Transatlantic Healthcare, LLC v. Alpha Constr. of the Triad, Inc., 2017 NCBC 21.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF GUILFORD 14 CVS 5263
TRANSATLANTIC HEALTHCARE, ) LLC and PROFESSIONAL CENTER ) FOR INTERNAL MEDICINE, INC., ) ) Plaintiffs, ) ) ORDER & OPINION ON PLAINTIFFS’ v. ) AND DEFENDANTS’ MOTIONS FOR ) SUMMARY JUDGMENT, PLAINTIFFS’ ALPHA CONSTRUCTION OF THE ) MOTION TO STRIKE AND MOTION TO TRIAD, INC.; J&M CONSTRUCTION ) COMPEL, AND DEFENDANTS’ SERVICES, INC.; JUDITH ) MOTIONS TO QUASH JUDALENA ALLEY a/k/a JUDITH J. ) BAUTISTA; and JEFFREY WAYNE ) ALLEY, ) ) Defendants. ) )
1. THIS MATTER is before the Court on (1) Plaintiffs’ Motion for Summary
Judgment or Partial Summary Judgment (“Plaintiffs’ Motion for Summary
Judgment”), (2) Defendants’ Motion for Summary Judgment, (3) Plaintiffs’ Motion to
Strike Affidavits of Judith Judalena Alley (“Motion to Strike”), (4) Plaintiffs’ Motion
to Compel Discovery (“Motion to Compel”), and (5) Defendants’ Motions to Quash
(collectively, the “Motions”). For the reasons discussed below, Plaintiffs’ Motion for
Summary Judgment is GRANTED IN PART and DENIED IN PART, Defendants’
Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART,
Plaintiffs’ Motion to Strike is DENIED, Plaintiffs’ Motion to Compel is GRANTED IN
PART and DENIED IN PART, and Defendants’ Motions to Quash are DENIED. Gordon Law Offices, by Harry G. Gordon, for Plaintiffs.
Rossabi Reardon Klein Spivey PLLC, by Amiel J. Rossabi and Elizabeth M. Klein, for Defendants.
Gale, Chief Judge.
I. BACKGROUND AND PROCEDURAL HISTORY
2. This lawsuit arises from the transfer of $165,000 from Plaintiffs to
Defendants. The threshold question is whether that transfer was a loan subject to
repayment under North Carolina law, or a gift that Defendants have no obligation to
repay.
3. The Court does not make findings of fact when it rules on a motion for
summary judgment, but it may summarize the underlying facts to provide context for
its ruling. E.g., In re Estate of Pope, 192 N.C. App. 321, 329, 666 S.E.2d 140, 147
(2008).
A. Factual Background
4. Plaintiffs Transatlantic Healthcare, LLC (“Transatlantic”) and
Professional Center for Internal Medicine, Inc. (“PCIM”) are companies organized
under Florida law. (Compl. ¶¶ 1–2.) Hemant Banker is the 99% owner of both
companies. (Banker Aff. ¶ 2; Kutty Aff. ¶ 6.)
5. Defendant J&M Construction Services, Inc. (“J&M”) is a former North
Carolina corporation formed in 1999 by Defendant Jeffrey Wayne Alley (“Jeffrey
Alley”) and his late wife, Margie Beasley Alley (“Margie Alley”). (Compl. ¶ 7.) J&M
was dissolved in September 2012. (See Compl. Ex. E.) Defendants assert that Jeffrey
Alley was the 100% owner of J&M at the time of dissolution. (Am. Countercl. ¶ 5.) Defendant Judith Judalena Alley a/k/a Judith J. Bautista’s (“Judith Alley”)
ownership interest in J&M is a contested fact in this lawsuit. (Compare Am.
Countercl. ¶ 5, with Pls.’ Br. Supp. Mot. Compel 4–7.)
6. Following Margie Alley’s death in 2004, Jeffrey Alley married Margie
Alley’s cousin, Judith Alley. (Compl. ¶ 7.) In 2009, Judith Alley formed a new
company, Defendant Alpha Construction of the Triad, Inc. (“Alpha”), a corporation
organized under North Carolina law. (Compl. ¶ 20.) Judith Alley is the 100% owner
of Alpha. (Am. Countercl. ¶ 4.)
7. During the economic recession in 2009, J&M began to experience
financial difficulties. Around that time, Theresa “Tess” Judalena (“Tess Judalena”),
Judith Alley’s mother, approached Dr. Mohan Kutty (“Dr. Kutty”) to ask for financial
assistance on behalf of J&M. (Am. Answer ¶ 9.)
8. Dr. Kutty is a citizen and resident of Florida, where he owns and
operates Trinity Physicians, LLC. (Am. Countercl. ¶ 8; Kutty Aff. ¶¶ 2, 7.) Through
his company, Dr. Kutty provides free medical-consulting services to Transatlantic.
(Kutty Aff. ¶ 7.) He also “provide[s] financial assistance to deserving students in need
of financial assistance to further their education.” (Kutty Aff. ¶ 10.) Dr. Kutty
worked closely with Pilar “Lari” Cummings (“Pilar Cummings”), Judith Alley’s aunt,
who owns a Florida corporation that previously provided consulting services to
Transatlantic. (Cummings Aff. ¶ 6.)
9. Pilar Cummings introduced Dr. Kutty and Hemant Banker to Tess
Judalena—Pilar Cummings’s sister—and to Jill Mary Bautista (“Jill Bautista”)— Tess Judalena’s daughter and Judith Alley’s younger sister. (Banker Aff. ¶ 3(b).)
Tess Judalena and Jill Bautista are citizens and residents of the Republic of the
Philippines. (Banker Aff. ¶ 3(c).) Tess Judalena became the business contact for one
of Hemant Banker’s business ventures in the Philippines. (Banker Aff. ¶ 3(d).) On
at least one occasion, Dr. Kutty provided financial assistance to Tess Judalena and
to Jill Bautista to help with Jill Bautista’s medical-school expenses. (Kutty Aff. ¶ 10.)
10. After his conversation with Tess Judalena, Dr. Kutty allegedly spoke
with Judith Alley by phone regarding J&M’s financial situation and was informed
that, to continue operating, J&M needed approximately $160,000 to $170,000.
(Judith Alley Aff. ¶¶ 3–4.) In response, Dr. Kutty asked Hemant Banker, as owner
of Transatlantic and PCIM, to approve a $165,000 transfer to Judith Alley for J&M.
(Banker Aff. ¶ 3(h).) Hemant Baker approved the transfer. (Banker Aff. ¶ 3(g).)
11. Dr. Kutty was in charge of setting the terms of the transaction. (Kutty
Dep. 24:14–26:11.) While Dr. Kutty claims that he instructed Transatlantic’s account
manager, Lori Diaz—Tess Judalena’s sister and Judith Alley’s aunt—to draw up loan
papers and have Judith Alley and Jeffrey Alley sign a promissory note or a security
agreement, it is uncontested that those documents were never created. (Diaz Aff.
¶¶ 4, 14; Kutty Dep. 25:3–27:17.)
12. On January 27, 2009, Plaintiffs received a fax from Judith Alley
addressed to “Aunt Lari”—Judith Alley’s name for Pilar Cummings—titled “Revised
Equipment & Vehicle List with estimated amortization schedule.” (Compl. ¶¶ 11–13; Diaz Aff. ¶ 16; see Compl. Exs. A, B.) It contained a sample amortization schedule
with the following terms:
Loan Date: 5/1/2009
Principal: $100,000.00
# of Payments: 60
Interest Rate: 3.50%
Payment: $1,819.17
(Compl. Ex. A.) Plaintiffs received a second fax from Judith Alley on February 17,
2009, containing an updated list of J&M’s equipment and vehicles. (Compl. ¶¶ 14–
15; Diaz Aff. ¶ 16; see Compl. Ex. C.) Lori Diaz received both of Judith Alley’s faxes
and provided copies to Pilar Cummings, Dr. Kutty, and Hemant Banker. (Diaz Aff.
¶ 16.)
13. Between January and May 2009, Plaintiffs wired a total of $165,000 to
J&M in four separate installments. (Compl. ¶ 18.) From June 2009 to January 2013,
Defendants made twenty-six payments to Plaintiffs, totaling $51,500. (Compl. ¶ 29.)
Some checks were written to Transatlantic, and others to PCIM. (Compl. ¶¶ 19, 25;
Am. Countercl. ¶ 30.) J&M made the first four payments, each for $3,000, between
June and September 2009. (Compl. ¶ 27.)
14. On January 5, 2010, J&M held a special meeting of its board of directors
for the purpose of “approv[ing] the transfer of all equipment of [J&M] to
TransAtlantic Health Group, Inc. [i]n satisfaction of debt.” (Poe Aff. Ex. E, at 2.)
During that meeting, the board passed a resolution signed by Jeffrey Alley, stating that J&M was unable to pay its debts because several of its customers had gone out
of business. (See Poe Aff. Ex. E, at 1.) The meeting minutes state that “[o]ne of
[J&M’s] largest creditors is Transatlantic Health Group which has a security interest
in all equipment of [J&M]. . . . [and] has called its loan due and requested surrender
of its security.” (Poe Aff. Ex. E, at 1.) J&M’s officers were ordered to “surrender all
equipment of the corporation that is security for Transatlantic’s loan to
Transatlantic.” (Poe Aff. Ex. E, at 1.)
15. A UCC financing statement filed with the North Carolina Secretary of
State on February 19, 2010, lists Transatlantic as a secured party relating to J&M’s
outstanding debt. (Poe Aff. ¶ 5; see Poe Aff. Ex. A.) The financing statement lists
equipment, supplies, tools, and receivables as collateral for the debt. (Poe Aff. Ex. A.)
16. Judith Alley has testified that the board minutes from J&M’s special
meeting erroneously refer to “Transatlantic” instead of Truliant Federal Credit Union
(“Truliant”). (Judith Alley Dep. 29:16–30:19, 227:11–16; Second Aff. Judith Alley
¶¶ 4–5.) At the time of the board meeting, J&M owed on a $395,000 loan with
Truliant. (Compl. ¶ 60; Am. Answer ¶¶ 60, 95, 102.)
17. Alpha, rather than J&M, made payments to Plaintiffs beginning with
the fifth of the twenty-six payments on April 30, 2010. (Compl. ¶ 25.) Between May
2010 and January 2013, Alpha sent multiple checks to Plaintiffs in varying amounts
of $3,000, $1,000, $300, and $200. (Compl. ¶¶ 26–27.) Some of the checks had “J&M
Construction loan payment,” “J&M Construction loan,” or “J&M Loan” written on the memo line. (Compl. ¶¶ 30–35.) Judith Alley sent the last check on behalf of Alpha
on January 31, 2013, for $200. (Compl. ¶ 46.)
18. On October 25, 2013, Plaintiffs sent Judith Alley a letter demanding
that Defendants pay their unpaid balance. (Compl. ¶ 47; see Compl. Ex. F.)
B. Procedural History
19. Plaintiffs commenced this action on May 2, 2014, asserting claims for
(1) breach of contract, (2) continuing fraud and misrepresentation, (3) continuing
conspiracy to defraud, (4) fraudulent conveyance, (5) de facto merger, (6) continuation
of the enterprise, (7) breach of fiduciary duty and constructive fraud, (8) intentional
interference with contract, (9) inducing breach of fiduciary duty and aiding and
abetting breach of fiduciary duty, (10) unfair or deceptive trade practices under N.C.
Gen. Stat. § 75-1.1, and (11) accounting.
20. Defendants filed an Answer, Counterclaims, and Third-Party Complaint
on July 7, 2014, asserting counterclaims against Plaintiffs, and third-party claims
against Dr. Kutty and Pilar Cummings. On August 13, 2014, Dr. Kutty and Pilar
Cummings moved to dismiss the Third-Party Complaint and filed a notice of
designation. The case was designated as a mandatory complex business case on
August 27, 2014, and assigned to the undersigned on August 28, 2014. The Answer,
Counterclaims, and Third-Party Complaint were later withdrawn. See Order,
Transatlantic Healthcare, LLC v. Alpha Constr. of the Triad, Inc., No. 14 CVS 5263
(N.C. Super. Ct. Jan. 20, 2015). 21. On January 20, 2015, Defendants filed an Amended Answer and
Counterclaim, asserting counterclaims for declaratory judgment, abuse of process,
fraud, and unfair or deceptive trade practices under N.C. Gen. Stat. § 75-1.1.
22. Defendants’ Motion for Summary Judgment asks the Court to grant
summary judgment in their favor on all claims asserted in Plaintiffs’ Complaint.
Plaintiffs’ Motion for Summary Judgment asks the Court to grant summary
judgment or partial summary judgment in their favor on all claims asserted in the
Complaint and on all counterclaims asserted by Defendants.
23. Plaintiffs’ Motion to Strike, filed contemporaneously with Plaintiffs’
Motion for Summary Judgment, asks the Court to strike Judith Alley’s affidavits.
24. Plaintiffs’ Motion to Compel, also filed contemporaneously with
Plaintiffs’ Motion for Summary Judgment, asks the Court to compel Defendants to
make discovery, strike Defendants’ defenses and counterclaims, and award attorney
fees to Plaintiffs.
25. Defendants’ Motions to Quash ask the Court to quash subpoenas issued
by Plaintiffs to Truliant, Branch Banking & Trust Company (“BB&T”), and Wells
Fargo Bank, N.A. (“Wells Fargo”).
26. The Motions—with the exception of Defendants’ Motions to Quash,
which were not briefed—have been fully briefed and argued, and are now ripe for
resolution. II. MOTIONS FOR SUMMARY JUDGMENT
A. Legal Standard
27. In ruling on a motion for summary judgment under Rule 56(c) of the
North Carolina Rules of Civil Procedure, the Court will grant summary judgment
where “the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that any party is entitled to a judgment as a matter of law.” N.C.
Gen. Stat. § 1A-1, Rule 56(c) (2015). Likewise, North Carolina courts recognize the
use of partial summary judgment under Rule 56(d) to simplify cases by disposing of
issues that are ripe for summary judgment. Id. § 1A-1, Rule 56(d); see, e.g., Case v.
Case, 73 N.C. App. 76, 78, 325 S.E.2d 661, 663 (1985).
28. “A ‘genuine issue’ is one that can be maintained by substantial
evidence.” Dobson v. Harris, 352 N.C. 77, 83, 530 S.E.2d 829, 835 (2000). The movant
may make the showing required for summary judgment by proving that “an essential
element of the opposing party’s claim does not exist, cannot be proven at trial, or
would be barred by an affirmative defense, or by showing through discovery that the
opposing party cannot produce evidence to support an essential element of her claim.”
Id. (citations omitted). The Court must take all facts asserted by the nonmoving party
as true, and view all inferences from those facts in the light most favorable to that
party. Id. In evaluating whether summary judgment is appropriate, the Court’s job
is not to determine which party is telling the correct version of the facts. See Kessing
v. Nat’l Mortg. Corp., 278 N.C. 523, 535, 180 S.E.2d 823, 830 (1971). B. Cross-Motions for Summary Judgment on Plaintiffs’ Claims
29. The parties move for summary judgment on each of Plaintiffs’ claims.
Defendants move for summary judgment on the grounds that no contract for a loan
ever existed between any Plaintiff and any Defendant, and thus, every claim brought
by Plaintiffs must fail because the claims are based on either the existence of a valid
contract between the parties or a debt owed by Defendants to Plaintiffs. Plaintiffs,
in turn, move for summary judgment in their favor, arguing that the pleadings,
affidavits, and depositions show definitive proof that a loan was made and that
Defendants engaged in fraud.
(1) Breach of contract
30. First, the parties move for summary judgment on Plaintiffs’ breach-of-
contract claim. This claim goes to the core dispute in this lawsuit: whether a contract
for a loan was formed between any Plaintiff and any Defendant in connection with
the $165,000 transfer. Plaintiffs contend that the transfer was based on an
agreement between the parties in which Defendants agreed to repay the $165,000
principal plus interest at 3.5%. (Compl. ¶ 49.) They claim that Defendants are
obligated to pay their remaining outstanding balance of $113,500 plus interest at the
legal rate of 8%, which is to be calculated from August 31, 2011, when Defendants
made their last $3,000 payment. (Compl. ¶ 49.) Defendants contend that Plaintiffs
have failed to sufficiently allege and prove that a contract was ever made, and that
the $165,000 transfer was intended not as a loan but as a gift to provide assistance
to Defendants when they were struggling financially. 31. Under North Carolina law, a breach-of-contract claim requires “(1) [the]
existence of a valid contract and (2) breach of the terms of that contract.” Poor v. Hill,
138 N.C. App. 19, 26, 530 S.E.2d 838, 843 (2000) (citing Jackson v. Carolina
Hardwood Co., 120 N.C. App. 870, 871, 463 S.E.2d 571, 572 (1995)). To constitute an
enforceable oral agreement, “the parties must express themselves in such terms that
the Court can ascertain to a reasonable degree of certainty what they intended by
their agreement.” Thomas v. McMahon, No. 08 CVS 24887, 2015 NCBC LEXIS 67,
at *26 (N.C. Super. Ct. June 23, 2015) (quoting F. Indus., Inc. v. Cox, 45 N.C. App.
595, 599, 263 S.E.2d 791, 793 (1980)). It must be clear that there has been “a meeting
of the minds,” meaning “that the parties assent to the same thing in the same sense.”
Pike v. Wachovia Bank & Tr. Co., 274 N.C. 1, 11, 161 S.E.2d 453, 462 (1968). “When
there has been no meeting of the minds on the essentials of an agreement, no contract
results.” Creech v. Melnik, 347 N.C. 520, 527, 495 S.E.2d 907, 912 (1998).
32. The parties do not dispute that Plaintiffs delivered $165,000 to
Defendants through four separate wire transfers. Rather, the parties dispute
whether there was an agreement to repay the $165,000.
33. Plaintiffs argue that they are entitled to summary judgment based on
Defendants’ twenty-six payments to Plaintiffs, the “J&M Construction loan
payment,” “J&M Construction loan,” and “J&M Loan” notation written on several
checks, the board resolution and meeting minutes that refer to Transatlantic as a
creditor of J&M, and the UCC financing statement listing Transatlantic as a secured
creditor. (Pls.’ Br. Summ. J. 5.) They also rely on an e-mail to Hemant Banker sent from Jeffrey Alley and Judith Alley’s joint e-mail address to Pilar Cummings’s e-mail
address, in which Jeffrey Alley and Judith Alley refer to the $165,000 as a loan and
mention monthly payments of $3,000. (Second Aff. Cummings Ex. A.)
34. Notwithstanding those documentary references, Defendants assert
Plaintiffs’ inability to articulate material terms for the alleged loan. They stress that
none of the parties who were supposed to set the terms of the alleged loan ever did
so, leaving material terms ambiguous, including the loan amount, interest rate,
payment amounts, due dates, repayment terms, required documentation, personal
guarantees, and required collateral.
35. The Court concludes that there are material facts in dispute regarding
whether the parties reached a meeting of the minds on the material terms of the
alleged loan contract that prevent the Court from granting summary judgment for
Plaintiffs or Defendants.
36. First, it is undisputed that J&M and Alpha made numerous payments
to Plaintiffs following the $165,000 transfer. According to Judith Alley, Defendants
made these payments because of Pilar Cummings’s suggestion that J&M—and later
Alpha—repay money each month “as a demonstration of good faith to Dr. Kutty.”
(Judith Alley Aff. ¶ 8.) However, while Defendants contend that specific terms for
repayment were never established, the transfers to Plaintiffs were for distinct and
consistent monetary amounts, initially beginning at $3,000. (Compl. ¶ 27.) The fact
that several checks contained “J&M Construction loan payment,” “J&M Construction loan,” or “J&M Loan” in the memo line indicates that Defendants may have viewed
the transfer as a loan instead of a gift.
37. Moreover, while the proposed amortization schedule faxed by Judith
Alley to Plaintiffs provides what appears to be terms for a proposed loan, including
the date, principal, number of payments, interest rate, and amount for monthly
payments, it does not match the amount that Plaintiffs actually paid Defendants.
Even when looking solely at the first three wire transfers, the amount actually
transferred exceeds the $100,000 principal provided on the estimated amortization
schedule. (See Compl. ¶ 27; Compl. Ex. A.) Although Pilar Cummings testified that
the last payment was $5,000 more than it should have been, (Second Aff. Cummings
¶ 5,) there are triable issues of fact surrounding the transfer of the specified
increments of funds, because those amounts do not match the amounts provided in
the document alleged to represent the terms of the loan.
38. Further, while Hemant Banker testified that Dr. Kutty was responsible
for determining the terms of the purported loan, Dr. Kutty testified that he did not
discuss any payment terms with Defendants because he expected Pilar Cummings to
do so. (Kutty Dep. 29:7–17.) Again, the loan amount stated in the proposed
amortization schedule differs from what was actually transferred, and Pilar
Cummings admits that neither she nor Lori Diaz ever followed up to request the
required paperwork from Defendants, including a promissory note or a security
agreement. (Second Aff. Cummings ¶ 5; see also Diaz Aff. ¶¶ 4, 14.) 39. Moreover, while both the UCC financing statement and the J&M board-
meeting minutes refer to Transatlantic as a creditor, it is undisputed that Truliant
also was a creditor of J&M at that time. J&M subsequently sold equipment to help
pay its loan with Truliant. Thus, a triable issue of fact remains regarding these
documents as evidence of whether a contract existed between the parties, and if so,
what its specific terms were.
40. Finally, there are issues of fact pertaining to the e-mail sent by Judith
Alley and Jeffrey Alley’s joint e-mail account. While the e-mail appears to come from
the couple’s joint e-mail address (jeffandjudithalley@yahoo.com), Judith Alley
contends that the e-mail was changed and was drafted in large part by Pilar
Cummings, who “required” that the e-mail be sent. (Judith Alley Dep. 202:6–217:13.)
41. The evidence shows triable issues of material fact, and thus, the motions
for summary judgment on this claim must be denied.
(2) Continuing fraud and misrepresentation and continuing conspiracy to defraud
a. Fraud
42. The parties move for summary judgment on Plaintiffs’ claims for
continuing fraud and misrepresentation and continuing conspiracy to defraud.
43. To prevail on a fraud claim, a party must prove five “essential elements”:
“(1) False representation or concealment of a material fact, (2) reasonably calculated
to deceive, (3) made with intent to deceive, (4) which does in fact deceive, (5) resulting
in damage to the injured party.” Ragsdale v. Kennedy, 286 N.C. 130, 138, 209 S.E.2d
494, 500 (1974). 44. A fraud claim “may be based on an ‘affirmative misrepresentation of a
material fact, or a failure to disclose a material fact relating to a transaction which
the parties had a duty to disclose.’” Hardin v. KCS Int’l, Inc., 199 N.C. App. 687, 696,
682 S.E.2d 726, 733 (2009) (quoting Harton v. Harton, 81 N.C. App. 295, 297, 344
S.E.2d 117, 119 (1986)). A duty to disclose a material fact arises in three situations:
(1) “where a fiduciary relationship exists between the parties to the transaction”;
(2) “when a party has taken affirmative steps to conceal material facts from the
other”; and (3) “where one party has knowledge of a latent defect in the subject matter
of the negotiations about which the other party is both ignorant and unable to
discover through reasonable diligence.” Harton, 81 N.C. App. at 297–98, 344 S.E.2d
at 119.
45. Plaintiffs allege that Defendants committed fraud and
misrepresentation by inducing them to lend money with no intent to repay the sum
transferred. (Compl. ¶ 67.) They contend that Judith Alley did this by sending the
estimated amortization schedule in which she represented the repayment terms for
a loan. (Compl. ¶ 67.) Plaintiffs further allege that Defendants falsely represented
both the purposes for which the money would be used and the idea that the money
would be repaid. (Compl. ¶¶ 66–77.) They claim that Defendants represented that
the funds would be used to pay J&M’s outstanding equipment loans, as well as unpaid
bills for concrete purchased by J&M. (Compl. ¶ 66.) Plaintiffs contend that, instead
of using the money for that purpose, Defendants put the money into Alpha’s accounts
to avoid paying J&M’s creditors, including Plaintiffs. (Compl. ¶ 69.) 46. Defendants contend that, because there was no contract, they are
entitled to summary judgment on this claim. They argue that, because no contract
existed, there could be no fraud or misrepresentation as to the transfer of money or
the purposes for which it would be used.
47. Whether a material fact was concealed requires a determination of the
relationship between the parties. If it is determined that Transatlantic and PCIM
were creditors of J&M, if a contract existed between Plaintiffs and J&M, or if there
are sufficient facts to support finding a fiduciary relationship between those parties,
there may be a basis for Plaintiffs’ fraud claim. However, if no such relationship
existed, there could be no concealment or misrepresentation of a material fact. Thus,
the motions for summary judgment on Plaintiffs’ fraud claim are not ripe, because
the claim depends on the resolution of other disputed claims.
b. Continuing conspiracy to defraud
48. The parties also move for summary judgment on Plaintiffs’ claim for
continuing conspiracy to defraud. This claim is grounded on Plaintiffs’ assertion that
Defendants conspired to avoid repaying Plaintiffs the amount of money transferred
in the “loan” transaction. (Compl. ¶¶ 78–81.)
49. A claim for conspiracy to defraud cannot succeed without a successful
underlying fraud claim. Jay Grp., Ltd. v. Glasgow, 139 N.C. App. 595, 599, 534 S.E.2d
233, 236 (2000) (citing Burton v. Dixon, 259 N.C. 473, 476, 131 S.E.2d 27, 30 (1963)).
Accordingly, this claim also is not ripe for determination. (3) Fraudulent conveyance, de facto merger, and continuation of the enterprise
50. The parties move for summary judgment on Plaintiffs’ claims for
fraudulent conveyance, de facto merger, and continuation of the enterprise.
Essentially, these claims seek to impose liability on Alpha for J&M’s obligations.
Neither Plaintiffs nor Defendants offer any case law supporting or opposing the
motions for summary judgment on these claims. Nevertheless, because the claims
depend first on Plaintiffs’ status as creditors of J&M, the Court determines that the
motions for summary judgment on these claims are not yet ripe for determination.
a. Fraudulent conveyance
51. Plaintiffs assert a claim for fraudulent conveyance in violation of N.C.
Gen. Stat. § 39-15. (Compl. ¶¶ 88–89.) That statute was repealed twenty years ago.
See Act of July 10, 1997, ch. 291, sec. 1, 1997 N.C. Sess. Laws 689, 689. Conveyances
that occurred after October 1, 1997, are governed by the Uniform Voidable
Transactions Act (“UVTA”), N.C. Gen. Stat. §§ 39-23.1 to .12 (2015).
52. Plaintiffs contend that J&M fraudulently conveyed all its assets to
Alpha to prevent creditors, including Plaintiffs, from recovering outstanding debts
from J&M. (Compl. ¶¶ 84–86.) Defendants contend that Plaintiffs are not creditors
of J&M and thus do not have standing to bring a claim for fraudulent conveyance.
(Mem. Law Supp. Defs.’ Mot. Summ. J. 15.)
53. A plaintiff must have standing as a creditor to proceed with a claim
under the UVTA. Poulos v. Poulos, No. 15 CVS 1116, 2016 NCBC LEXIS 73, at *31
(N.C. Super. Ct. Sept. 26, 2016). “[A] creditor who establishes the existence of a fraudulent transfer may obtain ‘[a]voidance of the transfer or obligation to the extent
necessary to satisfy the creditor’s claim.’” Miller v. First Bank, 206 N.C. App. 166,
170, 696 S.E.2d 824, 827 (2010) (alteration in original) (quoting N.C. Gen. Stat.
§ 39-23.7(a)(1)).
54. Because there are issues of fact remaining as to whether a loan contract
was formed between Plaintiffs and J&M, the motions for summary judgment on this
claim are not ripe for determination.
b. De facto merger and continuation of the enterprise
55. Plaintiffs’ claims for de facto merger and continuation of the enterprise
likewise depend on Plaintiffs’ status as creditors of J&M.
56. Plaintiffs allege that a de facto merger occurred when J&M merged with
Alpha and Alpha took on J&M’s liabilities. (Compl. ¶ 93.) They contend that
Defendants used Alpha to avoid liability for J&M’s debts, and that there was
continuity of management, personnel, physical location, type of business operations,
and ownership, among other things. They further allege that Alpha is liable for
J&M’s debts under a continuation-of-the-enterprise theory because Alpha resurfaced
as a business identical to J&M. (Compl. ¶ 99.)
57. As a general rule, a corporation that “purchases all or substantially all
of the assets of another corporation” is not liable for the old corporation’s debts. Budd
Tire Corp. v. Pierce Tire Co., 90 N.C. App. 684, 689, 370 S.E.2d 267, 270 (1988). This
general rule does not apply where
(1) there is an express or implied agreement by the purchasing corporation to assume the debt or liability; (2) the transfer amounts to a de facto merger of the two corporations; (3) the transfer of assets was done for the purpose of defrauding the corporation’s creditors, or; (4) the purchasing corporation is a “mere continuation” of the selling corporation in that the purchasing corporation has some of the same shareholders, directors, and officers.
Id. at 687, 370 S.E.2d at 269. To determine whether a corporation is a “mere
continuation” of an enterprise, courts look to the “continuity of stockholders and
directors between the selling and purchasing corporation,” along with factors such as
“inadequate consideration for the purchase” and “lack of some of the elements of a
good faith purchaser for value.” G.P. Publ’ns, Inc. v. Quebecor Printing—St. Paul,
Inc., 125 N.C. App. 424, 434–35, 481 S.E.2d 674, 680 (1997).
58. Because successor liability is treated as a matter of equity under North
Carolina law and exists to protect a predecessor corporation’s creditors, see Budd Tire
Corp., 90 N.C. App. at 689, 370 S.E.2d at 270, it necessarily follows that Plaintiffs
must be creditors of J&M to bring a claim for de facto merger or continuation of the
enterprise as an avenue for successor liability. As detailed above, there are questions
of fact as to whether Plaintiffs were creditors of J&M. Thus, Plaintiffs’ and
Defendants’ motions for summary judgment on Plaintiffs’ claims for de facto merger
and continuation of the enterprise are not yet ripe for determination.
(4) Breach of fiduciary duty and constructive fraud
59. Plaintiffs assert a single claim for breach of fiduciary duty and
constructive fraud against Judith Alley and Jeffrey Alley. As the basis for this claim,
Plaintiffs assert that, when J&M became insolvent, Judith Alley and Jeffrey Alley,
as owners, directors, and controlling shareholders of J&M, owed and then breached a fiduciary duty to Plaintiffs as creditors by taking advantage of their insider
positions for their own benefit and transferring assets from J&M to Alpha to avoid
paying outstanding debts. (Compl. ¶¶ 107–08.) Defendants contend that, because
Plaintiffs were not creditors, and because the transfer of $165,000 was not a loan,
summary judgment should be entered in their favor.
60. As a general rule, “directors of a corporation do not owe a fiduciary duty
to creditors of the corporation.” Keener Lumber Co. v. Perry, 149 N.C. App. 19, 29–
30, 560 S.E.2d 817, 824 (2002) (quoting Whitley v. Carolina Clinic, Inc., 118 N.C. App.
523, 526, 455 S.E.2d 896, 899 (1995)). However, directors of a corporation may owe
a fiduciary duty to creditors of the corporation where there are “circumstances
amounting to a ‘winding-up’ or dissolution of the corporation.” Id. at 31, 560 S.E.2d
at 825 (quoting Whitley, 118 N.C. App. at 528, 455 S.E.2d at 900).
61. As explained above, because Plaintiffs’ status as creditors depends on
the existence of a contract, the motions for summary judgment on Plaintiffs’ claim for
breach of fiduciary duty and constructive fraud are not ripe.
(5) Aiding and abetting breach of fiduciary duty
62. In addition to their claim for breach of fiduciary duty and constructive
fraud against Judith Alley and Jeffrey Alley, Plaintiffs assert a claim for inducing
breach of fiduciary duty and aiding and abetting breach of fiduciary duty against
Judith Alley, Jeffrey Alley, and Alpha.
63. Plaintiffs allege that Judith Alley, Jeffrey Alley, and Alpha, which
Plaintiffs collectively refer to as the “Interfering Defendants,” “intentionally and without justification interfered with and induced breach of fiduciary duty by
defendants Judith Alley and Jeffrey Alley and aided and abetted the breach of
fiduciary duty.” (Compl. ¶ 121.) Defendants ask for summary judgment on the
ground that there was no contract. Neither Plaintiffs nor Defendants offer any case
law to support or oppose the motions for summary judgment on this claim.
64. This Court has stated on numerous occasions that “[w]hether North
Carolina recognizes a claim for aiding and abetting a breach of fiduciary duty remains
an open question.” Krawiec v. Manly, No. 15 CVS 1927, 2016 NCBC LEXIS 7, at *39
(N.C. Super. Ct. Jan. 22, 2016) (Bledsoe, J.) (alteration in original) (quoting Veer
Right Mgmt. Grp., Inc. v. Czarnowski Display Serv., Inc., No. 14 CVS 1038, 2015
NCBC LEXIS 13, at *6 (N.C. Super. Ct. Feb. 4, 2015) (Gale, J.)). As the Court recently
explained, “even if such a claim should be recognized in North Carolina, the Court of
Appeals has held that the claim requires facts supporting an allegation of ‘substantial
assistance by the aider and abettor in the achievement of the primary violation.’”
Islet Scis., Inc. v. Brighthaven Ventures, LLC, No. 15 CVS 16388, 2017 NCBC LEXIS
4, at *14 (N.C. Super. Ct. Jan. 12, 2017) (McGuire, J.) (quoting Bottom v. Bailey, 238
N.C. App. 202, 212, 767 S.E.2d 883, 889 (2014)). The Court is not aware of a separate
claim for “inducing” breach of fiduciary duty.
65. Plaintiffs’ pleadings and briefs are completely devoid of support for their
aiding-and-abetting claim. If it is determined that Judith Alley and Jeffrey Alley owe
fiduciary duties to Plaintiffs, they cannot also be inducers, aiders, or abettors of a
breach of those duties. If they are determined to not owe fiduciary duties to Plaintiffs, there is no primary breach of fiduciary duty for which they could be liable for aiding
and abetting. See Veer Right Mgmt., 2015 NCBC LEXIS 13, at *8 (explaining that
“if North Carolina recognizes a claim for aiding and abetting breach of fiduciary duty,
the elements would include: (1) violation of a fiduciary duty by the primary party”).
Rather than reciting the elements for an aiding-and-abetting claim, Plaintiffs recite
the elements for a claim of intentional interference with contract. (See Compl.
¶¶ 121–22.)
66. For these reasons, Plaintiffs’ Motion for Summary Judgment on this
claim is denied, and Defendants’ Motion for Summary Judgment on this claim is
granted.
(6) Intentional interference with contract
67. Plaintiffs assert a claim for intentional interference with contract
against Judith Alley, Jeffrey Alley, and Alpha on the grounds that those Defendants
interfered with a valid contract between Plaintiffs and J&M. (Compl. ¶¶ 115–18.)
Defendants argue that, because no contract exists, there can be no claim of
intentional interference with contract.
68. Under North Carolina law, a claim of tortious interference with contract
requires five elements: (1) “a valid contract between the plaintiff and a third person
which confers upon the plaintiff a contractual right against a third person,” (2) “the
defendant knows of the contract,” (3) “the defendant intentionally induces the third
person not to perform the contract,” (4) “and in doing so acts without justification,”
(5) “resulting in actual damage to plaintiff.” United Labs., Inc. v. Kuykendall, 322 N.C. 643, 661, 370 S.E.2d 375, 387 (1988); see also Islet Scis., Inc. v. Brighthaven
Ventures, LLC, No. 15 CVS 16388, 2017 NCBC LEXIS 17, at *19–20 (N.C. Super. Ct.
Mar. 6, 2017).
69. Because the first element of an intentional-interference claim depends
on resolving the disputed issue regarding the existence of a valid contract, the
motions for summary judgment on this claim are not ripe for resolution.
(7) Section 75-1.1
70. The parties move for summary judgment on Plaintiffs’ claim for unfair
or deceptive trade practices under N.C. Gen. Stat. § 75-1.1. Plaintiffs base their
section 75-1.1 claim on the first nine claims asserted in their Complaint.
71. To state a claim under section 75-1.1, Plaintiffs must prove that
Defendants (1) “committed an unfair or deceptive act or practice,” (2) that the unfair
or deceptive act or practice was “in or affecting commerce,” and (3) that Defendants’
“act proximately caused injury” to Plaintiffs. Bumpers v. Cmty. Bank of N. Va., 367
N.C. 81, 88, 747 S.E.2d 220, 226 (2013) (quoting Dalton v. Camp, 353 N.C. 647, 656,
548 S.E.2d 704, 711 (2001)); see N.C. Gen. Stat. § 75-1.1(a) (2015).
72. The Court has held that it cannot resolve Plaintiffs’ fraud claim by
summary judgment. A fraud claim may also support a claim under section 75-1.1.
See, e.g., Jones v. Harrelson & Smith Contractors, LLC, 194 N.C. App. 203, 217, 670
S.E.2d 242, 252 (2008) (holding that, because the plaintiff proved the elements of a
fraud claim, they also established that unfair or deceptive acts occurred), aff’d, 363
N.C. 371, 677 S.E.2d 453 (2009) (mem.); see also Bob Timberlake Collection, Inc. v. Edwards, 176 N.C. App. 33, 42, 626 S.E.2d 315, 323 (2006) (noting that a section
75-1.1 claim may be grounded on a breach of contract if there are “substantial
aggravating circumstances attending the breach of contract”); KRG New Hill Place,
LLC v. Spring Inv’rs, LLC, No. 13 CVS 14770, 2015 NCBC LEXIS 72, at *20 (N.C.
Super. Ct. July 8, 2015) (holding that a fraudulent-transfer claim may support a
section 75-1.1 claim). Accordingly, Plaintiffs’ section 75-1.1 claim is not ripe for
summary judgment.
(8) Accounting
73. The parties move for summary judgment on Plaintiffs’ accounting claim.
Plaintiffs allege that they are entitled to see how the $165,000 “loan” was spent
because, as creditors, they were not repaid the value of the loan. Defendants contend
that summary judgment must be granted in their favor on this issue because
Plaintiffs are not creditors of J&M and thus lack standing to bring a claim for
accounting.
74. A party who requests an accounting must be connected to, or have an
interest in, the claims asserted. See Davis v. Davis, 246 N.C. 307, 310, 98 S.E.2d 318,
321 (1957). Because Plaintiffs’ right to an accounting depends on their status as
creditors, the motions for summary judgment on this claim are not ripe for
determination. C. Plaintiffs’ Motion for Summary Judgment on Defendants’ Counterclaims
75. Plaintiffs move for summary judgment on Defendants’ four
counterclaims.1 As discussed below, Plaintiffs’ Motion for Summary Judgment is
granted in part and denied in part.
(1) Declaratory judgment
76. Plaintiffs move for summary judgment on Defendants’ counterclaim for
declaratory judgment. Defendants ask the Court for a declaratory judgment under
N.C. Gen. Stat. § 1-253 that there is no contract to repay the $165,000. Plaintiffs’
Motion for Summary Judgment asks the Court to issue a declaratory judgment that
there is a contract between the parties.
77. As noted above, there are genuine issues of material fact regarding
whether the $165,000 transfer was intended as a loan that preclude summary
judgment on Defendants’ declaratory-judgment counterclaim. See Purcell v. Downey,
162 N.C. App. 529, 531, 591 S.E.2d 556, 558 (2004) (holding that summary judgment
is appropriate in a declaratory action only where “there is no substantial controversy
as to the facts disclosed by the evidence”). Accordingly, Defendants’ counterclaim for
declaratory judgment is not ripe for summary adjudication.
1 In Plaintiffs’ Brief in Opposition to Defendants’ Motion for Summary Judgment, Plaintiffs
appear to renew an earlier-filed motion to strike. (See Pls.’ Br. Opp’n to Defs.’ Mot. Summ. J. 4 (arguing that the Court should strike multiple paragraphs in Defendants’ Amended Answer and Counterclaim, as well as three of Defendants’ four counterclaims).) The Rule 12(f) motion to strike to which Plaintiffs refer was directed at Plaintiffs’ original Answer, Counterclaims, and Third-Party Complaint, and was deemed moot by Court order on January 20, 2015. See Order, Transatlantic Healthcare, LLC, No. 14 CVS 5263 (N.C. Super. Ct. Jan. 20, 2015). Plaintiffs’ motion to strike cannot be revived through their response brief and will not be considered by the Court. (2) Abuse of process
78. Plaintiffs also move for summary judgment on Defendants’ counterclaim
for abuse of process. As the basis of this counterclaim, Defendants assert that
“Plaintiffs have utilized this action in order to accomplish their ulterior purpose of
obtaining funds to which they were not entitled against J&M, Alpha, as well as Mr.
and Mrs. Alley individually.” (Am. Countercl. ¶ 64.)
79. Abuse of process is defined as “the misapplication of civil or criminal
process to accomplish some purpose not warranted or commanded by the process.”
Moch v. A.M. Pappas & Assocs., LLC, __ N.C. App. __, 794 S.E.2d 898, 905 (2016)
(quoting Pinewood Homes, Inc. v. Harris, 184 N.C. App. 597, 602, 646 S.E.2d 826, 831
(2007)). To succeed on a claim for abuse of process, two elements must be proven:
(1) “that the defendant had an ulterior motive to achieve a collateral purpose not
within the normal scope of the process used,” and (2) “that the defendant committed
some act that is a ‘malicious misuse or misapplication of that process after issuance
to accomplish some purpose not warranted or commanded by the writ.’” Id. (quoting
Pinewood Homes, Inc., 184 N.C. App. at 602, 646 S.E.2d at 831). An ulterior motive
for bringing the case, by itself, is insufficient to state a claim for abuse of process.
E.g., Edwards v. Jenkins, 247 N.C. 565, 568, 101 S.E.2d 410, 412 (1958) (“Regular
and legitimate use of process, though with a bad intention, is not a malicious abuse
of process.” (quoting Melton v. Rickman, 225 N.C. 700, 704, 36 S.E.2d 276, 278
(1945))); accord Chesson v. Rives, No. 12 CVS 3382, 2016 NCBC LEXIS 92, at *46–
47 (N.C. Super. Ct. Nov. 30, 2016); DDM&S Holdings, LLC v. Doc Watson Enters., LLC, No. 14 CVS 3107, 2016 NCBC LEXIS 88, at *8–9 (N.C. Super. Ct. Nov. 10,
2016).
80. The Court concludes that the evidence, viewed in the light most
favorable to Defendants, does not permit a factfinder to reasonably conclude that
Plaintiffs misused the legal process for an ulterior purpose. It is clear that, regardless
of whether a contract is found to exist or whether Plaintiffs are ultimately entitled to
recover, Plaintiffs’ motive in bringing this lawsuit is to recover the $165,000 that they
transferred to Defendants. Accordingly, the Court grants Plaintiffs’ Motion for
Summary Judgment on this claim.
(3) Fraud
81. Plaintiffs move for summary judgment on Defendants’ counterclaim for
fraud. As a basis for this counterclaim, Defendants allege that “Plaintiffs, by and
through their agents, Dr. Kutty and [Pilar] Cummings, deceived Defendants by
means of false representations of material facts, concealment of material facts, or
both.” (Am. Countercl. ¶ 67.) Plaintiffs contend that summary judgment is proper
because Defendants have failed to plead their fraud claim with the level of specificity
required for a fraud claim under North Carolina law.
82. As the Court explains above, to prevail on a fraud claim, a party must
prove five elements: “(1) False representation or concealment of a material fact,
(2) reasonably calculated to deceive, (3) made with intent to deceive, (4) which does
in fact deceive, (5) resulting in damage to the injured party.” Ragsdale, 286 N.C. at
138, 209 S.E.2d at 500. 83. Defendants assert that the fraud and misrepresentations were premised
on the fact that the $165,000 transfer was used to provide Plaintiffs the ability to
recuperate financial benefits that they were not entitled to receive. (Am. Countercl.
¶ 73(g).)
84. While Plaintiffs’ motion must be construed in the light most favorable
to Defendants, Defendants’ allegations of fraud and misrepresentation are premised
on the nature of the $165,000 transfer and whether it did in fact constitute a loan.
Because questions of fact remain as to whether there was a contract between the
parties and whether the transfer was intended to be a loan, Plaintiffs’ Motion for
Summary Judgment on Defendants’ counterclaim for fraud is not yet ripe for
determination.
(4) Section 75-1.1
85. Plaintiffs move for summary judgment on Defendants’ section 75-1.1
counterclaim.
86. In paragraph 71 of this Order & Opinion, the Court states the elements
required for a party to prevail on a section 75-1.1 claim. Defendants contend that
Plaintiffs actions constitute an unfair or deceptive trade practice because Plaintiffs
were part of a scheme to recover money that they were not entitled to receive. (Am.
Countercl. ¶ 80.) Plaintiffs contend that the alleged acts do not fall within the scope
of section 75-1.1 because there was no unfair or deceptive conduct, and because the
acts complained of do not affect commerce. 87. Here, the “scheme” that Defendants refer to is premised on the $165,000
transfer. If the transfer is found to be a loan, Defendants’ allegations that the
transaction was intended to allow Plaintiffs to recover money to which they were not
entitled cannot serve as a valid basis for Defendants’ section 75-1.1 claim. Whether
the transfer constituted a contract involves factual disputes that cannot be resolved
on a motion for summary judgment. Clearly, Plaintiffs contend that there was a
contract. However, the Court is dubious whether Plaintiffs’ conduct rises to the level
of unfair or deceptive conduct required under section 75-1.1, even if Plaintiffs prevail
on their contract claim. But in light of the other claims that must proceed, at this
time, Plaintiffs’ Motion for Summary Judgment on Defendants’ section 75-1.1 claim
is denied.
III. PLAINTIFFS’ MOTION TO STRIKE
88. Plaintiffs’ Motion to Strike asks the Court to strike the affidavits of
Judith Alley on the ground that the affidavits are inadmissible under the parol
evidence rule.
89. Rule 56(e) governs the form of summary-judgment affidavits and
requires that affidavits supporting or opposing summary judgment “shall be made on
personal knowledge, shall set forth such facts as would be admissible in evidence, and
shall show affirmatively that the affiant is competent to testify to the matters stated
therein.” N.C. Gen. Stat. § 1A-1, Rule 56(e). Statements of hearsay or facts that
would be inadmissible under the parol evidence rule should be stricken by the trial court. See Borden, Inc. v. Brower, 284 N.C. 54, 59, 199 S.E.2d 414, 418 (1973); Moore
v. Coachmen Indus., Inc., 129 N.C. App. 389, 394, 499 S.E.2d 772, 776 (1998).
90. The parol evidence rule “excludes prior or contemporaneous oral
agreements which are inconsistent with a written contract if the written contract
contains the complete agreement of the parties.” Emp’t Staffing Grp., Inc. v. Little,
__ N.C. App. __, 777 S.E.2d 309, 313 (2015) (quoting Phelps-Dickson Builders, LLC
v. Amerimann Partners, 172 N.C. App. 427, 436, 617 S.E.2d 664, 670 (2005)). The
rule “applies where the writing totally integrates all the terms of a contract or
supersedes all other agreements relating to the transaction.” Id. (quoting Craig v.
Kessing, 297 N.C. 32, 35, 253 S.E.2d 264, 265 (1979)).
91. As an initial matter, while the Motion to Strike purports to target
multiple affidavits—presumptively Judith Alley’s first affidavit, filed August 19,
2014, and her second affidavit, filed October 28, 2014—Plaintiffs’ argument appears
to address only the second affidavit. Nevertheless, Plaintiffs’ argument is misplaced
as to either affidavit.
92. Plaintiffs argue that the parol evidence rule should preclude Judith
Alley from contradicting “a fax she sent, an Amortization Schedule she faxed, checks
she signed, ‘memos’ on checks saying ‘payment on J&M loan,’ a Corporate Resolution,
or a letter-email to Mr. Banker she admitted was ‘drafted’ by her.” (Pls.’ Br. Opp’n to
Defs.’ Mot. Summ. J. 9.) But a key piece is missing to place this dispute in the realm
of the parol-evidence rule: a writing that “totally integrates all the terms of a contract.” Emp’t Staffing Grp., 777 S.E.2d at 313 (quoting Craig, 297 N.C. at 35, 253
S.E.2d at 265).
93. Indeed, Plaintiffs admit that no “writing intended to be the final
expression of the parties’ agreement” exists. Phelps v. Spivey, 126 N.C. App. 693,
697, 486 S.E.2d 226, 229 (1997) (quoting Weiss v. Woody, 80 N.C. App. 86, 91, 341
S.E.2d 103, 106 (1986)); (see, e.g., Diaz Aff. ¶¶ 4, 14.) Rather, Judith Alley’s second
affidavit merely points to a potential typographical error in the J&M board-meeting
minutes that puts into question whether a meeting of the minds existed between the
parties—a question that raises an issue of material fact as to whether the parties
entered into a contract and precludes summary judgment on that issue.
94. The Court finds that Plaintiffs’ Motion to Strike is without merit and is
therefore denied.
IV. PLAINTIFFS’ MOTION TO COMPEL
95. Plaintiffs’ Motion to Compel asks the Court to compel Defendants to
make discovery, strike Defendants’ affirmative defenses and counterclaims, and
award attorney fees to Plaintiffs for Defendants’ failure to make discovery. (Pls.’ Mot.
Compel 1, 5.)
96. As the basis for their motion, Plaintiffs contend that Defendants have
“outright refused to produce any tax returns and a number of requested documents
that would show the flow of substantial mon[eys] and assets among” Defendants.
(Pls.’ Mot. Compel ¶ 2.) They claim to have faced Defendants’ Motion for Summary
Judgment without having the full benefit of discovery to prove that (1) “Judith Alley admitted the loan on multiple occasions prior to claiming it was a ‘gift,’” and
(2) “[D]efendants have engaged in multiple fraudulent conveyances, sham
transactions, and unfair and deceptive acts and other conduct making them liable for
compensatory and punitive damages.” (Pls.’ Br. Supp. Mot. Compel 2.)
97. In response, Defendants claim that much of the information that
Plaintiffs seek through their Motion to Compel has already been produced or is no
longer in Defendants’ possession, custody, or control. (Defs.’ Mem. Law Opp’n Pls.’
Mot. Compel 12.) They argue that they cannot be compelled to produce documents
that either do not exist or are not in their possession or under their control.
98. Under North Carolina’s liberal discovery rules, parties are permitted to
obtain discovery on any relevant, nonprivileged matter that “appears reasonably
calculated to lead to the discovery of admissible evidence.” N.C. Gen. Stat. § 1A-1,
Rule 26(b)(1). A party’s response to a written discovery request must either state
that the request is permitted or raise an objection that articulates the basis for the
objection. Id. § 1A-1, Rule 34(b).
99. Rule 37 of the North Carolina Rules of Civil Procedure allows a party to
file a motion to compel where a party’s responses to discovery requests are “evasive
or incomplete.” Id. § 1A-1, Rule 37(a)(3). “The party resisting discovery bears the
burden of showing why the motion to compel should not be granted.” Nat’l Fin.
Partners Corp. v. Ray, No. 13 CVS 3319, 2014 NCBC LEXIS 50, at *26 (N.C. Super.
Ct. Oct. 13, 2014) (quoting Smithfield Bus. Park, LLC v. SLR Int’l Corp., No. 5:12-
CV-282-F, 2014 U.S. Dist. LEXIS 110535, at *7 (E.D.N.C. Aug. 11, 2014)). The decision whether to grant or deny a motion to compel discovery is within the sound
discretion of the trial court. See, e.g., Phelps-Dickson Builders, LLC, 172 N.C. App.
at 433, 617 S.E.2d at 668.
100. Plaintiffs’ supporting brief and the letters to opposing counsel
accompanying their Motion to Compel list several documents that Plaintiffs have
requested Defendants to produce. (See Pls.’ Mot. Compel Attachs. 1–5; Pls.’ Br. Supp.
Mot. Compel 7–11.) It is unclear which of these requests have been resolved since
Plaintiffs filed their motion.
101. Clearly, the Court cannot compel Defendants to produce documents that
they claim in good faith are no longer in their possession, custody, or control. (E.g.,
Defs.’ Mem. Law Opp’n Pls.’ Mot. Compel 12.) However, Defendants fail to meet their
burden of proof as to the other requests when they merely state that “[t]he remaining
requests seek documents that are irrelevant to whether or not a contract exists” or
“simply attempt to embarrass or harass Defendants.” (Defs.’ Mem. Law Opp’n Pls.’
Mot. Compel 13.) For example, whether the payments to Transatlantic and PCIM
were deducted on Defendants’ tax returns as a deductible business expense is directly
relevant to the issue whether the $165,000 was treated as a loan or a gift.
Defendants’ tax returns, along with the other requested, available documents listed
in Plaintiffs’ supporting brief and in the letters accompanying their Motion to
Compel, should be produced within twenty days of this Order & Opinion.
102. The Court, in its discretion, denies Plaintiffs’ request to strike
Defendants’ affirmative defenses and counterclaims. The Court, in its discretion, likewise denies Plaintiffs’ request for attorney fees under Rule 37(a)(4), because it
finds that Defendants’ opposition to the Motion to Compel was substantially justified
and that, at this stage in the proceedings, an award of expenses, including attorney
fees, would be unjust and not appropriate.
V. DEFENDANTS’ MOTIONS TO QUASH
103. In their three Motions to Quash, Defendants ask the Court to quash
subpoenas issued by Plaintiffs to Truliant, BB&T, and Wells Fargo on the grounds
that the information sought by Plaintiffs is not pertinent to the claims asserted in the
Complaint, that the issuance of subpoenas is not the proper procedure to gather such
information, and that Plaintiffs do not seek the production of the items listed in the
subpoenas for a proper or valid purpose.
104. The subpoena issued to Truliant commands Truliant to produce and
permit inspection and copying of “all documents in any reasonable way revealing or
pertaining to any loan or loans made to [J&M] (or owners/officers Jeffrey Wayne Alley
or Judith Alley) that were in place in 2009 or 2010 . . . and any and all correspondence
or other documents relating to the loan or loans.” (Mot. Quash Truliant Subpoena
Ex. A.)
105. The subpoena issued to BB&T commands BB&T to produce and permit
inspection and copying of “all documents in any way reflecting a) deposit of funds into
the account of [Alpha] from the time the account was created in 2009 until the end of
2014, or b) withdrawal of funds by check or otherwise from the time the account was
created in 2009 until the end of 2014.” (Mot. Quash BB&T Subpoena Ex. A.) 106. The subpoena issued to Wells Fargo commands Wells Fargo to produce
and permit inspection and copying of “all documents in any way reflecting deposit of
funds into the account of [J&M] from November 1, 2008, until the end of 2014 or
withdrawal of funds by check or otherwise from November 1, 2008 until the end of
2014.” (Mot. Quash Wells Fargo Subpoena Ex. A.)
107. No briefs were submitted to the Court by either Plaintiffs or Defendants
in connection with Defendants’ Motions to Quash. In their Motion to Compel,
Plaintiffs say that they attempted to subpoena the banks only after Defendants
declined to supplement their discovery responses. (Pls.’ Mot. Compel ¶¶ 13–14.)
According to Plaintiff’s Motion to Compel, Truliant has produced the subpoenaed
documents, but BB&T and Wells Fargo have not. (Pls.’ Mot. Compel ¶ 14.)
108. Whether to grant or deny a motion to quash is within the sound
discretion of the trial court. See, e.g., Vaughan v. Broadfoot, 267 N.C. 691, 697, 149
S.E.2d 37, 42 (1966). In exercising its discretion in ruling on a motion to quash a
subpoena, the Court should consider the relevancy and materiality of the subpoenaed
items, the right of the subpoenaed party to withhold production on other grounds,
and the policy against fishing expeditions. See State v. Stimson, __ N.C. App. __, 783
S.E.2d 749, 750–51 (2016).
109. This Court has previously held that “nothing in the North Carolina
Rules of Civil Procedure, the Federal Privacy Act, or the North Carolina Financial
Privacy Act expressly grants” a third party standing to quash a subpoena to that
party’s bank. Deyton v. Estate of Waters, No. 10 CVS 2582, 2011 NCBC LEXIS 36, at *14 (N.C. Super. Ct. Sept. 23, 2011). The parties do not address Defendants’
standing to challenge the bank subpoenas.
110. The Court, in its discretion, denies Defendants’ Motions to Quash.
VI. CONCLUSION
111. For the foregoing reasons, the Court concludes the following:
(1) Plaintiffs’ Motion for Summary Judgment is GRANTED IN PART
and DENIED IN PART as follows:
i. Summary judgment is GRANTED in favor of Plaintiffs on
Defendants’ abuse-of-process counterclaim, and that claim
is DISMISSED WITH PREJUDICE.
ii. Plaintiffs’ Motion for Summary as to all other claims and
counterclaims is DENIED.
(2) Defendants’ Motion for Summary Judgment is GRANTED IN
PART and DENIED IN PART as follows:
i. Summary judgment is GRANTED in favor of Defendants
on Plaintiffs’ claim for inducing breach of fiduciary duty or
aiding and abetting breach of fiduciary duty, and that
claim is DISMISSED WITH PREJUDICE.
ii. Defendants’ Motion for Summary Judgment as to all other
claims is DENIED.
(3) Plaintiffs’ Motion to Strike is DENIED. (4) Plaintiffs’ Motion to Compel is GRANTED IN PART and DENIED
IN PART.
(5) Defendants’ Motions to Quash are DENIED.
112. Other than provided in this Order & Opinion, discovery is now closed.
113. By April 1, 2017, counsel shall confer and propose two dates after July
1, 2017, when all parties can be available for a jury trial. The Court will set a trial
date and a schedule for the completion of pretrial procedures in accordance with
Business Court Rule 12.3.
SO ORDERED, this the 9th day of March, 2017.
/s/ James L. Gale James L. Gale Chief Business Court Judge