Professional Responsibility

It’s not very often that I see a fee application in a settled class action in the Business Court that doesn’t strike me as requesting approval of an overpayment for a less than successful result.  Those are most often in the settlement of merger class action in which the only benefit for the class was the extraction of additional disclosures in a proxy statement.

But last week, looking at the Order approving a class action settlement and a fee petition in Elliott v. KB Home North Carolina, Inc., 2017 NCBC 37, I had exactly the opposite reaction.  It was an excellent result for the class members, and the nearly $2 million in attorneys’ fees approved by the Business Court were well earned.

I’ve written about the Elliott case three times: The class was certified by Judge Jolly in 2012.  Judge Jolly ruled later that KB Home had waived its right to compel arbitration of the claims.  After Judge Jolly’s retirement, Judge McGuire ruled that he could modify the membership of the previously certified class due to a change in circumstances.  The class members are homeowners in North Carolina living in houses built by KB Home.  The houses were constructed with siding manufactured by HardiePlank that did not have a weather restrictive barrier (a WRB) behind the siding.  The houses were then damaged by water infiltration.

This is not a settlement where the class members receive something like coupons towards a future home purchase.  Instead, there is real and substantial money being paid to them.  Depending on the square footage of their homes, class members who are current homeowners can be paid between $6500 and $17,000.  In the alternative, these class members can have their existing siding and replaced with new HardiePlank, this time with the missing WRB.

There is also a subclass of class members who have already sold their homes.  These subclass members are entitled to receive either a lump sum payment of $3250 or to prove that the selling price of their home decreased due to the lack of a WRB.  This type of recovery is capped at $12,000.

There is no doubt that the lawyers worked hard to achieve this result, as detailed in the Affidavit of lead counsel in support of the fee petition.  They filed or responded to twenty-seven briefs in the trial court and eight briefs in the appellate courts.  They reviewed 46,000 pages of documents produced, and they took or defended or attended forty-four depositions in five states.  Fee Affidavit ¶41.

Judge McGuire wrote in glowing terms of the qualifications of class counsel.  He said that they had "decades of experience litigating construction product defect cases on an individual, multi-family, and class basis."  He called one of the lawyers "one of the nation’s most respected and experienced attorneys in these areas."  Order ¶37.

As a part of the settlement agreement, the Defendants agreed that they would not oppose a request for fees and expenses not to exceed $1,925,00.  That is exactly the amount requested by Plaintiffs’ counsel: including $148,493.61 in out-of-pocket expenses and $1,776,506.39 in attorneys’ fees.

That fee amounted yielded an "implied hourly rate" of $337.28 (based on 5,267 hours of work), which was approved as reasonable by Judge McGuire. Order ¶¶40-41.  That hourly rate is within the ranges previously approved as reasonable by the Business Court — like $325.04 per hour in Corwin v. British Am. Tobacco PLC, 2016 NCBC 14 at *15 and between $300 and $500 per hour in Nakatsukasa v. Furiex Pharms., Inc., 2015 NCBC 71 at *24.

I have a hard time reconciling this fee petition to the one from the lawyers representing the class in the Ehrenhaus case (which challenged the merger years ago between Wachovia and Wells Fargo).  The Ehrenhaus lawyers asked for $1,975,00, almost the same as the request by the Elliott lawyers ($1,925,000).  But the Ehrenhaus lawyers obtained nothing of value for that class.  Also, they did not bother to submit any records regarding the hours worked on the case, other than to claim having spent 2300 hours on the case (less than half of the 5267 hours spent by the Elliott lawyers).  They took four depositions (the Elliott lawyers took forty-four) and reviewed 9,500 pages of documents (far less than the 46,000 obtained by the Elliott lawyers).  The Ehrenhaus settlement, moreover, came just a couple of months after the lawsuit was filed.  The Elliott lawyers worked their case for eight years.

The Ehrenhaus fee petition of $1,975,000 ended up getting chopped down by Judge Diaz of the Business Court by nearly half (to $1 million).

The attorney for the Plaintiff in Foster Biodevice, LLC v. Cantrell. 2016 NCBC 51 said that he was only making a limited appearance, but the Business Court (through new Business Court Judge Robinson, in his first Opinion for the Court) wasn’t buying the limited nature of the appearance.

Plaintiff’s counsel had previously obtained an Order from Judge Bledsoe permitting him to withdraw as counsel for Foster Biodevice.  He then appeared in the case and filed a Voluntary Dismissal of the case Without Prejudice after his withdrawal.  He stated in the Voluntary Dismissal that he was "making a limited appearance . . . for the sole purpose of filing this Notice of Limited Appearance and Voluntary Dismissal Without Prejudice."

Limited Appearances Are Allowed Under The Revised Rules Of Professional Responsibility

The Revised Rules of Professional Conduct of the North Carolina State Bar permit limited appearances.  Rule 1.2(c) says that “[a] lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances.” in a "Formal Ethics Opinion," the State Bar said that the ability of an attorney, in a litigated matter, to make a “limited appearance” is subject to the "rules of the tribunal."  99 FEO 12, Inquiry No. 3.

Judge Robinson rejected the "limited appearance," saying that he "deem[ed] Plaintiff’s counsel to be . . . counsel of record for Plaintiff in this matter, at least with regard to proceedings in this Court, subject to all of the responsibilities of counsel of record."  Op. ¶25.

Judge Robinson pointed out that there was no Rule (either in the Business Court Rules, the Rules of Civil Procedure, or the Rules of General Practice) "that would permit a limitation of responsibility under these circumstances."  Op. ¶25.

Judge Robinson also looked to Rule 16 of the General Rules of Practice, which says that "[n]o attorney who has entered an appearance in any civil action shall withdraw his appearance, or have it stricken from the record, except on order of the court."  Op. ¶25

Was This Plaintiff Entitled To Take A Voluntary Dismissal?

Beyond the issue of the attempted "limited appearance," Judge Robinson dealt with the issue of whether the Plaintiff was entitled to file a voluntary dismissal of its case.  The answer ordinarily depends on whether the party taking the dismissal has "rested its case."  The Business Court explored that question recently.

In the case before Judge Robinson, the question was slightly different.  Another restraint on taking a voluntary dismissal applies when the opposing party has made a claim for affirmative relief arising out of the same transaction which is the subject of the attempted dismissal.  The Defendant here had asked in its prayer for relief (though not in a counterclaim) for a declaratory judgment  that it was the owner of the intellectual property which was at issue in the Complaint.

That prayer for relief wasn’t enough for Judge Robinson to deny the Plaintiff the right to take a voluntary dismissal.  He said that it was nothing "but a standard request that the Court deny Plaintiff’s requested relief."  Op. ¶25.

Since Judge Robinson allowed the voluntary dismissal without prejudice, does it make any difference that Plaintiff”s counsel must remain as Plaintiff’s counsel of record?  Probably not, since there is no longer a case in which that lawyer is required to appear.

Though it might make no difference to the attorney for Foster Biodevice, the ruling should cause all lawyers to consider whether they can limit the scope of their responsibility in a particular case and state that they are making a limited appearance.  They may find themselves committed more deeply than they had anticipated.

Coincidentally, yesterday I saw lawyers file Notices of Appearances in the Business Court in three related cases on a limited basis, in which they said they are appearing solely to deal with one particular Motion.  That limitation may not work for them, although that case is not before Judge Robinson.

Judge Robinson Finally Joins The Court

You’ve known for a long time that Governor McCrory nominated Michael Robinson to be a Business Court Judge.  That happened over a year ago, back in March of 2015.  He was confirmed by the NC General Assembly on June 16th, and was sworn in as the newest Judge on the Business Court on July 1st.

Judge Gale has reassigned a number of the cases previously pending in the Business Court to Judge Robinson.  If you’ve got a case in the Business Court, you might want to check to see if your case has been reassigned to Judge Robinson.

Judge Robinson will be holding court in a new courtroom (which is not yet ready) at Wake Forest Law School in Winston–Salem.  For the time being, he will be sharing a courtroom and chambers  with Chief Judge Gale, in Greensboro.

 

Judge McGuire came down pretty hard on a Florida attorney admitted pro hac vice (meaning “for this one particular occasion”) by another Superior Court Judge, in McCarthy v. Hampton, 2016NCBC 4.  He revoked the lawyer’s admission and barred him from practicing law in North Carolina for the next two years.

What had this attorney done to warrant his expulsion from the North Carolina courts?  Judge McGuire said that:

Attorney McCarthy has not only engaged in a course of conduct that does not meet the standard expected of attorneys practicing in North Carolina courts, but that conduct has also delayed this action, caused unnecessary additional expense, and has generally frustrated this Court’s efforts to resolve the dispute.

Op. ¶16.

You might remember the McCarthy case from a post here in July, which involved the Plaintiff”s effort to squirm out a settlement reached during a mediation.  Judge McGuire rejected those efforts, saying:

“[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable.”  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)).

He also said “that Plaintiff now seems dissatisfied with the agreement reached does not render the [agreement] unenforceable.”  Order ¶30 (emphasis added).

If you want more specifics on what led to the revocation, last week’s ruling was prompted by actions by Plaintiff’s attorney which frustrated the conclusion of the settlement.  Those included:

  • Not telling Defendant’s counsel that the Plaintiff did not have the $155,000 necessary to fund his settlement obligation until five days after the due date for the payment had passed.
  • Not informing the Court of his client’s inability to pay the $155,000 until the Court had set a hearing on a Motion to Show Cause why the Plaintiff should not be held in contempt for not making the payment.
  • Refusing to participate in the appraisal process required by the Settlement Agreement mandating the valuation of real property owned by an LLC in which the parties shared an interest. That required a Motion by the Defendants, resulting in a further unpublished ruling directing the appraisal to proceed.
  • “Misrepresenting and obfuscating” that his client had filed a bankruptcy petition.  The attorney informed the Court that his client had filed for bankruptcy when the petition had not yet been filed.

You might be wondering whether Judge McGuire had the power to revoke McCarthy’s pro hac admission.  The Order admitting the attorney to appear in the NC case was granted by another Superior Court Judge, before the case was designated to the Business Court.

That is not one Superior Court Judge overruling another, because G.S. §84-4.2 says that a pro hac admission can be “summarily revoked” by the Court in its discretion. The NC COA has ruled explicitly that a state court judge may withdraw the pro hac privileges granted by another judge.  Smith v. Beaufort County Hospital Association, Inc., 540 S.E.2d 775 (N.C. App. 2000).

As for the two year ban on the attorney’s right to be admitted pro hac vice in North Carolina, it is likely to be far longer than that.  The statute setting forth the requirements for a pro hac admission (G.S. §84-4.1) says that the applicant must disclose a record of “all that attorney’s disciplinary history.”  Discipline is defined to include any “revocation of any pro hac vice admission.”  §84-4.1(6). There is no time limit on the disclosure of a revocation, so any Superior court Judge considering granting pro hac admission by this attorney will likely be hesitant to do so given this decision.

If you’ve noticed that haven’t written about the first three 2016 Opinions from the Business Court before this one that I haven’t  written about, you can attribute it to my not finding them interesting enough to write about plus a dose of laziness on my part.

 

 

In an (unpublished) Order last week in Griggs v. Bittersweet Farms, LLC, Judge McGuire ruled that Plaintiffs’ counsel’s instruction to his client not to answer certain deposition questions was improper.  He granted a Motion to Compel responses to the unanswered questions, denied a Motion for Protective Order to excuse the Plaintiffs from having to respond, and ordered the Plaintiffs to pay Defendants’ attorneys’ fees for the cost of Making the Motion to Compel.

Instructing a witness not to answer a deposition question is pretty much forbidden unless a privilege is at issue.  There are rules in almost all courts about this practice.

The Rules On Instructing A Witness Not To Answer

Rule 30 of the North Carolina Rules of Civil Procedure says that: "[s]ubject to any limitations imposed by orders entered pursuant to Rule 26(c) or 30(d), evidence objected to shall be taken subject to the objections."  NCRCP 30(c).  The italicized portion of the Rule has been interpreted to mean that counsel is prohibited "from instructing a witness not to answer where only an objection is proper."  Order ¶4

The federal rule is more specific.  It says that:

A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3).

FRCP 30(c).  It also says that: "An objection must be stated concisely in a nonargumentative and nonsuggestive manner."

The Business Court has a Rule dealing specifically with when you may instruct a witness not to answer a question.  That is Business Court Rule 18.3:

Counsel shall not direct or request that a witness not answer a question, unless that counsel has objected to the question on the ground that the answer is protected by a privilege or a limitation on evidence directed by the Court.

Business Court Rule 18.3(a).  The Business Court Rule also deals with "speaking objections," saying that "[c]ounsel shall not make objections or statements which might suggest an answer to a witness." BCR 18.3(b).  Objections are to "be succinct, stating briefly the basis of the objection and nothing more."  Id.

The Griggs’ Depositions

The questions which the witnesses in the Griggs case refused to answer fell into two categories.  The first was questions concerning the Plaintiffs’ net worth, which the Defendants said were relevant to the Plaintiffs’ ability to pay punitive damages if the Defendants succeeded on their counterclaims.  The basis for the refusal to answer those questions was that they were intended to "annoy, embarrass or oppress" the witnesses.  The second category of questions concerned a criminal proceeding pending against one of the Plaintiffs.

Judge McGuire said that he understood the Plaintiffs’ desire to avoid disclosing their personal financial information in what he said was "an acrimonious family lawsuit,"  (Order ¶4), but he said that the protective order protecting that information should have been sought "prior to, or at the very latest during, the depositions."  Order ¶4.

The NC Rules of Civil Procedure expressly permit counsel to seek a protective order in the midst of a deposition (it’s in Rule 30(d)), but I can’t imagine a Judge being instantly available to resolve such a dispute.  As far as seeking a protective order "prior to" a deposition, how can a lawyer prophesize in advance of a deposition what opposing counsel might ask that she would want to prohibit?

The effort of Plaintiff’s counsel to obtain a Protective Order was hurt by him waiting nearly seven months after the depositions to request it.  Given that the Motion to Compel involved depositions occurring on several different days, Plaintiff’s counsel could have moved for a Protective Order after the first deposition.

Attorneys’ Fees

In addition to granting the Motion to Compel, Judge McGuire ordered the Plaintiffs to pay more than $3,000 in attorneys’ fees for their misconduct..  Rule 37(a)(4) says that the Court shall award attorneys’ fees if it grants a Motion to Compel "unless the Court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust."

After finding that the opposition to the Motion to Compel was not "substantially justified, Judge McGuire awarded $3,312.50  in fees.  The individual Plaintiffs are responsible for half of the sanctioned amount, and their counsel is responsible for the other half.

 

There are probably some of you who lie awake at night wondering whether Leagalzoom’s offering of do it yourself lawyering products will be found to be the unauthorized practice of law (UPL) in North Carolina.

For those few of you, that uncertainty will continue.  At the end of last week, Judge Gale issued an opinion in Bergenstock v. Legalzoom.com, Inc., 2015 NCBC 49, dismissing a putative class action by Plaintiffs seeking to represent all North Carolina residents who purchased Legalzoom products or services.  The claims were for UPL, unjust enrichment, and violations of the North Carolina Unfair and Deceptive Trade Practices Act.  Op. ¶28.

The Judge dismissed the complaint, but he did not make a ruling as to Legalzoom’s business model, nor did he address the question whether its services constitute UPL.  The resolution of that issue will have to come in the still pending case brought by LegalZoom against the NC State Bar: LegalZoom.com, Inc. v. North Carolina State Bar.  See here for my last update on that case.

The reason for the dismissal in the Bergenstock case was the full faith and credit given to the settlement of a similar class action in 2012 in California (known as the Webster case).  Webster had sued Legalzoom on behalf of a nationwide class.

The Webster Settlement

The Webster settlement covered all claims:

asserted or that could have been asserted [in that case] arising out of the LegalZoom website, any materials available on or through the LegalZoom website . . . the unauthorized practice of law, or the purchase or use of documents prepared through LegalZoom.

Op. ¶17.

In consideration for the settlement, LegalZoom agreed to provide sixty days of free enrollment in its prepaid legal services Programs.  As Judge Gale described those Programs (known as the LegalZoom Legal Advantage Plus Program [for individuals] and the Business Advantage Pro Program [for businesses]), they involve:

services provided by licensed attorneys, including telephone consultations; review and written summary of legal documents; an annual legal checkup (which would be provided to Webster class members in the free sixty-day period), including a written summary and recommendations for legal documents and strategies; a ten percent discount on all LegalZoom products; access to the LegalZoom form library; electronic document storage; and a twenty-five percent discount on legal services not included under the Programs, but provided by a participating firm.

Op. ¶18.

The challenge presented by the Bergenstock putative class was that those Programs were not available in North Carolina.  (That is true, as the NC State Bar has refused to approve the Programs.  That refusal is the subject of litigation between the State Bar and LegalZoom.  Op. ¶20).  The Settlement dealt with members who did not live in states where those Programs were available by providing them with the lesser of (i) $75.00, or (ii) half of the current base price of the document that the class member had purchased from LegalZoom.  Op. ¶19.

The Bergenstock Plaintiffs said that they had not received due process in the Webster settlement because there was no counsel representing their interests and there was no named class representative who had interests in common with them.  They further argued that the California Court approving the settlement had not considered the adequacy of the alternative payment to the class members who did not have the LegalZoom payments available to them.  They asserted that the settlement was not entitled to full faith and credit as to them.

Full Faith And Credit To Class Action Settlements

The main road block faced by the Plaintiffs challenging the effect of the Webster settlement lies in a U.S. Supreme Court decision holding that:

a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996), under 28 U.S.C. § 1738 (2014).

The North Carolina appellate courts have accordingly held that courts should:

apply only a “very limited” scope of review when determining whether a foreign judgment is entitled to full faith and credit, with the inquiry limited to whether jurisdictional and due process considerations were “fully and fairly litigated and finally decided” by the court rendering judgment.

Op. Par. 32 (citing Boyles v. Boyles, 308 N.C. 488, 491, 302 S.E.2d 790, 793 (1983); Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 275–76, 664 S.E.2d 569, 581–82 (2008).

If the out-of-state court found  jurisdiction and due process to have been "fully and fairly litigated" and they were finally decided, a "North Carolina court extends full faith and credit without further inquiry."  Op. ¶32.

The Bergenstock Plaintiffs argued that the California court had not specifically considered the adequacy of the settlement amount paid to persons living in states where LegalZoom’s programs were not offered and that they therefore had not been afforded due process.

Judge Gale refused to accept that argument, holding that:

the record does not allow for this parsing of the settlement consideration. The full settlement consideration, including the consideration provided to the Alternative Payment Plaintiffs, was before Judge Highberger [the California Judge approving the settlement] for his review. The Court cannot infer that Judge Highberger failed to consider the adequacy of representation of or the adequacy of consideration for the Alternative Payment Plaintiffs merely because he did not make express findings in that regard. He made findings that the overall settlement was fair and reasonable and that the Settlement Class had been adequately represented. The Court then must conclude that the issues Plaintiffs now seek to litigate in this Court were fully and fairly litigated and finally decided by Judge Highberger.

Op. ¶41.

You will all recall the Business Court’s disqualification of a law firm from representing its longtime client, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27.  Now there is a second chapter to the disqualification, which came in an Opinion last week, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 35.

The disqualified law firm had asked Judge Bledsoe to clarify his Order disqualifying it from representing the Plaintiff Kingsdown.  That was due to the firm’s past representation of Defendant Hinshaw (the corporation’s CEO) on a personal basis in the transactions which were the heart of the lawsuit.

The law firm was not giving up its representation of its corporate client easily.  The Court’s disqualification Order said that the law firm was disqualified from "further representation of Kingsdown in this matter against the Hinshaws."  Op. ¶56.  How far did the prohibition of that Order really go?

The law firm argued that it should be allowed to continue in its role as Kingsdown’s regular corporate counsel and to advise Kingsdown on the litigation against Hinshaw without appearing as counsel of record, so long as it did not disclose any of the confidential information it had obtained in the course of its representation of Mr. Hinshaw.

Judge Bledsoe shot that argument down quickly.  He said:

To the contrary, the Court intended that the Firm would cease all representation of Kingsdown adverse to the Hinshaws in this matter, whether as litigation counsel or otherwise. The Firm’s failure to satisfy Rule 10(b) of the Rules of Professional Conduct and the appearance of impropriety created by the Firm’s representation of Kingsdown do not disappear simply because the Firm is no longer counsel of record – as corporate counsel, the Firm is still representing a current client (Kingsdown) adverse to a former client (the Hinshaws) in a substantially related matter, and the ethical concerns attendant to that representation, including the appearance of impropriety, remain.

Op. ¶15.

In other words, once a law firm is disqualified from representing a client in a litigation matter, it may not work "behind the scenes" or consult with, or give advice to that client regarding the matter.  Op. ¶16.

There was one last piece of its representation with respect to the lawsuit which the law firm tried to keep.  That was its representation of its corporate client in the claims it had brought against its former officer, Ray.  The firm argued that it had never represented Ray, that it had none of her confidential information, and that it should be allowed to be adverse to Ray.

Wrong, said Judge Bledsoe, who said that:

because the Firm’s representation of Kingsdown on its claims against Ray will require Kingsdown to take positions directly adverse to the Hinshaws on claims that are substantially related to the Firm’s prior representation of the Hinshaws, the Court concludes that the same considerations requiring disqualification of Tuggle Duggins in this matter adverse to the Hinshaws likewise require disqualification of the Firm in connection with Kingsdown’s claims against Ray.

Op. ¶20.

So it looks like this entire lawsuit is radioactive to the law firm, despite the law firm’s protestations that its client is being deprived of the counsel of its choice.  The Court responded to that point by saying that:

the right of one to retain counsel of his choosing is secondary in importance to the Court’s duty to maintain the highest ethical standards of professional conduct to insure and preserve trust in the integrity of the bar. Avoiding a conflict and the appearance of impropriety are the best solutions.

Opinion ¶21.

While you might think that the issue of the law firm’s involvement in this case is now over, this may not be the end of the disqualification saga.  The law firm, which was successful before its disqualification on its Motion to Dismiss the counterclaims made by Defendant Ray, has moved for sanctions against Ray.  That motion is pending.  I will report back on this when there is a ruling.  [Update:  New counsel for Kingsdown withdrew the Motion for Sanctions on April 30, 2015]

The Business Court on Wednesday disqualified  a law firm from representing its longtime corporate client in a lawsuit against the corporation’s former CEO and Chairman of its Board of Directors.

The basis for the ruling in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27 was that a partner in the law firm (now deceased) had represented the former CEO/Chairman of the corporate plaintiff (Hinshaw) on a personal basis in some of the transactions that were at issue in the lawsuit.

Hinshaw moved to disqualify the law firm over its protestations that its representation was permitted by Rule 1.10 of the Revised Rules of Professional Conduct.  If that Rule isn’t uppermost in your mind, it says that:

When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:

(1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and

(2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter. 

So, to succeed on his disqualification motion, Hinshaw had to show that he had an attorney-client relationship with a former lawyer at the firm, and that the matters on which he had been represented were the "same or substantially related to" the matters involved in the lawsuit  before the Business Court, and the law firm had the burden to show that it did not have access to material confidential information protected by Rules 1.6 and 1.9(c).

Attorney-Client Relationship?

Kingsdown contended that the law firm had never opened a client matter for Hinshaw, had never sent him an engagement letter, and had never been paid any money by Hinshaw.  Hinshaw, from his side, presented affidavit testimony that the law firm’s senior partner, since deceased, had often advised him personally. 

Some of the advice concerned his compensation from Kingdown and a transaction regarding a beach house owned by Hinshaw which he traded to Kingsdown for an undeveloped beach property owned by Kingsdown which Hinshaw then leased back to Kingsdown. 

Both of those matters — Hinshaw’s compensation from Kingsdown and the curious beach house deal — were at the front and center of Kingsdown’s lawsuit against Hinshaw for breach of his fiduciary duty.

Judge Bledsoe didn’t waste much of his opinion in finding "ample evidence" that Hinshaw could have "reasonably inferred" that he had an attorney-client relationship with the deceased partner, and therefore the law firm. Op. par. 30.

Confidential Information?

The law firm fought hard to show that none of its current attorneys had any of Hinshaw’s confidential information.  That was the lawyers’ burden to carry, per Ferguson v. DDP Pharmacy, 174 N.C. App. 532, 539, 621 S.E.2d 323. 328 (2005)(“The burden rests upon the law firm to prove the former attorney did not share any information about the former client with the remaining attorneys in the firm.”).  Op. ¶37.

The argument of the lawyers rested partly on an affidavit from a lawyer representing Kingsdown as to his review of his firm’s billing records.  The affiant stated that the records showed that none of the lawyers still at the firm had represented Hinshaw on the matters at issue in the lawsuit.  Other lawyers at the firm who had worked on Kingsdown matters presented affidavits stating that they were "not aware" of any of Hinshaw’s confidential information.

Judge Bledsoe found that insufficient.  He noted that the situation before the Court was not the usual paradigm presented by Rule 1.10 of an attorney leaving a law firm and taking a client’s files and records containing confidential information with her.  Here, the attorney who had personally represented Hinshaw had passed away and the law firm had continued in existence.  The Court held that:

the client’s files and confidential documents presumably remain at the Firm and are available to the other attorneys in the firm. As such, the Court concludes that the failure of the Firm to provide competent and persuasive evidence of the existence and whereabouts of these files, and the clients’ confidential documents and information that may be contained therein, is a significant factor in determining whether Kingsdown and the Firm have met their burden under Rule [1.]10(b).

Op. ¶46.

What could the law firm have done to persuade Judge Bledsoe that its lawyers did not have access to or knowledge of Hinshaw’s confidential information?  He didn’t say specifically, but wrote that Kingsdown had:

not brought forward competent evidence that the Firm has conducted a sufficient investigation of the Firm’s attorneys and files to ascertain whether the Firm has knowledge of [Hinshaw’s] material confidential information, or if such an investigation has been conducted, provided evidence of what the investigation involved, who and what was consulted, and what the investigation found.

Op. ¶44.

So, if you ever find yourself in the unenviable position of representing a corporate client against a former officer/director on transactions where a deceased partner was personally advising that individual, you now have somewhat of a road map to avoiding disqualification.

Appearance of Impropriety

The "overarching consideration" in considering a motion to disqualify is to "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification."  Op.  ¶48.

While  Hinshaw obviously had angst at being sued by the same law firm that he said had given him the advice that he claimed to have followed, the Court pointed out another significant concern that might create the "appearance of impropriety."

The law firm’s attorneys were likely to be witnesses in the lawsuit.  Judge Bledsoe pointed out that:

those attorney-witnesses may potentially face divided loyalties between their allegiance to the Firm and the defense of the Firm’s advice, on the one hand, and their duty of loyalty to, and zealous advocacy for, their clients, on the other, as that advice, and the parties’ actions in alleged reliance on that advice, comes under intense scrutiny.

Op. ¶52.

This Opinion was issued at the same time as another published opinion in the case, Kingsdown Inc. v. Hinshaw, 2015 NCBC 28  That decision — which I may write about tomorrow — concerns a motion to dismiss one of the Defendant’s counterclaims and third party claims.

 

It’s probably never a good idea to proceed without a lawyer in any Court, but if you are a non-lawyer and insist on proceeding pro se in the Business Court, don’t be defiant and obnoxious.  You will not like the result.

Two of the Defendants (JW Ray and Digi-Plus LLC) in a case called London Leasing LLC v. Arcus  terminated the counsel representing them and decided to proceed on their own.

They did that in a high-handed and arrogant way. When Plaintiff’s counsel called Ray to try to arrange a mediation, Defendant Ray told him that:

(1) neither Ray nor DigiPlus would attend any mediation in person, and would only attend by teleconference ‘so that the mediator could explain to Plaintiff how absurd or ridiculous Plaintiff’s claims are in this lawsuit;’

(2) neither Ray nor DigiPlus would offer any payment towards a settlement;

(3) neither Ray nor DigiPlus would hire replacement counsel;

(4) neither Ray nor DigiPlus would respond to any discovery requests;

(5) neither Ray nor DigiPlus would pay any judgment levied against them in the lawsuit; and

(6) neither Ray nor DigiPlus would participate in the lawsuit unless they were “arrested for criminal conduct.”

Order ¶6.

As you can imagine, the (unpublished) Order entered by Judge McGuire was not complimentary of this discourtesy.  He stated that these two Defendants had "openly flouted this Court’s [case management] order and the applicable North Carolina rules."  ¶14.

The relief granted by the Court in light of this rude behavior — after ruling that lesser sanctions would be inadequate given the "seriousness of the misconduct" (Order ¶15)  — was to strike the Answer of these Defendants and to enter default against them.

The only punishment not delivered by Judge McGuire was not noting that Ray was engaging in the unauthorized practice of law if he was also speaking on behalf of DigiPlus LLC.

 

Be sure that an LLC member has the authority to hire you before accepting the representation of the LLC in a suit by or against another LLC member.  That authorization generally requires a majority of the interest of the members, at least under the default provisions of the LLC Act, which apply in the absence of an Operating Agreement providing to the contrary.

But what if a 50% owner goes ahead and retains counsel to represent the LLC against her 50% co-owner, who does not consent to the representation?  That can only turn out badly, even if there is a written fee agreement signed by the 50% owner.

In Judge Bledsoe’s decision last week in Battles v. Bywater, LLC, 2014 NCBC 52, the Court found that one of the 50% owners of two LLCs which were defendants did not have the power to hire counsel for the LLCs, either under the default provisions of the LLC Act or the terms of the Operating Agreement of one of the LLCs.

There is nothing new in holding that one 50% member does not have the power to retain counsel for the LLC in a lawsuit against the other 50% member.   The Court of Appeals held seven years ago, in Crouse v. Mineo, 189 N.C. App. 232, 658 S.E.2d 33 (2007) that:

a fifty percent LLC member ‘lacked authority to cause [the LLC] to institute [an]  . . . action on its own behalf’ against the other fifty percent LLC member).

Id. at 239, 658 S.E.2d 37-38.

The Business Court rejected the Plaintiff’s argument that he, as a 50% owner of the LLCs, had the authority under the new LLC Act to hire counsel without the consent of his adversarial member. 

Judge Bledsoe struck all of the filings made in the case by the lawyers for the LLC, though "without prejudice to Defendants’ right to refile these or other legally supportable and permissible documents after retention of new counsel." Op. ¶52.

That’s an expensive ruling for the lawyers who had been retained without proper authorization to represent the LLCs.  They had represented to the Court that they were owed $85,000 in legal fees by the LLCs that they were disqualified from representing.

Apart from guidance from the Bywater case of the necessary approval of the LLC members for an LLC representation, the case also makes clear that a management deadlock is a valid basis for dissolving an LLC per G.S. §57D-6-02(2).

Deadlock was formerly mentioned specifically in the dissolution statute (in the former G.S. §57C-6-02(2)), but the revised act deleted any reference to "deadlock" as a basis for dissolution in G.S. §57D-6-02.

Judge Bledsoe found that since the statute now allows dissolution where "it is not practicable to conduct the LLC’s business," that this embraces deadlock.  He supported that conclusion with reference to the similar language of the Delaware LLC Act.  The Delaware Court of Chancery held in Fisk Ventures, LLC v. Segal, 2009 Del. Ch. LEXIS 7 (Del. Ch. 2009) that if:

a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.

Op. ¶19 (quoting Fisk Ventures at *12)

 

 

 

United States District Court Judge Catherine Eagles of the Middle District of North Carolina delivered an admonition last week to all of the lawyers with cases in her Court.

You can read the "text order" here, but she said it was prompted by a recent "rash of briefs"  that were out of compliance with the M.D.N.C.’s Local Rules.  The Order was entered in "most of the Court’s pending civil cases,"  even those in which offending briefs had not been filed.

She said that the Order was being entered "to assist counsel in avoiding future problems."

Examples of Local Rule requirements that she indicated are mandatory were:

spacing, margin, and font constraints [and] excessive or inappropriate use of footnotes designed to avoid page limits will not be allowed.

If you are not familiar with the Court’s "spacing, margin, and font constraints," they are contained in Local Rule 7.1:

The margin at the top of each page shall not be less than one and one-quarter inches, and bottom, left and right margins shall be set at not less than one inch. Typewritten documents shall be double spaced.

All pleadings, motions and other original papers filed with the Clerk shall be in a
fixed-pitch type size no smaller than ten characters per inch or in a proportional font size no smaller than 13 point. There shall be no more than 27 lines of regularly spaced text on a page.

But there’s more to this message than font size and page layout.  Judge Eagles continued by making the obvious points that:

legal arguments require citation to legal authority, and factual assertions unsupported by citations pointing to specific, authenticated facts existing in the record will be disregarded.

She warned that of "particular concern":

are summary judgment briefs which fail to provide cites to the record for factual assertions. L.R. 56.1(d); see also L.R. 7.2(a)(2). Litigants must include such citations, and the citations must be specific. It is not sufficient, for example, to cite a fifty-page exhibit for a particular point, but yet to fail to identify where within that fifty-page document the evidence for that point is located. As a reminder, the Court is under no duty to scour the record to find support for a party’s factual assertions.

The Court, said Judge Eagles, is not under the obligation to "do legal research for parties who make perfunctory arguments without citation to legal authority. "

And this is not the first time that lawyers have been chided by the Court for not providing pinpoint citations to the evidence before the Court and support for the positions being taken.  Judge Eagles cited some of these cases in her text order.

For example, Judge Schroeder said in Stephenson v. Pfizer, Inc., 2014 U.S. Dist. LEXIS 124737 (M.D.N.C. 2014)  that:

Throughout her briefing, [the plaintiff] fails to provide any pinpoint citation to a particular page or paragraph, providing instead only cites to whole documents generally. This practice violates Local Rule 7.2(a)(2), substantially burdens the court with the obligation of investigating the basis of claimed facts — a task the court need not do, and renders a party’s position subject to rejection on this basis alone.

*1 at n.1.

And how about failing to cite authority to support your argument?  Also a bad thing, as observed by Judge Eagles in Hayes v. Self Help Credit Union, 2014 U.S. Dist. LEXIS 116888 (M.D.N.C. 2014):

the plaintiff has made numerous arguments as to which she has cited no legal authority of any kind.  It is not the role or the responsibility of the Court to undertake the legal research needed to support or rebut a perfunctory argument.

*2.

 And to the same effect is Judge Schroeder’s statement in Hughes v. B/E Aerospace:

A substantial portion of Hughes’ factual briefing fails to cite to the record, in violation of Local Rule 7.2(a)(2). A party should not expect a court to do the work that it elected not to do.

2014 WL 906220,  *1 & n.1 (M.D.N.C. 2014),

Consider yourself on notice of how to file a proper brief in the Middle District, even if you were not one of the many lawyers who received this text order.

[Disclosure: I am one of the members of the Local Rules Committee in the Middle District]