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

The lawyers who represented a class of Wachovia shareholders in the lawsuit over Wachovia's merger last year with Wells Fargo have gotten a ruling on their application for $1,975,000 in fees. Judge Diaz knocked that application down by over a million dollars -- or more than half of the fees sought -- to $932,621.98.

The Order today in Ehrenhaus v. Baker ruled that "the time spent by counsel on the case appears to be somewhat excessive," and that "the hourly rates of Plaintiff's New York counsel [of $750 per hour] are far in excess of those normally charged by attorneys in North Carolina."

I cannot tell you how the Court got to the $932,621.98 number because, as Judge Diaz observed, Plaintiff's counsel "did not submit detailed time records of the work done." But the fee application claimed 2,333 hours of work, which breaks down to an award of $399.75 per hour.

On a more serious note, there are two parts to the Order that may have more of a future precedential value.  One is that Judge Diaz' ruling certified a non-opt-out class. In other words, class members didn't have the traditional right to opt out of the settlement and pursue their individual claims. The Court said that this type of certification was appropriate given that this was a lawsuit over a merger seeking primarily equitable relief. There are no appellate cases in North Carolina approving such a non-opt-out certification, although the Business Court has certified such classes before.

The other is the Court's consideration of the reaction of the class itself in determining that the settlement was adequate. Judge Diaz said that "the reaction of the class to the settlement is perhaps the most significant factor to be weighed in considering its adequacy." He noted that over a million class members had received notice of the settlement, but that only 51 had objected. He held that "the overwhelming majority of the Class has been virtually silent as to the Proposed Settlement," and that "the muted reaction of the Class . . . supports a finding that the Proposed Settlement is fair and reasonable."

I don't think this was the tacit approval that Judge Diaz thought it was. It's more likely to me that Wachovia's shareholders were just tired of the whole darn thing.

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If you are removing a case to federal court where there are multiple defendants, it can be a tricky business. If the defendants are served at different times, when does the thirty days for a removal under 28 U.S.C. § 1446(b) begin and end running?

There is a split in the Circuit Courts on this issue. In the Fifth Circuit, the rule is the "first-served defendant rule." The thirty days starts to run as soon as the first defendant is served. If the first served defendant doesn't remove thirty days after it is served, defendants served later can't remove.

The rule is exactly the opposite in the Sixth, Eighth and Eleventh Circuits, which follow the "last-served defendant rule." Each defendant, no matter when it is served, has thirty days from the date of service on it to remove.

The Fourth Circuit's position wasn't clear. A footnote in McKinney v. Board. of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), suggested that the Circuit might be a "first-served" jurisdiction.  But in today's decision in Barbour v. International Union, the Fourth Circuit dismissed that footnote as "classic judicial dictum" and joined the "last-served" camp.

The majority in Barbour held "that in cases involving multiple defendants, each defendant, once served with formal process, has thirty days to file a notice of removal pursuant to 28 U.S.C. § 1446(b) in which earlier-served defendants may join regardless of whether they have previously filed a notice of removal."

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Only a handful of new cases were designated to the Business Court in January 2010. That may be a function of the cold weather, or perhaps it's a different kind of chilling effect, the $1,000 fee to designate a case to the Court. In any event, here are the six new cases:

Air Systems and Equipment Co. v. Sullair Corp.: (Catawba)(Diaz): Plaintiff claims that the Defendants used its confidential trade secret information to raid its workforce and hire several of its employees in violation of the North Carolina Trade Secrets Protection Act.

Beadnell v. Coastal Communities at Ocean Ridge Plantation, Inc. (Brunswick)(Jolly): another case (there are now several in the Business Court) involving claims by residential lot buyers that the price of their lots were grossly inflated through the fraud of the developer, with the cooperation of banks and appraisers.

Connett v. Jackson National Life Ins. Co. (New Hanover)(Jolly): apparently supersecret.  The Complaint and the Notice of Designation were filed under seal.

Coremin v. McNamara (Guilford)(Tennille):issues involving LLCs and partnerships, including whether a person may claim a membership interest in a North Carolina LLC based on an oral promise. (This one was designated to the Court on December 31, 2009).

LS Mtron, Ltd. v. Escorts, Ltd. (Edgecombe)(Jolly): Plaintiff, a creditor in a receivership proceeding, seeks to subordinate the claim of a secured lender (Textron Financial) based upon the lender's claimed knowledge of the financial fraud of its customer.

RS&M Appraisal Services, Inc. v. Alamance County (Alamance)(Tennille):dispute concerning services provided by plaintiff to Alamance County in connection with its octennial real property evaluation. Business Court jurisdiction is based on counterclaims by the County alleging conspiracy in restraint of trade and a combination in restraint of trade.

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What is a "dynasty trust"?  And what does that have to do with business litigation?

To answer the second question first, not much. But a case decided today by the North Carolina Court of Appeals, which affirms the validity of a 2007 statute which permits dynasty trusts, originated in the North Carolina Business Court. So it gets mentioned on this blog.

A dynasty trust is a trust designed to exist for multiple generations of a family, potentially forever, usually avoiding generation skipping tax. The North Carolina Legislature facilitated the creation of such trusts when it enacted N.C. Gen. Stat. §41-23 in 2007.

But that legislation, titled "Perpetuities and suspension of power of alienation for trusts" raised issues whether it violated the Rule Against Perpetuities, which has constitutional roots in North Carolina.

Section 34 of Article I of the state Constitution says that "[p]erpetuities and monopolies are contrary to the genius of a free state and shall not be allowed." A year ago, in Brown Brothers Harriman Trust Co., N.A. v. Benson, Judge Diaz ruled in an unpublished opinion that the statute did not conflict with the Constitution.

The Court of Appeals ruling today affirmed that decision. It holds that a trust created per Section 41-23 "may remain valid in perpetuity" so long as the provisions of the statute are complied with. That means that "the trustee has the power to sell, either expressed or implied, or . . . there exists an unlimited power to terminate the trust in one or more persons in being."

If you want the detailed analysis, which includes discussion of "estate entails," and "fee tail estates" and Supreme Court decisions nearly 200 years old, you'll have to read the opinion. If you want to brighten the day of an estate planning lawyer or tax lawyer with the happy news about dynasty trusts, you can forward this post to him or her by clicking on the little envelope icon at the bottom.

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A Joe Friday "just the facts ma'am" kind of affidavit was the subject of the North Carolina Supreme Court's decision at the end of last week in Bird v. Bird.

The issue? Whether the affidavit, presented in opposition to a motion for summary judgment, complied with Rule 56(e) of the North Carolina Rules of Civil Procedure.

That Rule says that "supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein."

The affidavit in Bird came from a private investigator who had been tailing the boyfriend of the Plaintiff's ex- wife. The Plaintiff was trying to show that his ex was cohabitating with her boyfriend. If that were so, it meant that the Plaintiff's obligation to pay alimony would end.

The ex-wife said she wasn't cohabitating. She moved for summary judgment. In opposition, the husband presented his investigator's affidavit. The wife objected to the PI's testimony, saying that it wasn't based on personal knowledge.

She had a point. The problem was that the affidavit was written in cop-speak. It said things like:

[The subject] was observed during the months of February and March 2007.

During the investigation, [the subject] was observed at [the wife's] residence for a minimum of eleven (11) consecutive nights.

[The subject] was observed to park, regularly, in [the wife's] garage.

[The subject] was regularly observed assisting [the wife] with chores such as walking the dog, taking care of the dog, unloading the vehicle when she returned from trips, and assisting her when she returned from the grocery store.

The ex-wife said the trial court should have refused to consider the affidavit. In her brief, she said that "the deliberate use of the grammatical construction, 'was observed', does not affirmatively show that she was the observer." She said that it was reasonable to assume that the investigator "was recounting the observations found in the report of one of her associates, and therefore found it necessary to use the passive voice." Defendant characterized the affidavit as "curiously devoid of pronouns."

The Court of Appeals majority said that notwithstanding the stilted construction of the affidavit it would conclude that the investigator herself was the "observer" and that the affidavit was therefore based on personal knowledge. The Supreme Court affirmed.

Justice Martin said "the trial court's duty to treat indulgently the Rule 56 materials of the party opposing the motion reasonably encompasses the passive voice averments set forth in the . . . Affidavit." In a footnote, he said "as has been aptly observed, '[i]n spite of generations of textbooks, use of the passive [voice] has increased.'"

This doesn't mean you should assume that this type of phrasing will carry the ball on summary judgment. The basis of both the Court of Appeals decision and the Supreme Court decision was that the affidavit had been offered by the non-moving party. The non-movant gets the benefit of the doubt on summary judgment, but the moving party doesn't. The Supreme Court said in a 1998 decision that "the evidence forecast by the party against whom summary judgment is contemplated is to be indulgently regarded while that of the party to benefit from summary judgment must be carefully scrutinized." Creech v. Melnik, 495 S.E.2d 907, 911 (N.C. 1998).

The affidavit in Bird probably wouldn't have passed that "careful scrutiny" if it had been offered by the moving party. That's my observation. I made it.

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Yesterday, the Business Court issued its first published opinion of 2010, Marosi v. M.F. Harris Research, Inc., 2010 NCBC 1 (N.C. Super. Ct. January 28, 2010), and ordered specific performance of a Subscription Agreement for the purchase of stock.

The dispute concerned a purchase by Thomas Marosi, shortly before he died, of stock in the Defendant corporation. The investment was made pursuant to a Subscription Agreement. Dr. Marosi's executor, the Plaintiff, said that the stock certificate for the shares had never been issued. He had requested that the company issue it, but for some reason not clear from the opinion or the briefs, the company refused.

The Plaintiff moved for specific performance of the Subscription Agreement. Judge Jolly said that the purpose of specific performance was to force a party "to do exactly what he ought to have done without being coerced by the court," and that the remedy was appropriate upon a "showing of (a) the existence of a valid contract, (b) its terms and (c) full performance by the party seeking performance or a demonstration that he is himself ready, willing and able to perform."

The Court determined that those elements were met, as there was a contract, its terms were clear, and the Defendant did not dispute that there had been full performance by Dr. Marosi in the form of payment for the stock.  Judge Jolly ordered that stock certificates be issued to Dr. Marosi's estate by February 8, 2010, subject to the same restrictions applicable to any other shares held by shareholders in the corporation.

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Does it make any sense to make a motion in limine before a bench trial? No, not according to Judge Diaz, who ruled as follows in a short Order in Hilb Rogal & Hobbs Co. v. Sellars:

"In a jury trial, motions in limine serve the useful purpose of giving counsel advance notice of the scope of evidence that will be considered by the jury. In a bench trial, however, a pretrial ruling on the admissibility of evidence would be superfluous because the trial judge must (in any event) consider the evidence before ruling."

The Court ruled that it would not rule on motions in limine before trial, but that it would "instead allow all evidence to be tendered to the Court, subject to any objections timely raised."

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If this blog were a dartboard, cases involving corporate and LLC governance issues would be at the bullseye. A bankruptcy case would be pretty far from the center, sometimes maybe even off the board.

With that perspective in mind, coupled with a dearth of bullseye type cases lately, this post is about the Fourth Circuit's decision last Friday in United Rentals, Inc. v. Angell, affirming a decision from the Eastern District of North Carolina.

The decision concerned a bankruptcy trustee's action to recover a preference paid to an equipment supplier (United) by the Debtor on a construction project. The Debtor had a surety bond, on which United had not made a claim, but which nevertheless formed the basis for its arguments that payments received by it during the ninety days preceding the Debtor's bankruptcy petition were not a preference.

United had two main arguments. It said that the Trustee could not show that the transfer enabled it to receive more than it would have received in the Chapter 7 case if the transfer had not been made. That's an essential element of a preference, per 11 U.S.C. § 547(b)(5). United also said that the transfer was a "contemporaneous exchange for new value" under 11 U.S.C. § 547(c)(1), a preference exception.

United said that if the transfer hadn't been made, it would have made a claim against the Debtor's surety bond and that it would have been paid in full by the surety. It argued that it therefore hadn't received more than it would have it the transfer hadn't been made, and that the Trustee therefore couldn't satisfy the requirement of Section 547(b)(5).

Judge Traxler made short work of this argument. He said that the inquiry was whether the creditor would have been paid the money in question out of the bankruptcy, not whether it would have been received from a third party. He held that "the Sec. 547(b)(5) inquiry focuses 'not on whether a creditor may have recovered all of the monies owed by the debtor from any source whatsoever, but instead upon whether the creditor would have received less than a 100% payout' from the bankruptcy estate."

The second argument -- that the payments were a contemporaneous exchange for new value -- was more complicated. United said (1) it had the right to a materialman's lien against the project, (2) the surety for the Debtor would have satisfied that lien it it had been asserted, (3) the surety then would have been equitably subordinated to the Debtor's right to be paid by the general contractor, and (4) there was "new value" because United had not pursued its lien and bond rights and the Debtor therefore had eventually been paid by the general contractor instead of having that money go to reimbursement of the surety.

United's argument was that the new value was the money the Debtor received later from the general contractor as a result of United foregoing pursuit of its lien claim. The Court said that even if this were so, United had not shown when this "new value" was received by the Debtor. It held "regardless of whether the transfers set in motion a chain of events that resulted in the Debtor's recoupment of the amounts paid, United did not show that such new value was 'given to the debtor' . . . as part of a "contemporaneous exchange.'" 

The Court found the argument regarding the possible payment by the surety and the anticipated following events to fall outside the purpose of the contemporaneous exchange exception, which it said was "to accommodate the need of financially unsteady companies to use checks to pay for new transactions."

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Not responding to Requests for Admissions is dangerous. Rule 36 of the North Carolina Rules of Civil Procedure say that a request is admitted if not answered, and that “any matter admitted under [Rule 36] is conclusively established unless the court on motion permits withdrawal or amendment of the admission.”

Two different panels of the North Carolina Court of Appeals in unpublished decisions yesterday dealt with defendants who hadn’t responded to Requests for Admission.

In one case, the Court affirmed a grant of summary judgment against the Defendant based on the ignored Requests. In the other, the Court went in a different direction and didn't hold the Defendant to an admission as to the amount of damages suffered by the Plaintiff.

Summary Judgment Based On Failure To Respond To Requests For Admission

In the first case, Kluttz v. Next Safety, Inc., the Plaintiff sued for breach of an employment contract. The Defendant denied the breach in its Answer, challenging the validity of the contract and whether it was supported by consideration. But the Defendant didn’t respond to later Requests for Admission which asked it to admit the validity of the contract and its breach.

The trial court entered summary judgment against the Defendant based upon the facts established by the admissions, and the Court of Appeals as affirmed. Judge Wynn said that “facts admitted under Rule 36(a) as a result of a party’s failure to respond timely to a request for admissions are sufficient to support a grant of summary judgment."

The Kluttz decision relied on an NC Supreme Court case, Goins v. Puleo, 350 N.C. 277, 512 S.E.2d 748 (1999), which holds that "an admitted matter, even if dispositive of the case, is conclusively established when admitted through failure to respond to a Rule 36 request for admissions."

Failure To Respond To Request For Admission Not Determinative Of Damages

The other case, Garner v. Cheek, noted the Goins decision, but relieved the Defendant from an admission as to the amount of damages. The Plaintiff had sent a series of Requests looking for admissions about Defendant’s fault in an auto accident and Plaintiff’s damages. One request asked the Defendant to admit that “[Plaintiff] has been damaged by the negligence of [Defendant] in the amount of thirty thousand dollars.”

Plaintiff sought and obtained a default judgment for $30,000. Defendant moved for a new trial on damages, arguing that he wasn't bound by the admission as to damages. The trial court granted the motion and entered a new judgment for only $7,500. The Court of Appeals affirmed.

There was conflicting evidence in the Garner case – from the same set of unanswered Requests for Admission – that warranted a much lower damage award. The Court of Appeals observed that  “plaintiff’s own evidence contradicted the amount of damages requested,” and it held that “it was within the trial court’s discretion to determine the amount of damages based on the Plaintiff’s medical expenses and pain suffered as a result of the collision."

The Garner case makes a couple of points about the nature of a Rule 36 admission from an earlier Court of Appeals decision, Eury v. N.C. Employment Security Comm., 115 N.C. App. 590, 446 S.E.2d 383 (1994):

A rule 36 admission is comparable to an admission in pleadings or a stipulation drafted by counsel for use at trial, rather than to an evidentiary admission of a party.

A judicial admission . . . is not evidence, but it, instead, serves to remove the admitted fact from the trial by formally conceding its existence.

If you understand either of those statements, please let me know. Apart from the riddle of how "judicial" admissions are different than "evidentiary" admissions, it's hard to square those statements from Eury with the explicit statement in the Supreme Court's Goins decision that an admitted matter is "conclusively established" by a failure to respond.

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