November 2009

The United States District Court for the Western District of North Carolina issued its new Local Rules today. There isn’t a blacklined version available, but there don’t appear to be a large number of changes as far as deadlines. Many of the Western District’s deadlines were already in the seven and fourteen day periods adopted by the revised Rules of Civil Procedure, and didn’t need to be revised.

The changes I saw were as follows:

Local Rule 16.1(B): Deadline for filing the Certification of Initial Attorney’s Conference.  Now due seven days (before it was five) after the Initial Attorney’s Conference.

Local Rule 16.1(C): Filing of Joint Stipulation of Consent to Magistrate Jurisdiction.  Now, if the Court rules on a motion to stay, the Joint Stipulation is due seven days after the Court’s ruling (it was five before).

Local Rule 54.1(D): Objections to Bill of Costs.  Objection within fourteen days of the electronic filing of the bill of costs (formerly ten days); response from prevailing party within seven days thereafter (before, five days).

Local Rule 54.1(E): Objections to the Ruling of the Clerk of Court. Request for review of ruling by Clerk on costs due seven days after the Clerk’s action (formerly five days).

 

 

The Court overruled an opposition to designation in a case involving "real estate developments which failed during the current financial crisis."

The Court found these types of cases "especially suited" for consideration by the Business Court because "(1) they involve numerous parties, (2) they involve complex issues, (3) they involve current issues relating to real estate development that will result in written opinions of use to the bar and business community, (4) they may involve resolution of multi-state legal issues, (5) they will require coordination with bankruptcy courts and other federal courts, (6) they require management by one judge, (7) they will benefit from consistent legal rulings on the same kinds of issues, (8) they will be motion intensive, and (9) they will benefit from the use of the Court’s electronic filing system."

Full Opinion

 

 

The Local Rules for the Eastern, Middle, and Western Districts of North Carolina are going to be amended to square up with the new time periods for various filings contained in the revised Federal Rules of Civil Procedure.

The Revised Middle District Rules, blacklined to show the changes, are already available. So are the Revised Eastern District Rules, also blacklined. The new Western District Rules are in the works and expected to be available shortly.

The Middle District has an entire page on its website devoted to the changes in its Local Rules and Standing Orders, which includes a summary of the Rules changes. The Middle District also has a brand new Rule 6.2, which defines what constitutes "inaccessibility" of the Clerk’s office and what should be done if there is an instance of inaccessibility.

The Eastern District didn’t do a summary of the changes to its Rules, but I’ve prepared one, available here. The Eastern District has a LOT of Rules and there are around 50 changes. I categorized them by subject, including general motions practice, trial, mediation, admiralty, and patents.

The changes to North Carolina’s Local Rules further the implementation of the new "a day is a day" time computation rules, which I wrote about last month. The new Local Rules, like the Federal Rules, take effect on December 1.

If you’ve been keeping up with this blog, you know that there’s an issue with exactly what that effective date means for deadlines calculated under the old Rules and already running on December 1.

The Court stayed discovery pending its resolution of a Motion to Dismiss. There is no discussion in the very short Order of the reasons for the Court’s decision, but the briefs are useful.

Full Opinion

MassMutual’s Brief in Support of Stay of Discovery

Clark Consulting’s Brief in Support of Stay of Discovery

BB&T’s Opposition to Both Motions

MassMutual’s Reply Brief in Support of Stay of Discovery

Clark Consulting’s Brief in Support of Stay of Discovery

North Carolina’s Superior Court Judges met for their bi-annual Conference last month. There are always presentations at these conferences useful to those of us standing on the other side of the bench, and this Conference was no exception.

You can see the full list of papers and handouts from the October 2009 Conference here, but worth mentioning are:

An Administration of Justice Bulletin which contains a thorough examination of the law of recusal from Professor Michael Crowell, including the United States Supreme Court’s decision in Caperton. The Bulletin contains a subject matter overview of what looks like every North Carolina appellate decision on recusal

If you are a medical malpractice lawyer, you’ll certainly want to read Practical Tips for Trying Medical Negligence Cases, written by Judges Richard Doughton, Ed Wilson, and Catherine Eagles.

A presentation titled Ex Parte Contacts: When Can a Judge Trust a Lawyer? by Paul Ross, the Executive Director of the Judicial Standards Commission, and Judge Catherine Eagles.

And last but not least, there is Computer Essentials For Judges from Judge Ripley Rand and Professor Jessica Smith of the IOG. That lists a number of legal websites and "blogs of note," including this one.

I’ve written before about the materials from these Conferences, all of which are available on the IOG website. Those records back to February 2002, and there are literally dozens of papers on all sorts of subjects available.

The Court denied a Motion for Preliminary Injunction under the North Carolina Trade Secrets Protection Act.

Plaintiff had failed to show a likelihood of success on the merits, for a number of reasons. First, the manufacturing process which Plaintiff claimed was a trade secret was not meeting the requirements of the third party buyer involved, which caused the Defendant to develop its own process. Second, there was evidence that some of the technology was widely known and used in the industry. Finally, Plaintiff had never insisted on a confidentiality agreement to protect the claimed trade secret information and had in fact shared some of the information with the Defendant. The Defendant’s signature on logs stating that it might be exposed to trade secret information was insufficient.

The Plaintiff had furthermore failed to show irreparable harm, given that its claim was that the Defendant had misappropriated the process in order to sell to their common customer. The Court held that "it should be relatively simple for Plaintiff to calculate its damages, which will be measured either by Plaintiff’s lost profits or the extent of Defendant’s unjust enrichment resulting from the alleged violation of the NCTSPA."

Full Opinion

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

It looks like there is a small problem with the impending amendments to the Federal Rules of Civil Procedure.

The drafters seem to have overlooked an important point: exactly how will the Rule changes apply to deadlines which have started running before December 1st, the date on which the changes become effective?

If you aren’t aware of the amendments about to take effect, the way in which you count the days to respond to a federal court filing will change on December 1, 2009. Time periods will change as well, usually from five days to seven days or from ten days to fourteen days.

What exactly does that mean if you are going to be dealing with a response to a filing made (or a deadline that starts running) before December 1, with a response or filing due after December 1? Should you count under the new "days are days" approach and use the time periods that are about to go in effect? Or do you apply the pre-December 1st Rules since the clock started ticking before then?

A Couple Of Examples Of The Problem

Does it make a difference on responses to motions? It could, because the Rule changes hit at a holiday time period, right after Thanksgiving. In North Carolina, there are two holiday days that week: Thanksgiving and the day after Thanksgiving. The old Rules excluded holidays from the count for certain response times, the new Rules don’t.

So let’s say you got served in an EDNC case via efiling with a Motion to Compel on Monday, November 16. You’ve right now got a ten day response time per EDNC Local Rule 7.1(e)(2). You count that ten days by excluding holidays and weekends and then add three extra days per FRCP 6(d). Under the current Rules, your response is due on Monday, December 7.

Under the effective-December-1-Rules, you have a 14 day response time, counted by including weekends and holidays and then adding the three extra days. That puts your response due on Thursday, December 3, four days earlier. Which deadline applies?

Here’s an example which runs in the opposite direction, where you would have more time under the new Rules. Right now, Rule 59 gives you ten days after the entry of judgment to file a motion for a new trial or to move to alter or amend a judgment. The amended Rule 59 gives you a whole lot more time, 28 days. So if judgment is entered on November 30, can you take the 28 days or do you need to file within ten?

There Isn’t A Clear Answer

I wish I could tell you that there was a clear answer, but there isn’t. The "Statutory Time-Periods Technical Amendments Act of 2009," which approved the time computation changes, says without equivocation that "the amendments made by this Act shall take effect on December 1, 2009."

Rule 86 of the Rules of Civil Procedure speaks to amendments of the Rules. It says that amendments "take effect at the time specified by the Supreme Court" and apply to actions commenced after that date, but also to actions "then pending," unless the Supreme Court specifies otherwise or "the court determines that applying them in a particular action would be infeasible or work an injustice."

In the past, there has been more specification about effectiveness, which has usually been pegged to subsequently filed proceedings. That’s true of the addition of Rule 502 to the Federal Rules of Evidence,  which applied to "all proceedings commenced after the date of enactment of this Act."

That approach is also true of the 2006 e-discovery amendments to the Rules of Civil Procedure, which said that they would take effect on December 1, 2006 and would "govern in all proceedings thereafter commenced."  The latter amendment specified its effect on pending cases, and said that it would apply "insofar as just and practicable, [to] all proceedings then pending."

Assuming motions are "proceedings," the drafters of the new changes didn’t limit the Rule changes to subsequently filed proceedings, and they didn’t address what happens with "then pending" actions.

The safest approach certainly is to apply the shorter time period, but it would have been nice if this issue wasn’t out there.

It might seem self-evident that the Business Judgment Rule applies to decisions made by the managers of a limited liability company, but if you were looking for a North Carolina case to cite on that point before last week, you wouldn’t have found one.

But now, we have Mooring Capital Fund, LLC v. Comstock North Carolina, LLCa November 13, 2009 decision from the North Carolina Business Court. The case addresses not only the business judgment rule, but also two other significant aspects of litigation involving LLCs.

The Business Judgment Rule And LLC Managers

Mooring Capital, a minority member of Comstock North Carolina, LLC, filed a lawsuit seeking an accounting and making derivative claims for a diversion of funds by the majority member and manager of the LLC, CHCI. CHCI contended that it was entitled to dismissal because it had limited liability as a member-manager.

Judge Jolly agreed that "member-managers generally are shielded from liability when acting as LLC managers," Op. ¶29, and further held that "the managers of an LLC may also be entitled to the protections of the ‘business judgment rule.’" Op. ¶30. The Court based the business judgment rule portion of its ruling on G.S. §57C-3-22(b), which states that an LLC manager is bound to act "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company."

The Court nevertheless denied the manager’s motion to dismiss, holding that "while the business judgment rule limits the liability of member-managers when acting on behalf of an LLC, this liability is not limited when managers act outside the scope of managing the LLC." Op. ¶33. Dismissal of Plaintiff’s claims wasn’t warranted because the Complaint made allegations that the manager had taken "actions clearly in conflict with the interests of the LLC" and had "entered into transactions from which" the manager had "derived an improper personal benefit." Op. ¶36. Those included unauthorized distributions from the LLC to the manager and entities with which the manager it was affiliated.

Derivative Actions On Behalf Of LLCs, And Stays Pending Investigation

There are at least two other LLC-related litigation points worth noting in Mooring Capital. One involves the standing of an LLC member to make a derivative claim, the other involves the right of the LLC to a stay of the action while it investigates the charges.

On the first point, although the LLC Act doesn’t specify that a demand be made before a member can file a derivative action, the statute does require that the complaint "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the managers, directors, or other applicable authority and the reasons for the plaintiff’s failure to obtain the action, or for not making the effort." N.C. Gen. Stat. §57C-8-01(b).

The Defendant claimed the Plaintiff hadn’t made sufficient effort to have the LLC take action. The Court disagreed, referencing Plaintiff’s contentions that "its minority status alone show[ed]" that it lacked the authority to cause the LLC to bring suit," and furthermore that it had made "repeated requests for financial information" to which the LLC had not responded.

On the point of the LLC’s right to a stay pending its investigation, the LLC had retained PriceWaterhouseCoopers to investigate some of the matters raised by Plaintiff. The LLC said that it therefore was entitled to a stay per G.S. §57C-8-01(b). The Court denied the stay, however, noting that it had concerns about the scope of the accounting firm’s investigation. The engagement letter between the LLC and PWC said that the accounting firm would perform a review of the LLC’s financial statements, but did not speak to an investigation of other allegations made by the Plaintiff in its Complaint.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Brief in Support of Motion to Stay

Brief in Opposition to Motion to Stay

A shareholder who guarantees the debt of a corporation does not have an injury "separate and distinct" from the injury sustained by the corporation itself. The shareholder did not standing to pursue damages for the breach of a contract with the corporation.  A shareholder "cannot assert claims against a third party for loss of its equity investment in a corporation."

Full Opinion