Despite What You Think, the Business Court Isn't Always Open

Everybody knows that you have thirty days to file a Notice of Appeal in a civil case.  Rule 3(c)(1) of the North Carolina Rules of Appellate Procedure says that: "a party must file and serve a notice of appeal: within thirty days after entry of judgment."

The lawyers appealing from a grant of summary judgment in a Business Court case, Carter v. Clements Walker PLLC, obviously knew that.  They e-filed their Notice of Appeal with the Court on the thirtieth day, but Judge Gale granted the Defendant's Motion to Dismiss their appeal in an Order this week.

Why wasn't that appeal timely, you are wondering.  Well, the answer is that even though the Notice of Appeal was e-filed in the Business Court on the thirtieth day, it was filed too late -- at 7:37 p.m.

But the Business Court is electronic.  You can make filings at any time during the day, or night.  Rule 6.7 of the Business Court Rules even says that "[a]n electronic filing may be submitted to the Court at any time of the day or night."

But  Business Court Rule 6.7 goes on to say that:

For purposes of determining the timeliness of a filing, if the submission of the filing began during normal business hours of the Business Court (8:00 a.m.–5:00 p.m., Monday through Friday, excluding holidays), the filing is deemed to have occurred on that date.   If the submission of the filing began after normal business hours of the Business Court, the filing is deemed to have occurred on the next day the Business Court is open for business.

So Judge Gale found this Notice of Appeal to be untimely, and dismissed the appeal.  If you are fascinated by appellate procedure (and if you are, you should be reading the North Carolina Appellate Practice Blog), then you might be wondering how it is that the trial court gets the authority to dismiss an appeal.  Judge Gale covered all that.  Order ¶¶ 9-12.

Briefly, you are thinking of the general rule that an appeal takes the case out of the jurisdiction of the trial court, rendering the trial judge "functus officio."  That's certainly true, but Rule 25(a) of the Rules of Appellate Procedure says that a Motion to Dismiss an appeal can be presented to the trial court until the appeal has been filed in an appellate court.  An appeal isn't "filed" with the Court of Appeals when the Notice of Appeal is filed with the trial court.  Instead, "filing" with the appellate court occurs only when the record on appeal is filed or the docket fee is paid. 
 

 

A Million Dollars In Fees For Class Counsel in Wachovia/Wells Fargo Merger Lawsuit

When I first looked at Judge Murphy's (unpublished) Order in Ehrenhaus v. Baker earlier this month awarding attorneys' fees to the class action attorneys who sued Wachovia and Wells Fargo over their merger in 2008,  I was disappointed, though the Judge was following a mandate from the Court of Appeals.

He awarded $1 million in fees and expenses ($1,056,067.57 to be exact) to the NY lawyers representing the class.  That ruling came following a decision from the NC Court of Appeals reversing a previous award of fees in that case (by Judge Diaz) and remanding the fee determination to the Business Court.

Judge Murphy had assessed that his "sole directive" on remand was "to determine whether Plaintiff's attorney's fee award request of $1.5 million is reasonable in light of Rule 1.5 of the RPPC."  (the Revised Rules of Professional Conduct).  Order ¶14.

The Lawyers Got Much Less Than They Had Requested

My disappointment stems from my perspective that the Ehrenhaus lawsuit achieved absolutely nothing of value for Wachovia's shareholders, except for obtaining a more detailed proxy statement containing additional (and to me, pointless) disclosures about the merger transaction.  So why did the lawyers deserve anything at all, let alone a million dollars? 

But after shedding a few tears for the widows and orphans who were holding Wachovia stock and their undoubtable anger at a million dollars for lawyers who obtained nothing of value for them , I came to the conclusion that this was a pretty good shellacking of the lawyers for the class.   After all, they had asked for almost twice that amount ($1,975,000) to start with and had to wait for years to get paid (though there's no telling whether they will have to wait longer as there might be another appeal of this fee award).

And in this most recent round, they had asked for $1.5 million, requesting that a "contingency multiplier" be applied to the fee generated by the hours (over 3,000 hours) they spent on the case at their hourly rate.  Judge Murphy rejected that request because there was no contingent fee agreement signed by the class representative.  RRPC 1.5(c) says that "[a] contingent fee agreement shall be in a writing signed by the client."  Given the mandatory nature of the Rule, Judge Murphy saw this as "a prerequisite in order to create an effective contingent fee agreement."  Order ¶29.  He ruled that "in the absence of a valid contingent fee agreement between Plaintiff and his attorneys, as required by Rule 1.5(c), any award using a contingency multiplier is unreasonable."  Order ¶30.

If you are wondering about the hourly rates proposed to the Business Court by class counsel, they had previously asked Judge Diaz  for a $750/hour rate, which he had said in 2010 was "far in excess of those normally charged by attorneys in North Carolina."  In their new application for fees, class counsel backed down to a maximum hourly rate of $450, which Judge Murphy ruled "was not excessive when compared with the hourly rates of attorneys engaged in complex business litigation in Charlotte, Mecklenburg County, North Carolina."  Order ¶22.

Oh, and there was very bad news in this Order for Mr. Ehrenhaus' local counsel.  The Court awarded not a dollar to him even though there was a valid fee sharing agreement between him and Ehrenhaus' out of state counsel.  The agreement specified that local counsel would receive five percent of the total fee, but local counsel offered no evidence of the time expended or his hourly rate so the Court could not determine whether the five percent (which would have been more than $50,000) was reasonable.

If you are despondent over the lack of recovery by the North Carolina counsel, Judge Murphy seemed willing to consider the submission of further evidence on the services rendered by him. Order ¶38.

"Disclosure Only" Settlements Should Be Closely Examined For Their Value

Turning back to the reasonableness of the Ehrenhaus fee, there has been quite a bit of judicial discussion recently  about the fees appropriate in "disclosure only" settlements.  In the case of Kazman v. Frontier Airlines, 398 S.W.2d 377 (Texas App. 2013), the Texas Court of Appeals refused to award any attorneys' fees where the only relief for the plaintiff was additional disclosures in SEC filings.

Delaware courts have ruled that they should scrutinize these types of settlements.  The Judges there have taken to asking the attorneys requesting fees in disclosure only settlements to identify which of the disclosures obtained are the most material and thereby evaluating their value.  (See In re PAETEC Holding Corp. Shareholders Litigation (letter opinion).

What would Ehrenhaus' lawyers say about the value of the additional disclosures that they obtained?  What could they have said?  If you want to make that evaluation yourself, you can find the "enhanced" disclosures here.

Maybe I'm being too harsh on the minimal value of this lawsuit for Wachovia's shareholders.  The class did obtain the invalidation of the 18 month "tail" in the merger agreement between Wachovia and Wells Fargo.  That gave Wells Fargo the right to keep its 40% voting interest in Wachovia's stock for 18 months if the shareholders voted against the merger.

But really, what other entity was likely to be deterred from making a better bid for Wachovia as a result of the tail?  Remember that Wachovia was literally hours away from a receivership when Wells Fargo made its offer.  And Judge Diaz ruled in his 2008 opinion that "the sobering reality is that there are few (if any) entities in a position to make a credible bid for Wachovia that would be superior to the Merger Agreement."  2008 NCBC 20 at ¶151.

So was a $1 million fee warranted?  I don't know, but In the old days of the Business Court, Judge Tennille might have condemned these fees as "stinky fees."

Don't get me wrong on my feelings about fees paid to class action counsel.  Sometimes they are well-earned.  For example, just  the other day, Amazon.com notified me that I was getting $13.00 or so in the settlement of the price-fixing class action against it over the pricing of e-books.  (though my Dad pointed out that he only got $3.00)  But what was the award for fees and expenses for the lawyers for the class in that case?  More than $11 million.  I have no problem with that.  They can buy a lot of books.  And they deserve them.

As for the prospects of an appeal of this fee award, that is unlikely to be warmly welcomed by the Court of Appeals.  The Fourth Circuit said yesterday, in a completely unrelated case, that:

[A]ppeals from awards of attorneys fees, after the merits of a case have been concluded,. . .must be one of the least socially productive types of litigation imaginable.

Best Medical Int'l, Inc.  v. Eckert & Ziegler Nuclitec GMBH at 10 (quoting Daly v. Hill, 790 F.2d 1071, 1079 n.10 (4th Cir. 1986).
 

 

Business Court Makes North Carolina Safe For Construction Lawyers

Construction lawyers in North Carolina can breathe a sigh of relief.  On Friday of last week, the Business Court ruled that the service of on-line service provider Lienguard in preparing claims of lien constitutes the unauthorized practice of law. 

You most likely have never heard of Lienguard.  It says on its website that it files throughout the country: "commercial mechanics liens, notices, public and federal bond claims as well as municipal liens." It does this on a fixed price basis.  It charges $495 for the preparation and filing of a mechanics lien.

A committee of the North Carolina State Bar sent Lienguard a cease and desist letter in 2010 informing Lienguard that it had concluded that Lienguard's conduct constituted the unauthorized practice of law.  Lienguard, notwithstanding the letter, continued offering its services in North Carolina.

The Order in North Carolina State Bar v. Lienguard, Inc., 2014 NCBC 11, followed in the State Bar's lawsuit.  Lienguard raised a litany of defenses against what it termed the State Bar's "monopolistic crusade" against the UPL.

Lienguard's Services Are The Unauthorized Practice Of Law

The Business Court didn't agree with any of Lienguard's defenses.  Lienguard argued, for example, that a claim of lien wasn't a "legal document" and its assistance in preparing those documents was therefore not within the statutory definition of the "practice of law."  Section 84-2.1 of the General Statutes bars non-lawyers from "preparing or aiding in the preparation of "deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors. . . ." 

Given the absence of "claims of liens" from the language of the statute,  Lienguard said it was not engaged in the practice of law.  Judge Gale looked to G.S. §84-4, which prohibits non-lawyers from preparing "any other legal document."  It took him just twenty words to conclude that a claim of lien is a "legal document":

Clearly, a claim of lien is prepared to enforce the claimant’s statutory lien rights.  It is,
therefore, a “legal document.”

Op. 55.

The Court also ruled that Lienguard's statements about its expertise in the construction industry, its commitment to compliance with the law,  and its qualifications to prepare claims of lien constituted Lienguard "holding out" that it was licensed to practice law.  There are  administrative regulations in North Carolina that direct that a lawyer who is not admitted to practice in this jurisdiction "shall not. . .  hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.” 27 N.C. Admin. Code 02, Rule 5.5(b).

Lienguard's services also constitute impermissible "legal advice" in violation of Chapter 84.  It provides definitions of lien law terms, gives warnings regarding time requirements, and reminders about sending out preliminary notices.  Those things are "legal advice," when combined with the preparation of legal documents.  Op. 72.

You might remember the "scrivener's exception" to charges of UPL, which recognizes that merely typing or “scrivening” a petition or legal document does not constitute the practice of law, so long as the non-attorney does not create the document, or advise on how the document should be prepared." Op. 59.  Lienguard wasn't entitled to this exception because "it performs services beyond that of a scrivener."  Op. 65.

Lienguard's Constitutional Claims Were Rejected

Lienguard also argued that Chapter 84 is so vague due to its lack of definitions that it cannot be constitutionally applied to it.  The Court rejected that argument, ruling that "there is no vagueness involved in concluding that a claim of lien is a legal document."  Op. 82.  Besides, the NC Supreme Court held almost a century ago that G.S. §84-4 is constitutional and valid. Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 632, 631 S.E.2d 540, 544 (1936).  And Lienguard hadn't taken the necessary procedural steps to attack the constitutionality of a statute anyway.  G.S. §1-260 requires service on the Attorney General if the constitutionality of a statute is in question, and he has an opportunity to be heard.

If you are not exhausted from reading this by now, you might be wondering how the Court resolved Lienguard's argument that the State Bar was in violation of the monopoly clause of the North Carolina Constitution.  That clause says that: "monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. §34.  The State Bar, which is a state agency, has the power to exclude persons from practicing in the legal profession "to protect the public against incompetents and imposters."  Op. 86.  (There was no finding that Lienguard was "incompetent.").  Judge Gale rejected the monopoly claim.

There's More To Come

The Court's ruling is not the final round for Lienguard.  The State Bar was directed to prepare a proposed form of permanent injunction for the Court to enter.  It was given twenty days to present it to Lienguard for "comments as to form."  You all know that this type of instruction from a Court can lead to endless back and forth between counsel for the parties.

A couple more things:

The Supreme Court of Ohio, bin 2010,also found Lienguard to be engaged in UPL. 

Also, I was surprised to discover that there are multiple companies in the business of providing DIY lien preparation services in North Carolina.  Companies named zlien, CRM Lien Services, and the Lien Professor all do that.  If the State Bar is truly concerned about stamping out UPL in this area, it has a lot more work to do. 

 

Real Estate Agents Need To Be Careful About Disclosing Dual Agency

Dual agency is a big deal to real estate agents.  It lets them represent both a buyer and a seller in a transaction.  Dual agency was the focal point of the Business Court's opinion last week in BDM Investments v. Lenhil, Inc., 2014 NCBC 6.  The Opinion shows the dangers of failing to disclose that you are acting as a dual agent.

If a real estate agent is acting as a dual agent she owes a fiduciary duty to both the buyer and the seller, "and must make a full and truthful disclosure . . . of all material facts [concerning] the [p]roperty."  Op. ¶43.

The fact of the dual agency is a material fact and must be disclosed.  Op. ¶44. 

Hollingsworth, one of the Defendants, did have a real estate license at the time of the transaction, but there's an issue of material fact whether he was acting as an agent for either the buyer or seller in the transaction.  Plaintiffs said that they would not have purchased ten residential lots for $850,000 if Hollingsworth had disclosed his relationship with the seller and the fact that he would earn a commission on the sale. 

The Plaintiffs wanted to rescind the transaction and get their $850,000 back, but there was nothing wrong with the property purchased, and there had been no misrepresentations about it by the purported agent.  As Judge Murphy observed, there are no:

case[s] under North Carolina law considering whether an undisclosed dual agency,
without any other misrepresentation or omission, permits a party to rescind a real
estate transaction if a jury finds the failure to disclose led to the purchase.

Op. ¶52.

He relied on two non-North Carolina opinions in ruling that if the jury at trial were to conclude that the failure to disclose a dual agency led to the decision to buy the property, that the Plaintiffs would be entitled to the remedy of rescission and also to pursue damages against Hollingsworth for "injuries not fully remedied by recovery of its purchase price."  Op. ¶53.

There would also be the danger of Hollingsworth having his real estate license revoked.  The General Statutes provide that a broker's license can be revoked for representing "more than one party in a transaction without the knowledge of all parties for whom he or she acts."  N.C. Gen. Stat. §93A-6(a)(4).  Hollingsworth died after the lawsuit was filed, so he doesn't face that danger. 

There are many more claims discussed in the BDM decision, but I have focused only on the dual agency aspect of the case because I am engaged to a real estate agent and I am of course now fascinated by real estate issues.  I felt it was necessary to make that disclosure.

 

NC Business Court Stays Arbitration Pending Ruling On Piercing The Veil Claim

The Order in Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 is a procedural conundrum wrapped up in arbitration issues.  The Plaintiffs in the Business Court are the respondents in a separate arbitration proceeding brought by the Defendant.  But none of the Plaintiffs -- all of whom were shareholders or directors of a corporation which had signed off on the arbitration agreement forming the basis for the arbitration -- had personally signed the arbitration agreement.

There's nothing novel about holding persons who haven't signed arbitration agreements to be bound by them.  The NC Court of Appeals held years ago that "well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Ellen v. A.C. Schultes of Md., Inc.,172 N.C. App. 317, 320, 615 S.E.2d 729, 732(2005) (quoting Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004)).

The non-signatories in Cold Springs were not willing to go to arbitration.  They moved for a preliminary  injunction to enjoin the Defendant from proceeding with the arbitration against them.  The Defendants' response was that they were entitled to "pierce the veil" against the corporate signer of the arbitration agreement and thereby get to the shareholders.

But is a Court entitled to determine a piercing the veil theory up front, in advance of an arbitration that is based on that very issue, or does that improperly delve into the merits?

Start with the concept of "arbitrability," which is "undeniably an issue for judicial determination."  AT&T Techs. v. CWA, 475 U.S. 643, 649 (1986).  Going along with that, however, is the concept that the court "is not to rule on the potential merits of the underlying claims."  Id.

So what's a court to do when arbitrability is wrapped up with the merits of the case?  Especially when the Defendants' demand for arbitration provides no specifics as to why the veil should be pierced, and makes only rote allegations as to why it should obtain that result.

Judge Jolly had little hesitation about getting at least somewhat into the merits.  He held:

An important distinction must be drawn between [impermissible] consideration of the merits of an arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same issues that underly the merits of a claim. The mere fact that certain issues could later be litigated substantively cannot on its own foreclose courts from assessing arbitrability. In such a situation, the overriding spirit of the Supreme Court's jurisprudence demands that courts nonetheless address those issues for the narrow and limited purpose of determining whether a claimant seeking to compel arbitration can sufficiently allege a basis for going forward against a responding party.

Op. ¶16.

Remember that this was a Motion for a Preliminary Injunction, to enjoin the Defendants from proceeding with the arbitration against the Plaintiff shareholders.  So what else did Plaintiff have to show to halt the arbitration?  Irreparable harm and a likelihood of success on the merits.

Irreparable harm was present, because "forcing a party to arbitrate an issue absent an agreement to do so constitutes 'per se irreparable' harm."  Op. ¶17.

On likelihood of success on the merits, Judge Jolly looked to G.S. § 1-569.7(b), which says that"[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."

He ruled that the parties should plan limited discovery on whether the shareholder Plaintiffs could be compelled to arbitrate, to be concluded in about the next six weeks.  The Judge also stayed the arbitration pending a ruling on the piercing the veil basis for the arbitration.

Oh, and if you are wondering which party has the burden of proof going forward, it is the Defendant, because "under both state and federal law, the party seeking to compel arbitration bears the "burden of establishing an agreement to arbitrate."  Op. 27  (citing  Routh v. Snap-On Tools Corp., 108 N.C. App. 268, 274 (1992).

That's a heavy burden here, because the NC Supreme Court said in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that "proceeding beyond the corporate form is a strong step: 'Like lightning, it is rare [and] severe[.]'"