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U.S. Tobacco Cooperative Inc. v. Big South Wholesale of Virginia, LLC

United States District Court, E.D. North Carolina, Western Division

February 19, 2019

U.S. TOBACCO COOPERATIVE, INC., U.S. FLUE-CURED TOBACCO GROWERS, INC., and BIG SOUTH DISTRIBUTION, LLC, Plaintiffs,
v.
BIG SOUTH WHOLESALE OF VIRGINIA, LLC d/b/a BIG SKY INTERNATIONAL, BIG SOUTH WHOLESALE, LLC, UNIVERSAL SERVICES CONSULTING GROUP, JASON CARPENTER, CHRISTOPHER SMALL, EMORY STEPHEN DANIEL, and ALBERT M. JOHNSON, Defendants.

          ORDER

          TERRENCE W. BOYLE CHIEF UNITED STATES DISTRICT JUDGE.

         This cause comes before the Court on the United States' motion to dismiss; plaintiffs' motion for partial summary judgment; defendants Big South Wholesale of Virginia d/b/a Big Sky International, Big South Wholesale, Carpenter, and Small's motion for summary judgment; defendant Daniel's motion for summary judgment; and defendant Johnson's motion for summary judgment. The matters have been fully briefed and are ripe for ruling. For the reasons that follow, the United States is dismissed, plaintiffs' motion for partial summary judgment is granted in part and denied in part, and defendants' motions for summary judgment are granted.

         BACKGROUND

         Procedural History

         On July 23, 2013, plaintiffs filed a complaint alleging that two of their employees, a consultant, and others engaged in a conspiracy to defraud plaintiffs of millions of dollars. [DE 1]. On April 23, 2014, the United States moved to intervene and stay discovery in the matter due to ongoing grand jury investigations, [DE 144], which was granted by the Court[1] on September 30, 2014 [DE 209]. The Court further granted in part a motion for judgment on the pleadings filed by defendants Big South Wholesale of Virginia (Big South Wholesale-Va.), Big South Wholesale, Carpenter, and Small (collectively the Big Sky defendants) and dismissed plaintiffs' claims for breach of fiduciary duty and constructive fraud against Carpenter and Small, as well as plaintiffs' claims for tortious interference, misappropriation of corporate opportunities, breach of the covenant of good faith and fair dealing, and unjust enrichment against the Big Sky defendants. [DE212].

         On July 24, 2015, the Court declined to extend the stay of discovery further [DE 323], and the case proceeded through discovery. On June 1, 2016, the parties filed various motions for summary judgment. On August 24, 2016, the Court held an evidentiary hearing on a petition to substitute the United States as a party pursuant to 28 U.S.C. § 2679 (Westfall certification) that had been filed by the Big Sky defendants. On November 7, 2016, the Court granted in part the petition to substitute the United States and granted Westfall certification to the Big Sky defendants for plaintiffs' fourth through ninth and seventeenth claims for relief. [DE 635].

         By order entered May 19, 2017, the seal imposed on a large number of documents in the case was lifted. [DE 810]. The Court took up plaintiffs' motion to reconsider Westfall certification and, after a hearing on July 20, 2017, granted the motion to reconsider, removed Westfall certification for the Big Sky defendants, and dismissed the United States as a substituted party. [DE 1096]. The Big Sky defendants appealed the denial of Westfall certification, and by opinion filed August 3, 2018, the Court of Appeals for the Fourth Circuit vacated this Court's order removing Westfall certification and remanded the case for further proceedings. [DE 1116]; U.S. Tobacco Coop. Inc. v. Big S. Wholesale of Virginia, LLC, 899 F.3d 236 (4th Cir. 2018).

         Accordingly, the case is now before the Court with the United States substituted for the Big Sky defendants on plaintiffs' claims for North Carolina RICO violations, fraud, fraud in the inducement, North Carolina Unfair and Deceptive Trade Practices Act (UDTPA) violations and civil conspiracy (plaintiffs' fourth through ninth, and seventeenth claims for relief). Also remaining for adjudication are plaintiffs' claims against Carpenter, Small, and/or Big South Wholesale and Big South Wholesale-Va. for federal RICO violations and breach of contract (plaintiffs' first, second, third, twelfth, thirteenth, and fourteenth claims for relief); plaintiffs' claims against Daniel and/or Universal Services Consulting Group (Universal) for federal RICO violations, North Carolina RICO violations, fraud, fraud in the inducement, constructive fraud, violations of the North Carolina UDTPA, breach of fiduciary duty, tortious interference with contractual relations, misappropriation of corporate opportunities, civil conspiracy, and unjust enrichment (plaintiffs' first through third, fourth through sixth, seventh through eleventh, and fifteenth through eighteenth claims for relief); plaintiffs' claims against Johnson for federal RICO violations, North Carolina RICO violations, fraud, fraud in the inducement, North Carolina UDTPA violations, breach of fiduciary duty, and civil conspiracy (plaintiffs' second, sixth, seventh through tenth and seventeenth claims for relief); Carpenter and Small's counterclaims for breach of contract, piercing the corporate veil, violations of North Carolina's UDTPA, and punitive damages; Daniel's counterclaim for indemnification; and Johnson's counterclaim for indemnification.

         Plaintiffs have moved for partial summary judgment on their claims for breach of the asset purchase agreement, breach of consulting agreement, and breach of employment agreement (plaintiffs' twelfth through fourteenth claims for relief) and on defendants Carpenter and Small's first, fourth, and sixth counterclaims. The Big Sky defendants have moved for summary judgment in their favor on each of plaintiffs' claims against them; Daniel, Universal, and Johnson have also moved for summary judgment in their favor on each of plaintiffs' claims and on their counterclaims against plaintiffs for indemnification. The United States has moved to dismiss each of plaintiffs' claims against it.

         Factual Background

         As the case is before the Court on multiple motions for summary judgment, the following factual recitation is comprised, unless otherwise indicated, of the undisputed portions of the Local Civil Rule 56.1 statements of undisputed material facts filed by the parties. [DE 460; 848; 649; 1018; 1135; 1144].[2]

         Plaintiff U.S. Tobacco Cooperative (U.S. Tobacco) is a member-owned cooperative that purchases tobacco from its member-growers and sells it to domestic and foreign customers. Plaintiff U.S. Flue-Cured Tobacco Growers (U.S. Flue-Cured), a wholly-owned subsidiary of U.S. Tobacco, was formed in 2004 to purchase a cigarette manufacturing facility in Timberlake, North Carolina. U.S. Flue-Cured entered into an exclusive manufacturing agreement with Premier Manufacturing, Inc., under which it manufactured Premier cigarette brands such as "Wildhorse"; U.S. Flue-Cured later began to manufacture its own cigarette brands, including "1839." Until May 2011, U.S. Flue-Cured sold its cigarettes through third-party distributors, which included defendants Big South Wholesale and Big South Wholesale-Va., companies owned and operated by defendants Carpenter and Small.

         In 2006 and 2007 respectively, defendants Carpenter and Small began working with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) in confidential roles, assisting ATF with operations that targeted corrupt cigarette retailers, wholesalers, brokers, distributors, and manufacturers.

         In early 2011, Daniel approached the U.S. Tobacco board of directors and encouraged them to acquire the assets of Big South Wholesale and Big South Wholesale-Va. Plaintiff Big South ' Distribution was organized as a wholly-owned subsidiary of U.S. Flue-Cured, and defendant Daniel, who was the executive vice president of U.S. Flue-Cured, became the president of Big South Distribution. In approximately December 2011, negotiations between Daniel, Carpenter, and Small began for U.S. Flue-Cured to acquire Big South Wholesale and Big South Wholesale-Va., and Daniel served as U.S. Tobacco's lead negotiator for the purchase of Big South Wholesale and Big South Wholesale-Va.'s assets. While negotiations were ongoing, a meeting was held on March 23, 2011, which included ATF Agent Whittemore, [3] Carpenter, Small, Daniel, U.S. Tobacco and U.S. Flue-Cured's chairman of the board of directors defendant Johnson, U.S. Tobacco treasurer John Taylor, plaintiffs' outside auditor Clay Worden, U.S. Tobacco president Tommy Bunn, and plaintiffs' outside general counsel Marks Arnold. Agent Wittemore informed the attendees, among other things, that Carpenter and Small's operations with ATF were winding down, and further instructed all attendees about the importance of maintaining as confidential the information that had been discussed at the meeting.

         Prior to the close of the agreement to purchase assets of Big South Wholesale and Big South Wholesale-Va., there was no disclosure to plaintiffs' full board of directors regarding Carpenter and' Small's work with the ATF or that, after the asset purchase, Carpenter and Small planned to form a separate entity called Big Sky International which would sell cigarettes to Big South Distribution at marked-up prices. Also undisclosed to the full board of directors were payments made by Carpenter and Small through Big South Wholesale-Va. to Universal Services First Consulting, a company owned and controlled by Daniel, for $2, 000 per month from August 2010 to April 2011, totaling $18, 000.

         Negotiations regarding the acquisition of Big South Wholesale and Big South Wholesale-Va. continued, culminating in an asset purchase agreement (APA) that was entered into on May 1, 2011. Pursuant to the APA, U.S. Tobacco paid Carpenter and Small approximately $8.6 million and Big South Distribution acquired assets of Big South Wholesale and Big South Wholesale-Va. On May 2, 2011, Carpenter and Small through Big South Wholesale-Va. made a payment of $69, 066.67 to Universal First Consulting, and this payment was not disclosed to U.S. Tobacco's full board of directors.

         As part of the APA, Carpenter was hired as a consultant and Small as an employee of the newly formed Big South Distribution. Under the APA and Carpenter and Small's consulting/employment agreements, a non-competition provision forbade Carpenter and Small from competing with Big South Distribution in the wholesale acquisition and distribution of tobacco products in Alabama, North Carolina, Virginia, Tennessee, South Carolina, and Georgia. Four days prior to the close of the APA, on April 27, 2011, Daniel sent an email to U.S. Tobacco's general counsel Marks Arnold, Carpenter and Small's counsel Henry Long, Carpenter, Small, and John Taylor, in part describing "concern over business operations that [Carpenter and Small] are involved in and the 'special' nature of certain activities that must be handled with extreme confidentiality." [DE 1135-14]. Marks Arnold responded by email the same day stating "Based on my conversation with Rusty Irby [Big South Wholesale's attorney] this morning, I suggest that we all recognize that the 'special' activities will not violate the non-compete, but not document that fact, for obvious reasons." [DE 849 Dep. Ex. 29].

         After the APA closed, Carpenter and Small oversaw Big South Distribution's day-to-day operations and controlled the tobacco products that it purchased for wholesale, and were paid annual salaries of more than $100, 000 per year plus a percentage of profits. Carpenter and Small also continued to operate Big South Wholesale-Va., under the name Big Sky International, out of the Big South Distribution warehouse in Bristol, Virginia. From May 2011 to May 2013, Carpenter and Small sold tobacco products from Big Sky to Big South Distribution, the majority of which were "Brand B" cigarettes. These sales exceeded $24 million. Between May 2011 and March 2013, Carpenter and Small through Big Sky made payments of over $470, 000 to Universal First Consulting, and these payments were not disclosed to U.S. Tobacco's full board of directors.

         On March 7, 2013, Brandon Moore, an employee at the Bristol, Virginia warehouse, emailed Stuart Thompson, the chief financial officer of U.S. Tobacco, about activities and alleged wrongdoing taking place at the warehouse. [DE 1135-23] Thompson Dep. at 130. The U.S. Tobacco board of directors voted to initiate an internal investigation into Moore's allegations and hired outside counsel. On July 23, 2013, U.S. Tobacco terminated Carpenter's consulting agreement and Small's employment agreement. Both Carpenter's consulting and Small's employment agreement contained early termination penalties where the agreement was terminated without cause. A finding that their respective non-competition agreements have been violated would forfeit any early termination penalties owed.

         DISCUSSION

         I. United States' motion to dismiss.

         On October 12, 2018, plaintiffs filed a notice of voluntary dismissal of their claims against the United States pursuant to Rule 41(a)(1)(A)(i) of the Federal Rules of Civil Procedure. [DE 1125]. Rule 41(a)(1)(A)(i) provides a plaintiff with the right to dismiss an action without a court order by filing a notice of dismissal before the opposing party has filed an answer or motion for summary judgment. Although some courts have found that reference to "an action" by the rule requires that a plaintiff may not proceed under Rule 41 to dismiss claims against one but not all defendants, "the sounder view and the weight of judicial authority are to the contrary." 9 Charles Alan Wright, et al., Federal Practice & Procedure § 2362 (3d ed. 2008); see also Duke Progress Energy LLC v. 3M Co., No. 5:08-CV-460-FL, 2015 WL 5603344, at *2 (E.D. N.C. Sept. 23, 2015) (noting use of Rule 41(a) to dismiss fewer than all defendants in an action is standard practice in this district); S. Bank & Tr. Co. v. Laburnum Hotel Partners, LLC, No. 2:13CV216, 2014 WL 3052535, at *5 (E.D. Va. July 3, 2014). Accordingly, by operation of the notice of voluntary dismissal, the United States has been dismissed as a defendant in this action. Counts four, five, six, seven, eight, nine, and seventeen of the second amended complaint are therefore dismissed without prejudice, and the United States' motion to dismiss is denied as moot. Plaintiffs' motion for leave to file surreply to the United States' renewed motion to dismiss is granted.

         II. Big Sky defendants' motion for summary judgment.

         Defendants Carpenter, Small, Big South Wholesale, and Big South Wholesale-Va. have moved for summary judgment in their favor on all claims, which include claims for federal RICO violations and state law claims for breach of contract. A motion for summary judgment may not be granted unless there are no genuine issues of material fact for trial and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If that burden has been met, the non-moving party must then come forward and establish the specific material facts in dispute to survive summary judgment. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986). In determining whether a genuine issue of material fact exists for trial, a trial court views the evidence and the inferences in the light most favorable to the nonmoving party: Scott v. Harris, 550 U.S. 372, 378 (2007).

         However, "[t]he mere existence of a scintilla of evidence" in support of the nonmoving party's position is not sufficient to defeat a motion for summary judgment. Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 252 (1986). "A dispute is genuine if a reasonable jury could return a verdict for the nonmoving party. . . .and [a] fact is material if it might affect the outcome of the suit under the governing law." Libertarian Party of Virginia v. Judd,718 F.3d 308, 313 (4th Cir. 2013) (internal quotations and citations omitted). Speculative or conclusory allegations will not suffice. Thompson v. Potomac Elec. Power Co.,312 F.3d 645, 649 (4th Cir. 2002). When deciding cross-motions for summary judgment, a court considers each motion ...


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