Ddm&s Holdings, LLC v. Doc Watson Enters., LLC

DDM&S Holdings, LLC v. Doc Watson Enters., LLC, 2016 NCBC 86.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
CATAWBA COUNTY 14 CVS 3107

DDM&S HOLDINGS, LLC; )
NICHOLAS DICRISTO; JOHN )
DICRISTO; CHARLES MCEWEN; )
and JON SZYMANSKI, )
)
Plaintiffs, ) ORDER AND OPINION ON PLAINTIFFS’
v. ) MOTION TO DISMISS
) COUNTERCLAIMS
DOC WATSON ENTERPRISES, LLC;
)
T. STEUART WATSON; and
)
DONALD PHILLIP SMITH, JR.,
)
)
Defendants.
)

1. THIS MATTER is before the Court upon Plaintiffs DDM&S Holdings, LLC,

Nicholas DiCristo, John Dicristo, Charles McEwen, and Jon Szymanski’s

(collectively, “Plaintiffs”) Motion to Dismiss Defendants Doc Watson Enterprises,

LLC (“DWE”) and T. Steuart Watson’s (collectively, the “Watson Defendants”)

Counterclaims (the “Motion”) pursuant to Rule 12(b)(6) of the North Carolina Rules

of Civil Procedure (“Rule(s)”). For the reasons discussed below, the Court hereby

DENIES the Motion.

Nexsen Pruet, PLLC, by R. Daniel Boyce, and Marks & Klein, LLP, by Justin
M. Klein, for Plaintiffs DDM&S Holdings, LLC, Nicholas DiCristo, John
DiCristo, Charles McEwen, and Jon Szymanski.

Quinn, Connor, Weaver, Davies & Rouco LLP, by Richard P. Rouco, and Rouco
Law PLLC, by George Rouco, for Defendants Doc Watson Enterprises, LLC
and T. Steuart Watson.

Jones Childers McLurkin & Donaldson PLLC, by Mark L. Childers, for
Defendant Donald Phillip Smith, Jr.

Robinson, Judge.
I. INTRODUCTION

2. This lawsuit was originally filed in 2014 and arises out of Plaintiffs’

contention that Plaintiffs were improperly squeezed out of PoliceReports.US

(“PRUS”) by the Watson Defendants and Defendant Donald Phillip Smith, Jr. in

advance of a lucrative sales transaction, which caused Plaintiffs damage.

3. After Plaintiffs filed an Amended Complaint in February 2016, the Watson

Defendants filed Counterclaims against Plaintiffs for abuse of process and tortious

interference with contract, alleging that Plaintiffs filed their lawsuit in order to

induce the purchaser of PRUS to withhold certain escrow funds from the Watson

Defendants, and thus to coerce the Watson Defendants into paying Plaintiffs

additional compensation for their membership interest in PRUS.

4. Because the Court determines that the Watson Defendants have

adequately pleaded claims for abuse of process and tortious interference with

contract, the Court concludes that the Motion should be denied.

II. PROCEDURAL HISTORY

5. Plaintiffs filed their original Complaint in this action on December 23, 2014.

6. The case was designated as a complex business case pursuant to N.C. Gen.

Stat. § 7A-45.4 by order of the Chief Justice of the North Carolina Supreme dated

January 26, 2015, and was assigned to the Honorable Louis A. Bledsoe, III by order

dated the same day. The case was later reassigned to the undersigned by order dated

July 5, 2016.
7. After an initial period of substantial discovery, and a mediation impasse,

Plaintiffs filed a Motion for Leave to File Amended Complaint on January 25, 2016.

The Court (Bledsoe, J.) entered an Order granting that motion, and Plaintiffs filed

their Amended Complaint on February 22, 2016.

8. Mr. Smith filed his Answer on April 22, 2016.

9. On May 26, 2016, the Watson Defendants filed their Answer to Amended

Complaint and Counterclaims.

10. Plaintiffs filed the Motion on July 15, 2016. Briefing was completed, and

the Court held a hearing on the Motion on October 5, 2016.

III. FACTUAL BACKGROUND

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

12(b)(6), but only recites those facts included in the Watson Defendants’

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

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

758 (1986).

12. On November 12, 2013, Plaintiffs assigned their membership interest in

Police Reports.US to DWE in exchange for a sum of $2,000,000 to be paid in

installments, pursuant to an Assignment Agreement (the “Assignment Agreement”).

(Watson Defs.’ Countercl. ¶ 1.) The Assignment Agreement provides that the parties

to that Agreement

generally release and discharge [each party] from any and all claims,
liabilities, expenses, damages, demands, actions and causes of action of
any kind, whether known or unknown, liquidated or unliquidated,
absolute or contingent, in law or in equity, arising from or relating to
facts occurring during the period from the beginning of time to the end
of the Earth, including but not limited to any and all claims against
Assignee, Company, Derochers, Huneycutt and Watson or any of them
arising out of or relating to the Assignor’s Units and Membership
Interest in the Company or the operation of the Company at any time.

(Watson Defs.’ Countercl. ¶ 3.)

13. The Assignment Agreement also contained a “conditional tail payment”

provision, which provided that, in the event PRUS was sold to a third party at or

above a minimum trigger price, Plaintiffs would receive a conditional tail payment

that was to be calculated as a percentage of the actual total sales price. (Watson

Defs.’ Countercl. ¶ 4.)

14. On August 4, 2014, the Watson Defendants executed a purchase agreement

with LexisNexis Claims Solutions, Inc. (“LexisNexis”) (the “LexisNexis Agreement”),

pursuant to which LexisNexis acquired PRUS. From the proceeds of that transaction,

Plaintiffs received (1) a payoff of all outstanding amounts owed under the Assignment

Agreement, and (2) the conditional tail payment. (Watson Defs.’ Countercl. ¶ 5.)

15. Plaintiffs received a copy of the LexisNexis Agreement, and were aware

that it contained an indemnification escrow, which held back approximately

$2,000,000 (the “Escrow Funds”). (Watson Defs.’ Countercl. ¶¶ 6–7.)

16. Shortly after filing this lawsuit, Plaintiffs notified a LexisNexis affiliate

that Plaintiffs had filed a lawsuit related to the sale of Plaintiffs’ membership interest

to the Watson Defendants, and requested that LexisNexis preserve relevant

documents. (Watson Defs.’ Countercl. ¶ 8.) Additionally, by naming Mr. Smith as a
defendant, Plaintiffs caused Mr. Smith to file a notice of claim against the

indemnification escrow. (Watson Defs.’ Countercl. ¶ 9.)

17. The Watson Defendants allege that the notice from Mr. Smith, and the

preservation letter sent to LexisNexis, caused LexisNexis to notify the escrow agent

to withhold any distribution of the Escrow Funds. (Watson Defs.’ Countercl. ¶ 10.)

The Watson Defendants have not received distributions of any of the Escrow Funds.

(Watson Defs.’ Countercl. ¶ 10.)

18. The Watson Defendants further allege that Plaintiffs either knew or

wantonly and recklessly disregarded the fact that filing suit regarding the sale of

their membership interest to the Watson Defendants would induce LexisNexis to

place a hold on distribution of the Escrow Funds. Thus, the Watson Defendants

allege, Plaintiffs filed this lawsuit in an effort to prevent distributions of the Escrow

Funds, and thereby gain leverage to extract additional money from the Watson

Defendants. (Watson Defs.’ Countercl. ¶ 11.)

IV. LEGAL STANDARD

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

reviews the allegations of the Watson Defendants’ Counterclaims in the light most

favorable to the Watson Defendants. The Court’s inquiry is “whether, as a matter of

law, the allegations of the [counterclaims], treated as true, are sufficient to state a

claim upon which relief may be granted under some legal theory.” Harris v. NCNB

Nat’l Bank, 85 N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987). The Court construes
the Counterclaims liberally and accepts all allegations as true. Laster v. Francis, 199

N.C. App. 572, 577, 681 S.E.2d 858, 862 (2009).

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

[counterclaim] on its face reveals that no law supports [defendant’s] claim; (2) when

the [counterclaim] reveals on its face the absence of fact sufficient to make a good

claim; [or] (3) when some fact disclosed in the [counterclaim] necessarily defeats the

[defendant’s] claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224

(1985); see also Jackson v. Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743, 745

(1986). Otherwise, “a [counterclaim] should not be dismissed for insufficiency unless

it appears to a certainty that [defendant] is entitled to no relief under any state of

facts which could be proved in support of the claim.” Sutton v. Duke, 277 N.C. 94,

103, 176 S.E.2d 161, 166 (1970) (emphasis omitted).

21. The Court 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). The Court can also ignore a party’s legal conclusions set forth

in its pleading. McCrann v. Pinehurst, LLC, 225 N.C. App. 368, 377, 737 S.E.2d 771,

777 (2013).

V. ANALYSIS

22. The Watson Defendants assert two counterclaims against Plaintiffs: (1)

abuse of process, and (2) intentional interference with contract.
A. Abuse of Process

23. “[A]buse of process is the misuse of legal process for an ulterior purpose.”

Chidnese v. Chidnese, 210 N.C. App. 299, 310, 708 S.E.2d 725, 734 (2011) (quoting

Fowle v. Fowle, 263 N.C. 724, 728, 140 S.E.2d 398, 401 (1965)). An abuse of process

claim “requires both an ulterior motive and an act in the use of the legal process not

proper in the regular prosecution of the proceeding.” Stanback v. Stanback, 297 N.C.

181, 201, 254 S.E.2d 611, 624 (1979) (quoting R. Byrd, Malicious Prosecution in North

Carolina, 47 N.C.L. Rev. 285, 288 (1969)).

The ulterior motive requirement is satisfied when the plaintiff [or
counterclaim plaintiff] alleges that the prior action was initiated by
defendant [or counterclaim defendant] or used by him to achieve a
collateral purpose not within the normal scope of the process used. The
act requirement is satisfied when the plaintiff alleges that once the prior
proceeding was initiated, the defendant committed some willful act
whereby he sought to use the existence of the proceeding to gain
advantage of the plaintiff in respect to some collateral matter.

Id. Ultimately,

[t]he test as to whether there is an abuse of process is whether the
process has been used to accomplish some end which is without the
regular purview of the process, or which compels the party against
whom it is used to do some collateral thing which he could not legally
and regularly be compelled to do.

Mfrs. & Jobbers Fin. Corp. v. Lane, 221 N.C. 189, 196, 19 S.E.2d 849, 853 (1942).

24. As to the ulterior motive requirement, the Watson Defendants allege that

Plaintiffs “filed suit for the ulterior purpose of preventing distributions from the

indemnification escrow to [the Watson Defendants].” (Watson Defs.’ Countercl. ¶ 16.)

The Court concludes, and Plaintiffs do not dispute, that this is a sufficient allegation

that the Plaintiffs initiated their action for the collateral purpose of preventing the
distributions of the Escrow Funds to the Watson Defendants, and that this purpose

was not within the normal scope of the process used.

25. As to the act requirement, the Watson Defendants allege that “[a]fter filing

of suit, [Plaintiffs] notified LexisNexis of their lawsuit [by sending the preservation

letter] knowing it would result in the non-distribution of funds from the

indemnification escrow. [Plaintiffs] took such action in order to coerce or oppress the

[Watson Defendants] into paying additional compensation for [Plaintiffs’]

membership interest.” (Watson Defs.’ Countercl. ¶ 16.)

26. The Court concludes that these allegations, taken as true, sufficiently state

a claim for abuse of process to survive a motion to dismiss under Rule 12(b)(6). The

Watson Defendants have alleged that an act done after the proceeding was initiated—

the sending of the preservation letter—was done to gain an advantage over Plaintiffs

with respect to a collateral matter.

27. Plaintiffs argue that a preservation of evidence letter can never serve as

the basis for an abuse of process claim. Indeed, all other things equal, there is nothing

inherently improper about a plaintiff sending a letter to individuals who may have

relevant evidence requesting that they preserve such evidence. It is a routine

litigation practice. The fact that is a routine litigation practice, however, does not

mean that such an act can never be used to gain an advantage with respect to some

collateral matter. North Carolina courts consistently hold that acts otherwise routine

and permissible can constitute an improper act sufficient to satisfy the “act” element

of an abuse of process claim. See, e.g., Hewes v. Wolfe, 74 N.C. App. 610, 614, 330
S.E.2d 16, 19 (1985) (denying Rule 12(b)(6) motion where plaintiff alleged that

defendants filed notices of lis pendens in order to coerce plaintiffs and to achieve a

purpose for which lis pendens was never intended).

28. If, through discovery, the Watson Defendants are able to prove what they

allege—that Plaintiffs sent the preservation of evidence letter in order to coerce the

Watson Defendants into paying additional compensation for Plaintiffs’ membership

interest in PRUS—then such proof would be sufficient for an abuse of process claim.

Coercing a party into paying additional monies is not a purpose for which a

preservation of evidence letter is intended. See, e.g., Carson v. Moody, 99 N.C. App.

724, 729, 394 S.E.2d 194, 198 (1990) (“Use of process to obtain a payment of a civil

claim meets the second prong of the test.”). That Plaintiffs contend that this was not

their purpose for sending the letter is irrelevant to the determination of whether the

Watson Defendants have sufficiently pleaded their claim to withstand Rule 12(b)(6)

dismissal.

29. Accordingly, the Court concludes that Plaintiffs’ Motion with respect to the

Watson Defendants’ abuse of process counterclaim should be denied.

B. Tortious Interference with Contract

30. In order to state a claim for tortious interference with contract, a plaintiff

must allege:

(1) a valid contract between the plaintiff and a third person which
confers upon the plaintiff a contractual right against a third person; (2)
the defendant knows of the contract; (3) the defendant intentionally
induces the third person not to perform the contract; (4) and in doing so
acts without justification; (5) resulting in actual damage to plaintiff.
Area Landscaping, L.L.C. v. Glaxo-Wellcome, Inc., 160 N.C. App. 520, 523, 586 S.E.2d

507, 510 (2003). As to the fourth element, “[i]nterference is without justification if a

defendant’s motive is not reasonably related to the protection of a legitimate business

interest.” Sellers v. Morton, 191 N.C. App. 75, 82, 661 S.E.2d 915, 921 (2008). Thus,

here, the Watson Defendants “must show that [Plaintiffs] acted with malice and for

a reason not reasonably related to the protection of a legitimate business interest of

the [Watson Defendants].” Id. “A motion under Rule 12(b)(6) should be granted when

the complaint reveals that the interference was justified or privileged.” Peoples Sec.

Life Ins. Co. v. Hooks, 322 N.C. 216, 220, 367 S.E.2d 647, 650 (1988). “[T]he complaint

must admit of no motive for interference other than malice.” Filmar Racing, Inc. v.

Stewart, 141 N.C. App. 668, 674, 541 S.E.2d 733, 378 (2001).

31. In their Motion, Plaintiffs contend that the Watson Defendants’ claim fails

because Plaintiffs had a legitimate business interest in filing the lawsuit. The

Watson Defendants’ relevant allegations include the following:

 the Watson Defendants have a valid contract with LexisNexis regarding

the purchase of PRUS that entitles the Watson Defendants to payment

of the Escrow Funds, (Watson Defs.’ Countercl. ¶ 21);

 Plaintiffs received a copy of the LexisNexis purchase agreement,

(Watson Defs.’ Countercl. ¶ 6), and were aware that the LexisNexis

purchase agreement contained an indemnification escrow, (Watson

Defs.’ Countercl. ¶ 7);
 Plaintiffs filed suit to induce LexisNexis to assert a claim to monies in

the indemnification escrow, preventing the release of the Escrow Funds

to the Watson Defendants, (Watson Defs.’ Countercl. ¶ 23);

 Plaintiffs’ lawsuit and its continued maintenance are without

justification because they had released all claims against the Watson

Defendants, had accepted payments from LexisNexis in satisfaction of

debt owed to Plaintiffs arising from the sale of their membership

interests, and knew that the Watson Defendants had no arrangements

or discussions with LexisNexis prior to the execution of the Assignment

Agreement, an allegation which was critical to Plaintiffs’ original

lawsuit, (Watson Defs.’ Countercl. ¶ 24); and

 as a result of Plaintiffs’ malicious conduct, the Watson Defendants did

not receive the first distribution from the Escrow Funds and have thus

been injured, (Watson Defs.’ Countercl. ¶ 25).

32. Contrary to Plaintiffs’ interpretation, these allegations, taken as true, do

not admit of a motive other than malice, or any legitimate business justification.

Plaintiffs cite to several North Carolina cases that have held the following are

legitimate business purposes:

 a defendant’s desire to “increase sales of its products,” Combs & Assocs.,

Inc. v. Kennedy, 147 N.C. App. 362, 271, 555 S.E.2d 634, 641 (2001);

 a defendant’s desire “to establish a competing business,” id.;
 a defendant’s desire “to satisfy the liens” on its assets, Sellers, 191 N.C.

App. at 83, 661 S.E.2d 915 at 922; and

 a defendant’s desire to pay a “less expensive price” for services, Area

Landscaping, 160 N.C. App. at 524, 586 S.E.2d 507, 510–11.

None of these legitimate business purposes, however, are at issue here. The Watson

Defendants’ Counterclaim does not admit, nor do Plaintiffs contend, that, in filing

their lawsuit, Plaintiffs had a desire to increase sales, establish a competing business,

satisfy liens, or pay a less expensive price.

33. In Hooks, plaintiff alleged that defendant offered plaintiff’s employees job

opportunities which induced them to terminate at-will contracts and induced them to

breach non-competition provisions in their employment contracts. Plaintiff also

alleged, however, that defendant’s new job involved developing new territory for the

new employer. The North Carolina Supreme Court concluded that such an allegation

admitted a legitimate business purpose. Hooks, 322 N.C. 216, 222, 367 S.E.2d 647,

650 (1988) (“We conclude that the hiring and placing of the plaintiff’s former

employees by the defendant for the purpose of developing the territory assigned to

him by a company competing with the plaintiff amounted to justifiable interference.”).

34. Here, however, there is no similar allegation. Despite Plaintiffs’

contentions (and allegations in their Amended Complaint, which the Court does not

consider in its resolution of this Motion) to the contrary, there is no allegation in the

Watson Defendants’ Counterclaims that Plaintiffs had any business justification for
filing the lawsuit other than the malicious purpose of inducing LexisNexis to prevent

the release of the escrow funds to the Watson Defendants.

35. Discovery may ultimately show that Plaintiffs were justified in interfering

with the LexisNexis Agreement; Plaintiffs certainly contend that they were, and

Plaintiffs’ Amended Complaint in this case alleges that they were. However,

considering only the allegations in the Watson Defendants’ Counterclaims, and

assuming those allegations to be true, the Watson Defendants have sufficiently stated

a claim for tortious interference with contract to survive Plaintiffs’ Motion.

36. Accordingly, the Court concludes that Plaintiffs’ Motion with respect to the

Watson Defendants’ counterclaim for tortious interference should be denied.

VI. CONCLUSION

37. For the foregoing reasons, the Court hereby DENIES the Motion.

SO ORDERED, this the 10th day of November, 2016.

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