Complying With The Rules Is Important In The Business Court

There's an ominous sounding sentence in a Business Court decision this week:

A party practicing before the North Carolina Business Court should take the deadlines imposed by its orders and the rules of practice very seriously.

Estate of Capps v. Blondeau. 2014 NCBC 24 at 36.  It is so ominous sounding that you would expect that sentence to be followed by punishment of the non-compliant party.  But Judge Jolly exercised mercy over the party which hadn't followed the rules.

What was the rule violation?  Two of the Defendants in the case (the Knights) hadn't filed their brief in support of their motion for summary judgment until more than 24 hours after the filing deadline set by the Court in its Case Management Order (requires all motions to be accompanied by a brief).  Also, the Knights never filed with the Court the exhibits referenced in their brief (BCR 15.5 requires a party to provide documents supporting allegations of fact in a brief).  Adding to their disregard of the Business Court Rules, the Knights never filed their Motion with the Wake County Superior Court (required by BCR 8.1)and they did not pay the required twenty dollar motion fee (dictated by N.C. Gen. Stat. § 7A-305(f)).

Plaintiffs demanded that the Business Court summarily deny the Knights' Motion for Summary Judgment due to the rules violations, which is permitted under BCR 15.11.  That rule says that:

[t]he failure to file a brief or response within the time specified in [BCR 15] shall constitute a waiver of the right thereafter to file such a brief or response.  . . .   A motion unaccompanied by a required brief may, in the discretion of the Court, be summarily denied.

Judge Jolly, in his discretion, opted to consider the Knights' Motion for Summary Judgment notwithstanding the Rules violations.  He referenced an appellate court decision -- Hammonds v. Lumbee River Elec. Membership Corp., 178 N.C. App. 1, 15 (2006) -- as support for his holding that:

[i]n deciding whether to dismiss a filing for procedural error, courts should weigh the impact of the rule violations on the non- violating party and the importance of upholding the integrity of the rules against the broader public policy favoring the resolution of disputes on the merits.

Op. Par. 37.  He noted the "relatively short delay" in meeting the deadline and the "relatively minor impact on Plaintiffs due to the delay."  Op. 37.

But after all that procedural hoopla, Judge Jolly went ahead, considered the motion for summary judgment and denied it without much discussion. 

So the only valuable lesson out of this decision is to follow the Business Court Rules.  A complete set of thos Rules is available here.

It Depends On The Meaning Of The Word "With"

The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with."  Well, actually on the phrase "entering into any contract . . . with."

HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF).  At that time,  HCIM became the sole managing member of HAMF per an Operating Agreement.  Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .

The HAMF Operating Agreement said in Section 2.03  that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member." 

HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.  Judge Jolly observed that:

The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.

Op. ¶16.

In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the  non-managing members of HAMF, but the Court determined that their consent was not required.  Two factors guided the Court's determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.

Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).

But the Court also looked to the totality of the Operating Agreement and said that

Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties' intention to vest the authority to sell HAMF in HCIM alone. Whether such an
arrangement was inadvertent or, more likely, the result of deliberation and  bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.

Op. ¶b20.

The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF's non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF].  Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).

So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims.  And I picked up from one of the Defendants' briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs' lawsuit.

 

Collateral Estoppel Sinks LLC Members' Claim

It might seem uncontroversial that the members of a limited liability company cannot follow with a personal lawsuit for injuries after their LLC litigates, and loses, claims based on the same issues.

But it took the Business Court a while to get to that conclusion last week, in Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22.

The Plaintiffs were the member-managers of Village Landing, LLC.  The LLC had made claims against Harold K. Jordan and Co. in an arbitration asserting that HKJ had misrepresented that it would build condominiums instead of the townhomes called for under the construction contract.  It said that this had caused the LLC "great financial harm." 

Right before the arbitration began, the member-managers sued HKJ for damages.  Then, the LLC lost on those claims in the arbitration.  The arbitrator, in his Award, specifically rejected the allegations regarding the townhome/condominium issue.

Nonmutual Collateral Estoppel

The unsuccessful arbitration meant that the LLC member-managers also failed in their Business Court lawsuit, which Judge Jolly dismissed based on collateral estoppel.  In reaching that result, he observed that he was "not aware of any North Carolina precedent addressing the attempted use of nonmutual collateral estoppel against nominally different plaintiffs."  Op. ¶30.

It could be that you don't remember the term "nonmutual collateral estoppel" because you went to law school as long ago as I did.  But it "prevent[s] a plaintiff from relitigating an issue the plaintiff has previously litigated unsuccessfully in another action against a different defendant."  Op. ¶30 (quoting Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002)).

So whether nonmutual collateral estoppel applied turned on the question of whether there was an "identity of parties" between the LLC in the arbitration and the member-managers in the Business Court lawsuit.  That can be shown by the parties being "in privity," but North Carolina law is that "privity with a corporation is not established solely by one's position as a corporate officer or shareholder."  Op. Par. 34 (relying on Troy Lumber v. Hunt, 251 N.C. 624, 627 (1960).

The LLC Members Had Control Over The Arbitration

The NC Supreme Court recognized, in Thompson v. Lassiter, 246 N.C. 34 (1957), that there is a "well established exception" to the "general rule" that an identity of parties is necessary to prevail on a res judicata defense. Op. ¶¶35-36.  (Wait, you sharp eyed readers are thinking: This is a case involving collateral estoppel, not res judicata.  Judge Jolly said that "the court notes that res judicata and collateral estoppel are companion doctrines, that traditionally have shared the identity requirement." Op. ¶31). 

So, that exception, applicable to both res judicata and collateral estoppel, has four elements:

(a) control of both the original and present lawsuit, (b) a proprietary interest or financial interest in the prior judgment, (c) an interest in the determination of a question of fact or a question of law regarding the same subject matter or transactions and (d) notice of participation.

Op. ¶36.

The first element, control, "is met when a corporation is dominated by a single party or entity or is otherwise the alter ego of that party or entity."  Op.  Par. 39.  Given that the Plaintiffs were the sole member-managers of the LLC, plus their active involvement in the arbitration (by calling eighteen witnesses to testify), Judge Jolly found that the control element was met.  It probably did not help that one of the Plaintiffs had testified at the arbitration that the Plaintiffs and the LLC were "one and the same."

The second element, a proprietary interest in the prior judgment, was also met, given that the LLC was "essentially a pass though entity" and the Plaintiffs were "financially intertwined" with the LLC.  Op. ¶41.

As for an interest in the determination of questions of fact or law, Judge Jolly wrote that:

At the very core of Plaintiffs' Claims against HKJ in this matter is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing "condominiums, rather than townhouses." This was the precise issue that Village Landing litigated extensively against HKJ in the Arbitration Action, an alleged misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions of dollars in losses.  Not only did Plaintiffs have an "interest" in the Arbitrator's determination on this issue, it was central to their LLC's entire case against HKJ in the Arbitration Action – as it is in their individual action here.

Op. ¶42.

The notice element was obviously met due to the Plaintiffs' involvement in the LLC's arbitration.

What Counts In Collateral Estoppel Is ISSUES, Not Claims

The Plaintiffs argued that their personal claims were "separate and distinct" from the claims pursued by the LLC in arbitration.  It didn't make any difference.

Judge Jolly observed that "our courts have repeatedly held that 'collateral estoppel precludes the subsequent adjudication of a previously determined issue, even if the subsequent action is based on an entirely different claim.'"  Op. ¶50 (emphasis in original)(quoting Hailes v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994)).

Since the arbitration had resolved the issue of whether HKJ had misrepresented that it was building townhomes instead of condominiums, the Plaintiffs were foreclosed from pursuing claims based on that issue.

The Remaining Elements For Collateral Estoppel Were Met

Judge Jolly quickly ticked through the remaining elements of collateral estoppel.  The issue had been "actually litigated" as it was "clear that litigation of issues in an arbitration action satisfies the 'actual litigation' prong of the collateral estoppel doctrine."  Op. ¶55.  It had been "actually determined" because the Arbitration Award was a reasoned one because it directly discussed and decided the issue of misrepresentation.  Op. ¶56.  Given its centrality to the Award, it was also "necessary and essential" to the Award.  Op. ¶57.

* * *

The easiest takeaway from this case is that LLC members can't pursue their own personal claims after their LLC has already arbitrated claims resting on those same issues.