Be Very Careful If You Are Instructing Your Clients Not To Answer Questions At A Deposition

In an (unpublished) Order last week in Griggs v. Bittersweet Farms, LLC, Judge McGuire ruled that Plaintiffs' counsel's instruction to his client not to answer certain deposition questions was improper.  He granted a Motion to Compel responses to the unanswered questions, denied a Motion for Protective Order to excuse the Plaintiffs from having to respond, and ordered the Plaintiffs to pay Defendants' attorneys' fees for the cost of Making the Motion to Compel.

Instructing a witness not to answer a deposition question is pretty much forbidden unless a privilege is at issue.  There are rules in almost all courts about this practice.

The Rules On Instructing A Witness Not To Answer

Rule 30 of the North Carolina Rules of Civil Procedure says that: "[s]ubject to any limitations imposed by orders entered pursuant to Rule 26(c) or 30(d), evidence objected to shall be taken subject to the objections."  NCRCP 30(c).  The italicized portion of the Rule has been interpreted to mean that counsel is prohibited "from instructing a witness not to answer where only an objection is proper."  Order ¶4

The federal rule is more specific.  It says that:

A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3).

FRCP 30(c).  It also says that: "An objection must be stated concisely in a nonargumentative and nonsuggestive manner."

The Business Court has a Rule dealing specifically with when you may instruct a witness not to answer a question.  That is Business Court Rule 18.3:

Counsel shall not direct or request that a witness not answer a question, unless that counsel has objected to the question on the ground that the answer is protected by a privilege or a limitation on evidence directed by the Court.

Business Court Rule 18.3(a).  The Business Court Rule also deals with "speaking objections," saying that "[c]ounsel shall not make objections or statements which might suggest an answer to a witness." BCR 18.3(b).  Objections are to "be succinct, stating briefly the basis of the objection and nothing more."  Id.

The Griggs' Depositions

The questions which the witnesses in the Griggs case refused to answer fell into two categories.  The first was questions concerning the Plaintiffs' net worth, which the Defendants said were relevant to the Plaintiffs' ability to pay punitive damages if the Defendants succeeded on their counterclaims.  The basis for the refusal to answer those questions was that they were intended to "annoy, embarrass or oppress" the witnesses.  The second category of questions concerned a criminal proceeding pending against one of the Plaintiffs.

Judge McGuire said that he understood the Plaintiffs' desire to avoid disclosing their personal financial information in what he said was "an acrimonious family lawsuit,"  (Order ¶4), but he said that the protective order protecting that information should have been sought "prior to, or at the very latest during, the depositions."  Order ¶4.

The NC Rules of Civil Procedure expressly permit counsel to seek a protective order in the midst of a deposition (it's in Rule 30(d)), but I can't imagine a Judge being instantly available to resolve such a dispute.  As far as seeking a protective order "prior to" a deposition, how can a lawyer prophesize in advance of a deposition what opposing counsel might ask that she would want to prohibit?

The effort of Plaintiff's counsel to obtain a Protective Order was hurt by him waiting nearly seven months after the depositions to request it.  Given that the Motion to Compel involved depositions occurring on several different days, Plaintiff's counsel could have moved for a Protective Order after the first deposition.

Attorneys' Fees

In addition to granting the Motion to Compel, Judge McGuire ordered the Plaintiffs to pay more than $3,000 in attorneys' fees for their misconduct..  Rule 37(a)(4) says that the Court shall award attorneys' fees if it grants a Motion to Compel "unless the Court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust."

After finding that the opposition to the Motion to Compel was not "substantially justified, Judge McGuire awarded $3,312.50  in fees.  The individual Plaintiffs are responsible for half of the sanctioned amount, and their counsel is responsible for the other half.

 

The Meaning Of "Successors," "Members," And "Designees" In A Release

The words "successors," "members," and "designees," as used in a Release were at issue in Judge Bledsoe's Opinion last week in TaiDoc Technology Corp. v. OK Biotech Co., 2015 NCBC 71.

Plaintiff TaiDoc had settled a related lawsuit previously pending in the Western District of North Carolina in which Defendant OK was not a party.  One of the settling parties, an LLC known as Prodigy, obtained a release from TaiDoc that released Prodigy's "predecessors, successors, directors, officers, managers, members . . . and their respective heirs, executors and designees . . . from any and all claims whatsoever brought in, or that could have been brought in the Action. . . whether known or unknown. . . ."  Op. ¶4.

OK moved for summary judgment on TaiDoc's claims against it based on the Release.  It said that it was a "successor" to Prodigy, a "member" of Prodigy, and also its "designee."

OK argued that it was a successor to Prodigy, and therefore entitled to avail itself of the protection of the Release, because it had purchased a 45% membership interest in Prodigy (a year) after the Release was obtained by Prodigy. 

Successor?

Judge Bledsoe rejected all three of OK's arguments.  As to the "successor" argument, he held:

the term 'successors,' as used in the context of the Release Agreement . . . contemplates either a successor legal entity, which stands in the shoes of a party typically through merger, acquisition, or other legal means of succession, or a successor to a person in the testamentary sense, which typically involves a successor standing in the shoes of a predecessor upon a predecessor's incapacity or death.

Op. ¶35.

Particularly astute readers might wonder why it would even make a difference if OK was deemed to be Prodigy's "successor," since TaiDoc's settled claims against Prodigy were undoubtedly different from those which it was bringing against OK.  Judge Bledsoe dealt with that point too, holding that:

even if OK Biotech became a legal 'successor' to the release that [the members of Prodigy] obtained under the Release Agreement, that release was only a release of the claims TaiDoc had against [the members of Prodigy] -- not a release of any claims TaiDoc had against OK Biotech at the time of the Release Agreement, or, in particular, of the claims TaiDoc has asserted against OK Biotech in this action.

Op. ¶36.

Member

OK then argued that since it had acquired a membership interest in Prodigy -- a year after the Release was executed --  it was included in the "members" of Prodigy released a year before by TaiDoc.

Judge Bledsoe dismissed that argument as "fully absurd," stating that this contention:

leads to the implausible and fully absurd construction that the parties intended that any non-party to the Release Agreement could purchase a release of its liability to TaiDoc -- on any claim whatsoever -- by purchasing a membership interest. . . in Prodigy, without TaiDoc having bargained for or contemplated that party's release from liability.

Order ¶41.

The word "members"  didn't mean "future members,"  it meant only those persons or entities which were members of Prodigy at the time the Release was signed.  Op. ¶¶37-38.

Designee

OK hadn't run out of arguments why it was entitled to the benefit of the Release.  OK said that it was a "designee" of Prodigy because Prodigy had assigned to it Prodigy's rights under an application to the FDA for a medical device.

That argument had some surface appeal, as the definition of a "designee" in Black's Law Dictionary is a "person who has been designated to perform some duty or carry out some specific role."  Op. ¶43 (quoting Black's Law Dictionary 478 (8th ed. 2004)).

Although Judge Bledsoe didn't say that this argument was "fully absurd," or even that it was "pure applesauce," he did say it was "without merit" and scoffed at it a bit, stating that:

[i]n short, OK Biotech argues that Prodigy had the unfettered right to designate any person or entity in the world as its designee for purposes or receiving the benefits of the [Release] and it chose OK Biotech for these purposes.

Op. ¶42.

In the context of the Release, in which the word "designee" appeared in conjunction with "heirs, executors and designees,"  the Court held that "it is clear that, in context, these three words are intended as similar and related legal terms used to describe types of representatives or successors to a natural person after death."  Op. ¶44.

Given that the posture of this ruling was a denial of a Motion for Summary Judgment as opposed to the granting of a Motion to Dismiss the affirmative defense of release, it's not clear whether the issue of the Release remains alive in this case.  But it seems pretty much dead, at least to me.

If You Reach A Settlement At Mediation, And Say The Settlement Will Be The Subject Of A Forthcoming Formal Agreement, Do You Have A Binding Deal?

You have most likely walked out of a mediated settlement conference at which the shorthand version of the settlement put to paper by the lawyers and the mediator stated that there would be a later, more detailed agreement.  And maybe, the next day, as work began on the "more formal agreement to be prepared later," you and your opposing counsel putting the more detailed pen to paper sank into disagreement on the words which should be used to finalize the settlement.

So, did you have a final and binding deal or not based on the document signed at the mediation?  You most likely did, if you look at Judge McGuire's Order earlier this month in McCarthy v. Hampton, 2015 NCBC 67.  The parties in that case had engaged in a mediation which resulted in a signed document titled "Essential Terms of Mediated Settlement Agreement with Formal Agreement to be Prepared Later."  That same day, the mediator notified the Business Court that the parties had reached a settlement  and that an upcoming hearing in the case would not be necessary.  Defendant's counsel followed up informing the Court via email that the "[p]arties successfully mediated and settled all claims" at the mediation and that the parties were finalizing settlement documents.  Counsel for Plaintiff, copied on the email, did nothing to contradict opposing counsel's email.

Thereafter, the parties exchanged drafts of the "formal agreement" contemplated by the "Essential Terms Agreement" executed at the mediation (which the Court referred to as the "ETA").  Those discussions quickly broke down when issues not specifically addressed in the ETA arose and could not be resolved.

Plaintiff said that the Essential Terms Agreement  was an unenforceable "agreement to agree," in his opposition to a motion to enforce the settlement.  In response, Judge McGuire distinguished an NC Supreme Court decision which found an agreement to be insufficiently final to be binding:

nothing on the face of the ETA indicates that this document was simply intended to outline the desires of the parties. Whereas the language at issue in Boyce [v. McMahan, 285 N.C. 730 (1974)] provided that the parties to that document 'desire to enter into a preliminary agreement setting out the main features as to the desires of the both parties,' id, the ETA provides that '[t]his agreement is . . . to memorialize essential terms of the mediated settlement agreement' in this action.'  Thus, that the ETA on its face purports to be an agreement as to the terms therein, without any qualification that it is merely a preliminary agreement or a recitation of the parties' desires, distinguishes this matter from the facts of Boyce

Order ¶22.

The argument that the ETA was ineffective because it was subject to the condition subsequent of a more formal settlement document also fell on unreceptive ears.  Judge McGuire said:

nothing in the ETA indicates that the agreement memorialized therein was conditioned on the execution of a final agreement.  Aside from simply indicating that one would ultimately be prepared, [the] ETA makes no other reference to a more formal agreement, much less any reference that raises an issue of fact whether the parties intended that the ETA not be a binding agreement until confirmed in a future writing.

Order ¶23.

After that, Judge McGuire paced through seven terms which the Plaintiff said were "material" but had not been addressed by the ETA.  Those ranged from how the intangible assets of the medical practice which was the subject of the lawsuit would be disposed of to what amount of Plaintiff's attorney's fees would be paid by the practice.

Some of the sticking points in the post-mediation negotiations reflected terms different than those contained in the ETA.  As Judge McGuire put it, "[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)).  Or, as he said later, "that Plaintiff now seems dissatisfied with the agreement reached does not render the ETA unenforceable."  Order ¶30 (emphasis added).

The other terms which the Plaintiff (who was the party seeking to evade enforcement of the ETA) said were material, but not addressed at the mediation were found by the Court to be embraced by the terms of the ETA, or not material at all.  The Court granted the Defendant's Motion to Enforce Mediated Settlement Agreement.

What should you do if you want to leave a mediation with the ability to avoid a settlement when you suspect that you won't be able to agree on the terms of a final settlement agreement because of an unreasonable and nitpicking opposing counsel?  There's no good answer.  You might try saying in the document prepared by the mediator that the settlement will not be binding until a written agreement to be negotiated later is signed by all parties.  Good luck with getting a decent mediator to let you go home with such an open-ended agreement.  And calling the mediation document an "Agreement as to Non-Essential Terms" would be silly, it would defeat the point of a mediation.

This is the second time in the last two months that the Business Court has refused to allow a party signing off on a settlement document at mediation to escape its terms.  The first case was Judge Gale's decision in DeCristoforo v. Givens, 2015 NCBC 53, which I wrote about in June.

 

 

 

 

When You Wish Upon A (Lode)Star: NC Business Court Cuts Fees Requested By Attorneys For Class Plaintiffs

The Business Court last week knocked down a fee request of Plaintiffs' class action counsel to $500,000, from the $660,000 requested, in an Order in Nakatsukasa v. Furiex Pharmaceuticals, Inc., 2015 NCBC 68.

The Settlement Of The Class Action

The ruling was entered in conjunction with the approval of a settlement of four class actions (two filed in North Carolina and two filed in Delaware).  The lawsuits concerned a challenge to Defendant Furiex's merger with Defendants Royal Empress, Inc. and Royal's affiliate Forest Laboratories, Inc.

As a part of the settlement, Plaintiffs' counsel reserved the right to apply to the Court for approval of fees not to exceed $695,000.  Given that the Defendants had waived their right to challenge the fee application, it fell to Judge McGuire to determine whether the fees requested were reasonable.

If the first question in your mind is "how much money did the Plaintiff obtain for the class?", the answer is none.  The claimed value to the class came in the waiver of "DADW provisions" in Confidentiality Agreements executed by the Defendants Royal Empress and Forest Laboratories as well as other potential buyers of Furiex.  There were also some additional disclosures obtained via the settlement.  (If you don't know my feelings about the value contained in disclosure only settlements, you haven't been reading this blog.)

DADW Provisions?

The NC Business Court hasn't had the opportunity to consider the viability of DADW -- don't ask, don't waive -- provisions,  but the Delaware Court of Chancery has ruled that they are not presumptively impermissible. If you are wondering what a DADW provision does, it prohibits the entity signing it from making an offer for the target corporation's shares without an express invitation from the target's Board of Directors. The "don't ask" aspect prevents the signing party from asking the target's Board to waive that restriction.

Since the Court didn't discuss the validity of the DADW provision at all, except to say that the waiver of it procured by the litigation was "a significant benefit to shareholders," (Order  ¶41), the validity of this type of deal protection device in North Carolina remains untested.  Given that the Court accepted Plaintiffs' counsel's argument that they had obtained value for the class  in the waiver of the DADW restriction (meriting fees of half a million dollars), lawyers in North Carolina should be cautious about including DADW's in their merger related documents . 

The lawyers for the class (two New York class action firms) had a pretty high opinion of the value that they had obtained for the class.  The requested that the Court allow $660,000 in fees for 700 hours of work. 

You don't need to do the math to figure the hourly rate that those figures yield. Judge McGuire calculated it at a staggering $941.72 per hour (Order ¶35), which was triple the hourly fee the Business Court had approved in a previous class action (In re Harris Teeter Merger Litig., 2014 NCBC 44) and seven times the hourly fee awarded in another class action approval (In re Progress Energy Shareholder Litig., 2011 NCBC 44).

The Business Court Refused To Apply A Multiplier To Plaintiffs' Counsel's Lodestar

The $660,000 sought was based on a request for a multiplier of 1.7 to be applied to the lodestar amount established by  Plaintiffs' counsel's regular billing rates (that was $388,465).  A "lodestar," if you are not familiar with the term, Wikipedia defines it as "a method of computing attorney's fees whereby a trial court must multiply the number of hours reasonably spent by trial counsel by a reasonable hourly rate."

Judge McGuire observed that no reported North Carolina appellate decision had ever applied a multiplier to increase a lodestar amount (Order ¶35), so he decided that the "best course is to assess the requested fees as if Plaintiffs were seeking an award of $941.72 per hour, and to consider such request based on whether special legal skills  and experience were involved that are not available in North Carolina, the rates charged by attorneys for comparable work in the local area, and in light of the result obtained for the amount of work expended."  Order ¶35.

Were North Carolina attorneys capable of handling this litigation?  The Plaintiffs' local counsel represented to the Court that "he did not believe there were a substantial number of attorneys in North Carolina prosecuting this type of shareholder action."  Order ¶36.  Judge McGuire said that the lack of specific information whether there were North Carolina attorneys qualified to handle the case warranted in favor of a "premium rate."  Id.

The Court Said That A Fee Award Of $941.72 Per Hour Would Be "Extraordinary"

Looking at the electronic docket sheet in the case, Plaintiffs' counsel did little more than filing a Complaint, a Motion for Expedited Discovery, and a Motion for approval of the settlement that they brokered.  On top of that, they took two depositions and reviewed only a thousand pages of documents.  Order ¶39. Maybe the case did require supremely qualified counsel not available in NC.

The rates "generally charged for sophisticated business litigation in North Carolina" were deemed to be $321.91 per hour (found to be "reasonable in In re Harris Teeter, 2014 NCBC 44 at ¶63), although Judge McGuire said that "his own experience is that rates of approximately $300 - $550 per hour are typical of the fees charged for this type of work in Wake County, North Carolina.  Order ¶37.

Looking at the substantially higher hourly fee of $941.72 sought by Plaintiffs' counsel, Judge McGuire deemed it to be an "extraordinary amount" (Order ¶41).

The Judge exercised his discretion and awarded $500,000 in fees.  Order ¶42.  That yielded an hourly rate of $712.96, still a pretty impressive award.  And notwithstanding Judge McGuire's rejection of the application of a multiplier, I calculate that as a multiplier of 1.28711724 on the lodestar of $388,465.

 

 

 

 

 

 

 

Don't Overplay Your Hand In The Business Court

When you last heard about London Leasing LLC v. Arcus, the Business Court had entered a default in March 2015 against two of the Defendants for what I called their "defiant and obnoxious conduct."

It then seemed like the Plaintiff was just a hop, skip, and a jump away from obtaining a default judgment against the Defendants against whom there had been an Entry of Default, but last week Judge McGuire denied a Motion for Default Judgment in an Order in London Leasing LLC v. Arcus, 2015 NCBC 65.  In fact, he went further than just denying the Motion for Default Judgment.  He actually set aside the Entry of Default he had imposed in the previous unpublished decision.

The ruling didn't represent a softening of the Court's heart as to the defiant Defendants.  The Court remained annoyed even though one of the defaulted Defendants, JW Ray, filed an Affidavit saying that he had not meant to "disrespect this Honorable Court" and that he was "unaware of the significance of his actions."

Judge McGuire said that "the Defendants have not demonstrated good cause to set aside the entry of default based on Ray's misunderstanding of his legal obligation in this matter."  Order ¶26.  He also said that the "Defendants' conduct that lead to the entry of default pursuant to Rule 37 was inexcusable."  Order ¶27 & n.20.  The Court said that it would "enter other appropriate sanctions against Defendants at a future date." Id.

So, having said all that about the "inexcusable" nature of the Defendants' conduct, what was the reason that the Court set aside its Entry of Default?  It lay in the Plaintiff's Motion to Amend its Complaint, adding five new Defendants and seeking to state two new claims against the defaulted Defendants.

The Court said that "it was forced to conclude that Plaintiff's decision to amend its Complaint provides the 'good cause' necessary to set aside the entry of default."  Order ¶27 (emphasis added).  The Defendants hadn't had the opportunity to respond to the new allegations and were entitled to defend against them.

The takeaway from the new London Leasing decision is that it is not a good idea to amend your Complaint after you have an Entry of Default in hand.  You run a risk of losing the Entry of Default.

By the way, if you noticed that there were no posts on this blog last week, it's because I was away at the beach last week with my family.  The Business Court didn't take notice of my absence (maybe I need to put in for secured leave next time I go away), and the Court went ahead and issued four opinions while I was gone which I am busy digesting.  So, look for more posts later this week.

Please note, as it has always said in the Disclaimer to this Blog, that my posts do not represent the views of Brooks Pierce, but only my own.

There's A Difference Between "Confidential And Proprietary Information" And A Trade Secret

I can't remember the last time that the Business Court granted a motion opposing the designation of a case as a mandatory complex business case.  And since the Business Court Modernization Act went into effect in October 2014?  I don't think one has been granted.

But earlier this week, Judge Gale did exactly that, in an Order this week in Cornerstone Health Care, P.A. v. Moore, 2015 NCBC 62.  Plaintiff Cornerstone, a medical practice in Greensboro, sued two of its former doctor-employees who joined competitive practices.  It asserted that they were violating their non-competition and confidentiality agreements.  It made claims for breach of contract and for a declaratory judgment regarding deferred compensation which the doctors claimed was owed to them.

The Business Court has traditionally been a little prickly about accepting the designation of cases involving covenants not to compete.  In 2008, in Workplace Benefits, LLC v. Lifecare, Inc. (unpublished), Judge Tennille held that "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon 'unfair competition.'"

Nevertheless, the Court had displayed a willingness to accept the designation of such cases if they included claims alleging the theft of trade secrets or actions designed to "unfairly damage another's business."  And the Court had also showed that it would go beyond the way in which the Plaintiff labelled its causes of action and delve into the facts alleged to determine whether there was a basis for the designation.  That largesse was demonstrated by a decision from then Chief Judge Jolly in New Breed, Inc. v. Golden, which I wrote about in 2012.

The Cornerstone Complaint which was the subject of this week's decision seemed to walk the right walk for an acceptable designation.  It asserted that the Defendant doctors would "inevitably disclose Cornerstone's confidential and proprietary information."  Order ¶10(e).  "Confidential and proprietary" information must be a trade secret, right?

No, apparently not, and those allegations were not enough to warrant the designation as a mandatory case for the Business Court.  Now Chief Judge Gale observed that

This Court has historically handled cases designated as complex business disputes which involved employment agreements including restrictive covenants.  In general, it has only done so where the allegations include a claim that the employee. . . misappropriated trade secrets in addition to violating the contract or restrictive covenant.

[t]he Court has not historically been assigned cases based on the assertion of more generalized allegations of the employer's loss of confidential or proprietary information.  Certainly evidence of that nature may be involved in any case concerning an alleged violation of a restrictive covenant contained within an employment contract because such evidence is necessary to support the employer's need for the restrictive covenant.  But that evidence was not the basis on which cases were assigned as mandatory complex business disputes.

Order ¶¶14&15.  The Judge directed that the case should not proceed in the Business Court but on the "regular docket of the Superior Court of Guilford County."  Order ¶20(e).

So it seems there must be some difference between a "trade secret" and "confidential and proprietary information".  Yes, but Judge Gale unfortunately did not expand on the difference. 

There is actually quite a bit written on the subject of confidential information as compared to trade secrets.  The views range from the position of a Massachusetts federal court that "trade secrets and confidential information are essentially identical concepts." Take it Away, Inc. v. Home Depot, Inc., 2009 WL 458552, at *8 (D. Mass. Feb. 6, 2009), to the Business Court's apparent position that they are different.

 You know from past blog posts here that the Business Court is particularly tough on the way trade secrets claims must be pleaded.  The Cornerstone ruling continues in that vein.  Saying that a trade secret is "confidential and proprietary" is not, standing alone, enough to get you into the Court as a mandatory complex case under G.S. §7A-45.4(a)(8).  You need to say more.

 

Something That You Might Not Have Known About Injunctions

I had always thought that you need to post a bond in order to obtain an injunction, both in federal and state court.  It turns out that I was wrong.

The federal rule seems to require a bond.  It says:

(c) Security. The court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained. The United States, its officers, and its agencies are not required to give security.

FRCP 65(c).

The state rule is even stronger on the apparent need for security.  it says:

(c) Security. - No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the judge deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. No such security shall be required of the State of North Carolina or of any county or municipality thereof, or any officer or agency thereof acting in an official capacity, but damages may be awarded against such party in accord with this rule. In suits between spouses relating to support, alimony, custody of children, separation, divorce from bed and board, and absolute divorce no such security shall be required of the plaintiff spouse as a condition precedent to the issuing of a temporary restraining order or preliminary injunction enjoining the defendant spouse from interfering with, threatening, or in any way molesting the plaintiff spouse during pendency of the suit, until further order of the court, but damages may be awarded against such party in accord with this rule.

NCRCP 65(c).

Given the seeming clarity of those Rules, I was surprised to learn, from Judge Bledsoe's opinion earlier this month in Bolier & Co., LLC v. Decca Furniture (USA), Inc., 2015 NCBC 52 that a federal judge or a state judge is free to issue an injunction without any requirement for a bond.

The Bolier case had been designated to the Business Court in 2012.  It was then removed to federal court, where Judge Vorhees (of the W.D.N.C.) entered a preliminary injunction without any requirement for a bond against the Plaintiff.  The case was remanded back to the Business Court in September 2014.

The Plaintiff argued to the Business Court that the federal injunction should be dissolved because it did not require a bond.  Judge Bledsoe rejected that argument, holding:

[t]he law is clear that a federal district court has broad discretion to set a bond amount as the court sees fit and may waive a security requirement altogether as Judge Vorhees did here.  Pashby v. Delia, 709 F.3d 307, 332 (4th Cir. 2013)(citation omitted); see also Aoude v. Mobil Oil Corp., 862 F.2d 890, 896 (1st Cir. 1988)("posting of a bond is not a jurisdictional prerequisite to the validity of a preliminary injunction"); Clarkson Co, v. Shaheen, 544 F.2d 624, 632 (2nd Cir. 1976)("[B]ecause, under Fed. R. Civ. P. 65, the amount of any bond to be given upon the issuance of a preliminary injunction rests within the sound discretion of the trial court, the district court may dispense with the filing of a bond." (citations omitted).

Op. ¶39.  Moreover, the Court said that North Carolina law is to the same effect.  The NC Court of Appeals has held that:

'[t]he trial court has power not only to set the amount of security but to dispense with any security requirement whatsoever where the restraint will do the [party] no material damage, and where the applicant for equitable relief has considerable assets and is able to respond in damages if [the party] does suffer damages by reason of a wrongful injunction.

Op. ¶39 (quoting Stevens v. Henry, 121 N.C. App. 150, 154, 464 S.E.2d 704, 707 (1995)(alterations and quotations omitted)(quoting Keith v. Day, 60 N.C. App. 559, 562, 299 S.E.2d 296, 298(1983)).

The NC COA, in an acknowledgement of the Rule's apparently mandatory language, said in a 1983 decision that it  " is more subtle than one would expect from words so apparently unambiguous."  It went on, in Keith v. Day, to hold that the "... as the court deems proper" language of the rule means that there are some instances when it is proper for no security to be required of a party seeking injunctive relief." 60 N.C. App. at 562, 299 S.E.2d at 299.

I wouldn't read Judge Bledsoe's Opinion to say that the party obtaining an injunction in the Business Court is unlikely to have to post a bond.  A bond of at least some amount is going to be appropriate in most cases.

 

Business Court: High To Low Posting of ATM Debit Card Transactions Properly Disclosed By Bank

The meaning of the word "item" was the definitive factor in the Business Court's decision last week in Gay v. People's Bank, 2015 NCBC 59.

The case was an attempted class action involving claims against the Bank for allegedly improperly imposing overdraft fees on checking accounts.  The overdraft fees arose due to the Bank's "high to low posting" of ATM charges.

The Bank did not deduct debit card charges from their accounts in the chronological order in which they were incurred, but instead re-ordered them from the largest debit charge to the smallest. This practice, according to the Plaintiff, had the effect of more quickly reducing the funds in his account and thereby "running up" the overdraft charges collected by the Bank.  He sought to represent a class of the Bank's customers who had incurred overdraft charges.

The Bank's position was that its high to low ordering was plainly disclosed in its account agreements.  That seemed pretty clear.  One document said:

Payment Order of Items - The law permits us to pay items (such as checks or drafts) drawn on your account in any order.  To assist you in handling your account with us, we are providing you with the following information regarding how we process the items that you write.  When processing items drawn on your account, our policy is to pay them according to the dollar amount.  We pay the largest items first.  The order in which items are paid is important if there is not enough money in your account to pay all of the items that are presented.  Our payment policy will cause your largest, and perhaps more important, items to be paid first . . . , but may increase the overdraft or NSF fees you have to pay if funds are not available to pay all of your items.

Op. ¶23 (quoting the Bank's Terms and Conditions).

The specificity of that language makes one wonder how the Plaintiff class ever got past a Motion for Judgment on the Pleadings.  But it did exactly that, in an unpublished Order from former Business Court Judge Murphy in April 2014.

What preclusive effect did that Order have on Judge Bledsoe's ruling?  None.  But hold it, if it does not have that effect, doesn't that mean that one Superior Court Judge can overrule another?  And we all know that is not allowed.  Judge Bledsoe wrote:

North Carolina law is clear . . . that 'denial of a previous motion for judgment on the pleadings made under [Rule 12(c)] does not preclude the trial court from granting a subsequent motion for summary judgment.'

Op. ¶20 (quoting Rhue v. Pace, 165 N.C. App. 423, 426, 598 S.E.2d 662, 664-65 (2004)).

Plaintiff tried to stir up ambiguity on whether the disclosure regarding the ordering of "items" included debit card transactions, given its specific reference to checks and draft and its lack of mention of debits.. But Judge Bledsoe said that "[t]he law is clear . . . that the Court will  not read an ambiguity into a contract where none exists."  Op. ¶26.  Moreover, it is settled that "parties can differ as to the interpretation of language without its being ambiguous."  Op. Par. 26 (quoting Walton v. City of Raleigh, 342 N.C. 879, 881-82, 467 S.E.2d 410, 412 (1996).

He concluded that the phrase "such as checks or drafts" following the word "items" was "an unambiguous phrase of inclusion and not an exhaustive list of the specific 'items' embraced by the Bank's policy."  Op. ¶27.  He actually went even further, ruling that the term "'item,' as used here, plainly contemplates any debit to an account -- whether by check, draft, ACH payment, wire, online, mobile device, voice response, debit transaction or other withdrawal."  Op. ¶28.  That construction of the word, he said, was consistent with the "plain, ordinary and popular use of the word 'item.'" as used in Webster's Dictionary  Op. ¶28.

If you are worried about how your own bank handles overdraft fees for the use of your ATM card, you don't have to be.  Or, if you are thinking you'd like to sue banks over overdraft charges, it's probably too late.  The Office of the Comptroller of the Currency put Regulation E in place in 2010.  Regulation E governs how banks must deal with overdraft charges from ATM cards.

Brooks Pierce represented Defendant People's Bank in this case, through Reid Phillips and Daniel Smith.

NC Business Court Says That Bank Didn't Owe A Fiduciary Duty To Its Customer, But Recognizes New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

Were you thinking that the Business Court might, one day, find that a bank owed a fiduciary duty to its customer?  That seemed like it might happen eventually, as the NC Supreme Court seemed to hold out that possibility last year, in Dallaire v. Bank of America, N.A., 367 N.C. 363, 368 (2014), in which it said that:

it is possible, at least theoretically, for a particular bank-customer transaction to give rise to a fiduciary relationship under the proper circumstances.

But on Monday of this week, in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, Judge McGuire stuck to the long-standing case law in North Carolina that a lender does not owe any fiduciary duties to its customer.  At the same time, however, he also recognized a new cause of action which might have ramifications for claims against any type of entity (not just a lender) which decides to break off negotiations with an opposing party.

The Plaintiff RREF had purchased from BB&T two loans totaling $5.275 million which BB&T had made to the Defendants back in 2005.  It had purchased the loans from BB&T while they were in default, and shortly after BB&T stopped negotiating a forbearance agreement with the Defendants.

No Fiduciary Duty

The Defendants' lead argument against RREF's lawsuit to collect on the loans was that BB&T had violated a fiduciary duty it owed to them.  They said that BB&T had breached its duty by failing to disclose its attempts to sell their loans while it was in the midst of negotiating a forbearance agreement with them.

The Defendants claimed that if they had known that BB&T was selling their loans, they would have tried to buy them themselves or had a third party buy the loans on their behalf.

The basis argued by the Defendants for BB&T's alleged fiduciary duty was that they had a thirty year relationship with a local office, and that they had worked closely with the Bank in developing various residential communities and in selling homes in those communities.  Op. ¶41.  BB&T responded that it owed no fiduciary duties to the Defendants and that it was simply pursuing the options available to it as the holder of loans that were in default.

As Judge McGuire noted, "[t]here is no reported North Carolina appellate case in which a fiduciary relationship has been found in a borrower-lender transaction."  Op. ¶38.  Given that one of the hallmarks of a fiduciary relationship is "a duty of the fiduciary to act in the best interests of the other party," Judge McGuire held that "it would seem nearly antithetical to require a commercial lender to put a borrower's interest ahead of its own in a business transaction."  Op. ¶41.

Another reason the Court refused to find a fiduciary relationship lay in the restructuring negotiations themselves.  Both the Defendants and the Bank were at this point represented by attorneys and were "negotiating to protect their respective best interests."  (Op. ¶43).  If there ever had been a fiduciary relationship between them, "such relationship ceased once BB&T declared Defendants in default of the Loans and the positions of the parties became adverse."  Op. ¶43.

The New Cause Of Action: Breach Of A Duty To Negotiate In Good Faith

Although it did grant summary judgment on the fiduciary duty claim, the Court nevertheless allowed the Defendants to go forward on a new claim hitherto not formally recognized in North Carolina: breach of a duty to negotiate in good faith.

 

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When A Motion To Strike Can Be Proper

After a defendant succeeded on a Motion for a More Definite Statement, a plaintiff added more detail to the claims that had been dismissed.  The defendant responded to the beefed up allegations with a Motion to Strike.

Is that a proper use of a Motion to Strike?  Yes, said Judge McGuire last week in an Order in Progress Point One-B Condominium Association, Inc. v. Progress Point One Property Owners Association, Inc., 2015 NCBC 54, given the nature of the previous dismissal.

You may be surprised at that conclusion, given that a Motion to Dismiss under Rule 12(b)(6) "is generally viewed as the proper means to challenge the sufficiency of a plaintiff's pleading, not a motion to strike."  Order ¶14.  Motions to strike, under Rule 12(f), are reserved for challenging "any redundant, irrelevant, immaterial, impertinent, or scandalous matter."

The unusual circumstance of this case was that Judge McGuire had dismissed a number of the repleaded claims in a previous decision granting a Motion for a More Definite Statement (2015 NCBC 20).  But he had not said that the dismissal was "with prejudice."  That lack of reference to the quality of the dismissal didn't make a difference, because Rule 41(b) says that "all dismissals, including those under Rule 12(b)(6) operate as an adjudication upon the merits unless the trial court specifies that the dismissal is without prejudice."  Order ¶9 (quoting Johnson v. Bellinger, 86 N.C. App. 1, 8 (1987).

A Motion to Strike is appropriate "where a party attempts to re-allege claims that have been previously dismissed by the court."  Order ¶9.

So if you are dealing with an adversary who refuses to concede that some of its claims were dismissed and insists on going forward with them, a Motion to Strike is completely warranted.