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Landress v. Tier One Solar LLC

United States District Court, M.D. North Carolina

March 21, 2017



          LORETTA C. BIGGS, District Judge.

         Plaintiff, Scott Landress, brings this diversity action against Defendants Tier One Solar, LLC (“TOS”)[1], SPV Solar One LLC (“SPV”), Isaac B. Horton III (“Horton”), and Ahmed Shaikh (“Shaikh”), alleging state law claims, including violations of the North Carolina Securities Act. Defendants SPV, Horton, and Shaikh have each moved to dismiss Plaintiff's Complaint pursuant to Rules 12(b)(6) and 12(b)(7) of the Federal Rules of Civil Procedure, or in the alternative, to stay this action. (ECF Nos. 15, 17, 19.) For the reasons set forth below, the Court grants in part Defendants' motions to the extent that the motions request a stay of this action, and the Court denies the motions to the extent that they seek dismissal of Plaintiff's claims.

         I. BACKGROUND

         TOS is a subsidiary of parent company, SPV. (ECF No. 4 ¶ 21.) At the time of the transactions at issue, Defendant Horton served as Chief Executive Officer of TOS, (ECF No. 4-1 at 19), as well as “founder and managing partner of SPV.” (ECF No. 4 ¶ 16.) Defendant Shaikh served as Chief Operating Officer of TOS as well as a principal of SPV who oversaw SPV's day-to-day operations. (Id. ¶ 17.) James Mason (“Mason”), who is not a party to this action, [2] served as the Chief Financial Officer of TOS as well as a principal of SPV. (Id. ¶ 18.)

         Mason, having had a prior business relationship with Plaintiff, approached him about investing in TOS. (Id. ¶ 24.) In his attempt to secure Plaintiff's investment, Mason made a number of representations to Plaintiff about TOS's solvency including: that TOS was solvent and able to repay Plaintiff's investment; that Horton had contributed “approximately $1.7 million in cash” to TOS; that, over a period of time, he (Mason) had personally invested $1.4 million in TOS; and that the other SPV/TOS Managers had likewise invested $1.5 million in TOS. (Id. ¶¶ 25-28.)

         Ultimately, Plaintiff decided to invest $1 million in TOS. (Id. ¶ 29.) In exchange for this investment, Plaintiff, through Mutsy I, LLC (“Mutsy”), an entity which he “wholly own[s] and manag[es], ” received secured and unsecured notes. (Id. ¶¶ 30, 31.) The parties executed a number of investment documents, including a Secured Convertible Promissory Note (“Secured Note”) for $850, 000 and accompanying Security Agreement, executed between Mutsy and TOS, and personally guaranteed by Mason, (id. ¶ 32; ECF No. 4-1 at 2). Each document, except a Note Purchase Agreement, is signed by Isaac Horton as CEO on behalf of TOS and SPV, and by Alexander G. Fraser as Attorney-in-Fact on behalf of Mutsy and Scott Landress. (See ECF Nos. 4-1 at 19, 20; 4-2 at 10, 11; 4-3 at 2; 4-6 at 5, 6.) Each document is dated December 23, 2013. (ECF Nos. 4-1 at 2; 4-2 at 2; 4-3 at 2; 4-6 at 2.)

         On April 30, 2014, Plaintiff notified TOS “that the principal amount ($850, 000), the premium amount ($212, 500), and the related legal fees of approximately $25, 000 (as of that date) were due under the Secured Note.” (ECF No. 4 ¶ 59.) In his Notice, Plaintiff “agreed to refrain from exercising his rights against TOS for five (5) business days to allow TOS the opportunity to negotiate an extension of the Secured Note's payment terms.” (Id. ¶ 62.) At the expiration of this five-day period, Plaintiff sent two additional notices seeking “acceptable stand-still terms, ” or full payment under the terms of the Secured and Unsecured Notes, including “accrued interest, post-default interest, and fees.” (Id. ¶ 69.)[3]

         Although Plaintiff did not receive any payments or “acceptable stand-still terms” in response to his notices, in November 2014, he did receive TOS and SPV financial statements “for the period ending December 31, 2013” which showed that “the sum total of the SPV/TOS Managers' investment in SPV and TOS was just $25, 000, not $4 million or so as TOS represented.” (Id. ¶¶ 71-73.) The SPV/TOS Managers obtained additional funding from other sources which they commingled, misappropriated, and used to pay to themselves in the form of “management fees, ” advances, and back pay, instead of repaying Plaintiff as required under the investment documents. (Id. ¶¶ 75-80.) Plaintiff was paid $125, 000 on September 2, 2014. (ECF No. 4-5 at 2.)

         On December 8, 2014, Mason filed for personal bankruptcy triggering “a stay of judicial proceedings against [him].” (ECF No. 4 ¶ 82.) Shortly thereafter, on January 17, 2015[4], SPV, Horton, Shaikh, TOS, and Mason entered into a Confidential Settlement Agreement and Release (“Settlement Agreement”) “to (i) restate the ownership interest of both SPV and TOS, (ii) confirm the liabilities and other obligations of both SPV and TOS, and (ii) [sic] release SPV Parties[5] and the TOS Parties from any and all claims as set forth herein.” (ECF No. 4-7 at 1; see also ECF No. 4 ¶ 85.) The Settlement Agreement provides, in part, that: (i) a majority interest (77.5%) in TOS shall be held by Mason while a 1% interest in TOS shall be held by SPV, (ECF No. 4-7 ¶ 2); (ii) “TOS shall remain liable to . . . Scott Landress (“Landress”) under that certain promissory note dated December 23, 2013, ” (id. ¶ 3); and (iii) the TOS parties indemnify the SPV Parties “from any and all lawsuits, liabilities, actions, causes of action, claims, demands, damages, costs, and debts of any kind whatsoever, both at law and in equity, whether known or unknown, which the TOS Parties ever had, now has or may have against [the SPV Parties], ” (id. ¶ 8(a).) A few months after execution of the Settlement Agreement, Plaintiff filed this action.

         Before the Court are: (i) SPV Solar One LLC's Motion to Dismiss Pursuant to Rule 12(b)(6) and 12(b)(7); (ii) Motion of Defendant Isaac B. Horton III to Dismiss Plaintiff's First Amended Complaint;[6] and (iii) Motion of Defendant Ahmed Shaikh to Dismiss Plaintiff's First Amended Complaint. (ECF Nos. 15, 17, 19.) Neither Horton nor Shaikh provide an independent basis for dismissal, nor do they provide a brief in support of their motions to dismiss. Rather, Horton and Shaikh state in their motions that they “expressly rel[y] upon the Motion to Dismiss and supporting brief filed . . . by [SPV], ” and they adopt and incorporate by reference “the arguments and authorities put forward by Defendant SPV in support of its Motion to Dismiss.” (ECF No. 17 at 1; ECF No. 19 at 1.) Because SPV's motion and supporting brief addresses only Plaintiff's claims of control person liability (fourth cause of action), fraudulent conveyance (fifth cause of action), and piercing the corporate veil (sixth cause of action), and because no defendant argues for dismissal of the remaining causes of action, the Court will treat Horton's and Shaikh's motions as seeking dismissal as to the causes of action addressed by SPV only.[7]


         A. Rule 12(b)(7) Failure to Join a Party under Rule 19

         Rule 12(b)(7) provides that an action may be dismissed for failure to join a party under Rule 19. See Fed. R. Civ. P. 12(b)(7). The moving party on a Rule 12(b)(7) motion to dismiss bears the burden of showing that an absent party is necessary and indispensable pursuant to Rule 19. Am. Gen. Life & Accident Ins. Co. v. Wood, 429 F.3d 83, 92 (4th Cir. 2005). “The inquiry contemplated by Rule 19 is a practical one” which is left “to the sound discretion of the trial court.” Coastal Modular Corp. v. Laminators, Inc., 635 F.2d 1102, 1108 (4th Cir. 1980). The court must initially determine whether the absent party should be joined as a party to the action in accordance with the criteria set forth in Rule 19(a). See Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Rite Aid of S.C., Inc., 210 F.3d 246, 250 (4th Cir. 2000). If joinder of an otherwise required party is not feasible, the court must then determine whether, under Rule 19(b), the absent party is indispensable such that the action cannot proceed in that party's absence. Fed.R.Civ.P. 19(b); Pettiford v. City of Greensboro, 556 F.Supp.2d 512, 517 (M.D. N.C. 2008) (citing Wood, 429 F.3d at 92). Generally, “courts are extremely reluctant to grant motions to dismiss based on nonjoinder, and dismissal will be ordered only when the defect cannot be cured and serious prejudice or inefficiency will result.” RPR & Assocs. v. O'Brien/Atkins Assocs., P.A., 921 F.Supp. 1457, 1463 (M.D. N.C. 1995), aff'd, 103 F.3d 120 (4th Cir. 1996).

         B. Rule 12(b)(6) Failure to State a Claim

         Under Rule 12(b)(6), an action may be dismissed for failure to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). Such a motion “challenges the legal sufficiency of a complaint, ” including whether it meets the pleading standard of Rule 8(a)(2). Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009). Rule 8(a)(2) requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), thereby “giv[ing] the defendant fair notice of what the . . . claim is and the grounds upon which it rests, ” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). The Court must accept all factual allegations in the Complaint as true, id., and construe all factual allegations in the light most favorable to the plaintiff, Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).

         Generally, on a Rule 12(b)(6) motion to dismiss, a court cannot consider documents beyond the complaint without converting the motion into a motion for summary judgment. See Occupy Columbia v. Haley, 738 F.3d 107, 116 (4th Cir. 2013). The court can, however, properly consider “documents attached to the complaint, as well as those attached to the motion to dismiss, so long as they are integral to the complaint and authentic.” Philips v. Pitt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (citation omitted). The Court will therefore consider the documents attached to, and referenced in, the Complaint, the authenticity of which is not challenged by any party.


         A. Mason Is A Necessary and Indispensable Party Under Rule 19

         Defendants first argue that, with regard to Plaintiff's claims of control person liability, fraudulent conveyance, and piercing the corporate veil, “Mason is a necessary party to these claims, ” (ECF No. 16 at 9), and his joinder is not feasible, (id. at 12). Thus, according to Defendants, “this action should be dismissed or stayed.” (Id.) Plaintiff argues, on the other hand, that Mason is neither a required nor indispensable party and his absence does not require that the Court dismiss or stay this case; rather, according to Plaintiff, the action should be allowed to proceed with the existing parties. (ECF No. 22 at 12-20.)

         Pursuant to Rule 19, courts must engage in a two-pronged inquiry to determine whether joinder of a party should be required. See Fed. R. Civ. P. 19. “First, the district court must determine whether a party is ‘necessary' to the action under Rule 19(a). If the court determines that the party is ‘necessary, ' it must then determine whether the party is ‘indispensable' to the action under Rule 19(b).” Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 210 F.3d at 249 (footnote omitted) (citing Fed.R.Civ.P. 19(a), (b)). “Only necessary persons can be indispensable, but not all necessary persons are indispensable.” Schlumberger Indus., Inc. v. Nat'l Sur. Corp., 36 F.3d 1274, 1285-86 (4th Cir. 1994) (citing Fed.R.Civ.P. 19(b)). The court's determination of whether a party is necessary and indispensable is fact-specific and must rest upon “the practical potential for prejudice in the context of the particular factual setting presented by the case at bar.” Id. “Courts are loath to dismiss cases based on nonjoinder of a party, so dismissal will be ordered only when the resulting defect cannot be remedied and prejudice or inefficiency will certainly result.” Owens-Illinois, Inc. v. Meade, 186 F.3d 435, 441 (4th Cir. 1999). Thus, “a decision whether to dismiss [under Rule 19] must be made pragmatically . . . rather than by procedural formula.” Provident Tradesmens Bank & Tr. Co. v. Patterson, 390 U.S. 102, 119 n.16 (1968).

         Under Rule 19(a)(1), a person is a “required party” if:

(A) in the person's absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may:
(i) as a practical matter impair or impede the person's ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.

Fed. R. Civ. P. 19(a)(1). “Thus, Rule 19(a)(1)(A) focuses on the relief to existing parties, whereas Rule 19(a)(1)(B) focuses on the interest of the absent person and the effect, if any, his absence would have on either himself or the existing parties.” Pettiford, 556 F.Supp.2d 512 at 517.

         1. Mason is a required party under Rule 19(a)

         a. Controlling person liability claim under N.C. Gen. Stat. § 78A-56(c)

         Defendants argue that because Mason is responsible for making the alleged misrepresentations to Plaintiff prior to securing Plaintiff's investment, and because Mason allegedly knew that his statements to Plaintiff were false and misleading, “[t]o not have Mason in this action . . . limits the remedy that the Court can afford here in his absence.” (ECF No. 16 at 9.) Defendants also argue that their liability “under N.C. ...

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