Zagaroli v. Neill (NCBC – Mar. 28, 2018)


Plaintiff Pete Zagaroli (“Zagaroli”), the former owner of now-defunct Zagaroli Construction Co. Inc., alleges that he and Defendants James Clayton Neill (“Neill”), Rick Berry (“Berry”), and Neill Grading and Construction Co., Inc. (“Neill Grading”) formed a partnership with the intent of developing three historic mill properties in Catawba County, North Carolina: Hollar Hosiery Mill, Moretz Mills, and Lyerly Mills.  This lawsuit resulted after a falling-out between the parties.

In 2009, Neill, Berry, Ed Neill, and Laurel Homes, Inc. formed Hollar Hosiery Investments, LLC (“HHI”) to finance the purchase and development of Hollar Hosier Mill (“Hollar”), with the intention that Zagaroli’s company would perform the renovation work.   Then, in 2010, Zagaroli, Neill, Berry, and Ryan Lovern (“Lovern”) formed Defendant Reclamation, LLC (“Reclamation”).  Reclamation’s initial purpose was to redevelop historic mills while reclaiming materials to use for furniture production.  Neill and Berry provided the financing for Reclamation’s operations. They obtained two $50,000 loans and later, a $125,000 loan.  Neill, Berry, and each of their wives personally guaranteed the loans’ repayment.  Zagaroli managed Reclamation’s day-to-day operations, and Reclamation agreed to pay Zagaroli $1,000 per week for his work.  Zagaroli did not have the authority to sign Reclamation’s checks.

Around October 12, 2011, HHI discovered that Zagaroli had entered into an agreement with the architect hired to work on the Hollar project, under which Zagaroli would be paid a portion of the fee paid to the architect by HHI.  After discovering this agreement, Neill, Berry, and Neill Grading developed Hollar Hosiery Mill without Zagaroli, and Neill and Neill Grading performed general-contracting work on Moretz Mills and Lyerly Mills in 2013 and 2014, respectively.  Zagaroli claims that Neill agreed to pay the $17,500 fee that he was to receive from the architect.

Lovern relinquished her ten-percent interest in Reclamation in June 2012.  Then, in 2013, Neill and Berry agreed to transfer their ownership interests in Reclamation to Zagaroli and Third-Party Defendant Dean Pritchett (“Pritchett”) upon Zagaroli’s and Pritchett’s (1) repayment of Neill and Berry’s cash advancements to Reclamation and (2) assumption and repayment of Neill’s and Berry’s obligations on the promissory notes.  If they failed to meet either of these obligations, Berry’s and Neill’s ownership interests would not transfer to Zagaroli and Pritchett.

Zagaroli and Pritchett failed to make the required payments in mid-2014.  Despite this, Zagaroli and Pritchett continued to operate Reclamation.  Reclamation was administratively dissolved on February 2, 2017, and Zagaroli went to work for Third-Party Defendant Benchmade, LLC (“Benchmade”) shortly afterward.

Zagaroli brought this action on October 26, 2015, bringing claims against Defendants of breach of fiduciary duty, constructive fraud, fraud, self-dealing and misappropriation of corporate opportunities, unjust enrichment, breach of contract, Wage and Hour Act violations, and defamation.  Defendants counterclaimed for declaratory judgment, conversion, fraud, breach of contract, and judicial dissolution of Reclamation.  Defendants also brought third-party claims against Benchmade for conversion and claim and delivery, which were related to Zagaroli’s alleged transfer of equipment and machinery from Reclamation to Benchmade. The court now evaluates all parties’ motions for summary judgment.

Notable Analysis:

  • A party cannot create a genuine issue of material fact simply by filing an affidavit that contradicts his or her prior sworn testimony.  Op. ¶ 52 (citing Cousart v. Charlotte-Mecklenburg Hosp. Auth., 209 N.C. App. 299, 304, 704 S.E.2d 540, 543 (2011)).
  • Because Reclamation’s initial business included the redevelopment of mill opportunities, any alleged preexisting partnership between the parties that also existed for that purpose ceased to exist upon Reclamation’s formation.
  • North Carolina courts have not recognized that a minority interest holder of an LLC who exercises actual control over the affairs of the LLC owes a fiduciary duty to the other members, and even if such a duty was recognized, Zagaroli has not produced evidence that Neill and Berry exercised the necessary domination and control over Reclamation for such a duty to arise.
  • To the extent Zagaroli seeks to recover through his Wage and Hour Act claim any wages that were due more than two years before he filed his complaint, any claim based on those wages are barred by the applicable two-year statute of limitations.   See N.C. Gen. Stat. § 95-25.22(f) (2017).  However, under his breach-of-contract claim, which is subject to a three-year statute of limitations, Zagaroli may seek any unpaid wages that were due within the three years before Zagaroli filed his complaint.
  • Even if Neill promised to pay the $17,500 fee that the architect agreed to pay to Zagaroli for his work on Hollar, Zagaroli has not produced a written agreement showing that Neill made that promise.  To be enforceable, a promise to pay the debt of another is required by the statute of frauds to be made in writing.  Op. ¶ 78 (see N.C. Gen. Stat. § 22-1).
  • Any claim based on the allegation that Defendants misappropriated mill-development opportunities was a claim that belongs to Reclamation, and not to Zagaroli.  Zagaroli’s failure to make a pre-suit demand on Reclamation is therefore fatal to any claims made on that basis.
  • Zagaroli’s express contract with the architect for payment related to work on the Hollar redevelopment precludes Zagaroli’s unjust enrichment claim for the services that he performed on Hollar.
  • Because Zagaroli exercised unauthorized dominion over Reclamation’s equipment only after he had lawfully obtained possession of it, a demand for the return of the equipment and Zagaroli’s refusal of that demand were necessary for Reclamation to state a valid conversion claim against Zagaroli.

Disposition (Motion(s)):

Defendants’ Motion for Summary Judgment: GRANTED in part and DENIED in part.

Plaintiff’s Motion for Summary Judgment: GRANTED in part and DENIED in part.

Third-Party Defendant’s Motion for Summary Judgment: GRANTED.

Disposition (Claim(s)):

Plaintiff’s claims for breach of fiduciary duty, constructive fraud, fraud, quasi-contract, and unjust enrichment are DISMISSED with prejudice.

Plaintiff’s Wage and Hour Act claim remains, to the extent that it is based on unpaid salary owed on or after October 26, 2013.  As to any Wage and Hour Act claim based on unpaid wages owed before that date, such claims are DISMISSED with prejudice.

Plaintiff’s breach-of-contract claim remains, to the extent that it is based on unpaid salary owed on or after October 26, 2012.  As to any breach-of-contract claim based on unpaid wages owed before that date, such claims are DISMISSED with prejudice.

The court enters judgment in favor of Defendants on Plaintiffs’ claim for declaratory judgment and DECLARES that Neill, Berry, and Zagaroli each own a one-third interest in Reclamation, and that Neill and Berry own the name “Reclamation, LLC.”

Defendants’ counterclaims for claim and delivery and judicial dissolution are DISMISSED with prejudice.

Defendants’ counterclaims for conversion and breach of contract remain.

Defendants’ third-party claim for conversion against Benchmade is DISMISSED with prejudice.

 

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

Cite: Zagaroli v. Neill, No. 15 CVS 2635, 2018 WL 1589148 (N.C. Super. Ct. Mar. 28, 2018). 

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