North Carolina Business Litigation Report : North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

It might seem self-evident that the Business Judgment Rule applies to decisions made by the managers of a limited liability company, but if you were looking for a North Carolina case to cite on that point before last week, you wouldn't have found one.

But now, we have Mooring Capital Fund, LLC v. Comstock North Carolina, LLC, a November 13, 2009 decision from the North Carolina Business Court. The case addresses not only the business judgment rule, but also two other significant aspects of litigation involving LLCs.

The Business Judgment Rule And LLC Managers

Mooring Capital, a minority member of Comstock North Carolina, LLC, filed a lawsuit seeking an accounting and making derivative claims for a diversion of funds by the majority member and manager of the LLC, CHCI. CHCI contended that it was entitled to dismissal because it had limited liability as a member-manager.

Judge Jolly agreed that "member-managers generally are shielded from liability when acting as LLC managers," Op. ¶29, and further held that "the managers of an LLC may also be entitled to the protections of the 'business judgment rule.'" Op. ¶30. The Court based the business judgment rule portion of its ruling on G.S. §57C-3-22(b), which states that an LLC manager is bound to act "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company."

The Court nevertheless denied the manager's motion to dismiss, holding that "while the business judgment rule limits the liability of member-managers when acting on behalf of an LLC, this liability is not limited when managers act outside the scope of managing the LLC." Op. ¶33. Dismissal of Plaintiff's claims wasn't warranted because the Complaint made allegations that the manager had taken "actions clearly in conflict with the interests of the LLC" and had "entered into transactions from which" the manager had "derived an improper personal benefit." Op. ¶36. Those included unauthorized distributions from the LLC to the manager and entities with which the manager it was affiliated.

Derivative Actions On Behalf Of LLCs, And Stays Pending Investigation

There are at least two other LLC-related litigation points worth noting in Mooring Capital. One involves the standing of an LLC member to make a derivative claim, the other involves the right of the LLC to a stay of the action while it investigates the charges.

On the first point, although the LLC Act doesn't specify that a demand be made before a member can file a derivative action, the statute does require that the complaint "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the managers, directors, or other applicable authority and the reasons for the plaintiff's failure to obtain the action, or for not making the effort." N.C. Gen. Stat. §57C-8-01(b).

The Defendant claimed the Plaintiff hadn't made sufficient effort to have the LLC take action. The Court disagreed, referencing Plaintiff's contentions that "its minority status alone show[ed]" that it lacked the authority to cause the LLC to bring suit," and furthermore that it had made "repeated requests for financial information" to which the LLC had not responded.

On the point of the LLC's right to a stay pending its investigation, the LLC had retained PriceWaterhouseCoopers to investigate some of the matters raised by Plaintiff. The LLC said that it therefore was entitled to a stay per G.S. §57C-8-01(b). The Court denied the stay, however, noting that it had concerns about the scope of the accounting firm's investigation. The engagement letter between the LLC and PWC said that the accounting firm would perform a review of the LLC's financial statements, but did not speak to an investigation of other allegations made by the Plaintiff in its Complaint.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Brief in Support of Motion to Stay

Brief in Opposition to Motion to Stay

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It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

• “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
• “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
• “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

• “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
• “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
• “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

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The march towards paperless courts continues in North Carolina. The latest step is the elimination by the Court of Appeals of paper copies of oral argument calendars.

You remember those. They came on yellow paper and listed all the cases to be heard during a particular week and the panels hearing them. The calendars also included the cases to be decided without oral argument, as permitted by Rule 30(f) of the North Carolina Rules of Appellate Procedure.

A few months ago, without fanfare, the Court of Appeals stopped sending out oral argument calendars.

That change came with the implementation in June of a new docketing system. The system will send electronic notification of oral argument hearings to attorneys who provide email addresses. The Court of Appeals will pick up counsel's email address from the Identification of Counsel page in the Record on Appeal.

While glitches in the notification system are being worked out, the Court is providing telephone notice to counsel of oral argument hearings a week or two in advance of the hearings. If you now are worried that you might be on a calendar in November but haven't gotten notice yet, here's the link to the calendar for that month. If you want to see the full lineup of cases set for hearing during a particular term of court, the calendars will continue to accessible on line.

The opinions of the Court will continue to be sent via regular mail.

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Judge Albert Diaz of the North Carolina Business Court was nominated today by President Obama to serve on the Fourth Circuit Court of Appeals.

Senators Kay Hagan and Richard Burr both issued glowing statements about Judge Diaz and North Carolina Court of Appeals Judge Jim Wynn, who was also nominated for the federal appellate court.

In the press release issued by the White House, President Obama said that the two Judges "have been exceptional public servants for the people of North Carolina." 

The Fourth Circuit has fifteen seats for active Judges, numbered in the order in which they were originally filled. Judge Wynn, if confirmed, will take Seat 7, formerly held by Judge J. Dickson Phillips, Jr. of North Carolina. That seat has been empty for fifteen years, longer than any other judgeship in the country.  It's actually the second time that Judge Wynn has been nominated for that seat. He was also nominated by President Clinton in 1999.

Judge Diaz will take Seat 11 if confirmed. That seat was formerly held by Judge William Wilkins of South Carolina and is still warm, as Judge Wilkins retired only a couple of years ago, in 2007.

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There were three decisions yesterday from the Court of Appeals worth a quick mention for the business litigator (and the baseball fan).

First, Fischer Investment Capital, Inc. v. Catawba Development Corp. is a piercing the corporate veil case. And not only that, a reverse piercing the corporate veil case. In a reverse piercing case, instead of a court disregarding the corporate entity to reach the assets of an individual owner, the court reaches the assets of the entity to satisfy an obligation of the individual owner. In a first impression holding, Judge Ervin rejected the argument that reverse piercing is limited to personal jurisdiction situations, and held that it also "is a recognized legal theory in North Carolina for substantive . . . purposes."

Second, in Telerent Leasing Corp. v. Boaziz, the Court allowed a recovery of attorneys fees that were more than 15% of the amount recovered by the Plaintiff, which the Defendant argued were in excess of the amount permitted by G.S. Sec. 6-21.2. The Court held this to be justified because the Plaintiff had expended attorneys' fees pursuing recovery through "multiple actions" and in "multiple venues." Those included fees incurred in a related out of state bankruptcy proceeding.

Finally, the case involving baseball is Reese v. Mecklenburg County. The Court held that the leasing of land by Mecklenburg County to the Charlotte Knights baseball team where the team would build a baseball stadium was a proper public purpose. That was true even though the team would own the stadium during the term of the lease.

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If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren't enough to invoke the mandatory jurisdiction of the Court. 

There was a short order on that subject yesterday in CCE Development Corp. v. Jebara Investments, LLC, in which the Court held that "[p]iercing the corporate veil alone is insufficient to establish mandatory jurisdiction." 

There was a similar ruling earlier this year, in Robert N. Pulliam, CPA/ABV PLLC v. Gardner, where the Court held "the presence of veil piercing allegations are not, in and of themselves, grounds for jurisdiction under N.C. Gen. Stat. § 7A-45.4(a)."

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There were ten new cases designated to the Business Court during October 2009. They include two lawsuits against former officers and directors of Wachovia regarding the collapse of Wachovia (Browne and Harris).

Abraham v. Jauregui (Onslow)(Jolly): fraud claims by 77 plaintiffs involving coastal real estate developments.

Blackburn v. L.E. Wooten & Company (Wake)(Jolly): claims regarding alleged breach of shareholders agreement, failure to pay dividends, frustration of reasonable expectations. The claims are similar to those made in the Kwong case, below.

Browne v. Thompson (Forsyth)(Jolly): claims by holders of Wachovia stock against certain officers and directors of the bank, as well as its auditors, for securities fraud and accounting misstatements relating to the collapse of Wachovia.

Building Union Investment And Local Development Fund Of America Trust v. Bromont Investments, Inc. (Mecklenburg)(Diaz): claims arising from foreclosure of defendants' membership and management interests in an LLC, and defendants' alleged refusal to turn over the assets, books, and records of the LLCs involved.

Danius v. India Abroad Publications, Inc. (Mecklenburg)(Diaz): defamation lawsuit against internet news organizations based in India, who allegedly reported without basis that one of the plaintiffs had abused his wife in a dispute over her dowry, and that he had attempted to murder her.

Franklin County Board of Education v. North Carolina Department of Revenue (Wake)(Tennille): petition for judicial review of a final agency decision in a contested tax case. The issue is whether the County Board of Education is entitled to a refund of sales and use paid in connection with construction projects when the actual payment was not made directly by it, but instead by Franklin County. The Administrative Law Judge denied the Board's refund request, ruling that the Board "cannot claim refunds of taxes which it did not pay."

Harris v. Wachovia (Mecklenburg)(Jolly): claim by Wachovia shareholder that Wachovia and its officers and directors  made incorrect statements of material fact and failed to disclose material information in connection with Wachovia's acquisition of Golden West Financial Corporation and concerning Wachovia's financial condition and prospects thereafter.

KLATMW, Inc. v. Electric Systems Protection, Inc. (Wake)(Tennille): allegations of breaches of asset purchase agreement, and dispute between buyer and seller regarding indemnification rights and right to escrowed funds.

Kwong v. L.E. Wooten and Co. (Wake)(Jolly): claims regarding alleged breach of shareholders agreement, failure to pay dividends, frustration of reasonable expectations. The claims are similar to those made in the Blackburn case, above.

McKee v. James (Robeson)(Diaz): minority shareholder lawsuit against persons who allegedly obtained a majority interest in the corporation based on fraudulent misrepresentations. The complaint seeks damages and dissolution of the corporation which manufactures "McKee Craft" boats, which the Complaint says are "unsinkable." That's what everyone thought about Wachovia, too.

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I had an out of state lawyer call me, concerned, a few weeks ago. He was defending a client in his home state in a case in which the plaintiff's counsel had obtained commissions to take depositions in North Carolina. The depositions were scheduled to begin in just a few days, and he was concerned that he needed to admitted pro hac vice, in a hurry.

My reaction was that this was unnecessary. It was an out of state case. Rule 5.5(c)(2)(B) of North Carolina's Revised Rules of Professional Practice says that it's not the unauthorized practice of law to take a deposition in North Carolina if the "matter . . .  arises out of or is otherwise reasonably related to the lawyer's representation of a client in a jurisdiction in which the lawyer is admitted to practice." Moreover, it was the other side that had gotten the necessary commission and subpoena to take the deposition. The lawyer who called just planned on attending and possibly asking some questions after the other lawyer finished with his questions.

But after I looked at the situation a little bit I wasn't so sure. One of the North Carolina depositions was to be taken in Wake County, where there is a specific Local Rule on point. Wake County Local Rule 13.1 says that "out-of-state attorneys seeking to take depositions of Wake County residents to be used in actions pending in other jurisdictions must be admitted pro hac vice unless local counsel has been associated."

That's pretty broad. It might even cover an out of state lawyer taking the deposition of someone who agreed to appear voluntarily, without a subpoena. And are you "seeking to take depositions" if you are not the lawyer who compels the appearance of the witness, but you simply show up and ask some questions? And what about "unless local counsel has been associated?" Does that mean that NC counsel has to take the deposition or at least attend it, or is it enough if NC counsel simply obtains the issuance of the commission?

Given all these questions, we went ahead and got the lawyer admitted out of an abundance of caution.

I did a quick spot check of Local Rules for similar provisions. The only other county I'm aware of with an applicable rule is Mecklenburg County. The local rule there, 18.2(f),says "[i]f the out-of-state attorney intends to make an appearance in North Carolina in connection with this matter (such as attending the deposition)," the lawyer must be admitted pro hac.

There are occasional quirky local requirements of a different nature regarding pro hac admissions, like including a statement in the motion confirming payment of the $225 admission fee, which Guilford County Local Rule 5.12 requires. (All of the local rules for North Carolina's counties are available here, it's worth checking the pertinent rules if you are seeking or considering a pro hac admission).

Don't forget that when a lawyer is admitted pro hac here, the NC attorney responsible for the admission has to obtain a completed Pro Hac Vice Registration Statement, and file that with the state bar within thirty days of the admission. Failure to do so is grounds for administrative suspension of the NC attorney from the practice of law.  27 NCAC Subchapter H, Section .0101(b).

The North Carolina Bar has has an FAQ page on pro hac admissions which has a lot of useful information. The statute governing pro hac admissions is N.C. Gen. Stat. §84-4.1.

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Here are a few pictures of the new North Carolina Business Court in Raleigh, thanks to Judge Jolly and his staff giving me a quick tour yesterday. The Court moved to the Campbell Law School's new Raleigh building on October 1st.

You'll see that there is a broad stretch of windows behind the Judge's bench, which look out on Hillsborough Street. Most new courtrooms don't seem to have windows. In addition to letting in some natural light, these will prove useful for daydreaming during tedious trial moments.

Also, there are two colorful, modern paintings of downtown Raleigh in the courtroom. Those aren't your typical courtroom art of former judges holding law books.

Beyond that, the courtroom has all the technological bells and whistles of the Business Courts in Raleigh and Charlotte.

[If you can't see the slideshow, try this link: http://www.flickr.com/photos/43856857@N05/sets/72157622518330473/show/

Created with Admarket's flickrSLiDR.

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