June 2012

If you are wondering what North Carolina has to do to comply with the Affordable Care Act now that the Supreme Court has said it passes constitutional muster, there are better places to look than my blog.  But there’s an excellent post from Professor Jill Moore at the UNC School of Government.  It’s on the School of Government’s Coates’ Canons blog, which I highly recommend you add to your reading list if you practice law in North Carolina.

Health Benefits Exchange

North Carolina is behind the curve on the ACA front on establishing a health benefits exchange.  The concept of an HBE "is to create an insurance pool so that uninsured people may purchase health insurance at lower rates than are typically available to individuals in the present market."  North Carolina isn’t the only state to have deferred creating an HBE, only 15 states have put an HBE in place in anticipation of the full deployment of the ACA.  But there’s a deadline.

North Carolina’s motivations were good.  The General Assembly passed a bill last year stating its intention to create an HBE.  The state House passed legislation doing exactly that, but the state Senate hasn’t considered that legislation yet.  Given that the Act requires that a state creating its own exchange must "demonstrate operational readiness by mid-2013 and begin operating in 2014,"  NC is in a crunch on the HBE issue, especially since the Senate isn’t expected to reconvene to consider this issue until next year, after the November elections.

Medicaid Expansion

There also a major issue about Medicaid.  The ACA expands Medicaid to cover a large population of low income adults.  That’s going to involve substantial expense which the federal government will mostly bear until 2020, when the states will be responsible for 10% of the increase and the federal government 90%.

A U.S. Senate Committee report estimates North Carolina’s increased costs to cover the expanded Medicaid program at $1.791 billion between 2014 and 2019.  Even Governor Perdue has expressed concerns about North Carolina’s financial ability to cover nearly half a million estimated new Medicaid recipients.

Given that the Supreme Court’s decision gives the states the option to opt-out of the expansion,  North Carolina has a difficult decision about whether to participate.  Many states are reported to be pondering exactly that.

Since the Republicans currently control the North Carolina General Assembly, and have a serious run ongoing for the Governorship, you can expect the dialogue over Medicaid expansion to be acrimonious after Election Day.

Do you have a client who says his associate embezzled a lot of his money?  Does he want to sue the Bank that held the funds, claiming that the Bank should have known that misdoings were afoot and blown the whistle?  You’d better tell him to think twice before bringing that claim to the Business Court, based on last week’s decision in Global Promotions Group, Inc. v. Danas Inc.

The Plaintiffs in Global had given one of the Defendants signature authority over their accounts at BB&T.  That Defendant later made unauthorized wire transfers from the accounts and deposited forged and unauthorized checks drawn on those accounts into their own accounts.  The total amount embezzled was more than $300,000.

The Plaintiffs said that BB&T should have discovered and prevented these transactions, but it was a claim looking for a cause of action that just couldn’t be found.

Judge Jolly first considered the North Carolina Uniform Fiduciaries Act, which states that a Bank can be liable for checks drawn by a depositor’s fiduciary only if "the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such check, or with knowledge of such facts that its action in paying the check amounts to bad faith."  N.C. Gen. Stat. §32-9.

Even if the Defendants were fiduciaries of the Plaintiffs (about which there was little discussion) Judge Jolly found nothing in the Complaint to support an allegation of bad faith, He said that "suspicious circumstances," with a "failure to make inquiry," were not "bad faith."  Op. ¶24.  A failure to make inquiry amounts to bad faith only if if it is "due to the deliberate desire to evade knowledge because of a belief or fear that inquiry would disclose a vice or defect in the transaction, – that is to say, where there is an intentional closing of the eyes or stopping of the ears.’"  (quoting Edwards v. Northwestern Bank, 39 N.C.App. 261 (1979)).

He held that the Plaintiffs had not alleged facts giving rise to a reasonable inference of either actual knowledge or the turning of a blind eye to the misconduct.  He went on to hold also that the Plaintiffs did not have a claim under what he termed the "more stringent" common law standards of care for banks.

On that "more stringent" standard, in trying to impose a fiduciary duty on BB&T, the Plaintiffs argued that the Bank and its employee had "exercised actual control over" the accounts and that they had placed a "special confidence" in the employee as a result.  They argued that the Bank’s employee therefore had a "responsibility to oversee their accounts."  Op. ¶32.

Not so, said Judge Jolly, who wrote that "all banks exercise some degree of custodial control over their
customers’ accounts; nonetheless, banks ordinarily do not owe fiduciary duties to their customers."  Op. ¶33. The Plaintiffs’ allegations did nothing more than merely establish the existence of an ordinary relationship between a bank and its customers, as all banks have a responsibility to safeguard their customers’ accounts."  Id.  Judge Jolly observed that "an ordinary relationship between a bank and its customers does not, without more, impose upon the Bank any special duties to its customers."  Op. ¶30.

After that, the other claims asserted by the Plaintiffs against BB&T fell like dominoes.

Continue Reading Bank Not Liable For Embezzlement, Says NC Business Court

Persistence can be a valuable quality, but when it leads to an unjustified refusal to give up a questionable case, the party suffering from persistency can get socked with attorneys’ fees.  That was the result in Judge Gale’s Order on Tuesday in McKinnon v. CV Industries, Inc.

McKinnon was entitled to benefits under a Severance Agreement which looked at when he had stopped competing with CV Industries after leaving his employment (yes, it’s unusual for a party to say he’s entitled to benefits because he was competing with his former employer but that was the situation here).

McKinnon argued throughout discovery, and into the Court of Appeals and then into a Petition for Discretionary Review with the NC Supreme Court that his employment with a company called Basofil Fibers was in competition with CV Industries.  CV Industries manufactures high-end furniture and fabric through two subsidiaries.  Basofil manufactures and sells fiber, but not fabric.

The Business Court’s opinion by Judge Tennille on summary judgment — and the Court of Appeals opinion — turned on the meaning of the word "competition.  McKinnon urged a very broad definition saying that Basofil "competed" with CV Industries because they both sold product to the furniture industry.  Both Judge Tennille and the COA rejected that argument.  The COA said that "competition":

entail[s] more than mutual existence in a common industry or marketplace; rather, it requires an endeavor among business entities to seek out similar commercial transactions with a similar clientele.

It also observed that under McKinnon’s theory of "competition," nearly every business selling any product or service to the furniture industry would be in competition with one another.  It said that McKinnon’s definition was "unpersuasive" and "excessively broad."  Appellate Opinion at  17.

The basis for the award of fees was N.C. Gen. Stat. Section 6-21.5, which says that "[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney’s fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The issue wasn’t whether McKinnon had a valid belief of a"justiciable issue" that he could prove he was in competition with his former employer when he filed his complaint .  As Judge Gale put it, "the more difficult question is whether he legitimately continued in that belief when pressed during the course of litigation to support his claim and failed to present a clear basis on which he could claim relief."  Op. ¶58.

When was the turning point when that belief was no longer legitimate?  Judge Gale said that it was after summary judgment was entered against McKinnon on his claims.  Judge Gale ordered that CV Industries was entitled to $40,000 in fees for McKinnon’s unjustified persistence after that point.

Judge Tennille’s summary judgment Order left no doubt on how he viewed the claims.  He said that "with the exception of Mckinnon’s self-serving conclusory allegations" it was "entirely unrefuted" that McKinnon’s employer was not in competition with the Defendant.

The fee award was probably not satisfactory to the Defendant, which had sought $322,000 in fees, presumably the cost of defending the case from the outset.  If that’s so, it probably explains why the Defendant also moved for fees per Rule 11.  Rule 11 requires that a Complaint (or any paper filed with the Court) must be "well grounded in fact and . . . warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

The problem with the Rule 11 argument was that the analysis of an entitlement to sanctions stops with the Complaint itself.  It is limited to "a review of the challenged pleading and whether it was warranted by facts and law known to the submitting party at the time the pleading was signed."  Op. ¶37.

The inquiry under section 6-21.5 is different and more flexible.  There, the court properly looks "beyond a particular pleading to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue.” Op. ¶43 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991).

Don’t walk away from McKinnon thinking you are entitled to attorneys fees just for getting summary judgment against a claim.  That’s certainly not the law. Success on summary judgment is only some evidence "to support . . . a finding" for fees.  Op. ¶42.