Potts v. Steel Tube, Inc. (NCBC – Mar. 27, 2018)


Nominal Defendant Steel Tube, Inc. (“Steel Tube”) was founded by Plaintiff W. Avalon Potts (“Potts”) and Walter Lazenby (“Lazenby”), who both served as Steel Tube’s officers and directors until Lazenby resigned in early 2015. In January 2015, Defendant Leon L. Rives, II (“Rives”) and Lazenby executed an agreement whereby Lazenby would transfer a 50% interest in Steel Tube to Rives in exchange for $600,000, which would be paid in monthly installments.  Under the agreement, Rives would also receive control of Steel Tube’s bank accounts and full authority to manage Steel Tube’s  affairs.

Shortly after Rives purchased Lazenby’s shares, Rives and Potts held a shareholder meeting, during which they elected themselves directors.  Afterward, they immediately held a board meeting, during which they elected Potts as president and Rives as secretary and treasurer, and “agreed not to make material acquisitions or dispositions of [Steel Tube] assets or property or spend more than $25,000 unless both parties agreed.” Op. ¶ 7 (alteration in original) (quoting V. Am. Compl. ¶ 27).

Potts alleges that Rives then (1) used Steel Tube’s assets to finance his purchase of Lazenby’s shares, (2) transferred $62,875 from Steel Tube into a personal account, (3) formed Defendant Elite Tube & Fab, LLC (“Elite Tube”) and transferred $120,000 from Steel Tube to Elite Tube, (4) transferred equipment to Elite Tube without consideration, (5) purchased equipment, materials, and services for Elite Tube using Steel Tube’s funds,  and (6) contracted with KEL, LLC (“KEL”), which was formed by Rives’s brothers in April 2016, for KEL to handle Steel Tube’s trucking and transportation, despite Steel Tube performing those services for itself at a profit.  Potts brought seventeen total claims, individually and derivatively, against Rives, KEL, R&A, and Elite Tube.

This case is before the court on Defendants Leon L. Rives, II (“Rives”) and Rives & Associates, LLP’s Motion to Dismiss, which requests dismissal of some but not all of Potts’s claims against them. As such, the court viewed the allegations in Plaintiff W. Avalon Potts’s (“Potts”) Amended Complaint as true and in the light most favorable to him.

Notable Analysis:

  • “To support a claim for fraud, a false representation must relate to a past or existing fact. Statements of opinion, predictions of future events, and promises of future intent generally do not give rise to an action for fraud.”  Op. ¶ 20 (internal citations omitted).
  • However, an promissory misrepresentation might constitute actual fraud if the speaker intended to deceive the listener and did not intend to follow through with the promise.
  • The fact that Rives had already taken steps to give himself authority to dispose of Steel Tube’s assets by the time he made the promise not to do so, and the short interval between Rives’s promise and his breach of that promise supports an inference that Rives never intended to abide by the agreement not to dispose of Steel Tube’s assets. [NOTE: The court took care to note that Potts’s fraud claim “may ultimately be difficult to prove.” Op. ¶ 26.]
  • The economic loss rule does not bar claims for fraud.
  • Even though Potts’s complaint alleges that Rives distributed Steel Tube’s assets to other entities and to Rives’s family members, this case ultimately revolves around an “intra-company feud[] about internal operations,” Op. ¶ 33, between two co-owners of a business, and therefore the dispute not sufficiently “in or affective commerce” to state a claim for unfair or deceptive trade practices.

Disposition (Motion(s)):

Motion to Dismiss: GRANTED in part and DENIED in part.

Disposition (Claim(s)):

Unfair or deceptive trade practices claim: DISMISSED with prejudice.

Negligent misrepresentation claim: DISMISSED with prejudice.

To the extent Potts’s claims for constructive fraud and breach of fiduciary duty claims seek recovery for injuries related to Potts’s tax preparation, they remain.  Potts’s claims for fraud and facilitating fraud also remain, to the extent they were brought derivatively.

For more detail, you can read the full opinion HERE.

Cite: Potts v. Steel Tube, Inc., No. 16 CVS 2877, 2018 WL 1597644 (N.C. Super. Ct. Mar. 27, 2018). 

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