Levin v. Jacobson,
2015 NCBC 108.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 10 CVS 12062
ERIC LEVIN, HOWARD SHAREFF,
SHAREFF & ASSOCIATES, DDS PA,
individually and derivatively in the right
of LAKEBOUND FIXED RETURN
FUND, LLC, and SILVERDEER OLDE
LIBERTY, LLC,
ORDER AND OPINION ON MOTIONS
Plaintiffs, FOR SUMMARY JUDGMENT
v.
HOWARD A. JACOBSON, CILPS
ACQUISITION LLC, and PROVINCE
GRANDE OLDE LIBERTY LLC,
Defendants.
{1} THIS MATTER is before the Court upon the Motion for Summary
Judgment filed by Plaintiffs Eric Levin (“Levin”), Howard Shareff (“Shareff”), and
Shareff & Associates, DDS PA, individually and derivatively in the right of
Lakebound Fixed Return Fund, LLC (“Lakebound”) and SilverDeer Olde Liberty,
LLC (“SDOL”) (collectively, “Plaintiffs”) (“Motion for Summary Judgment”) and the
Cross-Motion for Summary Judgment filed by Defendants Howard A. Jacobson
(“Jacobson”), CILPS Acquisition LLC (“CILPS”), and Province Grande Olde Liberty
LLC (“PGOL”) (collectively, “Defendants”) (“Cross-Motion for Summary Judgment,”
collectively with Plaintiffs’ Motion for Summary Judgment, the “Motions”) in the
above-captioned case.
{2} After considering the parties’ briefs in support of and opposition to
Plaintiffs’ Motion for Summary Judgment and Defendants’ Cross-Motion for
Summary Judgment, the appropriate evidence of record, and the arguments of
counsel at the hearing held on the Motions, the Court hereby DENIES Plaintiffs’
Motion for Summary Judgment and GRANTS in part and DENIES in part
Defendants’ Cross-Motion for Summary Judgment.
Parry Tyndall White, by James C. White and Michelle M. Walker, for
Plaintiffs Eric Levin, Howard Shareff, and Shareff & Associates, DDS PA,
individually and derivatively in the right of Lakebound Fixed Return Fund,
LLC and SilverDeer Olde Liberty, LLC.
Robinson Elliott and Smith, by William C. Robinson and Katherine
Armstrong, for Defendant Province Grande Olde Liberty LLC.
Howard A. Jacobson, for Defendants Howard A. Jacobson and CILPS
Acquisition LLC.
Bledsoe, Judge.
I.
PROCEDURAL HISTORY
{3} This case involves a lengthy procedural history stretching over five years
and containing numerous parties, some of which are no longer involved in this
lawsuit. The initial Complaint was filed in August 2010 by fourteen plaintiffs
alleging six original causes of action against four defendants.
{4} The Second Amended Complaint includes only the parties now reflected in
the caption and six causes of action.1 Although the Second Amended Complaint
does not specifically label which Defendants should be held liable for each of
Plaintiffs’ causes of action, it appears to the Court that Plaintiffs allege: (1)
constructive trust and accounting against all Defendants; (2) breach of fiduciary
duty against all Defendants; (3) constructive fraud against Mr. Jacobson; (4)
conversion against all Defendants; (5) quantum meruit against Mr. Jacobson; and
(6) permanent injunctive relief against all Defendants. (Second Am. Compl. ¶¶ 76–
106.)
1 Although Plaintiffs’ Motion for Summary Judgment and Defendants’ Cross-Motion for Summary
Judgment were both filed before the Second Amended Complaint, it appears from the parties’ filings
that the parties intend for their previously-filed Motions to apply to the Second Amended Complaint.
The Court also allowed the parties to file supplemental briefing on the Motions. Accordingly, the
Court deems the parties’ Motions to apply to Plaintiffs’ Second Amended Complaint. See Emergys
Corp. v. Consert, Inc., 2012 NCBC LEXIS, at *3 n.4 (N.C. Super. Ct. April 5, 2012).
{5} This Court2 held a hearing on the Motions, at which Plaintiffs and
Defendant PGOL were represented by counsel, and Defendant Howard A. Jacobson,
a member of the North Carolina State Bar, represented himself and CILPS.
{6} The time for briefing, arguments, and further submissions has now passed
and the Motions are ripe for resolution.
II.
RELEVANT FACTUAL BACKGROUND
{7} While findings of fact are not necessary or proper on a motion for summary
judgment, “it is helpful to the parties and the courts for the trial judge to articulate
a summary of the material facts which he considers are not at issue and which
justify entry of judgment.” Collier v. Collier, 204 N.C. App. 160, 161–62,
693 S.E.2d
250, 252 (2010) (quotations and citation omitted). Therefore, the Court limits its
factual recitation to the undisputed material facts necessary to decide the Motion,
and not to resolve issues of material fact.
{8} The individual Plaintiffs, Levin and Shareff, are investors in three limited
liability investment companies established by Jacobson through SilverDeer LLC
(“SilverDeer”): (i) Lakebound, (ii) SilverDeer Carolinas Caribbean I LLC, and (iii)
SDOL. (Second Am. Compl. ¶ 13.)
{9} On or about September 21, 2007, Levin invested $500,000 in Lakebound,
and on or about April 16, 2009, Shareff also invested $500,000 in Lakebound.
{10} In acknowledging the numerous complexities of the Jacobson-affiliated
LLCs, the Motions focus on three factual scenarios: (1) the alleged Lakebound
Ponzi scheme, (2) the purported transfer of $100,000 from Lakebound to CILPS,
and (3) the purported transfer of $188,000 from Lakebound to PGOL.
A. The Alleged Ponzi Scheme
{11} Jacobson and his former partner, Richard Deckelbaum, created SilverDeer,
LLC (“SilverDeer”) in 2003 as the first step in building a private equity business
with a focus on real estate development. (Jacobson Aff. ¶ 4.) Jacobson and
2 This case was originally designated a mandatory complex business case under N.C. Gen. Stat. § 7A-
45.4(b) and assigned to the Honorable John R. Jolly on September 7, 2010. The case was
subsequently reassigned to the undersigned by Order Reassigning Case on January 6, 2015.
Deckelbaum structured their investments so that one LLC would hold title to a
certain real estate asset, while another LLC would own the interests in that asset.
SilverDeer was the holding company that typically held profit interests or “carried
interests,” which Jacobson describes as ownership interests received as a result of
financing the transactions. (Jacobson Aff. ¶¶ 4a–b.)
{12} Jacobson and Deckelbaum later created SilverDeer Management, LLC
(“SilverDeer Management”), whose purpose was to provide management services—
including accounting, payroll, property management, and other services—to
SilverDeer and the other investment LLCs. (Jacobson Aff. ¶ 4c.) At the time of its
creation, Jacobson and Deckelbaum owned equal interests in SilverDeer
Management and were its only members or managers.
{13} Jacobson and Deckelbaum also created two investment funds, one of which
was Lakebound. (Jacobson Aff. ¶ 4a.) Lakebound was designed as a high-yield,
fixed-return vehicle that would invest in real estate projects and offer a fixed return
to investors. Lakebound’s Private Placement Memorandum indicated that members
could expect a return of 10% on capital contributions. (Shareff Aff. Ex. A 1.)
SilverDeer Management, which was in turn managed by Jacobson and Deckelbaum,
served as Lakebound’s initial manager. However, Lakebound’s most recent annual
report on file with the North Carolina Secretary of State identifies Jacobson as
Lakebound’s manager. (Lakebound Fixed Return Fund, LLC Annual Report,
attached to Pls.’ Mem. Supp. Summ. J., hereinafter “Lakebound 2009 Annual
Report.”) Plaintiffs allege that Lakebound was set up with the singular goal of
generating cash for Jacobson and Deckelbaum. (Pls.’ Mem. Supp. Summ. J. 1.)
{14} The first transaction contemplated for Lakebound was the purchase of a
portion of SilverDeer’s ownership interest in Olde Liberty Golf and Country Club
(“Olde Liberty”). (Jacobson Dep. v.1, 102; Shareff Aff. Ex. A. 10.) Olde Liberty is a
single-family residential community and golf course located in Franklin County,
North Carolina. (Second Am. Compl. ¶ 22.) In 2005, prior to the development of the
golf course and the residential community, Olde Liberty Club, LLC (“OLC LLC”)
purchased the Olde Liberty property. (Wolf Aff. ¶ 5.) OLC LLC financed the
purchase with a loan from a hedge fund and later secured contracts with builders
for the sale of existing and future lots on the Olde Liberty property. (Wolf Aff. ¶¶
5–6.) The contracts were sizeable enough that, if paid in full, they would have
generated sufficient funds to pay off OLC LLC’s existing and anticipated debt and
to return all of the investors’ capital contributions. (Wolf Aff. ¶ 7.) One of the main
investors in OLC LLC was SDOL, which held a $2,600,000 equity share in the
company and was entitled to priority profit share of $3,000,000. (Wolf Aff. ¶¶ 7, 15.)
SilverDeer in turn owned a share of SDOL. (Jacobson Aff. Ex. G.)
{15} On the same day that Lakebound filed its Articles of Organization with the
North Carolina Secretary of State, Lakebound and SilverDeer entered into a
Membership Interest Purchase Agreement whereby SilverDeer sold an ownership
interest in SDOL, and thus, through SDOL, an interest in Olde Liberty, to
Lakebound for $2,500,000, of which $750,000 was to be paid at closing. Lakebound
was to pay SilverDeer the remaining $1,750,000 out of its capital contributions and
cash flow, although no schedule or deadline was in place. (Shareff Aff. Ex. G.)
Jacobson signed on behalf of both SilverDeer and Lakebound. Lakebound’s Private
Placement Memorandum identified this as a conflict of interest transaction.
(Shareff Aff. Ex. A 13.)
{16} The ownership interest in Olde Liberty (“Olde Liberty Interest”) had a
projected profit value of $3,500,000, which meant that Lakebound could
theoretically realize profits over time on the sale of Olde Liberty Club lots.
Plaintiffs allege that the transaction had only the immediate effect of supplying
SilverDeer—and its manager Jacobson—with immediate access to cash that it
otherwise would not have seen for years. (Pls.’ Mem. Supp. Summ. J. 6–7.)
{17} A similar transaction occurred in December of 2007, when SilverDeer sold
to Lakebound its interests in SilverDeer Paradise Resort, LLC, and Paradise
Resort, LLC, which owned a condominium development in Myrtle Beach, South
Carolina. (Jacobson Aff. ¶ 85.) SilverDeer sold Lakebound this interest for
$3,100,000, of which $0 was due at closing. The remainder (the “Paradise Resort
Debt”) was owed to SilverDeer in installments, although the agreement included no
payment schedule or deadlines. Jacobson again acted as signatory for both parties
to the transaction. (Jacobson Aff. Ex. R.) Eventually, when Paradise Resort could
not pay Lakebound in cash, it conveyed title to some condominiums to Lakebound.
(Jacobson Dep. v.1, 68.)
{18} Bank statements for Lakebound show that as funds were invested into
Lakebound, they were quickly transferred into SilverDeer’s own accounts. (Mense
Dep. v.1, 41, Exh. 39.) Plaintiffs allege that Lakebound raised a total of $1,965,000
between September 2007 and March 2008 but never used the funds to invest in the
manner described in its formation documents. (Pls. Mem. Supp. Summ. J. 5–6.)
Plaintiffs argue that as investors paid money into Lakebound, Jacobson
immediately funneled funds into SilverDeer and paid returns to old investors with
this new money. (Pls.’ Mem. Supp. Summ. J. 6.)
{19} In the real estate and financial downturn of 2008, OLC LLC’s revenue
streams dried up. The builders who held contracts to buy Olde Liberty lots
withdrew, and OLC LLC was unable to find other interested buyers. (Wolf. Aff. ¶
23.) OLC LLC was unable to repay its investors, including SDOL, and it defaulted
on loans owed to:
i. Fifth Third Bank, for approximately $4,800,000;
ii. Paragon Commercial Bank (“Paragon”), for approximately $6,450,000;
and
iii. Interim-HZ Funding, for approximately $6,800,000.
{20} On November 11, 2008, Jacobson, on behalf of SilverDeer Management,
sent a letter notifying Lakebound investors that it was suspending distributions,
noting that Olde Liberty Club was its primary asset. (Shareff Aff. Ex. E.)
B. The CILPS Foreclosure
{21} In mid-2009, Interim-HZ Funding began foreclosing on the portion of the
Olde Liberty Club that secured its loan. (Jacobson Aff. ¶ 47.) After the foreclosure
occurred, a series of upset bids were placed. Diana Padgett, Jacobson’s wife,
submitted a bid on behalf of a related LLC. (Jacobson Aff. ¶ 53.) Ultimately, Erik
Troan placed the prevailing upset bid of $2,000,000. (Jacobson Aff. ¶ 59.) He later
assigned this bid to CILPS Acquisition, LLC (“CILPS”), in which Jacobson invested
$100,000 for a 5.5% ownership interest. (Jacobson Aff. ¶ 63.)
{22} Plaintiffs allege, and Jacobson admits, that the $100,000 he personally
invested in CILPS came from Lakebound. In October of 2009, Lakebound received
some funds as a result of the sale of some Paradise Resort condominiums. (Pls.’
Mem. Supp. Summ. J. 12.) Plaintiffs contend that Jacobson directed $100,000 from
Lakebound to SilverDeer and then to himself. (Pls.’ Mem. Supp. Summ. J. 12.)
Jacobson does not dispute this and contends that the transfer represented a valid
payment of the Paradise Resorts Debt. (Jacobson Aff. ¶ 94.)
C. The PGOL Foreclosure
{23} In late 2008 and early 2009, OLC LLC worked with Paragon to stave off
foreclosure against the part of the Olde Liberty Club secured by the $6,450,000
loan. Jacobson and a different group of investors formed Province Grande Olde
Liberty, LLC (“PGOL”) to provide capital to prevent foreclosure. (Jacobson Aff. ¶
34.) PGOL and Paragon negotiated an agreement by which Paragon loaned PGOL
funds to buy the Olde Liberty Club assets out of foreclosure for the same amount
owed by OLC LLC. (Pls. Mem. Supp. Summ. J. 13.) Paragon allegedly made this
loan because PGOL assured Paragon that it had new investors willing to put capital
into the project. (Pls. Mem. Supp. Summ. J. 14.) PGOL paid Paragon $236,761.56
at closing to purchase the land out of foreclosure. (Mense Dep. Ex. 73 at 10.)
PGOL’s general ledger notes that it received $188,000 at closing from Lakebound.
(Mense Dep. Ex. 73 at 10.)
{24} Jacobson also directed that the $188,000 transfer from Lakebound be
made. (Mense Dep. Ex. 82.) However, he again alleges that the transfer was a
valid payment of the Paradise Resorts Debt. (Jacobson Aff. ¶ 89.) PGOL contends
that the $188,000 transfer was a loan by Lakebound. (Def. PGOL’s Resp. Br. to Pls.’
Supplemental. Br. 2–3.)
III.
ANALYSIS
{25} Summary judgment under Rule 56(c) is only appropriate “if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and
that any party is entitled to judgment as a matter of law.” Craig v. New Hanover
Cty. Bd. of Educ., 363 N.C. 334, 337,
678 S.E.2d 351, 353 (2009). “The party
seeking summary judgment bears the initial burden of demonstrating the absence
of a genuine issue of material fact.” Liberty Mut. Ins. Co. v. Pennington,
356 N.C.
571, 579,
573 S.E.2d 118, 124 (2002) (citing DeWitt v. Eveready Battery Co.,
355
N.C. 672, 681,
565 S.E.2d 140, 146 (2002)). A genuine issue is one “supported by
substantial evidence” and “an issue is material if the facts alleged would constitute
a legal defense.” DeWitt,
355 N.C. at 681,
565 S.E.2d at 146. “[O]nce the party
seeking summary judgment makes the required showing, the burden shifts to the
nonmoving party to produce a forecast of evidence demonstrating specific facts, as
opposed to allegations, showing that he can at least establish a prima facie case at
trial.” Gaunt v. Pittaway,
139 N.C. App. 778, 784–85,
534 S.E.2d 660, 664 (2000).
All of the “[e]vidence presented by the parties is viewed in the light most favorable
to the non-movant.” Summey v. Barker,
357 N.C. 492, 496,
586 S.E.2d 247, 249
(2003).
A. Breach of Fiduciary Duty
{26} All parties seek summary judgment on Plaintiffs’ individual and derivative
breach of fiduciary duty claims, which allege that (i) Jacobson owed a fiduciary duty
to Lakebound and the individual Plaintiffs, and (ii) Jacobson breached these
fiduciary duties by misappropriating Lakebound funds for his own personal benefit.
(Pls.’ Mem. Supp. Summ. J. 16–20.)
i. Individual Claims
{27} Generally, “[s]hareholders . . . cannot bring individual actions to recover
what they consider their share of the damages suffered by the corporation. Barger
v. McCoy Hillard & Parks, 346 N.C. 650, 660,
488 S.E.2d 215, 220–21 (1997).
Instead, a claim arising from injury to a corporation is properly a derivative action,
because the loss of an investment is typically identical to the injury suffered by the
corporation as a whole. See Green v. Freeman,
367 N.C. 136, 144,
749 S.E.2d 262,
269 (2013). Under the North Carolina Limited Liability Company Act, N.C. Gen.
Stat. § 57C-1-01 et seq.,3 members of an LLC are treated like corporate
shareholders and managers are similar to directors. Kaplan v. O.K. Techs., L.L.C.,
196 N.C. App. 469, 473–74,
675 S.E.2d 133, 137 (2009). Managers owe fiduciary
duties to the company but not to individual members.
Id.
{28} This Court has previously explained that there are two exceptions to this
rule prohibiting individual actions by LLC members:
The North Carolina Supreme Court has recognized two exceptions to
this general rule, holding that “shareholders, creditors and guarantors
may bring an individual action against a third party for breach of
fiduciary duty when (1) ‘the wrongdoer owed [them] a special duty’ or
(2) they suffered a personal injury ‘distinct from the injury sustained
by . . . the corporation itself.’ [Green], 367 N.C. at 142, 759 S.E.2d at
268 (quoting Barger, 346 N.C. at 659,
488 S.E.2d at 219). ‘The
existence of a special duty thus would be established by facts showing
that defendants owed a duty to plaintiffs that was personal to
plaintiffs as shareholders and was separate and distinct from the duty
defendants owed the corporation.’ Barger, 346 N.C. at 659,
488 S.E.2d
at 220.
Significantly for this case, our courts have held that a special duty will
exist ‘when the wrongful actions of a party induced an individual to
become a shareholder.’ Id.
Atkinson v. Lackey,
2015 NCBC LEXIS 21, at *14 (N.C. Super. Ct. Feb. 27,
2015).4
3 Chapter 57C of the General Statutes was repealed and replaced by Chapter 57D, effective on
January 1, 2014. Because this case was commenced prior to Chapter 57D’s effective date, and
because the parties’ briefing relies on Chapter 57C, the Court elects to apply that section to its
analysis. See N.C. Gen. Stat. § 57D-11-03(b) (2015) (“Any proceeding commenced before January 1,
2014, may be completed in accordance with the law then in effect.”).
4 Although it originally discussed fiduciary duties in the context of corporations, Barger and its
progeny apply equally to LLCs. See Dawson v. Atlanta Design Assocs., Inc.,
144 N.C. App. 716, 719
n.1,
551 S.E.2d 877, 880 n.1 (2001) (applying the Barger rule to limited liability companies).
{29} Plaintiffs argue that they fall under the second exception and suffered an
injury distinct from the LLC’s injury. (Pls.’ Supplemental Br. Supp. Summ. J. 4–5.)
Our Supreme Court has held that injury is personal to a shareholder when a “‘legal
basis exists to support plaintiff’s allegations of an individual loss, separate and
distinct from any damage suffered by the corporation.’” Energy Investors Fund,
L.P. v. Metric Constructors, Inc., 351 N.C. 331, 335,
525 S.E.2d 441, 444 (2000)
(quoting Barger,
346 N.C. at 659,
488 S.E.2d at 220). “[H]opes for profits are hardly
unique,” and the loss of an investment typically is identical to the injury suffered by
the corporate entity as a whole. Energy Investors,
351 N.C. at 336,
525 S.E.2d at
444. Further, no individual injury exists on the basis of a person’s unique amount
of investment.
Id. In determining whether a plaintiff experienced a distinct injury,
the question is whether the plaintiff is in a less favorable position when compared
to all other similarly-situated investors. Jackson v. Marshall,
140 N.C. App. 504,
509,
537 S.E.2d 232, 235 (2000) (citing Energy Investors,
351 N.C. at 336,
525
S.E.2d at 444).
{30} Plaintiffs, therefore, have the burden of presenting evidence that their
injury is peculiar or personal to themselves. According to Plaintiffs’ theory, each
investor suffered individual harm because each investor’s capital contributions were
transferred from Lakebound to SilverDeer within days of deposit into Lakebound’s
account. (Pls.’ Supplemental Br. Supp. Summ. J. 5.) For example, under this
theory, Shareff claims that he was harmed individually when he made a $140,000
capital contribution to Lakebound on February 20, 2008 and Lakebound transferred
$125,000 to SilverDeer on February 21, 2008. (Mense Dep. Ex. 39; Aff. Sharreff ¶
8.)
{31} Plaintiffs have not identified any legal basis supporting their theory that
the timing of these transactions makes the injury personal. Plaintiffs’ alleged
injury is the diminution in value of their membership interests in Lakebound,
which is identical to the loss experienced by Lakebound. Plaintiffs’ individual
claims for breach of fiduciary duty therefore must fail as a matter of law. See
Energy Investors, 351 N.C. at 336,
525 S.E.2d at 444 (“That [the plaintiff] invested
an amount different from other limited partners hardly makes for an ‘individual
injury’”); Barger,
346 N.C. at 659,
488 S.E.2d at 220 (“[D]iminution or destruction of
the value of their shares as the result of defendants’ [malfeasance] . . . is precisely
the injury suffered by the corporation itself.”).
{32} Plaintiffs also allege that, under the other exception identified in Barger,
Jacobson owed them a “special duty” that was distinct from any duty he owed to
Lakebound. (Pls.’ Mem. Supp. Summ. J. 16–20.) A special duty is one that is
personal to shareholders and separate and distinct from the duty owed to the
corporation. Barger, 346 N.C. at 659,
488 S.E.2d at 220. Our courts have found a
special duty when a party wrongfully induced an individual to become a
shareholder, when a party performed individualized services directly for the
shareholder, and when a party advised shareholders independently of the
corporation.
Id. (noting that the list is illustrative); see also Howell v. Fisher,
49
N.C. App. 488, 498,
272 S.E.2d 19, 26 (1980), disc. review denied,
302 N.C. 218,
277
S.E.2d 69 (1981) (holding that stockholders’ claims for wrongful inducement to
invest is necessarily an individual rather than a derivative claim because the
alleged negligence occurred before plaintiffs became stockholders).
{33} Here, Plaintiffs intimate that Jacobson induced them to invest in
Lakebound. Shareff states that he chose to invest in Lakebound because of positive
experiences investing in other entities managed by Jacobson (Shareff. Aff. ¶ 5), and
Levin states that he invested in Lakebound on the advice of his financial advisor,
who had a professional relationship with Jacobson. (Levin Aff. ¶¶ 4–5.) Levin
acknowledges that he had no contact or communication with Jacobson prior to
investing, (Levin Dep. v.1, 10–11), and Shareff indicates only that he may have
spoken with Jacobson prior to investing in Lakebound, although he cannot identify
any representation made by Jacobson (Shareff Dep. v.1, 16). Plaintiffs, however,
have not identified any authority supporting a conclusion that an inducement to
invest could occur without some meaningful communication prior to investment.
See, e.g., Energy Investors, 351 N.C. at 338,
525 S.E.2d at 445 (holding that,
“[a]bsent some indication whereby defendants directly solicited [plaintiff] with the
intent to induce its participation in [the partnership],” plaintiff failed to allege a
special duty under Barger); Howell, 49 N.C. App. at 495–96, 272 S.E.2d at 24–25
(finding that plaintiffs sufficiently alleged inducement to invest where defendant
corporation’s agents personally told plaintiffs that the land the corporation intended
to mine was favorable for mining and that purchase of the corporation’s stock was a
good investment).
{34} Plaintiffs also suggest that Jacobson owed them an individual duty
because he “completely dominated” Lakebound. (Pls.’ Mem. Supp. Summ. J. 19–20.)
When fiduciary duties are not owed as a matter of law, a fiduciary relationship may
nevertheless arise in fact when “there is confidence reposed in one side, and
resulting domination and influence on the other.” Dalton v. Camp, 353 N.C. 647,
651–52,
548 S.E.2d 704, 707–08 (2001) (quoting Abbitt v. Gregory,
201 N.C. 577,
598,
160 S.E. 896, 906 (1931)); see also Curl v. Key,
311 N.C. 259, 264,
316 S.E.2d
272, 275 (1984) (“‘[A fiduciary] relationship exists in all cases where there has been
a special confidence reposed in one who in equity and good conscience is bound to
act in good faith and with due regard to the interests of the one reposing
confidence.’” (quoting Link v. Link,
278 N.C. 181, 192,
179 S.E.2d 697, 704 (1971))).
{35} Plaintiffs again suffer from the same problem that they had minimal
engagement with Jacobson before Lakebound failed. Levin did not speak to
Jacobson about his investment until 2009, after the Lakebound distributions ended.
(Levin Dep. v.1, 13–14.) Shareff likewise cannot specifically recall any
communication he had with Jacobson until the time when he demanded the return
of his investment. (Shareff Dep. v.1, 15–16.) Plaintiffs’ failure to demonstrate that
they placed special confidence in Jacobson personally “is insufficient to take the
parties’ relationship . . . from arm’s length to fiduciary.” Dallaire v. Bank of Am.,
N.A., 367 N.C. 363, 368,
760 S.E.2d 263, 267 (2014) (affirming that no fiduciary
relationship existed on the basis of a loan officer’s mere assertion that the plaintiffs
could obtain a favorable mortgage loan); Crumley & Assocs., P.C. v. Charles Peed &
Assocs., P.A.,
219 N.C. App. 615, 621,
730 S.E.2d 763, 767 (2012) (“North Carolina
courts generally find that parties who interact at arms-length do not have a
fiduciary relationship with each other . . . .”). See also Highland Paving Co. v. First
Bank,
227 N.C. App. 37, 42–43,
742 S.E.2d 287, 292 (2013) (affirming dismissal of
fiduciary duty claim when the parties’ written agreements and previous dealings
failed to demonstrate that plaintiff placed “special trust and confidence” in
defendant); Branch Banking and Trust Co. v. Thompson,
107 N.C. App. 53, 61,
418
S.E.2d 694, 699, disc. review denied,
332 N.C. 482,
421 S.E.2d 350 (1992) (“[P]arties
to a contract do not thereby become each others’ fiduciaries . . . .”).5
{36} Because Plaintiffs are unable to present evidence demonstrating that
Jacobson owed them individual duties, the Court denies summary judgment as to
their individual claims for breach of fiduciary duty and grants summary judgment
in favor of Jacobson on the individual claims.
ii. Derivative Claims
{37} Plaintiffs also bring a derivative claim alleging that Jacobson breached his
fiduciary duty to Lakebound. A manager owes a duty to the LLC to act in good
faith, with the care of an ordinary prudent person in a like position, and in the
manner the manager reasonably believes to be in the best interests of the LLC.
N.C. Gen. Stat. § 57C-3-22 (2012). The LLC Act, N.C. Gen. Stat. § 57C et seq.,
allows the members to limit a manger’s liability for breach of these duties. N.C.
Gen. Stat. § 57C-3-32(a). However, a manager’s liability cannot be limited for acts
known to be in conflict with the interests of the LLC or for acts from which the
manager derived an improper personal benefit. N.C. Gen. Stat. § 57C-3-32(b).
Lakebound’s operating agreement had such a provision limiting its manager’s
liability to acts known to be in conflict with the LLC’s interests and acts from which
the manager received an improper personal benefit. (Shareff Aff. Ex. B, hereinafter
“Lakebound Operating Agreement,” § 3.7.)
5 Plaintiffs have also failed to show that Jacobson’s limited relationship to them was one in which
Jacobson “figuratively [held] all the cards,” an additional fatal deficiency in Plaintiffs’ claim. See
Kaplan, 196 N.C. App. at 475,
675 S.E.2d at 138 (“[o]nly when one party figuratively holds all the
cards -- all the financial power or technical information, for example -- have North Carolina courts
found that the special circumstance of a fiduciary relationship has arisen.”).
{38} As an initial matter, Jacobson contends that Plaintiffs, having failed to
make a demand upon the LLC, lack standing to bring a derivative claim. (Def.
Jacobson’s Resp. to Pls.’ Supplemental Br. 3–4.) N.C. Gen. Stat. § 57C-8-01(b)
dictates that a complaint must allege with particularity a member’s efforts to obtain
the action the plaintiff desires from the managers or the reasons for the plaintiff’s
failure to do so. Plaintiffs in this case have alleged that they did not make efforts
under Section 57C-8-01 because Jacobson controlled the affairs of Lakebound and
they feared that he would further convert the LLC’s assets should demand be made.
(Second Am. Compl. ¶ 75.) In interpreting Section 57C-8-01, this Court has held
that an LLC “does not face the same inflexible demand requirements attendant to a
derivative suit brought on behalf of a closely-held corporation.” Island Beyond, LLC
v. Prime Capital Group, LLC, 2013 NCBC LEXIS 48, at *11–13 (N.C. Super. Ct.
Oct. 30, 2013) (Gale, J.) (holding that Section 57C-8-01 was satisfied when the
complaint alleged only that the defendant controlled all decision-making of the
subject entity). Therefore, the Court concludes that Plaintiffs have satisfied the
statute and have standing to bring a derivative claim on behalf of Lakebound. See
Crouse v. Mineo,
189 N.C. App. 232, 244–45,
658 S.E.2d 33, 40–41 (2008) (holding
that the LLC demand requirement was satisfied even when plaintiff made no effort
to label the claims as derivative).
{39} Plaintiffs’ derivative claim is premised on their contention that Jacobson
was Lakebound’s manager. Lakebound’s 2009 Annual Report filed with the
Secretary of State lists Jacobson as Lakebound’s manager. Plaintiffs contend that
North Carolina law entitles them to rely on the Annual Report as proof that
Jacobson was manager:
Any person dealing with a limited liability company . . . may rely conclusively
upon its most recent annual report and any amendments to it on file with the
Secretary of State as to the identity of its managers, except to the extent the
person has actual knowledge that a person identified therein as a manager is
not a manager.
N.C. Gen. Stat. § 57C-3-25 (2012).
{40} Jacobson asserts in response that he “was not the manager and never was
the manager” of Lakebound. (Jacobson Aff. ¶ 92.) In his opposition to Plaintiffs’
Motion, he identifies this as a disputed fact. (Defs.’ Mem. Opp. Summ. J. 7.)
Jacobson states that he signed the Annual Report in his name out of the belief that
SilverDeer Management, as an entity and the alleged actual manager, could not
sign the Annual Report. (Jacobson Aff. ¶ 92.) Jacobson instead points to the
Lakebound Operating Agreement, which identifies SilverDeer Management as
Lakebound’s manager. (Lakebound Operating Agreement § 2.28.) The individual
subscription agreements signed by the individual investors also identify SilverDeer
Management as the manager of Lakebound, and Jacobson as the manager of
SilverDeer Management. (Jacobson Aff. Ex. A.) In advancing this evidence,
Jacobson essentially argues that Plaintiffs had knowledge that Jacobson was not in
fact Lakebound’s manager and are therefore not entitled to rely on the Annual
Report under Section 57C-3-25. In light of this conflicting evidence, the Court finds
that there exist genuine issues of material fact concerning whether Jacobson was
Lakebound’s manager and thus whether he owed fiduciary duties to Lakebound. As
such, the Court denies summary judgment as to all parties on Plaintiffs’ derivative
claim for breach of fiduciary duty.
B. Constructive Fraud
{41} Plaintiffs seek summary judgment on their claims for constructive fraud
against Jacobson. Jacobson seeks summary judgment dismissing the claims for
constructive fraud.
{42} Constructive fraud arises in circumstances “where a confidential or
fiduciary relationship exists.” Forbis v. Neal, 361 N.C. 519, 528,
649 S.E.2d 382,
388 (2007) (quoting Watts v. Cumberland Cnty Hosp. Sys., Inc.,
317 N.C. 110, 115,
343 S.E.2d 879, 884 (1986)). A plaintiff is entitled to a presumption that fraud
occurred when the “superior party obtains a possible benefit through the alleged
abuse of the confidential or fiduciary relationship.” Id. at 529,
649 S.E.2d at 388.
To prove a claim for constructive fraud, a plaintiff must allege “facts and
circumstances (1) which created the relation of trust and confidence, 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.”
Terry v. Terry,
302 N.C. 77, 85,
273 S.E.2d 674, 679 (1981). “Put simply, a plaintiff
must show (1) the existence of a fiduciary duty, and (2) a breach of that duty.”
Governor’s Club Inc. v. Governor’s Club Ltd. P’ship,
152 N.C. App. 240, 249–50,
567
S.E.2d 781, 788 (2002) (citation omitted).
{43} Having determined that Jacobson did not owe fiduciary duties to the
individual Plaintiffs but that material questions of fact remain as to Jacobson’s
alleged fiduciary duties to Lakebound, the Court grants Jacobson’s motion for
summary judgment as to Plaintiffs’ individual claims for constructive fraud and
denies both motions for summary judgment on the derivative claim for constructive
fraud. See, e.g., Green v. Condra, 2009 NCBC LEXIS 20, at *21–22, 34–36 (N.C.
Super. Ct. Aug. 14, 2009) (evaluating both individual and derivative claims for
constructive fraud).
C. Conversion
{44} Plaintiffs contend that the transfers from Lakebound to CILPS and PGOL
constitute conversion. (Pls.’ Mem. Supp. Summ. J. 24.) North Carolina recognizes
conversion as the “unauthorized assumption and exercise of ownership over goods
or personal chattels belonging to another, to the alteration of their condition or the
exclusion of an owner’s rights.” Variety Wholesalers, Inc. v. Salem Logistics Traffic
Servs., LLC, 365 N.C. 520, 523,
723 S.E.2d 744, 747 (2012) (citation omitted).
“There are, in effect, two essential elements of a conversion claim: ownership in the
plaintiff and wrongful possession or conversion by the defendant.”
Id.
Traditionally, claims for conversion of money could only stand if the funds could be
specifically traced and identified.
Id. at 528,
723 S.E.2d at 750. Under North
Carolina law, “funds transferred electronically may be sufficiently identified
through evidence of the specific source, specific amount, and specific destination of
the funds in question.”
Id. at 529, 723 S.E.2d at 750–51.
{45} Specifically, Plaintiffs allege conversion by Jacobson in association with
the $100,000 transfer to CILPS (“CILPS Transfer”) and the $188,000 transfer to
PGOL (“PGOL Transfer”). In the CILPS Transfer, Plaintiffs contend that Jacobson
arranged for Erik Troan to bid on some of the OLC LLC assets in foreclosure, that
Troan placed the bid and transferred the bid to CILPS, and that Jacobson
transferred $100,000 from Lakebound to CILPS, which allowed him to take a 5%
ownership interest individually. In the PGOL Transfer, Plaintiffs contend that
Paragon was foreclosing on a portion of the Olde Liberty property, that Jacobson
negotiated a deal with Paragon in which Paragon loaned PGOL funds to purchase
the assets out of foreclosure, that a holding company owned by Jacobson and his
family had a 33% ownership interest in PGOL, and that Jacobson transferred
$188,000 from Lakebound to PGOL in order to secure Paragon’s loan to PGOL.
{46} The funds allegedly converted were held by Lakebound, and Lakebound’s
operating agreement affirms that “[l]egal title to all Company assets shall be held in
the name of the Company.” (Lakebound Operating Agreement § 1.7.) As such,
Plaintiffs’ conversion claim can only be asserted derivatively on behalf of
Lakebound. No party disputes that Lakebound owned the funds in question.
{47} “Where there has been no wrongful taking or disposal of the goods, and the
defendant has merely come rightfully into possession and then refused to surrender
them, demand and refusal are necessary to the existence of the tort.” White v.
Consol. Planning, Inc., 166 N.C. App. 283, 310–11,
603 S.E.2d 147, 165 (2004)
(quoting Hoch v. Young,
63 N.C. App. 480, 483,
305 S.E.2d 201, 203, disc. review
denied,
309 N.C. 632,
308 S.E.2d 715 (1983)). After making a demand, the
“unqualified refusal to surrender . . . is of course a conversion.” Hoch,
63 N.C. App.
at 483,
305 S.E.2d at 203. Plaintiffs allege that because “CILPS and PGOL
exercised ownership rights over [the funds] . . . each committed conversion of
Lakebound’s money.” (Pls.’ Mem. Supp. Summ. J. 25.) Plaintiffs do not allege any
wrongful act by CILPS or PGOL other than possession of the funds, (Levin Dep. v.1,
9; Shareff Dep. v.1, 135–36, 152), which means Plaintiffs must have first made a
demand for the return of the funds in order to sustain a conversion claim.
Plaintiffs, however, have neither alleged nor offered proof of demand and refusal as
to Defendants CILPS and PGOL; thus, the Court grants summary judgment in
favor of CILPS and PGOL on the conversion claim.
{48} As to Jacobson, on the other hand, Plaintiffs allege “wrongful taking.”
Jacobson contends that the $288,000 was not converted but instead properly
distributed to SilverDeer in payment of a valid debt owed by Lakebound to
SilverDeer. (Defs.’ Mem. Opp. Summ. J. 23.) In the transaction giving rise to the
Paradise Resort Debt, SilverDeer sold a prospective profit interest of $3,000,000 to
Lakebound for a reduced price of $2,500,000, all of which was to be paid in
unspecified installments after closing. Therefore, Jacobson argues, the transfer of
funds from Lakebound to CILPS and PGOL was lawful as a payment of the
Paradise Resort Debt owed to SilverDeer.
{49} As for the $100,000 transfer, Jacobson admits that he received a
distribution in that amount from SilverDeer, and that SilverDeer received those
funds from Lakebound as partial payment of the Paradise Resorts Debt. (Jacobson
Aff. ¶ 94.) Plaintiffs in turn have presented evidence that Jacobson directed
Lakebound’s law firm to return $100,000 from its trust account to Lakebound’s
operating account, that the law firm deposited $100,000 into Lakebound’s account
(Jacobson Dep. v.1, 180–82), that SilverDeer withdrew $100,000 from Lakebound’s
account on November 3, 2009 (Shareff Aff. Ex. K), that the $100,000 that left the
firm’s trust account was eventually used as a capital contribution in CILPS
(Jacobson Dep. v.1, 214), and that Jacobson owned a $100,000 interest in CILPS,
(Troan Aff. Ex. C).
{50} The Court concludes that summary judgment is inappropriate at this time
on the conversion claim against Jacobson based on the $100,000 transfer. Material
questions of fact remain, including whether the Paradise Resorts Debt, which had
no terms for repayment and was signed by Jacobson on behalf of all parties, was a
valid debt that entitled Jacobson, through SilverDeer, to transfer $100,000 from
Lakebound to himself.
{51} As to the $188,000 transfer, Plaintiffs have demonstrated that Jacobson
directed that $188,000 be withdrawn from Lakebound’s account, and that such
funds were deposited into the account of a real estate law firm. (Pls.’ Mem. Supp.
Summ. J. 14; Mense Dep. Ex. 82.) On the same day, PGOL’s general ledger reflects
a deposit of $188,000 with the notation “record amount received at closing from
Lakebound.” (Mense Dep. Ex. 73 at 10.) However, while Jacobson’s affidavit again
asserts that he was entitled to transfer that money out of Lakebound as payment on
the Paradise Resorts Debt, other documents evince this transaction as a “loan” from
Lakebound to PGOL. PGOL’s 2009 balance sheet lists this as a liability “payable to
Lakebound.” PGOL’s brief also categorizes this transaction as a loan. (Def. PGOL’s
Resp. Br. to Pls.’ Supplemental. Br. 2–3.) If this transfer was a loan, rather than a
payment of a debt, further questions exist as to whether the loan fell within the
manager’s discretion under the operating agreement or whether Jacobson received
an improper personal benefit. If the transfer was in payment of the Paradise
Resorts Debt, then material questions of fact remain as to the validity of that debt
and whether the LLCs actually treated the transfer as a payment on the debt.
Therefore, the Court concludes that material issues of fact remain, and denies
summary judgment to Jacobson and Plaintiffs on the claim for conversion against
Jacobson based on the $188,000 transfer.
D. Quantum Meruit
{52} The Second Amended Complaint seeks recovery in quantum meruit of “all
assets, income streams and corporate opportunities diverted by Jacobson.” At the
hearing, Plaintiffs clarified that they have pleaded this claim alternatively.
{53} A plaintiff may recover in quantum meruit “on an implied contract theory
for the reasonable value of services rendered.” Horack v. S. Real Estate Co. of
Charlotte, Inc., 150 N.C. App. 305, 311,
563 S.E.2d 47, 52 (2002) (citation omitted).
The law is settled that “an express contract precludes an implied contract with
reference to the same matter.”
Id. (citing Concrete Co. v. Lumber Co., 256 N.C 709,
713,
124 S.E.2d 905, 908 (1962)). Recovery in quantum meruit, therefore, “is not an
appropriate remedy when there is an actual agreement between the parties.”
Id.
(quoting Whitfield v. Gilchrist,
348 N.C. 39, 42,
497 S.E.2d 412, 414 (1998)).
{54} In this case, the Lakebound Operating Agreement governed Plaintiffs’
rights arising from their investments in Lakebound. The Lakebound Operating
Agreement further prescribed rights and obligations for Jacobson acting through
SilverDeer Management. No party disputes these facts, and so the Court concludes
that an actual agreement existed, which precludes recovery in quantum meruit.
The Court therefore grants summary judgment to Defendant on this claim.
E. Injunctive Relief
{55} “A permanent injunction is an extraordinary equitable remedy and may
only properly issue after a full consideration of the merits of a case.”
CB&I Constructors, Inc. v. Town of Wake Forest, 157 N.C. App. 545, 548,
579
S.E.2d 502, 504 (2003) (citation omitted). Furthermore, Plaintiffs would only be
entitled to injunctive relief if they can demonstrate that they have “no adequate
remedy at law and [that] irreparable harm will result if the injunction is not
granted.” Vest v. Easley,
145 N.C. App. 70, 76,
549 S.E.2d 568, 574 (2001) (citation
omitted).
{56} As a matter of timing, Plaintiffs’ request for preliminary injunctive relief
must fail. Since the filing of their Second Amended Complaint on February 13,
2013, Plaintiffs have not pursued their claim for preliminary injunctive relief, and
as such they have not offered any evidence of irreparable harm. See Precision Walls
v. Servie, 152 N.C. App. 630, 635,
568 S.E.2d 267, 271 (2002) (noting that a
preliminary injunction is intended to preserve the status quo during litigation).
Because there has not yet been a “full consideration of the merits of the case,” the
Court cannot grant a permanent injunction at this time. CB&I Constructors, Inc.,
157 N.C. App. at 548,
579 S.E.2d at 504.
{57} Plaintiffs have additionally failed to present any evidence that they lack
an adequate remedy at law. In fact, all of their claims arise from the loss of the
money that they invested in Lakebound and other Jacobson-affiliated entities, the
recovery of which as monetary damages would be an adequate remedy at law. See
Whalehead Props. v. Coastland Corp., 299 N.C. 270, 283,
261 S.E.2d 899, 907–08
(1980) (discussing money damages as a legal remedy). Therefore, because the
Plaintiffs have not forecast evidence entitling them to equitable relief, the Court
grants summary judgment for the Defendants on the claim for injunctive relief.
Vest,
145 N.C. App. at 76,
549 S.E.2d at 574 (2001) (reversing denial of defendant’s
summary judgment motion when plaintiff sought equitable relief and had adequate
remedies at law).
F. Constructive Trust & Accounting
{58} Plaintiffs request that the Court impose a constructive trust.
A constructive trust is a duty, or relationship, imposed by courts of
equity to prevent the unjust enrichment of the holder of title to, or of
an interest in, property which such holder acquired through fraud,
breach of duty or some other circumstance making it inequitable for
him to retain it against the claim of the beneficiary of the constructive
trust. . . . [T]here is a common, indispensable element in the many
types of situations out of which a constructive trust is deemed to arise.
This common element is some fraud, breach of duty or other
wrongdoing by the holder of the property, or by one under whom he
claims. . . .
Roper v. Edwards, 323 N.C. 461, 464,
373 S.E.2d 423, 424–25 (1988) (quoting
Wilson v. Dev. Co.,
276 N.C. 198, 211–12,
171 S.E.2d 873, 882 (1970)).
{59} While the imposition of a constructive trust may be appropriate at a future
time, the Court cannot grant summary judgment to any party on the Plaintiffs’
request for a constructive trust because it has not at this point conclusively found
wrongdoing by Defendants. That no legal claims survive against CILPS and PGOL
is not fatal to Plaintiffs’ ability to obtain a constructive trust against them as
holders of the allegedly misappropriated funds. Our Supreme Court has held that
“continued acceptance of . . . funds [when the defendant breached no duty but had
constructive notice of the disputed ownership] could be considered unconscientious
or inequitable and could thus permit the imposition of a constructive trust.” Variety
Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 365 N.C. 520, 531,
723
S.E.2d 744, 752 (2012). See also Houston v. Tillman,
760 S.E.2d 18, 22 (N.C. Ct.
App. 2014) (“Indeed, the Supreme Court’s application of the constructive trust
doctrine in Variety Wholesalers establishes that actual wrongdoing, such as fraud
or breach of fiduciary duty, is not necessary for imposition of a constructive trust.”)
After fact finding regarding the underlying events in this case, “the ultimate
decision whether to impose a constructive trust as an equitable remedy would rest
in the discretion of the trial court.” Variety Wholesalers,
365 N.C. at 531,
723
S.E.2d at 752. Therefore, the Court denies summary judgment as to all parties on
this claim.
IV.
CONCLUSION
{60} For the foregoing reasons:
1. Plaintiffs’ Motion for Summary Judgment is DENIED;
2. Defendants’ Cross-Motion for Summary Judgment is GRANTED in part
and DENIED in part;
3. Plaintiffs’ individual claims for breach of fiduciary duty are DISMISSED
with prejudice;
4. Plaintiffs’ individual claims for constructive fraud are DISMISSED with
prejudice;
5. Plaintiffs’ individual claims for conversion are DISMISSED with
prejudice;
6. Plaintiffs’ derivative claims for conversion against Defendants CILPS and
PGOL are DISMISSED with prejudice
7. Plaintiffs’ claims for recovery in quantum meruit are DISMISSED with
prejudice;
8. Plaintiffs’ claims for injunctive relief are DISMISSED with prejudice; and
9. Plaintiffs’ following claims and remedies survive:
a. Constructive trust and accounting;
b. Breach of fiduciary duty (derivative);
c. Constructive fraud (derivative); and
d. Conversion (derivative) against Defendant Jacobson based on the
$100,000 transfer and the $188,000 transfer.
{61} Consistent with the parties’ Joint Status Report and Proposal, Levin v.
Jacobson, Wake County No. 10-CVS-12062 (N.C. Super. Ct. Jan. 30. 2015), the
Court will issue an order in the related case, Shareff v. Jacobson, Wake County No.
09-CVS-9983 (the “Shareff Action”), setting forth a short supplemental briefing
schedule on the Motion to Consolidate in the Shareff Action. After resolution of the
Motion to Consolidate in the Shareff Action, the Court will schedule this matter for
trial.
SO ORDERED, this the 7th day of December, 2015.
/s/ Louis A. Bledsoe, III
Louis A. Bledsoe, III
Special Superior Court Judge
for Complex Business Cases
