Potts v. Kel, LLC

Potts v. KEL, LLC, 

.


STATE OF NORTH CAROLINA                     IN THE GENERAL COURT OF JUSTICE
                                                SUPERIOR COURT DIVISION
IREDELL COUNTY                                         16 CVS 2877

W. AVALON POTTS, individually
and derivatively on behalf of Steel
Tube, Inc.,

                 Plaintiff,

v.

KEL, LLC; RIVES & ASSOCIATES,
LLP,

                 Defendants,

           and

STEEL TUBE, INC.,                                ORDER AND OPINION ON
                                                DEFENDANTS’ MOTION FOR
                 Nominal Defendant,               SUMMARY JUDGMENT
           and

LEON L. RIVES, II,

                 Defendant/
                 Counterclaimant/
                 Third-Party Plaintiff,

 v.

AVALON1, LLC,

                 Third-Party Defendant/
                 Counterclaimant.


      1.    This case arises out of a dispute over the management of Steel Tube, Inc., a

North Carolina-based manufacturer founded nearly 30 years ago by Walter Lazenby

and Plaintiff W. Avalon Potts. The two served as Steel Tube’s only officers and

directors until 2015, when Lazenby sold all of his stock to Defendant Leon L. Rives,

II and resigned from the company. Rives was no stranger to Steel Tube—he and his

accounting firm, Rives & Associates, LLP, had long provided tax advice and tax
preparation services to the company.          But his arrival reshaped Steel Tube’s

management, with Rives becoming an officer and stepping into Lazenby’s place as

one of the two directors, along with Potts.

   2.     The relationship between Potts and Rives seems to have been rocky from

the start. In this action, Potts alleges that Rives began abusing his position as officer

and director almost immediately, siphoning funds for personal use and transferring

money and equipment to companies owned by his family. Potts asserts a host of

claims, both individual and derivative, against Rives for breach of fiduciary duty,

constructive fraud, conversion, unjust enrichment, and fraud, among others. Potts

also brings claims against Rives & Associates (for providing shoddy tax services) and

KEL, LLC (for facilitating Rives’s alleged fraud).

   3.     Rives and Rives & Associates have moved for summary judgment as to the

claims asserted against them under Rule 56 of the North Carolina Rules of Civil

Procedure. For the reasons stated below, the motion is GRANTED in part and

DENIED in part.

        Moore and Van Allen, PLLC, by Mark A. Nebrig and John T. Floyd, for
        Plaintiff W. Avalon Potts.

        Sharpless McClearn Lester Duffy, PA, by Frederick K. Sharpless and
        Pamela S. Duffy, for Defendants Leon L. Rives, II and Rives &
        Associates, LLP.

        No counsel appeared for Defendant KEL, LLC.

Conrad, Judge.
                                           I.
                                      BACKGROUND

    4.     The Court does not make findings of fact in ruling on motions for summary

judgment. The following background, drawn from the evidence submitted in support

of and opposition to the motion, is intended only to provide context for the Court’s

analysis and ruling.

    5.     Steel Tube is a “carbon steel and galvanized steel tube manufacturer.” (V.

Am. Compl. ¶ 13, ECF No. 17 [“Compl.”].) At the time of Steel Tube’s founding, Potts

and Lazenby divided its stock equally between them.1 Potts has been an owner,

officer, and director ever since. (Aff. W. Avalon 

, ECF No. 119.3 [“Potts

Aff.”].)

    6.     Rives is a Certified Public Accountant. (Aff. Leon L. Rives, II ¶ 2, ECF No.

111.1 [“Rives Aff.”].) He became familiar with Steel Tube in his role as tax preparer

and adviser. (Rives Aff. ¶ 2.) In July 2014, Rives offered to buy all of Steel Tube’s

stock from Potts and Lazenby for more than $2 million—a deal that would have made

Rives the company’s sole owner. (Rives Aff. ¶ 3; see also Potts Aff. ¶ 6.) By year’s

end, though, negotiations had reached an impasse, and Potts declined the offer.

(Compl. ¶ 17; see also Potts Aff. ¶ 6.) Rives settled instead for an agreement to buy

Lazenby’s shares for $600,000, split between an initial lump sum of $20,000 and

monthly installments of $6,000 for the remainder. (Lazenby Aff. ¶¶ 2, 4, 5; Defs.’ Br.



1 It appears that Lazenby later transferred half of his shares to his wife.  (See Aff. Walter L.
Lazenby, Jr. ¶ 2, ECF No. 119.15 [“Lazenby Aff.”].) That transfer isn’t material to the
disputed issues, so for simplicity, the Court refers to the stock owned by Lazenby and his wife
as Lazenby’s stock.
in Supp. Mot. Summ. J. Ex. 9, ECF No. 111.9 [“Purchase Agrmt.”].) Lazenby retained

a security interest in the shares. (Purchase Agrmt. 2.)

   7.    The sale of Lazenby’s shares was finalized on January 15, 2015.          (See

Lazenby Aff. ¶¶ 5, 9.) That same day, Lazenby and Rives executed an Acceptor

Management Agreement. (See Defs.’ Br. in Supp. Mot. Summ. J. Ex. 10, ECF No.

111.10 [“Management Agrmt.]”.) The Acceptor Management Agreement purports to

engage Rives and one of Rives’s closely held entities, together referred to as

“MANAGESTEEL,” for the purpose of managing Steel Tube’s operations.               (See

Management Agrmt.) Neither Lazenby nor Rives informed Potts of the Acceptor

Management Agreement or its terms. (See Lazenby Aff. ¶ 10; Potts Aff. ¶ 9; Dep. L.

Rives 110:9–15, ECF No. 111.3.) Lazenby then resigned as an officer and director of

Steel Tube a few days later. (Lazenby Aff. ¶ 9.)

   8.    In February 2015, Potts and Rives held their first shareholder meeting as

co-owners of Steel Tube. (See Dep. A. Potts 42:10–43:3, ECF No. 111.2; see also Pl.’s

Opp’n Defs.’ Mot. Summ. J. Ex. A1, ECF No. 119.2.) The two elected themselves as

directors, convened a meeting as board of directors, and then elected Potts as

president and Rives as secretary and treasurer. (Compl. Ex. 5; Defs.’ Br. in Supp.

Mot. Summ. J. Ex. 16, ECF No. 111.16.) Potts asserts, and Rives disputes, that they

orally agreed not to make material transactions of more than $25,000 without the

other’s consent. (See Potts Aff. ¶ 10; Rives Aff. ¶ 6.)

   9.    Over the next 18 months, Rives authorized a series of transactions that

Potts characterizes as self-dealing or otherwise not in Steel Tube’s best interests. It
is undisputed, for example, that Rives caused Steel Tube to issue a $20,000 check to

Lazenby, began making monthly cash withdrawals of $7,500, and deposited another

$62,875 into his personal bank account. (See Dep. L. Rives 114:24–115:7, 156:1–7,

189:3–9.) Potts offers evidence that Rives took the funds without authorization and

for his own personal benefit, including to pay for his purchase of Lazenby’s shares.

(See Potts. Aff. ¶ 15(a)–(g); see Dep. A. Potts 62:7–63:11, 68:7–14, 70:21–71:4.) Rives

responds that the payment to Lazenby was compensation for services to Steel Tube,

that the monthly withdrawals were an approved salary, and that Potts agreed to the

$62,875 distribution for tax purposes. (See Rives Aff. ¶ 4; Dep. L. Rives 98:10–12,

157:16–22, 193:6–8.)

   10.   Other disputed transactions involve companies in which Rives or members

of Rives’s family hold an interest. One is Elite Tube & Fab, LLC (“Elite Tube”), a

company that Rives helped form and in which his wife was a member. (See Dep. L.

Rives. 247:7–248:4; Rives Aff. ¶ 7.) The second is KEL, a company formed and owned

by Rives’s brothers. (See Dep. L. Rives 287:22–23.) It is undisputed that Rives

transferred cash and equipment to Elite Tube and made a deal with KEL to handle

certain transportation and trucking services for Steel Tube. (See Rives Aff. ¶¶ 7, 10.)

   11.   Rives maintains that all of these actions were proper. The transfers to Elite

Tube, he asserts, were part of a planned joint venture designed to expand Steel Tube’s

business and reach new customers, and the deal with KEL lowered shipping costs

and made transportation more convenient. (See Rives Aff. ¶ 7; Dep. L. Rives 40:5–7,

255:16–25, 290:21–291:18.) Potts, on the other hand, believes the transfers to Elite
Tube were little more than theft and that the contract with KEL diverted a corporate

opportunity from Steel Tube. (See, e.g., Dep. A. Potts 62:7–63:11, 68:7–14, 70:21–

71:4; Potts Aff. ¶ 15(a)–(g).)

   12.   Potts also alleges that Rives misrepresented other actions. Shortly after

joining Steel Tube, Rives proposed converting it into an S corporation for tax

purposes. (See Potts Aff. ¶ 13; Rives Aff. ¶ 5.) As alleged, Rives or Rives & Associates

prepared the paperwork and made the conversion effective October 1, 2014—a date

several months before Lazenby sold his shares to Rives. (See Potts Aff. ¶ 13; see also

Rives Aff. ¶ 5; Lazenby Aff. ¶¶ 5–7.) Potts signed off on the conversion but testifies

that he was not told about the effective date, which he now believes was improper

and caused Steel Tube to incur costs and penalties. (See Potts Aff. ¶ 13; Aff. Thomas

M. Borden ¶¶ 4–8, ECF No. 119.20 [“Borden Aff.”].)

   13.   Potts filed this action against Rives in November 2016. As originally filed,

the complaint requested dissolution of Steel Tube based on alleged wrongdoing and

waste of corporate assets by Rives. Potts also alleged the existence of an insoluble

management deadlock because neither he nor Rives owned a majority of Steel Tube’s

stock.

   14.   On February 22, 2017, Potts amended his complaint and alleged that he was

now the “sole shareholder” of Steel Tube. (Compl. ¶ 4.) As detailed in other Orders,

Potts acquired Lazenby’s security interest in Rives’s stock and then repossessed it

after Rives defaulted. (See Order on Mot. to Am. ¶¶ 24–30, ECF No. 57.) Potts also

took steps to remove Rives as officer and director. (See Order on Mot. to Am. ¶ 7;
Defs.’ Br. in Supp. Mot. Summ. J. 22, ECF No. 110 [“Br. in Supp.”].) Having taken

full control of Steel Tube, Potts abandoned his request for dissolution and asserted

seventeen new claims for relief, including a mix of individual and derivative claims.

Among other things, Potts claimed that Rives breached fiduciary duties owed to Steel

Tube and to Potts, committed fraud, converted funds and property, and was unjustly

enriched.

   15.     Potts also added Rives & Associates, Elite Tube, and KEL as defendants.

KEL has made no appearance and is in default. (See Entry of Default, ECF No. 104.)

Potts voluntarily dismissed all claims against Elite Tube, pursuant to a Court-

approved settlement agreement. (See Order Approving Voluntary Dismissal, ECF

No. 95.)

   16.     In December 2017, Rives and Rives & Associates moved to dismiss some

claims in the amended complaint. (See Defs.’ Mot. Dismiss, ECF No. 70.) The Court

granted that motion in part and dismissed Potts’s individual claim for fraud, the

claim for unfair or deceptive trade practices, and the claim for negligent

misrepresentation. See Potts v. KEL, LLC, 

, at *18–19 (N.C.

Super. Ct. Mar. 27, 2018). The Court denied the motion as to Potts’s derivative claims

for fraud and facilitating fraud and also allowed Potts’s individual claims for

constructive fraud and breach of fiduciary duty to proceed to the extent they seek

recovery for individual injuries, rather than injuries to Steel Tube. See id. at 19.

   17.     Discovery has closed, and Rives and Rives & Associates have moved for

summary judgment on all remaining claims against them. (Defs.’ Mot. Summ. J.,
ECF No. 109.) After full briefing, the Court held a hearing on November 28, 2018, at

which counsel for Potts, Rives, and Rives & Associates appeared. The motion is now

ripe for determination.

                                        II.
                                 LEGAL STANDARD

   18.   Summary judgment is 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 a

judgment as a matter of law.” N.C. R. Civ. P. 56(c). In deciding a motion for summary

judgment, the Court views the evidence “in the light most favorable to the

nonmov[ant],” taking the nonmovant’s evidence as true and drawing inferences in its

favor. Furr v. K-Mart Corp., 

, 

 (2001)

(internal citation and quotation marks omitted).

   19.   The moving party “bears the initial burden of demonstrating the absence of

a genuine issue of material fact.” Liberty Mut. Ins. Co. v. Pennington, 

, 

 (2002) (citation omitted). If the moving party carries this

burden, the responding party “may not rest upon the mere allegations or denials of

his pleading,” N.C. R. Civ. P. 56(e), but must instead “come forward with specific facts

establishing the presence of a genuine factual dispute for trial,” Liberty Mut. Ins. Co.,

, 

. “An issue is ‘genuine’ if it can be proven by

substantial evidence and a fact is ‘material’ if it would constitute or irrevocably

establish any material element of a claim or a defense.” Lowe v. Bradford, 

, 

 (1982) (citing Bone Int’l, Inc. v. Brooks, 

,

374–75, 

 (1981)).

                                          III.
                                       ANALYSIS

   20.   All of Potts’s claims arise out of Rives’s two-year tenure as an officer and

director of Steel Tube.   The Court begins with the claims premised on Rives’s

fiduciary duties.

                                A. Fiduciary Claims

   21.   Claims for breach of fiduciary duty and constructive fraud are often paired

together, as they are here.    An essential element of each is the existence of a

confidential or fiduciary relationship. To establish a breach of fiduciary duty, Potts

must show the existence of a fiduciary duty, a breach of that duty, and injury

proximately caused by the breach. See Green v. Freeman, 

, 

 (2013). Constructive fraud requires an additional element: Potts

must show that Rives sought to benefit himself through the breach. See White v.

Consol. Planning, Inc., 

, 

, 155–56 (2004).

   22.   Here, Potts asserts two sets of claims for breach of fiduciary duty and

constructive fraud. There is one set of claims based on duties that Rives allegedly

owed to Potts individually and a second set of derivative claims based on duties that

Rives owed to Steel Tube. For each, Potts contends that Rives used Steel Tube as his

“personal piggy bank,” transferring funds and property to himself and his family.

(See Pl.’s Opp’n Defs.’ Mot. Summ. J. 1, ECF No. 118 [“Opp’n”].) Rives responds that
he did not owe any fiduciary duties to Potts and that he did not breach any duties

owed to Steel Tube. (See, e.g., Br. in Supp. 13–16.)

1. Individual Claims

   23.   The individual claims for breach of fiduciary duty and constructive fraud are

based on duties allegedly owed to Potts by Rives “as de facto controlling shareholder.”

(Compl. ¶ 47.) Rives argues that he was not a controlling shareholder and therefore

owed no fiduciary duties to Potts individually. (See Br. in Supp. 17–18.)

   24.   The general rule is that shareholders “do not owe a fiduciary duty to one

another.” Brewster v. Powell Bail Bonding, Inc., 

, at *9 (N.C.

Super. Ct. July 26, 2018). One exception to this rule is that a majority shareholder

owes a duty to protect the interests of minority shareholders. See Corwin v. British

Am. Tobacco PLC, 

, 

 (2018) (“Corwin II”). This

exception does not apply here because Rives was not a majority shareholder. He and

Potts each owned 50 percent of Steel Tube’s stock. (See Rives Aff. ¶ 3; Potts Aff. ¶¶ 2,

10.)

   25.   Potts relies on a second exception, adopted by the North Carolina Court of

Appeals, “that a minority shareholder exercising actual control over a corporation

may be deemed a ‘controlling shareholder’ with a concomitant fiduciary duty to the

other shareholders.” Corwin v. British Am. Tobacco PLC, 

, 

 (2016), rev’d 

, 

 (2018). That holding,

which was based on cases from Delaware, was controlling law at the time of the

hearing on the motion for summary judgment but under review by the North Carolina
Supreme Court. Shortly after the hearing, the Supreme Court issued a decision

reversing the Court of Appeals and expressly reserving judgment as to whether a

controlling minority shareholder owes a duty to other shareholders. See Corwin II,

, 

. The Supreme Court concluded that it was

unnecessary to decide whether North Carolina should adopt the Delaware rule

because, even if that rule governed, the plaintiff in the case had not adequately

alleged actual control. See 

, 

.

   26.   So too here. Potts has not put forward evidence from which a jury could

infer that Rives exercised actual control over Steel Tube. The “inquiry focuses on

actual control over the board of directors,” and the undisputed evidence shows that

Rives did not possess or exercise control over Steel Tube’s board, which consisted only

of Rives and Potts. 

, 

 (citing Delaware law) (emphasis in

original). All of the evidence shows that each man had equal power to propose and

vote on initiatives. (Dep. L. Rives 128:14–17; Dep. A. Potts 42:10–14; see also Defs.’

Br. in Supp. Mot. Summ. J. Ex. 16.) There is also undisputed evidence that Potts

successfully blocked proposals by Rives, producing a deadlock and denying effective

control to Rives. (See Defs.’ Br. in Supp. Mot. Summ. J. Ex. 18, ECF No. 111.18.)

Potts points to evidence that Rives was able to misappropriate Steel Tube’s resources

without his knowledge, but that is not evidence of control. Rather, if true, it shows

the opposite, confirming that Rives was forced to circumvent the board to accomplish

his goals.
    27.   For this reason, the Court need not and does not decide whether a

non-majority shareholder exercising actual control over a corporation owes duties to

other shareholders. Even if the North Carolina Supreme Court were to adopt this

rule, Potts has not offered evidence of control sufficient to create an issue of fact for a

jury. Accordingly, the Court grants the motion for summary judgment as to Potts’s

individual claims for breach of fiduciary duty and constructive fraud.

2. Derivative Claims

    28.   Potts’s derivative claims for breach of fiduciary duty and constructive fraud

are based on the duties of loyalty and due care that Rives owed to Steel Tube. See

, -42. As an officer and director, Rives was required to

“discharge [his] duties in good faith, with due care, and in a manner [he] believe[d] to

be in the corporation’s best interests.” Raymond James Capital Partners, L.P. v.

Hayes, 

, 

 (2016). That much is undisputed.

    29.   Whether Rives honored his duties is another matter. At issue are a slew of

allegedly self-interested transactions: (1) a $20,000 payment to Lazenby; (2) monthly

withdrawals of $7,500, totaling $90,000; (3) a $62,875 distribution; (4) a transfer of

$120,000 to Elite Tube; and (5) other transfers of money and equipment to Elite

Tube.2 (See Compl. ¶ 44.) For the most part, Rives does not dispute that these


2 The amended complaint further alleges that Rives breached his fiduciary duties by
executing the contract to permit KEL to manage Steel Tube’s trucking and transportation
services and by filing S corporation election forms that contained false information. (See
Compl. ¶ 44.) In his opposition brief, Potts also contends that Rives improperly entered into
a contract with XS Steel, another company in which Rives held an interest. (See Opp’n 7,
15–16, 19.) Rives, however, offers no argument as to these disputed transactions in either of
his briefs. (See Br. in Supp. 12–17; Defs.’ Reply Br. in Further Supp. Mot. Summ. J. 5–7,
ECF No. 123 [“Reply Br.”].) Accordingly, the Court does not address them.
transactions occurred. Rather, he argues that the evidence is insufficient, as a matter

of law, to show that any of these actions amounted to a breach of his duties of loyalty

and due care to Steel Tube. (See Br. in Supp. 13–16.)

   30.   The $20,000 payment to Lazenby presents a classic jury question. Rives

concedes that he authorized the payment but argues that it was innocuous—a sum

intended to compensate Lazenby for work he continued to perform for Steel Tube

after selling his stock and stepping down as an officer. (See Dep. L. Rives 96:2–14.)

But Lazenby has testified that the payment was not compensation. Rather, it was a

payment toward Rives’s purchase of Lazenby’s stock. (See Lazenby Aff. ¶ 11.) Given

this conflicting evidence, a jury must decide whether Rives used Steel Tube’s funds

to pay his own debt to Lazenby, and if so, whether that was a breach of Rives’s duties

of loyalty and due care.

   31.   It is also undisputed that Rives received a distribution of $62,875 and

withdrew another $90,000. (See Dep. L. Rives 156:1–12, 175:5–7, 189:3–9.) Rives

characterizes these payments as a salary or similar type of compensation. (See Br.

in Supp. 12–13.) On that basis, he argues that Potts’s claims are barred by Fulton v.

Talbert, which holds that “contracts fixing the amount and method of paying

compensation for services to be rendered [by a corporate officer] are not void or

voidable per se.” 

, 

 (1961).

   32.   Fulton is no bar here. For one thing, it is far from clear that the payments

to Rives were “compensation for services to be rendered.” In his affidavit and during

his deposition, Potts testified that he refused to authorize a salary for Rives and that
he and Rives agreed not to take any distributions because Steel Tube wasn’t in a

financial position to make them. (See Potts Aff. ¶ 16; Dep. A. Potts 93:9–22.) If the

jury credits Potts’s testimony, it could reasonably conclude that Rives took more than

$150,000 without authorization, for his own personal use, and not as compensation

for anything he did on behalf of Steel Tube. Fulton does not address that situation.

   33.   Even if these transfers are properly characterized as compensation or

salary, they would not be immune from challenge. There is a clear conflict of interest

when an officer or director unilaterally decides to take a salary and then sets the

amount without approval of the board or the shareholders. See 

-

8-30(a). As this Court recently observed, “[c]onflict-of-interest transactions between

a corporation and its officers or directors have long been subject to special rules,”

including that the transaction must be fair to the corporation. Ehmann v. Medflow,

Inc., 

, at *45 (N.C. Super. Ct. Sept. 26, 2017). Although Fulton

directs courts not to second-guess the need for or amount of compensation duly

authorized by a corporation’s board, the case cannot “be fairly read to erode the

underlying concept that a transaction between a corporation and its officer or director

should be fair to the corporation.” 

 (discussing Fulton). Potts has put forward

evidence that Rives channeled more than $150,000 to himself without board approval

and at a time when doing so could undermine Steel Tube’s financial position. (See,

e.g., Potts Aff. ¶¶ 15(a)–(c), 16; Dep. A. Potts 51:8–14, 93:12–22.) The Court cannot

conclude, as a matter of law, that these transactions were fair to Steel Tube.
   34.   With little explanation, Rives also argues that his withdrawal of $90,000 in

$7,500 monthly installments was authorized as part of the Acceptor Management

Agreement and that Steel Tube is bound by this arrangement because Lazenby

signed the agreement while he was still an officer of Steel Tube. (See Reply Br. 5.)

This argument is unpersuasive. The Acceptor Management Agreement purports to

give Rives, or a company controlled by Rives, the authority to manage Steel Tube.

(See Management Agrmt. 1.) By its plain terms, though, the agreement states that

compensation for those services “will be set by budget annually.” (Management

Agrmt. 4.) Even assuming the Acceptor Management Agreement was binding on

Steel Tube, there is no evidence showing that Steel Tube’s board, or any other

authorized party, approved an annual budget allowing Rives a salary under the terms

of the agreement. And, as noted, Potts testified that he refused to allow a salary for

Rives.   (See Potts Aff. ¶ 15(b)–(c); Dep. A. Potts 38:1–40:25.)    The relationship

between the Acceptor Management Agreement and Rives’s monthly withdrawals

presents another question of fact.

   35.   The facts surrounding the transfer of $120,000 to Elite Tube are also

disputed. Rives argues that Potts misunderstands the nature of the transaction. He

contends that Steel Tube purchased a partial interest in a new tube bending machine,

which became an asset of the company. (See Rives Aff. ¶ 7.) In opposition, Potts

offers the affidavit of Todd Berrier, a manager of Elite Tube. Berrier testifies that

Elite Tube treated the $120,000 transfer as a capital contribution made in the name

of Rives’s wife but intended for Rives’s benefit. (Aff. Todd Berrier ¶¶ 6–8, ECF No.
119.33 [“Berrier Aff.”]; see also Opp’n Ex. C4, ECF No. 125.3.) Berrier also states that

he and Rives never discussed having Elite Tube and Steel Tube share ownership of a

tube bending machine. (See Berrier Aff. ¶ 8.) At this stage, the Court cannot credit

Rives’s account over Berrier’s; rather, weighing the credibility of each is a task for

the jury. See, e.g., Moore v. Fieldcrest Mills, Inc., 

, 

 (1979).

   36.   In a footnote, Rives argues that Potts has already fully recovered the

$120,000 through a settlement with Elite Tube. (See Br. in Supp. 14 n.1.) He points

to the well-established rule that a plaintiff is not entitled to a “double recovery” for

the same loss or injury. Chemimetals Processing, Inc. v. Schrimsher, 

, 

 (2000). The record on this point is undeveloped, though,

and it is unclear whether the settlement with Elite Tube resulted in a full recovery.

Potts acknowledges that he cannot obtain a second recovery for the amount obtained

from Elite Tube, but he argues that his expert will testify to additional damages that

may be recoverable from Rives.        (See generally Opp’n Ex. L1, ECF No. 125.15

[“Damages Report”].) The Court therefore declines to grant summary judgment,

albeit without prejudice to Rives’s ability to seek appropriate relief before or during

trial.

   37.   To the extent Rives contends that the business judgment rule shields the

$120,000 transfer to Elite Tube,3 the Court disagrees. The rationale for the business


3 Rives concedes that the business judgment rule does not apply to any payments made to

himself, (Br. in Supp. 16). See Ehmann, 

, at *45–46 (“While it may be
appropriate for a fiduciary to negotiate in his own interest, it does not follow that he is
entitled to the business judgment rule when doing so.”); see also Telxon Corp. v. Meyerson,
judgment rule is that officers and directors should be able to make business

decisions—whether good or bad—without “the hindsight of judicial second guessing.”

1 Robinson on North Carolina Corporation Law § 14.06 (2018). In the usual case, it

is presumed that the officer or director made his or her decision in good faith, and if

that presumption goes unrebutted, the court should not disturb the decision, absent

extraordinary circumstances. See State v. Custard, 

, at *56–57

(N.C. Super. Ct. Mar. 19, 2010). But these protections do not apply when the officer

or director has an interest in the disputed transaction. See Ehmann, 

, at *45–46. Potts has put forward evidence, through Berrier’s testimony,

showing not only that Rives had a personal interest in Elite Tube but that he

attempted to conceal that interest by placing it in his wife’s name. (See Berrier Aff.

¶ 5.) Taking that evidence as true, the Court cannot conclude that the business

judgment rule protects Rives’s actions.

   38.   There are two other transactions, however, where the record is one-sided in

Rives’s favor. In his complaint, Potts objects to the transfer of a piece of equipment

known as a roll former from Steel Tube to Elite Tube and to the payment of $2,550.00

to Steve Williams purportedly for Elite Tube’s benefit. (See Compl. ¶ 41(b)–(c).) Rives

has offered evidence showing that the roll former is and always has been an asset of

Steel Tube and that the payment to Williams went toward creating a website for Steel

Tube. (See Rives Aff. ¶¶ 7, 11.) Potts’s opposition brief does not address either issue.

 (Del. 2002) (“Like any other interested transaction, directoral selfcompensation decisions lie outside the business judgment rule’s presumptive protection, so
that, where properly challenged, the receipt of self-determined benefits is subject to an
affirmative showing that the compensation arrangements are fair to the corporation.”).
The Court is unaware of any evidence related to the roll former other than Rives’s

evidence, and as to the payment to Williams, Potts testified that he had no knowledge

of the matter. (See Dep. A. Potts 69:6–17.) It was incumbent on Potts to offer evidence

to support his claims that these transactions were improper. He has not done so.

   39.   The Court therefore grants summary judgment as to the derivative claims

for breach of fiduciary duty and constructive fraud to the extent those claims are

based on the misuse of the roll former and the payment to Williams. In all other

respects, the Court denies the motion as to these claims.

                                  B. Civil Conspiracy

   40.   Potts asserts his claim for civil conspiracy against Rives, Rives & Associates,

and KEL. The claim is premised on an agreement to facilitate an underlying breach

of fiduciary duty by Rives. (See Compl. ¶ 88.)

   41.   To the extent the Court has granted summary judgment as to the underlying

breach, summary judgment is also appropriate as to the conspiracy claim.             As

discussed, Rives owed no fiduciary duty to Potts individually; thus, there can be no

conspiracy to breach such a duty. Likewise, the evidence related to the use of the roll

former and the payment to Williams is insufficient to establish a breach of any duties

owed to Steel Tube, meaning those actions cannot support a claim for conspiracy

either. See Piraino Bros., LLC v. Atl. Fin. Group, Inc., 

, 

, 333–34 (2011) (“Where this Court has found summary judgment for the

defendants on the underlying tort claims to be proper, we have held that a plaintiff’s

claim for civil conspiracy must also fail.”).
   42.   The Court denies the motion for summary judgment to the extent the

conspiracy claim is based on the other alleged wrongdoing underlying Potts’s

derivative claim for breach of fiduciary duty. Rives and Rives & Associates invoke

the doctrine of intracorporate immunity, contending that they are agent and principal

and therefore cannot conspire with one another as a matter of law. (See Br. in Supp.

16–17.) As a general rule, this is true. See Chrysler Credit Corp. v. Rebhan, 

, 

 (1984). But courts have held that a conspiracy

may exist “if independent third parties are alleged to have joined the conspiracy.”

Robison v. Canterbury Vill., Inc., 

, 431 (3d Cir. 1988); see also AWP, Inc.

v. Commonwealth Excavating, Inc., 

, at *13–14 (W.D.

Va. July 24, 2013); Christie v. Borough of Folcroft, 

, at

*21–22 (E.D. Pa. Sept. 28, 2005). Here, the alleged conspiracy includes KEL—an

independent third party—in addition to Rives and Rives & Associates.             Thus,

intracorporate immunity does not apply, and the conspiracy claim may proceed to

trial to the extent it is based on a breach of the fiduciary duties that Rives owed to

Steel Tube.

                       C. Conversion and Unjust Enrichment

   43.   The claims for unjust enrichment and conversion are largely premised on

the same facts that underlie the derivative claim for breach of fiduciary duty. (See

Compl. ¶¶ 71, 74–75.) Rives offers no independent reason to dismiss these claims,

instead reiterating his arguments as to the claim for breach of fiduciary duty. (See

Br. in Supp. 21–22.)    Thus, for the reasons discussed above, the Court grants
summary judgment as to the claims for conversion and unjust enrichment to the

extent they are based on the use of the roll former and the payment to Williams but

denies the motion as to these claims in all other respects.

                         D. Fraud and Facilitation of Fraud

   44.   The fraud claim is based on an alleged promise by Rives not to authorize

transactions by Steel Tube above $25,000 without Potts’s consent. (See Compl. ¶ 59.)

According to Potts, Rives never intended to keep that promise and quickly broke it,

transferring large sums to himself and to companies owned by his family. (See, e.g.,

Compl. ¶¶ 31, 32, 41.) Potts also alleges that Rives & Associates and KEL facilitated

Rives’s fraud. (See Compl. ¶ 94.)

   45.   Our appellate courts routinely identify five essential elements necessary for

fraud: (a) a false representation or concealment of a material fact; (b) that was

reasonably calculated to deceive; (c) that was made with intent to deceive; (d) that

did in fact deceive (i.e., was relied upon by the recipient of the misrepresentation);

and (e) that resulted in damage to the injured party. See Rowan Cty. Bd. of Educ. v.

U.S. Gypsum Co., 

, 

 (1992). Facilitation of fraud

requires a showing “(1) that the defendants agreed to defraud the plaintiff; (2) that

defendants committed an overt tortious act in furtherance of the agreement; and

(3) that plaintiff suffered damages from that act.” Neugent v. Beroth Oil Co., 

, 

 (2002).

   46.   Rives argues, first, that there is no evidence that he made the alleged

promise. (See Br. in Supp. 19–21.) But Potts has testified that Rives did. As
described by Potts, each agreed “that either he or I could spend up to” $25,000, “[b]ut

if it went over that amount, well, then both of us would agree on it.” (Dep. A. Potts

31:10–12; see also Potts Aff. ¶ 10.) Potts’s testimony is corroborated by that of Janice

Hatchell, who stated that she witnessed a “handshake” or “gentlemen’s agreement”

along these lines in early 2015. (Dep. J. Hatchell 48:18–49:8, ECF No. 111.5; see also

Aff. J. Hatchell ¶¶ 4, 5, ECF No. 119.21 [“Hatchell Aff.”].) This evidence is sufficient

to reach a jury even though, as Rives notes, there is no evidence of an agreement in

the minutes of the February 2015 shareholder meeting or in a written shareholder

agreement. (See Dep. L. Rives 197:10–19; Dep. A. Potts 43:11–45:9, 47:18–48:4, 49:4–

11; see also Defs.’ Br. in Supp. Mot. Summ. J. Ex. 16.)

   47.   Rives also argues, without elaboration, that there is no evidence that he

made the alleged promise “under circumstances where it would be reasonable to infer

that there was no intent that it be kept.” (Br. in Supp. 19.) There is evidence, though,

that around the time of the alleged promise, Rives had taken steps to give himself

authority to act without Potts’s consent. Rives testified, for example, that he thought

Potts had “a history of giving up good business opportunities.” (Dep. L. Rives 109:12–

13.) In Rives’s own words, he asked Lazenby to execute the Acceptor Management

Agreement as “a contingency plan” that would permit him to exercise control of Steel

Tube in the event Potts made poor business decisions. (Dep. L. Rives 109:18.) Rives

concedes that he did not disclose this agreement to Potts. (See Dep. L. Rives 110:4–

15.)   From this evidence, a jury could reasonably infer that Rives took actions

inconsistent with his promise to obtain Potts’s consent for transactions over $25,000
and that he concealed those actions. As noted, there is also evidence that Rives began

authorizing payments to himself or for his personal benefit shortly after making this

alleged promise. Taken together, a jury could conclude from this evidence that Rives

did not intend to keep his promise at the time he made it. See, e.g., Whitley v. O’Neal,

, 

 (1969).

   48.   For these reasons, the Court denies the motion for summary judgment as to

the fraud claim. Rives offers no independent basis to dismiss the claim for facilitation

of fraud, and the Court denies the motion as to that claim as well.

                 E. Professional Negligence and Breach of Contract

   49.   Potts asserts derivative claims for breach of contract and professional

negligence against Rives & Associates. The claims are based on similar facts. As

alleged, Rives & Associates knowingly prepared and filed false tax forms for Steel

Tube, which did not correctly reflect the status of Rives’s ownership interest in the

company or the various payments that Rives made to himself and others. (See Compl.

¶¶ 81, 85.)

   50.   Rives & Associates begins by arguing that breach of contract is not a

cognizable theory of recovery on these facts. (See Br. in Supp. 22–23.) This argument,

only two sentences long, is not fully explained. Rives & Associates cites two cases

addressing medical malpractice claims, one of which states that “North Carolina does

not recognize breach of contract as a legal theory under which one can recover for

negligent malpractice.” Lackey v. Bressler, 

, 

 (1987). There is no additional reasoning on that point in Lackey, and the Court
is not aware of any case law applying it outside the medical malpractice context. At

least one court has suggested that the purpose of Lackey’s statement is to deter

plaintiffs from alleging a claim based on an implied contract as a way to circumvent

the special rules that apply to medical malpractice cases. See Estate of McIntyre v.

Transitional Health Servs., Inc., 

, at *13 (M.D.N.C. May

20, 1998) (denying motion for summary judgment as to claim based on an express

contract).

   51.      Based on the limited briefing and record related to this issue, the Court

concludes that summary judgment is inappropriate.            This is not a medical

malpractice case, and there is no concern that Potts’s contract claim is an end run

around the rules designed for those cases. In addition, neither party has explained

whether the alleged contractual relationship between Steel Tube and Rives &

Associates is express or implied. If the evidence at trial shows that the duties owed

by Rives & Associates to Steel Tube all derive from the common law as opposed to an

express contract, it may be inappropriate to submit two claims, rather than one, to

the jury. How to address that situation is a discussion better left to the pretrial

hearing or at trial. For now, the Court declines to dismiss the claim for breach of

contract.

   52.      Next, Rives & Associates argues that Potts cannot recover, under any

theory, for misrepresentations made on Steel Tube’s S corporation election form.

That form was prepared in the spring of 2015 but backdated to October 1, 2014, before

Rives acquired Lazenby’s stock. (See Potts Aff. ¶ 13; Rives Aff. ¶ 5.) Its purpose was
to convert Steel Tube from a tax-paying corporation to a pass-through corporation,

such that Steel Tube’s losses would be reported on Potts and Rives’s individual tax

returns and provide them with personal tax benefits. (See Damages Report 16; Rives

Aff. ¶ 5.) Potts’s evidence suggests that the election was eventually declared invalid

because the paperwork was not signed by Lazenby, who was a shareholder of Steel

Tube on the effective date. (See Borden Aff. ¶ 4.) The invalid election, Potts argues,

has resulted in fees, interest, and penalties. (See Borden Aff. ¶¶ 6–8.)

   53.   In seeking summary judgment, Rives & Associates cites the doctrine of in

pari delicto, “which prevents the courts from redistributing losses among

wrongdoers.” Whiteheart v. Waller, 

, 

(2009), disc. rev. denied, 

, 

 (2010). In short, Rives &

Associates says Potts lost any right to seek damages for the S corporation election

because he voluntarily signed the form and was therefore at least equally at fault.

(See Br. in Supp. 23.)

   54.   Potts objects on procedural grounds, arguing that Rives & Associates should

have, but did not, assert in pari delicto as an affirmative defense in its answer. (See

Opp’n 21.) Our Supreme Court has stated that “[f]ailure to raise an affirmative

defense in the pleadings generally results in a waiver thereof.” Robinson v. Powell,

, 

 (1998). But the Supreme Court has also

“permitted affirmative defenses to be raised for the first time by a motion for

summary judgment,” so long as the opposing party has a full and fair opportunity to

present argument and evidence on the issue. See 

 at 566–67, 

(citing Dickens v. Puryear, 

, 

 (1981)); see also

Williams v. HomeEq Servicing Corp., 

, 

, 388–

89 (2007). Potts had the opportunity to brief the issue, to offer evidence, and to

present oral argument. Thus, it is appropriate to consider the in pari delicto defense

even though Rives & Associates did not plead it as an affirmative defense.4

    55.   On the merits, Rives & Associates has not shown that the doctrine of in pari

delicto bars Potts’s claim as a matter of law.          “[T]he in pari delicto defense

traditionally has been narrowly limited to situations in which the plaintiff was

equally at fault with the defendant.” Skinner v. E.F. Hutton & Co., 

, 

 (1985) (emphasis in original); see also Zloop, Inc. v. Parker

Poe Adams & Bernstein, LLP, 

, at *16–17 (N.C. Super. Ct. Feb.

16, 2018) (the defense “operates to bar a plaintiff’s claims when the plaintiff is at least

equally at fault with the defendant and the allegedly wrongful conduct complained of

is the subject of the lawsuit”). Potts has alleged that Rives & Associates intentionally

prepared an S corporation election form that falsely backdated Rives’s ownership so

that Rives could claim Steel Tube’s losses in 2014 on his own personal tax return that

he was not, in fact, entitled to claim. (See Opp’n 4–5, 17–18; Potts Aff. ¶ 13.) Potts

has also alleged that he relied on the advice of Rives, a tax professional, in deciding

to sign the form. Even if it is true that Potts should have known that the election

form contained incorrect information, a jury could fairly conclude from this evidence


4 In its reply brief, Rives & Associates expands its argument beyond in pari delicto to
contributory negligence. (See Reply Br. 8–9.) Because that argument appears for the first
time in the reply brief, Potts did not have the same opportunity to provide evidence or to
respond through briefing, and the Court therefore does not consider that argument.
that Potts’s negligence was less culpable than Rives & Associates’s intentional

misrepresentations, made for Rives’s personal gain.       Summary judgment is not

appropriate as to the S corporation election.

   56.   Finally, Rives & Associates denies preparing and filing an allegedly false

1099-Misc form indicating that Rives’s monthly $7,500 withdrawals were payments

to Rives & Associates, rather than to Rives. The evidence in support of the motion

for summary judgment includes a 1096 form and two 1099-Misc forms, neither of

which relates to the monthly withdrawals. (See Rives Aff. Ex. 3.) Rives also testifies

that the allegedly false 1099-Misc form was never actually filed. (See Rives Aff. ¶ 9.)

The opposition brief does not address this issue, and the Court is not aware of any

evidence tending to show that the disputed form was filed. Hatchell testified, for

example, that she did not know whether the form was ever issued. (See Dep. Hatchell

77:11–13.) In the absence of any evidence showing the form was actually prepared

and filed by Rives & Associates, Potts cannot demonstrate any breach of contract or

professional negligence resulting from it.

   57.   The Court therefore grants the motion for summary judgment as to the

claims for professional negligence and breach of contract against Rives & Associates

to the extent the claims are based on the 1099-Misc form but denies the motion as to

these claims in all other respects.

                                F. Removal of Director

   58.   Rives moves for summary judgment on Potts’s claim seeking Rives’s removal

as a director. The parties acknowledge that Rives is no longer a director and agree
that the claim for his removal is moot. (See Br. in Supp. 22; Opp’n 24.) Accordingly,

the Court grants summary judgment as to this claim and dismisses the claim as moot.

                                          IV.
                                      CONCLUSION

   59.        For the reasons set forth above, the Court, in exercise of its discretion,

GRANTS in part and DENIES in part the motion.

         a.      The Court GRANTS the motion for summary judgment as to the claims

   for breach of fiduciary duty and constructive fraud to the extent that they are

   brought in Potts’s individual capacity.         The claims are DISMISSED with

   prejudice.

         b.      The Court GRANTS the motion for summary judgment as to the

   derivative claims for breach of fiduciary duty and constructive fraud to the extent

   those claims are based on the misuse of the roll former and the payment to

   Williams. The Court DENIES the motion for summary judgment as to these

   claims in all other respects.

         c.      The Court GRANTS the motion for summary judgment as to the claim

   for civil conspiracy to the extent the claim is based on the individual claims for

   breach of fiduciary duty and constructive fraud, the misuse of the roll former, and

   the payment to Williams. The Court DENIES the motion for summary judgment

   as to the claim for civil conspiracy in all other respects.

         d.      The Court GRANTS the motion for summary judgment as to the claims

   for conversion and unjust enrichment to the extent those claims are based on the
misuse of the roll former and the payment to Williams. The Court DENIES the

motion for summary judgment as to these claims in all other respects.

   e.       The Court DENIES the motion for summary judgment as to the claims

for fraud and facilitation of fraud.

   f.       The Court GRANTS the motion for summary judgment as to the claims

for professional negligence and breach of contract as asserted against Rives &

Associates to the extent based on the disputed 1099-Misc form.          The Court

DENIES the motion for summary judgment as to these claims in all other

respects.

   g.       The Court GRANTS the motion for summary judgment as to the claim

for removal of Rives as a director of Steel Tube. This claim is DISMISSED as

MOOT.



   SO ORDERED, this the 9th day of May, 2019.




                                       /s/ Adam M. Conrad
                                       Adam M. Conrad
                                       Special Superior Court Judge
                                        for Complex Business Cases