The NC Supreme Court Ducks The Opportunity To Opine on How To Challenge Business Court Jurisdiction

If you were waiting anxiously, as I was, for the Chief Justice of the North Carolina Supreme Court to elucidate the process for challenging a Business Court designation, which I wrote about a couple of weeks ago, your torture is over.

Chief Justice Parker ruled in a short Order in Ekren v. K&E Real Estate Investments, LLC that the "Motion to Revoke Status as a Mandatory Business Court Case" filed last month was "denied."  The Order was posted on the Business Court website yesterday. 

There was no explanation about whether a "Motion to Revoke" is the proper procedure to follow under G.S. §7A-45.4 to get a final review of a Business Court designation.  In fact, there was no discussion at all of how to appeal to the Chief Justice, as the statute says to do, when that final review is sought.  The Order looked much like one of the form Designation Orders that the Chief Justice issues when assigning a case to the Business Court

I was hoping for more, as you know from my earlier post on the issue.  But if this blog only covered the keenly written opinions with business litigation value that come from the NC Supreme Court, it would be a long and lonely vigil.  In four years, I've only written about a Supreme Court decision once.  That post was aptly titled "Lightning Strikes."

The lack of output from our Supreme Court has been the subject of much discussion, including this piece in the Greensboro News & Record.  My personal empirical research on the Court's productivity (conducted by my cat, Dusty, upon my special assignment) showed that in 2011, the Court issued only 13 civil opinions.  Dusty (pictured below) arrived at that number by excluding all 2011 opinions captioned "State v. ____."  Of the 13 civil opinions, 7 were "per curiam," meaning that no Justice of the Court had individual responsibility for authoring the "opinion."  Per curiam opinions typically have little discussion of the merits or the defining law.

So it's no surprise that after the Ekren "decision"  we are left without any independent analysis from the high state Court on how to oppose Business Court jurisdiction. And Dusty had no comment.  She went out hunting chipmunks after completing her project, and then took a nap. So there's nothing more to say, except that Dusty was known to my daughters as the "smart cat" of the family even before her dumb sister got outside and ran away.  Dusty was uniquely qualified to conduct this research.  But as you can tell from her picture, she found the project very boring.

 

 

 

It's Not Every Day That You Think About The Internal Affairs Doctrine (Or Res Judicata)

Wow.  The Business Court was busier churning out opinions last week than I wanted to be working on my blog, so here's a catchup and a rundown on two cases you should know about.  Two more coming after the holiday.

Internal Affairs Doctrine.  The internal affairs doctrine is a conflict of laws rule which says that only one State should have the authority to regulate a corporation's internal affairs.  In Mancinelli v. Momentum Research, Inc., 2012 NCBC 28, Judge Jolly ruled that Momentum's state of incorporation, Delaware, should govern issues regarding Plaintiff's claim that she was orally promised a 15% share ownership by the corporation. 

The Court rejected the argument that it should apply the "most significant relationship" test or  the lex loci doctrine test (the place of contracting), which would have resulted in North Carolina law applying.

That's significant because the corporation was based in North Carolina, and the agreement claimed by the Plaintiff had been entered into in North Carolina.  But the Court rejected the argument that North Carolina law should trump Delaware's because the business was based in NC.  The application of Delaware law resulted in the dismissal of Plaintiff's claim because an oral agreement for the issuance of shares, which was the basis of her claim, is not enforceable under Delaware law.

If you are a North Carolina lawyer representing a Delaware corporation here in NC, it's probably a good idea to know what constitutes an "internal affair" that will be governed by Delaware law.  Judge Jolly quoted the following examples from the Restatement of Conflict of Laws:

[S]teps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors' and shareholders' meetings, methods of voting including any requirement for cumulative voting, shareholders' rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and reclassification of shares.

Op. 12.

Res judicataThe message of this particular Tong v. Dunn case (it's one of three) is don't split your claims or they are likely to be barred by res judicata.  Tong filed a suit in Superior Court, later removed to federal court, alleging that he had been fraudulently induced to agree to a merger.  Then Tong filed a lawsuit (nine days after his first one) alleging that the Defendants had breached their fiduciary duties by entering into the same transaction. 

Judge Gale extolled the virtues of res judicata --  it "relieves litigants of the cost and confusion of multiple lawsuits, conserves judicial resources, and encourages reliance on adjudication" -- and observed that very similar facts had been pleaded in both Tong actions.

Res judicata bars a subsequent action when: "(1) there is a final judgment on the merits; (2) between the same parties; and (3) involving the same claim."  Op. 21

Tong's lawyers conceded that their voluntary dismissal of the federal court action with prejudice operated as an adjudication on the merits, so the issue for the Court was whether the federal court action and the case before it involved the "same claims."  That look some discussion, because the Judge said that "[t]he test for determining 'same claims' for purposes of res judicata has not been definitively stated by our appellate courts." Op. 22

He cast the analysis in terms of the principle against "claims splitting," and observed that "all damages incurred as the result of a single wrong must be recovered in one lawsuit."  Op. 27  That rule isn't ironclad.  Sometimes successive lawsuits alleging common facts can go forward, especially when all the facts weren't known with reasonable diligence at the time of the earlier adjudication.

But that wasn't the case with Tong's claims.  The claims in the second lawsuit were barred by res judicata because all of the facts relevant to his claims were known to him when he filed the dismissed federal court case and there was no compelling reason that all of his claims could not have been asserted in the first action.

You might remember having heard about Tong and Dunn from the Tong v. Dunn decision from the Business Court in March , 2012 NCBC 16, which I wrote about last month.  This new Tong v. Dunn case has the same parties in a decision involving different claims.

There was obviously way too much claims splitting going on with Tong.  Do any of you tell your clients that they need to file three lawsuits to get relief?

Happy Memorial Day.

 

 

Know Your "Business": Don't Bite Off More Than You Can Chew When Drafting A Covenant Not To Compete

The broadly written scope of the covenant not to compete before the Business Court in Outdoor Lighting Perspectives Franchising, Inc. v. Harders led to the denial of Plaintiff's Motion for a Preliminary Injunction this week.

The covenant said that the Defendant, a franchisee of the Olaintiff, could not compete "in any Competitive Business."  The term "Competitive Business" extended to any business in competition  with an outdoor lighting business or any business similar to the "Business."  The term "Business" was defined more narrowly, limited to "the business operations conducted or to be conducted by the [Defendant] consisting of outdoor lighting design and automated lighting control equipment and installation services, using the" Plaintiff's "systems, concepts, identifications, methods and procedures developed or used by the" Plaintiff for the sales and marketing of its Products and Services.

Judge Gale found the term "Competitive Business" to be overly broad and to reach[] beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and that it therefore fell "within those cases which prohibit unreasonable restrictions on competition."  Op. ¶6.

He further said that the "expansive" term "extends well beyond activities that Defendants performed
pursuant to the Agreement. It likewise extends beyond the business [Plaintiff] itself conducts.  The language thus extends beyond [Plaintiff's] legitimate business interests." Op. ¶35

Lurking in the opinion was the possibility that the covenant might have been valid under the more liberal standard applied in evaluating a covenant given in connection with the sale of a business. Judge Gale obviously felt that he lacked the authority to give the covenant in this franchise agreement that kind of interpretation, as urged by the franchisor, but he highlighted that issue for a future case, saying:

A North Carolina appellate court may later adopt a standard of general application to franchises that affords well written competition restrictions in a franchise agreement the benefit of the more liberal standard afforded to agreements incidental to the sale of a business.

Op. ¶9.

But until that happens, the scope of a franchisee's covenant not to compete is more likely to pass scrutiny if it is limited to the current scope of the franchisee's business.

 

Fee Fi Fo FIRREA: NC Business Court On Maintainability Of Claims Against Banks Which Buy The Assets Of Failed Banks

The Financial Institutions Reform, Recovery and Enforcement Act, affectionately known to banking lawyers as FIRREA, is a statute passed by Congress in the late 1980's at the tail end of the savings and loan crisis of that decade.  It bars lawsuits against institutions in FDIC receivership and requires that claims first be presented to the FDIC for administration before being made in court.  In other words, there is no subject matter jurisdiction over those claims.

Last week, the Business Court took up a case of first impression in North Carolina: to what extent is FIRREA a bar to claims against a bank that acquires the assets of a failed bank from the FDIC?  That was the threshold issue in Front Street Construction, LLC v. Colonial Bank, N.A., 2012 NCBC 25. Some of the assets and liabilities of Colonial had been acquired by BB&T, against which Front Street sought to make its claims arising from Colonial failing to fund a loan.

After a summary of a number of cases on this issue of successor liability and FIRREA, Judge Jolly elected to reject the reasoning of another court involving the same acquisition by BB&T, Frazier v. Colonial Bank, 2011 U.S. Dist. LEXIS 22630 (M.D. Ala. 2011). 

He said that the proper resolution of Plaintiffs' claims depended on the terms of the document by which BB&T had acquired any assets and liabilities of Colonial Bank. This was the Purchase and Assumption Agreement between BB&T and the FDIC (the PPA). This climb up the FIRREA beanstalk via the terms of the PPA had been led by several other federal court decisions which Judge Jolly found persuasive: Fernandes v. JPMorgan Chase Bank, N.A., 818 F. Supp. 2d 1086 (N.D. Ill. 2011); Caires v. JP Morgan Chase Bank, 745 F. Supp. 2d 40 (D. Conn. 2010); Rundgren v. Washington Mut. Bank, F.A., No. 09-00495, 2010 U.S. Dist. LEXIS 126803 (D. Haw. Nov. 30, 2010); Moldenhauer v. FDIC, No. 2:09-CV-00756 TS, 2010 U.S. Dist.LEXIS 25315 (D. Utah Mar. 18, 2010). 

The Plaintiffs’ claims bogged down when the Court examined a Shared Loss Agreement between BB&&T and the FDIC, which said that the FDIC would reimburse BB&T for at least some of the losses incurred by BB&T on certain loans assumed by BB&T. Plaintiffs didn’t allege that the Colonial loan agreement on which their claims were based was covered by the Shared Loss agreement, and Judge Jolly ruled that they had not carried their burden of showing that the Court had jurisdiction in the face of FIRREA.      Most of Plaintiffs' claims were dismissed due to the Business Court's lack of subject matter jurisdiction.

One claim that was left standing after Judge Jolly’s Order was the Plaintiff’s claim against BB&T directly, for BB&T's failure to fund the loan after it assumed Colonial’s assets. He held that FIRREA did not apply when bringing a claim against a sucessor bank for its own conduct.             

There were other claims discussed and dismissed by the Court, but none as significant as those raised by the FIRREA issues. And some of those other claims turned on Alabama law, about which I rarely care.   So if you are interested, you need to read the opinion.                                                                                                                                                                

 

 

 

 

Appealing From Business Court Jurisdiction

You all know the procedure for getting into and out of the jurisdiction of the Business Court.  It's kind of like the Hotel California: "you can check in any time you like, but you can never leave."  I don't know why people fight so hard to leave "such a lovely place," but there are often challenges to the Court's mandatory jurisdiction, and the Chief Judge rarely grants them.

There's a "check out" procedure in G.S. §7A-45.4 which has never been used before.  It is about to be tested for the first time.   Section 7A-45.4(e) says:

Based on the opposition or ex mero motu, the Business Court Judge may determine that the action should not be designated as a mandatory complex business case. If a party disagrees with the decision, the party may appeal to the Chief Justice of the Supreme Court.

Unless I've missed it, which seems unlikely to me, no party has exercised the statutory right to challenge a Business Court Judge's denial of an opposition to its jurisdiction by an "appeal to the Chief Justice of the Supreme Court."

Well, now that is happening, in a case called Ekren v. K&E Real Estate Investments, LLC.  I am so excited that I can barely wait to see what will happen. 

The Ekren case, which from the Complaint looks like it is well within the scope of the Court's mandatory jurisdiction, has already been through the opposition procedure.  Judge Jolly denied the opposition to jurisdiction on April 4, 2012.

A "Motion for Supreme Court to Revoke Status As Mandatory Business Court Case" was filed by the Plaintiff on April 23rd.

Does the Motion qualify as an "appeal," which is what the statute dictates?  The Defendant has raised exactly that challenge in its Brief in Response to the Motion.  It says that the Plaintiff hasn't appealed by filing a Motion, and that it should have filed a Notice of Appeal.  The Plaintiff could have done that because Rule 3(a) of the Appellate Rules says that "[a]ny party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule."

An "appeal" is defined in one of my dictionaries as "an application or resort to another person or authority, esp a higher one, as for a decision or confirmation of a decision."  The Motion by Ekren certainly fits that definition.  It might have been more appealing to title it as  "Appeal to the Chief Justice to Revoke Status As Mandatory Business court Case."  And as far as whether a Notice of Appeal was necessary, can you even file a Notice of Appeal just to the Chief Justice, as opposed to the entire Supreme Court?

And there's one last question that I see.  The way that Section 75A-4(e) is worded, it seems to be limited to appeals from the Business Court's determination that a case is outside its jurisdiction, which is the opposite of the ruling in Ekren.

What happens now?  Only Chief Justice Sarah Parker can decide to handle this unusual procedure.  The eyes of the world are upon her.

[Update:  The Chief Justice denied the "appeal" in a summary order on May 17th.  I wrote about that here.]

 

 

What NOT To Do When Your Witness Goes South At Trial

If you've tried cases, you've probably had your own witnesses -- who you thought were solid -- disintegrate in front of you at trial.  They start acting quirky, begin conceding important points on direct examination they had held on to at their depositions, and are still facing cross-examination.

What do you do?  I can tell you what not to do.  Don't do what the lawyers did at the trial of Brockington v. Jacobs Engineering Group, Inc.  These lawyers, Gill and Wright, were from Virginia and appearing pro hac in a trial in Johnston County.  The case involved an explosion at a ConAgra plant that had resulted in death and injury to several workers.

Their witness, Pottner, testified that he probably knew that gas lines were being installed across the roof of the ConAgra plant while he and Jacobs Engineering were working there.  This was apparently a significant concession, because Pottner had testified at his deposition that he didn't recall knowing about the gas lines.

Gill and Wright seemed to have concluded that Pottner had lost his mind.  Gill took him to an Urgent Care after Court on March 20th, and Wright reported the next day that Pottner had an alarmingly high blood pressure and that he might have an aneurysm.  Gill stated that one of Pottner's pupils had not been sensitive to light, a sign of a neurologic disorder.  They were also concerned that he had had a stroke.

Gill and Wright sent Pottner home to Wisconsin after several days of treatment even though he was still under a subpoena to appear at trial.  Judge Hobgood, relying on the representations of Gill and Wright, said that Pottner had been reported to have had a stroke and a loss of partial use of one side of his body.  He declared Pottner "unavailable" to testify per Rule 804(a)(4) of the Rules of Evidence.  Pottner never finished his testimony.

The Judge learned a little bit later, after medical records were subpoenaed, that the lawyers had misstated Pottner's condition.  He had not had a stroke, had not lost the use of his body, his blood pressure had not been as high as stated by counsel, and he was under no restrictions when he left Wake Medical Hospital in North Carolina.  Judge Hobgood observed that Pottner could have returned to testify without any danger to his health.

In his Order sanctioning the parties represented by the lawyers, the Judge outlined a number of violations of the NC Rules of Professional Conduct by Gill and Wright.  Those were of:

  • Rule 3.3, which requires candor toward the Court.  A lawyer is obligated to "inform the trial tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse."  Pottner's counsel had known that Judge Hobgood had not accurately stated Pottner's condition when he was declared to be unavailable.
  • Rule 3.4, which requires attorneys to conduct themselves with fairness to the opposing party and counsel.  You can't encourage a witness to leave the jurisdiction and make himself unavailable as a witness.
  • Rule 8.4(d), which prohibits conduct prejudicial to the administration of justice.

Since Pottner had been under subpoena, the defendants were open to a variety of sanctions per Rule 45 of the NC Rules of Civil Procedure.  Rule 45(e)(1) says that the Court can impose upon a party who fails to comply with a subpoena without cause any sanction allowed by Rule 37(d),  Judge Hobgood chose to strike the Defendants' Answer, saying that "no less a sanction" would provide an adequate remedy to the Plaintiffs.

The Order was entered on April 4, 2012.  Nine days later, the jury, unencumbered by any of the stricken defenses, returned a $14.6 million verdict for the Plaintiffs

There is still a punitive damages phase of the case to be tried.  I wonder if the Virginia lawyers will have the nerve to come back.

I wouldn't have known about this cautionary and very interesting trial court Order but for one of my partners circulating it at Brooks Pierce.  He asked me to keep him anonymous.  If any of you receive Orders that deserve wider circulation, I would be glad to write about them and even to disclose your identity and generosity.