Powell v. Dunn

Powell v. Dunn, 2014 NCBC 3.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF ORANGE 13 CVS 1318

DAVID J. POWELL, Jr.; JONATHAN )
GIBBS, et al., )
)
Plaintiffs, )
)
v. )
)
DAVID DUNN; TIMOTHY ) ORDER AND OPINION
KRONGARD; ED MASI; SOPHIA )
WONG; JANET WYLIE, )
)
Defendants. )
)
)
)

{1} THIS MATTER is before the court on Defendants’ Motion for
Judgment on the Pleadings (“Motion”). For the reasons stated below, the Motion is
GRANTED IN PART and CONTINUED IN PART. The Motion is granted as to
Plaintiffs’ claim pursuant to N.C. Gen. Stat. § 75-1.1. As to the statute of
limitations defense to Plaintiffs’ breach of fiduciary duty claim, the court will grant
limited discovery pursuant to Rule 56(f), allow supplemental briefing, and then hear
the matter as a motion for summary judgment.

Poyner & Spruill LLP by Steven B. Epstein for Plaintiffs.

Kilpatrick Townsend & Stockton LLP by Gregg E. McDougal and John M.
Moye for Defendants.

Gale, Judge.
I. FACTUAL AND PROCEDURAL BACKGROUND

{2} In ruling upon a Rule 12(c) motion, the court does not adjudicate facts
but construes the facts alleged and draws all reasonable inferences in Plaintiffs’
favor, without being bound to any legal conclusions asserted by either party. See,
e.g., Carpenter v. Carpenter, 189 N.C. App. 755, 762, 659 S.E.2d 762, 767 (2008).
Plaintiffs allege the following facts in support of their claims pursuant to Section
75-1.1.
{3} Plaintiff David J. Powell, Jr. (“Powell”) is a cofounder of Engineous
Software, Inc. (“Engineous”). (Compl. ¶ 2.) The remaining Plaintiffs are all
individuals or entities who are, were, or represent owners or option holders of
Engineous common stock, and collectively represent a majority of the common stock
ownership. (Compl. ¶¶ 3–42, 52.) Dr. Siu S. Tong (“Tong”), a non-party,1 was a
cofounder of Engineous and the largest shareholder of its common stock. (Compl. ¶
56.)
{4} Defendants David Dunn (“Dunn”), Timothy Krongard (“Krongard”), Ed
Masi (“Masi”), Sophia Wong (“Wong”), and Janet Wylie (“Wylie”) are former
directors of Engineous who also held preferred stock in Engineous, as did the
majority of all Board members. (Compl. ¶¶ 43, 47–51.)
{5} In early 2006, the Board decided to explore selling the company and
retained an investment banker. (Compl. ¶ 53.) The company’s investment banker
initially projected a sale price between $100 and $120 million, but only two
potential acquirers entered the bidding process, and Engineous sold for
approximately $40 million on July 21, 2008. (Compl. ¶¶ 54–55, 79.) When the
investment bank did not produce interested buyers at the projected price, Tong
undertook efforts to solicit potential acquirers. (Compl. ¶¶ 58–59.) While both were

1 Dr. Tong is a Plaintiff in a separate action pending in this court following its remand from the

North Carolina Court of Appeals. See generally Tong v. Dunn, No. COA12-1261, 2013 N.C. App.
LEXIS 1303 (N.C. Ct. App. Dec. 17, 2013); Tong v. Dunn, 2012 NCBC LEXIS 31 (N.C. Super. Ct.
May 18, 2012). The court will later consider whether the cases should be consolidated or otherwise
coordinated.
directors, Tong and Krongard initially agreed that a price below $60 million would
not be in the best interests of Engineous or its shareholders and agreed not to
pursue any merger below this price. (Compl. ¶¶ 54, 56–57.) Of the four buyers
who initially expressed interest, only two—Dassault Systemes S.A. (“Dassault”) and
Siemens—entered the bidding process. (Compl. ¶¶ 59, 74.)
{6} In fall 2007, the Board terminated Tong’s involvement in the
acquisition process, appointed Wylie to represent the company going forward, and
undertook efforts to exclude Tong from communications with Dassault. (Compl. ¶¶
60–61.) At one meeting Dunn opined that Tong could not protect the shareholders’
interest “since the preferred shareholders ‘are ahead’ of the common shareholders.”
(Compl. ¶ 61.) Tong refused to sign minutes of one Board meeting because they
omitted statements reflecting possible conflicts of interest between the preferred
and common shareholders and the plan to structure the merger to benefit preferred
shareholders (including Defendants and the entities they represented) without
protecting common shareholders. (Compl. ¶¶ 61–62, 64.)
{7} Tong believed Engineous would obtain higher offers after rolling out a
new product and wanted to delay selling the company, but the Board, including
Defendants, wanted to sell quickly. (Compl. ¶¶ 65–68, 73.) Some members of the
Board further opined that a future potential cash flow shortage weighed in favor of
a quicker sale. (Compl. ¶ 68.)
{8} Engineous eventually used merger proceeds to make “carve-out”
payments to employees and executives who supported the merger and to obtain
general releases from key employees. (Compl. ¶¶ 63, 70.) Plaintiffs allege that
Wylie and other preferred shareholder Board members misrepresented to
Engineous’s employees that Dassault, rather than Defendants, had insisted on the
releases. (Compl. ¶¶ 69, 71.)
{9} Krongard represented that deal terms offered by Dassault, including
the timing of the closing, size of the escrow, and the speed at which the preferred
shareholders would collect sale proceeds, were crucial factors in approving the deal.
(Compl. ¶ 77.) These terms protected the preferred shareholders’ interests, but they
did not protect or enhance the value of the common shares in the merger. (Compl. ¶
77.)
{10} Although the Board continued to negotiate with Siemens, Defendants
“showed little interest in undertaking any actions to negotiate a higher sale price”
that would better serve the common shareholders’ interests. (Compl. ¶ 75.) In
sum, Plaintiffs contend that Engineous’s “former officers and directors” structured
the merger with Dassault “in a manner designed to enrich [Engenious’s] preferred
shareholders . . . at the expense of the common shareholders” in breach of their
fiduciary duties to these shareholders. (Compl. ¶ 1.)
{11} The Complaint does not allege more specifically the actual structure of
the merger, but it does refer to the merger as a “wash out” and alleges that the
ultimate sales price was less than the preference amounts which would have to
have been satisfied before returning value to the common shareholders. (Compl. ¶¶
80–81).
{12} Plaintiffs contend that Defendants breached their fiduciary duties to
all shareholders by approving the merger and engaging in self-dealing. (Compl. ¶¶
85–87.) Plaintiffs also allege that Defendants’ actions constitute unfair or deceptive
acts in violation of Section 75-1.1. (Compl. ¶¶ 88–91.)
{13} Plaintiffs initiated the lawsuit by filing their Complaint in Orange
County on August 1, 2013. The case was designated a Business Court case by Chief
Justice Sarah Parker by Order dated August 19, 2013 and assigned to the
undersigned on August 21, 2013. Defendants filed their Motion pursuant to Rule
12(c) on October 9, 2013. The Motion contends that: (1) Plaintiffs’ claims are barred
by the applicable statutes of limitation; and (2) the Section 75-1.1 claim for unfair or
deceptive trade practices does not state a claim upon which relief may be granted.
The statute of limitations defense was brought under Rule 12(c) because
Defendants relied, in part, on matters attached to their Answer. Consideration of
whether the Complaint states a Section 75.1.1 claim would be the same whether the
Motion was brought pursuant to Rule 12(b)(6) or Rule 12(c), as that inquiry is based
solely on the allegations of the Complaint.2
{14} The Motion was fully briefed and the court held a hearing on January
9, 2014. At the hearing, the Parties acknowledged that ruling on the statute of
limitations issue requires consideration of matters outside the pleadings, so that
issue will be considered as a summary judgment motion pursuant to Rule 56. The
court indicated that it would grant Plaintiffs limited discovery pursuant to Rule
56(f) and allow further briefing and argument. Accordingly, the Motion is now ripe
only as to the issue of whether the Complaint states a claim upon which relief may
be granted pursuant to Section 75-1.1.3

II. ANALYSIS

{15} The standards are the same for a motion to dismiss under Rule
12(b)(6) and Rule 12(c). In either instance, the moving party must establish that
“no material issue of fact remains to be resolved and that he is entitled to judgment
as a matter of law.” Carpenter, 189 N.C. App. at 761, 659 S.E.2d at 767 (2008). The
court must view the facts and all permissible inferences flowing from them “in the
light most favorable to the” non-moving party. Id. at 762, 659 S.E.2d at 767.
{16} A Section 75-1.1 claim requires showing an unfair or deceptive act or
practice, in or affecting commerce, that proximately caused plaintiff’s injury.
Bumpers v. Cmty. Bank of N. Va., __ N.C. __, 747 S.E.2d 220, 226 (2013) (citing
Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001)). The dispositive
issue here is whether the complaint presents a claim which is “in or affecting
commerce.”
{17} This court is bound by the interpretation our Supreme Court has given
this statutory language, including its definition of “commerce” as being limited to

2 The court may consider whether a pleading states a claim upon which relief may be granted on a

Rule 12(c) motion. N.C. Gen. Stat. § 1A-1, Rule 12(h)(2).
3 Because it dismisses the claim on other grounds, the court need not determine whether the statute

of limitations would bar Plaintiffs’ Section 75-1.1 claim.
“business activities,” defined as “the manner in which businesses conduct their
regular, day-to-day activities, or affairs, such as the purchase or sale of goods, or
whatever other activities the business regularly engages in and for which it is
organized.” See HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594,
403 S.E.2d 483, 493 (1991) (affirming Rule 12(b)(6) dismissal of section 75-1.1 claim
premised on unfair or deceptive acts related to capital raising devices); see also, e.g.,
Wilson v. Blue Ridge Elec. Membership Corp., 157 N.C. App. 355, 357, 578 S.E.2d
692, 694 (2003). The Supreme Court later explained that Section 75-1.1 regulates
only “a business’s regular interactions with other market participants[,]” not
“internal conduct of individuals within a single market participant.” White v.
Thompson, 364 N.C. 47, 51, 53, 691 S.E.2d 676, 679–80 (2010). As a result, when
the unfair or deceptive conduct alleged only affects relationships within a single
business or market participant, and not dealings with other market participants,
that conduct is not “in or affecting” commerce within the meaning of Section 75-1.1,
even if other market participants may be indirectly involved in the unfair or
deceptive acts. See id. at 54, 691 S.E.2d at 680 (rejecting argument that
involvement of outside persons and entities in transactions at issue supported
Section 75-1.1 claim when unfair or deceptive conduct occurred only between
business partners).
{18} The court recognizes the broad remedial policy underlying Chapter 75’s
reach, but it cannot accept policy arguments which extend beyond the
pronouncements of our Supreme Court. Significantly, both the HAJMM Co. and
White majority opinions were issued over vigorous dissents that advocated a more
expansive reach for Chapter 75’s “in or affecting commerce” requirement grounded
in Chapter 75’s broadly stated statutory purpose.
{19} The Supreme Court’s refusal in White to allow indirect involvement of
other market participants to trigger liability under Section 75.1.1 forecloses
Plaintiffs’ argument here that the involvement of an investment bank and another
potential acquirer in the merger process provides a sufficient factual basis from
which the court could conclude Plaintiffs’ claim is “in or affecting commerce.” Nor
does this court’s earlier ruling in Wilkie v. Stanley, which concerned a partner in an
investment advising partnership improperly soliciting the partnership’s clients for
his own, separate business, support Plaintiffs’ argument. See 2011 NCBC LEXIS
11, at *3–*6, *14–*15 (N.C. Super. Ct. Apr. 11, 2011). While Wilkie involved an
“intra-corporate” dispute between two partners, the unfair acts alleged—improper
solicitation of customers—clearly occurred in the broader marketplace and
“impact[ed] other market participants.” See 2011 NCBC LEXIS 11, at *15.
Similarly, in Sara Lee Corp. v. Carter, the dispute in part dealt with the
employment contract between the parties, but the facts extended to the employee’s
undisclosed self-dealing by selling parts and service through companies which he
had organized. 351 N.C. at 28–30, 519 S.E.2d at 309–10 cited in Wilkie, 2011
NCBC LEXIS 11, at *15. Reaffirming HAJMM Co.’s holding that “regular, day-to-
day activities” in the marketplace are covered by Chapter 75, the Sara Lee Court
noted that these sales transactions with the other companies were “regularly
conducted . . . [transactions] in a business setting[.]” See id. at 32–33, 519 S.E.2d at
311–12.
{20} Applying these North Carolina Supreme Court precedents, the court
concludes that the allegations of the Complaint, accepted as true and construed in
Plaintiffs’ favor, do not allege or imply that the unfair or deceptive conduct of which
they complain is “in or affecting commerce” as required by Section 75-1.1. Rather,
the alleged breaches of fiduciary duty owed to the common shareholders and the
misrepresentations complained of were matters internal to Engineous and did not
concern the company’s interaction with other market participants in its “regular,
day-to-day activities.”4

4 Because the claim is not “in or affecting commerce,” the court need not separately resolve the

disputes between the Parties as to whether: (1) any breach of fiduciary duty must be considered a
per se violation of Section 75-1.1; or (2) the claim further falls outside of Section 75.1.1 as a securities
or capital-raising transaction.
III. CONCLUSION

{21} Accordingly, Plaintiffs have failed to state a claim under Section 75-
1.1. For the foregoing reasons, Defendants’ Motion is GRANTED as to Plaintiffs’
claim for unfair or deceptive trade practices pursuant to Section 75-1.1.
{22} After the Parties’ submission of an early discovery plan on or before
February 7, 2014, the court will issue a further order as to the scope of discovery to
be pursued and a schedule for further briefing and argument on the issue of
whether Plaintiffs’ other claims are barred by application of any statute of
limitations.

IT IS SO ORDERED, this the 28th day of January, 2014.