Have you ever billed a client nearly $65,000 for pursuing a motion to compel? Maybe you routinely handle mega-cases and you aren’t goggled by the size of that kind of fee  But that was the amount of the fee sought last month, in Out of the Box Developers, LLC  v. Logicbit Corp. following Plaintiff’s win on a motion for sanctions growing out of a discovery dispute.  It was sizeable enough to catch my attention.

The case is about the Defendants’ alleged theft of Plaintiff’s customizations to its case management software.  The Defendants’ product, aimed at  use by bankruptcy attorneys, is marketed under the name HoudiniEsq.   During discovery, Plaintiff requested production of the version of HoudiniEsq used by one of the Defendants in May 2010, which would have allowed Plaintiff to isolate the customization to the software as of that time.

Despite an April 12, 2013 Order from the Court directing the production of that version of the software, the two Defendants at which the Order was directed — The Doan Law Firm and Doan Law, LLP — failed to comply.  Judge Gale ruled in 2013 NCBC 32 that there was no justifiable reason for the noncompliance. Op. 41.  He found it egregious enough to warrant the "severe sanctions" allowed by Rule 37(b)(2) of the North Carolina Rules of Civil Procedure.  Op. 44.

Instead of imposing those severe sanctions — like striking pleadings or barring the Defendants from defending against a claim as allowed by Rule 37(b)(2) —  Judge Gale ruled that the Plaintiff should be reimbursed its "reasonable costs and expenses" associated with the several motions to compel made necessary by the Doan Defendants’ failure to produce the software.

The issue of the reasonableness of the costs and expenses was decided by the Business Court in 2013 NCBC 34.  Plaintiff’s lead counsel had filed an Affidavit requesting an award of $63,714.57.  That was based on fees the fim had billed for three motions to compel and the hearing for sanctions which led to the Court’s final discovery ruling.

 

Continue Reading Business Court Awards $38,000 In Fees For Opposing Party’s Failure To Comply With Discovery Order

There aren’t any great business law proclamations in Allran v. Branch Banking & Trust Corp., 2013 NCBC 41, decided late last week, but there a couple of procedural points that might help you avoid having summary judgment entered against your client.

Be Careful Which Defendants You Decide To Dismiss, And How You Dismiss Them

Judge Murphy granted summary judgment on Plaintiff’s unfair and deceptive practices act claim against Defendant BB&T. The ruling was entered pretty much because Plaintiff submarined his own case in two ways. 

First, he dismissed his claims with prejudice against BB&T’s employee, Corbett.  Plaintiff’s claim against BB&T rested on his allegation that Corbett had forged his initials on his financial statement and loan application leading to the defaulted loan at issue.

Be aware that a dismissal with prejudice is equivalent to a disposition on the merits, and it has res judicata effect.  Thus, because "[a] judgment on the merits in favor of the employee precludes any action against the employer where . . . the employer’s liability is purely derivative."  Op. 38 (quoting Wrenn v. Maria Parham Hosp., 135 N.C. App. 672, 681, 522 S.E.2d 789, 794 (1999), the dismissal of Corbett’s employer, BB&T, was appropriate.

Be careful of which Defendants you dismiss from your case, and try to avoid dismissing them with prejudice.

Don’t Try To Contradict Your Own Client’s Deposition Testimony

The second way in which the Plaintiff did in his case was by his own deposition testimony, in which he admitted that he had placed his initials on the documents which he had said carried his forged initials.  He attempted, after discovery closed, to avoid summary judgment by presenting affidavits designed to contradict that testimony.

Judge Murphy rejected those affidavits, holding:

‘[A] non-moving party cannot create an issue of fact to defeat summary judgment simply by filing an affidavit contradicting his prior sworn testimony[.]’   Having
acknowledged in his deposition that the initials on the Retail Loan Application and
Personal Financial Application were his, Plaintiff should not now be allowed to offer
affidavits that call his testimony into question.

Op. 35 (quoting Carter v. W. Am. Ins. Co., 190 N.C. App. 532, 539, 661 S.E.2d 264, 270 (2008).

You probably know that North Carolina is an employment-at-will state.  That means that in the absence of any employment contract, you can be fired from your job at any time, for good reason, no reason at all, or even a bad reason.

There’s a skinny exception to that rule: that an employee cannot be terminated for a purpose that contravenes public policy.  So here’s a head-scratcher for you: can a company terminate an employee for exercising her statutory right as a shareholder to inspect the company’s books and records?

That was an issue before the Business Court in Brady v. Van Vlaanderen, 2013 NCBC 37, in which the Plaintiff, a minority shareholder and employee of a corporation called United Tool, said she was terminated in retaliation for attempting to exercise her shareholder rights to inspect the corporation’s records.

Judge Gale dismissed her wrongful discharge claim in an Order last week, relying on two out-of- state cases.  He said he would not "adopt an additional public policy exception to North Carolina’s terminable at will doctrine."  Op. 31.

Knowledgeable North Carolina readers of this blog might say "but what about Meiselman?"

For non-North Carolina readers of this blog (like my dad) , and those otherwise ignorant of the North Carolina Supreme Court’s important decision in  Meiselman, Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983) (probably including my dad), that case holds that a shareholder may not be treated by the corporation in a manner contrary to her "reasonable expectations."

Judge Gale indeed did take Meiselman into account, and said that "Plaintiff should pursue her claim for salary and benefits, if at all, through her Meiselman claim."  Op. ¶31.

No wrongful discharge claim for being retaliated against for exercising her inspection rights, but a Meiselman claim for the same bad conduct by the corporation. So that’s six of one, half a dozen of the other, right?  I’m not so sure.  Let me know what you think.

It’s hard to conceive of a more unlikely Business Court case than Keister v. National Council of the Young Men’s Christian Assocation of the United States of America, a purported class action by YMCA members.  The Opinion, 2013 NCBC 36,  was issued late last week.

Keister and his family joined the YMCA in Asheville, North Carolina.  They said they did so based on advertisements that the YMCA provides a "healthy and safe environment" for families.

The environment turned out to be anything but healthy and safe, according to Mr. Keister.  The allegations in the Complaint were so graphic that Judge Jolly struck it in April 2012 and ordered it sealed.  He said it contained "unnecessary, extremely offensive, outrageous and explicit allegations."

The toned down Amended Complaint alleged that Mr. Keister observed homosexual behavior in the men’s locker room showers, and that he was twice thereafter sexually assaulted on the Y’s premises by fellow members of the Asheville YMCA.  He complained to the management and was told that the issue would be addressed.

The lead claim against the YMCA was that it engaged in an unfair and deceptive practice, in violation of G.S. § 75-1.1, by marketing its facilities as safe and healthy despite its knowledge of illicit sexual activities occurring at its facilities.  Plaintiffs said that the Y had been aware of such conduct for decades.

In law school, we would have called statements like "safe and healthy" mere "puff," and Judge Jolly indeed said that "such phrases defy precise definition and are not capable of objective verification."  Op. ¶27.  He ruled that the advertising by the Y was "neither false nor misleading on its face."  Op. ¶28.

He also dismissed a pretty weak claim for breach of fiduciary duty.  Plaintiffs said that "they placed a special confidence" in the YMCA to provide a safe and healthy environment and that the Y therefore owed them a fiduciary duty.  Judge Jolly said that Plaintiffs had "allege[d] nothing more than a traditional business-consumer relationship" (Op. ¶33) and that there was no fiduciary relationship.

 

The Plaintiff in Martinez v. Reynders, 2013 NCBC 35, had all of her claims dismissed last week in an Opinion from the Business Court.  The case illustrates why you might want to think twice about incorporating a business in Brazil, and how hard it is to make a fraud claim over a broken promise.

The Plaintiff is a Brazilian citizen.  She incorporated a pharmaceutical research and development company in Brazil in 2000.  The Brazilian company was sold to a Delaware corporation several years later.  Plaintiff became the sole manager of the purchased company.

Her claims arose from personal liability she claims she incurred as a result of her reliance on misrepresentations she claimed were made to her.  She personally guaranteed a lease in Brazil based on alleged representations that the Defendants would raise sufficient capital over a 90-day period to relieve her of her guaranty obligation.  She also became exposed to further liability because she was a "quota holder" of the Brazilian company.  (In Brazil, a quota holder is like a stockholder, but a quota holder can have personal liability for the corporation’s debts).

She claimed that she had become a quota holder at the Defendants’ request, allegedly upon repesentations that her status as a quota holder would be temporary and that the Defendants would replace her as a quota holder.  They didn’t, and the Plaintiff said that the Brazilian government was holding her personally liable for unpaid corporate taxes.  Plaintiff said she was also on the hook under Brazilian law for the wrongful termination of the Brazilian company’s employees due to the manner in which they had been terminated.

To the extent that the Plaintiff’s liability rested on her being conned into becoming a quota holder, she premised her claims on a fraud theory.  Judge Jolly was buying none of that.  He held:

the allegation that [one of the Defendants] asked Plaintiff to become a quota holder for three months, until a new quota holder was found, on its face is not a misrepresentation of a past or existing fact. Defendants’ assurance that it would replace Plaintiff as a quota holder within three months is, at most, a statement of future intent or promissory representation which cannot typically serve as the basis of a fraud claim. Leftwich v. Gaines, 134 N.C. App. 502, 508 (1999). A promissory representation may only serve as the basis of a fraud claim where the promissory representation is made with a present intent not to carry it out and may therefore be said to be a statement of existing fact. Id. In order for a promissory representation to be the basis of an action for fraud, facts must be alleged from which it may reasonably be inferred that the defendant did not intend to carry out such representation when it was made. Whitley v. O’Neal, 5 N.C. App. 136, 139 (1969). The court finds no facts alleged in the Complaint from which it might reasonably be inferred that Defendants did not intend to remove Plaintiff as a quota holder at the time they represented they intended to do so.

Op. Par. 29.

The claim that the guaranty was fraudulently induced failed for the same reason.  Judge Jolly said that:

Similar to the representations discussed above, there are no facts alleged from which it may reasonably be inferred that Defendants did not intend to relieve Plaintiff of her personal guaranty at the time they represented they would do so.

Op. Par. 37.

The photo above is by my daughter Juliet, who happens to be in Brazil right now.  Unfortunately, she left before I could warn her not to become a quota holder in a Brazilian company.  But she’s pretty savvy. . . .

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

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

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

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

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

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

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

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

I wouldn’t give up those signatures just yet.

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

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

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

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

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

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

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

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

Op. Pars. 15-16.

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

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

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

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

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

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

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

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

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

Op. Par. 10.

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

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

The Fourth Circuit doesn’t get into matters of LLC law very often, but it did last week in Painter’s Mill Grille, LLC v. Brown. The LLC and its members were suing their landlord for discriminating against them on the basis of race.

The LLC was operating a restaurant which served an African-American clientele. The Plaintiffs said that the Defendants became hostile to them as a result and referred to their business in a racially disparaging way and interfered with their sale of the business.

One of the comments by the Defendants, when the Plaintiffs attempted to sell their business, was whether they were going to open another "chicken and waffle shack."

Let me say that I love [fried] chicken and waffles for breakfast. If you haven’t tried that dish, Dame’s Chicken & Waffles, in Greensboro’s Southside neighborhood, is outstanding.  If you don’t get the racial animus alleged to be behind that term, the dish is said to have originated with African-American southerners.

But could the LLC members, who alleged that they suffered "personal out-of-pocket losses" as a result of the Defendants’ discriminatory conduct, state a claim against them?

No, said Judge Niemeyer, since they were LLC members.  He held that:

[i]n advancing their arguments [the members] failed to account for the fact that they elected to conduct their business through a limited liability company ("LLC") and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), forecloses just such claims.

Op. at 7 (emphasis added).

I wasn’t familiar with the Supreme Court’s decision in Domino’s Pizza, but it rejected in that case a shareholder’s personal claims for race discrimination, holding that they belonged solely to the corporation.  Justice Scalia held there that:

it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts.

546 U.S. at 477.

I will hold off on my pizza recommendations.

 

The issue in Johnson v. American United Life Insurance Co., decided last week by the Fourth Circuit. was whether the Plaintiff’s husband’s death from a car wreck while driving intoxicated was an "accident" under his life insurance policy from Defendant American United which provided "Accidental Death and Dismemberment" coverage .

The policy didn’t contain a definition for an "accident," making it necessary for the Court to interpret the term. It noted in passing that     "[t]here are probably not many words which have caused courts as much trouble as ‘accident’ and ‘accidental.’" Op. at n.1.

In the end, Judge Traxler ruled that the dead husband was covered by the policy, though he said that:

Reaching this result gives us no great pleasure. Drunk driving is reckless, irresponsible conduct that produces tragic consequences for the thousands it touches annually. But our task in this case is not to promote personal responsibility or enforce good driving habits. We must focus on the terms of the policies issued under the Plan and determine whether Richard died as a result of an accident without ‘allowing our moral judgments about drunk driving to influence our
review.’

Op. 3-4.

The Court’s analysis began with two competing definitions of the term "accident."  The Plaintiff argued that the "most natural and common understanding of the term . . . is an unintentional, unplanned incident that occurs as a result of a careless error."  Op. at 12.  She said that unless an intoxicated driver intended to crash his car and die, that his death would be an accident under the policy.

Another definition of "accident" would "exclude any incident where the consequences of intentional conduct are expected or reasonably forseeable."  Op. at 13.

Finding the term ambiguous, the Court applied "the rule of contra proferentum and construed the term[] strictly in favor of the insured." Op. at 15.   It found no evidence that the driver intended to have an accident and deemed the insured’s death to be an accident.

The District Court had ruled that a death caused by intoxication was not an "accident."  It relied on Section 58-3-30(b) of the North Carolina General Statutes, which says that

"Accident", "accidental injury", and "accidental means" shall be defined to imply "result" language and shall not include words that establish an accidental means test.  "

You might not be familiar with some of those terms.  I wasn’t.  The "accidental means" definition provides that there is no coverage when the loss "occurs by reason of an insured’s intentional act" or "is the natural and probable consequence of a voluntary actor course of conduct."  Op. at 21 (quoting Collins v. Life Ins. Co. of Va., 393 S.E.2d 342, 343 (N.C. Ct. App. 1990)).

The "accidental result" standard is more liberal. 

a policy that pays benefits based on an ‘accidental result’ standard does not categorically exclude from the definition of ‘accident’ losses resulting from intentional acts; rather, "accidental" under this standard means a loss occurred ‘fortuitously without intent or design’ and was ‘unexpected, unusual and unforeseen.’

Op. at 21 (quoting Henderson v. Hartford Accident & Indem. Co., 150 S.E.2d 17, 20 (N.C. 1966)).

Judge Traxler looked to a 1992 North Carolina Supreme Court decision — North Carolina Farm Bureau Mutual Ins. Co. v. Stox, 412 S.E.2d 318 (N.C. 1992) — which held:

 

Continue Reading The Fourth Circuit On “Accidents” And Drunken Driving