November 2008

One of the unusual things about the litigation over the Wachovia-Wells Fargo merger (which I’m hoping will come to a close soon so this blog won’t be all Wachovia all the time) was the flood of letters and emails written to the Court.  Judge Diaz received over 200 pieces of correspondence about the case.

The most high profile of those communications was the one from State Treasurer Richard Moore, who had said in a television interview that the merger amounted to "highway robbery."  Ever since Moore wrote his letter, I’ve been wondering why he didn’t move to intervene in the case.  That would have let him speak directly on behalf of the North Carolina Retirement System (the NCRS), which has lost nearly $20 million on its investment in Wachovia.

A likely answer why that didn’t happen came this week from the unlikeliest of places, a decision from Judge Keenan of the Southern District of New York, in a case called Kuriakose v. Federal Home Loan Mortgage CompanyThe opinion dealt with who should be the lead plaintiff in that class action under the Private Securities Litigation Reform Act (the PSLRA), and whether the State Treasurer has the power to seek to be a plaintiff in litigation.

The NCRS was vying in Kuriakose for the lead plaintiff position.  It looked like it had that spot locked up, because the Court determined that it was “the presumptively most adequate plaintiff under the PSLRA.”  This isn’t much of compliment, because adequacy turns mainly on the extent of the plaintiff’s financial loss.  The NCRS is down more than $18,000,000 on its investment in Freddie Mac stock, per an Affidavit filed by Moore in the case.

But Judge Keenan held that the NCRS couldn’t be lead plaintiff, because there was a substantial question whether Moore had the right to initiate litigation on its behalf.  In filings in the Southern District, the North Carolina Attorney General and the State Treasurer had gone to war over the authority of the State Treasurer to initiate the litigation and to retain outside counsel to represent the NCRS.

The battle started in late October 2008, with North Carolina’s Attorney General Roy Cooper writing to Moore’s counsel questioning Moore’s ability to retain counsel and to initiate litigation without his approval and demanding that he immediately withdraw his request for lead counsel status.  Moore’s lawyers wrote back, disputing Cooper’s assertions, and stating that he was "jeopardiz[ing] the ability of the Treasurer to protect the state employees’ retirement funds and to recover the significant losses."

The argument then spilled into the federal court in New York.  Cooper filed a Brief, explaining that while Moore served in various capacities to the various retirement systems which are members of the NCRS, that each of the constituent systems has its own "board of trustees with specific management and fiduciary duties specified by North Carolina law." Brf. at 2.  Cooper asserted that the Treasurer, while a member of some of those boards, "does not have independent authority to prosecute any legal action on behalf of the retirement system.  Such authority lies solely with the respective board of trustees."  Brf. at 4. 

That authority, according to Cooper, had not been sought by Moore from the respective boards.  Cooper further argued, relying on N.C. Gen. Stat. §114-2.3, that the approval of the Attorney General was necessary before the retention of private counsel for a state agency. That statute says that "every agency . . . shall obtain written permission from the Attorney General prior to employing private counsel."

Moore disputed Cooper’s statutory interpretation in a Response Brief, and pointed to N.C. Gen. Stat. §147-71, which says that the Treasurer has the power "to demand, sue for, collect and receive all money and property of the State not held by some person under authority of law," as well as N.C. Gen. Stat. §147-69.3(g), which empowers the Treasurer to "retain the services of . . . attorneys . . . possessing specialized skills or knowledge necessary for the proper administration of investment programs created pursuant to this section."

Judge Keenan didn’t pounce on the opportunity to resolve this North Carolina state government dispute, but instead held:

Given the uncertainty surrounding the Treasurer’s legal authority to act on NCRS’s behalf, the Court cannot accept his certification that NCRS is willing and able to serve as lead plaintiff. Nor would it be in the class’s interest to have a lead plaintiff likely to become bogged down in state court litigation concerning its participation in this federal securities class action. Therefore, Treasurer Moore’s motion to have NCRS appointed as lead plaintiff is denied. 

This is a thorny and interesting issue of the power of the State Treasurer versus that of the Attorney General.  Maybe it will be resolved one day in a court closer to home.

The Court denied a Motion for Expedited Discovery in a shareholder class action seeking injunctive relief against the merger of two national banks, finding that the facts necessary to decide the motion were already publicly known.

The Court considered several different tests for when expedited discovery should be allowed, including:

Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 151, 152 (E.D.N.C. 1993), in which the court held that the plaintiff should be required “to demonstrate (1) irreparable injury, (2) some probability of success on the merits, (3) some connection between the expedited discovery and the avoidance of the irreparable injury, and (4) some evidence that the injury that will result without expedited discovery looms greater than the injury that the defendant will suffer if the expedited relief is granted.”

Dimension Data N. America, Inc. v. NetStar-1, Inc., 226 F.R.D. 528, 531 (E.D.N.C. 2005), requiring a showing of reasonableness and good cause for the expedited discovery, "taking into account the totality of the circumstances."

Marie Raymond Revocable Trust v. MAT Five LLC, 2008 Del. Ch. LEXIS 77, at * 6 (June 26, 2008), requiring a plaintiff to “articulate a sufficiently colorable claim and shoe a sufficient possibility of a threatened irreparable injury to justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited . . . proceeding.”

The Court did not endorse any particular test.

Full Opinion

Plaintiff’s Brief In Support of Expedited Discovery

Defendant’s Brief in Opposition to Expedited Discovery

Plaintiff’s Reply Brief in Support of Expedited Discovery 


A default judgment against an individual is not permitted without the Court first determining whether the defendant is in active military service.  The Servicemembers Civil Relief Act, 50 U.S.C. app. §501-596 requires a party seeking a default to "file with the court an affidavit . . . (A) stating whether or not the defendant is in military service and showing necessary facts to support the affidavit; or (B) if the plaintiff is unable to determine whether or not the defendant is in military service, stating that the plaintiff is unable to determine whether or not the defendant is in military service." 50 U.SC. app. §521(b)(1).

The Court denied without prejudice the motion for entry of default against a defendant because of the lack of such an affidavit.

Full Opinion

There’s only one thing for sure after today’s preliminary injunction hearing in the lawsuit over the merger between Wachovia and Wells Fargo.  And that is that Judge Diaz displayed remarkable patience after more than three hours of argument from five different lawyers.

My favorite sound bites from the very long hearing (which are not verbatim, but based on my notes and recollection), are as follows:

From Plaintiff’s Counsel

Over 42% of the shares are locked up in favor of the merger.  That means that 86.2% have to vote "no," or not vote, to defeat the merger.  It’s like having a supermajority requirement to vote down a merger.

 If this deal is so good that it’s a no-brainer, let the shareholders vote.  Why do you need draconian deal protection measures if that is the case?

The Share Exchange and the lack of fiduciary out are a toxic combination.

The only terrible thing that will happen if our motion is granted is that Wells Fargo might walk away.  But Wells Fargo never says that they will.  They say they might walk.  Wells Fargo is not going to walk from this deal. 

A bond of $5,000 would be about right.

From Defendants’ Lawyers

The companies whose boards did not act quickly enough in this financial crisis — like Lehman and Washington Mutual — were wiped out.  The Wachovia board acted quickly. 

The shareholder franchise [to vote to approve a merger] is meaningless if there is no franchise remaining. 

Wachovia could very well be in bankruptcy or receivership if this deal hadn’t been approved by the Board.

The Wachovia Board faced a stark choice between illiquidity and receivership, on one hand, and Wells Fargo on the other.

Wachovia did not have other options.  These were the best terms that could be negotiated.

It is wishful thinking that another suitor will appear, or that the government will come along and bail out Wachovia.

Most Humorous Exchange

Judge Diaz: Wells Fargo relies on the IXC case from Delaware, where Vice Chancellor Steele said that if 40% of the vote was locked up, that still wasn’t a majority.  It was still possible for the shareholders to reject the transaction.

Plaintiff’s Counsel: I’m very familiar with that case, I worked on it.

Judge Diaz: Sounds like you lost.

Plaintiff’s counsel made it clear that Plaintiff is not requesting an injunction against the merger.  The relief sought is an invalidation of the Share Exchange which gave Wells Fargo nearly 40% of the vote, and a requirement that Wachovia’s Board negotiate a broader fiduciary out from the Merger Agreement.  Plaintiff wants a vote on the merger, he just doesn’t want Wells Fargo to be able to vote its shares.

At the end of the hearing, Judge Diaz said that he would take the case under advisement.  He did not say when he would rule.  The ruling will certainly be before the shareholders meeting, which has been set for December 23rd. 

Can it be that the Share Exchange Agreement, which gave Wells Fargo 40% of the voting control over Wachovia stock, is invalid?  That’s exactly what the  Plaintiff in the shareholder class action asking for an injunction regarding the Wachovia-Wells Fargo merger is saying in his Reply Brief filed yesterday.

In this new argument — not raised in Plaintiff’s opening Brief — Plaintiff says that a share exchange, under North Carolina law, requires the approval of the shareholders, and that this approval wasn’t obtained.  If Plaintiff is right, the substantial voting power obtained by Wells Fargo in connection with that Agreement would be invalid.

Plaintiff is certainly right about the need for approval of a share exchange under North Carolina law.  Section 55-11-03 of the General Statutes says that:

After adopting a . . . share exchange, the board of directors . . . of the corporation whose shares will be acquired in the share exchange, shall submit the . . . share exchange for approval by its shareholders.

N.C. Gen. Stat. ¶55-11-03(a). If this is the type of share exchange which is subject to the statute in the first place (Wachovia could just as easily have sold these shares to Wells Fargo for $10, and not exchanged shares, so it may not be), this will be a significant issue.

The won’t be the end of the inquiry, however, because not every share exchange requires shareholder approval.  The North Carolina statute requires approval only for a forced, involuntary transaction  The commentary to Section 55-11-02 says that:

This section introduces a concept that is new to North Carolina, i.e., a share exchange, which is defined as a transaction by which a corporation becomes the owner of all the outstanding shares of one or more classes of another corporation by an exchange that is compulsory on all owners of the acquired shares.

The statute specifically states that "this section does not limit the acquisition of all or part of the shares of one or more classes or series of a corporation through a voluntary exchange or otherwise."  N.C. Gen. Stat. §55-11-02(d).

Apart from being dictated by the severe financial pressures which Wachovia faced, the share exchange would seem to be voluntary.  If that’s the case, it didn’t require shareholder approval.

[Update: On Sunday, November 23rd, Wachovia filed a Motion for leave to file an additional Brief addressing this issue.  The  Proposed Brief was attached to the Motion.  In addition to arguing that the statute does not apply to a voluntary transaction, Wachovia argues in the new Brief that the statute does not apply to an issuance of new shares.  I wrote about the process by which these shares were issued in an earlier post.]


A case does not have to be "complex" in order to qualify for the Business Court’s mandatory jurisdiction.  In Johnson v. Johnson, the Court held that:

Plaintiff argues that the legal issues in this matter are not so complex as to warrant Rule 2.1 designation. Yet complexity or the lack thereof is not an issue under section 7A-45.4. Section 7A-45.4 simply requires that the action involves a material issue related to at least one of six subjects, including “[t]he law governing corporations” and “issues concerning governance” and “breach of duty of directors.” N.C. Gen. Stat. § 7A-45.4(a)(1) (LEXIS through 2007 legislation).

The Complaint in this case alleges, among other things, that Defendant breached his fiduciary duties as a shareholder, director, and officer of a closely held corporation. Since this matter involves material issues related to corporate law and breach of fiduciary duty, Plaintiff’s objection is overruled.

Full Opinion

The first round in a trademark dispute between two jewelers over the right to use the name "Windsor Jewelers" went to a WInston-Salem, North Carolina company.  Judge Diaz entered a Temporary Restraining Order  yesterday in Windsor Jewelers, Inc. v. Windsor Fine Jewelers, LLC, enjoining the Defendants from using the Windsor name for jewelry stores they had purchased in North Carolina.

Plaintiff Windsor has been operating in Winston-Salem for more than 25 years.  It has no federal trademark rights, but does have a service mark registered under the North Carolina Trademark Registration Act.  Plaintiff’s only bricks and mortar location is in Winston-Salem, but it sells jewelry throughout the state, including in the Charlotte area.

The Defendant operates jewelry stores in multiple locations, and says it is one of the "Top Ten Independent Jewelers In America."  In its home state, Georgia, those stores are operated under the name "Windsor Jewelers." Defendant has used that name even longer than the North Carolina Plaintiff, but it apparently has no trademark registration. 

The dispute arose when Defendants purchased three jewelry stores in Charlotte in December 2006 and proposed to operate them under the name "Windsor Fine Jewelers." Defendants had approached the Plaintiff and offered to buy its store as well. In the course of those discussions, Plaintiff says the Defendants admitted "that it would be a conflict to expand into the North Carolina market using the ‘Windsor’ name without Plaintiff’s permission or without" acquiring the Plaintiff. 

When the acquisition discussions broke down, Defendants offered to pay $750,000 simply to buy Plaintiff’s tradename.  Plaintiff refused, and Defendants proceeded to rename their new Charlotte stores as "Windsor Fine Jewelers."

The lawsuit, and the TRO, followed.   The TRO says that:

Defendants’ intent to confuse the consuming public is clear, as (notwithstanding that they have used the name Windsor Jewelers in Georgia and South Carolina) they were aware of Plaintiff’s trademark registration in North Carolina when they selected Windsor Fine Jewelers as the name for their NC based stores, and indeed, attempted to purchase the Plaintiff’s business and mark before announcing that they intended to change the name of their NC-based stores to Windsor Fine Jewelers.

Op. ¶3.  The TRO enjoins Defendants from use of the Windsor name in North Carolina, and also calls for all advertising materials which use the Windsor name in association with Defendants’ Charlotte stores to be destroyed.

The Order itself is very short, so you’ll have to look at the Briefs (linked below), if you would like to know more about the interesting state law trademark issues raised by this case.  There’s a preliminary injunction hearing set for November 25th.  If that goes forward, perhaps we’ll get a full opinion on some of the rarely addressed issues in the area of North Carolina trademark law.

Brief in Support of Motion for TRO

Brief in Opposition to Motion for TRO


The Plaintiff had never signed the agreements containing the arbitration provisions which the Defendant sought to enforce, but the Business Court on November 19 nevertheless granted a Motion to Compel Arbitration in American Drywall Construction, Inc. v. Superior Construction Corp.,

The Plaintiff was a subcontractor, the Defendant was the general contractor.  The Defendant prepared three written subcontracts — each of which contained an arbitration provision — but Plaintiff never signed any of them.

Judge Jolly noted three key facts regarding the unsigned agreements:

First, Plaintiff had undertaken to do the work described in the subcontracts, and it was seeking payment for that work in the lawsuit.

Second, Plaintiff submitted applications for payment referencing the subcontracts. The forms completed by the Plaintiff stated that "this Application for Progress Payment is made in strict accordance with the terms of the Subcontract."

Third, the parties had signed an addendum to one of the subcontracts which said that "all terms and conditions of the Subcontract . . .are incorporated herein and by reference and shall remain in full force and effect."

The Court held:

in this civil action Plaintiff seeks payment for performance of the work done pursuant to the terms of the respective Subcontracts, while at the same time it seeks to deny the enforceability of one of the terms of the Subcontracts.  Much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff’s conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause.  In addition, Defendant’s argument in favor of the enforceability of the arbitration clause is bolstered by the signed subsequent writings, which specifically relate back to and incorporate the terms of the respective Subcontracts.

Judge Jolly concluded "the facts and circumstances of the dealings between the parties clearly demonstrate that the Subcontracts were intended by the parties to be binding.  The fact that certain of the agreements were not signed does not change this result."

Brief in Support of Motion to Compel Arbitration

The Court dismissed unfair and deceptive trade practice claims in a dispute among doctors based on the "learned profession" exemption and because the dispute was not "in commerce." 

Plaintiff alleged that her partners had forced her out of their medical practice.  Judge Tennille (in a very short order), held that "North Carolina Appellate Courts have historically broadly interpreted the learned profession exemptions to the North Carolina Unfair and Deceptive Trade Practice Act, and the courts have also narrowly defined the definition of commerce for internal disputes between professionals."

Full Opinion


Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

The Court of Appeals split yesterday on whether a Plaintiff and his lawyers who continued with a lawsuit after they should have determined that it was not well grounded in fact or law could be hit with non-monetary sanctions.  The majority reversed, saying that the trial court should not have considered events occurring after the filing of the Complaint in awarding sanctions.

The case decided by the Court of Appeals is Egelhof v. Szulik.  The case arose in the Business Court, and was a shareholder derivative action against the technology company Red Hat.  Judge Tennille dismissed the case in 2006 due to Plaintiff’s failure to make a proper demand under Delaware law. 

After that, Defendants moved for sanctions and attorneys fees.  In the 2008 decision appealed from, Judge Tennille sanctioned Plaintiff and his lawyers by barring Plaintiff from serving as a representative plaintiff for five years and by barring the lawyers from being admitted pro hac in North Carolina for a like period.  Judge Tennille refused to award monetary sanctions.

Plaintiff appealed, arguing that there was no basis for Rule 11 sanctions because there had been no finding by the Business Court that their Complaint was "neither well grounded in fact nor warranted by existing law" at the time it was filed.  They were right, as the Business Court had expressly stated that the Complaint, standing alone, did not warrant Rule 11 sanctions.  Defendants appealed too, arguing that they were entitled to monetary sanctions.

The Business Court’s sanctions ruling was based on post-filing events which it said should have led the Plaintiff to conclude that it should no longer pursue its action, including the dismissal of another case (Pozen) brought in the Business Court by the same lawyers, for the same reason that the Egelhof case was dismissed a few months later: failure to make a demand under Delaware law. 

The Court of Appeals majority concluded that a Court cannot consider matters outside the face of the Complaint in determining whether the Complaint lacked factual or legal support so as to warrant Rule 11 sanctions.  It relied on Bryson v. Sullivan, 330 N.C. 644, 412 S.E.2d 327 (1992), in which the Supreme Court held that "in determining whether a pleading was warranted by existing law at the time it was signed the court must look at the face of the pleading and must not read it in conjunction with responsive pleadings."

Judge Calabria dissented, holding that "sanctions are not limited when later filings reveal the case has become meritless.  The trial court may look beyond the face of the pleading when considering whether litigation was continued for an improper purpose."  Judge Calabria found that sanctions were appropriate not only under Rule 11, but also under the inherent power of the Court.

And Judge Calabria took it one step further, holding that the trial court had erred by not giving proper consideration to an award of monetary sanctions under N.C. Gen. Stat. §6-21.5.  Relying on Sunamerica Financial Corp. v. Bonham, 328 N.C. 254, 400 S.E.2d 435 (1991), she held that a "trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue."

The Supreme Court will sort out this disagreement if the case goes forward, but there are two other Rule 11 tidbits in this opinion on which the majority and majority agreed:

The Court held that Rule 11 permits sanctions to be imposed against a party and his attorney attorney even though they didn’t sign the Complaint.  (Here, out-of-state counsel had never signed the Complaint, but were sanctioned by the trial court.) 

The Court of Appeals also held that due process does not require that a party against whom sanctions are sought be put on notice of the specific type of sanctions which may be ordered, rejecting a due process challenge by the Plaintiff.  All that is required is notice of the bases of the sanctions and an opportunity to be heard.