Five Things You Should Know About Discovery Under The New Business Court Rules

There are new Rules for the NC Business Court In effect, as of January 1, 2017.  If you have a case in the Business Court, or are expecting to designate a case there, you should look them over.  They are applicable to all actions currently pending in the Business Court.

If you are not willing to take the time to read the new Rules (which is not recommended), here are five things which affect discovery in the Business Court under the new Rules:

Be Courteous And Cooperative

New Rules 10.1 through 10.8 govern discovery.  The new Rules dictate cooperation in discovery.  Rule 10.1 (titled "general principles") says that:

The parties should cooperate to ensure that discovery is conducted efficiently. Courtesy and cooperation among counsel advances, rather than hinders, zealous representation.

If you think that this is a new and unfairly burdensome obligation, you are in the wrong profession.  The North Carolina Revised Rules of Professional Conduct say that "[l]awyers are encouraged to treat opposing counsel with courtesy and to cooperate with opposing counsel when it will not prevent or unduly hinder the pursuit of the objective of the representation."  Comment 1 to RRPC 1.2

Proportionality

The Rules make a specific reference to the concept of "proportionality," which was incorporated into the Federal Rules of Civil Procedure with the 2015 amendments to those Rules.  New Rule 10.3(a) says that in the Case Management Conference:

Counsel should discuss the scope of discovery, taking into account the needs of the case,the amount in controversy, limitations on the parties’ resources, the burden and expense of the expected discovery compared with its likely benefit, the importance of the issues at stake in the litigation, and the importance of the discovery for the adjudication of the merits of the case.

If you find this to be a startling limitation on the scope of discovery, it isn't.  NCRCP 26(b)(1a), effective in 2015 and captioned "limitations on frequency and extent," references much the same concepts.  If you have an interest in mastering the challenge of proportionality, the drafters of the new Business Court Rules recommend studying A Practical Guide in Achieving Proportionality under New Federal Rule of Civil Procedure 26, 9 The Fed. Cts. L. Rev. 20 (2015).

Electronically Stored Information (ESI)

The new Rules speak more specifically to electronically stored information (ESI), more so than did Old Rule 17.1(t), which mentioned only "metadata.".  New Rule 10.3(c) says that counsel for the parties should prepare an ESI protocol —an agreement between the parties for the identification, preservation, collection, and production of ESI."  The Rule goes on to suggest the items that should be covered, like "the specific sources, location, and estimated volume of ESI" and how the search should be conducted.  When should this happen?  Per new Rule 9.1(d), at the Case Management Meeting.  That meeting is required to happen no more than sixty days after the designation of the case to the Business Court.  (new Rule 9.1(b)).

Interrogatories, Requests For Admission, And Depositions

Interrogatories and requests for admission are limited to no more than twenty-five (new Rule 10.4(b)).  That's half the number permitted by the past set of Rules, which allowed for fifty of each (old Rule 18.2).  The number of depositions allowed remains unchanged-- to no more than twelve by each party.  (new Rule 10.4(c); old Rule 18.2),  Though under the old Rules, Rule 18.2 excluded "testifying experts" from the limitation of twelve.  The new Rules make no such exclusion, so this represents somewhat of a limitation.

All depositions are subject to a time limit of seven hours.  New Rule 10.7(a).  You might remember that when Rule 30 of the Federal Rules of Civil Procedure were amended in 2000  to provide for the same time limit, that there initially was debate about whether the time taken for breaks -- like coffee, lunch, or a trip to the bathroom -- was included in the time limit.  It wasn't really much of a debate, since the federal advisory committee notes actually resolved that question. The notes say “[t]]his limitation contemplates that there will be reasonable breaks during the day for lunch and other reasons, and that the only time to be counted is the time occupied by the actual deposition.”

The new Business Court Rule 10.7(a) resolves that practical issue on its face, it says that the seven hours is measured by "on--the-record time."

The new Rule contains some clarification for 30(b)(6) depositions.  A party providing a 30(b)(6) witness may often present multiple witnesses, each addressing a separate 30(b)(6) topic.  Rule 10.4(c) says that "for depositions conducted pursuant to Rule 30(b)(6), each period of seven hours of testimony will count as a single deposition, regardless of the number of designees presented during that seven-hour period."

Streamlined Procedure For Resolving Discovery Disputes

In a new approach for resolving discovery disputes, new Rule 10.9(b)(1) requires the moving party to "initiate a telephone conference among counsel and the presiding Business Court judge about the dispute."  in order to initiate this telephone conference, the moving party a party first must e-mail a summary of the dispute [of less than 700 words] "to the judicial assistant and law clerk for the presiding Business Court judge and to opposing counsel."  The opposing party has seven calendar days to respond with an equally pithy (700 word) response.  After receiving the response, the Judge can either require the filing of a formal motion and a brief, or rule based on the summaries.

It will be interesting to see how this approach works.  Maybe the Business Court Judges will be innundated with telephone conferences.  Or maybe, after the lawyers exchange the summaries, they will be infected with the spirit of courtesy and cooperation dictated by new Business Court Rule 10.1.

Credit Where Credit Is Due

I was guided in preparing this post by a document prepared by the principal drafters of the new Rules, including my partner Jennifer Van Zant, who seems to get mentioned on this blog more than any other Brooks Pierce lawyer.  The document was prepared quite a while ago (in May 2016), so the Rule changes actually implemented may vary from what are described in it.  It is titled Key Features of Proposed Changes to the North Carolina Business Court Rules.

I am working on adding the Revised Rules to the Sidebar of this blog.  They have been hyperlinked by my assistant Nancy Preslan, who is undoubtedly the best legal assistant in the world.  "Hyperlinked," in this case, means that you can clink on any Rule in the table of contents and hop to that Rule, and then click on the Rule itself to return to the Table of Contents.  That saves a lot of paging back and forth.  For now, they are here.

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NC Business Court Starts Off 2017 By Denying A Motion For Sanctions And Adding A New Judge

In the NC Business Court's first Opinion of the new year, Judge Bledsoe denied Defendants' Motion for Rule 11 Sanctions in Kure Corp. v. Peterson, 2017 NCBC 1.  The decision holds a few lessons about the operation of Rule 11 of the NC Rules of Civil Procedure.

You Can't Avoid A Rule 11 Sanction in North Carolina By Withdrawing Your Complaint

Maybe you got carried away and filed a Complaint that you discovered later wasn't "well grounded in fact" or "warranted by existing law" and was therefore in violation of Rule 11.  That  conduct exposed you (and your client) to a sanction of having to pay "the reasonable expenses incurred because of the filing of the pleading . . . including a reasonable attorney's fee."  NCRCP 11(a).

Can you avoid the whole problem by dismissing or amending the Complaint?  If you are in federal court, the answer would be "yes."  There is a "safe harbor" under FRCP 11.  Judge Bledsoe observed that under the Federal Rules, "once a party serves a Rule 11 motion on the opposing party, the motion 'must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service or within another time the court sets.'  Fed. R. Civ. P. 11(c))."  Op. 7 & n.2.

The Federal Rules were amended in 1993 to add that "safe harbor" language.  The North Carolina Rule was last amended in 1986 and was nearly identical to the federal rule in effect at that time.  It therefore doesn't provide for any "safe harbor."

So even though the Plaintiff in the Kure case had amended its Complaint, and even though the counsel filing the Complaint had had new counsel substituted for them, the lawyers filing the original Complaint were still subject to Rule 11 sanctions.

Suing On Behalf Of An Incorrect Party Is Not Sanctionable Under Rule 11

The Plaintiff Kure Corp. was suing as a result of alleged misrepresentations made to it.  As the Defendant pointed out in its Rule 11 Motion, however, Kure had not been formed as a corporation until after the alleged misrepresentations were made.  The Defendant said that the Plaintiff's counsel were subject to Rule 11 sanctions because they had sued on behalf of the wrong party.

The Business Court, looking to the terms of NCRCP 17, which says in part that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed" for substitution of the proper party, denied that aspect of the Rule 11 Motion.

Judge Bledsoe's ruling was bolstered by an NC Court of Appeals decision holding that “[c]ourts should not impose sanctions under Rule 11 when relief is available under another provision which more specifically addresses the situation.”  Op. 21(quoting Overcash v. Blue Cross & Blue Shield, 94 N.C. App. 602, 618, 381 S.E.2d 330, 340 (1989)).

Wanting To Be The First To File Isn't An "Improper Purpose" Per Rule 11

The parties to the Kure case had met to discuss a resolution of their dispute before the lawsuit was filed.  Defendants alleged that at that meeting, Plaintiff's representative had demanded that the Defendants sign a settlement agreement or that "plaintiff would file its Complaint within the hour." Op. 27.

In addition to its requirement that a pleading be "well grounded in fact" or "warranted by existing law" Rule 11(a) also condemns filing for an "improper purpose."  It says that a signature on a Complaint is a certification that litigation it is not "interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

An improper purpose is “any purpose other than one to vindicate rights . . . or to put claims of right to a proper test.” Op. 26 (quoting Mack v. Moore, 107 N.C. App. 87, 93, 418 S.E.2d 685, 689).  Judge Bledsoe ruled that the sort of conduct complained of by the Defendants was not sanctionable.  He said that:

Defendants. . . have not pointed to any authority demonstrating that a desire to gain a litigation advantage is beyond the scope of 'vindicating rights' or 'putting claims of right to a proper test.' Finding that Plaintiff acted with an improper purpose would expose to sanctions countless attorneys who make pre-filing settlement demands or seek to file before the opposing party does.

Op. 28.

A Couple More Things: New Judge(s?) for the Business Court And My Resolution

The Business Court also started off 2017 with at least one new Judge.  Adam M. Conrad was nominated a Special Superior Court Judge by outgoing Governor Pat McCrory in December 2016.  I don't know new Judge Conrad, but he has an outstanding background including a U.S. Supreme Court clerkship and formerly being a partner at King & Spalding.  Judge Conrad takes his Business Court judgeship by way of the General Assembly's enactment of N.C. Gen. Stat. sec. 7A-45.1(a9), which created  a new special superior court judgeship which the Governor, prior to submitting the nominee for confirmation and in consultation with the Chief Justice, shall determine has the requisite expertise and experience" to be designated as a business court judge."  His nomination was confirmed by the NC General Assembly last month.

Judge Conrad has assumed his position and will be residing in the Business Court in the Mecklenburg County courthouse.

Governor McCrory also nominated Andrew Heath as a Special Superior Court Judge.  Mr. Heath, confirmed by the General Assembly last month, is the former North Carolina Budget Director and former Chairman of the North Carolina Industrial Commission.  I'm pretty sure that I've read somewhere that Judge Heath is in line for an assignment to the Business Court, but don't count on me being correct on that. In any event, a seat on the Business Court may become available, possibly due to Judge Gale's resignation from the Court last October, which is referenced in the General Assembly's confirmation of Judge Heath (What!?  I spoke with Judge Gale about whether he had resigned, and he explained a complicated series of events, including his retirement, which led to him being named a "Senior Business Court Judge" (per a 2015 amendment to the General Statutes, codified in N.C. Gen. Stat. §7A-52(a1)).  That position allows him to be recalled from retirement to serve on the Business Court and to continue to hear cases beyond the mandatory retirement age of 72.  He continues to be the Chief Judge of the Business Court.

Finally, I made the ill-advised resolution in 2014 to write about every numbered Business Court decision.  I have failed miserably at that and please know that this year I have resolved that I definitely will NOT write about every numbered Business Court decision going forward.  That will be an easier resolution to keep.  I hope that this won't cause you to stop reading.

Think You Can Appeal The Business Court's Denial Of Your Opposition To Designation? You Probably Can't

The NC Supreme Court's jurisdiction over appeals from the Business Court expanded significantly with the passage of a bill by the NC General Assembly "modernizing" the Business Court in 2014.  A party can appeal even interlocutory orders of the Business Court to the state's highest Court.  N.C. Gen. Stat. §7A-27(a).

What about an Order from the Business Court denying an opposition to a designation to the Business Court?  That's surely "interlocutory," so appealable, right?  Yes, sure, if it affects a "substantial right," as provided in  G.S. §7A-27(a).

Given a ruling from the NC Supreme Court this week, however, it seems unlikely that being forced against your will to litigate in the Business Court will ever be deemed to affect a "substantial right."

The case is Hanesbrands Inc. v. FowlerPlaintiff, suing the Defendant for breaching stock grant agreements, designated the case to the Business Court at the time it filed its Complaint in August 2015.  The Defendant objected to the designation in September 2015.  Judge Gale denied the Opposition the next month and the interlocutory ruling was appealed to the NC Supreme Court.

The Supreme Court ruled that a "substantial right" was not affected by the case remaining in the Business Court and dismissed the appeal.  It rejected the Defendant's argument that she was just an "ordinary" human being who shouldn't have to fight a large corporation in a "special court" designed for sophisticated business entities.  The Defendant had argued:

that requiring her 'to defend a case filed against her by a large, public corporation in a special court established primarily for disputes between businesses' denies her the substantial right to 'have this matter heard in the same manner as ordinary disputes involving ordinary citizens.'

Op. at 5.

I wonder if a "substantial right" would be affected if the Business Court were to grant an Opposition to a Designation in a case appropriate for designation, requiring the designating party to litigate its case outside of the Business Court.  That would involve being in regular NC Superior Court, a Court without electronic filing, without law clerks to assist the Judge in ruling on its claims, without a Judge with the business expertise of a Business Court Judge dedicated to the case from start to finish and without a blog focused on the Court.  If that's not "substantial" enough, it is at least probably unconstitutional.

Before the Business Court was "modernized," the General Statutes allowed precisely that sort of appeal.  Section 7A-45.4(e) used to say that a party dissatisfied with an Order kicking a case out of the Business Court "may appeal to the Chief Justice of the Supreme Court."  There was no procedure for that unique kind of appeal to a single Judge.  The only time I think that it was exercised resulted in nothing more than a form Order from the NC Supreme Court.  I wrote about that case back in 2012.

But even looking back at that no longer effective statute, it seems unlikely that there ever was a right of appeal to the NC Supreme Court for an Order refusing to overturn a designation.

I would not  have been aware of the interesting Hanesbrands decision but for my partner Jennifer Van Zant emailing it to me a couple of days ago.  Thanks, Jennifer.

Who Would Ever Have Thought That Sending A Preservation Letter Might Be Dangerous?

There is probably nothing more routine in litigation today than a Plaintiff's counsel sending a "preservation letter."    A preservation letter, if you've never sent or received one, is a letter sent at the outset of litigation -- or even before it begins -- telling the opposing counsel or party (or even a non-party) to make sure to withhold from destruction documents relevant to the claims.

But who would have ever thought that sending such a routine letter could form the basis for an abuse of process claim?  Apparently it can, based on Judge Robinson's Opinion last month in DDM&S Holdings, LLLC v. Doc Watson Enterprises, LLC, 2016 NCBC 86.

Abuse Of Process

if you need a refresher on what a claim for abuse of process is, it is "the misuse of legal process for an ulterior purpose."  Op. ¶23 (quoting  Chidnese v. Chidnese, 210 N.C. App. 299, 310, 708 S.E.2d 725, 734 (2011)). 

The requirement of an "ulterior purpose"?  That is met when the party accused of the abuse of process takes some willful action after the lawsuit is filed which is aimed at getting the advantage of the opposing party in "some collateral matter."  Op. ¶23.

Judge Robinson spoke to the routine nature of a preservation letter:

Plaintiffs argue that a preservation of evidence letter can never serve as the basis for an abuse of process claim. Indeed, all other things equal, there is nothing inherently improper about a plaintiff sending a letter to individuals who may have relevant evidence requesting that they preserve such evidence. It is a routine litigation practice. The fact that is a routine litigation practice, however, does not mean that such an act can never be used to gain an advantage with respect to some collateral matter. North Carolina courts consistently hold that acts otherwise routine and permissible can constitute an improper act sufficient to satisfy the “act” element of an abuse of process claim.

Op. ¶27 (emphasis added).

The parties to the lawsuit had sold a database, which collected police reports from across the United States, to LexisNexis.  The ulterior motive alleged by the Defendants (via a counterclaim) was that the preservation letter sent to LexisNexis to cause it to withhold distributions from a $2 million escrow fund established in connection with the sale. LexisNexiss did indeed instruct the escrow agent to withhold any distribution from the escrow fund.  The non-payment of money from the escrow fund was alleged by the Defendants to be aimed at coercing and pressuring them to pay more money to the Plaintiffs (which the Defendants said they were not due per the terms of the sale to LexisNexis).

The Allegations Of A Pleading Are Assumed By A Court To Be True

Judge Robinson rejected the argument that a "preservation of evidence letter can never serve as the basis for an abuse of process claim."  Op. ¶27.  The allegations of the Defendants' counterclaim satisfied the bare bones pleading requirements for an abuse of process claim.  As Judge Robinson observed, "[c]oercing a party into paying additional monies is not a purpose for which a preservation of evidence letter is intended." Op. ¶28.  Even though the Plaintiffs denied that coercion was the purpose of their preservation letter, that wasn't enough for them to succeed on their motion to dismiss, as all allegations in a Complaint or counterclaim are accepted as true at the motion to dismiss stage.

This decision highlights the broad latitude that judges, both state and federal, are required to accord to the allegations in a pleading.  Skepticism about the truth of the allegations in a Complaint or Counterclaim is hardly ever sufficient to support a dismissal.  The U.S. Supreme Court said way back in 2009 (in Ashcroft v. Iqbal, 566 U.S. 662 (Souter, J., dissenting) that "[t]he sole exception to this rule lies with allegations that are sufficiently fantastic to defy reality as we know it: claims about little green men, or the plaintiff's recent trip to Pluto, or experiences in time travel."

The allegations surrounding the preservation letter in the DDM&S Holdings case aren't so "sufficient[ly] fantastical" as to fall into the category of little green men, trips to Pluto, or experiences in time travel.

But it remains to be seen whether this abuse of process claim can survive a motion for summary judgment.

What other innocent acts performed in connection with a lawsuit might form the basis for an abuse of process claim?  What about talking to the press?  Sending a notice of deposition or a subpoena?

I don't see an increase in abuse of process claims lying head based on preservation letters being sent.  This ruling wouldn't stop me from sending a preservation letter.

 

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NC Business Court Sends Some Important Messages About Fees To Lawyers For Class Action Plaintiffs

If you've been reading this blog for any length of time, you know that I am very sour on substantial attorneys' fees being awarded to the lawyers for class action plaintiffs who obtain nothing more for the class than valueless additional disclosures with regard to a merger transaction.  You can read some of those posts here and here.

The Business Court has routinely been awarding substantial fees for disclosure only settlements up until now, but the Business Court's decision last week in In re Newbridge Bancorp Shareholder Litig., 2016 NCBC 87 sends the message that its relaxed examination of the value of such settlements is probably at an end.  That is partly based on the Delaware Court of Chancery's decision in In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016), which was characterized as the "death knell" there for such settlements.

Judge Bledsoe said in the Newbridge Opinion:

the North Carolina Business Court has historically been guided in its consideration of motions to approve, and award attorneys’ fees in connection with, “disclosure-based” settlements of merger-based class action litigation by the body of persuasive case law developed by the Delaware courts over a period of many years. The Court is also aware that the Delaware courts have recently subjected such motions to much more exacting scrutiny than they have in the past.  See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016).

In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State.  The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions. As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.

Op. Pars. 4 and 5.

Notwithstanding Judge Bledsoe's decision that "enhanced scrutiny" would not be applied in the case before him, he did undertake a pretty close review of the value of the disclosures obtained for the class, and also the amount of the attorneys fees being awarded.

The Disclosures Obtained By Class Counsel Did Not Justify The Amount Of Fees Sought

He said that some of the disclosures touted as the basis for the fee award were "not material" or of "marginal benefit." Op. Pars. 64-65, 71 & n. 10.  He said that the Delaware Court of Chancery had "long rejected" the fallacy "that increasingly detailed disclosure is always material and beneficial disclosure."  Op. ¶64 (quoting Dent v. Ramtron Int’l Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *47  (Del. Ch. June 30, 2014)).

After that review, he sliced in half the amount of fees sought by class counsel, finding their fee request (of almost $275,000 based on an implied hourly rate of almost $525) was "not fair and reasonable, but rather excessive based on the circumstances of this case and the record before the Court."  Op. ¶69.

On the limited fee information provided by the class plaintiff's counsel, Judge Gale said that the $135,000 fee award he made yielded an implied average hourly rate of $258.  That probably seemed pretty skimpy to those lawyers, who said that the "usual and customary rates" for  the senior lawyers for the Court-approved Co-Lead Counsel ranged from $650-$850 per hour.  Op. ¶50.

But the lawyers for the class did little to justify their fees.  They did not offer any affidavits of North Carolina attorneys attesting to “the fees customarily charged in the locality for similar legal services,”  as contemplated by the Revised Rule 1.5(a)(3) of Professional Conduct.  Instead, they premised their fee request on a 2015 survey of billing rates published in the National Law Journal.  Judge Bledsoe rejected that, saying that "the NLJ Survey does not report the specific range of hourly rates customarily charged in North Carolina for legal services of the sort Plaintiffs’ counsel provided here."  Op. ¶51.

The Business Court Said That "Typical Fees" In North Carolina For Complex Litigation Are $250-$450 Per Hour

Left without any benchmarks for what North Carolina lawyers charged as "customary rates" for complex commercial litigation, Judge Bledsoe looked to affidavits offered to the Business Court in other class action fee applications which stated that "typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour."  Op. ¶52.  He also relied on the hourly fees charged by lawyers appointed by the Business Court to serve as receivers or as counsel for receivers (which ranged from $225 to $475 per hour). Op. ¶54.

Another Important Caution For Future Fee Applications

Another deficiency in the fee application was the failure to supply detailed time records justifying the time spent.  The fee applicants instead presented only summary charts showing the total hours spent on the lawsuit.  In another caution for lawyers requesting approval of fee applications, Judge Bledsoe said:

the Court notes that attorneys’ fees’ petitions in this Court are typically supported by detailed attorney time records and advises that the Court will be reluctant to approve future petitions for attorneys’ fees lacking such evidentiary support.

Op. ¶45 & n. 8 (emphasis added).

Judge Bledsoe also said that there was nothing so special about the work done by class counsel to justify the higher hourly rate that they requested.  He said that: the nature of the work performed by Plaintiffs’ counsel "could have been performed fully by competent North Carolina counsel and that the demands of the [litigation] did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute the [litigation].  Op. ¶55.

If you think that I am being too hard on Plaintiffs' counsel, I should point out that Judge Bledsoe said he found that:

Plaintiffs’ counsel are highly-regarded, highly-experienced class action counsel that have been involved in a number of significant class action matters including matters resulting in substantial monetary recovery for the class.

Op. ¶46.

Regardless of their qualifications, in the future these lawyers (who were undoubtedly disappointed in this ruling due to their success last year in getting a $550,000 fee award approved by a different Business Court Judge) and other lawyers for class action plaintiffs expecting big fees for anticipated disclosure only settlements of marginal value might need to find some other state in which to file those claims.

No more feeding at the trough in North Carolina.

A Couple Of Other Notes On This Opinion

One of the remarkable things about this Opinion is that there were no objections to the fees sought by the attorneys for the class.  Judge Bledsoe resolved, on his own accord, to closely review and reduce the fees sought.

Second, I recognize that even class actions leading to immaterial disclosure only settlements involve the need for North Carolina lawyers to defend those claims.  So it would be a shame if those out of state lawyers filing the suits leading to these settlements were to stay away from North Carolina altogether.

 

 

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Who Knew That A Motion To Transfer Venue Could Be So Complicated?

North Carolina cases that are filed in an "improper county" can be transferred to the "proper county" if the "defendant, before the time of answering expires, demands in writing that the trial be conducted in the proper county."  N.C. Gen Stat. §§1-83.

Multiple Claims With Different Venue Requirements

Well, what if there's a multiple count complaint, and only one of the claims was filed in an "improper county?"  That was the situation dealt with by Judge Robinson last week in Aldridge v. Kiger, 2016 NCBC 83.

Plaintiff a resident of Union County, sued the Defendants, including a corporation and an LLC which were based in Mecklenburg County, in Union County.  If there wasn't a specific venue provision applicable to the claims, the case was appropriately filed in Union County.  That would be so per G.S. §1-82, which says that an "action must be tried in the county in which the plaintiffs or the defendants, or any of them, reside at its commencement."

Dissolution Claims Have Their Own Venue Requirement

But Plaintiff's county of residency didn't control, because his complaint included a claim for dissolution of the corporate Defendant.  That claim has a specific venue provision which applies to it.  That provision isn't in Subchapter 4 of Chapter 1 of the General Statutes (G.S. §§ 1-76 to -87), where most of the provisions relating to venue are contained.

Instead, there is a provision regarding proper venue for corporate dissolution claims buried in the North Carolina Business Corporation Act.  Section 55-14-31(a) says that:

Venue for a proceeding to dissolve a corporation lies in the county where a corporation's principal office (or, if none in this State, its registered office) is or was last located.

Maybe you were aware of that provision.  I wasn't, and the attorneys for the Plaintiff obviously weren't either.

So Judge Robinson had no choice but to transfer the venue of the dissolution claim from Union County to Mecklenburg County.  But what about the other claims, which were properly venued in Union County?  Should they stay there?

The Court Did Not Sever The Claims So As To Let the Properly Venued Claims To Remain In The County Of Filing

Rule 42(b)(1) of the NC Rules of Civil Procedure allows the trial court to sever claims and it specifically speaks to venue considerations.  It says:

The court may in furtherance of convenience or to avoid prejudice and shall for considerations of venue upon timely motion order a separate trial of any . . .  number of claims.

While that Rule would seem to allow a severing of the claims, with one to be transferred to Mecklenburg County and the others to remain in Union County, Judge Robinson found the outcome to be dictated by one of the other venue statutes.  Section 1-87(a) of the General Statutes says that:

When a cause is directed to be removed. . .  all other proceedings shall be had in the county to which the place of trial is changed,

He ruled that  "[b]ecause all claims were brought in a single action in Union County , and Union County is an improper venue for the judicial dissolution claim, the entire action must be transferred to Mecklenburg County."  (emphasis added).

For those of you familiar with North Carolina geography, you know that there is not much inconvenience to the Plaintiff in having to litigate all his claims in Mecklenburg County as opposed to Union County.  Those two counties are right next to each other. The courthouses are about 25 miles apart!  The inconvenience is even less, since the case is in the Business Court, and will be overseen by the same Judge until conclusion.

It's hard to see how the Defendants will see this "win" as accomplishing anything much.  They might have thought that they would succeed in getting a dismissal of the case due to improper venue, but "North Carolina case law is clear that a motion to dismiss based on improper venue made pursuant to Rule 12(b)(3) shall be treated as a motion to transfer, rather than a motion to dismiss."  Op. ¶14 (citing Coats v. Sampson Cty. Mem’l Hosp., Inc., 264 N.C. 332, 334, 141 S.E.2d 490, 492 (1965)).

Protecting In-House Counsel From Having To Be Deposed

There a probably few things in legal practice as annoying as getting a Notice of Deposition for your client's in-house counsel.

Are you willing to pursue a Motion for a Protective Order to prevent the deposition?  The Defendant in a case before the Business Court tried that, but its Motion was denied in an Order and Opinion last week from Chief Judge Gale, in Edison v. Acuity Healthcare, 2016 NCBC 82.

The proposed deponent is general counsel and vice president of compliance and risk management for Defendant Acuity  The Defendant, in moving for a Protective Order, said that her deposition would be pointless because it "would be nothing more than a series of objections and instructions to [her] not to answer."  Op. ¶10.

The Shelton Rule

The Defendant premised this Motion on something called the "Shelton rule."  That "rule," if indeed it is a "rule," came from the federal appellate court decision in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986).  The rule provides some protection to an attorney who is to be subjected to a deposition.  The Shelton Court held that a party asking to take the deposition of opposing counsel had to show that:

(1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case.

Op. 58.

No North Carolina appellate court (federal or state) has adopted the Shelton approach, although it has been followed by two federal district courts in North Carolina.  Op. 13.  (citing CTB, Inc. v. Hog Slat, Inc., No. 7:14-CV-157-D, 2016 U.S. Dist. LEXIS 39024, at  *16–19 (E.D.N.C. Mar. 23, 2016); N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83, 85–86 (M.D.N.C. 1987)).  It was also followed by former Business Court Judge Murphy (in Blue Ridge Pediatric & Adolescent Med., Inc. v. First Colony Healthcare, LLC, 2012 NCBC 45).  I wrote about that decision when it was decided four years ago.

Does The Shelton Rule Apply To In-House Counsel?

The Plaintiff argued that the restrictive Shelton rule should not be applied to in-house counsel.  Some Courts have so ruled (cited in Op. 15).  Judge Gale rejected that position, stating that he discerned "no policy reasons that should prevent the Shelton rule from extending to in-house counsel" depending on the objective of the deposition.  He might take a different position "when a deposition targets only litigation strategies rather than necessary, factual information."  Op. 16.

The proposed in-house counsel deponent had been identified by another corporate employee, in a Rule 30(b)(6) deposition, as "the person who could best speak to certain clinical care standards and to consistency among Acuity's hospitals."  Op. 18.

Given her knowledge of facts relevant to the litigation, coupled with the lack of any "evidence . . . showing that she has been substantially involved with overseeing the litigation in this matter,"  (Op. 17), Judge Gale denied the Motion for a Protective Order.

The denial of the Motion doesn't mean that the Court left the Plaintiff to run roughshod over any matters known to the witness that would be protected by the attorney-client privilege.  Judge Gale said that the Defendant could "assert the attorney–client privilege on a question-by-question or subject-by-subject basis, as appropriate, during the deposition."  Op. 18.

Has The Business Court Adopted The Shelton Rule?

At no point in his Opinion did Judge Gale say that the Court had adopted the Shelton rule.  But the last time that the Business Court discussed the application of the Shelton decision (in the Blue Ridge opinion cited above), it applied the rule and quashed the deposition of an attorney who was active in the litigation (he had signed the Complaint). The party requesting the deposition said that it wanted to ask the lawyer about “advice, communications, and receipt of documents [that are] the basis” of Plaintiffs’ suit.  Judge Murphy said that "[s]uch knowledge is precisely the type of information Shelton attempts to protect from disclosure by litigation counsel in a deposition."  Op. 62 (emphasis added).

The circumstances before Judge Gale last week in the Acuity case were quite different.  The lawyer had knowledge of relevant facts.  Remember that "the attorney-client privilege does not protect against the disclosure of facts."  Judge Jolly of the Business Court said that in an unpublished Order back in 2013.

So, if the in-house lawyer of your client has knowledge of the circumstances involved in the lawsuit, her status as a lawyer is unlikely to be sufficient standing alone to protect her from being deposed.

 

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Member Of A Delaware LLC? Don't Bring Claims To Inspect Books And Records, Or For Dissolution, In North Carolina's Courts

The Plaintiff in Camacho v. McCallum, 2016 NCBC 79 has to head to Delaware to litigate her claims for inspection of the records of the LLC of which she is a member, and also to seek dissolution of the LLC.

Why, even though Plaintiff is a North Carolina resident and the Defendant LLC has business operations in North Carolina?  Because the LLC in question was a Delaware LLC.  Judge Robinson ruled that:

The Delaware Code grants exclusive jurisdiction over inspection claims to the Delaware Court of Chancery.  Op. ¶24.  (It says that in Section 18-305 of the Delaware Code).

The Delaware Court of Chancery also has exclusive subject matter jurisdiction over claims to dissolve a Delaware corporation.  Op. ¶29.

The Delaware Legislature has tried to stake out exclusive jurisdiction for its Court of Chancery in other areas.  Here's an example: Section 145(k) of the Delaware General Corporation Law says, regarding which court may hear actions for indemnification or advancement of expenses, that:

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

(emphasis added).

Can Delaware Really Claim Exclusive Jurisdiction For Its Chancery Court?

Can Delaware oust other courts from deciding matters of Delaware corporate law?   And did the Delaware Legislature even really mean to do so?  My guess is probably not.  Remember that Delaware has a Court of Chancery because it divided its court system into its Superior Court, which "has statewide original jurisdiction over criminal and civil cases, except equity cases," and the Court of Chancery, which has exclusive jurisdiction over "equity cases."  So the Delaware Legislature probably meant only to make clear that inspection and dissolution actions filed in Delaware should be brought in the Court of Chancery as opposed to the Delaware Superior Court.

Delaware certainly couldn't prohibit federal courts from ruling on this type of issue per its statutory declaration of "exclusivity."  Judge Easterbrook  of the Seventh Circuit addressed this issue in Truck Components v. Beatrice Co., 143 F.3d 1057, (7th Cir. 1998) with respect to another corporate issue: the right of an officer or director of a corporation to receive advancement for legal expenses in cases making claims regarding their service to the corporation.  He said:

No state may prevent a federal court from exercising jurisdiction created by Congress. . . . Nor do we suppose for one second that Delaware set out to contract the scope  of federal jurisdiction. Section 145(k) allocates jurisdiction among Delaware courts.  Delaware maintains separate systems of courts in law and equity.  Claims based on corporate arrangements go to the Court of Chancery rather than to the law courts, where other contracts are litigated. Such an intra-state allocation has no effect on federal litigation, which merged law and equity long ago.

Id. at 1061-1062 (emphasis added).

The NC Business Court isn't alone in deferring to Delaware's self-proclaimed "exclusive jurisdiction."  So have courts in Florida, Synchron, Inc. v. Kogan, 757 So..2d 564 (Fla. App. 2nd Dist.. 2000); New York:  In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div., 1st Dept. 2016)(New York court did not have jurisdiction to order dissolution of a Delaware corporation); Pennsylvania: Intertrust GCN, LP v. Interstate Gen. Media,LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phil Ct. Comm. Pl. 2014)(no jurisdiction to order dissolution of a Delaware corporation); and Vermont: Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009 Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. 2009)(same).

California has applied its own statute regarding inspection of corporate records to a Delaware corporation.  Havlicek v. Coast-to-Coast Analytical Services, 39 Cal. App. 4th 1844  (Cal App., 2nd Dist. 1995).  And notwithstanding the Raharney case cited above, New York has done the same, in Sachs v. Adeli, 26 AD 3d 52, 55 (N.Y. App. Div., 1st Dept. 2005).

How Can North Carolina Members Of A Delaware LLC Avoid Having To Bring Claims In A Delaware Court?

It's a good juncture to point out that the persons forming a Delaware corporation can specify in its bylaws that certain claims (those involving the internal affairs of the corporation) must be resolved exclusively in the North Carolina Business Court.  The Court of Chancery so ruled in September 2014.

So, in the absence of such a provision, claims for inspection of books and records and for dissolution (being the internal affairs types of claims that the Chancery Court said could be the subject of a forum selection clause) have to be brought in Delaware.

If you are a North Carolina lawyer creating a Delaware LLC or Delaware corporation for a North Carolina client, you may want to include a North Carolina forum selection provision in the Bylaws or Operating Agreement.  That way you won't have to explain down the line to the client why she has to pursue her claim to inspect corporate or LLC records (or dissolution) in Delaware.

You'll remember that North Carolina (like probably every state, has its own statute permitting LLC members the right to inspect the LLC's records.  That statute applies "only to members of an LLC formed under the North Carolina [Limited Liability] Act."  Op. ¶22.  So a member of a Delaware LLC has no inspection rights under the North Carolina statute.


 

 

 

 

Can You Compel An Insurance Carrier Representative To Attend A Mediation In Person?

You've undoubtedly been in a mediation where the lawyer on the other side has asked for a break so she can call her client's insurance carrier in order to get a response to your latest settlement offer.  You wait -- reliant on her summary of your devastating statement in the mediation about how the carrier will have to pay out to the policy limits after the verdict -- but your demand is rejected.

If only that insurance representative had been there to hear you, rather than getting a watered down version of your position.  Can you get a Court to order that an insurance representative attend the mediation in person?  What do the mediation rules say about a physical attendance at mediation?

Well, they are pretty clear.  Rule 4 of North Carolina's Revised Rules Implementing Statewide Mediated Settlement Conferences designates an "insurance company representative" as a person who "shall attend a mediated settlement conference."  It also specifies that: 

Each such carrier shall be represented at the conference by an officer, employee or agent, other than the carrier's outside counsel, who has the authority to make a decision on behalf of such carrier or who has been authorized to negotiate on behalf of the carrier and can promptly communicate during the conference with persons who have such decision-making authority.

But the Rules don't specifically give a Court the power to order attendance by an insurer representative.  Judge McGuire nevertheless ruled in an unpublished Order last month in Elliott v. KB Home North Carolina, Inc. that the Business Court "has the requisite authority to issue an Order to compel [an insurance carrier to mediation]."  Order ¶9.

He found that power in NC appellate decisions "which have recognized the discretion of the trial court to issue sanctions against parties and those obligated to appear in mediation under the Mediation Rules, but who failed to appear without good cause."  Order ¶9.  Judge McGuire said that "[i]t follows from these cases that the Court has the authority to issue an order to compel attendance at a mediated settlement conference."  Id.  Decisions from Courts in California and West Virginia bolstered his conclusion.  Order ¶10.

If you have that Order in your pocket, how easy is it to get the Business Court to order the representative of an insurance carrier to attend a mediation?  It's most likely tough.  The circumstances of the Elliott case were pretty unique.  The parties had met for mediation four times.  Three insurance carriers had potential liability for Plaintiffs' claims.  A fifth mediation was on the horizon at which the parties said a "global resolution" could not be reached without all carriers being in the room.  One carrier had said that its representative would appear.  That carrier had attended all four of the previous sessions.  Another carrier, whose representative had appeared at two of the previous mediations, opposed the requirement that it attend again.  The third carrier said that its representative would be on vacation during the scheduled fifth mediation, but that he could be available by telephone.

Judge McGuire recognized the costs that the carriers would incur by attending and that they had all attended at least some of the previous mediations, but said that:

the spirit of the Mediation Rules requires that the necessary parties continue to participate in the mediation process until either a resolution has been reached or the mediator has determined that an insurmountable impasse has occurred.

Order ¶10.

Judge McGuire's Order required the attorneys for all three carriers to attend what will hopefully be the final mediation session. and for representatives of two of the carriers to appear in person.  The representative who had an already planned vacation?  He doesn't have to appear in person, but was ordered to be available by telephone "from the starting time of the mediated settlement conference until such time as the mediator declares the mediation closed."  Order ¶14. That requirement could still ruin a vacation.

 

 

 

Does A Petition For Discretionary Review Divest A Trial Court Of Jurisdiction?

The place where a a trial court's jurisdiction over a case on appeal meets the competing jurisdiction of the appellate court over that same case is is a busy intersection.  It is often hard to tell when the trial court no longer has the jurisdiction to make rulings in a case that has been appealed. That power was the issue in two rulings from Business Court Judge Robinson, one in a published Opinion, in SED Holdings, LLC v, 3 Star Properties, LLC, 2016 NCBC 62, and the other in an unpublished Order in that case which followed several weeks later.

The General Rule And Its Exception

The "general rule", as observed by Judge Robinson, is that "an appeal divests the lower court of jurisdiction."  Op. ¶33.  So you would think that once an appeal is filed (and docketed) that the trial court is powerless.  But, that's not so:

the lower court nonetheless retains jurisdiction to take action which aids the appeal, and to hear motions and grant orders, so long as they do not concern the subject matter of the suit and are not affected by the judgment appealed from.

Id.

In the situation before Judge Robinson  last month in the SED case there were two separate appeals pending.  Neither were appeals from rulings of the Business Court, but were from rulings of the Superior Court for Durham County, made during the extended period of time before the case was designated to the Business Court.

Appeal Number One 

Appeal #1 is a long running appeal.  At the time of Judge Robinson's ruling the Court of Appeals had affirmed the trial court's grant of a preliminary injunction and its denial of a Motion to Dismiss.  Those appellate rulings were the subject of a PDR (a Petition for Discretionary Review) pending before the NC Supreme Court.

Appeal Number Two

Appeal #2 was filed this year, and has yet to be ruled on by the COA.  It is an appeal of several orders issued by the trial court holding the Defendants in civil contempt for not complying with the injunction that was the subject of Appeal #1. The Defendants are arguing that the trial court lacked jurisdiction to find them in contempt while the first appeal was pending.

Did The Business Court Still Have Jurisdiction Given The Two Appeals?

Whether the Business Court still had the authority to deal with the Plaintiff's Motion that he enter a mandatory injunction against a recently added Defendant (Charles A. Brown & Associates, PLLC) was the question faced by Judge Robinson.  Did he have any jurisdiction over the case with the two pending appeals? 

Appeal #2 was pretty easy to knock down as an impediment to the Business Court's jurisdiction.  Judge Robinson said that:

the issues presently before it are not embraced within the issues presently before the Court of Appeals in the [Appeal #2] and, thus, do not divest this Court of subject matter jurisdiction to consider and decide the Motion relating to newly added defendant Charles A. Brown.

Op. ¶32.

The Effect of A Petition for Discretionary Review On A Trial Court's Jurisdiction

But the rulings that were the subject of Appeal #1 were fundamental to a North Carolina court having jurisdiction over the entire case, since they concerned the validity or invalidity of a forum selection clause dictating that the case be litigated in Harris County, Texas.  The ruling from the Court of Appeals in Appeal #1 had affirmed the trial court's ruling that the forum selection clause was invalid.

The NC Supreme Court hadn't ruled on the PDR before Judge Robinson's first ruling.  I've observed in the past that your chances of getting the state supreme court to grant a PDR are on the same level as finding a four leaf clover.

Judge Robinson said:

with regard to Defendants' filing of the PDR, the Court concludes that, absent a motion to stay filed with and granted by the appropriate court, the filing of a petition for discretionary review with our State's highest court, by itself, does not divest the trial court of jurisdiction to consider matters after the Court of Appeals has determined a matter on appeal and has issued its mandate.

Op. ¶26.  By the way, what is the "appropriate court" in which to file a Motion to Stay?  Rule 8 of the North Carolina Rules of Appellate Procedure, titled "Stay Pending Appeal" says that:

After a stay order or entry has been denied or vacated by a trial court, an appellant may apply to the appropriate appellate court for a temporary stay and a writ of supersedeas in accordance with Rule 23.

Judge Robinson probably assumed that the NC Supreme Court would do the expected thing and deny the PDR.  Or he might have felt bound to follow the mandate from the Court of Appeals affirming the trial court's ruling that the forum selection clause calling for litigation to take place in Texas was invalid..  An "inferior court must follow the mandate of an appellate court in a case without variation or departure."  In re RAH, 641 S.E.2d 404, 407 (2007). 

But a few weeks after Judge Robinson delivered the published Opinion in 2016 NCBC 62, the NC Supreme Court did the nearly unthinkable and granted the PDR.  That made all the difference to Judge Robinson.  He held that the Business Court had been "divested of jurisdiction to proceed with the Injunction Hearing" because of the granting of the PDR.  Order ¶10.  That sua sponte reversal from Judge Robinson came in an unpublished Order.

So what Should You Do If You Don't Want The Trial Court To Rule Because Of Your Pending PDR?

So what do these rulings mean about the vitality of an NC Superior Court's jurisdiction in a case that is the subject of a pending PDR?  That if you want the Superior Court to refrain from ruling in your case in which a PDR is pending, that you should move for a stay "in the appropriate court" or argue that the PDR will be granted and that the Superior Court therefore no longer has jurisdiction and should not move forward in the case until the NC Supreme Court has made its ruling.  It's probably safer to request a stay given the four leaf clover nature of the granting of PDRs.

You might be wondering whether this case has been "over-appealed." Maybe it has.  In addition to the two appeals already pending, the Defendant has also appealed from Judge Robinson's ruling in 2016 NCBC 62.  That's the third appeal.  Even before that, it had filed a Petition for Rehearing in the COA following the Court of Appeals' decision.  (Good grief Charlie Brown).

But given that the successful PDR is likely to generate an opinion from the NC Supreme Court on the validity of a forum selection clause, all those appeals might be worthwhile.  Maybe the Appellants will ultimately be successful.