Where a business seeks to reform an agreement based upon a unilateral mistake, it must show that the other side caused the error through fraud or omission. TAC Investments LLC v. Rodgers, 2020 NCBC 88 (J. Conrad). Absent such evidence, the business’ only hope to reform the agreement may require proving the mistake was mutual.
In 2005, John Rodgers (“Rodgers”) founded GoPrime Mortgage, Inc. (“Prime”) and remained its 100% shareholder until 2017 when plaintiff TAC Investments, LLC (“TAC”) invested in Prime and received preferred, dividend-entitled shares of stock (whenever Prime’s Board authorized dividends). Pursuant to the Shareholder Agreement (“Agreement”): Rodgers and TAC were considered 50/50 shareholders (even though Rodgers’ common stock was not entitled to dividends); each could appoint one member of the 2-member Board; there existed a “put” right (requiring a “shareholder” to purchase Rodgers’ shares if he so elected); and there existed a “call” right (allowing either Prime or TAC to force a shareholder to sell his/its shares beginning in 2022). Any shares obtained through the put or call right would be obtained at fair market value, which depended in part on the cash Prime possessed at the time of the sale/purchase. Although the Board authorized dividends on two occasions after 2017, on several occasions thereafter Rodgers voted against more dividends, thereby leaving substantial cash in Prime as of February 2020 when he then exercised his put right. Rodgers claimed the Agreement’s reference to “shareholder” meant TAC had to buy his shares; TAC disagreed and filed a lawsuit asserting several claims against Rogers, including one for a declaration that “shareholder” meant Prime vis-à-vis the put right or that, at a minimum, the Agreement contained a unilateral or mutual mistake as to the “shareholder’s” identity. As to the latter request, TAC asked the Court to re-write (a/k/a “reform”) the Agreement to affirmatively declare Prime as the unidentified “shareholder.” Rodgers moved to dismiss, contending the complaint failed to state a claim.
The Business Court dismissed TAC’s claim for reformation of the Agreement based upon a unilateral mistake, recognizing that such a claim requires facts sufficient to show that the other party caused the agreement’s mistaken term to be included—either by fraud or by purposefully not calling the erroneous term to the plaintiff’s attention prior to signing. The Business Court held TAC’s complaint did not provide sufficient facts to show that Rodgers either caused the use of the term “shareholder” in the Agreement, or was aware of the problem using term “shareholder” but had failed to inform TAC about it. The Business Court did find TAC had alleged sufficient facts to support a claim for mutual mistake between the parties as to the identity of the “shareholder,” but dismissed the request for reformation based upon a unilateral mistake.
Based upon this decision, a business finding itself in a dispute over a contract’s ambiguous terms should evaluate whether the disputed term was caused either by the other party’s deceitful and/or fraud-like acts or was a mutual mistake by both parties.
Additional Legal Points From This Decision:
- A declaratory judgment claim is seldom subject to a motion to dismiss because the standard is only whether a complaint evidences a dispute to be resolved, not whether the plaintiff can prevail on the claim. (Opinion, ¶ 19).
- For a reformation claim based on mutual mistake, there is no obligation for plaintiff to allege facts about how or why the mutual mistake came about. (Id., ¶ 25).
- A 50/50 shareholder rarely owes a fiduciary duty to the other shareholder given that one shareholder cannot typically control the entire corporation in such an arrangement. (Id., ¶¶ 30-31).
- Contrary to interpretation of some case law, a claim for implied covenant of good faith and fair dealing can exist independent of a breach of contract claim in situations other than funeral services or insurance products. (Id., ¶ 35).
Categories: Key Business Court Decisions