Lau v. Douglas Constable
| Decision Date | 11 July 2022 |
| Docket Number | 16 CVS 4393 |
| Citation | 2022 NCBC 34 |
| Parties | GREGORY LAU and VENT TECH CORPORATION, Plaintiffs, v. DOUGLAS CONSTABLE; ROBERT MARTIN; TIFFANY WILLARD; and JENNIFER CONSTABLE, Defendants. |
| Court | Superior Court of North Carolina |
Terpening Law PLLC, by William R. Terpening and Shaefer A Shepard, for Plaintiff Vent Tech Corporation.
Blanco Tackabery & Matamoros, P.A., by Chad A. Archer, Peter J Juran, and Elliot A. Fus, for Defendant Robert Martin.
ORDER AND OPINION ON DEFENDANT ROBERT MARTIN'S MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION
1. THIS MATTER is before the Court on Defendant Robert Martin's ("Defendant" or "Martin") Motion to Dismiss for Lack of Subject Matter Jurisdiction (the "Motion" or "Motion to Dismiss") pursuant to North Carolina Rule of Civil Procedure ("Rule(s)") 12(b)(1). (ECF No. 206.) For the reasons stated below, the Motion is GRANTED in part and DENIED in part.
2. The gravamen of the Amended Complaint in this case is that, for years, funds were embezzled from Plaintiff Vent Tech Corporation ("Vent Tech" or the "Company") with the knowledge and participation of Martin, formerly the Company's President. On 31 December 2012, the majority of the Company's assets were sold to VL Acquisition, LLC (the "Purchaser") pursuant to the terms of an Asset Purchase Agreement ("APA"). The issue before the Court with respect to the current Motion is whether the Company sold its right to pursue its claims against Martin in this transaction such that it no longer has standing to pursue those claims and, therefore, this Court lacks subject matter jurisdiction over them. For the reasons stated below, the Court determines that some, but not all, of Vent Tech's claims must be dismissed because the Company no longer has standing to bring them.
3. "When reviewing a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), a trial court may consider and weigh matters outside the pleadings." Munger v. State, 202 N.C.App. 404, 410 (2010) (quoting DOT v. Blue, 147 N.C.App. 596, 603 (2001). And, when the Court considers the pleadings, it must "view the allegations [of the complaint] as true and the supporting record in the light most favorable to the non-moving party." Mangum v. Raleigh Bd. of Adjustment, 362 N.C. 640, 644 (2008). Accordingly, the following facts are stated only for purposes of deciding the present Motion.
4. Vent Tech is a closely-held entity organized under the laws of North Carolina. It was established to design, manufacture, and sell medical devices, many of which were produced in China and shipped to the Company's North Carolina plant for assembly. (Compl. ¶ 15.) Former Plaintiff Gregory Lau ("Lau") has been the majority shareholder of the Company at all relevant times. (Compl. ¶ 7.)
5. Martin is a resident of North Carolina. He has an extensive business background, served as the Company's President at all relevant times, and was a minority shareholder in the Company prior to October 2009. (Compl. ¶ 10.) He remained on the Company's payroll until the asset sale in December 2012, at which time he accepted a position with the Purchaser. (Compl. ¶ 22; Martin Aff. ¶ 39, ECF No. 161.)
6. As President, Martin had ultimate responsibility for all aspects of the Company's business, including accounting and record-keeping, as well as for overseeing the Company's other executives and employees. (Compl. ¶ 25.) Vent Tech alleges that in reality, however, Martin exercised very little oversight over the affairs of the Company, which allowed it to be "pillaged" by the Company's former Chief Financial Officer and minority shareholder, Douglas Constable ("Constable"). (Compl. ¶ 26.)
7. In addition to Lau's physical distance from the Company's United States operations, Lau does not have the same level of expertise in the industry or in financial accounting that Martin possesses. (Compl. ¶ 29.) Martin represented to Lau, who resides in China, that he would manage United States operations so that Lau could focus his attention on overseas production. (Compl. ¶ 27.)
8. As a result of Martin's control over the operations of the Company, Lau's own lack of expertise, and Martin's alleged representations to Lau, Lau was unaware that money was being stolen from the Company. (Compl. ¶¶ 27, 29-30.)
9. On or around 31 December 2012, most of the Company's assets were sold to the Purchaser, a Michigan limited liability company. (Compl. ¶ 32.) Following the sale, Lau was the sole remaining shareholder of the Company. (Compl. ¶ 33.)
10. The APA executed by both the Company and the Purchaser contains a choice of law provision. It states that the APA "shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to any choice or conflict of law provision or rule under the State of Michigan or any other jurisdiction that would cause the application of the laws of any jurisdiction other than the State of Michigan." (APA, at § 12.9, ECF No. 208.1.)
11. Pursuant to the APA, "the Buyer agree[d] to purchase from the Seller and the Seller agree[d] to sell, transfer, convey and deliver to the Buyer, all the assets, properties and rights of the Seller used or useful in the Business as of the Closing (as defined in Section 2.2 hereof), of whatever kind or nature . . ., other than the items set forth on Schedule 1.1 hereto (the 'Excluded Assets')." (APA, at § 1.1 (emphasis in original).) Section 1.1(k) of the APA includes, in the list of assets purchased, "claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind[.]" (APA, at § 1.1(k).)
12. Schedule 1.1 enumerates the Excluded Assets as follows:
(APA, at Sch. 1.1, ECF No. 208.2 (emphasis added).)
13. Section 3.25(w) of the APA provides: "Except as set forth in Schedule 3.25, no Employee owes any sum to the Seller." (APA, at §3.25(w) (emphasis in original).)
14. Schedule 3.25w, titled "Employee Loans," further describes the Excluded Assets:
There are a number of employees who owe various amounts to Seller. Those receivables do not convey to Buyer as a part of this transaction in any way, (sic) and are listed as Excluded Assts on Schedule 1.1.
(APA, at Sch. 3.25w, ECF No. 208.3.)
15. After the sale, on or about 10 May 2013, the Purchaser, believing that there were financial irregularities in the Company's books, advised Lau of its concern that Constable was responsible. (Compl. ¶ 35.) As a result, Lau conducted an investigation and discovered significant misuse of Company funds occurring over a period of years. (Compl. ¶ 36.)
16. In fact, Vent Tech alleges that it was Constable's misuse of Company funds and misrepresentations that led to the sale of the Company to Purchaser in 2012. For instance, in or around 2011, Constable told Lau that the Company was struggling to make ends meet and requested that Lau both take a salary reduction and contribute personal funds to finance the Company's operations. Meanwhile, Constable and Martin increased their salaries, and Constable allegedly falsified the Company's books and records for at least the period of 2008 through 2012 to conceal his fraud and theft. (Compl. ¶¶68-80.)
17. Vent Tech alleges that Martin, the Company's President, was "either aware of or complicit in the scheme, turned a blind eye toward the scheme, or, through his own complete lack of oversight, failed to detect the scheme." (Compl. ¶ 67.)
18. Ultimately, because of this misconduct, the Company was sold at a significantly lower price than it would have been had the Company's records not been manipulated. (Compl. ¶ 83.)
19. Even after the sale of its assets in 2012, and at a time when the Company was no longer conducting operations, Constable allegedly continued to use a Company credit card for personal benefit. (Compl. ¶¶ 86-87.) Vent Tech alleges that Martin also continued to use a Company credit card for personal benefit through 2013 without authorization. (Compl. ¶¶ 96-98.)
20. As a result of these alleged wrongs to the Company, Vent Tech asserts several economic fraud-based claims against Martin.
21. This case was designated as a mandatory complex business case by order of the Chief Justice of the North Carolina Supreme Court on 22 July 2016, (ECF No. 4), and assigned to the Honorable Michael L. Robinson the same day, (ECF No. 5). It was reassigned to the Honorable Gregory P. McGuire on 17 January 2018, (ECF No. 108), and then to the undersigned on 6 May 2021, (ECF No. 190).
22. This matter has an extensive procedural history. Plaintiffs filed their Complaint on 21 July 2016, (ECF No. 1), and amended their Complaint on 25 January 2018, (ECF No. 110).
23. On 7 February 2017, the Court issued its Order and Opinion on Motions to Dismiss, (ECF No. 44), and on 24 September 2019 it issued its Order and Opinion on Cross Motions for Summary Judgment, (ECF No. 178). As a result of these Orders and Opinions and other relevant filings in this case, several parties and claims have been dismissed. The remaining Plaintiff is Vent Tech, which asserts claims against the remaining Defendant, Martin, for constructive fraud, breach of fiduciary duty, conversion, unjust enrichment constructive...
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