The Interrogatory That Does Not Warrant An Objection Based On Privilege

There was enough worth talking about in Judge Bledsoe's opinion in National Financial Partners Corp. v. Ray, 2014 NCBC 49, which I posted about yesterday, to warrant a second post.

What I didn't discuss yesterday was the question answered in the National Financial opinion: whether a lawyer can object, on the basis of privilege, to an interrogatory asking him or her to identify all the documents relied upon in responding to the entire set of interrogatories.

I used to routinely object to that type of interrogatory because I felt that it intruded on the work product privilege.  I don't remember ever facing a Motion to Compel on that objection, but I would probably adjust that response now because it has been deemed unsustainable by Judge Bledsoe.

He said in the National Financial decision that:

in merely seeking identification of documents, [that type of interrogatory] requests only factual information that is not confidential or privileged and, therefore, offends neither the work product doctrine nor the attorney-client privilege.

Op. ¶43 (relying on  Berlinger v. Wells Fargo, N.A., 2012 U.S. Dist. LEXIS 26650, at *5-6 (M.D. Fla. March 1, 2012).

At least I can still object legitimately to interrogatories asking me to identify my trial witnesses.  Judge Bledsoe held a few weeks ago 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.'

Gay v. Peoples Bank. 2014 NCBC 45 at ¶24 (quoting King v. Koucouliotes, 108 N.C. App. 751, 755, 425 S.E.2d 462, 464 (1993)).

 

 

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Don't Throw The Kitchen Sink Of Defenses Into Your Answer

Say you are filing an Answer to a Complaint.  NC Rule of Civil Procedure 8(c)  lists a host of affirmative defenses you might raise.  They are:

accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, truth in actions for defamation, usury, waiver, and any other matter constituting an avoidance or affirmative defense.

Do you want to plead all of those, even though you don't currently have a basis to support them, hoping that you will find some facts in discovery to support them?

That's pretty much what the Plaintiffs did when responding to a crossclaim in National Financial Partners Corp. v. Ray, 2014 NCBC 49, decided on Wednesday by Judge Bledsoe.  The Plaintiffs raised nearly fifty affirmative defenses, hoping that they would generate facts later on to support their myriad defenses.

Many of their defenses were not supported by any facts pertinent to the lawsuit, although the Plaintiffs argued that it was too premature in the litigation for their affirmative defenses to be dismissed and that discovery might yield facts to support their defenses.

The Defendants moved to strike per NCRCP 12(f).  Judge Bledsoe wrote that:

'[T]o survive a motion to strike, a defendant must offer more than a "bare-bones conclusory allegation which simply names a legal theory but does not indicate how the theory is connected to the case at hand."'

Op. ¶34 (quoting Villa v. Ally Fin., Inc., 2014 U.S. Dist. LEXIS 25624, at *6 (M.D.N.C. Feb. 28, 2014)(citation omitted).

It didn't make a difference that the Plaintiffs had a good faith belief that discovery might provide a basis for the defenses stricken by Judge Bledsoe. He said that:

Plaintiffs’ professed good faith belief that their presently unsupported defenses will acquire the requisite factual support through the discovery stage of these proceedings does not alter the reality that these defenses were speculative at the time Plaintiffs asserted them in their responsive pleading.

 Op. ¶35.

Some of the arguments raised by the Plaintiffs in support of the defenses they had stated revealed their speculative nature on their face.  For example, on their defense of accord and satisfaction, Plaintiffs said that:

'[i]t is . . .far from certain that I[] Plaintiffs did not receive full and complete return of whatever funds they provided to Mr. Stokes'.

And the defense of "another action pending" was also quite imaginary.  The Plaintiffs said that:

'[n]o action is pending of which Plaintiffs are currently aware' but noted that '[s]uit may have been filed against Defendants somewhere else or against Plaintiffs in some other jurisdiction.'

Op. ¶¶35(iv) and (ix).

If you are, like me, too critical to be an even-tempered Judge and are wondering if there are sanctions available against a party pleading a horde of defenses without any factual support for them, the answer is that there might be.  Judge Bledsoe observed in a footnote that "Plaintiffs’ assertion of numerous affirmative defenses with little or no factual support can also raise concerns under Rule 11 of the North Carolina Rules of Civil Procedure."  Op. ¶36 & n.7.

He also quoted a Third Circuit case for the proposition that: “the practice of ‘throwing in the kitchen
sink’ at times may be so abusive as to merit Rule 11 condemnation.”)  Id. (quoting  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 97 (3d Cir. 1988)).

But no sanctions were entered.  Judge Bledsoe struck fifteen of the speculative defenses with leave to the Plaintiffs to plead them again in the event that they were able to develop evidence through discovery that the defenses could be properly asserted.  Op. ¶36.

 

One Superior Court Judge Overruling Another?

You are all familiar with the old adage that "one Superior Court Judge cannot overrule another Superior Court Judge."  But apparently there is at least a little bend in that rule, as illustrated by Judge Bledsoe's opinion this past Thursday, in Taidoc Technology Corp. v. OK Biotech Co., 2014 NCBC 48.

The Taidoc case is one that Judge Bledsoe inherited after Judge Murphy's retirement.

Judge Murphy had entered a discovery order in June 2014 granting in part Taidoc's Motion to Compel.  The Order allowed Taidoc to take the depositions of certain non-parties, but imposed restrictions which Taidoc did not appreciate. 

The proposed deponents had been involved in a related case in which Taidoc had been the Defendant, and they also had been deposed in that case and had testified at trial.  Judge Murphy's Order allowing the depositions limited the proposed deposition testimony to "matters not addressed by prior depositions of those witnesses."  The Order also provided that Taidoc would bear the fees and costs associated with any of the depositions, including the attorneys' fees of the deponents.

Taidoc said that Judge Murphy's restrictions should be overruled and stricken, or at least clarified.  Taidoc suggested in its Motion regarding the Order that counsel for the witnesses was taking the position that the Order cut off Taidoc's right to ask about any events occurring after a certain date.

Criteria For Overruling Another Judge's Decision

Judge Bledsoe stated the limited conditions under which he could change Judge Murphy's Order.  He said that:

our appellate courts have held that “[o]ne superior court judge may only modify, overrule, or change the order of another superior court judge where the original order was (1) interlocutory, (2) discretionary, and (3) there has been a substantial change of circumstances since the entry of the prior order.”

Op. ¶11 (quoting Crook v. KRC Mgmt. Corp., 206 N.C. App. 179, 189, 697 S.E.2d 449, 456 (2010).

Although the Order met the first two requirements for being modified --  being interlocutory and discretionary -- Judge Bledsoe found that there was no basis to find that there had been a "substantial change of circumstances" in the four months since Judge Murphy had entered his Order.

But the lack of changed circumstances didn't stop Judge Bledsoe from interpreting the Order, which he found to be somewhat ambiguous and capable of different interpretations.  He said that the words used by Judge Murphy in his Order -- that the depositions be limited to "matters not addressed by prior depositions of the same witnesses" -- were meant to avoid "unnecessarily duplicative examinations" of those witnesses and to prevent Taidoc from posing the same questions in the hope of obtaining different answers.  Op. ¶16.

He said that Taidoc could:

ask any questions and engage in any specific line of inquiry that was not pursued by Plaintiff in the prior depositions of the Non-Parties concerning any document, thing, person, event or fact, provided such inquiry is consistent with the requirements of Rule 26 and any other applicable rules of the North Carolina Rules of Civil Procedure.

Op. ¶16.

Judge Bledsoe also weighed in on the obligation that the Order had placed on Taidoc to pay the fees and costs associated with the depositions of the previously deposed witnesses, including the attorneys' fees of the deponents.  He ruled that any fees and costs presented for payment had to be "reasonable under the circumstances" and that Taidoc should be allowed to contest the reasonableness of the fees and costs before having to pay them."  Op. ¶17.

Surely that's what Judge Murphy intended in the first instance.

Judge Bledsoe Was Unwilling To Award Attorneys' Fees Which Judge Murphy Possibly Should Have Awarded

Judge Bledsoe refused to alter Judge Murphy's refusal to award attorneys' fees to Taidoc's lawyers with regard to the Motion that resulted in the Order at issue.  Although the Plaintiff had prevailed on the Motion to Compel leading to Judge Murphy's Order, and Rule 37(a)(4) says that fees shall be awarded to the prevailing party on a Motion to Compel, Judge Murphy had never made findings that the Defendant's opposition was "substantially justified" or that a fee award would be "unjust under the circumstances," which would have excused an award of fees,

Even if Judge Murphy not awarding fees was mistaken, which Judge Bledsoe did not suggest, he said that "one Superior Court Judge may not correct another's errors of law."  Op. ¶26 (quoting Calloway v. Ford Motor Co., 281 N.C. 496, 501, 189 S.E.2d 484, 488 (1972)).

So if you are a lawyer handling a case before Judge Bledsoe in which Judge Murphy previously entered an Order, your chances of getting a previous ruling overruled are pretty slim.  But getting an interpretation of an earlier ruling more favorable to your client seems possible.

There's more interesting stuff in Judge Bledsoe's ruling, especially on when a party can withdraw its responses to Requests for Admission.  Or more precisely, when can a party withdraw admissions made as a result of its failure to respond timely to the Requests.  That's in Paragraphs 29 through 35 of the Opinion.

 

 

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Shake Up At The NC Business Court

Yesterday, Governor Pat McCrory announced that he has appointed Raleigh lawyer Greg McGuire as a Special Superior Court Judge for a term beginning October 13, 2014.  The Governor's plan is to designate Judge McGuire as a Special Superior Court Judge for Complex Business Cases at the beginning of the Judge's term.

Judge McGuire will serve in Wake County, which means that he will be assigned to the Raleigh Business Court.

What about Judge Jolly, you are thinking?  He was been the Judge in the Raleigh Business Court since that Court opened.

I had been hearing for some time that Judge Jolly would be retiring soon due to his approaching of the mandatory retirement age of 72.  It appears that will not be the case, as the Business Court website now refers to Judge Jolly as a "Retired/Recalled Emergency Judge."  The Chief Justice is authorized, per G.S. §7A-57(3), to recall a Judge who has reached retirement age if the Chief Justice has determined that the Judge "is capable of efficiently and promptly discharging the duties of the office to which recalled."

One more change has occurred at the Business Court.  Judge Gale, who sits in the Greensboro Business Court, is now the Chief Special Superior Court Judge for Complex Business Cases.  That title was previously held by Judge Jolly.  Having the Chief Judge of the Business Court in Greensboro is as things should be, because everyone in North Carolina knows that Greensboro is the legal center of the State.

I have no information to pass on about new Judge McGuire, other than that he was a partner at Ogeltree Deakins in Raleigh.  His firm bio is here.  Ogeltree is nationally known for its labor and employment practice.

 

Don't Let Yourself Get Ehrenhaused When Appealing From The NC Business Court

It's probably not too soon to verbify the Business Court's opinion in Ehrenhaus v. Baker, 2014 NCBC 30, decided a few months ago.  If you missed that decision, know that you have to file your Notice of Appeal from a Business Court decision not just  by e-filing in the Business Court, but also by filing with the Clerk of Court in the county where the case was filed.  Otherwise, the Business Court can dismiss your appeal.

The plaintiffs in three separate cases suing the former principals of Bostic Construction Company for constructive fraud were Ehrenhaused last week.  They didn't file their Notices of Appeal with the Clerks of Superior Court in the counties from which their cases had originated, and Judge Bledsoe yesterday dismissed each of the appeals in response to the Defendants' Motions to Dismiss, based on the Ehrenhaus ruling.

The only one of the three cases that was published is American Mechanical, Inc. v. Bostic, 2014 NCBC 47.  The Orders from the other two cases dismissing the appeals for the same reason are unpublished.  They are in the Phillips and Jordan case and the Yates Construction Company cases brought against the Bostics.

While Ehrenhaus was certainly correctly decided based on the Business Court Rules and appellate court precedent, I can't say I like the concept of a court with a fully electronic filing system being undercut by a duplicative paper filing at a bricks and mortar courthouse.  Maybe the next time the General Assembly looks into "modernizing" the Business Court, it can take up this issue.

But for now, you are all on notice of where to file your Notice of Appeal from a Business Court decision.  E-file it in the Business Court and file a paper copy with the Clerk of Court in the County in which the case originated.  And don't forget that after October 1st there will be direct appeals from many Business Court rulings to the NC Supreme Court.

 

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.