Phelps Staffing, LLC v. S.C. Phelps, Inc.

• Citation: 720 S.E.2d 785
• Decision Date: 20 December 2011
• Docket Number: No. COA11–472.,COA11–472.
• Parties: PHELPS STAFFING, LLC, Plaintiff, v. S.C. PHELPS, INC.; Sheila Phelps; Charles T. Phelps; Moyses Roa Mata; and C T Phelps, Inc., Defendants,S.C. Phelps, Inc., Third Party Plaintiff, v. Omar El–Kaissi, Third Party Defendant.
• Court: North Carolina Court of Appeals

720 S.E.2d 785

PHELPS STAFFING, LLC, Plaintiff,

v.S.C. PHELPS, INC.; Sheila Phelps; Charles T. Phelps; Moyses Roa Mata; and C T Phelps, Inc., Defendants,S.C. Phelps, Inc., Third Party Plaintiff,

v.Omar El–Kaissi, Third Party Defendant.

No. COA11–472.

Court of Appeals of North Carolina.

Dec. 20, 2011.

Appeal by Plaintiff from order entered 13 May 2010 and memorandum of decision and judgment entered 18 August 2010 by Judge Howard E. Manning, Jr. in Franklin County Superior Court. Heard in the Court of Appeals 27 October 2011.

Harris & Hilton, P.A., Raleigh, by Nelson G. Harris, for Plaintiff-appellant.

Edmundson & Burnette, L.L.P., Oxford, by J. Thomas Burnette and James T. Duckworth, III, The Law Office of Thomas H. Clifton, PLLC, by Thomas H. Clifton, Davis, Sturges & Tomlinson, by Conrad Boyd Sturges, III, and J.P. Williamson, Jr., Louisburg, for Defendant-appellees.

HUNTER, JR., ROBERT N., Judge.

This controversy centers upon the sale of a contract labor staffing business and the alleged breach of a non-compete clause in the asset sale agreement. The purchaser of the business, Phelps Staffing, LLC (“Plaintiff”), appeals the trial court's order and memorandum of decision and judgment denying Plaintiff's claims for relief against six named defendants, including, inter alia, the seller of the business, Sheila Phelps, and her husband, Charles Phelps. Plaintiff contends the trial court erred by concluding (1) Ms. Phelps did not breach her obligations under the non-compete clause of the asset sale agreement; and (2) Mr. Phelps was not bound by the asset sale agreement and, therefore, did not breach the non-compete clause by entering into competition with Plaintiff. After careful review, we affirm.

I. Factual Background & Procedural History

The facts of this case are not in dispute. Ms. Phelps incorporated S.C. Phelps, Inc. (“SCP”) in 1996. She has served as the president and sole shareholder of SCP since its incorporation. SCP engaged in the business of providing contract labor to local businesses. Ms. Phelps handled SCP's payroll, bookkeeping, and workers' compensation matters. Phelps used his prior experience and contacts in the labor staffing industry to recruit customers and contract laborers for SCP.¹ While Mr. Phelps did not draw a salary for his work through 2006 due to apparent tax issues,² he was, however, provided with approximately $250,000 in cash out of the proceeds of the business. In addition, SCP paid various personal expenses on behalf of Mr. and Ms. Phelps including mortgage payments on their primary residence, rental payments on their beach cottage, utility bill payments at both residences, and personal vehicle expenses such as automotive insurance.

SCP thrived as Mr. Phelps continued to acquire new customers. These customers included Arcola Lumber Company, Cal–Maine Foods, Carolina Egg Companies, Coastal Supply, Inc., and Flippo Lumber Company. Moyses Roa Mata, another employee of SCP, assisted Mr. Phelps in recruiting the contract labor workers.

Ms. Phelps first attempted to sell SCP in 2000. The sale fell through, however, because Mr. Phelps refused to sign a non-competition agreement. In 2001, SCP leased a new office space on Bickett Boulevard. Ms. Phelps hired Crystal Powell to assist with SCP's payroll, taxes, and workers' compensation matters. Ms. Powell's role and responsibilities increased as Ms. Phelps' involvement with the business diminished.

Mr. Phelps' role with SCP also increased and, by 2006, he was the primary manager of the business and began drawing a weekly salary of $1,000. In March 2007, Mr. Phelps formed a new company, C.T. Phelps, Inc. (“CTP”). Ms. Phelps held no ownership interest in CTP, nor was she otherwise affiliated with CTP as Mr. Phelps' partner, agent, or employee. Around this time, Ms. Phelps told Mr. Phelps she was ready to get out of the contract labor business and wanted to sell SCP. Mr. Phelps agreed it was a good time to sell, and SCP was listed for sale later that year.

Omar El–Kaissi expressed an interest in acquiring SCP. Through discussions with Mr. and Ms. Phelps, Mr. El–Kaissi learned that Ms. Phelps was the sole owner of SCP and that SCP had been paying some of the Phelps' personal expenses. Mr. El–Kaissi informed Mr. and Ms. Phelps that he wanted both of them to sign a non-compete agreement as part of his asset purchase of SCP. Ms. Phelps agreed to sign on behalf of herself and SCP, but Mr. Phelps stated he would not sign a non-compete agreement.

Nevertheless, the transaction proceeded. On 10 December 2007, Ms. Phelps, acting on her own behalf and on behalf of SCP, and Mr. El–Kaissi, acting on behalf of Plaintiff, entered into an “Asset Purchase Agreement” (the “Agreement”). Pursuant to the Agreement, Plaintiff agreed to purchase all of SCP's assets including, inter alia, the business's good will, inventory, equipment, files, customer lists, and client information. Plaintiff agreed to pay a purchase price of $1.4 million, plus an additional $100,000 to be paid over a ten-year period pursuant to the terms of a promissory note. Mr. Phelps negotiated the sale on SCP's behalf and persuaded Mr. El–Kaissi to personally guarantee payment of the $100,000 note within twelve months of the Agreement.

The Agreement specifies $25,000 of the purchase price as consideration for the inclusion of a non-compete clause. Pursuant to this clause, SCP and Ms. Phelps agreed and covenanted “not [to] directly and/or indirectly Compete with Buyer ... either by himself [sic] or through any entity owned or managed, in whole or in part, by the Seller for a period of [5 years] ³ from the date of this Agreement within the Prohibited Territory.⁴” The clause further provides, for the same five-year period, “Seller, Shelia [sic] Phelps and Charles Phillips ⁵ shall not jeopardize the present and future operations of the Business by requesting any present or future client, customer, or vendor of Buyer to curtail, amend, or cancel its business with Buyer.” Moreover, the Agreement defines “Confidential Information” broadly and states:

Seller, Shelia [sic] Phelps and Charles Phillips agree to hold in confidence and shall not, except pursuant to written authorization from the Buyer or as required by a governmental entity: (i) directly or indirectly reveal, report, publish, disclose or transfer the Confidential Information or any part thereof to any person or entity; (ii) use any Confidential Information or any part thereof for any purpose other than the benefit of the Buyer; or (iii) assist any person or entity other than the Buyer to secure any benefit from the Confidential Information or any part thereof for a period of two (2) years after the date of Closing ...

Mr. Phelps was present at the execution of the Agreement but he did not sign the Agreement. Mr. Phelps did not sign a non-compete agreement relating to the asset sale of SCP, nor did he give any written or oral assurance that he would not compete with Plaintiff's business. Plaintiff initially retained Ms. Powell and Mr. Mata as employees; however, both refused to sign a non-compete agreement. Ms. Powell left Plaintiff to assist Ms. Phelps with accounting work at SCP in February 2008. Plaintiff terminated Mr. Mata's employment in October 2008 after Mr. El–Kaissi discovered Mr. Mata had been diverting Plaintiff's customers to a competing business.⁶

Ms. Phelps split the proceeds from the asset sale of SCP with Mr. Phelps, transferring $759,263.41 into Mr. Phelps' account in June 2008. Mr. and Ms. Phelps separated approximately one month later. After their separation, Ms. Powell continued to do accounting work for Mr. Phelps and Ms. Phelps separately and continued to pay the Phelps' personal expenses out of SCP's business account. These expenses included mortgage payments on the Phelps' primary residence, rental payments on a beach cottage at Emerald Isle, utility payments for their primary residence and the beach cottage, personal vehicles, and automobile insurance. In August 2008, Mr. Phelps transferred $50,000 to SCP, which Ms. Powell applied towards payment of these expenses. In addition, Ms. Powell performed accounting work for Mr. Phelps' business, CTP. She was not being paid for this work but was drawing unemployment benefits from SCP. CTP began operating its business at the Bickett Boulevard office location in August 2008. SCP, however, paid the rent on that office space through January 2009.

Mr. Phelps maintained contact with SCP's former customers throughout 2008. In October of that year, Mr. Phelps informed Ms. Powell of his intent to return to the contract labor staffing business. He asked her to acquire new computer software to assist the accounting work for CTP. Ms. Powell obliged and installed new accounting software on a computer purchased by Mr. Phelps for CTP. Without Ms. Phelps' permission or participation, all of SCP's old business, financial, and accounting data sets were installed into the accounting software on CTP's new computer.

In December 2008, Mr. Phelps began competing with Plaintiff. Mr. Phelps contacted SCP's former customers, Arcola Lumber Company, Cal–Maine Foods, Carolina Egg Companies, Coastal Supply, Inc., and Flippo Lumber Company. At the time, these companies were engaged in business with Plaintiff. Mr. Phelps persuaded some of these companies to conduct business with CTP, and, in addition, “flipped” many of the contract laborers who were then working for Plaintiff. Mr. Mata assisted Mr. Phelps in recruiting and transferring the laborers from Plaintiff to CTP. Plaintiff contends that because many of these workers did not fill out job applications with CTP,⁷ Mr. Phelps must have obtained their personal information, such as social security numbers, from SCP's old records.

In February 2009, CTP began paying the rent for its office space and the various personal expenses (rent and utilities for the beach house, mortgage and insurance payments) that had formerly been paid by...