An Important Tip On Appealing A Decision From The NC Business Court

The Business Court is electronic.  Paper copies of documents are not filed with the Business Court.  So when you e-file a Notice of Appeal, is that sufficient for purposes of Rule 3 of the NC Rules of Appellate Procedure?

Let's look at the Rule first.  It says that:

Any party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule.

N.C. R. App. Pro. 3(a)(emphasis added).

The Plaintiff in Ehrenhaus v. Baker, 2014 NCBC 30 wanted to file a cross appeal from Judge Murphy's decision awarding attorneys' fees to his lawyers in his lawsuit over Wachovia's merger with Wells Fargo.  If you need to be refreshed on that ruling, I wrote about it in April.

Since one of the individuals objecting to the fee award had already filed a notice of appeal, the Plaintiff had ten days after that to file his own notice of appeal.  N.C. R. App. Pro. 3(c).

The tenth day was May 2, 2014.  Plaintiff e-filed his notice of appeal with the Business Court on April 30, 2014. 

Was the notice of appeal timely?  No, said Judge Gale, as the notice of appeal was not filed with the Mecklenburg County Clerk of Superior Court until May 15, 2014.

The decision hinged on whether the e-filing, which had been delivered to the "Clerk of Court" at the Business Court, satisfied the filing requirement of Appellate Rule 3 of being directed to the "clerk of superior court."  (Note that the Business Court's electronic filing system produces a Notice of Electronic Filing which includes a reference to service on "Clerk of Court,"  which actually is the email address of the Court's law clerk in Raleigh.)

Plaintiff argued that the Business Court was a separate Superior Court within the North Carolina General Court of Justice and that he had therefore properly filed his notice of appeal with the Business Court "Clerk of Court."  Judge Gale rejected this argument, and observed that "the Business Court does not have its own clerk of court."  Op. 11 (emphasis added).

While the Court was "sympathetic" to Plaintiff's argument that he had been misled by the electronic filing system into believing that he had properly filed his notice of appeal, Judge Gale ruled that he could not "overlook the plain language of Appellate Rule 3 that requires a notice of appeal to be filed with the clerk of superior court within the time prescribed by Appellate Rule 3(c)."  Op. 13.

So Judge Gale dismissed Plaintiff's appeal.  But why did the Business Court have the authority to dismiss the appeal?  The answer is that Appellate Rule 25 "allows the trial court to dismiss an appeal if the appellant failed to give notice of appeal within the time allowed by"  Appellate Rule 3.  Landingham Plumbing & Heating of North Carolina, Inc. v. Funnell, 102 N.C. App. 814, 815, 403 S.E.2d 604, 605-06 (1991).

I don't know why Judge Gale didn't reference Business Court Rule 8.1 in his Opinion.  That Rule makes it clear that all filings with the Business Court must be made  with the Clerk of Superior Court in the judicial district where the case is pending.  It says that "all documents and materials submitted to the Business Court shll also be filed wihin five (5) business days with the Clerk of Superior Court in the judicial district in which the matter is pending."

Is an appeal of this ruling about an appeal a possibility?  Maybe, as the Plaintiff may have a legitimate argument that he was misled by the Business Court's filing system.  Judge Gale observed that the Court has corrected the "default" in the system that recognized the Court's "Clerk of Court."  He said that:

Prior to the briefing on the Motion, the court was not cognizant that the Notice of Electronic Filing email in this and other actions refers to the notice as having been sent to “Clerk of Court” by email to raleigh.clerk@aoc.nccourts.org.  That email address is for the law clerk resident in the Raleigh chambers of the Honorable John R. Jolly, Jr., Senior Special Superior Court Judge for Complex Business Cases. The court believes this application was added as a default by the system administrator. This default has now been removed.

Op. 12.

So if you are filing an appeal from a Business Court ruling, make sure to file a paper copy in the office of the Clerk in the County in which the case was filed within the time period set in Appellate Rule 3.

 

 

 

 

 

Pro Se Defendant Wins Trial On Breach Of Fiduciary Duty Claims In Business Court

When I was a young pup preparing to go to court against the uncommon adversary who was proceeding without a lawyer, I would joke that "I hope I don't lose."  Luckily, I never did.

But the Plaintiff in Seraph Garrison, LLC v. Garrison, 2014 NCBC 28, didn't have the same good luck.  It lost a case, following trial by Judge Murphy, to a Defendant who had no lawyer and didn't even bother to appear for trial.

Defendant Garrison was the CEO and a member of the Board of Directors of Garrison Enterprises, Inc.  He was sued derivatively for breaching his fiduciary duty to the corporation.  The alleged breaches included:

  • failing to pay payroll taxes due from the corporation.
  • failing to make 401(k) contributions.
  • executing a significant contract with an outside vendor without obtaining Board approval.

All of these things were uncontested at trial, but the defalcating Defendant escaped without any liability without even appearing at trial.  How so?

Judge Murphy said that:

Plaintiff has failed to present evidence that Defendant’s decision not to pay payroll taxes and 401(k) contributions was not in good faith, beneath the standard of care an ordinarily prudent person in a like position would exercise under similar circumstances, or not in a manner Defendant reasonably believed to be in the best interests [of[ the corporation.

Op. ¶38.

The evidence was that the corporation was in a cash crunch, and the Defendant had chosen to pay employees rather than the IRS obligations in order to keep the business running.

And as to the unapproved contract,  the Judge said that there was"insufficient evidence before the Court to support a finding that Defendant was obligated to seek approval before entering into contracts on behalf of" the corporation.  Op. ¶41.

But the Court found that the Defendant had breached his fiduciary duty by misleading the Board on the contents of the contract.  He had presented the Board with a previous unexecuted draft of the contract which was more favorable than the one he ended up actually signing.  No damages were awarded for this breach, because the Court ruled that the Board had not relied on the misrepresentation.

In any event, this unrepresented Defendant escaped scot-free.  There was no showing of the Board relying on his misrepresentation to its detriment.

Just a caution:  If you are thinking that you can proceed without a lawyer in the Business Court because of this case, you are wrong.  Don't do it.  But to be fair to this Plaintiff, who lost against a pro se rival, it was more than good luck for the Defendant.  He was represented by counsel until his lawyer withdrew, shortly before trial.

 

Business Court Refuses To Admit University Of Maryland's Lawyers On A Pro Hac Basis

The lawsuit filed by the Atlantic Coast Conference against the University of Maryland continues to percolate in the North Carolina Business Court.  But the University will have to proceed without its chosen attorneys, as the Court last week refused to admit them on a pro hac vice basis.  The decision came in an Order in Atlantic Coast Conference v. University of Maryland.

If you have forgotten about the ACC's lawsuit against the University of Maryland, it was filed by the ACC to recover the $50 million exit fee it says is due from the University upon its departure from the ACC to join the Big Ten Conference.  The University disputes the validity of the exit fee, and has counterclaimed in very detailed claims for violation of antitrust laws and unfair competition.

The Maryland University was represented by a lawyer from the Maryland Attorney General's office, and two lawyers from the Milwaukee firm Foley & Lardner.  When these lawyers moved to be admitted pro hac, the ACC objected.  It argued that the counsel from Foley & Lardner were in violation of Rule 1.7 of the North Carolina Rules of Professional Conduct due to their representation in other matters of Florida State, Virginia Tech, and the University of Virginia, members of the ACC, and the University of Louisville, which officially joined the ACC on July 1st.

Rule 1.7 says that "[a] lawyer shall not represent a client if the representation involves a concurrent conflict of interest."   There is a concurrent conflict of interest if:

(1) the representation of one client will be directly adverse to another client; or

(2) the representation of one or more clients may be materially limited by the lawyer's responsibilities to another client, a former client, or a third person, or by a personal interest of the lawyer. 

The ACC lawyers argued that the University of Maryland's lawyers were acting adversely to the interests of their other University clients.  One of the comments to Rule 1.7 is favorable to the University's position.  Comment 34 says that "[a] lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization."

But Comment 34 ends on a bad note for the University's argument.  It says that this qualification does not apply if "the lawyer's obligations to either the organizational client or the new client are likely to limit materially the lawyer's representation of the other client."

The University's (former) counsel argued that they could ameliorate any conflict by hiring independent counsel to take the depositions of any institution which was a member of the ACC and represented by them.  There is an ABA Opinion that supports this position, ABA Standing Committee on Ethics and Professional Responsibility, Formal Opinion 92-367, but it also says that if the "conflict is clearly forseeable, then the solution, absent client consent, is clear enough: the prospective engagement must be declined."

The Court refused to admit the University's attorneys on a pro hac basis, noting the lack of any conflict waiver, and stating that:

[w]hile it is true that a party's right to choose its own counsel is generally considered fundamental, 'an out-of-state attorney has no absolute right to practice law in another forum.'

Order ¶6.

Judge Jolly did admit pro hac an attorney from the Maryland Attorney General's office to represent the University, observing "the public policy behind permitting the attorney general of another state to practice in North Carolina, combined with the absence of direct legal authority preventing" his appearance in the case.  Order ¶11.

Is the resolution of this pro hac admission issue a victory for the ACC?  My general philosophy on efforts to preclude opposing counsel from representing a client is that you face a risk that they will be replaced by better lawyers.  In the University's situation, that seems to be unlikely.  Their now unadmitted counsel looked like a powerhouse in the area of sports law.  So score this as a win for the ACC.  But it's early in the first quarter.

 

Welcome Judge Bledsoe To The NC Business Court

Charlotte attorney Louis A. Bledsoe, III has been appointed by Governor Pat McCrory as a Special Superior Court Judge, and NC Supreme Court Justice Sarah Parker has designated him as a Special Superior Court for Complex Business Cases, which means he will be handling cases in the Business Court.

The Governor's press release said this about Judge Bledsoe:

Louis Bledsoe’s extensive experience in business and commercial litigation makes him well-suited for the Business Court. He has developed a great reputation as a litigator and has earned the trust and respect of many members of the Bar. He will be an outstanding judge for our state’s Business Court.

I don't often find myself in agreement with what Governor McCrory says, but he is absolutely right about Judge Bledsoe.  He will be an excellent Business Court Judge.  Until crossing to the other side of the bench, Judge Bledsoe was a partner at Robinson, Bradshaw & Hinson, which is undoubtedly one of the best law firms in the State of North Carolina.

New Judge Bledsoe will sit in the Charlotte Business Court.  He begins his judicial career with a pretty full docket of cases.  It looks like all of the cases previously being handled by Judge Murphy, who was until yesterday the only Business Court Judge in Charlotte, already have been assigned to Judge Bledsoe.  Judge Murphy's term on the Court ended June 30th.

I'm not sure how much longer it will be available, but here is a link to Judge Bledsoe's bio at Robinson Bradshaw.

Congratulations to Judge Bledsoe on a well-deserved appointment.  He has been a reader of this blog and I hope he will continue.

Complying With The Rules Is Important In The Business Court

There's an ominous sounding sentence in a Business Court decision this week:

A party practicing before the North Carolina Business Court should take the deadlines imposed by its orders and the rules of practice very seriously.

Estate of Capps v. Blondeau. 2014 NCBC 24 at 36.  It is so ominous sounding that you would expect that sentence to be followed by punishment of the non-compliant party.  But Judge Jolly exercised mercy over the party which hadn't followed the rules.

What was the rule violation?  Two of the Defendants in the case (the Knights) hadn't filed their brief in support of their motion for summary judgment until more than 24 hours after the filing deadline set by the Court in its Case Management Order (requires all motions to be accompanied by a brief).  Also, the Knights never filed with the Court the exhibits referenced in their brief (BCR 15.5 requires a party to provide documents supporting allegations of fact in a brief).  Adding to their disregard of the Business Court Rules, the Knights never filed their Motion with the Wake County Superior Court (required by BCR 8.1)and they did not pay the required twenty dollar motion fee (dictated by N.C. Gen. Stat. § 7A-305(f)).

Plaintiffs demanded that the Business Court summarily deny the Knights' Motion for Summary Judgment due to the rules violations, which is permitted under BCR 15.11.  That rule says that:

[t]he failure to file a brief or response within the time specified in [BCR 15] shall constitute a waiver of the right thereafter to file such a brief or response.  . . .   A motion unaccompanied by a required brief may, in the discretion of the Court, be summarily denied.

Judge Jolly, in his discretion, opted to consider the Knights' Motion for Summary Judgment notwithstanding the Rules violations.  He referenced an appellate court decision -- Hammonds v. Lumbee River Elec. Membership Corp., 178 N.C. App. 1, 15 (2006) -- as support for his holding that:

[i]n deciding whether to dismiss a filing for procedural error, courts should weigh the impact of the rule violations on the non- violating party and the importance of upholding the integrity of the rules against the broader public policy favoring the resolution of disputes on the merits.

Op. Par. 37.  He noted the "relatively short delay" in meeting the deadline and the "relatively minor impact on Plaintiffs due to the delay."  Op. 37.

But after all that procedural hoopla, Judge Jolly went ahead, considered the motion for summary judgment and denied it without much discussion. 

So the only valuable lesson out of this decision is to follow the Business Court Rules.  A complete set of thos Rules is available here.

It Depends On The Meaning Of The Word "With"

The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with."  Well, actually on the phrase "entering into any contract . . . with."

HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF).  At that time,  HCIM became the sole managing member of HAMF per an Operating Agreement.  Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .

The HAMF Operating Agreement said in Section 2.03  that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member." 

HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.  Judge Jolly observed that:

The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.

Op. ¶16.

In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the  non-managing members of HAMF, but the Court determined that their consent was not required.  Two factors guided the Court's determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.

Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).

But the Court also looked to the totality of the Operating Agreement and said that

Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties' intention to vest the authority to sell HAMF in HCIM alone. Whether such an
arrangement was inadvertent or, more likely, the result of deliberation and  bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.

Op. ¶b20.

The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF's non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF].  Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).

So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims.  And I picked up from one of the Defendants' briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs' lawsuit.

 

Collateral Estoppel Sinks LLC Members' Claim

It might seem uncontroversial that the members of a limited liability company cannot follow with a personal lawsuit for injuries after their LLC litigates, and loses, claims based on the same issues.

But it took the Business Court a while to get to that conclusion last week, in Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22.

The Plaintiffs were the member-managers of Village Landing, LLC.  The LLC had made claims against Harold K. Jordan and Co. in an arbitration asserting that HKJ had misrepresented that it would build condominiums instead of the townhomes called for under the construction contract.  It said that this had caused the LLC "great financial harm." 

Right before the arbitration began, the member-managers sued HKJ for damages.  Then, the LLC lost on those claims in the arbitration.  The arbitrator, in his Award, specifically rejected the allegations regarding the townhome/condominium issue.

Nonmutual Collateral Estoppel

The unsuccessful arbitration meant that the LLC member-managers also failed in their Business Court lawsuit, which Judge Jolly dismissed based on collateral estoppel.  In reaching that result, he observed that he was "not aware of any North Carolina precedent addressing the attempted use of nonmutual collateral estoppel against nominally different plaintiffs."  Op. ¶30.

It could be that you don't remember the term "nonmutual collateral estoppel" because you went to law school as long ago as I did.  But it "prevent[s] a plaintiff from relitigating an issue the plaintiff has previously litigated unsuccessfully in another action against a different defendant."  Op. ¶30 (quoting Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002)).

So whether nonmutual collateral estoppel applied turned on the question of whether there was an "identity of parties" between the LLC in the arbitration and the member-managers in the Business Court lawsuit.  That can be shown by the parties being "in privity," but North Carolina law is that "privity with a corporation is not established solely by one's position as a corporate officer or shareholder."  Op. Par. 34 (relying on Troy Lumber v. Hunt, 251 N.C. 624, 627 (1960).

The LLC Members Had Control Over The Arbitration

The NC Supreme Court recognized, in Thompson v. Lassiter, 246 N.C. 34 (1957), that there is a "well established exception" to the "general rule" that an identity of parties is necessary to prevail on a res judicata defense. Op. ¶¶35-36.  (Wait, you sharp eyed readers are thinking: This is a case involving collateral estoppel, not res judicata.  Judge Jolly said that "the court notes that res judicata and collateral estoppel are companion doctrines, that traditionally have shared the identity requirement." Op. ¶31). 

So, that exception, applicable to both res judicata and collateral estoppel, has four elements:

(a) control of both the original and present lawsuit, (b) a proprietary interest or financial interest in the prior judgment, (c) an interest in the determination of a question of fact or a question of law regarding the same subject matter or transactions and (d) notice of participation.

Op. ¶36.

The first element, control, "is met when a corporation is dominated by a single party or entity or is otherwise the alter ego of that party or entity."  Op.  Par. 39.  Given that the Plaintiffs were the sole member-managers of the LLC, plus their active involvement in the arbitration (by calling eighteen witnesses to testify), Judge Jolly found that the control element was met.  It probably did not help that one of the Plaintiffs had testified at the arbitration that the Plaintiffs and the LLC were "one and the same."

The second element, a proprietary interest in the prior judgment, was also met, given that the LLC was "essentially a pass though entity" and the Plaintiffs were "financially intertwined" with the LLC.  Op. ¶41.

As for an interest in the determination of questions of fact or law, Judge Jolly wrote that:

At the very core of Plaintiffs' Claims against HKJ in this matter is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing "condominiums, rather than townhouses." This was the precise issue that Village Landing litigated extensively against HKJ in the Arbitration Action, an alleged misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions of dollars in losses.  Not only did Plaintiffs have an "interest" in the Arbitrator's determination on this issue, it was central to their LLC's entire case against HKJ in the Arbitration Action – as it is in their individual action here.

Op. ¶42.

The notice element was obviously met due to the Plaintiffs' involvement in the LLC's arbitration.

What Counts In Collateral Estoppel Is ISSUES, Not Claims

The Plaintiffs argued that their personal claims were "separate and distinct" from the claims pursued by the LLC in arbitration.  It didn't make any difference.

Judge Jolly observed that "our courts have repeatedly held that 'collateral estoppel precludes the subsequent adjudication of a previously determined issue, even if the subsequent action is based on an entirely different claim.'"  Op. ¶50 (emphasis in original)(quoting Hailes v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994)).

Since the arbitration had resolved the issue of whether HKJ had misrepresented that it was building townhomes instead of condominiums, the Plaintiffs were foreclosed from pursuing claims based on that issue.

The Remaining Elements For Collateral Estoppel Were Met

Judge Jolly quickly ticked through the remaining elements of collateral estoppel.  The issue had been "actually litigated" as it was "clear that litigation of issues in an arbitration action satisfies the 'actual litigation' prong of the collateral estoppel doctrine."  Op. ¶55.  It had been "actually determined" because the Arbitration Award was a reasoned one because it directly discussed and decided the issue of misrepresentation.  Op. ¶56.  Given its centrality to the Award, it was also "necessary and essential" to the Award.  Op. ¶57.

* * *

The easiest takeaway from this case is that LLC members can't pursue their own personal claims after their LLC has already arbitrated claims resting on those same issues.

 

 

 

General Assembly May "Modernize" The NC Business Court

A bill was introduced this week in the NC General Assembly that would be entitled "An Act to Modernize the Business Court By Making Technical, Clarifying, And Administrative Changes To The Procedures For Complex Business Cases."  Here's the text of the bill.

This is a summary of the proposed changes:

Appeals From Business Court

There would be a direct appeal to the NC Supreme Court from any final judgment in a case designated as a mandatory complex business case per G.S. §7A-45.4.  Since the NC Supreme Court has yet to rule in a case that originated in the Business Court (as far as I know) even though the NC Court of Appeals has ruled in many such cases, this will result in more Supreme Court decisions in business cases. 

Changes to Cases That May Be Designated As Mandatory Complex Business Cases

One of the first posts that I wrote on this blog (way back in 2008!) was about the jurisdiction of the Business Court.  You can find it here, but this proposed bill would change things.

The proposed bill does away completely with jurisdiction over cases involving intellectual property law (currently in G.S. §7A-45.4(5)) and cases involving "the Internet, electronic commerce, and biotechnology" (currently in G.S. §7A-45.4(6))

The bill adds two new explicit categories of cases that would qualify to be designated as complex business cases:

  • One is "disputes involving trade secrets under Article 24 of Chapter 66 of the General Statutes."
  • The other is contract disputes if a few conditions are met: at least one plaintiff or one defendant must be authorized to transact business in North Carolina per Chapter 55, 55A, 55B, 57D, or 59 of the General Statutes, the claim must be for breach of contract or seek a declaration of an obligation under a contract, and the amount in controversy must be at least one million dollars.

There Would Be Cases That Must Be Designated As Mandatory Complex Business Cases

In a new twist, the proposed bill specifies certain types of cases which must be designated as mandatory complex business cases.  Call these "mandatory mandatory" complex business cases. Those are:

  1. Some cases involving tax law, like "a contested tax case for which judicial review is requested under G.S. 105-241.16" or "a civil action under G.S.105-241.17."
  2. Disputes arising under corporate law, partnership law, or LLC law where the amount in controversy is at least $5 million.
  3. Cases involving regulation of pole attachments brought pursuant to G.S.§62-350.

If a party fails to designate a "mandatory mandatory" case, the Superior Court in which it was filed can either dismiss it without prejudice or stay it until it is properly designated per proposed new Section 7A-45.4(g).

Increase In Designation Fee

The proposed bill would increase the fee for designating a case to the Business Court by one hundred dollars, from one thousand dollars to eleven hundred dollars.

But the bill doesn't fix the problem that the designation fee is not recoverable as an element of costs.  I wrote about that issue last year.

Additional Reporting On The Activity In The Business Court

The proposed bill would require the Director of the Administrative Office of the Courts to report semiannually to the Chief Justice and each member of the General Assembly on the number of cases that have been pending at each location of the Business Court for more than three years, motions pending without a ruling for more than six months after being "fully ripe for decision" and the number of cases in which bench trials were held and completed for more than six months in which no judgment had been rendered.  The report is to include an explanation from the Business Court. 

Thanks to my partner, Charles Marshall, who sent me a copy of this proposed legislation.

 

Corporate Shield Holds Up Against Creditor

There's no expression when speaking of football players to recognize a performance that hits three exceptional marks (like a hat trick in hockey or a triple double in basketball or the triple crown in baseball). 

Maybe there should be, because Jeff Bostic, who played twelve years in the NFL for the Washington Redskins and on three Super Bowl winning teams, pulled off an extraordinary triple victory yesterday in the Business Court.  He got summary judgment in three cases in which he was the Defendant: Yates Constr. Co. v. Bostic, 2014 NCBC 19; Phillips & Jordan, Inc. v. Bostic, 2014 NCBC 18; and American Mechanical, Inc. v. Bostic, 2014 NCBC 17.

All of the Plaintiffs were subcontractors on construction projects for Bostic Construction Inc., which Bostic owned.  When the company failed and they were not paid, the Plaintiffs sued Bostic personally, alleging that Bostic had engaged in constructive fraud by commingling and misusing the funds from construction loans and using those funds for personal purposes.

Those facts might give rise to a claim by a shareholder of the construction company, but each of these Plaintiffs was only a creditor.  They ran into this settled principle:

Generally, directors and officers of a corporation are not liable, solely by virtue of their offices, for torts committed by the corporation or its other directors and officers.

Phillips & Jordan Op. ¶19 (relying on Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 57, 554 S.E.2d 840, 845 (2001).

Before a director or an officer can be directly liable to a creditor, there must be "a tort personally committed by [him] or one in which he participated."  Id.

The problem for each of these Plaintiffs is that they had no direct communication or interaction with Bostic.  His ownership status, standing alone, therefore was "insufficient to hold him legally accountable for an injury to Plaintiffs [as] third party creditor[s] of" the corporation.  Ops. ¶ 22.

 

 

Business Court Dismisses Derivative Action Against Duke Energy

You might remember the derivative action filed against the board of directors of Duke Energy Corporation stemming from its 2012 merger with Progress Energy.  It received a lot of publicity.  The merger was concluded long ago, but there's finally been a ruling from the Business Court dismissing the derivative action.  It's Krieger v. Johnson, 2014 NCBC 13.

The lawsuit challenged the severance payment due to Progress' former CEO, Bill Johnson, following the merger.  Johnson was set to be the CEO of the combined entity following the merger, but he was removed as CEO a few hours after the merger became final.  This entitled Johnson to as much as $44.4 million in payments under his new (and very short-lived) employment agreement with Duke Energy.

Krieger made claims for unjust enrichment and for the directors' breach of fiduciary duty with regard to what he condemned as a grossly excessive payment for "scant hours of service." Op. ¶16.

Unjust Enrichment Claim Was Dismissed

Judge Jolly dismissed the unjust enrichment claim given Johnson's written employment agreement with Duke Energy.  He wrote that:

[e]ven assuming the payments to Johnson might be considered excessive as Plaintiff alleges, the existence of a contract between the parties concerning the subject matter of the unjust enrichment claim is dispositive.

Op. ¶16.  He also said that "[a]n assertion that the express terms of a contract were ultimately unfavorable to one of the contracting parties, without more, does not state a claim for unjust enrichment."  Op. ¶16 & n.13.

Derivative Claims Were Dismissed Due To Plaintiff's Failure To Make A Demand

Krieger's derivative claims were also dismissed, due to his failure to make a demand on the Duke board of directors to pursue the claims.  That took some analysis by Judge Jolly, first on the point whether the law of North Carolina or Delaware (Duke's state of incorporation) should control.  Delaware law won out, because this was a matter of the internal affairs of the corporation, and only the state of incorporation can exercise the authority over "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."  Op. ¶21.

That was only a minor win for Krieger, who was arguing that a demand on the board of directors was excused because it would have been futile, due to the board's alleged inability to make an independent and disinterested decision on the subject of the lawsuit.  Delaware recognizes the futility exception to the demand requirement, but North Carolina does not.

Plaintiff Couldn't Show That A Demand Would Have Been Futile

But Krieger couldn't meet the Delaware standard for showing futility, which requires a showing that there is a "reasonable doubt as to (a) director disinterest or independence or (b) whether the directors exercised proper business judgment in approving the challenged transactions."  Op. ¶23.

He argued that the board would be exposed to personal liability for agreeing to such excessive compensation, but Judge Jolly held that:

Mere allegations that directors participated in or approved of the alleged wrongs as a showing of directorial interest have been consistently rejected by Delaware courts.

Op. ¶27.

 Krieger argued that the grant of severance benefits to Johnson violated the corporation's publicly disclosed compensation mandates.  Those mandates said that compensation was designed to attract and retain talented executive officers, was to be performance based and was meant to reward individual performance.

But that got the Plaintiff nowhere.  The Court found those statements to be "aspirational," and said that they "should not be contorted into affirmative mandates or representations that could give rise to a substantial likelihood of liability. . . . "  Op. ¶31.

The only other attempt by Krieger at proving demand futility lay in his effort to raise a reasonable doubt that the challenged transaction was the product of  a valid exercise of business judgment.  Krieger argued that the payment to Johnson constituted waste, and asserted that what Duke had received in exchange for the millions of dollars of severance payments was "so inadequate that no person of ordinary, sound business judgment would deem it worth" what Duke had paid.  Op. ¶35.

Judge Jolly observed that "Delaware courts have developed an exacting standard by which to evaluate claims of corporate waste."  Op. Par. 36.  Krieger had to "plead specific facts from which it can be inferred that 'the decision [by the board] is so beyond the bounds of reasonable judgment that it seems essentially inexplicable on any other grounds."  Krieger's argument that $44.4 million for less than a day's work didn't meet that standard.

So, since Krieger had not made any demand on the Duke board to pursue this litigation, all of his claims were dismissed.

If you are affronted by the payment of $44.4 million to Johnson for "a few hours work,"  here are some things that you should know: (1) the Amended Complaint referred to only about $10 million in payments (Op. Par. 11 & n.8), (2) Johnson would have been due substantial severance benefits under the Progress Management Change-In-Control Plan even if his  Employment Agreement with Duke had never been formalized, and (3) Duke received agreements from Johnson in consideration of the severance payments, like (a) a release of claims against Duke; (b) an agreement to cooperate with Duke in respect to transition matters and (c) non-competition, non-solicitation, non-disparagement and confidentiality covenants.  Op. ¶37.