Persistence can be a valuable quality, but when it leads to an unjustified refusal to give up a questionable case, the party suffering from persistency can get socked with attorneys’ fees.  That was the result in Judge Gale’s Order on Tuesday in McKinnon v. CV Industries, Inc.

McKinnon was entitled to benefits under a Severance Agreement which looked at when he had stopped competing with CV Industries after leaving his employment (yes, it’s unusual for a party to say he’s entitled to benefits because he was competing with his former employer but that was the situation here).

McKinnon argued throughout discovery, and into the Court of Appeals and then into a Petition for Discretionary Review with the NC Supreme Court that his employment with a company called Basofil Fibers was in competition with CV Industries.  CV Industries manufactures high-end furniture and fabric through two subsidiaries.  Basofil manufactures and sells fiber, but not fabric.

The Business Court’s opinion by Judge Tennille on summary judgment — and the Court of Appeals opinion — turned on the meaning of the word "competition.  McKinnon urged a very broad definition saying that Basofil "competed" with CV Industries because they both sold product to the furniture industry.  Both Judge Tennille and the COA rejected that argument.  The COA said that "competition":

entail[s] more than mutual existence in a common industry or marketplace; rather, it requires an endeavor among business entities to seek out similar commercial transactions with a similar clientele.

It also observed that under McKinnon’s theory of "competition," nearly every business selling any product or service to the furniture industry would be in competition with one another.  It said that McKinnon’s definition was "unpersuasive" and "excessively broad."  Appellate Opinion at  17.

The basis for the award of fees was N.C. Gen. Stat. Section 6-21.5, which says that "[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney’s fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The issue wasn’t whether McKinnon had a valid belief of a"justiciable issue" that he could prove he was in competition with his former employer when he filed his complaint .  As Judge Gale put it, "the more difficult question is whether he legitimately continued in that belief when pressed during the course of litigation to support his claim and failed to present a clear basis on which he could claim relief."  Op. ¶58.

When was the turning point when that belief was no longer legitimate?  Judge Gale said that it was after summary judgment was entered against McKinnon on his claims.  Judge Gale ordered that CV Industries was entitled to $40,000 in fees for McKinnon’s unjustified persistence after that point.

Judge Tennille’s summary judgment Order left no doubt on how he viewed the claims.  He said that "with the exception of Mckinnon’s self-serving conclusory allegations" it was "entirely unrefuted" that McKinnon’s employer was not in competition with the Defendant.

The fee award was probably not satisfactory to the Defendant, which had sought $322,000 in fees, presumably the cost of defending the case from the outset.  If that’s so, it probably explains why the Defendant also moved for fees per Rule 11.  Rule 11 requires that a Complaint (or any paper filed with the Court) must be "well grounded in fact and . . . warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

The problem with the Rule 11 argument was that the analysis of an entitlement to sanctions stops with the Complaint itself.  It is limited to "a review of the challenged pleading and whether it was warranted by facts and law known to the submitting party at the time the pleading was signed."  Op. ¶37.

The inquiry under section 6-21.5 is different and more flexible.  There, the court properly looks "beyond a particular pleading to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue.” Op. ¶43 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991).

Don’t walk away from McKinnon thinking you are entitled to attorneys fees just for getting summary judgment against a claim.  That’s certainly not the law. Success on summary judgment is only some evidence "to support . . . a finding" for fees.  Op. ¶42.

If you were waiting anxiously, as I was, for the Chief Justice of the North Carolina Supreme Court to elucidate the process for challenging a Business Court designation, which I wrote about a couple of weeks ago, your torture is over.

Chief Justice Parker ruled in a short Order in Ekren v. K&E Real Estate Investments, LLC that the "Motion to Revoke Status as a Mandatory Business Court Case" filed last month was "denied."  The Order was posted on the Business Court website yesterday. 

There was no explanation about whether a "Motion to Revoke" is the proper procedure to follow under G.S. §7A-45.4 to get a final review of a Business Court designation.  In fact, there was no discussion at all of how to appeal to the Chief Justice, as the statute says to do, when that final review is sought.  The Order looked much like one of the form Designation Orders that the Chief Justice issues when assigning a case to the Business Court

I was hoping for more, as you know from my earlier post on the issue.  But if this blog only covered the keenly written opinions with business litigation value that come from the NC Supreme Court, it would be a long and lonely vigil.  In four years, I’ve only written about a Supreme Court decision once.  That post was aptly titled "Lightning Strikes."

The lack of output from our Supreme Court has been the subject of much discussion, including this piece in the Greensboro News & Record.  My personal empirical research on the Court’s productivity (conducted by my cat, Dusty, upon my special assignment) showed that in 2011, the Court issued only 13 civil opinions.  Dusty (pictured below) arrived at that number by excluding all 2011 opinions captioned "State v. ____."  Of the 13 civil opinions, 7 were "per curiam," meaning that no Justice of the Court had individual responsibility for authoring the "opinion."  Per curiam opinions typically have little discussion of the merits or the defining law.

So it’s no surprise that after the Ekren "decision"  we are left without any independent analysis from the high state Court on how to oppose Business Court jurisdiction. And Dusty had no comment.  She went out hunting chipmunks after completing her project, and then took a nap. So there’s nothing more to say, except that Dusty was known to my daughters as the "smart cat" of the family even before her dumb sister got outside and ran away.  Dusty was uniquely qualified to conduct this research.  But as you can tell from her picture, she found the project very boring.

 

 

 

Wow.  The Business Court was busier churning out opinions last week than I wanted to be working on my blog, so here’s a catchup and a rundown on two cases you should know about.  Two more coming after the holiday.

Internal Affairs Doctrine.  The internal affairs doctrine is a conflict of laws rule which says that only one State should have the authority to regulate a corporation’s internal affairs.  In Mancinelli v. Momentum Research, Inc., 2012 NCBC 28, Judge Jolly ruled that Momentum’s state of incorporation, Delaware, should govern issues regarding Plaintiff’s claim that she was orally promised a 15% share ownership by the corporation. 

The Court rejected the argument that it should apply the "most significant relationship" test or  the lex loci doctrine test (the place of contracting), which would have resulted in North Carolina law applying.

That’s significant because the corporation was based in North Carolina, and the agreement claimed by the Plaintiff had been entered into in North Carolina.  But the Court rejected the argument that North Carolina law should trump Delaware’s because the business was based in NC.  The application of Delaware law resulted in the dismissal of Plaintiff’s claim because an oral agreement for the issuance of shares, which was the basis of her claim, is not enforceable under Delaware law.

If you are a North Carolina lawyer representing a Delaware corporation here in NC, it’s probably a good idea to know what constitutes an "internal affair" that will be governed by Delaware law.  Judge Jolly quoted the following examples from the Restatement of Conflict of Laws:

[S]teps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors’ and shareholders’ meetings, methods of voting including any requirement for cumulative voting, shareholders’ rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and reclassification of shares.

Op. 12.

Res judicata.  The message of this particular Tong v. Dunn case (it’s one of three) is don’t split your claims or they are likely to be barred by res judicata.  Tong filed a suit in Superior Court, later removed to federal court, alleging that he had been fraudulently induced to agree to a merger.  Then Tong filed a lawsuit (nine days after his first one) alleging that the Defendants had breached their fiduciary duties by entering into the same transaction. 

Judge Gale extolled the virtues of res judicata —  it "relieves litigants of the cost and confusion of multiple lawsuits, conserves judicial resources, and encourages reliance on adjudication" — and observed that very similar facts had been pleaded in both Tong actions.

Res judicata bars a subsequent action when: "(1) there is a final judgment on the merits; (2) between the same parties; and (3) involving the same claim."  Op. 21

Tong’s lawyers conceded that their voluntary dismissal of the federal court action with prejudice operated as an adjudication on the merits, so the issue for the Court was whether the federal court action and the case before it involved the "same claims."  That look some discussion, because the Judge said that "[t]he test for determining ‘same claims’ for purposes of res judicata has not been definitively stated by our appellate courts." Op. 22

He cast the analysis in terms of the principle against "claims splitting," and observed that "all damages incurred as the result of a single wrong must be recovered in one lawsuit."  Op. 27  That rule isn’t ironclad.  Sometimes successive lawsuits alleging common facts can go forward, especially when all the facts weren’t known with reasonable diligence at the time of the earlier adjudication.

But that wasn’t the case with Tong’s claims.  The claims in the second lawsuit were barred by res judicata because all of the facts relevant to his claims were known to him when he filed the dismissed federal court case and there was no compelling reason that all of his claims could not have been asserted in the first action.

You might remember having heard about Tong and Dunn from the Tong v. Dunn decision from the Business Court in March , 2012 NCBC 16, which I wrote about last month.  This new Tong v. Dunn case has the same parties in a decision involving different claims.

There was obviously way too much claims splitting going on with Tong.  Do any of you tell your clients that they need to file three lawsuits to get relief?

Happy Memorial Day.

 

 

The broadly written scope of the covenant not to compete before the Business Court in Outdoor Lighting Perspectives Franchising, Inc. v. Harders led to the denial of Plaintiff’s Motion for a Preliminary Injunction this week.

The covenant said that the Defendant, a franchisee of the Olaintiff, could not compete "in any Competitive Business."  The term "Competitive Business" extended to any business in competition  with an outdoor lighting business or any business similar to the "Business."  The term "Business" was defined more narrowly, limited to "the business operations conducted or to be conducted by the [Defendant] consisting of outdoor lighting design and automated lighting control equipment and installation services, using the" Plaintiff’s "systems, concepts, identifications, methods and procedures developed or used by the" Plaintiff for the sales and marketing of its Products and Services.

Judge Gale found the term "Competitive Business" to be overly broad and to reach[] beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and that it therefore fell "within those cases which prohibit unreasonable restrictions on competition."  Op. ¶6.

He further said that the "expansive" term "extends well beyond activities that Defendants performed
pursuant to the Agreement. It likewise extends beyond the business [Plaintiff] itself conducts.  The language thus extends beyond [Plaintiff’s] legitimate business interests." Op. ¶35

Lurking in the opinion was the possibility that the covenant might have been valid under the more liberal standard applied in evaluating a covenant given in connection with the sale of a business. Judge Gale obviously felt that he lacked the authority to give the covenant in this franchise agreement that kind of interpretation, as urged by the franchisor, but he highlighted that issue for a future case, saying:

A North Carolina appellate court may later adopt a standard of general application to franchises that affords well written competition restrictions in a franchise agreement the benefit of the more liberal standard afforded to agreements incidental to the sale of a business.

Op. ¶9.

But until that happens, the scope of a franchisee’s covenant not to compete is more likely to pass scrutiny if it is limited to the current scope of the franchisee’s business.

 

The Financial Institutions Reform, Recovery and Enforcement Act, affectionately known to banking lawyers as FIRREA, is a statute passed by Congress in the late 1980’s at the tail end of the savings and loan crisis of that decade.  It bars lawsuits against institutions in FDIC receivership and requires that claims first be presented to the FDIC for administration before being made in court.  In other words, there is no subject matter jurisdiction over those claims.

Last week, the Business Court took up a case of first impression in North Carolina: to what extent is FIRREA a bar to claims against a bank that acquires the assets of a failed bank from the FDIC?  That was the threshold issue in Front Street Construction, LLC v. Colonial Bank, N.A., 2012 NCBC 25. Some of the assets and liabilities of Colonial had been acquired by BB&T, against which Front Street sought to make its claims arising from Colonial failing to fund a loan.

After a summary of a number of cases on this issue of successor liability and FIRREA, Judge Jolly elected to reject the reasoning of another court involving the same acquisition by BB&T, Frazier v. Colonial Bank, 2011 U.S. Dist. LEXIS 22630 (M.D. Ala. 2011). 

He said that the proper resolution of Plaintiffs’ claims depended on the terms of the document by which BB&T had acquired any assets and liabilities of Colonial Bank. This was the Purchase and Assumption Agreement between BB&T and the FDIC (the PPA). This climb up the FIRREA beanstalk via the terms of the PPA had been led by several other federal court decisions which Judge Jolly found persuasive: Fernandes v. JPMorgan Chase Bank, N.A., 818 F. Supp. 2d 1086 (N.D. Ill. 2011); Caires v. JP Morgan Chase Bank, 745 F. Supp. 2d 40 (D. Conn. 2010); Rundgren v. Washington Mut. Bank, F.A., No. 09-00495, 2010 U.S. Dist. LEXIS 126803 (D. Haw. Nov. 30, 2010); Moldenhauer v. FDIC, No. 2:09-CV-00756 TS, 2010 U.S. Dist.LEXIS 25315 (D. Utah Mar. 18, 2010). 

The Plaintiffs’ claims bogged down when the Court examined a Shared Loss Agreement between BB&&T and the FDIC, which said that the FDIC would reimburse BB&T for at least some of the losses incurred by BB&T on certain loans assumed by BB&T. Plaintiffs didn’t allege that the Colonial loan agreement on which their claims were based was covered by the Shared Loss agreement, and Judge Jolly ruled that they had not carried their burden of showing that the Court had jurisdiction in the face of FIRREA.      Most of Plaintiffs’ claims were dismissed due to the Business Court’s lack of subject matter jurisdiction.

One claim that was left standing after Judge Jolly’s Order was the Plaintiff’s claim against BB&T directly, for BB&T’s failure to fund the loan after it assumed Colonial’s assets. He held that FIRREA did not apply when bringing a claim against a sucessor bank for its own conduct.             

There were other claims discussed and dismissed by the Court, but none as significant as those raised by the FIRREA issues. And some of those other claims turned on Alabama law, about which I rarely care.   So if you are interested, you need to read the opinion.                                                                                                                                                                

 

 

 

 

You all know the procedure for getting into and out of the jurisdiction of the Business Court.  It’s kind of like the Hotel California: "you can check in any time you like, but you can never leave."  I don’t know why people fight so hard to leave "such a lovely place," but there are often challenges to the Court’s mandatory jurisdiction, and the Chief Judge rarely grants them.

There’s a "check out" procedure in G.S. §7A-45.4 which has never been used before.  It is about to be tested for the first time.   Section 7A-45.4(e) says:

Based on the opposition or ex mero motu, the Business Court Judge may determine that the action should not be designated as a mandatory complex business case. If a party disagrees with the decision, the party may appeal to the Chief Justice of the Supreme Court.

Unless I’ve missed it, which seems unlikely to me, no party has exercised the statutory right to challenge a Business Court Judge’s denial of an opposition to its jurisdiction by an "appeal to the Chief Justice of the Supreme Court."

Well, now that is happening, in a case called Ekren v. K&E Real Estate Investments, LLC.  I am so excited that I can barely wait to see what will happen. 

The Ekren case, which from the Complaint looks like it is well within the scope of the Court’s mandatory jurisdiction, has already been through the opposition procedure.  Judge Jolly denied the opposition to jurisdiction on April 4, 2012.

A "Motion for Supreme Court to Revoke Status As Mandatory Business Court Case" was filed by the Plaintiff on April 23rd.

Does the Motion qualify as an "appeal," which is what the statute dictates?  The Defendant has raised exactly that challenge in its Brief in Response to the Motion.  It says that the Plaintiff hasn’t appealed by filing a Motion, and that it should have filed a Notice of Appeal.  The Plaintiff could have done that because Rule 3(a) of the Appellate Rules says that "[a]ny party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule."

An "appeal" is defined in one of my dictionaries as "an application or resort to another person or authority, esp a higher one, as for a decision or confirmation of a decision."  The Motion by Ekren certainly fits that definition.  It might have been more appealing to title it as  "Appeal to the Chief Justice to Revoke Status As Mandatory Business court Case."  And as far as whether a Notice of Appeal was necessary, can you even file a Notice of Appeal just to the Chief Justice, as opposed to the entire Supreme Court?

And there’s one last question that I see.  The way that Section 75A-4(e) is worded, it seems to be limited to appeals from the Business Court’s determination that a case is outside its jurisdiction, which is the opposite of the ruling in Ekren.

What happens now?  Only Chief Justice Sarah Parker can decide to handle this unusual procedure.  The eyes of the world are upon her.

[Update:  The Chief Justice denied the "appeal" in a summary order on May 17th.  I wrote about that here.]

 

 

If you’ve tried cases, you’ve probably had your own witnesses — who you thought were solid — disintegrate in front of you at trial.  They start acting quirky, begin conceding important points on direct examination they had held on to at their depositions, and are still facing cross-examination.

What do you do?  I can tell you what not to do.  Don’t do what the lawyers did at the trial of Brockington v. Jacobs Engineering Group, Inc.  These lawyers, Gill and Wright, were from Virginia and appearing pro hac in a trial in Johnston County.  The case involved an explosion at a ConAgra plant that had resulted in death and injury to several workers.

Their witness, Pottner, testified that he probably knew that gas lines were being installed across the roof of the ConAgra plant while he and Jacobs Engineering were working there.  This was apparently a significant concession, because Pottner had testified at his deposition that he didn’t recall knowing about the gas lines.

Gill and Wright seemed to have concluded that Pottner had lost his mind.  Gill took him to an Urgent Care after Court on March 20th, and Wright reported the next day that Pottner had an alarmingly high blood pressure and that he might have an aneurysm.  Gill stated that one of Pottner’s pupils had not been sensitive to light, a sign of a neurologic disorder.  They were also concerned that he had had a stroke.

Gill and Wright sent Pottner home to Wisconsin after several days of treatment even though he was still under a subpoena to appear at trial.  Judge Hobgood, relying on the representations of Gill and Wright, said that Pottner had been reported to have had a stroke and a loss of partial use of one side of his body.  He declared Pottner "unavailable" to testify per Rule 804(a)(4) of the Rules of Evidence.  Pottner never finished his testimony.

The Judge learned a little bit later, after medical records were subpoenaed, that the lawyers had misstated Pottner’s condition.  He had not had a stroke, had not lost the use of his body, his blood pressure had not been as high as stated by counsel, and he was under no restrictions when he left Wake Medical Hospital in North Carolina.  Judge Hobgood observed that Pottner could have returned to testify without any danger to his health.

In his Order sanctioning the parties represented by the lawyers, the Judge outlined a number of violations of the NC Rules of Professional Conduct by Gill and Wright.  Those were of:

  • Rule 3.3, which requires candor toward the Court.  A lawyer is obligated to "inform the trial tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse."  Pottner’s counsel had known that Judge Hobgood had not accurately stated Pottner’s condition when he was declared to be unavailable.
  • Rule 3.4, which requires attorneys to conduct themselves with fairness to the opposing party and counsel.  You can’t encourage a witness to leave the jurisdiction and make himself unavailable as a witness.
  • Rule 8.4(d), which prohibits conduct prejudicial to the administration of justice.

Since Pottner had been under subpoena, the defendants were open to a variety of sanctions per Rule 45 of the NC Rules of Civil Procedure.  Rule 45(e)(1) says that the Court can impose upon a party who fails to comply with a subpoena without cause any sanction allowed by Rule 37(d),  Judge Hobgood chose to strike the Defendants’ Answer, saying that "no less a sanction" would provide an adequate remedy to the Plaintiffs.

The Order was entered on April 4, 2012.  Nine days later, the jury, unencumbered by any of the stricken defenses, returned a $14.6 million verdict for the Plaintiffs. 

There is still a punitive damages phase of the case to be tried.  I wonder if the Virginia lawyers will have the nerve to come back.

I wouldn’t have known about this cautionary and very interesting trial court Order but for one of my partners circulating it at Brooks Pierce.  He asked me to keep him anonymous.  If any of you receive Orders that deserve wider circulation, I would be glad to write about them and even to disclose your identity and generosity.

 

 

 

 

It’s about junk faxes and class certification again (and even again) in the Business Court.  Wednesday’s decision in Blitz v. Agean, Inc., 2012 NCBC 20 marks the third time the Court has refused to certify a class action under the Federal Telephone Consumer Protection Act.  (The TCPA, 42 U.S.C. §227, prohibits the transmission of "unsolicited advertisements" to fax machines)

The same Agean case had already been the subject of a dismissal by Judge Diaz, five years ago, but which was reversed by the Court of Appeals in a 2009 decision.  Judge Diaz had hung up on  another putative TCPA class action by Mr. Blitz in Blitz v. Xpress Image, Inc., 2006 NCBC 10.  That one wasn’t appealed.

So why couldn’t the Plaintiff in Agean connect, even after the COA ruling?  Judge Murphy said that even if a common question predominates in a class action, that this isn’t the end of the analysis.  He held "a common question is not enough when the answer may vary with each class member and is determinative of whether the member is properly part of the class."  (quoting Carnett’s, Inc. v. Hammond, 610 S.E.2d 529, 532 (Ga. 2005).

It was getting the answer to the question of whether each of the proposed class members had received unsolicited faxes was the problem.  Blitz said the class members were all persons whose fax numbers were on a list purchased by the Defendants, but some of those on the list had requested that the Defendants send them faxes.  So those persons weren’t entitled to be class members.

Judge Murphy said that the Court’s time, at trial, would be consumed with determining whether those included in the proposed class definition were entitled to be members of the class.  Judge Murphy said that "[t]his would have the Court conducting individual inquiries into each [fax] number and result in the type of mini-trials that class actions are designed to avoid." Op. ¶36.

But that wasn’t the only flaw in Plaintiff’s case seen by Judge Murphy.  He was concerned that the class action was being used by Blitz as "inappropriate leverage" to settle his own claims, which were worth only about $2500 (the statute authorizes $500 in damages for each unsolicited fax).  Judge Murphy quoted an early Judge Tennille opinion, Lupton v. Blue Cross & Blue Shield, 1999 NCBC 3, for the proposition that:

Class actions can involve amounts that threaten to cripple or bankrupt the defendant. This creates a potential for abuse that is readily apparent: the use of the class action complaint to put greater financial pressure on defendants to settle with the individual plaintiff.

Id. ¶10.

Judge Murphy, sensing that type of financial pressure at work, said that in his discretion certification "would be unjust on equitable grounds."  Op. ¶39.

Sometimes it takes longer to find the picture for the post than it takes to write the post. Today was one of those days.   I scoured the Internet for a picture of Yogi Berra sending a fax, which would have been ideal, but there are none to be found.  But I was surprised to find that Yogi can be faxed at his family company, LTD Enterprises (the number is 973-655-6788).  So with Yogi’s unavailability,  a dinosaur is what you get.  That’s what the fax machine has become.  There also were no pictures available of dinosaurs sending faxes (come on, look at those little hands on the tyrannosaurus!) and not even a fax number for a dinosaur.

 

 

There’s invariably a fight between lawyers over the division of a fee when a lawyer who left the firm generates a fee at his new firm from a preexisting contingent fee relationship.  There’s at least one case of that type in the Business Court (Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer), and the Court of Appeals tangled with one last Tuesday, in Crumley & Associates, P.C. v. Charles Peed & Associates.

The Crumley Firm had an employment agreement with Snyder, an associate who left the firm.  The agreement said that Snyder would pay it 70% of the fees he realized from clients who followed him from the Firm.  He was also required to reimburse the Crumley Firm for any funds it had advanced to the clients.

Approximately 30 clients followed Snyder with their workers’ compensation claims to his new firm, Peed & Associates, and substantial fees (more than $300,000) were generated.  After the Crumley Firm sought its 70% cut, Snyder went to the NC State Bar, asking for an opinion on the enforceability of the agreement.  In a Formal Ethics Opinion, 2008 FEO 8, the Bar ruled the agreement unenforceable, and said it was in violation of Rule 5.6 of the Rules of Professional Conduct.

That wasn’t the end of the matter.  The Crumley Firm then sought recovery on a quantum meruit basis.  The trial court awarded the Crumley Firm $147,946.53 as its reasonable share of the fees.  Both sides appealed.  Crumley wanted more from Peed’s hide, but Peed wanted to pay less, including getting out from under a $1.00 judgment against it for constructive fraud.  That must have hurt Peed’s pride more than its pocket.

Note that the opinion gives no guidance on how the fees should have been allocated.  The two firms stipulated to the amount due the Crumley Firm.

I haven’t read the appellate briefs, but they were apparently sharply worded.  Chief Judge Martin of the Court of Appeals admonished both sides for their tone.  He said that in both their briefs and their oral arguments, they:

freely trade suggestions and outright allegations that the other has engaged in unprofessional and even unethical conduct, perhaps hoping thereby to persuade the Court toward deciding for the party engaging in the least egregious conduct. Those questions are better left to the State Bar and the parties’ peers, and we reject their attempts, in exchanging affronts, to obfuscate the purely legal issues their dispute has presented, first to the trial court, and now to this Court.

Op. at 6.

There are very few people in this world around whom I have to struggle to be civil, but none of them are on our Court of Appeals.  Be on good behavior in Raleigh, even if it is against your nature.

After that admonishment, Judge Martin considered Peed’s argument that the Crumley Firm had unclean hands because the employment agreement violated the Rules of Professional Conduct, and that this barred any recovery of fees whatsoever.

He rejected that argument, saying that it was of "no consequence."  He said that the law "is settled in North Carolina" that:

counsel, who has provided legal services pursuant to a contingency fee contract and is terminated prior to a resolution of the case and the occurrence of the contingency upon which the fee is based, has a claim in quantum meruit to recover the reasonable value of those services from the former client, or, where the entire contingent fee is received by the former client’s subsequent counsel, from the subsequent counsel

Op. at 7-8.

Judge Martin held that the doctrine of unclean hands "is only available to a party who was injured by the alleged wrongful conduct."  Op. at 9.  Since the Crumley Firm had contingent fee agreements with its former clients, it was entitled to the reasonable value of its fees regardless of the supposed dirtiness of its hands with regard to Snyder and Peed.

The Court shot down the Crumley Firm’s argument that Peed had a fiduciary duty to hold the fees owed to the Crumley Firm in trust.  Peed had spent the fees in the course of its ordinary operations, and the Crumley Firm said that this amounted to constructive fraud.  The primary basis for the claimed fiduciary obligation was RPC 1.15-2(g), which says that “if [a] lawyer’s entitlement [to fees] is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.”

But the ethical rule didn’t create a fiduciary obligation.  The Court said that a violation of a Rule of Professional Conduct "does not give rise to civil liability in North Carolina."  Op. at 12, and it reversed the one dollar judgment finding Peed liable for constructive fraud.

There’s obviously no love lost between these two PI firms.  They have been fighting over these fees for the past five years.