Full Opinion (html_with_citations)

Estate of Schwarz v. Schwarz,
2016 NCBC 106
.


STATE OF NORTH CAROLINA                  IN THE GENERAL COURT OF JUSTICE
                                             SUPERIOR COURT DIVISION
COUNTY OF GUILFORD                                  16 CVS 3524

THE ESTATE OF GEOFFREY H.               )
SCHWARZ, by and through                 )
ALEXANDER TODD SCHWARZ, as              )
personal representative,                )
                                        )
                    Plaintiff,          ) ORDER & OPINION ON DEFENDANT’S
                                        ) MOTION FOR JUDGMENT ON THE
       v.                               )           PLEADINGS
                                        )
JOHN R. SCHWARZ,                        )
                                        )
                    Defendant.          )
                                        )

      1.    THIS MATTER is before the Court on Defendant’s Motion for

Judgment on the Pleadings (“Motion”), brought under Rule 12(c) of the North

Carolina Rules of Civil Procedure. For the reasons discussed below, the Motion is

DENIED.

      Smith Moore Leatherwood LLP, by Richard A. Coughlin and W. Craig
      Turner, for Plaintiff.

      Rossabi Reardon Klein Spivey PLLC, by Amiel J. Rossabi and Elizabeth M.
      Klein, for Defendant.

Gale, Chief Judge.

                                 I.   INTRODUCTION

      2.    Plaintiff is the Estate of Geoffrey H. Schwarz (the “Jeff Schwarz

Estate”), by and through Alexander Todd Schwarz (“Todd”), who is both the

personal representative of the Jeff Schwarz Estate and the son of Geoffrey H.

Schwarz (“Jeff”).    Before Jeff died in November 2015, he operated two limited-
liability companies with his brother, Defendant John R. Schwarz (“John”)—John &

Jeff Schwarz, LLC (“J&J”) and C.E.-Bett St. Lucie, LLC (“C.E.-Bett”). The Jeff

Schwarz Estate now seeks judicial intervention to determine the validity of its

membership interests in J&J and C.E.-Bett, and the value of the ownership

interests in the two companies.

                         II.      FACTUAL BACKGROUND

      3.     The following statement of facts is made solely for purposes of ruling

on the Motion.

      4.     Jeff died on November 25, 2015. (Am. Compl. ¶ 1.) He and John were

equal owners and the sole members and managers of J&J and C.E.-Bett. (Am.

Compl. ¶¶ 6, 8.)

      5.     The parties agree that J&J was formed in or around June 2005. (Am.

Compl. ¶ 6; Verified Am. Answer 7.) The parties disagree as to whether C.E.-Bett

was formed in 2006 or in 2011. (Am. Compl. ¶ 8; Verified Am. Answer 7.) The date

of C.E.-Bett’s formation is not relevant to the Motion. The relevant dates are the

dates that the brothers entered into purchase and sale agreements that control the

disposition of interests in the two businesses following either brother’s death. The

purchase and sale agreements attached as Exhibits B and C to the Amended

Complaint relate to J&J, and the agreements attached as Exhibits D and E relate to

C.E.-Bett. Plaintiff contends that Exhibits B and D control. Defendant contends

that Exhibits C and E control.
      6.     Plaintiff alleges that, on or about March 22, 2010, Jeff and John

executed Exhibit B regarding J&J. (Am. Compl. ¶ 11; see Am. Compl. Ex. B.) John

admits that he and Jeff executed Exhibit B sometime prior to March 22, 2010.

(Verified Am. Answer ¶ 12.) However, he contends that Exhibit B was only a draft

agreement, and that the final agreement between the brothers is attached as

Exhibit C, dated March 22, 2010. (Verified Am. Answer 8; see Am. Compl. Ex. C.)

      7.     Exhibit B provides, among other things, that upon the death of either

brother, the deceased brother’s estate has the option, but is not obligated, to sell to

the surviving brother the deceased brother’s ownership interest in J&J at fair

market value, determined either by agreement or by appraisal. (Am. Compl. Ex. B

¶¶ 5, 6.) It further provides that, until a sale might be effectuated, the estate of the

deceased brother would become a member of J&J and would have an equal share of

net profits in J&J, while the surviving brother would continue to operate the LLC.

(Am. Compl. Ex. B ¶¶ 1, 5.)       The copy of Exhibit B attached to the Amended

Complaint was signed by both John and Jeff but is not dated.

      8.     Exhibit C provides, among other things, that upon the death of John or

Jeff, the estate of the deceased brother must offer to sell the deceased brother’s

interest in J&J to the surviving brother for $750,000. (Am. Compl. Ex. C ¶ 5.) It

further provides that the $750,000 purchase price would be modified by agreement

or appraisal upon the five-year anniversary of the agreement’s execution if both

brothers were still living. (Am. Compl. Ex. C ¶ 8.)
         9.    John avers, and Plaintiff denies, that John and Jeff reached an oral

agreement prior to Jeff’s death that the purchase price for J&J would remain fixed

at $750,000 and that no new agreement would be prepared. (Am. Countercl. ¶¶ 35–

39.) Todd admits that he did not discuss the terms of the agreements for either J&J

or C.E.-Bett with Jeff.     (Pl.’s Reply to Def.’s Am. Countercl. ¶ 39.)       However,

Plaintiff also alleges that, in January 2015, prior to Jeff’s death, one of Jeff’s

employees advised John that J&J would need to be appraised, consistent with the

passing of the five-year anniversary of the agreement’s execution. (Am. Compl.

¶ 23.)

         10.   Plaintiff claims, pursuant to Exhibit B, that the Jeff Schwarz Estate is

now a member of J&J, that the estate has the option, but is not obligated, to sell

Jeff’s interest to Defendant, and that, in the event of a sale, the purchase price is for

fair market value determined either by agreement or by appraisal.            Defendant

contends that, regardless of whether Exhibit B or Exhibit C controls, Plaintiff is

obligated to sell Jeff’s interest to John for $750,000.

         11.   The parties have a similar dispute regarding John’s desire to purchase

Jeff’s interest in C.E.-Bett.   Plaintiff relies on Exhibit D.     Defendant relies on

Exhibit E. Exhibit D, which Plaintiff contends was executed on June 30, 2011,

provides the estate a right, but does not obligate it, to sell Jeff’s interest in C.E.-

Bett. Like the Exhibit C purchase and sale agreement for J&J, Exhibit E sets the

price for C.E.-Bett at $750,000, subject to modification upon the fifth anniversary of

the agreement’s execution.       (Am. Compl. ¶¶ 26–31.)       Plaintiff contends that,
pursuant to Exhibit D, because Jeff died before the fifth anniversary of that

agreement, the estate is now a member of C.E.-Bett and has the option, but is not

obligated, to sell Jeff’s interest for $750,000. Defendant contends that Exhibit E,

which has provisions comparable to Exhibit C, controls Plaintiff’s interest in C.E.-

Bett, and thus, Plaintiff did not become a member of C.E.-Bett and is now obligated

to sell Defendant its interest in C.E.-Bett for $750,000. (See Am. Compl. Ex. E ¶ 5.)

        12.   Plaintiff did not learn of Exhibits B and D until after Jeff’s death.

Plaintiff initially demanded an appraisal of J&J under the provisions of Exhibit C’s

requirement for a new valuation after the agreement’s five-year anniversary.

Defendant responded to Plaintiff’s demand by contending that, prior to Jeff’s death,

Jeff and John had agreed that no new valuation would be prepared and that the

purchase price would remain fixed at $750,000.         Plaintiff thereafter learned of

Exhibits B and D and now contends that those are the controlling agreements.

        13.   Defendant has demanded that Plaintiff convey Jeff’s interest in the

two companies for $750,000 each.

        14.   Plaintiff seeks a declaratory judgment in its favor.        Through his

Amended Counterclaim, Defendant seeks a declaratory judgment in his favor, as

well as a decree of specific performance to compel Plaintiff to sell Jeff’s interests to

John.

        15.   In the Motion, Defendant maintains that judgment should be entered

in his favor based on the pleadings because the pleadings reveal that Plaintiff

neither has nor will be able to develop evidence that Exhibits B and D are
enforceable and Exhibits C and E are not enforceable, and further, because the

pleadings prove that John and Jeff orally modified Exhibit C to eliminate any need

for a new valuation, such that Plaintiff’s obligation to sell Jeff’s interest is fixed at

$750,000.

                          III.   PROCEDURAL HISTORY

        16.   Plaintiff filed its Complaint and notice of designation on February 19,

2016. The Chief Justice entered an order designating the case as a mandatory

complex business case on February 22, 2016, and the matter was assigned to the

undersigned on February 24, 2016.

        17.   Plaintiff filed an Amended Complaint on March 8, 2016, seeking a

declaratory judgment on multiple grounds relating to its rights in J&J and C.E.-

Bett.

        18.   Defendant filed the Motion on June 24, 2016. The Court heard oral

argument on the Motion on August 30, 2016, and the Motion is now ripe for ruling.

                           IV.    STANDARD OF REVIEW

        19.   On a motion for judgment on the pleadings, the trial court is required

to view the facts and permissible inferences in the light most favorable to the

nonmoving party. Toomer v. Branch Banking & Tr. Co.,
171 N.C. App. 58, 66
,
614 S.E.2d 328, 334
 (2005). For purposes of a motion for judgment on the pleadings, all

factual allegations in the nonmovant’s pleadings are deemed admitted except those

that are legally impossible or are not admissible in evidence. Governors Club, Inc.

v. Governors Club Ltd. P’ship,
152 N.C. App. 240, 247
,
567 S.E.2d 781, 786
 (2002),
aff’d,
357 N.C. 46
,
577 S.E.2d 620
 (2003). “[J]udgment on the pleadings is not

appropriate merely because a claimant’s case is weak and he is unlikely to prevail

on the merits.” Huss v. Huss,
31 N.C. App. 463, 469
,
230 S.E.2d 159, 163
 (1976).

The purpose of the motion is to test the legal sufficiency of the complaint and not

the facts that support it. See Coker v. DaimlerChrysler Corp.,
172 N.C. App. 386, 389
,
617 S.E.2d 306, 309
 (2005), aff’d per curiam,
360 N.C. 398
,
627 S.E.2d 461

(2006).

                                  V.    ANALYSIS

      20.    Defendant’s Motion rests on two essential premises. If either of those

premises fails, the Motion must fail, and the claims must be resolved either by trial

or by subsequent motion practice on a developed record. The first premise is that

Plaintiff cannot and will not be able to establish a foundation to introduce Exhibits

B or D as evidence to be considered by the trier of fact, and thus, Plaintiff is bound

by Exhibits C and E. The second premise is that Plaintiff has admitted that Todd

never discussed the terms of the agreements with Jeff, and thus, Plaintiff has no

competent evidence to rebut John’s verified statement that he and Jeff reached an

oral agreement that modified Exhibit C, fixing the purchase price at $750,000 and

eliminating the need for any appraisal or agreement on a modified purchase price.

   A. Plaintiff Is Entitled to Discovery on the Parties’ Contested Positions
      Regarding Exhibits B and D.

      21.    Unquestionably, the Amended Complaint alleges that Exhibits B and

D are the agreements in force. Defendant contends that the Court can disregard

those allegations because the pleadings reveal that Plaintiff does not, and will not,
have factual support for those allegations. While the copy of Exhibit B attached to

the Amended Complaint is not signed, Defendant’s Amended Counterclaim

acknowledges that Exhibit B was prepared by the companies’ counsel. Plaintiff

further alleges that there were multiple copies of Exhibit B, at least one copy of

which was found among Jeff’s business records after his death, and that Defendant

in fact distributed copies of Exhibit B to Jeff’s heirs. (Am. Compl. ¶¶ 14–15.) While

the Court confines its ruling to matters disclosed by the pleadings, it notes that

Plaintiff stated at oral argument that discovery will reveal other evidence that the

brothers signed Exhibit B on or around March 22, 2010—the same date that

Defendant contends the brothers executed Exhibit C.

      22.    First, as to Plaintiff’s interest in J&J, the Court concludes that

Plaintiff has adequately pleaded that the brothers executed Exhibit B on or around

March 22, 2010, that Plaintiff is entitled to discovery in an effort to support those

allegations, and that the dispute between the parties should not be resolved solely

on the pleadings.

      23.    Defendant further contends that other uncontested evidence proves

that Exhibit C was the controlling agreement. For example, Defendant points to

Plaintiff having alleged that Jeff’s employee wrote an e-mail referring to an

appraisal term found in Exhibit C but not in Exhibit B. The Court concludes that

when making this allegation, Plaintiff did not admit, and is not bound to, a position

that Exhibit C is the controlling agreement.
      24.    As to Plaintiff’s interest in C.E.-Bett, the Court concludes that there

are factual disputes that should not be resolved on the pleadings alone. Defendant

contends that Plaintiff cannot rely on Exhibit D, noting Plaintiff’s own allegations

that the companies’ counsel never prepared Exhibit D and that John never signed

Exhibit D. (Am. Countercl. ¶ 22.) However, the copy of Exhibit D attached to the

Amended Complaint was fully executed by the parties and is dated June 30, 2011.

(See Am. Compl. Ex. D.)       There is a contested issue arising from sufficient

allegations adequate to survive a motion brought under Rule 12(c).

   B. Plaintiff’s Admission that Todd and Jeff Never Discussed the Terms of the
      Agreements Does Not Necessarily Foreclose Plaintiff’s Ability to Contest
      John’s Verified Statement that He and Jeff Reached an Oral Agreement that
      the $750,000 Purchase Price Would Not be Modified.

      25.    John contends that Plaintiff cannot rebut, and therefore must be

bound by, John’s verified statement that, prior to Jeff’s death, John and Jeff

reached an oral agreement to leave the purchase price for J&J fixed at $750,000

and to not execute any written modification because the purchase price would not

be changed. John relies on Plaintiff’s admission that Todd never discussed with his

father any terms of agreements between John and Jeff.

      26.    Defendant’s position does not fit comfortably within the constraints of

prevailing Rule 12(c) standards. First, the Amended Complaint contains specific

factual allegations that Exhibit B controls and that any modification to Exhibit C is

therefore not relevant in the first instance. Second, Plaintiff should be deemed to

have denied Defendant’s allegation that the brothers reached an oral modification.

A response stating that Plaintiff does not have information adequate to admit or
deny Defendant’s allegations “has the effect of a denial.” N.C. Gen. Stat. § 1A-1,

Rule 8(b) (2015). Defendant suggests that Rule 8 cannot protect Plaintiff when the

pleadings, taken as a whole, demonstrate that Plaintiff neither has, nor will be able

to, develop evidence to challenge Defendant’s verified statement. (Reply Mem. Law

Supp. Def.’s Mot. J. Pleadings 4.)    The questionable basis of that suggestion is

evident by the fact that, in support of his position, Defendant cites federal Rule 12

standards that North Carolina courts have not adopted. (Reply Mem. Law Supp.

Def.’s Mot. J. Pleadings 4 (citing Ashcroft v. Iqbal,
556 U.S. 662
, 677–78 (2009)).)

But see Holleman v. Aiken,
193 N.C. App. 484, 491
,
688 S.E.2d 579
, 584–85 (2008)

(rejecting the federal “plausibility” standard set forth in Bell Atl. Corp. v. Twombly,
550 U.S. 544
 (2007)).

      27.     More importantly, assuming that the trier of fact first concludes that

Exhibit C is the controlling agreement, Defendant would still have the burden of

proving that Exhibit C was modified. That burden has not been sustained simply

because of the fact that Todd did not have conversations with Jeff about agreements

between Jeff and John. There may be other evidence from which a jury may be

asked to test whether Exhibit C should be applied inconsistently with its written

terms because of an oral agreement.

      28.    In arguing their positions, the parties have each opined that the Dead

Man’s Statute embodied in North Carolina Rule of Evidence 601 supports their

respective positions. The Court is not required to resolve that disagreement at this

stage in the proceedings.
      29.    In sum, the Court concludes that there are well-stated pleadings that

raise contested issues regarding first, whether Exhibit C is the controlling

agreement, and if so, whether Exhibit C was modified by an oral agreement. Those

contested issues should not be resolved solely on the pleadings.

                               VI.    CONCLUSION

      30.    For the reasons stated above, Defendant’s Motion for Judgment on the

Pleadings is DENIED.


      IT IS SO ORDERED, this the 30th day of December, 2016.



                                        /s/ James L. Gale
                                       James L. Gale
                                       Chief Business Court Judge