In a case decided last week, McKenzie v. Hall, the Fourth Circuit sent a clear message that it does not tolerate Motions to Strike.  The Appellants had filed such a Motion to strike portions of an adversary’s brief which they said were objectionable.

The Court struck back, quoting a Seventh Circuit decision, Redwood v. Dobson, 476 F.3d 462, 471 (7th Cir. 2007), and holding that:

  • "Motions to strike sentences or sections out of briefs waste everyone’s time. . . ."
  • "Motions to strike words, sentences, or sections out of briefs serve no purpose except to aggravate the opponent. . . . — and . . .  this goal is not one the judicial system will help any litigant achieve."
  • "Motions to strike disserve the interest of judicial economy. The aggravation comes at an unacceptable cost in judicial time."

Op. 9 & n.3.

The proper way to deal with an objectionable brief is not a Motion to Strike.  The Court said that:

The Federal Rules of Appellate Procedure provide a means to contest the accuracy of the other side’s statement of facts: that means is a brief (or reply brief, if the contested statement appears in the appellee’s brief), not a motion to strike.

Id.  (emphasis added).

In case you were wondering, there’s no provision for a Motion to Strike in the Federal Rules of Appellate Procedure.
 

North Carolina has had more than its fair share of hurricanes over the years, but Hurricane Sandy, which hit New Jersey and New York City, even reached the North Carolina Business Court.

It came in the most mundane of motions, one to expand the word limitation for a brief.  The Order is in Gusinsky as Trustee for the Vladimir Gusinsky Living Trust v. Duke.  

The Motion was filed by the Plaintiffs on the same day an overly long brief was filed.  That violates Business Court Rule 15.8, which says that:

Requests for expansion of word limitations shall be made five (5) business days prior to filing the brief for which expansion of word limitations is sought. Requests for expansion of word limitations that are filed simultaneously with the brief shall be denied.

But this Motion was granted notwithstanding the untimely filing.  Why?  Plaintiff’s counsel said that they couldn’t comply with the Rule due "to communication issues among counsel caused by Hurricane Sandy."  Order 4.  Plaintiff;s counsel are located in New York City.

Judge Jolly recognized the havoc caused by the storm, saying:

The court acknowledges that Hurricane Sandy caused flooding, power outages and devastating damage along the East Coast of the United States, and the court is sensitive to issues created by this natural disaster. However, the court encourages counsel to recognize that compliance with the BCR promotes efficiency and fairness in case administration.

Op.h 4 & n.1.

In this case, though, the hurricane trumped the Business Court Rules.  But don’t look for this pass to be given out again.  That was a thousand year storm.  Follow the Rules in the absence of severe weather conditions.

 

 

 

You’ve gone through the laborious process of getting a subpoena issued in another state for production of documents.  You’ve had a commission issued by the Superior Court and you’ve hired out-of-state counsel to get the subpoena.

But now, opposing counsel shows up in North Carolina Superior Court and moves to quash the subpoena issued in another state by way of a North Carolina commission.

What do you do?  Not what the Plaintiff did in Capital Resources, LLC v. Chelda, Inc., decided this week by the NC Court of Appeals.  Capital persuaded the NC judge to enter a Protective Order quashing several out-of-state subpoenas.  In addition, the Protective Order directed that it should be served on each recipient of the subpoenas and on each clerk of court issuing the subpoenas.

The Court of Appeals, through Judge Stephens, said that "a superior court judge in this State does not have any authority over the courts of other states, and thus could not quash subpoenas issued by such courts."  Op. 13.

The orders quashing the subpoenas were "void and of no effect."  Op. 13.  They were so void that Judge Stephens said that the out-of-state courts "could simply have ignored" them.  Id.

By like measure, the party pursuing the subpoeanas has to seek their enforcement in the foreign courts.  The Court held that:

Had [the party issuing the subpoeanas] wished to proceed with its attempt to obtain documents under the . . . subpoenas, [it] could have requested those out-of-state courts to notify the subpoena recipients that Judge Levinson’s order was to no effect. To the extent the entities in question failed to comply with the subpoenas, [Its] remedy was to initiate contempt or other proceedings in those states’ courts as
provided for by their rules of civil procedure. Had [it] thus obtained any documents it felt relevant to this action, it could have attempted to introduce such in this case.

Op. 14.

It’s pretty clear that the federal practice is the same.  FRCP 45(c)(3) gives the power to quash a subpoena to the "issuing court."  The issuing court is also given the power to "hold in contempt" a person who fails "without adequate excuse to obey the subpoena,"  FRCP 45(e).

On a related issue, Judge Diaz of the Business Court held four years ago in Hilb Rogal & Hobbs Co. v. Sellars (unpublished) that a North Carolina court has no power to order an out-of-state resident to comply with a subpoena.

 

 

 

 

You probably remember the earlier opinion in Elliott v. KB Home, Inc., in which Judge Jolly certified a class action against the homebuilder KB Home over the improper installation of HardiePlank siding.

Last week, the Business Court ruled in another opinion in the case (2012 NCBC 55) that KB Home had waived its right to seek arbitration of those claims.  The waiver resulted from KB Homes’  delay in asserting its arbitration rights and the expense incurred by the Plaintiffs in litigating in court.

The standard for waiver was set out by the North Carolina Supreme Court in Servomation Corp. v. Hickory Constr. Co., 316 N.C. 543, 544 (1986).  Waiver of the right to compel arbitration occurs when the party with the arbitration right "acts inconsistently with arbitration, and the party opposing arbitration can show it has been prejudiced as a result."  Op. 35.

As for prejudice, that results: 

if [the plaintiff] [a] is forced to bear the expense of a long trial, [b] it loses helpful evidence, [c] it takes steps in litigation to its detriment or expends significant amounts of money on the litigation, or [d] its opponent makes use of judicial discovery procedures not available in arbitration.

Op. 35 (quoting Servomation Corp., supra, at 544).

The Plaintiffs in the KB Homes case had incurred fees and expenses of approximately $100,000 in litigating their claim by participating in four hearings and taking twenty depositions.  Judge Jolly said that:

KB Home’s delayed attempt to enforce the arbitration provisions only after Plaintiffs have expended material amounts of time and resources in pursuing their Claims would be prejudicial to Plaintiffs.  Such time and resources were expended after KB Home’s right to arbitrate accrued and could have been avoided through an earlier demand for arbitration. KB Home could have demanded arbitration as early as 2008, well before the named Plaintiffs actively litigated the Claims. Permitting KB Home to enforce its arbitration rights now would be inconsistent with the principles of waiver outlined in Servomation.

Op. 39.

The interesting issue from a class action perspective was whether the waiver of the right to arbitration ran to the unnamed class members.  KB Homes said that it couldn’t have asserted its arbitration rights against the unnamed class members until the class was certified and that it hadn’t delayed in moving to compel arbitration as to them.  

Judge Jolly rejected that argument, saying that it reeked of "gamesmanship."  Op. 41 & n.37.  He ruled that  ruling otherwise would give the Defendant a "second bite at the apple" chance to relitigate the class certification decision with the unnamed plaintiffs.  He relied on an unpublished decision on the point, Kingsbury v. U.S. Greenfiber, 2012 U.S. Dist. LEXIS 94854 (C.D. Cal. 2012).  In Kingsbury, the court stated:

[T]o accept [defendant’s arguments and compel arbitration] would be to condone gamesmanship in the class certification process. A defendant could wait in the weeds and delay asserting its arbitration rights. It could file motions to dismiss, litigate the named plaintiff’s legal theories, and oppose class certification motions. If and when a class is finally certified, the defendant could simply assert its arbitration rights and defeat certification of the previously-certified class. In the interests of the fair and efficient administration of justice, the Court cannot accept [defendant’s] position.

The Business Court adopted the Kingsbury holding "for the same considerations of fairness and the efficient administration of justice."  Op. 41 & n.37.

This isn’t the first time that the Business Court has considered a waiver of arbitration issue. Judge Tennille did so ten years ago, in  Polo Ralph Lauren Corp. v. Gulf Insurance Co., 2001 NCBC 3 (N.C. Super. Ct. Jan. 31, 2001) and found that a party had not waived its right to arbitration by pursuing discovery in the court proceeding.

 

You’ve undoubtedly had a Judge announce that she was entering an order "nunc pro tunc."  In case you didn’t have your Latin-English dictionary with you at the time, that literally means "now for then."

A nunc pro tunc order is a way for a Judge to correct an order previously made which was improperly entered or expressed.

The Fourth elucidated the boundaries of "this rarely used device" last week in Glynne v. Wilmed Healthcare.  Op. 6.  It reversed a nunc pro tunc ruling by Judge Malcolm Howard of the Eastern District of North Carolina.

The purpose of the reversed order was to extend the statute of limitations for the Plaintiff to refile state law claims.  The limitations period as to those claims had expired during the pendency of a federal court lawsuit.

A federal statute (28 U.S.C. sec 1367(d)) provides that the limitations period on any supplemental claim "shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a  longer tolling period."  The North Carolina Court of Appeals ruled in Huang v. Ziko, 511 S.E.2d 305, 308 (N.C. App. 1999) that North Carolina has no applicable "grace period" longer than the 30 days meted out by Section 1367(d).

Plaintiff let the 30 days expire and missed refiling her state law claims by six days.  She asked Judge Howard to revise his Order dismissing her state law claims, and to give her 40 days to refile her claims in state court.  Judge Howard complied, entering an Order nunc pro tunc giving the Plaintiff 60 days from the date of the original Order to refile her claims.

If you are thinking that Judge Howard didn’t have the power to extend the 30 day grace period of Section 1367(d), the Fourth Circuit didn’t weigh in on that question.  It said instead that he had "unquestionably erred" by entering the Amended Order, and held:

Because the doctrine of nunc pro tunc may only be employed to correct mistakes or omissions in the record sothat the record properly reflects the events that actually took place, the district court’s attempt to modify its earlier order for the first time under the guise of nunc pro tunc was error.

Op. 7-8.

The use of nunc pro tunc orders in driving under the influence cases in Wake County has led to indictments and the resignation of a district court judge,

 

 

It’s hard for me to think of a case I’d rather not write about than GR&S Atlantic Beach, LLC v. Hull, 2012 NCBC 52.  It’s not just  that it’s deathly boring or that it involves the interpretation of poorly written transaction documents.  It’s also that it centers on an indemnification agreement, one of the most stultifying areas of the law.

So, with those caveats, here’s the Reader’s Digest version of the GR&S case.  That is, if you haven’t stopped reading already.

Indemnification For Unforeseeable Events

The indemnification concerned losses relating to a water treatment fahcility purchased by one of the Plaintiffs.  One of the two tanks at the facility collapsed.  The collapse, which was totally unexpected, caused a release of untreated wastewater and substantial damage.  Defendants said that the indemnity should not be extended to cover losses which were not intended to be within the scope of the indemnity.

Judge Gale found the language of the indemnity to be clear and unambiguous — covering future claims arising from the use or operation of the facility — and he ruled that he would not consider any parol evidence regarding the unforseeability of the collapse.

Statute of Limitations For Indemnification Agreements

The Judge also sided with the Plaintiffs on a statute of limitations issue.  He rejected the argument that each claim under the indemnity was governed by a single limitations period, finding the indemnity agreement to be a severable contract including multiple undertakings.  

Doctrine of the Last Antecedent

This opinion gets even more interesting upon the Court’s consideration of whether the Indemnification Agreement was assigned to one of the Defendants.  By a general assignment one of the Defendants had assigned a variety of contracts, with an exclusionary phrase at the end of several subparagraphs that might have excluded the Indemnification Agreement.  

The Court looked to something called the doctrine of the last antecedent in wrestling with this contract interpretation.

Never heard of that doctrine?  Really?  It says that 

relative and qualifying words, phrases, and clauses ordinarily are to be applied to the word or phrase immediately preceding and, unless the context indicates a  contrary intent, are not to be construed as extending to or including others more remote.

Op. 74 (quoting Novant Health, Inc. v. Aetna U.S. Healthcare, 2001 NCBC 1 at 17-18).

Judge Gale found that even applying the doctrine of last antecedent didn’t lead to a clear contract interpretation and that the issue could only be resolved at trial.

Attorneys’ Fees Redux

Closing out this opinion, Judge Gale revisited his earlier ruling in the case on whether Plaintiff could recover attorneys’ fees incurred in defending "ancillary" litigation brought by the Utilities Commission.  He didn’t change his ruling, but took note of the intervening Court of Appeals decision in Robinson v. Hope, __ N.C. App. __, 719 S.E.2d 66 (2011) in which the appellate court held that attorneys’ fees in ancillary litigation caused by a tortfeasor’s wrong could not be recovered as an element of tort damages.

 

The efforts to disqualify Defendants’ counsel were unsuccessful in Atkinson v. Lackey.  In denying the motion to disqualify this week, Judge Murphy gave some insight on Rule 1.9 of the Revised Rules of Professional Conduct.

Rule 1.9 is titled "Duties to Former Clients."  It says that:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

Rule 1.9(a).

The law firm in question had consulted with one of the Plaintiffs about a lawsuit he later filed against other defendants who were connected to the defendants in the current action.  The disqualification issue distilled to whether the two lawsuits were "substantially related" per Rule 1.9.

Judge Murphy, relying on comments to the Rule, held that:

two cases will be deemed “substantially related” when they involve (1) the same transaction, (2) the same legal dispute, or (3) ‘if there otherwise is a substantial risk that information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.’ N.C. R. Prof’l Conduct R. 1.9, Cmt. 3. “Furthermore, ‘[t]he substantially related test requires a virtual congruence of issues, and the relationship between the issues in the prior
[representation] must be patently clear.’”Classic Coffee Concepts, Inc. v. Anderson,
2006 NCBC 21 ¶ 45 (N.C. Super. Ct., Dec. 1, 2006)(citation and internal quotations omitted).

 Op.  20.

He moved on to debunk the notion that the two cases were "substantially related," ruling that they "each arose from separate and distinct transactions surrounding potential fraud within different organizations."  The fact that there were three overlapping parties in the two actions did "not mandate a finding that the two actions are related."  Op.  21.

The Plaintiffs didn’t give up there.  They said that one of them, during consultations with Defendants’ law firm about the previous lawsuit, had disclosed information that would advance the Defendants’ position in the new litigation. That’s a basis for disqualification under Rule 1.9, but lawyers shouldn’t be disqualified from representing another client for using "generally known information."  Op.  ¶22.

Judge Murphy concluded that the information pointed to by the Plaintiffs — the corporate structure of the Defendants — would have been within the knowledge of the Defendants and that it therefore was "generally known."  Op.  22.

He also examined the information contained in the notes of Defendants’ counsel’s meeting with one of the Plaintiffs regarding the earlier lawsuit, and said that "what little information" was provided "was of a general nature that would be of little or no assistance" to the Defendants.  Op. Par. 23.

This is the second time in three months that Judge Murpy has denied a Motion to Disqualify.  The last one was in McKee v. James.  If you keep the stats of the Business Court on this type of motion, it has disqualified counsel  four  times (in Flick Mortgage Investors, Inc. v. The Epiphany Mortgage, Inc., 2006 NCBC 3 (N.C. Super. Ct. Feb. 1, 2006)(Diaz); Chemcraft Holdings Corp. v. Shayban, 2006 NCBC 13 (N.C. Super. Ct. Oct. 5, 2006)(Tennille); The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC (Jolly);  Ferguson Fibers, Inc. v. Foster (Tennille)  and denied disqualification five times (in Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC 21 (N.C. Super. Ct. Dec. 1, 2006)(Diaz), Wachovia Insurance Services, Inc. v. McGuirt, 2007 NCBC 3 (N.C. Super. Ct. Feb. 13, 2007)(Diaz); International Forest Products Corp. v. Jackson Paper Mfg. Co. (Murphy), McKee v. James (Murphy), and this week’s case.

 

 If you dip in to Judge Murphy’s Wednesday opinion in Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC, 2012 NCBC 51, you’ll find a little bit of everything.  It’s a ruling on a Motion to Dismiss a Complaint that alleged everything under the sun.  Here are the high points:

Quick Facts

The Plaintiffs entered into a deal with the Defendants for them to develop office space for the Plaintiffs’ medical practice.  Plaintiffs were to share in the profits from the sale of the property, but none were ever paid.  There were also allegations of misrepresentations by the Defendants as to their financial stability and claims of unauthorized changes to the transaction documents.

The Complaint sets out 23 causes of action against multiple defendants.

Piercing the Corporate Veil

The lesson here is that rote pleading won’t get you there on a piercing the corporate veil claim.  Plaintiffs recited the bare bones of the "instrumentality rule" in their Complaint, but Judge Murphy said that "these bare legal conclusions are not entitled to the presumption of truth afforded factual allegations on a motion to dismiss."  Op. 37.  Plaintiffs needed to point to specific acts of control or domination to state a valid claim.

Fraud

Plaintiffs said they relied on Defendants’ representations of their financial stability.  The truth was that Defendants were teetering on the brink of insolvency.

Judge Murphy nevertheless dismissed the claims for fraud, fraud in the inducement, negligent misrepresentation and negligence.  He found that the Plaintiffs had failed to show reasonable reliance because they had failed "to allege facts in support of their own investigation and due diligence."  Op. 48.

Securities Fraud

After determining that the Plaintiffs had stated a claim for securities fraud under the North Carolina Securities Act, Judge Murphy ruled that the individual defendants, employees of the corporate defendants, could be personally liable for the securities fraud, notwithstanding their argument that they had acted as corporate agents.

He held:

Defendants misapprehend the well-settled rule that ‘one is personally liable for all torts committed by him, including negligence, notwithstanding that he may have
acted as agent for another or as an officer for a corporation.’ Strang v. Hollowell, 97 N.C. App. 316, 318, 387 S.E.2d 664, 666 (1990) (citing Palomino Mills, Inc. v.
Davidson Mills Corp., 230 N.C. 286, 52 S.E.2d 915 (1949)).

Op. 64.

What about the lack of justifiable reliance which doomed the common law fraud claim, you may be thinking.  Judge Murphy disposed of that in a footnote, saying: "The Court is unaware of any case law asserting that the common law fraud requirement for alleging justifiable reliance extends to statutory claims for securities fraud. And, the Court declines to extend such a requirement to this claim at this stage."  Op. 63 & n.2.

Derivative Action

A member of an LLC who wants to file a derivative action is required by statute to allege "with particularity the efforts, if any, made by [him] to obtain the action [he] desires from the  managers, directors, or other applicable authority and the reasons for [his] failure to obtain the action, or for not making the effort."  N.C. Gen. Stat. §§ 57C-8-01(a)–(b) (2011). 

The efforts of these Plaintiffs to make the LLC aware of their claims were limited to sending a letter outlining their claims along with the contemporaneously filed Complaint.  Judge Murphy found that to be "insufficient" to meet the requirements of the statute and he therefore dismissed the derivative claims.

And More

There are many more claims discussed in this Opinion, including an unfair and deceptive practice claim, a civil conspiracy claim, and a constructive trust claim.  There is also discussion of equitable estoppel and a request for an accounting.

 

For the first time that I am aware of, the Business Court has found a Complaint to sufficiently allege a breach of fiduciary duty claim against a bank, in today’s opinion in WNC Holdings, LLC v. Alliance Bank & Trust Co., 2012 NCBC 50.

The case has a familiar ring to it on the facts.  Real estate loan based on an appraisal alleged to have overvalued the property.  Bank loaned $1 million plus which the borrower says it wouldn’t have borrowed but for the appraisal.  Property never developed due to financial downturn.

The borrower alleged the Bank had done more than just lend money, saying that it had served as a financial and development advisor for the project.  It said that the Bank had:

  • “review[ed] property development agreements and [made] suggested changes”
  • “[performed] inspections of the property and development," and
  • “complet[ed] financial feasibility pro [forma]” statements that are traditionally completed by the debtor.

Op. 62.

Those alleged facts were enough to Judge Murphy to state a claim for breach of fiduciary duty, and he denied the bank’s motion to dismiss.

If you are a lawyer representing banks, there’s still not much to worry about on the fiduciary duty front.  The Business Court said in an earlier case that  an ordinary debtor-creditor relationship generally does not give rise to the "special confidence" needed for a fiduciary relationship. Peak Coastal Ventures, LLC v. SunTrust Bank, 2011 NCBC 13 (N.C. Super. Ct. May 5, 2011).  It dismissed a fiduciary duty claim in Allran v. Branch Banking and Trust Corp., 2011 NCBC 21 (N.C. Super. Ct. July 6, 2011). And the Court of Appeals affirmed the dismissal of a fiduciary duty claim against a bank in Branch Banking & Trust Co. v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992).

Judge Murphy mentioned all those cases, but he left out Wells Fargo Bank, N.A. v. Vandorn, 2012 NCBC 6 (N.C. Super Ct. January 17, 2012), in which Judge Gale said in dismissing a fiduciary duty claim against a bank that “in an ordinary lender-borrower relationship, the lender does not owe any duty to its borrower beyond the terms of the loan agreement."  Op. 17.

 If you think that tailors have nothing to do with class actions, you are wrong.  Judge Jolly denied a motion for class certification last week because the proposed class was not "tailored" as was "practicable under the circumstances." Op.  ¶37 & n.34    The case is Lee v. Coastal Agrobusiness, Inc., 2012 NCBC 49.

Here’s the story: Plaintiffs bought an inoculant called N-TAKE from the Defendant to use on their peanut crop.  Instead of enhancing their crop of peanuts, the N-TAKE application resulted in the loss of Plaintiffs’ entire peanut crop.  Twenty of the 87 other purchasers of N-TAKE had similar problems and settled their claims with the Defendant.  Plaintiffs didn’t settle and sought to represent a class of the remaining 67 purchasers of N-TAKE.  

Plaintiffs alleged that all the other N-TAKE purchasers had suffered similar harm to their peanut  crops,  and were therefore proper members of the proposed class.  But Judge Jolly was not willing to accept that assertion without "at least some demonstration of a causal connection between the purchase and use of N-TAKE by proposed class members and some harm suffered by them as a result."  Op.  36.  He said there was no evidence in the record of losses to the proposed class members.

What led in part to this ruling was the advanced stage of the case.  It was well past the pleadings, and there had been substantial discovery and therefore an opportunity to contact the members of the [proposed class and to confirm their actual losses.  Judge Jolly held:

Our courts have made a distinction between a plaintiff’s burden of demonstrating the existence of a class at the pleading stage and the same burden following discovery and a hearing on class certification.  [Crow v. Citicorp Acceptance Co., 319 N.C. 274, 282, 354 S.E.2d 459, 465 (1987)]  Where, as here, there have been ample opportunities  for discovery and a hearing on class certification, Plaintiffs must establish, to the satisfaction of this court, "the actual existence of a class, the existence of other for prerequisites to utilizing the class action procedure, and the propriety of their proceeding on behalf of the class." Id. (emphasis added). At the current stage of these proceedings it is insufficient for Plaintiffs merely to allege the existence of a class. Id. Instead, Plaintiffs must demonstrate the actual existence of a class. Id.

Op.  32 (emphasis in original).

He remarked (in 34) that plaintiffs’ counsel had not done anything to contact the potential class members, although the names of all the N-TAKE purchasers had been disclosed by the defendants during discovery.

Further daunting the request for class certification was the Court’s perspective that it would "be required to conduct sixty-seven separate trials in order to reach an appropriate damages award as to the class plaintiffs."  Op.  42.

So where does this "tailoring" business come from?  The NC Court of Appeals said in Blitz v. Agean,, Inc., 197 N.C. App. 296, 311, 677 S.E.2d 1 (2009) that a class plaintiff has the burden to "show that he has, through thorough discovery and investigation, presented the trial court with as tailored a proposed class as practicable."  Op.  37 & n.34.