Avadim Health, Inc. v. Daybreak Cap. Partners, LLC

Avadim Health, Inc. v. Daybreak Cap. Partners, LLC, 2021 NCBC 73.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
BUNCOMBE COUNTY 20 CVS 3334

AVADIM HEALTH, INC.,

Plaintiff/
Counterclaim
Defendant,

v.

CRAIG HARKEY d/b/a HARK
HEALTH SERVICES,

Defendant, ORDER AND OPINION ON
PLAINTIFF AVADIM HEALTH, INC.,
v. AND COUNTERCLAIM DEFENDANT
DAYBREAK CAPITAL PARTNERS, STEPHEN WOODY’S JOINT MOTION
LLC, and COMMUNITY HEALTH TO DISMISS
GROUP, INC.,

Defendants/
Counterclaim
Plaintiffs,

STEPHEN WOODY,

Counterclaim
Defendant.

1. THIS MATTER is before the Court on the 1 February 2021 filing of

Plaintiff Avadim Health, Inc., and Counterclaim Defendant Stephen Woody’s Joint

Motion to Dismiss (the “Motion”) brought pursuant to Rule 12(b)(6) of the North

Carolina Rules of Civil Procedure (the “Rule(s)”). (ECF No. 31 [“Mot.”].)

2. For the reasons set forth herein, the Court hereby GRANTS IN PART

AND DENIES IN PART the Motion.

Allen Stahl + Kilbourne, PLLC, by Robert C. Carpenter, Robert E.
Dungan, and Jesse M. Swords, for Plaintiff and Counterclaim Defendant
Avadim Health, Inc.
Buchanan Ingersoll & Rooney PC, by Terry M. Brown, Jr., and Stanley
Yorsz, for Plaintiff and Counterclaim Defendant Avadim Health, Inc.
and Counterclaim Defendant Stephen Woody.

Robinson, Bradshaw & Hinson, P.A., by Benjamin DeCelle, and
Pearlynn Houck, and Faegre Drinker Biddle & Reath LLP, by Matthew
B. Kilby, James L. Volling, and Bryan K. Washburn, for Defendant Craig
Harkey d/b/a Hark Health Services, and Defendants and Counterclaim
Plaintiffs Community Health Group, Inc., and Daybreak Capital
Partners, LLC.

Robinson, Judge.

I. INTRODUCTION

1. Defendants and Counterclaim Plaintiffs Daybreak Capital Partners, LLC

(“Daybreak”) and Community Health Group, Inc. (“CHG”) (collectively the

“Counterclaim Plaintiffs”), have asserted counterclaims against Plaintiff and

Counterclaim Defendant Avadim Health, Inc., (“Avadim”) for breach of contract,

tortious interference with contract, tortious interference with prospective economic

advantage, fraud, unjust enrichment, 1 violation of the North Carolina Unfair and

Deceptive Trade Practices Act (the “UDTP Act”), and violation of the North Carolina

Racketeer Influenced and Corrupt Organizations Act (the “N.C. RICO Act”), and have

asserted counterclaims against Counterclaim Defendant Stephen Woody (“Woody”)

for tortious interference with contract, tortious interference with prospective

economic advantage, fraud, violation of the UDTP Act, and violation of the N.C. RICO

Act (the “Counterclaims”). (Defs.’ Answer and Countercls., ECF No. 22

[“Countercls.”].)

1 Avadim did not move to dismiss the unjust enrichment counterclaim. (See Mot.) Therefore,
the Court does not address that claim in this Opinion.
2. In short, these claims arise from Counterclaim Plaintiffs’ assertions that

Avadim has breached the Letter of Intent (the “LOI”) agreed to by the parties, and

that Avadim and Woody have interfered in Counterclaim Plaintiffs’ business in the

“business-to-business” market (the “B2B market”).

II. FACTUAL BACKGROUND

3. Avadim is a healthcare company in the business of selling topical products

designed to improve health. (Countercls. ¶ 1.) At all relevant times Woody was

Avadim’s Chief Executive Officer and served on Avadim’s Board of Directors.

(Countercls. ¶ 2.)

4. Counterclaim Plaintiffs allege that Avadim has not traditionally considered

the B2B market to be one of its target markets. (Countercls. ¶ 6.) Avadim’s only

effort to develop a B2B market for its products—the Community Health Business

unit (the “CHB Unit”)—was unsuccessful, and, in 2020, Avadim decided to cease

pursuing the B2B market strategy and terminate the employees working in the CHB

Unit, except for one, Stan Payne (“Payne”). (Countercls. ¶¶ 7, 8.)

5. Upon notice that the CHB Unit would be shut down, Payne and coworker

Craig Harkey (“Harkey”) attempted to persuade Avadim to keep the CHB Unit.

(Countercls. ¶ 9.) When Avadim insisted on closing the unit, Woody and David Fann

(“Fann”), then-president of Avadim, suggested that Payne and Harkey should “raise

money and buy the exclusive right to distribute and market products in that market

from Avadim[,]” if Payne and Harkey believed it to be a lucrative venture.

(Countercls. ¶ 9.)
6. Payne and Harkey thereafter engaged Daybreak and established a team of

individuals to help with the transition and to acquire the CHB Unit’s business from

Avadim. (Countercls. ¶ 10.)

7. Avadim and Daybreak then signed the LOI, which became effective on 20

March 2020, setting out the terms governing the sale of Avadim’s CHB Unit to

Daybreak. (Countercls. ¶¶ 11–12.) Additionally, Counterclaim Plaintiffs allege that

Hark Health Services and a “to be formed acquisition entity,” which later came to be

CHG, were expressed and intended beneficiaries of the LOI. (Countercls. ¶¶ 11–12.)

The LOI granted the buyers an exclusive and perpetual right to distribute and

market Avadim products in the B2B market. (Countercls. ¶ 13.) Among other terms,

the LOI provided: the purchase price of the CHB Unit; the markets being purchased;

the Avadim products CHG would exclusively distribute and market; the product

pricing; exclusivity tied to required sales thresholds; and the duration, which was to

be perpetual. (Countercls. ¶ 112.)

8. On 3 April 2020, the parties signed a second amendment to the LOI in

which they agreed that the LOI had become effective on 20 March 2020. (Countercls.

¶ 18.)

9. Subsequently, in June 2020, Avadim and CHG entered into an interim

“Distribution Agreement,” which allowed CHG to start selling Avadim’s products and

create a network of sub-distributors in the B2B market before the LOI transaction

was to be closed. (Countercls. ¶¶ 26, 33.) The interim Distribution Agreement was
to act as a precursor to the exclusive marketing and distribution agreement

contemplated by the LOI. (Countercls. ¶ 26.)

10. Counterclaim Plaintiffs allege that “[o]nce Woody and Avadim realized that

Payne, Harkey, CHG, and Daybreak were creating a business that would be capable

of achieving more than $100 million in annual sales for CHG, [Woody and Avadim]

secretly decided to stop negotiating in good faith to close the LOI Transaction.”

(Countercls. ¶ 54.)

11. Counterclaim Plaintiffs assert that Avadim and Daybreak agreed that the

LOI became effective on 20 March 2020, that the LOI has not since been terminated,

and that Avadim has breached the LOI and interfered in CHG’s business in the B2B

market.

12. The breach of contract counterclaim alleges that Avadim breached the

“Good Faith Negotiations” term of Section 9, the “Past Practice” term of Section 10,

and the “Competing Transactions” term of Section 11 of the LOI. (Countercls. ¶¶ 14,

98–123.)

13. Section 9 of the LOI required that Avadim and Daybreak “negotiate

exclusively in good faith towards a successful Closing of the Transaction.”

(Countercls. ¶ 110.)

14. Section 10 of the LOI provides that Avadim and the CHB Unit are required

to “afford to Buyer [Daybreak] and its agents and representatives full access at

reasonable times to the Company’s financial, legal, tax and other data and

information to conduct its due diligence investigation of the Company and its
business and affairs.” (Countercls. ¶ 100.) Section 10 further provides in the Past

Practice term, that Avadim and its CHB Unit “use reasonable commercial efforts

to . . . conduct its business only in the ordinary course and consistent with past

practice.” (Countercls. ¶ 102.)

15. Section 11 of the LOI provides that “Avadim could not, among other things,

‘directly or indirectly . . . . solicit, initiate or encourage any discussions with . . . any

person or entity with respect to the . . . Community Health business.’ ” (Countercls.

¶ 106.)

16. Counterclaim Plaintiffs maintain that the “Exclusivity Period” provided for

in Section 11 of the LOI remains in effect. (Countercls. ¶ 23.) Counterclaim Plaintiffs

contend that the Exclusivity Period has continued to renew for successive 30-day

increments, because a definitive purchase agreement was never executed, and the

parties never terminated the renewal provision of the LOI in writing. (Countercls.

¶¶ 20–23.) Counterclaim Plaintiffs further allege that in communications more than

90 days after the effective date of the LOI, all parties acknowledged and agreed that

the LOI was still in effect. (Countercls. ¶ 24.)

17. Counterclaim Plaintiffs assert that Avadim abandoned the B2B market by

the time the LOI became effective on 20 March 2020, but, by July 2020, Avadim had

begun pursuing the same B2B markets and distributors that CHG developed for

Avadim’s products. (Countercls. ¶¶ 37–41.) Counterclaim Plaintiffs allege that by so

doing, Avadim breached the Past Practice provision in Section 10 of the LOI.

(Countercls. ¶¶ 35–36.)
18. Counterclaim Plaintiffs also allege that Avadim breached the LOI’s

“Competing Transaction” term contained in Section 11 by soliciting CHG’s sub-

distributors—BTW Distributors, LLC (“BTW”), ProKlean, and School Health—to

distribute Avadim’s products in the B2B market. (Countercls. ¶¶ 42–43.)

19. CHG continually provided updates to Avadim regarding its progress in

developing the new company. (Countercls. ¶ 28.) “As a result of this continual

reporting and its own active participation in CHG’s sale efforts . . . Avadim had nearly

complete visibility into both the customers CHG developed and each customer’s

expected initial order and annualized sales potential.” (Countercls. ¶ 31.)

20. In addition, Counterclaim Plaintiffs allege that Avadim breached the LOI’s

“Good Faith Negotiation” provision contained in Section 9 of the LOI. (Countercls.

¶ 45.) In June 2020, Avadim allegedly refused to complete the transaction with

Daybreak, even though the only two remaining drafting issues “were resolved in

concept to the satisfaction of Avadim, Daybreak, and CHG[.]” (Countercls. ¶¶ 45–

46.)

21. Counterclaim Plaintiffs maintain that, by July 2020, the parties had

“agreed in concept on all material terms” of the LOI, and Avadim allegedly never

identified any material item necessitating resolution prior to consummating the sale.

(Countercls. ¶ 47.)

22. Nevertheless, on 6 August 2020, Woody, on behalf of Avadim, sent Jon

Tebol, Daybreak’s CEO, and David Hoffman, CHG’s Board Chairman, an email

proposing an alleged “better deal structure” that Counterclaim Plaintiffs believe “was
fundamentally inconsistent with the LOI.” (Countercls. ¶¶ 48–50.) Counterclaim

Plaintiffs further claim that the email, in bad faith, repudiated the deal contemplated

by the LOI. (Countercls. ¶ 48.)

23. Counterclaim Plaintiffs allege that Avadim has, in bad faith, refused to

engage in any further contract negotiations since the 6 August 2020 email.

(Countercls. ¶ 52.) In addition, Counterclaim Plaintiffs assert that Avadim acted in

bad faith by contacting other distributors in an effort to engage in business in

violation of the LOI during the same period that Avadim was negotiating an exclusive

distribution and marketing agreement with Counterclaim Plaintiffs. (Countercls.

¶ 53.)

24. Counterclaim Plaintiffs further allege that Avadim has breached the

liquidated damages term of Section 9 of the LOI. (Countercls. ¶ 117.) According to

Counterclaim Plaintiffs, Avadim did not close the transaction as agreed but instead

pursued alternative business arrangements with other distributors in the B2B

market that conflict with the final agreement contemplated by the LOI. (Countercls.

¶¶ 120–21.) As a result, Counterclaim Plaintiffs claim that Avadim and Woody owe

a termination fee in the amount of $2.5 million plus reimbursement of reasonable

out-pocket transaction expenses. (Countercls. ¶¶ 118, 122.)

25. Finally, Counterclaim Plaintiffs allege that Avadim and Woody interfered

with CHG’s business by soliciting CHG’s sub-distributors directly to circumvent CHG

and to encourage those sub-distributors to buy Avadim’s products directly from

Avadim. (Countercls. ¶¶ 74, 84–86, 89–90.) According to Counterclaim Plaintiffs,
Avadim knew that CHG’s sub-distributors had agreed not to compete with CHG, and

Woody allegedly assured CHG that Avadim would not attempt to circumvent CHG.

(Countercls. ¶ 68.)

26. According to Counterclaim Plaintiffs, CHG has now lost nearly $60 million

dollars in business and revenue due to Avadim and Woody’s misconduct as described

above. (Countercls. ¶¶ 95–97.)

27. Counterclaim Plaintiffs further allege that the factual scenario set out

above supports claims for fraud, violation of the N.C. RICO Act, and violation of the

UDTP Act. (Countercls. ¶¶ 159–64, 171–95.)

III. PROCEDURAL BACKGROUND

28. The Court sets forth here only those portions of the procedural history

relevant to its determination of the Motion.

29. Avadim and Woody filed the Motion pursuant to Rule 12(b)(6) for failure to

state a claim upon which relief may be granted on 1 February 2021. (Mot.)

30. The Motion is now fully briefed. (Pl. Avadim and Countercl. Def. Woody’s

Joint Mem. Law Supp. Mot. Dismiss, ECF No. 32 [“Mem. Supp.”], Br. Countercl. Pls.

Res. Avadim’s and Woody’s Mot. Dismiss, ECF No. 34 [“Mem. Opp’n”], and Pl. Avadim

and Countercl. Def. Woody’s Reply Mem. Supp. Joint Mot. Dismiss, ECF No. 38

[“Reply Br.”].)

31. This matter was reassigned to the undersigned for further proceedings by

the Chief Business Court Judge on 18 March 2021. (Reassign. Order, ECF No. 40.)
32. A hearing was held on the Motion on 13 April 2021. (See Not. Hearing and

Case Mgmt. Conf., ECF No. 41.)

33. The Motion is now ripe for resolution.

IV. LEGAL STANDARD

34. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court

reviews the allegations in the Complaint in the light most favorable to Plaintiff. 2 See

Christenbury Eye Ctr., P.A. v. Medflow, Inc., 370 N.C. 1, 5 (2017). The Court’s inquiry

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[.]” Harris v. NCNB Nat’l Bank, 85 N.C. App. 669, 670 (1987). The Court

accepts all well-pleaded factual allegations in the relevant pleading as true. See

Krawiec v. Manly, 370 N.C. 602, 606 (2018). The Court is therefore not required “to

accept as true allegations that are merely conclusory, unwarranted deductions of fact,

or unreasonable inferences.” Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human

Servs., 174 N.C. App. 266, 274 (2005) (quoting Veney v. Wyche, 293 F.3d 726, 730 (4th

Cir. 2002)).

35. Furthermore, the Court “can reject allegations that are contradicted by the

documents attached, specifically referred to, or incorporated by reference in the

complaint.” Moch v. A.M. Pappas & Assocs., LLC., 251 N.C. App. 198, 206 (2016)

(quoting Laster v. Francis, 199 N.C. App. 572, 577 (2009)). The Court may consider

these attached or incorporated documents without converting the Rule 12(b)(6)

2 Here, the Court will be reviewing allegations in the Counterclaims in the light most
favorable to the Counterclaim Plaintiffs.
motion to dismiss into a Rule 56 motion for summary judgment. Id. (citing Schlieper

v. Johnson, 195 N.C. App. 257, 261 (2009)). Moreover, the Court “may properly

consider documents which are the subject of a plaintiff’s complaint and to which the

complaint specifically refers even though they are presented by the defendant.”

Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60 (2001) (citing Robertson v. Boyd,

88 N.C. App. 437, 441 (1988)).

36. Our Supreme Court has noted that “[i]t is well-established that dismissal

pursuant to Rule 12(b)(6) 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. British Am. Tobacco PLC, 371

N.C. 605, 615 (2018) (quoting Wood v. Guilford Cty., 355 N.C. 161, 166 (2002)). This

standard of review for Rule 12(b)(6) is the standard our Supreme Court “routinely

uses . . . in assessing the sufficiency of complaints in the context of complex

commercial litigation.” Id. at n.7 (citing Krawiec, 370 N.C. at 606 and Christenbury

Eye Ctr., 370 N.C. at 5).

V. ANALYSIS

37. Avadim and Woody request that the Court dismiss the Counterclaims for

breach of contract, tortious interference with contract, tortious interference with

prospective economic advantage, fraud, violation of the UDTP Act, and violation of

the N.C. RICO Act.
A. Breach of Contract (Against Avadim)

38. Counterclaim Plaintiffs’ breach of contract claim is based on the alleged

breach by Avadim of Sections 9, 10, and 11 of the LOI. (Countercls. ¶¶ 99–123.)

39. To properly plead a breach of contract claim, the claimant must allege “(1)

[the] existence of a valid contract and (2) [a] breach of the terms of that contract.”

Poor v. Hill, 138 N.C. App. 19, 26 (2000) (citing Jackson v. Cal. Hardwood Co., 120

N.C. App. 870, 871 (1995)). Where each of these elements are alleged, “it is error to

dismiss a breach of contract claim under Rule 12(b)(6).” Woolard v. Davenport, 166

N.C. App. 129, 134 (2004).

40. Under North Carolina law, “a valid contract requires (1) assent; (2)

mutuality of obligation; and (3) definite terms.” Charlotte Motor Speedway, LLC v.

Cty. of Cabarrus, 230 N.C. App. 1, 7 (2013) (citing Schlieper, 195 N.C. App. at 261);

see also Elks v. N. State Ins. Co., 159 N.C. 619, 624 (1912) (“There is no contract unless

the parties thereto assent, and they must assent to the same thing, in the same

sense.” (cleaned up)). Mutual assent is demonstrated by the parties through a

showing of a “meeting of the minds,” evincing an intent to be bound by definite terms.

Parker v. Glosson, 182 N.C. App. 229, 232 (2007) (citing Charles Holmes Mach. Co. v.

Chalkley, 143 N.C. 181, 183 (1906)).

41. “A contract to enter into a future contract[,]” such as a letter of intent, “must

specify all its material and essential terms” in order to be enforceable. Boyce v.

McMahan, 285 N.C. 730, 734 (1974) (citing Croom v. Lumber Co., 182 N.C. 217, 220

(1921)).
42. Here, Avadim argues that the LOI lacks all material and essential terms.

(Mem. Supp. 8.) Taking the allegations of the counterclaims as true, however, the

Court disagrees. Counterclaim Plaintiffs have properly pleaded a breach of contract

claim sufficient to withstand Avadim’s Motion.

43. First, Counterclaim Plaintiffs have alleged sufficient facts to support the

existence of a valid contract between the parties. (See Countercls. ¶¶ 98–123.)

44. The parties agreed in a second amendment to the LOI in April 2020 that

the LOI became effective on 20 March 2020. (Countercls. ¶ 18.) According to

Counterclaim Plaintiffs, the LOI, which became effective as of March 2020, specified

the following terms of the agreement: the purchase price; the markets being

purchased; the Avadim products CHG would exclusively distribute and market; the

product pricing; exclusivity of required sales thresholds; and the duration.

(Countercls. ¶ 112.)

45. Counterclaim Plaintiffs further allege that, by July 2020, any loose ends

that may have been remaining as to the terms of the LOI were tied up, the parties

had agreed in concept to all material terms and could have proceeded to complete the

transaction, and that the remaining drafting issues had been resolved by the parties

and Avadim did not identify any condition that Daybreak or CHG was unable to

satisfy nor any material term needing resolution. (Countercls. ¶ 47.)

46. Additional events and circumstances surrounding the execution and the

signing of the LOI support Counterclaim Plaintiffs’ claim that the parties intended

to be bound by the LOI in working towards a final transaction. See JDH Capital,
LLC v. Flowers, 2009 NCBC LEXIS 8, at **15 (N.C. Super. Ct. Mar. 13, 2009)

(considering the circumstances surrounding the execution of the letter of intent

involved in that matter to find whether it was intended by the parties to be a binding

agreement).

47. In addition to the two amendments to the LOI negotiated by Avadim and

Daybreak previously, in June 2020, the parties also entered into an interim

Distribution Agreement, which allowed CHG to begin selling Avadim’s products in

the B2B market before the ultimate sale transaction was to be completed.

(Countercls. ¶ 26.) These acts demonstrate the parties’ mutual assent to be obligated

to complete the contemplated transaction.

48. In short, viewing the allegations contained in the Counterclaims in the light

most favorable to Counterclaim Plaintiffs, the Court concludes that Counterclaim

Plaintiffs have sufficiently stated a claim for breach of contract against Avadim.

49. The Court thus denies the Motion as to the breach of contract counterclaim.

B. Tortious Interference with Contract and Tortious Interference
with Prospective Economic Advantage (Against Avadim and
Woody)

50. Counterclaim Plaintiffs bring Counterclaims against both Avadim and

Woody for tortious interference with contract, as well as tortious interference with

prospective economic advantage (collectively the “Tortious Interference

Counterclaims”). (Countercls. ¶¶ 127–58.)

51. To state a claim for tortious interference with contract, a claimant must

allege the following: “(1) a valid contract [exists] between the [claimant] and a third
person; (2) the [opponent] knows of the contract; (3) the [opponent] intentionally

induces the third person not to perform the contract; (4) [opponent] in doing so acts

without justification; [and] (5) resulting in actual damage to [claimant].” United

Labs., Inc. v. Kuykendall, 322 N.C. 643, 661 (1988) (citing Childress v. Abeles, 240

N.C. 667, 674 (1954)).

52. The difference between a tortious interference with contract claim and a

tortious interference with prospective economic advantage claim is slight. Lunsford

v. ViaOne Servs., LLC, 2020 NCBC LEXIS 111, at *13 (N.C. Super. Ct. Sept. 28,

2020).

53. A tortious interference with prospective economic advantage claim arises

when someone “induces a third party ‘not to enter a contract with’ the [claimant]

when the contract would have resulted ‘but for the interference.’ ” Id. (quoting Dalton

v. Camp, 353 N.C. 647, 654 (2001) (internal citations omitted)).

54. “In either case, the interference is actionable only if done ‘without

justification.’ ” Id. (quoting United Labs., Inc., 322 N.C. at 661).

55. Here, Counterclaim Plaintiffs allege that Avadim and Woody interfered

with CHG’s contract with BTW, by circumventing CHG and working directly with

BTW while knowing that BTW was under contract with CHG “that prohibited BTW

and its employees from working with any ‘competing Company that operates, sells,

or distributes similar [ ] Products[,]’ ” where “Products” includes the same products

subject to the LOI. (Countercls. ¶ 133.)
56. Additionally, Counterclaim Plaintiffs allege that Avadim and Woody

caused both School Health and Proklean to refrain from entering into contracts with

CHG that otherwise would have materialized but for the interference. (Countercls.

¶¶ 141–58.)

57. Avadim and Woody take aim at the Tortious Interference Counterclaims

because they argue that Counterclaim Plaintiffs have failed to demonstrate the

unjustifiable nature of the interferences alleged (element number four delineated

above). 3 (Mem. Supp. 9–12.) Specifically, Avadim and Woody argue that

Counterclaim Plaintiffs have not alleged facts sufficient to show that Avadim and

Woody acted with the requisite malice. (Mem. Supp. 9–12.) The Court disagrees.

58. “A motion to dismiss a claim of tortious interference is properly granted

where the complaint shows the interference was justified[.]” Pinewood Homes, Inc.

v. Harris, 184 N.C. App. 597, 605 (2007) (citing Peoples Sec. Life Ins. Co. v. Hooks,

322 N.C. 216, 220 (1988)). “The interference is ‘without justification’ if the

defendants’ motives . . . were ‘not reasonably related to the protection of a legitimate

business interest’ of the defendant.” Privette v. Univ. North Carolina, 96 N.C. App.

124, 134 (1989) (quoting Smith v. Ford Motor Co., 289 N.C. 71, 94 (1976)).

59. “Accordingly, . . . the complaint must admit of no motive for interference

other than malice.” Id. at 134–35; see also Sides v. Duke Univ., 74 N.C. App. 331, 346

3 Because Avadim and Woody attack only element number four (regarding justification for

interference), the Court addresses only that issue here, and will not address whether
Counterclaim Plaintiffs have established the other elements of tortious interference.
(1985). “General allegations of malice are insufficient as a matter of pleading.”

Pinewood Homes, Inc., 184 N.C. App. at 605.

60. The malice required to sustain a tortious interference claim is legal, not

actual, malice. Childress, 240 N.C. at 675. Legal malice “denotes the intentional

doing of the harmful act without legal justification.” Id. Not only must the complaint

“admit of no motive for interference other than malice,” but it must also provide “a

factual basis to support the claim of malice.” Pinewood Homes, Inc., 184 N.C. App. at

605.

61. First, Avadim and Woody argue that the Counterclaim allegations stating

that Avadim and Woody “had no motive for their interference other than malice,”

(Countercls. ¶¶ 139, 150, 156), are conclusory. Therefore, Avadim and Woody argue

that those allegations need not be determinative in the outcome on a motion to

dismiss. (Mem. Supp. 9–12.)

62. However, Counterclaim Plaintiffs also allege, among other things, that

“Avadim had elected to abandon th[e B2B market] and terminate its employees” who

were working on fostering the B2B portion of Avadim’s business before the alleged

interference. (Countercls. ¶ 37.) Counterclaim Plaintiffs allege that it was not until

Avadim and Woody recognized that the B2B market would indeed be a profitable

venture for CHG that they “abruptly performed an about-face,” “secretly decided to

stop negotiating in good faith to close the LOI Transaction,” and “exhorted CHG to

continue its efforts” all the while knowingly “pursuing the exact B2B business and
specific customers and distributors that CHG developed[.]” (Countercls. ¶¶ 38–39,

54–55.)

63. These factual allegations are sufficient to survive a motion to dismiss.

Compare Pinewood Homes, Inc., 184 N.C. App. at 605–07 (reversing the grant of a

motion to dismiss on the tortious interference claim where the claimants had alleged

several allegations tending to support the assertion of malice), with Plasman v. Decca

Furnit. (USA), Inc., 2016 NCBC LEXIS 80, **42–43 (N.C. Super. Ct. Oct. 21, 2016)

(dismissing the tortious interference claims where the complaint contained no further

allegations that defendants acted with legal malice other than to simply state that

the actions were “maliciously intended”), and Charah, LLC v. Sequoia Servs., LLC,

2020 NCBC LEXIS 52, at *13–18 (N.C. Super. Ct. Apr. 17, 2020) (dismissing the

tortious interference claim where the claimant stated in conclusory fashion that the

actions were “malicious, willful, intentional, [ ] without justification[,] . . . [and]

beyond the bounds of normal competitive behavior[,]” but did not plead any facts

supporting those claims).

64. Second, Avadim and Woody argue that the Counterclaim Plaintiffs have

affirmatively alleged in the Counterclaims that Avadim and Woody were justified in

their interferences (if any), and therefore the Tortious Interference Counterclaims

must be dismissed. (Mem. Supp. 9–12.)

65. The Court readily admits that “ ‘North Carolina’s case law paints a less-

than-clear picture’ when it comes to distinguishing between justified and unjustified

interference with contract.” Lenders Funding, LLC v. Waim Mgmt. Co., 2018 NCBC
LEXIS 67, at *5 (N.C. Super. Ct. July 6, 2018) (quoting K&M Collision, LLC v. N.C.

Farm Bureau Mut. Ins. Co., 2017 NCBC LEXIS 109, at *21 (N.C. Super. Ct. Nov. 21,

2017)). Because of this, North Carolina appellate courts have allowed for a case-by-

case determination, by defining justification loosely as “just, lawful excuse” for the

alleged interference. Id. (quoting Childress, 240 N.C. at 675).

66. “Separating lawful from unlawful excuses depends on the nature of the

underlying contract, the relationship between the relevant actors, and societal

interests in permitting or deterring the conduct.” Id. at *5–6 (citing Peoples Sec. Life

Ins. Co., 322 N.C. at 221).

67. There is a “general principle that interference may be justified when the

[claimant] and [opponent] are competitors.” Peoples Sec. Life Ins. Co., 322 N.C. at

222 (citing Childress, 240 N.C. at 667). When “defendant is acting for a legitimate

business purpose, his actions are privileged. . . . [C]ompetition in business constitutes

justifiable interference in another’s business relations and is not actionable so long

as it is carried on in furtherance of one’s own interests and by means that are lawful.”

Id. at 221.

68. Here, Counterclaim Plaintiffs and Avadim and Woody were not competitors

at all, according to the Counterclaims. In fact, Avadim had opted to exit the B2B

market entirely and in turn work to transfer that portion of its business to

Counterclaim Plaintiffs. (Countercls. ¶¶ 37, 103.) Counterclaim Plaintiffs’ entire

claim is premised on the fact that Avadim was not to be CHG’s competitor but rather
its champion and supplier in pursuing the B2B business that Avadim was

abandoning.

69. In Lenders, the Court denied the motion to dismiss a tortious interference

claim because there were allegations sufficient to show that the alleged interferer

acted without justification. 2018 NCBC LEXIS 67, at *5–8. Similarly, here, the

nature of the LOI, the relationship between Avadim, Woody, CHG and Daybreak, and

the societal interests in deterring the type of conduct alleged in the Counterclaims all

weigh in favor of allowing the Tortious Interference Counterclaims to move forward.

70. Additionally, Counterclaim Plaintiffs’ allegations forming the basis of their

fraud counterclaim—which counterclaim survives this Motion also (see infra)—tend

to support accusations of malice and lack of legal justification as well. Cf. Window

Gang Ventures, Corp. v. Salinas, 2019 NCBC LEXIS 24, at *37 (N.C. Super. Ct. Apr.

2, 2019) (“Because [the] tortious interference claims rest upon allegations based in

fraud, the Court concludes that the economic loss rule does not bar [the] tortious

interference claims as pleaded here.”) Even if the parties are competitors, arguably

unfair competition furthered by fraud is not justified.

71. Because Counterclaim Plaintiffs have alleged facts sufficient to support a

showing of malice, and the Counterclaims do not affirmatively demonstrate that

Avadim and Woody were justified in their interferences, the Court denies the Motion

as to the Tortious Interference Counterclaims.
C. Fraud (Against Avadim and Woody)

72. Avadim and Woody also seek dismissal of the common law fraud claim pled

against them by Counterclaim Plaintiffs.

73. Counterclaim Plaintiffs must allege the five essential elements of a fraud

claim: “(1) [f]alse 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.” Rowan Cty. Bd. Educ. v. U.S.

Gypsum Co., 332 N.C. 1, 17 (1992) (quoting Terry v. Terry, 302 N.C. 77, 83 (1981))

(cleaned up).

74. First, Avadim and Woody seek dismissal of the fraud claim on the theory

that, “[a]n unfulfilled promise is not actionable fraud, unless the promisor had no

intention of carrying it out at the time of the promise.” (Mem. Supp. 12–13 (citing

McKinnon v. CV Indus., 213 N.C. App. 328, 339 (2011)).)

75. This is unpersuasive. Some of the alleged fraudulent statements are not

mere “unfulfilled promises” at all but are rather alleged affirmative misstatements of

then-existing fact. For instance, Counterclaim Plaintiffs allege that “Woody told

Tebol, Harkey, and Payne during a telephone call held on or around April 1, 2020,

that the deal reflected in the LOI had the express support of Avadim’s Board of

Directors and Hayfin”; however, Counterclaim Plaintiffs also allege that, “[m]onths

after the LOI was signed, neither the entire Board of Directors nor Hayfin had been

informed about the LOI and the Transaction.” (Countercls. ¶¶ 61, 160(a).) These

allegations, taken together, allege an affirmative misstatement of then-existing fact.
They do not allege an “unfulfilled promise,” and therefore, the argument set forth by

Avadim and Woody for dismissal of the fraud counterclaim is inapplicable.

76. Second, though they cite no caselaw to support this theory, Avadim and

Woody move to dismiss the fraud counterclaim on the additional theory that

Counterclaim Plaintiffs have failed to properly allege damages as a result of their

reliance on the alleged fraudulent assertions. (Mem. Supp. 12–13.) Avadim and

Woody rest this argument on the premise that any alleged damages would have

nevertheless been incurred in the operation of CHG’s new business, even despite

Avadim and Woody’s statements and actions, and thus no damages were sustained

by any such alleged fraud. (Mem. Supp. 12–13.)

77. Counterclaim Plaintiffs allege that they “retained employees, dedicated

time and resources to CHG, and developed a B2B market potentially worth hundreds

of millions of dollars that Avadim has now deprived them of[,]” and that “Avadim has

disrupted and sought to obtain for itself hundreds of millions of dollars of sales and

potential sales to B2B customers that CHG procured[,] . . . . [and] already secured for

itself millions of dollars in orders that CHG developed and quoted.” (Countercls.

¶¶ 93, 163.)

78. Counterclaim Plaintiffs have not affirmatively alleged that they would have

proceeded in the same manner in developing CHG even despite the alleged fraudulent

assertions made by Avadim and Woody. The Court need not engage at this stage of

the proceeding in an exercise to assume how Counterclaim Plaintiffs might have

proceeded with the development of CHG in the absence of the alleged fraudulent
assertions. Avadim and Woody have provided no supporting caselaw—and the Court

has discovered none—that would allow the Court to draw the conclusion that it must

disregard alleged damages based on the idea that Counterclaim Plaintiffs would have

proceeded in the same manner in the absence of the fraudulent assertions, especially

where, as here, Counterclaim Plaintiffs have alleged that they reasonably relied on

the statements to their detriment.

79. Because the Counterclaims allege misrepresentations of then-existing

material facts, and Counterclaim Plaintiffs have sufficiently set out that they

reasonably relied on the false statements and were damaged by these alleged

fraudulent assertions, Avadim and Woody’s arguments for dismissal of the fraud

counterclaim must fail and the Court hereby denies the Motion as to this claim.

D. North Carolina Unfair and Deceptive Trade Practices Act (Against

Avadim and Woody)

80. Counterclaim Plaintiffs also assert a claim against both Avadim and Woody

for violation of the UDTP Act, which Avadim and Woody seek to have the Court

dismiss.

81. North Carolina has created a private right of action under Chapter 75 as

part of its effort to protect consumers from unfair or deceptive trade practices. See

N.C.G.S. § 75-1.1 (outlawing unfair and deceptive trade practices) and N.C.G.S. § 75-

16 (creating a private right of action and authorizing treble damages). The three

prima facie elements of a UDTP Act claim are: (1) an unfair or deceptive trade

practice; (2) in or affecting commerce; and (3) proximately causing actual injury.
Mitchell v. Linville, 148 N.C. App. 71, 73–74 (2001) (citing Spartan Leasing, Inc. v.

Pollard, 101 N.C. App. 450, 460–61 (1991)).

82. While it is correct that a mere breach of contract cannot be the basis for a

UDTP Act claim, this Court has held that claims for tortious interference with

contract may form the basis of a UDTP Act claim. Southern Fastening Sys. v. Grabber

Constr. Prods., 2015 NCBC LEXIS 42, at *28–29 (N.C. Super. Ct. Apr. 28, 2015)

(“[O]ur courts have long recognized that claims for . . . tortious interference with

contract may form the basis of a UDTP [Act] claim[.] Because the Court has concluded

that [the] claim[ ] for . . . tortious interference should survive [the] Motion to Dismiss,

so should [the] claim for UDTP[.]”); see also United Labs., Inc., 322 N.C. at 665.

83. Here, the Tortious Interference Counterclaims have survived the Motion,

as discussed above, and the Tortious Interference Counterclaims that have survived

the Motion may form the basis for the UDTP Act counterclaim.

84. Additionally, “[t]he case law applying Chapter 75 holds that a plaintiff who

proves fraud thereby establishes that unfair or deceptive acts have occurred.” Bhatti,

328 N.C. at 243; see also Hardy v. Toler, 288 N.C. 303, 309 (1975) (“[p]roof of fraud

would necessarily constitute a violation of the prohibition against unfair and

deceptive acts”), and Tai Sports, Inc. v. Hall, 2012 NCBC LEXIS 64, at **55 (N.C.

Super. Ct. Dec. 28, 2012) (Bhatti held “that fraud constitutes a per se violation of the

UDTP” Act).

85. Here, the Fraud Counterclaim has survived the Motion as well, and may

further form the basis for the UDTP Act counterclaim.
86. Therefore, the Motion is also denied as to the UDTP Act counterclaim.

E. North Carolina Racketeer Influenced and Corrupt Organizations
Act (Against Avadim and Woody)

87. Finally, Counterclaim Plaintiffs assert a claim against both Avadim and

Woody for violations of the N.C. RICO Act, which Avadim and Woody seek to have

dismissed.

88. The N.C. RICO Act prohibits persons from engaging in a pattern of

racketeering activity or conducting or participating in an enterprise through a

pattern of racketeering activity. N.C.G.S. § 75D-4(a). A “pattern of racketeering

activity” is defined under North Carolina law as “at least two incidents of

racketeering activity [with] the same or similar purposes, results, accomplices,

victims, or methods[,]” within a four-year period. N.C.G.S. § 75D-3(b).

89. To properly state a claim under the N.C. RICO Act:

(1) an “innocent person” must allege (2) an injury or damage to his
business or property (3) by reason of two or more acts of organized
unlawful activity or conduct, (4) one of which is something other than
mail fraud, [or] wire fraud . . . (5) that resulted in pecuniary gain to the
defendant[s].

Gilmore v. Gilmore, 229 N.C. App. 347, 356 (2013) (quoting In re Bostic Constr., Inc.,

435 B.R. 46, 68 (Bankr. M.D.N.C. 2010)).

90. “Racketeering activity” is defined by N.C.G.S. §75D-3(c)(1) as, “to commit,

to attempt to commit, or to solicit, coerce, or intimidate another person to commit an

act or acts which would be chargeable by indictment if such act or acts were

accompanied by the necessary mens rea or criminal intent[.]” Section 75D-3(c)(1)

enumerates specific North Carolina statutory provisions, the violation of which will
serve as a predicate action to support a N.C. RICO Act claim. “ ‘Racketeering activity’

also includes the description in Title 18, United States Code, Section 1961(1).”

N.C.G.S. § 75D-3(c)(2).

91. “It is not the intent of the General Assembly that [the N.C. RICO Act] apply

to isolated and unrelated incidents of unlawful conduct but only to an interrelated

pattern of organized unlawful activity, the purpose or effect of which is to derive

pecuniary gain.” N.C.G.S. § 75D-2(c).

92. Counterclaim Plaintiffs allege that Avadim and Woody violated the N.C.

RICO Act by: (1) engaging in wire fraud by using email and text messages to send a

variety of fraudulent statements, (Countercls. ¶¶ 160–63, 179–80); (2) obtaining

property by false pretenses by siphoning the B2B sales network, development plans

and business model developed by Counterclaim Plaintiffs, (Countercls. ¶¶ 182–83);

and (3) obtaining Daybreak’s signature on the interim Distribution Agreement by

false pretenses by falsely asserting that Avadim and Woody intended to complete the

transaction contemplated by the LOI, (Countercls. ¶¶ 184–88).

93. Counterclaim Plaintiffs further allege that all these activities occurred

within a four-year period, and that all these incidents have a same or similar purpose,

result, accomplices, victims, or methods of commission or otherwise are interrelated

by distinguishing characteristics. (Countercls. ¶¶ 194–95.) Counterclaim Plaintiffs

also contend that they were injured by these practices and that Avadim and Woody

received pecuniary gain from these activities. (Countercls. ¶¶ 189–90.)
94. The Counterclaims further allege other instances of misconduct whereby

Avadim “misappropriate[d]” business or otherwise did not pay for services that were

rendered to it. (Countercls. ¶¶ 192–93.)

95. Our appellate courts have made clear that the N.C. RICO Act is intended

to reach allegations of “organized crime” rather than the type of conduct that is

alleged by Counterclaim Plaintiffs here. “The RICO statute was enacted in 1986 to

remedy the problem of increasing organized crime.” State ex rel. Thornburg v. Lot &

Bldgs. at 800 Waughtown St., 107 N.C. App. 559, 562 (1992) (discussing criminal

gambling charges as predicate racketeering activity).

96. The allegations contained in the Counterclaims here closely resemble those

in Campbell v. Bowman, where the North Carolina Court of Appeals held that “[t]he

General Assembly did not intend that an investor’s claim to recoup money lost

through a failed financial venture with no larger criminal scope could be the basis of

a RICO claim, [and] . . . [that] conduct is not within the scope of the [N.C.] RICO Act.”

COA05-16, 2005 N.C. App. LEXIS 2444, at *15 (Nov. 15, 2005) (unpublished).

97. Because the Counterclaims allegations do not sufficiently support a claim

under the N.C. RICO Act, the Court grants the Motion as to the N.C. RICO Act

counterclaim.

VI. CONCLUSION

98. For the foregoing reasons, the Court hereby GRANTS IN PART AND

DENIES IN PART the Motion as follows:
a. The motion to dismiss the breach of contract counterclaim is DENIED;

b. The motion to dismiss the tortious interference with contract and

prospective economic advantage counterclaims is DENIED;

c. The motion to dismiss the fraud counterclaim is DENIED;

d. The motion to dismiss the UDTP Act counterclaim is DENIED; and

e. The motion to dismiss the civil N.C. RICO Act counterclaim is GRANTED.

SO ORDERED, this the 30th day of November, 2021.

/s/ Michael L. Robinson
Michael L. Robinson
Special Superior Court Judge
for Complex Business Cases