The Meaning Of "Successors," "Members," And "Designees" In A Release

The words "successors," "members," and "designees," as used in a Release were at issue in Judge Bledsoe's Opinion last week in TaiDoc Technology Corp. v. OK Biotech Co., 2015 NCBC 71.

Plaintiff TaiDoc had settled a related lawsuit previously pending in the Western District of North Carolina in which Defendant OK was not a party.  One of the settling parties, an LLC known as Prodigy, obtained a release from TaiDoc that released Prodigy's "predecessors, successors, directors, officers, managers, members . . . and their respective heirs, executors and designees . . . from any and all claims whatsoever brought in, or that could have been brought in the Action. . . whether known or unknown. . . ."  Op. ¶4.

OK moved for summary judgment on TaiDoc's claims against it based on the Release.  It said that it was a "successor" to Prodigy, a "member" of Prodigy, and also its "designee."

OK argued that it was a successor to Prodigy, and therefore entitled to avail itself of the protection of the Release, because it had purchased a 45% membership interest in Prodigy (a year) after the Release was obtained by Prodigy. 

Successor?

Judge Bledsoe rejected all three of OK's arguments.  As to the "successor" argument, he held:

the term 'successors,' as used in the context of the Release Agreement . . . contemplates either a successor legal entity, which stands in the shoes of a party typically through merger, acquisition, or other legal means of succession, or a successor to a person in the testamentary sense, which typically involves a successor standing in the shoes of a predecessor upon a predecessor's incapacity or death.

Op. ¶35.

Particularly astute readers might wonder why it would even make a difference if OK was deemed to be Prodigy's "successor," since TaiDoc's settled claims against Prodigy were undoubtedly different from those which it was bringing against OK.  Judge Bledsoe dealt with that point too, holding that:

even if OK Biotech became a legal 'successor' to the release that [the members of Prodigy] obtained under the Release Agreement, that release was only a release of the claims TaiDoc had against [the members of Prodigy] -- not a release of any claims TaiDoc had against OK Biotech at the time of the Release Agreement, or, in particular, of the claims TaiDoc has asserted against OK Biotech in this action.

Op. ¶36.

Member

OK then argued that since it had acquired a membership interest in Prodigy -- a year after the Release was executed --  it was included in the "members" of Prodigy released a year before by TaiDoc.

Judge Bledsoe dismissed that argument as "fully absurd," stating that this contention:

leads to the implausible and fully absurd construction that the parties intended that any non-party to the Release Agreement could purchase a release of its liability to TaiDoc -- on any claim whatsoever -- by purchasing a membership interest. . . in Prodigy, without TaiDoc having bargained for or contemplated that party's release from liability.

Order ¶41.

The word "members"  didn't mean "future members,"  it meant only those persons or entities which were members of Prodigy at the time the Release was signed.  Op. ¶¶37-38.

Designee

OK hadn't run out of arguments why it was entitled to the benefit of the Release.  OK said that it was a "designee" of Prodigy because Prodigy had assigned to it Prodigy's rights under an application to the FDA for a medical device.

That argument had some surface appeal, as the definition of a "designee" in Black's Law Dictionary is a "person who has been designated to perform some duty or carry out some specific role."  Op. ¶43 (quoting Black's Law Dictionary 478 (8th ed. 2004)).

Although Judge Bledsoe didn't say that this argument was "fully absurd," or even that it was "pure applesauce," he did say it was "without merit" and scoffed at it a bit, stating that:

[i]n short, OK Biotech argues that Prodigy had the unfettered right to designate any person or entity in the world as its designee for purposes or receiving the benefits of the [Release] and it chose OK Biotech for these purposes.

Op. ¶42.

In the context of the Release, in which the word "designee" appeared in conjunction with "heirs, executors and designees,"  the Court held that "it is clear that, in context, these three words are intended as similar and related legal terms used to describe types of representatives or successors to a natural person after death."  Op. ¶44.

Given that the posture of this ruling was a denial of a Motion for Summary Judgment as opposed to the granting of a Motion to Dismiss the affirmative defense of release, it's not clear whether the issue of the Release remains alive in this case.  But it seems pretty much dead, at least to me.

If You Reach A Settlement At Mediation, And Say The Settlement Will Be The Subject Of A Forthcoming Formal Agreement, Do You Have A Binding Deal?

You have most likely walked out of a mediated settlement conference at which the shorthand version of the settlement put to paper by the lawyers and the mediator stated that there would be a later, more detailed agreement.  And maybe, the next day, as work began on the "more formal agreement to be prepared later," you and your opposing counsel putting the more detailed pen to paper sank into disagreement on the words which should be used to finalize the settlement.

So, did you have a final and binding deal or not based on the document signed at the mediation?  You most likely did, if you look at Judge McGuire's Order earlier this month in McCarthy v. Hampton, 2015 NCBC 67.  The parties in that case had engaged in a mediation which resulted in a signed document titled "Essential Terms of Mediated Settlement Agreement with Formal Agreement to be Prepared Later."  That same day, the mediator notified the Business Court that the parties had reached a settlement  and that an upcoming hearing in the case would not be necessary.  Defendant's counsel followed up informing the Court via email that the "[p]arties successfully mediated and settled all claims" at the mediation and that the parties were finalizing settlement documents.  Counsel for Plaintiff, copied on the email, did nothing to contradict opposing counsel's email.

Thereafter, the parties exchanged drafts of the "formal agreement" contemplated by the "Essential Terms Agreement" executed at the mediation (which the Court referred to as the "ETA").  Those discussions quickly broke down when issues not specifically addressed in the ETA arose and could not be resolved.

Plaintiff said that the Essential Terms Agreement  was an unenforceable "agreement to agree," in his opposition to a motion to enforce the settlement.  In response, Judge McGuire distinguished an NC Supreme Court decision which found an agreement to be insufficiently final to be binding:

nothing on the face of the ETA indicates that this document was simply intended to outline the desires of the parties. Whereas the language at issue in Boyce [v. McMahan, 285 N.C. 730 (1974)] provided that the parties to that document 'desire to enter into a preliminary agreement setting out the main features as to the desires of the both parties,' id, the ETA provides that '[t]his agreement is . . . to memorialize essential terms of the mediated settlement agreement' in this action.'  Thus, that the ETA on its face purports to be an agreement as to the terms therein, without any qualification that it is merely a preliminary agreement or a recitation of the parties' desires, distinguishes this matter from the facts of Boyce

Order ¶22.

The argument that the ETA was ineffective because it was subject to the condition subsequent of a more formal settlement document also fell on unreceptive ears.  Judge McGuire said:

nothing in the ETA indicates that the agreement memorialized therein was conditioned on the execution of a final agreement.  Aside from simply indicating that one would ultimately be prepared, [the] ETA makes no other reference to a more formal agreement, much less any reference that raises an issue of fact whether the parties intended that the ETA not be a binding agreement until confirmed in a future writing.

Order ¶23.

After that, Judge McGuire paced through seven terms which the Plaintiff said were "material" but had not been addressed by the ETA.  Those ranged from how the intangible assets of the medical practice which was the subject of the lawsuit would be disposed of to what amount of Plaintiff's attorney's fees would be paid by the practice.

Some of the sticking points in the post-mediation negotiations reflected terms different than those contained in the ETA.  As Judge McGuire put it, "[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)).  Or, as he said later, "that Plaintiff now seems dissatisfied with the agreement reached does not render the ETA unenforceable."  Order ¶30 (emphasis added).

The other terms which the Plaintiff (who was the party seeking to evade enforcement of the ETA) said were material, but not addressed at the mediation were found by the Court to be embraced by the terms of the ETA, or not material at all.  The Court granted the Defendant's Motion to Enforce Mediated Settlement Agreement.

What should you do if you want to leave a mediation with the ability to avoid a settlement when you suspect that you won't be able to agree on the terms of a final settlement agreement because of an unreasonable and nitpicking opposing counsel?  There's no good answer.  You might try saying in the document prepared by the mediator that the settlement will not be binding until a written agreement to be negotiated later is signed by all parties.  Good luck with getting a decent mediator to let you go home with such an open-ended agreement.  And calling the mediation document an "Agreement as to Non-Essential Terms" would be silly, it would defeat the point of a mediation.

This is the second time in the last two months that the Business Court has refused to allow a party signing off on a settlement document at mediation to escape its terms.  The first case was Judge Gale's decision in DeCristoforo v. Givens, 2015 NCBC 53, which I wrote about in June.

 

 

 

 

When You Wish Upon A (Lode)Star: NC Business Court Cuts Fees Requested By Attorneys For Class Plaintiffs

The Business Court last week knocked down a fee request of Plaintiffs' class action counsel to $500,000, from the $660,000 requested, in an Order in Nakatsukasa v. Furiex Pharmaceuticals, Inc., 2015 NCBC 68.

The Settlement Of The Class Action

The ruling was entered in conjunction with the approval of a settlement of four class actions (two filed in North Carolina and two filed in Delaware).  The lawsuits concerned a challenge to Defendant Furiex's merger with Defendants Royal Empress, Inc. and Royal's affiliate Forest Laboratories, Inc.

As a part of the settlement, Plaintiffs' counsel reserved the right to apply to the Court for approval of fees not to exceed $695,000.  Given that the Defendants had waived their right to challenge the fee application, it fell to Judge McGuire to determine whether the fees requested were reasonable.

If the first question in your mind is "how much money did the Plaintiff obtain for the class?", the answer is none.  The claimed value to the class came in the waiver of "DADW provisions" in Confidentiality Agreements executed by the Defendants Royal Empress and Forest Laboratories as well as other potential buyers of Furiex.  There were also some additional disclosures obtained via the settlement.  (If you don't know my feelings about the value contained in disclosure only settlements, you haven't been reading this blog.)

DADW Provisions?

The NC Business Court hasn't had the opportunity to consider the viability of DADW -- don't ask, don't waive -- provisions,  but the Delaware Court of Chancery has ruled that they are not presumptively impermissible. If you are wondering what a DADW provision does, it prohibits the entity signing it from making an offer for the target corporation's shares without an express invitation from the target's Board of Directors. The "don't ask" aspect prevents the signing party from asking the target's Board to waive that restriction.

Since the Court didn't discuss the validity of the DADW provision at all, except to say that the waiver of it procured by the litigation was "a significant benefit to shareholders," (Order  ¶41), the validity of this type of deal protection device in North Carolina remains untested.  Given that the Court accepted Plaintiffs' counsel's argument that they had obtained value for the class  in the waiver of the DADW restriction (meriting fees of half a million dollars), lawyers in North Carolina should be cautious about including DADW's in their merger related documents . 

The lawyers for the class (two New York class action firms) had a pretty high opinion of the value that they had obtained for the class.  The requested that the Court allow $660,000 in fees for 700 hours of work. 

You don't need to do the math to figure the hourly rate that those figures yield. Judge McGuire calculated it at a staggering $941.72 per hour (Order ¶35), which was triple the hourly fee the Business Court had approved in a previous class action (In re Harris Teeter Merger Litig., 2014 NCBC 44) and seven times the hourly fee awarded in another class action approval (In re Progress Energy Shareholder Litig., 2011 NCBC 44).

The Business Court Refused To Apply A Multiplier To Plaintiffs' Counsel's Lodestar

The $660,000 sought was based on a request for a multiplier of 1.7 to be applied to the lodestar amount established by  Plaintiffs' counsel's regular billing rates (that was $388,465).  A "lodestar," if you are not familiar with the term, Wikipedia defines it as "a method of computing attorney's fees whereby a trial court must multiply the number of hours reasonably spent by trial counsel by a reasonable hourly rate."

Judge McGuire observed that no reported North Carolina appellate decision had ever applied a multiplier to increase a lodestar amount (Order ¶35), so he decided that the "best course is to assess the requested fees as if Plaintiffs were seeking an award of $941.72 per hour, and to consider such request based on whether special legal skills  and experience were involved that are not available in North Carolina, the rates charged by attorneys for comparable work in the local area, and in light of the result obtained for the amount of work expended."  Order ¶35.

Were North Carolina attorneys capable of handling this litigation?  The Plaintiffs' local counsel represented to the Court that "he did not believe there were a substantial number of attorneys in North Carolina prosecuting this type of shareholder action."  Order ¶36.  Judge McGuire said that the lack of specific information whether there were North Carolina attorneys qualified to handle the case warranted in favor of a "premium rate."  Id.

The Court Said That A Fee Award Of $941.72 Per Hour Would Be "Extraordinary"

Looking at the electronic docket sheet in the case, Plaintiffs' counsel did little more than filing a Complaint, a Motion for Expedited Discovery, and a Motion for approval of the settlement that they brokered.  On top of that, they took two depositions and reviewed only a thousand pages of documents.  Order ¶39. Maybe the case did require supremely qualified counsel not available in NC.

The rates "generally charged for sophisticated business litigation in North Carolina" were deemed to be $321.91 per hour (found to be "reasonable in In re Harris Teeter, 2014 NCBC 44 at ¶63), although Judge McGuire said that "his own experience is that rates of approximately $300 - $550 per hour are typical of the fees charged for this type of work in Wake County, North Carolina.  Order ¶37.

Looking at the substantially higher hourly fee of $941.72 sought by Plaintiffs' counsel, Judge McGuire deemed it to be an "extraordinary amount" (Order ¶41).

The Judge exercised his discretion and awarded $500,000 in fees.  Order ¶42.  That yielded an hourly rate of $712.96, still a pretty impressive award.  And notwithstanding Judge McGuire's rejection of the application of a multiplier, I calculate that as a multiplier of 1.28711724 on the lodestar of $388,465.

 

 

 

 

 

 

 

Don't Overplay Your Hand In The Business Court

When you last heard about London Leasing LLC v. Arcus, the Business Court had entered a default in March 2015 against two of the Defendants for what I called their "defiant and obnoxious conduct."

It then seemed like the Plaintiff was just a hop, skip, and a jump away from obtaining a default judgment against the Defendants against whom there had been an Entry of Default, but last week Judge McGuire denied a Motion for Default Judgment in an Order in London Leasing LLC v. Arcus, 2015 NCBC 65.  In fact, he went further than just denying the Motion for Default Judgment.  He actually set aside the Entry of Default he had imposed in the previous unpublished decision.

The ruling didn't represent a softening of the Court's heart as to the defiant Defendants.  The Court remained annoyed even though one of the defaulted Defendants, JW Ray, filed an Affidavit saying that he had not meant to "disrespect this Honorable Court" and that he was "unaware of the significance of his actions."

Judge McGuire said that "the Defendants have not demonstrated good cause to set aside the entry of default based on Ray's misunderstanding of his legal obligation in this matter."  Order ¶26.  He also said that the "Defendants' conduct that lead to the entry of default pursuant to Rule 37 was inexcusable."  Order ¶27 & n.20.  The Court said that it would "enter other appropriate sanctions against Defendants at a future date." Id.

So, having said all that about the "inexcusable" nature of the Defendants' conduct, what was the reason that the Court set aside its Entry of Default?  It lay in the Plaintiff's Motion to Amend its Complaint, adding five new Defendants and seeking to state two new claims against the defaulted Defendants.

The Court said that "it was forced to conclude that Plaintiff's decision to amend its Complaint provides the 'good cause' necessary to set aside the entry of default."  Order ¶27 (emphasis added).  The Defendants hadn't had the opportunity to respond to the new allegations and were entitled to defend against them.

The takeaway from the new London Leasing decision is that it is not a good idea to amend your Complaint after you have an Entry of Default in hand.  You run a risk of losing the Entry of Default.

By the way, if you noticed that there were no posts on this blog last week, it's because I was away at the beach last week with my family.  The Business Court didn't take notice of my absence (maybe I need to put in for secured leave next time I go away), and the Court went ahead and issued four opinions while I was gone which I am busy digesting.  So, look for more posts later this week.

Please note, as it has always said in the Disclaimer to this Blog, that my posts do not represent the views of Brooks Pierce, but only my own.