Dunn Holdings I, Inc. v. Confluent Health LLC
| Decision Date | 24 August 2018 |
| Docket Number | 17 CVS 9321 |
| Citation | 2018 NCBC 89 |
| Court | Superior Court of North Carolina |
| Parties | DUNN HOLDINGS I, INC. (previously DUNN PHYSICAL THERAPY, INC.), a North Carolina corporation, Individually and Derivatively on behalf of BREAKTHROUGH CARY PT, LLC; CHRISTOPHER F. DUNN; and THERESA M. DUNN, Plaintiffs, v. CONFLUENT HEALTH LLC, a Delaware limited liability company; LAURENCE N. BENZ, Manager of Breakthrough Cary PT, LLC; BREAKTHROUGH CARY PT, LLC, a North Carolina limited liability company; MARK F. WHEELER; JEFFREY HATHAWAY; and BREAKTHROUGH PHYSICAL THERAPY, INC., Defendants. |
Smith Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, by J. Mitchell Armbruster for Plaintiffs Dunn Holdings I, Inc. Christopher Dunn; and Theresa Dunn.
Stites & Harbison PLLC, by Chadwick A. McTighe (pro hac vice) and Timothy D. Thompson (pro hac vice), and Robinson Bradshaw & Hinson, P.A., by Edward F. Hennessey, IV for Defendants Confluent Health LLC; Laurence N. Benz Breakthrough Cary PT, LLC; Mark F. Wheeler; Jeffrey Hathaway; and Breakthrough Physical Therapy, Inc.
THIS MATTER comes before the Court on Defendants Confluent Health LLC; Laurence N. Benz; Breakthrough Cary PT, LLC; Mark F. Wheeler; Jeffrey Hathaway; and Breakthrough Physical Therapy, Inc.'s (collectively, “Defendants”) Motion to Dismiss (“Motion”; ECF No. 48).
THE COURT, having considered the Motion, the briefs in support of and in opposition to the Motion, the exhibits attached to the Second Amended Complaint and the briefs, the arguments of counsel at the hearing, and other appropriate matters of record, concludes that the Motion should be GRANTED, in part, and DENIED, in part, for the reasons set forth below.
1. The Court does not make findings of fact on motions to dismiss under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. N.C. G.S. § 1A-1, Rule 12(b)(6) (). The Court only recites those facts included in the Second Amended Complaint that are relevant to the Court's determination of the Motion. See, e.g., Concrete Serv. Corp. v. Inv'rs Grp., Inc., 79 N.C.App. 678, 681, 340 S.E.2d 755, 758 (1986).
2. In 1998, Christopher Dunn ("Christopher") and Theresa Dunn ("Theresa") (collectively, "the Dunns") founded Dunn Physical Therapy, Inc., which later became Dunn Holdings I, Inc. (Dunn Physical Therapy, Inc., and Dunn Holdings I, Inc. are collectively referred to as "Dunn PT"). (2d Am. Compl., ECF No. 36.2, at ¶ 1.) Dunn PT operated four physical therapy offices in Wake County, North Carolina. (Id. at ¶ 26.)
3. Laurence N. Benz ("Benz") owned PT Development, LLC, which itself owned several physical therapy practices in North Carolina and across the country. (Id. at ¶¶ 14, 28.)
4. Mark D. Wheeler and Jeffrey Hathaway ("Hathaway") are former members of PT Development, LLC. (Id. at ¶¶ 17, 18.)
5. In 2014, the Dunns began to negotiate with Benz about Benz purchasing a majority interest in Dunn PT. Benz told the Dunns that PT Development, LLC's business model is to buy a majority stake in successful physical therapy practices but allow the original founders to continue to manage the practices with the support and experience of PT Development, LLC. (Id. at ¶ 24.) Benz also explained that PT Development, LLC provided all administrative services for a competitive fee, such that overall expenses would be reduced because multiple practices would be sharing expenses and realizing economies of scale. (Id. at ¶ 25.)
6. In June 2014, the Dunns sold 80% of Dunn PT to a Kentucky limited liability company established by Benz called PT Development Cary, LLC ("PTD Cary"). Benz also created a Kentucky limited liability company called Breakthrough Cary PT, LLC ("Breakthrough Cary") and contributed the 80% interest in Dunn PT to Breakthrough Cary. The Dunns then contributed their remaining 20% of Dunn PT to Breakthrough Cary (the sale of Dunn PT's interest and the contribution of its remaining 20% interest to Breakthrough Cary hereinafter is referred to as the "Sales Transaction"). Consequently, after the transaction was completed, PTD Cary and Dunn PT were the two members of Breakthrough Cary, with PTD Cary owning an 80% interest and Dunn PT owning a 20% interest. (Id. at ¶¶ 29-30.) On June 2, 2014, PTD Cary and Dunn PT executed an Operating Agreement for Breakthrough Cary ("Operating Agreement"). (ECF No. 50.1.) The Operating Agreement named Benz as the manager of Breakthrough Cary.
7. Benz financed a portion of the purchase price paid to the Dunns through a Seller Note payable from Breakthrough Cary to Dunn PT (the "Acquisition Debt"). (Id. at ¶ 33.) The Dunns expressed concern that the Acquisition Debt would be paid back directly out of Breakthrough Cary's profits, meaning that 20% of the debt would be paid by the Dunns, and told Benz that they did not want "to be in the position of 'paying themselves.'" (Id. at ¶¶ 33-35.) Benz assured the Dunns that the debt would be paid "'below the line' and, accordingly, would not have any effect on their distributions or the value of their interest in [Breakthrough Cary]." (Id. at ¶ 36.) Based on Benz's assurances, the Dunns agreed to go forward with the sale. (Id.) However, Plaintiffs allege that Benz ultimately did not pay the debt "below the line," but instead used Dunn PT's share of Breakthrough Cary's profits to repay the Acquisition Debt. (Id. at ¶ 4.)
8. During negotiation of the Sales Transaction, the Dunns sought assurances from Benz that they would receive regular distributions from Breakthrough Cary. (Id. at ¶¶ 41, 43.) The Operating Agreement gave Benz, as manager, the discretion to make distributions once Breakthrough Cary had cash reserves of 1.5 times the company's monthly expenses. (Id. at ¶ 42.) Benz "assured the Dunns that he planned to make regular distributions once the cash reserve threshold was met" and that they "could expect to start receiving distributions in or around the sixth month following the closing of the sale." (Id. at ¶¶ 44-45.) Plaintiffs allege that because the Acquisition Debt was paid out of Breakthrough Cary's profits and not "below the line," the company never met the cash reserve requirements and never paid distributions. (Id. at ¶ 46.)
9. In July 2016, in response to the Dunns' complaints about the lack of distributions, Hathaway sent an email to Christopher memorializing an agreement (the "Distribution Agreement") under which Christopher would receive quarterly distributions from Breakthrough Cary. (ECF No. 36.2, Ex. B.) The email stated as follows:
10. Breakthrough Cary subsequently paid the Dunns distributions for the second and third quarters of 2016 but did not make any further distributions. (ECF No. 36.2, at ¶ 51.)
11. In October 2014, PTD Cary notified the Dunns that PTD Cary intended to participate in a reorganization, whereby PTD Cary's 80% ownership interest in Breakthrough Cary would be transferred to Confluent Health, LLC ("Confluent"), an entity that Benz substantially owns. (Id. at ¶ 91.) In exchange, the owners of PTD Cary would receive ownership interests in Confluent (hereinafter the "Roll-up Transaction"). (Id.)
12. Plaintiffs allege that under Breakthrough Cary's Operating Agreement, Dunn PT also had the right to participate in the Roll-up Transaction (the "Tag-along Rights"). (Id. at ¶¶ 91-96.) The Operating Agreement provides that:
If [the Seller] proposes to transfer in a sale . . . Membership Interests representing fifty percent (50%) or more of the then outstanding Membership Interests of the Company . . . then the other Members (collectively, the 'Tag-Along Sellers') shall have the right . . . to require the proposed purchaser(s) to purchase from such Tag-Along Sellers their Membership Interest(s) . . . at the same price per unit and upon the same terms as offered by the [purchaser(s)].
(ECF No. 50.1, at § 18.1.) Dunn PT's Tag-along Rights as the Tag-Along Sellers were triggered under the Operating Agreement when the Seller (PTD Cary) sought to transfer its 80% interest in Breakthrough Cary to Confluent.
13. The Dunns notified Benz that Dunn PT wished to sell its interest in Breakthrough Cary to Confluent pursuant to the Tag-along Rights. Benz eventually agreed to offer Dunn PT a right to participate in the Roll-up Transaction, but only to transfer 50% of its membership in Breakthrough Cary to Confluent, and in a manner that Plaintiffs allege "deeply devalued" Dunn PT's interest in Breakthrough Cary. (Id. at ¶¶ 94-96.) Dunn PT did not accept the offer. Nevertheless, on December 22, 2014, Dunn PT executed an "Acknowledgment and Consent" authorizing PTD Cary to distribute its membership interests to Benz, Hathaway, and Wheeler, and the...
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