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Contract – Business Acquisition – Tort/Negligence – Fraud – Purchase Debt Payments – LLC Distributions

An acquisition transaction left the plaintiff-sellers owning 20 percent and the defendant-buyers owning 80 percent of a new LLC, with the new LLC responsible for paying the purchase price. Plaintiffs have stated a claim for fraud based on allegations that defendant represented that the payments would be “below the line,” so plaintiffs wouldn’t be paying themselves, when he had no intention of honoring that representation.

Defendants’ motion to dismiss is denied as to plaintiffs’ claim for (1) breach of tag-along rights, (2) breach of contract regarding the failure to make distributions, (3) judicial dissolution, (4) declaratory judgment, (5) fraud based on the source of debt payments and the payment of distributions, and (6) unfair trade practices. Defendants’ motion to dismiss is granted as to plaintiffs’ claim for (1) breach of contract regarding management of the company and (2) fraud based on the resolution of accounting and expense issues.

Background

Plaintiffs sold 80 percent of their interest in their physical therapy business to PT Development Cary. After the sale, plaintiff Dunn Holdings held a 20 percent interest and PTD Cary held an 80 percent interest in defendant Breakthrough Cary PT, LLC. PTD later transferred that interest to Confluent Health, an entity owned by Defendant Benz.

PTD Cary financed a portion of the purchase price through a note payable from Breakthrough Cary to Dunn PT. Plaintiffs expressed concern that the acquisition debt would be paid back directly out of Breakthrough Cary’s profits, meaning that 20 percent of the debt would be paid by plaintiffs. Benz, Breakthrough Cary’s manager, assured plaintiffs that the debt would be paid “below the line” and thus would not have any effect on plaintiffs’ distributions or the value of their interest in Breakthrough Cary.

The complaint alleges that the debt was not, in fact, paid “below the line,” and that, after plaintiffs complained about not receiving distributions from Breakthrough Cary, Breakthrough Cary’s CEO emailed them, agreeing to make such distributions. Although distributions were made for two quarters after the email, no other distributions were made.

Distributions

The operating agreement provides, “Any amendments to this Agreement … shall be in writing and unanimously approved by all members.”

Even if the email from PTD Cary’s CEO constitutes a sufficient “writing,” it is not signed by Dunn PT as required by the operating agreement, nor does it even refer to the operating agreement. The allegations do not support plaintiffs’ position that the email was an amendment to the operating agreement, or that breach of the email is a breach of the operating agreement.

However, plaintiffs have adequately alleged that the email is a separate and valid contract between Dunn PT, or Christopher individually, and Confluent.

Fraud

Plaintiffs allege that, when Benz said the acquisition debt would be paid “below the line,” he did not intend to honor his representation. Given plaintiffs’ allegations that Benz’s representations induced them into the sales transaction, plaintiffs’ allegations state a direct, rather than derivative, claim.

Plaintiffs also allege that Benz and Confluent made representations they did not intend to honor with regard to regular distributions. Since there is no allegation that the failure to make distributions to Dunn PT resulted in any harm to Breakthrough Cary, plaintiffs’ claim for fraud based on the failure to pay distributions is also not a derivative claim.

However, plaintiffs’ allegations that Benz promised to resolve various accounting and expense issues is simply a repackaging of their claims for breach of fiduciary duty and constructive fraud and do not state separate claims for fraud.

Unfair Trade Practices

Where the complaint alleges facts relating to interactions between market participants Dunn PT and Benz and his businesses, the allegations are sufficient at this stage to support a claim that the conduct was in or affecting commerce.

Motion granted in part, denied in part.

Dunn Holdings I, Inc. v. Confluent Health LLC (Lawyers Weekly No. 020-066-18, 35 pp.) (Gregory McGuire, J.) J. Mitchell Armbruster for plaintiffs; Chadwick McTighe, Timothy Thompson and Edward Hennessey for defendants. 2018 NCBC 89

 

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