The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with."  Well, actually on the phrase "entering into any contract . . . with."

HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF).  At that time,  HCIM became the sole managing member of HAMF per an Operating Agreement.  Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .

The HAMF Operating Agreement said in Section 2.03  that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member." 

HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.  Judge Jolly observed that:

The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.

Op. ¶16.

In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the  non-managing members of HAMF, but the Court determined that their consent was not required.  Two factors guided the Court’s determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.

Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).

But the Court also looked to the totality of the Operating Agreement and said that

Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties’ intention to vest the authority to sell HAMF in HCIM alone. Whether such an
arrangement was inadvertent or, more likely, the result of deliberation and  bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.

Op. ¶b20.

The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF’s non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF].  Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).

So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims.  And I picked up from one of the Defendants’ briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs’ lawsuit.

 

It might seem uncontroversial that the members of a limited liability company cannot follow with a personal lawsuit for injuries after their LLC litigates, and loses, claims based on the same issues.

But it took the Business Court a while to get to that conclusion last week, in Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22.

The Plaintiffs were the member-managers of Village Landing, LLC.  The LLC had made claims against Harold K. Jordan and Co. in an arbitration asserting that HKJ had misrepresented that it would build condominiums instead of the townhomes called for under the construction contract.  It said that this had caused the LLC "great financial harm." 

Right before the arbitration began, the member-managers sued HKJ for damages.  Then, the LLC lost on those claims in the arbitration.  The arbitrator, in his Award, specifically rejected the allegations regarding the townhome/condominium issue.

Nonmutual Collateral Estoppel

The unsuccessful arbitration meant that the LLC member-managers also failed in their Business Court lawsuit, which Judge Jolly dismissed based on collateral estoppel.  In reaching that result, he observed that he was "not aware of any North Carolina precedent addressing the attempted use of nonmutual collateral estoppel against nominally different plaintiffs."  Op. ¶30.

It could be that you don’t remember the term "nonmutual collateral estoppel" because you went to law school as long ago as I did.  But it "prevent[s] a plaintiff from relitigating an issue the plaintiff has previously litigated unsuccessfully in another action against a different defendant."  Op. ¶30 (quoting Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002)).

So whether nonmutual collateral estoppel applied turned on the question of whether there was an "identity of parties" between the LLC in the arbitration and the member-managers in the Business Court lawsuit.  That can be shown by the parties being "in privity," but North Carolina law is that "privity with a corporation is not established solely by one’s position as a corporate officer or shareholder."  Op. Par. 34 (relying on Troy Lumber v. Hunt, 251 N.C. 624, 627 (1960).

The LLC Members Had Control Over The Arbitration

The NC Supreme Court recognized, in Thompson v. Lassiter, 246 N.C. 34 (1957), that there is a "well established exception" to the "general rule" that an identity of parties is necessary to prevail on a res judicata defense. Op. ¶¶35-36.  (Wait, you sharp eyed readers are thinking: This is a case involving collateral estoppel, not res judicata.  Judge Jolly said that "the court notes that res judicata and collateral estoppel are companion doctrines, that traditionally have shared the identity requirement." Op. ¶31). 

So, that exception, applicable to both res judicata and collateral estoppel, has four elements:

(a) control of both the original and present lawsuit, (b) a proprietary interest or financial interest in the prior judgment, (c) an interest in the determination of a question of fact or a question of law regarding the same subject matter or transactions and (d) notice of participation.

Op. ¶36.

The first element, control, "is met when a corporation is dominated by a single party or entity or is otherwise the alter ego of that party or entity."  Op.  Par. 39.  Given that the Plaintiffs were the sole member-managers of the LLC, plus their active involvement in the arbitration (by calling eighteen witnesses to testify), Judge Jolly found that the control element was met.  It probably did not help that one of the Plaintiffs had testified at the arbitration that the Plaintiffs and the LLC were "one and the same."

The second element, a proprietary interest in the prior judgment, was also met, given that the LLC was "essentially a pass though entity" and the Plaintiffs were "financially intertwined" with the LLC.  Op. ¶41.

As for an interest in the determination of questions of fact or law, Judge Jolly wrote that:

At the very core of Plaintiffs’ Claims against HKJ in this matter is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing "condominiums, rather than townhouses." This was the precise issue that Village Landing litigated extensively against HKJ in the Arbitration Action, an alleged misrepresentation that Plaintiffs’ counsel contended was the proximate cause of millions of dollars in losses.  Not only did Plaintiffs have an "interest" in the Arbitrator’s determination on this issue, it was central to their LLC’s entire case against HKJ in the Arbitration Action – as it is in their individual action here.

Op. ¶42.

The notice element was obviously met due to the Plaintiffs’ involvement in the LLC’s arbitration.

What Counts In Collateral Estoppel Is ISSUES, Not Claims

The Plaintiffs argued that their personal claims were "separate and distinct" from the claims pursued by the LLC in arbitration.  It didn’t make any difference.

Judge Jolly observed that "our courts have repeatedly held that ‘collateral estoppel precludes the subsequent adjudication of a previously determined issue, even if the subsequent action is based on an entirely different claim.’"  Op. ¶50 (emphasis in original)(quoting Hailes v. N.C. Ins. Guar. Ass’n, 337 N.C. 329 (1994)).

Since the arbitration had resolved the issue of whether HKJ had misrepresented that it was building townhomes instead of condominiums, the Plaintiffs were foreclosed from pursuing claims based on that issue.

The Remaining Elements For Collateral Estoppel Were Met

Judge Jolly quickly ticked through the remaining elements of collateral estoppel.  The issue had been "actually litigated" as it was "clear that litigation of issues in an arbitration action satisfies the ‘actual litigation’ prong of the collateral estoppel doctrine."  Op. ¶55.  It had been "actually determined" because the Arbitration Award was a reasoned one because it directly discussed and decided the issue of misrepresentation.  Op. ¶56.  Given its centrality to the Award, it was also "necessary and essential" to the Award.  Op. ¶57.

* * *

The easiest takeaway from this case is that LLC members can’t pursue their own personal claims after their LLC has already arbitrated claims resting on those same issues.

 

 

 

A bill was introduced this week in the NC General Assembly that would be entitled "An Act to Modernize the Business Court By Making Technical, Clarifying, And Administrative Changes To The Procedures For Complex Business Cases."  Here’s the text of the bill.

This is a summary of the proposed changes:

Appeals From Business Court

There would be a direct appeal to the NC Supreme Court from any final judgment in a case designated as a mandatory complex business case per G.S. §7A-45.4.  Since the NC Supreme Court has yet to rule in a case that originated in the Business Court (as far as I know) even though the NC Court of Appeals has ruled in many such cases, this will result in more Supreme Court decisions in business cases. 

Changes to Cases That May Be Designated As Mandatory Complex Business Cases

One of the first posts that I wrote on this blog (way back in 2008!) was about the jurisdiction of the Business Court.  You can find it here, but this proposed bill would change things.

The proposed bill does away completely with jurisdiction over cases involving intellectual property law (currently in G.S. §7A-45.4(5)) and cases involving "the Internet, electronic commerce, and biotechnology" (currently in G.S. §7A-45.4(6))

The bill adds two new explicit categories of cases that would qualify to be designated as complex business cases:

  • One is "disputes involving trade secrets under Article 24 of Chapter 66 of the General Statutes."
  • The other is contract disputes if a few conditions are met: at least one plaintiff or one defendant must be authorized to transact business in North Carolina per Chapter 55, 55A, 55B, 57D, or 59 of the General Statutes, the claim must be for breach of contract or seek a declaration of an obligation under a contract, and the amount in controversy must be at least one million dollars.

There Would Be Cases That Must Be Designated As Mandatory Complex Business Cases

In a new twist, the proposed bill specifies certain types of cases which must be designated as mandatory complex business cases.  Call these "mandatory mandatory" complex business cases. Those are:

  1. Some cases involving tax law, like "a contested tax case for which judicial review is requested under G.S. 105-241.16" or "a civil action under G.S.105-241.17."
  2. Disputes arising under corporate law, partnership law, or LLC law where the amount in controversy is at least $5 million.
  3. Cases involving regulation of pole attachments brought pursuant to G.S.§62-350.

If a party fails to designate a "mandatory mandatory" case, the Superior Court in which it was filed can either dismiss it without prejudice or stay it until it is properly designated per proposed new Section 7A-45.4(g).

Increase In Designation Fee

The proposed bill would increase the fee for designating a case to the Business Court by one hundred dollars, from one thousand dollars to eleven hundred dollars.

But the bill doesn’t fix the problem that the designation fee is not recoverable as an element of costs.  I wrote about that issue last year.

Additional Reporting On The Activity In The Business Court

The proposed bill would require the Director of the Administrative Office of the Courts to report semiannually to the Chief Justice and each member of the General Assembly on the number of cases that have been pending at each location of the Business Court for more than three years, motions pending without a ruling for more than six months after being "fully ripe for decision" and the number of cases in which bench trials were held and completed for more than six months in which no judgment had been rendered.  The report is to include an explanation from the Business Court. 

Thanks to my partner, Charles Marshall, who sent me a copy of this proposed legislation.

 

There’s no expression when speaking of football players to recognize a performance that hits three exceptional marks (like a hat trick in hockey or a triple double in basketball or the triple crown in baseball). 

Maybe there should be, because Jeff Bostic, who played twelve years in the NFL for the Washington Redskins and on three Super Bowl winning teams, pulled off an extraordinary triple victory yesterday in the Business Court.  He got summary judgment in three cases in which he was the Defendant: Yates Constr. Co. v. Bostic, 2014 NCBC 19; Phillips & Jordan, Inc. v. Bostic, 2014 NCBC 18; and American Mechanical, Inc. v. Bostic, 2014 NCBC 17.

All of the Plaintiffs were subcontractors on construction projects for Bostic Construction Inc., which Bostic owned.  When the company failed and they were not paid, the Plaintiffs sued Bostic personally, alleging that Bostic had engaged in constructive fraud by commingling and misusing the funds from construction loans and using those funds for personal purposes.

Those facts might give rise to a claim by a shareholder of the construction company, but each of these Plaintiffs was only a creditor.  They ran into this settled principle:

Generally, directors and officers of a corporation are not liable, solely by virtue of their offices, for torts committed by the corporation or its other directors and officers.

Phillips & Jordan Op. ¶19 (relying on Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 57, 554 S.E.2d 840, 845 (2001).

Before a director or an officer can be directly liable to a creditor, there must be "a tort personally committed by [him] or one in which he participated."  Id.

The problem for each of these Plaintiffs is that they had no direct communication or interaction with Bostic.  His ownership status, standing alone, therefore was "insufficient to hold him legally accountable for an injury to Plaintiffs [as] third party creditor[s] of" the corporation.  Ops. ¶ 22.

 

 

You might remember the derivative action filed against the board of directors of Duke Energy Corporation stemming from its 2012 merger with Progress Energy.  It received a lot of publicity.  The merger was concluded long ago, but there’s finally been a ruling from the Business Court dismissing the derivative action.  It’s Krieger v. Johnson, 2014 NCBC 13.

The lawsuit challenged the severance payment due to Progress’ former CEO, Bill Johnson, following the merger.  Johnson was set to be the CEO of the combined entity following the merger, but he was removed as CEO a few hours after the merger became final.  This entitled Johnson to as much as $44.4 million in payments under his new (and very short-lived) employment agreement with Duke Energy.

Krieger made claims for unjust enrichment and for the directors’ breach of fiduciary duty with regard to what he condemned as a grossly excessive payment for "scant hours of service." Op. ¶16.

Unjust Enrichment Claim Was Dismissed

Judge Jolly dismissed the unjust enrichment claim given Johnson’s written employment agreement with Duke Energy.  He wrote that:

[e]ven assuming the payments to Johnson might be considered excessive as Plaintiff alleges, the existence of a contract between the parties concerning the subject matter of the unjust enrichment claim is dispositive.

Op. ¶16.  He also said that "[a]n assertion that the express terms of a contract were ultimately unfavorable to one of the contracting parties, without more, does not state a claim for unjust enrichment."  Op. ¶16 & n.13.

Derivative Claims Were Dismissed Due To Plaintiff’s Failure To Make A Demand

Krieger’s derivative claims were also dismissed, due to his failure to make a demand on the Duke board of directors to pursue the claims.  That took some analysis by Judge Jolly, first on the point whether the law of North Carolina or Delaware (Duke’s state of incorporation) should control.  Delaware law won out, because this was a matter of the internal affairs of the corporation, and only the state of incorporation can exercise the authority over "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."  Op. ¶21.

That was only a minor win for Krieger, who was arguing that a demand on the board of directors was excused because it would have been futile, due to the board’s alleged inability to make an independent and disinterested decision on the subject of the lawsuit.  Delaware recognizes the futility exception to the demand requirement, but North Carolina does not.

Plaintiff Couldn’t Show That A Demand Would Have Been Futile

But Krieger couldn’t meet the Delaware standard for showing futility, which requires a showing that there is a "reasonable doubt as to (a) director disinterest or independence or (b) whether the directors exercised proper business judgment in approving the challenged transactions."  Op. ¶23.

He argued that the board would be exposed to personal liability for agreeing to such excessive compensation, but Judge Jolly held that:

Mere allegations that directors participated in or approved of the alleged wrongs as a showing of directorial interest have been consistently rejected by Delaware courts.

Op. ¶27.

 Krieger argued that the grant of severance benefits to Johnson violated the corporation’s publicly disclosed compensation mandates.  Those mandates said that compensation was designed to attract and retain talented executive officers, was to be performance based and was meant to reward individual performance.

But that got the Plaintiff nowhere.  The Court found those statements to be "aspirational," and said that they "should not be contorted into affirmative mandates or representations that could give rise to a substantial likelihood of liability. . . . "  Op. ¶31.

The only other attempt by Krieger at proving demand futility lay in his effort to raise a reasonable doubt that the challenged transaction was the product of  a valid exercise of business judgment.  Krieger argued that the payment to Johnson constituted waste, and asserted that what Duke had received in exchange for the millions of dollars of severance payments was "so inadequate that no person of ordinary, sound business judgment would deem it worth" what Duke had paid.  Op. ¶35.

Judge Jolly observed that "Delaware courts have developed an exacting standard by which to evaluate claims of corporate waste."  Op. Par. 36.  Krieger had to "plead specific facts from which it can be inferred that ‘the decision [by the board] is so beyond the bounds of reasonable judgment that it seems essentially inexplicable on any other grounds."  Krieger’s argument that $44.4 million for less than a day’s work didn’t meet that standard.

So, since Krieger had not made any demand on the Duke board to pursue this litigation, all of his claims were dismissed.

If you are affronted by the payment of $44.4 million to Johnson for "a few hours work,"  here are some things that you should know: (1) the Amended Complaint referred to only about $10 million in payments (Op. Par. 11 & n.8), (2) Johnson would have been due substantial severance benefits under the Progress Management Change-In-Control Plan even if his  Employment Agreement with Duke had never been formalized, and (3) Duke received agreements from Johnson in consideration of the severance payments, like (a) a release of claims against Duke; (b) an agreement to cooperate with Duke in respect to transition matters and (c) non-competition, non-solicitation, non-disparagement and confidentiality covenants.  Op. ¶37.

 

 

Everybody knows that you have thirty days to file a Notice of Appeal in a civil case.  Rule 3(c)(1) of the North Carolina Rules of Appellate Procedure says that: "a party must file and serve a notice of appeal: within thirty days after entry of judgment."

The lawyers appealing from a grant of summary judgment in a Business Court case, Carter v. Clements Walker PLLC, obviously knew that.  They e-filed their Notice of Appeal with the Court on the thirtieth day, but Judge Gale granted the Defendant’s Motion to Dismiss their appeal in an Order this week.

Why wasn’t that appeal timely, you are wondering.  Well, the answer is that even though the Notice of Appeal was e-filed in the Business Court on the thirtieth day, it was filed too late — at 7:37 p.m.

But the Business Court is electronic.  You can make filings at any time during the day, or night.  Rule 6.7 of the Business Court Rules even says that "[a]n electronic filing may be submitted to the Court at any time of the day or night."

But  Business Court Rule 6.7 goes on to say that:

For purposes of determining the timeliness of a filing, if the submission of the filing began during normal business hours of the Business Court (8:00 a.m.–5:00 p.m., Monday through Friday, excluding holidays), the filing is deemed to have occurred on that date.   If the submission of the filing began after normal business hours of the Business Court, the filing is deemed to have occurred on the next day the Business Court is open for business.

So Judge Gale found this Notice of Appeal to be untimely, and dismissed the appeal.  If you are fascinated by appellate procedure (and if you are, you should be reading the North Carolina Appellate Practice Blog), then you might be wondering how it is that the trial court gets the authority to dismiss an appeal.  Judge Gale covered all that.  Order ¶¶ 9-12.

Briefly, you are thinking of the general rule that an appeal takes the case out of the jurisdiction of the trial court, rendering the trial judge "functus officio."  That’s certainly true, but Rule 25(a) of the Rules of Appellate Procedure says that a Motion to Dismiss an appeal can be presented to the trial court until the appeal has been filed in an appellate court.  An appeal isn’t "filed" with the Court of Appeals when the Notice of Appeal is filed with the trial court.  Instead, "filing" with the appellate court occurs only when the record on appeal is filed or the docket fee is paid. 
 

 

When I first looked at Judge Murphy’s (unpublished) Order in Ehrenhaus v. Baker earlier this month awarding attorneys’ fees to the class action attorneys who sued Wachovia and Wells Fargo over their merger in 2008,  I was disappointed, though the Judge was following a mandate from the Court of Appeals.

He awarded $1 million in fees and expenses ($1,056,067.57 to be exact) to the NY lawyers representing the class.  That ruling came following a decision from the NC Court of Appeals reversing a previous award of fees in that case (by Judge Diaz) and remanding the fee determination to the Business Court.

Judge Murphy had assessed that his "sole directive" on remand was "to determine whether Plaintiff’s attorney’s fee award request of $1.5 million is reasonable in light of Rule 1.5 of the RPPC."  (the Revised Rules of Professional Conduct).  Order ¶14.

The Lawyers Got Much Less Than They Had Requested

My disappointment stems from my perspective that the Ehrenhaus lawsuit achieved absolutely nothing of value for Wachovia’s shareholders, except for obtaining a more detailed proxy statement containing additional (and to me, pointless) disclosures about the merger transaction.  So why did the lawyers deserve anything at all, let alone a million dollars? 

But after shedding a few tears for the widows and orphans who were holding Wachovia stock and their undoubtable anger at a million dollars for lawyers who obtained nothing of value for them , I came to the conclusion that this was a pretty good shellacking of the lawyers for the class.   After all, they had asked for almost twice that amount ($1,975,000) to start with and had to wait for years to get paid (though there’s no telling whether they will have to wait longer as there might be another appeal of this fee award).

And in this most recent round, they had asked for $1.5 million, requesting that a "contingency multiplier" be applied to the fee generated by the hours (over 3,000 hours) they spent on the case at their hourly rate.  Judge Murphy rejected that request because there was no contingent fee agreement signed by the class representative.  RRPC 1.5(c) says that "[a] contingent fee agreement shall be in a writing signed by the client."  Given the mandatory nature of the Rule, Judge Murphy saw this as "a prerequisite in order to create an effective contingent fee agreement."  Order ¶29.  He ruled that "in the absence of a valid contingent fee agreement between Plaintiff and his attorneys, as required by Rule 1.5(c), any award using a contingency multiplier is unreasonable."  Order ¶30.

If you are wondering about the hourly rates proposed to the Business Court by class counsel, they had previously asked Judge Diaz  for a $750/hour rate, which he had said in 2010 was "far in excess of those normally charged by attorneys in North Carolina."  In their new application for fees, class counsel backed down to a maximum hourly rate of $450, which Judge Murphy ruled "was not excessive when compared with the hourly rates of attorneys engaged in complex business litigation in Charlotte, Mecklenburg County, North Carolina."  Order ¶22.

Oh, and there was very bad news in this Order for Mr. Ehrenhaus’ local counsel.  The Court awarded not a dollar to him even though there was a valid fee sharing agreement between him and Ehrenhaus’ out of state counsel.  The agreement specified that local counsel would receive five percent of the total fee, but local counsel offered no evidence of the time expended or his hourly rate so the Court could not determine whether the five percent (which would have been more than $50,000) was reasonable.

If you are despondent over the lack of recovery by the North Carolina counsel, Judge Murphy seemed willing to consider the submission of further evidence on the services rendered by him. Order ¶38.

"Disclosure Only" Settlements Should Be Closely Examined For Their Value

Turning back to the reasonableness of the Ehrenhaus fee, there has been quite a bit of judicial discussion recently  about the fees appropriate in "disclosure only" settlements.  In the case of Kazman v. Frontier Airlines, 398 S.W.2d 377 (Texas App. 2013), the Texas Court of Appeals refused to award any attorneys’ fees where the only relief for the plaintiff was additional disclosures in SEC filings.

Delaware courts have ruled that they should scrutinize these types of settlements.  The Judges there have taken to asking the attorneys requesting fees in disclosure only settlements to identify which of the disclosures obtained are the most material and thereby evaluating their value.  (See In re PAETEC Holding Corp. Shareholders Litigation (letter opinion).

What would Ehrenhaus’ lawyers say about the value of the additional disclosures that they obtained?  What could they have said?  If you want to make that evaluation yourself, you can find the "enhanced" disclosures here.

Maybe I’m being too harsh on the minimal value of this lawsuit for Wachovia’s shareholders.  The class did obtain the invalidation of the 18 month "tail" in the merger agreement between Wachovia and Wells Fargo.  That gave Wells Fargo the right to keep its 40% voting interest in Wachovia’s stock for 18 months if the shareholders voted against the merger.

But really, what other entity was likely to be deterred from making a better bid for Wachovia as a result of the tail?  Remember that Wachovia was literally hours away from a receivership when Wells Fargo made its offer.  And Judge Diaz ruled in his 2008 opinion that "the sobering reality is that there are few (if any) entities in a position to make a credible bid for Wachovia that would be superior to the Merger Agreement."  2008 NCBC 20 at ¶151.

So was a $1 million fee warranted?  I don’t know, but In the old days of the Business Court, Judge Tennille might have condemned these fees as "stinky fees."

Don’t get me wrong on my feelings about fees paid to class action counsel.  Sometimes they are well-earned.  For example, just  the other day, Amazon.com notified me that I was getting $13.00 or so in the settlement of the price-fixing class action against it over the pricing of e-books.  (though my Dad pointed out that he only got $3.00)  But what was the award for fees and expenses for the lawyers for the class in that case?  More than $11 million.  I have no problem with that.  They can buy a lot of books.  And they deserve them.

As for the prospects of an appeal of this fee award, that is unlikely to be warmly welcomed by the Court of Appeals.  The Fourth Circuit said yesterday, in a completely unrelated case, that:

[A]ppeals from awards of attorneys fees, after the merits of a case have been concluded,. . .must be one of the least socially productive types of litigation imaginable.

Best Medical Int’l, Inc.  v. Eckert & Ziegler Nuclitec GMBH at 10 (quoting Daly v. Hill, 790 F.2d 1071, 1079 n.10 (4th Cir. 1986).
 

 

Construction lawyers in North Carolina can breathe a sigh of relief.  On Friday of last week, the Business Court ruled that the service of on-line service provider Lienguard in preparing claims of lien constitutes the unauthorized practice of law. 

You most likely have never heard of Lienguard.  It says on its website that it files throughout the country: "commercial mechanics liens, notices, public and federal bond claims as well as municipal liens." It does this on a fixed price basis.  It charges $495 for the preparation and filing of a mechanics lien.

A committee of the North Carolina State Bar sent Lienguard a cease and desist letter in 2010 informing Lienguard that it had concluded that Lienguard’s conduct constituted the unauthorized practice of law.  Lienguard, notwithstanding the letter, continued offering its services in North Carolina.

The Order in North Carolina State Bar v. Lienguard, Inc., 2014 NCBC 11, followed in the State Bar’s lawsuit.  Lienguard raised a litany of defenses against what it termed the State Bar’s "monopolistic crusade" against the UPL.

Lienguard’s Services Are The Unauthorized Practice Of Law

The Business Court didn’t agree with any of Lienguard’s defenses.  Lienguard argued, for example, that a claim of lien wasn’t a "legal document" and its assistance in preparing those documents was therefore not within the statutory definition of the "practice of law."  Section 84-2.1 of the General Statutes bars non-lawyers from "preparing or aiding in the preparation of "deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors. . . ." 

Given the absence of "claims of liens" from the language of the statute,  Lienguard said it was not engaged in the practice of law.  Judge Gale looked to G.S. §84-4, which prohibits non-lawyers from preparing "any other legal document."  It took him just twenty words to conclude that a claim of lien is a "legal document":

Clearly, a claim of lien is prepared to enforce the claimant’s statutory lien rights.  It is,
therefore, a “legal document.”

Op. 55.

The Court also ruled that Lienguard’s statements about its expertise in the construction industry, its commitment to compliance with the law,  and its qualifications to prepare claims of lien constituted Lienguard "holding out" that it was licensed to practice law.  There are  administrative regulations in North Carolina that direct that a lawyer who is not admitted to practice in this jurisdiction "shall not. . .  hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.” 27 N.C. Admin. Code 02, Rule 5.5(b).

Lienguard’s services also constitute impermissible "legal advice" in violation of Chapter 84.  It provides definitions of lien law terms, gives warnings regarding time requirements, and reminders about sending out preliminary notices.  Those things are "legal advice," when combined with the preparation of legal documents.  Op. 72.

You might remember the "scrivener’s exception" to charges of UPL, which recognizes that merely typing or “scrivening” a petition or legal document does not constitute the practice of law, so long as the non-attorney does not create the document, or advise on how the document should be prepared." Op. 59.  Lienguard wasn’t entitled to this exception because "it performs services beyond that of a scrivener."  Op. 65.

Lienguard’s Constitutional Claims Were Rejected

Lienguard also argued that Chapter 84 is so vague due to its lack of definitions that it cannot be constitutionally applied to it.  The Court rejected that argument, ruling that "there is no vagueness involved in concluding that a claim of lien is a legal document."  Op. 82.  Besides, the NC Supreme Court held almost a century ago that G.S. §84-4 is constitutional and valid. Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 632, 631 S.E.2d 540, 544 (1936).  And Lienguard hadn’t taken the necessary procedural steps to attack the constitutionality of a statute anyway.  G.S. §1-260 requires service on the Attorney General if the constitutionality of a statute is in question, and he has an opportunity to be heard.

If you are not exhausted from reading this by now, you might be wondering how the Court resolved Lienguard’s argument that the State Bar was in violation of the monopoly clause of the North Carolina Constitution.  That clause says that: "monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. §34.  The State Bar, which is a state agency, has the power to exclude persons from practicing in the legal profession "to protect the public against incompetents and imposters."  Op. 86.  (There was no finding that Lienguard was "incompetent.").  Judge Gale rejected the monopoly claim.

There’s More To Come

The Court’s ruling is not the final round for Lienguard.  The State Bar was directed to prepare a proposed form of permanent injunction for the Court to enter.  It was given twenty days to present it to Lienguard for "comments as to form."  You all know that this type of instruction from a Court can lead to endless back and forth between counsel for the parties.

A couple more things:

The Supreme Court of Ohio, bin 2010,also found Lienguard to be engaged in UPL. 

Also, I was surprised to discover that there are multiple companies in the business of providing DIY lien preparation services in North Carolina.  Companies named zlien, CRM Lien Services, and the Lien Professor all do that.  If the State Bar is truly concerned about stamping out UPL in this area, it has a lot more work to do. 

 

Dual agency is a big deal to real estate agents.  It lets them represent both a buyer and a seller in a transaction.  Dual agency was the focal point of the Business Court’s opinion last week in BDM Investments v. Lenhil, Inc., 2014 NCBC 6.  The Opinion shows the dangers of failing to disclose that you are acting as a dual agent.

If a real estate agent is acting as a dual agent she owes a fiduciary duty to both the buyer and the seller, "and must make a full and truthful disclosure . . . of all material facts [concerning] the [p]roperty."  Op. ¶43.

The fact of the dual agency is a material fact and must be disclosed.  Op. ¶44. 

Hollingsworth, one of the Defendants, did have a real estate license at the time of the transaction, but there’s an issue of material fact whether he was acting as an agent for either the buyer or seller in the transaction.  Plaintiffs said that they would not have purchased ten residential lots for $850,000 if Hollingsworth had disclosed his relationship with the seller and the fact that he would earn a commission on the sale. 

The Plaintiffs wanted to rescind the transaction and get their $850,000 back, but there was nothing wrong with the property purchased, and there had been no misrepresentations about it by the purported agent.  As Judge Murphy observed, there are no:

case[s] under North Carolina law considering whether an undisclosed dual agency,
without any other misrepresentation or omission, permits a party to rescind a real
estate transaction if a jury finds the failure to disclose led to the purchase.

Op. ¶52.

He relied on two non-North Carolina opinions in ruling that if the jury at trial were to conclude that the failure to disclose a dual agency led to the decision to buy the property, that the Plaintiffs would be entitled to the remedy of rescission and also to pursue damages against Hollingsworth for "injuries not fully remedied by recovery of its purchase price."  Op. ¶53.

There would also be the danger of Hollingsworth having his real estate license revoked.  The General Statutes provide that a broker’s license can be revoked for representing "more than one party in a transaction without the knowledge of all parties for whom he or she acts."  N.C. Gen. Stat. §93A-6(a)(4).  Hollingsworth died after the lawsuit was filed, so he doesn’t face that danger. 

There are many more claims discussed in the BDM decision, but I have focused only on the dual agency aspect of the case because I am engaged to a real estate agent and I am of course now fascinated by real estate issues.  I felt it was necessary to make that disclosure.

 

The Order in Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 is a procedural conundrum wrapped up in arbitration issues.  The Plaintiffs in the Business Court are the respondents in a separate arbitration proceeding brought by the Defendant.  But none of the Plaintiffs — all of whom were shareholders or directors of a corporation which had signed off on the arbitration agreement forming the basis for the arbitration — had personally signed the arbitration agreement.

There’s nothing novel about holding persons who haven’t signed arbitration agreements to be bound by them.  The NC Court of Appeals held years ago that "well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Ellen v. A.C. Schultes of Md., Inc.,172 N.C. App. 317, 320, 615 S.E.2d 729, 732(2005) (quoting Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004)).

The non-signatories in Cold Springs were not willing to go to arbitration.  They moved for a preliminary  injunction to enjoin the Defendant from proceeding with the arbitration against them.  The Defendants’ response was that they were entitled to "pierce the veil" against the corporate signer of the arbitration agreement and thereby get to the shareholders.

But is a Court entitled to determine a piercing the veil theory up front, in advance of an arbitration that is based on that very issue, or does that improperly delve into the merits?

Start with the concept of "arbitrability," which is "undeniably an issue for judicial determination."  AT&T Techs. v. CWA, 475 U.S. 643, 649 (1986).  Going along with that, however, is the concept that the court "is not to rule on the potential merits of the underlying claims."  Id.

So what’s a court to do when arbitrability is wrapped up with the merits of the case?  Especially when the Defendants’ demand for arbitration provides no specifics as to why the veil should be pierced, and makes only rote allegations as to why it should obtain that result.

Judge Jolly had little hesitation about getting at least somewhat into the merits.  He held:

An important distinction must be drawn between [impermissible] consideration of the merits of an arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same issues that underly the merits of a claim. The mere fact that certain issues could later be litigated substantively cannot on its own foreclose courts from assessing arbitrability. In such a situation, the overriding spirit of the Supreme Court’s jurisprudence demands that courts nonetheless address those issues for the narrow and limited purpose of determining whether a claimant seeking to compel arbitration can sufficiently allege a basis for going forward against a responding party.

Op. ¶16.

Remember that this was a Motion for a Preliminary Injunction, to enjoin the Defendants from proceeding with the arbitration against the Plaintiff shareholders.  So what else did Plaintiff have to show to halt the arbitration?  Irreparable harm and a likelihood of success on the merits.

Irreparable harm was present, because "forcing a party to arbitrate an issue absent an agreement to do so constitutes ‘per se irreparable’ harm."  Op. ¶17.

On likelihood of success on the merits, Judge Jolly looked to G.S. § 1-569.7(b), which says that"[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."

He ruled that the parties should plan limited discovery on whether the shareholder Plaintiffs could be compelled to arbitrate, to be concluded in about the next six weeks.  The Judge also stayed the arbitration pending a ruling on the piercing the veil basis for the arbitration.

Oh, and if you are wondering which party has the burden of proof going forward, it is the Defendant, because "under both state and federal law, the party seeking to compel arbitration bears the "burden of establishing an agreement to arbitrate."  Op. 27  (citing  Routh v. Snap-On Tools Corp., 108 N.C. App. 268, 274 (1992).

That’s a heavy burden here, because the NC Supreme Court said in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that "proceeding beyond the corporate form is a strong step: ‘Like lightning, it is rare [and] severe[.]’"