November 2010

The Business Court dismissed a legal malpractice claim right before Thanksgiving last week in Inland American Winston Hotels, Inc. v. Winston, 2010  NCBC 19Judge Tennille found Plaintiff’s expert, a  Duke Law School professor, to be incompetent to testify to the Defendant lawyer’s alleged breach of his duty of care.

The claimed malpractice concerned the lawyer’s work on a commercial real estate transaction by which the Plaintiff acquired an entity from the Defendant and by which an entity controlled by the Plaintiff was substituted as the purchaser under an option.  The alleged breach of fiduciary duty (a form of professional malpractice) was the lawyer’s role in a change of the identity of the purchaser under the option.

Expert testimony is necessary in almost all cases to prove professional negligence, and Judge Tennille found the professor to lack the "requisite experience" to supply the required expert testimony, observing that he came up short on a number of grounds:

  • He hadn’t been licensed to practice law for more than 25 years;
  • He had never been licensed to practice law in North Carolina; and
  • He had never conducted any real estate transaction "as a lawyer or represented any individual, partnership, joint venture, LLC, or corporation in any real estate transaction. "

Op. ¶37.  Another factor contributing to the dismissal of the claims against the lawyer was the expert shooting himself in his own foot at his deposition, when he gave up any assertion that he was an expert in the sphere of real estate transactions:

  • He testified he did  not "consider himself to be an expert in the practice of real estate development or the practice of law related to real estate developments."
  • He admitted that he did "not know everything that a real estate lawyer does in representing a developer, putting together deals, and seeing them through to closing," and he conceded that he did "not know for sure . . .what the standard of care is for written engagement letters for an attorney handling the type of transaction at issue in this case."

The professor was undoubtedly an expert in the field of legal ethics, which he teaches at Duke.  He formed his opinion that the Defendant lawyer had been negligent based on what he saw as violations of the North Carolina Rules of Professional Responsibility, but the Court observed that "North Carolina appellate courts repeatedly have rejected the use of the Rules of Professional Conduct to establish attorney liability."  Op. ¶39.

The takeaways from this opinion are: if you are pursuing a malpractice claim in the Business Court against a lawyer, you need an expert witness who has been practicing in the field of the alleged malpractice in North Carolina, not a law school professor without that background.  And have your expert be sure about the applicable standard of care.

This is the second significant opinion to come out of the Inland American lawsuits.  The first concerned the enforceability of agreements to agree, which I wrote about in March 2009.

When you are filing a complaint to federal court, or removing one to federal court, the value of a claim for injunctive relief can be included in determining whether the $75,000 amount in controversy required for diversity jurisdiction under 28 U.S.C. §1332(a) is met.

Today in JTH Tax. Inc. v. Frashier  the Fourth Circuit reversed the trial court’s sua sponte dismissal of a franchisor’s complaint for failing to meet the amount in controversy requirement.

Plaintiff had franchised a tax preparation service to the Defendant.  When Defendant closed the office, Plaintiff sued him for $80,000 and requested injunctive relief enjoining him from competition.  When time for summary judgment rocketed around, Plaintiff requested only $60,000 in damages and the trial court dismissed the complaint on the ground that the required amount in controversy was lacking.

That was error, said the Fourth Circuit, because the burden was on the defendant to show that it was legally impossible for the Plaintiff to recover the jurisdictionally sufficient amount alleged in the complaint. and because the court had failed to consider the value of the injunction asking Defendant to be enjoined from operating a competing tax return business.

The Fourth Circuit said that "like requests for money damages, requests for injunctive relief must be valued in determining whether the plaintiff has alleged a sufficient amount in controversy."  The  value of the injunction could either be measured by its worth to the plaintiff or its cost to the defendant.

Plaintiff proposed two alternative values for the injunction which the Court found to meet the standard of being "facially plausible."  One was the value of the franchise, calculated in line with Plaintiff’s regular accounting practice of valuing franchises at 130% of their previous year’s receipts.  The Court also considered Plaintiff’s loss of goodwill, or its "market credibility."  Plaintiff based that on the $12 million it had spent on advertising during the prior year.

On the cost of the injunction to the Defendant, the Court looked to rental payments of $500 per month that would have been due to the Plaintiff  over the remaining sixteen month term of the franchise agreement.



Until December 10, 2010, lawyers need to remain aware that, in cases pending in  federal court  their communications with their retained expert witnesses and any draft reports prepared by the expert are likely to be discoverable based on a request from opposing counsel.

The expert rule changes which become effective on December 10  will give work product protection to both items.  This will permit attorneys to have more involvement in the preparation of an expert’s report without their involvement being subject to discovery. The new Rule also specifically exempts draft reports from any disclosure obligation.  

The limited exceptions to the work product protection specifically granted by new FRCP Rule 26(a)(4) (B) and (C) are contained in new FRCP Rule 26(a)(4)(C), and include:

  • communications regarding compensation to be paid to the expert,
  • "facts or data that the lawyer provided and that the expert considered in forming his opinion."
  • assumptions provided by the attorney upon which the expert relied in forming his opinion.

The former practice of dodging the need to disclose communications with an expert or the expert’s draft reports, by  which lawyers limited written communications to their experts and may have encouraged their experts not to keep drafts of their reports, will no longer be necessary.  The revisors felt that the discoverability of draft reports and the written give and take between lawyers and their experts "inhibited robust communications" between them.

The rule remains unchanged in the North Carolina Rules of Civil Procedure.  The Business Court ruled in 2008 that there is no privilege between counsel and an expert witness, which had been the general approach in federal cases. So, communications between lawyers and their experts remain discoverable in state court litigation regardless of the December 10 changes.

According to the judge chairing the committee responsible for the revisions the "changes will reduce cost, focus discovery and trial on the merits of the experts’ opinions, and allow parties and their counsel to make better use of their experts."  An interview in which he discusses the changes is here.

There are also changes to Rule 56, which governs summary judgment.  As I read the revised Rule, it doesn’t mark a change in how lawyers in North Carolina would approach a motion for summary judgment, but it is worth a read before you file or oppose a summary judgment motion in federal court after December 10.

From April 2009 through January 2010, I did a post at the beginning of each month on the new cases designated to the Business Court during the prior month. That’s been missing during my hiatus, without any outcry, but I am now resuming that service for October 2010.  There were nine new cases last month, running the usual gamut of minority shareholder claims to trade secrets claims, and breaches of fiduciary duty.

Blount Three Properties, LLC v. York Properties, Inc. (New Hanover):  Allegations that promoter and broker of shopping center development failed to make material disclosures prior to the sale of the property to the Plaintiffs

Carolinas AGC, Inc. v. Goodrich Hendry (Mecklenburg)(Diaz): claims that Defendant misappropriated Plaintiff’s confidential information and trade secrets to develop an internet database in competition with the Plaintiff.

Dugdale v. Polymer Group, Inc. (Mecklenburg)(Diaz): action by shareholder of Plaintiff to enjoin acquisition of the Plaintiff by Blackstone Group LP based on alleged breaches of fiduciary duties of the directors of Plaintiff. Plaintiff seeks class action certification.

Front Street Construction, LLC v. Colonial Bank, N.A. (Wake)(Jolly): claims that Defendant lender, acquired by BB&T, engaged in fraudulent and misleading conduct by failing to disclose that it was in financial difficulty when its loan to the Plaintiff was made, which led to it being unwilling or unable to fund the loan as represented.

Nestor v. Webb (Scotland)(Jolly): antitrust claim in which the Plaintiff alleges that the Defendants have conspired to monopolize the market in North Carolina counties for the market for kidney dialysis treatment services.

Peak Coastal Ventures, LLC v.SunTrust Bank (Forsyth)(Tennille): claim by Plaintiff that Defendant’s loan to the Plaintiff, an LLC, was not authorized by the Plaintiff as required by its operating agreement, which required majority approval by the managers of the LLC.

Thomas v. Moonracer, Inc. (Wake)(Jolly): minority shareholder claim alleging breach of fiduciary duty by the majority shareholders and seeking dissolution of the Defendant corporation.

Wilkie v. Stanley (Guilford)(Tennille): claims that Defendant violated partnership agreement

Wireless Communications, Inc. v. Epicor Software Corp. (Mecklenburg)(Diaz): claims that defendant made misrepresentations in connection with the licensing of business operations software