First Decision Under North Carolina's Identity Theft Act

Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008).

The North Carolina Business Court decided today the first published opinion under North Carolina’s Identity Theft Protection Act, N.C. Gen. Stat. §75-60 et seq. The case, Fisher v. Communications Workers of America, also involves an interesting invasion of privacy issue.

The Plaintiffs were members of the CWA, working for AT&T at various locations. A representative of the Union posted a notice on a bulletin board at one job site which contained the social security numbers of all the Plaintiffs.

This led to three claims by the Plaintiffs: that this violated the North Carolina Identity Theft Protection Act, that it was an unfair and deceptive practice, and that it was an invasion of privacy.

The Act specifically provides that a business may not "Intentionally communicate or otherwise make available to the general public an individual's social security number."  N.C. Gen. Stat. §75-62(a)(1).  Defendants argued that the list posted on the bulletin board had not been seen by the "general public" and that it had not been posted there in order to facilitate identity theft.  The Defendants also argued that the bulletin board was used for "internal verification or administrative purposes," and that the posting was therefore exempt under N.C. Gen. Stat. §75-62(b)(2).

Judge Diaz rejected these defenses.  He held that the Act does not require that the general public actually see the social security numbers in order for there to be a violation.  He also held that the communication of the social security numbers does not need to be made either for the purpose of providing them to the general public or for the purpose of facilitating identity theft.  And as to the "bulletin board defense," Judge Diaz held that this presented a question of fact which could not be resolved on a motion to dismiss.

The Motion as to the unfair and deceptive practice claim was also denied, mainly because the Act provides that “[a] violation of [section 75-62 of the North Carolina General Statutes] is a violation of [the UDTPA].” N.C. Gen. Stat. § 75-62(d) (2007).

The Court did grant the Motion to Dismiss on the invasion of privacy claim, however.  It held that the posting of the social security numbers was "not the type of 'intentional intrusion, "physically or otherwise,"' necessary to state a claim for invasion of privacy by intrusion into seclusion."  It held that this tort requires  "a physical or sensory intrusion or an unauthorized prying into confidential personal records."

The Court also rejected the argument that the posting on the bulletin board could make out an invasion of privacy claim because it was a "public disclosure of private facts."  The Court relied on  Hall v. Post, 323 N.C. 259, 265–70, 372 S.E.2d 711, 714–17 (1988), in which the North Carolina Supreme Court held that the tort does not encompass claims which involve the publication of true but private facts.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss


Taking The Fifth Results In Adverse Inference And Entry Of Preliminary Injunction In Trade Secrets Case

The Defendant's exercise of his Fifth Amendment right against self incrimination was the basis for the North Carolina Business Court's entry of a Preliminary Injunction on October 29th in Amacell LLC v. Bostic.

Plaintiff asserted that its former employee, a senior research scientist, had misappropriated trade secrets and violated a confidentiality agreement.  The Defendant didn't deny the misconduct alleged, but instead invoked his Fifth Amendment right against self-incrimination.

Judge Tennille drew an adverse inference as a result of the Defendant's refusal to testify and entered the Preliminary Injunction, holding:

In a civil case, adverse inferences may be drawn against a party who asserts the Fifth Amendment and remains silent.  Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them”); see Arminius Schleifmittel GMBH v. Design Indus., Inc., 2007 WL 534573 (M.D.N.C. Feb. 15, 2007) (granting injunction against defendant who asserted Fifth Amendment privilege because by asserting the privilege he rendered plaintiff’s factual presentation unrebutted). Because Bostic has not rebutted Plaintiff’s evidence, Plaintiff has established a likelihood of success on the merits of its claims for misappropriation of trade secrets and breach of his confidentiality agreement.

Order at 3.

The Business Court also dealt with the Fifth Amendment in the context of civil litigation in its opinion in Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), where the Court held that a plaintiff who refused to testify about certain matters could not testify about them at trial, and that it would give an adverse inference instruction.


Plaintiff Seeking Expedited Discovery In Lawsuit Over Wachovia-Wells Fargo Merger

The Plaintiff in the would be class action seeking to enjoin the Wachovia and Wells Fargo merger is pursuing his effort to obtain expedited discovery.  The parties have staked out the broad outlines of the claims and defenses in their briefs on that Motion. Plaintiff’s Brief is here, Wachovia’s Brief, filed yesterday afternoon, is here.

The essence of Plaintiff's argument is that the $7 per share offered by Wells Fargo in the Merger Agreement is an inadequate price, and that the Wachovia Board of Directors violated its fiduciary duty by approving the merger and by entering into the Share Exchange Agreement that gave Wells Fargo nearly 40% of the outstanding voting stock of Wachovia.

The Claim Of Inadequate Price

On the claim that the price being paid by Wells Fargo is inadequate, Plaintiff argues that Wachovia stock was trading at $10 per share on September 26, 2008, before the bailout bill was passed, and that the effect of the bailout is to make Wachovia more valuable because the federal government will purchase its non-performing assets. 

As Wachovia points out (in its Brief at page 4 n.2), there is no certainty that it would be entitled to federal funds, which are to be allocated in the discretion of the Treasury. 

Wachovia says, based on the previously presented Affidavit testimony of Robert Steel, that the "stark choice" for Wachovia was either to accept the Wells Fargo offer or to enter receivership. (Wach. Brf. at 4)

Fiduciary Duty Claim

Plaintiff’s claim of violation of fiduciary duty is based on the argument that the Share Exchange Agreement has rendered the shareholder vote on the merger "essentially meaningless," and precludes any competing bid from being made. 

Plaintiff contends that the Share Exchange is invalid under the Emergency Economic Stabilization Act of 2008.  He points to the Section 126(c) of the Act, which reads:


No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

Wachovia launched a full frontal attack in response to the assertion that there is another potential buyer or merger partner:

Plaintiff's application to this Court is based on the unsubstantiated and illogical notion that Wachovia has alternatives to the Wells Fargo merger and that somehow shareholders are being prevented from taking advantage of these supposedly superior opportunities.  This makes no sense.  It is now more than a month since Wachovia first announced that it was available for a transaction, and no offers other than those by Citigroup and Wells Fargo have been made.  If any capable third party was interested in making such an offer, it could have done so. 

Wach. Brf. at 5.  Wachovia also says that "any bank large enough to consider acquiring Wachovia knows how to formulate and communicate such an offer." (Wach. Brf. at 10-11).

The parties are also at odds over the significance of the "fiduciary out" in Section 6.3 of the Merger Agreement.  Plaintiff says that the fiduciary out does not permit Wachovia to terminate the Agreement in the event of a superior offer, but instead requires it to present the merger to the shareholders for a vote without a recommendation. 

On the point of motive, Plaintiff contends that the motive for this alleged breach of duty was to obtain "lucrative 'golden parachutes'" for Wachovia's executive team and for them to retain employment with the merged bank. Wachovia responded that the only management employee who voted to approve the merger is Robert Steel, who has publicly stated that he will not take a position with the merged entity.

Wachovia's Other Arguments

Wachovia stresses the need to close its transaction, and says that the consummation of the merger is "crucial to the stability of the United States banking system" in the judgment of the Federal Reserve.  Wach. Brf. at 2. 

The Charlotte bank says that Plaintiff can have no hope of posting a bond even it it obtains injunctive relief.  As Wachovia puts it:

it is inconceivable that this shareholder could possibly post a bond for the potential costs and damages resulting from obtaining a wrongful injunction against a multi-billion merger that is critical to the stability of the financial system

Wach. Brf. at 3. That would be quite a bond.

Business Court Allows Confidential Settlement Of Individual Claims In Class Action Suit

Thomas Cook Printing Co. v.  Subtle Impressions, Inc.2008 NCBC 17 (N.C. Super. Ct. Oct. 24, 2008).

On October 24th, the North Carolina Business Court approved the Plaintiff's withdrawal of class action claims under the Federal Telephone Consumer Protection Act (which prohibits the transmission of "unsolicited advertisements" to fax machines) and a settlement of the Plaintiff's individual claims.

The Court's approval was necessary as a result of the opinion of the North Carolina Court of Appeals in Moody v. Sears Roebuck and Co., 664 S.E.2d 569 (N.C. App. 2008), and Judge Tennille's recent Order interpreting that ruling.

What's interesting about the opinion is that the Court permitted counsel for parties to submit the documents supporting the settlement in camera.  It also permitted the parties to keep confidential the terms of the settlement with the individual Plaintiff.

Although Judge Diaz recognized that the settlement papers filed with the Court were "public records and, thus, are presumed to be available for public inspection pursuant to the North Carolina Public Records Act," he reasoned as follows in agreeing to keep them confidential:

In Virmani v. Presbyterian Health Servs. Corp., 350 N.C. 449, 463, 515 S.E.2d 675, 685 (1999), the North Carolina Supreme Court held that  “a trial court may, in the proper circumstances, shield portions of court proceedings and records from the public[.]” 

In the absence of the class action allegations, the parties "could have settled their dispute confidentially and filed a voluntary dismissal without any oversight from this Court." 

The amount being paid, as described by Judge Diaz, was "relatively insubstantial, particularly when viewed in the context of the high-dollar business disputes typical of this Court’s docket."

The case did not implicate substantial public policy concerns.  There had not been an interest voiced by the media or the public in the Plaintiff's allegations.

Maintaining the confidentiality of the settlement was in the best interests of justice, in the absence of any prejudice to the putative class members or the public at large.

The Business Court has in the past refused to certify class actions under the Federal Telephone Consumer Protection Act, in Blitz v. Agean, Inc., 2007 NCBC 21 (N.C. Super. Ct. June 25, 2007) and Blitz v. Xpress Image, Inc., 2006 NCBC 10 (N.C. Super. Ct. Aug. 6, 2006).  The Agean case is  on appeal to the North Carolina Court of Appeals and is fully briefed.


Petitions For Discretionary Review In The North Carolina Supreme Court

You've lost a case in the North Carolina Court of Appeals,  It was unanimous, 3-0.  You are talking with your client about a Petition for Discretionary Review to the North Carolina Supreme Court. 

What are your chances?  Frankly, not very good at all.  I took a look at the Supreme Court's track record this year on Petitions for Discretionary Review.  I counted 341 Petitions ruled upon on the five release dates so far this year.  Of that number, 319 were denied, and 22 were allowed.  In overall percentage terms, 94% were denied.

The numbers break a little better for civil Petitions as opposed to criminal Petitions.  There were 180 criminal Petitions, of which only 5 were granted. That's less than 3%.  There were 161 civil Petitions, of which 17 were granted.  The chances on a  civil Petition, overall, were slightly better than 10%, but eight of those were Petitions where there was a dissent in the Court of Appeals.  When you take those out of the mix because the Supreme Court was going to take the appeal as of right, the winning percentage is about 6%. 

I haven't subjected these numbers to actuarial review, but they are accurate enough for me to say that you might be better off looking for 4-leaf clovers than asking the Supreme Court to take your case on a discretionary basis.  The Court of Appeals, for all practical purposes, is the final level of review for a civil case in North Carolina.

Things are quite different if there is a dissenting opinion in the Court of Appeals and you ask the Supreme Court through a Petition for Discretionary Review to consider additional issues.  Virtually all of those Petitions were granted.

If you are proceeding ahead with a Petition despite the long odds, and are looking for a winning Petition to get some guidance in drafting your own, at the bottom of this post there are links to five of the Petitions allowed this year in civil cases. 

Petition for Discretionary Review in Mangum v. Raleigh Board of Adjustment

Petition for Discretionary Review in Pottle v. Link

Petition for Discretionary Review in Sandy Mush Properties, Inc. v. Rutherford County

Petition for Discretionary Review in Weaver v. Sheppa

Petition for Discretionary Review in Grant v. High Point Regional Health System

Shareholder Class Action Filed In North Carolina Business Court To Enjoin Wachovia-Wells Fargo Merger

The first Complaint I'm aware of seeking to enjoin the merger between Wachovia and Wells Fargo has been filed in North Carolina and designated to the North Carolina Business Court.

In the Notice of Designation to the Business Court of the case, Ehrenhaus v. Baker, the Plaintiff describes his claim as follows: 

"This is a class action on behalf of the public stockholders of Wachovia Corporation (“Wachovia” or the “Company”) in connection with a proposed acquisition of Wachovia by Wells Fargo & Company (“Wells Fargo”) in breach of defendants’ fiduciary duties (the “Merger”).  Plaintiff alleges that he and the other public stockholders of the Company’s common stock are entitled to enjoin the Merger, or alternatively, to recover damages in the event the Merger is consummated.  Plaintiff alleges that the Merger provides Wachovia’s public shareholders with inadequate consideration and is the product of a severely flawed sales process. Wachovia’s Board of Directors (the “Board”) has essentially disenfranchised the voters of Wachovia and locked up the vote in favor of the Merger when, in connection with the Merger Agreement, Wachovia and Wells Fargo entered into a share exchange agreement under which Wachovia is issuing Wells Fargo preferred stock that votes as a single class with Wachovia’s common stock representing 39.9 percent of Wachovia’s voting power."

Ehrenhaus has also filed a Motion for Preliminary Injunction and a Motion for Expedited Proceedings.  The case has been assigned to Judge Albert Diaz. 

Here's a little bit of background on the issue raised by the lawsuit regarding the shares to be issued by Wachovia to Wells Fargo:  In connection with their Merger Agreement , Wachovia and Wells Fargo entered into a Share Exchange Agreement, which provides that Wachovia will issue 10 shares of its "Series M, Class A Preferred Stock" to Wells Fargo in exchange for 1,000 shares of Wells Fargo Common stock.

What is "Series M, Class A Preferred Stock"?  The Form 8-K filed by Wachovia in connection with the Share Exchange Agreement says each one of those shares of stock represents 3.99% of the aggregate voting power represented by the shareholders of Wachovia common stock.  So, those ten shares have 39.99% of the voting power of Wachovia shareholders.

The effect of the issuance of those "super shares" to Wells Fargo will be to essentially to lock up the deal for Wells Fargo.  No other suitor for Wachovia can hope to obtain the necessary approval for an alternative merger deal while Wells Fargo holds a 40% voting bloc.  The lock up effect of the share issuance seems to be the main thrust of the Ehrenhaus Complaint.

It appears, however, that Wachovia complied with regulatory and statutory requirements regarding the issuance of those shares.  The New York Stock Exchange has a Shareholder Approval Policy which says that:

(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:
(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

The NYSE Rules provide for an exception when a delay in obtaining stockholder approval "would seriously jeopardize the financial viability of the enterprise," if the Audit Committee of the listed company expressly approves reliance on the exception.  The Rules further require that a company relying on this exception must mail a letter to its shareholders not less than 10 days before the securities will be issued, informing them of its intention to issue the securities without a shareholder vote.

Wachovia invoked the exception and sent the required letter to its shareholders, so it has complied with this particular requirement.

What about the North Carolina Business Corporation Act, which applies because Wachovia is a North Carolina corporation?  The Board of Directors of Wachovia has the power under North Carolina law, if the articles of incorporation so provide, to "determine, in whole or part, the preferences, limitations, and relative rights (within the limits set forth in G.S. 55‑6‑01) of (1) any class of shares before the issuance of any shares of that class or (2) one or more series within a class before the issuance of any shares of that series."  N.C. Gen. Stat. § 55‑6‑02.  The Articles of Incorporation of Wachovia presumably grant the Wachovia Board this authority and it was therefore presumably entitled to issue "Class M" shares with supervoting powers.

It will be interesting to see what happens with this case, which may be the first of many shareholder class actions over this merger.


Cruising And Recusing: Motion To Recuse Is Stricken By The North Carolina Business Court

This post is about an Order Striking a Motion for Recusal by the North Carolina Business Court, in J. Freeman Floor Company, LLC v. FreemanThe Motion was stricken because it was procedurally defective, but the factual allegations which the Plaintiff claimed warranted recusal were interesting, as was the way in which Judge Diaz handled those allegations.

The Plaintiff moved to recuse Judge Diaz from hearing the Defendant's Motion for Sanctions.  The argument for recusal ran like this: Plaintiff asserted that (1) Defendant's counsel (Winson) had  been counsel for Carnival Cruise Lines, (2) Carnival Cruise Lines had in the past been represented by Hunton & Williams, (3) Judge Diaz had formerly been an attorney with Hunton & Williams (even at the same time he was a Superior Court Judge, said the Plaintiff) , and (4) Judge Diaz had improperly reopened the case (which had been dismissed) in order to hear the Rule 11 Motion. 

The specific allegations made in the Motion for Recusal were that:

Mr. Winson has close and substantial ties with Hunton & Williams by virtue of his long and substantial relationship with Hunton & Williams' clients Carnival Corporation and Carnival Cruise Line.  Judge Diaz has close and substantial ties with Hunton & Williams due to his long and recent association with Hunton & Williams.  Mr. Winson's substantial ties to Hunton & Williams and Judge Diaz's substantial ties to Hunton & Williams creates a conflict of interest which Plaintiffs in good faith believe would prevent Judge Diaz from being fair and impartial to the Plaintiffs with regard to Mr. Winson's Rule 11 motion which was purposefully set before Judge Diaz in a closed case file which had to be re-opened in order to bring said motion before Judge Diaz, despite the fact that Mr. Winson could have filed the Rule 11 motion in the new case file which would not have been heard by Judge Diaz.  Thereafter, Mr. Winson removed the new case file to business court and purposefully requested that Judge Diaz be assigned to the case.  For these reasons, Plaintiffs in good faith do not believe that they will receive a fair and impartial decision with regard to Mr. Winson's Rule 11 motion.

The Motion to Recuse further alleged that Judge Diaz, who has been a Superior Court Judge since 2001, had been appearing in Court for Hunton & Williams clients as recently as 2006.  It referenced as support for this assertion several federal court opinions decided between 2003 and 2006 in which Judge Diaz was listed as counsel of record along with another Hunton & Williams attorney. (The Plaintiff was right about Judge Diaz being listed as counsel in those cases, but they all were filed before Judge Diaz took the bench).

The Plaintiff claimed that as a result of these facts there was an appearance of a "special relationship between Mr. Winson and Judge Diaz," and that this "would tend to give the appearance of impropriety." 

Judge Diaz didn't get to the merits of the Motion in his Order, but instead struck the Motion because it was filed without a brief, in violation of Business Court Rule 15.2.  He noted that the Rule violation would ordinarily result in a summary denial of the motion, but gave the Plaintiff ten days to refile its Motion (with a Brief).  The ten days have run out, and the Motion hasn't been refiled.

That's probably because notwithstanding the striking of the Motion, Judge Diaz gave the Plaintiff a direct response to its assertions showing that they didn't have any basis. The highlights are as follows:

  • With regard to the allegations that he had been practicing law while a Judge, Judge Diaz said "[s]ince taking the oath of office as a superior court judge in November 2001, I have not practiced law, whether with my former firm Hunton & Williams, LLP or any other firm. Indeed, such activity would be patently inconsistent with my oath as a judge and would also violate the North Carolina Code of Judicial Conduct. See N.C. Code of Judicial Conduct, Canon 5(F) (“Practice of law. A judge should not practice law.”)."
  • With regard to the allegations that Hunton & Williams had represented Carnival, Judge Diaz stated that was "news to me," and that "to the best of my knowledge and recollection, I never represented Carnival . . . during my tenure at H&W."
  • On whether he had a relationship with Carnival's former General Counsel, Judge Diaz said that he "had never met Mr. Winson during my tenure at H&W" and that the first time he had encountered him was by telephone when Winson was in Court on another Business Court case.
  • On the point of whether it was proper to reopen the case to hear the Rule 11 Motion, Judge Diaz observed that "the law is clear that a trial court retains jurisdiction to hear a motion filed pursuant to Rule 11 of the North Carolina Rules of Civil Procedure, even after the case is dismissed."  

The picture at the top is of one of Carnival's fleet of cruise ships, the Carnival Fantasy.

Dismissal Of North Carolina Lawsuit Involving Wachovia-Citigroup-Wells Fargo Merger Issues

The North Carolina litigation involving Citigroup and Wells Fargo's fight for Wachovia has been dismissed with the consent of the parties.  As a part of the dismissal, Citigroup has agreed that it will not take any steps to enjoin a merger between Wells Fargo and Wachovia or interfere with a vote of the Wachovia shareholders on that merger.

Bud Baker, Wachovia's former CEO, had obtained a Temporary Restraining Order in Mecklenburg County which prohibited Citigroup from "filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement." 

The referenced second paragraph of the Agreement gave Citigroup a period of exclusivity to pursue the negotiation of a definitive agreement with Wachovia.  Citigroup claimed in litigation in New York that this provision had been breached by Wachovia with the assistance of Wells Fargo, and it had obtained a limited injunction from a Judge there.

The Joint Stipulation of Dismissal of the North Carolina action contains a commitment by Citigroup that it will not seek to prevent a shareholder vote on a Wells Fargo-Wachovia Merger.  It says:

Without waiving its rights fully to pursue monetary damages in other litigation, that Citigroup will not pursue any form of injunctive relief to seek to prevent a shareholder vote on the merger between Wachovia Corporation and Wells Fargo & Company, Inc. or pursue any kind of injunctive relief that would prevent the consummation of that merger.

Citigroup stated in a Press Release its intention to pursue damage claims against Wachovia and Wells Fargo.  It says that its "shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Preliminary Injunction Hearing To Be Rescheduled In The North Carolina Litigation Involving Wachovia-Citigroup-Wells Fargo Merger Issues

The parties to the North Carolina lawsuit in which Wachovia's former CEO, Bud Baker, obtained a Temporary Restraining Order against Citigroup's efforts to acquire the banking operations of Wachovia have agreed to a Consent Scheduling Order.

The Order, if approved by Judge Diaz of the North Carolina Business Court, will move the Preliminary Injunction hearing from tomorrow (Thursday) at 2:00 p.m. to Monday, October 13th, at 2:00 p.m. in the North Carolina Business Court.

The Proposed Order provides that the supporting papers of the parties will be filed by Thursday, October 9th, at noon.  Responsive materials will be filed on Friday, October 10th, at noon.  Those papers will apparently be filed under seal, given that the parties have presented a Confidentiality Order to the Court asking to be allowed to file documents in that manner. 

I've written two previous posts about the North Carolina litigation, which have links to the Complaint, the TRO, and Affidavit of Wachovia's CEO, and other documents.  The first one is here, the second one is here.


Defamation Claim Against Lawyer Properly Dismissed Says North Carolina Court Of Appeals

The North Carolina Court of Appeals today affirmed the dismissal of a defamation claim against a lawyer and his law firm, giving a broad and expansive interpretation to the absolute privilege given to statements "made in the course of a judicial proceeding."

The claim by the Plaintiff in Jones v. Coward was that a lawyer handling a civil lawsuit against him had approached a potential witness named Bracken "while he was eating breakfast in a public place," and asked him whether he had heard that Jones had "got run out of town for drugs."

Jones, presumably still in town and drug-free, sued the attorney and his law firm for defamation.  The trial court dismissed Jones' complaint based on the established doctrine that "defamatory statements made in the course of a judicial proceeding are absolutely privileged and will not support a civil action for defamation, even if made with malice."

The question for the Court of Appeals was whether the statement, made outside of the courthouse, over bacon and eggs, was "made in the course of a judicial proceeding."  It determined that it was, holding as follows:

We hold that an attorney's statement or question to a potential witness regarding a suit in which that attorney is involved, whether preliminary to trial, or at trial, is privileged and immune from civil action for defamation, provided the statement or question is not “so palpably irrelevant to the subject matter of the controversy that no reasonable man can doubt its irrelevancy or impropriety[,]” and it was “so related to the subject matter of the controversy that it may [have] become the subject of inquiry in the course of the trial[.]”,

The Court determined that the statement wasn't "palpably irrelevant," and observed that the attorney had approached Bracken as a witness in order to gather evidence for the pending lawsuit, and that the question might have become the subject of inquiry at trial on Plaintiff's credibility. 

On that last point, Defendants had argued in their brief that a drug conviction would be admissible under North Carolina Rule of Evidence 609, which provides that "[f]or the purpose of attacking the credibility of a witness, evidence that the witness has been convicted [of a crime] shall be admitted if elicited from the witness or established by public record during cross-examination or thereafter."


Developments In The North Carolina Merger Litigation Involving Citigroup And Wachovia

There were some late breaking developments today in the North Carolina lawsuit regarding the Wachovia-Citigroup-Wells Fargo situation, including the unsealing of detailed Affidavit testimony from Wachovia's CEO about Wachovia's courtship dance with its two potential acquirors, a modification of the TRO entered on Sunday evening, a transfer of the case to the North Carolina Business Court, and then a standstill agreement with regard to the three pending lawsuits. 

First, Judge Johnston unsealed the Affidavit of Robert Steel, Wachovia's CEO, which had been filed with the Complaint.  The Affidavit is identical to an Affidavit filed in the New York lawsuit brought by Wachovia against Citigroup.  It describes the chronology of the negotiations between Wachovia and the two banks which so badly want to acquire it.  Briefly: 

  • Before September 29th, Both Wells Fargo and Citigroup were in negotiations to acquire either all of Wachovia's stock (Wells Fargo) or only Wachovia's banking subsidiaries (Citigroup).
  • Wells Fargo ended negotiations on September 28th, saying that it could not complete the acquisition of all of Wachovia's stock on a compressed timetable without substantial government assistance.
  • The Chairman of the FDIC then told Steel that the situation posed "a systemic risk to the banking system" and that the FDIC was prepared to "effect an open bank assisted transaction."
  • The next day, Steel told the Wachovia Board of Directors that its only options were to file for bankruptcy or to negotiate a deal with Citigroup.
  • The Wachovia Board voted to pursue the deal with Citigroup, and a three party Agreement-in-Principle was signed on September 29th by Wachovia, Citigroup, and the FDIC.  (The Agreement is Exhibit A to the Steel Affidavit).
  •  Under the terms of the Agreement, the FDIC committed to limit Citigroup's losses on a $312 billion loan portfolio to $42 billion.  In exchange, the FDIC was to receive $12 billion of preferred stock in Citigroup. 
  • The Exclusivity Agreement at issue in the lawsuit was also signed  on September 29th.
  • Wachovia thereafter conducted negotiations with Citigroup "earnestly and in good faith," but those negotiations were "complicated and difficult," according to the Affidavit.
  • The Chairman of the FDIC called Steel on October 2nd that Wells Fargo would be proposing a merger transaction, and encouraged him to "give serious consideration to that offer."
  • Wachovia's General Counsel advised the FDIC Chairman that Wachovia could not consider this proposal without a signed and Board-approved merger agreement from Wells Fargo.
  • That same day, at around 9:00 p.m., Wells Fargo presented an Agreement and Plan of Merger (which is attached to the Steel Affidavit as Exhibit C).
  • Two hours later, Wachovia's Board of Directors met and reviewed the Wells Fargo Agreement.  Steel states in his Affidavit that "[t]he Company's advisors and I told the Board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3 that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership."
  • Steel signed off on the Wells Fargo Agreement early in the morning on October 3rd, after receiving oral fairness opinions from Goldman Sachs and Perella Weinberg Partners.

Second, Judge Johnston entered an Order amending the TRO entered on October 5th, to DELETE the underlined language: 

“(i) filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement; (ii) making public representations about the validity of the second paragraph of the Letter Agreement; (iii) making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.

There was no indication for the modification, but presumably there were prior restraint issues.

Third, the case was designated by Citigroup to the North Carolina Business Court.  It has been assigned to Judge Diaz.  The Preliminary Injunction hearing is currently scheduled for Thursday, October 9th, at 2:00 p.m.

Finally, it's not clear whether that hearing will be held, because the three banks have entered into a brief standstill while they attempt to resolve their dispute.  Per a Citigroup press release, the terms of the agreement are: 

  1. A standstill of all formal litigation activity effective immediately;
  2. Cease any formal discovery activities, and
  3. Cooperate in good faith to agree among themselves to secure orders where necessary in all applicable cases in all jurisdictions tolling any schedules for the filing of litigation papers or court appearances or any other formal litigation deadlines, with the goal of preserving the status quo during the litigation standstill period.

This standstill agreement will terminate at noon on Wednesday, October 8, 2008, the day before the scheduled Preliminary Injunction hearing, unless otherwise extended.


The Battle Between Citigroup And Wells Fargo For Wachovia Comes To North Carolina

The fight between Citigroup and Wells Fargo for the remains of Wachovia moved into North Carolina's courts this weekend.  The new Complaint was filed by Wachovia's former CEO, Bud Baker, and another Wachovia shareholder to enjoin Citigroup from seeking to enforce its Letter Agreement to acquire Wachovia.

The Plaintiffs obtained an immediate Temporary Restraining Order in Mecklenburg County from Superior Court Judge Robert Johnston on Sunday, October 5th.  (Coincidentally, Judge Johnston entered a pivotal order in the North Carolina litigation over First Union's acquisition of Wachovia back in 2000.) 

The TRO enjoins Citigroup from:

“(i) filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement; (ii) making public representations about the validity of the second paragraph of the Letter Agreement; (iii) making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.”

If the TRO sticks, that means that Citigroup won't be able to continue with its New York state court lawsuit against Wachovia and Wells Fargo.  The New York Times Dealbook blog has an excellent summary of the New York litigation.

In the Conclusions of Law to the North Carolina TRO, Judge Johnston found that “Plaintiffs [are] likely to succeed on the merits of their claims because they have made a strong showing that the exclusivity provisions contained in the second paragraph of the Letter Agreement [between Wachovia and Citigroup] are invalid and unenforceable under North Carolina law.” 

The TRO doesn't reference any authority for the proposition that the exclusivity provisions are void.  The only reference to any North Carolina law in the TRO is to Section 53-128 of the North Carolina General Statutes, which is titled "[w]illfully and maliciously making derogatory reports."  That statute, under which there are no reported decisions, provides that: 

"Any person who shall willfully and maliciously make, circulate, or transmit to another or others any statement, rumor, or suggestion, written, printed, or by word of mouth, which is directly or by inference false and derogatory to the financial condition, or affects the solvency or financial standing of any bank, or who shall counsel, aid, procure, or induce another to state, transmit, or circulate any such statement or rumor shall be guilty of a Class 1 misdemeanor."

This promises to be interesting, though possibly short-lived.  If the case ends up in the North Carolina Business Court, that Court often stays North Carolina lawsuits if there is a forum which is the more logical center for resolution of the matters in dispute.  In fact, two of those recent cases were brought by Wachovia, and in both of them the Court stayed the North Carolina case to allow litigation involving the same matters to go forward in other states.  One is Wachovia Bank, N.A. v Harbinger Capital Partners Master Fund I, Ltd., 2008 NCBC 6 (N.C. Super. Ct. March 13, 2008) the other is Wachovia Bank v. Deutsche Bank Trust Company Americas, 2006 NCBC 8 (N.C. Super. Ct. June 2, 2006).

Wachovia's lawyers (the same lawyers representing the Plaintiffs in the North Carolina Citigroup lawsuit) tried exactly the same legal maneuver in Harbinger: obtaining an injunction barring litigation in New York so that Wachovia could have its claims resolved in North Carolina.  Judge Diaz of the Business Court granted a Motion to Stay the North Carolina case brought by Wachovia, ruling that there was a "practical reality that the New York Action is better able to arrive at a more comprehensive resolution of the litigation, given the broader scope of claims and parties before it." 

The North Carolina Complaint indicates that one of the Plaintiffs is a New York resident, so a stay in favor of a resolution in New York might be granted if requested by Citigroup.

[Update: Citigroup designated the case to the Business Court on October 6th.  The Notice of Designation is here.  The case has been assigned to Judge Diaz.]