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IN THE SUPREME COURT OF NORTH CAROLINA No. 269PA11 VARIETY WHOLESALERS, INC. v. SALEM LOGISTICS TRAFFIC SERVICES, LLC; SALEM LOGISTICS, INC.; SALEM LOGISTICS TRANSPORT SERVICES, LLC; WINSTON TRANSPORTATION MANAGEMENT, LLC; OVERBROOK LEASING, LLC; SALEM LOGISTICS TRANSPORT FINANCE, LLC; DAVID F. ESHELMAN; and ARK ROYAL CAPITAL, LLC FILED 13 APRIL 2012

On discretionary review pursuant to N.C.G.S. ' 7A-31 of a unanimous decision of the Court of Appeals, ___ N.C. App. ___, 712 S.E.2d 361 (2011), affirming in part and reversing in part an order on summary judgment entered 19 April 2010, as amended on 12 May 2010, by Judge Howard E. Manning, Jr. in Superior Court, Vance County. Heard in the Supreme Court 10 January 2012. Wyrick Robbins Yates & Ponton LLP, by K. Edward Greene, Tobias S. Hampson, and Paul J. Puryear, Jr., for plaintiff-appellant. Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by Jim W. Phillips, Jr. and Alexander Elkan, for defendant-appellee Ark Royal Capital, LLC. Bell, Davis & Pitt, P.A., by William K. Davis and Alan M. Ruley, for North Carolina Bankers Association, amicus curiae. HUDSON, Justice. Here we address whether summary judgment was appropriately entered on claims of conversion and constructive trust when a third party came into possession of funds, ownership of which was disputed between the primary contracting parties.

VARIETY WHOLESALERS V. SALEM
Opinion of the Court

We hold that the record forecasts genuine issues of material fact with respect to both claims, and we therefore reverse and remand for further proceedings. Background Variety Wholesalers ("Variety") is a large retail corporation with stores in fourteen states. To support its stores, Variety maintains significant shipping and trucking operations. At times pertinent here Salem Logistics ("Salem"), now

bankrupt, provided logistical services to businesses, including freight bill auditing services. Ark Royal Capital, LLC ("Ark") is an investment company that provides, among other services, asset-based loan arrangements to businesses. Asset-based loans are described here as a means for undercapitalized companies that cannot obtain traditional loans to receive a loan in exchange for a security interest in their assets, often accounts receivable. In March 2006 Salem entered into an asset-based loan agreement with Ark. Under that agreement (hereafter "Finance Agreement") Ark provided a revolving line of credit to Salem through which Salem could pay its operating expenses. In exchange, Salem gave Ark a security interest in all its assets. The Finance

Agreement capped the line of credit at the lesser of $2.2 million or 80% of Salems "Eligible Accounts," which it defined as "valid, legally enforceable obligation[s]" that were "not subject to any claim, dispute or other defense." Under the Finance Agreement Ark required Salem to forward any funds it received and to instruct its customers to send payments directly to a lockbox account maintained by Ark at -2-

VARIETY WHOLESALERS V. SALEM
Opinion of the Court

Wachovia Bank (now Wells Fargo1). Ark used the money that came into the lockbox account to pay itself the interest and principal on Salems revolving line of credit, thereby making further credit available to Salem. Salem had multiple clients that paid into the lockbox account, and the funds from those multiple clients were not segregated. Arks Chief Operating Officer, Allison Hanslik, joined Salems Board of Directors under the loan arrangement. Hanslik and research analyst David

Pearson reviewed Salems accounts on a weekly basis before issuing borrowing certificates. In July 2007 Variety entered into a contract (hereafter "Freight Agreement") with Salem under which Salem would provide freight bill payment and auditing services.2 The Freight Agreement has two distinct parts. Schedule A, titled

"Services Provided," describes the services that Salem would provide to Variety under that Agreement. Salem agreed to receive all of Varietys freight bills from the carriers, audit the bills, prepare a master invoice for the bills, and send the invoice to Variety weekly. Variety would then send Salem the full amount shown on the master invoice. Salem would then pay the carriers. Schedule B of the Freight Agreement, titled "Contractor Rates and Charges," describes the amounts Variety would pay to Salem for its services: $0.68 for each paper freight bill, $0.38 for each
In December 2008 Wells Fargo acquired Wachovia; by October 2011 the names of all ongoing Wachovia entities had been changed to Wells Fargo. 2 Variety and Salem also discussed and negotiated a proposal for Salem to provide some shipping services in addition to the bill auditing services; however, a draft agreement on this subject was never signed.
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VARIETY WHOLESALERS V. SALEM
Opinion of the Court

electronic freight bill, and $0.18 per small package. By letter Salem requested that Variety send the amounts on the master invoices directly to the Wachovia account, but did not inform Variety that the account was actually controlled by Ark. Throughout the time Variety operated under the Freight Agreement, the company fielded complaints from its carriers that their payments were arriving late or not at all. Variety worked with Salem in an effort to alleviate the problem. Salem promised to do so but problems continued. Variety terminated the Freight Agreement in December 2008 and filed suit in January 2009 for recovery of approximately $888,000 it had forwarded to Salem which had not been paid to carriers. In the process Variety sought and received an order of attachment on the Wachovia account it believed belonged to Salem. In so doing Variety discovered that the account actually belonged to Ark. Variety demanded the missing funds be returned by Ark but Ark refused. Variety then amended its complaint to add Ark as a defendant. The trial court conducted a period of discovery and depositions and received filings in support of and opposition to the parties motions for summary judgment. After a hearing, the trial court entered summary judgment for Variety on its claim of conversion against Ark, and for Ark on Varietys claim of constructive trust. The trial court ordered Ark to pay Variety $887,889.37, plus interest. The Court of

Appeals reversed, and entered summary judgment for Ark on both issues. We now reverse and remand on both issues. -4-

VARIETY WHOLESALERS V. SALEM
Opinion of the Court

Summary Judgment The standard of review for an order of summary judgment is firmly established in this state. We review a trial courts order granting or denying

summary judgment de novo. Builders Mut. Ins. Co. v. N. Main Constr., Ltd., 361 N.C. 85, 88, 637 S.E.2d 528, 530 (2006) (citation omitted). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law." N.C.G.S.

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