"Winding Up" A Law Firm Partnership Doesn't Necessarily Mean Liquidation

You can "wind up" a partnership without having to liquidate all of its assets and terminating its existence.  So ruled Judge McGuire last week in Hardin v. Lewis, 2016 NCBC 55.  But that may not be true for all partnerships.  This case involved a law firm partnership which was continuing to operate its practice after one of its partners left to start her own law firm.

The lawsuit concerned the amount due to the Plaintiff from her former partners for the value of her partnership share (along with a host of other claims on which the Court will rule later).  Her withdrawal had constituted a dissolution of the partnership as a  matter of law (Op. ¶4). She had also requested the winding up of the partnership.

What Is "Winding Up"?

North Carolina's Uniform Partnership Act seems to dictate that winding up is the final stage in the existence of a partnership.  Section 59-60 of the General Statutes says that: "[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed."  N.C.G.S. §59-60.

That is consistent with the definition often given to "winding up":

The last phase in the dissolution of a partnership or corporation, in which accounts are settled and assets are liquidated so that they may be distributed and the business may be terminated.

The Free Dictionary.

That a winding up ending in liquidation was not required of their law partnership was particularly good news for the Defendants in Hardin, as they were the remaining partners in the law firm which Plaintiff had left.  They had continued to practice law without their departing partner, and filed a Certificate of Amendment with the NC Secretary of State to change the name of the firm to delete Plaintiff's name.

Judge McGuire found support for his ruling that the old partnership would not have to liquidate as a part of its winding up in decisions from other states, observing that:

a number of courts have concluded that a 'winding up' is technically effected when an outgoing partner is compensated for their interest in the dissolving partnership, without any strict requirement that the dissolving partnership be liquidated.

Op. ¶18.

Judge McGuire said that given "the potential disruption to the representation of [the law firm's] current clients that would result from a liquidation of the Firm's assets" that an accounting and settling of accounts between the partners as of the date of the dissolution, with the new partnership continuing in business was the appropriate means of a "winding up."  Op. ¶19.

Law Firms Should Have Written Partnership Agreements In Place To Avoid Cases Like This

The Business Court has been called upon before to adjudicate breakups of law firms, like in Walters & Zimmerman, PLLC v. Zimmerman and in Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. BrewerIn the Mitchell case, the Court struggled with the issue of how a withdrawing partner should be compensated for fees generated from a contingent fee engagement after the withdrawal.

in every one of these kind of cases in the  Business Court, the partnership (or the PLLC) did not have a written agreement regarding the relationship of its partner/members, which led to significant dispute.  If you are a lawyer practicing with one or more other lawyers, put your agreement in writing and avoid having to get a Business Court Judge to resolve your disagreement.

Even though the Defendants in the Hardin case didn't have to liquidate their firm and shut down their practice, they still have to deal with the annoyance of having a Receiver overseeing their practice while the amount to be paid to the Plaintiff for her partnership interest is determined.  And they have to bear the cost of the Receiver.

NC Court Of Appeals, Not Sure That It Had Jurisdiction, Dismisses Appeal From Business Court Decision

How does your appeal get dismissed when you've appealed to the "right", "appropriate", or "correct" court?  In other words, your appeal was to the Court with jurisdiction over your appeal.  It happened in the NC Court of Appeals this week.

The Date That Your Case Was Designated To The Business Court Is Critical To Your Appeal

For some context, you'll remember the NC Court of Appeals decision in Christenbury Eye Center P.A. v. Medflow, Inc., in which the COA dismissed an appeal from a Business Court ruling because the proper appellate court to hear that case was not it, but the NC Supreme Court.  That was because the case was designated to the Business Court after October 1, 2014, when G.S. § 7A-27(a)(2), became effective.  That statute specifies that appeals of the Business Court's final judgments will go to the NC Supreme Court. 

Since the Christenbury appeal was from a case designated to the Business Court after the October 1, 2014 effective date of the statute, it was to the "wrong" Court. the NCCOA concluded that the case should have been appealed to the NC Supreme Court and it lacked jurisdiction to hear the appeal.

But in Grasinger v. Williams, this week, the NCCOA dismissed an appeal from a Business Court decision which was properly appealed to it, the "correct" Court.  This case was designated to the Business Court before the effective date of the statute, so there was no appeal directly to the NC Supreme Court under the new Section 7A-27(a)(2).

So, why did the COA dismiss this appeal?  Because there was nothing in the Record on Appeal showing the date that the case was designated to the Business Court.  In other words, there was no way to tell whether the case was designated to the Business Court before October 1, 2014 (in which case the appeal would go to the COA) or after that date (in which case the appeal would go to the NC Supreme Court).  Judge Calabria said:

[w]ithout the precise date upon which this action was designated as a mandatory complex business case, we cannot determine with certainty whether jurisdiction lies with this Court or our Supreme Court. . . .  In the instant case, because plaintiff-appellants failed to include the designation approval or a designation order in the record on appeal and failed to note the date of designation in their brief, they have failed to confer jurisdiction on this Court and we dismiss.

Op. at 9.

Show The Designation Date In Your Record On Appeal

She said that the party appealing from a case designated as a complex business case, "bears the burden of showing the actual designation date"  Op. at 9.  In order to carry that burden in an appeal from a Business Court case designated before October 1, 2014, the appealing party:

must include in the record a copy of the dated designation and explicitly note the date of designation in the statement of grounds for appellate review portions of their brief in order to confer jurisdiction on this Court.

Op. at 9.

The COA rejected the argument that since the Amended Complaint (in the Record on Appeal) showed a filing date of November 6, 2013, the designation to the Business Court must have followed no more than thirty days later (if the statutory procedure for designation was followed), and would have been designated to the Business Court well before the effective date of the statute requiring appeals be made to the NC Supreme Court.  Judge Calabria outlined a possible set of events by which a designation could be entered beyond the thirty day period specified by the statute.  Op. at 7.

Couldn't The COA Have Taken Judicial Notice Of The Date Of Designation?

The COA also was not willing to take the few minutes it took me to find the Grasinger Designation Order in the readily accessible case file on the Business Court's website.  The Designation Order bears a date of October 25, 2013, putting the Business Court's decision squarely within the COA's jurisdiction.  Could the COA have done the same thing that I did?  Sure, the NC Supreme Court has said that "this Court may take judicial notice of the public records of other courts within the state judicial system." Alpine Motors Corp. v. Hagwood, 233 N.C. 57, 62 S.E.2d 518 (1950).

In fact, if the North Carolina Rules of Evidence apply to the Court of Appeals, judicial notice might have been mandatory.  Rule 201(d) says: "When mandatory.– A court shall take judicial notice if requested by a party and supplied with the necessary information."  Of course, the Appellant in Grasinger probably had no idea that the COA would focus so squarely on the date of the designation, and that it would be unwilling to spend a couple of minutes on the Business Court's website to satisfy itself that it had jurisdiction over the appeal.  The Appellant  therefore had no opportunity to request that the COA take judicial notice of the readily available Designation Order.

To be fair, as Judge Calabria pointed out, "it is not the duty of this Court to construct arguments for or find support for [an] appellant’s right to appeal[.]" (quoting Jeffreys v. Raleigh Oaks Joint Venture, 115 N.C. App. 377, 380, 444 S.E.2d 252, 254 (1994).

The Court then dictated a mandatory procedure for those appealing opinions in case designated to the Business Court before October 1, 2014: they must include the Designation Order in the Record on Appeal, and state the date of designation in the statement of grounds for appellate review in their brief.  Op. at 9. 

This Dismissal Looks Like A One-Off

Should we be worried about a deluge of dismissals from the COA because Appellants didn't specify the date their case was designated to the Business Court?  Apparently not.  I thought that there couldn't be that many cases that old around still on appeal, but I checked and there were more than ten.  I looked at most of the Records on Appeal in those cases, and found that each either included the Designation Order or a statement reflecting the date of designation. So it's unlikely that there will be any more dismissals of this type from the COA.

Be Careful With Your Records On Appeal Going Forward Anyway

But in case the NC Supreme Court is as unwilling as the COA to check the Business Court website to determine whether a case was designated after October 1, 2014, it's a good idea to follow the instruction from the Grasinger opinion in appeals to the NC Supreme Court.

                                                           *     *     *  

I would have missed this decision but for my colleague Dan Smith, who circulated an email this week around Brooks Pierce about this decision.  (This is the second time that I owe a thank you to Dan)  And, of course, I was "scooped" again by the North Carolina Appellate Practice Blog, which wrote about this decision a couple of days ago.  I am reconciling myself to being much slower than I used to be.  I don't like it.

NC Attorney General Reaches $9 Million Settlement With "American Indian Business" Western Sky Over Usurious Loans

You will remember the North Carolina Attorney General's lawsuit against Western Sky Fin'l, LLC. It generated an opinion from the Business Court last year in which Judge McGuire enjoined the Defendants from making further high interest loans in violation of North Carolina's usury laws.  The Defendants had claimed that as an American Indian related business, they were exempt from North Carolina's usury laws regarding their lending operations.

Judge McGuire signed off this week on a Final Judgment in State ex rel. Cooper v. Western Sky Fin'l, LLC resolving the case, based upon the consent of all parties.

If you have questions about the terms of the Final Judgment, here are some answers:

  • Can Western Sky make any more loans in North Carolina?  No.  Western Sky and the other Defendants are permanently enjoined from offering loans in North Carolina, unless they obtain a license to do so. (¶4)
  • Can Western Sky collect on its outstanding loans?  No, Western Sky is enjoined permanently from collecting on any loans that it has already made.  (¶4) It must adjust any outstanding loans to a "zero balance." (¶5)
  • Can Western Sky's North Carolina borrowers get refunds of the excessive interest they paid to Western Sky? Yes, the Defendants are required to put $9,025,000 in an escrow account to provide refunds to North Carolina consumers who borrowed money from Western Sky.  (¶8)  The $9,025,000 is due within ten days of the date of entry of the Final Judgment.  The refund amount to  be paid to each eligible Borrower is based on the amount of interest paid by each borrower to Western Sky in excess of the maximum of 16% interest allowed by NC law. (¶10).  But the refund amount apparently is not equal to the full amount of usurious interest paid.
  • How will the refund process be handled? The refund process is to be administered by a company called Dahl Administration.  The Defendants must cover Dahl Administration's fees and expenses up to $100,000.  Dahl Administration is required to notify all borrowers who may be entitled to a refund with a "Notification of Refund Eligibility" within sixty days. Any Borrower accepting a refund is required to sign a Release of the Defendants.
  • Does Western Sky have to pay anything else?  Yes, the Defendants must pay $250,000 to North Carolina "for the State's costs and attorneys' fees." (¶7).
  • My inability to pay back my loan from Western Sky has hurt my credit, what can be done about that?  The Defendants are required, within sixty days, to contact Equifax and Experian (two of the major credit reporting agencies in the U.S.) and to request that they remove any reporting regarding Western Sky's loans to North Carolinians. (¶6)
  • What If another State reaches a better settlement with Western Sky?  It is possible that another State might strike a better deal than the one obtained by the North Carolina Attorney General.   (There are multiple lawsuits pending against Western Sky in other States).  But the Final Judgment protects (in 20) against any other State obtaining a more favorable settlement.  A more favorable settlement is defined in the Final Judgment as a settlement that requires the Western Sky Defendants to pay restitution of more than $9,025,000 to borrowers in any other State and that amount is more than 40% of the amount of usurious interest collected in that other State.  (I guess that 40% figure means that Western Sky is only going to have to repay 40% of the highly excessive interest it charged,)
  • What If Western Sky sold my loan, am I still covered by the Final Judgment?  It looks like the Final Judgment doesn't cover loans which Western Sky sold on the secondary market.  Although the Final Judgment extends to the "successors" and "assignees" of the Defendants, the Final Judgment says that "[f]or the avoidance of doubt, the terrms 'successors' and 'assignees' do not apply to parties not subject to this Final Judgment that purchased loans from Defendants." Final Judgment 1.

If I had needed to borrow money from Western Sky, and was despairing about the vicious debt cycle its loan had thrown me into, I would consider this a pretty good resolution by the Attorney General.  The AG's office issued a Press Release regarding the case yesterday.

Why North Carolina Is Probably The Best State In Which To File A Voluntary Dismissal Of Your Case

You have a case set for trial in a state trial court.  You are tenth on the trial calendar, but the nine cases in front of you have crumbled and settled over the weekend.  Plus, your most important witness is gone from your state based on your guess that the case wouldn't be reached for trial.  You've been hobbled by an Order granting a Motion in Limine excluding some of your evidence from trial. Even worse, the statute of limitations ran on your claims while your case was pending.  And you really aren't ready (or don't want) to try this case anyway.

Wouldn't it be nice to wipe the slate clean and get a fresh start?  Well, you can do that in North Carolina, but probably in no other court.  If you are admitted to practice law in North Carolina, you know that in NC state court a plaintiff can dismiss his case "by filing a notice of dismissal [per Rule 41 of the NC Rules of Civil Procedure] at any time before the plaintiff rests his case." 

That is a much more generous allowance of the voluntary dismissal right than anywhere else.  In federal court (and under the Rules in many other states), by contrast, a voluntary dismissal must be filed much sooner: "before the opposing party serves either an answer or a motion for summary judgment."

The "Safety Net" Of Rule 41

The North Carolina Supreme Court (relying on North Carolina's civil procedure expert, Gray Wilson) has said that:

The Rule 41(a) voluntary dismissal “has salvaged more lawsuits than any other procedural device, giving the plaintiff a second chance to present a viable case at trial.” 2 G. Gray Wilson, North Carolina Civil Procedure § 41-1, at 32 (2d ed. 1995). Many plaintiffs have used “this rule to cure an unforeseen defect in a claim that did not become apparent until trial . . . . The rule also offers a safety net to plaintiff or his counsel who are either unprepared or unwilling to proceed with trial the first time the case is called.” 2 G. Gray Wilson, North Carolina Civil Procedure § 41-1, at 33.

Brisson v. Santoriello, 351 N.C. 589, 597, 528 S.E.2d 569, 572-573 (2000).

The longer period of time in which a plaintiff can take a voluntary dismissal (without the permission of the opposing party) is not the "distinct" feature of the North Carolina Rule which Judge Bledsoe referenced last week in  BBB&T BOLI Plan Trust v. Massachusetts Mutual Life Ins. Co., 2016 NCBC 34 at ¶17 .  That feature is the extension of the statute of limitations governing your claims.  The Rule says that so long as your dismissed lawsuit was timely filed, "a new action based on the same claim may be commenced within one year after such dismissal."  That's true even if the statute of limitations has expired at the time of the voluntary dismissal.

When Has A Plaintiff "Rested His Case"?

The words "rests his case" has a trial connotation to me.  When the Plaintiff has presented all of his documents and witnesses and turns the presentation of evidence over to the Defendant, he has rested his case.

But you can actually "rest your case"  much sooner than that, at least for Rule 41 purposes.  Defending your position in a summary judgment hearing means that you have rested your case within the meaning of Rule 41(a)(1)(i).  Op. ¶27 (citing Maurice v. Hatterasman Motel Corp., 38 N.C. App. 588, 591-92, 248 S.E.2d 430, 432-33 (1978)).  In fact, anytime that a plaintiff is facing a dispositive motion, he rests his case by "advanc[ing] its arguments about the merits of [his] case. . . ." Op. ¶28.

In the case before the Business Court last week, Plaintiff BB&T Trust filed its voluntary dismissal about three weeks before its trial was set to begin  During the course of the case (three years ago), Judge Murphy had denied a Motion to Amend in which the Trust tried to add additional theories of liability.  Shortly before trial, Judge Gale granted a Motion in Limine prohibiting the Trust from presenting evidence relating to those theories of liability that were the subject of its unsuccessful Motion to Amend.

So, can a voluntary dismissal be filed by a Plaintiff to avoid a Court's adverse ruling, or has he "rested his case" by contesting the ruling?

Bad Faith Dismissals Are Not Allowed

The NC Supreme Court said in the Brisson decision that a voluntary dismissal must "not be done in bad faith."  351 N.C. 597, 528 S.E.2d 569, 573.

Judge Bledsoe rejected the argument that the BB&T Trust's dismissal was taken in "bad faith."  He said that:

allowing Brisson’s bad faith exception to subject all voluntary dismissals to judicial scrutiny would undermine the intent of Rule 41(a) by creating unnecessary barriers for plaintiffs who wish to abandon their claims.

Op. ¶21.

So what makes out a "bad faith" dismissal?  It's a pretty narrow circumstance, and is limited to the situation where "the initial complaint fails to conform with the rules of pleading and merely seeks to take advantage of the savings provision"  Op. ¶2.  The rationale for that limitation " is that where an initial complaint does not conform with the rules of pleading, a plaintiff should not be entitled to the “safety net” of Rule 41(a)’s [statute of limitations] savings provision after dismissal."  Op. ¶26.

Defendant MassMutual took a run at arguing that "bad faith" had to be determined on a case by case basis, and that the Plaintiff had acted in bad faith by waiting three years after the rejection of its Motion to Amend to take its voluntary dismissal.  Judge Bledsoe said that he would not extend the bad faith exception "so far beyond precedent,"  and that finding Plaintiff''s dismissal to be in bad faith "would defeat Rule 41(a)'s broad function as a 'safety net.'"  Op. ¶26.

The Opinion makes it clear that an unfavorable ruling on a "non-dispositive motion" (like the ruling on the Defendant''s Motion in Limine) does not mean that a Plaintiff unsuccessfully contesting such a Motion has "rested his case."  Op. ¶29.

My "Unsecured Leave"

I'm going to be out of the country for the next couple of weeks.  For the first time, I'm not carrying a laptop with me, so don't look for anything from my blog until near the end of the month.

 

 

NC "Seed Law" Trumps The Uniform Commercial Code

The Business Court last month resolved a clash between North Carolina's "Seed Law" and the Uniform Commercial Code, in Kornegay Family Farms, LLC v. Cross Creek Seed, Inc., 2016 NCBC 30.  The Plaintiff in the Kornegay case is one of eight Plaintiffs in the Business Court suing Defendant Cross Creek Seed for selling them certified tobacco seed that produced "abnormal tobacco crops." Op. 2.

The Plaintiffs are seeking millions of dollars in damages for their inadequate crops.  They will be limited to recovering the amount they paid for their seed if the limitation of damages clause placed on each container of seed is enforceable.  North Carolina's Seed Law may invalidate that limitation.

North Carolina's Seed Law

I had no idea that North Carolina has a "Seed Law."  It is codified in G.S. §106-277 to -277.34.  North Carolina was one of the first states in the country to enact a Seed Law (in 1891), but now almost every state has one.  The North Carolina law imposes penalties for the sale of mislabeled seed (in G.S. §106-277.24).

The purpose of the statute "is to regulate the labeling, possessing for sale, sale and offering or exposing for sale or otherwise providing for planting purposes of agricultural seeds and vegetable seeds; to prevent misrepresentation thereof. . . . "  N.C. Gen. Stat. §106-277.

The Public Policy Of The Seed Law

The NC Supreme Court held many years ago that the Seed Law represents a declaration of North Carolina's public policy that a seller of seed cannot enforce a limitation of remedy  that limits a buyer's recovery to the purchase price of the seed if the seed was mislabeled.  Op. 5.  It said that the Seed Law:

has declared the policy of North Carolina to be one of protecting the farmer from the disastrous consequences of planting seed of one kind, believing he is planting another. To permit the supplier of seed to escape all real responsibility for its breach of contract by inserting therein a skeleton warranty, such as was here used, would be to leave the farmer without any substantial recourse for his loss.

Gore v. George J. Ball, 279 N.C. 192, 208, 182 S.E.2d 389, 398 (1971).  The Gore Court held that It is a violation of North Carolina's public policy to attempt to limit the damages of the purchase of mislabeled seed to the purchase price.

That decision involved a sale of seed before North Carolina adopted the Uniform Commercial Code. If a seller of mislabeled seed after the UCC came into effect can't limit a buyer's damages to the cost of the seed, that runs counter to Section 2-719 of the UCC (N.C. Gen. Stat. §25-2-719), which says that a seller can limit a buyer's damages "by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts."

Judge Gale resolved the question of whether the UCC should yield to the Seed Law in this way:

  • The official comment to G.S. Section 25-2-719 says that "a limitation of remedies that purports to modify or limit the UCC's remedial provisions 'in an unconscionable manner' is unenforceable.
  • Both the UCC and the Seed Law have been amended by the NC Legislature since the Gore decision was handed down.  Since "the legislature is always presumed to act with full knowledge of prior and existing law [so] where it chooses not to amend a statutory provision that has been interpreted in a specific way, we may assume that it is satisfied with that interpretation."  Op. 30 (quoting Polaroid Corp. v. Offerman, 349 N.C. 290, 303, 507 S.E.2d 284, 294 (1998).  [Do any of you believe that?]
  • The specific takes precedence over the general.  "Where a local non-UCC statute governs a specific point, it prevails over a general provision of the UCC.  Op. 31 (quoting 1 Lary Lawrence, Lawrence's Anderson on the Uniform Commercial Code §1-102:18 (3d ed. 2002)).

Judge Gale ruled that "Gore does not allow Cross Creek to enforce its limitation of remedies against Plaintiffs if the seed sold to Plaintiffs was mislabeled."  Op. ¶38.

 Would The Limitation Of Remedy Clause Have Been Enforceable Without The Seed Law?

Many courts have addressed the validity of limitation of remedy clauses when a sale of seed was involved.  Many of those courts have refused to enforce them, either on the ground that they "failed of their essential purpose" or because they were unconscionable.  See, e.g., Schmaltz v. Nissen, 431 N.W.2d 657, 662 (S.D.1988)(limitation was unconscionable); Latimer v. William Mueller & Son, Inc., 149 Mich.App. 620, 637, 386 N.W.2d 618 (1986)(same); Lutz Farms v. Asgrow Seed Co., 948 F.2d 638, 646 (10th Cir. 1991)(both unconscionable and failed of its essential purpose); Nomo Agroindustrial SA de CV v. Enza Zaden North America, Inc., 492 F. Supp2d 1175, 1185 (D. Ariz. 2007)(limitation of remedy clause was unenforceable because it was both unconscionable and failed of its essential purpose).

Judge Gale said that it was unnecessary to reach the unconscionability/failure of essential purpose argument given that the Seed Law prohibited the enforcement of the limitation of remedy clause.  Op. 8.

Judge Gale On The Appeal Of His Opinion

One of the most interesting things about Judge Gale's Opinion is his direct request to the North Carolina Supreme Court to consider an appeal of his decision.  He acknowledges that any appeal would be interlocutory and therefore not appealable (Op. 33) and that he cannot certify it for immediate appeal per Rule 54(a) of the NC Rules of Civil Procedure (because that Rule applies only to "final judgment[s] as to one or more but fewer than all of the claims or parties).  Id.

A quick appellate resolution of the Seed Law v. UCC issue makes sense.  Judge Gale said:

[w]ithout the ability to seek immediate appellate review of this Order & Opinion, the parties in each of these eight cases must await a final answer on a significant and controlling threshold issue until after a final, appealable judgment, which cannot be entered until complex fact and expert discovery are completed.  That discovery is likely to be long, burdensome, and expensive.

Op. 35.

 

 

NC Business Court Refuses To Enjoin Similar British Lawsuit

It's possible to get an NC state court to enjoin a party from pursuing parallel litigation in another American state.  But what about enjoining a party before an NC court from pursuing a parallel case in another country?

The NC Business Court grappled with that international issue late last month in O'Brien v. TCG Consulting Partners, LLC, 2016 NCBC 25.  It turns out that there is no NC appellate decision regarding this issue, so Judge Bledsoe was in somewhat uncharted waters.

O'Brien, the Plaintiff, was seeking to enjoin Defendant TCG from proceeding with a lawsuit against him in the London Mercantile Court to collect on a Promissory Note.  In the North Carolina lawsuit (filed a month before the London action), O'Brien was seeking a declaratory judgment that he owed nothing on the Note.

One Hundred Years Ago, O'Brien Might Have Gotten An Injunction

Judge Bledsoe, looking to a case cited by O'Brien in support of his position, observed that a North Carolina federal district court decision affirmed by the Fourth Circuit more than a hundred years ago, United Cigarette Machine Co v. Wright, 156 F. 244 (C.C.E.D.N.C. 1907), aff'd, 193 F. 1023 (4th Cir. 1912) had held that:

[I]]t appears to be well established that courts of equity can, and in a proper case ought to and will, restrain litigants in a foreign court. . . . [It is] a duty of a court of equity to restrain litigants in a foreign state or country. . . where the matter is fully litigated in the court to which the application for injunctive relief is made.

Op. ¶17.

That venerable case did not guide the Court's decision.  Its old age did it in.  Judge Bledsoe said that the hundred year old decision had been issued "when North Carolina's international commerce was limited and considerations of international comity had not yet gained widespread judicial support."  Op. ¶17.

Today, Federal Courts Apply Two Different Approaches To This Issue

More modern federal decisions relied on by the Business Court -- from other Circuits -- have applied different legal standards in deciding whether a court should enjoin an international proceeding.  One is the "liberal approach," which gives only "modest weight" to the interest of the foreign court.  Op. ¶21.

The other approach -- the "conservative approach," says that "injunctions restraining litigants from proceeding in courts of independent countries are rarely issued" and gives substantial deference to the principle of international comity.  Op. ¶22.

The Plaintiff Will Have To Fight The Same Issue In Two Courts

The Fourth Circuit hasn't decided which approach to follow (Op. ¶22 & n.3) and Judge Bledsoe didn't need to choose between them.  He ruled that an injunction wouldn't be appropriate under either the liberal approach or the conservative approach.  Op. ¶24.

If you are thinking that it is unfair to make Mr. O'Brien to fight about the validity of the Note on two continents, it's really not.  O'Brien is a British citizen and a resident of England.  Op. ¶27.  His assets are located there,  Id.  Moreover, there was nothing in TCG's British lawsuit which could be considered harassment, even though it was filed after the Business Court lawsuit had begun.  TCG had warned O'Brien that it intended to file its London lawsuit before O'Brien sued it in North Carolina.  Op. ¶26.

As for the additional expense that O'Brien will face in being involved in two lawsuits involving the same issue, Judge Bledsoe said:

Although the Court is sympathetic that O'Brien may incur additional expense in litigating these two actions simultaneously, the Court does not find that the additional expense should cause the Court to deviate from the general rule of international comity that, absent some 'irreparable miscarriage of justice,' courts should be hesitant to enjoin a party from proceeding in an international forum.

Op. ¶27.

Silver Lining?

It's worth noting that the Rule in the London Mercantile Court regarding attorneys' fees and costs is that they are paid by the losing party.  Mercantile Court Guide Rule 15.  So if Mr. O'Brien is confident that he can prove that the Note he signed is invalid, he may actually be better off in that Court.  The "Promissory Note" (which is contained in an email), has no provision regarding the payment of attorneys' fees.

 

It Can Happen To Anyone: Mistakes In Appeals

The road to an appellate court can be lined with unanticipated obstacles,  You can avoid them if you follow the NC Rules of Appellate Procedure and you keep up with changes in the law regarding appeals.  Or you might retain a lawyer who is certified as an appellate specialist by the North Carolina State Bar's Board of Legal Specialization

Two cases decided last week (one from the Business Court, the other from the NC Court of Appeals) resulted in dismissals of appeals because the Appellant didn't follow the Rules or didn't know about a change in the law. The first appellant was proceeding pro se.  The second was represented by a lawyer.  So a dismissal of an appeal can really happen to anyone, lawyer or not.

The  NC Business Court case (Velleros v. Patterson) involved the appealing party not  properly filing his Notice of Appeal with the clerk for the county where the case had originated before designation to the Business Court, although that wasn't the only reason for the dismissal.  (Anyone reading this blog is aware that the appeal of a Business Court decision requires the filing of a paper copy of the Notice of Appeal in the County where the case originated, in addition to an electronic filing in the Business Court).

The appealing party, not represented by a lawyer, had also done nothing to prepare the Record on Appeal required by Rule 9 of the NC Rules of Appellate Procedure.  (a record on appeal is a compilation of the documents filed in the trial court which are necessary to a consideration of the appeal)

Judge McGuire dismissed the appeal because the Record on Appeal hadn't been prepared.  Wait a second!  (Or as my brother-in-law says: Whoa! Whoa! Whoa!)  Can a trial court dismiss an appeal because the appealing party has violated a Rule of Appellate Procedure?  Isn't that power limited to the appellate court?

There Is No Appeal Pending Until The Record On Appeal Is Docketed

The appellate rules contemplate that the power to dismiss an appeal is limited to the appellate court after the appeal is filed.  Appellate Rule 25(a), says that "after an appeal has been filed in an appellate court, motions to dismiss are made to that court."  Even if the Notice of Appeal had been properly filed the case would not have been in the hands of the COA without the Record on Appeal having been filed, An appeal isn't fully before an appellate court until the appeal has been "docketed."  Craver v. Craver, 298 N.C. 231, 258 S.E.2d 357 (1979)(" until a record on appeal is filed and docketed, there is nothing pending before the appellate division.")

So the action of filing a Notice of Appeal isn't enough to take the case out of the jurisdiction of the trial court and into the grasp of the appellate court.

And what is this "docketing" thing?  It relates directly to the Record on Appeal.  "Docketing" is dealt with in Appellate Rule 12(b), which says:

Docketing the Appeal.  At the time of filing the record on appeal, the appellant shall pay to the clerk the docket fee fixed pursuant to N.C.G.S. § 7A-20(b), and the clerk shall thereupon enter the appeal upon the docket of the appellate court. . . . An appeal is docketed under the title given to the action in the trial division, with the appellant identified as such. The clerk shall forthwith give notice to all parties of the date on which the appeal was docketed in the appellate court.

A Trial Court Has The Jurisdiction To Dismiss An Appeal Before It Has Been Docketed

So "when an appeal has not yet been docketed with the appellate court, the trial court retains jurisdiction over the case" and it can consider a Motion to Dismiss the appeal.  Order ¶2 (citing Carter v. Clements Walker PLLC, 2014 NCBC 12 at 7).  (I wrote about the Clements decision a few years ago).  Judge McGuire dismissed the Velleros case in an unpublished Order. because the Record on Appeal hadn't been filed.

This Appellant was proceeding without a lawyer.  It's a bad idea to appear in the Business Court without a lawyer,  it's even a worse idea to go pro se in an appellate court.

Make Sure You Appeal To The Right Court

But even a lawyer can make a mistake that can be fatal to an appeal.  The Order dismissing the Velleros appeal came on the heels of a decision from the NC Court of Appeals this week dismissing an appeal from a Business Court decision, Christenbury Eye Center P.A. v. Medflow, Inc.

Why? The party appealing (represented by a lawyer) had filed its Notice of Appeal in the wrong Court.  It was filed in the NC Court of Appeals, not the NC Supreme Court.  Because you read this blog or the NC Appellate Practice Blog (or you pay for a subscription to NC Lawyers Weekly), you've known since last year that the NC Legislature amended the General Statutes to provide that appeals of "final judgments" of the Business Court are taken to the NC Supreme Court, and no longer to the NC Court of Appeals.  N.C. Gen. Stat. §7A-27-(a)(2).

But the Plaintiff appealing Chief Business Court Judge Gale's final judgment in Christenbury Eye Center P.A. v. Medflow, Inc., didn't know about that change in the law.  That's an understandable mistake, as almost all civil appeals in North Carolina must go to the NC Court of Appeals and don't go directly to the NC Supreme Court.

What is particularly interesting about the Christenbury ruling is that the decision to dismiss the appeal wasn't even the result of a Motion to Dismiss by the Appellee pointing out the jurisdictional problem.  The Court of Appeals apparently raised the issue on its own volition.  It said that:

If an appealing party has no right of appeal, an appellate court on its own motion should dismiss the appeal even though the question of appealability has not been raised by the parties themselves.” 

Op, at 4 (quoting Hyatt v. Town of Lake Lure, 191 N.C. App. 386, 390, 663 S.E.2d 320, 322 (2008).

But understandable or not, and lack of a Motion to Dismiss or not, there was no mercy from the COA for the Appellant in Christenbury.  Judge Davis held that "we lack jurisdiction over Christenbury’s appeal, and as a result, the appeal must be dismissed."  Op. at 5.

The change regarding appeals from the Business Court going to the NC Supreme Court instead of the Court of Appeals applies only to cases designated to the Business Court on or after October 1, 2014. The Christenbury case was designated to the Business Court on October 29, 2014, so the change was applicable to it.

Update: The Plaintiff filed an Amended Notice of Appeal, this time appealing to the NC Supreme Court, after the decision by the NC COA dismissing its appeal.  Judge Gale dismissed that revised appeal in an Order on June 14, 2016, saying that he had "no discretion to allow Plaintiff to amend its appeal" and that only the appellate courts had that discretion.

(Note: I wouldn't have been aware of the Christenbury decision if my Brooks Pierce colleague Daniel F.E. Smith hadn't brought it to my attention.  Thanks, Dan).

(Another Note:  I have mentioned the NC Appellate Practice Blog at least twice in this post.  I am a huge fan of that blog, which does a great job of writing about what can be the "traps" of appealing an NC Business Court case (and does it way better and more thoroughly than this blog).  Today, Beth Scherer, a frequent author of that blog, wrote about the interesting appeal from the Business Court of four consolidated cases, one of which was designated to the Business Court before the effective date of the statute requiring appeals from the Business Court to go to the NC Supreme Court (October 1, 20014) and was therefore supposed to be appealed to the NC Court of Appeals, while the other three cases were designated after October 1, 2014 and were to be appealed to the NC Supreme Court.  Beth flagged that issue several months ago and today wrote about how the NC Supreme Court resolved whether it should consider the appeal of just three of the cases or consider all four.)

Is It Better To Be A LLC Member In The Minority Than A Minority Corporate Shareholder?

It is pretty common to think that limited liability company members have similar rights as shareholders in a corporation.

But they don't, (although in some respects the rights afforded to LLC members may be better).  The Business Court made that pretty clear last week in Fiske v. Kieffer, 2016 NCBC 22.

The Defendant held a minority (40%) interest in an LLC.  He asserted in a counterclaim that all the other members of the LLC members (the Plaintiffs) had acted together to breach their fiduciary duty to him.  The Plaintiffs collectively controlled the remaining 60% of the LLC and sat in the majority position.

The claimed breach of fiduciary duty involved the making of a $100,000 capital call by the majority.  The Defendant said that the capital call was unnecessary and was improperly aimed at diluting his interest in the LLC and forcing him into selling that interest.

If the LLC had been a corporation, the Court might have found the existence of a fiduciary duty.  The NC Court of Appeals held in Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d 248, 260 (2000) that "a fiduciary duty could arise where multiple minority shareholders in a corporation acted in concert to control the corporation."  Op. 16.

But LLCs are different statutory creatures, especially since in an Operating Agreement, the parties to that agreement can alter the statutory default rules.  Order 16.  Delaware's version of the Uniform Revised Limited Liability Company Act says that a member's fiduciary duty can be "expanded or restricted or eliminated" via an Operating Agreement.  6 Del. C. § 18-1101(c)

The North Carolina version of the "uniform" Revised Act doesn't contain that language, but it says that "[i]t is the policy of this Chapter to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements."  N.C. Gen.. Stat. § 57D-10-01(c).  The only boundaries which the NC Act places on the freedom of contract in Operating Agreements is that those agreements may not be "unconscionable" and that they must be governed by the "implied contractual covenant of good faith and fair dealing."  N.C.G.S. § 57D-2-30.

The LLC's Operating Agreement in the Fiske case required a super-majority vote (75% of the members) for a number of significant actions.  Judge McGuire held that this provided adequate protection to the Defendant of his interest and that he did not have a claim for breach of fiduciary duty.  Op. 17 & 18.  The Defendant could, for example, block a sale of the LLC by refusing to approve the sale, notwithstanding his minority status. The Defendant also had the right, under the terms of the Operating Agreement, to make a claim for breach of contract against the Defendant for making the capital call in violation of the Agreement.  Op. 21.

This isn't the first time that the NC Business Court has looked at the different rights of LLC members as compared to corporate shareholders.  Judge Gale did that three years ago, in Blythe v. Bell, 2013 NCBC 18  18-22. That Opinion stressed the availability of a derivative action to LLC members with fewer procedural obstacles than those that face a shareholder of a corporation filing a derivative action.  For example, no pre-litigation demand is necessary before filing of a complaint, and an LLC member doesn't have to show that she "fairly represents the interests of the corporation."  The statute governing corporate derivative actions, on the other hand, requires both (in G.S. §§ 55-7-42 and 55-7-41).

So if you are an LLC member holding a minority interest, are you better protected from the misdoings of the majority than a shareholder with a similar interest?  It probably depends on the terms of the Operating Agreement.

Do You Think You can Recover The $1100 Fee For Designating A Case To Business Court As A "Cost"? Maybe You Can't.

Recovering the $1,000+ fee for designating a case to the Business Court seems like the unattainable Holy Grail for successful parties in the Court.  That's so even though the NC General Assembly amended the statute listing items recoverable as a "cost" (G.S§ 7A-305) to add the $1,100 designation fee as a recoverable item (in G.S. §7A-305(d)(12)).

Last week in an (unpublished) Order in Sopko v. Stancill, Judge McGuire denied recovery of that fee to a Plaintiff who had obtained a voluntary dismissal from the Defendant of the counterclaims which she had brought.  That would seem to warrant a recovery of the designation fee.  

That's because Rule 41(d) of the NC Rules of Civil Procedure says that  "[a] plaintiff who dismisses an action or claim under section (a) of this rule shall be taxed with the costs of the action."  And that rule also applies expressly to the dismissal of a counterclaim. NC R. Civ. Pro. 41(c).

One thing that is clear about awarding costs is that a trial judge has no authority to award expenses incurred in the course of litigation that are not expressly allowed by statute.  City of Charlotte v. McNeely, 281 N.C. 684, 691, 190 S.E.2d 179, 185 (1972).  That's pretty plain from Section 7A-305(d), which says that "The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court's discretion to tax costs. . . ."

But no appellate court has decided whether a trial judge has the authority to refuse to award costs that are expressly provided for by statute, like, for example, the fee for designating a case to the Business Court.

Judge McGuire ruled that he was required to determine whether the costs sought by the Plaintiff had been "reasonably incurred."  Order ¶10.  I'm not sure if that is correct.  Some of the items recoverable as costs are prefaced with the words "reasonable and necessary", like deposition costs and expert witness fees.  The designation fee allowed in section 7A-305(d)(12) doesn't contain that qualifier.

Judge McGuire ruled in the Sopko Order that the designation fee was not "reasonably incurred," and he refused to award the designation fee as a cost.  He said:

the Court is convinced that Plaintiff is not entitled to recover the filing fee here.  First, the lawsuit was not designated to the Business Court based on Defendant's counterclaims.  Instead, Plaintiff voluntarily incurred the filing fee, apparently believing that the claims she raised in the Verified Complaint were best served by designation to the Business Court.  Second, no part of this fee can conceivably be characterized as 'reasonably incurred' by Plaintiff in defense of the counterclaims alleged by Defendant.

Order ¶13.

It may be that this case means that a Business Court plaintiff who obtains a dismissal of counterclaims filed against him after the designation of the case to Business Court can't recover the designation fee as a cost.  Even though Rule 41 says that a Court shall award such a cost.

Well, the word "shall" doesn't mean what it used to. It's a surprisingly slippery and confusing word.  It was deleted almost wholesale in revisions of the Federal Rules of Civil Procedure, Appellate Procedure and Criminal Procedure.  (It seems to me that I wrote something about that word a few years ago on this blog, but I couldn't find it.)

I don't think that I have seen a single Order from the Business Court allowing recovery of the designation  fee since the statute was amended to allow it.  That legislation became effective in October 2014.

The Plaintiff in Sopko didn't come up empty handed on his application for costs.  He was awarded about $3500 for costs incurred for a mediation and some of his deposition expenses.  Both those types of costs are specifically listed in the statute allowing costs, in G.S. §7A-305(d)(7) and (d)(10).  But the Defendant, who had also obtained her own voluntary dismissal (of some of Plaintiff's claims), was awarded more for her costs -- $4,274.80 -- so she washed out Plaintiff''s recovery of costs entirely.

 

 

Don't Count On The Sheriff To File Your Notice Of Appeal

Filing a Notice of Appeal seems like a pretty easy thing to do.  You walk it over (or mail it) to the Clerk of Superior Court in the County in which the case was filed, and the Clerk puts a "filed" stamp on it indicating the date on which it was filed.

Remember that when appealing a Business Court decision, it is not enough to just e-file your Notice of Appeal electronically with the Business Court.  You have to file the Notice of Appeal with the Clerk of Superior Court for the County in which the case originated.

Rule 3(a) of the North Carolina Rules of Appellate Procedure says:

a party may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof within the time prescribed by subsection (c) of this rule. 

The "time prescribed by subsection (c)" is generally 30 days following the entry of the ruling appealed from.

This filing thing seems pretty hard to get to go wrong.  But it did go wrong for the Plaintiff attempting an appeal in Hefner v. Mission Hospital, Inc., 2016 NCBC 21.

How did it happen?  Hefner, whose Notice of Appeal needed to be filed by January 19, 2016, mailed his Notice of Appeal to Buncombe County on January 8th (via  FedEx, when it "absolutely, positively has to be there overnight.")  But the Notice of Appeal was not file stamped by the Buncombe County Clerk of Court until twelve days later on January 20th, a day late.

You are thinking that FedEx must have fallen down on the job.  No, FedEx didn't screw up.  The package was delivered as it was addressed, to: "Buncombe County Courthouse, ATTN: Civil Division."  If you are questioning the quality of that address, a paralegal for Plaintiff's counsel says that is the address to send the filing that she was given in a phone call to the Clerk's office. Personius ¶3.   

So, as you might guess, the package didn't end up in the hands of the Buncombe County Clerk of Court.  It went to the civil process division of the Sheriff''s Department of Buncombe County, which is in the same building as the Clerk.  The Sheriff's office apparently forwarded the Notice of Appeal to the Clerk of Court in time for it to be file stamped on January 20th.

Plaintiff (in opposing Defendant's Motion to Dismiss the Appeal), said that the file stamp of January 20th was not dispositive of the filing date and that the Notice of Appeal was most likely  received by the Clerk of Court earlier than that.  Plaintiff offered in support of this argument an Affidavit from a Lieutenant in the Sheriff's office.  The Lieutenant said that the Sheriff's office's records showed that the Notice of Appeal was received on January 13, 2016 and served on the Defendant the next day. 

The Sheriff's office had a practice of delivering documents that needed to be filed with the Court of delivering those documents to the Clerk on the next business day following the day that they were served. 

The Lieutenant said that he was "quite confident" that those practices had been followed with respect to the Plaintiff's Notice of Appeal, and that the document would have been delivered to the Clerk of Court on January 15th.  Aff. at ¶5.

Judge Gale, in granting the Motion to Dismiss the Appeal, said that "'the trial court is held to a strict construction of Appellate Rule 3.  Order ¶9 (quoting Ehrenhaus v. Baker, 2014 NCBC LEXIS 30, at *10, cert. denied and appeal dismissed, 776 S.E.2d 699 (2015)).

He said that "plaintiff has not met his burden of proving that the Notice of Appeal was filed on any day other than . . . the  date found on the trial stamp."  Order ¶11.  Judge Gale referenced  Rule 3(a) of the NC Rules of Civil Procedure, which says that the file stamp on a Complaint "shall be prima facie evidence of the date of filing."  Order ¶8.

Given the lack of definitive evidence that the Notice of Appeal was in the hands of the Clerk's office before the appeal deadline, the Business Court said that it didn't need to address whether delivery to the Court could be a sufficient filing in the absence of a contemporaneous file stamp.  But that question is probably answered by Appellate Rule 26(a)(1), which says that:

filing may be accomplished by mail addressed to the clerk but is not timely unless the papers are received by the clerk within the time fixed for filing.

There is enough murk in this case that it is hard not to feel sorry for the Plaintiff missing the appeal deadline.  Even Judge Gale said that he was "sympathetic to the circumstances in which Plaintiff now finds himself."  Order Par. ¶11.  He said that he lacked the discretion to allow the appeal, as only the Court of Appeals has that sort of discretion.  He referenced Appellate Rules 2 and 21 as providing that flexibility.

Maybe the Plaintiff will appeal this ruling.  But the appellate courts are  pretty dogmatic about scrupulous compliance with Appellate Rule 3 (see Dogwood Dev. and Mgt, Co, v. White Oak Transport Co., 362 N.C. 191, 657 S.E.2d 361 (2008)), so I wouldn't be too optimistic if I were the Plaintiff.

Two takeaways from this Order are:

Don't count on the Sheriff to file time-sensitive documents, and

Double-check the address of the Clerk's office when filing by mail.

A Couple Of Things Not To Do In The NC Business Court

The NC Business Court's decision last month in Krawiec v. Manly, 2016 NCBC 7, illustrates a couple of things not to do in the Court.

Don't Make "Aiding and Abetting" Claims

The Plaintiff made a claim against some of the Defendants for aiding and abetting the other Defendants in their alleged breach of contract.  It didn't withstand a Motion to Dismiss.

Judge Bledsoe observed that there was only one mention of such a cause of action in a reported North Carolina decision.  That was in an unpublished 2011 Superior Court Order that dismissed the claim.  Although there was an appeal of that Order, the Court of Appeals didn't consider that cause of action.  Op. ¶71 (citing Pete Fortner, PLLC v. Koonce Wooten & Heywood, LLP, 2011 N.C. App. LEXIS 130).

If the lack of North Carolina authority was not enough of a basis to dismiss the Plaintiffs' aiding and abetting claim, Judge Bledsoe also stated that numerous states had refused to recognize a claim for aiding and abetting a breach of contract (like New York, Illinois, Pennsylvania, and Arizona).  Op. ¶71.

If you are wondering why North Carolina's Courts would even need to recognize a claim for aiding and abetting a breach of contract when our Courts already recognize a claim for tortious interference with contract, you are dead on target.  Judge Bledsoe recognized that "some courts have noted that 'aiding and abetting breach of contract' is akin to a claim for tortious interference with contract." Op ¶71 & n.15.

But the tortious interference counterclaim that the Plaintiffs had brought was dismissed along with their aiding and abetting claim.  Why?  There was no allegation that the Defendants had knowledge of the contract that was interfered with, an essential element of the tort.

The breach of contract claim was not the only aiding and abetting claim that the Court dismissed.  It also dismissed an aiding and abetting breach of fiduciary claim.  The validity of those claims has repeatedly been questioned by the Business Court and even by the NC Court of Appeals.  Judge Bledsoe described the validity of such a claim as an "open question."  Op. ¶72.

The Court didn't have to address whether such a claim exists because the Plaintiffs had not alleged that any of the Defendants owed them a fiduciary duty.  There has to be a breach of a fiduciary duty before it can be "aided and abetted."  Op. ¶72.

It is probably a waste of time to make an aiding and abetting claim in the Business Court.  At least for aiding and abetting a breach of contract or aiding and abetting a breach of fiduciary duty.

You might remember the name of the Krawiec case.  It generated an Opinion from the Business Court last year holding that the filing of an amended Complaint moots a previously filed Motion to Dismiss.  That win last year for the Plaintiffs only delayed the Business Court's review of their claims following the filing of a Motion to Dismiss the Amended Complaint.

But these Plaintiffs only delayed the inevitable consideration of a Motion to Dismiss by filing their Amended Complaint.  Judge Bledsoe dismissed a substantial number of their claims, based on a Motion to Dismiss the Amended Complaint.  But several claims survived the renewed Motion to Dismiss like: the breach of contract claim, as well as claims for fraudulent misrepresentation, unjust enrichment, and punitive damages.

Don't Make A Trade Secrets Claim Without Pleading Every (Yes, EVERY) Aspect Of It With Specificity

I have written several blog posts on the requirement that a trade secrets claim be pled with specificity,  like here, here, and here.  These Plaintiffs failed to do that.

Among the claims dismissed by Judge Bledsoe was the Plaintiffs' claim of trade secrets in their "original ideas and concepts for dance production." That claim was dismissed because it was, as Judge Bledsoe put it,  "so non-specific and generalized as to be meaningless." Op. ¶46. 

The allegation that some of the Defendants had "unlawfully disclosed" the claimed trade secrets was also deemed inadequate. Op. ¶48.  The requirement of specificity in trade secrets pleadings also extends to "the acts by which the alleged misappropriation was accomplished."  Op. ¶49.

.

 

 

Arbitration Provision Which Completely Prohibited Any Discovery Enforced By NC Business court.

I don't draft arbitration provisions in agreements, but if I did I would not draft one like the one in Taggart v. Physicians Pharmacy Alliance, Inc.  Not because it turned out to be unenforceable, but because it was found to be enforceable. What?

Judge McGuire granted a Motion to Compel Arbitration in that case in an (unpublished) Order last week.

The arbitration provision said that:

[i]]t is the desire and intent of the Parties that such arbitration be held without any discovery, deposition or motion practice, that the arbitrator receive evidence solely through the written submissions and not hold an evidentiary hearing, and that the arbitrator has no ability to extend dates or apply rules that conflict with these provisions.

Order 2 (emphasis added).

So the Plaintiff will have to go into this arbitration with absolutely no discovery, and with no way for the arbitrator to assess the credibility of witnesses (since there will be no depositions and all the evidence will be presented in writing).

Although I have arbitrated cases where the arbitration provision made no mention of discovery (and most often I got none), my preference for an arbitration clause which specifies that limited discovery will be allowed to the parties.

What About Discovery In Arbitration?

It's tempting to say that arbitration -- often billed as being quicker and less expensive than in-court litigation --- shouldn't include any discovery, but as a practical matter, it often does.  The Rules of the American Arbitration Association specifically permit discovery.  The Procedures for Large, Complex Commercial Disputes give the arbitrator the "[b]road authority to order and control the exchange of information, including depositions."

But it's not particularly clear whether the AAA Rules apply anyway.  The arbitration provision calls for the arbitrator to be selected via AAA procedures, but does not make any mention or incorporation of the AAA Rules. 

And regardless of whether the AAA Rules apply, these parties chose, in a most emphatic way, to prohibit any discovery whatsoever.  

The AAA Rules probably don't apply, but if they did, Rule 22 provides for a "pre--hearing exchange and production of information."  Maybe there's an argument that an "exchange and production of information" doesn't fall into the category of the prohibited "discovery."

Was This  Arbitration Provision Enforceable?

Plaintiff said that the ban on discovery and the lack of any ability to have the arbitrator to consider a motion made the arbitration "unfair and substantively unconscionable."  Order 16.

That might have been a successful argument if the parties to the agreement had been of "greatly unequal bargaining power."  But under Delaware law (which governed the Agreement), great deference is accorded to "the voluntary agreements of sophisticated parties."  Op. ¶15 (quoting NACCO Indus., Inc. v. Applica Inc., 997 A.3d 813, 840 (Del. Ch. 2011),

Judge McGuire concluded that:

although arbitration procedures might not be as extensive as [those available in courts], by agreeing to arbitrate, a party "trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and  expedition of arbitration."    An agreement between  two corporate parties to decrease expected litigation costs is not unconscionable, particularly when both sides must adhere to the same prohibitions.

Order 19 (quoting Tierra Right of Way Servs. v. Abengoa Solar Inc., 2011 U.S. Dist.. LEXIS *15-16 (D. Ariz.. 2011).

                                                  *         *         *

Notwithstanding the ruling forcing him to arbitrate  without any discovery at all, it is hard to feel sorry for Mr. Taggart.  The arbitration was required under the terms  of a Stock Purchase Agreement by which the Plaintiff sold his company for $52.5 million dollars.  Plaintiff was represented in that transaction by one of the largest law firms in the United States.

The issue in arbitration will be whether Mr. Taggart is bound to indemnify the buyer of his company for a $5 million settlement paid after the sale as the result of an investigation by the U.S. Department of Justice of the company

 

Should An Arbitrator Or A Judge Be The One To Decide Whether An Arbitration Is Barred By Res Judicata

There are all sorts of questions when court proceedings run alongside an arbitration dispute.  Who decides issues that cut across both?  Judge?  Arbitrator?

Assume that you represented the Claimant in an arbitration In which the opposing party (the Respondent) made a number of counterclaims on which it was awarded a substantial amount.  You're still smarting from the loss, and the Respondent starts a second arbitration.  The claims in the second arbitration are essentially a rehashing of the original counterclaims.

You've got a pretty good res judicata defense.  But who decides whether the Respondent now turned Claimant is barred from pursuing its new claims?  Can the Arbitrator assigned to the second Arbitration deal with that issue?

A Plaintiff in the Business Court found itself in precisely this situation.  Allscripts, a "healthcare-related software provider"  had initiated an arbitration against Etransmedia Technology, Inc., which "delivers similar software programs to medical practices and health systems."

The arbitration panel socked Allscripts with an Award of nearly $10 million on Etransmedia's counterclaims which was confirmed by an NC Court..

Almost two years after that Award, Etransmedia filed its own arbitration action against Alllscripts.

Allscripts, seeing these "new" claims as barred by the resolution of the first arbitration, filed a Complaint seeking an injunction that the claims were barred by res judicata.  Etransmedia opposed the request for an injunction, arguing that the question of res judicata should be decided by the Arbitrator in the second  case. The case (Allscripts Healthcare, LLC v. Etransmedia Technology, Inc.) was designated to the Business Court, and Judge McGuire issued an (unpublished) Order right before Christmas, denying the request for an injunction and ruling that the Arbitrator was the proper decisionmaker on this issue.

The NC COA Had Previously Ruled That A Judge (Not An Arbitrator) Decided Issues Of Res Judicata

Allscripts presented two Court of Appeals decisions seeming to dictate a ruling in its favor and giving the Business Court the right to rule on the injunction.  In the first, C & O Dev. Co. v. American Arbitration Ass'n,  48 N.C. App. 548 (1980), the Court held that "it is our opinion that the extent of a judgment's binding effect is a matter for judicial determination." In the second case, Rodgers Builders, Inc. v. McQueen, 76 N.C. App. 16 (1985), the Court held that:

[t]he scope of an arbitration award and its res judicata effect are matters for judicial determination; therefore, whether plaintiff's claims are barred was for the superior court to determine.

Id. at 23.

The NC Legislature Changed Those Rulings With The Enactment Of The Revised Uniform Arbitration Act

Why would Judge McGuire rule otherwise, given the clarity of those COA decisions?  Because those cases were decided before North Carolina adopted the Revised Uniform Arbitration Act (the "RUAA") in 2003,  Order 21.  Judge McGuire observed that:

[s]ection 6(c) of the RUAA provides that '[a]n arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.

Order 21 (quoting N.C. Gen. Stat. §1-569.6(c)).

If you are not seeing how that statutory language covers a res judicata argument, it's clearer in the Official Comment to Section 6(c)  It says that the provision is meant to:

incorporate the holdings of the vast majority of state courts and the law that has developed under the [Federal Arbitration Act] that . . . issues of procedural arbitrability, i.e. whether  prerequisites such as time limits, notice, laches, estoppel and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide.

Order 27.

Given that the RUAA was meant to bring the state arbitration act in line with the Federal Arbitration Act, the NC COA's opinion in WMS, Inc. v. Alltel Corp., 185 N.C. App. 86 (2007) was determinative.  There, the appellate court held that "in the context of the FAA, the issues of res judicata and collateral estoppel must be decided initially by the arbitrator and not the trial court."  Id. at 92.

Would you rather have a Judge or an Arbitrator decide a question of res judicata? Don't forget that arbitrators aren't obligated to follow the law.  Judge McGuire observed a month ago that arbitrators:

'are not bound to decide according to law when acting within the scope of their authority, being the chosen judges of the parties and a law unto themselves, but may award according to their notion of justice and without assigning any reason.'

Trilogy Capital Partners,, LLC v. Killian, 2015 NCBC 103, ¶33 (quoting Bryson v. Higdon, 222 N.C. 17, 19-20 (1942)).

If you are wondering whether an arbitration Award is even entitled to res judicata effect, that bridge was crossed years ago.  See  Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22, 48 ("It is clear that a confirmed Arbitration Award constitutes a final judgment on the merits for purposes of collateral estoppel.").

 

 

 

Sometimes It Might Not Be Worth It To Appeal The Denial Of A Preliminary Injunction

I don't think that it was worth it for TSG to appeal Judge Murphy's Order denying its Motion for a Preliminary Injunction on a covenant not to compete.  That's true even though an injunction (though not on the covenant) was ultimately granted by Judge Bledsoe in an unpublished Order on December 14th. 

From Business Court To Court Of Appeals To NC Supreme Court And Back

Here''s a quick procedural history of the case:  In January of last year TSG filed in the Business Court a Motion for Preliminary Injunction enforcing a covenant not to compete..  Judge Murphy denied the Motion via an unpublished Order in February 2014.  TSG appealed and obtained a decision from the NC Court of Appeals reversing Judge Murphy in December 2014., 566 S.E.2d 561 (2014). The COA remanded the case to the Business Court and directed it to enter the previously denied Preliminary Injunction.  But then, the Defendant filed a Petition for Discretionary Review with the NC Supreme Court.  The Supreme Court denied that Petition (like it does with almost all of them) eight months later, in August 2015.

The Term Of The Covenant Not To Compete Ran Down During The Appeals

All throughout this appeal, the clock on TSG's two year -compete was winding down,  Its former employee, Defendant Bollinger, had quit his job at TSG on November 21, 2013 and began employment with a competitor, Defendant American Custom Finishing, LLC, four days later.  The non-compete agreement which he had signed was in place for two years.  (It said as to its term thatthe employee could be enjoined "[d]uring the period of two (2) years following the date of Employee's termination of employment with TSG. . . ."  Murphy Order 9).

By the time of Judge Bledsoe's Order last week, the two-year period of the non-compete had expired, and Judge Bledsoe ruled that the covenant not to compete could not be enforced.  Op. 23.

The Court Couldn't Extend The Term Of The Covenant Not To Compete

Covenant not to compete experts will think of those NC cases that extend the term of the non-compete for the period that it was being violated.  But those cases involve covenants that contain an explicit provision regarding their extension, like: "[t]he periods of protection shall not be reduced by any period of time during which [the employee is] not in compliance therewith." Phillips Elecs. N. Am. v. Hope, 631 F.Supp.2d 705, 718 (M.D.N.C. 2009)

The NC COA enforced such language in QSP, Inc. v. Hair,  152 N.C.App. 174, 177-78, 566 S.E.2d 851, 853 (2002), where the non-compete said that:

[Employee] agree[s] in light of the special nature of QSP's fund-raising business that if [employee] violate[s] this Agreement, appropriate relief by a court requires that the terms of paragraphs 1(a-f) and 3(b) will be extended for a period of twelve (12) months commencing on the date of [employee's] last violation of this Agreement....

But in this case, the covenant contained no provision regarding an extension, so Judge Bledsoe could not extend it beyond its two year term.

The Appeal Presented No Basis For An Extension

How about that failed Petition for Discretionary Review?   Was that a basis for extending the covenant's duration?  The passage of time caused by that unsuccessful Petition by the Defendants had caused the non-compete to expire.  The competitive restriction was governed by Pennsylvania law, which allows for an extension of a covenant's restriction if "fraud or unnecessary delay caused by the [enjoined party] . . . unjustly permitted the . . . time restraint to expire."  Op. 22 (quoting Hayes v. Altman, 266 A.2d 269, 272 (Pa. 1970)).

Judge Bledsoe said that there was no evidence:

to suggest that Bollinger has engaged in fraud or unnecessary delay to cause the restrictive period to expire.  To the contrary, Judge Murphy declined to enter a preliminary injunction in February 2014, and Plaintiff elected to appeal.  When the Court of Appeals overturned Judge Murphy's decision, Bollinger timely exercised his legal right to file a petition for discretionary review with the North Carolina Supreme Court.  Upon learning of the Supreme Court's denial of Bollinger's petition for discretionary review and the certification of that decision to [the Clerk of Superior Court for the County in which the case had been filed], this Court has acted promptly to issue this Preliminary Injunction Order as directed by the Court of Appeals.  Accordingly, the timing of this Order is the result of the normal processes of the North Carolina court system and not due to any 'fraud or unnecessary delay' by Bollinger.  Thus, an extension of the restrictive period . . . is not available. . . .

Op. 26 (emphasis).  Read "normal processes of the North Carolina court system" to read that the judicial system is not built for speed.  (I'm not picking on the North Carolina courts, that's true of all court systems).  If you are chasing after an injunction on a non-compete in the appellate courts after it was denied in the trial court, your non-compete is likely to expire during the appeals. So, pursuing the "normal processes" of an appeal may be a waste of time (and your client's money).

Can You Really Appeal An Order Denying (Or Granting) An Injunction Or Is It Interlocutory And Not Appealable?

The opinion from the NC COA in the TSG case gives a brief discussion of the appealability of an Order granting or denying an injunction.

The Court said that:

North Carolina appellate courts have routinely reviewed interlocutory court orders both granting and denying preliminary injunctions, holding that substantial rights have been affected. See, e.g., A.E.P. Industries, Inc. v. McClure, 308 N.C. 393, 302 S.E.2d 754 (1983); Iredell Digestive Disease Clinic, P.A. v. Petrozza, 92 N.C.App. 21, 373 S.E.2d 449 (1988) aff'd, 324 N.C. 327, 377 S.E.2d 750 (1989); Cox v. Dine-A-Mate, Inc., 129 N.C.App. 773, 501 S.E.2d 353 (1998); Masterclean of North Carolina, Inc. v. Guy, 82 N.C.App. 45, 345 S.E.2d 692 (1986).

566 S.E.2d at 853.

An Argument Based On The Inevitable Disclosure Doctrine Didn't Work

Plaintiff took a run at enjoining Bollinger from working in its industry of textile finishing based on the inevitable disclosure doctrine.  That seemed like a good idea given that Pennsylvania recognizes the doctrine.  Op. 28.  But Judge Bledsoe said that NC law, not Pennsylvania law, governed Plaintiff's claim for misappropriation of trade secrets.  Order 28.  He cited three previous Business Court opinions in which the Business Court said that it was "uncertain" and "unclear" whether North Carolina's appellate courts had recognized the doctrine.  Op. 28.

But the Plaintiff got an injunction enjoining Bollinger from misappropriating its trade secrets or any "confidential or other proprietary information as opposed to an injunction based on the non-compete, which would have prevented Bollinger from working for his neww employer.  The bond required was quite small -- only $250 -- since "the potential risk for damages" to Bollinger was deemed to be minimal.  Order 31.

All Is Not Lost: Plaintiff Can Still Get Damages

It's worth noting that the expiration of the non-compete doesn't preclude the Plaintiff from recovering  damages "that arose as a result of Bollinger's alleged violation of the Non--Compete Provision during the restrictive period."  Op. 27 & n.8.

 

Problems To Avoid When Making A Meiselman Claim And/Or Filing A Derivative Action

The Business Court's Opinion last week in Coleman v. Coleman, 2015 NCBC 110, provides useful guidance on how to properly plead a Meiselman claim, and proper procedure to follow before making a derivative claim.

Plaintiff in the Coleman case made both a Meiselman claim and a derivative claim.  As you will guess from the case name, this was a family dispute in which all of the parties were  "related, either through blood or through marriage."  Op. 3.  Plaintiff was a shareholder and President of two family-owned corporations, one of which owns Asheville Mall.  He had been removed from  his position by his co-shareholder family members despite what he said was a shared expectation that he would remain the President as long as he was "capable and willing to serve."  Op. 11.

Plaintiff couched his first claim as one for "Breach of Fiduciary Duty -- Meiselman Action.  If you aren't familiar with a "Meiselman action," the North Carolina doctrine -- decided iby the NC Supreme Court in the case of Meiselman v. Meiselman in 1983 -- protects a shareholder in a closely held corporation from "the frustration of his reasonable expectations as a shareholder" (Op. 19).  That can include things like like continued employment with the corporation or actions affecting share ownership.  The shareholder must show that his  "reasonable expectations" were known to or assumed by the other persons involved with the corporation.  

Don't Expect Conclusory Allegations To Get You Past A Motion To Dismiss

The Plaintiff before the Court hadn't pleaded his Meiselman claim adequately.  Judge Bledsoe said that:

Plaintiff has not pleaded sufficient facts to show his expectations were reasonable or concurred in by Defendants.  Plaintiff has advanced only conclusory allegations that Defendants knew of and frustrated his substantial and reasonable expectation of continuing to serve as President of the Corporations.

Op. 22.

Plaintiff also hadn''t pled his claim with enough detail to get past the presumption afforded the corporation by the business judgment rule.  The business judgment rule creates a "a strong substantive presumption that [a] director's judgment will not be judicially second-guessed unless it cannot be attributed to a rational business purpose."  Op. 31.

Plaintiff said he had been replaced as President by a person who did "not have the requisite expertise or experience to properly manage the Corporations."  Op. 32  The Judge said that "[t]his conclusory statement, standing alone, is insufficient to demonstrate that the board's actions were outside the realm of the business judgment rule." Op. 32. 

Don''t Ask For Relief Which The Court Doesn't Have The Power To Grant

Another reason that the Meiselman claim was dismissed was because the relief that the Plaintiff sought (his reinstatement as President) could not be granted by the Court.

Judge Bledsoe observed that here was a significant change "between the statutory framework in which North Carolina courts  analyzed Meiselman and the framework in existence today."  Op. 24.  Years ago, a trial judge had the power per the now repealed G.S. §55-125.1 to cancel, alter, or enjoin "any resolution or other act of the corporation or to direct or prohibit "any act of the corporation or of shareholders, directors, officers or other persons party to the action."

As the law stands now, "courts are limited in the exercise of their 'discretionary equitable jurisdiction to order involuntary dissolution, or, alternatively, a mandatory buyout for the protection of the minority shareholders in closely held corporations.'"  Op. 24.  Reinstatement?  Not available.

The Dismissal Of The Meiselman Claim Was Without Prejudice

The Court allowed the Plaintiff to amend his Meiselman claim "in a manner consistent with Rule 8's requirements and prevailing case law.

A Demand on The Corporation Is Essential Before Filing A Derivative Action

A demand on the corporation to take action is an essential prerequisite to the filing of a derivative action.  G.S. §55-7-42 says that a shareholder "may not commence a derivative proceeding" without having made a written demand "upon the corporation to take suitable action."

A Plaintiff must wait ninety days after the demand before starting a derivative action.  The 90 day period is waived only if the corporation rejects the demand before the 90 days have run, or if irreparable injury would result to the corporation if the potential plaintiff is forced to wait.  N.C. Gen. Stat. §55-7-42.

This Plaintiff didn't wait the 90 days, contending that the corporations had rejected his demand via a voicemail.

What Constitutes The Rejection Of A Demand

Plaintiff had made his demand in a letter which he  sent to the other directors and shareholders of the corporations.  The attorney who Plaintiff said was counsel for the "Majority Shareholders and Majority Directors" (Op. 27 & n.3) left Plaintiff the voicemail rejecting the demand.

That phone call was not sufficient to avoid the 90 day waiting period because there was no allegation that this attorney had the authority to bind the corporation.  Op. 29.  That ruling was consistent with a decision from the Business Court last year, in which Judge Gale held that:

any response adequate to constitute a corporate rejection that excuses the further running of the ninety day waiting period must be made by those with the authority to act on behalf of the corporation.

Petty v. Morris, 2014 NCBC 66 at 46

Make Sure To Verify Your Derivative Action Complaint

Rule 23(b) of the NC  Rules of Civil procedure says that all complaints initiating a derivative action must be verified under oath. 

This Plaintiff had not verified his complaint, so his lawsuit was dismissed without prejudice.

                  *          *          *          *          *

If you are thinking that this Plaintiff stands in pretty good shape even after the grant of the Defendants' Motion to Dismiss because he has the right to refile his claims, you are mostly right.  But given that the lawsuit was filed in August of last year, Mr. Coleman will be starting all over again, nearly a year and a half later, following the dismissal.

 

 

A Couple Of Points About Receiverships

There's a lot to wonder about receiverships.  Like, how is the Receiver's  compensation calculated?  And does it make a difference to compensation if a corporate shareholder says the receivership was unnecessary, and that it was obtained for improper purposes?

Judge Bledsoe answered those questions this week in Ekren v. K&E Real Estate Investments, LLC. 2015 NCBC 107,

Compensation Can Be Based On Gross, As Opposed To Net, Receipts

A Receiver, once appointed by the Court, is paid per the terms of G.S.