Zloop, Inc. v. Parker Poe Adams & Bernstein, LLP
| Decision Date | 16 February 2018 |
| Docket Number | 17 CVS 5480 |
| Citation | 2018 NCBC 16 |
| Court | Superior Court of North Carolina |
| Parties | ZLOOP, INC., Plaintiff, v. PARKER POE ADAMS & BERNSTEIN, LLP; ALBA-JUSTINA SECRIST a/k/a A-J SECRIST; and R. DOUGLAS HARMON, Defendants. |
Rossabi Reardon Klein Spivey PLLC, by Gavin J. Reardon and Amiel J. Rossabi, and Allen & Gooch, by James H. Gibson (pro hac vice) and Charles M. Kreamer (pro hac vice), for Plaintiff Zloop, Inc.
Robinson, Bradshaw & Hinson, P.A., by Robert W. Fuller and Stuart L. Pratt, for Defendants Parker Poe Adams & Bernstein, LLP, Alba-Justina Secrist a/k/a A-J Secrist, and R. Douglas Harmon.
ORDER & OPINION ON DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS PURSUANT TO N.C. R.C.P 12(C)
1. THIS MATTER is before the Court on Defendants Parker Poe Adams & Bernstein, LLP, Alba-Justina Secrist, and R. Douglas Harmon's Motion for Judgment on the Pleadings Pursuant to N.C. R.C.P. 12(c) ("Motion"). For the reasons discussed below, the Court GRANTS the Motion.
2. This case "raises thorny questions relating to the bounds of legitimate legal advocacy and transgressive participation by attorneys at law in a client's illegal conduct." Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 407 (3d Cir. 2003).
3. Plaintiff Zloop, Inc. ("Zloop") is a bankrupt electronic-waste-recycling corporation in the process of liquidation that was formerly managed or owned by Robert Boston ("Boston") and Robert LaBarge ("LaBarge"), each of whom allegedly looted Zloop for personal benefit. Defendants are the law firm Parker Poe Adams & Bernstein, LLP ("Parker Poe") and two of its present or former attorneys Alba-Justina Secrist ("Secrist") and R. Douglas Harmon ("Harmon") (collectively, "Defendants"). In this action, Zloop seeks to recover damages based on claims for: (1) legal malpractice; (2) breach of Defendants' fiduciary duties owed to Zloop as its corporate counsel; and (3) aiding and abetting Boston and LaBarge's breach of their fiduciary duties owed to Zloop as its owners, managers, or directors. Zloop is currently maintaining a separate action against Boston and LaBarge before the United States District Court for the Western District of Louisiana ("Louisiana Lawsuit").
4. Defendants move for judgment on the pleadings pursuant to North Carolina Rule of Civil Procedure 12(c). The Motion rests on two primary contentions: (1) the common law doctrine of in pari delicto bars any claim for professional malpractice; and (2) North Carolina does not recognize a claim for aiding and abetting a breach of fiduciary duty. Defendants contend that Zloop's amended complaint ("Amended Complaint") must be dismissed because Zloop's own allegations support each of those two contentions as a matter of law.
5. Assuming solely for purposes of the Motion that all of Zloop's allegations are true, the Court concludes that the Motion must be granted and the Amended Complaint must be dismissed because, as a matter of law: (1) Zloop's claims for Defendants' professional malpractice are barred by the in pari delicto doctrine; (2) no claim for aiding and abetting breach of fiduciary duty has been recognized in North Carolina; and (3) even if the North Carolina Supreme Court ultimately recognizes an aiding and abetting breach of fiduciary claim, Zloop has failed to allege the essential elements of any such claim.
6. The Court accepts the following facts and construes them in Zloop's favor solely for purposes of ruling on the Motion.
7. Zloop was in the business of recycling electronic waste, including collecting old "e-waste" (i.e., obsolete computers, televisions, and radios), crushing the materials, and then harvesting and reselling the copper, plastic, and other usable byproducts gleaned from the waste. (Am. Compl. ¶ 5, ECF No. 52.) Zloop originally intended to operate pursuant to a franchise model. (Am. Compl. ¶ 5.)
8. Boston and LaBarge incorporated Zloop as a Delaware limited liability company ("LLC") in July 2012. (Am. Compl. ¶¶ 6-8.) In November 2012, LaBarge filed Zloop's Application for Certificate of Authority with the North Carolina Secretary of State, listing himself and Boston as Zloop's sole managers. (Am. Compl. ¶ 10; Am. Compl. Ex. 3, ECF No. 52.1.)
9. In the fall of 2012, Boston and LaBarge promoted Zloop's franchise opportunity and overall potential to Louisiana resident Kendal Mosing ("Mosing"). Between November 2012 and May 2014, Mosing advanced Zloop a total of $27, 498, 179, which was used to purchase franchises, LLC interests, and stock; to provide loans; and to grant pledges to secure Zloop's line of credit. (Am. Compl. ¶ 11.)
10. In or before January 2013, Zloop retained the law firm of McGuire Woods LLP ("McGuireWoods") as corporate counsel in connection with a potential securities offering. (Am. Compl. ¶ 14.) McGuireWoods provided Boston and LaBarge with a draft private placement memorandum ("PPM"), which Boston and LaBarge substantially edited before distributing to investors. (Am. Compl. ¶¶ 15-16.)
11. In April 2013, Boston and LaBarge altered this PPM ("April PPM") to offer convertible debt rather than preferred equity. (Am. Compl. ¶ 17.) Schedule A of the April PPM shows Zloop's total capital as $5, 100, 000, nearly $5, 000, 000 of which Mosing had contributed by that time. (Am. Compl. ¶ 18.) The April PPM recites that Boston and LaBarge each had 6, 250, 000 voting units in Zloop, LLC, and that Mosing had 1, 200, 000 non-voting units. (Am. Compl. ¶ 17.)
12. The April PPM also included an unexecuted operating agreement that included a provision that Zloop, LLC members would be issued stock proportional to their LLC interests if Zloop, LLC was converted to a corporation. (Am. Compl. ¶ 18.)
13. In May 2013, Zloop hired Mike Watson ("Watson") as its CEO. (Am. Compl. ¶ 28.)
14. On June 10, 2013, McGuireWoods advised Boston and LaBarge that Zloop had improperly broken the escrow provisions of its securities offering by taking and spending proceeds before the offering had closed. (Am. Compl. ¶¶ 20, 34.) McGuireWoods advised that immediate disclosures to investors were necessary, that Zloop should distribute a revised PPM, and that McGuireWoods would withdraw as Zloop's counsel if its advice was not followed. (Am. Compl. ¶¶ 20-21.)
15. Around this same time, Zloop hired Jack Jacobi ("Jacobi") and Jason Schubert ("Schubert") as its COO and CFO, respectively. (Am. Compl. ¶ 28.)
16. Zloop retained Parker Poe on June 19, 2013, and discharged McGuireWoods the following day. (Am. Compl. ¶¶ 23, 26.) When transmitting its files to Parker Poe, McGuireWoods cautioned Parker Poe that it should be aware of McGuireWoods' most recent advice to Zloop. (Am. Compl. ¶ 27.)
17. On July 10, 2013, Schubert began a review of Zloop's corporate records to prepare a revised PPM, and when doing so discovered numerous "red flags, " including: a $1, 300, 000 payment for a racing contract for Boston's son, listed as an "advertising" expense; a $247, 000 payment for private jet service, listed as a "marketing" expense; and a listing of Boston's wife and son as employees even though they provided no services to Zloop. (Am. Compl. ¶¶ 31-32.) Zloop's capitalization table, which Schubert reviewed, listed Boston, LaBarge, and their spouses as owning 87% of Zloop's voting shares even though they had made no investment, as compared to Mosing owning less than 1% of the non-voting shares even though he had, by that date, contributed $7, 890, 000, which sum was reflected in the table as "franchise fees." (Am. Compl. ¶ 33.) Schubert also discovered, as had McGuireWoods, that Zloop had broken escrow in connection with its securities offering. (Am. Compl. ¶ 34.)
18. Parker Poe revised the April PPM and delivered it to Boston and LaBarge on July 12, 2013. The draft did not modify this capitalization table and made no reference to Zloop having broken escrow. (Am. Compl. ¶ 36.)
19. On July 15, 2013, Watson, Schubert, and Jacobi informed Parker Poe that they intended to immediately resign their offices unless Boston and LaBarge gave them management control of Zloop. (Am. Compl. ¶¶ 39-42.) Parker Poe was advised of the factual basis leading to the demand that Boston and LaBarge surrender management control. (Am. Compl. ¶ 42.) Parker Poe advised Boston and LaBarge to refuse the demand, and the three officers then resigned and cautioned that they should not be referenced as a source for any information to be included in a PPM. (Am. Compl. ¶¶ 44-46.)
20. On August 28, 2013, Parker Poe advised Zloop to terminate the debt offering and to provide refunds to those who had already subscribed. (Am. Compl. ¶¶ 50-51.)
21. On September 23, 2013, a Moore & Van Allen attorney representing a Zloop investor wrote Harmon, expressing concern "regarding the manner in which Zloop and [Parker Poe] have handled recent events." (Am. Compl. ¶ 57.)
22. In February 2014, Parker Poe, Boston, and LaBarge discussed the possibility of converting Zloop from an LLC to a corporation in order to facilitate Zloop's repurchase of outstanding franchises. (Am. Compl. ¶ 75.) As a part of its efforts, Parker Poe engaged franchise attorney Eric Newman to provide an opinion regarding the legality of Zloop's outstanding franchise agreements. (Am. Compl. ¶ 75.) Mr. Newman concluded that many of Zloop's franchises had been created in violation of state and federal law. (Am. Compl. ¶ 75; Am. Compl. Ex. 35, ECF No. 52.4.)
23. On March 26, 2014, Parker Poe acted as counsel in a transaction by which Zloop converted from an LLC to a corporation whereby 10, 000 shares were issued to replace the 13, 960, 000 outstanding LLC units, apportioned as follows without any additional financial payment:...
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