Koch Measurement Devices, Inc. v. Armke Ex Rel. Armke

Koch Measurement Devices, Inc. v. Armke ex rel. Armke, 2013 NCBC 48.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF NEW HANOVER 12 CVS 3478

KOCH MEASUREMENT DEVICES, INC., )
Plaintiff )
)
v. )
) ORDER ON MOTION TO DISMISS
ANGELA LEE ARMKE, AS THE )
EXECUTRIX OF THE ESTATE OF )
KENNETH W. ARMKE, II; TOTE GLASS, )
INC. and DENNIS M. WALSAK d/b/a )
MODULAR GRAPHICS & MEDIA, a sole )
proprietorship, )
Defendants )

THIS MATTER comes before the court upon the Motion of Tote Glass, Inc. and

Dennis M. Walsak to Dismiss Plaintiff's Complaint ("Motion"), pursuant to Rule 12(b)(6)

of the North Carolina Rules of Civil Procedure ("Rule(s)"); and

THE COURT, after considering the Motion, the briefs in opposition and support

thereof, arguments of counsel and other appropriate matters of record, CONCLUDES

that the Motion should be DENIED for the reasons stated herein.

Marshall, Williams & Gorham, LLP by Matthew B. Davis, Esq., for Plaintiff.

Law Offices of G. Grady Richardson, Jr., PC by G. Grady Richardson, Jr., Esq.,
for Defendant Angela Lee Armke, as the Executrix of the Estate of Kenneth W.
Armke, II.

Hogue Hill, LLP by David A. Nash, Esq., for Defendants Tote Glass, Inc. and
Dennis M. Walsak.

Jolly, Judge.
FACTUAL AND PROCEDURAL HISTORY

[1] Plaintiff Koch Measurement Devices, Inc. ("Koch") is a North Carolina

corporation with its principal place of business located in Wilmington, North Carolina.1

The Amended Complaint alleges that Koch’s principal shareholders are a German entity

Karl Koch Thermometerfabrik Verwaltungs GmbH (75% owner) and Defendant Kenneth

Armke II (25% owner).

[2] Defendant Tote Glass ("Tote") is a North Carolina corporation with its

principal place of business located in Wilmington, North Carolina.2

[3] Defendant Michael Walsak ("Walsak") is a citizen and resident of

Wilmington, North Carolina and is a sole proprietor doing business under the name

Modular Graphics & Media ("Modular Graphics"). Walsak is engaged in the business of

graphic design, web design and web-hosting services.3

[4] Defendant Kenneth Armke, II ("Armke") was a citizen and resident of

Wilmington, North Carolina and was president, secretary, treasurer and a director of

Koch until his resignation on or about June 13, 2011.4 Armke is now deceased.

The Amended Complaint alleges, among other things, that:

[5] Koch is in the business of distributing, on a wholesale basis, high-end

glass beer growlers imported from Germany. At times material, Koch's sole line of

business was the importation and wholesaling of beer growlers. 5 Armke, in addition to

being president, secretary, treasurer and a director of Koch, served as the company's

1
Am. Compl. ¶ 1.
2
Id. ¶ 2.
3
Id. ¶ 4.
4
Id. ¶ 3.
5
Id. ¶ 6, 16.
only employee.6 Since 1997, Walsak provided Koch with various services under

contract including graphic design, website design, web hosting, webmail hosting and file

transfer protocol services.7

[6] Koch's sole supplier of beer growlers was Wassmann GmbH & Co., KG

("Wassmann"), and Koch served as Wassmann's exclusive distributor in the United

States.

[7] In March of 2011, Armke and Walsak incorporated Tote.8 The crux of the

Amended Complaint is that following the formation of Tote, Armke and Walsak, as part

of coordinated effort between the two of them, set about to divert certain assets,

business opportunities and trade secrets of Koch to Tote.

[8] On or about June 13, 2011, Armke informed Koch that he refused to act

on Koch's behalf in any capacity. At least one week prior to informing Koch of his

refusal to carry on the company's business, Armke closed Koch for business without

advance notice to the company.9 At the time of his departure, Armke removed the

following from Koch's office and warehouse: (a) his company-owned desktop computer,

(b) the hard drive of his company-owned laptop computer, (c) Koch's internal web

server and (d) certain customer files.10

[9] Around the time Tote was incorporated, Armke stopped placing regular

orders for Koch with Wassmann and allowed Koch's inventories to dwindle to the point

that the company did not have enough inventory to cover five days of average sales at

6
Id. ¶¶ 7.
7
Id. ¶ 14.
8
Id. ¶ 21.
9
Id. ¶¶ 8-9.
10
Id. ¶ 45.
the time of Armke's departure.11 This was contrary to Koch's regular practice of

maintaining inventory sufficient to satisfy approximately three-and-a-half weeks of

sales.12 Armke failed to maintain adequate inventories in anticipation of abandoning

Koch and diverting its business to Tote.13

[10] Following his departure from Koch, Armke instructed Wassmann to

terminate its relationship with Koch and instead do business with Tote.14 In addition,

Armke diverted 720 growlers from Koch's inventories to Tote by way of a fraudulent

invoice purporting to sell those 720 growlers to a former Koch customer that had

recently filed for bankruptcy.15 Koch's inventory records reflected that the company had

4,200 growlers in inventory following Armke's departure, but a physical inventory count

revealed that only 1,600 growlers were on hand.16 Around the time of Armke's

departure, Armke and Walsak removed Koch's website from the World Wide Web.17

[11] Following Armke's departure from Koch, Tote, under the control of Armke

and Walsak, began "importing growlers from Wassmann; using [Koch's] third-party

glass decorator, Mission Screen Printing, to decorate growlers; using the same freight

carriers as [Koch]; using the same pricing schedule as [Koch]; and using the same

graphic designer, web designer and web host as [Koch], to wit: Walsak." 18 After Tote

became operational, Armke instructed Koch's largest client, Granite City Food &

11
Id. ¶ 23.
12
Id. ¶ 24.
13
Id. ¶ 25.
14
Id. ¶ 26.
15
Id. ¶¶ 28-30.
16
Id. ¶ 31.
17
Id. ¶ 41.
18
Id. ¶ 33.
Beverage that Tote, and not Koch, would supply them with beer growlers moving

forward.19

[12] All of Armke and Walsak's actions described above were done without the

knowledge or approval of Koch.

[13] On the basis of the foregoing factual allegations, the Amended Complaint

asserts the following claims ("Claim(s)"): (a) Breach of Duties of Care and Loyalty

(against Armke) (“Claim One”), (b) Breach of Fiduciary Duty (against Armke) (“Claim

Two”), (c) Constructive Fraud (against Armke) (“Claim Three”), (d) Misappropriation of

Trade Secrets (against all Defendants) (“Claim Four”), (e) Unfair and Deceptive Trade

Practices (against all Defendants) (“Claim Five”), (f) Constructive Trust (against all

Defendants) (“Claim Six ”), (g) Unjust Enrichment (against all Defendants) (“Claim

Seven”), (h) Conversion (against all Defendants) (“Claim Eight”), (i) Breach of Contract

(against Walsak) (“Claim Nine”), (j) Civil Conspiracy (against all Defendants) (“Claim

Ten”) and (k) Punitive Damages (against all Defendants) (“Claim Eleven”).

[14] Pursuant to a Limited Stipulation of Dismissal with Prejudice filed May 29,

2013, all Claims and Counterclaims by and between Koch and Armke were voluntarily

dismissed. Accordingly, Claims One through Three were dismissed in their entirety and

Claims Four through Eleven were dismissed as to Armke. Walsak and Tote remain the

only Defendants as to Claims Four through Eleven.

[15] The Motion seeks dismissal of all Claims alleged against Tote and

Walsak, and is ripe for determination.

19
Id. ¶ 36.
DISCUSSION

[16] As an initial matter, Walsak and Tote argue that the dismissal of Armke

from this action requires dismissal of all Claims against them because the bulk of the

Amended Complaint describes alleged wrongs committed by Armke. The court

disagrees. There are sufficient allegations in the Amended Complaint concerning the

coordinated efforts of Armke, Walsak and Tote to, in essence, steal Koch's business to

allow this action to continue without the presence of Armke. The court will briefly

discuss each remaining Claim.

Claim Four -- Misappropriation of Trade Secrets

[17] A trade secret is business or technical information that "(a) [d]erives

independent actual or potential commercial value from not being generally known or

readily ascertainable through independent development or reverse engineering by

persons who can obtain economic value from its disclosure or use; and (b) [i]s the

subject of efforts that are reasonable under the circumstances to maintain its secrecy."

N.C. Gen. Stat. § 66-152(3)(a)-(b) (hereinafter, references to the North Carolina

General Statutes will be to “G.S.”), Sunbelt Rentals, Inc. v. Head and Enquist Equip.,

LLC, 174 N.C. App. 49, 53 (2005). Misappropriation refers to the "acquisition,

disclosure, or use of a trade secret of another without express or implied authority or

consent." G.S. 66-152(1).

[18] Defendants contend that Plaintiff's Claim Four fails to "identify a trade

secret with sufficient particularity so as to enable a defendant to delineate that which he

is accused of misappropriating and a court to determine whether misappropriation has
or is threatened to occur."20 Defendants argue that the description of any trade secret

in the Amended Complaint is too broad or vague to state a claim for the

misappropriation of a trade secret. In support of this contention, Defendants cite to

Washburn v. Yadkin Valley Bank & Trust Co., in which the court of appeals upheld

dismissal of a complaint that described the trade secret at issue as "business methods;

clients, their specific requirements and needs; and other confidential information

pertaining to Yadkin's business." 190 N.C. App. 315, 327 (2008).

[19] The court disagrees. The Amended Complaint identifies and sufficiently

describes as confidential business information the following: (a) customer lists including

names, contact persons, addresses and phone number of Koch's customers; (b) the

ordering habits, history and needs of Koch's customers and (c) Koch's pricing and

inventory management strategies.21 Such information may constitute a trade secret

under North Carolina law. The court is unable to determine as a matter of law that

Plaintiff’s Claim Four fails to state a claim upon which relief can be granted. Sutton v.

Duke, 277 N.C. 94 (1970).

[20] Accordingly, as to Plaintiff's Claim Four the Motion should be DENIED.22

Claim Five -- Unfair and Deceptive Trade Practices

[21] To state a claim for unfair and deceptive trade practices under G.S. 75-

1.1, a plaintiff must allege that: (a) the defendant committed an unfair or deceptive act

20
Br. Supp. Defs. Walsak's and Tote Glass, Inc.'s Mot. Dismiss Counts IV-XI of Pls.' Compl. 5
(hereinafter "Br. Supp. Mot.").
21
Am. Compl. ¶ 18.
22
The Amended Complaint sufficiently describes the acquisition and use of this information by Tote and
Walsak. Whether this information rises to the level of an actual trade secret and was subject to efforts
reasonable under the circumstances to maintain its secrecy is not before the court and is more
appropriately addressed as a question of fact under a Rule 56 motion or otherwise.
or practice, (b) the act complained of was in or affecting commerce and (c) it

proximately caused injury to the plaintiff. Sunbelt, 174 N.C. App. at 59.

[22] Defendants contend that Plaintiff's Claim Five is one for breach of the non-

disclosure provisions of Plaintiff's employment agreement with Armke, and that it falls

outside the scope of Chapter 75 because it concerns an employer/employee

relationship. See Kinesis Adver., Inc. v. Hill, 187 N.C. App. 1, 21 (2007) (noting that

actions arising out of the employer/employee relationship, including actions for an

alleged breach of an employment agreement, do not fall within the intended scope and

purpose of Chapter 75).

[23] While Defendants are correct as to the inapplicability of Chapter 75 to

employment disputes, the court disagrees that Plaintiff's Chapter 75 Claim must fail as a

matter of law. As to Tote and Walsak, the Amended Complaint adequately alleges that

Walsak collaborated with Armke to form Tote and to divert or convert certain business

opportunities, assets and information rightfully belonging to Koch. The allegations of

the Amended Complaint describe and allege, essentially, unfair competition on the part

of Walsak and Tote that falls outside of the employer/employee relationship and does

not directly concern any employment agreement that may have existed between Armke

and Koch. The court is unable to determine as a matter of law that Plaintiff’s Claim Five

fails to state a claim upon which relief can be granted. Sutton, 277 N.C. 94.

[24] Accordingly, as to Plaintiff's Claim Five the Motion should be DENIED.

Claim Six -- Constructive Trust

[25] A constructive trust is an equitable remedy that prevents the enrichment of

the holder of property acquired through breach of duty, fraud or other circumstances
which make it inequitable for him to retain it against the claim of the beneficiary of the

constructive trust. Sara Lee Corp. v. Carter, 351 N.C. 27, 34-35 (1999).

[26] Defendants contend that Plaintiff's Claim Six is fatally defective based on

the argument that "there is no such thing as a legal entitlement to customers" and that

Plaintiff's Claim for Conversion is "specious and founded solely upon inventory

discrepancies."23 The court finds this argument to be insufficient to support dismissal of

Plaintiff's Claim Six. While there may not be a legal entitlement to customers, the

Amended Complaint alleges that Defendants are in the wrongful possession of more

than just customers. The Amended Complaint specifically alleges that Defendants are

in possession of certain tangible business assets and inventory rightfully belonging to

Koch. Further, the Amended Complaint alleges that Defendants are in possession of

those assets by virtue of the fact that Armke, while in league with Walsak, breached the

fiduciary duty of care he owed to Koch as its officer and director. The court is unable to

determine as a matter of law that Plaintiff’s Claim Six fails to state a claim upon which

relief can be granted. Sutton, 277 N.C. 94.

[27] Accordingly, as to Plaintiff's Claim Six the Motion should be DENIED.

Claim Seven -- Unjust Enrichment

[28] "In order to establish a claim for unjust enrichment, a party must have

conferred a benefit on the other party. The benefit must not have been conferred

officiously, that is it must not be conferred by an interference in the affairs of the other

party in a manner that is not justified in the circumstances. The benefit must not be

gratuitous and it must be measurable." D.W.H. Painting Co., Inc. v. D.W. Ward Const.

Co., 174 N.C. App. 327, 334 (2005) (internal citation omitted).
23
Br. Supp. Mot. 10.
[29] Defendants seek dismissal of Plaintiff's Claim Seven based on the

argument that this Claim is, in fact, a claim for breach of contract against Armke.

Defendants argue that a claim for unjust enrichment, as an equitable remedy, will not lie

where an actual agreement or contract exists between the parties. See Booe v.

Shadrick, 322 N.C. 567 (1988).

[30] The Amended Complaint alleges that Tote and Walsak have "retained the

assets, benefits, and corporate opportunities that were conferred on them by virtue of

Armke's diverting and usurping corporate opportunities and assets rightfully belonging

to [Koch]."24 It further alleges that these Defendants "consciously accepted these

assets, benefits and corporate opportunities and have not paid or otherwise

compensated [Koch] for the same."25

[31] Our courts have held that "[i]n order to properly set out a claim for unjust

enrichment, a plaintiff must allege that property or benefits were conferred26 on a

defendant under circumstances which give rise to a legal or equitable obligation on the

part of the defendant to account for the benefits received, but that the defendant has

failed to make restitution for the property or benefits." Norman v. Nash Johnson &

Sons' Farms, Inc., 140 N.C. App. 390, 417 (2000) (citing Adams v. Moore, 96 N.C. App.

359, 362 (1989)).

24
Am. Compl. ¶ 92.
25
Id. ¶ 93.
26
With regard to the requirement that property or benefits as to which recovery is sought must have been
"conferred" upon a defendant as an element of an unjust enrichment claim, an argument can be raised as
to whether this means that a defendant initially must have come into possession of the property by
affirmative action of the plaintiff. In the context of this action, the court does not find any reported
authority to that effect, and it concludes that such a broad reading of the word "confer" is not appropriate
here.
[32] In the context of the specific facts alleged in this matter, the court is

unable to determine as a matter of law that Plaintiff’s Claim Seven fails to state a claim

upon which relief can be granted. Sutton, 277 N.C. 94.

[33] Accordingly, as to Plaintiff's Claim Seven the Motion should be DENIED.

Claim Eight -- Conversion

[34] "The tort of conversion is well defined as an unauthorized assumption and

exercise of the right of ownership over goods or personal chattels belonging to another,

to the alteration of their condition or the exclusion of an owner's rights." Variety

Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 365 N.C. 520, 523 (2012)

(internal citations omitted). To state a claim for conversion, a plaintiff must allege

rightful ownership in goods or personal chattel and wrongful possession of the same by

Defendant. Id.

[35] Here, Plaintiff has alleged that Defendants wrongfully took possession of

(a) Koch's inventory; (b) the email account kenarmke@coach-usa.com and all emails

and information associated with that account; (c) computer equipment, hard drives and

web server and (d) client files.27 It is further alleged that these assets rightfully

belonged to Koch and that Defendants exercised unauthorized authority and control

over the assets to the exclusion of Koch.28

[36] The court is unable to determine as a matter of law that Plaintiff’s Claim

Eight fails to state a claim upon which relief can be granted. Sutton, 277 N.C. 94.

[37] Accordingly, as to Plaintiff's Claim Eight the Motion should be DENIED.

27
Id. ¶ 96.
28
Id. ¶¶ 97-98.
Claim Nine -- Breach of Contract

[38] The elements of a claim for breach of contract are existence of a valid

contract and breach of the terms of that contract. Schlieper v. Johnson, 195 N.C. App.

257, 265 (2009). To state a claim for breach of the implied covenant of good faith and

fair dealing, a plaintiff must plead that the party charged has taken action which injured

the right of the plaintiff to receive the benefits of the agreement and deprived the plaintiff

of the fruits of his bargain. See Bicycle Transit Authority, Inc. v. Bell, 314 N.C. 219

(1985).

[39] Plaintiff's Claim Nine is directed at Walsak and argues that Walsak

breached the express terms of his contract with Koch as well as the implied covenant of

good faith and fair dealing. Defendants argue that Claim Nine is fatally flawed because

(a) the Amended Complaint fails to allege how actions taken by Walsak deprived Koch

of its expectancies under its contract with Walsak and (b) there is no allegation that

performance or services were owed under the contract at the time of the alleged

breach.

[40] The court has struggled with the viability of Claim Nine. However, it is

persuaded that in the context of the specific facts alleged in the Amended Complaint,

this Claim should not be dismissed under Rule 12(b)(6). Sutton, 277 N.C. 94. It is

sufficient for present purposes that Plaintiff has alleged, "[a] valid contract existed

between [Koch] and Walsak, whereby Walsak agreed to provide services, including but

not limited to, web design and webhosting for [Koch],"29 and that Walsak breached the

express and implied terms of that contract by coordinating with Armke to convert Koch's

company e-mail addresses and to remove Koch's web-site from the World Wide Web.
29
Id. ¶ 102.
[41] Accordingly, as to Plaintiff's Claim Nine the Motion should be DENIED.

Claim Ten -- Civil Conspiracy

[42] A complaint sufficiently states a claim for civil conspiracy when it alleges

(a) the existence of a conspiracy, (b) wrongful acts done by certain of the alleged

conspirators in furtherance of that conspiracy and (c) injury as a proximate result of the

conspiracy. State ex rel. Cooper v. Ridgeway Brands Mfg. LLC, 362 N.C. 431, 444

(2008).

[43] Here, Defendants argue that Plaintiff's Civil Conspiracy Claim must be

dismissed due to the dismissal from this action of Armke, Walsak's alleged co-

conspirator. Defendants contend that North Carolina does not recognize a separate

civil action for civil conspiracy and that any civil conspiracy must necessarily be

premised on an underlying tort claim. According to Defendants, the removal of Armke

from this action means that there is no underlying tort claim on which to premise

Plaintiff's Civil Conspiracy Claim.

[44] The court disagrees. Plaintiff has alleged a common scheme between

Walsak and Armke to divert certain corporate assets and opportunities of Koch.

Further, Plaintiff has alleged certain overt acts committed by both Walsak and Armke in

furtherance of that common scheme. If proven, these allegations could result in liability

for Walsak regardless of the presence of Armke in this action.30 See Burns v. Gulf Oil

Corp., 246 N.C. 266, 272 (1957) ("To create civil liability for conspiracy there must have

30
The impact of any settlement between Plaintiff and Armke upon Claim(s) against Walsak or Tote is not
before the court. However, on June 21, 2013, Defendants filed a Motion to Be Allowed to File Supplement
to Answer (“Motion to Amend”), in which they seek to raise this issue defensively. The Motion to Amend is
pending before the court.
been an overt act committed by one or more of the conspirators pursuant to the scheme

and in furtherance of the objective.")

[45] The court is unable to determine as a matter of law that Plaintiff’s Claim

Ten fails to state a claim upon which relief can be granted. Sutton, 277 N.C. 94.

[46] Accordingly, as to Plaintiff's Claim for Civil Conspiracy the Motion should

be DENIED.

Claim Eleven -- Punitive Damages

[47] Because Plaintiff's underlying Claims have survived the Motion, the Motion

should also be DENIED as to Plaintiff's Claim for Punitive Damages.

NOW THEREFORE, it is hereby ORDERED that:

[48] The Motion of Tote Glass, Inc. and Dennis M. Walsak to Dismiss Plaintiff's

Complaint is DENIED.

This the 14th of October, 2013.