May 2011

On Tuesday, the Court of Appeals affirmed the Business Court’s award of summary judgment against a shareholder of three private corporations in High Point Bank & Trust Co. v. Sapona Manufacturing, Inc.  We wrote about the Business Court’s ruling last year, but here’s the quick recap:  The estate of a woman who was the daughter and granddaughter of the founders of three family-originated corporations in Randolph County sued those businesses seeking the redemption of over $3.6 million worth of stock. 

The estate asserted a Meiselman claim, seeking dissolution on the grounds that the decedent had a reasonable expectation that her shares would be repurchased by the corporations upon her death and that the corporations had frustrated that expectation by refusing to redeem the shares.  Judge Tennille dismissed her claim on the grounds that the expectation, even if subjectively held by the decedent, was not held by all of the other shareholders and that her expectation was therefore unreasonable.

The Court of Appeals affirmed Judge Tennille’s opinion in all material respects.  The insufficient evidence of a shared understanding and expectation of a right of redemption consisted of the repurchase of one shareholder’s stock after his death in 1997, two corporations issuing a tender offer in 1997, and one corporation issuing another tender offer in 2000.  Rather than establishing an expectation of repurchase, this evidence "establish[es] a precedent that the corporation will ‘from time to time’ offer to purchase shares up to a certain amount and at a specified price."

In a footnote, the Court noted Judge Tennille’s analysis that there is a theoretical limit on the size of a corporation that can still be liable under Meiselman.  (In contrast to certain lending houses that were "too big to fail," these corporations would be "too big for plaintiffs to succeed").  Although the Court of Appeals did not really take a position on this part of the Business Court’s analysis, the size and breadth of the ownership base is relevant to several factors:  the likelihood of antagonistic relationships with and dominance by a single majority shareholder; the number of other shareholders whose own expectations would need to mirror the plaintiff’s in order for her to prevail; and the equity of dissolution toward shareholders who don’t play a role in the oppressive conduct.  These factors become nearly impossible for shareholder plaintiffs to satisfy once ownership is spread beyond more than a handful of people.

Full Opinion

We all sometimes say things that we are sorry to have said.  Even judges. Those types of statements by a District Court Judge in South Carolina, which the Fourth Circuit called "neither wise nor temperate" were the subject of a recusal motion ruled on last week by the Fourth Circuit, in Belue v. Aegon USA, Inc.   The Court also discussed the circumstances under which a pro hac vice admission can be withdrawn, taking issue with the trial judge’s revocation of that status.

The comments by Judge Anderson of the District of South Carolina were made in connection with a hearing in a  class action matter.  He criticized a related settlement in another jurisdiction as possibly being one "of those buddy settlements  we have to watch out for."  He was also critical of the defendants’ approach in another case and suggested that the settlement in that case had been "improper."

This prompted the defendants’ lawyers to file a motion to recuse Judge Anderson pursuant to 28 U.S.C. sec. 455 (b)(1), which requires recusal when a judge "has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding."

The Judge’s reaction to the motion to recuse was fiery.  He said it was the defense counsel’s reaction to negative rulings, saying "you lose the case and attack the judge."  He called the request for recusal "the most inappropriate motion in the world."

Judge Wilkinson, writing for the Fourth Circuit, said that recusals based on in-trial conduct generally involved "singular and startling facts."  He noted that the Supreme Court has said that the bias should stem from a source outside of the judicial proceeding, usually requiring an "extrajudicial source." 

The Fourth Circuit called the recusal motion "decidedly ill founded."  Judge Wilkinson said that "strong views" expressed by a judge about a case were not grounds for recusal, stating that:

Litigation is often a contentious business, and tempers often flare. But to argue that judges must desist from forming strong views about a case is to blink the reality that judicial decisions inescapably require judgment. Dissatisfaction with  a judge’s views on the merits of a case may present ample grounds for appeal, but it rarely — if ever — presents a basis for recusal.

Op. p.15. 

The opinion expresses a general disfavor of recusal motions, saying that they should not "become a form of brushback pitch for litigants to hurl at judges who do not rule in their favor," and that "no appellate court can afford to leave trial judges prey to a slew of groundless calls for recusal from litigants whose major objection to those judges appears to be a perceived disagreement with them."

Continue Reading The Fourth Circuit On Recusals And Pro Hac Vice Admissions

The Business Court yesterday sifted through cross motions for summary judgment brought by the seller and buyer of a business selling "power protection devices used primarily to control power surges and to provide power filtration in high volume office equipment." Op. ¶12.  The case turned on the application of New York law, which the APA had specified as the governing law, and the Order left a number of claims for trial.

The principal breach of warranty claimed by the buyer in KLATMW, Inc. v. Electronic Systems Protection, Inc., 2011 NCBC12, concerned the stability of the seller’s customer base.  Section 3.18 contained the following language:

none of the customers . . . required to be listed on Schedule 3.18 has cancelled, terminated or otherwise materially altered (including any material reduction in the rate or amount of sales or purchases or material increase in the prices charged or paid, as the case may be) or notified the Business of any intention to do any of the foregoing.

The seller had a significant customer, Global, that was in the process of being acquired by Xerox at the time the APA was signed.  There was some evidence that the seller should have expected a decline in the sales to Global as a result of Xerox’s historical lack of interest in the seller’s product, and Global was in fact listed on Schedule 3.18 as a customer whose sales volume "appears to be diminishing" as a result of Xerox’ acquisition of Global.  As things developed, the Global business declined by more than $2 million in the year following the purchase. Op.¶46.

The buyer made claims following the closing for breach of warranty and for fraud.  Its claims included breaches of warranty other than of section 3.18.  The claims were to be resolved per New York law, as the Court ruled in a 2010 Order.  As Judge Gale explained in yesterday’s opinion, New York law made a difference in the resolution of the case, both as to the buyer’s obligation to prove reliance on the warranty, and the circumstances under which the buyer might be found to have waived the warranty.

In New York, reliance is an element of a breach of contract claim, but reliance is established "so long as a buyer demonstrates that the warranty is a part of the basis of the parties’ bargain." Op. ¶ 5.  And waiver is proved only based on information provided by the seller to the point of knowledge on the part of the buyer of a breach of the warranty at the time of the closing.  Knowledge obtained from sources other than the seller, such as information commonly known, is irrelevant to waiver. 

Judge Gale did an admirable summary of ten years of  New York law on the questions of breach of warranty, reliance, and waiver. Op. ¶¶59-64  After this analysis, he found that there were questions of fact as to the buyer’s level of knowledge regarding the impending decline of the Global business.

Judge Gale dismissed the tort claims on the ground that the buyer could not show reasonable reliance on the misrepresentations it claimed with respect to Global’s status as a customer.  That finding stemmed in part from the buyer’s independent and extensive due diligence through a business broker which directly  contacted Global representatives about Xerox’s intentions.  He also dismissed a Chapter 75 claim because "the contract claims are adequate to provide the remedies [the buyer] seeks if those claims can be proven."  Op. ¶90

There’s a whole lot more to the facts of this case and to the claims made by the parties than are mentioned in this post.  Those especially interested in New York law should read the opinion.

And if you are just exhausted by now from reading this drudgy post you might want to look at the best blog in the Sperling family.  It’s written by my younger daughter, Maddie,  who is on a semester abroad in Argentina.  She is having a good time and she is often hilarious.  Great pictures too.  Check it out.