John A. Northen, Chapter 7 Tr. for C&M Invs. of High Point, Inc. v. MDC Innovations, LLC (In re C&M Invs. of High Point Inc.)
| Decision Date | 25 May 2016 |
| Docket Number | Case No. 13-10661,Adv. Pro. No. 14-02005 |
| Court | U.S. Bankruptcy Court — Middle District of North Carolina |
| Parties | In re: C AND M INVESTMENTS OF HIGH POINT INC., et al., Debtors. JOHN A. NORTHEN, Chapter 7 Trustee for C&M Investments of High Point, Inc., C. Wayne McDonald Contractor, Inc., C. Wayne McDonald, and Wendy C. McDonald, Plaintiff, v. MDC INNOVATIONS, LLC, MDC INVENTIONS, LLC, JASON MCDONALD, and MARK ALLEN HALL, Defendants. |
(Consolidated Cases for Purposes of Administration)
THIS MATTER came before the Court on January 6, 7, and 8, 2016 for trial on (1) the complaint filed by the Chapter 7 Trustee, John A. Northen (the "Trustee"), against MDC Innovations, LLC ("Innovations"), MDC Inventions, LLC ("Inventions"), Jason McDonald ("Jason"), and Mark Allen Hall ("Mark"); and (2) the cross-claim filed by Mark against Wayne McDonald ("Wayne") and Jason. J.P. Cournoyer appeared on behalf of the Trustee; Peter Juran appeared on behalf of Mark; and Ellis Drew, John Meadows, and Leon Porter appeared on behalf of Innovations, Inventions, and Jason. At the hearing, the Court received testimony from Mark, Wayne, Jason, Wendy McDonald, Natalie Crenshaw Folmar, Scott Randolph, and Robert Pitts. After considering the testimony before the Court, the arguments of counsel, the pleadings, and the record in this case, the Court finds the ownership interests of Mark, Wayne, and Jason in the MDC Companies to be 22.5%, 38.75%, and 38.75%, respectively. The Court further finds that the property at issue constitutes an asset of the MDC Companies and directs Jason to transfer the Patents (as defined below) to the MDC Companies.
This proceeding arises out of the involuntary bankruptcies of C and M Investments of High Point, Inc., C. Wayne McDonald Contractor, Inc., C. Wayne McDonald and Wendy McDonald, initiated by petitioning creditors on May 17, 2013. The complaint seeks: (1) a declaratory judgment determining the ownership rights of Wayne, Jason, and Mark in Innovations and Inventions (collectively, "the MDC Companies"), with an order directing Jason to transfer all intellectual property rights in the Nexcavator and related technologies (the "Intellectual Property") to the MDC Companies; (2) an accounting of the assets held by the MDC Companies; and (3) the avoidance and recovery of a purported transfer of ownership rights in the MDC Companies from Wayne to Jason. The cross-claim similarly requests that Jason be compelled to transfer the Intellectual Property to the MDC Companies, and demands, in the alternative, damages for fraud and unfair and deceptive trade practices, trebled under NorthCarolina General Statutes Chapter 75. The cross-claim also seeks an award of costs and attorney's fees.
On August 26, 2015, upon consideration of motions for summary judgment submitted by the parties, the Court entered an order declaring Mark to possess no less than a five percent ownership interest in the MDC Companies. The Court explained that an October 17, 2011 agreement among the parties, which employed Mark as the Executive Vice President and Chief Financial Officer ("Executive V.P./ C.F.O.") of the MDC Companies in exchange for an immediate five percent ownership interest in the companies, was a valid, unambiguous, and enforceable contract. The Court refrained from making further findings.
The matter again came before the Court for trial on January 6, 2016. At the conclusion of trial, the Court accepted post-trial briefs from the parties and took the matter under advisement.
Wayne is married to Wendy C. McDonald. Jason is Wayne's son by a previous marriage. Wayne has been in the real estate business in North Carolina for over forty years. He would buy homes and commercial properties in various conditions and refurbish and restore the properties for rent and resale. At one time, Wayne had assets in excess of $40,000,000 and debts in excess of $20,000,000.
Wayne was introduced to Mark Hall when Mark served as a loan officer at BB&T. Mark was familiar with several of Wayne's real estate properties and the loans associated with those properties. Mark has an MBA degree from Wake Forest University and experience in equipment financing. Wayne and Mark developed a working business relationship over an extended period of time.
Growing up in the McDonald household, Jason expressed an interest in his father's work and became an experienced heavy equipment user. Those who know Jason testified that he lacks people skills and can be off-putting but that, as a result of his upbringing and abilities, he has a gift for working with mechanical devices. In 2006 to 2007, Jason came up with the idea to build an excavator that could more easily create slopes from a fixed position. He envisioned the addition of a bucket compatible with the operation of heavy equipment that could rotate and swivel. Since that time, his primary focus has been on developing a number of working prototypes for this device, known as the Nexcavator.
In July of 2011, Wayne and Jason (the "McDonalds") formed the MDC Companies to develop and market the Nexcavator and related or derivative technologies. Each made an initial capital contribution of $500 and held a fifty percent ownership interest in the MDC Companies until the fall of 2011, when Wayne approached Mark about joining the companies, expressing an interest in recruiting an individual from the corporate world to help grow the business. Mark was shown videos of the partially completed device and agreed to join the companies as Executive V.P./ C.F.O. In exchange for his services, Mark was granted an immediate 5% ownership interest in the companies.2
After working full-time for the companies for less than a year, Mark signed an agreement with the McDonalds on May 18, 2012 (the "2012 Agreement"). This agreement provided that in exchange for the temporary foregoing of a salary and a $150,000 investment, Mark would receive an additional 17.5% ownership interest in each of the companies, "including all related intellectual properties". Though not explicitly delineated in the agreement, Wayne and Jason promised that their capital contributions to the companies would be in the form of assignments ofintellectual property rights in the Nexcavator3 and related technologies4 (the "Intellectual Property").5 They also promised Mark "[a]n equal salary, compensation and benefits" as themselves, a limited option to purchase an additional two and a half percent interest for $50,000, and "[a] first right of refusal on any future stock offerings, ownership sales or other capital raises, including a right to a pro-rata portion of such an offering."
Relying on the 2012 Agreement and assurances with respect to the Intellectual Property, Mark began investing in the MDC companies. Most of the monies spent were for the development of a working prototype for a standard (as opposed to "mini") excavator. The Companies generated no sales or revenue.
Mark served as the uncompensated "face" of the MDC Companies until approximately June of 2013. In this capacity, he introduced the companies to the public as the owners of the Intellectual Property.6 He also made repeated requests for the patent papers and associated documents from the McDonalds. They evaded his requests. Tuggle Duggins PLLC, a law firm retained to complete the MDC formation documents, simultaneously evidenced no hurry to memorialize Mark's ownership interest in the companies.
By March of 2013, Mark had invested nearly $150,000 into the companies, but they needed additional capital for continued operations, see, e.g., Ex.'s 75, 76. After several unsuccessful attempts to secure outside funding, the McDonalds offered Mark an additional 10.83% ownership interest in the companies for an additional $75,000 investment. See Ex. 106(acknowledging the existence of an offer and attempting to either discredit or clarify it, "Wayne stated that the $75,000 was never taken and the changes to the documents were never made"); Ex. 107 (). The exact terms of this offer (the "2013 Offer") remain unclear. Compare Ex. 105 () with Mark Hall, Testimony at the United States Bankruptcy Court for the Middle District of North Carolina (Jan. 6, 2016) ( that the McDonalds offered him a vested right to this increased ownership interest upon completion of investments equivalent to a total infusion of $225,000 into the companies).
On May 13, 2013, Mark paid an invoice from ProTool Company, Inc. in the amount of $38,380, bringing his total investment in the MDC Companies to $175,793.39. See Ex. 76 (summarizing Mark's official expenditures). Based on a series of emails between Mark, Jason, Wayne and Tuggle Duggins, Mark believed that the MDC operating and purchase agreements were finally complete and ready for signature. Mark arrived at the office of Tuggle Duggins on May 29, 2013. At the meeting which followed, the McDonalds terminated Mark's employment and stated that he would have no further involvement with the companies.
As of his termination—and indeed, as of the May 17, 2013 involuntary petition date in these consolidated proceedings—Mark held a 22.5% ownership interest in the MDC Companies.7
The McDonalds' ownership interests in the companies on or around the same...
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