Alexander v. Alexander , 250 N.C. App. 511 ( 2016 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA16-556
Filed: 6 December 2016
Macon County, No. 15 CVS 289
ERIC CARL ALEXANDER, Plaintiff
v.
RICHARD C. ALEXANDER, an individual, and OTTO TRUCKING, INC., a North
Carolina corporation, Defendants
Appeal by defendant from judgment entered 31 July 2015 by Judge Tommy
Davis in Macon County Superior Court. Heard in the Court of Appeals 2 November
2016.
Kenney Sloan & VanHook, PLLC, by Stuart Sloan, for plaintiff-appellee.
Griffin Wells, P.A., by M. Chase Wells, for defendant-appellant.
DAVIS, Judge.
This case involves a dispute regarding the meaning of the phrase “in or
affecting commerce” as used in North Carolina’s Unfair and Deceptive Trade
Practices Act (“UDTPA”). Richard C. Alexander (“Defendant”) appeals from a default
judgment entered in favor of Eric Carl Alexander (“Plaintiff”) on his claims for breach
of fiduciary duty, unjust enrichment, and unfair and deceptive trade practices under
the UDTPA. On appeal, Defendant argues that the trial court erred in determining
that his acts were “in or affecting commerce” for purposes of the UDTPA. After
ALEXANDER V. ALEXANDER
Opinion of the Court
careful review, we affirm in part, reverse in part, and remand for entry of a new
judgment.
Factual Background
Defendant and his late brother, Carl Alexander (“Carl”), operated Otto
Trucking, Inc. (“Otto Trucking”), a closely-held corporation, together from 1998 until
February 2013. The company provided shipping services to Caterpillar, Inc., its sole
customer. Originally, out of the 100 total shares of stock in the corporation,
Defendant and Carl each held 45 shares, the corporation controlled nine shares, and
the bookkeeper, Claire Graham, held the remaining share.
A stock transfer occurred at some point prior to February 2013 as a result of
which Defendant held 51 shares, Carl controlled 45 shares, and Graham held the
remaining four shares. Upon Carl’s death in February 2013, his 45 shares passed to
Plaintiff, his son.
Before Carl’s death, he and Defendant had generally made decisions regarding
shareholder distributions jointly and informally. At the end of each year, they would
distribute all of the funds held by the corporation except for those funds necessary to
operate the company through the following March.
On 13 May 2015, Plaintiff sued Defendant in Macon County Superior Court
alleging that Defendant had misappropriated Otto Trucking’s corporate assets. The
complaint included allegations that Defendant had (1) “caused the Corporation to pay
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Opinion of the Court
himself individually a monthly fee to use an area of land near the Defendant’s real
property . . . to park and store corporate vehicles and equipment[,]” the monthly
payment for which was “grossly in excess of a market rent for the land used . . . .”; (2)
“used corporate funds and credit to pay for wholly personal expenses,” including a
vacation to Costa Rica and personal health care; and (3) paid a total of $16,925 in
corporate funds to family members and friends even though the payments “had no
business purpose . . . .”
In his complaint, Plaintiff alleged that Defendant was liable for breach of
fiduciary duty, unjust enrichment, and unfair and deceptive trade practices under
the UDTPA. Plaintiff also requested that Otto Trucking be dissolved. Defendant was
served with a summons and complaint on 14 May 2015. After Defendant failed to file
an answer, Plaintiff moved for entry of default on 18 June 2015, and the clerk of court
made an entry of default that same day.
Plaintiff moved for a default judgment on 19 June 2015. A hearing was held
on 20 July 2015 before the Honorable Tommy Davis in Macon County Superior Court.
Plaintiff, Defendant, and Graham testified at the hearing. The trial court entered a
default judgment on 31 July 2015, which included the following pertinent findings of
fact:
10. The Defendant RICHARD ALEXANDER, as majority
shareholder in the corporation OTTO TRUCKING,
INC., over the course of the years 2014 and 2015
misdirected and misappropriated corporate funds to
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Opinion of the Court
his personal benefit. The amounts found to be
misdirected and misappropriated by the Defendant
RICHARD ALEXANDER in 2014 and 2015 are as
follows:
2014 payments
a) $24,000 in total payments denominated as ‘land rent’ in
the corporation’s financial records;
b) $16,925 in total payments made to the Defendant
RICHARD ALEXANDER’S mother and other family
members;
c) $759.02 in a payment made to purchase airline tickets
with Spirit Airlines for a personal trip to Costa Rica;
d) $183.71 in a payment made to Asheville Eye Associates
for a personal expense;
e) $389.62 in total payments for personal meals and
entertainment;
f) $202.46 in a payment made for golfing;
g) $100 in a payment made for repairs to an excavator;
2015 payments
h) $12,000 in total payments denominated as ‘land rent’ in
the corporation’s financial records;
i) $1,490.99 in total payments for personal travel;
j) $202.11 in total payments made for meals and
entertainment in Costa Rica;
The total amount of misappropriations for 2014 and 2015
is $56,252.91.
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Opinion of the Court
The trial court found Defendant liable for breach of fiduciary duty, unjust
enrichment, and unfair and deceptive trade practices under the UDTPA. The court
declined to dissolve Otto Trucking “given the profitability and ongoing operation of
the business of the company.” With regard to Plaintiff’s UDTPA claim, the trial court
specifically found that Defendant’s “acts of misappropriation were unfair and
deceptive acts which occurred in and affected commerce.”
The trial court determined that had the funds not been misappropriated
Plaintiff would have received a $25,313.81 disbursement. Based on the court’s
conclusion that Plaintiff was entitled to prevail on his UDTPA claim, the court trebled
his damages to the amount of $75,941.42 and awarded Plaintiff attorney’s fees in the
amount of $5,125, resulting in a total judgment for Plaintiff in the amount of
$81,066.42. Defendant filed a timely notice of appeal.1
Analysis
Defendant’s sole argument on appeal is that the trial court erred in finding
him liable under the UDTPA because his acts were not “in or affecting commerce.”2
We agree.
1 Although Otto Trucking was named as a defendant in the complaint, it is not a party to this
appeal.
2
Defendant does not challenge any aspect of the trial court’s default judgment other than its
finding that his acts were “in or affecting commerce” and the resulting determination that Defendant
was liable under the UDTPA.
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Opinion of the Court
Pursuant to Rule 55 of the North Carolina Rules of Civil Procedure, “[w]hen a
defendant fails to timely answer a complaint, an entry of default may be made by the
clerk on motion of the plaintiff.” Revelle v. Chamblee, 168 N.C. App. 227, 230, 606
S.E.2d 712, 714 (2005) (citation omitted). Once an entry of default has been made,
Rule 55 authorizes the plaintiff to move for entry of a default judgment. See N.C. R.
Civ. P. 55(b). Upon the filing of a motion for a default judgment, the trial court may
hold a hearing in order to “determine the amount of damages or to establish the truth
of any averment by evidence or to take an investigation of any other matter[.]” N.C.
R. Civ. P. 55(b)(2)(a).
“Once the default is established defendant has no further standing to contest
the factual allegations of plaintiff’s claim for relief.” Webb v. McJas, Inc., 228 N.C.
App. 129, 133, 745 S.E.2d 21, 24 (2013) (citation and quotation marks omitted). If
“the allegations of the complaint are sufficient to state a claim, the defendant has no
further standing to contest the merits of plaintiff's right to recover.” Hartwell v.
Mahan, 153 N.C. App. 788, 790, 571 S.E.2d 252, 253 (2002) (citation and quotation
marks omitted), disc. review denied, 356 N.C. 671, 577 S.E.2d 118 (2003). However,
“[a] default judgment admits only the allegations contained within the complaint, and
a defendant may still show that the complaint is insufficient to warrant plaintiff's
recovery.” Webb, 228 N.C. App. at 133, 745 S.E.2d at 24 (citation and quotation marks
omitted).
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Opinion of the Court
The UDTPA, which is contained in Chapter 75 of the North Carolina General
Statutes, provides that “[u]nfair methods of competition in or affecting commerce,
and unfair or deceptive acts or practices in or affecting commerce, are declared
unlawful.” N.C. Gen. Stat. § 75-1.1(a) (2015). “Whether an act found . . . to have
occurred is an unfair or deceptive practice which violates N.C.G.S. § 75-1.1 is a
question of law for the court.” Walker v. Fleetwood Homes of N.C., Inc., 362 N.C. 63,
71, 653 S.E.2d 393, 399 (2007) (citation and quotation marks omitted). If a violation
of the UDTPA is shown, the plaintiff is entitled to recover treble damages, and the
trial court has the discretion to award attorney’s fees. N.C. Gen. Stat. §§ 75-16, -16.1
(2015).
For purposes of the UDTPA, the term “ ‘commerce’ includes all business
activities, however denominated, but does not include professional services rendered
by a member of a learned profession.” N.C. Gen. Stat. § 75-1.1(b). The phrase
“ ‘business activities’ connotes the manner in which businesses conduct their regular,
day-to-day activities, or affairs, such as the purchase and sale of goods, or whatever
other activities the business regularly engages in and for which it is organized.”
White v. Thompson, 364 N.C. 47, 52, 691 S.E.2d 676, 679 (2010) (citation, quotation
marks, brackets, and ellipses omitted).
“Although this statutory definition of commerce is expansive, the [UDTPA] is
not intended to apply to all wrongs in a business setting.” HAJMM Co. v. House of
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Raeford Farms, Inc., 328 N.C. 578, 593, 403 S.E.2d 483, 492 (1991). In White, our
Supreme Court emphasized that the UDTPA “is not focused on the internal conduct
of individuals within a single market participant, that is, within a single business[,]”
but rather “the General Assembly intended the Act’s provisions to apply to
interactions between market participants.” White, 364 N.C. at 53, 691 S.E.2d at 680(emphasis added).
In White, three welders formed Ace Fabrication and Welding (“ACE”), a
partnership created primarily to provide welding services for a plant owned by
Smithfield Packing Company, Inc. (“Smithfield”). Id. at 49, 691 S.E.2d at 677. The
three partners agreed that they would divide up the contracts they won between
themselves and earn hourly wages for the hours each of them actually worked. One
of the partners — the defendant — subsequently violated this agreement by (1) hiring
several welders not affiliated with ACE to help him perform certain Smithfield jobs
that had been awarded to ACE; and (2) bidding for Smithfield welding jobs on behalf
of a new company he had formed called PAL. As a result of the defendant’s actions,
ACE ultimately went out of business. Id. at 49-50, 691 S.E.2d at 677-78. The
defendant’s former business partners sued him for breach of fiduciary duty and for
unfair and deceptive trade practices. Id. at 50, 691 S.E.2d at 678.
After the jury found that the defendant had breached his fiduciary duty to the
plaintiffs, the trial court determined that the defendant had violated the UDTPA. Id.-8-
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Opinion of the Court
at 51, 691 S.E.2d at 678. Our Supreme Court affirmed the decision of a divided panel
of this Court, holding that the defendant’s unlawful acts toward his partners did not
fall within the UDTPA because his acts were not “in or affecting commerce.” The
Supreme Court explained its ruling as follows:
[T]he unfairness of [the defendant’s] conduct occurred in
interaction among the partners within ACE. Plaintiffs
were partners with [the defendant] in a single market
participant. Plaintiffs alleged and proved that [the
defendant] breached his fiduciary duty as a partner in this
single market participant. . . . Because [the defendant]
unfairly and deceptively interacted only with his partners,
his conduct occurred completely within the ACE
partnership and entirely outside the purview of the
[UDTPA].
Id. at 53-54, 691 S.E.2d at 680.
The Court specifically rejected the argument that the defendant’s acts were “in
or affecting commerce” on the theory that they caused ACE to cease its operations as
a viable competitor in the marketplace for specialty fabrication work, which
potentially increased the prices that Smithfield would need to pay for such work in
the future. The Court held that such an argument “overlooks that the unfairness of
[the defendant’s] conduct did not occur in his dealings with Smithfield Packing” and
that the defendant “was found to have breached his fiduciary duty to his partners
through his conduct within the ACE partnership.” Id. at 54, 691 S.E.2d at 680(emphasis added). The Supreme Court concluded that “[t]he General Assembly
simply did not intend for such conduct to fall within the [UDTPA]’s coverage.” Id.-9-
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Opinion of the Court
We believe that the Supreme Court’s analysis in White compels a result in
Defendant’s favor in the present case. Here, the evidence shows that the unlawful
acts by Defendant involved his misappropriation of Otto Trucking funds through
payments made directly to himself and his family members as well as payments made
to cover some of his own personal expenses.
As in White, the “unfairness of [Defendant’s] conduct did not occur in his
dealings with [other market participants.]” Id. The inflated payments that
Defendant caused Otto Trucking to make to himself — as “land rent” in connection
with the storage of the company’s vehicles — and the other payments he caused Otto
Trucking to make for the benefit of himself and his family members are more properly
classified as the misappropriation of corporate funds within a single entity rather
than commercial transactions between separate market participants “in or affecting
commerce.” Like the plaintiff in White, Plaintiff here “alleged and proved that
[Defendant] breached his fiduciary duty as [co-owner of] this single market
participant. . . . Because [Defendant] unfairly and deceptively interacted only with
[Plaintiff, his co-owner], his conduct occurred completely within [the corporation] and
entirely outside the purview of the [UDTPA].” Id. at 53-54, 691 S.E.2d at 680.
The cases cited by Plaintiff are materially distinguishable. Defendant
principally relies on Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999),
disc. review denied, 365 N.C. 360, 718 S.E.2d 396 (2011). In that case, the defendant-
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Opinion of the Court
employee of the plaintiff, Sara Lee Corporation (“Sara Lee”), was responsible for
purchasing computer equipment for Sara Lee from outside vendors. The defendant
created several companies through which he sold Sara Lee equipment at inflated
prices while concealing his own ownership interests in those businesses. Id. at 29,
519 S.E.2d at 309.
The trial court found that the defendant had breached his fiduciary duty to
Sara Lee through this self-dealing and that his acts came within the UDTPA, and the
Supreme Court agreed that the defendant’s actions were “in or affecting commerce.”
The Court held that “[t]rusting that these were legitimate transactions secured at
competitive prices in the marketplace, [Sara Lee] regularly conducted business with
the companies in which defendant had an interest. In this case, defendant and
plaintiff clearly engaged in buyer-seller relations in a business setting[.]” Id. at 33,
519 S.E.2d at 312. In White, the Supreme Court distinguished Sara Lee, noting that
there “the defendant-employee’s unfair or deceptive actions were within the
[UDTPA]’s ambit because they did not occur solely within the employer-employee
relationship, but rather occurred in interactions between the plaintiff and the
defendant’s outside businesses.” White, 364 N.C. at 53, 691 S.E.2d at 680.
Defendant also cites Songwooyarn Trading Co. v. Sox Eleven, Inc., 213 N.C.
App. 49, 714 S.E.2d 162 (2011). In that case, the plaintiff corporation, Songwooyarn
Trading Company (“Songwooyarn”), created a separate corporation, Sox Eleven, Inc.
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Opinion of the Court
(“Sox Eleven”), and hired the defendant, Ung Chul Ahn, to operate it. Sox Eleven
was set up as an intermediary to facilitate the sale of socks manufactured by
Songwooyarn — a South Korean company — to wholesalers in the United States. Id.
at 51, 714 S.E.2d at 164. Songwooyarn sued Ahn after he failed to remit to
Songwooyarn a payment that had been made by a wholesaler to Sox Eleven for an
order of socks sold by Songwooyarn. The trial court found Ahn liable under the
UDTPA. Id. at 53, 714 S.E.2d at 166.
On appeal, this Court affirmed the trial court’s ruling, finding the case to be
analogous to Sara Lee and relying on the fact that Songwooyarn and Sox Eleven were
“distinct corporate entities.” Id. at 57, 714 S.E.2d at 168. We held as follows:
By misappropriating th[e] funds, Defendant Ahn
interrupted the commercial relationship between
Songwooyarn and Sox Eleven. Because there are multiple
companies, including a North Carolina corporation,
involved, we conclude that Ahn’s actions were “in or
affecting commerce” and constituted unfair or deceptive
acts or practices.
Id.Unlike in Sara Lee and Songwooyarn, the present case does not involve
“outside businesses,” “distinct corporate entities,” or the interruption of a
“commercial relationship” between two market participants. Rather, as in White, the
unlawful acts at issue here occurred within a single market participant.
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Opinion of the Court
For these reasons, the trial court erred in concluding that Defendant’s actions
were “in or affecting commerce.” Therefore, no legal basis existed for finding
Defendant liable under the UDTPA and awarding Plaintiff treble damages and
attorney’s fees.
Conclusion
For the reasons stated above, we reverse the portion of the trial court’s 31 July
2015 judgment finding Defendant liable under the UDTPA, trebling the amount of
damages, and awarding Plaintiff attorney’s fees. Accordingly, we remand this matter
for entry of a new judgment consistent with this opinion.
AFFIRMED IN PART; REVERSED IN PART; REMANDED.
Judges INMAN and ENOCHS concur.
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