Keener Lumber Co., Inc. v. Perry, COA00-1525.

• Decision Date: 05 March 2002
• Docket Number: No. COA00-1525.,COA00-1525.
• Citation: 560 S.E.2d 817,149 NC App. 19
• Court: North Carolina Court of Appeals
• Parties: KEENER LUMBER COMPANY, INCORPORATED, Plaintiff v. Leon W. PERRY, III and Conn Trucking, Inc., Defendants.

560 S.E.2d 817

149 NC App. 19

KEENER LUMBER COMPANY, INCORPORATED, Plaintiff v. Leon W. PERRY, III and Conn Trucking, Inc., Defendants.

No. COA00-1525.

Court of Appeals of North Carolina.

March 5, 2002.

Mast, Schulz, Mast, Mills & Stem, P.A. by George B. Mast, Bradley N. Schulz and David F. Mills, Smithfield, for plaintiff-appellee.

Kennedy, Covington, Lobdell & Hickman, L.L.P. by John L. Sarratt and Amie Flowers Carmack, Raleigh, for defendant-appellant Leon W. Perry, III.

HUNTER, Judge.

Defendant Leon W. Perry, III ("Perry") appeals from the trial court's judgment (1) upholding a jury verdict that Perry committed constructive fraud, and (2) determining as a matter of law that Perry's conduct in his business relationship with Keener Lumber Company, Inc. ("plaintiff") amounted to an unfair and deceptive practice. We affirm in part, reverse in part, and remand in part for a new trial on plaintiff's constructive fraud claim.

This case involves three corporations and one individual. The first corporation is plaintiff Keener Lumber Company, a North Carolina corporation that buys timber and sells lumber products. The second corporation is Perry Builders Outlet, Inc. ("Perry Builders"), now in bankruptcy, which was a North Carolina corporation that purchased lumber, chemically treated it, and sold it to retail supply centers. The individual defendant Perry was the chief operating officer ("COO"), president, director, and a twenty percent shareholder of Perry Builders. Perry is also the COO, president, director, and the majority shareholder of a third corporation, Conn Trucking, Inc. ("Conn Trucking"), a North Carolina corporation that hauls lumber products.

The evidence at trial tended to establish the following facts. Perry Builders experienced some financial difficulties in 1995 and 1996, including recurring annual operating losses. In 1996, Perry Builders defaulted on a loan from First Union which terminated its financing. In March of 1997, Perry Builders entered into a new financing arrangement with CIT Group/Business Credit ("CIT"), pursuant to which all money borrowed from CIT was secured by collateral including: Perry Builders' accounts receivable, inventory, equipment, and property. In addition, all loans from CIT were guaranteed by Perry (individually) and Conn Trucking.

In April of 1997, Perry Builders contacted plaintiff and expressed interest in purchasing lumber from plaintiff. Plaintiff began to sell lumber to Perry Builders in May of 1997 and, over a period of several months, Perry Builders purchased and paid for over $700,000.00 of lumber. In June or July of 1997, Perry Builders fell behind in its payments to plaintiff. By 12 September 1997, Perry Builders had paid for all lumber purchased from plaintiff through 29 August 1997. However, Perry Builders continued to purchase lumber through 26 September 1997, and ultimately failed to pay for all lumber purchased from plaintiff between 30 August 1997 and 26 September 1997, resulting in an outstanding debt of $146,185.23.

On or about 18 August 1997, Perry hired a "workout" company (Anderson, Bauman, Tourtellot, Vos & Company, or "ABTV") to perform an "operational analysis" of Perry Builders and Conn Trucking and to recommend business strategies, including the possible sale of either company or both companies. On 22 September 1997, ABTV set forth its findings in a report issued to Perry Builders. The report included a recommendation that Perry Builders cease operations, that the company be liquidated, and that Conn Trucking be continued.

According to the valuations set forth in the 22 September 1997 ABTV report, Perry Builders had assets worth $1,973,000.00, including equipment, inventory, real estate, and property. The evidence tended to show that Perry decided, at some point in time after receiving the ABTV report, to liquidate the company's assets and to use the money from the sale of the assets to pay the outstanding debts to the company's creditors. The evidence further tended to show that, between August of 1997 and early January of 1998, Perry fully, or nearly fully, paid off certain debts, including the secured loans from CIT, and an unsecured debt to Conn Trucking for services rendered. However, after 12 September 1997, Perry made no payments on the unsecured debt to plaintiff.

Perry Builders was unable to secure a purchaser of the company's assets outside of bankruptcy. Perry Builders filed for bankruptcy on 9 January 1998 and turned the administration of its assets over to the Bankruptcy Trustee, Richard Sparkman. The company's assets were ultimately sold in bankruptcy for only $335,000.00, resulting in a shortfall of funds to pay all of the creditors. Perry Builders acknowledged in its bankruptcy petition that it owed plaintiff $146,185.23. Plaintiff filed a proof of claim in the bankruptcy proceeding for that amount on 22 December 1998.

On 27 August 1998, plaintiff filed this action against defendants Perry and Conn Trucking. Plaintiff initially set forth four causes of action in its complaint: fraud, constructive fraud, unfair and deceptive practice (pursuant to N.C. Gen.Stat. § 75-1.1 (1999)), and racketeer influenced and corrupt organizations violation (the "RICO" claim). The trial court denied a motion by Perry to dismiss for lack of jurisdiction. The trial court granted summary judgment in favor of defendants on the RICO claim, and, at the close of all the evidence, the trial court granted a directed verdict as to all claims against Conn Trucking, and as to the fraud claim against Perry. Thus, the trial court submitted to the jury (1) the constructive fraud claim against defendant Perry, and (2) questions of fact pertaining to the unfair and deceptive practice claim.

The jury returned a verdict in favor of plaintiff on the constructive fraud claim and awarded plaintiff damages of $146,185.23. In addition, based upon the jury's findings of fact, the trial court determined as a matter of law that Perry's conduct amounted to an unfair and deceptive practice pursuant to N.C. Gen.Stat. § 75-1.1 and, therefore, trebled the damages pursuant to N.C. Gen.Stat. § 75-16 (1999), resulting in a total recovery of $438,555.00 for plaintiff. Perry moved for Judgment Notwithstanding the Verdict (JNOV) and for a new trial, which motions were denied. Perry appeals and plaintiff cross-appeals.

On appeal, the parties have raised a number of complex issues. First, we will address the trial court's denial of Perry's motion to dismiss for lack of jurisdiction. Second, we will address plaintiff's constructive fraud claim. Third, we will address plaintiff's unfair and deceptive practice claim. Finally, we will examine various other issues raised on appeal.

I. Jurisdiction/Standing

We turn first to Perry's argument regarding the trial court's denial of his motion to dismiss, filed 2 November 1998, and made pursuant to N.C. Gen.Stat. § 1A-1, Rules 12(b)(1) and 12(b)(6) (1999). Perry argues that the motion to dismiss should have been granted because the trial court lacked subject matter jurisdiction over the claims asserted by plaintiff. We disagree.¹

Perry first argues that the trial court lacked subject matter jurisdiction because plaintiff filed a proof of claim in the Perry Builders bankruptcy proceeding, and thereby submitted the determination of its claim to the jurisdiction of the bankruptcy court. The cases cited by Perry in support of this argument, and the legal propositions set forth in those cases, are patently inapplicable here. See, e.g., Langenkamp v. Culp, 498 U.S. 42, 44-45, 111 S.Ct. 330, 331, 112 L.Ed.2d 343, 347-48 (1990)

(holding that, where a creditor files a claim against a bankruptcy estate, and where the trustee in bankruptcy brings a preference claim against that creditor, that preference action against the creditor is triable only by the bankruptcy court in its equitable jurisdiction, and the creditor does not have a right to a jury trial on that preference action), reh'g denied, 498 U.S. 1043, 111 S.Ct. 721, 112 L.Ed.2d 709 (1991). Perry has not cited any authority for the proposition that a creditor who has filed a proof of claim against a bankrupt corporation is thereby prohibited from instituting a separate proceeding against a director of the corporation seeking damages resulting from an alleged breach of fiduciary duty. Thus, we reject this argument.

Perry also argues that the trial court lacked subject matter jurisdiction because plaintiff's claim is property of the Perry Builders bankruptcy estate and must, therefore, be brought by the trustee in bankruptcy.² When a corporation enters bankruptcy, any legal claims that could be maintained by the corporation against other parties become part of the bankruptcy estate, see 11 U.S.C.A. § 541(a) (West 1993), and claims that are part of the bankruptcy estate may only be brought by the trustee in the bankruptcy proceeding, see, e.g., National American Ins. v. Ruppert Landscaping Co., 187 F.3d 439, 441 (4th Cir.1999)

("[i]f a cause of action is part of the estate of the bankrupt then the trustee alone has standing to bring that claim"), cert. denied, 528 U.S. 1156, 120 S.Ct. 1162, 145 L.Ed.2d 1073 (2000). Because the trustee of the bankruptcy estate has full authority over claims that are part of the bankruptcy estate, a creditor may not pursue such a claim unless there is a judicial determination that the trustee in bankruptcy has abandoned the claim. See Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132, 136 (4th Cir. 1988). Moreover, this Court has held that North Carolina state trial courts lack subject matter jurisdiction to hear claims that belong to a bankruptcy estate. See Tart v. Prescott's Pharmacies, Inc., 118 N.C.App. 516, 521, 456 S.E.2d 121, 125 (1995).

Perry contends that the essence of plaintiff's claim is that Perry, as an individual director of Perry Builders, directed Perry Builders to make preferential payments to certain creditors for...