A minority member (Kaplan) of a limited liability company, who was the LLC’s only source of funds and who controlled the LLC’s checkbook, did not have fiduciary duties to the LLC and its other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan’s position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC’s Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Summary judgment was granted on Defendant’s claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan.  As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate."  (Op. at 14).

Last, the Court granted summary judgment on Defendant’s unfair and deceptive practices claim.  The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders.  Commerce is not affected by the parties’ inability to work together as an LLC."  (Op. at 14).

Full Opinion

Plaintiff’s Brief In Support Of Motion For Summary Judgment

Defendants’ Brief In Opposition To Motion For Summary Judgment

Plaintiff’s Reply Brief In Support Of Motion For Summary Judgment

The Court denied a motion for expedited discovery, but noted that the discovery at issue had already been served, and stated that "[i]n light of the claims alleged in the Complaint, the Court is not inclined to look favorably upon a motion by Defendant for an extension of time to respond to those requests."

Full Opinion

Brief in Support of Motion for Expedited Discovery

Brief in Opposition to Motion for Expedited Discovery

The Court denied a Motion for a Temporary Restraining Order.  The Motion sought enforcement of covenants not to compete executed by the Defendants, who were loan officers with the Plaintiff, a mortgage broker.

The covenants stated that the Defendants:

will not directly or indirectly, in any capacity work for any company, entity or individual, including himself/herself, who originates or sells residential housing loans in any state in which LO has originated a loan in the six (6) months preceding the termination of LO’s employment with the Company [Integrity].

The Court found this to be too broad a restriction, holding:

the individual Defendants would not merely be prevented from working as loan officers for other mortgage brokers, but would also be prevented from doing even wholly unrelated work at any firm that competes with the Plaintiff.

The Court also noted that the Defendants contended that the Plaintiff had breached its agreement by failing to pay them, and held:

Our courts have held that “[i]njunctive relief to enforce the terms of a contract will not be granted a party who has himself breached the terms of the contract when his breach is substantial and material and goes to the heart of the agreement."

Full Opinion

Brief in Support of Motion for Temporary Restraining Order

The person elected as liquidator to oversee the liquidation of the assets of two general partnerships was not entitled to limit his responsibility to the pursuit of a derivative action lawsuit against the auditor for the partnerships, as opposed to the general winding up of the affairs of the partnerships.  The Court held:

the substantive problem with Ray’s election as liquidator is that he is unwilling to accept the full mantle of responsibilities that attend to the post. Liquidation is a process for the winding up of a dissolved partnership’s affairs by collecting and providing for an orderly distribution of all of the partnership’s assets, first to creditors, if any, and then to the partners. See generally N.C.G.S. §§ 59-803 to -804 (2006); Del. Code Ann. tit. 6, §§ 17-803 to -804 (2006).

In the Court’s view, one who seeks to serve as a liquidator may not pick and choose among the assets of the partnership that he will supervise, but instead must be willing to accept responsibility for the full and complete winding up of the partnership’s affairs within this State.

The Court’s remedy was to exercise its "inherent equitable power" to appoint a receiver for the partnerships.  That person would determine, as a part of the receivership, whether the derivative action should be pursued.

Full Opinion

Plaintiff was entitled to discovery of documents relating to an arbitration proceeding involving similar claims, even though the legal issues were not identical, and also notwithstanding a confidentiality agreement entered by the arbitrator in the arbitration case. 

The Court made this comment on the standard of relevancy for discovery purposes:

A fundamental requirement of Rule 26, and the focus of the Court’s analysis here, is that the information sought to be discovered must be “relevant” to the pending action. The test of relevancy under Rule 26 is not the same as the more stringent relevancy requirement of Rule 401 of the North Carolina Rules of Evidence. See N.C. R. Evid. 401 (“‘Relevant evidence’ means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.”); see also Adams v. Lovette, 105 N.C. App. 23, 29, 411 S.E.2d 620, 624 (1992), aff’d, 332 N.C. 659, 422 S.E.2d 575 (1992). Moreover, a determination that information is relevant for discovery purposes does not necessarily mean that the information is admissible at trial. The latter determination is made according to Rule 401 of the Rules of Evidence. Shellhorn v. Brad Ragan, Inc., 38 N.C. App. 310, 314, 248 S.E.2d 103, 106 (1978). To be relevant for discovery purposes, the information sought need only be “reasonably calculated” to lead to the discovery of relevant evidence admissible at trial. See N.C. R. Civ. P. 26(b)(1).

The Court also held that there might be circumstances where an arbitrator’s ruling on confidentiality might be enforced:

The Court emphasizes the narrow and fact-specific nature of this ruling. There may be instances in which recognition of an arbitration panel’s confidentiality order is warranted. This Court recently acknowledged the strong state and federal public policy in favor of resolving disputes through arbitration. See, e.g., State v. Philip Morris USA, Inc., 2006 NCBC 22 ¶ 35 (N.C. Super. Ct. Dec. 4, 2006), http://www.ncbusinesscourt.net/opinions/2006%20NCBC%2022.htm. Confidentiality is an important part of the settlement process and is perceived as a clear advantage of arbitration. See, e.g., Richard C. Reuben, Constitutional Gravity: A Unitary Theory of Alternative Dispute Resolution and Public Civil Justice, 47 UCLA L. Rev. 949, 1086 (2000) (noting that “privacy can be an important consideration in the decision to waive full-blown trial rights in favor of the arbitral forum). However, in this case, the arbitration involves facts and witness that are also relevant to cases before this Court. Disclosure of the reinsurance arbitration information will be protected by the confidentiality order in place in this case and will promote the efficient resolution of these cases by streamlining the discovery process and refining the issues to be determined at trial.

Full Opinion

Today, in Moody v. Sears Roebuck & Co., the North Carolina Court of Appeals reversed a decision of the Business Court which had refused to approve the dismissal with prejudice of a North Carolina class action.  The Business Court had found that the settlement of the case, even though it had been approved by an Illinois court, was inadequate for the North Carolina class members. 

This is an interesting case (and a long post), but the Reader’s Digest version is that: (a) Rule 23 of the North Carolina Rules of Civil Procedure doesn’t require court approval before a class action which has not yet been certified is dismissed, but (b) a court nevertheless has the authority to conduct a review of a pre-certification dismissal and should exercise it, and (c) a court’s review of a foreign court’s approval of a class action settlement is limited to a consideration of whether the foreign court addressed issues of jurisdiction and due process.

The core of Judge Tennille’s May 2007 opinion in the Business Court (summarized here) was that there was a "shocking incongruity between the class benefit [of about $2400 to the entire nationwide class] and the fees afforded counsel and the representative [of more than $1 million]."  He held that this "leave[s] the appearance of collusion and cannot help but tarnish the public perception of the legal profession."

The class notice and claims process agreed to by Moody and Sears also came under Judge Tennille’s fire.  He held that the class notice was poorly distributed and uninformative, did not provide sufficient time for class members to opt out, and made no mention of the million dollar fee for the lawyers. He held that "it is hard to imagine a more inadequate notice plan and claims process."

The effect of the ruling was that Judge Tennille refused to allow the class plaintiff to dismiss its North Carolina class claims with prejudice, even though Sears had joined in the motion.  Judge Tennille allowed the dismissal of the class claims without prejudice. 

The class plaintiff and his adversary then both appealed Judge Tennille’s decision. So, the Court of Appeals was faced with the curious situation of Appellant and Appellee both arguing that the lower court was wrong. 

Each side filed its own brief, and each side filed a response to the other’s brief. There was an Appellant’s Brief from Plaintiff which said that Judge Tennille’s order was "bizarre and unbelievable" (on p. 17), an Appellant’s Brief from Sears saying that the Order was "astonishing" (on p. 12); and an Appellee’s Brief from Plaintiff and an Appellee’s Brief from Sears also urging reversal. So, in the end, the Court had four briefs saying how very wrong the Business Court had been.

A pivotal issue was whether Judge Tennille’s approval was even required for the dismissal to be taken.  The Business Court had held in a number of cases, including Moody, that when a claim is made on behalf of a class, court approval is required before any dismissal, even if the class hasn’t yet been certified.  Moody presented the first opportunity for the Court of Appeals to deal with that issue, and it rejected the argument that the North Carolina Rules of Civil Procedure require approval before a pre-certification dismissal.

The Court further held, however, that "our holding does not imply that a trial court wholly lacks authority to review a motion for pre-certification dismissal of a class-action complaint."  The Court observed that "[w]ithout some level of pre-certification court supervision, there is an unacceptable risk that parties may abuse the class-action mechanism in myriad ways."  It set out the following standard:

We therefore hold that when a plaintiff seeks voluntary dismissal of a pre-certification class-action complaint, the trial court should engage in a limited inquiry to determine (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members. If the trial court finds that neither of these concerns are present, the plaintiff is entitled to a voluntary dismissal. However, if the trial court finds that one or both of these concerns are present, it retains discretion to address the issues.

The inquiry is narrower, however, when a foreign court, like the Illinois court which had approved the settlement questioned by Judge Tennille, has already addressed these issues.  The issue, then, the Court determined, is one of full faith and credit. The Court of Appeals observed that the due process and jurisdictional issues considered by the Business Court had been "heard and answered" in the Illinois Court.  [The Illinois Judge had received a letter from Judge Tennille raising his concerns about the settlement and had inquired into those matters at a fairness hearing.]

The Court of Appeals held that any review of the approval of a class action by the courts of another state was "limited" to a consideration of whether jurisdictional and due process issues had been addressed by the foregin court.  It stated:

limited review serves important judicial interests in the efficiency and finality of class-action litigation, and ensures that no "waste of judicial resources" occurs by reason of "reviewing courts . . . conduct[ing] an extensive substantive review when one has already been undertaken in a sister state." Further, "second-guessing the fully[-]litigated decisions of our sister courts would violate the spirit of full faith and credit," and could make North Carolina the jurisdiction of choice for plaintiffs wishing to launch collateral challenges to other states’ judicial proceedings. While North Carolina courts surely have an important interest in not enforcing constitutionally infirm foreign judgments, the appropriate manner of correcting foreign trial court errors is "by appeal within the [foreign] state system and by direct review in the United States Supreme Court."

The Court of Appeals concluded that "the jurisdictional and due process conclusions contained in the trial court’s 7 May 2007 order were ‘fully and fairly litigated and finally decided’ in Illinois Circuit Court," and that "[t]his finding concludes our review and forecloses any reconsideration of the merits of the legal issues decided by the Illinois Circuit Court. . . .While we share the trial court’s serious concerns regarding the final accounting in the . . . settlement, we are constrained to hold that the trial court erred by refusing to accord full faith and credit to the . . . settlement. We therefore reverse the trial court’s 7 May 2007 order and remand this case to the trial court with instructions to dismiss the class-action allegations with prejudice."

The Business Court’s opinion had gotten a lot of attention.  The Rand Institute for Civil Justice had called it "fascinating," and a Harvard Law School Professor who writes frequently about class actions had applauded it.

Despite the reversal, the Business Court opinion in Moody remains significant for other reasons.  It is a primer from Judge Tennille’s perspective on what are acceptable class action settlements and notice procedures and certainly worth reading before presenting a settlement for approval in his court.

Today, the North Carolina Business Court ruled in Hill v. StubHub, Inc. that the Communications Decency Act didn’t provide a defense to on-line ticket seller StubHub against claims that it had violated North Carolina’s anti-scalping laws.

In his opinion, Judge Tennille allowed Plaintiffs to proceed on their unfair and deceptive practices claims against StubHub.  He dismissed, however, several other claims brought by the Hills, who were frustrated purchasers of Hannah Montana concert tickets for their eight year old daughter. 

According to the Amended Complaint, the Hills’ daughter had  repeatedly told her parents that she had a "sincere and strong" wish to see this show.  Mrs. Hill tried buying tickets on-line when they went on sale, but they sold out in moments. The Hills, probably under unrelenting “sincere and strong” pressure from their daughter, bought four tickets to the concert on StubHub, at a price nearly $100 per ticket higher than the $56 face value of each ticket.

Then, the Hills sued, alleging that  StubHub, along with the unnamed John Doe defendants who actually owned the tickets, had violated North Carolina’s anti-scalping law. The Hills sought class certification, not just for those who had to purchase tickets via StubHub for the Hannah Montana show, but also for the purchasers of tickets to the “many concerts, sporting events and other events and at numerous venues throughout the State of North Carolina” for which tickets had been sold through StubHub. The Hills made multiple claims: (1) violation of North Carolina’s anti-scalping statute (2) civil conspiracy, (3) tortious action in concert, (4) unfair and deceptive practices, and (5) punitive damages.

Continue Reading Communications Decency Act Doesn’t Insulate StubHub From Scalping Lawsuit

North Carolina’s Business Court is a "model for the nation," according to Directorship Magazine’s Annual Guide to State Litigation.

In addition to complimenting the Business Court, the Annual Guide gave North Carolina’s litigation climate a green light, indicating that the "state’s liability climate encourages growth and job creation."   It gave North Carolina a high national ranking, much higher than the State’s ranking in the U.S. Chamber of Commerce rankings issued earlier this year.

The State’s litigation climate ranking was sixth (behind Tennesse, Utah, Indiana, Ohio, and North Dakota), against twenty-first in the U.S. Chamber report.

Depending on your perspective, the litigation weather in North Carolina according to the Guide is partly cloudy or partly sunny.  The Guide said that North Carolina

"has maintained a fair and predictable liability climate that leads to growth and job creation.  It ranks among the three best states for monetary tort losses, improving from 7th in 2006.  However, North Carolina’s product liability losses rank 36th, which indicates heightened litigation activity and a rise in jury verdicts.  Further, the state’s plaintiffs’ bar is very active in the state legislature: a bill defeated last year extending the statute of repose from 6 to 15 years would have made North Carolina one of three states with the longest period for filing claims.  There is a rule of law majority on the state Supreme Court and the state business court serves as a model for the nation.  North Carolina, however, is a state to be watched because of aggressive trial bar legislative efforts." 

The Directorship Magazine rankings took the U.S. Chamber of Commerce rankings and evaluated them in conjunction with the U.S. Tort Liability Index prepared by the Pacific Research Institute, blending the two into its own ranking.  North Carolina was ranked third in the Pacific Research Institute’s study, which evaluates a myriad of empirical evidence.  The Institute’s complete spreadsheet, containing data for all 50 states, is here.

The Court allowed a motion to bifurcate in this shareholder dispute.  Shortly before trial, the Court agreed to try first Plaintiffs’ claims for reasonable expectations, mismanagement, and breach of fiduciary duty; and after determination of those issues to try, if necessary, the issues of valuation and dissolution.  The Order allowing bifurcation was entered with the consent of the parties.

Full Opinion

Motion to Bifurcate