Can Forcing a Company into Bankruptcy Be an Unfair or Deceptive Trade Practice? Part 2

In a recent post, we examined the bankruptcy case of In re American Ambulette & Ambulette Service, Inc.—a case in which a trustee raised a novel theory of liability under N.C. Gen. Stat. § 75-1.1. The bankruptcy trustee alleged that certain business strategies that forced the debtors into bankruptcy constituted unfair and deceptive trade practices.

The bankruptcy court dismissed the trustee’s original 75-1.1 claim for failing to plead how the defendants’ alleged conduct affected either competitors or consumers. But the court allowed the trustee to amend the complaint.

The trustee’s amended 75-1.1 claim survived dismissal. Today, we examine the court’s opinion about the amended complaint.

The Trustee’s Original Allegations

The debtors in American Ambulette were in the medical-transport business. Each of them filed for liquidation under chapter 7 of the bankruptcy code. The bankruptcy court consolidated the cases and appointed a single bankruptcy trustee to administer the debtors’ assets.

The trustee then filed an adversary proceeding against the debtors’ parent and sister corporations, as well as their officers and directors.

The trustee alleged that the debtors’ corporate parents developed a business plan to expand their operations. As part of the expansion plans, the parent entities established two new subsidiaries. The new subsidiaries allegedly competed with the debtors. According to the trustee, the corporate parents and their officers and directors caused the debtors to incur substantial expenses to further the expansion plans.

In the original complaint, the trustee accused the defendants of (1) diverting the fruits of their business-development activities to the competing subsidiaries, (2) transferring assets from the debtors to those subsidiaries, and (3) forcing the debtors into liquidation. Those activities, the trustee argued, eliminated the debtors as competition for the new subsidiaries.

The complaint included a claim against the parent companies and their officers and directors for violations of section 75-1.1.

The First Motion to Dismiss

The defendants moved to dismiss the original complaint. The motion largely relied on a recent federal district court decision since affirmed on appeal. The defendants argued that, under the recent decision, a business can pursue a 75-1.1 claim only when the business has acted as a consumer or is engaged in commercial dealings with the defendant. The defendants also stressed that the defendants on the 75-1.1 claim did not include the competing subsidiaries themselves.

The bankruptcy court granted the motion to dismiss. The court identified three categories of cases in which a business plaintiff may assert a 75-1.1 claim:

  • The plaintiff has acted as a consumer or has otherwise engaged in commercial dealings with the defendant.
  • The plaintiff and the defendant were competitors.
  • The conduct that gives rise to the claim has had a negative effect on the consuming public.

In the original complaint, the trustee did not allege that the debtors were engaged in commercial dealings with—or were competitors of—the defendants. The complaint also lacked any allegations on how the defendants’ conduct affected consumers. 

After the court dismissed the original 75-1.1 claim, the trustee filed an amended complaint. The amended complaint added the competing subsidiaries as parties to the 75-1.1 claim. It also asserted that the defendants’ actions benefited the competing subsidiaries.

The amended complaint also contained detailed allegations about how the defendants affected the marketplace and the consuming public.  The trustee’s amended complaint specifically alleged that the defendants’ conduct did not merely cause the replacement of one competitor with another, but actually removed a competitor from the relevant market altogether.  The trustee further alleged that the removal forced the county in which the debtors previously operated to declare a state of emergency. The county was also allegedly forced to obtain an injunction to compel the debtors to continue to provide the 911 emergency services that the debtors contracted to provide to the county.

The Second Motion to Dismiss

The defendants moved to dismiss the amended complaint, but the court refused to dismiss the amended 75-1.1 claim. The court used the same analytical framework, and categories for when a business may assert a 75-1.1 claim, as in the prior opinion.  This time around, however, the trustee convinced the court that the debtor’s alleged removal from the relevant market, and the alleged interruption of emergency medical service to citizens that was a result, made a sufficient impact on the consuming public to violate section 75-1.1.

The factual scenario in which the possible 75-1.1 violation in American Ambulette arose is relatively unique.  But the caselaw concerning when a business may assert a 75-1.1 claim is developing quickly.  Going forward, we may see other “theft of corporate opportunity” claims—both in and out of bankruptcy.

Author: George Sanderson

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