USA Trouser, S.A. de C.V. v. International Legwear Group, Inc. et al
Filing
94
MEMORANDUM OF DECISION AND ORDER denying 55 Pltf's Motion for Summary Judgment as to Claims Against Deft Scott Andrews; denying 57 Pltf's Motion for Summary Judgment as to Claims against Individual Defts John Sa nchez and William Sheely; granting in part and denying in part 60 Individual Defts' Motion for Summary Judgment. Individual Defts Motion for Summary Judgment with respect to all claims against Deft Andrews is GRANTED. Signed by District Judge Martin Reidinger on 12/13/12. (ejb)
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:11-cv-00244-MR-DLH
USA TROUSER, S.A. de C.V.,
)
)
Plaintiff,
)
)
vs.
)
)
)
INTERNATIONAL LEGWEAR GROUP, )
INC., WILLIAM SHEELY, JOHN
)
SANCHEZ, and SCOTT ANDREWS, )
)
Defendants.
)
_______________________________ )
MEMORANDUM OF
DECISION AND ORDER
THIS MATTER is before the Court on the Plaintiff’s Motion for
Summary Judgment as to Plaintiff’s Claims against Defendant Scott
Andrews [Doc. 55]; Plaintiff’s Motion for Summary Judgment as to Claims
against the Individual Defendants John Sanchez and William Sheely [Doc.
57]; and the Individual Defendants’ Motion for Summary Judgment [Doc.
60].
I.
PROCEDURAL BACKGROUND
On September 6, 2011, the Plaintiff USA Trouser, S.A. de C.V. (“USA
Trouser” or “Plaintiff”) commenced this action in the Burke County General
Court of Justice, Superior Court Division, against International Legwear
Group, Inc. (“ILG”) and three former officers of ILG, William Sheely
(“Sheely”), John Sanchez (“Sanchez”), and Scott Andrews (“Andrews”)
(collectively, “the Individual Defendants”). [Complaint, Doc. 1-1]. In the
Complaint, the Plaintiff asserts eight causes of action against ILG and the
Individual Defendants, including claims for breach of contract (First Claim
for Relief); breach of fiduciary duty/constructive trust (Second Claim for
Relief); fraud/fraudulent concealment/negligent misrepresentation (Third
Claim for Relief); unfair and deceptive trade practices (Fourth Claim for
Relief); breach of implied covenants of good faith and fair dealing (Fifth
Claim for Relief); fraudulent and/or negligent failure to perform statutory
duties (Sixth Claim for Relief); conversion (Seventh Claim for Relief); and
fraudulent conveyance (Eighth Claim for Relief). [Id.]. The Defendants
removed the action to this Court on September 21, 2011. [Doc. 1].
Shortly after removal, on October 14, 2011, the Plaintiff filed a motion
seeking immediate discovery from the Defendants.
For grounds, the
Plaintiff argued that immediate discovery was necessary to preserve assets
as well as material evidence.
[Doc. 5].
On November 9, 2011, the
Honorable Dennis L. Howell, United States Magistrate Judge, granted the
2
Plaintiff’s motion for early discovery and directed the Defendants to
respond to the Plaintiff’s requests for production of documents within fortyfive (45) days. [Doc. 10].
On December 29, 2011, Judge Howell entered a Pretrial Order and
Case Management Plan setting deadlines of August 1, 2012 for the
completion of discovery and September 1, 2012 for the filing of dispositive
motions. [Doc. 18]. The case was scheduled for trial during the January
14, 2013 term. [Id.].
In the meantime, counsel for the Defendants moved to withdraw from
representation of ILG.
[Doc. 17].
The Court granted the motion to
withdraw on January 11, 2012, and directed ILG to retain new counsel
within ten (10) days. [Doc. 20]. When ILG failed to comply with the Court’s
Order, the Court ordered ILG’s Answer to be stricken from the record, and
for default to be entered against ILG. [Doc. 23]. The Clerk entered default
against ILG on February 2, 2012. [Doc. 24].
On May 4, 2012, the Plaintiff filed a motion to compel ILG to comply
fully with the Plaintiff’s requests for the production of documents, which
were the subject of the Order permitting early discovery. [Doc. 31]. On
June 11, 2012, Judge Howell denied the Plaintiff’s motion without prejudice
3
for failing to comply with the briefing requirements set forth in Local Rule
7.1. [Doc. 32].
Over thirty (30) days later, on July 13, 2012, the Plaintiff renewed its
motion to compel against ILG. [Doc. 34]. At the same time, the Plaintiff
filed a motion seeking an extension of the discovery deadline, from August
1, 2012 to February 1, 2013. [Doc. 33]. The individual Defendants also
moved at the same time for leave to take the deposition of a third-party
witness, Russell Reighley, after the deadline for the completion of fact
discovery but prior to the filing of dispositive motions, due to an
unforeseeable conflict in Mr. Reighley’s schedule. [Doc. 37].
On July 19, 2012, Judge Howell entered an Order granting the
Defendants’ request to take Mr. Reighley’s deposition after the close of
discovery.
[Doc. 38]. In that same Order, however, Judge Howell denied
the Plaintiff’s request for an extension of time to complete discovery, noting
that the Plaintiff had not been diligent in pursuing discovery and that “the
problems encountered by Plaintiff in completing discovery are largely a
result of counsel’s delay in filing appropriate motions to compel.” [Doc. 38
at 2]. The Plaintiff objected to that Order and appealed the Magistrate
Judge’s ruling to this Court. [Doc. 42]. The Court overruled the Plaintiff’s
Objections on August 28, 2012. [Doc. 51].
4
Four days prior to the discovery deadline, on July 27, 2012, the
Plaintiff filed a motion seeking leave to take the depositions of James A.
Williams (ILG’s CEO and President) and Defendant Andrews after the
close of discovery. [Doc. 39]. The Magistrate Judge denied the Plaintiff’s
motion, again citing Plaintiff’s failure to conduct discovery in a diligent
manner. [Doc. 64]. The Plaintiff appealed that ruling of the Magistrate
Judge’s ruling. [Doc. 69].
On September 5, 2012, Judge Howell entered an Order denying
Plaintiff’s renewed motion to compel against ILG, stating that the Court “is
not going to compel a party in default to respond to discovery. Rather, the
proper course of action for Plaintiff to pursue is the filing of a motion for the
entry of default judgment.” [Doc. 65 at 1-2].
The Plaintiff also appealed
that ruling by the Magistrate Judge. [Doc. 67].
The Plaintiff filed three motions for summary judgment on September
4, 2012: one against Defendant Andrews, one against Defendants Sheely
and Sanchez, and one against ILG. [Docs. 54, 55, 57]. The Individual
Defendants filed a motion for summary judgment as well. [Doc. 60].
The Court denied the Plaintiff’s summary judgment motion as to ILG
on the grounds that ILG was in default. [Doc. 76]. Responses to the
remaining summary judgment motions were filed on September 21, 2012
5
[Docs. 72, 73, 74], and replies were filed on October 1, 2012 [Docs. 78, 79,
80].
The Court held a hearing on the pending motions on October 24,
2012. As a result of that hearing, the Court granted the Plaintiff leave to
take the depositions of James A. Williams and Defendant Andrews and to
seek non-party document production from ILG, Williams, and/or Richelieu
Ltd.
The parties were given the opportunity to file supplemental briefs
following this discovery, and the summary judgment portion of the hearing
was continued to November 21, 2012. [Doc. 88]. The parties filed their
supplemental briefs on November 14, 2012. [Docs. 90, 91]. On November
21, 2012, the Court heard arguments from the parties on the summary
judgment motions.
Having been fully briefed and argued, these motions are ripe for
disposition.
II.
STANDARD OF REVIEW
Summary judgment is proper “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). A fact is “material” if it
“might affect the outcome of the case.” News and Observer Pub. Co. v.
Raleigh-Durham Airport Auth., 597 F.3d 570, 576 (4th Cir. 2010).
6
A
“genuine dispute” exists “if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
A party asserting that a fact cannot be genuinely disputed must
support its assertion with citations to the record. Fed. R. Civ. P. 56(c)(1).
“Regardless of whether he may ultimately be responsible for proof and
persuasion, the party seeking summary judgment bears an initial burden of
demonstrating the absence of a genuine issue of material fact.” Bouchat v.
Baltimore Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003). If
this showing is made, the burden then shifts to the non-moving party who
must convince the Court that a triable issue does exist. Id.
A party opposing a properly supported motion for
summary judgment may not rest upon the mere
allegations or denials of his pleadings, but rather
must set forth specific facts showing that there is a
genuine issue for trial.
Furthermore, neither
unsupported speculation, nor evidence that is
merely colorable or not significantly probative, will
suffice to defeat a motion for summary judgment;
rather, if the adverse party fails to bring forth facts
showing that reasonable minds could differ on a
material point, then, regardless of any proof or
evidentiary
requirements
imposed
by
the
substantive law, summary judgment, if appropriate,
shall be entered.
Id. (internal quotation marks and citations omitted).
7
In considering the facts for the purposes of a summary judgment
motion, the Court must view the pleadings and materials presented in the
light most favorable to the nonmoving party and must draw all reasonable
inferences in the nonmoving party’s favor. Adams v. Trustees of the Univ.
of N.C.-Wilmington, 640 F.3d 550, 556 (4th Cir. 2011). Where both parties
seek summary judgment, the Court “must review each motion separately
on its own merits to determine whether either of the parties deserves
judgment as a matter of law.” Rossignol v. Voorhaar, 316 F.3d 516, 523
(4th Cir. 2003) (internal quotation marks and citation omitted).
III.
FACTUAL BACKGROUND
Viewing the forecast of evidence in the light most favorable to the
Plaintiff, the following is a summary of the relevant facts. USA Trouser is a
sock and hosiery manufacturer, which was founded in 2009 by members of
the Balas family in Mexico. [Affidavit of Juan Balas (“Juan Balas Aff.”),
Doc. 54-4 at ¶12]. Previously, the Balas family had operated a company
called Giovanni de Mexico, S.A. de C.V. (“Giovanni”). [Id. at ¶2]. Giovanni
manufactured “George” brand trouser socks for a company called Ellis
Hosiery (“Ellis”), which sold the socks to Wal-Mart. [Id. at ¶3].
8
ILG was a hosiery products distribution company based in Hildebran,
North Carolina.1 [Complaint, Doc. 1 at ¶¶2 and 11]. ILG purchased Ellis in
2004.
[Affidavit of Russ Reighley (“Reighley Aff.”), Doc. 58-2 at ¶3].
Giovanni continued to manufacture socks for Ellis after its acquisition by
ILG. [Affidavit of Jaime Balas (“Jaime Balas Aff.”), Doc. 54-1 at ¶14].
In February 2007, Jaime Balas met with two of ILG’s representatives,
Shannon Kennedy (“Kennedy”) and Kevin Passarello (“Passarello”).
At
that time, Kennedy and Passarello told Jaime Balas that they, along with
Scott Andrews, were the owners of ILG, and that they were authorized to
speak on Andrews’s behalf. [Declaration of Jaime Balas (“Jaime Balas
Decl.”), Doc. 58-7 at ¶3]. Kennedy and Passarello told Jaime Balas that
“they and Andrews guaranteed ILG’s debts and that they would make sure
that money owed to Giovanni and [the Balas] family would be paid.” [Id. at
¶5; Deposition of Jaime Balas (“Jaime Balas Dep.”), Doc. 58-8 at 3].
Kennedy and Passarello further assured Jaime Balas that Wal-Mart and
Payless were “large customers” who were capable of paying their bills in a
timely manner; Jaime Balas interpreted this statement to mean that
1
ILG’s corporate existence was terminated in May 2012. [Notice of Termination, Doc.
61-2 at 82-83].
9
payments from Wal-Mart and Payless would always be made to Giovanni.
[Jaime Balas Decl., Doc. 58-7 at ¶6].
In 2009, the Balas family decided to close Giovanni and start a new
company, USA Trouser. [Jaime Balas Dep., Doc. 58-14 at 3-4]. USA
Trouser continued to manufacture socks for Ellis/ILG. [Id.; Affidavit of Juan
Balas (“Juan Balas Aff.”), Doc. 54-4 at ¶¶12, 13].
In 2010, James A. Williams (“Williams”) was hired to serve as ILG’s
Chief Executive Officer. [See Employment Agreement, Doc. 58-19]. Also
in 2010, Defendant Sheely was hired to serve as ILG’s Chief Operating
Officer. [Affidavit of William Sheely (“Sheely Aff.”), Doc. 61-2 at 70 ¶2].
Defendant Sanchez became ILG’s Chief Financial Officer in January 2011.
[Affidavit of John Sanchez (“Sanchez Aff.”), Doc. 61-2 at 11 ¶2].
From 2006 to 2011, ILG was continually in a cash flow crisis and
experienced several and repeated defaults on its payment obligations
under certain credit and loan agreements that it had with its primary lender,
a bank called CapitalSource (“CapSource”). [CapSource Letter dated July
6, 2011, Doc. 61-3 at 28-30; ILG Shareholders’ Resolution, Doc. 63-2 at
80]. By 2011, ILG owed approximately $50 million to its secured creditors.
[Id.]. ILG also had at least twenty (20) unsecured creditors, which included
suppliers of hosiery products like the Plaintiff USA Trouser. [Sheely Aff.,
10
Doc. 61-2 at 70 ¶2]. In February 2011, ILG certified to CapSource that it
was in default of its loan covenants. [Compliance Certificate, Doc. 58-25].
By a letter dated March 2, 2011, CapSource reiterated ILG’s default.
[Letter dated July 6, 2011, Doc. 58-26].
In April or May 2011, CapSource decided to restrict ILG’s ability to
access cash, which made it difficult for ILG to pay its vendors.
[See
Affidavit of Scott Andrews (“Andrews Aff.”), Doc. 61-2 at ¶4]. By May 2011,
ILG was no longer able to pay its creditors, including USA Trouser. As a
result, ILG began seeking potential alternative lenders. [Id. at ¶5]. ILG
retained a third party, Business Capital, to prepare an Offering
Memorandum to distribute to potential lenders.
[Id.].
Business Capital
provided the Offering Memorandum to 52 potential lenders, and by June
11, 2011, ILG had received expressions of interest from eleven of those
lenders. [Id. at ¶6].
In late May or early June 20112, Sanchez and Sheely went to Mexico
City and met with Jaime, Juan, and Salomon Balas, the officers of USA
Trouser. At the time of the meeting in Mexico City, ILG was about two
2
Juan Balas and Defendant Sanchez indicate in their affidavits that this meeting
occurred on June 2, 2011. [Juan Balas Aff., Doc. 54-4 at ¶16; Sanchez Aff., Doc. 61-2
at ¶3; see also Sheely Aff., Doc. 61-2 at 70 ¶3 (indicating that meeting was in “early
June”)]. Jaime Balas states in his affidavit, however, that the meeting occurred on May
26, 2011. [Jaime Balas Aff., Doc. 54-1 at ¶32].
11
weeks late in paying approximately $200,000 to USA Trouser. [Juan Balas
Aff., Doc. 54-4 at ¶16].
Jaime Balas testified that during this meeting,
Sanchez and Sheely made the following representations:
In that meeting, John Sanchez and Bill Sheely told
me, Juan and Salomon that the bank that ILG used
was being difficult and that ILG did not want to use
the bank any longer. John and Bill told me that ILG
would have no problems replacing ILG’s bank, and
that ILG’s owners were wealthy and would ensure
that payments would be made and that ILG would
get [a] more cooperative bank.
[Jaime Balas Aff., Doc. 54-1 at ¶33]. Jaime Balas told Sheely and Sanchez
that USA Trouser required consistent and constant payments to ensure
that it could continue supplying products to ILG. [Id. at ¶34]. Sheely and
Sanchez assured Jaime Balas that “it would be no problem to pay ILG [sic]
$100,000 of the money owed by Wednesday June 1, 2011” and that “ILG
could make payments of at least $100,000 per week plus amounts for
products being shipped according to production schedules until the account
was current.” [Id. at ¶35].
Juan Balas testified in his Affidavit that during this meeting, Sheely
and Sanchez told him and the other officers of USA Trouser that “ILG
wanted to switch banks so that ILG would have a better bank for ILG’s
needs.” [Juan Balas Aff., Doc. 54-4 at ¶17]. According to Juan Balas,
12
Sheely and Sanchez further stated that “switching banks meant that ILG
might need to pay USA Trouser out of the Wal-Mart and Payless cashflow
only, and so ILG wanted to pay a weekly minimum of $100,000 until all
amounts paid up and current.” [Id.]. Juan Balas testified that Sheely and
Sanchez further assured USA Trouser that “ILG was receiving payments
from Wal-Mart and Payless, and that ILG had cash-flow sufficient to pay
USA Trouser for all products ordered.” [Id. at ¶16]. Sheely and Sanchez
assured the USA Trouser officers that “there was nothing to worry to [sic]
about, and that ILG’s owners were committed to paying everything owed to
USA Trouser.” [Id. at ¶20].
Following the meeting in Mexico City, ILG did not make a $100,000
payment as promised. [Jaime Balas Aff., Doc. 54-1 at ¶37]. After Jaime
Balas notified ILG that payment had not been made [Jaime Balas Aff., Doc.
54-1 at ¶38], ILG made a payment of $100,000 on June 3, 2011. [Affidavit
of Salomon Balas (“Salomon Balas Aff.”), Doc. 54-2 at ¶26].
ILG
subsequently made additional payments of $33,573.68 on June 10, 2011;
$136,529.82 on June 10, 2011; and $104,077.38 on June 17, 2011. [Id.].
During this time frame, ILG continued to order products from USA Trouser,
and USA Trouser continued to manufacture and ship socks to ILG. [Jaime
Balas Aff., Doc. 54-1 at ¶43; Salomon Balas Aff., Doc. 54-2 at ¶27].
13
Sanchez continued to assure USA Trouser that ILG was “trying to find the
best of many banks offering credit to ILG.” [Jaime Balas, Doc. 54-1 at ¶50].
Despite Sanchez’s representations, ILG was unable to secure
alternative financing. In an email to Andrews and Kennedy dated June 15,
2011, Sanchez outlined two “cash flow models” through the end of July
2011.
Sanchez stated that the “best case” model provided for the
availability of only $100,000 to pay creditors.
Sanchez stated that this
model would allow ILG “to get to the week of July 23rd but will jeopardize
our vendor relationships and potential receipts of product.” [June 15, 2011
Email, Doc. 58-36 at 3]. The other model provided for weekly minimum
payments of $100,000 to USA Trouser and another vendor.
Sanchez
estimated that this model would have ILG “struggling to get through next
week and completely under water the following week.”
[Id.].
Sanchez
further acknowledged that CapSource “will not continue funding in a
negative situation and I fear that if our cash availability continues to be
positive, [CapSource] will increase the reserves in order to force action on
our part.” [Id.]. Despite Sanchez’s dire cash flow projections, Sanchez
wrote to USA Trouser during this time to assure it that ILG had “4
interested banks” and that ILG “will be selecting one this week to move
14
forward with. That process will take 4-6 weeks.” [June 22, 2011 Email,
Doc. 54-1 at 28].
On June 23, 2011, Sanchez notified USA Trouser for the first time
that no payments could be made to vendors. [Email, Doc. 61-2 at 92].
In
response, USA Trouser stopped further production for ILG. [Jaime Balas
Aff., Doc. 54-1 at ¶52]. On or about June 30, 2011, Sheely told Jaime
Balas that ILG’s bank was going to release funds to USA Trouser. USA
Trouser agreed to manufacture and supply products so long as the past
due amounts were paid.
Sheely assured Jaime Balas that “past due
amounts would be paid very soon.” [Id. at ¶53].
On July 5, 2011, Sheely and Sanchez called Jaime Balas and
promised that ILG would be selecting a bank no later than Thursday, July
7, 2011.
[Id. at ¶54].
Hearing nothing further from ILG, USA Trouser
continued to press for assurances that payment would be made. [Id.]. In
mid-July 2011, ILG told CapSource that ILG needed four more weeks to
finalize an agreement with the potential lenders. [Andrews Aff., Doc. 61-2
at 6 ¶7; Sanchez Aff., Doc. 61-2 at 11 ¶26]. CapSource was unwilling to
give ILG additional time, however, and decided to foreclose on all of ILG’s
assets. [Andrews Aff., Doc. 61-2 at 6 ¶7; Sanchez Aff., Doc. 6102 at 11
¶26]. CapSource forced the liquidation of substantially all of ILG’s assets
15
pursuant to an August 11, 2011 Asset Purchase Agreement between ILG
and Gordon Brothers Commercial and Industrial, LLC (“Gordon Brothers”).
[Asset Purchase Agreement, Doc. 61-2 at 114].
Gordon Brothers
simultaneously sold ILG’s assets to a separate entity known as Richelieu,
which then began transacting business with the Plaintiff. [Jaime Balas Aff.,
Doc. 54-1 at ¶¶63-64].
IV.
DISCUSSION
In this action, the Plaintiff alleges that the Plaintiff and ILG were
“strategic partners” to supply Wal-Mart and Payless with trousers socks,
and that ILG fraudulently covered up its true financial condition so that ILG,
as well as ILG’s investors, officers and directors, could fraudulently sell
ILG’s assets. With respect to Defendant Andrews, the Plaintiff contends
that Andrews personally guaranteed ILG’s debts to induce Plaintiff to
become ILG’s strategic partner, and that Andrews then ignored his duties
as director and de facto officer of ILG and caused ILG to breach its
fiduciary duties to Plaintiff. The Plaintiff further alleges that Defendants
Sanchez and Sheely intentionally and fraudulently withheld material
information from the Plaintiff intending to induce Plaintiff to supply more
products to ILG.
The Plaintiff further contends that these Defendants
violated their fiduciary duties to the Plaintiff by assisting in the sale of ILG’s
16
assets and socks manufactured by Plaintiff to third parties. The Plaintiff
contends that both Sanchez and Sheely are liable for ILG’s debts as a
result of their failure to fulfill their legal duties as officers of ILG.
The
Plaintiff further contends that Sanchez and Sheely are individually
responsible for their tortious conduct, including fraud and unfair and
deceptive trade practices.
A.
Breach of Contract (First Claim for Relief) and Breach of
Implied Covenant of Good Faith and Fair Dealing (Fifth
Claim for Relief)
In its First Claim for Relief, the Plaintiff asserts that all of the
Defendants are liable to the Plaintiff for breach of contract. The Plaintiff
cannot prevail on its breach of contract theory as to the Individual
Defendants. It is undisputed that no contract existed between any one of
the Individual Defendants and the Plaintiff. While the Plaintiff contends that
Andrews is personally liable for ILG’s debt, the forecast of evidence
demonstrates that this “guaranty” was a vague oral statement made by
parties other than Andrews with respect to ILG’s obligations to Giovanni,
not USA Trouser. The Plaintiff has presented no forecast of evidence from
which a reasonable jury could conclude that Andrews personally
guaranteed the debt of ILG to the Plaintiff. Even assuming that there were
any evidence that Andrews had made such a promise to the Plaintiff, any
17
promise to stand for the debt of another must be in writing and signed by
the guarantor in order to be enforceable. See N.C. Gen. Stat. § 22-1.
The Plaintiff also cannot succeed on a theory of holding any of the
Individual Defendants personally liable for the debts of ILG because
Plaintiff does not allege in the Complaint that the corporate veil should be
pierced.
Under Virginia3 law, “officers and directors of an insolvent
company may be liable to creditors only where . . . there are allegations
and proof of self-dealing by the officers or directors.” Bank of America v.
Musselman, 222 F.Supp.2d 792, 794 (E.D. Va. 2002). Here, there is no
forecast of evidence of any such self-dealing by any of the Individual
Defendants.
Even if the Court assumes that ILG failed to pay for goods that
Plaintiff shipped to ILG, there is simply no basis for holding any of the
Individual Defendants liable for ILG’s breach of contract. None of the
Individual Defendants entered into a contract with Plaintiff. None of the
3
A federal court sitting in diversity must apply the substantive law of the forum in
which it sits, including that forum’s choice-of-law rules. See Klaxon v. Stentor Elec. Mfg.
Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). If faced with a
choice-of-law question regarding the equitable remedy of piercing the corporate veil, the
North Carolina Supreme Court would adopt the internal affairs doctrine and apply the
law of the state of incorporation. See Dassault Falcon Jet Corp. v. Oberflex, Inc., 909
F.Supp. 345, 349 (M.D.N.C. 1995). As ILG was incorporated under the laws of the
Commonwealth of Virginia, Virginia law should be applied in determining whether the
corporate veil should be pierced in this case.
18
Individual Defendants made a promise to personally guarantee any debt
that ILG allegedly owed to Plaintiff.
Further, there is no allegation in
Plaintiff’s Complaint that supports piercing the corporate veil so as to hold
the Individual Defendants liable for ILG’s alleged breach of a contract or
contracts with the Plaintiff. As a result, the Court will grant summary
judgment in favor of the Individual Defendants as to the Plaintiff’s breach of
contract claim.
Similarly, Plaintiff’s claim for breach of the implied covenant of good
faith and fair dealing fails.
In North Carolina, a breach of the implied
covenant of good faith and fair dealing “only arises where a party to a
contract performs its contractual obligations in bad faith, and such breach
of the implied duty serves as a cognizable basis for the breach of contract.”
Suntrust Mortg., Inc. v. Busby, 651 F.Supp.2d 472, 487 (W.D.N.C. 2009).
As noted above, there is no evidence of the existence of any contract
between Plaintiff and any Individual Defendant; thus, there is no attendant
implied duty of good faith and fair dealing owed by any of the Individual
Defendants. Further, the Plaintiff has failed to make any allegations that
would support piercing the corporate veil so as to hold the Individual
Defendants liable for breach of the implied duty of good faith and fair
19
dealing that allegedly arose from a contract between ILG and the Plaintiff.
Accordingly, this claim too shall be dismissed.
B.
Breach of Fiduciary Duty/Constructive Trust (Second Claim
for Relief)
Under North Carolina law, a fiduciary relationship exists when one
party is bound to act in good faith in the best interests of the other party,
and that other party has placed confidence in the first party. See Dalton v.
Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707-08 (2001). The Plaintiff
contends that a fiduciary relationship arose in this case due to the “mutual
interdependence” of USA Trouser and ILG. North Carolina courts have
explicitly held, however, that a fiduciary relationship does not exist even
between two “mutually interdependent businesses.” Tin Originals, Inc. v.
Colonial Tin Works, Inc., 98 N.C. App. 663, 666, 391 S.E.2d 831, 833
(1990).
At best, USA Trouser was an unsecured creditor of ILG. Generally,
corporate directors do not owe a fiduciary duty to creditors of the
corporation. See N.C. Gen. St. § 55-8-30 (commentary); Keener Lumber
Co., Inc. v. Perry, 149 N.C. App. 19, 29-30, 560 S.E.2d 817, 824-25 (2002).
An exception to the general rule that directors of a corporation do not owe a
fiduciary duty to creditors may occur under circumstances akin to a
20
“winding-up” or dissolution of the corporation. Keener Lumber Co., 149
N.C. App. at 29-30, 560 S.E.2d at 824-25.
In determining whether a
corporation is in fact “winding-up,” courts may look to the following factors:
(1) whether the corporation was insolvent, or nearly
insolvent, on a balance sheet basis; (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 continuing
to do so.
Id. at 31, 560 S.E.2d at 825. Such fiduciary duty is not present, however, if
there is simply a “balance sheet insolvency.” Id. As the Keener Lumber
Court explained, “‘a corporation is not insolvent, as a general rule, 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.’” Id. (quoting Whitley v. Carolina
Clinic, Inc., 118 N.C. App. 523, 527-28, 455 S.E.2d 896, 900 (1995)).
In the present case, the forecast of evidence, when viewed in the light
most favorable to the Plaintiff, demonstrates that the directors and officers
of ILG were actively trying to secure financing for the continued operation
21
of ILG up until the point that CapSource decided to foreclose. At the time
that ILG received the last shipment of goods from USA Trouser (in June
2011) up until the time ILG’s lender decided to foreclose on its secured
loans, ILG and the Individual Defendants were actively continuing ILG’s
operations. Under these circumstances, a fiduciary duty simply did not
arise with respect to ILG’s creditors.
Even if a fiduciary relationship did exist, however, there is no
evidence that the Individual Defendants breached such duty. As the court
in Keener Lumber Co. noted, when a fiduciary duty arises, directors of a
corporation may prefer secured creditors over unsecured creditors. 149
N.C. App. at 33, 560 S.E.2d at 827. It is undisputed that ILG had secured
creditors, including CapSource, which were required to be paid before any
unsecured creditors, such as USA Trouser. In fact, the Asset Purchase
Agreement demonstrates that CapSource held a lien on all of ILG’s assets,
and CapSource’s security interest was recorded with the Virginia Secretary
of State. Moreover, the Asset Purchase Agreement and Limited Consent
executed by ILG and Gordon Brothers show that the proceeds of the sale
of ILG’s assets were paid to CapSource, and not to any of the Individual
Defendants. This is uncontroverted.
22
Plaintiff also argues that a fiduciary duty arose from an alleged
“business partnership” between ILG and USA Trouser.
The Plaintiff,
however, conceded at the hearing that there was no such partnership or
joint venture between the parties. In any event, the Plaintiff has presented
no forecast of evidence showing any sharing of profits or co-ownership of
the businesses between the Plaintiff and any of the Individual Defendants.
Generally speaking, sharing of profits and co-ownership of the businesses
are required to establish a business partnership under North Carolina law.
See Best Cartage, Inc. v. Stonewall Packaging, LLC, 727 S.E.2d 291, 299
(N.C. Ct. App. 2012).
The Plaintiff’s claim for a constructive trust is also premised on a
theory of a fiduciary duty. For the reasons stated above, the Plaintiff has
failed to present a forecast of evidence of circumstances from which any
such fiduciary duty could arise, and thus Plaintiff’s attempt to impose a
constructive trust on the Individual Defendants also fails as a matter of law.
For these reasons, the Plaintiff’s claim for breach of fiduciary
duty/constructive is dismissed.
23
C.
Fraud,
Fraudulent
Concealment,
and
Misrepresentation (Third Claim for Relief)
Negligent
According to the Complaint, the Plaintiff relies on three alleged
misrepresentations in support of its claims sounding in fraud. First, the
Plaintiff asserts that Defendants Sheely and Sanchez falsely informed
Plaintiff on June 2, 2011 that ILG’s cash flow situation was improving when
they had specific information regarding ILG’s financials which, if fully
disclosed to Plaintiff, would have resulted in the Plaintiff refusing to ship
socks to ILG. [Complaint, Doc. 1-1 at ¶¶ 107, 115, 116]. Second, the
Plaintiff asserts that Defendants ILG, Sheely, and Sanchez fraudulently
promised to make payments of $100,000 per week to the Plaintiff on in
June 2011 but knew that such payments were not going to be made. [Id. at
¶¶ 108, 113]. Third, the Plaintiff alleges that the Individual Defendants
fraudulently concealed the sale of Plaintiff’s socks to Richelieu. [Id. at ¶¶
109-11].
To prove a claim for fraud in North Carolina, a plaintiff must
demonstrate: (1) a material misrepresentation of a past or existing fact; (2)
that the representation was definite and specific; (3) that it was made “with
knowledge of its falsity or in culpable ignorance of its truth”; (4) that the
misrepresentation was made with the “intention that it should be acted
24
upon”; (5) that the recipient of the misrepresentation reasonably relied and
acted upon the misrepresentation; and (6) that the misrepresentation
resulted in damage to the recipient. Horack v. Southern Real Estate Co. of
Charlotte, Inc., 150 N.C. App. 305, 313, 563 S.E.2d 47, 53 (2002).
Notably, none of the alleged misrepresentations or acts of fraud is
alleged to have been committed by Andrews personally. It is undisputed
that Andrews had no contact or communications with the Plaintiff.
Accordingly, the Court will grant summary judgment in favor of Andrews as
to this claim.
With regard to Sanchez and Sheely, the Court concludes that there
are genuine disputes of fact regarding their affirmative representations
about ILG’s financial condition and ability to continue to pay USA Trouser.
A jury question is also presented with respect to the Defendants’ promises
to make payments of $100,000 per week. Here, the Plaintiff has presented
a sufficient forecast of evidence to show that Sheely and Sanchez made
these representations with the knowledge that ILG did not have the ability
to make such payments within the time stated. Under North Carolina law, a
promissory representation (i.e., a promise to do a certain act in the future)
can serve as a basis for a fraud claim, even though it does not constitute
the representation of a subsisting fact, if “there is evidence of scienter
25
tending to show that the promisor intended to deceive and had no intention
of performing the promise at the time he made it.”
Synergy Financial,
L.L.C. v. Zarro, 329 F. Supp. 2d 701, 711 (W.D.N.C. 2004) (citation
omitted). Based on the forecast of evidence presented, it is possible that a
jury could find that when the promise was made to pay the $100,000 per
week that Sanchez and Sheely knew that ILG had no ability to perform, and
thus the promise was made without the intent to perform. Accordingly, the
Court will deny the Individual Defendants’ motion for summary judgment
with respect to this aspect of the Plaintiff’s fraud claim as to Sanchez and
Sheely.
To the extent that the Plaintiff’s claim of fraud is based on an alleged
duty to disclose that the Individual Defendants concealed the sale of
Plaintiff’s socks to Richelieu, this claim must be dismissed. In order to
prevail on a fraudulent concealment claim, the Plaintiff must demonstrate
that all or some of the Defendants had a duty to disclose material
information, as silence is fraudulent only when there is a duty to speak.
See Griffin v. Wheeler-Leonard & Co., 290 N.C. 185, 198, 225 S.E.2d 557,
565 (1976). The concealed information “must relate to a material matter
known to the party and which it is his legal duty to communicate to the
other . . . whether the duty arises from a relation of trust, from confidence,
26
inequality of condition or knowledge, or other attendant circumstances.”
Breeden v. Richmond Community College, 171 F.R.D. 189, 194 (M.D.N.C.
1997) (quoting Setzer v. Old Republic Life Ins. Co., 257 N.C. 396, 399, 126
S.E.2d 135, 137 (1962)). One of the instances in which a legal duty to
disclose arises is when a fiduciary relationship exists between the parties.
Breeden, 171 F.R.D. at 194 n.4.
As explained above, the forecast of
evidence establishes that a fiduciary relationship did not exist between the
Plaintiff and ILG, much less between Plaintiff and the Individual
Defendants. Also, it is undisputed that the inventory of socks was not sold
to Richelieu until August 2011, long after the Plaintiff shipped its last
products to ILG.
As such, even if there were any duty to provide this
information, the Plaintiff did nothing in reliance on its ignorance of this fact.
The Plaintiff’s negligent misrepresentation claim also lacks merit. In
order to prove a negligent misrepresentation, the Plaintiff must show that:
(1) it relied on information prepared by one or more of the Individual
Defendants, (2) its reliance was justifiable and detrimental, (3) one or more
of the Individual Defendants owed USA Trouser a duty to prepare the
information with reasonable care, and (4) one or more of the Individual
Defendants breached the duty when he prepared the information without
reasonable care. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 58,
27
554 S.E.2d 840, 846 (2001). The duty required to make the claim may
either come from statute, contract, or “may be implied from attendant
circumstances.” Id. at 59, 554 S.E.2d at 846.
As explained above, the forecast of evidence does not demonstrate
that ILG or the Individual Defendants owed a duty to the Plaintiff that would
give rise to a claim for negligent misrepresentation. At best, the Plaintiff
and ILG were mutually interdependent businesses engaged in arms’-length
transactions. North Carolina courts have held that this type of business
relationship does not give rise to a fiduciary duty. Tin Originals, 98 N.C.
App. at 666, 391 S.E.2d at 833.
For these reasons, the Court concludes that summary judgment
should be granted to the Individual Defendants with respect to the Plaintiff’s
claims of fraudulent concealment and negligent misrepresentation. In light
of the genuine issues of material fact related to the Plaintiff’s claim of fraud,
summary judgment will be denied, and the Plaintiff’s fraud claim will
proceed to trial.
D.
Violation of Alleged Statutory Duties Claim (Sixth Claim for
Relief)
The Plaintiff cannot prevail on its claim that ILG’s directors and
officers failed to perform statutory duties by continuing to operate ILG
28
during insolvency when “winding down” was required by law. The duties of
directors and officers pursuant to N.C. Gen. Stat. § 55-8-30 and N.C. Gen.
Stat. § 55-8-42 are duties that directors and officers of a corporation owe to
the corporation, not to the corporation’s creditors. See N.C. Gen. Stat. §
55-8-30 (requiring directors to act in a manner in which they believe is in
the best interests of the corporation); N.C. Gen. Stat. § 55-8-42 (requiring
the same of officers). As such, the Plaintiff lacks standing to prevail on a
claim of “failure to perform statutory duties.” The Individual Defendants are
entitled to summary judgment on this claim.
E.
Conversion and Fraudulent Conveyance Claims (Seventh
and Eighth Claims for Relief)
Based on the allegations of the Plaintiff’s Complaint, the Plaintiff is
not asserting its conversion claim against the Individual Defendants but
instead is only alleging that ILG is liable for conversion. [Complaint, Doc. 11 at ¶142]. Because the Plaintiff’s complaint is devoid of any allegations
that support piercing the corporate veil to hold the Individual Defendants
liable for torts allegedly committed by ILG, the Individual Defendants are
entitled to summary judgment on this claim as well.
The Plaintiff’s claim for fraudulent conveyance also must fail.
North Carolina, a fraudulent conveyance is defined as follows:
29
In
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor’s
claim arose before or after the transfer was made or
the obligation was incurred, if the debtor made the
transfer or incurred the obligation:
(1) With intent to hinder, delay, or defraud any
creditor of the debtor; or
(2) Without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and
the debtor:
a.
Was engaged or was about to engage in a
business or a transaction for which the remaining
assets of the debtor were unreasonably small in
relation to the business or transaction; or
b.
Intended to incur, or believed that the debtor
would incur, debts beyond the debtor’s ability to pay
as they became due.
N.C. Gen. Stat. § 39-23.4(a).
To support its claim of fraudulent conveyance, the Plaintiff relies on
the Asset Purchase Agreement.
There is no forecast of evidence that
indicates that the Individual Defendants were involved in negotiating the
Asset Purchase Agreement or authorizing any conveyance of socks
manufactured by the Plaintiff and shipped to ILG. Indeed, with respect to
Defendants Andrews and Sheely, the Asset Purchase Agreement was not
even completed until after Andrews and Sheely had already resigned from
ILG.
The Asset Purchase Agreement is signed by Williams, the sole
30
remaining member of the Board of Directors of ILG as of the date of the
Asset Purchase Agreement. Moreover, the sale of ILG’s inventory was the
result of a liquidation forced by ILG’s secured creditor, CapSource. The
Plaintiff has presented no forecast of evidence that the transfer of this
inventory was done with the intent to hinder, delay, or defraud a creditor, as
is required by statute to prove a claim for fraudulent conveyance. 4 For
these reasons, the Individual Defendants are entitled to summary judgment
on the Plaintiff’s claim for fraudulent conveyance.
F.
Chapter 75 Claim (Fourth Claim for Relief)
In order to prove a claim under Chapter 75, the Plaintiff must show
that “(1) [the] defendant committed an unfair or deceptive act or practice,
(2) the action in question was in or affecting commerce, and (3) the act
proximately caused injury to the plaintiff.” Dalton, 353 N.C. at 656, 548
S.E.2d at 711; N.C. Gen. Stat. § 75-1.1. Insofar as genuine issues of fact
4
The Plaintiff argues that the liquidation of ILG had the effect of transferring assets to a
“friendly” party for nominal consideration and placing its assets beyond the reach of
creditors, such as the Plaintiff. [See Response, Doc. 72]. This argument, however, is
simply not supported by the record. The forecast of evidence does not suggest any
“friendly” relationship between ILG and Gordon Brothers and/or Richelieu. Nor does the
record support a finding that the consideration provided for ILG’s assets was nominal. It
must be noted that even if ILG’s assets had been liquidated for $23.6 million, as the
Plaintiff suggests would have been a reasonable price, the Plaintiff would still be in the
same position in which it finds itself, as ILG owed its secured creditors more than $50
million. The Plaintiff, as an unsecured creditor, would still have received nothing from
the liquidation.
31
remain as to the Plaintiff’s fraud claim, the Court will also deny summary
judgment with respect to the Plaintiff’s claim under Chapter 75. In all other
respects, however, summary judgment will be granted in favor of the
Defendants on this claim. Accordingly, the Plaintiff’s Chapter 75 claim will
proceed to trial, but only with respect to the allegations of fraud on the part
of Defendants Sheely and Sanchez.5
V.
ORDER
IT IS, THEREFORE, ORDERED that the Plaintiff’s Motion for
Summary Judgment as to Plaintiff’s Claims against Defendant Scott
Andrews [Doc. 55] and the Plaintiff’s Motion for Summary Judgment as to
Claims against the Individual Defendants John Sanchez and William
Sheely [Doc. 57] are DENIED.
IT IS FURTHER ORDERED that the Individual Defendants’ Motion
for Summary Judgment [Doc. 60] is GRANTED IN PART and DENIED IN
PART.
Specifically, the Individual Defendants’ Motion for Summary
Judgment is DENIED with respect to the Plaintiff’s claims for fraud, and
unfair and deceptive trade practices based on fraud, against Defendants
5
At the summary judgment hearing, the Plaintiff argued that the Individual Defendants
can be held personally liable for the unfair and deceptive trade practices of ILG. The
Court requested additional briefing from the parties on this issue. Having reviewed the
parties’ submissions, the Court finds no support in North Carolina law for this novel
theory.
32
Sheely and Sanchez.
The Individual Defendants’ Motion for Summary
Judgment with respect to all claims against Defendant Andrews is
GRANTED.
Except as heretofore specifically denied, the Individual
Defendants’ Motion for Summary Judgment is hereby GRANTED.
IT IS SO ORDERED.
Signed: December 13, 2012
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