NC Attorney General Reaches $9 Milllion Settlement With "American Indian Business" Western Sky Over Usurious Loans

You will remember the North Carolina Attorney General's lawsuit against Western Sky Fin'l, LLC. It generated an opinion from the Business Court last year in which Judge McGuire enjoined the Defendants from making further high interest loans in violation of North Carolina's usury laws.  The Defendants had claimed that as an American Indian related business, they were exempt from North Carolina's usury laws regarding their lending operations.

Judge McGuire signed off this week on a Final Judgment in State ex rel. Cooper v. Western Sky Fin'l, LLC resolving the case, based upon the consent of all parties.

If you have questions about the terms of the Final Judgment, here are some answers:

  • Can Western Sky make any more loans in North Carolina?  No.  Western Sky and the other Defendants are permanently enjoined from offering loans in North Carolina, unless they obtain a license to do so. (¶4)
  • Can Western Sky collect on its outstanding loans?  No, Western Sky is enjoined permanently from collecting on any loans that it has already made.  (¶4) It must adjust any outstanding loans to a "zero balance." (¶5)
  • Can Western Sky's North Carolina borrowers get refunds of the excessive interest they paid to Western Sky? Yes, the Defendants are required to put $9,025,000 in an escrow account to provide refunds to North Carolina consumers who borrowed money from Western Sky.  (¶8)  The $9,025,000 is due within ten days of the date of entry of the Final Judgment.  The refund amount to  be paid to each eligible Borrower is based on the amount of interest paid by each borrower to Western Sky in excess of the maximum of 16% interest allowed by NC law. (¶10).  But the refund amount apparently is not equal to the full amount of usurious interest paid.
  • How will the refund process be handled? The refund process is to be administered by a company called Dahl Administration.  The Defendants must cover Dahl Administration's fees and expenses up to $100,000.  Dahl Administration is required to notify all borrowers who may be entitled to a refund with a "Notification of Refund Eligibility" within sixty days. Any Borrower accepting a refund is required to sign a Release of the Defendants.
  • Does Western Sky have to pay anything else?  Yes, the Defendants must pay $250,000 to North Carolina "for the State's costs and attorneys' fees." (¶7).
  • My inability to pay back my loan from Western Sky has hurt my credit, what can be done about that?  The Defendants are required, within sixty days, to contact Equifax and Experian (two of the major credit reporting agencies in the U.S.) and to request that they remove any reporting regarding Western Sky's loans to North Carolinians. (¶6)
  • What If another State reaches a better settlement with Western Sky?  It is possible that another State might strike a better deal than the one obtained by the North Carolina Attorney General.   (There are multiple lawsuits pending against Western Sky in other States).  But the Final Judgment protects (in 20) against any other State obtaining a more favorable settlement.  A more favorable settlement is defined in the Final Judgment as a settlement that requires the Western Sky Defendants to pay restitution of more than $9,025,000 to borrowers in any other State and that amount is more than 40% of the amount of usurious interest collected in that other State.  (I guess that 40% figure means that Western Sky is only going to have to repay 40% of the highly excessive interest it charged,)
  • What If Western Sky sold my loan, am I still covered by the Final Judgment?  It looks like the Final Judgment doesn't cover loans which Western Sky sold on the secondary market.  Although the Final Judgment extends to the "successors" and "assignees" of the Defendants, the Final Judgment says that "[f]or the avoidance of doubt, the terrms 'successors' and 'assignees' do not apply to parties not subject to this Final Judgment that purchased loans from Defendants." Final Judgment 1.

If I had needed to borrow money from Western Sky, and was despairing about the vicious debt cycle its loan had thrown me into, I would consider this a pretty good resolution by the Attorney General.  The AG's office issued a Press Release regarding the case yesterday.

Why North Carolina Is Probably The Best State In Which To File A Voluntary Dismissal Of Your Case

You have a case set for trial in a state trial court.  You are tenth on the trial calendar, but the nine cases in front of you have crumbled and settled over the weekend.  Plus, your most important witness is gone from your state based on your guess that the case wouldn't be reached for trial.  You've been hobbled by an Order granting a Motion in Limine excluding some of your evidence from trial. Even worse, the statute of limitations ran on your claims while your case was pending.  And you really aren't ready (or don't want) to try this case anyway.

Wouldn't it be nice to wipe the slate clean and get a fresh start?  Well, you can do that in North Carolina, but probably in no other court.  If you are admitted to practice law in North Carolina, you know that in NC state court a plaintiff can dismiss his case "by filing a notice of dismissal [per Rule 41 of the NC Rules of Civil Procedure] at any time before the plaintiff rests his case." 

That is a much more generous allowance of the voluntary dismissal right than anywhere else.  In federal court (and under the Rules in many other states), by contrast, a voluntary dismissal must be filed much sooner: "before the opposing party serves either an answer or a motion for summary judgment."

The "Safety Net" Of Rule 41

The North Carolina Supreme Court (relying on North Carolina's civil procedure expert, Gray Wilson) has said that:

The Rule 41(a) voluntary dismissal “has salvaged more lawsuits than any other procedural device, giving the plaintiff a second chance to present a viable case at trial.” 2 G. Gray Wilson, North Carolina Civil Procedure § 41-1, at 32 (2d ed. 1995). Many plaintiffs have used “this rule to cure an unforeseen defect in a claim that did not become apparent until trial . . . . The rule also offers a safety net to plaintiff or his counsel who are either unprepared or unwilling to proceed with trial the first time the case is called.” 2 G. Gray Wilson, North Carolina Civil Procedure § 41-1, at 33.

Brisson v. Santoriello, 351 N.C. 589, 597, 528 S.E.2d 569, 572-573 (2000).

The longer period of time in which a plaintiff can take a voluntary dismissal (without the permission of the opposing party) is not the "distinct" feature of the North Carolina Rule which Judge Bledsoe referenced last week in  BBB&T BOLI Plan Trust v. Massachusetts Mutual Life Ins. Co., 2016 NCBC 34 at ¶17 .  That feature is the extension of the statute of limitations governing your claims.  The Rule says that so long as your dismissed lawsuit was timely filed, "a new action based on the same claim may be commenced within one year after such dismissal."  That's true even if the statute of limitations has expired at the time of the voluntary dismissal.

When Has A Plaintiff "Rested His Case"?

The words "rests his case" has a trial connotation to me.  When the Plaintiff has presented all of his documents and witnesses and turns the presentation of evidence over to the Defendant, he has rested his case.

But you can actually "rest your case"  much sooner than that, at least for Rule 41 purposes.  Defending your position in a summary judgment hearing means that you have rested your case within the meaning of Rule 41(a)(1)(i).  Op. ¶27 (citing Maurice v. Hatterasman Motel Corp., 38 N.C. App. 588, 591-92, 248 S.E.2d 430, 432-33 (1978)).  In fact, anytime that a plaintiff is facing a dispositive motion, he rests his case by "advanc[ing] its arguments about the merits of [his] case. . . ." Op. ¶28.

In the case before the Business Court last week, Plaintiff BB&T Trust filed its voluntary dismissal about three weeks before its trial was set to begin  During the course of the case (three years ago), Judge Murphy had denied a Motion to Amend in which the Trust tried to add additional theories of liability.  Shortly before trial, Judge Gale granted a Motion in Limine prohibiting the Trust from presenting evidence relating to those theories of liability that were the subject of its unsuccessful Motion to Amend.

So, can a voluntary dismissal be filed by a Plaintiff to avoid a Court's adverse ruling, or has he "rested his case" by contesting the ruling?

Bad Faith Dismissals Are Not Allowed

The NC Supreme Court said in the Brisson decision that a voluntary dismissal must "not be done in bad faith."  351 N.C. 597, 528 S.E.2d 569, 573.

Judge Bledsoe rejected the argument that the BB&T Trust's dismissal was taken in "bad faith."  He said that:

allowing Brisson’s bad faith exception to subject all voluntary dismissals to judicial scrutiny would undermine the intent of Rule 41(a) by creating unnecessary barriers for plaintiffs who wish to abandon their claims.

Op. ¶21.

So what makes out a "bad faith" dismissal?  It's a pretty narrow circumstance, and is limited to the situation where "the initial complaint fails to conform with the rules of pleading and merely seeks to take advantage of the savings provision"  Op. ¶2.  The rationale for that limitation " is that where an initial complaint does not conform with the rules of pleading, a plaintiff should not be entitled to the “safety net” of Rule 41(a)’s [statute of limitations] savings provision after dismissal."  Op. ¶26.

Defendant MassMutual took a run at arguing that "bad faith" had to be determined on a case by case basis, and that the Plaintiff had acted in bad faith by waiting three years after the rejection of its Motion to Amend to take its voluntary dismissal.  Judge Bledsoe said that he would not extend the bad faith exception "so far beyond precedent,"  and that finding Plaintiff''s dismissal to be in bad faith "would defeat Rule 41(a)'s broad function as a 'safety net.'"  Op. ¶26.

The Opinion makes it clear that an unfavorable ruling on a "non-dispositive motion" (like the ruling on the Defendant''s Motion in Limine) does not mean that a Plaintiff unsuccessfully contesting such a Motion has "rested his case."  Op. ¶29.

My "Unsecured Leave"

I'm going to be out of the country for the next couple of weeks.  For the first time, I'm not carrying a laptop with me, so don't look for anything from my blog until near the end of the month.



NC "Seed Law" Trumps The Uniform Commercial Code

The Business Court last month resolved a clash between North Carolina's "Seed Law" and the Uniform Commercial Code, in Kornegay Family Farms, LLC v. Cross Creek Seed, Inc., 2016 NCBC 30.  The Plaintiff in the Kornegay case is one of eight Plaintiffs in the Business Court suing Defendant Cross Creek Seed for selling them certified tobacco seed that produced "abnormal tobacco crops." Op. 2.

The Plaintiffs are seeking millions of dollars in damages for their inadequate crops.  They will be limited to recovering the amount they paid for their seed if the limitation of damages clause placed on each container of seed is enforceable.  North Carolina's Seed Law may invalidate that limitation.

North Carolina's Seed Law

I had no idea that North Carolina has a "Seed Law."  It is codified in G.S. §106-277 to -277.34.  North Carolina was one of the first states in the country to enact a Seed Law (in 1891), but now almost every state has one.  The North Carolina law imposes penalties for the sale of mislabeled seed (in G.S. §106-277.24).

The purpose of the statute "is to regulate the labeling, possessing for sale, sale and offering or exposing for sale or otherwise providing for planting purposes of agricultural seeds and vegetable seeds; to prevent misrepresentation thereof. . . . "  N.C. Gen. Stat. §106-277.

The Public Policy Of The Seed Law

The NC Supreme Court held many years ago that the Seed Law represents a declaration of North Carolina's public policy that a seller of seed cannot enforce a limitation of remedy  that limits a buyer's recovery to the purchase price of the seed if the seed was mislabeled.  Op. 5.  It said that the Seed Law:

has declared the policy of North Carolina to be one of protecting the farmer from the disastrous consequences of planting seed of one kind, believing he is planting another. To permit the supplier of seed to escape all real responsibility for its breach of contract by inserting therein a skeleton warranty, such as was here used, would be to leave the farmer without any substantial recourse for his loss.

Gore v. George J. Ball, 279 N.C. 192, 208, 182 S.E.2d 389, 398 (1971).  The Gore Court held that It is a violation of North Carolina's public policy to attempt to limit the damages of the purchase of mislabeled seed to the purchase price.

That decision involved a sale of seed before North Carolina adopted the Uniform Commercial Code. If a seller of mislabeled seed after the UCC came into effect can't limit a buyer's damages to the cost of the seed, that runs counter to Section 2-719 of the UCC (N.C. Gen. Stat. §25-2-719), which says that a seller can limit a buyer's damages "by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts."

Judge Gale resolved the question of whether the UCC should yield to the Seed Law in this way:

  • The official comment to G.S. Section 25-2-719 says that "a limitation of remedies that purports to modify or limit the UCC's remedial provisions 'in an unconscionable manner' is unenforceable.
  • Both the UCC and the Seed Law have been amended by the NC Legislature since the Gore decision was handed down.  Since "the legislature is always presumed to act with full knowledge of prior and existing law [so] where it chooses not to amend a statutory provision that has been interpreted in a specific way, we may assume that it is satisfied with that interpretation."  Op. 30 (quoting Polaroid Corp. v. Offerman, 349 N.C. 290, 303, 507 S.E.2d 284, 294 (1998).  [Do any of you believe that?]
  • The specific takes precedence over the general.  "Where a local non-UCC statute governs a specific point, it prevails over a general provision of the UCC.  Op. 31 (quoting 1 Lary Lawrence, Lawrence's Anderson on the Uniform Commercial Code §1-102:18 (3d ed. 2002)).

Judge Gale ruled that "Gore does not allow Cross Creek to enforce its limitation of remedies against Plaintiffs if the seed sold to Plaintiffs was mislabeled."  Op. ¶38.

 Would The Limitation Of Remedy Clause Have Been Enforceable Without The Seed Law?

Many courts have addressed the validity of limitation of remedy clauses when a sale of seed was involved.  Many of those courts have refused to enforce them, either on the ground that they "failed of their essential purpose" or because they were unconscionable.  See, e.g., Schmaltz v. Nissen, 431 N.W.2d 657, 662 (S.D.1988)(limitation was unconscionable); Latimer v. William Mueller & Son, Inc., 149 Mich.App. 620, 637, 386 N.W.2d 618 (1986)(same); Lutz Farms v. Asgrow Seed Co., 948 F.2d 638, 646 (10th Cir. 1991)(both unconscionable and failed of its essential purpose); Nomo Agroindustrial SA de CV v. Enza Zaden North America, Inc., 492 F. Supp2d 1175, 1185 (D. Ariz. 2007)(limitation of remedy clause was unenforceable because it was both unconscionable and failed of its essential purpose).

Judge Gale said that it was unnecessary to reach the unconscionability/failure of essential purpose argument given that the Seed Law prohibited the enforcement of the limitation of remedy clause.  Op. 8.

Judge Gale On The Appeal Of His Opinion

One of the most interesting things about Judge Gale's Opinion is his direct request to the North Carolina Supreme Court to consider an appeal of his decision.  He acknowledges that any appeal would be interlocutory and therefore not appealable (Op. 33) and that he cannot certify it for immediate appeal per Rule 54(a) of the NC Rules of Civil Procedure (because that Rule applies only to "final judgment[s] as to one or more but fewer than all of the claims or parties).  Id.

A quick appellate resolution of the Seed Law v. UCC issue makes sense.  Judge Gale said:

[w]ithout the ability to seek immediate appellate review of this Order & Opinion, the parties in each of these eight cases must await a final answer on a significant and controlling threshold issue until after a final, appealable judgment, which cannot be entered until complex fact and expert discovery are completed.  That discovery is likely to be long, burdensome, and expensive.

Op. 35.



NC Business Court Refuses To Enjoin Similar British Lawsuit

It's possible to get an NC state court to enjoin a party from pursuing parallel litigation in another American state.  But what about enjoining a party before an NC court from pursuing a parallel case in another country?

The NC Business Court grappled with that international issue late last month in O'Brien v. TCG Consulting Partners, LLC, 2016 NCBC 25.  It turns out that there is no NC appellate decision regarding this issue, so Judge Bledsoe was in somewhat uncharted waters.

O'Brien, the Plaintiff, was seeking to enjoin Defendant TCG from proceeding with a lawsuit against him in the London Mercantile Court to collect on a Promissory Note.  In the North Carolina lawsuit (filed a month before the London action), O'Brien was seeking a declaratory judgment that he owed nothing on the Note.

One Hundred Years Ago, O'Brien Might Have Gotten An Injunction

Judge Bledsoe, looking to a case cited by O'Brien in support of his position, observed that a North Carolina federal district court decision affirmed by the Fourth Circuit more than a hundred years ago, United Cigarette Machine Co v. Wright, 156 F. 244 (C.C.E.D.N.C. 1907), aff'd, 193 F. 1023 (4th Cir. 1912) had held that:

[I]]t appears to be well established that courts of equity can, and in a proper case ought to and will, restrain litigants in a foreign court. . . . [It is] a duty of a court of equity to restrain litigants in a foreign state or country. . . where the matter is fully litigated in the court to which the application for injunctive relief is made.

Op. ¶17.

That venerable case did not guide the Court's decision.  Its old age did it in.  Judge Bledsoe said that the hundred year old decision had been issued "when North Carolina's international commerce was limited and considerations of international comity had not yet gained widespread judicial support."  Op. ¶17.

Today, Federal Courts Apply Two Different Approaches To This Issue

More modern federal decisions relied on by the Business Court -- from other Circuits -- have applied different legal standards in deciding whether a court should enjoin an international proceeding.  One is the "liberal approach," which gives only "modest weight" to the interest of the foreign court.  Op. ¶21.

The other approach -- the "conservative approach," says that "injunctions restraining litigants from proceeding in courts of independent countries are rarely issued" and gives substantial deference to the principle of international comity.  Op. ¶22.

The Plaintiff Will Have To Fight The Same Issue In Two Courts

The Fourth Circuit hasn't decided which approach to follow (Op. ¶22 & n.3) and Judge Bledsoe didn't need to choose between them.  He ruled that an injunction wouldn't be appropriate under either the liberal approach or the conservative approach.  Op. ¶24.

If you are thinking that it is unfair to make Mr. O'Brien to fight about the validity of the Note on two continents, it's really not.  O'Brien is a British citizen and a resident of England.  Op. ¶27.  His assets are located there,  Id.  Moreover, there was nothing in TCG's British lawsuit which could be considered harassment, even though it was filed after the Business Court lawsuit had begun.  TCG had warned O'Brien that it intended to file its London lawsuit before O'Brien sued it in North Carolina.  Op. ¶26.

As for the additional expense that O'Brien will face in being involved in two lawsuits involving the same issue, Judge Bledsoe said:

Although the Court is sympathetic that O'Brien may incur additional expense in litigating these two actions simultaneously, the Court does not find that the additional expense should cause the Court to deviate from the general rule of international comity that, absent some 'irreparable miscarriage of justice,' courts should be hesitant to enjoin a party from proceeding in an international forum.

Op. ¶27.

Silver Lining?

It's worth noting that the Rule in the London Mercantile Court regarding attorneys' fees and costs is that they are paid by the losing party.  Mercantile Court Guide Rule 15.  So if Mr. O'Brien is confident that he can prove that the Note he signed is invalid, he may actually be better off in that Court.  The "Promissory Note" (which is contained in an email), has no provision regarding the payment of attorneys' fees.


It Can Happen To Anyone: Mistakes In Appeals

The road to an appellate court can be lined with unanticipated obstacles,  You can avoid them if you follow the NC Rules of Appellate Procedure and you keep up with changes in the law regarding appeals.  Or you might retain a lawyer who is certified as an appellate specialist by the North Carolina State Bar's Board of Legal Specialization

Two cases decided last week (one from the Business Court, the other from the NC Court of Appeals) resulted in dismissals of appeals because the Appellant didn't follow the Rules or didn't know about a change in the law. The first appellant was proceeding pro se.  The second was represented by a lawyer.  So a dismissal of an appeal can really happen to anyone, lawyer or not.

The  NC Business Court case (Velleros v. Patterson) involved the appealing party not  properly filing his Notice of Appeal with the clerk for the county where the case had originated before designation to the Business Court, although that wasn't the only reason for the dismissal.  (Anyone reading this blog is aware that the appeal of a Business Court decision requires the filing of a paper copy of the Notice of Appeal in the County where the case originated, in addition to an electronic filing in the Business Court).

The appealing party, not represented by a lawyer, had also done nothing to prepare the Record on Appeal required by Rule 9 of the NC Rules of Appellate Procedure.  (a record on appeal is a compilation of the documents filed in the trial court which are necessary to a consideration of the appeal)

Judge McGuire dismissed the appeal because the Record on Appeal hadn't been prepared.  Wait a second!  (Or as my brother-in-law says: Whoa! Whoa! Whoa!)  Can a trial court dismiss an appeal because the appealing party has violated a Rule of Appellate Procedure?  Isn't that power limited to the appellate court?

There Is No Appeal Pending Until The Record On Appeal Is Docketed

The appellate rules contemplate that the power to dismiss an appeal is limited to the appellate court after the appeal is filed.  Appellate Rule 25(a), says that "after an appeal has been filed in an appellate court, motions to dismiss are made to that court."  Even if the Notice of Appeal had been properly filed the case would not have been in the hands of the COA without the Record on Appeal having been filed, An appeal isn't fully before an appellate court until the appeal has been "docketed."  Craver v. Craver, 298 N.C. 231, 258 S.E.2d 357 (1979)(" until a record on appeal is filed and docketed, there is nothing pending before the appellate division.")

So the action of filing a Notice of Appeal isn't enough to take the case out of the jurisdiction of the trial court and into the grasp of the appellate court.

And what is this "docketing" thing?  It relates directly to the Record on Appeal.  "Docketing" is dealt with in Appellate Rule 12(b), which says:

Docketing the Appeal.  At the time of filing the record on appeal, the appellant shall pay to the clerk the docket fee fixed pursuant to N.C.G.S. § 7A-20(b), and the clerk shall thereupon enter the appeal upon the docket of the appellate court. . . . An appeal is docketed under the title given to the action in the trial division, with the appellant identified as such. The clerk shall forthwith give notice to all parties of the date on which the appeal was docketed in the appellate court.

A Trial Court Has The Jurisdiction To Dismiss An Appeal Before It Has Been Docketed

So "when an appeal has not yet been docketed with the appellate court, the trial court retains jurisdiction over the case" and it can consider a Motion to Dismiss the appeal.  Order ¶2 (citing Carter v. Clements Walker PLLC, 2014 NCBC 12 at 7).  (I wrote about the Clements decision a few years ago).  Judge McGuire dismissed the Velleros case in an unpublished Order. because the Record on Appeal hadn't been filed.

This Appellant was proceeding without a lawyer.  It's a bad idea to appear in the Business Court without a lawyer,  it's even a worse idea to go pro se in an appellate court.

Make Sure You Appeal To The Right Court

But even a lawyer can make a mistake that can be fatal to an appeal.  The Order dismissing the Velleros appeal came on the heels of a decision from the NC Court of Appeals this week dismissing an appeal from a Business Court decision, Christenbury Eye Center P.A. v. Medflow, Inc.

Why? The party appealing (represented by a lawyer) had filed its Notice of Appeal in the wrong Court.  It was filed in the NC Court of Appeals, not the NC Supreme Court.  Because you read this blog or the NC Appellate Practice Blog (or you pay for a subscription to NC Lawyers Weekly), you've known since last year that the NC Legislature amended the General Statutes to provide that appeals of "final judgments" of the Business Court are taken to the NC Supreme Court, and no longer to the NC Court of Appeals.  N.C. Gen. Stat. §7A-27-(a)(2).

But the Plaintiff appealing Chief Business Court Judge Gale's final judgment in Christenbury Eye Center P.A. v. Medflow, Inc., didn't know about that change in the law.  That's an understandable mistake, as almost all civil appeals in North Carolina must go to the NC Court of Appeals and don't go directly to the NC Supreme Court.

What is particularly interesting about the Christenbury ruling is that the decision to dismiss the appeal wasn't even the result of a Motion to Dismiss by the Appellee pointing out the jurisdictional problem.  The Court of Appeals apparently raised the issue on its own volition.  It said that:

If an appealing party has no right of appeal, an appellate court on its own motion should dismiss the appeal even though the question of appealability has not been raised by the parties themselves.” 

Op, at 4 (quoting Hyatt v. Town of Lake Lure, 191 N.C. App. 386, 390, 663 S.E.2d 320, 322 (2008).

But understandable or not, and lack of a Motion to Dismiss or not, there was no mercy from the COA for the Appellant in Christenbury.  Judge Davis held that "we lack jurisdiction over Christenbury’s appeal, and as a result, the appeal must be dismissed."  Op. at 5.

The change regarding appeals from the Business Court going to the NC Supreme Court instead of the Court of Appeals applies only to cases designated to the Business Court on or after October 1, 2014. The Christenbury case was designated to the Business Court on October 29, 2014, so the change was applicable to it.

Update: The Plaintiff filed an Amended Notice of Appeal, this time appealing to the NC Supreme Court, after the decision by the NC COA dismissing its appeal.  Judge Gale dismissed that revised appeal in an Order on June 14, 2016, saying that he had "no discretion to allow Plaintiff to amend its appeal" and that only the appellate courts had that discretion.

(Note: I wouldn't have been aware of the Christenbury decision if my Brooks Pierce colleague Daniel F.E. Smith hadn't brought it to my attention.  Thanks, Dan).

(Another Note:  I have mentioned the NC Appellate Practice Blog at least twice in this post.  I am a huge fan of that blog, which does a great job of writing about what can be the "traps" of appealing an NC Business Court case (and does it way better and more thoroughly than this blog).  Today, Beth Scherer, a frequent author of that blog, wrote about the interesting appeal from the Business Court of four consolidated cases, one of which was designated to the Business Court before the effective date of the statute requiring appeals from the Business Court to go to the NC Supreme Court (October 1, 20014) and was therefore supposed to be appealed to the NC Court of Appeals, while the other three cases were designated after October 1, 2014 and were to be appealed to the NC Supreme Court.  Beth flagged that issue several months ago and today wrote about how the NC Supreme Court resolved whether it should consider the appeal of just three of the cases or consider all four.)

Is It Better To Be A LLC Member In The Minority Than A Minority Corporate Shareholder?

It is pretty common to think that limited liability company members have similar rights as shareholders in a corporation.

But they don't, (although in some respects the rights afforded to LLC members may be better).  The Business Court made that pretty clear last week in Fiske v. Kieffer, 2016 NCBC 22.

The Defendant held a minority (40%) interest in an LLC.  He asserted in a counterclaim that all the other members of the LLC members (the Plaintiffs) had acted together to breach their fiduciary duty to him.  The Plaintiffs collectively controlled the remaining 60% of the LLC and sat in the majority position.

The claimed breach of fiduciary duty involved the making of a $100,000 capital call by the majority.  The Defendant said that the capital call was unnecessary and was improperly aimed at diluting his interest in the LLC and forcing him into selling that interest.

If the LLC had been a corporation, the Court might have found the existence of a fiduciary duty.  The NC Court of Appeals held in Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d 248, 260 (2000) that "a fiduciary duty could arise where multiple minority shareholders in a corporation acted in concert to control the corporation."  Op. 16.

But LLCs are different statutory creatures, especially since in an Operating Agreement, the parties to that agreement can alter the statutory default rules.  Order 16.  Delaware's version of the Uniform Revised Limited Liability Company Act says that a member's fiduciary duty can be "expanded or restricted or eliminated" via an Operating Agreement.  6 Del. C. § 18-1101(c)

The North Carolina version of the "uniform" Revised Act doesn't contain that language, but it says that "[i]t is the policy of this Chapter to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements."  N.C. Gen.. Stat. § 57D-10-01(c).  The only boundaries which the NC Act places on the freedom of contract in Operating Agreements is that those agreements may not be "unconscionable" and that they must be governed by the "implied contractual covenant of good faith and fair dealing."  N.C.G.S. § 57D-2-30.

The LLC's Operating Agreement in the Fiske case required a super-majority vote (75% of the members) for a number of significant actions.  Judge McGuire held that this provided adequate protection to the Defendant of his interest and that he did not have a claim for breach of fiduciary duty.  Op. 17 & 18.  The Defendant could, for example, block a sale of the LLC by refusing to approve the sale, notwithstanding his minority status. The Defendant also had the right, under the terms of the Operating Agreement, to make a claim for breach of contract against the Defendant for making the capital call in violation of the Agreement.  Op. 21.

This isn't the first time that the NC Business Court has looked at the different rights of LLC members as compared to corporate shareholders.  Judge Gale did that three years ago, in Blythe v. Bell, 2013 NCBC 18  18-22. That Opinion stressed the availability of a derivative action to LLC members with fewer procedural obstacles than those that face a shareholder of a corporation filing a derivative action.  For example, no pre-litigation demand is necessary before filing of a complaint, and an LLC member doesn't have to show that she "fairly represents the interests of the corporation."  The statute governing corporate derivative actions, on the other hand, requires both (in G.S. §§ 55-7-42 and 55-7-41).

So if you are an LLC member holding a minority interest, are you better protected from the misdoings of the majority than a shareholder with a similar interest?  It probably depends on the terms of the Operating Agreement.

Do You Think You can Recover The $1100 Fee For Designating A Case To Business Court As A "Cost"? Maybe You Can't.

Recovering the $1,000+ fee for designating a case to the Business Court seems like the unattainable Holy Grail for successful parties in the Court.  That's so even though the NC General Assembly amended the statute listing items recoverable as a "cost" (G.S§ 7A-305) to add the $1,100 designation fee as a recoverable item (in G.S. §7A-305(d)(12)).

Last week in an (unpublished) Order in Sopko v. Stancill, Judge McGuire denied recovery of that fee to a Plaintiff who had obtained a voluntary dismissal from the Defendant of the counterclaims which she had brought.  That would seem to warrant a recovery of the designation fee.  

That's because Rule 41(d) of the NC Rules of Civil Procedure says that  "[a] plaintiff who dismisses an action or claim under section (a) of this rule shall be taxed with the costs of the action."  And that rule also applies expressly to the dismissal of a counterclaim. NC R. Civ. Pro. 41(c).

One thing that is clear about awarding costs is that a trial judge has no authority to award expenses incurred in the course of litigation that are not expressly allowed by statute.  City of Charlotte v. McNeely, 281 N.C. 684, 691, 190 S.E.2d 179, 185 (1972).  That's pretty plain from Section 7A-305(d), which says that "The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court's discretion to tax costs. . . ."

But no appellate court has decided whether a trial judge has the authority to refuse to award costs that are expressly provided for by statute, like, for example, the fee for designating a case to the Business Court.

Judge McGuire ruled that he was required to determine whether the costs sought by the Plaintiff had been "reasonably incurred."  Order ¶10.  I'm not sure if that is correct.  Some of the items recoverable as costs are prefaced with the words "reasonable and necessary", like deposition costs and expert witness fees.  The designation fee allowed in section 7A-305(d)(12) doesn't contain that qualifier.

Judge McGuire ruled in the Sopko Order that the designation fee was not "reasonably incurred," and he refused to award the designation fee as a cost.  He said:

the Court is convinced that Plaintiff is not entitled to recover the filing fee here.  First, the lawsuit was not designated to the Business Court based on Defendant's counterclaims.  Instead, Plaintiff voluntarily incurred the filing fee, apparently believing that the claims she raised in the Verified Complaint were best served by designation to the Business Court.  Second, no part of this fee can conceivably be characterized as 'reasonably incurred' by Plaintiff in defense of the counterclaims alleged by Defendant.

Order ¶13.

It may be that this case means that a Business Court plaintiff who obtains a dismissal of counterclaims filed against him after the designation of the case to Business Court can't recover the designation fee as a cost.  Even though Rule 41 says that a Court shall award such a cost.

Well, the word "shall" doesn't mean what it used to. It's a surprisingly slippery and confusing word.  It was deleted almost wholesale in revisions of the Federal Rules of Civil Procedure, Appellate Procedure and Criminal Procedure.  (It seems to me that I wrote something about that word a few years ago on this blog, but I couldn't find it.)

I don't think that I have seen a single Order from the Business Court allowing recovery of the designation  fee since the statute was amended to allow it.  That legislation became effective in October 2014.

The Plaintiff in Sopko didn't come up empty handed on his application for costs.  He was awarded about $3500 for costs incurred for a mediation and some of his deposition expenses.  Both those types of costs are specifically listed in the statute allowing costs, in G.S. §7A-305(d)(7) and (d)(10).  But the Defendant, who had also obtained her own voluntary dismissal (of some of Plaintiff's claims), was awarded more for her costs -- $4,274.80 -- so she washed out Plaintiff''s recovery of costs entirely.



Don't Count On The Sheriff To File Your Notice Of Appeal

Filing a Notice of Appeal seems like a pretty easy thing to do.  You walk it over (or mail it) to the Clerk of Superior Court in the County in which the case was filed, and the Clerk puts a "filed" stamp on it indicating the date on which it was filed.

Remember that when appealing a Business Court decision, it is not enough to just e-file your Notice of Appeal electronically with the Business Court.  You have to file the Notice of Appeal with the Clerk of Superior Court for the County in which the case originated.

Rule 3(a) of the North Carolina Rules of Appellate Procedure says:

a party may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof within the time prescribed by subsection (c) of this rule. 

The "time prescribed by subsection (c)" is generally 30 days following the entry of the ruling appealed from.

This filing thing seems pretty hard to get to go wrong.  But it did go wrong for the Plaintiff attempting an appeal in Hefner v. Mission Hospital, Inc., 2016 NCBC 21.

How did it happen?  Hefner, whose Notice of Appeal needed to be filed by January 19, 2016, mailed his Notice of Appeal to Buncombe County on January 8th (via  FedEx, when it "absolutely, positively has to be there overnight.")  But the Notice of Appeal was not file stamped by the Buncombe County Clerk of Court until twelve days later on January 20th, a day late.

You are thinking that FedEx must have fallen down on the job.  No, FedEx didn't screw up.  The package was delivered as it was addressed, to: "Buncombe County Courthouse, ATTN: Civil Division."  If you are questioning the quality of that address, a paralegal for Plaintiff's counsel says that is the address to send the filing that she was given in a phone call to the Clerk's office. Personius ¶3.   

So, as you might guess, the package didn't end up in the hands of the Buncombe County Clerk of Court.  It went to the civil process division of the Sheriff''s Department of Buncombe County, which is in the same building as the Clerk.  The Sheriff's office apparently forwarded the Notice of Appeal to the Clerk of Court in time for it to be file stamped on January 20th.

Plaintiff (in opposing Defendant's Motion to Dismiss the Appeal), said that the file stamp of January 20th was not dispositive of the filing date and that the Notice of Appeal was most likely  received by the Clerk of Court earlier than that.  Plaintiff offered in support of this argument an Affidavit from a Lieutenant in the Sheriff's office.  The Lieutenant said that the Sheriff's office's records showed that the Notice of Appeal was received on January 13, 2016 and served on the Defendant the next day. 

The Sheriff's office had a practice of delivering documents that needed to be filed with the Court of delivering those documents to the Clerk on the next business day following the day that they were served. 

The Lieutenant said that he was "quite confident" that those practices had been followed with respect to the Plaintiff's Notice of Appeal, and that the document would have been delivered to the Clerk of Court on January 15th.  Aff. at ¶5.

Judge Gale, in granting the Motion to Dismiss the Appeal, said that "'the trial court is held to a strict construction of Appellate Rule 3.  Order ¶9 (quoting Ehrenhaus v. Baker, 2014 NCBC LEXIS 30, at *10, cert. denied and appeal dismissed, 776 S.E.2d 699 (2015)).

He said that "plaintiff has not met his burden of proving that the Notice of Appeal was filed on any day other than . . . the  date found on the trial stamp."  Order ¶11.  Judge Gale referenced  Rule 3(a) of the NC Rules of Civil Procedure, which says that the file stamp on a Complaint "shall be prima facie evidence of the date of filing."  Order ¶8.

Given the lack of definitive evidence that the Notice of Appeal was in the hands of the Clerk's office before the appeal deadline, the Business Court said that it didn't need to address whether delivery to the Court could be a sufficient filing in the absence of a contemporaneous file stamp.  But that question is probably answered by Appellate Rule 26(a)(1), which says that:

filing may be accomplished by mail addressed to the clerk but is not timely unless the papers are received by the clerk within the time fixed for filing.

There is enough murk in this case that it is hard not to feel sorry for the Plaintiff missing the appeal deadline.  Even Judge Gale said that he was "sympathetic to the circumstances in which Plaintiff now finds himself."  Order Par. ¶11.  He said that he lacked the discretion to allow the appeal, as only the Court of Appeals has that sort of discretion.  He referenced Appellate Rules 2 and 21 as providing that flexibility.

Maybe the Plaintiff will appeal this ruling.  But the appellate courts are  pretty dogmatic about scrupulous compliance with Appellate Rule 3 (see Dogwood Dev. and Mgt, Co, v. White Oak Transport Co., 362 N.C. 191, 657 S.E.2d 361 (2008)), so I wouldn't be too optimistic if I were the Plaintiff.

Two takeaways from this Order are:

Don't count on the Sheriff to file time-sensitive documents, and

Double-check the address of the Clerk's office when filing by mail.

"Giving" And "Getting": The NC Business Court On Disclosure Only Class Action Settlements

Disclosure only settlements are in deep trouble in Delaware based on the Court of Chancery's decision last month in In re Trulia Inc. Stockholder Litigation.  That decision is said to have sounded a "death knell" in Delaware for such settlements.

If you are not familiar with disclosure only settlements, David Wright provides a good explanation on Robinson Bradshaw's Carolinas Class Action blog.

In the Trulia Opinion, Chancellor Bouchard concluded after an extended analysis (on pages 25-43) of each of the disclosures on which the settlement (and fee) were based that "none of the supplemental disclosures  were material or even helpful to Trulia's stockholders" and declined to approve the settlement, which would have involved a fee to the lawyers obtaining the disclosures of up to $375,000.  The Chancellor said that the Chancery Court would be "increasingly vigilant in scrutinizing the 'give' and the 'get'" of  disclosure only settlements.  Op. at 2.

How will this affect disclosure only settlements in North Carolina?  Hardly at all, at least based on how I read the recent Order by Judge Gale in Corwin v. British American Tobacco PLC, 2016 NCBC 14 which certified a class, approved a disclosure only settlement, and awarded Plaintiff's counsel nearly $400,000 in fees.

The Objection To The Corwin Settlement

The Corwin case was brought by a Reynolds shareholder attacking the transaction by which Reynolds American, Inc. (formerly R.J. Reynolds Tobacco) acquired Lorillard Tobacco.  Mr. Corwin originally sought to enjoin the transaction from proceeding, but he dropped that Motion in exchange for a settlement involving a limited group of additional disclosures.

Only one objection to the settlement was filed.  It was by a Lorillard shareholder named James Snyder.  I read Mr. Snyder's Objection at the time it was filed and thought it was well done, especially coming from a person who I assumed was not a lawyer, as he said in his Objection that he was "in the process of retaining counsel."

Later, I found out (from the Plaintiff's response to the Objection) that Mr. Snyder was not only a lawyer, but that he had previously been General Counsel for Family Dollar Stores, and in-house counsel for Home Depot, Inc.  Before that, he was a partner at King and Spalding in Atlanta.

Mr. Snyder fired off his most potent attack on the settlement through an Affidavit from a law professor/expert witness he retained named Sean Griffith.  Professor Griffith's CV is very impressive (he has just about everything in it but a Supreme Court clerkship). 

Professor Griffith's Affidavit excoriates the value of the additional disclosures obtained by Corwin.  Say you were a Reynolds shareholder interested in reviewing the Reynolds proxy statement and the additional disclosures obtained via the class action.  Here's what you got:

  • The "unlevered free cash flow projections" for Reynolds and Lorillard.  Given the wealth of financial data in the original proxy statement, this probably was useless additional information for a "reasonable investor."
  • A statement that Reynolds had not, at the time the transaction was announced, entered into a "technology-sharing initiative" with British American Tobacco.  You knew that there was no agreement in place even before the additional disclosures, as Reynolds referred in its original proxy statement only to "an agreement in principle" with BAT.  That was a pointless additional disclosure.
  • A statement that Reynolds "could not predict future regulatory action with regard to menthol" cigarettes.  Well, duh, who can predict future regulatory action?

The Business Court Said That It Had Carefully Assessed The "Give" And The "Get" of The Settlement

I was looking forward to Judge Gale weighing the value of these seemingly worthless disclosures, and dealing with Professor Griffith's Affidavit, but he didn't.  He covered the disclosures in a mere 15 words, saying that "[t]he Court has carefully balanced the ''give' and the 'get'' of the proposed Partial Settlement," and he overruled the Objection. Order 11(f).  There wasn't any discussion of whether the "give" (the $379,389.65 in fees) was an appropriate exchange for the "get" (the additional disclosures and a release by the class).

The applicability of the Trulia decision in North Carolina as a basis for disapproving disclosure only settlements was dealt with in this way:

the Court noted that there are differences between Delaware law and North Carolina law that may be relevant to Chancellor Bouchard's favored approach of reviewing fee requests based on supplemental disclosures. . . . That approach is possible because Delaware courts employ the common-benefit doctrine when approving attorneys'-fee requests.  North Carolina does not.

Order 11(f).  I have puzzled over the significance of the lack of recognition of the common-benefit doctrine in NC, and I just don't get it.  Even though our state doesn't recognize the "common-benefit doctrine" -- which means that when a shareholder obtains a substantial benefit (though nonmonetary) for other shareholders, a fee can be awarded --  it still is settled in NC that a court certifying a class action and approving a settlement is bound to assess the reasonableness of fees to be awarded to class counsel.  See, e.g., Ehrenhaus v. Baker (N.C. App. 2015)(a trial court considering a class action settlement "must ascertain whether the proposed settlement is fair, reasonable and adequate.").

Judge Gale did take steps towards assessing the reasonableness of the fee.  He said that the hourly rate yielded by the fee was $325.00 per hour, which he said was "reasonable, and clearly not an excessive rate."   Order  ¶11(n).  And he also said that the fee award was "consistent with, and in fact less than, the amount of fees awarded in connection with other disclosure-based settlements that have come before this Court for approval" and that the amount of the fee was also in line with "what a Delaware court would award in similar litigation," Order ¶11(o),  Whether that statement regarding what the Delaware Court of Chancery would have done if this settlement had been before it is open to debate, given the Trulia decision.

But there is absolutely nothing contained in this Order about whether the additional disclosures provided any meaningful new information to the Reynolds shareholders.  Maybe, in North Carolina, the Business Court is not going to bother to consider whether additional disclosures traded in exchange for a at fee award are really worth anything.

What Would Judge Tennille Have Done With This "Stinky Fee"?

I''m disappointed by the lack of analysis of these disclosures.  I think that Judge Tennille, the first Judge to serve on the Business Court, would have handled this differently.  Five years ago, in an unpublished Order, he railed against what he referred to as the "stinky fees" paid to the lawyers challenging merger transactions and settling for getting the disclosure of "additional information."

But if the result of the Business Court's decision in Corwin is that it is seen as a welcome mat for lawyers to bring more class actions in North Carolina courts challenging merger transactions, that's probably at least good for the North Carolina lawyers defending those actions.

It is worthwhile to point out that this blog does not represent the views of Brooks Pierce.  These views are only my own and they shouldn't be interpreted as a criticism of Judge Gale.  Only . . .  disappointment in the Corwin decision.

You Can Designate A Case To The NC Business Court Based On A Counterclaim, But It Can Be Tricky

The Business Court issued a significant Order last week, in Composite Fabrics of America, LLC v. Edge Structural Composites, Inc., 2016 NCBC 11 that Judge Gale said was an "opportunity to clarify. . .how the Court interprets the statutory mandates for designating a case as a mandatory complex business case"  and that the Business Court is not a court of separate jurisdiction.  Order 2.

Some Guidance About Designating A Case To The Business Court As A Mandatory Business Case Based On A Counterclaim

A counterclaim can be the basis for a notice of designation.  That Is true even though the statute governing a designation of a case to the Business Court (N.C. Gen. Stat. §7A-45.4(d)) does not mention a counterclaim as a basis for a designation.  It says only that a notice of designation may be filed:

by the plaintiff, the third-party plaintiff, or the petitioner for judicial review contemporaneously with the filing of the complaint, third party complaint, or the petition for discretionary review in the action.

N.C. Gen. Stat. §7A--45.4(d)(1).

Notwithstanding the absence of any mention of a counterclaim in the statute, Judge Gale ruled that the Court interpreted that language to include counterclaim plaintiffs and counterclaims as well as the party against whom a counterclaim is being asserted.  Order 18.

Thus, he concluded, that "a party may use its counterclaim as the basis for a notice of designation.  Order 9. 

If a party wants to base its notice of designation on both the Complaint and its own counterclaim, it needs to act quickly. The thirty day time limit on filing a notice of designation (contained in G.S. §7A-45.4(d)(3) plays a role here. Judge Gale said that:

if a counterclaimant wishes to rely on the opposing party's complaint as well as its own counterclaim as a basis for mandatory designation, the notice of designation would need to be filed within thirty days of service of the complaint and contemporaneously with the counterclaim.

Order 19.  That would require the Answer containing the counterclaim (and the contemporaneous notice of designation) to be filed more quickly than they might ordinarily be filed given the general practice of getting a thirty day extension of time to file an Answer.

If the counterclaim is the first pleading to warrant a designation, then the opposing party has thirty days from the date of service of that pleading to file a notice of  designation.  But things are different if the counterclaim is the first pleading to raise an issue that qualifies for mandatory designation.  Then, the thirty day period is measured from the filing of the counterclaim.  That's so long as the new pleading "is not being made for an improper purpose."  Order 21.

Things can be tricky if the notice of designation is based on the Complaint, before the counterclaim is filed.  But what if the notice of designation is filed based upon the Complaint, and the party seeking designation then files a counterclaim that would warrant a designation?  That was the situation faced by Judge Gale in the case before him. He said that "[w]hether [this type of situation] involves material issues within the scope of section 7A-45.4(a) must therefore depend on the allegations in the . . . Complaint."  Order 22.  But even so, the Business Court would consider the counterclaims "to inform it" whether [the claims made in the Complaint] necessarily include material issues that fall within the scope of the matters upon which a designation is allowed.  Order 23.

You can lose your right to designate a case on a counterclaim. If you forego designating a case which would have been appropriate for a mandatory designation based on the Complaint and let the thirty day period for designating lapse, you can't "renew [your] right to designation by filing a counterclaim."  Order ¶20.

Beware of Business Court Rule 3.2

Business Court Rule 3.2 is titled "Contents of Notice of Designation."  It directs the party filing a notice of designation "to not only describe how the case falls within one or more categories of section 7A-45.4, but to further identify factors that demonstrate why the Business Court is the appropriate venue for that case."  Order 24.

The portion of that  Rule requiring the designating party to "further identify factors" warranting designationis a survivor from the early days of the Business Court, before the NC General Assembly enacted the statute specifying "mandatory designations."  Cases were then designated to the Business Court through a discretionary assignment by the Chief Justice of the NC Supreme Court.

Judge Gale said of BCR 3.2 that its factors:

are useful in managing and assigning cases among the Business Court judges and may be useful in resolving requests for discretionary assignments.  But those factors do not provide a stand-alone basis for mandatory designation.  For a case to be certified as a mandatory complex business case, the pleading upon which the designation is based must raise a material issue that falls within one of the categories specified in section 7A--45.4.

Order 25.

Business Court Rule 3.2 is not long for this world.  Amended Rules are in the works.  The new Rule 3.2, which I've had an opportunity to see, not longer deals with the "contents of a designation."  The proposed new rule is captioned "Who may file", covering who can use the Court's electronic filing system..

The Business Court Is Not A Court Of "Separate Jurisdiction"

Judge Gale observed that "litigants often refer to the 'Business Court''s jurisdiction" and to its "subject-matter jurisdiction."  Order 26. 

But he questioned the use of those terms, stating that the Business Court is "merely an administrative division of the superior court in the General Court of Justice."  And a Business Court Judge is just a type of Superior Court Judge:

Just as a special superior court judge may be assigned to matters in any of these counties, when a Business Court judge is assigned to a case that has been designated as a complex business case, whether by a mandatory or discretionary assignment, he is commissioned to preside over that entire case until its conclusion, and he proceeds with the same authority as any other superior court judge who may be commissioned to hear matters in that case.

Order 27.

Coincidentally, the North Carolina Court of Appeals observed this week that the Business Court "is a superior court."  .  It said in American Mechanical, Inc. v. Bostic that:

while the Business Court is tasked with the adjudication of cases involving specialized subject matters by judges who have been designated for this purpose, it remains a part of the superior court division of the General Court of Justice.

Id. at 14.

The Terms "Removal" And "Remand" Don't Apply To Business Court Designations

I''m not sure why Judge Gale found it necessary to discuss the nature of the Business Court's jurisdiction, but he did use the Composite Fabrics Order to point out that the words "removal" and "remand" shouldn't be used when discussing a designation to the Business Court or a successful opposition to a designation.  Those words are concepts of the process by which cases commenced in state court are transferred to federal court  Cases are "removed" from state court to federal court per 28 U.S.C. §1446(a), and they can be sent back to state court (remanded) per 28 U.S.C. §1447

Lawyers in the Business Court often pick up on those terms, saying that a case is "removed" to the Business Court upon a successful designation, and "remanded" when an Opposition to a designation is granted.

Judge Gale pointed out that the designation of a Business Court case does not "remove" a case, as it always remains venued in the county in which it originated.  For that same reason -- that "the case has never left its county of origin" -- the withdrawal of a designation "does not constitute a 'remand'." Order 28.

So avoid using those terms when designating a case to the Business Court, or contesting a designation via an Opposition.