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:
Under North Carolina law, a court can assess Rule 11 sanctions against a plaintiff and the plaintiff’s counsel regardless of whether a court previously denied the defendant’s motion to dismiss pursuant to Rules 12(b)(6) and/or 9(b). See Perkins v. Healthmarkets, Inc., 2007 WL 2570242, *6 (N.C. Super. 2007)(“That the Plaintiff’s Amended Complaint meets the requirements of Rule 9(b), however, does not mean that it satisfies Plaintiff’s pleading obligations under Rule 11 of the North Carolina Rules of Civil Procedure.”); see also Hill v. Hill, 173 N.C. App. 309, 320, 622 S.E.2d 503, 511 (2005)(“. . . expenses incurred during the motion to dismiss, whether granted or denied, are reasonable expenses incurred due to plaintiff’s signing and filing the frivolous complaint.”). As the Court of Appeals noted, “whether the document complies with . . . the Rule is determined as of the time it is signed.” Id. Here, the allegations in the Amended Complaint, while considered to be true in considering a 12(b)(6) motion, are not well grounded in fact or law and the Bostics are entitled to dismissal of the claims and sanctions against Plaintiff and its counsel under Rule 11.