Ehmann v. Medflow, Inc.

Ehmann v. Medflow, Inc., 

.


STATE OF NORTH CAROLINA                   IN THE GENERAL COURT OF JUSTICE
                                              SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG                                15 CVS 3098

EUGENE K. EHMANN;
N. WILLIAM SCHIFFLI, JR.; and
THAD A. THRONEBURG,

                  Plaintiffs,

       v.

MEDFLOW, INC.; GREG E.
                                             ORDER & OPINION DENYING
LINDBERG; ELI RESEARCH, LLC;
                                            CROSS-MOTIONS FOR SUMMARY
ELI GLOBAL, LLC; ELI EQUITY, LLC;
                                                    JUDGMENT
SNA CAPITAL, LLC; SOUTHLAND
NATIONAL HOLDINGS, LLC;
SOUTHLAND NATIONAL
INSURANCE CORPORATION;
DJRTC, LLC; and MEDFLOW
HOLDINGS, LLC,

                  Defendants.


      1.     THIS MATTER is now before the Court on six summary judgment

motions: (1) Plaintiff N. William Schiffli, Jr.’s Motion for Partial Summary Judgment,

filed April 1, 2016; (2) Plaintiff Thad A. Throneburg’s Motion for Partial Summary

Judgment, filed July 18, 2016; (3) Plaintiff Eugene K. Ehmann’s Motion for Partial

Summary Judgment, filed August 11, 2016; (4) Defendants’ Motion for Summary

Judgment Against Eugene K. Ehmann, filed November 15, 2016; (5) Defendants’

Motion for Summary Judgment Against N. William Schiffli, Jr., filed November 15,

2016; and (6) Defendants’ Motion for Summary Judgment Against Thad A.

Throneburg, filed November 15, 2016 (collectively the “Motions”). For the reasons

discussed below, the Court DENIES the Motions.
      Caudle and Spears, P.A., by Christopher P. Raab and Harold C. Spears,
      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 hac vice), and Smith Moore Leatherwood, LLP, by C. Bailey
      King, Jr. and Matthew W. Krueger-Andes for Defendants.

Gale, Chief Judge.

                              I.      INTRODUCTION

      2.     Plaintiffs Thad A. Throneburg (“Throneburg”), Eugene K. Ehmann

(“Ehmann”), and N. William Schiffli, Jr. (“Schiffli”) (collectively the “Plaintiffs”) seek

to recover benefits, including severance payments and a change-of-control bonus,

provided for by their employment agreements with Defendant Medflow, Inc.

(“Medflow”). Plaintiffs’ employment agreements were entered into before Eli Global,

LLC (“Eli Global”), a company controlled by Defendant Greg E. Lindberg

(“Lindberg”), acquired Medflow.      Plaintiffs also challenge actions that Lindberg

allegedly directed the other corporate defendants to undertake to avoid enforcement

of Plaintiffs’ security interests.     Defendants contest any liability under the

employment agreements, contending first that the agreements were improper

conflict-of-interest transactions and second that their terms are so unfair to Medflow

as to be unenforceable.

      3.     The Court severed for early trial the issue of whether Plaintiffs’

employment agreements are binding and enforceable (the “Severed Issue”).

Following discovery on the Severed Issue, the parties filed cross-motions for summary

judgment. As part of their motions, Plaintiffs argue that the Court need not reach
the merits of the underlying arguments, contending that no Defendant has standing

to challenge the agreements because there are now no Medflow shareholders who

owned shares at the time the employment agreements were executed. As to the

underlying merits, the cross-motions present contested issues as to the proper legal

standard to use to assess the enforceability of the employment agreements and

whether the controlling legal standard has been met by these particular facts.

      4.     Except as narrowed by the Court’s ruling on issues of law, the Court

concludes that each of the Motions present contested issues of material fact and must,

therefore, be denied.

                         II.   PROCEDURAL HISTORY

      5.     Plaintiffs initiated this action on February 18, 2015, and filed their

Notice of Designation contemporaneously with their verified Complaint. This matter

was designated a mandatory complex business case by order of Chief Justice Mark

Martin on February 19, 2015, and assigned to the undersigned on February 20, 2015.

      6.     Plaintiffs filed a verified Amended Complaint on April 21, 2015, and

with leave of court, filed a verified Second Amended Complaint on December 2, 2015.

      7.     Plaintiffs’ Second Amended Complaint is 102 pages long, includes 696

separately numbered allegations and twelve causes of action. The central claim

subject to the present Motions is Plaintiffs’ efforts to enforce provisions of their

employment agreements providing for a change-of-control bonus, unpaid wages, and

severance benefits.
      8.     On December 4, 2015, Defendants moved to dismiss Plaintiffs’ Second

Amended Complaint.

      9.     On April 1, 2016, Schiffli filed his Motion for Partial Summary

Judgment.

      10.    On July 18, 2016, Throneburg filed his Motion for Partial Summary

Judgment, attaching his affidavits.

      11.    On August 11, 2016, Ehmann filed his Motion for Partial Summary

Judgment, attaching his affidavits.

      12.    On September 13, 2016, the Court denied Defendants’ Motion to Dismiss

Plaintiffs’ Second Amended Complaint as it related to Plaintiffs’ breach of contract

claims and reserved ruling on the other claims.

      13.    On September 19, 2016, the Court entered its order providing for an

early trial on the Severed Issue, which will resolve whether the employment

agreements were entered pursuant to a valid process and whether they can be voided

because they are unfair to Medflow. The Court allowed initial discovery limited to

the Severed Issue and set a deadline for summary judgment motions on that issue.

      14.    The Court also ordered that Defendants respond to the portion of the

Second Amended Complaint relevant to the Severed Issue. On October 3, 2016,

Defendants filed their response to the severed contract claim (“Answer”).

      15.    On November 15, 2016, Defendants filed separate summary judgment

motions against each Plaintiff on the Severed Issue, supported, in part, by affidavits
of former Medflow shareholders and directors. That same day, Defendants moved to

strike the affidavits Plaintiffs filed in support of their motions.

         16.   Plaintiffs then moved to strike Defendants’ supporting affidavits to the

extent they expressed an opinion on the fairness of the employment agreements.

         17.   The Court heard oral argument on Plaintiffs’ summary judgment

motions on December 2, 2016, while briefing on Defendants’ motions was in process.

         18.   On December 8, 2016, the Court allowed simultaneous supplemental

briefing on issues raised at the December 2, 2016 hearing.            The parties filed

supplemental briefs on January 11, 2017.

         19.   On May 3, 2017, the Court heard oral argument on Defendants’ motions

for summary judgment and the related motions to strike. The Court also entertained

supplemental argument on the matters addressed in the supplemental briefing noted

above.

         20.   On June 14, 2017, the Court directed the parties to file further

supplemental briefs on Plaintiffs’ more recently raised contention that the

contemporaneous ownership rule precludes any Defendant from having standing to

challenge, or defend against, the enforceability of the employment agreements.

         21.   All of the Motions have now been fully briefed and argued and are ripe

for determination.

                           III.   STATEMENT OF FACTS

         22.   The Court does not make findings of fact when ruling upon a motion for

summary judgment. But to provide context for its ruling, the Court may state either
those facts that it believes are not in material dispute or those facts on which a

material dispute forecloses summary adjudication. The following statement of facts

is solely for the purpose of this Order & Opinion.

A.    Medflow’s Early History and the December 2013 Change in
      Management

      23.    Medflow was formed on January 28, 1999, as a provider of computer

software for the medical industry. (Ehmann Aff. ¶ 9, Aug. 3, 2016.) At relevant times,

Medflow’s shareholders included its founder James Riggi (“Riggi”), Davlong Business

Solutions, LLC (“Davlong”), controlled by David Long (“Long”), and other minority

shareholders. (Riggi Aff. ¶¶ 3, 6; Long Aff. ¶ 5.)

      24.    Ehmann and Throneburg first became Medflow shareholders in 2004.

(Throneburg Aff. ¶ 26, July 5, 2016; Ehmann Aff. ¶ 10, Aug. 3, 2016.) Throneburg

served as Medflow’s CEO from January 1, 2005, to November 2007. (Throneburg Aff.

¶ 27, July 5, 2016.) In late 2007, Throneburg sold his approximate 24% ownership

interest to Davlong and returned to active law practice in Charlotte, North Carolina.

(Throneburg Aff. ¶¶ 26, 38, 42, July 5, 2016.)

      25.    Following Throneburg’s departure, Riggi became CEO. (Ehmann Aff.

¶ 15, Aug. 3, 2016.)

      26.    In November 2009, Ehmann accepted a position as Medflow’s director of

human resources. (Ehmann Aff. ¶ 18, Aug. 3, 2016.)

      27.    Schiffli joined Medflow in 2010 as its Chief Financial Officer. He was

hired as an independent contractor rather than as an employee. (See Schiffli Aff. ¶ 2,

Mar. 16, 2015; Throneburg Aff. ¶ 107, July 15, 2016.)
         28.   In the fall of 2013, shareholders controlling a majority of Medflow shares

discussed their dissatisfaction with Riggi’s leadership. (See Ehmann Aff. ¶ 24, Aug.

3, 2016.) On October 8, 2013, those shareholders entered a voting agreement and

irrevocable proxy that gave Davlong the right to vote for the majority of shares on

most issues. (See Ehmann Aff. ¶ 26, Aug. 3, 2016.) By December 6, 2013, the parties

to the voting agreement had resolved to ask Throneburg to return to Medflow as its

CEO. (Ehmann Aff. ¶ 29, Aug. 3, 2016.) On or before December 10, 2013, Throneburg

agreed to return as CEO on a ninety-day interim basis. (Ehmann Aff. ¶ 30, Aug. 3,

2016.)

         29.   On December 10, 2013, the shareholders met and voted to terminate all

of Medflow’s current officers, including Schiffli; to oust Riggi from management; to

hire Throneburg as interim CEO; to elect Ehmann as Vice President, Treasurer, and

Secretary; to limit Medflow’s board to a single director; and to elect Ehmann as that

sole director. (See Ehmann Aff. ¶ 39, Aug. 3, 2016; Throneburg Aff. Ex. 3, July 18,

2016.)

         30.   Although Schiffli was terminated as an officer, he continued to serve as

Medflow’s chief financial officer as an independent contractor. (See Throneburg Aff.

¶ 55; see also Throneburg Aff. Ex. 3, at 3.)

B.       Medflow’s Senior Management Team and the New Strategic Plan

         31.   After December 10, 2013, Throneburg, Ehmann, and Schiffli were three

of the four members of Medflow’s senior management team; the fourth member,

James Messier, is not a party to the litigation. (Throneburg Aff. ¶ 68, July 15, 2016.)
      32.    Plaintiffs assert, and Defendants deny, that the senior management

team adopted a multi-year strategic plan early in the first quarter of 2014 that

focused on moving Medflow’s software platform from a server-based system to a

cloud-based system (“Strategic Plan”). (Ehmann Aff. ¶ 44, Aug. 3, 2016; Throneburg

Aff. ¶¶ 75–76, July 15, 2016.) Plaintiffs assert that the Strategic Plan required

securing management personnel with multi-year contracts.

      33.    At his deposition, Throneburg testified that immediately after returning

as CEO, he recognized that Ehmann and Schiffli were essential members of

Medflow’s senior management team. (Throneburg Aff. ¶¶ 104, 108–09, July 15,

2016.) In early 2014, before negotiating the employment agreements, Throneburg

authorized   a   significant   pay   increase   for   Ehmann—changing     Ehmann’s

compensation from $52.50 per hour to an annual salary of $165,000—which

Throneburg asserts was accompanied by Ehmann’s increased duties. (Ehmann Dep.

72:5–20, Sept. 28, 2016; Throneburg Aff. ¶¶ 103–105, July 15, 2016.) Throneburg

also adjusted Schiffli’s compensation as an independent contractor to $165,000

annually. (Throneburg Aff. ¶ 113, July 15, 2016.)

C.    Throneburg Negotiates His Employment Agreement with 

.    Plaintiffs maintain that Throneburg first negotiated the essential terms

of his employment agreement with Ehmann before there was any expectation that

Throneburg would in turn negotiate a contract between Medflow and Ehmann,

meaning that Ehmann was able to represent Medflow as a disinterested director.

(Throneburg Aff. ¶ 87, July 15, 2016; Ehmann Aff. ¶¶ 54, 57, Aug. 3, 2016.)
         35.   The record is unclear as to exactly when Throneburg first began

negotiating his contract, but he testifies that he and Ehmann reached an agreement

in principle on all essential terms by March 1, 2014. (Throneburg Aff. ¶ 85, July 15,

2016.) The contract was not reduced to writing until July 2014 and at least one

material term was changed in July 2014. (Throneburg Aff. ¶¶ 139, 142, July 15,

2016.)

D.       Ehmann Delegates Board Authority to Throneburg

         36.   Throneburg contends that, after the terms of his employment agreement

as CEO were verbally agreed to, he then began negotiating employment agreements

with Ehmann and Schiffli on behalf of Medflow’s board, pursuant to authority

delegated to him by Ehmann.

         37.   Medflow’s bylaws provide that “[a]ll corporate powers shall be exercised

by or under the authority of, and the business and affairs of the corporation shall be

managed under the direction of, the Board of Directors.” (Throneburg Aff. Ex. 2

(“Bylaws”) Article III, Section 1, July 5, 2016.) Compensation of all officers is under

the authority of the board, and any officer compensation must be “duly authorized.”

(Bylaws Article V, Section 3.)

         38.   The bylaws allow the board to “authorize any officer or officers, agent or

agents, to enter into any contract or execute and deliver any instrument in the name

of and on behalf of the corporation.” (Bylaws Article VI, Section 1.) Medflow’s bylaws

allow its board to take action either at a duly called meeting or without a meeting,

provided that action taken without a meeting “must be evidenced by one or more
written consents signed by each director before or after such action, describing the

action taken, and included in the minutes or filed with the corporate records.”

(Bylaws Article IV, Section 8.)

      39.    Throneburg     and   Ehmann     testified   that   after   negotiations   on

Throneburg’s contract were complete, Ehmann orally delegated to Throneburg the

board’s authority to secure such additional employment contracts as Throneburg, in

his discretion, deemed necessary to effectuate the Strategic Plan. (Ehmann Aff. ¶ 61,

Aug. 3, 2016; Throneburg Aff. ¶ 94, July 15, 2016.) Ehmann testified that he relied

on Throneburg’s advice that Medflow’s bylaws allow for such a delegation. (Ehmann

Aff. ¶ 62, Aug. 3, 2016; see also Throneburg Aff. ¶ 95, July 15, 2016.) At the time, the

delegation was not reduced to writing.

E.    Throneburg Negotiates Employment Agreements with Ehmann and
      Schiffli

      40.    Throneburg testified that he pursued negotiations for contracts with

Ehmann, Messier, and Schiffli, based on this delegated authority. (See Throneburg

Aff. ¶¶ 102, 104–05, 112–14, July 15, 2016.)        Throneburg first negotiated with

Ehmann, reaching an agreement in principle on the essential terms for Ehmann’s

service as Vice President by April 1, 2014. (Throneburg Aff. ¶ 105, July 15, 2016;

Second Am. Compl. Ex. 7 (“Ehmann Contract”) ¶ H.) Ehmann’s written contract was

executed on July 7, 2014, but reflected an effective date of April 1, 2014. (Ehmann

Contract 1; Throneburg Aff. ¶ 142, July 15, 2016.)

      41.    Throneburg then negotiated Schiffli’s agreement, which was effective as

of July 1, 2014. (Second Am. Compl. Ex. 8 (“Schiffli Contract”), at 1.) The contract
terms provided that Schiffli would remain an independent contractor through

December 31, 2014, but would become an employee, without further action, on

January 1, 2015. (Schiffli Contract ¶ I.)

F.       Throneburg Drafts the Employment Agreements
         42.   Ehmann directed Throneburg to prepare the written agreements.

Ehmann had confidence, “[b]ased upon [his] knowledge of previous employment

agreements, other contracts[,] and other documents Mr. Throneburg had drafted for

Medflow and others, . . . that Mr. Throneburg had drafted employment agreements

which met all the necessary legal requirements and were consistent with arm’s length

transactions under the circumstances.” (Ehmann Aff. ¶ 91, Aug. 3, 2016.)

         43.   Throneburg primarily drafted the agreements over the July 4, 2014

holiday, utilizing information that his legal assistant had gathered for him, as well

as contracts he had negotiated in law practice. (Throneburg Aff. ¶¶ 123–29, July 18,

2016.)

         44.   When negotiating initial terms, Throneburg and Ehmann had agreed to

a two-year severance provision. After discussions on July 5, 2014, Throneburg and

Ehmann agreed that they should each add a change-of-control bonus in exchange for

limiting the severance payment to one year. (See Throneburg Aff. ¶ 139, July 15,

2016; Ehmann Aff. ¶ 88, Aug. 3, 2016.)

         45.   Throneburg then finalized the written agreements. Defendants have

argued that the agreements were improperly backdated. The record appears clear

that each of the agreements was executed on July 7, 2014, but reflect an earlier
effective date based on the alleged date the terms of the oral agreement had been

finalized. (Throneburg Aff. ¶ 142, July 15, 2016.)

       46.    Ehmann       executed     Throneburg’s        agreement   as   Medflow’s

representative. (See Throneburg Aff. ¶ 86, July 15, 2016.) Throneburg executed

Ehmann’s and Schiffli’s agreements as Medflow’s representative. (See Throneburg

Aff. ¶¶ 105, 114, July 15, 2016.)

       47.    Neither Throneburg nor Ehmann consulted with Medflow’s regular

outside corporate counsel, Dain Dulaney, Jr. (“Dulaney”), before executing the

employment agreements. (Throneburg Aff. ¶ 141, July 18, 2016; Ehmann Aff. ¶ 89,

Aug. 3, 2016.)     Throneburg explains that “the drafting and the terms of the

employment agreements were well within [his] experience and professional

competence and . . . [he] attempted to minimize outside professional fees where

possible.” (Throneburg Aff. ¶ 141, July 18, 2016.)

       48.    The existence and terms of the employment agreements were first

disclosed to Medflow’s controlling shareholders when the agreements were produced

in this litigation. (See Long Aff. ¶ 9; Riggi Aff. ¶ 10.)

G.     The Essential Terms of the Employment Agreements
       49.    The material terms of each of the agreements vary only in regard to the

respective title, salary, and effective date.        (See Second Am. Compl. Ex. 6

(“Throneburg Contract”); Ehmann Contract; Schiffli Contract.) Throneburg’s salary

was $360,000 per year as CEO, Ehmann’s salary was $165,000 per year as Vice

President, and Schiffli’s salary was $165,000 per year as CFO. (Throneburg Contract

¶ 10; Ehmann Contract ¶ 10; Schiffli Contract ¶ 10.) Each agreement provides that
it shall be governed by North Carolina law. (Throneburg Contract ¶ 30; Ehmann

Contract ¶ 30; Schiffli Contract ¶ 30.)

      50.    The three agreements share the following terms:

                      A three-year initial term, followed by one-year automatic

                       renewals, absent notice of termination (see, e.g., Throneburg

                       Contract ¶ 5);

                      Protection for the employee against a reduction in the

                       employee’s base salary (see, e.g., Throneburg Contract ¶ 10);

                      Employee’s potential eligibility for increased base salary or

                       bonuses (see, e.g., Throneburg Contract ¶ 10);

                      A right for the employee to terminate the agreement upon

                       thirty-days’ notice for any reason, with forfeiture of severance

                       and other benefits should the employee terminate without

                       “Good Reason,” (see, e.g., Throneburg Contract ¶¶ 6, 9(b));

                      A right for the employee to receive severance and other

                       benefits if the employee terminates the agreement upon

                       thirty-days’ notice for “Good Reason,” which is defined to

                       include a breach by Medflow, removal of the employee from

                       the position to which he was hired, or the employee’s own good

                       faith determination—binding on Medflow—that an adverse

                       change in the employment relationship has occurred (see, e.g.,

                       Throneburg Contract ¶¶ 8, 9(a)(ii));
   A right for Medflow to terminate the employee for “Cause” only

    if the employee (1) engages in unauthorized conduct causing

    “demonstrable and serious damage to Medflow,” (2) is

    convicted of a felony, or (3) unreasonably neglects or refuses to

    perform his duties, and the reason for termination is

    established by a final judicial proceeding (see, e.g., Throneburg

    Contract ¶ 7);

   A right for the employee to receive “one (1) times [the

    employee’s] Annual Base Salary,” payable in twelve monthly

    installments as severance pay for any termination by the

    employee for “Good Reason” or by Medflow without “Cause”

    (see, e.g., Throneburg Contract ¶ 9(a)(i));

   A right for the employee to receive an accelerated immediate

    payment of the employee’s entire severance pay in the event

    of a “Change of Control” (see, e.g., Throneburg Contract ¶ 9(c));

   A right for the employee to receive three years of medical and

    dental insurance coverage as a severance benefit unless the

    employee was terminated for “Cause” (see, e.g., Throneburg

    Contract ¶ 9(a)(ii));

   A right for the employee to receive a bonus payment in the

    event of a “Change of Control,” equal to one year’s salary plus

    an additional “gross-up payment,” unless the employee
                       terminates without “Good Reason” or Medflow terminates for

                       “Cause” prior to the “Change of Control” (see, e.g., Throneburg

                       Contract ¶ 9(c)); and

                      A security interest for the employee in all of Medflow’s

                       tangible and intangible personal property to secure Medflow’s

                       payment obligations. (Throneburg Contract ¶ 24; Ehmann

                       Contract ¶ 24; Schiffli Contract ¶ 24.)

H.    Ehmann Later Ratifies the Employment Agreements
      51.    Ehmann executed a Written Consent of Director to Action In Lieu of a

Meeting (“Written Consent”), dated December 9, 2014. (Ehmann Aff. Ex. 3 (“Written

Consent”), Aug. 3, 2016.) The Written Consent reflects that Ehmann had taken

action as sole director, inter alia, to elect Throneburg as President/Chief Executive

Officer, himself as Vice President/Secretary, and Schiffli as Treasurer/Chief

Financial Officer, to approve the Strategic Plan, and to ratify each of Plaintiffs’

employment contracts as of their effective date. (Written Consent 1–3.) The Written

Consent did not explicitly refer to Ehmann’s verbal delegation to Throneburg to

exercise duties on behalf of the board of directors.

      52.    It is not clear if the Written Consent was actually signed on December

9, 2014, or later. Throneburg testified that the Written Consent was prepared in

contemplation of an upcoming shareholders’ meeting to be held on December 19,

2014. (Throneburg Aff. ¶ 141, July 15, 2016.) On December 10, 2014, Throneburg

emailed Medflow’s outside counsel, Dulaney, an unsigned draft of the Written
Consent as well as the employment agreements. (Throneburg Aff. ¶ 141, July 15,

2016.)

         53.   Dulaney reviewed the employment agreements, and on December 11,

2014, sent Throneburg an e-mail, stating, in part:

         I am also struggling to determine who should approve [Ehmann’s]
         Employment Agreement because he cannot approve his own
         Employment Agreement as the Sole Director, since that is a clear
         conflict of interest. You cannot approve it since he gave one to you. That
         leaves me at the point where I believe the correct course of action would
         be to get the Shareholders to approve it at the Annual Meeting.

(Dulaney Aff. Ex. 1B.)

         54.   The employment agreements were neither submitted nor discussed at

the December 19 shareholders’ meeting. Riggi and Long testified that they first

became aware of the employment agreements after this litigation was initiated.

(Riggi Aff. ¶¶ 10–12; Long Aff. ¶¶ 9–10.) Long states that he would not have approved

the agreements if requested to do so as a shareholder. (Long Aff. ¶ 13.)

         55.   Dulaney also raised concerns that Throneburg, Ehmann, and Schiffli

had not executed non-competition agreements. (Dulaney Aff. Ex. 1B.) In December

2014, Plaintiffs each executed new non-competition agreements, which were

retroactive to the effective date of their employment agreements. (Throneburg Aff.

¶¶ 151–52, July 15, 2016.)

I.       Lindberg’s Entities Acquire Medflow
         56.   To address Plaintiffs’ standing argument, the Court assumes the

allegations in the Second Amended Complaint correctly outline the details regarding

Eli Global’s ultimate acquisition of all of Medflow’s shares by January 18, 2015.
       57.   In August 2014, Riggi formed DJRTC, LLC (“DJRTC”), to which he then

transferred his Medflow shares. (See Second Am. Compl. ¶ 242; Answer ¶ 242.) On

September 5, 2014, Riggi gave notice of this transaction to Medflow, contending that

the transaction was authorized by the shareholders’ agreement. (See Second Am.

Compl. Exs. 14, 15.) Plaintiffs challenged the validity of this transfer and did not

honor Riggi’s request to record the transfer on Medflow’s books. (See Am. Compl. Ex.

16.)

       58.   After the share transfer, Riggi sold DJRTC to SNA Capital, LLC

(“SNA”), an affiliate of Eli Global, which Lindberg owns or controls. (See Second Am.

Compl. Ex. 14.)

       59.   Lindberg met with Medflow’s senior management team on September

18, 2014, and advised Plaintiffs that he intended to acquire all of Medflow’s shares.

(Second Am. Compl. ¶¶ 289–90(a); see Second Am. Compl. Ex. 16, at 1.) Plaintiffs

allege that Lindberg, at that same time, initiated an illegal tender offer to Medflow’s

shareholders. (Second Am. Compl. ¶¶ 260–63; see Second Am. Compl. Ex. 16, at 2.)

       60.   On December 18, 2014, Eli Global contracted to buy Davlong’s Medflow

shares. (Second Am. Compl. Ex. 18.)

       61.   On December 19, 2014, Lindberg and David Long attended Medflow’s

annual shareholder meeting. (Second Am. Compl. ¶¶ 297–98.) Plaintiffs argue

Lindberg attended as a proxy. (See Second Am. Compl. ¶¶ 297–98.) Defendants

contend Lindberg attended as a representative of DJRTC—the new beneficial owner

of Medflow shares.
      62.     Lindberg was elected as Medflow’s sole director at the December 19

meeting. (Second Am. Compl. ¶ 302.)

      63.     By January 16, 2015, Lindberg had acquired ownership of all Medflow

shares through his company Eli Global. (See Second Am. Compl. ¶ 325.)

      64.     On January 16, 2015, Eli Global transferred all Medflow’s stock to

DJRTC. (Second Am. Compl. Ex. 20.)

J.    Lindberg Did Not Learn of the Employment Agreements Before
      Acquiring Medflow.

      65.     Lindberg and his companies completed limited due diligence in

connection with their acquisition of Medflow. They did not ask for copies of Plaintiffs’

employment agreements before completing the acquisition. (Second Am. Compl.

¶¶ 345–46.)      Eli Global executed a non-disclosure agreement with Medflow on

December 31, 2014, after which there was a limited exchange of Medflow’s corporate

information. (Second Am. Compl. ¶ 345.)

      66.     Lindberg first became aware of the employment agreements on January

23, 2015. (Second Am. Compl. ¶ 356; Answer ¶ 356.)

K.    Termination of the Employment Agreements

      67.     Plaintiffs contend that a “Change of Control,” as defined by the

employment agreements, occurred no later than January 16, 2015. (Second Am.

Compl. ¶ 336.)

      68.     On or about January 19, 2015, Schiffli, acting as Medflow’s CFO,

calculated and recorded the change-of-control payments due to Plaintiffs as a

Medflow current liability. (Second Am. Compl. ¶ 338.)
      69.    On January 22, 2015, Eli Global representatives visited Medflow’s

offices, at which time Schiffli provided them with the change-of-control payment

calculations and copies of the employment agreements. (Second Am. Compl. ¶¶ 347–

48; Answer ¶ 348.)

      70.    In February 2015, Plaintiffs filed this litigation and attempted to perfect

their UCC security interests, but contend that Defendants had already taken action

to thwart their security interests in Medflow’s assets.

      71.    Plaintiffs contend that they were placed on administrative leave, but

that they fully cooperated with Eli Global until they were purportedly terminated for

“Cause” on May 1, 2015. Plaintiffs contend that this termination was ineffective

because it was not for “Cause,” as defined by the employment agreements. Rather,

Plaintiffs contend that they terminated their employment for “Good Reason” on

September 3, 2015.

      72.    Plaintiffs contend that their termination for “Good Reason” triggers

their entitlement to severance compensation.

      73.    In addition to denying that Plaintiffs terminated their agreements for

“Good Reason,” Defendants contend that payments provided for by the agreements

are not owed to Plaintiffs because the agreements are unfair to Medflow and include

terms that are unconscionable.

L.    Affidavits Filed in Connection with the Motions

      74.    Plaintiffs filed Kevin Walker’s affidavit when they filed their motions

for partial summary judgment. Mr. Walker, a certified public accountant, opines that
the terms of the employment agreements are fair to Medflow. (Walker Aff. ¶¶ 12–

13.) Later, Plaintiffs filed an expert affidavit of Thomas B. Henson in opposition to

Defendants’ motions for summary judgment. Mr. Henson opines that the terms of

the agreements are substantively fair to Medflow but he expressly states that he does

not have an opinion regarding the process by which the agreements were entered.

(Henson Aff. ¶¶ 24–25.)

      75.    Defendants object to the use of Mr. Henson’s affidavit in support of

Plaintiffs’ motions, but acknowledge that it may be considered in opposition to

Defendants’ motions.

      76.    Defendants filed Riggi’s and Long’s affidavits with their motions for

summary judgment. Riggi and Long each state that they were not aware of the

employment agreements while they were Medflow shareholders. (Long Aff. ¶ 9; Riggi

Aff. ¶ 11.) Additionally, Long opines that the terms of the agreements are unfair to

Medflow and that he would not have approved the agreements had he been asked to

do so as the majority shareholder. (Long Aff. ¶¶ 13–14.)

      77.    Plaintiffs object to these affidavits on the basis that Long is not

competent to express an opinion on whether the employment agreements are fair and

that neither Long nor Riggi were identified in Defendants’ Response to Plaintiffs’

First Set of Interrogatories, which requested that Defendants identify persons who

had knowledge or facts regarding the action. (Pls.’ Br. Supp. Mot. Strike and Exclude

in Limine Affs. of David Long and James Riggi 1–3.)
      78.    Without ruling on the ultimate admissibility of the testimony reflected

in the affidavits, the Court, in its discretion, now denies the motions to strike. (See

Tr. 5:2–10, May 3, 2017.)

                            IV.   STANDARD OF REVIEW

      79.    Summary judgment is proper “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that any party is entitled to a

judgment as a matter of law.” N.C. Gen. Stat. § 1A-1, Rule 56(c) (2015). “Summary

judgment is improper if any material fact is subject to dispute.” Culler v. Hamlett,

, 

 (2002). The movant bears the burden of

proving the lack of a triable issue. Dalton v. Camp, 

, 

 (2001). Once the movant has met that burden, the burden shifts to the

nonmoving party to produce a forecast of evidence that demonstrates facts showing

that it can establish a prima facie case at trial. Austin Maint. & Constr., Inc. v.

Crowder Constr. Co., 

, 

 (2012). The Court

must view all the presented evidence in the light most favorable to the nonmoving

party. Dalton, 

, 

.

                                  V.     ANALYSIS

      80.    The cross-motions raise multiple issues. First, Plaintiffs contend that

no Defendant, including Medflow itself, has standing to challenge or defend against

the enforceability of the employment agreements because no Defendant was a

Medflow shareholder on or before July 7, 2014, when the agreements were executed.
Assuming standing, the parties disagree as to the legal standard the Court should

use to determine if the employment agreements may be voided as conflict-of-interest

transactions. Finally, assuming the agreements are not voided, Defendants contend

that the agreements are nevertheless unenforceable, in whole or in part, because the

terms are so unfair to Medflow as to be unconscionable and constitute corporate

waste.

A.       Park Terrace and the Contemporaneous Ownership Rule Do Not
         Preclude Judicial Review of the Employment Agreements

         81.   Plaintiffs contend that Defendants do not have standing to challenge the

agreements because the contemporaneous ownership rule, under the facts of this

case, should extend to Medflow as well as its current shareholders. The particular

facts of this case raise the interesting and unsettled issue as to whether that rule

applies not only to bar an affirmative claim but also to bar a defense against a claim

by a former officer or director and relieve that officer or director from the burden of

demonstrating that an interested transaction was fair to the corporation.

         82.   The contemporaneous ownership rule is generally understood to provide

that a shareholder bringing a derivative action must have been a shareholder at the

time of the wrong on which the action is based. Plaintiffs contend the rule should

also bar the corporation from asserting a direct claim or an affirmative defense if none

of the current shareholders owned shares at the time the wrong occurred. The issue

of defendants standing affects the Court’s subject matter jurisdiction. See Aubin v.

Susi, 

, 

 (2002). Standing is an issue that

can be challenged at any time, may be raised by the Court ex mero motu, and must
be addressed before the merits. See Willowmere Cmty. Ass’n v. City of Charlotte, ___

N.C. App. __, 

 (2016), discretionary review granted, ___ N.C.___,

 (2017); In re T.B., 

, 

, 531–32

(2009); Crouse v. Mineo & Crouse, PLLC, 

, 

(2008).      The burden of establishing standing rests with the party invoking

jurisdiction. Here, Plaintiffs seek to use a standing rule to preclude Defendants from

asserting a defense to Plaintiffs’ claims as well as a counterclaim, which recasts the

defense as a claim for declaratory judgment. See Neuse River Found. v. Smithfield

Foods, Inc., 

, 

 (2002); Queen’s Gap Cmty.

Ass’n v. McNamee, 

, at *4 (N.C. Super. Ct. Sept. 23, 2011).

       83.     Plaintiffs contend that Defendants’ standing is defeated by the rule

adopted by the Supreme Court of North Carolina in Park Terrace, Inc. v. Burge, 

, 

 (1959), and the statutory contemporaneous ownership rule,

codified in section 55-7-41 of the North Carolina General Statutes. Specifically,

Plaintiffs contend that to have standing under Park Terrace and section 55-7-41 a

shareholder must have been a shareholder at the time of the wrong complained of,

and where there is no such shareholder, the corporation likewise lacks standing to

complain of prior acts of its officers or directors.

       84.     Defendants first contend that the continued vitality of the holding in

Park Terrace is in doubt because the subsequent enactment of section 55-7-41 bars

only suits by new shareholders and does not expressly include any provision barring

a suit by the corporation itself. Second, Defendants contend that the Park Terrace
holding has not been, and should not be, applied to preclude a corporation from

raising a defense to a claim instituted by its former officers or directors. Third,

Defendants contend that even if the Park Terrace holding were to be applied, the

contemporaneous ownership requirement is satisfied here because the Plaintiffs’

employment agreements were not effective until they were ratified in writing by

board action on December 9, 2014, by which time Defendant DJRTC had acquired a

beneficial interest in Medflow.

      85.    The North Carolina courts have sparingly cited the Park Terrace

decision since it was issued in 1959. The Court must now interpret and apply Park

Terrace without the benefit of any significant subsequent precedent.

      (1)    The Statutory Contemporaneous Ownership Rule

      86.    The statutory contemporaneous ownership rule embodied in section

55-7-41 of the North Carolina General Statutes limits a shareholder’s standing to

bring a derivative action to one who either “[w]as a shareholder of the corporation at

the time of the act[s] or omission[s] complained of or became a shareholder through

transfer by operation of law from one who was a shareholder at that time.” 

(1) (2015). The statute does not expressly address a corporation’s

standing to bring a direct action in its own right nor does it address a corporation’s

right to assert an affirmative defense.

      87.    In Park Terrace v. Burge the Supreme Court of North Carolina

concluded, based on the facts before it, that a corporation did not have standing to

challenge breaches of fiduciary duty by its former officers where the claim would only
benefit the corporation’s current shareholder, who was not a shareholder when the

contested acts occurred. 

, 

 (1959). One leading

treatise characterizes the holding in Park Terrace as no more than the application of

the contemporaneous ownership rule before it was codified. See Russell M. Robinson,

II, Robinson on North Carolina Corporation Law § 17.04, at 17-19 (7th ed. 2016).

However, it appears that there was more at issue in the court’s decision.

      88.    The Park Terrace holding rested on equitable principles and was heavily

influenced by an often-cited Nebraska Supreme Court opinion authored by Dean

(then Commissioner) Roscoe Pound, which explained that

      “[w]hen the corporation comes into equity and seeks equitable relief,
      [the court] ought to look at the substance of the proceeding, and, if the
      beneficiaries of the judgment sought have no standing in equity to
      recover, [the court] ought not to become befogged by the fiction of
      corporation individuality, and apply the principles of equity to reach an
      inequitable result.”

, 

 (quoting Home Fire Ins. Co. v. Barber, 

, 1033 (Neb. 1903)) (internal citations omitted).        Based on that equitable

principle, the Supreme Court of North Carolina held that

      [i]n view of the fact that none of the present stockholders of the plaintiff
      corporation was a stockholder at the time of the transactions of which
      the plaintiff complains; the further fact that they obtained their shares
      through voluntary purchase or transfer, and not by operation of law, and
      since the action was not brought [o]n behalf of creditors or for the
      purpose of ‘asserting or endeavoring to protect a title to property,’ but
      solely as a suit in equity as [a] representative of its stockholders, it
      cannot be maintained.

 (quoting Home Fire Ins. Co., 93 N.W. at 1033) (internal citations omitted).
      (2)    The Trio of Cases Before the Supreme Court of North Carolina
             Arising From the Park Terrace Project

      89.    In addition to its 1959 decision in Park Terrace, on which Plaintiffs base

their standing argument, the Supreme Court of North Carolina issued two earlier

opinions in cases arising from the same facts—(1) Lester v. McLean, 

, 

 (1955) (“Lester”), and (2) Park Terrace, Inc. v. Phoenix Indemnification

Co., 

, 

 (1955) (“Phoenix”). The two earlier opinions are

instructive on how to read and apply Park Terrace v. Burge.

      90.    Park Terrace, Inc. was formed to construct and own a low-income

housing project financed by the Federal Housing Administration (“FHA”).          Park

Terrace, Inc., 

, 

. Park Terrace contracted with Park

Builders, Inc. to construct the project. Phoneix, 

, 85 S.E.2d at 677–

78. Lawson Lester, Jr. and R.G. Burge owned shares in both Park Terrace and Park

Builders. See 

. Park Terrace issued three classes of stock—A, B,

and preferred. Park Terrace, Inc., 249 N.C. at 309–310, 106 S.E.2d at 479–80. The

preferred stock, which did not include ownership rights, was issued to the FHA so it

could assume control of the project if the mortgage was not paid. Id. at 310, 

. The Class B shares were issued at $1 par value. 

, 

. The Class B holders issued notes to the company for the shares, but never

made any cash payments. 

, 

.

      91.    Through a series of transactions, Lester and Burge acquired all of Park

Terrace’s Class B shares and owed the company $123,291 on notes issued in
connection with the purchase of those shares. 

, 106 S.E.2d at 479–80. On

November 4, 1950, Lester and Burge sold all the Class B stock to Park Terrace for

more than its par value. 

 at 310–11, 

. Lester and Burge voted

as Class A shareholders to approve this sale. Id.

      92.     On February 15, 1951, M.P. McLean, Jr. acquired all of Park Terrace’s

Class A Stock from Lester and Burge.       Id. at 311, 

.   During

negotiations, McLean, Lester, and Burge discussed the value of equity Lester and

Burge had in the Park Terrace project as measured by the project’s value less the

outstanding mortgage. See Lester, 

, 

. McLean issued

purchase notes to Lester and Burge. 

, 

.

      93.    In Phoenix, Park Terrace, then wholly owned by McLean, asserted

claims against Park Builders and its surety for improper construction. 241 N.C. at

475–76, 

.      As part of his purchase of Park Terrace, McLean

individually entered into a settlement agreement with Lester and Burge, as Park

Builders’ shareholders, that included a general release of claims against Park

Builders, Lester, and Burge. 

, 

. The court held that

McLean’s individual release did not bind Park Terrace because, when signing the

release, McLean was not a shareholder or a representative of Park Terrace. 

 at

477–78, 85 S.E.2d at 679–80.

      94.    In Lester, Lester and Burge brought suit against McLean individually

to enforce the purchase notes McLean had executed. 

, 

. McLean defended on the basis that he had been fraudulently induced by Lester
and Burge’s misrepresentation as to the value of their equity in the Park Terrace

project. 

 The court rejected the defense, finding that McLean had the ability to

learn of the alleged misrepresentation because “he had unlimited opportunity to

inspect the property.” 

, 

.

      95.    In Park Terrace, Inc. v. Burge, Park Terrace, owned by McLean, filed

suit to recover the money Park Terrace had paid Burge and Lester to purchase their

Class B shares. See 249 N.C at 312–13, 

. The court held that, at

the time of the suit, Park Terrace was acting as the representative of its shareholder,

McLean, rather than for its own independent right and any recovery would

essentially reduce the price McLean paid for his shares. 

, 

.

The court then rejected the corporation’s right to assert its claim.

      96.    The three opinions read together demonstrate that there were multiple

factors that influenced the court’s holding in Park Terrace, Inc. v. Burge. First, the

court assumed, without deciding, that the corporation’s purchase of Lester and

Burge’s Class B shares was an unfair transaction, stating “[i]t is difficult to

understand how the payment of $221,000 for the purchase and retirement of this

stock could have been for the best interest of the plaintiff corporation.” 

,

. However, the unfairness of this transaction was not controlling.

Second, the court noted that all of Park Terrace’s shareholders had approved the

transaction, including those shareholders from whom McLean acquired his rights,

leading the court to opine that “neither the plaintiff corporation nor the holders of the

A stock could thereafter attack the validity of the transaction unless the corporation
in doing so was acting on behalf of creditors.” 

 This supports the generally

accepted view that a purchaser has no greater rights than his seller had. Third,

McLean acquired his Class A shares voluntarily with the benefit of due diligence,

suggesting that the court was influenced by McLean’s failure to protect his rights.

, 

; see Lester, 242 N.C. at 395–97, 87 S.E.2d at 890–91.

Fourth, McLean’s valuation of Park Terrace’s Class A shares was made after the

Class B share redemption had been completed. This raised the court’s concern that

allowing Park Terrace to recover the purchase price of the Class B shares would

effectively reduce McLean’s purchase price. Park Terrace, Inc., 

, 

; see Lester, 

, 

. Finally, neither the FHA

nor any creditor challenged the transaction. Park Terrace, Inc., 249 N.C. at 311–12,

106 S.E.2d at 480–81.

      (3)    The Nebraska Supreme Court Opinion—Home Fire Insurance
             Co. v. 

.    There is little subsequent North Carolina case law citing Park Terrace,

Phoenix, or Lester. However, the Nebraska Supreme Court’s opinion, Home Fire

Insurance Co. v. Barber, which our Supreme Court relied on heavily in Park Terrace,

has been widely cited and adopted. See, e.g., Bangor Punta Operations, Inc. v. Bangor

& A.R. Co., 

, 710–11 (1974); Molina v. Sovereign Camp, W.O.W., 

 (Dist. Neb. 1947); Eisler v. E. States Corp., 

 (Md. 1943).

      98.    In Home Fire Insurance, the corporation brought suit against its former

officer, who had sold his shares to the corporation’s new owner. Home Fire Ins. Co.,

67 Neb. at 645–47. The Nebraska Supreme Court categorized the corporation’s
claims into two distinct categories: (1) claims to recover damages for the officer’s

mismanagement, and (2) claims to recoup monies the officer had withdrawn in

connection with his claim for back salary. Id. at 653.

      99.    The court addressed whether the corporation should be barred from

bringing suit where there was no remaining shareholder who owned shares at the

time of the mismanagement, even though a derivative action would clearly be

appropriate by any shareholder who owned shares at the time of the alleged wrong.

Id. at 654–55. The court also noted that the new controlling shareholder purchased

his shares from the alleged wrongdoer, invoking the established principle that a

purchasing shareholder cannot acquire greater rights than the selling shareholder

had and cannot pursue a claim for mismanagement against his seller. Id. at 659–63.

The court explained that to hold otherwise would be inequitable and would allow the

purchasing shareholder to essentially reduce his purchase price although he suffered

no financial injury. Id. at 663–64.

      100.   The court reached its holding despite the officer’s former misconduct,

stating that “[b]ecause the inequitable conduct of [the officer] shocks the conscience

of a chancellor is no reason why he should give his conscience a further shock by

allowing [the purchaser] to recover money to which [he has] no legal or equitable

claim.” Id. at 664. “A plaintiff must recover on the strength of his own case, not on

the weakness of the defendant’s case. It is his right, not the defendant’s wrong-doing

that is the basis of recovery.” Id. at 673. Stated otherwise, a concern of leaving prior

corporate management unchecked was not adequate grounds to compel granting
standing to one who acquired his interest from the wrongdoer and did not directly

suffer an injury.

      101.   In the absence of a shareholder who owned shares at the time of the

misconduct, the corporation should not be allowed to pursue an equitable claim no

shareholder could pursue individually. Id. at 669–70. The court noted a different

result might be obtained in an action at law. Id.

      102.   Significantly, the court reached a different result when considering

whether the corporation should be allowed to recoup money the officer had improperly

withdrawn from the company and to assert a defense to the officer’s claim for

additional unpaid wages. Id. at 675. The court characterized the officer’s earlier

withdrawal of funds as a conversion that was not discovered until after a change in

management had occurred. Id. The court found “a clear distinction between the

company and its stockholders” when addressing “title to property and [the

corporation’s] right to its money and assets,” and allowed the corporation to assert its

own rights. Id.

      103.   The United States Supreme Court followed Home Fire Insurance,

denying a corporation’s standing in Bangor Punta Operations, Inc. v. Bangor &

Aroostook Railroad Co., 

 (1974). The United States Supreme Court’s

opinion was issued over a strong dissent that argued that a contrary holding was

necessary so that judicial review would deter future corporate misconduct. 

.
      (4)    Park Terrace and the Contemporaneous Ownership Rule Do Not
             Bar Medflow’s Defense to Plaintiffs’ Claims.

      104.   With this background, the Court now turns to Defendants’ argument as

to why Park Terrace does not deprive them of standing.

      105.   Defendants first argue that Park Terrace was tacitly overruled when the

legislature enacted section 55-7-41 limiting a shareholder’s standing to bring a

derivative action to one who owned shares at the time of the wrong complained of

without placing any limit on the corporation’s standing.         The Court believes

Defendants’ argument seeks to fashion a legislative intent that is not evident. The

Court concludes that section 55-7-41 did not overrule Park Terrace.

      106.   A more significant argument is that the facts now before the Court are

distinguishable from, and outside the holding in, Park Terrace. There are at least

two clear factual distinctions between Park Terrace and this case. First, Lindberg

and Eli Global did not acquire Medflow’s shares from the shareholders who are now

accused of misconduct. If Park Terrace solely rested on the notion that a buyer cannot

sue his seller for mismanagement, then the holding would not bar Medflow’s claim or

defense. But the Court is persuaded that Park Terrace’s holding was not so narrow

and that this distinction does not necessarily preclude applying the contemporaneous

ownership rule to bar Medflow’s standing.

      107.   The second factual distinction has greater significance. Plaintiffs seek

to apply Park Terrace to bar the corporation from asserting an affirmative defense to

Plaintiffs’ own claims and a declaratory judgment claim, which essentially restates

the defense. Both Park Terrace and Home Fire Insurance focused on not allowing the
corporation’s new shareholders to receive a windfall recovery. Here, there is an

equitable argument that Plaintiffs, not Defendants, are seeking a windfall because

they are seeking to recover large bonuses that they may not have been entitled to if

their employment agreements had been disclosed to Medflow’s shareholders. The

Court does not rule on the underlying merits of the argument, but Medflow’s position

seems more analogous to Home Fire Insurance’s claim to recover wrongfully

converted funds from the former officer and its affirmative defense against its former

officer’s claim for additional salary payments, which were both allowed to proceed.

       108.   Nonetheless, the Court is confronted with competing public policies that

were not resolved in Park Terrace or Home Fire Insurance. On the one hand, courts

have an obvious interest in policing corporate misconduct. On the other hand, courts

are reluctant to protect one who acquires a corporation while ignorant of its liabilities

because of the purchaser’s own lack of due diligence.

       109.   Had Lindberg inquired as to outstanding management contracts, he

either would have been advised of Plaintiffs’ agreements so that he could have taken

those into account in his purchase deliberations, or he likely would have a claim based

on any failure to disclose the agreements. The undisputed evidence suggests that

Lindberg and his companies proceeded with the purchase without making such

inquiries. As such, there is a strong policy argument that Lindberg and his companies

should be deemed to have purchased Medflow “as is,” with no basis for relief of any

undisclosed liabilities.
      110.   If the issue was solely that Medflow wanted to recover money already

paid to Plaintiffs prior to their termination, the Court would be inclined to deny

Medflow’s standing, because the current shareholders did not suffer an injury due to

those payments. The Court is not persuaded, however, that those same equitable

considerations should relieve Plaintiffs of establishing that the agreements, entered

by and known only to themselves, were fair to Medflow before they are entitled to

receive any future payments.

      111.   After careful analysis and weighing the competing public policies,

equitable considerations, and the undisputed facts distinguishing this case from Park

Terrace, the Court concludes, on balance, that Medflow has standing to defend

against Plaintiffs’ claims by seeking judicial review as to the enforceability of the

employment agreements.

      112.   Accordingly, the Court holds that the contemporaneous ownership rule

does not preclude Medflow’s standing to assert its defense or to seek a declaration

that the defense is valid. Having so held, the Court need not resolve the disputed

issue of whether DJRTC became a beneficial shareholder prior to the Ehmann’s

execution of the Written Consent approving the employment agreements, thereby

satisfying the contemporaneous ownership rule.

      113.   Therefore, Plaintiffs’ motions for summary judgment are denied to the

extent they assert that Defendants lack standing to defend against the enforceability

of the employment agreements.
B.    There Are Material Issues of Disputed Fact as to Whether Plaintiffs’
      Agreements Were Unfair to Medflow When Entered.

      114.   The parties promote different standards of review to assess whether

Plaintiffs’ employment agreements are enforceable.       Plaintiffs contend that the

agreements are entitled to the presumption of validity afforded by the business

judgment rule unless Defendants can first establish that Plaintiffs breached their

fiduciary duties to Medflow, either by failing to disclose facts or negotiating with a

Medflow representative known or reasonably assumed not to be independently

capable of representing Medflow’s best interest. Defendants contend that each of the

Plaintiffs were either a Medflow officer or director, that the employment agreements

were therefore conflict-of-interest transactions, that Ehmann, as a director, did not

take advantage of the statutory safe harbors, and that now each Plaintiff, consistent

with well-established common law principals, must establish that their contracts

were fair to Medflow when entered.

      115.   As to Schiffli, the Court must first determine whether the evidence

supports the contention that Schiffli was a de facto officer when entering his

employment agreement. If so, then he must meet the same burden as Throneburg.

      (1)    There Is a Material Dispute as to Whether Schiffli Was a De
             Facto Officer When He Entered His Employment Agreement.

      116.   The parties dispute whether Schiffli should be treated as an officer when

he negotiated his employment agreement in July 2014, at which time he was

Medflow’s CFO although not elected as a corporate officer.
      117.      “[I]n North Carolina, an individual may owe a fiduciary duty to the

corporation if he is considered to be a de facto officer or director, with authority for

tasks such as signing tax returns, offering major input as to the company’s formation

and operation, or managing the company.” Kinesis Advert., Inc. v. Hill, 

, 15–16, 

 (2007). While merely assuming a title to an office may

not alone be adequate evidence of being a de facto officer, the overall inquiry examines

whether one continuously exercises the duties of an authorized corporate officer.

Havelock Yacht Club, Inc. v. Crystal Lake Yacht Club, Inc., 

,

 (2011).

      118.      Schiffli was an elected officer of Medflow from 2010 until December 10,

2013. He was not an elected officer again until December 19, 2014. (Schiffli Dep.

23:13–15.) During the interim, Schiffli continued to operate in a senior financial

management capacity and to refer to himself as Medflow’s Chief Financial Officer,

including that title in his e-mail signature. (See Schiffli Dep. 23:13–18; Gottumukkla

Decl. Ex. A.)

      119.      By Throneburg and Ehmann’s admission, Schiffli was a member of

Medflow’s senior management team when he negotiated his employment agreement

with Throneburg. (Throneburg Aff. ¶ 108, July 15, 2016; see also Schiffli Dep. 23:8–

10, 16–18.)

      120.      The Court concludes that there is adequate evidence to present a triable

issue of fact as to whether Schiffli was a de facto Medflow officer at the time he

negotiated and executed his employment agreement and therefore subject to
fiduciary duties of care and loyalty.       Accordingly, Schiffli’s Motion for Partial

Summary Judgment is denied to the extent it rests on the assertion that Schiffli did

not owe Medflow fiduciary duties when negotiating his employment agreement.

      (2)     Plaintiffs’ Employment Agreements Were Conflict-of-Interest
              Transactions and Are Not Protected by the Business Judgment
              Rule.

      121.    Conflict-of-interest transactions between a corporation and its officers

or directors have long been subject to special rules. For directors, a conflict-of-interest

transaction is defined as “a transaction with the corporation in which a director of

the corporation has a direct or indirect interest.” 

(a) (2015).

The statute defines an “indirect interest” but does not define a “direct interest.” 

at § 55-8-31(b). The test of whether a director has a direct interest is a matter of

common sense. Robinson, supra, § 15.01[1], at 15-3. It follows that common sense

should dictate whether an officer has a direct interest in a transaction.

      122.    Common sense makes clear that each of the Plaintiffs had a direct

interest in their own employment agreements, making these agreements

conflict-of-interest transactions.   While it may be appropriate for a fiduciary to

negotiate in his own interest, it does not follow that he is entitled to the business

judgment rule when doing so. See In re Walt Disney Co. Derivative Litig., 

 (Del. Ch. 2005). The business judgment rule, if applicable at all, would only

apply to the person purportedly representing the corporation.

      123.    North Carolina’s Business Corporation Act contains a section dealing

specifically with transactions between a corporation and its directors. 

 (2015). There is no corresponding provision for transactions between a

corporation and its officers. Section 55-8-31 modifies the common law with regard to

director transactions by specifying two safe harbors—(1) approval by a majority of

the board of directors and (2) approval by a majority of the shareholders—that, when

followed, protect the transaction from attack.             See 

 § 55-8-31(a)(1)-(2).

Significantly, the board of directors’ safe harbor requires that the directors who

approve the transaction have no direct or indirect interest in the transaction. Id.

§ 55-8-31(c).     Otherwise, a director must prove the transaction was fair to the

corporation. Id. at § 55-8-31(a)(3).

      124.      Plaintiffs contend that these statutory safe harbors are optional, not

mandatory.       They further argue that an officer or director does not have an

affirmative burden to prove fairness until a party challenging the transaction comes

forward with evidence adequate to defeat an initial presumption of validity. In

addition to being devoid of case support, that argument inverts the presumption

applied at common law and is inconsistent with the limited statutory modification for

director conflict-of-interest transactions provided by section 55-8-31.

      125.      Plaintiffs contend that an officer or director has no affirmative duty to

prove that his compensation contract was fair to the corporation unless there is

evidence that the officer or director: (1) manipulated the independent judgment of the

director with whom the officer negotiated; (2) negotiated in bad faith, either by

defrauding the company or seeking an unconscionable advantage; (3) failed to make

a reasonable inquiry of the corporation’s condition or acted inappropriately in regard
to matters such an inquiry discloses; or (4) intentionally failed to act or consciously

disregarded his duty to act. (Pls.’ Suppl. Br. Supp. Mots. Summ. J. 5.) Plaintiffs

contend that an interested transaction is not voidable until there is adequate proof

by an opposing party of one of those duty violations. (Pls.’ Suppl. Br. Supp. Mots.

Summ. J. 5.)     At the hearing on these motions, Plaintiffs conceded that any

presumption that the agreements are valid is lost if the opposing party demonstrates

that the officer or director negotiating on behalf of the corporation is known to have

a personal interest in the transaction. That is, as applied here, the presumption is

lost if Throneburg or Ehmann had a direct or indirect interest in the other’s

agreement when representing Medflow in negotiations.

      126.   As to Ehmann’s independence, Throneburg’s own testimony concedes

that Throneburg had given him substantial compensation increases before

negotiations for Throneburg’s agreement began. (Throneburg Aff. ¶¶ 103–105, July

15, 2016.) Ehmann and Throneburg had collectively agreed to a multi-year Strategic

Plan and believed that the success of the Strategic Plan required long-term

commitments from the senior management team, supporting, at least, an inference

that Ehmann would expect that he, too, would receive a multi-year contract. Ehmann

testifies that he regularly deferred to Throneburg’s judgment, including his ability to

draft agreements for each of them. (See Ehmann Aff. ¶ 91, Aug. 3, 2016.)

      127.   As to Throneburg’s independence, among other factors, the evidence

shows that, contrary to the contention that the terms of Throneburg’s compensation

agreement were completely fixed prior to Throneburg negotiating Ehmann’s contract,
Throneburg and Ehmann continued negotiations in July 2014, resulting in the

addition of a change-of-control bonus.

      128.     There is also a factual dispute whether Throneburg even had authority

to act as a director and approve Ehmann’s employment agreement. Compare 

(d) (2015) (recognizing in some circumstances that the power of a

board may be exercised by an individual with delegated authority) with Grimes v.

Donald, 

 (Del. 1996) (explaining that certain duties of a board of

directors are nondelegable).

      129.     The Court concludes that the record requires a finding, as a matter of

law, that Throneburg and Ehmann had a direct or indirect interest when negotiating

each other’s agreements, and therefore, the presumption Plaintiffs argue for would

have been lost, even if it was supported by law.

      130.     However, the Court believes that Plaintiffs’ proposed standard of review

is, in any event, inconsistent with established North Carolina corporate principles. A

director, if not protected by the statutory safe harbors, or an officer when challenged,

must prove that his interested transaction with the corporation is fair to the

corporation.    See 

(a); Highland Cotton Mills v. Ragan

Knitting Co., 

, 

 (1927).

      131.     Plaintiffs argue that the Court is inappropriately imposing a standard

of “entire fairness” similar to that adopted by the Delaware Court of Chancery in

change-of-control situations, see Revlon, Inc. v. Macandrews Forbes Holdings, Inc.,

 (Del. 1986), when the North Carolina legislature clearly rejected
that standard when it amended section 55-8-30 to provide that “duties of a director

weighing a change of control situation shall not be any different, nor the standard of

care any higher, than otherwise provided in this section.” 

-

30(d) (2015).

      132.      However, Plaintiffs try to compare apples to oranges. The change to

section 55-8-30 regarding duties in a change-of-control situation does not modify the

duty of care a director has when negotiating his own interested transaction with the

corporation.     The Court is not imposing a heightened standard of care to a

conflict-of-interest transaction. The same duty applies to all interested transactions

between a corporation and its directors and officers. It does not vary depending on

whether or not it relates to a change in control.

      133.      The North Carolina Business Corporation Act specifically articulates

that in the absence of approval by a disinterested board or by shareholders, a director

must prove that his interested transaction is fair to the corporation. 

(a) (2015). At common law, a conflict-of-interest agreement between a

corporation and its director or officer was presumed invalid so that the director or

officer must demonstrate that the agreement was openly and fairly made and that

the corporation formally authorized or ratified the agreement. Robinson, supra,

§ 15.01, at 15-1 to -2; see also Highland Cotton Mills, 

, 

;

Fowle Mem’l Hosp. Co. v. Nicholson, 

, 

 (1925). It is true

that the Supreme Court of North Carolina has also held that compensation

agreements between a corporation and its officer or director are not per se void or
voidable. Fulton v. Talbert, 

, 

 (1961). But

neither section 55-8-31 nor Fulton can be fairly read to erode the underlying concept

that a transaction between a corporation and its officer or director should be fair to

the corporation, nor do they provide that such fairness is presumed by application of

the business judgment rule.

      134.   It is undisputed that the shareholders were not asked to approve the

employment agreements.        Further, Ehmann’s employment agreement was not

approved by an independent director of Medflow because, even if Throneburg was

properly delegated such authority, Throneburg was not sufficiently independent to

serve as a director for the purposes of approving Ehmann’s agreement pursuant to

section 55-8-31(a)(1).   Whether an independent director approved Schiffli’s or

Throneburg’s agreements is irrelevant because the statutory safe harbors do not

apply to them and they must establish that their agreements were fair. Thus, on

these facts, the Court concludes that Plaintiffs have not sustained their burden to

justify a summary adjudication that the agreements were fair to Medflow.

      135.   In sum, Plaintiffs’ Motions for Partial Summary Judgment are denied

to the extent they contend that Plaintiffs need not affirmatively prove that their

agreements were openly and fairly made. A jury must now determine whether

Throneburg, Ehmann, and Schiffli, if he is found to be a de facto officer, can prove

that their agreements were fair to Medflow when entered.
      (3)    The Fairness Inquiry Includes Assessing Both Whether the
             Agreements Were Entered Through a Fair Process and Whether
             the Terms of the Agreement Were Fair to Medflow

      136.   The Court now must determine the proper analysis the jury will use to

assess whether Plaintiffs’ agreements were fair to Medflow when entered. North

Carolina has not adopted any rigid definition of fairness as applied to

conflict-of-interest transactions. It is logical that what is fair must be measured by

the overall circumstances of a particular transaction.     The Official Comment to

section 8.31 of the Model Corporation Act, the section on which 

 is based, explains that

      [t]he fairness of a transaction for purposes of section 8.31 should be
      evaluated on the basis of the facts and circumstances as they were
      known or they should have been known at the time the transaction was
      entered into. For example, the terms of a transaction subject to section
      8.31 should normally be deemed “fair” if they are within the range that
      might have been entered into at arm’s-length by disinterested persons.

, cmt. 4. Former section 55-30(b), which section 55-8-31

replaced, used a “just and reasonable” standard measured against an arm’s length

transaction. See Meiselman v. Meiselman, 

, 

(1983) (quoting N.C. Gen. Stat. 55-30(b)(3)). This standard captured the essence of

the common law requirement that a conflict-of-interest transaction be “openly and

fairly made.” Meiselman, 

 n.7, 

 (quoting R. Robinson,

North Carolina Corporation Law & Practice, § 12-11, at 184 (3d ed. 1983)); see also

Hill v. Erwin Mills, Inc., 

, 

 (1954) (explaining

that an inherently fair transaction “carries the earmarks of an arm’s length bargain”)

(quoting Pepper v. Litton, 

 (1939)).
      137.   Plaintiffs contend that they only need to prove that the terms of their

agreements are substantively fair, and if they do so, the agreements cannot be voided

even if the procedure by which they were adopted was unfair. Defendants contend

that a conflict-of-interest agreement can never be upheld if it was entered through an

unfair process, even if the substantive terms are objectively fair. The Court concludes

that neither party is correct.

      138.   Rather, the overall fairness inquiry should not be segregated into two

separate components, but must compare both process and terms against an

exemplary arm’s length transaction.       There is a necessary interplay between

procedural and substantive fairness.

      139.   The Court has been, in part, guided by the more extensive body of

Delaware case law applying a fairness standard to interested transactions. The

Delaware Supreme Court recognizes that determining whether an agreement is fair

requires assessing both the process by which it was entered and its terms, but that a

fairness inquiry does not bifurcate along those considerations. Weinberger v. UOP,

Inc., 

 (Del. 1983); see also Del. Open MRI Radiology Assocs., P.A. v.

Keelser, 

 (Del. Ch. 2006) (“[T]he two-part fairness test is not a

bifurcated one”). Instead, determining fairness is a plenary inquiry into the “entire

fairness” of the agreement. Weinberger, 

.

      140.   The decision by former Delaware Chancellor, and now Delaware

Supreme Court Justice, Leo Strine, illustrates the interplay between process and

terms, and how terms that may be fair in an arm’s length transaction may
nevertheless be unfair when the process of securing those terms is considered. See

HMG/Courtland Props., Inc. v. Gray, 

, 116–18 (Del. Ch. 1999).              In

HMG/Courtland Properties, the interested directors sought to uphold a real estate

transaction by proof that the final terms of the transaction fell within a range of

fairness as measured by appraisals of the underlying property. 

. The court

accepted that the directors may have proven that the terms might have been agreed

to in an arm’s length bargain, but the directors failed to prove that, in this particular

transaction, the terms were not tainted by a manifestly unfair process. 

 at 116–

18. Therefore, the court concluded that the terms were not fair “in the sense inherent

in the entire fairness standard.” 

.

      141.   However, Delaware does not follow a rule that process unfairness alone

will defeat a transaction with terms that are substantively fair. See Valeant Pharm.

Int’l v. Jerney, 

 (Del. Ch. 2007). After finding that a corporation

had adopted a bonus program through an unfair process, Vice Chancellor Lamb

stated that such a finding

      does not end the court’s inquiry because it is possible that the pricing
      terms were so fair as to render the transaction entirely fair.
      Nevertheless, where the pricing terms of a transaction that is the
      product of an unfair process cannot be justified by reference to reliable
      markets or by comparison to substantial and dependable precedent
      transactions, the burden of persuading the court of the fairness of the
      terms will be exceptionally difficult. Relatedly, where an entire fairness
      review is required in such a case of pricing terms that, if negotiated and
      approved at arm’s length, would involve a broad exercise of discretion or
      judgment by the directors, common sense suggests that proof of fair
      price will generally require a showing that the terms of the transaction
      fit comfortably within the narrow range of that discretion, not at its
      outer boundaries.


 at 748–49.

         142.   These Delaware decisions are fully consistent with North Carolina

precedent directing that a conflict-of-interest transaction is fair only if it was openly

made with terms consistent with an arm’s length transaction. See Hill, 

, 

.      Requiring consistency with an arm’s length transaction

necessarily measures both the negotiation process and the substance of the terms.

There is a necessary interdependency between process and terms, and a dutiful

inquiry into fairness must consider both together in the overall context of the

transaction.

         143.   Here, Throneburg testified that he consulted market-based transactions

when drafting the employment agreements. (Throneburg Aff. ¶¶ 126–29, July 15,

2016.)     Plaintiffs have offered expert affidavits expressing opinions that the

substantive terms of the agreements were fair to Medflow and consistent with an

agreement negotiated at arm’s length, (see Walker Aff. ¶ 12; Henson Aff. ¶ 24,)

although one of Plaintiffs’ experts, Thomas Henson, is careful to note that he

expresses no opinion as to the fairness of the process by which the agreements were

entered. (Henson Aff. ¶ 25.)

         144.   These expert opinions must be measured against the uncontested

evidence that these agreements resulted from negotiations between a single CEO and

a sole director without involving the controlling shareholder or any review by

Medflow’s outside counsel. Admittedly, Throneburg and Ehmann each testify that

they were fully informed as to all material facts and circumstances when representing
Medflow in negotiations with the other. (See Throneburg Aff. ¶ 106, July 15, 2016;

Ehmann Aff. ¶¶ 56–57.) But considering other evidence of record, there is a genuine

dispute as to whether the agreements were consistent with a fair arm’s length

transaction.

       145.    Accordingly, each of Plaintiffs’ Motions for Partial Summary Judgment

must be DENIED. A jury must now determine whether Plaintiffs’ employment

agreements were fair to Medflow when entered. The jury will only address the

fairness of Shiffli’s agreement if it first finds he is a de facto officer.

C.     Defendants’ Assertion of Unconscionability Merges Into the Overall
       Fairness Inquiry, Precluding Summary Judgment in Their Favor.

       146.    Defendants argue that the terms of the employment agreements are so

unfair that they should be declared unconscionable and unenforceable as a matter of

law.

       147.    In this context, the concept of unconscionability is more often referred

to as a claim of corporate waste. If compensation terms rise to the level of being so

egregious that no disinterested board could approve them in good faith, then the

agreements may be found to constitute corporate waste. Robinson, supra, § 16.11, at

16-25; see Grimes, 

 (1996) (holding that the business judgment rule

cannot protect compensation decisions which are so egregious as to constitute

corporate waste).

       148.    Here, Plaintiffs’ experts’ affidavits are adequate to raise a material

dispute as to whether the substantive contract terms were fair to Medflow.

Defendants’ assertion of unconscionability collapses into the overall issue of fairness.
      149.   Accordingly, each of Defendants’ Motions for Summary Judgment must

be DENIED. The question of whether there is a basis to void the agreements as

corporate waste will depend on the substantial evidentiary record presented at trial.

The Court reserves determining whether this defense is applicable and if so, whether

this matter is a question for the Court or for the jury.

                                VI.    CONCLUSION

      150.   For the foregoing reasons, each of the motions for summary judgment is

DENIED. The Court will set a trial date on the Severed Issue as soon as practicable

considering other trial engagements and will establish a further pretrial schedule.

      IT IS SO ORDERED, this the 26th day of September, 2017.



                                          /s/ James L. Gale
                                         James L. Gale
                                         Chief Business Court Judge