Ehmann v. Medflow, Inc.

Ehmann v. Medflow, Inc., 2020 NCBC 30.

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.

JUDGMENT ON JURY VERDICT,

ORDER AND OPINION ON POST-

MEDFLOW, INC.; GREG E.

TRIAL MOTIONS, AND ORDER

LINDBERG; ELI RESEARCH, LLC;

AND OPINION ON PARTIAL

ELI GLOBAL, LLC; ELI EQUITY, LLC;

SUMMARY JUDGMENT MOTION

SNA CAPITAL, LLC; SOUTHLAND

NATIONAL HOLDINGS, LLC;

SOUTHLAND NATIONAL

INSURANCE CORPORATION;

DJRTC, LLC; and MEDFLOW

HOLDINGS, LLC,

Defendants.

1. THIS MATTER arises from the circumstances surrounding the end of

the employment relationship between Plaintiffs and their former employer,

Defendant Medflow, Inc. (“Medflow”), and focuses in particular on the manner in

which Plaintiffs’ employment ended and Plaintiffs’ rights to certain benefits under

their employment contracts.

2. Now before the Court are multiple motions, detailed below, including

post-trial motions following a trial solely against Medflow on a limited issue

regarding the enforceability of Plaintiffs’ contracts, as well as a renewed summary

judgment motion of which the Court deferred full consideration until after the trial.

3. Pursuant to an order in a rehabilitation proceeding in Wake County

Superior Court in which Defendant Southland National Insurance Corporation

(“SNIC”) is also a party (the “Rehabilitation Proceeding”), this Court is enjoined from

entering any judgment against SNIC or its assets without the express allowance of

the Wake County Superior Court. In this Judgment, Order and Opinion, the Court

makes no findings and expresses no opinion as to any right Plaintiffs may have to

impose liability upon SNIC.

4. For the reasons stated below, the various motions are DENIED in part

and GRANTED in part.

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

for Plaintiffs.

Condon Tobin Sladek Thornton PLLC, by Aaron Z. Tobin, Michele

Spillman (pro hac vice), and Jared T.S. Pace (pro hac vice), and Fox

Rothschild LLP, by Matthew Nis Leerberg and Troy D. Shelton, for

Defendants Medflow, Inc. and Medflow Holdings, LLC.

Gale, Judge.

I. INTRODUCTION

5. Plaintiffs executed employment contracts with Medflow on or about July

5, 2014, which vary as to their effective dates and the amount of annual

compensation, but otherwise contain the same terms on all matters central to this

litigation. Plaintiffs bring this litigation, in part, to recover unpaid wages, change-

of-control payments, and severance benefits to which they allege they are entitled

under their agreements.

6. Throughout the course of this litigation, Medflow has maintained that

the agreements are altogether unenforceable because they contain terms grossly

unfair to Medflow and were negotiated to protect Plaintiffs’ personal interests in

contravention of Plaintiffs’ fiduciary duties to Medflow. It is uncontested that

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

owed fiduciary duties to Medflow at the time they entered their employment

agreements as appointed officers. While Plaintiff N. William Schiffli, Jr. (“Schiffli”)

was an appointed Medflow officer at one time, he was not one when he entered his

employment agreement and instead continued in his role as Medflow’s Chief

Financial Officer (“CFO”) as an independent contractor. Medflow contends that

Schiffli was nevertheless a de facto officer charged with the same fiduciary duties as

Ehmann and Throneburg.

7. Fiduciary duties aside, Medflow contends in any event that Plaintiffs

are not entitled to the benefits they seek under their employment agreements because

it terminated each of those agreements for cause. Medflow argues it was not required

to meet the contractual standard of termination for “Cause” because that standard is

unconscionable. Plaintiffs contend the contractual definition of “Cause” applies, that

Medflow could not demonstrate such Cause, and instead that they terminated the

agreements for “Good Reason,” entitling them to their change-of-control payments

and severance benefits.

8. In 2016, all parties moved for summary judgment on the enforceability

of Plaintiffs’ contracts, focusing in particular on whether those transactions were

protected by the business judgment rule, and if not, what standard should be applied

to determine the fairness of those agreements. In its order and opinion denying the

summary judgment motions, the Court held Plaintiffs’ employment agreements were

interested transactions to the extent each Plaintiff was an officer and fiduciary of

Medflow, imposing a duty on the officer to prove his agreement was fair to Medflow

when entered. Because of the dispute about his status as a de facto officer, it was

unresolved whether Schiffli should be required to shoulder that burden.

9. The Court then severed for early trial the issue of whether any plaintiff

charged with fiduciary duties to Medflow could prove that his employment agreement

was fair to Medflow when entered (the “Severed Issue”), limited further pre-trial

discovery to the Severed Issue, and deferred its consideration of other pending

motions including whether any other Defendants could be charged with any liability

adjudged against Medflow. 1 First, a jury would determine if Schiffli was a de facto

officer. Second, that jury would determine whether the employment agreement of

each officer was fair to Medflow when entered.

10. The Severed Issue went to trial on April 22, 2019 (“Severed Issue Trial”).

11. The jury concluded its deliberations on May 13, 2019. The jurors issued

a unanimous verdict that Schiffli was not a de facto officer at the time he executed

his employment agreement and, as a result, did not consider the fairness of his

agreement to Medflow when entered. The jury was unable to reach a unanimous

1 Medflow is the corporate party to the employment agreements at issue. Defendant Medflow

Holdings, LLC (“Holdings”) was formed after the employment agreements were executed but

has stipulated for purposes of this case that it is Medflow’s corporate successor, which can be

charged for any liability that might arise against Medflow under the employment

agreements.

verdict on whether Ehmann and Throneburg’s employment agreements were fair to

Medflow when entered.

12. The Court must now resolve the following post-trial motions: (1)

Ehmann and Throneburg’s motion for judgment notwithstanding the verdict, (2)

Medflow’s motion for judgment notwithstanding the verdict or (3) new trial with

respect to Ehmann and Throneburg, (4) Medflow’s motion for judgment

notwithstanding the verdict or (5) new trial as to Schiffli, and (6) Schiffli’s motion for

entry of judgment and (7) renewed motion for partial summary judgment (together,

the “Motions”).

II. FACTUAL BACKGROUND 2

13. Medflow is or was a provider of computer software for the medical

industry. 3 James Riggi (“Riggi”) founded Medflow and was its Chief Executive Officer

(“CEO”) or president until December 2013. (Aff. D. James Riggi ¶¶ 3−4 (“Riggi Aff.”),

ECF No. 192.) 4 Prior to December 2014, Riggi and DavLong Business Solutions, LLC

(“DavLong”) controlled by David Long (“Long”), owned the controlling interest in

2 For more factual background and greater detail regarding the procedural history preceding

the current Motions, see Ehmann v. Medflow, Inc., 2019 NCBC LEXIS 10, at *1–8 (N.C.

Super. Ct. Feb. 6, 2019); Ehmann v. Medflow, Inc., 2017 NCBC LEXIS 88, at *1–25 (N.C.

Super. Ct. Sept. 26, 2017).

3 Medflow is inactive. Its liabilities, other than those which might be owed to Plaintiffs, and

assets, were acquired by Holdings. Defendants have stipulated that Holdings is the

successor-in-interest to Medflow, liable for any obligation Medflow owes to Plaintiffs, and the

corporate Defendants continue to operate Medflow’s prior business of providing software to

the medical industry. The parties continue to dispute whether Medflow’s liabilities, if any,

may be imposed on any Defendant other than Holdings.

4 For convenience, the Court will at times cite to affidavits filed by the parties, most often to

refer to facts that have not been disputed. The affiants testified at trial consistently with the

affidavit testimony cited.

Medflow, which had other minority shareholders. (Riggi Aff. ¶ 6; Aff. David Long ¶

5, ECF No. 194.)

14. Ehmann and Throneburg became Medflow shareholders in 2004. (Aff.

Thad A. Throneburg ¶ 26 (“Throneburg Aff.”), ECF No. 171.16; Eugene K. Ehmann

Aff. ¶ 10 (“Ehmann Aff.”), ECF No. 176.) Throneburg, a North Carolina attorney,

served as Medflow’s CEO from January 1, 2005 to November 2007 when he sold his

approximate 24% ownership interest to DavLong and returned to active law practice.

(Throneburg Aff. ¶¶ 27, 38, 42.)

15. Following Throneburg’s departure, Riggi again became CEO. (Ehmann

Aff. ¶ 15.) In November 2009, Ehmann accepted a position as Medflow’s director of

human resources but was not appointed an officer at that time. (Ehmann Aff. ¶ 18.)

In June 2010, Schiffli joined Medflow as its CFO pursuant to an independent

contractor arrangement and served as an appointed Medflow officer prior to

December 2013. (Aff. N. William Schiffli, Jr. ¶ 2, ECF No. 13; see also Throneburg

Aff. ¶ 107.)

16. On December 10, 2013, catalyzed by growing dissatisfaction with Riggi’s

leadership, (see Ehmann Aff. ¶ 24), Medflow shareholders met and took several

actions. All existing Medflow officers including Schiffli were removed from their roles

as officers. Riggi was ousted from management and Throneburg was hired as interim

CEO on a short-term contract. The Board of Directors was reorganized and limited

to one member. Ehmann was elected as Vice President, Treasurer, and Secretary,

and was appointed as Medflow’s sole director. (Ehmann Aff. ¶ 39; Throneburg Aff.

Ex. 3, at 2 (“Dec. 10, 2013 Shareholder Meeting Mins.”), ECF No. 171.4.)

17. Although Schiffli was terminated as an officer in December 2013, he

continued to maintain the title of Medflow’s CFO. (See Throneburg Aff. ¶ 55; see also

Dec. 10, 2013 Shareholder Meeting Mins. 3.) Ehmann testified that Schiffli’s officer

status was revoked upon Riggi’s ouster because of concern over Schiffli’s potential

loyalty to Riggi. (Civil Trial Tr. Vol. VI of XII Mon., Apr. 29, 2019 72:12–73:3 (“Trial

Tr. Vol. VI”), ECF No. 374.4.) Ehmann eventually reappointed Schiffli as a de jure

officer in December 2014. (Second Am. Compl. Ex. 9, at 1 (“Dec. 9, 2014 Director

Action”), ECF No. 118.1.) Schiffli therefore negotiated and executed his employment

agreement during the interim period in which he was not an appointed Medflow

officer.

18. Throneburg testified that, when he returned as Medflow’s CEO, he

initially prioritized the formation of a senior management team including James

Messier (“Messier”), 5 Ehmann, Schiffli, and himself. (Civil Trial Tr. Vol. VII of XII

Tue., Apr. 30, 2019 192:19−194:13, ECF No. 374.5; see also Throneburg Aff. ¶¶

68−69.) Plaintiffs testified that the senior management team adopted a three-year

strategic plan in early 2014 that focused on moving Medflow’s software platform from

a server-based system to a cloud-based system and that Throneburg deemed it critical

5 Messier is not a party to this litigation.

He entered a Medflow employment agreement at

the same time as Plaintiffs containing similar terms. Unlike Plaintiffs, Medflow did not

terminate his employment and he continues to work for Medflow’s successor under a different

agreement. (Civil Trial Tr. Vol. IX of XII Thu., May 2, 2019 200:14–204:6 (“Trial Tr. Vol.

IX”), ECF No. 374.7.) He testified on behalf of Medflow at the Severed Issue Trial.

to extend multi-year contracts to the senior management team—the persons

necessary to effectuate this strategic plan. (Civil Trial Transcript Vol. VIII of XII

Wed., May 1, 2019 25:24−26:18 (“Trial Tr. Vol. VIII”), ECF No. 374.6; see also

Ehmann Aff. ¶¶ 44−45; Throneburg Aff. ¶¶ 75–76.)

19. Medflow’s bylaws provide that compensation for officers is to be

determined by its directors, while making no similar provision for the compensation

of other employees. (Throneburg Aff. Ex. 2, at 6 (“Medflow Bylaws”), ECF No. 171.7.)

Ehmann first orally agreed to the terms of an employment agreement with

Throneburg and later requested that Throneburg reduce those terms to writing.

(Trial Tr. Vol. IX 13:13−16.) After reaching this oral agreement, Ehmann accepted

Throneburg’s advice that he could delegate to Throneburg the board’s authority to

determine compensation for officers. Throneburg represented Medflow in negotiating

the employment agreements for Ehmann, Messier, and Schiffli between March and

July 2014, and drafted the agreements for himself and the others on July 5−7, 2014,

with effective dates retroactive to the day on which each person orally agreed to the

chief terms of their employment. (Trial Tr. Vol. VIII 40:21−24, 43:15−17, 57:25−58:5,

66:3−6, 87:10−12, 101:1−103:2.)

20. Plaintiffs’ employment agreements contain identical terms except for

the effective date, compensation amount, and description of job duties. (Compare

Throneburg Agreement, ECF No. 118.2, with Ehmann Agreement, ECF No. 118.34,

and Pl. Ex. 005 (“Schiffli Agreement”), ECF No. 342 (together, “Pls.’ Agreements”).)

21. Each agreement provides for “Severance Benefits” if Medflow

terminated it without Cause or a Plaintiff terminated it for Good Reason. Severance

Benefits include a payment equal to the Plaintiff’s annual base salary (“Severance

Payment”), (Pls.’ Agreements ¶ 9(a)(i)), and thirty-six consecutive months of

“hospital, medical, dental, accident, disability and life insurance coverage equivalent

to that provided to Medflow employees” immediately following termination

(“Insurance Benefits”), (Pls.’ Agreements ¶ 9(a)(ii)). The agreements also provide for

a “Change-of-Control Payment” equal to one year of annual salary plus a “Gross-up”

which is determined by a calculation set out in the agreements. 6 (Pls.’ Agreements ¶

17.) Finally, the agreements provide that each party to the agreement would

indemnify the other “against all costs incurred by it in connection with its attempts

to seek damages or other remedies available to it as a result of the defaulting party’s

breach[.]” (Pls.’ Agreements ¶ 23.)

22. While Medflow had outside counsel that it consulted on various matters,

neither Ehmann nor Throneburg asked for advice from outside counsel before

executing their agreements, relying instead on Throneburg’s experience and

expertise. (Trial Tr. Vol. IX 14:12−17, 17:10−14, 17:24−18:9, 101:18−25.)

Furthermore, Ehmann and Throneburg did not seek independent review and

approval of the Plaintiffs’ employment agreements by Medflow’s shareholders. (Trial

6 As late as July 5, 2014, Plaintiffs’ agreements included a Severance Payment term equal to

two years of annual salary instead of a change-of-control bonus. Throneburg testified that

he modified all three agreements after considering Schiffli’s request for such a bonus, such

that the final agreements provided for one year of severance in addition to a change-of-control

bonus. (Trial Tr. Vol. VIII 74:15−16, 101:1−103:2.)

Tr. Vol. IX 156:5−7); see Ehmann, 2017 NCBC LEXIS 88, at *51 (“It is undisputed

that the shareholders were not asked to approve the employment agreements.”).

23. In the latter half of 2014, Defendant Greg E. Lindberg (“Lindberg”) first

acquired beneficial ownership of Riggi’s shares and then acquired control over

DavLong’s holdings, which vested him with controlling authority of Medflow. (Second

Am. Compl. ¶¶ 29−34 (“V. 2nd Am. Compl.”), ECF No. 119.6.) On December 19, 2014,

Lindberg attended Medflow’s annual shareholders meeting at which he was elected

Medflow’s sole director. (V. 2nd Am. Compl. ¶ 302.) By January 16, 2015, Lindberg

had acquired ownership of all Medflow shares through his company Defendant Eli

Global, LLC (“Eli Global”). 7 (V. 2nd Am. Compl. ¶ 325.) Lindberg and his companies

conducted very limited due diligence before completing their acquisition of Medflow.

24. On January 22, 2015, Eli Global representatives visited Medflow’s

offices, at which time Schiffli provided them with copies of Plaintiffs’ employment

agreements and calculations for the amount of Plaintiffs’ Change-of-Control

7 While the exact relationship between Medflow and Lindberg’s companies, including any

inter-company transfers, have not yet been fully discovered or resolved, there is no dispute

that either Lindberg or companies he controls acquired all Medflow shares. Although

discovery as to this issue has not been concluded, the record suggests that funds for the

acquisition may have been acquired through an intra-corporate loan or series of loans

through which SNIC acquired a senior lien on all of Medflow assets. Plaintiffs contend that

they should have a senior lien position because of the security interests provided by their

employment agreements and because Plaintiffs deferred perfecting their interests only

because they relied on Lindberg’s alleged false assurances that Medflow intended to honor

their employment agreements and make the Change-of-Control Payments. (V. 2nd Am.

Compl. ¶¶ 248, 359, 368−370.) In a pending motion for prejudgment relief that is not the

subject of this Judgment, Order, and Opinion, Plaintiffs contend that the assets taken from

Medflow following its acquisition by Lindberg’s companies should be restored, at least to the

extent of Medflow’s alleged liabilities to Plaintiffs. The validity, priority, and effect of any

such claimed liens involves issues before the Wake County Superior Court in the

Rehabilitation Proceeding, and this Court does not consider those issues at present in light

of the injunction entered in that action.

Payments. (V. 2nd Am. Compl. ¶¶ 347–48.) This constituted Lindberg and Eli

Global’s first knowledge of Plaintiffs’ agreements and their terms.

25. In February 2015, Plaintiffs were placed on administrative leave.

Plaintiffs initiated this litigation shortly thereafter on February 18, 2015. (See

Compl., ECF No. 1.) Medflow delivered letters to Plaintiffs on May 1, 2015 stating

that they were being terminated for Cause, effective immediately. Plaintiffs deny

that Medflow had the Cause the agreements require, but in part because Medflow

stripped Plaintiffs of their duties, Plaintiffs contend they appropriately terminated

their agreements for Good Reason by written notice to Medflow in Fall 2015. The

agreements provide for Severance Benefits only if Medflow terminated without Cause

or if Plaintiffs terminate for Good Reason.

III. PROCEDURAL HISTORY 8

26. Plaintiffs filed their verified second amended complaint (“Second

Amended Complaint”) on December 2, 2015, alleging twelve causes of action styled:

(1) breach of contract, (2) violation of the North Carolina Wage and Hour Act (“Wage

and Hour Act”), (3) violation of the North Carolina Retaliatory Employment

Discrimination Act, (4) tortious retaliation, (5) fraudulent transfer, (6) fraud, (7)

violation of the Unfair and Deceptive Trade Practices Act, (8) successor liability, (9)

alter ego/piercing the corporate veil, (10) conspiracy in the alternative, (11) Southland

8 The Court recites only the procedural history relevant to the Motions now before the Court

and refers the reader to prior opinions in this litigation for further procedural details.

Insurance security interest constructive trust in the alternative, and (12) replevin or

in the alternative, conversion. (V. 2nd Am. Compl.)

27. On December 4, 2015, Defendants moved to dismiss Plaintiffs’ Second

Amended Complaint in its entirety (the “Motion to Dismiss”). (Defs.’ Mot. Dismiss,

ECF No. 120.)

28. Plaintiffs then filed separate, partial motions for summary judgment on

their breach of contract claims. Schiffli moved for partial summary judgment on April

1, 2016 (“Schiffli’s 2016 Summary Judgment Motion”), (Pl. Schiffli’s Mot. Partial

Summ. J., ECF No. 159), Throneburg moved on July 18, 2016, (Pl. Throneburg’s Mot.

Partial Summ. J., ECF 171.17), and Ehmann moved on August 11, 2016, (Pl.

Ehmann’s Mot. Partial Summ. J., ECF No. 176.1).

29. On September 13, 2016, the Court denied the Motion to Dismiss as to

the breach of contract claims brought against Medflow and Holdings (together

“Medflow Defendants”). (Order Defs.’ Mot. Dismiss ¶ 1, ECF No. 182.) The Court

deferred ruling on the Motion to Dismiss as to the other Defendants and claims and

ordered Medflow Defendants to plead in their answer “all avoidances, affirmative

defenses, and counterclaims that relate to or arise out of the transactions or

occurrences that are the subject matter of Plaintiffs’ breach-of-contract claims.”

(Order Defs.’ Mot. Dismiss ¶¶ 3−4.)

30. On September 19, 2016, the Court then severed for early trial the

Severed Issue, defined as whether “Plaintiffs’ employment agreements are binding

and enforceable, which includes whether the agreements were validly executed and

whether the agreements should . . . be voided because they are unfair to Medflow,

Inc.” (Order Regarding Scheduling & Severance Issue Trial ¶ 1, ECF No. 183.) The

Court allowed additional discovery limited to the Severed Issue prior to a hearing on

Plaintiffs’ pending summary judgment motions and Defendants’ anticipated motions

for summary judgment. (Order Regarding Scheduling & Severance Issue Trial 3–4.)

31. On October 3, 2016, Medflow Defendants answered Plaintiffs’ Second

Amended Complaint and stated affirmative defenses and counterclaims related to

Plaintiffs’ breach of contract claims. (Medflow, Inc. & Medflow Holdings, LLC’s

Answer, Affirmative Defenses, & Countercl. Pls.’ Second Am. Compl. (“Medflow Defs.

Answer & Countercl.”), ECF No. 189.)

32. These affirmative defenses included that the agreements were procured

by fraud and breach of fiduciary duty, are unenforceable because they are

procedurally and substantively unconscionable, are unfair, are barred by the doctrine

of unclean hands, and that Ehmann released his claims in connection with the

purchase of his shares by Lindberg or his entities. (See Medflow Defs. Answer &

Countercl. 23.)

33. Medflow Defendants also stated counterclaims for breach of fiduciary

duty, declaratory judgment as to the employment agreements and confidentiality

agreements (for lack of mutual assent and consideration), declaratory judgment as to

the security agreements (for lack of mutual assent and consideration), constructive

fraud, civil conspiracy, unfair and deceptive trade practices in violation of N.C.G.S. §

75-1.1, conversion, and publication of personal information in violation of N.C.G.S. §

75-66. (Medflow Defs. Answer & Countercl. 36–45.)

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

motions against each Plaintiff. (See Defs.’ Mot. Summ. J. Against Eugene K.

Ehmann, ECF No. 200; Defs.’ Mot. Summ. J. Against N. William Schiffli, Jr., ECF

No. 203; Defs.’ Mot. Summ. J. Against Thad A. Throneburg, ECF No. 205.)

35. On September 26, 2017, the Court denied the cross-motions for

summary judgment. In its opinion, the Court set forth that Ehmann and Throneburg,

and Schiffli if found to be an officer, must bear the burden of proving that their

agreements were fair to Medflow when entered (“Summary Judgment Opinion”).

Ehmann, 2017 NCBC LEXIS 88, at *58−59.

36. On October 26, 2017, Plaintiffs appealed three of the Court’s orders to

the Supreme Court of North Carolina: the Summary Judgment Opinion, Order

Regarding Discovery for Trial on the Severed Issue, and Order Regarding Scheduling

and Severance of Issue for Trial. (Notice Appeal, ECF No. 261.) Plaintiffs later

sought a review of these orders via a Petition for Writ of Certiorari filed on January

31, 2018. (See Pls.’ Mot. Stay Proceedings Pending Pet. Writ Cert., ECF No. 264.)

37. On August 14, 2018, the Supreme Court denied Plaintiffs’ Petition for

Writ of Certiorari and allowed Defendants’ motion to dismiss the appeal. See

Ehmann v. Medflow, Inc., 371 N.C. 461, 817 S.E.2d 393 (2018); Ehmann v. Medflow,

Inc., 371 N.C. 461, 817 S.E.2d 206, 207 (2018).

38. On November 8, 2018, Plaintiffs filed a motion for reconsideration of the

Summary Judgment Opinion, (Pls.’ Mot. Recons., ECF No. 275), which the Court

denied on February 6, 2019, Ehmann, 2019 NCBC LEXIS 10, at *21.

39. On March 6, 2019, the Court noticed the Severed Issue Trial, (Notice

Trial & Pretrial Schedule, ECF No. 296), which began on April 22, 2019.

40. Defendants raised a Batson challenge during voir dire, (see Civil Trial

Tr. Vol. II of XII Tue., Apr. 23, 2019 63:14−18 (“Trial Tr. Vol. II”), ECF No. 374.2),

which, after due consideration, the Court denied from the bench, (Trial Tr. Vol. II

95:10−96:8).

41. The jury was impaneled on April 23, 2019, and counsel made their

opening statements that day. Following the close of all evidence, all parties timely

moved for a directed verdict on all issues, (Civil Trial Tr. Vol. X of XII Tue., May 7,

2019 109:17–110:11, 110:20–113:15 (“Trial Tr. Vol. X”), ECF No. 374.8), which the

Court denied, (Trial Tr. Vol. X 113:16–19).

42. Counsel made closing arguments on May 8, 2019, after which the Court

instructed the jury. (Civil Trial Tr. Vol. XI of XII Wed., May 8, 2019 117:1−135:14

(“Trial Tr. Vol. XI”), ECF No. 374.9.)

43. The Court submitted the following issues to the jury: (1) “[w]as Schiffli

an officer of Medflow, Inc. at the time he entered his employment agreement with

Medflow, Inc.?”, (2) “[w]as the employment agreement between Medflow, Inc. and

Schiffli fair to Medflow, Inc. at the time it was entered?”, (3) “[w]as the employment

agreement between Medflow, Inc. and Ehmann fair to Medflow, Inc. at the time it

was entered?”, and (4) “[w]as the employment agreement between Medflow, Inc. and

Throneburg fair to Medflow, Inc. at the time it was entered?” (Verdict Sheet, ECF

No. 330.) The Court instructed that Medflow had the burden of proof on issue one,

that the jury would reach issue two only if it answered issue one “yes”, and that the

burden of proof on issues two, three, and four was on each respective Plaintiff.

44. The jury returned its verdict on May 13, 2019 and answered “no” to issue

one, did not consider issue two, and advised that it was “unable to answer” issues

three and four. (Civil Trial Tr. Vol. XII of XII Mon., May 13, 2019 30:23−32:4 (“Trial

Tr. Vol. XII”), ECF No. 374.10.)

45. Following the Court’s discharge of the jury, in open court Ehmann and

Throneburg moved for judgment notwithstanding the verdict pursuant to Rule 50 of

the North Carolina Rules of Civil Procedure (“Rule(s)”), (Trial Tr. Vol. XII 46:25–

47:6), Schiffli requested entry of a judgment that he is entitled to recover under his

contract, (Trial Tr. Vol. XII 50:15–19), and Defendants reserved the right to make

post-trial motions, (Trial Tr. Vol. XII 49:3–7).

46. On May 23, 2019, Medflow filed its: (1) motion for new trial against

Schiffli pursuant to Rule 59(a), (2) motion for judgment as a matter of law against all

Plaintiffs pursuant to Rule 50(b), and (3) alternatively, motion for new trial on all

issues against all Plaintiffs. (Defs. Mot. J., J. Notwithstanding Verdict, & New Trial

(“Def.’s Mot. J., JNOV, & New Trial”), ECF No. 325.)

47. On May 29, 2019, Schiffli filed a motion for entry of judgment on the

jury verdict and renewed his 2016 Summary Judgment Motion on issues not

previously reached by the Court in its Summary Judgment Opinion. (Mot. Entry J.

Jury Verdict & Summ. J. Mot., ECF No. 327.)

48. On June 7, 2019, Ehmann and Throneburg filed a motion for judgment

notwithstanding the verdict. (Ehmann & Throneburg’s Mot. J. Notwithstanding

Verdict, ECF No. 333.)

49. On July 5, 2019, Plaintiffs notified the Court of the Wake County

Rehabilitation Proceeding enjoining certain proceedings in this litigation. (Request

Judicial Notice, ECF No. 350.)

50. The Court held a hearing on all pending Motions on July 17, 2019. The

Court delayed its consideration of the Motions until the parties submitted a complete

transcript of the Severed Issue Trial in September 2019. The Court further defers

entry of any opinion on other pending motions, including those that may touch upon

issues subject to the injunction issued in the Rehabilitation Proceeding.

51. All Motions have been fully briefed and argued and are now ripe for

determination.

IV. STANDARDS OF REVIEW

A. Judgment Notwithstanding the Verdict

52. A motion for judgment notwithstanding the verdict (“JNOV”) is a

renewal of an earlier motion for directed verdict. Bryant v. Nationwide Mut. Fire Ins.

Co., 313 N.C. 362, 368–69, 329 S.E.2d 333, 337 (1985) (citation omitted). JNOV

motions question “whether the evidence, taken in the light most favorable to the non-

moving party, [wa]s sufficient as a matter of law to be submitted to the jury.”

Scarborough v. Dillard’s, Inc., 363 N.C. 715, 720, 693 S.E.2d 640, 643 (2009) (citation

omitted).

53. “[A] motion for judgment notwithstanding the verdict is cautiously and

sparingly granted.” Bryant, 313 N.C. at 369, 329 S.E.2d at 338 (citation omitted).

“To survive a motion for directed verdict or JNOV, the non-movant must present

‘more than a scintilla of evidence’ to support its claim.” Morris v. Scenera Research,

LLC, 368 N.C. 857, 861, 788 S.E.2d 154, 157 (2016) (citation omitted). “While a

scintilla is very slight evidence, the non-movant’s evidence must still do more than

raise a suspicion, conjecture, guess, surmise, or speculation as to the pertinent facts

in order to justify its submission to the jury.” Id., 788 S.E.2d at 158 (internal

quotations and citations omitted). “[T]he party opposing the motion must provide

actual proof[] ‘of such a character as reasonabl[e] to warrant the inference of the fact

required to be established[.]’ ” Maurer v. SlickEdit, Inc., 2006 NCBC LEXIS 1, at *25

(N.C. Super. Ct. Feb. 3, 2006) (quoting Lee v. Stevens, 251 N.C. 429, 433, 111 S.E.2d

623, 627 (1959)). “The trial court must construe the evidence in the light most

favorable to the non-movant and resolve all evidentiary conflicts in the non-movant’s

favor.” Morris, 368 N.C. at 861, 788 S.E.2d at 158 (citation omitted).

B. New Trial

54. “The power to grant a new trial is entrusted to the discretion of the trial

court—discretion that ‘must be used with great care and exceeding reluctance.’ ”

Shaw v. Gee, 2018 NCBC LEXIS 109, at *15 (N.C. Super. Ct. Oct. 19, 2018) (quoting

In re Will of Buck, 350 N.C. 621, 626, 516 S.E.2d 858, 861 (1999)). The “verdict should

be liberally and favorably construed with a view of sustaining it, if possible,” Piazza

v. Kirkbride, 246 N.C. App. 576, 580, 785 S.E.2d 695, 698 (2016) (citation omitted),

and though the grounds for granting a new trial are numerous, see N.C.G.S. § 1A-1,

Rule 59(a), a jury verdict should be set aside only in “those exceptional situations

where the verdict is contrary to the evidence presented and will result in a

miscarriage of justice,” In re Will of Buck, 350 N.C. at 628, 516 S.E.2d at 862.

C. Summary Judgment

55. 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.G.S. § 1A-1, Rule 56(c). “Summary judgment is

improper if any material fact is subject to dispute.” Culler v. Hamlett, 148 N.C. App.

389, 391, 559 S.E.2d 192, 194 (2002) (quoting Ragland v. Moore, 299 N.C. 360, 363,

261 S.E.2d 666, 668 (1980)). “[A]n issue is genuine if it is supported by substantial

evidence, which is that amount of relevant evidence necessary to persuade a

reasonable mind to accept a conclusion.” Fox v. Green, 161 N.C. App. 460, 464, 588

S.E.2d 899, 903 (2003) (quoting Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571,

579, 573 S.E.2d 118, 124 (2002)).

56. The movant bears the burden of proving the lack of a triable

issue. Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707 (2001). Once the

movant has met that burden, the burden shifts to the non-moving 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., 224 N.C.

App. 401, 407, 742 S.E.2d 535, 540 (2012). The Court must view all the presented

evidence in the light most favorable to the non-moving party. Dalton, 353 N.C. at

651, 548 S.E.2d at 707.

V. ANALYSIS

A. Medflow’s Motions for JNOV and New Trial as to Schiffli

(1) JNOV Against Schiffli

57. Medflow moves for JNOV on the issue of whether Schiffli was an officer

at the time he entered his employment agreement based on its contention that the

evidence presented at trial conclusively “showed that Schiffli held himself out as the

Chief Financial Officer of Medflow and was viewed by others both inside and outside

Medflow as the Chief Financial Officer.” (Def.’s Mot. J., JNOV, & New Trial 3.)

58. In support, Medflow cites that Schiffli is referred to as CFO in his

employment agreement, signed e-mails and used business cards referring to himself

as CFO, admitted that Medflow had no other CFO, prepared financial statements

and business projections for Medflow, and continued to perform the same duties after

he ceased to be a de jure officer. (Br. Supp. Def.’s Mot. J., J. Notwithstanding Verdict,

& New Trial Against Schiffli, & Br. Opp’n Schiffli’s Mot. Entry J. 3–4 (“Def.’s Br.

Supp. Mot. J., JNOV, & New Trial Against Schiffli, & Br. Opp’n Schiffli’s Mot. Entry

J.”), ECF No. 342.)

59. Medflow has maintained that Schiffli’s title alone was adequate to

impose upon him the fiduciary duties of a de facto officer. Over Medflow’s objection,

the Court instructed the jury that Schiffli merely holding the title of an office was

insufficient to find in Medflow’s favor. Instead, the Court instructed the jury that a

“de facto officer is an officer by the nature and extent of duties undertaken on behalf

of the corporation[,]” (Jury Instrs. 7, ECF No. 340), and is

a person who is not an elected officer but acts with the level of authority

and control that rises to the level of an officer[.] [A] person must appear

to hold an actual office under some degree of notoriety, which means

that the individual is generally known or spoken of as holding the office,

or color of title, which means that the individual apparently holds title

to the office. In addition, the individual must continuously exercise the

functions of the office. The mere fact that an individual uses the title to

the office is not alone sufficient. In addition to his title, the individual

must have authority for tasks commensurate with those of an officer.

For example, a de facto officer might have authority to sign tax returns,

offer major input as to the company’s formation and operation, manage

the company, hire and fire employees, or make purchases on behalf of

the company.

(Jury Instrs. 8); see Havelock Yacht Club, Inc. v. Crystal Lake Yacht Club, Inc., 215

N.C. App. 153, 156, 714 S.E.2d 788, 790 (2011); Kinesis Advert., Inc. v. Hill, 187 N.C.

App. 1, 15–16, 652 S.E.2d 284, 295 (2007).

60. At the Severed Issue Trial, Ehmann testified that, after Riggi was

ousted and he appointed Throneburg as Medflow’s CEO, he “made the conscious

decision” not to reappoint Schiffli as an elected officer of Medflow. (Trial Tr. Vol. VI

72:12–16.) Ehmann continued:

Bill [Schiffli] was Jim Riggi’s right-hand man. Bill was very, very loyal

to people. . . . [Y]ou heard me earlier say that I’ve been working with Bill

for four years, but I didn’t know Bill. And I didn’t want to put the

company at risk to put somebody in there that might have loyalty issues.

. . . We had to take some of his responsibilities away because I just didn’t

know what he knew. I didn’t know how he was going to react.

(Trial Tr. Vol. VI 72:15–73:3.)

61. As a result, Schiffli had “little authority or control over matters of

significance” directly after Throneburg took over management. (Mem. Opp’n Def.’s

Mots. J., J. Notwithstanding Verdict, & New Trial Against Schiffli 3 (“Schiffli’s Mem.

Opp’n Defs.’ Mot. J. JNOV, & New Trial”), ECF No. 344; see Civil Trial Tr. Vol. IV of

XII Thur., April 25, 2019 131:15–132:14, 135:13–136:2, 136:12–139:20, 161:17–

162:13, 163:8–165:4, 169:23–171:21 (“Trial Tr. Vol. IV”), ECF No. 361.) According to

Schiffli, his duties were limited to overseeing the accounting team and bookkeepers,

overseeing accounts receivable, doing financial analysis, gathering information, and

developing business plans according to Throneburg’s instructions. (Trial Tr. Vol. IV

172:25–173:6, 177:24–175:1, 179:7–9.)

62. In sum, while there was evidence presented upon which the jury might

have found in Medflow’s favor, there was “more than a scintilla” of evidence in

Schiffli’s favor. Maurer, 2006 NCBC LEXIS 1, at *25 (quoting Clark v. Moore, 65

N.C. App. 609, 610, 309 S.E.2d 579, 580 (1983)). Medflow’s Motion for JNOV should

therefore be denied. 9

(2) New Trial as to Schiffli

63. Medflow moves for a new trial as to Schiffli on three alternative grounds:

(1) because “Schiffli violated the equal protection clause of the United States

9 Because the Court concludes that Defendants are not entitled to JNOV on the de facto officer

issue, it need not address Medflow’s additional argument that it is entitled to JNOV that

Schiffli failed to carry his burden of proving the fairness of his employment agreement. (See

Def.’s Br. Supp. Mot. J., JNOV, & New Trial Against Schiffli, & Br. Opp’n Schiffli’s Mot.

Entry J. 5.) As discussed below, the Court concludes that there is no other basis to impose

on Schiffli the burden of proving the fairness of his agreement to Medflow at the time it was

entered.

Constitution by exercising peremptory challenges based on prospective jurors’ race,”

(“Batson Challenge”); (2) “Schiffli’s counsel’s closing statement to the jury was replete

with prejudicial statements[,]” and (3) “the Court erred in its jury instructions

regarding the de facto officer issue[.]” (Def.’s Mot. J., JNOV, & New Trial 1–3.) The

Court concludes its jury instruction on the issue of whether Schiffli was a de facto

officer is consistent with North Carolina law as cited above, (see supra Section

V(A)(1)), and does not again address Medflow’s challenge to that instruction on

Medflow’s motion for new trial as to Schiffli.

a. Batson Challenge

64. Medflow raised its Batson Challenge, see generally Batson v. Kentucky,

476 U.S. 79 (1986) (holding that litigants may not use peremptory challenges to

engage in purposeful racial discrimination in violation of the equal protection clause),

after Plaintiffs used four of their five peremptory strikes to excuse black jurors, (Def.’s

Mot. J., JNOV, & New Trial 1). The Court now reaffirms its oral ruling made at the

Severed Issue Trial denying the challenge and allowing jury selection to proceed.

65. Batson challenges arise most often in criminal proceedings but are also

recognized in the civil context. See Edmonson v. Leesville Concrete Co., 500 U.S. 614,

631 (1991) (extending Batson’s burden-shifting framework to civil proceedings).

Courts use “[a] three-step process” to evaluate claims of racial discrimination in the

exercise of peremptory challenges:

First, [the challenger] must establish a prima facie case[ 10] that the

peremptory challenge was exercised on the basis of race. Second, if such

10 Factors relevant to the prima facie case include:

a showing is made, the burden shifts to the [challengee] to offer a

racially neutral explanation to rebut [the challenger]’s prima facie case.

Third, the trial court must determine whether the [challenger] has

proven purposeful discrimination.

Id. (quoting State v. Cummings, 346 N.C. 291, 307–08, 488 S.E.2d 550, 560 (1997)).

Where a trial court solicits a showing of a race-neutral justification before ruling on

whether the challenger first established a prima facie case of discrimination, the

challenger is relieved of that initial burden. Hernandez v. New York, 500 U.S. 352,

359 (1991); State v. Williams, 343 N.C. 345, 359, 471 S.E.2d 379, 386 (1996).

66. Here, Defendants raised the Batson Challenge, and the Court solicited

a race-neutral justification for Plaintiffs’ peremptory challenges before ruling on

whether Defendants made a prima facie demonstration of racial prejudice.

67. In response to the Batson Challenge, Plaintiffs asserted that they

exercised their peremptory challenges based on the prospective jurors’ lack of

relevant education, (Trial Tr. Vol. II 64:17–65:18), and the extent to which they were

familiar with the technology that, according to Plaintiffs’ theory of the case, was key

to the underlying facts and circumstances informing Plaintiffs’ decisions and the

the victim’s race, the race of the key witnesses, questions and statements of

the [challengee] which tend to support or refute an inference of discrimination,

repeated use of peremptory challenges against blacks such that it tends to

establish a pattern of strikes against blacks in the venire, the [challengee]’s

use of a disproportionate number of peremptory challenges to strike black

jurors in a single case, and the [challengee]’s acceptance rate of potential black

jurors.

State v. Hoffman, 348 N.C. 548, 550, 500 S.E.2d 718, 720 (1998) (quoting State v. Quick, 341

N.C. 141, 145, 462 S.E.2d 186, 189 (1995)).

issue of fairness that the jury would be tasked with deciding, (Trial Tr. Vol. II 70:21–

71:17).

68. As to any claim of actual prejudice, Plaintiffs stipulated that they are

each white and noted that all counsel and all of Medflow’s expected witnesses were

white, (Trial Tr. Vol. II 90:21–25), so there was no discernible advantage to be

achieved by excluding black jurors or any discriminatory inference that could be

drawn, (see Trial Tr. Vol. II 65:9–68:8, 75:5–7, 83:1–3).

69. Defendants argued in response that Plaintiffs passed on white jurors

that were similarly situated to the black jurors struck with respect to education and

technological literacy, such that the proffered justification must be considered

pretextual. (Trial Tr. Vol. II 68:9–23.)

70. After hearing the parties’ arguments, the Court denied the Batson

Challenge, stating it was not convinced that Medflow had established even a prima

facie case of discrimination, and if it had, Plaintiffs’ justification was not pretextual.

(Trial Tr. Vol. II 86:13–88:13.)

71. In its Motion for New Trial, Medflow has not argued any additional

grounds for its Batson Challenge. The Court therefore adopts and affirms its denial

of the Batson Challenge at trial. See Sellers v. Ochs, 180 N.C. App. 332, 333, 638

S.E.2d 1, 2 (2006) (“A Rule 59 motion ‘cannot be used as a means to reargue matters

already argued or to put forth arguments which were not made but could have been

made[.]’ ” (citation omitted)). Medflow is therefore not entitled to a new trial as to

Schiffli by way of its Batson Challenge.

b. Improper Closing Argument

72. Defendants claim they are entitled to a new trial because of prejudice

they suffered as a result of Plaintiffs’ closing arguments.

73. As an initial matter, Plaintiffs divided their closing argument at trial.

Plaintiffs’ counsel Christopher P. Raab (“Mr. Raab”) argued on Schiffli’s behalf on the

issue of whether he was a de facto officer, and Plaintiffs’ counsel Harold C. Spears

(“Mr. Spears”) argued on behalf of all Plaintiffs on the remaining issue of fairness.

Medflow does not challenge Mr. Raab’s argument but attacks several portions of Mr.

Spears’s argument as prejudicial, complaining that he: (1) made an improper missing

witness argument by asking the jury why Scott Harris (“Harris”), Long’s attorney and

agent, did not testify; (2) referred to Medflow’s counsel as being out-of-state; (3)

accused Medflow’s counsel, Aaron Z. Tobin (“Mr. Tobin”), of misrepresenting evidence

in his opening statement although Mr. Spears referred to the same evidence in his

opening; (4) argued law to the jury that does not exist; and (5) inflamed the jury’s

passions by posing provocative rhetorical questions. (Def.’s Mot. J., JNOV, & New

Trial 2–3.)

74. North Carolina law affords attorneys “wide latitude” to argue their cases

to the jury. Corwin v. Dickey, 91 N.C. App. 725, 728, 373 S.E.2d 149, 151 (1988)

(citing Pence v. Pence, 8 N.C. App. 484, 488, 174 S.E.2d 860, 862 (1970)). “[C]omment

of counsel is ordinarily left to the sound discretion of the trial judge, and the reviewing

court will reverse [the] decision . . . only when it is clear that counsel’s impropriety

was gross and well calculated to prejudice the jury.” Id. (citing Lamborn v.

Hollingsworth, 195 N.C. 350, 353, 142 S.E. 19 (1928)). Furthermore, “ ‘[n]ew trials

are not awarded because of technical errors. The error must be prejudicial[,]’ ” Sisk

v. Sisk, 221 N.C. App. 631, 635, 729 S.E.2d 68, 71 (2012) (citation omitted), and “

‘[t]he party asserting the error must demonstrate that he has been prejudiced

thereby[,]’ ” id. (citation omitted).

75. Here, Medflow must demonstrate that Mr. Spears’s closing argument

was so egregious that the Court committed reversible error by failing to intervene ex

mero motu because Medflow did not contemporaneously object to Mr. Spears’s closing.

See State v. Taylor, 363 N.C. 514, 545, 669 S.E.2d 239, 264 (2008); (see also Trial Tr.

Vol. XI 110:10–12 (“We didn’t want to interrupt Plaintiff’s closing and I know that

that puts us in the Court’s discretion as to whether this meets the grossly improper

standard.”)).

i. Missing Witness

76. In closing, Mr. Spears asked the jury to consider why Harris was not

present to testify despite the emphasis Medflow’s counsel placed in argument and

throughout trial on an e-mail in which Harris, acting as an agent of Long, asked

Throneburg to provide financial information about Medflow and urged him not to

“hide the ball.” (Trial Tr. Vol. XI 77:14–78:25.)

77. Medflow argues it was improper for Mr. Spears to draw attention to the

fact that Harris did not testify but cites no controlling North Carolina authority in

support. (See Def.’s Br. Supp. Mot. J., JNOV, & New Trial Against Schiffli, & Br.

Opp’n Schiffli’s Mot. Entry J. 10–11 (citing Gillespie v. Chrysler Motors Corp., 553

N.E.2d 291, 300 (Ill. 1990) (holding that it is improper for counsel to make a missing-

witness argument in closing when that witness is outside of the party’s control and

the court’s subpoena power).)

78. Schiffli counters that Murchison v. Reg’l Surgical Specialists, No.

COA18-297, 2019 N.C. App. LEXIS 453 (N.C. Ct. App. May 21, 2019), instructs that

Mr. Spears properly advanced the reasonable inference that Medflow had but did not

exercise the power of producing Harris’s testimony, either by having him appear in

person or securing his testimony by deposition, including, if necessary, by taking a de

benne esse deposition. (Schiffli’s Mem. Opp’n Defs.’ Mot. J. JNOV, & New Trial 14);

see Murchison, 2019 N.C. App. LEXIS 453, at *7 (holding a trial court did not abuse

its discretion by denying a motion for new trial where defense counsel argued there

were witnesses to the plaintiff’s medical condition that were not called to testify).

79. Murchison is instructive even though it is unpublished and otherwise

distinguishable from the case at bar. In holding that counsel’s arguments did not

travel “outside of the record in an improper manner,” the Murchison court observed

that, when commenting to the jury about potential reasons why certain witnesses

were not called to testify, those “statements were not made for the purpose of

buttressing the Defendants’ own evidence, but seemingly to flesh out inferences

defense counsel believed reasonably followed [the] testimony.” Murchison, 2019 N.C.

App. LEXIS 453, at *8.

80. The Court similarly construes Mr. Spears’s commentary on Harris’s

absence as an attempt to remediate and “flesh out inferences” made by Medflow’s

counsel in its closing argument. Mr. Tobin, arguing on behalf of Medflow in closing,

stated:

This is the Scott Harris June 20th email to Mr. Throneburg, CEO. He’s

asking for financial information. He is obviously – my interpretation,

not be kept – he’s been kept in the dark because – he says we want to

know the company’s finances since the management change. Does the

company keep financial reports? How does it know how it’s going? Does

it not even have gross revenue numbers? Is there any information I can

get from Bill Schiffli, who identifies himself as the chief financial officer

of the company, to fill this vacuum? Please keep in mind the

shareholders’ experience with the old regime. They withheld

information. They were hiding the ball and being unresponsive to

shareholders’ requests. As a shareholder, our client, meaning DavLong,

demands much − he didn’t say demands, but looks forward to much

greater accountability and transparency from Medflow’s current

executive team and I expect them to distinguish themselves from what’s

happened in the past.

(Trial Tr. Vol. XI 21:23–22:15.)

81. Mr. Tobin placed significant emphasis on Harris’s e-mail to challenge

Plaintiffs’ credibility and the fairness of their having executed their agreements

without disclosure to Medflow’s shareholders. Particularly, Medflow speculated on

Harris’s motivation in sending that e-mail and the significance of Harris’s word choice

to Plaintiffs’ detriment despite apparently never having an intent to call Harris as a

witness. (See Pretrial Order 4, ECF No. 321 (failing to list Harris as a potential

witness).)

82. Mr. Spears’s closing attacked Medflow’s use of the Harris e-mail as one

illustration of Medflow’s apparent strategy of building its defense on false premises.

Mr. Spears argued:

All of those requests, the comment about don’t hide the ball, dealt with

financial records and the things Long was looking for. Remember the

shareholders were very dissatisfied when Riggi was running it because

they couldn’t even get the financials before the annual meeting. That’s

what those communications were about. It’s a – it’s a − just a

misrepresentation that that is something different, that it applies to

everything. Again, a false, false premise.

And if it’s not − and if it’s not a false premise, if this − if this note from

Mr. Throneburg isn’t the truth, then where is Scott Harris? Where is

Scott Harris? Why isn’t he here? Why didn’t he come in and testify? If

what that note says and what Mr. Throneburg testified to and Mr.

Ehmann testified to about the very purpose of all this isn’t absolutely

completely 100 percent the truth, then where is Mr. Harris to say it was

different? Where is Mr. Harris to say that he was looking for some more

information that wasn’t provided in April, June, July? Where is it? He’s

not. Why? Because he would just confirm that what the Plaintiffs have

said is true. And that what the Defense has said is just utterly false. A

false premise.

(Trial Tr. Vol. XI 78:3–25.)

83. The Court concludes, in its discretion, and based on the authorities cited,

that Mr. Spears was within the bounds of permissible argument and his argument

did not rise to the level of “such gross impropriety to entitle [Medflow] to a new

trial[.]” Couch v. Private Diagnostic Clinic, 133 N.C. App. 93, 100, 515 S.E.2d 30, 36

(1999) (citation omitted); see State v. Vines, 105 N.C. App. 147, 157, 412 S.E.2d 156,

163 (1992) (holding that the prosecutor’s argument attacking the integrity of defense

counsel was grossly improper but not sufficiently prejudicial to require a new trial).

ii. Reference to Out-of-State Counsel

84. Medflow asserts it was prejudiced because Mr. Spears referred to

defense counsel as being from out of state. (See Trial Tr. Vol. XI 71:20–21 (“Do you

think that – I don’t know, two law firms out of state, out of town . . .”).) Medflow

argues that statement warrants a new trial as to Schiffli because: (1) it is false, (2)

there is no legitimate purpose for making that statement, and (3) that information

was not in evidence. (See Def.’s Br. Supp. Mot. J., JNOV, & New Trial Against

Schiffli, & Br. Opp’n Schiffli’s Mot. Entry J. 11.)

85. Again, Mr. Spears’s statement must be considered in context. At the

beginning of jury selection when Medflow’s lead counsel, Mr. Tobin, introduced

himself, he stated that he lives in Texas but is also licensed to practice law in North

Carolina. 11 (See Civil Trial Tr. Vol. I of XII Mon., Apr. 22, 2019 133:23–134:5, ECF

No. 374.1 (“[M]y name is Aaron Tobin. . . . I practice in Dallas, Texas at the firm

Condon Tobin. . . . I am licensed here in North Carolina. I practice quite a bit in

North Carolina. I split my time between North Carolina and Texas.”).) On balance,

and in its discretion, the Court finds that Mr. Spears’s reference to Medflow having

out-of-state counsel, to the extent it caused any prejudice at all, was not sufficiently

prejudicial to warrant a new trial.

iii. Improper Forecast of Evidence

86. Medflow contends that Mr. Spears prejudicially argued that Mr. Tobin,

in his opening statement, misrepresented that there would be no evidence that

Plaintiffs intended to include any change-of-control bonuses in their contracts until

July 2014. Medflow contends that the argument was particularly unfair because Mr.

11Four attorneys appeared on behalf of Medflow at the Severed Issue Trial: Mr. Tobin,

Michele Spillman (“Ms. Spillman”), Jared T.S. Pace (“Mr. Pace”), and Matthew Nis Leerberg

(“Mr. Leerberg”). Messrs. Tobin and Leerberg are admitted to practice law in North Carolina.

At the time of the Severed Issue Trial, Mr. Leerberg resided in North Carolina, and Ms.

Spillman and Mr. Pace resided in Texas.

Spears made the same representation in his opening statement. (Def.’s Br. Supp.

Mot. J., JNOV, & New Trial Against Schiffli, & Br. Opp’n Schiffli’s Mot. Entry J. 11.)

87. In opening, Mr. Spears narrated Throneburg’s process of drafting the

employment agreements over the July 4th weekend, including his decision to add the

Change-of-Control Payment term to the contract. (Trial Tr. Vol. II 200:24–202:3.)

However, Mr. Spears did not represent that the July 4th weekend was the first time

a change-of-control bonus was considered or discussed between the Plaintiffs.

88. In contrast, in his opening statement, Mr. Tobin represented that there

would be no “evidence whatsoever of these employment contracts until July 4, 2014,”

(Trial Tr. Vol. II 206:19−20), and further that “what the evidence is going to show is

that there is no mention whatsoever of a change of control payment, a severance

payment, any type of gross up factor at all until July 4th, a couple days after they

hear the company’s going to be sold[,]” (Trial Tr. Vol. II 210:17–21).

89. In closing, Mr. Spears did not challenge the argument that there was

not a change-of-control provision in the contracts before July 4, 2014, but he noted

that “Defense counsel also said that there was no mention of the change of control

provisions until July[,]” which Mr. Spears then attacked as “utterly, completely false.”

(Trial Tr. Vol. XI 85:25–86:11.)

90. The trial testimony included not only that Throneburg did not begin

drafting Plaintiffs’ employment agreements until the July 4, 2014 weekend before

their execution on July 8, 2014, but also that Throneburg and Schiffli discussed

change-of-control bonuses in April 2014. (Trial Tr. Vol. VIII 71:19–72:25.)

Throneburg also produced documentary evidence that he began collecting

agreements he might use as templates for drafting Plaintiffs’ agreements several

months before July 2014, and that at least some of those templates had change-of-

control provisions. (See Trial Tr. Vol. VIII 71:19–72:25, 99:20−100:6.)

91. The Court repeatedly instructed the jury that opening statements and

the arguments of counsel do not constitute evidence. In the overall context of the

record, and in its discretion, the Court concludes that neither Mr. Tobin’s

representation of the timing of the agreements in his opening statement nor Mr.

Spears’s challenge to Mr. Tobin’s representation was so out of bounds that the Court

should grant relief. Cf. In re Estate of Raney, No. COA10-1480, 2011 N.C. App. LEXIS

1904, at * 26–27 (N.C. Ct. App. Sept. 6, 2011) (holding that attorney’s publication of

evidence to the jury for the first time during closing argument, although “poor trial

practice, was not an act of skullduggery” warranting a new trial).

iv. Mischaracterization of Law or Custom

92. Medflow argues that Mr. Spears improperly told the jury to consider law

that does not exist. The argument must be considered in the context of the

proceedings in the case. Medflow’s consistent position throughout this litigation has

been that Plaintiffs intentionally failed to submit their employment agreements for

review by outside counsel or Medflow’s shareholders prior to execution of the

agreements. Plaintiffs have responded that the law does not require that they do so.

The Court instructed the jury to consider all the facts and circumstances surrounding

the execution of the agreements when determining whether Plaintiffs met their

burden of proving their contracts were fair.

93. In his closing argument, Mr. Spears stated:

There is no ordinary and customary practice in private companies in

North Carolina . . . that shareholder approval is required or outside

counsel is required to do any of these contracts. And you will not hear

that from the judge, that there is a customary practice that is usually

followed because it doesn’t exist. And you know what? If they did exist,

do you think that you would have heard about it?

(Trial Tr. Vol. XI 71:12–20; see Schiffli’s Mem. Opp’n Defs.’ Mot. J. JNOV, & New

Trial 15–16.)

94. There are multiple reasons why this argument does not warrant a new

trial as to Schiffli. First, the Court fully and repeatedly instructed the jury that only

the Court could advise them as to what law governs their deliberation and that

statements of counsel were neither evidence nor binding instruction. Second, it is

appropriate for counsel to argue to the jury that it should consider not only the law

included in the Court’s instructions, but also the absence of any mention in those

instructions of law supporting arguments upon which the opposing party has relied.

Third, because the jury never reached consideration of the issue of fairness with

respect to Schiffli, any potential prejudice resulting from an erroneous

characterization of law or custom by Mr. Spears never came to bear.

95. Based on the record, and in its discretion, the Court concludes that the

jury was not misled, and Medflow was not unfairly prejudiced because of any

potential misrepresentation of law by Mr. Spears. See State v. Trull, 349 N.C. 428,

452, 509 S.E.2d 178, 194 (1998) (holding that where counsel made a misstatement of

law in his closing argument, the trial court’s instructions cured any prejudice).

v. Prejudicial Rhetorical Questions

96. Medflow contends that Mr. Spears inflamed the passions of the jury by

asking improper rhetorical questions in his closing argument. (Def.’s Br. Supp. Mot.

J., JNOV, & New Trial Against Schiffli, & Br. Opp’n Schiffli’s Mot. Entry J. 12.)

Further elaborating on his argument that Medflow pursued a defense based on “false

premises,” in closing Mr. Spears argued:

You know, what’s a false premise? You know – excuse me. The classic

example is you say, how often do you abuse your spouse? When’s the

last time you got treatment for your abusive conduct? It’s presuming

that you assaulted somebody, that you were abusive to somebody, that

you need treatment. The minute that question is asked, you look at

people differently. Oh, you’re an abuser? You know, immediate

negative connotations from the way this thing happened.

(Trial Tr. Vol. XI 67:4–12.)

97. In the context of the overall evidence in the case, the Court concludes,

in the exercise of its discretion, that Mr. Spears’ argument was a proper attack on

Medflow’s express or implied argument that Plaintiffs’ employment agreements

should be deemed unfair to Medflow solely because they had not been submitted to

outside counsel or shareholders, and that argument did not rise to a level of a gross

impropriety adequate to compel a new trial as to Schiffli. Compare Helbein v.

Helbein, No. COA 18-383, 2019 N.C. App. LEXIS 249, at * 19–21 (N.C. Ct. App. Mar.

19, 2019) (holding that a reference to the opposing party and counsel engaging in

“misleading trickery” was improper but did not rise to the level of gross impropriety

needed to warrant a new trial), with Corwin, 91 N.C. App. at 728, 373 S.E.2d at 151

(holding that defendant’s counsel’s argument was grossly improper where he argued

that any monetary judgment would go to the lawyers and that it was not “Christian

to sue for money”).

98. Schiffli also argues that because it was Mr. Raab that argued the de

facto officer issue—the only issue which the jury considered with respect to Schiffli—

none of Mr. Spear’s statements could have created prejudice adequate to vacate the

jury’s verdict as to Schiffli. (Schiffli’s Mem. Opp’n Defs.’ Mot. J. JNOV, & New Trial

16–17.) Medflow responds that because Messrs. Raab and Spears “conducted the

entire trial on behalf of all three Plaintiffs[, t]heir strategic decision to divide the

labor at closing arguments did not segregate their unified representation.” (Reply

Supp. Def.’s Mot. J., J. Notwithstanding Verdict, & New Trial Against Schiffli 3, ECF

No. 359.)

99. The Court need not consider this argument because it has concluded

that Medflow has not shown that Mr. Spears’s arguments were improper in the first

instance or otherwise demonstrated prejudice. See Sisk, 221 N.C. App. at 635, 729

S.E.2d at 71 (holding that the plaintiff was not entitled to a new trial, in part, because

she had not shown prejudice).

100. In sum, having considered each of the bases on which Medflow seeks a

new trial as to Schiffli individually and collectively, the Court concludes that

Medflow’s motion for new trial should be denied.

B. Cross-Motions for JNOV as to Ehmann and Throneburg

101. Ehmann, Throneburg, and Medflow argue that, although the jury was

unable to reach a unanimous verdict on the issue, they are each entitled to JNOV on

the question of whether the employment agreements were fair to Medflow at the time

they were entered.

(1) Ehmann and Throneburg’s JNOV Motion

102. Ehmann and Throneburg argue that the evidence presented at trial

entitles each of them to a judgment that their respective employment agreement was

fair to Medflow when entered. 12 Their burden at trial was to show, “by the greater

weight of the evidence,” “the overall facts and circumstances . . . that were known or

should have been known at the time the transaction[s] [were] entered[,]”

demonstrated the agreements were entered into “openly and honestly,” and the terms

of those agreements were “in the range of what might have been entered at arm’s

length by disinterested persons.” (Jury Instrs. 11–12); see N.C.G.S. § 55-8-31, cmt. 4.

103. Ehmann and Throneburg contend, given that there was no evidence of

a lack of openness or honesty, the only finding that should have resulted from the

evidence presented at trial was that their agreements were consistent with arm’s

length transactions. (Mem. Supp. Ehmann & Throneburg’s Mot. J. Notwithstanding

Verdict 4, ECF No. 334.) Ehmann and Throneburg emphasize that they presented

12 Ehmann and Throneburg also carry forward their argument that the Court erroneously

refused to allow Plaintiffs to rely on the business judgment rule to shield them from the

obligation of proving the fairness of their employment agreements at the time they were

entered. Without repeating its basis for doing so, the Court adheres to its prior rulings

rejecting Plaintiffs’ position.

expert testimony while Medflow did not, and Plaintiffs’ experts Kevin Walker

(“Walker”) and Thomas Henson (“Henson”) testified that the terms of the employment

agreements were consistent with an arm’s length negotiation.

104. The Court finds Ehmann and Throneburg’s argument unavailing. First,

the burden of proving fairness was on Plaintiffs, and Ehmann and Throneburg cannot

satisfy their own burdens of proof on the issue of fairness with the expedient

argument that Medflow did not put on its own expert testimony that the agreements

were unfair.

105. Second, while the Court correctly instructed the jury to consider all facts

and circumstances surrounding the execution of Plaintiffs’ employment agreements,

the jury was not required to accept any expert testimony. N.C.P.I.-Civil 101.25; (Jury

Instrs. 2–3.)

106. Third, Walker and Henson specifically testified that they did not

consider the fairness of the negotiation process and only opined on the

appropriateness of the substantive terms of the agreements. (See, e.g., Trial Tr. Vol.

VI 130:6–12 (“I also did not review at all process, the process by which [the

agreements] might have been executed. I simply took these agreements and some

other ancillary agreements, read them, considered the facts or took the facts that

were stated and the preambles as being true and then I made a determination.”).)

107. When ruling on Ehmann and Throneburg’s JNOV Motion, the Court is

required to view the evidence most favorably to Medflow. The Court concludes that

there was ample evidence on which Medflow based its contention that the jury should

find in its favor on the issue of fairness. The Court, in the exercise of its discretion,

therefore concludes that Ehmann and Throneburg’s motion for JNOV should be

denied. See N.C. Nat’l Bank v. Burnette, 297 N.C. 524, 536, 256 S.E.2d 388, 395

(1979) (stating that JNOV motions brought by the party with the burden of proof are

“rarely granted”).

(2) Medflow’s JNOV Motion

108. Medflow contends that the evidentiary record, even considered in

Plaintiffs’ favor as the JNOV standard requires, compels a finding as a matter of law

that Ehmann and Throneburg’s agreements were unfair to Medflow at the time they

were entered. In part, Medflow’s argument restates the position, which the Court

previously rejected in its Summary Judgment Opinion, that procedural unfairness

alone renders Plaintiffs’ employment agreements unenforceable. See Ehmann, 2017

NCBC LEXIS 88, at *52–58; (Resp. Opp’n Throneburg & Ehmann’s Mot. J.

Notwithstanding Verdict 4–6, ECF No. 359.) The Court adheres to its ruling that

procedural unfairness is but one of the factors the jury is to consider when resolving

the issue of fairness of the employment agreements and concludes it properly

instructed the jury to this effect. (See Jury Instrs. 9–10.)

109. The jury ultimately determined that it could not unanimously agree that

Ehmann and Throneburg sustained their burden of proving their agreements were

fair to Medflow when entered. But the record contained more than a scintilla of

evidence, including both fact and expert testimony, upon which the jury could have

ruled in Plaintiffs’ favor, and that evidence is adequate to defeat Medflow’s motion

for JNOV. Upon that record, and in the exercise of its discretion, the Court concludes

that Medflow’s JNOV motion should be denied. See N.C. Indus. Capital, LLC v.

Clayton, 185 N.C. App. 356, 363, 649 S.E.2d 14, 20 (2007) (holding trial court did not

err in denying JNOV in the plaintiff’s favor where there was more than a scintilla of

evidence in support of the defendant’s assertion).

C. Medflow’s Motion for New Trial as to Ehmann and Throneburg

110. With the jury having been unable to reach a unanimous verdict as to

whether Ehmann and Throneburg proved their employment agreements were fair to

Medflow when entered, the Court agrees that it should declare a mistrial on those

issues and order that they be tried again before a jury. Accordingly, Medflow’s motion

for new trial on these issues should be granted. 13 See State v. Harris, 198 N.C. App.

371, 376, 679 S.E.2d 464, 468 (2009) (“When a . . . trial results in a hung jury[,] . . . a

new trial is ordered[.]”).

13 For the Severed Issue Trial, the parties agreed to limit testimonial and documentary

evidence to events that transpired through and including July 8, 2014. (Stipulation

Regarding Scope Evid. Trial Severed Issue 1, ECF No. 295.) The parties have not been able

to agree to carry forward the same limitation for any subsequent trial. Without that

stipulation, the Court deems it inefficient to limit a retrial on Ehmann and Throneburg’s

claims to the Severed Issue. Accordingly, all of Ehmann and Throneburg’s claims will be

tried together. (See generally Order Declaring Mistrial, Unsevering Case, & Granting Pls.’

Request Judicial Notice, ECF No. 371.) Because the Court concludes below that Schiffli is

only entitled to a partial summary judgment on his contract claim, the Court must separately

consider whether a final resolution of the remaining issues of material fact with respect to

Schiffli’s contract should be tried separately or should await a joint trial with Ehmann and

Throneburg. As stated in greater detail below, the extent of Schiffl’s contract remedies may

be easily determined in a standalone trial, while other issues common among Ehmann,

Throneburg, and Schiffli, may be tried together.

D. Schiffli’s Motions for Entry of Judgment and for Summary

Judgment

111. The jury unanimously concluded that Schiffli was not a de facto Medflow

officer when he entered his employment agreement. (Verdict Sheet 1.) In light of

that verdict, Schiffli now moves for a judgment that he is then entitled to unpaid

wages, a Change-of-Control Payment, and Severance Benefits pursuant to his

employment agreement.

(1) Entry of Judgment on Jury Verdict

112. Schiffli asserts that entry of judgment in his favor should not be

precluded by the jury’s inability to reach a unanimous verdict on the issues regarding

Ehmann and Throneburg’s agreements. (Mem. Supp. Mot. Entry J. Verdict & Summ.

J. Mot. 2–3, ECF No. 328 (citing Rhyne v. K-Mart Corp., 358 N.C. 160, 188, 594 S.E.2d

1, 20 (2004) (“[T]here are two distinct verdicts based upon causes of action for

individual plaintiffs.”)).) The Court agrees. (See Order Regarding Scheduling &

Severance Issue Trial 1 (“The Severed Issue shall be decided separately for each

Plaintiff.”).)

113. The Court determines and adjudges that the jury has finally and

conclusively determined that Schiffli was not a Medflow officer when he entered his

employment agreement. For reasons discussed below, the Court further concludes

that the effect of the jury’s verdict is that Schiffli does not have the burden of proving

that his employment agreement was fair to Medflow when it was entered, and that

Schiffli is entitled to summary judgment that he was not a Medflow fiduciary at any

pertinent time that would bar him from recovery under his contract.

(2) Schiffli’s Motion for Summary Judgment

114. Armed with the jury’s verdict in his favor on the issue of whether he was

a de facto officer when negotiating and executing his employment agreement, Schiffli

renews his 2016 Summary Judgment Motion and requests a summary judgment that:

(1) Defendants’ affirmative defenses and counterclaims for breach of fiduciary duty

and constructive fraud fail; (2) his employment agreement is valid and enforceable in

accordance with its terms; (3) Medflow did not terminate his employment agreement

for Cause; (4) he terminated his agreement for Good Reason; (5) he is accordingly

entitled to unpaid wages, a Change-of-Control payment, and Severance Benefits as

provided by his agreement; and (6) Medflow’s liability is chargeable against Holdings.

(Mot. Entry J. Jury Verdict & Summ. J. Mot. 2.)

a. Holdings’s Liability

115. Holdings stipulated that it is responsible for any judgment against

Medflow, (see Defs.’ Resp. Opp’n Pls.’ Mot. Prejudgment Relief 2, ECF No. 346 (“The

Defendants have stipulated that Medflow Holdings will ensure that any judgment

rendered against Medflow, Inc. gets paid.”)), and this Court has already determined

that Holdings is judicially bound by that admission and shall be charged with

whatever liability may result against Medflow regarding Plaintiffs’ employment

agreements, (see Order Declaring Mistrial, Unsevering Case, & Granting Pls.’

Request Judicial Notice 5 (noting that Holdings admitted that it is the corporate

successor of Medflow)). The Court concludes that it has already made a final ruling

that Holdings may be charged with any liability against Medflow to any Plaintiff, and

the Court need not reconsider the issue on Schiffli’s summary judgment motion. 14

b. Medflow Defendants’ Counterclaims and

Affirmative Defenses for Breach of Fiduciary Duty

and Constructive Fraud

116. Medflow Defendants challenged each of Plaintiffs’ employment

agreements on several grounds, including by contending that they are unenforceable

because they were procured through transactions in breach of Plaintiffs’ fiduciary

duties and amount to constructive fraud. (Medflow Defs. Answer & Countercl. 23,

36–37, 39.) The jury’s verdict conclusively establishes that Schiffli owed no fiduciary

duty to Medflow by reason of being a de facto officer at the time he entered his

employment agreement. Schiffli argues that he is entitled to recover under his

contract and Medflow Defendants’ counterclaims for breach of fiduciary duty and

constructive fraud must fail because Medflow Defendants have no remaining basis to

argue that he breached a fiduciary duty actually owed to Medflow.

117. Although Medflow Defendants did not specifically assert the argument

in their counterclaims, Medflow now contends that Schiffli should be barred from

recovering under his contract because, even if he owed no fiduciary duties at the time

he entered the agreement, he owed such duties at the time he later sought to enforce

it. Medflow argues both that Schiffli’s summary judgment motion is premature

because Medflow has not had the benefit of taking discovery on its counterclaims, and

14 As noted earlier, the Court does not consider here whether, with the exception of Holdings,

Medflow’s liability can be charged against other Defendants including SNIC, or whether the

Court should set aside any conveyance or transfer of Medflow’s assets between Defendants.

that, once that discovery is complete, it will demonstrate that Schiffli was a Medflow

fiduciary because he exercised dominion and control over Medflow at the time he

sought to enforce his agreement. (Def.’s Resp. Opp’n Schiffli’s Mot. Summ. J. 10−14,

ECF No. 352.)

118. The Court sees no need for discovery on the issue of whether Schiffli was

Medflow’s fiduciary when he asserted his right to benefits under his employment

agreement. The record is clear that Ehmann reappointed Schiffli as a Medflow officer

in December 2014 before Schiffli brought this action to enforce his agreement. (Dec.

9, 2014 Director Action 1 (memorializing Ehmann’s appointment of Schiffli as

Treasurer/CFO); Reply Defs.’ Am. Countercl. ¶ 1, ECF No. 190 (admitting “that

Schiffli served as an officer of Medflow, Inc. from December 19, 2014 through

approximately October 14, 2015”).)

119. The relevant question is whether a later-acquired fiduciary duty

precludes Schiffli from receiving the benefits of the employment agreement he

entered at a time when he owed no such duty. Medflow has cited no authority to

support that theory. While the Court deemed it material whether Schiffli owed

fiduciary duties to Medflow at the time he entered his agreement and therefore had

a duty to prove fairness, see Ehmann, 2017 NCBC LEXIS 88, at *42−45, it concludes

there is no basis to find that a later-acquired fiduciary duty bars Schiffli from

enforcing his earlier-entered agreement. Medflow has offered no proof that Schiffli

owed a fiduciary duty to Medflow when he entered his employment agreement other

than his status as a de facto officer. The Court then concludes that the jury verdict

in Schiffli’s favor forecloses Medflow Defendants’ breach of fiduciary duty and

constructive fraud counterclaims against him as a matter of law, and they should be

dismissed.

c. Medflow’s Other Challenges to the Enforceability of

Schiffli’s Agreement

120. Medflow challenges Schiffli’s employment agreement on several bases

that do not rest on Schiffli having breached a fiduciary duty owed to Medflow.

Specifically, Medflow contends that the terms of the agreement are so egregious and

unfair to Medflow that they should be stricken for unconscionability, and the

agreement as a whole is unenforceable because it results in corporate waste. (Def.’s

Resp. Opp’n Schiffli’s Mot. Summ. J. 1.)

i. Unconscionability

121. In its Summary Judgment Opinion, the Court stated, “[i]n th[e

corporate] 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.” Ehmann, 2017 NCBC LEXIS 88, at *58

(citing Robinson on North Carolina Corporate Law § 16.11, at 16−25 (7th ed. 2016),

and Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996) (holding that the business

judgment rule cannot protect compensation decisions which are so egregious as to

constitute corporate waste)). The Court concluded that, at least in the context of an

attack on a corporate officer’s compensation, “unconscionability collapses into the

overall issue of fairness.” Ehmann, 2017 NCBC LEXIS 88, at *59. The Court must

now consider Medflow’s assertion of unconscionability against Schiffli, who has been

determined not to be an officer.

122. Whereas Ehmann and Throneburg have the burden of proving the

fairness of their agreements as officers, the burden is on Medflow to ultimately prove

that Schiffli’s agreement was so unfair as to be unenforceable under the doctrine of

unconscionability. As an initial matter, it is unclear whether North Carolina’s

appellate courts would or should recognize the application of the unconscionability

doctrine to employment agreements for corporate leadership, but even if they did, the

elements of any such claim would include proof of procedural and substantive

unfairness. The Court concludes as a matter of law that Medflow has not forecasted

evidence adequate to meet its burden on those elements.

123. Unconscionability was traditionally conceived of as a defense to

enforcement of a contract for the sale of goods, see N.C.G.S. § 25-2-302, but has also

been applied to common law contracts, see, e.g., Rite Color Chem. Co. v. Velvet Textile

Co., 105, N.C. App. 14, 18−19, 411 S.E.2d 645, 647−48 (1992) (citing cases). North

Carolina courts have never addressed unconscionability in the corporate context, but

courts outside of North Carolina have associated the term “unconscionability” with

corporate waste. See, e.g., Brehm v. Eisner, 746 A.2d 244, 262 n.56 (Del. 2000)

(“[D]irectors have the power, authority and wide discretion to make decisions on

executive compensation. . . . [T]here is an outer limit to that discretion, at which

point a decision of the directors on executive compensation is so disproportionately

large as to be unconscionable and constitute waste.” (internal citations omitted)).

124. Medflow is unable to cite North Carolina precedent in support of its

unconscionability argument. It urges, however, that North Carolina law creates no

per se impediment to a corporation’s ability to raise an unconscionability defense, (see

Defs.’ Suppl. Br. Regarding Pls.’ Mots. Partial Summ. J. 12, ECF No. 232), citing

Leventhal v. New Valley Corp., No. 91 Civ 4238 (CSH), 1992 U.S. Dist. LEXIS 456, at

*18–19 (S.D.N.Y. Jan. 17, 1992).

125. In Leventhal, after a terminated officer’s ex-employer ceased making

severance payments under an employment contract, the officer sued the employer for

breach of that contract, and the employer raised unconscionability as an affirmative

defense. While the Leventhal Court considered the corporate defendant’s defense in

passing, it succinctly granted summary judgment in favor of the officer because, given

that New York law “require[d] a showing of ‘lack of meaningful choice,’ . . . [the]

corporate defendant [wa]s in no position to avail itself of the unconscionability

doctrine.” Id. at *18–19; see 1 E. Farnsworth, Contracts, § 4.28 at 505 n.41 (observing

that courts “have declined to apply the [unconscionability] doctrine in favor of

sophisticated corporations”)).

126. As such, Leventhal’s holding actually supports Schiffli’s position and

anchors the Court’s conclusion that, assuming for argument that North Carolina

courts would extend the unconscionability doctrine to the current context, Medflow

was required to but has failed to come forward with evidence adequate to satisfy the

essential elements of unconscionability.

127. North Carolina precedent dictates that

[a] court will generally refuse to enforce a contract on the ground of

unconscionability only when the inequality of the bargain is so manifest

as to shock the judgment of a person of common sense, and where the

terms are so oppressive that no reasonable person would make them on

the one hand, and no honest and fair person would accept them on the

other. In determining whether a contract is unconscionable, a court

must consider all the facts and circumstances of a particular case. If the

provisions are then viewed as so one-sided that the contracting party is

denied any opportunity for a meaningful choice, the contract should be

found unconscionable.

Brenner v. Little Red Sch. House, Ltd., 302 N.C. 207, 213, 274 S.E.2d 206, 210 (1981)

(internal citations omitted) (finding no unconscionability because there was no

“inequality of bargaining power between the parties” and the plaintiff “was not forced

to accept [the] defendant’s terms”). That is, “[i]n order to establish unconscionability,

[Medflow must] show both procedural unconscionability and substantive

unconscionability.” Wilner v. Cedars of Chapel Hill, LLC, 241 N.C. App. 389, 392,

773 S.E.2d 333, 336 (2015) (citation omitted).

128. Procedural unconscionability

involves bargaining naughtiness in the formation of the contract and is

equated with . . . unfair surprise . . . and with . . . lack of meaningful

choice. The term encompasses not only the employment of sharp

practices and the use of fine print and convoluted language, but a lack

of understanding and inequality of bargaining power.

Rite Color Chem. Co., 105 N.C. App. at 20, 411 S.E.2d at 648 (internal citations and

quotation marks omitted). Bargaining naughtiness has also been defined as “fraud,

coercion, undue influence, misrepresentation, [and] inadequate disclosure.” Johnson

v. Johnson, 259 N.C. App. 823, 831, 817 S.E.2d 466, 473 (2018).

129. “Substantive unconscionability . . . involves the harsh, oppressive, and

one-sided terms of a contract from which a party seeks relief[, and which] are

generally characterized as being unreasonably favorable to the other party to the

contract.” Rite Color Chem. Co., 105 N.C. App. at 20, 411 S.E.2d at 648−49 (internal

citations and quotation marks omitted).

130. Critically,

[a]lthough there is some confusion among the commentators as to

whether a court may determine a contract to be unconscionable on the

basis of only one of the two elements described above, [the North

Carolina Court of Appeals] has previously held that “[t]o

find unconscionability there must be an absence of meaningful choice on

part of one of the parties (procedural unconscionability) together

with contract terms which are unreasonably favorable to the other

(substantive unconscionability).”

Id., 411 S.E.2d at 649 (emphasis in original) (quoting Martin v. Sheffer, 102 N.C. App.

802, 805, 403 S.E.2d 555, 557 (1991)). “The question of unconscionability is

determined as of the date the contract was executed.” Weaver v. Saint Joseph of the

Pines, Inc., 187 N.C. App. 198, 212, 652 S.E.2d 701, 712 (2007) (citation omitted).

131. When attacking Schiffli’s agreement, Medflow focuses on actions of

parties other than Schiffli and standards that would have applied if Schiffli were an

officer when negotiating and entering his agreement with Medflow. (See Def.’s Resp.

Opp’n Schiffli’s Mot. Summ. J. 6–7.) Medflow has presented no evidence from which

a fact-finder could conclude there was bargaining naughtiness by Schiffli, or unequal

bargaining power between Schiffli and Medflow such that Medflow had no

meaningful choice but to enter the agreement. See Emerald Portfolio, LLC v. Outer

Banks/Kinnakeet Assocs., LLC, 249 N.C. App. 246, 254, 790 S.E.2d 721, 727 (2016)

(“In the absence of any procedural unconscionability, it cannot be said that the

guaranty agreement was unconscionable.”); Wilner, 241 N.C. App. at 393−94, 773

S.E.2d at 337 (finding insufficient evidence of procedural unconscionability where

“plaintiffs alleged only that defendants were more sophisticated and drafted the

contracts to their own benefit[,]” and insufficient evidence of substantive

unconscionability where the “plaintiffs lacked the ability to negotiate contract

terms”).

132. The Court therefore concludes that Schiffli is entitled to summary

judgment in his favor on the issue of unconscionability, whether Medflow styles its

unconscionability attack as an affirmative defense or counterclaim.

ii. Corporate Waste

133. Medflow recasts it unconscionability argument as a defense of corporate

waste. It is again significant that the jury has conclusively determined that Schiffli

was not a Medflow officer when negotiating and executing his employment

agreement.

134. Corporate waste is a breach of a corporate fiduciary’s affirmative

obligation under the duty of loyalty to “strive to advance the best interests of the

corporation.” Seraph Garrison, LLC v. Garrison, No. COA14-1166, 2016 N.C. App.

LEXIS 1376, at *8 (N.C. Ct. App. Apr. 19, 2016) (citing In re Walt Disney Co.

Derivative Litig., 2004 Del. Ch. LEXIS 132, at *5 n.49 (Del. Ch. Sept. 10, 2004)). In

North Carolina, corporate waste is not a separate cause of action but is subsumed

into claims for breach of fiduciary duty. See Brady v. Van Vlaanderen, 2013 NCBC

LEXIS 34, at *9–11 (N.C. Super. Ct. July 24, 2013).

135. In addition to having failed to prove that Schiffli owed fiduciary duties

at the time he entered his agreement, Medflow has not forecasted any evidence upon

which a jury could determine that Schiffli’s agreement was so devoid of consideration

to Medflow that it rose to the level of corporate waste.

136. “There is little direct law in North Carolina defining corporate

waste. However, our courts frequently turn to Delaware law for guidance on matters

of corporate law where North Carolina appellate decisions provide little guidance.”

Johnston v. Johnston Props., Inc., 2018 NCBC LEXIS 119, at *38 (N.C. Super. Ct.

Nov. 15, 2018) (citation omitted).

137. Under Delaware law, the standard for corporate waste is more exacting

than mere fairness:

Roughly, a waste entails an exchange of corporate assets for

consideration so disproportionately small as to lie beyond the range at

which any reasonable person might be willing to trade. Most often the

claim is associated with a transfer of corporate assets that serves no

corporate purpose; or for which no consideration at all is received. Such

a transfer is in effect a gift. If, however, there is any substantial

consideration received by the corporation, and if there is a good faith

judgment that in the circumstances the transaction is worthwhile, there

should be no finding of waste, even if the fact finder would conclude a

post that the transaction was unreasonably risky. Any other rule would

deter corporate boards from the optimal rational acceptance of risk, for

reasons explained elsewhere.

Krieger v. Johnson, 2014 NCBC LEXIS 13, at *22 (N.C. Super. Ct. Apr. 30, 2014)

(quoting Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997) (internal citations and

emphasis omitted)).

That there may be some consideration for the contract is not controlling

if the value of the compensation to be paid . . . is so out of all proportion

to the value of the services which [the beneficiary] would be expected to

render that no reasonable person would consider that the corporation

would receive a quid pro quo[.]

Fidanque v. Am. Maracaibo Co., 92 A.2d 311, 321 (Del. Ch. 1952) (citation omitted).

Therefore,

[t]he test for waste is extreme and rarely satisfied. . . . [E]ven if a

plaintiff successfully raises questions concerning the fairness of . . .

compensation, he does not necessarily succeed in pleading ‘the rare type

of facts from which it is reasonably conceivable’ that the compensation

awards constituted corporate waste.

Espinoza v. Zuckerberg, 124 A.3d 47, 67 (Del. Ch. 2015) (citation omitted).

138. Medflow introduced evidence at the Severed Issue Trial that Schiffli

proposed an employment agreement with fewer benefits than the one he ended up

receiving, and that his final agreement included items he had not requested including

the Gross-Up of the Change-of-Control Payment, a security interest in Medflow’s

assets, and thirty-six months of Insurance Benefits post-termination. (See Trial Tr.

Vol. IX 67:4–68:2.)

139. In seeking to demonstrate a viable argument for corporate waste,

Medflow now also relies on the declaration of its expert David Lewin (“Lewin”), who

did not testify at the Severed Issue Trial. Lewin’s report does not attack the decision

to hire or retain Schiffli but questions the extent of the benefits provided to secure

Schiffli’s employment. That is, Lewin opines that Schiffli received excessive

consideration under his final agreement because Schiffli did not previously have an

employment contract giving him significant long-term payments in the event of sale

or change of control, (Exs. Def.’s Resp. Opp’n Schiffli’s Mot. Summ. J. Ex. 2, at ¶ 31

(“Lewin Expert Decl.”), ECF No. 352.1), Schiffli did not ask for an employment

agreement, and there is no evidence that Schiffli would have left Medflow without

one, (Lewin Expert Decl. ¶ 33). Additionally, Lewin states that if Schiffli’s long term

employment was beneficial to Medflow then Plaintiffs had no reason to fail to advise

the shareholders of the agreement, (Lewin Expert Decl. ¶ 33), that the “self-serving

background” statement, security interest in Medflow’s assets, and thirty-six month

post-termination Insurance Benefits coverage were all “highly unusual and clearly

not customary,” (Lewin Expert Decl. ¶¶ 37–39), and that the Change-of-Control

Payments impose a disproportionate burden on Medflow, (Lewin Expert Decl. ¶ 40).

140. Even if the Court ignores evidence inconsistent with Lewin’s declaration

introduced at the Severed Issue Trial, 15 Medflow’s attack on the quantity of the

benefits Schiffli received under his contract fails when measured against the

heightened inquiry for corporate waste—whether Schiffli’s services to Medflow were

so devoid of value that no reasonable director would have approved Schiffli’s

agreement.

141. “[A]llegations that compensation is ‘excessive or even lavish . . . are

insufficient as a matter of law to meet the standard required for a claim of waste.’ ”

Espinoza, 124 A.3d at 67 (dismissing corporate waste claim where plaintiff argued

“that the average compensation for Facebook’s non-employee directors is 43% higher

than the average compensation for directors in a specified peer group of companies,

despite Facebook’s lower-than-average net income and revenue, and stock price

15 For example, Schiffli testified he may have decided not to continue his employment absent

a written agreement with adequate long-term protections. (Trial Tr. Vol. IV 227:15–22,

228:13–19.)

movement” because the plaintiff was essentially complaining that “some portion of

defendants’ 2013 compensation was above and beyond what they deserved for their

performance”); see Zucker v. Andreessen, No. 6014-VCP, 2012 Del. Ch. LEXIS 135, at

*35 (Del. Ch. June 21, 2012) (“Without question, the amount of [the former CEO’s]

severance may appear extremely rich or altogether distasteful to some. But, ‘[t]he

waste doctrine does not . . . . make transactions at the fringes of reasonable decision-

making its meat.’ ” (citation omitted)).

142. Medflow has never attacked Schiffli’s work ethic or competency as a

CFO. To the contrary, the trial evidence reflected that Schiffli was highly qualified

and experienced, and put in longer hours than he was obligated to during the period

in which he was intended to work part-time as an independent contractor. (See Trial

Tr. Vol. IV 102:7−117:10.)

143. Having failed to advance any colorable evidence supporting a finding

that Schiffli’s continued employment with Medflow was devoid of value, Medflow has

demonstrated no basis to pursue a claim or defense of corporate waste. Schiffli is

entitled to summary judgment on that issue, and Medflow’s corporate waste

counterclaim against Schiffli should be dismissed. See Espinoza, 124 A.3d at 67–68

(holding that, without an allegation “that the all-star cast on Facebook’s board is so

lacking in talent or exerts so little effort that Facebook receives nothing in return for

compensating its members[,] . . . the claim that Facebook paid its directors more than

it should have . . . fails to state a legally cognizable claim for waste of corporate

assets”); Zucker, 2012 Del. Ch. LEXIS 135, at *34–36 (holding the plaintiff failed to

rebut presumption of business judgment by alleging corporate waste because there

was “at least some element of bilateral exchange and that there were rational bases

for the Board” to pay $40 million in severance to the company’s former CEO).

iii. Validity of Execution of Schiffli’s Agreement

Under Medflow’s Bylaws

144. Read broadly, Medlow’s affirmative defenses and counterclaims

challenge whether Schiffli’s agreement can be avoided because it was not executed

with the corporate formality required by Medflow’s bylaws governing compensation

of its officers. Specifically, Medflow argues that Schiffli’s employment agreement

“was not validly executed in the absence of independent review or shareholder

approval[.]” (Def.’s Resp. Opp’n Schiffli’s Mot. Summ. J. 6.) Medflow’s expert Lewin

opined that because Plaintiffs’ agreements were executed without independent

review or shareholder approval, they were not “fair, did not result from arm’s length

transactions, are not consistent with common contracting practices and were not in

the best interests of Medflow.” (Lewin Expert Decl. ¶ 19.) As to Schiffli, that

argument now fails for the simple reason that the jury has determined that he was

not an officer when he executed his agreement.

145. Medflow cannot point to any provision of its Amended and Restated

Articles of Incorporation or its Bylaws which require any particular method that must

be followed when executing employment contracts for non-directors/officers. (See Pl.

Schiffli’s Mem. Supp. Mot. Partial Summ. J. Ex. A, ECF No. 160.) Consistent with

their respective powers under Medflow’s bylaws and general corporate practice,

Throneburg signed Schiffli’s employment agreement as Medflow’s CEO, and Ehmann

subsequently approved the agreement as Medflow’s sole director. (Schiffli Agreement

8; Medflow Bylaws 13 (stating Throneburg had the power to “supervise and control

all of the business and affairs of the corporation”.)

146. Schiffli is therefore entitled to summary judgment in his favor on the

issue of whether his employment agreement was executed in accordance with

required corporate formality.

d. Schiffli’s Entitlement to Severance Benefits Upon

Termination of His Employment Agreement, Unpaid

Wages, and a Change-of-Control Payment

147. Having concluded that Schiffli and Medflow entered an enforceable

employment agreement, the Court must now turn to the manner in which the

agreement was terminated and Schiffli’s right to benefits following the end of his

employment.

148. Schiffli’s employment agreement ties his entitlement to Severance

Benefits to the method by which his employment was terminated. Because Schiffli’s

employment agreement was one for a definite term, (Schiffli Agreement ¶ 5

(providing for a three-year employment period)), it could not be terminated at will

unless the agreement itself so provided, Kurtzman v. Applied Analytical Indus., Inc.,

347 N.C. 329, 331, 493 S.E.2d 420, 422 (1997) (citation omitted). Schiffli’s agreement

provided for termination under four possible scenarios: (1) by Medflow for Cause; (2)

by Medflow without Cause; (3) by Schiffli for Good Reason; (4) or by Schiffli without

Good Reason. Schiffli’s right to Severance Benefits was barred only if Medflow

terminated for Cause or Schiffli terminated without Good Reason. Otherwise,

Schiffli’s right to Severance Benefits vested upon termination. (See Schiffli

Agreement ¶ 9.)

149. Medflow does not contend it terminated Schiffli for Cause as it is

defined by his agreement. To the contrary, it claims that definition is unconscionable

and cannot restrict Medflow’s right to terminate Schiffli. (Def.’s Resp. Opp’n Schiffli’s

Mot. Summ. J. 11.) Schiffli contends Medflow had no Cause as defined by the

agreement, and rather that he terminated for Good Reason, entitling him to

Severance Benefits. (Mem. Supp. Mot. Entry J. Verdict & Summ. J. Mot. 7–8.)

150. Termination also required notice. Paragraph 6 of Schiffli’s employment

agreement allowed Medflow to terminate for Cause or Schiffli to terminate with or

without Good Reason with thirty days’ notice, and for Medflow to terminate without

Cause with ninety days’ notice. (Schiffli Agreement ¶ 6.) Medflow claims it

terminated the agreements effective immediately upon its delivery of the letter

notifying Plaintiffs of their termination (“Cause Letter”). (V. 2nd Am. Compl. Ex. 34

(“Cause Letter”), ECF No. 118.4.)

151. Though it seeks to avoid the definition of Cause in Schiffli’s agreement,

Medflow does not offer an alternative definition that would measure its right to

terminate, nor does it present any basis on which it was entitled to terminate without

notice. Medflow further argues that the issue of termination cannot be determined

on summary judgment because discovery on the issue is not complete, ignoring the

fact that it is in sole control of the evidence forming the basis for its decision to

terminate Schiffli.

152. For reasons discussed below, the Court concludes that Medflow is not

entitled to further discovery, and the issue of Schiffli’s termination is ripe for

determination by the Court. The Court further concludes that it need not determine

whether there is any legal theory that supports setting aside the contractual

definition of Cause because Medflow has not come forward with substantial evidence

of termination for cause under the common law standard. Additionally, based on the

evidence of record, Schiffli was not required to terminate the agreement for Good

Reason in order to vest his right to recover Severance Benefits. Rather, the Court

concludes that Schiffli is entitled to Severance Benefits because Medflow terminated

him without Cause, and that he is therefore entitled to summary judgment to that

effect. The monetary value of certain benefits are contested material facts that must

await resolution pending further proceedings.

i. Ripeness of Termination Issue

153. The Court finds Medflow’s contention that summary judgment is

premature because it has not had the opportunity to take discovery on whether

Schiffli was terminated for Cause without merit. (Def.’s Resp. Opp’n Schiffli’s Mot.

Summ. J. 4.)

154. First, Medflow’s opportunity to take discovery on the issue of Schiffli’s

termination was triggered when Schiffli raised the issue of the nature of his

termination before the Court severed the case and limited discovery to the Severed

Issue. Schiffli asserted that Medflow failed to terminate him for Cause in both the

Second Amended Complaint and his 2016 Summary Judgment Motion. That motion

triggered Medflow’s duty to respond and forecast the evidence on which it opposed

the motion. See Dixie Chem. Corp. v. Edwards, 68 N.C. App. 714, 717, 315 S.E.2d

747, 750 (1984) (“A motion for summary judgment allows one party to force his

opponent to produce a forecast of evidence which he has available for presentation at

trial to support his claim or defense.” (citation omitted)). Defendants responded to

Schiffli’s 2016 Summary Judgment Motion before the Court entered its order

directing discovery to proceed only on the Severed Issue.

155. Second, Medflow ignores that it is in sole possession of any evidence

relevant to why it believed it had grounds to terminate Schiffli. Significantly, even

though the Cause Letter states that Medflow terminated Schiffli based on the results

of an investigation of his employment at Medflow, when responding to Schiffli’s 2016

Summary Judgment Motion, Medflow relied only on the Cause Letter. On Schiffli’s

renewed motion for summary judgment, Medflow has again failed to forecast evidence

beyond the Cause Letter supporting its decision to terminate Schiffli.

156. Third, the discovery Medflow seeks is more accurately directed to its

argument that the agreements constituted breaches of fiduciary duty, as

demonstrated by its assertion that “more discovery w[ould] further reveal Schiffli’s

and other Plaintiffs’ intent to benefit themselves through the employment

agreements and to surreptitiously conceal their dealings from Medflow’s

shareholders and its largest customers.” (Defs.’ Resp. & Br. Opp’n Pl. Schiffli’s Mot.

Partial Summ. J. 11, ECF No. 163.1.) Medflow has had the full benefit of discovery

on the way Plaintiffs negotiated and executed their agreements in preparation for the

Severed Issue Trial.

157. The Court therefore concludes that Medflow is not entitled to additional

discovery on the issue of Schiffli’s termination and that the issue is now ripe for

summary adjudication.

ii. Cause and Good Reason

158. Schiffli argues that the record conclusively establishes that he

terminated his employment for Good Reason in Fall 2015 following Medflow’s earlier

ineffectual attempt to terminate him for Cause in May 2015. He premises his right

to Severance Benefits and unpaid wages on his having Terminated for Good Reason.

Medflow counters that Schiffli cannot rely on the “patently unreasonable termination

provisions” in the employment agreement. As an example, Medflow argues that the

definition of Cause in Schiffli’s agreement should be stricken because it requires a

final judicial determination of Schiffli’s wrongdoing, which would “operate to prevent

Medflow from firing Schiffli without continuing to pay him long after his termination

and when he provides no services to Medflow.” (Defs.’ Resp. & Br. Opp’n Pl. Schiffli’s

Mot. Partial Summ. J. 7–8.) Medflow subsequently argues that, “[i]n the absence of

those unconscionable ‘cause’ and ‘good reason’ provisions of the agreement, Medflow

properly terminated Schiffli under the employment agreement on May 1, 2015.”

(Defs.’ Resp. & Br. Opp’n Pl. Schiffli’s Mot. Partial Summ. J. 10.)

159. Schiffli’s employment agreement defines “Termination for Cause” as

follows:

For purposes of this Agreement, discharge for cause shall be limited to

discharge for (i) unauthorized conduct by Schiffli which has caused

demonstrable and serious damage to Medflow, monetary or otherwise,

as evidenced by a determination in a binding and final judgment, order

or decree of a court or administrative agency of competent jurisdiction,

in effect after exhaustion or lapse of all rights of appeal, in an action,

suit or proceeding, whether civil, criminal, administrative or

investigative; (ii) conviction of Schiffli of a felony, as evidenced by

binding and final judgment, order or decree of a court of competent

jurisdiction, in effect after exhaustion or lapse of all right of appeal; or

(iii) unreasonable neglect or refusal by Schiffli to perform his duties or

responsibilities (unless significantly changed without his consent), as

evidenced by binding and final judgment, order or decree of a court of

competent jurisdiction, in effect after exhaustion or lapse of all right of

appeal. (“Cause”). Any termination for Cause shall be approved by a

resolution duly adopted by a majority of the Board of Directors of

Medflow (or any successor corporation) or Chief Executive Officer of

Medflow then in office, and delivered to Schiffli specifying in detail the

factual basis for such termination and citing the provision of this

Agreement serving as the basis for such termination.

(Schiffli Agreement ¶ 7.)

160. “Termination for Good Reason” is defined as follows:

For purposes of this Agreement, Schiffli shall have a Good Reason for

termination of employment in the event of (i) any breach of this

Agreement by Medflow; (ii) the removal of Schiffli from or any failure to

reelect Schiffli to any of the positions held on the date hereof or any other

positions to which Schiffli shall thereafter be elected or assigned except

in the event that such removal or failure to reelect relates to the

termination by Medflow of Schiffli’s employment for Cause; (iii) a good

faith determination by Schiffli, which determination shall be conclusive

and binding on Medflow, that there has been a significant adverse

change, without Schiffli’s written consent, in working conditions or

status, including but not limited to (A) a significant change in the nature

or scope of Schiffli’s authority, powers, functions, duties or

responsibilities; (B) a reduction in the level of support services, staff,

secretarial and other assistance, office space and accoutrements

available to a level below that which is reasonably necessary for the

performance of such duties; or (C) a requirement that Schiffli relocate

outside the vicinity of Mecklenburg County, North Carolina (“Good

Reason”).

(Schiffli Agreement ¶ 8.)

161. Medflow has not contested that, on February 10, 2015, Plaintiffs were

placed on “paid vacation” and told that their “only job responsibility . . . was to stay

away from the Medflow office[,]” (V. 2nd Am. Compl. ¶¶ 408–11), and that, on

February 12, 2015, Schiffli e-mailed Medflow notice that it was in breach of his

employment agreement for failure to pay the Change-of-Control Payment provided

by the agreement, (V. 2nd Am. Compl. ¶ 425). It is also uncontested that on May 1,

2015, Medflow advised Schiffli through the Cause Letter that he was being

terminated for Cause, effective immediately. (V. 2nd Am. Compl. ¶¶ 429–30; Cause

Letter 1.) The parties do not dispute that Schiffli did not receive any wages from

Medflow after May 1, 2015. (V. 2nd Am. Compl. ¶ 474.)

162. The Cause Letter states that Medflow’s investigation into Schiffli while

he was on administrative leave with pay as of February 10, 2015 resulted in

Medflow’s conclusion that Schiffli “engaged in conduct and various transactions for

[his] own benefit and at Medflow’s expense in violation of [his] duties to Medflow,”

causing “severe loss in potential profits and revenues.” (Cause Letter 1.) Specifically,

Medflow purportedly found that Schiffli:

mismanaged the company by falsifying documentation, misleading the

company’s vend[o]rs, failing to inform customers of material events

(which ultimately led to customer confusion and loss of sales and

profits), purposely stopping sales on the company’s lucrative business

products, failing to address and respond to customer and value partner

inquiries, and mishandling client relationships.

(Cause Letter 1.)

163. As noted above, Medflow has not produced any documentation of the

investigation it allegedly conducted or any other evidence in support of Schiffli’s

termination beyond the Cause Letter itself. Neither has Medflow made any

argument justifying its failure to give adequate notice of termination under the terms

of the agreement.

164. Schiffli, along with Ehmann and Throneburg, sent a letter to Medflow

on September 3, 2015 stating that they were exercising their rights to terminate their

employment agreements for Good Reason (“Good Reason Letter”). (V. 2nd Am.

Compl. ¶ 458–59; V. 2nd Am. Compl. Ex. 36 (“Good Reason Letter”), ECF No.

118.29.)16

165. In the Good Reason Letter, Schiffli contends first that Medflow did not

properly terminate Schiffli for Cause because it did not meet the requirement of

providing a resolution adopted by Medflow’s board of directors and did not provide

thirty days’ written notice before termination, (Good Reason Letter 1−2), and second,

that he had Good Reason to terminate his employment agreement because Medflow

breached his agreement by failing to pay him the Change-of-Control Payment due on

January 16, 2015, his salary since May 1, 2015, and his Insurance Benefits since

April 30, 2015, and because Medflow removed Schiffli from his position on February

10, 2015, thereby materially changing his responsibilities. (Good Reason Letter 3.)

16 Schiffli later hand-delivered the Good Reason Letter to Medflow on September 14, 2015

following a dispute between the parties regarding whether proper notice had been given. (V.

2nd Am. Compl. ¶ 466.)

166. The record is clear that a change-of-control event occurred in 2015. (See,

e.g., V. 2nd Am. Compl. ¶¶ 21−22, 325.) The Court therefore concludes that Schiffli’s

right to a Change-of-Control Payment vested in January 2015 before Schiffli was

terminated.

167. The Court further concludes that the record does not support that

Medflow terminated Schiffli for Cause and that the Court need not consider whether

Schiffli terminated for Good Reason. The record demonstrates that Medflow took

action to terminate Schiffli and thus precluded Schiffli from later terminating for

Good Reason when it permanently relieved him of his responsibilities as Medflow’s

CFO on May 1, 2015, asked him to return all Medflow property, and stopped making

salary payments or providing other employment benefits after that date.

168. While Schiffli’s right to Severance Benefits might have been lost had

Medflow terminated Schiffli for Cause, Medflow has failed to forecast substantial

evidence supporting termination for Cause even if the termination provisions it

attacks are disregarded. The net effect is that Medflow terminated Schiffli without

Cause on May 1, 205, Schiffli’s right to Severance Benefits vested ninety days after

that date, and Schiffli is entitled to wages through the expiration of the ninety-day

contractual notice period.

169. Solely for purposes of illustration, the Court assumes without finding

that the contractual definitions of termination for Cause and Good Reason may be

stricken or disregarded upon some legal theory such as unconscionability. See Rite

Color Chem., 105 N.C. App. at 18, 411 S.E.2d at 648 (“[If] a contract . . . or any clause

of such contract was ‘unconscionable’ at the time it was made, the trial court ‘may

refuse to enforce the contract, or it may enforce the remainder of the contract without

the unconscionable clause, or it may so limit the application of any unconscionable

clause as to avoid any unconscionable result.’ ” (citation omitted)).

170. When the Court disregards those provisions, it must still enforce the

remainder of the agreement. Paragraph 6 provides that Medflow may terminate with

or without Cause subject to paragraph 9, which entitles Schiffli to Severance Benefits

if Medflow terminates without Cause. If the Court disregards the contractual

definition of “Cause,” it must separately determine the standard by which to judge

Medflow’s right to terminate Schiffli without paying him Severance Benefits. The

Court then looks to the definition of “just cause” developed in North Carolina case

law. See N.C.P.I.-Civil 640.14; see also, e.g., Wilson v. McClenny, 262 N.C 121, 131,

136 S.E.2d 569, 577 (1964) (stating that an employer may terminate for just cause if

he fails to serve his employer “with reasonable care, diligence, and attention”);

Haynes v. Winston-Salem Southbound Ry. Co., 252 N.C. 391, 398, 113 S.E.2d 906,

911 (1960) (holding that an employer may terminate for just cause if the employee

fails to perform all the duties incident to his employment with ordinary diligence,

care, and attention).

171. The Court concludes that Medflow has not forecasted sufficient evidence

upon which a fact finder could find Medflow terminated Schiffli for Cause even under

this more relaxed standard. The conclusory Cause Letter is the sole evidence with

which Medflow has come forward in support of its position, and that letter, standing

alone, does not rise to the level of the substantial evidence necessary to create an

issue of fact for trial.

172. In short, Schiffli is entitled to summary judgment that Medflow did not

terminate his agreement for Cause even if the Court does not enforce the contractual

definition that Medflow attacks. The Court therefore further concludes that Schiffli

was neither required to nor able to terminate his agreement for Good Reason because

Medflow terminated the agreement without Cause effective ninety days after

delivering the Cause Letter on May 1, 2005, vesting Schiffli with a right to unpaid

wages to that date, and thereafter to Severance Benefits.

e. Schiffli’s Contract Damages

173. There are outstanding issues of material fact that must be resolved prior

to entering a final judgment as to the amount of Schiffli’s contract damages. While

the Court has determined the effective date of termination, other issues must be

resolved to determine the exact amount of unpaid wages to which Schiffli is entitled. 17

Additionally, the value of the Insurance Benefits to which Schiffli may be entitled are

not sums certain which can determined on the present record, and Medflow contends

their determination will likely require expert testimony. The Court also defers

determination of whether Schiffli is entitled to statutory penalties and the amount of

attorneys’ fees to which Schiffli is entitled.

17 The Court concludes that the record is inadequate to determine that value of Schiffli’s

unpaid wages for the ninety days after he was terminated because there is no evidence in the

current record of where May 1, 2015 fell in Medflow’s pay cycle, and the parties have not

themselves calculated the value of unpaid wages if Schiffli was terminated without Cause.

It is therefore unclear whether the parties dispute this amount.

174. The Court finds that other portions of Schiffli’s monetary recovery are

capable of exact determination without the need for further proceedings. Specifically,

the Change-of-Control Payment and the Severance Payment equal to a one-time

payment of Schiffli’s annual base salary plus interest can be calculated based on the

current record.

175. Medflow contends that the amount of the Change-of-Control Payment

pursuant to paragraph 17 of Schiffli’s employment agreement depends on an

unresolved material issue of fact and “requires a sophisticated tax analysis.” Seeking

to bolster its argument, Medflow notes that Schiffli’s expert, Walker, calculated the

Change-of-Control Payment as $289,830, whereas Schiffli earlier calculated the

payment as $236,070.45. (Def.’s Resp. Opp’n Schiffli’s Mot. Summ. J. 15; see Exs.

Def.’s Resp. Opp’n Schiffli’s Mot. Summ. J. Ex. 3 (“Schiffli Change-of-Control

Calculation”), ECF No. 352.1; V. 2nd Am. Compl. Ex. 22, ECF No. 118.28.) The Court

finds Medflow’s contention without merit.

176. The plain language of the employment agreement provides the basis for

determining the amount of the Change-of-Control Payment without the need for any

further evidentiary proceeding. See Hodgin v. Brighton, 196 N.C. App. 126, 128, 674

S.E.2d 444, 446 (2009) (“Where the language of a contract is plain and unambiguous,

the construction of the agreement is a matter of law; and the court . . . must construe

the contract as written, in the light of the undisputed evidence as to the custom,

usage, and meaning of its terms.” (citation omitted)).

177. Paragraph 17 of Schiffli’s employment agreement provides:

Upon the occurrence of a Change of Control of Medflow, Medflow shall

pay to Schiffli or his designated beneficiary an amount equal to one (1)

times his Annual Base Salary as provided by paragraph 10 supra due

and payable upon the effective date of the Change of Control Payment

(“Change of Control Payment”). . . . At the time of the Change of Control

Payment, Medflow shall pay to Schiffli an additional amount (the

“Gross-Up Payment”) such that the net amount retained by Schiffli after

deduction of any federal, state, or local income tax on the Gross-Up

Payment and Change of Control Payment shall equal the pre-tax

amount of the Change of Control Payment. For purposes of determining

the amount of the Gross-up Payment, Schiffli shall be deemed to pay

federal income taxes at the highest marginal rate of federal income

taxation in the calendar year in which the Gross-Up Payment is to be

made (determined without regard to any additional tax imposed for the

purpose of phasing out the benefits of lower rates of taxation and

deductions of personal exemptions) and state and local income taxes at

the highest marginal rates of taxation in the state and locality of his

residence on the date the Gross-Up Payment is made, net of the

maximum reduction in federal income taxes which could be obtained

from deduction of such state and local taxes.

(Schiffli Agreement ¶ 17.)

178. The agreement therefore states that the Change-of-Control Payment

should be equal to Schiffli’s annual base salary, $165,000, after federal and state

taxes are taken into account. The Gross-Up Payment, the amount by which Schiffli’s

annual base salary should be increased such that Schiffli takes home $165,000 after

taxes, is determined under the simple formula in paragraph 17, which, contrary to

Medflow’s concerns, avoids any complex accounting by disregarding progressive tax

rates and the effect of any itemized deductions except the state and local tax or

“SALT” deduction. See 26 U.S.C. § 164(a). The formula assumes that the first dollar

of the Change-of-Control Payment is taxed at the highest marginal tax bracket for

the year in which the change-of-control event occurs for both state and federal taxes

and offsets the resulting federal tax liability dollar-for-dollar by the resulting state

tax liability.

179. The record is clear that a change-of-control event occurred during the

2015 tax year. (See, e.g., V. 2nd Am. Compl. ¶ 325.) The Court takes judicial notice

that the highest federal marginal tax rate in 2015 was 39.6%, and the highest North

Carolina marginal tax rate in 2015 was 5.75%. See https://www.irs.gov/pub/irs-

prior/i1040tt--2015.pdf, at 89, last visited Apr. 7, 2020;

https://www.ncdor.gov/taxes/individual-income-tax/tax-rate-schedules/tax-rate-tax-

year-2015-and-2016, last visited Apr. 7, 2020.

180. Accordingly, Schiffli’s state tax liability for the purpose of the Change-

of-Control Payment is $165,000 multiplied by 5.75%, which equals $9,487.50. As to

federal liability, considering the SALT deduction, Schiffli will be taxed on his

$165,000 annual base salary less his state tax liability ($9,487.50), which equals

$155,512.50. $155,512.50 multiplied by the federal rate of 39.6% equals $61,582.95.

Therefore, Schiffli will have a North Carolina state tax liability of $9,487.50, and a

federal tax liability of $61,582.95, which together equal a Gross-Up Payment of

$71,070.45. The Change of Control payment, $165,000, plus the Gross-Up Payment,

$71,070.45, equal a total payment to Schiffli of $236,070.45 before interest is

calculated under paragraph 23 of Schiffli’s employment agreement. This is the

amount Schiffli demanded from Medflow in February 2015. (See Schiffli Change-of-

Control Calculation; see also V. 2nd Am. Compl. ¶ 606(a).)

181. The Court therefore concludes that Schiffli is entitled summary

judgment that his recovery shall include a $165,000 Severance Payment under

paragraph 9(a)(i) and a $236,070.45 Change-of-Control Payment under paragraphs 1

and 17 of his agreement, plus interest at the contractual rate. Unless otherwise

agreed by the parties, further proceedings are required to determine the amount

Schiffli is entitled to recover for unpaid wages after May 1, 2015, thirty-six months

of Insurance Benefits, statutory penalties, and attorneys’ fees, together with interest

as may be provided. 18

182. The Court is therefore unable to enter a final judgment pending

resolution of these remaining issues.

VI. CONCLUSION

183. Consistent with the foregoing:

a. Medflow’s Motion for JNOV as to Schiffli is DENIED;

b. Medflow’s Motion for New Trial as to Schiffli is DENIED;

c. Schiffli’s Motion for Entry of Judgment on the jury verdict is

GRANTED, and the Court hereby ADJUDGES AND DECREES

that a jury has finally and conclusively determined that Schiffli

18 Recognizing that further proceedings are required before entering a final monetary

judgment, the Court concludes that that Schiffli’s unpaid wages, the Severance Payment, the

Change-of-Control Payment, and the value of the Insurance Benefits, if calculable, see

Morris, 368 N.C. at 862−63, 788 S.E.2d at 158–59, are wages for the purposes of the Wage

and Hour Act, N.C.G.S. § 95-25.2(16) (“ ‘Wage’ paid to an employee means compensation for

labor or services rendered by an employee . . . [including] severance pay . . . and other amounts

promised[.]”); Washburn v. Yadkin Valley Bank & Tr. Co., 190 N.C. App. 315, 324, 660 S.E.2d

577, 584 (2008) (stating severance benefits were wages under the Wage and Hour Act because

they “constitute severance pay”).

was not an officer of Medflow at the time he entered his

employment agreement, either de jure or de facto;

d. The Court further determines that, as a result of the jury’s

verdict, Schiffli is not required to prove that his agreement was

fair to Medflow at the time it was entered;

e. Schiffli’s Motion for Summary Judgment is GRANTED as to

Defendants’ affirmative defenses or counterclaims for breach of

fiduciary duty and constructive fraud to the extent they impact

Schiffli’s breach of contract claim, and those defenses and

counterclaims are hereby DISMISSED WITH PREJUDICE;

f. Schiffli’s Motion for Partial Summary Judgment on the basis that

Medflow did not terminate his employment agreement for Cause

is GRANTED;

g. The Court determines that Medflow terminated Schiffli’s

employment agreement without Cause effective on the date

ninety days after May 1, 2015;

h. Schiffli is entitled to summary judgment that he is entitled to

recover unpaid wages from May 1, 2015 to the effective date of

termination ninety-days later, Severance Benefits including the

Severance Payment for $165,000 plus interest, and a Change-of-

Control Payment in the amount of $236,070.45 plus interest;

i. Further proceedings are required to determine additional sums

to which Schiffli is entitled to recover, including: (1) the exact

amount of unpaid wages from May 1, 2015 to the effective date of

his termination, (2) the value of thirty-six months of Insurance

Benefits, (3) any potential statutory penalties, (4) and attorney’s

fees;

j. The Court hereby severs for separate trial the sole issue of the

final amount Schiffli is entitled to recover from Medflow or

Holdings in contract damages;

k. Nothing in this Judgment, Order and Opinion should be

construed as granting Schiffli a right to recover from or take

action against any Defendant other than Medflow and Holdings;

l. The Cross-Motions for JNOV as to Ehmann and Throneburg are

DENIED;

m. Medflow’s Motion for New Trial as to Ehmann and Throneburg is

GRANTED;

n. Further progress in the case is subject to orders issued by the

Chief Justice of the Supreme Court of North Carolina in response

to COVID-19;

o. To the extent that a right to appeal is not otherwise created by

statute, the Court finds that this Judgment, Order and Opinion

is interlocutory and there is just reason to delay appeal of any

issues decided here until their final adjudication and the entry of

final judgment as to one or more of the Plaintiffs.

SO ORDERED, this the 9th day of April, 2020.

/s/ James L. Gale

James L. Gale

Senior Business Court Judge