Business Court Enjoins Enforcement Of High Interest Rate Loans Made By American Indian-Related Business

Judge McGuire's opinion last week in Western Sky in State v. Western Sky Financial, LLC, 2015 NCBC 84 has a little bit of everything in it: choice of law, the U.S. Constitution, claims for usury (excessive interest rates) and American Indians.  If that doesn't impel you to read on, I don't know what would.

The chances are good, if you live in North Carolina, that you've seen at least one commercial for Western Sky.  It offered to loan you $10,000 in a day, with no collateral.  All you had to do was call and fill out a few online forms, but those loans, which ranged from $850 to a maximum of $10,000, "carried interest rates between 89.68% and 342.86%."  Op. 11.

NC Attorney General Roy Cooper came down hard on Western Sky for violating North Carolina's usury laws and otherwise taking advantage of North Carolina consumers.  The penalty for usury in North Carolina is forfeiture of all of the interest specified in the loan agreement, as well as recovery of twice the interest paid by the borrower.  N.C. Gen. Stat. §24-2.

American Indians

Wait.  You are undoubtedly wondering, what do American Indians have to do with all this?.  The Attorney General said that the Defendants were engaged in a "rent-a-tribe scheme, in which [an] unlicensed lender. . . makes usurious consumer loans . . . . by purporting to affiliate with an Indian tribe to claim federal tribal sovereign immunity."  Op. 18.

Western Sky is a South Dakota LLC, whose offices are located on the Cheyenne River Indian Reservation.  Its sole owner, Martin Webb, is a member of the Cheyenne River Sioux Tribe. Op. 7

Western Sky borrowers consented to loan agreements which said that the loan was "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation." Op. 13.  The loan agreements also provided that they were "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe."  Op. 14.

The Indian Commerce Clause

I'm assuming that none of you have ever heard of, or even thought about, the Constitution's Indian Commerce Clause.  Article I, Section 8, Clause 3 of the Constitution says that the United States Congress shall have power "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

Choice Of Law 

The central issue of the case was whether North Carolina's very strong restrictions on usurious loans could be applied to Western Sky's business.  Judge McGuire had to get past the argument that applying North Carolina's jurisdiction and laws to the Plaintiff's claims would infringe on the Cheyenne River Sioux Tribe's sovereign immunity.

The Defendants had argued that because Webb, Western Sky's sole owner, was a member of the Cheyennne River Sioux tribe, that Western Sky was exempt from the Court's authority.  And they also argued that Western Sky's assignees of the loans -- California corporations with no Indian connection -- were entitled to the same immunity.

Judge McGuire found that he didn't need to address that argument since even if Western Sky was a tribal member the Court's jurisdiction would not be precluded.  He put his focus on where the loan transactions had occurred and determined that "the last act necessary to formation of the loan agreements occurred in North Carolina,"  Op. 37, and that North Carolina law therefore applied.

The Court had many routes to get to the same conclusion that North Carolina law governed Western Sky's loans notwithstanding the choice of law provisions in the loan agreements.  One lay in the stringent nature of NC's usury laws.  Section 24-2.1(a) of the General Statutes provides that "[f]or purposes of this Chapter, any extension of credit shall be deemed to have been made in this state. . . if the lender offers or agrees in this State to lend to a borrower who is a resident of this State."  The NC Supreme Court has held that "a contract 'made in a foreign State or country with the intent and purpose to evade the usury laws of this State' is invalid and 'the interest laws of North Carolina are applicable." Op. 37 (quoting Bundy v. Comm. Credit Co., 200 N.C. 511, 517-18 (1931).

Also, since the Attorney General was not a party to the loan agreements, he was acting as "an enforcement arm of the State of North Carolina" and was not bound by the choice of law provision.  Op. 38.

And last but not least, there is also the public policy consideration that "North Carolina will not enforce a choice of law provision in a contract where the chosen law would 'violate a fundamental policy of [North Carolina] or otherwise applicable law."  Op. 39.  The usury statute itself says that "[i]t is the paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws."  N.C. Gen. Stat. §24-2.1(g).

More U.S. Constitution

Western Sky also argued that subjecting its loans to North Carolina law would violate the Dormant Commerce Clause of the Constitution.  The Dormant Commerce Clause?  If you don't remember that Clause and you can't find it in the Constitution, that is because it is not only "explicit.  it is implied in the grant of power to the federal government to "regulate commerce . . . among the several States."

Judge McGuire rejected the Dormant Commerce Clause argument, holding that:

[t]he statutes at issue do not attempt to regulate conduct beyond North Carolina's borders and do not unduly burden interstate commerce.    The statutes do not purport to dictate the interest rates or other lending practices that Defendants apply in any state other than North Carolina.

Op. 45.  It also noted that "[C}ourts throughout the United States have consistently allowed states to regulate the content of loan contracts made by out-of-state lenders to resident borrowers." Op. 44 (quoting State of Minn. v. CashCall, Inc., 2013 Minn. Dist. LEXIS 31 (Minn. Dist. Ct. Sept. 6, 2013).

I think that this decision represents the first time that the Business Court has considered these provisions of the United States Constitution.  I think the only other mention of the U.S. Constitution by the Business Court was its discussion of the Full Faith and Credit Clause earlier this year.  Generally, you don't need to know much about the Constitution to litigate in the Business Court.

The AG's Request For A Preliminary Injunction Was Only Partly Successful 

The Attorney General requested an extraordinarily broad preliminary injunction against Western Sky.  Judge McGuire granted only part of what was requested: enjoining Western Sky from making further loans within the State and from collecting payments on the loans that had previously been made.  Given that Western Sky had already ceased making loans in North Carolina even before the Complaint was filed, the Court said that "a restriction on Defendants' ability to initiate new loans would not be a significant hardship." Op. 82

The part of the requested injunction which was denied was that Western Sky establish an escrow fund sufficient to provide full restitution of the usurious interest to those consumers who had paid Western Sky interest higher than the 16% maximum allowed by North Carolina law (N.C. Gen. Stat.  §24-1.1(c) provides that for a loan of $25,000 or less, the maximum rate that may be charged is 16%).

That type of an injunction would amount to the seizure of the Defendants' assets before the entry of a judgment and the Court refused to grant that relief.  The Attorney General argued that the escrow account sought was necessary because of the potential financial impact of the substantial litigation facing Western Sky in other jurisdictions but the Court found no evidence that the escrow of funds was "necessary or appropriate." Op. 78. 

 Western Sky has shut down business in September 2013 due to what it referred to as "unwarranted overreach by state regulators."  The company has faced lawsuits in multiple states, and is also was sued by the Federal Trade Commission and consented to a Permanent Injunction.

A Happy Dance For Plaintiffs Who Moot A Motion To Dismiss By Moving To Amend Their Complaint

Maybe you've been in this situation before.  You've moved to dismiss a complaint, have fully briefed your motion, and the defendant dances in on the day of the hearing on your motion and amends his complaint.  And the defendant doesn't even bother to make a motion to amend his complaint!

What effect does that have on your well-drafted, sure to be granted, motion to dismiss?

Judge Bledsoe addressed almost exactly that situation today in Krawiec v. Manly, 2015 NCBC 82.  The only difference was that the Plaintiff made a Motion to Amend its Complaint.

The Plaintiffs had hired the Defendants to teach at their Forsyth County dance studio, "Happy Dance."  The Defendants quit their jobs and began working at another dance studio, in Charlotte.  The Plaintiffs' lawsuit followed, alleging everything from breach of contract to misappropriation of trade secrets.

The Defendants all moved to dismiss the Complaint in May 2015.  None of them filed an Answer to the Complaint.  The Court held a hearing on the Motion to Dismiss in July 2015.

About one month after the hearing, the Plaintiffs filed a Motion to Amend their Complaint.  That litigation maneuver leads to several questions:

Did Plaintiffs need to move to amend their Complaint?  No, the motion was unnecessary because Rule 15(a) of the North Carolina Rules of Civil Procedure says that "a party may amend his pleading once as a matter of course at any time before a responsive pleading is served. . . ."  N.C.R.Civ. P. 15(a)(emphasis added).

Weren't the Motions to Dismiss a "responsive pleading"?  No, because "[f]or the purposes of [Rule 15(a)], a Rule 12(b)(6) motion to dismiss is not a responsive pleading and thus does not itself terminate plaintiff's unconditional right to amend a complaint under Rule 15(a)."  Op. ¶10 (quoting Hardin v. York Mem'l Park, 221 N.C. App. 317, 320, 730 S.E.2d 768, 773 (2012)).

What happened to the Motion to Dismiss filed before the amendment?  It was rendered moot by the Amended Complaint, which was deemed filed by the Court as of the date of the entry of its Order.  Op. ¶14(b).

So, the outcome for the Defendants in the Krawiec opinion was that Judge Bledsoe allowed the amendment to the Complaint and denied the Motion to Dismiss as moot.

One way you can avoid the disappointing result for the Defendants in this case is to file your Answer at the same time you file your Motion to Dismiss.  But really, who wants to do that?

Special note: This post is the first one in years that i have published the same day as the decision being handed down.  I would be doing a happy dance myself about that if I could dance.  Unfortunately, I have self-diagnosed myself as being "beat deaf" and I have given up any hope of dancing.  But that promptness is largely a function of Judge Bledsoe's opinion only being five pages long anyway.

 

 

Business Court Awards Rule 11 Sanctions For Baseless Fiduciary Duty Claim

It is probably a good idea for a corporation to avoid making fiduciary duty claims against its employees  (unless they are also officers and directors).  Clients (or their lawyers) who insist on making such claims are liable to be assessed with the attorneys' fees of the persons they sue, at least based on the circumstances in Judge Gale's Order last week in Southeast Air Charter, Inc. v. Stroud, 2015 NCBC 79.

Southeast Air Charter had brought suit against three of its former employees, none of whom were officers or directors of the Plaintiff, alleging that they had breached their fiduciary duties to it.  It's not hard to be aware that fiduciary duty claims against "rank and file" employees are rarely going to get past a Motion to Dismiss.  The North Carolina Supreme Court pretty much eliminated the possibility of making a fiduciary duty claim against a non-officer or director employee almost fifteen years ago, in Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704 (2001).

Judge Gale wrote in his Southeast Air Charter ruling that:

[a]bsent extraordinary circumstances of special relationships of trust and confidence leading to dominion and control, employees who are not also officers and directors should not be put to the burden of defending fiduciary duty claims.

Order ¶26.

The Court had previously ordered that Rule 11 sanctions were appropriate for the Plaintiff "having filed the claims for which Plaintiff had no reasonable basis to believe were factually supported."  By the time the Court ordered sanctions, the Plaintiff had voluntarily dismissed all of its claims.  The ruling granting the Defendants' Motion for Sanctions was entered in a June 30, 2015 unpublished Order.

The purpose of this week's Order was to determine the appropriate amount of the sanction.  The Court had to determine how to allocate the attorneys' fees incurred by these Defendants, all of whom were represented by the same law firm.  The law firm requested a total of $35,887.01.  It broke that down as $19,322 for one of the Defendants (Steiner-Crowley) against whom all of Plaintiff's claims were deemed to be in violation of Rule 11, and an amount representing one-third of the total fees incurred by the two other Defendants (Robinson and Viall) who were subjected to not only the fiduciary duty claims deemed to have been made in violation of Rule 11 but also a variety of other claims that were not subject to Rule 11 sanctions.

Judge Gale didn't agree with those proposed allocations.  As to Defendant Steiner-Crowley, even though all the claims against her were subject to Rule 11 sanctions, he did not award her all of her fees.  Given that Steiner-Crowley had said that there was never any basis for the claims brought against her, the Court said that she "should bear some responsibility for not attacking those claims on the pleadings before incurring significant other expense."  Order ¶16.  In its discretion, the Court discounted her fees by fifty percent.

For Defendants Robinson and Viall, the determination of fees was more difficult.  Those Defendants had faced multiple claims, only two of which were subject to Rule 11 sanctions.  Their counsel suggested that they each receive a third of the fees they had paid.  Should they, like Steiner-Crowley have mounted an early attack on the claims forming the basis for sanctions?

Judge Gale recognized the "strategic considerations"  dictating that an early Motion to Dismiss not be filed.  He said:

[e]ven if counsel believed the motion was strong regarding the claims now subject to sanctions, the strong possibility that other claims would have survived an early dispositive motion justified allowing even the weak claims to survive. 

Order ¶20.

The Court then looked at the total fees billed for the entire representation, and found them to be reasonable.  But it determined that awarding one-third of the total fees would be excessive, as:

it cannot determine that this amount was incurred solely because [the pleadings] included the breach of fiduciary duty . . . claims.

Order ¶22.The Court found that an appropriate sanction would be ten percent of the fees charged.

Even after the cutting of the amount of fees sought, this was not an insignificant sanction.  The total fees awarded were $14,680.70.  Order ¶23.  And after some discussion about whether it was reasonable for Plaintiff's counsel to rely on his client's representations to make the fiduciary duty claims, Judge Gale ordered that the Plaintiff should bear the entire burden of the sanction as opposed to it being shared jointly with its lawyer.

If you are thinking that the award of nearly $15,000 in fees was not enough to give the Defendants a full recovery, Judge Gale dealt with that point as well.  he said:

the purpose of imposing Rule 11 sanctions is not to assure a full recovery on claims arising from a common factual nucleus.  Rather, the purpose is to sanction conduct and the statutory direction is to sanction only that portion of efforts that would not have been required but for the improper claims.

Order ¶22 & n.1.

 

 

Minority Shareholder Owed No Fiduciary Duty To Other Shareholders In Merger Transaction

Judge Gale's decision earlier this month in Corwin v. British American Tobacco PLC, 2015 NCBC  74 dismissed all of the claims of the Plaintiff class.  If the name Corwin is ringing a bell with you, his case is the shareholder class action over the now completed transaction among Reynolds American, Inc. (RAI), Lorillard, Inc., British American Tobacco (BAT), and Imperial Tobacco Group.  RAI (which you probably still think of as RJ Reynolds Tobacco Company) is the second largest tobacco company in the United States.  Defendant BAT  is RAI's largest shareholder, holding 42% of its stock.  RAI acquired Lorillard (then the third largest tobacco company in the U.S.) in the transaction.

BAT helped fund RAI's purchase of Lorillard (for $27.4 billion) by buying approximately $4.7 billion in RAI stock in order to maintain its 42% ownership of RAI.  RAI funded the remainder by selling of several of its popular cigarette brands to Imperial Tobacco Company, a tobacco holding company headquartered in Bristol, England.

Corwin's action asserted that BAT and RAI's  board of directors had breached their fiduciary duty of candor to him and other BAT shareholders by making inadequate disclosures regarding the transaction.  The claim that the disclosures were inadequate were resolved by a settlement in January 2015.  You can read that settlement agreement here.

Did BAT, RAI's 42% Shareholder, Owe A Fiduciary Duty To RAI's Minority Shareholders?

The issue before Judge Gale was whether BAT, which held only 42% of RAI's shares and was therefore not a majority shareholder of RAI's stock, owed any fiduciary duty at all to Corwin and the class of minority shareholders which he was seeking to represent.

North Carolina Law

If you are thinking that in North Carolina only majority shareholders owe a fiduciary duty to minority shareholders, and are skilled enough at math to know that 42% is not a majority, then you are dead on target.  Judge Gale wrote that "North Carolina courts have never squarely addressed whether a minority shareholder can exercise control adequate to impose such a fiduciary duty."  Op. ¶46.

Corwin argued that a fiduciary duty should be imposed because North Carolina precedent turned on whether the shareholder exercised "dominance and control, which can exist without majority ownership or voting control."  Op. ¶46.

To be fair to Mr. Corwin, loose language (you might say dicta) in North Carolina appellate decisions can be read to support the position that a minority shareholder's control (absent majority ownership) of a corporation can result in that shareholder owing a fiduciary duty to its fellow shareholders.  Judge Gale cited the following cases for that proposition:

See, e.g., Hill v. Erwin Mills, 239 N.C. 437, 444, 80 S.E.2d at 358, 363 (1954)("It is the general rule that when the fairness of transactions between a corporation and one dominating its policies is challenged, the burden is upon those who would maintain such transactions to show their inherent fairness to all parties concerned."); T-WOL Acquisition Co. v. ECDG S, LLC, 220 N.C. App. 189, 208 n.8, 725 S.E.2d 607, 617 n.8 (2012) ("[C]ontrolling or majority shareholders owe a fiduciary duty to minority shareholders in a closely held corporation." (emphasis added)); Freese v. Smith, 110 N.C. App. 28, 37, 428 S.E.2d 841, 847 (1993) ("In North Carolina, it is well established that a controlling shareholder owes a fiduciary duty to minority shareholders."); . . . .  Fulton v. Talbert, 255 N.C. 183, 185, 120 S.E.2d 410, 412 (1961) ("[W]here the corporation is so dominated and controlled by a wrongdoer as to be powerless to act, minority stockholders may bring the action, making the corporation a party.").

Op. ¶53.  Judge Gale, upon reviewing those cases, concluded that none of these North Carolina cases held that a "controlling shareholder must be a majority owner" but that in each case imposing a fiduciary duty, "the shareholder subject to that duty either owned or had control over a majority interest."  Op. ¶51.  He said that North Carolina precedent:

leaves open the specific question of whether a minority shareholder can exercise the degree of control . . . adequate to impose a fiduciary duty on that shareholder.

Op. ¶53.

The argument that North Carolina would impose a fiduciary duty on a non-majority shareholder therefore failed, Judge Gale then turned to Plaintiff's argument that Delaware law placed a fiduciary duty on a "controlling" -- even if minority -- shareholder.

Delaware Law Says That A Minority Shareholder Can Owe A Fiduciary Duty Under Certain Circumstances

The Delaware cases on which Corwin relied in support of his fiduciary duty argument were distinguished by Judge Gale as requiring "actual, rather than theoretical control" before imposing that duty.  Op. ¶56.

There is a presumption in Delaware "that a shareholder who owns less than fifty percent of the outstanding stock of a corporation is not a controlling shareholder.  Op. ¶56.

Getting past that presumption requires detailed allegations of actual control.  Judge Gale said that:

Delaware courts impose a significant pleading burden to allow a fiduciary claim against a minority shareholder and will dismiss such a claim under Delaware's Rule 12(b)(6) in the absence of sufficient allegations.

Op. ¶56.

Corwin's Complaint contained "significant detail," (Op. ¶62), which Corwin said demonstrated BAT's control over RAI (summarized in ¶62 of the Opinion), including a "Governance Agreement," between RAI and BAT which gave BAT veto power over whether certain intellectual property of RAI could be sold to complete the deal and a variety of other factors.

Judge Gale said, after reviewing Corwin's argument, that BAT had influence over the transaction but that "[i]nfluence does not equate to control and the potential imposition of a fiduciary duty turns on evidence of actual control."  Op. ¶63.

The conclusion of the Court was that even if North Carolina were to follow the Delaware standard, that the Complaint's allegations did not:

adequately allege that BAT's control over the Transaction was considerable enough to be the voting and managerial equivalent of a majority shareholder's control, or so potent that the independent Other Directors were unable to exercise their judgment freely with[out] fearing BAT's retribution.

Op. ¶65 (citation omitted).

The Court went on to dismiss fiduciary claims against the RAI directors.  That dismissal involved a discussion of whether a shareholder has standing to bring a direct claim against a member of a board of directors. That sort of claim is generally brought on a derivative basis.  Judge Gale sidestepped the standing issue, ruling that the attempted claim against the RAI directors failed on the merits..Op. ¶74..

What's Next

Given Corwin's marked lack of success on his claims regarding the RAI Transaction,  I'm wondering how much Corwin's counsel will dare to ask for in fees for getting the "disclosure only" settlement which they obtained in January of this year.  My views on the value of such settlements are that they often bring little value to the members of the shareholder class obtaining them and that the fees awarded should take that into account.

Judge Gale directed Corwin's counsel to file a motion for approval of their settlement before the end of August.  We will soon see if this settlement will spin off a sizeable fee.


 

 

Did It Need To Be In Writing?

Surratt v. Brown, 2015 NCBC 72, decided last week by the Business Court, involved an oral partnership to open and operate tattoo parlors throughout North Carolina.

Plaintiff and Defendant entered into an partnership (without any written agreement) to open a tattoo parlor in Winston-Salem.  Defendant Brown was to finance the business for a 30% share of the profits; Plaintiff Surratt was to open and operate the business for a 70% share.

The parties later orally agreed to expand their tattooing business by opening additional retail locations in which they would each have a 50% interest.  The new shops, according to Plaintiff, were to carry the "name. concept, design, and intellectual property developed" by Plaintiff in connection with the first store.  Op. ¶28.

Over the next few years, Defendant Brown opened several new new North Carolina tattoo shops: in Greensboro, Greenville, Jacksonville, and Fayetteville.  Surratt sued Brown over the new stores, alleging that he was entitled to an ownership interest in them.

Did The Agreement Need To Be In Writing?

Even if you are fascinated by tattoos, there is not much of interest in the Surratt decision.  It's mostly about whether Plaintiff's claims were barred by the statute of limitations, but there are a couple of interesting tidbits about Section 75-4 of the General Statutes, which requires that certain types of contract be in writing, and also one about conversion.  That statute says that:

No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory.

N.C. Gen. Stat. §75-4 (emphasis added).

The Defendant said that the claimed unwritten promise that he would not open other tattoo shops in North Carolina was unenforceable per Section 75-4 because it limited his right to be in the tattoo business in North Carolina.

Judge Gale, relying on a Fourth Circuit decision, said that:

where an oral agreement merely concerns the use of intellectual property, section 75-4 may not apply so long as other terms do not 'substantially' limit the party's right to do business.

Op. ¶31 (citing Ashley Furniture Indus. v. Sangiacomo, N.A., 187 F.3d 363, 378 (4th Cir. 1999)).

Judge Gale observed that "Plaintiff's narrowed description of the agreement does not prohibit [the Defendant] from operating in the tattoo and piercing industry without [the Plaintiff] so long as [the Defendant] does not utilize the name, concept, or related intellectual property created pursuant and subject to the agreements between the parties."  Op. ¶32.

Given the early stage of the case (this was a Motion to Dismiss), Judge Gale ruled that it was "premature to determine whether the agreement under which Plaintiff seeks to recover must be in writing in order to be enforceable."  Op.  ¶32.

You Cannot Convert A Partnership Interest

On Plaintiff's conversion claim, which asserted that the Defendant had converted the profits of the Partnership as well as Plaintiff's Partnership interest and his management rights, Judge Gale wrote that:

[a[lthough the law is unclear as to the dividing line between tangible and intangible property in some instances, it is clear that only goods and personal property are subject to a conversion claim: intangible interests, such as business opportunities or expectancy interests are not subject to conversion.

Op. ¶33 (emphasis added).

The Judge ruled that only the property interests of profits and distributions were subject to a conversion claim.  Thus, Plaintiff's conversion claim for "his right to partnership property, his business interest in the LLC/Partnership, and his right to participate in management of the LLC/Partnership" was intangible and not an appropriate conversion claim.  Op. ¶34.

 

 

 

Be Very Careful If You Are Instructing Your Clients Not To Answer Questions At A Deposition

In an (unpublished) Order last week in Griggs v. Bittersweet Farms, LLC, Judge McGuire ruled that Plaintiffs' counsel's instruction to his client not to answer certain deposition questions was improper.  He granted a Motion to Compel responses to the unanswered questions, denied a Motion for Protective Order to excuse the Plaintiffs from having to respond, and ordered the Plaintiffs to pay Defendants' attorneys' fees for the cost of Making the Motion to Compel.

Instructing a witness not to answer a deposition question is pretty much forbidden unless a privilege is at issue.  There are rules in almost all courts about this practice.

The Rules On Instructing A Witness Not To Answer

Rule 30 of the North Carolina Rules of Civil Procedure says that: "[s]ubject to any limitations imposed by orders entered pursuant to Rule 26(c) or 30(d), evidence objected to shall be taken subject to the objections."  NCRCP 30(c).  The italicized portion of the Rule has been interpreted to mean that counsel is prohibited "from instructing a witness not to answer where only an objection is proper."  Order ¶4

The federal rule is more specific.  It says that:

A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3).

FRCP 30(c).  It also says that: "An objection must be stated concisely in a nonargumentative and nonsuggestive manner."

The Business Court has a Rule dealing specifically with when you may instruct a witness not to answer a question.  That is Business Court Rule 18.3:

Counsel shall not direct or request that a witness not answer a question, unless that counsel has objected to the question on the ground that the answer is protected by a privilege or a limitation on evidence directed by the Court.

Business Court Rule 18.3(a).  The Business Court Rule also deals with "speaking objections," saying that "[c]ounsel shall not make objections or statements which might suggest an answer to a witness." BCR 18.3(b).  Objections are to "be succinct, stating briefly the basis of the objection and nothing more."  Id.

The Griggs' Depositions

The questions which the witnesses in the Griggs case refused to answer fell into two categories.  The first was questions concerning the Plaintiffs' net worth, which the Defendants said were relevant to the Plaintiffs' ability to pay punitive damages if the Defendants succeeded on their counterclaims.  The basis for the refusal to answer those questions was that they were intended to "annoy, embarrass or oppress" the witnesses.  The second category of questions concerned a criminal proceeding pending against one of the Plaintiffs.

Judge McGuire said that he understood the Plaintiffs' desire to avoid disclosing their personal financial information in what he said was "an acrimonious family lawsuit,"  (Order ¶4), but he said that the protective order protecting that information should have been sought "prior to, or at the very latest during, the depositions."  Order ¶4.

The NC Rules of Civil Procedure expressly permit counsel to seek a protective order in the midst of a deposition (it's in Rule 30(d)), but I can't imagine a Judge being instantly available to resolve such a dispute.  As far as seeking a protective order "prior to" a deposition, how can a lawyer prophesize in advance of a deposition what opposing counsel might ask that she would want to prohibit?

The effort of Plaintiff's counsel to obtain a Protective Order was hurt by him waiting nearly seven months after the depositions to request it.  Given that the Motion to Compel involved depositions occurring on several different days, Plaintiff's counsel could have moved for a Protective Order after the first deposition.

Attorneys' Fees

In addition to granting the Motion to Compel, Judge McGuire ordered the Plaintiffs to pay more than $3,000 in attorneys' fees for their misconduct..  Rule 37(a)(4) says that the Court shall award attorneys' fees if it grants a Motion to Compel "unless the Court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust."

After finding that the opposition to the Motion to Compel was not "substantially justified, Judge McGuire awarded $3,312.50  in fees.  The individual Plaintiffs are responsible for half of the sanctioned amount, and their counsel is responsible for the other half.

 

The Meaning Of "Successors," "Members," And "Designees" In A Release

The words "successors," "members," and "designees," as used in a Release were at issue in Judge Bledsoe's Opinion last week in TaiDoc Technology Corp. v. OK Biotech Co., 2015 NCBC 71.

Plaintiff TaiDoc had settled a related lawsuit previously pending in the Western District of North Carolina in which Defendant OK was not a party.  One of the settling parties, an LLC known as Prodigy, obtained a release from TaiDoc that released Prodigy's "predecessors, successors, directors, officers, managers, members . . . and their respective heirs, executors and designees . . . from any and all claims whatsoever brought in, or that could have been brought in the Action. . . whether known or unknown. . . ."  Op. ¶4.

OK moved for summary judgment on TaiDoc's claims against it based on the Release.  It said that it was a "successor" to Prodigy, a "member" of Prodigy, and also its "designee."

OK argued that it was a successor to Prodigy, and therefore entitled to avail itself of the protection of the Release, because it had purchased a 45% membership interest in Prodigy (a year) after the Release was obtained by Prodigy. 

Successor?

Judge Bledsoe rejected all three of OK's arguments.  As to the "successor" argument, he held:

the term 'successors,' as used in the context of the Release Agreement . . . contemplates either a successor legal entity, which stands in the shoes of a party typically through merger, acquisition, or other legal means of succession, or a successor to a person in the testamentary sense, which typically involves a successor standing in the shoes of a predecessor upon a predecessor's incapacity or death.

Op. ¶35.

Particularly astute readers might wonder why it would even make a difference if OK was deemed to be Prodigy's "successor," since TaiDoc's settled claims against Prodigy were undoubtedly different from those which it was bringing against OK.  Judge Bledsoe dealt with that point too, holding that:

even if OK Biotech became a legal 'successor' to the release that [the members of Prodigy] obtained under the Release Agreement, that release was only a release of the claims TaiDoc had against [the members of Prodigy] -- not a release of any claims TaiDoc had against OK Biotech at the time of the Release Agreement, or, in particular, of the claims TaiDoc has asserted against OK Biotech in this action.

Op. ¶36.

Member

OK then argued that since it had acquired a membership interest in Prodigy -- a year after the Release was executed --  it was included in the "members" of Prodigy released a year before by TaiDoc.

Judge Bledsoe dismissed that argument as "fully absurd," stating that this contention:

leads to the implausible and fully absurd construction that the parties intended that any non-party to the Release Agreement could purchase a release of its liability to TaiDoc -- on any claim whatsoever -- by purchasing a membership interest. . . in Prodigy, without TaiDoc having bargained for or contemplated that party's release from liability.

Order ¶41.

The word "members"  didn't mean "future members,"  it meant only those persons or entities which were members of Prodigy at the time the Release was signed.  Op. ¶¶37-38.

Designee

OK hadn't run out of arguments why it was entitled to the benefit of the Release.  OK said that it was a "designee" of Prodigy because Prodigy had assigned to it Prodigy's rights under an application to the FDA for a medical device.

That argument had some surface appeal, as the definition of a "designee" in Black's Law Dictionary is a "person who has been designated to perform some duty or carry out some specific role."  Op. ¶43 (quoting Black's Law Dictionary 478 (8th ed. 2004)).

Although Judge Bledsoe didn't say that this argument was "fully absurd," or even that it was "pure applesauce," he did say it was "without merit" and scoffed at it a bit, stating that:

[i]n short, OK Biotech argues that Prodigy had the unfettered right to designate any person or entity in the world as its designee for purposes or receiving the benefits of the [Release] and it chose OK Biotech for these purposes.

Op. ¶42.

In the context of the Release, in which the word "designee" appeared in conjunction with "heirs, executors and designees,"  the Court held that "it is clear that, in context, these three words are intended as similar and related legal terms used to describe types of representatives or successors to a natural person after death."  Op. ¶44.

Given that the posture of this ruling was a denial of a Motion for Summary Judgment as opposed to the granting of a Motion to Dismiss the affirmative defense of release, it's not clear whether the issue of the Release remains alive in this case.  But it seems pretty much dead, at least to me.

If You Reach A Settlement At Mediation, And Say The Settlement Will Be The Subject Of A Forthcoming Formal Agreement, Do You Have A Binding Deal?

You have most likely walked out of a mediated settlement conference at which the shorthand version of the settlement put to paper by the lawyers and the mediator stated that there would be a later, more detailed agreement.  And maybe, the next day, as work began on the "more formal agreement to be prepared later," you and your opposing counsel putting the more detailed pen to paper sank into disagreement on the words which should be used to finalize the settlement.

So, did you have a final and binding deal or not based on the document signed at the mediation?  You most likely did, if you look at Judge McGuire's Order earlier this month in McCarthy v. Hampton, 2015 NCBC 67.  The parties in that case had engaged in a mediation which resulted in a signed document titled "Essential Terms of Mediated Settlement Agreement with Formal Agreement to be Prepared Later."  That same day, the mediator notified the Business Court that the parties had reached a settlement  and that an upcoming hearing in the case would not be necessary.  Defendant's counsel followed up informing the Court via email that the "[p]arties successfully mediated and settled all claims" at the mediation and that the parties were finalizing settlement documents.  Counsel for Plaintiff, copied on the email, did nothing to contradict opposing counsel's email.

Thereafter, the parties exchanged drafts of the "formal agreement" contemplated by the "Essential Terms Agreement" executed at the mediation (which the Court referred to as the "ETA").  Those discussions quickly broke down when issues not specifically addressed in the ETA arose and could not be resolved.

Plaintiff said that the Essential Terms Agreement  was an unenforceable "agreement to agree," in his opposition to a motion to enforce the settlement.  In response, Judge McGuire distinguished an NC Supreme Court decision which found an agreement to be insufficiently final to be binding:

nothing on the face of the ETA indicates that this document was simply intended to outline the desires of the parties. Whereas the language at issue in Boyce [v. McMahan, 285 N.C. 730 (1974)] provided that the parties to that document 'desire to enter into a preliminary agreement setting out the main features as to the desires of the both parties,' id, the ETA provides that '[t]his agreement is . . . to memorialize essential terms of the mediated settlement agreement' in this action.'  Thus, that the ETA on its face purports to be an agreement as to the terms therein, without any qualification that it is merely a preliminary agreement or a recitation of the parties' desires, distinguishes this matter from the facts of Boyce

Order ¶22.

The argument that the ETA was ineffective because it was subject to the condition subsequent of a more formal settlement document also fell on unreceptive ears.  Judge McGuire said:

nothing in the ETA indicates that the agreement memorialized therein was conditioned on the execution of a final agreement.  Aside from simply indicating that one would ultimately be prepared, [the] ETA makes no other reference to a more formal agreement, much less any reference that raises an issue of fact whether the parties intended that the ETA not be a binding agreement until confirmed in a future writing.

Order ¶23.

After that, Judge McGuire paced through seven terms which the Plaintiff said were "material" but had not been addressed by the ETA.  Those ranged from how the intangible assets of the medical practice which was the subject of the lawsuit would be disposed of to what amount of Plaintiff's attorney's fees would be paid by the practice.

Some of the sticking points in the post-mediation negotiations reflected terms different than those contained in the ETA.  As Judge McGuire put it, "[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)).  Or, as he said later, "that Plaintiff now seems dissatisfied with the agreement reached does not render the ETA unenforceable."  Order ¶30 (emphasis added).

The other terms which the Plaintiff (who was the party seeking to evade enforcement of the ETA) said were material, but not addressed at the mediation were found by the Court to be embraced by the terms of the ETA, or not material at all.  The Court granted the Defendant's Motion to Enforce Mediated Settlement Agreement.

What should you do if you want to leave a mediation with the ability to avoid a settlement when you suspect that you won't be able to agree on the terms of a final settlement agreement because of an unreasonable and nitpicking opposing counsel?  There's no good answer.  You might try saying in the document prepared by the mediator that the settlement will not be binding until a written agreement to be negotiated later is signed by all parties.  Good luck with getting a decent mediator to let you go home with such an open-ended agreement.  And calling the mediation document an "Agreement as to Non-Essential Terms" would be silly, it would defeat the point of a mediation.

This is the second time in the last two months that the Business Court has refused to allow a party signing off on a settlement document at mediation to escape its terms.  The first case was Judge Gale's decision in DeCristoforo v. Givens, 2015 NCBC 53, which I wrote about in June.

 

 

 

 

When You Wish Upon A (Lode)Star: NC Business Court Cuts Fees Requested By Attorneys For Class Plaintiffs

The Business Court last week knocked down a fee request of Plaintiffs' class action counsel to $500,000, from the $660,000 requested, in an Order in Nakatsukasa v. Furiex Pharmaceuticals, Inc., 2015 NCBC 68.

The Settlement Of The Class Action

The ruling was entered in conjunction with the approval of a settlement of four class actions (two filed in North Carolina and two filed in Delaware).  The lawsuits concerned a challenge to Defendant Furiex's merger with Defendants Royal Empress, Inc. and Royal's affiliate Forest Laboratories, Inc.

As a part of the settlement, Plaintiffs' counsel reserved the right to apply to the Court for approval of fees not to exceed $695,000.  Given that the Defendants had waived their right to challenge the fee application, it fell to Judge McGuire to determine whether the fees requested were reasonable.

If the first question in your mind is "how much money did the Plaintiff obtain for the class?", the answer is none.  The claimed value to the class came in the waiver of "DADW provisions" in Confidentiality Agreements executed by the Defendants Royal Empress and Forest Laboratories as well as other potential buyers of Furiex.  There were also some additional disclosures obtained via the settlement.  (If you don't know my feelings about the value contained in disclosure only settlements, you haven't been reading this blog.)

DADW Provisions?

The NC Business Court hasn't had the opportunity to consider the viability of DADW -- don't ask, don't waive -- provisions,  but the Delaware Court of Chancery has ruled that they are not presumptively impermissible. If you are wondering what a DADW provision does, it prohibits the entity signing it from making an offer for the target corporation's shares without an express invitation from the target's Board of Directors. The "don't ask" aspect prevents the signing party from asking the target's Board to waive that restriction.

Since the Court didn't discuss the validity of the DADW provision at all, except to say that the waiver of it procured by the litigation was "a significant benefit to shareholders," (Order  ¶41), the validity of this type of deal protection device in North Carolina remains untested.  Given that the Court accepted Plaintiffs' counsel's argument that they had obtained value for the class  in the waiver of the DADW restriction (meriting fees of half a million dollars), lawyers in North Carolina should be cautious about including DADW's in their merger related documents . 

The lawyers for the class (two New York class action firms) had a pretty high opinion of the value that they had obtained for the class.  The requested that the Court allow $660,000 in fees for 700 hours of work. 

You don't need to do the math to figure the hourly rate that those figures yield. Judge McGuire calculated it at a staggering $941.72 per hour (Order ¶35), which was triple the hourly fee the Business Court had approved in a previous class action (In re Harris Teeter Merger Litig., 2014 NCBC 44) and seven times the hourly fee awarded in another class action approval (In re Progress Energy Shareholder Litig., 2011 NCBC 44).

The Business Court Refused To Apply A Multiplier To Plaintiffs' Counsel's Lodestar

The $660,000 sought was based on a request for a multiplier of 1.7 to be applied to the lodestar amount established by  Plaintiffs' counsel's regular billing rates (that was $388,465).  A "lodestar," if you are not familiar with the term, Wikipedia defines it as "a method of computing attorney's fees whereby a trial court must multiply the number of hours reasonably spent by trial counsel by a reasonable hourly rate."

Judge McGuire observed that no reported North Carolina appellate decision had ever applied a multiplier to increase a lodestar amount (Order ¶35), so he decided that the "best course is to assess the requested fees as if Plaintiffs were seeking an award of $941.72 per hour, and to consider such request based on whether special legal skills  and experience were involved that are not available in North Carolina, the rates charged by attorneys for comparable work in the local area, and in light of the result obtained for the amount of work expended."  Order ¶35.

Were North Carolina attorneys capable of handling this litigation?  The Plaintiffs' local counsel represented to the Court that "he did not believe there were a substantial number of attorneys in North Carolina prosecuting this type of shareholder action."  Order ¶36.  Judge McGuire said that the lack of specific information whether there were North Carolina attorneys qualified to handle the case warranted in favor of a "premium rate."  Id.

The Court Said That A Fee Award Of $941.72 Per Hour Would Be "Extraordinary"

Looking at the electronic docket sheet in the case, Plaintiffs' counsel did little more than filing a Complaint, a Motion for Expedited Discovery, and a Motion for approval of the settlement that they brokered.  On top of that, they took two depositions and reviewed only a thousand pages of documents.  Order ¶39. Maybe the case did require supremely qualified counsel not available in NC.

The rates "generally charged for sophisticated business litigation in North Carolina" were deemed to be $321.91 per hour (found to be "reasonable in In re Harris Teeter, 2014 NCBC 44 at ¶63), although Judge McGuire said that "his own experience is that rates of approximately $300 - $550 per hour are typical of the fees charged for this type of work in Wake County, North Carolina.  Order ¶37.

Looking at the substantially higher hourly fee of $941.72 sought by Plaintiffs' counsel, Judge McGuire deemed it to be an "extraordinary amount" (Order ¶41).

The Judge exercised his discretion and awarded $500,000 in fees.  Order ¶42.  That yielded an hourly rate of $712.96, still a pretty impressive award.  And notwithstanding Judge McGuire's rejection of the application of a multiplier, I calculate that as a multiplier of 1.28711724 on the lodestar of $388,465.

 

 

 

 

 

 

 

Don't Overplay Your Hand In The Business Court

When you last heard about London Leasing LLC v. Arcus, the Business Court had entered a default in March 2015 against two of the Defendants for what I called their "defiant and obnoxious conduct."

It then seemed like the Plaintiff was just a hop, skip, and a jump away from obtaining a default judgment against the Defendants against whom there had been an Entry of Default, but last week Judge McGuire denied a Motion for Default Judgment in an Order in London Leasing LLC v. Arcus, 2015 NCBC 65.  In fact, he went further than just denying the Motion for Default Judgment.  He actually set aside the Entry of Default he had imposed in the previous unpublished decision.

The ruling didn't represent a softening of the Court's heart as to the defiant Defendants.  The Court remained annoyed even though one of the defaulted Defendants, JW Ray, filed an Affidavit saying that he had not meant to "disrespect this Honorable Court" and that he was "unaware of the significance of his actions."

Judge McGuire said that "the Defendants have not demonstrated good cause to set aside the entry of default based on Ray's misunderstanding of his legal obligation in this matter."  Order ¶26.  He also said that the "Defendants' conduct that lead to the entry of default pursuant to Rule 37 was inexcusable."  Order ¶27 & n.20.  The Court said that it would "enter other appropriate sanctions against Defendants at a future date." Id.

So, having said all that about the "inexcusable" nature of the Defendants' conduct, what was the reason that the Court set aside its Entry of Default?  It lay in the Plaintiff's Motion to Amend its Complaint, adding five new Defendants and seeking to state two new claims against the defaulted Defendants.

The Court said that "it was forced to conclude that Plaintiff's decision to amend its Complaint provides the 'good cause' necessary to set aside the entry of default."  Order ¶27 (emphasis added).  The Defendants hadn't had the opportunity to respond to the new allegations and were entitled to defend against them.

The takeaway from the new London Leasing decision is that it is not a good idea to amend your Complaint after you have an Entry of Default in hand.  You run a risk of losing the Entry of Default.

By the way, if you noticed that there were no posts on this blog last week, it's because I was away at the beach last week with my family.  The Business Court didn't take notice of my absence (maybe I need to put in for secured leave next time I go away), and the Court went ahead and issued four opinions while I was gone which I am busy digesting.  So, look for more posts later this week.

Please note, as it has always said in the Disclaimer to this Blog, that my posts do not represent the views of Brooks Pierce, but only my own.