July 2009

I wouldn’t ordinarily write about the Fourth Circuit’s opinion yesterday in Walker v. Prince George’s County, Maryland., The Walker case doesn’t have anything at all to do with business litigation. But two things make the case remarkable.

The first is that the opinion was written by U.S. Supreme Court Justice Sandra Day O’Connor, sitting by designation on the Fourth Circuit. The second is the opinion’s irresistible opening line: "This is a case about a wolf named Duchess." You would expect a line like that from a Jack London story, not the Fourth Circuit.

Justice O’Connor faced this constitutional dilemma: Walker owned a wolf, or something like a wolf. That’s illegal in Prince George’s County. Walker’s sister ratted him out to the County’s Animal Management Division for illegal wolf possession. An animal control officer went to Walker’s house, saw Duchess, identified her as a wolf based on eighteen years of animal control experience, and impounded the animal.

Walker asserted that his wolf had been taken away from him in violation of his Fourth Amendment rights. Walker had a license for Duchess, obtained based on his veterinarian’s mistaken identification of the wolf as an Alaskan Malamute.  (We’ve all made that mistake). Walker argued that the animal control officer was obligated to inquire as to the legality of his possession before seizing the wolf.

As Walker put it, "the seizure of an animal may be reasonable for purposes of the Fourth Amendment only when an official has first determined whether the animal is being lawfully possessed."

The issue for the Fourth Circuit was whether the officer was entitled to qualified immunity. That issue turned on whether the asserted obligation to check Duchess’s registration before the impoundment was "clearly established."  Justice O’Connor said it wasn’t:

the ordinance upon which appellants rely says nothing about the lawful procedure for the seizure of a wolf. That a wolf may lawfully be possessed does not mean that the lawfulness of its possession must be verified as a prerequisite to its seizure when that seizure is necessary to protect the public safety or otherwise. . . . [A]ppellants have failed to point us to any authority that even suggests the existence of their purported Fourth Amendment right.

The Court also dealt with a Monell claim against the County, by which Walker asserted that the County had a policy and custom of illegal wolf seizure. Justice O’Connor termed the allegations of the complaint to be "threadbare," and dismissed the claim against the County based on the Supreme Court’s recent decision in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). 

The Iqbal case, which I wrote about in June, has been called "the most significant Supreme Court decision in a decade for day-to-day litigation in the federal courts."  The Walker decision is the first mention of Iqbal by the Fourth Circuit in a published opinion, though it was cited last month in an unpublished opinion, Shonk v. Fountain Power Boats, in which the Court affirmed the grant of a motion to dismiss.

The managing member and president of an LLC could not be liable for tortious interference with contract for firing the Plaintff. "A party to a contract, including the party’s managing agent, cannot be liable for wrongful interference of the contract." The defendant was not an outsider to the contract, and therefore could not be liable for wrongful interference for firing the Plaintiff

The Court dismissed Plaintiff’s unfair and deceptive practices claim, ruling that it was outside the scope of the statute because it involved securities claims and employer-employee relations.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss


Today in Torres v. The Steel Network, Inc., 2009 NCBC 19 (N.C. Super. Ct. July 27, 2009), the Business Court dismissed a tortious interference claim against Bank of America, ruling that the Bank couldn’t be sued under that theory for exercising its rights under its loan documents.

Plaintiff, a shareholder in the Defendant The Steel Network (TSN), had entered into an agreement  to sell his minority interest to the Company for $4 million. The promissory note entered into in connection with the stock redemption called for payments to be made over a three year period.

Bank of America took the position that the the terms of the note violated debt service covenant ratios in its loan agreement with the Defendant. The Bank said it would call its loan to the company if the debt wasn’t subordinated or if the transaction wasn’t repudiated by TSN. TSN backed out of the deal with the Plaintiff before ever making a payment on the note. The Plaintiff then sued the Bank for tortious interference with contract.

Judge Jolly granted the Bank’s motion to dismiss, holding:

Here, the Complaint and its exhibits show that execution of the Note threatened to place TSN in violation of its pre-existing contractual covenants with the Bank. The documents of record also establish that the purported actions of the Bank were motivated by justifiable interests in protecting pre-existing legitimate contractual interests between TSN and the Bank, and that the Bank’s actions were proper and proportionate to the interests it sought to protect.

Op. ¶11.

The Court held that boilerplate allegations that the Bank had acted "without justification" weren’t sufficient to get past a motion to dismiss, because the loan documents and other documents presented to the Court "support no conclusion other than that the Bank was acting pursuant to its contractual rights arising from its loan agreements with TSN."

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss


The Business Court made two novel rulings last week in its certification of a class action in Clark v. Alan Vester Auto Group, Inc., 2009 NCBC 17 (N.C. Super. Ct. July 17, 2009).  First, it adopted the the concept of a "juridical link," which it used to determine the scope of the class claims.  Second, the Court transferred the burden of class notice, which usually rests on the Plaintiff, to the Defendants due to their spoliation of evidence.

The Plaintiffs were seeking certification of a class of car buyers who had gotten loans through a group of auto dealerships. Plaintiffs claimed that the dealers violated the Motor Vehicle Dealers and Manufacturers Licensing Law by falsely reporting that he had made a down payment to purchase a used car. The dealers did this, according to the Plaintiffs, in order to increase the likelihood of the buyers getting loans and to get loan approvals for higher amounts.

First Impression Ruling On Juridical Link

In a second ruling issued the same day, the Court dismissed one Plaintiff’s claim on a motion for summary judgment, ruling that it could address the merits issue before determining the certification issue. The remaining Plaintiff was seeking to represent a class not only of purchasers from the dealership with which he had dealt, but also purchasers from all of the dealerships under the same corporate umbrella.  The Defendants argued that the Plaintiff lacked standing to sue the other dealerships, and that he could not be a proper class representative as to them.

Judge Jolly ruled against the Defendants, and certified a class against all of the dealerships, relying on the "juridical link doctrine."  He described a judicial link "as the existence of a legal relationship between two or more defendants in a way such that resolution of the disputed claims in a single civil action is preferable to numerous disparate, but similar actions." Op. ¶46.  He held, in what he "deem[ed] to be a matter of first impression for the North Carolina courts" that:

The ‘juridical-link doctrine’ answers the question of whether two defendants are sufficiently linked so that a plaintiff with a cause of action against only one defendant can also sue the other defendant under the guise of class certification. . . . A juridical link sufficient to confer standing generally must stem from an independent legal relationship. It must be some form of activity or association on the part of the defendants that warrants imposition of joint liability against the group even though the plaintiff may have dealt primarily with a single member. This link may be a conspiracy, partnership, joint enterprise, agreement, contract, or aiding and abetting which acts to standardize the factual underpinnings of the claims and to insure the assertion of defenses common to the class.

Op. ¶46.

The juridical link was established in Clark due to the close corporate relationship of the defendant dealerships, which included the following: (1) they were managed by a single corporation, (2) they all shared the same compliance manager and compliance manual, (3) the same individual was the president of each dealership, (4) they shared common officers, (5) their accounting was done by the same accountant.

Spoliation Results In The Shifting Of The Expense Of Class Notice

In a third ruling in the case, Judge Jolly ruled that the Defendants had spoliated evidence by destroying "cover sheets" which might have shown whether Defendants had falsely reported a down payment.

The Court observed that it was the "general rule" that a plaintiff should bear the cost of identifying and notifying class members of the pendency of a class action, but that there was an exception when "there has been abuse of discovery or other pre-trial process by the defendant."

The Defendants’ destruction of the cover sheets, according to the court, went "directly to the existence and identity of class members."  The Court ruled that the Defendants would therefore bear the costs of identifying and notifying class members of the action, not the Plaintiff.

I have not attached the briefs to this post because they were all filed under seal.

The Business Court sanctioned the Defendants in Clark v. Alan Vester Auto Group, Inc., 2009 NCBC 18 (N.C. Super. Ct. July 17, 2009) for spoliation of evidence.

The destruction of evidence involved "Cover Sheets" that the Defendants prepared whenever they sold a car. The Plaintiff contended that an entry on a Cover Sheet referring to "CFA" — which was shorthand for "customer funding assistance" — would have shown the Defendants’ falsification of information regarding the down payment made by the customer.

The Defendants continued to destroy Cover Sheets even after the Court entered an Order requiring them to produce all records which showed down payments. When Plaintiffs’ counsel learned of the continuing destruction, they asked Defendants through counsel to stop, but the response was that the Plaintiff would "continue with its normal business practice that has been in place for many years." There was in addition conflicting testimony from representatives of the Defendants regarding their procedures with regard to the Cover Sheets.

Judge Jolly determined:

  • "Where there has been improper destruction of documents even without notice of a claim, there can exist spoliation, particularly when the wholesale document destruction flies in the face of legal standards for document retention." Op. ¶73. (NC’s motor vehicle laws require down payment records to be retained for four years.)
  • Plaintiffs didn’t need to show that the spoliation involved intentional misconduct.
  • Prior litigation against the Defendants with regard to their financing practices established the knowledge and culpability of the Defendants with regard to the spoliation.
  • Defendants knew of the probative nature of the Cover Sheets when they were destroyed.
  • The Plaintiffs were prejudiced by the destruction. 

On sanctions, Judge Jolly ruled that he had "discretion to pursue a wide range of actions both for the purpose of leveling the evidentiary playing field and for sanctioning the improper conduct."  Op. ¶81. He said "the scope of discovery is intentionally broad, and discovery is not meant to be a game of hide and seek. The purpose of the discovery rules is ‘to prevent a party who has discoverable information from making evasive, incomplete, or untimely responses to requests for discovery.’" Op. ¶83.

The Court didn’t enter the sanction requested by the Plaintiffs, which was a striking of Defendants’ Answer, but ruled instead that it would give a "appropriate spoliation jury instruction with regard to inferences raised by the absence of Cover Sheets."  In addition to the adverse inference instruction, the Court awarded Plaintiffs their attorneys’ fees relative to the spoliation issue. Also, in a companion decision certifying a class action, the Court took the spoliation into account in determining that a class should be certified, and also ruled that the spoliation would cause the burden of class notice to shift from the Plaintiffs to the Defendants.

I have not included the briefs because they were all filed under seal.

The Court determined that it could rule on a dispositive motion in a putative class action before ruling on class certification.  It held "in appropriate cases it is neither unusual nor inappropriate for a court of jurisdiction to consider merits issues prior to determining class certification matters."

The Court granted summary judgment on a Fair Credit Reporting Act claim, denied it as to other claims, and did not issue an opinion stating its reasons. The Court said that the case had been assigned to it as an exceptional case under Rule 2.1 of the General Rules of Practice, not as a complex business cased under Rule 2.2, and that a written opinion therefore was not required.

In separate opinions issued the same day, the Court sanctioned the Defendants for spoliation of evidence and certified the class.

Full Opinion

An appellate decision has to be really, really wrong before the same Court will decide that it shouldn’t be treated as the "law of the case." In fact, the wrongness has to be as overpowering as a very old and very dead fish, per the Fourth Circuit’s opinion today in TFWS, Inc. v. Franchot.

The law of the case doctrine says that the decision of an appellate court "must be followed in all subsequent proceedings in the same case."  The doctrine can be avoided if "(1) a subsequent trial produces substantially different evidence, (2) controlling authority has since made a contrary decision of law applicable to the issue, or (3) the prior decision was clearly erroneous and would work manifest injustice."

The TFWS case is the latest decision in a ten year legal battle over whether Maryland’s liquor and wine regulations violate the antitrust laws.  (They do). In today’s decision, the fourth appellate decision in the case, the Court of Appeals rejected the State of Maryland’s argument that the Court wasn’t bound by its first decision in the case.

The State of Maryland argued the "clearly erroneous" exception, offering a new interpretation of its regulatory scheme. Judge Duncan rejected the argument, holding that "[a] prior decision does not qualify for this third exception by being ‘just maybe or probably wrong; it must . . . strike us as wrong with the force of a five-week-old, unrefrigerated dead fish."

North Carolina’s Chief Justice Sarah Parker has suspended the rotation of Superior Court Judges, effective beginning July 20, 2009 and continuing through August 28, 2009, due to the State’s budget crisis.  There’s an Amended Master Calendar Of Superior Courts available which shows where Judges will be holding court during the suspension period. 

Rotation of Superior Court Judges is required by the North Carolina Constitution, which says in Article 4, Section 11 that "[t]he principle of rotating Superior Court Judges among the various districts of a division is a salutary one and shall be observed."  The AOC website says that "[t]he rotation system helps avoid favoritism that might result from having a permanent judge in one district."

There’s a bill pending in the Legislature which says that nothing prohibits the Chief Justice "in times of severe financial difficulty, from temporarily suspending rotation under this subsection as a cost‑saving measure so long as rotation is resumed as soon as practicable in order to honor the constitutional mandate to observe the principle of rotation."

This isn’t the first time that the rotation of Judges has been suspended for fiscal reasons.  It happened in 1990 and also in 2002, according to a 2002 Triangle Business Journal article.

The photo at the top does not necessarily represent my personal views on this cost-saving measure.

The Business Court’s decision yesterday in Leiber v. Arboretum Joint Venture, LLC, 2009 NCBC 16 (N.C. Super. Ct. July 8, 2009) involved the law of agency: whether a German Count named Spreti had been acting as Plaintiff’s agent when the Defendant LLCs and partnerships sent Plaintiff’s share of distributions to Spreti. A large chunk of the money was then stolen by Spreti.

Plaintiff Leiber, a German citizen, had put money at the urging of Spreti in a number of United States investments (the "AAC entities"). The AAC entities were operated by two other Germans, Count and Countess Arco. Over a fifteen year period, the AAC entities sent hundreds of thousands of dollars of Leiber’s distributions and tax refunds to Spreti. 

Spreti paid some of the money he received to Leiber, but kept hundreds of thousands of dollars of Leiber’s money for himself. Leiber knew that his payments were sent to Spreti, but he never objected to this practice and apparently wasn’t very attentive to his investment.  Leiber began to suspect Spreti’s misconduct, but Spreti committed suicide the night before the two were to meet to discuss matters.

The specific distributions at issue in the case were payments to Leiber for redemption of his interests in two of the AAC entities. Spreti received both of these payments.  One was a Wachovia Bank check for $151,274 and the other a Bank of America check for $254,858.  Spreti forged Leiber’s indorsement on the checks, cashed them, and kept the money.

After Spreti’s suicide, Leiber sued the AAC entities, alleging that they had improperly sent the checks to Spreti.  He also sued Wachovia and Bank of America, alleging that they had improperly paid the checks over Spreti’s forged indorsement.

Agency Issues

The defense of the AAC entities was that Spreti had been acting as Leiber’s agent, and they therefore had acted appropriately in sending Leiber’s distributions to Spreti. The opinion contains a thorough discussion of the law of agency, including actual authority, apparent authority, apparent agency, agency by estoppel, and ratification.

Judge Tennille determined that although Leiber had not expressly authorized Spreti to act as his agent, there were a number of legal theories on which Spreti would be deemed to be Leiber’s agent:

  • Spreti had implied actual authority to act for Leiber, because Spreti had acted as Leiber’s only contact with the AAC entities for 15 years; and Leiber knew that his checks were being sent to Spreti and had never objected to that practice.
  • Spreti had apparent authority to act on Leiber’s behalf, because Leiber had held Spreti out to the AAC entities as having authority to act for him by using Spreti to manage his investments in the AAC entities for 15 years.
  • An apparent agency relationship existed between Leiber and Spreti, because Leiber’s silence regarding the checks sent to Spreti caused the AAC entities "to believe an agency relationship existed" and the AAC entities had relied on Leiber’s action to their detriment.
  • Because Spreti was the general partner of two of the AAC partnerships, he was deemed to be Leiber’s agent.

The Court further determined that even if there were no agency relationship, Leiber’s fifteen year silence regarding the checks was a ratification of Spreti’s unauthorized acts. The Court granted summary judgment on all of Leiber’s claims against the AAC entities, as they all depended on the argument that Spreti had not been authorized to receive checks on Leiber’s behalf.

Continue Reading You Can Count On This Case For A Good Discussion Of The Law Of Agency

There weren’t any earthshaking decisions yesterday from the North Carolina Court of Appeals, but there are a couple of cases worth a quick mention, one on arbitration and one on discoverability in a medical malpractice case of a letter to a "medical review committee."  There was also a copyright case yesterday from the Fourth Circuit resolving an issue of first impression involving computer software.


In Griessel v. Temas Eye Center, P.C., the Court held that it was not error for the trial court to deny a motion to compel arbitration without making findings of fact.  Findings of fact were required under the North Carolina Uniform Arbitration Act, but the 2-1 majority found in a case of first impression that they are not required under the Revised Uniform Arbitration Act. 

The majority reasoned that since there is only one ground under the RUAA which allows the denial of a motion to compel arbitration (that there is no valid agreement to arbitrate), the court must have made that determination in denying the motion. Judge Steelman disagreed, and said "[i[f one takes the position that the trial court must have logically made the correct decision, then there is little need to have appellate courts."

Discovery And Medical Review Committees

In Woods v. Moses Cone Health System, the issue was whether a plaintiff in a medical malpractice action was entitled to discovery of a letter from the decedent’s surgeon to a hospital’s peer review committee.  The  Court determined that committee to be a "medical review committee" within the meaning of G.S. §131E-95 of the General Statutes, which provides that the records and materials of such a committee "shall not be subject to discovery or introduction into evidence in any civil action against a hospital."  This protection exists "because of the fear that external access to peer investigations conducted by staff committees stifles candor and inhibits objectivity."

Plaintiff said that since the surgeon had sent the letter to persons who weren’t on the committee, the privilege had been waived.  The Court of Appeals said the privilege couldn’t be waived by the dissemination of the letter, because the letter was absolutely privileged under the statute. The Court didn’t reach an interesting question whether the letter was discoverable because it had been provided to Defendant’s expert witnesses.


The Fourth Circuit Court of Appeals ruled in Quantum Systems Integrators, Inc. v. Sprint Nextel Corp. that software stored in a computer’s random access memory can be sufficiently fixed to support a claim for copyright infringement, following what it described as the leading case on the issue, MAI Systems  Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). That was a question of first impression in the Fourth Circuit, but the Quantum opinion is unfortunately unpublished.