Koch Foods, Inc. v. Pate Dawson Company, Inc. et al
ORDER denying 85 Motion for Summary Judgment; denying 87 Motion for Summary Judgment Signed by Honorable David C. Bramlette, III on October 25, 2017 (jr)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
KOCH FOODS, INC.
CAUSE NO. 3:16-cv-355-DCB-MTP
PATE DAWSON COMPANY, INC., et al.
MEMORANDUM OPINION AND ORDER
This cause is before the Court on cross-motions for summary
judgment [Doc. Nos. 85, 87] filed by plaintiff Koch Foods, Inc.
(“Koch”) and defendants Malcolm Sullivan, Micah Sullivan, and
other unidentified officers and directors of Pate Dawson Company
otherwise fully informed in the premises, the Court finds as
This is a commercial dispute between a major poultry processor
and the former officers and directors of a defunct foodservice
distributor with whom it did much business. The poultry processor
claims that the foodservice distributor, while on the verge of
financial ruin, ordered $3.6 million in poultry products with
neither the intention nor the ability to pay. The foodservice
Plaintiff Koch is a major poultry processor. The Pate Dawson
Company (“PDC”) was a foodservice distributor. Defendants are the
former officers and directors of PDC.
For about eight years, Koch delivered “specialized chicken
products” to PDC [Doc. Nos. 86, ¶¶34-36; 92, ¶¶34-37]. PDC would
then sell the chicken products to restaurants such as Bojangles’
Famous Chicken ‘N Biscuits, a southeastern regional fast-food
chain and PDC’s biggest customer [Doc. Nos. 86, ¶¶34-36; 92, ¶¶3437]. This suit arises from $3.6 million in orders PDC placed with
Koch for delivery to Bojangles.
The parties’ payment arrangement was straightforward. Once
PDC delivered Koch’s chicken products, Bojangles paid PDC for the
cost of (1) shipping; and (2) the chicken products it had delivered
[Doc. Nos. 86, ¶¶37-38; 92, ¶¶37-38]. PDC then paid Koch a portion
of those payments
[Doc. Nos. 86, ¶¶37-38; 92 ¶¶37-38]. Koch
invoiced PDC once Koch’s chicken products had been delivered to
Bojangles [Doc. Nos. 86, ¶37; 92, ¶37]. PDC ordinarily paid each
invoice within 21 days [Doc. Nos. 86, ¶37; 92, ¶37].
PDC’s Financial Status
PDC was balance sheet insolvent in 2014 [Doc. Nos. 86, ¶1;
Consulting Group, [Doc. Nos. 86, ¶2; 92, ¶2] and posted a net loss
of over $5.7 million for the fiscal year ending in June of 2014
[Doc. Nos. 86, ¶3; 92, ¶3].
September 2015 [Doc. Nos. 86, ¶4; 92, ¶4]. As a result, PDC lost
about 60% of its revenue [Doc. No. 92, ¶5].
After learning that
PDC had lost its biggest customer in Bojangles, PNC Bank, PDC’s
senior lender, informed PDC that its line of credit would not be
renewed [Doc. Nos. 86, ¶6; 92, ¶6]. PDC owed PNC Bank about $13
million at the time [Doc. Nos. 86, ¶7; 92, ¶7]. The parties agree
that these events damaged PDC’s business prospects; however, they
dispute the degree of damage done: whether PDC’s business was at
this point certain to fail [Doc. Nos. 86, ¶9; 92, ¶9].
To mitigate damage caused by PNC Bank’s non-renewal of PDC’s
line of credit, Huron advised PDC to find a “debt replacement
facility” [Doc. Nos. 86, ¶7; 92, ¶7]. Huron further counseled that
PDC needed to find a debt replacement facility if it wished to
continue its normal course of business [Doc. Nos. 86, ¶8, 92, ¶8].
The parties dispute the odds that PDC would find the facility it
admittedly needed to maintain its business.
C. The Relevant Orders
From December 2015 to February 2016, PDC placed 38 purchase
orders with Koch for chicken products worth about $3.6 million
[Doc. Nos. 86, p. 3; 92, p. 5]. In March 2016, PDC sent Koch a
proposed payment schedule for its outstanding invoices [Doc. Nos.
86, ¶10; 92, ¶10]. PDC paid Koch about $106,000 for the first
invoice in March 2016 [Doc. No. 92, ¶16]. The parties dispute
whether this was an “ordinary course” payment showing that PDC was
cash flow solvent, or a delayed payment signaling that PDC was not
paying its bills as they became due.
PDC’s Transition Period
Around the time of its last order with Koch, PDC sought a
loan from AloStar Bank [Doc. Nos. 86, ¶17; 92, ¶17]. PDC hoped the
AloStar loan would allow it to meet the terms of its payment plan
with Koch [Doc. No. 92, ¶16]. But the PDC – AloStar loan deal fell
through in April 2016 [Doc. Nos. 86, ¶21; 92, ¶21]. Four months
later, Cheney Brothers, Inc. bought PDC’s assets [Doc. Nos. 86,
¶21; 92, ¶21].
During its transition period, PDC paid two entities owned by
the Sullivan family, P&D Corporation and P and S One, LLC [Doc.
Nos. 86, ¶24; 92, ¶24]. The parties dispute whether PDC, or an
entity agreeing to pay Koch on its behalf, has made good on any of
the remaining invoices [Doc. Nos. 86, ¶40; 92, ¶40].
In May of 2016, Koch sued PDC, Malcolm Sullivan, Micah
Sullivan, and Mike Pate Jr. for breach of contract, breach of
misrepresentation [Doc. No. 1].
After a period of discovery, Koch amended its complaint to
allege the following claims against defendants Malcolm Sullivan,
Micah Sullivan, and Mike Pate Jr.: (1) breach of fiduciary duty
[Doc. No. 49, ¶¶44-45]; (2) constructive fraud [Doc. No. 49, ¶¶4647]; (3) unfair and deceptive trade practices [Doc. No. 49, ¶¶4849]; and (4) conspiracy [Doc. No. 49, ¶¶55-58].
The Court does
not address the claims asserted against PDC because the parties
have informed the Court that PDC’s successor, Cheney Brothers,
Inc., has settled those claims with Koch [Doc. Nos. 85, p. 1; 91,
Summary Judgment Standard
The Court evaluates cross-motions for summary judgment under
the familiar Rule 56(a) standard. See Shaw Constructors v. ICF
Kaiser Eng’rs, Inc., 395 F.3d 533, 538-39 (5th Cir. 2004). Summary
judgment is properly entered if the movant shows that there is no
genuine dispute as to any material fact and that it is entitled to
judgment as a matter of law. FED. R. CIV. P. 56(a).
On cross-motions for summary judgment, the Court reviews each
party’s motion independently, viewing the evidence and inferences
in the light most favorable the non-movant. Ford Motor Co. v. Texas
Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2001); 10A Charles
Alan Wright, Arthur R. Miller & Mary Kay Kane, FEDERAL PRACTICE
PROCEDURE § 2720 (3d ed. 1998).
The movant in each summary judgment motion must “inform the
district court of the basis for its motion, and identify those
portions of the [record] . . . which it believes demonstrate the
absence of a genuine issue of material fact.” Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986). If the movant makes this initial
showing, then the burden shifts to the non-movant to “designate
specific facts showing that there is a genuine issue for trial.”
Davis v. Fort Bend Cty., 765 F.3d 480, 484 (5th Cir. 2014). A party
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en
banc) (per curiam).
B. Conflict of Laws
Although this Court sits in Mississippi, no party is a
Mississippi citizen, and the parties’ relationship is centered
substantive law should apply. The parties agree that North Carolina
law governs three of four claims; however, the Court conducts its
own conflict of laws analysis here.
Because this Court’s jurisdiction is based on diversity of
citizenship, the Court applies state substantive law. Gasperini v.
Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996); Erie R. Co.
v. Tompkins, 304 U.S. 64, 78-79 (1938). The Supreme Court of the
United States has long held that state conflict of law rules are
substantive under Erie. Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 496 (1941); Williams v. Liberty Mut. Ins. Co., 741 F.3d
617, 620 (5th Cir. 2014). Thus, this Court applies the conflict of
law rules of Mississippi.
Under Mississippi’s conflict of laws regime, the Court first
decides whether there is a “true conflict” between the laws of two
states with an interest in the litigation. South Carolina Ins. Co.
v. Keymon, 974 So. 2d 226, 230 (Miss. 2008) (en banc). Here, a
“true conflict” exists between the laws of Mississippi and North
Carolina relative to Koch’s breach of fiduciary duty,1 constructive
fraud,2 and unfair and deceptive trade practices claims.3 Because
the laws of Mississippi and North Carolina are in accord on the
elements of conspiracy,4 the Court applies Mississippi’s law of
Under Mississippi law, “[a] director occupies a fiduciary position
toward creditors.” Cooper v. Mississippi Land Co., 220 So. 2d 302, 307 (Miss.
1969). An officer or director, under North Carolina law, owes such a duty only
in limited circumstances. See Keener Lumber Co. v. Perry, 560 S.E.2d 817, 824
(N.C. Ct. App. 2002).
Constructive fraud is a statutory claim under Mississippi law, MISS. CODE
ANN. § 15-3-107, requiring proof of different elements than common law
constructive fraud under North Carolina law. See, e.g., Clay v. Monroe, 658
S.E.2d 532, 536 (N.C. Ct. App. 2008)
Mississippi and North Carolina have separate laws creating claims
against businesses engaged in unfair trade practices. Compare MISS. CODE ANN. §
75-24-5 with N.C. GEN. STAT. § 75-1.1.
4 Compare Harris v. Town of Woodville, 196 So. 3d 1121, 1131 (Miss. Ct.
App. 2016) with Dove v. Harvey, 608 S.E.2d 798, 800 (N.C. Ct. App. 2005).
conspiracy. See Daniels v. Crocker, 2017 WL 2505196, *4, __ So. 3d
__ (Miss. 2017).
Finding a “true conflict” exists on three of Koch’s four
claims, the Court conducts a three-step analysis: “(1) determine
whether the laws at issue are substantive or procedural; (2) if
contract; and (3) look to the relevant section of the Restatement
(Second) of Conflict of Laws.” Hartford Underwriters Ins. Co. v.
Foundation Health Servs. Inc., 524 F.3d 588, 593 (5th Cir. 2008)
(citing Zurich Am. Ins. Co. v. Goodwin, 920 So. 2d 427, 432 (Miss.
Regarding the first step, forum law dictates whether an issue
is substantive or procedural. 1A C.J.S.
Actions § 41. Under
Mississippi law, few laws qualify as procedural: statutes of
limitations, awards of attorney’s fees, and awards of prejudgment
interest. Zurich, 920 So. 2d at 433. Each of the laws at issue
here, concerning elements of tort claims, is “substantive” under
Regarding the second and third steps, breach of fiduciary
duty, constructive fraud, and unfair trade practices are tortbased claims governed by Chapter 7 of the Restatement (Second) of
Conflict of Laws, Section 145 and Section 6.
With respect to each claim, Chapter 7 of the Restatement
(Second) of Conflict of Laws directs the Court to apply the law of
occurrence and parties in light of the following “contacts”: (a)
the place where the injury occurred; (b) the place where the
conduct causing the injury occurred; (c) the domicile, residence,
nationality, place of incorporation and place of business of the
parties; and (d) the place where the relationship, if any, between
the parties is centered. Ellis v. Trustmark Builders, Inc., 625
F.3d 222, 226 (5th Cir. 2010); RESTATEMENT (SECOND)
The Court evaluates these tort-specific contacts in light of
seven general choice-of-law considerations: (a) the needs of the
interstate and international systems; (b) the relevant policies of
the forum; (c) the relevant policies of other interested states
and the relative interests of those states in the determination of
expectations; (e) the basic policies underlying the particular
field of law; (f) certainty, predictability, and uniformity of
result; and (g) ease in the determination and application of the
law to be applied. RESTATEMENT (SECOND)
LAWS § 6(2).
The Section 145 “contacts” and Section 6 “principles” “defy
—— they are less ‘rules of law’ than
generally-stated guideposts.” McDaniel v. Ritter, 556 So. 2d 303,
310 (Miss. 1989).
contacts relevant here are (a) the place where the injury occurred;
(b) the place where the conduct causing the injury occurred; and
(c) the place of incorporation and place of business of the
parties. See RESTATEMENT (SECOND)
LAWS § 145(2).
The place where the injury occurred is difficult to determine
but is likely Mississippi or Illinois. Mississippi could qualify
as the place of injury because Koch Foods of Mississippi, LLC sold
PDC the chicken products for which Koch contends PDC failed to
pay.5 Illinois could qualify because that is Koch’s “nerve center,”
and therefore the place where any business loss caused by PDC’s
non-payment would be most acutely felt.
To the extent the place of the conduct causing Koch’s injury
is identifiable, it is likely the place where PDC was incorporated
and maintained its principal place of business —— North Carolina.
The “place of business” criterion also points toward North Carolina
law. Although Koch is an Illinois corporation with a principal
corporation, and the Defendants are North Carolina citizens.
A review of the Section 6 “principles” confirms that North
Carolina law should govern this claim. North Carolina has a strong
interest in regulating the conduct of corporations doing business
Koch Foods of Mississippi, LLC assigned to Koch Foods, Inc. the unpaid
invoices for collection [Doc. No. 49, ¶5].
within its borders. See United Roasters Inc. v. Colgate-Palmolive
Co., 485 F. Supp. 1041, 1046 (E.D. N.C. 1979). The parties have
not identified, and the Court is unaware of, a forum policy or
regulatory interest. Thus, the Court finds that North Carolina is
the place with the “most significant relationship” to the parties
with respect to Koch’s breach of fiduciary duty claim.
Koch’s breach of fiduciary duty claim is based on the same
underlying facts as its other claims. The nebulous “place of
injury” criterion is constant across all claims. So too is the
equally hazy “place of conduct causing injury” criterion. Thus,
the same conflict of laws analysis and conclusion should follow
for Koch’s constructive fraud and unfair and deceptive trade
In sum, the Court applies the law of North Carolina to Koch’s
breach of fiduciary duty, constructive fraud, and unfair and
deceptive trade practices claims. The law of Mississippi governs
Koch’s conspiracy claim.
Breach of Fiduciary Duty
With one exception, officers and directors of a corporation
do not owe a fiduciary duty to the corporation’s creditors. USA
Trouser, S.A. de C.V. v. Andrews, 612 Fed. App’x 158, 160 (4th
Cir. 2015) (per curiam) (quoting Keener Lumber Co. v. Perry, 560
“circumstances amounting to a ‘winding-up’ or dissolution of the
corporation.” Keener, 560 S.E. 2d at 825.
To determine whether a corporation is “winding up,” the Court
(1) whether the corporation was insolvent, or nearly
insolvent, on a balance sheet basis;6 (2) whether the
corporation was cash flow insolvent; (3) whether the
corporation was making plans to cease doing business;
(4) whether the corporation was liquidating its assets
with a view of going out of business; and (5) whether
the corporation was still prosecuting its business in
good faith, with a reasonable prospect and expectation
of doing so.
USA Trouser, 612 Fed. App’x at 160.
A corporation is balance sheet insolvent when its liabilities
exceed its assets. See Matrix Grp. Ltd. v. Rawlings Sporting Goods
Co., 477 F.3d 583, 590 (8th Cir. 2007). Cash flow insolvency
implies an “inability to meet maturing obligations as they fall
due in the ordinary course of business.” Id. at 590; see also J.B.
Heaton, Solvency Tests, 62 BUS. LAW. 983, 988-95 (2007).
If and when a fiduciary duty to a creditor arises, the
officers and directors of a corporation “must treat all creditors
of the same class equally by making payments to such creditors on
a pro rata basis.” Keener, 560 S.E.2d at 827 (citing Bassett v.
Cooperage Co., 125 S.E. 14 (N.C. 1924)). North Carolina law also
6 A corporation is not insolvent “merely because it is embarrassed and
cannot pay its debts as they become due, or because its assets, if sold, would
not bring enough to pay all its liabilities, if it is still prosecuting its
business in good faith, with a reasonable prospect and expectation of continuing
to do so.” USA Trouser, 612 Fed. App’x at 160 n. 2.
imposes liability upon officers and directors who take advantage
of their knowledge of corporate affairs to the detriment of
creditors to whom they owe a fiduciary duty. Keener, 560 S.E. 2d
Generally, the existence of a fiduciary duty is a question of
fact for the jury. See Tin Originals, Inc. v. Colonial Tin Works,
Inc., 391 S.E.2d 831, 832 (N.C. Ct. App. 1990).
To recover for constructive fraud, Koch must prove “(1) a
relationship of trust and confidence; (2) that the defendant took
advantage of that position of trust in order to benefit himself;
and (3) that plaintiff was, as a result, injured.” Clay v. Monroe,
658 S.E.2d 532, 536 (N.C. Ct. App. 2008).
The second element is not met if the benefit sought was simply
a continued relationship or the payment of a fee to the defendant
for work it actually performed. White v. Consolidated Planning,
Inc., 603 S.E.2d 147, 156 (N.C. Ct. App. 2004) (citing Sterner v.
Penn, 583 S.E.2d 670, 674 (N.C. Ct. App. 2004)).
Unfair and Deceptive Trade Practices (UDTPA)
To recover under North Carolina’s Unfair and Deceptive Trade
Practices Act, N.C. GEN. STAT. § 75-1.1, Koch must prove “(1) an
unfair or deceptive act or practice; (2) in or affecting commerce;
(3) which proximately caused injury to the plaintiff or his
business.” Champion Pro Consulting Grp., Inc. v. Impact Sports
Football, LLC, 845 F.3d 104, 109 (4th Cir. 2016).
What qualifies as an “unfair” or “deceptive” trade practice
“is a somewhat nebulous concept.” Curtis B. Pearson Music Co. v.
Everitt, 368 Fed. App’x 450, 455 (4th Cir. 2010). UDTPA liability
ensues when a practice is either “unfair” or “deceptive” —— it
need not be both. Id. at 455. A practice is “deceptive” if “it has
a tendency or capacity to deceive.” Champion Pro Consulting, 845
F.3d at 109 (citing Dalton v. Camp,548 S.E.2d 704, 711 (N.C.
2001)). A practice is “unfair” when “it offends established public
consumers.” Carcano v. JBSS, LLC, 684 S.E.2d 41, 50 (N.C. Ct. App.
according to its effect on the “marketplace.” Id. at 50.
Because the UDTPA provides for treble damages, “courts have
been reluctant to classify every instance of wrongdoing in business
transactions as a violation of the UDTPA.” Curtis B. Pearson, 368
Fed. App’x at 455. Thus, North Carolina courts require “some type
of egregious or aggravating circumstances.” Dalton, 548 S.E.2d at
Koch’s Motion for Summary Judgment
Koch seeks summary judgment on all of its claims. Its bigpicture contention consists of two parts: (1) a fiduciary duty
arose by operation of law around the time PDC ordered over $3.5
million in chicken products from Koch; (2) Defendants breached
that duty by preferring family and related-entity creditors over
i). Existence of a Fiduciary Duty
As officers and directors of PDC, Defendants owed no duty to
Koch, a creditor of PDC, under North Carolina’s “general rule.”
USA Trouser, 612 Fed. App’x at 160. The key inquiry is when PDC
experienced “circumstances amounting to a winding up.” Keener, 560
S.E.2d at 825. Until then, Defendants owed no fiduciary duty to
Koch contends PDC was “winding up” as early as September 2015,
when PDC lost its chief customer, Bojangles. Defendants counter
that PDC remained viable after the split. They insist that PDC was
not “winding up” until April 14, 2016, when PDC’s loan deal with
AloStar collapsed. The Court turns to the five Keener factors,
viewing them in the non-movant Defendants’ favor, to determine if
the undisputed facts show that Defendants owed a fiduciary duty to
Koch before April 14, 2016.
The first factor —— balance sheet insolvency —— supports
Koch’s position. The parties do not dispute that PDC was balance
sheet insolvent as early as 2014 [Doc. Nos. ¶86, 1; ¶92, 1]. But
balance sheet insolvency alone is insufficient to show a “winding
up” triggering a fiduciary duty. See Whitley v. Carolina Clinic,
Inc., 455 S.E.2d 896, 899 (N.C. Ct. App. 1995).
The parties dispute many of the facts necessary to evaluate
the second factor, cash flow insolvency, and the fifth factor,
conducting business in good faith. USA Trouser, 612 Fed. App’x at
160. Because these factors are analytically related, the Court
considers them together.
Koch theorizes that PDC’s loss of Bojangles portended the end
of the business. After Bojangles’ exit, Koch reasons, PDC was cash
flow insolvent and no longer “prosecuting its business in good
faith.” See USA Trouser, 612 Fed. App’x at 160. In support of its
position, Koch marshals an export report purporting to show that
PDC was cash flow insolvent beginning in January 2016, [Doc. No.
85-11, p. 6] and deposition testimony of Huron Consulting’s Hugh
Sawyer and Jamie Lilac concerning the deleterious effect losing
Bojangles had on PDC’s business [Doc. No. 86, ¶5]. Koch also cites
Lance Buckert’s deposition testimony that PDC belatedly paid Koch
for just 1 of its 38 orders to prove that PDC was not paying its
bills as they became due [Doc. No. 86, ¶¶39-40].
Defendants counter that losing Bojangles was a setback, but
not one severe enough to derail the business entirely. Defendants
offer evidence purporting to show that PDC remained a viable
business until its deal with AloStar folded in April of 2016.
Defendants’ expert James Koerber opines that PDC was not “winding
down” its business operations until June of 2016, and that PDC had
“reasonable expectations of continuing operations” until April of
2016 [Doc. No. 91-1, p.5]. Defendants also point to the deposition
testimony of Lance Buckert, contending PDC’s payment of 1 of the
38 Koch invoices shows that it was cash flow solvent and paying
its bills as they became due [Doc. No. 92, p. 14].
Viewing all facts and inferences in Defendants’ favor, the
Court finds summary judgment inappropriate on the issue of the
existence of a fiduciary duty. Factual disputes abound concerning
the cash flow solvency of PDC and the date on which it was no
longer “conducting its business in good faith, with a reasonable
prospect and expectation of doing so.” USA Trouser, 612 Fed. App’x
For example, Huron’s Hugh Sawyer and Jamie Lisac provided
testimony which tends to show that PDC may not have been “winding
down” as early as Koch claims. Lisac was optimistic that Huron
could secure financing for PDC, and that such financing would
enable PDC to continue its operations in the ordinary course [Doc.
No. 85-9, pp. 18-19]. Sawyer testified that PDC “continued to
February of 2016 [Doc. No. 85-9, p. 29]. Sawyer’s testimony also
blunts the impact of PNC Bank’s non-renewal of PDC’s line of
credit. He testified that although PNC Bank opted not to renew
PDC’s credit facility, it continued to support PDC [Doc. No. 858, p. 30]. He further testified that Huron advised PDC to continue
to operate in the normal course” following Bogjanles’ departure
[Doc. No. 85-8, p. 35].
fiduciary duty should be determined by a jury. See Tin Originals,
391 S.E. at 832. Having concluded that genuine disputes as to
material facts preclude summary judgment as to the existence of a
fiduciary duty, the Court pretermits any discussion of breach and
damages, the remaining elements of a breach of fiduciary duty claim
under North Carolina law.
Like its claim for breach of fiduciary duty, Koch’s claim for
fiduciary duty during the relevant time period. See Keener, 560
S.E.2d at 822-23. Because the Court has decided that the facts
that would create a fiduciary duty under Keener are disputed,
summary judgment is unwarranted.
Unfair and Deceptive Trade Practices (UDTPA)
Koch cites two transactions which it contends should trigger
UDTPA liability: (1) PDC’s purchase of $3.6 million in chicken
products from Koch with neither the means nor the intention of
paying for it; and (2) preferential payments to corporations owned
and controlled by members of the Sullivan and Pate families.
Regarding the first trigger, the same disputed facts that
will establish whether Defendants owed Koch a fiduciary duty will
“deceptively” in purchasing $3.6 million in chicken products from
Koch from December 2015 to February of 2016.
UDTPA liability relative to this conduct turns on the disputed
facts concerning PDC’s cash flow solvency and its capacity to
continue operations in the normal course after Bojangles’ exit and
PNC Bank’s non-renewal of its line of credit. If it is proved that
financials reveal it could have
reasonable expectation of paying for the orders and could have had
no reasonable expectation of continuing business in the ordinary
course, then such conduct would qualify as “unfair” under the
UDTPA. See Carcano, 684 S.E. 2d at 50.
intention of paying for it would “offend established public policy”
of North Carolina, see id., and imposing liability for such conduct
would advance UDTPA’s purpose of ensuring “good faith and fair
dealings between buyers and sellers at all levels of commerce.”
Wilson v. Blue Ridge Elec. Membership Corp., 578 S.E.2d 692, 694
(N.C. Ct. App. 2003) (internal quotations omitted). But again,
summary judgment on this issue is inappropriate because the parties
dispute the critical facts about PDC’s prospects of resuming
ordinary business operations, its ability to pay bills in the
ordinary course, and its intentions regarding deferred payment of
determine whether PDC indeed acted “unfairly” or “deceptively” in
placing its December 2015 – February 2016 orders with Koch.
related entities, the facts are not disputed. The parties agree
that PDC paid P&D, a corporation owned by members of the Sullivan
family, $65,000 per month in rent from December 2015 to April 2017.
The parties agree that Malcolm Sullivan had minority interests in
P&D ($2.34%) and P&S (25%) and that Mike Pate had a minority
interest in P&D (4.43%). The critical inquiry, then, is the legal
significance of these payments.
The parties cite no North Carolina case law imposing UDTPA
liability on a preferential payment theory —— particularly in the
misrepresentation. It appears that Koch attempts to bootstrap its
UDTPA claim with the facts it marshalled in support of its breach
of fiduciary duty claim. Given this, and the absence of authority
supporting UDTPA recovery on the sole basis of “preferential
payments,” the Court finds that Koch has not met its summary
judgment burden and denies summary judgment at this point on this
iv.) Civil Conspiracy
Koch contends that the undisputed facts show that Defendants
conspired to constructively defraud it out of several million
dollars [Doc. No. 86, p. 21]. As the Court noted above, factual
disputes preclude it from determining as a matter of law whether
Defendants committed constructive fraud. Therefore, viewing the
facts and law in Defendants’ favor, the Court denies summary
judgment to Koch and against Defendants on the issue of civil
Defendants’ Motion for Summary Judgment
Defendants moved for summary judgment on Koch’s claims of
breach of fiduciary duty (Count IV), constructive fraud (Count V),
unfair and deceptive trade practices (Count VI) and conspiracy
(Count VIII) [Doc. No. 87].
Defendants contend that Koch’s breach of fiduciary duty claim
should be dismissed because Defendants did not owe Koch a fiduciary
duty as a matter of North Carolina law. And without an underlying
fiduciary duty, Defendants reason, Koch’s UDTPA, constructive
fraud, and conspiracy claims —— each requiring a predicate wrong
—— cannot survive summary judgment [Doc. No. 88, p. 19].
Breach of Fiduciary Duty and Constructive Fraud
Defendants argue that they owed no fiduciary to Koch until
April 2016, when PDC’s loan talks with AloStar ended [Doc. No. 88,
p. 12]. Until the loan deal became unworkable, Defendants submit,
PDC was “prosecuting its business in good faith, with a reasonable
prospect and expectation of doing so.” Keener, 560 S.E. 2d at 825.
On the fiduciary duty issue, Defendants’ summary judgment
evidence focuses on the financial status of PDC up to April 2016.
As evidence that PDC was cash flow solvent until then, Defendants
point to PDC’s $105,000 payment to Koch in March of 2016 and
characterize it as an “ordinary course” payment [Doc. No. 88, p.
12]. Aside from this payment, however, Defendants fail to cite to
record evidence tending to show that PDC was paying its bills as
they became due. See FED. R. CIV. P. 56(c)(1)(A) (assertions must
be supported by citation to parts of materials in the record);
Fennell v. Marion Ind. Sch. Dist., 804 F.3d 398, 414 n. 32 (5th
In opposition, Koch describes PDC circa December 2015 as a
corporation fated to fail. It underscores PDC’s admitted balance
sheet insolvency, PDC’s senior lender’s non-renewal of PDC’s line
of credit, and PDC’s loss of 60% of its revenue due to Bojangles’
departure [Doc. No. 88].
Viewing the evidence in Koch’s favor, the Court finds summary
creditor’s breach of fiduciary duty claim unless the plaintiff
fails to offer evidence from which a jury could conclude that the
corporation was “winding up” or dissolving. USA Trouser, 612 Fed.
sufficient evidence, North Carolina courts allow the jury to
determine whether the corporation was winding-up or dissolving
and, thus, whether a director-creditor fiduciary relationship
existed.” Id. at 160 (citing Keener, 560 S.E.2d at 826). As the
Court stated above relative to the fiduciary duty issue in Koch’s
motion, genuine issues of material fact remain regarding the cash
flow solvency of PDC and the date on which it was no longer
“conducting its business in good faith, with a reasonable prospect
and expectation of doing so.” USA Trouser, 612 Fed. App’x at 160.
judgment on Koch’s breach of fiduciary duty and constructive fraud
Unfair and Deceptive Trade Practices (UDTPA)
Defendants argue that Koch’s UDTPA claim must be dismissed
because Koch has insufficiently pleaded the claim and because Koch
cannot show that Defendants owed Koch a fiduciary duty during the
relevant period [Doc. No. 88, p. 19].
On the first contention, the Court disagrees. Koch has pointed
to record evidence which, if proved true, tends to show practices
qualifying as “unfair” or “deceptive” under the UDTPA. See supra
§ III(A)(iii). In so doing, Koch is not merely resting upon the
support[ing] by summary judgment evidence specific facts showing
the existence of a genuine issue for trial.” Ragas v. Tennessee
Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998).
Defendants’ second contention is not grounds for entry of
summary judgment. The Court has highlighted the existence of
genuine issues of material fact regarding the financial condition
of PDC during the relevant period, and by extension, the point at
which a fiduciary duty may have arisen under Keener. See supra §§
Defendants fail to carry their summary judgment burden of
proving the absence of material factual disputes on Koch’s UDTPA
claim. Therefore, the Court denies Defendants’ motion for summary
judgment on Koch’s UDTPA claim.
Conspiracy to Constructively Defraud
Defendants ask the Court to enter summary judgment on Koch’s
conspiracy claim on the ground that Koch must prove that Defendants
owed it a fiduciary duty but the undisputed facts and law show
that Koch cannot do so [Doc. No. 88, pp. 19-20].
determined that genuine issues of material fact preclude summary
against Koch on that claim, summary judgment on Koch’s conspiracy
to defraud claim —— a claim founded upon the same disputed facts
as Koch’s constructive fraud and breach of fiduciary duty claims
—— is improper.
The claims in this case center on disputed facts regarding
the financial status of PDC from December 2015 to February 2016.
Defendants owed Koch a fiduciary duty, and if so, whether it was
breached. These same facts will color the jury’s verdict on
constructive fraud, UDTPA liability, and conspiracy because each
theory of liability depends on the existence of a fiduciary duty
—— specifically, the point at which PDC was no longer “prosecuting
expectation of doing so.” Keener, 560 S.E.2d at 825.
IT IS HEREBY ORDERED that the Motion for Summary Judgment
filed by Plaintiff Koch Foods, Inc. [Doc. No. 85] is DENIED;
IT IS FURTHER ORDERED that the Motion for Summary Judgment
filed by Defendants [Doc. No. 87] is DENIED;
SO ORDERED this the 25th day of October, 2017.
/s/ David Bramlette_________
UNITED STATES DISTRICT JUDGE
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