August 2008

Today, the Supreme Court ruled in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that a claim for piercing the corporate veil could proceed against the individual shareholders of the corporate defendant.

The opinion makes clear the standard that North Carolina applies in such cases, but more significantly resolves an question on the interplay between alter ego claims and the statute of limitations.  The holding is that the filing of a complaint against the corporation will toll the time for bringing claims against the individuals or entities which might be subject to a veil piercing claim.

Ridgeway was in the business of manufacturing cigarettes in North Carolina.  It was not a party to the Master Settlement Agreement entered into by the major tobacco manufacturers, and therefore had the statutory obligation to pay a tax based on each cigarette it sold. When the company sold nearly 90  million cigarettes, and didn’t pay more than a million dollars in tax, the Attorney General pursued not only the company but also its individual shareholders. 

The trial judge had dismissed the alter ego claim.  The Court of Appeals had reversed, but found one of the alter ego claims to be barred by the statute of limitations.  The Supreme Court affirmed the Court of Appeals on the viability of the alter ego claims, ruling that sufficient facts had been alleged to warrant a disregard of the corporate entity.  It stated that the defendants had made a:

considered decision not to fulfill their statutory obligations in North Carolina.     Among the allegations against defendants are charges that they deliberately and purposefully chose to line their personal pockets by pricing cigarettes at a level that would increase their market share–to the detriment of their competitors who opted to function in a manner that would permit them to perform their statutory obligations. Defendant shareholders further chose to ignore the admonitions and warnings of their own experienced manager that their operational plan did not allow them to fulfill their statutory obligations. Defendant shareholders, including Heflin, also made a considered decision to pay their obligations in their home state of Kentucky while ignoring their obligations to North Carolina. Defendants further channeled corporate funds into unknown entities they controlled, leaving Ridgeway behind as a hollow shell from which plaintiff could not expect to recover anything.

Taking these allegations as true, it would be inequitable to permit defendants to shelter behind the corporate identity of the very entity they drained in the course of their actions. Given this, we hold that in light of our opinions in Henderson and Glenn, plaintiff has made the necessary showings at the pleading stage to establish that defendant Ridgeway was operated as a mere instrumentality of defendant Heflin.

The opinion is for the most part a straightforward application of the "instrumentality rule" adopted in Glenn v. Wagner, 313 N.C. 450, 329 S.E.2d 326 (1985), which requires a showing of three elements (1) stockholders’ control of the corporation amounting to “complete domination” with respect to the transaction at issue; (2) stockholders’ use of this control to commit a wrong, or to violate a statutory or other duty in contravention of the other party’s rights; and (3) this wrong or breach of duty must be the proximate cause of the injury to the other party."

The novel issue in this case was the interplay between an alter ego claim and the statute of limitations, and that’s where the Supreme Court reversed the Court of Appeals. The original complaint was filed in May 2004.  That complaint made claims only against the manufacturing company, and made no alter ego claims against its shareholders.  Over a year later, in October 2005, the State amended to add the veil piercing claims. Although the Court of Appeals agreed that those claims could go forward, it found that one of those claims against one of the defendants was by then barred by the statute of limitations, even though it had been timely made against the corporation.  The Court held that the alter ego claim could not relate back because the individual defendant would be a new party. 

The Supreme Court reversed, and held that "North Carolina follows the same rule as most other jurisdictions that have considered the issue: the principle that initiating a suit against a corporation tolls the statute of limitations with respect to its alter egos."

The opinion makes the not surprising observation that whether to pierce the corporate veil is "among the most confusing in corporate law" and "enveloped in the mists of metaphor." 

Why a picture of a lightning strike?  In the course of her opinion, Judge Timmons-Goodson quoted from Judge Easterbrook that "proceeding beyond the corporate form is a strong step: ‘Like lightning, it is rare [and] severe[.]’" 

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

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

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

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

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

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

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

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

I got an email invitation today to a seminar where one of the speakers will be speaking on "hot tubbing" with expert witnesses. I decided immediately that I would need to hire better looking experts in the future if this was going to catch on.

In all seriousness, it turns out that "hot tubbing" of experts had its origin in Australian courts, and it is becoming something of a "hot" subject here in the U.S.  There’s an article in ABA Journal about it, and also an article in the New York Times.

What it means is that all of the experts on a particular subject are sworn in at the same time, and then sit as a panel to be examined jointly by the lawyers for the parties and the Court. The procedure even allows for one expert to question another expert directly. 

Given the way the procedure works, it makes sense that hot tubbing is also known as "concurrent evidence."  If you are interested in exactly how this procedure works, you can keep reading below.

Continue Reading Expert Witnesses And Hot Tubs

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

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

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

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

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

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

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

Op. at 12.

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

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

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

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

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings


I’m writing this post about the Business Court’s past decisions involving tortious interference with contract because "tortious interference" is one of the most common searches leading readers to this blog. 

So, here’s a summary of more than a dozen Business Court decisions which involve that tort, with links to the summaries of the cases on this blog, which in turn have links to the full opinion and also to the briefs if they were available. 

Tortious interference claims survived dispositive motions in these cases: 

In Webb Builders, LLC v. Jones, January 24, 2002 (unpublished), a homebuilder was pursuing tortious interference claims against a dissatisfied customer.  The customer had complained to others for whom the builder was working, and some of those customers had terminated their relationships with the builder.  The customer also complained to prospective customers, some of whom declined to do business with the builder.  The Court considered the factors set out in the Restatement (Second) of Torts §767, which include "(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relations between the parties." The Court held that this tort does not require a showing of of force, or threat, or intimidation, and also that it does not require independently tortious conduct.

In Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2002 NCBC 4 (N.C. Super. Ct. July 10, 2002), the Court engaged in a thorough discussion of the tort of interference with prospective economic advantage (or prospective economic relations) and let survive a claim between two competitors.  It found that there were issues of fact "whether defendants prevented plaintiff from making contracts by means other than legitimate methods of competition."  Those facts, generally, involved the defendant’s use of the plaintiff’s confidential information and a deliberate pattern of undermining the plaintiff’s business.  The Court also allowed a claim for tortious interference for the manner in which defendant had recruited plaintiff’s employees.  (The Sunbelt case, which was affirmed by the North Carolina Court of Appeals, is probably the most significant North Carolina case involving tortious conduct between competitors).

In CNC/Access, Inc. v. Scruggs, 2006 NCBC 20 (N.C. Super. Ct. Nov. 15, 2006), the Court found issues of material fact whether the plaintiff had interfered with the defendant’s prospective relationships with certain customers.  The Court dismissed plaintiff’s claims for tortious interference, finding that the covenants not to compete on which those claims were based were unenforceable.  The parties were competitors.

The Business Court has dismissed tortious interference claims on multiple occasions, including cases involoving lenders, competitors, trust beneficiaries, and insurance agents:

In Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997), the Court held that there was no tortious interference claim by a junior lender against a senior lender which had required the borrower to sell off its collateral in order to pay down the senior debt.

In Praxair v. Airgas, Inc., 1999 NCBC 5 (N.C. Super. Ct. May 26, 1999) and Praxair v. Airgas, Inc., 1999 NCBC 9 (N.C. Super. Ct. Oct. 20, 1999), the Court dismissed a tortious interference claim between competitors.  It held (in the second opinion) that "absent proof that a competitor has acted maliciously or otherwise unlawfully, courts should be reluctant to impose liability for conduct that can be characterized fairly as legitimate competition."  The defendant therefore had a legitimate right to bid to acquire a business in which plaintiff had a right of first refusal.  The Court let survive, however, a tortious interference claim that the defendant had enouraged others to breach their rights to the plaintiff under that right of first refusal.

In Staton v. Brame, 2001 NCBC 5 (N.C. Super. Ct. May 31, 2001), the Court dismissed a tortious interference claim against the beneficiary of a charitable trust who had terminated a contract between a foundation formed by the trust and the defendant.  The Court noted the differing treatment under North Carolina for "outsiders" and "non-outsiders" to contracts, and determined that plaintiff was a non-outsider who had acted with what she believed was a legitimate interest in protecting her trust income, and who therefore had a qualified right to terminate the contract in question..

In Hinson v. Trigon Healthcare, Inc., August 23, 2001 (unpublished), the lawsuit was between parties in the business of insurance.  Defendant had sent letters to persons for whom the plaintiffs, insurance agents, had written policies informing them that it was exiting the business and that they should find substitute insurance.  The Court held that the defendant had a "legitimate business purpose in sending the letters" so that its policyholders could avoid gaps in their coverage, and dismissed the tortious interference claim. 

The case of Durham Coca-Cola Bottling Co. v. Coca-Cola Bottling Co., 2003 NCBC 3 (N.C. Super. Ct. Apr. 28, 2003) involved a letter of intent, which the Court found to be an agreement to agree at a future date, and subject to a future, more complete acquisition agreement.  The letter of intent therefore could not form the basis for a tortious inteference claim.  The Court went on to say, however, that summary judgment would have been appropriate in any event on the basis of justification. The defendant, a competitor of plaintiff, was competing with plaintiff for the purchase of the business in question and plaintiff therefore could not show that it was acting with bad faith or malice so as to justify its tortious interference claim.

In Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), the claim was dismissed because the action was between two competitors, and the Court held that interference with contract is justified if motivated by a legitimate business purpose, as when the parties are competitors.

In Epes v. Healthsouth Corp., February 8, 2008 (unpublished), the Court dismissed the claim because it found that the contract upon which the claim was based lacked mutual assent as to material elements necessary to create an enforceable contract, including the price to be paid, identification of the parties, and the subject matter of the contract. The letter merely expressed the intent and desires of the parties, rather than their agreement.

In Webb v. Royal American Company, LLC, March 17, 2008 (unpublished), the Court dismissed a tortious interference claim against a lender.  Although Plaintiffs had recited 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.  The Court held that a lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff must make something more than conclusory allegations about justification. 

In Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc., June 19, 2008 (unpublished), the Court granted a motion to dismiss a tortious interference claim between the plaintiff and its former supplier.  The plaintiff alleged that the defendant had acted improperly by selling product to plaintiff’s competitor.  The Court held that the defendant "had the right to do so," and that "competition does not in and of itself represent tortious interference."  The Court held that it is a legitimate justification to seek business from common customers.   


There was an article in the ABA Journal a few months ago about the Judges who are the "rock stars" of electronic discovery issues.  Two of those Judges, Paul Grimm of the District of Maryland and David Waxse of the District of Kansas, formed a "rock star trio" with Judge Tennille on an ABA panel earlier this year.

The subject was ethical issues in e-discovery.  You can download the whole presentation on the ABA website for a more than nominal fee.  But if you don’t want to do that, here’s some of what Judge Tennille had to say:

As Judge Tennille sees it, the "most important rule for lawyers’ from an ethical perspective is Rule 1.1, which is "Competence."  That Rule requires "the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation."  According to Judge Tennille, state court judges are looking to the lawyers and expecting them to present solutions to e-discovery issues.  As he put it, Judges are saying “I expect you to have the knowledge to handle this problem. I expect you to meet and confer with each other and tell me how you’re going to solve this problem.”

Judge Tennille referenced a Business Court case where the lawyers for a party turned over a mirrored hard drive to opposing counsel, and then had to scramble when it turned out that there were privileged documents on the hard drive.  Using that example, Judge Tennille said “You really have a very basic obligation to be compeltent in this area. And in my view, being competent does not mean turning your client’s hard drive over to the other side.”  So, reaching agreement in advance to deal with this type of situation, and including a clawback provision providing for the return of privileged documents, is a part of that competence.  (Although Judge Tennille didn’t name the case, it is Judge Diaz’ opinion in International Legwear Group, Inc. v. Legassi International Group, Inc.)

The seminar turned to a discussion of the California case (Qualcomm) sanctioning lawyers for their failure to turn over a substantial quantity of emails and misrepresenting the situation to the Court, and Rule 3.3’s duty of "Candor Toward The Tribunal."  Judge Tennille said “I think the best rule for you to keep in mind is not to follow the old suggestion that it is easier to ask foregiveness than permission. If you have a question, you ask for permission first. Because it’s really not worth risking your law license to ask for foregiveness later.

On the subject of lawyers who play fast and loose with e-discovery, Judge Tennille said: “I think judges generally try to look at it from the standpoint of when we’re trying to determine if somebody is gaming the system, we look at process and motivation and if you’ve got a good process and we don’t have any question about your motivation, you’re not going to be in trouble. If you haven’t used a good process or we have any question about your motivation or the client’s motivation and what they did, chances are that we’re going to determine that you were gaming the system and your client will suffer from that, 99 times out of a 100.

And then Judge Tennille said something that seems so easy to understand: "The best test is your common sense. And if you use it you’ll stay out of trouble. if you don’t, there’s going to be a judge somewhere who will penalize you for not using your common sense.”

Judge Tennille has written two Business Court opinions on the subject of e-discovery, Analog Devices, Inc. v. Michalski, 2006 NCBC 14 (N.C. Super. Ct. Nov. 1, 2006) and Bank of America Corporation v. SR International Business Insurance Company, Ltd., 2006 NCBC 15 (N.C. Super. Ct. Nov. 1, 2006), but that is still a largely uncharted territory in North Carolina’s state courts.

The image at the top is from, edited.

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

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

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

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

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

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

Full Opinion

Moody v. Sears, Roebuck & Co., 2008 NCBC 14 (N.C. Super. Ct. August 6, 2008)

The North Carolina Business Court has set out an explicit set of procedures to be followed when parties take a voluntary dismissal of a class action before a decision on class certification. 

This Order yesterday by Judge Tennille in the Moody case comes following the Court of Appeals decision in that case last month, which reversed the Business Court and held that full faith and credit should have been accorded to an Illinois court’s approval of a nationwide class action.

The new opinion from the Business Court requires that counsel taking a pre-certification dismissal of a class action must file a statement which includes:

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

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

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

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

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

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This is not a new requirement of the Court.  As Judge Tennille stated, "it has been the practice of this Court to require class representatives to file and publish a copy of the final accounting detailing the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

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

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

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

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

The accounting in Moody is that the members of the class in North Carolina received $66 in cash and coupons, the nationwide class members received $2,402 in cash and coupons, and Plaintiff’s counsel received $1,100,000 in cash and coupons.  Notwithstanding its reversal of the Business Court’s opinion of the original decision in Moody (which you can read about here) the Court of Appeals expressed concern about the adequacy and fairness of the Illinois settlement, stating "we share the trial court’s serious concerns regarding the final accounting in the . . . settlement."


On August 5th, in Hamm v. Blue Cross and Blue Shield of North Carolina, Judge Jolly certified a class action against health insurer Blue Cross.  The class will consist of Blue Cross members who claim that their medical providers charged them more than the amount the providers had contracted with Blue Cross to charge for their services, after the members exceeded certain benefit maximums.  According to Plaintiff’s Brief (at bottom), the class will have thousands of members.

The Court rejected a number of arguments made by Blue Cross as to why a proper class did not exist and why the class representative would not adequately represent the class.

Hamm was enrolled in a plan with Blue Cross that provided for "in-network providers" to charge a contracted-for amount for their services, referred to as the "allowed amount."  Hamm’s contention was that the plan provided that Hamm would not be responsible for any charge over the allowed amount.

In Hamm’s situation, however, she hit the "benefit period maximums," which included a cap on the dollar amount that a member could receive in paid benefits from Blue Cross for certain services.  She claimed that the in-network providers then began charging her at full rates, not the lower, negotiated-for allowed amount.  Hamm disputed that the plan permitted these additional charges, which led to her lawsuit.

The main arguments against class certification made by Blue Cross, and rejected by Judge Jolly, were as follows:

Blue Cross argued that the class had no injury.  As the insurer interpreted its agreement, in-network providers were entitled contractually to charge more than the allowed amount when a member exceeded the number of visits allowed by her policy (the "visit maximum").  But when a member exceeded the monetary amount that Blue Cross would pay for covered services (the "benefit maximum"), as opposed to the visit maximum, Blue Cross said that a provider was required to charge only the allowed amount, and it disputed that it had allowed the practice of a higher charge in those circumstances.  The Court wrote that there was "pragmatic appeal" to this argument (Op. at 12 n.8), but said that the construction of the contract was "not as clear to the court as it is to Defendant," and found these were both "merit-based defense(s) not properly before the court at this stage. . . ."  (Op. at 11 and 12). 

The insurer also argued that a member would have no claim unless he or she had actually paid an amount over and above the allowed amount.  The Court rejected this argument, stating that a class member would have at least a claim for nominal damages for a breach of the contract, and noting that Plaintiff sought a declaration regarding the future rights of the class members, which would not require a showing of any actual damages.

Blue Cross argued that the Court would have to make "extensive individualized inquiries" whether a class member had actually paid more than the allowed amount and whether administrative remedies had been exhausted.  The Court held that these inquiries did not predominate over the common liability issue.  It said that there would be "uniform, mechanized and documented evidence" of these matters given the nature of Blue Cross’ record-keeping.  (Op. at 12 n.9).

On the point of adequacy, Blue Cross argued that the Plaintiff was subject to unique defenses regarding the amounts she claimed to have been charged over the allowed amount.  Blue Cross contended that the only charges to Plaintiff over the allowed amount had come from an out-of-network provider, not an in-network provider, and that the services received were not a "covered service."  The Court disagreed that these arguments precluded class certification, stating that "the focus of class certification ‘is properly on the typicality of the plaintiff’s claim as it applies to the general liability issues [and] not on the plaintiff’s ultimate ability to recover.’"  (Op. at 15).

The Court concluded its analysis by ruling that a class action was a superior method for adjudicating the claims before it.  It held "the controversy is over a contract of insurance that is standardized over hundreds of thousands of North Carolinians.  The interpretation of such standardized agreement on a class-wide basis will provide certainty and prevent inconsistent adjudications."

My partners Jennifer Van Zant and Charles Marshall represent Blue Cross.

Brief in Support of Motion for Class Certification

(All other briefs were filed under seal)


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 immunityPlaintiff, 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, LLPIt 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.