Court Opinion

ID: 857848
Source: CourtListenerOpinion
Date Created: 2013-04-11 19:17:45.611221+00
Date Added: 2024-06-11T09:06:37.686762
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                            No. 12-1649

PAGIDIPATI ENTERPRISES, INC.,

                Plaintiff – Appellee,

           v.

LABORATORY CORPORATION OF AMERICA HOLDINGS,

                Defendant – Appellant.

Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro.   N. Carlton Tilley,
Jr., Senior District Judge. (1:10-cv-00742-NCT-LPA)

Argued:   March 21, 2013                  Decided:   April 11, 2013

Before MOTZ and DUNCAN, Circuit Judges, and Robert E. PAYNE,
Senior United States District Judge for the Eastern District of
Virginia, sitting by designation.

Affirmed by unpublished opinion.        Judge Duncan wrote     the
opinion, in which Judge Motz and Senior Judge Payne joined.

ARGUED: Robert Steiner, KELLEY DRYE & WARREN, LLP, New York, New
York, for Appellant.     Reid Lloyd Phillips, BROOKS, PIERCE,
MCLENDON, HUMPHREY & LEONARD, Greensboro, North Carolina, for
Appellee. ON BRIEF: Adam H. Charnes, Chad D. Hansen, KILPATRICK
TOWNSEND & STOCKTON LLP, Winston-Salem, North Carolina, for
Appellant.   Joseph A. Ponzi, BROOKS, PIERCE, MCLENDON, HUMPHREY
& LEONARD, Greensboro, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

                                2
DUNCAN, Circuit Judge:

     In    this    breach    of     contract       action,    Appellee   Pagidipati

Enterprises      (“PEI”)     sued    Appellant       Laboratory     Corporation     of

America (“LabCorp”) to recover payments due under their Asset

Purchase Agreement (“APA”).            LabCorp asserted mutual mistake as

an affirmative defense, arguing that the APA as written does not

provide    for    compensation        for        growth   attributable      only    to

customers PEI brought to the deal, which is what the parties

intended it to reflect.           Finding that LabCorp’s omission of some

of its own prior customers from the APA did not constitute a

mutual    mistake   under     North    Carolina       law,    the   district   court

granted PEI’s motion for summary judgment.                    For the reasons that

follow, we affirm.

                                            I.

                                            A.

     In late 2007, LabCorp, a New York corporation that operates

a nationwide medical laboratory network, became interested in

purchasing       PEI,   a     family-owned          Florida     corporation        then

operating clinical laboratories and testing centers in seventeen

Florida counties.       The parties began negotiations.               About a year

later    PEI   agreed   to    sell    its    assets,      including   its   customer

list, to LabCorp for an initial purchase price of $13 million,

as well as two Earnout Period Payments that PEI would receive if

                                            3
certain conditions were met.             This agreement was finalized in a

31-page contract--the APA.

     The      contested    provisions      of     the    APA    are    Section    2.3,

entitled “Earnout Amount,” and the accompanying Exhibit 2.3(a),

which lists “Shared Customers.”                See J.A. 44-45, 91.              Section

2.3 sets out the time period and formula for calculating the two

Earnout Period Payments.               These Payments are based on (1) a

Revenue Minimum Target Amount (“RMTA”), which the parties set at

$4,901,214,     reflective      of     PEI’s    2007    revenue;      (2)   a   Revenue

Multiplier, set at 2.1; and (3) “Revenues” for the first and

second years following the APA, defined as LabCorp’s revenues

“for any and all services provided and billed to any customer

listed   on    [PEI’s]     Customer      List,”    as    well    a    percentage    of

revenues for services provided to their shared customers.                           Id.

at 44.     Section 2.3 further defines “shared customers” as “those

customers      listed     on   Exhibit     2.3(a),      which      include      certain

customers . . . who were customers of both Seller and Purchaser

during the period from January 1, 2007 through and including

September 30, 2007.”           Id. 1     For each customer on the Shared

     1
       For the First Earnout Period (Year One), PEI was to obtain
a payout equal to (Year One Revenues – $4,901,214) x 2.1, not to
exceed $2 million.     The Second Earnout Period operated in a
similar way, such that the payout equals ((Year Two Revenues -
$4,901,214) x 2.1) – First Earnout Period Payment, with the
combined payouts for years one and two not to exceed $4 million.
See id.

                                          4
Customer   List   at    Exhibit    2.3,      PEI   would    only   earn   “partial

credit” for increased revenues, which the parties intended to be

“based on the historical percentage of business each company

generated from those shared clients.”                 Appellant’s Br. at 13;

see also J.A. 91.

       The Shared Customer List was the product of negotiation

between the parties.          LabCorp initially drafted the list because

it was unwilling to disclose its entire customer database to

PEI.     PEI   never    had    access   to    LabCorp’s     customer      database,

receiving only the list of shared customers created by LabCorp.

       Notably, the parties agree that not all shared customers

merited placement on the final list.                For example, because PEI

began referring certain customers to LabCorp before closing, PEI

negotiated with LabCorp to omit those customers from the Shared

Customer List.     Thus, it is undisputed that the Shared Customer

List attached to the APA was intentionally underinclusive, and

does not, nor was it ever meant to, “accurately” include all

customers shared between LabCorp and PEI.

       It is also undisputed that, under the APA as written, PEI

is entitled to the full $4 million Earnout Amount.                         LabCorp

nonetheless    argues    that     the   APA    should      not   be   enforced   as

written, and has refused to pay.

                                        5
                                               B.

       PEI   filed     this       breach    of      contract    action       under    North

Carolina law in the Middle District of North Carolina, asserting

federal jurisdiction based on diversity of citizenship.                           LabCorp

answered, defending its failure to pay any Earnout Payment to

PEI on grounds of mutual mistake.                    Specifically, LabCorp argued

that its own failure to correctly identify all customers shared

between the parties resulted in a Shared Customer List that did

not    effectuate      the    parties’         mutual    intent   to     reward      growth

attributable      to    customers        PEI    brought    to   the    deal.      LabCorp

sought    reformation        of    the     Shared     Customer    List       attached    as

Exhibit 2.3(a) to the APA.               PEI moved for summary judgment.

       The district court adopted the magistrate judge’s report

and recommendation, which rejected LabCorp’s affirmative defense

of mutual mistake.            The court reasoned that LabCorp had failed

to proffer any evidence that the parties had agreed to include

any specific customers on the Shared Customer List that did not

appear on the final list.                Instead, “Defendant seeks reformation

based on the prospect that a fact-finder might conclude that

Plaintiff would have accepted an Exhibit 2.3(a) to the APA that

included     on   the    list       of     ‘Shared      Customers’     the     additional

customers now belatedly identified by Defendant.”                              J.A. 999.

The court determined that LabCorp’s asserted mistake did not

fall     within   the     scope      of     North       Carolina’s     mutual     mistake

                                               6
doctrine, under which “a meeting of the minds as to the specific

terms” is required, and the “general intent” of the parties to

achieve some objective that the contract as written fails to

achieve will not suffice.    See id. at 1000 (emphasis omitted).

     Accordingly, the district court entered summary judgment in

PEI’s favor, awarding over $4.5 million for the full Earnout

Period Payments plus pre-judgment interest and costs.      LabCorp

timely appealed.

                                 II.

     As it did below, LabCorp asks this court to rewrite the

Shared Customer List to add customers that currently appear on

PEI’s Customer List but were apparently also shared by LabCorp,

so as to reduce PEI’s Earnout Amount to zero.     This reformation

is warranted, LabCorp argues, because the Shared Customer List

does not accurately reflect the parties’ intent to account for

growth attributable only to PEI’s customers.      Thus, the Shared

Customer List drafted and agreed to by the parties constitutes a

mutual mistake, and the district court erred in construing North

Carolina law too narrowly.    We disagree.

     LabCorp’s argument fails for at least three reasons: (1)

the “meeting of the minds” that LabCorp alleges the APA fails to

embody is far more general than the mistake it asserts, and the

reformation it seeks; (2) any mistake relating to the contents

                                  7
of the Shared Customer List was not mutual, but rather LabCorp’s

singular failure; and (3) even if it were warranted, LabCorp’s

inability to identify a mutual mistake with any specificity also

prevents the court’s reformation of the Shared Customer List.

We address each of these reasons in turn.                       In doing so, we

review the district court’s grant of summary judgment de novo,

viewing   all   facts    and     drawing      all   reasonable        inferences         in

LabCorp’s favor.       See Webster v. U.S. Dep’t of Agric., 685 F.3d

411, 421 (4th Cir. 2012).             We also review de novo the district

court’s   interpretation         of   North    Carolina     contract         law    in    a

diversity case such as this one.               See Trimed, Inc. v. Sherwood

Med. Co., 977 F.2d 885, 888 (4th Cir. 1992).

            A. A mutual mistake must be specific.

     We agree with the district court that LabCorp has failed to

meet its burden of proof under North Carolina’s mutual mistake

doctrine to show by clear, cogent and convincing evidence that

some material part of the agreement was inadvertently omitted.

Although the Shared Customer List may constitute a “mistake”

insofar   as    the    Earnout    Amount      under   the   APA       does    not,       in

LabCorp’s   present     estimation,      effectuate       the   parties’       general

intent    for    the     payments      to     compensate        PEI     for        growth

                                         8
attributable to PEI’s customers, that cannot justify the court’s

intervention into their drafting failure. 2

      A mutual mistake is a mistake that is “‘common to both

parties to a contract . . . wherein each labors under the same

misconception    respecting     a     material    fact,   the   terms    of    the

agreement, or the provisions of the written instrument designed

to   embody   such     agreement.’”     Branch    Banking   &   Trust    Co.    v.

Chicago Title Ins. Co., 714 S.E.2d 514, 518 (N.C. App. 2011)

(“BB&T”) (quoting Metro. Prop. & Cas. Ins. Co. v. Dillard, 487

S.E.2d    157,   159    (N.C.   App.    1997)).      We   apply   a     “‘strong

presumption in favor of the correctness of the instrument as

written and executed, for it must be assumed that the parties

knew what they agreed and have chosen fit and proper words to

      2
        LabCorp cites the following evidence to prove the
inaccuracy of the Shared Customer List: (1) the declaration of
LabCorp’s Director Greg Klenke, who states that the Shared
Customer List is “not accurate,” that it “omits many long-
standing clients of LabCorp,” and that these are “customers
LabCorp had before the [PEI] transaction,” J.A. 979-80; and (2)
the declaration of LabCorp’s Senior Vice President Robert
Nelson, who states: “Providing [PEI] with earn out credit for
LabCorp’s own customers is contrary to the intention of the
parties, reflected, among other things, in the form of the
transaction that contemplated the sale of a customer list as
well as the obligation placed on the sellers post-closing to
assist with the smooth transition of [PEI’s] customers to
LabCorp in the hope that such a transition would lead to a
growth in the business attributable to those customers,” J.A.
1020.   Like LabCorp’s argument, its evidence skips a step.   As
we discuss further, it does not necessarily follow from the fact
that the Shared Customer List omits some customers of LabCorp
that the Shared Customer List is “not accurate.”

                                        9
express that agreement in its entirety.’”                       Hice v. Hi-Mil, Inc.,

273 S.E.2d 268, 270 (N.C. 1981) (quoting Clements v. Life Ins.

Co. of Va., 70 S.E. 1076, 1077 (N.C. 1911)).

       However, as in BB&T, LabCorp “does not allege that it had

an oral agreement with [PEI] that was mistakenly omitted from

the [APA].”        714 S.E.2d at 518.            Instead, LabCorp argues “that a

mutual mistake by both it and [PEI] led to [an] ‘inadvertent

windfall’” of sorts because neither party ever intended that the

Earnout     Amount        would    exceed       growth        attributable        to    PEI’s

customers.     See id.          But BB&T makes clear that more is required

for reformation of a contract.                   LabCorp must “show that it and

[PEI] had a meeting of the minds as to the specific terms of the

[Shared Customer List], and that some material part of their

agreement     was    mistakenly         omitted        from    the    [Shared      Customer

List].”     Id. at 519.            LabCorp has not presented any evidence

that   it   and     PEI    had     a   mutual    intention       to    include         certain

customers     on     the     Shared      Customer        List    so    that       it     would

adequately reflect growth, and that the Shared Customer List, as

a result of a mutual mistake, failed to properly express those

intentions.

       LabCorp cites a legal treatise in support of a more lenient

burden it would have us apply here.                    In a generic summary of the

law, that treatise teaches: “To establish a mutual mistake in an

instrument    so     as    to     authorize      its    reformation      .    .   .     it   is

                                            10
sufficient to show that [the parties] agreed to accomplish a

particular object by the instrument to be executed and that such

instrument,         as   executed,   is    insufficient    to   effectuate    their

intention.”          66 Am. Jur. 2d Reformation of Instruments § 22.

Although that language is admittedly broader than the language

from BB&T upon which the district court relied, this treatise

does not supply the North Carolina law we are bound to apply in

this case.

       Nor do we find that LabCorp has met even the lesser burden

it presses upon us.            Although LabCorp’s evidence does tend to

show that the purpose of the Earnout Period Payments was to

reward PEI for additional growth attributable to PEI’s customers

beyond that anticipated at the time of the sale, 3 none of the

evidence shows that the Shared Customer List does not accomplish

that       objective--at     least   to     the   extent   that   objective    was

mutual.       On the basis of this evidence, we cannot conclude that

LabCorp       has    shown    the    APA    insufficiently      effectuates    the

       3
        To prove the parties’ mutual intent, LabCorp also
supplies, in addition to the Klenke and Nelson declarations
already discussed, supra note 2, (1) documentary evidence
concerning the negotiation and drafting of the APA, including
emails between the parties, and a memorandum written by PEI; and
(2) the deposition testimony of several of PEI’s shareholders
and officers, generally supporting the notion that the purpose
of   the Earnout    Payments  was  to  provide   PEI  additional
compensation if its customers produced increasing profits.   See
Appellant’s Br. at 3.

                                           11
parties’ mutual intent, so as to authorize its reformation, even

under its proposed formulation of the rule.

      None     of    the      North    Carolina     precedent     LabCorp          cites    in

support of its argument requires a contrary conclusion.                                    For

example, in Dettor v. BHI Prop. Co. No. 101, 379 S.E.2d 851, 853

(N.C.   1989),       the      North    Carolina     Supreme     Court    reversed          the

district court’s grant of partial summary judgment, ruling that

a triable issue of fact remained as to whether the parties to a

land sale had a mutual understanding that a creek running near a

ten-acre tract of land would provide the southern boundary, or

whether      the    specific        acreage      listed   in     the    agreement          was

intended to control.            That holding has no bearing on our present

inquiry, because there is no question of fact as to whether

LabCorp and PEI intended the Customer Lists attached to the APA

to control, or “provide the boundary for,” the Earnout Amount.

At the time they entered into the APA, both parties agreed to

the   Shared       Customer     List    as   the    proper     means    of    calculating

growth attributable to any shared customers for the purpose of

determining the Earnout Payments.

      Indeed,       as   it    must,    LabCorp     concedes     that    this       was    the

parties’ mutual intent.               Nonetheless, it now seeks to move a few

names   from       PEI’s   Customer       List     to   the   Shared     Customer         List

without      providing        any     evidence     whatsoever     that       the    parties

intended or agreed to do so.                  There is no mutual mistake to be

                                              12
found on these facts, merely an apparent lack of diligence by

LabCorp.       The court can provide no remedy for that mistake,

which is the result LabCorp negotiated and agreed to.

              B. Any mistake was unilateral, not mutual.

      It follows that the mistake upon which LabCorp seeks to

rely is solely its own.             “The mistake of one party . . . alone,

not induced by the fraud of the other, affords no ground for

relief by reformation.”              Matthews v. Shamrock Van Lines, Inc.,

142   S.E.2d     665,   668     (N.C.    1965)        (internal    quotation      marks

omitted).       Here,    full       responsibility       for    comparison       of   the

parties’ existing customer lists rested with LabCorp, because

LabCorp was unwilling to disclose all of its customers to PEI.

PEI   never    had   access     to    LabCorp’s       secret    customer       database,

which is what LabCorp used to draft the Shared Customer List.

LabCorp’s      assertion      that      the     “mistake”        here     was     mutual

consequently strains credulity, in addition to failing to meet

the clear requirements of North Carolina contract law.

              C. Lack of specificity renders reformation impossible.

      Finally, even if LabCorp were able to obtain reformation to

fix its own mistake, it cannot simply point to a customer on

PEI’s   Customer     List     and    argue     that    the     parties   intended      to

include that customer on the Shared Customer List for the sole

reason that it had also been a customer of LabCorp.                        As we have

already     discussed,      the      Shared     Customer        List     was    not    an

                                          13
exhaustive list of all shared customers.               In light of that fact,

LabCorp’s      failure       to    identify      with        particularity        the

circumstances       constituting      its   mistake--beyond        its     amorphous,

unsupported assertion that some customers from PEI’s Customer

List should have been added to the Shared Customer List--or to

proffer any evidence from which it could be determined that the

parties   intended     to    include    any    specific      omitted       customers,

renders     the    reformation     task      LabCorp    asks       us    to    perform

impossible.        It also underscores the flaws in LabCorp’s mutual

mistake theory as a whole.

     “‘Reformation is a well-established equitable remedy used

to reframe written instruments where, through mutual mistake or

the unilateral mistake of one party induced by the fraud of

another, the written instrument fails to embody the parties’

actual,   original      agreement.’”          BB&T,    714    S.E.2d      at   517-18

(quoting Metro. Prop. & Cas., 487 S.E.2d at 159).                        To qualify,

LabCorp     must     state    “with     particularity        the        circumstances

constituting mistake as to all of the parties to the written

instrument.”       Best v. Ford Motor Co., 557 S.E.2d 163, 166 (N.C.

App. 2001).

     Here,     the    undisputed      evidence    shows      that       the    parties

negotiated extensively to arrive at the final list of shared

customers that is embodied in the Shared Customer List attached

to the APA.        According to its stated terms, the Shared Customer

                                        14
List comprises only “certain customers . . . who were customers

of both [PEI] and [LabCorp] during the period from January 1,

2007 through and including September 30, 2007.”                          J.A. 44 at

2.3(a) (emphasis added).

      Because the Shared Customer List was never intended to be

inclusive of all customers shared between the parties, at the

bare minimum LabCorp would need to show something to prove the

parties     intended        that    each    omitted    customer    be   reflected    as

shared in the APA.            Given LabCorp’s lack of evidence, we cannot

discern any method for determining which “certain” customers we

might      add    to    a   reformed       Shared   Customer   List     in   order    to

effectuate the parties’ mutual agreement.                   LabCorp’s unsupported

assertion that the Earnout Amount as currently calculated under

the APA does not “accurately” account for growth attributable to

PEI’s customers falls far short of providing such a method.                           It

is   similarly         unclear     how   LabCorp    would   have   us   allocate     the

percentage of revenues to each omitted customer in reforming the

Shared Customer List. 4            From a practical standpoint then, we fail

to   see    how    the      APA    possibly    could   be   refashioned      based   on

LabCorp’s proffered evidence, even if reformation were legally

warranted, which it is not.

      4
       Also noticeably absent is any justification or explanation
by LabCorp for this “mutual” mistake.

                                              15
     Accordingly,   we    agree   with        the    district     court       that

LabCorp’s   performance   under   the        APA’s   provision     for    PEI’s

Earnout Amount, which embodies the parties’ actual, original,

fully-negotiated,   specific   agreement,       is     not   excused     by   any

mutual   mistake.   The   doctrine      of    mutual    mistake    cannot      be

intended for use by a party seeking to rewrite a contract in

order to obtain some benefit of a bargain better than the one it

negotiated for itself, merely because it mistakenly thought it

was getting a better deal.

                                  III.

     For the foregoing reasons, the judgment of the district

court is

                                                                    AFFIRMED.

                                   16