Business Court (In Judge McGuire's First Opinion) Outlines The "Indispensable Requirements" For The Formation Of A Partnership

Well, newest Business Court Judge Gregory McGuire has gotten off to a running start with his first opinion, issued only about a week after his appointment to the Business Court by Governor McCrory.  The case is La Familia Cosmovision, Inc. v. The Inspiration Networks, 2014 NCBC 51.

The main issue in La Familia concerned whether La Familia could pursue its claims that it and one of the Defendants had formed a partnership aimed at the development of a Spanish-language network called "La Familia Cosmovision."  It sought a declaratory judgment recognizing that the parties were in a partnership.  Judge McGuire ruled that there were insufficient allegations to establish the existence of a partnership and granted the Defendants' Motion to Dismiss.

The "Indispensible Requirements" For Forming A Partnership

Judge McGuire stated that:

there are . . . two 'indispensable' requirements that must be met for a legal partnership to exist.  The first requirement is 'sharing of any actual profits.'  The second 'indispensable requisite' is that of 'co-ownership of the business.'  Failure to properly plead allegations supporting the existence of one or both of these elements is fatal to a claim for declaratory judgment of an implied partnership.

Op. ¶36 (emphasis added)(relying on Wilder v. Hobson, 101 N.C. App. 199, 202 (1990) and McGurk v. Moore, 234 N.C. 248, 252 (1951)).

An important point from the La Familia case is that an agreement to share revenue (which was at least an ancillary part of the parties' agreement) does not meet the "indispensable requirement" of a sharing of profits,  There's nothing groundbreaking in this because, as Judge McGuire observed, the NC Supreme Court said 100 years ago that "an agreement to share gross returns does not create a partnership, for the reason that such an agreement is inconsistent with the joint ownership of the profits."   Op. ¶37 (quoting Buie v. Kennedy, 164 N.C. 290, 294 (1913)).

A Partnership Must Include An Agreement To Share Losses

But if sharing profits is an essential element, what about the flip side of that?  Must there also be an agreement to share losses?  North Carolina law was ambiguous, or at least "not clear" on this point, said Judge McGuire.  Op. Par. 41.  But the Judge imposed some clarity on this issue, holding that "[t]he general rule under the Uniform Partnership Act, and other law, is that an agreement to share losses as well as profits is essential to the existence of a partnership." Op. ¶42 (quoting 59A Am. Jur. 2d Partnership § 155 (2014).

The Letter of Intent which Plaintiff said had established the partnership said nothing about loss sharing.  It said that the Plaintiff and the Defendant  were each "solely responsible for all expenses incurred with the performance of their respective obligations under this LOI and any subsequently executed agreement." Op. Par. 38.

Co-Ownership Was Lacking

There was no evidence suggested by Plaintiff that it and the Defendants "ever combined assets or co-owned partnership property or any common legal entity.

Furthermore, the Letter of Intent stipulated that the Defendant Inspirational Networks, Inc. was the sole owner of the name "La Familia Cosmovision."  The Plaintiff had only a license to use that name.

Other factors which led to the Court's grant of the Defendants' Motion to Dismiss were the lack of a partnership tax return ever being filed and that no partnership bank account had ever been established.  Op. Par. 48.  Another factor sinking Plaintiff's claim was that a provision in the Letter of Intent said, under the heading "Relationship of the Parties," that the Defendant was an "Independent Contractor" and that "nothing in this agreement shall be construed to create a joint venture." Op. ¶48.

It didn't help Plaintiff's claim either to rely on "casual statements" made by the Defendant to third parties that it had a "partnership" with the Plaintiff.  The doctrine of "partnership by estoppel" was not applicable because Plaintiff's claim was not based directly on any of those statements. Op.  ¶46 & n.54.

A Question About Suing An Entity Operating Under An Assumed Name

Oh, and there is one other tidbit from the La Familia decision which is worth mentioning.  The Plaintiff had sued two Defendants: The Inspirational Networks, Inc., the corporate entity which had signed the Letter of Intent, and also The Inspiration Networks, the assumed name under which the corporation was doing business.

Could it sue both the corporation and the assumed name under which it was operating?  Judge McGuire said that this appeared to be an issue of first impression in North Carolina and ruled that Plaintiff could not sue both the corporation and the assumed name entity:

For the same reason that it would be nonsensical to name the same entity or individual twice as a party to an action, a plaintiff cannot maintain an action against both a legal entity and its assumed name.

Op. Par. 29.

So, in addition to alleging the "indispensable requirements" of a partnership before suing to establish a partnership, don't sue unnecessary defendants.

 

Trade Secrets Cases In The NC Business Court: You Show Me Yours Before I'll Show You Mine

There's a new roadblock for plaintiffs in the Business Court suing over trade secrets.  It was imposed last week by Judge Bledsoe in DSM Dyneema, LLC v. Thagard, 2014 NCBC 50, and it bars the plaintiff from proceeding with discovery until the trade secrets allegedly being misused by the defendant are identified with "sufficient particularity."

There is nothing new in requiring particularity in trade secrets claims.  The Business Court has frequently granted motions to dismiss trade secrets claims because the alleged trade secrets were not identified with sufficient particularity, but it had never refused to allow discovery on this basis, at least until the Dyneema decision.

Dyneema had sued its former employee, Thagard, and his new employers, three Honeywell companies, alleging misappropriation of its trade secrets for  the development of ballistic fibers for use in enhanced combat helmets ("ECH").

When the Honeywell Defendants were served with discovery, they objected and refused to produce responsive documents relating to their own methods of producing ECH (which they said were their own trade secrets) on the ground that the Plaintiff had not identified with sufficient particularity the trade secrets which it was saying had been misappropriated.

Judge Bledsoe examined a variety of federal court decisions on the point of when discovery is appropriate in a trade secrets case, and he found the "cases requiring pre-discovery disclosure of trade secrets persuasive."  ¶21.  The reasons supporting this bar to discovery until the plaintiff's trade secrets have been described in sufficient detail included:

  • prevent[ing] fishing expeditions into a competitor defendant's trade secret;
  • deny[ing] a plaintiff the opportunity to craft a trade secret claim to fit the evidence from the defendant;
  • prevent[ing] 'needless exposure of the defendant's trade secrets'; and
  • allow[ing] well-investigated claims to proceed while discouraging meritless trade secrets claims.

Op. ¶18.

The Judge recognized that there are countervailing reasons to allow discovery to proceed, including "the inherent difficulty in certain situations of identifying what portions of trade secrets have been misappropriated prior to receipt of discovery from defendants."  Op. ¶19.

So, how "particular" does a trade secrets plaintiff need to be in identifying its trade secrets with "sufficient particularity"?  The answer is that there is no clear answer.  Judge Bledsoe set an outer boundary, saying that a plaintiff does not need to "define every minute detail of its trade secrets down to the finest detail."  Op. ¶23 (quoting Prolifiq Software Inc. v. Veeva Sys. Inc., 2014 U.S. Dist. LEXIS 77493, *5 (N.D. Cal., June 4, 2014),

Short of that standard, it is hard to say what would meet the Court's approval in the future.  What  Dyneema did offer fell short, notwithstanding a full single spaced page describing its claimed trade secrets.  Op. ¶8.  Court found this description, despite its length, to "simply identify features that are common to all ballistic materials or common to the development and manufacture of ballistic materials." Op. ¶22.

Judge Bledsoe held that Dyneema had to:

specifically describe “what particular combination of components renders each of its
designs novel or unique, how the components are combined, and how they operate
in unique combination”

before it could go forward with discovery of the Defendants’ trade secrets.  Op. ¶24 (quoting Switch Commc’ns Grp. v. Ballard, 2012 WL 2342929, at *4 (D. Nev. June 19, 2012).

So, if you are representing a trade secrets plaintiff in the Business Court, plan on disclosing more about your client's trade secrets than your client would prefer.  Not every "minute detail," but a lot of details.

 

 

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

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

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

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

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

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

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

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

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

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

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

 Op. ¶35.

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

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

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

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

Op. ¶¶35(iv) and (ix).

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

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

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

 

Don't Let Yourself Get Ehrenhaused When Appealing From The NC Business Court

It's probably not too soon to verbify the Business Court's opinion in Ehrenhaus v. Baker, 2014 NCBC 30, decided a few months ago.  If you missed that decision, know that you have to file your Notice of Appeal from a Business Court decision not just  by e-filing in the Business Court, but also by filing with the Clerk of Court in the county where the case was filed.  Otherwise, the Business Court can dismiss your appeal.

The plaintiffs in three separate cases suing the former principals of Bostic Construction Company for constructive fraud were Ehrenhaused last week.  They didn't file their Notices of Appeal with the Clerks of Superior Court in the counties from which their cases had originated, and Judge Bledsoe yesterday dismissed each of the appeals in response to the Defendants' Motions to Dismiss, based on the Ehrenhaus ruling.

The only one of the three cases that was published is American Mechanical, Inc. v. Bostic, 2014 NCBC 47.  The Orders from the other two cases dismissing the appeals for the same reason are unpublished.  They are in the Phillips and Jordan case and the Yates Construction Company cases brought against the Bostics.

While Ehrenhaus was certainly correctly decided based on the Business Court Rules and appellate court precedent, I can't say I like the concept of a court with a fully electronic filing system being undercut by a duplicative paper filing at a bricks and mortar courthouse.  Maybe the next time the General Assembly looks into "modernizing" the Business Court, it can take up this issue.

But for now, you are all on notice of where to file your Notice of Appeal from a Business Court decision.  E-file it in the Business Court and file a paper copy with the Clerk of Court in the County in which the case originated.  And don't forget that after October 1st there will be direct appeals from many Business Court rulings to the NC Supreme Court.

 

Trade Secrets Claims Can Be Tough To Succeed On In The Business Court

If you want to pursue a trade secrets claim in the Business Court, you've got to disclose the details of your trade secret.  The Opinion last week in Unimin Corp. v. Gallo, 2014 NCBC 43 illustrates that point in detail. 

It seems at first blush like a case made for a preliminary injunction for the misappropriation of trade secrets, which is what the Plaintiff Unimin sought.  The individual Defendant, Gallo,  had been Unimin's General Manager of Research and Development.

Gallo had accepted a position with one of Plaintiff's competitors in the business of mining and processing "high purity quartz" (HPQ).

If you are like me, you have dwelt in ignorance of the importance of HPQ to your existence.  It is "one of today's key strategic materials for the high-tech industry."  It is used in semi-conductors, tubing for high temperature lamps, telecommunications devices, and in lenses for telescopes.

The quartz refined into HPQ is mined in only a few places around the world, one of them being in Spruce Pine, North Carolina.  Wherever it is mined, its slight impurities must be removed from the quartz in order to render it true high purity.

Plaintiff Unimin says that it is the global leader in HPQ and that its methods of processing the HPQ which it sells are "confidential, proprietary, and a trade secret." Op. ¶13. It said that Gallo had been the inventor or a "key player" in the development of its trade secrets and that he should be enjoined from using them for the benefit of his new employer.

Hadn't the Plaintiff taken steps to protect itself from Gallo's disclosure of this important and proprietary information?  Of course it had: Gallo was bound up by three separate agreements.  There were two Confidentiality Agreements and a Non-Compete.

The validity of those restrictive agreements wasn't the issue in this case.  Instead, it was whether the Plaintiff had sufficiently identified its trade secrets.

Plaintiff broadly described its trade secrets as the various processes that it followed in refining quartz, but failed to provide enough sufficient specifics to satisfy Judge Bledsoe that the Defendants had been put on notice as to what the trade secrets were.

It is hard to distill from this Opinion what you should show  in pursuing a trade secrets claim in the Business Court, but I will take a stab at it.  (Or if you want the full scope of the Court's analysis, read Paragraphs 35 to 50 of the Opinion).  The answer is not to refer generally to the process you allege is a protected trade secret.  Be prepared to give the details.  Judge Bledsoe said this:

Plaintiff broadly identifies various processes as its alleged trade secrets without offering evidence that those processes are unique to Plaintiff or have been modified by Plaintiff in unique ways.  For example, Plaintiff describes its 'mining process control plan as using "[REDACTED] modeling and process simulations' that develop 'mineral processing strategies' but does not offer evidence explaining what those simulations and strategies are or why these simulations and strategies are unique to Plaintiff.

Op. ¶41.

Apart from the Plaintiff's lack of specificity about its trade secrets, two other factors doomed Plaintiff's request for an injunction.  The first was the argument by Gallo's new employer that any trade secrets claimed to be known to Gallo would be of little use to it, given that its quartz was extracted from a different mine than the North Carolina mine operated by Plaintiff.  Judge Bledsoe found that the differences in the qualities of the different quartz ores "appear to require sufficiently different processes to mine and develop HPQ to render at least some, if not all, of Plaintiff's alleged trade secrets non-transferable."  Op. ¶57.

The second factor was a lack of any showing that Unimin was at risk of Gallo disclosing its trade secrets.  To the Court, this was established by the fact that Gallo had been gone from the Plaintiff's employment for five years before taking a job with his new employer.  During that five year hiatus, he had abided by the terms of his five year non-compete.  Judge Bledsoe ruled that Gallo's:

long-term adherence to his contractual obligations is persuasive evidence that he is not a threat to violate his contractual or other legal commitments to Plaintiff and disclose Plaintiff's alleged trade secrets.

Op. ¶59.

A "mere possibility of misappropriation" under the NC Trade Secrets Protection Act is insufficient to obtain an injunction.  Op. ¶63.

Although Judge Bledsoe had previously granted a Temporary Restraining Order to the Plaintiff, he denied its Motion for a Preliminary Injunction.

 

 

 

Who Bears The Burden Of Proving Waiver Of Attorney-Client Privilege?

This week, in an Opinion in Safety Test & Equipment Co. v. American Safety Utility Corp., 2014 NCBC 40, Judge Gale made a significant ruling on which party bears the burden of proof in showing a waiver of the attorney-client privilege (or showing the absence of a waiver)..

The elements that must be shown to make out the privilege are pretty well established.  Communications between lawyer and client are protected by the privilege if:

(1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated[,] and (5) the client has not waived the privilege.  

Op. 11 (quoting Isom v. Bank of America, N.A., 177 N.C. App. 406, 411, 628 S.E.2d 458, 462 (2006))(emphasis added).

Case Of First Impression In North Carolina

But as to that requirement that "the client  has not waived the privilege," does the party asserting the privilege need to prove that there has been no waiver?  That's the difficult task of proving a negative, and as Judge Gale observed, no North Carolina appellate decision has clearly considered whether "the party claiming privilege has an initial burden to prove the negative of a waiver or whether the privilege proponent need only prove absence of waiver in response to an adequately supported challenge."  Op. 12.

The case before Judge Gale involved a letter from the counsel for Defendant American Safety to one of the individual Defendants (Price) regarding that Defendant's possible employment with American Safety.  As you might guess, this is a case between competing businesses alleging misappropriation of trade secrets.

Curiously, the Plaintiff already possessed a redacted copy of the otherwise privileged letter, though the parties disputed how Plaintiff had obtained the redacted copy.  Plaintiff said that Price had voluntarily given it the letter, but Price denied that.  The Defendants implied that the letter had been stolen.

The Plaintiff also sought by motion to compel to obtain another letter from the same counsel for American Security written about two weeks later, which was identified on a privilege log.

So who wins this skirmish?  The party claiming the letter is protected by the privilege and denying any waiver, or the opposing party, with disputed evidence of waiver?

The Court Adopts A Burden-Shifting Approach

In resolving this question, the Court adopted a "burden-shifting approach," which it said was "'[t]he prevalent, albeit unstated, practice' in the federal courts where issues of potential waiver arise."  Op. Par. 13 (quoting 2 Paul R. Rice, Attorney-Client Privilege in the United States, §9:22, at 82 (2013-2014 ed. 2013).

That approach goes like this:

Under this burden-shifting approach, courts impose the initial burden of establishing the basic elements on the privilege proponent. This initial burden does not require the privilege holder to affirmatively negate waiver. Rather, once the proponent of the privilege establishes the basic elements of privilege, the burden of production of evidence shifts to the opponent to establish a prima facie case of waiver.  If the privilege opponent establishes a prima facie case of waiver, the burden of going forward with evidence shifts back to the proponent to rebut the prima facie case by demonstrating that the privilege is still viable.  Ultimately, the privilege proponent bears the burden of persuasion.

Op. 13 (citations omitted).

Given that the parties submitted conflicting evidence on the waiver issue, Judge Gale applied the principle that "[w]here the weight of the evidence is equal, the adverse ruling must be against the party with the ultimate burden of proof."  Thus, the Defendant lost on its claim of privilege, and it was directed to produce an unredacted copy of the letter already in the Plaintiff's possession.

Subject Matter Waiver Applies When The Waiver Is Not Intentional

The Defendants were also ordered to produce the second letter, the one which was not in the Plaintiff's possession.  Judge Gale said that he could not conclude that the waiver as to the first letter was inadvertent and that the waiver of privilege in the first letter therefore extended to the second.  Op. 19.

The result would have been different if the waiver had been inadvertent.  The Business Court has previously held that

[T]he general rule that a disclosure waives not only the specific communication but also the subject matter of it in other communications is not appropriate in cases of inadvertent disclosure . . . .

Morris v. Scenera Research, LLC, 2011 NCBC 34 at *33.

Judge Gale stanched the flow of blood there.  He ruled that he would not require the Defendants to produce any other communications from their counsel.

 

 

When Winding Up A Corporation Don't Do This

I don't know any lawyers who specialize in winding up corporations, but if any of you are out there, you should read this post.

It is important to remember, when winding up a corporation, that "principals and directors of a corporation owe a fiduciary duty to creditors of the corporation when the corporation is insolvent and 'under circumstances amounting to a "winding up" or dissolution of the corporation.'"  Order 6.

In an Order entered last week in Americana Development, Inc. v. Ebius Trading & Distributing Co., Judge Jolly entered a TRO against a financially troubled corporation preventing it from paying debts that had been guaranteed by its principals and officers to the exclusion of its other debts.

In granting a Temporary Restraining Order, Judge Jolly said that the individuals were:

using their positions as principals and officers of [Ebius and its parent corporation] to secure a personal benefit by satisfying only those debts for which they are personally liable.  If Defendants are permitted to favor only those creditors whose debts are personally guaranteed, Plaintiff, as a non-guaranteed creditor of Defendants, would be at risk of significant injury as its claim would go wholly unsatisfied as a result of the improper distribution by [the individuals].  The injury caused by the improper liquidation of Defendants' assets would be irreparable.

Op. 7.

The Defendants were enjoined from paying the debts on which Ebius was not liable, and also from paying any of the corporation's debts other than on a pro rata basis.

Congratulations to my colleague Clint Morse  for obtaining this result for the Plaintiff.

 

The Motion You Probably Shouldn't Bother To Make In The Business Court (Or In Any Other Court)

I think I might have made a Motion for a More Definite Statement.  If I did that, I did it only once, and I can't remember the result.  Asking for a more definite statement is a rarely used litigation maneuver, allowed by Rule 12(e) of the North Carolina Rules of Civil Procedure.

The Defendant in the NC Business Court case of Shaw v. Shaw made a Rule 12(e) Motion but it was rejected in an Order yesterday by Judge Bledsoe.  The Judge said:

Motions for a more definite statement are not favored by the courts and are 'sparingly granted because pleadings may be brief and lacking in factual detail, and because of the extensive discovery devices available to the movant.'  Ross v. Ross, 33 N.C.App. 447, 454, 235 S.E.2d 405, 410 (1977)(citations omitted).  As long as the pleading meets the standards of N.C.R.C.P.  Rule 8 and the opposing party is adequately notified of the nature of the claim, a motion for more definite statement will be denied.  Id.

Order 10 (emphasis added).

If you are curious about the allegations in the Complaint which were alleged to be too indefinite to allow a response, they were paragraphs 25(e) and (j), which concerned the Defendant's claimed making of unauthorized loans and payment of excessive compensation.

Judge Bledsoe ordered that the allegations fairly notified the Defendant of the claims against him, given the notice pleading requirements of Rule 8.

What about Complaints that go beyond the notice pleading requirements of Rule 8, that have too much detail?  That's a different kettle of fish. I've more often made a Rule 8(e) Motion, arguing that a Complaint violated Rule 8 because it was not "concise and direct."  But that's mainly because I like the word "prolix."  You don't get to use it very often.

Can You Get A Ruling From A Superior Court Judge After Your Case Is Designated To The Business Court?

If you've been reading this blog for a while, you know that once a case is in the Business Court, it is in there forever, even if the issues that justified it being there in the first place are subsequently resolved. 

But when does the Court's jurisdiction begin?  You might think it is when the Chief Justice of the Supreme Court signs an Order designating the case to the Court, especially if you look at G.S §75A-45.4(f), which says that:

Once a designation is filed under subsection (d) of this section, and after
preliminary approval by the Chief Justice, a case shall be designated and administered a complex business case. All proceedings in the action shall be before the Business Court Judge to whom it has been assigned.  . .

The decision by Judge Bledsoe last week in 130 of Chatham, LLC v. Rutherford Electric Membership Corp., 2014 NCBC 35, got me thinking about this issue, though on the surface the case has nothing at all to do with when the jurisdiction of the Business Court attaches.

The issue in the case was whether Judge Bledsoe should stay an order entered in the case while the decision was being appealed. 

The stay requested by Defendant REMC was of an Order entered in Rutherford County Superior Court.  It required REMC to provide the Plaintiff with the list of its members, the minutes of its Board of Directors, records of its member actions, and its financial statements.

The chronology of events is important here.  The case was designated to the Business Court by the Chief Justice on July 15th.  The Order being appealed from was entered in Rutherford County after that, on July 28th, following a hearing on July 21st.  Business Court Chief Judge Jolly assigned the case to Judge Bledsoe after the hearing, but before the Rutherford County Judge's ruling, on July 23rd. 

Judge Bledsoe refused to enter a stay, ruling that entering a stay would "effectively put the Court in the position of overruling [the Rutherford County Judge's] Order in violation of North Carolina law."  Op. ¶24.

What the Opinion doesn't mention is why a Superior Court Judge had entered an Order after the case had been designated to the Business Court.  Business Court Rule 15.1, titled "All Motions to be Filed in Business Court," says that "[a]fter a case has been assigned or designated to the Business Court . . . parties shall seek rulings on all motions in the case from this Court, and not from Superior Court Judges or Clerks in the counties where cases originate." (emphasis added).

So why had a Rutherford County Superior Court Judge entered a ruling in a case that had been designated to the Business Court?  I found the answer to this riddle in some of the filings by the Plaintiff, which included emails to and from the Business Court about what was then the pending motion to obtain the documents.   It turned out that the determining factor was that although the case had been designated to the Business Court, it had not yet been assigned to a particular judge.

Given that the motion had some urgency to it, the Plaintiff went ahead to have it heard in Rutherford County notwithstanding the designation to the Business Court.  But it kept the Business Court informed of its intentions and got a go-ahead to proceed.

Judge Jolly's law clerk stated in an email that "[b]ecause the Business Court is not a court of jurisdiction, a hearing may go forward on the pending motions in the county court of origin if the hearing is needed before the case is able to be assigned to a Business Court judge."

Judge Bledsoe's law clerk then stated in an email "[b]ecause the pending matters before [the Rutherford County Superior Court Judge] . . . were heard and calendared for further hearing prior to the designation of the case to the Business Court, it is the policy of the Business Court that [the Rutherford County Superior Court Judge] can decide whether to go forward with the hearing and rule on the matters pending before him at the time of designation."

Then, Judge Jolly's Trial Court Coordinator weighed in.  She handles the assignment of designated cases to Business Court Judges. but she said that she had been out on vacation and that the case had not yet been assigned due to her absence.  She added "[p]lease keep in mind that Business Court designation is not jurisdictional.  Your hearing may still go forward in Rutherford County."

You can read those e-mails here.

So, that's the long answer to why a Superior Court Judge was entitled to proceed to make a ruling in a case which had already been designated to the Business Court.  But don't read this post and think that you can get away with proceeding in the Court for the county where the case originated after it has been designated to the Business Court.  Ordinarily, a Judge is assigned immediately, removing the gray area into which this case fell. 

And I wouldn't take emails from Court personnel as the gospel.  Judge Bledsoe didn't discuss at all the propriety of the Superior Court's ruling in what had become a Business Court case.

Given 130 Chatham, you  can kinda sorta still obtain an Order from the Superior Court from which you designated the case even after it has been designated to the Business Court by the Chief Justice.  At least until your case is assigned to a Business Court Judge.

I don't recommend trying to pull off this trick.

 

 

An Important Tip On Appealing A Decision From The NC Business Court

The Business Court is electronic.  Paper copies of documents are not filed with the Business Court.  So when you e-file a Notice of Appeal, is that sufficient for purposes of Rule 3 of the NC Rules of Appellate Procedure?

Let's look at the Rule first.  It says that:

Any party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule.

N.C. R. App. Pro. 3(a)(emphasis added).

The Plaintiff in Ehrenhaus v. Baker, 2014 NCBC 30 wanted to file a cross appeal from Judge Murphy's decision awarding attorneys' fees to his lawyers in his lawsuit over Wachovia's merger with Wells Fargo.  If you need to be refreshed on that ruling, I wrote about it in April.

Since one of the individuals objecting to the fee award had already filed a notice of appeal, the Plaintiff had ten days after that to file his own notice of appeal.  N.C. R. App. Pro. 3(c).

The tenth day was May 2, 2014.  Plaintiff e-filed his notice of appeal with the Business Court on April 30, 2014. 

Was the notice of appeal timely?  No, said Judge Gale, as the notice of appeal was not filed with the Mecklenburg County Clerk of Superior Court until May 15, 2014.

The decision hinged on whether the e-filing, which had been delivered to the "Clerk of Court" at the Business Court, satisfied the filing requirement of Appellate Rule 3 of being directed to the "clerk of superior court."  (Note that the Business Court's electronic filing system produces a Notice of Electronic Filing which includes a reference to service on "Clerk of Court,"  which actually is the email address of the Court's law clerk in Raleigh.)

Plaintiff argued that the Business Court was a separate Superior Court within the North Carolina General Court of Justice and that he had therefore properly filed his notice of appeal with the Business Court "Clerk of Court."  Judge Gale rejected this argument, and observed that "the Business Court does not have its own clerk of court."  Op. 11 (emphasis added).

While the Court was "sympathetic" to Plaintiff's argument that he had been misled by the electronic filing system into believing that he had properly filed his notice of appeal, Judge Gale ruled that he could not "overlook the plain language of Appellate Rule 3 that requires a notice of appeal to be filed with the clerk of superior court within the time prescribed by Appellate Rule 3(c)."  Op. 13.

So Judge Gale dismissed Plaintiff's appeal.  But why did the Business Court have the authority to dismiss the appeal?  The answer is that Appellate Rule 25 "allows the trial court to dismiss an appeal if the appellant failed to give notice of appeal within the time allowed by"  Appellate Rule 3.  Landingham Plumbing & Heating of North Carolina, Inc. v. Funnell, 102 N.C. App. 814, 815, 403 S.E.2d 604, 605-06 (1991).

I don't know why Judge Gale didn't reference Business Court Rule 8.1 in his Opinion.  That Rule makes it clear that all filings with the Business Court must be made  with the Clerk of Superior Court in the judicial district where the case is pending.  It says that "all documents and materials submitted to the Business Court shll also be filed wihin five (5) business days with the Clerk of Superior Court in the judicial district in which the matter is pending."

Is an appeal of this ruling about an appeal a possibility?  Maybe, as the Plaintiff may have a legitimate argument that he was misled by the Business Court's filing system.  Judge Gale observed that the Court has corrected the "default" in the system that recognized the Court's "Clerk of Court."  He said that:

Prior to the briefing on the Motion, the court was not cognizant that the Notice of Electronic Filing email in this and other actions refers to the notice as having been sent to “Clerk of Court” by email to raleigh.clerk@aoc.nccourts.org.  That email address is for the law clerk resident in the Raleigh chambers of the Honorable John R. Jolly, Jr., Senior Special Superior Court Judge for Complex Business Cases. The court believes this application was added as a default by the system administrator. This default has now been removed.

Op. 12.

So if you are filing an appeal from a Business Court ruling, make sure to file a paper copy in the office of the Clerk in the County in which the case was filed within the time period set in Appellate Rule 3.

 

 

 

 

 

Welcome Judge Bledsoe To The NC Business Court

Charlotte attorney Louis A. Bledsoe, III has been appointed by Governor Pat McCrory as a Special Superior Court Judge, and NC Supreme Court Justice Sarah Parker has designated him as a Special Superior Court for Complex Business Cases, which means he will be handling cases in the Business Court.

The Governor's press release said this about Judge Bledsoe:

Louis Bledsoe’s extensive experience in business and commercial litigation makes him well-suited for the Business Court. He has developed a great reputation as a litigator and has earned the trust and respect of many members of the Bar. He will be an outstanding judge for our state’s Business Court.

I don't often find myself in agreement with what Governor McCrory says, but he is absolutely right about Judge Bledsoe.  He will be an excellent Business Court Judge.  Until crossing to the other side of the bench, Judge Bledsoe was a partner at Robinson, Bradshaw & Hinson, which is undoubtedly one of the best law firms in the State of North Carolina.

New Judge Bledsoe will sit in the Charlotte Business Court.  He begins his judicial career with a pretty full docket of cases.  It looks like all of the cases previously being handled by Judge Murphy, who was until yesterday the only Business Court Judge in Charlotte, already have been assigned to Judge Bledsoe.  Judge Murphy's term on the Court ended June 30th.

I'm not sure how much longer it will be available, but here is a link to Judge Bledsoe's bio at Robinson Bradshaw.

Congratulations to Judge Bledsoe on a well-deserved appointment.  He has been a reader of this blog and I hope he will continue.

Complying With The Rules Is Important In The Business Court

There's an ominous sounding sentence in a Business Court decision this week:

A party practicing before the North Carolina Business Court should take the deadlines imposed by its orders and the rules of practice very seriously.

Estate of Capps v. Blondeau. 2014 NCBC 24 at 36.  It is so ominous sounding that you would expect that sentence to be followed by punishment of the non-compliant party.  But Judge Jolly exercised mercy over the party which hadn't followed the rules.

What was the rule violation?  Two of the Defendants in the case (the Knights) hadn't filed their brief in support of their motion for summary judgment until more than 24 hours after the filing deadline set by the Court in its Case Management Order (requires all motions to be accompanied by a brief).  Also, the Knights never filed with the Court the exhibits referenced in their brief (BCR 15.5 requires a party to provide documents supporting allegations of fact in a brief).  Adding to their disregard of the Business Court Rules, the Knights never filed their Motion with the Wake County Superior Court (required by BCR 8.1)and they did not pay the required twenty dollar motion fee (dictated by N.C. Gen. Stat. § 7A-305(f)).

Plaintiffs demanded that the Business Court summarily deny the Knights' Motion for Summary Judgment due to the rules violations, which is permitted under BCR 15.11.  That rule says that:

[t]he failure to file a brief or response within the time specified in [BCR 15] shall constitute a waiver of the right thereafter to file such a brief or response.  . . .   A motion unaccompanied by a required brief may, in the discretion of the Court, be summarily denied.

Judge Jolly, in his discretion, opted to consider the Knights' Motion for Summary Judgment notwithstanding the Rules violations.  He referenced an appellate court decision -- Hammonds v. Lumbee River Elec. Membership Corp., 178 N.C. App. 1, 15 (2006) -- as support for his holding that:

[i]n deciding whether to dismiss a filing for procedural error, courts should weigh the impact of the rule violations on the non- violating party and the importance of upholding the integrity of the rules against the broader public policy favoring the resolution of disputes on the merits.

Op. Par. 37.  He noted the "relatively short delay" in meeting the deadline and the "relatively minor impact on Plaintiffs due to the delay."  Op. 37.

But after all that procedural hoopla, Judge Jolly went ahead, considered the motion for summary judgment and denied it without much discussion. 

So the only valuable lesson out of this decision is to follow the Business Court Rules.  A complete set of thos Rules is available here.

It Depends On The Meaning Of The Word "With"

The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with."  Well, actually on the phrase "entering into any contract . . . with."

HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF).  At that time,  HCIM became the sole managing member of HAMF per an Operating Agreement.  Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .

The HAMF Operating Agreement said in Section 2.03  that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member." 

HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.  Judge Jolly observed that:

The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.

Op. ¶16.

In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the  non-managing members of HAMF, but the Court determined that their consent was not required.  Two factors guided the Court's determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.

Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).

But the Court also looked to the totality of the Operating Agreement and said that

Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties' intention to vest the authority to sell HAMF in HCIM alone. Whether such an
arrangement was inadvertent or, more likely, the result of deliberation and  bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.

Op. ¶b20.

The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF's non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF].  Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).

So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims.  And I picked up from one of the Defendants' briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs' lawsuit.

 

Collateral Estoppel Sinks LLC Members' Claim

It might seem uncontroversial that the members of a limited liability company cannot follow with a personal lawsuit for injuries after their LLC litigates, and loses, claims based on the same issues.

But it took the Business Court a while to get to that conclusion last week, in Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22.

The Plaintiffs were the member-managers of Village Landing, LLC.  The LLC had made claims against Harold K. Jordan and Co. in an arbitration asserting that HKJ had misrepresented that it would build condominiums instead of the townhomes called for under the construction contract.  It said that this had caused the LLC "great financial harm." 

Right before the arbitration began, the member-managers sued HKJ for damages.  Then, the LLC lost on those claims in the arbitration.  The arbitrator, in his Award, specifically rejected the allegations regarding the townhome/condominium issue.

Nonmutual Collateral Estoppel

The unsuccessful arbitration meant that the LLC member-managers also failed in their Business Court lawsuit, which Judge Jolly dismissed based on collateral estoppel.  In reaching that result, he observed that he was "not aware of any North Carolina precedent addressing the attempted use of nonmutual collateral estoppel against nominally different plaintiffs."  Op. ¶30.

It could be that you don't remember the term "nonmutual collateral estoppel" because you went to law school as long ago as I did.  But it "prevent[s] a plaintiff from relitigating an issue the plaintiff has previously litigated unsuccessfully in another action against a different defendant."  Op. ¶30 (quoting Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002)).

So whether nonmutual collateral estoppel applied turned on the question of whether there was an "identity of parties" between the LLC in the arbitration and the member-managers in the Business Court lawsuit.  That can be shown by the parties being "in privity," but North Carolina law is that "privity with a corporation is not established solely by one's position as a corporate officer or shareholder."  Op. Par. 34 (relying on Troy Lumber v. Hunt, 251 N.C. 624, 627 (1960).

The LLC Members Had Control Over The Arbitration

The NC Supreme Court recognized, in Thompson v. Lassiter, 246 N.C. 34 (1957), that there is a "well established exception" to the "general rule" that an identity of parties is necessary to prevail on a res judicata defense. Op. ¶¶35-36.  (Wait, you sharp eyed readers are thinking: This is a case involving collateral estoppel, not res judicata.  Judge Jolly said that "the court notes that res judicata and collateral estoppel are companion doctrines, that traditionally have shared the identity requirement." Op. ¶31). 

So, that exception, applicable to both res judicata and collateral estoppel, has four elements:

(a) control of both the original and present lawsuit, (b) a proprietary interest or financial interest in the prior judgment, (c) an interest in the determination of a question of fact or a question of law regarding the same subject matter or transactions and (d) notice of participation.

Op. ¶36.

The first element, control, "is met when a corporation is dominated by a single party or entity or is otherwise the alter ego of that party or entity."  Op.  Par. 39.  Given that the Plaintiffs were the sole member-managers of the LLC, plus their active involvement in the arbitration (by calling eighteen witnesses to testify), Judge Jolly found that the control element was met.  It probably did not help that one of the Plaintiffs had testified at the arbitration that the Plaintiffs and the LLC were "one and the same."

The second element, a proprietary interest in the prior judgment, was also met, given that the LLC was "essentially a pass though entity" and the Plaintiffs were "financially intertwined" with the LLC.  Op. ¶41.

As for an interest in the determination of questions of fact or law, Judge Jolly wrote that:

At the very core of Plaintiffs' Claims against HKJ in this matter is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing "condominiums, rather than townhouses." This was the precise issue that Village Landing litigated extensively against HKJ in the Arbitration Action, an alleged misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions of dollars in losses.  Not only did Plaintiffs have an "interest" in the Arbitrator's determination on this issue, it was central to their LLC's entire case against HKJ in the Arbitration Action – as it is in their individual action here.

Op. ¶42.

The notice element was obviously met due to the Plaintiffs' involvement in the LLC's arbitration.

What Counts In Collateral Estoppel Is ISSUES, Not Claims

The Plaintiffs argued that their personal claims were "separate and distinct" from the claims pursued by the LLC in arbitration.  It didn't make any difference.

Judge Jolly observed that "our courts have repeatedly held that 'collateral estoppel precludes the subsequent adjudication of a previously determined issue, even if the subsequent action is based on an entirely different claim.'"  Op. ¶50 (emphasis in original)(quoting Hailes v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994)).

Since the arbitration had resolved the issue of whether HKJ had misrepresented that it was building townhomes instead of condominiums, the Plaintiffs were foreclosed from pursuing claims based on that issue.

The Remaining Elements For Collateral Estoppel Were Met

Judge Jolly quickly ticked through the remaining elements of collateral estoppel.  The issue had been "actually litigated" as it was "clear that litigation of issues in an arbitration action satisfies the 'actual litigation' prong of the collateral estoppel doctrine."  Op. ¶55.  It had been "actually determined" because the Arbitration Award was a reasoned one because it directly discussed and decided the issue of misrepresentation.  Op. ¶56.  Given its centrality to the Award, it was also "necessary and essential" to the Award.  Op. ¶57.

* * *

The easiest takeaway from this case is that LLC members can't pursue their own personal claims after their LLC has already arbitrated claims resting on those same issues.

 

 

 

General Assembly May "Modernize" The NC Business Court

A bill was introduced this week in the NC General Assembly that would be entitled "An Act to Modernize the Business Court By Making Technical, Clarifying, And Administrative Changes To The Procedures For Complex Business Cases."  Here's the text of the bill.

This is a summary of the proposed changes:

Appeals From Business Court

There would be a direct appeal to the NC Supreme Court from any final judgment in a case designated as a mandatory complex business case per G.S. §7A-45.4.  Since the NC Supreme Court has yet to rule in a case that originated in the Business Court (as far as I know) even though the NC Court of Appeals has ruled in many such cases, this will result in more Supreme Court decisions in business cases. 

Changes to Cases That May Be Designated As Mandatory Complex Business Cases

One of the first posts that I wrote on this blog (way back in 2008!) was about the jurisdiction of the Business Court.  You can find it here, but this proposed bill would change things.

The proposed bill does away completely with jurisdiction over cases involving intellectual property law (currently in G.S. §7A-45.4(5)) and cases involving "the Internet, electronic commerce, and biotechnology" (currently in G.S. §7A-45.4(6))

The bill adds two new explicit categories of cases that would qualify to be designated as complex business cases:

  • One is "disputes involving trade secrets under Article 24 of Chapter 66 of the General Statutes."
  • The other is contract disputes if a few conditions are met: at least one plaintiff or one defendant must be authorized to transact business in North Carolina per Chapter 55, 55A, 55B, 57D, or 59 of the General Statutes, the claim must be for breach of contract or seek a declaration of an obligation under a contract, and the amount in controversy must be at least one million dollars.

There Would Be Cases That Must Be Designated As Mandatory Complex Business Cases

In a new twist, the proposed bill specifies certain types of cases which must be designated as mandatory complex business cases.  Call these "mandatory mandatory" complex business cases. Those are:

  1. Some cases involving tax law, like "a contested tax case for which judicial review is requested under G.S. 105-241.16" or "a civil action under G.S.105-241.17."
  2. Disputes arising under corporate law, partnership law, or LLC law where the amount in controversy is at least $5 million.
  3. Cases involving regulation of pole attachments brought pursuant to G.S.§62-350.

If a party fails to designate a "mandatory mandatory" case, the Superior Court in which it was filed can either dismiss it without prejudice or stay it until it is properly designated per proposed new Section 7A-45.4(g).

Increase In Designation Fee

The proposed bill would increase the fee for designating a case to the Business Court by one hundred dollars, from one thousand dollars to eleven hundred dollars.

But the bill doesn't fix the problem that the designation fee is not recoverable as an element of costs.  I wrote about that issue last year.

Additional Reporting On The Activity In The Business Court

The proposed bill would require the Director of the Administrative Office of the Courts to report semiannually to the Chief Justice and each member of the General Assembly on the number of cases that have been pending at each location of the Business Court for more than three years, motions pending without a ruling for more than six months after being "fully ripe for decision" and the number of cases in which bench trials were held and completed for more than six months in which no judgment had been rendered.  The report is to include an explanation from the Business Court. 

Thanks to my partner, Charles Marshall, who sent me a copy of this proposed legislation.

 

Corporate Shield Holds Up Against Creditor

There's no expression when speaking of football players to recognize a performance that hits three exceptional marks (like a hat trick in hockey or a triple double in basketball or the triple crown in baseball). 

Maybe there should be, because Jeff Bostic, who played twelve years in the NFL for the Washington Redskins and on three Super Bowl winning teams, pulled off an extraordinary triple victory yesterday in the Business Court.  He got summary judgment in three cases in which he was the Defendant: Yates Constr. Co. v. Bostic, 2014 NCBC 19; Phillips & Jordan, Inc. v. Bostic, 2014 NCBC 18; and American Mechanical, Inc. v. Bostic, 2014 NCBC 17.

All of the Plaintiffs were subcontractors on construction projects for Bostic Construction Inc., which Bostic owned.  When the company failed and they were not paid, the Plaintiffs sued Bostic personally, alleging that Bostic had engaged in constructive fraud by commingling and misusing the funds from construction loans and using those funds for personal purposes.

Those facts might give rise to a claim by a shareholder of the construction company, but each of these Plaintiffs was only a creditor.  They ran into this settled principle:

Generally, directors and officers of a corporation are not liable, solely by virtue of their offices, for torts committed by the corporation or its other directors and officers.

Phillips & Jordan Op. ¶19 (relying on Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 57, 554 S.E.2d 840, 845 (2001).

Before a director or an officer can be directly liable to a creditor, there must be "a tort personally committed by [him] or one in which he participated."  Id.

The problem for each of these Plaintiffs is that they had no direct communication or interaction with Bostic.  His ownership status, standing alone, therefore was "insufficient to hold him legally accountable for an injury to Plaintiffs [as] third party creditor[s] of" the corporation.  Ops. ¶ 22.

 

 

Despite What You Think, the Business Court Isn't Always Open

Everybody knows that you have thirty days to file a Notice of Appeal in a civil case.  Rule 3(c)(1) of the North Carolina Rules of Appellate Procedure says that: "a party must file and serve a notice of appeal: within thirty days after entry of judgment."

The lawyers appealing from a grant of summary judgment in a Business Court case, Carter v. Clements Walker PLLC, obviously knew that.  They e-filed their Notice of Appeal with the Court on the thirtieth day, but Judge Gale granted the Defendant's Motion to Dismiss their appeal in an Order this week.

Why wasn't that appeal timely, you are wondering.  Well, the answer is that even though the Notice of Appeal was e-filed in the Business Court on the thirtieth day, it was filed too late -- at 7:37 p.m.

But the Business Court is electronic.  You can make filings at any time during the day, or night.  Rule 6.7 of the Business Court Rules even says that "[a]n electronic filing may be submitted to the Court at any time of the day or night."

But  Business Court Rule 6.7 goes on to say that:

For purposes of determining the timeliness of a filing, if the submission of the filing began during normal business hours of the Business Court (8:00 a.m.–5:00 p.m., Monday through Friday, excluding holidays), the filing is deemed to have occurred on that date.   If the submission of the filing began after normal business hours of the Business Court, the filing is deemed to have occurred on the next day the Business Court is open for business.

So Judge Gale found this Notice of Appeal to be untimely, and dismissed the appeal.  If you are fascinated by appellate procedure (and if you are, you should be reading the North Carolina Appellate Practice Blog), then you might be wondering how it is that the trial court gets the authority to dismiss an appeal.  Judge Gale covered all that.  Order ¶¶ 9-12.

Briefly, you are thinking of the general rule that an appeal takes the case out of the jurisdiction of the trial court, rendering the trial judge "functus officio."  That's certainly true, but Rule 25(a) of the Rules of Appellate Procedure says that a Motion to Dismiss an appeal can be presented to the trial court until the appeal has been filed in an appellate court.  An appeal isn't "filed" with the Court of Appeals when the Notice of Appeal is filed with the trial court.  Instead, "filing" with the appellate court occurs only when the record on appeal is filed or the docket fee is paid. 
 

 

NC Business Court Stays Arbitration Pending Ruling On Piercing The Veil Claim

The Order in Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 is a procedural conundrum wrapped up in arbitration issues.  The Plaintiffs in the Business Court are the respondents in a separate arbitration proceeding brought by the Defendant.  But none of the Plaintiffs -- all of whom were shareholders or directors of a corporation which had signed off on the arbitration agreement forming the basis for the arbitration -- had personally signed the arbitration agreement.

There's nothing novel about holding persons who haven't signed arbitration agreements to be bound by them.  The NC Court of Appeals held years ago that "well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Ellen v. A.C. Schultes of Md., Inc.,172 N.C. App. 317, 320, 615 S.E.2d 729, 732(2005) (quoting Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004)).

The non-signatories in Cold Springs were not willing to go to arbitration.  They moved for a preliminary  injunction to enjoin the Defendant from proceeding with the arbitration against them.  The Defendants' response was that they were entitled to "pierce the veil" against the corporate signer of the arbitration agreement and thereby get to the shareholders.

But is a Court entitled to determine a piercing the veil theory up front, in advance of an arbitration that is based on that very issue, or does that improperly delve into the merits?

Start with the concept of "arbitrability," which is "undeniably an issue for judicial determination."  AT&T Techs. v. CWA, 475 U.S. 643, 649 (1986).  Going along with that, however, is the concept that the court "is not to rule on the potential merits of the underlying claims."  Id.

So what's a court to do when arbitrability is wrapped up with the merits of the case?  Especially when the Defendants' demand for arbitration provides no specifics as to why the veil should be pierced, and makes only rote allegations as to why it should obtain that result.

Judge Jolly had little hesitation about getting at least somewhat into the merits.  He held:

An important distinction must be drawn between [impermissible] consideration of the merits of an arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same issues that underly the merits of a claim. The mere fact that certain issues could later be litigated substantively cannot on its own foreclose courts from assessing arbitrability. In such a situation, the overriding spirit of the Supreme Court's jurisprudence demands that courts nonetheless address those issues for the narrow and limited purpose of determining whether a claimant seeking to compel arbitration can sufficiently allege a basis for going forward against a responding party.

Op. ¶16.

Remember that this was a Motion for a Preliminary Injunction, to enjoin the Defendants from proceeding with the arbitration against the Plaintiff shareholders.  So what else did Plaintiff have to show to halt the arbitration?  Irreparable harm and a likelihood of success on the merits.

Irreparable harm was present, because "forcing a party to arbitrate an issue absent an agreement to do so constitutes 'per se irreparable' harm."  Op. ¶17.

On likelihood of success on the merits, Judge Jolly looked to G.S. § 1-569.7(b), which says that"[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."

He ruled that the parties should plan limited discovery on whether the shareholder Plaintiffs could be compelled to arbitrate, to be concluded in about the next six weeks.  The Judge also stayed the arbitration pending a ruling on the piercing the veil basis for the arbitration.

Oh, and if you are wondering which party has the burden of proof going forward, it is the Defendant, because "under both state and federal law, the party seeking to compel arbitration bears the "burden of establishing an agreement to arbitrate."  Op. 27  (citing  Routh v. Snap-On Tools Corp., 108 N.C. App. 268, 274 (1992).

That's a heavy burden here, because the NC Supreme Court said in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that "proceeding beyond the corporate form is a strong step: 'Like lightning, it is rare [and] severe[.]'"


 

NC Court Of Appeals: Foreclosures and Immutability

Can a law passed by a Legislature be called "immutable?"  (that means it's ageless, not ever subject to change).

The Court of Appeals used that word this week in Heaton-Sides v. State Employees Credit Union to describe a statute dealing with foreclosures. 

The case dealt with the rights of a person to her personal property after a foreclosure.  A homeowner has ten days following a foreclosure to retrieve personal property left in her home, based on a combined reading of G.S. §45-21.29(1) and §42-25.9(g).

The Court of Appeals rejected the Defendant's argument that Heaton-Sides had waived the ten day period by not taking it up on its invitation that she notify it of her intention to reclaim her property.

Chief Judge Martin ruled that the ten day period could not be waived, holding that:

In contract law there are generally two types of rules: default rules and immutable rules. Default rules are rules that “parties can contract around by prior agreement.” Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87 (1989).  Immutable rules, by comparison, are those rules that “parties cannot change by contractual agreement.”  Id. While these terms usually refer to the Uniform Commercial Code, they demonstrate the principle that some rules may be avoided by contract while others may not.

Op. 7.

When a law is subject to revocation or amendment by the Legislature, can it really be said to be immutable?  That's a pretty strong word.  That the sun rises in the east and sets in the west is immutable.  Nobody can change that.  Unless you live on Venus.

 

 

 

 

Collecting On Judgments Against A Member's LLC Interest

A lawyer has limited remedies to collect on a judgment from a defendant who is unwilling to pay.  If the defendant holds stock in a corporation, you can execute on the shares, take possession of them, and sell them. N.C. Gen. Stat. §1-324.3.  But if that ownership interest is in an LLC, a "charging order" is your only recourse (per G.S. §57D-5-03(d)).

If you don't know what a charging order is, it is a court order against an owner of an LLC interest which gives a creditor the right to receive any distributions that the owner of the interest would have received until the judgment is paid.

The Old LLC Act

Former Section 57C-5-03 of the General Statutes (which was repealed and replaced in January 2014 by the new North Carolina Limited Liability Act in Chapter 57D) said that:

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.

But what exactly did the holder of the charging order receive under the Old LLC Act, and what did the LLC owner lose upon the issuance of a charging order?  Last week, the NC Court of Appeals wrestled with the question whether a charging order operates as an assignment of an LLC interest, in First Bank v. S&R Grandview, LLC.

First Bank had obtained a charging order against Donald Rhine, a member of S&R Grandview, an LLC.  The charging order said that the Plaintiff "shall hereafter have the rights of an assignee" of Mr. Rhine's interest of the LLC, and that Mr. Rhine then had no remaining membership interest in the LLC.  The charging order said that his membership right would "lie fallow" until the judgment against him was satisfied.

Mr. Rhine appealed, arguing that the charging order did not operate to assign his LLC interest.  First Bank rejoined that the effect of  the charging order under Section 57C-5-03 was that Mr. Rhine was no longer a member of the LLC to which the order applied.

There was some plausibility to First Bank's argument.  Section 57C-5-03 said that "[t]o the extent so charged, the judgment creditor has . . . the rights of an assignee of the membership interest." And Section 57C-5-02 said that "a member ceases to be a member upon assignment of all of his membership interest."

A Charging Order Does Not Work An Assignment Of An LLC Interest

The Court of Appeals disagreed with First Bank's position, holding that "[n]owhere in these provisions does the General Assembly mandate an assignment of membership interests from a debtor to a judgment creditor through a charging order." Op. 8.  It added that "[h]ad the General Assembly intended a charging order to assign all membership interests and terminate a debtor’s membership in an LLC, as plaintiff contends, it could have easily included language to that effect." Op. 8-9.

The changes in the LLC Act through Chapter 57D bolstered the Court's conclusion.  The new provision dealing with charging orders states that "this Chapter does not deprive any interest owner of a right."  N.C. Gen. Stat. §57D-5-03(c).  I'm not sure whether statutory interpretation lets a court look at the subsequent actions of a Legislature to determine what the Legislature meant the first time around.

But anyway, why did this Defendant care whether his LLC interest was assigned and whether he had lost his membership rights?  Remember that an LLC member has an ownership interest that includes both an economic interest and a right to participate in the management of the LLC.  N.C. Gen. Stat. §57D-1-03(25).

A charging order can affect only the economic interest.  The charging order in First Bank went too far.  It took away Mr. Rhine's management rights.

What happens if those with management rights in the LLC decide to defer distributions from the LLC because of a dislike for the judgment creditor?  That's undoubtedly a risk, and it will probably be the subject of a yet to be decided court decision.

Why Should You Care About The Old LLC Act?

The NC General Assembly repealed the Old LLC Act, in Chapter 57C and replaced it with the New LLC Act through Chapter 57D.  That change became effective three months ago, on January 1, 2014.

Do you need to worry about the repealed Act?

Maybe.  In the "Savings Provisions" in the New Act, the General Assembly said that "[a]ny proceeding commenced before January 1, 2014, may be completed in accordance with the law then in effect."  N.C. Gen. Stat.  §57D-11-03(d)

.

 

 

The "Bright Star" Fades: The NC Business Court On Letters Of Credit

I've resolved this year to blog about every numbered decision of the Business Court, as opposed to past years, where my lack of enthusiasm about the more boring decisions has left me writing about less than 100% of the Court's decisions.

My resolve was tested with Judge Murphy's decision last week in Speedway Motorsports Int'l , Ltd. v. Bronwen Energy Trading, Ltd., 2014 NCBC 5, but I have bitten the bullet and I have laboriously produced this post.

What's the new Speedway decision about?  A complicated international dispute over oil contracts, letters of credit, a guarantee of letters of credit, and claims for fraud, conversion, negligent misrepresentation, and unfair and deceptive practices.

You might remember the Bronwen case.  It's been pending in the Business Court since 2008 and has been up and back from the Court of Appeals over that 5+ years.  I wrote about the Court of Appeals decision affirming  the Business Court in 2011 (and reversing it in another decision issued at the same time).  In the affirming decision, the COA held that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

The effect of that ruling was that the COA affirmed the dismissal of claims against Defendant BNP-Suisse, which had issued a demand guarantee to BNP-France on a letter of credit issued by France.  The Suisse guarantee was secured by $12 million which Plaintiff had on deposit with Suisse.  When Plaintiff sued over the draw on its letter of credit with Suisse, France argued that the case was governed by a choice of forum provision in the Suisse guarantee calling for resolution in Switzerland.

The COA held that Plaintiff, which was not a party to the guarantee given by Suisse in connection with the letter of credit transaction,  was barred by the "independence rule"  from availing itself of the choice of forum provision because the contracts surrounding a letter of credit transaction must be "separate and distinct."

So in last week's ruling, France sought to push the COA ruling in support of a new motion for judgment on the pleadings.  France argued that Plaintiff couldn't make any claims at all against it based on its draw on the guarantee because the guarantee was "separate and distinct" from the obligations between Suisse and the Plaintiff.

That seems to fit with the independence principle, doesn't it?  Not the way Judge Murphy saw it. France might have prevailed if the claims against it were based in contract.  But they were tort-based claims, for fraud, negligent misrepresentation, conversion, unfair and deceptive practices, and for an accounting.

Judge Murphy therefore denied the Rule 12(c) claim, holding that:

The Court of Appeals’ description of the “independence principle” was grounded in principles of contract. See Speedway I, 209 N.C. App. at 564, 706 S.E.2d at 263; see also Speedway II, 209 N.C. App. at 485, 707 S.E.2d at 392. Specifically, the Court of Appeals was concerned with maintaining the separateness of the multiple contracts that are characteristic of letter of credit transactions. See id. However, nothing in the Speedway opinions shields a defendant from purely tort-based claims like those alleged by Plaintiff. See id. Furthermore, France cites no authority that forecloses non-contract, purely tort-based claims by application of the independence principle. The import of the independence principle is that France is not bound by and cannot seek the benefits of the contracts that Plaintiff made with others.

Op. 28 (emphasis added).

 

What Happens To A Covenant Not To Compete Upon The Sale Of A Business?

Be careful with covenants not to compete when you buy or sell a business.  That's the lesson from Amerigas Propane, LP v. Coffey, 2014 NCBC 4, decided this week by Judge Jolly.

The Plaintiff had Defendant Coffey, an employee of the company which it was acquiring, sign a "Confidentiality and Post-Employment Agreement" after the acquisition.  The Agreement contained a non-solicitation provision and a section protecting the buyer's "confidential information." 

The Plaintiff fired Coffey a year later, and he went to work for a competing propane company.

Plaintiff moved for a preliminary injunction enforcing the restrictive covenants, which was denied by the Court.

You all know that there must be consideration for a covenant not to compete.  Those types of agreements ordinarily are entered into at the start of an employment relationship, and the new employment itself constitutes the consideration.  In North Carolina, continued employment can't satisfy the consideration requirement.

So did the acquisition work a termination of Coffey's employment with the selling company so that he had a new employment with the buyer?

Here's where it gets interesting.  The type of acquisition makes a difference. If it had been an asset purchase it might have been a new employment which could have served as consideration. Judge Jolly observed that:

an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction. In this regard, North Carolina courts previously have stated that acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.

Op. 5 (relying on Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597 (2006) (citing
QSP v. Hair
, 152 N.C. App. 174 (2002)); and Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (2007) ("[W]hen an employer sells its assets . . . the employment relationship has been terminated." Id. ¶38.).

But an acquisition via a stock purchase (or by purchasing membership interests, as happened in this case) doesn't have the same effect.  It does not automatically terminate existing employment relationships "and therefore ordinarily will not constitute new employment for purposes of consideration."  Op. 6.

So the Plaintiff was left to argue that there was other consideration for the restrictive covenants, like "new benefits" made available to Coffey, and a raise in salary shortly after the acquisition.  Judge Jolly didn't buy that.  He found the "new" benefits to be essentially the same as Coffey would have received with the selling employer.

 

The Business Court Takes A Narrow View Of When Claims Are "In Or Affecting Commerce" Under Chapter 75 Of The General Statutes

Chapter 75 claims have rarely fared well in the Business Court, though there is not much doubt about why they are included in almost every Complaint in the Court.  The prospect of treble damages (per G.S. §75-16) and attorneys' fees (per G.S. § 75-16.1) is too tempting for many to pass up.

But this week in Powell v. Dunn, 2014 NCBC 3, Judge Gale provided some clear guidelines about when these claims don't fit in the business litigation context because they are not "in or affecting commerce," an essential element under the statute.

The Plaintiffs in the case were holders of the common stock of Engenious Software, based in Cary, North Carolina.  The Defendants were former directors of the company who held preferred stock.  The directors negotiated a sale of the company, which had involved two potential acquirers and the services of an investment banker, for $40 million.  That sale apparently yielded nothing for the common shareholders.  The Plaintiffs made a claim for unfair and deceptive practices per Section 75-1.1 over the way the sale was handled, alleging a breach of fiduciary duty.

Judge Gale dismissed the claim, holding that:

when the unfair or deceptive conduct alleged only affects relationships within a single business or market participant, and not dealings with other market participants, that conduct is not “in or affecting” commerce within the meaning of Section 75-1.1,

Op. Par. 17.

He based that ruling on two North Carolina Supreme Court decisions construing the statute: HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991)  and White v. Thompson, 364 N.C. 47, 691 S.E.2d 676 (2010).

The White case was featured on this blog when it was decided, but the HAJMM case was decided before the idea of a blog was invented.  In HAJMM, the Court said that the statute extended only to “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase or sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  It affirmed the dismissal of 75-1.1 claims premised on unfair or deceptive acts related to the corporation's capital raising efforts.

The Powell decision is also noteworthy for its rejection of  the Plaintiffs' argument that the involvement of an investment bank in the transaction, and that another potential buyer was involved, made the claim one "in or affecting commerce."

Is a breach of fiduciary duty a per se violation of Section 75-1.1?  Judge Gale didn't reach that question because the claim was not "in or affecting commerce."  Op. ¶ 20 & n.4.


North Carolina COA Refuses To Award Attorneys' Fees Based On "New York Rates"

There's enough of interest in the North Carolina Court of Appeals' decision this week in GE Betz, Inc. v. Conrad for five posts. It's got a couple of good rulings on covenants not to compete, a few points about trade secrets issues, and an interesting matter of a violation of a protective order.  The opinion, a unanimous sixty-four pager written by Judge Robert C. Hunter, is worth reading.

The attorneys' fee aspect of the case was the most interesting part of the opinion to me.  The trial court awarded $5.77 million in fees to GE Betz, a General Electric subsidiary.  GE Betz had been successful, after trial, on its claims that the Defendants violated G.S. §75-1.1 and misappropriated trade secrets.

Over $3 million of the fees were billed by GE Betz's prestigious New York-based law firm -- Paul Hastings.  The hourly rate of Paul Hasting's lead counsel ranged from $633.25 to $675.75 during the course of the litigation.  The North Carolina firm that tried the case -- Ward & Smith -- charged significantly less, at rates between $270 and $390 an hour.  The trial court said that Ward & Smith was "a highly capable and qualified law firm."  Op. 51.

A trial court must make findings regarding the reasonableness of the fees in making an award.  A key factor to be considered is the "customary fees for like work."

The COA recognized that the question whether local rates should be a benchmark for reasonableness was one of first impression.  Judge Hunter said:

our appellate courts have not had occasion to decide whether fees must be awarded in light of the rates typically charged in the geographic region where the litigation takes place.

Op. 48.  He looked to a Fourth Circuit decision which "held that the community where the court sits is “the appropriate starting point for selecting the proper rate.” Nat'l Wildlife Fed'n v. Hanson, 859 F.2d 313, 317 (4th Cir.1988).

Judge Hunter refused to weigh in on whether it was reasonable for GE to hire its out-of-state counsel.  He held:

we decline to adopt a test that forces courts to assess the reasonableness of a litigant’s decision to hire counsel generally.  Parties, including GE, are free to hire as counsel whomever they wish at whatever rates they are willing to pay. The issue is whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

Op. 50.

On the issue of the reasonableness of the fees, Judge Hunter observed that "[i]t appears that much of the work performed by Paul Hastings' attorneys could have just as effectively been performed by local counsel at local rates.  The trial court did not attempt to make this distinction."  Op. 52.  He gave this example:

in April 2007, associate attorneys at Paul Hastings charged $500.00 per hour – double the $250.00 fee charged by attorneys at Ward and Smith – for “factual investigation and development; obtaining and analyzing [c]lient documents; [and] interview[ing] witnesses”. These duties clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts [which was part of GE's argument as to the reasonableness of the fees], because GE paid the attorneys at Ward and Smith to perform almost identical work during the same time period.

Op. 52-53.

In the end, the COA ruled that it was unreasonable to force the unsuccessful Defendants to pay a fee "that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium."  Op. 53. 

It gently chided GE for its excess, saying that " [u]ltimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against" the Defendants.  Id. 

The case was remanded to the trial court for further findings.

 

Business Court Says "Rule Of Reason" Analysis Appropriate To Antitrust Claim By Chiropractors Against Their Independent Practice Association

I can think of only three reasons why you might want to know about the Business Court's decision in Sykes v. Health Network Solutions, 2013 NCBC 53:

  • You are a chiropractor or you live with one.
  • You are fascinated by the subject of the management of health care costs.
  • You are interested in antitrust law.

If you don't fit those qualifications but are still willing to continue reading, the case is about Plaintiff Sykes' claim that Defendant HSN violated antitrust laws by fixing prices for chiropractic services through its operation of an "independent practice association" of chiropractors.

If you are already asleep, skip to near the end of this post, under the heading "Why The Injunction Was Denied."

Some Medical Terminology

To start, you'll need to know some healthcare terminology.  HSN is an IPA (an independent practice association).  Independent chiropractors each enter into a PPA (practitioner participation agreement) with HNS.  HNS negotiates with Payors (insurance companies like Blue Cross/Blue Shield and other third party purchasers of chiropractic services) to establish reimbursement rates for its members.  The chiropractors who are members of the network agree to be reimbursed by the negotiated rates.

HNS follows a QMI (Quality Management and Improvement Plan) to ensure that the services provided by its members are delivered in "the most effective and cost-efficient manner."  Op. Par. 20.

HNS established a maximum allowable average cost per patient for its providers (the chiropractors) of 151% of the HNS network average.  A provider exceeding this benchmark following review per the QMI faces probation, then termination by the network. 

The Antitrust Issues

Sykes contended this practice of controlling chiropractic costs was anti-competitive and illegal.  The illegality argument rested on North Carolina's insurance laws, which say that a review of a medical provider's costs must be based solely upon "medical necessity" and performed by a licensed entity.

The Court observed that of the 1,667 chiropractors licensed in North Carolina, 1,006 were HSN members.  Op. ¶16.  Though the Plaintiff's alleged that HSN had monopoly power, Judge Gale did not reach that issue.

He did rule, however, that the Plaintiffs did not present a case of per se violations, but that he would rule on a future motion to dismiss through a rule of reason analysis.   Op.  ¶57. 

If it has been thirty years since you took antitrust law in law school, here's q quick refresher.  Some categories of anti-competitive behavior are conclusively presumed to be violations of the antitrust laws, and are known as per se violations. A rule of reason analysis looks at all the surrounding circumstances of the alleged violation to determine whether the practice promotes or represses competition.

Judge Gale held:

[t]he mere presence of price related agreements in the various contracts at issue or exclusion of Plaintiffs from the HNS network do not necessarily lead to anticompetitive findings or per se violations.  Certain price related agreements may be appropriate when necessary to achieve efficiencies that achieve procompetitive effects for consumers.  Others may be so egregious and unaccompanied by other provisions so as to lead to illegality.  But, in appropriate circumstances pricing related agreements may also be a necessary component of a more comprehensive set of undertakings that on the whole lead to beneficial and procompetitive efficiencies.

Op. ¶58.

Judge Gale did not need to plow new ground on whether to follow a rule of reason analysis for the matter before him.  The Federal Trade Commission has taken the position since 2009 that IPAs should be evaluated on a case by case basis, taking into account an array of factors, like:

a definition of the market to which the analysis will be applied, the competitive nature of and the allocation of power within that market, whether the network under attack is an exclusive provider, the degree of sharing of financial risk by network participants, the degree of practice integration to achieve efficiencies or that are instead barriers to efficiencies, and other evidence of other anticompetitive purpose.

Op. ¶61 (quoting U.S. Dep't of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, Statement 8: Enforcement Policy on Physician Network Joint Ventures §B(1)(known as "Policy Statement 8")

The Court ruled that the record before it was not fully developed enough for it to follow the four-step process recommended by Policy Statement 8 in determining the anti-competitive effect of the HSN procedures.  Those steps involve "defining the market; evaluating the competitive effects of the physician joint venture; evaluating the impact of procompetitive efficiencies; and examining collateral agreements.

 

Why The Injunction Was Denied

One of the Plaintiffs, another chiropractor, was facing termination of his membership in HSN and was seeking an injunction barring his termination.  Since the Complaint of Sykes' co-Plaintiff, Dr. Lynn, requested money damages, you don't need to understand antitrust law to see why Judge Gale denied the motion.  He held:

If Dr. Lynn is able to prove that he has suffered a compensable loss, he may be compensated with money damages; indeed, his requested relief is for money damages. (Am. Compl. ¶¶ 169, 174, 179.)While his damages might ultimately be difficult to calculate, the court does not conclude that they are of such a “peculiar nature that compensation in money cannot atone for it.” Hodge , 137 N.C. App. 247, 252, 528 S.E.2d 22, 26 (2000).

Op. ¶66.

Congratulations to my partner Jennifer Van Zant, a renowned antitrust lawyer, for her representation of the Defendants.  Also involved from Brooks Pierce were Ben Norman and Mike Dowling.

A Prevailing Party Can't Recover The $1,000 Fee For Designating A Case To The Business Court As A "Cost"

If you think like me, you were thinking that the $1,000 fee for designating a case to the Business Court would be recoverable as an item of costs if you were successful in the case.

But I'm wrong.  Last Thursday, in an Order in Prospect Marketing Group, Inc. v. Chasnan, Inc., Judge Jolly ruled that there is no statutory basis for the recovery of the designation fee as a cost.

In looking at the statute governing costs, that is absolutely correct.  Section 7A-305 of the General Statutes, which is titled "Costs in civil actions," says in subsection (d) that "[t]he following expenses, when incurred, are assessable or recoverable, as the case may be. The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court's discretion to tax costs pursuant to G.S. 6-20." 

The designation fee is not included in the items listed in Section 7A-305(d).  So that's out as an item of recovery.

And what did the prevailing party in Prospect Marketing Group recover on its application for $2,248.19 in costs, which included the $1,000 designation fee?  A whopping $7.56, which represented the only recoverable amount: the cost incurred for service of process by certified mail, which is specifically allowed by G.S. §7A-305(d)(4).

I'm sure that the Prospect application for costs cost more than $7.56 to prepare, making it a losing exercise financially.  It seems like that is true for most applications for costs -- that they generate so little that they are not worth pursuing.

North Carolina Court of Appeals Says: We Don't Fear The Turtle

You've no doubt heard about the University of Maryland's withdrawal from the Atlantic Coast Conference and the University's unwillingness to pay the $50 million withdrawal fee required by the Constitution of the ACC.

This week, in Atlantic Coast Conference v. University of Maryland, the NCCOA rejected the U of M's contention that it was entitled to sovereign immunity from suit in North Carolina to collect the fee. The case will go forward on the issue of whether that sizeable fee is an appropriate measure of liquidated damages or an unconstitutional penalty.

The withdrawal fee is three times the ACC's total annual operating budget.  It adds up precisely to $52,266,342.  We are unfortunately well away from the time when the courts will rule on whether the withdrawal fee is enforceable as a liquidated damages provision.

Under NC law:

A stipulated sum is for liquidated damages only (1) where the damages which the parties reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

E. Carolina Internal Med. v. Faidas, 149 N.C. App. 940, 945-46, 564 S.E.2d 53, 56 (2002).

The $52 million fee is said to be the largest to be assessed upon a team leaving an athletic conference.  Syracuse, for example, was assessed $7.5 million upon leaving the Big East conference to join the ACC. 

But the opinion doesn't assess at all the enforceability of the fee.  Instead, the opinion focuses on whether the trial court's decision not to dismiss the case was immediately appealable and whether North Carolina should extend comity to its "sister state" on the University of Maryland's sovereign immunity request.

The decision of the trial court that it would not allow the University of Maryland the defense of sovereign immunity was immediately appealable because it affected the University's "substantial right" to be free from defending a case from which it might be immune.

But why shouldn't the State of North Carolina accord the University of the State of Maryland the defense of sovereign immunity?  Apart from what might be a general dislike of the Terrapins, the reason was that the ACC's claim is one for a breach of contract.  The Court said:

public policy is violated in North Carolina when the State is allowed to assert sovereign immunity as a defense to causes of action based on contract. It would seem plain, then, that because the ACC is seeking a declaration as to the parties’ rights and obligations under the terms of the ACC Constitution, it would violate public policy to extend comity to Defendants' claim of sovereign immunity.

Op. 19-20.

In an earlier decision, the NC Supreme Court  had said that allowing a State to walk away from its contractual obligations and to claim sovereign immunity "would be judicial sanction of the highest type of governmental tyranny."  Smith v. State, 289 N.C. 303, 320, 222 S.E.2d 412, 423 (1976).

Maryland is a member of the ACC through the 2013-14 season and will play in the 2014 ACC basketball tournament here in Greensboro.  I only live a few miles from the Greensboro Coliseum.  The Terps can drop that $52 million on my front lawn if they would like.

Two Things To Avoid When Opposing A Motion For Summary Judgment

There aren't any great business law proclamations in Allran v. Branch Banking & Trust Corp., 2013 NCBC 41, decided late last week, but there a couple of procedural points that might help you avoid having summary judgment entered against your client.

Be Careful Which Defendants You Decide To Dismiss, And How You Dismiss Them

Judge Murphy granted summary judgment on Plaintiff's unfair and deceptive practices act claim against Defendant BB&T. The ruling was entered pretty much because Plaintiff submarined his own case in two ways. 

First, he dismissed his claims with prejudice against BB&T's employee, Corbett.  Plaintiff's claim against BB&T rested on his allegation that Corbett had forged his initials on his financial statement and loan application leading to the defaulted loan at issue.

Be aware that a dismissal with prejudice is equivalent to a disposition on the merits, and it has res judicata effect.  Thus, because "[a] judgment on the merits in favor of the employee precludes any action against the employer where . . . the employer's liability is purely derivative."  Op. 38 (quoting Wrenn v. Maria Parham Hosp., 135 N.C. App. 672, 681, 522 S.E.2d 789, 794 (1999), the dismissal of Corbett's employer, BB&T, was appropriate.

Be careful of which Defendants you dismiss from your case, and try to avoid dismissing them with prejudice.

Don't Try To Contradict Your Own Client's Deposition Testimony

The second way in which the Plaintiff did in his case was by his own deposition testimony, in which he admitted that he had placed his initials on the documents which he had said carried his forged initials.  He attempted, after discovery closed, to avoid summary judgment by presenting affidavits designed to contradict that testimony.

Judge Murphy rejected those affidavits, holding:

‘[A] non-moving party cannot create an issue of fact to defeat summary judgment simply by filing an affidavit contradicting his prior sworn testimony[.]’   Having
acknowledged in his deposition that the initials on the Retail Loan Application and
Personal Financial Application were his, Plaintiff should not now be allowed to offer
affidavits that call his testimony into question.

Op. 35 (quoting Carter v. W. Am. Ins. Co., 190 N.C. App. 532, 539, 661 S.E.2d 264, 270 (2008).

The YMCA Wins Case In NC Business Court

It's hard to conceive of a more unlikely Business Court case than Keister v. National Council of the Young Men's Christian Assocation of the United States of America, a purported class action by YMCA members.  The Opinion, 2013 NCBC 36,  was issued late last week.

Keister and his family joined the YMCA in Asheville, North Carolina.  They said they did so based on advertisements that the YMCA provides a "healthy and safe environment" for families.

The environment turned out to be anything but healthy and safe, according to Mr. Keister.  The allegations in the Complaint were so graphic that Judge Jolly struck it in April 2012 and ordered it sealed.  He said it contained "unnecessary, extremely offensive, outrageous and explicit allegations."

The toned down Amended Complaint alleged that Mr. Keister observed homosexual behavior in the men's locker room showers, and that he was twice thereafter sexually assaulted on the Y's premises by fellow members of the Asheville YMCA.  He complained to the management and was told that the issue would be addressed.

The lead claim against the YMCA was that it engaged in an unfair and deceptive practice, in violation of G.S. § 75-1.1, by marketing its facilities as safe and healthy despite its knowledge of illicit sexual activities occurring at its facilities.  Plaintiffs said that the Y had been aware of such conduct for decades.

In law school, we would have called statements like "safe and healthy" mere "puff," and Judge Jolly indeed said that "such phrases defy precise definition and are not capable of objective verification."  Op. ¶27.  He ruled that the advertising by the Y was "neither false nor misleading on its face."  Op. ¶28.

He also dismissed a pretty weak claim for breach of fiduciary duty.  Plaintiffs said that "they placed a special confidence" in the YMCA to provide a safe and healthy environment and that the Y therefore owed them a fiduciary duty.  Judge Jolly said that Plaintiffs had "allege[d] nothing more than a traditional business-consumer relationship" (Op. ¶33) and that there was no fiduciary relationship.

 

NC Business Court Dismisses All Of Brazilian Plaintiff's Claims

The Plaintiff in Martinez v. Reynders, 2013 NCBC 35, had all of her claims dismissed last week in an Opinion from the Business Court.  The case illustrates why you might want to think twice about incorporating a business in Brazil, and how hard it is to make a fraud claim over a broken promise.

The Plaintiff is a Brazilian citizen.  She incorporated a pharmaceutical research and development company in Brazil in 2000.  The Brazilian company was sold to a Delaware corporation several years later.  Plaintiff became the sole manager of the purchased company.

Her claims arose from personal liability she claims she incurred as a result of her reliance on misrepresentations she claimed were made to her.  She personally guaranteed a lease in Brazil based on alleged representations that the Defendants would raise sufficient capital over a 90-day period to relieve her of her guaranty obligation.  She also became exposed to further liability because she was a "quota holder" of the Brazilian company.  (In Brazil, a quota holder is like a stockholder, but a quota holder can have personal liability for the corporation's debts).

She claimed that she had become a quota holder at the Defendants' request, allegedly upon repesentations that her status as a quota holder would be temporary and that the Defendants would replace her as a quota holder.  They didn't, and the Plaintiff said that the Brazilian government was holding her personally liable for unpaid corporate taxes.  Plaintiff said she was also on the hook under Brazilian law for the wrongful termination of the Brazilian company's employees due to the manner in which they had been terminated.

To the extent that the Plaintiff's liability rested on her being conned into becoming a quota holder, she premised her claims on a fraud theory.  Judge Jolly was buying none of that.  He held:

the allegation that [one of the Defendants] asked Plaintiff to become a quota holder for three months, until a new quota holder was found, on its face is not a misrepresentation of a past or existing fact. Defendants' assurance that it would replace Plaintiff as a quota holder within three months is, at most, a statement of future intent or promissory representation which cannot typically serve as the basis of a fraud claim. Leftwich v. Gaines, 134 N.C. App. 502, 508 (1999). A promissory representation may only serve as the basis of a fraud claim where the promissory representation is made with a present intent not to carry it out and may therefore be said to be a statement of existing fact. Id. In order for a promissory representation to be the basis of an action for fraud, facts must be alleged from which it may reasonably be inferred that the defendant did not intend to carry out such representation when it was made. Whitley v. O'Neal, 5 N.C. App. 136, 139 (1969). The court finds no facts alleged in the Complaint from which it might reasonably be inferred that Defendants did not intend to remove Plaintiff as a quota holder at the time they represented they intended to do so.

Op. Par. 29.

The claim that the guaranty was fraudulently induced failed for the same reason.  Judge Jolly said that:

Similar to the representations discussed above, there are no facts alleged from which it may reasonably be inferred that Defendants did not intend to relieve Plaintiff of her personal guaranty at the time they represented they would do so.

Op. Par. 37.

The photo above is by my daughter Juliet, who happens to be in Brazil right now.  Unfortunately, she left before I could warn her not to become a quota holder in a Brazilian company.  But she's pretty savvy. . . .

Do You Need Those Stinkin' Signatures? Maybe Not.

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

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

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

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

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

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

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

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

I wouldn't give up those signatures just yet.

Fourth Circuit On LLC Law And Fried Chicken And Waffles

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

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

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

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

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

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

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

Op. at 7 (emphasis added).

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

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

546 U.S. at 477.

I will hold off on my pizza recommendations.

 

The Fourth Circuit On "Accidents" And Drunken Driving

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

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

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

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

Op. 3-4.

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

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

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

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

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

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

The "accidental result" standard is more liberal. 

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

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

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

 

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Business Court Sanctions Parties For Disobeying Discovery Order

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

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

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

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

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

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

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



 

 

Arbitration Compelled Based On Unsigned Arbitration Agreement

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

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

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

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

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

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

Order 23.

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

 

 

Developments In NC State Trademark Law

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

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

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

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

 

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North Carolina Securities Act Claims Take Shape In The Business Court

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

TIC Interests Are Securities

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

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

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

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

The State Scheme For Civil Liability Under The Securities Act

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

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

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

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

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

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

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

Secondary Liability Under Section 56(a)(2)

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

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

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

Op. ¶79.

The Liability Of One Of The Defendants

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

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

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

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

 

Business Court Excludes Testimony Of Financial Expert On Lost Profit Damages

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

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

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

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

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

Op. ¶19.  He also said that while the amount of damages to be awarded is for the jury to determine, "the court determines as a matter of law whether the evidence would allow a jury to calculate lost profits with reasonable certainty."  Op. Par. 20.

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

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

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

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

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

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

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

 

 

 

 

 

 

NCCOA: The Constitution Reins In The Uniform Enforcement Of Foreign Judgments Act

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

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

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

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

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

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

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

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

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

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

 

Funeral Homes In Charlotte Battle Over Trademark Infringement

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

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

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

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

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

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

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

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

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

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

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

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

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

 

The Middle District Of North Carolina Okays Cellphones (With Cameras!)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Hotels.com And Other Online Travel Vendors Don't Have To Pay Occupancy Taxes To North Carolina Counties

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

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

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

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

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

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

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

Other Interesting Things About This Opinion

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

 

Continue Reading...

An Important Opinion On Assigning LLC Interests From The NC Business Court

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

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

What's Included in a LLC Member's Interest

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

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

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

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

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

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

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

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

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

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

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

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

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

How Do You Avoid This Type Of Problem?

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

 

 

Parol Evidence Rule Barred Defendants' Interpretation Of Earn-Out Provision

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

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

Interpretation of the Contract

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

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

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

Judge Murphy rejected this argument, holding:

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

 Op. 35.

Attorneys' Fees?

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

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

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

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

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

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

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

 

 

 

Does A Trial Judge Have The Discretion To Deny Costs To A Prevailing Party?

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

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

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

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

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

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

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

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

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

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

The Fourth Circuit Says Don't Do This

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

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

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

Op. 9 & n.3.

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

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

Id.  (emphasis added).

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

Hurricane Sandy Reaches The North Carolina Business Court

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

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

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

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

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

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

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

Op.h 4 & n.1.

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

 

 

 

Fourth Circuit Gives a Latin Lesson On Nunc Pro Tunc Orders

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

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

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

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

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

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

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

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

Op. 7-8.

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

 

 

Not An Oscar Winner: A Case About Indemnification

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

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

Indemnification For Unforeseeable Events

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

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

Statute of Limitations For Indemnification Agreements

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

Doctrine of the Last Antecedent

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

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

Never heard of that doctrine?  Really?  It says that 

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

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

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

Attorneys' Fees Redux

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

 

Under Those Blue Ridge Mountain Skies

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

Quick Facts

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

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

Piercing the Corporate Veil

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

Fraud

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

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

Securities Fraud

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

He held:

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

Op. 64.

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

Derivative Action

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

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

And More

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

 

Getting A Covenant Not To Compete Case Into The Business Court

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

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

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

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

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

He held:

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

Op. Par. 13.

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

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

 

COA Sets Aside $2.1 Million Unfair and Deceptive Practices Verdict Against Bank

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

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

Here's how Judge Stroud summed it up:

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

 Op. 15-16.

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

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

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

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

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

The Last Word On That Thirty Days

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

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

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

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

New Order 2.

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

 

 

 

Change In Business Court Designation Procedure: A Plaintiff No Longer Has 30 Days From Filing A Complaint To Designate The Case To The Business Court

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

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

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

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

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

Order Par. 5

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

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

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

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


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

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

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

 

 

Please Nominate This Blog For The ABA "Blawg 100"

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

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

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

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

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

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

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

The deadline for nominations is September 7th.

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

Thanks in advance for your support of this blog.

 

You Need All Your Ducks In A Row To Prove Default Under A Security Agreement

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

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

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

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

No difference, said Judge Gale, holding that:

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

Op. ¶16 (emphasis added).

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

 

 

Fourth Circuit Blunts CFAA As A Remedy Against A Rogue Employee

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

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

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

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

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

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

Op. 13.

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

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

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

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

 Id.

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

E-Discovery Landmark Decision For NC: Attorney-Client Privilege Waived In Electronic Discovery Production

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

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

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

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

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

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

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

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

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

Fourth Circuit Carves Up Children (For Bankruptcy Purposes Only)

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

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

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

How The Dictionaries Define "Household"

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

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

How The Bankruptcy Courts Have Dealt With This Issue

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

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

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

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

The Fourth Circuit Applies The Economic Unit Approach, With Fractions

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

A divided Fourth Circuit affirmed.

Continue Reading...

Summary Judgment From NC Business Court On Third Party Claims Against Appraisers

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

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

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

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

The Duty Of An Appraiser

As Judge Murphy put it:

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

Op. ¶45.

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

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

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

Op. ¶51 (emphasis added).

Reliance On The Actual Appraisal Is A Must

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

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

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

 

 

 

Preliminary Injunction Reinstating Contract Ordered By Business Court

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

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

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

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

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

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

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

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

You Can't Force A Defendant To Join In Another Party's Counterclaim

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

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

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

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

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

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

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

 

 

Is North Carolina Ready For The Affordable Care Act?

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

Health Benefits Exchange

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

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

Medicaid Expansion

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

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

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

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

Overly Persistent Plaintiff Socked With Attorneys' Fees By Business Court

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

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

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

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

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

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

The basis for the award of fees was N.C. Gen. Stat. Section 6-21.5, which says that "[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney's fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The issue wasn't whether McKinnon had a valid belief of a"justiciable issue" that he could prove he was in competition with his former employer when he filed his complaint .  As Judge Gale put it, "the more difficult question is whether he legitimately continued in that belief when pressed during the course of litigation to support his claim and failed to present a clear basis on which he could claim relief."  Op. ¶58.

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

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

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

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

The inquiry under section 6-21.5 is different and more flexible.  There, the court properly looks "beyond a particular pleading to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue.” Op. ¶43 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991).

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

The NC Supreme Court Ducks The Opportunity To Opine on How To Challenge Business Court Jurisdiction

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

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

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

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

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

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

 

 

 

It's Not Every Day That You Think About The Internal Affairs Doctrine (Or Res Judicata)

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

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

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

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

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

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

Op. 12.

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

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

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

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

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

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

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

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

Happy Memorial Day.

 

 

Know Your "Business": Don't Bite Off More Than You Can Chew When Drafting A Covenant Not To Compete

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

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

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

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

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

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

Op. ¶9.

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

 

Fee Fi Fo FIRREA: NC Business Court On Maintainability Of Claims Against Banks Which Buy The Assets Of Failed Banks

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

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

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

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

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

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

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

 

 

 

 

Fourth Circuit Sends Plaintiff To The Boondocks For International Arbitration, But With A Round Trip Ticket

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

Claims Under The North Carolina Securities Act Are Easier To Make Now

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

Choice of Law for NC Securities Act Claims

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

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

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

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

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

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

Whether Scienter Is Required To Prove An NCSA Claim

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

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

Particularity Is Not Required To Plead A Negligence Based NCSA Claim

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

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

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

Op. ¶49.

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

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

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

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

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

Summary

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

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

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

 

 

How Much Is That Doggie In The Window? (Not Much, Says The NC Court Of Appeals)

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

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

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

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

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

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

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

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

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

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

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

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