Because a company’s preparation of financial records for a potential acquisition was not a part of its day-to-day business activities, its alleged falsification of the records could not support an unfair deceptive trade claim. Computer Design & Integration v. Brown, 2018 NCBC 128 (J. Bledsoe). Moreover, while North Carolina does not recognize a claim for gross mismanagement against a company’s outside accountants, a company may nonetheless pursue a claim for professional negligence against the accountant in certain circumstances without expert testimony.
Plaintiff Computer Design & Integration, LLC (“CDI”) entered into an agreement with Defendant David Brown (“Brown”) to form Computer Design & Integrations Southeast, LLC (“CDISE”), a North Carolina LLC to design and manage various IT solutions for businesses. Although Brown was president and managed the day-to-day of CDISE, CDI was managing member and responsible for handling tax and accounting matters of CDISE. CDI used Defendant Brian Reid (“Reid”) for CDISE’s accounting and tax matters.
In the Fall of 2015, Brown negotiated for and signed a letter of intent (“LOI”) to purchase CDI’s 50% interest in CDISE. As part of the due diligence process following the LOI, Brown requested financial statements of CDISE, which Reid prepared and provided. Upon acquisition of CDI’s interest, Brown intended to shutter CDISE and to re-open as Rove, LLC (“Rove”). Brown subsequently discovered that the financial statements were materially false in that they failed to disclose that CDISE had failed to pay and was overdue on a number of federal tax obligations. By the summer of 2016, Brown refused to further negotiate with CDI over its interest in CDISE, and the sale collapsed. Brown immediately opened Rove, hired away a number of key CDISE employees, and allegedly stole CDISE’s trade secrets in the process. CDI filed suit asserting a number of claims including one for breach of the covenant of good faith and fair dealing for Brown’s refusal to continue to negotiate with CDI. Brown counter-sued, asserting a personal claim for unfair and deceptive trade practices against CDI, and derivative claims for gross mismanagement and professional negligence against Reid on behalf of CDISE.
The Business Court granted summary judgment against CDI on its breach of covenant of good faith claim arising from Brown’s refusal to continue to negotiate with CDI in the Summer of 2016. Recognizing that the LOI was explicitly “non-binding” and contained no explicit requirement for “good faith negotiations” (Opinion, ¶115), the Court found Brown was not obligated to negotiate in good faith. (Id., ¶¶116-17).
In granting summary against Brown on his UDTP claim, the Business Court first recognized that because the Brown’s potential purchase of CDI’s interest in CDISE was an internal dispute between Brown and CDI, the transaction was missing the “in and affecting commerce” element necessary to maintain an UDTP claim. Surprisingly, then, the Court went on to state that an additional, independent basis existed to throw out Brown’s UDTP claim; namely, because the preparation of financial records for Brown’s potential acquisition was not within the “manner in which businesses conduct their regular, day-to-day activities,” but rather the proposed acquisition was part of an “extraordinary event,” the Court found that the transaction was “beyond the reach” of the UDTP Act. (Opinion, ¶146).
The Court also granted summary judgment against Brown on his derivative claim of gross mismanagement against Reid arising from Reid’s failure to ensure CDISE’s taxes had been timely paid. (Opinion, ¶¶150-151). In granting the motion, the Court found that a claim for gross mismanagement under North Carolina law could only lie against an officer, director, or other person who owed a fiduciary duty to the company. (Id.). Because Reid was only CDISE’s outside accountant and had no fiduciary relationship with the company, the Court dismissed Brown’s derivative claim. Id.
Brown also derivatively asserted a claim for professional negligence against Reid, but did not offer any expert testimony in support of his claim. Reid sought summary judgment on the claim, contending Brown was obligated to provide expert testimony of his negligence. Recognizing that North Carolina courts had not addressed whether expert testimony to support a claim of professional negligence against an accountant but that many other courts always required expert testimony (Opinion, ¶154), the Court nonetheless took a hybrid approach, finding that some of Brown’s professional negligence claims against Reed did not need expert testimony (Opinion, ¶155) while others did. (Id., ¶¶157-58).
When one company seeks to acquire another, each would be well-served to remember that, unless the LOI has language that obligates both parties to negotiate in good faith during the process, neither buyer nor seller has such a binding obligation. Moreover, if a transaction is “outside the usual business” of the entity, chances are deceptive or unfair acts during the process will not give rise to a UDTP claim (and thus no opportunity for treble damages or attorneys’ fees). Finally, if one of its outside professionals messes up, a company likely cannot maintain a claim of gross mismanagement but might be able to assert a professional negligence claim without the support of expert (a/k/a expensive) testimony.
Categories: Key Business Court Decisions