LANDRESS v. TIER ONE SOLAR LLC et al

Filing 34

MEMORANDUM OPINION AND ORDER. Signed by JUDGE LORETTA C. BIGGS on 3/21/2017, that Defendants' motions to dismiss, (ECF Nos. 15 , 17 , 19 ), are GRANTED IN PART AND DENIED IN PART. The Court GRANTS Defendants' motions to the extent th ey seek entry of a stay of the proceedings thus, this action is STAYED pending the resolution of James Mason's Chapter 7 bankruptcy action in the United States District Court, Eastern District of North Carolina, Case No. 14-07105-5-DMW. The parties are directed to notify the Court within 14 days following resolution of the pending bankruptcy action. Defendants' motions to dismiss are DENIED as to all other matters. (Daniel, J)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
SCOTT LANDRESS,
Plaintiff,
v.
TIER ONE SOLAR LLC,
SPV SOLAR ONE LLC,
ISAAC B. HORTON III, and
AHMED SHAIKH,
Defendants.

)
)
)
)
)
)
)
)
)
)
)
)

1:15CV354

MEMORANDUM OPINION AND ORDER
LORETTA C. BIGGS, District Judge.
Plaintiff, Scott Landress, brings this diversity action against Defendants Tier One Solar,
LLC (“TOS”)1, SPV Solar One LLC (“SPV”), Isaac B. Horton III (“Horton”), and Ahmed
Shaikh (“Shaikh”), alleging state law claims, including violations of the North Carolina
Securities Act. Defendants SPV, Horton, and Shaikh have each moved to dismiss Plaintiff’s
Complaint pursuant to Rules 12(b)(6) and 12(b)(7) of the Federal Rules of Civil Procedure, or
in the alternative, to stay this action. (ECF Nos. 15, 17, 19.) For the reasons set forth below,
the Court grants in part Defendants’ motions to the extent that the motions request a stay of
this action, and the Court denies the motions to the extent that they seek dismissal of Plaintiff’s
claims.

1

To date, TOS has not entered an appearance in this case.

I.

BACKGROUND
TOS is a subsidiary of parent company, SPV. (ECF No. 4 ¶ 21.) At the time of the

transactions at issue, Defendant Horton served as Chief Executive Officer of TOS, (ECF No.
4-1 at 19), as well as “founder and managing partner of SPV.” (ECF No. 4 ¶ 16.) Defendant
Shaikh served as Chief Operating Officer of TOS as well as a principal of SPV who oversaw
SPV’s day-to-day operations. (Id. ¶ 17.) James Mason (“Mason”), who is not a party to this
action,2 served as the Chief Financial Officer of TOS as well as a principal of SPV. (Id. ¶ 18.)
Mason, having had a prior business relationship with Plaintiff, approached him about
investing in TOS. (Id. ¶ 24.) In his attempt to secure Plaintiff’s investment, Mason made a
number of representations to Plaintiff about TOS’s solvency including: that TOS was solvent
and able to repay Plaintiff’s investment; that Horton had contributed “approximately $1.7
million in cash” to TOS; that, over a period of time, he (Mason) had personally invested $1.4
million in TOS; and that the other SPV/TOS Managers had likewise invested $1.5 million in
TOS. (Id. ¶¶ 25–28.)
Ultimately, Plaintiff decided to invest $1 million in TOS. (Id. ¶ 29.) In exchange for
this investment, Plaintiff, through Mutsy I, LLC (“Mutsy”), an entity which he “wholly own[s]
and manag[es],” received secured and unsecured notes. (Id. ¶¶ 30, 31.) The parties executed
a number of investment documents, including a Secured Convertible Promissory Note
(“Secured Note”) for $850,000 and accompanying Security Agreement, executed between
Mutsy and TOS, and personally guaranteed by Mason, (id. ¶ 32; ECF No. 4-1 at 2). Each

2

“Mason filed for bankruptcy protection on December 8, 2014,” prior to this action being filed. (ECF
No. 4 ¶ 11.)

2

document, except a Note Purchase Agreement, is signed by Isaac Horton as CEO on behalf
of TOS and SPV, and by Alexander G. Fraser as Attorney-in-Fact on behalf of Mutsy and
Scott Landress. (See ECF Nos. 4-1 at 19, 20; 4-2 at 10, 11; 4-3 at 2; 4-6 at 5, 6.) Each document
is dated December 23, 2013. (ECF Nos. 4-1 at 2; 4-2 at 2; 4-3 at 2; 4-6 at 2.)
On April 30, 2014, Plaintiff notified TOS “that the principal amount ($850,000), the
premium amount ($212,500), and the related legal fees of approximately $25,000 (as of that
date) were due under the Secured Note.” (ECF No. 4 ¶ 59.) In his Notice, Plaintiff “agreed
to refrain from exercising his rights against TOS for five (5) business days to allow TOS the
opportunity to negotiate an extension of the Secured Note’s payment terms.” (Id. ¶ 62.) At
the expiration of this five-day period, Plaintiff sent two additional notices seeking “acceptable
stand-still terms,” or full payment under the terms of the Secured and Unsecured Notes,
including “accrued interest, post-default interest, and fees.” (Id. ¶ 69.)3
Although Plaintiff did not receive any payments or “acceptable stand-still terms” in
response to his notices, in November 2014, he did receive TOS and SPV financial statements
“for the period ending December 31, 2013” which showed that “the sum total of the
SPV/TOS Managers’ investment in SPV and TOS was just $25,000, not $4 million or so as
TOS represented.” (Id. ¶¶ 71–73.) The SPV/TOS Managers obtained additional funding
from other sources which they commingled, misappropriated, and used to pay to themselves
in the form of “management fees,” advances, and back pay, instead of repaying Plaintiff as

3

While the record before the Court does not include copies of any of the notices and letters sent by
Plaintiff to TOS demanding payment, for the purposes of this motion, the Court is required to accept
the factual allegations in the Complaint as true. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

3

required under the investment documents. (Id. ¶¶ 75–80.) Plaintiff was paid $125,000 on
September 2, 2014. (ECF No. 4-5 at 2.)
On December 8, 2014, Mason filed for personal bankruptcy triggering “a stay of
judicial proceedings against [him].” (ECF No. 4 ¶ 82.) Shortly thereafter, on January 17,
20154, SPV, Horton, Shaikh, TOS, and Mason entered into a Confidential Settlement
Agreement and Release (“Settlement Agreement”) “to (i) restate the ownership interest of
both SPV and TOS, (ii) confirm the liabilities and other obligations of both SPV and TOS,
and (ii) [sic] release SPV Parties5 and the TOS Parties from any and all claims as set forth
herein.” (ECF No. 4-7 at 1; see also ECF No. 4 ¶ 85.) The Settlement Agreement provides, in
part, that: (i) a majority interest (77.5%) in TOS shall be held by Mason while a 1% interest in
TOS shall be held by SPV, (ECF No. 4-7 ¶ 2); (ii) “TOS shall remain liable to . . . Scott
Landress (“Landress”) under that certain promissory note dated December 23, 2013,” (id. ¶
3); and (iii) the TOS parties indemnify the SPV Parties “from any and all lawsuits, liabilities,
actions, causes of action, claims, demands, damages, costs, and debts of any kind whatsoever,
both at law and in equity, whether known or unknown, which the TOS Parties ever had, now
has or may have against [the SPV Parties],” (id. ¶ 8(a).) A few months after execution of the
Settlement Agreement, Plaintiff filed this action.
Before the Court are: (i) SPV Solar One LLC’s Motion to Dismiss Pursuant to Rule
12(b)(6) and 12(b)(7); (ii) Motion of Defendant Isaac B. Horton III to Dismiss Plaintiff’s First

4

Although “executed as of January 17, 2015,” the Settlement Agreement states that it is “effective as
of November 25, 2014.” (ECF No. 4-7 at 1.)
5

The Settlement Agreement identifies the “SPV Parties” as SPV, Horton, Shaikh and Mason. The
“TOS Parties” are identified in the Settlement Agreement as TOS and Mason.

4

Amended Complaint;6 and (iii) Motion of Defendant Ahmed Shaikh to Dismiss Plaintiff’s
First Amended Complaint. (ECF Nos. 15, 17, 19.) Neither Horton nor Shaikh provide an
independent basis for dismissal, nor do they provide a brief in support of their motions to
dismiss. Rather, Horton and Shaikh state in their motions that they “expressly rel[y] upon the
Motion to Dismiss and supporting brief filed . . . by [SPV],” and they adopt and incorporate
by reference “the arguments and authorities put forward by Defendant SPV in support of its
Motion to Dismiss.” (ECF No. 17 at 1; ECF No. 19 at 1.) Because SPV’s motion and
supporting brief addresses only Plaintiff’s claims of control person liability (fourth cause of
action), fraudulent conveyance (fifth cause of action), and piercing the corporate veil (sixth
cause of action), and because no defendant argues for dismissal of the remaining causes of
action, the Court will treat Horton’s and Shaikh’s motions as seeking dismissal as to the causes
of action addressed by SPV only.7

6

The Court notes that, prior to filing his motion to dismiss, Horton filed an Answer, (ECF No. 9).
Under Federal Rule of Civil Procedure 12(b), a motion to dismiss pursuant to Rules 12(b)(6) and
12(b)(7) is untimely when filed after the filing of an answer. See Fed. R. Civ. P. 12(b). However, under
Rule 12(h)(2), the defenses of “[f]ailure to state a claim upon which relief can be granted [and failure]
to join a person required by Rule 19(b) . . . may be raised . . . by a motion under Rule 12(c).” Fed. R.
Civ. P. 12(h)(2); see Edwards v. City of Goldsboro, 178 F.2d 231, 243 (4th Cir. 1999). The Court will treat
Horton’s motion as a Rule 12(c) motion for judgment on the pleadings raising the defenses of failure
to state a claim upon which relief can be granted and failure to join a required party. Id.
7

Where a party fails to develop an issue in its brief, courts have deemed the issue waived and need
not address its merits. See Belk, Inc. v. Meyer Corp., U.S., 679 F.3d 146, 152 n.4 (4th Cir. 2012). Thus,
the Court will not consider the remaining causes of action (namely, the First, Second, Third, Seventh,
Eighth, and Ninth Causes of Action), which remain pending in this action.

5

II.

STANDARDS OF REVIEW
A. Rule 12(b)(7) Failure to Join a Party under Rule 19
Rule 12(b)(7) provides that an action may be dismissed for failure to join a party under

Rule 19. See Fed. R. Civ. P. 12(b)(7). The moving party on a Rule 12(b)(7) motion to dismiss
bears the burden of showing that an absent party is necessary and indispensable pursuant to
Rule 19. Am. Gen. Life & Accident Ins. Co. v. Wood, 429 F.3d 83, 92 (4th Cir. 2005). “The
inquiry contemplated by Rule 19 is a practical one” which is left “to the sound discretion of
the trial court.” Coastal Modular Corp. v. Laminators, Inc., 635 F.2d 1102, 1108 (4th Cir. 1980).
The court must initially determine whether the absent party should be joined as a party to the
action in accordance with the criteria set forth in Rule 19(a). See Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Rite Aid of S.C., Inc., 210 F.3d 246, 250 (4th Cir. 2000). If joinder of an
otherwise required party is not feasible, the court must then determine whether, under Rule
19(b), the absent party is indispensable such that the action cannot proceed in that party’s
absence. Fed. R. Civ. P. 19(b); Pettiford v. City of Greensboro, 556 F. Supp. 2d 512, 517 (M.D.N.C.
2008) (citing Wood, 429 F.3d at 92). Generally, “courts are extremely reluctant to grant motions
to dismiss based on nonjoinder, and dismissal will be ordered only when the defect cannot be
cured and serious prejudice or inefficiency will result.” RPR & Assocs. v. O’Brien/Atkins Assocs.,
P.A., 921 F. Supp. 1457, 1463 (M.D.N.C. 1995), aff’d, 103 F.3d 120 (4th Cir. 1996).
B. Rule 12(b)(6) Failure to State a Claim
Under Rule 12(b)(6), an action may be dismissed for failure to state a claim upon which
relief can be granted. See Fed. R. Civ. P. 12(b)(6). Such a motion “challenges the legal
sufficiency of a complaint,” including whether it meets the pleading standard of Rule 8(a)(2).

6

Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009). Rule 8(a)(2) requires a complaint to
contain “a short and plain statement of the claim showing that the pleader is entitled to relief,”
Fed. R. Civ. P. 8(a)(2), thereby “giv[ing] the defendant fair notice of what the . . . claim is and
the grounds upon which it rests,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting
Conley v. Gibson, 355 U.S. 41, 47 (1957)).
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). The Court must accept all factual
allegations in the Complaint as true, id., and construe all factual allegations in the light most
favorable to the plaintiff, Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).
Generally, on a Rule 12(b)(6) motion to dismiss, a court cannot consider documents
beyond the complaint without converting the motion into a motion for summary judgment.
See Occupy Columbia v. Haley, 738 F.3d 107, 116 (4th Cir. 2013). The court can, however,
properly consider “documents attached to the complaint, as well as those attached to the
motion to dismiss, so long as they are integral to the complaint and authentic.” Philips v. Pitt
Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (citation omitted). The Court will therefore
consider the documents attached to, and referenced in, the Complaint, the authenticity of
which is not challenged by any party.
III.

DISCUSSION
A. Mason Is A Necessary and Indispensable Party Under Rule 19

Defendants first argue that, with regard to Plaintiff’s claims of control person liability,
fraudulent conveyance, and piercing the corporate veil, “Mason is a necessary party to these

7

claims,” (ECF No. 16 at 9), and his joinder is not feasible, (id. at 12). Thus, according to
Defendants, “this action should be dismissed or stayed.” (Id.) Plaintiff argues, on the other
hand, that Mason is neither a required nor indispensable party and his absence does not require
that the Court dismiss or stay this case; rather, according to Plaintiff, the action should be
allowed to proceed with the existing parties. (ECF No. 22 at 12–20.)
Pursuant to Rule 19, courts must engage in a two-pronged inquiry to determine
whether joinder of a party should be required. See Fed. R. Civ. P. 19. “First, the district court
must determine whether a party is ‘necessary’ to the action under Rule 19(a). If the court
determines that the party is ‘necessary,’ it must then determine whether the party is
‘indispensable’ to the action under Rule 19(b).” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 210
F.3d at 249 (footnote omitted) (citing Fed. R. Civ. P. 19(a), (b)). “Only necessary persons can
be indispensable, but not all necessary persons are indispensable.” Schlumberger Indus., Inc. v.
Nat’l Sur. Corp., 36 F.3d 1274, 1285–86 (4th Cir. 1994) (citing Fed. R. Civ. P. 19(b)). The
court’s determination of whether a party is necessary and indispensable is fact-specific and
must rest upon “the practical potential for prejudice in the context of the particular factual
setting presented by the case at bar.” Id. “Courts are loath to dismiss cases based on
nonjoinder of a party, so dismissal will be ordered only when the resulting defect cannot be
remedied and prejudice or inefficiency will certainly result.” Owens-Illinois, Inc. v. Meade, 186
F.3d 435, 441 (4th Cir. 1999). Thus, “a decision whether to dismiss [under Rule 19] must be
made pragmatically . . . rather than by procedural formula.” Provident Tradesmens Bank & Tr.
Co. v. Patterson, 390 U.S. 102, 119 n.16 (1968).
Under Rule 19(a)(1), a person is a “required party” if:

8

(A) in the person’s absence, the court cannot accord
complete relief among existing parties; or
(B) that person claims an interest relating to the
subject of the action and is so situated that
disposing of the action in the person’s absence
may:
(i) as a practical matter impair or impede
the person’s ability to protect the
interest; or
(ii) leave an existing party subject to a
substantial risk of incurring double,
multiple, or otherwise inconsistent
obligations because of the interest.
Fed. R. Civ. P. 19(a)(1). “Thus, Rule 19(a)(1)(A) focuses on the relief to existing parties,
whereas Rule 19(a)(1)(B) focuses on the interest of the absent person and the effect, if any,
his absence would have on either himself or the existing parties.” Pettiford, 556 F. Supp. 2d
512 at 517.
1. Mason is a required party under Rule 19(a)
a. Controlling person liability claim under N.C. Gen. Stat. § 78A-56(c)
Defendants argue that because Mason is responsible for making the alleged
misrepresentations to Plaintiff prior to securing Plaintiff’s investment, and because Mason
allegedly knew that his statements to Plaintiff were false and misleading, “[t]o not have Mason
in this action . . . limits the remedy that the Court can afford here in his absence.” (ECF No.
16 at 9.) Defendants also argue that their liability “under N.C. Gen. Stat. § 78A-56(c) is
secondary and contingent on the liability of an alleged misstatement made by Mason.” Id.
The North Carolina Securities Act includes a “controlling person” provision which
provides as follows:
Every person who directly or indirectly controls a
person liable under subsection (a), (b), or (b1) of this
9

section, every partner, officer, or director of the person, every
person occupying a similar status or performing similar
functions, . . . who materially aids in the sale is also liable jointly
and severally with and to the same extent as the person,
unless able to sustain the burden of proof that the
person did not know, and in the exercise of reasonable
care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist.
N.C. Gen. Stat. § 78A-56(c)(1) (emphasis added).
Here, Plaintiff alleges that TOS solicited Plaintiff’s investment, and that TOS is the
party over whom SPV, Horton, and Shaikh act as controlling persons. (ECF No. 4 ¶¶ 126–
132.) Thus, before there can be a finding as to the secondary liability of SPV, Horton, and
Shaikh as controlling persons, there must be a determination as to the underlying liability of
TOS. However, TOS has not made an appearance in this action and further is included as an
asset of the bankruptcy estate in Mason’s pending bankruptcy action in the Eastern District
of North Carolina, as is a one-fifth interest in SPV.8 In light of this, the Court would be unable
to accord any relief to Plaintiff with respect to its claims against TOS in the instant action
because any finding here as to TOS’s potential liability would necessarily implicate and/or
impact the ongoing bankruptcy proceedings. Such a finding as to TOS’s potential liability here
may also impair or impede Mason’s ability to protect his interest in the subject of the action –
TOS – given that, per the Settlement Agreement executed on January 17, 2015 between the

8

The Court “may properly take judicial notice of matters of public record.” Sec’y of State for Defence v.
Trimble Navigation Ltd., 484 F.3d 700, 705 (4th Cir. 2007).

10

SPV Parties and the TOS Parties, Mason holds a 77.5% membership interest in TOS, (ECF
No. 4-7 ¶ 2).9
Plaintiff argues that Mason is not a required party as to this claim and the Court can
provide complete relief because he seeks to hold SPV, Horton, and Shaikh “jointly and
severally liable for TOS’s sale of the notes using false and misleading statements.” (ECF No.
22 at 13.) Although as a general rule, joint tortfeasors are not “necessary” or “indispensable”
parties within the meaning of Rule 19,10 the Court is required to consider “the practical
potential for prejudice in the context of the particular factual setting presented by the case at
bar,” Schlumberger Indus., Inc., 36 F.3d at 1286. In so doing, the Court concludes that any
potential relief as to this claim would likely interfere with or, at the very least, be intertwined
with, the pending bankruptcy court proceedings involving TOS, and would likely affect
Mason’s ability to protect his interest in TOS. Mason is, therefore, required for Plaintiff to
proceed on his controlling person liability claim.
b. Fraudulent conveyance claim
In his Complaint, Plaintiff alleges that the funds he invested into TOS were
“commingled with SPV assets, and the SPV/TOS Managers began paying themselves more
than $1 million under the pretext of supposed ‘management fees,’ ‘[a]dvance[s] towards
expenses,’ and ‘[b]ack pay.’” (ECF No. 4 ¶ 134 (alterations in original).) Plaintiff therefore

9

Though the validity of the Settlement Agreement entered into by Defendants and Mason is unknown,
under its terms SPV holds a 1% ownership interest in TOS, and Horton and Shaikh do not currently
have any ownership interest in TOS. (ECF No. 4-7 ¶ 2.)
10
See Fed. R. Civ. P. 19(a), advisory committee notes (“a tortfeasor with the usual ‘joint-and-several’
liability is merely a permissive party to an action against another with like liability”); Temple v. Synthes
Corp., 498 U.S. 5, 7 (1990) (per curiam) (“It has long been the rule that it is not necessary for all joint
tortfeasors to be named as defendants in a single lawsuit.”).

11

seeks an order voiding TOS’s illegal transfers to SPV, Horton, and Shaikh, and enjoining
Defendants “from further disposing of TOS’s assets and property – all of which are subject
to Landress’ security interest pursuant to the TOS Security Agreement.” (Id. ¶¶ 139, 140; see
id. at 40 ¶ (e); ECF No. 22 at 14.) Defendants argue that Plaintiff seeks “injunctive relief or
[a] constructive trust over TOS assets [which] requires the presence of all SPV and TOS
managers or else ‘the court cannot accord complete relief amongst the parties.’” (ECF No.
16 at 9–10 (quoting Fed. R. Civ. P. 19(a)).)
In support of their argument Defendants cite Allen ex rel. Allen v. Devine, 670 F. Supp.
2d 164 (E.D.N.Y. 2009). In that case, the plaintiff sought joint and several monetary damages,
as well as the creation of a constructive trust and an injunction preventing the defendants from
using, selling, or transferring any funds obtained from plaintiff, or any assets obtained with
plaintiff’s funds. Allen, 670 F. Supp. 2d at 169. That court denied the defendants’ Rule
12(b)(7) motion to dismiss as to plaintiff’s claims for joint and several monetary damages; but,
with respect to plaintiff’s requests for equitable relief, the court found that the non-parties to
whom the plaintiff alleged funds were improperly diverted were necessary in order to provide
complete relief to the plaintiff. Id. at 169–70.
Here, Plaintiff argues in his response brief that, unlike the Plaintiff in Allen, he “does
not seek a constructive trust, and [his] fraudulent conveyance claim does not require one.”
(ECF No. 22 at 14, 15.) Plaintiff does, however, seek to enjoin “the SPV/TOS Managers and
SPV . . . from further disposing of TOS’s assets and property – all of which are subject to
Landress’ security interest pursuant to the TOS Security Agreement.” (ECF No. 4 ¶ 140.)
Plaintiff has alleged that Mason is one of the SPV/TOS Managers, along with Horton and

12

Shaikh, (id. ¶ 2), and per the Settlement Agreement, Mason owns a majority interest in TOS,
(ECF No. 4-7 ¶ 2). Thus, Mason has an interest in the subject of this action – TOS’s assets –
such that disposing of this action would likely affect his (Mason’s) ability to protect his interest.
See Fed. R. Civ. P. 19(a)(1)(B). Consequently, to the extent that Plaintiff seeks an injunction
regarding the further disposition of TOS’s assets, over which it appears Mason may own a
majority interest, the Court finds that Mason is a required party.
c. Piercing the corporate veil 11
In his Complaint, Plaintiff seeks “an order allowing the piercing of TOS and SPV’s
corporate veil and finding SPV, Horton, and Shaikh fully and additionally liable for any
judgment entered against TOS in this action.” (ECF No. 4 at 40 ¶ (f).) Plaintiff nonetheless
argues that Mason need not be joined as a party to this action and “[t]he Court may grant
Landress the requested relief without joining any additional parties.” (ECF No. 22 at 17.)
Defendants contend that Mason is a shareholder of TOS and “[w]hen one is asking to
disregard the corporate form and hold the shareholders liable, it naturally follows that all the
shareholders should be a part of that action.” (ECF No. 16 at 11.)
As a general rule, “a corporation is an entity, separate and distinct from its officers and
stockholders, and . . . its debts are not the individual indebtedness of its stockholders.” DeWitt
Truck Brokers, Inc. v. W. Ray Fleming Fruit Co., 540 F.2d 681, 683 (4th Cir. 1976). However,
under the equitable doctrine of piercing the corporate veil, in extraordinary circumstances,

11

Plaintiff’s Complaint characterizes piercing the corporate veil as a cause of action. However, as will
be discussed in Section C. 3. below, piercing the corporate veil is not itself an independent cause of
action but is a means of imposing liability on an underlying claim. Shearson Lehman Hutton, Inc. v.
Venners, 165 F.3d 912, 1998 WL 761505, at *2 (4th Cir. 1998) (per curiam).

13

courts will disregard the corporate form, “exposing those behind the corporation to liability.”
Keffer v. H.K. Porter Co., 872 F.2d 60, 64 (4th Cir. 1989). “The standard for piercing the
corporate veil is high, but its purpose is to ‘achieve an equitable result’ by ‘focus[ing] on reality
and not form, on how the corporation operated and the [defendants’] relationship to that
operation.’” Flame S.A. v. Freight Bulk Pte. Ltd., 807 F.3d 572, 587 (4th Cir. 2015) (first
alteration in original) (quoting Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527, 544 (4th Cir.
2013)).
Here, per the Settlement Agreement executed on January 17, 2015 between the SPV
Parties and the TOS Parties, SPV holds a 1% ownership interest in TOS while Mason holds a
77.5% membership interest in TOS. 12 (ECF No. 4-7 ¶ 2.) Thus, to the extent that Plaintiff
seeks to pierce the corporate veil of TOS in order to “expos[e] those behind the corporation
to liability,” Keffer, 872 F.2d at 64, Mason, must be joined as a party to this action. In his
absence, if Plaintiff were to prevail in his effort to pierce TOS’s corporate veil, it would be
impossible for this Court to “accord complete relief among existing parties.” Fed. R. Civ. P.
19(a). Further, because TOS is property of the bankruptcy estate, if this Court were to
proceed, there would likely be two independent courts making adjudications with respect to
the same property, which could lead to inconsistent rulings.
Plaintiff argues that because he seeks to hold Defendants liable as joint tortfeasors, he
need not join any additional parties. (See ECF No. 22 at 16.) This argument, however, is
inapplicable given that, as Defendants argue, Plaintiff seeks to hold all managers and owners

12

Under the terms of the Settlement Agreement, Horton and Shaikh do not currently have any
ownership interest in TOS. (ECF No. 4-7 ¶ 2.)

14

of TOS liable for TOS’s breaches and defaults. (ECF No. 16 at 10; ECF No. 4 ¶ 155.)
Accordingly, the Court finds that Mason is a necessary party in order for Plaintiff to proceed
under the corporate veil-piercing theory.
2. Mason is an indispensable party under Rule 19(b)
Having concluded that Mason is a required party as to Plaintiff’s claims of control
person liability and fraudulent conveyance, as well as Plaintiff’s corporate veil-piercing theory
of recovery, the Court must now determine whether Mason, as a necessary party, is also
indispensable to this action such that, in his absence, this case cannot proceed.
Mason filed for bankruptcy on December 8, 2014, (ECF No. 4 ¶ 82), which triggered
a bankruptcy stay of judicial proceedings against him, under 11 U.S.C. § 362.13 (Id.) Plaintiff
now states in his supplemental brief14 that, on August 17, 2016, Mason was personally
discharged by the Bankruptcy Court, and the automatic stay is no longer in effect. (ECF No.
32 at 2–3.) While the Court will take judicial notice that Mason was personally discharged in
the bankruptcy action, Plaintiff’s further statements regarding its effect are not supported by
any independent evidence in the record. It appears, therefore, that Mason’s ability to be joined
in the instant action remains infeasible or, at best, questionable.
Under Rule 19(b), when joinder of a necessary party is not feasible, the court must
decide “whether, in equity and good conscience, the action should proceed among the existing

13

This statute provides that the filing of a bankruptcy petition “operates as a stay . . . of . . . any act to
collect, assess, or recover a claim against the debtor that arose before the commencement of the case
under this title.” 11 U.S.C. § 362(a).
14

On January 31, 2017, this matter was called for hearing on the pending motions to dismiss.
Following the hearing, the parties submitted supplemental briefing, as ordered by the Court, on issues
related to the pending bankruptcy action involving Mason.

15

parties or should be dismissed.” Fed. R. Civ. P. 19(b). In so doing, the court must consider
the following factors:
(1)
(2)

(3)
(4)

the extent to which a judgment rendered in the
person’s absence might prejudice that person or
the existing parties;
the extent to which any prejudice could be
lessened or avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or
(C) other measures.
whether a judgment rendered in the person’s
absence would be adequate; and
whether the plaintiff would have an adequate
remedy if the action were dismissed for
nonjoinder.

Fed. R. Civ. P. 19(b). “Dismissal of a case is a drastic remedy, however, which should be
employed only sparingly.” Teamsters Local Union No. 171 v. Keal Driveaway Co., 173 F.3d 915,
918 (4th Cir. 1999).
Defendants contend generally that Plaintiff’s claims against SPV (and by adoption of
SPV’s brief, Plaintiff’s claims against Horton and Shaikh as well), “should be dismissed or
stayed because Mason is an indispensible [sic], unavailable party to the adjudication of this
action and the rights of the other defendants.” (ECF No. 16 at 15.) Plaintiff, on the other
hand, argues that Mason is not an indispensable party because “Defendants are wholly liable
to Landress for their roles in the scheme to defraud him, and the Court can grant Landress
complete relief without impacting Mason.” (ECF No. 22 at 18.)
The Court finds that the Rule 19(b) factors do not weigh in Plaintiff’s favor. As noted
above, Plaintiff seeks a damages award against TOS, Horton, and Shaikh with respect to the
controlling person liability claim. (ECF No. 4 at 39 ¶ (d).) Also, as to Plaintiff’s fraudulent

16

conveyance claim, he seeks to enjoin further disposition of TOS’s assets. (Id. at 40 ¶ (e).)
Further, Plaintiff seeks to pierce TOS’s corporate veil to impose liability “for any judgment
entered against TOS in this action.” (Id. ¶ (f).) As such, any judgment rendered in Mason’s
absence regarding TOS’s potential liability as to these claims would likely prejudice Mason as
that corporation’s majority shareholder. In addition, given Mason’s role as TOS’s majority
shareholder, and the fact that TOS is included as an asset of the bankruptcy estate, it is unlikely
that this Court could effectively tailor any potential relief as to these claims which would not
impact the pending bankruptcy action, and which would lessen or avoid the impact to Mason,
a non-party. Moreover, should Plaintiff prevail on these claims, it is unlikely that a judgment
in Plaintiff’s favor would be adequate given that the majority shareholder of TOS is not a party
to this action and those who are parties to this action collectively own a mere 1% of TOS.
Notwithstanding the Court’s findings above, the Court concludes that it is unlikely that
Plaintiff would have an adequate remedy against the current Defendants for their alleged
wrongdoings if these claims were summarily dismissed for nonjoinder. Accordingly, the Court
will not dismiss this action for nonjoinder. The Court will, instead, consider whether the
particular circumstances here warrant a stay of the action, pending the resolution of the
bankruptcy case.
B. The Court Will Stay This Action
As recognized earlier, Mason filed for personal bankruptcy on December 8, 2014, thus
triggering an automatic stay of judicial proceedings against him.

(ECF No. 4 ¶ 82.)

Defendants argue that if the Court does not dismiss this action, then it should, in the
alternative, stay the case because: (i) Mason has agreed to indemnify Defendants against any

17

liability in this case, (ECF No. 16 at 13); (ii) aspects of the claims against Defendants “rests on
the liability of Mason,” (id. at 14); and (iii) “[t]o permit Plaintiff to take judgment against TOS
. . . would allow Plaintiff to impermissibly leapfrog over other potential bankruptcy creditors
(including Defendants),” (id. at 15). Here, Plaintiff has alleged nine (9) causes of action, eight
(8) of which involve TOS and/or SPV, entities which are also involved in the pending
bankruptcy action. Plaintiff nonetheless argues, in part, that a stay is not warranted here under
11 U.S.C. § 362 because such a stay only bars actions against the debtor and does not extend
to non-debtor third parties. (ECF No. 22 at 19.)
While Plaintiff is correct that an automatic bankruptcy stay under 11 U.S.C. § 362
applies only to the debtor and the debtor’s estate, this Court has inherent discretionary power
to stay proceedings in order to achieve equity and to ensure the efficient management of its
docket, Williford v. Armstrong World Indus., Inc., 715 F.2d 124, 127 (4th Cir. 1983). See Landis v.
N. Am. Co., 299 U.S. 248, 254 (1936) (“[T]he power to stay proceedings is incidental to the
power inherent in every court to control the disposition of the causes on its docket with
economy of time and effort for itself, for counsel, and for litigants.”). Proper use of this
authority requires the court to exercise its judgment “to balance the various factors relevant
to the expeditious and comprehensive disposition of the causes of action on the court’s
docket.” United States v. Ga. Pac. Corp., 562 F.2d 294, 296 (4th Cir. 1977). These various factors
include the interests of judicial economy, the hardship and equity to the moving party in the
absence of a stay, and the potential prejudice to the non-moving party in the event of a stay.
See, e.g., White v. Ally Fin., Inc., 969 F. Supp. 2d 451, 462 (S.D. W. Va. 2013). Essentially, in
considering whether to issue a stay, the Court “must weigh competing interests [of the parties]

18

and maintain an even balance.” Landis, 299 U.S. at 254–55. “The party seeking a stay must
justify it by clear and convincing circumstances outweighing potential harm to the party against
whom [the stay] is operative.” Williford, 715 F.2d at 127. If a stay is appropriate, the court
must keep it “within the bounds of moderation.” Landis, 299 U.S. at 256.
The Fourth Circuit has recognized that there are cases in which the debtor and other
non-debtor parties “are so intimately intertwined” so as to warrant a stay. A.H. Robins Co. v.
Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986). The court explained that there are “unusual
situation[s]” in which “there is such identity between the debtor and the third-party defendant
that the debtor may be said to be the real party defendant.” Id. at 999. An example of one
such situation, as described by the court, “would be a suit against a third-party who is entitled
to absolute indemnity by the debtor on account of any judgment that might result against them
in the case.” Id. Although the Fourth Circuit analyzed this in the context of extending an
automatic bankruptcy stay under 11 U.S.C. § 362(a), the Court finds this reasoning instructive
here given the unusual circumstances present in this case.
Here, the Settlement Agreement executed by the parties to this action includes a
provision in which Mason agrees to indemnify Defendants against liability in this action. (ECF
No. 4-7 ¶ 8(a).) Additionally, Plaintiff seeks relief against TOS and SPV, entities which are
included as part of the debtor’s estate in the pending bankruptcy proceeding. Also, Plaintiff
has filed a claim as a creditor in that pending bankruptcy action. The permissibility of
Plaintiff’s claim there has yet to be decided and, if allowed, there is potential for double
recovery by Plaintiff or, at a minimum, inconsistent rulings, particularly with respect to
recovery from TOS if the case were to proceed.

19

As such, the Court finds that the interests of the parties in this action are intimately
intertwined with Mason and his interest in TOS and SPV, entities which are subject to the
bankruptcy proceeding. Such an overlap of parties and interests makes it likely that any action
taken in this case would impact the ongoing bankruptcy proceeding or vice versa, as well as
any interests that Mason may have in TOS and/or SPV. Moreover, since Plaintiff is named
in the bankruptcy proceeding as a potential creditor, he has an interest in resolving all issues
without the potential for overlap or inconsistent rulings.

Therefore, in balancing the

competing interests present in this case, the Court concludes that equity and the proper
administration of these proceedings weigh heavily in favor of a stay pending the outcome of
the Chapter 7 bankruptcy action in the United States District Court for the Eastern District
of North Carolina.
C. Rule 12(b)(6) Failure to State a Claim
Defendants also seek dismissal of Plaintiff’s Complaint which they contend fails to
state a plausible claim for relief.
1. Control person liability claim under N.C. Gen. Stat. § 78A-56(c)
Defendants contend that, as to the substance of Plaintiff’s claim of control person
liability under N.C. Gen. Stat. § 78A-56(c), Plaintiff has failed to sufficiently allege that
Defendants were control parties. To establish control person liability, Plaintiff must establish
that Defendants “(1) had the ‘power to control’ the person or entity primarily liable under the
applicable law, and (2) engaged in ‘culpable conduct.’” Andrews v. Fitzgerald, 823 F. Supp. 356,
380 (M.D.N.C. 1993) (quoting Walker v. Cardinal Sav. & Loan Ass’n, 690 F. Supp. 494, 500
(E.D. Va. 1988)).

20

Defendants argue that “it is evident from [the Complaint] that Mason is primarily liable
for the misstatements for which Plaintiff seeks liability and it is axiomatic that a company does
not control its directors, rather, it is the other way around.” (ECF No. 16 at 18.) Plaintiff
argues, however, that “[a]s a control person of TOS, SPV cannot distance itself from
misstatements TOS made through Mason.” (ECF No. 22 at 8.) Furthermore, Plaintiff’s
Complaint contains a number of allegations about the Defendants’ role as controlling persons
of TOS. Specifically, the Complaint alleges that: (i) SPV is the parent company and alter-ego
of its subsidiary, TOS (ECF No. 4 ¶ 21); (ii) “SPV, Horton, and Shaikh acted as controlling
persons of TOS . . . and they materially aided in the sale of the Secured and Unsecured Notes
to Landress,” (id. ¶ 126); (iii) “SPV, as TOS’s manager and alter-ego, exercised dominion and
control over TOS” as a control person, (id. ¶ 132); (iv) “Horton is the CEO of TOS and,
among other things, executed the Secured Note, Unsecured Note, and TOS Security
Agreement on behalf of TOS,” (id. ¶ 128); (v) “on information and belief, Horton knew of
and authorized the materially false and misleading statements made to Landress to induce him
to purchase the Secured and Unsecured Note,” (id.); (vi) Shaikh is the COO and a manager of
TOS who “participated in the discussions with Landress when TOS was trying to get him to
invest,” (id. ¶ 129); (vii) “Horton and Shaikh met with Landress in his home to solicit additional
investments, and during that meeting they reiterated TOS’s assurances about the SPV/TOS
Managers’ financial contributions,” (id.); and (viii) “SPV, as TOS’s manager and alter-ego,
exercised dominion and control over TOS,” (id. ¶ 132).
The Court finds that these allegations, taken as true, state a plausible claim that
Defendants controlled the actions of TOS which ultimately caused Plaintiff’s alleged injury.

21

See N.C. Gen. Stat. § 78A-56(c)(1) (“Every person who directly or indirectly controls a person
liable [under this statute], . . . and every dealer or salesman who materially aids in the sale is
also liable jointly and severally.”). Accordingly, Defendants’ motions to dismiss this cause of
action will be denied.15
2. Fraudulent conveyance claim
To survive Defendants’ Rule 12(b)(6) motion to dismiss his fraudulent conveyance
claim, Plaintiff must sufficiently allege facts showing that Defendants transferred funds from
TOS with the “intent to hinder, delay, or defraud” and are therefore voidable. N.C. Gen. Stat.
§ 39-23.4. Defendants argue that Plaintiff’s Complaint contains only conclusory allegations
which do not establish “a plausible basis for holding [the] conveyances, or lack thereof in the
case of SPV distributions, to be fraudulent.” (ECF No. 16 at 18–19.) The Court disagrees.
Plaintiff alleges the following in his Complaint: (i) that his investment funds were
“commingled with SPV assets” and used by Defendants to pay “themselves more than $1

15

In further support of their argument that Plaintiff’s Complaint fails to state a claim for relief as to
the control person liability claim, Defendants also argue that “the claim belongs to the investor Mutsy”
because “the purchaser of the Secured Note is Mutsy, not Landress.” (ECF No. 16 at 16, 17.) Plaintiff
responds, in part, that “Landress is the sole member of Mutsy, which assigned its rights to Landress
as of December 23, 2013.” (ECF No. 22 at 11.) At this stage of the litigation, the Court accepts the
well-pled allegations in the Complaint as true. The Complaint alleges that (i) Mutsy “is wholly owned
and managed by Landress,” (ECF No. 4 ¶ 31); and (ii) as of December 23, 2013, “Mutsy subsequently
assigned all its rights and obligations under the investment documents to Landress,” (id.). Further, as
Plaintiff argues, the “Post-Closing Commitments” letter, executed by the parties on the same day as
the other investment documents, references Landress as the purchaser of the notes. (ECF No. 22 at
10.) Specifically, the Letter states that it “confirm[s] the understanding among [TOS, SPV, Mason]
and yourself regarding the certain commitments made to you by Tier One and SPV in connection
with your purchase (through Mutsy I, LLC (“Mutsy”) or another affiliate, together, “Landress”) on
the date hereof from Tier One, SPV Solar and/or Mason.” (ECF No. 4-6 at 1.) To the extent that
Defendants now seek to challenge whether Landress or Mutsy purchased the notes and/or whether
there has been an effective assignment of rights, such an issue is to be determined on a more developed
record.

22

million under the pretext of supposed ‘management fees,’ ‘[a]dvance[s] towards expenses,”
and “[b]ack pay,” (ECF No. 4 ¶ 134 (alterations in original)); (ii) that the SPV/TOS Cash
Statement he received from Defendants shows that “the amount and frequency of the
SPV/TOS Managers’ raiding of SPV/TOS funds increased significantly after TOS defaulted
on its payment obligations” under the investment documents, (id. ¶ 135 (emphasis added));
(iii) that these withdrawals “render[ed] TOS insolvent and unable to meet its obligations to
Landress,” (id. ¶ 136); (iv) that “the SPV/TOS Managers – and SPV itself – continue to
plunder the TOS coffers” knowing that TOS is insolvent “and with the intent to hinder and
delay payment to Landress and ultimately deprive him of his investment in TOS,” (id. ¶ 137);
and (v) that “SPV and the SPV/TOS Managers have failed to make any distributions to
[Plaintiff] and instead have used SPV to raid TOS and pay themselves despite their
obligations” under the investment documents, (id. ¶ 138).
In setting forth these allegations, Plaintiff has sufficiently pled facts to support his claim
that Defendants transferred funds from TOS in order to “hinder, delay, or defraud Plaintiff.
The Court therefore finds that, at this stage of the litigation, Plaintiff’s allegations, taken as
true, state a plausible claim of fraudulent conveyance.
3. Piercing the corporate veil
Defendants also seek dismissal of Plaintiff’s claim to pierce TOS’s corporate veil
because, in part, it is “based on the conclusory statement that TOS and SPV are mere
instrumentalities of one another.” (ECF No. 16 at 19.)
As an initial matter, Defendants argue that “[p]iercing the corporate veil is not a cause
of action and should be dismissed when pled as such.” (ECF No. 16 at 19.) Defendants are

23

correct that piercing the corporate veil is not an independent cause of action and, instead,
serves as “a means of imposing liability on an underlying cause of action.” Peacock v. Thomas,
516 U.S. 349, 354 (1996) (quotation omitted). Such a method of imposing liability, however,
“is analogous to a claim for punitive damages or loss of consortium” in that it “is dependent
on proving an underlying claim.” Strawbridge v. Sugar Mountain Resort, Inc., 243 F. Supp. 2d 472,
479 (W.D.N.C. 2003). Courts routinely analyze a Plaintiff’s allegations at the motion to
dismiss stage to determine whether Plaintiff has sufficiently alleged sufficient facts to justify
disregarding the corporate entity and thus, survive a motion to dismiss. See, e.g., Ademiluyi v.
PennyMac Mortg. Tr. Holdings I, LLC, 929 F. Supp. 2d 502, 519 (D. Md. 2013) (considering
defendants’ Rule 12(b)(6) motion to dismiss and finding that the “plaintiff’s conclusory
allegations in the Complaint, even if proven, are not sufficient to justify the piercing of the
corporate veil”); Blair v. Infineon Techs. AG, 720 F. Supp. 2d 462, 469–70 (D. Del. 2010) (finding
that, at the motion to dismiss stage, plaintiffs have sufficiently alleged facts to support the alter
ego doctrine for piercing the corporate veil); Richmond v. Indalex, Inc., 308 F. Supp. 2d 648, 655–
59 (M.D.N.C. 2004) (analyzing whether, on a motion to dismiss, Plaintiff has alleged facts
sufficient to establish derivative liability and pierce defendant’s corporate veil). The Court will
therefore consider whether Plaintiff has sufficiently pled allegations in his Complaint to
support a derivative liability theory for recovery and pierce TOS’s corporate veil.
In North Carolina, courts apply the “instrumentality rule,” to “disregard the corporate
form or ‘pierce the corporate veil,’ and extend liability for corporate obligations beyond the
confines of a corporation’s separate entity whenever necessary to prevent fraud or to achieve
equity.” Glenn v. Wagner, 329 S.E. 2d 326, 330 (N.C. 1985). Under the “instrumentality rule,”

24

a corporation will be held liable for the torts of another corporation over which it “exercises
actual control . . . operating the latter as a mere instrumentality or tool.” Id. (quoting B-W
Acceptance Corp. v. Spencer, 149 S.E.2d 570, 575 (N.C. 1966) (internal quotation marks omitted)).
In determining whether the corporate veil should be pierced, courts should consider the
following non-exhaustive factors: (i) “inadequate capitalization;” (ii) “non-compliance with
corporate formalities;” (iii) “complete domination and control;” (iv) “excessive
fragmentation;” (v) “non-payment of dividends;” (vi) “insolvency of the debtor corporation;”
(vii) “siphoning of funds by the dominant shareholder;” (viii) “non-functioning of other
officers or directors;” and (ix) “absence of corporate records.” Id. at 332.
In addition to Plaintiff’s allegation that “TOS is the alter-ego of SPV and exists solely
as an instrumentality of SPV,” (ECF No. 4 ¶ 142), Plaintiff alleges the following: (i) that TOS
was undercapitalized as reflected by financial statements received after he invested in TOS
showing that, contrary to the representations made prior to his investment, SPV/TOS
Managers had made no cash investments in TOS (id. ¶¶ 144–146); (ii) that “SPV and TOS
disregarded corporate formalities by, among other things, holding themselves out as a joint
entity when they obtained additional investment funds from [another investor] and
commingling funds” (id. ¶ 149); (iii) “that TOS and SPV have . . . blurred the lines of their
corporate forms” by agreeing that SPV would provide additional inducements to Landress in
exchange for his investment in TOS, (id. ¶ 152); and (iv) that money was “funnel[led]” from
TOS to SPV “and served as a conduit for the SPV/TOS Managers to unjustly enrich
themselves and render TOS insolvent,” (id. ¶ 150). The Court concludes that, at this stage, “it
is plausible that [these] factual allegations . . . are ‘enough to raise a right to relief [as to this

25

claim] above the speculative level.’” Andrew v. Clark, 561 F.3d 261, 266 (4th Cir. 2009) (quoting
Twombly, 550 U.S. at 555). The Court therefore denies Defendants’ motions to dismiss to the
extent they are based on the theory of piercing the corporate veil.
For the reasons outlined herein, the Court enters the following:
ORDER
IT IS THEREFORE ORDERED that Defendants’ motions to dismiss, (ECF Nos.
15, 17, 19), are hereby GRANTED IN PART AND DENIED IN PART. The Court
GRANTS Defendants’ motions to the extent they seek entry of a stay of the proceedings thus,
this action is hereby STAYED pending the resolution of James Mason’s Chapter 7 bankruptcy
action in the United States District Court, Eastern District of North Carolina, Case No. 1407105-5-DMW. The parties are directed to notify the Court within 14 days following
resolution of the pending bankruptcy action. Defendants’ motions to dismiss are hereby
DENIED as to all other matters.
This, the 21st day of March, 2017.

/s/ Loretta C. Biggs
United States District Judge

26