Be careful what you wish for, lest it come true.
– drawn from The Old Man and Death, Aesop
In Brewer v. Grue, 2020 NCBC 59, Judge Conrad offers a helpful update to convert that traditional morality tale to the rough and tumble world of commercial litigation. With apologies to Aesop, and the Court, it goes something like this:
Be careful what you ask for in litigation, because you will get that (if you’re lucky), and only that.
Versions of that maxim govern how most of us are trained in a commercial litigation practice. Draft a discovery request to leave as little wriggle room as possible for the responder; and respond to a request as fairly, and narrowly, as is possible. In Brewer, the Business Court showed little interest in policing a lack of diligence on the requesting end or in faulting precise responses to indifferent inquiries.
Three equal shareholders in Whispering Pines Sportswear, Inc. had a “history of mistrust” based on plaintiff Craig Brewer’s claims that defendants John Grue and Don Corey had used company resources to pay personal legal fees and to route payroll to nonemployees. ¶ 2. A 2003 settlement of those disputes did not bring eternal peace to Whispering Pines.
Brewer filed suit in 2018, as Judge Conrad put it, for “a mix of self-dealing and phony accounting” claims. The claims included new laments, like altering company records to adjust the shareholders’ interests; and old chestnuts, such as defendants Grue and Corey having the company pay their personal legal bills. ¶ 3. The dispute ultimately resolved by a settlement agreement in which Brewer would purchase Grue’s and Corey’s interests in Whispering Pines, as well as their interests in a second company, upon that entity’s closure of a pending real estate deal. ¶ 5.
The Business Court ultimately entertained a motion by Grue and Corey to enforce the settlement agreement after Brewer declined to follow through with either of its purchase components. Judge Conrad’s decision to enforce the settlement agreement hinged on what plaintiff Brewer knew because of discovery and settlement negotiations, and what he could have known.
In the lead-up to settlement, Brewer had requested and received documents that included financial statements and payroll registers. Those records showed echoes of the parties’ first dispute, as they indicated a small salary and withholdings for Corey’s son. In response, Brewer secured an indemnification provision on that issue because he believed Brian Corey was not an employee and treating him as such might expose the company to liability. ¶ 4.
Brewer’s refusal to close on the agreement’s transactions stemmed from what he learned after it was executed in January 2020. While awaiting releases from involved banks to close on the Whispering Pines purchase, Brewer asked for and received information that the company paid more than $1,800 monthly in benefits for Brian Corey. He also obtained evidence that the company paid $30,000 in legal expenses to the defendants’ lawyers. ¶ 6.
The Court quickly, but thoroughly, dispatched Brewer’s claim that there was fraud in misrepresentation or concealment of this information.
Plaintiff asked for a payroll register, and got it.
That request revealed that Brian Corey had money withheld for a flex spending account, but a payroll register was not a document that could disclose the full range of benefits he received from the company. Against the backdrop of Brewer’s existing concern about phantom employees, the Court would not fault the defendants for not ensuring plaintiff got unrequested information that might satisfy all his concerns: “Defendants did not misrepresent how much the company paid for insurance by truthfully reporting how much Brian paid to fund his FSA Medical account.” ¶ 13.
Defendants had no duty to disclose unfavorable information in a settlement posture
Brewer argued that non-disclosure of the benefits was fraudulent, but the Business Court found the claim lacking because “the party accused of fraud must have had a duty to speak or have taken steps to actively conceal facts.” (citing Chesson v. Rives, 2016 NCBC 90). Judge Conrad noted that “[e]stablishing a duty to speak is a tall order when the negotiations related to ongoing litigation,” but that here, with filed litigation, the answer was clear:
[T]he filing of this lawsuit made the parties adversaries and extinguished any fiduciary relationship that might have existed, at least for purposes of settlement negotiations.
2020 NCBC 59, ¶¶ 15-16.
Seek it in discovery, and bring the receipts
The Court found that plaintiff “sign[ed] the agreement first and ask[ed] for a breakdown of insurance benefits later.” It was not the sort of diligence expected of a plaintiff who “had all the tools of modern discovery available to him,” plus the “presumptive access to company records” of being president of Whispering Pines. ¶¶ 17-18. Moreover, after long-standing disputes about alleged company payment of personal legal bills, Judge Conrad faulted plaintiff for offering no showing he had investigated the issue, or that defendants had refused to provide discovery or concealed the facts.
- It is a tall order to unseat a settlement agreement based on allegations of fraud. But, to scale such a height, the Business Court will require heightened diligence into seeking and pursuing allegedly withheld or misrepresented information.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.