Fidus Investment Corporation v. McCollum

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF NORTH CAROLINA

CHARLOTTE DIVISION

CIVIL ACTION NO. 3:19-CV-00312-GCM

WEST INVESTMENT FOREIGN

SHARES, LLC,

FIDUS INVESTMENT

CORPORATION,

Plaintiffs,

v. ORDER

DANIEL A. MCCOLLUM,

GROVE 1005, LLC,

JOHN SHAW,

MCCOLLUM BUSINESS, LLC,

Defendants.

THIS MATTER comes before the Court on five motions to dismiss (ECF No. 65, 69, 74,

78, 80). The parties also filed supplemental jurisdictional briefing at the request of the Court.1 See

ECF No. 122–26. These motions are now ripe for disposition. Having carefully reviewed the

parties’ arguments and the applicable authorities, the Court will dismiss Defendant Daniel

McCollum’s counterclaims and third-party claims and will deny Defendants’ motions to dismiss

Plaintiffs’ fraudulent conveyance claims.

I. BACKGROUND

This is a case about corporate mismanagement. In the main collection action, loan collateral

agents Fidus Investment Corporation and West Investment Foreign Shares (collectively “Fidus”)

seek to enforce a $10 million personal guarantee made by Dr. Daniel McCollum, and to set aside

1 The parties did not previously plead their LLC members’ citizenship. Following the parties’

supplemental briefing, the Court is satisfied of complete diversity in this case.

allegedly fraudulent conveyances made by McCollum-owned entities to other defendants.

McCollum counterclaims against Fidus and impleads various third-party defendants, alleging that

Fidus and the third-party defendants hijacked his business and mismanaged it into the ground,

thereby triggering his personal guarantee.

a. The Loan

Defendant Daniel McCollum, a doctor, founded Oaktree Medical Center, P.C. (OMC).

ECF No. 117 ¶ 7. OMC operated pain management clinics throughout the Carolinas and

Tennessee. Id. ¶ 12. In 2014, OMC financed expansion by obtaining a revolving loan. Id. ¶¶ 13–

14. And McCollum personally guaranteed the loan, pledging $9.6 million in personal assets as

collateral.2 See ECF No. 48 ¶¶ 13; ECF No. 48-2 at 3.

In 2018, OMC became unable to make certain principal payments on the loan. ECF No. 66

¶ 22. Plaintiff Fidus Investment Corporation, the loan collateral agent, exercised a contractual

remedy in the loan agreement, sidelining Daniel McCollum from OMC’s operations and

appointing Third-Party Defendant Tim Daileader as OMC’s day-to-day manager. 3 See id. ¶¶ 21–

24. Daileader undertook to restructure the business. He hired Third-Party Defendant Huron

Consulting Group and an outside law firm to spearhead the restructuring, hoping ultimately to

refinance the loan. Id. ¶ 34. But in September 2019, OMC—along with other affiliated entities

owned by McCollum—filed for Chapter 7 bankruptcy. ECF No. 117 ¶ 74.

2 McCollum later incorporated another entity, Oaktree Medical Center, LLC, to manage the

operations of OMC P.C., FirstChoice, and other entities. ECF No. 66 at 10–11.

3 Daileader was affiliated with Drivetrain, LLC, also a third-party defendant. ECF No. 117 ¶¶ 3,

24.

b. The Collection Action

In July 2019, two months before OMC filed for bankruptcy, Fidus, the collateral agent,

filed a collection action against McCollum.4 ECF No. 1. Fidus sought to enforce the personal

guarantee made by McCollum in OMC’s loan agreement. McCollum counterclaimed, alleging

violations of the North Carolina Unfair and Deceptive Trade Practices Act, breaches of fiduciary

duty, constructive fraud, negligence, and civil conspiracy. He claimed that Fidus used its “control

position to ruin” his business, thereby triggering his loan obligations under the guaranty.

Fidus moved to dismiss McCollum’s counterclaims, arguing that were (1) facially

implausible under the Iqbal pleading standard; (2) substantively derivative claims that McCollum

lacked standing to assert; (3) non-cognizable under the legal standards of each claim; and (4)

contractually waived.

c. The Fraudulent Transfer Action

Fidus later amended its claims to add three new defendants: John Shaw, Grove 1005, LLC,

and McCollum Business LLC. According to Fidus, McCollum engaged in fraudulent transfers

involving these three defendants in order to evade his loan obligations. Grove 1005’s sole member

was McCollum. And its only asset was an office building worth $3.5 million. McCollum

transferred his interest in Grove 1005 to John Shaw. Shaw then allegedly caused Grove 1005 to

sell the office building, and then loan money from the proceeds back to another McCollum entity,

McCollum Business LLC.

Fidus and West argue that these two transactions were intended to impede their collection

efforts. In their view, “[b]y transferring his interest in Grove 1005 to Shaw, and then having Shaw

4 Fidus later amended its complaint to add a new collateral agent, West Investment Foreign

Shares LLC (“West”) as a plaintiff. West became the collateral agent for the loan in March 2020.

ECF No. 48 ¶ 11.

‘loan’ him a large percentage of the value of Grove 1005’s assets to one of his companies,

McCollum has turned a valuable asset into a substantial liability.” ECF No. 76 at 4. Defendants

McCollum Business, Grove 1005, and John Shaw filed motions to dismiss. ECF No. 65; ECF No.

69.

d. The Third-Party Complaint

McCollum filed a third-party complaint against Tim Daileader, his company Drivetrain

LLC, and Huron Consulting Group, alleging, in substance, that the third parties “drove the business

into the ground.” ECF No. 88 at 3. He claimed that their conduct harmed him personally because

it caused OMC to become insolvent, thereby making him liable on his personal guarantee of the

loan. Daileader and Drivetrain moved to dismiss. ECF No. 78. Huron filed a motion to transfer to

compel arbitration, and asked for dismissal in the alternative. ECF No. 80.

e. Procedural History

The adjacency of this case to related bankruptcy and criminal proceedings has slowed the

pace of this litigation. Most notably, a criminal prosecution against Dr. McCollum led to the stay

of discovery and briefing on various motions to dismiss on April 28, 2021. ECF No. 96; ECF No.

100. That criminal case was resolved in December 2021. The Court then lifted the stay in January

2022, and ordered the completion of briefing on the various motions. ECF No. 104.

II. DISCUSSION

a. Standard of Review

A party may move for dismissal based on the complaint’s failure to state a claim upon

which relief can be granted. Fed. R. Civ. P. 12(b)(6). On a Rule 12(b)(6) motion, the Court does

not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.

King v. Rubenstein, 825 F.3d 206, 214 (4th Cir. 2016). Instead, the Court considers whether the

complaint contains “sufficient factual matter, accepted as true, to state a claim that is plausible on

its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

A court ruling on a Rule 12(b)(6) motion reviews the complaint in the light most favorable

to the plaintiff, accepting as true all well-pleaded allegations. Randall v. United States, 30 F.3d

518, 522 (4th Cir. 1994). Ordinarily, an allegation is “well-pleaded” if it contains “a short and

plain statement” of the claim showing that the pleader is entitled to relief. See Fed. R. Civ. P.

8(a)(2). But the court need not accept as true unwarranted inferences, unreasonable conclusions,

or arguments. Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008); see also Iqbal, 556 U.S.

at 678 (“Rule 8 . . . demands more than an unadorned, the-defendant-unlawfully-harmed-me

accusation.”) And where a plaintiff alleges fraud or mistake, “a party must state with particularity

the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).

b. South Carolina Law Governs the Claims at Issue

Because the Court sits in diversity, it applies the substantive law of North Carolina,

including North Carolina’s choice of law rules. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 79

(1938); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The parties repeatedly

clash about where North Carolina’s choice-of-law rules point: to North Carolina, South Carolina,

or New York. For reasons discussed in more detail below, South Carolina law governs the claims

at issue.

i. Lex Loci Test

In North Carolina, matters affecting the substantial rights of the parties are determined by

lex loci, or the law of the situs of the claim. Boudreau v. Baughman, 368 S.E.2d 849, 853–54 (N.C.

1988). North Carolina favors the use of this test in cases involving torts or tort-like claims. SciGrip,

Inc. v. Osae, 838 S.E.2d 334, 343 (N.C. 2020). In such cases, the lex loci test points to “the

substantive law of the state where the injury or harm was sustained or suffered, which is, ordinarily,

the state where the last event necessary to make the actor liable or the last event required to

constitute the tort takes place.” Id. (cleaned up).

For non-tort-related matters, North Carolina uses the “most significant relationship” test

from the Second Restatement. See id. at 420; see also Env’t Holdings Grp., LLC v. Finch, 21 CVS

14019, 2022 NCBC LEXIS 45, at *9–10 (N.C. Sup. Ct. 2022). Under that test, courts apply the

law of the state with the most significant relationship to the claim in question, taking into

consideration (1) the place where the injury occurred; (2) the place where the conduct giving rise

to the injury occurred; (3) the domicile of the parties; and (4) the place where the relationship

between the parties is centered. Henry v. Henry, 229 S.E.2d 158, 163 (N.C. 1979).

The parties disagree about two things: (1) where the “last event necessary” occurred in this

case; and (2) whether fraudulent transfers are governed by lex loci, or another test.

1. Lex Loci Points to South Carolina Law

All of the parties appear to agree that lex loci, and not the “most significant relationship”

test, govern most of their claims. However, the parties dispute the proper application of the test.

McCollum, for example, argues that North Carolina law should apply to his counterclaims

because the “final acts of injury” were (1) the filing of bankruptcy by Oaktree Medical Center,

LLC in North Carolina;5 and (2) the filing of this lawsuit in North Carolina. ECF No. 108 at 6;

ECF No. 65 at 5–6. Fidus responds that South Carolina law applies to McCollum’s

counterclaims because (1) McCollum lived in South Carolina; (2) and he alleged that he was

harmed in his individual capacity. ECF No. 75 at 6.

5 OMC, LLC was a holding company for other entities, including OMC, P.C. Although it

initially filed for bankruptcy in North Carolina, the bankruptcy action was transferred to South

Carolina. See In re Oaktree Medical Center, LLC, No. 19-05154-hb (Bankr. D.S.C.).

The Court agrees with Plaintiffs and Third-Party Defendants that South Carolina law

governs the claims at issue. As a reminder, lex loci points to the law “of the state where the

injury or harm was sustained or suffered.” SciGrip, 838 S.E.2d at 343. Ordinarily, this is “where

the last event necessary to make the actor liable or the last event required to constitute the tort

takes place.” Id. Here, the injuries giving rise to the counterclaims and third-party claims at issue

all transpired in South Carolina: McCollum claims that Fidus, Daileader, Drivetrain, and Huron

all ran his South Carolina business into the ground, making him personally liable on the

Guaranty in South Carolina.

2. South Carolina Law Also Governs Fidus’ Fraudulent

Conveyance Claim

McCollum Business, Grove 1005, John Shaw, and Fidus also debate whether a fraudulent

transfer is a “tort-like claim” indicating the use of the lex loci test. Courts across the country are

divided on the proper categorization of fraudulent transfers, and North Carolina courts have not

definitively taken a position one way or another. See Sheehan v. Saoud, 650 F. App’x 143, 154

(4th Cir. 2016) (describing split in authority); see also TrustCo Bank v. Matthews, C.A. No.

8374-VCP, 2015 WL 295373, at *9 (Del. Ch. Jan. 22, 2015) (“Fraudulent transfers bear some

resemblance to both tort and contract claims and do not fit neatly in either category.”); Gulf

Coast Bank & Trust Co. v. Mingo Tribal Preservation Trust, 2016 U.S. Dist. LEXIS 195181, at

*11 (W.D.N.C. Aug. 25, 2016) (Voorhees, J.) (deciding that a fraudulent transfer claim was

assignable because it appeared to arise out of contract).

Without taking any position on the appropriate characterization of a fraudulent transfer,

the Court concludes that South Carolina law should apply because the lex loci test and the “most

significant relationship” test point to the same place: South Carolina. Here, the challenged

transfers took place in South Carolina, involved property in South Carolina, among parties

domiciled in South Carolina, and generally related to the alleged evasion of a contract executed

in South Carolina.

c. Analysis

The Court now turns to the substance of the parties’ motions. Reaching only some of the

arguments raised, the Court concludes that (1) McCollum’s counterclaims should be dismissed for

lack of standing; (2) that McCollum’s third-party claims should also be dismissed for lack of

standing and improper impleader; and (3) that the fraudulent transfer claim asserted by Plaintiffs

should not be dismissed.6

i. Stockholder Standing

Plaintiffs and Third-Party Defendants argue that McCollum lacks standing to bring claims

that are, in substance, derivative corporate claims. The Court agrees.

As a general rule, a recovery based on corporate mismanagement belongs solely to the

corporation. See Johnson v. Baldwin, 69 S.E.2d 585, 588 (S.C. 1952). There are two exceptions.

First, stockholders can recover (1) if the alleged wrongdoers owe a fiduciary relationship to the

shareholder and full relief to the shareholder cannot be had through a derivative action; or (2) if

the shareholder’s loss is “separate and distinct” from that of the corporation. Rice-Marko v.

Wachovia Corp., 728 S.E.2d 61, 65 (S.C. Ct. App. 2012) (citing Brown v. Stewart, 557 S.E.2d

676, 684–85 (S.C. 2001)).

6 Fidus argued, for example, that McCollum’s counterclaims were facially implausible in

violation of Iqbal and contractually waived by the Guaranty. Third-Party Defendant Huron

Consulting, LLC sought (as an alternative to dismissal) to compel arbitration. And Plaintiffs and

the third-party defendants all argued that the various counterclaims and third-party claims failed

to state a cause of action. Because the Court resolves the motions on other grounds, it has no

occasion to consider these issues.

Citing North Carolina law,7 McCollum argues that he meets both exceptions to the bar on

direct recoveries. First, he argues that Fidus owed him special and fiduciary duties because Fidus

assumed complete control of his solely-owned business. ECF No. 108 at 8. Second, McCollum

claims that his injuries are “separate and distinct,” because (1) he was “squeeze[d] out of any

financial benefit” from OMC; and (2) he was exposed individually to a $10 million liability

because of Fidus’ conduct. Id.

a. Special / Fiduciary Duty

McCollum first claims that Fidus owed him a fiduciary duty because Fidus took

“complete control” of his solely-owned business. See ECF No. 108 at 8. Fidus, in response,

argues that any such duty ran to Oaktree Medical Center, P.C., not to McCollum, and cites a

North Carolina Business Court case to that effect. ECF No. 111 at 5 (citing Timbercreek Land &

Timber Co., LLC v. Robbins, 17 CVS 140, 2017 WL 3214427 (N.C. Super. Ct. Jul. 28, 2017).

Under South Carolina law, a special or fiduciary relationship exists “when one reposes

special confidence in another, so that the latter, in equity and good conscience, is bound to act in

good faith and with due regard to the interests of the one reposing confidence.”8 O’Shea v.

Lesser, 416 S.E.2d 629, 631 (S.C. 1992) (citation omitted). Fiduciaries are “in a superior position

to the other,” enabling them to “exercise influence” over the trusting party. Burwell v. S.C. Nat’l

Bank, 340 S.E.2d 786, 790 (S.C. 1986). “[M]ere respect for another’s judgment or trust in . . .

character is usually not sufficient to establish [a fiduciary] relationship. The facts and

7 Fidus argues that South Carolina law applies, but cites only North Carolina law, “indulg[ing]

McCollum. ECF No. 111 at 4 n.1.

8 McCollum argues that the existence of a fiduciary duty is a jury question. ECF No. 108 at 14

n.4. That is incorrect. Whether such a duty exists is a question of law for the Court; whether

there is a breach of the duty is generally a question for the jury. Hendricks v. Clemson, 578

S.E.2d 711, 715 (S.C. 2003).

circumstances must indicate that the one reposing the trust has foundation for his belief that the

one giving advice or presenting arguments is acting not in his own behalf, but in the interests of

the other party.” Id.

The Fourth Circuit, describing North and South Carolina law together, has identified two

categories of special duties in the corporate mismanagement context. See Rivers v. Wachovia

Corp., 665 F.3d 610, 618 (4th Cir. 2011). First, a special duty may arise when misrepresentations

by a defendant cause a plaintiff to become a corporate shareholder. Id. And second, majority

shareholders in closely held corporations may have special duties towards minority shareholders.

Id.

Neither Fidus nor the third-party defendants owed any fiduciary duty to McCollum.

McCollum could not have any reasonable basis for believing that Fidus was acting in his

personal interest. See Burwell, 340 S.E.2d at 790. Nor does this case fall into either of the two

scenarios identified in Rivers: Fidus did not induce McCollum to personally guarantee the loan to

OMC, P.C. via any misrepresentations. And McCollum was not a minority shareholder shunted

aside by a majority shareholder. To the extent that any fiduciary duty existed because Fidus

“held all the cards,” any such duty would run to OMC, P.C., not to McCollum.

b. Separate and Distinct Injury

McCollum also claims that he can bring a direct stockholder action because he incurred a

“separate and distinct” injury. McCollum points to two buckets of “separate” injuries: (1) being

“squeezed out of any financial benefit” from OMC; and (2) being “exposed” to liability under

the guarantee.

The first bucket is unavailing because the business’ failure was an injury to the

corporation, not to McCollum. See Rivers, 665 F.3d at 618 (rejecting claim that mismanagement

harmed plaintiff individually because “monetary loss was common to every shareholder”). In

Rice-Marko v. Wachovia Corp., the South Carolina Court of Appeals upheld dismissal of a suit

predicated on misrepresentations that resulted in lower share prices. See 728 S.E.2d 61, 66–67

(S.C. Ct. App. 2012). The diminution in share prices was “precisely the same injury suffered by

the corporation itself.” Id. (citing Barger v. McCoy Hillard & Parks, 488 S.E.2d 215, 220 (N.C.

1997)).

Similarly, McCollum’s personal guarantee of the loan does not confer any “separate and

distinct” injury. That is because under the majority rule, “guarantors of a corporation’s debts

ordinarily may not pursue individual actions to recover damages for injuries to the corporation.”

Barger v. McCoy Hillard & Parks, 488 S.E.2d 215, 221 (N.C. 1997).

In sum, because neither of the two exceptions to the general rule is likely to apply,

McCollum’s counterclaims are derivative in substance. As such, McCollum lacks standing to bring

a stockholder action asserting corporate mismanagement. See Carolina First Corp. v. Whittle, 539

S.E.2d 402, 407 (S.C. Ct. App. 2000) (affirming dismissal based on failure to allege compliance

with state demand requirement). His counterclaims will be dismissed.9

9 McCollum sought leave to amend his counterclaims in the event that South Carolina law were

deemed applicable. See ECF No. 108 at 6. He also asks for dismissal without prejudice to permit

the amendment. Id. at 24. The Court will not permit amendment, and dismissal will be with

prejudice.

“A district court may deny a motion to amend when the amendment would be prejudicial to the

opposing party, the moving party has acted in bad faith, or the amendment would be futile.”

Equal Rights Ctr. v. Niles Bolton Assocs., 602 F.3d 597, 603 (4th Cir. 2010). Here, amendment

would be both futile and prejudicial. Starting with futility, North Carolina and South Carolina

law reach the same result on the topic of derivative and direct standing. The parties recognize

that fact, arguing the case law interchangeably. See, e.g., ECF No. 108 at 8 n.3 (noting that South

Carolina applies the same law on shareholder suits). Finally, amendment would be prejudicial to

the opposing parties, resetting the clock on a glacially-paced case and causing the parties to incur

yet more expenses.

c. Third Party Claims

McCollum’s third-party claims are similarly derivative in substance. As a practical matter,

McCollum asserts essentially the same claims against the third-party defendants as he does against

Fidus. He casts the Third-Party Defendants as Fidus’ minions, driving his company into

bankruptcy through incompetent management. See id. ¶¶ 50–51, 66, 72. At Fidus’ direction,

McCollum claims that the Third-Party Defendants “solved nothing, [took] little action, and only

marched OMC to bankruptcy.” Id. ¶ 72.

As with his counterclaims, McCollum cannot show a special duty or a “separate and

distinct injury” sufficient to obtain a direct recovery. First, McCollum claims that “the allegations

that the Third-Party Defendants and Fidus were acting in concert . . . establish a special fiduciary

duty upon which McCollum can sue individually.” ECF No. 109 at 11. McCollum argues that that

duty arose from a “control imbalance” because “Fidus, Drivetrain, Daileader, and Huron wrested

complete control of OMC from McCollum during 2018.” Id. And McCollum cites Norman v. Nash

Johnson & Sons’ Farms, Inc., 537 S.E.2d 248 (N.C. Ct. App. 2000), which he says “stands for the

general principle that when owners of a small corporation are powerless against those controlling

it, they should be able to individually sue the wrongdoers to overcome that imbalance of control.”

Not so. Norman addressed the circumstances under which minority shareholders in closely

held corporations could bring individual claims against majority shareholders. Id. at 253. As

discussed earlier, majority oppression of minority shareholders in closely held corporations is a

prototypical example giving rise to special duties. See Rivers, 665 F.3d at 618. This case does not

present any such scenario.

McCollum next argues that he incurred a “separate and distinct injury” from the third-party

defendants because (1) their action made him liable on the guarantee and (2) he suffered

reputational damages related to the failure of his solely-owned business.10 For the reasons already

discussed, McCollum’s liability on the guarantee does not constitute a separate and distinct injury.

And McCollum cannot point to any case law identifying reputational damage to a shareholder as

a separate and distinct injury. See Audio Odyssey, Ltd. V. Brenton First Nat’l Bank, 245 F.3d 721,

729 (8th Cir. 2001) (“Doubtless a sole shareholder may suffer shame and humiliation when a

corporation is destroyed, but an ‘emotional injury’ exception would swallow the rule against

shareholder standing.”).

In short, McCollum’s third-party claims principally allege corporate mismanagement—a

claim that belongs to OMC, P.C., not to McCollum as an individual shareholder. Because

McCollum cannot show that the Third-Party Defendants had any special duties to him, or that he

had any “separate and distinct injury” apart from that inflicted on the corporation, McCollum lacks

standing to bring his third-party claims. Those claims will be dismissed.

ii. Improper Impleader

As separate grounds for dismissal of the third-party complaint, Third-Party Defendants

argue that their impleader is improper under Rule 14 of the Federal Rules of Civil Procedure.

The Court agrees.

Rule 14 provides that a “defending party may, as third-party plaintiff, serve a summons

and complaint on a nonparty who is or may be liable to it for all or part of the claim against it.”

Fed. R. Civ. P. 14(a)(1). The rule hinges on derivative theories of liability: To show that a

10 McCollum also appears to argue that because he was the sole owner of OMC entities, a

derivative recovery would be meaningless because any such recovery would go exclusively to

him. ECF No. 109 at 12. This argument discounts the corporate form entirely, and the Court

rejects it without further discussion. See Hunting v. Elders, 597 S.E.2d 803, 806 (S.C. Ct. App.

2004) (“[I]t is recognized that a corporation is an entity, separate and distinct from its officers

and stockholders . . . .”).

nonparty is “liable to it for all or part of the claim” against the third-party plaintiff, there must be

a legal obligation created via indemnification, contribution, subrogation, warranty, or some other

derivative device. See Watergate Landmark Condominium Ass’n. v. Wiss, Janey, Elstner Assocs.,

Inc., 117 F.R.D. 576, 578 (E.D. Va. 1987). “Derivative liability is central to the operation of

Rule 14. It cannot be used as a device to bring into a controversy matters which merely happen

to have some relationship to the original action.”11 Id.; see also 3 Moore’s Federal Practice –

Civil § 14.04(3)(a) (2022) (“An impleader claim may not be used to assert any and all rights to

recovery arising from the same transaction or occurrence as the underlying action.”).

McCollum argues that Rule 14 is to be construed liberally and explains that he “expect[s]

to be made whole” by the Third-Party Defendants in the event that he is found liable under the

Guaranty. ECF No. 109 at 6. But McCollum’s explanation makes clear that there is no basis for

impleader here. Because McCollum has not pled any basis for derivative liability, the Third-

Party Defendants were improperly impleaded. They will be dismissed.

iii. Defendants’ Motions for Dismissal

Defendants McCollum Business, Grove 1005, LLC, and John Shaw move to dismiss the

fraudulent conveyance claims against them, arguing that they fail to state a claim upon which relief

can be granted. Defendants also seek to dismiss Fidus’ claim for injunctive relief. The Court will

deny the motions to dismiss.

11 To be sure, once a proper third-party claim exists, the plaintiff may join additional claims

“arising out of the transaction or occurrence that is the subject matter of the plaintiff’s claim

against the third-party plaintiff.” Fed. R. Civ. P. 14(a)(3).

1. Fraudulent Conveyance

Defendants first move to dismiss Fidus’ fraudulent conveyance action. As a reminder,

Fidus claims that McCollum transferred his sole membership interest in Grove 1005, LLC to John

Shaw (“the LLC transfer”). Two months after that, Shaw caused Grove 1005 to sell its principal

asset, a building, for $3.825 million. And Shaw then caused Grove 1005 to “loan” $2.76 million

back to a McCollum-owned entity, McCollum Business LLC (“the mortgage transfer”). Fidus says

that McCollum orchestrated these moves to evade creditors, noting that McCollum transferred his

membership interest less than six months after being sued in this case. “By transferring [his]

interest to Shaw, and by Shaw’s causing Grove 1005 to loan the bulk of the sales proceeds from

its real estate transaction to another LLC in which McCollum owns the sole membership interest,

the Defendants have managed to transform McCollum’s sole asset into McCollum Business’

substantial debt.” ECF No. 48 ¶ 39.

Defendants’ arguments for dismissal primarily hinge on North Carolina statutory law. The

North Carolina fraudulent conveyance statute contemplates “a conveyance by a debtor, made with

the intent to defraud a creditor.” See ECF No. 65 at 7 (citing N.C. Gen. Stat. § 39-23.4). Those

terms are defined by statute. McCollum Business, Grove 1005, LLC, and John Shaw argue that

they are not “debtors,” and Fidus is not a “creditor” under the relevant definitions.

Unfortunately for Defendants, South Carolina law, not North Carolina, governs this claim.

South Carolina’s fraudulent conveyance statute, the Statute of Elizabeth,12 provides: “Every gift,

grant, alientation, bargain, transfer, and conveyance of lands . . . for any intent or purpose to delay,

12 The name refers to a predecessor statute adopted in England in 1571. See In re Medina, 619

B.R. 236, 241 n.4 (B.A.P. 9th Cir. 2020) (discussing historical origin of the Statute of Elizabeth).

hinder, or defraud creditors and others of their just and lawful actions, suits, debts, damages,

penalties, and forfeitures must be deemed and taken . . . to be clearly and utterly void . . . .” S.C.

Code Ann. § 27-23-10(A). The Court has no trouble in concluding that Fidus plausibly alleges

fraudulent conveyance under this statute.

Defendants also argue that the fraudulent conveyance claims should be dismissed for

failing to adequately allege fraud under Rule 9(b)’s heightened pleading standards. Rule 9(b)

requires a plaintiff alleging fraud to “state with particularity the circumstances constituting fraud,”

although intent may be alleged generally. Fed R. Civ. P. 9(b).

As a preliminary matter, the Fourth Circuit has not decided whether fraudulent

conveyances trigger Rule 9(b)’s heightened pleading standard. See In re Life Partners Holdings,

Inc., 926 F.3d 103, 118 (5th Cir. 2019). Some courts claim that all fraudulent conveyances trigger

Rule 9(b). See In re Air Cargo, Inc., 401 B.R. 178, 192 n.7 (Bankr. D. Md. 2008). But the greater

weight of authority finds that actual fraudulent transfer claims are governed by Rule 9(b), whereas

constructive fraudulent transfer cases are not. See id. (“A larger, second line of cases . . . only

applies Rule 9(b) to complaints that allege actual fraud.”); In re Tronox, Inc., 429 B.R. 73, 96

(Bankr. S.D.N.Y. 2010) (“[T]he overwhelming weight of authority is that the heightened pleading

requirements of Rule 9(b) are inapplicable [to constructive fraudulent conveyance claims].”).

The Court needs not wade into the debate. Even under Rule 9(b)’s more rigorous pleading

requirement, the facts underpinning the alleged fraudulent conveyances are adequately pled to

survive dismissal. Fidus identifies “the time, place, and contents” of the challenged transfers,

including the identities of the relevant parties and what the parties obtained as a result of the

transfers. Cf. Weidman v. Exxon Mobil Corp., 776 F.3d 214, 219 (4th Cir. 2015) (explaining

pleading standards for a fraud claim).

Many of the perceived deficiencies in Fidus’ fraudulent conveyance claim relate to

insufficient pleading of intent. But Rule 9(b) “allows conclusory allegations of [a] defendant’s

knowledge as to the true facts and of defendant’s intent to deceive.” Harrison v. Westinghouse

Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999). And as the Fourth Circuit has cautioned,

courts “should hesitate to dismiss a complaint under Rule 9(b) if the court is satisfied (1) that the

defendant has been made aware of the particular circumstances for which [the defendant] will have

to prepare a defense at trial; and (2) the plaintiff has substantial pre-discovery evidence of those

facts.” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999). The

Court is amply satisfied of those factors here. Accordingly, the motion to dismiss Fidus’ fraudulent

transfer claim will be denied.

2. Injunctive Relief

Defendants McCollum Business, Grove 1005, LLC, and John Shaw seek to dismiss Fidus’

claim for preliminary and permanent injunctive relief. These three defendants claim that because

Fidus cannot show a fraudulent conveyance under North Carolina law, Fidus cannot show the

requisite “likelihood of success on the merits” to obtain injunctive relief. ECF No. 65 at 12; ECF

No. 69 at 10. Because Fidus plausibly states a claim for fraudulent conveyance under South

Carolina’s Statute of Elizabeth, there is no merit to his argument.

McCollum Business also argues for the first time in reply that Fidus cannot show an

“irreparable injury” sufficient to give rise to equitable relief, because damages are an adequate

remedy for the harm alleged. See ECF No. 106 at 9. The Court will decline to consider this

argument. See Clawson v. FedEx Ground Package Sys., 451 F. Supp. 2d 731, 734 (D. Md. 2006)

(“The ordinary rule in federal courts is that an argument raised for the first time in a reply brief or

memorandum will not be considered.”). In any event, the parties’ argument on this point is

undeveloped and premature, as Fidus has not yet moved for a preliminary injunction. Should such

a motion come before the Court, the parties will be free to brief this issue anew.

iv. McCollum’s Jury Demand

Finally, Fidus asks the Court to strike McCollum’s jury demand, arguing that he waived

the right to a jury trial under the Guaranty. See ECF No. 75 at 22 (citing ECF No. 48-2 at 11). In

the briefing on this issue, the parties debate whether New York or North Carolina law applies to

the jury waiver, apparently employing the lex loci test as discussed earlier. But under the Erie

doctrine, federal courts sitting in diversity apply federal procedural law, and jury waivers are a

procedural right. See County of Orange v. United States District Court, 784 F.3d 520, 526–29

(9th Cir. 2015); see also Leasing Service Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986)

(citing U.S. Const. amend. VII). So the appropriate question is not whether North Carolina or

New York courts would enforce the jury waiver, but whether federal courts would do so.

Federal law does permit the jury trial right to be “knowingly and intentionally waived by

contract.” Id. “In light of the strong federal policy favoring jury trials, however, courts have

typically indulged every reasonable presumption against waiver.” Mowbray v. Zumot, 536 F.

Supp. 2d 617, 620 (D. Md. 2008) (citing Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 392 (1937)

(cleaned up).

Here, McCollum’s waiver certainly appears to be both knowing and intentional. The

waiver clause in question appeared in all bold and capitals, conspicuously displayed on the ninth

page of the 14-page agreement. ECF No. 48-2 at 10. It unequivocally stated: “EACH PARTY

HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT

PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY

JURY IN ANY LEGAL PROCEEDING” related to the Guaranty. Id. And there is no

indication that the Guaranty was not a bargained-for, arms-length transaction. McCollum

accordingly waived his right to a jury trial.13 See Leasing Services Corp., 804 F.2d at 833

(enforcing a waiver because the provision was conspicuous, the parties were not “manifestly

unequal,” and the parties had negotiated the contract at issue).

III. ORDER

IT IS THEREFORE ORDERED THAT:

1. Defendant McCollum Business’ Motion to Dismiss (ECF No. 65) is DENIED.

2. Defendants Grove 1005, LLC, and John Shaw’s Motion to Dismiss (ECF No. 69)

is DENIED.

3. Plaintiff Fidus Investment Corporation and West Investment Foreign Shares,

LLC’s Motion to Dismiss Amended Counterclaims (ECF No. 74) is GRANTED,

and Defendant Daniel McCollum’s Amended Counterclaims (ECF No. 66) are

DISMISSED.

4. Third-Party Defendant Tim Daileader and Drivetrain LLC’s Motion to Dismiss

Amended Third-Party Complaint (ECF No. 78) is GRANTED.

5. Third-Party Defendant Huron Consulting Group, LLC’s Motion for Transfer to

Compel Arbitration or to Strike or Dismiss McCollum’s Amended Third-Party

Complaint (ECF No. 80) is GRANTED as stated in this Order.

6. Third-Party Plaintiff McCollum’s Amended Third-Party Complaint (ECF No.

117) is DISMISSED.

7. Defendant McCollum’s demand for trial by jury is STRICKEN.

13 At this juncture, this finding may be of little practical effect since other defendants have

demanded trial by jury. See ECF No. 70 at 8 (jury demand by Defendants John Shaw and Grove

1005, LLC).

SO ORDERED.

Signed: November 1, 2022

Labnl Uhh

Graham C. Mullen

United States District Judge gt

20