Islet Scis., Inc. v. Brighthaven Ventures, LLC

2017 NCBC 76

Opinion

Islet Scis., Inc. v. Brighthaven Ventures, LLC, 2017 NCBC 76.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF WAKE 15 CVS 16388

ISLET SCIENCES, INC. Plaintiff,

v.

BRIGHTHAVEN VENTURES, LLC, JAMES GREEN, WILLIAM WILKISON, OPINION AND ORDER ON MOTION Defendants. TO RECONSIDER, MOTION TO DISMISS, AND MOTION TO AMEND and CMO

BRIGHTHAVEN VENTURES LLC,

Third-Party Plaintiff,

v.

JOHN F. STEEL, IV, EDWARD T. GIBSTEIN, and COVA CAPITAL PARTNERS, LLC,

Third-Party Defendants.

THIS MATTER comes before the Court on Plaintiff Islet Sciences, Inc.’s

(“Islet”) Motion for Reconsideration pursuant to Rule 60 (“Motion for

Reconsideration”), and Defendants Brighthaven Ventures, LLC (“BHV”), James

Green (“Green”), and William Wilkison’s (“Wilkison”) (collectively, “Defendants”)

Motion to Dismiss Under Rule 41(b) (“Motion to Dismiss”) (collectively, “Motions”).

Also before the Court is Islet’s Motion to Amend Case Management Order.

THE COURT, having considered the Motions, the parties’ briefs in support of

and in opposition to the Motions, the arguments of counsel at the hearing on the Motion to Dismiss1, and other appropriate matters of record, concludes that Islet’s

Motion for Reconsideration should be DENIED and Defendants’ Motion to Dismiss

should be GRANTED for the reasons set forth below. Accordingly, Islet’s Motion to

Amend Case Management Order is DENIED as MOOT.

Fitzgerald Litigation by Andrew L. Fitzgerald, Esq., and Sigmon Law, PLLC by Mark R. Sigmon, Esq. for Plaintiff Islet Sciences, Inc.

Parry Tyndall White by K. Allan Parry, Esq., for Defendants James Green and William Wilkison.

Jerry Meek, PLLC by Gerald F. Meek, Esq. for Defendant Brighthaven Ventures, LLC.

A. Factual and Procedural History

1. The Motions relate to this Court’s Order and Opinion on Green and

Wilkison’s Motions issued on January 12, 2017 (“Green and Wilkison Order”). See

Islet Scis., Inc. v. Brighthaven Ventures, LLC, 2017 NCBC LEXIS 3 (N.C. Super. Ct.

Jan. 12, 2017). The Court has recited the factual and procedural background of this

matter in various orders including the Green and Wilkison Order. Here, the Court

recites only those limited background and procedural facts necessary to the resolution

of the Motions.

2. On May 20, 2016, Green and Wilkison filed a motion for partial

judgment on the pleadings pursuant to Rule 12(c) (ECF No. 64). In the motion, Green

and Wilkison, inter alia, sought judgment on their counterclaims for declaratory

judgment seeking a declaration that Islet had contractual and statutory obligations

1 Pursuant to BCR 7.4 the Court decides the Motion for Reconsideration and Motion to Amend

Case Management Order without hearing. to advance defense costs Green and Wilkison had incurred in defending this lawsuit

and two other lawsuits2 (the “Advancement”).

3. Islet made no argument in opposition to Green and Wilkison’s motion

for judgment on their claims for declaratory judgment. Instead, Islet contended only

that it lacked financial means to pay the Advancement.

4. In the Green and Wilkison Order, the Court, inter alia, granted

judgment in favor of Green and Wilkison on their counterclaims for declaratory

judgment. The Court held that Islet was obligated to pay Green and Wilkison the

Advancement under the unambiguous terms of their respective Employment

Agreements and as required by Nevada statutory law. Islet Sciences, 2017 NCBC

LEXIS 3 at *16–22. The Court also held that the “claimed inability to pay does not

excuse Islet’s obligation to make the [A]dvancement.” Islet Sciences, 2017 NCBC

LEXIS 3 at *21.

5. On January 13, 2017, the Court issued an Order permitting Michael

Simes, Irving Brenner, Michael Easley, and the law firm of McGuireWoods LLP to

withdraw as Islet’s counsel (ECF. No. 94).

2 The two other lawsuits are (1) Richard Schoninger, Jacqueline Schoninger, Scott Schoninger, Gerald Allen and COVA Capital Partners, LLC v. James Green and William Wilkison, 15 CV 2233, United States District Court for the Southern District of New York (“Schoninger Action”), and (2) COVA Capital Partners, LLC v. James Green, William Wilkison, James Snapper, Antonio O’Ferral, Larry Hutchison, and Islet Scis., Inc., 15 CV 06834, in the United States District Court for the Southern District of New York (“COVA Action”). 6. On January 20, 2017, Green and Wilkison provided Islet with

documentation supporting a claim for Advancement of $367,175.78 for defense costs

incurred in the three lawsuits. To date, Islet has not paid the Advancement.

7. On February 7, 2017, Defendants filed the Motion to Dismiss (ECF. No.

95). Defendants seek dismissal of Islet’s remaining claims based on (a) Islet’s failure

to diligently prosecute this lawsuit and participate in discovery, and (b) Islet’s

violation of the Green and Wilkison Order in failing to pay the Advancement.

8. On February 13, 2017, Mark R. Sigmon and the Sigmon Law Firm,

PLLC, and on February 14, 2017, Andrew L. Fitzgerald, appeared as new counsel on

behalf of Islet (ECF. Nos. 98 and 99).

9. On February 27, 2017, Islet filed its response to the Motion to Dismiss.

In its response Islet stated that it “is fully aware of and appreciates the Court’s ruling

regarding advancement of fees, but it does not have the money to pay the amounts

demanded by Mr. Green and Mr. Wilkison.” (Pl.’s Resp. Mot. Dismiss, ECF No. 100

at 2.) Islet also argued that because the Court did not order Islet to pay “a sum certain

of attorneys (sic) fees,” Islet is not in violation of the Green and Wilkison Order. (ECF

No. 100 at 2.)

10. On March 9, 2017, Defendants filed a reply in support of the Motion to

Dismiss (ECF. No. 102).

11. On March 20, 2017, Islet filed a Motion to Amend Case Management

Order to extend all remaining deadlines in the Case Management Order (ECF. No.

103). Islet seeks an additional seven months to conduct discovery from the date of the order granting the motion. Defendants do not consent to the motion, but did not

respond, and the time for response has expired.

12. On March 30, 2017, the Court held a hearing on the Motion to Dismiss.

Islet’s CEO, Gary Blackburn (“Blackburn”), appeared at the hearing and provided

testimony. Blackburn testified that Islet had secured investment financing that

would permit Islet to make the Advancement. Blackburn further testified that he

believed that Islet would have access to the funds within thirty (30) days. Blackburn

testified that while the ultimate decision regarding use of the funds to pay the

Advancement would be made by Islet’s Board of Directors, Blackburn believed that

Islet would pay the Advancement once it secured the financing. At the hearing, Islet

did not argue that Green and Wilkison were not entitled to the Advancement.

13. Given Blackburn’s testimony regarding Islet’s pending access to funds,

on March 31, 2017, the Court issued an order taking the Motion to Dismiss under

advisement and staying the action until 5:00 p.m. on May 5, 2017 (the “March 31

Order”, ECF No. 110). The March 31 Order further provided that “[o]n or before the

expiration of the stay, [Islet] shall report to the Court whether [it] has made the

Advancement to Green and Wilkison.” (ECF No. 100 at 3.) The Court made clear that

“[i]f the Advancement has not been made by the expiration of the stay, the Court will

consider other remedies for the Defendants including dismissal of [Islet]’s remaining

claims.” (ECF No. 100 at 3.)

14. On May 5, 2017, Islet reported that “it appears the funds have not

become available as hoped” and that Islet had not made the Advancement. Islet has not provided any further information to the Court regarding whether it intends to

pay the Advancement.

15. Also on May 5, 2017, Islet filed the Motion for Reconsideration, asking

the Court to reconsider the Green and Wilkison Order to the extent that it required

Islet to advance defense costs related to the Schoninger Action (ECF No. 115). Islet

contends that its prior counsel failed to present argument to the Court regarding

“whether the claims against Green and Wilkison in the [Schoninger] litigation were

actually related to their status as officers and directors of Islet[.]” (Pl.’s Br. Supp. Mot.

Recons., ECF No. 116 at 2.) Islet did not ask the Court to reconsider the Advancement

for Green’s and Wilkison’s defense costs in this lawsuit or the COVA Action.

16. On May 24, 2017, Defendants filed their Brief in Opposition to Islet’s

Motion for Reconsideration (ECF No. 119). Islet did not file a reply brief, and,

accordingly, the Motion for Reconsideration is ripe for disposition.

B. Analysis

i. Motion for Reconsideration

17. Islet brings its Motion for Reconsideration pursuant to Rule 60. Islet

seeks reconsideration on the grounds that its “then-counsel failed to address the

defense cost advancement issue in its briefing, including whether the claims against

Green and Wilkison in the New York litigation were actually related to their status

as officers and directors of Islet, for reasons that Islet cannot presently comprehend.”

(ECF No. 116, at 2.) Islet requests that “the Court to reconsider its prior ruling and order that only the fees associated with the case at bar and the COVA case, and not

the Schoninger Case, be advanced to Green and Wilkison.” (ECF No. 116 at 4.)

18. Rule 60 provides, in relevant part, that the Court “may relieve a party

or his legal representative from a final judgment order, or proceeding for . . . (1)

Mistake inadvertence, surprise, or excusable neglect; . . . (6) Any other reason

justifying relief from the operation of the judgment.”

19. Defendants argue that the Supreme Court of North Carolina expressly

rejected the negligence of prior counsel as a basis for Rule 60 reconsideration in Briley

v. Farabow, 348 N.C. 537, 501 S.E.2d 649 (1998). In Briley, the Court held, in relevant

part, as follows:

Clearly, an attorney’s negligence in handling a case constitutes inexcusable neglect and should not be grounds for relief under the “excusable neglect” provision of Rule 60(b)(1). In enacting Rule 60(b)(1), the General Assembly did not intend to sanction an attorney’s negligence by making it beneficial for the client and to thus provide an avenue for potential abuse. Allowing an attorney’s negligence to be a basis for providing relief from orders would encourage such negligence and present a temptation for litigants to use the negligence as an excuse to avoid court-imposed rules and deadlines.

348 N.C. at 546, 501 S.E.2d at 655. The Court finds Briley controlling. Prior counsel’s

negligent failure to make potentially relevant legal arguments on Islet’s behalf is not

grounds for the Court to reconsider Islet’s obligation to advance defense costs.

20. For these reasons, the Court declines to reconsider the Green and

Wilkison Order, and concludes that the Motion for Reconsideration should be

DENIED. ii. Motion to Dismiss

21. Plaintiffs seek dismissal of Islet’s claims under Rule 41(b) based on

Islet’s failure to prosecute its claims and comply with applicable rules of court, and

on Islet’s failure to comply with the Green and Wilkison Order. Rule 41(b) provides

that “[f]or failure of the plaintiff to prosecute or to comply with these rules or any

order of court, a defendant may move for dismissal of an action or of any claim therein

against him.” (emphasis added). Since the Court concludes that Islet’s claims should

be dismissed for failure to comply with the Green and Wilkison Order, it will address

only those grounds.

22. Dismissal is an appropriate sanction for a party’s failure to obey an

order of the court. See Daniels v. Montgomery Mut. Ins. Co., 320 N.C. 669, 681, 360

S.E.2d 772, 780 (1987); Ray v. Greer, 212 N.C. App. 358, 368, 713 S.E.2d 93, 99–100

(2011). “Dismissal under Rule 41(b) is within the discretion of the trial court.” Eakes

v. Eakes, 194 N.C. App. 303, 309, 669 S.E.2d 891, 895 (2008). Nevertheless, imposing

dismissal as a sanction is only appropriate after the Court has considered whether

less drastic sanctions would suffice. Ray, 212 N.C. App. at 365, 713 S.E.2d at 98.

“Less drastic sanctions include: (1) striking the offending portion of the pleading; (2)

imposition of fines, costs (including attorney fees) or damages against the represented

party or his counsel; (3) court ordered attorney disciplinary measures, including

admonition, reprimand, censure, or suspension; (4) informing the North Carolina

State Bar of the conduct of the attorney; and (5) dismissal without prejudice.” Id. 23. Islet has not complied with the Green and Wilkison Order requiring

Islet to make the Advancement. Green and Wilkison provided Islet with a demand

for payment of a specific amount of defense costs on January 12, 2017, and Islet has

not objected to the amount sought. Islet’s claimed inability to pay does not excuse its

failure to provide the Advancement. Orion Ethanol, Inc. v. Evans, No. 08-1180-JTM,

2009 U.S. Dist. LEXIS 65555 at *10 (D. Kan. July 29, 2009) (applying Nevada law

and finding the obligation to advance defense costs to a corporate officer was not

excused because corporation claimed it lacked funds to pay).

24. Green and Wilkison contend that Islet’s failure to advance their defense

costs has imposed a substantial hardship on both of them. As one court has

summarized the right to advancement:

Advancement is a distinct right complementary to the right to indemnification . . . . The right to indemnity, however, is often impossible to determine until the legal proceedings are finished. Absent advances, the officer himself must front the cost of defending the legal proceeding, significantly diminishing the attractiveness of indemnity. Advancement addresses this problem by providing timely relief in the midst of litigation. If a corporation withholds advances, the right will be irretrievably lost at the conclusion of the litigation, because at that point the officer will only be entitled to indemnity.

Westar Energy, Inc. v. Lake, 552 F.3d 1215, 1225 (10th Cir. 2009) (citations omitted).

Islet’s continued failure to comply with the Court’s orders has prejudiced Green and

Wilkison.

25. Islet contends that “the Court has not ordered any specific amount of

attorney (sic) fees payable” and “Islet is not in violation of an Order to pay a sum certain.” (ECF. No. 100 at 2.) Islet apparently misunderstands the basis for its

obligation to pay the Advancement. The Green and Wilkison Order concluded that

the Advancement is required by the unambiguous terms of the Employment

Agreements between Islet and Green and Wilkison, and by Nevada law. Islet

Sciences, 2017 NCBC LEXIS 3 at *21–22. It is undisputed that Green and Wilkison

have provided Islet with a demand for the Advancement and have made the required

statutory undertaking to exercise their advancement rights. No additional order or

award of fees is required from this Court to trigger Islet’s obligation to provide the

Advancement.

26. The Court has considered imposition of sanctions short of dismissal of

Islet’s claims, but concludes that such sanctions will not be effective. See Ray, 212

N.C. App. at 365, 713 S.E.2d at 98. There is no “offending pleading” involved in this

matter, and striking Islet’s complaint would amount to a dismissal. The imposition

of additional costs and fees as sanctions against Islet would be ineffective because

Islet already has demonstrated an inability or unwillingness to pay its existing

obligations. The Court also does not believe that attorney disciplinary measures are

warranted under these circumstances.

27. Another lesser sanction is dismissal without prejudice. Ordinarily, a

dismissal under Rule 41(b) operates as an adjudication upon the merits; however, a

trial judge is afforded wide discretion to dismiss a case with or without prejudice.

Rule 41(b); see also Trent v. River Place, LLC, 179 N.C. App. 72, 76–77, 632 S.E.2d

529, 533 (2006) (citing Whedon v. Whedon, 313 N.C. 200, 210, 328 S.E.2d 437, 443 (1985)). Under the circumstances present here, however, the Court concludes that

dismissal without prejudice would not be an appropriate sanction. Allowing Islet to

potentially refile its claims would be a disservice to Green and Wilkison, who already

have had to defend this action for many months and at great expense without benefit

of the advancement of defense costs to which they are entitled. Islet’s claims therefore

should be dismissed with prejudice.

28. The Court concludes that Islet’s claims should be dismissed with

prejudice pursuant to Rule 41(b), and the Motion to Dismiss should be GRANTED.

THEREFORE, IT IS HEREBY ORDERED that:

29. Islet’s Motion for Reconsideration is DENIED.

30. Defendants’ Motion to Dismiss is GRANTED, and Islet’s remaining

claims against all Defendants are hereby DISMISSED WITH PREJUDICE.

31. Islet’s Motion to Amend Case Management Order is DENIED as MOOT.

SO ORDERED this the 29th day of August, 2017.

/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases