September 8, 2021

Merger Agreement Breach Supports NC Deceptive Trade Practices Claim

The North Carolina Business Court recently held that a seller’s breach of a merger agreement could support a claim not only for breach of contract, but also for violating the provisions of that state’s Unfair and Deceptive Trade Practices Act (UDTPA). I haven’t seen this kind of consumer protection statute used in M&A litigation, but this case suggests that it may sometimes be a viable option in certain situations if the state in question has a strong unfair trade practices statute in place.

Every state has some form of unfair trade practices statute that’s designed to protect consumers from conduct involving shady business practices, but those statutes vary in terms of their strength. North Carolina’s version appears to have some teeth. In addition to allowing a plaintiff to be awarded attorneys fees for willful violations, it also provides a remedy for actions that, while not representing a mere breach of contract, involve misconduct that doesn’t rise to the level of fraud. All that is required is for the act in question to have “the tendency or capacity to mislead, or created a likelihood of deception.”

In Loyd v. Griffin, (NCBC 9/21), the UDTPA claim was asserted as part of a counterclaim by the defendant in an action arising out of a business dispute between an insurance agency and its former agent.  The parties had originally sought to provide the plaintiff with an interest in the business, and settled upon a merger between his business and the defendant’s agency as the means of providing him with that ownership interest.  The merger agreement apparently included a broad “compliance with laws” rep under the terms of which the plaintiff represented that his company “has complied with and is not in default in any material respect under any laws, ordinances, requirements, regulations, or orders applicable to its business.’ ”

The insurance agency subsequently sought a buyer for its business, and during the course of due diligence, it was discovered that the plaintiff allegedly issued a number of false insurance certificates both before and after the merger. That discovery not only disrupted the proposed sale, but also resulted in an investigation of the agency by North Carolina regulators.  To add insult to injury, the plaintiff allegedly refused to assist the agency in identifying all of the false certificates that he issued.

The agency terminated the plaintiff, and the litigation ensued.  After the plaintiff initiated the lawsuit, the defendants filed a counterclaim alleging breach of the merger agreement and other agreements between the parties, fraud, breach of fiduciary duty, and a violation of the UDTPA. The plaintiff moved to dismiss, contending that a breach of the merger agreement couldn’t form the basis for a UDTPA claim. The Court disagreed:

“It is well established that ‘a mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under N.C.G.S. § 75-1.1.’ ” Id. (quoting Branch Banking & Tr. Co. v. Thompson, 107 N.C. App. 53, 62 (1992)) (internal citations omitted); see also SciGrip, Inc. v. Osae, 373 N.C. 409, 427 (2020) (“[A]n intentional breach of contract, standing alone, simply does not suffice to support the assertion of an unfair and deceptive trade practices claim.”); Birtha v. Stonemor, N.C., LLC, 220 N.C. App. 286, 298 (2012) (“North Carolina courts are extremely hesitant to allow plaintiffs to attempt to manufacture a tort action and alleged UDTP out of facts that are properly alleged as [a] breach of contract claim.” (quoting Jones v. Harrelson & Smith Contr’rs, LLC, 194 N.C. App. 203, 229 (2008)) (internal citation omitted)

For a breach of contract to fall within the scope of [the UDTPA], “[e]gregious or aggravating circumstances must be alleged” and ultimately proven. Becker v. Graber Builders, Inc., 149 N.C. App. 787, 794 (2002) (citing Bartolomeo v. S.B. Thomas, Inc., 889 F.2d 530, 535 (4th Cir. 1989).

The Court ultimately concluded that, taking the allegations in the counterclaim as true, the defendants had established sufficiently egregious conduct to support a UDTPA claim premised on a breach of the merger agreement. It also found that even if “egregious or aggravating circumstances” weren’t present, the fraud and breach of fiduciary duty allegations were sufficient on their own to establish a claim under the UDTPA.

John Jenkins