Chesson v. Rives

• Court: Superior Court of North Carolina
• Writing for the Court: JAMES L. GALE CHIEF BUSINESS COURT JUDGE.
• Citation: Chesson v. Rives, 2016 NCBC 90., 12 CVS 3382 (N.C. Super. Ct. Nov 30, 2016)
• Decision Date: 30 November 2016
• Docket Number: 12 CVS 3382
• Parties: W. CHRISTOPHER CHESSON; JAMES G. LOVELL; and DAVID D. FRASER, Plaintiffs, v. W. LEON RIVES; LEON L. RIVES, II; and RIVES & ASSOCIATES, LLP, Defendants.

2016 NCBC 90.

W. CHRISTOPHER CHESSON; JAMES G. LOVELL; and DAVID D. FRASER, Plaintiffs, v. W. LEON RIVES; LEON L. RIVES, II; and RIVES & ASSOCIATES, LLP, Defendants.

No. 12 CVS 3382

Superior Court of North Carolina, Davidson

November 30, 2016

Carruthers & Roth, P.A., by Jack B. Bayliss, Jr. and Mark K. York for Plaintiffs.

Sharpless & Stavola, P.A., by Frederick K. Sharpless, for Defendants.

ORDER & OPINION ON MOTIONS FOR SUMMARY JUDGMENT

JAMES L. GALE CHIEF BUSINESS COURT JUDGE.

1. THIS MATTER is before the Court on (1) Defendants' Motion for Partial Summary Judgment ("Defendants' Motion") and (2) Plaintiffs' Motion for Partial Summary Judgment ("Plaintiffs' Motion"). The Court GRANTS IN PART Defendants' Motion and DENIES Plaintiffs' Motion. The Court will address other pending motions in a subsequent order.

I. THE PARTIES

2. Plaintiff W. Christopher Chesson ("Chesson") is a licensed certified public accountant ("CPA") who resides in Davidson County, North Carolina. He is currently employed by LB&A, Certified Public Accountants, PLLC ("LB&A"), a public accounting firm in Matthews, North Carolina.

3. Plaintiff James G. Lovell ("Lovell") is a licensed CPA who resides in Mecklenburg County, North Carolina. He is licensed to practice law in New York. Lovell is currently employed by LB&A.

4. Defendant William Leon Rives ("William") resides in Davidson County, North Carolina. William has been a licensed CPA since 1978 and is a member of the American Institute of Certified Public Accountants ("AICPA").

5. Defendant Leon L. Rives, II ("Leon"), sometimes referred to as "Little Rives, " resides in Davidson County, North Carolina. He has been a licensed CPA since 2002 and is a member of the AICPA.

6. Defendant Rives & Associates, LLP ("RA") was formed in 2004 as a North Carolina limited liability partnership that engages in certified public accounting. RA has offices in Davidson, Mecklenburg, and Wake Counties.

II. FACTUAL BACKGROUND

7. When reviewing a motion for summary judgment, the Court does not make findings of fact or resolve contested factual issues. See Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C.App. 138, 142, 215 S.E.2d 162, 164-65 (1975). The Court may, however, summarize the factual record to provide context for its opinion. See BDM Invs. v. Lenhil, Inc., No. 11-CVS-449, 2014 NCBC LEXIS 32, at *3 (N.C. Super. Ct. July 21, 2014).

A. RA's Formation and the Partnership Agreement

8. William and Leon formed RA in 2004. On September 1, 2007, Chesson joined RA from Dixon Hughes, PLLC ("Dixon Hughes"), and William, Leon, and Chesson executed the RA Partnership Agreement (Leon L. Rives, II Aff. Ex. D ("Partnership Agreement"), at 1, Feb. 9, 2015.) The Partnership Agreement defines the Founding Partners as William, Leon, and Chesson. (Partnership Agreement § 1.09.)

9. Dixon Hughes sued Chesson for breach of his contractual obligation to pay Dixon Hughes one-half of all amounts that he later earned from former Dixon Hughes clients. In November 2012, Dixon Hughes and Chesson reached a settlement agreement that required payments from Chesson. RA paid Dixon Hughes with two checks for $75, 000 each, which RA contends were loan payments to Chesson.

10. The Partnership Agreement provides that each of RA's geographic locations serves as a separate division and creates an entity identified as the "Pool, " which serves as a de facto holding company. (Partnership Agreement § 1.08.) The Pool owns the entire interest in RA's Charlotte Operations. (Partnership Agreement § 3.01.) The Pool's ownership is limited to the Founding Partners and allocated 40% to William, 40% to Leon, and 20% to Chesson. (Partnership Agreement § 3.01.)

11. The Partnership Agreement contemplates both voting and nonvoting partners. Only partners who have an ownership interest in the Pool are entitled to a vote, and a partner is "entitled to one (1) vote for each percentage ownership of the Pool." (Partnership Agreement § 2.06.)

12. The Partnership Agreement provides that RA's management is vested in the partners, who have the option to "delegate responsibilities to a Managing Partner, Executive Team, or Chief Executive Officer." (Partnership Agreement § 2.05.)

B. RA Admits Lovell and Fraser, but Not as Founding Partners.

13. A new partner can be admitted to RA "only by unanimous vote of the Partners." (Partnership Agreement § 2.04.) On August 17, 2009, William, Leon, Chesson, and Lovell signed the Addendum to the Partnership Agreement ("Addendum") to admit Lovell as a partner. (Marshall Aff. Ex. O ("Addendum"), at 4, Feb. 9, 2015.) Lovell was given a 0.01% interest in the "Charlotte Operations, " as defined in the Partnership Agreement, and a $120, 000 annual partnership draw. (Addendum ¶¶ 1, 4.) He did not obtain ownership in the Pool and was never referred to as a Founding Partner.

14. The Addendum expressly incorporates the Partnership Agreement by reference, stating that:

All terms of the [Partnership] Agreement shall continue to apply to the Partners and the New Partner as members of the Partnership as if the same terms were fully set forth herein, and the New Partner, by execution of this agreement, agrees to be bound by the terms and conditions of the [Partnership] Agreement.

(Addendum ¶ 3.) Lovell read the Addendum but did not request to see the Partnership Agreement before signing the Addendum. (Lovell Dep. 30:6-13, Feb. 5, 2014.) Lovell first read the Partnership Agreement either just before or just after he left RA in 2012. (Lovell Dep. 30:14-31:2, Feb. 5, 2014.)

15. The Addendum includes a term that provides that if Lovell's partnership with RA terminates for any reason and Lovell thereafter "compete[s] with [RA] . . . by performing work for clients of [RA], " Lovell is required to pay RA a percentage of the fees that he bills to those clients for a period of two years ("Addendum Competition Provision"). (Addendum ¶ 5.) More specifically, the Addendum Competition Provision obligates Lovell to pay "fifty percent (50%) of the gross fees billed or received by either [Lovell], his partnership, or a corporation in which he is a stockholder or by any business entity by which he is employed in the field of public accounting." (Addendum ¶ 5.) Such payments are due "whether or not the fees are collected by [Lovell], his partnership, or his corporation or his employer." (Addendum ¶ 5.)

16. On the same day Lovell signed the Addendum, David Fraser ("Fraser"), who had been an RA employee since December 2007, signed a substantially similar addendum and was admitted as a partner. (See Marshall Aff. Ex. N ("Fraser Addendum"), Feb. 9, 2015.) Prior to Fraser signing the Fraser Addendum, Leon had stated in an internal memo that he wanted to "remove Dave [Fraser] from the firm" in order to improve the Charlotte office's profitability. (See Marshall Aff. Ex. R ("Rives Memo"), Feb. 9, 2015.) While Fraser was an employee, before he became a partner, he was not subject to the Addendum Competition Provision or to any other provision regarding competition. Fraser was not advised of the Rives Memo or of Leon's intent before he signed the Fraser Addendum.

C. Plaintiffs Assert that Leon Violated Professional Standards and Failed to Afford Lovell Rights He was Entitled to as a Partner.

17. All RA partners are CPAs licensed in North Carolina and are therefore subject to the practice standards established by the North Carolina State Board of Certified Public Accountant Examiners ("Board Standards"). Plaintiffs assert that William and Leon violated Board Standards and endorsed or acquiesced in other RA employees' violations of Board Standards, including but not limited to actions in connection with an audit of at least one significant client. At the time of that audit, Lovell oversaw RA's audits and had the most experience of anyone at RA regarding that specific type of audit. However, Lovell was excluded from participating in the audit. Lovell contends that Leon and William ignored his expressed concerns and approved an audit opinion that did not comport with applicable professional standards, which ultimately resulted in litigation against RA.

18. Plaintiffs further complain that Leon violated professional independence standards by forming and operating School Efficiency Consultants, LLC ("Consultants") as a subsidiary of RA and providing audit services for Consultants' clients on a contingency-fee basis.

19. Lovell further complains that Leon and William wrongfully excluded him from RA's management despite his being a partner. More specifically, Lovell complains that he was not provided access to RA's books and records. He also complains that he was not allowed to vote on partnership matters but does not point to any Partnership Agreement provision that grants him voting rights.

D. Plaintiffs Plan to Leave RA and Call for RA to Expel Leon as an RA Partner

20. In July 2012, Lovell and Fraser met with John Bly ("Bly"), a partner at LB&A, to discuss the possibilities that Bly might purchase RA's Charlotte office or that Fraser and Lovell might leave RA to join LB&A. (Bly Dep. 27:16-29:8, 37:4- 38:20, Oct. 21, 2014.) Fraser and Lovell expressed their belief to Bly that the ethical violations at RA should allow them to avoid any efforts to enforce the Addendum Competition Provisions. (Bly Dep. 54:7-55:21, Oct. 21, 2014.)

21. Chesson began attending meetings with Lovell, Fraser, and Bly in September 2012. Chesson sent Bly a spreadsheet that contained the names and contact information of Chesson's RA clients.

22. After the meetings with LB&A, Plaintiffs and their attorneys met with William and Leon on September 24, 2012 and expressed concerns about the audit discussed above, Defendants' failure to adhere to Board Standards, and conflicts...