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COA Rejects Fraud And UTPA Suit By Company Executives Arising From Company's Asset Sale

By Sean E. Andrussier

Today in Schlieper v. Johnson, an appeal arising from the Business Court, the Court of Appeals (COA) affirmed the dismissal of a fraud and UTPA suit brought by two former executive employees against the company for which they worked and the CEO. The suit arose from the company's asset sale, which produced $2 million for these plaintiffs.

The plaintiffs had 5% and 2.5% stakes, respectively, in the company's profits. The company wanted to sell its assets to a third party, but the sale was contingent on plaintiffs agreeing to terminate their compensation agreements under which they received their stakes in the company's profits. They agreed to do so based on an alleged representation that the assets were being sold for $35 million, and they received $2 million in the process. But according to the complaint, they later discovered from an insider that the actual sale price was higher than what they had been told. They claimed they had been defrauded, but the Business Court and the COA relied on documents that plaintiffs themselves attached to their complaint to conclude that there had been no misrepresentation about sale price.

The COA also rejected plaintiffs' UTPA claim under the line of cases holding that employment disputes generally are not actionable under the UTPA because they aren't "in or affecting commerce" (a UTPA element) as that phrase has been judicially construed in cases like Buie v. Daniel Inter. Corp., 289 S.E.2d 118 (N.C. App. 1982) and Dalton v. Camp, 548 S.E.2d 704 (N.C. 2001). Plaintiffs in this case tried to rely on the outlier decision in Sara Lee Corp. v. Carter, 519 S.E.2d 308 (N.C. 1999) (allowing UTPA suit against former employee engaged in self-dealing business activities against former employer). They argued that they were business partners, not mere employees, given their stakes in the company's profits. But the COA didn't buy it, stressing that plaintiffs had no equity stake in the business. Like the Business Court below, the COA held that Sara Lee was distinguishable, concluding that this dispute was about employment compensation in the context of a sale of a company's assets, with the consequence that it wasn't "in or affecting commerce" under the Buie/Dalton line of cases.

Employees frequently try to bring UTPA claims. Add this case to the stack of decisions that have rejected efforts to circumvent the Buie/Dalton rule.

Full post as published by North Carolina Appellate Blog on February 03, 2009 (boomark / email).