Gottfried v. Covington

Gottfried v. Covington, 2014 NCBC 26.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WATAUGA COUNTY 13 CVS 456

KENNETH GOTTFRIED,

Plaintiff,

v.
ORDER AND OPINION
P. ALEXANDER COVINGTON, JR.,
EXPRESSIONS HOLDINGS, INC., ONE
LOVE SMOKE SHOP, INC. and
BENJAMIN COVINGTON,

Defendants.

Capua Law Firm, P.A. by Paul A. Capua, R. Scott Tobin, and Michael Volpe
for Plaintiff Kenneth Gottfried;
Womble Carlyle Sandridge and Rice, LLP by Sarah Motley Stone and
Brandie N. Smith, for Defendants P. Alexander Covington, Jr. and
Expressions Holdings, Inc.; and
Gray, Layton, Kersh, Solomon, Furr & Smith, P.A. by Michael Carpenter and
Christopher M. Whelchel for Defendants Benjamin Covington and One Love
Smoke Shop, Inc.
Murphy, Judge.
{1} THIS MATTER is before the Court on Defendants P. Alexander
Covington, Jr. (“A. Covington”) and Expressions Holdings, Inc.’s (“Expressions”)
(collectively, “Expressions Defendants”) Motion to Dismiss pursuant to Rule 12(b)(6)
of the North Carolina Rules of Civil Procedure (“Motion I”), and Defendants
Benjamin Covington (“B. Covington”) and One Love Smoke Shop, Inc. (“One Love”)
(collectively, “One Love Defendants”) Motion to Dismiss pursuant to Rule 12(b)(6) of
the North Carolina Rules of Civil Procedure (“Motion II”). Having considered the
Motions, the parties’ briefs in support of and opposition to the Motions, and the
arguments of counsel at the hearing held on April 17, 2014, the Court GRANTS
Motions I and II.
I.
PROCEDURAL HISTORY
{2} On September 4, 2013, Plaintiff Kenneth Gottfried (“Plaintiff”) filed his
Complaint in this action, asserting claims for fraud, breach of contract, unfair and
deceptive trade practices, equitable accounting, civil conspiracy to commit
conversion, and declaratory judgment.
{3} Subsequently, the case was designated a mandatory complex business
case, and assigned to this Court on October 8, 2013.
{4} On December 20, 2013, Expressions Defendants filed Motion I, seeking
dismissal of Plaintiff’s claims for fraud, unfair and deceptive trade practices, and
civil conspiracy to commit conversion. That same day, One Love Defendants filed
Motion II to dismiss Plaintiff’s claims for unfair and deceptive trade practices,
equitable accounting, and civil conspiracy to commit conversion.
{5} Thereafter, on January 13, 2014, Plaintiff filed a consolidated response
in opposition to the Motions. On January 27, 2014, the Expressions Defendants and
One Love Defendants separately filed replies in support of their Motions. And, the
Court held a hearing on the Motions on April 17, 2014.
II.
FACTUAL BACKGROUND
{6} For purposes of this Order and Opinion, the Court recites those facts
from the Complaint that are relevant to the Court’s legal determinations.
{7} Plaintiff formerly owned and operated six retail novelty stores in North
Carolina under the trade name “Expressions” (“Expressions Stores”), and was the
sole holder of the “Expressions” trademark and other related business trademarks
(the “Marks”). (Compl. ¶ 9.)
{8} In 2007, Plaintiff offered the Expressions Stores and their assets for
sale. (Compl. ¶10.) A. Covington contacted Plaintiff about purchasing the stores,
and the parties negotiated through 2008. (Compl. ¶10.) Initially, Plaintiff intended
to retain the Marks in the sale, but according to Plaintiff, A. Covington convinced
him to transfer the Marks to Expressions in return for royalty payments. (Compl. ¶
13.) As part of this negotiation, Plaintiff alleges that A. Covington represented to
Plaintiff that he planned to expand Expressions into a nationwide retail novelty
business, and that such expansion would occur using the Expressions trade name,
resulting in larger royalties for Plaintiff. (Compl. ¶ 14.)
{9} In anticipation of the sale, A. Covington incorporated Expressions in
July 2008 as a holding company for the Expressions Stores and the Marks. Per the
Complaint, A. Covington is the sole owner of Expressions. (Compl. ¶ 11.)
{10} On September 3, 2008, Plaintiff and A. Covington, on behalf of
Expressions, entered into an Asset Purchase Agreement (“APA”) under which
Expressions acquired substantially all of the assets of the Expressions Stores.
(Compl. ¶15.) Contemporaneous with the APA, Plaintiff assigned the Marks to
Expressions under the terms of an Intellectual Property Agreement (“IP
Agreement”). (Compl. ¶ 15.)
{11} The IP Agreement outlined a comprehensive plan for royalty payments
to Plaintiff after Expressions recouped certain initial start-up costs. In relevant
part, Expressions would pay Plaintiff royalties equal to 30% of the net pre-tax
income from retail operations of any “New Store.” (Compl. Ex. A.) 1 Pursuant to the
IP Agreement, a “New Store” includes “any new physical retail outlet[] owned,
operated, and opened by [Expressions] . . . that operate[s] under the trade name
‘EXPRESSIONS’.” (Compl. Ex. A § 2(a).) Expressions further agreed that “any new
physical retail outlet owned, operated and opened by Expressions . . . must use the
‘EXPRESSIONS’ trade name and such store will be considered a New Store and the
New Store Royalty will apply . . . .” (Compl. Ex. A § 2(a).)
{12} Additionally, the IP Agreement included a non-compete clause that
prohibited Plaintiff from engaging in retail or wholesale business substantially

1 “When documents are attached to and incorporated into a complaint, they become part of the

complaint and may be considered in connection with a Rule 12(b)(6) motion without converting it
into a motion for summary judgment.” Schlieper v. Johnson, 195 N.C. App. 257, 261, 672 S.E.2d 548,
551 (2009). Plaintiff attached the IP Agreement to the Complaint as Exhibit A, and expressly refers
to it throughout the Complaint. The Court, therefore, considers this document in reaching its
determinations.
similar to the business of Expressions. (Compl. Ex. A.) The IP Agreement defined
such substantially similar business as the sale of certain goods and services termed
“Products,” including adult novelty gift items, clothing, costumes, tobacco, tobacco
pipes and accessories, adult DVDs and body piercing services. (Compl. Ex. A.)
However, the IP Agreement contains no reciprocal promise by A. Covington.
Indeed, the IP Agreement does not restrict A. Covington in any way from owning or
operating new, similar stores not utilizing the Marks.
{13} On May 11, 2010, A. Covington and B. Covington incorporated and
opened One Love in Charlotte, North Carolina. According to Plaintiff, One Love is a
novelty retail business substantially similar to Expressions that is owned and
operated by A. Covington and B. Covington. (Compl. ¶ 16.)
{14} Upon learning about One Love’s operations, Plaintiff questioned A.
Covington about his and Expressions’ involvement with One Love, and A. Covington
responded that he was only a “silent partner” in One Love. (Compl. ¶ 25.)
However, Plaintiff contends he later discovered that A. Covington actively
participated in the operations of One Love.
{15} Given the similarities between the Expressions Stores and One Love,
Plaintiff asserts that Expressions should have opened One Love under the
Expressions’ trade name, and thereafter, should have paid Plaintiff royalties due
under the IP Agreement. In failing to do so, Plaintiff argues that Expressions
breached the IP Agreement. Furthermore, Plaintiff contends that the Expressions
Defendants committed fraud; that the actions of the Expressions Defendants and
the One Love Defendants constituted unfair and deceptive trade practices; that the
One Love Defendants and A. Covington conspired to convert Plaintiff’s royalties;
and that Plaintiff is entitled to an equitable accounting from One Love and a
declaratory judgment that he has been released from the non-compete in the IP
Agreement.
III.
LEGAL STANDARD
{16} The question for the court on a Rule 12(b)(6) motion to dismiss is
“whether, as a matter of law, the allegations of the complaint, treated as true, are
sufficient to state a claim upon which relief may be granted under some legal
theory, whether properly labeled or not.” Harris v. NCNB Nat’l Bank of North
Carolina, 85 N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987).
{17} “The complaint must be liberally construed, and the court should not
dismiss the complaint unless it appears beyond a doubt that the plaintiff could not
prove any set of facts to support his claim which would entitle him to relief.” Block
v. County of Person, 141 N.C. App. 273, 277–78, 540 S.E.2d 415, 419 (2000) (quoting
Harris, 85 N.C. App. at 670, 355 S.E.2d at 840). When the complaint fails to allege
the substantive elements of some legally cognizable claim, or where it alleges facts
that defeat the claim, the complaint should be dismissed under Rule 12(b)(6). See
Hudson-Cole Dev. Corp. v. Beemer, 132 N.C. App. 341, 345–46, 511 S.E.2d 309, 312
(1999).
{18} While factual allegations must be accepted as true on a motion to
dismiss, bare legal conclusions are “not entitled to a presumption of truth.” Miller
v. Rose, 138 N.C. App. 582, 592, 532 S.E.2d 228, 235 (2000). Further, the Court is
mindful that averments of fraud must be pled specifically and with particularity.
N.C. R. Civ. P. 9(b).
IV.
ANALYSIS
A.
FRAUD
{19} To state a claim for fraud, a plaintiff must allege a “(1) false
representation or concealment of a material fact, (2) reasonably calculated to
deceive, (3) made with intent to deceive, (4) which does in fact deceive, and (5)
resulting in damage to the injured party.” Becker v. Graber Builders, Inc., 149 N.C.
App. 787, 793, 561 S.E.2d 905, 910 (2002) (quoting Ragsdale v. Kennedy, 286 N.C.
130, 138, 209 S.E.2d 494, 500 (1974)).
{20} “A claim for fraud may be based on an ‘affirmative misrepresentation
of a material fact, or a failure to disclose a material fact relating to a transaction
that the parties had a duty to disclose.’” McKee v. James, 2013 NCBC 38 ¶ 49 (N.C.
Super. Ct. July 24, 2013), http://www.ncbusinesscourt.net/opinions/
2013_NCBC_38.pdf (quoting Hardin v. KCS Int’l, Inc., 199 N.C. App. 687, 696, 682
S.E.2d 726, 733 (2009)). Here, Plaintiff alleges that the Expressions Defendants
failed to disclose material facts about A. Covington’s involvement in One Love.
{21} “Fraudulent concealment or fraud by omission is, by its very nature,
difficult to plead with particularity.” Lawrence v. UMLIC-Five Corp., 2007 NCBC
20 ¶ 39 (N.C. Super. Ct. June 18, 2007), http://www.ncbusinesscourt.net/opinions/
2007_NCBC_20.pdf. Thus, Plaintiff must allege:
(1) the relationship [between plaintiff and defendant] giving rise to the
duty to speak; (2) the event or events triggering the duty to speak and/or
the general time period over which the relationship arose and the
fraudulent conduct occurred; (3) the general content of the information
that was withheld and the reason for its materiality; (4) the identity of
those under a duty who failed to make such disclosures; (5) what [the
defendant] gained by withholding information; (6) why plaintiff's
reliance on the omission was both reasonable and detrimental; and (7)
the damages proximately flowing from such reliance.
Lawrence, 2007 NCBC 20 ¶ 39 (adopting Breeden v. Richmond Cmty. Coll., 171
F.R.D. 189, 195–96 (M.D.N.C. 1997)).
{22} “A duty to speak may arise: (1) in the context of a fiduciary
relationship, (2) where ‘a party has taken affirmative steps to conceal material facts
from the other,’ or (3) ‘where one party has knowledge of a latent defect in the
subject matter of the negotiations . . . .’” McKee, 2013 NCBC 38 ¶ 51 (quoting
Harton v. Harton, 81 N.C. App. 295, 297, 344 S.E.2d 117, 119 (1986)).
{23} Plaintiff initially argues that the Expressions Defendants owed him a
fiduciary duty to disclose the information. However, the factual allegations do not
support such a claim. Although Plaintiff alleges a relationship of trust, there are no
specific factual allegations to support this assertion, nor is there any allegation of
dominion and control by the Expressions Defendants. Kaplan v. O.K. Techs., LLC,
196 N.C. App. 469, 474, 675 S.E.2d 133, 137 (2009) (“Although our courts have
broadly defined fiduciary relationships, no such relationship arises absent the
existence of dominion and control by one party over another.”). The facts as alleged
simply describe two parties bound to each other under the terms of a contract
negotiated at arm’s length, which does not in itself create a fiduciary relationship
between the parties. See Branch Banking & Trust, Co. v. Thompson, 107 N.C. App.
53, 61, 418 S.E.2d 694, 699 (1992).
{24} Next, Plaintiff argues that the Expressions Defendants took
affirmative steps to conceal their connection to One Love, giving rise to a duty to
fully disclose their involvement to Plaintiff. While the allegations support
Plaintiff’s claim that A. Covington hid his true involvement with One Love, this
concealment was not of a material fact relevant to the transaction between the
parties. Under the IP Agreement, A. Covington remained free to engage in other
businesses, even similar, competing businesses. The IP Agreement only
constrained Expressions from opening similar businesses under a different name,
and Plaintiff does not allege that Expressions had any ownership interest or
involvement in One Love. Even accepting the allegations as true, the Court does
not discern any concealment or misrepresentation of a material fact.
{25} Furthermore, Plaintiff failed to allege how he actually relied on the
concealment to his detriment. Although Plaintiff includes the conclusory allegation
that he relied on the Expressions Defendants’ omissions, there are no factual
allegations regarding what actions Plaintiff took or refrained from taking in
reliance thereon.2 Instead, Plaintiff merely complains that he has been denied
royalties due under the IP Agreement. It seems Plaintiff’s injury is based on the
alleged breach of contract rather than any reliance on the Expressions Defendants’
misrepresentations or concealment. The Court, therefore, concludes that Plaintiff
failed to sufficiently allege a claim for fraud.
{26} Accordingly, the Court hereby GRANTS Motion I with respect to
Plaintiff’s claim for fraud, and DISMISSES the claim with prejudice.

2 The Court notes that Plaintiff did not allege or argue that the Expressions Defendants fraudulently

induced Plaintiff to execute the IP Agreement through their representations about developing the
business nationwide. Rather Plaintiff’s claim relies solely on the Expressions Defendants’ actions in
carrying out their obligations under the IP Agreement after execution.
B.
UNFAIR AND DECEPTIVE TRADE PRACTICES
{27} To properly state a claim for unfair and deceptive trade practices, a
plaintiff must allege that “(1) defendants committed an unfair or deceptive act or
practice, (2) in or affecting commerce and (3) plaintiff was injured as a result.”
Phelps-Dickson Builders, LLC v. Amerimann Partners, 172 N.C. App. 427, 439, 617
S.E.2d 664, 671 (2005) (citing Edwards v. West, 128 N.C. App. 570, 574, 495 S.E.2d
920, 923 (1998)). In this case, Plaintiff alleges that both the Expressions
Defendants and the One Love Defendants committed unfair and deceptive trade
practices.
1.
THE EXPRESSIONS DEFENDANTS
{28} The Expressions Defendants argue that Plaintiff’s claim fails because
it attempts to elevate a breach of contract claim to an unfair and deceptive trade
practices claim.
{29} “Ordinarily, under section 75-1.1, a mere breach of contract does not
constitute an unfair or deceptive act . . . .” Cullen v. Valley Forge Life Ins. Co., 161
N.C. App. 570, 578, 589 S.E.2d 423, 430 (2003) (citing Becker, 149 N.C. App. at 794,
561 S.E.2d at 910). To proceed with such a claim for unfair and deceptive trade
practices, “[t]he plaintiff must show substantial aggravating circumstances
attending the breach . . . .” Eastover Ridge, LLC v. Metric Constructors, Inc., 139
N.C. App. 360, 368, 533 S.E.2d 827, 833 (2000) (internal quotation and citation
omitted). To be sure, “[i]t is ‘unlikely that an independent tort could arise in the
course of contractual performance, since those sorts of claims are most
appropriately addressed by asking simply whether a party adequately fulfilled its
contractual obligations.’” Id. (quoting Broussard v. Meineke Muffler Discount, Inc.,
155 F.3d 331, 347 (4th Cir. 1998)).
{30} In alleging his claim for unfair and deceptive trade practices, Plaintiff
relies on the same facts underlying his claim for breach of contract and fraud. To
the extent it relies on the allegations of fraud, Plaintiff’s claim for unfair trade
practices fails for the same reasons discussed above, leaving the Court solely with
the underlying claim for breach of contract. Without the aggravating fraud claim,
Plaintiff has not pled substantial aggravating circumstances attending the breach
that would rise to the level of an unfair or deceptive act. The Court concludes,
therefore, that Plaintiff’s claim against the Expressions Defendants fails as a
matter of law.
{31} Accordingly, the Court GRANTS Motion I as to Plaintiff’s unfair and
deceptive trade practices claim, and hereby DISMISSES the claim against the
Expressions Defendants with prejudice.
2.
THE ONE LOVE DEFENDANTS
{32} As to the One Love Defendants, the Complaint is devoid of allegations
revealing any individual actions by One Love or B. Covington other than their
association with A. Covington. Plaintiff does not allege that either made any
misrepresentations or were parties to any contract with Plaintiff. Indeed, Plaintiff
does not allege any prior relationship or interaction with One Love or B. Covington
beyond Plaintiff’s interactions with A. Covington related to Expressions. Although
Plaintiff alleged a civil conspiracy, Plaintiff limited his conspiracy claim to the
alleged conversion of royalties, and did not argue that any such claim supported the
unfair and deceptive trade practices claim.3 Instead, Plaintiff relies solely on the
alleged actions of the Expressions Defendants to sustain this claim. Without an
allegation of an unfair or deceptive act committed by the One Love Defendants, the
Court concludes that Plaintiff cannot proceed with this claim.4

3 In any case, as discussed below, Plaintiff’s claim for conspiracy to commit conversion fails, and

thus, would not allow Plaintiff’s claim for unfair and deceptive trade practices to survive.
4 Because the Court dismissed Plaintiff’s unfair and deceptive trade practices claim against the

Expressions Defendants, the Court need not address Plaintiff’s argument that One Love is the alter
ego of Expressions, and can be held liable for Expressions’ actions. However, the Court notes that
there is only one allegation in the Complaint that asserts, as a legal conclusion, that One Love is the
alter ego of Expressions, (Compl. ¶ 23), and none of the required factual allegations to support that
claim appear anywhere in the Complaint. As such, it is unlikely that this claim would survive even
if the Court were to reach this argument.
{33} Accordingly, the Court GRANTS Motion II as to this claim. The Court
hereby DISMISSES Plaintiff’s claim for unfair and deceptive trade practices against
the One Love Defendants with prejudice.
C.
EQUITABLE ACCOUNTING
{34} “The remedy of an equitable accounting may be available when a
plaintiff has asserted a valid claim for relief in equity and an accounting is
necessary to compel discovery of information regarding accounts held exclusively by
the defendant.” Mkt. Choice, Inc. v. New England Coffee Co., 2009 U.S. Dist.
LEXIS 73627 at *35–*36 (W.D.N.C. Aug. 18, 2009) (citing Dunn v. Johnson, 115
N.C. 249, 20 S.E. 390, 390–91 (1894), and Toomer v. Branch Banking & Trust Co.,
171 N.C. App. 58, 70, 614 S.E.2d 328, 337 (2005)). Nevertheless, the Court will not
grant equitable relief where a party has a full and complete remedy at law. See
Hinson v. United Fin. Servs., Inc., 123 N.C. App. 469, 473, 473, S.E.2d 382, 385
(1996). In requesting an equitable accounting, Plaintiff must allege facts that
warrant an equitable remedy. Wilmar, Inc. v. Liles, 13 N.C. App. 71, 74, 185 S.E.2d
278, 280 (1971).
{35} Plaintiff contends that he needs an accounting from One Love to assess
the amount of royalties due under the IP Agreement. However, Plaintiff may
obtain this relief through discovery related to his breach of contract claim.
Furthermore, Plaintiff failed to allege or argue any clear reason why discovery
would be insufficient, other than a vague assertion that “the statutory limitations or
Court rules or orders which may limit discovery may not be coextensive with the
equitable rights to an accounting.” (Pl.’s Br. Opp. Mot. II 14–15.) The Court finds
this argument unavailing, and concludes that Plaintiff has failed to sufficiently
allege facts that warrant an equitable accounting.
{36} Accordingly, the Court GRANTS Motion II, and hereby DISMISSES
Plaintiff’s claim for equitable accounting with prejudice.
D.
CIVIL CONSPIRACY TO COMMIT CONVERSION
{37} “The elements of a civil conspiracy are: (1) an agreement between two
or more individuals; (2) to do an unlawful act or a lawful act in an unlawful way; (3)
resulting in injury to plaintiff inflicted by one or more of the conspirators; and (4)
pursuant to a common scheme. Strickland v. Hedrick, 194 N.C. App. 1, 19, 669
S.E.2d 61, 72 (2008) (internal quotation and citation omitted). “It is well
established that ‘there is not a separate civil action for civil conspiracy in North
Carolina.’” Piraino Bros., LLC v. Atl. Fin. Group, Inc., 211 N.C. App. 343, 350, 712
S.E.2d 328, 333 (2011) (quoting Dove v. Harvey, 168 N.C. App. 687, 690, 608 S.E.2d
798, 800 (2005)). “Instead, ‘civil conspiracy is premised on the underlying act.’” Id.
(quoting Harris v. Matthews, 361 N.C. 265, 273, n.2, 643 S.E.2d 566, 571, n.2
(2007)).
{38} Plaintiff alleges conversion as the underlying tort for his civil
conspiracy claim. Specifically, Plaintiff argues that A. Covington and the One Love
Defendants conspired to convert the royalty payments due to Plaintiff under the IP
Agreement.
{39} “Conversion is 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.’” Norman v. Nash
Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000).
However, “only goods and personal property are properly the subjects of a claim for
conversion. A claim for conversion does not apply to . . . intangible interests such as
business opportunities and expectancy interests . . . .” Id. Here, the royalties
constitute an intangible, contractual expectancy under the IP Agreement, and are
not subject to a claim for conversion. Plaintiff’s underlying claim for conversion
therefore fails, leaving no premise for the civil conspiracy claim.5

5 The Court also notes that Plaintiff made no attempt to argue that the civil conspiracy claim was

based on any other underlying tort alleged in the Complaint.
{40} The Court GRANTS Motions I and II with respect to Plaintiff’s claim
for civil conspiracy to commit conversion, and hereby DISMISSES the claim with
prejudice.
V.
CONCLUSION
{41} For the reasons stated above, the Court GRANTS Motions I and II, and
accordingly, DISMISSES with prejudice Plaintiff’s claims for fraud, unfair and
deceptive trade practices, equitable accounting, and civil conspiracy to commit
conversion.
SO ORDERED, this 25th day of June 2014.