Ct. App. Reverses Business Court on Audit Choice of Law Issue

The Court of Appeals faced that rarest of truffles this week:  an outcome-determinative choice of law question.  The Court adhered to its traditional roots and rejected a new test fashioned by the Business Court.

At issue in Harco Nat'l Ins. Co. v. Grant Thornton, LLP was an audit of a company providing bail and immigration bonds in North Carolina and other states.  The plaintiff, an insurance company, entered into an agreement with the bonding company on the basis of that audit.  When the bonding company went defunct, the plaintiff ultimately became liable for $15 million in bonds issued in North Carolina alone.

Conflict of laws professors seeking exam questions, take note of these facts:  The plaintiff is an Illinois corporation who paid most of the $15 million from its corporate bank account in Illinois, but did not pay any of that money to any Illinois recipient.  The audit itself was performed by the defendant in Pennsylvania and the audit report was delivered to the bonding company in that Commonwealth as well.

Unlike many choice of law disputes, this one actually made a difference due to the great variety of standards among states for auditor liability to third parties not in privity with the auditor.  The plaintiff argued that North Carolina law applied and, under North Carolina law, the defendant would not be entitled to summary judgment.  The defendant argued that Illinois law applied and that no liability was possible under that state's law.

As we noted last April, the Business Court went its own way, determining that Pennsylvania law applied.  In doing so, Judge Tennille held that the law of the state in which an audit is performed should govern the auditor's liability to third parties not in privity.  The Business Court's analysis was premised on principles of certainty, predictability, and the avoidance of forum shopping.

The novelty of this approach clearly bothered the Court of Appeals in its somewhat tersely-worded opinion:

The Business Court’s Audit State test seems to be the only such test of its kind.  Our research has not revealed a single case in any jurisdiction that purports to utilize such a test for the purpose of determining the choice of law in an auditor liability
case. As the Business Court’s order acknowledges, claims for negligence and negligent misrepresentation are claims sounding in tort.  It is the nature of the cause of action, not the occupation of a defendant, that controls the determination of the applicable choice of law test.  While the Business Court expressed concern that “[u]sing the law of the state where the injury occurred is problematic[,]” it was required to apply the lex loci test to plaintiff’s tort claims pursuant to the prior holdings of our Supreme Court and the doctrine of stare decisis.

In other words, a tort is a tort is a tort, and any deviation from the First Restatement: Conflict of Laws (1934) will be punished.  (The Second Restatement, at not yet 40 years old, apparently lacks the gravitas necessary for such issues).

Applying the traditional lex loci test, the Court of Appeals held that Pennsylvania, although the site of the alleged misrepresentations, was not the site where the injury was felt.  Nor was Illinois, the location of Plaintiff's business.  Instead, the place of harm was North Carolina, in which the plaintiff's funds were seized by the Department of Insurance.

Note that the Court of Appeals affirmed the Business Court's denial of the defendant's summary judgment motion under Illinois law.  Because the Business Court determined that Illinois law did not apply, the denial of summary judgment was appropriate.

French Choice Of Forum Provision Enforced by North Carolina Business Court

The North Carolina Business Court ruled today on an issue of first impression -- when a North Carolina Court should apply the law of a foreign country -- and concluded that it would apply North Carolina law to a forum selection clause requiring the parties to litigate their dispute in the Commercial Court of Paris, under French law.

The result was that the Court enforced the forum selection clause and dismissed a crossclaim brought by an Arizona corporation (Swift) against a French Bank (Paribas), in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct., February 18, 2009).

The provisions specifying French law and a French choice of forum were contained in a series of Third Party Letter of Credit Agreements which had been submitted by Swift and another Defendant (Bronwen) to Paribas. They stated that French law would apply and that "[a]ny disputes arising [t]hereunder or in connection [t]herewith shall be exclusively submitted to the commercial court of Paris, France."

When the Bank moved to dismiss, Swift argued that the Bank had never signed the agreement, that Its tort claims were not in any event subject to the clause, and also that it would violate public policy to make it litigate its claims in a French court.

The first issue for the Court was whether North Carolina law or French law should be applied to determine the validity of the forum selection provision.  The opinion is the first published decision under Rule 44.1 of the North Carolina Rules of Civil Procedure, which addresses a trial court's determination of the law of a foreign country.  Judge Diaz, relying on federal cases, determined that:

  • He had "broad authority to conduct [his] own independent research to determine foreign law," but that he had no duty to so.
  • It was the burden of both parties 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. 

Under North Carolina law, it didn't make a difference that Paribas 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 Agreements, and that the Agreements spoke to Swift's obligations to Paribas  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."

Swift's argument that its claims sounded in tort, and that they were therefore outside the scope of the clause, was rejected.  The Court determined that claims stemmed from the contracts themselves, and that they could not be restyled as tort claims to avoid the agreement to the Parisian forum.

Lastly, 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."

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

 

NY Lawsuit Trumps NC Lawsuit, Even Though NC Lawsuit Was First Filed

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: