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

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

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

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

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

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

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

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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 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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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 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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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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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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Plaintiff, who was pro se, moved for Rule 11 sanctions based on defendant's Rule 68 Offer of Judgment of a single dollar. After noting that the purpose of Rule 68 is to "encourage settlements and avoid protracted litigation," the Court found that the $1.00 offer provided little chance of seriously opening negotiations or settling a case. It found, instead, that the minimal offer "was not intended to promote a settlement but instead it was a tactical maneuver intended to trigger the cost-shifting mandate of Rule 68 in the event of a defense verdict."

The Court held, however, that this tactic did not warrant sanctions. The offer satisfied the literal requirement of Rule 68, and a defendant is not required to offer a substantial sum to obtain the benefit of the statute if it is convinced that the case lacks merit. The Court denied the motion for sanctions, although it expressed doubt as to whether the $1.00 offer would entitle the defendant to recover its costs if it was successful.

The plaintiff had also moved for sanctions against the defendant for removing the case to the Business Court. The defendant cross-moved for sanctions, and the Court granted this motion. It held that even though the plaintiff was pro se, he could have readily determined from the Court's own information that the removal was proper. It found that the purpose of the motion was to harass the defendant, to unnecessarily delay the proceedings, and to needlessly increase the cost of litigation. Plaintiff, as a pro se litigant, was not exempt from the operation of Rule 11.

Full Opinion

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