A Valuable Point From The NC Business Court On Subpoenas Without Depositions

Can you send a subpoena duces tecum -- which translated from Latin is "a writ commanding a person to produce in court certain designated documents or evidence " --  without coupling it with a deposition?

Maybe that question has never puzzled you, but in an Order of the Business Court on February 12, 2015 in Harriott v. Central Carolina Surgical Eye Associates, P.A. Judge Bledsoe answered whether a subpoena duces tecum can be served without noticing a deposition in conjunction with the subpoena.

Plaintiff had served a subpoena duces tecum on several entities which were not party to the case. Those entities objected contending that a "subpoena duces tecum must be issued in conjunction with a proceeding in which testimony is to be received."

Judge Bledsoe disagreed, ruling "a subpoena duces tecum . . . can . . . be used to compel a non-party to produce documents without a concurrent request to testify."  Order at 1-2.

The governing Rule of Civil Procedure (NCRCP 45) is less than clear on this point. It says that a "command to produce records, books, papers, electronically stored information, or tangible things may be joined with a command to appear at trial or hearing or at a deposition, or any subpoena may be issued separately." NCRCP 45(a)(2).

The federal rule, by contrast,  is explicit on being able to serve a subpoena for documents without a contemporaneous deposition.  It says that:

Combining or Separating a Command to Produce or to Permit Inspection . . . . A command to produce documents, electronically stored information, or tangible things or to permit the inspection of premises may be included in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in a separate subpoena.

FRCP45(a)(1)(C).

So, if there was any doubt about this practical nuts and bolts issue, state law practice is now consistent with the federal rule.  Subpoena away.  At least in the Business Court.

The Business Court Rules Again On Claims Under The North Carolina Securities Act

Last week's decision in Atkinson v. Lackey, 2015 NCBC 13 doesn't tell you everything you wanted to know about the North Carolina Securities Act (the "NCSA"), but it comes pretty close.

The lawsuit was brought by three individuals who had made investments in the Pacific Fund, a defendant LLC.  The individual Defendants -- Lackey, Saldarini, and Mehler -- were the members of Pacific Capital, which was in turn the sole manager of the Pacific Fund.

The Plaintiffs alleged that their investments in the Pacific Fund had been fraudulently induced by Lackey, Saldarini, and Mehler.  The alleged misrepresentations were that the Pacific Fund owned various properties in high-end residential communities on the South Carolina coast.

The Atkinson case is the latest in a small handful of cases brought under the NCSA that have resulted in rulings from the Business Court.  The others are: NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, 2013 NCBC 12, Associated Packaging, Inc. v. Jackson Paper Manufacturing Co., 2012 NCBC 13, and Skoog v. Harbert Private Equity Fund, II, LLC, 2013 NCBC 17.  I wrote about NNN Durham and Associated Packaging on this blog, but missed Skoog.

Standing: Were The Fiduciary Duty Claims Direct Or Derivative?

The first issue up for consideration by Judge Bledsoe in Atkinson was whether the Plaintiffs had standing to bring their claims for a breach of fiduciary duty. That issue turned on whether the claims were direct or derivative.  An LLC member or corporate shareholder generally cannot pursue a direct cause of action against a third party for the loss of the value of his investment.  Barger v. McCoy Hilliard & Parks, 346 N.C. 650, 660, 488 S.E.2d 215, 220-21 (1997).

The exceptions to the "Barger Rule" -- rarely met -- are that direct claims may be brought by an LLC member or shareholder when "the wrongdoer owed him a special duty, or (2) that the injury suffered by the guarantor is personal to him and distinct from the injury sustained by the corporation itself."  Id. at 659, 488 S.E.2d at 221.

Judge Bledsoe did not have to plow any new ground to find that the Plaintiffs before him were owed a "special duty."  The NC Court of Appeals held more than thirty years ago that a special duty exists "when the wrongful actions of a party induced an individual to become a shareholder."  Howell v. Fisher, 49 N.C. App. 488, 498, 272 S.E.2d 19, 26 (1980).  Since the Plaintiffs alleged that the Defendants had made misrepresentations in order to obtain their investment, the Plaintiffs had standing to pursue their claims.

Securities Fraud Claims: Primary and Secondary Liability

Standing was not an issue for the state securities fraud claims.  G.S. §78A-56(a)(2) provides an individual cause of action for "any person purchasing a security."

There are "two different pathways" to liability under the NCSA.  The first "pathway" is for "primary liability" under G.S. § 78A-56(a)(2):

which imposes primary civil liability upon “an offeror or seller of a security who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statement which was made to not be misleading.” NNN Durham Office Portfolio 1, LLC, 2013 NCBC 12 at ¶64. To avoid primary liability, an offeror or seller must prove “he did not know, and in the exercise of reasonable care could not have known[] of the truth or omission.” Id.; Latta v. Rainey, 202 N.C. App. 587, 598, 689 S.E.2d 898, 908 (2010). Section 78A-56(a)(2). 

Op. ¶34.

The second "pathway" lies in "secondary liability":

If Plaintiffs can prove that an offeror or seller has primary liability under N.C.G.S. § 78A-56(a)(2), secondary liability will lie for “[e]very person who directly or indirectly controls [that person], every partner, officer, or director of the person, every person occupying a similar status or performing similar functions, and every dealer or salesman who materially aids in the sale,” unless that person proves that he “did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.” N.C.G.S. § 78A-56(c)(1) (2014).

Op. ¶35.

 

 

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An Answer To A Million Dollar Question About Designating Cases To The NC Business Court

This past Friday, I went to a seminar put on by the Antitrust and Complex Business Disputes Law Section of the North Carolina Bar Association in an almost successful effort to finish getting my required CLE hours for 2014.  This seminar included presentations from Business Court Chief Judge Gale as well as Business Court Judges Bledsoe, McGuire, and Jolly (Judge Jolly was presented with the Section's Distinguished Service Award). 

Sometimes there is real value in a seminar.  One tip from Chief Judge Gale was worth the price of admission to this alone.  The tip concerned an open question under the Business Court Modernization Act, which became effective on October 1, 2014.

The Modernization Act created a new class of cases which can be designated to the Business Court: Contract disputes where a corporation, partnership, or LLC is a party and where the amount in controversy is more than $1 million.  It is the only type of case which requires the consent of all parties before it can be properly designated to the Business Court.  G.S. §7A-45.4(a)(9)(d).

That consent requirement is hard to reconcile with the requirement that a Notice of Designation must be filed "contemporaneously with the filing of the complaint." G.S. §7A-45.4(d)(1).

How can you get the consent of the opposing party before the complaint is filed?  What if you have no idea what lawyer is going to represent the defendant?  And even after the filing, it may take weeks before counsel appears for the opposing party.  If you wait for counsel to appear and consider your request that the case be designated, you may run afoul of the "contemporaneous" requirement.

So what's the best course of action?  Here's where the tip from Judge Gale came in handy.  He said that it is best not to wait, but to file the Notice of Designation immediately and request that it be held in abeyance pending a response from all other parties whether they will consent.

You would think that having all the Judges in one place last Friday would mean that no opinions would be issued by the Court that day, giving me a day off.  But that was not the case.  Judge Bledsoe delivered an opinion late Friday evening in Atkinson v. Lackey, 2015 NCBC 13, an interesting case involving the North Carolina Securities Act.  Considering that the Judge probably didn't get back to Charlotte from Cary until 6:30 p.m. at the earliest, it makes me wonder how late his clerks work.  But I will write about that case tomorrow.

Supreme Court Justices Box The Fourth Circuit's Ears

Two Justices of the U.S. Supreme Court took the Fourth Circuit to task for not publishing a significant opinion.  The ear-boxing came last month in the form of a denial of a Petition for Certiorari from which Justice Thomas and Justice Scalia dissented, taking the position that the Supreme Court should accept the case for review.

Let's set the stage: The Fourth Circuit's unpublished opinion, forty pages long, came in the case of Austin v. Plumley.  The case is as far as can be from the usual business law case that I usually write about on this blog.  It concerns the sentencing of criminal defendants.  The Fourth Circuit opinion construes a presumption that the Supreme Court set down nearly fifty years ago in North Carolina v. Pearce, 395 U.S. 711, 725-26 (1969): that when a trial judge imposes a harsher sentence on a defendant who was previously sentenced by that judge for the same crime, "judicial vindictiveness" should be presumed..

There is a split among the Circuit courts about under what circumstances judicial vindictiveness should be presumed.  The Fifth and Ninth Circuits construe the presumption narrowly, holding that it applies only when there is a "triggering event" like a reversal by a higher court that "prods the sentencing court into a posture of self-vindication."  Kindred v. Spears, 894 F.2d 1477, 1480 (5th Cir. 1990); accord Fenner v. United States Parole Comm'n, 251 F.3d 782, 788 (9th Cir. 2001).

The Fourth Circuit, in its unpublished opinion, lined up with the Seventh Circuit (United States v. Paul, 783 F.2d 84, 88 (7th Cir. 1986) and took a more expansive view, ruling that the presumption applies when the trial court applies a more severe sentence after it grants a motion for a corrected sentence.

So, should the Fourth Circuit have published this opinion?  The Court's own Local Rules seem to call for that.  Local Rule 36(a) says that the Court's opinions will be published if they meet "one or more" of five criteria.  Justice Thomas felt that at least three were met because the opinion:

'establishe[d] . . . a rule of law within th[at] Circuit,' 'involve[d] a legal issue of continuing public interest,' and 'create[d] a conflict with a decision in another circuit.'

Denial at 7.

Does it make any difference that the opinion is unpublished?  The Fourth Circuit formerly "disfavored" the citation of its unpublished decisions, in the previous version of its Local Rule 36(c).  Now, there is a line of cleavage in the Fourth Circuit Rules -- citing unpublished decisions from before January 1, 2007 is still "disfavored," but unpublished decisions after that date are fair game for citation.  That is due to a change of that date in the Federal Rules of Civil Procedure, which states that:

[a] court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments or other written dispositions that have been:

(i) designated as 'unpublished,' 'not for publication,' 'non-precedential,' 'not precedent,' or the like; and

(ii) issued on or after January 1, 2007.

FRAP 32.1.t

So, lawyers can cite all they want to the Austin v. Plumley decision. The real concern about the Fourth Circuit's unpublished ruling is that is not binding on the Court, as Justice Thomas pointed out, relying on Minor v. Bostwick Labs, Inc., 669 F.3d 428, 433 n.6 (4th Cir. 2012).  He said:

It is hard to imagine a reason that the Court of Appeals would not have published this opinion except to avoid creating binding law for the Circuit.

Denial at 7.

It will be interesting to see if Justice Thomas' and Scalia's beef with the Fourth Circuit results in any visible reaction from the lower appellate court.  It would probably be more likely if Chief Justice John Roberts had joined his two colleagues in the dissent to the denial of the Petition for Certiorari, as the Chief Justice is the Justice on the Supreme Court assigned to the Fourth Circuit.  Justice Scalia has the Fifth Circuit, and Justice Thomas the Eleventh.

Don't think that I scour the Supreme Court's denial of cert. petitions looking for something to write about.  I would not have known about this ruling but for my son, Dash Sperling, a freshman at UNC, reading about it in the New York Times and bringing it to my attention.  Oh, and the North Carolina Appellate Blog also wrote about Justice Thomas' complaining about the Fourth Circuit yesterday.