“Ray Reason, along with his aunt and uncle, decided to go into business with Gerald Barfield, a family friend who was a real estate developer.”

When that’s a line in a holiday card letter of how the year went, it disappears into the ether. But when it’s the first line of a court opinion it’s a fair bet that next year’s mailing list will be shorter.

In Reason v. Barfield, 2023 NCBC 25, the Business Court began the process of untangling allegations that Gerald Barfield, “a long-time friend of [Ray] Reason’s father,” might have been the “knowledgeable business owner and real estate developer” plaintiffs thought, but not the business partner Reason “believed he could trust.” Id. ¶ 6.

The “business” at hand was the rescue of several properties of Reason that were to be auctioned at foreclosure. He and his aunt and uncle (also plaintiffs) planned to bid on the properties and, for any acquired, to share ownership. Plaintiffs changed course after meeting Barfield, and allege they all agreed Barfield would finance the venture and they would together create a North Carolina LLC – interests split three ways – to hold the properties. Id. ¶¶ 8-11.

Along the way to creating their LLC, the parties didn’t. Instead, plaintiffs allege that at Barfield’s suggestion they agreed to transfer any successful auction bids to an existing LLC he controlled – defendant Market Crossing, LLC. Moreover, plaintiffs say they agreed to include a third-party financer introduced by Barfield, but assented to these deal alterations on Barfield’s assurances that their agreement to share its fortunes would remain intact. As the Court stated: “Barfield urged Reason to trust him.” Id. ¶¶ 17-20.

The trouble came when the parties were two-thirds through their agreed-upon course. Plaintiffs allege that two of three properties moved into Market Crossing were handled and disposed as agreed. But they allege the third, on which a motel operated, was sold out from underneath them without their involvement or any sharing of the motel’s operational profits or proceeds from its sale. Id. ¶¶ 24-28.

The Court denied the Rule 12(c) motion of Barfield and his LLC with a few notable guideposts for fans of early motions practice in contract disputes.

Declaratory Judgment: In weighing plaintiffs’ request for a declaration that the parties’ oral agreement was valid and enforceable, Judge Earp cautioned that the benchmark for surviving the motion was having pled a “genuine controversy,” not its relative strength. “A motion to dismiss for failure to state a claim is seldom appropriate in actions for declaratory judgments,” the Court noted, “and will not be allowed simply because the plaintiff may not be able to prevail.” Id. 34 (quoting Morris v. Plyler Paper Stock Co., 89 N.C. App. 555, 557 (1988)).

Existence of a Partnership: The Court weighed defendants’ challenge to the existence of a partnership or joint venture, focusing on the key requirements that (i) the parties “agree[d] to share the financial repercussions of their adventure,” and that (ii) there was a “co-ownership of the business.” ¶¶ 37-38. Defendants argued that because the complaint didn’t specifically allege that the parties had agreed to split prospective losses as well as gains, no partnership or joint venture was formed.

Judge Earp ruled that the complaint adequately pled the existence of a partnership in alleging that the parties (¶ 41):

“entered into an oral agreement to create and operate a business that would purchase, hold, operate, manage and sell real property” . . . [and] “agreed they would split any profits and share any proceeds from the LLC’s business based on the percentage of their membership interests.”

The Court cautioned that “at a later stage” plaintiffs would need to demonstrate “that the parties’ agreement was not limited to sharing only the upside of their venture.”  Id.

Takeaways

•  The Business Court resolves many a dispute in the “friends and family” realm. John D. Rockefeller’s famous adage that “a friendship founded on business is a good deal better than a business founded on friendship” might be a valuable guidepost to future partners or joint venturers.

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