Robert Martin was the president of a medical device company, Vent Tech Corporation, during times that the company alleges he embezzled funds and through lax oversight allowed the company to be “pillaged” by its former CFO. In Lau v. Constable, 2022 NCBC 34, the Business Court probed the issue of who owned the claims against Martin: the allegedly embezzled entity that claims Martin’s conduct weakened its financial affairs and ultimately lowered its sales price, or the purchasing entity that might have secured a “significantly lower price” and took on Martin as an employee. Id. ¶¶ 2, 6, 17-18, 41.
The question of which entity had standing to sue Martin over these claims was critical because after a long procedural journey that began at filing in 2016, key court rulings in 2017 and 2019 had winnowed the parties down to only a single plaintiff, Vent Tech, with Martin as the sole defendant. Id. ¶¶ 23-25. With the case slated for trial in February 2022, a month before the setting Martin tested the timing element of the well-settled rule that “[i]f a court finds at any stage of the proceedings” that it lacks subject matter jurisdiction “it can only dismiss” the case. Id. ¶ 29 (quoting Richards v. Nationwide Homes, 263 N.C. 295, 303 (1965)). Martin claimed the Court lacked jurisdiction because Vent Tech had sold the right to pursue claims against him to the purchaser.
Judge Earp had to determine whether Vent Tech, because it “had not yet become aware of Martin’s alleged wrongdoing” at the time of the asset purchase agreement’s execution in December 2012, could transfer an undiscovered claim. Finding that the fraud and related claims accrued “at the time the wrong . . . was done” under Michigan law, the Court observed that “[p]arties routinely contract to release claims of which they are unaware.” Id. ¶¶ 47-49. The Court noted Michigan case law supported the notion that the undiscovered claims against Martin were captured by the APA’s list of assets purchased by VL Acquisition, LLC as including: “claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind.” Id. ¶¶ 11, 49.
The Court also rejected Vent Tech’s arguments that the APA specifically excluded the claims against Martin from the asset purchase because Vent Tech retained the rights to: “All Amounts Due from employees, amounting to approximately $81,000 and subject to change prior to closing.” Judge Earp noted that “[t]his language indicates that the Company was aware of the amounts in question and that they were capable of being calculated prior to closing.” Id. ¶¶ 54-57. The Court further observed that the alleged damages arising from the claims against Martin could hardly be considered “due” when,
“at the time the sale occurred – and to this date – no determination has yet been made that Vent Tech’s claims have resulted in any sums owed by Martin to Vent Tech.”
Choice of Law: The Court arrived at the ability to make those decisions after settling a scuffle about whether the choice of law provision in the APA – selecting Michigan – should govern. North Carolina courts will generally enforce such provisions except where the selected state (i) “has no substantial relationship to the parties or the transaction” and there is not an otherwise “reasonable basis for the choice; or (ii) applying the chosen state’s law “would be contrary to [a] fundamental policy of” a state that shows “a materially greater interest . . . in the determination of the particular issue.” Cable Tel Servs. v. Overland Contracting, Inc., 154 N.C. App. 639, 642–43 (2002).
While Vent Tech argued that the “substantial relationship” test was not met where neither it nor Martin had “any ties to Michigan,” the Court agreed with Martin that the real question was whether “the parties to the APA have ties to Michigan.” On that point, Judge Earp held that, “There is an obvious and reasonable basis for the contract to be governed by Michigan law. The Purchaser is a Michigan limited liability company.” Lau, ¶¶ 34-35.
- The cut-and-paste, general release language used in settlement and transaction documents that seeks to include “any and all” existing and future claims is worth a look now and again: it likely means just what it says.
- Eleventh-hour claims that a court lacks subject matter jurisdiction may well be viewed as tardy, but not untimely.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.