LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members

Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.

The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste.  Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC's checkbook.  Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.

When the company's prospects faded, Kaplan stopped funding the company and asked for repayment of his loans.  The other members responded by voting to dissolve the LLC, which was placed in receivership.  Kaplan sued to collect his substantial debt.

The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan's position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan's fiduciary duty required him to do."  (Op. at 9).  The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC's Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.

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The Law And Duke Football

Although this isn't in the mainstream of the business litigation decisions that I write about on this blog, I'm writing today about a contract case that's important to the jurisprudence of North Carolina.  It's the judicial determination made last week about the quality of Duke University football. 

The case is University of Louisville v. Duke University, pending in Franklin County, Kentucky.   Louisville filed its Complaint against Duke when Duke backed out of a contract to play four games against the Cardinals.  Duke had lost the first game in 2002 by a score of 40-3, and decided for some reason that it didn't want to play the remaining three games in the series, due to be played in 2007-2009.

Louisville didn't appreciate losing a record-padding opponent of the quality of Duke.  It sued, based on a provision in the Athletic Competition Agreement which called for a $150,000 payment for each game not played.  Duke's defense was a provision in the contract which stated that it had to pay only if Louisville was unable to find a replacement opponent of "similar stature" to Duke.  The Agreement didn't define the term.

Louisville, in discovery, asked Duke what NCAA football teams were of "similar stature."  Duke's response was that every single team in former Division I-A and a lot of teams in former Division I-AA were.  The only teams that weren't, to Duke, were junior varsity teams.  Here is Duke's response from Interrogatory No. 1:

Duke states that any and all college varsity teams in the Football Bowl Subdivision (formerly Division I-A) are teams of a 'similar stature' to Duke. . . . Additionally, Duke states that any and all college varsity football teams in the Football Championship Subdivision (formerly Division I-AA) that would be considered as good or better than Duke in football. . . are teams of a 'similar stature' to Duke. . . . [J]unior varsity programs of any of the aforementioned teams would not be teams of a 'similar stature' to Duke's varsity college football team.

Louisville's definition of "similar stature" was narrower, but maybe not narrow enough.  It said the term should be defined as "any school that is a member of a Bowl Championship Series conference whose champion automatically qualifies for a BCS bowl game," plus Notre Dame.  Louisville had been unable to find such a substitute opponent.

Duke moved for judgment on the pleadings, and won.  Its argued at the hearing that the standard for "similar stature" was very low because the quality of Duke football was as low as it gets.  As Judge Phillip J. Shepherd of the Franklin Circuit Court described the argument in his June 19th Opinion:

The term 'team of similar stature' simply means any team that competes at the same level of athletic performance as the Duke football team.  At oral argument, Duke . . . persuasively asserted that this is a threshold that could not be any lower.  Duke's argument on this point cannot be reasonably disputed by Louisville.  Duke won only one football game, and lost eleven, during the 2007 football season.


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Court Of Appeals Ruling On Personal Jurisdiction And The Internet

The Court of Appeals held on June 17, 2008 in Dailey v. Popma that a defendant's Internet postings, even though available in North Carolina and causing injury in North Carolina, aren't sufficient for personal jurisdiction unless the postings are "targeted" to residents of the State.

In Dailey, the plaintiff claimed that Popma had posted statements about him on the Internet accusing him of theft, embezzlement, and being the "equivalent" of a child molester, among others.

Popma asserted that the postings had been made by him in Georgia, and that the North Carolina courts could not exercise personal jurisdiction over him.

The Court held, relying on Young v. New Haven Advocate, 315 F.3d 256 (4th Cir. 2002), cert. denied, 538 U.S. 1035, 155 L. Ed. 2d 1065, 123 S. Ct. 2092 (2003), that "the dispositive question in such cases should be whether the defendant 'through the Internet postings, manifest[ed] an intent to target and focus on [the forum state's] readers.'"

After assessing the record, the Court found that plaintiff had "failed to establish that defendant posted the material in the bulletin board discussions with the intent to direct his content to a North Carolina audience" and that there was no basis for personal jurisdiction.

The Dailey decision isn't the first time the Court of Appeals has addressed the interplay between personal jurisdiction and the Internet.  In 2005, in Havey v.Valentine, 172 N.C. App. 812, 616 S.E.2d 642 (2005), the Court of Appeals had adopted the Fourth Circuit's analysis in ALS Scan, Inc. v. Digital Serv. Consultants, Inc., 293 F.3d 707 (4th Cir. 2002), cert. denied, 537 U.S. 1105, 154 L. Ed. 2d 773, 123 S. Ct. 868 (2003).  

The ALS formulation calls for the Court to consider whether the Defendant (1) directs electronic activity into the State, (2) with the manifested intent of engaging in business or other interactions within the State, and (3) that activity creates, in a person within the State, a potential cause of action cognizable in the State's courts.

The decision in Havey also established that  "a person who simply places information on the Internet does not subject himself to jurisdiction in each State into which the electronic signal is transmitted and received."  That the postings have an effect on a North Carolina resident is not enough to support jurisdiction. 

What's On Tap In The Business Court: Pending Motions To Dismiss, June 2008

This is a list of the eight cases (my count) in which Motions to Dismiss are fully briefed and ready for a ruling, with links to the Business Court file for each case:

CompuChem v. Shealy Environmental Services, Inc.: whether employee owed employer a fiduciary duty, validity of claim for aiding and abetting breach of fiduciary duty, tortious interference claim against competitor.  Defendant also argues that the Court should apply the "new" standard for evaluating a motion to dismiss articulated by the U.S. Supreme Court in Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955 (2007).

Covenant Equipment Corp. v. Forklift Pro, Inc.: permissible geographic and temporaral scope of a confidentiality agreement (under South Carolina law).

Crockett Capital Corp. v. Inland American Winston Hotels, Inc.: whether development agreement was a binding contract or an “agreement to agree.”

Fayetteville Imaging Associates, Inc. v. National Imaging Affiliates, Inc.: breach of fiduciary duty, internal affairs doctrine, duty of majority shareholder to minority, pleading fraud with particularity.  The Motion asserts that Tennessee law applies.

General Electric Capital Corp. v. Royal American Co., L.L.C.: impleader, propriety of third party complaint.

Hill v. StuHub, Inc.: Whether claim against on-line ticket website StubHub for scalping tickets is barred by the Communications Decency Act.

Hume v. Stevenson: unfair and deceptive practices (whether actions of defendant were "in commerce," whether transaction involved securities so as to be outside scope of statute), pleading fraud with particularity, motion for a more definite statement.

O’Henry, Inc.v. Advantage Marketing Wholesalers, L.L.C.: sufficiency of allegations of breach of contract (New Jersey law).

These are not complete descriptions of the pending issues, only a general summary. 

I did a similar post earlier this month on pending Motions for Summary Judgment, you can find that here.

Tortious Interference And Negligent Misrepresentation Claims Dismissed

The Business Court today granted in part, and denied in part, a Motion to Dismiss in Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc. Judge Tennille ruled on claims of tortious interference with prospective economic advantage, negligent misrepresentation, and misappropriation of trade secrets, among others.

Plaintiff (Gateway) alleged that the Defendant (ALT) sold it faulty lubricant which was used by automobile and truck dealers to which Plaintiff sold warranties.  The lubricant allegedly turned out to be defective, and Gateway claims it was called upon to pay substantial warranty claims.  

The parties stopped doing business with one another, and ALT then began selling the same lubricant, under a different name, to Gateway's competitor.  According to Gateway, ALT gave the competitor a list of Gateway's customers which it used to solicit business.

The Motion to Dismiss was granted as to the tortious interference claim, which asserted that Gateway had lost business as a result of ALT's sale of lubricant to the competitor.  The Court held that:

ALT sold product to a competitor of Gateway. It had the right to do so. Competition does not in and of itself represent tortious interference; rather it is a legitimate justification for seeking business from common customers. Here it is even one step removed since ALT sold product to Gateway’s competitor.

It is . . . clear that the complaint does not adequately allege interference with prospective economic advantage. To do so the complaint must allege interference with a trade or business by maliciously inducing a person not to enter into a contract with a third person, which he would have entered into but for the interference. A legitimate exercise on a person’s rights cannot support a claim for interference with prospective economic advantage.

The negligent misrepresentation claim was dismissed because Gateway's claims were for breach of warranty and covered by the UCC, and also because of the economic loss rule.  Judge Tennille held:

This is a breach of warranty case. The complaint alleges any statements were made in the course of the contractual representation. It fails to establish any independent duty running from ALT to Gateway. To substitute negligent misrepresentation for breach of warranty under the circumstances of this case would eviscerate the pertinent sections of the UCC. Both the negligent misrepresentation claim and the negligence claim in Count VI are barred by the economic loss rule. Both are based upon a breach of contract or warranty and the recovery is limited to the contract or warranty claim. Our Court of Appeals has held that: “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract.” Spillman v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741 (1992).

Finally, the trade secrets claim survived the Motion to Dismiss. The Court held that "[c]ustomer lists may or may not be trade secrets depending on the circumstances and the use made of them," and held that discovery on this claim would be necessary.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss




Sex and Fiduciary Duty

The case of  Land v. Land is a minority shareholder dispute among shareholders of a family business. 

The Business Court sees these kinds of disputes regularly, and there's not much novel in the Court's Order today denying summary judgment in a fight over a masonry business involving two brothers and their father.

The part of the Order that warrants a mention, however, has to do with the Plaintiff's claim of a breach of fiduciary duty by his brother Eddie, the majority shareholder of the business.  Eddie had an unusual defense to this claim by his brother, Alan.

The defense was that Eddie had an affair with Alan's wife, that Alan had discovered the affair, and that Alan therefore could not have had any expectation of a fiduciary duty being owed to him by Eddie.  According to Eddie, Alan therefore could not have relied on the allegedly false statements made to him by Eddie regarding the affairs of the Company.

The Court rejected the argument, holding:

Eddie claims that Alan could not have reasonably relied upon any actions of Eddie’s because Alan caught Eddie in a compromising position with Alan’s then wife in the mid-1980s. (Def. Br. Summ. J. Alan 11.) Eddie asks the Court to hold that that circumstance alone defeats any claim to reasonable reliance or a fiduciary relationship between the two. Alan claims that his knowledge of the situation (which he kept secret until discovery in this case) gave him more leverage and reason to trust Eddie in business. (Alan Br. Opp’n 19; Def. Mot. Summ. J. Alan 4.) While the Court may have its own personal view of the wisdom of one brother trusting another under these circumstances, the Court believes that the overall question of whether there was a fiduciary relationship between Eddie and Alan is one for the jury after it sorts out all the sordid facts.



Plaintiff Collaterally Estopped Based On Arbitration Award

Today, Judge Jolly ruled on a Motion to Dismiss in Essa Commercial Real Estate, Inc. v. Five Trees, LLC, in which the issues involved defenses of issue preclusion based on an Arbitration Award. 

The Court determined that the Award was entitled to collateral estoppel effect -- even though the Defendants had not been parties to the arbitration -- and dismissed a number of Plaintiff's claims.  It also held, however, that the Plaintiff could seek to enforce the Award against the Defendants.

The Award had been obtained by the Plaintiff against two members of a limited liability company based on an agreement which they had executed before the formation of the LLC.  Plaintiff contended that the agreement had been assumed by the LLC, and sought to make in the Business Court the same claims against the LLC and two of the other organizers of the LLC as it had made in the arbitration.  In the alternative, the Plaintiff sought to enforce the Award against the Defendants.

The Defendants argued that the Award, and a subsequent settlement agreement based on the Award, were a complete bar to Plaintiff's claims based on collateral estoppel, res judicata, and the "one satisfaction doctrine."

In assessing the collateral estoppel defense, the Court compared the claims made in the Arbitration to the claims made in the Amended Complaint, and found them to be identical.  It further determined that the Plaintiff had "a full and fair opporutnity to litigate these issues." 

The Court concluded that "the doctrine of collateral estoppel serves to bar [the Plaintiff] from relitigating the issue of its damages resulting from breach of the Agreements and/or those services it provided to the Project before it ceased providing such services."  It therefore dismissed the claims which had been decided in the arbitration proceeding.

The Court found, however, that the Plaintiff was not barred from seeking to enforce against the Defendants the Award itself, because there were issues about whether the Award had been satisfied.  The Court stated that the settlement of the Award contained "numerous contingencies."  The claims on the Award were therefore not precluded by either res judicata or by the "one-satisfaction doctrine."

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Information Obtained At Interview, And Interview Notes, Protected By Work Product Privilege

The only place that you are likely to find a written opinion from a North Carolina Court on a discovery issue is from the Business Court.  Those kinds of interlocutory issues just don't get addressed by appellate courts. 

So, here's a post about a (very) short June 10, 2008 Order in Harco National Insurance Co. v. BDO Seidman, LLP, on an interesting work product issue.

In Harco, the general counsel of the Defendant, an accounting firm, sent a representative to interview one of the key players in the audit that was at issue in the lawsuit. 

The Plaintiff deposed both the interviewer and the person interviewed.  The Defendant balked, however, when Plaintiff's counsel asked the interviewer questions about the objectives of the interview and whether certain questions had been asked at the interview.  The Defendant also refused to produce the interviewer's notes.  The Defendant contended that all of this information was protected by the work product privilege.  Plaintiff filed a Motion to Compel.

According to Defendant's Brief in opposition to the Motion, some of the objectionable questions were whether the interviewer had conducted the interview with particular questions in mind, whether she had focused on particular areas of the audit, whether she showed the interviewee particular documents, and what conclusions she reached after the interview.

Judge Tennille denied the Motion, holding that the interviewer (Ms. Lister):

declined to answer questions which called for her mental impressions and litigation strategy based upon attorney-client privilege and work product. Ms. Lister conducted the interview at the direction and under the supervision of the General Counsel of BDO in order to prepare BDO’s defense to the claims asserted in the lawsuit. The Court concludes that the limited amount of information withheld by Ms. Lister was protected as attorney work product under N.C. R. Civ. P. 26(b)(3). Harco elicited testimony about what was said and done at the interview. The information it now seeks relates to impressions and opinions Ms. Lister formed and conveyed to BDO’s General Counsel. Harco has not demonstrated any hardship as it has obtained discovery of the underlying facts. Harco’s Motion to Compel is denied.

Plaintiff's Brief in support of its Motion isn't available because it was filed under seal, but its Reply Brief is here.  The link to Defendant's Brief is above.


Motion To Amend To Add Statute Of Limitations Defense Denied Based On Undue Delay

Today, in Cope v. Daniel, the Business Court denied the Defendant's request to amend its Answer to add a statute of limitations defense and a defense of ERISA preemption.  Judge Tennille found that the Defendant had unduly delayed by raising the statute of limitations defense, and that the Plaintiff would be prejudiced if it were allowed.  The Court denied the ERISA amendment for another reason, finding it to be futile.

The case involves a dispute between shareholders of a medical practice.  Plaintiff alleged that the Defendant engaged in financial misdoings, including charging unauthorized expenses to the practice, improperly reporting to taxing authorities, paying himself unauthorized distributions of salary and bonus, and overcharging rent.

The amendment on the statute of limitations was requested fourteen months after the original Answer was filed.  The Court noted that the Complaint asserted claims based on events beginning as far back as 1999, and stated "[n]o questions have been raised as to whether Defendants knew at the time the complaint was filed . . . what claims were being asserted against them and during what timeframe."

The Court denied the Motion, holding that "[a] delay of over fourteen months before filing a statutes of limitation defense is an undue delay and causes undue prejudice to Plaintiff."  It also held that "[a] defense based upon statutes of limitation is, by definition, time sensitive. A delay of over fourteen months before asking for an amendment could be acceptable in certain circumstances. . . . The situation where statutes of limitations defense is raised is not one of those circumstances."

The ERISA claim came in for a different analysis.

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Protective Order Entered Over Objection Of The North Carolina Department of Revenue

The Court granted a Motion for Protective Order yesterday in Delhaize America, Inc. v. Hinton.  There's nothing particularly remarkable about the entry of a Protective Order, which usually happens by consent, but this Protective Order may set some precedent in future Business Court cases.

The case involves the type of tax refund litigation which is within the Business Court's mandatory jurisdiction under N.C. Gen. Stat. § 7A-45.4(a)(7).  The Order was entered against the North Carolina Department of Revenue over its objection. 

The Department of Revenue had sought extensive information regarding Delhaize's business activities which Delhaize offered to produce subject to a Protective Order. 

The Department, in its Brief, raised a series of objections to the information being kept confidential.  It said that:

Delhaize was "attempt[ing] to cloak its tax refund litigation in a veil of secrecy;"

A Protective Order would "violate the public's right of access [to the courts] under state and federal law," including the First Amendment;

The North Carolina Public Records Act compelled public disclosure of the information requested; and

Delhaize's request for a refund operated as a waiver of its rights under the North Carolina "Taxpayer Bill of Rights."

All of these objections were effectively rejected by the Court's entry of the Order.  The Order itself contains no discussion of the basis for the ruling and is a fairly standard Protective Order.

Delhaize's Brief, setting out the reasons why a Protective Order was appropriate, is here.  (My partners Reid Phillips, Bill McNairy, and Andy Haile represent Delhaize in this case).





There's A Danger In "General Objections" To Discovery Requests

Hilb Rogal & Hobbs Co. v. Sellars2008 NCBC 12 (N.C. Super. Ct. June 6, 2008)(Diaz)

It is very common to get discovery responses which have "General Objections" up front, followed by specific objections to each of the numbered discovery requests.

There's a danger in responding that way, based on Judge Diaz's opinion today in Hilb Rogal & Hobbs Co. v. Sellars.

In Hilb, Defendant's responses to interrogatories contained general objections "on grounds of relevancy, scope, and undue burden."   Plaintiff moved to compel on particular responses which it contended were not adequate.  Defendant argued that the information sought wasn't relevant, but he hadn't included that as an objection to the responses at issue.

The Court cast doubt on whether the objection had been properly presented.  The Court first held that the Rules of Civil Procedure require a party to state its objections in response to each interrogatory:

Rule 33 of the North Carolina Rules of Civil Procedure requires that each interrogatory “be answered separately and fully in writing under oath, unless it is objected to, in which event the reasons for objection shall be stated in lieu of an answer.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007). Moreover, “[a]n objection to an interrogatory shall be made by stating the objection and the reason therefore either in the space following the interrogatory or following the restated interrogatory.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007) (emphasis added).

The Court then stated what it said was the ruling of most federal courts on the subject of general objections:

'objections stated at the beginning of the response to the interrogatories, are ineffective and are an abuse of the discovery process because such objections block discovery without explaining why and to what extent.' Waters Edge Living, LLC v. RSUI Indem. Co., 2008 U.S. Dist. LEXIS 33049, at *11 (N.D. Fla. Apr. 22, 2008).

Although the Court considered the objection as to relevancy anyway (and found it to be without merit and based on a "crabbed" reading of the interrogatories), there's clearly a risk in presenting general objections in the manner at issue in the Hilb case


Business Court Gives Broad Interpretation To Its Mandatory Jurisdiction Over Antitrust Cases

The Business Court has mandatory jurisdiction under N.C. Gen. Stat. §7A-45.4 over claims involving "antitrust law, except claims based solely on unfair competition under N.C. Gen. Stat. §75-1.1.

The Court gave a broad reading to its grant of its antitrust jurisdiction in an Order today in Sonic Automotive, Inc. v. Mercedes-Benz USA, LLC, in which it denied an objection to a Notice of Designation of the case as a mandatory complex business case. 

Sonic, which already owned nine Mercedes dealerships, sued Mercedes-Benz for refusing to approve its purchase of another dealership in Charlotte.  According to the Complaint, Mercedes-Benz withheld its approval because of Sonic's alleged failure to comply with the terms of a letter agreement executed when Sonic had acquired other Mercedes dealerships. 

The case was designated to the Business Court by Mercedes-Benz as being within the Court's mandatory jurisdiction over antitrust cases and the law governing corporations.  Sonic filed a Motion to Remand objecting to the designation.

There's no claim in Sonic's Complaint denominated as an antitrust claim, and the word antitrust isn't even in the Complaint. 

Mercedes-Benz argued in its Opposition to the Motion to Remand that Sonic's claim was based on a "contract in restraint of trade," which implicated "antitrust and unfair competition issues squarely within the Business Court's jurisdiction."  The car manufacturer was helped in its arguments by public statements made by Sonic's President that Sonic was being "extorted" by Mercedes-Benz and that Mercedes-Benz had "tied" the sale of the Charlotte dealership to Sonic's compliance with the letter agreement.

Judge Tennille found that the Court's antitrust jurisdiction was implicated, and also held that its mandatory jurisdiction was appropriate for other reasons presented by Mercedes-Benz in its Opposition:

Plaintiff has asked the Court to remand this action because the case “does not involve any . . . issue” regarding antitrust law or the law governing corporations. (Pl. Br. Supp. Opp’n 1.) The Court disagrees. First, this case potentially involves violations of antitrust law. Section 75-1.1 of the North Carolina General Statutes does not cover simple breach of contract. N.C. Gen. Stat. § 75-1.1 (2007). Thus, the unfair trade practices claim may involve antitrust issues. Second, this case may involve issues with broad ramifications for automobile dealers and manufacture[r]s. Third, this case may also involve the interplay between courts and administrative agencies. These parties and agencies will benefit from a single judge hearing this case. Fourth, this case involves the sale of a business or business assets. Fifth, the case is likely to be motion intensive.

Court Of Appeals Rules That NC Wage And Hour Act Has No Application Outside North Carolina

The North Carolina Wage and Hour Act does not apply to out-of-state employees working for North Carolina companies even if their employment agreements provides that the law of North Carolina applies, per the ruling of the North Carolina Court of Appeals today in Sawyer v. Market America, Inc.

Sawyer, a resident of Oregon, worked for Market America, a North Carolina based company, under an independent contractor agreement.  All of Sawyer's work was done outside of North Carolina.

The Agreement between Sawyer and Market America provided that it should be "governed and construed under the laws of the State of North Carolina." 

When Sawyer sued, he made claims under the North Carolina Wage and Hour Act.  He argued that since the parties had agreed to the application of North Carolina law, there was no reason for the Court to reach the issue whether the Act has extraterritorial effect.

The Court of Appeals rejected this argument, relying on venerable North Carolina Supreme Court precedent that "every statute is confined in its operation to the persons, property, rights, or contracts, which are within the territorial jurisdiction of the legislature which enacted it. The presumption is always against any intention to attempt giving to the act an extraterritorial operation and effect.”

The conclusion of the Court of Appeals was that summary judgment had been properly entered by the trial court, because "the North Carolina Wage and Hour Act does not apply to the wage payment claims of a nonresident who neither lives nor works in North Carolina." 

No Unfair And Deceptive Practices Claim From Law Firm Dissolution, And More

There's an old Jackson Browne album called "Lawyers in Love."  Lately, there have been a lot of cases involving lawyers out of love, and dissolving their firms.  One was decided by the Business Court on June 2nd, Walters & Zimmerman, PLLC v. Zimmerman.

Plaintiff, a lawyer in the dissolved law firm who was a manager of the Professional Limited Liability Company, brought claims on behalf of the PLLC and in her own name for breach of fiduciary duty and conversion.  She also asserted trade secrets claims and a claim for unfair and deceptive practices.  Defendant, another lawyer in the dissolved firm, moved to dismiss on a variety of grounds.

The only claim on which Defendant was successful was a claim for unfair and deceptive practices.  Judge Tennille held that the claims between the lawyers involved an "internal dispute," and that such disputes did not "affect commerce" as required by the statute. 

The roadblock to the other grounds asserted for dismissal was one of standing, and whether the proper parties were before the Court.  The members of the PLLC were not the individual lawyers themselves, but professional corporations that each of the individual lawyers had formed.  The Court found issues about whether the proper parties were before it, and directed the parties to consider the Court of Appeals' recent decision in Crouse v. Mineo, 2008 N.C. App. LEXIS 546, 658 S.E.2d 33 (N.C. Ct. App. 2008).  That case dealt with another law firm dissolution. 

That Court of Appeals held in Crouse that a manager of an LLC does not have the authority to bring suit on behalf of the LLC because such an action is not within the powers of a manager, which are limited to things necessary to "carry[] on in the usual way the business of the limited liability company."  Bringing a lawsuit against the LLC, the Court of Appeals held, was not within the course of usual business.  The Crouse court concluded, however, that the Plaintiff there had the right to make a derivative claim on behalf of the LLC under the circumstances presented.  You can click here for a more complete summary of the Crouse case. 

Turning back to the Walters & Zimmerman case, the Business Court also summarized when the moving party on a Motion to Dismiss can rely on documents outside of the pleadings.  It is good to know where the Business Court stands on that issue.  It held:

Furthermore, the Court may not consider “extraneous matter” outside the complaint, or else the Rule 12(b)(6) motion will be converted into a Rule 56 motion for summary judgment. See, e.g., Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 891 (1979). However, the Court may consider documents the moving party attaches to a 12(b)(6) motion which are the subject of the challenged pleading and specifically referred to in that pleading, even though they are presented to the Court by the moving party. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001) (considering a contract on a 12(b)(6) motion even though the contract was presented by the movant). The Court is not required to accept as true “any conclusions of law or unwarranted deductions of fact.” Id. at 56, 554 S.E.2d at 844. Thus the Court can reject allegations that are contradicted by the supplementary documents presented to it. See E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000) (stating that the court “need not accept as true unwarranted inferences, unreasonable conclusions, or arguments”).

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Looking Ahead At Motions For Summary Judgment Pending In The Business Court, June 2008

Looking ahead, there are a number of Business Court cases in which summary judgment motions have been fully briefed and in which rulings should be issued over the next few months.  In alphabetical order, with links to the Business Court electronic file, they are:

Edgewater Services, Inc. v. Epic Logistics, Inc.: dispute between competing third party logistics companies in the transportation industry including claims involving trade secrets, joint venture, tortious interference with contract by hiring employee subject to non-compete, tortious interference with prospective economic advantage, and unfair and deceptive trade practices.

Griffin Management Corp. v. Carolina Power and Light Co.: plaintiff, a supplier of personnel to Progress Energy and Duke Energy, alleges a destruction of its business through actions by those companies and plaintiff's competitor. It's hard to tell what issues are before the court, because 21 of the last 22 filings were made under seal.  Only those with appropriate security clearance (or at least a secret decoder ring) will be able to read the opinion.

JDH Capital, LLC v. Flowers: the issues include the binding effect of a letter of intent, whether a joint venture existed, and the legal effect of oral statement “we have a deal.”

Land v. Land: shareholder dispute involving claims for breach of fiduciary duty, and issues of statute of limitations and laches.

Leiber v. Arboretum Joint Venture, LLC: commercial paper issues inolving actual and apparent authority, conversion of checks by an allegedy unauthorized agent, and liability of drawee and drawer banks for payment over claimed unauthorized endorsements of checks.  In addition to the Motion on the principal claims, Bank of America and Wachovia are slugging it out here on who should end up holding the bag in the event of an adverse ruling on the agency question.

Marotta v. Datacraft Solutions, Inc.: issues include shareholder's right to vote for election of directors and whether an amendment to the corporation's Articles of Incorporation created dissenters' rights.

Miller & Long Co., Inc. v. Intracoastal Living, LLC: construction law case involving issues of collection on payment bond and enforcement of claim of lien.

Mitchell, Brewer, et al v. Brewer: issues regarding beakup of law firm that was a limited liability company.

Novo Nordisk Pharmaceutical Industries, Inc. v. Carolina Power & Light Company: issue of enforceability of provision limiting or excluding liability in a tariff approved by the North Carolina Utility Commision.

This summary is not meant to be anything near a complete description of the issues pending in these cases.

There are furthermore eight cases in which Motions to Dismiss are awaiting ruling.  I might write about those cases another time if I decide that a forward looking post like this is worthwhile.  You are welcome to give me input on that if you want, either directly ( or by commenting below.