North Carolina Business Litigation Report : North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

Let's say you are a corporate lawyer.  You spend your pitiful and lonely life surrounded by marked up papers and red pens, drafting or revising agreements.  You send your final versions out to your clients to sign, with those annoying little "sign here" stickers.

Then, the big day finally comes.  Your work is in court and the case turns on an agreement that you drafted.  But it wasn't signed by everybody concerned.  It's a nightmare.  What's going to happen?

Your astonishingly bright (and good looking) litigation partner says "No sweat.  We don't need no stinkin' signatures."  Is he or she right?

He or she might be, based on Judge Gale's decision last week in Hawes v. Vandoros, 2013 NCBC 31.  The parties were all joint owners of two investment beach houses.  When they refinanced the houses, most of them signed "contribution agreements" providing that they would each pay a pro rata share of the monthly payments due under the new loans.  

There were eleven signature lines on the Contribution Agreements, but two of the owners (the Schemerhorns) did not sign.  Two of those who had signed defaulted on their payments, and argued that the Agreements were not valid because all of the co-owners had not signed.

Judge Gale held that "a signature is not always essential to the binding force of an agreement . . . and .  . . in the absence of a statute it need not be signed, provided it is accepted and acted on, or is delivered and acted on."  Op.  ¶29 (quoting Fidelity & Casualty Co. of NY  v. Charles W. Angle, Inc., 243 N.C. 570, 575-76, 91 S.E.2d 575, 579 (quoting W.B. Coppersmith & Sons v. Aetna Ins. Co., 222 N.C. 14, 21 S.E.2d 838 (1942)).

Those who hadn't signed the Agreements had abided by them -- they consistently made the payments due from them and had accepted the Agreements via their performance.  Op. ¶29.  Therefore, all signatures were not required.

Judge Gale also rejected the argument that obtaining all signatures was a condition precedent to the validity of the Agreements.  He said that "[a]bsent plain language, a contract ordinarily will not be construed as containing a condition precedent."  Op.  ¶30 (quoting Craftique, Inc. v. Stevents & Co., Inc., 321 N.C. 564, 566-67, 364 S.E.2d 129, 131 (1988)).

I wouldn't give up those signatures just yet.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Fourth Circuit doesn't get into matters of LLC law very often, but it did last week in Painter's Mill Grille, LLC v. Brown. The LLC and its members were suing their landlord for discriminating against them on the basis of race.

The LLC was operating a restaurant which served an African-American clientele. The Plaintiffs said that the Defendants became hostile to them as a result and referred to their business in a racially disparaging way and interfered with their sale of the business.

One of the comments by the Defendants, when the Plaintiffs attempted to sell their business, was whether they were going to open another "chicken and waffle shack."

Let me say that I love [fried] chicken and waffles for breakfast. If you haven't tried that dish, Dame's Chicken & Waffles, in Greensboro's Southside neighborhood, is outstanding.  If you don't get the racial animus alleged to be behind that term, the dish is said to have originated with African-American southerners.

But could the LLC members, who alleged that they suffered "personal out-of-pocket losses" as a result of the Defendants' discriminatory conduct, state a claim against them?

No, said Judge Niemeyer, since they were LLC members.  He held that:

[i]n advancing their arguments [the members] failed to account for the fact that they elected to conduct their business through a limited liability company ("LLC") and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), forecloses just such claims.

Op. at 7 (emphasis added).

I wasn't familiar with the Supreme Court's decision in Domino's Pizza, but it rejected in that case a shareholder's personal claims for race discrimination, holding that they belonged solely to the corporation.  Justice Scalia held there that:

it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts.

546 U.S. at 477.

I will hold off on my pizza recommendations.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The issue in Johnson v. American United Life Insurance Co., decided last week by the Fourth Circuit. was whether the Plaintiff's husband's death from a car wreck while driving intoxicated was an "accident" under his life insurance policy from Defendant American United which provided "Accidental Death and Dismemberment" coverage .

The policy didn't contain a definition for an "accident," making it necessary for the Court to interpret the term. It noted in passing that     "[t]here are probably not many words which have caused courts as much trouble as 'accident' and 'accidental.'" Op. at n.1.

In the end, Judge Traxler ruled that the dead husband was covered by the policy, though he said that:

Reaching this result gives us no great pleasure. Drunk driving is reckless, irresponsible conduct that produces tragic consequences for the thousands it touches annually. But our task in this case is not to promote personal responsibility or enforce good driving habits. We must focus on the terms of the policies issued under the Plan and determine whether Richard died as a result of an accident without 'allowing our moral judgments about drunk driving to influence our
review.'

Op. 3-4.

The Court's analysis began with two competing definitions of the term "accident."  The Plaintiff argued that the "most natural and common understanding of the term . . . is an unintentional, unplanned incident that occurs as a result of a careless error."  Op. at 12.  She said that unless an intoxicated driver intended to crash his car and die, that his death would be an accident under the policy.

Another definition of "accident" would "exclude any incident where the consequences of intentional conduct are expected or reasonably forseeable."  Op. at 13.

Finding the term ambiguous, the Court applied "the rule of contra proferentum and construed the term[] strictly in favor of the insured." Op. at 15.   It found no evidence that the driver intended to have an accident and deemed the insured's death to be an accident.

The District Court had ruled that a death caused by intoxication was not an "accident."  It relied on Section 58-3-30(b) of the North Carolina General Statutes, which says that

"Accident", "accidental injury", and "accidental means" shall be defined to imply "result" language and shall not include words that establish an accidental means test.  "

You might not be familiar with some of those terms.  I wasn't.  The "accidental means" definition provides that there is no coverage when the loss "occurs by reason of an insured's intentional act" or "is the natural and probable consequence of a voluntary actor course of conduct."  Op. at 21 (quoting Collins v. Life Ins. Co. of Va., 393 S.E.2d 342, 343 (N.C. Ct. App. 1990)).

The "accidental result" standard is more liberal. 

a policy that pays benefits based on an 'accidental result' standard does not categorically exclude from the definition of 'accident' losses resulting from intentional acts; rather, "accidental" under this standard means a loss occurred 'fortuitously without intent or design' and was 'unexpected, unusual and unforeseen.'

Op. at 21 (quoting Henderson v. Hartford Accident & Indem. Co., 150 S.E.2d 17, 20 (N.C. 1966)).

Judge Traxler looked to a 1992 North Carolina Supreme Court decision -- North Carolina Farm Bureau Mutual Ins. Co. v. Stox, 412 S.E.2d 318 (N.C. 1992) -- which held:

 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 When you think of sanctions, your mind probably goes to Rule 11 of the Rules of Civil Procedure.  But what about Rule 37(b)(2)?  It says that: 

if a party . . . fails to obey an order to provide or permit discovery, . . . a judge of the court in which the action is pending may make such orders in regard to the failure as are just . . . . In lieu of any [such order] or in addition thereto, the court shall require the party failing to obey the order to pay the reasonable expenses, including attorney’s fees, caused by the failure . . . .

Judge Murphy applied the teeth in Rule 37 to sanction two of the parties -- Allison and Stathopoulos -- in an Order this week in BOGNC v. Cornelius Self-Storage LLC to the tune of almost $10,000 for failing to comply with an earlier discovery order in the case.

 He had entered that Order in December 2011, ruling that the attorney-client privilege did not apply to communications between Allison (an attorney) and Stathopoulus, both of whom were LLC members.  He directed those two parties to produce the documents they had withheld on the basis of privilege within thirty days, and to produce a privilege log for documents they continued to maintain as privileged within the same time frame.  If disputes continued, Allison and Stathopoulus were to deliver the documents in camera for the Court's review.

The deadlines passed without compliance.  Although the Order did not state a deadline for production of the documents for an in camera review, they were not provided until eight months after the entry of the Order.  Judge Murphy said that the production was "riddled with deficiencies" and  the parties had acted in "blatant disregard" of his Order.   Order ¶18.

The sanctions were equivalent to the reasonable expenses incurred by the Plaintiff as a result of the parties' failure to comply with the Court's 2011 Order, which were ruled to be $9,614.00.

It is worth mentioning that these sanctions didn't run against the lawyers for Allison and Stathopoulus.  They ran directly against the parties.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you were thinking that an arbitration agreement needs to be signed in order to get an order compelling arbitration, your world may have been turned on its ear by the Order from the Business Court last week in Morton v. Ivey, McClellan, Gatton & Talcott, LLP, 2013 NCBC 23..

 There's certainly a fair amount of North Carolina authority that an arbitration agreement can't be enforced if it was never signed (noted in ¶20 of the Order), but Judge Gale held that the Revised Uniform Arbitration Act relaxes this requirement.

The RUAA became effective in 2004, and provides that "[a]n agreement contained in a record to submit to arbitration . . . is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for revoking a contract."  N.C. Gen. Stat. §1-569.6(a).  

A "record" is defined by the Act as "information that is inscribed on a tangible medium."  N.C. Gen. Stat. §1-569.1(6).  The predecessor statute -- the Uniform Arbitration Act -- carried a more stringent standard.  It said that "parties may agree in writing to submit to arbitration . . . or they may include in a written contract a provision for the settlement of arbitration of any controversy. . . . "

Even though the Plaintiffs had never signed the partnership agreement containing the arbitration provision, they had known of the agreement and taken a significant role in drafting it.  Judge Gale found that:

the draft Partnership Agreement circulated by [one of the Plaintiffs] and assented to by [the Defendants], is a sufficient 'record' to satisfy the requirement of § 569.6(a) of the RUAA.

Order ¶23.

Congratulations to my partners Jeff Oleynik and John Ormand for pulling off this magic trick and getting the Order compelling arbitration.  (And no, that's not Jeff or John in the picture.  Or their rabbit.)

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When I last wrote about SCI North Carolina Funeral Services, LLC v. McEwen Ellington Funeral Services, Inc., Judge Murphy had entered a TRO against the Defendants for trademark infringement over their use of the McEwen name in their funeral home business.  The case seemed cut and dried then, and it looked like that the Defendants had no defense to the infringement claim.

Last week, Judge Murphy entered a preliminary injunction in the same case in 2013 NCBC 11, this time over the Defendants' vigorous defense.  The second time around was a much closer call. 

The case involves the McEwen name, which is the middle name of Defendant Carl Ellington. When the Defendants sold the funeral homes that they had operated under the McEwen name to the Plaintiffs, they included in the sale the rights to all "trademarks, tradenames (including all trade names under which [they] did business."  McEwen was the last name of Carl J. McEwen, the founder of McEwen Funeral Services, Inc.

Several years after their sale, the Defendants opened a new, competing funeral home under the McEwen name and this trademark infringement lawsuit ensued.

 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There is little case law under the North Carolina Securities Act.  But last week, in NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, 2013 NCBC 12, Judge Gale took several steps into that uncharted territory.

TIC Interests Are Securities

The first issue addressed in NNN was whether the "TIC interests" purchased by Plaintiffs fell within the definition of a "security."  If you've never heard of a TIC interest, it is "an undivided share in real property 'with each person having an equal right to possess the whole property. . . .'" Op. ¶42.

There's been a good bit of litigation about whether a TIC interest can  be considered a security.  It's not a security if it simply involves the sale of fractional real estate shares, but it can be if it is coupled with a management contract.

That was the situation before the Court in NNN.  Plaintiffs had purchased TIC interests in several office buildings in Durham.  Two of the primary tenants of the buildings were affiliates of the Duke University Health System.  The properties were to be managed by Triple Net Properties, LLC, which is a defendant in a separate lawsuit also before the Business Court.

Plaintiffs alleged that Triple Net and Highwoods, the former owner of the properties, obtained their investment by making material misstatements which misled them into making their purchases. The alleged misstatements concerned Duke's intention to remain as a tenant.  After the purchases of the TIC interests, Duke decided not to renew its leases.  The properties which it had occupied then went to foreclosure. 

The State Scheme For Civil Liability Under The Securities Act

Section 78A-56(a) imposes "primary liability" on the seller or offeror of a security.  There are two "pathways" to primary liability.  One lies in fraud, generally comparable to federal 10b-5 claims. That's in N.C. Gen. Stat. §78A-8, (Section 78A-56(a) creates civil liability for a violation of section 78A-8.)  The other pathway is through making false or misleading statements, comparable to federal claims under 12(a)(2) of the Securities Act of 1933.  That's in N.C. Gen. Stat. §78A-56(a)(2).

Note that the remedies under the NCSA are less generous than those under the corresponding federal claims.  The recovery under NC law is generally limited to the consideration paid for the security.  N.C. Gen. Stat. §78A-56(a).

Pleading, Scienter, and Justifiable Reliance Under Sections 56(a)(1) and 56(a)(2)

Judge Gale ruled that a Plaintiff must prove scienter and justifiable reliance to make out a primary violation under Section 56(a)(1) of the NCSA.  Recall that Judge Murphy ruled last year that scienter is not necessarily a required element of a claim under Section 56(a)(2), which can be grounded on negligence.  

So, Judge Gale ruled, a claim under Section 56(a)(1) must be pled with particularity, in compliance with Rule 9(b) of the NC Rules of Civil Procedure.  Op. ¶¶62-63.

Section 56(a)(2) is different.  It provides for a claim against an offeror or a seller of a security "who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statment which was made to not be misleading."  Op. ¶64.  There's a built-in defense in the statute.  A seller or offeror can avoid liability for such a statement or omission if he can prove that "he did not know, and in the exercise of reasonable care could not have known of the truth or omission."  N.C. Gen. Stat. §78A-56(a)(2).

On pleading requirements as to Section 56(a)(2),  Judge Gale ruled that "the heightened pleading standards of Rule 9(b) do not apply [to a claim under that Section] where the action is grounded on negligence, but rather Rule of Civil Procedure 8(c) controls."  Op. ¶67.  The plaintiff also doesn't need to prove justifiable reliance under this Section.  Id.

Secondary Liability Under Section 56(a)(2)

North Carolina extends secondary liability under Section 56(a)(2) to "every other person who materially aids in the transaction."  But the "other person" must be shown to "actually [know] of the factual predicate of the primary liability."  Op. ¶69.

What does "materially aid" mean?  Judge Gale devoted several paragraphs of his decision to that issue (¶¶71-80), and concluded that:

for purposes of the present Rule 12(b)(6) motion the court will require allegations of conduct which rises to the level of having contributed substantial assistance to the act or conduct leading to primary liability under the NCSA, and, when later assessing plaintiff’s proof, will apply the concept of 'substantial assistance' restrictively.

Op. ¶79.

The Liability Of One Of The Defendants

The last part of the opinion deals with the liability of the Defendant Highwoods.  Highwoods conveyed the fractional interests in the properties directly to the Plaintiffs, but hadn't been involved in the peddling of the management contract.  That wasn't enough to make it liable as a seller of the security and make it primarily liable, so there was no claim for liability under Section 78A-56(a)(1).

Highwoods did not fare as well on Plaintiffs' claims that it was secondarily liable under Section 78A-56(a)(2).  Judge Gale ruled that "[w]hether a person’s participation in the sale of a security constitutes 'material aid' and whether that person 'actually knew of the existence of the facts by reason of which the liability is alleged to exist' are necessarily fact-intensive inquiries. " Op. ¶91.

The facts about Highwoods' knowledge that Duke planned to vacate the sold properties are to be the subject of "further proceedings."  Op. ¶90.

Being a Tar Heel fan, I have to say It's a shame that no one can figure out a way to sue Duke.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The case of Blythe v. Bell is like the gift that keeps on giving.  It generated two significant opinions last year, and this week a third and a fourth.  The July 2012 opinion was a major e-discovery decision, and the December 2012 opinion addressed an important issue about the assignment of LLC interests.

Today's post is about the Blythe v. Bell opinion numbered 2013 NCBC 8, on the subject of expert testimony.  In this third Blythe opinion, Defendants had moved to exclude the testimony of Plaintiffs' expert witness, Barbee, on the grounds that he was not qualified to render his opinion and that his methodology was deficient.

Barbee, a CPA, had offered testimony that the Plaintiffs' damages were lost profits consisting of more than ten million dollars, including  “historic lost profits” of about $3.3 million;  and “additional lost profits” of about $7.4 million.  Defendants' Motion to Exclude at ¶7.

Remember that it is very tough to prove lost profit damages in North Carolina.  As Judge Gale held, 

[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.  He also said that while the amount of damages to be awarded is for the jury to determine, "the court determines as a matter of law whether the evidence would allow a jury to calculate lost profits with reasonable certainty."  Op. Par. 20.

Furthermore, the expert testimony must "pass the realm of conjecture, speculation, or opinion not founded on facts, and must consist of actual facts from which a reasonably accurate conclusion regarding the cause and the amount of the loss can be logically and rationally drawn." Op. ¶20 (quoting Overnite Transp. Co. v. Int'l Brotherhood of Teamsters, 257 N.C. 18, 30, 125 S.E.2d 277, 286 (1962). 

The Defendants attacked Barbee's expertise, saying that he was not a qualified expert on the subject of marketing and that the method he had used to calculate lost profits was not reliable enough to pass muster.

Judge Gale gave a nod of approval to Barbee's expertise, saying that he was well qualified in the field of damages calculations.  He had the qualifications many of us look for when hiring a financial expert, like certifications from the American Institute of Certified Public Accountants in the areas of business valuation and financial forensics.

The AICPA puts limitations on a CPA's methods of calculating lost profits.  One of its publications counsels against speculation, saying that "damages for lost profits are recoverable only if the plaintiff can prove the damages related to lost profits are reasonable and that they have been calculated using reliable factors without undue speculation."  Op. ¶16 (quoting Richard A. Pollack, et al, AICPA, Calculating Lost Profits, Ch. 58 ¶¶ 52-53 (2006)).

Judge Gale ruled that Barbee's calculation of lost profits crossed the line into "conjecture and speculation" and that it should be excluded from evidence.  Op. ¶5.  

So where did Barbee leave the terra firma of "reliable factors" and enter the world of "conjecture and speculation"?  His calculation assumed that one of the Plaintiffs would have increased its sale of the socks that were central to the lawsuit and thereby its profits.  He based that calculation upon an assumption that the Plaintiffs would have had more dollars available to spend on marketing to increase sales.  He didn't specify how the dollars would have been spent or how they would have generated new sales.

But if you are cheering for the Blythe side of this case, all wasn't lost.  Part of Barbee's calculation of lost profits withstood Judge Gale's scrutiny.  That portion (the "historic" lost profits of $3.3 million) didn't involve a projection of sales which hadn't happened, but instead was based on actual sales.  Even so, the Blythe side of the case had their damages reduced by 75%.

 

 

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you've been practicing law for more than a few years, you've undoubtedly been asked to "domesticate" in North Carolina's courts a judgment entered in another state. A pretty easy task you think, covered by North Carolina's adoption of the Uniform Enforcement of Foreign Judgments Act, N.C. Gen. Stat. Sec. 1C-1701 to -1708.

Let's say that the lawyer defending against the domestication tells you that the out-of-state judgment was obtained based on "intrinsic fraud, misrepresentation, and misconduct."  Those would probably be grounds for setting aside a North Carolina judgment under Rule 60(b) of the North Carolina Rules of Civil Procedure.  Can the foreign judgment be enforced in North Carolina under the Uniform Act?

Those of you who are particularly sharp are wondering about the constitutional principle of Full Faith and Credit.  Article IV, Section 1 of the Constitution says that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State."  Not surprisingly, there is a good bit of judicial discussion of the interplay between the Uniform Act and the Constitution, with the most recent comment this week from the North Carolina Court of Appeals, in DOCRX, Inc. v. EMI Services of NC, LLC.

DOCRX was on the receiving end of a judgment in Mobile County, Alabama, of nearly half a million dollars.  When EMI sought to have its Alabama judgment enforced in North Carolina, DOCRX argued per NCRCP 60(b) that the judgment  could not be enforced because it was obtained on the basis of intrinsic fraud.  

The trial judge refused to enforce the judgment based on the Rule 60(b) argument and the Court of Appeals noted that this interpretation was "warranted from the plain language of the statute." Section 1C-1703(c) states that a foreign "judgment so filed has the same effect and is subject to the same defenses as a judgment of this State and shall be enforced or satisfied in like manner[.]"  And Rule 60(b) refers to "[f]raud (whether heretofore denominated intrinsic or extrinsic)" as a ground for setting aside a judgment.

But the Constitution intervenes here.  The core of the Court of Appeals' holding was that:

We hold that postjudgment relief from foreign judgments under N.C.G.S. § 1A-1, Rule 60(b) is limited to the following grounds: '(1) the judgment is based upon extrinsic fraud; (2) the judgment is void; or (3) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application.

Op. at 9 (quoting Craven v. Southern Farm Bureau Cas. Ins., 117 P.3d 11, 14 (Colo. App. 2004))(emphasis added)

These were the only grounds on which the trial court could have denied enforcement.  The arguments of "intrinsic fraud, misrepresentation and misconduct" were insufficient.  So, the Court of Appeals reversed the trial judge and remanded the case "for further proceedings."  Op. at 11.

Oh, and what about "intrinsic" fraud anyway?  What is that and how is it different from "extrinsic" fraud?  The federal Third Circuit called the terms a "most unfortunate" distinction, in Averbach v. Rival Mfg. Co., 809 F.2d 1016 (3d Cir. 1987).  Intrinsic fraud is fraud deceiving the court in obtaining a judgment. Extrinsic fraud is conduct which happens outside of court, but which deprives an adversary of the opportunity to present his case.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

You don't see a trademark infringement action in the Business Court every day, let alone a TRO decision, but a case with both came along last Friday in SCI Carolina Funeral Services, LLC v. McEwen Ellington Funeral Services, Inc.  Moreover, this was a common law trademark case, with no federal registration -- or even a state registration -- involved.

The Defendants had previously operated funeral homes under the McEwen name in the Charlotte, North Carolina area.  In 1986, they sold those funeral homes, and their trademarks and trade names, to the Plaintiffs.

Then, notwithstanding their agreement, the Defendants opened a funeral home under the McEwen name and began advertising under that name as well.  They also registered a trade name with the North Carolina Board of Funeral Services as McEwen Ellington Funeral Services.  

There's very little North Carolina state law on trademark infringement, but Judge Murphy found enough to enter a temporary restraining order against the Defendants.

He held, relying on a 1907 North Carolina Supreme Court decision, that "North Carolina common law protects corporations' trade names," stating that

It is well settled that an exclusive right may be acquired in the name in
which a business has been carried on, whether the name of a partnership or
of an individual, and it will be protected against infringement by another
who assumes it for the purpose of deception, or even when innocently
used without right, to the detriment of another; and this right, which is in
the nature of a right to a trade-mark, may be sold or assigned. 

Op. ¶9 (quoting Blackwell’s Durham Tobacco Co. v. American Tobacco Co., 145 N.C. 367, 374, 59 S.E. 123, 127 (1907).

Then, although there's no reported state court decision on when a trademark infringement plaintiff has shown the likelihood of confusion necessary to prevail, Judge Murphy relied on a federal decision from the Western District of North Carolina holding that the factors to be considered are:

1) the strength or distinctiveness of the mark; 2) the similarity of the two
marks; 3) the similarity of the goods/services the marks identify; 4) the
similarity of the facilities the two parties use in their businesses; 5) the
similarity of the advertising used by the two parties; 6) the defendant’s
intent; and 7) actual confusion.

Op. ¶10 (quoting Wachovia Bank & Trust Co. v. Crown Nation Bancorporation, 835 F. Supp. 882, 886(W.D.N.C. 1993)).

If that standard sounds familiar, that's because it is, and drawn from the Fourth Circuit Court of Appeals' often cited opinion in Pizzeria Uno v. Temple, 747 F.2d 1522, 1527 (4th Cir. 1984)).

Given that the Plaintiffs had shown that their McEwen mark was distinctive, the marks in question appeared to be similar, the funeral services provided by the parties were identical, the parties use similar facilities, the parties' advertising is similar, and that one of the Defendants had registered and operated under the challenged mark with the intent to cause confusion among the consuming public, it was any easy step to enjoin the Defendants from using the McEwen name in connection with funeral services.

It's hard to tell how the Defendants defended this pretty clear case of infringement, given that they didn't even file a brief in opposition to the motion for a TRO.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are a lawyer practicing in the Middle District of North Carolina, you will be excited about Standing Order #2, issued by the Judges of the Court on January 8th.

The Order authorizes the use of cellphones -- even those with cameras -- in the courthouses of the District.  The banning of cellphones with cameras has long been a bugaboo for lawyers practicing here.  And after all, can you even buy a cellphone without a camera anymore?

Here are the answers to some of the questions you may have about this sea change in Middle District procedures:

When is the new policy effective?  It is effective immediately.

What about my clients?  Can they bring their cellphones to Court?  No, the policy applies only to attorneys, including out of state attorneys who are appearing with local counsel per Local Rule 83.1(d).

What about paralegals and personnel of my law firm?  They are not covered by this policy.

Can I let someone with me use my cellphone in the courthouse?  No, the Standing Order says that "[p]ermitted attorneys shall maintain sole custody over the electronic device and shall not allow it to be used by anyone else unless they have been given court permission."

Is there anything I need to do to get my cellphone into the courthouses?  Yes, you need to fill out a form for an "Electronic Device Permission Card."  Submit the form with a self-addressed stamped envelope.  You'll need to show the card upon entering a courthouse with your cellphone.

But I already have a Laptop Authorization Card.  Do I need to reapply for an Electronic Device Permission Card?  Yes. Here's the form.

Does this new policy apply in the Bankruptcy Court courthouses?  Yes, it applies to all of the federal courthouses in the Middle District.

What about my iPad and other electronic devices?  They are all included.  The new policy extends to "cell phones, laptops, tablets [and] other electronic devices."

Are there any other restrictions I should know about?  Yes, you need to make sure that your device is not emitting any sounds while in the courtroom.  In most situations, it should be turned off while in the courtroom. As always, you are prohibited from "record[ing], broadcast[ing] or transmit[ting] any video images or audio sounds of the proceedings or the environs."  You agree in advance to these restrictions (and others) when applying for an Electronic Device Permission Card.

What if I violate the restrictions?  You might forfeit your privileges, have your device confiscated, or be held in contempt of court.

What about the Eastern and Western Districts?  The policy on electronic devices varies from District to District.  I wrote about the Eastern and Western District's policies a couple of years ago.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It's hard to like the result in Wake County v. Hotels.com, LP, 2012 NCBC 61.  The case is a consolidation of cases brought by several North Carolina counties (Mecklenburg, Wake, Dare, and Buncombe) against Hotels.com and other internet travel sites (like Orbitz.com, priceline.com, and travelocity.com).  Hotels.com, the first named Defendant, is an online booking service that promises the lowest available rates for a multitude of hotels.

The NC County Plaintiffs allege that Hotels.com and the other Defendants contract with hotels for rooms at a discounted rate, and then sell the rooms to consumers at a higher rate.  Their beef is over the non-payment by hotels.com of the Occupancy Tax ordinarily paid by hoteliers.  They allege that Hotels.com and the other Defendants charge their customers for tax at the higher rate at which the hotels actually sell the room, but then only remit taxes based on the discounted rate they pay the hotel operator.

What happens to the difference?  Hotels.com and the other Defendants pocket it.  Shouldn't they pay the excess collected to the counties or the North Carolina Department of Revenue?  The Counties thought so.

But the upshot of Judge Murphy's decision in the Wake County case is that the Counties had no cause of action against the Defendants.  He granted summary judgment in favor of the Defendants.

The why of it took 30 pages of statutory analysis of North Carolina's taxation scheme.  The Occupancy Tax is not contained in the General Statutes.  Instead, the General Assembly passed statutes authorizing counties to levy an Occupancy Tax.  The counties levy the Occupancy Tax via resolutions or ordinances.

So the cases turned on the counties' ordinances, and upon whom they placed the obligation to collect the tax.  In Mecklenburg and Wake Counties, it was the "operator of a taxable establishment."  In Dare and Buncombe Counties, it was the "operator of a business subject to a room occupancy tax."

Judge Murphy concluded that the Defendants were not responsible for collecting the Occupancy Tax.  If you are curious about how he reached that conclusion -- and you must be a state taxation junkie if you are -- you can read about it in Paragraphs 33 through 53 of the Opinion.

Other Interesting Things About This Opinion

For those of you who aren't enamored  by the Occupancy Tax, you might find interesting Judge Murphy's discussion of Rule 8 of the North Carolina Rules of Civil Procedure and his disposition of a conversion claim.

 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Today's post is really a thank you to Judge Gale for delivering the Christmas gift I requested in last week's post: a decision from the North Carolina Business Court on an open question of North Carolina's corporate law to write about because I was tired of writing about Delaware law on this North Carolina blog.

The gift came in the decision in Blythe v. Bell, 2012 NCBC 60, decided Monday by the Business Court.  The Blythe opinion is the first decision under North Carolina's Limited Liability Company Act construing the effect of a transfer of an LLC interest by an LLC member.

What's Included in a LLC Member's Interest

The definition of a membership interest is in G.S. §57C-1-03.  As Judge Gale observed, the statute recognizes the distinction between a member's 'economic interest' (the right to receive distributions from the LLC) and the member's 'control interest' (the right to vote or to participate in the management of the LLC).  Op. ¶27. 

Assigning an LLC Member's Interest Doesn't Make The Assignee A New Member Of The LLC

The LLC Act deals in N.C. Gen. Stat. §57C-5-02 with "assignment of membership interests."  Section 57C-5-04(a) covers the "right of assignee to become a member."

It's worth a look at the statutes, which you can read by clicking on the links, as they were too long to quote.  As Judge Gale observed, Section 57C-5-02 makes it clear by its wording that "an assignment in and of itself does not entitle the assignee to become a member or to exercise a
member’s rights if he is not already a member. "  Op. ¶33.  

If there is an assignment of an LLC interest to someone who is not already a member of the LLC, then Section 57C-5-04(a)(2) requires the unanimous consent of the other members before the assignee can become a member.

What Happens To The Control Interest When There's An Attempted Assignment To A Non-Member?  

The issue of the control interest's assignability was the nub of the Blythe case.  One of the Defendants, Joseph, had assigned his membership interest in an LLC to HBI, which was not a member of the LLC.  Plaintiff said this meant that neither Joseph nor the assignee had a right to vote the 30% interest.

The effect of this argument, if accepted, was that the Plaintiff's control interest went from 40%  to 57% (based on 40% of the 70% remaining with Joseph's 30% out of the equation).  That turned a minority member into the controlling majority member.

Judge Gale rejected that argument focusing on the LLC Act as a whole.  He said that the control rights continued to reside with the assigning member until the assignee was admitted as a new member per the terms of Section 57C-5-04.  In particular, he relied on G.S. §57C-5-06, which prohibits a member from voluntarily withdrawing from the LLC without an express agreement from the other members allowing the withdrawal.  Accepting Plaintiff's argument would have allowed a member to withdraw via assignment which Judge Gale found to be contrary to the Act.

The effect of this ruling was that Joseph had transferred his economic interest, but he remained a member of the LLC with voting rights unless and until until his assignee was admitted as a member by unanimous consent. 

It's worth noting that the same result would have been reached under the terms of the Revised Uniform Limited Liability Company Act, Section 502(g).

There's A Difference If The Assignment Is To An Existing LLC Member

 Here's another part of the ground-breaking LLC news from Blythe:  Judge Gale held that he "interprets the Act to allow members, absent a contrary agreement, to transfer both their economic and control membership interests to existing members without unanimous member consent."  Op. ¶44. 

How Do You Avoid This Type Of Problem?

Is there a way to avoid this type of wrangling over assignments of LLC interests?  Of course.  The default provisions of the LLC Act control "unless otherwise provided in the articles of organization or the operating agreement of a North Carolina LLC."  Op. ¶24.  The LLC in Blythe had no operating agreement.  If there had been one, the assignment provisions of the LLC Act might have been varied.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Premier, Inc. v. Peterson, 2012 NCBC 59, decided last Friday by Judge Murphy, turned on a strict application of the parol evidence rule.

At issue was whether the defendants were entitled to a substantial earn-out payment under a Stock Purchase Agreement.  The Plaintiff had purchased the Defendants' software business of selling a Web-based surveillance and analytic services to healthcare providers.

Interpretation of the Contract

The Stock Purchase Agreement called for the earnout payment to be made on a series of five year anniversaries of the acquisition date.  The calculation was to be based on the number of hospitals at which a "Product Implementation" of the software products purchased by the Plaintiff had occurred.

The SPA contained a definition of "Product Implementation," and Judge Murphy not surprisingly held that "[b]ecause the goal of construing a contract is to arrive at the intent of the parties when he contract was executed, where a contract defines a term, 'that definition is to be used.'"  Op. ¶31(quoting Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 505-06, 246 S.E.2d 773, 777 (1978)).

The definition called for the hospital in question to have subscribed to or licensed the product and to have implemented it as well.  A representative of the sellers said that notwithstanding the definition, the parties had agreed during  the negotiations that a "Product Implementation" would include instances where the product was merely provided to the hospital, even without a subscription or license.

Judge Murphy rejected this argument, holding:

 this agreement, at best, adds to the unambiguous terms of the contract requiring a
subscription or license. As such, the parol evidence rule bars consideration of this
proffered agreement, and the Court must enforce the language as written. In doing
so, the Court concludes that Plaintiff’s interpretation construes all the terms
harmoniously, giving effect to the entire provision. Therefore, the Court concludes
that the language is unambiguous, and that Plaintiff has presented a reasonable
interpretation of “Product Implementation.”

 Op. ¶35.

Attorneys' Fees?

Maybe you are thinking that the Defendants' argument was so beyond the pale of the parol evidence rule that the Plaintiff should have been awarded attorneys' fees.  And the Stock Purchase Agreement called for fees to be awarded to the "prevailing party."

So were fees awarded to the Plaintiff?  No, because of the NC Supreme Court's decision in Stilwell Enter. v. Interstate Equip Co., 300 N.C. 286, 266 S.E.2d 812 (1980), in which it held that:

[e]ven in the face of a carefully drafted contractual provision indemnifying a party for such attorneys' fees as may be necessitated by a successful action on the contract itself, our courts have consistently refused to sustain such an award absent statutory authority therefor.

Id. at 289, 266 S.E.2d 815-16 (emphasis added).

Statutory authority?  Wait a minute.  What about N.C. Gen. Stat. sec. 6-21.6(c), which says that:

If a business contract governed by the laws of this State contains a reciprocal attorneys' fees provision, the court or arbitrator in any suit, action, proceeding, or arbitration involving the business contract may award reasonable attorneys' fees in accordance with the terms of the business contract.

No to attorneys' fees, said Judge Murphy, notwithstanding Section 6-21.6.  That statute applies only to business contracts entered into on or after that statute's effective date, which was October 1, 2011.  This Stock Purchase Agreement was entered into five years before that effective date, in 2006.  Op. ¶46 & n.2.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you've ever made a Motion for Costs following a win at summary judgment or a win at trial you know that the law on such motions is a quagmire.   Does the trial court have discretion in determining whether to award costs to a prevailing party?  Section 6-20 of the General Statutes implies that the Court always has discretion (it's titled "Costs allowed or not, in discretion of Court"), but the answer is muddy.

Judge Gale ruled in a post-judgment ruling last Friday in Dunn v. Dart that the costs listed in and allowed by G.S. N.C. Gen Stat.§7A-305(d) must be awarded to a prevailing party, and that a trial judge lacks any discretion in determining to deny them.  He interpreted a less than year old Court of Appeals decision, Khomyak v. Meek, 720 S.E.2d 392 (2011), "[t]o eliminate that discretion and to compel awarding the prevailing party those costs allowed by N.C. Gen Stat.§7A-305(d)"

The Khomyak case represented an admirable effort by Judge McCullough of the Court of Appeals to harmonize the cases laying in the "troublingly divergent path" taken by the COA  in ruling on motions for costs that have come to it on appeal.

That "troubling path" includes Smith v. Cregan, 178 N.C. App. 519, 632 S.E.2d 2006 (2006), which held that a trial court does have discretion whether to award costs:

this Court's decision explicitly holds that, for actions governed under section 6-20, such as negligence actions like the present case, the trial court has the discretion to determine whether or not to award costs to the prevailing party, and if the trial court chooses to exercise that discretion, then the trial court is confined to those costs expressly enumerated under section 7A-305(d) or any other statute." Id. at 222 (emphasis added).

Id. at 734, 596 S.E.2d 895.

Since one panel of the Court of Appeals can't overrule another, and since the North Carolina Supreme Court hasn't ruled on the discretion issue, the Smith case is still out there as good (but now questionable) law.

It doesn't take much reading between the lines of the one page Order in Dunn v. Dart to take away that Judge Gale did not look kindly on this  Motion for Costs.  In fact, he stated that "[i]f the court did have discretion to do so, it would exercise its discretion here to deny all costs."  

And he certainly exercised some discretion, in awarding only about five thousand dollars in costs against Defendants' request for more than $130,000 in fees and costs.  

Don't forget that this case is a fight between lawyers to carve up a big fat fee about which I wrote last year.  There's obviously no love lost between those lawyers, and maybe the Court of Appeals will get another chance to consider the law on Motions for Costs if there is an appeal of this ruling.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a case decided last week, McKenzie v. Hall, the Fourth Circuit sent a clear message that it does not tolerate Motions to Strike.  The Appellants had filed such a Motion to strike portions of an adversary's brief which they said were objectionable.

The Court struck back, quoting a Seventh Circuit decision, Redwood v. Dobson, 476 F.3d 462, 471 (7th Cir. 2007), and holding that:

• "Motions to strike sentences or sections out of briefs waste everyone’s time. . . ."
• "Motions to strike words, sentences, or sections out of briefs serve no purpose except to aggravate the opponent. . . . -- and . . .  this goal is not one the judicial system will help any litigant achieve."
• "Motions to strike disserve the interest of judicial economy. The aggravation comes at an unacceptable cost in judicial time."

Op. 9 & n.3.

The proper way to deal with an objectionable brief is not a Motion to Strike.  The Court said that:

The Federal Rules of Appellate Procedure provide a means to contest the accuracy of the other side’s statement of facts: that means is a brief (or reply brief, if the contested statement appears in the appellee’s brief), not a motion to strike.

Id.  (emphasis added).

In case you were wondering, there's no provision for a Motion to Strike in the Federal Rules of Appellate Procedure.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

North Carolina has had more than its fair share of hurricanes over the years, but Hurricane Sandy, which hit New Jersey and New York City, even reached the North Carolina Business Court.

It came in the most mundane of motions, one to expand the word limitation for a brief.  The Order is in Gusinsky as Trustee for the Vladimir Gusinsky Living Trust v. Duke.  

The Motion was filed by the Plaintiffs on the same day an overly long brief was filed.  That violates Business Court Rule 15.8, which says that:

Requests for expansion of word limitations shall be made five (5) business days prior to filing the brief for which expansion of word limitations is sought. Requests for expansion of word limitations that are filed simultaneously with the brief shall be denied.

But this Motion was granted notwithstanding the untimely filing.  Why?  Plaintiff's counsel said that they couldn't comply with the Rule due "to communication issues among counsel caused by Hurricane Sandy."  Order ¶4.  Plaintiff;s counsel are located in New York City.

Judge Jolly recognized the havoc caused by the storm, saying:

The court acknowledges that Hurricane Sandy caused flooding, power outages and devastating damage along the East Coast of the United States, and the court is sensitive to issues created by this natural disaster. However, the court encourages counsel to recognize that compliance with the BCR promotes efficiency and fairness in case administration.

Op.h ¶4 & n.1.

In this case, though, the hurricane trumped the Business Court Rules.  But don't look for this pass to be given out again.  That was a thousand year storm.  Follow the Rules in the absence of severe weather conditions.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

You've undoubtedly had a Judge announce that she was entering an order "nunc pro tunc."  In case you didn't have your Latin-English dictionary with you at the time, that literally means "now for then."

A nunc pro tunc order is a way for a Judge to correct an order previously made which was improperly entered or expressed.

The Fourth elucidated the boundaries of "this rarely used device" last week in Glynne v. Wilmed Healthcare.  Op. 6.  It reversed a nunc pro tunc ruling by Judge Malcolm Howard of the Eastern District of North Carolina.

The purpose of the reversed order was to extend the statute of limitations for the Plaintiff to refile state law claims.  The limitations period as to those claims had expired during the pendency of a federal court lawsuit.

A federal statute (28 U.S.C. sec 1367(d)) provides that the limitations period on any supplemental claim "shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a  longer tolling period."  The North Carolina Court of Appeals ruled in Huang v. Ziko, 511 S.E.2d 305, 308 (N.C. App. 1999) that North Carolina has no applicable "grace period" longer than the 30 days meted out by Section 1367(d).

Plaintiff let the 30 days expire and missed refiling her state law claims by six days.  She asked Judge Howard to revise his Order dismissing her state law claims, and to give her 40 days to refile her claims in state court.  Judge Howard complied, entering an Order nunc pro tunc giving the Plaintiff 60 days from the date of the original Order to refile her claims.

If you are thinking that Judge Howard didn't have the power to extend the 30 day grace period of Section 1367(d), the Fourth Circuit didn't weigh in on that question.  It said instead that he had "unquestionably erred" by entering the Amended Order, and held:

Because the doctrine of nunc pro tunc may only be employed to correct mistakes or omissions in the record sothat the record properly reflects the events that actually took place, the district court’s attempt to modify its earlier order for the first time under the guise of nunc pro tunc was error.

Op. 7-8.

The use of nunc pro tunc orders in driving under the influence cases in Wake County has led to indictments and the resignation of a district court judge,

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It's hard for me to think of a case I'd rather not write about than GR&S Atlantic Beach, LLC v. Hull, 2012 NCBC 52.  It's not just  that it's deathly boring or that it involves the interpretation of poorly written transaction documents.  It's also that it centers on an indemnification agreement, one of the most stultifying areas of the law.

So, with those caveats, here's the Reader's Digest version of the GR&S case.  That is, if you haven't stopped reading already.

Indemnification For Unforeseeable Events

The indemnification concerned losses relating to a water treatment fahcility purchased by one of the Plaintiffs.  One of the two tanks at the facility collapsed.  The collapse, which was totally unexpected, caused a release of untreated wastewater and substantial damage.  Defendants said that the indemnity should not be extended to cover losses which were not intended to be within the scope of the indemnity.

Judge Gale found the language of the indemnity to be clear and unambiguous -- covering future claims arising from the use or operation of the facility -- and he ruled that he would not consider any parol evidence regarding the unforseeability of the collapse.

Statute of Limitations For Indemnification Agreements

The Judge also sided with the Plaintiffs on a statute of limitations issue.  He rejected the argument that each claim under the indemnity was governed by a single limitations period, finding the indemnity agreement to be a severable contract including multiple undertakings.  

Doctrine of the Last Antecedent

This opinion gets even more interesting upon the Court's consideration of whether the Indemnification Agreement was assigned to one of the Defendants.  By a general assignment one of the Defendants had assigned a variety of contracts, with an exclusionary phrase at the end of several subparagraphs that might have excluded the Indemnification Agreement.  

The Court looked to something called the doctrine of the last antecedent in wrestling with this contract interpretation.

Never heard of that doctrine?  Really?  It says that 

relative and qualifying words, phrases, and clauses ordinarily are to be applied to the word or phrase immediately preceding and, unless the context indicates a  contrary intent, are not to be construed as extending to or including others more remote.

Op. ¶74 (quoting Novant Health, Inc. v. Aetna U.S. Healthcare, 2001 NCBC 1 at 17-18).

Judge Gale found that even applying the doctrine of last antecedent didn't lead to a clear contract interpretation and that the issue could only be resolved at trial.

Attorneys' Fees Redux

Closing out this opinion, Judge Gale revisited his earlier ruling in the case on whether Plaintiff could recover attorneys' fees incurred in defending "ancillary" litigation brought by the Utilities Commission.  He didn't change his ruling, but took note of the intervening Court of Appeals decision in Robinson v. Hope, __ N.C. App. __, 719 S.E.2d 66 (2011) in which the appellate court held that attorneys' fees in ancillary litigation caused by a tortfeasor's wrong could not be recovered as an element of tort damages.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 If you dip in to Judge Murphy's Wednesday opinion in Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC, 2012 NCBC 51, you'll find a little bit of everything.  It's a ruling on a Motion to Dismiss a Complaint that alleged everything under the sun.  Here are the high points:

Quick Facts

The Plaintiffs entered into a deal with the Defendants for them to develop office space for the Plaintiffs' medical practice.  Plaintiffs were to share in the profits from the sale of the property, but none were ever paid.  There were also allegations of misrepresentations by the Defendants as to their financial stability and claims of unauthorized changes to the transaction documents.

The Complaint sets out 23 causes of action against multiple defendants.

Piercing the Corporate Veil

The lesson here is that rote pleading won't get you there on a piercing the corporate veil claim.  Plaintiffs recited the bare bones of the "instrumentality rule" in their Complaint, but Judge Murphy said that "these bare legal conclusions are not entitled to the presumption of truth afforded factual allegations on a motion to dismiss."  Op. ¶37.  Plaintiffs needed to point to specific acts of control or domination to state a valid claim.

Fraud

Plaintiffs said they relied on Defendants' representations of their financial stability.  The truth was that Defendants were teetering on the brink of insolvency.

Judge Murphy nevertheless dismissed the claims for fraud, fraud in the inducement, negligent misrepresentation and negligence.  He found that the Plaintiffs had failed to show reasonable reliance because they had failed "to allege facts in support of their own investigation and due diligence."  Op. ¶48.

Securities Fraud

After determining that the Plaintiffs had stated a claim for securities fraud under the North Carolina Securities Act, Judge Murphy ruled that the individual defendants, employees of the corporate defendants, could be personally liable for the securities fraud, notwithstanding their argument that they had acted as corporate agents.

He held:

Defendants misapprehend the well-settled rule that 'one is personally liable for all torts committed by him, including negligence, notwithstanding that he may have
acted as agent for another or as an officer for a corporation.' Strang v. Hollowell, 97 N.C. App. 316, 318, 387 S.E.2d 664, 666 (1990) (citing Palomino Mills, Inc. v.
Davidson Mills Corp., 230 N.C. 286, 52 S.E.2d 915 (1949)).

Op. ¶64.

What about the lack of justifiable reliance which doomed the common law fraud claim, you may be thinking.  Judge Murphy disposed of that in a footnote, saying: "The Court is unaware of any case law asserting that the common law fraud requirement for alleging justifiable reliance extends to statutory claims for securities fraud. And, the Court declines to extend such a requirement to this claim at this stage."  Op. ¶63 & n.2.

Derivative Action

A member of an LLC who wants to file a derivative action is required by statute to allege "with particularity the efforts, if any, made by [him] to obtain the action [he] desires from the  managers, directors, or other applicable authority and the reasons for [his] failure to obtain the action, or for not making the effort."  N.C. Gen. Stat. §§ 57C-8-01(a)–(b) (2011). 

The efforts of these Plaintiffs to make the LLC aware of their claims were limited to sending a letter outlining their claims along with the contemporaneously filed Complaint.  Judge Murphy found that to be "insufficient" to meet the requirements of the statute and he therefore dismissed the derivative claims.

And More

There are many more claims discussed in this Opinion, including an unfair and deceptive practice claim, a civil conspiracy claim, and a constructive trust claim.  There is also discussion of equitable estoppel and a request for an accounting.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Long time readers of this blog know that you can't designate a case limited to a covenant not to compete to the Business Court.  That's the Lifecare case, from 2008, in which Judge Tennille said "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon 'unfair competition.'"

Judge Tennille intimated in Lifecare that additional allegations surrounding the breach of the covenant might give rise to the Business Court's mandatory jurisdiction.  He said:

For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

Late last week, Judge Jolly refined the contours of the Business Court's unfair competition jurisdiction, in an Order on Notice of Designation in New Breed, Inc. v. Golden.  The New Breed complaint alleges that the multiple defendants, all former IT professionals with New Breed, were lured away by a competitor in violation of covenants contained in their employment agreements.

So what pushed New Breed over the hurdle and into the jurisdiction of the Court?  Judge Jolly said that the Complaint alleged unfair competition, which is a basis for mandatory jurisdiction under G.S.§7A-45.4(a)(4).  He said that the styling of that particular cause of action as "unfair and deceptive practices," which are excluded from the Court's unfair competition jurisdiction under Section 7A-45.4(a)(4), made no difference. 

He held:

Under North Carolina's current scheme of notice pleading, in examining a claim alleged in a complaint, neither the court nor party litigants are limited to the technical label given to the claim by the pleader. Rather, the reader appropriately should examine the actual facts alleged.

Op. Par. 13.

Upon examining the "actual facts alleged," Judge Jolly concluded the Complaint stated a claim for common law unfair competition, which he said was "a wrongful act done in the context of competition between business rivals."   Order ¶11. He read the Complaint to make allegations that "Defendants were guilty of unfair competition in that they wrongfully intended to (a) raid Plaintiff of its IT employees, (b) harm Plaintiff's business and (c) acquire Plaintiff's trade secrets and confidential and proprietary information." Id.

Also noteworthy in the Order is Judge Jolly's ruling that it isn't necessary to sue the competing business to make out a claim for unfair competition.  He held that "[t]he court cannot find a requirement that a competing business be a party litigant as a condition precedent to alleging a common law claim for unfair competition." Order ¶12.  New Breed sued only its former employees, not their new employer.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

You all know that there is no Chapter 75 claim for a breach of contract unless there are "substantial aggravating circumstances."  What if you have the substantial aggravating circumstances but you don't have a breach of contract?  The Court of Appeals answered that question Tuesday in SunTrust Bank v. Bryant/Sutphin Properties, LLC.

The answer is you might not have anything.  That's why the COA set aside the Defendants' $2.1 million verdict against SunTrust. 

Here's how Judge Stroud summed it up:

the jury found that although there was not a breach of contract there were “[s]ubstantial
aggravating circumstances” that took place. Mitchell, 148 N.C. App. at 75, 557 S.E.2d at 623-24. While this was a logical conclusion for the jury to make, as they could properly find that a breach of contract had not taken place and that plaintiff had committed the acts listed in [the verdict question covering the allegedly unfair and deceptive acts]. . . it was error for the trial court to determine as a matter of law that these acts constituted a Section 75-1.1(a) violation where the only acts alleged were “[s]ubstantial aggravating circumstances” to a breach of contract when there was no breach of contract. Id. Without an independent Section 75-1.1(a) claim based upon some conduct outside the scope of the contracts, an award for a Section 75-1.1(a) claim could be entered only if the jury found a breach of contract accompanied by “[s]ubstantial aggravating circumstances.” Id. As the jury did not find a breach of contract, the inquiry should have ended because there was no breach of contract. Id.

 Op. 15-16.

If you can't understand that unusual result, and you don't want to slog through Judge Stroud's 23 page opinion to figure it out, here's the story: 

The jury found that the Bank had frozen one of the Defendant's money market accounts without any notice of a default or making any demand for repayment of a separate loan it had made, which action the Defendants said had destroyed their business.  The jury also found, somewhat inconsistently, that the Bank hadn't breached the contract that governed the money market account by freezing the account.  The trial judge had determined those actions to be an unfair and deceptive practice and had trebled the $700,000 damages awarded by the jury for those actions, per G.S. §75-16.

The reversal was based on the lack of breach of contract to accompany the "substantial aggravating circumstances."

The moral of this story seems to be that if you are trying to morph a breach of contract claim into a treble damage claim under Chapter 75, you'd better be able to prove the breach of contract.

The SunTrust decision marks the second time this month that Judge Stroud has tangled with Chapter 75.  In the other opinion, Green v. Freeman, the Judge affirmed the dismissal of Chapter 75 claims made by investors in a business.  She ruled that this was "raising capital," which "is not a business activity contemplated within the Act."  Op. 37.  By the way, that case is headed to the Supreme Court of NC based on a dissent, though the majority and the dissent agreed on the Chapter 75 issue.  The issue for the appeal concerns the sufficiency of the evidence to support a breach of fiduciary duty claim on which the Plaintiffs prevailed.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I hope you don't think I am harping on this recent change in the procedure for designating a case to the Business Court, but on Friday Judge Jolly withdrew his Order in the Kight v. Ganymede Holdings II, Inc. case, recognizing that it was "a change in the previous practice relative to certain time requirements for designating an action as a mandatory."  It's just not fair to change the rules in the middle of the game.

[If you haven't followed this important issue, up until recently a plaintiff had thirty days after filing his or her complaint to file a Notice of Designation to the Business Court.   Beginning August 10th, Judge Jolly said that the Notice of Designation had to be filed at the same time as the Complaint (or the Amended Complaint if the amended document raises Business Court issues)].

Judge Jolly's New Order lets Kight slip into the Business Court despite filing his Notice of Designation twenty-seven days after filing his Amended Complaint.  Nevertheless, Judge Jolly sent up a clear signal that the rule has now changed.  He said in the New Order in the Kight case that:

Notwithstanding any previous rulings of this court or any procedural guidelines that may be found on the North Carolina Business Court website or elsewhere on the Internet, as of this date and pursuant to N.C. Gen. Stat. § 7A-45.4(d)(1), any Notice of Designation by a plaintiff, third-party plaintiff or petitioner for judicial review that is based upon a complaint, third-party complaint or petition for judicial review, respectively (collectively, "Complaint") that is not filed on the same day as the Complaint shall not be considered filed contemporaneously with the Complaint and will be deemed untimely.

New Order ¶2.

This should be the last word on that now vanished thirty days.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There was one thing I could have told you for sure about Business Court procedure before August 10th.  That was that a Plaintiff had 30 days from the filing of his Complaint to designate the case to the Business Court per N.C. Gen. Stat. §7A-45.4.

That certainty was based on a decision from Judge Tennille over four years ago, in Ross v. Autumn House, Inc. He reached that conclusion notwithstanding the language of the statute, which says that "[t]he Notice of Designation shall be filed: (1) By the plaintiff or third-party plaintiff contemporaneously with the filing of the complaint . . . in the action." N.C. Gen. Stat. § 7A-45.4(d)(1)(emphasis added). 

The Autumn House decision was based on Guidelines still available today on the Business Court's website which say that the Plaintiff could file a Notice of Designation within 30 days of filing the Complaint.

So what's changed?  Chief Judges of the Business Court for one thing.  Judge Jolly, who took over the chiefship after Judge Tennille's retirement in early 2011, issued an Order on August 10th in Foster v. Bell Mini-Storage, Inc. in which he said the statute requires that:

a plaintiff must file a notice of designation at the same time the complaint is filed.

Order Par. 5

So now, after Foster v. Bell Mini-Storage, Inc., if you are a Plaintiff wanting to designate your new case to the Business Court, you'd better file that Notice of Designation at the same time you file your Complaint.

Note that Judge Jolly found the designation in Foster to be valid even though it was made more than thirty days after the complaint was filed.  He did that because the answer raised issues of corporate governance.  Section 7A-45.4(d)(3) says that any party has "30 days of receipt of service of the pleading seeking relief from the defendant or party" to file a Notice of Designation.  The Notice was filed six days after the Answer was filed, so it was timely in that regard.

But there's no doubt now that the thirty day largesse granted by the Autumn House decision to Plaintiffsd has been laid to rest.  Judge Jolly referenced that decision yesterday in an Order in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46, and held that:

In Ross v. Autumn House, Inc., Caldwell County No. 07 CVS 2172 (N.C. Super. Ct. Order Feb. 26, 2008), this court interpreted "contemporaneously" in this context to mean within thirty days of the filing of the complaint, relying on certain "guidelines" published on the website for the North Carolina Business Court.

The court now reconsiders the requirement that a notice of designation be filed contemporaneously with the complaint. To comply with this requirement, a plaintiff must file a notice of designation at the same time the complaint — or amended complaint — is
filed.

Op. at 2.  This disagreement between Judge Tennille and Judge Jolly over the meaning of "contemporaneous" reminds me of Humpty Dumpty's statement to Alice (in Through the Looking Glass) that "When I use a word, it means just what I choose it to mean — neither more nor less."

For now, the Business Court's definition of "contemporaneous" means what Judge Jolly chooses it to mean: "at the same time."

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Do me a favor.  Take five minutes and fill out an American Bar association form (link here) nominating this blog to be included on the ABA's list of the 100 best legal blogs.

The blog fits pretty well the criteria set out by the ABA for a nomination.  The ABA says:

• We're primarily interested in blawgs in which the author is recognizable as someone working in a legal field or studying law in the vast majority of his or her posts.
• The blawg should be written with an audience of legal professionals or law students—rather than potential clients or potential law students—in mind.
• The majority of the blawg's content should be unique to the blawg and not cross-posted elsewhere or cut and pasted from other publications.
• We are not interested in blawgs that more or less exist to promote the author's products and services.

There's a box on the form where you have to explain your reasons for supporting the blog.  The question is "Why Are You A Fan Of This Blawg?'  If you are dry on reasons, here are a few suggestions:

• This blog changed my life.  [fill in how and tell me about that too]  [Ex: In addition to feeling knowledgeable and up-to-date, I  am taller and better-looking when I go to Court as a result of reading the blog.]
• It's like a Cliffs Notes for the NC Business Court.  Mack reads the cases and summarizes them. and I don't have read them.
  
• Everybody I know reads this blog.  If that's not true, tell everybody you know to read it. 

Please take the few minutes this will take.  After all, it is Friday.

Note that lawyers and personnel associated with Brooks Pierce are discouraged by the ABA from voting.  But I am specifically encouraged by the ABA to invite non-Brooks Pierce readers to send it  messages on behalf of this blog.

The deadline for nominations is September 7th.

Now, this is just the first step.  If I make the list I'll ask you later in the year to vote for me.

Thanks in advance for your support of this blog.

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The Plaintiff in Kreich, Inc. v. Tarheel Publishing Co. thought he had all of his ducks in a row for summary judgment and a preliminary injunction.  But he didn't.

Defendant was in serious default under promissory notes given in connection with its acquisition of the Plaintiff's interest in an LLC.   Payments were due on the first day of each month, with a ten-day cure period.  The payments were chronically between 25 and 70 days late for almost an entire year.

Plaintiff wanted to exercise his rights under a Membership Interest Pledge Agreement, which was his security for the promissory notes.  The Pledge Agreement gave the Plaintiff equal control of the LLC it had sold to Defendant Hayes in the event of a default.

Given the repeated acceptance of delinquent payments, Judge Gale saw questions of fact on whether the Plaintiff had waived his right to timely payments.  Well, you might be thinking, didn't he have a provision in his agreement saying that acceptance of late payments wasn't a waiver of a right to call a default?

No difference, said Judge Gale, holding that:

a party that has consistently accepted late payments can only enforce timely payment by first giving notice to the other party of his intention to enforce the terms of the agreement in the future. Meehan v. Cable, 135 N.C. App. 715, 719, 523 S.E.2d 419, 422 (1999). This rule can apply even when the contract contains a non-waiver provision, as a non-waiver provision can itself be waived or modified through the conduct of the parties. See 42 E., LLC v. D.R. Horton, Inc., ___ N.C. App. ___, ___, 722 S.E.2d 1, 6-7 (2012).

Op. ¶16 (emphasis added).

There was no evidence that the Defendant had been given notice that the Plaintiff intended to enforce its right to timely payments, so the Motion for a Preliminary Injunction enforcing the Pledge Agreement was denied.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Let's say a client calls telling you that a valued former employee has left to work for a competitor.  Just before leaving, the employee emailed himself a substantial number of your client's confidential documents.  He's now made a presentation to a potential customer, using the "stolen" information, and he secured the customer for his new employer.

The client asks what can you sue the rogue employee for.  Lots of causes of action come to mind.  Violating a non-compete (if there was one).  Conversion?  Tortious Interference? Misappropriation of trade secrets?  Maybe violation of a confidentiality agreement?

What about a claim under the Computer Fraud and Abuse Act?  It seems to fit.  The CFAA

renders liable a person who (1) "intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer," in violation of [18 U.S.C.] § 1030(a)(2)(C); (2) "knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value," in violation of § 1030(a)(4); or (3) "intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage[,] or . . . causes damage and loss," in violation of § 1030(a)(5)(B)-(C).

If you had read the Fourth Circuit's opinion last week in WEC Carolina Energy Solutions LLC v. Miller, you would stop dead in your tracks.  In affirming the dismissal of the CFAA claim, Judge Floyd wrote:

Our conclusion here likely will disappoint employers hoping for a means to rein in rogue employees. But we are unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy

Op. 13.

The problem with the claim by WEC was that its former employee had been given access to the confidential information during his employment.  CFAA doesn't provide a remedy for misappropriation, said the appellate court, when the authorization has not been rescinded.

In reaching this conclusion the Fourth Circuit rejected the approach taken by Judge Posner and the Seventh Circuit in Int'l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006), which was that an employee who takes data to further interests contrary to those of his employer violates his duty of loyalty and thereby terminates his agency relationship, thus losing his authority to access the computer or any information on it. 

Judge Floyd held that "[t]he deficiency of a rule that revokes authorization when an employee uses his access for a purpose contrary to the employer's interests is apparent."  Op. 12.  It was as obvious to the Judge as Facebook.  He said that:

Such a rule would mean that any employee who checked the latest Facebook posting or sporting event scores in contravention of his employer’s use policy would be subject to the instantaneous cessation of his agency and, as a result, would be left without any authorization to access his employer’s computer systems.

 Id.

The Court concluded that Congress didn't intend to impose criminal liability for a Facebook "frolic."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a classic understatement, Judge Gale said in a North Carolina Business Court opinion last Thursday that "North Carolina case law addressing problems inherent in electronic discovery. . .is not yet well developed."  Op. ¶50.  But in Blythe v. Bell, 2012 NCBC 42, the Judge went ahead and posted some road signs along that undeveloped and difficult path.

The issue in Blythe was waiver of attorney-client privilege.  The Defendants had produced 3.5 million documents on two hard drives of which 1700 turned out afterwards to be potentially privileged.  They made a motion for an order compelling the return of the privileged documents, which Judge Gale denied, ruling that the privilege had been waived.

The first lesson of the case is the test the Court will follow in determining whether an inadvertent disclosure will result in a waiver of attorney-client privilege in an electronic production.  It is that the Court will consider "(1) the reasonableness of the precautions taken to prevent inadvertent disclosure; (2) the number of inadvertent disclosures; (3) the extent of the disclosures; (4) any delay in measures taken to rectify the disclosures; and (5) the overriding interests of justice."  Op. ¶52.  You might remember that test from the infamous case of Victor Stanley, Inc. v. Creative Pipe, Inc. (D. Md. 2008).

Judge Gale didn't get much past the reasonableness of the precautions, which he said was "paramount."  That was especially so given the size of the production by the Bell defendants.  He ruled that the "degree of those efforts should increase as the potential volume of documents to be produced increases."  Op. ¶54.

The "sheer volume" of the production suggested that "more than minimal efforts" have been taken to guard against an inadvertent production.  But the precautions were almost non-existent.

The Defendants had hired a computer consultant -- a firm named "Computer Ants" -- to process their email.  The person overseeing the production for Computer Ants had limited experience in litigation matters.  His employment background included stints as a truck driver and a Bass Pro Shops Security Manager.  Defendants' counsel had told Computer Ants to withhold from production any emails with their email address extension (hickorylaw.com), but those emails had been included in the production.  The form of the production was also a problem.  The documents were not searchable unless they were opened individually.

To further underscore the lack of precautions, the Defendants hadn't reviewed the documents gathered by Computer Ants before providing them.  Judge Gale stopped short of applying a bright line test that a failure to conduct a privilege review before production would establish waiver, but said that "efforts by a consultant demand a degree of oversight...."  Op. ¶61.  He held that "counsel cannot altogether delegate the need to guard against production of privileged communications to an outside consultant."  Op. ¶63 (emphasis added).

Judge Gale said that he took "no pleasure in finding the waiver of attorney-client privilege."  Op. ¶65.  The opinion reflects a caution that general North Carolina state court trial practice may not be as experienced in electronic discovery as federal court practice is.  (Op. ¶56). 

That gap of experience has got to be closing at this point. This isn't the first clarion call from the Business Court on the obligations of North Carolina counsel with regard to e-discovery.  I wrote about a decision by Judge Tennille from a couple of years ago which sent a "message for counsel" about e-discovery.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Maybe you've got a friend who is a bankruptcy lawyer.  Maybe not.  But if you do, you should think about forwarding to them this post about the Fourth Circuit's decision from last Tuesday in Johnson v. Zimmer.  It's a decision of first impression in all of the Circuit Courts about how to determine the size of a Chapter 13 Debtor's "household", which is relevant to determining her "disposable income" for purposes of a Chapter 13 Plan.

Let's start with why those terms are important.  A Chapter 13 Debtor is obligated to make payments to his creditors based on her "projected disposable income."  The Bankruptcy Code defines "disposable income" as "current monthly income received by the Debtor" reduced by "amounts reasonably necessary to be expended for the Debtor's maintenance and support, for qualifying charitable contributions, and for business expenditures."

The "amounts reasonably necessary to be expended" are determined, in part, by the size of the Debtor's "household."  Congress didn't bother to define what "household" means, so that was the main challenge for the Fourth Circuit.

How The Dictionaries Define "Household"

Well that's easy, you would think.  Look up "household" in the dictionary.  Because we give undefined words their ordinary meaning. But that doesn't really work because the common definitions for "household" are different and could yield different results.

Black's Law Dictionary says that a "household" is "1. A family living together.  2. A group of people who dwell under the same roof."  Webster's Third New International Dictionary says that the term means "a social unit comprised of those living together in the same dwelling place."

How The Bankruptcy Courts Have Dealt With This Issue

The bankruptcy courts have adopted three different approaches to define a "household."  Those are:

• The "heads-on-beds" approach, which follows the Census Bureau’s broad definition of a household as "all the people who occupy a housing unit," without regard to relationship, financial contributions,or financial dependency;
• the "income tax dependent" method derived from the Internal Revenue Manual’s definition that examines which individuals either are or could be "included on the debtor’s tax return as dependents";
• The "economic unit" approach that "assesses the number of individuals in the household who act as a single economic unit by including those who are financially dependent on the debtor, those who financially support the debtor, and those whose income and expenses are inter-mingled with the debtor’s."

The reason that Johnson's case was so difficult was that she was divorced and remarried.  Her new husband had three kids from his prior marriage and she had two.  The children from the first marriages spent about half a year with the Debtor and her new husband and the rest of their time with their other parent.

So the Debtor said her household consisted of her husband and all the kids, or seven.  Zimmer, a creditor, said that the count of 7 resulted in an overcalculation of the Debtor's expenses and that counting the household as smaller would free up income to pay under her Chapter 13 Plan to her unsecured debts.

The Fourth Circuit Applies The Economic Unit Approach, With Fractions

The Bankruptcy Judge, J. Rich Leonard, agreed partly and applied a variation of the economic unit approach.  He "fractionated" the kids based on the number of days that they were in the Debtor's house, and calculated that she had 2.59 children in her house full-time.  He rounded that up to three, and declared the household to be one of five.

A divided Fourth Circuit affirmed.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We all know how a residential real estate loan goes. You apply to a Bank for the loan; the Bank orders an appraisal of the property; maybe you get a copy of the appraisal; maybe you don't; the Bank makes the loan taking a Deed of Trust on the property as security. What if the appraiser flubs the appraisal? Do you have a claim against him or her?

Judge Murphy answered a number of questions about appraiser liability yesterday, in Cabrera v. Hensley, 2012 NCBC 41. By the end of the 26 page opinion, summary judgment was granted for the appraisers on all of the claims that they had overvalued the lots purchased by the Plaintiffs at "Wild Ridges," an upscale gated community in the North Carolina mountains which was never completed by the developer.

The primary issues addressed by Judge Murphy were whether the appraisers owed a duty to the Plaintiffs in preparing their appraisals, and whether the Plaintiffs could show that they relied on the appraisals.

The answer to both issues was found in Section 552 of the Restatement (Second) of Torts, which is the governing standard for negligent misrepresentation claims against appraisers (and accountants)..

The Duty Of An Appraiser

As Judge Murphy put it:

Stated plainly, an appraiser owes a duty to those who he intends to be the recipients of an appraisal and those to whom he knows the intended recipient also intends to supply the appraisal.

Op. ¶45.

The Cabrera Plaintiffs argued that they, as prospective buyers of the properties, were reasonably forseeable plaintiffs who should have been known to the appraisers and that they met the requirements of Section 552. There is some authority for that proposition in an old NC Court of Appeals decision, Alva v. Cloninger, 51 N.C. App. 602, 277 S.E.2d 535 (1981)(holding that an appraiser's duty to third parties include[s] a prospective buyer who reasonably relies upon the outcome of the appraisal.),

But the Restatement represents a "more limited standard of liability than a test of forseeability" Op. ¶43.  Judge Murphy rejected the Plaintiffs' argument, holding that:

Taken to its logical conclusion, Plaintiffs’ argument—that those who are reasonably foreseeable to the maker of a representation are also known to the maker—would eviscerate the limits on liability enunciated by the Court in [Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988)]. A Defendant would not have to 'know that the recipient intends' to supply another with the information, rather, liability would be extended to all reasonably foreseeable individuals that the intended recipient, unbeknownst to the Defendant,intended to supply the information. This interpretation would effectively write out the knowledge requirement from section 552.

Op. ¶51 (emphasis added).

Reliance On The Actual Appraisal Is A Must

The Plaintiffs had an even more difficult argument to accept on how they met the reliance requirement. That was particularly so because they had never seen the appraisals before committing to buy the lots.

They said that "at the most fundamental level of intuition," lenders didn't lend money without supporting appraisals and that they had relied on the banks' decisions to approve financing in taking out their loans.

That was at best indirect reliance on the appraisals, which is insufficient under Section 552. Plaintiffs had to show that they relied on the actual appraisals themselves to have a valid claim.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It's not every day that you see a "mandatory injunction,"  In fact, Judge Jolly said last Friday that such an injunction was "rare and generally disfavored as an interlocutory remedy," in Bayer Cropscience LP v. Chemtura Corp., 2012 NCBC 40. Op. ¶22.  But that didn't stop the Judge from entering an injunction that most of us would think of as mandatory: an injunction ordering Defendant Chemtura to reinstate its contract with the Plaintiff Bayer and resume its exclusive arrangement to sell a seed treatment called Ipconazole to Bayer. 

Injunctions are normally "prohibitory."  They prohibit the defendant from taking a particular action. If an injunction is "mandatory," it requires the defendant to take a specific action. 

So was this injunction mandatory?  No, not according to Judge Jolly.

The difference to Judge Jolly between the two types of injunction lay in the status quo between the parties, the state of affairs which an injunction is designed to preserve during litigation.  Chemtura said that it had already terminated the contract so the status quo at the time of the lawsuit was that no agreement existed.  The Judge rejected this argument, rolling the clock back a bit.  He said the status quo was not the "circumstances existing at the moment suit was filed," but rather "the last peaceable uncontested status that existed before the dispute arose."  Op. ¶24.  The "peaceable uncontested status" was the four years that the contract had been in place, and the Court said it should remain so.

He said that Bayer was seeking in substance to prohibit Chemtura from terminating the contract, and that the injunction was therefore prohibitory.  He said that ruling otherwise "would create an incentive for a party to breach an existing contract before the other party can seek injunctive relief in an effort to alter the status quo and the nature of the injunctive relief sought (i.e., mandatory relief rather than prohibitory relief)."  Op. ¶24.

The other valuable piece of this opinion was in the Court's ruling on irreparable harm.  Chemtura said that any harm to Bayer could be compensated by money damages after trial, but Bayer said its harm would be irreparable because it would lose "customer goodwill, market share, and its competitive position in the marketplace," which were not determinable by money damages.

Judge Jolly agreed, relying on North Carolina federal court rulings that harms such as the loss of "customer goodwill" and "competitive positions, including threatened loss of market share and threatened loss of existing and potential customers" are types of injuries that satisfy the irreparable harm requirement.  Op. ¶42.

The Court set the amount of the bond to be posted by Bayer as a condition of the injunction at $3 milllion pending further submissions from the parties.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 Can you force a party to a lawsuit to join in another party’s claim? There’s no answer in the  North Carolina Rules of Civil Procedure. But Judge Gale provided an answer this week in Nelson v. Alliance Hospitality Mgt., LLC, 2012 NCBC 39.

Two Rules were implicated: Rule 18, which allows for joinder of claims, and Rule 19, which allows for joinder of necessary parties. Neither Rule speaks to a forced joinder, and the Judge said he had not found any North Carolina case where a party already involved in a lawsuit was compelled to join other claims or counterclaims.

Why would Nelson want to force one of the Defendants to join in a counterclaim brought by another Defendant anyway? Well, the counterclaim was about the extent of Nelson’s percentage ownership interest in Alliance. Nelson said he had a 16.4% interest, but Alliance had counterclaimed saying that Nelson’s interest was limited to 10%. One of the other Defendants, Axis, was the majority owner of Alliance, and Nelson wanted Axis to be required to join in Alliance’s counterclaim. But Axis was already a Defendant on Nelson’s claims.

If you were to call this "compulsory joinder," the only time NC courts have required a person to join in claims or counterclaims has been when the person is not already a party to the case.

Judge Gale framed the issue as “whether Rule 19 compels a person who is already a plaintiff or defendant on other claims in the lawsuit to be joined to the other claims or counterclaims of that lawsuit.” Op. Par. 11 (emphasis added). He concluded that “when a party is already a party to the lawsuit, Rule 19 does not compel the party to join other claims or counterclaims.” Op. ¶16.

Nelson argued that Axis was the real party in interest, and that Rule 17, which requires all claims to be made in the name of the real party in interest, therefore required its joinder.  Judge Gale said that the LLC itself, Alliance, was the real party in interest, because "Rule 17. . . considers a party authorized by statute to bring the claim in its own name the real party in interest without joining the party for whose benefit the action is brought."  Op. ¶23.

Since Alliance, a Georgia LLC, had the authority under the Georgia Code to sue in its own name, it was the real party in interest, and Axis didn't need to be joined to Alliance's claims.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are wondering what North Carolina has to do to comply with the Affordable Care Act now that the Supreme Court has said it passes constitutional muster, there are better places to look than my blog.  But there's an excellent post from Professor Jill Moore at the UNC School of Government.  It's on the School of Government's Coates' Canons blog, which I highly recommend you add to your reading list if you practice law in North Carolina.

Health Benefits Exchange

North Carolina is behind the curve on the ACA front on establishing a health benefits exchange.  The concept of an HBE "is to create an insurance pool so that uninsured people may purchase health insurance at lower rates than are typically available to individuals in the present market."  North Carolina isn't the only state to have deferred creating an HBE, only 15 states have put an HBE in place in anticipation of the full deployment of the ACA.  But there's a deadline.

North Carolina's motivations were good.  The General Assembly passed a bill last year stating its intention to create an HBE.  The state House passed legislation doing exactly that, but the state Senate hasn't considered that legislation yet.  Given that the Act requires that a state creating its own exchange must "demonstrate operational readiness by mid-2013 and begin operating in 2014,"  NC is in a crunch on the HBE issue, especially since the Senate isn't expected to reconvene to consider this issue until next year, after the November elections.

Medicaid Expansion

There also a major issue about Medicaid.  The ACA expands Medicaid to cover a large population of low income adults.  That's going to involve substantial expense which the federal government will mostly bear until 2020, when the states will be responsible for 10% of the increase and the federal government 90%.

A U.S. Senate Committee report estimates North Carolina's increased costs to cover the expanded Medicaid program at $1.791 billion between 2014 and 2019.  Even Governor Perdue has expressed concerns about North Carolina's financial ability to cover nearly half a million estimated new Medicaid recipients.

Given that the Supreme Court's decision gives the states the option to opt-out of the expansion,  North Carolina has a difficult decision about whether to participate.  Many states are reported to be pondering exactly that.

Since the Republicans currently control the North Carolina General Assembly, and have a serious run ongoing for the Governorship, you can expect the dialogue over Medicaid expansion to be acrimonious after Election Day.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Persistence can be a valuable quality, but when it leads to an unjustified refusal to give up a questionable case, the party suffering from persistency can get socked with attorneys' fees.  That was the result in Judge Gale's Order on Tuesday in McKinnon v. CV Industries, Inc.

McKinnon was entitled to benefits under a Severance Agreement which looked at when he had stopped competing with CV Industries after leaving his employment (yes, it's unusual for a party to say he's entitled to benefits because he was competing with his former employer but that was the situation here).

McKinnon argued throughout discovery, and into the Court of Appeals and then into a Petition for Discretionary Review with the NC Supreme Court that his employment with a company called Basofil Fibers was in competition with CV Industries.  CV Industries manufactures high-end furniture and fabric through two subsidiaries.  Basofil manufactures and sells fiber, but not fabric.

The Business Court's opinion by Judge Tennille on summary judgment -- and the Court of Appeals opinion -- turned on the meaning of the word "competition.  McKinnon urged a very broad definition saying that Basofil "competed" with CV Industries because they both sold product to the furniture industry.  Both Judge Tennille and the COA rejected that argument.  The COA said that "competition":

entail[s] more than mutual existence in a common industry or marketplace; rather, it requires an endeavor among business entities to seek out similar commercial transactions with a similar clientele.

It also observed that under McKinnon's theory of "competition," nearly every business selling any product or service to the furniture industry would be in competition with one another.  It said that McKinnon's definition was "unpersuasive" and "excessively broad."  Appellate Opinion at  17.

The basis for the award of fees was N.C. Gen. Stat. Section 6-21.5, which says that "[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney's fee to the 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 issue wasn't whether McKinnon had a valid belief of a"justiciable issue" that he could prove he was in competition with his former employer when he filed his complaint .  As Judge Gale put it, "the more difficult question is whether he legitimately continued in that belief when pressed during the course of litigation to support his claim and failed to present a clear basis on which he could claim relief."  Op. ¶58.

When was the turning point when that belief was no longer legitimate?  Judge Gale said that it was after summary judgment was entered against McKinnon on his claims.  Judge Gale ordered that CV Industries was entitled to $40,000 in fees for McKinnon's unjustified persistence after that point.

Judge Tennille's summary judgment Order left no doubt on how he viewed the claims.  He said that "with the exception of Mckinnon's self-serving conclusory allegations" it was "entirely unrefuted" that McKinnon's employer was not in competition with the Defendant.

The fee award was probably not satisfactory to the Defendant, which had sought $322,000 in fees, presumably the cost of defending the case from the outset.  If that's so, it probably explains why the Defendant also moved for fees per Rule 11.  Rule 11 requires that a Complaint (or any paper filed with the Court) must be "well grounded in fact and . . . warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

The problem with the Rule 11 argument was that the analysis of an entitlement to sanctions stops with the Complaint itself.  It is limited to "a review of the challenged pleading and whether it was warranted by facts and law known to the submitting party at the time the pleading was signed."  Op. ¶37.

The inquiry under section 6-21.5 is different and more flexible.  There, the court properly looks "beyond a particular pleading 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.” Op. ¶43 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991).

Don't walk away from McKinnon thinking you are entitled to attorneys fees just for getting summary judgment against a claim.  That's certainly not the law. Success on summary judgment is only some evidence "to support . . . a finding" for fees.  Op. ¶42.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you were waiting anxiously, as I was, for the Chief Justice of the North Carolina Supreme Court to elucidate the process for challenging a Business Court designation, which I wrote about a couple of weeks ago, your torture is over.

Chief Justice Parker ruled in a short Order in Ekren v. K&E Real Estate Investments, LLC that the "Motion to Revoke Status as a Mandatory Business Court Case" filed last month was "denied."  The Order was posted on the Business Court website yesterday. 

There was no explanation about whether a "Motion to Revoke" is the proper procedure to follow under G.S. §7A-45.4 to get a final review of a Business Court designation.  In fact, there was no discussion at all of how to appeal to the Chief Justice, as the statute says to do, when that final review is sought.  The Order looked much like one of the form Designation Orders that the Chief Justice issues when assigning a case to the Business Court

I was hoping for more, as you know from my earlier post on the issue.  But if this blog only covered the keenly written opinions with business litigation value that come from the NC Supreme Court, it would be a long and lonely vigil.  In four years, I've only written about a Supreme Court decision once.  That post was aptly titled "Lightning Strikes."

The lack of output from our Supreme Court has been the subject of much discussion, including this piece in the Greensboro News & Record.  My personal empirical research on the Court's productivity (conducted by my cat, Dusty, upon my special assignment) showed that in 2011, the Court issued only 13 civil opinions.  Dusty (pictured below) arrived at that number by excluding all 2011 opinions captioned "State v. ____."  Of the 13 civil opinions, 7 were "per curiam," meaning that no Justice of the Court had individual responsibility for authoring the "opinion."  Per curiam opinions typically have little discussion of the merits or the defining law.

So it's no surprise that after the Ekren "decision"  we are left without any independent analysis from the high state Court on how to oppose Business Court jurisdiction. And Dusty had no comment.  She went out hunting chipmunks after completing her project, and then took a nap. So there's nothing more to say, except that Dusty was known to my daughters as the "smart cat" of the family even before her dumb sister got outside and ran away.  Dusty was uniquely qualified to conduct this research.  But as you can tell from her picture, she found the project very boring.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Wow.  The Business Court was busier churning out opinions last week than I wanted to be working on my blog, so here's a catchup and a rundown on two cases you should know about.  Two more coming after the holiday.

Internal Affairs Doctrine.  The internal affairs doctrine is a conflict of laws rule which says that only one State should have the authority to regulate a corporation's internal affairs.  In Mancinelli v. Momentum Research, Inc., 2012 NCBC 28, Judge Jolly ruled that Momentum's state of incorporation, Delaware, should govern issues regarding Plaintiff's claim that she was orally promised a 15% share ownership by the corporation. 

The Court rejected the argument that it should apply the "most significant relationship" test or  the lex loci doctrine test (the place of contracting), which would have resulted in North Carolina law applying.

That's significant because the corporation was based in North Carolina, and the agreement claimed by the Plaintiff had been entered into in North Carolina.  But the Court rejected the argument that North Carolina law should trump Delaware's because the business was based in NC.  The application of Delaware law resulted in the dismissal of Plaintiff's claim because an oral agreement for the issuance of shares, which was the basis of her claim, is not enforceable under Delaware law.

If you are a North Carolina lawyer representing a Delaware corporation here in NC, it's probably a good idea to know what constitutes an "internal affair" that will be governed by Delaware law.  Judge Jolly quoted the following examples from the Restatement of Conflict of Laws:

[S]teps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors' and shareholders' meetings, methods of voting including any requirement for cumulative voting, shareholders' rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and reclassification of shares.

Op. ¶12.

Res judicata.  The message of this particular Tong v. Dunn case (it's one of three) is don't split your claims or they are likely to be barred by res judicata.  Tong filed a suit in Superior Court, later removed to federal court, alleging that he had been fraudulently induced to agree to a merger.  Then Tong filed a lawsuit (nine days after his first one) alleging that the Defendants had breached their fiduciary duties by entering into the same transaction. 

Judge Gale extolled the virtues of res judicata --  it "relieves litigants of the cost and confusion of multiple lawsuits, conserves judicial resources, and encourages reliance on adjudication" -- and observed that very similar facts had been pleaded in both Tong actions.

Res judicata bars a subsequent action when: "(1) there is a final judgment on the merits; (2) between the same parties; and (3) involving the same claim."  Op. ¶21

Tong's lawyers conceded that their voluntary dismissal of the federal court action with prejudice operated as an adjudication on the merits, so the issue for the Court was whether the federal court action and the case before it involved the "same claims."  That look some discussion, because the Judge said that "[t]he test for determining 'same claims' for purposes of res judicata has not been definitively stated by our appellate courts." Op. ¶22

He cast the analysis in terms of the principle against "claims splitting," and observed that "all damages incurred as the result of a single wrong must be recovered in one lawsuit."  Op. ¶27  That rule isn't ironclad.  Sometimes successive lawsuits alleging common facts can go forward, especially when all the facts weren't known with reasonable diligence at the time of the earlier adjudication.

But that wasn't the case with Tong's claims.  The claims in the second lawsuit were barred by res judicata because all of the facts relevant to his claims were known to him when he filed the dismissed federal court case and there was no compelling reason that all of his claims could not have been asserted in the first action.

You might remember having heard about Tong and Dunn from the Tong v. Dunn decision from the Business Court in March , 2012 NCBC 16, which I wrote about last month.  This new Tong v. Dunn case has the same parties in a decision involving different claims.

There was obviously way too much claims splitting going on with Tong.  Do any of you tell your clients that they need to file three lawsuits to get relief?

Happy Memorial Day.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The broadly written scope of the covenant not to compete before the Business Court in Outdoor Lighting Perspectives Franchising, Inc. v. Harders led to the denial of Plaintiff's Motion for a Preliminary Injunction this week.

The covenant said that the Defendant, a franchisee of the Olaintiff, could not compete "in any Competitive Business."  The term "Competitive Business" extended to any business in competition  with an outdoor lighting business or any business similar to the "Business."  The term "Business" was defined more narrowly, limited to "the business operations conducted or to be conducted by the [Defendant] consisting of outdoor lighting design and automated lighting control equipment and installation services, using the" Plaintiff's "systems, concepts, identifications, methods and procedures developed or used by the" Plaintiff for the sales and marketing of its Products and Services.

Judge Gale found the term "Competitive Business" to be overly broad and to reach[] beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and that it therefore fell "within those cases which prohibit unreasonable restrictions on competition."  Op. ¶6.

He further said that the "expansive" term "extends well beyond activities that Defendants performed
pursuant to the Agreement. It likewise extends beyond the business [Plaintiff] itself conducts.  The language thus extends beyond [Plaintiff's] legitimate business interests." Op. ¶35

Lurking in the opinion was the possibility that the covenant might have been valid under the more liberal standard applied in evaluating a covenant given in connection with the sale of a business. Judge Gale obviously felt that he lacked the authority to give the covenant in this franchise agreement that kind of interpretation, as urged by the franchisor, but he highlighted that issue for a future case, saying:

A North Carolina appellate court may later adopt a standard of general application to franchises that affords well written competition restrictions in a franchise agreement the benefit of the more liberal standard afforded to agreements incidental to the sale of a business.

Op. ¶9.

But until that happens, the scope of a franchisee's covenant not to compete is more likely to pass scrutiny if it is limited to the current scope of the franchisee's business.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Financial Institutions Reform, Recovery and Enforcement Act, affectionately known to banking lawyers as FIRREA, is a statute passed by Congress in the late 1980's at the tail end of the savings and loan crisis of that decade.  It bars lawsuits against institutions in FDIC receivership and requires that claims first be presented to the FDIC for administration before being made in court.  In other words, there is no subject matter jurisdiction over those claims.

Last week, the Business Court took up a case of first impression in North Carolina: to what extent is FIRREA a bar to claims against a bank that acquires the assets of a failed bank from the FDIC?  That was the threshold issue in Front Street Construction, LLC v. Colonial Bank, N.A., 2012 NCBC 25. Some of the assets and liabilities of Colonial had been acquired by BB&T, against which Front Street sought to make its claims arising from Colonial failing to fund a loan.

After a summary of a number of cases on this issue of successor liability and FIRREA, Judge Jolly elected to reject the reasoning of another court involving the same acquisition by BB&T, Frazier v. Colonial Bank, 2011 U.S. Dist. LEXIS 22630 (M.D. Ala. 2011). 

He said that the proper resolution of Plaintiffs' claims depended on the terms of the document by which BB&T had acquired any assets and liabilities of Colonial Bank. This was the Purchase and Assumption Agreement between BB&T and the FDIC (the PPA). This climb up the FIRREA beanstalk via the terms of the PPA had been led by several other federal court decisions which Judge Jolly found persuasive: Fernandes v. JPMorgan Chase Bank, N.A., 818 F. Supp. 2d 1086 (N.D. Ill. 2011); Caires v. JP Morgan Chase Bank, 745 F. Supp. 2d 40 (D. Conn. 2010); Rundgren v. Washington Mut. Bank, F.A., No. 09-00495, 2010 U.S. Dist. LEXIS 126803 (D. Haw. Nov. 30, 2010); Moldenhauer v. FDIC, No. 2:09-CV-00756 TS, 2010 U.S. Dist.LEXIS 25315 (D. Utah Mar. 18, 2010). 

The Plaintiffs’ claims bogged down when the Court examined a Shared Loss Agreement between BB&&T and the FDIC, which said that the FDIC would reimburse BB&T for at least some of the losses incurred by BB&T on certain loans assumed by BB&T. Plaintiffs didn’t allege that the Colonial loan agreement on which their claims were based was covered by the Shared Loss agreement, and Judge Jolly ruled that they had not carried their burden of showing that the Court had jurisdiction in the face of FIRREA.      Most of Plaintiffs' claims were dismissed due to the Business Court's lack of subject matter jurisdiction.

One claim that was left standing after Judge Jolly’s Order was the Plaintiff’s claim against BB&T directly, for BB&T's failure to fund the loan after it assumed Colonial’s assets. He held that FIRREA did not apply when bringing a claim against a sucessor bank for its own conduct.             

There were other claims discussed and dismissed by the Court, but none as significant as those raised by the FIRREA issues. And some of those other claims turned on Alabama law, about which I rarely care.   So if you are interested, you need to read the opinion.                                                                                                                                                                

 

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Fourth Circuit last week affirmed a ruling that an injured plaintiff had to arbitrate his claims against his employers in the Philippines, but ruled that the District Court had improperly dismissed his claims for injunctive relief, in Aggarao v. MOL Ship Management Co.

Aggarao had suffered horrible injuries.  They occurred when the ship on which he was a seaman was preparing to unload a cargo of cars near the Port of Baltimore.  He was crushed between "a deck lifting machine and a pillar."  He was airlifted to the University of Maryland Shock Trauma Center where he went through twelve surgeries.

Then there was a tug of war over the payment of Aggaro's substantial medical bills.  Aggarao, a citizen of the Philippines, had signed a Philippine Overseas Employment Administration of Employment contract (the "POEA") which said that his employers would be liable "for the full cost of . . . medical[,] surgical and hospital treatment as well as board and lodging until the seafarer is declared fit to work or to be repatriated."

Plaintiff's Employers Refuse To Pay For Medical Care in the United States

Aggarao sued the parties to the POEA in June 2009, and settled the amount due to the Maryland hospital for nearly a million dollars.  Then, the defendants said they would pay to repatriate Aggarao to the Phillipines and pay for additional medical care there, but that they would "have no further responsibility for, and [would] not pay for, any further medical care" in the United States.

Aggarao, who had been advised by the University of Maryland doctors that he would "need appropriate and diligent medical care for the rest of his life,"  refused to leave the United States.  His doctors expressed concern that he would be unable to obtain the necessary level of care in the Phillipines.

The lawsuit, still pending, was transferred to Baltimore.  Then, apparently for the first time, the defendants invoked a mandatory arbitration clause contained in the POEA, and moved to dismiss for improper venue.  Aggarao argued that the arbitration clause was unenforceable, and sought an injunction requiring his employers to provide maintenance and cure for him in the United States until he attained "maximum medical cure."  (That's a term from the American statute known as the Jones Act, which covers injured American seamen.  A shipowner from the U.S. is obligated to pay for an injured seaman's maintenance and cure until he has attained "maximum medical cure.").

Enforcement of Foreign Arbitration Clauses is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards

Judge Beach of the District of Maryland ruled that the arbitration clause was enforceable, and she denied the motion for an injunction as moot and ordered the case to be closed.  Judge King of the Fourth Circuit parsed through the claims and affirmed in part, vacated in part, and remanded the case.

Much of the Court's opinion is a crash course in the law surrounding foreign arbitration clauses, so keep reading if you are interested in this area of law.

More than fifty years ago, UNESCO adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The goal of the Convention "was "was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries." Op. at 14 (quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974). The Convention was implemented by Congress in 1970 by its enactment of Chapter 2 of the Federal Arbitration Act.

When certain "jurisdictional prerequisites" have been met, a District Court is obligated to order arbitration, unless it finds the arbitration agreement to be "null and void, inoperative or incapable of being performed."  The prerequisites are that

(1) there is an agreement in writing within the meaning of the Convention; (2) the agreement provides for arbitration in the territory of a signatory of the Convention; (3) the agreement arises out of a legal relationship, whether contractual or not, which is considered commercial; and (4) a party to the agreement is not an American citizen, or that the commercial relationship has some reasonable relation with one or more foreign states.

Balen v. Holland Am. Line Inc., 583 F.3d 647, 654–55 (9th Cir. 2009).

There were a few challenges by Agarrao to the prerequisites -- one being that the arbitration clause had been superseded by a novation -- but they failed in light of the "federal policy favoring arbitration." Op. at 17.

The Court then put to rest Agarrao's argument that a claim he had under the Seaman's Wage Act guaranteed him the right to sue in federal court, and that this trumped the arbitration clause.  It joined the Ninth and Eleventh Circuits, which had ruled:

"[t]he Convention Act expressly compels the federal courts to enforce arbitration agreements," notwithstanding the jurisdiction conferred on such courts to adjudicate Seaman’s Wage Act claims. 

Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1156 (9th Cir. 2008);  (citing Lobo v. Celebrity Cruises, Inc., 488 F.3d 891, 894-95 (11th Cir.2007)). 

So the Convention Act "partly supplants" the Seaman's Wage Act, "requiring a federal court to refer to arbitration seamen wage claims and any other claims subject to an enforceable arbitration  agreement."  Op. at 22.

 The "Prospective Waiver Doctrine" Is A Valid Challenge To The Enforceability of a Foreign Arbitration Clause, If Raised After The Award is Issued

But Aggarao and his lawyers weren't finished fighting to invoke American jurisdiction.  Next, they argued that arbitration in the Phillipines would be against public policy because he would be deprived of his right to pursue his federal statutory claims under U.S. law.  This is known as the "prospective waiver doctrine."  The problem with this attack was that it was premature.  It can't be raised at the stage where enforcement of an arbitration clause is the issue.  Instead, it is ripe only after an "arbitration award has been made and the court is 'considering whether to recognize and enforce an arbitral award.'" Op. at 24 (citing Convention, art. V).

By now I was feeling really sorry for Aggarao, who looked like he was facing an involuntary return to the Phillipines and an arbitration there.  He was thousands of miles from home, paralyzed in a wheelchair, on the hook for more than $100,000 for medical care, and at one point he was living in a homeless shelter.

There's a ray of American sunshine for him, because the Fourth Circuit held that his case should not have been dismissed and that his injunction request should not have been denied as moot.  Dismissal of a case headed to arbitration is appropriate only when "all of the issues presented in a lawsuit are arbitrable."  If all the issues are not arbitrable -- and the prospective waiver issue wasn't -- then a stay is appropriate as opposed to a dismissal.

The District Court Had The Authority To Enter An Injunction Even Though The Case was to be Arbitrated in the Phillipines

Here also came up something else I had never heard of: the "hollow formality" test.  The Court said:

where a dispute is subject to mandatory arbitration under the [FAA], a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a 'hollow formality.' The arbitration process would be a hollow formality where 'the arbitral award when rendered could not return the parties substantially to the status quo ante.

Op. at 31 (citing Merrill Lynch, Pierce, Fenner & Smith v. Bradley, 756 F.2d 1048, 1053-54 (4th Cir. 1985) (quoting Lever Bros. Co. v. Int’l Chem. Workers Union, Local 217, 554 F.2d 115, 123 (4th Cir. 1976)).

Judge King observed that Aggarao couldn't be returned to the pre-lawsuit status quo if he died upon return to the Phillipines or if his medical condition deteriorated as a result of inadequate care there.  He charged the District Court with determining whether Aggarao was fit to be repatriated and whether the medical care available in the Phillipines was adequate for Aggarao.  There was conflicting testimony from physicians.  A surgeon from the Phillipines said that his hospital was "world class" and that it had "state-of-the-art facilities."  Op. at 11.  He also opined that the Phillipine doctors could provide all the care necessary, and that Aggarao was fit to return to his homeland.  Op. at 11.  American doctors expressed doubt on these points.  Judge Beach was told to consider additional evidence if she deemed it necessary.

The Case Should Have Been Stayed Pending Arbitration, Not Dismissed, So That The Plaintiff Could Have Judicial Review of his Challenge to the Validity of the Arbitration

Lastly, the Fourth Circuit ordered that the District Court stay (and not dismiss) the case to make sure that Aggarao would have an opportunity at the "award enforcement phase" to have judicial review of his public policy defense based on the prospective waiver doctrine.  It said that the Convention "contemplates a court retaining jurisdiction to ensure that an arbitration award comports with the public policy of the forum country."  Op. at 37.

Whew.  Writing this post has made me tired.   I hope it's of use to the hundreds of lawyers reading this blog who represent foreign seamen in admiralty cases and and the couple of dozen practicing in the area of international arbitration.  I think it's a significant opinion for them.  (Really, are there any of you out there?)

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Judge Murphy set some new ground rules for cases brought under the North Carolina Securities Act (the NCSA) last week in Associated Packaging, Inc. v. Jackson Paper Manufacturing Co., 2012 NCBC 13.  The Jackson Paper case is an important read for any lawyer bringing or defending an NCSA claim in the Business Court.  Sorry for the length of this post, but the case has got a lot of stuff in it.

Choice of Law for NC Securities Act Claims

Most cases in the Business Court touch multiple states, and there is often a spat about which state's law ought to apply.  Some of the plaintiffs in Jackson Paper were Georgia investors in a failed Delaware LLC, Stonewall, whose operating agreement said that "[a]ll issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement [shall] . . . be governed by, and construed in accordance with, the laws of the State of Delaware."  The defendants said in their Motion to Dismiss that Delaware law applied and required dismissal of the securities claims.

So did Delaware law govern the claims by the Plaintiffs that the prospects of Stonewall had been misrepresented to them by the defendants in order to procure their investments?  No, because those were tort claims, not claims regarding the enforcement of the LLC Agreement, Judge Murphy said, relying on Mosteller Mansion, LLC v. Mactec Eng’g & Consulting of Georgia, Inc., No. COA07-664, 2008 N.C. App. LEXIS 1011 at *7–8 (N.C. Ct. App. May 20, 2008).

Judge Murphy then waded into a thicket of law on which state's law ought to apply to the NCSA claims. He said that NC's appellate courts had never before ruled on whether NCSA claims were based in tort.  If they were based in tort, then the appropriate choice of law test was lex loci delicti (if your Latin dictionary isn't close by, that means the law of the situs of the claim).  The alternative choice  was the "most significant relationship test."  He relied on cases determining the choice of law test for unfair and deceptive trade practices, like the NC Supreme Court's decision in Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849(1988), in ruling that the lex loci test should apply to NCSA claims.

Under the lex loci rule, "the law of the state where the plaintiff was injured controls the outcome of the claim."  Op. ¶28.  Injury happens in the state "where the last act occurred giving rise to [the] injury."  Id.  The inquiry is different for negligence based claims (the plaintiffs had made some) and the NCSA claims.

The location of the state of injury for a corporate plaintiff is "more difficult" than determining the location of an individual victim of an assault and battery.  Judge Murphy said "it might be presumed that the last act occurred where Plaintiffs made their investments in Stonewall." Op. ¶32.  But the Court provided a different answer for the negligence claims, because Judge Murphy said that Plaintiffs had no loss at that time, and therefore no injury, and therefore no claim to make at the time of investment.  Their loss (and injury) occurred when the receiver handling the demise of Stonewall completed the sale of Stonewall's assets.  That happened in Sylva, North Carolina, where Stonewall's plant was located and where the receiver's sale took place.

The question is a little easier to answer on the NCSA claims, because the statute specifies liability for an offer to sell securities, or the actual sale, made "by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made . . . not misleading."  N.C. Gen. Stat. §78A-56(a)(2). So a claim for a violation of the NCSA "is complete upon the "[o]ffer[ing] or s[ale] of a security" by means of an untrue statement or omission of a material fact."  Op. ¶31.Judge Murphy said that the offers to sell an interest in Stonewall were made by employees or agents of Jackson Paper, a North Carolina company with its principal place of business in North Carolina.  He determined that North Carolina law, the NCSA, therefore applied.

Whether Scienter Is Required To Prove An NCSA Claim

Whether scienter (fraud or reckless disregard for the truth) is required to prove an NCSA claim is another question on which the North Carolina appellate courts have not ruled.  But you might recall that the U.S. Supreme Court said that scienter was required under the federal Rule 10b-5, in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).  So since the NC Court of Appeals has said (in State v. Davidson, 131 N.C. App. 276, 282-83, 506 S.E.2d 743, 748 (1998)) that 10b-5 cases are "instructive" when construing Section 78A-8 of the NCSA because it "closely parallels" 10b-5, shouldn't Hochfelder be the end of the analysis?

Not so, said Judge Murphy, who deemed it appropriate to plumb the intent of the North Carolina Legislature in enacting the NCSA.  He concluded that there was no requirement of scienter, holding that "the legislature intended for the civil remedy provided under Section 78A-56 of the NCSA to include claims based on negligence and negligent misrepresentations." Op. ¶48.

Particularity Is Not Required To Plead A Negligence Based NCSA Claim

 The defendants moved to dismiss the NCSA claim on the grounds that NCRCP 9(b) required it to be plead with particularity and that the Complaint did not specify which financial information supplied by them was false.  The plaintiffs said that the state securities act allowed negligence based claims and that their notice pleading was sufficient.

The Court observed that "it is generally known and widely accepted among practitioners that when pleading claims under Section 78A-56 it 'is important to remember that a claim under the antifraud provisions cannot be ple[d] under the normal notice pleading standards because an averment of fraud must be ple[d] with particularity.'"  But Judge Murphy ruled that:

Notwithstanding the general practice of applying Rule 9(b)’s particularity standard to claims brought under the NCSA, unlike claims based in fraud, the rationale for requiring
particularized pleading here is not well adapted to claims based in negligence.  Accordingly, this Court finds that when claims brought under Section 78A-56(a)(2)
are based in negligence rather than fraud, plaintiff need only meet the general
notice pleading standard of Rule 8(c).

Op. ¶49.

Disgruntled Investors Could Make A Claim For Negligence And Adequately Pleaded Reasonable Reliance

Plaintiffs faced another hurdle in the general rule that “shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock.” Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 215 (1997).  Those types of claims belong to the corporation, and must be brought on a derivative basis.

Judge Murphy apparently assumed that the plaintiffs' claims, being for their lost investment in Stonewall, fell within the Barger rule, and he went on to consider whether the claims met the "special duty" exception to the rule. Barger says that "the [special] duty must be one that the alleged wrongdoer owed directly to the shareholder as an individual." Op. ¶57. 

He concluded that a "special duty" arose because the challenged actions induced the investors to buy an interest in Stonewall. 

Another issue the opinion dealt with was whether the plaintiffs had pleaded reasonable reliance on the financial information provided in connection with their investment in Stonewall.  Judge Murphy found the reasonable reliance requirement satisfied by the Complaint's allegation that the plaintiffs "had an accountant review the financial information provided by Defendants. (Compl. ¶ 109.)." He said that "[t]he accountant’s inability to detect any irregularities supports Plaintiffs’ contention that they could not have discovered the truth."  Op. ¶61.  The same rationale saved the negligent misrepresentation claim.

Summary

This decision definitely breaks some new ground.  You don't have to show scienter for a state securities claim?  You don't have tp plead your claim with particularity?  Those are real relaxations of requirements for plaintiffs.  It is not clear that these rulings are the law of North Carolina, but they are the law in Judge Murphy's courtroom.  Whether they'll stick on appeal is an open question.  The Court of Appeals seems to love to reverse the Business Court.  They did it today in Hill v. Stubhub, Inc., reversing a determination by Judge Tennille that the Communications Decency Act didn't insulate StubHub from a claim that its ticket selling practices violated North Carolina's anti-scalping laws.  I wrote about that case back in 2008.

So if you are a plaintiff with a securities claim, don't wait to see what the Court of Appeals might do.  Bring it now, in Mecklenburg County or elsewhere in the Western part of North Carolina, and put it in the Business Court.  It's most likely that it will be assigned to Judge Murphy.  That seems like a good place to be.

But don't think that the Jackson Paper plaintiffs are about ready to collect a jackpot.  If you read the opinion, you'll see that there are a lot of warts on their case.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The North Carolina Court of Appeals ruled last week in Shera v. N.C. State University Veterinary Teaching Hospital that dog owners are not entitled to recover damages for the negligent death of their pet beyond the cost to replace the pet.  In other words, a sentimental attachment to a pet does not result in an increase to damages.

The dog in the case was a Jack Russell Terrier named Laci.  She had been owned and loved by the Sheras for 12 years, since she was a puppy.  They shepherded her through cancer treatment in 2003, and had gone to N.C. State University's veterinary hospital for further treatment for her in 2007.  Unfortunately, the vets inserted a feeding tube improperly. That caused Laci's death.

The Sheras, who had a close relationship with their dog, sued the hospital and its veterinarians for the "intrinsic value" of Laci and also for "emotional distress and loss of enjoyment of life."  They emphasized the "human-animal bond" between them and their dog.

The Industrial Commission (which had jurisdiction over the claim because of the involvement of NCSU) ruled that it could not allow intrinsic value damages for the loss of a pet.  It granted an award of $3,105.72, which covered reimbursement for the cost of the treatment that led to Laci's death plus $350 for the replacement cost of a new Jack Russell Terrier puppy.

There were amicus briefs filed for each side in the appeal to the Court of Appeals.  Lining up with the Defendant were the American Kennel Club and the Cat Fanciers' Association.  You might expect the AKC, a dog loving organization, to be supporting the Sheras in trying to recover damages based on their emotional valuation of their dog, but the AKC says that allowing large awards to pet owners based  on their emotional attachment would result in an increase to the price of pet services and products to cover the cost of the awards.  Many pet owners then could not afford the more expensive services and care and would forgo them argued the AKC, so pets "would suffer."  AKC Brf. at 14.  I don't know whether the Cat Fanciers have a different perspective on the value of a dead cat, but anyone who has a cat as a pet knows that it's only fair that veterinarians should have to pay more for the unintended death of a cat.  The established superiority of cats to dogs has even been observed by the highly reputable newspaper, The Onion.

The amicus filing for the Sheras was by the Animal Legal Defense Fund.  The ALDF says on its website that it fights "to protect the lives and advance the interests of animals through the legal system."

The best argument made by the Sheras in support of their position was probably the one based on North Carolina's Pattern Jury Instruction 810.66.  That jury instruction says that intrinsic value should be used as a measure of damage "where damages measured by market value would not adequately compensate the plaintiff and repair or replacement would be impossible."  One of the factors to be taken into consideration if the instruction applies is "the opinion  of the plaintiff as to . . . value."

The Court dwelt for a while on the Sheras' argument that Laci was irreplaceable and that market value therefore wouldn't be adequate damages.  It said, based on the Sheras' testimony, that Laci performed no unique task or function that could not be performed by another dog.  It agreed that the "emotional bond" was irreplaceable, but not the dog herself.  It said that its conclusion was supported by the consistency of "our case law denying recovery for sentimental value of negligently lost or destroyed personal property."  Op. at 15.

Another basis for enhanced damages offered by the Sheras was also rejected by the Court.  They said that their damages should include what they had paid for Laci's medical care throughout her lifetime, including her cancer treatment.  The Court rejected that argument, saying "North Carolina law has not yet recognized a lost investment valuation method in wrongful death cases, whether human child or pet animal." Op. at 16.

Don't mistake my position on cats vs. dogs as making light of the Shera's understandable distress over the unexpected death of Laci.  The Court of Appeals certainly did not do that.  Judge McCullough ended the unanimous opinion by saying "[w]e sincerely empathize with plaintiffs' loss of their beloved pet Laci."  Op. at 19.  He said that the Court of Appeals was "an error-correcting court, not a law-making court" (id.) and that an expansion of the law to allow pet owners to recover sentimental damages for the loss of a pet was within the province of the NC Supreme Court, or preferably the Legislature.

That would be an unprecedented step for the state supreme court or the General Assembly.  I do not think there is a single state in the country that allows recovery for emotional damages for losing a pet.

And speaking of lost pets, one of my two cats got outside about a month ago and hasn't come back. Her picture is below.  Snickers is part Maine Coon cat and she is a real beauty.  If you have seen her running free in Greensboro, I am offering a reward of $500 for her return.  That's her intrinsic value to me based on what I have paid approximately over time to fill her Xanax prescription (don't ask me why she takes Xanax, it has nothing to do with me.)  But who knows, even though the Shera court rejected the cost of past medical treatment as a measure of damages, that's only dog law and perhaps cats will blaze a new trail in our appellate courts.

 

 

 

 

 

• Email This
• Print
• Comments (3)
• Trackbacks
• Share Link

I’ve written before about trade secrets claims being dismissed by the Business Court and the NC Court of Appeals because the trade secrets were too broadly referenced and not described with “sufficient particularity".  Two of those cases are Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC 41; and Washburn v. Yadkin Valley Bank and Trust Co. 190 N.C. App. 315, 660 S.E.2d 577 (2008).

And just yesterday came yet another Rule 12 dismissal of an inadequately pleaded trade secrets claim. Judge Jolly of the Business Court shot down the claim because of the insufficiency of the pleading in AECOM Tech Corp. v. Keating, 2012 NCBC 10.

AECOM has the familiar fact pattern of an employee leaving employment with the plaintiff for a position at the defendant, a competitor, with accompanying claims of unfair and deceptive trade practices, tortious interference with contract, and misappropriation of  trade secrets (which was dismissed).

The allegedly stolen "trade secrets" in AECOM were "customer lists, customer contract information, pricing information, and product information,  These descriptions of the trade secrets were deemed to be too "sweeping and conclusory" to put the defendant on notice of what had been stolen and were dismissed.

Most of the claims survived dismissal because the departing employee (Keating) had been an officer of AECOM.  That meant he owed AECOM a fiduciary duty.  Op. ¶16.  The unfair and deceptive practices claim also stuck because the alleged conspiracy between the new employer and Keating to violate his fiduciary duty could constitute constructive fraud, which makes out a UDTPA claim.

Given that getting trade secrets claims dismissed  in the Business Court now (if the trade secrets are not described with sufficient particularity) is as easy as shooting fish in a barrel, I am declaring a boycott on writing about those types of dismissals.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The only thing sweeter than winning a civil case against the federal government is to win the case and then be awarded your attorneys' fees.  But the winning defendant in EEOC v. Great Steaks, Inc., decided last week by the Fourth Circuit, will have to resign itself to eating cake without icing, notwithstanding three colorable fee arguments which were shot down by the Court.

The EEOC sued Great Steaks on behalf of several employees who claimed they had been sexually harassed in their work at Great Steaks' restaurant in Greensboro.  Great Steaks won the case after a three day jury trial and moved for its fees under Title VII's fee-shifting provision, under the Equal Access to Justice Act (the "EAJA") and under 28 U.S.C. § 1927.  Judge Beaty of the Middle District of North Carolina denied the fee request and was affirmed by the Fourth Circuit. 

Title VII's Fee-Shifting Provision

Title VII contains a provision allowing the Court in its discretion to award reasonable attorneys’ fees to prevailing parties in actions brought under it. 42 U.S.C. § 2000e-5(k).  The statute makes no distinction between the standard for prevailing plaintiffs versus prevailing defendants, but in Christiansburg Garment Co. v. EEOC, 434 U.S. 412 (1978), the Supreme Court established a more stringent standard governing when prevailing defendants may recover as compared to prevailing plaintiffs.  The Supreme Court said in Christianburg Garment  that a prevailing defendant is entitled to fees only if the trial court:

finds that [the plaintiff’s] claim was frivolous, unreasonable, or groundless, or that the plaintiff continued to litigate after it clearly became so.

Id. at 422.  A Title VII plaintiff who prevails, on the other hand, "is ordinarily entitled to attorneys' fees unless special circumstances militate against such an award."

The reasons for the difference are discussed by the Court on pages 9-10 of the opinion.

A highly significant factor to the Fourth Circuit in its determination that no fees were warranted was that Great Steaks had made a motion for judgment as a matter of law at the close of the EEOC's evidence at trial, which had been denied.  So the case was strong enough to go to the jury.  Judge Floyd said that the denial of a Rule 50 motion was a ""particularly strong indicator that the plaintiff’s case is not frivolous,unreasonable, or groundless."  He said that "we are hard-pressed to imagine circumstances where the district court could make this determination and nevertheless deem the plaintiff’s case frivolous, unreasonable, or groundless."  Op. at 12.

The review was for abuse of discretion, and the appellate court said that Judge Beaty was "in the best position"  to make the fee assessment" since he had "managed the litigation and conducted the trial."  Op. at 14.

All Great Steaks had to offer in support of its motion was that the EEOC's case had steadily eroded over time from being a class action on behalf of numerous Great Steaks' employees to a case involving only one employee who turned out not to be very credible and whose testimony had been deemed "troubling" by the Magistrate Judge who recommended that a summary judgment motion made by Great Steaks be denied.  One potential class member had refused to appear for her deposition, and another announced that she was quitting the case at her deposition.  This wasn't enough to establish frivolity or groundlessness, according to the Court

Great Steaks took two more shots at a fee award.

 

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Business Court decision last week in Shamoon v. Turkow, 2011 NCBC 46  has a little bit of everything: a plaintiff who is a claimed huckster (maybe even a fraudster), parties who are members of a fundamentalist church, plus a Fortune 50 company.  When you mix patents for a high-tech device called the "Ubiquitous Connectivity & Control System for Remote Locations," into that cast of characters, you've got something like a holiday delicacy that is itself ubiquitous.

Shamoon is the inventor of the Ubiquitous device.  He sold a 1/2 percent interest of some type in it to the Turkows.  Whether ownership was conveyed was a principal issue in the case.  The assignment document said:

We, Charles and Deborah Shamoon, hereby grant Allen & Lucy Turkow one-half percent ownership in the Ubiquitous Connectivity & Control System for Remote Locations for the sum of $60000.00.

This grant of ownership entitles Allen & Lucy Turkow to one half percent of all the proceeds from the sale of the Ubiquitous Connectivity & Control System for Remote
Locations.

The Turkows made their investment based on Shamoon' s representations that he was about to license the invention to General Electric and that he was expecting money from GE in "sixty, ninety, worst case scenario, one hundred and twenty days."  He said he was "at the finish line" of the deal. 

The Turkows learned of Shamoon through their church, of which Shamoon was also a member.   He had sold an interest in the invention to a number of other members of the Living Word Family Church in Raleigh.  No doubt there was great expectation of a quick profit on the investment in the patents.  Parishioners at the church subscribe to a theology:

that believers who have strong faith and employ wise and moral business practices will be rewarded with spiritual abundance and financial prosperity.

Brf in support of Turkows' Motion for Summary Judgment at 3.  So it looked like a sure thing, with a quick return, but you can guess already that the transaction with GE failed to materialize, and the fallout was a  lawsuit.

Ownership of the Patents

Shamoon sued the Turkows because the Turkows were threatening to "assign or grant licenses[s] under the Patents to others" without sharing the proceeds with him. Complaint  Par. 11.  Shamoon said that he had not sold an ownership interest in the Patents to the Turkows and that the Turkows should be enjoined from their activity.

Could the Turkows have done what Shamoon feared with their teeny half a percent, if they had obtained an assignment of ownership?  Yes, because 35 U.S.C. §262 says that a joint owner of a patent  "may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners." 

Judge Jolly found the agreement to be ambiguous as to the nature of the interest acquired by the Turkows, and denied Shamoon's motion for summary judgment.  Shamoon was seeking a declaratory judgment that the Turkows were not owners of the Patents, but he now faces a trial if he wants that kind of relief.

Counterclaims

The Turkows made counterclaims against Shamoon based on the statements he had made regarding the imminent closing of his deal with GE.  Those were styled as claims for fraud and negligent misrepresentation.  Summary judgment was denied as to both of those claims, in part because Judge Jolly found a question of fact whether the Turkows could prove reasonable reliance based on the alleged statements about the finality of a deal with GE.  The Turkows had argued that their reliance on Turkow was reasonable because they were members of the same church.

Judge Jolly also found a question of fact about whether Shamoon's statements could be the basis for an unfair and deceptive practices claim.  As he put it, the issue was "whether Charles Shamoon’s solicitation of Defendants’ investment was primarily a "capital raising device" or a transaction to produce personal income for Charles Shamoon."  Op. ¶57.  "Capital raising" can't be an unfair and deceptive practice, but "personal income raising" can be.  So Shamoon is facing a trial on that issue too.

No fruitcakes were eaten during the preparation of this post. 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

My favorite multi-volume treatise is Words and Phrases.  If you don't know it, it is a super-legal dictionary that collects cases from every jurisdiction defining ... well, frequently used words and phrases.  Since business litigation often turns on the definition of a word or a term that the drafters left undefined, I have a thoroughly excellent time finding a definition in the cases that supports my interpretation.

Last week, in Nelson v. Alliance Hospitality Management, LLC, 2011 NCBC 42, Judge Gale tangled with a word undefined in an LLC's Operating Agreement: "insolvency".  The word was tucked away  in what is probably familiar rote language to you, setting out the conditions under which an LLC member would lose his or her rights as a member.  It said "[a] member shall cease to have any power as a Member or Manager, any voting rights or rights of approval hereunder upon death, bankruptcy, insolvency, dissolution, assignment for the benefit of creditors, or legal incapacity. . . ."

The Defendant, Alliance, said that Nelson didn't have standing to sue it because he was insolvent, and he therefore had lost all rights of a member.  Alliance presented evidence to Judge Gale that Nelson had several judgments and other court activity which had not gone at all in his favor.  The net amount against him totaled almost $8 million. Op.¶28.

Judge Gale was unwilling to rule on a Motion to Dismiss that Nelson was insolvent even in light of the $8 million that he owed.  He said that there was no evidence before the Court establishing the asset side of Nelson's balance sheet, and nothing to demonstrate "his conclusive inability to pay his debts as they come due."  Op. ¶29. 

You don't want to leave this post without knowing what Words and Phrases says about "insolvent," do you?  It collects four North Carolina cases defining the term.  Three of them approve a balance sheet test, which appears to be what Judge Gale used, asking whether the obligor can meet liabilities by converting all of the property owned by that person into money  (e.g. Silver Valley Mining Co. v. North Carolina Smelting Co., 119 N.C. 417 (1896)).

It's nice to have a Court assume that you might have a net worth of more than $8 million and that you therefore wouldn't be rendered insolvent by scrambling to pay off multi-million dollar judgments.  I only know a couple of people who really warrant that generous a presumption, but I'm not one of them

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 

Have you ever filed a reply to a counterclaim where your reply was 89 pages long and to which you attached more than 200 pages of exhibits? I think you probably haven’t, but the Plaintiff in the Business Court case Fountain v. Fountain Powerboats, Inc. did. When the Defendant made a Motion to Strike the Reply, Judge Gale granted it in an Order filed last Friday,  saying that dissecting all the irrelevant allegations of the Reply "would burden this opinion with a tediousness serving no useful purpose.”” Op. ¶21.

            The legal issue decided in the opinion was whether a responsive pleading like a reply to a counterclaim or an answer to a complaint gives the responding party the latitude to provide the Court with “notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved,” which is what the Plaintiff said his rambling Reply had provided. The problem with that argument was that the quoted language, from Rule 8(a) of the North Carolina Rules of Civil Procedure, applies only to complaints. The part of Rule 8 that governs answers to complaints and replies to counterclaims doesn’t contain that language and doesn’t permit “a new cause of action or other matter beyond the scope of the new matter raised in the answer.”

 In other words, complaints and counterclaims, which set forth causes of action, allow for a “richness of detail” which isn’t warranted in a response to those allegations.

 
The court ruled that the expansive reply included statements that were “immaterial, impertinent, and redundant,” which included allegations which were

• “self-promotional,”
• Self-serving and irrelevant metaphors and analogies,”
• “Statements that appear to serve no purpose but to frustrate Fountain Powerboats current operations and promote RF Powerboats,” and
• “Unnecessary name calling”

Those types of things are frowned upon, although necessary name calling is often tempting.

And as for the hundreds of pages of exhibits, Judge Gale said that “none of these exhibits are germane to any legitimate defenses that can be asserted by Reggie Fountain.”Op. ¶22.   In fact, he said that the only reason for the exhibits to be attached to the Reply was “so as to become part of a centralized public record Reggie Fountain can use to further his personal ends, easily accessible via the Business Court’s website.”Op. ¶22.

The Judge let the Plaintiff dictate what would be stricken from the Defendant's Reply, ordering that the Plaintiff's version of the Reply would be the version considered as the case went forward.  Plaintiff submitted with its Motion filed on September 9, 2011 as Exhibit A a redlined copy of the Reply proposed by the Defendant.  It's not very often (like never) that an opposing party gets to control what the other side's pleading will say.

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

If you are trying a case in in federal court after December 1, 2011, you’d better bring a new copy of the Federal Rules of Evidence. Don’t lose any sleep, because the substance of the Rules hasn’t changed, they’ve only been “restyled.” This reworking of the FRE was aimed at making the Rules more consistent in their use of terminology, to stick to “plain language” and to make the language more “user-friendly.”

The Committee leading this effort (and there was a herd of committees) tried to be clear that its changes were not substantive. The Committee Note to virtually every changed Rule says that “these changes are intended to be stylistic only. There is no intent to change any result in any ruling on evidence admissibility.” The Committee avoided making changes to what it called “sacred phrases” in the Rules, which it felt would have been substantive.  “Sacred phrases” are those phrases that had become “so familiar in practice that [their] alteration would be disruptive..” In other words,  that means "phrases that have become so familiar as to be fixed in cement."

Do you know any of those? The only one that has stuck in my mind like cement over the years has been an out of court statement “offered to prove the truth of the matter asserted.” That definition of hearsay was indeed deemed “sacred,” but there have been other rewritings of the hearsay rules that make them more digestible.

The new Rules aren’t on the level of as good a read as, let’s say, John Grisham’s new book, The Litigators. But they certainly are easier to read than they were before. There’s a side by side comparison of the original Rule against the restyled Rule available to look at if you have an affection for a particular Rule or Rules. Oh, and the new Rules won a Burton Award.  Those awards are "designed to reward major achievements in the law ranging from literary awards to the greatest reform in law." The restyled Rules won the Reform in Law Award.

These changes have been in the works since 2006, so freshly graduated lawyers ought to be familiar with them. The luminaries working on this five year restyling effort included Professor Ken Broun of UNC Law School, who was a consultant to the Advisory Committee. Another professor involved, Joseph Kimble of the Thomas Cooley Law School, was the “style consultant” for the project. He wrote a series of four articles explaining improvements in specific Rules. You can read those here, here, here,  and here.

Professor Broun, incidentally, is not taking a break from the Rules of Evidence after this multi-year effort.. He is leading a project to create a resource that” would describe the federal common law on evidentiary privileges.” A very detailed draft on attorney client privilege and the marital communications privilege as presented to the Advisory Committee on Evidence Rules is available (at Tab IV).

I wonder if we could get restyling going on the North Carolina Rules of Appellate Procedure. They are sludge.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are making an Offer of Judgment per Rule 68 of the Federal Rules of Civil Procedure, be sure to think about whether to include costs and attorneys' fees in the amount offered.  Yesterday, the Fourth Circuit underscored the need for "precise drafting" of such Offers,and required the offering party to pay triple the amount specified in its imprecise Offer to cover the attorneys' fees and other costs not mentioned in the Offer.  The case is Bosley v. Mineral County Commission.

The Plaintiff had made an offer "in the amount of Thirty Thousand Dollars ($30,000.00) as full and complete satisfaction of [Plaintiff's] claim against . . . Defendants."  The Offer was accepted by the Defendants, who then made a motion for an award of attorneys' fees pursuant to a fee shifting statute, 42 U.S.C. §1988(b), as the prevailing party.

When the District Court awarded over $66,000 in attorneys' fees (which are defined as "costs" per 42 U.S.C. §1988(b)) plus other recoverable costs on top of the $30,000 offer, the Plaintiff screamed that its Offer in "full and complete satisfaction" of the claims  had implicitly included all attorneys' fees because attorneys' fees had been requested in the ad damnum clause of the complaint.  Judge Davis, writing for the Court, said this contention was without merit."

Quoting a Supreme Court opinion on Rule 68, Marek v. Chesney, 473 U.S. 1 (1985), Judge Davis wrote:

if the offer does not state that costs are included and an amount for costs is not specified, the court will be obliged by the terms of the Rule to include in its judgment an additional amount which in its discretion. . . it determines to be sufficient to cover the costs.

Judge Davis declined to consider the negotiations between the parties leading to the Rule 68 Offer, which the Plaintiff said would show that the $30,000 Offer had been understood to include fees and other costs.  He said that considering such evidence would be "imprudent, impractical, and . . . wholly foreclosed by the reasoning of [the Supreme Court's Marek decision."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The June 8th opinion from Business Court Judge Judge Gale in Best Cartage, Inc. v. Stonewall Packaging, LLC, 2011 NCBC 15, dismissed the Plaintiff's complaint, finding its allegations that an alleged partner should be liable for the partnership debts, or otherwise liable on a veil piercing basis, were insufficient to state a valid claim.  There's also a choice of law issue.

The Plaintiff Best, which had contracted with the Defendant Stonewall to provide transportation services, sued another defendant, Jackson, arguing that Jackson and Stonewall were partners or joint  venturers or alternatively that Stonewall was Jackson's alter ego, and therefore liable for Stonewall's debt to the Plaintiff.

The facts that seemed to the Court  to be most detrimental to Plaintiff's claims of partnership were Best's own allegations that it had known of the claimed partnership before it entered into its contract only with the Defendant Stonewall LLC instead of with the partnership itself, and also that the contract made no mention at all of a relationship between Stonewall and Jackson but instead disclaimed the existence of any third party beneficiary to the contract.

The Court faulted Plaintiff for its pleading of the basis for partnership liability, stating:

A party seeking to impose partnership liability on a fellow partner when neither the partnership nor that partner is a party to the contract faces a particularized pleading burden to show that the contract was for partnership purposes.

Op. ¶19.  Judge Gale said that the Plaintiff "hadn't alleged the minimal elements to show that the [contract] was entered into for partnership purposes," including a lack of an allegation that the alleged partners had shared profits and losses, an "essential element of a partnership."  Op. ¶22

 The lack of specificity in Plaintiff's complaint  also did in its claim that the Court should pierce Stonewall's corporate veil and find Jackson behind the veil.  The Court said the veil piercing allegations were "broad and conclusory" and were missing the "critical element" that Jackson had misused the corporate form to "achieve a wrongful or inequitable result."  Op. ¶30  Judge Gale concluded by saying that:

Disregarding the protection of the limited liability company under these circumstance reaches beyond the intended purpose of the doctrine and improperly seeks to use a “drastic remedy” which should be utilized sparingly. See Dorton v. Dorton, 77 N.C. App. 667, 672, 336 S.E.2d 415, 419 (1985).

On the choice of law issue, Plaintiff had argued that the Court couldn't decide the corporate veil issue without evidence as to Stonewall''s state of formation, which the contract recited was Delaware.  Judge Gale agreed that the appellate courts of this State had not ruled on which state's law should apply to a veil piercing claim.

He nevertheless concluded that the claim couldn't survive under either North Carolina law or Delaware law, based on an opinion from Judge Beaty of the Middle District in Richmond v. Indalex, Inc., 308 F.Supp.2d 648 (M.D.N.C. 2004) in which Judge Beaty dismissed a veil piercing claim based on insufficient allegations to support a veil piercing claim under the law of the same two states.  Judge Beaty's opinion contains an extensive discussion of what Delaware law requires to pierce a corporate veil.  He said in the Richmond case that that the entity alleged to be liable must exercise “complete domination and control” over the alter ego and have "used such control to commit a fraud or injustice."

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Business Court yesterday sifted through cross motions for summary judgment brought by the seller and buyer of a business selling "power protection devices used primarily to control power surges and to provide power filtration in high volume office equipment." Op. ¶12.  The case turned on the application of New York law, which the APA had specified as the governing law, and the Order left a number of claims for trial.

The principal breach of warranty claimed by the buyer in KLATMW, Inc. v. Electronic Systems Protection, Inc., 2011 NCBC12, concerned the stability of the seller's customer base.  Section 3.18 contained the following language:

none of the customers . . . required to be listed on Schedule 3.18 has cancelled, terminated or otherwise materially altered (including any material reduction in the rate or amount of sales or purchases or material increase in the prices charged or paid, as the case may be) or notified the Business of any intention to do any of the foregoing.

The seller had a significant customer, Global, that was in the process of being acquired by Xerox at the time the APA was signed.  There was some evidence that the seller should have expected a decline in the sales to Global as a result of Xerox's historical lack of interest in the seller's product, and Global was in fact listed on Schedule 3.18 as a customer whose sales volume "appears to be diminishing" as a result of Xerox' acquisition of Global.  As things developed, the Global business declined by more than $2 million in the year following the purchase. Op.¶46.

The buyer made claims following the closing for breach of warranty and for fraud.  Its claims included breaches of warranty other than of section 3.18.  The claims were to be resolved per New York law, as the Court ruled in a 2010 Order.  As Judge Gale explained in yesterday's opinion, New York law made a difference in the resolution of the case, both as to the buyer's obligation to prove reliance on the warranty, and the circumstances under which the buyer might be found to have waived the warranty.

In New York, reliance is an element of a breach of contract claim, but reliance is established "so long as a buyer demonstrates that the warranty is a part of the basis of the parties' bargain." Op. ¶ 5.  And waiver is proved only based on information provided by the seller to the point of knowledge on the part of the buyer of a breach of the warranty at the time of the closing.  Knowledge obtained from sources other than the seller, such as information commonly known, is irrelevant to waiver. 

Judge Gale did an admirable summary of ten years of  New York law on the questions of breach of warranty, reliance, and waiver. Op. ¶¶59-64  After this analysis, he found that there were questions of fact as to the buyer's level of knowledge regarding the impending decline of the Global business.

Judge Gale dismissed the tort claims on the ground that the buyer could not show reasonable reliance on the misrepresentations it claimed with respect to Global's status as a customer.  That finding stemmed in part from the buyer's independent and extensive due diligence through a business broker which directly  contacted Global representatives about Xerox's intentions.  He also dismissed a Chapter 75 claim because "the contract claims are adequate to provide the remedies [the buyer] seeks if those claims can be proven."  Op. ¶90

There's a whole lot more to the facts of this case and to the claims made by the parties than are mentioned in this post.  Those especially interested in New York law should read the opinion.

And if you are just exhausted by now from reading this drudgy post you might want to look at the best blog in the Sperling family.  It's written by my younger daughter, Maddie,  who is on a semester abroad in Argentina.  She is having a good time and she is often hilarious.  Great pictures too.  Check it out.

 

 

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Fourth Circuit on Thursday sided with a franchisor in its efforts to recover prospective damages under North Carolina law, including lost profits, from a franchisee which it had terminated.  Franchisors seeking such damages should find joy in Meineke Car Care Centers, Inc. v. RLB Holdings, LLC,  in which the Court said it was not necessary for the franchise agreement to speak to the possibility of the recovery of prospective damages.

The opinion also resolves what appears to be a burning issue for franchisors: whether they can recover lost profits if it is the franchisor which takes the step of terminating the franchisee as a result of the franchisee's breach of the franchise agreement.  The Fourth Circuit discussed a variety of approaches to the recovery of damages in such circumstances, but found the answer in this case "in the relevant North Carolina law concerning damages recoverable following a breach of contract."

RLB claimed that its shops weren't "commercially feasible" to operate, but the Court said that Meineke didn't need to show that the shops could have been profitable, but only that they would have generated revenues upon which royalty payments would have been based. 

The Fourth Circuit also found acceptable Meineke's method of calculation of its lost profits, which the franchisor based on the average weekly sales of the shops multiplied by the number of weeks in the three year period for which it sought relief times the average historical royalty rate paid to Meineke.  The district court had said this formula was speculative, but the appellate court disagreed.  It said that "using past profits as a basis for calculating future lost profits is a widely accepted methodology."

The franchise agreements didn't mention the possibility of the recovery of lost profits, but the Fourth Circuit did not find that to be necessary.  It ruled that lost profit damages were "reasonably supposed to have been within the contemplation of the parties," and that an express written agreement was therefore not required.  The district court had entered summary judgment for the franchisee on this point, but the Fourth Circuit remanded the case for further proceedings.

The Court ended its opinion by discussing Meineke's obligation to mitigate its damages.  The trial judge had held that Meineke's failure to mitigate barred it from any recovery.  The Fourth Circuit held that if there had been a failure to mitigate it only served as a limitation of the damages that might be recovered, not a complete bar.  The Court accepted Meineke's argument that its decision to limit its recovery to a three year period of lost profits rather than the longer remaining term of each of the franchise agreements could serve as the needed mitigation by Meineke.

The upshot of the Court's decision is that it found issues of fact that should have prevented the trial court's entry of summary judgment in favor of the franchisee.  Meineke still has to prove its damages.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Business Court spanked the Department  of Revenue again last week, just after a ruling two weeks ago when it said in another case that the DOR's position was "harsh, and potentially fatal. . . ."  This time, in Delhaize America, Inc. v. Lay, 2011 NCBC 2, Judge Tennille ruled that the attempted imposition of a $1 million tax penalty by the DOR not only violated the taxpayer's due process rights, but also a provision of the state Constitution which requires the power of taxation to be exercised in "a just and equitable manner." 

Delhaize, the North Carolina operator of Food Lion grocery stores, was audited by the DOR after it restructured its operations by placing its trademarks, trade names, service marks, and other assets in an out of state subsidiary named Food Lion Florida (FLFL).  Delhaize paid royalties and fees to FLFL, and those were repaid to Delhaize in the form of non- taxable dividends. This resulted in "income distortions," Op. ¶23, and the payment of less tax by Delhaize

Given the North Carolina statute saying that a corporation "shall not file a consolidated return" (N.C. Gen. Stat §105-130.14), and the lack of clear guidelines to taxpayers about when a combined return might be accepted, the penalty was ruled to be unconstitutional.  Judge Tennille said on the due process issue that taxpayers were individuals with a property interest who "must receive notice and an opportunity to be heard before the government may deprive them of their property." Op. ¶73.  The guidelines for when a combined return would be allowed were, as the Court put it, "so elusive" that "ordinary taxpayers 'exercising ordinary common sense' [could not] sufficiently understand or predict when a penalty will be assessed." Op. ¶75.

As for the penalty running afoul of the the North Carolina Constitution's requirement that it be "just and equitable," Judge Tennille held:

When a corporation is charged a significant penalty for complying with the law, the result of which is an automatic, non-negligence, punitive penalty assessed by the Department of Revenue, the state’s power of taxation is being exercised in a manner that is unjust and inequitable.

 Op. ¶87. It was constitutionally unjust to allow this penalty without published guidelines as to when the penalty was warranted. 

Judge Tennille also found distasteful the DOR's program, operated before the amendment of the penalty statute, by which it offered amnesty to corporate taxpayers which had engaged in restructurings.  It agreed in those negotiations to waive the 25% penalty in exchange for the payment of the lost tax revenue.  This resulted in collection of an additional $300 million in tax.  Judge Tennille referred to the threat of a penalty in this program as "deft use" by the DOR of "a club." Op. ¶77.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I have been puzzling for the last three days on what to write about the Business Court's first opinion of the year, in Technocomm Business Systems, Inc. v. North Carolina Department of Revenue, 2011 NCBC 1.  It involves an opinion about the sales and use tax and whether the taxpayer (Technocomm) was entitled to a refund.

You might be wondering: what is The Business Court doing writing about sales and use taxes?  The answer is that in 2008, the Business Court became the route of review for tax cases decided in the Office of Administrative Hearings by an Administrative Law Judge.  This was the first opinion from the Court acting in its judicial review capacity in a tax case. 

What standard of review applied?  Since it was a question of law, the standard of review was de novo.  That meant that Judge Tennille could "freely substitute [his] own judgment for the [ALJ's] judgment." Op. ¶28.  And he did that.

Who won?  The Department of Revenue or the taxpayer? Judge Tennille  reversed the determination by an ALJ and remanded the case for the ALJ to determine the amount of a tax credit due Technocomm which the DOR had refused to allow.  Along the way, he condemned the Department's position as "harsh at best and potentially fatal at worst." Op. ¶25 

What was the basis for the credit claim?  Technocomm said it was due a credit against use taxes as a result of sales taxes it had collected from its customers in error, and which it had remitted to the DOR. The sales taxes had been collected in connection with service agreements sold by Technocomm simultaneously with the sale of office equipment.  The agreements included parts and supplies estimated by Technocomm to be necessary for it to fulfill its maintenance obligations.

Technocomm had been told by the DOR in 1999 following an audit that it should not collect sales tax on its service agreements.  The Department said that Technocomm should pay a use tax based on the dollar value of the actual parts and supplies used to meet its service obligations.  But Technocomm disregarded that instruction, and continued to charge its customers the estimated sales tax in what it conceded to be "bad business practice." Op. ¶23.

The department and Technocomm were at war over which section of the state tax law applied: section 105-164.41 (titled Excess payments; refunds) or section 105-164.11 (titled excessive and erroneous collections).  After some statutory construction of how to deal with the conflict between a general and specific statute, and the obligatory Latin phrase generalia specialibus non derogant (general words do not derogate from special), the Court applied the more general provisions of 164.41 which says that when excess tax is paid "then the amount in excess shall be credited against any tax . . . then due from the taxpayer."

Now, wait a minute, you might say.  Isn't Technocomm generating  this credit from money paid by its own customers?  Shouldn't they, as opposed to Technocomm, get the credit since they provided the dollars that will result in the credit? Judge Tennille covered that point extensively, in Paragraphs 40 through 53 of the Opinion.  The bottom line, as I saw it, was that the service agreements allocated the risks and costs of repair in advance between Technocomm and its customers.  Technocomm carried the risk of having to provide more parts and supplies than it had anticipated and built into the cost of the service agreement.

Part of the cost of that repair risk flows from a human trait observed by Judge Tennille in my favorite part of the Opinion:

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Option ruled on by the Business Court yesterday in NRC Golf Course, LLC v. JMR Golf, LLC, 2010 NCBC 20, said that the Plaintiff had the option to purchase a golf course for “fair market value at exercise date validated by an independent third-party appraisal." 

Plaintiff offered $750,000, which was the value for the golf course "validated"  by an appraisal from Hotel & Club Associates, Inc., but the Defendant refused to close, contending that the Option was not valid.

It's not unusual for North Carolina courts to enforce options which leave the purchase price to be determined by appraisal, so why did this option fail?  See, e.g. Phoenix Ltd. Partnership  v. Simpson, 688 S.E.2d 717, 719-20 (N.C. App. 2009)  As the Business Court put it in the NRC case, the NRC Option "not only lack[ed] a sufficiently definite price term, but also lack[ed] a sufficient method by which to determine the price term." Op. ¶45.

What was necessary, said the Court,  was a "clear and unambiguous direction on how to arrive at a purchase price, so that the parties do not have to reach further agreement before a final price may be determined."  Op. ¶47.

The "fatal flaw" of this option was the lack of any agreed upon mechanism for selecting an appraiser or for resolving discrepancies in the fair market value opinions of different appraisers.  There was sufficient elasticity in this option, as the Court saw it, to permit the seller to unilaterally employ its own appraiser, who might have delivered a much higher opinion of the fair market value for the property than the $750,000 offered by the plaintiff-buyer.  In that event, the option contained no means for resolving the dispute over price.

The Phoenix case, mentioned above and which I wrote about a year ago, allowed buyer and seller each to choose an appraiser to determine the purchase price under the option.  In the event of a wide variance as to fair market value, the option said that the two appraisers would pick a third appraiser, and that the purchase price would be the average of the two closest appraisals.  That price determination provision wasn't the focus of the opinion, which was the effect of a lengthy environmental clean-up of the optioned property on a "time is of the essence" provision.

That looks like the last opinion in 2010 from the Business Court, and also the last post this year from this blog.  Happy New Year, and best wishes for 2011.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Superior Court Judge Calvin Murphy has been appointed as a Business Court Judge to replace Judge Albert Diaz, who is leaving the Business Court for the Fourth Circuit Court of Appeals.  All of Judge Diaz' pending cases were assigned to Judge Murphy by Judge Tennille in an Order signed December 23rd.

I have never appeared before Judge Murphy, who sat in Mecklenburg County, so the only information I can give you about him results from a Google search.  But If you go down the same Google road that I did, be aware that Judge Calvin Murphy, who did play basketball in college, is not the same Calvin Murphy who played point guard for the Houston Rockets.

The Mecklenburg County Bar News reported in 2005 that Judge Murphy  had been elected President of the North Carolina State Bar for the 2005-2006 term.  He described his presidency as one "focused on professionalism."  He graduated from Davidson College in 1970, then served as an intelligence officer in the military, and graduated from North Carolina Central Law School in 1977.  He serves on Davidson's Board of Directors. He was an assistant district attorney in Charlotte from 1977 to 1982, and then had a criminal defense practice.  

Judge Murphy was originally appointed as a Special Superior Court Judge by Governor Easley in 2007.  Senator Kay Hagan had recommended Judge Murphy for a federal Western District  District Court Judgeship last year.

At that time, a former Chief Justice of the North Carolina Supreme Court, Burley Mitchell, described Judge Murphy as a "solid, proven judge[] and [an] excellent legal technician[]" with "a calm, dispassionate demeanor in court."

Judge Murphy's most highly publicized decision involved the First Amendment protection he gave to the identities of  readers commenting on line about on line news stories.  He said that news sources did not need to disclose the commenters'  identities because they were protected by North Carolina's "shield law."  There was a thorough discussion of that decision earlier this year on Brooks Pierce's Newsroom Law Blog.

I found no record of any business cases decided by Judge Murphy which were appealed.  What I did find were 31 criminal law cases decided by Judge Murphy which were  appealed to  the North Carolina Court of Appeals, 

I am  looking forward to writing about Judge Murphy's decisions while he is sitting on the Business Court.  He starts with a full caseload.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Unless you live in a cave, you know that the nomination of Judge Diaz of the Business Court to the Fourth Circuit has finally been confirmed by the Senate. The confirmation, a unanimous one, has been widely reported by North Carolina newspapers, including those in Charlotte, Greensboro, and Raleigh. 

This vote took quite a while.  Judge Diaz is said to have been waiting for confirmation by the Senate longer than any other nominee of President Obama.

President Obama held out Judge Diaz as an example of the type of nominee who should be confirmed in a letter sent three months ago by the President to the Senate  That letter didn't speed up the process.  There are still thirty judicial nominees approved by the Senate Judiciary Committee awaiting an up or down vote from the full Senate. 

North Carolina Senator Kay Hagan attributed the delay on the Senate vote for Judge Diaz   "to partisan reasons having nothing to do with his qualifications."

According to the Business Court's last Report to the General Assembly as of February 2010, Judge Diaz was handling 64 cases in the Business Court.  The Fourth Circuit's gain is the Business Court's loss.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When you are filing a complaint to federal court, or removing one to federal court, the value of a claim for injunctive relief can be included in determining whether the $75,000 amount in controversy required for diversity jurisdiction under 28 U.S.C. §1332(a) is met.

Today in JTH Tax. Inc. v. Frashier  the Fourth Circuit reversed the trial court's sua sponte dismissal of a franchisor's complaint for failing to meet the amount in controversy requirement.

Plaintiff had franchised a tax preparation service to the Defendant.  When Defendant closed the office, Plaintiff sued him for $80,000 and requested injunctive relief enjoining him from competition.  When time for summary judgment rocketed around, Plaintiff requested only $60,000 in damages and the trial court dismissed the complaint on the ground that the required amount in controversy was lacking.

That was error, said the Fourth Circuit, because the burden was on the defendant to show that it was legally impossible for the Plaintiff to recover the jurisdictionally sufficient amount alleged in the complaint. and because the court had failed to consider the value of the injunction asking Defendant to be enjoined from operating a competing tax return business.

The Fourth Circuit said that "like requests for money damages, requests for injunctive relief must be valued in determining whether the plaintiff has alleged a sufficient amount in controversy."  The  value of the injunction could either be measured by its worth to the plaintiff or its cost to the defendant.

Plaintiff proposed two alternative values for the injunction which the Court found to meet the standard of being "facially plausible."  One was the value of the franchise, calculated in line with Plaintiff's regular accounting practice of valuing franchises at 130% of their previous year's receipts.  The Court also considered Plaintiff's loss of goodwill, or its "market credibility."  Plaintiff based that on the $12 million it had spent on advertising during the prior year.

On the cost of the injunction to the Defendant, the Court looked to rental payments of $500 per month that would have been due to the Plaintiff  over the remaining sixteen month term of the franchise agreement.

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

From April 2009 through January 2010, I did a post at the beginning of each month on the new cases designated to the Business Court during the prior month. That's been missing during my hiatus, without any outcry, but I am now resuming that service for October 2010.  There were nine new cases last month, running the usual gamut of minority shareholder claims to trade secrets claims, and breaches of fiduciary duty.

Blount Three Properties, LLC v. York Properties, Inc. (New Hanover):  Allegations that promoter and broker of shopping center development failed to make material disclosures prior to the sale of the property to the Plaintiffs

Carolinas AGC, Inc. v. Goodrich Hendry (Mecklenburg)(Diaz): claims that Defendant misappropriated Plaintiff's confidential information and trade secrets to develop an internet database in competition with the Plaintiff.

Dugdale v. Polymer Group, Inc. (Mecklenburg)(Diaz): action by shareholder of Plaintiff to enjoin acquisition of the Plaintiff by Blackstone Group LP based on alleged breaches of fiduciary duties of the directors of Plaintiff. Plaintiff seeks class action certification.

Front Street Construction, LLC v. Colonial Bank, N.A. (Wake)(Jolly): claims that Defendant lender, acquired by BB&T, engaged in fraudulent and misleading conduct by failing to disclose that it was in financial difficulty when its loan to the Plaintiff was made, which led to it being unwilling or unable to fund the loan as represented.

Nestor v. Webb (Scotland)(Jolly): antitrust claim in which the Plaintiff alleges that the Defendants have conspired to monopolize the market in North Carolina counties for the market for kidney dialysis treatment services.

Peak Coastal Ventures, LLC v.SunTrust Bank (Forsyth)(Tennille): claim by Plaintiff that Defendant's loan to the Plaintiff, an LLC, was not authorized by the Plaintiff as required by its operating agreement, which required majority approval by the managers of the LLC.

Thomas v. Moonracer, Inc. (Wake)(Jolly): minority shareholder claim alleging breach of fiduciary duty by the majority shareholders and seeking dissolution of the Defendant corporation.

Wilkie v. Stanley (Guilford)(Tennille): claims that Defendant violated partnership agreement

Wireless Communications, Inc. v. Epicor Software Corp. (Mecklenburg)(Diaz): claims that defendant made misrepresentations in connection with the licensing of business operations software

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Yesterday, the Business Court entered a preliminary injunction against a distributor which the Court determined had engaged in deceptive conduct by "passing off" a Chinese product as coming from the American manufacturer of a  superior product, in Pittsburgh Corning Corp. v. McCormick Insulation Supply, Inc.

Plaintiff Pittsburgh Corning Corp. is the only American manufacturer of cellular glass insulation, which it sells under the trademark FOAMGLAS.  McCormick had been a licensed distributor of FOAMGLAS until May 2008.  After that, McCormick began delivering the Chinese insulation to its customers even as it continued to represent on its website that it was still a distributor for the Plaintiff, and it accepted orders from customers specifying Plaintiff's trademarked product.

Testing of the product after it was installed revealed that it contained carcinogenic levels of crystalline silica about which the buyers had not been informed.

The Order outlines the circumstances under which McCormick sold 220,000 pounds of the Chinese insulation to 53 customers who believed they were receiving PCC's product.  Judge Tennille called McCormick's actions deceptive (Op. ¶¶39, 50-51).

The injunction entered was sweeping, ordering McCormick among other things to notify all 53 customers which had received the Chinese product of its opinion, and the Court drafting a letter for McCormick to send  to those customers informing them of the inadequacy of the Chinese product and its carcinogenic nature. 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In North Carolina, the "notice" portion of notice pleading has long been honored more in the breach.  A recent Business Court order perhaps signals that enough is enough, at least when multiple plaintiffs each are suing multiple different defendants.

Allen v. Land Resource Group of North Carolina, LLC is the oldest of a growing number of cases currently pending before the Business Court involving real estate developers who went bankrupt before their developments were completed.  The original complaint in Allen involved 22 plaintiffs, 29 defendants, and 15 causes of action.  As Judge Tennille described it,

Each plaintiff participated in his or her own transaction involving a specific lot or lots.  Each plaintiff may have dealt with different defendants, including different salespeople, different appraisers, and different banks, and each plaintiff may have had a different level of knowledge. The defendants are varied and include officers and owners of the development company as well as administrative employees and salesmen who had no ownership or control of the company, appraisers, banks and even TV show producers.

(The latter reference is to an HGTV Dream Home located in one of these now-defunct developments on Lake Lure).  After being directed to plead their fraud and misrepresentation claims with greater specificity to satisfy Rule 9(b), Plaintiffs filed a 795-paragraph, 107-page amended complaint, which the Court still found deficient under the pleading rules:  "The Amended Complaint still does not clarify which claims are asserted by which plaintiff against which defendant.  Complaints in similar cases suffer from the same deficiencies. The largest problems are created by the indiscriminate references to all 'Defendants' when specific defendants should be identified."  In fact, the Court included a citation to the rarely seen Rule 10(b), which requires that each paragraph of a pleading "be limited to a single set of circumstances and that each claim is founded upon a separate transaction or occurrence."

Procedurally, the Court reached its last straw when certain defendants filed a motion to sever claims and the Court was unable to decide the motion based on the state of the pleadings.  The Court included a threat of sanctions if the situation did not improve:

Rule 11 ensures that counsel have done their homework before filing claims, particularly those involving fraud and conspiracy to commit fraud.  Having done the work required by Rule 11, there is no excuse for not properly pleading separate causes of action that put each defendant on notice of the claims asserted against that defendant.  Failure to properly plead separate causes of action and to identify specifically the party against whom a claim is asserted may be an indication of a Rule 11 violation.

The Court ordered the Plaintiffs to file a "Statement of Claims" within 30 days -- even going so far as to provide a form attached to the Order.  Each plaintiff will be required to file a separate form for each defendant whom he is suing, listing the claims that plaintiff is asserting against that specific defendant.

North Carolina lawyers have wondered whether the Iqbal and Twombley decisions from the U.S. Supreme Court will ever trickle down to state court.  Judge Tennille's order in Allen does not shed much light on that question because a complaint that is unclear as to which plaintiff is suing which defendants falls short of even a properly understood notice pleading regime.  The Allen order, however, is a welcome clarification that the "notice" part of notice pleading is not a superfluous term.

Full Order

UPDATE 9-27-2010:  Judge Tennille issued a similar order two days later in an unrelated case, NNN Durham Office Portfolio I, LLC v. Highwoods Realty L.P.  There, the Court ordered the Plaintiffs to file a second amended complaint with separate responses by each Plaintiff to eight different questions posed by the Court.  You can read the questions in the order here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Court of Appeals faced that rarest of truffles this week:  an outcome-determinative choice of law question.  The Court adhered to its traditional roots and rejected a new test fashioned by the Business Court.

At issue in Harco Nat'l Ins. Co. v. Grant Thornton, LLP was an audit of a company providing bail and immigration bonds in North Carolina and other states.  The plaintiff, an insurance company, entered into an agreement with the bonding company on the basis of that audit.  When the bonding company went defunct, the plaintiff ultimately became liable for $15 million in bonds issued in North Carolina alone.

Conflict of laws professors seeking exam questions, take note of these facts:  The plaintiff is an Illinois corporation who paid most of the $15 million from its corporate bank account in Illinois, but did not pay any of that money to any Illinois recipient.  The audit itself was performed by the defendant in Pennsylvania and the audit report was delivered to the bonding company in that Commonwealth as well.

Unlike many choice of law disputes, this one actually made a difference due to the great variety of standards among states for auditor liability to third parties not in privity with the auditor.  The plaintiff argued that North Carolina law applied and, under North Carolina law, the defendant would not be entitled to summary judgment.  The defendant argued that Illinois law applied and that no liability was possible under that state's law.

As we noted last April, the Business Court went its own way, determining that Pennsylvania law applied.  In doing so, Judge Tennille held that the law of the state in which an audit is performed should govern the auditor's liability to third parties not in privity.  The Business Court's analysis was premised on principles of certainty, predictability, and the avoidance of forum shopping.

The novelty of this approach clearly bothered the Court of Appeals in its somewhat tersely-worded opinion:

The Business Court’s Audit State test seems to be the only such test of its kind.  Our research has not revealed a single case in any jurisdiction that purports to utilize such a test for the purpose of determining the choice of law in an auditor liability
case. As the Business Court’s order acknowledges, claims for negligence and negligent misrepresentation are claims sounding in tort.  It is the nature of the cause of action, not the occupation of a defendant, that controls the determination of the applicable choice of law test.  While the Business Court expressed concern that “[u]sing the law of the state where the injury occurred is problematic[,]” it was required to apply the lex loci test to plaintiff’s tort claims pursuant to the prior holdings of our Supreme Court and the doctrine of stare decisis.

In other words, a tort is a tort is a tort, and any deviation from the First Restatement: Conflict of Laws (1934) will be punished.  (The Second Restatement, at not yet 40 years old, apparently lacks the gravitas necessary for such issues).

Applying the traditional lex loci test, the Court of Appeals held that Pennsylvania, although the site of the alleged misrepresentations, was not the site where the injury was felt.  Nor was Illinois, the location of Plaintiff's business.  Instead, the place of harm was North Carolina, in which the plaintiff's funds were seized by the Department of Insurance.

Note that the Court of Appeals affirmed the Business Court's denial of the defendant's summary judgment motion under Illinois law.  Because the Business Court determined that Illinois law did not apply, the denial of summary judgment was appropriate.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you didn't think a case with a $55 million default judgment could get more interesting, you were wrong.  The Business Court awarded a total of $82 million in damages this week against a company that successfully set aside the lesser default judgment.

In Deutsche Bank Trust Co. Americas v. TradeWinds Airlines, Inc., three airline-related plaintiffs sued a lessor of large airplanes.  The lessor was funded by deep pockets including George Soros, but not so deep as to enter an appearance before entry of default.  One of the plaintiffs went around its compatriots, moving for and obtaining a $55 million default judgment, then entering bankruptcy in order to avoid further proceedings.  We posted last April about an order in which the Business Court declined to rule during the pendency of a bankruptcy stay, but in which the Court gave strong hints about its likely ruling once the stay was lifted.  Last September, those hints became rulings, as the default judgment was set aside (although the entry of default remained in place).

So what did the defendant gain by having a $55 million award set aside?  An $82 million judgment instead, following a 6-day bench trial.  Here's how the Court got there:

• Two of the plaintiffs (Coreolis and TradeWinds Holdings) lost a combined $11,544,000 that they had to pay in settlement of claims against them due to the defendant's fraudulent inducement.
• TradeWinds itself suffered almost $2.7 million in repair costs, $6.2 million in lease payment losses, and $7.2 million in other damages due to engine failures, for a total of $16.1 million.
• The allegation amounting to unfair and deceptive trade practices were deemed admitted due to the entry of default, so both awards were statutorily trebled.  That resulted in over $34 million in damages to Coreolis and Tradewinds Holdings and over $48 million for TradeWinds.

It wasn't all bad news for the Defendant -- in a separate Order, the Court declined to award attorneys' fees.  The Court found that, because the case was intertwined with efforts to pierce the defendant's corporate veil in New York (to reach Soros and others), this particular case was not capable of resolution, and thus was not the subject of an unwarranted refusal to settle.  In addition, the Court criticized the damages sought by TradeWinds Holdings and Coreolis that were in excess of the ultimate award:  "If those damage claims did not cross the border of speculation, they reached the very edge of the line."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The sealing of a complaint due to confidentiality concerns is more than an administrative exercise, according to a Business Court order last week.  Parties seeking to maintain a complaint under seal will face a heavy burden, and the Court signaled a willingness to revisit orders of other courts, both inside and outside North Carolina.

In Smith v. Raymond, a shareholder derivatively sued various directors and officers of a corporation.  Procedurally, the dispute began in the Delaware Chancery Court, in which the Plaintiff sued the corporation itself to obtain access to the company's books and records.  Under the terms of a stipulation in that case, if the Plaintiff relied on information obtained in that case to file derivative claims later, he was required to obtain the Chancery Court's permission and to file the complaint under seal.

The Plaintiff followed the Delaware court's order and filed his complaint under seal in Mecklenburg County.  He obtained an order from a resident Superior Court judge approving the sealing of the complaint, then designated the case as a mandatory complex business case.  Like many Superior Court orders, the sealing order did not recite any findings of fact or conclusions of law.  It read in its entirety:  "Plaintiff having moved the Court for leave to file his Complaint under seal, and good cause appearing therefore [sic], IT IS HEREBY ORDERED that Plaintiff may file his Complaint in the instant action under seal."

Judge Diaz held that he was not bound by either the Delaware stipulation or the pre-designation Mecklenburg County order.  First, the Business Court has the inherent authority to modify orders entered by a pre-designation judge.  Second, although the parties contemplated that the lawsuit would be brought here, the stipulation itself was entered by the Delaware Chancery Court.  "Put bluntly, the Stipulation does not bind this Court."

The Court stated that sealing of court documents "is inconsistent with the North Carolina Public Records Act."  Under existing law, "Absent 'clear statutory exemption or exception, documents falling within the definition of 'public records’ in the Public Records Law must be made available for public inspection.'"  (See News & Observer Publ’g Co. v. Poole, 330 N.C. 465, 486, 412 S.E.2d 7, 19 (1992)).  Court records are public records, and their sealing is appropriate only “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest.”  (See Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999)). 

After examining the complaint, the Court concluded that it was "hard pressed" to find such a countervailing public interest to support sealing the entire complaint.  There were no documents attached to the complaint, so the express terms of the stipulation were not violated.  Although there were quotes from some documents in the complaint, most of those quotes were taken from letters between the CEO and other officers and directors of the corporation.

The Court gave the parties ten days to file supplemental briefs if they insisted that the entire complaint needed to remain under seal.

(The image is the 1981 cover from the single "Our Lips Are Sealed" by the superfluously-apostrophed band The Go-Go's).

Full Order

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We can't say it better than Mack Sperling did about eight months ago:  "If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren't enough to invoke the mandatory jurisdiction of the Court. "

In case you're wondering, the Business Court has not changed its mind since November.  Earlier today, in Bullard v. Liberty Healthcare Services of Mary Gran Nursing, LLC, Judge Tennille on his own motion denied the Defendants' designation of the matter as a mandatory complex business case.  As the Court stated unequivocally, "Piercing the corporate veil alone is insufficient to establish mandatory jurisdiction."  It is not the first time, or even the second time, the Court has made that statement.

The Notice of Designation contained a number of allegations regarding the potential complexity of the matter.  By remanding the case, the Business Court has reiterated that, when it comes to mandatory jurisdiction, the question is whether the matter fits into one of the "business" categories of Section 7A-45.4 of the General Statutes, regardless of complexity.  Rule 2.1 designation remains available for cases in which complexity (plus some business relationship) makes up for a case not fitting within the statute.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Fervent followers of the Business Court may remember the case of Wachovia Bank, N.A. v. Harbinger Capital Partners Master Fund I, L.P., which this blog has discussed before.  Just over two years ago, Wachovia preemptively sued certain defendants whom it accused of trafficking in litigation and obtained an anti-lawsuit injunction against the defendants.  After designation as a Rule 2.1 case, Judge Diaz modified the injunction and stayed the Business Court lawsuit in favor of pending litigation before the Southern District of New York.

Over the two intervening years, three new developments occurred:  the S.D.N.Y. dismissed the lawsuit before it in August 2008, on the grounds that the federal claim was premature and that the court declined to exercise supplemental jurisdiction over the state law claims; some of the New York plaintiffs (but not those that were North Carolina defendants) filed a new lawsuit asserting the state law claims before the New York Supreme Court; and the North Carolina Court of Appeals affirmed Judge Diaz's injunction modification and stay order.

Given those developments, the North Carolina defendants asked Judge Diaz to modify the injunction so as to permit them to join as plaintiffs in the New York Supreme Court action, and Wachovia asked Judge Diaz to lift the stay so that it could pursue its case in North Carolina.  In a March 15 order, Judge Diaz re-adopted all of the findings of fact from his original order and further found that "(1) the NY State Action is better able to arrive at a more comprehensive resolution of the dispute in this case, given the broader scope of claims and parties before it, and (2) judicial economy counsels again in favor of litigation in New York."  As a result, he granted Defendants' motion to modify the injunction and denied Wachovia's request to lift the stay.  He also denied Wachovia's motion to hold certain defendants in contempt for asserting a RICO claim in the S.D.N.Y. lawsuit, holding that the original injunction did not prohibit the assertion of claims arising under federal law.

 

 

This Empire State Building photo is from jorbasa's photostream on Flickr, some rights reserved.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Mack Sperling, founder and author of this blog, is away on medical leave. 

Like the cotton gin or the steam engine, Mack by himself can do the work of several people, and this blog is no exception.  Jennifer Van Zant, Julia Ambrose, and John Buford, Mack's colleagues at Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., have agreed to share the load during Mack's absence.  We cannot promise you that any of us will have Mack's singular insight, wit, or charm.  We can promise that we will continue to monitor and report judicial developments of interest to North Carolina businesses and business lawyers. 

We are all avid readers of this blog and know firsthand what a valuable resource it is.  We do not intend to be your permanent hosts.  We are guests, house-sitting while Mack is away.  Nothing will please us more than the day when Mack is back and we can return to our previous status as fans of the blog.

Those who wish to send greetings to Mack may address them to msperling@brookspierce.com.  Thank you for your past and continued readership and for the kind messages that many of you have had for Mack over the past weeks.

 

[We will strive to continue Mack's apt illustrative use of photography and clip art.  The photo of the cotton gin above is from billums's photostream on Flickr, some rights reserved.]
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

North Carolina law says that "one judge may not modify, overrule, or change the judgment of another Superior Court judge previously made in the same action."  In a Business Court decision last week, Phillips and Jordan, Inc. v. Bostic, the Court granted a motion for Rule 11 sanctions on a fraud claim that another Superior Court Judge had refused to dismiss on a 12(b)(6) motion. It did so over the objection of the Plaintiff that the grant of the sanctions motion would be an overruling of the first Judge's Order on the motion to dismiss.

The procedural facts are quirky. A group of defendants (the "Bostic Defendants") had made and lost a motion to dismiss a fraud claim before the case was designated to the Business Court. After the designation, another defendant moved to dismiss the same fraud claim made in an amended complaint. That dismissal motion was granted by the Business Court on Rule 9(b) grounds.

Judge Diaz referenced in his Order facts showing the Plaintiff had not relied on the statements it claimed were misrepresentations. He said, however, that he wouldn't consider these facts as to the fraud claim against the Bostic Defendants because that would be "a backdoor attempt . . . to re-litigate the legal sufficiency of the fraud . . . claims in the face of a prior court order denying their Rule 12(b)(6) motion to dismiss."

He nevertheless admonished Plaintiff and its counsel to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before . . . pursuing the fraud claim against the remaining Defendants."  Plaintiff didn't take that advice, and in August 2009 the Bostic Defendants filed their motion for sanctions. Judge Diaz "again suggested to Plaintiff's counsel that they consider the merits of the claim alleging fraud" after the motion was fully briefed. This time, the Plaintiff took the Court's advice and dismissed its fraud claim.

Judge Diaz went ahead and granted the motion for sanctions. He applied a standard of objective reasonableness, and said that "a legal position violates Rule 11 if it "has absolutely no chance of success under the existing precedent." He found that total lack of potential success to be present because the basis of the fraud claim was that the Plaintiff had been deprived of information necessary to make a lien claim against a construction project, but Plaintiff had in fact been able to make this very claim. The Court ruled that the claimed misrepresentation "did not deceive Plaintiff."

The Order doesn't address why this wasn't an end run around the principle that one Superior Court Judge can't overrule another. The Bostic Defendants addressed this in their opening Brief.  Their position was:

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are a lawyer headed to federal court in one of the three federal districts in North Carolina, can you take a laptop computer into the courthouse? What about a cellphone, either with or without a camera? 

The answers are different in the Eastern, Middle, and Western Districts. That's also true throughout the country, because the Administrative Office of the Courts has left the decision about how to handle these devices to the discretion of each Court.

The Middle District

The Middle District of North Carolina is the most restrictive of North Carolina's three districts. That Court last year implemented a strict policy banning laptops entirely without advance court approval. That policy has now been relaxed, and you can apply for a Laptop Authorization Card to bring a laptop to Court.

But you can forget about a camera with a cellphone in the Middle District The Court's website says that "[p]hotographic, recording or transmitting devices are prohibited in all courthouses. Prohibited devices include, but are not limited to . . . wireless microphones, recorders, cameras, 2-way radios, push to talk cellphones and cellphones with cameras."  

Cellphone without a camera?  That's fine in the Middle District.

The Eastern District

In the Eastern District, there is a Standing Order dated August 15, 2005 titled In re Prohibition of Wireless Communication Devices In Courtroom Facilities. The Order covers laptops, cellphones, and cellphones with cameras, and says they can't be brought into the courthouses.

But the Order exempts "attorneys on court business provided that their possession and use of wireless communication devices in courtroom facilities is relating to their official duties." The exemption allows attorneys to bring cellphones with cameras into the courthouses in the Eastern District.

But even though you might think that laptops fall within the exemption, they don't. If you want to bring a laptop into an Eastern District court, you need to contact the Case Manager for the Judge you are appearing before and ask for advance permission.  If permission is granted, the Court Security Officers will be informed and will you'll be able to get the computer through security.

The Western District

The Western District is the most technology friendly district in North Carolina.  Lawyers headed for the courthouses in Charlotte and Asheville can bring in both laptops and cellphones with cameras.

The Standing Order there applies to "lap top computers, cell phones, pagers, personal digital assistants or other electronic devices." It says that members of the bar can bring such devices into the courthouses so long as they are screened by the Marshals and turned off while the court is in session. The permitted devices include cameras with cellphones.

Not only that, but there is wireless internet access in the attorney conference rooms in the Western District.

___________________

Thanks very much to John Brubaker, Dennis Iavarone, and Frank Johns, the Clerks in the Middle, Eastern, and Western Districts, who were very helpful in answering questions about these policies.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Plaintiff in Stratton v. Royal Bank of Canada, 2010 NCBC 2 (N.C. Super. Ct. February 5, 2010) thought she had struck it rich. She had found a 1927 stock certificate in the name of her late mother for five shares of stock in the Bank of Manteo. Plaintiff's calculation was that her mother's shares of stock, following various mergers, were the equivalent of 14,486 shares of RBC common stock. That's about $765,000.

The problem for the Plaintiff -- and the reason that summary judgment was entered against her -- was that she had known about the stock certificate since 1982 and that her mother had known that the Bank hadn't recognized her as a shareholder since well before that. The Plaintiff furthermore had over the years asked bank employees, stockbrokers, and lawyers about the stock, but she hadn't done anything to begin a lawsuit.

The dismissal was based on laches, "an equitable doctrine 'designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.'" Op. ¶33. A party defending on the basis of laches is required to show "that (a) the plaintiff negligently failed to assert an enforceable right within a reasonable time and (b) the defendant was prejudiced by the delay in bringing the action." Op. ¶36.

Judge Jolly ruled that Plaintiff and her mother had known about the first merger of the Bank of Manteo, with Planters National Bank, and had known that the Bank didn't consider Plaintiff's mother to have been a shareholder after that merger took place in 1962.  He said:

Given the small size of the town and Inge's extended residence there over several decades, the court determines there is no genuine question that Inge knew of the merger. There is no evidence that Inge received dividends or any other incidents of share ownership during that time, and the court concludes that it is undisputed that Inge knew or should have known the Bank of Manteo and its successors no longer considered her to be a shareholder.

The long delay in pursuing the claim had prejudiced the Bank. Judge Jolly held that "the passage of time has (a) made appropriate written records unavailable and (b) precluded RBC or its predecessors from talking effectively with witnesses or Inge, who either now are deceased or whose memory about such a transaction that took place many years ago most likely would have deteriorated materially, to the prejudice of the Defendant."

The Court also ruled that claims for constructive trust, conversion, and unjust enrichment were barred by the applicable statutes of limitation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you've tried cases, you've probably lived through this nightmare. It's a few weeks before trial. You call your out of state client to make arrangements for your witnesses to be in the courtroom at the appointed time. But your contact tells you that the company has just fired your key witness.

What, you say?  What were you thinking? How could you do that? I can't try this case without Pete. After the initial shock has faded, you start to hope that Pete will show up voluntarily. You ask your client about that. Well, they say, it wasn't a pretty parting. And sure enough, Pete laughs and hangs up on you when you ask him if he will come to North Carolina to testify.

Now you are in crisis mode, scrambling for a way to get this key testimony. There's a video deposition of Pete, but all the questioning was done by opposing counsel. You probably prepped Pete before the deposition with that common advice that he shouldn't volunteer information, so there are a lot of one word answers, terse responses, and not much presentation of the warm side of Pete. You didn't ask a single question, counting on Pete striding confidently to the witness stand to carry your client's banner during your direct examination. The video just isn't going to play well.

What now? You scour the Business Court Rules. Rule 18.10 provides some hope. It says:

18.10 – Trial Preparation After the Close of Discovery. For good cause appearing
therefor, the physical or mental examination of a party may be ordered at any time prior to or during trial. Ordinarily, the deposition of a material witness not subject to subpoena should be taken during discovery. However, the deposition of a material witness who agrees to appear for trial, but later becomes unavailable or refuses to attend, may be ordered at any time prior to or during trial.

Surely the unexpected firing of Pete is good cause, and you you make a motion to take a trial deposition of Pete per Rule 18.10. Will it be granted? Every case is different, but maybe not. A motion on similar facts was denied last week in the case of Hilb Rogal & Hobbs Company v. Sellars, in which Judge Diaz prohibited the taking of a deposition two weeks before trial.

The facts in Hilb Rogal need a little development. . . .

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are removing a case to federal court where there are multiple defendants, it can be a tricky business. If the defendants are served at different times, when does the thirty days for a removal under 28 U.S.C. § 1446(b) begin and end running?

There is a split in the Circuit Courts on this issue. In the Fifth Circuit, the rule is the "first-served defendant rule." The thirty days starts to run as soon as the first defendant is served. If the first served defendant doesn't remove thirty days after it is served, defendants served later can't remove.

The rule is exactly the opposite in the Sixth, Eighth and Eleventh Circuits, which follow the "last-served defendant rule." Each defendant, no matter when it is served, has thirty days from the date of service on it to remove.

The Fourth Circuit's position wasn't clear. A footnote in McKinney v. Board. of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), suggested that the Circuit might be a "first-served" jurisdiction.  But in today's decision in Barbour v. International Union, the Fourth Circuit dismissed that footnote as "classic judicial dictum" and joined the "last-served" camp.

The majority in Barbour held "that in cases involving multiple defendants, each defendant, once served with formal process, has thirty days to file a notice of removal pursuant to 28 U.S.C. § 1446(b) in which earlier-served defendants may join regardless of whether they have previously filed a notice of removal."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Only a handful of new cases were designated to the Business Court in January 2010. That may be a function of the cold weather, or perhaps it's a different kind of chilling effect, the $1,000 fee to designate a case to the Court. In any event, here are the six new cases:

Air Systems and Equipment Co. v. Sullair Corp.: (Catawba)(Diaz): Plaintiff claims that the Defendants used its confidential trade secret information to raid its workforce and hire several of its employees in violation of the North Carolina Trade Secrets Protection Act.

Beadnell v. Coastal Communities at Ocean Ridge Plantation, Inc. (Brunswick)(Jolly): another case (there are now several in the Business Court) involving claims by residential lot buyers that the price of their lots were grossly inflated through the fraud of the developer, with the cooperation of banks and appraisers.

Connett v. Jackson National Life Ins. Co. (New Hanover)(Jolly): apparently supersecret.  The Complaint and the Notice of Designation were filed under seal.

Coremin v. McNamara (Guilford)(Tennille):issues involving LLCs and partnerships, including whether a person may claim a membership interest in a North Carolina LLC based on an oral promise. (This one was designated to the Court on December 31, 2009).

LS Mtron, Ltd. v. Escorts, Ltd. (Edgecombe)(Jolly): Plaintiff, a creditor in a receivership proceeding, seeks to subordinate the claim of a secured lender (Textron Financial) based upon the lender's claimed knowledge of the financial fraud of its customer.

RS&M Appraisal Services, Inc. v. Alamance County (Alamance)(Tennille):dispute concerning services provided by plaintiff to Alamance County in connection with its octennial real property evaluation. Business Court jurisdiction is based on counterclaims by the County alleging conspiracy in restraint of trade and a combination in restraint of trade.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

What is a "dynasty trust"?  And what does that have to do with business litigation?

To answer the second question first, not much. But a case decided today by the North Carolina Court of Appeals, which affirms the validity of a 2007 statute which permits dynasty trusts, originated in the North Carolina Business Court. So it gets mentioned on this blog.

A dynasty trust is a trust designed to exist for multiple generations of a family, potentially forever, usually avoiding generation skipping tax. The North Carolina Legislature facilitated the creation of such trusts when it enacted N.C. Gen. Stat. §41-23 in 2007.

But that legislation, titled "Perpetuities and suspension of power of alienation for trusts" raised issues whether it violated the Rule Against Perpetuities, which has constitutional roots in North Carolina.

Section 34 of Article I of the state Constitution says that "[p]erpetuities and monopolies are contrary to the genius of a free state and shall not be allowed." A year ago, in Brown Brothers Harriman Trust Co., N.A. v. Benson, Judge Diaz ruled in an unpublished opinion that the statute did not conflict with the Constitution.

The Court of Appeals ruling today affirmed that decision. It holds that a trust created per Section 41-23 "may remain valid in perpetuity" so long as the provisions of the statute are complied with. That means that "the trustee has the power to sell, either expressed or implied, or . . . there exists an unlimited power to terminate the trust in one or more persons in being."

If you want the detailed analysis, which includes discussion of "estate entails," and "fee tail estates" and Supreme Court decisions nearly 200 years old, you'll have to read the opinion. If you want to brighten the day of an estate planning lawyer or tax lawyer with the happy news about dynasty trusts, you can forward this post to him or her by clicking on the little envelope icon at the bottom.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A Joe Friday "just the facts ma'am" kind of affidavit was the subject of the North Carolina Supreme Court's decision at the end of last week in Bird v. Bird.

The issue? Whether the affidavit, presented in opposition to a motion for summary judgment, complied with Rule 56(e) of the North Carolina Rules of Civil Procedure.

That Rule says that "supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein."

The affidavit in Bird came from a private investigator who had been tailing the boyfriend of the Plaintiff's ex- wife. The Plaintiff was trying to show that his ex was cohabitating with her boyfriend. If that were so, it meant that the Plaintiff's obligation to pay alimony would end.

The ex-wife said she wasn't cohabitating. She moved for summary judgment. In opposition, the husband presented his investigator's affidavit. The wife objected to the PI's testimony, saying that it wasn't based on personal knowledge.

She had a point. The problem was that the affidavit was written in cop-speak. It said things like:

[The subject] was observed during the months of February and March 2007.

During the investigation, [the subject] was observed at [the wife's] residence for a minimum of eleven (11) consecutive nights.

[The subject] was observed to park, regularly, in [the wife's] garage.

[The subject] was regularly observed assisting [the wife] with chores such as walking the dog, taking care of the dog, unloading the vehicle when she returned from trips, and assisting her when she returned from the grocery store.

The ex-wife said the trial court should have refused to consider the affidavit. In her brief, she said that "the deliberate use of the grammatical construction, 'was observed', does not affirmatively show that she was the observer." She said that it was reasonable to assume that the investigator "was recounting the observations found in the report of one of her associates, and therefore found it necessary to use the passive voice." Defendant characterized the affidavit as "curiously devoid of pronouns."

The Court of Appeals majority said that notwithstanding the stilted construction of the affidavit it would conclude that the investigator herself was the "observer" and that the affidavit was therefore based on personal knowledge. The Supreme Court affirmed.

Justice Martin said "the trial court's duty to treat indulgently the Rule 56 materials of the party opposing the motion reasonably encompasses the passive voice averments set forth in the . . . Affidavit." In a footnote, he said "as has been aptly observed, '[i]n spite of generations of textbooks, use of the passive [voice] has increased.'"

This doesn't mean you should assume that this type of phrasing will carry the ball on summary judgment. The basis of both the Court of Appeals decision and the Supreme Court decision was that the affidavit had been offered by the non-moving party. The non-movant gets the benefit of the doubt on summary judgment, but the moving party doesn't. The Supreme Court said in a 1998 decision that "the evidence forecast by the party against whom summary judgment is contemplated is to be indulgently regarded while that of the party to benefit from summary judgment must be carefully scrutinized." Creech v. Melnik, 495 S.E.2d 907, 911 (N.C. 1998).

The affidavit in Bird probably wouldn't have passed that "careful scrutiny" if it had been offered by the moving party. That's my observation. I made it.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Yesterday, the Business Court issued its first published opinion of 2010, Marosi v. M.F. Harris Research, Inc., 2010 NCBC 1 (N.C. Super. Ct. January 28, 2010), and ordered specific performance of a Subscription Agreement for the purchase of stock.

The dispute concerned a purchase by Thomas Marosi, shortly before he died, of stock in the Defendant corporation. The investment was made pursuant to a Subscription Agreement. Dr. Marosi's executor, the Plaintiff, said that the stock certificate for the shares had never been issued. He had requested that the company issue it, but for some reason not clear from the opinion or the briefs, the company refused.

The Plaintiff moved for specific performance of the Subscription Agreement. Judge Jolly said that the purpose of specific performance was to force a party "to do exactly what he ought to have done without being coerced by the court," and that the remedy was appropriate upon a "showing of (a) the existence of a valid contract, (b) its terms and (c) full performance by the party seeking performance or a demonstration that he is himself ready, willing and able to perform."

The Court determined that those elements were met, as there was a contract, its terms were clear, and the Defendant did not dispute that there had been full performance by Dr. Marosi in the form of payment for the stock.  Judge Jolly ordered that stock certificates be issued to Dr. Marosi's estate by February 8, 2010, subject to the same restrictions applicable to any other shares held by shareholders in the corporation.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Does it make any sense to make a motion in limine before a bench trial? No, not according to Judge Diaz, who ruled as follows in a short Order in Hilb Rogal & Hobbs Co. v. Sellars:

"In a jury trial, motions in limine serve the useful purpose of giving counsel advance notice of the scope of evidence that will be considered by the jury. In a bench trial, however, a pretrial ruling on the admissibility of evidence would be superfluous because the trial judge must (in any event) consider the evidence before ruling."

The Court ruled that it would not rule on motions in limine before trial, but that it would "instead allow all evidence to be tendered to the Court, subject to any objections timely raised."

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If this blog were a dartboard, cases involving corporate and LLC governance issues would be at the bullseye. A bankruptcy case would be pretty far from the center, sometimes maybe even off the board.

With that perspective in mind, coupled with a dearth of bullseye type cases lately, this post is about the Fourth Circuit's decision last Friday in United Rentals, Inc. v. Angell, affirming a decision from the Eastern District of North Carolina.

The decision concerned a bankruptcy trustee's action to recover a preference paid to an equipment supplier (United) by the Debtor on a construction project. The Debtor had a surety bond, on which United had not made a claim, but which nevertheless formed the basis for its arguments that payments received by it during the ninety days preceding the Debtor's bankruptcy petition were not a preference.

United had two main arguments. It said that the Trustee could not show that the transfer enabled it to receive more than it would have received in the Chapter 7 case if the transfer had not been made. That's an essential element of a preference, per 11 U.S.C. § 547(b)(5). United also said that the transfer was a "contemporaneous exchange for new value" under 11 U.S.C. § 547(c)(1), a preference exception.

United said that if the transfer hadn't been made, it would have made a claim against the Debtor's surety bond and that it would have been paid in full by the surety. It argued that it therefore hadn't received more than it would have it the transfer hadn't been made, and that the Trustee therefore couldn't satisfy the requirement of Section 547(b)(5).

Judge Traxler made short work of this argument. He said that the inquiry was whether the creditor would have been paid the money in question out of the bankruptcy, not whether it would have been received from a third party. He held that "the Sec. 547(b)(5) inquiry focuses 'not on whether a creditor may have recovered all of the monies owed by the debtor from any source whatsoever, but instead upon whether the creditor would have received less than a 100% payout' from the bankruptcy estate."

The second argument -- that the payments were a contemporaneous exchange for new value -- was more complicated. United said (1) it had the right to a materialman's lien against the project, (2) the surety for the Debtor would have satisfied that lien it it had been asserted, (3) the surety then would have been equitably subordinated to the Debtor's right to be paid by the general contractor, and (4) there was "new value" because United had not pursued its lien and bond rights and the Debtor therefore had eventually been paid by the general contractor instead of having that money go to reimbursement of the surety.

United's argument was that the new value was the money the Debtor received later from the general contractor as a result of United foregoing pursuit of its lien claim. The Court said that even if this were so, United had not shown when this "new value" was received by the Debtor. It held "regardless of whether the transfers set in motion a chain of events that resulted in the Debtor's recoupment of the amounts paid, United did not show that such new value was 'given to the debtor' . . . as part of a "contemporaneous exchange.'" 

The Court found the argument regarding the possible payment by the surety and the anticipated following events to fall outside the purpose of the contemporaneous exchange exception, which it said was "to accommodate the need of financially unsteady companies to use checks to pay for new transactions."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Fourth Circuit's ruling last Friday in Galustian v. Peter reinstated a Iraq-based defamation case which had been dismissed by the District Court on the grounds of forum non conveniens. The opinion also contains some significant points on amendments as of right under the Rules of Civil Procedure.

The lawsuit was brought in the Eastern District of Virginia by Galustian, a resident of the United Arab Emirates. Peter, the Defendant, was a resident of Virginia. Galustian contended that Peter had defamed him to a trade association of contractors working in Iraq. The statements in question were made by Peter in Iraq, where he lived and worked. Peter moved to dismiss on grounds of forum non conveniens, and the District Court granted the Motion.

The Fourth Circuit reversed. The case turned partly on whether Iraqi law provided a remedy in defamation to Galustian and whether Peter was immune from suit in Iraq, but I'll leave those esoteric points to those of you who specialize in defamation law in Iraq. Here's what business litigators might find significant in Galustian: 

The Obligation To Prove That There Is An Adequate Alternative Forum

First, a main focus of the case was whether Iraq was an "alternate, adequate, and available forum."  The Fourth Circuit said that an alternative forum is adequate when "(1) all parties can come within that forum's jurisdiction, and (2) the parties will not be deprived of all remedies or treated unfairly, even though they may not enjoy all the same benefits as they might receive in an American court."

Whether Iraq provided a remedy for defamation, and whether an additional defendant who was added to the case after the motion to dismiss was filed could be subject to suit in Iraq, were both matters the Fourth Circuit said should be considered more fully by the District Court after remand.

The Role Of Defendant's Residence On A Forum Non Conveniens Motion

Second, Peter's residence in Virginia was an important factor. The Court observed that while it was not required to give much deference to the choice of forum by a foreign plaintiff, "this lack of deference is muted . . . when the defendant is a resident and citizen of the forum he seeks to have declared inconvenient for litigation."

Peter's residence in Virginia wasn't dispositive, said the Court, but that factor needed to be examined more closely by the District Court on remand. 

Amendments As Of Right

Third, the Fourth Circuit said that reversal was appropriate because the trial judge had refused to allow Galustian to amend to add the additional defendant after the motion to dismiss had been filed. The Court stated that "it is this Circuit's policy to liberally allow amendment in keeping with the spirit of Federal Rule of Civil Procedure 15(a)."

The appellate court pointed out that the motion to amend had been made before the filing of a responsive pleading, and that Galustian therefore had an absolute right to amend his pleading. That was true even though the trial court had determined that the amendment would be futile.

On this point, Judge Gregory said "the doctrine of futility only applies when the plaintiff seeks leave of court to amend and does not have a right to amend. The plaintiff's right to amend once is absolute." That absolute right extends to amendments seeking to add parties, as Galustian's motion did.  (There's a split in Circuits on the point whether Rule 15(a) applies to amendments adding parties). The District Court's refusal to allow the amendment was an abuse of discretion.

Last, the Court reminded lawyers that Rule 15, which governs amendments to pleadings, changed on December 1, 2009. Formerly, a party could amend as of right literally up until the Court ruled on a motion to dismiss, because a motion to dismiss is not a responsive pleading. The changed rule says that amendments as of right must be made within 21 days after service of a 12(b) motion. The revised rule setting the new time limit didn't apply to Galustian's case, but the result might have been different if it had. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The circumstances under which an individual can be personally liable for an employer's failure to pay payroll taxes was the subject of Erwin v. United States, decided yesterday by the Fourth Circuit.

The Court affirmed a grant of summary judgment by Judge Beatty of the Middle District of North Carolina imposing personal liability on the Defendant, a shareholder who held various executive positions with the Company. This was a 2-1 decision, with a majority opinion from Judge Motz and a dissent by Judge Hamilton.

Individual Liability For Payroll Tax Withholding

The Court provided a quick primer on how an individual can become personally liable for payroll taxes:

• Employers are required to withhold social security and federal excise taxes from employee wages.
• Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
• Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
• Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can't, because "the government cannot be made an unwilling partner in a floundering business."
• The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer's decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid. 

The Test For Determining A "Responsible Person"

In Plett v. United States, 185 F.3d 216 (4th Cir. 1999), the Fourth Circuit set out a variety of factors it would consider in determining whether an individual was a "responsible person" who should have personal liability for unpaid payroll taxes.  They are:

whether the employee (1) served as an officer or director of the company; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the corporation's day-to-day management; (5) had the ability to hire and fire employees; and (6) possessed the power to write checks. 

Responsibility and Willfulness Established As A Matter Of Law

In the Erwin case, the Court discussed each factor, and summarized their application as follows in deciding that the Defendant was a responsible person and therefore personally liable:

Erwin admitted that at all times he owned at least one third of the stock of this closely-held corporation and served as its secretary, treasurer, vice president, and director. Erwin admitted that he signed loan documents and leases on behalf of the corporation, thus evidencing that he shared responsibility for establishing the corporation’s financial policy. Erwin admitted that he approved restaurant site selection and regularly reviewed sales data. Erwin admitted holding quarterly meetings with his partners and weekly telephone calls with the general manager to discuss the restaurants. Erwin admitted that he directed or negotiated payments to certain favored creditors to reduce [the company] debt, which he had personally guaranteed. Erwin admitted that he hired and fired upper-management employees, including [the company's] accountants. Finally, although Erwin delegated many of the day-to-day financial responsibilities of the corporation to others, he admitted that he infused capital into [the company and admonished the [company's accountants], over whom he had significant control, to stay current with the company’s tax obligations.

The Court then turned to the issue whether the Defendant had willfully failed to collect, account for, or pay the taxes in question. Judge Motz ruled that the Defendant's conduct after he learned of the tax deficiencies established willfulness as a matter of law. He hadn't taken steps to remedy the known deficiencies and had instead directed payment to other creditors.

She held that "we adopt the rule that when a  responsible person learns that withholding taxes have gone unpaid in past quarters for which he was responsible, he has a duty to use all current and future unencumbered funds available to the corporation to pay those back taxes."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

What do you get when you mix together a luxury automobile, a tiger, and a wind tunnel?

It sounds like something out of the movie The Hangover, but it's the case of BCD LLC v. BMW Manufacturing Co. LLC, an unpublished decision from the Fourth Circuit Court of Appeals.

BMW and Clemson University were developing a new Graduate Engineering Center. Plaintiffs wanted to build a wind tunnel facility -- catering to the racing industry -- as a part of the Center. They claimed that BMW and Clemson had tortiously interfered with their efforts.

The threshold issue addressed by the decision was whether the Plaintiffs had a valid and enforceable contract with which the Defendants could have interfered. The Court found that they had at best an "agreement to agree" which had never risen to the level of an enforceable agreement. In the absence of a contract, Plaintiffs couldn't pursue a tortious interference claim.

The Court also found the conduct by BMW which Plaintiffs said constituted tortious interference to have been competitively justified.  It said that "at all times, BMW acted in pursuit of its legitimate interests in founding an educational partnership with Clemson," and held as follows:

The only harm that BMW may have intended to cause [the Plaintiffs] was the incidental harm to a competitor that is necessarily part of all business competition. That increased benefits for one entity may come at the expense of a competing entity is merely a fact of life in a market economy. Consequently, although a party cannot interfere with a contract because of malice or spite, it is altogether legitimate for BMW to engage in business competition with [Plaintif's] entities.

That's a quote that may prove useful if you are defending against a tortious interference claim.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I had no idea that utility companies trim trees with saws hanging from helicopters. That's going to make me all the more certain to look up when I hear a helicopter.

I learned this interesting tidbit from one of the new cases (with a plaintiff aptly named "Aerial Solutions") of the six designated to the North Carolina Business Court in December 2009. Those are listed below.

The total for new cases designated to the Business Court during 2009, by my count, was one hundred and eleven.

Allen Smith Investment Poperties, LLC v. Barbarry Properties, LLC (Mecklenburg)(Diaz): dispute among partners in limited partnership. Claims for breach of fiduciary duty, misappropriation of funds, and fraud.

Aerial Solutions, Inc. v. Lail (Columbus)(Jolly): unfair competition claims against former helicopter pilot for an aerial tree-trimming business, including breach of non-competition agreement and providing co-defendant with confidential information regarding Plaintiff's "patented Aerial Power Saw."

Arky v. Variable Annuity Life Ins. Co. (Durham)(Jolly): enforceability of non-solicitation provision in registered representative agreement, including claim that customer identities and account information are trade secrets.

Mark v. Wachovia Bank, N.A. (McDowell)(Tennille): claims against real estate developers and banks asserting false and misleading sales tactics and that the parties "conspired with each other to artificially inflate the value of the subject lots through knowingly overstated appraisals."

NRC Golf Course, L.L.C. v. JMR Golf L.L.C. (Carteret)(Jolly): Dispute between the parties over terms of a lease and option to purchase a golf course.

Yodle v. WebVisible, Inc. (Mecklenburg)(Diaz):plaintiff, which says that it is "an industry leader in providing local online advertising services to business around the country," makes claims of unfair competition against a competitor including raiding of employees, theft of trade secrets, and false statements to plaintiff's customers.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A split Fourth Circuit affirmed the dismissal yesterday of a defamation claim against a consumer complaint website, in Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. The Court found the Defendant, Consumeraffairs.com, to be entitled to immunity under the Communications Decency Act, relying on the heightened standard for considering a Motion to Dismiss from the Supreme Court in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). 

Even if you don't practice in an area that implicates the CDA, the Nemet case is significant for its further development of the Iqbal standard in the Fourth Circuit. It is another indication, after the opinion earlier this month in Francis v. Giacomelli, that the Court is becoming much more exacting on how Motions to Dismiss should be evaluated.

Background on the CDA

The CDA carves out a broad immunity from state law claims (like defamation claims) for providers of "interactive computer services." The Defendant, www.consumeraffairs.com, is such a provider. It runs a website soliciting complaints from consumers about businesses with which they've dealt.

The Fourth Circuit emphasized the breadth of the immunity, and the need to resolve its applicability "at the earliest possible stage of the case." In that respect, said the Court, the CDA immunity is much like the qualified immunity to which state officials are entitled.

The issue in Nemet was whether the Plaintiff had presented a complaint with enough plausibility to show that the Defendant fell outside the scope of the immunity because it was an "information content provider." Such a provider, per 47 U.S.C. §230(f)(3), is "any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service."

The Plaintiff, a Chevrolet dealer who had been lambasted in twenty posts on Defendant's website, offered two arguments why the Defendant wasn't entitled to immunity. The first was that the Defendant had participated in creating and developing the posts by the way it had structured its website and also through hands-on revision of the comments in question. The second was that some of the comments were fabricated by the Defendant, and it was therefore responsible for their content.

The Fourth Circuit rejected both arguments, though over a partial dissent.

The "Creation And Development" Claim Wasn't Plausible

On the argument about creation and development, Judge Agee, writing for the majority, distinguished the Ninth Circuit's decision in Fair Housing Council v. Roommates.com, LLC, 521 F.3d 1157 (9th Cir. 2008), a seminal CDA decision. There, the website operator wasn't entitled to immunity because it had specifically designed its website to develop unlawful content, which included requesting tthe sex, family status, and sexual orientations of the site users seeking housing as well as those of their desired roommates.

In Nemet, the Plaintiff said that the Defendant had structured its website to be a clearinghouse for class action lawyers seeking plaintiffs, and that it therefore wasn't entitled to immunity. The Court disagreed, and said "there is nothing unlawful about developing this type of content; it is a legal undertaking: Federal Rule of Civil Procedure 23, for instance, specifically provides for class-action suits."

Relying on Iqbal, the Court said that even assuming all the facts regarding the structure and design of the website were true, that this "does not show, or even intimate" that the Defendant had contributed to the allegedly false nature of the comments. Plaintiff, according to the Court, hadn't even shown that it was a "likely possibility" that the Defendant was an information content provider, and certainly not that this was "plausible" under Iqbal.

The Fourth Circuit also trashed the Chevy dealer's argument that the Defendant had been involved in developing or creating the content. It said that the Plaintiff hadn't pled any facts showing the nature of the claimed revising and redrafting of the comments, or that such rewriting went beyond a "traditional editorial function." It invoked Iqbal's admonition that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."

The Fabrication Claim Was "Pure Speculation"

The Court then turned to the Plaintiff's claim that the Defendant had fabricated the posts and was therefore responsible for their substance and content. It dismissed these allegations as "pure speculation and a conclusory allegation" that the Defendant had created the information. It said, relying on Iqbal, that these were "bare assertions 'devoid of further factual enhancement,' which are not entitled to an assumption of truth."

The dismissal of the "fabrication claim" provoked a dissent from Judge James P. Jones of the Western District of Virginia, sitting by designation.

He found some of the allegations made by the Plaintiff to support the fabrication claim rendered it plausible, including Plaintiff's assertion that it had no record of ever having sold a car to the persons that had supposedly made the complaints.

Judge Jones said that there had to be a distinction between the pleading requirements of Rule 8 and the summary judgment standard of Rule 56. He stated "[i]t cannot be the rule that the existence of any other plausible explanation that points away from liability bars the claim. Otherwise, there would be few cases that could make it past the pleading stage."

He said that the proper application of Iqbal was that "it is only where there are 'more likely explanations' for the result that the plausibility of the claim is justifiably suspect."

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Sanctions were awarded by the Business Court in Red Ventures, LLC v. Modern Consumer, LLC, when two of the four Defendants didn't show up for a mediated settlement conference.

The mediation had been scheduled by agreement, and all parties had received notice of the conference. Two of the Defendants, however, decided not to appear and didn't provide any advance notice that they were not going to do so. The other parties showed up, but decided not to proceed without the missing Defendants.

The Court observed that Rule 4 of the Rules Implementing Statewide Mediated Settlement Conferences "requires all individual parties to attend a mediated settlement conference." The same rule provides specific procedures for a party to follow if it wishes to be excused from the conference.

The Defendants said that the conference wasn't covered by the Rule, because it was a "voluntary" proceeding. Judge Diaz made short shrift of that argument, stating that "there simply is no basis in the record for Defendants' belief that they were free to attend the Conference -- or not -- at their pleasure." He also rejected their argument that Plaintiff should have gone ahead without the missing Defendants.

Mediation Rule 5 authorizes monetary sanctions against a non-attending party. Judge Diaz required the AWOL Defendants to reimburse the mediator fees in full; to pay the hourly fees for the lawyers for the other parties in attending the conference; and also to pay the fees in preparing and arguing the Motion for sanctions. The Court found the Plaintiff's lawyer's hourly rate of $405 to be "comparable to the rates of other attorneys with similar experience and practices in the Charlotte, North Carolina market."  The total sanctions awarded were $5,000.

There are a couple of other Business Court decisions involving mediations and sanctions, including Hemenway v. Hemenway, and Mattress Now, Inc. v. Vickers; and the Court of Appeals entered a mediation sanctions opinion earlier this year in Perry v. GRP Financial Services Corp.

I mentioned the Red Ventures decision to Andy Little, who is a great mediator and who was one of the leaders in implementing mediation in North Carolina. Andy pointed out that the mediation rules used to provide for even harsher sanctions for a non-attending party, including dismissal of the case, and told me that the Court of Appeals affirmed such a sanction years ago, in Triad Mack Sales and Service, Inc. v. Clement Brothers Co., 438 S.E.2d 485 (N.C. App. 1994). Rule 5 would not permit that type of sanction today.

The cartoon at the top is by Charles Fincher, a lawyer who is also a cartoonist. You can find his "inside baseball" comics for lawyers at lawcomix.com. The one I used, with his permission and which he owns, is from a series of one-panel cartoons called Scribble-in-Law.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The impact of a "time is of the essence" provision on a real property transaction delayed by the discovery of environmental contamination was the subject of the Court of Appeals decision yesterday in Phoenix Limited Partnership v. Simpson.

The decision supersedes and replaces a March 2009 decision by the Court, in which it had reversed a grant of summary judgment in favor of the Plaintiff (the buyer). After a rare grant of a Petition for Rehearing, the Court reversed itself and affirmed the trial court's ruling in full, granting specific performance of the contract.

The property involved was the subject of a "put option" by which Plaintiff was required to purchase the property. After the exercise of the put, but before the date scheduled for closing, the Defendants discovered significant environmental problems on the property.

The Defendants informed the Plaintiff that they intended to clean up the property. Three years after the closing date called for in the contract, the Plaintiff asked about the status of the remediation, and learned the Defendants hadn't finished the cleanup. Instead, they had contracted to sell the property to another buyer for approximately $400,000 more than the option purchase price.

Plaintiff sued for specific performance notwithstanding the three year delay. The Defendants argued that they were relieved from the obligation to complete the transaction because of the "time is of the essence" provision. They also contended that because the Plaintiff hadn't sought to close within a reasonable time after the scheduled closing date, the option had terminated.

The Court of Appeals disagreed and said that the time is of the essence provision had been waived, ruling:

defendants' conduct in pursuing an environmental cleanup -- including hiring their own environmental consultant, telling plaintiff that they were conducting an environmental investigation, notifying plaintiff of the results of that investigation, and stating that they wanted to enroll the . . . property in the [North Carolina Dry-Cleaning Solvent Act program] -- coupled with the fact that an environmental cleanup could take years to complete, indicated to plaintiff that defendants still intended to perform under the contract despite the passing of the original closing date. 

In the absence of a time is of the essence provision, the law in North Carolina is that the parties are allowed "a reasonable time after the date set for closing to complete performance." In its first opinion, the Court of Appeals had found a question of fact on this issue. It abandoned that ruling in the new opinion, however, finding that it was unnecessary to reach the reasonableness issue.

The Court, relying on the North Carolina Supreme Court's decision in Fletcher v. Jones, 314 N.C. 389, 333 S.E.2d 731 (1985), held that "in order for the clock to start ticking on the reasonable time frame, defendants were required to notify plaintiff that they had completed their cleanup and were ready and able to perform." Defendants had never done so.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Maybe, when you decided which cellphone provider to sign on with, you took a look at its coverage map showing what excellent coverage you would have throughout the country.

If you relied on that map in picking your carrier, you probably shouldn't have. That's the essence of an unpublished decision from the Fourth Circuit Court of Appeals last Friday in Johnson v. Sprint Solutions, Inc.

The claim by Johnson was that Sprint had charged her roaming fees in areas where she said its coverage maps showed she should have been within the carrier's coverage. Her core allegation was "that various maps provided and displayed by Sprint formed part of [her contract with Sprint], and that these maps outlined where Sprint customers would, and would not, be subject to roaming fees."  She sought class certification on her claims.

The Court agreed that the maps were a part of the contract, but held based on the written agreements signed by Johnson that the maps "were no more than approximate representations of service coverage areas and provided no geographic promises depicting where Johnson could and would not be subject to roaming fees." 

The dismissal of Plaintiff's claims was affirmed.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Things actually got funny during the Senate Judiciary Committee's hearing today on the nominations of Judges Albert Diaz and James Wynn of North Carolina to the Fourth Circuit Court of Appeals. You can see that for yourselves in the video at the left.

Funny happened when Senator Al Franken, formerly of Saturday Night Live, expressed concern about the possible lack of diversity of the Fourth Circuit if both nominees are confirmed. Judge Wynn and Judge Diaz will add great diversity to the Fourth Circuit, so the Senator wasn't asking about diversity in the usual sense.

The "diversity" he asked about involved the similar military backgrounds of Judge Wynn and Judge Diaz, who both served as attorneys in the military and as military judges. The comedian turned Senator also questioned whether Judge Wynn, formerly a Navy captain, and Judge Diaz, formerly a lieutenant-colonel in the Marines Corps Reserves, could be fair to litigants from other branches of the armed forces. Both Judges responded by pledging to treat all members of the military equally, a bit tongue in cheek, to a deadpan Senator Franken.

Up until that point, the hearing was the serious affair that you would expect. The Committee Chairman (Senator Benjamin Cardin of Maryland, sitting in for an absent Senator Patrick Leahy) and the ranking minority member (Senator Jeff Sessions of Alabama) opened the proceedings by observing the rarity of the Committee considering two nominees simultaneously.  Senator Cardin attributed the unusual double hearing to the bipartisan support that North Carolina's nominees have received from North Carolina Senators Kay Hagan and Richard Burr. 

Senator Burr, who introduced the nominees, asked the Committee to give the Judges an "expedited review and referral" to the full Senate. The process is already moving quickly. This hearing took place less than six weeks after the nominations from President Obama.

After subsequent remarks from Senator Hagan about the need for North Carolina to have greater representation on the Fourth Circuit, Judge Wynn and Judge Diaz each gave a brief opening statement, and introduced the many family members and other persons who had come to support them at the hearing.

There was then a brief period of questioning from the Committee. Both nominees were asked about the role of "empathy," a word which became somewhat of a flashpoint during the hearings on Justice Sonia Sotamayor's nomination, in judicial decisionmaking. Neither Senator Sessions nor Senator Cardin decided to wade in and ask Judge Diaz about derivative actions, fiduciary duties, or any other corporate matters based on his many Business Court opinions. The only question even approaching a hardball was Senator Sessions asking Judge Wynn about a couple of his Fourth Amendment decisions.

The Judiciary Committee's website describes the procedure from here out. There is a short period for follow-up written questions by members of the Committee. After those are asked and answered, the nominations can be listed for consideration by the full Committee during an Executive Business Meeting. If the Committee orders the nominations to be reported, they are placed on the Senate's Executive Calendar for consideration by the full Senate. Let's hope the process continues to move at a fast pace, though Senator Leahy pointed out in a written statement that nominations are stalling when they reach the Executive Calendar. 

If you want to watch the entire hearing, there's a full webcast available. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Lawyers defending against punitive damages claims ought to put on their dancing shoes after the North Carolina Supreme Court's decision Friday in Scarborough v. Dillard's, Inc.

That's because the majority opinion by Chief Justice Parker makes it easier for trial and appellate judges to set aside a jury's award on punitive damages. With Scarborough on the books, a "scintilla of evidence" is no longer enough to support a judgment granting punitive damages.

Facts

The Plaintiff in Scarborough was a shoe salesman for Dillard's. Dillard's had him indicted for embezzlement for letting two customers leave the store without paying for shoes. He said was a mistake and that his employer's actions were malicious.

A jury found the Plaintiff not guilty, and he then sued Dillard's for malicious prosecution. He won a jury award of $30,000 in compensatory damages and $77,000 in punitive damages.

Dillard's moved for JNOV on the punitive damages award. The trial court granted the motion, ruling that the plaintiff hadn't shown the "clear and convincing evidence" required by G.S. §1D-15(b) for an award of punitive damages.

The Court of Appeals reversed in a 2-1 ruling and reinstated the punitive damages award. It ruled that the JNOV motion should have been denied based on the familiar standard that such a motion should be denied so long as there was "more than a scintilla of evidence to support the plaintiff's prima facie case."

The Majority Opinion

The Supreme Court majority ruled that a different standard than a "scintilla of evidence" applies to a JNOV motion when punitive damages are at issue.

The proper standard, said the majority, was the one set out in Section 1D-15(b) itself: the trial judge must be satisfied that the evidence to support the award is "clear and convincing." Chief Justice Parker ruled that the evidence hadn't been clear and convincing, that the trial judge had properly set aside the award of punitive damages, and reversed the Court of Appeals.

The holding was: "the proper standard of review of a trial court's ruling on a motion for judgment notwithstanding the verdict as to punitive damages is whether the nonmovant produced clear and convincing evidence of of one of the statutory aggravating factors for punitive damages."

That's a whole lot different than looking for a "scintilla." The Random House Dictionary defines a scintilla as "a minute particle; [a] spark; [a] trace."  Merriam-Webster's Dictionary of Law says it is "a small trace or barely perceptible amount of something."

The Dissent

Justice Timmons-Goodson disagreed, quite strongly. She said that the standard for setting aside a jury verdict doesn't change because the burden of persuasion is higher than the usual preponderance of the evidence standard, as it is when punitive damages are involved.

She ruled that once the jury is instructed on the clear and convincing standard, the determination of whether that burden had been met is "the exclusive province of the factfinder." And once the jury has made its decision, Justice Timmons-Goodson ruled, it should not be set aside "unless only a single inference, unfavorable to the plaintiff, is possible from the evidence."

Justice Timmons-Goodson said that the majority's statement of the facts, and its perception that they did not rise to the level of being clear and convincing, "illuminate[d] the difficulty of reviewing a cold record." She observed that the majority's interpretation of the evidence might be right, but that there was "an equally plausible view of the evidence" that would support a punitive damages award.

She concluded with this statement:

It was the jury's role to sift through the evidence, evaluate the demeanor and credibility of the witnesses, and determine whether plaintiff met his burden of persuasion by producing clear and convincing evidence in support of his claim for punitive damages. The jury did so and found in favor of plaintiff. The majority's decision usurps the jury's role and imposes its own view of the evidence, contrary to well-established case law.

Last Word

This is a decision that is going to have a broad day to day (or at least trial to trial) application. And if defense lawyers really are dancing in the streets over this one, plaintiffs' counsel have got to be tearing their hair out.  Judges now have way more authority to question the conclusion of a jury on punitive damages and to throw out such an award.

 

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Middle District's new Magistrate Judge, Patrick Auld, was invested yesterday in a ceremony at the federal courthouse in Greensboro.

Cameras are allowed in the courthouse on ceremonial occasions like this, so I'm able to share with you a couple of photographs of the ceremony. That's Judge Auld in the photo on the left, and the four District Judges of the Middle District in the other (from left, Judge Tilley, Judge Osteen, Chief Judge Beatty, and Judge Schroeder, applauding Judge Auld).

Judge Auld attended Wake Forest University and then Yale Law School.  He clerked for Judge Woody Tilley of the Middle District, and then for Judge Phyllis Kravitch of the 11th Circuit Court of Appeals. He practiced in Atlanta after his clerkships, and then joined the U.S. Attorney's office in the Middle District in 1998.  He has been Deputy Chief of the Criminal Division in this District since 2004.

Magistrate Judge Trevor Sharp, who introduced Judge Auld, noted the new Judge's sense of humor and informed him that his jokes will now be much funnier, at least to the lawyers appearing before him. True to form when judicial humor is involved, there was robust laughter from the crowded courtroom at Judge Sharp's remarks.

Judge Auld will be resident in Winston-Salem. He takes the seat held by Magistrate Judge Russell Eliason, who retired after more than thirty years as a Magistrate Judge.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Every so often, I add cases decided by the Business Court to the Case Database part of this blog. These cases are less significant than those that get a blog post-- at least in my unbridled and unchecked editorial discretion over this blog -- but nevertheless include some valuable points.

Email and RSS notifications don't go out when I add these cases, so you won't have seen them unless you've done some searching through the Database.

Here's a short list of the last several cases I added to the Database, with links to the summaries:

Abraham v. Jauregui: denying a motion opposing mandatory designation of a case involving a real estate development, and setting out factors why the case was appropriate for designation to the Business Court. (There are many other cases in the database involving the mandatory jurisdiction of the Court).

Allen v. Land Resource Group: Dismissing negligence and fraud claims against lenders which had financed residential lot purchases in a failed real estate development. Also dismissing claims under the Interstate Land Sales Full Disclosure Act.

BB&T BOLI Plan Trust v. Massachusetts Mutual Life Ins. Co.: granting a motion to stay discovery pending resolution of a motion to dismiss.

Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, Inc.: granting a motion to dismiss fiduciary duty claims and unfair and deceptive practices claim by bank customer against the bank for alleged mismanagement of securities investments.

Griffin v. Carolina Power and Light: granting motion that a shareholder who guarantees the debt of a corporation does not have an injury "separate and distinct" from the injury sustained by the corporation itself giving him standing to sue for the breach of a contract with the corporation. Further holding that a shareholder "cannot assert claims against a third party for loss of its equity investment in a corporation."

Laney v. Corn: enforcing a mandatory forum selection clause.

Mattress Now, Inc. v. Vickers: sanctioning a pro se party for failing to appear at a mediation.

Napco, Inc. v. PBM Graphics, Inc.: denying a motion for preliminary injunction under the North Carolina Trade Secrets Protection Act.

You can get to the Case Database -- where you can search by keyword -- by clicking the link at the upper left hand corner of the blog.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If an attorney improperly removes a case to federal court, the Fourth Circuit concluded today in In re Crescent City Estates, LLC that he or she can't be liable for attorneys' fees. The Court interpreted 28 U.S.C. §1447(c), which says that "[a]n order remanding the case may require payment of just costs and and any actual expenses, including attorneys fees, incurred as a result of the removal." It held that this statute allows fees to be imposed only on parties, not their counsel.

The issue was whether the silence in the statute on the power to assess fees on attorneys should be read to allow it. The Appellants said that the lack of mention in the statute as to counsel was the equivalent of Congressional permission, but Judge Wilkinson held that  "the proper presumption is that when a fee-shifting statute does not explicitly permit a fee award against counsel, it prohibits it."

The Court premised its decision on the American Rule, which provides that "the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser."  It referred to the Rule as "a longstanding legal principle" and said that it was the Court's "duty to keep the American Rule intact."

The potential chilling effect of imposing fees on counsel was a fundamental part of the Court's decision.  It held that "holding counsel responsible under §1447(c) could begin to transform what it means to practice law. A lawyer should not be required to risk personal liability merely for acting in a representational capacity or for seeking to place a client in a more favorable litigation posture."

The Court observed that in an exceptional case, a "particularly blameworthy" removal could result in an imposition of fees on the attorney under Rule 11 or 28 U.S.C. §1927. 

The Fourth Circuit said that it is only the only Circuit Court to address whether fees can be assessed on counsel under the removal statute, and it observed that the district courts considering the issue "are badly divided."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The standard for getting past a 12(b)(6) Motion in federal court in North Carolina inched higher yesterday with the Fourth Circuit's decision in Francis v. Giacomelli.  

The opinion from Judge Niemeyer, relying on the United States Supreme Court's June 2009 decision in Ashcroft v. Iqbal, affirmed the grant of a Motion to Dismiss in a political firing case. 

Although Francis isn't a business case, you should definitely look at it if you are dealing with a Motion to Dismiss in federal court. It takes a stern view of pleading requirements after Iqbal, including a discussion of the need to deter "strike suits" and to avoid the "high costs of frivolous litigation."

The Court actually went so far as to suggest that the Federal Rules never really allowed notice pleading:

Overlooking the broad range of criteria stated in the Federal Rules for a proper complaint, some have suggested that the Federal Rules, when adopted in 1938, simply created a “notice pleading” scheme, pointing for support to Rule 8(a)2), which requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” and Rule 8(d)(1), which provides that “[n]o technical form [for stating allegations] is required.” But the “notice pleading” characterization may itself be too simplistic, failing to recognize the many other provisions imposing requirements that permit courts to evaluate a complaint for sufficiency early in the process. Rule 8 itself requires a showing of entitlement to relief. Rule 9 requires that allegations of fraud, mistake, time, place, and special damages be specific. Rule 11 requires that the pleading be signed and provides that the signature “certifies” (1) that the claims in the complaint are not asserted for collateral purposes; (2) that the claims asserted are “warranted”; and (3) that the factual contentions “have evidentiary support.” And Rule 12(b)(6) authorizes a court to dismiss any complaint that does not state a claim “upon which relief can be granted.” The aggregation of these specific requirements reveals the countervailing policy that plaintiffs may proceed into the litigation process only when their complaints are justified by both law and fact.

Senator Arlen Specter has introduced legislation to repeal Iqbal.  It is called the Notice Pleading Restoration Act of 2009.  The legislation would reinstate the liberal pleading standard of Conley v. Gibson, 355 U.S. 41 (1957) discarded by the Supreme Court in Iqbal and an earlier decision, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Courtroom View Network is the "leading provider of live and on-demand video for high stakes civil litigation."  CVN was in North Carolina providing that video coverage for the hearing on a Motion to Dismiss in BB&T's lawsuit regarding a $55 million hedge fund investment turned sour. That's certainly a "high stakes" matter.

The videos from CVN are part of a subscription service, but the company has graciously provided me with two clips of the hearing before Judge Diaz, which you can view below. 

Before you do that, a little background. The case is BB&T BOLI Plan Trust v. Massachusetts Mutual Life Insurance Co. BB&T invested in a Citigroup hedge fund, Falcon Strategies, LLC. The investment was made in connection with BB&T's purchase of bank owned life insurance (BOLI) through Defendants MassMutual and Clark Consulting, Inc.

BB&T paid a $112 million premium to MassMutual for the BOLI. About $55 million was placed in the Falcon hedge fund. The hedge fund's performance, according to BB&T, was so poor that it triggered BB&T's right to reallocate that investment. 

BB&T claims that MassMutual and Defendant Clark nevertheless falsely advised them that no "reallocation event" had occurred, resulting in a significant loss.  The first video clip shows BB&T's lawyer arguing the claimed false statement by the Defendants.

The Amended Complaint doesn't specify the amount of BB&T's loss, but Falcon is reported to have lost more than 80% of its value. That would mean BB&T lost $44 million on this investment.

Other banks had far more substantial losses in Falcon than BB&T. The bank formerly known as Wachovia lost $315 million.  Fifth Third Bank had $612 million invested in Falcon, and has sued over its losses in federal court in Ohio.

Another issue before Judge Diaz at the hearing was whether discovery should be stayed pending resolution of the Motion to Dismiss. The second clip shows Winston-Salem attorney Mike Robinson arguing in favor of the stay.  Judge Diaz granted that motion in a short order the following day. He hasn't ruled yet on the Motion to Dismiss.

MassMutual's Brief In Support Of Motion To Dismiss

BB&T Response

MassMutual's Reply Brief

Clark Consulting's Brief In  Support Of Motion To Dismiss

BB&T Response

Clark Consulting's Reply Brief

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Nine  new cases were designated to the Business Court during November 2009:

Alexander Hospital Investors, LLC v. Frye Regional Medical Center, Inc. (Alexander)(Tennille): dispute between the owner of Alexander Community Hospital and its former tenant regarding the Defendant's alleged actions in causing the facility to lose its Medicare and Medicaid certification.

American Mechanical, Inc. v. Bostic (Randolph)(Diaz): claims against officers and directors of an insolvent corporation for constructive fraud and breach of fiduciary duty to creditors. The same claims are made in the Yates Construction case, below, and are similar to claims in an already pending case in which the Court has issued an opinion on the obligations of corporate insiders in a situation of deepening insolvency.

CCE Development Corp. v. Jebara Investments, LLC (Mecklenburg)(unassigned): lawsuit regarding a like-kind exchange in which Plaintiff sought to pierce the corporate veil between the attorney handling the transaction and a related title services company. The case was immediately remanded to Superior Court by a short order in which the Court ruled that allegations seeking to pierce the corporate veil are, standing alone, not sufficient for mandatory Business Court jurisdiction.

Lee v. Coastal AgroBusiness, Inc. (Sampson)(Jolly): claims regarding an inoculant applied by Plaintiff to its peanut crop, which Plaintiff alleges caused damage to the crop. Jurisdiction is based on the Business Court's jurisdiction over biotechnology matters.

Phelan v. Harbor Capital Management (Haywood)(Diaz): Claims by Defendant, a registered investment adiviser, against two of its former representatives who left the Defendants' firm, including claims for breach of fiduciary duty, tortious interference, misappropriation of trade secrets, and unfair competition.

Polytec, Inc. v. Andrews (Iredell)(Diaz): claims for breach of covenant not to compete and tortious interference with contract.

Press Communications, LLC v. Wachovia Bank, N.A. (Mecklenburg)(Tennille): claims regarding interest rate swaps.

Tyson v. Tyson: minority shareholder dispute. Claims for dissolution, breach of fiduciary duty, breach of reasonable expectations, conversion, fraud, and accounting, among others.

Yates Construction Co. v. Bostic (Rockingham)(Diaz): claims against officers and directors of an insolvent corporation for constructive fraud and breach of fiduciary duty to creditors. The same claims are made in the American Mechanical case, above, and are similar to claims in an already pending case in which the Court has issued an opinion on the obligations of corporate insiders in a situation of deepening insolvency.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The United States District Court for the Western District of North Carolina issued its new Local Rules today. There isn't a blacklined version available, but there don't appear to be a large number of changes as far as deadlines. Many of the Western District's deadlines were already in the seven and fourteen day periods adopted by the revised Rules of Civil Procedure, and didn't need to be revised.

The changes I saw were as follows:

Local Rule 16.1(B): Deadline for filing the Certification of Initial Attorney's Conference.  Now due seven days (before it was five) after the Initial Attorney's Conference.

Local Rule 16.1(C): Filing of Joint Stipulation of Consent to Magistrate Jurisdiction.  Now, if the Court rules on a motion to stay, the Joint Stipulation is due seven days after the Court's ruling (it was five before).

Local Rule 54.1(D): Objections to Bill of Costs.  Objection within fourteen days of the electronic filing of the bill of costs (formerly ten days); response from prevailing party within seven days thereafter (before, five days).

Local Rule 54.1(E): Objections to the Ruling of the Clerk of Court. Request for review of ruling by Clerk on costs due seven days after the Clerk's action (formerly five days).

 

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Local Rules for the Eastern, Middle, and Western Districts of North Carolina are going to be amended to square up with the new time periods for various filings contained in the revised Federal Rules of Civil Procedure.

The Revised Middle District Rules, blacklined to show the changes, are already available. So are the Revised Eastern District Rules, also blacklined. The new Western District Rules are in the works and expected to be available shortly.

The Middle District has an entire page on its website devoted to the changes in its Local Rules and Standing Orders, which includes a summary of the Rules changes. The Middle District also has a brand new Rule 6.2, which defines what constitutes "inaccessibility" of the Clerk's office and what should be done if there is an instance of inaccessibility.

The Eastern District didn't do a summary of the changes to its Rules, but I've prepared one, available here. The Eastern District has a LOT of Rules and there are around 50 changes. I categorized them by subject, including general motions practice, trial, mediation, admiralty, and patents.

The changes to North Carolina's Local Rules further the implementation of the new "a day is a day" time computation rules, which I wrote about last month. The new Local Rules, like the Federal Rules, take effect on December 1.

If you've been keeping up with this blog, you know that there's an issue with exactly what that effective date means for deadlines calculated under the old Rules and already running on December 1.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

North Carolina's Superior Court Judges met for their bi-annual Conference last month. There are always presentations at these conferences useful to those of us standing on the other side of the bench, and this Conference was no exception.

You can see the full list of papers and handouts from the October 2009 Conference here, but worth mentioning are:

An Administration of Justice Bulletin which contains a thorough examination of the law of recusal from Professor Michael Crowell, including the United States Supreme Court's decision in Caperton. The Bulletin contains a subject matter overview of what looks like every North Carolina appellate decision on recusal

If you are a medical malpractice lawyer, you'll certainly want to read Practical Tips for Trying Medical Negligence Cases, written by Judges Richard Doughton, Ed Wilson, and Catherine Eagles.

A presentation titled Ex Parte Contacts: When Can a Judge Trust a Lawyer? by Paul Ross, the Executive Director of the Judicial Standards Commission, and Judge Catherine Eagles.

And last but not least, there is Computer Essentials For Judges from Judge Ripley Rand and Professor Jessica Smith of the IOG. That lists a number of legal websites and "blogs of note," including this one.

I've written before about the materials from these Conferences, all of which are available on the IOG website. Those records back to February 2002, and there are literally dozens of papers on all sorts of subjects available.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It looks like there is a small problem with the impending amendments to the Federal Rules of Civil Procedure.

The drafters seem to have overlooked an important point: exactly how will the Rule changes apply to deadlines which have started running before December 1st, the date on which the changes become effective?

If you aren't aware of the amendments about to take effect, the way in which you count the days to respond to a federal court filing will change on December 1, 2009. Time periods will change as well, usually from five days to seven days or from ten days to fourteen days.

What exactly does that mean if you are going to be dealing with a response to a filing made (or a deadline that starts running) before December 1, with a response or filing due after December 1? Should you count under the new "days are days" approach and use the time periods that are about to go in effect? Or do you apply the pre-December 1st Rules since the clock started ticking before then?

A Couple Of Examples Of The Problem

Does it make a difference on responses to motions? It could, because the Rule changes hit at a holiday time period, right after Thanksgiving. In North Carolina, there are two holiday days that week: Thanksgiving and the day after Thanksgiving. The old Rules excluded holidays from the count for certain response times, the new Rules don't.

So let's say you got served in an EDNC case via efiling with a Motion to Compel on Monday, November 16. You've right now got a ten day response time per EDNC Local Rule 7.1(e)(2). You count that ten days by excluding holidays and weekends and then add three extra days per FRCP 6(d). Under the current Rules, your response is due on Monday, December 7.

Under the effective-December-1-Rules, you have a 14 day response time, counted by including weekends and holidays and then adding the three extra days. That puts your response due on Thursday, December 3, four days earlier. Which deadline applies?

Here's an example which runs in the opposite direction, where you would have more time under the new Rules. Right now, Rule 59 gives you ten days after the entry of judgment to file a motion for a new trial or to move to alter or amend a judgment. The amended Rule 59 gives you a whole lot more time, 28 days. So if judgment is entered on November 30, can you take the 28 days or do you need to file within ten?

There Isn't A Clear Answer

I wish I could tell you that there was a clear answer, but there isn't. The "Statutory Time-Periods Technical Amendments Act of 2009," which approved the time computation changes, says without equivocation that "the amendments made by this Act shall take effect on December 1, 2009."

Rule 86 of the Rules of Civil Procedure speaks to amendments of the Rules. It says that amendments "take effect at the time specified by the Supreme Court" and apply to actions commenced after that date, but also to actions "then pending," unless the Supreme Court specifies otherwise or "the court determines that applying them in a particular action would be infeasible or work an injustice."

In the past, there has been more specification about effectiveness, which has usually been pegged to subsequently filed proceedings. That's true of the addition of Rule 502 to the Federal Rules of Evidence,  which applied to "all proceedings commenced after the date of enactment of this Act."

That approach is also true of the 2006 e-discovery amendments to the Rules of Civil Procedure, which said that they would take effect on December 1, 2006 and would "govern in all proceedings thereafter commenced."  The latter amendment specified its effect on pending cases, and said that it would apply "insofar as just and practicable, [to] all proceedings then pending."

Assuming motions are "proceedings," the drafters of the new changes didn't limit the Rule changes to subsequently filed proceedings, and they didn't address what happens with "then pending" actions.

The safest approach certainly is to apply the shorter time period, but it would have been nice if this issue wasn't out there.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

It might seem self-evident that the Business Judgment Rule applies to decisions made by the managers of a limited liability company, but if you were looking for a North Carolina case to cite on that point before last week, you wouldn't have found one.

But now, we have Mooring Capital Fund, LLC v. Comstock North Carolina, LLC, a November 13, 2009 decision from the North Carolina Business Court. The case addresses not only the business judgment rule, but also two other significant aspects of litigation involving LLCs.

The Business Judgment Rule And LLC Managers

Mooring Capital, a minority member of Comstock North Carolina, LLC, filed a lawsuit seeking an accounting and making derivative claims for a diversion of funds by the majority member and manager of the LLC, CHCI. CHCI contended that it was entitled to dismissal because it had limited liability as a member-manager.

Judge Jolly agreed that "member-managers generally are shielded from liability when acting as LLC managers," Op. ¶29, and further held that "the managers of an LLC may also be entitled to the protections of the 'business judgment rule.'" Op. ¶30. The Court based the business judgment rule portion of its ruling on G.S. §57C-3-22(b), which states that an LLC manager is bound to act "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company."

The Court nevertheless denied the manager's motion to dismiss, holding that "while the business judgment rule limits the liability of member-managers when acting on behalf of an LLC, this liability is not limited when managers act outside the scope of managing the LLC." Op. ¶33. Dismissal of Plaintiff's claims wasn't warranted because the Complaint made allegations that the manager had taken "actions clearly in conflict with the interests of the LLC" and had "entered into transactions from which" the manager had "derived an improper personal benefit." Op. ¶36. Those included unauthorized distributions from the LLC to the manager and entities with which the manager it was affiliated.

Derivative Actions On Behalf Of LLCs, And Stays Pending Investigation

There are at least two other LLC-related litigation points worth noting in Mooring Capital. One involves the standing of an LLC member to make a derivative claim, the other involves the right of the LLC to a stay of the action while it investigates the charges.

On the first point, although the LLC Act doesn't specify that a demand be made before a member can file a derivative action, the statute does require that the complaint "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the managers, directors, or other applicable authority and the reasons for the plaintiff's failure to obtain the action, or for not making the effort." N.C. Gen. Stat. §57C-8-01(b).

The Defendant claimed the Plaintiff hadn't made sufficient effort to have the LLC take action. The Court disagreed, referencing Plaintiff's contentions that "its minority status alone show[ed]" that it lacked the authority to cause the LLC to bring suit," and furthermore that it had made "repeated requests for financial information" to which the LLC had not responded.

On the point of the LLC's right to a stay pending its investigation, the LLC had retained PriceWaterhouseCoopers to investigate some of the matters raised by Plaintiff. The LLC said that it therefore was entitled to a stay per G.S. §57C-8-01(b). The Court denied the stay, however, noting that it had concerns about the scope of the accounting firm's investigation. The engagement letter between the LLC and PWC said that the accounting firm would perform a review of the LLC's financial statements, but did not speak to an investigation of other allegations made by the Plaintiff in its Complaint.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Brief in Support of Motion to Stay

Brief in Opposition to Motion to Stay

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

• “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
• “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
• “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

• “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
• “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
• “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The march towards paperless courts continues in North Carolina. The latest step is the elimination by the Court of Appeals of paper copies of oral argument calendars.

You remember those. They came on yellow paper and listed all the cases to be heard during a particular week and the panels hearing them. The calendars also included the cases to be decided without oral argument, as permitted by Rule 30(f) of the North Carolina Rules of Appellate Procedure.

A few months ago, without fanfare, the Court of Appeals stopped sending out oral argument calendars.

That change came with the implementation in June of a new docketing system. The system will send electronic notification of oral argument hearings to attorneys who provide email addresses. The Court of Appeals will pick up counsel's email address from the Identification of Counsel page in the Record on Appeal.

While glitches in the notification system are being worked out, the Court is providing telephone notice to counsel of oral argument hearings a week or two in advance of the hearings. If you now are worried that you might be on a calendar in November but haven't gotten notice yet, here's the link to the calendar for that month. If you want to see the full lineup of cases set for hearing during a particular term of court, the calendars will continue to accessible on line.

The opinions of the Court will continue to be sent via regular mail.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Judge Albert Diaz of the North Carolina Business Court was nominated today by President Obama to serve on the Fourth Circuit Court of Appeals.

Senators Kay Hagan and Richard Burr both issued glowing statements about Judge Diaz and North Carolina Court of Appeals Judge Jim Wynn, who was also nominated for the federal appellate court.

In the press release issued by the White House, President Obama said that the two Judges "have been exceptional public servants for the people of North Carolina." 

The Fourth Circuit has fifteen seats for active Judges, numbered in the order in which they were originally filled. Judge Wynn, if confirmed, will take Seat 7, formerly held by Judge J. Dickson Phillips, Jr. of North Carolina. That seat has been empty for fifteen years, longer than any other judgeship in the country.  It's actually the second time that Judge Wynn has been nominated for that seat. He was also nominated by President Clinton in 1999.

Judge Diaz will take Seat 11 if confirmed. That seat was formerly held by Judge William Wilkins of South Carolina and is still warm, as Judge Wilkins retired only a couple of years ago, in 2007.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There were three decisions yesterday from the Court of Appeals worth a quick mention for the business litigator (and the baseball fan).

First, Fischer Investment Capital, Inc. v. Catawba Development Corp. is a piercing the corporate veil case. And not only that, a reverse piercing the corporate veil case. In a reverse piercing case, instead of a court disregarding the corporate entity to reach the assets of an individual owner, the court reaches the assets of the entity to satisfy an obligation of the individual owner. In a first impression holding, Judge Ervin rejected the argument that reverse piercing is limited to personal jurisdiction situations, and held that it also "is a recognized legal theory in North Carolina for substantive . . . purposes."

Second, in Telerent Leasing Corp. v. Boaziz, the Court allowed a recovery of attorneys fees that were more than 15% of the amount recovered by the Plaintiff, which the Defendant argued were in excess of the amount permitted by G.S. Sec. 6-21.2. The Court held this to be justified because the Plaintiff had expended attorneys' fees pursuing recovery through "multiple actions" and in "multiple venues." Those included fees incurred in a related out of state bankruptcy proceeding.

Finally, the case involving baseball is Reese v. Mecklenburg County. The Court held that the leasing of land by Mecklenburg County to the Charlotte Knights baseball team where the team would build a baseball stadium was a proper public purpose. That was true even though the team would own the stadium during the term of the lease.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren't enough to invoke the mandatory jurisdiction of the Court. 

There was a short order on that subject yesterday in CCE Development Corp. v. Jebara Investments, LLC, in which the Court held that "[p]iercing the corporate veil alone is insufficient to establish mandatory jurisdiction." 

There was a similar ruling earlier this year, in Robert N. Pulliam, CPA/ABV PLLC v. Gardner, where the Court held "the presence of veil piercing allegations are not, in and of themselves, grounds for jurisdiction under N.C. Gen. Stat. § 7A-45.4(a)."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There were ten new cases designated to the Business Court during October 2009. They include two lawsuits against former officers and directors of Wachovia regarding the collapse of Wachovia (Browne and Harris).

Abraham v. Jauregui (Onslow)(Jolly): fraud claims by 77 plaintiffs involving coastal real estate developments.

Blackburn v. L.E. Wooten & Company (Wake)(Jolly): claims regarding alleged breach of shareholders agreement, failure to pay dividends, frustration of reasonable expectations. The claims are similar to those made in the Kwong case, below.

Browne v. Thompson (Forsyth)(Jolly): claims by holders of Wachovia stock against certain officers and directors of the bank, as well as its auditors, for securities fraud and accounting misstatements relating to the collapse of Wachovia.

Building Union Investment And Local Development Fund Of America Trust v. Bromont Investments, Inc. (Mecklenburg)(Diaz): claims arising from foreclosure of defendants' membership and management interests in an LLC, and defendants' alleged refusal to turn over the assets, books, and records of the LLCs involved.

Danius v. India Abroad Publications, Inc. (Mecklenburg)(Diaz): defamation lawsuit against internet news organizations based in India, who allegedly reported without basis that one of the plaintiffs had abused his wife in a dispute over her dowry, and that he had attempted to murder her.

Franklin County Board of Education v. North Carolina Department of Revenue (Wake)(Tennille): petition for judicial review of a final agency decision in a contested tax case. The issue is whether the County Board of Education is entitled to a refund of sales and use paid in connection with construction projects when the actual payment was not made directly by it, but instead by Franklin County. The Administrative Law Judge denied the Board's refund request, ruling that the Board "cannot claim refunds of taxes which it did not pay."

Harris v. Wachovia (Mecklenburg)(Jolly): claim by Wachovia shareholder that Wachovia and its officers and directors  made incorrect statements of material fact and failed to disclose material information in connection with Wachovia's acquisition of Golden West Financial Corporation and concerning Wachovia's financial condition and prospects thereafter.

KLATMW, Inc. v. Electric Systems Protection, Inc. (Wake)(Tennille): allegations of breaches of asset purchase agreement, and dispute between buyer and seller regarding indemnification rights and right to escrowed funds.

Kwong v. L.E. Wooten and Co. (Wake)(Jolly): claims regarding alleged breach of shareholders agreement, failure to pay dividends, frustration of reasonable expectations. The claims are similar to those made in the Blackburn case, above.

McKee v. James (Robeson)(Diaz): minority shareholder lawsuit against persons who allegedly obtained a majority interest in the corporation based on fraudulent misrepresentations. The complaint seeks damages and dissolution of the corporation which manufactures "McKee Craft" boats, which the Complaint says are "unsinkable." That's what everyone thought about Wachovia, too.

• Email This