February 2010

North Carolina law says that "one judge may not modify, overrule, or change the judgment of another Superior Court judge previously made in the same action."  In a Business Court decision last week, Phillips and Jordan, Inc. v. Bostic, the Court granted a motion for Rule 11 sanctions on a fraud claim that another Superior Court Judge had refused to dismiss on a 12(b)(6) motion. It did so over the objection of the Plaintiff that the grant of the sanctions motion would be an overruling of the first Judge’s Order on the motion to dismiss.

The procedural facts are quirky. A group of defendants (the "Bostic Defendants") had made and lost a motion to dismiss a fraud claim before the case was designated to the Business Court. After the designation, another defendant moved to dismiss the same fraud claim made in an amended complaint. That dismissal motion was granted by the Business Court on Rule 9(b) grounds.

Judge Diaz referenced in his Order facts showing the Plaintiff had not relied on the statements it claimed were misrepresentations. He said, however, that he wouldn’t consider these facts as to the fraud claim against the Bostic Defendants because that would be "a backdoor attempt . . . to re-litigate the legal sufficiency of the fraud . . . claims in the face of a prior court order denying their Rule 12(b)(6) motion to dismiss."

He nevertheless admonished Plaintiff and its counsel to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before . . . pursuing the fraud claim against the remaining Defendants."  Plaintiff didn’t take that advice, and in August 2009 the Bostic Defendants filed their motion for sanctions. Judge Diaz "again suggested to Plaintiff’s counsel that they consider the merits of the claim alleging fraud" after the motion was fully briefed. This time, the Plaintiff took the Court’s advice and dismissed its fraud claim.

Judge Diaz went ahead and granted the motion for sanctions. He applied a standard of objective reasonableness, and said that "a legal position violates Rule 11 if it "has absolutely no chance of success under the existing precedent." He found that total lack of potential success to be present because the basis of the fraud claim was that the Plaintiff had been deprived of information necessary to make a lien claim against a construction project, but Plaintiff had in fact been able to make this very claim. The Court ruled that the claimed misrepresentation "did not deceive Plaintiff."

The Order doesn’t address why this wasn’t an end run around the principle that one Superior Court Judge can’t overrule another. The Bostic Defendants addressed this in their opening Brief.  Their position was:

Continue Reading One Superior Court Judge Can’t Overrule Another, Right?

The Court had warned Plaintiff and his counsel in an Order granting a Motion to Dismiss to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before continuing to pursue a common law fraud claim" against the "Bostic Defendants".

The Court’s Order had dismissed the fraud claim against one Defendant, but it didn’t dismiss the claim against the Bostic Defendants because those defendants had already made a Motion to Dismiss and had it denied before the case was transferred to Business Court.

After that, the Bostic Defendants filed a Motion for Rule 11 Sanctions. The Court then in an in chambers conference "suggested to Plaintiff’s counsel that they consider the merits of the claim alleging fraud." Shortly after that, the Plaintiff voluntarily dismissed its fraud claim.

The Court nevertheless granted the Motion for Sanctions. It held that "a legal position violates Rule 11 if it ‘has absolutely no chance of success under the existing precedent.’"  It found that to be the case because the fraud claim was founded on the theory that the Defendants had misrepresented the true owner of property in order to deprive the Plaintiff of its Chapter 44A lien rights. But Plaintiff had determined the true owner of the property and had in fact filed a claim of lien, and it had not therefore been deceived.

The Court held "in other words, Plaintiff either knew or should have known that its claim alleging common law fraud had absolutely no chance of success because Plaintiff was not deceived by this particular misrepresentation."

Full Opinion

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions



If you are a lawyer headed to federal court in one of the three federal districts in North Carolina, can you take a laptop computer into the courthouse? What about a cellphone, either with or without a camera? 

The answers are different in the Eastern, Middle, and Western Districts. That’s also true throughout the country, because the Administrative Office of the Courts has left the decision about how to handle these devices to the discretion of each Court.

The Middle District

The Middle District of North Carolina is the most restrictive of North Carolina’s three districts. That Court last year implemented a strict policy banning laptops entirely without advance court approval. That policy has now been relaxed, and you can apply for a Laptop Authorization Card to bring a laptop to Court.

But you can forget about a camera with a cellphone in the Middle District The Court’s website says that "[p]hotographic, recording or transmitting devices are prohibited in all courthouses. Prohibited devices include, but are not limited to . . . wireless microphones, recorders, cameras, 2-way radios, push to talk cellphones and cellphones with cameras."  

Cellphone without a camera?  That’s fine in the Middle District.

The Eastern District

In the Eastern District, there is a Standing Order dated August 15, 2005 titled In re Prohibition of Wireless Communication Devices In Courtroom Facilities. The Order covers laptops, cellphones, and cellphones with cameras, and says they can’t be brought into the courthouses.

But the Order exempts "attorneys on court business provided that their possession and use of wireless communication devices in courtroom facilities is relating to their official duties." The exemption allows attorneys to bring cellphones with cameras into the courthouses in the Eastern District.

But even though you might think that laptops fall within the exemption, they don’t. If you want to bring a laptop into an Eastern District court, you need to contact the Case Manager for the Judge you are appearing before and ask for advance permission.  If permission is granted, the Court Security Officers will be informed and will you’ll be able to get the computer through security.

The Western District

The Western District is the most technology friendly district in North Carolina.  Lawyers headed for the courthouses in Charlotte and Asheville can bring in both laptops and cellphones with cameras.

The Standing Order there applies to "lap top computers, cell phones, pagers, personal digital assistants or other electronic devices." It says that members of the bar can bring such devices into the courthouses so long as they are screened by the Marshals and turned off while the court is in session. The permitted devices include cameras with cellphones.

Not only that, but there is wireless internet access in the attorney conference rooms in the Western District.


Thanks very much to John Brubaker, Dennis Iavarone, and Frank Johns, the Clerks in the Middle, Eastern, and Western Districts, who were very helpful in answering questions about these policies.

The Plaintiff in Stratton v. Royal Bank of Canada, 2010 NCBC 2 (N.C. Super. Ct. February 5, 2010) thought she had struck it rich. She had found a 1927 stock certificate in the name of her late mother for five shares of stock in the Bank of Manteo. Plaintiff’s calculation was that her mother’s shares of stock, following various mergers, were the equivalent of 14,486 shares of RBC common stock. That’s about $765,000.

The problem for the Plaintiff — and the reason that summary judgment was entered against her — was that she had known about the stock certificate since 1982 and that her mother had known that the Bank hadn’t recognized her as a shareholder since well before that. The Plaintiff furthermore had over the years asked bank employees, stockbrokers, and lawyers about the stock, but she hadn’t done anything to begin a lawsuit.

The dismissal was based on laches, "an equitable doctrine ‘designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.’" Op. ¶33. A party defending on the basis of laches is required to show "that (a) the plaintiff negligently failed to assert an enforceable right within a reasonable time and (b) the defendant was prejudiced by the delay in bringing the action." Op. ¶36.

Judge Jolly ruled that Plaintiff and her mother had known about the first merger of the Bank of Manteo, with Planters National Bank, and had known that the Bank didn’t consider Plaintiff’s mother to have been a shareholder after that merger took place in 1962.  He said:

Given the small size of the town and Inge’s extended residence there over several decades, the court determines there is no genuine question that Inge knew of the merger. There is no evidence that Inge received dividends or any other incidents of share ownership during that time, and the court concludes that it is undisputed that Inge knew or should have known the Bank of Manteo and its successors no longer considered her to be a shareholder.

The long delay in pursuing the claim had prejudiced the Bank. Judge Jolly held that "the passage of time has (a) made appropriate written records unavailable and (b) precluded RBC or its predecessors from talking effectively with witnesses or Inge, who either now are deceased or whose memory about such a transaction that took place many years ago most likely would have deteriorated materially, to the prejudice of the Defendant."

The Court also ruled that claims for constructive trust, conversion, and unjust enrichment were barred by the applicable statutes of limitation.

If you’ve tried cases, you’ve probably lived through this nightmare. It’s a few weeks before trial. You call your out of state client to make arrangements for your witnesses to be in the courtroom at the appointed time. But your contact tells you that the company has just fired your key witness.

What, you say?  What were you thinking? How could you do that? I can’t try this case without Pete. After the initial shock has faded, you start to hope that Pete will show up voluntarily. You ask your client about that. Well, they say, it wasn’t a pretty parting. And sure enough, Pete laughs and hangs up on you when you ask him if he will come to North Carolina to testify.

Now you are in crisis mode, scrambling for a way to get this key testimony. There’s a video deposition of Pete, but all the questioning was done by opposing counsel. You probably prepped Pete before the deposition with that common advice that he shouldn’t volunteer information, so there are a lot of one word answers, terse responses, and not much presentation of the warm side of Pete. You didn’t ask a single question, counting on Pete striding confidently to the witness stand to carry your client’s banner during your direct examination. The video just isn’t going to play well.

What now? You scour the Business Court Rules. Rule 18.10 provides some hope. It says:

18.10 – Trial Preparation After the Close of Discovery. For good cause appearing
therefor, the physical or mental examination of a party may be ordered at any time prior to or during trial. Ordinarily, the deposition of a material witness not subject to subpoena should be taken during discovery. However, the deposition of a material witness who agrees to appear for trial, but later becomes unavailable or refuses to attend, may be ordered at any time prior to or during trial.

Surely the unexpected firing of Pete is good cause, and you you make a motion to take a trial deposition of Pete per Rule 18.10. Will it be granted? Every case is different, but maybe not. A motion on similar facts was denied last week in the case of Hilb Rogal & Hobbs Company v. Sellars, in which Judge Diaz prohibited the taking of a deposition two weeks before trial.

The facts in Hilb Rogal need a little development. . . .

Continue Reading Problems At Trial: The Suddenly Unavailable Key Witness

The lawyers who represented a class of Wachovia shareholders in the lawsuit over Wachovia’s merger last year with Wells Fargo have gotten a ruling on their application for $1,975,000 in fees. Judge Diaz knocked that application down by over a million dollars — or more than half of the fees sought — to $932,621.98.

The Order today in Ehrenhaus v. Baker ruled that "the time spent by counsel on the case appears to be somewhat excessive," and that "the hourly rates of Plaintiff’s New York counsel [of $750 per hour] are far in excess of those normally charged by attorneys in North Carolina."

I cannot tell you how the Court got to the $932,621.98 number because, as Judge Diaz observed, Plaintiff’s counsel "did not submit detailed time records of the work done." But the fee application claimed 2,333 hours of work, which breaks down to an award of $399.75 per hour.

On a more serious note, there are two parts to the Order that may have more of a future precedential value.  One is that Judge Diaz’ ruling certified a non-opt-out class. In other words, class members didn’t have the traditional right to opt out of the settlement and pursue their individual claims. The Court said that this type of certification was appropriate given that this was a lawsuit over a merger seeking primarily equitable relief. There are no appellate cases in North Carolina approving such a non-opt-out certification, although the Business Court has certified such classes before.

The other is the Court’s consideration of the reaction of the class itself in determining that the settlement was adequate. Judge Diaz said that "the reaction of the class to the settlement is perhaps the most significant factor to be weighed in considering its adequacy." He noted that over a million class members had received notice of the settlement, but that only 51 had objected. He held that "the overwhelming majority of the Class has been virtually silent as to the Proposed Settlement," and that "the muted reaction of the Class . . . supports a finding that the Proposed Settlement is fair and reasonable."

I don’t think this was the tacit approval that Judge Diaz thought it was. It’s more likely to me that Wachovia’s shareholders were just tired of the whole darn thing.

If you are removing a case to federal court where there are multiple defendants, it can be a tricky business. If the defendants are served at different times, when does the thirty days for a removal under 28 U.S.C. § 1446(b) begin and end running?

There is a split in the Circuit Courts on this issue. In the Fifth Circuit, the rule is the "first-served defendant rule." The thirty days starts to run as soon as the first defendant is served. If the first served defendant doesn’t remove thirty days after it is served, defendants served later can’t remove.

The rule is exactly the opposite in the Sixth, Eighth and Eleventh Circuits, which follow the "last-served defendant rule." Each defendant, no matter when it is served, has thirty days from the date of service on it to remove.

The Fourth Circuit’s position wasn’t clear. A footnote in McKinney v. Board. of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), suggested that the Circuit might be a "first-served" jurisdiction.  But in today’s decision in Barbour v. International Union, the Fourth Circuit dismissed that footnote as "classic judicial dictum" and joined the "last-served" camp.

The majority in Barbour held "that in cases involving multiple defendants, each defendant, once served with formal process, has thirty days to file a notice of removal pursuant to 28 U.S.C. § 1446(b) in which earlier-served defendants may join regardless of whether they have previously filed a notice of removal."

Only a handful of new cases were designated to the Business Court in January 2010. That may be a function of the cold weather, or perhaps it’s a different kind of chilling effect, the $1,000 fee to designate a case to the Court. In any event, here are the six new cases:

Air Systems and Equipment Co. v. Sullair Corp.: (Catawba)(Diaz): Plaintiff claims that the Defendants used its confidential trade secret information to raid its workforce and hire several of its employees in violation of the North Carolina Trade Secrets Protection Act.

Beadnell v. Coastal Communities at Ocean Ridge Plantation, Inc. (Brunswick)(Jolly): another case (there are now several in the Business Court) involving claims by residential lot buyers that the price of their lots were grossly inflated through the fraud of the developer, with the cooperation of banks and appraisers.

Connett v. Jackson National Life Ins. Co. (New Hanover)(Jolly): apparently supersecret.  The Complaint and the Notice of Designation were filed under seal.

Coremin v. McNamara (Guilford)(Tennille):issues involving LLCs and partnerships, including whether a person may claim a membership interest in a North Carolina LLC based on an oral promise. (This one was designated to the Court on December 31, 2009).

LS Mtron, Ltd. v. Escorts, Ltd. (Edgecombe)(Jolly): Plaintiff, a creditor in a receivership proceeding, seeks to subordinate the claim of a secured lender (Textron Financial) based upon the lender’s claimed knowledge of the financial fraud of its customer.

RS&M Appraisal Services, Inc. v. Alamance County (Alamance)(Tennille):dispute concerning services provided by plaintiff to Alamance County in connection with its octennial real property evaluation. Business Court jurisdiction is based on counterclaims by the County alleging conspiracy in restraint of trade and a combination in restraint of trade.

What is a "dynasty trust"?  And what does that have to do with business litigation?

To answer the second question first, not much. But a case decided today by the North Carolina Court of Appeals, which affirms the validity of a 2007 statute which permits dynasty trusts, originated in the North Carolina Business Court. So it gets mentioned on this blog.

A dynasty trust is a trust designed to exist for multiple generations of a family, potentially forever, usually avoiding generation skipping tax. The North Carolina Legislature facilitated the creation of such trusts when it enacted N.C. Gen. Stat. §41-23 in 2007.

But that legislation, titled "Perpetuities and suspension of power of alienation for trusts" raised issues whether it violated the Rule Against Perpetuities, which has constitutional roots in North Carolina.

Section 34 of Article I of the state Constitution says that "[p]erpetuities and monopolies are contrary to the genius of a free state and shall not be allowed." A year ago, in Brown Brothers Harriman Trust Co., N.A. v. Benson, Judge Diaz ruled in an unpublished opinion that the statute did not conflict with the Constitution.

The Court of Appeals ruling today affirmed that decision. It holds that a trust created per Section 41-23 "may remain valid in perpetuity" so long as the provisions of the statute are complied with. That means that "the trustee has the power to sell, either expressed or implied, or . . . there exists an unlimited power to terminate the trust in one or more persons in being."

If you want the detailed analysis, which includes discussion of "estate entails," and "fee tail estates" and Supreme Court decisions nearly 200 years old, you’ll have to read the opinion. If you want to brighten the day of an estate planning lawyer or tax lawyer with the happy news about dynasty trusts, you can forward this post to him or her by clicking on the little envelope icon at the bottom.