January 2009

The North Carolina Business Court dismissed today a highly publicized case brought by a City of Roanoke Rapids taxpayer who sought to challenge the City’s investment of more than $13 million to build the "Randy Parton Theater" in Halifax County.  (See here, here, and here for local and national articles about the lawsuit).  The Court held that the Plaintiff, Garrett, lacked standing to bring the suit, either as an individual taxpayer or on a derivative basis on behalf of the City.

Roanoke Rapids, in reliance on a business plan presented by Randy Parton, the younger and less talented brother of Dolly Parton, had financed a music theater with Tax Increment Financing bonds.  Those are a relatively new public financing mechanism authorized by a 2004 Amendment to the North Carolina Constitution. The Roanoke Rapids financing — by which the City was authorized to issue $21 million in TIF bonds to finance the Theater and a related development — was reportedly the first TIF financing in North Carolina. 

After the Theater was built, there were allegations of misuse of funds by Parton (like a $600 pair of pants and trips to Las Vegas), conflicts of interest, and mismanagement of the venture.  Parton, a regular headliner at the Theater, wasn’t much of a draw and reportedly showed up intoxicated for his shows.  The Theater failed, and the City was unable to make payments on the TIF Bonds from the revenues of the Theater, which were the anticipated repayment source. 

In February 2008, the City entered into a Settlement Agreement with Parton, paying him $750,000 for the privilege of being released from his $1.5 million per year management contract. The release included the "Moonlight Bandit" entities which had been formed by Parton and others in connection with the Theater. 

The Plaintiff, backed by the North Carolina Institute for Constitutional Law, filed a Complaint notwithstanding the settlement against Parton, the Moonlight Bandit entities, and others involved in the failed venture. Taxpayers don’t get a vote on the issuance of TIF bonds.  Former Supreme Court Justice Bob Orr, who is the Executive Director of the Institute for Constitutional Law, said on his More from Orr Blog that "the voting public was literally snookered into giving up their constitutionally guaranteed right to vote on the issuance" of these types of bonds.

The issue before Judge Jolly was whether Garrett, a resident of the City, had standing to sue.  Garrett claimed that he was entitled to bring suit individually because the losses from the failed Theater would be borne by all of the taxpayers of the City, and alternatively that he was entitled to sue derivatively on behalf of the City because the proper authorities had refused to act with regard to such losses. 

No Individual Taxpayer Standing

The law of North Carolina is that individual taxpayers don’t have standing to bring a suit in the public interest.  Op. ¶41.  Garrett argued that he was entitled to an exception to this general rule (under a case called Texfi Industries v. City of Fayetteville, 44 N.C. App. 268, 261 S.E.2d 21 (1979)) because the Theater had levied a tax on him "for an unconstitutional, illegal, or unauthorized purpose."

Judge Jolly rejected Garrett’s individual standing argument, holding:

here, the expenditures used in support of the Theater Project were funded by TIF bonds that were issued only after a feasibility study was conducted for the benefit of the City, and which was lawfully approved by the City and the [Local Government Commission]. . . .  Notwithstanding that the Theater Project ultimately failed and may well have been a very bad business decision by the City, the obligations undertaken by the City were neither illegal nor unauthorized.

Op. ¶43. 

No Derivative Taxpayer Standing

The Court ruled that Garrett didn’t have derivative standing either.  North Carolina recognizes derivative standing for taxpayers if "public authorities wrongfully neglect or refuse to act."  A taxpayer must show, however, that "their either (a) has been a demand upon and wrongful refusal by the proper authorities to act, or (b) the particular facts would make such a demand futile."  Op. ¶46. 

The fact of the City’s settlement with Parton doomed Garrett’s derivative standing.  Judge Jolly held that "the Settlement Agreement acts to resolve the very claims in behalf of the City that otherwise — given refusal or inaction after timely taxpayer demand — arguably might be available derivatively to a taxpaying citizen.  In fact, the City’s action in settling with Parton and Moonlight Bandit on terms with which the Plaintiff disagrees apparently is the very reason Plaintiff seeks to bypass the City." Op. ¶47.

The Theater has been renamed the "Roanoke Rapids Theater."  The City is trying to sell it to a private investor.

Full Opinion

In its first significant opinion of the new year, the Business Court interpreted the pricing mechanism contained in a contract between convenience store operator The Pantry and CITGO, its supplier of gasoline. The case, which handed a win to CITGO allowing it to charge higher prices than those urged by The Pantry, is The Pantry, Inc. v. CITGO Petroleum Corp.

Per the contract, The Pantry’s price for gasoline was based on the average of the two lowest prices for "the applicable grade of motor fuel" as determined by an industry source. The dispute arose when CITGO started selling E-10 gasoline to The Pantry.  That’s a blend of 90% "clear gasoline" and 10% ethanol, commonly called "gasohol."  E-10 is more expensive than clear gasoline.

The contract didn’t contemplate the sale of E-10. CITGO said the contract price should be determined by the two lowest prices for E-10 gasoline, but The Pantry said it should be determined by the two lowest prices for clear gasoline.  CITGO’s interpretation resulted in The Pantry paying a higher price.

The Pantry’s argument was CITGO had unilaterally determined to substitute E-10 for clear gasoline, and that this meant that E-10 was "interchangeable with and a substitute for clear gasoline."  It also relied on the language of the contract referring to the "grade" of the fuel being purchased, arguing that "grade" referred to grades of clear gasoline.  The convenience store operator also stressed that the purpose of the agreement was to obtain pricing that would allow it to sell gasoline "at prices competitive with other retailers in its markets," and that CITGO’s interpretation would impair that objective.

Thus, The Pantry asserted, CITGO was bound to look to the two lowest prices for clear gasoline in setting the price.  Judge Diaz didn’t agree.  He determined that the "only reasonable interpretation" of the contract was for the parties to look to the "precise motor fuel product purchased by The Pantry (whether clear gasoline or E-10 gasoline)" to determine the proper price. 

As to the argument that CITGO’s interpretation impaired The Pantry’s intention to obtain favorable pricing, Judge Diaz held that The Pantry’s "remedy is not to contort the language of the ‘market pricing’ provisions of the [agreement] beyond their plain meaning but, instead, to renegotiate the contract terms or find an alternate supplier."  Op. Par. 60.

The Court held that the interpretation urged by The Pantry "does violence to the contract terms by ‘mixing apples and oranges’ as to the motor fuels offered by CITGO,"  Op. Par. 56, and granted CITGO’s Motion to Dismiss.

You probably won’t find much of help in this opinion as far as precedent for future North Carolina cases.  That’s because of the narrowness of the issue and the fact that the Court applied Oklahoma law.

CITGO was represented by Brooks Pierce lawyers Jim Williams, Jennifer Van Zant, and D.J. O’Brien, and Scott Solberg and Lisa Meyer of Eimer Stahl Klevorn & Solberg in Chicago.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

The courthouse door in North Carolina is now wide open to antitrust plaintiffs making indirect purchaser claims, after the Court of Appeals’ decision this week in Teague v. Bayer.  That decision reverses the North Carolina Business Court’s dismissal of the case for lack of standing.

For those whose hearts don’t start beating faster when reading about antitrust cases, an "indirect purchaser" is "one who purchases a product from some intermediary party rather than directly from the manufacturer." 

Teague alleges that he purchased garden hoses, roofing materials, and other items which contained ethylene propylene diene monomor alastomers (EPDM) sold by the defendant chemical companies to the manufacturers of those items.  Teague, an indirect purchaser of EPDM, claimed that the manufacturers of EPDM had conspired to fix its price.

Indirect purchasers can’t make claims under the federal antitrust laws after the Supreme Court’s seminal decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), but these types of claims can be made under state antitrust laws, per Associated General Contractors v. Carpenters, 459 U.S. 519 (1983). North Carolina has allowed such claims since Hyde v. Abbott Laboratories, 123 N.C. App. 572, 473 S.E.2d 680 (1996).

In the lower court ruling, Judge Tennille dismissed the case based on standing grounds, relying on a variation of the factors set out by the Supreme Court in the Associated General Contractors decision for determining standing under the federal antitrust laws.  I summarized the Business Court decision in an earlier post, but this was the gist of what the Business Court considered in dismissing the case nearly two years ago:

the relevant market (it determined that plaintiff was a participant in a collateral market, a factor working against standing), the directness of impact (what the court termed a complex issue involving multiple distribution chains, which weighed against standing), that other indirect purchasers were likely to have been more heavily impacted (having absorbed some or all of the price increase without passing it on to plaintiff), and the daunting and complex nature of the calculation of damages (which the Court found even more complex than the calculation considered in its dismissal of an earlier case, Crouch).

The Court of Appeals reversed, holding that the Associated General Contractors factors don’t apply to antitrust claims by consumers.  It acknowledged the Business Court’s point on the difficulty that plaintiff would have proving his claims, especially as to causation and damages, but said that these matters would be better addressed at the class certification and summary judgment stages.  Here’s the key part of this week’s holding:

Defendants contend that courts would have to isolate the effect of the alleged conspiracy on the price of EPDM and rule out the numerous other factors that could cause a price increase in these products such as inflation, prices of other inputs, transport costs, product demand, and market conditions. Thus, a rigorous economic analysis would be required to determine whether increased prices were the result of the alleged price fixing or the result of some other factor.

The U.S. Court of Appeals for the Ninth Circuit has recognized, "Complex antitrust cases . . . invariably involve complicated questions of causation and damages." Forsyth v. Humana, Inc., 114 F.3d 1467, 1478 (9th Cir. 1997). Even if the present case proves to be no exception, that is not sufficient reason to dismiss for lack of standing. As the trial court found, considering several products containing EPDM adds to the complexity of apportioning damages in this case. The analysis described above would have to be conducted for every product at issue in order to accurately calculate Plaintiff’s damages. Our Court recognized in Hyde that a suit by indirect purchasers under our antitrust laws would be complex. However, "fear of complexity is not a sufficient reason to disallow a suit by an indirect purchaser, given the intent of the General Assembly to ‘establish an effective private cause of action for aggrieved consumers in this State.’" Hyde, 123 N.C. App. at 584, 473 S.E.2d at 687-88 (quoting Marshall, 302 N.C.at 543, 276 S.E.2d at 400). . . .  We therefore hold that Plaintiff has standing to bring this antitrust and consumer fraud action.

The Teague decision also calls into question another Business Court decision, Crouch v. Compton Corp., 2004 NCBC 7 (N.C. Super. Ct. Oct. 26, 2004), in which the Court dismissed an indirect purchaser claim on standing grounds.

 

A successful mediation session ends with a signed document reflecting the settlement, usually the AOC Form "Memorandum of Mediated Settlement," but is often accompanied by an agreement to draft a more comprehensive settlement agreement. 

The unpublished Court of Appeals decision this week in Santoni v. Sundown Cove, LLC is a reminder to be careful that the Memorandum accurately sets out the terms of the deal.  That’s especially so if the settlement applies to only some of the defendants or potential defendants.

In Santoni, the plaintiffs had originally sued multiple defendants, but had taken voluntary dismissals without prejudice as to two of them.  Those dismissals were taken before the mediation session.

At the mediation, the plaintiffs settled up with the remaining defendants. They executed a Memorandum of Mediated Settlement which contained the form language that they would "execute such releases as required by Defendants in a form accceptable to Defendants."  The Memorandum included handwritten language saying that they would "execute mutual releases of all existing claims."

When defendants’ counsel presented a release that specifically included the previously dismissed defendants, the plaintiffs refused to sign.  They argued that the claims against those parties were not "existing claims."  The trial court disagreed and ordered the plaintiffs to sign the settlement agreement as presented, and the Court of Appeals affirmed.  It held:

In the case at bar, the terms of the parties’ settlement, as set out in the memorandum of mediated settlement agreement, are clear and unambiguous, and the agreement must be given effect. Plaintiffs agreed to execute releases of “all existing claims” and to “execute such releases as required by Defendants in a form acceptable to Defendants[.]” A claim is defined as “[t]he aggregate of operative facts giving rise to a right enforceable by a court[,]” and “[t]he assertion of an existing right[.]” Black’s Law Dictionary 264 (8th ed. 2004). The facts giving rise to Plaintiffs’ claims were “existing” at the time the parties reached the agreement, and Plaintiffs had the right, at the time the parties reached the agreement, to assert claims against the [dismissed defendants]. That Plaintiffs had not re-filed an action against the [dismissed defendants], or instituted an action against any other person or entity, is of no moment. Plaintiffs are required to execute the proposed settlement agreement which, as Defendants drafted it, was in a form acceptable to Defendants.

You can see the full Memorandum of Settlement by clicking on the image at the top.

 

 

The  NC Court of Appeals ruled today on what it means to be a "prevailing party" under N.C. Gen. Stat. §6-21.5 so as to be entitled to recover attorneys’ fees. There was no North Carolina precedent — until now — on this issue.

The effect of the ruling may be that fees under the statute, which are allowed to a prevailing party "if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading," will be awarded on an issue by issue basis.

In the case decided by the Court of Appeals, Persis Nova Construction, Inc. v. Edwards, the trial court had dismissed the claims of the plaintiff as well as the counterclaims of the defendant on motions for summary judgment.  When the defendant moved for an award of statutory fees, the Court denied the motion, reasoning that the dismissal of the claims of both parties meant that  there was no "prevailing party."

The Court of Appeals reversed. It held that a party doesn’t have to be the outright and unquestioned winner of the lawsuit in order to be entitled to fees.  The Court focused on the statute’s reference to the "losing party in any pleading," and reasoned that fees should be allowed to "a party who prevails on a claim or issue in an action."  It is not necessary for the party requesting fees to prevail in the entire action.

The Court noted that the purpose of the statute is to "discourage frivolous legal action," and said that this purpose "would be circumvented by limiting the statute’s application to the party who prevails" in the lawsuit as  a whole.

The conclusion of the Court’s opinion was as follows:

the trial court properly found that Plaintiff did not prevail on the claims set forth in its complaint and that Defendants did not prevail on the counterclaim set forth in their answer.  As a corollary, however, Defendants prevailed on Plaintiff’s claims, and Plaintiff prevailed on Defendants’ counterclaim.  Accordingly, the trial court erroneously concluded that Defendants were not prevailing parties in this action.

This means that fee petitions under the statute may start getting presented on an issue by issue basis. It means also that a plaintiff could prevail on virtually all of its claims, but still get socked for fees on the claims on which it was not successful, if that particular claim lacked a justiciable issue. 

When the dust clears after litigation is over, it is sometimes hard to tell the score and who really won.  The Persis Nova case may make it even harder.

Have you ever booked a hotel room through an online reseller like Hotels.com, Priceline, or Orbitz?  If you have, you might be interested in this post, even though you might not otherwise be interested in an issue of North Carolina state tax law.

Those companies, and other internet resellers of hotel rooms, have a significant tax dispute pending in North Carolina’s courts.  And right now, the Fourth Circuit is directly at odds with the North Carolina Business Court on the proper outcome. 

The tax problem comes up because the customer is paying these companies more than the price at which the online company purchases the hotel rooms from the hotel operator.  That’s obvious, that’s how they make a profit.  What’s not so obvious is that the online companies charge Occupancy Tax based on the full price of the room, but they only remit tax calculated at the lower price they paid to buy the room. They keep the difference, which they call a "nonitemized service fee."

This questionable practice has led to a flurry of litigation by municipalities against Hotels.com, Priceline, and other online vendors, like Orbitz and Travelocity. Four of those cases are being litigated in the North Carolina Business Court, brought by Dare County, Mecklenburg County, Wake County, and Buncombe County. Similar cases are pending throughout the country.

Last week, the online travel companies scored a big win when the Fourth Circuit affirmed the grant of a Motion to Dismiss in a case brought by Pitt County, in Pitt County v. Hotels.com, L.P.  (I read about that decision on the North Carolina Appellate Blog).  The Fourth Circuit ruling is apparently the first appellate decision in the country on this issue, but that ruling is directly at odds with a decision by Judge Diaz in the Business Court, Wake County v. Hotels.com, L.P., 2007 NCBC 35 (N.C. Super. Ct. Nov. 19, 2007).  

Continue Reading Taxing Online Travel Companies: The North Carolina Business Court And The Fourth Circuit Don’t See It The Same Way

If you have this blog in your bookmarks in Firefox or Internet Explorer, and you check it from time to time, DON’T do that.  That’s not because I don’t want you to read it, it’s just that there are two better ways to get news from this blog and just about every other blog and many websites.

The best way is to subscribe by RSS — which is easy to do and explained below — but you can also subscribe by email just by filling in your email address.  Then you’ll get an email with a link to the blog every time there is a new post.  Both these options are midway down the left side of the blog, and look like the image at the right.  Just put your email address in the box.

But if there are number of blogs and websites that you mean to check regularly  — but sometimes forget to check — the much better route is to use RSS feeds in an "aggregator" or "reader."  A reader is like a personalized newspaper that shows you a the title of posts from each of the blogs to which you subscribe, along with the first several words of the post. The image at the top of this post is from the aggregator I use, which is Google Reader

If you have this blog and other blogs or websites that you look at frequently set up in an aggregator, you just click on a particular entry if you want to read it, without ever having to check the website in the first place.

To set this up, just click on the orange RSS icon which is on the left side of this blog (or wherever it is on any blog or website).  It looks like the image at the right, but smaller.  Then select the aggregator that you are using or want to use, and can subscribe. You’ll have several different options. 

If you pick Google Reader, but don’t have an account set up on Google yet, it will walk you through that in about 20 seconds.  There’s also an option to add blogs to your Google home page if you prefer that.  No more remembering — or forgetting — to check. RSS, by the way, stands for "really simple syndication."

Here’s a one-minute video that explains the concept and how to use Google Reader.

https://youtube.com/watch?v=VSPZ2Uu_X3Y%26hl%3Den%26fs%3D1

 

Plaintiff sued to impose a constructive trust on property purchased by the Defendant LLC at a foreclosure sale.  It alleged that some of the members of the Defendant LLC had been members of the LLC which had defaulted on the mortgage loan in question.  Plaintiff contended that it was "inequitable for [the Defendant] to own and possibly profit from the Property." 

The Court rejected this argument and dismissed the claim.  It observed that the property "was lawfully purchased at a foreclosure sale with a valid upset bid."  There was therefore no fraud, no breach of fiduciary duty, and no inequitable circumstance that warranted the imposition of a constructive trust.

The Court also ordered the cancellation of a notice of lis pendens filed by the Plaintiff, concluding that  a lis pendens is appropriate only when the case involves an action affecting title to real property.  The Court held that "a lis pendens . . . does not properly apply to actions brought for the purpose of securing a personal money judgment. . . ."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

This is an opinion from Judge Diaz before he joined the Business Court, in which he denied a Motion for Sanctions.

The basis for the Motion was that Plaintiff should not have taken the position that North Carolina law applied to the covenant not to compete at issue.  The Defendant worked for Plaintiff in North Carolina and the agreement gave a North Carolina address for the Defendant, but it had been signed by the Defendant in Virginia and by the Plaintiff in Wisconsin. 

The case, which was affirmed by the North Carolina Court of Appeals in an unpublished opinion, contains a good discussion of the relevant Rule 11 inquiries.  The Court found the facts of the case to be "muddled," and that they "would test the most seasoned of choice of law practitioners."  The Court found that the Plaintiff’s lawyers had made the requisite "reasonable inquiry" before deciding that North Caroiina law applied, and accordingly denied the Motion for Rule 11 Sanctions.

Full Opinion