Law Firm Breakups: Whether It's A Withdrawal Or A Dissolution Can Make A Big Difference

Whether the departure of three partners from a law firm LLC was a withdrawal or a dissolution of the LLC was the issue in Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 2009 NCBC 10 (N.C. Super. Ct. March 26, 2009), decided today by the North Carolina Business Court.

The characterization of the nature of the Plaintiffs' departure determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

If a dissolution had occurred, Plaintiffs' rights were governed by N.C. Gen. Stat. §§57C-6-04(b) and 57C-6-05(3), which said that the law firm would continue in existence and that its managers would be obligated to obtain "as promptly as reasonably possible. . . the fair market value for the [LLC's] assets" and to distribute the recovery to the members of the LLC.  That interpretation might have yielded a significant distribution from the in-process contingent fee cases.

But if the actions of the Plaintiffs constituted a "withdrawal," the Plaintiffs' rights would be governed by N.C. Gen. Stat. §57C-05-07, and their final distributions would be limited to the fair value of their interest in the firm as of the date of withdrawal.  The value of the contingent fee cases was potentially nothing under this analysis.

Plaintiffs Had No Right To Voluntarily Withdraw

The law firm had no written operating agreement,  and the articles of organization were silent on the subject of withdrawal.  Plaintiffs argued that dissolution was the only remedy;but  the Defendants argued that this interpretation made it impossible for a member to withdraw. 

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  It rejected Defendants' arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

Plaintiffs Were Estopped From Disputing Their Withdrawal

The Court nevertheless ruled that Plaintiffs were estopped from disputing that they had withdrawn from the LLC.  Judge Jolly held that estoppel is "kaleidoscopic," that it could arise "by conduct, deed, or misrepresentation," and that estoppel "is viewed as 'flexible' in its application." 

The factors he considered in concluding that estoppel applied were (a) the Plaintiff's oral and written representations that they intended to withdraw, including one Plaintiff's statement "I am out of here," (b) the treatment by all parties of Plaintiffs' departure as a withdrawal, (c) the Plaintiffs' formation of their own firm, (d) Defendants' detrimental reliance on Plaintiffs' representations of withdrawal, and (e) Plaintiffs' silence "on the pivotal issue [of whether there had been a dissolution or a withdrawal] for approximately one year."

The Court rejected Plaintiffs' arguments that they could not have withdrawn because they "did not appreciate the distinction between withdrawal and dissolution" at the time they left the firm.  Judge Jolly said that "when they unilaterally chose to leave the Firm, and characterized their leaving as a 'withdrawal,' the Plaintiffs were charged with knowledge of the consequences of their actions; and Defendants were entitled to rely and act upon those actions."

Judge Jolly held that "[t]he fact that the unilateral decision by Plaintiffs to leave the Firm subsequently turned out potentially to be to their economic disadvantage is regrettable, but not relevant to whether they are deemed to have withdrawn."

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment 

Fee-Shifting, And Other Pending Bills In The North Carolina General Assembly Affecting Litigation

A losing plaintiff would be liable for the defendant's attorneys' fees if a bill introduced this month in the North Carolina Senate becomes law. 

Other pending bills of interest to litigators include one which would change the way in which the Rules of Civil Procedure and the Rules of Evidence can be amended, legislation which would affect the use of computer forensics consultants, and a change to Rule 4 on who is authorized to serve process.

Attorneys' Fees.  Senate Bill 942 would change the American Rule in North Carolina.  It would require a Court  "to award reasonable attorneys' fees, resulting from the successful defense of any civil action arising under this Chapter or any other statute, against the plaintiff."  As presently drafted, the term "successful defense" is defined as "the defendant prevailed after trial with respect to all claims presented by plaintiff, or the action was dismissed pursuant to Chapter 1A‑1, Rule 12(b)."

Rules of Civil Procedure and EvidenceSenate Bill 862 would give the North Carolina Supreme Court the authority to "adopt and amend" the North Carolina Rules of Civil Procedure and Rules of Evidence. The General Assembly would retain the ability to amend or veto any rulemaking by the Supreme Court.  Under the current wording of the statute, the Supreme Court can "prescribe rules of practice and procedure for the superior and district courts supplementary to, and not inconsistent with, acts of the General Assembly."

Licensing Requirement For Digital Forensics ConsultantsComputer forensic consultants working in North Carolina will need to be licensed as "digital forensics examiners" under House Bill 570. Those persons requiring a license would include "[a]ny person who, on a contractual basis, engages in the practice of conducting examinations of digitally stored data to recover, image, analyze, or examine the data by using specialized software to determine responsibility or reconstruct usage of the data." There are a number of states that require licensing for these types of consultants.  I wrote about this subject several months ago.

Private Process ServersSenate Bill 1090 would amend Rule 4 of the North Carolina Rules of Civil Procedure to provide that the persons authorized to serve a Summons and Complaint include "a private investigator duly licensed under Chapter 74C of  the General Statutes." 


NC Business Court Issues Significant Discovery Sanctions Opinion

The North Carolina Business Court delivered a significant opinion on discovery sanctions today in Azalea Garden Board & Care, Inc. v. Vanhoy, 2009 NCBC 9 (N.C. Super. Ct. March 26, 2009). If you are litigating in the Business Court, you'd better read this one, which emphasizes the duty of lawyers to cooperate with one another in discovery.

The Defendant's Motion for Sanctions concerned an interrogatory response by Plaintiff identifying two attorneys as potential expert witnesses, its subsequent refusal based on attorney-client privilege to supply information that it had provided to the experts, and its withdrawal of those persons as experts after the Court granted a Motion to Compel.

That earlier ruling on the Motion to Compel was very short, and wasn't published, but if you were reading this blog you would have seen it in this May 2008 post.

The Defendant, having prevailed on the Motion to Compel, sought sanctions. The basis for the Sanctions was Rule 26(g) of the North Carolina Rules of Civil Procedure, which provides that an attorney's signature on a discovery response is a certification that it is "consistent with the rules," and "not interposed for any improper purpose," and "not unreasonable or unduly burdensome or expensive."

In a first impression aspect of his ruling, Judge Tennille said that sanctions under Rule 26(g) are mandatory in the event of a violation.  He also said that Rule 11 cases don't have much relevance in a Rule 26(g) sanctions motion.

Judge Tennille emphasized the duty of attorneys to cooperate in discovery in complex cases, quoting extensively from Mancia v. Mayflower Textile Serv. Co., 253 F.R.D. 354 (D.Md. 2008), an opinion by Magistrate Judge Paul Grimm.  Judge Tennille described Judge Grimm as "one of the leading commentators on discovery issues in the federal court,"  and said that "his entire opinion should be read by all trial lawyers."  Op. ¶18. (The link is in the case name).

Forthright discovery is particularly important, said Judge Tennille, when expert discovery is involved.  He held that "[o]ur rules are designed to flush out what opinions are going to be expressed at trial so that challenges to those opinions can be heard pretrial without wasting the jurors’ time. Responses to discovery that comply with the rules save the parties and the courts substantial time and money." Op. ¶13.

Here's how Judge Tennille summed it up:

Judges and lawyers should resurrect the original intention of the discovery rules, which was to make discovery a more cooperative and less adversarial system designed to reduce, not increase, the cost of litigation. North Carolina’s Rule 26(g) was designed to do that and mandates sanctions when violations of the rule occur. Our system of civil justice cannot function effectively and economically unless lawyers and judges return to the original intention of the discovery rules and make cooperation, communication, and transparency the cornerstones of the discovery process.

Op. ¶19.

On the facts before him, Judge Tennille entered sanctions.  He determined that Rule 26(g) had been violated because Plaintiff's counsel had (1) designated one person (Wagner) as an expert "without an intention of having  Wagner prepare any expert report containing his opinions and the basis therefore, (2) failing to make inquiry into Wagner’s qualifications to give any expert opinions, and (3) designating [another witness, Tarr] as an expert without even having communicated with Tarr." Op. ¶28.

The Court found that these actions had caused delay and undue expense for Defendant and his counsel, necessitating a Motion to Compel, and furthermore that "[t]he conduct was unreasonable under the circumstances. It was more than mere negligence."  Op. ¶28.  The Court also said that the refusal to provide information based on attorney client privilege was "totally unfounded in the law." Op. ¶29.

Another factor leading to sanctions was Plaintiff's counsel refusal to discuss matters with Defendant's counsel.  Judge Tennille said that "[l]awyers have a responsibility and a duty to their clients, the Court, and opposing counsel to communicate openly and civilly with each other. A failure to do so is a breach of their professional duties and results in unnecessary delay and expense to the parties and the Court." Op. ¶32.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

The Electronic Filings In The Business Court Are "Public Records"

If the filings of the parties and the rulings of the Business Court weren't available electronically on the Business Court's website, I wouldn't be able to write this blog.  That's one reason I found so interesting the short Order by Judge Diaz today in the case of Clemenzi v. Freer. 

The Order addressed Plaintiffs' Motion to place their Complaint under seal.  The concern they raised was the electronic availability of their filing on the Business Court's website.  In their Brief, Plaintiffs said that they had "only recently discovered that the Business Court allows for public access to individual court records in ongoing actions via an unsecured internet link on its website."  

The specific concern of the Plaintiffs was that "the case documents might be indexed by Google" which they said would create "an extremely troubling degree of public access."  They stated that although they had "done several experiments with Google, and have determined that Google does not index the documents which are held within a Zip file, as is the case on the Business Court's website," they remained concerned that there was a "threat of indexing . . . unless the court has arrangements to the contrary with Google and the other web indexing services."

Judge Diaz denied the Motion.  He held that Court filings are "public records" which fall under N.C. Gen. Stat. §7A-109(a).  That statute specifically grants the public the right to inspect court records in criminal and civil proceedings. A Court therefore can limit the public's right of access only “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest.” (citing Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999).

On the point that a public record should be treated differently if it is available online at the Business Court's website as opposed to simply being in the paper file at the courthouse, Judge Diaz held: "because all court filings are 'public records,' the fact that the Complaint in the Court’s paper file is also accessible on the Court’s website is a distinction without meaning." 

Business Court Rejects Bright Line Rule That A Subsidiary Cannot Conspire With Its Parent

The Business Court provided a thorough discussion today on whether a subsidiary and its parent can conspire with one another, in BHB Enterprises, Inc. v. Waste Management of Carolinas, Inc.

Judge Diaz rejected Defendants' argument that a parent can never be liable for the actions of its subsidiary under a conspiracy theory.  But he dismissed the claim anyway, in the absence of any assertion that the subsidiary had been rendered unable to pay its debts by the action of the parent. 

The Court also rejected Plaintiff's attempt to bring an unfair and deceptive practices claim based on what was essentially a breach of contract, notwithstanding what the Court called "artful pleading."

Plaintiff runs a restaurant in Charlotte called Vinnie's Sardine and Raw Bar. It had contracted with Waste Management of Carolinas, Inc. ("WMC"), a subsidiary of Waste Management, Inc., for waste collection and disposal services.

WMC had unilaterally increased its monthly charges to Vinnie's, relying on contract provisions that permitted such increases under certain circumstances.  Vinnie's contested WMC's right to raise the charges and sought to represent a class of WMC customers.  Among other claims, Plaintiff asserted one for civil conspiracy, alleging that WMC and its parent were in cahoots on the unauthorized price increases. 

WMC responded that that it was not possible for a parent to conspire with a wholly owned subsidiary. Judge Diaz disagreed.  He stated that "the Court's research discloses only six (6) cases addressing the doctrine of intracorporate immunity in the context of a claim for civil conspiracy under North Carolina law,"  and summarized all six of them.  He observed that none of these cases dealt with the point "whether a parent and its wholly owned subsidiary are capable of committing a civil conspiracy under the doctrine."

Judge Diaz looked to Delaware law.  Relying on Allied Capital Corp. v. GC-Sun Holdings, LP, 910 A.2d 1020 (Del. Ch. 2006), he concluded that such a claim could be made, although he reiterated the concern raised by the Allied case in permitting such claims:

"if plaintiffs were allowed to sue parent entities whenever the decision to cause a subsidiary to act in a certain manner originated with the parent, it 'would increase litigation costs and deter the use of subsidiaries, even when there is a legitimate purpose for doing so and there is no wrong to others in being forced to look only to the subsidiary for relief.'"

The Court dismissed the claim made by Vinnie's, stating that there was no allegation that WMC would be unable to satisfy a judgment if Plaintiff were to prevail, concluding that the civil conspiracy claim was barred by the intracorporate immunity doctrine.

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Fourth Circuit Rules No Vertical Price Fixing In Manufacturers' Sale Of Pesticide

The Fourth Circuit held today that the manner in which manufacturers of pest control products sold their products to consumers did not constitute illegal resale price maintenance.  The decision in of Charlotte, Inc. v. Bayer Corprejected Plaintiffs' argument that an antitrust stalwart, United States v. General Electric Co., 272 U.S. 476 (1926) had been overruled by a recent decision of the Supreme Court, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).

Both Defendant Bayer Corporation, which sells a termite killer called Premise, and Defendant BASF, with a competing product called Termidor, sold their products through distributors.  The distributors sold Premise and Termidor at prices set by the manufacturers to the "pest management professionals ("PMPs"), who provide pest control services to homeowners and other individual customers."  The Plaintiffs making the antitrust claim were three of the PMPs.

For those who need a refresher on this aspect of antitrust law, which included me, the General Electric case held that a manufacturer selling its product directly to consumers through agents is not liable for vertical price fixing.  The rationale of the decision was that when a manufacturer sells through a genuine agent, there is no "contract, combination" or "conspiracy" to violate Section 1 of the Sherman Act.

In Leegin, the Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which had held that resale price maintenance agreements were per se unlawful.  In other words, during the long era during which Dr. Miles held sway, such agreements did not require proof that they unreasonably restrained trade.  They were presumed to do so.  The Leegin decision abolished the per se rule and held that such restraints were subject to the rule of reason, because of "a growing consensus in economic theory that vertical pricing agreements, while sometimes anti-competitive, can often have procompetitive effects."

Plaintiffs in argued that Leegin effectively overruled General Electric, and that Leegin dictated a rule of reason analysis even if there was a true principal-agent relationship between a manufacturer and its distributors.  The Fourth Circuit exterminated that argument, saying that Leegin had presented an entirely different question of the proper analysis to be applied after it had been established that there was in fact a retail price maintenance agreement.  It noted that Leegin had not mentioned the General Electric decision at all, and that the Supreme Court had said in another case that it "does not normally overturn . . . earlier authority sub silentio."

The Fourth Circuit then evaluated the validity of the principal-agent relationships in place between the pesticide manufacturers and their distributors, and found them to be well on the acceptable "General Electric side of the line."  The distributors bore the risk of loss, the agency sales method had been used for legitimate business reasons, and there was no evidence that the agency agreements were the product of coercion. 

Zimbabwe, Ford Motor Company, And Covenants Not To Compete

The Court of Appeals for the Fourth Circuit invalidated a covenant not to compete today, in Lampman v. DeWolff Boberg & Associates, Inc. Along the way, the Court made allusions to Ford Motor Company and Zimbabwe to illustrate the overly broad scope of the agreement.

A couple of caveats first.  The opinion is unpublished, and it involves South Carolina law.  That said, the analysis is interesting, and potentially applicable to a North Carolina case given the similarity of South Carolina's law on the subject of non-competes.

The restriction, contained in a Shareholders' Agreement, said that the Plaintiff would "not, directly or indirectly, engage in Competition" with the Plaintiff.  The term "Competition" was defined as "serving in any capacity . . . for any Person that analyzes, designs, modifies and implements management systems to improve productivity, quality, service and capacity levels that generates quantifiable financial savings, and where such services are competitive with or similar to those that such Shareholder rendered during his or her employment with" the Defendant.

There was no geographic restriction in the covenant, which nevertheless had been upheld by the District Court.  It did so based on Defendant's argument that its business occupied a "unique, narrow niche" with "a very limited set of direct competitors."

The Fourth Circuit reversed, observing that the effect of the non-compete was to prohibit the Plaintiff from working for many entities that didn't compete at all with the Defendant.  It gave the example of Ford Motor Company, which it said was also engaged in "analyzing, designing, modifying and implementing management systems."  There was no valid reason to prevent the Plaintiff from working for Ford and providing those services, given that Ford and the Defendant weren't competitors. 

Since South Carolina -- like North Carolina -- doesn't blue pencil, that alone was enough of a basis to void this covenant.  But the Court pointed out another flaw in the covenant as well, that it would prevent the Plaintiff from providing competitive services anywhere in the world, even though the Defendant didn't do business throughout the world.  It held that "the non-competition clause. . . would prohibit [Plaintiff] from working for a 'competitor' in Zimbabwe, even though [the Defendant] does not provide services in that country and has no legitimate interest in prohibiting [the Plaintiff] from working there."

The photograph is of Victoria Falls, from Dragonwoman's photostream on Flickr.


A Liquidated Damages Provision Providing Inadequate Damages Isn't A "Penalty"

It's black letter law in North Carolina that a liquidated damages provision is enforceable, so long as it is not a "penalty."  The need to make that distinction typically comes up when the Defendant believes the liquidated amount is excessive when compared to the actual damages incurred by the Plaintiff.

In Azalea Garden Board & Care, Inc. v. Vanhoy2000 NCBC 8 (N.C. Super. Ct. March 17, 2009), the Business Court confronted the exact opposite of the usual penalty argument.  The Plaintiff asserted that a provision in the contract severely limiting its recovery was a penalty because it would only allow damages it described as being "woefully inadequate." 

The provision at issue, contained in a $3.6 million contract to buy a nursing facility, said that "Buyer agrees that if he should fail or refuse to complete this transaction after timely acceptance by the seller, then any funds or deposit with the Broker will be forfeited and shall be split 50% to the broker and 50% to the seller." That provision yielded damages to the Plaintiff of only $12,500.

The Court determined this was a liquidated damages provision as a matter of law, and that it did not constitute a penalty. The Court held "Plaintiff's argument that the liquidated damages provision is unreasonable because it is too small in light of the damages actually suffered is not persuasive."  Op. Par. 30.  The Opinion referenced cases from other jurisdictions reaching the same result in a situation the Court described as "rare."

The other issue resolved in the Opinion was whether Tuttle could be liable for a breach of the agreement to purchase the nursing facility even though he had not signed it.  Tuttle asserted the Statute of Frauds.  The Plaintiff responded that the Tuttle was part of a joint venture, that the contract had been signed by an authorized agent of the joint venture, and that it was therefore binding on Tuttle.  

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Reasonable Expectations Of Minority Shareholders Frustrated By Dilution of Ownership, But Not By Termination Of Employment

The "reasonable expectations" of minority shareholders as to continued employment and continued stock ownership were the issue in Vernon v. Cuomo, 2009 NCBC 6 (N.C. Super. Ct. March 17, 2009), decided yesterday by the North Carolina Business Court.

Judge Tennille ruled after a one week trial that the Plaintiffs did not have a reasonable expectation of continued employment, given extreme animosity that had developed among the shareholders of the Company. 

On the dilution issue, however, the Court ruled that Plaintiffs had a reasonable expectation that their ownership interest in the Company would not be diluted, at least not through the means that the Defendants chose to accomplish that dilution. Plaintiffs were restored by the Court to their original ownership position and the Court ordered dissolution of the Company.

The Plaintiffs were two shareholders with a 40% ownership in TriboFilm, Inc., which was developing technology to eliminate silicone as a necessary lubricant in syringes.  They had a serious falling out with the Defendants, five other shareholders who controlled the remaining 60% of the Company.  The Court described the situation as "intolerable" and "dysfunctional."

The majority stripped the Plaintiffs of their status as employees, officers, and directors. Then, after each faction rejected an offer by the other to be bought out, the Defendants implemented a plan to virtually eliminate the Plaintiffs' ownership interest.  Here's what happened as the Court described it:

  • Defendants voted themselves "unrealistic" and "inflated" salaries (most of them had not had any salary at all before this) or salary increases.  The Company did not have the financial ability to pay these salaries.
  • The Defendants then agreed to defer a substantial portion of their new salaries.
  • None of this information regarding salaries and deferral was disclosed to Plaintiffs.
  • Next, the Directors voted to convert a portion of the deferred salary into Company stock at a penny per share, much less than they had been offered by Plaintiffs.
  • Defendants, in their capacities as Board members, then recommended to the shareholders that the number of outstanding shares be increased from 1 million shares to 15 million shares to permit the deferred salary conversion.
  • The Defendants informed the Plaintiffs that the reason for the new shares was to raise additional capital and pay certain obligations.  They did not disclose their plan to exchange their deferred salaries for some of the new stock.
  • The share issuance resolution was approved by the shareholders, over Plaintiffs' objections.
  • The Defendants then each forgave $15,000 of deferred salary (an essentially worthless claim, given the financial state of the Company) in exchange for 1,500,000 shares of Company stock.
  • The effect of the transfer was to immediately reduce each Plaintiff's ownership interest in the Company from 20.2% to 2.4%.

Plaintiffs sued, asserting that their "reasonable expectations" as shareholders to continued employment and continued ownership of their stock had been frustrated.  They lost on the first point, but won on the second.

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Attorney Notes Get Work Product Protection From North Carolina Court Of Appeals

A novel issue of work product privilege was decided today by the North Carolina Court of Appeals in Boyce & Isley, PLLC v. Cooper.  The Court held that an attorney's verbatim copying of the text of selected documents at a document production was entitled to the protection of the privilege.

Here are the facts: during a document production, an attorney for the Defendant made notes on her laptop computer of the documents being reviewed. Her notes included "short snippets of verbatim text from certain documents" and her "thoughts regarding them and her theories of the case."

Plaintiff moved to compel production. The trial court ordered the production of the lawyer's notes, but the Court of Appeals accepted an interlocutory appeal of the issue and reversed.

The precedent the Court found to be similar consisted of federal cases holding that an attorney's highlighting of documents constituted protected work product.  The Court of Appeals held that "the act of defendants' counsel of inputting text from [plaintiff's] files into her laptop is analogous to an attorney highlighting select portions of copied documents." 

The Defendants also argued that the lawyer's selection of a few items to record verbatim -- out of thousands of pages of documents produced -- warranted the protection of the work product privilege.  The Court agreed, and held moreover that this was opinion work product entitled to absolute protection:

Defendants contend that the disclosure of the notes would direct plaintiffs to the few documents and portions thereof that defendants' counsel focused on and considered significant enough to emphasize from among a vast number of items. We agree. Consequently, we conclude that the verbatim text entered in the computer of defendants' counsel qualifies as opinion work product and is not discoverable, especially where plaintiffs. . . already have the underlying, original documents in their possession. As such, the trial court abused its discretion by concluding otherwise. Furthermore, even assuming, arguendo, that the verbatim text here qualifies merely as ordinary work product as opposed to opinion work product, we agree with defendants that plaintiffs have neither argued nor shown that there is a “substantial need” or “undue hardship” to justify production, particularly given that [plaintiffs have] all of the underlying documents in [their] possession.

The Court also observed that "in cases that involve reams of documents and extensive document discovery, the selection and compilation of documents is more crucial than legal research."  (quoting Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986)).

I've used the term "privilege" in this post, the Court of Appeals said that work product is actually a "qualified immunity."

Jim Phillips and Charles Coble of Brooks Pierce represent the Defendant.


Letters Of Intent And Agreements To Agree: Two Rulings From The North Carolina Business Court

Whether the parties had agreed on the material terms necessary to create a binding contract was the issue resolved by the Business Court in two opinions issued simultaneously on Friday, March 13th.  The claims in one case survived a motion to dismiss, the claims in the other were cut down on summary judgment.

In the first case, JDH Capital, LLC v. Flowers, 2009 NCBC 4 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that a Letter of Intent executed by the parties was a "non-binding agreement to agree," and dismissed the case.  In the second case, Crockett Capital Corp. v. Inland American Winston Hotels, Inc., 2009 NCBC 5 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that the plaintiff could proceed in its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.

These cases are must reads if you are litigating a contract formation issue in the Business Court.  They are equally important to look at if you are drafting Letters of Intent or other agreements involving commercial real estate ventures, which were the business deals involved in both Flowers and Crockett. (There are reportedly non-litigation lawyers who read this blog precisely to see how their deal documents might play out in Court).

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Business Court Dismisses Claims Arising From City Of Charlotte Construction Project

The Business Court ruled today in Crowder Construction Co. v. City of Charlotte, a construction law case, that North Carolina does not recognize the "cardinal change doctrine."  It also dismissed a claim that a project consultant had tortiously interfered with the contract between the general contractor and the City by rejecting the general contractor's claims for payment.

A "cardinal change" is a change to a government contract which "fundamentally alters the contractual undertaking of the contractor."  It is a change which "cannot be redressed within the contract by an equitable adjustment to the contract price."

Crowder was the general contractor for a parking garage for the City of Charlotte.  It claimed that "after it began work on the Project, it discovered that the soil conditions at the site differed greatly from those represented in the Bid Documents and that these changed conditions resulted in significant additional work and expense. . . ."  Crowder sued to recover these additional expenses, claiming that the unanticipated soil conditions were a cardinal change.

Judge Diaz dismissed the claim, stating that it was "not recognized in North Carolina."  He ruled that a claim for cardinal change was essentially a claim for breach of an implied contract, and that such a claim was barred by the doctrine of sovereign immunity.

Also dismissed was a claim by Crowder for tortious interference with contract against  STV, the City's "Project Management Support Services Consultant."  Crowder claimed that STV had interfered with Crowder's contract by failing to properly administer the contract and by refusing to negotiate proper payment for Crowder.

The Court held that the "interference" was justified, even though Crowder had specifically alleged that it was not.  Judge Diaz ruled that Crowder's allegation as to the lack of justification was "a legal conclusion the Court need not accept," and that Crowder's allegations on this point were self-defeating.  Crowder had referenced STV's contract, which showed that it had been contractually authorized to review and approve change orders, and had asserted that STV was responsible for evaluating the validity of any claims made in connection with the Project. 

The Court determined that STV had a proper motive -- the performance of its own duties under its own contract with the City -- in how it had dealt with Crowder.  Thus, the Court concluded, STV's actions were "reasonably related to the protection of a legitimate business interest," and it dismissed Crowder's tortious interference claim.

Brief in Support of Motion to Dismiss (Cardinal Change Issue)

Brief in Support of Motion to Dismiss (Tortious Interference Issue)

Brief in Opposition to Motion to Dismiss (Tortious Interference Issue)

Reply Brief in Support of Motion to Dismiss (Cardinal Change Issue)

You've Gotten A Rule 30(f) Notice From The North Carolina Court Of Appeals, What Does It Mean?

Most of the cases in the North Carolina Court of Appeals are decided without oral argument.   In 2008, for example, the Court calendared oral argument in 175 cases, but ruled that it would decide 824 others without oral argument.  These numbers, based on the Court's calendars for 2008, mean that only about 17.5% of cases were called for oral argument.  That percentage is comparable to numbers from the Court for 2005. 

This no-hearing disposition is permitted by Rule 30(f)(2) of the Rules of Appellate Procedure, which provides that "[i]f all of the judges of the panel to which a pending appeal has been referred conclude that oral argument will not be of assistance to the Court, the case may be disposed of on record and briefs.  Counsel will be notified not to appear for oral argument." 

The Court issues 30(f) Notices in the substantial majority of the cases it decides.  Can you draw any conclusions upon getting that Notice?  Does it mean, for example, that the trial court was so obviously right that the Court of Appeals doesn't need to hear the terrific argument you wanted to make?  Or could it mean that the trial judge got it so painfully wrong that the appeals court doesn't need to do anything more than read your brief to be persuaded?

Every case is certainly different, but I can provide you with some statistics that will give you a little bit of guidance.  My wonderful and never complaining assistant Nancy and I ran the numbers for (1) every case in which a 30(f) Notice was issued during calendar year 2008 and (2) which was decided by the Court of Appeals by March 1, 2009. 

There were 703 cases total (civil and criminal) in the group.  Of that number, 499 were affirmed.  That's an overall affirmance percentage of 70%  So, a broad generalization is that if you get a 30(f) notice, and you are the appellant, there's only about a 30% chance of a reversal.  And some of the reversals in our count might not be much of a win, because we counted any "affirmed in part and reversed in part" as a reversal.  You're certainly better off being the appellee, which is probably obvious anyway.  (Another note: we counted appeals that were dismissed as having been affirmed).

If you are appealing a criminal case, your chances as the appellant are worse.  We counted 309 criminal cases, of which 234 were affirmed.  That's a success rate for prosecutors of 76% in cases where the Court declines argument.

There probably aren't many prosecutors reading this blog, so what about the civil cases standing alone?  Overall, we counted 394 civil cases which were 30(f)'d.  Of those, 265 were affirmed.  That's an affirmance rate of 67% overall.

What was the affirmance rate over the same time period for cases where the Court did hear oral argument?  Higher or lower than the rate by which 30(f) cases are decided?  I'll follow up with that later this week.  Call this the first blog cliffhanger.

As you are thinking about this information, don't forget, as is often attributed to Mark Twain, "there are three kinds of lies: lies, damned lies, and statistics."  That might be an apt thought to keep in mind with regard to this particular post.

Covenant Not To Compete Ruled Unenforceable By Middle District Of North Carolina

You can't use a compass to draw a circle without working from a fixed point in the center. That basic principle of geometry is what doomed Plaintiff's effort to enforce a covenant not to compete in Asheboro Paper and Packaging, Inc. v. Dickinson, decided by Judge Schroeder in the Middle District of North Carolina on February 19th.

The Defendant, Dickinson, had signed a covenant not to compete saying that he wouldn't work for a competitor within a 150 mile radius of the Asheboro Paper's "branch office" in Virginia.

The problem for the Plaintiff was that although it had intended to open a Virginia office at the time the agreement was signed, it had never done so.  Dickinson therefore ended up working from his home, as did another Virginia-based employee of Asheboro Paper.  The Court therefore had no starting point to draw a circle with a radius of 150 miles.

Judge Schroeder rejected the argument that the covenant should be drawn from the locations of Dickinson and his fellow employee, saying that "such an interpretation would reduce the 'branch office' reference in the No-Compete Agreement to a concept rather than a place and fail to establish any reasonable basis from which to calculate a territorial restriction of 150 miles."

The case also serves as a reminder that a covenant not to compete may be too broad if it prevents the employee from working for a competitor "in any other relationship or capacity whatsoever," as this one was worded.  Judge Schroeder held that "[w]here a covenant requires an employee to have no association whatsoever with any business irrespective of whether he or she would be in a position to compete or divulge protected information, the covenant is overbroad."