Potts v. KEL, LLC
| Decision Date | 09 May 2019 |
| Docket Number | 16 CVS 2877 |
| Citation | 2019 NCBC 29 |
| Court | Superior Court of North Carolina |
| Parties | W. AVALON POTTS, individually and derivatively on behalf of Steel Tube, Inc., Plaintiff, v. KEL, LLC; RIVES & ASSOCIATES, LLP, Defendants, and STEEL TUBE, INC., Nominal Defendant, and LEON L. RIVES, II, Defendant/ Counterclaimant/ Third-Party Plaintiff, v. AVALON1, LLC, Third-Party Defendant/ Counterclaimant. |
Moore and Van Allen, PLLC, by Mark A. Nebrig and John T. Floyd, for Plaintiff W. Avalon Potts.
Sharpless McClearn Lester Duffy, PA, by Frederick K Sharpless and Pamela S. Duffy, for Defendants Leon L. Rives II and Rives & Associates, LLP.
No counsel appeared for Defendant KEL, LLC.
ORDER AND OPINION ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
1. This case arises out of a dispute over the management of Steel Tube, Inc., a North Carolina-based manufacturer founded nearly 30 years ago by Walter Lazenby and Plaintiff W. Avalon Potts. The two served as Steel Tube's only officers and directors until 2015, when Lazenby sold all of his stock to Defendant Leon L. Rives, II and resigned from the company. Rives was no stranger to Steel Tube-he and his accounting firm, Rives & Associates, LLP, had long provided tax advice and tax preparation services to the company. But his arrival reshaped Steel Tube's management, with Rives becoming an officer and stepping into Lazenby's place as one of the two directors, along with Potts.
2. The relationship between Potts and Rives seems to have been rocky from the start. In this action, Potts alleges that Rives began abusing his position as officer and director almost immediately, siphoning funds for personal use and transferring money and equipment to companies owned by his family. Potts asserts a host of claims, both individual and derivative, against Rives for breach of fiduciary duty constructive fraud, conversion, unjust enrichment, and fraud, among others. Potts also brings claims against Rives & Associates (for providing shoddy tax services) and KEL, LLC (for facilitating Rives's alleged fraud).
3. Rives and Rives & Associates have moved for summary judgment as to the claims asserted against them under Rule 56 of the North Carolina Rules of Civil Procedure. For the reasons stated below, the motion is GRANTED in part and DENIED in part.
4. The Court does not make findings of fact in ruling on motions for summary judgment. The following background, drawn from the evidence submitted in support of and opposition to the motion, is intended only to provide context for the Court's analysis and ruling.
5. Steel Tube is a "carbon steel and galvanized steel tube manufacturer." (V. Am. Compl. ¶ 13, ECF No. 17 ["Compl."].) At the time of Steel Tube's founding, Potts and Lazenby divided its stock equally between them.[1] Potts has been an owner, officer, and director ever since. (Aff. W. Avalon Potts ¶¶ 2, 3, ECF No. 119.3 ["Potts Aff."].)
6. Rives is a Certified Public Accountant. (Aff. Leon L. Rives, II ¶ 2, ECF No. 111.1 ["Rives Aff."].) He became familiar with Steel Tube in his role as tax preparer and adviser. (Rives Aff. ¶ 2.) In July 2014, Rives offered to buy all of Steel Tube's stock from Potts and Lazenby for more than $2 million-a deal that would have made Rives the company's sole owner. (Rives Aff. ¶ 3; see also Potts Aff. ¶ 6.) By year's end, though, negotiations had reached an impasse, and Potts declined the offer. (Compl. ¶ 17; see also Potts Aff. ¶ 6.) Rives settled instead for an agreement to buy Lazenby's shares for $600, 000, split between an initial lump sum of $20, 000 and monthly installments of $6, 000 for the remainder. Lazenby retained a security interest in the shares.
7. The sale of Lazenby's shares was finalized on January 15, 2015. (See Lazenby Aff. ¶¶ 5, 9.) That same day, Lazenby and Rives executed an Acceptor Management Agreement. (See Defs.' Br. in Supp. Mot. Summ. J. Ex. 10, ECF No. 111.10 ["Management Agrmt.]".) The Acceptor Management Agreement purports to engage Rives and one of Rives's closely held entities, together referred to as "MANAGESTEEL," for the purpose of managing Steel Tube's operations. (See Management Agrmt.) Neither Lazenby nor Rives informed Potts of the Acceptor Management Agreement or its terms. (See Lazenby Aff. ¶ 10; Potts Aff. ¶ 9; Dep. L. Rives 110:9-15, ECF No. 111.3.) Lazenby then resigned as an officer and director of Steel Tube a few days later. (Lazenby Aff. ¶ 9.)
8. In February 2015, Potts and Rives held their first shareholder meeting as co-owners of Steel Tube. (See Dep. A. Potts 42:10-43:3, ECF No. 111.2; see also Pl.'s Opp'n Defs.' Mot. Summ. J. Ex. A1, ECF No. 119.2.) The two elected themselves as directors, convened a meeting as board of directors, and then elected Potts as president and Rives as secretary and treasurer. Potts asserts, and Rives disputes, that they orally agreed not to make material transactions of more than $25, 000 without the other's consent. (See Potts Aff. ¶ 10; Rives Aff. ¶ 6.)
9. Over the next 18 months, Rives authorized a series of transactions that Potts characterizes as self-dealing or otherwise not in Steel Tube's best interests. It is undisputed, for example, that Rives caused Steel Tube to issue a $20, 000 check to Lazenby, began making monthly cash withdrawals of $7, 500, and deposited another $62, 875 into his personal bank account. (See Dep. L. Rives 114:24-115:7, 156:1-7, 189:3-9.) Potts offers evidence that Rives took the funds without authorization and for his own personal benefit, including to pay for his purchase of Lazenby's shares. Rives responds that the payment to Lazenby was compensation for services to Steel Tube, that the monthly withdrawals were an approved salary, and that Potts agreed to the $62, 875 distribution for tax purposes. (See Rives Aff. ¶ 4; Dep. L. Rives 98:10-12, 157:16-22, 193:6-8.)
10. Other disputed transactions involve companies in which Rives or members of Rives's family hold an interest. One is Elite Tube & Fab, LLC ("Elite Tube"), a company that Rives helped form and in which his wife was a member. (See Dep. L. Rives. 247:7-248:4; Rives Aff. ¶ 7.) The second is KEL, a company formed and owned by Rives's brothers. (See Dep. L. Rives 287:22-23.) It is undisputed that Rives transferred cash and equipment to Elite Tube and made a deal with KEL to handle certain transportation and trucking services for Steel Tube. (See Rives Aff. ¶¶ 7, 10.)
11. Rives maintains that all of these actions were proper. The transfers to Elite Tube, he asserts, were part of a planned joint venture designed to expand Steel Tube's business and reach new customers, and the deal with KEL lowered shipping costs and made transportation more convenient. (See Rives Aff. ¶ 7; Dep. L. Rives 40:5-7, 255:16-25, 290:21-291:18.) Potts, on the other hand, believes the transfers to Elite Tube were little more than theft and that the contract with KEL diverted a corporate opportunity from Steel Tube. (See, e.g., Dep. A. Potts 62:7-63:11, 68:7-14, 70:21- 71:4; Potts Aff. ¶ 15(a)-(g).)
12. Potts also alleges that Rives misrepresented other actions. Shortly after joining Steel Tube, Rives proposed converting it into an S corporation for tax purposes. (See Potts Aff. ¶ 13; Rives Aff. ¶ 5.) As alleged, Rives or Rives & Associates prepared the paperwork and made the conversion effective October 1, 2014-a date several months before Lazenby sold his shares to Rives. (See Potts Aff. ¶ 13; see also Rives Aff. ¶ 5; Lazenby Aff. ¶¶ 5-7.) Potts signed off on the conversion but testifies that he was not told about the effective date, which he now believes was improper and caused Steel Tube to incur costs and penalties. (See Potts Aff. ¶ 13; Aff. Thomas M. Borden ¶¶ 4-8, ECF No. 119.20 ["Borden Aff."].)
13. Potts filed this action against Rives in November 2016. As originally filed, the complaint requested dissolution of Steel Tube based on alleged wrongdoing and waste of corporate assets by Rives. Potts also alleged the existence of an insoluble management deadlock because neither he nor Rives owned a majority of Steel Tube's stock.
14. On February 22, 2017, Potts amended his complaint and alleged that he was now the "sole shareholder" of Steel Tube. (Compl. ¶ 4.) As detailed in other Orders, Potts acquired Lazenby's security interest in Rives's stock and then repossessed it after Rives defaulted. (See Order on Mot. to Am. ¶¶ 24-30, ECF No. 57.) Potts also took steps to remove Rives as officer and director. Having taken full control of Steel Tube, Potts abandoned his request for dissolution and asserted seventeen new claims for relief, including a mix of individual and derivative claims. Among other things, Potts claimed that Rives breached fiduciary duties owed to Steel Tube and to Potts, committed fraud, converted funds and property, and was unjustly enriched.
15. Potts also added Rives & Associates, Elite Tube, and KEL as defendants. KEL has made no appearance and is in default. (See Entry of Default, ECF No. 104.) Potts voluntarily dismissed all claims against Elite Tube, pursuant to a Court-approved settlement agreement. (See Order Approving Voluntary Dismissal, ECF No. 95.)
16. In December 2017, Rives and Rives & Associates moved to dismiss some claims in the amended complaint. (See Defs.' Mot. Dismiss, ECF No. 70.) The Court granted that motion in part and dismissed Potts's individual...
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