North Carolina's Attorney General And State Treasurer Duke It Out

One of the unusual things about the litigation over the Wachovia-Wells Fargo merger (which I'm hoping will come to a close soon so this blog won't be all Wachovia all the time) was the flood of letters and emails written to the Court.  Judge Diaz received over 200 pieces of correspondence about the case.

The most high profile of those communications was the one from State Treasurer Richard Moore, who had said in a television interview that the merger amounted to "highway robbery."  Ever since Moore wrote his letter, I've been wondering why he didn't move to intervene in the case.  That would have let him speak directly on behalf of the North Carolina Retirement System (the NCRS), which has lost nearly $20 million on its investment in Wachovia.

A likely answer why that didn't happen came this week from the unlikeliest of places, a decision from Judge Keenan of the Southern District of New York, in a case called Kuriakose v. Federal Home Loan Mortgage CompanyThe opinion dealt with who should be the lead plaintiff in that class action under the Private Securities Litigation Reform Act (the PSLRA), and whether the State Treasurer has the power to seek to be a plaintiff in litigation.

The NCRS was vying in Kuriakose for the lead plaintiff position.  It looked like it had that spot locked up, because the Court determined that it was “the presumptively most adequate plaintiff under the PSLRA.”  This isn't much of compliment, because adequacy turns mainly on the extent of the plaintiff's financial loss.  The NCRS is down more than $18,000,000 on its investment in Freddie Mac stock, per an Affidavit filed by Moore in the case.

But Judge Keenan held that the NCRS couldn't be lead plaintiff, because there was a substantial question whether Moore had the right to initiate litigation on its behalf.  In filings in the Southern District, the North Carolina Attorney General and the State Treasurer had gone to war over the authority of the State Treasurer to initiate the litigation and to retain outside counsel to represent the NCRS.

The battle started in late October 2008, with North Carolina's Attorney General Roy Cooper writing to Moore's counsel questioning Moore's ability to retain counsel and to initiate litigation without his approval and demanding that he immediately withdraw his request for lead counsel status.  Moore's lawyers wrote back, disputing Cooper's assertions, and stating that he was "jeopardiz[ing] the ability of the Treasurer to protect the state employees' retirement funds and to recover the significant losses."

The argument then spilled into the federal court in New York.  Cooper filed a Brief, explaining that while Moore served in various capacities to the various retirement systems which are members of the NCRS, that each of the constituent systems has its own "board of trustees with specific management and fiduciary duties specified by North Carolina law." Brf. at 2.  Cooper asserted that the Treasurer, while a member of some of those boards, "does not have independent authority to prosecute any legal action on behalf of the retirement system.  Such authority lies solely with the respective board of trustees."  Brf. at 4. 

That authority, according to Cooper, had not been sought by Moore from the respective boards.  Cooper further argued, relying on N.C. Gen. Stat. §114-2.3, that the approval of the Attorney General was necessary before the retention of private counsel for a state agency. That statute says that "every agency . . . shall obtain written permission from the Attorney General prior to employing private counsel."

Moore disputed Cooper's statutory interpretation in a Response Brief, and pointed to N.C. Gen. Stat. §147-71, which says that the Treasurer has the power "to demand, sue for, collect and receive all money and property of the State not held by some person under authority of law," as well as N.C. Gen. Stat. §147-69.3(g), which empowers the Treasurer to "retain the services of . . . attorneys . . . possessing specialized skills or knowledge necessary for the proper administration of investment programs created pursuant to this section."

Judge Keenan didn't pounce on the opportunity to resolve this North Carolina state government dispute, but instead held:

Given the uncertainty surrounding the Treasurer’s legal authority to act on NCRS’s behalf, the Court cannot accept his certification that NCRS is willing and able to serve as lead plaintiff. Nor would it be in the class’s interest to have a lead plaintiff likely to become bogged down in state court litigation concerning its participation in this federal securities class action. Therefore, Treasurer Moore’s motion to have NCRS appointed as lead plaintiff is denied. 

This is a thorny and interesting issue of the power of the State Treasurer versus that of the Attorney General.  Maybe it will be resolved one day in a court closer to home.

Preliminary Injunction Hearing In Wachovia-Wells Fargo Merger Lawsuit

There's only one thing for sure after today's preliminary injunction hearing in the lawsuit over the merger between Wachovia and Wells Fargo.  And that is that Judge Diaz displayed remarkable patience after more than three hours of argument from five different lawyers.

My favorite sound bites from the very long hearing (which are not verbatim, but based on my notes and recollection), are as follows:

From Plaintiff's Counsel

Over 42% of the shares are locked up in favor of the merger.  That means that 86.2% have to vote "no," or not vote, to defeat the merger.  It's like having a supermajority requirement to vote down a merger.

 If this deal is so good that it's a no-brainer, let the shareholders vote.  Why do you need draconian deal protection measures if that is the case?

The Share Exchange and the lack of fiduciary out are a toxic combination.

The only terrible thing that will happen if our motion is granted is that Wells Fargo might walk away.  But Wells Fargo never says that they will.  They say they might walk.  Wells Fargo is not going to walk from this deal. 

A bond of $5,000 would be about right.

From Defendants' Lawyers

The companies whose boards did not act quickly enough in this financial crisis -- like Lehman and Washington Mutual -- were wiped out.  The Wachovia board acted quickly. 

The shareholder franchise [to vote to approve a merger] is meaningless if there is no franchise remaining. 

Wachovia could very well be in bankruptcy or receivership if this deal hadn't been approved by the Board.

The Wachovia Board faced a stark choice between illiquidity and receivership, on one hand, and Wells Fargo on the other.

Wachovia did not have other options.  These were the best terms that could be negotiated.

It is wishful thinking that another suitor will appear, or that the government will come along and bail out Wachovia.

Most Humorous Exchange

Judge Diaz: Wells Fargo relies on the IXC case from Delaware, where Vice Chancellor Steele said that if 40% of the vote was locked up, that still wasn't a majority.  It was still possible for the shareholders to reject the transaction.

Plaintiff's Counsel: I'm very familiar with that case, I worked on it.

Judge Diaz: Sounds like you lost.

Plaintiff's counsel made it clear that Plaintiff is not requesting an injunction against the merger.  The relief sought is an invalidation of the Share Exchange which gave Wells Fargo nearly 40% of the vote, and a requirement that Wachovia's Board negotiate a broader fiduciary out from the Merger Agreement.  Plaintiff wants a vote on the merger, he just doesn't want Wells Fargo to be able to vote its shares.

At the end of the hearing, Judge Diaz said that he would take the case under advisement.  He did not say when he would rule.  The ruling will certainly be before the shareholders meeting, which has been set for December 23rd. 

Is Wachovia's Share Exchange With Wells Fargo Invalid?

Can it be that the Share Exchange Agreement, which gave Wells Fargo 40% of the voting control over Wachovia stock, is invalid?  That's exactly what the  Plaintiff in the shareholder class action asking for an injunction regarding the Wachovia-Wells Fargo merger is saying in his Reply Brief filed yesterday.

In this new argument -- not raised in Plaintiff's opening Brief -- Plaintiff says that a share exchange, under North Carolina law, requires the approval of the shareholders, and that this approval wasn't obtained.  If Plaintiff is right, the substantial voting power obtained by Wells Fargo in connection with that Agreement would be invalid.

Plaintiff is certainly right about the need for approval of a share exchange under North Carolina law.  Section 55-11-03 of the General Statutes says that:

After adopting a . . . share exchange, the board of directors . . . of the corporation whose shares will be acquired in the share exchange, shall submit the . . . share exchange for approval by its shareholders.

N.C. Gen. Stat. ¶55-11-03(a). If this is the type of share exchange which is subject to the statute in the first place (Wachovia could just as easily have sold these shares to Wells Fargo for $10, and not exchanged shares, so it may not be), this will be a significant issue.

The won't be the end of the inquiry, however, because not every share exchange requires shareholder approval.  The North Carolina statute requires approval only for a forced, involuntary transaction  The commentary to Section 55-11-02 says that:

This section introduces a concept that is new to North Carolina, i.e., a share exchange, which is defined as a transaction by which a corporation becomes the owner of all the outstanding shares of one or more classes of another corporation by an exchange that is compulsory on all owners of the acquired shares.

The statute specifically states that "this section does not limit the acquisition of all or part of the shares of one or more classes or series of a corporation through a voluntary exchange or otherwise."  N.C. Gen. Stat. §55-11-02(d).

Apart from being dictated by the severe financial pressures which Wachovia faced, the share exchange would seem to be voluntary.  If that's the case, it didn't require shareholder approval.

[Update: On Sunday, November 23rd, Wachovia filed a Motion for leave to file an additional Brief addressing this issue.  The  Proposed Brief was attached to the Motion.  In addition to arguing that the statute does not apply to a voluntary transaction, Wachovia argues in the new Brief that the statute does not apply to an issuance of new shares.  I wrote about the process by which these shares were issued in an earlier post.]


Temporary Restraining Order Entered In Trademark Dispute Between Jewelers

The first round in a trademark dispute between two jewelers over the right to use the name "Windsor Jewelers" went to a WInston-Salem, North Carolina company.  Judge Diaz entered a Temporary Restraining Order  yesterday in Windsor Jewelers, Inc. v. Windsor Fine Jewelers, LLC, enjoining the Defendants from using the Windsor name for jewelry stores they had purchased in North Carolina.

Plaintiff Windsor has been operating in Winston-Salem for more than 25 years.  It has no federal trademark rights, but does have a service mark registered under the North Carolina Trademark Registration Act.  Plaintiff's only bricks and mortar location is in Winston-Salem, but it sells jewelry throughout the state, including in the Charlotte area.

The Defendant operates jewelry stores in multiple locations, and says it is one of the "Top Ten Independent Jewelers In America."  In its home state, Georgia, those stores are operated under the name "Windsor Jewelers." Defendant has used that name even longer than the North Carolina Plaintiff, but it apparently has no trademark registration. 

The dispute arose when Defendants purchased three jewelry stores in Charlotte in December 2006 and proposed to operate them under the name "Windsor Fine Jewelers." Defendants had approached the Plaintiff and offered to buy its store as well. In the course of those discussions, Plaintiff says the Defendants admitted "that it would be a conflict to expand into the North Carolina market using the 'Windsor' name without Plaintiff's permission or without" acquiring the Plaintiff. 

When the acquisition discussions broke down, Defendants offered to pay $750,000 simply to buy Plaintiff's tradename.  Plaintiff refused, and Defendants proceeded to rename their new Charlotte stores as "Windsor Fine Jewelers."

The lawsuit, and the TRO, followed.   The TRO says that:

Defendants' intent to confuse the consuming public is clear, as (notwithstanding that they have used the name Windsor Jewelers in Georgia and South Carolina) they were aware of Plaintiff's trademark registration in North Carolina when they selected Windsor Fine Jewelers as the name for their NC based stores, and indeed, attempted to purchase the Plaintiff's business and mark before announcing that they intended to change the name of their NC-based stores to Windsor Fine Jewelers.

Op. ¶3.  The TRO enjoins Defendants from use of the Windsor name in North Carolina, and also calls for all advertising materials which use the Windsor name in association with Defendants' Charlotte stores to be destroyed.

The Order itself is very short, so you'll have to look at the Briefs (linked below), if you would like to know more about the interesting state law trademark issues raised by this case.  There's a preliminary injunction hearing set for November 25th.  If that goes forward, perhaps we'll get a full opinion on some of the rarely addressed issues in the area of North Carolina trademark law.

Brief in Support of Motion for TRO

Brief in Opposition to Motion for TRO


Arbitration Provision Enforced Even Though It Was Never Signed By Plaintiff

The Plaintiff had never signed the agreements containing the arbitration provisions which the Defendant sought to enforce, but the Business Court on November 19 nevertheless granted a Motion to Compel Arbitration in American Drywall Construction, Inc. v. Superior Construction Corp.,

The Plaintiff was a subcontractor, the Defendant was the general contractor.  The Defendant prepared three written subcontracts -- each of which contained an arbitration provision -- but Plaintiff never signed any of them.

Judge Jolly noted three key facts regarding the unsigned agreements:

First, Plaintiff had undertaken to do the work described in the subcontracts, and it was seeking payment for that work in the lawsuit.

Second, Plaintiff submitted applications for payment referencing the subcontracts. The forms completed by the Plaintiff stated that "this Application for Progress Payment is made in strict accordance with the terms of the Subcontract."

Third, the parties had signed an addendum to one of the subcontracts which said that "all terms and conditions of the Subcontract . . .are incorporated herein and by reference and shall remain in full force and effect."

The Court held:

in this civil action Plaintiff seeks payment for performance of the work done pursuant to the terms of the respective Subcontracts, while at the same time it seeks to deny the enforceability of one of the terms of the Subcontracts.  Much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff's conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause.  In addition, Defendant's argument in favor of the enforceability of the arbitration clause is bolstered by the signed subsequent writings, which specifically relate back to and incorporate the terms of the respective Subcontracts.

Judge Jolly concluded "the facts and circumstances of the dealings between the parties clearly demonstrate that the Subcontracts were intended by the parties to be binding.  The fact that certain of the agreements were not signed does not change this result."

Brief in Support of Motion to Compel Arbitration

Court Of Appeals Reverses Order Granting Rule 11 Sanctions In A 2-1 Split

The Court of Appeals split yesterday on whether a Plaintiff and his lawyers who continued with a lawsuit after they should have determined that it was not well grounded in fact or law could be hit with non-monetary sanctions.  The majority reversed, saying that the trial court should not have considered events occurring after the filing of the Complaint in awarding sanctions.

The case decided by the Court of Appeals is Egelhof v. Szulik.  The case arose in the Business Court, and was a shareholder derivative action against the technology company Red Hat.  Judge Tennille dismissed the case in 2006 due to Plaintiff's failure to make a proper demand under Delaware law. 

After that, Defendants moved for sanctions and attorneys fees.  In the 2008 decision appealed from, Judge Tennille sanctioned Plaintiff and his lawyers by barring Plaintiff from serving as a representative plaintiff for five years and by barring the lawyers from being admitted pro hac in North Carolina for a like period.  Judge Tennille refused to award monetary sanctions.

Plaintiff appealed, arguing that there was no basis for Rule 11 sanctions because there had been no finding by the Business Court that their Complaint was "neither well grounded in fact nor warranted by existing law" at the time it was filed.  They were right, as the Business Court had expressly stated that the Complaint, standing alone, did not warrant Rule 11 sanctions.  Defendants appealed too, arguing that they were entitled to monetary sanctions.

The Business Court's sanctions ruling was based on post-filing events which it said should have led the Plaintiff to conclude that it should no longer pursue its action, including the dismissal of another case (Pozen) brought in the Business Court by the same lawyers, for the same reason that the Egelhof case was dismissed a few months later: failure to make a demand under Delaware law. 

The Court of Appeals majority concluded that a Court cannot consider matters outside the face of the Complaint in determining whether the Complaint lacked factual or legal support so as to warrant Rule 11 sanctions.  It relied on Bryson v. Sullivan, 330 N.C. 644, 412 S.E.2d 327 (1992), in which the Supreme Court held that "in determining whether a pleading was warranted by existing law at the time it was signed the court must look at the face of the pleading and must not read it in conjunction with responsive pleadings."

Judge Calabria dissented, holding that "sanctions are not limited when later filings reveal the case has become meritless.  The trial court may look beyond the face of the pleading when considering whether litigation was continued for an improper purpose."  Judge Calabria found that sanctions were appropriate not only under Rule 11, but also under the inherent power of the Court.

And Judge Calabria took it one step further, holding that the trial court had erred by not giving proper consideration to an award of monetary sanctions under N.C. Gen. Stat. §6-21.5.  Relying on Sunamerica Financial Corp. v. Bonham, 328 N.C. 254, 400 S.E.2d 435 (1991), she held that a "trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue."

The Supreme Court will sort out this disagreement if the case goes forward, but there are two other Rule 11 tidbits in this opinion on which the majority and majority agreed:

The Court held that Rule 11 permits sanctions to be imposed against a party and his attorney attorney even though they didn't sign the Complaint.  (Here, out-of-state counsel had never signed the Complaint, but were sanctioned by the trial court.) 

The Court of Appeals also held that due process does not require that a party against whom sanctions are sought be put on notice of the specific type of sanctions which may be ordered, rejecting a due process challenge by the Plaintiff.  All that is required is notice of the bases of the sanctions and an opportunity to be heard.

Wachovia Shoots Back: Says Its Board Of Directors Fulfilled Its Fiduciary Duties In Negotiating Merger With Wells Fargo

Wachovia has filed its Brief in opposition to Plaintiff's Motion for Preliminary Injunction, laying out the case why its Board of Directors fulfilled their fiduciary duties in agreeing to the Merger with Wells Fargo.

The principal factual support for Wachovia's Brief is the Affidavit of Dona Davis Young, a member of the Wachovia Board of Directors, which relies heavily on the Form S-4 filed by Wells Fargo on October 31st, which discloses the background for the Merger.

Young's Affidavit lays out a day by day chronology of the downward financial spiral in which Wachovia found itself over the months of September and October 2008, and concludes with the approval of the Merger Agreement on October 3rd.

The Affidavit emphasizes that if the Board hadn't voted to approve the Merger, "it was likely . . . that Wachovia would not be able to fund normal banking activities and thus would again face the very real prospect of FDIC receivership."  Young Aff. ¶9.

As Young describes the situation, it was essential to sew up the deal with Wells Fargo in order to obtain the cash needed to sustain operations pending the closing of the Merger:

It was important that Wells Fargo have assurance that the merger could close in order to have an incentive to establish interim funding arrangements with Wachovia, and it was equally important that the financial markets and the Federal Reserve have the same assurance so that Wachovia could obtain funding from these sources as well. Absent the ability to obtain such funding, Wachovia faced receivership, which would have destroyed the value of Wachovia as a business franchise and left its shareholders with worthless stock.  Shortly after the merger agreement was signed and the merger was announced, Wachovia was able to obtain the financing it needed from Wells Fargo and from other sources of funding.

Young Aff. ¶11.

On the key issue of the Share Exchange Agreement which gave 39.9% voting control over Wachovia to Wells Fargo, the Young Affidavit says that Wells Fargo had initially demanded a 50% stake.  Young says that Wachovia negotiated that percentage down to 39.9%. Young Aff. ¶10. (It is a bit unsatisfying that Young's "testimony" on this pivotal point is really double hearsay -- she says in ¶10 the Board was "informed" by an unidentified person that someone, also unidentified, acting on behalf of Wachovia had engaged in this sharp negotiation with Wells Fargo).

Wachovia relied on a Delaware Chancery opinion from 1999, In re IXC Communications, Inc. Shareholders Litig., 1999 WL 1009174 (Del. Ch. 1999) which held that giving away 40% voting control doesn't lock up a merger and which emphasized the power of the remaining 60%:

Here, an admittedly independent majority of IXC's shareholders (owning nearly 60% of all IXC shares) may still freely vote for or against the merger, based on their own perceived best interests, and ultimately defeat the merger, if they desire. The defendants have not, in fact, 'locked up' an absolute majority of the votes required for the merger through the GEPT deal. Plaintiffs themselves, notwithstanding vigorous argument questioning the fairness of the GEPT deal, tacitly admit that the vote-buying agreement does not make the outcome of the vote a foregone conclusion. They can only say that the GEPT deal 'almost completely lock[s] up the vote-thus giving shareholders scant power to defeat the Merger...'  'Almost locked up' does not mean 'locked up,' and 'scant power' may mean less power, but it decidedly does not mean 'no power.'

Wachovia makes much of the absence of a material adverse change provision in the Merger Agreement, stating:

A few days after the Merger Agreement was executed, Wachovia posted a loss in excess of $20 billion for the third quarter of 2008 -- but faced no risk that Wells Fargo could terminate the Merger Agreement because the Agreement contains no material adverse change provision.  Wachovia obtained exceptional value in return for the so-called 'deal protection provisions' afforded to Wells Fargo.

Wachovia Brf. 17-18.

As it's spun out by Wachovia, one could argue that Wachovia, near financial death, out-negotiated Wells Fargo on this deal.  The Board got $7 per share for the Wachovia shareholders no matter how bad thing get, short of bankruptcy, insolvency, or a receivership.  Wachovia Brf. 15 n.7.  That's pretty impressive -- "exceptional value" in Wachovia's words -- considering the dire circumstances painted by the papers and the continuing implosion of the financial markets.

Plaintiff's reply brief is due Friday (November 21), then there's a hearing Monday (November 24).

North Carolina State Treasurer Says Wachovia-Wells Fargo Merger is "Highway Robbery"

This morning on CNBC, North Carolina State Treasurer Richard Moore referred to Wells Fargo's pending acquisition of Wachovia as a "shotgun marriage," "highway robbery," and as not being fair to Wachovia shareholders.

The State Treasurer has a significant interest in this merger.  The North Carolina Retirement System was holding 2,275,664 shares of Wachovia stock as of June 30, 2008, which were then worth $35,341,062, per the State Treasurer's Annual Report.  At the $7 per share to be paid by Wells Fargo, that investment has lost nearly $20 million in value since June.

Moore said in a follow-up interview today with the Charlotte Observer that the shares held by the Retirement System will vote against the merger, and that he will send a letter supporting the shareholder lawsuit seeking to enjoin the merger.  He stated “I hope that the shareholders of Wachovia will vote against this deal, and I hope that every politician that North Carolina has at the state and federal level works as hard as they can for an independent Wachovia.” 

He'll presumably send that letter directly to Judge Diaz, who is presiding over the lawsuit brought by Irving Ehrenhaus.  Moore won't be the first prominent citizen to do so, and he also won't be the first to use the word "robbery" to describe the pending deal. [Update: Moore did send his letter, on November 12, 2008].

The first person I know of to do that was John Georgius, who was President of First Union National Bank until 1999, two years before First Union became the surviving entity in its merger with Wachovia.  Georgius has already written a letter to Judge Diaz, expressing his objection to the merger, and stated that:


The capital letters are in the original.

And in another communication to Judge Diaz, William B. Greene, Jr., the Chairman of Bank of Tennessee, said that the only reason the Wachovia Board agreed to the merger was that they had been "beaten down and buggy whipped by the Regulators."

These letters, whether written or unwritten, obviously aren't evidence of anything probative to the legal issues raised by the shareholder class action.  But they certainly display a public sentiment that is strongly against this transaction, and make one wonder whether this deal would get the approval of  the majority of Wachovia shareholders if Wells Fargo didn't already have 40% of the vote locked up.

Update On The North Carolina Lawsuit Seeking To Block The Wachovia-Wells Fargo Merger

If you are following the shareholder class action seeking to enjoin the Wachovia-Wells Fargo merger, Plaintiff filed his Brief in support of his Motion for Preliminary Injunction yesterday. 

The focal point of Plaintiff's argument is that the deal protection devices in the Wachovia-Wells Fargo Merger agreement were too hastily negotiated by the Wachovia board, and that the Board violated its fiduciary duties in agreeing to them.  As Plaintiff puts it, "the Board rolled over and accepted all of these provisions 'in derogation of their unyielding fiduciary duties.'" Brf. at 22. 

Wachovia's response to Plaintiff's Brief is due November 17th; and Plaintiff's reply is due November 21st.  A hearing is set for 2:00 p.m on November 24th.


"Neutral Evaluation" Is One Of Several Alternatives To Mediation In North Carolina

Mediation often devolves into the mediator shuttling back and forth between two rooms, carrying alternating declining and increasing offers to the parties.

There are times during this ping ponging of offers when I wish the mediator was pushing harder on the other party to explain the absolute rightness of my client's position, inevitably to result in summary judgment in our favor, or explaining to me why my client and I have missed the boat in evaluating the case.  Most mediators won't do that, and dismiss the concept of informing the parties of the mediator's perception of the quality of their case or defense as being unacceptably "evaluative."

I'm prompted to write about this subject based on a one paragraph Order by Judge Tennille earlier this year in Bank of America Corporation v. Beazer Morgage Corp., granting the Joint Motion of the parties to have a "neutral evaluation" instead of a mediation.  

What is a "neutral evaluation?"  In short, it's "a process in which a third party neutral examines the evidence and listens to the disputants' positions, and then gives the parties his or her evaluation of the case."  Here's a good article on the subject, and also the American Arbitration Association's description of the procedure and how it works.  Neutral evaluation apparently led to a settlement of the Beazer case, because the parties filed a joint dismissal with prejudice a few weeks after the evaluation, in which a state court Judge in Georgia served as the neutral.

There is clear approval of alternative resolution procedures to mediation in North Carolina's statute on mediated settlement conferences. N.C. Gen. Stat. Sec. 7A-38.1:

Promotion of other settlement procedures -- Nothing in this section is intended to preclude the use of other dispute resolution methods within the superior court. Parties to a superior court civil action are encouraged to select other available dispute resolution methods. The senior resident superior court judge, at the request of and with the consent of the parties, may order the parties to attend and participate in any other settlement procedure authorized by rules of the Supreme Court or by the local superior court rules, in lieu of attending a mediated settlement conference. Neutral third parties acting pursuant to this section shall be selected and compensated in accordance with such rules or pursuant to agreement of the parties. Nothing in this section shall prohibit the parties from participating in, or the court from ordering, other dispute resolution procedures, including arbitration to the extent authorized under State or federal law.

 Id. at i.

Also, the North Carolina Rules Implementing Statewide Mediated Settlement Conferences in Superior Court Civil Actions contain a specific provision (Rule 10) permitting the parties to request the use of procedures other than mediation, including neutral evaluation (Rule 11), non-binding arbitration (Rule 12), or non-binding summary jury or non-jury trials (Rule 13).  I don't hear much about these alternative procedures being used in North Carolina even though they are specifically allowed by the Rules.

There is no special certification necessary to become a neutral evaluator.  In Mecklenburg County, for example, the Court maintains a list of approved neutrals.  You are qualified to serve if you have five years of experience as "a judge, practicing attorney, law professor, arbitrator or mediator, or have equivalent experience" and you are of "good moral character," and you "adhere to ethical standards."

The cartoon at the top is by Charles Fincher, a lawyer who is also a cartoonist.  His very funny comics and comic strips are what he calls "inside baseball" humor for lawyers.  He has a number of different cartoons and strips, which you can find at  The one I used, with his permission, is from a series of one-panel cartoons called Scribble-in-Law

North Carolina Court Of Appeals Refuses To Adopt U.S. Supreme Court's Twombly Standard For Motions To Dismiss

Today, the North Carolina Court of Appeals said that it did not have the authority to adopt the "new" standard for consideration of a Rule 12(b)(6) Motion articulated last year by the United States Supreme Court in Bell Atlantic Corp. v. Twombly, __ U.S. __, 167 L.Ed.2d 929 (2007). 

If Twombly is to become the law of North Carolina, that is now up to the North Carolina Supreme Court.  Given the pace of appeals in North Carolina, it's going to take a while to see whether that will happen.

The Court's decision came in a rather bizarre case, Holleman v. Aiken, which was brought by a very enthusiastic fan of Clay Aiken, of American Idol fame.  Plaintiff, the author of a book about Aiken's life, claimed that Aiken and others had defamed her by saying that her book was not authorized by them and by refusing to endorse her book. Among other things, Plaintiff wanted an injunction requiring Aiken to endorse her book on his website, to write an endorsement for the back of the book, and to write an introduction to her book thanking her for writing it.

The Court affirmed the dismissal of virtually all of Plaintiff's claims, including claims for libel per se and libel per quod, notwithstanding its refusal to adopt the Twombly standard.  Judge Stroud, writing for the Court of Appeals, said that "our courts cannot be used to force celebrities or their family or friends into making endorsements for another person's profit."

North Carolina Business Court Agrees To Decide Motion To Enjoin Wachovia-Wells Fargo Merger On An Expedited Basis, But Denies Expedited Discovery

The North Carolina Business Court today denied Plaintiff's request for expedited discovery in the putative shareholder class action seeking to enjoin the Wachovia-Wells Fargo Merger, but agreed to decide Plaintiff's Motion for a Preliminary Injunction on an expedited basis, setting a hearing three weeks from today. (I wrote about the Motion for Expedited Discovery in a previous post.)

After discussion of the appropriate standard for ruling on a motion for expedited discovery, Judge Diaz focused in his 10 page Order on Plaintiff's burden on the merits to show that Wachovia's Board of Directors had breached its fiduciary duties, and the deference to be given the Wachovia Board under North Carolina's Business Judgment Rule.

The Court described the Business Judgment Rule as a "high hurdle," and one which Plaintiff "may well be unable to overcome . . . particularly where (1) Wachovia's board asserts that quick action on the Merger Agreement was necessary to avoid a government-directed liquidation of the Company, and (2) Plaintiff presents no evidence of a competing offer for the Company."  Op. at ¶43.

Judge Diaz then observed that the Plaintiff had stated what he described as "colorable claims":

Plaintiff appears to have alleged colorable claims as to his contentions that (1) the Share Exchange transferring a nearly 40% voting bloc to Wells Fargo in advance of a vote on the Merger Agreement is unduly coercive, and (2) the limited “fiduciary out” clause contained in the Merger Agreement violates the Wachovia board’s continuing responsibility to exercise its fiduciary duties. See generally First Union Corp., 2001 NCBC 9 ¶¶ 81, 89 (stating that (1) a relevant test as to shareholder coercion is whether the vote will “‘be a valid and independent exercise of the shareholders’ franchise, without any specific preordained result which precludes them from rationally determining the fate of the proposed merger,’” and (2) courts should invalidate merger plans that “purport to restrict a board’s duty to fully protect the interests of the corporation and its shareholders”).

Op. at ¶44.  Judge Diaz also held that Plaintiff had "present[ed] a colorable claim as to irreparable harm."  Op. at ¶45.

Judge Diaz held, however, that expedited discovery was not necessary because "most (if not all) of the facts pertinent to resolving Plaintiff's request for preliminary injunctive relief are matters of public record."  Op. at ¶48.  He described those facts as follows:

(1) A mere two weeks before the Company’s demise, Wachovia’s President and CEO was insisting publicly that Wachovia “had a great future as an independent company;”

(2) In the ensuing period, Wachovia’s share price tumbled from $18.75 to $1.84;

(3) Wachovia’s board faced a crisis of historic proportions when it met to consider and approve the Merger Agreement;

(4) Wachovia’s board took very little time to digest and act upon the Merger Agreement;

(5) The Share Exchange gives Well Fargo almost 40% of the vote in advance of a decision by the Company’s shareholders as to approval of the Merger Agreement;

(6) The “fiduciary out” clause in the Merger Agreement prohibits the Wachovia board from walking away from the Wells Fargo deal should a better deal materialize, but instead only allows the board in that instance to make no recommendation to the shareholders, with an explanation;

(7) Should the Merger Agreement be approved by the shareholders, three members of the Wachovia board will be invited to join the Wells Fargo board;

(8) All of the agencies with regulatory authority over the Merger Agreement have approved it; and

(9) Following approval of the Merger Agreement by Wachovia’s board, no other entity has made a bid to purchase the Company.

Op. at ¶49.

The Court gave short shrift to the argument by Plaintiff that the Share Exchange Agreement (which gave Wells Fargo nearly 40% of voting control over Wachovia) was invalid under the Emergency Economic Stabilization Act of 2008.  In a footnote, Judge Diaz picked up the language of the Act which says that an agreement that "directly or indirectly . . . affects, restricts, or limits the ability of any person to offer or acquire . . . all or part of any insured depository institution" is unenforceable against an acquirer.  He held that Wells Fargo, the only acquirer on the horizon for Wachovia, "obviously has no interest in having the Share Exchange declared unenforceable."  Op. at n.7.

The Court set the following schedule for resolution of the Motion for Preliminary Injunction: Plaintiff's Brief and supporting materials are due November 10th; Defendants' responsive papers are due November 17th; and Plaintiff's reply is due November 21st.  A hearing is set for 2:00 p.m on November 24th.  

[If you read footnote 10 of Judge Diaz's opinion, he mentioned this blog and referred to me as a "prolific North Carolina business law blogger."  I appreciated that.  My dictionary defines "prolific" as "marked by abundant inventiveness."]

North Carolina Senate Campaign Lawsuit (Hagan v. Dole) Started By Summons Without Complaint

There's been a lot of publicity about North Carolina Senate candidate Kay Hagan's "lawsuit" against incumbent Senator Elizabeth Dole over a television commercial suggesting  that Hagan is "godless." 

The subject of this post is that there technically isn't a lawsuit at all, at least not yet.  The court filing by Hagan illustrates an interesting quirk of North Carolina civil procedure.  In North Carolina, you can start a legal proceeding without filing the Complaint which typically begins a lawsuit.

That's pretty unusual.  I'm not aware of any other state which has a procedure exactly like the one contained in Rule 3 of the North Carolina Rules of Civil Procedure, which lets a lawyer file a Summons to start a lawsuit and to then follow up twenty days later with a Complaint detailing the claims against the defendant. (Though North Dakota Rules of Civil Procedure 3 and 4(c) provide that you can start a lawsuit with a Summons and the Defendant can then demand that the Complaint be filed within twenty days).

The North Carolina procedure is colloquially called a "Summons without Complaint."  Our Rule 3 provides that while a lawsuit is ordinarily started with the filing of a Complaint:

A civil action may also be commenced by the issuance of a summons when

(1) A person makes application to the court stating the nature and purpose of his action and requesting permission to file his complaint within 20 days and

(2) The court makes an order stating the nature and purpose of the action and granting the requested permission.

Why would a lawyer use this procedure?  One reason might be to toll the statute of limitations, which obviously wasn't necessary given the very recent airing of the commercial, or to try to be first to the courthouse when there is a dispute over where a particular claim should be litigated, also not a particularly significant factor in the dispute between the candidates.

There is a North Carolina form for a lawsuit started without a Complaint, which is exactly what Hagan filed to initiate her claim against Senator Dole. The filing lays out the basis for the lawsuit, probably in more detail than Rule 3 requires, because the Rule requires only "preliminary notice" of the nature of the claim.  See, e.g., Morris v. Dickson, 14 N.C. App. 122, 187 S.E.2d 409 (1972). 

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