Button v. Level Four Orthotics & Prosthetics, Inc.

• Decision Date: 11 March 2022
• Docket Number: 376A20
• Parties: James C. BUTTON v. LEVEL FOUR ORTHOTICS & PROSTHETICS, INC., Level Four SBIC Holdings, LLC, Penta Mezzanine SBIC Fund I, L.P., Rebecca R. Irish, and Seth D. Ellis
• Court: North Carolina Supreme Court

380 N.C. 459

869 S.E.2d 257

James C. BUTTON

v.LEVEL FOUR ORTHOTICS & PROSTHETICS, INC., Level Four SBIC Holdings, LLC, Penta Mezzanine SBIC Fund I, L.P., Rebecca R. Irish, and Seth D. Ellis

No. 376A20

Supreme Court of North Carolina.

Filed March 11, 2022

Mullins Duncan Harrell & Russell PLLC, by Alan W. Duncan, Stephen M. Russell, Jr., and Tyler D. Nullmeyer, for plaintiff.

Robinson, Bradshaw & Hinson, P.A., Charlotte, by Brian L. Church and David C. Wright, III, for defendants.

BERGER, Justice.

¶ 1 On March 13, 2020, the trial court entered an order dismissing without prejudice plaintiff James Button's claims for declaratory judgment against Level Four SBIC Holdings (Level Four Holdings). In addition, the trial court dismissed plaintiff's claim for tortious interference with contract against Penta Mezzanine SBIC Fund I, L.P. (Penta Fund), Level Four Holdings, and Seth Ellis. The trial court also denied motions to dismiss for lack of personal jurisdiction by Level Four Holdings and Ellis. Level Four Holdings and Ellis filed a notice of appeal as to the trial court's denial of their motions to dismiss for lack of personal jurisdiction. Plaintiff filed a notice of cross-appeal from the trial court's order partially granting defendants’ motions to dismiss. Plaintiff acknowledged that the order from which he was attempting to appeal was interlocutory, but he argues that the appeal affects a substantial right. Alternatively, plaintiff filed a petition for writ of certiorari, arguing that this Court should allow review of the trial court's dismissal without prejudice of his claims for declaratory judgment and for tortious interference with contract.

I. Factual and Procedural Background

¶ 2 Penta Fund is a limited partnership formed in Delaware with its principal place of business in Winter Park, Florida. Penta Fund is a manager and majority owner of Level Four Holdings and minority shareholder of Level Four Orthotics & Prosthetics, Inc. (Level Four Inc.). Level Four Holdings, a Florida corporation with its principal place of business in Winter Park, Florida, is the majority shareholder of Level Four Inc., a North Carolina corporation with its principal place of business in Winston-Salem, North Carolina.

¶ 3 In July 2017, plaintiff, a citizen of New Jersey, entered into an employment agreement (the Employment Agreement) with Level Four Inc. to serve as its Chief Executive Officer. Plaintiff negotiated the terms of his employment with Rebecca Irish (Irish) and Ellis, both of whom are residents of Florida. During these negotiations, Irish "simultaneously represented Level Four Inc., Level Four Holdings, and Penta Fund." At all times relevant to the current dispute, Irish concurrently acted as "the sole director of Level Four Inc., a manager of Level Four Holdings, and a managing partner and investment committee member of Penta Fund." Ellis was the managing partner of Penta Fund and a member on its investment committee.

¶ 4 In addition to the Employment Agreement, plaintiff entered into a Warrant Agreement with Level Four Inc. Further, with Level Four Holdings, plaintiff entered into an Option Agreement, Stock Repurchase Agreement, Go Shop Provision with Future Sale Agreement (Go Shop Agreement), and Shareholder Voting Agreement (collectively, the Level Four Holdings Agreements).

A. The Employment Agreement and Warrant Agreement with Level Four Inc.

¶ 5 The Employment Agreement allowed Level Four Inc. to terminate plaintiff's employment with or without cause. Termination without cause entitled plaintiff to a thirty-day written notice along with several severance benefits. If terminated for cause, plaintiff would not be entitled to notice or severance benefits. Pursuant to the Employment Agreement, termination for cause was permissible for "any willful misconduct or gross negligence which could reasonably be expected to have a material adverse affect [sic] on the business and affairs of [Level Four Inc.]." "Willful misconduct" under the agreement was defined as conduct that a court determines "to be knowingly fraudulent or deliberately dishonest." Additionally, during employment negotiations, plaintiff learned of and became concerned with the amount of debt Level Four Inc. owed to Penta Fund. As a result, plaintiff negotiated for a clause to be included in the Employment Agreement whereby the interest rates on promissory notes payable to Penta Fund by Level Four Inc. would "be reduced to no greater than the two- and one-half percent (2.5%) at all times subsequent to July 1, 201[7]."

¶ 6 Under the Warrant Agreement, plaintiff had the right to purchase 30% of Level Four Inc.’s common stock, subject to certain vesting requirements. Notably, plaintiff's rights under the Warrant Agreement would fully vest without regard to the duration of his employment if his employment was terminated without cause. However, if plaintiff's employment was terminated for cause, no further rights under the Warrant Agreement would vest.

B. The Level Four Holdings Agreements

¶ 7 Pursuant to the Option Agreement, plaintiff had the right to purchase 21% of Level Four Inc.’s common stock, along with over $3 million worth of notes plus accrued interest owed to Penta Fund by Level Four Inc. Plaintiff's voluntary resignation or termination for cause would eliminate his right to exercise the option contained in the Option Agreement. Otherwise, a termination without cause would allow plaintiff's rights under the Option Agreement to continue until they naturally expired.

¶ 8 The Stock Repurchase Agreement concerned what rights Level Four Holdings had regarding stock obtained by plaintiff pursuant to the Warrant Agreement and Option Agreement. If plaintiff's employment was terminated without cause, Level Four Holdings would not have the ability to purchase stock acquired by plaintiff under the Option Agreement but would be allowed to purchase stock acquired by plaintiff under the Warrant Agreement. Alternatively, if plaintiff's employment was terminated for cause, Level Four Holdings would have the option to purchase stock acquired by plaintiff under both the Option Agreement and Warrant Agreement.

¶ 9 Finally, under the Go Shop Agreement, plaintiff was given the right to submit a competing offer to purchase Level Four Inc. within a thirty-day period should Level Four Holdings agree to an offer to sell Level Four Inc. to a third party. Plaintiff's termination for cause or voluntary resignation would immediately terminate these rights. If plaintiff's employment was terminated without cause, however, his rights under the Go Shop Agreement would continue for six months from the date of his "without cause" termination.

C. Plaintiff's employment and subsequent termination

¶ 10 Upon plaintiff's employment as CEO, Level Four Inc. owed Penta Fund close to $10 million in long-term debt bearing various interest rates of up to 18%. Pursuant to the Employment Agreement, however, the interest rate on the debt owed by Level Four Inc. was reduced to 2.5%. In November 2018, plaintiff sought an additional loan from Penta Fund. On December 12, 2018, Irish conditioned the additional funding with an 8% interest rate applicable to both new and existing amounts owed to Penta Fund. Plaintiff refused to agree to any modification regarding the interest rate provision in the Employment Agreement and believed implementation of an 8% interest would violate the Employment Agreement.

¶ 11 Despite plaintiff's objection to increasing the interest, Penta Fund wired funds to Level Four Inc. on December 12, 2018. On that day, as well as on February 21, 2019, Irish and Ellis presented to plaintiff promissory notes with an interest rate of 8%, and plaintiff refused to sign the notes. On a February 21, 2019, conference call, Ellis informed plaintiff that the promissory note needed to be signed.

¶ 12 Plaintiff traveled to North Carolina on March 20, 2019, to meet with employees and attend various meetings. One of the meetings included a conference call with Penta Fund's Investment Committee. During this call, plaintiff was given an opportunity to resign. When he refused, plaintiff was informed by Irish that his employment with Level Four Inc. was being terminated for cause. Plaintiff contends he has not been provided with a reason for his termination, specifically regarding the classification as for cause. Upon termination of plaintiff's employment, Irish was appointed CEO of Level Four Inc.

¶ 13 On May 30, 2019, plaintiff filed a complaint in this matter, and the case was designated as a complex business case. Plaintiff sought, among other things, a declaratory judgment setting forth his specific rights under the Employment Agreement and Level Four Holdings Agreements. Plaintiff also alleged claims for tortious interference with contract against Penta Fund, Ellis, Level Four Holdings, and Irish. Defendants moved to dismiss all claims against Level Four Holdings and Ellis for lack of personal jurisdiction.

¶ 14 On March 13, 2020, the trial court determined that it did not have subject matter jurisdiction over plaintiff's declaratory judgment claim because no actual controversy existed and dismissed that claim against Level Four Holdings without prejudice under Rule 12(b)(1). The trial court also dismissed without prejudice plaintiff's claims for tortious interference with contract against Penta Fund, Level Four Holdings, and Ellis pursuant to Rule 12(b)(6). The trial court determined that plaintiff's allegations of malice were insufficiently pled in the complaint. Further, the trial court denied defendant's motion to dismiss for lack of personal jurisdiction over Level Four Holdings and Ellis. Plaintiff and defendants cross-appeal, both arguing the trial court erred in making the above rulings.

¶ 15 The initial question we must address is whether plaintiff's appeal is properly before this Court. An order is either "interlocutory or the final determination of the rights of the parties." N.C.G.S. § 1A-1, Rule...