Southern Produce Distributors, Inc. v. Friedman et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
SOUTHERN PRODUCE 	Case No. 03-02838-8-JRL
DISTRIBUTORS, INC.,
Debtor.
SOUTHERN PRODUCE 	Adversary Proceeding No.:
DISTRIBUTORS, INC., 	L-05-00013-8-AP
Plaintiff,
vs.
CHARLIE FRIEDMAN and
FRIEDMAN & BROUSSARD
PRODUCE, INC.,
Defendants.
CHARLIE FRIEDMAN, PAMELA
FRIEDMAN, and FRIEDMAN &
BROUSSARD PRODUCE, INC.,
Counter-Claimants and
Third Party Plaintiffs,
vs.
SOUTHERN PRODUCE
DISTRIBUTORS, INC. and
D. STEWART PRECYTHE,
Third Party Defendants.
_____________________________________________________________________________
SO ORDERED.
SIGNED this 10 day of May, 2007.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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ORDER
This case is before the court on a motion to dismiss the third party claims against D.
Stewart Precythe filed by Mr. Precythe and a motion for an order delaying responses to
discovery filed by Mr. Precythe and Southern Produce Distributors, Inc. (“Southern Produce”).
On April 23, 2007, the court conducted a hearing on these matters in Raleigh, North Carolina.
JURISDICTION AND PROCEDURE
This court has jurisdiction over the parties and the subject matter of this proceeding
pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the
United States District Court for the Eastern District of North Carolina on August 3, 1984. This
is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and
determine.
BACKGROUND
On March 24, 2000, Southern Produce entered into a contract with Charlie Friedman and
Friedman & Broussard Produce, Inc., regarding the brokering and sales of sweet potatoes.
Southern Produce later filed a chapter 11 bankruptcy petition on March 31, 2003. On January,
19, 2005, Southern Produce filed a complaint against Charlie Friedman and Friedman &
Broussard Produce, Inc., alleging that they violated the contract by contacting and soliciting
Southern Produce’s customers without its consent. On November 16, 2006, Charlie Friedman,
Pamela Friedman, and Friedman & Broussard Produce, Inc. (the “Friedman Parties”) filed a
counterclaim against Southern Produce and a third party complaint against Precythe alleging that
Southern Produce violated the contract by selling sweet potatoes to the Friedman Parties’
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customers from 2000 to 2002. Additionally, the Friedman Parties allege that in 2003, 2005, and
2006 Southern Produce sold sweet potatoes utilizing the Friedman Parties’ labels and trade
names without their consent. Based on these alleged facts, the counterclaim contains causes of
action for misappropriation of trade names and trademarks, unauthorized sales of product,
tortious interference with business contract, and the third party complaint seeks to pierce the
corporate veil and impose liability on Precythe.
The third party complaint alleges liability on the part of Precythe based on his alleged
control of Southern Produce. With respect to Precythe, the third party complaint alleges:
33. 	The allegations contained in Paragraphs 1 through 32 are re-alleged as if set forth
in their entirety.
34. 	At all times relevant, the Defendant Precythe was and is the 100% shareholder of
the Defendant Corporation.
35. 	Upon to sometime in May 2003, the Defendant Precythe was the President of the
Defendant Corporation.
36. 	From sometime in May 2003 to present, the Defendant Precythe has served as the
Chief Executive Officer of the Defendant Corporation.
37. 	Upon information and belief, up to the filing of the Defendant Corporation’s
bankruptcy, the Defendant Corporation did not properly adhere to the required
corporate duties such as conducting board of director meetings and shareholder
meetings.
38. 	Upon information and belief, the Defendant Precythe used the Defendant
Corporation as his own instrumentality. Specifically, and without limitation, the
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following occurred:
a. 	The corporate assets were used to pay personal debts;
b. 	The Defendant Corporation and the Defendant Precythe co-
mingled assets for each’s own use;
c. 	The Defendant Corporation hired personnel to take care of the
financial transactions of the Defendant Precythe;
d. 	The Defendant Corporation hired the Defendant Precythe’s
girlfriend and paid her although she did not perform any duties for
the Defendant Corporation.
39. 	Grounds exist for the disregard of the corporate structure and to assess the
Defendant Precythe individually with the damages proven herein.
Precythe now seeks to have the claim for piercing the corporate veil dismissed for failure to state
a claim upon which relief may be granted.
STANDARD OF REVIEW
For purposes of deciding a motion to dismiss for failure to state a claim upon which relief
may be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) applicable to bankruptcy by
Bankruptcy Rule 7012, the court takes the complaint’s factual allegations as true. Ibarra v.
United States, 120 F.3d 472, 474 (4th Cir. 1997). Dismissal is appropriate if the nonmoving
party can prove no set of facts sufficient to support its claims for relief. If, on a motion to
dismiss for failure to state a claim upon which relief may be granted, matters outside the
pleadings are presented to and not excluded by the court, the motion shall be treated as one for
summary judgment, and all parties shall be given reasonable opportunity to present all pertinent
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material. Fed. R. Civ. P. 12(b). Thus, Rule 12(b)(6) permits a party to defend a motion to dismiss
by presenting evidence; however, the party can do so only after notice that the court intends to
convert the Rule 12(b)(6) motion into a summary judgment motion. Fayetteville Investors v.
Commercial Builders, Inc., 936 F.2d 1462, 1471 (4th Cir. 1991). If no conversion of the Rule
12(b)(6) motion is made then the court must limit itself to the facts and allegations stated in the
complaint.
ANALYSIS
The Friedman Parties seek to impose individual liability on Precythe for the alleged
wrongs committed by Southern Produce. The Friedman Parties assert that the alleged facts are
sufficient to pierce Southern Produce’s corporate veil and thereby extend liability to Precythe.
Precythe disagrees and argues that under North Carolina law the Friedman Parties have failed to
allege any facts that justify piercing the corporate veil.
Under North Carolina law, a corporate form will be respected unless the corporation “is
so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder and a
shield for its activities in violation of the declared public policy or statute of the state[.]” Glenn
v. Wagner, 313 N.C. 450, 453, 329 S.E.2d 326, 329 (1985). North Carolina courts have held that
piercing the corporate veil is a “drastic remedy” and should only be invoked in extreme cases
where it is necessary to serve the ends of justice. Keener Lumber Co., Inc. v. Perry, 149 N.C.
App. 19, 37, 560 S.E.2d 817, 829 (N.C. Ct. App. 2002); Cherry v. State Farm Mut. Auto. Ins.
Co., 162 N.C. App. 535, 538, 590 S.E. 2d 925, 929 (N.C. Ct. App. 2004)(piercing the corporate
veil is not to be taken lightly); Dorton v. Dorton, 77 N.C.App., 667, 670, 336 S.E.2d 415, 418
(N.C. Ct. App. 1985)(piercing the corporate veil is a remedy that should be exercised reluctantly
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1 The instrumentality rule may be used to impose liability on an individual as well as a
corporation. Becker v. Graber Builders, Inc., 149 N.C. App. 787, 790, 561 S.E.2d 905, 908 (N.C.
Ct. App. 2002).
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and cautiously).
North Carolina applies the “instrumentality rule” to determine when the corporate form
should be disregarded and the veil of the corporation pierced. Glenn, 313 N.C. at 454, 329
S.E.2d at 330. Under this rule, “[a] corporation which exercises actual control over another,
operating the latter as a mere instrumentality or tool, is liable for the torts of the corporation thus
controlled. In such instances, the separate identities of parent and subsidiary or affiliated
corporations may be disregarded.” 1 Id. at 454, 329 S.E.2d at 330. The court in Glenn enumerated
three elements which support disregarding the corporate entity under the instrumentality rule:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances, but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own; and
(2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetrate the violation of a statutory or other positive legal duty, or a dishonest
and unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
Id. at 454-55, 329 S.E.2d at 330. The court also noted possible factors to consider in determining
whether there is sufficient control and domination to satisfy the first prong of the instrumentality
rule. These factors include: (1) inadequate capitalization, (2) noncompliance with corporate
formalities, (3) complete domination and control, (4) excessive fragmentation, (5) nonpayment
of dividends, (6) insolvency of the debtor corporation, (7) siphoning of funds by the dominate
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2 The court it is not considering the seventy plus pages attached to the Friedman Parties’
response to the motion to dismiss. Instead, the court is looking only at the third party complaint
and the legal arguments made by counsel at the hearing.
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shareholder, (8) non-functioning of other officers or directors, and (9) absence of corporate
records. Id. at 458, 329 S.E.2d at 332. The court stressed that these are merely factors, not an
exhaustive checklist, in determining whether sufficient control and domination is present to
satisfy the first prong. Id.
In the present case, Precythe argues that the third party complaint does not set forth the
necessary elements for piercing the corporate veil. The third party complaint fails to allege
complete domination and control of Southern Produce by Precythe, which is necessary to satisfy
the first prong of the Glenn test. Precythe also contends that there are no allegations in the third
party complaint that address the second and third prongs. The third party complaint contains no
allegations connecting the alleged acts by Precythe to the alleged harm suffered by the Friedman
Parties. Precythe concludes that the absence of any allegations on the second and third prongs is
fatal to the Friedman Parties’ claim against him.
The Friedman Parties contend that Precythe did exercise control over Southern Produce
to the extent that piercing the corporate veil is appropriate.2 The Friedman Parties argue that the
alleged failure to adhere to corporate duties by Southern Produce, Precythe’s role as President
and later CEO of Southern Produce, in conjunction with the alleged intermingling of corporate
and personal finances meet the first prong of the Glenn test. As to prongs two and three, the
Friedman Parties contend that Precythe knew about the alleged wrongs by Southern Produce and
that those wrongs caused injury to the Friedman Parties.
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3A “district court may also take judicial notice of matters of public records without
converting a 12(b)(6) motion into a motion for summary judgment.” Henson v. CSC Credit
Services, 29 F.3d 280, 284 (7th Cir. 1994); see also Holly’s, Inc. v. City of Kentwood (In re
Holly’s, Inc.), 172 B.R. 545, 554 (Bankr. W.D. Mich. 1994)(a bankruptcy court may take
judicial notice of the bankruptcy court’s records in ruling on a motion for summary judgment or
a motion to dismiss).
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Having reviewed the third party complaint, the court finds that the allegations contained
in it are insufficient to support a claim for piercing the corporate veil. Although, the Friedman
Parties have alleged that Precythe controlled Southern Produce, such allegations are insufficient
to meet the first prong of the Glenn test. Glenn requires the control to be “such complete
domination of policy and business practice that as to the transactions in question the subservient
corporation had no separate mind, will or existence of its own.” Glenn, 313 N.C. at 453, 329
S.E.2d at 329-30. The Friedman Parties failed to allege such complete domination and control by
Precythe over Southern Produce. Additionally, the third party complaint contains no allegations
that Southern Produce was a sham corporation. See Broussard v. Meineke Discount Muffler
Shops, Inc., 155 F.3d 331,349 (4th Cir. 1998)(citing B-W Acceptance Corp. v. Spencer, 268 N.C.
1, 8, 149 S.E.2d 570, 575 (N.C. 1966)(North Carolina law provides that “[a] corporate parent
cannot be liable for the acts of its subsidiary unless the corporate structure is a sham”). In
contrast, the court takes judicial notice of the fact that Southern Produce is a multi-million dollar
corporation that is currently involved in a successful chapter 11 reorganization and has been
since 2003.3 In this highly litigious case, no creditor nor the Bankruptcy Administrator has ever
suggested that the debtor ignored corporate formalities, or is a “sham” corporation. Furthermore,
the third party complaint concedes that Precythe was not even the president of Southern Produce
when a number of the alleged transactions occurred. The allegations set forth in the third party
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4At the hearing, counsel for the Friedman Parties’ argued that Precythe knew that
Southern Produce was using the Friedman Parties’ labels and that it was selling to the Friedman
Parties’ customers. Even if the court considered this information despite the fact that it is not
alleged in the third party complaint, mere knowledge by a CEO or president of a corporate
wrong is not enough to pierce the corporate veil and hold the individual liable.
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complaint are insufficient to meet the control prong of the Glenn test.
More important, even if the third party complaint did meet the first prong, it contained no
allegations as to the second and third prongs. The Friedman Parties failed to allege that Precythe
used his complete domination and control of Southern Produce in order to commit the alleged
wrongs. Instead, the third party complaint merely alleged that Southern Produce, not Precythe,
used the Friedman Parties’ labels and sold to the Friedman Parties’ customers. 4 Furthermore, the
third party complaint failed to allege that Precythe’s complete domination of Southern Produce
was the approximate cause of the Friedman Parties’ damages. The wrongs that the Friedman
Parties accuse Southern Produce of committing took place within its routine day-to-day
operations, and those wrongs had no connection to the alleged control exercised by Precythe
over Southern Produce.
In conclusion, the Friedman Parties’ bare allegations of control are insufficient to allow
them to pierce Southern Produce’s corporate veil so as to extend liability to Precythe. There are
no allegations that Precythe completely dominated Southern Produce, much less any facts that
support that allegation. Additionally, there are no allegations that the alleged control was used by
Precythe to commit the alleged wrongs.
CONCLUSION
Based on the forgoing, the Friedman Parties’ third party complaint is insufficient to
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support piercing the corporate veil of Southern Produce. The motion to dismiss the third party
claims against D. Stewart Precythe is ALLOWED. Furthermore, the motion for an order
delaying responses to discovery is now moot.
“END OF DOCUMENT”
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