November 2013

If you think like me, you were thinking that the $1,000 fee for designating a case to the Business Court would be recoverable as an item of costs if you were successful in the case.

But I’m wrong.  Last Thursday, in an Order in Prospect Marketing Group, Inc. v. Chasnan, Inc., Judge Jolly ruled that there is no statutory basis for the recovery of the designation fee as a cost.

In looking at the statute governing costs, that is absolutely correct.  Section 7A-305 of the General Statutes, which is titled "Costs in civil actions," says in subsection (d) that "[t]he following expenses, when incurred, are assessable or recoverable, as the case may be. The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court’s discretion to tax costs pursuant to G.S. 6-20." 

The designation fee is not included in the items listed in Section 7A-305(d).  So that’s out as an item of recovery.

And what did the prevailing party in Prospect Marketing Group recover on its application for $2,248.19 in costs, which included the $1,000 designation fee?  A whopping $7.56, which represented the only recoverable amount: the cost incurred for service of process by certified mail, which is specifically allowed by G.S. §7A-305(d)(4).

I’m sure that the Prospect application for costs cost more than $7.56 to prepare, making it a losing exercise financially.  It seems like that is true for most applications for costs — that they generate so little that they are not worth pursuing.

You’ve no doubt heard about the University of Maryland’s withdrawal from the Atlantic Coast Conference and the University’s unwillingness to pay the $50 million withdrawal fee required by the Constitution of the ACC.

This week, in Atlantic Coast Conference v. University of Maryland, the NCCOA rejected the U of M’s contention that it was entitled to sovereign immunity from suit in North Carolina to collect the fee. The case will go forward on the issue of whether that sizeable fee is an appropriate measure of liquidated damages or an unconstitutional penalty.

The withdrawal fee is three times the ACC’s total annual operating budget.  It adds up precisely to $52,266,342.  We are unfortunately well away from the time when the courts will rule on whether the withdrawal fee is enforceable as a liquidated damages provision.

Under NC law:

A stipulated sum is for liquidated damages only (1) where the damages which the parties reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

E. Carolina Internal Med. v. Faidas, 149 N.C. App. 940, 945-46, 564 S.E.2d 53, 56 (2002).

The $52 million fee is said to be the largest to be assessed upon a team leaving an athletic conference.  Syracuse, for example, was assessed $7.5 million upon leaving the Big East conference to join the ACC. 

But the opinion doesn’t assess at all the enforceability of the fee.  Instead, the opinion focuses on whether the trial court’s decision not to dismiss the case was immediately appealable and whether North Carolina should extend comity to its "sister state" on the University of Maryland’s sovereign immunity request.

The decision of the trial court that it would not allow the University of Maryland the defense of sovereign immunity was immediately appealable because it affected the University’s "substantial right" to be free from defending a case from which it might be immune.

But why shouldn’t the State of North Carolina accord the University of the State of Maryland the defense of sovereign immunity?  Apart from what might be a general dislike of the Terrapins, the reason was that the ACC’s claim is one for a breach of contract.  The Court said:

public policy is violated in North Carolina when the State is allowed to assert sovereign immunity as a defense to causes of action based on contract. It would seem plain, then, that because the ACC is seeking a declaration as to the parties’ rights and obligations under the terms of the ACC Constitution, it would violate public policy to extend comity to Defendants’ claim of sovereign immunity.

Op. 19-20.

In an earlier decision, the NC Supreme Court  had said that allowing a State to walk away from its contractual obligations and to claim sovereign immunity "would be judicial sanction of the highest type of governmental tyranny."  Smith v. State, 289 N.C. 303, 320, 222 S.E.2d 412, 423 (1976).

Maryland is a member of the ACC through the 2013-14 season and will play in the 2014 ACC basketball tournament here in Greensboro.  I only live a few miles from the Greensboro Coliseum.  The Terps can drop that $52 million on my front lawn if they would like.

The best lines in Green v. Freeman, decided last week by the NC Supreme Court, are that "[t]he doctrine of piercing the corporate veil is not a theory of liability.  Rather, it provides an avenue to pursue legal claims against corporate officers or directors who would otherwise be shielded by the corporate form."  Op. 17-18 (emphasis added).

That means it’s not enough to show merely that the shareholder has so "dominated the corporation" that its "corporate separatedness" should be disregarded.  As Justice Martin put it, "sufficient evidence of domination and control establishes only the first element for liabilityThere must also be an underlying legal claim to which liability may attach."  Op. 17.

The Supreme Court reversed the jury’s verdict that one of the defendant corporation’s directors had breached a fiduciary duty to the Plaintiffs and that she was accordingly personally liable due to her domination and control of the corporation.  It also found that no fiduciary duty was owed to the Plaintiff by the defendant director.  It remanded the case to the Court of Appeals to consider another theory of liability.

Is there anything else of interest in the Green case?  It’s got some good language to cite in future cases for the well-accepted principle that directors of a North Carolina corporation don’t owe a fiduciary duty directly to shareholders:  "The General Assembly has expressly indicated its intent “to avoid an interpretation [of N.C.G.S. §55-8-30]. . .that would give shareholders a direct right of action on claims that should be asserted derivatively” and to avoid giving creditors a generalized fiduciary claim."  Op. 9.  Of course, there are numerous Business Court cases stating the same principle, but it’s always nice to have a Supreme Court case to rely on.

My basic comment about this case is that it represents the application of long established rules in the context of litigation against corporate officers and directors, and that it breaks no new ground.

It’s worth noting that piercing the corporate veil claims are mostly unsuccessful.  Five years ago, Justice Timmons-Goodson of the NC Supreme Court said  that "proceeding beyond the corporate form is a strong step: ‘Like lightning, it is rare [and] severe[.]’"  That’s the last time the State’s high Court spoke to the subject.

And don’t forget that piercing the corporate veil allegations are not a basis for mandatory jurisdiction in the Business Court.

You may remember the case of Out of the Box Developers, LLC v. Logicbit Corp.  It has spawned a couple of interesting discovery decisions.  One was on subpoenas to third parties, another involved nearly $40,000 in sanctions for attorneys’ fees against two of the Defendants for failing to comply with a discovery order.

Now there’s something new in that case.  Judge Gale followed that nearly $40,000 sanctions order  with an October 4th Order ruling that the Defendants had violated a Protective Order by posting on the internet  information which it had obtained during discovery.  He allowed the Plaintiff some limited discovery on the extent of the protective order violation, and deferred his ruling on sanctions "until a later date."

I blinked when the Defendants filed a notice of appeal  the same day that the Order was entered.  Can you even appeal a discovery ruling?  Isn’t it interlocutory?  The appealability of non-final judgments is not an issue I focus on, though it does seem like half of the output from the North Carolina Court of Appeals involves a discussion whether an appeal is interlocutory.  If you like reading about that issue or other appellate procedure quirks, the North Carolina Appellate Practice blog discusses them frequently.

Did the Defendants care if the October 4th Order was immediately appealable?  Maybe not.  Maybe they thought that even if they ended up having their appeal dismissed as interlocutory by the COA a year down the line, at least they would have delayed the discovery contemplated by the Order.

Their next step was to ask Judge Gale for a stay of all proceedings in the Business Court while their appeal proceeded. 

That motion was denied by Judge Gale, who ruled last week in a November 1st Order that his October 4th Order was not immediately appealable.  Now, wait, you are thinking.  The trial court can’t do that, can it?  Isn’t it an issue for the appellate court?

Well, the North Carolina Court of Appeals has held that a trial court can determine whether its own Order is immediately appealable:

The trial court has the authority. . .  to determine whether or not its order affects a substantial right of the parties or is otherwise immediately appealable. See Utilities Comm. v. Edmisten, Attorney General, 291 N.C. 361, 365, 230 S.E.2d 671, 674 (1976); Veazey, 231 N.C. at 364, 57 S.E.2d at 382-83; T & T Development Co., 125 N.C.App. at 603, 481 S.E.2d at 349; Benfield v. Benfield, 89 N.C.App. 415, 420, 366 S.E.2d 500, 503 (1988).

 RPR & Assocs., Inc. v. University of North Carolina, 153 N.C. App. 342, 348, 570 S.E.2d 510, 514 (2002).

So what’s next for the Defendants?  Apparently, a motion in the Court of Appeals.  The RPR & Associates case says that:

Pursuant to Appellate Rule 8, a party may apply to the appellate courts for a stay when the trial court chooses to proceed with the matter. See N.C.R.App. P. 8 (2002).

Id.  The Defendants stated in a November 4th filing that they intend to file a Petition for a Writ of Supersedeas.  [Update: That Petition was filed on November 6th.]

It might be that the parties will never get to the merits of this case, with all the wrangling over discovery issues.

If you are a partner in a limited liability partnership, or if you have clients who are, you’ll want to read Judge Gale’s opinion in Chesson v. Rives, 2013 NCBC 49, decided last week.  It provides guidance on the rights of partners withdrawing from LLPs.

Chesson, one of the Plaintiffs, was a partner in an accounting firm, Rives & Associates, an LLP.  Chesson and two other partners withdrew from the firm, and then sued two of their former partners on a variety of claims, including breach of fiduciary duty, constructive fraud, and "constructive expulsion."

The case is a good reminder that most of the relationship between partners is governed by the Uniform Partnership Act (Chapter 59 of the General Statutes), but can often be modified by a written Partnership Agreement.

Can a partner make claims against his partners after he has withdrawn from the partnership?  Judge Gale said that "[a]lthough Plaintiffs withdrew from the partnership, they retained personal rights for the value of their partnership interest at the time of their withdrawal."  Op. ¶22.  In other words, the withdrawing partners had standing to make their claims.

Didn’t the former partners’ withdrawal result in a dissolution of the partnership? Ordinarily it would have, because dissolution "occurs automatically by operation of law upon any partner’s unequivocal expression of an intent and desire to dissolve the partnership."  Op. ¶29 (quoting Sturm v. Goss, 90 N.C. App. 326, 332, 368 S.E.2d 399, 402-03 (1988)),  In this case, the partnership agreement provided that the non-withdrawing partners could continue the partnership.

Does a partner have to make a demand on the partnership, and have that demand refused,  before suing for an accounting?  Judge Gale said that a demand was not necessary.

Can Partners eliminate the fiduciary duties they owe to one another via a partnership agreement? No, "a partnership agreement cannot eliminate those enumerated fiduciary duties partners owe to one another as a matter of law."  Op. ¶26.  Those "duties include providing full information to the partnership, accounting for the use of partnership property, disclosing self-dealing transactions, and remitting profits obtained through transactions affiliated with the partnership’s business." Id.

Thus, the partners who had withdrawn had not lost claims that the remaining partners had diverted partnership assets to themselves personally and had used partnership assets to form a separate entity.

What is the measure of damages for partners who have withdrawn?  "Absent agreement to the contrary, upon dissolution which was not caused by contravention of the partnership, a partner’s right is his pro rata share of the net value of the partnership assets at the time of dissolution."  Op. ¶30.

What about a claim for "constructive expulsion," that the remaining partners had made working conditions so intolerable that they forced a resignation?  North Carolina "does not recognize a claim for wrongful expulsion from a partnership," held Judge Gale.  Op. ¶36.

At least accountants don’t commonly have contingent fee engagements.  Those can cause real headaches in valuation, as the Court’s opinion last year in Mitchell v. Brewer, 2013 NCBC 14, illustrates.  I wrote about that case last year.