General Assembly May "Modernize" The NC Business Court

A bill was introduced this week in the NC General Assembly that would be entitled "An Act to Modernize the Business Court By Making Technical, Clarifying, And Administrative Changes To The Procedures For Complex Business Cases."  Here's the text of the bill.

This is a summary of the proposed changes:

Appeals From Business Court

There would be a direct appeal to the NC Supreme Court from any final judgment in a case designated as a mandatory complex business case per G.S. §7A-45.4.  Since the NC Supreme Court has yet to rule in a case that originated in the Business Court (as far as I know) even though the NC Court of Appeals has ruled in many such cases, this will result in more Supreme Court decisions in business cases. 

Changes to Cases That May Be Designated As Mandatory Complex Business Cases

One of the first posts that I wrote on this blog (way back in 2008!) was about the jurisdiction of the Business Court.  You can find it here, but this proposed bill would change things.

The proposed bill does away completely with jurisdiction over cases involving intellectual property law (currently in G.S. §7A-45.4(5)) and cases involving "the Internet, electronic commerce, and biotechnology" (currently in G.S. §7A-45.4(6))

The bill adds two new explicit categories of cases that would qualify to be designated as complex business cases:

  • One is "disputes involving trade secrets under Article 24 of Chapter 66 of the General Statutes."
  • The other is contract disputes if a few conditions are met: at least one plaintiff or one defendant must be authorized to transact business in North Carolina per Chapter 55, 55A, 55B, 57D, or 59 of the General Statutes, the claim must be for breach of contract or seek a declaration of an obligation under a contract, and the amount in controversy must be at least one million dollars.

There Would Be Cases That Must Be Designated As Mandatory Complex Business Cases

In a new twist, the proposed bill specifies certain types of cases which must be designated as mandatory complex business cases.  Call these "mandatory mandatory" complex business cases. Those are:

  1. Some cases involving tax law, like "a contested tax case for which judicial review is requested under G.S. 105-241.16" or "a civil action under G.S.105-241.17."
  2. Disputes arising under corporate law, partnership law, or LLC law where the amount in controversy is at least $5 million.
  3. Cases involving regulation of pole attachments brought pursuant to G.S.§62-350.

If a party fails to designate a "mandatory mandatory" case, the Superior Court in which it was filed can either dismiss it without prejudice or stay it until it is properly designated per proposed new Section 7A-45.4(g).

Increase In Designation Fee

The proposed bill would increase the fee for designating a case to the Business Court by one hundred dollars, from one thousand dollars to eleven hundred dollars.

But the bill doesn't fix the problem that the designation fee is not recoverable as an element of costs.  I wrote about that issue last year.

Additional Reporting On The Activity In The Business Court

The proposed bill would require the Director of the Administrative Office of the Courts to report semiannually to the Chief Justice and each member of the General Assembly on the number of cases that have been pending at each location of the Business Court for more than three years, motions pending without a ruling for more than six months after being "fully ripe for decision" and the number of cases in which bench trials were held and completed for more than six months in which no judgment had been rendered.  The report is to include an explanation from the Business Court. 

Thanks to my partner, Charles Marshall, who sent me a copy of this proposed legislation.

 

Corporate Shield Holds Up Against Creditor

There's no expression when speaking of football players to recognize a performance that hits three exceptional marks (like a hat trick in hockey or a triple double in basketball or the triple crown in baseball). 

Maybe there should be, because Jeff Bostic, who played twelve years in the NFL for the Washington Redskins and on three Super Bowl winning teams, pulled off an extraordinary triple victory yesterday in the Business Court.  He got summary judgment in three cases in which he was the Defendant: Yates Constr. Co. v. Bostic, 2014 NCBC 19; Phillips & Jordan, Inc. v. Bostic, 2014 NCBC 18; and American Mechanical, Inc. v. Bostic, 2014 NCBC 17.

All of the Plaintiffs were subcontractors on construction projects for Bostic Construction Inc., which Bostic owned.  When the company failed and they were not paid, the Plaintiffs sued Bostic personally, alleging that Bostic had engaged in constructive fraud by commingling and misusing the funds from construction loans and using those funds for personal purposes.

Those facts might give rise to a claim by a shareholder of the construction company, but each of these Plaintiffs was only a creditor.  They ran into this settled principle:

Generally, directors and officers of a corporation are not liable, solely by virtue of their offices, for torts committed by the corporation or its other directors and officers.

Phillips & Jordan Op. ¶19 (relying on Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 57, 554 S.E.2d 840, 845 (2001).

Before a director or an officer can be directly liable to a creditor, there must be "a tort personally committed by [him] or one in which he participated."  Id.

The problem for each of these Plaintiffs is that they had no direct communication or interaction with Bostic.  His ownership status, standing alone, therefore was "insufficient to hold him legally accountable for an injury to Plaintiffs [as] third party creditor[s] of" the corporation.  Ops. ¶ 22.

 

 

Business Court Dismisses Derivative Action Against Duke Energy

You might remember the derivative action filed against the board of directors of Duke Energy Corporation stemming from its 2012 merger with Progress Energy.  It received a lot of publicity.  The merger was concluded long ago, but there's finally been a ruling from the Business Court dismissing the derivative action.  It's Krieger v. Johnson, 2014 NCBC 13.

The lawsuit challenged the severance payment due to Progress' former CEO, Bill Johnson, following the merger.  Johnson was set to be the CEO of the combined entity following the merger, but he was removed as CEO a few hours after the merger became final.  This entitled Johnson to as much as $44.4 million in payments under his new (and very short-lived) employment agreement with Duke Energy.

Krieger made claims for unjust enrichment and for the directors' breach of fiduciary duty with regard to what he condemned as a grossly excessive payment for "scant hours of service." Op. ¶16.

Unjust Enrichment Claim Was Dismissed

Judge Jolly dismissed the unjust enrichment claim given Johnson's written employment agreement with Duke Energy.  He wrote that:

[e]ven assuming the payments to Johnson might be considered excessive as Plaintiff alleges, the existence of a contract between the parties concerning the subject matter of the unjust enrichment claim is dispositive.

Op. ¶16.  He also said that "[a]n assertion that the express terms of a contract were ultimately unfavorable to one of the contracting parties, without more, does not state a claim for unjust enrichment."  Op. ¶16 & n.13.

Derivative Claims Were Dismissed Due To Plaintiff's Failure To Make A Demand

Krieger's derivative claims were also dismissed, due to his failure to make a demand on the Duke board of directors to pursue the claims.  That took some analysis by Judge Jolly, first on the point whether the law of North Carolina or Delaware (Duke's state of incorporation) should control.  Delaware law won out, because this was a matter of the internal affairs of the corporation, and only the state of incorporation can exercise the authority over "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."  Op. ¶21.

That was only a minor win for Krieger, who was arguing that a demand on the board of directors was excused because it would have been futile, due to the board's alleged inability to make an independent and disinterested decision on the subject of the lawsuit.  Delaware recognizes the futility exception to the demand requirement, but North Carolina does not.

Plaintiff Couldn't Show That A Demand Would Have Been Futile

But Krieger couldn't meet the Delaware standard for showing futility, which requires a showing that there is a "reasonable doubt as to (a) director disinterest or independence or (b) whether the directors exercised proper business judgment in approving the challenged transactions."  Op. ¶23.

He argued that the board would be exposed to personal liability for agreeing to such excessive compensation, but Judge Jolly held that:

Mere allegations that directors participated in or approved of the alleged wrongs as a showing of directorial interest have been consistently rejected by Delaware courts.

Op. ¶27.

 Krieger argued that the grant of severance benefits to Johnson violated the corporation's publicly disclosed compensation mandates.  Those mandates said that compensation was designed to attract and retain talented executive officers, was to be performance based and was meant to reward individual performance.

But that got the Plaintiff nowhere.  The Court found those statements to be "aspirational," and said that they "should not be contorted into affirmative mandates or representations that could give rise to a substantial likelihood of liability. . . . "  Op. ¶31.

The only other attempt by Krieger at proving demand futility lay in his effort to raise a reasonable doubt that the challenged transaction was the product of  a valid exercise of business judgment.  Krieger argued that the payment to Johnson constituted waste, and asserted that what Duke had received in exchange for the millions of dollars of severance payments was "so inadequate that no person of ordinary, sound business judgment would deem it worth" what Duke had paid.  Op. ¶35.

Judge Jolly observed that "Delaware courts have developed an exacting standard by which to evaluate claims of corporate waste."  Op. Par. 36.  Krieger had to "plead specific facts from which it can be inferred that 'the decision [by the board] is so beyond the bounds of reasonable judgment that it seems essentially inexplicable on any other grounds."  Krieger's argument that $44.4 million for less than a day's work didn't meet that standard.

So, since Krieger had not made any demand on the Duke board to pursue this litigation, all of his claims were dismissed.

If you are affronted by the payment of $44.4 million to Johnson for "a few hours work,"  here are some things that you should know: (1) the Amended Complaint referred to only about $10 million in payments (Op. Par. 11 & n.8), (2) Johnson would have been due substantial severance benefits under the Progress Management Change-In-Control Plan even if his  Employment Agreement with Duke had never been formalized, and (3) Duke received agreements from Johnson in consideration of the severance payments, like (a) a release of claims against Duke; (b) an agreement to cooperate with Duke in respect to transition matters and (c) non-competition, non-solicitation, non-disparagement and confidentiality covenants.  Op. ¶37.