Crown Equipment Corporation v. Brady et al

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
STATESVILLE DIVISION
CIVIL ACTION NO. 5:23-CV-059-KDB-DCK
THIS MATTER IS BEFORE THE COURT on Defendants’ “Motion To Dismiss For
Failure To State A Claim” (Document No. 37). This motion has been referred to the undersigned
Magistrate Judge pursuant to 28 U.S.C. §636(b), and is now ripe for disposition. Having carefully
considered the arguments, the record, and applicable authority, the undersigned will respectfully
recommend that the motion be denied.
I. BACKGROUND
Crown Equipment Corporation (“Plaintiff” or “Crown”) initiated this action with the filing
of a “Complaint” (Document No. 1) on May 10, 2023. Crown has a principal place of business in
New Bremen, Ohio and “manufactures, services, and sells material handling equipment, such as
lift trucks, and related warehouse products.” (Document No. 1, p. 3).
The Complaint asserts claims against David Brady (“Brady”), William Tucker (“Tucker”),
Joseph Boggs (“Boggs”), Brawtus Holding Company, Inc. (f/k/a Pneu-Mech Systems
CROWN EQUIPMENT CORPORATION, )
)
Plaintiff, )
)
v. ) MEMORANDUM AND
) RECOMMENDATION
DAVID BRADY, WILLIAM TUCKER,
JOSEPH BOGGS, PNEU-MECH SYSTEMS
MANUFACTURING, INC., PNEU-MECH
SYSTEMS MANUFACTURING, LLC,
BRAWTUS HOLDING COMPANY, INC.,
BRAWTUS, MANAGEMENT COMPANY, LLC,
and UNITED FINISHING SYSTEMS LLC,
)
)
)
)
)
)
)
)
Defendants. )
)
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Manufacturing, Inc.)(“Brawtus Holding” or “Pneu-Mech 1.0”), Pneu-Mech Systems
Manufacturing, LLC, (n/k/a Pneu-Mech Dissolution, LLC) (“Pneu-Mech 2.0” or “the LLC”),
Brawtus Management Company, LLC (“Brawtus Management”), Pneu-Mech Systems
Manufacturing, Inc. (“Pneu-Mech 3.0” or “the Corporation”), and United Finishing Systems LLC
(“Pneu-Mech 4.0”). (Document No. 1, pp. 3-4). The individual Defendants all reside in
Statesville, North Carolina. (Document No. 1, p. 3). The corporate entity Defendants all have the
same principal place of business address in Statesville, NC – originally known as 201 Pneu-Mech
Drive, now known as 201 United Drive. Id.
According to the Complaint, Plaintiff Crown entered into a contract “with a Pneu-Mech
branded entity for the engineering and construction of a $15 million powder coating system.”
(Document No. 1, p. 1). The Pneu-Mech entity allegedly “failed to properly complete the project
or fix its errors with the system” and “the system as constructed damaged the Crown facility.”
(Document No. 1, pp. 1-2). In addition, Crown “faced demands for payment from sub-contractors
the Pneu-Mech branded entity used but did not pay for work on the powder coating system
project.” (Document No. 1, p. 2).
Plaintiff Crown alleges that it “has learned there were several iterations of the ‘Pneu-Mech’
company, all either owned or controlled by David Brady and William Tucker” who “developed a
pattern of creating ‘Pneu-Mech’ companies over the years, transferring the assets of the old
companies to the new companies and ‘starting fresh.’” (Document No. 1, p. 2). Crown contends
that it “unknowingly dealt with different iterations of ‘Pneu-Mech.’” Id. Crown further alleges
that the “convoluted nature of this matter is the result of David Brady’s, William Tucker’s and
others’ efforts to hide the Pneu-Mech entity’s assets from collection.” Id.
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The Complaint includes the following Counts: (1) negligence causing damage to Crown’s
property (against Pneu-Mech 2.0 and Pneu-Mech 3.0); (2) negligence causing damage to the
powder coating system (against Pneu-Mech 2.0 and Pneu-Mech 3.0); (3) breach of engineering
contract, construction contract and addendum (against Pneu-Mech 2.0 and Pneu-Mech 3.0 (a/k/a
“Pneu-Mech”)); (4) breach of fiduciary duty (against Brady and Tucker); (5) breach of fiduciary
duty (against Boggs); (6) aiding and abetting breach of fiduciary duty (against Boggs); (7) fraud
(against Pneu-Mech 3.0); (8) successor liability under North Carolina and Federal Common Law
(against Pneu-Mech 3.0); (9) successor liability under North Carolina and Federal Common Law
(against Pneu-Mech 4.0); (10) fraudulent transfer in violation of the North Carolina Fraudulent
Transfer Act (“NCFTA”) (against Brady, Tucker, Pneu-Mech 2.0, and Pneu-Mech 3.0); (11)
fraudulent transfer in violation of the North Carolina Fraudulent Transfer Act (“NCFTA”) (against
Brady, Tucker, Brawtus Management, Pneu Mech 1.0, Pneu-Mech 2.0, Pneu-Mech 3.0 and Pneu-
Mech 4.0); (12) Common Law piercing of the corporate veil / alter ego (against Brady and
Tucker); and (13) alter ego doctrine / single business enterprise / instrumentality rule (against all
corporate entity Defendants). (Document No. 1, pp. 21-41).
The following responses to the Complaint have been filed: “Defendant Joseph Boggs’
Answer To Plaintiff’s Complaint” (Document No. 34); “Defendant United Finishing Systems,
LLC’s Answer” (Document No. 35); the pending “Motion To Dismiss For Failure To State A
Claim” (Document No. 37); and “Defendant Pneu-Mech Systems Manufacturing, Inc. Answer
And Defenses To Plaintiff’s Complaint” (Document No. 42).
The “Motion To Dismiss…” (Document No. 37) and “Memorandum In Support…”
(Document No. 38) were filed on August 21, 2023, by Brady, Tucker, Brawtus Holding, Brawtus
Management, and Pneu-Mech Dissolution, LLC (f/k/a Pneu-Mech Systems Manufacturing LLC
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(“the LLC” or “Pneu-Mech 2.0”)). Plaintiff’s Memorandum In Opposition…” (Document No. 43)
was filed September 18, 2023; and “Defendants’ Reply…” (Document No. 45) was filed on
September 25, 2023.
At this time, Defendants Boggs, Pneu Mech Systems Manufacturing, Inc. (“Pneu-Mech
3.0”) and United Finishing Systems, LLC (“Pneu-Mech 4.0) have not moved for dismissal.
The pending motion has been fully briefed and is ripe for review and a recommended
disposition to the Honorable Kenneth D. Bell.
II. STANDARD OF REVIEW
A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) tests the “legal sufficiency of the
complaint” but “does not resolve contests surrounding the facts, the merits of a claim, or the
applicability of defenses.” Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992);
Eastern Shore Markets, Inc. v. J.D. Assoc. Ltd. Partnership, 213 F.3d 175, 180 (4th Cir. 2000). A
complaint attacked by a Rule 12(b)(6) motion to dismiss will survive if it contains “enough facts
to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also, Robinson v.
American Honda Motor Co., Inc., 551 F.3d 218, 222 (4th Cir. 2009). “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements,
do not suffice.” Id.
The Supreme Court has also opined that
Federal Rule of Civil Procedure 8(a)(2) requires only “a short
and plain statement of the claim showing that the pleader is entitled
to relief.” Specific facts are not necessary; the statement need only
“‘give the defendant fair notice of what the ... claim is and the
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grounds upon which it rests.’” In addition, when ruling on a
defendant’s motion to dismiss, a judge must accept as true all of the
factual allegations contained in the complaint.
Erickson v. Pardus, 551 U.S. 89, 93-94 (2007) (quoting Twombly, 550 U.S. at 555-56).
“Although for the purposes of this motion to dismiss we must take all the factual allegations
in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual
allegation.” Papasan v. Allain, 478 U.S. 265, 286 (1986). The court “should view the complaint
in the light most favorable to the plaintiff.” Mylan Labs, Inc. v. Matkar, 7 F.3d 1130, 1134 (4th
Cir. 1993).
III. DISCUSSION
At the outset, the undersigned notes that one thing the parties appear to agree on is that this
is a difficult case. Plaintiff refers to the case’s “convoluted nature,” and Defendants acknowledge
it “is a complex case.” (Document No. 1, p. 2; Document No. 37, p. 4). Keeping track of the
various iterations of the Pneu-Mech and Brawtus parties is challenging, and not aided by each
side’s briefing using different short-hand names. The undersigned intends to provide the Court
and the parties a helpful summary of the arguments and a recommended disposition.
Brady, Tucker, Brawtus Holding, Brawtus Management, and Pneu-Mech 2.0 (together,
“Movants”) seek dismissal of all the claims against them. (Document No. 37, p. 4). Specifically,
Movants argue that Counts One and Two for negligence (against Pneu-Mech 2.0); Count Three
for breach of contract (against Pneu-Mech); Count Four for breach of fiduciary duty (against
Brady and Tucker); Counts Ten and Eleven for fraudulent transfer (against Brady, Tucker, and
Pneu-Mech 2.0); Count Twelve for veil piercing / alter ego (against Brady and Tucker); and
Count Thirteen for alter ego / single business enterprise / instrumentality rule (against Pneu-Mech
2.0) should be dismissed.
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A. Breach of Contract (against Pneu-Mech 2.0)
The Complaint asserts that in “January 2018, because Pneu-Mech 2.0 performed well on
earlier projects, Crown included Pneu-Mech 2.0 as a potential bidder on a large project involving
the design and construction of an automated powder coating system in one of Crown’s plants in
New Bremen, Ohio (“Crown Facility”). (Document No. 1, p. 14). On September 19, 2018, Crown
awarded the Engineering Project to Pneu-Mech 2.0 “and issued Purchase Order #A408898 (the
“Engineering Contract”).” Id. (citing Document No. 1-8).
Crown “did not know that Brady and Trostle had months earlier orchestrated the transfer
of Pneu-Mech 2.0 assets to Pneu-Mech 3.0.” Id. “Jerry Trostle (“Trostle”) joined Pneu-Mech 2.0
in 2012 and served as Vice-President of Sales.” (Document No. 1, p. 6). Since Pneu-Mech 3.0’s
formation in or about December 2017, James Andrews (“Andrews”) has been President and
Trostle Vice President and Secretary. (Document No. 1, pp. 6-7). “Andrews’ and Trostle’s roles
following the sale were no different than before when they were Pneu-Mech 2.0 employees.”
(Document No. 1, p. 8).
In February 2019, Crown contracted with Pneu-Mech 2.0 “to construct the powder coating
system at a cost of $15,125,000 . . . less the $1.5 million paid under the Engineering Contract” and
issued Purchase Order #A412353 (the “Construction Contract”)” (Document No. 1, p. 15) (citing
Document No. 1-14). Although Crown awarded the Engineering Contract and the Construction
Contract to Pneu-Mech 2.0, it was invoiced by, and made multiple payments to, Pneu-Mech 3.0.
(Document No. 1, pp. 14-15). Crown contends that “[b]ecause Pneu-Mech 3.0 was a mere
continuation of Pneu-Mech 2.0,” “Pneu Mech 3.0 is bound to the Contracts.” (Document No. 1,
p. 15).
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The Complaint further alleges that “Crown and Pneu-Mech enter[ed] into an Addendum to
Agreement to Design and Manufacture Powder Coating Paint System on June 7, 2022
(“Addendum”).” (Document No. 1, p. 17) (citing Document No. 1-15). “The Addendum covered
Pneu-Mech servicing, maintaining, correcting, repairing, replacing, or otherwise fixing issues
unrelated to the cure oven.” Id.
In Count Three of the Complaint, Plaintiff alleges that Pneu-Mech 2.0 and Pneu-Mech 3.0
(“Pneu-Mech”) breached the Engineering Contract, the Construction Contract, and the Addendum
(the “Contracts”). (Document No. 1, pp. 23-24).
In support of dismissal of the breach of contract claim, Movants contend “that the only
person ever bound by the Contracts was either the Corporation [“Pneu-Mech 1.0” or “Brawtus
Holding”] or those individuals who personally signed their names to the proposals or other offers
received by Crown.” (Document No. 38, p. 6). Movants further contend that “Brady, Tucker,
[and] the Brady-Tucker Entities cannot possibly be bound to the Contracts.”1 Id.
Movants argue that Trostle did not have authority to bind the LLC (Pneu-Mech 2.0), and
that the facts alleged do not support Crown’s “conclusion that Trostle acted on the LLC’s behalf
when it executed the Contracts involving Crown.” (Document No. 38, pp. 6-7). Movants further
argue that there are no facts suggesting that Trostle was an agent of Pneu-Mech 2.0, and they assert
that “Trostle established and purchased an entirely separate entity prior to entering the Contracts”
and that he was not employed by Pneu-Mech 2.0 “in any capacity at the time he executed the
Contracts.” (Document No. 38, p. 7).
1 Movants refer “to Brawtus Holding and Brawtus Management collectively as the ‘Brawtus Companies,’
and the Brawtus Companies together with the LLC [Pneu-Mech 2.0] as the ‘Brady-Tucker Entities.’”
(Document No. 38, p. 1).
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Based on these arguments, Movants conclude that “this Court should dismiss Crown’s
claims against the LLC for breach of the Contacts and negligence in performing the Contracts.”
(Document No. 38, p. 7).
In response, Plaintiff Crown summarizes its argument as follows:
Crown has pled a plausible breach of contract claim against Pneu-
Mech 2.0. Crown attached to its Complaint the documents
reflecting the terms of the agreements with Pneu-Mech 2.0, detailed
how Pneu-Mech 2.0 breached its obligations, and identified the
harm caused by the breaches. Moving Defendants’ arguments
related to theories of agency are irrelevant to the Court’s Rule
12(b)(6) analysis and are for disposition following discovery.
(Document No. 42, p. 2).
Crown goes on to note that it “need plead only two elements to state a claim for breach of
contract: (1) the existence of a valid contract and (2) breach of the terms of that contract.”
(Document No. 43, p. 5) (citing Montessori Children’s House of Durham v. Blizzard, 244 N.C.
App. 633, 636 (2016)). Crown suggests it has easily satisfied the requirements for stating a breach
of contract claim. (Document No. 43, pp. 5-6).
In addition, Crown notes that it started doing business with Pneu-Mech 2.0 in 2015, and
that the underlying proposals and Contracts all refer to Pneu-Mech Systems Mfg. LLC (“Pneu-
Mech 2.0). (Document No. 43, pp. 7-8). Specifically, Crown points out that a proposal that led to
the Engineering Contract was signed by “Jerry Trostle (VP Sales) Pneu-Mech Systems LLC” on
or about February 5, 2018. (Document No. 43, p. 7) (citing Document No. 1-6, p. 51). Similarly,
Crown awarded “Pneu-mech Systems Mfg. LLC” the Construction Contract on April 30, 2019;
and in June 2019, agreed to the Addendum with “Pneu-Mech Systems Manufacturing LLC.”
(Document No. 43, p. 8). Crown states that its allegations and attachments support a plausible
claim “that Pneu-Mech 2.0 contracted with Crown, just as the documents show.” Id.
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After reviewing all the parties’ briefs, the undersigned is persuaded that Plaintiff Crown
has alleged “enough facts to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at
678. In short, the undersigned finds that the allegations are sufficient to warrant discovery on this
claim. As such, the undersigned will recommend that dismissal of the claim for breach of contract
be denied, without prejudice to Movants raising their arguments again at a later date.
B. Negligence (against Pneu-Mech 2.0)
The Complaint asserts two Counts of negligence for alleged damage by Pneu-Mech to
Crown’s property “other than the powder coating system,” and “to the powder coating system.”
(Document No. 1, pp. 21-22). Plaintiff alleges that the way Pneu-Mech designed and constructed
the powder coating system caused damage to both the Crown Facility and components of the
powder coating system. Id.
Regarding Counts One and Two for negligence, Movants re-assert their position regarding
the contract claim and conclude that Trostle was not an agent of the LLC (Pneu-Mech 2.0) when
he entered into the Contracts with Crown, and therefore, “damages Crown may have experienced
because of the Corporation’s (Pneu-Mech 1.0) performance of the Contracts are not the result of
any action by the LLC.” (Document No. 38, p. 17). Essentially, Movants seem to argue that Pneu-
Mech 2.0 cannot be liable because it was not a party to the Contracts. Id. Movants then seem to
present an alternative argument that if they were a party to the Contracts, they cannot face tort
liability where Crown has relied “purely on a contractual duty to design and install the machinery
described in the Complaint.” Id. (citations omitted).
In response, Crown states that it “has a right to have its negligence and breach of contract
claims proceed side-by-side because Pneu-Mech denies the existence of any contract, the common
law duty is different than any contractual obligations Pneu-Mech 2.0 may have, and damages from
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its negligence fall outside any applicable contract.” (Document No. 43, p. 3). Plaintiff contends
it has adequately alleged Pneu-Mech’s negligence in causing physical damage to Crown’s
property. (Document No. 43, p. 10) (citing A. G. v. The City Of Statesville, No. 5:20-CV-165-
KDB-DCK, 2021 WL 2582577, at *4 (W.D.N.C. June 23, 2021) (“must allege the existence of a
legal duty or standard of care owed to the plaintiff by the defendant, breach of that duty, and a
causal relationship between the breach of duty and certain actual injury or loss sustained by the
plaintiff.”).
Plaintiff Crown effectively argues that regardless of the parties’ contractual relationship,
Defendants had a legal duty to act with reasonable care and not damage Crown’s property.
(Document No. 43, p. 11). Crown then seems to acknowledge that generally, a party cannot
recover in tort for actions which arise from breach of contract; however, Crown observes that
there is an exception to the general rule if damage occurs to property that was not subject to the
contract. See (Document No. 43, p. 13) (citing Legacy Data Access, Inc. v. Cadrillion, LLC, 889
F.3d 158, 164 (4th Cir. 2018) and Mason v. Yontz, 102 N.C.App. 817, 818 (1991)).
The undersigned is persuaded that Counts One and Two should also survive the instant
motion to dismiss and be subjected to discovery. The undersigned will recommend that dismissal
of the claims for negligence be denied, without prejudice to Movants raising their arguments again
at a later date.
C. Breach of Fiduciary Duty (against Brady and Tucker)
Next, Movants challenge Plaintiff’s claim for breach of fiduciary duty against Brady and
Tucker. (Document No. 38, pp. 17-18). The Complaint alleges that Brady and Tucker were
members of the Board of Directors of Pneu-Mech 3.0 in July 2022, when they declared the
promissory note (the “Note”) that supported the transfer of assets from Pneu-Mech 2.0 to Pneu-
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Mech 3.0 to be in default. See (Document No. 1, pp. 7, 24-25). Brady and Tucker evicted Pneu-
Mech 3.0, seized control of its assets, and caused it to stop operating. (Document No. 1, p. 25).
Allegedly, Brady and Tucker knew by March 2022, that Pneu-Mech 3.0 was insolvent, and their
actions were to Crown’s detriment as a Pneu-Mech 3.0 creditor. Id.
Crown contends that “Brady and Tucker were prohibited from using their intimate
knowledge of Pneu-Mech 3.0’s corporate affairs and from using their position of trust for their
own benefit, to the detriment of Crown.” Id.
Movants argue that Brady and Tucker are not Crown’s fiduciaries. (Document No. 38, pp.
17-18). In support, Movants provide the following legal authority:
The “mere existence of a debtor-creditor relationship between [two
parties] does not create a fiduciary relationship.” Dallaire v. Bank
of Am., N.A., 367 N.C. 363, 368 (2014); Branch Banking & Trust
Co. v. Thompson, 107 N.C. App. 53, 61 (1992). In some cases, a
creditor is permitted to bring an individual action against a third
party for breach of a fiduciary duty when “(1) the wrongdoer owed
[the creditor] a special duty; or (2) [the creditor] suffered a personal
injury distinct from the injury sustained by the corporation itself.”
Green v. Freeman, 367 N.C. 136, 136, 749 S.E.2d 262, 265 (2013).
(Document No. 38, p. 18).
Here, Movants contend that there are no additional facts alleging a “special relationship”
that justify extending their fiduciary duties to Crown. Id. Moreover, Movants argue that Plaintiff
Crown does not have standing to bring this claim – “[t]o have standing to bring a particular claim
against a particular party, a plaintiff must show that it ‘suffered an invasion of a legally protected
interest that is concrete and particularized and actual or imminent, not conjectural or
hypothetical.’” Id. (quoting Beck v. McDonald, 848 F.3d 262, 270 (4th Cir. 2017)).
In opposition, Crown first notes that “[t]o plead a breach of fiduciary duty claim, a plaintiff
must allege facts to show that: (1) the defendant owed the plaintiff a fiduciary duty of care, (2)
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the defendant violated that fiduciary duty of care, and (3) this breach of duty proximately caused
injury to the plaintiff.” (Document No. 43, p. 13) (quoting Noble Bottling, LLC v. Sherman, No.
3:22-CV-083-KDB-DCK, 2023 WL 4535468, at *5 (W.D.N.C. July 13, 2023)). Crown
acknowledges that “directors seldom owe a fiduciary duty to creditors,” but asserts that such a
duty can arise when a company is “closing up shop.” (Document No. 43, p. 14) (citing Keener
Lumber Co. v. Perry, 149 N.C.App. 19, 30 (2002) and General Fid. Ins. Co. v. WFT, Inc., 269
N.C.App. 181, 186-87 (2020)).
Applying North Carolina law, Plaintiff Crown argues the following:
Brady and Tucker’s fiduciary duty stems from their position as
directors of Crown’s debtor, Pneu-Mech 3.0. (See Doc. No. 1, ¶¶31,
126; id. at ¶23). Their duty arose when, as Pneu-Mech 3.0 directors,
they declared the Pneu-Mech 3.0 note in default, evicted Pneu-Mech
3.0, and effectively caused Pneu-Mech 3.0 to stop operating, only to
then transfer its assets to themselves and Pneu-Mech 4.0. (Id. at
¶¶31, 43-44, 126-31). They took these actions despite knowing,
among other things, Pneu-Mech 3.0 owed Crown substantial money,
Pneu-Mech 3.0 was insolvent and unable to pay Crown, their actions
would inure to their personal benefit and to Crown’s detriment, and
they would force the wind-up of Pneu-Mech 3.0’s business.
. . .
Further still, a director breaches his fiduciary duty when he uses
his “intimate knowledge of the corporate affairs” for “his own
benefits and to the detriment of creditors” because the director “must
treat all creditors[] equally by making any payments to such
creditors on a pro rata basis.”
…
Ultimately, whether corporate directors owe a fiduciary duty to
a corporate creditor presents a “complex analysis” requiring a
review of evidence and weighing several factors, including
insolvency inquiries, plans for future business, liquidation of assets,
and whether good faith business operations continued. USA
Trouser, S.A. de C.V. v. Andrews, 612 F. App’x 158, 160 (4th Cir.
2015) (citing Keener, 149 N.C. at 825). When enough evidence is
presented to show the existence of a fiduciary duty, it becomes a
jury question.
(Document No. 43, pp. 14-15) (citations omitted).
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Crown concludes that based on their cited authority, including the “Fourth Circuit’s
recognition that whether a director owes a creditor of a debtor-corporation a fiduciary duty is a
‘complex analysis,’” dismissal of Count Four at this stage of the litigation would be improper.
(Document No. 43, p. 17).
In reply, Movants seem to accept Crown’s position that directors may have a fiduciary duty
in some circumstances; however, Movants argue that “individuals who are directors and secured
creditors may receive a greater priority.” (Document No. 45, p. 14) (citing Hill v. Pioneer Lumber
Co., 113 N.C. 173, 178, 180-81 (1893)). “Even after a fiduciary duty arises, directors of a
corporation may prefer secured creditors over unsecured ones.” Id. (citing Keener Lumber Co. v.
Perry, 149 N.C. App. 19, 33 (2002) and Drug Co. v. Drug Co., 173 N.C. 502, 508 (1917)
Movants assert that the Complaint itself shows that Brady and Tucker “were secured
creditors of Pneu-Mech Inc. [Pneu-Mech 3.0] by virtue of a promissory note for the purchase of
the LLC’s [Pneu-Mech 2.0’s] business assets (referred to in the Complaint as the “Note”).
(Document No. 45, p. 15 (citing Document No. 1, ¶ 29). “Crown has not alleged any facts that
would tend to show that it is in the same class of creditors as the LLC, that Brady and Tucker took
property in which they had no secured interest, or that Crown for any other reason should have
had equal priority to Brady and Tucker.” Id.
The undersigned finds that this claim presents a close call, and perhaps, Movants’ strongest
argument for dismissal of a claim. However, the undersigned is persuaded that dismissal of this
claim should also be denied at this stage of the litigation. As noted above, the Fourth Circuit in
USA Trouser stated that whether corporate directors owe a fiduciary duty to a corporate creditor
presents a “complex analysis” USA Trouser, 612 Fed.Appx. at 160 (quoting Keener, 560 S.E.2d
at 825). This “complex analysis” involves:
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various factors ..., including but not limited to: (1) whether the
corporation was insolvent, or nearly insolvent, on a balance sheet
basis; (2) whether the corporation was cash flow insolvent; (3)
whether the corporation was making plans to cease doing business;
(4) whether the corporation was liquidating its assets with a view of
going out of business; and (5) whether the corporation was still
prosecuting its business in good faith, with a reasonable prospect
and expectation of continuing to do so.
Id.
The undersigned finds that this claim should be subjected to discovery and careful
consideration of the “complex analysis” factors that may, inter alia, shed more light on Movants’
alleged priority as secured creditors and how that impacts any fiduciary duty. Moreover, the
undersigned notes that another case applying USA v. Trouser opined that “[t]he issue of the
existence (and timing) of Defendants’ fiduciary duty should be determined by a jury.” Koch
Foods, Inc. v. Pate Dawson Co., Inc., 2017 WL 4818426, at *7 (S.D. Miss. Oct. 25, 2017) (citing
Tin Originals, 98 N.C.App. 663, 665 (1990)).
Based on the foregoing, the undersigned will recommend that the motion to dismiss be
denied as to Count Four breach of fiduciary duty, without prejudice to Movants raising their
arguments again at a later date.
D. Fraudulent Transfer (against Brady, Tucker, and Pneu-Mech 2.0)
Movants next argue that N.C.Gen.Stat. §§ 39-23.4 and 39-23.5 do not apply to the
transactions described in Counts Ten and Eleven and are not fraudulent conveyances. (Document
No. 38, pp. 19-22). Movants note that a plausible claim for relief under these Counts requires a
showing that:
(1) Crown was a creditor of a specific entity; (2) that specific debtor
entity transferred something of value to a third party without
receiving equivalent value in exchange and either (a) the debtor
intended to incur debts it would not be able to pay, or (b) the
remaining assets of the business were unreasonably small in relation
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to a current or future business transaction; and (3) the debtor entity
made that transfer with the intent to hinder, delay, or defraud Crown
or any other creditor.
(Document No. 38, p. 19) (citing N.C.Gen.Stat. §§ 39-23.4 and 39-23.5).
In seeking dismissal of the fraudulent transfer claims, Movants contend the “allegations
are replete with deficiencies.” Id. “The primary issue with this claim is that, while Crown’s factual
narrative presents a cornucopia of facts about a multiplicity of transactions, it fails to adequately
narrow the field and clarify which ones it believes are fraudulent under N.C. Gen. Stats. §§ 39-
23.4 and 39-23.5.” Id. Movants suggest that the Complaint does not provide enough details “to
identify which transaction(s) it believes to be fraudulent.” (Document No. 38, pp. 20-21).
Plaintiff Crown’s response summarizes the facts alleged to support its claims and states:
Considering the many facts alleged, Crown has fairly identified
the parties, dates, and property at issue, provided details about the
transactions, and included other material facts, all without the
benefit of discovery. Put differently, Crown’s Complaint contains
detailed facts to support each legal element of the claims in Counts
Ten and Eleven and, those facts taken together as true, present
plausible claims for relief supported by law.
(Document No. 43, p. 19); see also (Document No. 43, p. 18).
In reply, Movants assert that “[t]his is much ado about nothing.” (Document No. 45, p.
15). Movants conclude that the alleged fraudulent transfers are just normal transactions and that
these claims should be dismissed. (Document No. 45, pp. 15-18).
The undersigned is satisfied that Plaintiff Crown’s allegations are sufficient to support
plausible claims in Counts Ten and Eleven. The undersigned will recommend that dismissal of
the claims for fraudulent transfer be denied, without prejudice to Movants raising their arguments
again at a later date.
E. Veil Piercing (against Brady, Tucker, and Pneu-Mech 2.0)
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“The ‘piercing the corporate veil’ doctrine is ‘a drastic remedy’ and
‘should be invoked only in an extreme case where necessary to serve
the ends of justice.’” Keener Lumber, 149 N .C. at 37, 569 S.E.2d
at 829 (quoting Dorton v. Dorton, 77 N.C.App. 667, 672, 336 S.E.2d
415, 419 (1985)). Three elements that support a claim for piercing
the corporate veil are:
(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 a plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
Glenn, 313 N.C. at 454-55, 329 S.E.2d at 330 (quoting Spencer, 268
N.C. at 9, 149 S.E.2d at 576). Factors that are considered in
determining whether the corporate veil has been pierced [] include
inadequate capitalization, non-compliance with corporate
formalities, complete domination and control of the corporation so
that it has no independent identity, excessive fragmentation of a
single enterprise into separate corporations, non-payment of
dividends, insolvency of the debtor corporation, siphoning of funds
by the dominant shareholder, nonfunctioning of other officers or
directors, and absence of corporate records. Glenn, 313 N.C. at 455-
58. 329 S.E.2d at 330-32. However, these are “merely factors to be
considered to determine whether sufficient control and domination
is present to satisfy the first prong of the three-pronged rule known
as the instrumentality rule.” Glenn, 313 N.C. at 458, 329 S.E.2d at
332.
Bear Hollow, LLC v. Moberk, LLC, No. 5:05-CV-210-RLV, 2006 WL 1642126, at *17
(W.D.N.C. June 5, 2006).
In Counts Twelve and Thirteen, Plaintiff Crown asserts veil piercing claims seeking “an
equitable remedy to impose liability.” (Document No. 1, pp. 39-41). The Complaint alleges that
“Brady and Tucker oversaw a convoluted network of business entities to avoid liability,” while
exercising “complete dominion and control over the Brady-Tucker Entities.” (Document No. 1,
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p. 39). Plaintiff further alleges that Brady and Tucker have been in complete control of the
finances, policies, and business practices of the Brady-Tucker Entities. Id.
In further support of Count Thirteen, the Complaint provides in pertinent part:
237. The Brady-Tucker Entities all operate from the same
location. The entities have the same chief financial officer (Boggs)
and, on information and belief, the same actual or de facto owners
(Brady and Tucker). The board of managers or board of directors
for the entities are, on information and belief, dominated by the same
mangers or directors (Brady and Tucker).
238. Pneu-Mech 4.0, Pneu-Mech 3.0, Pneu-Mech 2.0, and
Brawtus Management are not separate and distinct entities from
Pneu-Mech 1.0, which is itself controlled and dominated by Brady
and Tucker. The Brady-Tucker Entities are, in substance, a single
business enterprise so that the alter ego doctrine applies.
(Document No. 1, p. 41).
Crown contends it is “entitled to a finding that the corporate veil for the Brady-Tucker
Entities should be pierced” and it is “entitled to a finding that some or all of the Brady-Tucker
Entities function as a single business enterprise in substance, their corporate veils should be
disregarded, and the Court should declare that the Brady-Tucker Entities were and are the alter-
egos of one another, Pneu-Mech 1.0 and Brady and Tucker.” (Document No. 1, ¶¶ 232, 239).
Movants note that courts impose this type of remedy “reluctantly and cautiously.”
(Document No. 38, p. 12) (quoting Dorton v. Dorton, 77 N.C. App. 667, 670 (1985)). Movants
argue that “Crown has not pled sufficient facts that, if believed, plausibly lay out a prima facie
case for veil piercing against Brady, Tucker, or the Brady-Tucker Entities.” (Document No. 38,
p. 13). Movants contend that “[t]he most glaringly obvious problem with Crown’s veil-piercing
attempt against Brady and Tucker is that it has not alleged that Brady or Tucker were ever
shareholders in the Corporation.” Id.
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In addition, Movants argue that “Crown has not supplied any relevant facts that show
whether Brady, Tucker, or the Brady-Tucker Entities used their alleged control over the
Corporation to perpetrate a violation of any statutory or other positive legal right held by Crown.”
(Document No. 38, p. 14). Movants conclude that although “Crown presents a host of legal
conclusions in an effort to satisfy each element and factor relevant to veil-piercing, the Complaint
as pled falls woefully short of explaining how or why any of these are applicable.” (Document
No. 38, p. 16).
At the outset, Plaintiff summarizes its position in support of counts Twelve and Thirteen
as follows:
Crown alleges Brady and Tucker exercised ownership, control, and
domination over certain entities and disregarded their corporate
forms to perpetuate the fraudulent transfer of assets and personally
enrich themselves, all while using the corporate forms to shield
themselves from personal liability to Crown’s detriment. These
allegations are precisely what is needed to state a plausible claim
under North Carolina law for disregarding corporate forms.
(Document No. 43, pp. 3-4).
In further support of its claims, Crown argues that “[a] motion to dismiss is generally [an]
improper device to dispose of a veil piercing claim since discovery is necessary for a plaintiff to
develop its claim.” (Document No. 43) (citing Bear Hollow, LLC v. Moberk, LLC, No. 5:05-CV-
210-RLV, 2006 WL 1642126 (W.D.N.C. June 5, 2006). In Bear Hollow, the Honorable Richard
L. Voorhees opined that “[s]ince piercing the corporate veil depends upon facts that Plaintiffs must
obtain through discovery, Defendants’ Motion to Dismiss is premature and is denied.” Bear
Hollow, 2006 WL 1642126, at *17.
Crown argues that the Complaint is adequate as to these Counts because it
alleges Brady and Tucker exercised ownership, control, and
domination over the Brady-Tucker Entities, including Pneu-Mech
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3.0, and disregarded their corporate forms to perpetuate the
fraudulent transfer of assets and personally enrich themselves, all
while using the corporate forms to shield themselves from personal
liability. (See, e.g., Doc. No. 1, ¶¶38, 41, 86-105, 187, 197, 237).
And the Crown Complaint alleges Brady’s and Tucker’s control and
domination caused the injury at issue. (Id. at ¶¶105, 233). Thus,
Crown has alleged all that is needed to state a plausible claim under
North Carolina law for disregarding corporate forms, and the
Court’s consideration of Moving Defendants’ request to dismiss
Counts Twelve and Thirteen can end here.
(Document No. 43, p. 22).
In reply, Movants argue that Crown has overlooked a critical aspect of veil piercing: “it
can pierce the veil and reach the assets of Brady, Tucker, and their legal entities only if these
Defendants or their legal entities contracted with Crown—that is, only if Brady, Tucker, or their
entities owned the legal person with which Crown contracted.” (Document No. 45, p. 6). Movants
assert that Plaintiff Crown has conveniently skirted “around the issue of actual ownership.”
(Document No. 45, p. 10). Movants further suggest “that there are no facts supporting [Crown’s]
claim that Brady, Tucker, the LLC, or the Brawtus Companies have ever had any ownership stake
in the Corporation.
Later, Movants acknowledge that “Crown does state that Brady and Tucker are the “actual
or de facto owners” of Pneu-Mech LLC, the Brawtus Companies, and Pneu-Mech Inc. . . . and
“states elsewhere that ‘Andrews and Trostle were identified on paper as [Pneu-Mech Inc.]
owners.’” (Document No. 45, p. 12) (citing Document No. 1, ¶¶ 237, 38). However, Movants
argue that ownership “is a legal conclusion that must be supported by facts.”
After careful consideration of the parties’ arguments, the undersigned will recommend that
the Court follow the guidance of Judge Voorhees’ opinion that “piercing the corporate veil depends
upon facts that Plaintiff[] must obtain through discovery.” Bear Hollow, 2006 WL 1642126, at
*17. The undersigned is persuaded that here, as in Bear Hollow, Plaintiff has pled sufficient facts
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to state a claim and that dismissal would be premature. Id. On this claim, as with most of the
others, it appears that further development of the record will assist a determination on the merits,
or in the alternative, a settlement.
The undersigned will recommend that dismissal of Counts Twelve and Thirteen related to
veil piercing be denied, without prejudice to Movants raising their arguments again at a later date.
IV. RECOMMENDATION
FOR THE FOREGOING REASONS, the undersigned respectfully recommends that
Defendants’ “Motion To Dismiss For Failure To State A Claim” (Document No. 37) be DENIED.
V. TIME FOR OBJECTIONS
The parties are hereby advised that pursuant to 28 U.S.C. § 636(b)(1)(C), and Rule 72 of
the Federal Rules of Civil Procedure, written objections to the proposed findings of fact,
conclusions of law, and recommendation contained herein may be filed within fourteen (14) days
of service of same. Responses to objections may be filed within fourteen (14) days after service
of the objections. Fed.R.Civ.P. 72(b)(2). Failure to file objections to this Memorandum and
Recommendation with the District Court constitutes a waiver of the right to de novo review by the
District Court. Diamond v. Colonial Life, 416 F.3d 310, 315-16 (4th Cir. 2005); United States v.
Benton, 523 F.3d 424, 428 (4th Cir. 2008). Moreover, failure to file timely objections will preclude
the parties from raising such objections on appeal. Id. “In order ‘to preserve for appeal an issue
in a magistrate judge’s report, a party must object to the finding or recommendation on that issue
with sufficient specificity so as reasonably to alert the district court of the true ground for the
objection.’” Martin v. Duffy, 858 F.3d 239, 245 (4th Cir. 2017) (quoting United States v. Midgette,
478 F.3d 616, 622 (4th Cir. 2007)).
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IT IS SO RECOMMENDED.
Signed: February 23, 2024
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