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

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.

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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. 

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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

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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.

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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.
 

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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."

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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."

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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.

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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.

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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.

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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:

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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.

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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.

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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.

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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.

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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

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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. 

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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.

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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.

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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."

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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

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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.

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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.

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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.]
 

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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:

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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.

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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.

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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. . . .

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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."

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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.

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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.

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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.

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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.

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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."

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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."

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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. 

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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."

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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.

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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.

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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."

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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

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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.

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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.

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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. 

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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.

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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.

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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.

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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."

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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).

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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

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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.

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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).

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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.

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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.

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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.

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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

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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.”

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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.

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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.

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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.

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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)."

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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.

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Judge Albert Diaz of the North Carolina Business Court may be nominated by President Obama to the Fourth Circuit Court of Appeals, according to the Charlotte Observer.

And speaking of Judge Diaz, here's an interview of him that I hadn't seen before. The part about the pink hippopotamus is especially interesting.

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Digital signatures and medieval law met today in the North Carolina Court of Appeals decision in Powell v. City of Newton, and the twenty-first century emerged the winner.

The Court enforced a settlement agreement involving a conveyance of land, even though no agreement reflecting the transaction had been signed as required by the Statute of Frauds. It relied, in part, on emails between counsel reflecting the settlement and circulating the necessary deed. It held that these satisfied the signature requirement, relying on North Carolina's Uniform Electronic Transactions Act.

The case arose from the settlement by the parties of their lawsuit in open court, during trial. The transcript reflected Plaintiff's agreement to convey property to the Defendant as a part of the settlement. A settlement agreement was circulated by email between the lawyers for the parties after that, but Plaintiff refused to sign.

The Electronic Signature Of Plaintiff's Counsel Satisfied The Statute Of Frauds

Plaintiff based his refusal to follow through on the Statute of Frauds, which requires an agreement to convey land to be in writing, and "signed by the party to be charged." The trial court ordered Plaintiff to sign the settlement papers, and the Court of Appeals majority affirmed. It held that there had been "total compliance" with the Statute of Frauds. It based its decision, in part, on North Carolina's Uniform Electronic Transactions Act, N.C. Gen. Stat. §66-311 et seq). As far as I know, this is the first mention of that statute by the Court of Appeals.

Judge Jackson, writing for the majority, said:

We note that this was not some barroom conversation between drunken neighbors, agreed to in jest, and written on a random scrap of paper. See Lucy v. Zehmer, 84 S.E.2d 516 (1954). This was an agreement among four parties represented by counsel, in a court of law, supervised by the presiding judge, who inquired of each party whether the terms were agreeable. The party to be charged -- plaintiff -- confirmed, 'Yes, that's my agreement.'

The Court observed that emails had then passed back and forth between counsel regarding the settlement, including drafts of a settlement agreement and a deed. This led to the Court's first impression reliance on the Uniform Electronic Transactions Act. The Court said:

Pursuant to that Act, plaintiff's counsel affixed his electronic signature to emails concerning the transaction. . . . When the hearing transcript, draft agreement, draft quitclaim deed, and associated emails are read together, as permitted by the statute of frauds, the settlement agreement that plaintiff was ordered to execute is in total compliance with the statute of frauds.

Other Grounds

The majority also provided other grounds for its decision, including the doctrine of judicial estoppel and a discussion whether the Statute of Frauds should apply at all to court announced settlements.

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When lawyers are arguing over whether documents were properly withheld from production on the basis of attorney-client privilege, one side or the other will often say "let's have the Judge do an in camera review."  (Translation for nonlawyers reading this blog: let's drop all these documents on the Judge and let him or her decide).

Judges love this procedure, right? That would not be so.

A very short opinion the other day from the Business Court in Crockett Capital Corp. v. Inland American Winston Hotels is a good illustration. The decision suggests it is a good idea for both sides to take steps to make such a review as easy as possible for the Judge. There's also a good point on the scope of attorney-client privilege.

The Documents For The In Camera Review Were Highly Repetitive

The parties were arguing over redactions made to a number of emails on claimed grounds of privilege. In the ensuing in camera review. The parties provided what the Court described as "two large three-ring binders," one of which had clean copies of the claimed-to-be-privileged emails and the other of which had redacted copies of the emails produced.

We all know that emails proliferate like bunnies. The problem for the Court was that the emails in the binders had done exactly that. They were repeated over and over, in what the Court described as "repetitive strings of the same email time and time again." 

There's a process in e-discovery called "deduplication," which eliminates redundant copies of electronic documents. The lack of deduplication did not make the Court happy. Here's a quote:

Seldom has the Court been called upon to waste so much of its time because counsel did not fulfill their responsibilities in the meet and confer required by the Court's Local Rule 18.6. . . . It is apparent that counsel did not sit down and look at the documents. If so, they surely would have realized that the Court was being asked to look at repetitive strings of the same email time and time again. . . . If counsel had met and conferred they would have provided the Court with one copy of each email string rather than the copy for each recipient and saved the Court hours of wasted time. Eighty percent of the  documents would not have required Court review if counsel had done their job.

That the documents were in electronic format was not an excuse. The Court said:

Discovery in a digital age is expensive and difficult. That does not relieve counsel  of their obligation to carefully review documents and to sit down with the documents before them in a meet and confer and reduce to the fullest extent work required by the Court. Such scrutiny obviously did not occur in this case.

Privilege Issues

The Court also questioned some of the claims of privilege, which involved documents exchanged between businesspeople but copied to lawyers. The Court described these as "emails on which lawyers were simply copied with information about business decisions and no advice was sought or given."

It said: "[b]usiness decisions are not protected just because a lawyer is copied on a memo. Businessmen making business decisions may not hide behind their lawyers. Lawyers making business decisions cannot hide behind a privilege."

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Claims involving the "raising of capital" don't fall within the scope of North Carolina's unfair and deceptive practices statute. That was the basis for the dismissal of Chapter 75 claims yesterday in two cases, one decided by the North Carolina Court of Appeals and the other by the North Carolina Business Court.

In the Court of Appeals case, Carcano v. JBSS, LLC, the plaintiffs claimed they had invested money based on misrepresentations by the defendants that the funds were for an interest in an LLC. The LLC, however, had never been formed.

The appellate court affirmed the dismissal of an unfair and deceptive practices claim based on these allegations, holding:

the most egregious allegations made against defendants, and the crux of plaintiffs' claims, is that defendants 'marketed membership in a fictional LLC' which involved 'deception, lies, and misrepresentations.' Even taken as true, these facts do not constitute unfair and deceptive practices so as to violate Chapter 75. The allegations merely assert that defendants asked plaintiffs to invest in a business arrangement. These are actions which are capital raising ventures among sophisticated business entrepreneurs.

The Business Court case, decided the same day, is Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank. The Hospital alleges that Wachovia mishandled millions of dollars of its funds. The Hospital asserted an unfair and deceptive practices claim, and argued that this wasn't an exempted securities transaction because it was really a claim involving "investment advice."

Judge Tennille dismissed the Chapter 75 claim, rejecting the Hospital's characterization and finding the claim to involve a securities transaction beyond the scope of the statute. He held that "given the 'raising capital' nature of this relationship, the Court finds that any wrongdoing by Wachovia in its administration of the securities lending program clearly falls within the purview of the securities transactions exception." 

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Get ready for changes in how to count the days for meeting deadlines under Rule 6 of the Federal Rules of Civil Procedure. The upcoming changes abandon the practice of excluding weekend days and holiday days in calculating a response date when the period for the response is less than eleven days.

On December 1st, when "time computation amendments" to the Federal Rules become effective, a day will be counted as a day, whether it is a weekend day, Thanksgiving, Christmas, or any other recognized holiday day. That will be true regardless of the number of days allowed for the response.

New Rule 6(a)(1)(B) says to "count every day, including intermediate Saturdays, Sundays, and legal holidays." The objective of this change, according to the Report of the Judicial Conference, was to "make the method of computing time consistent, simpler, and clearer." If a deadline is measured in hours, The new Rule says hours are counted the same way. Every hour counts.

The full text of the new Rules is here, and what follows is a short summary of important time calculation points.

Counting Will Be A Little Different Depending On Whether You Are Counting Forward Or Backward

The basic rules of when to start counting days, and when to stop, won't change under the new Rule. The day of the act or event that triggers the count still isn't included. You start counting the following day. If the last day of the count falls on a weekend day or on a state or federal holiday, the count still extends forward to the next day that is not a weekend day or holiday.

The count also gets extended if the final day falls on a day that the court is "inaccessible," to the first accessible day. The term "inaccessible" isn't limited, as it is currently, to lack of accessibility caused by "weather or other conditions." The new advisory committee notes to Rule 6 suggest that inaccessibility might include "an outage of the electronic filing system."

Things are a little different if you are counting backwards. Why would you count backwards? Think of, for example, final pretrial disclosures due a certain number of days before trial.

The new Rule 6 says that to get to the "next day" when counting backwards, you continue to count backwards if the last day of the count is a weekend or holiday. So if your last day is Saturday, the filing is due the Friday before that Saturday.

Holidays are treated differently between a backward count and a forward count. If you are counting backwards, and the last day is a state holiday (not a federal holiday), then the count ends on the state holiday. If you hit a federal holiday, however, you continue counting backwards to the next business day. But forward counts treat state and federal holidays in the same way.

New Definition Of The "Last Day"

There's now specific definition of the meaning of "last day," contained in new Rule 6(a)(4). For paper filings, the last day ends "when the clerk's office is scheduled to close." For electronic filing, the last day ends "at midnight in the court's time zone."

What About Three Days For Mailing?

Rule 6(d), which gives lawyers an additional three days if served by mail or e-filing, has survived. That seems odd, given the definition of "last day" taking into account e-filing procedures and the widespread use of electronic filing.

Response Periods For Discovery Responses, Summary Judgment, And Other Matters

The change in counting methodology resulted in the adjustment of a number of different response time periods set out in the Rules.

The drafters of the new rules changed most time periods to be in multiples of seven, the thought being that deadlines then would usually fall on weekdays. So most ten day periods in the Rules became 14 days. The time for responding to a complaint, formerly 20 days, will be 21 days.

As for summary judgment, there is a new version of Rule 56(c)(1)(A), which says that in the absence of local rule, a party can move for summary judgment at any time up until thirty days after the close of discovery. The response is due 21 days later, and the reply is due 14 days after that.

The time for responding to interrogatories and document requests wasn't affected by the rule changes. Those remain at 30 days.

If you want a rule by rule breakdown of the change in time periods for responses, of which there are many, there are good summaries on the Smart Rules blog and also in an article at law.com. There's also an powerpoint from the federal judiciary website, titled "The Days Of Our District Court Lives."

Other Rules

Similar amendments were made to the Federal Rules of Appellate Procedure and the Federal Rules of Bankruptcy Procedure. There's an appellate rules powerpoint from the federal judiciary website, and also a bankruptcy rules powerpoint.

[I've done a followup post on the rules amendments about issues involving the effective date of the amendments. Specifically, it's on how the amendments apply to deadlines that were already running on the December 1 effective date.]

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Eleven new cases were designated to the Business Court in September 2009, including a class action against the North Carolina Department of Revenue claiming that the taxation of retirement benefits paid to certain state employees is unconstitutional (Pendergraph).

Bankers Life and Casualty Co. v. Barnes (Mecklenburg)(Diaz): claims for misappropriation of confidential information and trade secrets and violation of covenants not to compete.

Comor Corp. v. Comor Communications, LLC (Guilford)(Tennille): derivative action.

Global Promotions Group, Inc. v. Danas, Inc. (Wake)(Jolly): designated based on allegations that BB&T and its employee improperly allowed unauthorized electronic transfers of funds from Plaintiffs' accounts.

Holden v. Morlando (Guilford)(Tennille): derivative claims for diversion of corporate funds and claim for dissolution.

Howard v. Dunaways, (Mecklenburg)(Diaz): claim for payment of shareholder dividend allegedly wrongfully withheld.

Laney v. Corn (Gaston)(Diaz): claims for breach of franchise agreements and breach of fiduciary duty of franchisor, issues regarding liability of successor to franchisor.

Mason v. Raich (Guilford)(Tennille): complaint seeking confirmation of an arbitration award.

McDermott v. Bankers Life and Casualty Co. (Guilford)(Tennille): claims for fraud and unfair and deceptive practices involving sale by  defendants of annuity policies.

Pendergraph v. North Carolina Department of Revenue (Wake)(Jolly): lawsuit by taxpayers to have declared unconstitutional North Carolina's taxation of retirement benefits paid by the Local Governnmental Employees' Retirement System and the Teachers' and State Employees' Retirement System for persons who began participating in those plans before statutory amendments in 1989, and seeking class certification.

Presidium Retirement Advisors, Inc. v. Alliance Benefit Group Carolinas, LLC (Chatham)(Jolly): corporate governance claims, including breach of duty of directors, the election and removal of directors, and dissolution.

Sea Ranch II, Inc. v. Gusler (Dare)(Tennille): class action, filed pursuant to a settlement agreement of a case that originated in the Business Court, seeking appointment of receiver to sell a timeshare condominium.

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Litigation between shareholders can be as unpleasant and messy as a divorce. That was the situation today in Koopman v. Koopman Dairies, Inc., a case which the North Carolina Business Court called a "corporate domestic dispute."

That analogy to family law led the Court to award attorneys' fees for the defendants' contempt of court orders. Ordinarily, fees aren't allowable in a contempt proceeding. Getting that type of award is as rare as, say, a 75th wedding anniversary.

In Koopman, two brothers and their wives each owned 50% of a family dairy farm. They squared off in a lawsuit seeking dissolution. During the course of the lawsuit, the defendants made a habit of taking funds out of the corporate account without the consent of the plaintiffs. The Business Court responded by ordering that neither party could remove funds except in the ordinary course of business.

The defendants violated that order, other directives of the Court, and a settlement agreement regarding the permissible use of corporate funds. You can read the opinion if you want the detail, but Judge Tennille summarized that the defendants "have routinely and repeatedly resorted to self-help when it suited their purposes and deliberately and without justification violated clear and direct orders of this Court. In doing so they also breached the settlement agreement they had reached. Their conduct has been willful and intended to harm [the plaintiff's] business."

The Court held the defendants in contempt. The plaintiffs requested the attorneys' fees they incurred in obtaining that ruling. Judge Tennille observed the "general rule" that "its inherent authority to issue sanctions for failure to obey its orders does not include an award of attorney fees." Op. ¶14.

Nevertheless, the Court awarded fees, relying on Hartsell v. Hartsell, 99 N.C. App. 380, 393 S.E.2d 570 (1990), a domestic case in which the Court of Appeals awarded fees for a party's failure to comply with an equitable distribution award. 

Judge Tennille held "[t]his is a corporate domestic dispute in which the parties had agreed to an equitable distribution of the assets of the company. The rationale for awarding attorney fees under both circumstances is the same. If the parties can choose to ignore court orders and treat the assets at issue in any manner they choose, the system does not work. Parties could simply choose to comply with a court order on distribution in any way they saw fit, leaving the court and their adversary with no remedy." Op. ¶15.

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If you are a secured creditor trying to sell off the collateral securing your loan in a "commercially reasonable manner" under North Carolina's Uniform Commercial Code, it's not a good idea to advertise the sale right before Christmas and have the sale right after Christmas.

That's at least part of the lesson from the North Carolina Court of Appeals last week in Commercial Credit Group, Inc. v. Barber, where the Court ruled that the secured creditor's Christmas-time sale had not been commercially reasonable, and denied its request for a substantial deficiency judgment.

The Facts

Barber had given his lender a security interest in a Peterson Pacific 5400 heavy duty waste recycler, a specialized piece of commercial equipment which grinds logs into wood chips.

The recycler broke down almost immediately after Barber bought it. The dealer wasn't able to repair it, and Barber defaulted on his loan to Commercial Credit because he couldn't generate any revenue from the recycler. The creditor took possession of the broken down recycler and gave Barber written notice that it would sell it at public auction on December 27, 2007.

Commercial Credit complied literally with the terms of its security agreement with Barber, which said that a public sale "will be deemed commercially reasonable" if (1) the Debtor had ten days notice of the sale, (2) the sale was advertised twice in at least one newspaper in the area of the sale, and (3) the terms of sale were 25% down plus the balance within 24 hours.

Commercial Credit gave ten days notice. It advertised the sale twice (on December 23rd and 26th) in general publication newspapers. It stated in the ads that 25% down would be required, but with a slight variation that turned out to be a problem, and said that the sale would be "as is," which also turned out to be a problem.

Only one bidder other than Commercial Credit showed up at the December 27th sale. Commercial Credit made the only bid of $100,000. Commercial Credit sold the recycler a few months later at a private sale for $90,000 more than its bid, but still sued to recover the full $128,000 difference between its auction bid and the outstanding balance on the loan.

The trial court ruled that the sale hadn't been conducted in a commercially reasonable manner and rejected Commercial Credit's claim for a deficiency judgment. The Court of Appeals affirmed, taking issue with the content of Commercial Credit's advertising of the sale, and the timing of the advertisements about the sale.

Problems With The Timing Of The Advertisements

The Court of Appeals found fault with the timing of the ads run by Commercial Credit right before and after Christmas. Judge Robert N. Hunter said that a public sale was one where "the public has had a meaningful opportunity for competitive bidding," and that the advertisements by Commercial Credit were insufficient to generate that "meaningful opportunity":

The recycler at issue in this case has a narrow commercial use, and as a result, the pool of bidders potentially interested in this equipment was necessarily limited from the outset. This fact was then inexplicably exacerbated by Creditor’s decision to run advertisements for the auction in two general circulation newspapers just two days before and one day after the Christmas holiday. Obviously, scheduling a public auction for a highly specialized and expensive piece of inoperable machinery just two days after Christmas would almost certainly not enhance “competitive bidding” under N.C.G.S. § 25-9-610. Perhaps the best evidence of the result of Creditor’s decision was that only one other person in addition to Creditor attended the auction.

According to the Court, Commercial Credit "should have chosen a more appropriate date of sale, and tried considerably harder to market the recycler by targeting legitimate prospective buyers." It said "there is no excuse for putting forth clandestine advertisements that are misleading, obtuse, and targeted to no one during the busiest holiday season of the year."

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Lawyers don't have any obligation to disclose information harmful to their client's position during settlement discussions, the North Carolina Court of Appeals ruled today in Hardin v. KCS International, Inc.

The parties in Hardin had settled an earlier lawsuit involving plaintiff's claims over problems with his new yacht. Plaintiff then was dissatisfied with the repairs to the yacht undertaken pursuant to the settlement, and filed a second lawsuit notwithstanding the settlement agreement's full release.

The plaintiff asserted that the release had been procured by fraud. He pointed to documents produced in the second lawsuit which showed that his yacht had been involved in a collision while being delivered to North Carolina. Plaintiff said he had never been told that his yacht had hit a tree while being transported down the road (really), and that he should have been informed of this fact during the settlement negotiations. He said he wouldn't have settled in the first place if he had known about the accident.

Judge Geer disagreed that the defendants had any obligation to disclose the fact of the collision, observing that plaintiff had been obligated to use reasonable diligence to find out about the damage and that he could have easily done so through discovery. She furthermore emphasized the arms length nature of the settlement negotiations, and said that "no negotiation could be more arms length" than negotiations during "the course of on-going litigation."

The Court held that Plaintiff:

cites no authority — and we have found none — requiring opposing parties in litigation to disclose information adverse to their positions when engaged in settlement negotiations. Such a requirement would be contrary to encouraging settlements. One of the reasons that a party may choose to settle before discovery has been completed is to avoid the opposing party's learning of information that might adversely affect settlement negotiations. The opposing party assumes the risk that he or she does not know all of the facts favorable to his or her position when choosing to enter into a settlement prior to discovery. On the other hand, the opposing party may also have information it would prefer not to disclose prior to settlement.

On a first impression point of appellate procedure, the Court held that a motion to enforce a settlement agreement should be reviewed under the same standard applicable to a motion for summary judgment.

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Whether a furniture manufacturer's marketing of a line of trademarked furniture for its licensor had been "commercially reasonable" was decided by the Business Court yesterday in favor of the manufacturer, in Lexington Furniture Industries, Inc. v. Bob Timberlake Collection, Inc., 2009 NCBC 22 (September 9, 2009).

The parties had entered into a License Agreement giving Lexington the right to sell furniture collections under the Bob Timberlake trademarks. Sales had apparently gone quite well; Timberlake's COO testified that one of the collections was "the most successful furniture line in the history of the industry." Timberlake had made $25 million over the years in royalties from Lexington's sales.

In 2007, three years before the License Agreement was to expire, Timberlake asked to restructure the Agreement. Lexington declined. Timberlake offered to buy out the License Agreement, and Lexington refused that as well. Timberlake then notified Lexington that it would terminate it as a result of Lexington's alleged failure under the License Agreement "to use its commercially reasonable efforts in the manufacture, sale, promotion, advertisement, and marketing" of the Timberlake collections.

The Interpretation Of "Commercially Reasonable Efforts"

The case turned on the interpretation of the meaning of "its commercially reasonable efforts." Timberlake said that "the inclusion of the word 'its' prior to the term 'commercially reasonable efforts' makes the commercially reasonable standard personal to Lexington." Timberlake asserted that this subjective approach meant that Lexington had to market the furniture consistently with its past practice. As evidence of breach, Timberlake pointed to things that Lexington had done in the past to market the furniture lines that it was no longer doing.

Lexington said that "its" simply meant that Lexington was the party responsible for making the commercially reasonable marketing efforts. It presented the testimony of an industry expert detailing Lexington's marketing activities, who concluded that Lexington's efforts were "equal to that of the best companies in the furniture industry" and that they "exceeded industry practice."

Commercial Reasonableness Needed To Be Assessed Against An Industry Standard

Judge Tennille rejected the notion that past practice was the guide. He said that

[t]o require Lexington to market the Timberlake Collections in 2008 in the same manner as it did when the furniture line was first introduced in 1991 would be unreasonable. The types of promotion and advertising that work effectively for a particular product do not remain static. As new collections gain brand name recognition, marketing strategies change to keep in step. Moreover, marketing means change daily.  The Internet has opened new avenues for advertising -- avenues not readily available eighteen years ago. New furniture shows, such as Las Vegas, now exist that were unheard of in 1991. Would Timberlake be satisfied if Lexington restricted its market shows to those which existed in 1991 or if Lexington only used print media that existed when the parties originally executed the contract? If the parties wished to bind Lexington to past practice, then their License Agreement should have expressly stated so.

The test for "commercial reasonableness," according to the Court, did not require consideration of "whether any specific activity should or should not have been used." The inquiry was "the marketing effort as a whole which must be judged against some industry standard." The only evidence of industry standard before the Court had been presented by Lexington.

The Court, granting summary judgment in favor of Lexington, held that "[t]he mere fact that Timberlake disagrees with the marketing decisions Lexington made is not enough to raise an issue of fact as to whether such decisions were commercially reasonable."

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The written provisions of a franchise agreement -- and its merger clause -- resulted in summary judgment on a franchisee's fraud and other claims against a franchisor. The case, decided last Friday by the Business Court, is L'Heureux Enterprises, Inc. v. Port City Java, Inc.

Conflicting Representations

Plaintiffs claimed they had premised their purchase of a bakery on verbal representations from Port City Java, a franchisor of coffee shops, that it would only cost $50,000 to convert a small existing coffee kiosk in the bakery space into a full sit-down cafe.

Plaintiffs obtained an upfit estimate six days after closing in a range of $100,000 more than the $50,000 represented. Plaintiffs then sued the franchisor for fraud, negligent misrepresentation, unfair and deceptive practices, and breach of contract.

But before closing, the Plaintiffs had asked the franchisor's COO for a guarantee on the upfit costs. He wouldn't provide that, saying instead that he would not make any guarantee with regard to specific costs. He also provided a letter saying that the cost of renovations would be "entirely dependent on the extent and quality of same."

The Plaintiffs' claim was further weakened by the transaction documents. Those included a Uniform Franchise Offering Circular which provided an estimated range for typical costs associated with creating a cafe. And the Franchise Agreement signed by the Plaintiffs contained a merger clause which expressly excluded prior negotiations between the parties and stated that it represented the entire agreement of the parties.

Plaintiffs Could Not Establish Reasonable Reliance

Judge Jolly granted Port City's Motion for Summary Judgment, focusing on the issue of the reasonableness of Plaintiffs reliance on the alleged misrepresentations. He stated "[r]eliance is not reasonable where the plaintiff could have discovered the truth of the matter through reasonable diligence, but failed to investigate." Op. ¶37. He concluded that the Plaintiffs had not used reasonable diligence in relying on the claimed verbal statements "over clearly contrary language" in the written documents. Op. ¶39.

In dismissing the unfair and deceptive practices claim, Judge Jolly held:

While the disclosures and documents unfortunately appear not to have been adequately digested, investigated or understood by Plaintiffs, the forecast evidence does not establish any violation of duty on the part of Defendants to educate Plaintiffs on the plain meaning of the contractual documents involved in the Transaction.

Op. ¶47.

The clear written provisions of the UFOC and the Franchise Agreement also, according to the Court, warranted the grant of summary judgment on the breach of contract claim. 

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I write sometimes about litigation involving Duke University's sports teams. In fact, the most popular post ever on this blog was The Law And Duke Football: The Video, which has a video of Duke's own lawyer telling a judge how bad Duke football is. That video, according to youtube, has been watched over 17,000 times.

Posts on derivative actions and motions for sanctions don't get that kind of traffic.

Anyway, yesterday's decision (sorry, no video) from the North Carolina Court of Appeals in Pressler v. Duke University is worth a mention.  It involves Duke's unsuccessful effort to force its former men's lacrosse coach out of court and into arbitration on his defamation claims.

The defamation claim arose after Pressler and Duke had settled matters involving his resignation as coach. The Mutual Release and Settlement Agreement, entered into in 2007, contained a non-disparagement provision.  It also contained a provision stating that Pressler and Duke "wish to cancel all earlier agreements" between them. Those earlier agreements included an Employment Contract which incorporated by reference Duke's Dispute Resolution Policy. The Policy required arbitration of all disputes.

In 2008, Pressler sued Duke for allegedly defaming him in post-settlement statements. Duke moved to compel arbitration in reliance on its Policy, notwithstanding the language of the Release extinguishing all prior agreements. Duke argued that "when the mutual release referred to 'all earlier agreements,' this did not really mean all earlier agreements."

When all was said and done, the Court of Appeals disagreed.  The Court held "[t]he mutual release addresses 'all earlier agreements,' and whether the policy was a part of the 2005 Employment Contract or not, surely it was an 'earlier agreement' between the parties which would be encompassed by the term 'all.'"

Th-th-th-that's all folks. 

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Six new cases were designated to the Business Court in August 2009, including a case seeking class certification over charges for medical records (Toney), and a shareholder dispute pitting a father against his son (Shallcross).

Moltzon v. King (Wake)(Tennille): minority shareholder dispute in which plaintiff alleges the defendants breached their fiduciary duties by starting a competing business and forcing him out.

Oak-Bark Corp. v. French (New Hanover)(Tennille); Action by plaintiff against former employees for breach of restrictive covenants and misappropriation of trade secrets.

Shallcross v. Shallcross (Wake): Plaintiff, 89 years old and legally blind, sued his son to invalidate an irrevocable proxy allowing the son to vote his father's shares. The father contends that the son misrepresented the nature of the proxy as being revocable.

Thompson v. Manuel (Rowan)(Tennille): allegations regarding breach of partnership agreement, breach of fiduciary duty, alter ego, and accounting.

Toney v. IOD Inc. (Wake)(Jolly): Class action against a company which provides copies of medical records, for which Plaintiffs allege it overcharged in violation of North Carolina state law.

Williams v. McAlpine (Union)(Diaz): Securities claim by investor based on alleged misrepresentations as to defendant homebuilder's financial strength, contention that officers and members of LLC defendants are personally liable.

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When an employee quits his or her job, unemployment benefits aren't available unless there was "good cause" for leaving the job. Today, the North Carolina Supreme Court answered the question whether an employee who quits in the face of a downsizing, accepting a "voluntary" retirement package, can show the good cause necessary to receive unemployment benefits.

The answer to that question of first impression, in the case of Carolina Power & Light Company v. Employment Security Commission, was "no."  Along the way, the Court made some interesting observations on downsizings in general, and the rights of employees at will.

The case involved a former CP&L employee named Roberts, who accepted a Voluntary Early Retirement Package. Roberts took the package in the face of a downsizing by CP&L.  His position had been eliminated, he was relocated and put in a temporary position, and when he asked if he would continue to have a job, he didn't receive any assurances. Although the opinion doesn't say it, Roberts must have been very concerned that if he didn't take the package, he wasn't going to have a job much longer.

Roberts' right to unemployment benefits turned on N.C. Gen. Stat. § 96-14(1), which disqualifies an employee from benefits if he is "unemployed because he left work without good cause attributable to the employer." It's the employee's burden to show the good cause.  Id. at §96-14(1a),

The argument by Roberts was that the downsizing itself was good cause, as was his employer's failure to tell him whether he would still have a job if he didn't grab the retirement package. The Supreme Court, in an opinion written by Chief Justice Parker, rejected both arguments.

As to the downsizing, the Court said "[d]ownsizing of the workforce is a recognized means by which corporations and businesses maintain their productivity and profitability. Although downsizing may ultimately lead to the loss of some jobs, downsizing to a desired number of employees is often achieved through attrition.  Downsizing or a reduction in force does not automatically trigger layoffs."

The Court also gave short shrift to Roberts' argument regarding his uncertainty as to continued employment because CP&L didn't answer his question about whether he still had a job. Justice Parker said "[t]o construe the failure to answer that question as good cause assumes that claimant, who from the record appears to have been an employee at will, was entitled to an assurance tantamount to a contract guaranteeing him a job after the downsizing was completed. An employee who has no such guarantee of a job before the employer begins downsizing certainly has no legal basis to use the failure of the employer to give such assurances as good cause entitling him to unemployment benefits when he voluntarily accepts an enhanced early retirement package."

As the Court described the situations where good cause is present, they are limited to (1) "circumstances which make continued work logistically impractical," and (2) "when the work or work environment itself is intolerable." Roberts' arguments didn't fall in either category.

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The Court of Appeals issued today a number of opinions worth a mention, running the gamut from two personal jurisdiction rulings to a significant legal malpractice decision.

Personal Jurisdiction

The opinion in Brown v. Meter contains a thorough discussion of personal jurisdiction based on product sales in the "stream of commerce," with a mention of virtually every North Carolina case on the subject. At the end, the Court held that the Plaintiffs could pursue wrongful death claims in Forsyth County Superior Court against a Turkish affiliate of Goodyear Tire for an accident that occurred in France. The Court found that the Defendants had "purposefully injected [their] product into the stream of commerce" with the result that thousands of tires manufactured by each of the Defendants had been distributed in North Carolina. It further noted North Carolina's "well-recognized interest in providing a forum in which its citizens are able to seek redress for injuries they have sustained," and the burden of requiring the Plaintiffs to litigate in France.

In another personal jurisdiction case, Barloworld Fleet Leasing, LLC v. Palmetto Forest Products, Inc., the Court of Appeals affirmed a finding of personal jurisdiction over the South Carolina customer of an equipment leasing company. The Court held that "the contracts and attendant regular payments [made by the Defendant to the NC Plaintiff] represented 'continuing obligations' between defendants and a resident of North Carolina," and this was sufficient to make out the necessary minimum contacts. The Court rejected the Defendant's argument that the Plaintiff should be required to show that it would be inconvenienced by having to litigate the short distance over the state line into South Carolina. It said it found no case supporting "the proposition that a convenient location for the plaintiff other than the forum State shows that the exercise of jurisdiction over the defendant offends fair play and substantial justice."

Legal Malpractice

In a case of first impression, the Court held in Whiteheart v. Waller that a client who was in pari delicto with his lawyer could not pursue a claim for legal malpractice. The client had encouraged his lawyer to pursue earlier litigation that had no basis. The dismissal of that case resulted in a second lawsuit, this one against the client for abuse of process, in which the client was socked with a $700,000 jury award. The client then sued his lawyer for malpractice, and the trial court dismissed the case.  The Court of Appeals affirmed. Quoting the Supreme Court of Wisconsin, Judge Calabria said "[a] court should not encourage others to commit illegal acts upon their lawyer's advice by allowing the perpetrators to believe that a suit against the attorney will allow them to obtain relief from any damage they might suffer if caught."

North Carolina Mortgage Lending Act

The decision in Guyton v. FM Lending Services, Inc. is another case of first impression. The Court held that a lender was liable under the North Carolina Mortgage Lending Act for failing to disclose that real property for which it was making a loan was located in a flood plain (a "special flood hazard area."). The claim involved more than an oversight, it was that the defendant had "actively and intentionally withheld the information that the property lay in a flood plain." Judge Ervin further found that the claim was not preempted under the National Flood Insurance Act

Arbitration

The case of United States Trust Co. v. Stanford Group Company reminds, yet again, that when a trial court denies a motion to compel arbitration, it must state the reasons for denying the motion, including determining whether the parties had a valid agreement to arbitrate and whether the specific dispute falls within the substantive scope of that agreement. The Court of Appeals remanded the case to the trial court for proper findings.

Preemption Under The LMRA

The Court of Appeals pancaked a former player for the Carolina Panthers in Jeffers v. D'Alessandro, ruling that his claims against the football team involving his medical treatment were preempted bt\y Section 301 of the Labor Management Relations Act. Judge Geer, relying on two federal court decisions involving similar claims by other NFL players, said that "the touchstone of Jeffers' claims -- no matter how couched or labeled -- is that the Carolina Panthers acted improperly in providing him medical care through the team physician.  These claims necessarily derive from the obligations in the [NFL's Collective Bargaining Agreement] and will require analysis of the CBA in order to be resolved." Jeffers has no claim left to make.  He tried to start an arbitration under the CBA during the course of his lawsuit, but it was rejected by the NFL as untimely.

Foreclosure

In an opinion from the burgeoning specialty of foreclosure law, Mosler v. Druid Hills Land Co., Inc., the Court held that the Superior Court couldn't consider the issue of merger as a defense to foreclosure under N.C. Gen. Stat. §45-21.36. The defendant said that the plaintiff couldn't foreclose because the defendant had delivered a deed in lieu of foreclosure (which the plaintiff had refused to accept), resulting in a merger of the note and deed of trust. The clerk of court had refused to allow foreclosure because of what it termed "title issues." The Superior Court ruled that the foreclosure could proceed and the the Court of Appeals affirmed. The appellate court said that merger was an equitable doctrine which could only be raised in an action to enjoin a foreclosure pursuant to N.C. Gen. Stat. §45-21.34, and that there was no subject matter jurisdiction over a merger defense in a foreclosure proceeding initiated before the clerk. A 2007 change in the law regarding appeals from rulings by the clerk (N.C. Gen. Stat. §1-301.1) didn't expand the Superior Court's jurisdiction.

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The Business Court granted summary judgment on Plaintiff's trade secrets claim yesterday in Edgewater Services, Inc. v. Epic Logistics, Inc., 2009 NCBC 20 (N.C. Super. Ct. August 11, 2009). It also dismissed Plaintiff's claim for punitive damages.

Plaintiff Edgewater and Defendant Epic are third party logistics companies, arranging for transportation of freight for their customers. Epic handled less than truckload (LTL) shipping. Edgewater's specialty was truckload (TL) freight.

The two companies had an oral agreement for Epic to refer TL shipments to Edgewater, and for Edgewater to refer LTL shipments to Epic. In 2004, an Edgewater employee named Osgood decided to leave Edgewater and join Epic, and Epic then began to move into the TL side of the business.

Edgewater sued, contending that Epic had misappropriated its trade secrets, which it said consisted of information regarding the carriers it used, the rates charged for TL and LTL shipments, and its customer files. Edgewater's president later conceded at her deposition that only the rate information could be considered a trade secret.

Judge Jolly granted summary judgment to Epic on the trade secrets claim, ruling that:

The rate information was not a trade secret, because rates changed as variables like the cost of fuel and insurance changed.

The rate information didn't constitute trade secrets because there was no evidence that Edgewater expended any significant amount of effort or money in developing the information outside of its cost of doing business.

Edgewater didn't take reasonable steps to maintain the secrecy of the information: its customers and carriers weren't required to keep the information confidential; and the information on rates was kept in an unlocked file room accessible to anyone.

On the punitive damages claim, G.S. §1D-15(a) required Plaintiff to show malice and willful or wanton conduct. Its evidence consisted only of its president's "feeling" that the Defendants "were greedy and trying to get something that they didn't have to pay for." Judge Jolly ruled this was insufficient to meet the statutory requirement that evidence supporting punitive damages be "clear and convincing."

There were two earlier rulings in this case: a May 2007 ruling involved the discoverability of  psychiatric records, and an October 2007 ruling involved the enforceability of a covenant not to compete.

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If you've practiced in federal court in North Carolina for any period of time -- or anywhere in the Fourth Circuit for that matter -- you are familiar with the case of Blackwelder Furniture Co. of Statesville v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977), which set out the standard for the grant of a preliminary injunction. 

You would never write a brief asking for or opposing injunctive relief in federal court in the Fourth Circuit without mentioning Blackwelder.  It was a standard, a touchstone.

Well, the Blackwelder era is now over.  The Fourth Circuit decided today The Real Truth About Obama, Inc. v. Federal Election Commission, in which it ruled that Blackwelder stood in "fatal tension" with a 2008 Supreme Court decision, and held that "the Blackwelder balance-of-hardship test may no longer be applied in granting or denying preliminary injunctions in the Fourth Circuit."

The Supreme Court decision is Winter v. Natural Resources Defense Council, Inc., 129 S.Ct. 365, 374-76 (2008).  Judge Niemeyer, writing for the Fourth Circuit, held that in Winter "the Supreme Court articulated clearly what must be shown to obtain a preliminary injunction . . . the plaintiff must establish '[1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.'"

The Winter articulation is the new standard in the Fourth Circuit.  Here's a chart showing the points of "fatal tension" between Blackwelder and Winter, and how the test for injunctive relief has changed:

The Real Truth About Obama case involved the constitutionality of Federal Election Commission regulations of political advertising.  Plaintiff sought an injunction against their enforcement, which was denied by the District Court.  The Fourth Circuit affirmed, finding that the Plaintiff had not made a "clear showing that it [was] likely to succeed at trial on the merits."  One of the concerns articulated by the District Court was that enjoining the regulations "would create a 'wild west' of electioneering fundraising and communications."

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July was a slow month for new Business Court cases. By my count, there were only eight. One involves a hurricane (Bodie Island), another involves children's cartoon characters (Middleton), a third involves telephone poles (Town of Murphy), and the others raise the usual allegations of corporate malfeasance and misconduct.

Bodie Island Beach Club Association, Inc. v. Wray (Dare)(Jolly): Derivative action by condominium homeowners association asserting claims for legal malpractice and breach of fiduciary duty. The claims stem from the process by which the use of the facility as a timeshare condominium was terminated following damage caused Hurricane Isabel in September 2003.

Cabrera v. Ridges at Morgan Creek, LLC: (McDowell)(Diaz):claims for false and misleading sales practices in sale of lots in a real estate development, including allegations that the defendants, which include Wachovia, Bank of America, and BB&T, were part of a joint venture or common enterprise.

Fratelli of North Carolina v. Scarfone (Guilford)(Tennille): claims for breach of fiduciary duty and self-dealing by member of LLC.

Marlabs, Inc. v. Consert, Inc. (Wake)(Jolly): claims for injunctive relief regarding agreement for development of computer software and data hosting.

McCarter Electrical Company v. Jones (Scotland)(Diaz):claims of breach of fiduciary duty and embezzlement by corporate officers and employees, theft of trade secrets, and violation of covenant not to compete.

Middleton v. Smith (Cabarrus)(Tennille): derivative action to enjoin sale of corporate assets and for appointment of a receiver. The corporate entity owns the rights to a cartoon series called "Danger Rangers" which teaches safety to children.

Town of Murphy v. Verizon South, Inc. (Cherokee)(Tennille): issues of Verizon's obligations to Plaintiff under an agreement for the joint use of utility poles. Business Court jurisdiction is premised on, among other things, the Court's jurisdiction over the internet and electronic commerce.

Zairy v. VKO, Inc. (Guilford)(Tennille): claims of breach of fiduciary duty and piercing the corporate veil against corporate officers, asserting that they are personally responsible for debt of insolvent corporation.

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I wouldn't ordinarily write about the Fourth Circuit's opinion yesterday in Walker v. Prince George's County, Maryland., The Walker case doesn't have anything at all to do with business litigation. But two things make the case remarkable.

The first is that the opinion was written by U.S. Supreme Court Justice Sandra Day O'Connor, sitting by designation on the Fourth Circuit. The second is the opinion's irresistible opening line: "This is a case about a wolf named Duchess." You would expect a line like that from a Jack London story, not the Fourth Circuit.

Justice O'Connor faced this constitutional dilemma: Walker owned a wolf, or something like a wolf. That's illegal in Prince George's County. Walker's sister ratted him out to the County's Animal Management Division for illegal wolf possession. An animal control officer went to Walker's house, saw Duchess, identified her as a wolf based on eighteen years of animal control experience, and impounded the animal.

Walker asserted that his wolf had been taken away from him in violation of his Fourth Amendment rights. Walker had a license for Duchess, obtained based on his veterinarian's mistaken identification of the wolf as an Alaskan Malamute.  (We've all made that mistake). Walker argued that the animal control officer was obligated to inquire as to the legality of his possession before seizing the wolf.

As Walker put it, "the seizure of an animal may be reasonable for purposes of the Fourth Amendment only when an official has first determined whether the animal is being lawfully possessed."

The issue for the Fourth Circuit was whether the officer was entitled to qualified immunity. That issue turned on whether the asserted obligation to check Duchess's registration before the impoundment was "clearly established."  Justice O'Connor said it wasn't:

the ordinance upon which appellants rely says nothing about the lawful procedure for the seizure of a wolf. That a wolf may lawfully be possessed does not mean that the lawfulness of its possession must be verified as a prerequisite to its seizure when that seizure is necessary to protect the public safety or otherwise. . . . [A]ppellants have failed to point us to any authority that even suggests the existence of their purported Fourth Amendment right.

The Court also dealt with a Monell claim against the County, by which Walker asserted that the County had a policy and custom of illegal wolf seizure. Justice O'Connor termed the allegations of the complaint to be "threadbare," and dismissed the claim against the County based on the Supreme Court's recent decision in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). 

The Iqbal case, which I wrote about in June, has been called "the most significant Supreme Court decision in a decade for day-to-day litigation in the federal courts."  The Walker decision is the first mention of Iqbal by the Fourth Circuit in a published opinion, though it was cited last month in an unpublished opinion, Shonk v. Fountain Power Boats, in which the Court affirmed the grant of a motion to dismiss.

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Today in Torres v. The Steel Network, Inc., 2009 NCBC 19 (N.C. Super. Ct. July 27, 2009), the Business Court dismissed a tortious interference claim against Bank of America, ruling that the Bank couldn't be sued under that theory for exercising its rights under its loan documents.

Plaintiff, a shareholder in the Defendant The Steel Network (TSN), had entered into an agreement  to sell his minority interest to the Company for $4 million. The promissory note entered into in connection with the stock redemption called for payments to be made over a three year period.

Bank of America took the position that the the terms of the note violated debt service covenant ratios in its loan agreement with the Defendant. The Bank said it would call its loan to the company if the debt wasn't subordinated or if the transaction wasn't repudiated by TSN. TSN backed out of the deal with the Plaintiff before ever making a payment on the note. The Plaintiff then sued the Bank for tortious interference with contract.

Judge Jolly granted the Bank's motion to dismiss, holding:

Here, the Complaint and its exhibits show that execution of the Note threatened to place TSN in violation of its pre-existing contractual covenants with the Bank. The documents of record also establish that the purported actions of the Bank were motivated by justifiable interests in protecting pre-existing legitimate contractual interests between TSN and the Bank, and that the Bank's actions were proper and proportionate to the interests it sought to protect.

Op. ¶11.

The Court held that boilerplate allegations that the Bank had acted "without justification" weren't sufficient to get past a motion to dismiss, because the loan documents and other documents presented to the Court "support no conclusion other than that the Bank was acting pursuant to its contractual rights arising from its loan agreements with TSN."

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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An appellate decision has to be really, really wrong before the same Court will decide that it shouldn't be treated as the "law of the case." In fact, the wrongness has to be as overpowering as a very old and very dead fish, per the Fourth Circuit's opinion today in TFWS, Inc. v. Franchot.

The law of the case doctrine says that the decision of an appellate court "must be followed in all subsequent proceedings in the same case."  The doctrine can be avoided if "(1) a subsequent trial produces substantially different evidence, (2) controlling authority has since made a contrary decision of law applicable to the issue, or (3) the prior decision was clearly erroneous and would work manifest injustice."

The TFWS case is the latest decision in a ten year legal battle over whether Maryland's liquor and wine regulations violate the antitrust laws.  (They do). In today's decision, the fourth appellate decision in the case, the Court of Appeals rejected the State of Maryland's argument that the Court wasn't bound by its first decision in the case.

The State of Maryland argued the "clearly erroneous" exception, offering a new interpretation of its regulatory scheme. Judge Duncan rejected the argument, holding that "[a] prior decision does not qualify for this third exception by being 'just maybe or probably wrong; it must . . . strike us as wrong with the force of a five-week-old, unrefrigerated dead fish."

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North Carolina's Chief Justice Sarah Parker has suspended the rotation of Superior Court Judges, effective beginning July 20, 2009 and continuing through August 28, 2009, due to the State's budget crisis.  There's an Amended Master Calendar Of Superior Courts available which shows where Judges will be holding court during the suspension period. 

Rotation of Superior Court Judges is required by the North Carolina Constitution, which says in Article 4, Section 11 that "[t]he principle of rotating Superior Court Judges among the various districts of a division is a salutary one and shall be observed."  The AOC website says that "[t]he rotation system helps avoid favoritism that might result from having a permanent judge in one district."

There's a bill pending in the Legislature which says that nothing prohibits the Chief Justice "in times of severe financial difficulty, from temporarily suspending rotation under this subsection as a cost‑saving measure so long as rotation is resumed as soon as practicable in order to honor the constitutional mandate to observe the principle of rotation."

This isn't the first time that the rotation of Judges has been suspended for fiscal reasons.  It happened in 1990 and also in 2002, according to a 2002 Triangle Business Journal article.

The photo at the top does not necessarily represent my personal views on this cost-saving measure.

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The Business Court's decision yesterday in Leiber v. Arboretum Joint Venture, LLC, 2009 NCBC 16 (N.C. Super. Ct. July 8, 2009) involved the law of agency: whether a German Count named Spreti had been acting as Plaintiff's agent when the Defendant LLCs and partnerships sent Plaintiff's share of distributions to Spreti. A large chunk of the money was then stolen by Spreti.

Plaintiff Leiber, a German citizen, had put money at the urging of Spreti in a number of United States investments (the "AAC entities"). The AAC entities were operated by two other Germans, Count and Countess Arco. Over a fifteen year period, the AAC entities sent hundreds of thousands of dollars of Leiber's distributions and tax refunds to Spreti. 

Spreti paid some of the money he received to Leiber, but kept hundreds of thousands of dollars of Leiber's money for himself. Leiber knew that his payments were sent to Spreti, but he never objected to this practice and apparently wasn't very attentive to his investment.  Leiber began to suspect Spreti's misconduct, but Spreti committed suicide the night before the two were to meet to discuss matters.

The specific distributions at issue in the case were payments to Leiber for redemption of his interests in two of the AAC entities. Spreti received both of these payments.  One was a Wachovia Bank check for $151,274 and the other a Bank of America check for $254,858.  Spreti forged Leiber's indorsement on the checks, cashed them, and kept the money.

After Spreti's suicide, Leiber sued the AAC entities, alleging that they had improperly sent the checks to Spreti.  He also sued Wachovia and Bank of America, alleging that they had improperly paid the checks over Spreti's forged indorsement.

Agency Issues

The defense of the AAC entities was that Spreti had been acting as Leiber's agent, and they therefore had acted appropriately in sending Leiber's distributions to Spreti. The opinion contains a thorough discussion of the law of agency, including actual authority, apparent authority, apparent agency, agency by estoppel, and ratification.

Judge Tennille determined that although Leiber had not expressly authorized Spreti to act as his agent, there were a number of legal theories on which Spreti would be deemed to be Leiber's agent:

• Spreti had implied actual authority to act for Leiber, because Spreti had acted as Leiber's only contact with the AAC entities for 15 years; and Leiber knew that his checks were being sent to Spreti and had never objected to that practice.
• Spreti had apparent authority to act on Leiber's behalf, because Leiber had held Spreti out to the AAC entities as having authority to act for him by using Spreti to manage his investments in the AAC entities for 15 years.
• An apparent agency relationship existed between Leiber and Spreti, because Leiber's silence regarding the checks sent to Spreti caused the AAC entities "to believe an agency relationship existed" and the AAC entities had relied on Leiber's action to their detriment.
• Because Spreti was the general partner of two of the AAC partnerships, he was deemed to be Leiber's agent.

The Court further determined that even if there were no agency relationship, Leiber's fifteen year silence regarding the checks was a ratification of Spreti's unauthorized acts. The Court granted summary judgment on all of Leiber's claims against the AAC entities, as they all depended on the argument that Spreti had not been authorized to receive checks on Leiber's behalf.

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There weren't any earthshaking decisions yesterday from the North Carolina Court of Appeals, but there are a couple of cases worth a quick mention, one on arbitration and one on discoverability in a medical malpractice case of a letter to a "medical review committee."  There was also a copyright case yesterday from the Fourth Circuit resolving an issue of first impression involving computer software.

Arbitration

In Griessel v. Temas Eye Center, P.C., the Court held that it was not error for the trial court to deny a motion to compel arbitration without making findings of fact.  Findings of fact were required under the North Carolina Uniform Arbitration Act, but the 2-1 majority found in a case of first impression that they are not required under the Revised Uniform Arbitration Act. 

The majority reasoned that since there is only one ground under the RUAA which allows the denial of a motion to compel arbitration (that there is no valid agreement to arbitrate), the court must have made that determination in denying the motion. Judge Steelman disagreed, and said "[i[f one takes the position that the trial court must have logically made the correct decision, then there is little need to have appellate courts."

Discovery And Medical Review Committees

In Woods v. Moses Cone Health System, the issue was whether a plaintiff in a medical malpractice action was entitled to discovery of a letter from the decedent's surgeon to a hospital's peer review committee.  The  Court determined that committee to be a "medical review committee" within the meaning of G.S. §131E-95 of the General Statutes, which provides that the records and materials of such a committee "shall not be subject to discovery or introduction into evidence in any civil action against a hospital."  This protection exists "because of the fear that external access to peer investigations conducted by staff committees stifles candor and inhibits objectivity."

Plaintiff said that since the surgeon had sent the letter to persons who weren't on the committee, the privilege had been waived.  The Court of Appeals said the privilege couldn't be waived by the dissemination of the letter, because the letter was absolutely privileged under the statute. The Court didn't reach an interesting question whether the letter was discoverable because it had been provided to Defendant's expert witnesses.

Copyright 

The Fourth Circuit Court of Appeals ruled in Quantum Systems Integrators, Inc. v. Sprint Nextel Corp. that software stored in a computer's random access memory can be sufficiently fixed to support a claim for copyright infringement, following what it described as the leading case on the issue, MAI Systems  Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). That was a question of first impression in the Fourth Circuit, but the Quantum opinion is unfortunately unpublished.

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It's hard to get an injunction enforcing a covenant not to compete that has a nationwide territory, but the Plaintiff was successful at that in the Middle District's decision last week in Philips Electronics North America Corp. v. Hope.  The injunction was also based on the North Carolina Trade Secrets Protection Act.

This was a thorough 44 page opinion addressing a number of non-compete and trade secrets issues, so this is a long post.  You'll have to read to near the end to see why the post gets a picture of, of all things, a sausage?

Background

Hope was the Executive Vice President of Sales for DLO, responsible for the company's sales of iPod accessories throughout the United States and Canada.  Hope had substantial interaction in that position with a $75 million customer, Best Buy, and other major DLO customers.

In December 2006, Hope signed a Letter Agreement containing a broad covenant not to compete.  It prevented him from working in the same or similar position for a DLO competitor anywhere that DLO conducted business, potentially throughout the entire world, for a two year period.

The stock of DLO was purchased by Phillips Electronics six months later.  Phillips operated DLO as a separate entity until January 2009, when DLO was merged into Phillips.  (This created an interesting standing issue regarding the right of a corporate acquirer to enforce a non-compete, discussed below under the heading "Standing").

In 2008, while still employed by DLO, Hope began planning to compete with the company.  He contacted others at DLO about the possibility;  began discussions with a manufacturer about making competing products; and used confidential DLO materials in his efforts, including DLO's business plan and internal financial information.

Hope resigned from DLO months later, the day after his new company obtained financing.  He misled his old employer about his intentions, saying he was going to work with his father.  The new company immediately began selling to some of DLO's customers, including Best Buy.  Several months later, DLO discovered Hope's involvement with the new competitor.

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The North Carolina Supreme Court adopted yesterday a comprehensive overhaul of the North Carolina Rules of Civil Procedure. The new Rules will apply to cases appealed on or after October 1, 2009.  This post has a quick summary of the major changes.

Assignments of Error Are Abolished

Far and away the most significant change is the welcome elimination of assignments of error, to be replaced by a list of proposed issues.

The new procedure set out in Rule 10(b) provides that "proposed issues that the appellant intends to present on appeal shall be stated without argument at the conclusion of the record on appeal in a numbered list.  Proposed issues on appeal are to facilitate the preparation of the record on appeal and shall not limit the scope of the issues presented on appeal in an appellant's brief."  There are examples of proposed issues in Table 4 to Appendix C in the Rules.

Supplementation of Record on Appeal

There's a new procedure for supplementing the Record on Appeal without leave of Court. Rule 9(b)(5)(a) says "if the record on appeal as settled is insufficient to respond to the issues presented in an appellant's brief or the issues presented in an appellee's brief pursuant to rule 10(c), the responding party may supplement the record on appeal with any items that could otherwise have been included, pursuant to this Rule 9. . . . The supplement shall be filed no later than the responsive brief or within the time allowed for filing such a brief if none is filed."

Transcripts To Be Delivered Electronically, Email Addresses Required

The amended Rules take a couple of steps into the electronic age.  The court reporter is required to deliver the transcript to counsel electronically (Rule 7(b)(1)), in .pdf format (Rule 7(b)(2)), and to file the electronic transcript with the appellate court (Rule 7(b)(2)).  Signature blocks need to include email addresses (Rules 26(g)(3) and 28(b)(8)).

Out-Of-State Attorneys

The revised Rules impose more oversight on lawyers admitted pro hac.  The Record on Appeal now requires the inclusion of any order that admitted an out of state attorney (Rule 9(a)(1)(n)). Furthermore, out of state attorneys intending to appear in the appellate courts must make a motion in order to do so (Rule 33(d)).

New Protections For Identity Of Juveniles

If you handle appeals involving juvenile law (like termination of parental rights cases), there are new procedures in Rule 3.1 to protect the identity of juveniles.

There's a redlined copy of the Rules available which shows all the changes, including all of the many gender-neutralizing changes.

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There were ten new cases designated to the North Carolina Business Court during June 2009, down from eighteen in May and fourteen in April.  The June cases are as follows:

Anderson & Associates of Virginia, Inc. v. Tuscany Development Co. (Guilford)(Tennille): whether an individual can be personally liable for the obligations of an LLC when the entity was erroneously designated in the contract documents.

Berton v. Jacobson (Wake)(Jolly):alleged misrepresentations to induce plaintiffs to invest in limited liability companies, allegations of a Ponzi scheme.  Claims under the North Carolina Securities Act, breach of fiduciary duty, fraud, negligent misrepresentation, N.C. RICO, and to pierce the corporate veil. Related to the Shareff case, below.

BB&T BOLI Plan Trust v. Massachusetts Mutual Life Ins. Co. (Forsyth)(Diaz): alleged mismanagement of $55 million securities investment by BB&T, which BB&T claims was to be reallocated into less risky investments if the value fell below a certain amount.   BB&T claims "despite knowing of the meltdown in the mortgage-backed securities market and that [the fund] was heavily investment in [mortgage backed securities] investments, [Defendant] failed to take timely steps to protect BB&T's premiums."

Engineering Services, P.A. v. Dail (Wake)(Jolly): claims for breach of fiduciary duty and conversion by corporate officer and shareholder, counterclaim seeking dissolution of the corporation or redemption of defendant's ownership interest.

Ferguson Fibers, Inc. v. Foster (Davidson)(Tennille): claims against former employee for unfair competition and misuse of proprietary information.

Kiser v. Shelby (Caldwell)(Diaz): claims for breach of operating agreement of LLC, breach of buy-sell agreement, breach of fiduciary duties, dissolution and misappropriation of intellectual property.

Oracle Flexible Packaging, Inc. v. Industrial Air Quality, Inc. (Forsyth)(Diaz): This is a Rule 2.1 case in which "Plaintiff seeks in excess of $31,000,000 for damages resulting from an explosion . . . at a manufacturing complex where it produced aluminum packaging materials" allegedly resulting from defendants' design and installation of an "oily foil trim collection system."

Red Ventures, LLC v. Modern Consumer, LLC (Mecklenburg)(Diaz): alleged fraud in Plaintiffs' acquisition of business sold by the Defendants.

Rouen v. Smith (New Hanover)(Diaz): plaintiffs allege that the defendants formed a sand mining business that was intended to include the plaintiffs as members, but failed to include them.  Also claims for usurpation of corporation opportunities and wrongful sales of member interests in the venture.

Shareff v. Lakebound Fixed Return Fund, LLC (Wake)(Jolly): alleged misrepresentations to induce plaintiff to invest in limited liability companies, claims under North Carolina Securities Act and North Carolina Investment Adviser Act and for common law fraud.  Related to the Berton case, above. 

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The North Carolina courts are taking some serious strides towards the implementation of electronic filing in Superior Court.  The State has gone live with pilot e-filing programs in Chowan and Davidson Counties.  Wake County will be added shortly as a third pilot county.  The goal is full and mandatory implementation throughout the State within two years.

The State has selected a software program called E-Flex from Tybera to handle electronic filing.  If you want to bone up in advance on the filing procedures, there's an on-line manual available from Tybera, as well as some general information about the program, including training opportunities with CLE credit.

The Supreme Court has approved a new set of rules for e-filing, which are titled Supplemental Rules of Practice and Procedure for the North Carolina eFiling Pilot Project for Chowan and Davidson Counties Initially, and then also for Wake County.

At the end of recent report from the Technology Committee of the AOC about the e-filing project, the author says "Bottom Line: E-Filing and E-Pay is here.  The money is in hand.  The implementation will be gradual but the estimated time for mandatory use throughout the state, barring any major problems, is less than two years.  Hold on tight -- this will be quite a trip."

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The Fourth Circuit today affirmed the dismissal of a personal injury action based on a forum selection provision requiring that any claims would be resolved in the courts of Amsterdam.  The case is Baker v. Adidas America, Inc.

Plaintiff, who had sued in federal court in North Carolina, argued that she was a college student without the financial means to fund a lawsuit in Amsterdam, that contingency fee arrangements were not permitted in Amsterdam, and that she wouldn't be able to pursue her claim if the forum selection clause was enforced.

The Fourth Circuit, relying on the Supreme Court's decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), held that the inconvenience of litigating in a foreign forum doesn't warrant setting aside a selection clause "where it can be said with reasonable assurance" that at the time the contract was made the parties contemplated the claimed inconvenience.  The party seeking to avoid a forum selection clause also must show that a trial in the specified forum "will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court." 

The Fourth Circuit found the clause to be valid, ruling that the claimed burden of a trial in Amsterdam should have been foreseeable when Plaintiff accepted the benefits of the agreement, and that she had presumably been compensated for those burdens.

The North Carolina Business Court rejected an attack earlier this year on a forum selection clause specifying litigation in the Commercial Court of Paris, in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct., February 18, 2009).  The party objecting to the application of that clause said that litigation in France would deprive it "of the full scope of discovery that would otherwise be available in" the North Carolina Courts. 

In the Speedway case, Judge Diaz held that there was "no authority . . . for the proposition that merely requiring a party to litigate in a forum with substantially different discovery rules than those applied in a U.S. court is sufficient cause to override the parties' choice of forum."  He ruled that the party forced to fight its claim in France was neither "deprive[d] of its day in court" nor "without an adequate remedy."

Another issue in the Fourth Circuit decision today concerned whether Plaintiff, a professional tennis player who was a minor when the contract with Adidas was signed by her agent, had acted promptly enough to disaffirm the agreement after she attained the age of majority.  The Fourth Circuit said that she hadn't, because her agent had accepted payments from Adidas after she turned 18, and she didn't inform Adidas that she was voiding the contract until 32 months after her 18th birthday.

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An accountant who had prepared financial statements did not need to be designated as an expert witness in order to provide testimony regarding those financial statements, per the Business Court's ruling in A-1 Pavement Marking, LLC v. APMI Corporation, 2009 NCBC 15 (N.C. Super. Ct. June 26, 2009).  The opinion also discusses generally accepted accounting principles ("GAAP") relevant to financial statements of consolidated entities.

The issue in A-1 was Plaintiff's calculation of a bonus due one of the Defendants, which was to be based on Plaintiff's gross profits. The Plaintiff's consolidated financial statements had eliminated a significant receivable due from a subsidiary. The Defendant asserted that his bonus would have been substantially higher with the inclusion of that receivable in the gross profit calculation, and brought a claim under the North Carolina Wage and Hour Act.

The Plaintiff moved for summary judgment, relying on an affidavit from the accountant who had prepared the financial statements on which the calculation was based.  The Defendant objected to what it termed "improper opinion testimony," and argued that the accountant had never been designated as an expert witness.

Judge Diaz rejected the argument that the accountant was an undisclosed expert who shouldn't be allowed to testify, holding:  

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If you have privileged documents, you shouldn't share them with your wife and daughter.  You should also be careful with technology, which lets you do "dumb things".  Those are the lessons of Judge Tennille's very short opinion last week in Crockett Capital Corp. v. Inland American Winston Hotels, Inc.

An executive of the Defendant had sent his wife and daughter emails which included attorney-client communications.  The reason for sending the emails to his wife was to "vent frustration" about work-related matters.  The daughter was apparently asked for grammatical advice.

The Plaintiff said that the privilege had been waived by this intentional production.  Judge Tennille determined that the privilege had not been waived, emphasizing that his decision was based on the specific circumstances before him.  Here's what he said:

Technology multiplies the opportunities for man to do dumb things and increases the speed at which he can do them.

Venting one’s frustrations about work to a spouse is an everyday occurrence.  Attaching a string of emails containing attorney client information to an email to a person’s spouse venting one’s frustration at work is just not smart. The Court does not believe it constitutes a waiver of the attorney client privilege under these circumstances.

Using a child as a grammarian with the result that attorney client privileged information is included in emails to her is just not smart. The Court does not believe it constitutes a waiver of the attorney client privilege under these circumstances.

There isn't much discussion in the opinion, so if you are looking for some law on the issue of privilege waiver, you might want to look at the briefs.  The principal brief was filed under seal, but the brief on why privilege hadn't been waived and the reply brief in support of the waiver argument are available.

I don't think Bart Simpson would carelessly share privileged documents.  Homer?  Probably.

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Today, in TAI Sports, Inc. v. Hall, the Business Court denied Plaintiff's' Motion for a Preliminary Injunction freezing Defendants' assets and appointing a receiver to manage the business of the Defendants.

The claim made by Plaintiff was that one of the Defendants had used his position as an officer of one of the Plaintiff's companies to misappropriate over $1 million in cash and inventory.  The Defendants had disputed the allegations.

Judge Diaz observed that the bulk of the damages sought by Plaintiff were lost profits, and that Plaintiff had not shown that it would be able to prove those with the required "reasonable certainty."  He held:

the Court notes that TAI is a relatively new enterprise, having been formed in 2005, and the record is silent on Plaintiff’s history of profitability, if any. And while North Carolina law has no per se rule precluding an award of damages for lost profits here a business has no recent record of profitability, such businesses, like established businesses, must prove such damages with reasonable certainty. . . .  Plaintiff’s evidence here falls short of proving its lost revenue or profits with reasonable certainty, and thus, Plaintiff has not shown a likelihood of success on the merits of a substantial portion of its claim.  

The Court concluded, in denying the Motion::

At bottom, this is a case where Plaintiff seeks money damages. Plaintiff is asking the Court to issue a preliminary injunction to prevent the Hall Defendants from rendering a monetary judgment against them unenforceable. Plaintiff, however, has not sustained its burden to show that it will suffer irreparable injury should the injunction not issue. Specifically, there is no evidence in this record that the Hall Defendants have fraudulently transferred assets (whether those purportedly belonging to Plaintiff or their own) to a third party or taken any other action to thwart Plaintiff’s ability to recover damages should it prevail on the claims.

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

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There were three North Carolina Supreme Court decisions today which are worth a mention, involving personal jurisdiction, depositions, and the North Carolina Whistleblower Act:

In the personal jurisdiction case, the Court reversed the Court of Appeals in an alienation of affections case, Brown v. Ellis.  The Court ruled that there was jurisdiction over the out-of-state defendant in North Carolina even though the defendant had "never set foot in the State of North Carolina."  The Supreme Court based jurisdiction on defendant's daily phone calls and emails to the plaintiff's wife.  The Supreme Court didn't accept defendant's protestations that these extensive communications were "the normal pleasantries associated with a friendly working relationship."

The deposition case, Rodriguez-Carias v. Nelson's Auto Salvage & Towing Service, Inc., resulted in an unfortunate 3-3 split.  Rodriguez-Carias involved the practical issue whether the court reporter for a telephone deposition needs to be in the physical presence of the deponent.  The Court of Appeals decision ruled that it was sufficient for the court reporter to be in the "vocal and aural presence" of the deponent, not his or her physical presence.  The effect of a 3-3 decision is that the Court of Appeals ruling stands, but without precedential effect.  The fact that there were three members of the Court willing to reverse this decision makes it risky to take depositions without having the court reporter at the other end of the phone line, with the deponent.

The Whistleblower decision, Helm v. Appalachian State University, reversed the Court of Appeals. Plaintiff was a Vice Chancellor at Appalachian who claimed she was fired for objecting to the issuance of a $10,000 check from the University Endowment to obtain an option to buy property for $475,000.  Plaintiff complained that there weren't funds available in her budget to exercise the option and she had blown the whistle about a "misappropriation of funds." The Court of Appeals majority affirmed the dismissal of her case, saying that the option had an "inherent, intrinsic value," and thus there had been no misappropriation to report.  The Supreme Court adopted Judge Calabria's dissent in the Court of Appeals, in which she said "while the enforceable right to purchase does have theoretical value, its value under the facts as alleged by the plaintiff does not justify the expenditure of $10,000 from the public funds."

You can find the rest of today's decisions from the Supreme Court here.

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Plaintiff's bribes to an employee of the Defendant didn't bar the Plaintiff's unfair and deceptive practices claim, per the Court of Appeals decision today in Media Network, Inc. v. Long Haymes Carr, Inc., The ruling upheld a $1.3 million jury verdict in favor of the Plaintiff, trebled by the Business Court to $3,776,085.

The bribes -- determined to be such by the jury -- included cash payments, use of a BMW, and tickets to all manner of entertainment and sporting events.  Those included everything from tickets to the circus, tickets for Broadway shows, and World Series tickets (2004, Cardinals vs. the Red Sox).

The payments were made to induce the Defendant to hire Plaintiff to participate in a lucrative advertising program for Defendant's client.  The client learned of the bribes, and conducted a confidential attorneys' eyes only investigation which confirmed the payments.  The employee was then fired by the Defendant.  Shortly after that, the Defendant terminated its contract with the Plaintiff, which Plaintiff contended had been represented to be non-cancelable.

The Plaintiff sued, making a variety of claims.  All of its claims were dismissed in pretrial rulings by the Business Court except for an unfair and deceptive practices claim.  The jury found for the Plaintiff.  It also found that the Plaintiff had bribed the employee, but that the employer had known about the bribes.  The Business Court entered judgment on the jury's verdict of more than a million dollars.  On appeal, the Defendant contended that the Plaintiff's "commercial bribery" barred its claim.  It said "since every transaction that [the Plaintiff] performed for [the Defendant] was spawned from commercial bribery, [Plaintiff] cannot recover."

The Court of Appeals disagreed.  It held that "commercial bribery has not been recognized as a defense, complete or otherwise, to unfair and deceptive trade practices in North Carolina."  It distinguished a New Jersey decision, Jaclyn, Inc. v. Edison Bros. Stores, Inc., 406 A.2d 474 (N.J. Super. 1979), in which the Court had dismissed a contract claim based on the plaintiff's bribery of an agent of the defendant who had entered into the contract in question.

The Court held that unfair and deceptive practice claims "are not subject to the same defenses as traditional contract and tort claims."  Judge Elmore ruled that "not only is the defendant's intent irrelevant when evaluating a UDTP claim, the plaintiff's intent and conduct is also irrelevant."  He that it had been error even to charge the jury on whether commercial bribery had occurred, but that the error had not affected the outcome.

This case spawned four rulings by the Business Court: an opinion on the discoverability of a settlement agreement, an opinion refusing leave to the defendant to amend its counterclaim because of undue delay (which was also affirmed by the Court of Appeals), an opinion dismissing Plaintiff's claim for damages based on diminution in value of its business (also affirmed by the Court of Appeals), and an opinion denying the successful Plaintiff's motion for attorneys' fees (also affirmed).

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You don't see a "reverse" piercing the corporate veil case very often, but the Business Court decided one yesterday in Health Management Associates, Inc. v. Yerby, 2009 NCBC 14 (N.C. Super. Ct. June 1, 2009).  The Court rejected a Plaintiff's argument that its own corporate veil should be pierced, and granted summary judgment in favor of the Defendants.

Why was the Plaintiff Health Management Associates, Inc.,  taking the position that the Court should disregard the corporate separateness between it and its wholly owned subsidiary, Louisburg H.M.A., Inc?

The parent and the subsidiary had settled a medical malpractice case brought against them and the doctors that had been involved in a surgical procedure that went very badly.  The surgery had taken place at the facility operated by the subsidiary.  The surgeon and his practice refused to participate in the settlement, but the parent (not the subsidiary) paid the settlement and obtained a release for everyone involved in the procedure, including the surgeon.

The parent and the subsidiary then sued the surgeon and his practice for contribution.  The problem for the parent was that it was simply the owner of the allegedly negligent facility operated by its subsidiary, and it therefore wasn't a joint tortfeasor entitled to contribution.  So the parent argued that the Court should pierce its own corporate veil and find it the alter ego of its subsidiary, which had been alleged to be a joint tortfeasor.

But the parent had taken a completely different position in the underlying malpractice lawsuit, responding to discovery and asserting that its subsidiary was not a "mere instrumentality," and that it did not dominate its subsidiary's finances or policies.  It had also taken the position that the subsidiary was adequately capitalized and did have its own independent corporate identity.  

Judge Jolly, relying on the doctrine of judicial estoppel, held that:

[e]ven if there was evidence of record that would support an inference that the corporate veil between HMA and Louisburg HMA could be pierced, under the facts of this action, the Plaintiffs are estopped from making such an argument by virtue of their knowingly having taken diametrically opposed positions on the corporate veil issues in the [earlier lawsuit] and in the instant action.

The Court rejected an alternative theory posited by the parent which was that it should be treated as an insurer subrogated to the claim of its "insured," the subsidiary.  Relying on N.C. Gen. Stat. §58-28-15, the Court held that an unlicensed insurance carrier was not entitled to maintain an action in the Courts of North Carolina. 

The car at the top?  It's a 1948 Tucker.  The prototype was built without a reverse gear.

Here's a link to the only brief available:

Brief in Opposition to Motion for Summary Judgment

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Eighteen new cases were designated to the Business Court during the month of May 2009.  Most are the usual disputes between members, partners, or shareholders of business organizations, but there are a few securities claims and a couple of trade secrets cases as well.

[Update: It's actually nineteen new cases, I added the Napco case, which I had overlooked, after this post was first published.]

American Acquisition, LLC v. Goldman (Mecklenburg)(Diaz): claims involving dissolution of general partnership, and general partner's refusal to distribute proceeds from sale of partnership asset based on his position that funds may be necessary to defend against potential claims.

Boone v. American Benefit Concepts, Inc. (Guilford)(Tennille): Claim by investors that defendant brokers violated the North Carolina Securities Act by inducing them to invest in a company later placed into SEC receivership (Diversified Lending Group, Inc.).

Bradley v. Bradley Farms, Inc. (Halifax)(Tennille): shareholder dispute alleging misappropriation of funds, claims for breach of fiduciary duty and dissolution.

Cartridge Limited v. JRiDevelopment Group, LLC (Alamance)(Tennille): defendants, formerly associated with plaintiff, are alleged to have stolen Plaintiff's technology for use and sale by a competing entity.

Fitte v. Rutter (Guilford)(Tennille):dispute between members of an LLC, plaintiff alleges that he has been improperly excluded from participating in the management of the LLC.

Henderson v. Manuel (Guilford)(Tennille): Claims for breach of fiduciary duty and self-dealing against member and partner in multiple business entities.

Howard Perry & Walston Realty, Inc. v. Campbell (Wake)(Jolly): Allegations of theft of trade secrets and violation of non-compete agreements against former employees of real estate brokerage firm.

InSource Business Strategies, Inc. v. Bell (Iredell)(Diaz): claims that member/manager allegedly failed to provide truthful and accurate information about the financial condition of the Plaintiffs, and improperly obtained investment in the corporation without proper board approval and usurped corporate opportunities.  Also issues of validity of board approval of asset purchase agreement due to deficiencies in notice and lack of quorum.

Mast v. Edward D. Jones & Co. (Johnston)(Jolly) claim against securities broker involving unanticipated tax consequences from rollover of insurance policies.

Napco, Inc. v. PBM Graphics, Inc. (Alleghany)(Diaz): alleged misappropriation of trade secrets involving process for manufacture of sports memorabilia cards, breach of confidentiality agreement.

Pineway Partners, LLC v. Holt Asia, LLC (Alamance)(Tennille): claims for wrongful dissolution of an LLC and breach of fiduciary duty.

Port City Java, Inc. v. Reynolds and Sutton v. Reynolds (New Hanover)(Jolly): interpretation of shareholders' agreement, counterclaims regarding breach of fiduciary duty and violation of the Stored Communications Act and the North Carolina Computer Crimes Act.

Queen City Television Services Co. v. Player (Mecklenburg)(Tennille): the Third Party Complaint seeks dissolution of a corporation based on alleged breaches of fiduciary duty.

St. George Technology, Inc. v. Watkins (New Hanover)(Jolly): alleged diversions of funds by former president of company, claims for breach of fiduciary duty, fraud, NC RICO, and unfair and deceptive practices.  Defendant claims he was released from such claims when Plaintiff purchased his stock in the company.

Tai Sports, Inc. v. Hall (Gaston)(Diaz):Claim by sports apparel company for injunctive relief to "freeze" corporate assets or appoint receivers, for accounting, for declaratory judgment concerning the ownership, use and possession of corporate assets, and for breach of cororate fiduciary duties.

Tedder v. Tedder (Dare)(Jolly): shareholder dispute (between brothers) alleging misconduct by shareholder and officer, including claims for conversion, "bogus expense reports," and excess compensation. 

Triad Group, Inc. v. Wachopvia Bank, N.A. (Yadkin)(Tennille): securities claims regarding bonds issued by plaintiff and sold by Wachovia and also claims involving an interest rate swap agreement.

Wefald v. Wake Heart and Vascular Associates, P.A. (Johnston)(Tennille):lawsuit by cardiologist forced out of medical practice, issues whether termination was "for cause" and right of corporation to redeem former employee's shares.

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The Court of Appeals split today 2-1 on whether two partners with claims against a third partner for self-dealing and breach of opportunity could make an unfair and deceptive practices claim.  The case is White v. Thompson.  Judge Wynn wrote the majority opinion, and Judge Ervin dissented. 

The partnership was Ace Fabrication and Welding, the partners were White, Ellis, and Thompson.  Ace did several jobs for a large customer, but Thompson then secured a number of jobs from that customer on his own, without performing them with the partnership.

The other partners obtained a jury verdict on a breach of fiduciary duty claim, and were awarded damages of $138,195.  The trial court trebled the damages, but the Court of Appeals majority reversed. 

Its reasoning was that the claim was for a breach of partnership duties involving matters of internal management of the partnership, so the claim did not make out the "in or affecting commerce" requirement of a Section 75-1.1 claim.  It said that the Defendant's activities had indeed harmed the partnership, "but had no impact in the broader marketplace."

Judge Ervin saw things completely differently.  He said:

"Impairing the ability of others to compete for work in this fashion is tantamount to unfair competition, a type of conduct which is clearly actionable" as an unfair and deceptive practice.

"The effect of such conduct was to deprive the partnership of the ability to actually perform certain specialty fabrication jobs . . . a fact which clearly implicates the 'activities the business regularly engages in and for which it [was] organized.'"

"Depriving the partnership of the opportunity to perform these . . .  jobs inevitably affected its financial viability, producing an inevitable impact on competitive conditions in the market for the performance of . . . jobs in the area served by the partnership."

The North Carolina Business Court has faced the issue of what is "in or affecting commerce" on a number of occasions.

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A Plaintiff who obtained an Arbitration Award against two members of an LLC lost the right to recover under the Award from the LLC when it settled up with the two LLC members.  The case, decided today by the Business Court, is Essa Commercial Real Estate, Inc. v. Five Trees, LLC.

The facts are complicated, but they boil down to this: Plaintiff got an arbitration award of $325,000 against two members of an LLC (Five Trees).  Plaintiff then sued the LLC and its other members to collect on the Award.  In the meantime, Plaintiff settled its claims against the two members against whom it had obtained the Award.

Under the settlement, the Plaintiff agreed to give up its claims against the two members in exchange for $150,000 and an assignment of the two members' interest in the LLC.  The Plaintiff attempted to preserve its right to pursue the LLC and the other members for the balance by including language in the settlement which said "nothing in this Agreement shall act to release, dispose of, compromise, or otherwise impair the right or ability of [Essa] to seek recovery from Five Trees, its members or members of its members under any theory of law or for recovery of the Arbitration Award."

That didn't work.  The Court held that Plaintiff's claim was barred by the "one satisfaction rule," which says that a party is only entitled to a single recovery for any judgment. Since the Plaintiff had resolved the Arbitration Award, it no longer had any right to seek recovery under the Award.

That was so even though the LLC and the other members weren't released by the settlement agreement. In this respect, the case is similar to a recent Court of Appeals decision, Santoni v. Sundown Cove, LLC, where the Court held that a plaintiff''s settlement with some defendants resulted in a settlement as to all plaintiff's claims, even against non-parties to the settlement.

In an earlier opinion in the Five Trees case, the Business Court ruled that the Arbitration Award had collateral estoppel effect. 

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This post is a listing and short summary of the fourteen new cases designated to the Business Court during the month of April 2009.  I may start doing a post like this on a monthly basis.

The Sunbelt v. Ahern case (which was settled almost immediately after it was filed) made me think of Yogi Berra.

1st Americard, Inc. v. Kitchens (Mecklenburg)(Diaz) and Grainger v. Kitchens (Union) (Diaz): Dispute between shareholders of a credit card processing company.

Ammons v. Fire & Wire, inc. (Guilford)(Tennille): Dispute between shareholders of a fire alarm and security company.  Plaintiff, a 1/3 shareholder of a Virginia corporation, alleges that his two co-shareholders set up a competing North Carolina company to engage in the same business.

Bason v. Euliss, Inc. (Alamance)(Tennille): enforceability of deed restrictions entered into by a dissolved corporation requiring the operation of an 18-hole golf course.

Browning Systems, Inc. v. Davis (Henderson)(Tennille): claim for breach of fiduciary duty and misappropriation of trade secrets against former officers and shareholder of Plaintiff for their actions in starting a competing business as issuing agents for Chicago Title Insurance Company.  Counterclaims for breach of fiduciary duty, tortious interference, and dissolution of the Plaintiff.

ChampBoat Series, LLC v. In2Focus Films, Inc. (Mecklenburg)(Diaz): copyright case alleging that the Defendant has infringed on Plaintiff's rights to audio and video of powerboat racing series.

Cunniff v. Lewis (Mecklenburg)(Diaz): shareholder derivative action against Bank of America regarding the Bank's acquisition of Merrill Lynch. 

LeCann v. Cobham, LeCann & Torres, P.A. (Wake)(Jolly): Dissolution of dental practice.

McKinnon v. CV Industries (Catawba)(Tennille): Interpretation of severance agreement and former shareholder's rights under a Shadow Equity Plan.

Pfeiffer v. Frontier Spinning Mills, Inc. (Lee)(Jolly): securities fraud claim in connection with squeeze out merger, breach of fiduciary duty, self-dealing, dissenters' rights.

Pharma Services, Network, Inc. v. Associated Medical Group (Mecklenburg)(Diaz): Dispute over agreements relating to clinical drug testing trials.  (Don't forget that the Business Court has mandatory jurisdiction over cases involving "biotechnology.")

Sunbelt Rentals, Inc. v. Ahern Rentals, Inc. (Mecklenburg)(Diaz): Claim by equipment leasing company against its competitor, charging that the defendant has "coordinated multi-state employee raids . . . to pirate away employees of Sunbelt through unlawful and unfair conduct."  If you think this is deja vu all over again, well, you are right.

USFalcon, Inc. v. Yorktown Systems Group, Inc. (Wake)(Jolly): Dispute whether Defendants have an ownership interest in an LLC.

Waste Industries, LLC v. Waste Hauling Services, LLC (New Hanover)(Jolly): Dispute between waste disposal and collection companies.  The Plaintiff claims that its competitor's alleged failure to comply with municipal regulations constitutes unfair competition because the non-compliance reduces its competitor's operational costs and results in an anti-competitive market.

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The Fourth Circuit today, in the case of In re Bees, reversed the trial court's imposition of sanctions based on an attorney's oral statements during a motion hearing.  The Court held that Rule 11 does not extend to oral statements except in very limited circumstances.

The court said:

"Rule 11 . . . severely limits a court's ability to sanction counsel for oral statements.  It permits a court to impose sanctions only on the basis of a false, misleading, or otherwise improper 'pleading, written motion, or other paper.'  Fed. R. Civ. P. 11(b).  Thus, as the Advisory Committee has explained, Rule 11 'applies only to assertions contained in papers filed with or submitted to the court.'  Fed. R. Civ. P. 11 advisory committee's note (1993 Amendments, Subdivisions (b) and (c)).  The rule 'does not cover matters arising for the first time during oral presentations to the court, when counsel may make statements that would not have been made if there had been more time for study and reflection.'  Id.  In sum, an oral statement may form a basis for Rule 11 sanctions only if it advocates a contention previously contained within a written submission."

The Court also reversed an entry of sanctions based on statements in briefs submitted by the government, finding that the admitted errors "were an inadvertent mistake, not a deliberate attempt to mislead or a failure to conduct a reasonable inquiry."  The Court held that "an isolated, inadvertent error does not justify Rule 11 sanctions."

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Whether the departure of three partners from a law firm LLC was a withdrawal or a dissolution of the LLC was the issue in Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 2009 NCBC 10 (N.C. Super. Ct. March 26, 2009), decided today by the North Carolina Business Court.

The characterization of the nature of the Plaintiffs' departure determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

If a dissolution had occurred, Plaintiffs' rights were governed by N.C. Gen. Stat. §§57C-6-04(b) and 57C-6-05(3), which said that the law firm would continue in existence and that its managers would be obligated to obtain "as promptly as reasonably possible. . . the fair market value for the [LLC's] assets" and to distribute the recovery to the members of the LLC.  That interpretation might have yielded a significant distribution from the in-process contingent fee cases.

But if the actions of the Plaintiffs constituted a "withdrawal," the Plaintiffs' rights would be governed by N.C. Gen. Stat. §57C-05-07, and their final distributions would be limited to the fair value of their interest in the firm as of the date of withdrawal.  The value of the contingent fee cases was potentially nothing under this analysis.

Plaintiffs Had No Right To Voluntarily Withdraw

The law firm had no written operating agreement,  and the articles of organization were silent on the subject of withdrawal.  Plaintiffs argued that dissolution was the only remedy;but  the Defendants argued that this interpretation made it impossible for a member to withdraw. 

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  It rejected Defendants' arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

Plaintiffs Were Estopped From Disputing Their Withdrawal

The Court nevertheless ruled that Plaintiffs were estopped from disputing that they had withdrawn from the LLC.  Judge Jolly held that estoppel is "kaleidoscopic," that it could arise "by conduct, deed, or misrepresentation," and that estoppel "is viewed as 'flexible' in its application." 

The factors he considered in concluding that estoppel applied were (a) the Plaintiff's oral and written representations that they intended to withdraw, including one Plaintiff's statement "I am out of here," (b) the treatment by all parties of Plaintiffs' departure as a withdrawal, (c) the Plaintiffs' formation of their own firm, (d) Defendants' detrimental reliance on Plaintiffs' representations of withdrawal, and (e) Plaintiffs' silence "on the pivotal issue [of whether there had been a dissolution or a withdrawal] for approximately one year."

The Court rejected Plaintiffs' arguments that they could not have withdrawn because they "did not appreciate the distinction between withdrawal and dissolution" at the time they left the firm.  Judge Jolly said that "when they unilaterally chose to leave the Firm, and characterized their leaving as a 'withdrawal,' the Plaintiffs were charged with knowledge of the consequences of their actions; and Defendants were entitled to rely and act upon those actions."

Judge Jolly held that "[t]he fact that the unilateral decision by Plaintiffs to leave the Firm subsequently turned out potentially to be to their economic disadvantage is regrettable, but not relevant to whether they are deemed to have withdrawn."

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment 

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If the filings of the parties and the rulings of the Business Court weren't available electronically on the Business Court's website, I wouldn't be able to write this blog.  That's one reason I found so interesting the short Order by Judge Diaz today in the case of Clemenzi v. Freer. 

The Order addressed Plaintiffs' Motion to place their Complaint under seal.  The concern they raised was the electronic availability of their filing on the Business Court's website.  In their Brief, Plaintiffs said that they had "only recently discovered that the Business Court allows for public access to individual court records in ongoing actions via an unsecured internet link on its website."  

The specific concern of the Plaintiffs was that "the case documents might be indexed by Google" which they said would create "an extremely troubling degree of public access."  They stated that although they had "done several experiments with Google, and have determined that Google does not index the documents which are held within a Zip file, as is the case on the Business Court's website," they remained concerned that there was a "threat of indexing . . . unless the court has arrangements to the contrary with Google and the other web indexing services."

Judge Diaz denied the Motion.  He held that Court filings are "public records" which fall under N.C. Gen. Stat. §7A-109(a).  That statute specifically grants the public the right to inspect court records in criminal and civil proceedings. A Court therefore can limit the public's right of access 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.” (citing Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999).

On the point that a public record should be treated differently if it is available online at the Business Court's website as opposed to simply being in the paper file at the courthouse, Judge Diaz held: "because all court filings are 'public records,' the fact that the Complaint in the Court’s paper file is also accessible on the Court’s website is a distinction without meaning." 

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The Business Court provided a thorough discussion today on whether a subsidiary and its parent can conspire with one another, in BHB Enterprises, Inc. v. Waste Management of Carolinas, Inc.

Judge Diaz rejected Defendants' argument that a parent can never be liable for the actions of its subsidiary under a conspiracy theory.  But he dismissed the claim anyway, in the absence of any assertion that the subsidiary had been rendered unable to pay its debts by the action of the parent. 

The Court also rejected Plaintiff's attempt to bring an unfair and deceptive practices claim based on what was essentially a breach of contract, notwithstanding what the Court called "artful pleading."

Plaintiff runs a restaurant in Charlotte called Vinnie's Sardine and Raw Bar. It had contracted with Waste Management of Carolinas, Inc. ("WMC"), a subsidiary of Waste Management, Inc., for waste collection and disposal services.

WMC had unilaterally increased its monthly charges to Vinnie's, relying on contract provisions that permitted such increases under certain circumstances.  Vinnie's contested WMC's right to raise the charges and sought to represent a class of WMC customers.  Among other claims, Plaintiff asserted one for civil conspiracy, alleging that WMC and its parent were in cahoots on the unauthorized price increases. 

WMC responded that that it was not possible for a parent to conspire with a wholly owned subsidiary. Judge Diaz disagreed.  He stated that "the Court's research discloses only six (6) cases addressing the doctrine of intracorporate immunity in the context of a claim for civil conspiracy under North Carolina law,"  and summarized all six of them.  He observed that none of these cases dealt with the point "whether a parent and its wholly owned subsidiary are capable of committing a civil conspiracy under the doctrine."

Judge Diaz looked to Delaware law.  Relying on Allied Capital Corp. v. GC-Sun Holdings, LP, 910 A.2d 1020 (Del. Ch. 2006), he concluded that such a claim could be made, although he reiterated the concern raised by the Allied case in permitting such claims:

"if plaintiffs were allowed to sue parent entities whenever the decision to cause a subsidiary to act in a certain manner originated with the parent, it 'would increase litigation costs and deter the use of subsidiaries, even when there is a legitimate purpose for doing so and there is no wrong to others in being forced to look only to the subsidiary for relief.'"

The Court dismissed the claim made by Vinnie's, stating that there was no allegation that WMC would be unable to satisfy a judgment if Plaintiff were to prevail, concluding that the civil conspiracy claim was barred by the intracorporate immunity doctrine.

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It's black letter law in North Carolina that a liquidated damages provision is enforceable, so long as it is not a "penalty."  The need to make that distinction typically comes up when the Defendant believes the liquidated amount is excessive when compared to the actual damages incurred by the Plaintiff.

In Azalea Garden Board & Care, Inc. v. Vanhoy, 2000 NCBC 8 (N.C. Super. Ct. March 17, 2009), the Business Court confronted the exact opposite of the usual penalty argument.  The Plaintiff asserted that a provision in the contract severely limiting its recovery was a penalty because it would only allow damages it described as being "woefully inadequate." 

The provision at issue, contained in a $3.6 million contract to buy a nursing facility, said that "Buyer agrees that if he should fail or refuse to complete this transaction after timely acceptance by the seller, then any funds or deposit with the Broker will be forfeited and shall be split 50% to the broker and 50% to the seller." That provision yielded damages to the Plaintiff of only $12,500.

The Court determined this was a liquidated damages provision as a matter of law, and that it did not constitute a penalty. The Court held "Plaintiff's argument that the liquidated damages provision is unreasonable because it is too small in light of the damages actually suffered is not persuasive."  Op. Par. 30.  The Opinion referenced cases from other jurisdictions reaching the same result in a situation the Court described as "rare."

The other issue resolved in the Opinion was whether Tuttle could be liable for a breach of the agreement to purchase the nursing facility even though he had not signed it.  Tuttle asserted the Statute of Frauds.  The Plaintiff responded that the Tuttle was part of a joint venture, that the contract had been signed by an authorized agent of the joint venture, and that it was therefore binding on Tuttle.  

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Whether the parties had agreed on the material terms necessary to create a binding contract was the issue resolved by the Business Court in two opinions issued simultaneously on Friday, March 13th.  The claims in one case survived a motion to dismiss, the claims in the other were cut down on summary judgment.

In the first case, JDH Capital, LLC v. Flowers, 2009 NCBC 4 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that a Letter of Intent executed by the parties was a "non-binding agreement to agree," and dismissed the case.  In the second case, Crockett Capital Corp. v. Inland American Winston Hotels, Inc., 2009 NCBC 5 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that the plaintiff could proceed in its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.

These cases are must reads if you are litigating a contract formation issue in the Business Court.  They are equally important to look at if you are drafting Letters of Intent or other agreements involving commercial real estate ventures, which were the business deals involved in both Flowers and Crockett. (There are reportedly non-litigation lawyers who read this blog precisely to see how their deal documents might play out in Court).

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The Business Court ruled today in Crowder Construction Co. v. City of Charlotte, a construction law case, that North Carolina does not recognize the "cardinal change doctrine."  It also dismissed a claim that a project consultant had tortiously interfered with the contract between the general contractor and the City by rejecting the general contractor's claims for payment.

A "cardinal change" is a change to a government contract which "fundamentally alters the contractual undertaking of the contractor."  It is a change which "cannot be redressed within the contract by an equitable adjustment to the contract price."

Crowder was the general contractor for a parking garage for the City of Charlotte.  It claimed that "after it began work on the Project, it discovered that the soil conditions at the site differed greatly from those represented in the Bid Documents and that these changed conditions resulted in significant additional work and expense. . . ."  Crowder sued to recover these additional expenses, claiming that the unanticipated soil conditions were a cardinal change.

Judge Diaz dismissed the claim, stating that it was "not recognized in North Carolina."  He ruled that a claim for cardinal change was essentially a claim for breach of an implied contract, and that such a claim was barred by the doctrine of sovereign immunity.

Also dismissed was a claim by Crowder for tortious interference with contract against  STV, the City's "Project Management Support Services Consultant."  Crowder claimed that STV had interfered with Crowder's contract by failing to properly administer the contract and by refusing to negotiate proper payment for Crowder.

The Court held that the "interference" was justified, even though Crowder had specifically alleged that it was not.  Judge Diaz ruled that Crowder's allegation as to the lack of justification was "a legal conclusion the Court need not accept," and that Crowder's allegations on this point were self-defeating.  Crowder had referenced STV's contract, which showed that it had been contractually authorized to review and approve change orders, and had asserted that STV was responsible for evaluating the validity of any claims made in connection with the Project. 

The Court determined that STV had a proper motive -- the performance of its own duties under its own contract with the City -- in how it had dealt with Crowder.  Thus, the Court concluded, STV's actions were "reasonably related to the protection of a legitimate business interest," and it dismissed Crowder's tortious interference claim.

Brief in Support of Motion to Dismiss (Cardinal Change Issue)

Brief in Support of Motion to Dismiss (Tortious Interference Issue)

Brief in Opposition to Motion to Dismiss (Tortious Interference Issue)

Reply Brief in Support of Motion to Dismiss (Cardinal Change Issue)

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Most of the cases in the North Carolina Court of Appeals are decided without oral argument.   In 2008, for example, the Court calendared oral argument in 175 cases, but ruled that it would decide 824 others without oral argument.  These numbers, based on the Court's calendars for 2008, mean that only about 17.5% of cases were called for oral argument.  That percentage is comparable to numbers from the Court for 2005. 

This no-hearing disposition is permitted by Rule 30(f)(2) of the Rules of Appellate Procedure, which provides that "[i]f all of the judges of the panel to which a pending appeal has been referred conclude that oral argument will not be of assistance to the Court, the case may be disposed of on record and briefs.  Counsel will be notified not to appear for oral argument." 

The Court issues 30(f) Notices in the substantial majority of the cases it decides.  Can you draw any conclusions upon getting that Notice?  Does it mean, for example, that the trial court was so obviously right that the Court of Appeals doesn't need to hear the terrific argument you wanted to make?  Or could it mean that the trial judge got it so painfully wrong that the appeals court doesn't need to do anything more than read your brief to be persuaded?

Every case is certainly different, but I can provide you with some statistics that will give you a little bit of guidance.  My wonderful and never complaining assistant Nancy and I ran the numbers for (1) every case in which a 30(f) Notice was issued during calendar year 2008 and (2) which was decided by the Court of Appeals by March 1, 2009. 

There were 703 cases total (civil and criminal) in the group.  Of that number, 499 were affirmed.  That's an overall affirmance percentage of 70%  So, a broad generalization is that if you get a 30(f) notice, and you are the appellant, there's only about a 30% chance of a reversal.  And some of the reversals in our count might not be much of a win, because we counted any "affirmed in part and reversed in part" as a reversal.  You're certainly better off being the appellee, which is probably obvious anyway.  (Another note: we counted appeals that were dismissed as having been affirmed).

If you are appealing a criminal case, your chances as the appellant are worse.  We counted 309 criminal cases, of which 234 were affirmed.  That's a success rate for prosecutors of 76% in cases where the Court declines argument.

There probably aren't many prosecutors reading this blog, so what about the civil cases standing alone?  Overall, we counted 394 civil cases which were 30(f)'d.  Of those, 265 were affirmed.  That's an affirmance rate of 67% overall.

What was the affirmance rate over the same time period for cases where the Court did hear oral argument?  Higher or lower than the rate by which 30(f) cases are decided?  I'll follow up with that later this week.  Call this the first blog cliffhanger.

As you are thinking about this information, don't forget, as is often attributed to Mark Twain, "there are three kinds of lies: lies, damned lies, and statistics."  That might be an apt thought to keep in mind with regard to this particular post.

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The excitement from the Business Court today is a ruling on, of all things, the Rule Against Perpetuities.  The Opinion is in Brown Brothers Harriman Trust Co. v. Benson.

The subject of perpetuities is addressed in the North Carolina Constitution.  It says that "perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. Art. I, §34.

In 2007, however, the Legislature enacted G.S. §41-23, which repealed the common law Rule Against Perpetuities as well as the Uniform Statutory Rule Against Perpetuities (N.C. Gen. Stat. §41-15) as they apply to trusts created or administered in North Carolina.  N.C. Gen. Stat. §41-23(h).

The constitutionality of that statute was at issue in the Brown Brothers case, which involved a Trust formed by the grantor as a "perpetual or dynasty trust." With this type of trust, the principal is never transferred to any beneficiary.  Successive generations receive distributions, and the beneficiaries potentially avoid generation skipping taxes.  In the case of the Trust formed by Mrs. Benson, the Trustee had the specific authority to transfer title to the property owned by the Trust, a key factor in the Court's ruling.

Mrs. Benson's children instructed Brown Brothers to terminate the Trust immediately, contending that it violated the Rule and that the 2007 statute was unconstitutional.  This gave rise to the controversy before the Business Court, which held the Trust valid and the statute constitutional.

The Opinion by Judge Diaz is quite short.  It holds as follows

1. Section 41-23 of the North Carolina General Statutes, denominated as Perpetuities and Suspension of Power of Alienation for Trusts, (hereinafter the “Act”) is a valid exercise of the General Assembly’s legislative power to repeal both the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities, as they apply to trusts in North Carolina;

2. The prohibition against “perpetuities and monopolies” found at Article I, Section 34 of the North Carolina Constitution applies only to unreasonable restraints on the alienation of property and not to the vesting of remote interests; and

3. Because Plaintiff (as trustee of the Benson Trust) has the power to transfer title to any and all property that is part of the corpus of the Benson Trust, either by sale or by distribution to the trust beneficiaries, the Court holds that the Benson Trust is valid under the Act and does not violate the North Carolina Constitution.

The classic book on the Rule Against Perpetuities was written in 1886 by John Chipman Gray, a Professor at Harvard Law School who is pictured at the top.  You can imagine my great delight in discovering that Google has digitized the third edition of his book, published in 1914.  You can download the whole thing and read it at your leisure.

Plaintiff's Brief in Support of Motion for Summary Judgment

Defendant's Brief in Opposition to Motion for Summary Judgment

Plaintiff's Reply Brief in Support of Motion for Summary Judgment

Amicus Brief of North Carolina Bankers Association

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You've certainly been caught in the gap between a trial court proceeding that isn't completely over, and an interlocutory appeal. One side wants to proceed ahead in the trial court, but the other wants a reversal in the appellate court. Can the trial court proceed?

The Business Court entered an Order today in the case of Land v. Land which involved exactly this situation.  The Court had bifurcated the trial on liability and damages, and the liability phase had ended with a verdict for the Plaintiffs.  The Defendants, wanting to avoid the damages phase of the trial, filed an interlocutory appeal.  The Plaintiffs objected, pushing for a resolution of the damages issue in the Business Court before heading to the Court of Appeals.

The issue was whether the Defendants would be deprived of a "substantial right" which would be "lost absent immediate review."  The authority to make this decision rests initially with the trial court, and the Court of Appeals ultimately makes the determination whether it will hear an appeal.

Judge Tennille concluded that the Defendants' appeal did not affect a substantial right permitting an immediate appeal.  He held:

In this case, the only right affected by denial of the interlocutory appeal would be the Defendants’ right to avoid the second phase of the bifurcated proceedings. While this may be inconvenient for the Defendants, it clearly does not trigger the substantial right provision for interlocutory appeals, since “[t]he avoidance of a rehearing or trial is not a substantial right.” . . .  There is no possibility of inconsistent verdicts present and no risk of an irreparable loss of any substantial right if the Defendants must await final judgment before pursuing their appeal. In short, the Court concludes as a matter of law that the Defendants’ appeal does not affect a substantial right.

The Court noted that it had the discretion to stay the case pending the conclusion of the appeal, but it declined to do so.  Judge Tennille observed that the bifurcation of the issues had come at the Defendants' request, over the Plaintiffs' objection, and that there would be a long delay before a final conclusion if he were to stay the case.  He stated:

The jury found liability.  It is time to complete damage discovery and have a trial on damages so that the appellate courts can review the case as a whole rather than in a piecemeal process that could result in the case lasting a decade.  It would be manifestly unjust if this case did not move forward.

The successful result for the Plaintiffs in the liability phase of the trial was the product of the great work of my partners, Reid Phillips and Jennifer Harrod.

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The North Carolina Business Court ruled today on an issue of first impression -- when a North Carolina Court should apply the law of a foreign country -- and concluded that it would apply North Carolina law to a forum selection clause requiring the parties to litigate their dispute in the Commercial Court of Paris, under French law.

The result was that the Court enforced the forum selection clause and dismissed a crossclaim brought by an Arizona corporation (Swift) against a French Bank (Paribas), in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct., February 18, 2009).

The provisions specifying French law and a French choice of forum were contained in a series of Third Party Letter of Credit Agreements which had been submitted by Swift and another Defendant (Bronwen) to Paribas. They stated that French law would apply and that "[a]ny disputes arising [t]hereunder or in connection [t]herewith shall be exclusively submitted to the commercial court of Paris, France."

When the Bank moved to dismiss, Swift argued that the Bank had never signed the agreement, that Its tort claims were not in any event subject to the clause, and also that it would violate public policy to make it litigate its claims in a French court.

The first issue for the Court was whether North Carolina law or French law should be applied to determine the validity of the forum selection provision.  The opinion is the first published decision under Rule 44.1 of the North Carolina Rules of Civil Procedure, which addresses a trial court's determination of the law of a foreign country.  Judge Diaz, relying on federal cases, determined that:

• He had "broad authority to conduct [his] own independent research to determine foreign law," but that he had no duty to so.
• It was the burden of both parties to "raise[]the issue that foreign law may apply in an action, and the burden of adequately proving foreign law to enable the court to apply it in a particular case."
• When the "parties fail to satisfy either burden the court will ordinarily apply the forum's law."

The Business Court applied North Carolina law, because the parties hadn't provided the Court "with any authority or evidence from which it might discern how French law would evaluate the validity and scope of the forum selection clause in the" Agreements. 

Under North Carolina law, it didn't make a difference that Paribas hadn't signed the agreement.  Judge Diaz reasoned that the only signature required should be that of "the party to be charged therewith," that Swift had signed the Agreements, and that the Agreements spoke to Swift's obligations to Paribas  He also relied on cases involving arbitration provisions, which are often enforced against non-signatories when the claims are "intimately founded in and intertwined with the underlying contract obligations."  The Judge also noted the "strong seal of approval that our Supreme Court has given to contract clauses requiring litigation in a foreign jurisdiction."

Swift's argument that its claims sounded in tort, and that they were therefore outside the scope of the clause, was rejected.  The Court determined that claims stemmed from the contracts themselves, and that they could not be restyled as tort claims to avoid the agreement to the Parisian forum.

Lastly, the Court rejected the public policy argument that it simply wasn't fair for Swift to have to litigate its claims in France.  Swift said it would "be deprived of the full scope of discovery that would otherwise be available in" the Business Court.  Judge Diaz said there was "no authority . . . for the proposition that merely requiring a party to litigate in a forum with substantially different discovery rules than those applied in a U.S. court is sufficient cause to override the parties' choice of forum."  Swift was neither "deprive[d] of its day in court" nor "without an adequate remedy."

Brief in Support of Motion to Dismiss Crossclaim

Brief in Opposition to Motion to Dismiss Crossclaim

Reply Brief in Support of Motion to Dismiss Crossclaim

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Today, the Business Court denied Plaintiff's Motion for a Preliminary Injunction in a state law trademark dispute between competing jewelry stores.  The Order in Windsor Jewelers, Inc. v. Windsor Fine Jewelers, LLC, 2009 NCBC 2 (N.C. Super. Ct. Feb. 16, 2009) dissolved a Temporary Restraining Order which had previously been entered in the case.  I wrote about the entry of the TRO back in November 2008.

Defendant bought two jewelry stores in Charlotte, planning to rename them "Windsor Fine Jewelers."  Plaintiff, which operates a single jewelry store in Winston-Salem under the name "Windsor Jewelers," sought to enjoin the use of the Windsor name in the Charlotte area.  It argued that it had sold jewelry there and that the use of the Windsor name would infringe on its common law trademark rights and its service mark registered under the North Carolina Trademark Registration Act.

Judge Diaz applied federal Lanham Act principles in deciding whether Windsor Jewelers had a sufficient market presence in the Charlotte area to warrant injunctive relief.  He said that "North Carolina's common law is no different" from federal law in determining the rights of a senior user. Op. n.7.

The established tests for injunctive relief when a senior user sues a junior user are "(1) the 'market penetration' test, which applies where the senior user actually uses its mark in the market in which it seeks an injunction; or (2) the 'zone of natural expansion' test, which applies where the senior user has not actually penetrated the market, but may be likely to do so."  Op. ¶70.

Windsor Jewelers failed the market penetration test.  Although it had averaged annual sales in Mecklenburg County of $66,024 over a fifteen year period, the level of sales had fluctuated over that time and the sales were inconsequential when measured against the total sales of jewelry in that area. Mecklenburg County jewelery stores had sold $138,578,260 of jewelry in 2006, for example, much of it undoubtedly available for much less now in area pawnshops. 

Further leading to the Plaintiff's lack of success was that it had completed only 88 transactions in Mecklenburg County in 2006, but the average jewelry store there completed 1,718 transactions.  Plaintiff also hadn't done any advertising targeted at the Charlotte market. 

The Winston-Salem jeweler also struck out on the zone of natural expansion test.  Although it presented evidence that it had "considered" opening a Charlotte store, Judge Diaz found that Plaintiff had not taken any concrete steps to enter the Charlotte market. 

This opinion adds to the precious little bit of law under the North Carolina Trademark Act.   

Brief in Support of Motion for Temporary Restraining Order

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction 

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Today, the North Supreme Court made it clear that there can be personal jurisdiction over a corporate officer even if his only contacts with the state were in  his capacity as a corporate officer.

The case is Saft America, Inc. v. Plainview Batteries, Inc.,  The opinion reverses the April 2008 decision of the Court of Appeals, which had ruled in a split decision that the officer didn't have sufficient minimum contacts with North Carolina to justify jurisdiction because he had no contact with the state in his "individual capacity."

The Supreme Court opinion is unfortunately a per curiam ruling, so it simply adopts without discussion the analysis of the dissenting opinion in the Court of Appeals.  The key portion of that opinion, by Judge Arrowood, read as follows:

In sum, under North Carolina precedent the determination of whether personal jurisdiction is properly exercised over a defendant does not exclude consideration of defendant's actions merely because they were undertaken in the course of his employment. In particular, the corporate actions of a defendant who is also an officer and principal shareholder of a corporation are imputed to him for purposes of deciding the issue of personal jurisdiction. On the other hand, personal jurisdiction cannot be based solely on a defendant's employment status as the agent or officer of a company with ties to North Carolina, or on personal connections to North Carolina that fall short of the requisite "minimum contacts."

The contacts relied upon by the Court of Appeals dissent were that the corporate officer had been the plaintiff's primary contact with the corporate defendant, he had traveled to North Carolina to visit the plaintiff's facility, he had submitted purchase orders on behalf of the corporate defendant. and he had been personally involved "in negotiating and carrying out the contracts that gave rise to the instant lawsuit."

As Judge Arrowood put it in the opinion adopted by the Supreme Court, it does not "correctly state the law in North Carolina" that "actions taken by an individual in the course of his employment or in his 'official' capacity do not 'count' as part of a defendant's contacts with the forum state." 

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The North Carolina Business Court dismissed today a highly publicized case brought by a City of Roanoke Rapids taxpayer who sought to challenge the City's investment of more than $13 million to build the "Randy Parton Theater" in Halifax County.  (See here, here, and here for local and national articles about the lawsuit).  The Court held that the Plaintiff, Garrett, lacked standing to bring the suit, either as an individual taxpayer or on a derivative basis on behalf of the City.

Roanoke Rapids, in reliance on a business plan presented by Randy Parton, the younger and less talented brother of Dolly Parton, had financed a music theater with Tax Increment Financing bonds.  Those are a relatively new public financing mechanism authorized by a 2004 Amendment to the North Carolina Constitution. The Roanoke Rapids financing -- by which the City was authorized to issue $21 million in TIF bonds to finance the Theater and a related development -- was reportedly the first TIF financing in North Carolina. 

After the Theater was built, there were allegations of misuse of funds by Parton (like a $600 pair of pants and trips to Las Vegas), conflicts of interest, and mismanagement of the venture.  Parton, a regular headliner at the Theater, wasn't much of a draw and reportedly showed up intoxicated for his shows.  The Theater failed, and the City was unable to make payments on the TIF Bonds from the revenues of the Theater, which were the anticipated repayment source. 

In February 2008, the City entered into a Settlement Agreement with Parton, paying him $750,000 for the privilege of being released from his $1.5 million per year management contract. The release included the "Moonlight Bandit" entities which had been formed by Parton and others in connection with the Theater. 

The Plaintiff, backed by the North Carolina Institute for Constitutional Law, filed a Complaint notwithstanding the settlement against Parton, the Moonlight Bandit entities, and others involved in the failed venture. Taxpayers don't get a vote on the issuance of TIF bonds.  Former Supreme Court Justice Bob Orr, who is the Executive Director of the Institute for Constitutional Law, said on his More from Orr Blog that "the voting public was literally snookered into giving up their constitutionally guaranteed right to vote on the issuance" of these types of bonds.

The issue before Judge Jolly was whether Garrett, a resident of the City, had standing to sue.  Garrett claimed that he was entitled to bring suit individually because the losses from the failed Theater would be borne by all of the taxpayers of the City, and alternatively that he was entitled to sue derivatively on behalf of the City because the proper authorities had refused to act with regard to such losses. 

No Individual Taxpayer Standing

The law of North Carolina is that individual taxpayers don't have standing to bring a suit in the public interest.  Op. ¶41.  Garrett argued that he was entitled to an exception to this general rule (under a case called Texfi Industries v. City of Fayetteville, 44 N.C. App. 268, 261 S.E.2d 21 (1979)) because the Theater had levied a tax on him "for an unconstitutional, illegal, or unauthorized purpose."

Judge Jolly rejected Garrett's individual standing argument, holding:

here, the expenditures used in support of the Theater Project were funded by TIF bonds that were issued only after a feasibility study was conducted for the benefit of the City, and which was lawfully approved by the City and the [Local Government Commission]. . . .  Notwithstanding that the Theater Project ultimately failed and may well have been a very bad business decision by the City, the obligations undertaken by the City were neither illegal nor unauthorized.

Op. ¶43. 

No Derivative Taxpayer Standing

The Court ruled that Garrett didn't have derivative standing either.  North Carolina recognizes derivative standing for taxpayers if "public authorities wrongfully neglect or refuse to act."  A taxpayer must show, however, that "their either (a) has been a demand upon and wrongful refusal by the proper authorities to act, or (b) the particular facts would make such a demand futile."  Op. ¶46. 

The fact of the City's settlement with Parton doomed Garrett's derivative standing.  Judge Jolly held that "the Settlement Agreement acts to resolve the very claims in behalf of the City that otherwise -- given refusal or inaction after timely taxpayer demand -- arguably might be available derivatively to a taxpaying citizen.  In fact, the City's action in settling with Parton and Moonlight Bandit on terms with which the Plaintiff disagrees apparently is the very reason Plaintiff seeks to bypass the City." Op. ¶47.

The Theater has been renamed the "Roanoke Rapids Theater."  The City is trying to sell it to a private investor.

Full Opinion

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The Business Court's plate is pretty full as we move into the new year of 2009.  This post summarizes the dispositive motions pending before the Court that are fully briefed and ready for a ruling.

These cases cover a broad range of issues, summarized by general categories below, including: class actions, construction law, derivative actions, breach of fiduciary duty/unfair competition, jurisdiction, partnership, securities fraud, shareholder/member disputes, trademark law, trusts, and uniform commercial code. 

As you read on, a few disclaimers.  First, this only covers dispositive motions.  There are certainly other, non-dispositive motion pending.  Second, I may have missed some.  And third, these summaries are deliberately short.  I'm not trying to cover all of the issues that might be included in a dispositive motion filing, just trying to give you a general idea of rulings that may be coming down in the next several months.  That's involved a quick look at the briefs.  And on that note, a number of the cases involves multiple issues and don't fall exclusively into one category.

Each summary includes a link to the Business Court electronic file.

Class Actions

Clark v. Alan Vesture Auto Group, Inc.: This is a putative class action against an automobile dealer for allegedly misleading financing practices.  Pending are a motion to dismiss two defendants because of insufficiency of service of process, and a motion for summary judgment.  One issue is whether the Court should consider the dispositive motion before discovery and at the same time as its ruling on the class certification motion. 

Construction Law

Miller & Long Co., Inc. v. Intracoastal Living, LLC: The issues in this construction law case involve collection on a payment bond and enforcement of a claim of lien.

Wachovia Bank N.A. v. Superior Construction Corp.: The issue in this construction law case is the priority of Wachovia’s deed of trust versus a previously filed mechanics lien, where the lienholder had accepted some payment on its lien and executed a partial waiver of lien.

RJM Plumbing, inc. v. Superior Construction Corp: Motion for summary judgment by subcontractor on claim for breach of contract

Derivative Actions

Esquire Trade & Finance, Inc. v. Diversified Senior Services, Inc.: This case raises derivative action issues, including whether the allegations of the complaint were improperly broader than the demand which had been made, the effect of findings by a special litigation committee, whether plaintiff was owed a “special duty” as a preferred shareholder which entitled him to make direct claims against the corporation, and whether fiduciary duty claims were barred by the two year statute of repose of GS §55-7-48.

Garrett v. Parton: Motions to dismiss a derivative claim made by taxpayer on behalf of the City of Roanoke to recover money invested in a music theater, on the basis of standing.

Lancaster v. Harold K. Jordan and Co.: This is another derivative action case, involving whether the plaintiffs, members of the limited liability company plaintiff, had standing to bring claims on behalf of the LLC. The case raises the usual issues of whether the Defendant owed a “special duty” to the Plaintiffs, and whether Plaintiffs had injury “separate and distinct” from that of the LLC.

Mitchell, Brewer, et al v. Brewer: This dispute involves the breakup of a law firm that was a limited liability company, including whether plaintiffs were entitled to maintain the action as a derivative action, in part because they had withdrawn as members of the limited liability company, and whether they were entitled to pursue an action against the individual members of the LLC.

Revolutionary Concepts, Inc. v. Clements Walker PLLC: This isn't a derivative action in the true sense of the term, but it does raise the issue of when a shareholder has standing to maintain an action for an injury to the corporation.  The more interesting issue in this case is whether the Business Court lacks subject matter jurisdiction over a malpractice claim involving a patent because federal courts have exclusive jurisdiction over patent matters.

Webb v. Royal American Company: Motion to dismiss derivative claim against lender to limited liability company, issues include whether an adequate demand was made or whether plaintiff had established demand futility, and whether claims were barred by exculpatory provisions in loan agreement.

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Even if you read this blog regularly -- and thanks if you do -- you may not know that the Case Database feature here is a great place for researching a North Carolina business litigation issue. To get to that part of the blog, there's a Case Database button near the top left:

Click on that.  You'll see the interface down below.  Let's say you were trying to decide whether a particular case fell within the Business Court's statutory mandatory jurisdiction.  If you looked in the annotations to N.C. Gen. Stat. §7A-45.4, you wouldn't find any cases at all on that point.  The same would be true if you searched that term on Westlaw.  But if you check the "mandatory jurisdiction" box in the search box, or type those words as a search term, you'll get links to more than ten unpublished cases decided by the Business Court on that subject. 

That's just one example.  The Database contains searchable summaries of every numbered decision of the Business Court, which currently total 150 opinions going back to 1996.   The Database also has nearly 100 summaries of decisions of the Court that didn't get a number, and which therefore aren't "published."   Every summary has a link to the opinion or order.  The unpublished orders and opinions can't be found anywhere else other than the Court's website.  They aren't readily accessible there and they get taken off line when a case is closed.

Here are a few examples of unpublished cases in the Database:

• A case discussing the issue of when it is permissible to contact the former employees of a party without informing opposing counsel.  Symphony Service Corp. v. Motricity, Inc.
  
• A case quashing a subpoena to a law firm on the ground of attorney-client and work-product privilege.  UPS Capital Business Credit, Inc. v. Royal American Company, LLC.
• A case where the Court dismissed unfair and deceptive practices claims made by a doctor against his former partners, based on the "learned profession" exemption to the statute and because the claim was not "in commerce."  Faruque v. Bishopric.
• A case where the Court ordered specific performance of a Shareholders Agreement and required a minority shareholder to tender his shares to the corporation per the Agreement due to the termination of his employment.  Western Piedmont Anesthesia, P.A. v. Barnette.
•  A denial of a Motion for Temporary Restraining Order in a covenant not to compete case.  Integrity Financial Services, LLC v. Gutierrez
• A case holding that the Court has the power to sanction parties for missing mediation deadlines without good cause.  Hemenway v. Hemenway.

You can enter your own search term or use pre-defined terms, like these:

The more recent summaries I've done include links to the briefs of the parties.  The briefs often have thorough discussions of the issues and extensive case citations.

It's taken a while to get this feature working smoothly.  It's still not perfect and it doesn't have the sleekness or high functionality of a Westlaw or a Lexis, but it's working well enough for me to mention it specifically and to ask you to please try it out.

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The first round in a trademark dispute between two jewelers over the right to use the name "Windsor Jewelers" went to a WInston-Salem, North Carolina company.  Judge Diaz entered a Temporary Restraining Order  yesterday in Windsor Jewelers, Inc. v. Windsor Fine Jewelers, LLC, enjoining the Defendants from using the Windsor name for jewelry stores they had purchased in North Carolina.

Plaintiff Windsor has been operating in Winston-Salem for more than 25 years.  It has no federal trademark rights, but does have a service mark registered under the North Carolina Trademark Registration Act.  Plaintiff's only bricks and mortar location is in Winston-Salem, but it sells jewelry throughout the state, including in the Charlotte area.

The Defendant operates jewelry stores in multiple locations, and says it is one of the "Top Ten Independent Jewelers In America."  In its home state, Georgia, those stores are operated under the name "Windsor Jewelers." Defendant has used that name even longer than the North Carolina Plaintiff, but it apparently has no trademark registration. 

The dispute arose when Defendants purchased three jewelry stores in Charlotte in December 2006 and proposed to operate them under the name "Windsor Fine Jewelers." Defendants had approached the Plaintiff and offered to buy its store as well. In the course of those discussions, Plaintiff says the Defendants admitted "that it would be a conflict to expand into the North Carolina market using the 'Windsor' name without Plaintiff's permission or without" acquiring the Plaintiff. 

When the acquisition discussions broke down, Defendants offered to pay $750,000 simply to buy Plaintiff's tradename.  Plaintiff refused, and Defendants proceeded to rename their new Charlotte stores as "Windsor Fine Jewelers."

The lawsuit, and the TRO, followed.   The TRO says that:

Defendants' intent to confuse the consuming public is clear, as (notwithstanding that they have used the name Windsor Jewelers in Georgia and South Carolina) they were aware of Plaintiff's trademark registration in North Carolina when they selected Windsor Fine Jewelers as the name for their NC based stores, and indeed, attempted to purchase the Plaintiff's business and mark before announcing that they intended to change the name of their NC-based stores to Windsor Fine Jewelers.

Op. ¶3.  The TRO enjoins Defendants from use of the Windsor name in North Carolina, and also calls for all advertising materials which use the Windsor name in association with Defendants' Charlotte stores to be destroyed.

The Order itself is very short, so you'll have to look at the Briefs (linked below), if you would like to know more about the interesting state law trademark issues raised by this case.  There's a preliminary injunction hearing set for November 25th.  If that goes forward, perhaps we'll get a full opinion on some of the rarely addressed issues in the area of North Carolina trademark law.

Brief in Support of Motion for TRO

Brief in Opposition to Motion for TRO

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The Plaintiff had never signed the agreements containing the arbitration provisions which the Defendant sought to enforce, but the Business Court on November 19 nevertheless granted a Motion to Compel Arbitration in American Drywall Construction, Inc. v. Superior Construction Corp.,

The Plaintiff was a subcontractor, the Defendant was the general contractor.  The Defendant prepared three written subcontracts -- each of which contained an arbitration provision -- but Plaintiff never signed any of them.

Judge Jolly noted three key facts regarding the unsigned agreements:

First, Plaintiff had undertaken to do the work described in the subcontracts, and it was seeking payment for that work in the lawsuit.

Second, Plaintiff submitted applications for payment referencing the subcontracts. The forms completed by the Plaintiff stated that "this Application for Progress Payment is made in strict accordance with the terms of the Subcontract."

Third, the parties had signed an addendum to one of the subcontracts which said that "all terms and conditions of the Subcontract . . .are incorporated herein and by reference and shall remain in full force and effect."

The Court held:

in this civil action Plaintiff seeks payment for performance of the work done pursuant to the terms of the respective Subcontracts, while at the same time it seeks to deny the enforceability of one of the terms of the Subcontracts.  Much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff's conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause.  In addition, Defendant's argument in favor of the enforceability of the arbitration clause is bolstered by the signed subsequent writings, which specifically relate back to and incorporate the terms of the respective Subcontracts.

Judge Jolly concluded "the facts and circumstances of the dealings between the parties clearly demonstrate that the Subcontracts were intended by the parties to be binding.  The fact that certain of the agreements were not signed does not change this result."

Brief in Support of Motion to Compel Arbitration

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Mediation often devolves into the mediator shuttling back and forth between two rooms, carrying alternating declining and increasing offers to the parties.

There are times during this ping ponging of offers when I wish the mediator was pushing harder on the other party to explain the absolute rightness of my client's position, inevitably to result in summary judgment in our favor, or explaining to me why my client and I have missed the boat in evaluating the case.  Most mediators won't do that, and dismiss the concept of informing the parties of the mediator's perception of the quality of their case or defense as being unacceptably "evaluative."

I'm prompted to write about this subject based on a one paragraph Order by Judge Tennille earlier this year in Bank of America Corporation v. Beazer Morgage Corp., granting the Joint Motion of the parties to have a "neutral evaluation" instead of a mediation.  

What is a "neutral evaluation?"  In short, it's "a process in which a third party neutral examines the evidence and listens to the disputants' positions, and then gives the parties his or her evaluation of the case."  Here's a good article on the subject, and also the American Arbitration Association's description of the procedure and how it works.  Neutral evaluation apparently led to a settlement of the Beazer case, because the parties filed a joint dismissal with prejudice a few weeks after the evaluation, in which a state court Judge in Georgia served as the neutral.

There is clear approval of alternative resolution procedures to mediation in North Carolina's statute on mediated settlement conferences. N.C. Gen. Stat. Sec. 7A-38.1:

Promotion of other settlement procedures -- Nothing in this section is intended to preclude the use of other dispute resolution methods within the superior court. Parties to a superior court civil action are encouraged to select other available dispute resolution methods. The senior resident superior court judge, at the request of and with the consent of the parties, may order the parties to attend and participate in any other settlement procedure authorized by rules of the Supreme Court or by the local superior court rules, in lieu of attending a mediated settlement conference. Neutral third parties acting pursuant to this section shall be selected and compensated in accordance with such rules or pursuant to agreement of the parties. Nothing in this section shall prohibit the parties from participating in, or the court from ordering, other dispute resolution procedures, including arbitration to the extent authorized under State or federal law.

 Id. at i.

Also, the North Carolina Rules Implementing Statewide Mediated Settlement Conferences in Superior Court Civil Actions contain a specific provision (Rule 10) permitting the parties to request the use of procedures other than mediation, including neutral evaluation (Rule 11), non-binding arbitration (Rule 12), or non-binding summary jury or non-jury trials (Rule 13).  I don't hear much about these alternative procedures being used in North Carolina even though they are specifically allowed by the Rules.

There is no special certification necessary to become a neutral evaluator.  In Mecklenburg County, for example, the Court maintains a list of approved neutrals.  You are qualified to serve if you have five years of experience as "a judge, practicing attorney, law professor, arbitrator or mediator, or have equivalent experience" and you are of "good moral character," and you "adhere to ethical standards."

The cartoon at the top is by Charles Fincher, a lawyer who is also a cartoonist.  His very funny comics and comic strips are what he calls "inside baseball" humor for lawyers.  He has a number of different cartoons and strips, which you can find at lawcomix.com.  The one I used, with his permission, is from a series of one-panel cartoons called Scribble-in-Law. 

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Today, the North Carolina Court of Appeals said that it did not have the authority to adopt the "new" standard for consideration of a Rule 12(b)(6) Motion articulated last year by the United States Supreme Court in Bell Atlantic Corp. v. Twombly, __ U.S. __, 167 L.Ed.2d 929 (2007). 

If Twombly is to become the law of North Carolina, that is now up to the North Carolina Supreme Court.  Given the pace of appeals in North Carolina, it's going to take a while to see whether that will happen.

The Court's decision came in a rather bizarre case, Holleman v. Aiken, which was brought by a very enthusiastic fan of Clay Aiken, of American Idol fame.  Plaintiff, the author of a book about Aiken's life, claimed that Aiken and others had defamed her by saying that her book was not authorized by them and by refusing to endorse her book. Among other things, Plaintiff wanted an injunction requiring Aiken to endorse her book on his website, to write an endorsement for the back of the book, and to write an introduction to her book thanking her for writing it.

The Court affirmed the dismissal of virtually all of Plaintiff's claims, including claims for libel per se and libel per quod, notwithstanding its refusal to adopt the Twombly standard.  Judge Stroud, writing for the Court of Appeals, said that "our courts cannot be used to force celebrities or their family or friends into making endorsements for another person's profit."

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There's been a lot of publicity about North Carolina Senate candidate Kay Hagan's "lawsuit" against incumbent Senator Elizabeth Dole over a television commercial suggesting  that Hagan is "godless." 

The subject of this post is that there technically isn't a lawsuit at all, at least not yet.  The court filing by Hagan illustrates an interesting quirk of North Carolina civil procedure.  In North Carolina, you can start a legal proceeding without filing the Complaint which typically begins a lawsuit.

That's pretty unusual.  I'm not aware of any other state which has a procedure exactly like the one contained in Rule 3 of the North Carolina Rules of Civil Procedure, which lets a lawyer file a Summons to start a lawsuit and to then follow up twenty days later with a Complaint detailing the claims against the defendant. (Though North Dakota Rules of Civil Procedure 3 and 4(c) provide that you can start a lawsuit with a Summons and the Defendant can then demand that the Complaint be filed within twenty days).

The North Carolina procedure is colloquially called a "Summons without Complaint."  Our Rule 3 provides that while a lawsuit is ordinarily started with the filing of a Complaint:

A civil action may also be commenced by the issuance of a summons when

(1) A person makes application to the court stating the nature and purpose of his action and requesting permission to file his complaint within 20 days and

(2) The court makes an order stating the nature and purpose of the action and granting the requested permission.

Why would a lawyer use this procedure?  One reason might be to toll the statute of limitations, which obviously wasn't necessary given the very recent airing of the commercial, or to try to be first to the courthouse when there is a dispute over where a particular claim should be litigated, also not a particularly significant factor in the dispute between the candidates.

There is a North Carolina form for a lawsuit started without a Complaint, which is exactly what Hagan filed to initiate her claim against Senator Dole. The filing lays out the basis for the lawsuit, probably in more detail than Rule 3 requires, because the Rule requires only "preliminary notice" of the nature of the claim.  See, e.g., Morris v. Dickson, 14 N.C. App. 122, 187 S.E.2d 409 (1972). 

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Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008).

The North Carolina Business Court decided today the first published opinion under North Carolina’s Identity Theft Protection Act, N.C. Gen. Stat. §75-60 et seq. The case, Fisher v. Communications Workers of America, also involves an interesting invasion of privacy issue.

The Plaintiffs were members of the CWA, working for AT&T at various locations. A representative of the Union posted a notice on a bulletin board at one job site which contained the social security numbers of all the Plaintiffs.

This led to three claims by the Plaintiffs: that this violated the North Carolina Identity Theft Protection Act, that it was an unfair and deceptive practice, and that it was an invasion of privacy.

The Act specifically provides that a business may not "Intentionally communicate or otherwise make available to the general public an individual's social security number."  N.C. Gen. Stat. §75-62(a)(1).  Defendants argued that the list posted on the bulletin board had not been seen by the "general public" and that it had not been posted there in order to facilitate identity theft.  The Defendants also argued that the bulletin board was used for "internal verification or administrative purposes," and that the posting was therefore exempt under N.C. Gen. Stat. §75-62(b)(2).

Judge Diaz rejected these defenses.  He held that the Act does not require that the general public actually see the social security numbers in order for there to be a violation.  He also held that the communication of the social security numbers does not need to be made either for the purpose of providing them to the general public or for the purpose of facilitating identity theft.  And as to the "bulletin board defense," Judge Diaz held that this presented a question of fact which could not be resolved on a motion to dismiss.

The Motion as to the unfair and deceptive practice claim was also denied, mainly because the Act provides that “[a] violation of [section 75-62 of the North Carolina General Statutes] is a violation of [the UDTPA].” N.C. Gen. Stat. § 75-62(d) (2007).

The Court did grant the Motion to Dismiss on the invasion of privacy claim, however.  It held that the posting of the social security numbers was "not the type of 'intentional intrusion, "physically or otherwise,"' necessary to state a claim for invasion of privacy by intrusion into seclusion."  It held that this tort requires  "a physical or sensory intrusion or an unauthorized prying into confidential personal records."

The Court also rejected the argument that the posting on the bulletin board could make out an invasion of privacy claim because it was a "public disclosure of private facts."  The Court relied on  Hall v. Post, 323 N.C. 259, 265–70, 372 S.E.2d 711, 714–17 (1988), in which the North Carolina Supreme Court held that the tort does not encompass claims which involve the publication of true but private facts.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Defendant's exercise of his Fifth Amendment right against self incrimination was the basis for the North Carolina Business Court's entry of a Preliminary Injunction on October 29th in Amacell LLC v. Bostic.

Plaintiff asserted that its former employee, a senior research scientist, had misappropriated trade secrets and violated a confidentiality agreement.  The Defendant didn't deny the misconduct alleged, but instead invoked his Fifth Amendment right against self-incrimination.

Judge Tennille drew an adverse inference as a result of the Defendant's refusal to testify and entered the Preliminary Injunction, holding:

In a civil case, adverse inferences may be drawn against a party who asserts the Fifth Amendment and remains silent.  Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them”); see Arminius Schleifmittel GMBH v. Design Indus., Inc., 2007 WL 534573 (M.D.N.C. Feb. 15, 2007) (granting injunction against defendant who asserted Fifth Amendment privilege because by asserting the privilege he rendered plaintiff’s factual presentation unrebutted). Because Bostic has not rebutted Plaintiff’s evidence, Plaintiff has established a likelihood of success on the merits of its claims for misappropriation of trade secrets and breach of his confidentiality agreement.

Order at 3.

The Business Court also dealt with the Fifth Amendment in the context of civil litigation in its opinion in Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), where the Court held that a plaintiff who refused to testify about certain matters could not testify about them at trial, and that it would give an adverse inference instruction.

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You've lost a case in the North Carolina Court of Appeals,  It was unanimous, 3-0.  You are talking with your client about a Petition for Discretionary Review to the North Carolina Supreme Court. 

What are your chances?  Frankly, not very good at all.  I took a look at the Supreme Court's track record this year on Petitions for Discretionary Review.  I counted 341 Petitions ruled upon on the five release dates so far this year.  Of that number, 319 were denied, and 22 were allowed.  In overall percentage terms, 94% were denied.

The numbers break a little better for civil Petitions as opposed to criminal Petitions.  There were 180 criminal Petitions, of which only 5 were granted. That's less than 3%.  There were 161 civil Petitions, of which 17 were granted.  The chances on a  civil Petition, overall, were slightly better than 10%, but eight of those were Petitions where there was a dissent in the Court of Appeals.  When you take those out of the mix because the Supreme Court was going to take the appeal as of right, the winning percentage is about 6%. 

I haven't subjected these numbers to actuarial review, but they are accurate enough for me to say that you might be better off looking for 4-leaf clovers than asking the Supreme Court to take your case on a discretionary basis.  The Court of Appeals, for all practical purposes, is the final level of review for a civil case in North Carolina.

Things are quite different if there is a dissenting opinion in the Court of Appeals and you ask the Supreme Court through a Petition for Discretionary Review to consider additional issues.  Virtually all of those Petitions were granted.

If you are proceeding ahead with a Petition despite the long odds, and are looking for a winning Petition to get some guidance in drafting your own, at the bottom of this post there are links to five of the Petitions allowed this year in civil cases. 

Petition for Discretionary Review in Mangum v. Raleigh Board of Adjustment

Petition for Discretionary Review in Pottle v. Link

Petition for Discretionary Review in Sandy Mush Properties, Inc. v. Rutherford County

Petition for Discretionary Review in Weaver v. Sheppa

Petition for Discretionary Review in Grant v. High Point Regional Health System

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The North Carolina litigation involving Citigroup and Wells Fargo's fight for Wachovia has been dismissed with the consent of the parties.  As a part of the dismissal, Citigroup has agreed that it will not take any steps to enjoin a merger between Wells Fargo and Wachovia or interfere with a vote of the Wachovia shareholders on that merger.

Bud Baker, Wachovia's former CEO, had obtained a Temporary Restraining Order in Mecklenburg County which prohibited Citigroup from "filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the second paragraph of the Letter Agreement." 

The referenced second paragraph of the Agreement gave Citigroup a period of exclusivity to pursue the negotiation of a definitive agreement with Wachovia.  Citigroup claimed in litigation in New York that this provision had been breached by Wachovia with the assistance of Wells Fargo, and it had obtained a limited injunction from a Judge there.

The Joint Stipulation of Dismissal of the North Carolina action contains a commitment by Citigroup that it will not seek to prevent a shareholder vote on a Wells Fargo-Wachovia Merger.  It says:

Without waiving its rights fully to pursue monetary damages in other litigation, that Citigroup will not pursue any form of injunctive relief to seek to prevent a shareholder vote on the merger between Wachovia Corporation and Wells Fargo & Company, Inc. or pursue any kind of injunctive relief that would prevent the consummation of that merger.

Citigroup stated in a Press Release its intention to pursue damage claims against Wachovia and Wells Fargo.  It says that its "shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

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