Pagidipati Enterprises, Inc. v. Laboratory Corp. of America Holdings ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1649
PAGIDIPATI ENTERPRISES, INC.,
Plaintiff – Appellee,
v.
LABORATORY CORPORATION OF AMERICA HOLDINGS,
Defendant – Appellant.
Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. N. Carlton Tilley,
Jr., Senior District Judge. (1:10-cv-00742-NCT-LPA)
Argued: March 21, 2013 Decided: April 11, 2013
Before MOTZ and DUNCAN, Circuit Judges, and Robert E. PAYNE,
Senior United States District Judge for the Eastern District of
Virginia, sitting by designation.
Affirmed by unpublished opinion. Judge Duncan wrote the
opinion, in which Judge Motz and Senior Judge Payne joined.
ARGUED: Robert Steiner, KELLEY DRYE & WARREN, LLP, New York, New
York, for Appellant. Reid Lloyd Phillips, BROOKS, PIERCE,
MCLENDON, HUMPHREY & LEONARD, Greensboro, North Carolina, for
Appellee. ON BRIEF: Adam H. Charnes, Chad D. Hansen, KILPATRICK
TOWNSEND & STOCKTON LLP, Winston-Salem, North Carolina, for
Appellant. Joseph A. Ponzi, BROOKS, PIERCE, MCLENDON, HUMPHREY
& LEONARD, Greensboro, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
DUNCAN, Circuit Judge:
In this breach of contract action, Appellee Pagidipati
Enterprises (“PEI”) sued Appellant Laboratory Corporation of
America (“LabCorp”) to recover payments due under their Asset
Purchase Agreement (“APA”). LabCorp asserted mutual mistake as
an affirmative defense, arguing that the APA as written does not
provide for compensation for growth attributable only to
customers PEI brought to the deal, which is what the parties
intended it to reflect. Finding that LabCorp’s omission of some
of its own prior customers from the APA did not constitute a
mutual mistake under North Carolina law, the district court
granted PEI’s motion for summary judgment. For the reasons that
follow, we affirm.
I.
A.
In late 2007, LabCorp, a New York corporation that operates
a nationwide medical laboratory network, became interested in
purchasing PEI, a family-owned Florida corporation then
operating clinical laboratories and testing centers in seventeen
Florida counties. The parties began negotiations. About a year
later PEI agreed to sell its assets, including its customer
list, to LabCorp for an initial purchase price of $13 million,
as well as two Earnout Period Payments that PEI would receive if
3
certain conditions were met. This agreement was finalized in a
31-page contract--the APA.
The contested provisions of the APA are Section 2.3,
entitled “Earnout Amount,” and the accompanying Exhibit 2.3(a),
which lists “Shared Customers.” See J.A. 44-45, 91. Section
2.3 sets out the time period and formula for calculating the two
Earnout Period Payments. These Payments are based on (1) a
Revenue Minimum Target Amount (“RMTA”), which the parties set at
$4,901,214, reflective of PEI’s 2007 revenue; (2) a Revenue
Multiplier, set at 2.1; and (3) “Revenues” for the first and
second years following the APA, defined as LabCorp’s revenues
“for any and all services provided and billed to any customer
listed on [PEI’s] Customer List,” as well a percentage of
revenues for services provided to their shared customers. Id.
at 44. Section 2.3 further defines “shared customers” as “those
customers listed on Exhibit 2.3(a), which include certain
customers . . . who were customers of both Seller and Purchaser
during the period from January 1, 2007 through and including
September 30, 2007.” Id. 1 For each customer on the Shared
1
For the First Earnout Period (Year One), PEI was to obtain
a payout equal to (Year One Revenues – $4,901,214) x 2.1, not to
exceed $2 million. The Second Earnout Period operated in a
similar way, such that the payout equals ((Year Two Revenues -
$4,901,214) x 2.1) – First Earnout Period Payment, with the
combined payouts for years one and two not to exceed $4 million.
See id.
4
Customer List at Exhibit 2.3, PEI would only earn “partial
credit” for increased revenues, which the parties intended to be
“based on the historical percentage of business each company
generated from those shared clients.” Appellant’s Br. at 13;
see also J.A. 91.
The Shared Customer List was the product of negotiation
between the parties. LabCorp initially drafted the list because
it was unwilling to disclose its entire customer database to
PEI. PEI never had access to LabCorp’s customer database,
receiving only the list of shared customers created by LabCorp.
Notably, the parties agree that not all shared customers
merited placement on the final list. For example, because PEI
began referring certain customers to LabCorp before closing, PEI
negotiated with LabCorp to omit those customers from the Shared
Customer List. Thus, it is undisputed that the Shared Customer
List attached to the APA was intentionally underinclusive, and
does not, nor was it ever meant to, “accurately” include all
customers shared between LabCorp and PEI.
It is also undisputed that, under the APA as written, PEI
is entitled to the full $4 million Earnout Amount. LabCorp
nonetheless argues that the APA should not be enforced as
written, and has refused to pay.
5
B.
PEI filed this breach of contract action under North
Carolina law in the Middle District of North Carolina, asserting
federal jurisdiction based on diversity of citizenship. LabCorp
answered, defending its failure to pay any Earnout Payment to
PEI on grounds of mutual mistake. Specifically, LabCorp argued
that its own failure to correctly identify all customers shared
between the parties resulted in a Shared Customer List that did
not effectuate the parties’ mutual intent to reward growth
attributable to customers PEI brought to the deal. LabCorp
sought reformation of the Shared Customer List attached as
Exhibit 2.3(a) to the APA. PEI moved for summary judgment.
The district court adopted the magistrate judge’s report
and recommendation, which rejected LabCorp’s affirmative defense
of mutual mistake. The court reasoned that LabCorp had failed
to proffer any evidence that the parties had agreed to include
any specific customers on the Shared Customer List that did not
appear on the final list. Instead, “Defendant seeks reformation
based on the prospect that a fact-finder might conclude that
Plaintiff would have accepted an Exhibit 2.3(a) to the APA that
included on the list of ‘Shared Customers’ the additional
customers now belatedly identified by Defendant.” J.A. 999.
The court determined that LabCorp’s asserted mistake did not
fall within the scope of North Carolina’s mutual mistake
6
doctrine, under which “a meeting of the minds as to the specific
terms” is required, and the “general intent” of the parties to
achieve some objective that the contract as written fails to
achieve will not suffice. See id. at 1000 (emphasis omitted).
Accordingly, the district court entered summary judgment in
PEI’s favor, awarding over $4.5 million for the full Earnout
Period Payments plus pre-judgment interest and costs. LabCorp
timely appealed.
II.
As it did below, LabCorp asks this court to rewrite the
Shared Customer List to add customers that currently appear on
PEI’s Customer List but were apparently also shared by LabCorp,
so as to reduce PEI’s Earnout Amount to zero. This reformation
is warranted, LabCorp argues, because the Shared Customer List
does not accurately reflect the parties’ intent to account for
growth attributable only to PEI’s customers. Thus, the Shared
Customer List drafted and agreed to by the parties constitutes a
mutual mistake, and the district court erred in construing North
Carolina law too narrowly. We disagree.
LabCorp’s argument fails for at least three reasons: (1)
the “meeting of the minds” that LabCorp alleges the APA fails to
embody is far more general than the mistake it asserts, and the
reformation it seeks; (2) any mistake relating to the contents
7
of the Shared Customer List was not mutual, but rather LabCorp’s
singular failure; and (3) even if it were warranted, LabCorp’s
inability to identify a mutual mistake with any specificity also
prevents the court’s reformation of the Shared Customer List.
We address each of these reasons in turn. In doing so, we
review the district court’s grant of summary judgment de novo,
viewing all facts and drawing all reasonable inferences in
LabCorp’s favor. See Webster v. U.S. Dep’t of Agric., 685 F.3d
411, 421 (4th Cir. 2012). We also review de novo the district
court’s interpretation of North Carolina contract law in a
diversity case such as this one. See Trimed, Inc. v. Sherwood
Med. Co., 977 F.2d 885, 888 (4th Cir. 1992).
A. A mutual mistake must be specific.
We agree with the district court that LabCorp has failed to
meet its burden of proof under North Carolina’s mutual mistake
doctrine to show by clear, cogent and convincing evidence that
some material part of the agreement was inadvertently omitted.
Although the Shared Customer List may constitute a “mistake”
insofar as the Earnout Amount under the APA does not, in
LabCorp’s present estimation, effectuate the parties’ general
intent for the payments to compensate PEI for growth
8
attributable to PEI’s customers, that cannot justify the court’s
intervention into their drafting failure. 2
A mutual mistake is a mistake that is “‘common to both
parties to a contract . . . wherein each labors under the same
misconception respecting a material fact, the terms of the
agreement, or the provisions of the written instrument designed
to embody such agreement.’” Branch Banking & Trust Co. v.
Chicago Title Ins. Co., 714 S.E.2d 514, 518 (N.C. App. 2011)
(“BB&T”) (quoting Metro. Prop. & Cas. Ins. Co. v. Dillard, 487
S.E.2d 157, 159 (N.C. App. 1997)). We apply a “‘strong
presumption in favor of the correctness of the instrument as
written and executed, for it must be assumed that the parties
knew what they agreed and have chosen fit and proper words to
2
LabCorp cites the following evidence to prove the
inaccuracy of the Shared Customer List: (1) the declaration of
LabCorp’s Director Greg Klenke, who states that the Shared
Customer List is “not accurate,” that it “omits many long-
standing clients of LabCorp,” and that these are “customers
LabCorp had before the [PEI] transaction,” J.A. 979-80; and (2)
the declaration of LabCorp’s Senior Vice President Robert
Nelson, who states: “Providing [PEI] with earn out credit for
LabCorp’s own customers is contrary to the intention of the
parties, reflected, among other things, in the form of the
transaction that contemplated the sale of a customer list as
well as the obligation placed on the sellers post-closing to
assist with the smooth transition of [PEI’s] customers to
LabCorp in the hope that such a transition would lead to a
growth in the business attributable to those customers,” J.A.
1020. Like LabCorp’s argument, its evidence skips a step. As
we discuss further, it does not necessarily follow from the fact
that the Shared Customer List omits some customers of LabCorp
that the Shared Customer List is “not accurate.”
9
express that agreement in its entirety.’” Hice v. Hi-Mil, Inc.,
273 S.E.2d 268, 270 (N.C. 1981) (quoting Clements v. Life Ins.
Co. of Va., 70 S.E. 1076, 1077 (N.C. 1911)).
However, as in BB&T, LabCorp “does not allege that it had
an oral agreement with [PEI] that was mistakenly omitted from
the [APA].” 714 S.E.2d at 518. Instead, LabCorp argues “that a
mutual mistake by both it and [PEI] led to [an] ‘inadvertent
windfall’” of sorts because neither party ever intended that the
Earnout Amount would exceed growth attributable to PEI’s
customers. See id. But BB&T makes clear that more is required
for reformation of a contract. LabCorp must “show that it and
[PEI] had a meeting of the minds as to the specific terms of the
[Shared Customer List], and that some material part of their
agreement was mistakenly omitted from the [Shared Customer
List].” Id. at 519. LabCorp has not presented any evidence
that it and PEI had a mutual intention to include certain
customers on the Shared Customer List so that it would
adequately reflect growth, and that the Shared Customer List, as
a result of a mutual mistake, failed to properly express those
intentions.
LabCorp cites a legal treatise in support of a more lenient
burden it would have us apply here. In a generic summary of the
law, that treatise teaches: “To establish a mutual mistake in an
instrument so as to authorize its reformation . . . it is
10
sufficient to show that [the parties] agreed to accomplish a
particular object by the instrument to be executed and that such
instrument, as executed, is insufficient to effectuate their
intention.” 66 Am. Jur. 2d Reformation of Instruments § 22.
Although that language is admittedly broader than the language
from BB&T upon which the district court relied, this treatise
does not supply the North Carolina law we are bound to apply in
this case.
Nor do we find that LabCorp has met even the lesser burden
it presses upon us. Although LabCorp’s evidence does tend to
show that the purpose of the Earnout Period Payments was to
reward PEI for additional growth attributable to PEI’s customers
beyond that anticipated at the time of the sale, 3 none of the
evidence shows that the Shared Customer List does not accomplish
that objective--at least to the extent that objective was
mutual. On the basis of this evidence, we cannot conclude that
LabCorp has shown the APA insufficiently effectuates the
3
To prove the parties’ mutual intent, LabCorp also
supplies, in addition to the Klenke and Nelson declarations
already discussed, supra note 2, (1) documentary evidence
concerning the negotiation and drafting of the APA, including
emails between the parties, and a memorandum written by PEI; and
(2) the deposition testimony of several of PEI’s shareholders
and officers, generally supporting the notion that the purpose
of the Earnout Payments was to provide PEI additional
compensation if its customers produced increasing profits. See
Appellant’s Br. at 3.
11
parties’ mutual intent, so as to authorize its reformation, even
under its proposed formulation of the rule.
None of the North Carolina precedent LabCorp cites in
support of its argument requires a contrary conclusion. For
example, in Dettor v. BHI Prop. Co. No. 101, 379 S.E.2d 851, 853
(N.C. 1989), the North Carolina Supreme Court reversed the
district court’s grant of partial summary judgment, ruling that
a triable issue of fact remained as to whether the parties to a
land sale had a mutual understanding that a creek running near a
ten-acre tract of land would provide the southern boundary, or
whether the specific acreage listed in the agreement was
intended to control. That holding has no bearing on our present
inquiry, because there is no question of fact as to whether
LabCorp and PEI intended the Customer Lists attached to the APA
to control, or “provide the boundary for,” the Earnout Amount.
At the time they entered into the APA, both parties agreed to
the Shared Customer List as the proper means of calculating
growth attributable to any shared customers for the purpose of
determining the Earnout Payments.
Indeed, as it must, LabCorp concedes that this was the
parties’ mutual intent. Nonetheless, it now seeks to move a few
names from PEI’s Customer List to the Shared Customer List
without providing any evidence whatsoever that the parties
intended or agreed to do so. There is no mutual mistake to be
12
found on these facts, merely an apparent lack of diligence by
LabCorp. The court can provide no remedy for that mistake,
which is the result LabCorp negotiated and agreed to.
B. Any mistake was unilateral, not mutual.
It follows that the mistake upon which LabCorp seeks to
rely is solely its own. “The mistake of one party . . . alone,
not induced by the fraud of the other, affords no ground for
relief by reformation.” Matthews v. Shamrock Van Lines, Inc.,
142 S.E.2d 665, 668 (N.C. 1965) (internal quotation marks
omitted). Here, full responsibility for comparison of the
parties’ existing customer lists rested with LabCorp, because
LabCorp was unwilling to disclose all of its customers to PEI.
PEI never had access to LabCorp’s secret customer database,
which is what LabCorp used to draft the Shared Customer List.
LabCorp’s assertion that the “mistake” here was mutual
consequently strains credulity, in addition to failing to meet
the clear requirements of North Carolina contract law.
C. Lack of specificity renders reformation impossible.
Finally, even if LabCorp were able to obtain reformation to
fix its own mistake, it cannot simply point to a customer on
PEI’s Customer List and argue that the parties intended to
include that customer on the Shared Customer List for the sole
reason that it had also been a customer of LabCorp. As we have
already discussed, the Shared Customer List was not an
13
exhaustive list of all shared customers. In light of that fact,
LabCorp’s failure to identify with particularity the
circumstances constituting its mistake--beyond its amorphous,
unsupported assertion that some customers from PEI’s Customer
List should have been added to the Shared Customer List--or to
proffer any evidence from which it could be determined that the
parties intended to include any specific omitted customers,
renders the reformation task LabCorp asks us to perform
impossible. It also underscores the flaws in LabCorp’s mutual
mistake theory as a whole.
“‘Reformation is a well-established equitable remedy used
to reframe written instruments where, through mutual mistake or
the unilateral mistake of one party induced by the fraud of
another, the written instrument fails to embody the parties’
actual, original agreement.’” BB&T, 714 S.E.2d at 517-18(quoting Metro. Prop. & Cas., 487 S.E.2d at 159). To qualify,
LabCorp must state “with particularity the circumstances
constituting mistake as to all of the parties to the written
instrument.” Best v. Ford Motor Co., 557 S.E.2d 163, 166 (N.C.
App. 2001).
Here, the undisputed evidence shows that the parties
negotiated extensively to arrive at the final list of shared
customers that is embodied in the Shared Customer List attached
to the APA. According to its stated terms, the Shared Customer
14
List comprises only “certain customers . . . who were customers
of both [PEI] and [LabCorp] during the period from January 1,
2007 through and including September 30, 2007.” J.A. 44 at
2.3(a) (emphasis added).
Because the Shared Customer List was never intended to be
inclusive of all customers shared between the parties, at the
bare minimum LabCorp would need to show something to prove the
parties intended that each omitted customer be reflected as
shared in the APA. Given LabCorp’s lack of evidence, we cannot
discern any method for determining which “certain” customers we
might add to a reformed Shared Customer List in order to
effectuate the parties’ mutual agreement. LabCorp’s unsupported
assertion that the Earnout Amount as currently calculated under
the APA does not “accurately” account for growth attributable to
PEI’s customers falls far short of providing such a method. It
is similarly unclear how LabCorp would have us allocate the
percentage of revenues to each omitted customer in reforming the
Shared Customer List. 4 From a practical standpoint then, we fail
to see how the APA possibly could be refashioned based on
LabCorp’s proffered evidence, even if reformation were legally
warranted, which it is not.
4
Also noticeably absent is any justification or explanation
by LabCorp for this “mutual” mistake.
15
Accordingly, we agree with the district court that
LabCorp’s performance under the APA’s provision for PEI’s
Earnout Amount, which embodies the parties’ actual, original,
fully-negotiated, specific agreement, is not excused by any
mutual mistake. The doctrine of mutual mistake cannot be
intended for use by a party seeking to rewrite a contract in
order to obtain some benefit of a bargain better than the one it
negotiated for itself, merely because it mistakenly thought it
was getting a better deal.
III.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED.
16