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Mack Sperling

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I’m a business litigator in North Carolina, with Brooks Pierce McLendon Humphrey & Leonard, LLP.

I grew up in New York, went to college there (at Union College in Schenectady), and then came to North Carolina to law school at UNC-Chapel Hill. I clerked for United States District Judge Frank Bullock of the U.S. District Court for the Middle District of North Carolina after graduating, and then joined Brooks Pierce.

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[Ed. note:  The following article was written by Mack Sperling before his unplanned leave.  Although releasing it today is less timely than is Mack’s custom, the issues involved in the case are still of interest to businesses and business lawyers.  Any errors or shortcomings in the article are attributable to your substitute bloggers.]

On February 16, in Lynn v. Lynn, the Court of Appeals interpreted provisions of a Shareholders Agreement requiring the corporation to repurchase a shareholder’s "restricted shares" upon his death, with the purchase to be funded by the proceeds of a life insurance policy on the shareholder.

The trial court had found the Agreement to be ambiguous, and had considered a variety of extrinsic evidence in determining the ownership of the shares in question.  The Court of Appeals found no ambiguity, ruled that it had been error to consider the extrinsic evidence, but it nevertheless reached the same result as to ownership.

Background

A father (James) and his two sons (Greg and Kenneth) formed a corporation, James Lynn & Sons, Inc. Eventually, the father owned 51% and the sons each owned 24.5% of the company’s stock.

In 1993, the shareholders and their wives entered into a shareholders’ agreement requiring that upon death, each shareholder would sell his "restricted" shares back to the corporation for an amount equivalent to the face amount of a life insurance policy on his life, with the face amount to be adjusted annually. The corporation was to own the policies.

The sons kept life insurance in place, paid for by the company, which increased over time from $75,000 to $375,000. The corporation paid the premiums, though the brothers had the policies issued in their names as opposed to them being owned by the corporation.  They named their wives as beneficiaries of the policies. The father didn’t maintain insurance, due to expense, but upon his death in 1997 his executor sold his shares to the sons in a transaction referencing the Shareholders Agreement.

Later, the sons adjusted their ownership interests with Kenneth becoming the 55% majority owner and Greg holding a 45% interest.

Then it got interesting. Greg and his wife got divorced, and were involved in heated litigation over the equitable distribution of their property. Greg’s wife sued Kenneth, as majority shareholder, to establish that the shares of the company were subject to equitable distribution.

Kenneth then died unexpectedly.  His shares went to his estate.  The insurance proceeds went to his wife.  Greg’s ex-wife said that 100% of the shares were now subject to her equitable distribution claim.  Greg pretty much agreed with his ex-wife, and said that upon the payment of the life insurance proceeds to Kenneth’s wife, he held 100% of the shares.

Kenneth’s widow had a different point of view.  She said that the Shareholders Agreement only applied to "restricted shares," and that the shares held by her late husband did not fit that definition. She also said that the corporation hadn’t complied with the life insurance provision given that it did not own the policies. She said she was entitled to both the insurance proceeds and the shares.

Continue Reading NC Court of Appeals Interprets the “Purchase on Death” Provisions of a Shareholders Agreement

North Carolina law says that "one judge may not modify, overrule, or change the judgment of another Superior Court judge previously made in the same action."  In a Business Court decision last week, Phillips and Jordan, Inc. v. Bostic, the Court granted a motion for Rule 11 sanctions on a fraud claim that another Superior Court Judge had refused to dismiss on a 12(b)(6) motion. It did so over the objection of the Plaintiff that the grant of the sanctions motion would be an overruling of the first Judge’s Order on the motion to dismiss.

The procedural facts are quirky. A group of defendants (the "Bostic Defendants") had made and lost a motion to dismiss a fraud claim before the case was designated to the Business Court. After the designation, another defendant moved to dismiss the same fraud claim made in an amended complaint. That dismissal motion was granted by the Business Court on Rule 9(b) grounds.

Judge Diaz referenced in his Order facts showing the Plaintiff had not relied on the statements it claimed were misrepresentations. He said, however, that he wouldn’t consider these facts as to the fraud claim against the Bostic Defendants because that would be "a backdoor attempt . . . to re-litigate the legal sufficiency of the fraud . . . claims in the face of a prior court order denying their Rule 12(b)(6) motion to dismiss."

He nevertheless admonished Plaintiff and its counsel to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before . . . pursuing the fraud claim against the remaining Defendants."  Plaintiff didn’t take that advice, and in August 2009 the Bostic Defendants filed their motion for sanctions. Judge Diaz "again suggested to Plaintiff’s counsel that they consider the merits of the claim alleging fraud" after the motion was fully briefed. This time, the Plaintiff took the Court’s advice and dismissed its fraud claim.

Judge Diaz went ahead and granted the motion for sanctions. He applied a standard of objective reasonableness, and said that "a legal position violates Rule 11 if it "has absolutely no chance of success under the existing precedent." He found that total lack of potential success to be present because the basis of the fraud claim was that the Plaintiff had been deprived of information necessary to make a lien claim against a construction project, but Plaintiff had in fact been able to make this very claim. The Court ruled that the claimed misrepresentation "did not deceive Plaintiff."

The Order doesn’t address why this wasn’t an end run around the principle that one Superior Court Judge can’t overrule another. The Bostic Defendants addressed this in their opening Brief.  Their position was:Continue Reading One Superior Court Judge Can’t Overrule Another, Right?

The Court had warned Plaintiff and his counsel in an Order granting a Motion to Dismiss to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before continuing to pursue a common law fraud claim" against the "Bostic Defendants".

The Court’s Order had dismissed the fraud claim against one…

If you’ve tried cases, you’ve probably lived through this nightmare. It’s a few weeks before trial. You call your out of state client to make arrangements for your witnesses to be in the courtroom at the appointed time. But your contact tells you that the company has just fired your key witness.

What, you say?  What were you thinking? How could you do that? I can’t try this case without Pete. After the initial shock has faded, you start to hope that Pete will show up voluntarily. You ask your client about that. Well, they say, it wasn’t a pretty parting. And sure enough, Pete laughs and hangs up on you when you ask him if he will come to North Carolina to testify.

Now you are in crisis mode, scrambling for a way to get this key testimony. There’s a video deposition of Pete, but all the questioning was done by opposing counsel. You probably prepped Pete before the deposition with that common advice that he shouldn’t volunteer information, so there are a lot of one word answers, terse responses, and not much presentation of the warm side of Pete. You didn’t ask a single question, counting on Pete striding confidently to the witness stand to carry your client’s banner during your direct examination. The video just isn’t going to play well.

What now? You scour the Business Court Rules. Rule 18.10 provides some hope. It says:

18.10 – Trial Preparation After the Close of Discovery. For good cause appearing
therefor, the physical or mental examination of a party may be ordered at any time prior to or during trial. Ordinarily, the deposition of a material witness not subject to subpoena should be taken during discovery. However, the deposition of a material witness who agrees to appear for trial, but later becomes unavailable or refuses to attend, may be ordered at any time prior to or during trial.

Surely the unexpected firing of Pete is good cause, and you you make a motion to take a trial deposition of Pete per Rule 18.10. Will it be granted? Every case is different, but maybe not. A motion on similar facts was denied last week in the case of Hilb Rogal & Hobbs Company v. Sellars, in which Judge Diaz prohibited the taking of a deposition two weeks before trial.

The facts in Hilb Rogal need a little development. . . .Continue Reading Problems At Trial: The Suddenly Unavailable Key Witness