Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, N.A., October 6, 2009 (Tennille)(unpublished)

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

Western Piedmont Anesthesia, P.A. v. Barnette, November 20, 2007 (Tennille)(unpublished)

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

 

Kaplan v. O.K. Technologies, June 27, 2008 (Tennille)(unpublished)

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

Vernon v. Cuomo, July 9, 2008 (Tennille)(unpublished)

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

Land v. Land, June 16, 2008 (Tennille)(unpublished)

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.

Full Opinion

Regions Bank v. Regional Property Development Corp., 2008 NCBC 8 (N.C. Super. Ct. April 21, 2008)(Diaz)

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.

Full Opinion

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

Voyager Pharmaceutical Corp. v. Bowen, April 15, 2008 (Jolly)(unpublished)

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

Cox v. Mitchell, February 6, 2008 (Tennille)(unpublished)

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. 

Full Opinion

Braun v. Earthworks Lawn & Landscape, Inc., June 2007 (Diaz)(unpublished)

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."

Full Opinion

Webb v. Royal American Company, LLC, March 17, 2008 (unpublished)

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

Connor v. Monarch Hosiery Mills, Inc., 2006 WL 4453451 (November 20, 2006)(Tennille)(unpublished)

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.

Full Opinion

Whitney v. Winston, June 20, 2007 (Jolly)(unpublished)

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.

Full Opinion

 

Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)

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?"

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Battleground Veterinary Hospital, P.C. v. McGeough, 2007 NCBC 33 (N.C. Super. Ct. Oct. 19, 2007)(Diaz)

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.

Full Opinion

Lawrence v. UMLIC-Five Corp., 2007 NCBC 30 (N.C. Super. Ct. Sept. 14, 2007)(Diaz)

Plaintiff, who held a default judgment against a North Carolina corporation, sued its directors to collect from them personally. The claims included breach of fiduciary duty, fraudulent conveyance, failure to give notice of dissolution, and piercing the corporate veil.

The directors served discovery aimed at the validity of the amount of the judgment, which potentially reached privileged material. The plaintiffs objected, and before the Court was plaintiff's Motion to Compel. The Court discussed the scope of discovery, the historic strength of the attorney client privilege, and denied the motion. It held that defendants were not entitled to information regarding plaintiffs' analysis of the value of their claims and their discussions with counsel.

In reaching this conclusion, the Court noted that a director of a company in dissolution mode has fiduciary duties to creditors, and an obligation to treat all creditors of the same class equally.

Furthermore, the plaintiffs' communications on the value of their claim were not relevant, as the issue of the damages to be recovered had already been adjudicated.

Also, if the plaintiff managed to pierce the veil of the corporation, they would have established that the directors thoroughly dominated the affairs of the corporation. The directors would then be collaterally estopped from contesting the amount of the judgment. A default judgment is entitled to preclusive effect if the party against whom judgment is entered had a full and fair opportunity to contest it.

Full Opinion

State ex re. Long v. Custard, 2007 NCBC 26 (N.C. Super. Ct. Aug. 8, 2007)(Tennille)

The North Carolina Insurance Commissioner sued the defendants, shareholders of insurance carriers in liquidation, for breach of fiduciary duty. Defendants moved to dismiss, claiming that the claims were barred by the statute of limitations at the time of the filing of the petition for liquidation. The Court found the statute of limitations for breach of fiduciary duty to be the three year statute contained in N.C.G.S. §1-52(2).

The Court held that "[a]n ambiguous, ill-defined limitations period for breach of the standards of conduct for directors and officers would have a chilling effect on the willingness of individuals to serve in those capacities, and as such would be an unsound public policy." Thus, all breaches of fiduciary duty occuring more than three years before the filing of the petition for liquidation were barred by the statute of limitations.

The plaintiff argued that the statute should be tolled pursuant to the "adverse domination," doctrine, a theory the Court found was not recognized in North Carolina. The Court stated that it would not apply the doctrine in any event, because it tolled only claims based on a breach of the duty of loyalty like decisions made on the basis of self-interest, and that the claims before it were limited to claims for negligent management. There is no cause of action in North Carolina for negligent management.

As the Court put it, "[n]o rational business person would sit on the board of an insurance company if they were personally liable if the company's decision with respect to underwriting or investment proved faulty." Some of the decisions challenged here -- to enter a particular market and to write a particular kind of policy -- were "quintessential decisions subject to the business judgment rule."

Plaintiff was entitled to go forward on its claim that the defendants had submitted false or misleading financial statements to the Department of Insurance, as such conduct would violate the defendants' fiduciary duties to their policyholders.

Unfair trade practice claims based on the false financials, and the defendants' alleged increased underwriting activity for their own personal gain, also survived the motion to dismiss.

Full Opinion

Heinitsh v. Wachovia Bank, 2007 NCBC 19 (N.C. Super. June 11, 2007)(Tennille)

This case involved a trustee caught between the income beneficiary and the remainder beneficiaries of a trust. The beneficiaries disputed whether proceeds of the sale of property were income, to be distributed to the income beneficiary, or principal, to be held in trust for the remainder beneficiaries. The trustee elected to put the money in a money market account while the beneficiaries attempted to solve the dispute. The Court engaged in a thorough discussion of the fiduciary duties of a trustee, and found that the trustee had acted reasonably and in good faith.

Full Opinion

Wachovia Capital Partners, LLC v. Frank Harvey Investment Family Limited Partnership, 2007 NCBC 7 (N.C. Super. Ct. Mar. 5, 2007)(Tennille)

Defendant, via a counterclaim, sought damages as a result of a concluded merger involving a Delaware LLC. The Court held that the decision whether to merge belonged to the Management Committee of the LLC, and that it would review that decision pursuant to the Business Judgment Rule.

Defendant contended that company insiders "stood on both sides of the deal," and they were therefore conflicted in their ability to properly approve this merger. The Court rejected this contention. It held that "the mere presence of managers on both sides of a merger does not mean the transaction must fail due to a conflict of interest." The Court observed that the 95% of the company's shareholders had approved the merger, and that Delaware courts "have made clear that such a 'fully informed vote of stockholders approving a merger will extinguish a claim for breach of fiduciary duty.'"

The remainder of the Court's opinion dealt with defendant's Motion to Compel, which sought information regarding the details of plaintiff's contracts with its teachers with whom it did business. The Court discussed the broad scope of relevancy, and the distinction between relevance for discovery purposes and relevancy at trial, and denied the Motion. It found that the information sought was not relevant, and that it involved confidential business information and information potentially subject to attorney-client privilege.

Full Opinion

Maurer v. Slickedit, Inc., 2006 NCBC 1 (N.C. Super. Ct. Feb. 3, 2005)(Tennille)

The Court began this final installment of the Maurer (2005 NCBC 1; 2005 NCBC 4) saga with a bit of ominous poetry: "O, what a tangled web we weave, When first we practise to deceive."

The first issue it addressed was whether bonus payments which the company had withheld from a terminated shareholder/employee were "wages" within the North Carolina Wage and Hour Act. If they were, the Court was entitled to award liquidated damages as a result of the company's failure to pay. The Court rejected a blanket rule that payments to be made following termination of employment could not be "wages," and was persuaded by the company's own treatment of the bonus payments as such by making withholdings for Social Security and Medicare.

The Court found that the company had not acted in good faith in withholding the payments, and that it had done so in order to pressure the plaintiff into selling her stock. The Court refused to consider the company's argument that it had acted on the advice of its counsel, since the company had invoked the attorney-client privilege at the lawyer's deposition. It awarded plaintiff liquidated damages on this aspect of her claim.

The Court was not so generous, however, on plaintiff's fraud claim, on which she had prevailed at trial. It granted judgment notwithstanding the verdict on this claim, holding that the alleged misrepresentation by a defendant that he would arrange for a sale of the company if he was hired and given stock was not definite and specific enough to support a claim for fraud, and that plaintiff could not have reasonably relied upon it.

Plaintiff could not recover for dilution of her ownership when one of the individual defendants purchased additional stock, because there can be damages for dilution of ownerhip only when the recipient pays less than the actual value of the stock. The Court also set aside the jury's award of punitive damages, and held that there could be cases where a plaintiff prevailed on a fraud claim (which requires proof by a preponderance of the evidence) but would not be entitled to punitive damages (which require proof by clear and convincing evidence).

The Court was critical of plaintiff's failure to disclose a secret "side deal" with one of the defendants, which it termed a breach of her fiduciary duty.

Full Opinion

In re Pozen Shareholders Litigation, 2005 NCBC 7 (N.C. Super. Ct. Nov. 10, 2005)(Tennille)

The Court dismissed a series of shareholder derivative actions due to plaintiffs' failure to make the required demand under Delaware law. Since the shareholders did not attack a specific action of the board, the Court undertook to determine "whether any of the directors were rendered 'interested' by any of the conduct alleged and, if so, whether the disinterested directors were nonetheless capable of acting independently from those interested directors." (If a specific action of the board had been under attack, the Court would have analyzed whether there was a "a reasonable doubt that either: (1) a majority of the directors [was] incapable of acting in a disinterested and independent manner or (2) the transaction was not a result of a valid exercise of business judgment.").

The Court rejected the argument that four of the directors of the company were "interested" because of their service on the company's audit committee. The Court held that "[a]udit committees of publicly traded companies are required to have independent and disinterested directors comprise the committee. It makes no sense to require audit committees to be made up of independent and disinterested directors and then find them not to be independent and disinterested because they are on the audit committee."

The Court also rejected what it referred to as "blanket allegations" that the directors participated in or approved the alleged misconduct. The directors were entitled to rely upon management's assessment of the safety and efficacy of the company's products" in the absence of specific language to the contrary.

The Court also ran through, and rejected, a series of arguments in support of futility that had been rejected by the Delaware Courts, including (a) that the directors would be forced to sue themselves, (b) that the directors would not sue themselves because this would open them up to further litigation, (c) that the directors had an interest in the suit being derivative because they would have no insurance coverage for a direct claim, and (d) that the directors were interested because they had stock options.

The Court also considered the independence of the directors. It held that allegations that some of the directors were beholden to members of the compensation committee, which determined whether they would be compensated for their service, were insufficient. It held that allegations of business, professional, and personal relationships would not affect independence, in the absence of facts showing that "'the non-interested director would be more willing to risk his or her reputation' than to jeopardize his relationship with the person with whom he is allegedly entangled."

In a footnote, the Court once again referenced its belief that shareholders should make books and records inspection requests before filing such actions. It quoted Beam v. Stewart, 833 A.2d 961, 981 (Del. Ch. September 30, 2003) for the propositiong that “it is troubling to this Court that, notwithstanding repeated suggestions, encouragement, and downright admonitions over the years both by this Court and by the Delaware Supreme Court, litigants continue to bring derivative complaints pleading demand futility on the basis of precious little investigation beyond perusal of the morning newspapers”.

Full Opinion

Sompo Japan Insurance Inc. v. Deloitte & Touche, LLP, 2005 NCBC 2 (N.C. Super. Ct. June 10, 2005)(Tennille)

Following its decision in Sompo Japan Insurance Inc. v. Deloitte & Touche, LLP, the Court found that there was no recognized claim under North Carolina law for aiding and abetting fraud. The Court did allow a claim for aiding and abetting breach of fiduciary duty to proceed, however.

Full Opinion

Maurer v. Slickedit, Inc., 2005 NCBC 1 (N.C. Super. Ct. May 15, 2005)(Tennille)

Plaintiff, a significant (42.5%) minority shareholder of the corporate defendant, filed a derivative action against the corporate defendant. The Court characterized the case as "a domestic case disguised as a derivative action." The Court looked to the law of Virginia, the place of the incorporation of the company, to determine the appropriate prerequisites.

The claims by plaintiff against the directors of the company were for breach of fiduciary duty, and they were therefore derivative claims belonging to the corporation. It ruled that the plaintiff had failed to make a demand, and her derivative claims were dismissed.

The Court also dismissed plaintiff's unfair and deceptive practices claims concerning the termination of her employment with the company, holding that these claims related to the internal corporate affairs of the company as opposed to being "in commerce," as required by the unfair and deceptive practices statute.

Although Virginia does not recognize Meiselman-type claims, the Court that if it did that plaintiff would not have stated a claim for termination of her employment due to her execution of a written agreement providing that she could be terminated at any time. The Court also dismissed the conspiracy claim against the defendants, holding that they were entitled to intracorporate immunity because "alleging that a corporation is conspiring with its agents, officers or employees is accusing a corporation of conspiring with itself.” Although there is an exception of the officers were acting on behalf of an "indpendent personal stake," that is a narrow exception which is not triggered by an officer's interest in the corporation's profitability.

Full Opinion

Marcoux v. Prim, 2004 NCBC 5 (N.C. Super. Ct. Apr. 16, 2004)(Tennille)

This action sought to enjoin a merger involving a publicly traded company. The Court addressed whether the action was derivative or direct under Delaware law. If it was derivative, the Court held that the complaint suffered from three flaws: it was not verified, the corporation had not been joined as a party, and there were no allegations with respect to demand futility as required by North Carolina law.

The Court held, under Delaware precedent, that a shareholder claiming that the merger price is the product of a breach of the directors' duty of loyalty, as a result of the directors being conflicted or acting in bad faith, is entitled to make a direct claim. The Court further held that a Revlon claim is a direct claim, because the injury results from the diminished value that a shareholder receives in the merger process. As the Court put it, "the treasury of the shareholder is depleted, not the treasury of the corporation."

The Court discussed the analysis to be followed when a shareholder seeks to enjoin a merger. It held that if there is no competing offer, the shareholder must make "a particularly strong showing on the merits" in order to obtain the injunction because of the potential loss of the merger premium.

Plaintiff contended that the Special Committee of the company's board, which had approved the merger, was not independent because the members of the board sat on the boards of each others' companies, and that they vacationed together. The Court found that these challenges to directorial independence were merely personal and business relationships. One director had served as outside counsel to the company, and had been paid legal fees. The Court held that "the receipt of legal fees by a director's law firm does not, by itself, demonstrate that director's lack of independence."

The Court further found that the board was not required to conduct an auction. It had conducted a market check. Nor were the directors required to disclose the benefit of merger synergies or to obtain a study which quantified the synergies. Nor were the directors required to disclose the existence of derivative lawsuits pending against the company in the merger proxy, and that those claims would be extinguished as a result of the merger. There furthermore was no diversion of the merger consideration to the company's president, who sold property to the buyer and obtained a new employment contract as a result of the merger.

The Court noted that the plaintiff had failed to make a statutory inspection request under Delaware law before filing its complaint, and that he had not waited for the merger proxy to be filed before he filed suit.

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Mechanical Systems & Services, Inc. v. Carolina Air Solutions, L.L.C., 2003 NCBC 9 (N.C. Super. Ct. Dec. 3, 2003)(Tennille)

Plaintiff sought to enforce the stock repurchase provisions of a shareholders agreement with two former employees, the defendants. The Court found, however, that the price to be paid ($5 for stock with a book value of more than $36,000), and the circumstances under which the defendants had signed the agreement, rendered the transaction unconscionable. The Court further found, however, that there was no mandatory buyback obligation of the plaintiff.

The Court granted summary judgment on plaintiff's claims that the defendants had violated fiduciary duties through their post-termination activities. As low level employees, defendants had no fiduciary duties as a result of their employment.

Nor had defendants violated any trade secret obligations by bidding on a contract where bidding was open to the public.

Full Opinion

Jacobs v. Physicians Weight Loss Center of America, Inc., 2003 NCBC 8 (N.C. Super. Ct. Nov. 5, 2003)(Tennille), aff'd in part and rev'd in part, 173 N.C. App. 663, 620 S.E.2d 232 (2005), cert. denied, 360 N.C. 290, 628 S.E.2d 3

This was a class action for unfair trade practices against a weight loss clinic. Plaintiffs' claim rested partly on their argument that their contracts required them to buy prescriptions from the defendant at a price higher than they would have paid at an outside pharmacy. The Court granted summary judgment on this claim, holding that the Unfair Trade Practices Act "did not eliminate caveat emptor," and that the defendant had no obligation to inform the plaintiffs that there were less expensive means to meet their goals.

The Court held that plaintiffs had stated a claim with regard to defendant's refusal to write prescriptions to be filled at outside pharmacies because this violated medical ethics. The Court determined that it had the authority to modify the previous order of class certification to limit the class to those plaintiffs who had requested -- but been refused -- written prescriptions.

Those class members also had a claim for the tort of intentional interference with a fiduciary relationship, and also for constructive fraud because of a "special relationship" between them and the plaintiff because they had provided medical background and submitted to tests. The Court rejected arguments that the weight loss clinics were "health benefit plans" subject to North Carolina insurance law. Nor were plaintiffs entitled to make a claim that defendant had improperly referred them to entities in which the defendants were investors because only the Attorney General can make such a claim.

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Sunbelt Rentals, Inc. v. Head & Enquist Equipment, L.L.C., 2002 NCBC 4 (N.C. Super. Ct. July 10, 2002)(Tennille)

This is a significant Business Court opinion on unfair competition. The defendants were a competitor of the plaintiff, and former employees of the plaintiff who had left to join the defendant. The first issue addressed by the Court was whether the former employees owed a fiduciary duty to their former employer. The Court found there was a question of fact whether the former employees who had served in management positions had the ability to dominate and influence their former employer, so it denied summary judgment on the issue whether those employees had fiduciary duties. Summary judgment was granted, however, as to some of the employees who the Court found had only basic management responsibilities. Authority over day to day operations, even with substantial discretion over such operations, is insufficient to make out a fiduciary duty.

On the merits of the claims, the Court noted that merely planning to work for another company or planning to start a new company is not unlawful behavior. The proper focus, the Court held, is upon the actions taken by the former employees in furtherance of a plan to compete. The Court granted summary judgment as to the employees who it had found might have had a fiduciary duty, as the only evidence before the Court of their pre-departure activities was that they had met and discussed the possibility of competing.

The Court denied summary judgment on plaintiff's claim of tortious interference with prospective economic relations.

The claim for violation of the North Carolina Trade Secrets Protection Act also survived. The Court found that business plans, marketing strategies, and customer information could constitute confidential information protected under the Act. The substantial decrease in plaintiff's business, and the simultaneous increase in defendant's business, constituted circumstantial evidence that there had been a misappropriation.

A claim for unfair and deceptive practices also survived summary judgment, as did a claim for conspiracy. The Court denied summary judgment based on the defense of laches, finding that there had not been an unreasonable delay in bringing suit and that defendant was unable to show any prejudice as a result of the alleged delay.

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Reply Brief in Support of Motion for Summary Judgment

(All other briefs were filed under seal)

Alexander v. DaimlerChrysler Corp., 2002 NCBC 2 (N.C. Super. Ct. Feb. 19, 2002)(Tennille)

The plaintiffs moved, before class certification, to withdraw their allegations seeking class certification. The Business Court ruled that where a complaint is filed containing class action allegations and claims, those class claims may not be withdrawn, whether by voluntary dismissal, amendment to the complaint or simple failure to pursue class certification without court approval under Rule 23(c). The Court noted that class plaintiffs owe a fiduciary duty to absent class members, and class counsel owe those same fiduciary duties. The court found that notice of dismissal of the class claims would be required and required the submission of notice plans.

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First Union Corp. v. Suntrust Banks, Inc., 2001 NCBC 9 (N.C. Super. Ct. July 20, 2001)(Tennille)

The Court, faced with significant litigation over the proposed merger of two major banks and the validity of deal protection provisions in the approved merger agreement, engaged in a thorough discussion of the underpinnings and evolution of the business judgment rule as well as the development of Delaware law in the area of corporate change of control.  The Court articulated the standard it would apply in reviewing the validity of such provisions.

At the heart of the Court's discussion is an analysis of the tension between the degree of freedom which corporate boards should have to make decisions, and the level of review which a Court should apply to such decisions.

The Court held that "our system requires: (a) that directors have the power and authority to plan, develop, design, negotiate and contract for mergers and other acquisitions fundamental to the corporation's business strategy, (b) that shareholders have the right to vote on any such fundamental changes in corporate structure and (c) that their vote results in a free, uncoerced and informed valuation of the proposed corporate action. Exposing a transaction to valuation in the marketplace is the best test of its worth. When corporate law adopts a review process that insures that these structural requirements are met, it promotes corporate value."

The Court held that directors of North Carolina corporations do not have Revlon duties, based on the amendment of N.C.G.S. Sec. 55-8-30(d), which provides that "the duties of a director weighing a change in control situation shall not be any different, nor the standard of care any higher, than otherwise provided in this section."  It determined that the policy of North Carolina demanded deference to the strategic decisions of directors, but at the same time a vigorous preservation of the voting rights of shareholders. 

The Court held that it would apply the following standard in cases seeking injunctive relief against deal protection devices in a stock for stock merger:

In reviewing deal protection measures in a stock-for-stock merger subject to shareholder approval, the court will first review the transaction, including the adoption of deal protection measures, to determine if the directors have complied with their statutory duty of care under N.C.G.S. § 55-8-30. The burden is upon the shareholder challenging their actions to prove that a breach of duty has occurred. If no breach of duty is proven, the action of the directors is entitled to a strong presumption of reasonableness and validity, including noncoercion, and the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties. If a breach of duty is established, the burden shifts to the directors to prove that their actions were reasonable and that it is in the best interests of the shareholders that they be permitted to vote on the transaction, and, if at issue, that the deal protection measures were not actionably coercive and did not prevent the directors from performing their statutory duties. Where the court finds that the deal protection measures are coercive or require directors to breach their statutory duties, the court must then weigh the harm to the shareholders in enjoining either the deal protection measures, the vote on the transaction or the merger, if the transaction is approved, against the harm resulting from not entering injunctive relief.

Applying this standard, the Court found no breach of duty on the part of the Wachovia directors.  They had acted with due care, and were entitled in their determination to rely upon the advice of legal counsel, investment bankers, and other professionals in managing the business of the corporation.  They had negotiated a higher price than initially offered, and had obtained a fiduciary out to the no-shop provision in the merger agreement.  In response to SunTrust's argument that the directors did not fully understand the economic impact of a cross-option agreement which they had approved, the Court held that it made no difference that the directors did not understand the intricacies of the break up fee resulting from that agreement.  The directors understood the bottom line, which was $780 million, and the Court found that sufficient.

The Court found that the deal protection measures before it were not coercive.  It held "they do not force management's preferred alternative on the shareholders.  There is no preordained result or any structural or situational coercion.  Wachovia shareholders can vote their economic interests.  The Court is convinced that those shareholders have an unfettered, fully informed opportunity to exercise their right to approve or disapprove of the merger their board has proposed to them, and that is the market test our system prefers."

The Court found invalid, however, a provision in the merger agreement which kept the merger agreement in place for five months past the date scheduled for the shareholders meeting at which the merger was to be presented for approval.  It referred to this as "numb hands" for the Wachovia board, and an "impermissible abrogation" of their duties.  The Court held that if the merger were not approved, "this board has impermissibly tied its hand and cannot do the very thing the Delaware Supreme Court found to be of fundamental importance to the shareholders -- 'negotiating a possible sale of the corporation.'"

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Winters v. First Union Corp., 2001 NCBC 8 (N.C. Super. Ct. July 13, 2001)(Tennille)

Plaintiff was not entitled to proceed on its derivative action seeking to enjoin a merger because it had not waited for the 90 day period required by N.C.G.S. §55-7-42. Plaintiff failed to sufficiently plead irreparable harm, which might have excused it from waiting the 90 day period.

It was not irreparable harm that the company's shareholders would be called upon to vote on the merger transaction before the expiration of the 90 day period, because there was an absolute statutory right to vote on the merger absent a showing of breach of fiduciary duty by the company's directors, and plaintiff could present its position through a proxy fight if it desired.

Plaintiff's rote allegations regarding a breach of fiduciary duty were insufficient to survive a motion to dismiss or to overcome the presumption of the business judgment rule.

Full Opinion

Staton v. Brame, 2001 NCBC 5 (N.C. Super. Ct. May 31, 2001)(Tennille)

A myriad of claims were at issue in this case, which involved claims of misuse of funds in trust. Some of plaintiff's claims were barred by a settlement agreement it had entered into with other entities. Others were dismissed because the court determined that a trustee had repudiated his fiduciary relationship, and could not be held liable for breach of fiduciary duty. Also considered were claims for fraud, tortious interference with contract, negligent misrepresentation. constructive fraud, the statute of limitations, and breach of contract.

Full Opinion

Tomlin v. Dylan Mortgage, Inc., 2000 NCBC 9 (N.C. Super. Ct. June 12, 2000)(Tennille)

A mortgage broker has a fiduciary duty to his client. Plaintiffs' claims that they were charged excessive fees survived a motion to dismiss, as the Court could not determine whether various charges were interest, so as to be usurious, or permissible "finance charges." The Court deferred dermining whether purchasers of mortgage loans were holders in due course, and held that they were potentially liable as assignees under the Home Ownership Equity Protection Act.

Full Opinion

Oberlin Capital, L.P. v. Slavin, 2000 NCBC 6 (N.C. Super. Ct. )(Tennille), aff'd in part and rev'd in part, 147 N.C. App. 52, 554 S.E.2d 840 (2001)

A director cannot be liable, solely because of his or her capacity as a director, for the wrongdoing of others associated with the corporation in the absence of his or her own participation in the alleged wrong.  The duties of a director run directly to the corporation, indirectly to shareholders, and not to creditors, so directors do not owe duties to outsiders except for torts that they personally commit.

The directors in this case did not breach any duty by failing to disclose a particular transaction with the exception of one who took affirmative steps to conceal the transaction. Nor was there any claim against the directors for negligent misrepresentation, as that tort was not intended to apply to corporate directors who fail to disclose certain information to the corporlation's creditors.

The plaintiff had no claim for unfair and deceptive practices, because that statute does not apply to transactions involving securities.

Full Opinion

Smith v. NC Motor Speedway, 1997 NCBC 5 (N.C. Super. Ct. Nov. 12, 1997)(Tennille), aff'd, 132 N.C.App. 132, 516 S.E.2d 921, disc. rev. denied, 350 N.C. 310, 534 S.E.2d 596 (1999)

A majority shareholder has no fiduciary duty to minority shareholders to "auction off" the company or otherwise obtain the highest possible value for their interests once the majority shareholder decides to sell its controlling interest or engage in a cash out merger. The duties of a shareholder are distinct from those of a director under Revlon.

Under these circumstances, the remedy of the minority shareholders is exclusive, and limited to dissent and appraisal, unless the transaction is unlawful or fraudulent.

Assuming that the test of "entire fairness" must be met, it was met where the price per share was above the range determined to be appropriate by the investment advisor to the company's special committee.

An injunction against the merger was not appropriate.

Full Opinion

Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997)(Tennille)

A senior lienholder had no fiduciary duty to a junior lienholder. The mere fact that the senior lienholder took action to cause its debt to be paid down did not establish domination and control of the debtor's business so as to give rise to a fiduciary duty. The senior lienholder's efforts to collect its debt did not constitute tortious interference with contract.

Full Opinion