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

An entity can be interested (legally) in the outcome of a lawsuit, or it may simply be interested (in the go-sports-team-from-my-hometown-or-university! sense) in the outcome.  Under a recent Business Court ruling, only the former supports intervention under Rule 24.

Time Warner Entertainment Advance / Newhouse Partnership v. Town of Landis involved access to utility poles, a type of dispute committed to the Business Court under 2009 legislation. The North Carolina Association of Electric Cooperatives ("NCAEC"), an organization of 26 electric membership corporations across North Carolina, sought leave to intervene under Rule 24 as a defendant aligned with the Town.  NCAEC admitted that it had no direct interest in the outcome of the dispute between the plaintiff and the defendant, but was concerned about the potential precedential effect of a ruling that would establish a methodology for use in future cases.

The Court denied NCAEC's request to intervene.  First, NCAEC could not intervene as of right because it had neither a statutory right to intervene nor an interest relating to the specific property or transaction (i.e. the particular utility poles at issue).  "Instead, NCAEC has at best a general interest in the precedent that may be set in this case regarding the methodology for calculating pole attachment rates, terms, and conditions, which the Court concludes is insufficient to allow intervention as of right pursuant to Rule 24."

NCAEC could not intervene permissibly either.  Rule 24(b)(2) requires a common question of fact or law for permissive intervention, and the Court held that NCAEC had not put forth any claim for relief for any ripe dispute.  According to Judge Diaz, allowing intervention would force the Court to issue an advisory opinion in advance of any actual dispute between NCAEC and any cable provider.  Moreover, allowing intervention and the addition of new counterclaims would threaten the statutory mandate that utility access disputes be resolved by the Court within 180 days of commencement.

The Court permitted NCAEC an opportunity to be heard, however.  To the extent that future proceedings in the case involved the question of the rate methodology to be applied by the Court, the Court allowed NCAEC leave to appear as amicus curiae on that one issue.

Full Order

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As discovery of electronically-stored information ("ESI") becomes more prevalent and relevant in litigation, so too does litigation regarding the obligation to preserve ESI.  Last Friday, the Business Court issued two orders reaching opposite results on motions for "non-spoliation" orders, based on significant differences between the scope of the preservation obligations that the plaintiff sought to impose.

In Capps v. Blondeau, the Business Court previously ruled that an arbitration clause was unenforceable.  Two defendants appealed that ruling and, during the pendency of the appeal, the plaintiff moved the Court for what they called "non-spoliation" orders (essentially, orders that parties preserve ESI) one against a defendant and one against Wachovia Bank.  In a pair of orders, the Court allowed the motion as to Wachovia but denied the motion as to the defendant.

Judge Jolly discussed several principles of note in the order denying the motion against the defendant, Morgan Keegan:

• As is typical in Case Management Orders in the Business Court, the CMO in this case already contained a mandate that the parties preserve relevant information, including ESI, until the conclusion of the lawsuit.  This suggested that a further order on the subject was unnecessary.
• When a lawsuit has already been filed, "the potential parameters of the claims – and the evidentiary importance of relevant information – are apparent."
• The Court's duty is to "weigh and balance the respective rights and interests of the parties" when determining the scope of any preservation obligation.

The Court examined the categories of information proferred by the plaintiff and determined that the breadth of those requests prevented the Court from entering any order that would impose a preservation obligation for specific information:

Many of the categories of Information defined in the Motion are stated in the form of either a request for production of documents and materials or in the form of interrogatories, and are not focused on the stated concept of Information preservation.   In substance, the requests are so broadly and loosely defined that the court is forced to conclude that it would be difficult, if not impossible, to enter a preservation order without micro-managing the preservation initiative to such an extent that the result likely would impose an unjust result on either Plaintiff or Morgan Keegan.   An order from this court requiring preservation of such Information would be difficult, if not impossible, for Morgan Keegan in good faith to obey or for this court to police.

In a footnote, the Court identified specific concerns about the scope of those requests:  "For example, the Motion makes multiple use of broad qualifying words such as 'any' and 'all' 'records' or 'communications' about a particular subject.  It also uses qualifiers seeking to preserve information about occurrences, events or 'communications' that took place 'at all relevant times.''''

In contrast, the Court allowed plaintiff's motion for an order against Wachovia, a third party who was served with a subpoena duces tecum.  There were three key differences between Wachovia and Morgan Keegan.  First, Wachovia was not a party and was not subject to the CMO, so a separate order was conceivably more necessary.  Second, Wachovia, unlike Morgan Keegan, never filed a response in opposition to plaintiff's motion.  Third, the scope of Wachovia's information that plaintiff sought to preserve was clearly and specifically outlined in the requests attached to the subpoena.  The Court listed and ordered preservation of those specific categories of information, such as signature cards, account statements, and transaction details for specific bank accounts.

In the end, however, the Court's reluctance to enter an order against Morgan Keegan did not mean that its preservation obligations were lessened:

The duty of Morgan Keegan and other party litigants to preserve Information relevant to the issues is apparent. The potential ramifications and available sanctions of a violation of that duty also are apparent. The court expects that Morgan Keegan and all other parties will discharge those duties appropriately and in good faith.

There are two takeaways for Business Court litigators.  First, if there is a CMO in place, preservation obligations already have been ordered against the parties, and the Court is likely to perceive a subsequent motion as superfluous.  Second, to the extent that a party wants to impose a preservation obligation, use of typical discovery terminology like "any" and "all," rather than identifying specific categories of information, will hamper that party's ability to impose an enforceable obligation on its opponent.

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If you have visited the restroom in an office building in the last five years, chances are you've had the opportunity to use Georgia Pacific's hands-free paper towel dispenser known as "enMotion."  In a published opinion released yesterday, the Fourth Circuit generally ruled in GP's favor on trademark infringement, tortious interference, and unfair and deceptive trade practices claims.

The enMotion dispenser (pictured here) operates through an electronic motion sensor that dispenses towels without any physical contact from the user's hands.  The dispenser was designed for use with a proprietary paper towel sold exclusively by GP, one that the Fourth Circuit described as having "a soft-fabric like feel created by using a through-air-dried (TAD) process."  (Our own end-user experience confirms that these towels are quite supple, as commercial paper towels go).  The dispensers are not sold, they are leased to distributors, who are permitted to sub-lease them to end-users (like office buildings).  The leases and subleases require the end users to use only GP's towels in the dispensers.  The towels themselves are a non-standard size.

The defendant designed and manufactured a competing paper towel in the exact same non-standard size, but with a "slick, scratchy feel," and marketed it to users of the enMotion dispensers.  Those towels did not fit any other dispenser on the market.

GP sued in the Eastern District for trademark infringement, Lanham Act and common law unfair competition, and tortious interference with contract, and the defendant counterclaimed for unfair and deceptive trade practices.  Judge Boyle granted summary judgment in favor of the defendant on GP's claims and in favor of GP on the defendant's unfair & deceptive counterclaim.

The Fourth Circuit vacated and remanded everything except the counterclaim.  Without delving too deeply into the trademark issues, suffice it to say that the court was convinced that a fact issue existed due to statistical evidence of substantial consumer confusion as to the source of the towels, combined with evidence of the defendant's intent to "stuff" the GP dispensers with its own towels.

As for the tortious interference claim, the district court ruled that the defendant's conduct was legitimate competition and was therefore justified, creating a qualified privilege under North Carolina law.  The Fourth Circuit vacated that ruling with two caveats.  First, GP's claim would be limited to tortious interference with contracts between GP and its distributors because GP did not have contractual relations with the end users themselves.  Second, GP could prevail only if it also prevailed on its trademark claims.  Success on those claims would make the defendant's conduct illegal, which would destroy the qualified privilege.

Finally, the Fourth Circuit affirmed the dismissal of the defendant's unfair & deceptive trade practices counterclaim (describing the district court's reasoning with the Blackstonian phrase "right on the money").  Although the defendant claimed that GP's attempts to exclude other towel manufacturers from its dispensers was unfair or deceptive, the court held that GP entered into its leases "in good faith, openly, and transparently."  Moreover, the defendant had shown no actual injury because it had been successful in competing with GP in the marketplace.

Full Opinion

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Be careful what you request in your complaint, particularly if it's a request for judicial dissolution.  According to a Court of Appeals opinion this week, you'll be stuck with that request if your defendant asks for the same thing.

In Bradley v. Bradley, a husband-wife team were the shareholders and officers of a legal recruiting firm, Laura Segal & Associates ("LSA").  When the couple separated, the business basically did too -- the wife asserted that the husband misappropriated corporate funds and denied her access to the company's books, records, and accounting software.  The husband alleged that the wife was trying to usurp the intellectual property of LSA, freeze the husband out of the business, and terminate his employment.

The husband filed a complaint seeking judicial dissolution, appointment of a receiver, and damages for breach of fiduciary duty.  The wife counterclaimed for judicial dissolution or appointment of a receiver.  The trial court entered a TRO and later a preliminary injunction preventing the parties from taking various actions against each other and "established a procedure allowing the management of LSA’s accounts receivable and payable without the parties having to directly interact with each other."

The husband filed a notice of voluntary dismissal of his dissolution and receivership claims.  The trial court set aside the voluntary dismissal and granted summary judgment on the defendant's counterclaims for judicial dissolution and appointed a receiver.

Three legal issues of note arose in the Court of Appeals opinion:

• The trial court properly set aside the husband's voluntary dismissal of his dissolution and receivership claims.  The voluntary dismissal was void on its face because, once the wife asserted counterclaims arising from the exact same transactions, the husband lost the authority to voluntarily dismiss claims without the wife's consent.
• The husband could not challenge the wife's right to dissolution because his own complaint pled facts supporting dissolution (and, of course, he requested dissolution himself).  The husband was not allowed to contradict his judicial admissions.
• The Court rejected the husband's assertion that the appointment of a receiver should be reviewed de novo.  Instead, the Court followed earlier cases reviewing such appointments for abuse of discretion.

 Full Opinion

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If you didn't think a case with a $55 million default judgment could get more interesting, you were wrong.  The Business Court awarded a total of $82 million in damages this week against a company that successfully set aside the lesser default judgment.

In Deutsche Bank Trust Co. Americas v. TradeWinds Airlines, Inc., three airline-related plaintiffs sued a lessor of large airplanes.  The lessor was funded by deep pockets including George Soros, but not so deep as to enter an appearance before entry of default.  One of the plaintiffs went around its compatriots, moving for and obtaining a $55 million default judgment, then entering bankruptcy in order to avoid further proceedings.  We posted last April about an order in which the Business Court declined to rule during the pendency of a bankruptcy stay, but in which the Court gave strong hints about its likely ruling once the stay was lifted.  Last September, those hints became rulings, as the default judgment was set aside (although the entry of default remained in place).

So what did the defendant gain by having a $55 million award set aside?  An $82 million judgment instead, following a 6-day bench trial.  Here's how the Court got there:

• Two of the plaintiffs (Coreolis and TradeWinds Holdings) lost a combined $11,544,000 that they had to pay in settlement of claims against them due to the defendant's fraudulent inducement.
• TradeWinds itself suffered almost $2.7 million in repair costs, $6.2 million in lease payment losses, and $7.2 million in other damages due to engine failures, for a total of $16.1 million.
• The allegation amounting to unfair and deceptive trade practices were deemed admitted due to the entry of default, so both awards were statutorily trebled.  That resulted in over $34 million in damages to Coreolis and Tradewinds Holdings and over $48 million for TradeWinds.

It wasn't all bad news for the Defendant -- in a separate Order, the Court declined to award attorneys' fees.  The Court found that, because the case was intertwined with efforts to pierce the defendant's corporate veil in New York (to reach Soros and others), this particular case was not capable of resolution, and thus was not the subject of an unwarranted refusal to settle.  In addition, the Court criticized the damages sought by TradeWinds Holdings and Coreolis that were in excess of the ultimate award:  "If those damage claims did not cross the border of speculation, they reached the very edge of the line."

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In what Judge Tennille described as a "close case," the Business Court reconsidered and reversed the prior dismissal of a breach of fiduciary duty claim, but the principles it outlined should not give litigants high hopes for reconsideration motions in general.

Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, N.A. involved an investor suing its advisors over investments gone bad.  The Hospital Authority asserted a number of claims against Wachovia, including a breach of fiduciary duty claim that the Court dismissed last October on a Rule 12(b)(6) motion.

Discovery ensued, and at the end of discovery Plaintiff moved to reconsider the dismissal of the fiduciary duty claim under Rule 54(b).  Several points from the order are worth noting.

First, the Court adopted the federal Rule 54(b) standard, which allows for reconsideration of interlocutory orders at any time before final judgment, but which has judicially-created, policy-based limitations to situations:  "(1) where there has been an intervening change in controlling law; (2) where there is additional evidence that was not previously available; or (3) where the prior decision was based on clear error or would work manifest injustice.”

Second, the plaintiff did not argue an intervening change in controlling law, but instead asserted a new legal theory -- that as a federally registered investment adviser, one of the Wachovia defendants was a fiduciary as a matter of law.  Rather than new law, this argument was based on a 1963 U.S. Supreme Court case and a 2003 decision from the Eastern District of Virginia.  The Court was troubled by the assertion of a new theory on a motion to reconsider:

Motions for reconsideration do not serve as an avenue for a party to “present a better and more compelling argument that the party could have presented in the original briefs.”   Madison River Mgmt. Co. v. Bus. Mgmt. Software Corp., 402 F. Supp. 2d 617, 619 (M.D.N.C. 2005).  Generally, when a party “fails to present his strongest case in the first instance,” he loses the “right to raise new theories or arguments in a motion to reconsider.”  Duke Energy Corp., 218 F.R.D. at 474.  Nonetheless, had Plaintiff presented this newly raised argument initially, it would have affected the Court’s decision.  Metropolitan’s status as a federally registered investment advisor provides the strongest case for asserting clear error of law in the Court’s October 9, 2010 Order.  However, the fact that a party did not make its strongest and best case on prior submissions will not, standing alone, justify reconsideration.

Third, Plaintiff also asserted that newly discovered facts justified reconsideration.  The Court did not believe Plaintiff's argument that the defendant's status as a federally registered investment advisor was a fact not available until discovery.  On the other hand, Plaintiff provided facts adduced during discovery that demonstrated the existence of a special relationship of trust and confidence.

The Court was troubled by the fact that discovery occurred on a dismissed claim, but determined that justice required reconsideration and reversal of the dismissal:

This Court is not inclined to encourage parties to conduct discovery on claims that have already been eliminated in hopes of finding grounds for reconsideration.  Litigation is complex and expensive enough as it is without conducting discovery on claims that have already been dismissed.  Furthermore, viewing Plaintiff’s position charitably, many of the “new” facts adduced could have related to Plaintiff’s breach of contract claim as well as its breach of fiduciary duty claim.

However, the newly discovered facts, if true, would have impacted the Court’s earlier decision.  These new facts contradict the facts on which the Court previously relied.  The Court, therefore, will set aside the concerns expressed herein and hold fast to its ultimate responsibility—reaching “the correct judgment under law.”

In reconsidering the dismissal, however, the Court noted the inequity of allowing Plaintiff to take discovery on the dismissed claim while Defendants relied on the dismissal by not seeking discovery relevant to that claim.  To remedy the situation, the Court ordered discovery by Plaintiff to be closed, but allowed Defendants a 90-day period to conduct discovery on the revived fiduciary duty claim.

Full Order

[Ed. note:  The Business Court has been busy this week issuing orders at a rate faster than your humble author has been able to comment upon them.  Stay tuned for more posts in the coming days on some other recent orders of interest.]

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For anyone who has agonized over a decision between moving to dismiss or moving to compel arbitration, your strategic torment may be over.  A short but important order from the Business Court yesterday ruled that the two options are not mutually exclusive.

In Triad Group, Inc. v. Wachovia Bank, N.A., a bond swap lawsuit filed in April 2009, Wachovia moved to dismiss the claims of the various nursing center plaintiffs.  This April, Judge Tennille dismissed the punitive damages and Chapter 75 claims, but denied the motion as to all remaining claims.  Soon thereafter, Wachovia moved to stay the case and compel arbitration based on a comprehensive arbitration clause contained in one of the written agreements between the parties, and the Court agreed that the clause was enforceable.

The Plaintiffs' most interesting argument was that Wachovia waived the right to arbitrate by moving to dismiss, which caused the Plaintiffs to incur substantial litigation expense during the year that the lawsuit was pending before the Court.  Judge Tennille rejected that argument:

Although the Court is always concerned about the ever-increasing costs of litigation, the fact that one party may file a motion to dismiss prior to invoking an existing arbitration clause is in and of itself insufficient to warrant denial of enforcement of an otherwise valid arbitration agreement.  It would be bad public policy to discourage parties from filing early motions to test the legal sufficiency of claims.

The Court also noted that the Plaintiffs could have avoided their own litigation expense by moving to compel arbitration themselves before Wachovia moved to dismiss.

Although the Order does not address this point, it is consistent with the growing sentiment of many commentators in the profession that arbitration often is no less expensive than litigation.  If that sentiment is accurate, then the expense of some judicial proceeding before compelling arbitration is less likely to constitute the prejudice that must be shown for a waiver of the right to arbitration.

(The image is the only one I could find from Miller Lite's excellent "Let's Watch Both!" series of commercials circa 1993, featuring amalgamated sports like the Full Contact Golf depicted above).

Full Order

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The insolvency of prominent contractor Bostic Construction, Inc. has been a fertile source of Business Court litigation over the last couple of years in three cases against the company's officers and directors.  A recent Bankruptcy Court decision from the Middle District permits the Business Court cases to proceed, holding that they are not barred by a settlement between the bankruptcy trustee and those officers and directors.

The procedural history is complicated (as you would expect with three cases in Business Court and one in Bankruptcy Court) but the underlying facts are not.  Bostic Construction was formed by one of the "Hogs," former Redskins guard Jeff Bostic, and his brother, former St. Louis Cardinals guard Joe Bostic, both Greensboro natives.  In its heyday, Bostic was the nation's second-largest apartment builder, with over $200 million in revenue.  Bostic Construction's operating model focused on construction management, delegating most or all of the labor, materials, and equipment to subcontractors.

During the 1990s, Bostic Construction performed most of its work for unrelated third parties, but at the turn of the millenium, the company transitioned to projects for LLCs owned or controlled by company insiders.  Those insiders also formed other LLCs to provide labor and materials to Bostic Construction at a profit for the LLCs.  Bostic Construction's financial condition deteriorated in 2003 and 2004, and the company's creditors allege that the insiders began acting to ensure the profitability of the LLCs rather than Bostic Construction itself.

Bostic Construction's creditors filed an involuntary Chapter 7 petition in January 2005.  The trustee settled the company's claims against the insiders in 2007.  Three cases then were filed in Superior Court against the insiders:  the Phillips & Jordan case in January 2008, and the American Mechanical and Yates Construction cases in October 2009. 

The insiders moved for Judge Diaz to dismiss the American and Yates cases and moved the Bankruptcy Court for an interpretation that its order approving the 2007 settlement barred the creditors' claims against the insiders.  (By that time, Judge Diaz had already ruled that the plaintiffs in the Phillips & Jordan case had direct claims against the insiders which were not impacted by the trustee's settlement).  Judge Diaz stayed the American and Yates cases pending the Bankruptcy Court's ruling.

The Bankruptcy Court held that the settlement did not bar the Business Court claims.  The key question was whether the creditors' claims were personal, direct claims against the insiders or whether they were derivative claims that could be asserted only by the trustee.  That question is determined by state law. 

Judge Waldrep cited North Carolina cases for a familiar series of propositions:  

Although the general rule is that directors of North Carolina corporations do not owe a fiduciary duty to the creditors of the corporation, an exception exists when there are circumstances amounting to a winding up or dissolution of the corporation. . . .  If the directors and officers continue to operate an insolvent corporation only to recover the amounts owed to them, to the detriment of the corporation’s other creditors, North Carolina courts equate that to a winding up or dissolution and find that the directors and officers owe a fiduciary duty to creditors. . . . However, no duty is owed to creditors, even if the corporation is balance sheet insolvent, when the directors and officers are acting in good faith in running the business.

The claims of constructive fraud, aiding and abetting constructive fraud, and violations of the NC RICO statutes were personal to the creditors, not derivative.  The circumstances of Bostic Construction amounted to a winding up or dissolution of the business, creating a fiduciary duty from the directors to each creditor to support the constructive fraud and aiding and abetting claims.  (The Court noted the ongoing doubt over whether any aiding and abetting claims exist under North Carolina law anymore, but ruled that if they existed at all, they were direct claims).  Similarly, the Court examined the text of Chapter 75D, which includes the element that RICO defendants personally benefit from the illegal conduct.  Based on that element, the Court concluded that the RICO claims were direct, not derivative, and were not barred by the settlement.

Bankruptcy Court Opinion

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The City of Richmond was kind to the City of Greensboro last week.  After nearly a decade of litigation and arbitration, the Fourth Circuit affirmed the district court's rejection of a challenge to a nearly $15 million arbitration award against the general contractor of a wastewater treatment facility.

The published opinion in MCI Constructors, LLC v. City of Greensboro is the latest round in a dispute arising from a 1996 contract.  That contract delegated to the city manager the role of referee and arbitrator for disputes.  The City terminated MCI for cause, and MCI sought relief from the city manager.  After a hearing in 2002, the city manager ruled that the termination for cause was proper.  At a subsequent hearing in 2003 on the issue of damages, the city manager awarded the City over $13 million.

In 2004, on a challenge by MCI to the arbitration award, the Middle District of North Carolina entered summary judgment in favor of the City.  The Fourth Circuit reversed in 2005, 125 Fed. Appx. 471, holding that the District Court's application of a highly deferential "fraud, bad faith, or gross mistake" standard was inappropriate because applying that standard to the city manager, who "in essence was adjudicating his own performance, rights, and liabilities under the contract," would result in an illusory contract.  Instead, the Fourth Circuit required review under "a standard of objective reasonableness 'based upon good faith and fair play.'"

After the Fourth Circuit's original decision, the parties agreed to re-arbitrate the matter, this time before a panel of three arbitrators.  In 2007, the panel ruled that MCI's termination was for cause.  At the damages hearing in 2008, the panel awarded the City $14,939,004.  In 2009, the Middle District rejected MCI's challenges and confirmed the award.

The Fourth Circuit rejected the three main arguments raised by MCI on appeal.  First, the Fourth Circuit held that the Middle District did not err in certifying the matter as final under Rule 54(b).  MCI's claims against the project engineer, who was not party to the arbitration proceedings, did not affect the arbitration in such a way as to require their adjudication before the arbitration award was confirmed.

Second, the Fourth Circuit held that there were no grounds, either under the FAA or at common law, to justify vacating the award.  The award was not procured by "undue means" despite MCI's arguments about allegedly objectionable conduct by opposing counsel.  "[N]o court has ever suggested that the term 'undue means' should be interpreted to apply to actions of counsel that are merely legally objectionable."  The Court also held that MCI failed to show that the alleged undue means led to the procurement of the award.  Although MCI argued that meeting this standard was impossible because the panel did not issue a reasoned award, the Fourth Circuit was unwilling to waive the causal element out of fear that parties would intentionally reject reasoned awards so as to ease their burden of proof later in judicial challenges to those awards.

The Court also rejected MCI's argument that the panel exceeded the scope of its authority.  "[N]either misinterpretation of a contract nor an error of law constitutes a ground on which an award can be vacated. . . .  As long as the arbitrator[s] [are] even arguably construing or applying the contract, as they were here, their awards will not be disturbed."

The Court likewise dismissed MCI's common-law argument that the award "failed to draw its essence" from the contract -- essentially that the award was "impossible to square" with certain contractual provisions.  In doing so, the Court avoided confronting the issue of whether there even exist any common law grounds to vacate arbitration awards after the Supreme Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

Finally, the Fourth Circuit rejected MCI's claim that the award was invalid because it was not reasoned.  MCI claimed that the arbitration was governed by JAMS Rule 24(h), which requires reasoned awards.  The arbitration agreement, however, allowed the panel to proceed pursuant to JAMS Rules or AAA Complex Commercial Arbitration Rules.  The panel having elected the latter, which do not require a reasoned award unless requested before appointment of the panel, the award remained valid.

The Brooks Pierce attorneys comprising the City's team before the Fourth Circuit included Bill Cary, George House, Mike Meeker, and Joey Ponzi.  A number of others at the firm have contributed to the case over its lengthy lifetime.

Full Opinion

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