Smith v. E&E Co., Ltd.
Filing
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MEMORANDUM OF DECISION AND ORDER granting 9 Deft's Motion to Dismiss Counterclaims for constructive fraud and deceptive trade practices with prejudice; sustaining 18 Pltf's Objections to M&R; and rejecting 17 Memorandum and Recommendations. Signed by District Judge Martin Reidinger on 8/1/12. (ejb)
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:12cv18
J. TEDD SMITH,
Plaintiff,
vs.
E&E CO., LTD.,
Defendant.
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MEMORANDUM OF
DECISION AND ORDER
THIS MATTER is before the Court on the Plaintiff’s Motion to Dismiss
Counterclaims
[Doc. 9]; the
Magistrate
Judge’s
Memorandum
and
Recommendation [Doc. 17] regarding the disposition of said motion; and the
Plaintiff’s Objections to the Memorandum and Recommendation [Doc. 18].
I.
PROCEDURAL BACKGROUND
On December 20, 2011, the Plaintiff J. Tedd Smith filed his Complaint
in the Buncombe County General Court of Justice, Superior Court Division,
asserting a claim for breach of his employment contract against the Defendant
E&E Co., Ltd. [Complaint, Doc. 1-1]. On January 26, 2012, the Defendant
removed the action to this Court on the basis of diversity jurisdiction. [Notice
of Removal, Doc. 1].
On February 2, 2012, the Defendant filed its Answer and Counterclaims
for constructive fraud and deceptive trade practices.
[Answer and
Counterclaims, Doc. 4]. On February 27, 2012, the Plaintiff filed his Motion
to Dismiss the Defendant’s Counterclaims, contending that the Defendant had
failed to allege its claims with sufficient particularity.
[Motion to Dismiss
Counterclaims, Doc. 9].
Pursuant to 28 U.S.C. § 636(b) and the Standing Orders of Designation
of this Court, the Honorable David S. Cayer, United States Magistrate Judge,
was designated to consider the Plaintiff’s Motion to Dismiss Counterclaims
and to submit a recommendation for its disposition. On May 30, 2012, the
Magistrate Judge entered a Memorandum and Recommendation in which he
recommended that the Motion to Dismiss Counterclaims be denied. [Doc. 17].
The
Plaintiff
filed
a
timely
Objection
to
the
Memorandum
and
Recommendation on June 17, 2012. [Doc. 18]. The Defendant filed a Reply
in opposition on July 5, 2012. [Doc. 19].
Having been fully briefed, this matter is now ripe for disposition.
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II.
STANDARD OF REVIEW
A.
Standard of Review Applicable to Objections to Magistrate
Judge’s Memorandum and Recommendation
The Federal Magistrate Act requires a district court to “make a de novo
determination of those portions of the report or specific proposed findings or
recommendations to which objection is made.” 28 U.S.C. § 636(b)(1). In
order “to preserve for appeal an issue in a magistrate judge’s report, a party
must object to the finding or recommendation on that issue with sufficient
specificity so as reasonably to alert the district court of the true ground for the
objection.” United States v. Midgette, 478 F.3d 616, 622 (4th Cir. 2007). The
Court is not required to review, under a de novo or any other standard, the
factual or legal conclusions of the magistrate judge to which no objections
have been raised. Thomas v. Arn, 474 U.S. 140, 150, 106 S.Ct. 466, 88
L.Ed.2d 435 (1985). Additionally, the Court need not conduct a de novo
review where a party makes only “general and conclusory objections that do
not direct the court to a specific error in the magistrate's proposed findings
and recommendations.” Orpiano v. Johnson, 687 F.2d 44, 47 (4th Cir. 1982).
B.
Rule 12(b)(6) Standard of Review
In order to survive a motion to dismiss pursuant to Rule 12(b)(6), “a
complaint must contain sufficient factual matter, accepted as true, to ‘state a
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claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662,
678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). To
be “plausible on its face,” a plaintiff must demonstrate more than “a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129
S.Ct. 1937.
[T]he Supreme Court has held that a complaint must
contain “more than labels and conclusions, and a
formulaic recitation of the elements of a cause of
action will not do.” To discount such unadorned
conclusory allegations, “a court considering a motion
to dismiss can choose to begin by identifying
pleadings that, because they are not more than
conclusions, are not entitled to the assumption of
truth.”
This approach recognizes that “naked
assertions” of wrongdoing necessitate some “factual
enhancement” within the complaint to cross “the line
between possibility and plausibility of entitlement to
relief.”
At bottom, determining whether a complaint states on
its face a plausible claim for relief and therefore can
survive a Rule 12(b)(6) motion will “be a contextspecific task that requires the reviewing court to draw
on its judicial experience and common sense. But
where the well-pleaded facts do not permit the court
to infer more than the mere possibility of misconduct,
the complaint has alleged – but it has not ‘show[n]’ –
‘that the pleader is entitled to relief,’” as required by
Rule 8. ... [E]ven though Rule 8 “marks a notable and
generous departure from the hyper-technical,
codepleading regime of a prior era, ... it does not
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unlock the doors of discovery for a plaintiff armed with
nothing more than conclusions.”
Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Twombly,
550 U.S. at 555, 557, 127 S.Ct. 1955 and Iqbal, 556 U.S. at 678-79, 129 S.Ct.
1937).
III.
FACTUAL BACKGROUND
Taking the allegations set forth in the Defendant’s Counterclaims as
true, the following is a summary of the relevant facts.
A.
June 2, 2008 Formation of 1967 Bedding, LLC
The Plaintiff was the President of International Home Fashions, Inc.
(“IHF”) in June 2008. [Answer and Counterclaims, Doc. 4 at ¶ 31]. At that
time, Edmund Jin (“Jin”) was CEO of the Defendant E&E. [Id. at ¶ 2]. On
June 2, 2008, the Plaintiff and Jin formed 1967 Bedding, LLC (“1967
Bedding”). [Id. at ¶ 33]. The original Articles of Organization of 1967 Bedding
identify the Plaintiff as the sole Member/Organizer. [Articles of Organization,
Doc. 4-2 at 2]. A subsequent Amendment to the Articles of Organization
added Jin as Member/Organizer on June 6, 2008. [Amendment of Articles of
Organization, Doc. 4-2 at 4].
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B.
June 3, 2008 Assets Agreement
On June 3, 2008, 1967 Bedding entered into an “Agreement to Sell
Assets” (“Assets Agreement”) with the Plaintiff’s company, IHF. [Answer and
Counterclaims, Doc. 4 at ¶35]. The Assets Agreement indicates that IHF had
insufficient funds to complete the 2008 bedding and blanket season and that
it intended to file a voluntary Chapter 11 bankruptcy proceeding within a
matter of days.
[Assets Agreement, Doc. 4-1 at ¶¶ 1, 7]. Pursuant to the
Agreement, 1967 Bedding agreed to purchase IHF’s inventory of bedding and
blankets and sell this inventory during the 2008 bedding and blanket season.
[Id. at ¶ 2]. The Assets Agreement acknowledges that “1967 Bedding is an
associated business with E&E Co. Ltd. a/k/a JLA.” [Id.]
At the time of the Assets Agreement, however, Plaintiff failed to disclose
a significant financial liability, namely, an agreement between IHF and its
customers (the largest being QVC) that IHF would buy back any inventory
those customers could not sell. [Answer and Counterclaims, Doc. 4 at ¶¶ 3739]. In addition, the Plaintiff represented that IHF products were of good
quality, and he failed to disclose known product issues. [Id. at ¶ 40].
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C.
June 4, 2008 Employment Agreement
On June 4, 2008, the Defendant and the Plaintiff entered an
Employment Agreement, in which the Defendant agreed to hire the Plaintiff
as Vice President of Sales. [Id. at ¶¶ 42-43]. One of the Plaintiff’s duties
under the Employment Agreement was to sell Defendant’s JLA division
products, which included former IHF products. [Employment Agreement, Doc.
1-1 at 8 ¶ 2.1; Answer and Counterclaims, Doc. 4 at ¶ 44]. The Plaintiff and
the Defendant agreed that the Plaintiff would make a targeted amount of
sales.
[Employment Agreement, Doc. 1-1 at 9 ¶ 4.a(2); Answer and
Counterclaims, Doc. 4 at ¶ 45]. The parties further agreed that the Plaintiff
would receive additional compensation based on commissions from the sale
of former IHF product after IHF creditors were paid. [Employment Agreement,
Doc. 1-1 at 9 ¶ 3.2(c); Answer and Counterclaims, Doc. 4 at ¶ 46].
Following the execution of these Agreements, the Defendant was forced
to buy back former IHF product from IHF’s former customers, including QVC.
[Answer and Counterclaims, Doc. 4 at ¶¶ 49-50]. The Defendant has been
unable to sell all of the returned IHF inventory. [Id. at ¶ 51]. The Defendant
also experienced lower than expected sales and more than expected
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customer issues arising from significant defects in the former IHF products.
[Id. at ¶ 52].
On or around February 27, 2009, the Defendant terminated the
Plaintiff’s employment. [Complaint, Doc. 1-1 at ¶ 12]. Thereafter, the Plaintiff
brought this action, asserting claims arising from the breach of the
Employment Agreement. [Id. at ¶¶ 18-20]. The Defendant, in turn, asserted
counterclaims for constructive fraud and deceptive trade practices based upon
an allegation that the Plaintiff owed the Defendant a fiduciary duty “[a]s [a]
Member/Organizer of 1967 Bedding.” [Answer and Counterclaims, Doc. 4 at
¶ 53]. The Defendant asserts in its counterclaims that the Plaintiff breached
this duty when he misrepresented the quality and value of the IHF inventory
as well as his ability to make sales, and that the “Defendant relied on these
misrepresentations in entering the Employment Agreement and Assets
Agreement to its detriment.” [Id. at ¶¶ 54, 55].
IV.
DISCUSSION
The Defendant premises its constructive fraud and deceptive trade
practice claims upon the Plaintiff’s breach of an alleged fiduciary duty to
disclose certain information to the Defendant. For the reasons discussed
herein, however, the Court concludes that the Defendant has failed to allege
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sufficient facts to demonstrate any plausible claims for relief based upon these
alleged nondisclosures.
To maintain a claim for constructive fraud, a party must allege:
circumstances (1) which created the relation of trust
and confidence [the “fiduciary” relationship], and (2)
[which] led up to and surrounded the consummation
of the transaction in which defendant is alleged to
have taken advantage of his position of trust to the
hurt of plaintiff. Put simply, a plaintiff must show (1)
the existence of a fiduciary duty, and (2) a breach of
that duty.
Keener Lumber Co. v. Perry, 149 N.C. App. 19, 28, 560 S.E.2d 817, 823
(citation and internal quotation marks omitted), disc. rev. denied, 356 N.C.
164, 568 S.E.2d 196 (2002).
Generally, to establish a counterclaim for unfair or deceptive trade
practices, the Defendant must show that the Plaintiff (1) engaged in an unfair
or deceptive practice or act, (2) “in or affecting commerce,” and (3) that such
act proximately caused the Defendant actual injury. Mitchell v. Linville, 148
N.C. App. 71, 73-74, 557 S.E.2d 620, 623 (2001). Here, the Defendant bases
its deceptive trade practices claim on the same breach of fiduciary duty which
forms the basis of its constructive fraud claim.
[See Answer and
Counterclaims, Doc. 4 at ¶ 62]. Thus, in order to prevail on its deceptive trade
practices claim, the Defendant must establish some plausible basis for the
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existence of a fiduciary duty on the part of the Plaintiff.
See generally
Governors Club, Inc. v. Governors Club Ltd. P’ship, 152 N.C. App. 240, 250,
567 S.E.2d 781, 788 (2002) (noting allegations sufficient to state claim for
constructive fraud are likewise sufficient to state claim for unfair and deceptive
trade practices) aff’d, 357 N.C. 46, 577 S.E.2d 620 (2003).
Generally speaking, North Carolina court have recognized two types of
fiduciary relationships:
(1) those that arise from legal relations such as
attorney and client, broker and client … partners,
principal and agent, trustee and cestui que trust, and
(2) those that exist as a fact, in which there is
confidence reposed on one side, and the resulting
superiority and influence on the other.
S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC, 189 N.C. App. 601, 613,
659 S.E.2d 442, 451 (2008). In the present case, the Defendant does not
allege any fiduciary relationship “existing as a fact,” nor does the Defendant
allege that it had any of the legal relations with the Plaintiff that North Carolina
Courts have generally recognized as giving rise to fiduciary relationships. At
most, the Defendant has alleged an employment relationship with the Plaintiff.
[See Answer and Counterclaims, Doc. 4 at ¶¶ 42-43]. An employer-employee
relationship, however, does not generally give rise to a fiduciary relationship
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under North Carolina law. See Dalton v. Camp, 353 N.C. 647, 651, 548
S.E.2d 704, 708 (2001).
The Defendant asserts in its Counterclaims that the Plaintiff’s fiduciary
duty to the Defendant arose by virtue of his status as a Member/Organizer of
1967 Bedding. While North Carolina does recognize that managers of a LLC
have a fiduciary duty, such duty flows only to the LLC itself. See Kaplan v.
O.K. Technologies, L.L.C., 196 N.C. App. 469, 473-74, 675 S.E.2d 133, 137
(2009). The Defendant is not the LLC at issue, and thus, any fiduciary duty
that the Plaintiff had to 1967 Bedding does not apply to the Defendant.
In arguing that the Plaintiff owed it a fiduciary duty as a Member of 1967
Bedding, the Defendant repeatedly asserts that it formed 1967 Bedding, LLC
with the Plaintiff. [See Doc. 12 at 8, 10, 12]. These assertions, however, are
contradicted by the 1967 Bedding’s Articles of Organization, as amended,
which identify only the Plaintiff and Edmund Jin as Member-Managers, not the
Defendant.
[Articles of Organization, Doc. 4-2 at 4]. While the Assets
Agreement does make reference to the fact that 1967 Bedding is “an
associated business with E&E,” a mere association between 1967 Bedding
and Defendant, standing alone, is not sufficient to establish that Plaintiff’s
fiduciary duty to 1967 Bedding extended to Defendant. No North Carolina
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case law supports the Defendant’s assertion that the Plaintiff, as a
Member/Organizer of 1967 Bedding, LLC, owed a fiduciary duty to the
Defendant, an entity that did not even hold an ownership interest in 1967
Bedding, LLC but was merely “associated” by reason of Jin’s role as CEO of
the Defendant. Indeed, under North Carolina law, Smith did not even owe a
fiduciary duty to Jin, the only other LLC member, by reason of his interest in
the LLC. See Kaplan, 196 N.C. App. at 473-74, 675 S.E.2d at 137.
Although not specifically alleged in its Counterclaims, the Defendant
claims in its Response to the Motion to Dismiss that a joint venture existed
between the Plaintiff and the Defendant, and that the Plaintiff’s fiduciary duty
arose from this joint venture. [Response to Motion to Dismiss, Doc. 12 at 6-7].
A joint venture is defined as “an association of persons with intent, by way of
contract, express or implied, to engage in and carry out a single business
adventure for joint profit, for which purpose they combine their efforts,
property, money, skill, and knowledge, but without creating a partnership in
the legal or technical sense of the term.” Lake Colony Const., Inc. v. Boyd,
711 S.E.2d 742, 746 (N.C. Ct. App. 2011) (citation omitted). Under North
Carolina law:
[T]he essential elements of a joint venture are (1) an
agreement to engage in a single business venture
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with the joint sharing of profits, (2) with each party to
the joint venture having a right in some measure to
direct the conduct of the other through a necessary
fiduciary relationship. The second element requires
that the parties to the agreement stand in the relation
of principal, as well as agent, as to one another.
Id. at 746-47 (internal citations and quotation marks omitted). A principal is
“one who authorizes another to act on his or her behalf as an agent.” Black’s
Law Dictionary 1312 (9th ed. 2009). “An agent is one who, with another's
authority, undertakes the transaction of some business or the management
of some affairs on behalf of such other, and to render an account of it.”
Phelps-Dickson Builders, L.L.C., v. Amerimann Partners, 172 N.C. App 427,
435, 617 S.E.2d 664, 669 (2005).
The Defendant references the Assets Agreement to establish that the
Plaintiff and the Defendant entered into an implicit joint venture, whereby the
parties would engage in a single business venture with joint sharing of profits.
[Response to Motion to Dismiss, Doc. 12 at pp. 8,10].
The Assets
Agreement, however, was between IHF and 1967 Bedding, not between the
Plaintiff and the Defendant. Therefore, this document does not establish a
joint venture between the parties to this lawsuit. Additionally, the Defendant
argues that the parties stand in the relation of principal and agent to one
another, thus evidencing a joint venture relationship. [Response to Motion to
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Dismiss, Doc. 12 at 10]. While the Employment Agreement establishes that
the Plaintiff was an agent to the Defendant, and the Defendant a principal to
the Plaintiff, the Counterclaims fail to allege facts that demonstrate how the
Defendant acted as an agent to the Plaintiff. Moreover, there is nothing in the
Defendant’s Counterclaims to indicate that the Defendant required the
Plaintiff’s authority to undertake transactions involving the sale of IHF
blankets, or that the Defendant was managing the sale of IHF blankets on
behalf of the Plaintiff. Indeed, the pleadings fail to allege facts to establish
that the Plaintiff had the power to direct the conduct of Defendant in any
manner. Without any plausible allegations to establish that each party stood
as principal, as well as agent, to one another, the Counterclaims fail to allege
the existence of any joint venture between the Plaintiff and the Defendant.
In sum, the Court concludes that the Defendant failed to allege any wellpled facts supporting its conclusory assertion that the Plaintiff owed any
fiduciary duty to the Defendant. Accordingly, the Defendant cannot maintain
claims for constructive fraud and unfair trade acts based upon the existence
of a fiduciary relationship between the Plaintiff and the Defendant.
Within its Response, both to the Motion to Dismiss and to the Plaintiff’s
Objections to the Memorandum and Recommendation, the Defendant
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alternatively requests that the Court grant it leave to replead its Counterclaims
to cure any deficiencies therein. [Response to Motion to Dismiss, Doc. 12 at
21; Reply to Objections, Doc. Doc. 19 at 15].
The Defendant had the
opportunity to amend its Counterclaims as of right once the Motion to Dismiss
was filed. See Fed. R. Civ. P. 15(a)(1)(B). The Defendant, however, failed
to take advantage of this opportunity and instead sought leave to amend as
“alternative relief” to the Plaintiff’s Motion to Dismiss.
The Defendant’s
request for leave to amend is procedurally improper, as the Defendant
included its request in a responsive brief and failed to file a separate motion
as required by the Local Rules. See LCvR 7.1(C)(2). On this basis alone, the
Defendant’s request for leave to amend should be denied. Even if the Court
considered the Defendant’s request, however, the Defendant has failed to
present the Court with a proposed amended pleading.
The Defendant
therefore has denied the Court the opportunity to consider the effect or
efficacy of any hypothetical amendment to its pleading. For these reasons,
the Defendant’s alternative request to amend its Counterclaims is denied.
For the reasons set forth above, the Court concludes that the Plaintiff’s
Motion to Dismiss Plaintiff’s Counterclaims should be granted.
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ORDER
IT IS, THEREFORE, ORDERED that the Plaintiff’s Objections to the
Magistrate Judge’s Memorandum and Recommendation [Doc. 18] are
SUSTAINED, and the Memorandum and Recommendation of the Magistrate
Judge [Doc. 17] is REJECTED.
IT IS FURTHER ORDERED that the Defendant’s Motion to Dismiss
Counterclaims [Doc. 9] is GRANTED, and the Defendant’s Counterclaims for
constructive fraud and deceptive trade practices are hereby DISMISSED
WITH PREJUDICE.
IT IS SO ORDERED.
Signed: August 1, 2012
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