Zoutewelle v. Mathis,
2018 NCBC 94.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG 17 CVS 20422
SARA JAMES ZOUTEWELLE f/k/a
SARA JAMES MATHIS, individually
and derivatively on behalf of 5620
FAIRVIEW, LLC and 5628
FAIRVIEW, LLC; SOUTHSTAR
HOLDINGS-BURLINGTON I, LLC;
SOUTHSTAR HOLDINGS- ORDER AND OPINION ON
DURHAM, GASTONIA, LLC; DEFENDANTS’ MOTIONS TO
SOUTHSTAR HOLDINGS-FRANKLIN, LLC; SOUTHSTAR DISMISS PURSUANT TO RULE
HOLDINGS-REYNOLDA, LLC; 12(b)(1) AND RULE 12(b)(6)
SOUTHSTAR HOLDINGS-ROCK
HILL, LLC; SOUTHSTAR
HOLDINGS-DILWORTH I, LLC;
SOUTHSTAR HOLDINGS-NORTH
CHARLOTTE, LLC; SOUTHSTAR
HOLDINGS-BURLINGTON II, LLC;
CARTERET COMMONS, LLC;
SOUTHSTAR HOLDINGS, LLC;
SOUTHSTAR HOLDINGS-SMITHFIELD III A, LLC;
SOUTHSTAR HOLDINGS-UNCC,
LLC; ELKIN WG REALTY, LLC;
GAPWAY ROAD REALTY, LLC;
GROT, LLC; NEW BERN AVENUE
REALTY, LLC; and NEXT REALTY
INVESTMENTS, LLC,
Plaintiffs,
v.
JEFFREY DON MATHIS; NEXT
REALTY MANAGEMENT, INC.; and
MSA PROPERTY HOLDINGS, LLC,
Defendants.
THIS MATTER comes before the Court on Defendants’ Jeffrey Don Mathis;
Next Realty Management, Inc. and MSA Property Holdings, LLC’s (“Defendants”)
Motions to Dismiss Pursuant to Rule 12(b)(1) and Rule 12(b)(6) of the North Carolina
Rules of Civil Procedure (“Rules”). (“Motion”; ECF No. 37.)
THE COURT, having considered the Motion, the briefs in support of and in
opposition to the Motion, the exhibits attached to the First Amended Verified
Complaint, the arguments of counsel at the hearing, and other appropriate matters
of record, concludes that the Motion should be GRANTED, in part, and DENIED, in
part, for the reasons set forth below.
Fred B. Monroe of James, McElroy & Diehl, P.A. for Plaintiffs Sara
James Zoutewelle f/k/a Sara James Mathis, individually and
derivatively on behalf of 5620 Fairview, LLC and 5628 Fairview, LLC,
Southstar Holdings-Burlington I, LLC, Southstar Holdings-Durham,
Gastonia, LLC, Southstar Holdings-Franklin, LLC; Southstar Holdings-Reynolda, LLC, Southstar Holdings-Rock Hill, LLC, Southstar
HoldingsDilworth I, LLC, Southstar Holdings-North Charlotte, LLC,
Southstar Holdings-Burlington II, LLC, Carteret Commons, LLC,
Southstar Holdings, LLC, Southstar Holdings-Smithfield III A, LLC,
Southstar Holdings-UNCC, LLC, Elkin WG Realty, LLC, Gapway Road
Realty, LLC, Grot, LLC, New Bern Avenue Realty, LLC, and Next Realty
Investments, LLC.
R. Jeremy Sugg and Tricia M. Derr of Lincoln Derr PLLC for Defendants
Jeffrey Don Mathis, Next Realty Management, Inc., and MSA Property
Holdings, LLC.
McGuire, Judge.
FACTS AND PROCEDURAL HISTORY
A. The parties
1. Plaintiff Sara James Zoutewelle (“Zoutewelle”) and Defendant Jeffrey
Don Mathis (“Mathis”) were married on May 22, 1982. They separated on July 12,
2006 and divorced on July 15, 2009. (First Am. Ver. Compl., ECF No. 29 at ¶ 34.)
2. Plaintiffs 5620 Fairview, LLC, 5628 Fairview, LLC, Southstar Holdings-
Burlington I, LLC, Southstar Holdings-Durham, Gastonia, LLC, Southstar Holdings-
Franklin, LLC, Southstar Holdings-Reynolda, LLC; Southstar Holdings-Rock Hill,
LLC; Southstar HoldingsDilworth I, LLC; Southstar Holdings-North Charlotte, LLC;
Southstar Holdings-Burlington II, LLC; Carteret Commons, LLC; Southstar
Holdings, LLC; Southstar Holdings-Smithfield III A, LLC; Southstar Holdings-
UNCC, LLC; Elkin WG Realty, LLC; Gapway Road Realty, LLC; Grot, LLC; New
Bern Avenue Realty, LLC, and Next Realty Investments, LLC are North Carolina
limited liability companies (collectively “the Real Estate Entities”). (Id. at ¶¶ 2–21.)
3. Defendants NEXT Realty Management, Inc. (“NEXT”) and MSA
Property Holdings, LLC (“Holdings”) are North Carolina companies owned and
controlled by Mathis (collectively, Mathis, NEXT, and Holdings are referred to as
“Defendants”).
4. Non-party Crossroads Realty Group, LLC (“Crossroads”) is a North
Carolina limited liability company owned and controlled by Mathis.
B. The Marital Settlement Agreement
5. Zoutewelle and Mathis entered into a Marital Settlement Agreement
(“MSA”) on May 6, 2009 in order to resolve their respective property rights and other
obligations arising out of their marital relationship. (Id. at ¶ 35; ECF No. 29.3–29.4.)
The MSA divided the ownership of the Real Estate Entities between Mathis and
Zoutewelle, so that both Mathis and Zoutewelle each received a 50% membership
interest in the Real Estate Entities.
6. Under the MSA, Mathis remained the sole manager of the Real Estate
Entities. (Id. at ¶ 37–38.) The Real Estate Entities are “special purpose entities”
that hold income producing real estate or real estate for development. (Id. at ¶ 37.)
The MSA permits Mathis to receive certain fees as manager of the Real Estate
Entities as follows:
(i) A base asset manager fee equal in amount to two
percent (2%) of the gross rental income received by the Real
Estate Entities; provided, however, the amount of these
fees shall not exceed the total sum of $75,000.00 in any
calendar year.
(ii) A sales fee equal in amount to one percent (1%) of
the sale price of each real estate asset of the Real Estate
Entities; provided, however, such fee shall not exceed the
total amount of $50,000.00 per entity.
(iii) In cases where [Mathis] procures a tenant for one of
the Real Estate Entities and no real estate broker is
utilized by the parties, Husband shall receive a lease fee
equal to four percent (4%) of the gross rental due under the
lease, to be paid one-half upon execution of the lease and
one-half upon tenant’s occupancy.
(Id. at ¶ 39.) Mathis is authorized to hire other entities, including Crossroads, to
provide services for the Real Estate Entities. However, if Mathis hires Crossroads to
provide services to a Real Estate Entity, he is not permitted under the MSA to receive
the same fees twice for the same work, once as the managing member of the Real
Estate Entities and again for work that Crossroads performs. (Id. at ¶ 40.)
7. The MSA also provides, in relevant part, as follows:
Each party shall be entitled to be fully informed regarding
the Real Estate Entities and their assets, and each party
shall be entitled to copies of all significant documents
regarding the Real Estate Entities and their assets.
Husband shall provide Wife with information about all
significant activities of each real estate entity and all
significant transactions concerning the real estate assets of
the entities, such as, for example, acquisition of new
tenants, sale of a real estate asset, and profits and losses
from operations. Husband shall also provide Wife with
copies of all significant documents concerning the Real
Estate Entities and their assets, such as, for example,
income tax returns, periodic financial statements, leases
for tenants and modifications thereof, and contracts for the
sale of real estate assets. In addition, Wife shall be entitled
to inspect the books and records of each Real Estate Entity
at reasonable times and places, during ordinary business
hours, upon her request. (ECF No. 29.3, at § 6.16(h).)
Except for the asset management fees which are to be paid
to Husband (as set forth above), Husband and Wife shall
receive equal distributions of money from each of the Real
Estate Entities, and each party shall receive distributions
at the same time as the other party receives distributions.
These distributions shall include, but not be limited to,
distribution of net rental income and proceeds from the
sale of real estate assets. (Id. at § 6.16(i).)
On or before the 15th day of each month, Husband shall
determine the amount of money available for distribution
to each party, after payment of current expenses and
establishing reserves for anticipated future expenses and
liabilities. Husband shall prepare a report which
summarizes his decisions, and shall cause the distributions
to be made directly to each party. Husband shall provide
Wife with a copy of these monthly reports. The reports
shall be substantially similar to the reports which
Husband has been providing to Wife for the past several
months. If there is any material change in the
management structure of the Real Estate Entities, such as,
for example, a change in personnel who are responsible for
leasing the real estate assets of the Real Estate Entities,
then Husband shall promptly notify Wife by means of a
note in the monthly reports. (Id.)
There is no agreement or guarantee as to the amount which
will be available for distribution to the parties each month.
There are a number of variables which could adversely or
beneficially affect the amount. However, it is the hope of
the parties that each of them will receive distributions
which range from $25,000.00 - $50,000.00 per month. (Id.)
In order to divide the net economic value of the Real Estate
Entities, it is the intention of the parties to eventually sell
the real estate assets of each of the Real Estate Entities, to
equally divide the net proceeds from such sales, and to also
divide all other assets of the Real Estate entities, and then
to dissolve such entities. (Id., at § 6.16(m).)
8. Finally, section 1.1 of the MSA provided that “each party hereby
stipulates, and acknowledges that he or she … :
(b) Has had adequate opportunity to seek disclosure
of financial information and documents from the
other party;
(c ) Is reasonably informed concerning the financial
circumstances of both parties, including the income
of the other party, the nature and extent of property
owned by the parties, and the debts of the parties;
(d) Has waived the necessity for additional
disclosure of financial information from the other
party;
(e) Has been represented by separate legal counsel
in connection with the negotiation, preparation,
review, and execution of this Agreement. …”
(Id., at § 1.1.)
9. The terms of the MSA supersede the terms contained in the Real Estate
Entities’ operating agreements (“Operating Agreements”). (ECF No. 29, at ¶ 40.)
10. Finally, in section 6.18 of the MSA Mathis represented that he owned a
20% interest in Carolina Group Partners, LLC (“CGP”), but that CGP did not own
any real estate or an own interest in any other entity that owned real estate. (Id. at
¶ 118.)
C. Mathis’s alleged misconduct
11. Zoutewelle alleges that Mathis, in breach of the MSA, the Operating
Agreements, and his fiduciary duties: paid himself excessive management, sales, and
lease fees (Id. at ¶¶ 43, 50, 63, 70–98); engaged in self-dealing, usurped corporate
opportunities, and engaged in other improper conduct related to the sales, leasing,
and development of properties held by the Real Estate Entities (Id. at ¶¶ 55–62, 99–
101, 112–14); failed to make equal distributions to Zoutewelle (Id. at ¶¶ 104–06);
provided false and misleading financial reports for the Real Estate Entities (Id. at ¶¶
102–03); failed to provide required reports regarding Real Estate Entities (Id. at ¶
45); refused to provide Zoutewelle with access to the books and records of the Real
Estate Entities (Id. at ¶¶ 44, 124–28); and failed to disclose his interests in other real
estate companies and real estate holdings in negotiating the MSA. (Id. at ¶¶ 118–
23.)
12. On April 9, 2015 Zoutewelle’s attorney sent a letter to Mathis alleging
breaches of his duties and obligations to Zoutewelle and to the Real Estate Entities
(“Demand Letter”). (ECF 29, at ¶130; ECF No. 29.2, at Exh. W.) The Demand Letter
specifically claimed that Mathis was paying himself management fees in excess of
those permitted by the MSA, and made a demand that Mathis pay Zoutewelle
$373,554.43.
13. The Demand Letter also claimed that Mathis had failed to provide
adequate monthly financial reporting regarding the Real Estate Entities to
Zoutewelle as required by the MSA, and had failed to provide copies of two specific
closing statements related to real estate sales made by the Real Estate Entities. The
Demand Letter requested information about a project called “Fairview on Closeburn,”
and anticipated sales of real estate by 5620 Fairview, LLC and 5628 Fairview, LLC.
(ECF 29.2, at Exh. W.) In the Demand Letter, Zoutewelle also requested certain
records from the Real Estate Entities.
14. Finally, the Demand Letter stated that it was “a demand pursuant to
N.C.G.S. § 57D-8-01” on Mathis and “the Real Estate Entities, to take suitable action
to rectify your waste, if any, of the Real Estate Entities’ assets, any self-dealing by
you, or any other abuse of your position, power, or duties that you owe either the Real
Estate Entities, or [Zoutewelle].” (Id.)
15. On November 1, 2017 Zoutewelle filed this lawsuit, (ECF No. 3), and the
case was designated to the North Carolina Business Court by the Chief Justice of the
Supreme Court of North Carolina, and assigned to the undersigned by the Chief
Judge of the North Carolina Business Court. (ECF Nos. 1 and 2.)
16. Zoutewelle subsequently filed the First Amended Verified Complaint
making individual and derivative claims for breach of contract, or alternatively,
unjust enrichment, breach of fiduciary duty, constructive fraud, and conversion;
individual claims for fraud, declaratory relief interpreting the MSA, inspection of the
Real Estate Entities’ records, punitive damages, accounting, and constructive trust.
17. On March 14, 2018, Defendants filed the Motion seeking dismissal of
the claims for breach of contract, unjust enrichment, breach of fiduciary duty,
constructive fraud, conversion, fraud, and constructive trust. Defendants do not
move to dismiss the claims for declaratory relief, inspection of records, punitive
damages, or accounting. Zoutewelle filed a brief in opposition to the Motion, and
Defendants filed a reply brief. The Court held a hearing on the Motion, and the
Motion is now ripe for determination.
ANALYSIS
A. Standards of review
18. Dismissal under Rule 12(b)(1) is proper “[i]f a party does not have
standing to bring a claim [because] a court has no subject matter jurisdiction to hear
the claim.” Estate of Apple v. Commercial Courier Express, Inc., 168 N.C. App. 175,
177,
607 S.E.2d 14, 16 (2005). When considering a motion to dismiss for lack of
standing, the Court must “view the allegations as true and the supporting record in
the light most favorable to the non-moving party.” Mangum v. Raleigh Bd. of
Adjustment,
362 N.C. 640, 644,
669 S.E.2d 279, 283 (2008).
19. The burden is on the party invoking the Court’s subject matter
jurisdiction to establish standing. Marriot v. Chatham Cty., 187 N.C. App. 491, 494,
654 S.E.2d 13, 16 (2007). The Court will only grant a Rule 12(b)(1) motion “if the
material jurisdictional facts are not in dispute and the moving party is entitled to a
judgment as a matter of law.” Wilkie v. Stanley,
2011 NCBC LEXIS 11, at *10 (N.C.
Super. Ct. Apr. 20, 2011) (quoting Southstar Funding, L.L.C. v. Warren, Perry &
Anthony, P.L.L.C.,
445 F. Supp. 2d 583, 585 (E.D.N.C. 2006)).
20. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court’s
inquiry is “whether, as a matter of law, the allegations of the [C]omplaint, treated as
true, are sufficient to state a claim upon which relief may be granted under some
legal theory, whether properly labeled or not.” Harris v. NCNB Nat’l Bank, 85 N.C.
App. 669, 670,
355 S.E.2d 838, 840 (1987). Dismissal is proper “(1) when the
complaint on its face reveals that no law supports plaintiff’s claim; (2) when the
complaint reveals on its face the absence of fact sufficient to make a good claim; [or]
(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s
claim.” Oates v. JAG, Inc.,
314 N.C. 276, 278,
333 S.E.2d 222, 224 (1985). In deciding
a motion to dismiss, the Court must construe the Complaint liberally and accept all
well-pleaded allegations as true, Laster v. Francis,
199 N.C. App. 572, 577,
681
S.E.2d 858, 862 (2009), but is not required “to accept as true allegations that are
merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”
Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human Servs.,
174 N.C. App. 266,
274,
620 S.E.2d 873, 880 (2005) (citation and quotations omitted). In addition, the
Court may consider documents that are the subject of Plaintiff’s Complaint and to
which the Complaint specifically refers. Oberlin Capital, L.P. v. Slavin,
147 N.C.
App. 52, 60,
554 S.E.2d 840, 847 (2001).
B. Mathis’s fiduciary duties
21. Underlying several of Zoutewelle’s claims in this action are her
allegations that Mathis owes fiduciary duties not only to the Real Estate Entities, but
also directly to her individually. Zoutewelle alleges that Mathis owes her an
individual fiduciary duty because, as manager of the Real Estate Entities, he has
complete discretion and authority to make “all financial decisions” regarding those
companies. (ECF No. 29, at ¶¶ 38; 146–49.) Zoutewelle further alleges that “[a]s a
result of the relationship between [her] and Defendant, and the terms of the MSA,
[she] reposed trust and confidence in Defendant to treat her fairly, abide by the terms
of the MSA, and act in a prudent manner in the operation and management of the
Real Estate Entities.” (Id.)
22. A fiduciary relationship may arise when “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[.]” Dalton
v. Camp, 353 N.C. 647, 651–52,
548 S.E.2d 704, 707 (2001) (quoting Abbitt v. Gregory,
201 N.C. 577, 598,
160 S.E. 896, 906 (1931)) (internal quotations omitted). Such a
relationship “extends to any possible case in which a fiduciary relationship exists in
fact, and in which there is confidence reposed in one side, and resulting domination
and influence on the other.”
Id. at 652, 548 S.E.2d at 707–08. However, “[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.” Lockerman v. South River Elec.
Membership Corp.,
794 S.E.2d 346, 352,
2016 N.C. App. LEXIS 1234, *11
(2016) (quoting S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC,
189 N.C. App. 601,
613,
659 S.E.2d 442, 451 (2008)).
23. Pursuant to the North Carolina Limited Liability Company Act, a
manager or officer of a limited liability company “shall discharge that person’s duties
(i) in good faith, (ii) with the care an ordinary prudent person in a like position would
exercise under similar circumstances, and (iii) subject to the operating agreement, in
a manner the manager believes to be in the best interests of the LLC.” N.C. Gen.
Stat. §§ 57D-3-21(a), 57D-3-23 (hereinafter “G.S.”); see Kaplan v. O.K. Techs., L.L.C.,
196 N.C. App. 469, 473–74,
675 S.E.2d 133, 137 (2009) (holding that a manager owed
a fiduciary duty to the limited liability company). A manager of a limited liability
company owes these duties to the company only, and not to the individual members
of the LLC. Id.; see also RCJJ, LLC v. RCWIL Enters., LLC,
2016 NCBC LEXIS 46,
at *22 (N.C. Super. Ct. June 20, 2016) (citing Kaplan,
196 N.C. App. at 474,
675
S.E.2d at 137).
24. Defendants argue that as manager of the Real Estate Entities, Mathis
owed fiduciary duties to the LLCs, but not to Zoutewelle individually, and that
“[Zoutewelle] has alleged the same fiduciary duties owed to her and the [Real Estate]
Entities arising out of [Mathis’s] management and control of [the Real Estate
Entities].” (ECF No. 38, at pp.8, 13–16.) Zoutewelle contends that she sufficiently
alleges “that a de facto fiduciary relationship exists between her and [Mathis].
[Mathis] holds all the cards, both with respect to the disclosure of information
relating to the management and day-to-day operations of the Real Estate Entities
(…), as well as all the financial power.” (ECF No. 40, at p. 15.)
25. The Court concludes that Zoutewelle’s allegations fail to support the
claim that Mathis owed her an individual fiduciary duty based on the authority he
possessed as manager of the Real Estate Entities. Rather, Mathis’s duties ran to the
Real Estate Entities and not Zoutewelle as a member of the companies. Significantly,
Zoutewelle agreed and consented to giving Mathis the substantial authority he
possessed as manager in the MSA. (ECF No. 29.3, at § 6.16(d); Exh. 4 at p. 8.) The
authority granted Mathis is comparable to the authority provided to managers of
other limited liability companies in North Carolina. Under the default rules of the
LLC Act “an LLC’s managers have virtually complete authority over its affairs[.]”
Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 34.04[2] (7th
ed. 2016); see also G.S. § 57D-3-20(b)-(c) (2016). In addition, the MSA gives
Zoutewelle broad rights to receive information from Mathis and review the records of
the Real Estate Entities. The allegations do not support that Mathis had domination
and influence over Zoutewelle, or “held all the cards,” with regard to the Real Estate
Entities. See Timbercreek Land & Timber Co., LLC v. Robbins, 2017 NCBC LEXIS
64, *20–21 (N.C. Super. Ct. July 28, 2017) (plaintiffs allegation that defendant owed
her a fiduciary duty arising out of the defendant’s “superior knowledge” of and
“domination and influence over” the business, and the commensurate confidence
reposed by the plaintiff in the defendant, not sufficient to support claim of
independent fiduciary duty owed individually to plaintiff). The facts pleaded fail to
support Mathis’s allegation that Mathis owed Zoutewelle a fiduciary relationship
arising from his role as manager of the Real Estate Entities.
26. Zoutewelle also alleges that Mathis owed her a fiduciary duty because
of their “marital relationship.” (ECF No. 29, at ¶ 148.) Under North Carolina law, a
husband and wife are in confidential relationship during the marital relationship.
Searcy v. Searcy, 215 N.C. App. 568, 573,
715 S.E.2d 853, 857 (2011). “However, th[e]
[fiduciary] duty ends when the parties separate and become adversaries negotiating
over the terms of their separation.”
Id. (quoting Sidden v. Mailman,
150 N.C. App.
373, 376,
563 S.E.2d 55, 58 (2002)). The Complaint clearly alleges that Mathis and
Zoutewelle separated in 2006, and were represented by separate counsel in the
negotiation and execution of the MSA, and divorced in July 2009. Any fiduciary duty
Mathis owed Zoutewelle arising from their martial relationship had been
extinguished before the period relevant to the claims in this lawsuit.
C. Zoutewelle’s standing to pursue claims belonging to the Real Estate
Entities
27. Zoutewelle alleges derivative claims on behalf of the Real Estate
Entities for: breach of contract, or, alternatively, unjust enrichment; conversion;
breach of fiduciary duty; and constructive fraud. Defendants move to dismiss these
claims pursuant to Rule 12(b)(1) motion for lack of standing. Defendants argue that
these claims belong to the Real Estate Entities and that (a) Zoutewelle does not have
standing to raise the claims derivatively on behalf of the Real Estate Entities because
she did not make a proper pre-suit demand, and (b) Zoutewelle cannot pursue the
claims directly because she has not alleged facts that would permit her to bring direct
claims under the special duty or separate injury exceptions recognized in Barger v.
McCoy Hillard & Parks, 346 N.C. 650, 658,
488 S.E.2d 215, 219 (1997) (Defs.’ Br.
Supp. Mots. Dismiss, ECF No. 38, at pp. 6–12.) The Court will address Defendants’
arguments in turn.
1. Derivative claims
28. Defendants contend that Zoutewelle lacks standing to pursue her claims
derivatively because the Demand Letter did not meet the requirements of G.S. § 57D-
8-01(a), which provides, in pertinent part, that
[A] member may bring a derivative action if the following
conditions are met:
...
(2) The member made written demand on the LLC to take
suitable action, and either (i) the LLC notified the member
that the member’s demand was rejected, (ii) 90 days have
expired from the date the demand was made, or (iii)
irreparable injury to the LLC would result by waiting for
the expiration of the 90-day period.
G.S. § 57D-8-01(a)(2).
29. “By its very nature, a derivative action requires that the [member]
bringing such an action have proper standing to bring the action.” Anderson v.
Seascape at Holden Plantation, LLC, 241 N.C. App. 191, 203,
773 S.E.2d 78, 87 (2015)
(citation and quotations omitted). “The challenge to the adequacy of any pre-suit
demand is, inter alia, a challenge to the Court’s subject matter jurisdiction over the
derivative claims.” Petty v. Morris,
2014 NCBC LEXIS 67, at *4 (N.C. Super. Ct. Dec.
16, 2014). In order to have standing to bring derivative claims, a plaintiff must have
made a proper pre-suit demand. Miller v. Burlington Chem. Co. LLC,
2017 NCBC
LEXIS 6, at *26 (N.C. Super. Ct. Jan. 27, 2017). The purpose of the demand
requirement is to
allow[ ] the corporation the opportunity to remedy the
alleged problem without resort to judicial action, or, if the
problem cannot be remedied without judicial action, to
allow the corporation, as the true beneficial party, the
opportunity to bring suit first against the alleged
wrongdoers.
Bridges v. Oates, 167 N.C. App. 459, 467–68,
605 S.E.2d 685, 691 (2004) (citation
omitted).
30. The pre-suit demand required by section 57D-8-01(a) “must be made
with sufficient clarity and particularity to permit the corporation . . . to assess its
rights and obligations and determine what action is in the best interest of the
company.” Miller, 2017 NCBC LEXIS 6, at *29 (quoting Garlock v. Hilliard,
2000
NCBC LEXIS 6, at *9 (N.C. Super. Ct. Aug. 22, 2000)).
[T]he Court must [ ] determine whether the Demand Letter
constituted a proper demand to take suitable action so as
to satisfy the demand requirement. In so doing, the Court
must compare the derivative claims asserted in a
complaint against the specific demands a plaintiff has
made prior to filing suit.
Id. at *30 (quotation marks omitted). Accordingly, the Court will compare the
derivative claims asserted in the lawsuit with the demands contained in the Demand
Letter.
31. Zoutewelle’s claims for breach of contract and unjust enrichment allege
that Mathis breached the MSA and the Operating Agreements by collecting fees in
excess of those permitted by the MSA, and by making improper distributions and
loans from the Real Estate Entities to himself. Zoutewelle makes a claim for
conversion based on the same conduct. In the Demand Letter, Zoutewelle claims that
Mathis breached the MSA by “taking management fees in excess of the maximum
allowed,” and taking management fees when he has engaged a third-party to provide
management services, making specific reference to sections 6.16(e)(i) and 6.16(f) of
the MSA. (ECF No. 29.2, at Exh. W.) The Demand Letter also states that Zoutewelle
seeks certain records for purposes of investigating “payment of excess management
fees to [Mathis].” (Id., at p. 4.) The Demand Letter does not specify from which Real
Estate Entities Mathis has collected these fees, but demands payment to Zoutewelle
of excess management fees of $373,554.43. (Id.) The Demand Letter does not make
a specific request for investigation of excessive lease fees or sales fees, or improper
distributions.
32. The Court concludes that Zoutewelle made a sufficient pre-suit demand
to Mathis regarding her breach of contract, unjust enrichment, and conversion claims
for payments of excessive management fees, but not regarding her claims for
payments of excessive lease or sale fees, or improper distributions or loans. The
Demand Letter refers specifically only to management fees, ties the claim of excessive
fees to sections 6.16(e)(i) and 6.16(f) regarding Mathis’s rights to fees for management
of the Real Estate Entities, and not to the sections entitling Mathis to fees based on
the sales of properties or securing leases from tenants. The Demand letter makes no
specific claims regarding distributions or loans. The Demand Letter’s vague
reference to “waste” and “self-dealing” are not sufficiently specific to place Mathis on
notice regarding demands other than those related to management fees.
Accordingly, Zoutewelle lacks standing to pursue derivative breach of contract, unjust
enrichment, and conversion claims on behalf of the Real Estate Entities for alleged
excessive lease or sales fees paid to Mathis and for improper distributions or loan
payments to Mathis, but Zoutwelle does have standing to pursue such claims for
alleged excessive management fees.
33. The Court next considers the derivative claims on behalf of the Real
Estate Entities for breach of fiduciary duty and constructive fraud. Zoutewelle
alleges that Mathis breached his fiduciary duties to the Real Estate Entities “by
usurping opportunities that rightfully belonged to one or more of the Real Estate
Entities for himself, by taking excess (sic) fees, by taking excess (sic) distributions, by
wasting the assets of the Real Estate Entities, by failing to disclose material
information concerning transactions in which one, or more, of the Real Estate
Entities’ assets or revenue streams would be utilized for the improper, and wrongful,
benefit of Defendant and not properly for the benefit of [Zoutewelle], by failing to
obtain [Zoutewelle]’s consent and authorization prior to eliminating [Zoutewelle]’s
right to partition the Shops at Rock Creek, and, upon information and belief, by
failing to disclose all of [Mathi’s]’s real estate holdings, whether held directly, or
indirectly through a business entity in which he had an interest at the time of the
execution of the MSA.” (ECF No. 29, at ¶ 149.)
34. As previously discussed, the Demand Letter specifically requests
investigation of Mathis’s alleged payment to himself of excessive and improper
management fees, and demands repayment of those fees, but does not adequately
make demands for other fees, improper distributions, or loans. Accordingly,
Zoutewelle may proceed with her derivative claims that Mathis breached fiduciary
duties and committed constructive fraud by paying himself excessive management
fees. Zoutewelle’s derivative claims for breach of fiduciary duty and constructive
fraud for improper distributions, loans, and other payments must be dismissed. See
Miller, 2017 NCBC LEXIS 6, at *32–34 (demand letter’s failure to mention the
specific breaches of fiduciary duty alleged by plaintiff in the complaint fatal to
plaintiff’s derivative claims).
35. Lastly, the demand letter complains that Mathis is not providing
Zoutewelle with the monthly financial reports required by the MSA; raises concerns
about Mathis’s offer to purchase Zoutewelle’s interests in 5620 Fairview, LLC and
5628 Fairview, LLC and requests that Mathis provide additional information about
any agreements to sell those properties and about the Fairview on Closeburn project;
demands access to certain financial and other records of the Real Estate Entities; and
demands that Mathis and the Real Estate Entities “take suitable action to rectify”
any waste, self-dealing, “or any other abuse of your position, power, or duties.” (ECF
No. 29.2, at Exh. W.) These complaints are not sufficient to give Zoutewelle standing
to raise the derivative claims for usurping corporate opportunities, wasting assets,
failing to disclose information to her, failing to obtain her consent prior to eliminating
her right to partition the Shops at Rock Creek, and, Mathis’s failure to disclose all of
his real estate holdings prior to executing the MSA.
36. First, the Demand Letter contains no mention whatsoever of the failure
to obtain Zoutewelle’s consent prior to eliminating her right to partition the Shops at
Rock Creek, and failing to disclose all of Defendant’s real estate holdings at the time
of the execution of the MSA. To the extent Zoutewelle seeks to bring derivative claims
for waste of the Real Estate Entities’ assets, the failure to obtain her consent prior to
eliminating her right to partition the Shops at Rock Creek, and failing to disclose all
of Defendant’s real estate holdings at the time of the execution of the MSA, she failed
to make a demand for suitable action, and the derivative claims for breach of fiduciary
duty and constructive fraud must be dismissed.1
37. In addition, the Court concludes that Zoutewelle has failed to allege a
claim belonging to the Real Estate Entities based on Mathis’s failure to provide the
monthly financial reporting. Such claim does not allege any injury to the Real Estate
Entities and belongs to Zoutewelle individually. Zoutewelle cannot pursue a
derivative claim on behalf of the Real Estate Entities for Mathis’s failure to provide
reports.
38. Finally, the Demand Letter does not make any specific demand or claim
regarding allegedly usurped corporate opportunities or wasted corporate assets. The
vague request “to take suitable action to rectify your waste, if any” and to otherwise
rectify “any other abuse of your position” lacks anything near the “sufficient clarity
and particularity to permit the corporation . . . to assess its rights and obligations and
determine what action is in the best interest of the company.” Miller, 2017 NCBC
LEXIS 6, at *29.
39. Defendants’ motion to dismiss Zoutewelle’s derivative claims on behalf
of the Real Estate Entities for breach of contract, unjust enrichment, conversion,
1 In addition, Mathis’s failure to obtain Zoutewelle’s consent regarding the partition rights
and the failure to disclose his real estate holdings do not allege conduct that injured the Real
Estate Entities, and the Real Estate Entities have no claims for these alleged actions that
Zoutewelle could pursue derivatively, and should also be dismissed on that basis.
breach of fiduciary duty, and constructive fraud for taking excessive management
fees should be DENIED.
40. Further, Defendants’ motion to dismiss Zoutewelle’s derivative claims
on behalf of the Real Estate Entities for breach of contract, unjust enrichment,
conversion, breach of fiduciary duty, and constructive fraud, except as specifically
denied, should be GRANTED, and those claims should be DISMISSED WITHOUT
PREJUDICE.
2. Direct Claims
41. Defendants contend that Zoutewelle lacks standing to bring direct
claims for breach of contract or unjust enrichment, conversion, breach of fiduciary
duty, and constructive fraud because she has not alleged Mathis owed her a special
duty separate from his duties to the Real Estate Entities nor that she suffered
injuries separate and distinct from the injuries to the Real Estate Entities. See
Barger, 346 N.C. at 658,
488 S.E.2d at 219 (1997). Under Barger, a shareholder or
member may bring a direct claim against a third party for wrongs or injuries to the
corporate entity “if the shareholder can show that the wrongdoer owed him a special
duty or that the injury suffered by the shareholder is separate and distinct from the
injury sustained by the other shareholders or the corporation itself.”
Id. at 659,
488
S.E.2d at 219. In Barger, the Supreme Court expressly held that “[t]he special duty
may arise from contract or otherwise. To support the right to an individual lawsuit,
the duty must be one that the alleged wrongdoer owed directly to the shareholder as
an individual.” Id.; see also Estate of Brown v. Thompson,
219 N.C. App. 637, 639,
727
S.E.2d 573, 575 (2012) (Plaintiffs failed to state Barger exception, in part, because
they did “not allege a duty arising from a particular contract between plaintiffs and
defendants.”).
42. In the MSA, Mathis expressly agreed to assign a portion of his interests
in the Real Estate Entities to Zoutewelle, and assumed specific additional and special
obligations directly to Zoutewelle with regard to management of the Real Estate
Entities, that are separate from any duties he owes her as manager of the Real Estate
Entities. In other words, the MSA is a contract that unquestionably creates “special
duties” owed directly to Zoutewelle by Mathis. This clearly is sufficient to permit
Zoutewelle to pursue direct claims for breach of contract, unjust enrichment,
conversion, breach of fiduciary duty, and constructive fraud. See Barger, 346 N.C. at
659,
488 S.E.2d at 220. Defendants’ motion to dismiss Zoutewelle’s direct claims for
breach of contract, unjust enrichment, conversion, breach of fiduciary duty, and
constructive fraud arising from breaches of the MSA should be DENIED.
D. Defendants’ Rule 12(b)(6) motion
1. Individual claim for breach of contract
43. Defendants move to dismiss Zoutewelle’s individual claim for breach of
contract. Zoutewelle claims that Defendants breached the MSA and the operating
agreements of the Real Estate Entities by taking fees in excess of those permitted
under the MSA, wasting the assets of some of the Real Estate Entities, and diverting
certain amounts of the revenue streams of the Real Estate Entities to himself. (ECF
No. 29, at ¶ 33.) Defendants argue that the claim should be dismissed because
Zoutewelle did not identify “the information upon which she relied” in forming the
belief that Defendants took excessive fees and did not allege the type or amount of
the outstanding fees or from which Real Estate Entity the fees originated. (ECF No.
37, at p. 13.) Zoutewelle counters that they have adequately pleaded a claim for
breach of contract, and the claim should not be dismissed.
44. North Carolina is a notice-pleading state. “Under the notice theory of
pleading a statement of claim is adequate if it gives sufficient notice of the claim
asserted to enable the adverse party to answer and prepare for trial, to allow for the
application of the doctrine of res judicata, and to show the type of case brought.”
Brewer v. Harris, 279 N.C. 288, 293,
182 S.E.2d 345, 348 (1971) (citation and
quotations omitted). A pleading that alleges breach of contract only needs to meet
the notice pleading standard. Tillery Envtl. LLC v. A&D Holdings, Inc.,
2018 NCBC
LEXIS 13, at *77–78 (N.C. Super. Ct. Feb. 9, 2018) (citing Haynie v. Cobb,
207 N.C.
App. 143, 148,
698 S.E.2d 194, 198 (2010)).
45. A claim for breach of contract requires that the plaintiff plead (1) the
existence of a valid contract and (2) breach of the terms of that contract. McLamb v.
T.P. Inc., 173 N.C. App. 586, 588,
619 S.E.2d 577, 580 (2005). Zoutewelle alleges, and
Defendants do not argue otherwise, that the MSA is a valid contract, and that Mathis
breached the MSA. Zoutewelle has adequately alleged a claim for breach of contract
under notice pleading and does not need to allege further information about the
breaches, as Defendants argue. Defendants’ motion to dismiss Zoutewelle’s
individual claim for breach of contract is DENIED.
2. Individual claims for breach of fiduciary duty and constructive fraud
46. Defendants move to dismiss Zoutewelle’s individual claims for breach of
fiduciary duty and constructive fraud on the grounds that Mathis does not owe
Zoutewelle a fiduciary duty. The Court already has concluded that Mathis the facts
do not support the allegation that Mathis owed a fiduciary duty directly to
Zoutewelle. Accordingly, Defendants’ motion to dismiss Zoutewelle’s individual
claims for breach of fiduciary duty and constructive fraud should be GRANTED.
3. Individual claim for fraud
47. Zoutewelle alleges that Mathis engaged in fraud by making intentional
misrepresentations to Zoutewelle about “the net rental income and sales proceeds
available for distribution [from the Real Estate Entities]” in order to conceal Mathis’s
alleged payments to himself of excessive fees and improper distributions. (ECF No.
29, at ¶¶ 155–56.) Zoutewelle also alleges that Mathis made misrepresentations to
her to induce her to enter into the MSA by withholding information about his
ownership in real estate businesses other than the Real Estate Entities, and by
misrepresenting that CGP did not own any interest in real estate. (Id., at ¶ 155.)
48. The essential elements of fraud are: “(1) [f]alse representation or
concealment of a material fact, (2) reasonably calculated to deceive, (3) made with
intent to deceive, (4) which does in fact deceive, (5) resulting in damage to the injured
party.” Terry v. Terry, 302 N.C. 77, 83,
273 S.E.2d 674, 677 (1981). Allegations
of fraud must be pled “with particularity.” Rule 9(b); Terry,
302 N.C. at 85,
273
S.E.2d at 678. “The particularity required by the rule generally encompasses
the time, place and contents of the fraudulent representation, the identity of the person
making the representation and what was obtained by the fraudulent acts or
representations. The particularity required cannot be satisfied by using conclusory
language.”
Id. (emphasis in original). Additionally, the deceived party must have
reasonably relied on the allegedly false representations. Forbis v. Neal,
361 N.C. 519,
527,
649 S.E.2d 382, 387 (2007).
49. Defendants move to dismiss Zoutewelle’s fraud claim based on the
alleged misrepresentations about the net rental income, sales proceeds, and excessive
fees, on the grounds that Zoutewelle “failed to allege with particularity that she acted
in reliance upon any alleged misrepresentations in the financial reports, or how any
such reliance resulted in any damages.” (ECF No. 38, at p. 18.) Zoutewelle did not
address this argument in her brief in opposition to the Motion to Dismiss.
Nevertheless, the Court concludes that Zoutewelle sufficiently alleged that the
misrepresentations in the reports provided by Mathis allowed him to collect excessive
fees and make unequal distributions to himself, and that the misrepresentations
prevented Zoutewelle from discovering Mathis’s misconduct. Defendants’ motion to
dismiss Zoutewelle’s claim for fraud based on misrepresentation of net rental income,
distributions, and excessive fees should be DENIED.
50. Defendants also move to dismiss Zoutewelle’s fraud claim based on
Mathis’s alleged concealment of his ownership in real estate businesses other than
the Real Estate Entities, and misrepresentations regarding CGP’s ownership of real
estate. First, Defendants argue that the MSA does not say that Mathis has disclosed
all of his interests in businesses owning real estate. The MSA states that “[Mathis]
owns membership interests in a number of limited liability companies” listed in
Exhibit 2 of the MSA, but it does not state that the list in Exhibit 2 is an exhaustive
list. (ECF No. 29.3, at § 6.16.) In addition, the MSA expressly provides that
Zoutewelle had an opportunity to request any financial information desired, was
satisfied with the information she received, and that she waived the need for any
more information prior to entering into the agreement. (Id., 1.1(b)–(d)).
51. Second, Defendants argue that Mathis did not have any obligation to
fully disclose his real estate owning businesses. Under North Carolina law, absent
contractual language obligating the parties to make a full disclosure with respect to
all marital property, “[a] full and accurate disclosure is required only with respect to
that information requested,” and the Court of Appeals has “reject[ed] the . . .
argument that every spouse as party to a separation and/or property settlement
agreement has an affirmative obligation to make a full and accurate disclosure of his
or her assets and debts.” Daughtry v. Daughtry, 128 N.C. App. 737, 740,
497 S.E.2d
105, 107 (1998). The MSA states that both Mathis and Zoutewelle had adequate
opportunity to seek disclosure of financial information and documents from the other
party, were reasonably informed about the financial circumstances of the other party,
and have waived additional disclosures of financial information from the other party.
(ECF No. 29.3, at §§ 1.1(b)–(d).)
52. Finally, Defendants argue that Zoutewelle did not allege that she
investigated Mathis’s financial situation or was denied the opportunity to investigate,
nor did she allege that she could not have learned the facts through reasonable
diligence. North Carolina courts have held that “when the party relying on false or
misleading representation could have discovered the truth upon inquiry, the
complaint must allege that he was denied the opportunity to investigate or that he
could not have learned the true facts by exercise of reasonable diligence.” Oberlin
Capital, L.P. v. Slavin, 147 N.C. App. 52, 59,
554 S.E.2d 840, 846–47 (2001) (citation
and quotations omitted).
53. The Court concludes that Zoutewelle’s allegations defeat any claim for
fraud based on Mathis’s representations or concealments about his interests in real
estate companies. First, in the MSA Zoutewelle expressly acknowledged that she had
all of the information about Mathis’s financial interests that she needed and waived
the right to any further information. In addition, the parties were not in a
confidential relationship at the time they negotiated the MSA, and Mathis owed no
duty to make disclosures to Zoutewelle. Finally, Zoutewelle has not alleged that she
was denied the opportunity to make further investigation into Mathis’s business
interests. Defendants’ motion to dismiss Zoutewelle’s claim for fraud for Mathis’s
alleged misrepresentations or concealments of his business interests should be
GRANTED.
4. Claim for constructive trust
54. Finally, Defendants move to dismiss Zoutewelle’s claim for a
constructive trust. Zoutewelle alleges that she is entitled to a constructive trust with
respect to the “assets of [ ] CGP . . . and other entities, that held or had an ownership
interest in real estate at, or prior to, the execution of the MSA.” (ECF No. 29, at
¶ 181.) A constructive trust is an equitable remedy. “Courts of equity will impose
a constructive trust to prevent the unjust enrichment of the holder of the legal title
to property acquired through a breach of duty, fraud, or other circumstances which
make it inequitable for him to retain it against the claim of the beneficiary of
the constructive trust.” Cline v. Cline, 297 N.C. 336, 343–44,
255 S.E.2d 399, 404
(1979). “[A] constructive trust ordinarily arises out of the existence of fraud, actual
or presumptive—usually involving the violation of a confidential or fiduciary
relation—in view of which equity transfers the beneficial title to some person other
than the holder of the legal title.” Leatherman v. Leatherman,
297 N.C. 618, 621–22,
256 S.E.2d 793, 795–96 (1979), superseded by statute on other grounds
(quoting Bowen v. Darden,
241 N.C. 11, 13–14,
84 S.E.2d 289, 292 (1954)).
55. In this case the Court has concluded that allegations support a
Zoutewelle’s derivative claims for breach of fiduciary duty and constructive fraud,
and Plaintiff’s direct claims based on breach of the MSA. Accordingly, dismissal of
the claim for the remedy of a constructive trust is premature and Defendants’ motion
to dismiss Zoutewelle’s claim for constructive trust should be DENIED.
THEREFORE, IT IS ORDERED that:
56. Defendants’ motion to dismiss Zoutewelle’s derivative claims on behalf
of the Real Estate Entities for breach of contract, unjust enrichment, conversion,
breach of fiduciary duty, and constructive fraud for taking excessive management
fees is DENIED.
57. Defendants’ motion to dismiss Zoutewelle’s derivative claims on behalf
of the Real Estate Entities for breach of contract, unjust enrichment, conversion,
breach of fiduciary duty, and constructive fraud, except as specifically denied, is
GRANTED, and those claims are DISMISSED WITHOUT PREJUDICE.
58. Defendants’ motion to dismiss Zoutewelle’s direct claims for breach of
contract, unjust enrichment, conversion, breach of fiduciary duty, and constructive
fraud is DENIED.
59. Defendants’ motion to dismiss Zoutewelle’s individual claim for breach
of contract is DENIED.
60. Defendants’ motion to dismiss Zoutewelle’s individual claims for breach
of fiduciary duty and constructive fraud is GRANTED.
61. Defendants’ motion to dismiss Zoutwelle’s claim for fraud based on
misrepresentation of net rental income, distributions, and excessive fees is DENIED.
62. Defendants’ motion to dismiss Zoutewelle’s claim for fraud for Mathis’s
alleged misrepresentations or concealments of his business interests should be
GRANTED.
63. Defendants’ motion to dismiss Zoutewelle’s claim for constructive trust
is DENIED.
SO ORDERED, this the 13th day of September, 2018.
_/s/ Gregory P. McGuire________
Gregory P. McGuire
Special Superior Court Judge for
Complex Business Case
