Brown v. Secor

2017 NCBC 65

DOUGLAS BROWN, Plaintiff, v. ARTHUR D. SECOR; SECOR GROUP, LLC; JOSEPH CHRISTOPHER ROSSO; ROSSO GROUP, LLC; and SOUTHGROUP REAL ESTATE MARKETING, LLC, Defendants.

No. 16 CVS 608

Superior Court of North Carolina, Cleveland

July 28, 2017

Gray Layton, Kersh, Solomon, Furr & Smith, P.A. by Michael L Carpenter and Marshall P. Walker for Plaintiff.

Parker Poe Adams & Bernstein LLP by Morgan H. Rogers and Eric A Frick for Defendants.

ORDER AND OPINION ON RULE 12 MOTIONS AND DISCOVERY MOTIONS

Adam M. Conrad Special Superior Court Judge.

1. In May 2013, Plaintiff Douglas Brown and Defendant Arthur Secor entered into an oral agreement in which Brown would invest in Secor's real estate deals. Three deals and three years later, Brown brought this suit, alleging that his $2 million investment has vanished. Brown contends that Secor, Defendant Joseph Rosso (Secor's business partner), and several entities controlled by Secor and Rosso are liable for a host of wrongs from breach of contract to fraud to securities violations. Brown also seeks a declaratory judgment regarding his alleged membership interest in Defendant Southgroup Real Estate Marketing, LLC ("Southgroup").

2. This Order addresses six pending motions. Defendants jointly moved for judgment on the pleadings under Rule 12(c) of the North Carolina Rules of Civil Procedure, seeking dismissal of all claims except breach of contract ("Rule 12(c) Motion"). Rosso and Defendant Secor Group, LLC ("Secor Group") additionally moved to dismiss the claim for breach of contract under Rule 12(b)(6) ("Rule 12(b)(6) Motion"). Finally, after engaging in the procedure set forth in Rule 10.9 of the General Rules of Practice and Procedure for the North Carolina Business Court ("BCR"), and after having been given permission by the Court to do so, the parties filed cross-motions as to two discovery disputes: Brown filed two motions to compel the production of certain documents and information ("Motions to Compel"), and Defendants cross-moved for a protective order ("Motions for Protective Order").

3. Having considered the parties' filings and arguments, the Court GRANTS the Rule 12(b)(6) Motion, GRANTS in part and DENIES in part the Rule 12(c) Motion, GRANTS in part and DENIES in part the Motions to Compel, and GRANTS in part and DENIES in part the Motions for Protective Order.

I. BACKGROUND

A. Factual History

4. The Court does not make findings of fact in deciding motions filed under Rule 12(b)(6) or Rule 12(c). The following factual summary is drawn from relevant allegations in the pleadings and the attached exhibits.

5. Secor and Rosso are businessmen and residents of Mecklenburg County, North Carolina. (Am. Compl. ¶¶ 2, 4.) Secor is the principal owner and manager of Secor Group, and Rosso is the principal owner and manager of Defendant Rosso Group, LLC ("Rosso Group"). (Am. Compl. ¶¶ 3, 5.) Secor and Rosso also do business using the name LW Land, which is not an incorporated entity. (Am. Compl. ¶ 7.)

6. In early 2013, Secor met with Brown for the purpose of soliciting Brown's investment in certain real estate deals. (See Am. Compl. ¶¶ 1, 8.) Secor represented that he had many investors in various properties he was marketing or developing. (Am. Compl. ¶ 9.) Rosso did not attend the meeting, and Rosso's relationship with Secor was not discussed. (Am. Compl. ¶¶ 8-9; see also Am. Compl. ¶ 16.)

7. A further meeting resulted in an oral agreement in which Brown promised to finance real estate investments to be held by Southgroup, another entity controlled by Secor. (See Am. Compl. ¶ 11.) According to Brown, he and Secor agreed to split any profits from the real estate investments "50/50 at the time of sale" after Brown "received a return of his principal investment plus six percent (6%) interest." (Am. Compl. ¶ 11; see also Am. Compl. ¶ 47.)

8. Defendants admit there was an oral agreement but disagree with Brown over its terms. (See Am. Answer ¶ 11.) Among other things, they allege that "Brown promised to provide the funding for all of Secor Group's and Southgroup's land acquisitions." (Am. Countercls. ¶ 18.)

9. Between May 13 and June 27, 2013, Brown made five fund transfers totaling $1, 799, 488.17 for the purpose of acquiring real property in the name of Southgroup. (See Am. Compl. ¶¶ 12, 16, 18.) The first two transfers related to a North Carolina property called Black Bear Falls. (Am. Compl. ¶ 12.) Brown alleges Secor failed to disclose at the time of the oral agreement that Secor was buying out his former investors and that Black Bear Falls was subject to a $300, 000 mortgage. (Am. Compl. ¶ 13.) The next two transfers related to property in Ashe County, North Carolina (Am. Compl. ¶ 14), and the final transfer related to a development in Georgia called Nature's Courtyard (Am. Compl. ¶ 15). Apart from one $50, 000 transfer made to LW Land, each transfer of funds was made to a law firm involved in the respective real estate transactions. (See Am. Compl. ¶¶ 12-16.)

10. After June 27, 2013, Brown refused to make further advances without "documentation of the relationship between the parties." (Am. Compl. ¶ 19.) Brown also alleges that, around this time, he met with Rosso "for the first time during an additional solicitation of funds." (Am. Compl. ¶ 16.)

11. In response to Brown's concerns, Secor "personally represented" that the Nature's Courtyard property would be sold the next month "'at a substantial profit.'" (Am. Compl. ¶ 20(a).) Secor also sent Brown two documents. The first, a "Marketing Summary" for LW Land, stated that Nature's Courtyard would be sold by August 17, 2013, for between $990, 000 and $1, 320, 000, contingent on an additional transfer of $300, 000 from Brown. (Am. Compl. ¶ 20(b).) The second document was a membership interest purchase agreement ("MIPA"), which was signed by Secor on behalf of Southgroup and backdated to the date Brown first advanced funds. (See Am. Compl. ¶ 20; see also Am. Compl. Ex. A ["MIPA"].)

12. The parties sharply dispute the terms and effect of the MIPA. As relevant, Southgroup is identified as "the Seller" and represents that it owns a 100% membership interest in "the Company, " which is not named but is defined as "a single-purpose entity established for the development of" Black Bear Falls and other real property, including Nature's Courtyard. (MIPA p.1.) Southgroup agreed to transfer this membership interest to Brown, who is identified as "the Buyer." (MIPA ¶ 1.) Brown interprets these provisions to mean that Southgroup is both "the Seller" and "the Company, " such that the MIPA transferred to him a 100% membership interest in Southgroup. (Am. Compl. ¶¶ 17, 20-21.)

13. Defendants interpret the MIPA to state that Southgroup and "the Company" are separate entities. (See Am. Answer ¶ 21A; see also Am. Compl. ¶ 45.) Defendants also allege that the MIPA, though signed by Brown and Secor, never became operative. (Am. Answer ¶ 21D.) According to Defendants, the MIPA would have become effective only in the event of a default under the terms of a separate memorandum of understanding between Brown and Secor. (Am. Countercls. ¶¶ 19, 24, 31(b).) Defendants and Brown agree that no memorandum of understanding was ever signed. (See Am. Countercls. ¶¶ 32, 34; Reply ¶¶ 32, 34.)

14. After receiving these documents from Secor, Brown made two further fund transfers. He first wired $100, 000 to LW Land on July 5, 2013 for Black Bear Falls. (See Am. Compl. ¶ 22(a).) Then, on July 23, 2013, Brown wired an additional $300, 000 to LW Land for marketing and clean-up costs for Nature's Courtyard. (See Am. Compl. ¶ 22(b).)

15. A partial sale of Nature's Courtyard took place on August 17, 2013 (as LW Land's brochure stated) but returned no more than $600, 000 (less than LW Land forecast). (See Am. Compl. ¶¶ 20(b), 23-24.) Brown alleges that Secor falsely represented that only marketing costs were recovered from the sale. (Am. Compl. ¶¶ 23-25.) Brown further alleges that he did not receive any proceeds, either directly or through his alleged membership interest in Southgroup. (Am. Compl. ¶ 35.)

16. After the Nature's Courtyard sale, Brown inquired about the properties throughout the remainder of 2013 and 2014 but received little information. (See Am. Compl. ¶¶ 26, 30, 32.) It does not appear that Black Bear Falls was ever sold, but on January 14, 2015, the Ashe County property sold for $1, 670, 000. (See Am. Compl. ¶ 33.) Brown first learned of the sale some 11 months after it took place and, again, received no proceeds. (See Am. Compl. ¶¶ 32-33, 41.) He alleges that Secor transferred more than $1 million in proceeds from the sale to Secor Group. (Am. Compl. ¶ 41.)

17. Through counsel, Brown requested access to Southgroup's books in December 2015 and January 2016. (See Am. Compl. ¶ 38.) The request was refused on the ground that Brown does not hold any membership interest in Southgroup. (See Am. Compl. ¶¶ 39-40.) According to Brown, Defendants' counsel also "indicated that all the proceeds from the sales are gone." (Am. Compl. ¶ 36.)

B. Procedural History

18. Brown filed his original complaint on April 15, 2016, alleging fraud and seeking to enforce his rights as an alleged owner of Southgroup. After filing their answer, Defendants filed an initial motion for judgment on the pleadings on November 23, 2016, and Brown moved to amend his complaint on January 6, 2017. After a hearing on both motions, the Court granted in part the motion to amend and denied the Rule 12(c) motion as moot, without prejudice to Defendants' ability to challenge the amended complaint through a subsequent Rule 12 motion. (Order on Pl.'s Mot. to Am. Compl. and Defs.' Mot. for J. on the Pleads. ¶ 10(a)-(c).)

19. The amended complaint, filed March 2, 2017, asserts...