Ehmann v. Medflow, Inc.

2019 NCBC 9.

EUGENE K. EHMANN; N. WILLIAM SCHIFFLI, JR.; and THAD A. THRONEBURG, Plaintiffs, v. MEDFLOW, INC.; GREG E. LINDBERG; ELI RESEARCH, LLC; ELI GLOBAL, LLC; ELI EQUITY, LLC; SNA CAPITAL, LLC; SOUTHLAND NATIONAL HOLDINGS, LLC; SOUTHLAND NATIONAL INSURANCE CORPORATION; DJRTC, LLC; and MEDFLOW HOLDINGS, LLC, Defendants.

No. 15 CVS 3098

Superior Court of North Carolina, Mecklenburg

February 6, 2019

Caudle & Spears, P.A., by Harold C. Spears and Christopher P Raab, for Plaintiffs.

Condon Tobin Sladek Thornton PLLC, by Aaron Z. Tobin (pro hac vice) Kendal B. Reed (pro hac vice), John DeFeo (pro hac vice), and Jared T.S. Pace (pro hace vice), and Fox Rothschild LLP, by Matthew Krueger-Andes, Matthew Nis Leerberg, and Troy D Shelton, for Defendants.

ORDER & OPINION ON PLAINTIFFS' MOTION FOR RECONSIDERATION

JAMES L. GALE SENIOR BUSINESS COURT JUDGE

1. THIS MATTER is before the Court on Plaintiffs Eugene K. Ehmann, N. William Schiffli, Jr., and Thad A. Throneburg's Motion for Reconsideration (the "Motion") of this Court's September 26, 2017, Order & Opinion Denying Cross-Motions for Summary Judgment ("Summary Judgment Opinion"). For the reasons stated below, the Motion is DENIED.

I. INTRODUCTION

2. Plaintiffs Thad A. Throneburg ("Throneburg"), Eugene K. Ehmann ("Ehmann"), and N. William Schiffli ("Schiffli") (collectively, the "Plaintiffs") filed this action seeking to enforce benefits provided under their employment agreements with Defendant Medflow, Inc. ("Medflow"). Medflow challenges the validity of the employment agreements, contending they are improper conflict-of-interest transactions which were unfair to Medflow at the time they were entered. The Court severed for early determination the issue of whether Plaintiffs' employment agreements are binding and enforceable (the "Severed Issue"). The parties filed cross-motions for summary judgment on the Severed Issue.

3. Plaintiffs contended that the employment agreements were entitled to a presumption of validity under the business judgment rule and that Plaintiffs were therefore entitled to summary judgment because Defendants offered no evidence upon which Plaintiffs could be found to have breached their fiduciary duties to Medflow. Defendants contended that the employment agreements were conflict-of-interest transactions, and that Plaintiffs, as Medflow officers or directors, could not as a matter of law prove that the employment agreements were fair to Medflow when entered.

4. In its Summary Judgment Opinion denying the cross-motions for summary judgment, the Court found remaining issues of disputed material facts. As to Schiffli, it is unresolved whether he was a de facto officer of Medflow at the time he entered into his agreement and is subject to the rules governing contracts between a corporation and its officers. Otherwise, the Court held that Plaintiffs' employment agreements were conflict-of-interest transactions which were not sheltered by the business judgment rule, so that Plaintiffs must bear the initial burden of proving that their agreements were fair to Medflow when they were entered into. The Court rejected Defendants' position that the agreements were unfair as a matter of law.

5. Plaintiffs bring the present Motion because N.C. Gen. Stat. § 55-8-11 ("Section 55-8-11") has been amended since the Court's Summary Judgment Opinion (the "2018 Amendment"). Neither the parties' summary judgment motions nor the Summary Judgment Opinion relied on Section 55-8-11. Yet, Plaintiffs contend that the 2018 Amendment mandates the conclusion that the Court's Summary Judgment Opinion was in error because, regarding Ehmann's conduct, it overlooked Section 55-8-11 and instead relied on N.C. Gen. Stat. § 55-8-31 ("Section 55-8-31") to refuse him, and subsequently all Plaintiffs, the benefit of the business judgment rule.^[1] They contend that the 2018 Amendment clarifies that the law is, and has at all times been, that a director's compensation is governed by Section 55-8-11, not Section 55-8-31, and is presumptively valid whether or not the compensation is for services rendered by a director in his or her capacity as a director. Plaintiffs then contend summary judgment should be granted in their favor because Defendants offered no evidence to overcome the presumption of validity.

6. For reasons discussed below, the Court rejects Plaintiffs' construction of the 2018 Amendment, finding that Section 55-8-11 does not govern compensation of a director for services not rendered in his or her capacity as a director, and concludes that its Summary Judgment Opinion was not in error. Accordingly, the Court will deny the Motion.

II. FACTUAL BACKGROUND

7. The Court now summarizes the facts necessary to provide context for its consideration of the Motion.^[2]

A. The Employment Agreements

8. At the time of the relevant transactions, Throneburg was Medflow's interim Chief Executive Officer, Ehmann was Medflow's sole director as well as a Vice-President, and Schiffli, while no longer a Medflow officer, continued to discharge the duties he had previously fulfilled as Medflow's Chief Financial officer. Throneburg, Ehmann, and Schiffli were three of the four members of Medflow's senior executive team (the "Senior Executive Team"). Following the ouster of Medflow's President and shortly after Throneburg became interim CEO, the Senior Executive Team adopted a three-year strategic plan to implement a new business model for Medflow (the "Strategic Plan"). Plaintiffs contend that due to the multi-year span of the Strategic Plan, its success was dependent on the continued employment of the persons necessary to its execution. Therefore, as part of the Strategic Plan, Throneburg, Ehmann, and Schiffli entered employment agreements with Medflow.

9. Before their negotiations began, Throneburg significantly increased Ehmann's and Schiffli's compensation. Throneburg, Ehmann, and Schiffli's agreements were negotiated in that order, and written contracts for each were executed several weeks later. As sole director of Medflow, Ehmann first negotiated Throneburg's employment agreement with him. After agreeing on the core terms, Ehmann directed Throneburg, an attorney, to prepare his own written contract. Then Ehmann, upon Throneburg's advice that the corporate bylaws authorized Ehmann to do so, delegated to Throneburg the authority of the board of directors to negotiate such contracts as Throneburg thought necessary to achieve the Strategic Plan. Throneburg began by negotiating Ehmann's employment contract. That contract compensated Ehmann solely for his employment services and did not seek to set any compensation for services that Ehmann might undertake in his capacity as a director.

10. Throneburg then negotiated employment agreements with Schiffli and another member of the management team who is not a party to this litigation. The written agreements for Throneburg, Ehmann, and Schiffli contain identical terms except for the compensation amount. When preparing the final agreements, Plaintiffs agreed to add a term providing for additional payment in the event of a change of control of Medflow. The agreements were not reviewed by Medflow's outside counsel or submitted to Medflow's shareholders for approval before they were executed.

B. The Summary Judgment Opinion

11. On summary judgment Defendants argued, and this Court agreed, that Plaintiffs' employment agreements were conflict-of-interest transactions because Plaintiffs each possessed a direct interest in his own employment agreement, and neither Throneburg nor Ehmann could independently act for Medflow. In light of Ehmann's conflict, the Court considered Section 55-8-31, which applies to directors transacting with a corporation but not to officers. While Section 55-8-31 provides two safe harbors for interested transactions between a corporation and a director-(1) approval by a majority of the board of directors and (2) approval by a majority of the shareholders-it otherwise incorporates the common law rule that a director must prove that his interested transaction with the corporation is fair to the corporation. Regarding Throneburg's and Schiffli's conduct, the Court considered the same common law rule, which also applies to officers who engage in interested transactions. In its Summary Judgment Opinion, the Court held that the issue of fairness is to be determined at the time the contracts were entered into.

12. On the motion for summary judgment, Plaintiffs contended that there were sound business reasons for entering the agreements without submitting them for shareholder approval and that these business reasons afforded them the benefit of the business judgment rule. Plaintiffs argued that Defendants did not overcome the business judgment rule's presumption in Plaintiffs' favor because they did not present any evidence that Plaintiffs breached their fiduciary duties to Medflow. As such, Plaintiffs sought a declaration on summary judgment that their employment agreements were valid. This Court disagreed that the agreements' validity could be determined summarily and held that "[a] director, if not protected by the statutory safe harbors, or an officer when challenged, must prove that his [or her] interested transaction with the corporation is fair to the corporation." (Summ. J. Op. 40 (citing N.C. Gen. Stat. § 55-8-31(a); Highland Cotton Mills v. Ragan Knitting Co., 194 N.C. 80, 87, 138 S.E. 428, 431 (1927)).)

13. The Court left open the issue of whether Ehmann did or could have delegated director authority to Throneburg, but held as a matter of law that neither Throneburg nor Ehmann could be considered an independent and disinterested director with whom the employment agreements could be negotiated. Accordingly, this Court...