Internal Business Disputes, Third Parties, and Section 75-1.1
The reach of N.C. Gen. Stat § 75-1.1 extends to conduct “in or affecting commerce.” Although this phrasing seems broad, courts interpreted it to exempt several types of conduct from the statute’s purview.
One recognized exemption is for internal business disputes: that is, conduct among members of the same business.
A recent decision by the North Carolina Business Court addressed this important exemption. In Chisum v. Campagna, the plaintiff tried to sidestep the exemption by alleging that his section 75-1.1 claim involved not only owners of the same business, but also several third-party companies.
Did that allegation bring the claim within the statute’s ambit? This post examines the Court’s analysis and conclusion.
A membership dispute
Dennis Chisum was a commercial real estate developer in the Wilmington area. In the 1990s, he teamed up with fellow Wilmington developers, and father and son, Rocky and Rick Campagna. The three formed several LLCs to develop land in and around Wilmington.
Chisum alleged that, beginning in 2007, the Campagnas started a campaign to squeeze Chisum out of the LLCs. The campaign allegedly included “sham” capital calls, designed to dilute his interest in each company. According to Chisum, he never received notice of the capital calls, and the Campagnas also held member meetings without him. Through these capital calls and meetings, the Campagnas purported to cut Chisum’s ownership in each company in half.
Chisum further alleged that the Campagnas engaged in self-interested transactions, including (a) diverting opportunities to themselves or other entities they controlled, (b) selling the companies’ assets without Chisum’s knowledge or approval, and (c) failing to pay Chisum his proper share of the assets.
Chisum’s complaint included a section 75-1.1 claim. The defendants moved to dismiss that claim.
Conduct does not become less “internal” to a business simply because the conduct benefits third parties
Judge Gregory P. McGuire granted the motion to dismiss. As his decision explains, Chisum’s section 75-1.1 claim concerned a dispute between owners of a business—and therefore fell beyond the statute’s reach.
Judge McGuire noted that the Campagnas’ allegedly wrongful conduct involved intracorporate actions. This conduct included the “sham” capital calls, a fraudulent attempt to amend an operating agreement, and the Campagnas’ conversion of Chisum’s membership interests.
That alleged conduct, Judge McGuire explained, did not affect any other market participants; the conduct only affected the co-owners of the businesses. To confirm this conclusion, Judge McGuire cited White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010). In White, the Supreme Court held that section 75-1.1 does not regulate the “internal conduct of individuals within a single market participant,” which the court defined as a “single business.”
While the exemption clearly captured these allegations, Chisum’s other allegations required a deeper analysis. Chisum alleged that the Campagnas had diverted assets and opportunities away from the Chisum-associated LLCs and into other companies that the Campagnas controlled. Chisum argued that the exemption did not apply to these actions because the actions involved third parties—namely, companies that the Campagnas alone controlled.
Here, Judge McGuire drew a line: he reasoned that the mere involvement of a third party was not enough, and that the allegedly unfair or deceptive conduct must actually be directed toward the third party to affect commerce.
Judge McGuire then applied that rule. Chisum alleged that the Campagnas directed the unfair conduct toward the Chisum-associated LLCs—and not toward any third-party companies. The conduct therefore constituted conduct internal to the businesses that Chisum owned with the Campagnas. Critically, the fact that third-party companies benefitted from the allegedly wrongful conduct did not, by itself, mean that the Campagnas directed their conduct toward those companies.
Overcoming the exemption
The exemption for internal business disputes often sounds the death knell for section 75-1.1 claims. The decision in Chisum adds another data point to this conclusion. As Chisum reveals, the exemption can apply even when internal conduct benefits a third party.
Author: Jeremy Falcone