October 2008

The Business Court held that it had mandatory jurisdiction over a claim involving the interpretation and validity of the corporate bylaws of an electric membership cooperative.  The bylaws were similar to those of a number of other electric membership cooperatives, and the Court held "that the disposition of this case may have an impact far beyond the confines of this case."

Full Opinion

Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008).

The North Carolina Business Court decided today the first published opinion under North Carolina’s Identity Theft Protection Act, N.C. Gen. Stat. §75-60 et seq. The case, Fisher v. Communications Workers of America, also involves an interesting invasion of privacy issue.

The Plaintiffs were members of the CWA, working for AT&T at various locations. A representative of the Union posted a notice on a bulletin board at one job site which contained the social security numbers of all the Plaintiffs.

This led to three claims by the Plaintiffs: that this violated the North Carolina Identity Theft Protection Act, that it was an unfair and deceptive practice, and that it was an invasion of privacy.

The Act specifically provides that a business may not "Intentionally communicate or otherwise make available to the general public an individual’s social security number."  N.C. Gen. Stat. §75-62(a)(1).  Defendants argued that the list posted on the bulletin board had not been seen by the "general public" and that it had not been posted there in order to facilitate identity theft.  The Defendants also argued that the bulletin board was used for "internal verification or administrative purposes," and that the posting was therefore exempt under N.C. Gen. Stat. §75-62(b)(2).

Judge Diaz rejected these defenses.  He held that the Act does not require that the general public actually see the social security numbers in order for there to be a violation.  He also held that the communication of the social security numbers does not need to be made either for the purpose of providing them to the general public or for the purpose of facilitating identity theft.  And as to the "bulletin board defense," Judge Diaz held that this presented a question of fact which could not be resolved on a motion to dismiss.

The Motion as to the unfair and deceptive practice claim was also denied, mainly because the Act provides that “[a] violation of [section 75-62 of the North Carolina General Statutes] is a violation of [the UDTPA].” N.C. Gen. Stat. § 75-62(d) (2007).

The Court did grant the Motion to Dismiss on the invasion of privacy claim, however.  It held that the posting of the social security numbers was "not the type of ‘intentional intrusion, "physically or otherwise,"’ necessary to state a claim for invasion of privacy by intrusion into seclusion."  It held that this tort requires  "a physical or sensory intrusion or an unauthorized prying into confidential personal records."

The Court also rejected the argument that the posting on the bulletin board could make out an invasion of privacy claim because it was a "public disclosure of private facts."  The Court relied on  Hall v. Post, 323 N.C. 259, 265–70, 372 S.E.2d 711, 714–17 (1988), in which the North Carolina Supreme Court held that the tort does not encompass claims which involve the publication of true but private facts.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss


The Defendant’s exercise of his Fifth Amendment right against self incrimination was the basis for the North Carolina Business Court’s entry of a Preliminary Injunction on October 29th in Amacell LLC v. Bostic.

Plaintiff asserted that its former employee, a senior research scientist, had misappropriated trade secrets and violated a confidentiality agreement.  The Defendant didn’t deny the misconduct alleged, but instead invoked his Fifth Amendment right against self-incrimination.

Judge Tennille drew an adverse inference as a result of the Defendant’s refusal to testify and entered the Preliminary Injunction, holding:

In a civil case, adverse inferences may be drawn against a party who asserts the Fifth Amendment and remains silent.  Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them”); see Arminius Schleifmittel GMBH v. Design Indus., Inc., 2007 WL 534573 (M.D.N.C. Feb. 15, 2007) (granting injunction against defendant who asserted Fifth Amendment privilege because by asserting the privilege he rendered plaintiff’s factual presentation unrebutted). Because Bostic has not rebutted Plaintiff’s evidence, Plaintiff has established a likelihood of success on the merits of its claims for misappropriation of trade secrets and breach of his confidentiality agreement.

Order at 3.

The Business Court also dealt with the Fifth Amendment in the context of civil litigation in its opinion in Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), where the Court held that a plaintiff who refused to testify about certain matters could not testify about them at trial, and that it would give an adverse inference instruction.


The Plaintiff in the would be class action seeking to enjoin the Wachovia and Wells Fargo merger is pursuing his effort to obtain expedited discovery.  The parties have staked out the broad outlines of the claims and defenses in their briefs on that Motion. Plaintiff’s Brief is here, Wachovia’s Brief, filed yesterday afternoon, is here.

The essence of Plaintiff’s argument is that the $7 per share offered by Wells Fargo in the Merger Agreement is an inadequate price, and that the Wachovia Board of Directors violated its fiduciary duty by approving the merger and by entering into the Share Exchange Agreement that gave Wells Fargo nearly 40% of the outstanding voting stock of Wachovia.

The Claim Of Inadequate Price

On the claim that the price being paid by Wells Fargo is inadequate, Plaintiff argues that Wachovia stock was trading at $10 per share on September 26, 2008, before the bailout bill was passed, and that the effect of the bailout is to make Wachovia more valuable because the federal government will purchase its non-performing assets. 

As Wachovia points out (in its Brief at page 4 n.2), there is no certainty that it would be entitled to federal funds, which are to be allocated in the discretion of the Treasury. 

Wachovia says, based on the previously presented Affidavit testimony of Robert Steel, that the "stark choice" for Wachovia was either to accept the Wells Fargo offer or to enter receivership. (Wach. Brf. at 4)

Fiduciary Duty Claim

Plaintiff’s claim of violation of fiduciary duty is based on the argument that the Share Exchange Agreement has rendered the shareholder vote on the merger "essentially meaningless," and precludes any competing bid from being made. 

Plaintiff contends that the Share Exchange is invalid under the Emergency Economic Stabilization Act of 2008.  He points to the Section 126(c) of the Act, which reads:


No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

Wachovia launched a full frontal attack in response to the assertion that there is another potential buyer or merger partner:

Plaintiff’s application to this Court is based on the unsubstantiated and illogical notion that Wachovia has alternatives to the Wells Fargo merger and that somehow shareholders are being prevented from taking advantage of these supposedly superior opportunities.  This makes no sense.  It is now more than a month since Wachovia first announced that it was available for a transaction, and no offers other than those by Citigroup and Wells Fargo have been made.  If any capable third party was interested in making such an offer, it could have done so. 

Wach. Brf. at 5.  Wachovia also says that "any bank large enough to consider acquiring Wachovia knows how to formulate and communicate such an offer." (Wach. Brf. at 10-11).

The parties are also at odds over the significance of the "fiduciary out" in Section 6.3 of the Merger Agreement.  Plaintiff says that the fiduciary out does not permit Wachovia to terminate the Agreement in the event of a superior offer, but instead requires it to present the merger to the shareholders for a vote without a recommendation. 

On the point of motive, Plaintiff contends that the motive for this alleged breach of duty was to obtain "lucrative ‘golden parachutes’" for Wachovia’s executive team and for them to retain employment with the merged bank. Wachovia responded that the only management employee who voted to approve the merger is Robert Steel, who has publicly stated that he will not take a position with the merged entity.

Wachovia’s Other Arguments

Wachovia stresses the need to close its transaction, and says that the consummation of the merger is "crucial to the stability of the United States banking system" in the judgment of the Federal Reserve.  Wach. Brf. at 2. 

The Charlotte bank says that Plaintiff can have no hope of posting a bond even it it obtains injunctive relief.  As Wachovia puts it:

it is inconceivable that this shareholder could possibly post a bond for the potential costs and damages resulting from obtaining a wrongful injunction against a multi-billion merger that is critical to the stability of the financial system

Wach. Brf. at 3. That would be quite a bond.

The parties failed to submit their designation of mediator to the Court by the deadline provided for in the Case Management Order, and also after an inquiry from the Court.  The Court held that the parties had as a result "forfeited their right" to select a mediator. 

The parties were also delinquent in filing their good faith estimate of costs.  The Court ordered that document to be filed by a set date, and held that if the parties did not complete that filing that they would be required to show cause why they should not be held in contempt.

Full Opinion

Thomas Cook Printing Co. v.  Subtle Impressions, Inc.2008 NCBC 17 (N.C. Super. Ct. Oct. 24, 2008).

On October 24th, the North Carolina Business Court approved the Plaintiff’s withdrawal of class action claims under the Federal Telephone Consumer Protection Act (which prohibits the transmission of "unsolicited advertisements" to fax machines) and a settlement of the Plaintiff’s individual claims.

The Court’s approval was necessary as a result of the opinion of the North Carolina Court of Appeals in Moody v. Sears Roebuck and Co., 664 S.E.2d 569 (N.C. App. 2008), and Judge Tennille’s recent Order interpreting that ruling.

What’s interesting about the opinion is that the Court permitted counsel for parties to submit the documents supporting the settlement in camera.  It also permitted the parties to keep confidential the terms of the settlement with the individual Plaintiff.

Although Judge Diaz recognized that the settlement papers filed with the Court were "public records and, thus, are presumed to be available for public inspection pursuant to the North Carolina Public Records Act," he reasoned as follows in agreeing to keep them confidential:

In Virmani v. Presbyterian Health Servs. Corp., 350 N.C. 449, 463, 515 S.E.2d 675, 685 (1999), the North Carolina Supreme Court held that  “a trial court may, in the proper circumstances, shield portions of court proceedings and records from the public[.]” 

In the absence of the class action allegations, the parties "could have settled their dispute confidentially and filed a voluntary dismissal without any oversight from this Court." 

The amount being paid, as described by Judge Diaz, was "relatively insubstantial, particularly when viewed in the context of the high-dollar business disputes typical of this Court’s docket."

The case did not implicate substantial public policy concerns.  There had not been an interest voiced by the media or the public in the Plaintiff’s allegations.

Maintaining the confidentiality of the settlement was in the best interests of justice, in the absence of any prejudice to the putative class members or the public at large.

The Business Court has in the past refused to certify class actions under the Federal Telephone Consumer Protection Act, in Blitz v. Agean, Inc., 2007 NCBC 21 (N.C. Super. Ct. June 25, 2007) and Blitz v. Xpress Image, Inc., 2006 NCBC 10 (N.C. Super. Ct. Aug. 6, 2006).  The Agean case is  on appeal to the North Carolina Court of Appeals and is fully briefed.


You’ve lost a case in the North Carolina Court of Appeals,  It was unanimous, 3-0.  You are talking with your client about a Petition for Discretionary Review to the North Carolina Supreme Court. 

What are your chances?  Frankly, not very good at all.  I took a look at the Supreme Court’s track record this year on Petitions for Discretionary Review.  I counted 341 Petitions ruled upon on the five release dates so far this year.  Of that number, 319 were denied, and 22 were allowed.  In overall percentage terms, 94% were denied.

The numbers break a little better for civil Petitions as opposed to criminal Petitions.  There were 180 criminal Petitions, of which only 5 were granted. That’s less than 3%.  There were 161 civil Petitions, of which 17 were granted.  The chances on a  civil Petition, overall, were slightly better than 10%, but eight of those were Petitions where there was a dissent in the Court of Appeals.  When you take those out of the mix because the Supreme Court was going to take the appeal as of right, the winning percentage is about 6%. 

I haven’t subjected these numbers to actuarial review, but they are accurate enough for me to say that you might be better off looking for 4-leaf clovers than asking the Supreme Court to take your case on a discretionary basis.  The Court of Appeals, for all practical purposes, is the final level of review for a civil case in North Carolina.

Things are quite different if there is a dissenting opinion in the Court of Appeals and you ask the Supreme Court through a Petition for Discretionary Review to consider additional issues.  Virtually all of those Petitions were granted.

If you are proceeding ahead with a Petition despite the long odds, and are looking for a winning Petition to get some guidance in drafting your own, at the bottom of this post there are links to five of the Petitions allowed this year in civil cases. 

Petition for Discretionary Review in Mangum v. Raleigh Board of Adjustment

Petition for Discretionary Review in Pottle v. Link

Petition for Discretionary Review in Sandy Mush Properties, Inc. v. Rutherford County

Petition for Discretionary Review in Weaver v. Sheppa

Petition for Discretionary Review in Grant v. High Point Regional Health System

The first Complaint I’m aware of seeking to enjoin the merger between Wachovia and Wells Fargo has been filed in North Carolina and designated to the North Carolina Business Court.

In the Notice of Designation to the Business Court of the case, Ehrenhaus v. Baker, the Plaintiff describes his claim as follows: 

"This is a class action on behalf of the public stockholders of Wachovia Corporation (“Wachovia” or the “Company”) in connection with a proposed acquisition of Wachovia by Wells Fargo & Company (“Wells Fargo”) in breach of defendants’ fiduciary duties (the “Merger”).  Plaintiff alleges that he and the other public stockholders of the Company’s common stock are entitled to enjoin the Merger, or alternatively, to recover damages in the event the Merger is consummated.  Plaintiff alleges that the Merger provides Wachovia’s public shareholders with inadequate consideration and is the product of a severely flawed sales process. Wachovia’s Board of Directors (the “Board”) has essentially disenfranchised the voters of Wachovia and locked up the vote in favor of the Merger when, in connection with the Merger Agreement, Wachovia and Wells Fargo entered into a share exchange agreement under which Wachovia is issuing Wells Fargo preferred stock that votes as a single class with Wachovia’s common stock representing 39.9 percent of Wachovia’s voting power."

Ehrenhaus has also filed a Motion for Preliminary Injunction and a Motion for Expedited Proceedings.  The case has been assigned to Judge Albert Diaz. 

Here’s a little bit of background on the issue raised by the lawsuit regarding the shares to be issued by Wachovia to Wells Fargo:  In connection with their Merger Agreement , Wachovia and Wells Fargo entered into a Share Exchange Agreement, which provides that Wachovia will issue 10 shares of its "Series M, Class A Preferred Stock" to Wells Fargo in exchange for 1,000 shares of Wells Fargo Common stock.

What is "Series M, Class A Preferred Stock"?  The Form 8-K filed by Wachovia in connection with the Share Exchange Agreement says each one of those shares of stock represents 3.99% of the aggregate voting power represented by the shareholders of Wachovia common stock.  So, those ten shares have 39.99% of the voting power of Wachovia shareholders.

The effect of the issuance of those "super shares" to Wells Fargo will be to essentially to lock up the deal for Wells Fargo.  No other suitor for Wachovia can hope to obtain the necessary approval for an alternative merger deal while Wells Fargo holds a 40% voting bloc.  The lock up effect of the share issuance seems to be the main thrust of the Ehrenhaus Complaint.

It appears, however, that Wachovia complied with regulatory and statutory requirements regarding the issuance of those shares.  The New York Stock Exchange has a Shareholder Approval Policy which says that:

(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:
(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

The NYSE Rules provide for an exception when a delay in obtaining stockholder approval "would seriously jeopardize the financial viability of the enterprise," if the Audit Committee of the listed company expressly approves reliance on the exception.  The Rules further require that a company relying on this exception must mail a letter to its shareholders not less than 10 days before the securities will be issued, informing them of its intention to issue the securities without a shareholder vote.

Wachovia invoked the exception and sent the required letter to its shareholders, so it has complied with this particular requirement.

What about the North Carolina Business Corporation Act, which applies because Wachovia is a North Carolina corporation?  The Board of Directors of Wachovia has the power under North Carolina law, if the articles of incorporation so provide, to "determine, in whole or part, the preferences, limitations, and relative rights (within the limits set forth in G.S. 55‑6‑01) of (1) any class of shares before the issuance of any shares of that class or (2) one or more series within a class before the issuance of any shares of that series."  N.C. Gen. Stat. § 55‑6‑02.  The Articles of Incorporation of Wachovia presumably grant the Wachovia Board this authority and it was therefore presumably entitled to issue "Class M" shares with supervoting powers.

It will be interesting to see what happens with this case, which may be the first of many shareholder class actions over this merger.


The Court found that a Complaint seeking commissions due which would require the interpretation of various infrastructure agreements concerning "the fiber optic infrastructure to support the provision of telecommunication and internet services" fell within its jurisdiction over matters involving "the internet and electronic commerce." 

The Court found additional support for the designation in Defendant’s counterclaim for misappropriation of trade secrets, which implicated its jurisdiction over matters involving "state trademark or unfair competition law."

Full Opinion

Opposition to Notice of Designation

Memorandum Supporting Retention of Action in Business Court

Notice of Designation and Complaint


This post is about an Order Striking a Motion for Recusal by the North Carolina Business Court, in J. Freeman Floor Company, LLC v. FreemanThe Motion was stricken because it was procedurally defective, but the factual allegations which the Plaintiff claimed warranted recusal were interesting, as was the way in which Judge Diaz handled those allegations.

The Plaintiff moved to recuse Judge Diaz from hearing the Defendant’s Motion for Sanctions.  The argument for recusal ran like this: Plaintiff asserted that (1) Defendant’s counsel (Winson) had  been counsel for Carnival Cruise Lines, (2) Carnival Cruise Lines had in the past been represented by Hunton & Williams, (3) Judge Diaz had formerly been an attorney with Hunton & Williams (even at the same time he was a Superior Court Judge, said the Plaintiff) , and (4) Judge Diaz had improperly reopened the case (which had been dismissed) in order to hear the Rule 11 Motion. 

The specific allegations made in the Motion for Recusal were that:

Mr. Winson has close and substantial ties with Hunton & Williams by virtue of his long and substantial relationship with Hunton & Williams’ clients Carnival Corporation and Carnival Cruise Line.  Judge Diaz has close and substantial ties with Hunton & Williams due to his long and recent association with Hunton & Williams.  Mr. Winson’s substantial ties to Hunton & Williams and Judge Diaz’s substantial ties to Hunton & Williams creates a conflict of interest which Plaintiffs in good faith believe would prevent Judge Diaz from being fair and impartial to the Plaintiffs with regard to Mr. Winson’s Rule 11 motion which was purposefully set before Judge Diaz in a closed case file which had to be re-opened in order to bring said motion before Judge Diaz, despite the fact that Mr. Winson could have filed the Rule 11 motion in the new case file which would not have been heard by Judge Diaz.  Thereafter, Mr. Winson removed the new case file to business court and purposefully requested that Judge Diaz be assigned to the case.  For these reasons, Plaintiffs in good faith do not believe that they will receive a fair and impartial decision with regard to Mr. Winson’s Rule 11 motion.

The Motion to Recuse further alleged that Judge Diaz, who has been a Superior Court Judge since 2001, had been appearing in Court for Hunton & Williams clients as recently as 2006.  It referenced as support for this assertion several federal court opinions decided between 2003 and 2006 in which Judge Diaz was listed as counsel of record along with another Hunton & Williams attorney. (The Plaintiff was right about Judge Diaz being listed as counsel in those cases, but they all were filed before Judge Diaz took the bench).

The Plaintiff claimed that as a result of these facts there was an appearance of a "special relationship between Mr. Winson and Judge Diaz," and that this "would tend to give the appearance of impropriety." 

Judge Diaz didn’t get to the merits of the Motion in his Order, but instead struck the Motion because it was filed without a brief, in violation of Business Court Rule 15.2.  He noted that the Rule violation would ordinarily result in a summary denial of the motion, but gave the Plaintiff ten days to refile its Motion (with a Brief).  The ten days have run out, and the Motion hasn’t been refiled.

That’s probably because notwithstanding the striking of the Motion, Judge Diaz gave the Plaintiff a direct response to its assertions showing that they didn’t have any basis. The highlights are as follows:

  • With regard to the allegations that he had been practicing law while a Judge, Judge Diaz said "[s]ince taking the oath of office as a superior court judge in November 2001, I have not practiced law, whether with my former firm Hunton & Williams, LLP or any other firm. Indeed, such activity would be patently inconsistent with my oath as a judge and would also violate the North Carolina Code of Judicial Conduct. See N.C. Code of Judicial Conduct, Canon 5(F) (“Practice of law. A judge should not practice law.”)."
  • With regard to the allegations that Hunton & Williams had represented Carnival, Judge Diaz stated that was "news to me," and that "to the best of my knowledge and recollection, I never represented Carnival . . . during my tenure at H&W."
  • On whether he had a relationship with Carnival’s former General Counsel, Judge Diaz said that he "had never met Mr. Winson during my tenure at H&W" and that the first time he had encountered him was by telephone when Winson was in Court on another Business Court case.
  • On the point of whether it was proper to reopen the case to hear the Rule 11 Motion, Judge Diaz observed that "the law is clear that a trial court retains jurisdiction to hear a motion filed pursuant to Rule 11 of the North Carolina Rules of Civil Procedure, even after the case is dismissed."  

The picture at the top is of one of Carnival’s fleet of cruise ships, the Carnival Fantasy.