N.C. Business Court Dismisses a Motion to Enforce Mediated Settlement Agreement After a Protracted Struggle Among Owners

In Local Social, Inc. v. Stallings, 2019 NCBC 8 (N.C. Super. Ct. Jan. 30, 2019), Judge Robinson granted the Plaintiffs’ Motion to Dismiss the Defendant’s Motion to Enforce the Mediated Settlement Agreement for lack of subject matter jurisdiction based on the doctrine of mootness.  See Order and Opinion.

The current conflict grew out of several prior disputes between 50/50 owners of Plaintiff Local Social, Inc. Beginning in 2009, Ms. Eaddy, the Plaintiff owner of Local Social, and Mr. Stallings, the Defendant, were engaged in a romantic relationship. In 2014, Ms. Eaddy sold half of her interest in the company to Mr. Stallings. After the transaction, the co-owners had a falling out. Arbitration ensued. Later, Ms. Eaddy and the company alleged that Mr. Stallings “engaged in an array of misconduct,” including personal use of the company’s credit card for personal expenses totaling $146,736 (the “Disputed Expenses”). Mr. Stallings was removed as an officer and his employment terminated. Litigation followed. Mr. Stallings asserted various counterclaims.

The parties mediated their dispute and executed a Memorandum of Settlement in December 2017. The Plaintiffs agreed to make several cash payments to Mr. Stallings over time, to be secured by a confession of judgment.

With regard to the Disputed Expenses, the Memorandum stated in Paragraph 3(f) that Plaintiffs

agree to work in good faith with Local Social Inc.’s accounting firm to recharacterize [sic] the item marked “loan to [Stallings]” on the 2016 Local Social, Inc. balance sheet: (i) as an uncollectible debt on the 2017 taxes, (ii) as a business expense for the year 2016, requiring an amendment of the 2016 tax returns of Local Social, Inc., or (iii) some combination of the above, in increments recommended by Local Social, Inc.’s accountant.

Op.  ⁋ 8.

Thereafter, Local Social’s accountant determined that the Disputed Expenses should be reclassified as neither an uncollectable debt on the 2017 return nor a business expense for 2016. That decision prompted Mr. Stallings to file the motion to enforce the settlement agreement.

The Court denied the motion because it determined that Paragraph 3(f) is ambiguous. It can reasonably be interpreted to mean either that the Plaintiffs must make a good faith effort to re-characterize the Disputed Expenses in one of the three ways listed in Paragraph 3(f) (regardless of whether they succeed in doing so); or that the Plaintiff must re-characterize the Disputed Expenses and would work in good faith with their accountants to determine the method of re-characterization. The Court set the narrow matter for trial.

Before trial, Plaintiffs contacted a new CPA who, in accordance with option (i) of Paragraph 3(f), recommended re-characterizing the entirety of the Disputed Expenses as uncollectable debt. He wanted to list the debt on the company’s 2017 tax returns. After the Court continued the trial, the new CPA amended his recommendation. He advised splitting the Disputed Expenses: $51,043 would be written off as uncollectable debt for 2017, and the remainder would be deducted as a 2016 business expenses.

Plaintiffs filed the current motion to dismiss, arguing there was nothing left for the Court to resolve.

Mr. Stallings did not agree. The CPA’s recommendation to characterize the $51,043 as a non-deductible capital loss (rather than as a deduction) meant an increase in Mr. Stallings’ taxable income. He made a number of arguments that the existing dispute required Court adjudication.

One argument was based in equity. Mr. Stallings argued that the Plaintiffs must be barred from changing their position based on an equitable doctrine whose origin lies in corporal feats of strength.  The trusty “mend the hold” doctrine generally “precludes the assertion of inconsistent litigation positions, usually concerning the meaning of a contract, within the context of a single lawsuit.” Whitacre P’ship v. BioSignia, Inc., 358 N.C. 1, 24 (2004). The Court dispensed with this argument, however, based on the rule’s exception, i.e., when the change in position results from new facts.

Another argument was based in contract. Mr. Stallings argued that the parties previously agreed that the Disputed Expenses could not be deducted from Local Social’s taxes as an uncollectable debt, and that, regardless, Paragraph 3(f) did not authorize amending tax returns.  The Court considered Mr. Stallings’ request for a full deduction outside his motion to enforce and outside the proposed issues for trial.  The Court determined the issue of a full deduction was a question of breach, which Mr. Stallings could enforce only by separate action.

The Court agreed with Plaintiffs that the matter was moot. It cited In re Peoples, 296 N.C. 109 147 (1978), for the proposition that the Court should usually dismiss an action when the questions originally in controversy are no longer in issue.

As the claim for breach remains possible, this case could rear its head again.