Who Doesn't Like Reading About A Ruling On A Motion To Compel?

I probably enjoy reading a ruling on a motion to compel a whole lot more than the judge does in writing it.  So of course I enjoyed reading Judge Murphy's Order on a Motion to Compel yesterday in County of Catawba v. Frye Regional Medical Center.  It's actually pretty interesting.  It's got discovery issues, a 30(b)(6) issue, and an attorney-client privilege issue too.

Frye Regional moved to compel because the County hadn't organized and labelled its document production to respond to the request to which the documents were responsive.  Frye Regional's co-defendant re-served the same document requests to which the County had already responded, demanding labelling.  Rule 34 requires labelling, but it also allows a party in the alternative to produce documents as they are kept in the "ordinary course of business."  Judge Murphy accepted the County's representation that it had produced its documents as they were kept in the ordinary course of business, and denied that aspect of the motion to compel. 

The County was more successful on its own Motion to Compel.  Frye Regional had refused to produce a witness on some of the topics listed in the County's 30(b)(6) deposition notice.  The Defendant had argued that a number of the topics in the notice requested information not "known or reasonably available" to it.  Frye Regional said that the proposed topics -- on its financial performance -- would require its witness to make burdensome calculations and compilations that it did not ordinarily perform.

Judge Murphy said:

While the Court is cognizant of the fact that the Rule 30(b)(6) Notice, by its nature, imposes a heavy burden on Frye and its designee, this burden does not relieve Frye of its obligation to appoint a designee to provide deposition testimony on behalf of the company. Rule 30(b)(6) clearly states that, upon notice from the requesting party, the organization “shall designate” a representative to “testify as to matters known or reasonably available to the organization.” N.C. R. Civ. P. 30(b)(6). Having considered Plaintiff’s Motion and the arguments of counsel, the Court finds no basis to relieve Frye of its obligation under Rule 30(b)(6). Therefore, the Court concludes that Frye must respond to the Rule 30(b)(6) Notice [and] designate a witness to testify on the company’s behalf.

Order ¶20.

The County also sought documents from Frye Regional by its Motion to Compel.  These were "Quarterly Certifications" prepared by Frye Regional's parent to prepare filings required by the federal government under the Sarbanes Oxley Act.

Frye Regional had withheld those documents on the basis of attorney-client privilege, but Judge Murphy said that any privilege belonged to Frye Regional's parent company (Tenet), not to Frye Regional.  He held:

the documents in question reflect communications between a Tenet employee and Tenet executives and counsel.  Although Frye appears to be a subsidiary of Tenet, Frye remains a third party to any privileged communications between Tenet and its counsel, and therefore, has no standing to assert a claim of privilege over such communications. . . . Therefore, the Court concludes that only Tenet or an attorney on its behalf may raise a claim of privilege over the requested portions of the Quarterly Certifications and accompanying memos.

Op. ¶22.

If the issue of the invocation of the parent's attorney-client privilege by a subsidiary is ringing a distant bell in your mind, you might be thinking of Judge Gale's recent opinion in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42,which I wrote about in August.  Though the issue in SCR-Tech wasn't precisely whether a subsidiary can claim its parent company's privilege, that certainly seemed assumed in the opinion.  At the hearing in this case, Frye Regional's counsel stated that the privilege belonged to Tenet, not Frye Regional. Op. ¶22.

But all is not lost for the privilege  -- Judge Murphy ordered that Tenet should be given notice of his ruling and be allowed to intervene to protect its privilege.

The County is represented by Brooks Pierce lawyers Jimmy Adams, Forrest Campbell, and Justin Outling.

 

Don't Sue A North Carolina Board Of Directors Over A Merger Without Reading This Case

Last week's Order in Gusinsky v. Flanders Corp., 2013 NCBC 46, should be required reading for lawyers thinking of suing the directors of a corporation in North Carolina over a merger transaction.  It provides guidance on the duties of directors in those transactions, whether the claims are derivative or direct, and lays down some heightened pleading requirements for some of those types of claims. 

You probably wouldn't be surprised to have never heard of Flanders Corporation.  Flanders, based in Washington, NC, says it is the largest United States manufacturer of air filters.  It was publicly traded until its shareholders approved a sale of the company via a merger in May 2012.

That approval by the shareholders came nearly a year and a half ago, but it was only last week that the NC Business Court dismissed a shareholder class action challenging the merger.  In its Order, the Court dismissed the  claims by the Plaintiff (a trust) for breach of fiduciary duty and for aiding and abetting breach of fiduciary duty.

One claim of breach of fiduciary duty was an alleged failure to "maximize shareholder value" in the sale of the company, which Plaintiff claimed was a duty owed by the directors of Flanders to all shareholders.  The other was an alleged failure to disclose information material to the deal.

There Is Rarely A Fiduciary Duty Owed Directly From A Corporation's Directors To Its Shareholders

In dismissing the claim, the Business Court underscored the principle that directors virtually never owe a fiduciary duty directly to shareholders.  The duty is owed to the corporation, not shareholders. Those claims therefore must be made derivatively, unless the circumstances of the "Barger rule" are met. (I've written about the Barger rule before).

It seems so obvious that this type of claim is derivative that you might be wondering how this class action plaintiff even argued its position.  All it made was a couple of pretty anemic arguments which Judge Jolly shot down.

One was that the General Statutes contemplate fiduciary duties owed directly to shareholders.  Plaintiff said that G.S. Section 55-8-30, which delineates the duties of directors, contains only one reference to a duty to the corporation and that the other duties prescribed therefore must be owed directly to shareholders.

That's so wrong.  The North Carolina Court of Appeals held last year that:

The drafters [of the Business Corporation Act] recognized that directors have a duty to act for the benefit of all shareholders of the corporation, but they intended to avoid stating a duty owed directly by the directors to the shareholders that might be construed to give shareholders a direct right of action on claims that should be asserted derivatively.

Estate of Browne v. Thompson. __ N.C. App. __, 727 S.E.2d 573, 576 (2012)(quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 14.01[2] (7th ed.) (citing Official Commentary, N.C. Gen. Stat. § 55-8-30 (1989)).

The Plaintiff also failed in its argument that it met the requirements of the "Barger rule." Plaintiff struck out on that score because the Flanders directors owed no duty to the class Plaintiff that was personal to the Plaintiff.  The cases that the Plaintiff relied on were cases involving closely held corporations controlled by a majority shareholder.  Judge Jolly found them not to be apposite.

Judge Jolly also ruled that a claim alleging inadequate consideration in a merger transaction was a harm to the corporation itsself, not to shareholders individually.  He said that:

[t]his is so because a claim for inadequate consideration is, functionally, a claim for the diminution of the value of shares held by all Flanders shareholdrs.  Without more, the 'lost value' of all shares of Flanders' stock does not describe an injury peculiar and personal to Plaintiffs.

Op. Par. 32.

You can probably guess the rest of this story.  If you can't, remember that derivative claims require the prospective Plaintiff to make a demand on the corporation to pursue the claim before being allowed to file a complaint.  This Plaintiff made no demand.  As the Court observed, "A plaintiff's failure to fulfill the statuory requirements for bringing a shareholder derivative action [is an] . . insurmountable bar [to recovery]." (quoting Allen v. Ferrera, 141 N.C. App. 284, 287, 546 S.E.2d 761, 764 (2000)).

So the first claim for breach of fiduciary duty for "failure to maxinize shareholder value" was dismissed.

 

 

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