Contract – Asset Purchase Agreement – Fixed Costs and Families Grants

Defendant’s interpretation of COVID-related grants as non-recurring revenue under an Asset Purchase Agreement was a proper exercise of contractual discretion, and denied the plaintiffs’ claims for breach of contract, breach of good faith, and declaratory relief.

We granted Defendant’s motion for summary judgment and denied Plaintiffs’ motion, resolving all claims in Defendant’s favor.

The Court addressed cross-motions for summary judgment regarding a dispute over a Contingent Payment under an Asset Purchase Agreement (APA) for the sale of nine childcare centers. Plaintiffs, nine North Carolina corporations and LLCs, sold their childcare facilities to Defendant LJ Schools (Carolina), Inc., with the total purchase price consisting of a closing payment, a holdback, and a Contingent Payment of up to $6,000,000, calculated using a formula based on the Purchased Assets’ rolling 12-month EBITDA. The parties’ disagreement focused on whether COVID-related grant funds received by Defendant, the Compensation Support Grants and Fixed Costs and Families Grants, constituted Non-Recurring Revenue, which would reduce the Contingent Payment, or recurring revenue, which would increase it. The APA gave Defendant discretion to determine the formula’s variables, including whether grant funds were “free of mandated expense obligations,” an undefined term in the contract.

Plaintiffs argued that the Fixed Costs and Families Grants carried mandated expense obligations under the American Rescue Plan Act and North Carolina guidelines, making them recurring revenue, and claimed that Defendant breached the APA, the implied covenant of good faith and fair dealing, and sought declaratory relief to establish that the grants were not free of mandated obligations. Defendant contended the Fixed Costs and Families Grants did not require additional spending beyond existing expenses and thus properly counted as Non-Recurring Revenue, and that its exercise of discretion was in good faith. The parties agreed the APA was clear and unambiguous and that there were no material factual disputes; the case turned solely on interpretation of the term “mandated expense obligations” and whether Defendant’s exercise of discretion was proper.

We analyzed whether the APA was enforceable and whether Defendant’s discretion rendered the contract illusory. It concluded that the APA was valid, as Defendant’s discretion was limited by the implied covenant of good faith and fair dealing, which required that discretion to be exercised honestly and fairly. Relying on dictionary definitions, we found that Defendant reasonably interpreted “mandated expense obligations” to mean expenses that were officially required or imposed, and that excluding the Fixed Costs and Families Grants from revenue in the EBITDA calculation was a legitimate exercise of contractual discretion. Disagreement over interpretation and financial consequences alone does not establish bad faith.

Because the APA granted Defendant discretion and Plaintiffs failed to present evidence that Defendant acted dishonestly, arbitrarily, or to evade the contract’s spirit, we concluded Defendant did not breach the APA or the duty of good faith. Likewise, we dismissed Plaintiffs’ declaratory judgment claim as duplicative of the breach of contract claim.

Granted.

Child Care Inc. v. LJ Schools (Carolina) Inc. (Lawyers Weekly No. 020-008-26, 26 pp.) (A. Todd Brown, J.) 2026 NCBC 8. Shumaker, Loop & Kendrick, LLP, by Steven A. Meckler and Frederick M. Thurman, for Plaintiffs Child Care Inc., Early Childhood Services Inc., Day Care Inc., Child Development Inc., Child Learning Programs Inc., Sam Newell Child Development, LLC, South Point Child Development LLC, Ruben Linker Child Development Center LLC, and Monroe Road Child Development Center LLC. Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., by Evan M. Sauda, for Defendant LJ Schools (Carolina), Inc. North Carolina Business Court