I’m writing this post about the Business Court’s past decisions involving tortious interference with contract because "tortious interference" is one of the most common searches leading readers to this blog. 

So, here’s a summary of more than a dozen Business Court decisions which involve that tort, with links to the summaries of the cases on this blog, which in turn have links to the full opinion and also to the briefs if they were available. 

Tortious interference claims survived dispositive motions in these cases: 

In Webb Builders, LLC v. Jones, January 24, 2002 (unpublished), a homebuilder was pursuing tortious interference claims against a dissatisfied customer.  The customer had complained to others for whom the builder was working, and some of those customers had terminated their relationships with the builder.  The customer also complained to prospective customers, some of whom declined to do business with the builder.  The Court considered the factors set out in the Restatement (Second) of Torts §767, which include "(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relations between the parties." The Court held that this tort does not require a showing of of force, or threat, or intimidation, and also that it does not require independently tortious conduct.

In Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2002 NCBC 4 (N.C. Super. Ct. July 10, 2002), the Court engaged in a thorough discussion of the tort of interference with prospective economic advantage (or prospective economic relations) and let survive a claim between two competitors.  It found that there were issues of fact "whether defendants prevented plaintiff from making contracts by means other than legitimate methods of competition."  Those facts, generally, involved the defendant’s use of the plaintiff’s confidential information and a deliberate pattern of undermining the plaintiff’s business.  The Court also allowed a claim for tortious interference for the manner in which defendant had recruited plaintiff’s employees.  (The Sunbelt case, which was affirmed by the North Carolina Court of Appeals, is probably the most significant North Carolina case involving tortious conduct between competitors).

In CNC/Access, Inc. v. Scruggs, 2006 NCBC 20 (N.C. Super. Ct. Nov. 15, 2006), the Court found issues of material fact whether the plaintiff had interfered with the defendant’s prospective relationships with certain customers.  The Court dismissed plaintiff’s claims for tortious interference, finding that the covenants not to compete on which those claims were based were unenforceable.  The parties were competitors.

The Business Court has dismissed tortious interference claims on multiple occasions, including cases involoving lenders, competitors, trust beneficiaries, and insurance agents:

In Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997), the Court held that there was no tortious interference claim by a junior lender against a senior lender which had required the borrower to sell off its collateral in order to pay down the senior debt.

In Praxair v. Airgas, Inc., 1999 NCBC 5 (N.C. Super. Ct. May 26, 1999) and Praxair v. Airgas, Inc., 1999 NCBC 9 (N.C. Super. Ct. Oct. 20, 1999), the Court dismissed a tortious interference claim between competitors.  It held (in the second opinion) that "absent proof that a competitor has acted maliciously or otherwise unlawfully, courts should be reluctant to impose liability for conduct that can be characterized fairly as legitimate competition."  The defendant therefore had a legitimate right to bid to acquire a business in which plaintiff had a right of first refusal.  The Court let survive, however, a tortious interference claim that the defendant had enouraged others to breach their rights to the plaintiff under that right of first refusal.

In Staton v. Brame, 2001 NCBC 5 (N.C. Super. Ct. May 31, 2001), the Court dismissed a tortious interference claim against the beneficiary of a charitable trust who had terminated a contract between a foundation formed by the trust and the defendant.  The Court noted the differing treatment under North Carolina for "outsiders" and "non-outsiders" to contracts, and determined that plaintiff was a non-outsider who had acted with what she believed was a legitimate interest in protecting her trust income, and who therefore had a qualified right to terminate the contract in question..

In Hinson v. Trigon Healthcare, Inc., August 23, 2001 (unpublished), the lawsuit was between parties in the business of insurance.  Defendant had sent letters to persons for whom the plaintiffs, insurance agents, had written policies informing them that it was exiting the business and that they should find substitute insurance.  The Court held that the defendant had a "legitimate business purpose in sending the letters" so that its policyholders could avoid gaps in their coverage, and dismissed the tortious interference claim. 

The case of Durham Coca-Cola Bottling Co. v. Coca-Cola Bottling Co., 2003 NCBC 3 (N.C. Super. Ct. Apr. 28, 2003) involved a letter of intent, which the Court found to be an agreement to agree at a future date, and subject to a future, more complete acquisition agreement.  The letter of intent therefore could not form the basis for a tortious inteference claim.  The Court went on to say, however, that summary judgment would have been appropriate in any event on the basis of justification. The defendant, a competitor of plaintiff, was competing with plaintiff for the purchase of the business in question and plaintiff therefore could not show that it was acting with bad faith or malice so as to justify its tortious interference claim.

In Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), the claim was dismissed because the action was between two competitors, and the Court held that interference with contract is justified if motivated by a legitimate business purpose, as when the parties are competitors.

In Epes v. Healthsouth Corp., February 8, 2008 (unpublished), the Court dismissed the claim because it found that the contract upon which the claim was based lacked mutual assent as to material elements necessary to create an enforceable contract, including the price to be paid, identification of the parties, and the subject matter of the contract. The letter merely expressed the intent and desires of the parties, rather than their agreement.

In Webb v. Royal American Company, LLC, March 17, 2008 (unpublished), the Court dismissed a tortious interference claim against a lender.  Although Plaintiffs had recited all of the elements of that claim, the face of the complaint demonstrated that there was a valid business justification for the Defendant’s actions.  The Court held that a lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff must make something more than conclusory allegations about justification. 

In Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc., June 19, 2008 (unpublished), the Court granted a motion to dismiss a tortious interference claim between the plaintiff and its former supplier.  The plaintiff alleged that the defendant had acted improperly by selling product to plaintiff’s competitor.  The Court held that the defendant "had the right to do so," and that "competition does not in and of itself represent tortious interference."  The Court held that it is a legitimate justification to seek business from common customers.   

 

There was an article in the ABA Journal a few months ago about the Judges who are the "rock stars" of electronic discovery issues.  Two of those Judges, Paul Grimm of the District of Maryland and David Waxse of the District of Kansas, formed a "rock star trio" with Judge Tennille on an ABA panel earlier this year.

The subject was ethical issues in e-discovery.  You can download the whole presentation on the ABA website for a more than nominal fee.  But if you don’t want to do that, here’s some of what Judge Tennille had to say:

As Judge Tennille sees it, the "most important rule for lawyers’ from an ethical perspective is Rule 1.1, which is "Competence."  That Rule requires "the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation."  According to Judge Tennille, state court judges are looking to the lawyers and expecting them to present solutions to e-discovery issues.  As he put it, Judges are saying “I expect you to have the knowledge to handle this problem. I expect you to meet and confer with each other and tell me how you’re going to solve this problem.”

Judge Tennille referenced a Business Court case where the lawyers for a party turned over a mirrored hard drive to opposing counsel, and then had to scramble when it turned out that there were privileged documents on the hard drive.  Using that example, Judge Tennille said “You really have a very basic obligation to be compeltent in this area. And in my view, being competent does not mean turning your client’s hard drive over to the other side.”  So, reaching agreement in advance to deal with this type of situation, and including a clawback provision providing for the return of privileged documents, is a part of that competence.  (Although Judge Tennille didn’t name the case, it is Judge Diaz’ opinion in International Legwear Group, Inc. v. Legassi International Group, Inc.)

The seminar turned to a discussion of the California case (Qualcomm) sanctioning lawyers for their failure to turn over a substantial quantity of emails and misrepresenting the situation to the Court, and Rule 3.3’s duty of "Candor Toward The Tribunal."  Judge Tennille said “I think the best rule for you to keep in mind is not to follow the old suggestion that it is easier to ask foregiveness than permission. If you have a question, you ask for permission first. Because it’s really not worth risking your law license to ask for foregiveness later.”

On the subject of lawyers who play fast and loose with e-discovery, Judge Tennille said: “I think judges generally try to look at it from the standpoint of when we’re trying to determine if somebody is gaming the system, we look at process and motivation and if you’ve got a good process and we don’t have any question about your motivation, you’re not going to be in trouble. If you haven’t used a good process or we have any question about your motivation or the client’s motivation and what they did, chances are that we’re going to determine that you were gaming the system and your client will suffer from that, 99 times out of a 100.”

And then Judge Tennille said something that seems so easy to understand: "The best test is your common sense. And if you use it you’ll stay out of trouble. if you don’t, there’s going to be a judge somewhere who will penalize you for not using your common sense.”

Judge Tennille has written two Business Court opinions on the subject of e-discovery, Analog Devices, Inc. v. Michalski, 2006 NCBC 14 (N.C. Super. Ct. Nov. 1, 2006) and Bank of America Corporation v. SR International Business Insurance Company, Ltd., 2006 NCBC 15 (N.C. Super. Ct. Nov. 1, 2006), but that is still a largely uncharted territory in North Carolina’s state courts.

The image at the top is from xkcd.com, edited.

This was a dispute between insurance agents and an insurer for which they had sold policies.

Plaintiff asserted that the Court had personal jurisdiction over a parent company with an indirect subsidiary in North Carolina based on the alter ego doctrine.  The Court held that "if [the parent] has dominated and controlled. . . a second tier subsidiary doing business in North Carolina, to the extent that the corporate veil may be pierced, such action would justify assertion of jurisdiction over the parent."  Although the Court found the allegations of dominance to be somewhat vague and ambiguous, it found that there were questions of fact whether the corporate veil could be pierced, and denied the motion, suggesting that it be renewed at a later date.  The Court observed that "it will not be sufficient for plaintiffs to establish only a parent-subsidiary relationship and some involvement in the subsidiary’s business by the parent. The burden will be much heavier."

The Court dismissed, based on lack of personal jurisdiction, claims against several officers of one of the corporate defenants.  It held "plaintiffs may not assert jurisdictionover a corporate agent without some affirmative act committed in his individual official capacity," which the Court found to be lacking.  The Court found that it did have jurisdiction over one of the officers, who had been alleged to have made misrepresentations to the Plaintiffs while at a meeting in North Carolina. 

Also dismissed was a negligence claim, because the Court found that duties of the parties to be defined by their contract.  The Court noted the narrow circumstances under which North Carolina recognizes a claim for negligent breach of contract, and held that allowing such a claim would "open this particular tort to all parties to a contract."

Claims for tortious interference with contract were also dismissed, because Defendant’s conduct in notifying insurance policyholders that Defendant would be exiting the insurance business and that they should find new insurance had a legitimate business purpose. 

The Court found insufficient aggravating circumstances to make out an unfair and deceptive practices claim, and dismissed that claim as well.

Full Opinion

Moody v. Sears, Roebuck & Co., 2008 NCBC 14 (N.C. Super. Ct. August 6, 2008)

The North Carolina Business Court has set out an explicit set of procedures to be followed when parties take a voluntary dismissal of a class action before a decision on class certification. 

This Order yesterday by Judge Tennille in the Moody case comes following the Court of Appeals decision in that case last month, which reversed the Business Court and held that full faith and credit should have been accorded to an Illinois court’s approval of a nationwide class action.

The new opinion from the Business Court requires that counsel taking a pre-certification dismissal of a class action must file a statement which includes:

(1) the reason for dismissal, (2) the personal gain received by the plaintiffs in any settlement, (3) a statement of any other material terms of the settlement, specifically including any terms which have the potential to impact class members, (4) a statement of any counsel fees paid to plaintiff’s counsel by defendants, and (5) a statement of any agreement by plaintiff(s) restricting their ability to file other litigation against any defendant. 

Op. at ¶2.  In addition, counsel for the Plaintiff is required to "file a statement either detailing any potential prejudice to putative class members or representing to the Court that no prejudice exists."  Judge Tennille indicated that the Court would "be particularly concerned about issues related to tolling of the statute of limitations."

In a case involving the dismissal of a North Carolina class action resulting from the approval of a nationwide class action settlement in another state, which was the situation in Moody, there is a different requirement.  Then:

counsel shall file with the Court a copy of the order approving settlement and sufficient information concerning the notice provisions so that the Court can ascertain if jurisdictional and due process issues have been addressed by the foreign court and whether North Carolina citizens have been represented in the proceeding. 

Op. at ¶4.  Judge Tennille indicated that this filing would permit the court to "raise any concerns with the foreign court," and that "once those concerns have been addressed, the foreign court’s order will be entitled to full faith and credit whether or not this Court would have granted approval of the settlement."  Op. at ¶4.  (It doesn’t appear that in a case involving an out-of-North Carolina settlement that the statement regarding the reasons for the dismissal is necessary.)

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This is not a new requirement of the Court.  As Judge Tennille stated, "it has been the practice of this Court to require class representatives to file and publish a copy of the final accounting detailing the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

The Court noted two reasons for the requirement of an accounting.  First, the Court said that this would "promote greater transparency that will fill the ‘informational black hole’ concerning final distributions and make administration of class actions more efficient and effective and thus more beneficial to class members."  Op. at ¶8.

Second, the Court said it would use this information for other purposes, including an assessment of the qualifications of class counsel:

This Court would add to that list of benefits from transparency, the benefit of judges being able to assess the past performance, abilities and commitment of those lawyers who seek to be class counsel in other cases. A history of final results in other cases would also alert judges to scrutinize settlements proposed by defendants who have settled their class action in ways that resulted in no benefits to class members. This Court can think of no reason why the final results should not be made known to the Court and the citizens affected. 

Op. at ¶9.  The accounting information will be available on the Business Court’s website. 

The accounting in Moody is that the members of the class in North Carolina received $66 in cash and coupons, the nationwide class members received $2,402 in cash and coupons, and Plaintiff’s counsel received $1,100,000 in cash and coupons.  Notwithstanding its reversal of the Business Court’s opinion of the original decision in Moody (which you can read about here) the Court of Appeals expressed concern about the adequacy and fairness of the Illinois settlement, stating "we share the trial court’s serious concerns regarding the final accounting in the . . . settlement."

 

On August 5th, in Hamm v. Blue Cross and Blue Shield of North Carolina, Judge Jolly certified a class action against health insurer Blue Cross.  The class will consist of Blue Cross members who claim that their medical providers charged them more than the amount the providers had contracted with Blue Cross to charge for their services, after the members exceeded certain benefit maximums.  According to Plaintiff’s Brief (at bottom), the class will have thousands of members.

The Court rejected a number of arguments made by Blue Cross as to why a proper class did not exist and why the class representative would not adequately represent the class.

Hamm was enrolled in a plan with Blue Cross that provided for "in-network providers" to charge a contracted-for amount for their services, referred to as the "allowed amount."  Hamm’s contention was that the plan provided that Hamm would not be responsible for any charge over the allowed amount.

In Hamm’s situation, however, she hit the "benefit period maximums," which included a cap on the dollar amount that a member could receive in paid benefits from Blue Cross for certain services.  She claimed that the in-network providers then began charging her at full rates, not the lower, negotiated-for allowed amount.  Hamm disputed that the plan permitted these additional charges, which led to her lawsuit.

The main arguments against class certification made by Blue Cross, and rejected by Judge Jolly, were as follows:

Blue Cross argued that the class had no injury.  As the insurer interpreted its agreement, in-network providers were entitled contractually to charge more than the allowed amount when a member exceeded the number of visits allowed by her policy (the "visit maximum").  But when a member exceeded the monetary amount that Blue Cross would pay for covered services (the "benefit maximum"), as opposed to the visit maximum, Blue Cross said that a provider was required to charge only the allowed amount, and it disputed that it had allowed the practice of a higher charge in those circumstances.  The Court wrote that there was "pragmatic appeal" to this argument (Op. at 12 n.8), but said that the construction of the contract was "not as clear to the court as it is to Defendant," and found these were both "merit-based defense(s) not properly before the court at this stage. . . ."  (Op. at 11 and 12). 

The insurer also argued that a member would have no claim unless he or she had actually paid an amount over and above the allowed amount.  The Court rejected this argument, stating that a class member would have at least a claim for nominal damages for a breach of the contract, and noting that Plaintiff sought a declaration regarding the future rights of the class members, which would not require a showing of any actual damages.

Blue Cross argued that the Court would have to make "extensive individualized inquiries" whether a class member had actually paid more than the allowed amount and whether administrative remedies had been exhausted.  The Court held that these inquiries did not predominate over the common liability issue.  It said that there would be "uniform, mechanized and documented evidence" of these matters given the nature of Blue Cross’ record-keeping.  (Op. at 12 n.9).

On the point of adequacy, Blue Cross argued that the Plaintiff was subject to unique defenses regarding the amounts she claimed to have been charged over the allowed amount.  Blue Cross contended that the only charges to Plaintiff over the allowed amount had come from an out-of-network provider, not an in-network provider, and that the services received were not a "covered service."  The Court disagreed that these arguments precluded class certification, stating that "the focus of class certification ‘is properly on the typicality of the plaintiff’s claim as it applies to the general liability issues [and] not on the plaintiff’s ultimate ability to recover.’"  (Op. at 15).

The Court concluded its analysis by ruling that a class action was a superior method for adjudicating the claims before it.  It held "the controversy is over a contract of insurance that is standardized over hundreds of thousands of North Carolinians.  The interpretation of such standardized agreement on a class-wide basis will provide certainty and prevent inconsistent adjudications."

My partners Jennifer Van Zant and Charles Marshall represent Blue Cross.

Brief in Support of Motion for Class Certification

(All other briefs were filed under seal)

 

It was a busy opinion day today in the North Carolina Court of Appeals: there were 44 published opinions, three of which I’m commenting about briefly below.  The three involve a range of issues, including arbitrator immunity, Rule 11 sanctions, and an technical point about subpoenas in state tax refund litigation and also work product privilege.

The arbitrator case, Dalenko v. Collier, addressed an issue of first impression in North Carolina, whether an arbitrator is entitled to judicial immunity.  Plaintiff, a pro se litigant who had been unsuccessful in an arbitration heard by former Judge Collier, sued him for allegedly being personally interested in the case and biased.  The Court of Appeals held (relying on Burns v. Reed, 500 U.S. 478 (1991)) that whether a private citizen acting as an arbitrator is entitled to judicial immunity depends upon a "functionality test."  It stated:

defendant was sitting as an arbitrator to resolve a dispute pending in the courts of Wake County. Under the functionality test, defendant was entitled to judicial immunity and was immune from the claims asserted in the instant case. Plaintiff’s complaint alleges conduct which was clearly within the course and scope of the arbitration proceeding. Plaintiff’s claims were barred by arbitrator immunity, and the trial court correctly found them to be frivolous.

The Dalenko case also affirmed an award of Rule 11 sanctions against the Plaintiff, and also found that Plaintiff was collaterally estopped from pursuing her claims against the arbitrator since she had raised those same claims in seeking a vacation of the arbitration award.

In Ward v. Jett Properties, LLC, the Court affirmed the entry of Rule 11 sanctions against a pro se litigant who had sued his landlord for allowing other tenants to play football "within striking distance of his car" and to "dart around" on "metal skooters." To me, the significant point worth noting about Ward is that one of the reasons the Court found the Complaint to be "legally insufficient" for Rule 11 purposes was that it had been dismissed on a Rule 12(b)(6) motion.  The Court held "though the mere fact that a cause of action is dismissed upon a Rule 12(b)(6) motion does not automatically entitle the moving party to have sanctions imposed. . . . it is often indicative that sanctions are proper."  The fact that Ward had filed forty two other lawsuits in the past six years, at least one of which was identical to the one before the Court, was undoubtedly a factor in the affirmance.

Last, the work product case is In the Matter of the Summons Issued to Ernst & Young, LLP.  It involves a subpoena issued by the North Carolina Department of Revenue to the accounting firm of Ernst & Young for documents relating to the tax refund lawsuit between the DOR and Wal-Mart.  Wal-Mart intervened and challenged the subpoena. 

Before it got to the work product issue, the Court resolved a threshold issue whether the Rules of Civil Procedure apply to subpoenas issued by the DOR pursuant to N.C. Gen. Stat. § 105-258.  The DOR argued that the Rules didn’t apply, the Court of Appeals disagreed and said that they did.  The applicability of the Rules made a difference to Wal-Mart, which was arguing that the Court didn’t have subject matter jurisdiction because the DOR hadn’t issued a summons and filed a Complaint.  Although Wal-Mart prevailed on its argument about the application of the Rules, the Court denied the Motion to Dismiss because "the statute provides jurisdiction to the Wake County Superior Court upon application by the Secretary of Revenue."

On the work product side of things, the issue was whether some of the documents prepared by E&Y had been done "in anticipation of litigation."  Wal-Mart argued that the documents had been prepared by the accountants specifically for its restructuring, not for tax return purposes and not for purposes of its audit; that it had been billed separately for the work; that the partner who had done the work anticipated that there might be litigation from various tax authorities; and that the documents were not prepared in the ordinary course of business.  The Court found this insufficient to determine the applicability of the privilege, and remanded the case for an in camera review by the trial court.

A-1 Pavement Marking, LLC v. APMI Corp., 2008 NCBC 13 (N.C. Super. Ct. August 4, 2008)(Diaz)

The North Carolina Business Court on August 4th denied a Motion for Judgment on the Pleadings on a counterclaim for reformation of an asset purchase agreement.  Judge Diaz, in denying the Motion, held that if the reformation were allowed, the remedies of the Defendants under the agreement would be broad.  The opinion in A-1 Pavement Marking, LLC v. APMI Corp, for which the link is at the top of this post, also dealt with an unfair and deceptive practices claim.

Defendants’ contention was that a page was inadvertently left out of the asset purchase agreement.  The missing page detailed long term liabilities which Defendants claimed the Plaintiff was obligated to pay.  Defendants argued that the failure to pay constituted a violation of the Promissory Note and Security Agreement, and relieved them from their obligations under their non-compete agreements.

The Motion for Judgment on the Pleadings filed by the Plaintiff asserted that even if reformation was allowed, the only remedy for Defendants was for Plaintiffs to pay the liabilities listed on the missing page.  Judge Diaz held:

The Court disagrees. While there is a strong presumption in favor of correctness of an instrument as written, Hice, 301 N.C. at 651, 273 S.E.2d at 270, a “court’s principle [sic] objective is to determine the intent of the parties to the agreement.” Holshouser v. Shaner Hotel Group Props. One Ltd. P’ship, 134 N.C. App. 391, 397, 518 S.E.2d 17, 23 (1999).’

Moreover, when a court reforms an instrument, the general rule is that ‘”[t]he rights of the parties are measured by the instrument as originally intended, and the effect of the reformation, as a whole, is to give all the parties all the rights to which they are equitably entitled under the instrument that they intended to execute.” 66 Am. Jur. 2d Reformation of Instruments § 9 (2007) (citing Gurske v. Strate, 87 N.W.2d 703 (Neb. 1958)).

Thus, if Defendants establish by clear, cogent and convincing evidence that, because of a mutual mistake, the APA does not reflect the true intention of the parties at the original date of execution with respect to the long-term liabilities to be assumed by Plaintiff, they would be entitled to (1) have the agreement judicially reformed to correct the mistake, and (2) seek full relief for Plaintiff’s alleged breach of the APA and related contract documents. Long, 178 N.C. at 506, 101 S.E. at 13 (stating that when reformation is granted, the court not only corrects the contract as written, but enforces it in its amended form).

The Court dismissed, however, an unfair and deceptive practices claim by one of the Defendants, who asserted that the Plaintiff had diverted funds rendering the Plaintiff unable to meet its contractual obligations to him.  The Court held that "A-1’s alleged accounting misdeeds arguably relate to matters of internal corporate governance, which are insufficient to sustain a UDTPA claim."  The Court further held that the claim was nothing more than one for breach of contract, stating "it does not matter that the purported breach resulted from A-1’s alleged accounting irregularities, as that fact alone is insufficient to elevate a contract dispute into an UDTPA claim."

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

The United States District Court for the Middle District of North Carolina dismissed an LLC member’s fiduciary duty claims against a manager based on grounds of standing in Morris v. Hennon & Brown Properties, LLC.

The Defendant LLC was an investor and member of three limited liability companies.  It alleged in a counterclaim that the Plaintiff, the manager of three of the LLCs, owed it a direct fiduciary duty, and that Plaintiff had violated that duty by comingling funds of the LLCs and using them for his personal benefit. 

Plaintiff pitched its Motion to Dismiss on the argument that a co-manager of the LLC does not have a fiduciary duty to its members under N.C. Gen. Stat. Sec. 57C-3-22, which sets out the duties of LLC managers.  The Court declined to decide the case on this basis, noting that there was no North Carolina state court authority on the point and stating that it had an obligation to approach an issue of first impression cautiously, and to avoid it if possible. 

The Court instead framed the issue as follows: "the more important question in this case is to whom is that duty owed-to the LLCs or to the member individually."  The Court found that the breaches of duty alleged by the Defendant would have affected all of the members of the LLC, not just the Defendant, and that the Defendant therefore was not entitled to assert a direct claim for breach of fiduciary duty.

The Court concluded as follows in granting the Motion:

In the instant case, Defendant fails to make any allegations of a special duty owed only to it and not the other members of the LLCs, nor has it shown that it suffered a special loss, separate and distinct from the harm to the LLCs and other members of the LLCs. Consequently, Defendant has no standing to bring a direct or individual action against a member-manager of the LLCs. For this reason, Defendant’s claims alleging breach of fiduciary duty should be dismissed.

This case was decided about a month ago, I picked it up from this week’s North Carolina Lawyers Weekly.

The Court overruled an objection to its mandatory jurisdiction in this case involving a software license agreement.  It held, in affirming Defendant’s Notice of Designation of the case as one involving "intellectual property law," that:

Software licensing has become an integral part of economic life. Decisions concerning software licensing can have an impact beyond the confines of a particular case and development of a body of case law in this area of law will be beneficial to the bar and business. See Smart Online, Inc. v. OpenSite Technologies, Inc. 2003 NCBC 5 (N.C. Super. Ct. June 17, 2003).  For the forgoing reasons, Plaintiff’s Objection to Designation is OVERRULED.

Full Opinion

The Court dismissed the derivative claim of a minority shareholder who alleged that the majority shareholders of the corporation had breached their fiduciary duty to the minority shareholders by failing to make distributions, failing to investigate allegations on that subject, and terminating the minority shareholder’s employment. 

The Court held that this was not a proper derivative claim, because the shareholder had not alleged a cause of action belonging to the corporation or a remedy to which the corporation would be entitled.

The Court further found that even if the claim was derivative, that the minority shareholder did not fairly represent the corporation as required by North Carolina General Statute § 55-7-41(2).  The Court held:

The North Carolina Court of Appeals has applied the federal standard for determining when a shareholder “may fairly and adequately represent a corporation.” Robbins v. Tweetsie R.R., 126 N.C. App. 572, 579, 486 S.E.2d 453, 456, rev. denied, 347 N.C. 402, 494 S.E.2d 418 (1997). The federal standard uses a case by case analysis of whether a shareholder qualifies to represent the corporation. Id. (citations omitted). In Robbins, the court discussed the facts surrounding the plaintiff to conclude that plaintiff was not a suitable shareholder to bring a derivative suit. Id. at 579–80. Before the court addressed the facts of Robbins, it specifically set out that “a minority shareholder, who has uppermost a personal agenda rather than the best interests of the corporation, would [not] have standing to file and maintain a shareholder derivative action.” Id. at 578.

The Court held that the minority shareholder had a personal agenda that affected his ability to adequately represent the bests interests of the corporation. 

The Court also dismissed the shareholder’s unfair and deceptive practices claim because the shareholder was a physician and the Court found the learned profession exception to applied.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss