Preiss v. Wine and Design Franchise

Preiss v. Wine and Design Franchise, 2018 NCBC 98.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
COUNTY OF WAKE SUPERIOR COURT DIVISION
17 CVS 11895
EMILY PREISS and WINE AND
DESIGN, LLC,
Plaintiffs,

v.

ORDER AND OPINION ON
WINE AND DESIGN FRANCHISE, DEFENDANTS’ MOTIONS TO DISMISS
LLC; HARRIET E. MILLS;
PATRICK MILLS; and CAPITAL
SIGN SOLUTIONS, LLC,

Defendants.

THIS MATTER comes before the Court on Harriet E. Mills (“Harriet”), Patrick

Mills (“Patrick”) and Capital Sign Solutions, LLC’s (“CSS”) (collectively the “Mills

Defendants”) Motion to Dismiss All Claims Against Them With Prejudice N.C. R. Civ.

P. 12(b)(1) and 12(b)(6) (“Mills Motion to Dismiss”, ECF No. 12), and on Wine and

Design Franchise, LLC’s Motion to Dismiss, (“Franchise Company Motion to

Dismiss”, ECF No. 14; collectively, the Mills Motion to Dismiss and the Franchise

Company Motion are the “Motions to Dismiss”).

THE COURT, after considering the Motions to Dismiss, the briefs filed in

support of and in opposition to the Motions, the arguments of counsel at the hearing,

and other appropriate matters of record, CONCLUDES that the Mills Motion should

be GRANTED, in part, and DENIED, in part, and the Franchise Company Motion

should be GRANTED, in part, and DENIED, in part.

Zaytoun Law Firm, PLLC, by Robert E. Zaytoun, John R. Taylor, and Matthew
T. Ballew for Plaintiffs Emily Preiss and Wine and Design, LLC.
Batten Lee, PLLC, by Gloria T. Becker, Matthew Mariani, and Kari Johnson,
for Defendants Harriet E. Mills, Patrick Mills, and Capital Sign Solutions,
LLC.

Ward and Smith, by A. Charles Ellis, Marla S. Bowman, and Joseph A.
Schouten, for Defendant Wine and Design Franchise, LLC.

McGuire, Judge.

I. FACTUAL AND PROCEDURAL BACKGROUND

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

N.C. Gen. Stat. § 1A-1, Rule 12(b)(6) (hereinafter, the North Carolina General

Statutes will be referred to as “G.S.” and the Rules of Civil Procedure will be referred

to as “Rule(s)”), but only recites those facts included in the 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). The facts in this case

are drawn from the First Amended Complaint. (“FAC”, ECF No. 3.)

2. In this Order the Court discusses only the facts relevant to the Court’s

consideration of and conclusions regarding the pending Motions to Dismiss. Other

aspects of the procedural and factual history in this case are fully described in the

Court’s previous Orders. (Order on Defs.’ Mot. to Strike CMR, ECF No. 45; Order on

Pls.’ Mot. to Consolidate, ECF No. 54; Order on Pls.’ Mot. to Appoint Guardian ad

Litem, ECF No. 72; Order on Pls.’ Mot. for Protective Order, ECF No. 74.)

3. This matter arises out of a broken business relationship between

friends. On June 1, 2010, Emily Preiss (“Emily”) and Harriet “co-founded Wine and

Design, LLC, a unique paint party business in which customers were invited to

engage in painting and design activities in a relaxed social atmosphere.” (ECF No.
3, at ¶ 10 (internal quotation marks omitted).) (Hereinafter, Wine and Design, LLC

will be referred to as the “Raleigh Studio.”) Initially, the business expenses, net

earnings, and management decisions were split on a “50-50 basis” between Emily and

Harriet. (Id. at ¶ 11.)

4. The Raleigh Studio was a success, and in June 2011, Emily and Harriet

organized Wine and Design Franchise, LLC (the “Franchise Company”) to franchise

the concept to other locations. Between 2011 and 2014, the Franchise Company

acquired over 40 franchised locations along the East Coast. The Franchise Company

paid monthly distributions to both Harriet and Emily in an average of $2,186 through

the last half of 2011; $4,676.33 in 2012; and $7,512 in 2013.

5. In the summer of 2013, personal conflicts between Emily and Harriet

festered and began to impact their business relationship. Emily assumed control over

both the Raleigh Studio and the Franchise Company for “most of the summer of

2013.” (Id. at ¶ 18.) During this time, Harriet criticized Emily’s disorganization, lack

of structure, her choice of a business manager, and her “failure to hire other

personnel.” (Id. at ¶ 19.)

6. Emily was under “extreme stress” as the result of “running both

businesses by herself and being harshly criticized by her close friend,” and this stress

was compounded by Harriet and Patrick telling employees, Emily’s estranged

husband John, and others that Emily was struggling with drug addiction and meeting

with drug dealers at work. (Id. at ¶¶ 20–22.) Emily alleges that this was false, and

that she “was not a drug addict, [but instead] she had long suffered from Adult
Attention Deficit Hyperactivity Disorder for which she had been treated with

Adderall by mental health providers since the late 1990s.” (Id. at ¶ 22.)

7. “Under pressure from Harriet, Patrick, and John, [Emily] enrolled at a

center known as ‘Behavioral Health of the Palm Beaches’ in Lake Worth, Florida” in

March of 2014. (Id. at ¶ 24.) The center was a treatment facility for drug addicts,

with a minimum stay of thirty days, and “required her to quit taking Adderall,

anxiety medication, and to daily attend group sessions.” (Id.) After only four days,

Emily asked to withdraw from the program.

8. Upon her return to Raleigh, Emily discovered that Harriet and Patrick

had locked her out of the premises of the Franchise Company and the Raleigh Studio,

and removed Emily from the companies’ bank accounts.

9. Emily and Harriet then spent several months during 2014 negotiating

potential changes to their business relationship and to the structure of the Franchise

Company. Emily and Harriet were represented by attorneys during the negotiations.

(Id. at ¶¶ 27–28.) Emily alleges that during the negotiations, Harriet “terminated

payments of distributions, dividends, salary, or any other form of compensation to

[Emily].” (Id. at ¶ 29.) The extended period of negotiations left Emily feeling

“extremely anxious, depressed, and confused. She was experiencing panic attacks . .

. despite therapy” and prescribed medications. (Id.)

10. In October 2014 Emily signed a document entitled “Restructure

Agreement.” (Id. at ¶¶ 30, 40; ECF No. 3, Ex. A.) The Restructure Agreement had

an effective date of September 1, 2014. Emily contemporaneously signed six
additional documents intended to restructure Emily’s relationship with Harriet and

with the Franchise Company in the following ways:

1. Harriet’s 50% interest in the Raleigh Studio was transferred entirely

to Emily such that Emily would hold 100% of the membership

interest in the Raleigh Studio;

2. 22% of Emily’s initial 50% membership interest in the Franchise

Company was transferred to Harriet such that Harriet would hold

72% of the membership interest in the Franchise Company and

Emily would hold 28%;

3. The Franchise Company would execute Operating Agreements that

would expressly provide that Harriet would be the manager of all

day-to-day operations of the Franchise Company, but that certain

actions would require consent of a supermajority (in excess of

Harriet’s 72% membership interest);

4. Emily would have no obligation to guarantee the debts of the

Franchise Company, and would not be a franchisee; and

5. The Raleigh Studio would be given the “royalty free right to use the

name ‘Wine and Design’ and associated trademarks within a 10 mile

protected territory of the Raleigh Studio” including “access and

utilization of the website registration system of” the Franchise

Company, outlined by a separate license agreement that would
“include the terms customary in such agreements to protect the

goodwill of the ‘Wine and Design’ intellectual property.”

(ECF No. 3, Ex. A at pp. 1–2; collectively, the Restructure Agreement and the six

additional documents are the “Restructure Agreement Documents”).

11. The Restructure Agreement contains a Mutual Agreement provision

that states

Harriet and [Emily] acknowledge that they, with their
advisors, negotiated the restructure and terms herein and
acknowledge their respective satisfaction of the division
and exchange of assets as contemplated herein and other
obligations as set forth.

(Id. at p. 4.) The Restructure Agreement also contains a broad mutual release of

claims. (Id.)

12. The Restructure Agreement Documents include a Franchise Company

Operating Agreement (“Operating Agreement”), a Trademark Licensing Agreement

(“TLA”), and a Manager Contract regarding Harriet’s management of the Franchise

Company (“Manager Contract”). Emily alleges that the Operating Agreement

provides Harriet, as Manager, the discretion to make monthly distributions of

$10,000 “taking into consideration the necessary working capital reserves of the

[Franchise] Company.” (ECF No. 3, at ¶ 35.) Despite having adequate capital

reserves, Harriet did not make the monthly distributions to Emily. Emily also alleges

that Harriet engaged in self-dealing, including making improper payments from the

Franchise Company to Patrick and CSS. (Id. at ¶¶ 33–34.) Finally, Harriet paid

herself salaries that exceeded the limits provided in the Manager Contract. (Id. at

¶¶ 38–39.)
13. The TLA establishes the Franchise Company’s exclusive ownership of

the Wine and Design brand name, but gives Emily a license for the royalty-free use

of the name. The Franchise Company retained the right to discontinue the license if

“Harriet[ ] decided that [Emily] had not complied with any of the [TLA]’s numerous

restrictions, quality assurance, [or] advertising requirements.” (Id. at ¶ 41.) The

TLA also provided that the Raleigh Studio would be listed on the Franchise

Company’s website. Despite this, “[f]rom time to time,” Harriet removed the Raleigh

Studio from the website. (Id. at ¶ 44.) Finally, Harriet had the option to terminate

the TLA “at any time upon [her] reasonable opinion that the Raleigh Studio had failed

to conform with the standards of quality in client care, use, advertising, and

promotion required by [the] Agreement.” (Id. at ¶ 45 (internal quotation marks

omitted).) Harriet allegedly made frequent claims that Emily was not in compliance

with the Restructure Agreement Documents. (Id. at ¶ 48.)

14. On September 28, 2017 Plaintiffs filed the complaint in this action. (Br.

Supp. Mills Mot. Dismiss, ECF No. 13, at p. 2.) On October 18, 2017 Plaintiffs filed

the FAC. The FAC contains a highly confusing set of ostensible “causes of action.”

The causes of action are titled as follows: “Breach of Fiduciary Duty; Coercion,

Duress, and Undue Influence” (ECF No. 3, at ¶¶ 54–64); “Conversion,

Misappropriation, Waste of Corporate Assets” (Id. at ¶¶ 65–68); “Conspiracy in

Restraint of Trade or Commerce; Unfair or Deceptive Trade Practices” (Id. at ¶¶ 69–

71); “Constructive Trust and Accounting” (Id. at ¶¶ 72–76); “Civil Conspiracy” (Id.

at ¶¶ 77–81); and “Derivative Claims.” (Id. at ¶¶ 82–85.) Plaintiffs’ prayer for relief
seeks (1) a declaration that the Restructure Agreement Documents are void and for

the Court to set them aside “restoring [Emily] to her 50% interest in the Franchise

Company;” (2) an award of compensatory damages, punitive damages, interests,

costs, and attorneys’ fees, and for damages found to result from a violation of G.S.

§ 75 to be trebled; (3) to “[h]old any assets, income streams, distributions or other

forms of remuneration due plaintiffs but received by individual defendants in

constructive trust for the benefit of plaintiffs;” and (4) an order for an accounting. (Id.

at pp. 19–20.)

15. On December 14, 2017, the Mills Defendants filed the Mills Motion to

Dismiss and accompanying brief in support. (ECF No. 12; ECF No. 13.) The Mills

Motion to Dismiss is made pursuant to Rule 12(b)(1) and Rule 12(b)(6) and seeks

dismissal of the entire FAC as against Harriet, Patrick, and CSS.

16. On December 20, 2017, the Franchise Company filed the Franchise

Company Motion and accompanying Brief in Support. (ECF No. 14; Br. Supp.

Franchise Co. Mot. Dismiss, ECF No. 15.) The Franchise Company Motion seeks to

dismiss Plaintiffs’ derivative claims for breach of fiduciary duty, coercion, duress, and

undue influence; conspiracy in restraint of trade and unfair and deceptive trade

practices; and civil conspiracy.

17. Plaintiffs filed a single brief in response to both Motions to Dismiss.

(Pls.’ Br. Resp. Mots. Dismiss, ECF No. 41.) The Mills Defendants filed a reply on

February 9, 2018. (Mills Defs.’ Reply Supp. Mot. Dismiss, ECF No. 48.) The

Franchise Company filed a reply on February 12, 2018. (Franchise Co. Reply Supp.
Mot. Dismiss, ECF No. 50.) The Court held a noticed hearing on the Motions to

Dismiss, and the Motions are now ripe for determination.

18. On March 29, 2018, while the Motions to Dismiss were pending,

Plaintiffs’ Counsel moved pursuant to Rule 17(b) for appointment of a guardian ad

litem (“GAL”) for Emily over Emily’s objection. (“Motion for GAL”, ECF No. 57.) In

response to the Motion for GAL, the Court held a hearing during which it conducted

an extensive voir dire examination of Emily and considered other evidence presented

by Plaintiffs’ counsel. The Court determined that there was not sufficient evidence

before it to proceed to a hearing on appointment of a GAL. On April 12, 2018, the

Court issued an order denying the Motion for GAL without prejudice. (Order on Mot.

for GAL, ECF No. 72.) On May 14, 2018 Plaintiffs’ Counsel filed a Renewed Motion

for Appointment of a GAL. (“Renewed Motion for GAL”, ECF No. 79.) The Court

summarily denied the Renewed Motion for GAL on the grounds that it was not

supported by any new evidence regarding Emily’s competency. (Order on Renewed

Motion for GAL, ECF No. 91.)

II. ANALYSIS

A. Standard of Review

19. 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 complaint, 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). Our appellate courts frequently reaffirm that
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.,

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 res judicata, and to show the

type of case brought.” Id.

20. 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 that 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). Otherwise,

“a complaint should not be dismissed for insufficiency unless it appears to a certainty

that plaintiff 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). The Court construes the complaint liberally and accepts all

allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681 S.E.2d 858, 862

(2009). However, 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).

21. The Court may consider documents which are the subject of plaintiff’s

complaint and to which the complaint specifically refers, including the contract that
forms the subject matter of the action. Oberlin Capital, L.P. v. Slavin, 147 N.C. App.

52, 60, 554 S.E.2d 840, 847 (2001).

B. The Issue of Emily’s Mental Incompetence or Disability

22. Underlying many of Plaintiffs’ claims in this lawsuit is the contention

that Emily is, and was at the time she executed the Restructure Agreement

Documents, mentally incompetent or under a disability. Plaintiffs allege that Emily

was not competent to enter into the Restructure Agreement Documents, rendering

those agreements void or voidable. (ECF No. 3, at ¶ 58.) In response to the Motions

to Dismiss, Plaintiffs also argue that the statutes of limitations applicable to Emily’s

claims should be tolled because “[Emily] was under a continuing disability from the

time she was first ousted from the [Franchise Company][ ] from which she has not

emerged.” (ECF No. 41, at pp. 9–11.) Accordingly, for purposes of deciding the

Motions to Dismiss, the Court will first determine whether Plaintiffs sufficiently

allege that Emily was mentally incompetent at the time she entered into the

Restructure Agreement Documents or at the time her claims accrued.

23. “A person entitled to commence an action who is under a disability at

the time the cause of action accrued may bring his or her action within the [applicable

statute of limitations], after the disability is removed.” G.S. § 1-17(a). For purposes

of G.S. § 1-17(a), “a person is under a disability if the person . . . is incompetent as

defined in G.S. § 35A-1101(7) or (8).” G.S. § 1-17(a)(3). G.S. § 35A-1101(7) provides

that

[An] [i]ncompetent adult [is] an adult . . . who lacks
sufficient capacity to manage the adult’s own affairs or to
make or communicate important decisions concerning the
adult’s person, family, or property whether the lack of
capacity is due to mental illness, mental retardation,
epilepsy, cerebral palsy, autism, inebriety, senility,
disease, injury, or similar cause or condition.

24. Plaintiffs’ allegations in the FAC do not include the words

“incompetent,” “disabled,” or “mentally ill.” Plaintiffs, however, contend that the

following allegations support the claim that Emily was incompetent at the time her

claims accrued:

1. At the end of 2013 Emily was “extreme[ly] stressed” from

running the Franchise Company and the Raleigh Studio. (ECF No. 3,

at ¶ 20);

2. Emily “had long suffered from Adult Attention Deficit

Hyperactivity Disorder for which she had been treated with Adderall by

mental health providers since the late 1990s when she was in college.”

(Id. at ¶ 22);

3. During the negotiations for the Restructure Agreement

Documents Emily was “extremely anxious, depressed, and

confused . . . [and] experiencing panic attacks” and was in therapy and

taking “different medications she was prescribed by her psychiatrist.”

(Id. at ¶ 29); and

4. Emily “was deprived of the free will and deliberate

judgment necessary to freely and voluntarily enter into the Restructure
Agreement Documents, such that the Restructure Agreement

Documents are void and should be set aside by this Court.” (Id. at ¶ 58.)

25. In support of their position, Plaintiffs rely on the holding in Fox v. Sara

Lee Corp., 210 N.C. App. 706, 709 S.E.2d 496 (2011). In Sara Lee Corp., the plaintiff

filed a complaint against her former employer and co-worker alleging negligent and

intentional infliction of emotional distress caused by the co-worker’s sexual assault

of the plaintiff. The plaintiff alleged that the sexual assault caused her to suffer

“severe emotional distress.” Id. at 708, 709 S.E.2d at 498. The trial court dismissed

her claims based on application of the statutes of limitations, and the plaintiff

appealed. Id.

26. On appeal, the plaintiff contended that the trial court erred in

dismissing her claims because the allegations in her complaint sufficiently alleged

that she was incompetent when her claims accrued and she was entitled to tolling of

the limitations periods. Id. The plaintiff alleged “[f]rom September, 2005 until

February 2007, . . . [p]laintiff's poor mental health, . . . [prevented] [p]laintiff from

working, managing her own affairs, coping with daily life, or going about by herself.

During much of this time . . . [p]laintiff was obliged to live with her parents because

she could not manage by herself.” Id. at 713, 709 S.E.2d at 501. The plaintiff further

alleged “that she was under psychiatric care, could not leave her house by herself,

and was unable to mentally function.” Id. Based on these allegations, and applying

the standard set forth in G.S. § 1101(7), the Court of Appeals held that plaintiff
sufficiently pleaded that she was mentally incompetent, and reversed the trial court.

Id. at 715, 709 S.E.2d at 502.

27. The holding in Sara Lee Corp. is inapplicable to this case, and highlights

the deficiencies in Plaintiffs’ allegations. Here, unlike in Sara Lee Corp., Plaintiffs

have not pleaded that Emily’s various mental conditions or her mental state rendered

her “incompetent” or prevented her from “working, managing her own affairs, coping

with daily life, or going about by herself.” Id. at 713, 709 S.E.2d at 501. Further,

although Plaintiffs allege that Emily was under psychiatric care, Plaintiffs do not

allege that she was suffering to the degree recognized by the North Carolina Court of

Appeals in Sara Lee Corp., where the plaintiff “could not leave her house by herself,

and was unable to mentally function” at any time relevant to the claims in this

lawsuit. Id. (quotation marks omitted).

28. “The appropriate test for establishing an adult incompetent is one of

mental competence to manage one’s own affairs. The term ‘affairs’ encompasses more

than just one transaction or one piece of property to which he may have a unique

attachment.” Soderlund v. Kuch, 143 N.C. App. 361, 373, 546 S.E.2d 632, 640 (2001)

(citations and quotation marks omitted) (emphasis in original). In Soderlund, the

plaintiff alleged that “his mental condition caused him to be incapable of

understanding his legal rights, making or communicating important decisions about

those rights or bringing a lawsuit.” Id. at 373, 546 S.E.2d at 640 (quotation marks

omitted). The plaintiff’s evidence established that “[he] suffered from extreme

feelings of shame and confusion,” “abus[ed] alcohol,” [was] “unable to form healthy
relationships with others or lead a normal life[,] . . . had several mental breakdowns,”

and “contemplated suicide.” Id. at 368, 546 S.E.2d at 637. The Court concluded that,

despite this strong evidence, the “plaintiff was not incompetent as per [G.S.] § 35A-

1101(7), and plaintiff's mental condition did not warrant tolling the [ ] statute of

limitations[,]” because the record evidence also showed he managed his own affairs,

held jobs, and managed his own day-to-day life. Id. at 373, 546 S.E.2d at 640.

29. The allegations in this case state only that Emily was diagnosed with

Adult Attention Deficit Hyperactivity Disorder, and at various times experienced

stress, anxiety, depression, confusion, and panic attacks. Plaintiffs do not allege that

any of these conditions, separately or together, made Emily unable to manage her

own affairs or tend to her daily life. To the contrary, Plaintiffs allege that throughout

all of the stressful events underlying Emily’s claims she has continued to operate the

Raleigh Studio.

30. The allegations are not sufficient to support the assertion that Emily

was mentally incompetent at the time she entered into the Restructure Agreement

Documents or at any other time relevant to the claims in this lawsuit. The allegations

do not support a claim that the Restructure Agreement Documents are void or

voidable, nor the argument that the statutes of limitations on any of Plaintiffs’ claims

should be tolled.

31. Therefore, to the extent Plaintiffs seek an order declaring the

Restructure Agreement Documents are void or voidable, as alleged in paragraph 58
of the FAC, the Motions to Dismiss should be GRANTED, and the claim and

allegations DISMISSED.

32. The Court now turns to a determination of Emily’s individual causes of

action.

C. Breach of Fiduciary Duty; Coercion, Duress, and Undue Influence

33. Plaintiffs First Cause of Action is labeled “Breach of Fiduciary Duty;

Coercion, Duress, and Undue Influence.” This attempt to assert four separately

recognized legal theories under one cause of action is needlessly confusing and

violates Rule 10(b), which states “[e]ach claim founded upon a separate transaction

or occurrence . . . shall be stated in a separate count . . . whenever a separation

facilitates the clear presentation of the matters set forth.” Rule 10(b); Musten v.

Musten, 36 N.C. App. 618, 619, 244 S.E.2d 699, 700–01 (1978) (“Rule 10(b) of the

Rules of Civil Procedure requires that claims founded upon separate transactions be

stated in separate counts.”).

34. In the first cause of action, Plaintiffs allege that Harriet’s breaches of

her fiduciary duties coerced and unduly influenced Emily into signing the

Restructure Agreement Documents “such that the Restructure Agreement

Documents are void.” (ECF No. 3, at ¶¶ 55–58.) Plaintiffs also allege that Harriet

breached fiduciary duties owed to Emily after the execution of the Restructure

Agreement Documents, apparently as the majority interest holder in the Franchise

Company. (Id. at ¶¶ 59–64.) However, Plaintiffs do not expressly allege that conduct

occurring after the execution of the Restructure Agreement Documents unduly

influenced or coerced Emily, nor what legal effect any alleged coercion had on Emily’s
legal rights after the Parties entered into the Restructure Agreement Documents.

Since Plaintiffs allege that Emily was coerced and unduly influenced by conduct that

allegedly constituted breaches of Harriet’s fiduciary duties, the Court concludes that

Plaintiffs have not stated a separate claim for coercion, duress, or undue influence,

and analyzes the first cause of action solely as a claim for breach of fiduciary duty.

35. In order to establish a claim for breach of fiduciary duty, a plaintiff must

show that (1) defendant owed plaintiff a fiduciary duty; (2) defendant breached that

fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury

to the plaintiff. Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013). A

fiduciary relationship may arise when “there has been a special confidence reposed

in one who in equity and good conscience is bound to act in good faith and with due

regard to the interests of the one reposing confidence[.]” Dalton v. Camp, 353 N.C.

647, 651–52, 548 S.E.2d 704, 707 (2001) (quoting Abbitt v. Gregory, 201 N.C. 577, 598,

160 S.E. 896, 906 (1931)) (internal quotations omitted). Such a relationship “extends

to any possible case in which a fiduciary relationship exists in fact, and in which there

is confidence reposed in one side, and resulting domination and influence on the

other.” Id. at 652, 548 S.E.2d at 707–08. However, “[o]nly when one party

figuratively holds all the cards—all the financial power or technical information, for

example—have North Carolina courts found that the special circumstance of a

fiduciary relationship has arisen.” Lockerman v. South River Elec. Membership Corp.,

794 S.E.2d 346, 352, 2016 N.C. App. LEXIS 1234, at *11 (2016) (quoting S.N.R.
Mgmt. Corp. v. Danube Partners 141, LLC, 189 N.C. App. 601, 613, 659 S.E.2d 442,

451 (2008)).

36. The Mills Defendants argue that Harriet did not owe Emily a fiduciary

duty prior to the execution of the Restructure Agreement Documents because Harriet

and Emily were equal owners and had equal membership interests in the Franchise

Company.

37. “Under the LLC Act, members of an LLC are like shareholders in a

corporation in that members do not owe fiduciary duties to each other or the LLC,

except a controlling member owes fiduciary duties to minority members.” Miller v.

Burlington Chem. Co., LLC, 2017 NCBC LEXIS 6, at *23 (N.C. Super. Ct. Jan. 27,

2017); Strategic Mgmt. Decisions v. Sales Performance Int’l, 2017 NCBC LEXIS 69,

at *10 (N.C. Super. Ct. Aug. 7, 2017) (citing Fiske v. Kieffer, 2016 NCBC LEXIS 22,

at *9 (N.C. Super. Ct. Mar. 9, 2016); Zagaroli v. Neill, 2016 NCBC LEXIS 106, at *18

(N.C. Super. Ct. Dec. 29, 2016).

38. Defendants are correct that Harriet owed no fiduciary duty to Emily

while they remained equal co-owners of the Franchise Company. Plaintiffs have not

pleaded facts that would support an allegation that Harriet owed Emily a fiduciary

duty on any other basis prior to execution of the Restructure Agreement Documents.

To the contrary, in their brief Plaintiffs state that “[Emily] and Harriet were 50/50

member owners of [the Franchise Company] and the Raleigh Studio, and successfully

co-managed them through the middle of March 2014.” (ECF No. 41, at pp. 2–3.) Once

the dispute arose between Emily and Harriet, they engaged in adversarial
negotiations of the Restructure Agreement Documents with the assistance of counsel

on both sides. Plaintiff does not allege that Emily placed any special confidence in

Harriet during the period of negotiations. Their relationship during the negotiations

was adversarial, and they were represented by attorneys. There could not have been

a fiduciary relationship between Emily and Harriet during this period. Cf. Piedmont

Inst. of Pain Mgmt. v. Staton Found., 157 N.C. App. 577, 583–84, 581 S.E.2d 68, 72–

73 (2003) (finding that the fiduciary duty trustee owed to beneficiaries ended when

during negotiation of a settlement agreement, “both parties were represented by

counsel” and “were negotiating for the termination of legal rights”); Lancaster v.

Lancaster, 138 N.C. App. 459, 463, 530 S.E.2d 82, 85 (2000) (“[W]hile a husband and

wife generally share a confidential relationship . . . [i]t is well established that when

one party to a marriage hires an attorney to begin divorce proceedings, the

confidential relationship is usually over.”); Harton v. Harton, 81 N.C. App. 295, 297–

98, 344 S.E.2d 117, 119 (1986) (holding that husband’s fiduciary duty to wife ended

when the parties separated and became adversaries negotiating over the terms of

their separation).

39. Therefore, the Mills Motion to Dismiss the first cause of action to the

extent the claim is based on acts occurring prior to the execution of the Restructure

Agreement Documents should be GRANTED.

40. Additionally, because all allegations relating to coercion, duress, or

undue influence are inextricably tied to the allegations of breaches of fiduciary duties

occurring prior to the execution of the Restructure Agreement Documents, to the
extent Plaintiffs purport to state causes of action for coercion, duress, and undue

influence, those causes of action are DISMISSED.

41. The Mills Defendants also argue that Plaintiffs’ claim for breach of

fiduciary duty for Harriet’s alleged breaches that took place prior to September 28,

2014 are barred by the three-year statute of limitations in G.S. § 1-52(1). (ECF No.

13, at pp. 6–7.)

42. “Allegations of breach of fiduciary duty that do not rise to the level of

constructive fraud are governed by the three-year statute of limitations applicable to

contract actions contained in N.C. Gen. Stat. § 1-52(1) (2003).” Toomer v. Branch

Banking & Trust Co., 171 N.C. App. 58, 66, 614 S.E.2d 328, 335 (2005). The Court

already concluded that the allegations do not support a claim that Emily was under

a disability that would toll the statute of limitations. Accordingly, the Mills Motion

to Dismiss the first cause of action to the extent it is based on alleged breaches of

fiduciary duties that took place prior to September 28, 2014 should be GRANTED.

43. After the Restructure Agreement Documents were signed, and Harriet

became the majority owner and member in the Franchise Company, the analysis

changes. As a majority owner of the Franchise Company, Harriet owed a fiduciary

duty to minority member Emily. Strategic Mgmt. Decisions, 2017 NCBC LEXIS 69,

at *10. Plaintiffs allege Harriet breached her fiduciary duty as majority member

through a number of improper and unfair acts including, inter alia, manipulating the

standards for making distributions to lower or eliminate Emily’s share of

distributions, diverting Franchise Company funds to Patrick and CSS, and
interfering with and terminating Emily’s rights to use the Wine and Design

trademark and website. (ECF No. 3, at ¶ 59.) The Court concludes that the

allegations are sufficient at this stage to support a breach of fiduciary duty claim

against Harriet for acts that occurred after the execution of the Restructure

Agreement Documents.

44. The Mills Motion to Dismiss the first cause of action to the extent the

claim is based on acts occurring after the execution of the Restructure Agreement

Documents should be DENIED.

45. Plaintiffs allege that Harriet breached her fiduciary duties “in collusion

with [Patrick] and [CSS].” (ECF No. 3, at ¶ 59.) However, Plaintiffs do not allege

facts that would support an allegation that Patrick or CSS owed Emily a fiduciary

duty. Accordingly, to the extent Plaintiffs attempt to bring the first cause of action

against Patrick and CSS, the Mills Motion to Dismiss Plaintiffs’ first cause of action

against Patrick and CSS should be GRANTED.

D. Conversion, Misappropriation, and Waste of Corporate Assets

46. Plaintiffs’ second cause of action is titled “Conversion, Misappropriation,

and Waste of Corporate Assets.” (ECF No. 3, at ¶¶ 65–68.) In support of this claim,

Plaintiffs allege that Harriet “converted and misappropriated Franchise Company

funds to the benefit of herself and” Patrick. (Id. at ¶ 66.)

47. Preliminarily, even under a generous reading of the FAC, there are no

allegations specifically against Patrick or CSS that would support claims for

conversion, misappropriation, or waste of corporate assets against them.
Accordingly, the Mills Motion to Dismiss Plaintiffs’ second cause of action as stated

against Patrick and CSS should be GRANTED.

a. Conversion and Misappropriation of Corporate Funds

48. “Conversion is defined as ‘an unauthorized assumption and exercise of

the right of ownership over goods or personal chattels belonging to another, to the

alteration of their condition or the exclusion of an owner’s rights.’” Norman v. Nash

Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000)

(quoting Spinks v. Taylor, 303 N.C. 256, 264, 278 S.E.2d 501, 506 (1981)). To state

a claim for misappropriation of corporate funds, a plaintiff must allege that the

defendant “(1) misappropriated funds, i.e. used funds for a purpose that does not

benefit the corporation; (2) converted the funds for a use not beneficial to the

corporation; and (3) converted the funds without authority.” Outen v. Mical, 118 N.C.

App. 263, 268, 454 S.E.2d 883, 886 (1995).

49. Plaintiffs’ claims for conversion and misappropriation of corporate funds

against Harriet are based on the same conduct as the breach of fiduciary duty claim

against Harriet for diverting corporate funds to herself and Patrick, (ECF No. 3, at

¶ 59(C)), and Plaintiffs would seem to be adequately protected by the surviving

breach of fiduciary duty claim against Harriet. Clearly, Plaintiffs would not be

entitled to recover twice for the same misconduct. Nevertheless, the Court concludes

that Plaintiffs have adequately pleaded claims for conversion and misappropriation

of corporate funds to survive dismissal at this stage of the case. The Mills Motion to
Dismiss Plaintiffs’ second cause of action for conversion and misappropriation of

corporate funds should be DENIED.

b. Waste of Corporate Assets

50. Although some jurisdictions recognize a claim for waste of corporate

assets, see, e.g., White v. Panic, 783 A.2d 543, 554 (Del. Oct. 3, 2001), “‘North Carolina

does not recognize corporate waste as an independent cause of action,’ because such

a claim is subsumed within a breach of fiduciary duty claim.” Gao v. Sinova

Specialties, Inc., 2016 NCBC LEXIS 104, at *22–23 (N.C. Super. Ct. Dec. 21, 2016)

(quoting Soft Line, S.p.A. v. Italian Homes, LLC, 2015 NCBC LEXIS 6, at *15–16

(N.C. Super. Ct. Jan. 16, 2015). See also, e.g., Green v. Condra, 2009 NCBC LEXIS

20, at *29 (N.C. Super. Ct. Aug. 14, 2009); McKee v. James, 2013 NCBC LEXIS 33, at

*41 (N.C. Super. Ct. July 24, 2013).

51. Accordingly, to the extent the second cause of action attempts to state a

claim for waste of corporate assets separate from the claim for breach of fiduciary

duty, the Motions to Dismiss should be GRANTED.

E. Conspiracy in Restraint of Trade & Unfair and Deceptive Trade
Practices

52. Plaintiffs label their third cause of action “Conspiracy in Restraint of

Trade of Commerce; Unfair or Deceptive Trade Practices.” (ECF No. 3, at 69–71.).

Plaintiffs allege that “Defendants’ actions . . . amount to a conspiracy in restraint of

trade under [G.S.] § 75-1 [ ] and unfair or deceptive trade practices under [G.S.] § 75-

1.1” (hereinafter, the North Carolina Unfair or Deceptive Trade Practices Act will be

referred to as “UDTPA”).
a. Conspiracy in Restraint of Trade

53. A conspiracy in restraint of trade is an agreement between multiple

market participants intending to illegally hinder trade or commerce. G.S. § 75-1.

“There has been little litigation as to the various kinds of contracts that may

constitute illegal restraints of trade under G.S. [§] 75-1,” but North Carolina courts

generally interpret G.S. § 75-1 by looking to the “body of law applying to the Sherman

Act.” E.g., Rose v. Vulcan Materials Co., 282 N.C. 643, 655, 194 S.E.2d 521, 530

(1973) (conducting a thorough review and analysis of English and American common

law on this topic).

[O]nly combinations or agreements which operate to the
prejudice of the public by unduly or unreasonably
restricting competition or restraining trade are illegal.
...
The combination is not objectionable if the restraint is such
only as to afford fair protection to the parties thereto and
not broad enough to interfere with the interest of the
public.

Id. at 656, 194 S.E.2d at 530–31. “Section 75-1 requires a plaintiff to allege (1) the

existence of an agreement in the form of a contract, combination, or conspiracy that

(2) imposes an unreasonable restraint on trade.” Sykes v. Health Network Sols., Inc.,

2017 NCBC LEXIS 73, at *58 (N.C. Super. Ct. Aug. 18, 2017) (citation and quotations

omitted). To establish a claim under G.S. § 75-1, “public damage must be alleged and

proven.” United Roasters, Inc. v. Colgate-Palmolive Co., 485 F. Supp. 1041, 1048

(E.D.N.C. 1979).

54. The FAC does not allege facts that would support an allegation that

Defendants have acted in violation of G.S. § 75-1. There is no allegation that multiple
market participants entered into a contract or other agreement that operated to the

damage of, or would have any adverse effect on, the public. The Mills Motion to

Dismiss Plaintiffs’ claim under G.S. § 75-1 for conspiracy in restraint of trade should

be GRANTED.

b. UDTPA

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

[in violation of G.S. § 75-1.1], 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).

56. In enacting 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 v. Thompson, 364 N.C. 47, 47–48, 691 S.E.2d 676, 676 (2010)

(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). “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. Assoc., 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 . . . .’”).
57. Plaintiffs’ claim for unfair or deceptive trade practices must fail to the

extent it is based upon actions internal to the Franchise Company prior to the

effective date of the Restructure Agreement Documents because such actions were

not in or affecting commerce.

58. Similarly, Plaintiffs’ claims relating to Harriet’s internal

mismanagement of the Franchise Company after the effective date of the Restructure

Agreement Documents, including Plaintiffs’ claims regarding Harriet’s improper

distribution of funds within the Franchise Company, are not in or affecting commerce

and should be dismissed.

59. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair

and deceptive trade practices, to the extent it is based on actions internal to the

Franchise Company both prior to and after the effective date of the Restructure

Agreement Documents, should be GRANTED.

60. After the effective date of the Restructure Agreement Documents, the

Raleigh Studio and the Franchise Company were two separate businesses. Dealings

between the two businesses were, arguably, in or affecting commerce. The allegations

relating to dealings between the Franchise Company and the Raleigh Studio are thin,

and are based entirely on the Franchise Company’s control over the company website

and enforcement of the TLA. Despite the thin allegations, the Court deems Plaintiffs’

UDTPA claim based on allegations relating to relations between the Franchise

Company and the Raleigh Studio sufficient to survive a Rule 12(b)(6) motion.
61. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair

and deceptive trade practices, to the extent it is based on alleged dealings between

the Raleigh Studio and the Franchise Company after the effective date of the

Restructure Agreement Documents, should be DENIED.

F. Civil Conspiracy

62. Plaintiffs allege that Harriet, Patrick, and CSS “entered into an

agreement to unlawfully and wrongfully cause devaluation of the Raleigh Studio to

eliminate it as competition of the franchisees of the Franchise Company.” (ECF No.

3, at ¶ 78.) The Mills Defendants argue that Plaintiffs have not adequately alleged

an agreement. (ECF No. 13, at p. 20.) Plaintiffs did not make any argument in

support of the civil conspiracy claim in their responsive brief.

63. “It is well established that ‘there is not a separate civil action for

civil conspiracy in North Carolina’” and “the conspiracy charge is simply a

mechanism for associating the defendants and broadening the admissible evidence.”

Plasman v. Decca Furniture (USA), Inc., 2016 NCBC LEXIS 80, at *33 (N.C. Super.

Ct. Oct. 21, 2016) (citations and quotations omitted). In order to properly plead civil

conspiracy, a complaint must allege “(1) an agreement between two or more

individuals; (2) to do an unlawful act or to do a lawful act in an unlawful way; (3)

resulting in injury to plaintiff inflicted by one or more of the conspirators; and (4)

pursuant to a common scheme.” Elliott v. Elliott, 200 N.C. App. 259, 264, 683 S.E.2d

405, 409 (2009) (emphasis added).

In civil conspiracy, recovery must be on the basis of
sufficiently alleged wrongful overt acts. The charge
of conspiracy itself does nothing more than associate the
defendants together and perhaps liberalize the rules of
evidence to the extent that under proper circumstances the
acts and conduct of one might be admissible against all.

Shope v. Boyer, 268 N.C. 401, 405, 150 S.E.2d 771, 773–74 (1966); see also,

GoRhinoGo, LLC v. Lewis, 2011 NCBC LEXIS 39, at *20 (N.C. Super. Ct. Sept. 9,

2011) (“Having joined the conspiracy, [two individual defendants] became exposed to

liability with [co-defendant] and any other co-conspirators for damages caused by any

act in furtherance of the common scheme.”).

64. A claim for civil conspiracy cannot survive when it relies upon mere

“suspicion or conjecture,” see S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC, 189

N.C. App. 601, 609, 659 S.E.2d 442, 449 (2008), and should be dismissed when it “fails

to allege how th[e] conspiracy came to be, or when, or where, or why” and “[t]he

complaint asserts mere conclusions concerning the elements of civil conspiracy,

without offering a scintilla of factual allegation in support of the claim.” Bottom v.

Bailey, 238 N.C. App. 202, 213, 767 S.E.2d 883, 890 (2014); see also Worley v. Moore,

2017 NCBC LEXIS 15, at *77 (N.C. Super. Ct. Feb. 28, 2017) (quoting Thomas &

Howard Co. v. Am. Mut. Liab. Ins. Co., 241 N.C. 109, 115, 84 S.E.2d 337, 341 (1954)

and Kirby v. Reynolds, 212 N.C. 271, 284, 193 S.E. 412, 420 (1937)).

65. Plaintiffs do not allege facts that support the allegation that CSS

participated in a civil conspiracy. To the extent the Mills Motion to Dismiss seeks

dismissal of the fifth cause of action as against CSS, the motion should be GRANTED.

66. With regard to the alleged conspiracy between Harriet and Patrick,

Plaintiffs allege that Harriet and Patrick “entered into an agreement to devalue the
Raleigh Studio and eliminate it as competition.” (ECF No. 3, at ¶ 78.) Plaintiffs also

allege that Harriet and Patrick spread false rumors about Emily, “disseminat[ed]

false and misleading advertising about” Emily’s involvement in the history of the

Franchise Company, and wrongfully interfered with and terminated Emily’s right to

use the “Wine and Design” name and website. (ECF No. 3, at ¶¶ 21 and 59(E–G).)

Plaintiffs further allege that Harriet and Patrick’s actions interfered with Emily’s

ability to operate the Raleigh Studio and impaired its goodwill and reputation. (Id.

at 60.)

67. The Court concludes that these allegations are minimally sufficient to

support Plaintiffs’ claim of a conspiracy between Harriet and Patrick. Accordingly,

the Motions to Dismiss Plaintiffs’ fifth cause of action against Harriet and Patrick

should be DENIED.

G. Derivative Claims

68. Plaintiffs’ sixth cause of action is labeled “Derivative Claims” and

alleges “[i]n the alternative to the individual causes of action . . . [Emily] is entitled

to bring these claims derivatively on behalf of Franchise Company.” (ECF No. 3, at

¶ 84.) The Franchise Company moves to dismiss Emily’s derivative claims with

regard to the first, third, and fifth causes of action on the grounds that those causes

of action allege only individual claims belonging to Emily, and not claims for injuries

to the Franchise Company. (ECF No. 15, at pp. 6–13.) The Mills Defendants argue1

1 In their brief in support, the Mills Defendants argued that Emily lacked standing to pursue

the derivative claims because she had not made a proper demand on the Franchise Company
pursuant to G.S. § 57D-8-01. (ECF No. 13, at pp. 21–22.) However, at the hearing on the
that all of Plaintiffs’ claims, except for the claims based on Harriet’s misappropriation

of corporate funds, allege injuries only to Plaintiffs, and not the Franchise Company

and are individual claims. (ECF No. 13, at p. 22.)

69. Generally, LLC members do not have standing to pursue individual

causes of action for wrongs or injuries to the LLC. Barger v. McCoy Hillard & Parks,

346 N.C. 650, 658, 488 S.E.2d 215, 219 (1997); Corwin v. British Am. Tobacco PLC,

796 S.E.2d 324, 338, 2016 N.C. App. LEXIS 1320, at *37–39 (2016), cert. granted, 369

N.C. 751 (June 8, 2017) (No. 56PA17). A member may be permitted to bring

derivatively claims belonging to the LLC if the member meets certain statutory

requirements. G.S. § 57D-8-01. “A derivative proceeding is a civil action brought . . .

in the right of’ a corporation . . . while an individual action . . . [brought] to enforce a

right which belongs to [plaintiff] personally.” Morris v. Thomas, 161 N.C. App. 680,

684, 589 S.E.2d 419, 422 (2003) (internal quotation marks omitted) (quoting Norman,

140 N.C. App. at 395, 537 S.E.2d at 253). The purpose of derivative claims is to allow

LLC members to assert the rights of the harmed LLC, and recovery in such actions

flows to the LLC, not to the individual member. Green, 367 N.C. at 141–42, 749 S.E.2d

at 268.

70. Accordingly, the Court must determine whether Emily’s2 claims truly

belong to the corporation or whether Emily’s claims are truly individual claims.

Norman, 140 N.C. App. at 395, 537 S.E.2d at 253. The Court notes that the law

Motions to Dismiss, all Defendants conceded Emily had satisfied the demand requirements
and that the Court has subject matter jurisdiction over Emily’s derivative claims.
2 Emily is alleged to be a member of the Franchise Company, but the Raleigh Studio is not

alleged to be a member. Any derivative claims, therefore, would be brought by Emily.
restricts the types of derivative claims because of “concerns that derivative actions

will be misused by self-selected advocates pursuing individual gain rather than the

interests of the corporation or the shareholders as a group, bringing costly and

potentially meritless strike suits.” Id. (citations and quotations omitted).

71. Emily’s third cause of action for unfair or deceptive trade practices and

fifth cause of action for civil conspiracy are alleged as individual claims for injuries

to Emily and the Raleigh Studio, and do not state claims belonging to the Franchise

Company. (ECF No. 3, at ¶¶ 78, 81.) Plaintiffs do not allege that the Franchise

Company was injured by these acts.

72. Therefore, the Franchise Company Motion to Dismiss Emily’s derivative

claims based on the third and fifth causes of action should be GRANTED.

73. Plaintiffs’ first cause of action alleging breaches of fiduciary duty prior

to and surrounding the execution of the Restructure Agreement Documents does not

allege any injury to the Franchise Company. (ECF No. 3, at ¶¶ 56–58.) The

Franchise Company Motion to Dismiss Emily’s derivative claims based on alleged

conduct prior to execution of the Restructure Agreement Documents should be

GRANTED.

74. Plaintiffs’ allegations regarding Harriet’s breaches of fiduciary duty

following the execution of the Restructure Agreement Documents include some

conduct that could form the basis of a derivative claim. Plaintiffs allege that Harriet

misappropriated the Franchise Company’s funds and diverted them to herself,

Patrick, and CSS. (Id. at ¶ 59(C).) Following execution of the Restructure Agreement
Documents, Harriet was the manager of the Franchise Company, and she owed

fiduciary duties to the Franchise Company. The alleged misappropriation and

diversion of funds would have caused injury to the Franchise Company, and could be

the basis for a derivative claim.

75. In addition, Emily may have standing to bring direct claims against

Harriet based on the special duty exception from Barger. Harriet undertook

obligations to Emily pursuant to the Restructure Agreement Documents that were

separate from, and in addition to, Harriet’s duties arising out of her status as majority

member in the Franchise Company. See Barger, 346 N.C. at 658, 488 S.E.2d at 219

(stating that one exception to the general rule that a shareholder cannot pursue

derivative actions is “where there is a special duty, such as a contractual duty,

between the wrongdoer and the shareholder”). If Harriet owed Emily a special duty

following execution of the Restructure Agreement Documents, that would provide

grounds for Emily to pursue direct claims for breach of fiduciary duty against Harriet

separate from her individual claim for breach of fiduciary duty. See Zoutewelle v.

Mathis, 2018 NCBC LEXIS 95, at *26–27 (N.C. Super. Ct. Sept. 13, 2018) (holding

that a marital settlement agreement containing obligations in addition to and outside

of LLC operating agreements created special duties on former husband towards ex-

wife as member of jointly owned LLCs).

76. Accordingly, the Franchise Company Motion to Dismiss, to the extent it

seeks dismissal of Emily’s derivative or direct claims based on Harriet’s conduct as
manager of the Franchise Company after the execution of the Restructure Agreement

Documents, should be DENIED.3

III. CONCLUSION

In conclusion, the Court FINDS, CONCLUDES, and ORDERS as follows:

1. To the extent Plaintiffs seek an order declaring the Restructure Agreement

Documents void or voidable, as alleged in paragraph 58 of the FAC, the

Motions to Dismiss are GRANTED, and that claim and those allegations

are DISMISSED, WITHOUT PREJUDICE.

2. The Mills Motion to Dismiss Plaintiffs’ first cause of action against Patrick

and CSS is GRANTED, and the claim is DISMISSED.

3. The Mills Motion to Dismiss the first cause of action to the extent the claim

is based on acts occurring prior to the execution of the Restructure

Agreement Documents is GRANTED, and the claim is DISMISSED.

4. The Mills Motion to Dismiss the first cause of action to the extent the claim

is based on acts occurring after the execution of the Restructure Agreement

Documents is DENIED.

5. To the extent Plaintiffs attempt to state claims for coercion, duress, and

undue influence, those claims are DISMISSED, WITHOUT PREJUDICE.

6. The Mills Motion to Dismiss Plaintiffs’ second cause of action against

Patrick and CSS is GRANTED, and those claims are DISMISSED.

3 To the extent Mills Defendants seek dismissal of Emily’s direct and derivative claims under

the second cause of action for conversion and misappropriation of Franchise Company funds,
the Mills’ Motion should be DENIED.
7. The Mills Motion to Dismiss Plaintiffs’ second cause of action for conversion

and misappropriation of corporate funds is DENIED.

8. The Mills Motion to Dismiss Plaintiffs’ second cause of action for waste of

corporate assets is GRANTED, and the claim is DISMISSED.

9. The Mills Motion to Dismiss Plaintiffs’ third cause of action for conspiracy

in restraint of trade is GRANTED, and the claim is DISMISSED.

10. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair and

deceptive trade practices, to the extent it is based on actions internal to the

Franchise Company both prior to and after the effective date of the

Restructure Agreement Documents, is GRANTED, and the claims are

DISMISSED.

11. The Mills Motion to Dismiss Plaintiffs’ third cause of action for unfair and

deceptive trade practices, to the extent it is based on alleged dealings

between the Raleigh Studio and the Franchise Company after the effective

date of the Restructure Agreement Documents, is DENIED.

12. The Mills Motion to Dismiss Plaintiffs’ fifth cause of action for civil

conspiracy against CSS is GRANTED, and the claim is DISMISSED.

13. The Mills Motion to Dismiss Plaintiffs’ fifth cause of action for civil

conspiracy against Harriet and Patrick is DENIED.

14. The Franchise Company Motion to Dismiss Emily’s derivative claims based

on the third and fifth causes of action is GRANTED, and such claims are

DISMISSED.
15. The Franchise Company Motion to Dismiss Emily’s derivative claim based

on the first cause of action relating to actions taken prior to the execution

of the Restructure Agreement Documents is GRANTED, and such claims

are DISMISSED.

16. The Franchise Company Motion to Dismiss Emily’s derivative or direct

claims based on the first cause of action relating to Harriet’s conduct as

manager of the Franchise Company after the execution of the Restructure

Agreement Documents is DENIED.

17. To the extent the Mills Defendants seek Dismissal of Emily’s direct and

derivative claims under the second cause of action, the motion is DENIED.

18. Except as expressly stated herein, Defendants’ Motions to Dismiss

Plaintiffs’ claims are DENIED.

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

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