https://youtube.com/watch?v=ujVCpOv9IZQ%26hl%3Den%26fs%3D1

This is a follow-up to the most read post on this blog.  That’s the one about the lawsuit brought by the University of Louisville against Duke University when Duke backed out of its contract to play four football games against the Cardinals. Louisville sought a contractual cancellation fee of $150,000 per cancelled game, but Duke won the case on a Motion for Judgment on the Pleadings.

You can read the earier post here, but a quick synopsis of Kentucky Judge Phillip Shepherd’s decision is that Louisville was not entitled to damages because the contract said that Louisville could not get damages if it was able to replace Duke with teams of "similar stature."  The Court observed that at oral argument, Duke . . . persuasively asserted that this is a threshold that could not be any lower."  The Court adopted Duke’s argument that any football team playing in former Division 1-A and many in former Division 1-AA were of "similar statute" to Duke, and dismissed the case. 

Since then, I’ve been wondering: what exactly did Duke’s lawyers say to Judge Shepherd to so "persuasively assert" that Duke football is so bad?

Well, not only can I fill you in on that, you can watch and see for yourselves.  The Court in Franklin County, Kentucky, videotapes some of their hearings, and a video excerpting the highlights of the Louisville v. Duke hearing is at the top of this post. (There’s no criticism of the lawyering here, Duke’s lawyer did a great job, and after all, she won the case for her client.).  The video takes a few seconds to get going.

If you don’t want to take the time to watch the video, you can keep reading to see exactly what was said.

Continue Reading The Law And Duke Football: The Video

The small Arizona town of Sedona is one of the centers of the e-discovery universe, and the Sedona Conference’s Best Practices for dealing with electronic discovery issues have been favorably referenced by many Courts, including the North Carolina Business Court (see here and here).

Now, the Conference has put out a Commentary on Preservation, Management and Identification of Sources of Information that are not Reasonably Accessible.  Why should you care about that?

The answer is that the term "reasonably accessible" is contained in Rule 34 of the Federal Rules of Civil Procedure, governing document production, which says that "a party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost."  (North Carolina Rule 34, last amended twenty-one years ago with a quill pen, contains no such language).

The new Commentary contains detailed guidelines for determining how to make the determination of accessibility, and when electronic information should be preserved.  The Guidelines themselves are below, from the Electronic Discovery Law blog (which is a great resource for court decisions on e-discovery matters) but the Commentary itself contains many useful examples and case citations and is worth reading.   

Continue Reading Electronically Stored Information: New Sedona Principles On Preservation Of ESI

In this legal malpractice action, the plaintiff alleged that the defendant law firm had failed to comply with "standards established by the Rules of Professional Conduct promulgated by the North Carolina State Bar."  The Court granted a Motion to Strike with regard to this language, observing that "the Rules of Professional Conduct of the North Carolina State Bar are not admissible on the issue of the conformity by the Defendants to the applicable standard of care. . . ."

Full Opinion

Plaintiff sued the Defendant Bank for allegedly allowing improper deposits of company checks into a personal account.  The Bank designated the case to the Business Court based on its jurisdiction over cases involving "the law governing corporations, partnerships, limited liability companies, and limited liability partnerships." 

The Plaintiff moved to remand, arguing that the case involved nothing more than issues of agency, and that cases involving banking law were not included in the categories of cases over which the Business Court has mandatory jurisdiction.

The Bank contended in its Opposition to the Motion to Remand that the cases involved issues of "corporate governance" and corporate authority, and also unique issues under Article 3 of the Uniform Commercial Code which were of significance to the state’s banking community.

The Business Court denied the Motion to Remand "for two reasons. First, it appears from the submissions that questions of authority of corporate officers will be a significant issue. Second, the decisions in this case could provide guidance to businesses and the financial community with respect to banking laws."

Brief Opposing Designation As A Mandatory Complex Business Case

Opposition To Motion To Remand

Full Opinion

Today, the North Carolina Court of Appeals allowed a plaintiff to proceed with her lawsuit that "litigation funding," the practice by which private firms make advances to plaintiffs involved in litigation in exchange for a substantial return in the event of a successful result, violates the law of North Carolina. Reversing the trial court, the Court of Appeals let stand claims for usury, unfair and deceptive practices, and a violation of the North Carolina Consumer Finance Act. The Court threw out, however, claims that this practice constitutes "unlawful gaming" and champerty. 

In the case of Odell v. Legal Bucks, LLC, the litigation funder had advanced Ms. Odell $3,000 for her motor vehicle accident claim.  Ms. Odell ultimately settled her claim for $18,000, but found that the terms of her agreement required her to pay Legal Bucks $9,582, or more than triple the advance that she had received. Ms. Odell, certainly unhappy at having to give up more than half of her recovery, then sued Legal Bucks, seeking class certification on her multiple claims.

The principal argument of Legal Bucks against the usury claim was that Ms. Odell was not under an absolute obligation to repay the money she had been advanced, and that the arrangement between them was therefore not usurious.  The Court recognized that the litigation funding was not a "loan," because a "loan" carries the requirement of an unconditional obligation to repay principal, but held that N.C. Gen. Stat. §24-1.1 also covers "advances," which do not have the same requirement. The Court found that the agreement between the parties demonstrated an understanding that the principal of the advance would be returned, meeting a key element of the test for usury. The Court further found that there was no dispute "that the rate of interest provided for in the Agreement substantially exceeds that permitted" by the statute, and that Legal Bucks had "intentionally entered into a contract to receive a greater amount of interest that that allowed" by law.

Since Legal Bucks wasn’t licensed under the Consumer Finance Act, that made out a violation of the Act, as did its violation of the usury statute. The unfair and deceptive practices claim also went forward, over Legal Bucks’ objection that the terms of the agreement had been fully disclosed to the plaintiff. The Court held that:

 "violations of statutes designed to protect the consuming public and violations of established public policy may constitute unfair and deceptive trade practices." In this regard, we note that it is a "paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws." N.C. Gen. Stat. § 24-2.1 (2003). [The] [d]efendants’ practice of offering usurious loans was a clear violation of this policy.

 

Continue Reading The Practice Of “Litigation Funding” Gets A Chilly Reception From The North Carolina Court Of Appeals

The North Carolina Court of Appeals ruled today on cases involving the statute of repose applicable to legal malpractice actions, fiduciary duties of trustees, and the waiver of the right to arbitration.

On the fiduciary duty issue, the Court affirmed the decision of the Business Court in Heinitsh v. Wachovia Bank on an obscure point of trust law for which it observed there was "surprisingly little guidance." The trustee in Heinitsh was caught between the income beneficiaries and the remaindermen of a substantial trust over a dispute whether millions of dollars from the sale of property should be categorized as income or principal. During the dispute, the trustee took the disputed funds and invested them in a money market account. The plaintiff, an income beneficiary, argued that the trustee’s duties required it to maximize income in her favor, and that the trustee had breached its fiduciary duties by placing the funds in a low-yielding money market account. The Court of Appeals held that "holding the retained funds during the pending litigation was reasonable in light of the circumstances and defendant did not breach its fiduciary duty to plaintiff." The Court suggested, however, that "the better practice may be to interplead the funds. . . ."

The legal malpractice case is Goodman v. Holmes & McLaurin Attorneys at Law. The plaintiff had sued outside the four year statute of statute of repose contained in N.C. Gen. Stat. §1-15(c), but contended that the law firm was equitably estopped from asserting the statute given a lawyer’s active conduct in trying to hide the fact of his malpractice.  The Court of Appeals found that conduct of concealment to be "particularly egregious," but held that "this Court has consistently refused to apply equitable doctrines to estop a defendant from asserting a statute of repose defense in the legal malpractice context. . . ."  It found plaintiff’s claims therefore to be barred by the statute of repose.

In Gemini Drilling and Foundation, LLC v. National Fire Insurance Co. of Hartford, the Court found that the defendant had waived its right to arbitration. The defendant had filed a motion to compel arbitration, and lost. Instead of taking an immediate interlocutory appeal, which it had the right to do, it participated in discovery and then a bench trial of the claim. The Court held that the purpose of arbitration "would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment."

There’s another case from today’s opinions, Odell v. Legal Bucks, LLC, which I’ll deal with separately. You can find all of the Court of Appeals opinions today here.

The photo of the Court of Appeals building is from Juliet Sperling.

 

Today, the Supreme Court ruled in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that a claim for piercing the corporate veil could proceed against the individual shareholders of the corporate defendant.

The opinion makes clear the standard that North Carolina applies in such cases, but more significantly resolves an question on the interplay between alter ego claims and the statute of limitations.  The holding is that the filing of a complaint against the corporation will toll the time for bringing claims against the individuals or entities which might be subject to a veil piercing claim.

Ridgeway was in the business of manufacturing cigarettes in North Carolina.  It was not a party to the Master Settlement Agreement entered into by the major tobacco manufacturers, and therefore had the statutory obligation to pay a tax based on each cigarette it sold. When the company sold nearly 90  million cigarettes, and didn’t pay more than a million dollars in tax, the Attorney General pursued not only the company but also its individual shareholders. 

The trial judge had dismissed the alter ego claim.  The Court of Appeals had reversed, but found one of the alter ego claims to be barred by the statute of limitations.  The Supreme Court affirmed the Court of Appeals on the viability of the alter ego claims, ruling that sufficient facts had been alleged to warrant a disregard of the corporate entity.  It stated that the defendants had made a:

considered decision not to fulfill their statutory obligations in North Carolina.     Among the allegations against defendants are charges that they deliberately and purposefully chose to line their personal pockets by pricing cigarettes at a level that would increase their market share–to the detriment of their competitors who opted to function in a manner that would permit them to perform their statutory obligations. Defendant shareholders further chose to ignore the admonitions and warnings of their own experienced manager that their operational plan did not allow them to fulfill their statutory obligations. Defendant shareholders, including Heflin, also made a considered decision to pay their obligations in their home state of Kentucky while ignoring their obligations to North Carolina. Defendants further channeled corporate funds into unknown entities they controlled, leaving Ridgeway behind as a hollow shell from which plaintiff could not expect to recover anything.

Taking these allegations as true, it would be inequitable to permit defendants to shelter behind the corporate identity of the very entity they drained in the course of their actions. Given this, we hold that in light of our opinions in Henderson and Glenn, plaintiff has made the necessary showings at the pleading stage to establish that defendant Ridgeway was operated as a mere instrumentality of defendant Heflin.

The opinion is for the most part a straightforward application of the "instrumentality rule" adopted in Glenn v. Wagner, 313 N.C. 450, 329 S.E.2d 326 (1985), which requires a showing of three elements (1) stockholders’ control of the corporation amounting to “complete domination” with respect to the transaction at issue; (2) stockholders’ use of this control to commit a wrong, or to violate a statutory or other duty in contravention of the other party’s rights; and (3) this wrong or breach of duty must be the proximate cause of the injury to the other party."

The novel issue in this case was the interplay between an alter ego claim and the statute of limitations, and that’s where the Supreme Court reversed the Court of Appeals. The original complaint was filed in May 2004.  That complaint made claims only against the manufacturing company, and made no alter ego claims against its shareholders.  Over a year later, in October 2005, the State amended to add the veil piercing claims. Although the Court of Appeals agreed that those claims could go forward, it found that one of those claims against one of the defendants was by then barred by the statute of limitations, even though it had been timely made against the corporation.  The Court held that the alter ego claim could not relate back because the individual defendant would be a new party. 

The Supreme Court reversed, and held that "North Carolina follows the same rule as most other jurisdictions that have considered the issue: the principle that initiating a suit against a corporation tolls the statute of limitations with respect to its alter egos."

The opinion makes the not surprising observation that whether to pierce the corporate veil is "among the most confusing in corporate law" and "enveloped in the mists of metaphor." 

Why a picture of a lightning strike?  In the course of her opinion, Judge Timmons-Goodson quoted from Judge Easterbrook that "proceeding beyond the corporate form is a strong step: ‘Like lightning, it is rare [and] severe[.]’" 

This post is about three significant business decisions from courts in other jurisdictions.  They involve an issue of attorney-client privilege for limited liability companies, whether an LLC member can waive his statutory right to seek dissolution of an LLC, and board duties in a merger context.

First, if there’s litigation between a member-manager of an LLC and the LLC, does the LLC have an attorney-client privilege to assert against its own member-manager? This issue hasn’t arisen in any case before the North Carolina Business Court, but it undoubtedly will. 

A federal court in Nevada confronted that question recently and held in Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. 2008), that the LLC should be treated, for privilege purposes, like a corporation.  It determined that the privilege belonged to the entity alone, and that the plaintiff was not entitled to discovery of privileged information even though he was a member of the LLC and a former manager.  Thanks to Peter Mahler and his New York Business Divorce Blog, where I read about this case.

Second, can a member of an LLC waive his or her right to dissolution by an anti-dissolution provision in the Operating Agreement?  The answer is yes, at least under Delaware law, as held by the Delaware Court of Chancery last week in R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del.Ch., Aug. 19, 2008).  You can read the summary of the case, from the Delaware Corporate and Commercial Litigation Blog, here.  The Court rejected the argument that a member’s agreement not to seek dissolution violated the public policy of Delaware, stressing instead the freedom of contract afforded those forming a limited liability company.

Third, also from Delaware, is a decision late last month about director duties in a merger context, Ryan v. Lyondell Chemical Co.  The Court of Chancery held that a shareholder could proceed to trial against the directors of Lyondell on a claim for breach of fiduciary duty, even though the action challenged was the consummated sale of the company for a "blowout" market premium.  The Court found a "troubling board process," in the board’s determination after only seven days to approve the sale of the company without any market check, without any post-agreement "go shop" period, and their approval of a merger agreement with strong deal protection measures and a substantial breakup fee. 

The Court said it was unable to find on the summary judgment record that that Board had satisfied its Revlon duties, or that the deal protection measures were reasonable and necessary to secure the offer per Unocal.  This case is also courtesy of the Delaware Corporate and Commercial Litigation Blog.

The picture of the Cook Out hamburger at the top of this post is by my daughter, Juliet, a sophmore at UNC-Chapel Hill.

I’ve been having trouble recently with the pictures and links on my blog, so if they are not working when you first read this please check back later.

I got an email invitation today to a seminar where one of the speakers will be speaking on "hot tubbing" with expert witnesses. I decided immediately that I would need to hire better looking experts in the future if this was going to catch on.

In all seriousness, it turns out that "hot tubbing" of experts had its origin in Australian courts, and it is becoming something of a "hot" subject here in the U.S.  There’s an article in ABA Journal about it, and also an article in the New York Times.

What it means is that all of the experts on a particular subject are sworn in at the same time, and then sit as a panel to be examined jointly by the lawyers for the parties and the Court. The procedure even allows for one expert to question another expert directly. 

Given the way the procedure works, it makes sense that hot tubbing is also known as "concurrent evidence."  If you are interested in exactly how this procedure works, you can keep reading below.

Continue Reading Expert Witnesses And Hot Tubs

Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008).

The Business Court today threw out, on a Motion for Judgment on the Pleadings, an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company. The Reid Pointe, LLC v. Stevens case also addresses a question of first impression involving an unlicensed general contractor.  There was a judicial dissolution issue as well.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

Judge Diaz granted the Motion on the unfair and deceptive practices claim, holding that the actions involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently ‘in or affecting commerce’ to sustain an UDTPA claim."  Op. at 16. (There have been a series of cases from the Business Court reaching similar conclusions in cases involving disputes between members of LLCs or between corporate shareholders.  Those cases are Kaplan, Walters & Zimmerman, Schlieper, and Slickedit.)

The defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Plaintiff’s claims seeking judicial dissolution of the LLCs survived, but barely. Judge Diaz found that Plaintiffs’ allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC’s assets."  Op. at 11.He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants’ pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants’ rights and interests in the LLCs.

Op. at 12.

Last but not least, one of CDC’s claim was for breach of a construction contract.  CDC, however, wasn’t licensed as a general contractor in North Carolina, and our law is pretty clear that an unlicensed general contractor can’t recover for its work.  The twist here was that CDC’s contract called for some work that required a general contractor’s license, and some that didn’t.

Grimmer argued that CDC was barred from recovering anything at all on the contract, but Judge Diaz held that:

Although the Court’s research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  Given the "indulgent standard" of inquiry required on a Motion for Judgment on the Pleadings, the Court denied the Motion because the contract extended to matters for which a license wasn’t necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings