May 2013

The Fourth Circuit doesn’t get into matters of LLC law very often, but it did last week in Painter’s Mill Grille, LLC v. Brown. The LLC and its members were suing their landlord for discriminating against them on the basis of race.

The LLC was operating a restaurant which served an African-American clientele. The Plaintiffs said that the Defendants became hostile to them as a result and referred to their business in a racially disparaging way and interfered with their sale of the business.

One of the comments by the Defendants, when the Plaintiffs attempted to sell their business, was whether they were going to open another "chicken and waffle shack."

Let me say that I love [fried] chicken and waffles for breakfast. If you haven’t tried that dish, Dame’s Chicken & Waffles, in Greensboro’s Southside neighborhood, is outstanding.  If you don’t get the racial animus alleged to be behind that term, the dish is said to have originated with African-American southerners.

But could the LLC members, who alleged that they suffered "personal out-of-pocket losses" as a result of the Defendants’ discriminatory conduct, state a claim against them?

No, said Judge Niemeyer, since they were LLC members.  He held that:

[i]n advancing their arguments [the members] failed to account for the fact that they elected to conduct their business through a limited liability company ("LLC") and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), forecloses just such claims.

Op. at 7 (emphasis added).

I wasn’t familiar with the Supreme Court’s decision in Domino’s Pizza, but it rejected in that case a shareholder’s personal claims for race discrimination, holding that they belonged solely to the corporation.  Justice Scalia held there that:

it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts.

546 U.S. at 477.

I will hold off on my pizza recommendations.


The issue in Johnson v. American United Life Insurance Co., decided last week by the Fourth Circuit. was whether the Plaintiff’s husband’s death from a car wreck while driving intoxicated was an "accident" under his life insurance policy from Defendant American United which provided "Accidental Death and Dismemberment" coverage .

The policy didn’t contain a definition for an "accident," making it necessary for the Court to interpret the term. It noted in passing that     "[t]here are probably not many words which have caused courts as much trouble as ‘accident’ and ‘accidental.’" Op. at n.1.

In the end, Judge Traxler ruled that the dead husband was covered by the policy, though he said that:

Reaching this result gives us no great pleasure. Drunk driving is reckless, irresponsible conduct that produces tragic consequences for the thousands it touches annually. But our task in this case is not to promote personal responsibility or enforce good driving habits. We must focus on the terms of the policies issued under the Plan and determine whether Richard died as a result of an accident without ‘allowing our moral judgments about drunk driving to influence our

Op. 3-4.

The Court’s analysis began with two competing definitions of the term "accident."  The Plaintiff argued that the "most natural and common understanding of the term . . . is an unintentional, unplanned incident that occurs as a result of a careless error."  Op. at 12.  She said that unless an intoxicated driver intended to crash his car and die, that his death would be an accident under the policy.

Another definition of "accident" would "exclude any incident where the consequences of intentional conduct are expected or reasonably forseeable."  Op. at 13.

Finding the term ambiguous, the Court applied "the rule of contra proferentum and construed the term[] strictly in favor of the insured." Op. at 15.   It found no evidence that the driver intended to have an accident and deemed the insured’s death to be an accident.

The District Court had ruled that a death caused by intoxication was not an "accident."  It relied on Section 58-3-30(b) of the North Carolina General Statutes, which says that

"Accident", "accidental injury", and "accidental means" shall be defined to imply "result" language and shall not include words that establish an accidental means test.  "

You might not be familiar with some of those terms.  I wasn’t.  The "accidental means" definition provides that there is no coverage when the loss "occurs by reason of an insured’s intentional act" or "is the natural and probable consequence of a voluntary actor course of conduct."  Op. at 21 (quoting Collins v. Life Ins. Co. of Va., 393 S.E.2d 342, 343 (N.C. Ct. App. 1990)).

The "accidental result" standard is more liberal. 

a policy that pays benefits based on an ‘accidental result’ standard does not categorically exclude from the definition of ‘accident’ losses resulting from intentional acts; rather, "accidental" under this standard means a loss occurred ‘fortuitously without intent or design’ and was ‘unexpected, unusual and unforeseen.’

Op. at 21 (quoting Henderson v. Hartford Accident & Indem. Co., 150 S.E.2d 17, 20 (N.C. 1966)).

Judge Traxler looked to a 1992 North Carolina Supreme Court decision — North Carolina Farm Bureau Mutual Ins. Co. v. Stox, 412 S.E.2d 318 (N.C. 1992) — which held:


Continue Reading The Fourth Circuit On “Accidents” And Drunken Driving

 When you think of sanctions, your mind probably goes to Rule 11 of the Rules of Civil Procedure.  But what about Rule 37(b)(2)?  It says that: 

if a party . . . fails to obey an order to provide or permit discovery, . . . a judge of the court in which the action is pending may make such orders in regard to the failure as are just . . . . In lieu of any [such order] or in addition thereto, the court shall require the party failing to obey the order to pay the reasonable expenses, including attorney’s fees, caused by the failure . . . .

Judge Murphy applied the teeth in Rule 37 to sanction two of the parties — Allison and Stathopoulos — in an Order this week in BOGNC v. Cornelius Self-Storage LLC to the tune of almost $10,000 for failing to comply with an earlier discovery order in the case.

 He had entered that Order in December 2011, ruling that the attorney-client privilege did not apply to communications between Allison (an attorney) and Stathopoulus, both of whom were LLC members.  He directed those two parties to produce the documents they had withheld on the basis of privilege within thirty days, and to produce a privilege log for documents they continued to maintain as privileged within the same time frame.  If disputes continued, Allison and Stathopoulus were to deliver the documents in camera for the Court’s review.

The deadlines passed without compliance.  Although the Order did not state a deadline for production of the documents for an in camera review, they were not provided until eight months after the entry of the Order.  Judge Murphy said that the production was "riddled with deficiencies" and  the parties had acted in "blatant disregard" of his Order.   Order 18.

The sanctions were equivalent to the reasonable expenses incurred by the Plaintiff as a result of the parties’ failure to comply with the Court’s 2011 Order, which were ruled to be $9,614.00.

It is worth mentioning that these sanctions didn’t run against the lawyers for Allison and Stathopoulus.  They ran directly against the parties.



Maybe you’ve wondered whether a claim for legal malpractice can be assigned. Maybe you haven’t. But yesterday, the North Carolina Court of Appeals answered that question.  In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the Court held that "malpractice claims are not assignable in North Carolina."  Op. at 10.

Why not?  A cascade of horribles might result if they were assignable.  The concerns noted by the COA were:

the potential for a conflict of interest, the compromise of confidentiality, and the negative effect assignment would have on the integrity of the legal profession and the administration of justice.

Op. at 9.

Malpractice claims now fit in a broad category of personal injury claims which are not assignable, like "claims for defamation, abuse of process, malicious prosecution or conspiracy to injure another’s business, unfair and deceptive trade practices and conspiracy to commit fraud."  Op. at 8.

If the name of the case sounds familiar, that’s because it was a Business Court case which you’ve read about before on this blog.

And don’t think that this result represents a win for the law firm involved.  The COA reversed a 2010 Order from the Business Court holding that the firm’s individual client had assigned away his malpractice claim to a corporate Plaintiff and that he therefore had no standing to bring the malpractice claim.

You’ve undoubtedly prevailed in a federal case — either at summary judgment or after a trial — and you have probably struggled with what you are entitled to recover as costs under 28 U.S.C. §1920.  And recently, your client, being the victor, most likely has asked about the recovery of its costs associated with the production of electronically stored information.

The Fourth Circuit’s decision on Monday of this week in The Country Vintner v. E & J Gallo Winery, Inc. gives answers to those questions, but your prevailing party client won’t like them.

Gallo ran up bills from e-discovery vendors of more than $100,000 in its production to the Plaintiff of its ESI, and it sought to have the District Court award that as an element of costs.  The bulk of that amount was for "flattening" and "indexing" the ESI. The Court defined that as the "initial processing" of the data, which:

involved decompressing container files (e.g., ZIP files or Microsoft PST files); making the data searchable by extracting text and creating Optical Character Recognition for text that could not be extracted; indexing the data; removing system files that were known not to contain any user-generated content; and removing duplicate files. 

Op. at 5.

That part of the application for costs was denied by the District Court, which was affirmed by the Fourth Circuit.

The Court was constrained by the terms of 28 U.S.C. sec 1920(4), which says that a "judge or clerk of any court of the United States may tax as costs . . . fees for exemplification and the cost of making copies of any materials where the copies are necessarily obtained for use in the case."

The heart of the holding was in the narrow definition of "making copies."  The Court relied on the Third Circuit’s decision in Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012), which held that "only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD involved ‘copying’" within the meaning of §1920(4).  Id. at 171.

Judge Davis of the Fourth Circuit ruled that "subsection (4) limits taxable costs to . . . converting electronic files to non-editable formats, and burning the files onto discs."  Op. at 21.  Thus, Gallo recovered only about $600 of the more than $100,000 it had asked for.
Why so little?  Well, as the Supreme Court has said,
Taxable costs are a fraction of the nontaxable expenses borne by litigants for attorneys, experts, consultants, and investigators. It comes as little surprise, therefore, that costs almost always amount to less than the successful litigant’s total expenses in connection with a lawsuit.
Taniguchi v. Kan P. Saipan, Ltd., 132 S. Ct. 1997, 2006 (2012).
If you don’t like this result, your only option may be to move to England, where "loser pays" is the general rule.