation such that they have not alleged conduct “in or affecting commerce” within
the meaning of the UDTPA. The essence of Plaintiffs’ allegations is that Defendants
authorized improper payments from Piedmont to themselves and their family
members, inflated Piedmont’s expenses, and withheld money and assets belonging to
Plaintiffs.
56. As noted above, Plaintiffs’ main argument as to why Defendants’ alleged
conduct was “in or affecting commerce” is that their acts had indirect consequences
outside the company on patients and consumers. “The Supreme Court’s refusal in
White to allow indirect involvement of other market participants to trigger liability
under Section 75-1.1 forecloses [this] argument.” Powell v. Dunn, 2014 NCBC LEXIS
3, at **10–11 (N.C. Super. Ct. Jan. 28, 2014); see White, 346 N.C. at 54 (rejecting
plaintiffs’ argument that defendant’s internal conduct was “in or affecting commerce”
because it indirectly “reduc[ed] competition and potentially affect[ed] prices in the
market”); see also LLG-NRMH, LLC v. Northern Riverfront Marina & Hotel, LLLP,
2018 NCBC LEXIS 105, at *13 (N.C. Super. Ct. Oct. 9, 2018) (finding allegations of
defendants’ indirect harm to the “broader marketplace” insufficient to support a
UDTP claim). Moreover, although Plaintiffs are correct that the Amended Complaint
references third-party entities that acquired Piedmont, the mere mention of these
other entities does not alter the fundamental character of this case, as the allegedly unfair conduct does not directly involve those entities. See JS Real Estate Invs. LLC,
2017 NCBC LEXIS 104, at *21; Bandy v. Gibson, 2017 NCBC LEXIS 66, at *21–22
(N.C. Super. Ct. July 26, 2017).
57. Accordingly, the Court finds that Plaintiffs have failed to adequately
allege conduct that is “in or affecting commerce.” Therefore, the Court concludes that
Defendants’ Motion to Dismiss is GRANTED as to Plaintiffs’ claim for UDTP, and
this claim is DISMISSED without prejudice.
F. Fraud
58. The Amended Complaint further alleges a claim for fraud. (ECF No.
11, at ¶¶ 106–10.) Under North Carolina law, the essential elements of a claim for
fraud are: “(1) [f]alse 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.” Terry v. Terry, 302 N.C. 77, 83 (1981)
(quoting Ragsdale v. Kennedy, 286 N.C. 130, 138 (1974)).
59. Defendants contend that the fraud claim should be dismissed because
Plaintiffs’ allegations do not satisfy the heightened pleading requirement for such
claims as required by Rule 9(b) of the North Carolina Rules of Civil Procedure. (ECF
No. 17, at pp. 16–20.)
60. Rule 9(b) requires that “the circumstances constituting fraud” be alleged
“with particularity.” N.C. R. Civ. P. 9(b). “The purpose of Rule 9(b) is to provide a
defendant with sufficient notice of the fraud alleged ‘in order to meet the charges.’ ”
Provectus Biopharm., Inc. v. RSM US LLP, 2018 NCBC LEXIS 101, at *63 (N.C. Super. Ct. Sept. 28, 2018) (quoting Terry, 302 N.C. at 85). Our Supreme Court has
held that “in pleading actual fraud[,] the particularity requirement is met by alleging
time, place[,] and content of the fraudulent representation, identity of the person
making the representation[,] and what was obtained as a result of the fraudulent acts
or representations.” Terry, 302 N.C. at 85. Thus, “a pleading is sufficiently particular
‘if, upon a liberal construction of the whole pleading, the charge of fraud might be
supported by proof of the alleged constitutive facts.’ ” Provectus Biopharm., Inc., 2018
NCBC LEXIS 101 at *63 (quoting Carver v. Roberts, 78 N.C. App. 511, 513 (1985)).
61. Here, the Amended Complaint contains general allegations that
“Defendants” made “false and intentionally misleading statements” on “multiple
occasions” to “Plaintiffs” during periods spanning up to three years. (ECF No. 11, at
¶¶ 107(a)–(i).) However, as with Plaintiffs’ conversion claim, these fraud allegations
are vague—particularly with regard to who made the statements, to whom the
statements were made, the substance of the statements, and the dates the statements
were made. Accordingly, the Court finds that Plaintiffs have inadequately pled their
fraud claim with particularity, as required by Rule 9(b).
62. Therefore, Defendants’ Motion to Dismiss is GRANTED as to Plaintiffs’
claim for fraud, and this claim is DISMISSED without prejudice.
G. Civil Conspiracy
63. Finally, the Amended Complaint includes a claim for civil conspiracy.
(ECF No. 11, at ¶¶ 77–83.) Our Supreme Court has held that “a complaint
sufficiently states a claim for civil conspiracy when it alleges (1) a conspiracy, (2) wrongful acts done by certain of the alleged conspirators in furtherance of that
conspiracy, and (3) injury as a result of that conspiracy.” Krawiec v. Manly, 370 N.C.
602, 614 (2018) (cleaned up). A claim for civil conspiracy is not a standalone claim
and therefore “must be based on an adequately pled underlying claim.” USA Trouser,
S.A. de C.V. v. Williams, 258 N.C. App. 192, 201 (2018); see Krawiec, 370 N.C. at 615
(dismissing civil conspiracy claim where the underlying claims were dismissed).
64. Defendants contend that Plaintiffs’ civil conspiracy claim should be
dismissed because (a) Plaintiffs “failed to adequately plead that an agreement existed
between the Defendants”; and (b) if the Court accepts Defendants’ arguments for
dismissal of all other claims in the Amended Complaint, there will be no underlying
claim left to serve as the basis for the civil conspiracy claim. (ECF No. 17, at p. 11.)
65. With regard to Defendants’ first argument, our Supreme Court has
stated that “[a] party may prove an action for civil conspiracy by circumstantial
evidence[.]” Dalton v. Camp, 138 N.C. App. 201, 213 (2000) (cleaned up) (citing
Dickens v. Puryear, 302 N.C. 437, 456 (1981)). Here, the Amended Complaint
contains allegations that, since 2017, Defendants Nolan and Hauser—as majority
shareholders and officers of Piedmont—had meetings, conversations, and other
communications in which they developed a “plan or scheme” to deny Plaintiffs from
receiving a fair share of profits and income from Piedmont. (ECF No. 11, at ¶¶ 67,
79–80.) These statements, taken as true as is required under Rule 12(b)(6),
sufficiently allege that an agreement existed between the Defendants to engage in
unlawful conduct toward Plaintiffs. Indeed, this Court has recognized that “it is difficult to dismiss a conspiracy claim summarily because the elements of a
conspiracy claim are broadly stated.” Safety Test & Equip. Co. v. Am. Safety Util.
Corp., 2015 NCBC LEXIS 40, at *48 (N.C. Super. Ct. Apr. 23, 2015). While Plaintiffs
will ultimately bear the burden of proving that a conspiracy did, in fact, exist, the
Court finds these allegations sufficient at the pleadings stage.
66. As for Defendants’ second argument, although Defendants are correct
that a claim for civil conspiracy is not a standalone claim, the Court—as discussed
above—is denying Defendants’ Motion to Dismiss as to Plaintiffs’ breach of fiduciary
duty claim. This Court has previously allowed a civil conspiracy claim predicated on
a breach of fiduciary duty claim to survive a motion to dismiss. See, e.g., Veer Right
Mgmt. Grp., Inc. v. Czarnowski Display Serv., 2015 NCBC LEXIS 13, **9–11 (N.C.
Super. Ct. Feb. 4, 2015); GoRhinoGo, LLC v. Lewis, 2011 NCBC LEXIS 39, at *20
(N.C. Super. Ct. Sept. 29, 2011).
67. Therefore, Defendants’ Motion to Dismiss is DENIED as to Plaintiffs’
claim for civil conspiracy.
CONCLUSION
THEREFORE, IT IS ORDERED that Defendants’ Motion to Dismiss is
GRANTED, in part, and DENIED, in part, as follows:
1. The Motion is GRANTED with respect to the following claims, which
are dismissed without prejudice:
a. Plaintiffs’ claim for breach of contract; b. Plaintiffs’ claim for breach of the covenant of good faith and
fair dealing;
c. Plaintiffs’ claim for conversion;
d. Plaintiffs’ claim for UDTP; and
e. Plaintiffs’ claim for fraud.
2. The Motion is DENIED with respect to the following claims:
a. Plaintiffs’ claim for civil conspiracy; and
b. Plaintiffs’ claim for breach of fiduciary duty.
3. The Motion is DENIED as MOOT to the extent it seeks dismissal of
any derivative claims contained in the Amended Complaint.
4. Plaintiffs shall have thirty (30) days in which to file a Second
Amended Complaint if they desire to do so. 9
SO ORDERED, this the 19th day of July, 2022.
/s/ Mark A. Davis Mark A. Davis Special Superior Court Judge for Complex Business Cases
9 In the event that Plaintiffs elect to file a Second Amended Complaint, they are directed to
state their claims with greater clarity than that existing in the Amended Complaint currently before the Court.