March 2010


What should you do if your firm’s e-mail account is down and you receive no e-mails for at least four days?  The Fourth Circuit says you’d better check your federal court dockets. 

In a published decision released Friday, Robinson v. Wix Filtration Corp., No. 09-1167 (4th Cir. Mar. 26, 2010), the Fourth Circuit affirmed a denial of Rule 59(e) motion to set aside entry of summary judgment against the plaintiff where the plaintiff’s attorney never received notice from the Western District of North Carolina that the summary judgment motion had been filed. 

The WDNC had previously set a deadline for dispositive motions of August 8, 2008.  On that date, defendants filed a motion for summary judgment using the court’s Electronic Case Filing ("ECF") system.  The ECF filing generated a Notice of Electronic Filing (“NEF”) that was emailed to counsel of record and, consistent with the WDNC local rules, no other service was made.  The response deadline passed without any response from plaintiff, and, not surprisingly, the District Court granted the motion on December 3, 2008.  (The District Court treated the facts as undisputed and conducted a full legal analysis of the grounds for the motion.)  Plaintiff then filed a motion under Rule 59(e) and Rule 60(b) seeking to set aside the order.  That motion was denied, and plaintiff appealed.

Plaintiff’s counsel’s explanation for the failure to respond was that his firm’s Internet domain name had expired and thus his e-mail system was down when Defendant filed the motion.  E-mails from the intervening period (at least four days) between expiration and reinstatement were lost in cyberspace, never to be found.  At oral argument in the Fourth Circuit, counsel for plaintiff stated that he knew the summary judgment deadline had passed and that he made a strategic decision not to ask defense counsel whether they had filed a motion.  Judges Duncan and Davis had little sympathy for plaintiff.  Some choice highlights from the majority opinion:

“We can hardly say that the district court abused its discretion in declining to vacate its judgment to prevent ‘manifest injustice’ given that Appellant’s failure to receive notice of the motion resulted from his counsel’s conscious choice not to take any action with respect to his computer troubles.”

“Instead, Appellant’s counsel strategically chose not to call opposing counsel after the deadline for filing dispositive motions had passed because he did not want to alert them to the court’s deadline. More amazingly, he chose not to check with the district court either. In other words, Appellant’s counsel made the affirmative decision to remain in the dark.”

And from Judge Davis’s concurring opinion:

“Our good colleague in dissent laments the possible consequences to an ‘innocent’ litigant from his counsel’s unwise and misplaced strategic choice to litigate, ostrich-like, with his head in the sand."

Judge King’s dissent argued that plaintiff should not be faulted for his counsel’s error and that because the Notice of Electronic Filing did not reach plaintiff’s counsel, service was not complete under Rule 5(e).  (Defense counsel apparently had no indication that plaintiff’s counsel did not receive the filing).

Electronic filing and service have been mandatory in the WDNC since January 1, 2006, and apparently they cannot be ignored.

[Ed. note:  Today’s entry was authored by Jennifer Van Zant, who was unable to post under her own name for technical reasons but who, in the spirit of the Fourth Circuit’s opinion, took prompt action to overcome those electronic issues and bring you this case of note.]


I’m not sure we’ve ever had the opportunity to describe a Business Court opinion as "epic" before, but here we are.  On Friday, in State v. Custard, the Court delivered a 70-page, 4-appendix opinion that’s the corporate governance equivalent of The Ten Commandments or Ben-HurIn addition to a thorough discussion of directors’ duties under North Carolina and Delaware law, the opinion answers four previously unanswered questions posed in the Robinson on North Carolina Corporation Law treatise that occupies a prominent shelf in every North Carolina business lawyer’s library.

Custard was a breach of fiduciary duty case brought by the Commissioner of Insurance as the liquidator of Commercial Casualty Insurance Company of North Carolina ("CCIC") against three directors of CCIC.  To make a long story short, CCIC focused on "artisan" liability insurance policies for small contractors and tradesmen in California.  For a period of time, it also offered non-standard auto policies in North Carolina and redomesticated itself from Georgia to North Carolina in 2001, thus becoming subject to NCDOI regulation.  In hindsight, CCIC set its premiums too low and wrote too many policies.  As the Court tactfully phrased it, "CCIC’s growth outperformed the Company’s ability to generate policyholder surplus."  It became insolvent in 2004.

Key points from Judge Tennille’s opinion include:


Continue Reading Business Court Blockbuster: If You Only Read One Corporate Governance Case This Year, Make It This One

If you have exchanged three-page letters with opposing counsel and held a short teleconference with dueling soliloquies on the scope of discovery relevance, you probably have complied with the meet & confer requirement that is a prerequisite to filing a motion to compel under North Carolina Rule 37 and any motion or objection related to discovery under Business Court Rule 18.6.  The minimum contact to satisfy that requirement may be that exchange; it may even be something short of that.  What does not satisfy the requirement is no contact at all, as a Business Court decision yesterday made clear.

In Northfield Investments, Inc. v. Regions Bank, a developer, Northfield, sued its lender, Regions, in June 2007 to try to enjoin a foreclosure sale, and Regions counterclaimed to collect under the promissory note at issue.  Two years later, in August 2009, Northfield moved to depose Regions’s attorney , Derr, on the grounds that Derr may have "failed to timely transmit the Purchase Agreement to Regions so that Regions could adequately assess the offer, respond in good faith to its customer and agree to have its lien released upon the closing of the Purchase Agreement . . ."  Allegedly, the attorney’s failure may have caused a third-party sale to fall through which otherwise would have maximized the value of the collateral. 

Derr filed a motion for sanctions under Rule 26(g) and attached email correspondence demonstrating that she did transmit the documents at issue to her client.  Northfield then withdrew its motion for leave to depose Derr.

Judge Diaz analyzed the parties’ Rule 26(g) duties by the same objective reasonableness standard used in Rule 11 cases:  "a party’s inquiry is objectively reasonable if, ‘given the knowledge and information which can be imputed to a party, a reasonable person under the same or similar circumstances would have terminated his or her inquiry and formed the belief that the claim was warranted under existing law.’”  He held that Northfield and its attorneys did not satisfy that duty in seeking Derr’s deposition.

The Court rejected Northfield’s proffered good-faith basis: 

9. The fact that Smith may have (during some unspecified timeframe) suggested to
Northfield that Derr was unresponsive to inquiries made in 2007 on the subject of the Purchase Agreement is a thin reed indeed on which to support a motion seeking to depose opposing counsel two years later.

10. Moreover, had Northfield and the Third-Party Defendants (or their new counsel)
spoken with Smith prior to filing the Discovery Motion, it is difficult to believe that Smith would not have refuted the factual premise for taking Derr’s deposition and made the relevant e-mails on the subject available to his former client, particularly since Smith was personally involved on behalf of Northfield in the discussions and e-mails surrounding the settlement negotiations. See N.C. Rev. R. Prof’l Conduct 1.16(d) (“[u]pon termination of representation, a lawyer shall . . . [surrender] papers and property to which the client is entitled[.]”).

11. Similarly, the fact that a Regions officer testified in a deposition that he could not
recall whether he saw the proposed settlement documents does not (without more) provide a good faith basis for believing that Derr in fact did not transmit the documents to her client.

12. The Court holds that the knowledge of Northfield’s prior counsel, including the emails between Smith and Derr refuting the factual basis for taking Derr’s deposition, should be imputed to Northfield and the Third-Party Defendants and their new counsel for purposes of determining whether they undertook a reasonable inquiry. Alternatively, a reasonable inquiry by Northfield and the Third-Party Defendants would have revealed the information contained in the e-mails without the need to file the Discovery Motion, which in turn would have made clear to these parties that their Discovery Motion was unreasonable.

The Court also chastised Northfield for declining Derr’s invitation to discuss the issue, which refusal violated Business Court Rule 18.6:  "’Judges and lawyers should resurrect the original intention of the discovery rules, which was to make discovery a more cooperative and less adversarial system designed to reduce, not increase, the cost of litigation. . . .  Our system of civil justice cannot function effectively and economically unless lawyers . . . make cooperation [and] communication . . . cornerstones’ of discovery."  Order ¶ 14 (quoting Azalea Garden Bd. & Care, Inc. v. Vanhoy, 2009 NCBC 9 ¶¶ 18-19).  On the other hand, the Court also believed that Derr was partly at fault for filing the Motion for Sanctions without first attempting to defuse the situation by producing the emails attached to her motion.

Nevertheless, the Court determined that Northfield bore the primary responsibility due to its failure to conduct a Rule 26(g) reasonableness inquiry and failure to satisfy the meet & confer obligations of Rule 18.6.  The Court allowed Northfield five days to respond on the issue of the reasonableness of Regions’s requested fees.

 Full Order

 [UPDATE:  On July 1, 2010, Judge Diaz entered an Order awarding $10,630 in sanctions.]

Fervent followers of the Business Court may remember the case of Wachovia Bank, N.A. v. Harbinger Capital Partners Master Fund I, L.P., which this blog has discussed before.  Just over two years ago, Wachovia preemptively sued certain defendants whom it accused of trafficking in litigation and obtained an anti-lawsuit injunction against the defendants.  After designation as a Rule 2.1 case, Judge Diaz modified the injunction and stayed the Business Court lawsuit in favor of pending litigation before the Southern District of New York.

Over the two intervening years, three new developments occurred:  the S.D.N.Y. dismissed the lawsuit before it in August 2008, on the grounds that the federal claim was premature and that the court declined to exercise supplemental jurisdiction over the state law claims; some of the New York plaintiffs (but not those that were North Carolina defendants) filed a new lawsuit asserting the state law claims before the New York Supreme Court; and the North Carolina Court of Appeals affirmed Judge Diaz’s injunction modification and stay order.

Given those developments, the North Carolina defendants asked Judge Diaz to modify the injunction so as to permit them to join as plaintiffs in the New York Supreme Court action, and Wachovia asked Judge Diaz to lift the stay so that it could pursue its case in North Carolina.  In a March 15 order, Judge Diaz re-adopted all of the findings of fact from his original order and further found that "(1) the NY State Action is better able to arrive at a more comprehensive resolution of the dispute in this case, given the broader scope of claims and parties before it, and (2) judicial economy counsels again in favor of litigation in New York."  As a result, he granted Defendants’ motion to modify the injunction and denied Wachovia’s request to lift the stay.  He also denied Wachovia’s motion to hold certain defendants in contempt for asserting a RICO claim in the S.D.N.Y. lawsuit, holding that the original injunction did not prohibit the assertion of claims arising under federal law.



This Empire State Building photo is from jorbasa’s photostream on Flickr, some rights reserved.

Valuing a closely held business is often a debate over hypothetical dollars, particularly when the company’s sole asset is unproven technology.  The Business Court confronted such a situation recently in Vernon v. Cuomo.

The company in question developed a new technology with potential widespread medical application:  silicone-free syringes, which would enable syringes (especially of high-priced medicines) to be pre-filled without risk of contamination.  The potential of the technology, however, was not enough to keep the company together.  Two shareholders asserted dilution and self-dealing claims against the other shareholders.  After a bench trial, the Court concluded that the defendants engaged in self-dealing and breached their fiduciary duty to the plaintiffs.  The Court ordered the judicial dissolution of the company to protect the interests of the complaining shareholders pursuant to N.C.G.S. § 55-14-30(2)(ii).  (Mack wrote about the bench trial opinion last year).

In lieu of dissolution, the defendants exercised their statutory option to purchase the plaintiffs’ shares at fair value under N.C.G.S. § 55-14-31(d).  That statute neither defines fair value nor specifies the procedures for a court to use in arriving at it.  In Vernon, Judge Tennille followed a procedure similar to two previous valuation cases, Garlock v. Hilliard and Royals v. Piedmont Electric Repair Co.:  solicit the opinion of an independent appraiser, "but also [take] into account other equitable and practical considerations based on the arguments and submissions of counsel and matters of record."

The added complication of Vernon was that, with the only asset an unproven technology, there was a high risk of windfall on both sides:  "One of the key problems faced by the Court in this valuation process has been how to protect against a windfall by the majority shareholders if the technology proves to be extremely valuable while not requiring the majority to pay an initial price that may be too high if the technology is not adopted widely in the industry."

The Court approved of the methodology of the appointed appraiser, who had extensive IP valuation experience.  The appraiser’s methodology included:

  • the discounted future economic income method to discern fair value
  • Latin Hypercube simulation algorithms to generate income estimates
  • a Fisher Pry model to project a market adoption rate for the technology
  • Monte Carlo simulation methods to consider uncertainties in the company’s underlying earnings potential

However, because of the uncertainties and the windfall risk, the Court concluded that a royalty sharing arrangement would best capture the value of the technology for both sides.  The Court found that the plaintiff’s shares were worth a specific amount, plus a royalty sharing arrangement of a specified percentage.  (The amounts themselves are redacted in the public version of the Court’s opinion).  The Court ordered the closing to take place within 20 days, with 50% of the purchase price paid at closing and the balance paid in two annual installments with no interest.

Recognizing the novelty of the approach (and the appellate courts’ distrust of novelty), the Court also reached a backup conclusion of the total fair value of the plaintiffs’ shares, which would take effect if an appellate court struck down the royalty sharing arrangement.



[The photo of the syringe is from Zaldylmg’s photostream on Flickr, some rights reserved.]

What’s the difference between a patent holder who suffers harm from third-party infringement and a patent holder who suffers harm from his own attorney’s malpractice?  The latter can pursue his claim in state court, according to a March 9 Business Court decision.

In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the inventor of an "automated audio video messaging and answering system" and the current holder of the patent sued a patent agent, three patent attorneys, and a law firm for malpractice in failing to take certain actions before the United States Patent & Trademark Office ("USPTO").  Specifically, Plaintiffs alleged that Defendants failed to file certain paperwork that cost Plaintiffs their ability to patent their invention in foreign jurisdictions, including Japan and the European Union.  Defendants moved to dismiss for lack of subject matter jurisdiction, arguing that the claims lay within the exclusive jurisdiction of the federal courts. 

Further complicating matters, shortly after filing the Business Court lawsuit, Plaintiffs filed a separate lawsuit in the Western District of North Carolina, Carter v. Ozoeneh (W.D.N.C. No. 3:09-CV-614), to determine the ownership of the patent at issue.  The defendant in the federal lawsuit is an individual who was listed as a co-inventor on a prior patent application for the technology at issue.  Plaintiffs sought to amend the federal complaint to add one of the attorney defendants from the Business Court lawsuit along with Lawyers Mutual for claims of racketeering, maintenance, unfair competition, and tortious interference.  On September 16, 2009, Magistrate Judge David Cayer denied the motion to amend and recommended that the District Judge dismiss other claims against John Doe defendants, but the ownership claims remain in the federal lawsuit.

As for the jurisdictional issue in the Business Court lawsuit, Judge Tennille held that Plaintiffs’ malpractice claim was not within the exclusive jurisdiction of the federal courts.  The Court examined cases from several jurisdictions, some of which permitted malpractice claims to proceed in state court and others of which held them to be exclusively federal claims.  The distinction depended on whether federal patent law was an essential element of the Plaintiffs’ claims.  In Revolutionary Concepts, it was not:

In this Court’s view, the case sub judice is different.  The Complaint in this case does not raise an issue which requires the determination of the validity, scope or infringement of a United States patent.  Furthermore, the Complaint does not raise an issue requiring determination of what the USPTO would do under certain circumstances, nor does it involve regulation of the conduct of counsel appearing before the patent office.  The Complaint clearly raises issues of what the validity and scope of potential foreign patents would have been and perhaps issues of infringement of potential foreign patents that were allegedly lost.

The loss of the foreign patent rights is based upon a breach of the standard of care, quintessentially a state law claim.  Every malpractice action will require determination of a standard of care.  It is unlikely that any standard of care can be assessed without some reference to compliance with the proper procedures in the USPTO.  This Court does not read the Federal Circuit decisions to hold that any case by a patent owner against its patent counsel will fall within the exclusive jurisdiction of the federal courts.  Where federal jurisdiction will promote uniformity of claim construction, consistency in validity, scope and infringement of U.S. patents, or promote uniform regulation of patent counsel conduct before the USPTO, federal jurisdiction is mandated.  Where the issues involve foreign patent rights and issues of whether a lawyer complied with a standard of care, federal jurisdiction is not mandated.

The Court also noted that Plaintiffs voluntarily dismissed a claim for breach of contract in the prosecution of the patent before the USPTO.  In contrast to the foreign registrability issues of the malpractice claim, the breach of contract claim would have implicated federal law enough to confer exclusive federal jurisdiction over the lawsuit.  After the dismissal of that claim, however, whatever exclusivity may have existed previously no longer did.


[Ed. note:  The following article was written by Mack Sperling before his unplanned leave.  Although releasing it today is less timely than is Mack’s custom, the issues involved in the case are still of interest to businesses and business lawyers.  Any errors or shortcomings in the article are attributable to your substitute bloggers.]


On February 16, in Lynn v. Lynn, the Court of Appeals interpreted provisions of a Shareholders Agreement requiring the corporation to repurchase a shareholder’s "restricted shares" upon his death, with the purchase to be funded by the proceeds of a life insurance policy on the shareholder.

The trial court had found the Agreement to be ambiguous, and had considered a variety of extrinsic evidence in determining the ownership of the shares in question.  The Court of Appeals found no ambiguity, ruled that it had been error to consider the extrinsic evidence, but it nevertheless reached the same result as to ownership.


A father (James) and his two sons (Greg and Kenneth) formed a corporation, James Lynn & Sons, Inc. Eventually, the father owned 51% and the sons each owned 24.5% of the company’s stock.

In 1993, the shareholders and their wives entered into a shareholders’ agreement requiring that upon death, each shareholder would sell his "restricted" shares back to the corporation for an amount equivalent to the face amount of a life insurance policy on his life, with the face amount to be adjusted annually. The corporation was to own the policies.

The sons kept life insurance in place, paid for by the company, which increased over time from $75,000 to $375,000. The corporation paid the premiums, though the brothers had the policies issued in their names as opposed to them being owned by the corporation.  They named their wives as beneficiaries of the policies. The father didn’t maintain insurance, due to expense, but upon his death in 1997 his executor sold his shares to the sons in a transaction referencing the Shareholders Agreement.

Later, the sons adjusted their ownership interests with Kenneth becoming the 55% majority owner and Greg holding a 45% interest.

Then it got interesting. Greg and his wife got divorced, and were involved in heated litigation over the equitable distribution of their property. Greg’s wife sued Kenneth, as majority shareholder, to establish that the shares of the company were subject to equitable distribution.

Kenneth then died unexpectedly.  His shares went to his estate.  The insurance proceeds went to his wife.  Greg’s ex-wife said that 100% of the shares were now subject to her equitable distribution claim.  Greg pretty much agreed with his ex-wife, and said that upon the payment of the life insurance proceeds to Kenneth’s wife, he held 100% of the shares.

Kenneth’s widow had a different point of view.  She said that the Shareholders Agreement only applied to "restricted shares," and that the shares held by her late husband did not fit that definition. She also said that the corporation hadn’t complied with the life insurance provision given that it did not own the policies. She said she was entitled to both the insurance proceeds and the shares.



Continue Reading NC Court of Appeals Interprets the “Purchase on Death” Provisions of a Shareholders Agreement

Mack Sperling, founder and author of this blog, is away on medical leave. 

Like the cotton gin or the steam engine, Mack by himself can do the work of several people, and this blog is no exception.  Jennifer Van Zant, Julia Ambrose, and John Buford, Mack’s colleagues at Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., have agreed to share the load during Mack’s absence.  We cannot promise you that any of us will have Mack’s singular insight, wit, or charm.  We can promise that we will continue to monitor and report judicial developments of interest to North Carolina businesses and business lawyers. 

We are all avid readers of this blog and know firsthand what a valuable resource it is.  We do not intend to be your permanent hosts.  We are guests, house-sitting while Mack is away.  Nothing will please us more than the day when Mack is back and we can return to our previous status as fans of the blog.

Those who wish to send greetings to Mack may address them to  Thank you for your past and continued readership and for the kind messages that many of you have had for Mack over the past weeks.


[We will strive to continue Mack’s apt illustrative use of photography and clip art.  The photo of the cotton gin above is from billums‘s photostream on Flickr, some rights reserved.]