Preiss v. Wine and Design Franchise, 2018 NCBC 98.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE COUNTY OF WAKE SUPERIOR COURT DIVISION 17 CVS 11895 EMILY PREISS and WINE AND DESIGN, LLC, Plaintiffs,
v.
ORDER AND OPINION ON WINE AND DESIGN FRANCHISE, DEFENDANTS’ MOTIONS TO DISMISS LLC; HARRIET E. MILLS; PATRICK MILLS; and CAPITAL SIGN SOLUTIONS, LLC,
Defendants.
THIS MATTER comes before the Court on Harriet E. Mills (“Harriet”), Patrick
Mills (“Patrick”) and Capital Sign Solutions, LLC’s (“CSS”) (collectively the “Mills
Defendants”) Motion to Dismiss All Claims Against Them With Prejudice N.C. R. Civ.
P. 12(b)(1) and 12(b)(6) (“Mills Motion to Dismiss”, ECF No. 12), and on Wine and
Design Franchise, LLC’s Motion to Dismiss, (“Franchise Company Motion to
Dismiss”, ECF No. 14; collectively, the Mills Motion to Dismiss and the Franchise
Company Motion are the “Motions to Dismiss”).
THE COURT, after considering the Motions to Dismiss, the briefs filed in
support of and in opposition to the Motions, the arguments of counsel at the hearing,
and other appropriate matters of record, CONCLUDES that the Mills Motion should
be GRANTED, in part, and DENIED, in part, and the Franchise Company Motion
should be GRANTED, in part, and DENIED, in part.
Zaytoun Law Firm, PLLC, by Robert E. Zaytoun, John R. Taylor, and Matthew T. Ballew for Plaintiffs Emily Preiss and Wine and Design, LLC. Batten Lee, PLLC, by Gloria T. Becker, Matthew Mariani, and Kari Johnson, for Defendants Harriet E. Mills, Patrick Mills, and Capital Sign Solutions, LLC.
Ward and Smith, by A. Charles Ellis, Marla S. Bowman, and Joseph A. Schouten, for Defendant Wine and Design Franchise, LLC.
McGuire, Judge.
I. FACTUAL AND PROCEDURAL BACKGROUND
1. The Court does not make findings of fact on motions to dismiss under
N.C. Gen. Stat. § 1A-1, Rule 12(b)(6) (hereinafter, the North Carolina General
Statutes will be referred to as “G.S.” and the Rules of Civil Procedure will be referred
to as “Rule(s)”), but only recites those facts included in the complaint that are relevant
to the Court’s determination of the Motion. See, e.g., Concrete Serv. Corp. v. Inv’rs
Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986). The facts in this case
are drawn from the First Amended Complaint. (“FAC”, ECF No. 3.)
2. In this Order the Court discusses only the facts relevant to the Court’s
consideration of and conclusions regarding the pending Motions to Dismiss. Other
aspects of the procedural and factual history in this case are fully described in the
Court’s previous Orders. (Order on Defs.’ Mot. to Strike CMR, ECF No. 45; Order on
Pls.’ Mot. to Consolidate, ECF No. 54; Order on Pls.’ Mot. to Appoint Guardian ad
Litem, ECF No. 72; Order on Pls.’ Mot. for Protective Order, ECF No. 74.)
3. This matter arises out of a broken business relationship between
friends. On June 1, 2010, Emily Preiss (“Emily”) and Harriet “co-founded Wine and
Design, LLC, a unique paint party business in which customers were invited to
engage in painting and design activities in a relaxed social atmosphere.” (ECF No. 3, at ¶ 10 (internal quotation marks omitted).) (Hereinafter, Wine and Design, LLC
will be referred to as the “Raleigh Studio.”) Initially, the business expenses, net
earnings, and management decisions were split on a “50-50 basis” between Emily and
Harriet. (Id. at ¶ 11.)
4. The Raleigh Studio was a success, and in June 2011, Emily and Harriet
organized Wine and Design Franchise, LLC (the “Franchise Company”) to franchise
the concept to other locations. Between 2011 and 2014, the Franchise Company
acquired over 40 franchised locations along the East Coast. The Franchise Company
paid monthly distributions to both Harriet and Emily in an average of $2,186 through
the last half of 2011; $4,676.33 in 2012; and $7,512 in 2013.
5. In the summer of 2013, personal conflicts between Emily and Harriet
festered and began to impact their business relationship. Emily assumed control over
both the Raleigh Studio and the Franchise Company for “most of the summer of
2013.” (Id. at ¶ 18.) During this time, Harriet criticized Emily’s disorganization, lack
of structure, her choice of a business manager, and her “failure to hire other
personnel.” (Id. at ¶ 19.)
6. Emily was under “extreme stress” as the result of “running both
businesses by herself and being harshly criticized by her close friend,” and this stress
was compounded by Harriet and Patrick telling employees, Emily’s estranged
husband John, and others that Emily was struggling with drug addiction and meeting
with drug dealers at work. (Id. at ¶¶ 20–22.) Emily alleges that this was false, and
that she “was not a drug addict, [but instead] she had long suffered from Adult Attention Deficit Hyperactivity Disorder for which she had been treated with
Adderall by mental health providers since the late 1990s.” (Id. at ¶ 22.)
7. “Under pressure from Harriet, Patrick, and John, [Emily] enrolled at a
center known as ‘Behavioral Health of the Palm Beaches’ in Lake Worth, Florida” in
March of 2014. (Id. at ¶ 24.) The center was a treatment facility for drug addicts,
with a minimum stay of thirty days, and “required her to quit taking Adderall,
anxiety medication, and to daily attend group sessions.” (Id.) After only four days,
Emily asked to withdraw from the program.
8. Upon her return to Raleigh, Emily discovered that Harriet and Patrick
had locked her out of the premises of the Franchise Company and the Raleigh Studio,
and removed Emily from the companies’ bank accounts.
9. Emily and Harriet then spent several months during 2014 negotiating
potential changes to their business relationship and to the structure of the Franchise
Company. Emily and Harriet were represented by attorneys during the negotiations.
(Id. at ¶¶ 27–28.) Emily alleges that during the negotiations, Harriet “terminated
payments of distributions, dividends, salary, or any other form of compensation to
[Emily].” (Id. at ¶ 29.) The extended period of negotiations left Emily feeling
“extremely anxious, depressed, and confused. She was experiencing panic attacks . .
. despite therapy” and prescribed medications. (Id.)
10. In October 2014 Emily signed a document entitled “Restructure
Agreement.” (Id. at ¶¶ 30, 40; ECF No. 3, Ex. A.) The Restructure Agreement had
an effective date of September 1, 2014. Emily contemporaneously signed six additional documents intended to restructure Emily’s relationship with Harriet and
with the Franchise Company in the following ways:
1. Harriet’s 50% interest in the Raleigh Studio was transferred entirely
to Emily such that Emily would hold 100% of the membership
interest in the Raleigh Studio;
2. 22% of Emily’s initial 50% membership interest in the Franchise
Company was transferred to Harriet such that Harriet would hold
72% of the membership interest in the Franchise Company and
Emily would hold 28%;
3. The Franchise Company would execute Operating Agreements that
would expressly provide that Harriet would be the manager of all
day-to-day operations of the Franchise Company, but that certain
actions would require consent of a supermajority (in excess of
Harriet’s 72% membership interest);
4. Emily would have no obligation to guarantee the debts of the
Franchise Company, and would not be a franchisee; and
5. The Raleigh Studio would be given the “royalty free right to use the
name ‘Wine and Design’ and associated trademarks within a 10 mile
protected territory of the Raleigh Studio” including “access and
utilization of the website registration system of” the Franchise
Company, outlined by a separate license agreement that would “include the terms customary in such agreements to protect the
goodwill of the ‘Wine and Design’ intellectual property.”
(ECF No. 3, Ex. A at pp. 1–2; collectively, the Restructure Agreement and the six
additional documents are the “Restructure Agreement Documents”).
11. The Restructure Agreement contains a Mutual Agreement provision
that states
Harriet and [Emily] acknowledge that they, with their advisors, negotiated the restructure and terms herein and acknowledge their respective satisfaction of the division and exchange of assets as contemplated herein and other obligations as set forth.
(Id. at p. 4.) The Restructure Agreement also contains a broad mutual release of
claims. (Id.)
12. The Restructure Agreement Documents include a Franchise Company
Operating Agreement (“Operating Agreement”), a Trademark Licensing Agreement
(“TLA”), and a Manager Contract regarding Harriet’s management of the Franchise
Company (“Manager Contract”). Emily alleges that the Operating Agreement
provides Harriet, as Manager, the discretion to make monthly distributions of
$10,000 “taking into consideration the necessary working capital reserves of the
[Franchise] Company.” (ECF No. 3, at ¶ 35.) Despite having adequate capital
reserves, Harriet did not make the monthly distributions to Emily. Emily also alleges
that Harriet engaged in self-dealing, including making improper payments from the
Franchise Company to Patrick and CSS. (Id. at ¶¶ 33–34.) Finally, Harriet paid
herself salaries that exceeded the limits provided in the Manager Contract. (Id. at
¶¶ 38–39.) 13. The TLA establishes the Franchise Company’s exclusive ownership of
the Wine and Design brand name, but gives Emily a license for the royalty-free use
of the name. The Franchise Company retained the right to discontinue the license if
“Harriet[ ] decided that [Emily] had not complied with any of the [TLA]’s numerous
restrictions, quality assurance, [or] advertising requirements.” (Id. at ¶ 41.) The
TLA also provided that the Raleigh Studio would be listed on the Franchise
Company’s website. Despite this, “[f]rom time to time,” Harriet removed the Raleigh
Studio from the website. (Id. at ¶ 44.) Finally, Harriet had the option to terminate
the TLA “at any time upon [her] reasonable opinion that the Raleigh Studio had failed
to conform with the standards of quality in client care, use, advertising, and
promotion required by [the] Agreement.” (Id. at ¶ 45 (internal quotation marks
omitted).) Harriet allegedly made frequent claims that Emily was not in compliance
with the Restructure Agreement Documents. (Id. at ¶ 48.)
14. On September 28, 2017 Plaintiffs filed the complaint in this action. (Br.
Supp. Mills Mot. Dismiss, ECF No. 13, at p. 2.) On October 18, 2017 Plaintiffs filed
the FAC. The FAC contains a highly confusing set of ostensible “causes of action.”
The causes of action are titled as follows: “Breach of Fiduciary Duty; Coercion,
Duress, and Undue Influence” (ECF No. 3, at ¶¶ 54–64); “Conversion,
Misappropriation, Waste of Corporate Assets” (Id. at ¶¶ 65–68); “Conspiracy in
Restraint of Trade or Commerce; Unfair or Deceptive Trade Practices” (Id. at ¶¶ 69–
71); “Constructive Trust and Accounting” (Id. at ¶¶ 72–76); “Civil Conspiracy” (Id.
at ¶¶ 77–81); and “Derivative Claims.” (Id. at ¶¶ 82–85.) Plaintiffs’ prayer for relief seeks (1) a declaration that the Restructure Agreement Documents are void and for
the Court to set them aside “restoring [Emily] to her 50% interest in the Franchise
Company;” (2) an award of compensatory damages, punitive damages, interests,
costs, and attorneys’ fees, and for damages found to result from a violation of G.S.
§ 75 to be trebled; (3) to “[h]old any assets, income streams, distributions or other
forms of remuneration due plaintiffs but received by individual defendants in
constructive trust for the benefit of plaintiffs;” and (4) an order for an accounting. (Id.
at pp. 19–20.)
15. On December 14, 2017, the Mills Defendants filed the Mills Motion to
Dismiss and accompanying brief in support. (ECF No. 12; ECF No. 13.) The Mills
Motion to Dismiss is made pursuant to Rule 12(b)(1) and Rule 12(b)(6) and seeks
dismissal of the entire FAC as against Harriet, Patrick, and CSS.
16. On December 20, 2017, the Franchise Company filed the Franchise
Company Motion and accompanying Brief in Support. (ECF No. 14; Br. Supp.
Franchise Co. Mot. Dismiss, ECF No. 15.) The Franchise Company Motion seeks to
dismiss Plaintiffs’ derivative claims for breach of fiduciary duty, coercion, duress, and
undue influence; conspiracy in restraint of trade and unfair and deceptive trade
practices; and civil conspiracy.
17. Plaintiffs filed a single brief in response to both Motions to Dismiss.
(Pls.’ Br. Resp. Mots. Dismiss, ECF No. 41.) The Mills Defendants filed a reply on
February 9, 2018. (Mills Defs.’ Reply Supp. Mot. Dismiss, ECF No. 48.) The
Franchise Company filed a reply on February 12, 2018. (Franchise Co. Reply Supp. Mot. Dismiss, ECF No. 50.) The Court held a noticed hearing on the Motions to
Dismiss, and the Motions are now ripe for determination.
18. On March 29, 2018, while the Motions to Dismiss were pending,
Plaintiffs’ Counsel moved pursuant to Rule 17(b) for appointment of a guardian ad
litem (“GAL”) for Emily over Emily’s objection. (“Motion for GAL”, ECF No. 57.) In
response to the Motion for GAL, the Court held a hearing during which it conducted
an extensive voir dire examination of Emily and considered other evidence presented
by Plaintiffs’ counsel. The Court determined that there was not sufficient evidence
before it to proceed to a hearing on appointment of a GAL. On April 12, 2018, the
Court issued an order denying the Motion for GAL without prejudice. (Order on Mot.
for GAL, ECF No. 72.) On May 14, 2018 Plaintiffs’ Counsel filed a Renewed Motion
for Appointment of a GAL. (“Renewed Motion for GAL”, ECF No. 79.) The Court
summarily denied the Renewed Motion for GAL on the grounds that it was not
supported by any new evidence regarding Emily’s competency. (Order on Renewed
Motion for GAL, ECF No. 91.)
II. ANALYSIS
A. Standard of Review
19. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court’s
inquiry is “whether, as a matter of law, the allegations of the complaint, treated as
true are sufficient to state a claim upon which relief may be granted under some legal
theory, whether properly labeled or not.” Harris v. NCNB Nat’l Bank, 85 N.C. App.
669, 670, 355 S.E.2d 838, 840 (1987). Our appellate courts frequently reaffirm that North Carolina is a notice pleading state. See e.g., Feltman v. City of Wilson, 238
N.C. App. 246, 252, 767 S.E.2d 615, 620 (2014) (quoting Wake Cty. v. Hotels.com, L.P.,
762 S.E.2d 477, 486 (2014)). “Under notice pleading, a statement of claim is adequate
if it gives sufficient notice of the claim asserted to enable the adverse party to answer
and prepare for trial, to allow for the application of the res judicata, and to show the
type of case brought.” Id.
20. Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the
complaint on its face reveals that no law supports plaintiff’s claim; (2) when the
complaint reveals on its face that absence of fact sufficient to make a good claim; [or]
(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s
claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224 (1985). Otherwise,
“a complaint should not be dismissed for insufficiency unless it appears to a certainty
that plaintiff is entitled to no relief under any state of facts which could be proved in
support of the claim.” Sutton v. Duke, 277 N.C. 94, 103, 176 S.E.2d 161, 166 (1970)
(emphasis omitted). The Court construes the complaint liberally and accepts all
allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681 S.E.2d 858, 862
(2009). However, the Court is not required “to accept as true allegations that are
merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”
Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266,
274, 620 S.E.2d 873, 880 (2005).
21. The Court may consider documents which are the subject of plaintiff’s
complaint and to which the complaint specifically refers, including the contract that forms the subject matter of the action. Oberlin Capital, L.P. v. Slavin, 147 N.C. App.
52, 60, 554 S.E.2d 840, 847 (2001).
B. The Issue of Emily’s Mental Incompetence or Disability
22. Underlying many of Plaintiffs’ claims in this lawsuit is the contention
that Emily is, and was at the time she executed the Restructure Agreement
Documents, mentally incompetent or under a disability. Plaintiffs allege that Emily
was not competent to enter into the Restructure Agreement Documents, rendering
those agreements void or voidable. (ECF No. 3, at ¶ 58.) In response to the Motions
to Dismiss, Plaintiffs also argue that the statutes of limitations applicable to Emily’s
claims should be tolled because “[Emily] was under a continuing disability from the
time she was first ousted from the [Franchise Company][ ] from which she has not
emerged.” (ECF No. 41, at pp. 9–11.) Accordingly, for purposes of deciding the
Motions to Dismiss, the Court will first determine whether Plaintiffs sufficiently
allege that Emily was mentally incompetent at the time she entered into the
Restructure Agreement Documents or at the time her claims accrued.
23. “A person entitled to commence an action who is under a disability at
the time the cause of action accrued may bring his or her action within the [applicable
statute of limitations], after the disability is removed.” G.S. § 1-17(a). For purposes
of G.S. § 1-17(a), “a person is under a disability if the person . . . is incompetent as
defined in G.S. § 35A-1101(7) or (8).” G.S. § 1-17(a)(3). G.S. § 35A-1101(7) provides
that
[An] [i]ncompetent adult [is] an adult . . . who lacks sufficient capacity to manage the adult’s own affairs or to make or communicate important decisions concerning the adult’s person, family, or property whether the lack of capacity is due to mental illness, mental retardation, epilepsy, cerebral palsy, autism, inebriety, senility, disease, injury, or similar cause or condition.
24. Plaintiffs’ allegations in the FAC do not include the words
“incompetent,” “disabled,” or “mentally ill.” Plaintiffs, however, contend that the
following allegations support the claim that Emily was incompetent at the time her
claims accrued:
1. At the end of 2013 Emily was “extreme[ly] stressed” from
running the Franchise Company and the Raleigh Studio. (ECF No. 3,
at ¶ 20);
2. Emily “had long suffered from Adult Attention Deficit
Hyperactivity Disorder for which she had been treated with Adderall by
mental health providers since the late 1990s when she was in college.”
(Id. at ¶ 22);
3. During the negotiations for the Restructure Agreement
Documents Emily was “extremely anxious, depressed, and
confused . . . [and] experiencing panic attacks” and was in therapy and
taking “different medications she was prescribed by her psychiatrist.”
(Id. at ¶ 29); and
4. Emily “was deprived of the free will and deliberate
judgment necessary to freely and voluntarily enter into the Restructure Agreement Documents, such that the Restructure Agreement
Documents are void and should be set aside by this Court.” (Id. at ¶ 58.)
25. In support of their position, Plaintiffs rely on the holding in Fox v. Sara
Lee Corp., 210 N.C. App. 706, 709 S.E.2d 496 (2011). In Sara Lee Corp., the plaintiff
filed a complaint against her former employer and co-worker alleging negligent and
intentional infliction of emotional distress caused by the co-worker’s sexual assault
of the plaintiff. The plaintiff alleged that the sexual assault caused her to suffer
“severe emotional distress.” Id. at 708, 709 S.E.2d at 498. The trial court dismissed
her claims based on application of the statutes of limitations, and the plaintiff
appealed. Id.
26. On appeal, the plaintiff contended that the trial court erred in
dismissing her claims because the allegations in her complaint sufficiently alleged
that she was incompetent when her claims accrued and she was entitled to tolling of
the limitations periods. Id. The plaintiff alleged “[f]rom September, 2005 until
February 2007, . . . [p]laintiff's poor mental health, . . . [prevented] [p]laintiff from
working, managing her own affairs, coping with daily life, or going about by herself.
During much of this time . . . [p]laintiff was obliged to live with her parents because
she could not manage by herself.” Id. at 713, 709 S.E.2d at 501. The plaintiff further
alleged “that she was under psychiatric care, could not leave her house by herself,
and was unable to mentally function.” Id. Based on these allegations, and applying
the standard set forth in G.S. § 1101(7), the Court of Appeals held that plaintiff sufficiently pleaded that she was mentally incompetent, and reversed the trial court.
Id. at 715, 709 S.E.2d at 502.
27. The holding in Sara Lee Corp. is inapplicable to this case, and highlights
the deficiencies in Plaintiffs’ allegations. Here, unlike in Sara Lee Corp., Plaintiffs
have not pleaded that Emily’s various mental conditions or her mental state rendered
her “incompetent” or prevented her from “working, managing her own affairs, coping
with daily life, or going about by herself.” Id. at 713, 709 S.E.2d at 501. Further,
although Plaintiffs allege that Emily was under psychiatric care, Plaintiffs do not
allege that she was suffering to the degree recognized by the North Carolina Court of
Appeals in Sara Lee Corp., where the plaintiff “could not leave her house by herself,
and was unable to mentally function” at any time relevant to the claims in this
lawsuit. Id. (quotation marks omitted).
28. “The appropriate test for establishing an adult incompetent is one of
mental competence to manage one’s own affairs. The term ‘affairs’ encompasses more
than just one transaction or one piece of property to which he may have a unique
attachment.” Soderlund v. Kuch, 143 N.C. App. 361, 373, 546 S.E.2d 632, 640 (2001)
(citations and quotation marks omitted) (emphasis in original). In Soderlund, the
plaintiff alleged that “his mental condition caused him to be incapable of
understanding his legal rights, making or communicating important decisions about
those rights or bringing a lawsuit.” Id. at 373, 546 S.E.2d at 640 (quotation marks
omitted). The plaintiff’s evidence established that “[he] suffered from extreme
feelings of shame and confusion,” “abus[ed] alcohol,” [was] “unable to form healthy relationships with others or lead a normal life[,] . . . had several mental breakdowns,”
and “contemplated suicide.” Id. at 368, 546 S.E.2d at 637. The Court concluded that,
despite this strong evidence, the “plaintiff was not incompetent as per [G.S.] § 35A-
1101(7), and plaintiff's mental condition did not warrant tolling the [ ] statute of
limitations[,]” because the record evidence also showed he managed his own affairs,
held jobs, and managed his own day-to-day life. Id. at 373, 546 S.E.2d at 640.
29. The allegations in this case state only that Emily was diagnosed with
Adult Attention Deficit Hyperactivity Disorder, and at various times experienced
stress, anxiety, depression, confusion, and panic attacks. Plaintiffs do not allege that
any of these conditions, separately or together, made Emily unable to manage her
own affairs or tend to her daily life. To the contrary, Plaintiffs allege that throughout
all of the stressful events underlying Emily’s claims she has continued to operate the
Raleigh Studio.
30. The allegations are not sufficient to support the assertion that Emily
was mentally incompetent at the time she entered into the Restructure Agreement
Documents or at any other time relevant to the claims in this lawsuit. The allegations
do not support a claim that the Restructure Agreement Documents are void or
voidable, nor the argument that the statutes of limitations on any of Plaintiffs’ claims
should be tolled.
31. Therefore, to the extent Plaintiffs seek an order declaring the
Restructure Agreement Documents are void or voidable, as alleged in paragraph 58 of the FAC, the Motions to Dismiss should be GRANTED, and the claim and
allegations DISMISSED.
32. The Court now turns to a determination of Emily’s individual causes of
action.
C. Breach of Fiduciary Duty; Coercion, Duress, and Undue Influence
33. Plaintiffs First Cause of Action is labeled “Breach of Fiduciary Duty;
Coercion, Duress, and Undue Influence.” This attempt to assert four separately
recognized legal theories under one cause of action is needlessly confusing and
violates Rule 10(b), which states “[e]ach claim founded upon a separate transaction
or occurrence . . . shall be stated in a separate count . . . whenever a separation
facilitates the clear presentation of the matters set forth.” Rule 10(b); Musten v.
Musten, 36 N.C. App. 618, 619, 244 S.E.2d 699, 700–01 (1978) (“Rule 10(b) of the
Rules of Civil Procedure requires that claims founded upon separate transactions be
stated in separate counts.”).
34. In the first cause of action, Plaintiffs allege that Harriet’s breaches of
her fiduciary duties coerced and unduly influenced Emily into signing the
Restructure Agreement Documents “such that the Restructure Agreement
Documents are void.” (ECF No. 3, at ¶¶ 55–58.) Plaintiffs also allege that Harriet
breached fiduciary duties owed to Emily after the execution of the Restructure
Agreement Documents, apparently as the majority interest holder in the Franchise
Company. (Id. at ¶¶ 59–64.) However, Plaintiffs do not expressly allege that conduct
occurring after the execution of the Restructure Agreement Documents unduly
influenced or coerced Emily, nor what legal effect any alleged coercion had on Emily’s legal rights after the Parties entered into the Restructure Agreement Documents.
Since Plaintiffs allege that Emily was coerced and unduly influenced by conduct that
allegedly constituted breaches of Harriet’s fiduciary duties, the Court concludes that
Plaintiffs have not stated a separate claim for coercion, duress, or undue influence,
and analyzes the first cause of action solely as a claim for breach of fiduciary duty.
35. In order to establish a claim for breach of fiduciary duty, a plaintiff must
show that (1) defendant owed plaintiff a fiduciary duty; (2) defendant breached that
fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury
to the plaintiff. Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013). A
fiduciary relationship may arise when “there has been a special confidence reposed
in one who in equity and good conscience is bound to act in good faith and with due
regard to the interests of the one reposing confidence[.]” Dalton v. Camp, 353 N.C.
647, 651–52, 548 S.E.2d 704, 707 (2001) (quoting Abbitt v. Gregory, 201 N.C. 577, 598,
160 S.E. 896, 906 (1931)) (internal quotations omitted). Such a relationship “extends
to any possible case in which a fiduciary relationship exists in fact, and in which there
is confidence reposed in one side, and resulting domination and influence on the
other.” Id. at 652, 548 S.E.2d at 707–08. However, “[o]nly when one party
figuratively holds all the cards—all the financial power or technical information, for
example—have North Carolina courts found that the special circumstance of a
fiduciary relationship has arisen.” Lockerman v. South River Elec. Membership Corp.,
794 S.E.2d 346, 352, 2016 N.C. App. LEXIS 1234, at *11 (2016) (quoting S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC, 189 N.C. App. 601, 613, 659 S.E.2d 442,
451 (2008)).
36. The Mills Defendants argue that Harriet did not owe Emily a fiduciary
duty prior to the execution of the Restructure Agreement Documents because Harriet
and Emily were equal owners and had equal membership interests in the Franchise
Company.
37. “Under the LLC Act, members of an LLC are like shareholders in a
corporation in that members do not owe fiduciary duties to each other or the LLC,
except a controlling member owes fiduciary duties to minority members.” Miller v.
Burlington Chem. Co., LLC, 2017 NCBC LEXIS 6, at *23 (N.C. Super. Ct. Jan. 27,
2017); Strategic Mgmt. Decisions v. Sales Performance Int’l, 2017 NCBC LEXIS 69,
at *10 (N.C. Super. Ct. Aug. 7, 2017) (citing Fiske v. Kieffer, 2016 NCBC LEXIS 22,
at *9 (N.C. Super. Ct. Mar. 9, 2016); Zagaroli v. Neill, 2016 NCBC LEXIS 106, at *18
(N.C. Super. Ct. Dec. 29, 2016).
38. Defendants are correct that Harriet owed no fiduciary duty to Emily
while they remained equal co-owners of the Franchise Company. Plaintiffs have not
pleaded facts that would support an allegation that Harriet owed Emily a fiduciary
duty on any other basis prior to execution of the Restructure Agreement Documents.
To the contrary, in their brief Plaintiffs state that “[Emily] and Harriet were 50/50
member owners of [the Franchise Company] and the Raleigh Studio, and successfully
co-managed them through the middle of March 2014.” (ECF No. 41, at pp. 2–3.) Once
the dispute arose between Emily and Harriet, they engaged in adversarial negotiations of the Restructure Agreement Documents with the assistance of counsel
on both sides. Plaintiff does not allege that Emily placed any special confidence in
Harriet during the period of negotiations. Their relationship during the negotiations
was adversarial, and they were represented by attorneys. There could not have been
a fiduciary relationship between Emily and Harriet during this period. Cf. Piedmont
Inst. of Pain Mgmt. v. Staton Found., 157 N.C. App. 577, 583–84, 581 S.E.2d 68, 72–
73 (2003) (finding that the fiduciary duty trustee owed to beneficiaries ended when
during negotiation of a settlement agreement, “both parties were represented by
counsel” and “were negotiating for the termination of legal rights”); Lancaster v.
Lancaster, 138 N.C. App. 459, 463, 530 S.E.2d 82, 85 (2000) (“[W]hile a husband and
wife generally share a confidential relationship . . . [i]t is well established that when
one party to a marriage hires an attorney to begin divorce proceedings, the
confidential relationship is usually over.”); Harton v. Harton, 81 N.C. App. 295, 297–
98, 344 S.E.2d 117, 119 (1986) (holding that husband’s fiduciary duty to wife ended
when the parties separated and became adversaries negotiating over the terms of
their separation).
39. Therefore, the Mills Motion to Dismiss the first cause of action to the
extent the claim is based on acts occurring prior to the execution of the Restructure
Agreement Documents should be GRANTED.
40. Additionally, because all allegations relating to coercion, duress, or
undue influence are inextricably tied to the allegations of breaches of fiduciary duties
occurring prior to the execution of the Restructure Agreement Documents, to the extent Plaintiffs purport to state causes of action for coercion, duress, and undue
influence, those causes of action are DISMISSED.
41. The Mills Defendants also argue that Plaintiffs’ claim for breach of
fiduciary duty for Harriet’s alleged breaches that took place prior to September 28,
2014 are barred by the three-year statute of limitations in G.S. § 1-52(1). (ECF No.
13, at pp. 6–7.)
42. “Allegations of breach of fiduciary duty that do not rise to the level of
constructive fraud are governed by the three-year statute of limitations applicable to
contract actions contained in N.C. Gen. Stat. § 1-52(1) (2003).” Toomer v. Branch
Banking & Trust Co., 171 N.C. App. 58, 66, 614 S.E.2d 328, 335 (2005). The Court
already concluded that the allegations do not support a claim that Emily was under
a disability that would toll the statute of limitations. Accordingly, the Mills Motion
to Dismiss the first cause of action to the extent it is based on alleged breaches of
fiduciary duties that took place prior to September 28, 2014 should be GRANTED.
43. After the Restructure Agreement Documents were signed, and Harriet
became the majority owner and member in the Franchise Company, the analysis
changes. As a majority owner of the Franchise Company, Harriet owed a fiduciary
duty to minority member Emily. Strategic Mgmt. Decisions, 2017 NCBC LEXIS 69,
at *10. Plaintiffs allege Harriet breached her fiduciary duty as majority member
through a number of improper and unfair acts including, inter alia, manipulating the
standards for making distributions to lower or eliminate Emily’s share of
distributions, diverting Franchise Company funds to Patrick and CSS, and interfering with and terminating Emily’s rights to use the Wine and Design
trademark and website. (ECF No. 3, at ¶ 59.) The Court concludes that the
allegations are sufficient at this stage to support a breach of fiduciary duty claim
against Harriet for acts that occurred after the execution of the Restructure
Agreement Documents.
44. The Mills Motion to Dismiss the first cause of action to the extent the
claim is based on acts occurring after the execution of the Restructure Agreement
Documents should be DENIED.
45. Plaintiffs allege that Harriet breached her fiduciary duties “in collusion
with [Patrick] and [CSS].” (ECF No. 3, at ¶ 59.) However, Plaintiffs do not allege
facts that would support an allegation that Patrick or CSS owed Emily a fiduciary
duty. Accordingly, to the extent Plaintiffs attempt to bring the first cause of action
against Patrick and CSS, the Mills Motion to Dismiss Plaintiffs’ first cause of action
against Patrick and CSS should be GRANTED.
D. Conversion, Misappropriation, and Waste of Corporate Assets
46. Plaintiffs’ second cause of action is titled “Conversion, Misappropriation,
and Waste of Corporate Assets.” (ECF No. 3, at ¶¶ 65–68.) In support of this claim,
Plaintiffs allege that Harriet “converted and misappropriated Franchise Company
funds to the benefit of herself and” Patrick. (Id. at ¶ 66.)
47. Preliminarily, even under a generous reading of the FAC, there are no
allegations specifically against Patrick or CSS that would support claims for
conversion, misappropriation, or waste of corporate assets against them. Accordingly, the Mills Motion to Dismiss Plaintiffs’ second cause of action as stated
against Patrick and CSS should be GRANTED.
a. Conversion and Misappropriation of Corporate Funds
48. “Conversion is 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.’” Norman v. Nash
Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000)
(quoting Spinks v. Taylor, 303 N.C. 256, 264, 278 S.E.2d 501, 506 (1981)). To state
a claim for misappropriation of corporate funds, a plaintiff must allege that the
defendant “(1) misappropriated funds, i.e. used funds for a purpose that does not
benefit the corporation; (2) converted the funds for a use not beneficial to the
corporation; and (3) converted the funds without authority.” Outen v. Mical, 118 N.C.
App. 263, 268, 454 S.E.2d 883, 886 (1995).
49. Plaintiffs’ claims for conversion and misappropriation of corporate funds
against Harriet are based on the same conduct as the breach of fiduciary duty claim
against Harriet for diverting corporate funds to herself and Patrick, (ECF No. 3, at
¶ 59(C)), and Plaintiffs would seem to be adequately protected by the surviving
breach of fiduciary duty claim against Harriet. Clearly, Plaintiffs would not be
entitled to recover twice for the same misconduct. Nevertheless, the Court concludes
that Plaintiffs have adequately pleaded claims for conversion and misappropriation
of corporate funds to survive dismissal at this stage of the case. The Mills Motion to Dismiss Plaintiffs’ second cause of action for conversion and misappropriation of
corporate funds should be DENIED.
b. Waste of Corporate Assets
50. Although some jurisdictions recognize a claim for waste of corporate
assets, see, e.g., White v. Panic, 783 A.2d 543, 554 (Del. Oct. 3, 2001), “‘North Carolina
does not recognize corporate waste as an independent cause of action,’ because such
a claim is subsumed within a breach of fiduciary duty claim.” Gao v. Sinova
Specialties, Inc., 2016 NCBC LEXIS 104, at *22–23 (N.C. Super. Ct. Dec. 21, 2016)
(quoting Soft Line, S.p.A. v. Italian Homes, LLC, 2015 NCBC LEXIS 6, at *15–16
(N.C. Super. Ct. Jan. 16, 2015). See also, e.g., Green v. Condra, 2009 NCBC LEXIS
20, at *29 (N.C. Super. Ct. Aug. 14, 2009); McKee v. James, 2013 NCBC LEXIS 33, at
*41 (N.C. Super. Ct. July 24, 2013).
51. Accordingly, to the extent the second cause of action attempts to state a
claim for waste of corporate assets separate from the claim for breach of fiduciary
duty, the Motions to Dismiss should be GRANTED.
E. Conspiracy in Restraint of Trade & Unfair and Deceptive Trade Practices
52. Plaintiffs label their third cause of action “Conspiracy in Restraint of
Trade of Commerce; Unfair or Deceptive Trade Practices.” (ECF No. 3, at 69–71.).
Plaintiffs allege that “Defendants’ actions . . . amount to a conspiracy in restraint of
trade under [G.S.] § 75-1 [ ] and unfair or deceptive trade practices under [G.S.] § 75-
1.1” (hereinafter, the North Carolina Unfair or Deceptive Trade Practices Act will be
referred to as “UDTPA”). a. Conspiracy in Restraint of Trade
53. A conspiracy in restraint of trade is an agreement between multiple
market participants intending to illegally hinder trade or commerce. G.S. § 75-1.
“There has been little litigation as to the various kinds of contracts that may
constitute illegal restraints of trade under G.S. [§] 75-1,” but North Carolina courts
generally interpret G.S. § 75-1 by looking to the “body of law applying to the Sherman
Act.” E.g., Rose v. Vulcan Materials Co., 282 N.C. 643, 655, 194 S.E.2d 521, 530
(1973) (conducting a thorough review and analysis of English and American common
law on this topic).
[O]nly combinations or agreements which operate to the prejudice of the public by unduly or unreasonably restricting competition or restraining trade are illegal. ... The combination is not objectionable if the restraint is such only as to afford fair protection to the parties thereto and not broad enough to interfere with the interest of the public.
Id. at 656, 194 S.E.2d at 530–31. “Section 75-1 requires a plaintiff to allege (1) the
existence of an agreement in the form of a contract, combination, or conspiracy that
(2) imposes an unreasonable restraint on trade.” Sykes v. Health Network Sols., Inc.,
2017 NCBC LEXIS 73, at *58 (N.C. Super. Ct. Aug. 18, 2017) (citation and quotations
omitted). To establish a claim under G.S. § 75-1, “public damage must be alleged and
proven.” United Roasters, Inc. v. Colgate-Palmolive Co., 485 F. Supp. 1041, 1048
(E.D.N.C. 1979).
54. The FAC does not allege facts that would support an allegation that
Defendants have acted in violation of G.S. § 75-1. There is no allegation that multiple market participants entered into a contract or other agreement that operated to the
damage of, or would have any adverse effect on, the public. The Mills Motion to
Dismiss Plaintiffs’ claim under G.S. § 75-1 for conspiracy in restraint of trade should
be GRANTED.
b. UDTPA
55. “To establish a prima facie case of unfair and deceptive trade practices
[in violation of G.S. § 75-1.1], a plaintiff must show that (1) the defendant committed
an unfair or deceptive act or practice, (2) the act was in or affecting commerce, and
(3) the act proximately caused injury to the plaintiff.” White v. Consol. Planning, Inc.,
166 N.C. App. 283, 303, 603 S.E.2d 147, 161 (2004).
56. In enacting the UDTPA “our General Assembly sought to prohibit unfair
or deceptive conduct in interactions between different market participants. The
General Assembly did not intend for the Act to regulate purely internal business
operations.” White v. Thompson, 364 N.C. 47, 47–48, 691 S.E.2d 676, 676 (2010)
(holding that conduct between partners in a business, even when the conduct involves
multiple business entities owned by the partners, is nonetheless internal to a single
market participant). “As a result, any unfair or deceptive conduct contained solely
within a single business is not covered by the Act.” Id. at 53, 691 S.E.2d at 680; see
also Weaver Inv. Co. v. Pressly Dev. Assoc., 234 N.C. App. 645, 654, 760 S.E.2d 755,
761 (2014) (dismissing plaintiff’s UDTPA claim because “defendants’ misconduct
within the confines of the partnership was not ‘in or affecting commerce . . . .’”). 57. Plaintiffs’ claim for unfair or deceptive trade practices must fail to the
extent it is based upon actions internal to the Franchise Company prior to the
effective date of the Restructure Agreement Documents because such actions were
not in or affecting commerce.
58. Similarly, Plaintiffs’ claims relating to Harriet’s internal
mismanagement of the Franchise Company after the effective date of the Restructure
Agreement Documents, including Plaintiffs’ claims regarding Harriet’s improper
distribution of funds within the Franchise Company, are not in or affecting commerce
and should be dismissed.
59. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair
and deceptive trade practices, to the extent it is based on actions internal to the
Franchise Company both prior to and after the effective date of the Restructure
Agreement Documents, should be GRANTED.
60. After the effective date of the Restructure Agreement Documents, the
Raleigh Studio and the Franchise Company were two separate businesses. Dealings
between the two businesses were, arguably, in or affecting commerce. The allegations
relating to dealings between the Franchise Company and the Raleigh Studio are thin,
and are based entirely on the Franchise Company’s control over the company website
and enforcement of the TLA. Despite the thin allegations, the Court deems Plaintiffs’
UDTPA claim based on allegations relating to relations between the Franchise
Company and the Raleigh Studio sufficient to survive a Rule 12(b)(6) motion. 61. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair
and deceptive trade practices, to the extent it is based on alleged dealings between
the Raleigh Studio and the Franchise Company after the effective date of the
Restructure Agreement Documents, should be DENIED.
F. Civil Conspiracy
62. Plaintiffs allege that Harriet, Patrick, and CSS “entered into an
agreement to unlawfully and wrongfully cause devaluation of the Raleigh Studio to
eliminate it as competition of the franchisees of the Franchise Company.” (ECF No.
3, at ¶ 78.) The Mills Defendants argue that Plaintiffs have not adequately alleged
an agreement. (ECF No. 13, at p. 20.) Plaintiffs did not make any argument in
support of the civil conspiracy claim in their responsive brief.
63. “It is well established that ‘there is not a separate civil action for
civil conspiracy in North Carolina’” and “the conspiracy charge is simply a
mechanism for associating the defendants and broadening the admissible evidence.”
Plasman v. Decca Furniture (USA), Inc., 2016 NCBC LEXIS 80, at *33 (N.C. Super.
Ct. Oct. 21, 2016) (citations and quotations omitted). In order to properly plead civil
conspiracy, a complaint must allege “(1) an agreement between two or more
individuals; (2) to do an unlawful act or to do a lawful act in an unlawful way; (3)
resulting in injury to plaintiff inflicted by one or more of the conspirators; and (4)
pursuant to a common scheme.” Elliott v. Elliott, 200 N.C. App. 259, 264, 683 S.E.2d
405, 409 (2009) (emphasis added).
In civil conspiracy, recovery must be on the basis of sufficiently alleged wrongful overt acts. The charge of conspiracy itself does nothing more than associate the defendants together and perhaps liberalize the rules of evidence to the extent that under proper circumstances the acts and conduct of one might be admissible against all.
Shope v. Boyer, 268 N.C. 401, 405, 150 S.E.2d 771, 773–74 (1966); see also,
GoRhinoGo, LLC v. Lewis, 2011 NCBC LEXIS 39, at *20 (N.C. Super. Ct. Sept. 9,
2011) (“Having joined the conspiracy, [two individual defendants] became exposed to
liability with [co-defendant] and any other co-conspirators for damages caused by any
act in furtherance of the common scheme.”).
64. A claim for civil conspiracy cannot survive when it relies upon mere
“suspicion or conjecture,” see S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC, 189
N.C. App. 601, 609, 659 S.E.2d 442, 449 (2008), and should be dismissed when it “fails
to allege how th[e] conspiracy came to be, or when, or where, or why” and “[t]he
complaint asserts mere conclusions concerning the elements of civil conspiracy,
without offering a scintilla of factual allegation in support of the claim.” Bottom v.
Bailey, 238 N.C. App. 202, 213, 767 S.E.2d 883, 890 (2014); see also Worley v. Moore,
2017 NCBC LEXIS 15, at *77 (N.C. Super. Ct. Feb. 28, 2017) (quoting Thomas &
Howard Co. v. Am. Mut. Liab. Ins. Co., 241 N.C. 109, 115, 84 S.E.2d 337, 341 (1954)
and Kirby v. Reynolds, 212 N.C. 271, 284, 193 S.E. 412, 420 (1937)).
65. Plaintiffs do not allege facts that support the allegation that CSS
participated in a civil conspiracy. To the extent the Mills Motion to Dismiss seeks
dismissal of the fifth cause of action as against CSS, the motion should be GRANTED.
66. With regard to the alleged conspiracy between Harriet and Patrick,
Plaintiffs allege that Harriet and Patrick “entered into an agreement to devalue the Raleigh Studio and eliminate it as competition.” (ECF No. 3, at ¶ 78.) Plaintiffs also
allege that Harriet and Patrick spread false rumors about Emily, “disseminat[ed]
false and misleading advertising about” Emily’s involvement in the history of the
Franchise Company, and wrongfully interfered with and terminated Emily’s right to
use the “Wine and Design” name and website. (ECF No. 3, at ¶¶ 21 and 59(E–G).)
Plaintiffs further allege that Harriet and Patrick’s actions interfered with Emily’s
ability to operate the Raleigh Studio and impaired its goodwill and reputation. (Id.
at 60.)
67. The Court concludes that these allegations are minimally sufficient to
support Plaintiffs’ claim of a conspiracy between Harriet and Patrick. Accordingly,
the Motions to Dismiss Plaintiffs’ fifth cause of action against Harriet and Patrick
should be DENIED.
G. Derivative Claims
68. Plaintiffs’ sixth cause of action is labeled “Derivative Claims” and
alleges “[i]n the alternative to the individual causes of action . . . [Emily] is entitled
to bring these claims derivatively on behalf of Franchise Company.” (ECF No. 3, at
¶ 84.) The Franchise Company moves to dismiss Emily’s derivative claims with
regard to the first, third, and fifth causes of action on the grounds that those causes
of action allege only individual claims belonging to Emily, and not claims for injuries
to the Franchise Company. (ECF No. 15, at pp. 6–13.) The Mills Defendants argue1
1 In their brief in support, the Mills Defendants argued that Emily lacked standing to pursue
the derivative claims because she had not made a proper demand on the Franchise Company pursuant to G.S. § 57D-8-01. (ECF No. 13, at pp. 21–22.) However, at the hearing on the that all of Plaintiffs’ claims, except for the claims based on Harriet’s misappropriation
of corporate funds, allege injuries only to Plaintiffs, and not the Franchise Company
and are individual claims. (ECF No. 13, at p. 22.)
69. Generally, LLC members do not have standing to pursue individual
causes of action for wrongs or injuries to the LLC. Barger v. McCoy Hillard & Parks,
346 N.C. 650, 658, 488 S.E.2d 215, 219 (1997); Corwin v. British Am. Tobacco PLC,
796 S.E.2d 324, 338, 2016 N.C. App. LEXIS 1320, at *37–39 (2016), cert. granted, 369
N.C. 751 (June 8, 2017) (No. 56PA17). A member may be permitted to bring
derivatively claims belonging to the LLC if the member meets certain statutory
requirements. G.S. § 57D-8-01. “A derivative proceeding is a civil action brought . . .
in the right of’ a corporation . . . while an individual action . . . [brought] to enforce a
right which belongs to [plaintiff] personally.” Morris v. Thomas, 161 N.C. App. 680,
684, 589 S.E.2d 419, 422 (2003) (internal quotation marks omitted) (quoting Norman,
140 N.C. App. at 395, 537 S.E.2d at 253). The purpose of derivative claims is to allow
LLC members to assert the rights of the harmed LLC, and recovery in such actions
flows to the LLC, not to the individual member. Green, 367 N.C. at 141–42, 749 S.E.2d
at 268.
70. Accordingly, the Court must determine whether Emily’s2 claims truly
belong to the corporation or whether Emily’s claims are truly individual claims.
Norman, 140 N.C. App. at 395, 537 S.E.2d at 253. The Court notes that the law
Motions to Dismiss, all Defendants conceded Emily had satisfied the demand requirements and that the Court has subject matter jurisdiction over Emily’s derivative claims. 2 Emily is alleged to be a member of the Franchise Company, but the Raleigh Studio is not
alleged to be a member. Any derivative claims, therefore, would be brought by Emily. restricts the types of derivative claims because of “concerns that derivative actions
will be misused by self-selected advocates pursuing individual gain rather than the
interests of the corporation or the shareholders as a group, bringing costly and
potentially meritless strike suits.” Id. (citations and quotations omitted).
71. Emily’s third cause of action for unfair or deceptive trade practices and
fifth cause of action for civil conspiracy are alleged as individual claims for injuries
to Emily and the Raleigh Studio, and do not state claims belonging to the Franchise
Company. (ECF No. 3, at ¶¶ 78, 81.) Plaintiffs do not allege that the Franchise
Company was injured by these acts.
72. Therefore, the Franchise Company Motion to Dismiss Emily’s derivative
claims based on the third and fifth causes of action should be GRANTED.
73. Plaintiffs’ first cause of action alleging breaches of fiduciary duty prior
to and surrounding the execution of the Restructure Agreement Documents does not
allege any injury to the Franchise Company. (ECF No. 3, at ¶¶ 56–58.) The
Franchise Company Motion to Dismiss Emily’s derivative claims based on alleged
conduct prior to execution of the Restructure Agreement Documents should be
GRANTED.
74. Plaintiffs’ allegations regarding Harriet’s breaches of fiduciary duty
following the execution of the Restructure Agreement Documents include some
conduct that could form the basis of a derivative claim. Plaintiffs allege that Harriet
misappropriated the Franchise Company’s funds and diverted them to herself,
Patrick, and CSS. (Id. at ¶ 59(C).) Following execution of the Restructure Agreement Documents, Harriet was the manager of the Franchise Company, and she owed
fiduciary duties to the Franchise Company. The alleged misappropriation and
diversion of funds would have caused injury to the Franchise Company, and could be
the basis for a derivative claim.
75. In addition, Emily may have standing to bring direct claims against
Harriet based on the special duty exception from Barger. Harriet undertook
obligations to Emily pursuant to the Restructure Agreement Documents that were
separate from, and in addition to, Harriet’s duties arising out of her status as majority
member in the Franchise Company. See Barger, 346 N.C. at 658, 488 S.E.2d at 219
(stating that one exception to the general rule that a shareholder cannot pursue
derivative actions is “where there is a special duty, such as a contractual duty,
between the wrongdoer and the shareholder”). If Harriet owed Emily a special duty
following execution of the Restructure Agreement Documents, that would provide
grounds for Emily to pursue direct claims for breach of fiduciary duty against Harriet
separate from her individual claim for breach of fiduciary duty. See Zoutewelle v.
Mathis, 2018 NCBC LEXIS 95, at *26–27 (N.C. Super. Ct. Sept. 13, 2018) (holding
that a marital settlement agreement containing obligations in addition to and outside
of LLC operating agreements created special duties on former husband towards ex-
wife as member of jointly owned LLCs).
76. Accordingly, the Franchise Company Motion to Dismiss, to the extent it
seeks dismissal of Emily’s derivative or direct claims based on Harriet’s conduct as manager of the Franchise Company after the execution of the Restructure Agreement
Documents, should be DENIED.3
III. CONCLUSION
In conclusion, the Court FINDS, CONCLUDES, and ORDERS as follows:
1. To the extent Plaintiffs seek an order declaring the Restructure Agreement
Documents void or voidable, as alleged in paragraph 58 of the FAC, the
Motions to Dismiss are GRANTED, and that claim and those allegations
are DISMISSED, WITHOUT PREJUDICE.
2. The Mills Motion to Dismiss Plaintiffs’ first cause of action against Patrick
and CSS is GRANTED, and the claim is DISMISSED.
3. The Mills Motion to Dismiss the first cause of action to the extent the claim
is based on acts occurring prior to the execution of the Restructure
Agreement Documents is GRANTED, and the claim is DISMISSED.
4. The Mills Motion to Dismiss the first cause of action to the extent the claim
is based on acts occurring after the execution of the Restructure Agreement
Documents is DENIED.
5. To the extent Plaintiffs attempt to state claims for coercion, duress, and
undue influence, those claims are DISMISSED, WITHOUT PREJUDICE.
6. The Mills Motion to Dismiss Plaintiffs’ second cause of action against
Patrick and CSS is GRANTED, and those claims are DISMISSED.
3 To the extent Mills Defendants seek dismissal of Emily’s direct and derivative claims under
the second cause of action for conversion and misappropriation of Franchise Company funds, the Mills’ Motion should be DENIED. 7. The Mills Motion to Dismiss Plaintiffs’ second cause of action for conversion
and misappropriation of corporate funds is DENIED.
8. The Mills Motion to Dismiss Plaintiffs’ second cause of action for waste of
corporate assets is GRANTED, and the claim is DISMISSED.
9. The Mills Motion to Dismiss Plaintiffs’ third cause of action for conspiracy
in restraint of trade is GRANTED, and the claim is DISMISSED.
10. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair and
deceptive trade practices, to the extent it is based on actions internal to the
Franchise Company both prior to and after the effective date of the
Restructure Agreement Documents, is GRANTED, and the claims are
DISMISSED.
11. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair and
deceptive trade practices, to the extent it is based on alleged dealings
between the Raleigh Studio and the Franchise Company after the effective
date of the Restructure Agreement Documents, is DENIED.
12. The Mills Motion to Dismiss Plaintiffs’ fifth cause of action for civil
conspiracy against CSS is GRANTED, and the claim is DISMISSED.
13. The Mills Motion to Dismiss Plaintiffs’ fifth cause of action for civil
conspiracy against Harriet and Patrick is DENIED.
14. The Franchise Company Motion to Dismiss Emily’s derivative claims based
on the third and fifth causes of action is GRANTED, and such claims are
DISMISSED. 15. The Franchise Company Motion to Dismiss Emily’s derivative claim based
on the first cause of action relating to actions taken prior to the execution
of the Restructure Agreement Documents is GRANTED, and such claims
are DISMISSED.
16. The Franchise Company Motion to Dismiss Emily’s derivative or direct
claims based on the first cause of action relating to Harriet’s conduct as
manager of the Franchise Company after the execution of the Restructure
Agreement Documents is DENIED.
17. To the extent the Mills Defendants seek Dismissal of Emily’s direct and
derivative claims under the second cause of action, the motion is DENIED.
18. Except as expressly stated herein, Defendants’ Motions to Dismiss
Plaintiffs’ claims are DENIED.
SO ORDERED, this the 24th day of September, 2018.
/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases