August 2009

When an employee quits his or her job, unemployment benefits aren’t available unless there was "good cause" for leaving the job. Today, the North Carolina Supreme Court answered the question whether an employee who quits in the face of a downsizing, accepting a "voluntary" retirement package, can show the good cause necessary to receive unemployment benefits.

The answer to that question of first impression, in the case of Carolina Power & Light Company v. Employment Security Commission, was "no."  Along the way, the Court made some interesting observations on downsizings in general, and the rights of employees at will.

The case involved a former CP&L employee named Roberts, who accepted a Voluntary Early Retirement Package. Roberts took the package in the face of a downsizing by CP&L.  His position had been eliminated, he was relocated and put in a temporary position, and when he asked if he would continue to have a job, he didn’t receive any assurances. Although the opinion doesn’t say it, Roberts must have been very concerned that if he didn’t take the package, he wasn’t going to have a job much longer.

Roberts’ right to unemployment benefits turned on N.C. Gen. Stat. § 96-14(1), which disqualifies an employee from benefits if he is "unemployed because he left work without good cause attributable to the employer." It’s the employee’s burden to show the good cause.  Id. at §96-14(1a),

The argument by Roberts was that the downsizing itself was good cause, as was his employer’s failure to tell him whether he would still have a job if he didn’t grab the retirement package. The Supreme Court, in an opinion written by Chief Justice Parker, rejected both arguments.

As to the downsizing, the Court said "[d]ownsizing of the workforce is a recognized means by which corporations and businesses maintain their productivity and profitability. Although downsizing may ultimately lead to the loss of some jobs, downsizing to a desired number of employees is often achieved through attrition.  Downsizing or a reduction in force does not automatically trigger layoffs."

The Court also gave short shrift to Roberts’ argument regarding his uncertainty as to continued employment because CP&L didn’t answer his question about whether he still had a job. Justice Parker said "[t]o construe the failure to answer that question as good cause assumes that claimant, who from the record appears to have been an employee at will, was entitled to an assurance tantamount to a contract guaranteeing him a job after the downsizing was completed. An employee who has no such guarantee of a job before the employer begins downsizing certainly has no legal basis to use the failure of the employer to give such assurances as good cause entitling him to unemployment benefits when he voluntarily accepts an enhanced early retirement package."

As the Court described the situations where good cause is present, they are limited to (1) "circumstances which make continued work logistically impractical," and (2) "when the work or work environment itself is intolerable." Roberts’ arguments didn’t fall in either category.

If you are getting ready to designate a case to the North Carolina Business Court, you might want to go ahead and do that in the next few days. That’s because starting September 1, 2009, it’s going to cost your client a bunch more money to have a case heard in the Business Court.

Effective September 1st, the fee due to the Clerk of Court in the county where the case was filed will increase to $1,000.  It was previously only $200.  The change will be codified at N.C. Gen. Stat. §7A-305(a)(2)("Costs in Civil Actions").

Business Court Rule 3.4 deals with the payment of the fee. It says that the payment is due to the Clerk of Court immediately upon counsel’s receipt of the Order assigning the case to the Business Court.  The Rule also says that the fee is non-refundable in the event that the case is later remanded to Superior Court. 

A minority shareholder who said he was forced to resign as an officer and director of the company got past a Motion to Dismiss challenging his claims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, conspiracy, and punitive damages in the Business Court’s opinion last Friday in Oakeson v. TBM Consulting Group, Inc.

Plaintiff had been TBM’s Vice President of Global Consulting, a board member, and owned a 13.5% interest in the company. He was party to both a Shareholders Agreement and an Employment Agreement. The latter agreement had a five year term, running through 2009, and specified that Plaintiff could only be terminated for defined "cause."

The Plaintiff alleged that Sharma, the majority shareholder of TBM, began demanding, insistently, that Plaintiff resign. Plaintiff refused to do so. Sharma told Plaintiff that he and the other defendants had the votes to remove Plaintiff as an officer and director of the company, and that they were "resolute in [their] decision to remove [him]." He told Plaintiff that he shouldn’t bother to attend the board meeting at which the vote would be taken.

Plaintiff gave in and resigned as a director, but not as an officer and employee. Sharma then continued his pressure on Plaintiff to obtain a full resignation, to which Plaintiff finally agreed. Plaintiff then filed suit against the company raising a variety of claims resulting from his ouster.

Breach of Fiduciary Duty: Judge Jolly, denying the motion as to the claim for breach of fiduciary duty, said that "our courts long have recognized that a controlling shareholder owes a fiduciary duty to minority shareholders not to misuse his management power to promote his personal interests." Op. ¶44. The opinion has a brief history of appellate cases recognizing the duty of the majority to the minority, beginning with White v. Kincaid, 149 N.C. 415 (1908), and continuing through Gaines v. Long Manufacturing Co., 234 N.C. 331 (1951) and Freese v. Smith, 110 N.C. App. 28 (1993).

Breach of Covenant Of Good Faith and Fair Dealing: Defendants argued that a tort action which arises from a breach of contract couldn’t be maintained. Judge Jolly disagreed, and said "the allegations go beyond a pure and simple contract claim. Rather, they raise implications of the respective fiduciary duties, if any, between shareholders in a closely-held corporate setting, and of possible civil conspiracy." Op. ¶40.

Civil Conspiracy: In response to the motion to dismiss the conspiracy claim, the Court recognized that "North Carolina does not recognize an independent cause of action for civil conspiracy," Op. ¶48, but Judge Jolly went on to say that "where there exists a separate but underlying claim for unlawful conduct, a plaintiff also may state a claim for civil conspiracy by alleging that two or more persons came together in agreement to carry out the unlawful conduct complained of in the separate cause of action, and that injury to the plaintiff proximately resulted from the agreement." Op. ¶48. The Complaint, said the Court, "alleges that the Defendant shareholders agreed upon a combined course of various actions designed to force Plaintiff out of TBM in all his corporate capacities, one of those actions resulting in beach of Plaintiff’s Employment Agreement." Op. ¶49.

Punitive Damages: The claim for punitive damages also survived the Motion to Dismiss. Judge Jolly ruled that "when a breach of contract claim reflects potential fraud or deceit, or other aggravated or malicious behavior, a claim for punitive damages may lie." Op. ¶52. He said also that "the North Carolina courts will recognize a claim for punitive damages arising from a breach of fiduciary duty when it is coupled with the requisite aggravating factors." Op. ¶53.

The opinion is premised on the liberal pleading standard of the U.S. Supreme Court’s decision in Conley v. Gibson. The Conley standard has been rejected by the Supreme Court, but remains the law of North Carolina based on a recent North Carolina Court of Appeals opinion.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Once the Business Court takes jurisdiction over a case, that jurisdiction remains in place for the life of the case, regardless of dismissals of parties or changes in the nature of the claims.

That was the ruling of the Court last week in Mattress Now, Inc. v. KS Bank, Inc. in response to the Plaintiff’s Motion to Remand.

The case had been designated to the Business Court by the Defendant Bank, which was one of two defendants. The Plaintiff challenged that designation, but the Court rejected Plaintiff’s arguments in an earlier ruling and refused to remand the case.  After that, the Plaintiff settled the claims involving the Bank.

Plaintiff then moved again to remand.  It asserted in its Motion that the remaining claims "do not involve the corporate law and banking issues that justified removal of this case to the Business Court" and that none of the issues "require the expertise of the Business Court."

Judge Tennille, in a very short ruling, held "[t]his case was designated a mandatory complex business case pursuant to North Carolina General Statute Section 7A-45.4 on August 12, 2008. Once jurisdiction attaches, it remains attached for the entire case."

The Court of Appeals issued today a number of opinions worth a mention, running the gamut from two personal jurisdiction rulings to a significant legal malpractice decision.

Personal Jurisdiction

The opinion in Brown v. Meter contains a thorough discussion of personal jurisdiction based on product sales in the "stream of commerce," with a mention of virtually every North Carolina case on the subject. At the end, the Court held that the Plaintiffs could pursue wrongful death claims in Forsyth County Superior Court against a Turkish affiliate of Goodyear Tire for an accident that occurred in France. The Court found that the Defendants had "purposefully injected [their] product into the stream of commerce" with the result that thousands of tires manufactured by each of the Defendants had been distributed in North Carolina. It further noted North Carolina’s "well-recognized interest in providing a forum in which its citizens are able to seek redress for injuries they have sustained," and the burden of requiring the Plaintiffs to litigate in France.

In another personal jurisdiction case, Barloworld Fleet Leasing, LLC v. Palmetto Forest Products, Inc., the Court of Appeals affirmed a finding of personal jurisdiction over the South Carolina customer of an equipment leasing company. The Court held that "the contracts and attendant regular payments [made by the Defendant to the NC Plaintiff] represented ‘continuing obligations’ between defendants and a resident of North Carolina," and this was sufficient to make out the necessary minimum contacts. The Court rejected the Defendant’s argument that the Plaintiff should be required to show that it would be inconvenienced by having to litigate the short distance over the state line into South Carolina. It said it found no case supporting "the proposition that a convenient location for the plaintiff other than the forum State shows that the exercise of jurisdiction over the defendant offends fair play and substantial justice."

Legal Malpractice

In a case of first impression, the Court held in Whiteheart v. Waller that a client who was in pari delicto with his lawyer could not pursue a claim for legal malpractice. The client had encouraged his lawyer to pursue earlier litigation that had no basis. The dismissal of that case resulted in a second lawsuit, this one against the client for abuse of process, in which the client was socked with a $700,000 jury award. The client then sued his lawyer for malpractice, and the trial court dismissed the case.  The Court of Appeals affirmed. Quoting the Supreme Court of Wisconsin, Judge Calabria said "[a] court should not encourage others to commit illegal acts upon their lawyer’s advice by allowing the perpetrators to believe that a suit against the attorney will allow them to obtain relief from any damage they might suffer if caught."

North Carolina Mortgage Lending Act

The decision in Guyton v. FM Lending Services, Inc. is another case of first impression. The Court held that a lender was liable under the North Carolina Mortgage Lending Act for failing to disclose that real property for which it was making a loan was located in a flood plain (a "special flood hazard area."). The claim involved more than an oversight, it was that the defendant had "actively and intentionally withheld the information that the property lay in a flood plain." Judge Ervin further found that the claim was not preempted under the National Flood Insurance Act

Arbitration

The case of United States Trust Co. v. Stanford Group Company reminds, yet again, that when a trial court denies a motion to compel arbitration, it must state the reasons for denying the motion, including determining whether the parties had a valid agreement to arbitrate and whether the specific dispute falls within the substantive scope of that agreement. The Court of Appeals remanded the case to the trial court for proper findings.

Preemption Under The LMRA

The Court of Appeals pancaked a former player for the Carolina Panthers in Jeffers v. D’Alessandro, ruling that his claims against the football team involving his medical treatment were preempted bty Section 301 of the Labor Management Relations Act. Judge Geer, relying on two federal court decisions involving similar claims by other NFL players, said that "the touchstone of Jeffers’ claims — no matter how couched or labeled — is that the Carolina Panthers acted improperly in providing him medical care through the team physician.  These claims necessarily derive from the obligations in the [NFL’s Collective Bargaining Agreement] and will require analysis of the CBA in order to be resolved." Jeffers has no claim left to make.  He tried to start an arbitration under the CBA during the course of his lawsuit, but it was rejected by the NFL as untimely.

Foreclosure

In an opinion from the burgeoning specialty of foreclosure law, Mosler v. Druid Hills Land Co., Inc., the Court held that the Superior Court couldn’t consider the issue of merger as a defense to foreclosure under N.C. Gen. Stat. §45-21.36. The defendant said that the plaintiff couldn’t foreclose because the defendant had delivered a deed in lieu of foreclosure (which the plaintiff had refused to accept), resulting in a merger of the note and deed of trust. The clerk of court had refused to allow foreclosure because of what it termed "title issues." The Superior Court ruled that the foreclosure could proceed and the the Court of Appeals affirmed. The appellate court said that merger was an equitable doctrine which could only be raised in an action to enjoin a foreclosure pursuant to N.C. Gen. Stat. §45-21.34, and that there was no subject matter jurisdiction over a merger defense in a foreclosure proceeding initiated before the clerk. A 2007 change in the law regarding appeals from rulings by the clerk (N.C. Gen. Stat. §1-301.1) didn’t expand the Superior Court’s jurisdiction.

The alleged efforts of a board of directors to entrench itself – which included refusing to permit dissent shareholders to vote at a shareholders meeting and issuing additional shares to give the board majority control of the company – were the subject of the Business Court’s opinion last Friday in Green v. Condra, 2009 NCBC 21 (N.C. Super. Ct. August 14, 2009).

Among other things, the Court held that a shareholder can maintain an individual (i.e. not derivative) claim for breach of fiduciary duty when his right to vote his shares is disallowed, and also let the Plaintiffs go forward on derivative claims for gross mismanagement and unjust enrichment.

Background

The parties were shareholders and/or directors of MedOasis, which provided billing services to anesthesiology practices. In November 2005, the Board removed the Plaintiffs, Green and Ellington, as directors and also fired Plaintiff Green as CEO. The company offered Green a buyout of his shares. He refused.

The other Plaintiff, Ellington, had been an anesthesiologist at MedOasis’ first and largest client, AAA. In May 2008, the company terminated its management contract with AAA. It then told Ellington that it was as a result required to repurchase his shares. It based the right to repurchase on a bylaw provision saying that MedOasis shareholders had to be members of medical practices under contract with MedOasis.

Other AAA shareholders had been offered redemption, and had also refused the offer. Twenty of those shareholders gave Ellington their proxies, giving him control over 481,000 shares. Combined with Green’s shares, the two Plaintiffs had control over 707,000 shares of the company’s 1,147,109 shares outstanding, a clear majority.  The members of the board held the remaining 440,109 shares that had been issued.

The Board Actions At Issue

Green then called a shareholders’ meeting. The Board, concerned about its minority position and the impending vote, called an emergency meeting at which it took a number of defensive steps which formed the basis for the lawsuit.

First, the board decided that it would not let Ellington and Green vote the shares they controlled. Next, it issued an additional 280,000 shares to two of the defendants at a below market value price. Those additional shares gave the board members a majority of the outstanding shares. Last, it decided that it wouldn’t give notice of the shareholders meeting to Ellington and Green or the shareholders whose shares they controlled.

Ellington and Green showed up at the shareholder meeting notwithstanding the lack of notice. The company refused to let them vote their shares or the shares over which Ellington held a proxy. It did count the newly issued shares, and defeated motions proposed by Green to change the composition of the board.

The Plaintiffs then made a written demand on the company for it to take “suitable action.”  The board refused to act. The lawsuit, raising a fusillade of individual and derivative claims, followed.

In the opinion on Defendants’ motion to dismiss, which for the most part denied the motion, Judge Diaz dealt with a series of corporate law issues:

Exculpatory Provision

The Defendants first said that they were immune from suit based upon an exculpatory provision in the company’s articles of incorporation. That provision, however, didn’t extend to claims arising from “any transaction from which the director derived an improper personal benefit.”

Judge Diaz held that Plaintiffs’ allegations regarding the issuance of the new shares “at a stated price well below its market value or fair value” in order to “ensur[e] that the board could protect itself from being unseated,” did not fall within the scope of the exculpation clause.

Individual Claims For Breach Of Fiduciary Duty

Most of the claims asserted by the Plaintiffs were derivative in nature, but Plaintiffs also raised their own individual claims for breach of fiduciary duty and constructive fraud. Defendants asserted that all of the claims were derivative in nature and that they could not be maintained on an individual basis.

Judge Diaz acknowledged that the fiduciary duty owed by the MedOasis directors was owed to the corporation as opposed to the individual shareholders, and that such claims are generally derivative, but nevertheless held that Plaintiffs could proceed on their individual claims.

The Court focused on the refusal of the board to permit the Plaintiffs to vote their shares, ruling that the right to vote “is specifically recognized by statute” per G.S. §55-7-21(a). Judge Diaz referenced Delaware precedent holding that when “a plaintiff shareholder alleges that Company stock was issued for grossly inadequate consideration and primarily for entrenchment purposes, the claim “may state either an individual or derivative claim.” (quoting Avacus Partners, L.P. v. Briani, Civil Action No. 11001, 1990 Del. Ch. LEXIS 178, at *22 (Del. Ch. Oct. 24, 1990)). Op. ¶158.

Judge Diaz concluded by holding that the individual claims raised “statutory violations of Plaintiffs’ right to vote their shares at the 18 August 2008 shareholders’ meeting,” and that claims of this nature “are properly pled as individual claims.” Op. ¶159.

Derivative Claim For Breach Of Fiduciary Duty

The Court held that the derivative allegations regarding the board’s efforts to entrench itself made out a claim for breach of fiduciary duty. It said that this conduct would be “a breach of their fiduciary duty to discharge their duties in ‘good faith,’ which includes a responsibility to act with undivided loyalty to the Company.” Op. ¶122. 

Furthermore, the Court held that the Defendants were not protected by the Business Judgment Rule because the “sole purpose” of the challenged conduct was to “thwart a shareholder vote.” Op. ¶123. The claimed misconduct amounted to bad faith, which “rebutt[ed] the deference normally afforded a Board by the business judgment rule.” Op. ¶124.

The Court further held that Plaintiffs could proceed on their claim for constructive fraud based upon the same allegations.

Derivative Claims For “Abuse Of Control,” Corporate Waste, and “Gross Mismanagement”

Derivative claims made by the Plaintiffs for abuse of control and corporate waste were dismissed by Judge Diaz, who ruled these claims were “not recognized as independent torts in North Carolina.” Op. ¶¶127-28. He said, however, that these claims were embraced by the derivative claims for breach of fiduciary duty, gross mismanagement, and constructive fraud.

The claim for gross mismanagement survived. The Court ruled that this was essentially a claim for a violation of the statutory duty of care under G.S. §55-8-30(a)(2), which requires a director to exercise his duties “with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” It observed that North Carolina “courts have recognized that a claim for gross mismanagement against a director is a proper derivative claim.” Op. ¶133.

Derivative Claim For Unjust Enrichment

The alleged conduct of the Defendants in entrenching themselves on the board also made out a derivative claim for unjust enrichment. The Court held:

Plaintiffs allege that Defendants unlawfully circumvented Plaintiffs’ voting rights so as to retain their seats on the Board, and, as a result, Defendants will continue to receive salaries, benefits, bonuses, stock issues, etc., at the Company’s expense and ‘under circumstances where it would be unfair for [Defendants] to retain [these benefits] without [the Company] being repaid or compensated.’ These allegations are sufficient to make out a claim for unjust enrichment. 

Op. ¶¶145-46.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

We’ll probably never know the identity of the Appellant in Lefkoe v. Jos. A. Bank Clothiers, Inc., decided yesterday by the Fourth Circuit.  Whether anyone, including the Defendant, was entitled to know that person’s name was the whole point of the appeal by the party referred to by the Fourth Circuit as the "Doe Client."

The Doe Client had accused Jos. A. Bank, a publicly traded company, of serious accounting fraud. That individual, who claimed a constitutional right to anonymity, appealed a ruling of a trial judge in the District of Maryland ordering his or her identity to be disclosed to the Defendant.

The Fourth Court’s ruling touches both deposition and subpoena procedure under the Federal Rules of Civil Procedure as well as issues of freedom of speech under the First Amendment.

Background

You’ll need more than a little bit of background, as the case has elements of a John Grisham novel. Lefkoe is a securities class action. Plaintiffs assert fraud based on a sharp drop in the clothing company’s share price when it delayed an earnings report.

The delay occurred because Bank’s Audit Committee had received, shortly before the report’s due date, a letter from the law firm of Foley & Lardner making detailed charges of accounting improprieties.The letter was sent by the law firm on behalf of a shareholder who it said "held several hundred thousand shares" of Bank stock. The shareholder was not identified in the letter.

Bank hired lawyers and accountants to investigate the charges. The conclusion of the investigation was that the charges were "without substance." In the securities lawsuit, filed in federal court in Maryland, Bank sent a subpoena to the law firm seeking to require it to present a witness to testify as to the identity of its client. The subpoena was issued from the Massachusetts district court.

The law firm objected there to the subpoena, asserting that its client had "a right of anonymity as protected by the First Amendment." The Massachusetts judge permitted the deposition to take place. The law firm presented the Doe Client as the witness. The Court ordered the deposition sealed and entered a protective order stating that the lawyers for Bank couldn’t tell their client the name of the Doe Client.

The lawyers for Bank investigated the Doe Client, and found facts suggesting it had taken "deliberate and successful actions to drive down the market price" of Bank stock, and furthermore that it was a short seller who held a substantial quantity of puts on Bank stock.  The Doe Client therefore stood to profit from the decline in Bank stock.

The clothing company’s lawyers then asked the Maryland judge to permit them to provide the name of  the Doe Client to Bank. The Maryland judge agreed to a wider disclosure, but only to Bank’s in-house counsel.

The Doe Client appealed to the Fourth Circuit, arguing that the Maryland court didn’t have the authority to modify the Massachusetts’ court’s ruling, and furthermore that the ruling violated the Doe Client’s First Amendment rights.

Continue Reading Law Firm’s Client Didn’t Have First Amendment Right To Be Anonymous

The Business Court now has jurisdiction over utility pole disputes between communications providers and municipalities.  That surprising expansion of the Court’s jurisdiction is thanks to a new law passed at the just concluded session of the North Carolina Legislature.

New section 62-55 of the General Statutes requires a municipality that "owns or controls poles, ducts, or conduits" to allow a "communications service provider" to have access to those resources at "just, reasonable, and nondiscriminatory rate." (The statute doesn’t apply if the poles, ducts, or conduits are subject to federal regulation under the Communications Act of 1934).

If a provider makes a request for access, and the request is refused, the new statute provides that either party can have its claim resolved by the Business Court, which will have exclusive jurisdiction over the dispute. The jurisdiction kicks in only after the expiration of a 90-day negotiation period or before then if either side "believes in good faith that an impasse has been reached."

The law became effective July 10, 2009. Earlier this week, in Town of Murphy v. Verizon South, Inc., Judge Tennille discussed the new statute and the procedure that the Business Court intends to follow with respect to utility pole disputes. Among other things,the Court discouraged "gamesmanship" which might result in a party rushing to file a lawsuit before the expiration of the 90 day negotiation period. Judge Tennille said "[t]he parties would be well advised to use the mediation process if their negotiations are not proving fruitful and leave it to the mediator to declare an impasse."

In the Town of Murphy case, Judge Tennille remanded a utility pole dispute to Cherokee County Superior Court. The case had been filed before the effective date of the statute, and Judge Tennille ruled that the new law was not retroactive.

Once the Business Court takes jurisdiction over case, that jurisdiction remains in place for the life of the case, regardless of dismissals of parties or changes in the nature of the claims.

In this case, the Plaintiff moved to remand the case to Superior Court, arguing that it had settled its claims with the party which had designated the case to the Business Court. It asserted that the remaining claims did "not involve the corporate law and banking issues that justified removal of this case to the Business Court" and that none of the issues "require the expertise of the Business Court."

The Court denied the motion, holding "[t]his case was designated a mandatory complex business case pursuant to North Carolina General Statute Section 7A-45.4 on August 12, 2008. Once jurisdiction attaches, it remains attached for the entire case."

Full Opinion

Motion to Remand