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

Valuing a closely held business is often a debate over hypothetical dollars, particularly when the company's sole asset is unproven technology.  The Business Court confronted such a situation recently in Vernon v. Cuomo.

The company in question developed a new technology with potential widespread medical application:  silicone-free syringes, which would enable syringes (especially of high-priced medicines) to be pre-filled without risk of contamination.  The potential of the technology, however, was not enough to keep the company together.  Two shareholders asserted dilution and self-dealing claims against the other shareholders.  After a bench trial, the Court concluded that the defendants engaged in self-dealing and breached their fiduciary duty to the plaintiffs.  The Court ordered the judicial dissolution of the company to protect the interests of the complaining shareholders pursuant to N.C.G.S. § 55-14-30(2)(ii).  (Mack wrote about the bench trial opinion last year).

In lieu of dissolution, the defendants exercised their statutory option to purchase the plaintiffs' shares at fair value under N.C.G.S. § 55-14-31(d).  That statute neither defines fair value nor specifies the procedures for a court to use in arriving at it.  In Vernon, Judge Tennille followed a procedure similar to two previous valuation cases, Garlock v. Hilliard and Royals v. Piedmont Electric Repair Co.:  solicit the opinion of an independent appraiser, "but also [take] into account other equitable and practical considerations based on the arguments and submissions of counsel and matters of record."

The added complication of Vernon was that, with the only asset an unproven technology, there was a high risk of windfall on both sides:  "One of the key problems faced by the Court in this valuation process has been how to protect against a windfall by the majority shareholders if the technology proves to be extremely valuable while not requiring the majority to pay an initial price that may be too high if the technology is not adopted widely in the industry."

The Court approved of the methodology of the appointed appraiser, who had extensive IP valuation experience.  The appraiser's methodology included:

• the discounted future economic income method to discern fair value
• Latin Hypercube simulation algorithms to generate income estimates
• a Fisher Pry model to project a market adoption rate for the technology
• Monte Carlo simulation methods to consider uncertainties in the company's underlying earnings potential

However, because of the uncertainties and the windfall risk, the Court concluded that a royalty sharing arrangement would best capture the value of the technology for both sides.  The Court found that the plaintiff's shares were worth a specific amount, plus a royalty sharing arrangement of a specified percentage.  (The amounts themselves are redacted in the public version of the Court's opinion).  The Court ordered the closing to take place within 20 days, with 50% of the purchase price paid at closing and the balance paid in two annual installments with no interest.

Recognizing the novelty of the approach (and the appellate courts' distrust of novelty), the Court also reached a backup conclusion of the total fair value of the plaintiffs' shares, which would take effect if an appellate court struck down the royalty sharing arrangement.

 

 

[The photo of the syringe is from Zaldylmg's photostream on Flickr, some rights reserved.]

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

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

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

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

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

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

Under North Carolina law, a court can assess Rule 11 sanctions against a plaintiff and the plaintiff’s counsel regardless of whether a court previously denied the defendant’s motion to dismiss pursuant to Rules 12(b)(6) and/or 9(b). See Perkins v. Healthmarkets, Inc., 2007 WL 2570242, *6 (N.C. Super. 2007)(“That the Plaintiff’s Amended Complaint meets the requirements of Rule 9(b), however, does not mean that it satisfies Plaintiff’s pleading obligations under Rule 11 of the North Carolina Rules of Civil Procedure.”); see also Hill v. Hill, 173 N.C. App. 309, 320, 622 S.E.2d 503, 511 (2005)(“. . . expenses incurred during the motion to dismiss, whether granted or denied, are reasonable expenses incurred due to plaintiff’s signing and filing the frivolous complaint.”). As the Court of Appeals noted, “whether the document complies with . . . the Rule is determined as of the time it is signed.” Id. Here, the allegations in the Amended Complaint, while considered to be true in considering a 12(b)(6) motion, are not well grounded in fact or law and the Bostics are entitled to dismissal of the claims and sanctions against Plaintiff and its counsel under Rule 11.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions

 

 

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The Court had warned Plaintiff and his counsel in an Order granting a Motion to Dismiss to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before continuing to pursue a common law fraud claim" against the "Bostic Defendants".

The Court's Order had dismissed the fraud claim against one Defendant, but it didn't dismiss the claim against the Bostic Defendants because those defendants had already made a Motion to Dismiss and had it denied before the case was transferred to Business Court.

After that, the Bostic Defendants filed a Motion for Rule 11 Sanctions. The Court then in an in chambers conference "suggested to Plaintiff's counsel that they consider the merits of the claim alleging fraud." Shortly after that, the Plaintiff voluntarily dismissed its fraud claim.

The Court nevertheless granted the Motion for Sanctions. It held that "a legal position violates Rule 11 if it 'has absolutely no chance of success under the existing precedent.'"  It found that to be the case because the fraud claim was founded on the theory that the Defendants had misrepresented the true owner of property in order to deprive the Plaintiff of its Chapter 44A lien rights. But Plaintiff had determined the true owner of the property and had in fact filed a claim of lien, and it had not therefore been deceived.

The Court held "in other words, Plaintiff either knew or should have known that its claim alleging common law fraud had absolutely no chance of success because Plaintiff was not deceived by this particular misrepresentation."

Full Opinion

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions

 

 

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The Court granted an Opposition to Notice of Designation of Action as a Mandatory Complex Business case, ruling that:

This matter appears on the face of the pleadings to involve enforcement of a restrictive covenant contained in a settlement agreement. No additional issues involving the identification, delineation and protection of trade secrets appear from the pleadings and response to the Opposition. Nor does there appear to be an unfair trade practice issue unrelated to the enforcement of the restrictive covenant. Where, as here, the only critical issue is the enforceability of a restrictive covenant, mandatory jurisdiction of the Business Court is not implicated.

Full Opinion

Opposition to Notice of Designation

Response to Opposition to Notice of Designation

Notice of Designation and Complaint

 

 

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The Court denied a motion for sanctions because of the moving party's failure to comply with the meet and confer requirements of Business Court Rule 18.6(a).  The Court held that "[t]his reason alone is sufficient for the Court to deny the Motion."

Full Opinion

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The Court denied an opposition to the designation of a case as a mandatory complex business case, holding that "[t]he allegations in the Complaint involve a breach of fiduciary duty and the failure to pay dividends and fall within the mandatory jurisdiction of the Business Court."

Full Opinion

Opposition to Designation

Response in Opposition to Designation

Complaint

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The Court denied a motion opposing the designation of this case as a mandatory business case, holding that "this matter is a derivative action by a minority shareholder which involves issues relating to the law governing corporations," therefore "conclud[ing] that the allegations in the Complaint fall within the mandatory jurisdiction of the Business Court."

Full Opinion

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The Court dismissed claims against banks which had provided financing to lot purchasers under the Interstate Land Sales Full Disclosure Act. The Court held that there was no showing that the banks were "developers or developer's agents" as defined by the Act, and furthermore no allegations that the banks' involvement in the development had gone "beyond standard industry practices with respect to real estate transactions" so as to make them liable under the Act.

The Court also dismissed claims against the banks for negligence and negligent misrepresentation, holding that no facts supported those claims and that "'conclusions of law or unwarranted deductions of fact' are not treated as true for purposes of a motion to dismiss."

Also dismissed were fraud claims against the Bank, which the Court ruled to be "insufficient to meet the factual particularity required under Rule 9(b)."

Full Opinion

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Plaintiff could not make tort claims, including breach of fiduciary duty claims, against a Bank for mismanagement of its investments. "As a general rule, parties to a contract 'owe no special duty to one another beyond the terms of the contract.' This general rule even applies to bank-customer relationships like the one at issue."

Plaintiff also could not pursue an unfair and deceptive practices claim, because the relationship involved the "raising of capital" and was therefore within the securities transaction exception.

Full Opinion

Brief in Support of Motion to Dismiss

Brief In Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court overruled an opposition to designation in a case involving "real estate developments which failed during the current financial crisis."

The Court found these types of cases "especially suited" for consideration by the Business Court because "(1) they involve numerous parties, (2) they involve complex issues, (3) they involve current issues relating to real estate development that will result in written opinions of use to the bar and business community, (4) they may involve resolution of multi-state legal issues, (5) they will require coordination with bankruptcy courts and other federal courts, (6) they require management by one judge, (7) they will benefit from consistent legal rulings on the same kinds of issues, (8) they will be motion intensive, and (9) they will benefit from the use of the Court's electronic filing system."

Full Opinion

 

 

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The Court stayed discovery pending its resolution of a Motion to Dismiss. There is no discussion in the very short Order of the reasons for the Court's decision, but the briefs are useful.

Full Opinion

MassMutual's Brief in Support of Stay of Discovery

Clark Consulting's Brief in Support of Stay of Discovery

BB&T's Opposition to Both Motions

MassMutual's Reply Brief in Support of Stay of Discovery

Clark Consulting's Brief in Support of Stay of Discovery

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The Court denied a Motion for Preliminary Injunction under the North Carolina Trade Secrets Protection Act.

Plaintiff had failed to show a likelihood of success on the merits, for a number of reasons. First, the manufacturing process which Plaintiff claimed was a trade secret was not meeting the requirements of the third party buyer involved, which caused the Defendant to develop its own process. Second, there was evidence that some of the technology was widely known and used in the industry. Finally, Plaintiff had never insisted on a confidentiality agreement to protect the claimed trade secret information and had in fact shared some of the information with the Defendant. The Defendant's signature on logs stating that it might be exposed to trade secret information was insufficient.

The Plaintiff had furthermore failed to show irreparable harm, given that its claim was that the Defendant had misappropriated the process in order to sell to their common customer. The Court held that "it should be relatively simple for Plaintiff to calculate its damages, which will be measured either by Plaintiff’s lost profits or the extent of Defendant’s unjust enrichment resulting from the alleged violation of the NCTSPA."

Full Opinion

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

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When the parties to a contract have negotiated and agreed to a mandatory forum selection clause, that clause is valid except when compelling reasons dictate otherwise. 

The Court enforced a forum selection clause in a franchise agreement, and transferred venue of the case from Gaston County to Buncombe County. 

Full Opinion

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A shareholder who guarantees the debt of a corporation does not have an injury "separate and distinct" from the injury sustained by the corporation itself. The shareholder did not standing to pursue damages for the breach of a contract with the corporation.  A shareholder "cannot assert claims against a third party for loss of its equity investment in a corporation."

Full Opinion

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If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren't enough to invoke the mandatory jurisdiction of the Court. 

There was a short order on that subject yesterday in CCE Development Corp. v. Jebara Investments, LLC, in which the Court held that "[p]iercing the corporate veil alone is insufficient to establish mandatory jurisdiction." 

There was a similar ruling earlier this year, in Robert N. Pulliam, CPA/ABV PLLC v. Gardner, where the Court held "the presence of veil piercing allegations are not, in and of themselves, grounds for jurisdiction under N.C. Gen. Stat. § 7A-45.4(a)."

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The Court sanctioned a pro se party for failing to appear at a scheduled mediation. The sanction included (1) requiring the party to pay her share of the mediation she did not attend, (2) being compelled to attend another mediation to be scheduled at the mediator's discretion, and (3) requiring her to pay the total expense of the new mediation.

Full Opinion

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Order granting a preliminary injunction enjoining a foreclosure based on plaintiffs showing that “'there is a serious controversy'” as to default or the enforceability of the loan documents at issue."

Full Opinion

Brief in Support of Motion for Preliminary Injunction

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The Court granted the motion to dismiss of a member of an LLC in which the Plaintiff sought dissolution, ruling that “'[i]t is not necessary to join members as parties to a proceeding to dissolve a limited liability company unless relief is sought against them individually, however the court shall order that appropriate notice of the dissolution proceeding be given to all members by the party initiating the proceeding.'” N.C. Gen. Stat. § 57C-6-02.1(b) (2007). The law is also clear that '[a] member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object of the proceeding is to enforce a member’s right against or liability to the limited liability company.” N.C. Gen. Stat. § 57C-3-30(b) (2007).'"

The Court further ruled that to the extent the complaint asserted claims against the Defendant regarding his management of the LLC, those claims were derivative in nature and Plaintiff was not entitled to pursue them individually.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court had mandatory jurisdiction over Plaintiff's complaint because it involved the interpretation of a shareholders agreement, and also because it involved the rights to manufacture certain products and use certain processes covered by patents.

Full Opinion

Complaint

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Once the Business Court takes jurisdiction over a case, that jurisdiction remains in place for the life of the case, regardless of dismissals of parties or changes in the nature of the claims.

That was the ruling of the Court last week in Mattress Now, Inc. v. KS Bank, Inc. in response to the Plaintiff's Motion to Remand.

The case had been designated to the Business Court by the Defendant Bank, which was one of two defendants. The Plaintiff challenged that designation, but the Court rejected Plaintiff's arguments in an earlier ruling and refused to remand the case.  After that, the Plaintiff settled the claims involving the Bank.

Plaintiff then moved again to remand.  It asserted in its Motion that the remaining claims "do not involve the corporate law and banking issues that justified removal of this case to the Business Court" and that none of the issues "require the expertise of the Business Court."

Judge Tennille, in a very short ruling, held "[t]his case was designated a mandatory complex business case pursuant to North Carolina General Statute Section 7A-45.4 on August 12, 2008. Once jurisdiction attaches, it remains attached for the entire case."

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The Business Court now has jurisdiction over utility pole disputes between communications providers and municipalities.  That surprising expansion of the Court's jurisdiction is thanks to a new law passed at the just concluded session of the North Carolina Legislature.

New section 62-55 of the General Statutes requires a municipality that "owns or controls poles, ducts, or conduits" to allow a "communications service provider" to have access to those resources at "just, reasonable, and nondiscriminatory rate." (The statute doesn't apply if the poles, ducts, or conduits are subject to federal regulation under the Communications Act of 1934).

If a provider makes a request for access, and the request is refused, the new statute provides that either party can have its claim resolved by the Business Court, which will have exclusive jurisdiction over the dispute. The jurisdiction kicks in only after the expiration of a 90-day negotiation period or before then if either side "believes in good faith that an impasse has been reached."

The law became effective July 10, 2009. Earlier this week, in Town of Murphy v. Verizon South, Inc., Judge Tennille discussed the new statute and the procedure that the Business Court intends to follow with respect to utility pole disputes. Among other things,the Court discouraged "gamesmanship" which might result in a party rushing to file a lawsuit before the expiration of the 90 day negotiation period. Judge Tennille said "[t]he parties would be well advised to use the mediation process if their negotiations are not proving fruitful and leave it to the mediator to declare an impasse."

In the Town of Murphy case, Judge Tennille remanded a utility pole dispute to Cherokee County Superior Court. The case had been filed before the effective date of the statute, and Judge Tennille ruled that the new law was not retroactive.

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Once the Business Court takes jurisdiction over case, that jurisdiction remains in place for the life of the case, regardless of dismissals of parties or changes in the nature of the claims.

In this case, the Plaintiff moved to remand the case to Superior Court, arguing that it had settled its claims with the party which had designated the case to the Business Court. It asserted that the remaining claims did "not involve the corporate law and banking issues that justified removal of this case to the Business Court" and that none of the issues "require the expertise of the Business Court."

The Court denied the motion, holding "[t]his case was designated a mandatory complex business case pursuant to North Carolina General Statute Section 7A-45.4 on August 12, 2008. Once jurisdiction attaches, it remains attached for the entire case."

Full Opinion

Motion to Remand

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

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

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

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

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

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

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

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

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

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

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The managing member and president of an LLC could not be liable for tortious interference with contract for firing the Plaintff. "A party to a contract, including the party's managing agent, cannot be liable for wrongful interference of the contract." The defendant was not an outsider to the contract, and therefore could not be liable for wrongful interference for firing the Plaintiff

The Court dismissed Plaintiff's unfair and deceptive practices claim, ruling that it was outside the scope of the statute because it involved securities claims and employer-employee relations.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

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The Court determined that it could rule on a dispositive motion in a putative class action before ruling on class certification.  It held "in appropriate cases it is neither unusual nor inappropriate for a court of jurisdiction to consider merits issues prior to determining class certification matters."

The Court granted summary judgment on a Fair Credit Reporting Act claim, denied it as to other claims, and did not issue an opinion stating its reasons. The Court said that the case had been assigned to it as an exceptional case under Rule 2.1 of the General Rules of Practice, not as a complex business cased under Rule 2.2, and that a written opinion therefore was not required.

In separate opinions issued the same day, the Court sanctioned the Defendants for spoliation of evidence and certified the class.

Full Opinion

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

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

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

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

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

Arbitration

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

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

Discovery And Medical Review Committees

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

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

Copyright 

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

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The Court partially granted an LLC member's motion for an accounting, ordering the LLC to provide the member with periodic "(1) information regarding the status of the business and the financial condition of [the LLC] including a summary of all funds disbursed and spent and all revenue generated from 1 January 2009 to the present, and (2) a copy of [the LLC's] federal, State, and local income tax returns as filed for each year the company has been in business."

Full Opinion

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The Court denied a motion for "alternative service of process" on a foreign defendant, ruling that the Plaintiff had not shown it had exhausted the traditional means of service available under Rule 4(j3) by attempting service through the means specified in the Hague Convention.

The Court further stated that if Plaintiff could not with due diligence serve the foreign defendant through traditional means, that it would allow for service of process by publication.  The Court referenced an earlier order in another case in which it had done so.

Full Opinion

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Complaint asserting breach of fiduciary duty by securities broker fell within the Court's mandatory jurisdiction over securities matters, as did issues regarding enforceability of arbitration provisions in brokerage agreement.

Order

Opposition to Notice of Designation

Brief in Support of Notice of Designation

Notice of Designation and Complaint

 

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Directors of corporations verging on insolvency can owe fiduciary duties to creditors under certain circumstances.  Whether those duties were owed -- and whether the claim for their breach had been released as a part of the corporation's bankruptcy proceeding -- were the main issues yesterday in Phillips and Jordan, Inc. v. Bostic, 2009 NCBC 13 (N.C. Super. Ct. June 2, 2009).

The Plaintiff claimed that the Defendant directors had diverted money through "a web of sham entities" for their own personal benefit during a time when the corporation faced "deepening insolvency" and that they were liable to it under a theory of constructive fraud.

Here's how Judge Diaz described North Carolina law on the duties of directors of a corporation in financial difficulty:

In certain circumstances. . . corporate directors may owe a fiduciary duty to creditors of the corporation. The circumstances under which a director’s fiduciary obligations extend to creditors have been limited to those situations 'amounting to a "winding up" or dissolution of the corporation.'

'Once the fiduciary duty arises, a director must treat all creditors of the same class equally by making any payments to such creditors on a pro rata basis.'

Where a creditor can show constructive fraud by a director at a time when the corporation 'is in declining circumstances and verging on insolvency,' or 'where such facts establish circumstances that amount "practically to a dissolution,"' the claim is one that 'belongs to the creditor and not the corporation.'

Op. ¶¶42-45.

The Court denied the Defendants' motion to dismiss the Plaintiff's claim for constructive fraud.  It also rejected arguments that the claim had been settled as a part of the corporation's bankruptcy proceeding, ruling that "where . . . the claim arises from a purported breach of a fiduciary duty owed by a corporate director to a creditor, and where the claim, therefore, properly belongs to the creditor and not the corporation, 'it is not a part of the bankruptcy estate, and the trustee in bankruptcy does not have authority to bring [or settle the] claim.'"  

In another part of the Opinion, the Court granted a motion to dismiss a fraud claim because it failed to comply with Rule 9(b).  The Complaint, which asserted the fraud claim against a group of individuals, did not identify the specific person who made the alleged misrepresentations.  The Court allowed leave to amend.

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The Business Court, relying on the Court of Appeals decision in White v. Thompson, dismissed an unfair and deceptive practices claim brought by an LLC member who claimed that another member and manager had usurped Company opportunities and converted Company assets.  It held that there was no assertion that the defendant's "actions had any impact in the broader marketplace" and that dismissal was therefore appropriate.

Full Opinion

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When law firms break up, litigation often follows.  The case of Merritt, Flebotte, Wilson, Webb & Caruso, PLLC v. Hemmings, decided Tuesday by the North Carolina Court of Appeals, involved claims between lawyers of defamation and violation of a nondisparagement provision in a settlement agreement.

The Defendants had left the Plaintiff's firm to start their own practice. The Plaintiff sued them over sharing of fees and reimbursement of costs. The fighting lawyers settled the first lawsuit. A nondisparagement provision was included in their settlement agreement.

Then came round two. Plaintiff sued the Defendants again, saying they hadn't complied with the settlement. The Defendants responded that they were excused from their obligations for several reasons, including a breach of the nondisparagement provision. They counterclaimed for defamation.

The defamation claim involved statements made by Plaintiff's office manager. He had been out one night at a bar in Raleigh called "White Collar Crime." He allegedly said to a friend of one of the Defendants that the Defendant was "untrustworthy" and "suggested" that the Defendant "had done something wrong or committed some kind of crime when he left the firm."

The Defendants said that the office manager had been acting on behalf of the Plaintiff law firm when he made these statements and that the nondisparagement provision had been breached. The Plaintiff disputed that the office manager was authorized to speak for the firm, and said that the after hours statements at the bar hadn't been made within the course and scope of his employment anyway.

The Court of Appeals affirmed the trial court's summary judgment for the Plaintiff, and said that the Defendants could "articulate no legal connection between these facts and the legal relationship of principal and agent. Defendants offered no evidence that the scope of [the office manager's] employment included barroom gossip about members of the firm, and cite no appellate opinions suggesting that an employee is considered an 'agent' of his employer even when he acts far outside the scope of his employment."

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

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

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

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

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

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

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This case, which involved four related lawsuits between the shareholders of a closely held corporation, contains a discussion of when a claim is a compulsory counterclaim.  The Court said "Rule 13(a) of the North Carolina Rules of Civil Procedure provides that a party is required to plead as a counterclaim: (1) “any claim which at the time of serving the [responsive] pleading the pleader has against any opposing party”; (2) “if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim”; and (3) if it “does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.” N.C. R. Civ. P. 13(a) (2007)."

The Court dismissed some of the claims, finding that they should have been brought in an earlier action, and discussed also the distaste of North Carolina courts for claim splitting. It held "North Carolina law requires that all damages incurred as a result of a single injury, transaction, or occurrence be recovered in one lawsuit."

The Court also held that an individual shareholder was not entitled to maintain a derivative action on a pro se basis, ruling that "an individual non-attorney litigant may not proceed derivatively on behalf of a corporation without counsel."  This would presumably have been the unauthorized practice of law.  The Court said there was no authority in North Carolina on this point.

Full Opinion

 

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After a case is designated to the Business Court, the Clerk of Court in the county in which the case is pending no longer has the authority to grant a motion for extension of time.  In this case, per Business Court Rule 9.2, the Court struck the Order entered by the Clerk granting an extension of time and directed the party to re-file a motion in compliance with the rules of the Court.

Order

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When a member leaves an LLC, whether his or her departure is a withdrawal or a dissolution can make a significant difference.  In this case, the characterization of the nature of the Plaintiffs' departure from a law firm LLC determined whether they were entitled to proceeds from contingent fee cases generated after their departure.

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

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

The Court held in what it described as a case of first impression that the LLC Act does not allow a voluntary withdrawal by a member unless the articles of organization or a written operating agreement provide for a withdrawal.  There was none in this case   It rejected Defendants' arguments to cobble together an operating agreement from various documents, though it did hold that "it may well be in a given case, multiple documents viewed collectively could constitute a written operating agreement as contemplated by the Act."

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

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

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

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

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This case involves sanctions under Rule 26(g) of the North Carolina Rules of Civil Procedure, which provides that an attorney's signature on a discovery response is a certification that it is "consistent with the rules," and "not interposed for any improper purpose," and "not unreasonable or unduly burdensome or expensive."

The Court determined that sanctions under Rule 26(g) are mandatory in the event of a violation, and that Rule 11 cases don't have much relevance in a Rule 26(g) sanctions motion.

Plaintiff was sanctioned because its counsel had (1) designated one person (Wagner) as an expert "without an intention of having  Wagner prepare any expert report containing his opinions and the basis therefore, (2) failing to make inquiry into Wagner’s qualifications to give any expert opinions, and (3) designating [another witness, Tarr] as an expert without even having communicated with Tarr." Op. ¶28.

Lawyers have a duty to cooperate in discovery in complex cases. Forthright discovery is particularly important, said Judge Tennille, when expert discovery is involved.  He held that "[o]ur rules are designed to flush out what opinions are going to be expressed at trial so that challenges to those opinions can be heard pretrial without wasting the jurors’ time. Responses to discovery that comply with the rules save the parties and the courts substantial time and money." Op. ¶13.

Another factor leading to sanctions was Plaintiff's counsel refusal to discuss matters with Defendant's counsel.  Judge Tennille said that ""[l]awyers have a responsibility and a duty to their clients, the Court, and opposing counsel to communicate openly and civilly with each other. A failure to do so is a breach of their professional duties and results in unnecessary delay and expense to the parties and the Court." Op. ¶32.

Full Opinion

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

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The electronic filings on the Business Court website are public records, which the public has the right to inspect.  The Court's power to place filings under seal, or to limit the public's right of access, is permitted “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest.” (citing Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476,515 S.E.2d 675, 693 (1999).  There is no distinction between a record available online at the Court's website or one available in a paper file at a county courthouse.

Full Opinion

 

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A parent corporation can, under certain circumstances, be liable for the actions of its subsidiary under a conspiracy theory, notwithstanding the doctrine of intracorporate immunity.

This opinion summarizes prior law in North Carolina -- consisting of six cases -- addressing the doctrine of intracorporate immunity in the context of a claim for civil conspiracy under North Carolina law. 

The Court nevertheless dismissed the claim in this case, stating that 

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

The Court also dismissed an unfair and deceptive practices claim, even though Plaintiff had alleged that the Defendants had never intended to honor the contract at issue.  The Court said the Plaintiff had failed to allege any facts in its Complaint to support this assertion, and that it was "nothing more than an 'unwarranted deduction[] of fact' that the Court need not accept."

Judge Diaz also rejected other arguments by the Plaintiff that it said would support an unfair and deceptive practices claim, including arguments that (1) the Defendants had owed fiduciary duties to the Plaintiff, (2) the Defendants had "inequitably asserted their position of power over Plaintiff," and (3) the unilateral price increases amounted to conversion.

The Court ruled that there was nothing before it other than a breach of contract, and it relied on settled law that "a mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to sustain an action under" the unfair and deceptive practices statute. 

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court rejected Plaintiff's argument that a provision limiting its recovery of damages for breach of contract was an unenforceable penalty, ruling instead that this was a valid liquidated damages provision. 

The Court also found there to be a question of fact whether one of the Defendants had been a part of a joint venture, so that he could be personally bound under a contract even though he had not signed it.  The Court denied this Defendant's statute of frauds argument on that basis, stating the following with regard to joint ventures:

{14}  A joint venture is “an association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business adventure for joint profit, for which purpose they combine their efforts, property, money, skill, and knowledge, but without creating a partnership in the legal or technical sense of the term.” Pike, 274 N.C. at 8, 161 S.E.2d at 460 (citing In re Simpson, 222 F. Supp. 904, 909 (M.D.N.C. 1963)). An express agreement is not required to prove the existence of a joint venture. See Rhue v. Rhue ___ N.C. App. ___, ___, 658 S.E.2d 52, 59 (2008); see also Wike v. Wike, 115 N.C. App. 139, 141, 445 S.E.2d 406, 407 (1994). Rather, intent to create a joint venture can be inferred by the conduct of the parties and the surrounding circumstances. See Rhue, ___ N.C. App. at ___, 658 S.E.2d at 59; see also Wike, 115 N.C. App. at 141, 445 S.E.2d at 407. The existence of a joint venture “may be based upon a rational consideration of the acts and declarations of the parties, warranting the inference that the parties understood that they were [co-adventurers] and acted as such.” Davis v. Davis, 58 N.C.App. 25, 30, 293 S.E.2d 268, 271 (1982) (citing Eggleston v. Eggleston, 228 N.C. 668, 674, 47 S.E. 2d 243, 247 (1948)). “Facts showing the joining of funds, property, or labor, in a common purpose . . . in which each has a right . . . to direct the conduct of the other[s] through a necessary fiduciary relation[ship]” is sufficient for finding the existence of a joint venture. Pike, 274 N.C. at 8, 161 S.E.2d at 460; Cheape v. Chapel Hill, 320 N.C. 549, 561, 359 S.E.2d 792, 799 (1987).

{15} In North Carolina, joint ventures are similar to partnerships, and they are “governed by substantially the same rules.” Jones v. Shoji, 336 N.C. 581, 585, 444 S.E.2d 203, 205 (1994). A hallmark of a partnership is the sharing of “any profits, income, expenses, joint business property or hav[ing] authority of any kind over each other.” Wilder v. Hobson, 101 N.C. App. 199, 203, 398 S.E.2d 625, 628 (1990).

In another opinion issued at the same time in the same case, the Court granted the motion for summary judgment of another Defendant (Allen) on the same grounds, finding that there was no genuine material issue of fact as to Allen's lack of association with the claimed joint venture.  That opinion is Azalea Garden Board & Care v. Vanhoy, 2008 NCBC 7 (N.C. Super. Ct. March 17, 2009).

Full Opinion

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Minority sharehoders did not have a "reasonable expectation" of continued employment after serious issues arose between them and the majority which rendered them unable to work together.

Those same shareholders did have enforceable reasonable expectations that their stock ownership interest would not be diluted, however, and the Court invalidated steps taken by the majority to improperly issue themselves more shares in the company.  

The Court held that the Defendants had been engaged in self-dealing through the transactions which diluted the ownership interest of the Plaintiffs.  It rejected the argument that the Defendants were entitled to the protection of N.C. Gen. Stat. §55-8-31(a), which allows for conflict of interest transactions under certain defined circumstances.

Given the receipt by the directors of a personal financial benefit from the transaction, the Court held that the directors were not entitled to the benefit of the Business Judgment Rule.  And in light of the self-dealing nature of the transaction, the burden of proof fell on the Defendant to prove that the transactions were fair, just, and reasonable. They were unable to carry that burden.

The Court ordered the dissolution of the Company, subject to the right of the Company to purchase the Plaintiffs' shares at fair value.

Full Opinion

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The Court ruled that the plaintiff could proceed with its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.  The agreement was therefore not an unenforceable agreement to agree.

Judge Tennille described the Agreement at issue and its attachments as "a very sophisticated business transaction among parties of equal knowledge negotiating at arms length," and said that "the extensive nature of the documentation left very few terms to be negotiated for each side."  Op. ¶ 19.It contained what the Judge referred to as "impasse provisions" which dealt with situations where the parties did not reach agreement.

He denied the Motion to Dismiss, holding:

The impasse provisions in . . . the Master Agreement do not require the Court to supply any material terms. . . . Unlike the JDH case, in which the Court is asked to supply terms missing from a written letter of intent, this case involves the enforcement of specific remedies provided for in the agreement itself.

Op. ¶¶ 33-34.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

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The Court granted a Motion for Summary Judgment, finding that a Letter of Intent containing language which said that it did "not create any binding, contractual rights between Flowers and JDH and shall serve only as an expression of intent between the parties" was an unenforceable agreement to agree.

The Court held that (1) the document itself supported the finding that it was a non-binding agreement, (2)  there were many significant terms left unaddressed in the LOI, (3) complicated real estate development projects "generally require the execution of lengthy, sophisticated, and detailed documents to govern the relationships between the parties," (4) courts should decline to fill in material gaps left open by contracting parties, (5) the LOI failed to provide any remedy in the event a contemplated LLC was never formed, and (6) JDH, as the drafter of the LOI, should have any ambiguity resolved against it.

The Court also rejected the argument that the subsequent oral agreements of the parties, and their partial performance, made the LOI enforceable; and also the argument that the Plaintiff was in the alternative entitled to a recovery in quantum meruit.

Full Opinion

Brief in Support of Motion for Summary Judgmen

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

 

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North Carolina does not recognize the "cardinal change doctrine" in government contract cases.

The Court also dismissed a claim for tortious interference with contract against a consultant who had advised the owner not to pay the Plaintiff for its work on a construction project.  The Court found the alleged interference to be justified, even though the Plaintiff alleged it was not. Judge Diaz ruled that Plaintiff's allegation as to the lack of justification was "a legal conclusion the Court need not accept," and that Plaintiff's allegations on this point were self-defeating.  

The Court determined that the consultant had a proper motive -- the performance of its own duties under its own contract with the owner -- in how it had dealt with the Plaintiff.  Thus, the Court concluded, the consultant's actions were "reasonably related to the protection of a legitimate business interest."

Full Opinion

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

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

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

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

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N.C. Gen. Stat.  §41-23, which repealed the common law Rule Against Perpetuities as well as the Uniform Statutory Rule Against Perpetuities (N.C. Gen. Stat. §41-15) as they apply to trusts created or administered in North Carolina is constitutional.

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

Full Opinion

Plaintiff's Brief in Support of Motion for Summary Judgment

Defendant's Brief in Opposition to Motion for Summary Judgment

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

Amicus Brief of North Carolina Bankers Association

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When a Court is considering whether to apply the law of a foreign country, as permitted by Rule 44.1 of the North Carolina Rules of Civil Procedure:

• The Court has "[b]road authority to conduct [its] own independent research to determine foreign law," but no duty to so.
• Both parties have the burden to "raise[]the issue that foreign law may apply in an action, and the burden of adequately proving foreign law to enable the court to apply it in a particular case."
• When the "parties fail to satisfy either burden the court will ordinarily apply the forum's law."

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

The Court also enforced a forum selection clause, even though the party asserting the benefit of it [Swift] hadn't signed the agreement.  Judge Diaz reasoned that the only signature required should be that of "the party to be charged therewith," that Swift had signed the Agreement, and that the Agreements spoke to Swift's obligations to the party seeking enforcement of the forum selection clause.  He also relied on cases involving arbitration provisions, which are often enforced against non-signatories when the claims are "intimately founded in and intertwined with the underlying contract obligations."  The Judge also noted the "strong seal of approval that our Supreme Court has given to contract clauses requiring litigation in a foreign jurisdiction."

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

Full Opinion

Brief in Support of Motion to Dismiss Crossclaim

Brief in Opposition to Motion to Dismiss Crossclaim

Reply Brief in Support of Motion to Dismiss Crossclaim

 

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The issue here was whether a Plaintiff located in Winston-Salem which held a state trademark registration was entitled to an injunction against a competing store with a similar name located in Charlotte.

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

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

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

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

The Plaintiff also couldn't meet the zone of natural expansion test.  Although it presented evidence that it had "considered" opening a Charlotte store, Judge Diaz found that Plaintiff had not taken any concrete steps to enter the Charlotte market. 

Full Opinion

Brief in Support of Motion for Temporary Restraining Order

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

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The Business Court held that an individual taxpayer did not have standing to sue over alleged misuse of taxes paid by residents of the City of Roanoke Rapids to build a music entertainment theater, rejecting his arguments that he was entitled to bring suit individually because the losses from the theater would be borne by all of the taxpayers of the City, and alternatively that he was entitled to sue derivatively on behalf of the City because the proper authorities had refused to act with regard to such losses. 

No Individual Taxpayer Standing

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

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

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

Op. ¶43. 

No Derivative Taxpayer Standing

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

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

Full Opinion

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

The court said:

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

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

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The North Carolina Business Court delivered a significant opinion on discovery sanctions today in Azalea Garden Board & Care, Inc. v. Vanhoy, 2009 NCBC 9 (N.C. Super. Ct. March 26, 2009). If you are litigating in the Business Court, you'd better read this one, which emphasizes the duty of lawyers to cooperate with one another in discovery.

The Defendant's Motion for Sanctions concerned an interrogatory response by Plaintiff identifying two attorneys as potential expert witnesses, its subsequent refusal based on attorney-client privilege to supply information that it had provided to the experts, and its withdrawal of those persons as experts after the Court granted a Motion to Compel.

That earlier ruling on the Motion to Compel was very short, and wasn't published, but if you were reading this blog you would have seen it in this May 2008 post.

The Defendant, having prevailed on the Motion to Compel, sought sanctions. The basis for the Sanctions was Rule 26(g) of the North Carolina Rules of Civil Procedure, which provides that an attorney's signature on a discovery response is a certification that it is "consistent with the rules," and "not interposed for any improper purpose," and "not unreasonable or unduly burdensome or expensive."

In a first impression aspect of his ruling, Judge Tennille said that sanctions under Rule 26(g) are mandatory in the event of a violation.  He also said that Rule 11 cases don't have much relevance in a Rule 26(g) sanctions motion.

Judge Tennille emphasized the duty of attorneys to cooperate in discovery in complex cases, quoting extensively from Mancia v. Mayflower Textile Serv. Co., 253 F.R.D. 354 (D.Md. 2008), an opinion by Magistrate Judge Paul Grimm.  Judge Tennille described Judge Grimm as "one of the leading commentators on discovery issues in the federal court,"  and said that "his entire opinion should be read by all trial lawyers."  Op. ¶18. (The link is in the case name).

Forthright discovery is particularly important, said Judge Tennille, when expert discovery is involved.  He held that "[o]ur rules are designed to flush out what opinions are going to be expressed at trial so that challenges to those opinions can be heard pretrial without wasting the jurors’ time. Responses to discovery that comply with the rules save the parties and the courts substantial time and money." Op. ¶13.

Here's how Judge Tennille summed it up:

Judges and lawyers should resurrect the original intention of the discovery rules, which was to make discovery a more cooperative and less adversarial system designed to reduce, not increase, the cost of litigation. North Carolina’s Rule 26(g) was designed to do that and mandates sanctions when violations of the rule occur. Our system of civil justice cannot function effectively and economically unless lawyers and judges return to the original intention of the discovery rules and make cooperation, communication, and transparency the cornerstones of the discovery process.

Op. ¶19.

On the facts before him, Judge Tennille entered sanctions.  He determined that Rule 26(g) had been violated because Plaintiff's counsel had (1) designated one person (Wagner) as an expert "without an intention of having  Wagner prepare any expert report containing his opinions and the basis therefore, (2) failing to make inquiry into Wagner’s qualifications to give any expert opinions, and (3) designating [another witness, Tarr] as an expert without even having communicated with Tarr." Op. ¶28.

The Court found that these actions had caused delay and undue expense for Defendant and his counsel, necessitating a Motion to Compel, and furthermore that "[t]he conduct was unreasonable under the circumstances. It was more than mere negligence."  Op. ¶28.  The Court also said that the refusal to provide information based on attorney client privilege was "totally unfounded in the law." Op. ¶29.

Another factor leading to sanctions was Plaintiff's counsel refusal to discuss matters with Defendant's counsel.  Judge Tennille said that "[l]awyers have a responsibility and a duty to their clients, the Court, and opposing counsel to communicate openly and civilly with each other. A failure to do so is a breach of their professional duties and results in unnecessary delay and expense to the parties and the Court." Op. ¶32.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

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The Court granted a Motion opposing the designation of the case, which involved the allegedly fraudulent transfer of assets by a corporate defendant and its sole shareholder, as a mandatory complex business case.  The Court ruled that the allegations did not present a material issue related to the law governing corporations.  The Court found that the principal issue in the case involved the Uniform Fraudulent Transfer Act, and furthermore that Defendant's potential individual liability based on veil piercing allegations did not by itself create grounds for mandatory jurisdiction. 

Full Opinion

Brief in Opposition to Notice Of Designation

Brief in Support of Notice of Designation

Notice of Designation and Complaint

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The Court denied an Opposition to Designation of Action as a Mandatory Complex Business case, which was based partly on the argument that the case had been pending for a year before the Notice of Designation was filed.

The Complaint had been amended, however, to state a new claim for constructive fraud.  The Court observed that the new claim was "substantively different from the original claims."

The Court's denial was based on Business Court Rule 3.1,  which states that “[i]n the event that a party amends a pleading under N.C. R. Civ. P. 15 . . . if the amendment raises a new material issue listed in subsections (a)(1) through (a)(6) of N.C. Gen. Stat. § 7A-45.4, then a Notice of Designation (with respect to the entire action) may be filed with respect to such new material issue. . . .” BCR 3.1(b) (2006).

The new cause of action fell under the Business Court's mandatory jurisdiction, because it alleged "(1) liability for actions taken by the Individual Defendants as corporate officers and directors, (2) 'preferential payment to various creditors,' and (3) liability for actions taken during a 'winding up' or 'dissolution' of" a corporate entity.  The Court found that "these allegations support mandatory jurisdiction under N.C. Gen. Stat. 7A-45.4."

Full Opinion

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The Fourth Circuit held today that the manner in which manufacturers of pest control products sold their products to consumers did not constitute illegal resale price maintenance.  The decision in Valupest.com of Charlotte, Inc. v. Bayer Corp. rejected Plaintiffs' argument that an antitrust stalwart, United States v. General Electric Co., 272 U.S. 476 (1926) had been overruled by a recent decision of the Supreme Court, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).

Both Defendant Bayer Corporation, which sells a termite killer called Premise, and Defendant BASF, with a competing product called Termidor, sold their products through distributors.  The distributors sold Premise and Termidor at prices set by the manufacturers to the "pest management professionals ("PMPs"), who provide pest control services to homeowners and other individual customers."  The Plaintiffs making the antitrust claim were three of the PMPs.

For those who need a refresher on this aspect of antitrust law, which included me, the General Electric case held that a manufacturer selling its product directly to consumers through agents is not liable for vertical price fixing.  The rationale of the decision was that when a manufacturer sells through a genuine agent, there is no "contract, combination" or "conspiracy" to violate Section 1 of the Sherman Act.

In Leegin, the Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), which had held that resale price maintenance agreements were per se unlawful.  In other words, during the long era during which Dr. Miles held sway, such agreements did not require proof that they unreasonably restrained trade.  They were presumed to do so.  The Leegin decision abolished the per se rule and held that such restraints were subject to the rule of reason, because of "a growing consensus in economic theory that vertical pricing agreements, while sometimes anti-competitive, can often have procompetitive effects."

Plaintiffs in Valupest.com argued that Leegin effectively overruled General Electric, and that Leegin dictated a rule of reason analysis even if there was a true principal-agent relationship between a manufacturer and its distributors.  The Fourth Circuit exterminated that argument, saying that Leegin had presented an entirely different question of the proper analysis to be applied after it had been established that there was in fact a retail price maintenance agreement.  It noted that Leegin had not mentioned the General Electric decision at all, and that the Supreme Court had said in another case that it "does not normally overturn . . . earlier authority sub silentio."

The Fourth Circuit then evaluated the validity of the principal-agent relationships in place between the pesticide manufacturers and their distributors, and found them to be well on the acceptable "General Electric side of the line."  The distributors bore the risk of loss, the agency sales method had been used for legitimate business reasons, and there was no evidence that the agency agreements were the product of coercion. 

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The Court denied the entry of a mandatory injunction requiring the Defendant to deliver the title to a motor vehicle to a third party purchaser. 

The Court observed that “'[m]andatory injunctions are disfavored as an interlocutory remedy[]' because, rather than maintaining the status quo (as is the case when a prohibitory injunction issues), a mandatory injunction effectively alters it."

The Court held that such an injunction is appropriate where a plaintiff provides proof of “serious irreparable injury to the [plaintiff] if the injunction is not granted, no substantial injury to the [defendant] if the injunction is granted, and predictably good chances of success on the [merits].”

The injunction requested by the Plaintiff was denied for several reasons, including because Plaintiff's claimed injuries would be compensable by money damages and there was therefore no irreparable harm.

In a Uniform Commercial Code sidelight, the Court discussed the concepts of attachment, perfection, and priority, and held that Defendant might have a valid purchase money security interest under the UCC even though it had not perfected its claimed security interest.  The Court held "the Court has found no case (and Plaintiff cites none) holding that the failure to perfect a security interest deprives a secured creditor of its remedies against the debtor for default, including its right to demand possession of proceeds in the possession of the debtor following the unlawful sale of the creditor’s collateral."

Full Opinion

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

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The "reasonable expectations" of minority shareholders as to continued employment and continued stock ownership were the issue in Vernon v. Cuomo, 2009 NCBC 6 (N.C. Super. Ct. March 17, 2009), decided yesterday by the North Carolina Business Court.

Judge Tennille ruled after a one week trial that the Plaintiffs did not have a reasonable expectation of continued employment, given extreme animosity that had developed among the shareholders of the Company. 

On the dilution issue, however, the Court ruled that Plaintiffs had a reasonable expectation that their ownership interest in the Company would not be diluted, at least not through the means that the Defendants chose to accomplish that dilution. Plaintiffs were restored by the Court to their original ownership position and the Court ordered dissolution of the Company.

The Plaintiffs were two shareholders with a 40% ownership in TriboFilm, Inc., which was developing technology to eliminate silicone as a necessary lubricant in syringes.  They had a serious falling out with the Defendants, five other shareholders who controlled the remaining 60% of the Company.  The Court described the situation as "intolerable" and "dysfunctional."

The majority stripped the Plaintiffs of their status as employees, officers, and directors. Then, after each faction rejected an offer by the other to be bought out, the Defendants implemented a plan to virtually eliminate the Plaintiffs' ownership interest.  Here's what happened as the Court described it:

• Defendants voted themselves "unrealistic" and "inflated" salaries (most of them had not had any salary at all before this) or salary increases.  The Company did not have the financial ability to pay these salaries.
• The Defendants then agreed to defer a substantial portion of their new salaries.
• None of this information regarding salaries and deferral was disclosed to Plaintiffs.
• Next, the Directors voted to convert a portion of the deferred salary into Company stock at a penny per share, much less than they had been offered by Plaintiffs.
• Defendants, in their capacities as Board members, then recommended to the shareholders that the number of outstanding shares be increased from 1 million shares to 15 million shares to permit the deferred salary conversion.
• The Defendants informed the Plaintiffs that the reason for the new shares was to raise additional capital and pay certain obligations.  They did not disclose their plan to exchange their deferred salaries for some of the new stock.
• The share issuance resolution was approved by the shareholders, over Plaintiffs' objections.
• The Defendants then each forgave $15,000 of deferred salary (an essentially worthless claim, given the financial state of the Company) in exchange for 1,500,000 shares of Company stock.
• The effect of the transfer was to immediately reduce each Plaintiff's ownership interest in the Company from 20.2% to 2.4%.

Plaintiffs sued, asserting that their "reasonable expectations" as shareholders to continued employment and continued ownership of their stock had been frustrated.  They lost on the first point, but won on the second.

There Were No Reasonable Expectations To Continued Employment

The Court rejected the argument that the Plaintiffs had a reasonable expectation of continued employment with TriboFilm, at least once they became at odds with their fellow shareholders.  It held:

While shareholders may hold reasonable expectations as a result of their ownership of a small, closely held company, those expectations may be subverted to the overall business interest of the company or may become unsustainable under certain circumstances. At the outset of their involvement, Vernon and Williams had a reasonable expectation that they would continue to work with TriboFilm. That expectation ceased to be reasonable when the Company and the relationships among the shareholders became dysfunctional. It is undisputed on this record that by fall 2005, all trust among the parties had disappeared. The Company could not operate and fulfill its function. There was no communication or cooperation among the small group of researchers who were required to work closely together. A company is not required to fulfill once-reasonable expectations of continued employment where that employment may be detrimental to the ongoing survival of the business. Something had to be done to keep the Company alive and functioning. A majority of shareholders agreed on how to accomplish that goal. The majority was within its rights to terminate the employment of Vernon and Williams, and it did not breach a fiduciary duty by doing so under the circumstances that existed in this case.

Op. ¶78.

There Were Reasonable Expectations Of Undiluted Stock Ownership

The reasonable expectations of the Plaintiffs regarding their continued stock ownership were different.   The Court observed that while startup companies "often have to issue new stock to angel investors," Vernon and Williams "had reasonable expectations that their ownership percentage in TriboFilm in relation to the Individual Defendants' ownership percentage would not be changed without their consent,"  at least not "purely to benefit other shareholders."  Op. ¶72. 

The Court held that the Defendants had been engaged in self-dealing through the transactions which diluted the ownership interest of the Plaintiffs.  It rejected the argument that the Defendants were entitled to the protection of N.C. Gen. Stat. §55-8-31(a), which allows for conflict of interest transactions under certain defined circumstances.

Given the receipt by the directors of a personal financial benefit from the transaction, the Court held that the directors were not entitled to the benefit of the Business Judgment Rule.  And in light of the self-dealing nature of the transaction, the burden of proof fell on the Defendant to prove that the transactions were fair, just, and reasonable. They were unable to carry that burden.

The remedy ordered by the Court was to rescind the issuance of additional shares to the Defendants, restoring the Plaintiffs to their previous ownership percentages.  The Court also held that the actions taken by the Defendants showed "the majority is not operating, and will not operate, the Company in the best interest of all the shareholders."  Op. ¶91.  It therefore ordered the dissolution of the Company, subject to the right of the Company to purchase the Plaintiffs' shares at fair value.

 

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The Court struck an Entry of Default which had been signed by an assistant clerk of court in the county where the case had been filed.  The entry of default was signed after the case was designated to the Business Court.  Judge Diaz cited Business Court Rule 15.1, stating:

Because the above-captioned cases are Business Court cases, the Clerk of Court had no authority to enter this Order and Entry of Default. See BCR 15.1 (“After a case has been assigned or designated to the Business Court, and for as long as the case is pending in [the Business] Court, parties shall seek rulings on all motions in the case from [the Business] Court, and not from Superior Court Judges or Clerks in the counties where the cases originate.”).

Full Opinion

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The Court struck Defendants' Motion for Summary Judgment because it violated Business Court Rule 15.2, which requires that "[]ll motions, unless made orally during a hearing or trial, . . . be in paper writing or electronic form and . . . be accompanied by a brief . . . set out in a separate paper."  Defendants had incorporated their Motion and the arguments in support of the Motion into a single filing. 

The Court granted leave to refile the Motion, but observed that it had been filed before the close of discovery, and stated that "[w]hile it is true that, pursuant to Rule 56, '[a] party seeking to recover upon a claim . . . may, at any time after the expiration of 30 days from the commencement of the action . . . move with or without supporting affidavits for a summary judgment in his favor[,]' N.C. R. Civ. P. 56(a) (2007), a 'motion filed at the outset of a case that is not limited to purely legal issues should be carefully scrutinized because at least some discovery is usually warranted where factual contentions are in dispute,' 2 G. Gray Wilson, North Carolina Civil Procedure § 56-7 (3d ed. 2007)."

The Court said that it would "carefully scrutinize any such Motion to determine whether it should be heard before the close of discovery."

Full Opinion

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The Court ruled that Defendants' appeal, following an adverse judgment on liability, did not affect a substantial right even though the damages phase of the trial remained.  The Court found that it had continued jurisdiction over the case and that it could proceed with the damages phase notwithstanding the pendency of the appeal. The Court also ruled that it would not stay the case during the pendency of the appeal. 

The Court denied the Plaintiffs' request for the appointment of a receiver, but held that it would impose conditions on the Defendants' operation of their business.  It held that:

The Court’s greater power to appoint a receiver for the Company logically includes the lesser power to require the parties who are in control of the Company’s assets to maintain those assets in an appropriate and businesslike manner, including hiring an independent accountant to maintain the books and records of the company pendente lite and directing [the Defendants] to cease making personal use of Company assets.

Full Opinion

 

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The Business Court on its own motion remanded a case which had been designated to the Court based on its mandatory jurisdiction over cases involving unfair competition.

In the Notice of Designation, the Defendant asserted that "as a case between two direct competitors focused on slander and libel claims, this lawsuit meets the criteria for designation as a mandatory complex business case because it expressly involves state 'unfair competition law' separate and apart from section 75-1.1." The Defendant further alleged the Plaintiff's allegations of false statements by the Defendant regarding the Plaintiff's "methods of business and corporate integrity" brought the case within the mandatory jurisdiction of the Court.

The Court disagreed, stating in its brief Order that the case was "primarily concerned with libel and slander claims."

Full Opinion.

Notice of Designation and Complaint

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The Court granted a Motion to Remand, holding that "this litigation is a straight forward contract case. Contract cases are routinely adjudicated in Superior Court."

Full Opinion

Complaint

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There weren't any opinions from the Court of Appeals last week which would have been considered for the legal equivalent of an Oscar, but three cases are worth an honorable mention.  They involve arbitration, the statutory requirements for contracting with a municipality, and a healthcare law case involving Certificates of Need.

Arbitration

The arbitration case is WHD v. Mayflower Capital, LLC, in which the Court made a rare reference to the Commercial Arbitration Rules of the American Arbitration Association. The Defendant argued that the arbitrator had erred by failing to require the Plaintiff to produce a settlement agreement. The Court disagreed, noting the authority that an arbitrator has under AAA Rule 21 (permitting an arbitrator to direct the production of documents, and authorizing an arbitrator "to resolve any disputes concerning the exchange of information”) and AAA Rule 31 (stating that the parties “shall produce [at the hearing] such evidence as is relevant and material to the dispute.”).

The Court also rejected the Defendant's argument that the arbitrator had made a mistake by permitting the introduction of a criminal conviction of the Defendant which would not have been admissible under the Rules of Evidence.  It said twice in its opinion that “if an arbitrator makes a mistake, either as to law or fact, it is a misfortune of the party, and there is no help for it,” quoting an 1895 Supreme Court decision, Patton v. Garrett, 116 N.C. 848, 21 S.E. 679 (1895).  John Ormand in Brooks Pierce's Raleigh office represented the Plaintiff.

Contracting With Municipalities

The municipality case is National Railroad Museum and Hall of Fame, Inc. v. City of Hamlet.  Hamlet was the home of the National Railroad Museum and Hall of Fame.  According to the Court's opinion, the Museum housed "exhibits, antiques, artifacts, and general materials relating to the development of the railroad industry in North Carolina and the United States as a whole." 

The Museum operated in a building leased from the City, but the parties appeared to have agreed that the building would be torn down and that they would attempt to obtain financing to build a new home for the Museum's artifacts.  When that didn't happen, the Museum sued. 

Blocking the tracks for the Museum was Section 160A-16 of the General Statutes, which requires contracts by or on behalf of a city to be in writing, and which says "a contract made in violation of this section shall be void and unenforceable unless it is expressly ratified by the council."  Although the City Council had adopted a resolution supporting "the depot project," and it had submitted a funding application to the Department of Transportation, the Court of Appeals held that these facts didn't make out either an express contract or a duly ratified agreement.

Certificate of Need

Last, the CON decision is Total Renal Care of NC, LLC v. North Carolina Dept. of Health and Human Services, The Court held that when a party awarded a CON completes the construction of the facility and it becomes fully operational, an appeal challenging the award of the CON is moot.  The Court relied on a 2005 per curiam decision of the North Carolina Supreme Court in Mooresville Hosp. Mgmt. Assocs. v. N.C. Dep't of Health & Human Services, 360 N.C. 156, 622 S.E.2d 621 (2005), and held:

Both parties recognized during the pendency of this appeal that, as in Mooresville,  the appeal could become moot upon the completion of BMA's facility. We must presume that the General Assembly recognized such a possibility in enacting the CON Law. Even if the General Assembly failed to recognize this possibility prior to the Supreme Court's decision in Mooresville, in the more than three years since that case was decided, the General Assembly has not revised the CON Law to provide for a stay of either the construction or operation of a facility for which a CON has been issued pending an appeal from a final agency decision.

So if you are awarded a CON, build fast.  Or at least faster than the Court of Appeals can rule.

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Members of a "pretended corporation" may have personal liability as individuals when a plaintiff has extended credit to the corporation, but they are not personally liable for all contractual obligations of the corporation.  In this case Defendant, a shareholder of a corporation that had not been formed, was not personally liable for the pretended corporation's failure to make a capital contribution to an entity formed by the Plaintiffs. 

Full Opinion

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The Court entered a stay of discovery pending its resolution of a Motion to Dismiss.

Full Opinion

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The Court permitted an insurance carrier, which had reinsured part of the loss suffered by the Plaintiff and which had made payment to the Plaintiff, and which claimed to be subrogated to the rights of the Plaintiff, to intervene in the Plaintiff's action to recover amounts it had paid paid.  The Court found that intervention was appropriate both as a matter of right, and on a permissive basis.  The intervention was permitted only for the limited purpose of the carrier being permitted to file amicus briefs.

Full Opinion

Brief in Support of Motion to Intervene

Reply Brief in Support of Motion to Intervene

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The Court denied a Motion to Amend, finding that there was undue delay in seeking the amendment.  Discovery in the case had gone on for years and had been completed months before the Motion to Amend was filed.  Plaintiff furthermore had the documents on which the Motion was based in its possession for two years.

The Court also denied the Motion based upon the prejudice to the Defendant.  The new causes of action would have changed the Defendant's approach to discovery.  Furthermore, one of the proposed new claims was for punitive damages, and it would have been prejudicial to the Defendant to "change 'the stakes of the lawsuit' at this late stage of the proceedings."

Full Opinion

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In its first significant opinion of the new year, the Business Court interpreted the pricing mechanism contained in a contract between convenience store operator The Pantry and CITGO, its supplier of gasoline. The case, which handed a win to CITGO allowing it to charge higher prices than those urged by The Pantry, is The Pantry, Inc. v. CITGO Petroleum Corp.

Per the contract, The Pantry's price for gasoline was based on the average of the two lowest prices for "the applicable grade of motor fuel" as determined by an industry source. The dispute arose when CITGO started selling E-10 gasoline to The Pantry.  That's a blend of 90% "clear gasoline" and 10% ethanol, commonly called "gasohol."  E-10 is more expensive than clear gasoline.

The contract didn't contemplate the sale of E-10. CITGO said the contract price should be determined by the two lowest prices for E-10 gasoline, but The Pantry said it should be determined by the two lowest prices for clear gasoline.  CITGO's interpretation resulted in The Pantry paying a higher price.

The Pantry's argument was CITGO had unilaterally determined to substitute E-10 for clear gasoline, and that this meant that E-10 was "interchangeable with and a substitute for clear gasoline."  It also relied on the language of the contract referring to the "grade" of the fuel being purchased, arguing that "grade" referred to grades of clear gasoline.  The convenience store operator also stressed that the purpose of the agreement was to obtain pricing that would allow it to sell gasoline "at prices competitive with other retailers in its markets," and that CITGO's interpretation would impair that objective.

Thus, The Pantry asserted, CITGO was bound to look to the two lowest prices for clear gasoline in setting the price.  Judge Diaz didn't agree.  He determined that the "only reasonable interpretation" of the contract was for the parties to look to the "precise motor fuel product purchased by The Pantry (whether clear gasoline or E-10 gasoline)" to determine the proper price. 

As to the argument that CITGO's interpretation impaired The Pantry's intention to obtain favorable pricing, Judge Diaz held that The Pantry's "remedy is not to contort the language of the 'market pricing' provisions of the [agreement] beyond their plain meaning but, instead, to renegotiate the contract terms or find an alternate supplier."  Op. Par. 60.

The Court held that the interpretation urged by The Pantry "does violence to the contract terms by 'mixing apples and oranges' as to the motor fuels offered by CITGO,"  Op. Par. 56, and granted CITGO's Motion to Dismiss.

You probably won't find much of help in this opinion as far as precedent for future North Carolina cases.  That's because of the narrowness of the issue and the fact that the Court applied Oklahoma law.

CITGO was represented by Brooks Pierce lawyers Jim Williams, Jennifer Van Zant, and D.J. O'Brien, and Scott Solberg and Lisa Meyer of Eimer Stahl Klevorn & Solberg in Chicago.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

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The courthouse door in North Carolina is now wide open to antitrust plaintiffs making indirect purchaser claims, after the Court of Appeals' decision this week in Teague v. Bayer.  That decision reverses the North Carolina Business Court's dismissal of the case for lack of standing.

For those whose hearts don't start beating faster when reading about antitrust cases, an "indirect purchaser" is "one who purchases a product from some intermediary party rather than directly from the manufacturer." 

Teague alleges that he purchased garden hoses, roofing materials, and other items which contained ethylene propylene diene monomor alastomers (EPDM) sold by the defendant chemical companies to the manufacturers of those items.  Teague, an indirect purchaser of EPDM, claimed that the manufacturers of EPDM had conspired to fix its price.

Indirect purchasers can't make claims under the federal antitrust laws after the Supreme Court's seminal decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), but these types of claims can be made under state antitrust laws, per Associated General Contractors v. Carpenters, 459 U.S. 519 (1983). North Carolina has allowed such claims since Hyde v. Abbott Laboratories, 123 N.C. App. 572, 473 S.E.2d 680 (1996).

In the lower court ruling, Judge Tennille dismissed the case based on standing grounds, relying on a variation of the factors set out by the Supreme Court in the Associated General Contractors decision for determining standing under the federal antitrust laws.  I summarized the Business Court decision in an earlier post, but this was the gist of what the Business Court considered in dismissing the case nearly two years ago:

the relevant market (it determined that plaintiff was a participant in a collateral market, a factor working against standing), the directness of impact (what the court termed a complex issue involving multiple distribution chains, which weighed against standing), that other indirect purchasers were likely to have been more heavily impacted (having absorbed some or all of the price increase without passing it on to plaintiff), and the daunting and complex nature of the calculation of damages (which the Court found even more complex than the calculation considered in its dismissal of an earlier case, Crouch).

The Court of Appeals reversed, holding that the Associated General Contractors factors don't apply to antitrust claims by consumers.  It acknowledged the Business Court's point on the difficulty that plaintiff would have proving his claims, especially as to causation and damages, but said that these matters would be better addressed at the class certification and summary judgment stages.  Here's the key part of this week's holding:

Defendants contend that courts would have to isolate the effect of the alleged conspiracy on the price of EPDM and rule out the numerous other factors that could cause a price increase in these products such as inflation, prices of other inputs, transport costs, product demand, and market conditions. Thus, a rigorous economic analysis would be required to determine whether increased prices were the result of the alleged price fixing or the result of some other factor.

The U.S. Court of Appeals for the Ninth Circuit has recognized, "Complex antitrust cases . . . invariably involve complicated questions of causation and damages." Forsyth v. Humana, Inc., 114 F.3d 1467, 1478 (9th Cir. 1997). Even if the present case proves to be no exception, that is not sufficient reason to dismiss for lack of standing. As the trial court found, considering several products containing EPDM adds to the complexity of apportioning damages in this case. The analysis described above would have to be conducted for every product at issue in order to accurately calculate Plaintiff's damages. Our Court recognized in Hyde that a suit by indirect purchasers under our antitrust laws would be complex. However, "fear of complexity is not a sufficient reason to disallow a suit by an indirect purchaser, given the intent of the General Assembly to 'establish an effective private cause of action for aggrieved consumers in this State.'" Hyde, 123 N.C. App. at 584, 473 S.E.2d at 687-88 (quoting Marshall, 302 N.C.at 543, 276 S.E.2d at 400). . . .  We therefore hold that Plaintiff has standing to bring this antitrust and consumer fraud action.

The Teague decision also calls into question another Business Court decision, Crouch v. Compton Corp., 2004 NCBC 7 (N.C. Super. Ct. Oct. 26, 2004), in which the Court dismissed an indirect purchaser claim on standing grounds.

 

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Plaintiff sued to impose a constructive trust on property purchased by the Defendant LLC at a foreclosure sale.  It alleged that some of the members of the Defendant LLC had been members of the LLC which had defaulted on the mortgage loan in question.  Plaintiff contended that it was "inequitable for [the Defendant] to own and possibly profit from the Property." 

The Court rejected this argument and dismissed the claim.  It observed that the property "was lawfully purchased at a foreclosure sale with a valid upset bid."  There was therefore no fraud, no breach of fiduciary duty, and no inequitable circumstance that warranted the imposition of a constructive trust.

The Court also ordered the cancellation of a notice of lis pendens filed by the Plaintiff, concluding that  a lis pendens is appropriate only when the case involves an action affecting title to real property.  The Court held that "a lis pendens . . . does not properly apply to actions brought for the purpose of securing a personal money judgment. . . ."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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This is an opinion from Judge Diaz before he joined the Business Court, in which he denied a Motion for Sanctions.

The basis for the Motion was that Plaintiff should not have taken the position that North Carolina law applied to the covenant not to compete at issue.  The Defendant worked for Plaintiff in North Carolina and the agreement gave a North Carolina address for the Defendant, but it had been signed by the Defendant in Virginia and by the Plaintiff in Wisconsin. 

The case, which was affirmed by the North Carolina Court of Appeals in an unpublished opinion, contains a good discussion of the relevant Rule 11 inquiries.  The Court found the facts of the case to be "muddled," and that they "would test the most seasoned of choice of law practitioners."  The Court found that the Plaintiff's lawyers had made the requisite "reasonable inquiry" before deciding that North Caroiina law applied, and accordingly denied the Motion for Rule 11 Sanctions.

Full Opinion

 

 

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The Court appointed a receiver to conduct the winding up of a dissolved professional corporation.  One of the reasons given by the Court was that the Member-Manager of the dissolved entity, a law firm, had a conflict due to her individual interests and the interests of her new professional corporation.

Full Opinion

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The Court denied a motion for preliminary injunction in this litigation involving the merger of Wachovia and Wells Fargo.

The principal holdings of the decision were  that (1) the Wachovia Board of Directors, in approving the merger deal, satisfied its obligations under the Business Judgment Rule in light of the dire economic circumstances and lack of alternatives faced by the Board, (2) the Board complied with North Carolina law in the issuance of new shares of stock to Wells Fargo which gave it 39.9% of the voting control over Wachovia, and (3) the grant of this voting bloc was not coercive to Wachovia's shareholders. 

The Court also found, however, that the continuation of Wells Fargo's right to vote these shares for an 18 month period if the Wachovia shareholders were to reject the merger was invalid. 

There's a more complete summary of the Court's opinion here.

Full Opinion

 

Brief in Support of Motion for Preliminary Injunction

Wachovia Brief in Opposition to Motion for Preliminary Injunction

Wells Fargo Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

Wachovia Sur-Reply in Opposition fo Motion for Preliminary Injunction

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The Court entered a Temporary Restraining Order in a dispute between jewelers with similar trademarks.  Plaintiff holds a North Carolina state trademark registration for Windsor Jewelers, Inc., and was seeking to enjoin Defendant from using the name Windsor Fine Jewelers.

The TRO says that:

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

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

The Order itself is very short, so you'll have to look at the Briefs (linked below), to get the full flavor of the issues in the case.

Temporary Restraining Order

Brief in Support of Motion for TRO

Brief in Opposition to Motion for TRO

 

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This case enforced an arbitration provision, even though the Plaintiff had never signed the agreements which contained the arbitration provision. 

A Motion to Compel Arbitration was granted, because the Plaintiff had done the work described in the agreements and was seeking payment pursuant to those agreements, it had submitted applications for payment pursuant to the terms of the agreements and accepted some payment, and it had signed an addendum to one of the agreements which referenced the agreement containing the arbitration provision.

Among other things, the Court noted that "much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff's conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause."

Full Opinion

 

Brief in Support of Motion to Compel Arbitration

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This case interpreted South Carolina law -- different than North Carolina law -- on the enforceability of a confidentiality agreement that the Defendant argued was overly broad.

The South Carolina precedent is Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where the South Carolina Supreme Court  held that a broad confidentiality agreement, which would have the effect of a covenant not to compete, will be subject “to the same scrutiny as a covenant not to compete.” The confidentiality agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which Muckenfuss had gained during his employment with the plaintiff. The South Carolina Supreme Court held that this broad provision was tantamount to a covenant not to compete, and that it was invalid because it contained no restrictions as to time or territory.

The following year, however, the South Carolina Legislature overruled Muckenfuss, at least in part, by enacting the South Carolina Trade Secrets Act. A provision of that statute provides that “a contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.” S.C. Code Ann. §39-1-30(D) (2007). (There is no counterpart to this provision in the North Carolina Trade Secrets Protection Act). 

In this case, the North Carolina Business Court interpreted South Carolina law to be as follows:

South Carolina law, as it applies to this case, prohibits an employer (or business purchaser) from enforcing a restriction on the use of information that would amount to an unlawfully broad restrictive covenant preventing a person from using the general skills and knowledge acquired as an owner or employee of a business. On the other hand, expiration of a restrictive covenant does not permit a former employee or business owner to use proprietary and confidential information or trade secrets of a business that are otherwise protectible.

Thus, Judge Tennille observed, South Carolina law would permit the Plaintiff to restrict Caldwell from using “specific customer or supplier pricing information” he had learned before leaving the company. But South Carolina law would not permit the Plaintiff to restrict Caldwell “from using his general knowledge of how prices are set in the forklift repair business to compete.”

The Court denied the motion to dismiss, interpreting the confidentiality provision to be permissibly  limited to prohibiting Caldwell’s use of non-public, proprietary information to which he had access at the business he had sold, and which had been part of the assets purchased by the Plaintiff. 

The North Carolina appellate case on the issue of enforceability of confidentiality agreements is Chemimetals Processing, Inc. v. McEneny, 124 N.C.App. 194, 476 S.E.2d 374 (1996), where the Court held:

An agreement is not in restraint of trade, however, if it does not seek to prevent a party from engaging in a similar business in competition with the promisee, but instead seeks to prevent the disclosure or use of confidential information. Such agreements may, therefore, be upheld even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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Business Court Rule 15.12, which is titled "Determination Of Discovery Motions Through Oral Argument Without Briefs" states that "with the consent of both parties and as allowed by the Court, the parties may present motions and the Court may resolve disputes regarding discovery matters through the use of an expedited oral argument procedure. Such motions will routinely be limited to matters which can be argued and determined in one hour or less."

The Court will not consider the use of this expedited procedure without the consent of the non-moving party, as required by the language of the Rule.

In Hilb, the Court struck the Motion to Compel filed by the Plaintiff because consent had not been obtained.

Full Opinion

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When a Plaintiff files a Rule 41 dismissal, and then refiles his action, Rule 41(d) of the North Carolina Rules of Civil Procedure requires that he must pay the costs of the first action as a prerequisite to pursuing the new action.  "[T}his section establishes a mechanical condition precedent that must be satisfied before that plaintiff may commence a new action based upon the same claims against the same defendant."

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In this case, the Court rejected the unopposed motion of the plaintiff to place the entire contents of a case which had been settled under seal.  

The Court's rationale ran like this:

• It is inconsistent with the North Carolina Public Records Act, N.C. Gen. Stat. §§ 132-1 to 132-10 (2007), to put everything in a case file under seal.
• The Public Records law provides that there should be "liberal access to public records," and that public records "must be made available for public inspection" in the absence of a “clear statutory exemption or exception."
• Civil and criminal case filings are public records.  The public has a statutory right of inspection of court filings pursuant to N.C. Gen. Stat. § 7A-109(a) (2007).
• The public's right of access to court filings can be limited only “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest,” per the North Carolina Supreme Court's decision in Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999).

Judge Diaz indicated that he would consider the arguments of the parties as to the need for sealing particular documents in "due course."

This isn't the first time that the parties to this case tried to keep their dispute out of the public eye.  Back in September 2008, Judge Diaz entered an Order denying their request for a blanket protective order permitting them to file all exhibits to their briefs and pleadings under seal.  The rationale of that Order was pretty much the same as the order entered in December.

Full Opinion

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The Court allowed a stay of discovery while it considered the Defendants' Motions to Dismiss, stating that "a brief stay of discovery initiatives has the laudable potential of minmizing fees, expenses and the various costs of litigation for the parties in this matter.  Such a stay is in the best interests of justice."

Full Opinion

Brief in Support of Motion to Stay Discovery

Brief in Opposition to Motion to Stay Discovery

Bonus: Delaware Court of Chancery Letter Opinion staying discovery

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A lawsuit regarding a residential property development, in which the Plaintiffs made claims against the developer of the project, its lenders, appraisers, and others under the Interstate Land Sales Full Disclosure Act, and for fraud, breach of fiduciary duty, and breach of contract, among others, fell within the Business Court's mandatory jurisdiction.  Some of the Defendants' marketing had been done over the internet.  The Court held:

This case involves material issues of corporate law and issues related to the internet and electronic commerce. This case specifically raises issues of corporate governance and fiduciary duties—areas of law plainly listed in N.C. Gen. State. § 7A-45.4(a)(1) as grounds for mandatory complex business designation. Furthermore, making sense of the complex relationships between the Defendants brings this action properly before the Business Court. The assignment of one presiding judge and use of the Business Court Rules will allow for the most efficient administration of justice. Lastly, the Chapter 11 filing made by several of the Defendants in this case is likely to add to the complexity of this litigation. Under these circumstances, mandatory complex business designation is proper.

Full Opinion

Brief in Opposition to Designation

Brief in Support of Designation (Scripps)

Brief in Support of Designation (Wachovia)

Complaint

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The Court held that a party which failed to appear for a show cause hearing at the direction of the Court, having received notice of the hearing, would be held in contempt.  The Court determined that the non-appearance was a “[w]illful . . . failure to comply with schedules and practices of the court resulting in substantial interference with the business of the court.” N.C. Gen. Stat. § 5A-11(7) (2007).  Pursuant to N.C. Gen. Stat. § 5A-12(a) (2007), the Court fined the party $500, and further ruled that if the payment was not made by the date specified, that the failure would "subject its managing officers to additional criminal contempt penalties, including imprisonment for up to thirty (30) days," relying on State ex rel. Grimsley v. West Lake Dev., Inc., 71 N.C. App. 779, 782, 323 S.E.2d 448, 449 (1984) (a corporate officer may be punished for criminal contempt and imprisoned if that person fails to take appropriate action within his power to comply with a court order).

Full Opinion
 

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The Court denied a Motion for Expedited Discovery in a shareholder class action seeking injunctive relief against the merger of two national banks, finding that the facts necessary to decide the motion were already publicly known.

The Court considered several different tests for when expedited discovery should be allowed, including:

Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 151, 152 (E.D.N.C. 1993), in which the court held that the plaintiff should be required “to demonstrate (1) irreparable injury, (2) some probability of success on the merits, (3) some connection between the expedited discovery and the avoidance of the irreparable injury, and (4) some evidence that the injury that will result without expedited discovery looms greater than the injury that the defendant will suffer if the expedited relief is granted.”

Dimension Data N. America, Inc. v. NetStar-1, Inc., 226 F.R.D. 528, 531 (E.D.N.C. 2005), requiring a showing of reasonableness and good cause for the expedited discovery, "taking into account the totality of the circumstances."

Marie Raymond Revocable Trust v. MAT Five LLC, 2008 Del. Ch. LEXIS 77, at * 6 (June 26, 2008), requiring a plaintiff to “articulate a sufficiently colorable claim and shoe a sufficient possibility of a threatened irreparable injury to justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited . . . proceeding.”

The Court did not endorse any particular test.

Full Opinion

Plaintiff's Brief In Support of Expedited Discovery

Defendant's Brief in Opposition to Expedited Discovery

Plaintiff's Reply Brief in Support of Expedited Discovery 

 

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A default judgment against an individual is not permitted without the Court first determining whether the defendant is in active military service.  The Servicemembers Civil Relief Act, 50 U.S.C. app. §501-596 requires a party seeking a default to "file with the court an affidavit . . . (A) stating whether or not the defendant is in military service and showing necessary facts to support the affidavit; or (B) if the plaintiff is unable to determine whether or not the defendant is in military service, stating that the plaintiff is unable to determine whether or not the defendant is in military service." 50 U.SC. app. §521(b)(1).

The Court denied without prejudice the motion for entry of default against a defendant because of the lack of such an affidavit.

Full Opinion

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A case does not have to be "complex" in order to qualify for the Business Court's mandatory jurisdiction.  In Johnson v. Johnson, the Court held that:

Plaintiff argues that the legal issues in this matter are not so complex as to warrant Rule 2.1 designation. Yet complexity or the lack thereof is not an issue under section 7A-45.4. Section 7A-45.4 simply requires that the action involves a material issue related to at least one of six subjects, including “[t]he law governing corporations” and “issues concerning governance” and “breach of duty of directors.” N.C. Gen. Stat. § 7A-45.4(a)(1) (LEXIS through 2007 legislation).

The Complaint in this case alleges, among other things, that Defendant breached his fiduciary duties as a shareholder, director, and officer of a closely held corporation. Since this matter involves material issues related to corporate law and breach of fiduciary duty, Plaintiff’s objection is overruled.

Full Opinion

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

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

Judge Jolly noted three key facts regarding the unsigned agreements:

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

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

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

The Court held:

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

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

Brief in Support of Motion to Compel Arbitration

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The Court dismissed unfair and deceptive trade practice claims in a dispute among doctors based on the "learned profession" exemption and because the dispute was not "in commerce." 

Plaintiff alleged that her partners had forced her out of their medical practice.  Judge Tennille (in a very short order), held that "North Carolina Appellate Courts have historically broadly interpreted the learned profession exemptions to the North Carolina Unfair and Deceptive Trade Practice Act, and the courts have also narrowly defined the definition of commerce for internal disputes between professionals."

Full Opinion

Complaint

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court had mandatory jurisdiction over a case involving Internet advertising, holding "[t]hat issue falls squarely within the definition of N.C. Gen. Stat. § 7A-45.4(a)(6) which covers material issues related to the Internet and electronic commerce. It also involves issues that would have implications for use of the Internet by others, both consumers and advertisers, who are not parties to this lawsuit."

Full Opinion

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The Business Court held that it had mandatory jurisdiction over a Complaint which raised “potential issues of corporate governance and the duties of corporate officers and directors involved which are broader than a simple employment contract.”

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The Business Court held that it had jurisdiction over a case relating to securities law under N.C. Gen. Stat. sec. 7A-45.4(a)(2).  The Complaint concerned issues regarding the ownership of shares in Centura Bank.

Full Opinion

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The Business Court held that it had mandatory jurisdiction over a case involving the sale of financial products, holding "It is sufficient for purposes of removal to the Business Court that there are issues concerning which law applies which will have industry-wide application. The potential thus exists for the establishment of case law which may prove useful to consumers of and businesses selling financial products." issues which would have industry wide application, with the potential to establish case law which might prove useful to consumers of and businesses selling financial products).

Full Opinion

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The Business Court held that it had mandatory jurisdiction over a case involving complex tax matters.  The Court also noted that its decision "could have implications for other companies, and thus the publication of a written opinion by this Court could prove beneficial to the State and those companies."

Full Opinion

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The Business Court found that a case raising claims for receivership, securities law violations, piercing the corporate veil, and unfair and deceptive practices fell within its mandatory jurisdiction.  Among other things, the Court held that "claims based on piercing the corporate veil clearly fall within" its mandatory jurisdiction because they involve a material issue related to the law governing corporations under N.C. Gen. Stat. sec. 7A-45.4(a)(1).

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Following the procedure of Moody v. Sears Roebuck and Co., 664 S.E.2d 569 (N.C. App. 2008), and Judge Tennille's Order in  Moody v. Sears Roebuck and Co., 2008 NCBC 14 (N.C. Super. Ct. Aug. 6, 2008) applying that ruling, the Court approved the withdrawal of class action claims.

The Court permitted the parties to keep confidential the terms of the settlement with the individual Plaintiff.  Judge Diaz recognized that the settlement papers filed with the Court were "public records and, thus, are presumed to be available for public inspection pursuant to the North Carolina Public Records Act," but he reasoned as follows in agreeing to keep them confidential:

In Virmani v. Presbyterian Health Servs. Corp., 350 N.C. 449, 463, 515 S.E.2d 675, 685 (1999), the North Carolina Supreme Court held that  “a trial court may, in the proper circumstances, shield portions of court proceedings and records from the public[.]” 

In the absence of the class action allegations, the parties "could have settled their dispute confidentially and filed a voluntary dismissal without any oversight from this Court." 

The amount being paid, as described by Judge Diaz, was "relatively insubstantial, particularly when viewed in the context of the high-dollar business disputes typical of this Court’s docket."

The case did not implicate substantial public policy concerns.  There had not been an interest voiced by the media or the public in the Plaintiff's allegations.

Maintaining the confidentiality of the settlement was in the best interests of justice, in the absence of any prejudice to the putative class members or the public at large.

Full Opinion

 

 

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Plaintiffs claimed that the Defendant Union had violated the North Carolina Identity Theft Protection Act by its posting of a list of their social security numbers on a company bulletin board.  The Plaintifs also made claims for unfair and deceptive trade practices and for invasion of privacy.

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

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

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

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

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

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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Judge Tennille drew an adverse inference as a result of the Defendant's claiming of his Fifth Amendment privilege against self incrimination and entered a Preliminary Injunction, holding:

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

Order at 3.

Full Opinion

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The Business Court held that it had mandatory jurisdiction over a claim involving the interpretation and validity of the corporate bylaws of an electric membership cooperative.  The bylaws were similar to those of a number of other electric membership cooperatives, and the Court held "that the disposition of this case may have an impact far beyond the confines of this case."

Full Opinion

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

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

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

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

Order at 3.

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

 

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The parties failed to submit their designation of mediator to the Court by the deadline provided for in the Case Management Order, and also after an inquiry from the Court.  The Court held that the parties had as a result "forfeited their right" to select a mediator. 

The parties were also delinquent in filing their good faith estimate of costs.  The Court ordered that document to be filed by a set date, and held that if the parties did not complete that filing that they would be required to show cause why they should not be held in contempt.

Full Opinion

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The Court found that a Complaint seeking commissions due which would require the interpretation of various infrastructure agreements concerning "the fiber optic infrastructure to support the provision of telecommunication and internet services" fell within its jurisdiction over matters involving "the internet and electronic commerce." 

The Court found additional support for the designation in Defendant's counterclaim for misappropriation of trade secrets, which implicated its jurisdiction over matters involving "state trademark or unfair competition law."

Full Opinion

Opposition to Notice of Designation

Memorandum Supporting Retention of Action in Business Court

Notice of Designation and Complaint

 

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If a case involves only a breach of a covenant not to compete or a confidentiality agreement, it is not within the mandatory "unfair competition" jurisdiction of the North Carolina Business Court.

The Complaint in this case asserted that the Defendant was improperly using a Confidentiality Agreement signed by the individual Plaintiff to threaten her so she wouldn't call on potential customers.  The Plaintiffs further alleged that potential customers had been impeded from doing business with the corporate Plaintiff as a result. 

The Complaint sought a declaratory judgment that the Confidentiality Agreement was invalid, and also made claims for tortious interference with contract and a breach of the duty of good faith and fair dealing.

The case was designated to the Business Court based on the Court's mandatory jurisdiction over cases involving "unfair competition law."  Judge Tennille disagreed that there was mandatory jurisdiction, and held:

every suit based upon a breach of a restrictive covenant or breach of a Confidentiality Agreement [will not] give rise to a mandatory business case based upon “unfair competition.” In order to raise a material issue of unfair competition, some additional factors must be alleged. 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).

The Court determined that those additional factors were lacking in the Workplace Benefits complaint. 

In another case, Brookhart v. ADT Security Services, Inc., July 23, 2008 (Tennille)(unpublished), the Court remanded a lawsuit in which the plaintiff sought a declaratory judgment that a covenant not to compete was invalid. Judge Tennille remanded the case on his own motion, before any Answer had been filed, and referenced the Workplace Benefits decision.

Full Opinion

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The North Carolina Business Court rejected a novel argument regarding the validity of post-employment consideration for a covenant not to compete.  It also dealt with the issue of the validity of a summons issued in the wrong name.

On the non-compete side, Plaintiff signed the non-compete with the cleaning company for which she had worked three years after she began employment.  Defendant argued that it had held off from firing the Plaintiff in exchange for her execution of the agreement, and that this was valid consideration.

Judge Tennille disagreed, holding:

"The Court is not aware of any prior decisions holding that a decision not to fire someone is adequate consideration for a non-compete. Instead, this state has found that '[w]hen the relationship of employer and employee is established before the covenant not to compete is signed there must be consideration for the covenant such as a raise in pay or a new job assignment.' Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 527, 379 S.E.2d 824, 827 (1989) (citing Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E.2d 118 (1964)). That consideration can NOT be the continuation of employment. Mach. Co. v. Miholen, 27 N.C. App. 678, 686–87, 220 S.E.2d 190, 196 (1975). Indeed, under Defendants’ theory, every employer could offer an employee the option of being fired or signing a non-competition agreement and argue that 'consideration' had been paid. That is not the law in North Carolina. The restrictive covenant in this case was invalid."

The issue involving the validity of the summons arose because Plaintiff had sued a company called Molly Mops, LLC, but had meant to sue a different company, Molly Mops Cleaning Service, LLC.  Plaintiff discovered the error promptly, and amended her complaint before any responsive pleading was filed, but never had a new summons issued.

Plaintiff sought leave to amend the original summons to properly name Molly Mops Cleaning Service, LLC.  Judge Tennille denied the Motion, even though the right party had notice of the lawsuit, holding:

This is not a case of misnomer. The wrong entity was named in the summons which was never amended. There is no doubt that MMCS had notice; however, that does not cure the defect. It may well be that plaintiff intended to sue MMCS and was confused; however, that does not cure the defect. Plaintiff did file an amended complaint; however, that did not cure the defect. A proper summons was never served on MMCS and thus no action has been commenced against it.

* * *

In this case, Plaintiff made a substantive mistake and sued the wrong entity. That mistake was fatal. The court does not have jurisdiction over MMCS because no valid summons was issued and served on MMCS.

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

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Counsel taking a pre-certification dismissal of a class action must file a statement which includes:

(1) the reason for dismissal, (2) the personal gain received by the plaintiffs in any settlement, (3) a statement of any other material terms of the settlement, specifically including any terms which have the potential to impact class members, (4) a statement of any counsel fees paid to plaintiff’s counsel by defendants, and (5) a statement of any agreement by plaintiff(s) restricting their ability to file other litigation against any defendant. 

Op. at ¶2.  In addition, counsel for the Plaintiff is required to "file a statement either detailing any potential prejudice to putative class members or representing to the Court that no prejudice exists."  Judge Tennille indicated that the Court would "be particularly concerned about issues related to tolling of the statute of limitations."

In a case involving the dismissal of a North Carolina class action resulting from the approval of a nationwide class action settlement in another state, there is a different requirement.  Then:

counsel shall file with the Court a copy of the order approving settlement and sufficient information concerning the notice provisions so that the Court can ascertain if jurisdictional and due process issues have been addressed by the foreign court and whether North Carolina citizens have been represented in the proceeding. 

Op. at ¶4.  This filing will permit the court to "raise any concerns with the foreign court," and that "once those concerns have been addressed, the foreign court’s order will be entitled to full faith and credit whether or not this Court would have granted approval of the settlement."  Op. at ¶4.  (In a case involving an out-of-North Carolina settlement, the statement regarding the reasons for the dismissal is not necessary.)

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This needs to include "the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

The Court noted two reasons for the requirement of an accounting.  First, the Court said that this would "promote greater transparency that will fill the 'informational black hole' concerning final distributions and make administration of class actions more efficient and effective and thus more beneficial to class members."  Op. at ¶8.

Second, the Court said it would use this information for other purposes, including an assessment of the qualifications of class counsel:

This Court would add to that list of benefits from transparency, the benefit of judges being able to assess the past performance, abilities and commitment of those lawyers who seek to be class counsel in other cases. A history of final results in other cases would also alert judges to scrutinize settlements proposed by defendants who have settled their class action in ways that resulted in no benefits to class members. This Court can think of no reason why the final results should not be made known to the Court and the citizens affected. 

Op. at ¶9.  The accounting information will be available on the Business Court's website.

Full Opinion,

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Defendants' contention was that they were entitled to reformation of a contract because a page was inadvertently left out of the asset purchase agreement.  The missing page detailed long term liabilities which Defendants claimed the Plaintiff was obligated to pay.  Defendants argued that the failure to pay constituted a violation of the accompanying Promissory Note and Security Agreement, and relieved them from their obligations under their non-compete agreements.

The Motion for Judgment on the Pleadings filed by the Plaintiff asserted that even if reformation was allowed, the only remedy for Defendants was for Plaintiffs to pay the liabilities listed on the missing page.  Judge Diaz held:

The Court disagrees. While there is a strong presumption in favor of correctness of an instrument as written, Hice, 301 N.C. at 651, 273 S.E.2d at 270, a “court’s principle [sic] objective is to determine the intent of the parties to the agreement.” Holshouser v. Shaner Hotel Group Props. One Ltd. P’ship, 134 N.C. App. 391, 397, 518 S.E.2d 17, 23 (1999).'

Moreover, when a court reforms an instrument, the general rule is that ‘”[t]he rights of the parties are measured by the instrument as originally intended, and the effect of the reformation, as a whole, is to give all the parties all the rights to which they are equitably entitled under the instrument that they intended to execute.” 66 Am. Jur. 2d Reformation of Instruments § 9 (2007) (citing Gurske v. Strate, 87 N.W.2d 703 (Neb. 1958)).

Thus, if Defendants establish by clear, cogent and convincing evidence that, because of a mutual mistake, the APA does not reflect the true intention of the parties at the original date of execution with respect to the long-term liabilities to be assumed by Plaintiff, they would be entitled to (1) have the agreement judicially reformed to correct the mistake, and (2) seek full relief for Plaintiff’s alleged breach of the APA and related contract documents. Long, 178 N.C. at 506, 101 S.E. at 13 (stating that when reformation is granted, the court not only corrects the contract as written, but enforces it in its amended form).

The Court dismissed an unfair and deceptive practices claim by one of the Defendants, who asserted that the Plaintiff had diverted funds rendering the Plaintiff unable to meet its contractual obligations to him.  The Court held that "A-1’s alleged accounting misdeeds arguably relate to matters of internal corporate governance, which are insufficient to sustain a UDTPA claim."  The Court further held that the claim was nothing more than one for breach of contract, stating "it does not matter that the purported breach resulted from A-1’s alleged accounting irregularities, as that fact alone is insufficient to elevate a contract dispute into an UDTPA claim."

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

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Business Court Rule 9.2 says that "the movant shall have a good faith basis for requesting any . . . extension of time and, except in extraordinary cases, the movant shall first consult with any opposing party and reflect that party's position in the motion and indicate whether the opposing party wishes to be heard on the motion."

If you don't follow the Rules, you aren't going to get your extension.  In Velocity Fiber Broadband, LLC v. Lang Management, Inc., the required consultation hadn't occurred.  Judge Jolly, in denying the plaintiff's motion to respond to a counterclaim, stated "notwithstanding that the . . . reporting requirements of Rule 9.2 of the Business Court Rules may be viewed by some as merely a technicality and not substantive, the requirements are clear and simple, and compliance with them promotes efficiency in case administration by the court and counsel."

Full Opinion

Other cases denying a Motion for Extension of Time for the same reason are TelSouth Solutions, Inc. v. Voyss Liquidation Co., October 17, 2008 (Diaz)(unpublished); Cape Fear Realty, LLC v. Cape Fear Trading Group, LLC, November 12, 2008 (Jolly)(unpublished); and A-1 Pavement Marking, LLC v. APMI Corp., January 2, 2009 (Diaz)(unpublished).

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The Business Court dismissed on a Motion for Judgment on the Pleadings an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

The Business Court held that the conduct involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16.

A defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Claims seeking judicial dissolution of the LLCs survived.  Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11. He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

The Court also held that CDC's claim for breach of a construction contract could proceed even though CDC was not licensed as a general contractor.  CDC's contract called for some work that required a general contractor's license, and some that didn't.  Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  The contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

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In this legal malpractice action, the plaintiff alleged that the defendant law firm had failed to comply with "standards established by the Rules of Professional Conduct promulgated by the North Carolina State Bar."  The Court granted a Motion to Strike with regard to this language, observing that "the Rules of Professional Conduct of the North Carolina State Bar are not admissible on the issue of the conformity by the Defendants to the applicable standard of care. . . ."

Full Opinion

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Plaintiff sued the Defendant Bank for allegedly allowing improper deposits of company checks into a personal account.  The Bank designated the case to the Business Court based on its jurisdiction over cases involving "the law governing corporations, partnerships, limited liability companies, and limited liability partnerships." 

The Plaintiff moved to remand, arguing that the case involved nothing more than issues of agency, and that cases involving banking law were not included in the categories of cases over which the Business Court has mandatory jurisdiction.

The Bank contended in its Opposition to the Motion to Remand that the cases involved issues of "corporate governance" and corporate authority, and also unique issues under Article 3 of the Uniform Commercial Code which were of significance to the state's banking community.

The Business Court denied the Motion to Remand "for two reasons. First, it appears from the submissions that questions of authority of corporate officers will be a significant issue. Second, the decisions in this case could provide guidance to businesses and the financial community with respect to banking laws."

Brief Opposing Designation As A Mandatory Complex Business Case

Opposition To Motion To Remand

Full Opinion

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

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

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

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

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

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

 

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This post is about three significant business decisions from courts in other jurisdictions.  They involve an issue of attorney-client privilege for limited liability companies, whether an LLC member can waive his statutory right to seek dissolution of an LLC, and board duties in a merger context.

First, if there's litigation between a member-manager of an LLC and the LLC, does the LLC have an attorney-client privilege to assert against its own member-manager? This issue hasn't arisen in any case before the North Carolina Business Court, but it undoubtedly will. 

A federal court in Nevada confronted that question recently and held in Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. 2008), that the LLC should be treated, for privilege purposes, like a corporation.  It determined that the privilege belonged to the entity alone, and that the plaintiff was not entitled to discovery of privileged information even though he was a member of the LLC and a former manager.  Thanks to Peter Mahler and his New York Business Divorce Blog, where I read about this case.

Second, can a member of an LLC waive his or her right to dissolution by an anti-dissolution provision in the Operating Agreement?  The answer is yes, at least under Delaware law, as held by the Delaware Court of Chancery last week in R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del.Ch., Aug. 19, 2008).  You can read the summary of the case, from the Delaware Corporate and Commercial Litigation Blog, here.  The Court rejected the argument that a member's agreement not to seek dissolution violated the public policy of Delaware, stressing instead the freedom of contract afforded those forming a limited liability company.

Third, also from Delaware, is a decision late last month about director duties in a merger context, Ryan v. Lyondell Chemical Co.  The Court of Chancery held that a shareholder could proceed to trial against the directors of Lyondell on a claim for breach of fiduciary duty, even though the action challenged was the consummated sale of the company for a "blowout" market premium.  The Court found a "troubling board process," in the board's determination after only seven days to approve the sale of the company without any market check, without any post-agreement "go shop" period, and their approval of a merger agreement with strong deal protection measures and a substantial breakup fee. 

The Court said it was unable to find on the summary judgment record that that Board had satisfied its Revlon duties, or that the deal protection measures were reasonable and necessary to secure the offer per Unocal.  This case is also courtesy of the Delaware Corporate and Commercial Litigation Blog.

The picture of the Cook Out hamburger at the top of this post is by my daughter, Juliet, a sophmore at UNC-Chapel Hill.

I've been having trouble recently with the pictures and links on my blog, so if they are not working when you first read this please check back later.

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Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008).

The Business Court today threw out, on a Motion for Judgment on the Pleadings, an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company. The Reid Pointe, LLC v. Stevens case also addresses a question of first impression involving an unlicensed general contractor.  There was a judicial dissolution issue as well.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

Judge Diaz granted the Motion on the unfair and deceptive practices claim, holding that the actions involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16. (There have been a series of cases from the Business Court reaching similar conclusions in cases involving disputes between members of LLCs or between corporate shareholders.  Those cases are Kaplan, Walters & Zimmerman, Schlieper, and Slickedit.)

The defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Plaintiff's claims seeking judicial dissolution of the LLCs survived, but barely. Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11.He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

Last but not least, one of CDC's claim was for breach of a construction contract.  CDC, however, wasn't licensed as a general contractor in North Carolina, and our law is pretty clear that an unlicensed general contractor can't recover for its work.  The twist here was that CDC's contract called for some work that required a general contractor's license, and some that didn't.

Grimmer argued that CDC was barred from recovering anything at all on the contract, but Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  Given the "indulgent standard" of inquiry required on a Motion for Judgment on the Pleadings, the Court denied the Motion because the contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

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This was a dispute between insurance agents and an insurer for which they had sold policies.

Plaintiff asserted that the Court had personal jurisdiction over a parent company with an indirect subsidiary in North Carolina based on the alter ego doctrine.  The Court held that "if [the parent] has dominated and controlled. . . a second tier subsidiary doing business in North Carolina, to the extent that the corporate veil may be pierced, such action would justify assertion of jurisdiction over the parent."  Although the Court found the allegations of dominance to be somewhat vague and ambiguous, it found that there were questions of fact whether the corporate veil could be pierced, and denied the motion, suggesting that it be renewed at a later date.  The Court observed that "it will not be sufficient for plaintiffs to establish only a parent-subsidiary relationship and some involvement in the subsidiary’s business by the parent. The burden will be much heavier."

The Court dismissed, based on lack of personal jurisdiction, claims against several officers of one of the corporate defenants.  It held "plaintiffs may not assert jurisdictionover a corporate agent without some affirmative act committed in his individual official capacity," which the Court found to be lacking.  The Court found that it did have jurisdiction over one of the officers, who had been alleged to have made misrepresentations to the Plaintiffs while at a meeting in North Carolina. 

Also dismissed was a negligence claim, because the Court found that duties of the parties to be defined by their contract.  The Court noted the narrow circumstances under which North Carolina recognizes a claim for negligent breach of contract, and held that allowing such a claim would "open this particular tort to all parties to a contract."

Claims for tortious interference with contract were also dismissed, because Defendant's conduct in notifying insurance policyholders that Defendant would be exiting the insurance business and that they should find new insurance had a legitimate business purpose. 

The Court found insufficient aggravating circumstances to make out an unfair and deceptive practices claim, and dismissed that claim as well.

Full Opinion

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It was a busy opinion day today in the North Carolina Court of Appeals: there were 44 published opinions, three of which I'm commenting about briefly below.  The three involve a range of issues, including arbitrator immunity, Rule 11 sanctions, and an technical point about subpoenas in state tax refund litigation and also work product privilege.

The arbitrator case, Dalenko v. Collier, addressed an issue of first impression in North Carolina, whether an arbitrator is entitled to judicial immunity.  Plaintiff, a pro se litigant who had been unsuccessful in an arbitration heard by former Judge Collier, sued him for allegedly being personally interested in the case and biased.  The Court of Appeals held (relying on Burns v. Reed, 500 U.S. 478 (1991)) that whether a private citizen acting as an arbitrator is entitled to judicial immunity depends upon a "functionality test."  It stated:

defendant was sitting as an arbitrator to resolve a dispute pending in the courts of Wake County. Under the functionality test, defendant was entitled to judicial immunity and was immune from the claims asserted in the instant case. Plaintiff's complaint alleges conduct which was clearly within the course and scope of the arbitration proceeding. Plaintiff's claims were barred by arbitrator immunity, and the trial court correctly found them to be frivolous.

The Dalenko case also affirmed an award of Rule 11 sanctions against the Plaintiff, and also found that Plaintiff was collaterally estopped from pursuing her claims against the arbitrator since she had raised those same claims in seeking a vacation of the arbitration award.

In Ward v. Jett Properties, LLC, the Court affirmed the entry of Rule 11 sanctions against a pro se litigant who had sued his landlord for allowing other tenants to play football "within striking distance of his car" and to "dart around" on "metal skooters." To me, the significant point worth noting about Ward is that one of the reasons the Court found the Complaint to be "legally insufficient" for Rule 11 purposes was that it had been dismissed on a Rule 12(b)(6) motion.  The Court held "though the mere fact that a cause of action is dismissed upon a Rule 12(b)(6) motion does not automatically entitle the moving party to have sanctions imposed. . . . it is often indicative that sanctions are proper."  The fact that Ward had filed forty two other lawsuits in the past six years, at least one of which was identical to the one before the Court, was undoubtedly a factor in the affirmance.

Last, the work product case is In the Matter of the Summons Issued to Ernst & Young, LLP.  It involves a subpoena issued by the North Carolina Department of Revenue to the accounting firm of Ernst & Young for documents relating to the tax refund lawsuit between the DOR and Wal-Mart.  Wal-Mart intervened and challenged the subpoena. 

Before it got to the work product issue, the Court resolved a threshold issue whether the Rules of Civil Procedure apply to subpoenas issued by the DOR pursuant to N.C. Gen. Stat. § 105-258.  The DOR argued that the Rules didn't apply, the Court of Appeals disagreed and said that they did.  The applicability of the Rules made a difference to Wal-Mart, which was arguing that the Court didn't have subject matter jurisdiction because the DOR hadn't issued a summons and filed a Complaint.  Although Wal-Mart prevailed on its argument about the application of the Rules, the Court denied the Motion to Dismiss because "the statute provides jurisdiction to the Wake County Superior Court upon application by the Secretary of Revenue."

On the work product side of things, the issue was whether some of the documents prepared by E&Y had been done "in anticipation of litigation."  Wal-Mart argued that the documents had been prepared by the accountants specifically for its restructuring, not for tax return purposes and not for purposes of its audit; that it had been billed separately for the work; that the partner who had done the work anticipated that there might be litigation from various tax authorities; and that the documents were not prepared in the ordinary course of business.  The Court found this insufficient to determine the applicability of the privilege, and remanded the case for an in camera review by the trial court.

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The Court overruled an objection to its mandatory jurisdiction in this case involving a software license agreement.  It held, in affirming Defendant's Notice of Designation of the case as one involving "intellectual property law," that:

Software licensing has become an integral part of economic life. Decisions concerning software licensing can have an impact beyond the confines of a particular case and development of a body of case law in this area of law will be beneficial to the bar and business. See Smart Online, Inc. v. OpenSite Technologies, Inc. 2003 NCBC 5 (N.C. Super. Ct. June 17, 2003).  For the forgoing reasons, Plaintiff’s Objection to Designation is OVERRULED.

Full Opinion

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The Court dismissed the derivative claim of a minority shareholder who alleged that the majority shareholders of the corporation had breached their fiduciary duty to the minority shareholders by failing to make distributions, failing to investigate allegations on that subject, and terminating the minority shareholder's employment. 

The Court held that this was not a proper derivative claim, because the shareholder had not alleged a cause of action belonging to the corporation or a remedy to which the corporation would be entitled.

The Court further found that even if the claim was derivative, that the minority shareholder did not fairly represent the corporation as required by North Carolina General Statute § 55-7-41(2).  The Court held:

The North Carolina Court of Appeals has applied the federal standard for determining when a shareholder “may fairly and adequately represent a corporation.” Robbins v. Tweetsie R.R., 126 N.C. App. 572, 579, 486 S.E.2d 453, 456, rev. denied, 347 N.C. 402, 494 S.E.2d 418 (1997). The federal standard uses a case by case analysis of whether a shareholder qualifies to represent the corporation. Id. (citations omitted). In Robbins, the court discussed the facts surrounding the plaintiff to conclude that plaintiff was not a suitable shareholder to bring a derivative suit. Id. at 579–80. Before the court addressed the facts of Robbins, it specifically set out that “a minority shareholder, who has uppermost a personal agenda rather than the best interests of the corporation, would [not] have standing to file and maintain a shareholder derivative action.” Id. at 578.

The Court held that the minority shareholder had a personal agenda that affected his ability to adequately represent the bests interests of the corporation. 

The Court also dismissed the shareholder's unfair and deceptive practices claim because the shareholder was a physician and the Court found the learned profession exception to applied.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

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Plaintiff was entitled to specific performance of a Shareholders' Agreement requiring the Defendant, a terminated employee, to tender his shares back to the Plaintiff.  The repurchase was ordered even though the Defendant claimed that his termination was wrongful. 

The Court granted a Motion for Judgment on the Pleadings, and held:

Specific performance is appropriate when monetary damages are inadequate. Whalehead Properties v. Coastland Corp., 299 N.C. 270, 282, 261 S.E.2d 899, 907 (1980) (citing In Trust Co. v. Webb, 206 N.C. 247, 250, 173 S.E. 598, 600 (1934)). Viewing the material facts in the light most favorable to Defendant, the Court finds that Defendant’s employment was terminated (Compl. ¶ 9; Def.’s Ans. ¶ 9) regardless of the alleged wrongful or proper nature of the termination, Plaintiff tendered an amount to Defendant to purchase Defendant’s shares (Compl. ¶ 11; Def.’s Ans. ¶ 11), and Defendant failed to tender those shares to Plaintiff (Compl. ¶ 12; Def.’s Ans. ¶¶ 10, 12). If Defendant Barnette has a cause of action for wrongful termination, his damages may include losses resulting from his forced sale of shares. He therefore has an adequate remedy. Plaintiffs do not have an adequate remedy at law for his failure to sell his shares and are entitled to equitable relief. Only transfer of the shares at issue pursuant to the Shareholder Agreement would be an adequate remedy for breach of the Shareholder Agreement.

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

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The Business Court denied the Plaintiff's Motion for Expedited Discovery, without discussion, in its Order in this covenant not to compete case.  From looking at Defendant's brief in opposition, what probably doomed the motion was that the one year non-compete period had nearly expired when Plaintiff requested expedited discovery.  The same Order was entered on the same day in a companion case, Robert Half Int'l Inc. v. Flood.

Full Opinion

Brief in Support of Motion for Expedited Discovery

Brief in Opposition to Motion for Expedited Discovery

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The Court found that the Noerr-Pennington doctrine did not apply to the false submission of data to a public agency.  The Court further found this conduct was not entitled to free speech protection under the First Amendment and the North Carolina Constitution.  Nor were the Defendants entitled to state action immunity, or the protection of the filed rate doctrine. 

Full Opinion

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The Court granted a Motion for Protective Order preventing Defendant from determining the identity of a confidential informant to the Department of Environment and Natural Resources.  The Court found that the identity of the confidential informant was "of no consequence to the issues in this case."  The Court further found that there was good cause for the entry of the Protective Order, holding:

Here, the burdens of the proposed discovery greatly outweigh any benefits, and Plaintiffs have demonstrated good cause for the entry of a protective order. The most significant burden of forcing DENR to reveal the identity of the informant is the chilling effect such a ruling would have on potential informants. The Court wishes to encourage individuals who believe a fraud is being committed on the state to present such information to the proper authorities. Without the promise of confidentiality, such individuals are less likely to come forward. There may be instances in which circumstances require disclosure of the identity of a confidential informant under the discovery rules, but this is not one of them. Here, where the Defendants already know the substance of the informant’s communications and have demonstrated no genuine need for the informant’s identity, the Court is unwilling to erode the incentives offered to the public to speak out when they observe a possible fraud on their government.

Full Opinion

Brief in Support of Motion for Protective Order

Reply Brief in Support of Motion for Protective Order

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Plaintiff sought an injunction preventing Defendant from selling its assets in North Carolina.  The Motion was filed pursuant to N.C. Gen. Stat. § 1-485, which permits an injunction when "the defendant threatens or is about to remove or dispose of his property, with intent to defraud the plaintiff." 

The Court denied the injunction, finding that it would be a detriment to the Defendant's ability to sell its assets, and might result in Defendant's operation being forced to close.  The Court required, however, that the Defendant give sixty days notice before the closing of a sale of all or substantially all of its assets.

Full Opinion

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This opinion dealt with subpoenas to a party's attorney and its accounting firm.  The Court quashed the subpoena to the law firm (Gray Layton), holding:

Service of a subpoena duces tecum on a law firm seeking documents from the firm’s client files clearly raises worrisome issues of attorney-client and work product privilege. The attorney-client privilege protects confidential communications between attorney and client “made on the faith of the relationship between them.” Kenneth S. Broun, Brandis & Broun on North Carolina Evidence § 129 (4th ed. 1993). The work product privilege prevents disclosure of the “mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation in which the material is sought.” N.C. R. Civ. P. 26(b)(3). The Court may quash a subpoena if it “requires disclosure of privileged or other protected matter.” N.C. R. Civ. P. 45(c)(3)(b), (c)(5). Gray Layton’s files may well contain materials protected by one or both of these privileges.

 The Court enforced the subpoena to the accounting firm, however, holding:

In 2001, the Court of Appeals restated that “[a]n accountant-client privilege is not recognized in North Carolina.” Miles v. Martin, 147 N.C. App. 255, 261, 555 S.E.2d 361, 365 (2001) (citing State v. Agnew, 294 N.C. 382, 394, 241 S.E.2d 684, 692 (1978)). In the absence of such a privilege, the Court finds no reason to quash the subpoena served on McCannon Rogers.

Full Opinion

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The personal representative of a decedent was not required to give personal notice of the deadline for filing claims against the estate to a claimant, as required by N.C. Gen. Stat. § 28A-14-1, where she did not have actual knowledge of the claim.  The Court also determined that she had no obligation to conduct an investigation to determine whether there was a potential claim.  The Plaintiff therefore had not properly presented its claim as required by N.C. Gen. Stat. § 28A-19-3(a). 

The Court also dealt with a statute of limitations issue: whether the three year statute for breach of contract or the ten year statute for a contract signed under seal should apply.  The Court found this to be a question of law as to the defendant who had passed away, who had not signed the agreement in question, but a question for the jury as to other defendants, who had.   It determined that the deceased defendant could not be bound by the sealed signatures of others on the basis that he was a member of a joint venture and that he had therefore adopted the signatures of the others as his own.

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

 

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The Business Court overruled an objection to its mandatory jurisdiction over a Complaint alleging breach of a trademark license agreement.  It held "this case involves both the right to use trademarks and the right to use designs previously sold under the trademarked names at issue. It involves issues which fall within the mandatory issues supporting assignment to the Business Court."

Full Opinion

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A minority member (Kaplan) of a limited liability company, who was the LLC's only source of funds and who controlled the LLC's checkbook, did not have fiduciary duties to the LLC and its other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan's position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC's Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Summary judgment was granted on Defendant's claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan.  As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate."  (Op. at 14).

Last, the Court granted summary judgment on Defendant's unfair and deceptive practices claim.  The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders.  Commerce is not affected by the parties' inability to work together as an LLC."  (Op. at 14).

Full Opinion

Plaintiff's Brief In Support Of Motion For Summary Judgment

Defendants' Brief In Opposition To Motion For Summary Judgment

Plaintiff's Reply Brief In Support Of Motion For Summary Judgment

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The Court denied a motion for expedited discovery, but noted that the discovery at issue had already been served, and stated that "[i]n light of the claims alleged in the Complaint, the Court is not inclined to look favorably upon a motion by Defendant for an extension of time to respond to those requests."

Full Opinion

Brief in Support of Motion for Expedited Discovery

Brief in Opposition to Motion for Expedited Discovery

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The Court denied a Motion for a Temporary Restraining Order.  The Motion sought enforcement of covenants not to compete executed by the Defendants, who were loan officers with the Plaintiff, a mortgage broker.

The covenants stated that the Defendants:

will not directly or indirectly, in any capacity work for any company, entity or individual, including himself/herself, who originates or sells residential housing loans in any state in which LO has originated a loan in the six (6) months preceding the termination of LO’s employment with the Company [Integrity].

The Court found this to be too broad a restriction, holding:

the individual Defendants would not merely be prevented from working as loan officers for other mortgage brokers, but would also be prevented from doing even wholly unrelated work at any firm that competes with the Plaintiff.

The Court also noted that the Defendants contended that the Plaintiff had breached its agreement by failing to pay them, and held:

Our courts have held that “[i]njunctive relief to enforce the terms of a contract will not be granted a party who has himself breached the terms of the contract when his breach is substantial and material and goes to the heart of the agreement."

Full Opinion

Brief in Support of Motion for Temporary Restraining Order

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The person elected as liquidator to oversee the liquidation of the assets of two general partnerships was not entitled to limit his responsibility to the pursuit of a derivative action lawsuit against the auditor for the partnerships, as opposed to the general winding up of the affairs of the partnerships.  The Court held:

the substantive problem with Ray’s election as liquidator is that he is unwilling to accept the full mantle of responsibilities that attend to the post. Liquidation is a process for the winding up of a dissolved partnership’s affairs by collecting and providing for an orderly distribution of all of the partnership’s assets, first to creditors, if any, and then to the partners. See generally N.C.G.S. §§ 59-803 to -804 (2006); Del. Code Ann. tit. 6, §§ 17-803 to -804 (2006).

In the Court’s view, one who seeks to serve as a liquidator may not pick and choose among the assets of the partnership that he will supervise, but instead must be willing to accept responsibility for the full and complete winding up of the partnership’s affairs within this State.

The Court's remedy was to exercise its "inherent equitable power" to appoint a receiver for the partnerships.  That person would determine, as a part of the receivership, whether the derivative action should be pursued.

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Plaintiff was entitled to discovery of documents relating to an arbitration proceeding involving similar claims, even though the legal issues were not identical, and also notwithstanding a confidentiality agreement entered by the arbitrator in the arbitration case. 

The Court made this comment on the standard of relevancy for discovery purposes:

A fundamental requirement of Rule 26, and the focus of the Court’s analysis here, is that the information sought to be discovered must be “relevant” to the pending action. The test of relevancy under Rule 26 is not the same as the more stringent relevancy requirement of Rule 401 of the North Carolina Rules of Evidence. See N.C. R. Evid. 401 (“‘Relevant evidence’ means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.”); see also Adams v. Lovette, 105 N.C. App. 23, 29, 411 S.E.2d 620, 624 (1992), aff’d, 332 N.C. 659, 422 S.E.2d 575 (1992). Moreover, a determination that information is relevant for discovery purposes does not necessarily mean that the information is admissible at trial. The latter determination is made according to Rule 401 of the Rules of Evidence. Shellhorn v. Brad Ragan, Inc., 38 N.C. App. 310, 314, 248 S.E.2d 103, 106 (1978). To be relevant for discovery purposes, the information sought need only be “reasonably calculated” to lead to the discovery of relevant evidence admissible at trial. See N.C. R. Civ. P. 26(b)(1).

The Court also held that there might be circumstances where an arbitrator's ruling on confidentiality might be enforced:

The Court emphasizes the narrow and fact-specific nature of this ruling. There may be instances in which recognition of an arbitration panel’s confidentiality order is warranted. This Court recently acknowledged the strong state and federal public policy in favor of resolving disputes through arbitration. See, e.g., State v. Philip Morris USA, Inc., 2006 NCBC 22 ¶ 35 (N.C. Super. Ct. Dec. 4, 2006), http://www.ncbusinesscourt.net/opinions/2006%20NCBC%2022.htm. Confidentiality is an important part of the settlement process and is perceived as a clear advantage of arbitration. See, e.g., Richard C. Reuben, Constitutional Gravity: A Unitary Theory of Alternative Dispute Resolution and Public Civil Justice, 47 UCLA L. Rev. 949, 1086 (2000) (noting that “privacy can be an important consideration in the decision to waive full-blown trial rights in favor of the arbitral forum). However, in this case, the arbitration involves facts and witness that are also relevant to cases before this Court. Disclosure of the reinsurance arbitration information will be protected by the confidentiality order in place in this case and will promote the efficient resolution of these cases by streamlining the discovery process and refining the issues to be determined at trial.

Full Opinion

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The Court allowed a motion to bifurcate in this shareholder dispute.  Shortly before trial, the Court agreed to try first Plaintiffs' claims for reasonable expectations, mismanagement, and breach of fiduciary duty; and after determination of those issues to try, if necessary, the issues of valuation and dissolution.  The Order allowing bifurcation was entered with the consent of the parties.

Full Opinion

Motion to Bifurcate

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A North Carolina court has no authority to enforce a subpoena issued to an out-of-state non-party, even if the non-party has a registered agent in North Carolina.

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The Court, sua sponte, struck Plaintiff's Motion for Expedited Discovery because Plaintiff had not included a Rule 18.6 certification regarding its counsel's efforts to confer with opposing counsel.

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There was no tortious interference contract claim against a defendant who sold product to plaintiff's competitor.  This was a legitimate exercise of the defendant's rights.

There was no claim for negligence, or negligent misrepresentation, against the defendant because the plaintiff's claims were for breach of warranty and covered by the UCC, and also because of the economic loss rule.  Judge Tennille held:

This is a breach of warranty case. The complaint alleges any statements were made in the course of the contractual representation. It fails to establish any independent duty running from ALT to Gateway. To substitute negligent misrepresentation for breach of warranty under the circumstances of this case would eviscerate the pertinent sections of the UCC. Both the negligent misrepresentation claim and the negligence claim in Count VI are barred by the economic loss rule. Both are based upon a breach of contract or warranty and the recovery is limited to the contract or warranty claim. Our Court of Appeals has held that: “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract.” Spillman v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741 (1992).

A trade secrets claim, which asserted that defendant had improperly given plaintiff's customer list to a competitor of plaintiff, survived the Motion to Dismiss. The Court held that "[c]ustomer lists may or may not be trade secrets depending on the circumstances and the use made of them," and held that discovery on this claim would be necessary.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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Defendant claimed that the Plaintiff, who was the majority shareholder of a family corporation, couldn't have had an expectation of a fiduciary duty from him because the Defendant had had an affair with Plaintiff's wife.  The Court disagreed, and said that the existence of a fiduciary duty under these circumstances was a question of fact.

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An Arbitration Award was entitled to collateral estoppel effect, even though the Defendants had not been parties to the arbitration.  

The Court compared the claims made in the Arbitration to the claims made in the Amended Complaint, and found them to be identical.  It further determined that the Plaintiff had "a full and fair opporutnity to litigate these issues." 

The Court concluded that "the doctrine of collateral estoppel serves to bar [the Plaintiff] from relitigating the issue of its damages resulting from" [the matters which had been at issue in the Arbitration].

The Court found, however, that the Plaintiff was not barred from seeking to enforce against the Defendants the Award itself, because there were issues about whether the Award had been satisfied.  The Court stated that the settlement of the Award contained "numerous contingencies."  The claims on the Award were therefore not precluded by either res judicata or by the "one-satisfaction doctrine."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The actions and impressions of a non-lawyer sent by counsel to conduct an interview were subject to work product privilege.  

Judge Tennille held that the interviewer (Ms. Lister):

declined to answer questions which called for her mental impressions and litigation strategy based upon attorney-client privilege and work product. Ms. Lister conducted the interview at the direction and under the supervision of the General Counsel of BDO in order to prepare BDO’s defense to the claims asserted in the lawsuit. The Court concludes that the limited amount of information withheld by Ms. Lister was protected as attorney work product under N.C. R. Civ. P. 26(b)(3). Harco elicited testimony about what was said and done at the interview. The information it now seeks relates to impressions and opinions Ms. Lister formed and conveyed to BDO’s General Counsel. Harco has not demonstrated any hardship as it has obtained discovery of the underlying facts. Harco’s Motion to Compel is denied.

Full Opinion

Brief in Opposition to Motion to Compel

Reply Brief in Support of Motion to Compel 

(Brief in Support of Motion to Compel not available)

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The Business Court denied the Defendant's request to amend its Answer to add a statute of limitations defense and a defense of ERISA preemption.  Judge Tennille found that the Defendant had unduly delayed by raising the statute of limitations defense fourteen months after the filing of its Answer, and that the Plaintiff would be prejudiced if it were allowed.  The Court denied the ERISA amendment for another reason, finding it to be futile.

The Court held that "[a] delay of over fourteen months before filing a statutes of limitation defense is an undue delay and causes undue prejudice to Plaintiff."  It also held that "[a] defense based upon statutes of limitation is, by definition, time sensitive. A delay of over fourteen months before asking for an amendment could be acceptable in certain circumstances. . . . The situation where statutes of limitations defense is raised is not one of those circumstances."

On the ERISA claim, the Court held that although the Complaint did reference the pension plan of the practice, this was insufficient to warrant ERISA preemption because the claim did not involve the existence or extent of benefits under an employee benefit plan. 

Full Opinion

Brief in Support of Motion to Amend

Brief in Opposition to Motion to Amend

Reply Brief in Support of Motion to Amend

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The Court granted a Motion for Protective Order over the objection of the North Carolina Department of Revenue in tax refund litigation.  The opinion is very short, but the Briefs have good general discussion on protective order issues.

Full Opinion

Defendant's Brief in Opposition to Motion for Protective Order

Defendant's Brief in Support of Motion for Protective Order 

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The "General Objections" that many lawyers put up front in their responses to discovery requests may not be effective.  The Business Court held that such objections may violate the Rules of Civil Procedure, which require a party to state its objections in response to each interrogatory:

Rule 33 of the North Carolina Rules of Civil Procedure requires that each interrogatory “be answered separately and fully in writing under oath, unless it is objected to, in which event the reasons for objection shall be stated in lieu of an answer.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007). Moreover, “[a]n objection to an interrogatory shall be made by stating the objection and the reason therefore either in the space following the interrogatory or following the restated interrogatory.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007) (emphasis added).

The Court then stated what it said was the ruling of most federal courts on the subject of general objections:

'objections stated at the beginning of the response to the interrogatories, are ineffective and are an abuse of the discovery process because such objections block discovery without explaining why and to what extent.' Waters Edge Living, LLC v. RSUI Indem. Co., 2008 U.S. Dist. LEXIS 33049, at *11 (N.D. Fla. Apr. 22, 2008).

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The Business Court had mandatory jurisdiction under N.C. Gen. Stat. §7A-45.4 over plaintiff's lawsuit because it involved claims involving antitrust law, even though the complaint did not specifically allege an antitrust claim.  It was sufficient that the claim was essentially based on a "contract in restraint of trade."  The Court held:

Plaintiff has asked the Court to remand this action because the case “does not involve any . . . issue” regarding antitrust law or the law governing corporations. (Pl. Br. Supp. Opp’n 1.) The Court disagrees. First, this case potentially involves violations of antitrust law. Section 75-1.1 of the North Carolina General Statutes does not cover simple breach of contract. N.C. Gen. Stat. § 75-1.1 (2007). Thus, the unfair trade practices claim may involve antitrust issues. Second, this case may involve issues with broad ramifications for automobile dealers and manufacture[r]s. Third, this case may also involve the interplay between courts and administrative agencies. These parties and agencies will benefit from a single judge hearing this case. Fourth, this case involves the sale of a business or business assets. Fifth, the case is likely to be motion intensive.

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A party making claims out of the dissolution of a law firm PLLC was not entitled to proceed on its unfair and deceptive practices.  Judge Tennille held that the claims between the lawyers involved an "internal dispute," and that such disputes did not "affect commerce" as required by the statute. 

There was also an issue of standing.  The Court referenced the Court of Appeals' decision in Crouse v. Mineo, 2008 N.C. App. LEXIS 546, 658 S.E.2d 33 (N.C. Ct. App. 2008).  That Court of Appeals held there that a manager of an LLC does not have the authority to bring suit on behalf of the LLC because such an action is not within the powers of a manager, which are limited to things necessary to "carry[] on in the usual way the business of the limited liability company."  Bringing a lawsuit against the LLC, the Court of Appeals held, was not within the course of usual business.  

The Business Court also summarized when the moving party on a Motion to Dismiss can rely on documents outside of the pleadings:

the Court may not consider “extraneous matter” outside the complaint, or else the Rule 12(b)(6) motion will be converted into a Rule 56 motion for summary judgment. See, e.g., Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 891 (1979). However, the Court may consider documents the moving party attaches to a 12(b)(6) motion which are the subject of the challenged pleading and specifically referred to in that pleading, even though they are presented to the Court by the moving party. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001) (considering a contract on a 12(b)(6) motion even though the contract was presented by the movant). The Court is not required to accept as true “any conclusions of law or unwarranted deductions of fact.” Id. at 56, 554 S.E.2d at 844. Thus the Court can reject allegations that are contradicted by the supplementary documents presented to it. See E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000) (stating that the court “need not accept as true unwarranted inferences, unreasonable conclusions, or arguments”).

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Business Court dismissed Plaintiff's claim that he had been dismissed from his employment in violation of the public policy of North Carolina. 

Plaintiff, a doctor who had been employed by the Defendant medical practice, alleged that he had been forced to resign his employment while he was disabled and seeking medical treatment.  He asserted that the Defendant's "conduct in demanding an unnecessary resignation agreement of a disabled employee while he was in a vulnerable state . . . offends the public policy of the State of North Carolina."

Judge Diaz disagreed and granted Defendant's Motion to Dismiss.  He held:

While Plaintiff’s original and amended pleadings assert that he was disabled and seeking medical treatment at the time he was purportedly coerced by BRBJ into resigning from employment, Plaintiff does not allege facts sufficient to show that he met the criteria for disability under any relevant statute, nor does he allege that BRBJ discriminated against him on the basis of any such disability. Cf. Baucom v. Cabarrus Eye Ctr., P.A., No. 1:06CV00209, 2007 U.S. Dist. LEXIS 25101, at *19–22 (M.D.N.C. Apr. 4, 2007) (dismissing claim alleging wrongful termination where Plaintiff failed to allege facts sufficient to demonstrate disability under state or federal law or that Defendant discriminated against plaintiff on the basis of any such disability). 

Full Opinion

Defendant's Brief In Support Of Motion To Dismiss

Plaintiff's Brief In Opposition To Motion To Dismiss

Defendant's Reply Brief In Support Of Motion To Dismiss

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The Business Court has mandatory jurisdiction under N.C. Gen. Stat. §7A-45.4 over claims involving "antitrust law, except claims based solely on unfair competition under N.C. Gen. Stat. §75-1.1." 

The Court gave a broad reading to its grant of its antitrust jurisdiction in an Order today in Sonic Automotive, Inc. v. Mercedes-Benz USA, LLC, in which it denied an objection to a Notice of Designation of the case as a mandatory complex business case. 

Sonic, which already owned nine Mercedes dealerships, sued Mercedes-Benz for refusing to approve its purchase of another dealership in Charlotte.  According to the Complaint, Mercedes-Benz withheld its approval because of Sonic's alleged failure to comply with the terms of a letter agreement executed when Sonic had acquired other Mercedes dealerships. 

The case was designated to the Business Court by Mercedes-Benz as being within the Court's mandatory jurisdiction over antitrust cases and the law governing corporations.  Sonic filed a Motion to Remand objecting to the designation.

There's no claim in Sonic's Complaint denominated as an antitrust claim, and the word antitrust isn't even in the Complaint. 

Mercedes-Benz argued in its Opposition to the Motion to Remand that Sonic's claim was based on a "contract in restraint of trade," which implicated "antitrust and unfair competition issues squarely within the Business Court's jurisdiction."  The car manufacturer was helped in its arguments by public statements made by Sonic's President that Sonic was being "extorted" by Mercedes-Benz and that Mercedes-Benz had "tied" the sale of the Charlotte dealership to Sonic's compliance with the letter agreement.

Judge Tennille found that the Court's antitrust jurisdiction was implicated, and also held that its mandatory jurisdiction was appropriate for other reasons presented by Mercedes-Benz in its Opposition:

Plaintiff has asked the Court to remand this action because the case “does not involve any . . . issue” regarding antitrust law or the law governing corporations. (Pl. Br. Supp. Opp’n 1.) The Court disagrees. First, this case potentially involves violations of antitrust law. Section 75-1.1 of the North Carolina General Statutes does not cover simple breach of contract. N.C. Gen. Stat. § 75-1.1 (2007). Thus, the unfair trade practices claim may involve antitrust issues. Second, this case may involve issues with broad ramifications for automobile dealers and manufacture[r]s. Third, this case may also involve the interplay between courts and administrative agencies. These parties and agencies will benefit from a single judge hearing this case. Fourth, this case involves the sale of a business or business assets. Fifth, the case is likely to be motion intensive.

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The Court ruled, on summary judgment, that the word "value" in a Trust Agreement meant "'fair market value' of the shares of the railroad company which was the subject of the case as value would be viewed by the Trust, as prospective seller, and the Blue family [those entitled to buy them per the Trust Agreement], as prospective purchasers."  The term "value" did not mean the fair market value of the shares if they had been offered to the general public.

The Court rejected, at least at the summary judgment stage, the value for the shares established in a report prepared by the railroad's accounting firm.  The Court noted that this report had been prepared "for the limited purpose of determining the fair market value between a willing buyer and a willing seller in the general marketplace of a minority interest of a share of the Railroad's common stock for gift and estate tax purposes."   The Court found that there were material issues of fact whether this valuation, which incorporated a significant discount for the lack of marketability of the shares, reflected the intent of the settlor of the trust.

The Court rejected an argument by the Plaintiffs that they were entitled to challenge the methodology of the accounting firm.   It held "the court notes that since [the testator] is deemed to have embraced the expertise of [the accounting firm] by virtue of paragraph 8.01 of the Trust Agreement, it is likely that criticism of [the accounting firm's] valuation methodology would be of limited probative value, if it would be admissible at all."

The Court also allowed an amendment to the Complaint even though the proposed new allegations were "substantively different" from those in the original Complaint.  It held that the duty of construing the relevant provisions of the Trust Agreement was its domain, and stated "variations existing between the Petition and the Amended Petition regarding the Trustee's contended construction of the Trust Agreement are not of material consequence in this setting."

Full Opinion

Defendants' Brief In Support Of Their Motion For Summary Judgment And In Opposition To Motion To Amend

Plaintiffs' Brief In Opposition To Defendants' Motion For Summary Judgment

Plaintiffs' Reply Brief In Support Of Their Motion To Amend

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Compliance with the meet and confer obligations contained in Business Court Rule 18.6 is essential before the filing of a discovery motion.

In this case, the Court denied the Plaintiff's Motion for a Protective Order because of counsel's failure to comply with the certification requirements of that Rule.  Judge Tennille held that "this reason alone is sufficient for the Court to deny Plaintiff's motion."

Full Opinion

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There is no attorney client privilege or work product privilege between lawyers and their experts regarding information exchanged between them, even if the expert is also the client. 

The Court held:"Plaintiff’s assertion of the attorney client privilege to shield discovery of any communications with counsel involving his expert opinions is misplaced. Expert witnesses are subject to specific rules of discovery under the North Carolina Rules of Civil Procedure. N.C.R. Civ. P. Rule 26(b). Generally, the facts known to and the opinions held by an expert are discoverable as well as the materials the expert relied upon in coming to his or her opinion. See id. at Rule 26(b)(4), 26(b)(1). If [the expert's] opinions are based upon any information supplied to him by counsel that information is discoverable and Plaintiff is required to make disclosures of that information."

Full Opinion

Defendant's Brief 

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When you have an additional three days to respond to a filing served by mail, and the response period ends on a weekend or holiday, this is how you calculate the response period:

"The correct formula for the computation of a time period during which a filing is required is as follows: number of days allowed under applicable statute + three days under Rule 6(e) + any weekend or holiday under Rule 6(a). The Court notes that the three days under Rule 6(e) is added to the end of the time period allowed by statute regardless of whether that time period ends on a Saturday, Sunday, or legal holiday. It is at the end of the additional three days that Rule 6(a) applies."

Also, when the response is due to a document which has been e-filed, but the party who has to respond has not yet registered to e-file and no Order requiring e-filing has yet been entered, the count for the response starts when the party from which the response is due is served pursuant to North Carolina Rule of Civil Procedure 5(b). If an Order has been entered requiring e-filing, however, service will be complete when the party filing the document to which the response is due receives notice of its own e-filing.  Business Court Rule 6.4 says that an electronic filing is complete when the person filing the paper gets a Notice of Electronic Filing.  Business Court Rule 6.5 says that e-filing is an "adequate and timely substitute for service" under the Rules of Civil Procedure.

It makes no difference in this situation if the party from whom the response is due is unaware of the e-filed document.  The Court held that "all parties have an affirmative duty to check the status of cases they have in front of the Business Court before they are registered to e-file as the Court’s filings are all made via the electronic system." 

Full Opinion 

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The Court of Appeals affirmed yesterday a 12(b)(6) dismissal of a claim under the North Carolina Trade Secrets Protection Act, in Washburn v. Yadkin Valley Bank and Trust Co. 

In Washburn, the Defendant had made a counterclaim charging that the Plaintiffs, former employees, had misappropriated its trade secrets.  The trade secrets the Defendant referenced in its Complaint were its "business methods; clients, their specific requirements and needs; and other confidential information."

The Court held that the Defendant was under an obligation to identify the trade secrets involved with "sufficient particularity to enable [the opposing party] to delineate that which he is accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur." 

The Court characterized Defendant's allegations as "broad and vague," and "general and conclusory."  It affirmed the trial court's dismissal of the claims.

The case was summarized on the North Carolina Appellate Blog.  That's an excellent resource which reports promptly on civil decisions by the North Carolina Supreme Court and Court of Appeals and the Fourth Circuit Court of Appeals.

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Service of process can be made by leaving the Summons and Complaint at the Defendant's residence, even though not in literal compliance with Rule 4, if the Defendant has evaded service.

The Defendant will waive an objection to service (and to jurisdiction) by filing a Notice of Designation to the North Carolina Business Court, because "the filing of a Notice of Designation in an action constitutes a general appearance for the purpose of personal jurisdiction."  To keep such objections alive, the Notice of Designation must contain an objection to personal jurisdiction. 

On a covenant not to compete issue, the Court followed the principle it set out in Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (N.C. Super. Ct. Nov. 1, 2007) regarding the right of an asset purchaser to to enforce a non-compete entered into between the seller and an employee. The buyer has the option to enforce the noncompetition agreement or to enter into a new agreement. As the Court held: "a noncompetition agreement that has been sold as part of an asset sale, as opposed to the sale of a business, gives the buyer the right to enforce the noncompetition agreement as of the date of the sale but not to enforce the noncompetition agreement as if it had been entered into originally by the buyer."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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A Notice of Designation must be actually filed in the county in which the case originated within thirty days of receipt of service of the Complaint in order to be timely, not just served within that time frame.

N.C. Gen. Stat.Sec. 7A-45.4(b) allows a defendant to designate an action as a complex business case "by filing a Notice of Designation in the Superior Court in which the action has been filed and simultaneously serving the notice" on opposing counsel, the Chief Judge of the Business Court, and the Chief Justice within thirty days after receipt of service of the Complaint.

"Filing" means actual filing within thirty days in the Court in the County in which the case was filed.  In counting the thirty days, a defendant does not get to count an additional three days if the Complaint was served by mail. 

Full Opinion

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Motion to Dismiss granted where there were "patent inconsistencies" in the Complaint in Plaintiff's claims of fraudulent inducement regarding an employment agreement. 

The Court held "it is patently inconsistent for [one of the Plaintiffs] Hittle to allege, on the one hand, that Defendant never intended to pay the wages promised, and on the other, that Defendant in fact performed in part and that it failed to complete performance for reasons unrelated to its intent."  The Court held that partial performance of a contract demonstrates a party's intention to fulfill the promise at the time it was made, undermining Hittle's claim on its face.

The fraudulent inducement claim of another Plaintiff (Warren), was allowed to go forward, however.  Warren's claim was that he had been promised substantial severance pay if he was terminated for reasons other than those specified in his written employment agreement.  Although Warren, like Hittle, had begun employment, the Court found that "the fact that Defendant employed Warren for a period of time before terminating him for financial reasons does not negate Warren’s allegation that Defendant never intended (at the time it made the promise) to pay Warren severance upon his discharge."

The Court denied the Motions to Dismiss the Wage and Hour Act claims made by both Warren and Hittle.  According to her allegations, Hittle was entitled to a guaranteed payment of one year of compensation at the time she began employment, and the Court held that she therefore stated a claim for recovery of wages under the Act.  Warren had a claim under the Act because severance pay is included in the definition of wages.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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A party cannot use its own response to an opposing party's Requests for Admission in order to defeat a Motion for Summary Judgment. 

The Court held that "while admissions of a party-opponent are not hearsay, 'a party may not utilize his own admissions at trial.'"  Since evidence that would not be admissible at trial may not be considered on a Motion for Summary Judgment, there was no competent evidence contradicting Defendant's properly supported factual position.  The Court also refused to rely on letters presented by Plaintiff's counsel containing unsworn facts.

As the Court put it, "the bottom line is that neither Plaintiff nor any member of the firm representing Plaintiff have submitted Affidavits refuting the facts set forth" in the Affidavit submitted by Defendant.  On the record before it, the Court granted Defendant's Motion for Summary Judgment.

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A settlement agreement between the plaintiff and a co-defendant was discoverable.  Motion to Compel granted. 

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A counterclaim by a member of a North Carolina LLC against the LLC's lender for aiding and abetting a breach of fiduciary duty was derivative, not direct.

The Court relied on “[t]he well-established 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.”   That principle applies "equally to suits brought by members of a limited liability company."

The claim that the lender's actions had resulted in an unlawful distribution to other members of the LLC was "just another way of saying that the Individual Members wrongfully diverted Company assets."  That was a derivative claim belonging to the Company, not to its members.  The Motion to Dismiss the Counterclaim was therefore granted.

The Court did not resolve a parallel ground for the Motion to Dismiss: whether North Carolina still recognizes a claim for aiding and abetting a breach of fiduciary duty in light of the United States Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).  That question has come before the Business Court a number of times in recent years, but has not been resolved by North Carolina's appellate courts.

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Brief In Support Of Motion To Dismiss

Brief In Opposition To Motion To Dismiss

Supplemental Brief In Support Of Motion To Dismiss

Supplemental Brief In Opposition To Motion To Dismiss

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Pursuant to Rule 30(e) of the North Carolina Rules of Civil Procedure, a deponent can make substantive changes to her deposition transcript during the thirty day review period, so long as the deponent signs "a statement reciting such changes and the reasons given . . . for making them."  The deponent will, however, be subject to cross-examination on the original answers, which may be used for impeachment or any other relevant purpose. 

If a deponent wants an extension of the thirty day period allowed by Rule 30(e) of the Rules to read and sign a deposition, that extension must come from the Court, not from the court reporter.

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Brief In Support Of Motion To Strike

Brief In Opposition To Motion To Strike

Reply Brief In Support Of Motion To Strike

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The plaintiff corporation claimed that the defendant, one of its former directors, had made false statements which interfered with its initial public offering.  The director claimed that he was entitled to defend claims made against him for breach of fiduciary duty based on the business judgment rule.  The Court held that "such conduct, even if well-motivated, does not constitute the type of 'business decision' the business judgment rule is meant to insulate."

In determining choice of law, the Court looked to the place of the corporation's incorporation, per the internal affairs doctrine. 

The Court allowed fiduciary duty claims to proceed against a former employer.  The Court noted that "an employer-employee relationship is not generally a fiduciary relationship," but held that this determination involved a fact-intensive inquiry, and denied a Motion to Dismiss. 

The Court dismissed unfair and deceptive practices claims against the defendants.  It held that all of plaintiff's claimed injuries related to the failed IPO, and that "the IPO, which is clearly a securities transaction, is beyond the scope of Chapter 75."

The Court let stand claims for aiding and abetting breach of fiduciary duty.

Full Opinion

Bowen's Brief in Support of Motion to Dismiss

Atwood's Brief in Support of Motion to Dismiss

Voyager's Brief in Opposition to Motion to Dismiss

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A Plaintiff has thirty days after the filing of its Complaint to file a Notice of Designation to the Business Court.

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The Court denied the entry of a preliminary injunction in a case involving the dissolution of a law firm.  The injunction would have prevented the defendants from distributing to themselves the proceeds from contingent fees cases in which the plaintiffs claimed an interest. 

The Court held that "[t]he Plaintiffs have not made a convincing showing that they either are likely to sustain irreparable loss unless the injunction is issued, or that such relief is necessary for the protection of their rights during the course of litigation.  Plaintiffs' contentions in this regard are implausible.  Their claim for an accounting will not be affected by the issuance or denial of the injunction sought; and their claims for money damages are adequately provided for at law, and are weak grounds for the issuance of an injunction."

Full Opinion

Brief In Support Of Motion For Preliminary Injunction

Brief In Opposition To Motion For Preliminary Injunction

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The Defendant failed to file its Notice of Designation to the Business Court within the thirty days of its receipt of either the Complaint or the Amended Complaint, as required by N.C. Gen. Stat. §7A-45.4.  The Court denied designation of the case as a mandatory complex business case due to the untimely filing, noting that the case could still be designated as a 2.1 case.

See this post for other cases involving challenges to the Court's mandatory jurisdiction.

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The Court threw out a securities fraud case that would otherwise have been within the scope of its mandatory jurisdiction because there were already two cases pending in Wake County making similar claims. One of those cases had already received a Rule 2.1 designation as an exceptional case. The Court found that it would be more efficient if discovery in the cases was coordinated, and that inconsistent rulings would be avoided, and recommended that the case receive a 2.1 designation.

See this post for other cases involving challenges to the Court's mandatory jurisdiction.

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Today, in Nucor Corp. v. Prudential Equity Group, LLC, the Court of Appeals affirmed the 12(b)(6) dismissal of a claim for libel per se against a securities firm. 

The firm had published a report about the plaintiff which stated that antitrust lawsuits against the company were possible, and that the company needed to give up its "monopoly dreams." 

The Court held that in order for words to be libelous per se, they "must be susceptible of but one meaning and of such nature that the court can presume as a matter of law that they tend to disgrace and degrade the party or hold him up to public hatred, contempt or ridicule, or cause him to be shunned and avoided."  The words must be defamatory on their face, "stripped of all insinuations, innuendo, colloquium and explanatory circumstances."

The Court ruled that the publication did not assert any illegal or wrongful conduct on the part of the company.  It further ruled that it could not consider the explanatory circumstances offered by the plaintiff to determine whether the words at issue were libelous.  The Court further found that it needed to consider the document as a whole, and that the "overall import" of the publication was not defamatory of the company.  It therefore affirmed the trial court's dismissal.

The Court also ruled that plaintiff could not base an unfair and deceptive practices claim as to the report on the alleged breach of a confidentiality agreement by an employee of the defendant, because that was a mere breach of contract without any "substantial aggravating circumstances."

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The Court dismissed a defamation claim.  It found that the claims were not plead with sufficient particularity (omitting in some instances to state to whom the statements were made and when they were made).  One allegedly defamatory statement was subject to an absolute privilege, which covers "not only . . . statements made in the course of a pending judicial proceeding but also . . .  communications relevant to proposed judicial proceedings.”

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The Court entered a series of discovery rulings in this case.

In a July 2007 ruling, the Court struck a Motion to Compel because the moving party had not included a certificate of compliance with Business Court Rule 18.6(a).  The Court found an attachment including the correspondence between the parties over discovery matters to be insufficient: "[t]he purpose of the certificate is to have the moving party succinctly set out what was done to resolve the dispute short of judicial intervention—the Court has no interest in, nor should it be burdened with, sifting through 23 pages of correspondence to determine whether the parties have complied with its rules."

In an October 2007 opinion, the Court expressed its frustration with the discovery conduct of the lawyers for the parties: "[r]ather than focusing on the merits of the claims, counsel have opted for personal combat, engaging in chest-thumping and mud-slinging the likes of which would make a professional wrestler blush."  The Court admonished that "counsel are not awarded points for gamesmanship in discovery; rather, the proper focus should be on the orderly disclosure of relevant facts."  The Court stayed all further discovery pending its consideration of a raft of Motions to Compel filed by the parties, and reminded the parties of the possibility of sanctions for their conduct.

In a January 2008 opinion,the Court found that Defendant's counsel had "abused the discovery process" by surreptitiously copying privileged documents from electronically stored information (ESI) produced by the Plaintiff.  The Court ordered the data returned to Plaintiff and ruled that the Defendant could not use any of the information.

In a February 2008 ruling, the Court ruled that the Defendant could not make use of any information contained in the returned ESI, even if that information was obtained legitimately, from other sources, during discovery.

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A party must comply with Business Court Rule 15.8 (word limitation for briefs) and 18.6 (requiring certification prior as to resolution efforts before filing a motion to compel) even when pursuing discovery from a non-party.

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Although Plaintiff's claims were timely against the insurance agent they claimed had defrauded them, those claims were not timely against the agent's employer.  The agent had terminated his relationship with his employer several years before the lawsuit was filed.  Although the statute did not run against the agent, because the alleged fraud continued, the Court held that "the statute of limitations as to claims against a principal is tolled only to the extent its agent continues to engage in fraudulent conduct during the course of the agency relationship. Should the agency relationship terminate, however, there no longer exists a basis to impute the deceptive acts of the agent to the principal for purposes of tolling the statute of limitations, and the applicable limitations period therefore begins to run."

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A manager of an limited liability company may not, as a condition of the payment of consideration from a merger of the LLC, require that the member receiving the consideration execute a general release exonerating the manager and insiders from any misconduct.  Holding the consideration "hostage" in exchange for such a release might amount to willful and wanton conduct warranting punitive damages.

An LLC member pursuing a derivative claim must be a member of the LLC at the time the suit is filed.  Where the LLC no longer existed at the time the lawsuit was filed, Plaintiffs lacked standing to bring their claim.  Plaintiff's claim for mismanagement was a "classic derivative claim," which was also barred by their lack of standing. 

The Court also dismissed Plaintiffs' unfair and deceptive practices claim, because "misconduct arising from a merger of business entities is not the type of 'regular, day-to-day' business activity that is the principal focus of North Carolina's Unfair and Deceptive Trade Practices Act."

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Plaintiff sought Defendant's psychiatric records in discovery to determine whether she had ever been treated for bipolar disorder.  The Court determined that the Defendant had not met her burden of establishing that the information sought was subject to the Psychologist-Patient privilege, and ordered the records to be produced. 

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Paintiffs, who had suffered signficant losses on variable annuity policies sold to them by the defendant agents and insurance companies, asserted claims on multiple theories: breach of fiduciary duty, constructive fraud, unfair and deceptive practices, negligence, negligent misrepresentation, aiding and abetting breach of fiduciary duty, and unjust enrichment. 

The Court dismissed some claims and ordered the Plaintiffs to replead others with more particularity. 

It held that Plaintiffs could proceed on their claims against some of the agents for breach of fiduciary duty, given the Plaintiffs alleged lack of financial sophistication and their allegations of reliance upon the expertise of the agents.  There was no claim for such breach against the insurance companies, since they had not obtained any benefit from the sale of the policies other than the commissions received. 

The causes of action for breach of fiduciary duty arose when the Plaintiffs knew or should have known of the facts giving rise to their claims.  The Court found the facts insufficient to determine whether the statute of limitations had run, and ordered Plaintiffs to replead their claims with more particularity.  The Court made a similar order with respect to the constructive fraud claim, and ordered Plaintiffs to provide more detail in their pleading as to when they were charged the commissions and surrender charges that formed the basis of their claims.  Those charges would have put Plaintiffs on notice of their claims and begun the running of the statute of limitations. 

The Court also demanded more particularity on the negligent misrepresentation claim.  It disagreed with Plaintiffs contention that their only burden was to allege the misrepresentations made, and that they had been made negligently.  Instead, Plaintiffs had to alleged "(1) there was a duty owed by defendants to plaintiffs, (2) the defendants did not use reasonable care in supplying information leading to (3) misrepresentations made to the plaintiffs which (4) the plaintiffs justifiably relied on (5) and that reliance caused pecuniary injury to the plaintiffs."

The Court dismissed the unfair and deceptive practices claim.  It found that variable annuity policies are subject to pervasive and intricate regulation, and that such policies involve securities transactions not within the scope of the statute.  It made no difference that the Plaintiffs did not understand that they were investing in securities.

The punitive damages claims against the insurance companies were also dismissed, because there is no vicarious liability for punitive damages. 

The unjust enrichment claims were also dismissed because there was an express contract between the parties. 

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The Court denied Defendant's motion to dismiss Plaintiff's unfair and deceptive practices claim.  It rejected the argument that the matter before the Court was simply a private dispute which did not implicate the consuming public or the general marketplace, and was therefore not "in commerce."

The Court held that the statute reaches "derivative claims arising out of fraudulent activities relating to the manner in which a business conducts its “regular, day-to-day activities, or affairs . . . .” It further held that plaintiff, in its derivative action, had alleged fraud and various breaches of the duties of good faith, loyalty, and due care, stating "North Carolina courts have consistently held that allegations of fraud or a breach of fiduciary duty will support a separate claim for unfair or deceptive trade practices."

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Defendants moved to dismiss on the ground that their signatures did not appear on the agreement which was the subject of the suit.  The Court denied the motion based on plaintiff's claim that the defendants were co-adventurers.  Since adventurers in a joint venture are treated as partners in a partnership, the signature of one alleged co-adventurer was sufficient to bind all. 

The Court also found a question of fact on whether the contract had been executed under seal so as to make applicable the ten year statute of limitations of N.C. Gen. Stat. §1-47(2).

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The issue here was the timeliness of Plaintiff's claim against the estate of one of the defendants.  The Plaintiff had failed to serve that defendant's personal representative with notice of his claim within the 90 day period prescribed in N.C. Gen. Stat. §28A-19-3(a).

The Plaintiff argued that it was excused from the notice requirement because the personal representative had a duty to notify it of the 90-day claim period.  In order to carry that burden, however, the Plaintiff needed to show that the personal representative had actual knowledge of the claim.  The Court that there was no such evidence, based on the affidavit of the personal representative denying such knowledge. The Court held that the personal representative had "no affirmative duty to shift through all the work files accumulated during [the decedent's} career to determine whether any one of them could possibly be the basis of an unsatisfied claim that could be asserted against the estate."

The Court also rejected Plaintiff's argument that its breach of contract claim was subject to the ten year statute of limitations of N.C. Gen. Stat. §1-47(2) because the contract had been signed under seal.  It found, as a matter of law, that the contract had not been signed under seal.

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The Court found a shareholders agreement between the parties to be poorly drafted and ambiguous, determined that it would need to consider extrinsic evidence in order the properly interpret the agreement, and denied the parties' cross-motions for summary judgment. 

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Claims against the lender which had financed an acquisition gone awry were barred by the exculpatory provisions of a subordination agreement.  Georgia law applied, and Georgia law permits one contracting party to waive all recourse in the event of breach by the other.  The exculpatory provision was valid and an absolute defense to plaintiffs' claims, and the Court granted the Defendant's Motion to Dismiss.

Plaintiffs did not have a claims for the breach of the duty of good faith and fair dealing, because the assertion of valid rights under an enforceable agreement does not give rise to such a claim just because the assertion of those rights adversely impacts the parties against whom the rights are asserted. 

The tortious interference with contract claim made the the Plaintiffs was also dismissed.  Although Plaintiffs had plead all of the elements of that claim, the face of the complaint demonstrated that there was a valid business justification for the Defendant's actions.  A lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff make something more than conclusory allegations about justification. 

The Court also rejected a facilitation of fraud claim, holding "[t]o the extent Plaintiffs’ theory is that a commercial lender would agree to defraud a seller of a business by making a loan to the purchaser which the lender agreed in advance would be put in default and that the purchasers of the business would pledge their own assets and provide personal guarantees of the loan knowing it was going into default, such a theory is simply not sustainable."

Plaintiff were also not entitled to proceed on their claim for marshalling of assets, because such a claim is inapplicable where a superior creditor has a right to certain assets.

There was no fiduciary duty under the loan agreement.  The lender had not stepped into the shoes of the majority shareholders by exercising its rights under the loan agreement. 

The Court granted leave to the Plaintiffs, however to make derivative claims against the lender.  It permitted Plaintiffs to assert these claims because a receiver had been appointed for the corporation and he had stated that he would not pursue claims for economic reasons.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court found that an out-of-state lawyer who had assisted a pro se litigant in preparing her Answer had engaged in the unauthorized practice of law.  N.C. Gen. Stat. Sec. 84-2.1, which defines the "practice of law," includes "preparing or aiding in the preparation of any petitions or orders in any probate or court proceeding" and "assisting in any legal work."  The unauthorized practice of law is a Class 1 Misdemeanor.

The Court declined to strike the Answer, since doing so would "unfairly penalize the [defendant] for the conduct of [her] attorney."  But the Court ruled that the defendant could not file further papers in the case unless she agree to proceed on a true pro se basis or she retained a licensed attorney to represent her. 

On the merits of the case, the Court deferred ruling on the defendant's motion to dismiss, finding that the Affidavit in support of her motion was not in proper form.  The Court held that North Carolina law requires "strict compliance with the requirement that an affidavit be properly sworn."  Compliance with the federal statute permitting a declaration to be signed "under penalty of perjury" (under 29 U.S.C. §1746) was not sufficient. 

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A pro se defendant could not file an Answer on behalf of a corporation, because "a corporation must be represented by counsel and cannot appear pro se."  The Court found this to be the unauthorized practice of law and struck the Answer filed by the defendant.

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Wachovia Bank, N.A. v. Harbinger Capital Partners Master Fund I, Ltd., 2008 NCBC 6 (N.C. Super. Ct. March 13, 2008) (Diaz)

Wachovia was first to file its claims in North Carolina Superior Court, but the Business Court nevertheless stayed the action in favor of a later filed New York action.

The claims in both cases involved Wachovia's arranging of $285 million in credit for Le Nature, which collapsed in a massive accounting fraud. After the fraud was revealed, the Defendants purchased some of Le Nature's debt on the secondary market with the express intention of suing Wachovia for alleged complicity in the fraud.

Wachovia, in an effort to preempt the expected lawsuit by the Defendants in New York, filed a declaratory judgment in North Carolina and obtained an injunction prohibiting the Defendants from asserting any "personal tort claims." Wachovia asserted that Defendants had engaged in "illegal trafficking in litigation claims."

Undeterred, Defendants went ahead and filed a lawsuit against Wachovia Capital Markets in the Southern District of New York alleging a RICO violation. Defendants then moved to stay the North Carolina action pursuant to N.C.G.S. Sec. 1-75.12 in favor of their own later filed action.  The Court granted the motion after considering the ten factors enumerated in Lawyers Mut. Liab. Ins. Co. v. Nexsen Pruett Jacobs & Pollard, 435 S.E.2d 571, 573 (N.C. App. 1993).

One reason the Court held that Wachovia was not entitled to the choice of its home forum was that it knew before filing its own suit that Defendants intended to sue, and "if the plaintiff in the declaratory suit was on notice at the time of filing that the defendant was planning to file suit, a court should look beyond the filing dates to determine whether the declaratory suit is merely a strategic maneuver to achieve a preferable forum.”

The Court also considered, and rejected, Wachovia's argument that North Carolina's public policy demanded that New York law be rejected. It held, in reliance on North Carolina Supreme Court precedent, that "North Carolina's public policy exception to the comity generally afforded the laws of our sister states is a narrow one."

In the end, the Court determined that there was a "practical reality that the New York Action is better able to arrive at a more comprehensive resolution of the litigation, given the broader scope of claims and parties before it."  Wachovia filed a Notice of Appeal the day after the Court entered its Order.

In the conclusion to its opinion, the Court referenced Whac-A-Mole, which it described as "an arcade game involving mechanical moles that pop up from their holes at random." Judge Diaz "confessed to being a 'Whac-a-Mole' aficionado."  If you don't know the game, you might want to watch the video below: 

 

 

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The Court granted a Motion to Stay in this case, ruling that the plaintiff was required to litigate its claims in New York, even though its North Carolina action had been filed before the New York action.   N.C.G.S. Sec. 1-75.12 in favor of their own later filed action.  The Court granted the Motion after considering the ten factors enumerated in Lawyers Mut. Liab. Ins. Co. v. Nexsen Pruett Jacobs & Pollard, 435 S.E.2d 571, 573 (N.C. App. 1993).

One reason the Court held that the plaintiff was not entitled to the choice of its home forum was that it knew before filing its own suit that Defendants intended to sue, and "if the plaintiff in the declaratory suit was on notice at the time of filing that the defendant was planning to file suit, a court should look beyond the filing dates to determine whether the declaratory suit is merely a strategic maneuver to achieve a preferable forum.”

The Court also considered, and rejected, plaintiff's argument that North Carolina's public policy demanded that New York law be rejected. It held, in reliance on North Carolina Supreme Court precedent, that "North Carolina's public policy exception to the comity generally afforded the laws of our sister states is a narrow one."

In the end, the Court determined that there was a "practical reality that the New York Action is better able to arrive at a more comprehensive resolution of the litigation, given the broader scope of claims and parties before it."

The Court did not resolve whether Defendant's filing its New York lawsuit was a violation of a preliminary injunction previously entered in the case limiting filing any "personal tort claims" in any other jurisdiction, and whether the Court had the authority to enjoin federal litigation.  Those matters are addressed in the briefs of the parties on the subject of contempt.

Full Opinion

Defendant's Brief in Support of Motion to Stay        Plaintiff's Brf. in Support of Motion for Contempt

Plaintiff's Brief Opposing Motion to Stay                  Defendant's Brf. Opposing Motion for Contempt

Defendant's Reply Brief on Motion to Stay               Plaintiff's Reply Brf. in Support of Mot. for Contempt

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Harco Nat'l Ins. Co. v. Grant Thornton LLP, 2008 NCBC 5 (N.C. Super. Ct. March 4, 2008)(Tennille)

Plaintiff sent discovery regarding the Defendant accounting firm's insurance coverage.  In addition to obtaining information on the face amount of the policy, plaintiff also sought information on the other claims made under the policy and the amount of coverage left under the policy.  The Court rejected the argument that plaintiff was entitled to discovery on the other claims, because it would "lead to unnecessary argument over the policy limits."

The Court ruled, however, that plaintiff was entitled to the information regarding the coverage remaining, because "when it comes time to negotiate, the amount of liability coverage available to a defendant should be disclosed to the plaintiff." A plaintiff is entitled to the "true facts" about the amount of coverage, which means the actual amount remaining to be paid under the policy.

The Court also observed that a refusal to provide accurate information about liability insurance coverage at the time of mediation would not be mediating in good faith.

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Plaintiff sought information via a discovery motion not only as to the face amount of defendant's insurance policies, but also the amount of coverage remaining.  The Court ruled that plaintiff was entitled to this information, because "when it comes time to negotiate, the amount of liability coverage available to a defendant should be disclosed to the plaintiff."  A plaintiff is entitled to the "true facts" about the amount of coverage, which means the actual amount remaining to be paid under the policy.  A refusal to provide accurate information about liability insurance coverage at the time of mediation would not be mediating in good faith. 

Full Opinion

(The briefs on this motion were filed under seal and are not available)

 

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The Court approved a voluntary dismissal of a class action, pre-certification, without notice to class members. There was a separate class action which had been settled in California, which bound the class members. The Court determined that "[s]ending a class notice regarding dismissal of this action would be costly, time-consuming, and confusing." Court approval of the dismissal of a class action is required, even if the class has not been certified.

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The Court granted a Motion to Dismiss a claim for slander, ruling that plaintiff had failed to plead the allegedly defamatory statement with sufficient particularity. It held that, although plaintiff was not required to plead the words verbatim, it was required to plead them either substantially as they were said or at least with sufficient particularity to determine whether the statement was defamatory. The Court held that "it would be unduly harsh to require defendants to venture a response to weighty allegations of slander couched only in the most general of terms."

The Court let stand, however, plaintiff's claim for tortious interference with contract against the defendant, who was dissatisfied with the plaintiff homebuilder's work for him. Plaintiff had expressed his displeasure to others for whom the plaintiff was working, which resulted in them terminating their contracts with the plaintiff.

In reaching this conclusion, the Court considered the factors set out in the Restatement (Second) of Torts §767, which include "(a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference, and (g) the relations between the parties." The Court held that this tort does not require the element of force, or threat, or intimidation, and also that it does not require independently tortious conduct.

Full Opinion

 

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The Court ordered highly confidential information, consisting of computer source code, to be produced to an independent expert appointed by the Court.

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This is a detailed Order from Judge Tennille approving settlement of a class action.

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This case involved a troubled company, whose board of directors had hired turnaround consultants to assist with management. When the composition of the board of directors changed, the new board sued the consultants, and others, for fraud and unjust enrichment, alleging that the consultants had withheld information from the board and that they had been unjustly enriched (i.e. overpaid). The Court denied a motion to dismiss on the fraud claim, although it said that plaintiffs' claim was tenuous.

The Court granted the motion to dismiss as to the unjust enrichment claim, finding that plaintiffs had failed to plead with specificity why the amounts paid were unjust. There were several other claims.

The Court expressed serious doubt as to the viability of a claim for aiding and abetting fiduciary duty under North Carolina law. It dismissed that claim on a different ground, however, finding that the consultant stood in a direct fiduciary relationship to the company, and that it would be redundant and confusing to allow both a direct claim for breach of fiduciary duty as well as an aiding and abetting claim.

The Court let stand a claim for punitive damages, after determining that there is no requirement that the party seeking damages specifically allege the circumstances underlying the aggravating factors required by N.C.G.S. §1D-15(a).

The Court refused to exclude an expert witness identified by the defendants, ruling based on North Carolina Supreme Court precedent that trial courts "should be hesitant when making outcome-determinative rulings on expert testimony" because so doing may "unnecessarily encroach upon the constitutionally-mandated function of the jury to decide issues of fact and to assess the weight of the evidence."

The Court then turned to issues of attorney-client privilege. A law firm for the corporation had retained another law firm to advise it with regard to an asset sale. The corporation's law firm then discussed the advice it had received with the corporation's board of directors and the turnaround consultant. The consultant sought to obtain these materials by subpoena, but the law firm had objected. The Court held that there was no privilege, because "a communication intended to be disclosed to a third party is not confidential," and it ordered production. The result was different with regard to the communications between corporate counsel and a third law firm, which had been retained to advise on other issues. These communications had not been transmitted to third parties, and the Court held there had been no waiver of the privilege.

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The Court dismissed some of plaintiff's claims because they had been the subject of a dismissal, with prejudice, in a prior action. The Court held that a dismissal with prejudice is a final judgment for purposes of res judicata. Other claims were being simultaneously litigated in another action between the parties. It was difficult to determine, because of the procedural posture of the cases, in which action the claims had been first filed. The Court had jurisdiction over both actions, and determined that it would manage them "so as to assure their efficient resolution."

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The attorneys for the parties missed the mediation deadline set by the Court, twice. They ultimately did mediate, and did settle some of the claims in the case. The Court sanctioned them, however, finding that their explanations for missing the deadlines were inadequate and without good cause. The Court noted that North Carolina's Rules Implementing Statewide Mediated Settlement Conferences in Superior Court Actions do not provide for sanctions, but held that it had the inherent power to impose sanctions for wilful failure to comply with the rules of court. The sanction was minimal, $100 per lawyer.

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The Court granted defendants' motion to dismiss for lack of personal jurisdiction based on their lack of minimum contacts with the State of North Carolina. The Court found that defendants had not made a general appearance in the case, and thereby waived their right to contest jurisdiction by participating in discovery, by asking the Court to set a peremptory trial date, and by asking to be excused from the mediation conference.

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The Court dismissed non-contract claims in a dispute between physicians who were parties to Professional Services Agreements. The Court held, based on established North Carolina law, that "a tort action does not lie against a party to a contract who simply fails to properly perform the contract, even if that failure to properly perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract . . . which defines the obligations and remedies of the parties in such a situation."

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The Court found no bias or prejudice warranting that it enter an order recusing another judge. Bias requires a showing of personal enmity by the judge toward the party seeking to disqualify. Errors of law will not support recusal, as those are a matter for appeal. Nor did the judge's threats to hold counsel in contempt warrant recusal. The fact that the judge, who was partially retired, also conducted a mediation practice did not warrant recusal either.

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This opinion contains a thorough discussion of the economic loss doctrine. Plaintiff had purchased "sight chambers," used for monitoring intravenous feeds, made with raw material supplied by defendant. Defendant had used low grade materials to fulfill its end of the contract, which led to plaintiff having to recall millions of sight chambers.

As the Court saw it, plaintiff was clearly seeking to recover for economic loss, which were the financial losses it suffered when it was forced to recall a product that did not perform as expected because of a defect in a component part. The Court was sensitive to the notion that a plaintiff should not manufacture a tort claim out of a simple breach of contract claim and held that "[b]oiled to its essence, [defendant's] claim is that [plaintiff] should have anticipated and planned for the possibility of fraud in this transaction and that, having failed to do so, it may look only to its contract remedies under the UCC. The law, however, should not foster commercial negotiations that 'begin with the assumption that the other party is lying.'"

The Court recited the principles it later reiterated in the Club Car, Inc. v. The Dow Chemical Company case, and held that plaintiff was entitled to proceed on a fraud claim because plaintiff's claim "smacked of tort." The Court also distinguished Judge Tennille's opinion in Coker v. DaimlerChrysler Corp.

It further held that a claim for negligent misrepresentation is not barred by the economic loss doctrine. Plaintiff's claim for unfair and deceptive practices was allowed to proceed as well. The Court did, however, dismiss plaintiff's negligence claim, holding that "North Carolina law prohibits the bringing of a negligence action against the manufacturer or seller of a product for economic losses sustained as a result of the product's failure to perform as expected."

Thanks to Brad Kutrow at Helms Mullis & Wicker for sending me this opinion.

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Plaintiff sought to enjoin a merger. He alleged that the defendants, directors of the company to be acquired, had breached their fiduciary duties by failing to disclose pertinent information to the shareholders, failing to maximize shareholder value, and agreeing to a coercive and unreasonable termination fee.

The Court noted that it was uncertain whether plaintiff was entitled to make direct claims, as directors of a corporation owe their fiduciary duties to the company, as opposed to the shareholders, and a claim for breach of those duties belong to the corporation. North Carolina does not impose Revlon duties on directors.

It held that the directors here were entitled to rely on their advice of their counsel and their investment advisors, as provided for in N.C.G.S. §55-8-30, and denied the Motion.

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Plaintiff sought to enjoin a foreclosure sale to be conducted for the benefit of the secured lender. Plaintiff was a general contractor who had done substantial work on the property which was the subject of the sale, for which it was owed more than $ 8 million. Efforts of the owner of the property to find a buyer had been unsuccessful.

The Court refused to enjoin the sale, holding that there was a serious question whether a lienholder had standing to enjoin a sale, and that the stated basis that the sale might not bring enough proceeds to satisfy plaintiff's liens were not a basis for an injunction.

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The Court approved an award of attorneys' fees of $4 million to class counsel. It found the fees to be reasonable under the percentage of fund approach, the lodestar-multiplier approach, and the fee factors considered in North Carolina cases based on Rule 1.5 of the North Carolina Rules of Professional Conduct.

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The Court found sufficient grounds for the appointment of a receiver, given disputes between the developer of timeshare properties and the homeowners association.

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Defendant had sufficiently pled an agency relationship to survive a motion to dismiss.

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The Court found that an arbitration agreement involved commerce so as to implicate the Federal Arbitration Act, and found the arbitration provision to be enforceable. The principal issue, however, was whether the Court had jurisdiction to award provisional relief. In this case, that meant the appointment of a receiver.

The Court found that it had that power, but denied the remedy. It held that "[t]he appointment of a receiver is a harsh and cumbersome remedy, and is arguably outside the permissible interpretation of the Arbitration provision under the FAA." The Court determined, however, that it would grant a limited preliminary injunction.

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The Court denied plaintiff's Motion to Compel because it failure to file a brief in support of its Motion, as required by Rule 15.11 of the Business Court Rules.

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The Court denied an objection to designation of a case as a complex business case, apparently made on the ground that the law of North Carolina might not apply. The Court held that "[]t is sufficient for purposes of removal to the Business Court that there are issues concerning which law applies which will have industry-wide application. The potential thus exists for the establishment of case law which may prove useful to consumers of and businesses selling financial products."

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Plaintiffs were not entitled to pursue a derivative action, because they were not shareholders of the company at the time of the acts complained of. One of the defendants was a trust, to which a shareholder of the company had transferred shares. The Court held that the trust, as transferee, could not maintain the action because it had not become a shareholder through operation of law. A voluntary transfer is not a transfer through operation of law. Also, the trust had never made a demand, which barred its claim.

In a related case, the Court held that a diminution in value of a shareholder's shares is an injury to stockholders generally, and therefore a derivative claim. It further held that a derivative claim could not be maintained against directors who had not been mentioned in the shareholder's demand letter.

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Plaintiff's counsel violated the Rules of Professional Responsibility by contacting a former employee of the defendant, who had participated substantially in the legal representation of the defendant before his termination.  The Court struck the affidavit from the witness proferred by the plaintiff, and ruled that he could not be presented by the plaintiff as a witness going forward.  The Court denied, however, the motion to disqualify plaintiff's counsel.

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This Motion to Intervene before the Court in this class action case against Microsoft was filed not by a potential party, but by a group of lawyers seeking to share in any fee award to plaintiff's counsel. The Court refused to allow the lawyers to intervene, because lawyers who have never been counsel of record cannot have an interest in a settlement. Allowing intervention, which would have led to a fee dispute, would have delayed implementation of the settlement.

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The Court denied the Motion to Intervene by a shareholder of the defendant, a Delaware corporation, by which the proposed intervenor sought to compel an inspection of books and records and to compel an annual meeting. The Court held that "appropriate and efficient remedies" were available under Delaware law.

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In what County should a lawsuit seeking the final distribution of the assets of a limited liability company which has already been dissolved be filed? The answer is in the county where the LLC's principal office is or was located. The Court therefore transferred venue in this case from Mecklenburg County to Forsyth County, finding that the change of venue was mandatory pursuant to N.C.G.S. §57C-6-02.1, which deals with "a proceeding to dissolve a limited liability company."

The Court held, in the alternative, that the change of venue was appropriate for the convenience of the witnesses and the ends of justice.

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This is an unpublished order approving settlement of a class action against Microsoft Corporation.

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There is no limitation on the Business Court's jurisdiction when it comes to cases involving the Internet and e-commerce. "The legislature specifically included cases relating to those subjects without any limitation on the nature of the legal issues involved. . . .It did so in order to provide a court with expertise in these areas and to see that the law was developed consistently. The Internet and e-commerce generally involve new, novel, and complex technologies. Those technologies impact business in innumerable ways."

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The Court declined to award attorneys' fees under the Unfair and Deceptive Practices Statute. It found that there was no unwarranted refusal to fully resolve the matter, the case involved unique issues of law, and the defendant had valid reasons to refuse to settle this matter and to litigate it to conclusion.

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The individual defendants were personally liable for the judgment obtained by plaintiff under the North Carolina Wage and Hour Act. The Court refused to award liquidated damages, however, finding that the defendant had acted in good faith and had a reasonable basis for believing that their refusal to pay bonuses was not in violation of the Act.

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The Court granted a preliminary injunction on a covenant not to compete even though defendant denied that he had signed the agreement and presented a handwriting expert who testified that his signature had been forged. The Court found that New York law applied to the covenant, that New York law permitted blue pencilling, and that it therefore could modify the scope of the restriction.

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Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

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Claims of limited partners against general partner were derivative, not direct.  Limited partners cannot bring an individual action against a general partner in the absence of an injury to the limited partner that is "separate and distinct" to him or that arose from a breach of a "special duty" owed to the limited partner by the general partner.

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The Court discussed the consideration element of a post-employment covenant not to compete, nothing that an increase in compensation or a job promotion can be sufficient consideration.

The Court held the non-compete at issue invalid for other reasons, however, involving its temporal and geographic scope. First, the Court held that the covenant prevented the defendant from having even an indirect ownership in a competing company. It therefore did not protect a legitimate business interest of the former employer.

The Court futher found the time period of the restriction to be unreasonable, as the wording of the restriction required it to "look back" to a period of time when the employee began serving the customers as to which the restriction was sought.

The restriction also attempted, invalidly, to prevent the employee from dealing with "prospective customers," which the Court found to be "an undefined, and, therefore, unduly vague group."

Given that the covenant was customer based, as opposed to geographically based, the Court found the covenant to be invalid.

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The Court granted a Motion to Strike, finding that statements made in the Complaint had been made in the course of settlement negotiations, and therefore inadmissible pursuant to Rule 408 of the North Carolina Rules of Evidence. The Court rejected the argument that the statements concerned settlement of a different claim, not at issue in the lawsuit.

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There were parallel actions challenging a merger, one in Delaware and one, filed first, in North Carolina. Defendant filed a motion to stay the North Carolina action. The Court identified twelve factors it would consider in such situations, including whether the issues should be settled in the corporation's state of incorporation, the convenience of parties and witnesses, and the significance, if any, of the first to file. The Court stayed the North Carolina action pending the Delaware Court's consideration of a proposed settlement.

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The issue was whether a letter formed an enforceable contract. After a thorough discussion of the elements of a valid contract, the Court found that the letter lacked mutual assent as to material elements necessary to create an enforceable contract, including the price to be paid, identification of the parties, and the subject matter of the contract. The letter merely expressed the intent and desires of the parties, rather than their agreement.

Plaintiff therefore could not state a claim for tortious interference with contract.

Nor could plaintiff proceed on its promissory estoppel claim, as North Carolina recognizes that doctrine only in limited, defensive situations.

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Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court found that it lacked personal jurisdiction over out-of-state doctors and dentists who had allegedly sent internet advertising to plaintiff, a North Carolina resident.  The Court rejected plaintiff's argument that there was jurisdiction under N.C.G.S. §1-75.4(4)(a), which allows for the assertion of jurisdiction when “solicitation or services activities were carried on within this State or by or on behalf of the defendant.”

The Court stated that “it makes absolutely no sense that Moving Defendants, all of whom operate law or dental practices in states far removed from North Carolina, would have any interest in soliciting [plaintiff], or any other North Carolina resident.” The defendants, via affidavits, in fact denied such interest.

The Court relied on the North Carolina Court of Appeals decision in Havey v. Valentine, 172 N.C. App. 812, 616 S.E.2d 642 (2005), in which the appellate court held that “a person who simply places information on the Internet does not subject himself to jurisdiction in each State into which the electronic signal is transmitted and received.”

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The Court applied the literal definition of "first to file" in ruling on a Motion to Stay.  One party had e-filed in federal court several hours before the other party had hand filed a similar action in state court.  The Court held that the party which had e-filed had priority, and stayed the case before it because it was the second to be filed.  The Court rejected cases holding that cases filed on the same day should be deemed to have been filed simultaneously.

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Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court found that plaintiff was an inadequate representative to lead a derivative action.  A derivative action plaintiff has fiduciary obligations to the company on whose behalf he brings a suit.  This plaintiff had no experience in litigation, no involvement in the suit, and only a small stake in the company.  On the point of plaintiff's minimal stock ownership, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff's lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."

The plaintiff was sanctioned by the Court, as were his lawyers, for violating Rule 1.4 of the Rules of Professional Conduct by failing to properly inform their client. The Court also found that the firm had failed in its "duty to know its client" and to "have confidence in the client's knowledge and ability to fulfill his or her fiduciary duties." Instead, the firm had "borrowed" the plaintiff's name, "treated the lawsuit as its own," and made all litigation decisions without input from their supposed client.  The lawyers had also failed to obtain pro hac admission from the Business Court before arguing the motion for sanctions.

The Court also noted the obligations of local counsel in representing a derivative action plaintiff.  It held that "the Court does not believe that it is the primary duty of local counsel to know and communicate with a client who has an established relationship with out-of-state counsel to the same extent as the primary counsel. The local lawyer's role is more limited, and local counsel should be able to rely on primary out-of-state counsel to communicate with the client. Where local counsel signs pleadings and briefs, they are representing to the Court that the positions taken therein have merit and that Rule 11 has been followed. Local counsel would be well advised to consider as a practical matter some of the things a court might consider in reviewing the pleadings. Is there a real plaintiff capable of fulfilling his or her fiduciary duties? Is the complaint being filed in a race to the courthouse? Are the allegations based on known facts or media stories? Has there been any effort to review the books and records of the company to support demand futility claims? Are the claims meritorious, and are there allegations that would support a finding that red flags existed to warrant board action in a derivative case? Is there clear precedent supporting or contrary to the positions taken?"

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Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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Defendant, a terminated employee, owned one third of the outstanding stock of Classic Coffee Concepts. The issue was the price to be paid for the stock, which the corporation was obligated to repurchase under a Stockholders Agreement. The Agreement said that the price would be determined by looking to the fair market value of the stock as determined by an independent appraisal of the Employee Stock Ownership Plan. But no ESOP had ever been established.

A variety of conflicting appraisals were presented to the Court at trial.  Defendant would have been entitled to a multi-million recovery under two of them. The first, prepared pre-litigation for the accounting purpose of conducting a goodwill impairment, set the company's "fair value" at $12,500,000. A "fair value" appraisal ignores discounts in value that are typical for closely held corporations, like those for lack of marketability and lack of control. Defendant's shares would have been worth $4 million if this appraisal applied. A second appraisal factored in the discounts applicable to closely held corporations, and concluded that the corporation had a value of $8,390,000. If this appraisal had controlled, defendant's shares would have been worth more than $2.7 million.

For purposes of the litigation, the company obtained a hypothetical appraisal which valued the company as if the ESOP required by the Agreement was in place. The value placed on defendant’s shares under this approach was markedly lower, only $120,000. Yet another appraisal assuming the existence of the ESOP valued defendant's shares at $192,000, and the last of the many appraisals before the Court valued them at zero.

After analyzing this thicket of conflicting appraisals, the Court held that it would apply the first hypothetical ESOP appraisal, because that was "the only evidence of value that attempts to honor the parties' agreement." The Court ruled that the establishment of the ESOP was not a condition precedent excusing performance by both parties, because conditions precedent are not favored in the law and also because neither party had argued the point at trial.

The Court also found that the company had materially breached the Stockholders Agreement by failing to redeem defendant's shares within sixty days of the date of the termination of his employment, and that the pledging of defendant's stock as collateral did not excuse it from having to do so. In a small victory for the defendant, the Court held that the company could not invoke its right to pay for defendant's stock over a sixty month period, but that it was required to make an immediate, lump sum payment.

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Plaintiff's Trial Brief

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The principal issue here was insurance coverage for Bank of America's settlement payments in connection with litigation against it relating to Worldcom. The Court rejected the insurer's argument the Bank had not suffered a "loss" within the meaning of the policies because the public policy of North Carolina would not permit insurance coverage for claims made under Section 11 and 12 of the Securities Act of 1933.

The Court also rejected the argument that the "personal profit" exclusion applied. Similarly rejected was the insurer's argument that the Bank's claim was barred by its warranty statement that it was unaware of any facts that might give rise to a future claim. The Court held that a subjective test would apply to the statement based on the knowledge of the signer, not an objective test of what the Bank should have guessed what might happen under the circumstances.

The insurer also argued that the settlement paid by the Bank of $460 million was unreasonable. The Court dismissed this argument as well, noting that the Bank faced an exposure of more than $17 billion, that the Bank had paid an amount over and above its coverage, and that the insurer had presented no facts to support its argument of unreasonableness.

The Court denied the Bank's motion for summary judgment as to the insurer's claims for fraud, unfair trade practices, and rescission, nothing that there were issues of fact whether the bank's broker had misled the insurer.

The Court granted the insurer's motion for summary judgment on the Bank's bad faith claim, after a thorough discussion of the elements of a bad faith claim and their application to the complex situation before it.

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Four North Carolina counties sued hotels.com, alleging that the online aggregator purchased blocks of hotel rooms from hotel owners and only paid occupancy tax based on the price paid, even though they sold those rooms to lodgers for more than they had paid and even though the lodgers paid occupancy tax based upon the higher price. (The Court referenced a series of cases filed across the country on the same issue).

The plaintiff counties had various ordinances and various administrative procedures regarding the enforcement of those ordinanances, and the Court observed that the case raised "thorny issues of statutory interpretation." It denied the motion to dismiss as to the principal claims because the defendant was collecting the tax and failing to remit it, and also failing to file the returns required by law.

The Court granted the motion as to an unfair and deceptive practices claim, however, holding that the act does not apply when the alleged wrong is already the subject of extensive governmental regulation and oversight, as there is for a failure to remit taxes. Otherwise, the Court observed, every tax dispute could become an unfair and deceptive practices claim, entitling the taxing authority to treble damages. The Court also noted that there was no commercial activity involved which implicated the deceptive practices statute.

The Court also dismissed the claims of one of the plaintiff counties, because it had failed to exhaust its own administrative remedies before filing suit. Having chosen to create such procedures, the county was not entitled to arbitrarily decide to ignore them.

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Defendant had entered into a covenant not to compete with his employer, BBF. The assets of BBF, including its contract rights, were acquired by GDX. GDX then terminated defendant's employment per the agreement, and hired him directly. There was no new non-compete agreement entered into directly between GDX and defendant. Years later, GDX filed for bankruptcy, and its assets were purchased by the plaintiff.

The Court held that a covenant not to compete can be assigned as the part of the sale of a business. Therefore, GDX would have been entitled to enforce the covenant against defendant if defendant had left GDX at the time of the sale and begun to compete. The Court further held, however, that GDX was obligated to negotiate a new non-compete if it wished to continue the covenant in place. (The Court held that the answer would have been different if GDX had acquired the stock of BBF, as opposed to its assets). It stated "when an employer sells its assets, including its right to enforce a restrictive covenant in an employment contract, the period of the restrictive covenant begins to run because the employment relationship has been terminated. The former employee and the new employer have the choice of either not entering into a new agreement and having the old covenant enforceable or entering into a new agreement with a new restrictive covenant."

On the issue of the entitlement of a purchaser of assets at a bankrupty sale to enforce a covenant not to compete, the Court held "this Court is doubtful that the appellate courts of this state will sanction the purchase and enforcement of restrictive covenants by bidders for assets of the bankrupt employer."

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Defendant, a veterinarian, had signed a covenant not to compete with his former employer. He was, at the time, the sole shareholder, sole officer, and sole director of his employer, although the management of the company was controlled by an affiliated entity (VetCor). Defendant left the business and sold its stock, but before doing so he formally cancelled his own non-compete and that of his wife, another veterinarian.

His former employer sued for breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unfair and deceptive practices, and violation of the North Carolina Trade Secrets Protection Act. The Court granted summary judgment on the breach of contract claim as to the former employer. It held that "a sole shareholder of a corporation is generally free to dispose of corporate assets as he sees fit, except where such actions harm or defraud the corporation's creditors, or otherwise violate public policy." Vetcor, however, was entitled to proceed on its breach of contract claim, because the contract had been intended for its benefit.

The Court held that summary judgment was inappropriate on the argument that the covenants were unenforceable becasue they had been signed after the commencement of employment. The date on the contracts was contemporaneous with the start of employment of defendant and his wife, and the Court held that the dates in the contract were prima facie evidence of the date of execution. The Court said that it would consider parol evidence on the actual date that the contracts were signed.

The Court also found that the covenants were ambiguous about whether they applied in the event of a resignation, as opposed to a termination, and that this was an issue for trial.

The Court granted summary judgment on the fiduciary duty claims. Defendant had no fiduciary duty to Vetcor, which was merely a creditor of a corporation that was not in a winding up mode, and he had not breached any duty to his former employer because he was the sole shareholder at the time of his alleged misconduct in setting up a competing business. The Court held that "to hold that [defendant] breached a fiduciary duty would mean only that he breached a duty to himself. Because this conclusion is a non sequitur, the Court declines to adopt it."

On the trade secrets claim, the Court ruled that customer lists are not protected if they contain information that is easily accessible or which can be retrieved by reviewing public information, and that plaintiff had no claim.

The Court let stand the unfair and deceptive practices claim, finding questions of fact on whether defendant was entitled to invoke the learned profession exemption from the statute.

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The Court interpreted an earnout provision in an asset purchase agreement, which called for the application of Delaware law. The Court granted relief to the plaintiff, which resulted in an award to the plaintiff of nearly $4 million in stock based upon defendant's failure to comply with its contractual obligation to provide "outside financial information" regarding its post-purchase performance. This was more than the defendant would have had to pay if the earnout target had been met, and it appeared both parties agreed that it had not been met.

The Court discussed the defendant's argument that this was both an unenforceable penalty and a windfall, but concluded that "the fundamental maxim [of contract construction is] that the parties are bound by the terms of their own agreement."

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This case addresses a minor, but significant point involving discovery. Rule 33(a) of the North Carolina Rules of Civil Procedure provides that "[i]nterrogatory parts and subparts shall be counted as separate interrogatories" for purposes of counting the number of interrogatories. The Court ruled that a subpart is counted separately only if it is requesting information about a discrete subject. If the subparts are "sufficiently related to the primary question," they will count together as a single interrogatory.

The Court further held that "[i]nterrogatories are designed to elicit facts in a cost-efficient manner" and that they do not need to be "one-event, one-fact questions."

In a sidelight, the Court held that once a case is removed to the Business Court, requests for extensions of time must be addressed to the Business Court, and may not be entered by the Clerk of Court in the County where the case is pending.

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