March 2012

I’ve written before about the unsettled nature of North Carolina law on whether it’s valid to assert a claim for aiding and abetting a breach of fiduciary duty.  It doesn’t seem that there is much legal enthusiasm for allowing such a claim, but no Court, including the Business Court and the Court of Appeals, seems willing to come out and say that the claim is not recognized.

Judge Gale dismissed an aiding and abetting fiduciary duty claim last month in Tong v. Dunn, 2012 NCBC 16, but he skinned the cat in a different way than declaring the cause of action invalid.

Tong was suing his co-directors for their actions involving the sale of Engenious Software, Inc., the company on whose board they served.  He was claiming that Engenious — the corporation — had aided and abetted the directors in their breaches of fiduciary duty in accepting an offer he deemed too low for the company.

A corporation generally "cannot be said to conspire with its own directors," (Op. ¶ 28), so Tong argued that a director who was also an officer had aided the other directors in breaching their duties, and that her acts were imputed to the corporation.

Judge Gale wasn’t biting on the distinction between directors and officers.  He held:

[a[s a general rule, the conduct of a corporate officer, within the scope of
employment, cannot expose the corporation itself to aider and abettor liability
because of the intra-corporate immunity doctrine, which recognizes that ‘a
corporation cannot successfully conspire with its own officers, employees or agents.’

Op. ¶29 (quoting Tate v. Sallie Mae, Inc., 2011 WL 3651813, at *3 (W.D.N.C. Aug. 19, 2011).

The claim might have survived in Delaware, which Judge Gale observed recognizes a "limited exception to the intra-corporate immunity doctrine."  Op. ¶29  But in North Carolina, if Tong sticks in the Court of Appeals, there’s not much chance of a plaintiff succeeding on a claim that a corporation aided and abetted its own officers or directors in breaching their fiduciary duties.

If you’ve noticed the lack of posting on this blog for the last couple of weeks, that’s because of the visit of my son, who I had to spend a lot of time chauffeuring around town so he could visit his many buds, and my moving into a new house and all the distraction of that.  Oh, and there was also the season premiere on Sunday night of Game of Thrones and episode 2 of this season’s Mad Men  to take into account.  But I am more focused now.  At least until next Sunday night.

The Fourth Circuit last week affirmed a ruling that an injured plaintiff had to arbitrate his claims against his employers in the Philippines, but ruled that the District Court had improperly dismissed his claims for injunctive relief, in Aggarao v. MOL Ship Management Co.

Aggarao had suffered horrible injuries.  They occurred when the ship on which he was a seaman was preparing to unload a cargo of cars near the Port of Baltimore.  He was crushed between "a deck lifting machine and a pillar."  He was airlifted to the University of Maryland Shock Trauma Center where he went through twelve surgeries.

Then there was a tug of war over the payment of Aggaro’s substantial medical bills.  Aggarao, a citizen of the Philippines, had signed a Philippine Overseas Employment Administration of Employment contract (the "POEA") which said that his employers would be liable "for the full cost of . . . medical[,] surgical and hospital treatment as well as board and lodging until the seafarer is declared fit to work or to be repatriated."

Plaintiff’s Employers Refuse To Pay For Medical Care in the United States

Aggarao sued the parties to the POEA in June 2009, and settled the amount due to the Maryland hospital for nearly a million dollars.  Then, the defendants said they would pay to repatriate Aggarao to the Phillipines and pay for additional medical care there, but that they would "have no further responsibility for, and [would] not pay for, any further medical care" in the United States.

Aggarao, who had been advised by the University of Maryland doctors that he would "need appropriate and diligent medical care for the rest of his life,"  refused to leave the United States.  His doctors expressed concern that he would be unable to obtain the necessary level of care in the Phillipines.

The lawsuit, still pending, was transferred to Baltimore.  Then, apparently for the first time, the defendants invoked a mandatory arbitration clause contained in the POEA, and moved to dismiss for improper venue.  Aggarao argued that the arbitration clause was unenforceable, and sought an injunction requiring his employers to provide maintenance and cure for him in the United States until he attained "maximum medical cure."  (That’s a term from the American statute known as the Jones Act, which covers injured American seamen.  A shipowner from the U.S. is obligated to pay for an injured seaman’s maintenance and cure until he has attained "maximum medical cure.").

Enforcement of Foreign Arbitration Clauses is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards

Judge Beach of the District of Maryland ruled that the arbitration clause was enforceable, and she denied the motion for an injunction as moot and ordered the case to be closed.  Judge King of the Fourth Circuit parsed through the claims and affirmed in part, vacated in part, and remanded the case.

Much of the Court’s opinion is a crash course in the law surrounding foreign arbitration clauses, so keep reading if you are interested in this area of law.

More than fifty years ago, UNESCO adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  The goal of the Convention "was "was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries." Op. at 14 (quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974). The Convention was implemented by Congress in 1970 by its enactment of Chapter 2 of the Federal Arbitration Act.

When certain "jurisdictional prerequisites" have been met, a District Court is obligated to order arbitration, unless it finds the arbitration agreement to be "null and void, inoperative or incapable of being performed."  The prerequisites are that

(1) there is an agreement in writing within the meaning of the Convention; (2) the agreement provides for arbitration in the territory of a signatory of the Convention; (3) the agreement arises out of a legal relationship, whether contractual or not, which is considered commercial; and (4) a party to the agreement is not an American citizen, or that the commercial relationship has some reasonable relation with one or more foreign states.

Balen v. Holland Am. Line Inc., 583 F.3d 647, 654–55 (9th Cir. 2009).

There were a few challenges by Agarrao to the prerequisites — one being that the arbitration clause had been superseded by a novation — but they failed in light of the "federal policy favoring arbitration." Op. at 17.

The Court then put to rest Agarrao’s argument that a claim he had under the Seaman’s Wage Act guaranteed him the right to sue in federal court, and that this trumped the arbitration clause.  It joined the Ninth and Eleventh Circuits, which had ruled:

"[t]he Convention Act expressly compels the federal courts to enforce arbitration agreements," notwithstanding the jurisdiction conferred on such courts to adjudicate Seaman’s Wage Act claims. 

Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1156 (9th Cir. 2008);  (citing Lobo v. Celebrity Cruises, Inc., 488 F.3d 891, 894-95 (11th Cir.2007)). 

So the Convention Act "partly supplants" the Seaman’s Wage Act, "requiring a federal court to refer to arbitration seamen wage claims and any other claims subject to an enforceable arbitration  agreement."  Op. at 22.

 The "Prospective Waiver Doctrine" Is A Valid Challenge To The Enforceability of a Foreign Arbitration Clause, If Raised After The Award is Issued

But Aggarao and his lawyers weren’t finished fighting to invoke American jurisdiction.  Next, they argued that arbitration in the Phillipines would be against public policy because he would be deprived of his right to pursue his federal statutory claims under U.S. law.  This is known as the "prospective waiver doctrine."  The problem with this attack was that it was premature.  It can’t be raised at the stage where enforcement of an arbitration clause is the issue.  Instead, it is ripe only after an "arbitration award has been made and the court is ‘considering whether to recognize and enforce an arbitral award.’" Op. at 24 (citing Convention, art. V).

By now I was feeling really sorry for Aggarao, who looked like he was facing an involuntary return to the Phillipines and an arbitration there.  He was thousands of miles from home, paralyzed in a wheelchair, on the hook for more than $100,000 for medical care, and at one point he was living in a homeless shelter.

There’s a ray of American sunshine for him, because the Fourth Circuit held that his case should not have been dismissed and that his injunction request should not have been denied as moot.  Dismissal of a case headed to arbitration is appropriate only when "all of the issues presented in a lawsuit are arbitrable."  If all the issues are not arbitrable — and the prospective waiver issue wasn’t — then a stay is appropriate as opposed to a dismissal.

The District Court Had The Authority To Enter An Injunction Even Though The Case was to be Arbitrated in the Phillipines

Here also came up something else I had never heard of: the "hollow formality" test.  The Court said:

where a dispute is subject to mandatory arbitration under the [FAA], a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a ‘hollow formality.’ The arbitration process would be a hollow formality where ‘the arbitral award when rendered could not return the parties substantially to the status quo ante.

Op. at 31 (citing Merrill Lynch, Pierce, Fenner & Smith v. Bradley, 756 F.2d 1048, 1053-54 (4th Cir. 1985) (quoting Lever Bros. Co. v. Int’l Chem. Workers Union, Local 217, 554 F.2d 115, 123 (4th Cir. 1976)).

Judge King observed that Aggarao couldn’t be returned to the pre-lawsuit status quo if he died upon return to the Phillipines or if his medical condition deteriorated as a result of inadequate care there.  He charged the District Court with determining whether Aggarao was fit to be repatriated and whether the medical care available in the Phillipines was adequate for Aggarao.  There was conflicting testimony from physicians.  A surgeon from the Phillipines said that his hospital was "world class" and that it had "state-of-the-art facilities."  Op. at 11.  He also opined that the Phillipine doctors could provide all the care necessary, and that Aggarao was fit to return to his homeland.  Op. at 11.  American doctors expressed doubt on these points.  Judge Beach was told to consider additional evidence if she deemed it necessary.

The Case Should Have Been Stayed Pending Arbitration, Not Dismissed, So That The Plaintiff Could Have Judicial Review of his Challenge to the Validity of the Arbitration

Lastly, the Fourth Circuit ordered that the District Court stay (and not dismiss) the case to make sure that Aggarao would have an opportunity at the "award enforcement phase" to have judicial review of his public policy defense based on the prospective waiver doctrine.  It said that the Convention "contemplates a court retaining jurisdiction to ensure that an arbitration award comports with the public policy of the forum country."  Op. at 37.

Whew.  Writing this post has made me tired.   I hope it’s of use to the hundreds of lawyers reading this blog who represent foreign seamen in admiralty cases and and the couple of dozen practicing in the area of international arbitration.  I think it’s a significant opinion for them.  (Really, are there any of you out there?)




Judges don’t like to do in camera reviews of documents.  Part of the reason is the quantity of documents involved.  There was an Order from Judge Tennille a couple of years ago in which the Judge chastised the parties for submitting notebooks filled with repetitive paper copies of emails which the Defendant claimed were privileged.  For a recap of that October 2009 ruling regarding an in camera review, see here.

Judge Tennille observed then that "discovery in a digital age is expensive and difficult."  Today, we are even further into the digital age.  Things are no less expensive now, but just as difficult (or even more so).

A case in point is Capps v. Blondeau, in the discovery phase now before Judge Jolly in the Business Court.  This week, Judge Jolly found a digital presentation of documents submitted to be reviewed in camera to be too voluminous for the Court to handle, and ordered that paper copies be provided.  The defendant claiming privilege had submitted two DVD’s containing electronic copies of privilege logs and the more than a thousand documents claimed to be privileged. 

Judge Jolly wasn’t happy about the presentation.  He said that he could not "access and/or manage a material portion of the voluminous electronic In Camera Submission in the format provided by [the defendant]." Order at 1.

He ordered the defendant to submit  "in individual hard copy, each of the documents and other electronically stored information that constitutes the In Camera Submission."  He also ordered the paper documents to be bates stamped to correspond to the privilege log entries.  Order at ¶¶1&2.  He gave the defendant two days to comply.

The lesson here?  Don’t trick yourself into thinking that you are organized because you’ve put all the documents from a case on a disk instead of filling boxes with paper.  All you’ve done is make your box smaller. 

How can you be sure that your digital presentation will be easily reviewed by the Court?  I have no idea of the nature of the presentation by the Capps defendant, but the privilege log could have contained links to the documents at issue, and it could have been sortable by the originator and recipient of the document.  The defendant could have tested the disk in several computers to make sure that it would be accessible to Judge Jolly.  Maybe the defendant did all that.  Maybe Judge Jolly just prefers paper.

Either way, it’s best to ask any Judge when requesting an in camera review whether he or she prefers  paper copies of documents or a disk.  Or to avoid in camera reviews altogether.

Judge Murphy set some new ground rules for cases brought under the North Carolina Securities Act (the NCSA) last week in Associated Packaging, Inc. v. Jackson Paper Manufacturing Co., 2012 NCBC 13.  The Jackson Paper case is an important read for any lawyer bringing or defending an NCSA claim in the Business Court.  Sorry for the length of this post, but the case has got a lot of stuff in it.

Choice of Law for NC Securities Act Claims

Most cases in the Business Court touch multiple states, and there is often a spat about which state’s law ought to apply.  Some of the plaintiffs in Jackson Paper were Georgia investors in a failed Delaware LLC, Stonewall, whose operating agreement said that "[a]ll issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement [shall] . . . be governed by, and construed in accordance with, the laws of the State of Delaware."  The defendants said in their Motion to Dismiss that Delaware law applied and required dismissal of the securities claims.

So did Delaware law govern the claims by the Plaintiffs that the prospects of Stonewall had been misrepresented to them by the defendants in order to procure their investments?  No, because those were tort claims, not claims regarding the enforcement of the LLC Agreement, Judge Murphy said, relying on Mosteller Mansion, LLC v. Mactec Eng’g & Consulting of Georgia, Inc., No. COA07-664, 2008 N.C. App. LEXIS 1011 at *7–8 (N.C. Ct. App. May 20, 2008).

Judge Murphy then waded into a thicket of law on which state’s law ought to apply to the NCSA claims. He said that NC’s appellate courts had never before ruled on whether NCSA claims were based in tort.  If they were based in tort, then the appropriate choice of law test was lex loci delicti (if your Latin dictionary isn’t close by, that means the law of the situs of the claim).  The alternative choice  was the "most significant relationship test."  He relied on cases determining the choice of law test for unfair and deceptive trade practices, like the NC Supreme Court’s decision in Boudreau v. Baughman, 322 N.C. 331, 368 S.E.2d 849(1988), in ruling that the lex loci test should apply to NCSA claims.

Under the lex loci rule, "the law of the state where the plaintiff was injured controls the outcome of the claim."  Op. ¶28.  Injury happens in the state "where the last act occurred giving rise to [the] injury."  Id.  The inquiry is different for negligence based claims (the plaintiffs had made some) and the NCSA claims.

The location of the state of injury for a corporate plaintiff is "more difficult" than determining the location of an individual victim of an assault and battery.  Judge Murphy said "it might be presumed that the last act occurred where Plaintiffs made their investments in Stonewall." Op. ¶32.  But the Court provided a different answer for the negligence claims, because Judge Murphy said that Plaintiffs had no loss at that time, and therefore no injury, and therefore no claim to make at the time of investment.  Their loss (and injury) occurred when the receiver handling the demise of Stonewall completed the sale of Stonewall’s assets.  That happened in Sylva, North Carolina, where Stonewall’s plant was located and where the receiver’s sale took place.

The question is a little easier to answer on the NCSA claims, because the statute specifies liability for an offer to sell securities, or the actual sale, made "by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made . . . not misleading."  N.C. Gen. Stat. §78A-56(a)(2). So a claim for a violation of the NCSA "is complete upon the "[o]ffer[ing] or s[ale] of a security" by means of an untrue statement or omission of a material fact."  Op. ¶31.Judge Murphy said that the offers to sell an interest in Stonewall were made by employees or agents of Jackson Paper, a North Carolina company with its principal place of business in North Carolina.  He determined that North Carolina law, the NCSA, therefore applied.

Whether Scienter Is Required To Prove An NCSA Claim

Whether scienter (fraud or reckless disregard for the truth) is required to prove an NCSA claim is another question on which the North Carolina appellate courts have not ruled.  But you might recall that the U.S. Supreme Court said that scienter was required under the federal Rule 10b-5, in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).  So since the NC Court of Appeals has said (in State v. Davidson, 131 N.C. App. 276, 282-83, 506 S.E.2d 743, 748 (1998)) that 10b-5 cases are "instructive" when construing Section 78A-8 of the NCSA because it "closely parallels" 10b-5, shouldn’t Hochfelder be the end of the analysis?

Not so, said Judge Murphy, who deemed it appropriate to plumb the intent of the North Carolina Legislature in enacting the NCSA.  He concluded that there was no requirement of scienter, holding that "the legislature intended for the civil remedy provided under Section 78A-56 of the NCSA to include claims based on negligence and negligent misrepresentations." Op. ¶48.

Particularity Is Not Required To Plead A Negligence Based NCSA Claim

 The defendants moved to dismiss the NCSA claim on the grounds that NCRCP 9(b) required it to be plead with particularity and that the Complaint did not specify which financial information supplied by them was false.  The plaintiffs said that the state securities act allowed negligence based claims and that their notice pleading was sufficient.

The Court observed that "it is generally known and widely accepted among practitioners that when pleading claims under Section 78A-56 it ‘is important to remember that a claim under the antifraud provisions cannot be ple[d] under the normal notice pleading standards because an averment of fraud must be ple[d] with particularity.’"  But Judge Murphy ruled that:

Notwithstanding the general practice of applying Rule 9(b)’s particularity standard to claims brought under the NCSA, unlike claims based in fraud, the rationale for requiring
particularized pleading here is not well adapted to claims based in negligence.  Accordingly, this Court finds that when claims brought under Section 78A-56(a)(2)
are based in negligence rather than fraud, plaintiff need only meet the general
notice pleading standard of Rule 8(c).

Op. ¶49.

Disgruntled Investors Could Make A Claim For Negligence And Adequately Pleaded Reasonable Reliance

Plaintiffs faced another hurdle in the general rule that “shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock.” Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 215 (1997).  Those types of claims belong to the corporation, and must be brought on a derivative basis.

Judge Murphy apparently assumed that the plaintiffs’ claims, being for their lost investment in Stonewall, fell within the Barger rule, and he went on to consider whether the claims met the "special duty" exception to the rule. Barger says that "the [special] duty must be one that the alleged wrongdoer owed directly to the shareholder as an individual." Op. ¶57

He concluded that a "special duty" arose because the challenged actions induced the investors to buy an interest in Stonewall. 

Another issue the opinion dealt with was whether the plaintiffs had pleaded reasonable reliance on the financial information provided in connection with their investment in Stonewall.  Judge Murphy found the reasonable reliance requirement satisfied by the Complaint’s allegation that the plaintiffs "had an accountant review the financial information provided by Defendants. (Compl. ¶ 109.)." He said that "[t]he accountant’s inability to detect any irregularities supports Plaintiffs’ contention that they could not have discovered the truth."  Op. 61.  The same rationale saved the negligent misrepresentation claim.


This decision definitely breaks some new ground.  You don’t have to show scienter for a state securities claim?  You don’t have tp plead your claim with particularity?  Those are real relaxations of requirements for plaintiffs.  It is not clear that these rulings are the law of North Carolina, but they are the law in Judge Murphy’s courtroom.  Whether they’ll stick on appeal is an open question.  The Court of Appeals seems to love to reverse the Business Court.  They did it today in Hill v. Stubhub, Inc., reversing a determination by Judge Tennille that the Communications Decency Act didn’t insulate StubHub from a claim that its ticket selling practices violated North Carolina’s anti-scalping laws.  I wrote about that case back in 2008.

So if you are a plaintiff with a securities claim, don’t wait to see what the Court of Appeals might do.  Bring it now, in Mecklenburg County or elsewhere in the Western part of North Carolina, and put it in the Business Court.  It’s most likely that it will be assigned to Judge Murphy.  That seems like a good place to be.

But don’t think that the Jackson Paper plaintiffs are about ready to collect a jackpot.  If you read the opinion, you’ll see that there are a lot of warts on their case.