ALCOF III NUBT, L.P. v. CHIRICO, 2024 NCBC 52

STATE OF NORTH CAROLINA
MECKLENBURG COUNTY
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
23CV031985-590
ALCOF III NUBT, L.P.; ALTA
FUNDAMENTAL ADVISERS LLC,
on behalf of funds it manages;
BLACKCOMB DEBT HOLDINGS,
L.P.; CTC ALTERNATIVE
STRATEGIES, LTD; NUVEEN
ASSET MANAGEMENT, LLC;
SCULPTOR SPECIAL MASTER
FUND, LTD; TBK BANK, SSB;
TRANSAMERICA LIFE
INSURANCE COMPANY;
VENTURE 28A CLO, LIMITED;
VENTURE XXX CLO, LIMITED;
VENTURE 31 CLO, LIMITED;
VENTURE 32 CLO, LIMITED;
VENTURE 33 CLO, LIMITED;
VENTURE 36 CLO, LIMITED;
VENTURE XV CLO, LIMITED;
VENTURE XIX CLO, LIMITED;
VENTURE XXII CLO, LIMITED;
and VENTURE XXIII CLO,
LIMITED,
Plaintiffs,
v.
JAMES M. CHIRICO, JR.; KIERAN
MCGRATH; and STEPHEN D.
SPEARS,
Defendants.
ORDER AND OPINION
ON DEFENDANT STEPHEN D.
SPEARS’S MOTION TO DISMISS
1. Plaintiffs are investors that hold interests in loans made to Avaya, Inc.1 in
July 2022. The value of their interests plunged when Avaya declared bankruptcy the
following year. In this lawsuit, Plaintiffs accuse three of Avaya’s former officers—
James M. Chirico, Jr., Kieran McGrath, and Stephen D. Spears—of wrongfully
1 Some allegations refer to both Avaya and its parent company, Avaya Holdings Corp. For
ease of comprehension, the Court will follow the parties’ lead and refer to the two Avaya
entities simply as “Avaya.”
ALCOF III NUBT, L.P. v. Chirico, 2024 NCBC 52.

inducing them to invest based on false statements and omissions about the company’s
financial condition and expectations for future earnings.
2. This opinion addresses Spears’s motion to dismiss for failure to state a
claim.2 (See ECF No. 82.) For the following reasons, the Court GRANTS his motion.
Parker Poe Adams & Bernstein LLP, by Melanie Black Dubis and
Andrew Tabeling, and Glenn Agre Bergan & Fuentes LLP, by Andrew
Glenn, Marissa E. Miller, Eric J. Carlson, George L. Santiago, and
Trevor J. Welch, for Plaintiffs ALCOF III NUBT, L.P. et al.
Johnston, Allison & Hord, P.A., by William D. McClelland, Kenneth
Lautenschlager, and Austin R. Walsh, and Dorsey & Whitney, LLP, by
Thomas O. Gorman and Stephen Weingold, for Defendant James M.
Chirico, Jr.
Robinson, Bradshaw & Hinson, P.A., by David C. Wright, Adam Doerr,
and Ethan R. White, and Kellogg, Hansen, Todd, Figel & Frederick,
PLLC, by Reid Mason Figel, Minsuk Han, and Jordan Gonzalez, for
Defendant Kieran McGrath.
James, McElroy & Diehl, P.A., by Jennifer M. Houti and Adam L. Ross,
for Defendant Stephen D. Spears.
Conrad, Judge.
I.
BACKGROUND
3. The Court does not make findings of fact on a motion to dismiss. The
following background assumes that the allegations of the amended complaint are
true.
4. Avaya specializes in multifunction communications. It provides unified
“video, audio, phone, and chat” software, related technical support, and
2 Chirico and McGrath have filed their own motions to dismiss for improper venue and failure
to state a claim. A separate opinion addresses those motions and similar ones in a related
case, Brigade Cavalry Fund Ltd. v. Chirico (23CV031948-590).

communications hardware to its customers. During the relevant period, Chirico was
its president and chief executive officer, McGrath was its executive vice president and
chief financial officer, and Spears was its chief revenue officer. (See Am. Compl.
¶¶ 32–34, 37–39, ECF No. 76.)
5. A few years ago, Avaya shifted its sales strategy toward its cloud-based
product. In May 2022, Chirico told investors that this “strategy [was] taking hold”
and was “reflected in our revised second half guidance.” Avaya had filed its Form 8-K
with the Securities and Exchange Commission that same day and provided bullish
earnings guidance for the third quarter of its fiscal year (which was the second
quarter of the calendar year). McGrath signed the Form 8-K on Avaya’s behalf. (Am.
Compl. ¶¶ 37, 39, 42–45; see also Am. Compl. ¶ 69.)
6. Several weeks later, Avaya began trying to raise money to pay off existing
debt and for general purposes. In “a pre-marketing call” with potential investors on
2 June 2022, McGrath shared a lender presentation that incorporated the company’s
third-quarter guidance. Avaya provided substantially the same presentation to
Plaintiffs on 8 June 2022, which was the date that the company publicly launched its
marketing campaign. The presentation named McGrath and Avaya’s treasurer as
presenters and listed Chirico, McGrath, Spears, and others as members of Avaya’s
“Experienced Management Team.” Around this time, Avaya also created a virtual
data room so that potential investors could conduct due diligence. The data room
included a letter stating that estimates and projections in the lender presentation
were “developed by management” of Avaya and that “management believes such

assumptions and estimates to be reasonable.” As alleged, Chirico and McGrath were
responsible for reviewing, approving, and developing the third-quarter guidance and
including it within the lender presentation. Eventually, Plaintiffs agreed to lend
Avaya $236 million in a deal that closed on 12 July 2022. (Am. Compl. ¶¶ 2, 47, 49–
55.)
7. Just two weeks after the signing of the loan agreement, Avaya published
preliminary results for the third quarter, missing its revenue guidance by nearly
twenty percent and its EBITDA (earnings before interest, taxes, depreciation, and
amortization) guidance by over sixty percent. The situation deteriorated rapidly. In
August 2022, Avaya disclosed that it doubted its “ability to continue as a going
concern.” Then, in February 2023, Avaya filed for bankruptcy protection. (Am.
Compl. ¶¶ 76, 79, 88.)
8. Plaintiffs now claim to have been defrauded. They say that Chirico and
McGrath knew that the company’s cloud-based strategy was failing even as they told
investors that it was succeeding. In April 2022, for example, Avaya’s senior director
of sales finance told Spears that the revenue projection for North America was
“scary”—a concern that Spears said was “spot on” and that he would raise to a
“smaller audience.” In a related conversation, another member of the finance team
confirmed that this concern “made its way to” Chirico, and by early June 2022, Chirico
was telling Spears and others that internal revenue projections were “clearly not good
at all.” Despite this, Chirico and McGrath reaffirmed Avaya’s third-quarter guidance

to Plaintiffs and others in the lender presentation. (See, e.g., Am. Compl. ¶¶ 2, 58–
62, 64, 65, 71–74.)
9. According to Plaintiffs, any doubt about Avaya’s performance was removed
when its third quarter ended. On 1 July 2022, the first day of the new quarter, the
company received a report that it had substantially underperformed, confirming the
finance team’s fears. Spears drafted an e-mail addressed to Avaya’s board of directors
about the results. He sent that draft to Chirico, who did not send it to the board. On
3 July 2022, though, the board received a message from a whistleblower, which
denounced Chirico’s and McGrath’s alleged “financial engineering” and
“fabrications,” including their creation of “fake EBITDA numbers.” No one shared
any of this with Plaintiffs before the loan agreement closed just over a week later.
(Am. Compl. ¶¶ 67–70, 83–85.)
10. In this action, Plaintiffs say that they would not have invested in Avaya had
they known the truth. They assert claims for fraudulent misrepresentation,
fraudulent omission, and negligent misrepresentation against Chirico and McGrath.
They assert only the claim for fraudulent omission against Spears.
11. Spears has moved to dismiss that claim. The motion is fully briefed, and the
Court held a hearing on 21 May 2024. The motion is ripe for decision.
II.
LEGAL STANDARD
12. A motion to dismiss for failure to state a claim “tests the legal sufficiency of
the complaint.” Isenhour v. Hutto, 350 N.C. 601, 604 (1999) (citation and quotation
marks omitted). Dismissal is proper when “(1) the complaint on its face reveals that

no law supports the plaintiff’s claim; (2) the complaint on its face reveals the absence
of facts sufficient to make a good claim; or (3) the complaint discloses some fact that
necessarily defeats the plaintiff’s claim.” Corwin v. Brit. Am. Tobacco PLC, 371 N.C.
605, 615 (2018) (citation and quotation marks omitted). In deciding the motion, the
Court must treat all well-pleaded allegations as true and view the facts and
permissible inferences in the light most favorable to the nonmoving party. See, e.g.,
Sykes v. Health Network Sols., Inc., 372 N.C. 326, 332 (2019).
III.
ANALYSIS
13. Fraud has five “essential elements”: (a) a false representation or
concealment of a material fact, (b) calculated to deceive, (c) made with intent to
deceive, (d) that did in fact deceive, and (e) that resulted in damage to the injured
party. Rowan Cnty. Bd. of Educ. v. U.S. Gypsum Co., 332 N.C. 1, 17 (1992). The
injured party’s reliance on the misrepresentation or concealment “must be
reasonable.” Forbis v. Neal, 361 N.C. 519, 527 (2007).
14. Because “silence is fraudulent only when there is a duty to speak,” a claim
based on “concealment or nondisclosure” requires the plaintiff to allege with
particularity that the defendant “had a duty to disclose material information.”
Lawrence v. UMLIC-Five Corp., 2007 NCBC LEXIS 20, at *8 (N.C. Super. Ct. June
18, 2007) (citing Griffin v. Wheeler-Leonard & Co., 290 N.C. 185, 198 (1976)); see also
N.C. R. Civ. P. 9(b) (requiring allegations of fraud to “be stated with particularity”).
A duty to disclose arises when the parties are in a fiduciary relationship, when one
party “has taken affirmative steps to conceal material facts from the other,” or when

“one party has knowledge of a latent defect in the subject matter of the negotiations
about which the other party is both ignorant and unable to discover through
reasonable diligence.” Harton v. Harton, 81 N.C. App. 295, 297–98 (1986). In
addition, “a party who chooses to speak has a duty to make a full and fair disclosure
of facts concerning the matters on which he chooses to speak.” Tillery Env’t LLC v.
A&D Holdings, Inc., 2018 NCBC LEXIS 13, at *22 (N.C. Super. Ct. Feb. 9, 2018)
(citing Ragsdale v. Kennedy, 286 N.C. 130, 139 (1974)).
15. Spears denies that he had a duty to speak. In his view, the allegations of
the amended complaint show that he played no role in making any
misrepresentations to Plaintiffs, did not draft or sign the lender presentations or
regulatory filings at issue, and never communicated with Plaintiffs in any way. He
further contends that the allegations that he took affirmative steps to conceal
information from Plaintiffs are conclusory.
16. Plaintiffs do not contend that they had a fiduciary relationship with Spears
or that he was a party to the negotiations with knowledge of a latent defect in their
subject matter. Instead, they offer three other arguments, none convincing.
17. First, they argue that Spears participated in the alleged misrepresentations
in Avaya’s third-quarter guidance. This argument is based partly on allegations
concerning a lender presentation that incorporated the third-quarter guidance. The
presentation, which McGrath delivered, identified Spears as Avaya’s chief revenue
officer and part of its “Experienced Management Team.” A different document given
to potential lenders stated that the projections contained in McGrath’s presentation

were “developed by” unnamed members of “management” and that “management
believes such assumptions and estimates to be reasonable.” (Am. Compl. ¶¶ 34, 50,
53, 54.)
18. Even if true, these allegations are insufficient. Spears’s status as an officer,
without more, does not make him liable for the corporation’s acts or the acts of other
officers. See Russell M. Robinson, II, Robinson on North Carolina Corporation Law
§ 16.08 (7th ed. 2018). Nowhere do Plaintiffs allege that Spears was among the
management group that developed the third-quarter guidance, that he “actively
participat[ed] in the production of due diligence information” to Plaintiffs, or that he
prepared or approved any of the documents containing the alleged
misrepresentations about Avaya’s financial state or its expected financial
performance. See Tillery Env’t, 2018 NCBC LEXIS 13, at *49. Nor do they allege
that he “was actively involved . . . in the negotiations” that led to the loan agreement.
See Oberlin Cap., L.P. v. Slavin, 147 N.C. App. 52, 58 (2001). In fact, there are no
allegations that Spears had any contact with Plaintiffs at all. See id. at 57 (affirming
dismissal of fraudulent concealment claim, among others, for failure to “clarify how
and to what extent [officer] defendants actively and personally participated”).
19. Second, Plaintiffs argue that Spears took affirmative steps to conceal
material facts. This argument is based on an e-mail that Spears drafted and sent to
Chirico less than two weeks before the loan agreement closed. The draft was
addressed to Avaya’s board of directors and stated that the company would not meet
its third-quarter guidance. Chirico sent it to a third individual but apparently did

not send it to the board. Having alleged these facts, the amended complaint goes on
to allege in a conclusory manner that Spears “intentionally concealed” the draft from
Plaintiffs as well as Avaya’s board and other investors. (Am. Compl. ¶¶ 68, 70, 109.)
20. As our Court of Appeals has explained, “[m]ere generalities and conclusory
allegations of fraud will not suffice.” Sharp v. Teague, 113 N.C. App. 589, 597 (1994)
(quoting Moore v. Wachovia Bank & Tr. Co., 30 N.C. App. 390, 391 (1976)). Plaintiffs
had to “allege the specific affirmative acts”—something beyond nondisclosure itself,
such as deleting or destroying the information or directing others not to disclose it—
that Spears took “to conceal” the draft. Vitaform, Inc. v. Aeroflow, Inc., 2020 NCBC
LEXIS 132, at *31 (N.C. Super. Ct. Nov. 4, 2020); see also Maxwell Foods, LLC v.
Smithfield Foods, Inc., 2023 NCBC LEXIS 20, at *7 (N.C. Super. Ct. Feb. 3, 2023)
(“Nondisclosure alone is not an affirmative act of concealment.”). They haven’t done
so. See Aym Techs., LLC v. Scopia Cap. Mgmt. LP, 2021 NCBC LEXIS 29, at *25
(N.C. Super. Ct. Mar. 31, 2021) (concluding that party “fail[ed] to specifically allege
what steps [wrongdoer] took to hide this information”); see also Lee v. McDowell, 2022
NCBC LEXIS 51, at *46–47 (N.C. Super. Ct. May 26, 2022) (collecting cases).
21. Third, Plaintiffs point to several allegations to show that Spears knew the
truth about Avaya’s third-quarter guidance. As early as April 2022, Spears expressed
concern about the guidance for Avaya’s North American revenue. Two months later,
Chirico told Spears that the available revenue estimates were “clearly not good at
all.” And the day after the third quarter ended, Spears learned that Avaya had not

met its targets, prompting him to send to Chirico the draft e-mail intended for Avaya’s
board. (Am. Compl. ¶¶ 58, 59, 64, 68–70.)
22. Again, even if true, these allegations show only that Spears knew certain
facts and remained silent. No allegations suggest that Spears created the
third-quarter guidance, approved the inclusion of the guidance in presentations to
Plaintiffs, or had any interactions with Plaintiffs concerning negotiations for the loan
agreement or any other subject. All that is alleged is Spears’s “silence,” and that
alone “is insufficient under North Carolina law to establish a duty to disclose.” Lee,
2022 NCBC LEXIS 51, at *46 (concluding that “allegations and arguments on
[defendant’s] failure to correct” someone else’s “representations” were inadequate).
23. In sum, Plaintiffs have not alleged with particularity facts showing that
Spears was personally involved in making the alleged misrepresentations or that he
had a duty to disclose material information to them. As a result, Plaintiffs have not
stated a claim for fraudulent omission against him.
IV.
CONCLUSION
24. For all these reasons, the Court GRANTS Spears’s motion to dismiss.
Plaintiffs’ claim against him is DISMISSED with prejudice.

SO ORDERED, this the 21st day of August, 2024.
/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases