September 2010

In North Carolina, the "notice" portion of notice pleading has long been honored more in the breach.  A recent Business Court order perhaps signals that enough is enough, at least when multiple plaintiffs each are suing multiple different defendants.

Allen v. Land Resource Group of North Carolina, LLC is the oldest of a growing number of cases currently pending before the Business Court involving real estate developers who went bankrupt before their developments were completed.  The original complaint in Allen involved 22 plaintiffs, 29 defendants, and 15 causes of action.  As Judge Tennille described it,

Each plaintiff participated in his or her own transaction involving a specific lot or lots.  Each plaintiff may have dealt with different defendants, including different salespeople, different appraisers, and different banks, and each plaintiff may have had a different level of knowledge. The defendants are varied and include officers and owners of the development company as well as administrative employees and salesmen who had no ownership or control of the company, appraisers, banks and even TV show producers.

(The latter reference is to an HGTV Dream Home located in one of these now-defunct developments on Lake Lure).  After being directed to plead their fraud and misrepresentation claims with greater specificity to satisfy Rule 9(b), Plaintiffs filed a 795-paragraph, 107-page amended complaint, which the Court still found deficient under the pleading rules:  "The Amended Complaint still does not clarify which claims are asserted by which plaintiff against which defendant.  Complaints in similar cases suffer from the same deficiencies. The largest problems are created by the indiscriminate references to all ‘Defendants’ when specific defendants should be identified."  In fact, the Court included a citation to the rarely seen Rule 10(b), which requires that each paragraph of a pleading "be limited to a single set of circumstances and that each claim is founded upon a separate transaction or occurrence."

Procedurally, the Court reached its last straw when certain defendants filed a motion to sever claims and the Court was unable to decide the motion based on the state of the pleadings.  The Court included a threat of sanctions if the situation did not improve:

Rule 11 ensures that counsel have done their homework before filing claims, particularly those involving fraud and conspiracy to commit fraud.  Having done the work required by Rule 11, there is no excuse for not properly pleading separate causes of action that put each defendant on notice of the claims asserted against that defendant.  Failure to properly plead separate causes of action and to identify specifically the party against whom a claim is asserted may be an indication of a Rule 11 violation.

The Court ordered the Plaintiffs to file a "Statement of Claims" within 30 days — even going so far as to provide a form attached to the Order.  Each plaintiff will be required to file a separate form for each defendant whom he is suing, listing the claims that plaintiff is asserting against that specific defendant.

North Carolina lawyers have wondered whether the Iqbal and Twombley decisions from the U.S. Supreme Court will ever trickle down to state court.  Judge Tennille’s order in Allen does not shed much light on that question because a complaint that is unclear as to which plaintiff is suing which defendants falls short of even a properly understood notice pleading regime.  The Allen order, however, is a welcome clarification that the "notice" part of notice pleading is not a superfluous term.

Full Order

UPDATE 9-27-2010:  Judge Tennille issued a similar order two days later in an unrelated case, NNN Durham Office Portfolio I, LLC v. Highwoods Realty L.P.  There, the Court ordered the Plaintiffs to file a second amended complaint with separate responses by each Plaintiff to eight different questions posed by the Court.  You can read the questions in the order here.

The Court of Appeals faced that rarest of truffles this week:  an outcome-determinative choice of law question.  The Court adhered to its traditional roots and rejected a new test fashioned by the Business Court.

At issue in Harco Nat’l Ins. Co. v. Grant Thornton, LLP was an audit of a company providing bail and immigration bonds in North Carolina and other states.  The plaintiff, an insurance company, entered into an agreement with the bonding company on the basis of that audit.  When the bonding company went defunct, the plaintiff ultimately became liable for $15 million in bonds issued in North Carolina alone.

Conflict of laws professors seeking exam questions, take note of these facts:  The plaintiff is an Illinois corporation who paid most of the $15 million from its corporate bank account in Illinois, but did not pay any of that money to any Illinois recipient.  The audit itself was performed by the defendant in Pennsylvania and the audit report was delivered to the bonding company in that Commonwealth as well.

Unlike many choice of law disputes, this one actually made a difference due to the great variety of standards among states for auditor liability to third parties not in privity with the auditor.  The plaintiff argued that North Carolina law applied and, under North Carolina law, the defendant would not be entitled to summary judgment.  The defendant argued that Illinois law applied and that no liability was possible under that state’s law.

As we noted last April, the Business Court went its own way, determining that Pennsylvania law applied.  In doing so, Judge Tennille held that the law of the state in which an audit is performed should govern the auditor’s liability to third parties not in privity.  The Business Court’s analysis was premised on principles of certainty, predictability, and the avoidance of forum shopping.

The novelty of this approach clearly bothered the Court of Appeals in its somewhat tersely-worded opinion:

The Business Court’s Audit State test seems to be the only such test of its kind.  Our research has not revealed a single case in any jurisdiction that purports to utilize such a test for the purpose of determining the choice of law in an auditor liability
case. As the Business Court’s order acknowledges, claims for negligence and negligent misrepresentation are claims sounding in tort.  It is the nature of the cause of action, not the occupation of a defendant, that controls the determination of the applicable choice of law test.  While the Business Court expressed concern that “[u]sing the law of the state where the injury occurred is problematic[,]” it was required to apply the lex loci test to plaintiff’s tort claims pursuant to the prior holdings of our Supreme Court and the doctrine of stare decisis.

In other words, a tort is a tort is a tort, and any deviation from the First Restatement: Conflict of Laws (1934) will be punished.  (The Second Restatement, at not yet 40 years old, apparently lacks the gravitas necessary for such issues).

Applying the traditional lex loci test, the Court of Appeals held that Pennsylvania, although the site of the alleged misrepresentations, was not the site where the injury was felt.  Nor was Illinois, the location of Plaintiff’s business.  Instead, the place of harm was North Carolina, in which the plaintiff’s funds were seized by the Department of Insurance.

Note that the Court of Appeals affirmed the Business Court’s denial of the defendant’s summary judgment motion under Illinois law.  Because the Business Court determined that Illinois law did not apply, the denial of summary judgment was appropriate.

We present two items today for the consideration of our loyal readers:

1.  Shameless Plug for Your Votes

The good people at Lexis, which hosts our firm’s legal blogs and many others, recently notified us that we have been nominated for consideration as one of Lexis’s Top 25 Business Law Blogs.  If you are a registered member of the LexisNexis Business Law Communities, please feel free to put in a kind word at this link.  If you are not a registered member but are so compelled that you want to register for free in order to talk us up, you are a wonderful human being.

As with the Oscars and Emmys, it’s an honor just to be nominated.  Also as with the Oscars and Emmys, our adherence to that statement improves greatly if we win.


2.  Less Shameless, More Practical Request for Opinions and Orders

From time to time readers ask how we monitor the dockets of the various courts on which we report.  Without revealing all eleven of our herbs and spices, some courts (such as the Fourth Circuit) have convenient email subscription services; some (like the North Carolina appellate courts) release opinions on specified days; and some (like the Business Court) feature an electronic architecture that enables us to monitor it through the use of proprietary software.

Federal district court and bankruptcy court opinions, however, are almost impossible to monitor without racking up salary-sized PACER charges.  Our reporting on those courts is largely dependent on tips from readers.  If you are involved in or otherwise aware of an order or opinion of note on an issue of North Carolina business law, especially in federal trial courts, please feel free to email us.  We are happy either to acknowledge the contribution or preserve the contributor’s anonymity, depending upon your preference.

Thank you as always for your continued readership.