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  The earlier case (unpublished) is Post v. Avita Drugs, LLC.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."


Five Things You Should Know About Discovery Under The New Business Court Rules

There are new Rules for the NC Business Court In effect, as of January 1, 2017.  If you have a case in the Business Court, or are expecting to designate a case there, you should look them over.  They are applicable to all actions currently pending in the Business Court.

If you are not willing to take the time to read the new Rules (which is not recommended), here are five things which affect discovery in the Business Court under the new Rules:

Be Courteous And Cooperative

New Rules 10.1 through 10.8 govern discovery.  The new Rules dictate cooperation in discovery.  Rule 10.1 (titled "general principles") says that:

The parties should cooperate to ensure that discovery is conducted efficiently. Courtesy and cooperation among counsel advances, rather than hinders, zealous representation.

If you think that this is a new and unfairly burdensome obligation, you are in the wrong profession.  The North Carolina Revised Rules of Professional Conduct say that "[l]awyers are encouraged to treat opposing counsel with courtesy and to cooperate with opposing counsel when it will not prevent or unduly hinder the pursuit of the objective of the representation."  Comment 1 to RRPC 1.2


The Rules make a specific reference to the concept of "proportionality," which was incorporated into the Federal Rules of Civil Procedure with the 2015 amendments to those Rules.  New Rule 10.3(a) says that in the Case Management Conference:

Counsel should discuss the scope of discovery, taking into account the needs of the case,the amount in controversy, limitations on the parties’ resources, the burden and expense of the expected discovery compared with its likely benefit, the importance of the issues at stake in the litigation, and the importance of the discovery for the adjudication of the merits of the case.

If you find this to be a startling limitation on the scope of discovery, it isn't.  NCRCP 26(b)(1a), effective in 2015 and captioned "limitations on frequency and extent," references much the same concepts.  If you have an interest in mastering the challenge of proportionality, the drafters of the new Business Court Rules recommend studying A Practical Guide in Achieving Proportionality under New Federal Rule of Civil Procedure 26, 9 The Fed. Cts. L. Rev. 20 (2015).

Electronically Stored Information (ESI)

The new Rules speak more specifically to electronically stored information (ESI), more so than did Old Rule 17.1(t), which mentioned only "metadata.".  New Rule 10.3(c) says that counsel for the parties should prepare an ESI protocol —an agreement between the parties for the identification, preservation, collection, and production of ESI."  The Rule goes on to suggest the items that should be covered, like "the specific sources, location, and estimated volume of ESI" and how the search should be conducted.  When should this happen?  Per new Rule 9.1(d), at the Case Management Meeting.  That meeting is required to happen no more than sixty days after the designation of the case to the Business Court.  (new Rule 9.1(b)).

Interrogatories, Requests For Admission, And Depositions

Interrogatories and requests for admission are limited to no more than twenty-five (new Rule 10.4(b)).  That's half the number permitted by the past set of Rules, which allowed for fifty of each (old Rule 18.2).  The number of depositions allowed remains unchanged-- to no more than twelve by each party.  (new Rule 10.4(c); old Rule 18.2),  Though under the old Rules, Rule 18.2 excluded "testifying experts" from the limitation of twelve.  The new Rules make no such exclusion, so this represents somewhat of a limitation.

All depositions are subject to a time limit of seven hours.  New Rule 10.7(a).  You might remember that when Rule 30 of the Federal Rules of Civil Procedure were amended in 2000  to provide for the same time limit, that there initially was debate about whether the time taken for breaks -- like coffee, lunch, or a trip to the bathroom -- was included in the time limit.  It wasn't really much of a debate, since the federal advisory committee notes actually resolved that question. The notes say “[t]]his limitation contemplates that there will be reasonable breaks during the day for lunch and other reasons, and that the only time to be counted is the time occupied by the actual deposition.”

The new Business Court Rule 10.7(a) resolves that practical issue on its face, it says that the seven hours is measured by "on--the-record time."

The new Rule contains some clarification for 30(b)(6) depositions.  A party providing a 30(b)(6) witness may often present multiple witnesses, each addressing a separate 30(b)(6) topic.  Rule 10.4(c) says that "for depositions conducted pursuant to Rule 30(b)(6), each period of seven hours of testimony will count as a single deposition, regardless of the number of designees presented during that seven-hour period."

Streamlined Procedure For Resolving Discovery Disputes

In a new approach for resolving discovery disputes, new Rule 10.9(b)(1) requires the moving party to "initiate a telephone conference among counsel and the presiding Business Court judge about the dispute."  in order to initiate this telephone conference, the moving party a party first must e-mail a summary of the dispute [of less than 700 words] "to the judicial assistant and law clerk for the presiding Business Court judge and to opposing counsel."  The opposing party has seven calendar days to respond with an equally pithy (700 word) response.  After receiving the response, the Judge can either require the filing of a formal motion and a brief, or rule based on the summaries.

It will be interesting to see how this approach works.  Maybe the Business Court Judges will be innundated with telephone conferences.  Or maybe, after the lawyers exchange the summaries, they will be infected with the spirit of courtesy and cooperation dictated by new Business Court Rule 10.1.

Credit Where Credit Is Due

I was guided in preparing this post by a document prepared by the principal drafters of the new Rules, including my partner Jennifer Van Zant, who seems to get mentioned on this blog more than any other Brooks Pierce lawyer.  The document was prepared quite a while ago (in May 2016), so the Rule changes actually implemented may vary from what are described in it.  It is titled Key Features of Proposed Changes to the North Carolina Business Court Rules.

I am working on adding the Revised Rules to the Sidebar of this blog.  They have been hyperlinked by my assistant Nancy Preslan, who is undoubtedly the best legal assistant in the world.  "Hyperlinked," in this case, means that you can clink on any Rule in the table of contents and hop to that Rule, and then click on the Rule itself to return to the Table of Contents.  That saves a lot of paging back and forth.  For now, they are here.





You Can Designate A Case To The NC Business Court Based On A Counterclaim, But It Can Be Tricky

The Business Court issued a significant Order last week, in Composite Fabrics of America, LLC v. Edge Structural Composites, Inc., 2016 NCBC 11 that Judge Gale said was an "opportunity to clarify. . .how the Court interprets the statutory mandates for designating a case as a mandatory complex business case"  and that the Business Court is not a court of separate jurisdiction.  Order 2.

Some Guidance About Designating A Case To The Business Court As A Mandatory Business Case Based On A Counterclaim

A counterclaim can be the basis for a notice of designation.  That Is true even though the statute governing a designation of a case to the Business Court (N.C. Gen. Stat. §7A-45.4(d)) does not mention a counterclaim as a basis for a designation.  It says only that a notice of designation may be filed:

by the plaintiff, the third-party plaintiff, or the petitioner for judicial review contemporaneously with the filing of the complaint, third party complaint, or the petition for discretionary review in the action.

N.C. Gen. Stat. §7A--45.4(d)(1).

Notwithstanding the absence of any mention of a counterclaim in the statute, Judge Gale ruled that the Court interpreted that language to include counterclaim plaintiffs and counterclaims as well as the party against whom a counterclaim is being asserted.  Order 18.

Thus, he concluded, that "a party may use its counterclaim as the basis for a notice of designation.  Order 9. 

If a party wants to base its notice of designation on both the Complaint and its own counterclaim, it needs to act quickly. The thirty day time limit on filing a notice of designation (contained in G.S. §7A-45.4(d)(3) plays a role here. Judge Gale said that:

if a counterclaimant wishes to rely on the opposing party's complaint as well as its own counterclaim as a basis for mandatory designation, the notice of designation would need to be filed within thirty days of service of the complaint and contemporaneously with the counterclaim.

Order 19.  That would require the Answer containing the counterclaim (and the contemporaneous notice of designation) to be filed more quickly than they might ordinarily be filed given the general practice of getting a thirty day extension of time to file an Answer.

If the counterclaim is the first pleading to warrant a designation, then the opposing party has thirty days from the date of service of that pleading to file a notice of  designation.  But things are different if the counterclaim is the first pleading to raise an issue that qualifies for mandatory designation.  Then, the thirty day period is measured from the filing of the counterclaim.  That's so long as the new pleading "is not being made for an improper purpose."  Order 21.

Things can be tricky if the notice of designation is based on the Complaint, before the counterclaim is filed.  But what if the notice of designation is filed based upon the Complaint, and the party seeking designation then files a counterclaim that would warrant a designation?  That was the situation faced by Judge Gale in the case before him. He said that "[w]hether [this type of situation] involves material issues within the scope of section 7A-45.4(a) must therefore depend on the allegations in the . . . Complaint."  Order 22.  But even so, the Business Court would consider the counterclaims "to inform it" whether [the claims made in the Complaint] necessarily include material issues that fall within the scope of the matters upon which a designation is allowed.  Order 23.

You can lose your right to designate a case on a counterclaim. If you forego designating a case which would have been appropriate for a mandatory designation based on the Complaint and let the thirty day period for designating lapse, you can't "renew [your] right to designation by filing a counterclaim."  Order ¶20.

Beware of Business Court Rule 3.2

Business Court Rule 3.2 is titled "Contents of Notice of Designation."  It directs the party filing a notice of designation "to not only describe how the case falls within one or more categories of section 7A-45.4, but to further identify factors that demonstrate why the Business Court is the appropriate venue for that case."  Order 24.

The portion of that  Rule requiring the designating party to "further identify factors" warranting designationis a survivor from the early days of the Business Court, before the NC General Assembly enacted the statute specifying "mandatory designations."  Cases were then designated to the Business Court through a discretionary assignment by the Chief Justice of the NC Supreme Court.

Judge Gale said of BCR 3.2 that its factors:

are useful in managing and assigning cases among the Business Court judges and may be useful in resolving requests for discretionary assignments.  But those factors do not provide a stand-alone basis for mandatory designation.  For a case to be certified as a mandatory complex business case, the pleading upon which the designation is based must raise a material issue that falls within one of the categories specified in section 7A--45.4.

Order 25.

Business Court Rule 3.2 is not long for this world.  Amended Rules are in the works.  The new Rule 3.2, which I've had an opportunity to see, not longer deals with the "contents of a designation."  The proposed new rule is captioned "Who may file", covering who can use the Court's electronic filing system..

The Business Court Is Not A Court Of "Separate Jurisdiction"

Judge Gale observed that "litigants often refer to the 'Business Court''s jurisdiction" and to its "subject-matter jurisdiction."  Order 26. 

But he questioned the use of those terms, stating that the Business Court is "merely an administrative division of the superior court in the General Court of Justice."  And a Business Court Judge is just a type of Superior Court Judge:

Just as a special superior court judge may be assigned to matters in any of these counties, when a Business Court judge is assigned to a case that has been designated as a complex business case, whether by a mandatory or discretionary assignment, he is commissioned to preside over that entire case until its conclusion, and he proceeds with the same authority as any other superior court judge who may be commissioned to hear matters in that case.

Order 27.

Coincidentally, the North Carolina Court of Appeals observed this week that the Business Court "is a superior court."  .  It said in American Mechanical, Inc. v. Bostic that:

while the Business Court is tasked with the adjudication of cases involving specialized subject matters by judges who have been designated for this purpose, it remains a part of the superior court division of the General Court of Justice.

Id. at 14.

The Terms "Removal" And "Remand" Don't Apply To Business Court Designations

I''m not sure why Judge Gale found it necessary to discuss the nature of the Business Court's jurisdiction, but he did use the Composite Fabrics Order to point out that the words "removal" and "remand" shouldn't be used when discussing a designation to the Business Court or a successful opposition to a designation.  Those words are concepts of the process by which cases commenced in state court are transferred to federal court  Cases are "removed" from state court to federal court per 28 U.S.C. §1446(a), and they can be sent back to state court (remanded) per 28 U.S.C. §1447

Lawyers in the Business Court often pick up on those terms, saying that a case is "removed" to the Business Court upon a successful designation, and "remanded" when an Opposition to a designation is granted.

Judge Gale pointed out that the designation of a Business Court case does not "remove" a case, as it always remains venued in the county in which it originated.  For that same reason -- that "the case has never left its county of origin" -- the withdrawal of a designation "does not constitute a 'remand'." Order 28.

So avoid using those terms when designating a case to the Business Court, or contesting a designation via an Opposition.


Shake Up At The NC Business Court

Yesterday, Governor Pat McCrory announced that he has appointed Raleigh lawyer Greg McGuire as a Special Superior Court Judge for a term beginning October 13, 2014.  The Governor's plan is to designate Judge McGuire as a Special Superior Court Judge for Complex Business Cases at the beginning of the Judge's term.

Judge McGuire will serve in Wake County, which means that he will be assigned to the Raleigh Business Court.

What about Judge Jolly, you are thinking?  He was been the Judge in the Raleigh Business Court since that Court opened.

I had been hearing for some time that Judge Jolly would be retiring soon due to his approaching of the mandatory retirement age of 72.  It appears that will not be the case, as the Business Court website now refers to Judge Jolly as a "Retired/Recalled Emergency Judge."  The Chief Justice is authorized, per G.S. §7A-57(3), to recall a Judge who has reached retirement age if the Chief Justice has determined that the Judge "is capable of efficiently and promptly discharging the duties of the office to which recalled."

One more change has occurred at the Business Court.  Judge Gale, who sits in the Greensboro Business Court, is now the Chief Special Superior Court Judge for Complex Business Cases.  That title was previously held by Judge Jolly.  Having the Chief Judge of the Business Court in Greensboro is as things should be, because everyone in North Carolina knows that Greensboro is the legal center of the State.

I have no information to pass on about new Judge McGuire, other than that he was a partner at Ogeltree Deakins in Raleigh.  His firm bio is here.  Ogeltree is nationally known for its labor and employment practice.


Mark Your Calendar For October 1st For Changes To The Business Court

If you litigate cases in the NC Business Court, mark your calendar for October 1st.  That's when the General Assembly's "modernization" of the Business Court is due to become effective.  The bill containing these changes was signed into law by Governor McCrory last week

I wrote about the proposed bill back in May, and you can look back at that post as most of the changes proposed in the initial version of the bill have made it through to the approved version.

There were some changes to the bill before it was passed, and here are a few new wrinkles:

Broadened Scope Of Appeals To The NC Supreme Court

In the original bill, the General Assembly authorized a direct appeal to the NC Supreme Court from any final judgment of the Business Court.

The enacted law broadens the scope of Business Court rulings that can be appealed to the Supreme Court, allowing appeals from an interlocutory order from the Business Court that does one of the following:

a.     Affects a substantial right.
b.     In effect determines the action and prevents a judgment from which an appeal   might be taken.
c.      Discontinues the action.
d.     Grants or refuses a new trial.

Revised G.S. §7A-27.

I'm worried about the Supreme Court getting bogged down in deciding whether an interlocutory order really "affects a substantial right."  The language regarding interlocutory appeals is identical to the language governing interlocutory appeals to the NC Court of Appeals. It seems like half of the decisions from the Court of Appeals go on for pages on that issue before deciding that the appeal before it doesn't "affect a substantial right" and should therefore be remanded to the trial court.  The Supreme Court may face the same quicksand. 

But even so, this change will provoke more business-related decisions from the NC Supreme Court.  That's certainly a good thing.  I'm at a loss to remember the last one -- it might be Meiselman v. Meiselman, 307 S.E.2d 551, 309 N.C. 279 (1983), decided over thirty years ago.

More Written Opinions From The Business Court

Under the enacted law, the Business Court Judges will be required to issue a written opinion granting or denying a motion under North Carolina Rules of Civil Procedure 12, 56, 59, or 60, "or any order finally disposing of a complex business case"  except for orders approving a settlement  or a jury verdict.  New G.S. §7A-45.3.

That's a significant expansion of the Court's opinion writing obligation.  Currently, its only obligation to issue a written opinion is "upon final disposition of the case" per Rule 2.1(b) of the North Carolina General Rules of Practice.

And the Court currently issues many one or two paragraph orders denying motions to dismiss (per Rule 12) or for summary judgment (per Rule 56).  Will those brief rulings constitute "written opinions" denying those motions, or will the Court need to engage in detailed discussion about why it is denying a motion?

Stay of Cases That Should Be, But Aren't Designated To The Business Court

The new law requires in G.S. §75A-4(b) that certain types of cases must be designated to the Business Court.  Briefly, these are contested tax cases on appeal from the Office of Administrative Hearings, many cases falling within the Court's jurisdiction in which the amount in controversy is at least $5 million, and cases involving regulation of pole attachments pursuant to G.S. §62-350.

On that $5 million threshold, the party drafting the pleading is obligated under an amendment to Rule 8 of the North Carolina Rules of Civil Procedure contained in the passed bill to state whether relief is demanded in that amount.

If the party filing a case which the statute requires be designated to the Business Court doesn't do so, the Superior Court in the county where the case was filed must stay the case until the party who was required to designate it has done so.  The original  version of the bill allowed a dismissal without prejudice as an alternative.  New G.S. §7A-45.4(g).

Designation Fee Now Recoverable As A Cost

It's expensive to designate a case to the Business Court.  The Legislature raised the fee to $1,000 in September 2009, and the new law raises the fee by $100, to $1100.  New G.S. §7A-305(a)(2)

But the good news now for parties who designate a case, and then prevail, is that the designation fee will now be a recoverable element of costs.  That's in new G.S. §7A-305(d)(12).  This change was lacking in the original version of the bill.


Appealing From Business Court Jurisdiction

You all know the procedure for getting into and out of the jurisdiction of the Business Court.  It's kind of like the Hotel California: "you can check in any time you like, but you can never leave."  I don't know why people fight so hard to leave "such a lovely place," but there are often challenges to the Court's mandatory jurisdiction, and the Chief Judge rarely grants them.

There's a "check out" procedure in G.S. §7A-45.4 which has never been used before.  It is about to be tested for the first time.   Section 7A-45.4(e) says:

Based on the opposition or ex mero motu, the Business Court Judge may determine that the action should not be designated as a mandatory complex business case. If a party disagrees with the decision, the party may appeal to the Chief Justice of the Supreme Court.

Unless I've missed it, which seems unlikely to me, no party has exercised the statutory right to challenge a Business Court Judge's denial of an opposition to its jurisdiction by an "appeal to the Chief Justice of the Supreme Court."

Well, now that is happening, in a case called Ekren v. K&E Real Estate Investments, LLC.  I am so excited that I can barely wait to see what will happen. 

The Ekren case, which from the Complaint looks like it is well within the scope of the Court's mandatory jurisdiction, has already been through the opposition procedure.  Judge Jolly denied the opposition to jurisdiction on April 4, 2012.

A "Motion for Supreme Court to Revoke Status As Mandatory Business Court Case" was filed by the Plaintiff on April 23rd.

Does the Motion qualify as an "appeal," which is what the statute dictates?  The Defendant has raised exactly that challenge in its Brief in Response to the Motion.  It says that the Plaintiff hasn't appealed by filing a Motion, and that it should have filed a Notice of Appeal.  The Plaintiff could have done that because Rule 3(a) of the Appellate Rules says that "[a]ny party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule."

An "appeal" is defined in one of my dictionaries as "an application or resort to another person or authority, esp a higher one, as for a decision or confirmation of a decision."  The Motion by Ekren certainly fits that definition.  It might have been more appealing to title it as  "Appeal to the Chief Justice to Revoke Status As Mandatory Business court Case."  And as far as whether a Notice of Appeal was necessary, can you even file a Notice of Appeal just to the Chief Justice, as opposed to the entire Supreme Court?

And there's one last question that I see.  The way that Section 75A-4(e) is worded, it seems to be limited to appeals from the Business Court's determination that a case is outside its jurisdiction, which is the opposite of the ruling in Ekren.

What happens now?  Only Chief Justice Sarah Parker can decide to handle this unusual procedure.  The eyes of the world are upon her.

[Update:  The Chief Justice denied the "appeal" in a summary order on May 17th.  I wrote about that here.]



Five Reasons You Should Care About The Rulings From The North Carolina Business Court Even Though The NC Court Of Appeals Says You Shouldn't

The NC Court of Appeals said earlier this month in Browne v. Thompson that the decisions of the Business Court have "no precedential value."  Being a big fan of the Business Court, that rankled me. And being the author of a blog which focuses on the Business Court, it caused me to question my reason for writing.

In the Browne opinion, which affirms an opinion from Judge Jolly granting a motion to dismiss the case, Judge Steelman of the COA dissed the Business Court at the same time he affirmed it.  Judge Steelman was scoffing at the Plaintiffs’ reliance on several Business Court decisions in support of their unsuccessful appeal. He said:

The remaining cases cited by plaintiffs are decisions of the North Carolina Business Court. The Business Court is a special Superior Court, the decisions of which have no precedential value in North Carolina.

That was a strong statement. NO precedential value? Really?  Not even a little bit? So why should North Carolina lawyers care what the Business Court does (or why should they even bother reading this blog)?

Here are my top five reasons to disagree with Judge Steelman:

First, the Business Court is on the front line of business law issues in North Carolina. If you want to be up to date on corporate matters, you need to know what the Court is dealing with.  Disregard it at your peril, precedential or not

Second, the Court was formed, as stated by Rule 2.2 of the General Rules of Practice, in recognition of the "desirability of a state having a substantial body of corporate law that provides predictability for business decision making. Also, it is essential that corporations litigating complex business issues receive timely and well reasoned written decisions from an expert judge."  There's no predictability without precedent.

Third, the Business Court is a quality court. It has smart, capable Judges. The opinions are thorough, well-reasoned, and well-written. The Court has been described as “a model for the nation.”  The opinions are worth treating as having precedential value.

Fourth, while Judge Steelman is probably right from a legal standpoint that the Business Court's decisions are not binding precedent, he is ignoring the value of those decisions as “persuasive precedent."  What's the difference in the types of precedent?

Persuasive precedent:

is precedent or other legal writing that is related to the case at hand but is not a binding precedent on the court under common law legal systems such as English law. However, persuasive authority may guide the judge in making the decision in the instant case. Persuasive precedent may come from a number of sources such as lower courts, "horizontal" courts, foreign courts, statements made in dicta, treatises or law reviews.

I don't think the term has ever been used by the NC Court of Appeals.  The best definition I've found for it comes from Wikipedia

It's not unusual for appellate courts to look to trial courts for persuasive guidance.  Does the Fourth Circuit Court of Appeals disregard the opinions of the District Courts within the geographic area of the Circuit?  Of course not.  And other state appellate courts look to trial court opinions for their persuasive value  See, e.g.,State Farm Fire & Cas. Co. v. Estate of Mehlman 589 F.3d 105, 108 (3d Cir. 2009)("Inasmuch as Pennsylvania law governs this action we treat Pennsylvania Supreme Court opinions as binding precedent and Pennsylvania Superior Court opinions as persuasive precedent.").

Last, if you are litigating in the Court, and you don't know how Business Court Judge Jolly, Judge Gale, or Judge Murphy ruled in the past in similar cases, you are litigating in the dark.  Maybe their past rulings are not precedent but only representative of their individual habit, but it's good to know about them nevertheless.

Maybe the Court of Appeals could take their heads out of the sand about the precedential value of Business Court opinions.

And if you have time, let me know if any of you have been successful in persuading non-Business Court Superior Court Judges that they should follow a decision of the Business Court or whether their reaction was to say there's "no precedential value."




I'm Back With An Update on Six Business Court Cases

i was gone (not fishin') for the entire month of September.  I haven't written on this blog since August and nobody has noticed.  Nobody has emailed me to ask where the heck I was or what I was doing or whether anything worth knowing had happened in the Business Court  The lack of any outcry about my absence hurt my feelings, but I am back even so with this September update on cases in the Business Court decided during the missing September.  They ran the gamut, from subpoenas to injunctions to how not to get an extension of time in the Business Court.

Standing to Object to Subpoenas to Non-Party Banks

In Deyton v. Estate of Kenneth C. Waters, Jr., 2011 NCBC 34, Judge Gale ruled that a party to a lawsuit lacked standing to object to a subpoena sent by the opposing party to a non-party bank.  The Judge observed that "as a general proposition, parties to a lawsuit typically lack standing to challenge a subpoena issued to a third party." 

Although there is an exception to that general rule if the objecting party has privilege in the documents requested,  the moving party attempted to invoke, Judge Gale held there is not a privilege created in bank records by the Federal Right  to Privacy Act of 1978 (12 U.S.C. §3402) or the North Carolina Financial Privacy Act (N.C. Gen. Stat. §53B-1, et seq.).

The rule might be different in federal court.  Judge Gale stated in a footnote that an Eastern District of North Carolina court has said in United States v. Gordon, 247 F.R.D. 509, 510 (E.D.N.C. 2007) that "[a] small number of courts have held that a party's claimed privilege with respect to his or her bank account records is sufficient to confer standing for purposes of challenging a subpoena."

In another case decided on the same day, Jones v. Sutherland, Judge Murphy, without the benefit of the Deyton discussion, considered an objection by a defendant to a subpoena to a non-party bank.  He denied the motion to limit the subpoena even though it covered a nine-year "extensive time period," saying it was not "designed to be a fishing expedition."

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The Teacher Becomes the Student: Delaware Creates Its Own Business Court

The North Carolina Business Court was formed in 1995, largely inspired by Delaware's Chancery Court.  Our state recently returned the favor:  Delaware now has created its own business court division of its Superior Court, sparked by the experiences of North Carolina and sixteen other states.  Delaware's new Complex Commercial Litigation Division (“CCLD”) shares some common elements with our Business Court, but differs in other aspects.

For the core details of the CCLD, we recommend the summaries from two blogs that you should be reading anyway:  the Delaware Corporate and Commercial Litigation Blog and the Delaware Business Litigation Report.  In addition, if you'd like to see how business courts in other states are structured, you should check out the appendix to the report of the Delaware special committee that was appointed to survey such courts.

Like our Business Court, the CCLD features assignment of a case to a single judge from cradle to grave and more uniform, intense, and proactive case management than in the courts of general civil jurisdiction.  Here are a few interesting comparisons and contrasts between the CCLD and our Business Court:

Topical Definitions of Jurisdiction:  To qualify for mandatory complex business designation in North Carolina, a case must fit into at least one of seven defined categories:  corporate or other entity law, securities law, antitrust law, state trademark or unfair competition law, intellectual property law, Internet / e-commerce / biotechnology, and certain tax cases.  The CCLD, on the other hand, has a list of categories that will be excluded per se from its jurisdiction:   personal, physical, or mental injury cases; mortgage foreclosure cases; mechanics’ lien cases; condemnation proceedings; and any case involving an exclusive choice of court agreement where a party to the agreement is an individual acting primarily for personal, family, or household purposes or where the agreement relates to an individual or collective contract of employment.

Choice of Court Agreements:  Speaking of that last clause, the CCLD has jurisdiction over any case not otherwise excluded in which the parties have selected the CCLD through an exclusive choice of court agreement.  There is no corresponding provision in our statutes or rules that permits parties to contractually "select" the Business Court if a case does not qualify through mandatory jurisdiction or Rule 2.1 practice, although it would be interesting to see how many North Carolina businesses would utilize such clauses in their contracts if permitted.

Amount in Controversy:  As long as the subject matter is not excluded, the CCLD will have jurisdiction over any case with $1 million or more in controversy.  North Carolina does not have any such qualifying amount.  Nevertheless, a large amount in controversy may influence the decision of a Senior Resident Superior Court Judge to recommend complex business designation under Rule 2.1 (or exceptional case designation under Rule 2.1).

Judicial Assignments:  North Carolina has three Special Superior Court Judges who focus on cases assigned to the Business Court.  They occasionally are drafted to fill in for other Superior Court judges for regular civil or even criminal trial calendars, but that is an irregular occurrence.  The three judges of the CCLD, in contrast, apparently will continue to hold regular civil terms hearing both CCLD cases and cases that do not qualify for CCLD designation.  CCLD cases automatically will take priority over non-CCLD cases on a judge's calendar.

Designation Procedure:  In North Carolina, a mandatory complex business case is designated by filing a Notice of Designation with the Clerk of Superior Court, with copies to the Chief Justice and the Chief Business Court Judge.  Cases outside mandatory complex business jurisdiction can be assigned to the Business Court upon motion to the Senior Resident Superior Court Judge, who makes a recommendation to the Chief Justice, who ultimately determines whether or not such a case will be assigned.  Delaware makes it easier:  a qualifying case can be designated by typing the appropriate four-letter code on Delaware's equivalent of our AOC's Civil Action Cover Sheet (AOC-CV-751, for those of you scoring at home).  In both states, a party opposing designation can challenge it by filing the analogue of a federal court motion to remand, and in both states, such a motion is resolved by the presiding judge of the specialized court.


An Important Procedural Point For Contested Tax Cases In The North Carolina Business Court

Read this if you litigate with the North Carolina Department of Revenue over tax matters, or know someone who does. The subject is a Business Court decision which makes clear an important prerequisite for obtaining review of a tax case in the Court.

The Business Court has jurisdiction over parties seeking judicial review of a contested tax case decided in the Office of Administrative Hearings by an Administrative Law Judge. It has had such jurisdiction since 2008 amendments to the General Statutes, including Section 7A-45.4(a)(7) and Section 105-24.16, which says that:

A taxpayer aggrieved by the final decision in a contested case commenced at the Office of Administrative Hearings may seek judicial review of the decision in accordance with Article 4 of Chapter 150B of the General Statutes. Notwithstanding G.S. 150B-45, a petition for judicial review must be filed in the Superior Court of Wake County and in accordance with the procedures for a mandatory business case set forth in G.S. 7A-45.4(b) through (f). A taxpayer who files a petition for judicial review must pay the amount of tax, penalties, and interest the final decision states is due.

The statute says that the taxpayer must pay the tax with penalties and interest, but it doesn't say when the payment is to be made and says nothing about payment being a prerequisite to judicial review .

In Franklin County Board of Education v. North Carolina Department of Revenue, 2009 NCBC 28 (N.C. Super. Ct., December 23, 2009), the first case in the Business Court seeking judicial review pursuant to the statute, Franklin County hadn't paid the tax and interest before filing its Petition. The Department of Revenue pointed this out to the County, and the County promptly paid in full. Nevertheless, DOR moved to dismiss because the payment had not been made before the filing in the Business Court.

Judge Tennille denied the Motion based on his power under G.S. §150B-45 to allow an untimely Petition "for good cause shown." He said that the statute "is not a model of clarity," and that it "should have made it clear that the tax, penalties, and interest had to be paid before or contemporaneously with the filing of the Petition." He also pointed out that DOR had not said in the Notice of Appeal Rights provided to the County that it was required to pay the tax before seeking judicial review. 

That pass given to Franklin County won't extend to future cases, and that's the important part. The Court said "[n]ow that the Statute has been clarified by the Court, attorneys are on notice of the requirement." DOR will presumably provide notice of this requirement to taxpayers, because the Court said that DOR "would be well advised to make the payment requirement clear in its notice of appeal procedures."

Take A Look At The New Raleigh Business Court

Here are a few pictures of the new North Carolina Business Court in Raleigh, thanks to Judge Jolly and his staff giving me a quick tour yesterday. The Court moved to the Campbell Law School's new Raleigh building on October 1st.

You'll see that there is a broad stretch of windows behind the Judge's bench, which look out on Hillsborough Street. Most new courtrooms don't seem to have windows. In addition to letting in some natural light, these will prove useful for daydreaming during tedious trial moments.

Also, there are two colorful, modern paintings of downtown Raleigh in the courtroom. Those aren't your typical courtroom art of former judges holding law books.

Beyond that, the courtroom has all the technological bells and whistles of the Business Courts in Raleigh and Charlotte.

[If you can't see the slideshow, try this link:

Created with Admarket's flickrSLiDR.

Business Court Is Getting More Expensive

If you are getting ready to designate a case to the North Carolina Business Court, you might want to go ahead and do that in the next few days. That's because starting September 1, 2009, it's going to cost your client a bunch more money to have a case heard in the Business Court.

Effective September 1st, the fee due to the Clerk of Court in the county where the case was filed will increase to $1,000.  It was previously only $200.  The change will be codified at N.C. Gen. Stat. §7A-305(a)(2)("Costs in Civil Actions").

Business Court Rule 3.4 deals with the payment of the fee. It says that the payment is due to the Clerk of Court immediately upon counsel's receipt of the Order assigning the case to the Business Court.  The Rule also says that the fee is non-refundable in the event that the case is later remanded to Superior Court. 

Business Court Jurisdiction Is Forever

Once the Business Court takes jurisdiction over a case, that jurisdiction remains in place for the life of the case, regardless of dismissals of parties or changes in the nature of the claims.

That was the ruling of the Court last week in Mattress Now, Inc. v. KS Bank, Inc. in response to the Plaintiff's Motion to Remand.

The case had been designated to the Business Court by the Defendant Bank, which was one of two defendants. The Plaintiff challenged that designation, but the Court rejected Plaintiff's arguments in an earlier ruling and refused to remand the case.  After that, the Plaintiff settled the claims involving the Bank.

Plaintiff then moved again to remand.  It asserted in its Motion that the remaining claims "do not involve the corporate law and banking issues that justified removal of this case to the Business Court" and that none of the issues "require the expertise of the Business Court."

Judge Tennille, in a very short ruling, held "[t]his case was designated a mandatory complex business case pursuant to North Carolina General Statute Section 7A-45.4 on August 12, 2008. Once jurisdiction attaches, it remains attached for the entire case."

The NC Business Court Now Has Jurisdiction Over Utility Poles

The Business Court now has jurisdiction over utility pole disputes between communications providers and municipalities.  That surprising expansion of the Court's jurisdiction is thanks to a new law passed at the just concluded session of the North Carolina Legislature.

New section 62-55 of the General Statutes requires a municipality that "owns or controls poles, ducts, or conduits" to allow a "communications service provider" to have access to those resources at "just, reasonable, and nondiscriminatory rate." (The statute doesn't apply if the poles, ducts, or conduits are subject to federal regulation under the Communications Act of 1934).

If a provider makes a request for access, and the request is refused, the new statute provides that either party can have its claim resolved by the Business Court, which will have exclusive jurisdiction over the dispute. The jurisdiction kicks in only after the expiration of a 90-day negotiation period or before then if either side "believes in good faith that an impasse has been reached."

The law became effective July 10, 2009. Earlier this week, in Town of Murphy v. Verizon South, Inc., Judge Tennille discussed the new statute and the procedure that the Business Court intends to follow with respect to utility pole disputes. Among other things,the Court discouraged "gamesmanship" which might result in a party rushing to file a lawsuit before the expiration of the 90 day negotiation period. Judge Tennille said "[t]he parties would be well advised to use the mediation process if their negotiations are not proving fruitful and leave it to the mediator to declare an impasse."

In the Town of Murphy case, Judge Tennille remanded a utility pole dispute to Cherokee County Superior Court. The case had been filed before the effective date of the statute, and Judge Tennille ruled that the new law was not retroactive.

Can You Designate A Case From North Carolina District Court To The Business Court?

Here's a new one. Can you make a mandatory designation of a case directly from North Carolina District Court to the Business Court?  Believe it or not, there are circumstances under which you might want to do that, so the Business Court's opinion this month in Bailey Pointe Homeowners' Association v. Strong is worth knowing about.

Start from square one: The District Court has jurisdiction over matters involving $10,000 or less and the Superior Court has jurisdiction over cases exceeding $10,000 (per G.S. §7A-243).  Since the Business Court is a part of the Superior Court division of the trial courts, a case that falls under District Court jurisdiction can't be designated to the Business Court because there isn't sufficient amount in controversy to qualify for Superior Court jurisdiction.

But it happens that cases are filed in District Court which involve more than $10,000.  Or there are District Court cases in which counterclaims are made for more than that amount and which properly belong in Superior Court.  Or there might be a case filed in District Court asking for injunctive relief against a statute, for which Superior Court is the correct division under G.S. §7A-245.  In all of these circumstances, there's a mechanism in G.S. §7A-258 for transferring a case from District Court to Superior Court.

So let's say you are representing the Defendant in a District Court case which wasn't properly filed there because it involves more than $10,000, or in which you are going to counterclaim for more than $10,000, and the issues in the case otherwise make it appropriate for mandatory jurisdiction in the Business Court   Can you jump the case straight from District Court to the Business Court?

The answer is no.  In Bailey Pointe, the Plaintiff sought to designate the District Court case it had filed to the Business Court.  The designation was based on counterclaims raising corporate governance claims and seeking in excess of $10,000 in damages.  Judge Tennille held that G.S. §7A-45.4(b) says that cases are designated "by filing a Notice of Designation in the Superior Court in which the action has been filed. . . ."  So, he held, "only actions filed in or transferred to Superior Court may seek mandatory complex business designation."

In other words, you can't hopscotch directly from District Court to Business Court.  Judge Tennille denied the Notice of Designation by the Plaintiff in Bailey Pointe, and held that the only route to the Business Court for that Plaintiff was a motion to the Chief District Court Judge, per Rule 2.1 of the General Rules of Practice, to recommend that the case be designated as a complex business case. 

Choice Of Law For Professional Liability Claims Against Accountants: North Carolina Business Court Adopts The "Audit State Test"

Until today, there wasn't any law in North Carolina on the proper choice of law analysis to decide what state's law to apply in an accounting malpractice case.  That changed with the North Carolina Business Court's decision today in Harco Nat'l Ins. Co. v. Grant Thornton LLP, 2009 NCBC 11 (N.C. Super. Ct. April 20, 2009)

Harco sued Grant Thornton, alleging that it relied on the accounting firm's audit of Capital Bonding Corporation, a Pennsylvania company, in deciding to participate in a bonding program.  Capital failed and Harco paid millions of dollars in claims for bonds issued by Capital.

The claim touched at least three states: Illinois, where both Harco and Grant Thornton are headquartered; Pennsylvania, where Capital was based and where Grant Thornton did its auditing of Capital; and North Carolina, where Harco directed its operations with regard to the bonding program, Harco's key officers were located, and where Harco paid its first and some of its most significant losses on the bonding program.

The three states have very different approaches to the duty of care owed by an auditor to a third party claiming reliance on an audit opinion.  Grant Thornton moved for summary judgment relying on Illinois law, which requires near privity, a standard very favorable to accountants when they are sued by third parties claiming to have relied upon an audit.  In fact, Judge Tennille said that Grant Thornton would have been entitled to summary judgment under Illinois law.

Harco argued for the application of North Carolina law, which is less favorable to accountants.  North Carolina follows the test  of the Restatement (Second) of Torts §552, which is not as stringent a standard as privity but which requires more than reasonable forseeability. 

Judge Tennille, however, ruled that Pennsylvania law should apply, under what he referred to as the "Audit State Test."  He held that "[t]he law of the state where an audit is performed, delivered, and disseminated (the 'Audit State') should control the scope of liability to third parties not in privity with an accountant."  Op. ¶30. 

The justifications for this choice of law standard, according to Judge Tennille, are that "the Audit State has the most significant public policy interest in the liability of auditors performing audits within the state for local companies," and that it "provides clarity, certainty, and consistency for the auditing profession and those relying on the auditor's work."  This will promote "clear risk analysis" for both the auditor and those relying on the auditor's work. Op. ¶¶31-32.

The clarity will be only short-lived, because Pennsylvania has not clearly staked out a position on the issue of the liability of auditors to third parties. 

The painting at the top is of Luca Pacioli, the "Father of Accounting."  According to the website of the American Institute of Incorporated Public Accountants, Pacioli said "do not go to bed at night until the debits equal the credits." 

Harco Amended Brief In Support Of Choice Of Law Determination

(Grant Thornton's Brief was filed under seal).

Raleigh Business Court To Relocate To Campbell University's Law School In Fall 2009

The North Carolina Business Court in Raleigh will be relocating to Campbell University's Law School.  The move will happen in Fall 2009, when the Norman Adrian Wiggins School of Law finishes its own relocation, from Buies Creek to Raleigh.

North Carolina then will have two law schools with courtrooms on the premises.  The other one, of course, is the Business Court at the Elon Law School in Greensboro.

The plans at the top of this post shows the expected location of the Court on the third floor of the new Law School, which will be located at 225 Hillsborough Street in Raleigh.  That's an existing building which is being fully renovated.  A representative of Raleigh's Small Kane Architects, who are working on the project, said that the details of the plans may have changed.

There is more information about the project on the website of the Law School.

Taxing Online Travel Companies: The North Carolina Business Court And The Fourth Circuit Don't See It The Same Way

Have you ever booked a hotel room through an online reseller like, Priceline, or Orbitz?  If you have, you might be interested in this post, even though you might not otherwise be interested in an issue of North Carolina state tax law.

Those companies, and other internet resellers of hotel rooms, have a significant tax dispute pending in North Carolina's courts.  And right now, the Fourth Circuit is directly at odds with the North Carolina Business Court on the proper outcome. 

The tax problem comes up because the customer is paying these companies more than the price at which the online company purchases the hotel rooms from the hotel operator.  That's obvious, that's how they make a profit.  What's not so obvious is that the online companies charge Occupancy Tax based on the full price of the room, but they only remit tax calculated at the lower price they paid to buy the room. They keep the difference, which they call a "nonitemized service fee."

This questionable practice has led to a flurry of litigation by municipalities against, Priceline, and other online vendors, like Orbitz and Travelocity. Four of those cases are being litigated in the North Carolina Business Court, brought by Dare County, Mecklenburg County, Wake County, and Buncombe County. Similar cases are pending throughout the country.

Last week, the online travel companies scored a big win when the Fourth Circuit affirmed the grant of a Motion to Dismiss in a case brought by Pitt County, in Pitt County v., L.P.  (I read about that decision on the North Carolina Appellate Blog).  The Fourth Circuit ruling is apparently the first appellate decision in the country on this issue, but that ruling is directly at odds with a decision by Judge Diaz in the Business Court, Wake County v., L.P., 2007 NCBC 35 (N.C. Super. Ct. Nov. 19, 2007).  

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Preliminary Injunction Hearing To Be Rescheduled In The North Carolina Litigation Involving Wachovia-Citigroup-Wells Fargo Merger Issues

The parties to the North Carolina lawsuit in which Wachovia's former CEO, Bud Baker, obtained a Temporary Restraining Order against Citigroup's efforts to acquire the banking operations of Wachovia have agreed to a Consent Scheduling Order.

The Order, if approved by Judge Diaz of the North Carolina Business Court, will move the Preliminary Injunction hearing from tomorrow (Thursday) at 2:00 p.m. to Monday, October 13th, at 2:00 p.m. in the North Carolina Business Court.

The Proposed Order provides that the supporting papers of the parties will be filed by Thursday, October 9th, at noon.  Responsive materials will be filed on Friday, October 10th, at noon.  Those papers will apparently be filed under seal, given that the parties have presented a Confidentiality Order to the Court asking to be allowed to file documents in that manner. 

I've written two previous posts about the North Carolina litigation, which have links to the Complaint, the TRO, and Affidavit of Wachovia's CEO, and other documents.  The first one is here, the second one is here.


Developments In The North Carolina Merger Litigation Involving Citigroup And Wachovia

There were some late breaking developments today in the North Carolina lawsuit regarding the Wachovia-Citigroup-Wells Fargo situation, including the unsealing of detailed Affidavit testimony from Wachovia's CEO about Wachovia's courtship dance with its two potential acquirors, a modification of the TRO entered on Sunday evening, a transfer of the case to the North Carolina Business Court, and then a standstill agreement with regard to the three pending lawsuits. 

First, Judge Johnston unsealed the Affidavit of Robert Steel, Wachovia's CEO, which had been filed with the Complaint.  The Affidavit is identical to an Affidavit filed in the New York lawsuit brought by Wachovia against Citigroup.  It describes the chronology of the negotiations between Wachovia and the two banks which so badly want to acquire it.  Briefly: 

  • Before September 29th, Both Wells Fargo and Citigroup were in negotiations to acquire either all of Wachovia's stock (Wells Fargo) or only Wachovia's banking subsidiaries (Citigroup).
  • Wells Fargo ended negotiations on September 28th, saying that it could not complete the acquisition of all of Wachovia's stock on a compressed timetable without substantial government assistance.
  • The Chairman of the FDIC then told Steel that the situation posed "a systemic risk to the banking system" and that the FDIC was prepared to "effect an open bank assisted transaction."
  • The next day, Steel told the Wachovia Board of Directors that its only options were to file for bankruptcy or to negotiate a deal with Citigroup.
  • The Wachovia Board voted to pursue the deal with Citigroup, and a three party Agreement-in-Principle was signed on September 29th by Wachovia, Citigroup, and the FDIC.  (The Agreement is Exhibit A to the Steel Affidavit).
  •  Under the terms of the Agreement, the FDIC committed to limit Citigroup's losses on a $312 billion loan portfolio to $42 billion.  In exchange, the FDIC was to receive $12 billion of preferred stock in Citigroup. 
  • The Exclusivity Agreement at issue in the lawsuit was also signed  on September 29th.
  • Wachovia thereafter conducted negotiations with Citigroup "earnestly and in good faith," but those negotiations were "complicated and difficult," according to the Affidavit.
  • The Chairman of the FDIC called Steel on October 2nd that Wells Fargo would be proposing a merger transaction, and encouraged him to "give serious consideration to that offer."
  • Wachovia's General Counsel advised the FDIC Chairman that Wachovia could not consider this proposal without a signed and Board-approved merger agreement from Wells Fargo.
  • That same day, at around 9:00 p.m., Wells Fargo presented an Agreement and Plan of Merger (which is attached to the Steel Affidavit as Exhibit C).
  • Two hours later, Wachovia's Board of Directors met and reviewed the Wells Fargo Agreement.  Steel states in his Affidavit that "[t]he Company's advisors and I told the Board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3 that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership."
  • Steel signed off on the Wells Fargo Agreement early in the morning on October 3rd, after receiving oral fairness opinions from Goldman Sachs and Perella Weinberg Partners.

Second, Judge Johnston entered an Order amending the TRO entered on October 5th, to DELETE the underlined language: 

“(i) filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement; (ii) making public representations about the validity of the second paragraph of the Letter Agreement; (iii) making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.

There was no indication for the modification, but presumably there were prior restraint issues.

Third, the case was designated by Citigroup to the North Carolina Business Court.  It has been assigned to Judge Diaz.  The Preliminary Injunction hearing is currently scheduled for Thursday, October 9th, at 2:00 p.m.

Finally, it's not clear whether that hearing will be held, because the three banks have entered into a brief standstill while they attempt to resolve their dispute.  Per a Citigroup press release, the terms of the agreement are: 

  1. A standstill of all formal litigation activity effective immediately;
  2. Cease any formal discovery activities, and
  3. Cooperate in good faith to agree among themselves to secure orders where necessary in all applicable cases in all jurisdictions tolling any schedules for the filing of litigation papers or court appearances or any other formal litigation deadlines, with the goal of preserving the status quo during the litigation standstill period.

This standstill agreement will terminate at noon on Wednesday, October 8, 2008, the day before the scheduled Preliminary Injunction hearing, unless otherwise extended.


The Battle Between Citigroup And Wells Fargo For Wachovia Comes To North Carolina

The fight between Citigroup and Wells Fargo for the remains of Wachovia moved into North Carolina's courts this weekend.  The new Complaint was filed by Wachovia's former CEO, Bud Baker, and another Wachovia shareholder to enjoin Citigroup from seeking to enforce its Letter Agreement to acquire Wachovia.

The Plaintiffs obtained an immediate Temporary Restraining Order in Mecklenburg County from Superior Court Judge Robert Johnston on Sunday, October 5th.  (Coincidentally, Judge Johnston entered a pivotal order in the North Carolina litigation over First Union's acquisition of Wachovia back in 2000.) 

The TRO enjoins Citigroup from:

“(i) filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement; (ii) making public representations about the validity of the second paragraph of the Letter Agreement; (iii) making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.”

If the TRO sticks, that means that Citigroup won't be able to continue with its New York state court lawsuit against Wachovia and Wells Fargo.  The New York Times Dealbook blog has an excellent summary of the New York litigation.

In the Conclusions of Law to the North Carolina TRO, Judge Johnston found that “Plaintiffs [are] likely to succeed on the merits of their claims because they have made a strong showing that the exclusivity provisions contained in the second paragraph of the Letter Agreement [between Wachovia and Citigroup] are invalid and unenforceable under North Carolina law.” 

The TRO doesn't reference any authority for the proposition that the exclusivity provisions are void.  The only reference to any North Carolina law in the TRO is to Section 53-128 of the North Carolina General Statutes, which is titled "[w]illfully and maliciously making derogatory reports."  That statute, under which there are no reported decisions, provides that: 

"Any person who shall willfully and maliciously make, circulate, or transmit to another or others any statement, rumor, or suggestion, written, printed, or by word of mouth, which is directly or by inference false and derogatory to the financial condition, or affects the solvency or financial standing of any bank, or who shall counsel, aid, procure, or induce another to state, transmit, or circulate any such statement or rumor shall be guilty of a Class 1 misdemeanor."

This promises to be interesting, though possibly short-lived.  If the case ends up in the North Carolina Business Court, that Court often stays North Carolina lawsuits if there is a forum which is the more logical center for resolution of the matters in dispute.  In fact, two of those recent cases were brought by Wachovia, and in both of them the Court stayed the North Carolina case to allow litigation involving the same matters to go forward in other states.  One is Wachovia Bank, N.A. v Harbinger Capital Partners Master Fund I, Ltd., 2008 NCBC 6 (N.C. Super. Ct. March 13, 2008) the other is Wachovia Bank v. Deutsche Bank Trust Company Americas, 2006 NCBC 8 (N.C. Super. Ct. June 2, 2006).

Wachovia's lawyers (the same lawyers representing the Plaintiffs in the North Carolina Citigroup lawsuit) tried exactly the same legal maneuver in Harbinger: obtaining an injunction barring litigation in New York so that Wachovia could have its claims resolved in North Carolina.  Judge Diaz of the Business Court granted a Motion to Stay the North Carolina case brought by Wachovia, ruling that there was a "practical reality that the New York Action is better able to arrive at a more comprehensive resolution of the litigation, given the broader scope of claims and parties before it." 

The North Carolina Complaint indicates that one of the Plaintiffs is a New York resident, so a stay in favor of a resolution in New York might be granted if requested by Citigroup.

[Update: Citigroup designated the case to the Business Court on October 6th.  The Notice of Designation is here.  The case has been assigned to Judge Diaz.]


Expert Witnesses And Hot Tubs

I got an email invitation today to a seminar where one of the speakers will be speaking on "hot tubbing" with expert witnesses. I decided immediately that I would need to hire better looking experts in the future if this was going to catch on.

In all seriousness, it turns out that "hot tubbing" of experts had its origin in Australian courts, and it is becoming something of a "hot" subject here in the U.S.  There's an article in ABA Journal about it, and also an article in the New York Times.

What it means is that all of the experts on a particular subject are sworn in at the same time, and then sit as a panel to be examined jointly by the lawyers for the parties and the Court. The procedure even allows for one expert to question another expert directly. 

Given the way the procedure works, it makes sense that hot tubbing is also known as "concurrent evidence."  If you are interested in exactly how this procedure works, you can keep reading below.

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