NC Business Court Sends Some Important Messages About Fees To Lawyers For Class Action Plaintiffs

If you've been reading this blog for any length of time, you know that I am very sour on substantial attorneys' fees being awarded to the lawyers for class action plaintiffs who obtain nothing more for the class than valueless additional disclosures with regard to a merger transaction.  You can read some of those posts here and here.

The Business Court has routinely been awarding substantial fees for disclosure only settlements up until now, but the Business Court's decision last week in In re Newbridge Bancorp Shareholder Litig., 2016 NCBC 87 sends the message that its relaxed examination of the value of such settlements is probably at an end.  That is partly based on the Delaware Court of Chancery's decision in In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016), which was characterized as the "death knell" there for such settlements.

Judge Bledsoe said in the Newbridge Opinion:

the North Carolina Business Court has historically been guided in its consideration of motions to approve, and award attorneys’ fees in connection with, “disclosure-based” settlements of merger-based class action litigation by the body of persuasive case law developed by the Delaware courts over a period of many years. The Court is also aware that the Delaware courts have recently subjected such motions to much more exacting scrutiny than they have in the past.  See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016).

In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State.  The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions. As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.

Op. Pars. 4 and 5.

Notwithstanding Judge Bledsoe's decision that "enhanced scrutiny" would not be applied in the case before him, he did undertake a pretty close review of the value of the disclosures obtained for the class, and also the amount of the attorneys fees being awarded.

The Disclosures Obtained By Class Counsel Did Not Justify The Amount Of Fees Sought

He said that some of the disclosures touted as the basis for the fee award were "not material" or of "marginal benefit." Op. Pars. 64-65, 71 & n. 10.  He said that the Delaware Court of Chancery had "long rejected" the fallacy "that increasingly detailed disclosure is always material and beneficial disclosure."  Op. ¶64 (quoting Dent v. Ramtron Int’l Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *47  (Del. Ch. June 30, 2014)).

After that review, he sliced in half the amount of fees sought by class counsel, finding their fee request (of almost $275,000 based on an implied hourly rate of almost $525) was "not fair and reasonable, but rather excessive based on the circumstances of this case and the record before the Court."  Op. ¶69.

On the limited fee information provided by the class plaintiff's counsel, Judge Gale said that the $135,000 fee award he made yielded an implied average hourly rate of $258.  That probably seemed pretty skimpy to those lawyers, who said that the "usual and customary rates" for  the senior lawyers for the Court-approved Co-Lead Counsel ranged from $650-$850 per hour.  Op. ¶50.

But the lawyers for the class did little to justify their fees.  They did not offer any affidavits of North Carolina attorneys attesting to “the fees customarily charged in the locality for similar legal services,”  as contemplated by the Revised Rule 1.5(a)(3) of Professional Conduct.  Instead, they premised their fee request on a 2015 survey of billing rates published in the National Law Journal.  Judge Bledsoe rejected that, saying that "the NLJ Survey does not report the specific range of hourly rates customarily charged in North Carolina for legal services of the sort Plaintiffs’ counsel provided here."  Op. ¶51.

The Business Court Said That "Typical Fees" In North Carolina For Complex Litigation Are $250-$450 Per Hour

Left without any benchmarks for what North Carolina lawyers charged as "customary rates" for complex commercial litigation, Judge Bledsoe looked to affidavits offered to the Business Court in other class action fee applications which stated that "typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour."  Op. ¶52.  He also relied on the hourly fees charged by lawyers appointed by the Business Court to serve as receivers or as counsel for receivers (which ranged from $225 to $475 per hour). Op. ¶54.

Another Important Caution For Future Fee Applications

Another deficiency in the fee application was the failure to supply detailed time records justifying the time spent.  The fee applicants instead presented only summary charts showing the total hours spent on the lawsuit.  In another caution for lawyers requesting approval of fee applications, Judge Bledsoe said:

the Court notes that attorneys’ fees’ petitions in this Court are typically supported by detailed attorney time records and advises that the Court will be reluctant to approve future petitions for attorneys’ fees lacking such evidentiary support.

Op. ¶45 & n. 8 (emphasis added).

Judge Bledsoe also said that there was nothing so special about the work done by class counsel to justify the higher hourly rate that they requested.  He said that: the nature of the work performed by Plaintiffs’ counsel "could have been performed fully by competent North Carolina counsel and that the demands of the [litigation] did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute the [litigation].  Op. ¶55.

If you think that I am being too hard on Plaintiffs' counsel, I should point out that Judge Bledsoe said he found that:

Plaintiffs’ counsel are highly-regarded, highly-experienced class action counsel that have been involved in a number of significant class action matters including matters resulting in substantial monetary recovery for the class.

Op. ¶46.

Regardless of their qualifications, in the future these lawyers (who were undoubtedly disappointed in this ruling due to their success last year in getting a $550,000 fee award approved by a different Business Court Judge) and other lawyers for class action plaintiffs expecting big fees for anticipated disclosure only settlements of marginal value might need to find some other state in which to file those claims.

No more feeding at the trough in North Carolina.

A Couple Of Other Notes On This Opinion

One of the remarkable things about this Opinion is that there were no objections to the fees sought by the attorneys for the class.  Judge Bledsoe resolved, on his own accord, to closely review and reduce the fees sought.

Second, I recognize that even class actions leading to immaterial disclosure only settlements involve the need for North Carolina lawyers to defend those claims.  So it would be a shame if those out of state lawyers filing the suits leading to these settlements were to stay away from North Carolina altogether.

 

 

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Who Knew That A Motion To Transfer Venue Could Be So Complicated?

North Carolina cases that are filed in an "improper county" can be transferred to the "proper county" if the "defendant, before the time of answering expires, demands in writing that the trial be conducted in the proper county."  N.C. Gen Stat. §§1-83.

Multiple Claims With Different Venue Requirements

Well, what if there's a multiple count complaint, and only one of the claims was filed in an "improper county?"  That was the situation dealt with by Judge Robinson last week in Aldridge v. Kiger, 2016 NCBC 83.

Plaintiff a resident of Union County, sued the Defendants, including a corporation and an LLC which were based in Mecklenburg County, in Union County.  If there wasn't a specific venue provision applicable to the claims, the case was appropriately filed in Union County.  That would be so per G.S. §1-82, which says that an "action must be tried in the county in which the plaintiffs or the defendants, or any of them, reside at its commencement."

Dissolution Claims Have Their Own Venue Requirement

But Plaintiff's county of residency didn't control, because his complaint included a claim for dissolution of the corporate Defendant.  That claim has a specific venue provision which applies to it.  That provision isn't in Subchapter 4 of Chapter 1 of the General Statutes (G.S. §§ 1-76 to -87), where most of the provisions relating to venue are contained.

Instead, there is a provision regarding proper venue for corporate dissolution claims buried in the North Carolina Business Corporation Act.  Section 55-14-31(a) says that:

Venue for a proceeding to dissolve a corporation lies in the county where a corporation's principal office (or, if none in this State, its registered office) is or was last located.

Maybe you were aware of that provision.  I wasn't, and the attorneys for the Plaintiff obviously weren't either.

So Judge Robinson had no choice but to transfer the venue of the dissolution claim from Union County to Mecklenburg County.  But what about the other claims, which were properly venued in Union County?  Should they stay there?

The Court Did Not Sever The Claims So As To Let the Properly Venued Claims To Remain In The County Of Filing

Rule 42(b)(1) of the NC Rules of Civil Procedure allows the trial court to sever claims and it specifically speaks to venue considerations.  It says:

The court may in furtherance of convenience or to avoid prejudice and shall for considerations of venue upon timely motion order a separate trial of any . . .  number of claims.

While that Rule would seem to allow a severing of the claims, with one to be transferred to Mecklenburg County and the others to remain in Union County, Judge Robinson found the outcome to be dictated by one of the other venue statutes.  Section 1-87(a) of the General Statutes says that:

When a cause is directed to be removed. . .  all other proceedings shall be had in the county to which the place of trial is changed,

He ruled that  "[b]ecause all claims were brought in a single action in Union County , and Union County is an improper venue for the judicial dissolution claim, the entire action must be transferred to Mecklenburg County."  (emphasis added).

For those of you familiar with North Carolina geography, you know that there is not much inconvenience to the Plaintiff in having to litigate all his claims in Mecklenburg County as opposed to Union County.  Those two counties are right next to each other. The courthouses are about 25 miles apart!  The inconvenience is even less, since the case is in the Business Court, and will be overseen by the same Judge until conclusion.

It's hard to see how the Defendants will see this "win" as accomplishing anything much.  They might have thought that they would succeed in getting a dismissal of the case due to improper venue, but "North Carolina case law is clear that a motion to dismiss based on improper venue made pursuant to Rule 12(b)(3) shall be treated as a motion to transfer, rather than a motion to dismiss."  Op. ¶14 (citing Coats v. Sampson Cty. Mem’l Hosp., Inc., 264 N.C. 332, 334, 141 S.E.2d 490, 492 (1965)).

Protecting In-House Counsel From Having To Be Deposed

There a probably few things in legal practice as annoying as getting a Notice of Deposition for your client's in-house counsel.

Are you willing to pursue a Motion for a Protective Order to prevent the deposition?  The Defendant in a case before the Business Court tried that, but its Motion was denied in an Order and Opinion last week from Chief Judge Gale, in Edison v. Acuity Healthcare, 2016 NCBC 82.

The proposed deponent is general counsel and vice president of compliance and risk management for Defendant Acuity  The Defendant, in moving for a Protective Order, said that her deposition would be pointless because it "would be nothing more than a series of objections and instructions to [her] not to answer."  Op. ¶10.

The Shelton Rule

The Defendant premised this Motion on something called the "Shelton rule."  That "rule," if indeed it is a "rule," came from the federal appellate court decision in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986).  The rule provides some protection to an attorney who is to be subjected to a deposition.  The Shelton Court held that a party asking to take the deposition of opposing counsel had to show that:

(1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case.

Op. 58.

No North Carolina appellate court (federal or state) has adopted the Shelton approach, although it has been followed by two federal district courts in North Carolina.  Op. 13.  (citing CTB, Inc. v. Hog Slat, Inc., No. 7:14-CV-157-D, 2016 U.S. Dist. LEXIS 39024, at  *16–19 (E.D.N.C. Mar. 23, 2016); N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83, 85–86 (M.D.N.C. 1987)).  It was also followed by former Business Court Judge Murphy (in Blue Ridge Pediatric & Adolescent Med., Inc. v. First Colony Healthcare, LLC, 2012 NCBC 45).  I wrote about that decision when it was decided four years ago.

Does The Shelton Rule Apply To In-House Counsel?

The Plaintiff argued that the restrictive Shelton rule should not be applied to in-house counsel.  Some Courts have so ruled (cited in Op. 15).  Judge Gale rejected that position, stating that he discerned "no policy reasons that should prevent the Shelton rule from extending to in-house counsel" depending on the objective of the deposition.  He might take a different position "when a deposition targets only litigation strategies rather than necessary, factual information."  Op. 16.

The proposed in-house counsel deponent had been identified by another corporate employee, in a Rule 30(b)(6) deposition, as "the person who could best speak to certain clinical care standards and to consistency among Acuity's hospitals."  Op. 18.

Given her knowledge of facts relevant to the litigation, coupled with the lack of any "evidence . . . showing that she has been substantially involved with overseeing the litigation in this matter,"  (Op. 17), Judge Gale denied the Motion for a Protective Order.

The denial of the Motion doesn't mean that the Court left the Plaintiff to run roughshod over any matters known to the witness that would be protected by the attorney-client privilege.  Judge Gale said that the Defendant could "assert the attorney–client privilege on a question-by-question or subject-by-subject basis, as appropriate, during the deposition."  Op. 18.

Has The Business Court Adopted The Shelton Rule?

At no point in his Opinion did Judge Gale say that the Court had adopted the Shelton rule.  But the last time that the Business Court discussed the application of the Shelton decision (in the Blue Ridge opinion cited above), it applied the rule and quashed the deposition of an attorney who was active in the litigation (he had signed the Complaint). The party requesting the deposition said that it wanted to ask the lawyer about “advice, communications, and receipt of documents [that are] the basis” of Plaintiffs’ suit.  Judge Murphy said that "[s]uch knowledge is precisely the type of information Shelton attempts to protect from disclosure by litigation counsel in a deposition."  Op. 62 (emphasis added).

The circumstances before Judge Gale last week in the Acuity case were quite different.  The lawyer had knowledge of relevant facts.  Remember that "the attorney-client privilege does not protect against the disclosure of facts."  Judge Jolly of the Business Court said that in an unpublished Order back in 2013.

So, if the in-house lawyer of your client has knowledge of the circumstances involved in the lawsuit, her status as a lawyer is unlikely to be sufficient standing alone to protect her from being deposed.

 

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Member Of A Delaware LLC? Don't Bring Claims To Inspect Books And Records, Or For Dissolution, In North Carolina's Courts

The Plaintiff in Camacho v. McCallum, 2016 NCBC 79 has to head to Delaware to litigate her claims for inspection of the records of the LLC of which she is a member, and also to seek dissolution of the LLC.

Why, even though Plaintiff is a North Carolina resident and the Defendant LLC has business operations in North Carolina?  Because the LLC in question was a Delaware LLC.  Judge Robinson ruled that:

The Delaware Code grants exclusive jurisdiction over inspection claims to the Delaware Court of Chancery.  Op. ¶24.  (It says that in Section 18-305 of the Delaware Code).

The Delaware Court of Chancery also has exclusive subject matter jurisdiction over claims to dissolve a Delaware corporation.  Op. ¶29.

The Delaware Legislature has tried to stake out exclusive jurisdiction for its Court of Chancery in other areas.  Here's an example: Section 145(k) of the Delaware General Corporation Law says, regarding which court may hear actions for indemnification or advancement of expenses, that:

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

(emphasis added).

Can Delaware Really Claim Exclusive Jurisdiction For Its Chancery Court?

Can Delaware oust other courts from deciding matters of Delaware corporate law?   And did the Delaware Legislature even really mean to do so?  My guess is probably not.  Remember that Delaware has a Court of Chancery because it divided its court system into its Superior Court, which "has statewide original jurisdiction over criminal and civil cases, except equity cases," and the Court of Chancery, which has exclusive jurisdiction over "equity cases."  So the Delaware Legislature probably meant only to make clear that inspection and dissolution actions filed in Delaware should be brought in the Court of Chancery as opposed to the Delaware Superior Court.

Delaware certainly couldn't prohibit federal courts from ruling on this type of issue per its statutory declaration of "exclusivity."  Judge Easterbrook  of the Seventh Circuit addressed this issue in Truck Components v. Beatrice Co., 143 F.3d 1057, (7th Cir. 1998) with respect to another corporate issue: the right of an officer or director of a corporation to receive advancement for legal expenses in cases making claims regarding their service to the corporation.  He said:

No state may prevent a federal court from exercising jurisdiction created by Congress. . . . Nor do we suppose for one second that Delaware set out to contract the scope  of federal jurisdiction. Section 145(k) allocates jurisdiction among Delaware courts.  Delaware maintains separate systems of courts in law and equity.  Claims based on corporate arrangements go to the Court of Chancery rather than to the law courts, where other contracts are litigated. Such an intra-state allocation has no effect on federal litigation, which merged law and equity long ago.

Id. at 1061-1062 (emphasis added).

The NC Business Court isn't alone in deferring to Delaware's self-proclaimed "exclusive jurisdiction."  So have courts in Florida, Synchron, Inc. v. Kogan, 757 So..2d 564 (Fla. App. 2nd Dist.. 2000); New York:  In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div., 1st Dept. 2016)(New York court did not have jurisdiction to order dissolution of a Delaware corporation); Pennsylvania: Intertrust GCN, LP v. Interstate Gen. Media,LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phil Ct. Comm. Pl. 2014)(no jurisdiction to order dissolution of a Delaware corporation); and Vermont: Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009 Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. 2009)(same).

California has applied its own statute regarding inspection of corporate records to a Delaware corporation.  Havlicek v. Coast-to-Coast Analytical Services, 39 Cal. App. 4th 1844  (Cal App., 2nd Dist. 1995).  And notwithstanding the Raharney case cited above, New York has done the same, in Sachs v. Adeli, 26 AD 3d 52, 55 (N.Y. App. Div., 1st Dept. 2005).

How Can North Carolina Members Of A Delaware LLC Avoid Having To Bring Claims In A Delaware Court?

It's a good juncture to point out that the persons forming a Delaware corporation can specify in its bylaws that certain claims (those involving the internal affairs of the corporation) must be resolved exclusively in the North Carolina Business Court.  The Court of Chancery so ruled in September 2014.

So, in the absence of such a provision, claims for inspection of books and records and for dissolution (being the internal affairs types of claims that the Chancery Court said could be the subject of a forum selection clause) have to be brought in Delaware.

If you are a North Carolina lawyer creating a Delaware LLC or Delaware corporation for a North Carolina client, you may want to include a North Carolina forum selection provision in the Bylaws or Operating Agreement.  That way you won't have to explain down the line to the client why she has to pursue her claim to inspect corporate or LLC records (or dissolution) in Delaware.

You'll remember that North Carolina (like probably every state, has its own statute permitting LLC members the right to inspect the LLC's records.  That statute applies "only to members of an LLC formed under the North Carolina [Limited Liability] Act."  Op. ¶22.  So a member of a Delaware LLC has no inspection rights under the North Carolina statute.