Llg-Nrmh, LLC v. N. Riverfront Marina & Hotel, Lllp

2018 NCBC 104

• Court: North Carolina Business Court
• Decided: October 9, 2018
• Docket: 18-CVS-4522
• Status: Published

Opinion

LLG-NRMH, LLC v. N. Riverfront Marina & Hotel, LLLP, 2018 NCBC 104.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 18 CVS 4522

LLG-NRMH, LLC; 10 HARNETT BLACKFINN WILMINGTON, LLC; LLG-VW, LLC; and 10 HARNETT VIDA WILMINGTON, LLC,

Plaintiff,

v.

NORTHERN RIVERFRONT MARINA & HOTEL, LLLP; WILMINGTON RIVERFRONT DEVELOPMENT, LLC; VIDA WILMINGTON, LLC; USA INVESTCO, LLC; and CHARLES SCHONINGER,

Defendants, ORDER AND OPINION ON DEFENDANTS’ MOTION TO DISMISS and

NORTHERN RIVERFRONT MARINA & HOTEL, LLLP,

Third-Party Plaintiff,

ROBERT DURKIN,

Third-Party Defendant.

1. This action arises out of a dispute between the co-owners of two failed

restaurants in Wilmington, North Carolina. Plaintiffs pin the failures on Defendant

Charles Schoninger, alleging that he, and several entities he owns or controls, failed

to deliver promised funding, diverted assets to other personal and professional uses,

and interfered with restaurant management and operations. In response, Defendants put the blame on Plaintiffs, alleging mismanagement and misuse of

funds.

2. The subject of this Opinion is Defendants’ motion to dismiss some but not

all of Plaintiffs’ claims under Rule 12(b)(6) of the North Carolina Rules of Civil

Procedure. For the following reasons, the Court GRANTS the motion.

James, McElroy & Diehl, P.A., by John R. Buric and John R. Brickley, for Plaintiffs LLG-NRMH, LLC, 10 Harnett BlackFinn Wilmington, LLC, LLG-VW, LLC, and 10 Harnett Vida Wilmington, LLC.

Jones, Hewson & Woolard, by Lawrence J. Goldman, for Defendants Northern Riverfront Marina & Hotel, LLLP, Wilmington Riverfront Development, LLC, Vida Wilmington, LLC, USA InvestCo, LLC, and Charles Schoninger.

Conrad, Judge.

I. BACKGROUND

3. The Court does not make findings of fact in deciding motions filed under

Rule 12(b)(6). The following factual summary is drawn from relevant allegations in

the complaint.

4. The parties’ relationship goes back to 2012. At that time, Schoninger

conceived the idea of opening restaurants in Wilmington. (See Mot. Appt. Receiver,

Mot. for Attachment, & V. Compl. ¶ 18, ECF No. 3 [“Compl.”].) Schoninger, a real-

estate developer, had no experience with restaurants, so he approached others who

did, namely the principals of Plaintiffs 10 Harnett BlackFinn Wilmington, LLC and

10 Harnett Vida Wilmington, LLC (collectively, “Harnett Entities”). (See Compl.

¶¶ 18–20.) 5. According to the complaint, Schoninger’s pitch was simple. He would

provide all the funding, and the Harnett Entities would perform the necessary

management and consulting services. (See Compl. ¶ 20.) Any profits would be split

“on a sliding scale over time.” (Compl. ¶ 20.) Schoninger also represented that he

had already raised $25,000,000 from Chinese investors through the federal

government’s EB-5 program. (Compl. ¶¶ 21–22.) (The EB-5 program permits foreign

investors to become permanent residents in return for commercial investments that

create jobs for American workers.) The parties struck a deal and agreed to develop

two restaurants, known as BlackFinn and Vida Cantina. (Compl. ¶¶ 15, 31.)

6. Although work on the projects began immediately, it was not until August

2015 that the parties memorialized their agreement in writing. They did so by

executing operating agreements for two limited liability companies—LLG-NRMH,

LLC and LLG-VW, LLC—that the parties created to own and operate the

restaurants. (See Compl. ¶¶ 16, 17, 23.) Neither agreement is attached to the

complaint. As alleged, though, each agreement states that Schoninger (through

companies he controls) would supply the capital and that the Harnett Entities would

contribute a license for the restaurant concepts along with management and

consulting services. (See Compl. ¶¶ 24, 25, 27–29.) Schoninger and Robert Durkin

were appointed as the managers of LLG-NRMH and LLG-VW. (Compl. ¶ 26.)

7. The organizational structures of LLG-NRMH and LLG-VW are complex,

allegedly so as to comply with the EB-5 program. (See Compl. ¶ 38.) LLG-NRMH’s

members are 10 Harnett BlackFinn Wilmington and Defendant Northern Riverfront Marina & Hotel, LLLP (“Northern Riverfront”). (Compl. ¶¶ 6, 16.) Northern

Riverfront is owned in part by Defendant Wilmington Riverfront Development, LLC

(with a 90 percent interest) and in part by unidentified Chinese investors (who own

the other 10 percent). (Compl. ¶ 16.) Wilmington Riverfront Development, in turn,

has two members, Schoninger and John Wang. (Compl. ¶ 16; see also Compl. ¶ 41.)

8. LLG-VW is similarly structured, with 10 Harnett Vida Wilmington and

Defendant Vida Wilmington, LLC as its only members. (Compl. ¶¶ 17, 26.) Vida

Wilmington is owned by Defendant USA InvestCo, LLC and by unidentified Chinese

investors. (Compl. ¶ 17.) USA InvestCo is owned jointly by Schoninger and Wang.

(Compl. ¶ 17.) The complaint does not state what percentage interest the Chinese

investors hold in Vida Wilmington or whether they are the same as, or overlap with,

the investors in Northern Riverfront.

9. According to the complaint, the projects were plagued by debt and delay

from the outset. By 2015, Schoninger had used some or all of the EB-5 funds on other

projects “and to fund his extravagant personal lifestyle.” (Compl. ¶ 33.) As a result,

funding ran short, and the parties had to take out loans. (Compl. ¶¶ 32, 35–37.) This

cycle repeated in 2017: Schoninger informed Plaintiffs that he had exhausted his

EB-5 funds and bank loans, again asking the Harnett Entities for help. (See Compl.

¶ 37.)

10. Also in 2017, Schoninger began pushing to restructure the businesses.

Although LLG-NRMH and LLG-VW had supposedly been designed with the EB-5

program in mind, Schoninger told the Harnett Entities that changes were needed to satisfy EB-5 regulations. (See Compl. ¶ 39.) He proposed to eliminate the Harnett

Entities’ membership interests in LLG-NRMH and LLG-VW and, instead, to have

them enter into management agreements with Northern Riverfront and Vida

Wilmington. (See Compl. ¶ 39.) After seeing the draft management agreements, the

Harnett Entities refused. (Compl. ¶ 42.) They now allege the proposal had nothing

to do with the EB-5 program but was instead an effort to push them aside so that

Schoninger could seek more money from other investors. (See Compl. ¶ 41.)

11. BlackFinn eventually opened, rushed and undercapitalized, in May 2017.

(See Compl. ¶¶ 47, 48, 55.) Initial success faded quickly. As alleged, Schoninger

began interfering with the restaurant’s management. (See Compl. ¶ 50.) He also

took money out of BlackFinn’s operating account, resulting in bounced checks to

vendors and insufficient funds to meet payroll. (See Compl. ¶¶ 56, 57.) On another

occasion, Schoninger took food and alcohol from BlackFinn to throw a party at Vida

Cantina, all to convince his Chinese investors that Vida Cantina was open to the

public and fully operational. (See Compl. ¶ 58.) In fact, Vida Cantina never opened,

allegedly due to Schoninger’s failure to supply his required capital contribution. (See

Compl. ¶ 63.)

12. After BlackFinn opened, Schoninger again attempted to reorganize the

operating companies along the lines he had proposed in March 2017. (See Compl.

¶ 51.) By September 2017, discussions had broken down for good. (See Compl. ¶ 53.)

Shortly after, Schoninger purported to terminate the Harnett Entities’ management

of BlackFinn and excluded them from LLG-NRMH’s bank account. (See Compl. ¶¶ 59, 61.) He and Northern Riverfront then closed the restaurant. (Compl. ¶ 62.)

The Harnett Entities believe Schoninger intends to open new restaurants to replace

BlackFinn and Vida Cantina, without their participation but using their “furniture,

equipment, proprietary systems, methods, processes, other intellectual property, and

trade secrets.” (Compl. ¶ 62; see also Compl. ¶ 63.)

13. In this action, the Harnett Entities assert a mix of direct claims and

derivative claims on behalf of LLG-NRMH and LLG-VW, including fraud, breach of

fiduciary duty, conversion, unfair or deceptive trade practices under N.C. Gen. Stat.

§ 75-1.1, constructive trust, and others. Defendants deny any wrongdoing, and

Northern Riverfront has responded with counterclaims alleging a number of

improper acts by Plaintiffs, including misuse of funds.

14. Defendants also moved to dismiss Plaintiffs’ claims for unfair or deceptive

trade practices and constructive trust. (ECF No. 11.) After briefing, the Court held

a hearing on August 15, 2018. (ECF Nos. 20, 30.) The motion is now ripe for

determination.

II. LEGAL STANDARD

15. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the

complaint.” Concrete Serv. Corp. v. Inv’rs Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d

755, 758 (1986). The motion should be granted “(1) when the complaint on its face

reveals that no law supports [the] claim; (2) the complaint on its face reveals the

absence of a fact sufficient to make a good claim; [or] (3) some fact disclosed in the complaint necessarily defeats [the] claim.” Jackson v. Bumgardner, 318 N.C. 172,

175, 347 S.E.2d 743, 745 (1986).

16. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded

allegations of the complaint as true and view the facts and permissible inferences “in

the light most favorable to” the plaintiff. Ford v. Peaches Ent. Corp., 83 N.C. App.

155, 156, 349 S.E.2d 82, 83 (1986); see also Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d

161, 163 (1970). “[T]he court is not required to accept as true any conclusions of law

or unwarranted deductions of fact.” Oberlin Capital, L.P. v. Slavin, 147 N.C. App.

52, 56, 554 S.E.2d 840, 844 (2001).

III. ANALYSIS

17. Defendants present two issues. The first is whether Plaintiffs’ section 75-1.1

claim must be dismissed because the acts alleged in the complaint “are not in or

affecting commerce.” (Defs.’ Br. in Supp. 2, ECF No. 25 [“Defs.’ Br.”].) The second is

whether a constructive trust is a remedy, rather than a claim for relief. (See Defs.’

Br. 3.) The Court begins with section 75-1.1.

A. Unfair or Deceptive Trade Practices

18. By statute, “unfair or deceptive acts or practices in or affecting commerce”

are “unlawful.” N.C. Gen. Stat. § 75-1.1. As construed by our Supreme Court, this

language is 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. White v. Thompson, 364 N.C. 47, 51–52, 691

S.E.2d 676, 679 (2010); see also HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594, 403 S.E.2d 483, 493 (1991). Thus, “any unfair or deceptive conduct

contained solely within a single business is not covered by” section 75-1.1. White, 364

N.C. at 53, 691 S.E.2d at 680; see also Brewster v. Powell Bail Bonding, Inc., 2018

NCBC LEXIS 76, at *17 (N.C. Super. Ct. July 26, 2018) (collecting cases).

19. Defendants contend that their alleged conduct occurred within a single

business—either LLG-NRMH or LLG-VW—and thus was not in or affecting

commerce. (See Defs.’ Br. 2–3.) Plaintiffs respond that “[n]umerous” market

participants were “involved and affected by this dispute.” (Pls.’ Mem. in Opp’n 9–10,

ECF No. 31 [“Opp’n”].)

20. The Court agrees with Defendants. At bottom, this dispute is one about the

ownership and management of LLG-NRMH and LLG-VW, along with the two

restaurants they owned, developed, and operated. Construing the complaint

liberally, the alleged unfair or deceptive acts by Defendants include (1) the failure to

properly capitalize the companies, (see Compl. ¶¶ 20, 24, 35–37, 44, 46, 63); (2) the

wrongful demand to reorganize them, (see Compl. ¶¶ 39–42, 51–53); (3) interference

with the management of the restaurants, (see Compl. ¶¶ 50, 54); and

(4) misappropriation of funds and other assets, (see Compl. ¶¶ 33, 56). Each of these

acts, even if accepted as true, was internal to LLG-NRMH or LLG-VW and therefore

not in or affecting commerce.

21. Defendants’ obligation to contribute capital, for example, arises directly

from the operating agreements for LLG-NRMH and LLG-VW. These are “internal

agreement[s] between [the] members” of the companies, which exist for the purpose of governing the companies’ internal operations. Urquhart v. Trenkelbach, 2017

NCBC LEXIS 12, at *13 (N.C. Super. Ct. Feb. 8, 2017); see also N.C. Gen. Stat.

§ 57D-2-30 (“The operating agreement governs the internal affairs of an LLC . . . .”).

As a result, even assuming Schoninger and the other Defendants violated their

obligation to make capital contributions, the violations occurred solely within “the

internal affairs of” LLG-NRMH and LLG-VW. Id. They do not concern the

companies’ “regular interactions with other market participants.” White, 364 N.C. at

51, 691 S.E.2d at 679 (citing HAJMM Co., 328 N.C. at 594, 403 S.E.2d at 493).

22. The analysis is essentially the same for Schoninger’s attempt to amend the

operating agreements to eliminate the Harnett Entities’ membership interests.

Disputes between co-owners over their ownership interests are, by their nature,

internal. See Chisum v. Campagna, 2017 NCBC LEXIS 102, at *33–35 (N.C. Super.

Ct. Nov. 7, 2017) (dismissing section 75-1.1 claim based on, among other things,

defendant’s attempts to amend operating agreements to alter plaintiff’s ownership

interest); see also Wilson v. Blue Ridge Elec. Membership Corp., 157 N.C. App. 355,

358, 578 S.E.2d 692, 694–95 (2003) (affirming dismissal of section 75-1.1 claim based

on defendant’s modification of corporation’s by-laws to prevent plaintiff from serving

on the board).

23. The remaining unfair acts include Schoninger’s alleged interference with

restaurant management and misappropriation of assets. Management disputes are

a classic example of conduct solely related to a business’s internal operations. Indeed,

Plaintiffs specifically allege that Schoninger “interfered with 10 Harnett BlackFinn’s and the operations team’s ability to provide” management services. (Compl. ¶ 50

(emphasis added).) Thus, as alleged, the unfair conduct was directed at a co-owner

and co-manager. See White, 364 N.C. at 54, 691 S.E.2d at 680.

24. Plaintiffs contend that the alleged misappropriation of assets is different

because Schoninger used the assets (including property contributed by the Harnett

Entities) for his own personal and professional endeavors, separate from the

restaurants. (See Opp’n 10–11.) But this Court and our Court of Appeals have held

that similar actions were “more properly classified as the misappropriation of

corporate funds within a single entity rather than commercial transactions between

separate market participants.” Alexander v. Alexander, 792 S.E.2d 901, 905 (N.C. Ct.

App. 2016); accord Potts v. KEL, LLC, 2018 NCBC LEXIS 24, at *13–14 (N.C. Super.

Ct. Mar. 27, 2018); Urquhart, 2017 NCBC LEXIS 12, at *12–13. That Schoninger

advanced the interests of his own entities at the expense of the Harnett Entities “does

not change the fundamental character of the dispute.” JS Real Estate Invs. LLC v.

Gee Real Estate, LLC, 2017 NCBC LEXIS 104, at *21 (N.C. Super. Ct. Nov. 9, 2017)

(noting that “White itself involved a partner’s breach of fiduciary duty by diverting

work to his own business and away from the partnership,” which the Supreme Court

deemed outside the scope of section 75-1.1). Schoninger’s alleged conduct may well

be unfair, but the unfairness “inheres in the relationship between” Schoninger,

through his entities, and the Harnett Entities “as co-owners of” LLG-NRMH and

LLG-VW. Potts, 2018 NCBC LEXIS 24, at *15 (emphasis in original). 25. Plaintiffs offer three other arguments. They contend, first, that Defendants

are not all parties to any operating agreement, such that the disputes cannot all be

internal. (See Opp’n 9.) Not so. Each of the Defendants is part of the complex, nested

corporate structure that the parties chose for LLG-NRMH and LLG-VW. The “fact

that separate entities comprise [a] single market participant does not” make external

what is otherwise internal to the business. Polyquest, Inc. v. Vestar Corp., 2014 U.S.

Dist. LEXIS 14905, at *35 (E.D.N.C. Feb. 6, 2014).

26. Plaintiffs next contend that Defendants’ wrongful acts harmed the Chinese

EB-5 investors, each of whom Plaintiffs describe as “an independent market

participant,” by deceiving them as to the purpose and success of their investments.

(Opp’n 9–10.) On the face of the complaint, though, the EB-5 investors are not

external to either LLG-NRMH or LLG-VW. Rather, they are also co-owners, albeit

indirectly, through their interests in two parent entities, Wilmington Riverfront and

Vida Wilmington. (See Compl. ¶¶ 16, 17.) At the hearing, Plaintiffs’ counsel argued

that the precise nature of the EB-5 investors’ involvement is unclear and that they

need discovery to explore it. For purposes of this motion, though, the Court must

evaluate what Plaintiffs have alleged, not what they could allege with more

investigation. Plaintiffs were required to allege all necessary elements, including

that Defendants’ conduct was in or affecting commerce. As alleged, it was not.*

* The Court doubts whether unfair conduct directed toward the Chinese investors would be

in or affecting commerce even if those investors are external to the businesses. Although the complaint does not describe in detail the nature of the transactions, Schoninger’s alleged interactions with the EB-5 investors involved solicitation of their investments. (See Compl. ¶¶ 33, 58.) Our Supreme Court has held that unfair or deceptive conduct involving “extraordinary event[s] done for the purpose of raising capital” are beyond the scope of section 27. Third, and finally, Plaintiffs argue that Defendants’ actions caused harm in

the broader marketplace, including to contractors, vendors, and the City of

Wilmington, due to failures to make payments or to fulfill other agreements. (See

Opp’n 10.) At most, these allegations suggest that Defendants’ actions within

LLG-NRMH and LLG-VW also had consequences outside the company. There is no

allegation, though, that Defendants directed their unfair or deceptive conduct toward

the marketplace in general. The tangential or “indirect involvement of other market

participants” does not “trigger liability under [s]ection 75-1.1.” Powell v. Dunn, 2014

NCBC LEXIS 3, at *10 (N.C. Super. Ct. Jan. 28, 2014); see also Wheeler v. Wheeler,

2018 NCBC LEXIS 38, at *13–14 (N.C. Super. Ct. Apr. 25, 2018); JS Real Estate

Invs., 2017 NCBC LEXIS 104, at *21.

28. For these reasons, the Court grants Defendants’ motion to dismiss Plaintiffs’

section 75-1.1 claim. In its discretion, though, the Court dismisses this claim without

prejudice to Plaintiffs’ ability to seek leave to amend the complaint to assert a valid

section 75-1.1 claim during the course of discovery.

B. Constructive Trust

29. Defendants also argue that the Court should dismiss Plaintiffs’ claim for a

constructive trust because a constructive trust is a remedy, not a claim for relief. (See

Defs.’ Br. 3.) Plaintiffs do not object to dismissal “provided that such dismissal is

75-1.1. HAJMM Co., 328 N.C. at 594, 403 S.E.2d at 493; see also Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 62, 554 S.E.2d 840, 848 (2001); Tillery Envtl. LLC v. A&D Holdings, Inc., 2017 NCBC LEXIS 68, at *11–16 (N.C. Super. Ct. Aug. 4, 2017). without prejudice” to their ability to seek a constructive trust as a remedy for their

remaining claims. (Opp’n 14–15 (citation and quotation marks omitted).)

30. The Court agrees that a constructive trust is not a standalone claim for relief

or cause of action. See Weatherford v. Keenan, 128 N.C. App. 178, 179, 493 S.E.2d

812, 813 (1997). Accordingly, for purposes of clarity, the Court grants Defendants’

motion to dismiss to the extent it seeks dismissal of the purported cause of action for

a constructive trust. The Court renders this decision without prejudice to Plaintiffs’

ability to pursue the equitable remedy of a constructive trust to the extent one or

more other claims for relief may justify such a remedy. See Roper v. Edwards, 323

N.C. 461, 464, 373 S.E.2d 423, 424–25 (1988) (describing constructive trust as an

equitable remedy “to prevent the unjust enrichment of the holder of . . . an interest

in[] property which such holder acquired through fraud”).

IV. CONCLUSION

31. For the foregoing reasons, the Court GRANTS the motion to dismiss and

ORDERS that:

a. Plaintiffs’ claim for unfair or deceptive trade practices is DISMISSED

without prejudice; and

b. Plaintiffs’ claim for a constructive trust is DISMISSED without

prejudice to their right to seek a constructive trust as a remedy for their surviving

claims for relief. This the 9th day of October, 2018.

/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases