Zloop, Inc. v. E Recycling Systems, LLC et al

Filing 22

ORDER denying 18 Defendants' Motion to Dismiss for Failure to State a Claim. Signed by District Judge Richard Voorhees on 12/9/14. (smj)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
STATESVILLE DIVISION
CIVIL ACTION NO. 5:14-CV-87
ZLOOP, INC.,
Plaintiffs,
v.
E RECYCLING SYSTEMS, LLC AND
JAMES CUNNINGHAM A/K/A JIM
CUNNINGHAM,
Defendants.

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ORDER

BEFORE THE COURT is Defendant E Recycling Systems, LLC (“ERS”) and James
Cunningham’s Motion to Dismiss (Doc. 18), to which Zloop, Inc. (“Zloop”) has responded,
(Doc. 20). Defendants have filed a Reply to Zloop’s Response, (Doc. 21).
An extensive discussion of the factual background of the instant matter is unnecessary.
Zloop, LLC purchased recycling equipment from ERS.

(Doc. 1-1, at 2; Doc. 1-2, at 2).

However, Zloop, Inc. is instituting the current action alleging facts and circumstances involving
the Zloop, LLC – ERS transaction. Defendants claim that Zloop, Inc. is a foreign party to the
contract and therefore the current action must be dismissed.
At the outset, the Court notes that the parties have filed public records from both the
North Carolina Secretary of State and Delaware Secretary of State. The Court judicially notices
such documents for the purpose of this 12(b)(6) motion. Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322 (2007); Philips v. Pitt Cnty Mem’l Hosp., 572 F.3d 176, 180 (4th Cir.
2009).1
1

Neither party has objected to the propriety of considering these documents. Although the conversion is not evident
on the face of the complaint, the Court judicially notices such documents. Butler v. Wells Fargo Bank, N.A., No.

1

The Court will now recite the corporate history of Zloop. In July 2012, Zloop was
formed as a Delaware limited liability company (“LLC”). Zloop, LLC filed for a Certificate of
Authority to do business in North Carolina during the same month. (Doc. 19-2). On March 26,
2014, Zloop, LLC filed a Certificate of Conversion in Delaware to convert to a Delaware
corporation. Specifically, the Certificate of Conversion allowed Zloop to “chang[e] its name
from ‘Zloop, LLC’ to ‘Zloop, Inc.’” (Doc. 20-1, at 2). On March 31, 2014, Zloop, Inc. was duly
incorporated under the laws of Delaware. (Doc. 20-2, at 5).2 On April 7, 2014, Zloop, Inc. filed
and was granted a Certificate of Authority by the North Carolina Secretary of State. (Docs. 20-2,
20-3). On the same day, Zloop, LLC filed a Notice of Withdrawal “by reason of merger.” (Doc.
20-4).3
I.

Standard of Review
Defendants originally brought their motion under 12(b)(6) and Zloop treated it as such.

(Docs. 18, 20). However, Defendants’ Reply indicates that the motion is being brought pursuant
to Rule 12(b)(1) for lack of subject matter jurisdiction due to the fact that Zloop allegedly does
not have standing.4

CIV.A. MJG-12-2705, 2013 WL 145886, at *1 (D. Md. Jan. 11, 2013) (taking judicial notice of court filings, even
thought not specifically referenced in complaint). Judicial notice is especially warranted here given that no party
will be prejudiced because Defendants may still bring a 12(c) motion involving other bases for dismissal.
2
Notably, the Secretary of State of Delaware provided that “Zloop, Inc.” was incorporated in Delaware in July of
2012. (Doc. 20-2, at 5).
3
There appears to be some dispute as to what method Zloop used to withdraw. However, the Court finds that such
dispute is immaterial.
4
Defendants also move to dismiss pursuant to Rule 17. Rule 17 provides that “[a]n action must be prosecuted in the
name of the real party in interest.” Fed. R. Civ. P. 17(a). “[A] real party in interest is one that possesses the right to
enforce the claim and has a significant interest in the litigation under North Carolina law.” Murray v. Callaway Golf
Sales Co., No. 3:04CV274, 2006 WL 2192707, at *1 (W.D.N.C. Aug. 1, 2006) (quoting Virginia Elec. & Power Co.
v. Westinghouse Elec. Corp., 485 F.2d 78, 83 (4th Cir. 1973)). North Carolina law provides that “a real party in
interest is a party who is benefited or injured by the judgment in the case.” American Oil Co. v. AAN Real Estate,
LLC, 754 S.E.2d 844, 846 (N.C. 2014) (quoting Woolard v. Davenport, 601 S.E.2d 319, 323 (N.C. Ct. App. 2004)).
North Carolina appears to use standing in the same manner as the real party in interest concept. Id. (a motion to
dismiss for standing implicates the real party in interest requirement). Therefore, the Court will do the same.

2

A plaintiff, in order to establish standing at the motion to dismiss stage, must plausibly
allege that:
(1) it has suffered an injury in fact that is (a) concrete and
particularized and (b) actual or imminent, not conjectural or
hypothetical;
(2) the injury is fairly traceable to the challenged action of the
defendant; and
(3) it is likely, as opposed to merely speculative, that the injury
will be redressed by a favorable decision.
Liberty Univ., Inc. v. Lew, 733 F.3d 72, 89 (4th Cir.) cert. denied sub nom. Liberty Univ. v. Lew,
134 S. Ct. 683 (2013). Challenges to standing are generally brought under 12(b)(1) for lack of
subject matter jurisdiction. Payne v. Chapel Hill N. Properties, LLC, 947 F. Supp. 2d 567, 572
(M.D.N.C. 2013) (citing CGM, LLC v. BellSouth Telecommunications, Inc., 664 F.3d 46, 52 (4th
Cir. 2011)).
Federal Rule of Civil Procedure 12(b)(1) allows a party to move for dismissal where the
court lacks jurisdiction over the subject matter of the action. A party “may challenge subject
matter jurisdiction in one of two ways.” Kerns v. United States, 585 F.3d 187, 192 (4th Cir.
2009). The first way is to argue “that a complaint simply fails to allege facts upon which subject
matter jurisdiction can be based.” Id. (quoting Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.
1982)). In this type of facial challenge, the non-movant receives procedural protection akin to a
motion under 12(b)(6) in that all allegations are taken as true. Id. The second way to challenge
subject matter is to argue that the allegations of the non-movant are not true. Id.
Since this challenge is under the first method, the Court will discuss the protections given
under Rule 12(b)(6). Under a motion to dismiss under 12(b)(6), the court must accept as true all
factual allegations in the complaint, Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per curiam),
and all reasonable inferences must be drawn in the non-movants favor, Ibarra v. United States,

3

120 F.3d 472, 474 (4th Cir. 1997). This requirement applies only to facts, not legal conclusions,
however. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).
Rule 12(b)(6) protects against meritless litigation by requiring sufficient factual
allegations “to raise a right to relief above the speculative level” so as to “nudge[ ] the[ ] claims
across the line from conceivable to plausible.” Twombly, 500 U.S. at 555, 570; see Iqbal, 556
U.S. at 662. Under Iqbal, the court performs a two-step analysis. First, it separates factual
allegations from allegations not entitled to the assumption of truth (i.e., conclusory allegations,
bare assertions amounting to nothing more than a “formulaic recitation of the elements”).
Second, it determines whether the factual allegations, which are accepted as true, “plausibly
suggest an entitlement to relief.” 556 U.S. at 681.
II.

Whether Zloop, Inc. May Institute the Current Action
Section 265 of Title 8 of the Delaware Code allows a limited liability company (“LLC”)

to convert to a Delaware corporation. Specifically, the statute provides that:
When an other entity has been converted to a corporation of this
State pursuant to this section, the corporation of this State shall,
for all purposes of the laws of the State of Delaware, be deemed
to be the same entity as the converting other entity. When any
conversion shall have become effective under this section, for all
purposes of the laws of the State of Delaware, all of the rights,
privileges and powers of the other entity that has converted, and
all property, real, personal and mixed, and all debts due to such
other entity, as well as all other things and causes of action
belonging to such other entity, shall remain vested in the domestic
corporation to which such other entity has converted and shall be
the property of such domestic corporation and the title to any real
property vested by deed or otherwise in such other entity shall not
revert or be in any way impaired by reason of this chapter . . . .
The rights, privileges, powers and interests in property of the
other entity, as well as the debts, liabilities and duties of the other
entity, shall not be deemed, as a consequence of the conversion, to
have been transferred to the domestic corporation to which such
other entity has converted for any purpose of the laws of the State
of Delaware.
4

Del. Code Ann. tit. 8, § 265(f) (2014). The statute further provides that
Unless otherwise agreed for all purposes of the laws of the State of
Delaware or as required under applicable non-Delaware law, the
converting other entity shall not be required to wind up its affairs
or pay its liabilities and distribute its assets, and the conversion
shall not be deemed to constitute a dissolution of such other entity
and shall constitute a continuation of the existence of the
converting other entity in the form of a corporation of this State.
Del. Code Ann. tit. 8, § 265(g) (2014). The statute plainly provides for a change in corporate
form that (1) amounts to a continuation of the former entity and (2) does not constitute a
dissolution, merger, or a transfer of assets.5
Defendants argue that the conversion only allowed Zloop, Inc. to acquire “ZLOOP,
LLC’s rights and liabilities, “for [ ] purposes of the laws of the State of Delaware.” (Doc. 21, at
2) (quoting 8 Del. Code Ann., tit. 8, § 265(f)). Defendants argue that because the contracts were
substantially performed in North Carolina, then Zloop, LLC must have converted into a North
Carolina Corporation to sue under the contract in dispute. (Id.).6 At issue is the meaning of the
phrase “for all purposes of the laws of the State of Delaware” in the context of these two statutes.
Zloop’s existence is predicated upon the existence of Delaware’s corporation statutes. A
corporation’s existence depends on the state law that allows its creation. CTS Corp. v. Dynamics
Corp. of Am., 481 U.S. 69, 89 (1987). “It thus is an accepted part of the business landscape in
this country for States to create corporations, to prescribe their powers, and to define the rights
that are acquired by purchasing their shares.” Id. at 91.

5

The Court notes that North Carolina has a substantially similar method to convert to a domestic North Carolina
corporation. See N.C. Gen. Stat. §§ 55-11A-01 to -04.
6
Taking Defendants’ argument to its logical conclusion, if Zloop had been a larger entity it would have had to
convert under every single state in which it had contracts to retain its rights. This alone warrants ruling against
Defendants with regard to this issue.

5

ERS signed a contract with an entity known as “Zloop, Inc.” What “Zloop, Inc.” is or
means must be determined from the laws of Delaware because they govern its existence. 7
Therefore, when, according to the laws of Delaware, “Zloop, Inc.” means “Zloop, LLC” then
“Zloop, LLC” will be a proper party to the current lawsuit and have standing to sue on the
contract.
Defendants posit that the case of American Oil Co., Inc. v. AAN Real Estate, LLC, 754
S.E.2d 844 (N.C. Ct. App. 2014) compels a different conclusion. In American Oil, AAN Real
Estate, LLC was a party to a lease with an entity known as “American Oil Group.” Id. at 845.
An entity named “American Oil Company, Inc.” filed a complaint against AAN alleging breach
of the lease agreement. Id. The Court of Appeals found that “American Oil Company, Inc.” was
“neither a corporation existing within [North Carolina] currently nor at the time the amended
complaint was filed.” Id. at 846. The Court found that “American Oil Company, Inc.” was an
unincorporated entity and that it did not allege the location of its certification to do business
under an assumed name pursuant to N.C. Gen. Stat. § 1-69.1(a)(3). Therefore, dismissal was
appropriate for failure to comply with the statute. Id. As a separate holding, the Court stated
that dismissal was appropriate because the complaint did not show that “American Oil Company,
Inc.” was “in privity of contract with [American Oil Group] or a beneficiary of any kind to the
lease.” Id. Given that that there were no facts linking the two parties, the Court found that the
complaint did not show that American Oil Company, Inc. suffered an injury because of the
alleged breach. The Court found that either defect warranted dismissal on a lack of standing. Id.
at 846-47.
7

This would result under North Carolina law. Courts in North Carolina interpret a contract according to the parties’
intent at the time of execution and the plain meaning of provisions may provide such intent. State v. Philip Morris
USA Inc., 618 S.E.2d 219, 225 (N.C. 2005). ERS entered into contracts with “ZLOOP, LLC, a limited liability
company organized and existing under the laws of the State of Delaware.” (Doc. 1-1, at 2; Doc. 1-2, at 2). The
parties plainly indicated that that the laws of Delaware governed the existence of Zloop.

6

At the outset, Defendants do not advance that N.C. Gen. Stat. § 1-69.1(a)(3) governs. It
is clear that “Zloop, LLC” differs from “Zloop, Inc.” But that does not end the inquiry. While
the Court did not find any factual linkage between the two entities in American Oil, this Court
has already judicially noticed documents evidencing such a linkage here. This Court finds that
this factual distinction is determinative.8
The Court finds that case of Purina Mills, L.L.C. v. Less, 295 F. Supp. 2d 1017 (N.D.
Iowa 2003) persuasive. In the Purina case, Purina Mills, L.L.C. instituted a breach of contract
action. Id. at 1024. The Defendants asserted that Purina Mills, L.L.C. was not the proper party
to be instituting the action because their agreement was made with Purina Mills, Inc. Id. at 1027.
Purina pointed out that it had converted from a corporation to an LLC pursuant to Del. Code
Ann. tit. 6, § 18-214 (2014), a similar statute to the one at issue. The Court accepted the
assertion that “Purina Mills, L.L.C. obtained the rights, privileges, and obligations of Purina
Mills, Inc. under the Agreement upon the conversion of Purina Mills from a corporation to a
limited liability company.” Id. at 1028; see also Johnson v. SmithKline Beecham Corp., 853 F.
Supp. 2d 487, 496 (E.D. Pa. 2012) (entity that converted to LLC under Delaware law was real
party in interest that consented to removal, no other entity existed that had interest in litigation)
aff'd, 724 F.3d 337 (3d Cir. 2013); Capital Gold Grp., Inc. v. Nortier, 176 Cal. App. 4th 1119,
1130, 98 Cal. Rptr. 3d 439, 446 (2009) (entity that converted under Delaware law had capacity to
pursue claims after conversion). Therefore, the Court refused to dismiss Purina Mills, L.L.C.,
even though Purina Mills, Inc. signed the agreement. 295 F. Supp. 2d at 1028. Zloop, like
Purina Mills, validly converted under Delaware law. Therefore, Zloop, Inc. has all “rights,

8

The Court believes that allowing a dismissal due to a change in corporate structure would amount to elevating form
over substance. See Cent. Wyoming Law Associates, P.C. v. Denhardt, 836 F. Supp. 793, 799 (D. Wyo. 1993)
vacated as moot, 60 F.3d 684 (10th Cir. 1995).

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privileges, and obligations” of Zloop, LLC under the Zloop, LLC – ERS agreement. There is no
other entity that has an interest in the contract.
III.

The Remainder of Defendants’ Motion Will Not be Considered
The remainder of Defendants’ motion to dismiss involves factual content that is not

available from the face of the complaint. Specifically, Defendants posit that notice requirements
or consent requirements of the contracts at issue may not have been complied with. The Court
will hear such arguments if raised at summary judgment because a Plaintiff may plead conditions
precedent generally. Fed. R. Civ. P. 9(c).
IV.

Defendants Must Answer
Plaintiff claims that Defendants must answer the complaint if the motion is denied. In the

original motion to dismiss, Defendants attempted to reserve the right to bring a separate motion
to dismiss. (Doc. 18, ¶ 18). Defendants’ attempted reservation is denied.
Rule 12(g) generally limits successive motions to dismiss. See Fed. R. Civ. P. 12(g)(2)
(“[A] party that makes a motion under [Rule 12] must not make another motion under this rule
raising a defense or objection that was available to the party but omitted from its earlier
motion.”). Rule 12(h)(2) excepts from this general rule of waiver any 12(b)(6) defenses raised in
(1) the answer, (2) a motion under 12(c), and (3) a motion made at trial. See Fed. R. Civ. P.
12(h)(2). Under the plain meaning of the rules, Defendants must now answer and then bring a
12(c) motion if they see fit. See Taylor v. Bettis, 976 F. Supp. 2d 721, 734 n. 5 (E.D.N.C. 2013)
(there is nothing untoward about filing a Rule 12 motion, answering, and then bringing a motion
under 12(c)).
IT IS, THEREFORE, ORDERED that Defendant’s Motion to Dismiss (Doc. 18) is
DENIED.

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Signed: December 9, 2014

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