Dunn Holdings I, Inc. v. Confluent Health LLC

Dunn Holdings I, Inc. v. Confluent Health LLC, 2018 NCBC 89.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF WAKE 17 CVS 9321

DUNN HOLDINGS I, INC.
(previously DUNN PHYSICAL
THERAPY, INC.), a North Carolina
corporation, Individually and
Derivatively on behalf of
BREAKTHROUGH CARY PT, LLC;
CHRISTOPHER F. DUNN; and ORDER AND OPINION ON
THERESA M. DUNN, DEFENDANTS’ MOTION TO DISMISS
Plaintiffs, SECOND AMENDED COMPLAINT

v.

CONFLUENT HEALTH LLC, a
Delaware limited liability company;
LAURENCE N. BENZ, Manager of
Breakthrough Cary PT, LLC;
BREAKTHROUGH CARY PT, LLC,
a North Carolina limited liability
company; MARK F. WHEELER;
JEFFREY HATHAWAY; and
BREAKTHROUGH PHYSICAL
THERAPY, INC.,

Defendants.

THIS MATTER comes before the Court on Defendants Confluent Health LLC;

Laurence N. Benz; Breakthrough Cary PT, LLC; Mark F. Wheeler; Jeffrey Hathaway;

and Breakthrough Physical Therapy, Inc.’s (collectively, “Defendants”) Motion to

Dismiss (“Motion”; ECF No. 48).

THE COURT, having considered the Motion, the briefs in support of and in

opposition to the Motion, the exhibits attached to the Second Amended Complaint

and the briefs, the arguments of counsel at the hearing, and other appropriate

matters of record, concludes that the Motion should be GRANTED, in part, and

DENIED, in part, for the reasons set forth below.
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, by J.
Mitchell Armbruster for Plaintiffs Dunn Holdings I, Inc.; Christopher
Dunn; and Theresa Dunn.

Stites & Harbison PLLC, by Chadwick A. McTighe (pro hac vice) and
Timothy D. Thompson (pro hac vice), and Robinson, Bradshaw &
Hinson, P.A., by Edward F. Hennessey, IV for Defendants Confluent
Health LLC; Laurence N. Benz; Breakthrough Cary PT, LLC; Mark F.
Wheeler; Jeffrey Hathaway; and Breakthrough Physical Therapy, Inc.

McGuire, Judge.

FACTS AND PROCEDURAL BACKGROUND

1. The Court does not make findings of fact on motions to dismiss under

Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. N.C.G.S. § 1A-1, Rule

12(b)(6) (hereinafter, the North Carolina Rules of Civil Procedure will be referred to

as “Rule(s)”). The Court only recites those facts included in the Second Amended

Complaint that are relevant to the Court’s determination of the Motion. See, e.g.,

Concrete Serv. Corp. v. Inv’rs Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758

(1986).

2. In 1998, Christopher Dunn (“Christopher”) and Theresa Dunn

(“Theresa”) (collectively, “the Dunns”) founded Dunn Physical Therapy, Inc., which

later became Dunn Holdings I, Inc. (Dunn Physical Therapy, Inc., and Dunn Holdings

I, Inc. are collectively referred to as “Dunn PT”). (2d Am. Compl., ECF No. 36.2, at

¶ 1.) Dunn PT operated four physical therapy offices in Wake County, North

Carolina. (Id. at ¶ 26.)
3. Laurence N. Benz (“Benz”) owned PT Development, LLC, which itself

owned several physical therapy practices in North Carolina and across the country.

(Id. at ¶¶ 14, 28.)

4. Mark D. Wheeler and Jeffrey Hathaway (“Hathaway”) are former

members of PT Development, LLC. (Id. at ¶¶ 17, 18.)

A. The Sales Transaction and financing of the sale

5. In 2014, the Dunns began to negotiate with Benz about Benz purchasing

a majority interest in Dunn PT. Benz told the Dunns that PT Development, LLC’s

business model is to buy a majority stake in successful physical therapy practices but

allow the original founders to continue to manage the practices with the support and

experience of PT Development, LLC. (Id. at ¶ 24.) Benz also explained that PT

Development, LLC provided all administrative services for a competitive fee, such

that overall expenses would be reduced because multiple practices would be sharing

expenses and realizing economies of scale. (Id. at ¶ 25.)

6. In June 2014, the Dunns sold 80% of Dunn PT to a Kentucky limited

liability company established by Benz called PT Development Cary, LLC (“PTD

Cary”). Benz also created a Kentucky limited liability company called Breakthrough

Cary PT, LLC (“Breakthrough Cary”) and contributed the 80% interest in Dunn PT

to Breakthrough Cary. The Dunns then contributed their remaining 20% of Dunn

PT to Breakthrough Cary (the sale of Dunn PT’s interest and the contribution of its

remaining 20% interest to Breakthrough Cary hereinafter is referred to as the “Sales

Transaction”). Consequently, after the transaction was completed, PTD Cary and
Dunn PT were the two members of Breakthrough Cary, with PTD Cary owning an

80% interest and Dunn PT owning a 20% interest. (Id. at ¶¶ 29–30.) On June 2,

2014, PTD Cary and Dunn PT executed an Operating Agreement for Breakthrough

Cary (“Operating Agreement”). (ECF No. 50.1.) The Operating Agreement named

Benz as the manager of Breakthrough Cary.

7. Benz financed a portion of the purchase price paid to the Dunns through

a Seller Note payable from Breakthrough Cary to Dunn PT (the “Acquisition Debt”).

(Id. at ¶ 33.) The Dunns expressed concern that the Acquisition Debt would be paid

back directly out of Breakthrough Cary’s profits, meaning that 20% of the debt would

be paid by the Dunns, and told Benz that they did not want “to be in the position of

‘paying themselves.’” (Id. at ¶¶ 33–35.) Benz assured the Dunns that the debt would

be paid “‘below the line’ and, accordingly, would not have any effect on their

distributions or the value of their interest in [Breakthrough Cary].” (Id. at ¶ 36.)

Based on Benz’s assurances, the Dunns agreed to go forward with the sale. (Id.)

However, Plaintiffs allege that Benz ultimately did not pay the debt “below the line,”

but instead used Dunn PT’s share of Breakthrough Cary’s profits to repay the

Acquisition Debt. (Id. at ¶ 4.)

B. Failure to make distributions and the Distribution Agreement

8. During negotiation of the Sales Transaction, the Dunns sought

assurances from Benz that they would receive regular distributions from

Breakthrough Cary. (Id. at ¶¶ 41, 43.) The Operating Agreement gave Benz, as

manager, the discretion to make distributions once Breakthrough Cary had cash
reserves of 1.5 times the company’s monthly expenses. (Id. at ¶ 42.) Benz “assured

the Dunns that he planned to make regular distributions once the cash reserve

threshold was met” and that they “could expect to start receiving distributions in or

around the sixth month following the closing of the sale.” (Id. at ¶¶ 44–45.) Plaintiffs

allege that because the Acquisition Debt was paid out of Breakthrough Cary’s profits

and not “below the line,” the company never met the cash reserve requirements and

never paid distributions. (Id. at ¶ 46.)

9. In July 2016, in response to the Dunns’ complaints about the lack of

distributions, Hathaway sent an email to Christopher memorializing an agreement

(the “Distribution Agreement”) under which Christopher would receive quarterly

distributions from Breakthrough Cary. (ECF No. 36.2, Ex. B.) The email stated as

follows:

You had asked me to put in writing the mechanics or
agreement on your distribution from BreakThrough
Cary. Below is an outline – pretty simple! Christopher
Dunn Distribution Agreement: Starting in Q2 2016
Distributions from BreakThrough Cary will be as
follows: 1. At the end of each quarter the EBIDTA after
OHA will be calculated taking out the debt costs (interest,
etc.) from the sale of Dunn PT to BT Cary. 2. Assuming
there are no losses to be made up from the previous
quarters (initially starting with Q1 2016) then 20% of the
net profits will be paid to Christopher Dunn[.]

Let me know if you have any concerns or questions.

Jeff
Jeffrey W. Hathaway, PT, DPT
Proactive/Breakthrough PT/Confluent Health

(Id.)
10. Breakthrough Cary subsequently paid the Dunns distributions for the

second and third quarters of 2016 but did not make any further distributions. (ECF

No. 36.2, at ¶ 51.)

C. The Roll-up Transaction and Dunn PT’s “Tag-along Rights”

11. In October 2014, PTD Cary notified the Dunns that PTD Cary intended

to participate in a reorganization, whereby PTD Cary’s 80% ownership interest in

Breakthrough Cary would be transferred to Confluent Health, LLC (“Confluent”), an

entity that Benz substantially owns. (Id. at ¶ 91.) In exchange, the owners of PTD

Cary would receive ownership interests in Confluent (hereinafter the “Roll-up

Transaction”). (Id.)

12. Plaintiffs allege that under Breakthrough Cary’s Operating Agreement,

Dunn PT also had the right to participate in the Roll-up Transaction (the “Tag-along

Rights”). (Id. at ¶¶ 91–96.) The Operating Agreement provides that:

If [the Seller] proposes to transfer in a sale . . . Membership
Interests representing fifty percent (50%) or more of the
then outstanding Membership Interests of the
Company . . . then the other Members (collectively, the
‘Tag-Along Sellers’) shall have the right . . . to require the
proposed purchaser(s) to purchase from such Tag-Along
Sellers their Membership Interest(s) . . . at the same price
per unit and upon the same terms as offered by the
[purchaser(s)].

(ECF No. 50.1, at § 18.1.) Dunn PT’s Tag-along Rights as the Tag-Along Sellers were

triggered under the Operating Agreement when the Seller (PTD Cary) sought to

transfer its 80% interest in Breakthrough Cary to Confluent.
13. The Dunns notified Benz that Dunn PT wished to sell its interest in

Breakthrough Cary to Confluent pursuant to the Tag-along Rights. Benz eventually

agreed to offer Dunn PT a right to participate in the Roll-up Transaction, but only to

transfer 50% of its membership in Breakthrough Cary to Confluent, and in a manner

that Plaintiffs allege “deeply devalued” Dunn PT’s interest in Breakthrough Cary.

(Id. at ¶¶ 94–96.) Dunn PT did not accept the offer. Nevertheless, on December 22,

2014, Dunn PT executed an “Acknowledgment and Consent” authorizing PTD Cary

to distribute its membership interests to Benz, Hathaway, and Wheeler, and the

contribution of their membership interests to Confluent. (“Acknowledgment and

Consent,” ECF No. 50.6.)

14. Following the Roll-up Transaction, Confluent became an 80% owner of

Breakthrough Cary.

D. Management Services Agreement and improper expenses charged to
Breakthrough Cary

15. Contemporaneously with the Sales Transaction, “Benz, on behalf of both

PT Development and Breakthrough Cary, executed a Management Services

Agreement pursuant to which PT Development was to provide certain administrative

and management services to Breakthrough Cary, including without limitation,

certain accounting, billing, collections, marketing, and human resources services in

exchange for a monthly management fee equal to 7% of the Company’s gross

collections.” (ECF No. 36.2, at ¶ 56.)
16. Plaintiffs allege that despite their complaints, Benz and Confluent have

regularly charged Breakthrough Cary for expenses that are not Breakthrough Cary’s

responsibility and should not have been charged to the company. (Id. at ¶¶ 57–80.)

E. Interference with Christopher’s management of Breakthrough Cary

17. As part of the Sales Transaction, Christopher executed an employment

agreement with Breakthrough Physical Therapy, Inc. (“Employment Agreement”).

(Id. at ¶ 160; Empl. Agreement, ECF No. 50.5.) Under Article 14 of the Operating

Agreement, Benz, as manager, is to manage the business and affairs of the Company.

(ECF No. 36.2, at ¶ 158.) Although Benz served as manager of Breakthrough Cary,

Benz promised that Christopher would continue to manage the day-to-day operations

of the physical therapy practice and delegated to Christopher those management

responsibilities. (Id. at ¶¶ 32, 160.) Despite Benz’s promise, however, Hathaway

began “assert[ing] himself more and more directly” into the management of

Breakthrough Cary to “usurp Christopher’s day to day management responsibilities

and authority.” (Id. at ¶¶ 82, 84.) Hathaway changed the name of Breakthrough

Cary’s locations from “Dunn Physical Therapy” to “Breakthrough Physical Therapy,”

and in July 2017, Hathaway informed Christopher that he had been the CEO of

Breakthrough Cary since 2015. (Id. at ¶¶ 88, 90.)

F. The Non-compete Agreements

18. In conjunction with the Sales Transaction, Breakthrough Cary entered

into Noncompetition, Nonsolicitation, and Nondisclosure Agreements with

Christopher and Theresa (the “Non-compete Agreements”). (Id. at ¶¶ 164–75; ECF
Nos. 50.3 and 50.4.) The Non-compete Agreements restrict Christopher and Theresa

from having any relationship whatsoever with a physical therapy business for a

period of five years following execution of the agreements and in a territory

encompassing a 25 mile radius around Breakthrough Cary’s office locations. (ECF

No. 36.2, at ¶¶ 168–69.) The Employment Agreement also contains a non-compete

provision placing similar restrictions on Christopher. (Id. at ¶ 165.) Plaintiffs now

allege that the restrictions are overbroad and unenforceable.

G. Procedural history

19. Plaintiffs filed their first Complaint in this matter on July 28, 2017.

(ECF No. 3.) Plaintiffs subsequently filed an Amended Complaint on November 6,

2017. (ECF No. 7.) Defendants moved to dismiss the Amended Complaint on

December 1, 2017 (ECF No. 16), and the motion became ripe on January 11, 2018.

(ECF No. 45.)

20. On December 22, 2017, Plaintiffs filed a Motion to Amend Complaint.

(ECF No. 36.) The Court granted the Motion to Amend Complaint on January 30,

2018 and deemed the Second Amended Complaint to have been filed and served upon

Defendants on January 30, 2018. (ECF No. 47.) The Second Amended Complaint

alleges claims for: breaches of contract; breach of fiduciary duty; judicial dissolution;

appointment of a receiver; declaratory judgment declaring the Non-compete

Agreements invalid; unfair and deceptive trade practices; constructive fraud; and

fraud. (ECF No. 36.2, at ¶¶ 127–98.)
21. On March 1, 2018, Defendants filed the Motion. (ECF No. 48.)

Defendants move to dismiss under Rules 12(b)(1) and 12(b)(6). (Id.) On March 26,

2018, Plaintiffs filed a response to the Motion (ECF No. 52), and Defendants filed

their reply on April 9, 2018 (ECF No. 54). The Court subsequently held a hearing on

the Motion. During the hearing, the Court directed the parties to file supplemental

briefing on the issue of whether Plaintiffs adequately alleged that Confluent is a

successor to PTD Cary for purposes of imposing liability on Confluent. The parties

subsequently filed the supplemental briefs. (Defs.’ Suppl. Br., ECF No. 57; Pls.’

Suppl. Br., ECF No. 58.) The Motion is now ripe for resolution.

ANALYSIS

A. Standards of review

22. Dismissal under Rule 12(b)(1) is proper “[i]f a party does not have

standing to bring a claim [because] a court has no subject matter jurisdiction to hear

the claim.” Estate of Apple v. Commercial Courier Express, Inc., 168 N.C. App. 175,

177, 607 S.E.2d 14, 16 (2005). When considering a motion to dismiss for lack of

standing, the Court must “view the allegations as true and the supporting record in

the light most favorable to the non-moving party.” Mangum v. Raleigh Bd. of

Adjustment, 362 N.C. 640, 644, 669 S.E.2d 279, 283 (2008).

23. The burden is on the party invoking jurisdiction to establish standing.

Marriot v. Chatham Cty., 187 N.C. App. 491, 494, 654 S.E.2d 13, 16 (2007). The Court

will only grant a Rule 12(b)(1) motion “if the material jurisdictional facts are not in

dispute and the moving party is entitled to a judgment as a matter of law.” Wilkie v.
Stanley, 2011 NCBC LEXIS 11, *10 (N.C. Super. Ct. Apr. 20, 2011) (citing Southstar

Funding, L.L.C. v. Warren, Perry & Anthony, P.L.L.C., 445 F. Supp. 2d 583, 584

(E.D.N.C. 2006)).

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

inquiry is “whether, as a matter of law, the allegations of the [C]omplaint, 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, 85 N.C.

App. 669, 670, 355 S.E.2d 838, 840 (1987). North Carolina is a notice pleading state.

See, e.g., Feltman v. City of Wilson, 238 N.C. App. 246, 252, 767 S.E.2d 615, 620 (2014)

(quoting Wake Cty. v. Hotels.com, L.P., 235 N.C. App. 633, 646, 762 S.E.2d 477, 486

(2014)). “Under notice pleading, a statement of claim is adequate if it gives sufficient

notice of the claim asserted to enable the adverse party to answer and prepare for

trial, to allow for the application of the doctrine of res judicata, and to show the type

of case brought.” Id.

25. Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the

complaint on its face reveals that no law supports plaintiff’s claim; (2) when the

complaint reveals on its face the absence of fact sufficient to make a good claim; [or]

(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s

claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224 (1985). In deciding

a motion to dismiss, the Court must construe the Complaint liberally and accept all

well-pleaded allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681

S.E.2d 858, 862 (2009). The Court, however, is 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, 620 S.E.2d 873, 880 (2005) (citations and quotation

marks omitted). In addition, the Court may consider documents that are the subject

of Plaintiff’s Complaint and to which the Complaint specifically refers. Oberlin

Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001).

B. Successor liability

26. As an initial matter, Defendants argue that Plaintiffs cannot make

claims against Confluent as the successor to PTD Cary because PTD Cary is now

dissolved and Confluent is not a successor in interest to PTD Cary. (ECF No. 57, at

p. 2.) Plaintiffs, however, argue that Confluent is the legal successor in interest to

PTD Cary and that, in any event, Plaintiffs are permitted to sue former members of

a dissolved LLC under Kentucky law.1 (ECF No. 58, at pp. 4, 7.)

27. Under Kentucky law, “[i]t is generally accepted . . . that a corporation

which purchases another corporation does not assume the payment of any debts or

liabilities of the corporation which it has purchased.” Pearson v. Nat’l Feeding Sys.,

90 S.W.3d 46, 49 (Ky. 2002) (citing Am. Railway Express Co. v. Commonwealth, 228

S.W. 433, 436–37 (Ky. 1920)). However, there are four exceptions to this rule:

(1) where the purchaser expressly or impliedly agrees to
assume such debts or other liabilities; (2) where the
transaction amounts to a consolidation or merger of the
seller and purchaser; (3) where the purchasing corporation
is merely a continuation of the selling corporation; or (4)

1 PTD Cary was created under Kentucky law. (ECF No. 36.2, at ¶ 2.) The parties both make
their arguments regarding successor liability referencing Kentucky law. (ECF No. 57, at pp.
2–3; ECF No. 58, at pp. 4, 6–7.)
where the transaction is entered into fraudulently in order
to escape liability for such debts.

Id.

28. Plaintiffs have not alleged, and neither party contends, that PTD Cary

“sold” its assets to Confluent. Rather, Plaintiffs allege, and Defendants do not

dispute, that PTD Cary transferred its ownership interest to Confluent in what

Plaintiffs describe as a “roll-up.” (ECF No. 36.2, at ¶ 31.) The Acknowledgment and

Consent in which the parties consented to the transfer states that PTD Cary

“distribute[d]” its interest to the members (Benz, Hathaway, and Wheeler), and the

members “contribute[d]” the interests in PTD Cary to Confluent “in exchange for

limited liability company interests in Confluent.” (ECF 57.1, at p. 1.) The allegations

do not suggest an arms-length purchase of PTD Cary by Confluent, but rather a

restricting of PTD Cary’s ownership interest in Breakthrough Cary between close

business associates.

29. In addition, Plaintiffs expressly allege that Confluent is a “successor” to

PTD Cary’s membership interest in Breakthrough Cary. (ECF No. 36.2, at ¶¶ 13,

133.) Plaintiffs also contend that the provisions of the Operating Agreement

regarding transfers of membership interests strongly support the notion that

Confluent should be considered a successor for purposes of the claims raised in this

lawsuit. (ECF No. 58, at pp. 2–3.) Section 16.1 of the Operating Agreement, entitled

“Restrictions on Transfer,” provides in relevant part as follows:

The Transfer of an Interest pursuant to this Article 16, or
otherwise, shall not release the assigning Member from
such Member’s obligations under this Agreement unless
the transferee of such Interest is approved by the vote of
Members holding all of the Participating Percentages as a
substituted Member, and the approved assignee assumes in
writing the obligations of the assigning Member. The
approved Transfer pursuant to this paragraph 16.1 shall
confer upon the assignee the right to become a substituted
Member, in the following manner and subject to the
following conditions: . . .

(iv) Each assignee shall agree in writing to be subject to and
bound by the terms of this Agreement as if originally a party
to this Agreement.

(ECF No. 50.1, at § 16.1) (emphasis added). Plaintiffs argue that this language either

expressly or impliedly, creates successor liability obligations on Confluent as the

transferee of PTD Cary. (ECF No. 58, at pp. 2–3.)

30. Finally, Plaintiffs argue that the allegations in the Second Amended

Complaint support the conclusion that the transfer of PTD Cary’s interests to

Confluent amounted to a consolidation of merger and that Confluent’s ownership of

the interest was a mere continuation of PTD Cary’s interest. (Id. at pp. 4–5.) Indeed,

the allegations do not suggest that Breakthrough Cary’s operations changed in any

significant way after the transfer of membership interest.

31. The Court concludes that, at this early stage of the proceedings,

Plaintiffs have adequately alleged that Confluent is the successor to PTD Cary for

purposes of imposing liability on Confluent. Accordingly, the Court need not address

at this time Plaintiffs’ allegations concerning the potential individual liability of

Benz, Hathaway, and Wheeler.
C. Standing to bring direct and derivative claims

32. Plaintiffs allege that Confluent breached fiduciary duties to Dunn PT

and committed constructive fraud “by engaging in self-dealing and engaging in

financial transactions and accounting decisions which have benefited Defendants

Confluent and/or Benz to the detriment of Plaintiff Dunn PT,” (ECF No. 36.2, at

¶142), and by making misrepresentations that the acquisition debt would be kept

“below the line’ and “regarding distributions, expenses, acquisition indebtedness

treatment, and other matters.” (Id. at ¶¶ 184–85, 193.) Plaintiffs further allege that

“to the extent Dunn PT can only recover on [these] claim[s] derivatively” the claims

are “also asserted as [ ] derivative claim[s].” (Id. at ¶¶ 146, 187.) Defendants argue

that Dunn PT’s claims for breach of fiduciary duty and constructive fraud against

Confluent should be dismissed pursuant to Rule 12(b)(1) because Dunn PT lacks

standing to pursue those claims directly or derivatively on behalf of Breakthrough

Cary. Defendants contend that Dunn PT has failed to allege direct claims against

Confluent and that Dunn PT did not make a proper derivative demand that would

enable them to assert the claims derivatively. (Mem. Supp. Defs.’ Mot. Dismiss Pls.’

Second Am. Compl., ECF No. 49, at pp. 14–16.)

33. Defendants argue that the alleged actions of Confluent can only have

harmed Breakthrough Cary, “with any harm to [Dunn PT] flowing from its

membership interest in Breakthrough Cary.” (Id. at p. 14.) Any harm to Dunn

Holdings could “give rise only to claims by Breakthrough Cary, and so any possible

claim would be derivative.” (Id. at p. 6.) Plaintiffs counter that Confluent owed Dunn
PT a fiduciary duty as majority, controlling member of Breakthrough Cary, and that

Dunn PT is permitted to bring an individual action against Confluent for breaches of

that duty. (ECF No. 52, at p. 16.)

34. Under North Carolina law, a controlling member of an LLC owes a

fiduciary duty to minority members. Kaplan v. O.K. Techs., L.L.C., 196 N.C. App.

469, 473, 675 S.E.2d 133, 137 (2009); Plasman v. Decca Furniture (USA), Inc., 2016

NCBC LEXIS 80, *25–26 (N.C. Super. Ct. Oct. 21, 2016) (holding that defendant, as

a majority member of the LLC, owed a fiduciary duty to plaintiff, a minority member

of the LLC); see also Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App.

390, 405, 537 S.E.2d 248, 259 (2000) (“[M]inority shareholders in a closely held

corporation who allege wrongful conduct and corruption against the majority

shareholders in the corporation may bring an individual action against those

shareholders, in addition to maintaining a derivative action on behalf of the

corporation.”) Plaintiffs allege that Confluent had an 80% ownership interest in

Breakthrough Cary, and was “the controlling majority member of [Breakthrough

Cary].” (ECF No. 36.2, at ¶¶ 2, 118.) Therefore, Plaintiffs have alleged Confluent

owed Dunn PT a fiduciary duty, and Dunn PT may pursue its own individual claims

for breach of fiduciary duty and constructive fraud against Confluent.

35. Defendants also assert that Plaintiffs did not make a proper derivative

demand on Breakthrough Cary that would enable Dunn PT to bring its claims for

breach of fiduciary duty or constructive fraud. Since Plaintiffs plead the derivative

claims only in the alternative, and the Court already has concluded that Dunn PT
may pursue direct claims for breach of fiduciary duty and constructive fraud, the

Court need not address Defendants’ argument.

36. Defendants’ Motion to Dismiss Plaintiffs’ claims for breach of fiduciary

duty and constructive fraud should be DENIED to the extent those claims allege

direct, non-derivative claims. In addition, Plaintiffs’ claims for breach of fiduciary

duty and constructive fraud should be DISMISSED AS MOOT to the extent those

claims allege derivative claims.

D. First Claim for Relief: Breach of Contract – Tag-Along Rights

37. In their First Claim for Relief, Plaintiffs allege that Confluent breached

the Operating Agreement regarding the Tag-along Rights. Plaintiffs allege that

“[t]he Confluent Roll-up in October 2014 triggered Dunn PT’s Tag-along Rights under

the Operating Agreement, and Benz and PTD Cary (now Confluent) breached the

Operating Agreement by not allowing Dunn PT to fully participate in the Roll-up at

the fair value of their equity stake, which it would have done if permitted.” (Id. at

¶ 129.) Defendants contend that this claim should be dismissed because (a) Dunn PT

waived any breaches of the Operating Agreement by signing the Acknowledgment

and Consent allowing the transfer of PTD Cary’s interest to Confluent, (ECF No. 49,

at pp. 8–9), and (b) Plaintiffs have not alleged a breach because Dunn PT’s only

remedy for Confluent’s refusal to purchase Dunn PT’s interests was to invoke Section

18.2 of the Operating Agreement blocking PTD Cary’s transfer of its interests to

Confluent. (Id. at pp. 9–10.) Plaintiffs, on the other hand, argue that (a) the Court

cannot consider the Acknowledgment and Consent because it is not expressly
referenced in the Second Amended Complaint; (b) Defendants’ waiver argument is

not properly considered on a motion to dismiss under Rule 12(b)(6); and (c) Plaintiff

has sufficiently alleged a breach of the Tag-along Rights. (ECF No. 52, at pp. 9–13.)

38. As a preliminary matter, the Court concludes that it can properly

consider the Acknowledgment and Consent in deciding the Motion. Although

Plaintiffs do not expressly refer to the Acknowledgment and Consent in their

allegations, the Roll-up Transaction is one of the primary transactions that is the

subject of the claims in this lawsuit. Oberlin Capital, L.P., 147 N.C. App. at 60, 554

S.E.2d at 847 (the “consideration of a contract which is the subject matter of an action

does not expand the scope of a 12(b)(6) hearing and does not create justifiable surprise

in the nonmoving party.”).

39. The Court also believes that it can properly consider Defendants’ waiver

defense under the circumstances of this case. Although there is North Carolina case

law suggesting that it may not be proper to consider an affirmative defense on a

motion to dismiss under Rule 12(b)(6) motion, see Brooks Distributing Co v. Push, 91

N.C. App. 715, 723–24, 373 S.E.2d 300, 305 (Cozort, J., dissenting), rev’d per curiam

324 N.C. 326, 378 S.E.2d 31 (1989), more recent cases have permitted consideration

of statute of limitations defenses raised by motion to dismiss. Johnson v. North

Carolina DOT, 107 N.C. App. 63, 66–67, 418 S.E.2d 700, 702 (1992) (“Absent a

showing of prejudice, an affirmative defense may be raised by a Rule 12(b)(6) motion

to dismiss.”); Carlisle v. Keith, 169 N.C. App. 674, 687, 614 S.E.2d 542, 551 (2005)

(“This Court has held that a trial court may consider a statute of limitations defense,
though not raised in a motion to dismiss, when the non-movant has not been

surprised and has full opportunity to argue and present evidence on the affirmative

defense.” (citations and quotation marks omitted)). Plaintiffs do not argue that they

are prejudiced by Defendants’ waiver argument, and they cannot be surprised by a

defense based on the Acknowledgment and Consent, to which Dunn PT is a party.

Under the circumstances of this case, the Court concludes that it is appropriate to

consider Defendants’ argument that Plaintiffs waived the claim for breach of the Tag-

along Rights.

40. The Supreme Court of North Carolina has held that

It is well established that a written contract may be
waived, and the provisions in a contract may be waived. A
waiver takes place where a man dispenses with the
performance of something which he has a right to exact. A
party may excuse performance expressly or by conduct
which naturally and justly leads the other party to believe
that performance is dispensed with. There can be no
waiver unless so intended by one party, and so understood
by the other, or one party has so acted as to mislead the
other. It is a question of intent, which may be inferred from
a party’s conduct. Intent is an operation of the mind and
should be proven and found as a fact and is rarely to be
inferred as a matter of law.

Harris & Harris Constr. Co. v. Crain & Denbo, Inc., 256 N.C. 110, 118–19, 123 S.E.2d

590, 596 (1962) (citation omitted).

41. Defendants argue that Dunn PT expressly waived its claim for breach

of the Tag-along Rights in the Operating Agreement by executing the

Acknowledgment and Consent, which contained the following provision:

Each of the Company and its members and manager
hereby irrevocably waives on a one-time basis (a) any
purchase options, rights of first refusal or similar rights
that may arise or that may have otherwise arisen under
the Operating Agreement or otherwise to purchase the
PTD Cary Interest as a result of the transactions described
above, and (b) any noncompliance with the terms of the
Operating Agreement resulting from the foregoing.

(ECF No. 57.1, at p. 1.) Plaintiffs make several arguments in response. First,

Plaintiffs contend that the referenced language does not explicitly waive the Tag-

along Rights contained in Article 18 of the Operating Agreement, and is most

reasonably interpreted as applying only to claims on non-compliance with Article 16

involving transfers of interest. (ECF No. 52, at p. 10.) Plaintiffs also argue that the

Acknowledgment and Consent does not reference any consideration provided to

Plaintiffs and therefore cannot alter their rights under the Operating Agreement.

(Id.) The Court does not find these arguments persuasive. The language in the

Acknowledgment and Consent expressly waives “any noncompliance with the terms

of the Operating Agreement,” and is broad enough to encompass potential claims

regarding Tag-along Rights without express mention of those rights. In addition,

Plaintiffs have not directed the Court to any North Carolina precedent holding that

a contractual right can only be waived in exchange for consideration. To the contrary,

the law provides that a person can waive contract rights by words or conduct that

“naturally leads the other party to believe that the right has been intentionally given

up.” Phoenix Ltd. P’ship v. Simpson, 201 N.C. App. 493, 500, 688 S.E.2d 717, 722

(2009) (citations and quotation marks omitted).

42. Plaintiffs also argue that since a waiver involves a question of intent, it

is ill-suited to resolution on a motion to dismiss. (ECF No. 52, at pp. 10–11.) Plaintiffs
note that “the Roll-up [T]ransaction [ ] includes many documents, e-mails, and other

communications” that may bear on whether PT Dunn intended to waive it rights. (Id.

at p. 10.) The Acknowledgment and Consent does not contain a merger clause

purporting to limit its terms to the written provisions of the documents. Accordingly,

there may exist other documents and communications surrounding the execution of

the Acknowledgment and Consent that would inform the interpretation of the waiver

provision.

43. The Court concludes that it is premature at this stage of the case to

decide Defendants’ waiver defense. Discovery may yield additional information

regarding Dunn PT’s intent in executing the Acknowledgment and Consent.

44. Finally, Defendants contend Plaintiffs do not allege a claim for breach

of the Tag-along Rights because Dunn PT’s only recourse for Confluent’s refusal to

purchase Dunn PT’s membership interests in the Roll-up Transaction was to block

PTD Cary’s transfer of its interests to Confluent pursuant to Section 18.2 of the

Operating Agreement. Plaintiffs do not directly respond to Defendants’ argument,

but instead contend they have adequately alleged a claim for breach of contract to

survive dismissal. A breach of contract claim requires that the plaintiff 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, 530 S.E.2d 838, 843 (2000). Plaintiffs have adequately

alleged, and Defendants do not dispute, that the Operating Agreement was a valid

contract. Plaintiffs have also alleged a breach of the Operating Agreement. (ECF

No. 5, at ¶ 129.) Accordingly, the Court concludes that Plaintiffs have properly pled
a claim for breach of the Operating Agreement regarding the Tag-along Rights.

Highland Paving Co. v. First Bank, 227 N.C. App. 36, 40, 742 S.E.2d 287, 291 (2013)

(“The elements of a claim for breach of contract are (1) existence of a valid contract

and (2) breach of the terms of the contract. This Court has held that where the

complaint alleges each of these elements, it is error to dismiss a breach of contract

claim under N.C. Gen. Stat. § 1A-1, Rule 12(b)(6).” (citations and quotation marks

omitted)).

45. Defendants’ motion to dismiss the claim for breach of the Tag-along

Rights in the Operating Agreement should be DENIED.

E. Second Claim for Relief: Breach of Contract – Distributions

46. In their Second Claim for Relief, Plaintiffs allege that Confluent

breached the Distribution Agreement by failing to pay any further distributions to

Dunn PT after making distributions for the second and third quarters of 2016. (ECF

No. 36.2, at ¶¶ 134–38.)

47. Defendants move to dismiss the Second Claim for Relief. Defendants

contend that Breakthrough Cary’s Operating Agreement gives Benz, as manager, the

sole discretion to determine whether to make distributions. (ECF No. 49, at pp. 11–

12.) Defendants argue that the Distribution Agreement is not a valid amendment of

the Operating Agreement, which requires the written and unanimous approval of

Breakthrough Cary’s members, and Hathaway is not a member of Breakthrough

Cary. (Id. at p. 12.) Finally, Defendants argue that even if Breakthrough Cary,

through Hathaway, entered into a valid agreement to make distributions, Plaintiffs
allege that Confluent is the party in breach of the Distribution Agreement. (Id. at p.

13.)

48. The Operating Agreement states that distributions other than tax

distributions “shall be distributed to the Members at such time or times and in such

amounts as determined by the Manager in its sole discretion.” (ECF No. 50.1, at

§ 9.1.) The Operating Agreement also provides that “[a]ny amendments to this

Agreement . . . shall be in writing and unanimously approved by all members.” (Id.

at § 22.12.) Plaintiffs contend that the Distribution Agreement is a valid amendment

to the Operating Agreement, altering the manager’s discretion in making

distributions, because the Distribution Agreement is in writing and is signed by

Hathaway on behalf of Confluent and Breakthrough Cary. (ECF No. 52, at p. 13.)

The Court disagrees. First, even if the Distribution Agreement constitutes a

sufficient “writing,” it is not signed by Dunn PT as required by the Operating

Agreement. Second, the Distribution Agreement does not purport to be a formal

amendment to the Operating Agreement and does not make reference to the

Operating Agreement, much less to Section 9.1 governing distributions. The

allegations do not support Plaintiffs’ position that the Distribution Agreement was

an amendment to the Operating Agreement, or that breach of the Distribution

Agreement is a breach of the Operating Agreement.

49. Plaintiffs have, however, adequately alleged that the Distribution

Agreement is a separate and valid contract between Dunn PT, or Christopher

individually, and Confluent. (ECF No. 36.2, at ¶¶ 50–52, 134, 138.) Defendants do
not argue that Dunn PT or Christopher and Confluent could not enter into

agreements separate from and additional to the Operating Agreement. In addition,

Plaintiffs allege that Confluent acknowledged the validity of the Distribution

Agreement by paying the agreed upon distributions for two quarters.

50. Defendants also argue that Confluent cannot be liable for this alleged

breach because it is Breakthrough Cary, not Confluent, that is responsible for paying

distributions to its members. (ECF No. 49, at p. 13.) Plaintiffs argue that Hathaway

signed the new agreement on behalf of both Breakthrough Cary and Confluent, and

because Plaintiffs have alleged that Confluent is the controlling member of

Breakthrough Cary, Confluent is essentially the one responsible for making

distributions under the new agreement. (ECF No. 52, at pp. 14–15.) At the motion

to dismiss stage, the Court accepts these allegations as sufficient to state a breach of

the new agreement by Confluent, the controlling member of Breakthrough Cary.

51. Even though Plaintiffs have not adequately alleged a breach of the

Operating Agreement regarding distributions, they have alleged a breach of the

Distribution Agreement. Defendants’ motion to dismiss Plaintiffs’ claim for breach

of contract regarding the failure to make distributions under the Distribution

Agreement is DENIED.

F. Fourth and Fifth Claims for Relief: Oppression and Judicial Dissolution,
and Appointment of Receiver

52. In their Fourth Claim for Relief, Plaintiffs seek a judicial dissolution of

Breakthrough Cary under N.C. Gen. Stat. § 57D-6-02 (hereinafter, “G.S.”). In their

Fifth Claim for Relief, Plaintiffs seek the appointment of a receiver over
Breakthrough Cary under G.S. § 57D-6-04 to oversee the dissolution. Plaintiffs allege

that dissolution is necessary because “[u]nder the present circumstances, it is not

practicable to continue to conduct the business of Breakthrough Cary in conformance

with the Operating Agreement and Chapter 57D of the North Carolina General

Statutes.” (ECF No. 36.2, at ¶ 149.) Plaintiffs allege that a “receiver is necessary to

protect the interest of the minority member Plaintiff, to prevent the continued

allocation of inappropriate expenses to Breakthrough Cary, to provide for

distributions as agreed upon by the members, to conduct an accounting, and for other

appropriate relief.” (Id. at ¶ 156.)

53. Defendants seek dismissal of the claims for dissolution and appointment

of a receiver contending that the allegations do not support dissolution and the

remedies are “improper and unnecessary.” (ECF No. 49, at p. 17.)

54. G.S. § 57D-6-02 provides that “[t]he superior court may dissolve an LLC

in a proceeding brought by . . . [a] member, if it is established that (i) it is not

practicable to conduct the LLC’s business in conformance with the operating

agreement and this Chapter or (ii) liquidation of the LLC is necessary to protect the

rights and interests of the member.” Plaintiffs’ allegations are more than sufficient

to support the requested relief on grounds that it is not practicable to conduct the

LLC’s business given the parties’ disputes and their current relationship. Plaintiffs

also allege improprieties by Confluent and Benz that would support the claim that

dissolution is necessary to protect Dunn PT’s interests. Defendants’ motion to
dismiss Plaintiffs’ requests for judicial dissolution and appointment of a receiver

should be DENIED.

G. Sixth Claim for Relief: Breach of Contract – Management of Company

55. In their Sixth Claim for Relief, Plaintiffs allege that Defendants

breached the Operating Agreement by appointing Hathaway as CEO of

Breakthrough Cary. Plaintiffs claim that Benz, as manager, delegated to Christopher

the responsibility for the day-to-day operations of Breakthrough Cary and that the

purported appointment of Hathaway impaired Christopher’s ability to conduct those

operations. (ECF No. 36.2, at ¶¶ 160, 162.)

56. The Operating Agreement provides that Benz, as manager, “shall be

entitled to delegate certain duties to another person pursuant to the terms of a

management agreement entered into by and between such party and [Breakthrough

Cary].” (ECF No. 50.1, at § 14.3.) The Operating Agreement places no specific

restriction on the persons to whom Benz can delegate duties or the particular duties

he can delegate. In addition, G.S. § 57D-3-22 provides general authority to a manager

of a limited liability company to “delegate authority to act on behalf of the LLC to

persons other than managers.”

57. Plaintiffs argue that the Operating Agreement “does not provide for the

appointment of a Chief Executive Officer” because the Operating Agreement only

states that the manager may delegate certain duties to “another person,” not multiple

people, and those duties had already been delegated to Christopher. (ECF No. 36.2,

at ¶ 161; ECF No. 52, at pp. 20–21.) Defendants contend that this is a
misinterpretation of the Operating Agreement, which simply authorizes the manager

to delegate certain duties to whomever he chooses pursuant to a “management

agreement.” (ECF No. 50.1, at § 14.3.) Defendants further note that Plaintiffs have

alleged that Christopher was not bestowed his duties pursuant to a “management

agreement,” but rather pursuant to an employment agreement. (ECF No. 36.2, at

¶ 160; ECF No. 49, at p. 20.)

58. The Court agrees with Defendants’ arguments. The Court concludes

that the language of the Operating Agreement does not preclude the manager from

delegating duties to one or more persons under Section 14.3. Nonetheless, even if

Section 14.3 were to be read as only allowing for delegation to one other person

pursuant to a management agreement, Plaintiffs have only alleged that Christopher

signed an employment agreement, not a management agreement. (ECF No. 36.2, at

¶ 160.) Defendants’ Motion to Dismiss Plaintiffs’ claim for breach of contract

regarding the management of the company is GRANTED.

H. Seventh Claim for Relief: Declaratory Judgment

59. Plaintiffs’ Seventh Claim for Relief seeks a declaratory judgment

declaring that the non-compete restrictions in the Non-compete Agreements and the

Employment Agreement are unenforceable because they are overbroad as to time,

geographic territory, and the scope of activities from which Christopher and Theresa

are restricted. (ECF No. 36.2, at ¶¶ 164–75.) Defendants move to dismiss this claim

arguing that the non-compete provisions are valid, reasonable, and enforceable under
North Carolina law and therefore the claim should be dismissed. (ECF No. 49, at pp.

20–22.)

60. A covenant not to compete related to the purchase of a business will be

enforced if it is (1) “necessary to protect the legitimate interest of the purchaser”; (2)

“reasonable with respect to both time and territory”; and (3) “if it does not interfere

with the interest of the public.” Beverage Sys. of the Carolinas LLC v. Assoc. Bev.

Repair LLC, 368 N.C. 693, 698, 784 S.E.2d 457, 461 (2016). North Carolina courts

will enforce a covenant not to compete entered into as part of an employment contract

if it is: “(1) in writing; (2) reasonable as to [the] terms, time, and territory; (3) made a

part of the employment contract; (4) based on valuable consideration; and (5) not

against public policy.” Triangle Leasing Co. v. McMahon, 327 N.C. 224, 228, 393

S.E.2d 854, 857 (1990); United Labs., Inc. v. Kuykendall, 322 N.C. 643, 649–50, 370

S.E.2d 375, 380 (1988). “The reasonableness of a non-competition covenant is a

matter of law for the court to decide.” Medical Staffing Network, Inc. v. Ridgway, 194

N.C. App. 649, 655, 670 S.E.2d 321, 327 (2009); Sandhills Home Care, L.L.C. v.

Companion Home Care - Unimed, Inc., 2016 NCBC LEXIS 61, *13 (N.C. Super. Ct.

Aug. 1, 2016).

61. To plead a valid claim for declaratory judgment, a plaintiff must

plead “all facts necessary to disclose the existence of an actual controversy between

the parties to the action with regard to their respective rights and duties.” Lide v.

Mears, 231 N.C. 111, 118, 56 S.E.2d 404, 409 (1949). The Court concludes that

Plaintiffs have alleged the existence of an actual controversy between the parties over
the enforceability of the non-compete restrictions sufficient to support a claim for

declaratory judgment at the motion to dismiss stage. Defendants’ motion to dismiss

Plaintiff’s claim for declaratory judgment should be DENIED.

I. Tenth Claim for Relief: Fraud

62. In their Tenth Claim for Relief, Plaintiffs allege that Benz and Confluent

made various fraudulent representations to the Dunns. (ECF No. 36.2, at ¶¶ 190–

98.) Plaintiffs make these claims as direct claims and, alternatively, as derivative

claims. (Id. at ¶ 197.)

63. In order to state a claim for fraud, a plaintiff must allege: “(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, (5) resulting in damage

to the injured party.” Ragsdale v. Kennedy, 286 N.C. 130, 138, 209 S.E.2d 494, 500

(1974).

64. The Dunns allege that Benz represented that the Acquisition Debt

would be kept “below the line” so that the Dunns would not be paying themselves for

any of the debt. (ECF No. 36.2, at ¶¶ 192–93.) Plaintiffs further allege that at the

time Benz made the representations, he did not intend to honor them. (Id. at ¶ 191.)

65. Plaintiffs also allege that Benz and Confluent represented that they

would “act in the best interest” of Breakthrough Cary, and that “Benz/Confluent and

Jeff Hathaway promised to start making regular distributions to Dunn PT in July

2016 . . . but later abandoned that agreement,” and that Defendants promised to
resolve various accounting and expense issues but have failed to do so. (Id. at ¶¶ 192,

194–95.)

66. Defendants first argue that Plaintiffs’ fraud claim should be dismissed

because the claim is derivative in nature, and Plaintiffs did not properly bring a

derivative claim. (ECF No. 49, at p. 24.) With regard to the fraud claim based on

Benz’s promise that the Acquisition Debt would be kept “below the line,” the Court

disagrees. “There are two major, often overlapping, exceptions to the general rule

that a shareholder cannot sue for injuries to his corporation: (1) where there is a

special duty, such as a contractual duty, between the wrongdoer and the shareholder,

and (2) where the shareholder suffered an injury separate and distinct from that

suffered by other shareholders.” Barger v. McCoy Hillard & Parks, 346 N.C. 650,

658-659, 488 S.E.2d 215, 219-220 (1997) (citations and quotation marks omitted).

Plaintiffs allege that they were induced into the Sales Transaction and becoming

members in Breakthrough Cary and would not have sold their interests in Dunn PT

but for Benz’s misrepresentation. (ECF No. 36.2, at ¶ 193.) Plaintiffs’ allegations

state a direct claim under the special duty or separate injury exceptions. Norman v.

Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 398, 537 S.E.2d 248, 254–55

(2000) (“[O]ur appellate courts allow shareholders to bring individual actions against

third parties who induce them to make corporate investments which prove to be

worthless.”); Energy Investors Fund, L.P. v. Metric Constr., Inc., 133 N.C. App. 522,

524, 516 S.E.2d 399, 401 (1999) (“Special duties [under Barger] have been found

when, for instance, a third party . . . induced the shareholder to buy stock in the first
place . . . .”); see also Spoor v. Barth, 244 N.C. App. 670, 684, 781 S.E.2d 627, 636–37

(2016) (finding that plaintiff had standing to sue defendants directly because they

were fraudulently induced into investing in a corporation, which constituted an injury

“separate and distinct” from the other shareholders); Newton v. Barth, 788 S.E.2d

653, 659–61, 2016 N.C. App. LEXIS 776, *11–19 (2016) (same). Defendants’

argument that Plaintiffs’ claim for fraud based on Benz’s misrepresentation about

the treatment of the Acquisition Debt must fail.

67. With regard to Plaintiffs’ fraud claim based on the failure to receive

distributions under the Distribution Agreement, there is no allegation that the failure

to make distributions to Dunn PT resulted in any harm to Breakthrough Cary that

would give rise to a claim by the LLC. Plaintiffs’ claim for fraud based on the failure

to pay distributions under the Distribution Agreement is not a derivative claim, but

instead is an individual claim belonging to Dunn PT or Christopher.

68. Plaintiffs’ allegations that Benz promised that Confluent would act in

the best interests of Breakthrough Cary and promised to resolve the expense issues

is simply a repackaging of their claims for breach of fiduciary duty and constructive

fraud and do not state separate claims for fraud.

69. Plaintiffs have adequately pleaded claims for fraud regarding Benz’s

representation that the Acquisition Debt would be paid “below the line” and based on

the failure to pay distributions under the Distribution Agreement. Defendants’

motion to dismiss Plaintiffs’ claim for fraud based on these allegations should be

DENIED. Defendants’ motion to dismiss Plaintiffs’ claim for fraud based on the
allegations that Benz promised that Confluent would act in the best interests of

Breakthrough Cary and promised to resolve the expense issues should be GRANTED.

J. Eighth Claim for Relief: Unfair and Deceptive Trade Practices

70. Plaintiffs’ Eighth Claim for Relief alleges that Defendants “engaged in

unfair or deceptive acts in or affecting commerce, in violation of [G.S.] § 75-1.1.” (ECF

No. 36.2, at ¶ 177.) Plaintiffs allege that

Benz and Confluent have developed a business model of
“partnering” with smaller practices with promises of
growth, support, and reduced expenses, only to saddle their
“partners” with excessive and inappropriate expenses (to
the benefit of Confluent/Benz). These practices reduce the
alleged value of the partners’ shares, and then allow
Confluent to buy out the partners at an artificially low
valuation.

(Id. at ¶ 180.) Although the Second Amended Complaint is less than clear about

which specific wrongful acts by Defendants form the basis of the unfair and deceptive

practices, the Court concludes that the claim is premised on Benz’s alleged

misrepresentations to the Dunns during the negotiations of the Sales Transaction.

71. “To establish a prima facie case of unfair and deceptive trade practices,

a plaintiff must show that (1) the defendant committed an unfair or deceptive act or

practice, (2) the act was in or affecting commerce, and (3) the act proximately caused

injury to the plaintiff.” White v. Consol. Planning, Inc., 166 N.C. App. 283, 303, 603

S.E.2d 147, 161 (2004). “Plaintiff[s] must first establish that [D]efendants’ conduct

was ‘in or affecting commerce’ before the question of unfairness or deception arises.”

HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 592, 403 S.E.2d 483, 492

(1991). The phrase “‘business activities’ [ ] connotes the manner in which businesses
conduct their regular, day-to-day activities, or affairs, such as the purchase and sale

of goods, or whatever other activities the business regularly engages in and for which

it is organized.” White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010)

(citations and quotation marks omitted); Alexander v. Alexander, 792 S.E.2d 901, 904,

2016 N.C. App. LEXIS 1252, *7 (N.C. Ct. App. Dec. 6, 2016).

72. “With the [UDTPA] our General Assembly sought to prohibit unfair or

deceptive conduct in interactions between different market participants. The

General Assembly did not intend for the Act to regulate purely internal business

operations.” White, 364 N.C. at 47–48, 691 S.E.2d at 676 (holding that conduct

between partners in a business, even when the conduct involves multiple business

entities owned by the partners, is nonetheless internal to a single market

participant). “The [UDTPA] is not focused on the internal conduct of individuals

within a single market participant, that is, within a single business. . . . As a result,

any unfair or deceptive conduct contained solely within a single business is not

covered by the Act.” Id. at 53, 691 S.E.2d at 680; see also Weaver Inv. Co. v. Pressly

Dev. Assocs., 234 N.C. App. 645, 654, 760 S.E.2d 755, 761 (2014) (dismissing plaintiff's

UDTPA claim because “defendants’ misconduct within the confines of the partnership

was not ‘in or affecting commerce’”).

73. The Court determines whether the alleged unfair or deceptive acts are

“in or affecting commerce” as a matter of law. See Walker v. Fleetwood Homes of N.C.,

Inc., 362 N.C. 63, 71, 653 S.E.2d 393, 399 (2007); Urquhart v. Trenkelbach, 2017

NCBC LEXIS 12, *10 (N.C. Super. Ct. Feb. 8, 2017).
74. Defendants argue that Plaintiffs cannot maintain their claim for unfair

and deceptive trade practices because the alleged conduct is related to internal

business operations. (ECF No. 49, at p. 22.) Plaintiffs counter, and the Court agrees,

that the Second Amended Complaint does not allege facts that solely relate to the

internal operations of Breakthrough Cary, but rather to interactions between market

participants Benz and his businesses and Dunn PT. At this stage, the allegations are

sufficient to support a claim that the conduct was in or affecting commerce.

Defendants’ motion to dismiss Plaintiffs’ claim for unfair and deceptive trade

practices is DENIED.

THEREFORE, IT IS ORDERED that Defendants’ Motion to Dismiss is

GRANTED, in part, and DENIED, in part, as follows:

75. Defendants’ Motion to Dismiss Plaintiffs’ Sixth Claim for Relief is

GRANTED.

76. Defendants’ Motion to Dismiss Plaintiffs’ First, Fourth, Fifth, Seventh,

and Eighth Claims for Relief is DENIED.

77. Defendants’ Motion to Dismiss Plaintiffs’ Second Claim for Relief is

DENIED to the extent it alleges breach of contract regarding the failure to make

distributions under the Distribution Agreement. Defendants’ Motion to Dismiss

Plaintiffs’ Second Claim for Relief is GRANTED to the extent it alleges breach of

contract regarding the failure to make distributions under the Operating Agreement.

78. Defendants’ Motion to Dismiss Plaintiffs’ Third and Ninth Claims for

Relief is DENIED to the extent those claims allege direct, non-derivative claims. In
addition, Plaintiffs’ Third and Ninth Claims for Relief are DISMISSED WITHOUT

PREJUDICE AS MOOT to the extent those claims allege derivative claims.

79. Defendants’ Motion to Dismiss Plaintiffs’ Tenth Claim for Relief is

DENIED to the extent it alleges fraud based on Benz’s representations that the

Acquisition Debt would be paid “below the line” and to the extent it alleges failure to

pay distributions under the Distribution Agreement. Defendants’ Motion to Dismiss

Plaintiffs’ Tenth Claim for Relief is GRANTED to the extent it alleges fraud based on

the allegations that Benz promised that he and Confluent would act in the best

interests of Breakthrough Cary and promised to resolve the expense issues.

SO ORDERED, this the 24th day of August, 2018.

/s/ Gregory P. McGuire
Gregory P. McGuire
Special Superior Court Judge for
Complex Business Cases