Gen. Fid. Ins. Co. v. WFT

IN THE COURT OF APPEALS OF NORTH CAROLINA

No. COA18-1103

Filed: 7 January 2020

Mecklenburg County, No. 14 CVS 9043

GENERAL FIDELITY INSURANCE COMPANY, Plaintiff,

v.

WFT, INC., BLESSMATCH MARINE INSURANCE SERVICES, INC., ALPHA

MARINE UNDERWRITERS, INC., and PETER J. WILLIS FLEMING, Defendants.

Appeal by defendants from order entered 12 January 2018 by Judge Eric L.

Levinson and judgment entered 30 April 2018 by Judge Forrest D. Bridges in

Mecklenburg County Superior Court. Heard in the Court of Appeals 8 May 2019.

James, McElroy & Diehl, P.A., by Preston O. Odom, III, John R. Buric, and

John R. Brickley, for plaintiff-appellee.

Lincoln Derr PLLC, by Sara R. Lincoln and Kathleen K. Lucchesi, for

defendants-appellants.

ZACHARY, Judge.

Defendants appeal from two judgments. Defendants first argue that the trial

court erred (1) by granting partial summary judgment in favor of Plaintiff on

Plaintiff’s claims for breach of fiduciary duty/corporate fraud and fraudulent transfer;

and (2) by disregarding Defendants’ corporate form and piercing the corporate veil,

thereby enabling the court to enter judgment against all Defendants. Next,

Defendants challenge a judgment entered against them for unfair and deceptive trade

practices. Upon review, we affirm both judgments.

GEN. FID. INS. CO. V. WFT, INC.

Opinion of the Court

Background

Defendant WFT, Inc. (“WFT”) was a North Carolina corporation with its

principal place of business in Mecklenburg County. In 2005, WFT began working

with General Fidelity Insurance Company (“Plaintiff”), a company organized in South

Carolina with its principal place of business in New Hampshire. A dispute eventually

arose, and arbitration proceedings commenced in Texas in June 2010. Following

interim arbitration awards in 2012 and 2013, a final award was entered in favor of

Plaintiff on 2 August 2013.

On 27 December 2013, a Texas court entered judgment on the arbitration

award (“the Texas Judgment”). WFT was ordered to pay Plaintiff the principal

amount of $2,367,943.89, together with pre-judgment interest of $67,022.00,

attorneys’ fees of $218,586.69, and interest at the rate of 5% per year until fully paid.

However, WFT was administratively dissolved on 7 January 2015, prior to fulfilling

its obligation to Plaintiff under the Texas Judgment.

On 15 May 2014, Plaintiff filed the instant action in Mecklenburg County

Superior Court seeking enforcement of the Texas Judgment. Plaintiff sued not only

WFT, but also Blessmatch Marine Insurance Services, Inc. (“Blessmatch”), Alpha

Marine Underwriters, Inc. (“Alpha Marine”), and Peter J. Willis Fleming

(“Fleming”).1 Defendants are closely connected to one another. Blessmatch was

1 The four individual defendants will be collectively referred to as either “Defendants” or, for

clarity, “all Defendants.”

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incorporated in North Carolina in 2011 and administratively dissolved on 7 January

2015—the same day as WFT. Fleming was the registered agent and president of both

WFT and Blessmatch. Fleming also formed Alpha Marine, which was incorporated

in Delaware on 14 January 2013.

In its complaint, Plaintiff alleged that “sometime during the underlying

arbitration, Defendants ceased conducting business through WFT and instead are

now operating the same business through Blessmatch Marine and/or Alpha

Marine[.]” Plaintiff further contended that these businesses were “the alter egos of

each other,” which were created to “avoid WFT paying Plaintiff the amounts due

pursuant to the Texas Judgment.” Plaintiff sought to enforce the Texas Judgment

and pierce the corporate veil, and also asserted claims for (1) breach of fiduciary duty,

(2) constructive fraud, (3) fraudulent transfer, (4) unfair and deceptive trade

practices, and (5) facilitation of fraud and civil conspiracy.

On 13 July 2017, Plaintiff moved for summary judgment on all claims. The

motion came on for hearing before the Honorable Eric L. Levinson in Mecklenburg

County Superior Court on 17 August 2017 and 13 November 2017. By order entered

12 January 2018, Judge Levinson granted summary judgment in Plaintiff’s favor as

to its claims for (1) action on the Texas Judgment, (2) constructive fraud, (3) breach

of fiduciary duty, and (4) fraudulent transfer; he also permitted recovery from

Defendants jointly and severally, based on piercing the corporate veil. Judge

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Opinion of the Court

Levinson denied Plaintiff’s motion for summary judgment on its claim for unfair and

deceptive trade practices, and granted summary judgment in favor of Defendants as

to Plaintiff’s claim for facilitation of fraud and civil conspiracy. The trial court denied

Defendants’ request to certify the order for immediate appeal. On 19 January 2018,

Fleming filed notice of appeal from the interlocutory summary judgment order.

On 22 January 2018, Fleming filed a Motion to Stay Proceedings Pending

Appeal. The motion asserted that “[w]hile Fleming’s appeal is interlocutory, he has

a substantial right to immediately appeal the [summary judgment] order to avoid the

possibility of two trials and inconsistent verdicts on the same issues.” Plaintiff

challenged the Motion to Stay, arguing that “Fleming’s intent is clear – he simply

seeks to delay this matter and avoid a trial where he faces liability” on Plaintiff’s

claim for unfair and deceptive trade practices. Plaintiff further asserted that

postponing appeal until resolution of the unfair and deceptive trade practices claim

would not affect any substantial right of Fleming, and that “there is no risk of

inconsistent verdicts” because all of the claims are distinct.

On 1 February 2018, the remaining Defendants filed notice of appeal from

Judge Levinson’s summary judgment order, and four days later, they too filed a

Motion to Stay Proceedings Pending Appeal. Defendants set forth two grounds for

staying the proceedings: (1) they had undergone several changes in counsel; and (2)

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Opinion of the Court

like Fleming, they were at risk “of two trials and inconsistent verdicts on the same

issues.”

On 12 February 2018, a bench trial was held before the Honorable Forrest D.

Bridges in Mecklenburg County Superior Court on Plaintiff’s remaining claim for

unfair and deceptive trade practices.

On 20 March 2018, Judge Bridges entered an order denying both of

Defendants’ Motions to Stay. Judge Bridges concluded that there was little risk of

inconsistent verdicts, and, although there may be some “overlapping facts” between

the unresolved claim and those in the 12 January 2018 summary judgment order, the

issues are “separate and apart” from each other. He also noted that “the matters will

best be addressed by the appellate court when considered within the context of the

case as a whole and not a series of piecemeal appeals.”

On 30 April 2018, Judge Bridges entered judgment in Plaintiff’s favor on its

claim for unfair and deceptive trade practices. All Defendants timely appealed the

judgment on 21 May 2018.

Discussion

On appeal, Defendants argue that (1) Judge Levinson erred in granting partial

summary judgment in favor of Plaintiff; and (2) Judge Bridges erred by entering

judgment in favor of Plaintiff on its claim for unfair and deceptive trade practices.

I.

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Opinion of the Court

We first consider whether the trial court erred in granting partial summary

judgment in favor of Plaintiff on its claims for (1) breach of fiduciary duty/constructive

fraud, and (2) fraudulent transfer, and (3) by piercing the corporate veil and entering

judgment against all Defendants. We affirm the trial court’s ruling and address each

issue in turn.

A. Standard of Review

Summary judgment is appropriate when “the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact.” N.C. Gen. Stat. § 1A-1, Rule

56(c) (2017). On appeal, summary judgment orders are reviewed de novo. Mancuso

v. Burton Farm Dev. Co. LLC, 229 N.C. App. 531, 536, 748 S.E.2d 738, 742 (quotation

marks omitted), disc. review denied, 367 N.C. 279, 752 S.E.2d 149 (2013). “Both

before the trial court and on appeal, the evidence must be viewed in the light most

favorable to the non-moving party and all inferences from that evidence must be

drawn against the moving party and in favor of the non-moving party.” White v.

Consol. Planning, Inc., 166 N.C. App. 283, 296, 603 S.E.2d 147, 157 (2004), disc.

review denied, 359 N.C. 286, 610 S.E.2d 717 (2005). “If the trial court grants

summary judgment, the decision should be affirmed on appeal if there is any ground

to support the decision.” Nifong v. C.C. Mangum, Inc., 121 N.C. App. 767, 768, 468

S.E.2d 463, 465, aff’d, 344 N.C. 730, 477 S.E.2d 150 (1996).

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B. Breach of Fiduciary Duty/Constructive Fraud

Constructive fraud “arises where a confidential or fiduciary relationship exists,

which has led up to and surrounded the consummation of the transaction in which

defendant is alleged to have taken advantage of his position of trust to the hurt of

plaintiff.” Forbis v. Neal, 361 N.C. 519, 528, 649 S.E.2d 382, 388 (2007) (internal

citations and quotation marks omitted). To recover under a claim of constructive

fraud, “a plaintiff must establish the existence of circumstances (1) which created the

relation of trust and confidence, and (2) which led up to and surrounded the

consummation of the transaction in which defendant is alleged to have taken

advantage of his position of trust[.]” Trillium Ridge Condo. Ass’n v. Trillium Links

& Vill., LLC, 236 N.C. App. 478, 502, 764 S.E.2d 203, 219 (internal brackets and

quotation marks omitted), disc. review denied, 766 S.E.2d 646 (2014). Unlike a claim

for actual fraud, there is no element of intent to deceive. Link v. Link, 278 N.C. 181,

192, 179 S.E.2d 697, 704 (1971).

“[D]irectors of a corporation owe a fiduciary duty to creditors of the corporation

only where there exist circumstances amounting to a winding-up or dissolution of the

corporation.” Keener Lumber Co. v. Perry, 149 N.C. App. 19, 31, 560 S.E.2d 817, 825

(internal quotations omitted), disc. review denied, 356 N.C. 164, 568 S.E.2d 196

(2002). Once a fiduciary relationship is established, constructive fraud occurs when

the director of the debtor-corporation takes advantage of the fiduciary relationship in

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order to benefit himself, and the plaintiff-creditor is injured as a result. White, 166

N.C. App. at 294, 603 S.E.2d at 156.

Several non-dispositive factors may be considered in determining whether

circumstances amount to a “winding-up or dissolution of the corporation[,]” including

(1) whether the corporation was insolvent, or nearly

insolvent, on a balance sheet basis; (2) whether the

corporation was cash flow insolvent; (3) whether the

corporation was making plans to cease doing business; (4)

whether the corporation was liquidating its assets with a

view of going out of business; and (5) whether the

corporation was still prosecuting its business in good faith,

with a reasonable prospect and expectation of continuing

to do so.

Keener Lumber Co., 149 N.C. App. at 31, 560 S.E.2d at 825.

In the present case, it is evident that Fleming created Blessmatch for the

purpose of continuing WFT operations under the name of a separate corporate entity.

Fleming testified that all of WFT’s business and assets were transferred to

Blessmatch, and that WFT became “insolvent at the time that Blessmatch was

formed[.]” He further confirmed that WFT laid off its last employees and ceased

operations sometime around 2013. WFT’s operations were clearly winding up around

the time when WFT’s business and assets were transferred to Blessmatch. Thus,

WFT owed a fiduciary duty to its creditors.

Nevertheless, Defendants contend that WFT owed no fiduciary duty to

Plaintiff because Plaintiff was not a creditor of WFT when the Texas Judgment was

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entered. Defendants argue that “at the time the decision was made to rebrand WFT

as Blessmatch and to transfer all the assets, [Plaintiff] was not a creditor of WFT. . .

. [B]y the time the Texas Judgment was entered . . . Blessmatch had assumed the

business of WFT[.]” We disagree.

Plaintiff became WFT’s creditor prior to the entry of the Texas Judgment on

27 December 2013. In his deposition, Fleming confirmed that WFT laid off its last

employees and ceased operations sometime around 2013. However, Plaintiff was

granted two interim awards—one in 2012 and another in April of 2013—in the

binding arbitration proceedings prior to entry of the Texas Judgment. Plaintiff was

also granted a final arbitration award in August of 2013. Accordingly, WFT owed a

fiduciary duty to Plaintiff, its creditor since at least 2012, well before WFT’s

operations were winding down.

Alternatively, Defendants argue that if a fiduciary duty were owed to Plaintiff,

a claim for constructive fraud cannot be maintained because Fleming did not act to

benefit himself by transferring WFT’s business and assets to Blessmatch. We reject

this argument on several grounds.

First, by transferring WFT’s business and assets to Blessmatch, Fleming

ensured that his business would be shielded from liability for any judgments entered

against WFT, including the Texas Judgment. Second, after the dissolution of WFT,

Fleming received a total of $754,850 in salary, dividends, and interest from

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Blessmatch as its shareholder and director. Fleming could not have received this

income but for his decision to transfer WFT’s business to Blessmatch.

In sum, both the record and Fleming’s actions establish no genuine issue of

material fact, and therefore Plaintiff was entitled to summary judgment on its claim

for breach of fiduciary duty/constructive fraud.

C. Fraudulent Transfer

The Uniform Fraudulent Transfer Act provides, in pertinent part, that:

A transfer made or obligation incurred by a debtor is

voidable as to a creditor whose claim arose before the

transfer was made or the obligation was incurred if the

debtor made the transfer or incurred the obligation without

receiving a reasonably equivalent value in exchange for the

transfer or obligation, and the debtor was insolvent at that

time or the debtor became insolvent as a result of the

transfer or obligation.

N.C. Gen. Stat. § 39-23.5(a) (2017).

“An essential element of a transfer in fraud of creditors claim . . . is that the

transfer was made without the debtor receiving ‘reasonably equivalent value.’ ”

Estate of Hurst v. Jones, 230 N.C. App. 162, 169, 750 S.E.2d 14, 20 (2013). “To

evaluate whether reasonably equivalent value was exchanged, we examine the net

effect of the transaction on the debtor’s estate and whether there has been a net loss

to the debtor’s estate as a result of the transaction.” Id. A plaintiff who successfully

proves a claim for fraudulent transfer may either avoid the transfer to the extent

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necessary to satisfy the claim, or obtain a judgment for the amount of the claim or

transfer. N.C. Gen. Stat. § 39-23.7(a)(1), (b).

In this case, it is undisputed that Plaintiff’s claim arose before the alleged

fraudulent transfer. Our review is therefore limited to whether any genuine issue of

material fact exists with respect to whether WFT received the reasonably equivalent

value when its assets and business were transferred to Blessmatch.

Defendants argue that WFT received adequate value for its business and

assets because WFT’s liabilities were also transferred to Blessmatch. However, there

is no indication in the record that any of WFT’s liabilities were transferred to

Blessmatch. By contrast, it is manifest that Blessmatch did not pay WFT for the

transfer of its assets and business. Likewise, when asked specifically whether any

“consideration” was exchanged for WFT’s assets, Fleming responded, “I don’t recall,

but, no, I wouldn’t have thought so.” It is clear, then, that WFT did not receive

reasonably equivalent value when its assets and business were transferred to

Blessmatch, and that summary judgment was properly granted in Plaintiff’s favor.

D. Piercing the Corporate Veil

Ordinarily, corporations and their shareholders are treated as distinct and

separate entities, and a corporation’s liability to a creditor cannot be imputed to its

shareholders. State ex rel. Cooper v. Ridgeway Brands Mfg., LLC, 362 N.C. 431, 438,

666 S.E.2d 107, 112 (2008). However, “while a corporation’s separate and

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independent existence is not to be disregarded lightly,” it is well established that

courts should disregard the corporate form when recognizing it “would accomplish

some fraudulent purpose, operate as a constructive fraud, or defeat some strong

equitable claim.” Id. at 438-39, 666 S.E.2d at 112-13 (internal quotation marks

omitted).

In determining whether to pierce the corporate veil and extend liability from a

corporation to a shareholder, North Carolina courts apply the “instrumentality rule.”

Acceptance Corp. v. Spencer, 268 N.C. 1, 8, 149 S.E.2d 570, 575 (1966) (quotation

marks omitted). Our Supreme Court has explained the rule as follows: “[A]

corporation which exercises actual control over another, operating the latter as a

mere instrumentality or tool, is liable for the torts of the corporation thus controlled.

In such instances, the separate identities of parent and subsidiary or affiliated

corporations may be disregarded.” Id.

Under the instrumentality rule, a plaintiff is required to prove the following:

(1) Control, not mere majority or complete stock control,

but complete domination, not only of finances, but of policy

and business practice in respect to the transaction attacked

so that the corporate entity as to this transaction had at

the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to

commit fraud or wrong, to perpetrate the violation of a

statutory or other positive legal duty, or a dishonest and

unjust act in contravention of plaintiff’s legal rights; and

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(3) The aforesaid control and breach of duty must

proximately cause the injury or unjust loss complained of.

Glenn v. Wagner, 313 N.C. 450, 455, 329 S.E.2d 326, 330 (1985) (quotation marks

omitted).

To determine whether each prong of the instrumentality test is satisfied,

courts consider four primary factors: (1) inadequate capitalization; (2) lack of

compliance with corporate formalities; (3) complete domination and control of the

corporation such that it has no independent identity; and (4) excessive fragmentation.

Estate of Hurst v. Moorehead I, LLC, 228 N.C. App. 571, 578, 748 S.E.2d 568, 574

(2013). A showing of constructive fraud or fraudulent transfer is sufficient to satisfy

the second and third elements of the instrumentality rule. See Hamby v. Thurman

Timber Co., ___ N.C. App. ___, ___, 818 S.E.2d 318, 324 (2018).

In the instant case, Fleming was the president and sole stockholder of WFT

and Blessmatch at all relevant times, including when he decided to transfer all of

WFT’s business and assets to Blessmatch. When asked whether “WFT, Alpha

Marine, and Blessmatch are . . . one and the same” business, Fleming answered in

the affirmative. Indeed, Fleming testified that the decision to rebrand WFT as

Blessmatch amounted to nothing more than a “name change.”

Defendants argue that WFT had a corporate board that was involved in the

decision to rebrand WFT as Blessmatch, and that Fleming was therefore not in full

control of the decision to transfer WFT’s business and assets to Blessmatch. Fleming

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testified that “senior people” associated with WFT would have been involved in the

decision to change the name to Blessmatch.

However, the change from WFT to Blessmatch occurred in 2013, and only two

employees remained affiliated with WFT after 2011. Fleming described one of those

employees as his assistant, and the other was not one of the “senior people” he named

in his deposition. More importantly, Fleming had full authority to transfer all of

WFT’s business and assets to Blessmatch at the time of the decision. Thus, Fleming,

WFT, and Blessmatch had “no separate mind, will or existence of [their] own” with

respect to the decision to transfer WFT’s business and assets to Blessmatch. See

Glenn, 313 N.C. at 455, 329 S.E.2d at 330.

Because we affirm the trial court’s order with respect to Plaintiff’s claims for

breach of fiduciary duty/constructive fraud and fraudulent transfer, we need not

continue our analysis on piercing the corporate veil. See Hamby, ___ N.C. App. at

___, 818 S.E.2d at 324. Accordingly, Judge Levinson did not err in granting partial

summary judgment in favor of Plaintiff.

II.

Defendants next argue that Judge Bridges erred by entering judgment in favor

of Plaintiff on its claim for unfair and deceptive trade practices, in that the underlying

conduct in this case was not “in or affecting commerce.” We disagree.

A. Standard of Review

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“[W]hen the trial court sits without a jury, the standard of review on appeal is

whether there was competent evidence to support the trial court’s findings of fact and

whether its conclusions of law were proper in light of such facts.” Eley v. Mid/East

Acceptance Corp. of N.C., 171 N.C. App. 368, 369, 614 S.E.2d 555, 558 (2005)

(quotation marks omitted). “While an appellant may challenge the sufficiency of the

evidence supporting the findings of fact, we are bound by the trial court’s findings so

long as there is some evidence to support them—even if the evidence might sustain

findings to the contrary.” Golver v. Dailey, 254 N.C. App. 46, 50-51, 802 S.E.2d 136,

140 (2017) (internal citations and quotation marks omitted). Conclusions of law are

reviewed de novo. Id. at 51, 802 S.E.2d at 140.

B. Unfair and Deceptive Trade Practices

Under North Carolina law, “[u]nfair methods of competition in or affecting

commerce, and unfair or deceptive acts or practices in or affecting commerce, are . . .

unlawful.” N.C. Gen. Stat. § 75-1.1(a). To establish a prima facie case under the

statute, the plaintiff must show: “(1) [the] defendant committed an unfair or deceptive

act or practice, (2) the action in question was in or affecting commerce, and (3) the act

proximately caused injury to the plaintiff.” Pleasant Valley Promenade v. Lechmere,

Inc., 120 N.C. App. 650, 664, 464 S.E.2d 47, 58 (1995) (citation omitted).

Defendants concede that “[b]ecause the trial court had already granted

summary judgment on the issue of fraud and injury to [Plaintiff], the only remaining

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issue for the trial court at the time of trial was whether the conduct at issue was ‘in

or affecting commerce.’ ” Chapter 75 of our General Statutes defines “commerce” as

“all business activities, however denominated[.]” N.C. Gen. Stat. § 75-1.1(b). Our

Supreme Court has also determined that “commerce” can be broadly read to include

“intercourse for the purposes of trade in any form.” Johnson v. Phoenix Mut. Life Ins.,

300 N.C. 247, 261, 266 S.E.2d 610, 620 (1980), overruled on other grounds by Myers

& Chapman, Inc. v. Thomas G. Evans, Inc., 323 N.C. 559, 374 S.E.2d 385 (1988).

Likewise, the term “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.” Sara Lee Corp. v. Carter, 351 N.C. 27, 32, 519 S.E.2d 308, 311, reh’g

denied, 351 N.C. 191, 541 S.E.2d 716 (1999).

In the instant case, the trial court thoroughly explained its basis for concluding

that Defendants’ actions were “in or affecting” commerce. First, the trial court

determined that “the regular business activity for which [Blessmatch and Alpha

Marine] were formed was simply to aid in defeating the use of WFT’s assets for

satisfaction of claims of its creditors[.]” (Emphasis added). The trial court reasoned

that, were this to be generally permitted, it would adversely affect the marketplace

and consumers, because it “would allow corporate entities . . . to incur debts, be

subject to judgments, and yet freely transfer assets to other entities in order to avoid

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payment of those obligations[.]” Such actions “would totally erode the marketplace

and [the] free enterprise system and undermine the rule of law as it pertains to

business operations.”

The trial court’s findings are well supported by the evidence, and its

comprehensive analysis is bolstered by our existing case law. See, e.g., Shepard v.

Bonita Vista Props., L.P., 191 N.C. App. 614, 624, 664 S.E.2d 388, 395 (2008) (“The

purpose of [N.C. Gen. Stat. §] 75-1.1 is to provide a civil means to maintain ethical

standards of dealings between persons engaged in business and the consuming public

within this State, and applies to dealings between buyers and sellers at all levels of

commerce.”), aff’d per curiam, 363 N.C. 252, 675 S.E.2d 332 (2009).

Defendants nevertheless contend that the transfer of assets from WFT to the

other businesses did not affect commerce. In support of this claim, Defendants cite

Ivey v. ES2, LLC, 544 B.R. 833 (Bankr. M.D.N.C. 2015), in which the court held that

a dispute between a parent company and its subsidiary did not affect commerce.

However, Ivey is manifestly inapposite for two simple reasons. First and foremost,

this Court is not bound by bankruptcy court rulings. See Moch v. A.M. Pappas &

Assocs., LLC, 251 N.C. App 198, 209, 794 S.E.2d 898, 904 (2016). Second, in this case,

Plaintiff is neither a parent company nor a subsidiary of Defendants, but rather a

market participant which conducted business with Defendants.

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Accordingly, we confine our analysis to the facts of this case: Plaintiff obtained

a significant award and judgment against WFT; Fleming transferred all of WFT’s

assets to other companies, which either quickly failed or never conducted any

business; the asset transfer prevented Plaintiff from enforcing its judgment against

WFT; and all of this, in turn, had a harmful effect on commerce. Consequently,

Defendants’ final argument fails.

Conclusion

For the reasons stated herein, we affirm (1) Judge Levinson’s grant of partial

summary judgment in favor of Plaintiff; and (2) Judge Bridges’s judgment entered

against Defendants as to Plaintiff’s claim for unfair and deceptive trade practices.

AFFIRMED.

Judges DILLON and BERGER concur.

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