The North Carolina Court of Appeals has before it a number of the interesting issues decided by the Business Court over the past several months.

There are, by my count, fifteen Business Court decisions on appeal to the Court of Appeals.  The cases involve class actions, derivative actions, forum selection clauses, motions to stay, and antitrust law, among other matters.

The list of cases on appeal is below, with links to earlier posts or case summaries on this blog about the Business Court decision as well as the dates of the most recent filings in the Court of Appeals.

Antitrust

Teague v. Bayer AG (Appellant’s Brief filed November 21, 2007; Appellee’s Brief filed January 23, 2008).  Antitrust case involving issues of indirect purchaser standing. 

Class Actions

Blitz v. Agean (Record on Appeal filed June 16, 2008).  Denial of class action under the Federal Telephone Consumer Protection Act.

Moody v. Sears Roebuck and Co. (briefing concluded January 2008, argued March 5, 2008).  Need for court approval before dismissal of class action.

Derivative Actions

Egelhof v. Szulik  (Appellant’s Brief filed June 5, 2008).  Sanctions against derivative action plaintiff and his lawyers.

Gaskin v. J.S. Proctor Co. (Record on Appeal filed June 24, 2008).  Whether claims of limited partners against general partner were derivative, or direct.

Regions Bank v. Regional Property Development Corp. (Notice of Appeal filed May 20, 2008).  Dismissal of derivative action by members of limited liability company. 

Employment

Kornegay v. Aspen Asset Group, LLC (Notice of Appeal filed June 18, 2008).  Appeal from jury verdict finding breach of contract to pay bonus compensation and existence of bonus agreement and violation of North Carolina Wage and Hour Act.  Post-trial, the Court refused to award liquidated damages under the Act.

Motions To Stay

Signalife, Inc. v. Rubbermaid Inc. (Appellants’ Brief filed June 13, 2008).  Grant of Motion to Stay based on case filed earlier, through electronic means, in federal court. 

Wachovia Bank v. Harbinger Capital Partners Master Fund I (Record filed May 30, 2008).  Grant of Motion to Stay of North Carolina action in favor of a subsequently filed New York lawsuit. 

Forum Selection Clause

Sony Ericsson Mobile Communications USA, Inc. v. Agere Systems (Record on Appeal filed May 9, 2008).  Enforceability of forum selection clause.

Trusts

Heinitsh v. Wachovia Bank (Appellant’s Brief filed 11/13/2007; Appellee’s Brief filed January 14, 2008).  Dispute over distribution of trust proceeds, propriety of attorneys’ fees incurred by trustee.

Miscellaneous Issues

Eleanor B. Johnson Limited Partnership v. Ball (Record on Appeal filed May 29, 2008).  Issues involving receivership and arbitration. 

Kintz v. Amerilink LTD (Notice of Appeal filed May 27, 2008).  Appeal of jury verdict in breach of contract case.

Media Network, Inc. v. Long Haymes Carr, Inc. (Notice of Appeal filed May 1, 2008).  Appeal of jury verdict regarding breach of advertising contract.

Schlieper v. Johnson (Appellant’s Brief filed February 15, 2008; Appellee’s Brief filed April 15, 2008).  Dismissal of claims for fraud, negligent misrepresentation, unfair and deceptive trade practices, and breach of contract regarding sale of business.

The photo at the top of this post is from Lance McCord’s photostream on Flickr.

An Order granting discovery sanctions in the Western District of North Carolina is the basis for a $107 million malpractice lawsuit against a New York law firm.

The discovery Order was entered two years ago in a multidistrict proceeding formerly pending in Charlotte.  The case, just recently settled, involved the alleged price fixing of polyester staple fiber. 

The law firm of Kaye Scholer represented CNA Holdings, Inc. and Celanese Americas in that litigation.  Judge Vorhees sanctioned Celanese for failing to produce a significant quantity of responsive documents. 

According to the Amended Complaint filed on June 25th against Kaye Scholer, Judge Vorhees ruled from the bench that:

[T]he efficient disposition of a case like this one depends on full and candid discovery and [Celanese has] withheld that compliance with their obligations . . . . The efforts by [Celanese] do not meet the requirements of the discovery rules or the court’s directives . . . . The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling. And they don’t encourage the court to rely on the good faith of [Celanese]. . . . The efforts by [Celanese] to play cat and mouse with the court and with the non-class plaintiffs since at least 2004 is unbecoming . . . to say the least.

The sanction entered by the Court in the antitrust litigation was that Celanese had to pay opposing counsel’s attorneys’ fees in pursuing the discovery motion, which were more than $100,000, and that the Court would consider further sanctions.  Shortly after that, Celanese fired Kaye Scholer.

New counsel then conducted a comprehensive review of Celanese’s records which resulted in the production of hundreds of thousands of additional documents.  The Plaintiffs in the North Carolina case responded by asking for an array of additional sanctions, including (a) a default judgment against Celanese, (b) a finding of fact that Celanese had engaged in “bad faith, willful and deliberate discovery misconduct,” (c) instructions to the jury that this misconduct reflected consciousness of guilt, and (d) adverse inferences against Celanese on claims that it engaged in an illegal price-fixing conspiracy.

Judge Vorhees withheld ruling on the sanctions requested by Plaintiffs, but stated that he "did not take lightly the allegation that material false written and oral misrepresentations were knowingly and intentionally made" to the Court and the Plaintiffs. 

Celanese settled the antitrust claims in May 2008 for $107 million.  In the new lawsuit, Celanese says it was forced to pay this substantial settlement because "[t]he North Carolina Federal Court’s sanctions rulings and the threat of additional severe sanctions at trial resulting from Kaye Scholer’s conduct materially changed Celanese’s likelihood of success at trial."  As Celanese put it, "the inflated $107 million settlement forced by Kaye Scholer’s misconduct was essential to avoid the potentially devestating impact of sanctions that would have undermined Celanese’s defense on the merits and would have exposed Celanese to catastrophic treble antitrust damages."

Celanese is seeking from Kaye Scholer a return of the legal fees it paid the firm, plus the difference between the $107 million settlement and what it claims would have been a "nominal settlement" in the absence of the discovery issues.  Celanese bases its claim that the antitrust claims had minimal value on memoranda in which Kaye Scholer opined that the case presented little risk.

The lawsuit is pending in federal court in Texas.  Kaye Scholer has filed its own lawsuit in the Southern District of New York seeking the recovery from Celanese of unpaid legal fees, and a declaration that its legal work was properly performed. 

Advising an out-of-state defendant whether it is subject to personal jurisdiction is often a judgment call.  There is no bright line test when minimum contacts are involved.

The 2-1 decision today by the North Carolina Court of Appeals in Rossetto USA, Inc. v. Greensky Financial, LLC, in which two Georgia LLCs challenged personal jurisdiction, illustrates that pretty clearly.  The Court actually split twice on the jurisdiction question, reaching different conclusions on whether there was jurisdiction over the two defendants.

The Georgia companies were Greensky Financial, LLC and Furniture Retailers, LLC.  The trial judge found that it had jurisdiction over both of them.  The Court of Appeals majority found that it had jurisdiction over Greensky, but not over Furniture Retailers.  The dissent found that there was no jurisdiction over Greensky, but that there was jurisdiction over Furniture Retailers.

The facts underlying these conflicting jurisdictional conclusions were fairly routine.  Greensky was a financing company, which had funded a company called EclecticGlobal’s purchases of furniture from the Plaintiff, a North Carolina company.  Greensky had made frequent payments on Eclectic’s behalf to the Plaintiff and had frequently communicated to Plaintiff’s representatives in North Carolina.  That was enough to find jurisdiction for the majority, but not enough for the dissent.

Furniture Retailers had taken over the business of Eclectic.  It had accepted one shipment of furniture sent by Plaintiff to Eclectic and tried to sell that furniture.  It had also made one telephone call to Plaintiff’s North Carolina office. Those were insufficient contacts to the majority, but sufficient for the dissent.

I wish I could tell you where to go from here. 

Clint Pinyan and John Buford of Brooks Pierce represent Greensky and Furniture Retailers.

Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.

The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste.  Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC’s checkbook.  Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.

When the company’s prospects faded, Kaplan stopped funding the company and asked for repayment of his loans.  The other members responded by voting to dissolve the LLC, which was placed in receivership.  Kaplan sued to collect his substantial debt.

The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the 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.

Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan’s fiduciary duty required him to do."  (Op. at 9).  The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.

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).

Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.

Continue Reading LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members

Although this isn’t in the mainstream of the business litigation decisions that I write about on this blog, I’m writing today about a contract case that’s important to the jurisprudence of North Carolina.  It’s the judicial determination made last week about the quality of Duke University football. 

The case is University of Louisville v. Duke University, pending in Franklin County, Kentucky.   Louisville filed its Complaint against Duke when Duke backed out of a contract to play four games against the Cardinals.  Duke had lost the first game in 2002 by a score of 40-3, and decided for some reason that it didn’t want to play the remaining three games in the series, due to be played in 2007-2009.

Louisville didn’t appreciate losing a record-padding opponent of the quality of Duke.  It sued, based on a provision in the Athletic Competition Agreement which called for a $150,000 payment for each game not played.  Duke’s defense was a provision in the contract which stated that it had to pay only if Louisville was unable to find a replacement opponent of "similar stature" to Duke.  The Agreement didn’t define the term.

Louisville, in discovery, asked Duke what NCAA football teams were of "similar stature."  Duke’s response was that every single team in former Division I-A and a lot of teams in former Division I-AA were.  The only teams that weren’t, to Duke, were junior varsity teams.  Here is Duke’s response from Interrogatory No. 1:

Duke states that any and all college varsity teams in the Football Bowl Subdivision (formerly Division I-A) are teams of a ‘similar stature’ to Duke. . . . Additionally, Duke states that any and all college varsity football teams in the Football Championship Subdivision (formerly Division I-AA) that would be considered as good or better than Duke in football. . . are teams of a ‘similar stature’ to Duke. . . . [J]unior varsity programs of any of the aforementioned teams would not be teams of a ‘similar stature’ to Duke’s varsity college football team.

Louisville’s definition of "similar stature" was narrower, but maybe not narrow enough.  It said the term should be defined as "any school that is a member of a Bowl Championship Series conference whose champion automatically qualifies for a BCS bowl game," plus Notre Dame.  Louisville had been unable to find such a substitute opponent.

Duke moved for judgment on the pleadings, and won.  Its argued at the hearing that the standard for "similar stature" was very low because the quality of Duke football was as low as it gets.  As Judge Phillip J. Shepherd of the Franklin Circuit Court described the argument in his June 19th Opinion:

The term ‘team of similar stature’ simply means any team that competes at the same level of athletic performance as the Duke football team.  At oral argument, Duke . . . persuasively asserted that this is a threshold that could not be any lower.  Duke’s argument on this point cannot be reasonably disputed by Louisville.  Duke won only one football game, and lost eleven, during the 2007 football season.

 

Continue Reading The Law And Duke Football

There was no tortious interference contract claim against a defendant who sold product to plaintiff’s competitor.  This was a legitimate exercise of the defendant’s rights.

There was no claim for negligence, or negligent misrepresentation, against the defendant because the plaintiff’s claims were for breach of warranty and covered by the UCC, and also because of the economic loss rule.  Judge Tennille held:

This is a breach of warranty case. The complaint alleges any statements were made in the course of the contractual representation. It fails to establish any independent duty running from ALT to Gateway. To substitute negligent misrepresentation for breach of warranty under the circumstances of this case would eviscerate the pertinent sections of the UCC. Both the negligent misrepresentation claim and the negligence claim in Count VI are barred by the economic loss rule. Both are based upon a breach of contract or warranty and the recovery is limited to the contract or warranty claim. Our Court of Appeals has held that: “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract.” Spillman v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741 (1992).

A trade secrets claim, which asserted that defendant had improperly given plaintiff’s customer list to a competitor of plaintiff, survived the Motion to Dismiss. The Court held that "[c]ustomer lists may or may not be trade secrets depending on the circumstances and the use made of them," and held that discovery on this claim would be necessary.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Defendant claimed that the Plaintiff, who was the majority shareholder of a family corporation, couldn’t have had an expectation of a fiduciary duty from him because the Defendant had had an affair with Plaintiff’s wife.  The Court disagreed, and said that the existence of a fiduciary duty under these circumstances was a question of fact.

Full Opinion

An Arbitration Award was entitled to collateral estoppel effect, even though the Defendants had not been parties to the arbitration.  

The Court compared the claims made in the Arbitration to the claims made in the Amended Complaint, and found them to be identical.  It further determined that the Plaintiff had "a full and fair opporutnity to litigate these issues." 

The Court concluded that "the doctrine of collateral estoppel serves to bar [the Plaintiff] from relitigating the issue of its damages resulting from" [the matters which had been at issue in the Arbitration].

The Court found, however, that the Plaintiff was not barred from seeking to enforce against the Defendants the Award itself, because there were issues about whether the Award had been satisfied.  The Court stated that the settlement of the Award contained "numerous contingencies."  The claims on the Award were therefore not precluded by either res judicata or by the "one-satisfaction doctrine."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

The actions and impressions of a non-lawyer sent by counsel to conduct an interview were subject to work product privilege.  

Judge Tennille held that the interviewer (Ms. Lister):

declined to answer questions which called for her mental impressions and litigation strategy based upon attorney-client privilege and work product. Ms. Lister conducted the interview at the direction and under the supervision of the General Counsel of BDO in order to prepare BDO’s defense to the claims asserted in the lawsuit. The Court concludes that the limited amount of information withheld by Ms. Lister was protected as attorney work product under N.C. R. Civ. P. 26(b)(3). Harco elicited testimony about what was said and done at the interview. The information it now seeks relates to impressions and opinions Ms. Lister formed and conveyed to BDO’s General Counsel. Harco has not demonstrated any hardship as it has obtained discovery of the underlying facts. Harco’s Motion to Compel is denied.

Full Opinion

Brief in Opposition to Motion to Compel

Reply Brief in Support of Motion to Compel 

(Brief in Support of Motion to Compel not available)