The Option ruled on by the Business Court yesterday in NRC Golf Course, LLC v. JMR Golf, LLC, 2010 NCBC 20, said that the Plaintiff had the option to purchase a golf course for “fair market value at exercise date validated by an independent third-party appraisal." 

Plaintiff offered $750,000, which was the value for the golf course "validated"  by an appraisal from Hotel & Club Associates, Inc., but the Defendant refused to close, contending that the Option was not valid.

It’s not unusual for North Carolina courts to enforce options which leave the purchase price to be determined by appraisal, so why did this option fail?  See, e.g. Phoenix Ltd. Partnership  v. Simpson, 688 S.E.2d 717, 719-20 (N.C. App. 2009)  As the Business Court put it in the NRC case, the NRC Option "not only lack[ed] a sufficiently definite price term, but also lack[ed] a sufficient method by which to determine the price term." Op. ¶45.

What was necessary, said the Court,  was a "clear and unambiguous direction on how to arrive at a purchase price, so that the parties do not have to reach further agreement before a final price may be determined."  Op. ¶47.

The "fatal flaw" of this option was the lack of any agreed upon mechanism for selecting an appraiser or for resolving discrepancies in the fair market value opinions of different appraisers.  There was sufficient elasticity in this option, as the Court saw it, to permit the seller to unilaterally employ its own appraiser, who might have delivered a much higher opinion of the fair market value for the property than the $750,000 offered by the plaintiff-buyer.  In that event, the option contained no means for resolving the dispute over price.

The Phoenix case, mentioned above and which I wrote about a year ago, allowed buyer and seller each to choose an appraiser to determine the purchase price under the option.  In the event of a wide variance as to fair market value, the option said that the two appraisers would pick a third appraiser, and that the purchase price would be the average of the two closest appraisals.  That price determination provision wasn’t the focus of the opinion, which was the effect of a lengthy environmental clean-up of the optioned property on a "time is of the essence" provision.

That looks like the last opinion in 2010 from the Business Court, and also the last post this year from this blog.  Happy New Year, and best wishes for 2011.

 

 

 

Superior Court Judge Calvin Murphy has been appointed as a Business Court Judge to replace Judge Albert Diaz, who is leaving the Business Court for the Fourth Circuit Court of Appeals.  All of Judge Diaz’ pending cases were assigned to Judge Murphy by Judge Tennille in an Order signed December 23rd.

I have never appeared before Judge Murphy, who sat in Mecklenburg County, so the only information I can give you about him results from a Google search.  But If you go down the same Google road that I did, be aware that Judge Calvin Murphy, who did play basketball in college, is not the same Calvin Murphy who played point guard for the Houston Rockets.

The Mecklenburg County Bar News reported in 2005 that Judge Murphy  had been elected President of the North Carolina State Bar for the 2005-2006 term.  He described his presidency as one "focused on professionalism."  He graduated from Davidson College in 1970, then served as an intelligence officer in the military, and graduated from North Carolina Central Law School in 1977.  He serves on Davidson’s Board of Directors. He was an assistant district attorney in Charlotte from 1977 to 1982, and then had a criminal defense practice.  

Judge Murphy was originally appointed as a Special Superior Court Judge by Governor Easley in 2007.  Senator Kay Hagan had recommended Judge Murphy for a federal Western District  District Court Judgeship last year.

At that time, a former Chief Justice of the North Carolina Supreme Court, Burley Mitchell, described Judge Murphy as a "solid, proven judge[] and [an] excellent legal technician[]" with "a calm, dispassionate demeanor in court."

Judge Murphy’s most highly publicized decision involved the First Amendment protection he gave to the identities of  readers commenting on line about on line news stories.  He said that news sources did not need to disclose the commenters’  identities because they were protected by North Carolina’s "shield law."  There was a thorough discussion of that decision earlier this year on Brooks Pierce’s Newsroom Law Blog.

I found no record of any business cases decided by Judge Murphy which were appealed.  What I did find were 31 criminal law cases decided by Judge Murphy which were  appealed to  the North Carolina Court of Appeals, 

I am  looking forward to writing about Judge Murphy’s decisions while he is sitting on the Business Court.  He starts with a full caseload.

Unless you live in a cave, you know that the nomination of Judge Diaz of the Business Court to the Fourth Circuit has finally been confirmed by the Senate. The confirmation, a unanimous one, has been widely reported by North Carolina newspapers, including those in Charlotte, Greensboro, and Raleigh. 

This vote took quite a while.  Judge Diaz is said to have been waiting for confirmation by the Senate longer than any other nominee of President Obama.

President Obama held out Judge Diaz as an example of the type of nominee who should be confirmed in a letter sent three months ago by the President to the Senate  That letter didn’t speed up the process.  There are still thirty judicial nominees approved by the Senate Judiciary Committee awaiting an up or down vote from the full Senate. 

North Carolina Senator Kay Hagan attributed the delay on the Senate vote for Judge Diaz   "to partisan reasons having nothing to do with his qualifications."

According to the Business Court’s last Report to the General Assembly as of February 2010, Judge Diaz was handling 64 cases in the Business Court.  The Fourth Circuit’s gain is the Business Court’s loss.

The Fourth Circuit ruled today in Albemarle Corp. v. AstraZeneca UK Ltd. that it was required to interpret the forum selection clause negotiated by the parties under English law, which meant that the clause would be read as requiring litigation to be brought in an English court, even though the clause would have been  deemed permissive under American law and would have allowed the lawsuit at issue to be filed in the South Carolina court where it had in fact been filed.

The contract, which required AstraZeneca to buy an ingredient for an anesthetic from Albemarle, contained a forum selection clause which said that the contract "shall be subject to English Law and the jurisdiction of the English High Court."

In affirming the dismissal of the case, the Fourth Circuit aligned itself with six other circuits and held that "a federal court interpreting a forum selection clause must apply federal law in doing so."  Federal law on this subject is that ‘an agreement conferring jurisdiction in one forum will not be interpreted as excluding jurisdiction elsewhere unless it contains specific language of exclusion.’"

English law?  In this case it is as different from federal law as my breakfast this morning was from bangers and mash.  ‘"Under English law, when the parties designate the English High Court as an appropriate forum, the designation is mandatory and exclusive."  Thus, litigation in the High Court was required per English law.

The only issue remaining for the Court was whether it would be unreasonable to enforce the English forum selection clause, an inquiry required by a 1972 Supreme Court decision, The Bremen, 407 U.S. 1 (1972).  In The Bremen, the Supreme Court upheld an English forum selection clause "in the light of present-day commercial realities and expanding international trade" unless it could be shown that such enforcement might violate "a strong public policy" of the unselected forum in which the case had been brought.

In the Albemarle case, Judge Niemeyer rejected the argument that South Carolina had a strong public policy against the enforcement of forum selection clauses because of a state statute disfavoring such clauses.  Quoting The Bremen, he said that the federal policy enforcing such clauses made them "an almost indispensable precondition  to achievement of the orderliness and predictability essential to any international business transaction."  Id. at 13-14.

The North Carolina Business Court has previously enforced a forum selection clause specifying a foreign jurisdiction in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct. Feb. 18, 2009) (Diaz).

 

 

The Business Court dismissed a legal malpractice claim right before Thanksgiving last week in Inland American Winston Hotels, Inc. v. Winston, 2010  NCBC 19.  Judge Tennille found Plaintiff’s expert, a  Duke Law School professor, to be incompetent to testify to the Defendant lawyer’s alleged breach of his duty of care.

The claimed malpractice concerned the lawyer’s work on a commercial real estate transaction by which the Plaintiff acquired an entity from the Defendant and by which an entity controlled by the Plaintiff was substituted as the purchaser under an option.  The alleged breach of fiduciary duty (a form of professional malpractice) was the lawyer’s role in a change of the identity of the purchaser under the option.

Expert testimony is necessary in almost all cases to prove professional negligence, and Judge Tennille found the professor to lack the "requisite experience" to supply the required expert testimony, observing that he came up short on a number of grounds:

  • He hadn’t been licensed to practice law for more than 25 years;
  • He had never been licensed to practice law in North Carolina; and
  • He had never conducted any real estate transaction "as a lawyer or represented any individual, partnership, joint venture, LLC, or corporation in any real estate transaction. "

Op. ¶37.  Another factor contributing to the dismissal of the claims against the lawyer was the expert shooting himself in his own foot at his deposition, when he gave up any assertion that he was an expert in the sphere of real estate transactions:

  • He testified he did  not "consider himself to be an expert in the practice of real estate development or the practice of law related to real estate developments."
  • He admitted that he did "not know everything that a real estate lawyer does in representing a developer, putting together deals, and seeing them through to closing," and he conceded that he did "not know for sure . . .what the standard of care is for written engagement letters for an attorney handling the type of transaction at issue in this case."

The professor was undoubtedly an expert in the field of legal ethics, which he teaches at Duke.  He formed his opinion that the Defendant lawyer had been negligent based on what he saw as violations of the North Carolina Rules of Professional Responsibility, but the Court observed that "North Carolina appellate courts repeatedly have rejected the use of the Rules of Professional Conduct to establish attorney liability."  Op. ¶39.

The takeaways from this opinion are: if you are pursuing a malpractice claim in the Business Court against a lawyer, you need an expert witness who has been practicing in the field of the alleged malpractice in North Carolina, not a law school professor without that background.  And have your expert be sure about the applicable standard of care.

This is the second significant opinion to come out of the Inland American lawsuits.  The first concerned the enforceability of agreements to agree, which I wrote about in March 2009.

When you are filing a complaint to federal court, or removing one to federal court, the value of a claim for injunctive relief can be included in determining whether the $75,000 amount in controversy required for diversity jurisdiction under 28 U.S.C. §1332(a) is met.

Today in JTH Tax. Inc. v. Frashier  the Fourth Circuit reversed the trial court’s sua sponte dismissal of a franchisor’s complaint for failing to meet the amount in controversy requirement.

Plaintiff had franchised a tax preparation service to the Defendant.  When Defendant closed the office, Plaintiff sued him for $80,000 and requested injunctive relief enjoining him from competition.  When time for summary judgment rocketed around, Plaintiff requested only $60,000 in damages and the trial court dismissed the complaint on the ground that the required amount in controversy was lacking.

That was error, said the Fourth Circuit, because the burden was on the defendant to show that it was legally impossible for the Plaintiff to recover the jurisdictionally sufficient amount alleged in the complaint. and because the court had failed to consider the value of the injunction asking Defendant to be enjoined from operating a competing tax return business.

The Fourth Circuit said that "like requests for money damages, requests for injunctive relief must be valued in determining whether the plaintiff has alleged a sufficient amount in controversy."  The  value of the injunction could either be measured by its worth to the plaintiff or its cost to the defendant.

Plaintiff proposed two alternative values for the injunction which the Court found to meet the standard of being "facially plausible."  One was the value of the franchise, calculated in line with Plaintiff’s regular accounting practice of valuing franchises at 130% of their previous year’s receipts.  The Court also considered Plaintiff’s loss of goodwill, or its "market credibility."  Plaintiff based that on the $12 million it had spent on advertising during the prior year.

On the cost of the injunction to the Defendant, the Court looked to rental payments of $500 per month that would have been due to the Plaintiff  over the remaining sixteen month term of the franchise agreement.

 

 

Until December 10, 2010, lawyers need to remain aware that, in cases pending in  federal court  their communications with their retained expert witnesses and any draft reports prepared by the expert are likely to be discoverable based on a request from opposing counsel.

The expert rule changes which become effective on December 10  will give work product protection to both items.  This will permit attorneys to have more involvement in the preparation of an expert’s report without their involvement being subject to discovery. The new Rule also specifically exempts draft reports from any disclosure obligation.  

The limited exceptions to the work product protection specifically granted by new FRCP Rule 26(a)(4) (B) and (C) are contained in new FRCP Rule 26(a)(4)(C), and include:

  • communications regarding compensation to be paid to the expert,
  • "facts or data that the lawyer provided and that the expert considered in forming his opinion."
  • assumptions provided by the attorney upon which the expert relied in forming his opinion.

The former practice of dodging the need to disclose communications with an expert or the expert’s draft reports, by  which lawyers limited written communications to their experts and may have encouraged their experts not to keep drafts of their reports, will no longer be necessary.  The revisors felt that the discoverability of draft reports and the written give and take between lawyers and their experts "inhibited robust communications" between them.

The rule remains unchanged in the North Carolina Rules of Civil Procedure.  The Business Court ruled in 2008 that there is no privilege between counsel and an expert witness, which had been the general approach in federal cases. So, communications between lawyers and their experts remain discoverable in state court litigation regardless of the December 10 changes.

According to the judge chairing the committee responsible for the revisions the "changes will reduce cost, focus discovery and trial on the merits of the experts’ opinions, and allow parties and their counsel to make better use of their experts."  An interview in which he discusses the changes is here.

There are also changes to Rule 56, which governs summary judgment.  As I read the revised Rule, it doesn’t mark a change in how lawyers in North Carolina would approach a motion for summary judgment, but it is worth a read before you file or oppose a summary judgment motion in federal court after December 10.

From April 2009 through January 2010, I did a post at the beginning of each month on the new cases designated to the Business Court during the prior month. That’s been missing during my hiatus, without any outcry, but I am now resuming that service for October 2010.  There were nine new cases last month, running the usual gamut of minority shareholder claims to trade secrets claims, and breaches of fiduciary duty.

Blount Three Properties, LLC v. York Properties, Inc. (New Hanover):  Allegations that promoter and broker of shopping center development failed to make material disclosures prior to the sale of the property to the Plaintiffs

Carolinas AGC, Inc. v. Goodrich Hendry (Mecklenburg)(Diaz): claims that Defendant misappropriated Plaintiff’s confidential information and trade secrets to develop an internet database in competition with the Plaintiff.

Dugdale v. Polymer Group, Inc. (Mecklenburg)(Diaz): action by shareholder of Plaintiff to enjoin acquisition of the Plaintiff by Blackstone Group LP based on alleged breaches of fiduciary duties of the directors of Plaintiff. Plaintiff seeks class action certification.

Front Street Construction, LLC v. Colonial Bank, N.A. (Wake)(Jolly): claims that Defendant lender, acquired by BB&T, engaged in fraudulent and misleading conduct by failing to disclose that it was in financial difficulty when its loan to the Plaintiff was made, which led to it being unwilling or unable to fund the loan as represented.

Nestor v. Webb (Scotland)(Jolly): antitrust claim in which the Plaintiff alleges that the Defendants have conspired to monopolize the market in North Carolina counties for the market for kidney dialysis treatment services.

Peak Coastal Ventures, LLC v.SunTrust Bank (Forsyth)(Tennille): claim by Plaintiff that Defendant’s loan to the Plaintiff, an LLC, was not authorized by the Plaintiff as required by its operating agreement, which required majority approval by the managers of the LLC.

Thomas v. Moonracer, Inc. (Wake)(Jolly): minority shareholder claim alleging breach of fiduciary duty by the majority shareholders and seeking dissolution of the Defendant corporation.

Wilkie v. Stanley (Guilford)(Tennille): claims that Defendant violated partnership agreement

Wireless Communications, Inc. v. Epicor Software Corp. (Mecklenburg)(Diaz): claims that defendant made misrepresentations in connection with the licensing of business operations software

If you are bringing or defending a derivative action in North Carolina, you may have to look to the law of another state to determine whether a pre-filing demand on the board of directors to pursue the claim is a prerequisite and whether there are any exceptions to the need for a demand.  The law depends on the corporation’s state of incorporation.  In a case decided by the North Carolina Business Court on Friday, Smith v. Raymond, 2010 NCBC 18, the application of Delaware law resulted in the dismissal of  a derivative action against the directors of a Delaware corporation because of the Plaintiff’s failure to establish that the demand should have been excused because a demand would have been futile.

Delaware and North Carolina disagree on the futility exception to the demand requirement.  North Carolina does not recognize a futility exception.  In a 1998 decision in Greene v. Shoemaker, Judge Tennille observed "it is absolutely clear that the [North Carolina] legislature intended to adopt the universal demand requirement and eliminated the futility exception when it passed the 1995 North Carolina Business Corporation Act."  Delaware. with a different point of view, recognizes futility as an excuse to the demand requirement.

So do North Carolina’s lawyers need to know about demand futility when it has been rejected as an exception to demand in North Carolina?  Sure, because when a Delaware corporation is the defendant in a derivative action, the application of Delaware law to resolve issues is required by North Carolina statute.  The General Statutes provide that "in any derivative proceeding in the right of  foreign corporation, the matters . . . shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation."  N.C. Gen Stat Sec. 55-7-47 (2009). The failure to make a demand before filing  a lawsuit against a Delaware corporation resulted in the dismissal  on Friday in Smith v. Raymond.

The defendants in the Smith case were outside directors of Horizon Lines, Inc.  Other directors had previously pled guilty to price-fixing charges, and the Complaint in the North Carolina case asserted that the outside directors had "knowingly conspired" in the illegal price-fixing plan and that a demand upon them would therefore have been futile.

Judge Diaz held that the allegations of the Complaint "fell far short of what is required under Delaware law to excuse demand."  He described those allegations as "blanket allegations that the directors participated in or approved the alleged misconduct."  A 1993 Delaware Supreme Court decision, Rales v. Blasband, 634 A.2d 927 (Del. 1993) requires "particularized factual allegations" as to why a demand would have been futile.

Demand can also be excused under a standard set forth in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), which applies when a particular transaction is being challenged.  In such a case, the questions are:

i) whether a reasonable doubt is created that the directors are disinterested and independent; and (ii) whether the pleading creates a reasonable doubt that the challenged transaction was anything other than the product of a valid exercise of business judgment.

The Aronson standard didn’t apply, according to Judge Diaz,  because the Complaint did not allege a decision by the Horizon board of directors which would implicate the business judgment rule.

The best place to keep up Delaware law regarding corporations  is Francis Pileggi’s Delaware Cororate and Commercial Litigation Blog.

Brief in Support of Motion to Dismiss

Brief Opposing Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

 

Yesterday, the Business Court entered a preliminary injunction against a distributor which the Court determined had engaged in deceptive conduct by "passing off" a Chinese product as coming from the American manufacturer of a  superior product, in Pittsburgh Corning Corp. v. McCormick Insulation Supply, Inc.

Plaintiff Pittsburgh Corning Corp. is the only American manufacturer of cellular glass insulation, which it sells under the trademark FOAMGLAS.  McCormick had been a licensed distributor of FOAMGLAS until May 2008.  After that, McCormick began delivering the Chinese insulation to its customers even as it continued to represent on its website that it was still a distributor for the Plaintiff, and it accepted orders from customers specifying Plaintiff’s trademarked product.

Testing of the product after it was installed revealed that it contained carcinogenic levels of crystalline silica about which the buyers had not been informed.

The Order outlines the circumstances under which McCormick sold 220,000 pounds of the Chinese insulation to 53 customers who believed they were receiving PCC’s product.  Judge Tennille called McCormick’s actions deceptive (Op. ¶¶39, 50-51).

The injunction entered was sweeping, ordering McCormick among other things to notify all 53 customers which had received the Chinese product of its opinion, and the Court drafting a letter for McCormick to send  to those customers informing them of the inadequacy of the Chinese product and its carcinogenic nature.