When External Means Internal
Ellis & Winters
Disputes among business owners can be ugly. That ugliness lends itself to accusations of unfairness and deception.
Maybe for this reason, business owners engaged in fisticuffs turn to N.C. Gen. Stat. § 75-1.1 for relief. It’s hard to blame them. The statute declares unlawful “unfair or deceptive acts or practices in or affecting commerce.”
Based on this language, unfair and deceptive conduct by one business owner against another might seem to be the prototypical 75-1.1 violation.
Courts, however, have construed the term “commerce” to require conduct outside of an intra-company dispute.
The Business Court’s recent decision in Potts v. KEL, LLC illustrates this doctrine and its reasoning.
I can use the company’s money for my own personal gain, right?
Potts concerns Steel Tube, Inc., a company in Statesville that manufactures carbon steel and galvanized steel tube.
Steel Tube had two founders: W. Avalon Potts and Walter Lazenby. A few years ago, Leon Rives approached Steel Tube’s owners about acquiring the company. Rives ended up acquiring Lazenby’s shares.
Rives then began using Steel Tube’s assets to finance his purchase of those shares. He withdrew $7,500 a month for one year, plus an additional $62,875.
There’s more. Rives’s family members formed a company called Elite Tube & Fab. Rives transferred over $120,000 from Steel Tube to Elite Tube.
They didn’t stop there. Rives’s brothers formed another company called KEL, LLC. Rives arranged for Steel Tube to hire KEL for Steele Tub’s transportation and trucking needs.
Potts was not pleased when he learned of these activities. He repossessed Rives’s shares, and then sued Rives and the other companies. His claims included an alleged violation of section 75-1.1.
Family feuds are not commercial feuds
The defendants moved to dismiss the 75-1.1 claim. They argued that the relevant conduct occurred within a single business—Steel Tube—and therefore was not “in or affecting commerce.”
To evaluate this argument, Judge Adam Conrad first reflected on “[t]he very purpose of this lawsuit,” which he described as “to resolve disputes about the management of a single business (Steel Tube) that arose between its co-owners and co-directors (Potts and Rives).” On this point, Judge Conrad noted that the very premise of the 75-1.1 claim concerns Rives taking advantage of his position at Steel Tube to benefit himself and his family.
In essence, Judge Conrad explained, the case is an “intra-company feud about internal operations.”
Judge Conrad then cited three recent Business Court decisions—including Chisum v. Campagna and JS Real Estate Investments v. Gee Real Estate—that had a similar fact pattern. In each case, the court disposed of a section 75-1.1 claim. These dispositions carried out the longstanding principle that section 75-1.1 does not encompass conduct related to the internal operations of a business—a principle clarified by the North Carolina Supreme Court in its 2010 decision in White v. Thompson.
Potts tried to sidestep White and its progeny. Potts argued that, by channeling Steel Tube’s assets to third parties like KEL and Elite Tube, the conduct concerned more than an internal business dispute.
Judge Conrad didn’t buy it. The unfairness of Rives’s conduct, he explained, inheres in the relationship between Potts and Rives as Steel Tube’s co-owners.
Put another way, Potts did not allege “any unfairness in the broader marketplace.” The involvement of Elite Tube and KEL “was merely incidental to” a dispute about a single company’s management.
The boundaries of unfairness can seem unfair
As Potts makes clear, section 75-1.1 requires that a plaintiff show unfairness or deception in a marketplace transaction, separate and apart from any internal squabble.
Potts also raises an interesting question: what external conduct related to an intra-company dispute would not be considered incidental to the dispute? In particular, what if a third party encourages one business owner to deceive his co-owner? Is there any degree of third-party influence that could warrant a 75-1.1 claim in a dispute between co-owners?
For now, Potts instructs that no 75-1.1 claim arises based on the mere creation of a sham business to receive company funds. Further data points might define the boundaries of this doctrine.
Author: Stephen Feldman