The North Carolina General Assembly has decided to legislate choice of law in commercial transactions.  The new statute, enacted in June, is called the "North Carolina Choice of Law and Forum in Business Contracts Act." It will be codified at N.C. Gen. Stat. §1G-1.

The Statute Applies Only To "Business Contracts"

The statute applies only to "business contracts."  That term is defined as: "[a] contract or undertaking, contingent or otherwise, entered into primarily for business or commercial purposes."  Specifically excluded from that definition are "consumer contract[s] or . . .. employment contract[s]."  N.C. Gen. Stat. §1G-2(1).  If you had any doubt about what constitutes a "consumer contract," that term is defined as well.  It is "[a] contract or undertaking, contingent or otherwise, entered into by an individual primarily for the individual’s personal, family, or household purposes."  N.C. Gen. Stat. §1G-2(2).

It seems like the General Assembly could have gone without bothering to define an "employment contract," but it didn’t.  An "employment contract" is "A contract or undertaking, contingent or otherwise, between an individual and another party to provide labor or personal services by that individual to the other party, whether the relationship is in the nature of employer-employee or principal-independent contractor."  N.C. Gen. Stat. §1G-2(3).

So, what are the benefits extended to those who are party to a "business contract"?  The short answer is that they can choose North Carolina law to govern their contracts and they can select North Carolina as a forum to resolve their disputes.  You might be thinking: "big deal, couldn’t they do that anyway"?

This Represents A Big Shift In NC Law On Choice Of Law Provisions

Before the new statute, you were always subject to the opposing party who had agreed to apply NC law being able to squirm out of its commitment.  The opposing party could do that by saying that North Carolina was improperly chosen as the State’s law which should apply — because the dispute does not bear a "reasonable relation" to this State, or could also argue that the application of North Carolina’s law would violate a "fundamental policy" of the State whose law would apply in the absence of the choice of law provision (call that the "public policy exception") .

Those arguments have long been recognized by NC appellate courts. See below 

The new statute does away with those types of attacks on a choice of law provision. It says that parties to a business contract may agree that North Carolina law will govern their relationship:

whether or not any of the following statements are true:

(1) The parties, the business contract, or the transaction that is the subject of the business contract bear a reasonable relation to this State.

(2) A provision of the business contract is contrary to the fundamental policy of the jurisdiction whose law would apply in the absence of the parties’ choice of North Carolina law.  

N.C. Gen. Stat. §1G-3(a)(emphasis added).

The approach of the new statute is directly contrary to what the widely accepted doctrine is on the validity of an agreement to apply the law of a particular State.  The North Carolina appellate courts have long followed the principles set out by the Restatement (Second) Conflict of Laws §187. See, e.g., Behr v. Behr, 46 N.C. App. 694, 266 S.E.2d 393 (1980); Cable Tel Services, Inc. v. Overland Contracting, Inc., 154 N.C.App. 639, 574 S.E.2d 31 (2002). The Restatement says that choice of law should be deemed invalid for the reasons that are permitted in the new statute.  It says that a choice of law provision should not be applied if:

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of [section] 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Restatement (Second) Conflict of Laws §187.

Why Did We Need This Statute?

Did North Carolina need its Legislature to intrude in this area of the law?  According to the Business Law Section of the North Carolina Bar Association, there were "many sound reasons" for the legislation.  Those are detailed in a Report from the Legal Opinion Committee of the Business Law Section.

They seem to boil down to making North Carolina more "business friendly."  The report says:

The General Assembly’s enactment of statutes that give effect to choice of North Carolina law and forum provisions in business contracts will enhance the perception of North Carolina as a business friendly state. Businesses are attracted by such freedom and clarity, and the proposed legislation will provide certainty to businesses and the attorneys who counsel them as to the applicability of North Carolina law and the ability to have disputes resolved by North Carolina courts. Such legislation will, in effect, place North Carolina on an equal footing with states such as Delaware, New York, Illinois and California.

Report at 4.

Every one of the States mentioned in the Report have legislated that choice of law provisions are valid even if the matter has "no reasonable relation" to that State.  Delaware’s statute is here, New York’s is  here, Illinois’ is here, and California’s is here.

Will this statute be enough to make North Carolina the choice of lawyers as the State within which to incorporate, or whose law to choose, as opposed to Delaware?  Or New York, Illinois, and California? I doubt it, but it is probably at least a step in that direction.

But none of the four States mentioned in the Report have included in their statute a provision rejecting the public policy exception.

Effective Date And A Question

Drafters of business contracts don’t need to do anything to revise previously drafted choice of law provisions.  The new statute says that it "is effective when it becomes law and applies to business contracts entered into before, on, or after that date."

I have at least one question about the force of this statute.  Although the title of the statute professes to "validate choice of North Carolina law and forum [selection] provisions in business contracts," the operative provision of the statute does not use the word "validate" or to make any suggestion that they must be enforced. It says simply that the parties to a business contract "may agree" that North Carolina law will control their relationship. 

You will note that I did not discuss the "choice of forum" aspect of this statute at all.  The choice of law part was much more interesting to me.




I don’t usually write about decisions from the Delaware Court of Chancery because it’s rare for that Court to even mention North Carolina.  But a decision by that Court this week — in City of Providence v. First Citizens Bancshares, Inc., explicitly approves that Delaware corporations can, via a forum selection clause in their bylaws, specify that corporate law disputes be litigated in North Carolina courts.  So that decision is certainly worth note in this North Carolina-centric blog.

Here are the facts:  First Citizens Bank & Trust Company, which has banking branches all over North Carolina (and in 16 other states) and which is headquartered in NC, is a Delaware corporation.  The Court of Chancery dubbed it "FC North."  FC North announced on June 10th a merger transaction with First Citizens Bancorporation, Inc., a separate bank holding company incorporated and based in South Carolina ("FC South" to the Court). 

On the same day as the announcement of the merger, the FC North Board amended its bylaws to provide that (1) any derivative action against the corporation, (2) any claim for breach of fiduciary duty, (3) any claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, or (4) any claim governed by the internal affairs doctrine must be brought in the North Carolina Courts.  The full text of the bylaw is quoted in footnote 18 to the Court’s opinion.

In the course of the inevitable lawsuit stemming from almost every merger announcement, the City of Providence challenged the validity of the bylaw amendment.  It wanted to litigate in Delaware, not North Carolina.

Perhaps you are wondering whether a board of directors is free to revise its corporation’s bylaws without shareholder consent.  The Court of Chancery ruled on that issue a while ago, holding:

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders. . . . [A] change by the board [to the bylaws pursuant to 8 Del. C. § 109(a)] is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.

Op. at 9 (quoting Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013).

So, now the Court of Chancery confronted a new question.  As it put it, that question was "whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes."  Op. at 8.

The answer, as you can guess already, is yes, a Delaware board may dictate that disputes over Delaware corporate law matters involving its corporation must be litigated in a non-Delaware court.

The Chancery Court rejected the argument that FC North’s directors, all based in North Carolina, were self-interestedly trying to tilt the playing field in their favor.

This was perhaps the point at which the Court of Chancery might have lavished praise upon the quality of the Courts in North Carolina, their unbiased nature, and their judicial prowess.  But it fell short of that mark, stating only that:

Providence has not provided any well-pled facts to call into question the integrity of the federal and state courts of North Carolina or to explain how the defendants are advancing their ‘self-interests’ by having their approval of the proposed merger adjudicated in those courts as opposed to the courts of Delaware.

Op. at 14.

A law professor at Widener University School of Law was more provincial in his outlook.  He was quoted in a news article as saying:

One of the better arguments for a presumption that courts of the state of incorporation will handle internal affairs disputes is that those courts are more experienced in the matter and are the ultimate source of definitive legal rulings.

That’s not to say that courts of other states can’t ever do a decent job, but a bylaw that systematically moves litigation from the courts of the state of incorporation to some other jurisdiction doesn’t exactly advance the policy argument just noted.


Moreover, as far as the alleged self-interest of the directors in amending the bylaw at the same time as their announcement of the merger, the Court noted that the bylaw did not mean that "the proposed merger will . . . be absolved from judicial review" it meant only that any review "must occur in a North Carolina court."  Op. at 21.

In fact, the Court pretty much saw the timing issue as irrelevant.  It said "[t]hat the Board adopted [the bylaw change] on an allegedly ‘cloudy’ day . . . rather than on a ‘clear’ day is immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in this timing."  Op. at 21.

If you are expecting the case challenging the merger of FC North and FC South to pop up in the Business Court, that seems unlikely.  The forum selection provision that was challenged makes the Eastern District of North Carolina the designated forum unless that court lacks jurisdiction or the corporation consents in writing to an alternative forum.

Note to North Carolina corporate lawyers forming Delaware corporations which will be headquartered in North Carolina  (of which there must be hundreds): consider including in the bylaws a forum selection provision specifying that disputes be litigated in the North Carolina courts.

Everybody loves a penguin, or at least I think that is so.  But Penguin Toilets, the Defendant in Roth v. Penguin Toilets, LLC, 2011 NCBC 45, can’t be loving the result it got on its Motion to Dismiss, which was denied in the Business Court by Judge Murphy on Wednesday.

The Motion to Dismiss was based on Penguin’s argument that litigation against it had to be brought in Michigan and that North Carolina was therefore an improper venue.  This was premised on a forum selection clause in the LLC’s operating agreement which said that:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

I don’t know why even a penguin would choose to litigate in Wayne County, which boasts of being the home of the City of Detroit, over the North Carolina Business Court, but Wayne County is where Penguin has its headquarters, so that provides some explanation.

Roth was the former President of Penguin.  He had sued Penguin after his termination, claiming violations of the terms of his Employment Agreement.  He was also a member of the LLC.  Penguin said that venue was improper in North Carolina because of the forum selection clause in the Operating Agreement, although there was no forum selection language in the Employment Agreement.  Judge Murphy held that the terms of the Operating Agreement had not been incorporated by reference into the Employment Agreement and that the lawsuit was about the obligations owed to Roth under his Employment Agreement, not his rights as an LLC member.

Judge Murphy ruled that the clause would not be enforceable even if had been properly incorporated into the Employment Agreement.  North Carolina will only dismiss a case based on a forum selection clause if the clause is mandatory as to where the case must be filed.  That has been the ruling of the NC Court of Appeals before, in Mark Group Int’l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  Although the Penguin clause specified that "any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan," that language wasn’t "mandatory" enough. 

You might think that the word "shall" is equivalent to "must," and therefore mandatory, but the word "shall" is falling into disfavor as a command.  The Committee drafting the Restyled Rules of Federal Evidence, which became effective yesterday, dropped the use of that word in a number of the Restyled Rules. The Committee on Rules of Practice and Procedure said:

‘shall’ is no longer generally used in spoken or clearly written English. The restyled rules replace "shall" with ‘must,’ ‘may,’ or ‘should,’ depending on which one the context and established interpretation make correct in each rule.

See here. at 29.  Words like "exclusive," "sole," or "only" are the magic words that will carry the ball across the line for an enforceable forum selection clause, as the NC Court of Appeals noted in the Mark Group case.

So what’s this Penguin to do?  Leave some of that Michigan winter gear at home and resign itself to litigating in North Carolina.  Keep selling the Penguin toilets with overflow protection it offers from its headquarters in Michigan.  And work on revising that forum selection clause so it will stick the next time.  There’s pretty clear guidance now about the words that it takes. 

Oh, and don’t forget about N.C. Gen. Stat. §22B-3,  which makes a forum selection clause unenforceable if it requires litigation outside of North Carolina and it’s "in a contract entered into in North Carolina."  That type of forum selection clause is against North Carolina’s public policy, per the statute.  Roth presumably didn’t enter into the Employment Agreement in North Carolina so that statute wasn’t an issue in the case.




The North Carolina Court of Appeals sent a pretty clear message last Tuesday  to out of state citizens filing claims for alienation of affection in North Carolina courts.  The message was don’t file your lawsuit here, even though North Carolina is one of the few states in the country that hasn’t abolished that tort.

The case was Bell v. Mozley.  Mr. Bell, a resident of South Carolina, sued Mozley, another South Carolina resident, for alienating the affections of Bell’s wife, and engaging in criminal conversation with her.  Mozley conceded having had sex with Mrs. Bell in a number of states, but denied having done so in North Carolina.  in fact, there was little evidence of any contact between them in North Carolina.

The trial judge denied the motion to dismiss for lack of jurisdiction, ruling that North Carolina had an "especially great" interest in providing a forum for a cause of action that had been abolished in South Carolina.  Judge McCullough, writing for the COA, took a distinctly different view.  He said, in reversing the trial judge and ordering dismissal of the case for lack of jurisdiction, that the decision of Bell to sue in North Carolina "smacks of forum-shopping."

i doubt there are many readers of this blog who concentrate their practice in alienation of affection cases  So beyond that small group, what’s in this case for the you business litigators?    Not much, really.  But there’s a good covenant not to compete case coming tomorrow, so stay tuned.

Yesterday, the United States Supreme Court delivered two of its most significant opinions on  the subject of personal jurisdiction in nearly twenty-five years (since Asahi Metal Ind. Co. v. Superior Court of California, 480 U.S. 102(1987)).  The new cases are J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Dunlop Tires Operations, S.A. v. Brown. (linked below)

In Goodyear, Justice Ginsburg authored a unanimous opinion in which the Court reversed a decision by the North Carolina Court of Appeals which she said had "confused" or incorrectly "blended" jurisdictional principles.  The plaintiffs in Goodyear were the parents of two young soccer players who had been killed in a bus accident in France.  Tires manufactured by Goodyear’s Turkish subsidiary  were the alleged cause.

The foreign subsidiaries had lost a motion to dismiss made on jurisdictional grounds in the trial court, which had been affirmed by the North Carolina Court of Appeals.  The NC Supreme Court denied a petition for discretionary review, but the Supreme Court accepted certiorari

The Supreme Court reversed, disagreeing with Judge Ervin’s conclusion that the sale by the subsidiaries of thousands of tires to North Carolina customers supported a finding of general jurisdiction over them because they had "purposefully injected [their] product into the stream of commerce" without excluding North Carolina from that distribution.  To him, this meant that they had "purposefully availed themselves of the protection of the laws of this State."  681 S.E.2d at 68-69. 

He had concluded that stream of commerce analysis can support a finding of general jurisdiction, necessary because the injury to the soccer players hadn’t flowed from the NC sales.

Justice Ginsburg said that the "attenuated connections" to North Carolina fell "far short" of the "’continuous and systematic general business contacts’ necessary to empower North Carolina to entertain suit against them on claims unrelated to anything that connects them to the State."

That ruling seems pretty clear, but the companion decision in J. McIntyre clouded things.  It is a fragmented opinion, with Justice Ginsburg this time in the dissent, Justice Breyer concurring, and Justice Kennedy (joined by the Chief Justice and Justices Scalia and Thomas) delivering the plurality opinion.

J. McIntyre had been more deliberate about the sales of its metal recycling machinery in the United States than Goodyear had been for its tires.  J. McIntyre had an affiliated Ohio-based distributor which handled the U.S. sales it had deliberately sought, and it had attended numerous trade shows in the U.S., and it had sold at least one machine in New Jersey, to Nicastro’s employer.  The injury to Nicaastro, which involved the severing of four fingers on his right hand, had occurred in New Jersey.

 The New Jersey Supreme Court considered in its opinion the Supreme Court’s conflicting opinions in Asahi on how the stream of commerce analysis fits into the personal jurisdiction paradigm (the competing opinions in that case, one by Justice O’Connor and one by Justice Brennan, are discussed by Justice Kennedy in his plurality opinion), and held:

that a foreign manufacturer that places a defective product in the stream of commerce through a distribution scheme that targets a national market, which includes New Jersey, may be subject to the in personam jurisdiction of a New Jersey court in a product-liability action

Justice Kennedy, in the plurality opinion, disagreed, stating that "as a general rule, the exercise of judicial power is not lawful unless the defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’"  It was not enough to the plurality that J. McIntyre had targeted the entire United States as a market and that it perhaps should have foreseen sales in New Jersey.  Forseeability is not the test.  As Justice Kennedy held:

[t]his Court’s precedents make clear that it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.

Plurality Op. at 8.

It’s hard to assess where jurisdiction stands over foreign entities which  sell some product in various areas of the United States.  The availment of a state’s laws must certainly be "purposeful," which isn’t a new concept.  It was first articulated by the Supreme Court in Hanson v. Denckla, 357 U.S. 235 (1958).  Justice Ginsburg said that the majority:

turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it.

Dissenting Op. at 2.  She said that the majority took "a giant step away from the notions of fair play and substantial justice" imbedded in the notion of the "minimum contacts" necessary to support a finding of personal jurisdiction. 

You can find deeper analysis of these two important Supreme Court opinions at the Civil Procedure & Federal Courts Blog.  There’s a lot more to be said about their impact.   They will be confounding those teaching Civil Procedure in our law schools for the next twenty years.  Certainly as much as Asahi did

The Court of Appeals on Tuesday of last week, in Speedway Motorsports Int’l Ltd. v. Bronwen Energy Trading, Ltd., unwound a year old decision by the Business Court. In that decision, Judge Diaz had ruled that a Defendant bank which had issued a letter of credit was bound to litigate in Switzerland a crossclaim involving the letter of credit. The judge dismissed the claims against the Bank, relying on a choice of forum clause specifying that litigation would take place in Geneva.  The forum selection clause was contained in a secondary guarantee of amounts drawn on the letter of credit, a guarantee to which the Bank was not a party.

The Business Court had found the third party claims to be closely related to the letter of credit transactions that were at issue and therefore subject to the Swiss forum selection clause.  Judge Diaz based his decision partly on cases where a non-signatory to an arbitration agreement was held to be obligated to arbitrate.

The Court of Appeals went off in an entirely different direction, referencing its 1981 decision in Sunset Invs.,  Ltd. v. Sargent, 52 N.C. App. 284, 278 S.E.2d 558, disc rev. denied, 303 N.C. 550, 281 S.E.2d 401 (1981).  In Sunset, the Court said that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

This "basic principle" is known as the "independence principle" or the "autonomy principle."

The Court of Appeals said that it was "unwilling to risk undermining letter of credit transactions."  It said that given the need for certainty and speed of payment under letters of credit, "it is important that the law not carry into letter of credit transactions rules that properly apply only to secondary guarantees or to other forms of engagement."

The same principle led to another opinion in the same case issued the same day in which the Court of Appeals ruled that there was no personal jurisdiction over the letter of credit issuer in spite of its "incorporation by reference" of the document containing the forum selection clause.  So the Bank still prevailed on its jurisdiction-based motion to dismiss.  It didn’t have to defend the claim against it in North Carolina.

So, it seems clear that to draft a forum selection clause binding the issuer of a letter of credit, the drafter must make the clause part of the letter of credit itself.

The Fourth Circuit ruled today in Albemarle Corp. v. AstraZeneca UK Ltd. that it was required to interpret the forum selection clause negotiated by the parties under English law, which meant that the clause would be read as requiring litigation to be brought in an English court, even though the clause would have been  deemed permissive under American law and would have allowed the lawsuit at issue to be filed in the South Carolina court where it had in fact been filed.

The contract, which required AstraZeneca to buy an ingredient for an anesthetic from Albemarle, contained a forum selection clause which said that the contract "shall be subject to English Law and the jurisdiction of the English High Court."

In affirming the dismissal of the case, the Fourth Circuit aligned itself with six other circuits and held that "a federal court interpreting a forum selection clause must apply federal law in doing so."  Federal law on this subject is that ‘an agreement conferring jurisdiction in one forum will not be interpreted as excluding jurisdiction elsewhere unless it contains specific language of exclusion.’"

English law?  In this case it is as different from federal law as my breakfast this morning was from bangers and mash.  ‘"Under English law, when the parties designate the English High Court as an appropriate forum, the designation is mandatory and exclusive."  Thus, litigation in the High Court was required per English law.

The only issue remaining for the Court was whether it would be unreasonable to enforce the English forum selection clause, an inquiry required by a 1972 Supreme Court decision, The Bremen, 407 U.S. 1 (1972).  In The Bremen, the Supreme Court upheld an English forum selection clause "in the light of present-day commercial realities and expanding international trade" unless it could be shown that such enforcement might violate "a strong public policy" of the unselected forum in which the case had been brought.

In the Albemarle case, Judge Niemeyer rejected the argument that South Carolina had a strong public policy against the enforcement of forum selection clauses because of a state statute disfavoring such clauses.  Quoting The Bremen, he said that the federal policy enforcing such clauses made them "an almost indispensable precondition  to achievement of the orderliness and predictability essential to any international business transaction."  Id. at 13-14.

The North Carolina Business Court has previously enforced a forum selection clause specifying a foreign jurisdiction in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct. Feb. 18, 2009) (Diaz).



The Business Court held today in Armacell v. Bostic that it had personal jurisdiction over an Italian company, L’Isolante, which hired a scientist, Bostic, away from a competitor.

The Plaintiff claimed that the hiring violated Bostic’s non-compete agreement, and that Bostic had also stolen "thousands of data files containing sensitive proprietary information and trade secrets."

The Business Court rejected the argument of L’Isolante that it was not subject to personal jurisdiction, finding that the Italian company had (1) pursued and offered employment to Bostic in North Carolina, (2) had obtained a legal opinion from its North Carolina counsel about the enforceability of Bostic’s non-compete agreement, (3) tasked Bostic with supporting, from North Carolina, L’Isolante’s research and development efforts, (4) worked directly with Bostic in North Carolina after he was hired, and (5) shipped samples of product to North Carolina.

The Court found these contacts to be "direct and strong," and that L’Isolante "had fair warning that these activities might subject it to the jurisdiction of North Carolina."  Judge Tennille also held that "North Carolina’s interest in exercising jurisdiction over L’Isolante is substantial.  This case involves the alleged theft of a large amount of trade secrets from a North Carolina company, with injury felt in North Carolina."

At his deposition, Bostic pled the Fifth Amendment about his alleged theft.  In an earlier opinion, the Business Court drew an adverse inference from Bostic’s refusal to testify, and entered a preliminary injunction.

Brief in Support of Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

This case from the North Carolina Business Court involves the world’s 29th richest man, the City of Detroit, and a $55 million default judgment.  Oh, and airplanes too.  Big ones.

All this and more was discussed in the Business Court’s decision today in Deutsche Bank Trust Company Americas v. Tradewinds Airlines, Inc.2009 NCBC 12 (N.C. Super. Ct. April 29, 2009). 

The $55 Million Default

The saga began when TradeWinds, an air freight carrier, obtained an entry of default against C-S Aviation in August 2004.  C-S was once the world’s largest lessor of A300 aircraft, and had leased planes to TradeWinds. 

The entry of default was obtained jointly by TradeWinds, its sole shareholder, TradeWinds Holdings, and another company, Coreolis Holdings.  The three parties did not pursue a default judgment.

Four years passed.  TradeWinds by then had been sold.  Its new owners included the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit. 

TradeWinds learned that the plaintiff in a New York lawsuit had pierced the corporate veil of C-S Aviation.  That was a worthwhile endeavor.  The shareholders of C-S Aviation are George Soros, who Forbes Magazine says is the 29th richest man in the world (the "S"); and Purnendu Chatterjee, also a "wealthy individual," according to the Court (who is the "C.")

TradeWinds decided to pursue a big payday.  It moved in April 2008, without TradeWinds Holdings or Coreolis, to secure the missing default judgment.  It obtained that on June 27, 2008.  The judgment was a whopper: $54,867,872.49.  The very next day, TradeWinds filed suit in the Southern District of New York against Soros and Chatterjee to recover the $55 million.  A month later, TradeWinds filed for bankruptcy protection in Florida in what the Court described as an apparent effort to "shield" the default judgment.  Op. ¶73.

The Motion To Set Aside

Coreolis and TradeWinds Holdings didn’t appreciate being left out of this potential multi-million dollar recovery.  They filed a motion in the Business Court to be added as beneficiaries of the judgment.  By then, C-S had moved to set aside both the entry of the default and the default judgment in the Business Court based on service of process, personal jurisdiction, and "extraordinary circumstances."

Judge Tennille deferred ruling on the Motion, noting the multi-state litigation pending concerning his default judgment, including a Bankruptcy Court stay.  He said "like aircraft lined up for departure, the litigation involving TradeWinds is stacked up on the taxiway awaiting clearance for takeoff."  Op. ¶2.  The Court didn’t make any definitive ruling in the case because of the Bankruptcy Court stay, but stated what it was likely to do once the stay was lifted.

Service of Process

C-S, a Delaware corporation, claimed that the service of the Third Party Complaint was invalid because Delaware law (8 Del. Code §321) requires in-person delivery of service on a Delaware corporation.  TradeWinds had served C-S by certified mail addressed to C-S’ registered agent, CT Corporation, which C-S contended was inadequate.  That was perfectly valid service under Rule 4 of the North Carolina Rules of Civil Procedure.

Judge Tennille ruled that the argument of C-S was "unpersuasive," and that "the local law of the forum determines the method of serving process and of giving notice of the proceeding to the defendant."  Op. ¶36.  North Carolina law therefore controlled the question of service of process.

The Judge further held that he could look to Delaware substantive law "to decide whether the party is properly qualified as an ‘agent’ to receive service of process," but that he was "not bound by Delaware’s restrictions on the manner in which service on a duly qualified agent must be conducted."  Op. ¶36, 39.

C-S further quibbled that the Affidavit of Service filed electronically with the Business Court didn’t show a signature reflecting receipt.  The return receipt in the paper file at the Guilford County Superior Court did have the missing signature, however, and Judge Tennille held that the statute permitted him to consider not only "the attached registry receipt" but also "other evidence satisfactory to the court of delivery to the addressee."  Op. ¶51; N.C. Gen. Stat. §1-75.10(a)(4)b.

Personal Jurisdiction

The jurisdictional question turned on N.C. Gen. Stat. Sec. §1-75.4 which permits jurisdiction if there has been "solicitation or services activities . . . carried on within this State by or on behalf of the defendant."  C-S said it hadn’t solicited TradeWinds in North Carolina, and that it was actually TradeWinds that had initially approached it. 

The Court said that this made no difference, holding that "C-S Aviation negotiated a contract for the leasing of aircraft, made assurances about the aircraft engine performance, induced TradeWinds to enter into the contract, maintained an ongoing relationship with TradeWinds, renegotiated the agreement that resulted in better leasing terms for TradeWinds, and delivered the aircraft to TradeWinds in North Carolina. . . . C-S Aviation directed its efforts toward TradeWinds, who, while operating out of a North Carolina airport, was a North Carolina resident."  Op. ¶68.

Jurisdiction was therefore proper in North Carolina.

Default Judgment

It doesn’t appear that the default judgment will stand.

Judge Tennille observed that he had the power under Rule 60(b)(6) to set aside a default judgment if "(1) extraordinary circumstances exist, (2) justice demands the setting aside of the judgment, and (3) the defendant has a meritorious defense." 

Although the Court didn’t set aside the default judgment, it said that it was likely to do so once the bankruptcy court stay was lifted, based on the following:

  • The sheer size of the award itself was "an extraordinary circumstance in favor of setting aside a default judgment."
  • There were "significant procedural irregularities with respect to the Entry of Default and the Default Judgment." 
  • Although the entry of default was entered on behalf of three parties, only TradeWinds sought and obtained the default judgment.

Op. ¶¶71-72.  The Court concluded that "[a] full hearing on damages with all affected parties represented and participating would provide a more just resolution than the procedural gamesmanship now being employed."  Op. ¶73.  

The Court further expressed concerns about what it described as a "lack of transparency on the part of TradeWinds, particularly its failure to disclose the divergence of interests between TradeWinds and the other parties to the Entry of Default."  Op. ¶73.

Today, the North Supreme Court made it clear that there can be personal jurisdiction over a corporate officer even if his only contacts with the state were in  his capacity as a corporate officer.

The case is Saft America, Inc. v. Plainview Batteries, Inc.The opinion reverses the April 2008 decision of the Court of Appeals, which had ruled in a split decision that the officer didn’t have sufficient minimum contacts with North Carolina to justify jurisdiction because he had no contact with the state in his "individual capacity."

The Supreme Court opinion is unfortunately a per curiam ruling, so it simply adopts without discussion the analysis of the dissenting opinion in the Court of Appeals.  The key portion of that opinion, by Judge Arrowood, read as follows:

In sum, under North Carolina precedent the determination of whether personal jurisdiction is properly exercised over a defendant does not exclude consideration of defendant’s actions merely because they were undertaken in the course of his employment. In particular, the corporate actions of a defendant who is also an officer and principal shareholder of a corporation are imputed to him for purposes of deciding the issue of personal jurisdiction. On the other hand, personal jurisdiction cannot be based solely on a defendant’s employment status as the agent or officer of a company with ties to North Carolina, or on personal connections to North Carolina that fall short of the requisite "minimum contacts."

The contacts relied upon by the Court of Appeals dissent were that the corporate officer had been the plaintiff’s primary contact with the corporate defendant, he had traveled to North Carolina to visit the plaintiff’s facility, he had submitted purchase orders on behalf of the corporate defendant. and he had been personally involved "in negotiating and carrying out the contracts that gave rise to the instant lawsuit."

As Judge Arrowood put it in the opinion adopted by the Supreme Court, it does not "correctly state the law in North Carolina" that "actions taken by an individual in the course of his employment or in his ‘official’ capacity do not ‘count’ as part of a defendant’s contacts with the forum state."