You Aren't Entitled to "Original" Corporate Records When Making A Shareholder Inspection Request

When is the last time that you needed an "original" document for a trial?  Maybe never.  The Rules of Evidence permit the admissibility of "duplicates."  Rule 1003 of the North Carolina Rules of Evidence says that:

A duplicate is admissible to the same extent as an original unless (1) a genuine question is raised as to the authenticity of the original or (2) in the circumstances it would be unfair to admit the duplicate in lieu of the original.

But the Plaintiff in Beam v. Beam Rest Home, Inc., 1014 NCBC 46, decided in the NC Business Court last week by Judge Bledsoe, raised a stink about getting the original corporate records of the Defendant.  Plaintiff, a shareholder and director of Beam Rest Home, Inc., had made inspection requests as allowed by N.C. Gen. Stat. §§55-16-02(a) and -05(a).  Although the Defendant had already produced copies of all those records, the Plaintiff demanded to see the original records.

Neither statute requires that the corporation allowing inspection must produce its "original" records, and originals are not ordinarily produced when an inspection request is made.

As Judge Bledsoe observed, the "modern practice" is that:

shareholders, directors and their counsel typically receive duplicate copies of requested documents, either in hard copy or digital form, and, absent illegibility or good cause to suspect that the copies are not a true and accurate reproduction of the original records, do not insist on a visit to the corporation’s principal office for a physical inspection of the corporation’s original records.

Op. ¶20.  So, the Judge denied the request for "original corporate records."

Why was this Plaintiff insisting on "original" records when he already had the copies?  It may have been to obtain an  order compelling production of the originals, which might have provided a basis for the recovery of attorneys' fees, said Judge Bledsoe.  Op. ¶21.  The inspection statutes (G.S. §§55-16-04 and -05) allow for an award of fees if a shareholder or director is improperly refused the right to inspect and copy a corporation's records.

A corporation can avoid having to pay attorneys' fees for refusing an inspection request by a shareholder if it has a reasonable belief that the shareholder has not made the request for a "proper purpose."  A proper purpose is any "purpose that is reasonably relevant to the demanding shareholder's interest as  shareholder."  Op. ¶16.  The NC Court of Appeals has found a proper purpose by a shareholder to include: "1) determin[ing] the value of his stock; (2) investigat[ing] the conduct of the management; and (3) determin[ing] the financial condition of the corporation" Carter v. Wilson Constr. Co., 83 N.C. App. 61, 65, 348 S.E.2d 830, 832 (1986).

Given a past history of inspection requests by the Plaintiff, and another, previous lawsuit to obtain corporate records, coupled with the threat of another, the Court ruled that the Defendant had a reasonable basis to believe that the Plaintiff lacked a proper purpose in his request and was attempting to harass the Defendant into offering a buyout of his shares.

Judge Bledsoe, quoting a Delaware Chancery Court opinion, said that shareholder inspection requests "can become an effective and troubling tool for harassment and other mischief" if "not properly monitored by the Court."  Op. ¶22 (quoting Shamrock Activist Value Fund, L.P. v. iPass, Inc., 2006 Del. Ch. LEXIS 212, *10 n. 18 (Del. Ch. 2006).

 

 

 

Business Court Resolves A Trio Of Discovery Issues

Three interesting discovery issues were resolved last week by Judge Bledsoe's Order in Gay v. Peoples Bank.  First, can you obtain in discovery in a class action the fee arrangement between the plaintiff and his  lawyers?  Second, can you obtain (in any kind of case) a protective order against the deposition of your client's top executives?  And third, can you refuse to respond to an interrogatory asking you to identify the witnesses you intend to call at trial?

The answers to those very questions are contained in the Order.

Discoverability Of Engagement Letters In Class Actions

Gay is a purported class action against Peoples Bank regarding overdraft charges.  Peoples asked Gay to produce "letters or other forms of agreement concerning the terms of [Plaintiff's] representation by [his] lawyers in the case."  Order ¶2.

Gay responded that the engagement letter was privileged and not relevant to the subject matter of the litigation.

Judge Bledsoe observed that this was a case of first impression in North Carolina, stating that "[t]he North Carolina appellate courts do not appear to have addressed the production of an attorney fee agreement in a purported class action."  Order  ¶13.

But multiple federal courts have ruled on this issue and have generally held that fee agreements are not relevant to the issue of class certification.  See, e.g., Stanich v. Travelers Indem. Co., 259 F.R.D. 294, 322 (N.D. Ohio 2009)("Most courts . . . find [discovery of fee agreements] irrelevant to the issue of class certification, except perhaps to determine whether the named plaintiffs and class counsel have the resources to pursue the class action.").

Fee agreements can become relevant later in a case, however, if the class obtains a judgment or a settlement in its favor.  See, e.g., Porter v. NationsCredit Consumer Disc. Co., 2004 U.S. Dist. LEXIS 13641, *7 (E.D. Pa. 2004)('[f]ee agreements may be relevant . . . to the question of awarding attorney's fees upon settlement or judgment.").

Judge Bledsoe said that he found the federal cases persuasive, and ruled that the fee arrangement between Gay and his counsel was not relevant to the subject matter of the case and therefore not subject to discovery.  He denied the Bank's Motion to Compel without prejudice to its renewal at a later stage in the case.

But the Bank was successful at this point on a couple of separate issues: to prevent two of its top executives (its CFO and its Chief Administrative Officer) from being deposed, and to avoid having to respond to an interrogatory asking it to identify its witnesses for trial.

Protective Order Against Discovery Of Top Executives

The Bank said that five of its Officers had already been deposed and that further depositions of its C-level officers would be unduly burdensome, unnecessary and repetitive.

The Court gave a passing nod to something known as the "apex doctrine."  Judge Bledsoe wrote that:

[u]nder the apex doctrine, 'before a plaintiff may depose a corporate defendant's high ranking officer, the plaintiff must show how "(1) the executive has unique or special knowledge of the facts at issue and (2) other less burdensome avenues for obtaining the information sought have been exhausted."'

Order ¶18 & n.4 (quoting Smithfield Business Park, LLC v. SLR Int'l Corp., 2014 U.S. Dist. LEXIS 16338, *6 (E.D.N.C. 2014)).

But the Judge didn't go down the road of accepting the apex doctrine.  He accepted the Bank's argument that the additional depositions of the chief officers were unnecessary and that they would disrupt the Defendant's operations. He ordered that the depositions not be taken.

You Don't Have To Identify Your Trial Witnesses Before Trial

The Court also dealt with the issue whether the Bank was obligated to identify the witnesses it would be calling at trial so that the Plaintiff could decide whether to depose them before the end of discovery.  Apparently the Plaintiff's counsel raised this issue at a hearing, and had not served an interrogatory asking for this information. 

Judge Bledsoe observed that "[i]t is axiomatic that Defendant is not obligated to provide answers to interrogatories that Plaintiff has not yet served."  Order ¶23.

But even if an interrogatory requesting that information had been served, it would have been denied.  Judge Bledsoe stated that:

North Carolina law is clear that 'a party is not entitled to find out, by discovery, which witnesses his opponent intends to call at the trial.'

Order ¶24 (quoting King v. Koucouliotes, 108 N.C. App. 751, 755, 425 S.E.2d 462, 464 (1993)).

The Bank is represented by Reid Phillips and Dan Smith of Brooks Pierce.

 

 

 

Trade Secrets Claims Can Be Tough To Succeed On In The Business Court

If you want to pursue a trade secrets claim in the Business Court, you've got to disclose the details of your trade secret.  The Opinion last week in Unimin Corp. v. Gallo, 2014 NCBC 43 illustrates that point in detail. 

It seems at first blush like a case made for a preliminary injunction for the misappropriation of trade secrets, which is what the Plaintiff Unimin sought.  The individual Defendant, Gallo,  had been Unimin's General Manager of Research and Development.

Gallo had accepted a position with one of Plaintiff's competitors in the business of mining and processing "high purity quartz" (HPQ).

If you are like me, you have dwelt in ignorance of the importance of HPQ to your existence.  It is "one of today's key strategic materials for the high-tech industry."  It is used in semi-conductors, tubing for high temperature lamps, telecommunications devices, and in lenses for telescopes.

The quartz refined into HPQ is mined in only a few places around the world, one of them being in Spruce Pine, North Carolina.  Wherever it is mined, its slight impurities must be removed from the quartz in order to render it true high purity.

Plaintiff Unimin says that it is the global leader in HPQ and that its methods of processing the HPQ which it sells are "confidential, proprietary, and a trade secret." Op. ¶13. It said that Gallo had been the inventor or a "key player" in the development of its trade secrets and that he should be enjoined from using them for the benefit of his new employer.

Hadn't the Plaintiff taken steps to protect itself from Gallo's disclosure of this important and proprietary information?  Of course it had: Gallo was bound up by three separate agreements.  There were two Confidentiality Agreements and a Non-Compete.

The validity of those restrictive agreements wasn't the issue in this case.  Instead, it was whether the Plaintiff had sufficiently identified its trade secrets.

Plaintiff broadly described its trade secrets as the various processes that it followed in refining quartz, but failed to provide enough sufficient specifics to satisfy Judge Bledsoe that the Defendants had been put on notice as to what the trade secrets were.

It is hard to distill from this Opinion what you should show  in pursuing a trade secrets claim in the Business Court, but I will take a stab at it.  (Or if you want the full scope of the Court's analysis, read Paragraphs 35 to 50 of the Opinion).  The answer is not to refer generally to the process you allege is a protected trade secret.  Be prepared to give the details.  Judge Bledsoe said this:

Plaintiff broadly identifies various processes as its alleged trade secrets without offering evidence that those processes are unique to Plaintiff or have been modified by Plaintiff in unique ways.  For example, Plaintiff describes its 'mining process control plan as using "[REDACTED] modeling and process simulations' that develop 'mineral processing strategies' but does not offer evidence explaining what those simulations and strategies are or why these simulations and strategies are unique to Plaintiff.

Op. ¶41.

Apart from the Plaintiff's lack of specificity about its trade secrets, two other factors doomed Plaintiff's request for an injunction.  The first was the argument by Gallo's new employer that any trade secrets claimed to be known to Gallo would be of little use to it, given that its quartz was extracted from a different mine than the North Carolina mine operated by Plaintiff.  Judge Bledsoe found that the differences in the qualities of the different quartz ores "appear to require sufficiently different processes to mine and develop HPQ to render at least some, if not all, of Plaintiff's alleged trade secrets non-transferable."  Op. ¶57.

The second factor was a lack of any showing that Unimin was at risk of Gallo disclosing its trade secrets.  To the Court, this was established by the fact that Gallo had been gone from the Plaintiff's employment for five years before taking a job with his new employer.  During that five year hiatus, he had abided by the terms of his five year non-compete.  Judge Bledsoe ruled that Gallo's:

long-term adherence to his contractual obligations is persuasive evidence that he is not a threat to violate his contractual or other legal commitments to Plaintiff and disclose Plaintiff's alleged trade secrets.

Op. ¶59.

A "mere possibility of misappropriation" under the NC Trade Secrets Protection Act is insufficient to obtain an injunction.  Op. ¶63.

Although Judge Bledsoe had previously granted a Temporary Restraining Order to the Plaintiff, he denied its Motion for a Preliminary Injunction.

 

 

 

The Delaware Court Of Chancery Can See Forever On A Clear Day (Even To North Carolina)

I don't usually write about decisions from the Delaware Court of Chancery because it's rare for that Court to even mention North Carolina.  But a decision by that Court this week -- in City of Providence v. First Citizens Bancshares, Inc., explicitly approves that Delaware corporations can, via a forum selection clause in their bylaws, specify that corporate law disputes be litigated in North Carolina courts.  So that decision is certainly worth note in this North Carolina-centric blog.

Here are the facts:  First Citizens Bank & Trust Company, which has banking branches all over North Carolina (and in 16 other states) and which is headquartered in NC, is a Delaware corporation.  The Court of Chancery dubbed it "FC North."  FC North announced on June 10th a merger transaction with First Citizens Bancorporation, Inc., a separate bank holding company incorporated and based in South Carolina ("FC South" to the Court). 

On the same day as the announcement of the merger, the FC North Board amended its bylaws to provide that (1) any derivative action against the corporation, (2) any claim for breach of fiduciary duty, (3) any claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, or (4) any claim governed by the internal affairs doctrine must be brought in the North Carolina Courts.  The full text of the bylaw is quoted in footnote 18 to the Court's opinion.

In the course of the inevitable lawsuit stemming from almost every merger announcement, the City of Providence challenged the validity of the bylaw amendment.  It wanted to litigate in Delaware, not North Carolina.

Perhaps you are wondering whether a board of directors is free to revise its corporation's bylaws without shareholder consent.  The Court of Chancery ruled on that issue a while ago, holding:

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders. . . . [A] change by the board [to the bylaws pursuant to 8 Del. C. § 109(a)] is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.

Op. at 9 (quoting Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013).

So, now the Court of Chancery confronted a new question.  As it put it, that question was "whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes."  Op. at 8.

The answer, as you can guess already, is yes, a Delaware board may dictate that disputes over Delaware corporate law matters involving its corporation must be litigated in a non-Delaware court.

The Chancery Court rejected the argument that FC North's directors, all based in North Carolina, were self-interestedly trying to tilt the playing field in their favor.

This was perhaps the point at which the Court of Chancery might have lavished praise upon the quality of the Courts in North Carolina, their unbiased nature, and their judicial prowess.  But it fell short of that mark, stating only that:

Providence has not provided any well-pled facts to call into question the integrity of the federal and state courts of North Carolina or to explain how the defendants are advancing their 'self-interests' by having their approval of the proposed merger adjudicated in those courts as opposed to the courts of Delaware.

Op. at 14.

A law professor at Widener University School of Law was more provincial in his outlook.  He was quoted in a news article as saying:

One of the better arguments for a presumption that courts of the state of incorporation will handle internal affairs disputes is that those courts are more experienced in the matter and are the ultimate source of definitive legal rulings.

That’s not to say that courts of other states can’t ever do a decent job, but a bylaw that systematically moves litigation from the courts of the state of incorporation to some other jurisdiction doesn’t exactly advance the policy argument just noted.

Article.

Moreover, as far as the alleged self-interest of the directors in amending the bylaw at the same time as their announcement of the merger, the Court noted that the bylaw did not mean that "the proposed merger will . . . be absolved from judicial review" it meant only that any review "must occur in a North Carolina court."  Op. at 21.

In fact, the Court pretty much saw the timing issue as irrelevant.  It said "[t]hat the Board adopted [the bylaw change] on an allegedly 'cloudy' day . . . rather than on a 'clear' day is immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in this timing."  Op. at 21.

If you are expecting the case challenging the merger of FC North and FC South to pop up in the Business Court, that seems unlikely.  The forum selection provision that was challenged makes the Eastern District of North Carolina the designated forum unless that court lacks jurisdiction or the corporation consents in writing to an alternative forum.

Note to North Carolina corporate lawyers forming Delaware corporations which will be headquartered in North Carolina  (of which there must be hundreds): consider including in the bylaws a forum selection provision specifying that disputes be litigated in the North Carolina courts.

Receiver Appointed To Oversee Sell-Off Of Corporation's Intellectual Property

When I wrote last week about Americana Development, Inc. v. Ebius Trading & Distributing Co., the Business Court had entered a TRO against the Defendants prohibiting them from disposing of the intellectual property of Defendant Ebius Trading and using the proceeds to pay off debts which had been personally guaranteed by its officers and principals.

This week,  the court followed up with an Order granting a Preliminary Injunction prohibiting the same conduct, and it has also appointed a Receiver to handle the disposition of the assets of the Defendants.

If you are not familiar with the concept of receivership, North Carolina allows for the appointment of a receiver "when a corporation becomes insolvent or suspends its ordinary business for want of funds, or is in imminent danger of insolvency. . . ."  N.C. Gen. Stat. §1-507.1.  It is often referred to as the state law equivalent of bankruptcy.

You might be wondering why injunctive relief wasn't sufficient in this case.  Judge Jolly expressed concern about the willingness of the individuals associated with the corporations to promptly liquidate the intellectual property of the entities.  He said that:

the value of the intellectual property has a finite shelf life.  Federal courts have long recognized that the appointment of a receiver (or interim trustee in bankruptcy) may be necessary to promptly liquidate assets when the assets are 'liable to deteriorate in price and value.'

Op. 28 (quoting Collier on Bankruptcy 2002.02[2]).

He granted the Receiver broad powers, literally running from a to z in the Court's Order.

The only one that I blinked at was its ruling that the person appointed as the Receiver (a lawyer in a law firm) would be entitled to the "customary hourly rates" for him and other members of his firm.  Order at 17. That may be excessive unless the Receiver or members of his firm end up performing services "beyond the ordinary routine of a receivership," as the receivership statute says that:

the court shall allow a reasonable compensation to the receiver for his services, not to exceed five percent upon receipts and disbursements, and the costs and expenses of administration of his trust and of the proceedings in said court, to be first paid out of said assets. The court is authorized and empowered to allow counsel fees to an attorney serving as a receiver (in addition to the commissions allowed him as receiver as herein provided) where such attorney in behalf of the receivership renders professional services, as an attorney, which are beyond the ordinary routine of a receivership and of a type which would reasonably justify the retention of legal counsel by any such receiver not himself licensed to practice law.

G.S. §1-507.9.

If you are thinking that this receivership remedy sounds attractive and is easy to obtain, you are wrong.  Judge Jolly stated at the outset of his opinion that "receivership is a 'harsh' remedy and 'should be utilized only with "attendant caution and circumspection."'  He also said that "a receivership is appropriate 'only where there is no other safe or expedient remedy.'"  Op. 24.

In the circumstances of this case, where the principals of the corporations were "engaged in fraud and gross misconduct in the management" of those corporations (Order 26), the appointment of  a Receiver was deemed appropriate. 

Don't forget that this outstanding result was obtained by my Brooks Pierce colleague Clint Morse.


 

You Win Some, You Lose Some: How Should A Request For Attorneys' Fees Be Ruled Upon?

Let's say that you've tried a case, you have lost on a few of your claims, but you won a couple of claims and have gotten a judgment for damages against the defendant for $25,000.  You've billed your client $1,162,895 for your services and your mixed success. And you have a statutory basis for recovering your attorneys' fees.

What do you think the result of a motion to the Court for more than a million dollars in fees would be on those bare facts?  Astonishment from the Judge to whom you've made the fee request?  Maybe a lecture?

Judge Gale was not astonished at the more than a million dollars in fees sought on similar facts in his ruling last week following a trial in Out of the Box Developers, LLC v. Doan Law, LLP, 2014 NCBC 39 , and he did not lecture on the amount of the fees, except maybe once (see below).  In making his ruling he made a number of valuable observations on fee awards in cases of mixed success, like Out of the Box.  The basis for attorneys' fees?  Two of the jury's answers to the issues supported a finding of unfair and deceptive practices, allowing for fees under G.S. §75-16.1.

First, he said that"[i]f a plaintiff brings multiple claims arising from a common nucleus of facts, and succeeds on some claims but not others, the court is not necessarily required to allocate fees between the successful and unsuccessful claims."  Op. ¶51

Second, even so, "where the fee requested and the success achieved are incongruous, an adjustment must be made to assure that the fee awarded is reasonable."  Id.

Third, in determining the amount of an appropriate adjustment, the Court may apply a "percentage reduction method."  Judge Gale applied a 50% reduction to the invoices presented by Plaintiff's counsel.

And finally, as far as a lecture, Judge Gale delivered a mild rebuke to Plaintiff's counsel for overlawyering the case.  He said:

the invoices  [presented by Plaintiff's counsel] demonstrate that [Plaintiff's] counsel engaged in what has become the all-too-common practice in today's litigation environment of having multiple lawyers attend a task where a single attorney might suffice.

Op. ¶60 (emphasis added).

He dampened that criticism by continuing:

particularly in complex cases, there are certain occasions where it is necessary, and indeed efficient, for multiple attorneys to participate, for example, in client or attorney conferences where core theories or strategies are developed.

Id.

After that observation, the Court eliminated the time billed at trial for a third attorney, ruling that the two more senior attorneys (a partner and an associate) could have handled the trial on their own.  He took pains to note that his elimination of that attorney's fees was "no reflection on the quality of her participation, as she contributed well."  Id.

Judge Gale also eliminated a fair amount of associate time from the fee request due to changes in the associates working on the case, which he attributed to the long duration of the case (it ran for four years).  In some instances, he reduced the associate time by 75%.

For those who are looking for a barometer of the reasonableness of their hourly rates, Judge Gale found the partner's rate of $495 an hour to be "reasonable and appropriate," as he did for the lead associate's hourly rate of $260 an hour.  Other associate rates of $180 to $250 per hour were found similarly reasonable.  So were legal assistant rates of $130 an hour.

All that discussion and the accompanying reductions led to an award of $467,827.63 against a fee request of $1,162,895, after Judge Gale parsed through more than 40 monthly invoices, invoice by invoice.  That award bears interest at the legal rate until it is paid.  Order ¶70 (4).

Will the Defendant pay it?  I doubt it, based on the facts their own counsel moved to withdraw before trial because his bills had not been paid and he did not expect them to be paid going forward (see Order ¶19), and because the Defendant's pretrial settlement offers were negligible and they did not include an offer to pay the sanctions of approximately $35,000 which had been previously ordered against it for discovery non-compliance.  Plus, who has half a million dollars sitting around to pay the opposing party's attorneys' fees?

You might be wondering about the daily interest on that fee award.  My calculation is $102.54 per day at an 8% interest rate (the rate allowed by G.S. §24-1).

If you remember the name Out of the Box, that's probably because I have written about decisions in the case several times: about sanctions for violations of a Protective Order; the Business Court's dismissal of an appeal of those sanctions; sanctions for violation of a discovery order; and the proper way top serve a non-party with a subpoena.

Who Bears The Burden Of Proving Waiver Of Attorney-Client Privilege?

This week, in an Opinion in Safety Test & Equipment Co. v. American Safety Utility Corp., 2014 NCBC 40, Judge Gale made a significant ruling on which party bears the burden of proof in showing a waiver of the attorney-client privilege (or showing the absence of a waiver)..

The elements that must be shown to make out the privilege are pretty well established.  Communications between lawyer and client are protected by the privilege if:

(1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated[,] and (5) the client has not waived the privilege.  

Op. 11 (quoting Isom v. Bank of America, N.A., 177 N.C. App. 406, 411, 628 S.E.2d 458, 462 (2006))(emphasis added).

Case Of First Impression In North Carolina

But as to that requirement that "the client  has not waived the privilege," does the party asserting the privilege need to prove that there has been no waiver?  That's the difficult task of proving a negative, and as Judge Gale observed, no North Carolina appellate decision has clearly considered whether "the party claiming privilege has an initial burden to prove the negative of a waiver or whether the privilege proponent need only prove absence of waiver in response to an adequately supported challenge."  Op. 12.

The case before Judge Gale involved a letter from the counsel for Defendant American Safety to one of the individual Defendants (Price) regarding that Defendant's possible employment with American Safety.  As you might guess, this is a case between competing businesses alleging misappropriation of trade secrets.

Curiously, the Plaintiff already possessed a redacted copy of the otherwise privileged letter, though the parties disputed how Plaintiff had obtained the redacted copy.  Plaintiff said that Price had voluntarily given it the letter, but Price denied that.  The Defendants implied that the letter had been stolen.

The Plaintiff also sought by motion to compel to obtain another letter from the same counsel for American Security written about two weeks later, which was identified on a privilege log.

So who wins this skirmish?  The party claiming the letter is protected by the privilege and denying any waiver, or the opposing party, with disputed evidence of waiver?

The Court Adopts A Burden-Shifting Approach

In resolving this question, the Court adopted a "burden-shifting approach," which it said was "'[t]he prevalent, albeit unstated, practice' in the federal courts where issues of potential waiver arise."  Op. Par. 13 (quoting 2 Paul R. Rice, Attorney-Client Privilege in the United States, §9:22, at 82 (2013-2014 ed. 2013).

That approach goes like this:

Under this burden-shifting approach, courts impose the initial burden of establishing the basic elements on the privilege proponent. This initial burden does not require the privilege holder to affirmatively negate waiver. Rather, once the proponent of the privilege establishes the basic elements of privilege, the burden of production of evidence shifts to the opponent to establish a prima facie case of waiver.  If the privilege opponent establishes a prima facie case of waiver, the burden of going forward with evidence shifts back to the proponent to rebut the prima facie case by demonstrating that the privilege is still viable.  Ultimately, the privilege proponent bears the burden of persuasion.

Op. 13 (citations omitted).

Given that the parties submitted conflicting evidence on the waiver issue, Judge Gale applied the principle that "[w]here the weight of the evidence is equal, the adverse ruling must be against the party with the ultimate burden of proof."  Thus, the Defendant lost on its claim of privilege, and it was directed to produce an unredacted copy of the letter already in the Plaintiff's possession.

Subject Matter Waiver Applies When The Waiver Is Not Intentional

The Defendants were also ordered to produce the second letter, the one which was not in the Plaintiff's possession.  Judge Gale said that he could not conclude that the waiver as to the first letter was inadvertent and that the waiver of privilege in the first letter therefore extended to the second.  Op. 19.

The result would have been different if the waiver had been inadvertent.  The Business Court has previously held that

[T]he general rule that a disclosure waives not only the specific communication but also the subject matter of it in other communications is not appropriate in cases of inadvertent disclosure . . . .

Morris v. Scenera Research, LLC, 2011 NCBC 34 at *33.

Judge Gale stanched the flow of blood there.  He ruled that he would not require the Defendants to produce any other communications from their counsel.

 

 

When Winding Up A Corporation Don't Do This

I don't know any lawyers who specialize in winding up corporations, but if any of you are out there, you should read this post.

It is important to remember, when winding up a corporation, that "principals and directors of a corporation owe a fiduciary duty to creditors of the corporation when the corporation is insolvent and 'under circumstances amounting to a "winding up" or dissolution of the corporation.'"  Order 6.

In an Order entered last week in Americana Development, Inc. v. Ebius Trading & Distributing Co., Judge Jolly entered a TRO against a financially troubled corporation preventing it from paying debts that had been guaranteed by its principals and officers to the exclusion of its other debts.

In granting a Temporary Restraining Order, Judge Jolly said that the individuals were:

using their positions as principals and officers of [Ebius and its parent corporation] to secure a personal benefit by satisfying only those debts for which they are personally liable.  If Defendants are permitted to favor only those creditors whose debts are personally guaranteed, Plaintiff, as a non-guaranteed creditor of Defendants, would be at risk of significant injury as its claim would go wholly unsatisfied as a result of the improper distribution by [the individuals].  The injury caused by the improper liquidation of Defendants' assets would be irreparable.

Op. 7.

The Defendants were enjoined from paying the debts on which Ebius was not liable, and also from paying any of the corporation's debts other than on a pro rata basis.

Congratulations to my colleague Clint Morse  for obtaining this result for the Plaintiff.

 

The Motion You Probably Shouldn't Bother To Make In The Business Court (Or In Any Other Court)

I think I might have made a Motion for a More Definite Statement.  If I did that, I did it only once, and I can't remember the result.  Asking for a more definite statement is a rarely used litigation maneuver, allowed by Rule 12(e) of the North Carolina Rules of Civil Procedure.

The Defendant in the NC Business Court case of Shaw v. Shaw made a Rule 12(e) Motion but it was rejected in an Order yesterday by Judge Bledsoe.  The Judge said:

Motions for a more definite statement are not favored by the courts and are 'sparingly granted because pleadings may be brief and lacking in factual detail, and because of the extensive discovery devices available to the movant.'  Ross v. Ross, 33 N.C.App. 447, 454, 235 S.E.2d 405, 410 (1977)(citations omitted).  As long as the pleading meets the standards of N.C.R.C.P.  Rule 8 and the opposing party is adequately notified of the nature of the claim, a motion for more definite statement will be denied.  Id.

Order 10 (emphasis added).

If you are curious about the allegations in the Complaint which were alleged to be too indefinite to allow a response, they were paragraphs 25(e) and (j), which concerned the Defendant's claimed making of unauthorized loans and payment of excessive compensation.

Judge Bledsoe ordered that the allegations fairly notified the Defendant of the claims against him, given the notice pleading requirements of Rule 8.

What about Complaints that go beyond the notice pleading requirements of Rule 8, that have too much detail?  That's a different kettle of fish. I've more often made a Rule 8(e) Motion, arguing that a Complaint violated Rule 8 because it was not "concise and direct."  But that's mainly because I like the word "prolix."  You don't get to use it very often.

Mark Your Calendar For October 1st For Changes To The Business Court

If you litigate cases in the NC Business Court, mark your calendar for October 1st.  That's when the General Assembly's "modernization" of the Business Court is due to become effective.  The bill containing these changes was signed into law by Governor McCrory last week

I wrote about the proposed bill back in May, and you can look back at that post as most of the changes proposed in the initial version of the bill have made it through to the approved version.

There were some changes to the bill before it was passed, and here are a few new wrinkles:

Broadened Scope Of Appeals To The NC Supreme Court

In the original bill, the General Assembly authorized a direct appeal to the NC Supreme Court from any final judgment of the Business Court.

The enacted law broadens the scope of Business Court rulings that can be appealed to the Supreme Court, allowing appeals from an interlocutory order from the Business Court that does one of the following:

a.     Affects a substantial right.
b.     In effect determines the action and prevents a judgment from which an appeal   might be taken.
c.      Discontinues the action.
d.     Grants or refuses a new trial.

Revised G.S. §7A-27.

I'm worried about the Supreme Court getting bogged down in deciding whether an interlocutory order really "affects a substantial right."  The language regarding interlocutory appeals is identical to the language governing interlocutory appeals to the NC Court of Appeals. It seems like half of the decisions from the Court of Appeals go on for pages on that issue before deciding that the appeal before it doesn't "affect a substantial right" and should therefore be remanded to the trial court.  The Supreme Court may face the same quicksand. 

But even so, this change will provoke more business-related decisions from the NC Supreme Court.  That's certainly a good thing.  I'm at a loss to remember the last one -- it might be Meiselman v. Meiselman, 307 S.E.2d 551, 309 N.C. 279 (1983), decided over thirty years ago.

More Written Opinions From The Business Court

Under the enacted law, the Business Court Judges will be required to issue a written opinion granting or denying a motion under North Carolina Rules of Civil Procedure 12, 56, 59, or 60, "or any order finally disposing of a complex business case"  except for orders approving a settlement  or a jury verdict.  New G.S. §7A-45.3.

That's a significant expansion of the Court's opinion writing obligation.  Currently, its only obligation to issue a written opinion is "upon final disposition of the case" per Rule 2.1(b) of the North Carolina General Rules of Practice.

And the Court currently issues many one or two paragraph orders denying motions to dismiss (per Rule 12) or for summary judgment (per Rule 56).  Will those brief rulings constitute "written opinions" denying those motions, or will the Court need to engage in detailed discussion about why it is denying a motion?

Stay of Cases That Should Be, But Aren't Designated To The Business Court

The new law requires in G.S. §75A-4(b) that certain types of cases must be designated to the Business Court.  Briefly, these are contested tax cases on appeal from the Office of Administrative Hearings, many cases falling within the Court's jurisdiction in which the amount in controversy is at least $5 million, and cases involving regulation of pole attachments pursuant to G.S. §62-350.

On that $5 million threshold, the party drafting the pleading is obligated under an amendment to Rule 8 of the North Carolina Rules of Civil Procedure contained in the passed bill to state whether relief is demanded in that amount.

If the party filing a case which the statute requires be designated to the Business Court doesn't do so, the Superior Court in the county where the case was filed must stay the case until the party who was required to designate it has done so.  The original  version of the bill allowed a dismissal without prejudice as an alternative.  New G.S. §7A-45.4(g).

Designation Fee Now Recoverable As A Cost

It's expensive to designate a case to the Business Court.  The Legislature raised the fee to $1,000 in September 2009, and the new law raises the fee by $100, to $1100.  New G.S. §7A-305(a)(2)

But the good news now for parties who designate a case, and then prevail, is that the designation fee will now be a recoverable element of costs.  That's in new G.S. §7A-305(d)(12).  This change was lacking in the original version of the bill.