The errata sheet. You’ve probably never given it a second thought. It is baked into the Rule of Civil Procedure governing the taking of depositions. NCRCP 30(e) gives the deponent the right to review her deposition and to make “changes in form or substance” by completing an errata sheet and stating the reason for the changes.

But are there limits on a deponent’s right to revise her testimony? Surely, having testified that the “traffic light was green,” the witness can’t backtrack and revise her testimony about the light color to red. Can she?

Well, yes, she can. Judge Davis of the NC Business Court ruled in Relation Insurance, Inc. v. Pilot Risk Management Consulting, LLC, 2023 NCBC 21 that “North Carolina Rule 30(e) . . . places no limits on a deponent’s ability to make substantive changes to his prior deposition testimony on an errata sheet.” Op. ¶19. The changed testimony at issue in Relation Insurance wasn’t as dramatic as red lights becoming green, but it was close. There was a lot of “no’s” becoming “yeses” and vice-versa. The explanations for the about face were “I was mistaken” or “I misunderstood the question.”

The Business Court didn’t break any new ground in making its ruling. The Business Court has given the same interpretation to Rule 30(e) at least three times, in BB&T Boli Plan Tr. v. Mass. Mut. Life Ins. Co., 2017 NCBC 235 (N.C. Super. Ct. 2017), Window World of Baton Rouge, LLC v. Window World, Inc., 2018 NCBC 79, and in an unpublished Order in Bueche v. Noel. I wrote about those cases when they were decided, in 2008, 2009, and 2018.

If you’re having a difficult time accepting this generous interpretation of Rule 30(e), you’re not alone. Several federal courts “have refused to allow changes on an errata sheet that contradict the witness’s testimony.” The Eastern District of North Carolina is one of them. See, e.g., Thorp Revocable Tr. v. Ameritas Inv. Corp., 57 F. Supp. 3d 508, 518 (E.D.N.C. 2014) (“A change in ‘form’ would include correcting a typographical error or a spelling error. A change in ‘substance’ would include the substantive correction of a court reporter’s transcription (i.e., the witness answers ‘No,’ but the court reporter records ‘Yes’).”)

If you are thinking that this witness got off unaffected by his “corrected” deposition testimony, you’re wrong. Judge Davis said that he built in “two safeguards,” (though I count three, not two), making the deponent’s change of heart virtually worthless to him.

The Two (or three)”Safeguards”

The first safeguard installed by Judge Davis was that the “original answers to the questions posed at her deposition will remain part of the record and may be used for impeachment, as contemplated under the applicable North Carolina Rules of Evidence, or for any other relevant or proper purpose. Op. ¶21.

Second, Judge Davis gave counsel challenging the deposition changes a second crack at the flip flopping deponent. Counsel was given the opportunity to “re-depose [the deponent] for a period of no more than two (2) hours of on-the-record time—at Plaintiffs’ expense—with regard to any substantive changes to his prior deposition testimony that are contained on his Errata Sheet on the pages of his deposition transcript referenced herein.” Op ¶21.

Next, although he did not call it a third safeguard, Judge Davis said that Defendants’ counsel could “seek to challenge Cooper’s substantive corrections as contained in his Errata Sheet to the extent that Plaintiffs offer those corrections for the purposes of advancing or defeating summary judgment later in this case.” Op. ¶25.


I couldn’t pass on writing about a Business Court Order that the Court itself described as “Sua Sponte Order on Abusive Language.”  This is In re SE Eye Ctr, 2023 NCBC Order 15.

Abusive language?  That might be too complimentary a description of the stream of vitriol let loose by Mark McDaniel, a “contingent debtor” of Southeastern Eye Center, in his court filings.  McDaniel, not a physician (nor a lawyer), is the former Executive Director of the Center. He is proceeding pro se.

Judge Bledsoe laid out a long list of abusive statements by McDaniel in his order. Most of the abuse was targeted by McDaniel against what he referred to as the “Trio,” who were the Receiver appointed in the case, the Receiver’s attorney, and one of the major creditors of the Center.  Judge Bledsoe’s itemization of the abusive statements goes on for pages (2-5) in the Order, but here are some of the gems:

  • That the Trio have acted with ‘complete disregard for facts’ and in a ‘flippant and cavalier manner’;
  • That the Trio have committed extortion;
  • That one member of the Trio ‘has no regard for the law [and is willing] to commit outright felonies’ ;
  • That the Trio are willing to ‘ruin lives with fake evidence’ with this Court’s connivance;
  • That one member of the Trio is professionally incompetent;
  • That one member of the Trio has defrauded the Internal Revenue Service;
  • That the Trio have operated a ‘scam’;
  • That the Trio have committed federal bank fraud;
  • That the Trio are guilty of ‘[g]reed and ethical failures.’

Here’s how Judge Bledsoe summed up McDaniel’s invective:

Even a cursory review of the Objections shows that each is replete with personal vitriol against the Receiver and other parties in this case, ad hominem attacks against the Receiver and others, and egregious accusations of misconduct against others with virtually no citations to evidence, the developed record, or to applicable law.

Order  ¶4.

If you are underwhelmed by ther abusive nature of McDaniel’s statements, this was apparently a longstanding approach by McDaniel of which Judge Bledsoe obviously was tired. He said “[u]nsupported and unwarranted personal attacks and vitriol have been a hallmark of McDaniel’s advocacy before this Court, certainly since he was permitted” to appear in the case. He said that it was “beyond the bounds of zealous advocacy.” Order  ¶8.

Lawyers have an ethical obligation to “foster civility among members of the bar.” That’s from the Rules of Professional Conduct  As Judge Bledsoe put it, “[t]he principles of professional courtesy that forbid such language are . . . crucial to the proper administration of justice.” Order  ¶9. McDaniel didn’t have a pass from the obligation of civility because he was proceeding pro se. The Rules which govern attorney conduct apply to anyone appearing on a pro se basis.  Order  ¶11

Despite its annoyance with McDaniel’s conduct, the Business Court actually went fairly lightly on him.  It did not sanction him, but ordered him to “cease and desist further abusive and invective-based advocacy, either in writings filed with the Court or in oral presentations before the Court.”  Order  ¶16(a).  Judge Bledsoe reserved his right to sanction McDaniel in the future.  Order  ¶17.

Can McDaniel clean up his act? I’ll keep an eye out.

Plaintiffs asked for an award of attorneys’ fees in Vanguard Pai Lung, LLC v. Moody, 2022 NCBC 48.  They had been awarded $3 million in compensatory and punitive and thjeir lawyers sought $2.5 million in fees.  The motion for fees was not successful, for a number of reasons, but what sticks out in Judge Conrad’s opinion is his assessment that the fees applied for were excessive.

How much were Plaintiffs asking per hour? More than $700 per hour, with two of the lawyers billing more than $1,000 per hour.  (Note that these lawyers weren’t from around here, they were from California and Texas.)  Judge Conrad stated that the request was “not reasonable,” and said:

These rates may be typical of firms and attorneys based in California and Texas but are significantly higher than rates customarily charged in North Carolina for cases of this type.

Op. ¶21.

“Typical And Customary” Hourly Rates For Complex Commnercial Litigation In North Carolina

Judge Conrad observed that the Business Court had previously concluded “that a typical and customary hourly rate charged in North Carolina for complex commercial litigation ranges from $250 to $475.”  Op. ¶20 (quoting Bradshaw v. Maiden, 2018 NCBC LEXIS 98 at *12).

Did the complexity of the case warrant such high fees?  No, said Judge Conrad, holding:

Although this has not been a simple case, neither has it been inordinately complex. Commercial
litigation often involves the same mix of business torts at issue here. It would be unreasonable to award “a fee that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium.”

Op. ¶21

Adding insult to injury, Judge Conrad noted that the rates demanded by the out of state counsel “dwarf those charged by [Plaintiff’s] capable local counsel.  Id.

Don’t think that this Opinion from the Business Court was fueled by xenophobia.  In many respects it follows the Court of Appeals’ rejection of high hourly fees charged by New York lawyers in GE Betz, Inc. v. Conrad, 231 N.C. App. 214 (2013), which I wrote about a few years ago.


Other Deficiencies In The Fee Request

Would asking for a more reasonable hourly rate made a difference in Plaintiffs’ fee request?  Probably not.  The fee demand was based on G.S. §1-538.2, which says that a party prevailing on a claim for embezzlement is entitled to “reasonable attorneys’ fees.”  While one Plaintiff had obtained a judgment for embezzlement against one of the Defendants, that success came in a case in which sixteen claims for relief were made, and twelve counterclaims filed.  Thus, the Court stated, it was required to apportion fees among the myriad of claims and counterclaims.  Op. ¶18.

Apportionment would not be required if all of the claims and counterclaims were “inextricably interwoven with [the] embezzlement claim.  Op. 18-19.  These were not.

Another stumbling block for Plaintiffs was to provide nothing more in their fee application than “the total number of hours billed and the total amount charged by each attorney.”   Op. Par. 22.  That made it “impossible to determine whether Vanguard’s attorneys spent a reasonable or unreasonable amount of time drafting or responding to motions, preparing for and conducting depositions, and
handling other discovery matters, for example.”  Op. Par. 22.

Plaintiffs get another crack at their fee request, as Judge Conrad denied the request without prejudice to a renewal of the motion after “the entry of judgment, the resolution of any postjudgment motions, and the exhaustion of any appeals.” Op. Par. 23.  I expect that Plaintiffs will take another run at obtaining fees, but it won’t be a request for $2.5 million the next time around.

The parties in Leonard v. Ast, 2022 NCBC 35, decided by the NC Business Court last week, were collaborators in a business venture they named Barks and Recreation.  Barks was a dog training business which the Defendants felt would funnel business to their already existing dog grooming business, “Just Dog People.”

As anyone interested in the NC Business Court can already guess, there was a falling out among the parties.  It happened less than a year after Barks began operations with $100,000 invested by the Plaintiff from her retirement account.  (The Defendants contributed no cash, only “sweat equity.”) One of the individual Defendants (Jason Ast) told the Plaintiff to leave the premises of the business and “never return.”  Op. ¶13.  He also removed her from the email system of the business, its phone lines and cut off her access to the security system cameras.

Continuing their campaign to oust the Plaintiff from the business, the Defendants then called a special shareholders meeting and voted to dissolve Barks.

But Was Barks Really A Corporation?

Plaintiff objected to the special meeting, arguing that Barks was not a corporation.  She said that shares had never been issued and that corporate bylaws had never been adopted by the shareholders.  Plaintiff’s Complaint included a claim for declaratory relief that Barks was not a corporation but was in fact a partnership.

You might think that a business entity without shares and bylaws could not be a valid corporation (like I did), but you would be wrong.  As Judge Earp pointed out:

The North Carolina Business Corporation Act (the “Act”) states that “[c]orporate existence begins when the articles of incorporation become effective[,]” and that “[t]he Secretary of State’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation[.]” N.C.G.S. § 55-2-03(a)–(b)

Op. ¶40.

The Defendants had filed Articles of Incorporation.  Given that “conclusive proof” of incorporation, Judge Earp held that “failure to adopt bylaws or issue shares, while problematic in other ways, does not convert a corporation to a partnership.”  Op. ¶42.

The Court also rejected Plaintiff’s argument that Barks was not entitled to dissolve itself as a corporation due to the non-issuance of shares.  That argument is foreclosed by G.S. §55-14-01(a), which says that “a majority of the incorporators of a corporation that has not issued shares may dissolve the corporation by . . . filing articles of dissolution.”  Op. ¶43.

So the claim to have Barks declared a partnership  was dismissed.

Business litigation sharpies are undoubtedly wondering about a piercing the corporate veil claim, as disregarding corporate formalities is often the basis for a veil piercing claim.  That sort of claim was unnecessary, as the Business Court allowed a breach of fiduciary duty claim to go forward against the individual Defendants.

Plaintiff Did Better With Her Breach Of Fiduciary Duty Claim

Plaintiff’s claim for breach of fiduciary duty ran into a familiar roadblock, the “well-settled principle of North Carolina law that shareholders of a corporation cannot pursue individual causes of action for wrongs or injuries to the corporation.”   Op. ¶30.  But a shareholder can bring a direct claim “when there is a special duty between the wrongdoer and the shareholder.  Op. ¶31 (quoting Barger v. McCoy Hillard & Parks, 346 N.C. 650, 659 (1997)).

Since the individual Defendants claimed to own two-thirds of the (never issued) shares in Barks, Judge Earp observed that “North Carolina courts ha[ve] recognized that individual minority shareholders of a closely-held corporation who act in concert and collectively own the
majority interest in the corporation may owe fiduciary duties as the controlling shareholders.” Op. ¶33.

*  * *

That dog picture at the top of this post?  That dog has nothing at all to do with Barks and Recreation.  That’s Herschel, my dog.  He’s a very good dog.

Oh, and notwithstanding the click-baity title of this post, the NC Business Court is not “going to the dogs.”

This is Part 2 of an examination of the 100+ “Orders of Significance” dropped by the NC Business Court late last year.  Part 1 of this series (on designating cases to the Court) is here.  If you haven’t heard anything about the Orders of Significance, look here.

There are a couple of Orders of Significance dealing with attorney-client privilege that are significant enough to be written about on this blog.  The first is Judge Conrad’s Order on a Motion to Compel in Kelley v. Charlotte Radiology, P.A. 2019 NCBC Order 13.

Waiver By Disclosure To A Non-Client

The “general rule” is that the attorney-client privilege is waived “when an attorney and client communicate in the presence of a third party.”  Order ¶12.

Waiver doesn’t apply if the third party is “an agent of the client or the attorney.”  Id.  It also doesn’t apply “when the third parties are co-clients who are each represented by the same attorney.”  Id.

So who was the third party in the Kelley case who received the otherwise privileged communications?  There were actually two of them: the son of the Plaintiff, and the Plaintiff’s wife.

Judge Conrad concluded that the Plaintiff’s son was not acting as his agent.  There was nothing in the record showing that the son had the authority to act on the Plaintiff’s behalf, “an essential element of agency.”  Order ¶23.  As for the wife, the Court ruled that the wife had received the same communications as the son, so there was no need for a separate analysis as to her.

Waiver Of Privilege By Use Of Defendant-Employer’s Email System

The Plaintiff had used his employer’s email system to communicate with his attorneys.  A bad idea if you are wanting to protect privilege since the question of waiver turns on whether the employee “had a reasonable expectation of privacy and confidentiality in his email communications with his personal attorney.”  Order ¶38.

Judge Conrad said “[i]t is debatable whether an employee ever has an
expectation of privacy when using his employer’s e-mail system to communicate about a legal dispute against the employer.”  Order ¶38.

Moreover, the Plaintiff had received the Defendant’s Employee Handbook, which stated that the Defendant had the right to monitor employee emails.  That eliminated the possibility of any “reasonable expectation of privacy” in his emails.

Adequacy Of Privilege Logs

Privilege logs identifying documents withheld on the basis of privilege are required by Rule 26(b)(7)(ii) of the North Carolina Rules of Civil Procedure and Business Court Rule 10.5.

The Defendant challenged the adequacy of the privilege log provided by the Plaintiff, arguing that the descriptions of the withheld documents were “obtuse and uninformative.”  Judge Conrad disagreed, stating:

Kelley’s privilege log provides the date of each communication, the sender and recipients, a short description of the subject matter, and the type of privilege asserted. (See Kelley Privilege Log.) This is all the Case Management Order requires, (ECF No. 21), and it is the type of information courts usually find adequate for this purpose.

Order ¶17.

Plus, Judge Conrad added, even if the privilege log had been inadequate, the appropriate remedy would not have been to strike the entire log, but instead for the Court to conduct an in camera review.  Order ¶19.

It’s important to identify all the grounds for withholding documents in the privilege log.  The Defendant said that the Plaintiff had waived the claim that some of the documents listed in the log were entitled to work-product immunity by not originally referencing that immunity in the privilege log.

Judge Conrad rejected this argument of waiver, saying:

It is true that a belated assertion of immunity can result in its forfeiture. This usually occurs when a party asserts one ground for withholding documents, waits to see the other side’s motion to compel (or to see how the court decides the motion), and then asserts a different ground in an effort to get a second bite at the apple.  That type of gamesmanship is obviously prejudicial.

Order ¶20.  Since the Plaintiff had revised its original privilege log to include the work-product assertion before the Defendant filed its Motion to Compel, there was no “gamesmanship” or any prejudice to the Defendant, and no waiver of the work-product privilege.

Miscellaneous Privileged Items

Draft pleadings are subject to work-product protection.  Order ¶3.

Engagement letters cannot be withheld from production.  Though there is “little North Carolina law” on this point, Judge Conrad held that:

federal courts generally find that agreements outlining the general nature of the representation rather than the specific work that the attorney will perform are not protected by the attorney-client privilege or the work-product doctrine.

Order ¶4.

The remainder of the Kelley Order is an email by email review of whether those particular emails are privileged.

Appealing An Order Ruling on a Privilege Issue

You can appeal an Order affecting a privilege immediately, and you don’t need to wait for a final judgment in the case.

That was the situation before Judge McGuire in Global Textile Alliance, Inc. v. TDI Worldwide, LLC, 2019 NCBC Order 6.  Judge McGuire had entered an Order prevbiously in the case ruling that the Plaintiff had waived attorney-client privilege by permitting a third party to participate in conversations with its counsel.

Plaintiff appealed.  The Defendant sought to move forward with dispositive motions in the case.  Plaintiff argued that all proceedings in the case should be stayed pending the appeal.

Judge McGuire said that “[c]laims of privilege . . . are substantial rights that would be lost if orders affecting them were not immediately reviewed.”  ¶6.  Given that the immediate appeal was legitimate. Judge McGuire ruled that the Court was divested of jurisdiction to proceed in the case.

If the Order ruling that privilege had been waived had not been immediately appealable, the Court could have retained jurisdiction and proceeded with the case.





This is the first of several intended posts on the so far unexamined “Orders of Significance” handed down by the NC Business Court.  This one focuses on several Orders from Chief Judge Bledsoe on whether a case was properly designated to the Court.  It is embarrassingly long, sorry.

Intellectual Property Cases

A handful of these Orders involved a designation per G.S. § 7A-45.4(a)(5), which gives the Court jurisdiction over cases which relate to  a “dispute involving the ownership, use, licensing, lease, installation, or performance of intellectual property. . . . ”

You would think that a Complaint which mentioned intellectual property would be enough to support a Designation to the Court, but that’s not the case.  Chief Judge Bledsoe makes it clear that the mere presence of an agreement concerning intellectual property is not enough to support a Designation.

In Innovative Agriproducts, LLC v. Fins & Feathers Charter And Commercial Fishing, LLC, 2019 NCBC Order 11, the case involved an exclusive license granted to Plaintiff to extract oil from “any and all hemp harvested by Defendants.”  This case might have survived the Opposition to the Designation if Chief Judge Bledsoe had been persuaded that “hemp plant clones” were intellectual property.   He was not, although  Chief Judge Bledsoe observed that plants could constitute intellectual property.  Order ¶14.

Although he ruled that there had been no showing that the hemp plant clones were intellectual property, he also ruled that the lawsuit was not proper for designation to the Business Court since the substance of the allegations were contract-based, essentially a claim for failing to pay money owed.

He held that a party seeking designation of an intellectual property case must show  that it “involves a material issue relating to a dispute that is ‘closely tied to the underlying intellectual property aspects’.”  Order ¶15.

The same fault resulted in the rejection of a Designation in Grifols Therapeutics LLC v. Z Automation Co., 2019 NCBC Order 18.  The intellectual property involved there was a “cartoner,” which is “an automated machine that inserts products into their outer-packaging.”  Order ¶1.  Since the claims`only involved “the application of contract principles,” Chief Judge Bledsoe ruled that:

the mere fact that intellectual property (i.e, the cartoner here) is the subject of a purchase agreement is insufficient to permit designation under section 7A-45.4(a)(5).

Order at ¶6.  He rejected the Designation because:

the cartoner at issue here is simply a piece of equipment Plaintiff contends that it sold to Defendant and for which Defendant has failed to pay―any intellectual property aspects of the cartoner are not germane to the dispute as it is currently cast.

You might be befuddled at how to determine whether the dispute is “closely tied” to the “underlying intellectual property aspects.”  That language comes from a 2018 Opinion authored by then Chief Business Court Judge Gale, who said in an intellectual property case involving pharmaceuticals that:

It is. . .  difficult to define a bright line test to determine when a dispute is closely tied to the intellectual property aspects of a pharmaceutical. Rather, the determination requires an allegation-specific inquiry that will vary from case to case.

Cardiorentis AG v. IQVIA Ltd., 2018 NCBC 62 at ¶5.

I doubt that this language clarifies when a case involving intellectual property is appropriate for designation to the Business Court.  Clearly, simply using the words “intellectual property” in your Complaint is not enough.

Procedural Mistakes

A procedural mistake led to the rejection of a designation in MDG Constr. Servs. v. MDG Roofing & Contracting LLC, 2019 NCBC Order 12.  The Plaintiff filed its Complaint on April 24, 2019, but did not file its Notice of Designation until two days later, on April 26th.

The Designation statute, G.S. sec. 7A-45.4(d)(1) requires a Notice of Designation to be filed “contemporaneously with the filing of the complaint.”  Chief Judge Bledsoe observed that this contemporaneous filing requirement “is mandatory” and that the Notice of Designation therefore was untimely.

Doing things two days apart is not doing them “contemporaneously.”  Two hours?  Presumably yes.  The Business Court requiring that the Designation be filed at the same time as the Complaint is nothing new.  Judge Jolly issued a published Order to that effect in 2012, in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46.

Last of these Significant Orders on the subject of designation is Brown v. Caruso Homes, 2019 NCBC Order 30.  This Order reminds me that there is an alternative path to designating a case to the Business Court other than those specified in the designation statute (G.S. sec. 75A-45.4).  That path lies in Rule 2.1 of the General Rules of Practice.

You can still get a case into the Business Court (per Rule 2.1) by persuading a non-Business Court Judge in the County where the case originated that he or she should recommend to the Chief Justice of the NC Supreme Court that the case be treated as a complex business case.

The factors to be taken into account are:

the number and diverse interests of the parties; the amount and nature of anticipated pretrial discovery and motions; whether the parties voluntarily agree to waive venue for hearing pretrial motions; the complexity of the evidentiary matters and legal issues involved; whether it will promote the efficient administration of justice; and such other matters as the Chief Justice shall deem appropriate.

The Plaintiff in Brown had filed a Complaint against his employer alleging a single violation of the North Carolina Wage and Hour Act.  He designated the case to the Business Court the same day relying upon the discretionary factors set out in Rule 2.1.  Chief Judge Bledsoe rejected the arguments that the case was “complex,” that it would be “fact-intensive,” and that it would require “voluminous and complex” discovery and would need “focused judicial attention and oversight.”

Chief Judge Bledsoe didn’t mention that these arguments should have been addressed to a regular Superior Court Judge, not to a Business Court Judge.

In any event, he returned the case to the regular docket of the Wake County Superior Court.

*   *   *

The next post in this series on the Orders of Significance should drop next week.







If you ever look at the Business Court’s website, you’ve noticed that the Court added late last year a new category of rulings, which it has dubbed “Orders of Significance.”  There are 118 of these Orders, stretching back ten years, to 2010.

The Court is statutorily mandated to publicly post a number of its rulings, per N.C.G.S. § 7A-45.3, which obligates the Court to issue a written Opinion on rulings rendered per NCRCP 12, 56, 59, and 60, but these Orders of Significance don’t fall into those categories.

I asked Chief Judge Bledsoe (via email) what had prompted the posting of these Orders.  He responded that the Court thought that these Orders “would be of interest to the Bar” and that the Court had been contemplating adding them for a while.  As for their content, he said that these Orders “cover a wide variety of subject matters and include TROs, preliminary injunctions, discovery rulings, receivership orders, contempt orders, and designation orders, among others.”

I asked Judge Bledsoe if there were any “extra” Significant Orders in this sprawling body of work, because I don’t have the desire or the energy to plow unguided through 118 rulings.  To my disappointment, he said that he didn’t “know that any are more significant than the others.”

Nevertheless, he did advise that all of the Court’s orders regarding challenges to the designation of a case to the Business Court are in this group of rulings, and that he thought that these would be of interest to readers of this blog.  So I have elected to write about them as a start on these significant Orders.

But when I attempted to use the search function on the Court’s website to find the Orders regarding designation, it yielded nothing.  It looks to me like the search function will not get into the text of the Orders, but only the case names.

So, I have created my own searchable file of all of these Orders.  And coming Monday is the first of what will be several dives into these 118 Orders of Significance.  I’ll start with the Orders regarding designation to the Business Court.


Everest Mountain Peak – the top of the world (8848 m)

I know that you haven’t heard from me in a while.  I’m sorry, and I feel guilty.  You’ve undoubtedly noticed that a gaggle of ten lawyers at Fox Rothschild have started a competing Business Court blog, called It’s Just Business.

Well, notwithstanding the gaggle, I’m not ready to abdicate my position as the original NC Business Court blogger, so I’m back at it again.

My reentry point is the Business Court’s decision this month in Duke Energy Carolinas, LLC v. AG Insurance SA/NV, 2019 NCBC 73.  The case concerns Duke Energy’s efforts to obtain insurance coverage for its liabilities connected to “coal combustion residuals,” more commonly known as “coal ash.”  For readers not living in North Carolina, Duke Energy’s problems in handling its coal ash (a byproduct from the operation of coal-fired power plants) have been a huge issue here.

Thirty nine tons of coal ash from a pond maintained by Duke Energy were spilled into North Carolina’s Dan River in 2014.  That resulted in the North Carolina Legislature ordering Duke Energy to close 32 ponds maintained by it containing coal ash by 2029.  It also led to millions of dollars of fines for Duke Energy from the Environmental Protection Agency.

The issue in the AG Insurance case was whether the insurance companies litigating the case — and there are at least fifteen of them — were entitled to take the depositions  of Duke Energy’s CEO and CFO.

C Suite officers never want to be deposed, and Duke objected to the depositions, forcing a Motion to Compel.  Duke argued, per the “Apex doctrine,” that the insurers had to show that the officers had “unique or special knowledge of the facts at issue and that “other less burdensome avenues for obtaining the information sought have been exhausted.”  Op. ¶21.

The Business Court has dealt with the Apex doctrine on at least three prior occasions.  In each, the Business Court discussed the doctrine, but refused to adopt it.  Those cases are Gay v. People’s Bank (unpublished), Next Advisor Continued, Inc. v. Lendingtree, Inc, 2016 NCBC 70,  and Bradshaw v. Maiden, 2017 NCBC 30.  These decisions were all delivered by Chief Judge Bledsoe.

Chief Judge Bledsoe’s basis for rejecting the Apex doctrine in AG Insurance was that Rule 26 of the Rules of Civil Procedure is sufficient guidance for resolving the dispute over the CEO and CFO depositions.

Rule 26 says that discovery can be limited and it incorporates most of the protection that the Apex doctrine provides to chief executives.  It says in part that a Court may limit discovery if:

i) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the importance of the issues at stake in the litigation.

N.C. R. Civ. Pro. 26(b)(1a)(emphasis added).

Chief Judge Bledsoe then assessed the  involvement of the CEO and CFO in the coal ash matters at issue in the case.  He wrote that: “each had significant involvement in analyzing, directing, and/or implementing Duke’s strategy and decision-making concerning coal plant closures and coal ash remediation both before and after the Dan River Spill.”  Op. ¶25.

It didn’t make any difference to his analysis that lower level executives had already testified on these same subjects.  He held that the views of higher level executives “may be of far greater probative value on the issue of intent and motive than the views of the lower-level executives.”  Op. ¶25 (quoting Travelers Rental Co. v. Ford Motor Co., 116 F.R.D.  140, 146 (D. Mass. 1987)).

Judge Bledsoe did provide some limited protection to the high level Duke Energy deponents.  The deponents will be deposed in their individual capacities, not as corporate representatives per N.C. R. Civ. Pro. 30(b)(6).  The depositions were also limited to four hours, instead of the presumptive seven hours allowed under Business Court Rule 10.7(a).



State law antitrust claims in North Carolina seem to go together with unfair and deceptive trade practices claims (Chapter 75 claims) like peanut butter and jelly.  Section 75-2 of the General Statutes says that “any act, contract, combination in the form of trust, or conspiracy in restraint of trade or commerce which violates the principles of the common law” is a violation of the unfair and deceptive trade practices law.

So why did Business Court Judge Robinson dismiss the UDTPA claim in the antitrust lawsuit (at the Rule 12 stage) in DiCesare v. Charlotte-Mecklenburg Hospital Auth., 2019 NCBC 13 ?

He did so because of his decision that quasi-municipal corporations are exempt from liability under Chapter 75.

Never heard of a quasi-municipal corporation?  It is defined as “a corporation vested with . . . municipal powers for the accomplishment of a limited municipal purpose.”  The Charlotte-Mecklenburg Hospital Authority, the Defendant, said that it was a quasi-municipal corporation and therefore not subject to a Chapter 75 claim.  The Plaintiff said that the Defendant didn’t have that status, and that the question of its status was a question of fact which couldn’t be resolved on a motion to dismiss.

Judge Robinson, before reaching the question of the Defendant’s legal status, decided whether quasi-municipal corporations were exempt from Chapter 75 claims.  He ruled that they were, relying on a 2018 decision from the North Carolina Court of Appeals, Badin Shores Resort Owners Ass’n v. Handy Sanitary Dist., 811 S.E.2d 198 (N.C. Ct. App. 2018).  The Badin Shores Court held that the Defendant there, “as a quasi-municipal corporation it cannot be sued for unfair and deceptive trade practices.”  Id. at 210.

What gives quasi-municipal corporations their special status?  They derive their existence from the State, and Chapter 75 applies only to persons, firms, and corporations.  N.C. Gen. Stat. § 75-16.  The State of North Carolina is none of those things, so it is exempt from the statute.  The question of the State’s exposure to unfair and deceptive trade practices claims has been decided since 1985, with the COA’s decision in Sperry Corp. v. Patterson, 73 N.C. App. 123, 125, 325 S.E.2d 642, 644-45 (1985)(“The State of North Carolina is not a ‘person, firm or corporation within the meaning of G.S. 75-16. . . .”)

Though the Badin case seemed to answer the question of the inapplicability of Chapter 75 to quasi-municipal corporations, Judge Robinson had to distinguish a possibly conflicting NC Supreme Court decision, Madison Cablevision, Inc. v. City of Morganton, 325 N.C. 634, 386 S.E.2d 200 (1989) to reach that conclusion.

The Plaintiff took a run at arguing that the Defendant wasn’t a quasi-municipal corporation anyway, and that this status was a question of fact which the Court couldn’t resolve at the Rule 12 stage.  The Business Court ruled that this was a question of law based upon statutory construction and not a question of fact.  The Defendant’s Certificate of Incorporation stated that it was “incorporated as a public body and a body corporate and politic.”  The legislation by which it was formed, the Hospital Authorities Act, declared it to be the same.  The term “body politic and corporate” encompasses quasi-municipal corporations. Op. ¶33.

With those issues decided, the Court dismissed the Plaintiff’s UDTPA claim.  But the Plaintiff’s core antitrust claim survived.

How Much Of The Market Does An Alleged Monopolist Need To Control?

The Defendant Hospital Authority argued that the Plaintiff’s antitrust claim was deficient because it did not allege that competition had been eliminated in the Charlotte area.  it further argued that the Complaint was self-defeating because it alleged that there were other healthcare providers in the Charlotte area which competed with the Defendant.

The need for total elimination of any competition is inconsistent with how the NC Supreme Court has defined an entity which holds a “monopoly.”  Judge Robinson observed that the NC Supreme Court has defined a “monopolist” as “an organization or entity so magnified that it suppresses competition and acquires a dominance in the market.” Op. at ¶38 (quoting American Motor Sales Corp. v. Peters, 311 N.C. 311, 315−16, 317 S.E.2d at 351, 355 (1985).

The Court therefore denied Plaintiff’s Motion for Judgment on the Pleadings as to the monopolization claim.  Op. ¶42.

Certification For Immediate Appeal

Judge Robinson, acting per NCRCP 54(b), certified his Opinion for immediate appellate review.  He wrote that “[t]he issue of the applicability of Chapter 75 to hospital authorities decided by the Court today has importance beyond this case.”  Op. ¶45.

I have no idea how many quasi-municipal corporations there are in North Carolina, but this decision may well have some impact.

A Notice of Appeal hasn’t been filed.  Yet.




Judge Robinson boldly went where no North Carolina Judge writing published Opinions had gone before last month in the case of Wheeler v. Wheeler, 2018NCBC117.  The subject was a corporate officer’s right to the advancement of legal fees incurred in defending against a lawsuit.

Judge Robinson noted that there was only “one case in which our appellate courts have dealt with the issue of advancement.”  Op. ¶1 & n.1.  That case was inapplicable to the Wheeler decision.

Advancement (the right for an officer, director, agent or employee of a corporation to be reimbursed for expenses incurred in litigation) is governed by G.S. §55-8-53.  The right to be indemnified for a liability resulting from such litigation is governed by G.S. §55-8-51.

The corporation of which Plaintiff (Gray Wheeler) was an officer, director, and shareholder had provided for advancement and indemnification rights in its Bylaws.  It was the Gray Wheeler who was seeking advancement.  The corporation refused to advance his legal fees and expenses, and Wheeler moved for a preliminary injunction forcing the Defendant corporation to pay his fees and expenses.

Why Was A Plaintiff Seeking Advancement?

Plaintiff Wheeler initiated the lawsuit before the Business Court, alleging a breach of fiduciary duty by one of his co-directors and shareholders, and also seeking dissolution of the corporation.  There was no advancement due for those claims.

Instead, Plaintiff sought advancement for counterclaims brought against him as well as a separate arbitration filed against him.

The corporation took the position that counterclaims are not “an action, suit or proceeding” for which advancement is allowed.

Judge Robinson didn’t waste much time in rejecting that argument, holding that the language in the Bylaws “contained no language excluding counterclaims . . . .”  Op. ¶80.

The Relationship Between Advancement And Indemnification

The General Statutes prohibit indemnification:

(1) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or

(2) In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.

N.C. Gen. Stat. §55-8-51(d).  Also, a corporation may not provide indemnification to a person for “activities which were at the time taken known or believed by him to be clearly in conflict with the bests interests of the corporation.”  N.C. Gen. Stat. §58-8-57(a).

The Defendant corporation argued that it was not obligated to advance Wheeler’s litigation expenses and fees.  It said it would not be permitted to indemnify him because Wheeler had to have known that the conduct at issue was in conflict with the best interests of the corporation.  In other words, its position was that the right to advancement is dependent on the right to indemnification.

Not so, said Judge Robinson, looking to the more well-developed Delaware law on this subject.  He held:

The Delaware Supreme Court has held that “[a]lthough the right[s] to indemnification and advancement are correlative, they are separate and distinct legal actions.” Generally, “[t]he right to advancement is not dependent on the right to indemnification.

Op. ¶58 (citations omitted).


Can A Corporate Officer Or Director Ever Obtain An Injunction To Force Advancement?

So after finding that Plaintiff Wheeler had shown a clear likelihood that he was likely to succeed on the merits on his claim for advancement, why didn’t Judge Robinson enter an injunction requiring the corporation to advance his legal fees?

The short answer is that Gray Wheeler hadn’t shown that he would be irreparably harmed if he did not receive an injunction.  On this point, there was no guidance from the Delaware courts because advancement claims in that State “are decided in separate, stand-alone proceedings and/or on summary judgment, not by means of a preliminary injunction” Op. ¶87.  That is a function of the Delaware statute governing advancement.  Del. Code Ann. tit. 8, § 145(k).

Wheeler’s pursuit of an injunction to assure his advancement rights was an issue of first impression in North Carolina.  Op. ¶86.

The injunction sought by the Plaintiff was a mandatory injunction as opposed to the more common prohibitory injunction.  If you missed learning about that distinction (maybe it was in first year Civil Procedure), here is the difference:

‘A prohibitory injunction seeks to preserve the status quo, until the rights of the parties can be determined, by restraining the party enjoined from doing particular acts.’. . .  In contrast, ‘[a] mandatory injunction is intended to restore a status quo and to that end requires a party to perform a positive act.’

Op. ¶35.

The burden for obtaining a mandatory injunction is greater than that for a prohibitory injunction.  Op. ¶101.  Thus, Wheeler was required to” show that the injury was “immediate, pressing, irreparable, and clearly established.”  Op. ¶84.

Wheeler ran into the well-established principle that “where an injury may be compensated by the payment of monetary damages, the injury is not irreparable, and an injunction should not issue.”  Op. ¶92.

Judge Robinson did not rule out the possibility that a person denied advancement might suffer irreparable harm warranting an injunction.
But the Plaintiff’s contention that he lacked the funds to “continue effectively defending himself” were not enough.  Wheeler said that his lawyers had already billed him more than half a million dollars for his defense.

Judge Robinson observed that Wheeler had “submitted no evidence showing that he has been unable to pay these fees as they became and become due.”  Op. ¶96.  Wheeler’s only effort in establishing his inability to pay his lawyers was to say that his net worth was “concentrated in illiquid assets.  That “illiquidity” was said to be tied up in an apartment he owned in New York City, a house in Asheville, NC, and his and his wife’s 401(k) accounts.

Judge Robinson was unimpressed by this claimed illiquidity, and said that  he was “unable to obtain loans or borrow against any of his illiquid assets to pay his legal fees as they become due.”

The Judge also brushed aside the argument that Wheeler’s litigation strategy had been affected because he could not afford to “take a more aggressive approach with expert witnesses.”  Op. ¶100.  Assuming that “more aggressive” meant “more expensive,” Wheeler hadn’t identified
who the “more costly expert witnesses” are, the claims on which they would testify, and how this testimony might improve Gray’s chances of ultimate success in defense of the . . . claims against him. Op. ¶100.


Wheeler Was Not Entitled To Advancement For Some Of The Claims Made Against Him.

The corporate Bylaws provided that Wheeler was entitled to indemnification for claims brought “by reason of the fact” that he was acting as an officer or a director.  The “by reason of the fact” language is contained in the Delaware indemnification statute (Del. Code. Ann. tit. 8, §145(a)-(b)), so Judge Robinson looked to Delaware law for interpretation of this phrase.

He held:

“[I]n order for one to be deemed a party to a proceeding ‘by
reason of the fact’ of one’s corporate position, there must be a ‘causal connection or nexus’ between the underlying proceedings and ‘the corporate function or “official [corporate] capacity. . . .  ‘The requisite connection is established ‘if the corporate powers were used or necessary for the commission of the alleged misconduct.’

Op. ¶72 (citations omitted).

The claim in question involved Wheeler’s breach of his obligation to tender his shares of the corporation per a Buy-Sell Agreement.  It therefore lacked any causal relationship to his status as a corporate officer or director.