Where the parties to a share purchase agreement agreed that New York would be the exclusive forum for disputes, the suit was transferred to the Southern District of New York. Although the seller argued that the suit could remain in North Carolina because it related to a “setoff” and, under the agreement, disputes relating to a setoff could be brought in North Carolina, this argument failed because the conditions for a setoff claim were never satisfied.
In August 2018, Pamela Whitaker entered into a share purchase agreement with Monroe Staffing Services LLC for the sale of her business, which agreement the parties later amended. Whitaker filed suit in December 2019 in North Carolina state court, alleging that the defendants had not made interest and earnout payments as required under the amended agreement. The defendants removed the case to federal court, where they argued that the courts in New York were the exclusive forums under the contract’s forum selection clause. The defendants also argued that Whitaker’s claims were not yet ripe.
The magistrate judge recommended transferring the case to the Southern District of New York. The district court disagreed, concluding that Whitaker’s claims were “relating to” a setoff, enabling Whitaker to invoke an exception in the forum selection clause and maintain her suit in North Carolina state court.
According to Monroe, because the earnout payments were not due until February 2020 under the terms of the amended agreement, Whitaker’s complaint was premature when filed in December 2019. In her complaint, filed in December 2019, Whitaker alleged that the defendants materially breached the contract “by failing to make the payments and interest as agreed.” Under the terms of the amended agreement, Monroe’s failure to make the first earnout payment, originally due in August 2019, constituted a breach unless Monroe made the monthly interest payments beginning on Sept. 30, 2019. By alleging in her complaint that Monroe had failed to pay “interest,” Whitaker claimed that a breach already had occurred.
While acknowledging that its interest payments may have been untimely, Monroe asserts without documentary evidence that it paid the required interest. However, this factual dispute centers on the merits of Whitaker’s breach of contract claim. This merits argument does not implicate the court’s jurisdiction to entertain the breach of contract claim as pleaded.
Moreover there is no dispute that Whitaker’s claims were ripe by the time that the district court issued its decision in February 2021. Regardless whether interest payments were made before the complaint was filed, Monroe failed to pay the earnout amounts by the final February 2020 due date.
Monroe argues that the forum selection clause in the parties’ contract established exclusive jurisdiction over Whitaker’s claims in the federal or state courts in New York. According to Monroe, the clause’s North Carolina exception for disputes “arising out of or relating to” a setoff does not apply here, because Monroe never sought to exercise its right to a setoff pursuant to section 7.08.
Section 7.08 establishes three prerequisites for Monroe to exercise its contractual right to a setoff, namely, written notice to Whitaker that includes the basis for Monroe’s claim to a setoff, a calculation of the setoff amount and supporting documentation. None of these requirements were satisfied by the reservation of rights letter.
Thus, to the extent that Monroe’s general reservation of rights indicated a “dispute” regarding a potential setoff, that dispute was not formalized “pursuant to Section 7.08,” as required by the plain language of the contract. Nor did any later communications between the parties or Monroe’s complaint filed in the Southern District of New York satisfy the requirements of section 7.08.
Whitaker argues that the North Carolina exception applies because Monroe could assert a “possible” setoff claim or defense. Under this view, however, any claim against Monroe for nonpayment would “relate to” a “possible” setoff dispute, irrespective whether a setoff right had been asserted pursuant to section 7.08 of the contract. Such an interpretation would read the phrase “pursuant to Section 7.08” out of the contractual language, contrary to fundamental principles of New York contract law.
Vacated and remanded with instructions.
Richardson, J., concurring in part and concurring in the judgment:
I agree with most of the majority’s fine opinion: the claims were ripe in the district court and should have been transferred. I write separately only because I find a different path to reach the issue of ripeness.
Whitaker v. Monroe Staffing Services LLC, Case No. 21-1217, July 22, 2022. 4th Cir. (Keenan), from MDNC at Greensboro (Tilley). Jonathan D. Pressment for Appellants. Grover Gray Wilson for Appellee. VLW 022-2-180. 24 pp.