Nc Business Court Stretches NCRCP 14 to Allow New Third Party Defendants To Be Added Years After The Commencement Of Litigation

The North Carolina Rules of Civil Procedure are fairly identical to the Federal Rules of Civil Procedure.  In fact, I am hard pressed to think of any substantial differences.

But the lack of one word contained in FRCP 14 -- "original" -- but omitted from the parallel NC Rule made all the difference in the NC Business Court's Opinion in AP Atlantic, Inc. v. Crescent University City Ventures, LLC, 2017 NCBC 91.

The case had to do with Plaintiff AP filing a third party complaint against multiple Defendants after Defendant Crescent University amended its Answer and counterclaim.  Big deal, you are probably thinking.  Rule 14 says that you can add as a third party Defendant anyone who "is or may be liable" to that party.  It is designed to "promote judicial efficiency and the convenience of parties by eliminating circuity of action . . . by consolidating [all] suits into one action."  Op. ¶26 (quoting Heath v. Board of Comm’rs, 292 N.C. 369, 376, 233 S.E.2d 889, 893 (1977)(quoting Charles Alan Wright et al., Federal Practice and Procedure § 1442 (1971)).

What made the AP Atlantic case unusual was that the counterclaim against AP which entitled it to add third party defendants who "were or might be liable to it" was first made in January 2016.  It wasn't until a year and a half later (in July 2017), when Crescent amended its counterclaim, that AP made its third party complaint against thirteen new third party defendant subcontractors.

AP Did Not Need The Permission Of The Court To File Its Third Party Complaint

Defendant Crescent said that AP needed to leave of court to make its third party complaint.  Crescent, relying on NCRCP 14, disputed that it had needed leave of court.  North Carolina's Rule 14 says:

At any time after commencement of the action a defendant, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him. Leave to make the service need not be obtained if the third-party complaint is filed not later than 45 days after the answer to the complaint is served.

N.C. R. Civ. Pro. 14(a)(emphasis added).

The third party complaint adding the thirteen new parties was filed 21 days after the Answer amending the counterclaim against AP.  Timely?  Not under federal Rule 14, which says that:

the third-party plaintiff must, by motion, obtain the court's leave if it files the third-party complaint more than 14 days after serving its original answer.

FRCP 14(a)(1)(emphasis added).

The absence of the word "original," or any reference to amended pleadings in NCRCP 14, led Judge Bledsoe to rule that the words "answer to the complaint" in NCRCP 14 were ambiguous.  Op. ¶18.  He then embarked on an effort to determine the intention of the North Carolina Legislature in adopting a rule that did not parrot the "original answer" language of FRCP 14.

It Was Fundamental To The Court's Decision That The NC Legislature Is Presumed To Know Everything

He started with the proposition that:

Because North Carolina’s rule was first enacted in 1967, and because the Court must presume the legislature acted with full knowledge of prior and existing law, the Court must presume that the legislature knew of the language in Federal Rule of Civil Procedure 14 and — and continues to make — a deliberate decision not to use it in North Carolina’s rule.

Op. ¶21.

The presumption that the NC Legislature was omniscient and well versed in the Federal Rules of Civil Procedure is not something that Judge Bledsoe created out of thin air.  The North Carolina Supreme Court has said many times that "[i]t is always presumed that the legislature acted with care and deliberation and with full knowledge of prior and existing law."  See, e.g., State v. Benton, 276 N.C. 641, 174 S.E.2d 793, 805 (1970).

Judge Bledsoe moved on to considering the meaning of the words "original answer" in the federal rule, concluding that it "would be the first or earliest answer filed in a lawsuit, as no answer would have been filed before it."  Op. ¶23. It follows from that proposition that North Carolina's version of Rule 14 doesn't make a distinction between original or amended pleadings.  Op. ¶23.

So, AP was allowed to amend its third party complaint -- without leave of Court -- to add more than a doen new parties to the case well more than a year after the case was first filed.

Judge Bledsoe obviously had some uneasiness about this ruling, saying that he made his decision "reluctantly."  Op. ¶23.

 

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NC Business Court Rules On What Constitutes An "Arbitration"

You've probably never had to decide what it means to agree to arbitrate.  Usually, there is a written provision that references the AAA Rules and includes a consent to AAA's procedures as to the appointment of the arbitrator(s) and the conduct of the procedure. And most usually, the word "arbitration" is used in the provision.

Lately, however, the NC Business Court wrestled with two cases in which there was no provision referencing the AAA, no mention of the words "arbitrate" or "arbitration" but only a provision deferring resolution of some financial issues to an accountant.

The more recent one is Martin & Jones, PLLC v. Olson, 2017 NCBC 85.  The earlier case (unpublished) is Post v. Avita Drugs, LLC.  It is worth it to me to point out that I would not have known about the Post decision if it wasn't referenced in the Martin & Jones decision.  Back before the Business Court revamped its filing system, my software program would have caught the Post decision.  Now?  Not possible.  I hate that new filing system.  Maybe those of you filing cases in the Business Court like it.

Anyway, having vented and now feeling a little better, I can turn to the Post decision.  Post had sold his business to Defendant Avita.  The purchase price included an deferred earnout payment based on "six times (6x) the difference between (a) Adjusted EBITDA and (b) $925,000.

After the sale was completed, Post disputed Avita's calculation of Adjusted EBITDA.  He contended that Avita had depressed the amount of the Adjusted EBITDA by using improper accounting standards.

A Dispute Can Be "Arbitrated" By An Accountant If The Procedure Resembles "Classic Arbitration"

The Stock Purchase Agreement specified how a dispute over Adjusted EBITDA should be resolved. It said that:

the determination of Adjusted EBITDA shall be submitted promptly to [an] Independent Accountant for determination in accordance with this Agreement and the determination of the Independent Accountant shall be binding and conclusive for the purposes of this Agreement absent manifest error by the Independent Accountant” (the “Independent Accountant Process”).

After Post sued Avita, Avita moved to stay the case pending the resolution of the "Independent Accountant Process."  It made that Motion per G.S. §1-569.7, which is a motion to compel or stay arbitration.

As Judge Conrad concisely framed the issue, it was "whether [the] independent accountant process is an 'arbitration.'" Order ¶2.  You might think that the Federal Arbitration Act, which governed that issue, would contain a definition of "arbitration,"  but it doesn't.  Judge Conrad, looking to federal court decisions on whether an agreed dispute resolution procedure fit the definition of arbitration, held that:

courts routinely consider 'how closely the specified procedure resembles classic arbitration.' Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1, 7 (1st Cir. 2004).  The question is whether the agreement exhibits the 'common incidents of arbitration': a final determination by 'an independent adjudicator,' 'substantive standards,' 'and an opportunity for each side to present its case.' Id. at 7.

Order ¶13 (emphasis added).

Judge Conrad found that the terms setting out the Independent Accountant Process met the standard of "classic arbitration."  The parties had agreed to a "binding and conclusive" determination.  The agreement required the application of "substantive standards" via a definition in the Stock Purchase Agreement of how Adjusted EBITDA should be calculated.  Furthermore each side was afforded the opportunity to present whatever written materials it deemed relevant.  Order ¶¶14-15.

This Procedure Did Not Resemble "Classic Arbitration"

The result was different in the second Business Court decision, Martin & Jones, which was a dispute among former law firm partners regarding the amount to be paid to the Plaintiff for his retirement benefits per the law firm''s Operating Agreement.  That agreement, like the agreement in the Post case, called for the involvement of an accountant if there was disagreement.  It said that:

in the event of a dispute among the Members with respect to the determination of the net cash flow, net profit, net losses or capital account balances of the Law Firm, an independent certified public accountant shall be engaged by the Law Firm at the Law Firm’s expense whose computation of such items shall be binding upon all the Members.

Op. Par. 15.

The two flaws in the argument that this accountant-oriented provision should be treated as an arbitration as pointed out by Judge McGuire were that:

the Operating Agreement does not set forth any 'substantive standards' such as procedural guidance for selecting the independent CPA,or the method by which the independent CPA will make a determination. Furthermore, the Operating Agreement does not state whether, or how, each side will have the 'opportunity  . . .  to present its case.'

Op. Par. 19.

So if you want a CPA to be acting as the arbitrator of a dispute arising under a document that you drafted, set the appropriate rules of a "classic arbitration."