When Judging Investment Options By The Numbers, Second Follows First, And Nothing Else

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Business Court Confirms a Right
To Invest in a “Second” Project
Extends No Further
 

At Fifth and Church streets in uptown Charlotte, a group of investors opened the aptly named restaurant, 5Church. Other locations and restaurant brands followed, the fifth of which – Sophia’s Lounge – landed next door to the original location in an adjacent hotel building. A falling out among the investment group led the Business Court, in Maurice Panzino v. 5 Church, Inc., et al., 2020 NCBC 13 (N. C. Super. Ct. Feb. 12, 2020), to resolve a breach of contract claim going strictly by the numbers. See Order and Opinion.

Plaintiff had been an original investor in 5Church, and by operating agreement had rights under a “first refusal” provision with regard to investment in the entity’s restaurant expansions.  Id. ¶ 6. Panzino claimed breach of this provision because he was not offered a chance to invest in the nearby Sophia’s, but the Court determined that the investment option did not extend beyond the group’s second outing, the now-departed South End restaurant Nan & Byron’s. It was all in the numbers, as the operating agreement limited Panzino’s option to invest only “[i]n the event of a second business to be operated after the commencement of [5Church].”  Id.

There was no dispute that Panzino was not offered a chance to invest in Sophia’s and the defendants contended this was appropriate because Sophia’s “was the fifth business opened, not the second.” Plaintiff was offered, and declined, an opportunity to invest in the group’s second restaurant, Nan & Byron’s. He argued that the “first refusal” provision should be read to provide investment options in all of the restaurant group’s future ventures.  Id. ¶¶ 7, 25.

The Court readily concluded that “second” didn’t mean fifth, or anything else besides what follows first. It followed the logic of a Western District of North Carolina case that found the provision “plain and unambiguous” in a related dispute involving 5Church investors:

“The ordinary meaning of `second’ is ‘coming next after the first in order, place, rank, time, or quality.’”

Kamel v. 5Church, Inc., 2019 WL 4024252, *8 (W.D.N.C. Aug. 23, 2019). The Business Court also rejected a request to examine extrinsic evidence to shed light on what the parties intended, noting that’s intended only “to clarify ambiguities not to create them.”  2020 NCBC 13, ¶ 28.

Takeaways:

  • The Court opted for a narrow, literal interpretation of a clause defining right of first refusal investment options.
  • The Court continues a trend of carefully parsing parties’ claims about what agreements say, and calling out litigants for expansive liberties taken in describing them.

Fiduciary Duty

Plaintiff also alleged breach of fiduciary duty and constructive fraud claims arising from defendant Patrick Whalen’s failure to disclose that the group intended to open a 5Church restaurant in Charleston, South Carolina. Each of the claims required a finding that Whalen owed a fiduciary duty to Panzino – an inquiry complicated by 5Church’s status as an incorporated entity that behaved and ran itself more like a limited liability company. The Court noted that while 5Church was a North Carolina corporation, it “has been governed much like a limited liability company.” That included a contract “styled as an operating agreement,” a manager instead of a board of directors, and references to members instead of shareholders. Id. ¶ 5. The Business Court found the formation “unusual,” but applied the operating agreement because “no one challenges [its] validity.” Id.

As the manager of 5Church, the Court found Whalen functioned akin to a corporate director who had duties to the corporation but not any one, or all, of the shareholders.  See N.C. Gen. Stat. § 55-8-30. The Court did not decide whether 5Church had the authority to contract for a non-statutory fiduciary duty (as an LLC would), but curtly rejected Plaintiff’s argument that the parties had intended to do so in an operating agreement provision regarding Whalen’s authority as manager.

The Court found that Panzino had taken considerable liberties in that argument, and flagged it:

“In his opposition brief, Panzino crops the first sentence in its entirety, omits the introduction to the second sentence, and then reads the last clause in isolation to impose new fiduciary duties by implication. That is not a reasonable interpretation.”

2020 NCBC 13, ¶ 18. (For another look at the Court’s scrutiny of parties’ claims about controlling documents, see our recent post, here.) The Court noted that MAP Management of Charlotte, LLC, a majority shareholder in 5Church, might have had a duty to protect the interests of Panzino as a minority shareholder. But, Plaintiff did not sue MAP, and Whalen’s participation in MAP did not impute duties MAP might have had to him, personally. Id. ¶ 20. Panzino attempted to remedy the problem by suing MAP for constructive fraud and breach of fiduciary duty in a separate action that was just recently designated to the Business Court.

Surviving Breach Claims

The Court allowed two breach claims to proceed to trial. Panzino argued that defendants had failed to make distributions required under the operating agreement during a period before he sold his remaining interests. Defendants argued that, without any proof of damages, summary judgment was appropriate. The Court declined, noting that proof of damages is not a breach of contract claim element. Id. ¶ 31. Plaintiff’s undisputed claim that 5Church did not provide specified monthly financial statements also advanced. The Court rejected application of the traditional rule that a shareholder can’t bring an action for damage to his or her shares because of a wrong to the entity. Here, Panzino’s claim survived because the agreement required the entity to provide information to him, and Plaintiff “seeks to enforce his own rights, and not those of 5Church.” Id. ¶ 34.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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