Cold Springs Ventures, LLC v. Gilead Sci., Inc.

Cold Springs Ventures, LLC v. Gilead Sci., Inc., 2015 NCBC 1.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF DURHAM 14 CVS 1873

COLD SPRINGS VENTURES, LLC, a North )
Carolina Limited Liability Company; )
JAMES M. STRATHMEYER; and )
BRUCE J. BOEHM, )
Plaintiffs )
) ORDER ON DECLARATORY
v. ) ACTION TO STAY ARBITRATION
)
GILEAD SCIENCES, INC.; a California )
Corporation; L. ERIC HALLMAN; )
DOUGLAS BAKER; and NEIL JONES, )
Defendants )

THIS CAUSE, designated a mandatory complex business case by Order of the Chief

Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-45.4(b)

(hereinafter, references to the North Carolina General Statutes will be to "G.S."), and

assigned to the undersigned Special Superior Court Judge for Complex Business Cases,

came before the Court for hearing upon Plaintiffs' Declaratory Action to Stay Arbitration

("Motion"), contained in their Amended Complaint;1 and

THE COURT, after reviewing the Motion, briefs in support of and in opposition to

the Motion, arguments of counsel, and other appropriate matters of record, FINDS and

CONCLUDES that:

1See Am. Compl. ¶¶ 135-140, 141 (b)-(c). Plaintiffs' First Cause of Action is functionally the same as
a G.S. 1-569.7(b) motion to stay arbitration and is treated as such.
Background

1. Defendant Gilead Sciences, Inc. ("Gilead") has joined Plaintiffs2 as

respondents in an arbitration action ("Arbitration") pending before the American

Arbitration Association ("AAA").3

2. Plaintiffs are former investors, shareholders, and directors of Old Kryo, Inc.

("NC Kryo"),4 a North Carolina corporation. In September 2010, NC Kryo entered into a

contract with Gilead ("Gilead Contract"), which contained a mandatory arbitration clause. 5

In March 2011, NC Kryo entered into an agreement ("Kryo Transaction") to sell all or

substantially all of its assets and business to Kryosphere, Inc. ("GA Kryo"), a Georgia

corporation.6 As part of the Kryo Transaction, NC Kryo purportedly assigned the Gilead

Contract to GA Kryo.7 Gilead contends that NC Kryo did not obtain prior written consent

from Gilead for the assignment of the Gilead Contract to GA Kryo as required under the

Gilead Contract.8 NC Kryo was subsequently dissolved.9 In October 2013, Gilead initiated

the Arbitration against GA Kryo and the Plaintiffs for alleged breach of the Gilead

Contract.10

3. Although Plaintiffs did not sign the Gilead Contract, they have been named

as respondents in the Arbitration. Gilead contends that Plaintiffs committed fraud,

2 In addition to the remaining Plaintiffs in this action, Gilead named as respondents in the

arbitration Commonwealth Ventures, LLC, Endeavors Venture, and Jeannie Mullen. These former
Plaintiffs voluntarily dismissed all claims asserted in this action with prejudice on June 16, 2014.
Gilead additionally named in the arbitration proceeding Kryosphere, Inc., L. Eric Hallman, Douglas
Baker, Neil Jones, Michael J. Schierbeek, John O. Norton, Patrick Norton, and Ryan Norton. These
parties were dismissed from this action by Court Order on November 18, 2014.
3 Am. Compl. ¶¶ 79-80.
4 Id. ¶¶ 1-6.
5 Ex. A to Am. Compl.
6 Id. ¶¶ 55, 59.
7 See id. ¶ 68.
8 See id.; Pls.' Mem. Supp. Req. Prelim. Inj. ("Pls.' PI Br.") at 5; Gilead Contract.
9 Am. Compl. ¶ 63.
10 Id. ¶ 79; Ex. B to Am. Compl. ("Arbitration Demand").
depleted NC Kryo's resources and are in substance the alter ego of NC Kryo. Gilead argues

that Plaintiffs’ actions and relationship with NC Kryo would expose Plaintiffs to liability to

Gilead under the instrumentality rule even though Plaintiffs were not signatories to the

Gilead Contract or any other arbitration agreement.11 Plaintiffs concede that they could be

compelled to participate in the Arbitration if they are liable under the instrumentality

rule.12 Plaintiffs contend, however, that Gilead has not sufficiently shown misconduct on

Plaintiffs' part as investors and directors of NC Kryo that would subject them to such

liability. Plaintiffs therefore brought this civil action seeking declaratory and injunctive

relief from this Court.

4. On Tuesday, March 4, 2014, the Court heard Plaintiffs' requests for

temporary, preliminary, and permanent injunctive relief ("Injunction Motions").13 In its

March 26, 2014, Amended Order on Motion for Preliminary Injunction and Notice of

Hearing ("Preliminary Order"),14 the Court chose to treat the Injunction Motions as

preliminary requests pending a determination of Plaintiffs' Declaratory Judgment Claim,

which the Court determined should be treated as a motion to stay arbitration pursuant to

G.S. 1-569.7 ("Declaratory Action to Stay Arbitration").15 In the Preliminary Order, the

Court found and concluded that a determination over the arbitrability of the dispute

between the Parties is within the province of the Court, subject to the restriction that the

Court refrain from impermissibly considering the dispute's underlying merits.16 The Court

also concluded that this dispute is governed by both the Federal Arbitration Act ("FAA"), 9

11 See Arbitration Demand.
12 Pls.' PI Br. at 14.
13 See Am. Compl. ¶¶ 153-160.
14 Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 (N.C. Super. Ct. 2014).
15 Preliminary Order at 14-15 ¶¶ 24-25. That is, the Injunction Motions were treated as motions to

temporarily stay the Arbitration pending final resolution of the arbitrability dispute.
16 Id. at 11, 13 ¶¶ 18, 21.
USC § 1 et seq., and North Carolina's Revised Uniform Arbitration Act ("NCRUAA"), G.S.

1-569.1 et seq. More specifically, the NCRUAA governs the procedural aspects of this

dispute, while the FAA governs with regard to substantive issues. The Court's Preliminary

Order resolved the issues raised by Plaintiffs' Injunction Motions, provided a short

discovery period related to the Declaratory Action to Stay Arbitration, and noticed the same

for hearing.17 On Friday, December 5, 2014, the Court heard Plaintiffs' Declaratory Action

to Stay Arbitration.

Procedure

5. At the December 5, 2014, hearing, the Parties continued to manifest a

fundamental disagreement on the procedural contours of a G.S. 1-569.7(b) inquiry in this

matter and under these facts.

6. G.S. 1-569.7(b) requires courts presented with a motion to stay arbitration to

"proceed summarily to decide . . . if there is an enforceable agreement to arbitrate." As

noted in the Preliminary Order, the exact procedural setting contemplated by the statute's

requirement of summary determination is not immediately apparent. Plaintiffs, however,

correctly observe that the statute and relevant case law taken together establish that the

Court is required to make finding facts in order to determine whether an “enforceable

agreement to arbitrate” exists which may involve conducting the equivalent of a non-jury

trial. See Cornelius v. Lipscomb, __ N.C. App. __, __, 734 S.E.2d 870, 871 (2012) (Court of

Appeals has "repeatedly held" that order denying motion to compel arbitration must include

17 Plaintiffs' First Cause of Action contains a prayer for declaratory relief on three separate issues.

See Am. Compl. ¶ 141 (a)-(c). As noted in the Preliminary Order, the Declaratory Action to Stay
Arbitration includes only the relief sought in subsections (b) and (c) of that paragraph. For reasons
discussed at length in the Preliminary Order as well as below, the court cannot properly consider the
relief sought in Am. Compl. ¶ 141(a), which seeks a broad declaration that "there is no legal or
factual basis for Gilead to pierce the [NC Kryo] corporate veil against [Plaintiffs] with regard to the
Gilead Contract."
findings of fact as to arbitrability); Routh v. Snap-On Tools Corp., 108 N.C. App. 268 (1992)

(Routh II) (After remand due to trial court's failure to summarily determine whether valid

agreement to arbitrate exists, trial court properly held "non-jury trial" and made findings of

fact in order determine motion to compel arbitration); Blow v. Shaughnessy, 68 N.C.App. 1,

18 (1984), disc. review denied, 311 N.C. 751 (1984) (trial court in motion to stay proceedings

and compel arbitration was "sitting as the trier of fact"); Capps v. Blondeau, 2010 NCBC 7

n. 6 (N.C. Super. Ct. 2010) ("[I]n determining the threshold issue of whether a mandatory

arbitration agreement exists, the court necessarily must sit as a finder of fact. Accordingly,

for such limited purpose, the court also may consider evidence as to facts that are in

dispute.") (citing Slaughter v. Swicegood, 162 N.C. App. 457, 461 (2004)); see also Routh v.

Snap-On Tools Corp., 101 N.C. App. 703, 706 (1991) (Routh I) (Inappropriate under

predecessor statute to G.S. 1-569.7 for judge to apply "a summary judgment standard of

whether there was a 'genuine issue of material fact'").

7. While G.S. 1-569.7(b) requires summary determination and perhaps even the

equivalent of a bench trial, the Court is simultaneously faced with the obligation to avoid

impermissible entanglement in the underlying merits of a potentially arbitrable dispute.

See, e.g., AT&T Techs., 475 U.S. at 649 ("[I]n deciding whether the parties have agreed to

submit a particular grievance to arbitration, a court is not to rule on the potential merits of

the underlying claims."), G.S. 1-569.7(d) (A court should not refuse to compel arbitration

"because the claim lacks merit or because grounds for the claim have not been

established"). This dispute poses a unique tension because deciding “summarily" the

question of arbitrability necessarily involves consideration of issues very similar to those

involved in the merits of Gilead's instrumentality claim against Plaintiffs in the underlying

arbitration.
8. In order to resolve this tension, Gilead urges the Court to follow the Fourth

Circuit's jurisprudence in J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d

315 (4th Cir. 1988), Long v. Silver, 248 F.3d 309 (4th Cir. 2001), and Smith v. Cato, 2006

U.S. Dist. LEXIS 31935 (W.D.N.C. May 9, 2006). The Cato court interpreted J.J. Ryan,

Long, and other Fourth Circuit precedent as having

carved an exception to the rule that a party should not be compelled to
arbitrate claims which he has not agreed to arbitrate, where (1) the allegations
against a non-signatory and a signatory are based on the same facts, and are
inherently inseparable or closely intertwined; and (2) the non-signatory
exercises substantial control over the signatory's activities.

Cato, 2006 U.S. Dist. LEXIS 31935 at *20.

9. Gilead takes the position that the Court should disregard the requirements of

G.S. 1-569.7 and apply a federal standard18 using the formulation created by the court in

Cato. Defendants take the position that the Cato standard is "more demanding than a

motion to dismiss under Rule 12(b)(6), but less demanding than a motion for summary

judgment because it requires more than a mere allegation that [Plaintiffs] are subject to the

arbitration agreement, but stops short of requiring Gilead to demonstrate that it is entitled

to judgment as a matter of law."19 While it is clear that this Court is not to apply a

summary judgment standard to its decision, G.S. 1-569.7 does require the Court to make

findings of fact and reach a determination as to whether an enforceable agreement to

arbitrate exists. This a task wholly different than deciding a motion to dismiss or a motion

for summary judgment, and not inconsistent with the approach taken by the federal court

18 It is not entirely clear how application of a federal standard would benefit Gilead here since the

federal analogue to G.S. 1-569.7 requires a "trial" on the issue of arbitrability and even provides for a
jury trial where that right is asserted. See 9 U.S.C. § 4 ("If the making of the arbitration agreement
or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily
to the trial thereof."). Accordingly, this Court inevitably must make findings of fact that necessarily
will touch on the veil-piercing theory raised by Gilead in the underlying arbitration.
19 Gilead Mem. Opp'n Pls.' Declaratory Action Stay Arbitration (May 19, 2014) ("Gilead Brief") at 13-

14 (emphasis added).
in Cato. Accordingly, the Court does not interpret the Cato standard as being inconsistent

with application of the G.S. 1-569.7 requirements.

10. The Court CONCLUDES that it should summarily decide the question of

whether an enforceable agreement to arbitrate exists between Plaintiffs and Gilead under

G.S. 1-569.7.20 The Court’s inquiry, undertaken for the limited purpose of determining

whether the facts establish that Plaintiffs were parties to an enforceable agreement to

arbitrate, will not constitute a final judgment on the merits of Gilead’s veil-

piercing/instrumentality claim raised in the arbitration. This decision will not have

collateral estoppel or res judicata consequences,21 and as such does not contravene the

relevant public policy underlying the court's obligation to refrain from ruling on the merits

of a dispute.22

11. Having determined that a full G.S. 1-569.7 inquiry is the proper form of

analysis in this case, the Court, solely for the purpose of determining the Motion, makes the

following FINDINGS OF FACT and CONCLUSIONS OF LAW.

FINDINGS OF FACT

12. Plaintiff Bruce J. Boehm ("Boehm") was an individual investor and director of

NC Kryo.23 Boehm invested over $190,000 in NC Kryo. At all relevant times, Boehm was a

20 However, even if the Court were inclined to follow the reasoning of Cato, as discussed below, the
Court finds that an analysis under Cato yield the same result.
21 See Thomas M. McInnis & Associates, Inc. v. Hall, 318 N.C. 421, 428 (1986) (res judicata requires

"a final judgment on the merits in a prior action"), Bee Tree Missionary Baptist Church v. McNeil,
153 N.C. App. 797, 799 (collateral estoppel requires the same).
22 Cf. MAG Portfolio, 268 F.3d 58 (Second Circuit vacated district court's order compelling arbitration

and remanded matter to district court "for an evidentiary hearing on the question of whether the
corporate veil . . . should be pierced in order to compel arbitration" because the instrumentality rule
demands a "very fact specific inquiry involving a multitude of factors" and the record lacked
"sufficient fact finding to support affirmation based on a veil-piercing theory").
23 Am. Compl. ¶¶ 31, 38.
member of the Board of Directors of NC Kryo but did not hold any position as an officer of

that company.

13. Plaintiff James M. Strathmeyer ("Strathmeyer") was an individual director of

NC Kryo. Strathmeyer was not an individual investor in NC Kryo.24

14. Plaintiff Cold Springs Ventures, LLC ("Cold Springs"), is a North Carolina

limited liability company whose sole member is Strathmeyer. Cold Springs was an investor

in NC Kryo.25 Cold Springs invested over $180,000 in NC Kryo.

15. NC Kryo was formed to store and manage various biomaterials, including

clinical trial samples. NC Kryo and Gilead entered into a Master Services Agreement

("Gilead Contract"), effective September 1, 2010, whereby NC Kryo agreed to store and

manage material belonging to Gilead. The Gilead Contract contained a non-assignment

provision, limiting the ability to transfer the agreement without the consent of the other

party, and an arbitration clause, which required submission of any dispute arising under

the Gilead Contract to arbitration with the AAA. The Gilead Contract was executed on

behalf of NC Kryo by L. Eric Hallman ("Hallman"), NC Kryo's Chief Executive Officer. 26

There is no evidence in the record that Plaintiffs participated in the negotiation, or even

were aware of the existence, of the Gilead Contract.

16. At various times in the operation of NC Kryo, the company operated with

vacancies on its Board of Directors and in officer positions.27 At no time in NC Kryo's

corporate history did it ever fill all five seats on the Board of Directors.28

24 Am. Compl. ¶¶ 35, 38.
25 Am. Compl. ¶¶ 1, 4, 32.
26 Ex. A to Am. Compl.
27 Boehm Depo. 61:20-23.
28 Id.
17. In their role as directors, Boehm and Strathmeyer participated actively in

soliciting funding for NC Kryo and were routinely apprised of the financial condition of that

company by its officers.29 As to the financial condition of the company, Boehm

acknowledged that NC Kryo "was always insolvent" and was "never a going concern."30

18. While serving as directors, Boehm and Strathmeyer terminated officers,31

approved reimbursements to other directors,32 and actively participated in arranging either

a liquidation or acquisition of NC Kryo.33 During its operation, minutes of meetings of

directors of NC Kryo were routinely kept.34 However, no minutes have been produced from

any meeting wherein the termination of Eric Hallman as Chief Executive Officer was

discussed or authorized by the Board of Directors.

19. Subsequent to the execution of the Gilead Contract, and due to the financial

condition of the company, NC Kryo's Board of Directors elected to wind down or sell NC

Kryo. Boehm, Strathmeyer, and Hallman35 voted in favor of winding down NC Kryo, while

Douglas Baker ("Baker") abstained.36

20. In late 2010, NC Kryo entered into negotiations with John Norton ("Norton")

to purchase NC Kryo's assets and liabilities ("Kryo Transaction"). These negotiations

culminated in the drafting of an Asset Purchase Agreement whereby NC Kryo's assets

would be sold for a cash sum in addition to the assumption of NC Kryo's liabilities. When

the Kryo Transaction was approved, by both the Board of Directors and the shareholders of

29 Ex. M to Gilead Brief.
30 Boehm Depo. 89:5-7.
31 Boehm Depo. 75:8-10.
32 Ex. FF to Gilead Brief.
33 Ex. M to Gilead Brief.
34 See, e.g., Ex. M to Gilead Brief, Ex FF to Gilead Brief.
35 Prior to this meeting, Hallman was terminated as Chief Executive Officer of NC Kryo, but

remained a director until March 2011.
36 Ex. M to Gilead Brief.
NC Kryo, Boehm and Strathmeyer were the sole directors of NC Kryo. To facilitate

approval of the Kryo Transaction, Boehm and Strathmeyer, as sole directors, appointed a

number of individuals to fill vacancies in officer positions.37 Following the execution of the

Kryo Transaction, NC Kryo was dissolved.38 It is undisputed that Boehm and Cold Springs

lost their entire investments in NC Kryo.

21. In 2013, Gilead performed an audit GA Kryo’s performance under the Gilead

Contract. The audit revealed that GA Kyro, and previously NC Kryo, had failed to

adequately perform their obligations and had breached the Gilead Contract.39 On the basis

of the results of the 2013 audit, Gilead initiated the Arbitration.40

CONCLUSIONS OF LAW

22. In North Carolina, "[t]he general rule is that in the ordinary course of business,

a corporation is treated as distinct from its shareholders." State ex rel. Cooper v. Ridgeway

Brands Mfg., LLC, 362 N.C. 431, 438 (2008). However, in proper circumstances a court can

look behind the corporate form and disregard the corporation's separate and independent

existence. Id. at 438-39. Our appellate courts have repeatedly cautioned that disregarding

the corporate form, or piercing the corporate veil, is a remedy that "should be invoked only

in an extreme case where necessary to serve the ends of justice." Dorton v. Dorton, 77 N.C.

App. 667, 672 (1985).

23. "Piercing the corporate veil . . . allows a plaintiff to impose legal liability for a

corporation's obligations, or for torts committed by the corporation, upon some other company

or individual that controls and dominates a corporation." Green v. Freeman, 367 N.C. 136,

37 See Ex. J to Gilead Brief.
38 See Boehm Depo. 27:22-23.
39 Ex. V to Gilead Brief.
40 See Ex. B to Am. Compl.
145 (2013). The purpose of piercing the corporate veil is to prevent the use of the corporate

form for some fraudulent purpose, or to accomplish an unconscionable result. See Ridgeway

Brands Mfg., LLC, 362 N.C. at 438.

24. In order to pierce the corporate veil a party must show "that the corporation is

so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder

and a shield for his activities in violation of the declared public policy or statute of the State."

Green, 367 N.C. at 145. This "instrumentality rule" inquiry involves three elements:

(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances, but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetrate the violation of a statutory or other positive legal duty, or
a dishonest and unjust act in contravention of [a] plaintiff's legal rights; and

(3) The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.

Id. at 145-46 (internal citations omitted).

25. Factors relevant to the Court's instrumentality rule analysis include

"inadequate capitalization, noncompliance with corporate formalities, lack of a separate

corporate identity, excessive fragmentation, siphoning of funds by the dominant shareholder,

nonfunctioning officers and directors, and absence of corporate records." Id. (internal

citations omitted).

Element 1: Complete Domination and Control

26. Turning to the case at bar, Gilead contends that Plaintiffs so controlled and

dominated NC Kryo that the Court should disregard the corporate form and compel Plaintiffs

to arbitrate. More specifically, Gilead focuses on four key factors in support of its contention

that the Court should pierce the corporate veil in this case. First, Gilead contends that

Plaintiffs had domination and control over NC Kryo's affairs. Second, NC Kryo failed to follow
corporate formalities and had non-functioning officers and directors, or vacancies in those

positions. Third, Gilead contends that NC Kryo's financial condition supports veil piercing.

Finally, Gilead argues that the use of NC Kryo funds to repay personal expenses justifies

disregarding the corporate form. The Court will address each of these contentions in turn.

Domination and Control over NC Kryo

27. Gilead's first contention in support of their position that the Court should

pierce NC Kryo's corporate veil and compel Plaintiffs to arbitrate is that Plaintiffs had

sufficient domination and control over NC Kryo to support disregarding that entity's

corporate form.

28. The complete domination and control of a corporation is a critical, if not the

most critical, element in a court's veil piercing analysis. See generally Green, 367 N.C. at

145-46. Control, for the purpose of a veil piercing analysis, means "complete domination, not

only of finances, but of policy and business practice . . . so that the corporate entity . . . had

at the time no separate mind, will or existence of its own . . . ." Green, 367 N.C. at 145

(internal citations omitted). Ownership of a corporation, and even participation in the

management of the corporation, is not sufficient control to satisfy the instrumentality rule.

See Waff Bros., Inc. v. Bank of North Carolina, N.A., 289 N.C. 198, 210 (1976) (recognizing

that ownership of all outstanding stock of two corporations by a single person who served as

chief executive officer of both corporations did not destroy their corporate identities).

29. To begin, as Plaintiffs note, Gilead does not at all contend that Plaintiff Cold

Springs was directly engaged in the control of NC Kryo, though one corporation can be

sufficiently dominated and controlled by another. See B-W Acceptance Corp. v. Spencer, 268

N.C. 1, 8 (1966). Gilead instead appears to argue that Plaintiff Cold Springs should be

required to arbitrate based on the control over NC Kryo exerted by Cold Springs' sole
member, Strathmeyer.41 In doing so, Gilead asks this Court to disregard not only NC Kryo's

corporate form, but also that of Cold Springs in order to hold that company liable for the

actions of its member. While North Carolina law recognizes this type of "reverse veil

piercing," see Strategic Outsourcing, Inc. v. Stacks, 176 N.C. App. 247, 254 (2006), Gilead has

not provided any evidence that would support doing so in this case. Absent evidence that Cold

Springs exercised control over NC Kryo, Gilead has not satisfied its burden under the

instrumentality rule and the Arbitration, as it pertains to Plaintiff Cold Springs, LLC, should

be STAYED.

30. Turning to Boehm and Strathmeyer, Gilead argues that the following facts

support finding that those individuals exercised "complete domination" and control over NC

Kryo: (i) Boehm was instrumental in the creation of NC Kryo and became the first non-

founding member of the Board; (ii) Strathmeyer suggested a plan for acquiring bridge

financing in April 2010, at the same time it was decided that the company would need to be

sold or wound down, that resulted in his election as a director; (iii) Strathmeyer terminated

Eric Hallman from his position as CEO; (iv) Boehm and Strathmeyer voted in favor of the

decision to wind down NC Kryo or sell its assets; (v) Boehm negotiated the terms of the sale

to GA Kryo; (vi) Boehm and Strathmeyer orchestrated and approved the execution of the

Kryo Transaction; (vii) Strathmeyer participated in the installation of officers prior to the

closing of the Kryo Transaction; and (viii) the structure of the Board and the lack of any

outside director enabled Boehm and Strathmeyer to exert control over the company.42

41 In its Reply Brief, Gilead also argues that Cold Springs' "financial influence" justifies a finding

that Cold Springs exercised control over NC Kryo. Reply Br. (May 30, 2014) p. 7. In support of this
position, however, Gilead directs the Court to actions that were undertaken by Strathmeyer. Id. at 7-
8. While Strathmeyer's involvement in NC Kryo was due to the investment of Cold Springs, Gilead
has not shown that Cold Springs was anything but a passive investor after Strathmeyer's election to
the Board.
42 See Gilead Brief pp. 17-19. Many of these facts appear to the Court to be undisputed. See Gilead

Reply Brief p. 2.
31. These facts, however, do not demonstrate that Boehm and Strathmeyer had

such complete and total control of NC Kryo as to render that company devoid of any "separate

mind, will, or existence of its own." Green, 367 N.C. at 145. As directors, Boehm and

Strathmeyer were charged with overseeing and directing the operation of NC Kryo.

Statutorily, directors of North Carolina business corporations are charged with exercising, or

directing the exercise of, all corporate powers. G.S. § 55-8-01(b). Gilead's argument regarding

the control exercised by Boehm and Strathmeyer is based almost entirely on actions taken

by those individuals pursuant to their statutory authority as directors. For example, Gilead

contends that Boehm and Strathmeyer made the decision to wind down, or dissolve, NC Kryo

and that this decision should support piercing the corporate veil. Pursuant to G.S. § 55-14-

02, however, a corporation's board of directors may propose dissolution for submission to the

company's shareholders. Therefore, the fact that Boehm and Strathmeyer, acting as directors

of NC Kryo while participating in a meeting of the Board of Directors for which minutes were

recorded,43 each voted in favor of recommending dissolution does not support Gilead's

contention that the corporate veil should be pierced.

32. Undoubtedly, Boehm and Strathmeyer exercised control over NC Kryo. Indeed,

it is undisputed that, at least for a period of time, Boehm and Strathmeyer were the only two

directors of that company. However, Gilead has not shown that such control rose to the level

of "complete domination" as required to pierce NC Kryo's corporate veil and compel those

individuals to arbitration. Gilead has not shown that Boehm and Strathmeyer exceeded their

role as directors by directing the day-to-day operations of NC.

33. In sum, while Boehm and Strathmeyer certainly exercised control over NC

Kryo, the record before the Court indicates that the control exercised by those directors does

43 See Ex. M to Gilead Brief.
not rise to the "complete domination" of corporate policy, finances, and practices necessary to

support disregarding the corporate form in this action.

Failure to Follow Corporate Formalities

34. Gilead next contends that the failure of NC Kryo, and its directors Boehm and

Strathmeyer, to follow corporate formalities, especially in NC Kryo's final days, justifies

piercing the corporate veil and compelling Plaintiffs to arbitration.

35. North Carolina courts are more likely to pierce the corporate veil when the

principals of a corporation make "no effort to keep, or pretense of keeping, [their] interest[s]

and activities separate and apart from those of the corporation." Henderson v. Security

Mortg. & Finance Co., 273 N.C. 253, 260 (1968). Examples of failures to follow corporate

formalities weighing in support of piercing the corporate veil include the failure to hold an

organizational meeting or issue shares, Keels v. Turner, 45 N.C. App. 213, cert. denied, 300

N.C. 197 (1980), commingling of personal and corporate funds and a failure to formally keep

corporate records, including corporate minutes, Monteau v. Reis Trucking & Constr., Inc.,

147 N.C. App. 121 (2001), and the transfer of funds to other entities or individuals without

formal debt instruments or any other formal records, Atlantic Tobacco Co. v. Honeycutt, 101

N.C. App. 160, 166 (1990). However, noncompliance with corporate formalities, standing

alone, is insufficient to justify disregarding the corporate form. Hoots v. Toms & Bazzle, P.A.,

100 N.C. App. 412, 419 (1990).

36. Here, Gilead contends that NC Kryo failed to keep minutes on several

occasions, including an April 2010 Board meeting wherein the plan to wind down the

company was discussed,44 and when the Board approved, if it ever did, the termination of

Eric Hallman as Chief Executive Officer. Additionally, Gilead argues that NC Kryo, and

44 Though minutes were kept for the meeting wherein the decision to wind down NC Kryo was

actually put to a vote. See Ex. M to Gilead Brief.
specifically Boehm and Strathmeyer, failed to fill officer and director positions as they came

open, and that, when positions were filled, corporate titles were not taken seriously. Only

when it came to closing the Kryo Transaction, Gilead contends, did the Board appoint a full

complement of corporate officers. Finally, Gilead contends that the approval of the Kryo

Transaction by the shareholders of NC Kryo was "tainted" by the failure to follow corporate

formalities in that the shareholders were not provided with all material information

regarding the transaction. In support of this final contention, Gilead adds that "there is no

indication that those shareholders who asked for a complete copy [of the asset purchase

agreement] were provided it."

37. On the evidence presented by the parties, the Court cannot conclude that, on

the whole, NC Kryo, by and through Boehm and Strathmeyer, failed to adequately maintain

corporate formalities. It does appear that at least one Board meeting, possibly more, lacked

adequate record keeping, and that NC Kryo operated with vacancies on its Board and in

corporate offices. While the Court acknowledges the record reveals that, at times, it appears

that record keeping was not the highest priority for NC Kryo, the evidence presented by

Gilead does not rise to the level that North Carolina appellate courts have required to support

invocation of the instrumentality rule. Missing from Gilead's argument is any evidence that

Boehm and/or Strathmeyer commingled personal funds with NC Kryo funds, transferred NC

Kryo funds between company accounts and personal accounts without formal records, failed

to properly adopt by-laws, or failed to issue shares.

38. The inadequacies in record keeping identified by Gilead are not as systemic as

in cases where failure to maintain corporate formalities has been a factor favoring veil

piercing. As such, this factor, the failure to maintain corporate formalities, does not weigh in

favor of piercing the corporate veil of NC Kryo.

NC Kryo's Financial Condition
39. Gilead next claims that because NC Kryo was "always insolvent," the Court

should pierce the corporate veil and compel the Plaintiffs to arbitration. In the

instrumentality rule analysis, however, courts distinguish between inadequate capitalization

borne out of deception or fraud, see Fischer Inv. Capital, Inc. v. Catawba Dev. Corp., 200 N.C.

App. 644, 653 (2009) (where corporation's principal allegedly transferred assets "for the

purpose of avoiding payment" of a debt), and inadequate capitalization "arising simply out of

a lack of funds available for contribution to the enterprise." Russell M. Robinson II, Robinson

on North Carolina Corporation Law § 2.10[2] (hereinafter "Robinson").

40. Here, the record before the Court indicates that, while NC Kryo did suffer from

"inadequate capitalization" in the most literal sense, NC Kryo's financial condition was not

the product of fraud or deception, but was due instead to NC Kryo's circumstance as a start-

up company struggling to raise capital. The record indicates that NC Kryo made multiple

attempts to secure operating capital, including those that resulted in the Plaintiffs'

investment in the company. Gilead does not direct the Court to any evidence in the record

that indicates NC Kryo's financial condition was a result of fraud or other improper conduct

on the part of Plaintiffs, such as using corporate funds for their personal benefit. Instead,

Gilead contends that NC Kryo's "congenital insolvency" supports its veil piercing claim.

However, the mere fact that NC Kryo's capitalization efforts did not ultimately yield enough

capital for the company to survive should not, without more, support the drastic remedy of

disregarding the corporate form.

Use of Corporate Funds for Personal Reimbursement

41. Gilead's final factor in support of piercing NC Kryo's corporate veil is that NC

Kryo directors, specifically Plaintiffs Boehm and Strathmeyer, approved a $5,000 payment

to Eric Hallman for "personal expenses."
42. One of the factors cited in Green in support of disregarding the corporate form

is the siphoning of corporate funds by the dominant shareholder. In that case, corporate funds

were used "to pay personal expenses, such as home mortgage and utility bills." Green, 367

N.C. at 145. Similarly, in Fischer Investment Capital, Inc., the Court of Appeals held that

the plaintiff stated a claim for piercing the corporate veil where plaintiff alleged, among other

things, that the principal of the defendant, Mark Lewis, siphoned corporate funds for his own

benefit. Fischer Inv. Capital, Inc., 200 N.C. App. at 652.

43. At the outset, the Court recognizes the situation at bar differs slightly from

those, such as Green, in which using corporate funds for personal purposes has been a key

factor supporting the application of the instrumentality rule. Here, Gilead does not contend

that Boehm and Strathmeyer used their positions as directors to transfer corporate funds to

themselves for their personal benefit, but, rather, to benefit another director, Eric Hallman.45

Nevertheless, Gilead maintains that the approval of the payment to Eric Hallman can

support its veil piercing argument.

44. It is undisputed that Boehm and Strathmeyer, in their role as directors of NC

Kryo, voted to approve the $5,000 payment to Eric Hallman. However, the evidence presented

by Gilead does not necessarily support the claim that these expenses were "personal," as

those in Green, and not genuine business expenses. The minutes from the February 8, 2011,

Board meeting in which the reimbursement was approved reflect that these expenses were

considered "reimbursable."46 Moreover, in opposition to Plaintiff's Declaratory Action, Gilead

submitted an e-mail exchange involving Michael J. Schierbeek, then Chief Financial Officer

of NC Kryo, that reflects that the expenses submitted by Eric Hallman were the subject of at

45 See Gilead Brief p. 22.
46 Exhibit FF to Gilead Brief.
least some discussion among the directors and officers regarding whether they were

reimbursable.47

45. Simply stated, it is unclear based on the record before the Court that the

payment to Eric Hallman for expenses incurred was truly a "siphoning of corporate funds" as

occurred in Green, or as was alleged in Fischer Investment Capital. As such, the

reimbursement of funds does not necessarily support the drastic remedy of disregarding NC

Kryo's corporate form.

46. In sum, the record before the Court clearly indicates that Boehm and

Strathmeyer controlled NC Kryo. However, the control exerted by those individuals does not

rise to the level of "complete domination" required to support piercing the corporate veil.

Elements 2 and 3: Control Used to Perpetrate a Wrong, Proximately Causing
Gilead's Injuries

47. The exercise of domination and control over the corporation is a "threshold"

requirement for piercing the corporate veil. See Atlantic Tobacco Co. v. Honeycutt, 101 N.C.

App. at 165. Here, having found that the evidence before the Court fails to establish that

Plaintiffs dominated and controlled NC Kryo, "it is not possible to proceed to the further

issues of whether that control was used to perpetrate a wrong, or whether the control

proximately caused [Gilead's] injuries." Id.48

Cato Analysis

48. Having already found that a full G.S. 1-569.7 inquiry is the proper method of

analysis in this matter, the Court will nevertheless address Gilead's contention that

application of the Fourth Circuit standard, as stated in Smith v. Cato, supra, would lead to

different result. In Cato, the plaintiff entered into a “complex business and multifaceted

47 Exhibit CC to Gilead Brief.
48 The Court also notes that Gilead did not present any evidence that Boehm or Strathmeyer took

any action with the express intent of defrauding Gilead or any other customer or creditor.
contractual relationship”, including an employment agreement, with Cato Enterprises,

LLC, and Cato Management, LLC ("Cato Entities"). 2006 U.S. Dist. LEXIS 31935, **2-3.

The employment agreement contained an arbitration clause. Wayland H. Cato, Jr.

("Defendant") was the manager of both of the Cato Entities. Id. at *2. Defendant

“personally negotiated” the integrated business agreement with plaintiff, and signed the

employment agreement in his capacity as manager of the Cato Entities, but not in his

individual capacity. Id. at **3-4. The Cato Enterprises subsequently terminated the

plaintiff, and Cato Entities, the plaintiff and Defendant brought claims against one another

in court and under the arbitration clause in the employment agreement. The plaintiff

sought to compel Defendant to arbitrate claims brought in the federal court lawsuit under

the arbitration agreement in the employment agreement. Id. at **6-8. Defendant opposed

arbitration on the grounds that he had not signed the employment agreement in his

individual capacity, but only as the manager for the Cato Entities and, accordingly wasn’t a

party to the arbitration agreement. Id. at *9.

49. In Cato, the court recognized that “in an appropriate case” a “non-signatory

can enforce, or be bound by, an arbitration provision within a contract executed by other

parties.” 2006 U.S. Dist. LEXIS 31935, **22-23. The court also held that the Fourth Circuit

had created an exception to the general rule that a party could not be compelled to arbitrate

claims he has not agreed to arbitrate when "(1) the allegations against a non-signatory and

a signatory are based on the same facts, and are inherently inseparable or closely

intertwined; and (2) the non-signatory exercises substantial control over the signatory's

activities." Id. at *20. Applying these factors, the court concluded that the claims being

raised by and against the non-signatory, Defendant, and the signatories, Plaintiff and the

Cato Entities, were “inherently inseparable and closely intertwined.” Id. at *22. The Court

further held Defendant exercised control over of the Cato Entities as manager, Defendant
"signed the Employment Agreement, which contained an arbitration provision, in his

capacity as manager,” and also “personally negotiated each component part of the parties

integrated business relationship.” Id. at **21-22. Accordingly, the court held that

Defendant should be required to arbitrate.

50. This Court finds on that on the record before it that Gilead has not satisfied

the two-prong Cato standard. First, in this case, the allegations against Plaintiffs are not

based on the same facts, or inherently inseparable or closely intertwined, with the

allegations in the underlying arbitration against the signatory to the Gilead Contract, GA

Kryo/NC Kryo (hereinafter collectively “Kryo”). In the arbitration, Gilead makes claims

arising from the alleged breach of the Gilead contract by Kyro. Gilead alleges, among other

things, that Kyro breached the Gilead Contract by improperly storing and recording

Gilead’s samples, and improperly failed to maintain adequate insurance coverage. Gilead’s

allegations against Plaintiffs, on the other hand, are aimed at providing a basis for holding

someone liable for damages should they prevail on the breach of contract allegations. As

discussed at length herein, the allegations against Plaintiff in the arbitration are that they

operated NC Kyro as a sham, dominated and controlled its business practices, policies and

finances, and used such domination and control to perpetrate a fraud on Gilead. Gilead has

made no allegations that Plaintiffs were personally involved in any manner in performing

NC Kryo’s obligations under the Gilead Contract. Whatever overlap there may be between

the issues of whether Kryo breached the Gilead Contract and the veil-piercing or

instrumentality allegations against Plaintiffs, they certainly are not “inherently

inseparable”.

51. Even if Gilead were able to satisfy the first prong of the Cato standard, it has

not shown that the Plaintiffs, as non-signatories, exercised substantial control over the

signatory's activities. Here, as discussed above, Gilead's argument that Plaintiffs controlled
NC Kryo rests almost entirely on Boehm and Strathmeyer's roles as directors.49 Gilead

presented no evidence that Plaintiffs exercised control over the day-to-day operations of NC

Kryo as officers or managers. In addition, in Cato, that Defendant was intimately involved

in negotiating the agreements underlying the claims between the parties, and even signed

the agreement on behalf of the Cato Entities. Those types of facts simply are not present in

this case where there is no evidence connecting Boehm or Strathmeyer to the Gilead

Contract.

52. Accordingly, even under the Cato analysis, Gilead has not shown that

Plaintiffs should be compelled to arbitrate with Gilead.

NOW THEREFORE, based on the foregoing FINDINGS and CONCLUSIONS, IT IS

ORDERED that:

1. To the extent that Plaintiffs' Declaratory Action Staying Arbitration requests

this Court to find that Plaintiffs are not bound by the arbitration provision in the Gilead

Contract, that claim is GRANTED.

2. As to Plaintiff Cold Springs Ventures, LLC, Plaintiff Bruce J. Boehm, and

Plaintiff James M. Strathmeyer, the Arbitration is permanently STAYED, and Defendants

are permanently ENJOINED from attempting to arbitrate their claim for breach of the

Gilead Contract against Plaintiffs.

3. Nothing in this Order shall be construed as a ruling on the merits of

Defendant Gilead Sciences, Inc.'s instrumentality rule theory, nor shall this Order have any

preclusive effect on any subsequent attempt to hold Plaintiffs liable to Gilead under the

instrumentality rule.

49 As also noted above, Gilead presents no evidence that Cold Springs exercised any control over NC

Kryo.
4. Except as expressly granted herein, Plaintiffs' Declaratory Action to Stay

Arbitration is DENIED.

This the 6th day of January, 2015.