Southern Produce Distributors, Inc. v. Friedman et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
SOUTHERN PRODUCE
DISTRIBUTORS, INC.,
Debtor. Case No. 03-02838-8-JRL
SOUTHERN PRODUCE
DISTRIBUTORS, INC.,
Plaintiff,
vs. Adversary Proceeding No.:
05-00013-8-AP
CHARLIE FRIEDMAN and
FRIEDMAN & BROUSSARD
PRODUCE, INC.,
Defendants.
______________________________________________________________________________
ORDER
This matter is before the court on the defendants’ motion for summary judgment. On August 8,
2006, the court conducted a hearing in Raleigh, North Carolina. Following the hearing, supplemental
SO ORDERED.
SIGNED this 06 day of October, 2006.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1Although the Contract included in the record is not signed by defendants, plaintiff concedes for
the purpose of this motion that the Contract was signed in Louisiana.
2
memoranda of law were filed by the parties.
UNDISPUTED FACTS
1. The plaintiff is a corporation organized under the laws of North Carolina with its
principal place of business in Faison, North Carolina.
2. Charlie Friedman is a resident of Louisiana, and Friedman & Broussard, Inc. is a
Louisiana corporation.
3. On March 24, 2000, the plaintiff entered into a contract (“Contract”) with Charlie
Friedman and Friedman & Broussard Produce, Inc., allowing them to exclusively
purchase, broker, and sell sweet potatoes and produce for the plaintiff beginning March
24, 2000 through March 23, 2010.
4. The Contract was signed in Louisiana.1
5. On January, 19, 2005, the plaintiff filed a complaint against Charlie Friedman and
Freidman & Broussard Produce, Inc., asserting that the defendants violated the
Contract, specifically the covenant not to compete. The plaintiff alleges that the
defendants contacted its customers and solicited business from such customers without
the plaintiff’s consent.
6. In their answer, the defendants argue that the plaintiff was the first party to breach the
Contract, and they deny the plaintiff’s allegations in the complaint.
7. The defendants assert that Louisiana law applies to all causes of action alleged in the
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complaint.
8. The plaintiff asserts that North Carolina law applies to all causes of action alleged in the
complaint.
PROCEDURAL HISTORY
On August 8, 2006, the court conducted a hearing and denied defendants’ motion for summary
judgment on two issues. First, summary judgment was denied as to the assertion that there was a pre-
petition breach by plaintiff that excused future performance by defendants. Secondly, summary
judgment was denied as to the issue that plaintiff did not successfully assume the Contract in its Chapter
11 case. An order was filed on August 30, 2006. At the August 8, 2006 hearing, the court deferred
ruling on the choice of law questions posed by the defendants’ motion pending a review of
supplemental memoranda. The court allowed the plaintiff twenty days from the August 8, 2006 hearing
to supplement its memorandum in opposition to the application of Louisiana substantive law in this
adversary proceeding. The defendants were allowed ten days to reply to the plaintiff’s supplement.
Briefing was concluded on September 7, 2006.
STANDARD OF REVIEW
“[S]ummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories and
admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law.’” Celotex Corp. v.
Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986). In making this determination, conflicts are
resolved by viewing all facts and all reasonable inferences in the light most favorable to the nonmoving
party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994 (1962).
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ANALYSIS
Choice of law issues are questions of law to be determined by the court. Stetser v. TAP Pharm.
Prods., Inc., 165 N.C. App. 1, 14, 598 S.E.2d 570, 579 (2004). A federal court sitting in diversity is
bound to follow the choice of law rules of the forum state. Klaxon Co. v. Stentor Elextric Mfg. Co., 313
U.S. 487, 496-97, 61 S. Ct. 1020, 1021-22 (1941). Additionally, the Fourth Circuit has held that
unless some federal interest requires a different result, a federal bankruptcy court should apply the
Klaxon rule, and therefore follow the choice of law rules of the forum state. In re Merritt Dredging Co.,
839 F.2d 203, 206 (4th Cir. 1988). In this case, the plaintiff alleged six causes of action against the
defendants: breach of contract, tortious interference with contractual relationships, misappropriation of
trade secrets and confidential information, violation of the North Carolina Trade Secrets Protection Act,
conversion, and violation of the North Carolina Unfair Trade Practices Act. This court must first look at
the nature of each cause of action alleged in the complaint and then use North Carolina choice of law
rules to determine which state’s law applies to that cause of action.
1. Breach of Contract
Under North Carolina choice of law rules, substantive questions of contract construction and
interpretation are governed by the law of the state where the contract was made. Tanglewood Land
Co., Inc. v. Byrd, 299 N.C. 260, 262, 261 S.E.2d 655, 656 (1980). Since it is undisputed that the
Contract was executed in Louisiana, under traditional North Carolina choice of law rules Louisiana law
would apply to the breach of contract cause of action.
However, plaintiff asserts that the Contract involves the sale of goods and should be governed
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by the Uniform Commercial Code (“UCC”). If the Contract is governed by the UCC, it would be
subject to the choice of law rule provision in N.C. Gen. Stat.§ 25-1-105(1). The plaintiff contends that
the Contract is predominantly a contract for the sale of sweet potatoes and produce that also regulates
the relationship between the parties regarding those sales. Additionally, plaintiff argues that because the
number of boxes of sweet potatoes and produce sold by Friedman were counted in order for Friedman
to receive payment from the plaintiff, “the Contract contemplates the sale of goods and the UCC should
apply.” Westpoint Stevens, Inc. v. Panda-Rosemary Corp., 1999 WL 33545512 at *4 (N.C. Super.
Dec. 16, 1999).
Defendants object to the application of the UCC to the Contract and contend that the traditional
North Carolina choice of law rules apply. Defendants assert that based on the plain language of Article
2 of the UCC the Contract does not fall within an Article 2 transaction.
The North Carolina Court of Appeals has stated that “[t]he scope of the UCC is limited to
‘transactions in goods’ and does not apply to contracts for the provision of services.” Hensley v. Ray’s
Motor Co. of Forest City, Inc., 158 N.C. App. 261, 265, 580 S.E.2d 721, 724 (2003). The Contract
at issue in this case is predominantly for services. The Contract allowed defendants to “purchase, broker
and sell potatoes and produce for and on behalf of Southern.” In return, plaintiff agreed to pay
defendants “a commission of fifty cents per box of potatoes sold” for the first five years of the Contract
and then increase the commission to fifty-five cents per box sold. Based on the terms of the Contract,
the Contract is not for the sale of goods but instead is a service contract. Therefore, the UCC does not
apply.
Since the UCC does not apply, under North Carolina choice of law rules, substantive questions
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2 The Contract provides:
Friedman covenants and agrees that he will not during the term of
this contract engage in a business directly or indirectly in competition
with Southern involved with the purchasing or sale of sweet potatoes
and/or produce. Friedman shall not (other than on behalf of Southern)
during the term of this contract, directly or indirectly, on Friedman’s
own account...engage in or become financially interested in the buying
and selling of sweet potatoes, or engage in any type of business
handling items or products now handled or from time to time handled
by Southern. Friedman shall not during the term of this contract for
any reason whatsoever, directly or indirectly, solicit the trade or
patronage of any of the customers or clients of Southern unless
Friedman shall first receive the specific consent and agreement of
Southern.
Exhibit A, Contract, page 3-4 (emphasis added).
of contract construction and interpretation are governed by the law of the state where the contract was
made. Tanglewood Land Co., Inc., 299 N.C. at 262, 261 S.E.2d at 656. It is undisputed that both
parties to the Contract executed the Contract in Louisiana, and therefore Louisiana law will apply to the
breach of contract cause of action.
Next, the court must look at defendants’ argument that under Louisiana law the non-competition
clauses in the Contract are void. Defendants assert that Louisiana has a strong public policy against non-
competition agreements. Therefore, defendants contend that the clauses prohibiting defendants from
competing with plaintiff or soliciting plaintiff’s customers are void.2
However, defendants are mistaken as to the interpretation of Louisiana law. Under Louisiana
law,
Any person, including a corporation and the individual shareholders of such corporation,
who is employed as an agent, servant, or employee may agree with his employer to
refrain from carrying on or engaging in a business similar to that of the employer and/or
from soliciting customers of the employer within a specified parish or parishes,
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municipality or municipalities, or parts thereof, so long as the employer carries on a like
business therein, not to exceed a period of two years from termination of employment.
An independent contractor, whose work is performed pursuant to a written contract,
may enter into an agreement to refrain from carrying on or engaging in a business similar
to the business of the person with whom the independent contractor has contracted, on
the same basis as if the independent contractor were an employee, for a period not to
exceed two years from the date of the last work performed under the written contract.
La. R. S. § 23:291(C). This statute allows for an independent contractor to enter into a contract that
would prohibit his/her right to compete, subject to some restrictions, for up to two years from the date of
the last work performed under the contract. If an independent contractor can enter into a contract
prohibiting competition after his/her contract has expired, a contract prohibiting competition during the
term of the contract would certainly be valid. Additionally, the cases cited in defendants’ brief all involve
former employees and refer to post-employment competition. See Orkin Exterminating Co. v. Foti, 302
So. 2d 593 (La. 1974); Cellular One, Inc. v. Boyd, 94-1783 (La. App. 1 Cir. 3/3/95); 653 So. 2d 30;
Turner Prof’l Servs, LTD. v. Broussard, 99-2838 (La. App. 1 Cir. 5/12/00); 762 So. 2d 184.
Louisiana does have a strong public policy against non-competition agreements. However, that
policy appears to be directed at post-employment or post-contract competition and not competition that
takes place during employment or during the term of the contract. Louisiana Smoked Prods. v. Savoie’s
Sausage & Foods Prods., 96-1716 (La. 7/1/97); 696 So. 2d 1373, 1379 (“Louisiana has consistently
had a strong public policy against any employment contract which prohibits an employee from competing
with a former employer.”). Therefore, even under Louisiana law the clauses in the Contract prohibiting
defendants from engaging in a business in competition with plaintiff or soliciting plaintiff’s customers
during the term of the Contract are not facially void.
As part of the breach of contract claim, plaintiff also alleges that defendants violated the
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3See McElmurry v. Fergusson, 2006 U.S. Dist. LEXIS 10760, at *32 (M.D.N.C. March 8,
2006)(treating claims under the North Carolina Trade Secrets Protection Act as sounding in tort)
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contractual obligation not to disclose plaintiff’s trade secrets and confidential information. Under
Louisiana law, confidentiality agreements are not subject to the prohibitions and requirements of La. R.S.
23:921 and are enforceable. Engineered Mechanical Services, Inc. v. Langlois, 464 So.2d 329, 334
n.15 (La. App. 1 Cir. 1984). Therefore the clauses in the Contract prohibiting defendants from
disclosing plaintiff’s trade secrets and confidential information are not facially void.
Based on the foregoing, the court finds that there is no disputed issue of material fact as to the
place the Contract was executed. Therefore, Louisiana law will apply to the breach of contract claim.
However, even when applying Louisiana law, the non-competition clauses and the confidentiality
agreement in the Contract are not facially void and summary judgment is denied as to Count I.
2. Tortious Interference with Contractual Relationships, Misappropriation of Trade
Secrets and Confidential Information, North Carolina Trade Secrets Protection Act,
and Conversion
Under North Carolina choice of law rules, substantial rights of the parties are determined by lex
loci, the law of the situs of the claim. “For actions sounding in tort, the state where the injury occurred is
considered the situs of the claim.” Boudreau v. Baughman, 322 N.C. 331, 335, 368 S.E.2d, 849, 853-
54 (1988). The plaintiff in this case is located in North Carolina and its alleged economic harm occurred
in North Carolina. Therefore, North Carolina law will apply to the tortious interference with contractual
relationships, misappropriation of trade secrets and confidential information, and conversion claims, as
well as the claim under the North Carolina Trade Secrets Protection Act3.
3. North Carolina Unfair Trade Practices Act
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4See Andrew Jackson Sales v. Bi-Lo Stores, Inc., 68 N.C. App. 222, 225, 314 S.E.2d 797,
799 (1984) (“the law of the state having the most significant relationship to the occurrence gives rise to
the action” should govern). But see United Virginia Bank v. Air-Lift Assocs., Inc., 79 N.C. App. 315,
321, 339 S.E.2d 90, 93 (1986)(“the law of the state where the injuries are sustained should govern”).
5 See United Dominion Indus., Inc. v. Overhead Door Corp., 762 F. Supp. 126, 129
(W.D.N.C. 1991)(the law of the state where the injuries are sustained is the appropriate state law). But
see Food Lion, Inc. v. Capital Cities/ABC, Inc., 964 F.Supp. 956, 959 (M.D.N.C. 1997); American
Rockwool, Inc. v. Owen-Corning Fiberglass Corp., 640 F. Supp. 1411, 1430-31 (E.D.N.C.1986)
(the law of the state with the most significant relationship to the occurrence should govern).
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The North Carolina Court of Appeals is split on the substantive law to be applied to unfair or
deceptive trade practice claims. 4 Additionally, federal courts predicting how the North Carolina
Supreme Court would resolve this issue have also split on the appropriate rule to be used.5 This court
will follow the Eastern District of North Carolina’s approach by applying the most significant
relationship test in determining which law should apply to unfair trade practice claims. American
Rockwool, Inc. v. Owen-Corning Fiberglass Corp., 640 F. Supp. 1411, 1430-31 (E.D.N.C.1986).
Based on the record before the court at this time, it appears that North Carolina has the most
significant relationship with this transaction. However, due to the many disputed material facts, the court
reserves the right to change that determination if additional underlying facts disputing that conclusion
come to light during trial. Therefore, the court denies the defendant’s motion for summary judgment as
to Count VI.
CONCLUSION
Based on a review of the pleadings, affidavits, depositions, admissions, and answers to
interrogatories, the court finds that material issues of fact exist in this proceeding. There is a material
issue as to whether the non-competition clauses in the Contract are valid or were violated, and
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therefore summary judgment is denied as to Count I. Counts II, III, IV, and V sound in tort and are
subject to North Carolina law, and therefore summary judgment is denied as to those counts. Finally,
there is also a material issue as to whether Louisiana or North Carolina has the most significant
relationship with this transaction, and therefore summary judgement is denied as to Count VI.
“END OF DOCUMENT”
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