Don't Throw The Kitchen Sink Of Defenses Into Your Answer

Say you are filing an Answer to a Complaint.  NC Rule of Civil Procedure 8(c)  lists a host of affirmative defenses you might raise.  They are:

accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, truth in actions for defamation, usury, waiver, and any other matter constituting an avoidance or affirmative defense.

Do you want to plead all of those, even though you don't currently have a basis to support them, hoping that you will find some facts in discovery to support them?

That's pretty much what the Plaintiffs did when responding to a crossclaim in National Financial Partners Corp. v. Ray, 2014 NCBC 49, decided on Wednesday by Judge Bledsoe.  The Plaintiffs raised nearly fifty affirmative defenses, hoping that they would generate facts later on to support their myriad defenses.

Many of their defenses were not supported by any facts pertinent to the lawsuit, although the Plaintiffs argued that it was too premature in the litigation for their affirmative defenses to be dismissed and that discovery might yield facts to support their defenses.

The Defendants moved to strike per NCRCP 12(f).  Judge Bledsoe wrote that:

'[T]o survive a motion to strike, a defendant must offer more than a "bare-bones conclusory allegation which simply names a legal theory but does not indicate how the theory is connected to the case at hand."'

Op. ¶34 (quoting Villa v. Ally Fin., Inc., 2014 U.S. Dist. LEXIS 25624, at *6 (M.D.N.C. Feb. 28, 2014)(citation omitted).

It didn't make a difference that the Plaintiffs had a good faith belief that discovery might provide a basis for the defenses stricken by Judge Bledsoe. He said that:

Plaintiffs’ professed good faith belief that their presently unsupported defenses will acquire the requisite factual support through the discovery stage of these proceedings does not alter the reality that these defenses were speculative at the time Plaintiffs asserted them in their responsive pleading.

 Op. ¶35.

Some of the arguments raised by the Plaintiffs in support of the defenses they had stated revealed their speculative nature on their face.  For example, on their defense of accord and satisfaction, Plaintiffs said that:

'[i]t is . . .far from certain that I[] Plaintiffs did not receive full and complete return of whatever funds they provided to Mr. Stokes'.

And the defense of "another action pending" was also quite imaginary.  The Plaintiffs said that:

'[n]o action is pending of which Plaintiffs are currently aware' but noted that '[s]uit may have been filed against Defendants somewhere else or against Plaintiffs in some other jurisdiction.'

Op. ¶¶35(iv) and (ix).

If you are, like me, too critical to be an even-tempered Judge and are wondering if there are sanctions available against a party pleading a horde of defenses without any factual support for them, the answer is that there might be.  Judge Bledsoe observed in a footnote that "Plaintiffs’ assertion of numerous affirmative defenses with little or no factual support can also raise concerns under Rule 11 of the North Carolina Rules of Civil Procedure."  Op. ¶36 & n.7.

He also quoted a Third Circuit case for the proposition that: “the practice of ‘throwing in the kitchen
sink’ at times may be so abusive as to merit Rule 11 condemnation.”)  Id. (quoting  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 97 (3d Cir. 1988)).

But no sanctions were entered.  Judge Bledsoe struck fifteen of the speculative defenses with leave to the Plaintiffs to plead them again in the event that they were able to develop evidence through discovery that the defenses could be properly asserted.  Op. ¶36.

 

You Win Some, You Lose Some: How Should A Request For Attorneys' Fees Be Ruled Upon?

Let's say that you've tried a case, you have lost on a few of your claims, but you won a couple of claims and have gotten a judgment for damages against the defendant for $25,000.  You've billed your client $1,162,895 for your services and your mixed success. And you have a statutory basis for recovering your attorneys' fees.

What do you think the result of a motion to the Court for more than a million dollars in fees would be on those bare facts?  Astonishment from the Judge to whom you've made the fee request?  Maybe a lecture?

Judge Gale was not astonished at the more than a million dollars in fees sought on similar facts in his ruling last week following a trial in Out of the Box Developers, LLC v. Doan Law, LLP, 2014 NCBC 39 , and he did not lecture on the amount of the fees, except maybe once (see below).  In making his ruling he made a number of valuable observations on fee awards in cases of mixed success, like Out of the Box.  The basis for attorneys' fees?  Two of the jury's answers to the issues supported a finding of unfair and deceptive practices, allowing for fees under G.S. §75-16.1.

First, he said that"[i]f a plaintiff brings multiple claims arising from a common nucleus of facts, and succeeds on some claims but not others, the court is not necessarily required to allocate fees between the successful and unsuccessful claims."  Op. ¶51

Second, even so, "where the fee requested and the success achieved are incongruous, an adjustment must be made to assure that the fee awarded is reasonable."  Id.

Third, in determining the amount of an appropriate adjustment, the Court may apply a "percentage reduction method."  Judge Gale applied a 50% reduction to the invoices presented by Plaintiff's counsel.

And finally, as far as a lecture, Judge Gale delivered a mild rebuke to Plaintiff's counsel for overlawyering the case.  He said:

the invoices  [presented by Plaintiff's counsel] demonstrate that [Plaintiff's] counsel engaged in what has become the all-too-common practice in today's litigation environment of having multiple lawyers attend a task where a single attorney might suffice.

Op. ¶60 (emphasis added).

He dampened that criticism by continuing:

particularly in complex cases, there are certain occasions where it is necessary, and indeed efficient, for multiple attorneys to participate, for example, in client or attorney conferences where core theories or strategies are developed.

Id.

After that observation, the Court eliminated the time billed at trial for a third attorney, ruling that the two more senior attorneys (a partner and an associate) could have handled the trial on their own.  He took pains to note that his elimination of that attorney's fees was "no reflection on the quality of her participation, as she contributed well."  Id.

Judge Gale also eliminated a fair amount of associate time from the fee request due to changes in the associates working on the case, which he attributed to the long duration of the case (it ran for four years).  In some instances, he reduced the associate time by 75%.

For those who are looking for a barometer of the reasonableness of their hourly rates, Judge Gale found the partner's rate of $495 an hour to be "reasonable and appropriate," as he did for the lead associate's hourly rate of $260 an hour.  Other associate rates of $180 to $250 per hour were found similarly reasonable.  So were legal assistant rates of $130 an hour.

All that discussion and the accompanying reductions led to an award of $467,827.63 against a fee request of $1,162,895, after Judge Gale parsed through more than 40 monthly invoices, invoice by invoice.  That award bears interest at the legal rate until it is paid.  Order ¶70 (4).

Will the Defendant pay it?  I doubt it, based on the facts their own counsel moved to withdraw before trial because his bills had not been paid and he did not expect them to be paid going forward (see Order ¶19), and because the Defendant's pretrial settlement offers were negligible and they did not include an offer to pay the sanctions of approximately $35,000 which had been previously ordered against it for discovery non-compliance.  Plus, who has half a million dollars sitting around to pay the opposing party's attorneys' fees?

You might be wondering about the daily interest on that fee award.  My calculation is $102.54 per day at an 8% interest rate (the rate allowed by G.S. §24-1).

If you remember the name Out of the Box, that's probably because I have written about decisions in the case several times: about sanctions for violations of a Protective Order; the Business Court's dismissal of an appeal of those sanctions; sanctions for violation of a discovery order; and the proper way top serve a non-party with a subpoena.

Business Court Refuses To Admit University Of Maryland's Lawyers On A Pro Hac Basis

The lawsuit filed by the Atlantic Coast Conference against the University of Maryland continues to percolate in the North Carolina Business Court.  But the University will have to proceed without its chosen attorneys, as the Court last week refused to admit them on a pro hac vice basis.  The decision came in an Order in Atlantic Coast Conference v. University of Maryland.

If you have forgotten about the ACC's lawsuit against the University of Maryland, it was filed by the ACC to recover the $50 million exit fee it says is due from the University upon its departure from the ACC to join the Big Ten Conference.  The University disputes the validity of the exit fee, and has counterclaimed in very detailed claims for violation of antitrust laws and unfair competition.

The Maryland University was represented by a lawyer from the Maryland Attorney General's office, and two lawyers from the Milwaukee firm Foley & Lardner.  When these lawyers moved to be admitted pro hac, the ACC objected.  It argued that the counsel from Foley & Lardner were in violation of Rule 1.7 of the North Carolina Rules of Professional Conduct due to their representation in other matters of Florida State, Virginia Tech, and the University of Virginia, members of the ACC, and the University of Louisville, which officially joined the ACC on July 1st.

Rule 1.7 says that "[a] lawyer shall not represent a client if the representation involves a concurrent conflict of interest."   There is a concurrent conflict of interest if:

(1) the representation of one client will be directly adverse to another client; or

(2) the representation of one or more clients may be materially limited by the lawyer's responsibilities to another client, a former client, or a third person, or by a personal interest of the lawyer. 

The ACC lawyers argued that the University of Maryland's lawyers were acting adversely to the interests of their other University clients.  One of the comments to Rule 1.7 is favorable to the University's position.  Comment 34 says that "[a] lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization."

But Comment 34 ends on a bad note for the University's argument.  It says that this qualification does not apply if "the lawyer's obligations to either the organizational client or the new client are likely to limit materially the lawyer's representation of the other client."

The University's (former) counsel argued that they could ameliorate any conflict by hiring independent counsel to take the depositions of any institution which was a member of the ACC and represented by them.  There is an ABA Opinion that supports this position, ABA Standing Committee on Ethics and Professional Responsibility, Formal Opinion 92-367, but it also says that if the "conflict is clearly forseeable, then the solution, absent client consent, is clear enough: the prospective engagement must be declined."

The Court refused to admit the University's attorneys on a pro hac basis, noting the lack of any conflict waiver, and stating that:

[w]hile it is true that a party's right to choose its own counsel is generally considered fundamental, 'an out-of-state attorney has no absolute right to practice law in another forum.'

Order ¶6.

Judge Jolly did admit pro hac an attorney from the Maryland Attorney General's office to represent the University, observing "the public policy behind permitting the attorney general of another state to practice in North Carolina, combined with the absence of direct legal authority preventing" his appearance in the case.  Order ¶11.

Is the resolution of this pro hac admission issue a victory for the ACC?  My general philosophy on efforts to preclude opposing counsel from representing a client is that you face a risk that they will be replaced by better lawyers.  In the University's situation, that seems to be unlikely.  Their now unadmitted counsel looked like a powerhouse in the area of sports law.  So score this as a win for the ACC.  But it's early in the first quarter.

 

Business Court Makes North Carolina Safe For Construction Lawyers

Construction lawyers in North Carolina can breathe a sigh of relief.  On Friday of last week, the Business Court ruled that the service of on-line service provider Lienguard in preparing claims of lien constitutes the unauthorized practice of law. 

You most likely have never heard of Lienguard.  It says on its website that it files throughout the country: "commercial mechanics liens, notices, public and federal bond claims as well as municipal liens." It does this on a fixed price basis.  It charges $495 for the preparation and filing of a mechanics lien.

A committee of the North Carolina State Bar sent Lienguard a cease and desist letter in 2010 informing Lienguard that it had concluded that Lienguard's conduct constituted the unauthorized practice of law.  Lienguard, notwithstanding the letter, continued offering its services in North Carolina.

The Order in North Carolina State Bar v. Lienguard, Inc., 2014 NCBC 11, followed in the State Bar's lawsuit.  Lienguard raised a litany of defenses against what it termed the State Bar's "monopolistic crusade" against the UPL.

Lienguard's Services Are The Unauthorized Practice Of Law

The Business Court didn't agree with any of Lienguard's defenses.  Lienguard argued, for example, that a claim of lien wasn't a "legal document" and its assistance in preparing those documents was therefore not within the statutory definition of the "practice of law."  Section 84-2.1 of the General Statutes bars non-lawyers from "preparing or aiding in the preparation of "deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors. . . ." 

Given the absence of "claims of liens" from the language of the statute,  Lienguard said it was not engaged in the practice of law.  Judge Gale looked to G.S. §84-4, which prohibits non-lawyers from preparing "any other legal document."  It took him just twenty words to conclude that a claim of lien is a "legal document":

Clearly, a claim of lien is prepared to enforce the claimant’s statutory lien rights.  It is,
therefore, a “legal document.”

Op. 55.

The Court also ruled that Lienguard's statements about its expertise in the construction industry, its commitment to compliance with the law,  and its qualifications to prepare claims of lien constituted Lienguard "holding out" that it was licensed to practice law.  There are  administrative regulations in North Carolina that direct that a lawyer who is not admitted to practice in this jurisdiction "shall not. . .  hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.” 27 N.C. Admin. Code 02, Rule 5.5(b).

Lienguard's services also constitute impermissible "legal advice" in violation of Chapter 84.  It provides definitions of lien law terms, gives warnings regarding time requirements, and reminders about sending out preliminary notices.  Those things are "legal advice," when combined with the preparation of legal documents.  Op. 72.

You might remember the "scrivener's exception" to charges of UPL, which recognizes that merely typing or “scrivening” a petition or legal document does not constitute the practice of law, so long as the non-attorney does not create the document, or advise on how the document should be prepared." Op. 59.  Lienguard wasn't entitled to this exception because "it performs services beyond that of a scrivener."  Op. 65.

Lienguard's Constitutional Claims Were Rejected

Lienguard also argued that Chapter 84 is so vague due to its lack of definitions that it cannot be constitutionally applied to it.  The Court rejected that argument, ruling that "there is no vagueness involved in concluding that a claim of lien is a legal document."  Op. 82.  Besides, the NC Supreme Court held almost a century ago that G.S. §84-4 is constitutional and valid. Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 632, 631 S.E.2d 540, 544 (1936).  And Lienguard hadn't taken the necessary procedural steps to attack the constitutionality of a statute anyway.  G.S. §1-260 requires service on the Attorney General if the constitutionality of a statute is in question, and he has an opportunity to be heard.

If you are not exhausted from reading this by now, you might be wondering how the Court resolved Lienguard's argument that the State Bar was in violation of the monopoly clause of the North Carolina Constitution.  That clause says that: "monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. §34.  The State Bar, which is a state agency, has the power to exclude persons from practicing in the legal profession "to protect the public against incompetents and imposters."  Op. 86.  (There was no finding that Lienguard was "incompetent.").  Judge Gale rejected the monopoly claim.

There's More To Come

The Court's ruling is not the final round for Lienguard.  The State Bar was directed to prepare a proposed form of permanent injunction for the Court to enter.  It was given twenty days to present it to Lienguard for "comments as to form."  You all know that this type of instruction from a Court can lead to endless back and forth between counsel for the parties.

A couple more things:

The Supreme Court of Ohio, bin 2010,also found Lienguard to be engaged in UPL. 

Also, I was surprised to discover that there are multiple companies in the business of providing DIY lien preparation services in North Carolina.  Companies named zlien, CRM Lien Services, and the Lien Professor all do that.  If the State Bar is truly concerned about stamping out UPL in this area, it has a lot more work to do. 

 

Maybe We Are Getting Closer To A Decision in North Carolina On Whether LegalZoom Is Engaged In The Unauthorized Practice Of Law

Legalzoom may be a step closer to overcoming the NC State Bar's assertion that its online legal document service constitutes the unauthorized practice of law (UPL), following yesterday's ruling in LegalZoom, Inc. v. North Carolina State Bar, 2014 NCBC 9.  Or it may be only a few questions away from a ruling that would impact its ability to conduct business in North Carolina, depending on how you read the decision.

If you need some background on LegalZoom, you probably don't own a television or you haven't read my two previous posts on this long simmering dispute, from January 2012 and August 2012.  The company is constantly advertising its legal document generation service which it says on its website "strive(s) to be the best legal document service on the web."  It prepares incorporation papers, wills, trademark applications, and divorce documents and other things for its customers, who want a "do it yourself" approach to law.   LegalZoom has been battling with the NC State Bar in the Business Court since 2010 over whether its service constitutes the UPL.

Yesterday, Judge Gale denied the State Bar's motion for judgment on the pleadings, ruling that he needed a "more developed record" to make a decision, in 2014 NCBC 9.  Op. 50.

Exceptions To The Unauthorized Practice Of Law and Judge Gale's Questions

The definition of the "practice of law" is contained in G.S. §84-2.1.  LegalZoom argues that it falls within recognized exceptions to states' prohibitions on the UPL.  One is known as the “self-help” or the “self-representation” exception, which means "that one can legally undertake activities in his own interests that would be UPL if undertaken for another, or to “practice law” to represent oneself." Op. 58.

The NC Supreme Court weighed in on the "self-help" exception fifty years ago, in State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962), in which it held that a non-lawyer employee of a company in the business of constructing and selling of homes did not engage in the UPL by preparing deeds of trust for homes that his employer sold.  The Court said that:

[a] person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating [the law].” Id. at 637, 127 S.E.2d at 339.

Op. ¶61.  Since LegalZoom doesn't have a "primary interest" in its customers' business, it wasn't able to successfully avail itself of the "self-help" exception.

The second exception, relied on more heavily by LegalZoom has been referred to as a “scrivener’s exception,” which essentially means "that unlicensed individuals may record information that another provides without engaging in UPL as long as they do not also provide advice or express legal judgments." Id.

Judge Gale had a number of questions whether the operation of LegalZoom's online software fit within the scrivener's exception.  Those questions could not be answered on the existing record.  He posed the following:

if a customer makes one choice presented to him by the [LegalZoom] software, are there portions of the template that are then never shown to the customer? If so, what is the reasoning behind and the legal significance of the software’s determination not to present that portion of the form?  [Does the premise of the Pledger decision] require that only the unlicensed individual make choices in drafting a legal document, and that the choice or risk of an incorrect choice about which portions of a form to include must belong exclusively to the individual? Is there then a legally significant difference between how one engaging in self-representation uses a form book versus LegalZoom’s interactive . . . software? A form book presents the customer with the entire form, often accompanied by opinions or directions on how to use the form, but any choice and its implications are solely the customer’s. Does the LegalZoom software effectively make choices for its customer? Do responses depend in any part on the effects of statements embodied in the software, either those that promote the program or those that disclaim legal advice being given?

Op. ¶66.  Although the Judge was careful to say that these were not the "controlling or only relevant questions,"  Op.¶67, they certainly provide a road map for future resolution of the case via a motion for summary judgment.  

LegalZoom's Prepaid Legal Services Plan

There's another aspect to the case, which involves Legaloom's prepaid legal services plans. The State Bar, which is responsible for registering such plans, refused to register LegalZoom's plans.  The online vendor said this refusal violated the equal protection clauses of the U.S. and North Carolina Constitutions.

Judge Gale dismissed that claim, because LegalZoom had not exhausted its remedies by failing to request a hearing before the State Bar.  The Administrative Procedure Act, to which the State Bar is subject, requires a final agency decision before judicial review is allowed. 

LegalZoom had taken the position that requesting a hearing was only optional, and that a hearing would have been futile.  Judge Gale observed that both arguments were foreclosed by NC appellate decisions.  Op.  46, 47.
 

LegalZoom's Claim that it has been Defamed by the NC State Bar was Dismissed

LegalZoom had made a claim against the State Bar that the Bar's statements that it was engaging in the UPL were "false and untrue" and that those statements disparaged its product.

Judge Gale found those statements to be barred by the doctrine of sovereign immunity.

 

 

Never Give Up? Never Surrender? Probably Bad Advice In The Business Court

Section 6-21.5 of the North Carolina General Statutes is the closest thing the State has to "loser pays." It allows for the award of attorneys' fees to a prevailing party "if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The plaintiff in Jacobson v. Walsh, 2014 NCBC 2, decided by Judge Murphy this week, didn't ever give up on his claims for breach of fiduciary duty and fraudulent concealment (which depended on there being a fiduciary duty) even though he had virtually conceded those claims at his deposition. As a result, the Judge awarded fees in an amount to be determined to one of the Defendants.

Why?  The Plaintiff based his fiduciary duty claim against one of the Defendants on his "past investment experiences" with that Defendant (Walsh), as he had alleged in the Complaint.  But at his deposition, the Plaintiff said that he had no prior dealings at all with Defendant Walsh, and that his contrary allegation in the Complaint was "an oversight."  He even conceded at his deposition that there was no fiduciary relationship between him and Walsh.

Notwithstanding those concessions, the Plaintiff did not dismiss his fiduciary duty claim. Judge Murphy concluded that "the losing party persisted in litigating the case after a point where he should reasonably become aware that the pleading he filed no longer contained a justiciable issue." Op. ¶94 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991)).

So how much will Walsh recover in attorneys' fees?  That remains to be determined.  Walsh was directed to submit an accounting of the the fees "reasonably incurred in defending against" the fiduciary duty and fraudulent concealment claims.  Op. ¶97.  Since there were multiple claims in the Complaint which were dismissed in the Order, the fees attributable to the fiduciary duty claim and the fraudulent concealment claim will be only a portion of the fees charged by Walsh's lawyers.

If you are wondering, this isn't the first time that the Business Court has socked an unduly persistent plaintiff with attorneys' fees per Section 6-21.5.  Judge Gale did that in an Order in McKinnon v. CV Industries, Inc., which I wrote about in June 2012.

Don't Rely On Your Expert's Speculation To Save You From Summary Judgment

Just because an expert says something is so doesn't mean that it is.  That's the lesson of Judge Gale's ruling last week in Carter v. Clements Walker, 2014 NCBC 1.  He rejected the evidentiary value of an expert's report stating that Plaintiff's damages were $33 million, saying that it was insufficient to create a genuine issue of material fact on whether Plaintiff had suffered any damages at all.

Some background will help.  The case is for legal malpractice.  Plaintiff, an inventor, alleged that the Defendant law firm committed malpractice by allowing a domestic patent application to be published before it filed an application for international patent rights.  Since some foreign countries require "absolute patent novelty" before granting a patent, Plaintiff couldn't obtain a patent in those countries given the filing of the U.S. application.

The case has been up and down from the Court of Appeals.  The COA reversed the previous dismissal of the case.  It's been the subject of blog posts here twice before, in 2010 and last year.

So now that the COA had breathed new life into the case, how was Plaintiff damaged by the alleged malpractice?  By the loss of the opportunity to sell or license his invention in those foreign countries in which he couldn't secure a patent. What was the value of those potential revenues? If Plaintiff had had revenues in the U.S. from his invention, those might have served as a benchmark, but the invention had never been manufactured or licensed in this country.

Plaintiff relied on the report of an expert witness, which concluded that he had "lost total gross profits of approximately $33 million between the years of 2010 and 2020" as a result of not obtaining foreign patent rights.

Think that was enough to get to a jury as evidence of damages?  it wasn't.  Judge Gale ruled that:

In light of the overwhelming evidence that [the Plaintiff]  had [not], at the time of [the expert's] opinion, ever realized or reasonably projected any commercial value from the invention (even though it had domestic patent protection), [the expert's] speculative, bare-bones conclusion is insufficient to create a genuine issue of material fact on whether [Plaintiff] suffered damages.

Op. ¶22 (emphasis added).

This isn't the first time in the Business Court that an expert's inadequate report has resulted in the dismissal of a case.  Judge Tennille dismissed a malpractice claim in Inland American Winston Hotels, Inc. v. Winston, 2010 NCBC 19 because the expert wasn't qualified to testify.

And in Blythe v. Bell, 2013 NCBC 8, Judge Gale said in refusing to consider an expert's report, saying that:

[w]hile the courts do not demand mathematical certitude in calculating lost profits, they do not countenance conjecture or speculation, and conjecture or speculation does not become admissible simply because it is presented by an expert. 

Op. ¶19 (emphasis added).

The Plaintiff didn't rely solely on the expert's report.  He also offered documents from the internet which he said showed that other products similar to the invention were being offered in foreign markets.  That didn't provide admissible evidence in opposition to the motion for summary judgment.  Relying on an opinion from the COA, Judge Gale held that:

Unauthenticated “internet printouts . . . do not constitute admissible evidence for purpose of the analysis required in connection with . . . [a] summary judgment motion[.]”

Op. ¶25 (quoting Rankin v. Food Lion, 706 S.E.2d 310, 316 (N.C. App. 2011).

 

"Common Interest" Privilege Considered By The NC Business Court

How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client  privilege to extend to communications between the susidiary and the lawyer for the parent company?

Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate, given that he found no applicable North Carolina precedent.  Op. 8.

The Plaintiff, SCR-Tech, had been owned by a holding company in which Ebinger had a minority (37.5%) interest.  The communications withheld on the basis of privilege covered a three year period during which SCR-Tech, Ebinger, and counsel were negotiating the sale of SCR-Tech.

Defendants said that to be considered SCR-Tech's "parent," Ebinger needed to be a majority owner with a greater than 50% interest.

That argument launched Judge Gale into distinguishing the "joint client" aspect of the attorney-client privilege from the "common interest" doctrine.  He said:

The “joint client” privilege focuses on client identity as defined by the extent of corporate relationship between two entities. The “common-interest” doctrine depends more on common legal interests between the separate entities, although the fact of corporate affiliation between them can factor into the analysis of that common legal interest.  The common-interest doctrine has arisen by expanding the joint-defense doctrine in criminal law, which was not controlled by any ownership relationship.

Op. 12.

The extent of Ebinger's interest in SCT-Tech really didn't make much difference to the analysis, given the two companies' common legal interest in the matters discussed in the withheld communications.

The Court held that the documents in question were privileged and denied the Defendants' motion to compel their production.

Judge Gale cautioned that "the court here does not intend to set rigid parameters for applying the common-interest doctrine, and this Order must be read in the context of the particular facts of this case."  Op. 12 & n.1.

There's No Attorney-Client Privilege For The Communication Of Facts

It's been nearly ten years since the North Carolina Supreme Court decided a case involving the attorney-client privilege.  That case was In re Miller, 357 N.C. 316, 584 S.E.2d 772 (2003), which raised the question whether the privilege survives the death of the client.  (It does.)

That case, which involved a criminal investigation, raised some esoteric issues.  Those are probably unlikely to come up in a business litigation practice, but Judge Jolly's Order last week in Meir v. Meir is likely to have more of a day-to-day impact on your practice.

Let's say your client is questioned about the facts underlying the Complaint that you drafted based on those facts as told to you by her.  Are those facts privileged because they were told to you, her attorney?  Of course not.  We all should know that.

But what if you, lawyer, tell her, client, the facts you have learned about her claim from other sources.  Is that privileged?  Can you instruct her not to answer questions about those facts at her deposition?

Not so sure about that situation?  The Meir Order has the answer: you may not instruct your client not to answer those questions.  Judge Jolly ruled as follows:

The attorney-client privilege does not protect against the disclosure of facts. Rather, it only protects against the disclosure of certain confidential communications between an attorney and client. See Upjohn Co. v. United States, 449 U.S. 383, 396-97 (1981); In re Miller, 357 N.C. 316, 336 (2003). The fact that Violet Meir and her counsel may have discussed certain facts related to this case does not trigger the application of any protection as to those facts. The court concludes that the
attorney-client privilege does not attach to specific facts simply because Violet Meir is aware of those facts only because of conversations with her attorney. In addition, the attorney-client privilege does not protect against the disclosure of Violet Meir's personal opinions, feelings or knowledge.

Op. Par. 10.

The attorney-client privilege isn't like a "cone of silence" that extends to the exchange of facts between attorney and client.

And if you are too young to remember the TV show Get Smart, which occasionally referred to the Cone of Silence, click here.  This might be the most valuable thing that you learn from this post.

Claims For Legal Malpractice Aren't Assignable In North Carolina

Maybe you've wondered whether a claim for legal malpractice can be assigned. Maybe you haven't. But yesterday, the North Carolina Court of Appeals answered that question.  In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the Court held that "malpractice claims are not assignable in North Carolina."  Op. at 10.

Why not?  A cascade of horribles might result if they were assignable.  The concerns noted by the COA were:

the potential for a conflict of interest, the compromise of confidentiality, and the negative effect assignment would have on the integrity of the legal profession and the administration of justice.

Op. at 9.

Malpractice claims now fit in a broad category of personal injury claims which are not assignable, like "claims for defamation, abuse of process, malicious prosecution or conspiracy to injure another's business, unfair and deceptive trade practices and conspiracy to commit fraud."  Op. at 8.

If the name of the case sounds familiar, that's because it was a Business Court case which you've read about before on this blog.

And don't think that this result represents a win for the law firm involved.  The COA reversed a 2010 Order from the Business Court holding that the firm's individual client had assigned away his malpractice claim to a corporate Plaintiff and that he therefore had no standing to bring the malpractice claim.

When Law Firms Dissolve: Dividing Up The Proceeds From Contingent Fee Cases

The Court of Appeals in February 2011 ordered Judge Jolly to dissolve Mitchell, Brewer, Richardson, Adams, Burge & Boughman, a law firm organized as a member-managed professional limited liability company.  The dissolution was ordered per N.C. Gen. Stat. §57C-6-02, which authorizes judicial dissolution when the managers of the LLC are deadlocked "in the management of the affairs of the limited liability company."

The deadlock, which had existed since June of 2005, concerned how  the profits from contingent fee engagements, concluded after several partners withdrew from the PLLC, should be divided among the partners.  Carrying out the directive of the Court of Appeals, Judge Jolly  last week in Mitchell v. Brewer, 2013 NCBC 14 resolved the issue of how those profits should be shared.

These former partners have been at war for seven years over the division of these fees.  I've written several times about the case, including in May 2007April 2008, and March 2009.

In this latest round in their war, the former partners (the Plaintiffs) and the remaining Partners (the Defendants, who did all the work after the dissolution to resolve the outstanding contingent fee matters) had different approaches as to how the fees should be allocated among them.

Plaintiffs said they were entitled to their share in the profits from the engagements regardless when and by whom they were realized.  There is some support for this view in the LLC Act, which 

provides that upon dissolution, unless otherwise agreed, an LLC such as [the Company] continues in existence while its managers, or others charged with winding up the affairs of the LLC, have a statutory duty to (a) obtain '[a]s promptly as reasonably possible . . . the fair market value for the [LLC's] assets,' and (b) distribute the net balance of those assets to the LLC's Members, and others.
G.S. 57C-6-04(b), 05(3).

Op. 7.  Plaintiffs said that the statute placed a duty on the managers of the LLC "to carry on the firm's unfinished business in order to realize fair market value for its assets."  Op.  8.

The Defendants, who had done the work to pursue the contingent fee engagements to resolution, had a different point of view.  They said that the only interest that the former partners had in the contingent fee engagements was the value that they had before dissolution.  Since the value that actually materialized thereafter was due solely to the Defendants' efforts after the dissolution, they said that

they should be required to remit to the Company only the value of net profits ultimately derived from the Contingent Fee Engagements less those profits that are attributable exclusively to Defendants' post-dissolution efforts.

Op. 12.

Judge Jolly, as the decider, disagreed with both positions.  He observed that contingent-fee engagements "cannot be 'liquidated' in the conventional sense of the term.  The only way to realize a tangible value in a contingent fee case is "by ultimately reaching a favorable settlement or verdict in the matter."  Op. 19.

Therefore, he said, "dissolution should end the right of members to share in the future profits of their fellow members' personal-service engagements."  Op. 22.  So profits attributable to "post-dissolution personal services by individual former members should not accrue to the LLC."  Op. 22.

The valuation protocol which Judge Jolly dictated was to look to the "percentage of pre-dissolution Time expended relative to the net profit ultimately realized on that matter."  Op. 25.  He gave this example:

if a total of 100 attorney hours were expended on a particular Contingent Fee Engagement and 50 of those hours were performed prior to dissolution, the net fee ultimately received by Defendants should be shared 50/50 with Plaintiffs.

Id.

It seems doubtful that the contingent fee engagements will fall that neatly into boxes.  That may be the reason that the Judge appointed an accountant as a Special Master to conduct an accounting of the contingent fee engagements. 

 

 

Another Disqualification Motion In The Business Court

The efforts to disqualify Defendants' counsel were unsuccessful in Atkinson v. Lackey.  In denying the motion to disqualify this week, Judge Murphy gave some insight on Rule 1.9 of the Revised Rules of Professional Conduct.

Rule 1.9 is titled "Duties to Former Clients."  It says that:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

Rule 1.9(a).

The law firm in question had consulted with one of the Plaintiffs about a lawsuit he later filed against other defendants who were connected to the defendants in the current action.  The disqualification issue distilled to whether the two lawsuits were "substantially related" per Rule 1.9.

Judge Murphy, relying on comments to the Rule, held that:

two cases will be deemed “substantially related” when they involve (1) the same transaction, (2) the same legal dispute, or (3) 'if there otherwise is a substantial risk that information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.' N.C. R. Prof’l Conduct R. 1.9, Cmt. 3. “Furthermore, ‘[t]he substantially related test requires a virtual congruence of issues, and the relationship between the issues in the prior
[representation] must be patently clear.’”Classic Coffee Concepts, Inc. v. Anderson,
2006 NCBC 21 ¶ 45 (N.C. Super. Ct., Dec. 1, 2006)(citation and internal quotations omitted).

 Op.  20.

He moved on to debunk the notion that the two cases were "substantially related," ruling that they "each arose from separate and distinct transactions surrounding potential fraud within different organizations."  The fact that there were three overlapping parties in the two actions did "not mandate a finding that the two actions are related."  Op.  21.

The Plaintiffs didn't give up there.  They said that one of them, during consultations with Defendants' law firm about the previous lawsuit, had disclosed information that would advance the Defendants' position in the new litigation. That's a basis for disqualification under Rule 1.9, but lawyers shouldn't be disqualified from representing another client for using "generally known information."  Op.  ¶22.

Judge Murphy concluded that the information pointed to by the Plaintiffs -- the corporate structure of the Defendants -- would have been within the knowledge of the Defendants and that it therefore was "generally known."  Op.  22.

He also examined the information contained in the notes of Defendants' counsel's meeting with one of the Plaintiffs regarding the earlier lawsuit, and said that "what little information" was provided "was of a general nature that would be of little or no assistance" to the Defendants.  Op. Par. 23.

This is the second time in three months that Judge Murpy has denied a Motion to Disqualify.  The last one was in McKee v. James.  If you keep the stats of the Business Court on this type of motion, it has disqualified counsel  four  times (in Flick Mortgage Investors, Inc. v. The Epiphany Mortgage, Inc., 2006 NCBC 3 (N.C. Super. Ct. Feb. 1, 2006)(Diaz); Chemcraft Holdings Corp. v. Shayban, 2006 NCBC 13 (N.C. Super. Ct. Oct. 5, 2006)(Tennille); The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC (Jolly);  Ferguson Fibers, Inc. v. Foster (Tennille)  and denied disqualification five times (in Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC 21 (N.C. Super. Ct. Dec. 1, 2006)(Diaz), Wachovia Insurance Services, Inc. v. McGuirt, 2007 NCBC 3 (N.C. Super. Ct. Feb. 13, 2007)(Diaz); International Forest Products Corp. v. Jackson Paper Mfg. Co. (Murphy), McKee v. James (Murphy), and this week's case.

 

Ethics And Email, From The NC State Bar

The intersection of technology and the rules of ethics continues to develop.  The NC State Bar has proposed a new FEO (2012 Formal Ethics Opinion 5), which deals with the interesting question of the attorney-client privilege of an employee's emails to her personal lawyer that are on her employer's email system.

If Your Client Is The Employee

The Opinion contains a caution: If you are a lawyer representing an employee in any matter, whether related to her employment or not, you probably shouldn't communicate with her at her office email address.  The opinion recommends that the lawyer "explore with the client alternative methods of communicating including use of the employee’s personal email system, telephone, and texting. "

If Your Client Is The Employer

If you are a lawyer representing the company, can you access the employee's emails with her lawyer on the corporate system?  Only if you can conclude "confidently" and "in good faith" that any privilege has been waived.

How can you arrive at that "confident" determination?  It depends on whether the employee "had a reasonable expectation of privacy in the email communications."  That requires taking into account a hodgepodge of factors, including:

whether the employer has a clear, unambiguous policy regarding email usage and monitoring; whether that policy is effectively communicated to employees; whether the policy is adhered to by the employer; whether third parties have access to the employee’s email account on the employer’s system; when/where the communication occurred (at home or the office; during work or leisure hours); and whether the employee took affirmative steps to preserve the privacy of the communication.

Since the opinion recommends that the attorney seeking to view or use the emails "should err on the side of recognizing the privilege whenever an analysis of the facts and case law is inconclusive," it seems that the necessary "confidence" might not often be found. 

But let's say that you are in the rare situation where the employee could not be said to have a "reasonable expectation of privacy" in the emails.  Do you have to notify the employee's personal counsel that you are going to read them?  There is a bright line answer here: No.  The reason is that the fact that the employer has copies of the emails is confidential client information, which the employer's attorney may not disclose without his client's consent or unless an exception to confidentiality (like a need to disclose to comply with the law, a court order, or the rules governing discovery) applies.

Employee's Personal Email Account

The opinion isn't really different when it's a personal email account involved (like a gmail account which the employee accesses at work).  The lawyer for the employer can't advise his client to invade the account by changing the password.  I didn't realize that was possible, but it would violate RPC 1.2(d), which prohibits a lawyer from counseling a client "to engage in criminal or fraudulent conduct,"  Nor can the lawyer reap the benefit of the client undertaking that action on its own.  That would be assisting the client in fraudulent conduct.

But what if you don't need to change a password to access the account, or you can recover the emails from the employee's hard drive?  No clear answer.  Given that the Opinion is fiercely protective of the privilege, I would say you can't.  It says that the privilege "is fundamental to the client-lawyer relationship and the trust that underpins that relationship. As such, the bar must protect the privilege and seek to limit incursions upon the privilege that are not warranted by law."

This isn't the only foray of the State Bar into the intersection of ethics and email.  2012 FEO 7, proposed at the same time, says that a lawyer sending an email to a lawyer representing an adverse party cannot copy the other lawyer's client on the email.

The Opinion says that "[c]opying the opposing party on a communication—whether email or conventional mail—with opposing counsel is a communication under Rule 4.2(a) and prohibited unless there is consent. "  "Consent" means "express consent from opposing counsel."

The Opinion sets out the same rule even if the opposing client was copied on the email to which the response is being made.

Note that these Opinions are only proposed.  The Bar is inviting and accepting comments.

Thanks to my friend Molly Whitlatch for suggesting that I write about 2012 FEO 5.

 

Legalzoom Strikes Out In Declaratory Judgment Action Against NC State Bar

Sometimes you have a hard time telling who won and who lost a motion ruling.  That's true of Judge Gale's ruling on Monday in Legalzoom, Inc. v. The North Carolina State Bar, 2012 NCBC 47.

You are all undoubtedly familiar with Legalzoom, an on-line purveyor of do it yourself legal documents. This isn't the first time that I've written about Legalzoom. The NC State Bar has been making noise for several years that the vending of Legalzoom's documents is the unauthorized practice of law, and therefore illegal. 

This irked Legalzoom, so it hauled off and sued the Bar for a declaratory judgment in September 2011 seeking a ruling that it isn't engaged in the unauthorized practice of law.   It also made affirmative claims for "commercial disparagement" and for the Bar violating the Monopoly Clause of the state Constitution.  The State Bar made a motion to dismiss, arguing that all of Legalzoom's claims depended on it not being involved in the unauthorized practice of law.

So who won?  No one.  Judge Gale denied the motion to dismiss Legalzoom's claim for declaratory relief, and deferred ruling on the other claims.

The principal reason for the ruling was the Bar had not put the unauthorized practice issue in play by presenting a claim for unauthorized practice.  The Bar can do that by making a claim for injunctive relief to a Superior Court (per N.C. Gen Stat. §84-37), or a District Attorney can initiate misdemeanor proceedings against an unauthorized offender (per G.S. §§84-7, and 84-8).

Judge Gale said that "[a] declaratory judgment action is not generally envisioned as a proceeding to force a State agency or criminal authority to undertake an enforcement proceeding it has in its discretion to date elected not to take."  Op. 44.

Judge Gale said that a motion to dismiss "is seldom an appropriate pleading in actions for declaratory judgments."  Op. 28.

He invited the Bar to make a counterclaim raising the unauthorized practice of law issue.  I expect that will be coming soon, unless the Bar and Legalzoom patch up their differences.

Lawyer Who Might Be Called As Witness Not Disqualified

If you are making a motion to disqualify opposing counsel before Judge Murphy in the Business Court, his decision yesterday in McKee v. James is likely to be of concern.  He not only denied the Motion, but he dropped a few nuggets along the way which the party opposing the motion in your case may want to quote:

He said that disqualification motions should be "carefully scrutinized" because they "have a potential for abuse as litigation tactics," and that "disqualification is viewed by courts as a 'drastic measure' to be imposed only when 'absolutely necessary.'"  Op. 10.

The burden on the party moving for disqualification is "high."  Op.11.  It's also important to note that "a party’s right to counsel of its choosing is a fundamental tenet of American jurisprudence, and that, therefore, a court may not lightly deprive a party of its chosen counsel." (citing United States v. Smith, 653 F.2d 126 (4th Cir. 1981)). Id.

It was against this backdrop of skepticism that Judge Murphy turned to Rule 3.7, the Rule of Professional Conduct on which the Motion was based.  Rule 3.7 deals with a lawyer's ability to continue as litigation counsel if he may be called as a witness.  It says: 

A lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a necessary witness unless: (1) the testimony relates to an uncontested issue, (2) the testimony relates to the nature and value of services rendered in the case, or (3) disqualification of the lawyer would work a substantial hardship on the client. . . . [Moreover, a] lawyer may act as advocate in a trial in which another lawyer in the lawyer’s firm is likely to be called as a witness unless precluded from doing so by Rule 1.7 or Rule 1.9.

Defendant James was saying that he would be calling Plaintiff's counsel as witnesses to testify about the circumstances under which they had asked another witness to sign an affidavit.  That witness later disavowed his affidavit, which was highly supportive of Plaintiff's case, and it turned out that he had been unable to read it before signing it.

If you are thinking that these affidavit issues can't be central to the issues of the case, Judge Murphy agreed. 

But if Plaintiff's counsel really found it important to present evidence at trial about the affidavit shenanigans, then Defendant's counsel were not "necessary" witnesses.  Judge Murphy said that "[a] necessary witness is not the best witness, but the only witness that can testify to information that is relevant and material to the dispute."  Op. 16.  A lawyer's testimony is “necessary” when it is "relevant, material, and unobtainable by other means."  Op.17.

Since there were other persons who had been present at the signing of the affidavit, that testimony was "obtainable through other means," so the Defendant's lawyers were not required to step aside.

So, disqualification based on RPC 3.7 is pretty narrow.

If you are interested in other Business Court rulings involving Motions to Disqualify, you can click here, or type "disqualify" into the search box on the left side of the main blog page.

 

 

What NOT To Do When Your Witness Goes South At Trial

If you've tried cases, you've probably had your own witnesses -- who you thought were solid -- disintegrate in front of you at trial.  They start acting quirky, begin conceding important points on direct examination they had held on to at their depositions, and are still facing cross-examination.

What do you do?  I can tell you what not to do.  Don't do what the lawyers did at the trial of Brockington v. Jacobs Engineering Group, Inc.  These lawyers, Gill and Wright, were from Virginia and appearing pro hac in a trial in Johnston County.  The case involved an explosion at a ConAgra plant that had resulted in death and injury to several workers.

Their witness, Pottner, testified that he probably knew that gas lines were being installed across the roof of the ConAgra plant while he and Jacobs Engineering were working there.  This was apparently a significant concession, because Pottner had testified at his deposition that he didn't recall knowing about the gas lines.

Gill and Wright seemed to have concluded that Pottner had lost his mind.  Gill took him to an Urgent Care after Court on March 20th, and Wright reported the next day that Pottner had an alarmingly high blood pressure and that he might have an aneurysm.  Gill stated that one of Pottner's pupils had not been sensitive to light, a sign of a neurologic disorder.  They were also concerned that he had had a stroke.

Gill and Wright sent Pottner home to Wisconsin after several days of treatment even though he was still under a subpoena to appear at trial.  Judge Hobgood, relying on the representations of Gill and Wright, said that Pottner had been reported to have had a stroke and a loss of partial use of one side of his body.  He declared Pottner "unavailable" to testify per Rule 804(a)(4) of the Rules of Evidence.  Pottner never finished his testimony.

The Judge learned a little bit later, after medical records were subpoenaed, that the lawyers had misstated Pottner's condition.  He had not had a stroke, had not lost the use of his body, his blood pressure had not been as high as stated by counsel, and he was under no restrictions when he left Wake Medical Hospital in North Carolina.  Judge Hobgood observed that Pottner could have returned to testify without any danger to his health.

In his Order sanctioning the parties represented by the lawyers, the Judge outlined a number of violations of the NC Rules of Professional Conduct by Gill and Wright.  Those were of:

  • Rule 3.3, which requires candor toward the Court.  A lawyer is obligated to "inform the trial tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse."  Pottner's counsel had known that Judge Hobgood had not accurately stated Pottner's condition when he was declared to be unavailable.
  • Rule 3.4, which requires attorneys to conduct themselves with fairness to the opposing party and counsel.  You can't encourage a witness to leave the jurisdiction and make himself unavailable as a witness.
  • Rule 8.4(d), which prohibits conduct prejudicial to the administration of justice.

Since Pottner had been under subpoena, the defendants were open to a variety of sanctions per Rule 45 of the NC Rules of Civil Procedure.  Rule 45(e)(1) says that the Court can impose upon a party who fails to comply with a subpoena without cause any sanction allowed by Rule 37(d),  Judge Hobgood chose to strike the Defendants' Answer, saying that "no less a sanction" would provide an adequate remedy to the Plaintiffs.

The Order was entered on April 4, 2012.  Nine days later, the jury, unencumbered by any of the stricken defenses, returned a $14.6 million verdict for the Plaintiffs

There is still a punitive damages phase of the case to be tried.  I wonder if the Virginia lawyers will have the nerve to come back.

I wouldn't have known about this cautionary and very interesting trial court Order but for one of my partners circulating it at Brooks Pierce.  He asked me to keep him anonymous.  If any of you receive Orders that deserve wider circulation, I would be glad to write about them and even to disclose your identity and generosity.

 

 

 

 

NC Court of Appeals Rules in Law Firms' Fight Over Contingent Fees

There's invariably a fight between lawyers over the division of a fee when a lawyer who left the firm generates a fee at his new firm from a preexisting contingent fee relationship.  There's at least one case of that type in the Business Court (Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer), and the Court of Appeals tangled with one last Tuesday, in Crumley & Associates, P.C. v. Charles Peed & Associates.

The Crumley Firm had an employment agreement with Snyder, an associate who left the firm.  The agreement said that Snyder would pay it 70% of the fees he realized from clients who followed him from the Firm.  He was also required to reimburse the Crumley Firm for any funds it had advanced to the clients.

Approximately 30 clients followed Snyder with their workers' compensation claims to his new firm, Peed & Associates, and substantial fees (more than $300,000) were generated.  After the Crumley Firm sought its 70% cut, Snyder went to the NC State Bar, asking for an opinion on the enforceability of the agreement.  In a Formal Ethics Opinion, 2008 FEO 8, the Bar ruled the agreement unenforceable, and said it was in violation of Rule 5.6 of the Rules of Professional Conduct.

That wasn't the end of the matter.  The Crumley Firm then sought recovery on a quantum meruit basis.  The trial court awarded the Crumley Firm $147,946.53 as its reasonable share of the fees.  Both sides appealed.  Crumley wanted more from Peed's hide, but Peed wanted to pay less, including getting out from under a $1.00 judgment against it for constructive fraud.  That must have hurt Peed's pride more than its pocket.

Note that the opinion gives no guidance on how the fees should have been allocated.  The two firms stipulated to the amount due the Crumley Firm.

I haven't read the appellate briefs, but they were apparently sharply worded.  Chief Judge Martin of the Court of Appeals admonished both sides for their tone.  He said that in both their briefs and their oral arguments, they:

freely trade suggestions and outright allegations that the other has engaged in unprofessional and even unethical conduct, perhaps hoping thereby to persuade the Court toward deciding for the party engaging in the least egregious conduct. Those questions are better left to the State Bar and the parties’ peers, and we reject their attempts, in exchanging affronts, to obfuscate the purely legal issues their dispute has presented, first to the trial court, and now to this Court.

Op. at 6.

There are very few people in this world around whom I have to struggle to be civil, but none of them are on our Court of Appeals.  Be on good behavior in Raleigh, even if it is against your nature.

After that admonishment, Judge Martin considered Peed's argument that the Crumley Firm had unclean hands because the employment agreement violated the Rules of Professional Conduct, and that this barred any recovery of fees whatsoever.

He rejected that argument, saying that it was of "no consequence."  He said that the law "is settled in North Carolina" that:

counsel, who has provided legal services pursuant to a contingency fee contract and is terminated prior to a resolution of the case and the occurrence of the contingency upon which the fee is based, has a claim in quantum meruit to recover the reasonable value of those services from the former client, or, where the entire contingent fee is received by the former client’s subsequent counsel, from the subsequent counsel

Op. at 7-8.

Judge Martin held that the doctrine of unclean hands "is only available to a party who was injured by the alleged wrongful conduct."  Op. at 9.  Since the Crumley Firm had contingent fee agreements with its former clients, it was entitled to the reasonable value of its fees regardless of the supposed dirtiness of its hands with regard to Snyder and Peed.

The Court shot down the Crumley Firm's argument that Peed had a fiduciary duty to hold the fees owed to the Crumley Firm in trust.  Peed had spent the fees in the course of its ordinary operations, and the Crumley Firm said that this amounted to constructive fraud.  The primary basis for the claimed fiduciary obligation was RPC 1.15-2(g), which says that “if [a] lawyer’s entitlement [to fees] is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.”

But the ethical rule didn't create a fiduciary obligation.  The Court said that a violation of a Rule of Professional Conduct "does not give rise to civil liability in North Carolina."  Op. at 12, and it reversed the one dollar judgment finding Peed liable for constructive fraud.

There's obviously no love lost between these two PI firms.  They have been fighting over these fees for the past five years.

 

 

We're Gonna Zoom A Zoom A Zoom in North Carolina

You probably know that there is a fight afoot between the North Carolina State Bar and the do-it-yourself vendor of legal documents, LegalZoom. The simmering dispute has been covered in the Wall Street Journal, the ABA Journal, and the case is now in the Business Court over Legalzooom's vitriolic objections.  The issue is whether LegalZoom's offerings constitute the unauthorized practice of law.

LegalZoom bills itself as “transform[ing] the way people think about and fulfill common legal needs.” It says that it has made its mission “to simplify the process and to set new standards for convenience and service in an industry not typically known for great customer care.” The company basically sells legal forms to non-lawyers (and helps its customers to fill them out by computer) which enable them to form their own corporations, write their own wills, and get their own divorces, while at the same time avoiding what LegalZoom condemns as the high cost of attorneys’ fees.

It’s said pretty often that “you get what you pay for,” so it’s not surprising that LegalZoom has taken some heat (like from Consumer Reports) for the quality of its services, even though it advertises that 94% of its customers "recommend LegalZoom to friends and family." The lawyers who provide the same services as those offered by LegalZoom, such as estate planning lawyers, and lawyers filing trademark applications, aren’t keen on the service. 

Not much has happened in the Business Court so far, except for LegalZoom’s strident efforts to stay out of the Business Court. Those began with the filing of the case by LegalZoom against the State Bar. LegalZoom immediately asked the Chief Justice of the NC Supreme Court for an exceptional case designation to Superior Court Judge Paul Gessner. That was granted back in October, apparently without notice to the NC Bar.  The Bar then designated the case to the Business Court as a mandatory complex business case, which LegalZoom opposed, saying its case was not a " complex business case" within the mandatory jurisdiction of the Business Court.

LegalZoom has lost Round 1.  Judge Jolly (who decides all designation motions as the Chief Judge of the Business Court) ruled that the claims made by LegalZoom in its Complaint are squarely within the jurisdiction of the Business Court. Count 1 of the Complaint is for a violation of the Monopoly Clause of the North Carolina Constitution, saying that the State Bar has interfered with LegalZoom’s constitutional right to freely do business in North Carolina. Count 2 says that the State Bar has also violated the state Constitution by excluding LegalZoom from “register[ing] its legally compliant prepaid legal services plan.” (That's a whole different LegalZoom service).  The third count is for “commercial disparagement,” alleging that the State Bar has made false statements to the public which caused the public “to regard [LegalZoom’s] product as legally unauthorized, and imputing illegal conduct to [LegalZoom].”

 In opposing the Bar’s designation as a mandatory business case, LegalZoom argued that its case was “exceptional,” but not a “complex business case.”  Judge Jolly didn’t spill much ink in denying the Opposition in an Order on January 9th. He said:

Plaintiff's Complaint specifically alleges that "this case includes claims that involve a material issue relating to . . . [a] anti-monopoly, anti-competition, and antitrust law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; [b] unfair competition law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; and [c] the Internet and electronic commerce." These allegations are substantially identical with three separate statutory grounds for designation of a civil action as a mandatory complex business case under the Removal Statute.

Order ¶3.  So that's that.  The case has been assigned to Judge Gale and will be resolved in the Business Court.

Where was the vitriol?

Continue Reading...

Company Waives Attorney-Client And Work Product Privileges Through Advice Of Counsel Defense

A broadly worded defense in a case challenging the sale of a company resulted in a waiver of the attorney-client and work product privileges last week, in Richardson v. Frontier Spinning Mills, Inc.

Richardson claimed that the company had improperly structured its sale so that non-employee shareholders like him were paid less for their stock than the shareholders who were employed by Frontier and that the company had failed to disclose material facts regarding the transaction.  The company defended by asserting that it had relied on the advice of its corporate counsel in how the sale was structured.

It is not unusual for counsel defending corporate directors to raise an "advice of counsel" defense because G.S. §55-8-30 says that directors may rely upon information provided by "[l]egal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence" in discharging their duties as directors.

According to the Business Court, there is "ample authority" that the raising of such a defense results in a waiver of the attorney-client privilege.  Given that the scope of waiver is often a "thorny issue" (Op. Par. 9), a defense relying on Section 55-8-30 should be carefully worded.  The defense before Judge Jolly in the Richardson case stated that

if it is determined there was illegal disparate treatment of the "Outside Shareholder[s]" and the "Inside Shareholders" or insufficient material disclosure in the Stock Purchase Agreement and otherwise, which the Defendants specifically deny, then Defendants assert that in the discharge of any legal responsibilities with respect to these allegations, they relied on the advice of counsel.

In his ruling, the Judge said that the word "otherwise" was "so broad as to be elusive of clear and reasonable definition." Op. at Par. 8. He said also that "[s]uch broad language makes it extremely difficult for the court to define fairly and reasonably where any resulting waiver of the attorney-client privilege begins and ends." Op. ¶10.

He held that the waiver covered any communications between the defendants and their counsel that took place before the closing of the sale and which reasonably related to a broad range of matters involving the sale.

The waiver extended to the work-product of counsel, because the statutory defense applies only if the director reasonably relies on the legal advice.  Judge Jolly relied on cases outside of North Carolina for the proposition that:

fairness dictates the necessity for an examination of the underlying good faith and reasonableness of the advice itself, including the circumstances surrounding issuance of the legal opinion, and that relevant work product therefore loses its privilege protections.

That exposed the lawyers to having to produce all documents reflecting communications between the law firm's primary counsel to the company and other lawyers at the law firm.

Judge Jolly said that "it would not have been difficult" to limit the scope of the waiver by limiting the wording of the defense. Op. 10.  That might be easier said than done.  Waiver is a slippery slope once you start heading down it.  There's no telling where you might end up.

 

Business Court Denies Motion For Disqualification Of Counsel

in an Order yesterday in International Forest Products Corp. v. Jackson Paper Mfg. Co., the Business Court denied a motion to disqualify defense counsel from representing Jackson Paper.  The lawyers who were challenged were from the Atlanta firm of McKenna Long & Aldridge. 

The basis for disqualification was that McKenna had previously represented a Jackson Paper subsidiary, Stonewall, in matters substantially related to the Business Court case and in matters on which the lawyers'  testimony would be required. The Plaintiff  International had acquired the claims it was pursuing against Jackson Paper by assignment from Stonewall in a receivership proceeding.

If it were Stonewall suing Jackson, it seems likely that McKenna Long could not have been jackson's counsel due to McKenna's previous representation of stonewall.  That's because Rule 1.9 of the Revised Rules of Professional Conduct says that

a lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client.

But International Forest didn't acquire the attorney-client relationship between McKenna Long and Stonewall.  It only acquired the claims that Stonewall had against Jackson.  Judge Murphy said that this made all the difference and that the Rule did not apply:

Rule 1.9 and its commentary. . .make clear that a duty of loyalty attaches to a client, and not to a claim or transaction. The lawyer-client relationship is a personal one and cannot be assigned. In the present matter, a lawyer-client relationship existed between McKennaLong and [Stonewall]. Thus, McKenna Long’s duty of loyalty and confidentiality are owed to Stonewall, not to Stonewall’s claims or interests. This personal duty, therefore, did not transfer to Plaintiff International Forest Products Corporation (“International Forest”) when it acquired certain of Stonewall’s claims. As an assignee, International Forest cannot claim protection under the duty of loyalty because it is not a former client of McKenna Long itself. Therefore, Rule[] 1.9 [is] inapplicable.

Another ground for disqualification was International's stated intention to call McKenna Long lawyers (other than Jackson's litigation counsel) as witnesses.  RPC 3.7(a) says that a lawyer cannot be an advocate at a trial in which the lawyer is likely to be a necessary witness.  But RPC 3.7(b) says that other lawyers in a lawyer-witness’s firm may continue to act as advocate unless the lawyer-witness’s testimony would be adverse to the client’s interests.  The Defendants didn't claim that the lawyer testimony would be adverse, so Judge Murphy denied that aspect of the disqualification motion as well.

Malpractice Is Malpractice: State Court Jurisdiction for Patent Attorney Professional Negligence Claims

What's the difference between a patent holder who suffers harm from third-party infringement and a patent holder who suffers harm from his own attorney's malpractice?  The latter can pursue his claim in state court, according to a March 9 Business Court decision.

In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the inventor of an "automated audio video messaging and answering system" and the current holder of the patent sued a patent agent, three patent attorneys, and a law firm for malpractice in failing to take certain actions before the United States Patent & Trademark Office ("USPTO").  Specifically, Plaintiffs alleged that Defendants failed to file certain paperwork that cost Plaintiffs their ability to patent their invention in foreign jurisdictions, including Japan and the European Union.  Defendants moved to dismiss for lack of subject matter jurisdiction, arguing that the claims lay within the exclusive jurisdiction of the federal courts. 

Further complicating matters, shortly after filing the Business Court lawsuit, Plaintiffs filed a separate lawsuit in the Western District of North Carolina, Carter v. Ozoeneh (W.D.N.C. No. 3:09-CV-614), to determine the ownership of the patent at issue.  The defendant in the federal lawsuit is an individual who was listed as a co-inventor on a prior patent application for the technology at issue.  Plaintiffs sought to amend the federal complaint to add one of the attorney defendants from the Business Court lawsuit along with Lawyers Mutual for claims of racketeering, maintenance, unfair competition, and tortious interference.  On September 16, 2009, Magistrate Judge David Cayer denied the motion to amend and recommended that the District Judge dismiss other claims against John Doe defendants, but the ownership claims remain in the federal lawsuit.

As for the jurisdictional issue in the Business Court lawsuit, Judge Tennille held that Plaintiffs' malpractice claim was not within the exclusive jurisdiction of the federal courts.  The Court examined cases from several jurisdictions, some of which permitted malpractice claims to proceed in state court and others of which held them to be exclusively federal claims.  The distinction depended on whether federal patent law was an essential element of the Plaintiffs' claims.  In Revolutionary Concepts, it was not:

In this Court’s view, the case sub judice is different.  The Complaint in this case does not raise an issue which requires the determination of the validity, scope or infringement of a United States patent.  Furthermore, the Complaint does not raise an issue requiring determination of what the USPTO would do under certain circumstances, nor does it involve regulation of the conduct of counsel appearing before the patent office.  The Complaint clearly raises issues of what the validity and scope of potential foreign patents would have been and perhaps issues of infringement of potential foreign patents that were allegedly lost.

The loss of the foreign patent rights is based upon a breach of the standard of care, quintessentially a state law claim.  Every malpractice action will require determination of a standard of care.  It is unlikely that any standard of care can be assessed without some reference to compliance with the proper procedures in the USPTO.  This Court does not read the Federal Circuit decisions to hold that any case by a patent owner against its patent counsel will fall within the exclusive jurisdiction of the federal courts.  Where federal jurisdiction will promote uniformity of claim construction, consistency in validity, scope and infringement of U.S. patents, or promote uniform regulation of patent counsel conduct before the USPTO, federal jurisdiction is mandated.  Where the issues involve foreign patent rights and issues of whether a lawyer complied with a standard of care, federal jurisdiction is not mandated.

The Court also noted that Plaintiffs voluntarily dismissed a claim for breach of contract in the prosecution of the patent before the USPTO.  In contrast to the foreign registrability issues of the malpractice claim, the breach of contract claim would have implicated federal law enough to confer exclusive federal jurisdiction over the lawsuit.  After the dismissal of that claim, however, whatever exclusivity may have existed previously no longer did.

 

Business Court Grants Motion To Disqualify Counsel

The Business Court granted a Motion to Disqualify counsel today in Ferguson Fibers, Inc. v. Foster, and sent a cautionary word to lawyers who represent the employees of their corporate clients in what they might believe to be unrelated matters.

The issue was whether the attorney for Plaintiff Ferguson Fibers should be disqualified because he had previously represented Foster in a child support matter and in a lawsuit involving the sale of the business of Foster's wife. The new lawsuit appeared to be completely unrelated to those past representations. It involved claims by Ferguson Fibers that Foster had engaged in inappropriate conduct while employed by Ferguson Fibers.

Rule 1.9 of the North Carolina Rules of Professional Conduct provides that "a lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related mater in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing."

The test for whether matters are "substantially related" is "if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that information as would normally have been obtained in the prior representation would materially advance the client's position in the subsequent matter."

Foster asserted that he had discussed with his former lawyer during the past representations his employment and business dealings with Ferguson Fibers, his role in helping his employer move part of its business to Mexico, and his "strained relationship" with his boss. He said that disqualification was warranted because this information might be relevant to the lawyer in his representation of his former employer.

The attorney disputed that he had ever discussed such matters with his former client, but Judge Tennille held that this made no difference. He observed that a court should "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification." He said "[t]he Court need not resolve this factual dispute. Its existence is sufficient to require disqualification," and that "Foster's perception of events, as the client, is of 'paramount importance' in preventing the appearance of impropriety."

The Court also provided a quick word of advice to lawyers who represent organizations as well as their employees: "Attorneys who represent various constituents of an organization, be they investors, employees, suppliers, or customers, are in a better position than lay persons to protect against potential conflicts of interest. Where counsel represents both a company and its employees, it is the duty of the lawyer to inform the client about the implications of the dual relationship."

Other decisions by the Business Court involving Motions to Disqualify are The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC, Chemcraft Holdings Corp. v. Shayban, and Flick Mortgage Investors, Inc. v. The Epiphany Mortgage, Inc.

Brief in Support of Motion to Disqualify

Brief in Opposition to Motion to Disqualify

Reply Brief in Support of Motion to Disqualify

Out Of State Counsel, Depositions, And Pro Hac Vice Admissions In North Carolina

I had an out of state lawyer call me, concerned, a few weeks ago. He was defending a client in his home state in a case in which the plaintiff's counsel had obtained commissions to take depositions in North Carolina. The depositions were scheduled to begin in just a few days, and he was concerned that he needed to admitted pro hac vice, in a hurry.

My reaction was that this was unnecessary. It was an out of state case. Rule 5.5(c)(2)(B) of North Carolina's Revised Rules of Professional Practice says that it's not the unauthorized practice of law to take a deposition in North Carolina if the "matter . . .  arises out of or is otherwise reasonably related to the lawyer's representation of a client in a jurisdiction in which the lawyer is admitted to practice." Moreover, it was the other side that had gotten the necessary commission and subpoena to take the deposition. The lawyer who called just planned on attending and possibly asking some questions after the other lawyer finished with his questions.

But after I looked at the situation a little bit I wasn't so sure. One of the North Carolina depositions was to be taken in Wake County, where there is a specific Local Rule on point. Wake County Local Rule 13.1 says that "out-of-state attorneys seeking to take depositions of Wake County residents to be used in actions pending in other jurisdictions must be admitted pro hac vice unless local counsel has been associated."

That's pretty broad. It might even cover an out of state lawyer taking the deposition of someone who agreed to appear voluntarily, without a subpoena. And are you "seeking to take depositions" if you are not the lawyer who compels the appearance of the witness, but you simply show up and ask some questions? And what about "unless local counsel has been associated?" Does that mean that NC counsel has to take the deposition or at least attend it, or is it enough if NC counsel simply obtains the issuance of the commission?

Given all these questions, we went ahead and got the lawyer admitted out of an abundance of caution.

I did a quick spot check of Local Rules for similar provisions. The only other county I'm aware of with an applicable rule is Mecklenburg County. The local rule there, 18.2(f),says "[i]f the out-of-state attorney intends to make an appearance in North Carolina in connection with this matter (such as attending the deposition)," the lawyer must be admitted pro hac.

There are occasional quirky local requirements of a different nature regarding pro hac admissions, like including a statement in the motion confirming payment of the $225 admission fee, which Guilford County Local Rule 5.12 requires. (All of the local rules for North Carolina's counties are available here, it's worth checking the pertinent rules if you are seeking or considering a pro hac admission).

Don't forget that when a lawyer is admitted pro hac here, the NC attorney responsible for the admission has to obtain a completed Pro Hac Vice Registration Statement, and file that with the state bar within thirty days of the admission. Failure to do so is grounds for administrative suspension of the NC attorney from the practice of law.  27 NCAC Subchapter H, Section .0101(b).

The North Carolina Bar has has an FAQ page on pro hac admissions which has a lot of useful information. The statute governing pro hac admissions is N.C. Gen. Stat. §84-4.1.

Mining For Metadata In Communications From Opposing Counsel Would Be Prohibited Under Proposed Ethics Opinion From North Carolina State Bar

The North Carolina State Bar has proposed an Ethics Opinion on whether a lawyer can look for and use metadata contained in a electronic communication from another party or that party's lawyer. Proposed 2009 Formal Ethics Opinion 1, if approved, would place affirmative obligations on not only the recipient of the data, but also its sender.

[Note: On October 22, 2009, the State Bar Ethics Committee voted to withdraw this opinion and to send it to a subcommittee for further study.]

Metadata is "data contained within electronic materials that is not ordinarily visible to those viewing the information."  Metadata might show information that a lawyer chose to delete, or a private comment that the lawyer didn't mean the reader to see.

Obligations On Sending Lawyers

Those sending an email or electronic version of a document to an opposing counsel or party will be obligated to "use reasonable care to prevent the disclosure of confidential client information." That means being careful about using word processing software that tracks changes, allows the insertion of comments, or permits the saving of multiple versions of a document. The Opinion says that lawyers should use scrubbing applications that delete metadata, or avoid metadata altogether by sending fax transmissions or hard copies of documents.

Obligations On Receiving Lawyers

On the recipient side, the Proposed Opinion would prohibit a lawyer receiving electronic communications from searching for or using confidential information contained in the metadata in the document. And not only that, if the recipient unintentionally views hidden data, he or she must notify the sender of that fact.

The Proposed Opinion doesn't apply, of course, to documents produced in response to a subpoena or a discovery request.

Other States

The issue of metadata has been confounding state bar ethicists for years. The Proposed Opinion references a number of other state bars which have issued ethics opinions on the subject, including Alabama, Arizona, Colorado, the District of Columbia, Florida, Maine, Maryland, New York, and Pennsylvania.

North Carolina, if it adopts the Proposed Opinion, will be lining up with Alabama, Arizona, Florida, Maine, and New York. Each of those states takes the position that a lawyer should not search metadata for confidential information belonging to an opposing party. There are a few with a contrary view or which don't take a position on the subject, including the American Bar Association, Colorado, Maryland, and Pennsylvania.

The ABA has a good one page summary of the rules on metadata in these various jurisdictions, including a few additional jurisdictions not referenced by the NC State Bar in the Proposed Opinion.

If you have thoughts on this subject, you can address comments on the Proposed Opinion by September 30, 2009, to the NC State Bar Ethics Committee at P.O. Box 25908, Raleigh, North Carolina 27611.

The full text of the Proposed Opinion is below.

Continue Reading...

Business Court Grants Motion For Disqualification Of Counsel

The Business Court today granted a motion to disqualify counsel for Plaintiffs, finding their prior representation of the Defendants involved a matter "substantially related" to the matters at issue in the lawsuit. 

The law firm representing the Plaintiffs in The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC had been longstanding counsel for the Plaintiff homeowners association.  They had first been retained when Defendant Dominion, the former owner of the property, converted it to a condominium and incorporated the HOA.

The Board of the HOA at that time consisted of representatives appointed by Dominion.  In 2006, the Dominion-controlled Board sought the law firm's advice about maintenance issues.  The advice was sought on behalf of both the HOA and Dominion.  The lawyers delivered a written opinion letter on "the maintenance responsibilities between the Unit Owners and the Association."

Over a year later, an owner-controlled Board of the HOA was elected.  Issues arose regarding the adequacy of maintenance reserves.  The law firm filed a lawsuit for the HOA against Dominion and the former board members for breaching their fiduciary duty by failing to set adequate reserves for common area and maintenance expenses.

After sifting through the positions of the parties, the Court held:

[h]ere, Defendants find themselves in a position in which the very lawyer who advised one or more of them with respect to duties and obligations relating to budgeting for and maintaining Stonehenge common areas now seeks damages against them for breaching their duty to adequately set aside fiscal reserves for the repair and maintenance of those same common areas.  The court is forced to conclude that the two are inextricably and substantially related.

Judge Jolly granted the Motion to Disqualify, stating that the prior representation presented the "substantial risks contemplated under Rule 1.9" of the North Carolina Rules of Professional Conduct, and that "it is the court's duty to resolve any and all such risks in favor of disqualification."

The Dairy Queen sign is from tboard's photostream on Flickr.

Brief in Support of Motion to Disqualify

Brief in Opposition to Motion to Disqualify

Funds Stolen By Lawyer At Closing: NC Court Of Appeals Rules On Whether Buyer Or Seller Bears The Loss

When the attorney closing a residential real estate transaction steals the closing proceeds, does the buyer or the seller bear the loss? 

The holding of the 2-1 majority today in the North Carolina Court of Appeals decision in Johnson v. Schultz is that in the typical transaction the loss will fall on the party whose lawyer absconded with the funds, at least in the absence of fault.

In North Carolina, that's in most cases going to be the buyer, who typically selects the closing attorney.  The holding of Judge Robert C. Hunter, concurred in by Judge Martin, was as follows:

we conclude that where, as here: (1) one attorney is used to handle a residential real estate closing, (2) the attorney misappropriates the remaining balance of the purchase price owed to the seller, and (3) the risk of loss must be allocated to one or more parties, courts should first consider the existence of fault. However, if fault does not exist and the risk must be allocated between essentially “innocent” parties, courts should then consider which parties had an attorney-client relationship with the wrongdoing attorney and impose the risk of loss on those parties. Where multiple parties to the transaction have an attorney-client relationship with the offending attorney, the risk of loss should be shared among them.

The Court rejected the approach taken by the trial court, which had followed what is known as the "entitlement rule." Under that rule, the loss fell on the seller, who was the party entitled to the funds in the hands of the attorney.  The theory of the entitlement rule is that that the holder of an escrow is the agent for the party for whom the funds are being held.  An earlier Court of Appeals decision, GE Capital Mortgage Services v. Avent, 114 N.C. APP. 430, 442 S.E.2d 98 (1994), had followed the entitlement rule in a case involving an escrow held following a residential closing, but it was distinguished by today's decision.

Judge Wynn dissented, and took a completely different approach.  He would have placed the risk of loss on the seller, because the seller had opted to take its proceeds in the form of a check drawn on the closing attorney's trust account, as opposed to the cash payment specified in the standard 2005 NCBA contract form.  The majority reasoned that requiring sellers to walk away from the closing with cash "would significantly disrupt the way real estate transactions are traditionally closed in North Carolina."

The opinion contains a detailed discussion of how residential real estate transactions are closed in North Carolina.  Those generally involve the "settlement closing" method, but sometimes involve what's called an "escrow closing."  The case also defines what an "escrow" is, for the first time in a reported North Carolina appellate opinion, and discusses obscure types of escrows like a "set-aside escrow" and a "deed and money escrow."  (You'll have to read the opinion if you want to know more about these things).

In the Johnson case, the closing attorney, now disbarred, had made off with more than $250,000 in closing proceeds owed to the seller.  The case was apparently a big deal in the residential real estate closing world.  The North Carolina State Bar weighed in with an amicus brief on behalf of the seller, which was countered by an amicus brief by the North Carolina Land Title Association for the buyer.

It's now on to the Supreme Court.  And even then, the case may not be over.  That's because the buyer claimed that the attorney had been acting for the seller as well, and the Court of Appeals held that the case needed to be remanded for resolution of this issue.

Court Of Appeals Reverses Order Granting Rule 11 Sanctions In A 2-1 Split

The Court of Appeals split yesterday on whether a Plaintiff and his lawyers who continued with a lawsuit after they should have determined that it was not well grounded in fact or law could be hit with non-monetary sanctions.  The majority reversed, saying that the trial court should not have considered events occurring after the filing of the Complaint in awarding sanctions.

The case decided by the Court of Appeals is Egelhof v. Szulik.  The case arose in the Business Court, and was a shareholder derivative action against the technology company Red Hat.  Judge Tennille dismissed the case in 2006 due to Plaintiff's failure to make a proper demand under Delaware law. 

After that, Defendants moved for sanctions and attorneys fees.  In the 2008 decision appealed from, Judge Tennille sanctioned Plaintiff and his lawyers by barring Plaintiff from serving as a representative plaintiff for five years and by barring the lawyers from being admitted pro hac in North Carolina for a like period.  Judge Tennille refused to award monetary sanctions.

Plaintiff appealed, arguing that there was no basis for Rule 11 sanctions because there had been no finding by the Business Court that their Complaint was "neither well grounded in fact nor warranted by existing law" at the time it was filed.  They were right, as the Business Court had expressly stated that the Complaint, standing alone, did not warrant Rule 11 sanctions.  Defendants appealed too, arguing that they were entitled to monetary sanctions.

The Business Court's sanctions ruling was based on post-filing events which it said should have led the Plaintiff to conclude that it should no longer pursue its action, including the dismissal of another case (Pozen) brought in the Business Court by the same lawyers, for the same reason that the Egelhof case was dismissed a few months later: failure to make a demand under Delaware law. 

The Court of Appeals majority concluded that a Court cannot consider matters outside the face of the Complaint in determining whether the Complaint lacked factual or legal support so as to warrant Rule 11 sanctions.  It relied on Bryson v. Sullivan, 330 N.C. 644, 412 S.E.2d 327 (1992), in which the Supreme Court held that "in determining whether a pleading was warranted by existing law at the time it was signed the court must look at the face of the pleading and must not read it in conjunction with responsive pleadings."

Judge Calabria dissented, holding that "sanctions are not limited when later filings reveal the case has become meritless.  The trial court may look beyond the face of the pleading when considering whether litigation was continued for an improper purpose."  Judge Calabria found that sanctions were appropriate not only under Rule 11, but also under the inherent power of the Court.

And Judge Calabria took it one step further, holding that the trial court had erred by not giving proper consideration to an award of monetary sanctions under N.C. Gen. Stat. §6-21.5.  Relying on Sunamerica Financial Corp. v. Bonham, 328 N.C. 254, 400 S.E.2d 435 (1991), she held that a "trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue."

The Supreme Court will sort out this disagreement if the case goes forward, but there are two other Rule 11 tidbits in this opinion on which the majority and majority agreed:

The Court held that Rule 11 permits sanctions to be imposed against a party and his attorney attorney even though they didn't sign the Complaint.  (Here, out-of-state counsel had never signed the Complaint, but were sanctioned by the trial court.) 

The Court of Appeals also held that due process does not require that a party against whom sanctions are sought be put on notice of the specific type of sanctions which may be ordered, rejecting a due process challenge by the Plaintiff.  All that is required is notice of the bases of the sanctions and an opportunity to be heard.

Cruising And Recusing: Motion To Recuse Is Stricken By The North Carolina Business Court

This post is about an Order Striking a Motion for Recusal by the North Carolina Business Court, in J. Freeman Floor Company, LLC v. FreemanThe Motion was stricken because it was procedurally defective, but the factual allegations which the Plaintiff claimed warranted recusal were interesting, as was the way in which Judge Diaz handled those allegations.

The Plaintiff moved to recuse Judge Diaz from hearing the Defendant's Motion for Sanctions.  The argument for recusal ran like this: Plaintiff asserted that (1) Defendant's counsel (Winson) had  been counsel for Carnival Cruise Lines, (2) Carnival Cruise Lines had in the past been represented by Hunton & Williams, (3) Judge Diaz had formerly been an attorney with Hunton & Williams (even at the same time he was a Superior Court Judge, said the Plaintiff) , and (4) Judge Diaz had improperly reopened the case (which had been dismissed) in order to hear the Rule 11 Motion. 

The specific allegations made in the Motion for Recusal were that:

Mr. Winson has close and substantial ties with Hunton & Williams by virtue of his long and substantial relationship with Hunton & Williams' clients Carnival Corporation and Carnival Cruise Line.  Judge Diaz has close and substantial ties with Hunton & Williams due to his long and recent association with Hunton & Williams.  Mr. Winson's substantial ties to Hunton & Williams and Judge Diaz's substantial ties to Hunton & Williams creates a conflict of interest which Plaintiffs in good faith believe would prevent Judge Diaz from being fair and impartial to the Plaintiffs with regard to Mr. Winson's Rule 11 motion which was purposefully set before Judge Diaz in a closed case file which had to be re-opened in order to bring said motion before Judge Diaz, despite the fact that Mr. Winson could have filed the Rule 11 motion in the new case file which would not have been heard by Judge Diaz.  Thereafter, Mr. Winson removed the new case file to business court and purposefully requested that Judge Diaz be assigned to the case.  For these reasons, Plaintiffs in good faith do not believe that they will receive a fair and impartial decision with regard to Mr. Winson's Rule 11 motion.

The Motion to Recuse further alleged that Judge Diaz, who has been a Superior Court Judge since 2001, had been appearing in Court for Hunton & Williams clients as recently as 2006.  It referenced as support for this assertion several federal court opinions decided between 2003 and 2006 in which Judge Diaz was listed as counsel of record along with another Hunton & Williams attorney. (The Plaintiff was right about Judge Diaz being listed as counsel in those cases, but they all were filed before Judge Diaz took the bench).

The Plaintiff claimed that as a result of these facts there was an appearance of a "special relationship between Mr. Winson and Judge Diaz," and that this "would tend to give the appearance of impropriety." 

Judge Diaz didn't get to the merits of the Motion in his Order, but instead struck the Motion because it was filed without a brief, in violation of Business Court Rule 15.2.  He noted that the Rule violation would ordinarily result in a summary denial of the motion, but gave the Plaintiff ten days to refile its Motion (with a Brief).  The ten days have run out, and the Motion hasn't been refiled.

That's probably because notwithstanding the striking of the Motion, Judge Diaz gave the Plaintiff a direct response to its assertions showing that they didn't have any basis. The highlights are as follows:

  • With regard to the allegations that he had been practicing law while a Judge, Judge Diaz said "[s]ince taking the oath of office as a superior court judge in November 2001, I have not practiced law, whether with my former firm Hunton & Williams, LLP or any other firm. Indeed, such activity would be patently inconsistent with my oath as a judge and would also violate the North Carolina Code of Judicial Conduct. See N.C. Code of Judicial Conduct, Canon 5(F) (“Practice of law. A judge should not practice law.”)."
  • With regard to the allegations that Hunton & Williams had represented Carnival, Judge Diaz stated that was "news to me," and that "to the best of my knowledge and recollection, I never represented Carnival . . . during my tenure at H&W."
  • On whether he had a relationship with Carnival's former General Counsel, Judge Diaz said that he "had never met Mr. Winson during my tenure at H&W" and that the first time he had encountered him was by telephone when Winson was in Court on another Business Court case.
  • On the point of whether it was proper to reopen the case to hear the Rule 11 Motion, Judge Diaz observed that "the law is clear that a trial court retains jurisdiction to hear a motion filed pursuant to Rule 11 of the North Carolina Rules of Civil Procedure, even after the case is dismissed."  

The picture at the top is of one of Carnival's fleet of cruise ships, the Carnival Fantasy.

Court of Appeals Rulings Today (September 2, 2008)

The North Carolina Court of Appeals ruled today on cases involving the statute of repose applicable to legal malpractice actions, fiduciary duties of trustees, and the waiver of the right to arbitration.

On the fiduciary duty issue, the Court affirmed the decision of the Business Court in Heinitsh v. Wachovia Bank on an obscure point of trust law for which it observed there was "surprisingly little guidance." The trustee in Heinitsh was caught between the income beneficiaries and the remaindermen of a substantial trust over a dispute whether millions of dollars from the sale of property should be categorized as income or principal. During the dispute, the trustee took the disputed funds and invested them in a money market account. The plaintiff, an income beneficiary, argued that the trustee's duties required it to maximize income in her favor, and that the trustee had breached its fiduciary duties by placing the funds in a low-yielding money market account. The Court of Appeals held that "holding the retained funds during the pending litigation was reasonable in light of the circumstances and defendant did not breach its fiduciary duty to plaintiff." The Court suggested, however, that "the better practice may be to interplead the funds. . . ."

The legal malpractice case is Goodman v. Holmes & McLaurin Attorneys at Law. The plaintiff had sued outside the four year statute of statute of repose contained in N.C. Gen. Stat. §1-15(c), but contended that the law firm was equitably estopped from asserting the statute given a lawyer's active conduct in trying to hide the fact of his malpractice.  The Court of Appeals found that conduct of concealment to be "particularly egregious," but held that "this Court has consistently refused to apply equitable doctrines to estop a defendant from asserting a statute of repose defense in the legal malpractice context. . . ."  It found plaintiff's claims therefore to be barred by the statute of repose.

In Gemini Drilling and Foundation, LLC v. National Fire Insurance Co. of Hartford, the Court found that the defendant had waived its right to arbitration. The defendant had filed a motion to compel arbitration, and lost. Instead of taking an immediate interlocutory appeal, which it had the right to do, it participated in discovery and then a bench trial of the claim. The Court held that the purpose of arbitration "would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment."

There's another case from today's opinions, Odell v. Legal Bucks, LLC, which I'll deal with separately. You can find all of the Court of Appeals opinions today here.

The photo of the Court of Appeals building is from Juliet Sperling.

 

There Won't Be Any Unauthorized Practice Of Law In The Business Court

Burgess v. Vitola, 2008 NCBC 7 (N.C. Super. Ct. March 26, 2006)(Diaz)

Bueche v. Noel, March 25, 2008 (Diaz)(unpublished)

The Business Court decided two cases this week involving what it found to be the unauthorized practice of law.  In the first, Bueche v. Noel, the Court held that a pro se defendant could not file an Answer on behalf of a corporation, because "a corporation must be represented by counsel and cannot appear pro se."  The Court struck the Answer filed by the defendant.

In the second case, Burgess v. Vitola, the issue was whether an out-of-state attorney who had apparently ghost written an Answer for a defendant had engaged in the unauthorized practice of law.

The defendant involved was Dr. Entezam, a California dentist sued by the plaintiff for allegedly trespassing on his computer through an unwanted advertisement.  (Whether those advertisements subjected the defendants to jurisdiction in North Carolina was the subject of an earlier post).  Dr. Entezam filed an Answer under her own pro se signature which had clearly been drafted by a lawyer.   

Continue Reading...

Sanctions For Derivative Action Plaintiff And His Lawyers

Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)

It’s hard to imagine a more inadequate plaintiff than Egelhof to undertake the fiduciary responsibility of being a plaintiff in a derivative action against Red Hat, a publicly traded company. Egelhof was only 24 years old, and held only a few hundred dollars of Red Hat's stock. He had become a plaintiff in response to a solicitation on the internet. As the Court described Egelhof, "[h]e had little investing experience, no experience in litigation, no prior connection with the [his] law firm, no personal knowledge of [the corporation] and its operations, and a minor criminal record."

The Court concluded that this plaintiff "lacked any credentials to act as a fiduciary for a company in multi-million dollar litigation." Noting Egelhof’s paltry stake in Red Hat, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff's lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."

These factors alone would probably not have warranted sanctions, but Egelhof was completely uninvolved in his case. He relocated, more than once, and never gave his lawyers a forwarding address. He sold his stock during the course of the lawsuit, creating a significant standing issue, but never mentioned this to his lawyers. He had never even met his lawyers until the night before his deposition and had spent a total of five hours on the case by the time he was deposed.

The Court's sanction to Egelhof was to prohibit him from being a plaintiff in a class action or derivative action in North Carolina for the next five years. The lawyers came in for an equally harsh sanction.

Continue Reading...