June 2013

Let’s say you are a corporate lawyer.  You spend your pitiful and lonely life surrounded by marked up papers and red pens, drafting or revising agreements.  You send your final versions out to your clients to sign, with those annoying little "sign here" stickers.

Then, the big day finally comes.  Your work is in court and the case turns on an agreement that you drafted.  But it wasn’t signed by everybody concerned.  It’s a nightmare.  What’s going to happen?

Your astonishingly bright (and good looking) litigation partner says "No sweat.  We don’t need no stinkin’ signatures."  Is he or she right?

He or she might be, based on Judge Gale’s decision last week in Hawes v. Vandoros, 2013 NCBC 31.  The parties were all joint owners of two investment beach houses.  When they refinanced the houses, most of them signed "contribution agreements" providing that they would each pay a pro rata share of the monthly payments due under the new loans.  

There were eleven signature lines on the Contribution Agreements, but two of the owners (the Schemerhorns) did not sign.  Two of those who had signed defaulted on their payments, and argued that the Agreements were not valid because all of the co-owners had not signed.

Judge Gale held that "a signature is not always essential to the binding force of an agreement . . . and .  . . in the absence of a statute it need not be signed, provided it is accepted and acted on, or is delivered and acted on."  Op.  29 (quoting Fidelity & Casualty Co. of NY  v. Charles W. Angle, Inc., 243 N.C. 570, 575-76, 91 S.E.2d 575, 579 (quoting W.B. Coppersmith & Sons v. Aetna Ins. Co., 222 N.C. 14, 21 S.E.2d 838 (1942)).

Those who hadn’t signed the Agreements had abided by them — they consistently made the payments due from them and had accepted the Agreements via their performance.  Op. 29.  Therefore, all signatures were not required.

Judge Gale also rejected the argument that obtaining all signatures was a condition precedent to the validity of the Agreements.  He said that "[a]bsent plain language, a contract ordinarily will not be construed as containing a condition precedent."  Op.  30 (quoting Craftique, Inc. v. Stevents & Co., Inc., 321 N.C. 564, 566-67, 364 S.E.2d 129, 131 (1988)).

I wouldn’t give up those signatures just yet.

A breach of fiduciary duty by the Defendants resulted in a sweeping preliminary injunction in an Order entered by the Business Court last Friday, in Esposito v. Esposito.

The parties were co-shareholders of Anthem Leather, Inc., a Delaware corporation, which was in the business of buying leather from tanneries and selling it to its customers for various uses.  The Defendants also served as officers and directors of the company.

According to the Plaintiffs, the Defendants embarked on a related venture focusing on the distribution of contract leather, which is leather used in institutional furniture in offices, hotels, and hospitals. Anthem had never been in this business, but said that it was a natural area of growth for it.

When the Plaintiffs learned that the Defendants had formed a new entity, Crest Leather, LLC, to engage in the contract leather business, using Anthem’s resources, they filed their Complaint alleging breaches of fiduciary duty.  The Defendants, caught with their hand in the cookie jar, responded by attempting to assign their interest in Crest to the Plaintiffs.

The grant of the injunction turned on Delaware law per the internal affairs doctrine.  In Delaware, it is a breach of fiduciary duty for an officer or director to usurp an opportunity belonging to the corporation.  The elements of that claim are:

(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.

The Defendants argued that their assignment to Plaintiffs of their interest in the usurped opportunity made it impossible for the Plaintiffs to show that they had been irreparably harmed.  Judge Jolly was not buying any of that.  He said:

Defendants contend that by voluntarily assigning their Crest interests to Anthem they mooted any showing of irreparable harm to Plaintiffs. The court does not agree.  A preliminary injunction is a measure taken by a court to preserve the status quo of the parties during litigation. Triangle Leasing Co. v. McMahon, 327 N.C.224, 227 (1990). An "injunction is generally framed so as to restrain the defendant from permitting his previous act to operate, or to restore conditions that existed before the wrong complained of was committed." Anderson v. Waynesville, 203 N.C. 37, 46 (1932); see also Rauch Indus., Inc. v. Radko, No. 3:07-cv-197-C, 2007 U.S. Dist. LEXIS 79311, *19 (W.D.N.C. Oct. 25, 2007) (characterizing the status quo between the parties as "the time that the allegedly unlawful acts complained of reasonably may be believed to have occurred"). Defendants’ voluntary assignment of their Crest interests to Anthem does not cure the possibility that Plaintiffs still can be irreparably harmed by Defendants’ breach of fiduciary duty. On this requirement, the court concludes that Plaintiffs have shown they are likely to sustain irreparable harm in the absence of an injunction.

Op. Pars. 15-16.

The injunction barred the Defendants from, among things, entering Anthem’s facilities, accessing its computer systems, or contacting or selling leather to Anthem’s customers.

You can’t put the cookie back in the cookie jar after you’ve taken it.

Congratulations to my colleagues Bob King and Elizabeth Taylor, who represented the Plaintiffs.

It’s been nearly ten years since the North Carolina Supreme Court decided a case involving the attorney-client privilege.  That case was In re Miller, 357 N.C. 316, 584 S.E.2d 772 (2003), which raised the question whether the privilege survives the death of the client.  (It does.)

That case, which involved a criminal investigation, raised some esoteric issues.  Those are probably unlikely to come up in a business litigation practice, but Judge Jolly’s Order last week in Meir v. Meir is likely to have more of a day-to-day impact on your practice.

Let’s say your client is questioned about the facts underlying the Complaint that you drafted based on those facts as told to you by her.  Are those facts privileged because they were told to you, her attorney?  Of course not.  We all should know that.

But what if you, lawyer, tell her, client, the facts you have learned about her claim from other sources.  Is that privileged?  Can you instruct her not to answer questions about those facts at her deposition?

Not so sure about that situation?  The Meir Order has the answer: you may not instruct your client not to answer those questions.  Judge Jolly ruled as follows:

The attorney-client privilege does not protect against the disclosure of facts. Rather, it only protects against the disclosure of certain confidential communications between an attorney and client. See Upjohn Co. v. United States, 449 U.S. 383, 396-97 (1981); In re Miller, 357 N.C. 316, 336 (2003). The fact that Violet Meir and her counsel may have discussed certain facts related to this case does not trigger the application of any protection as to those facts. The court concludes that the
attorney-client privilege does not attach to specific facts simply because Violet Meir is aware of those facts only because of conversations with her attorney. In addition, the attorney-client privilege does not protect against the disclosure of Violet Meir’s personal opinions, feelings or knowledge.

Op. Par. 10.

The attorney-client privilege isn’t like a "cone of silence" that extends to the exchange of facts between attorney and client.

And if you are too young to remember the TV show Get Smart, which occasionally referred to the Cone of Silence, click here.  This might be the most valuable thing that you learn from this post.