Then, the big day finally comes.  Your work is in court and the case turns on an agreement that you drafted.  But it wasn't signed by everybody concerned.  It's a nightmare.  What's going to happen?

Your astonishingly bright (and good looking) litigation partner says "No sweat.  We don't need no stinkin' signatures."  Is he or she right?

He or she might be, based on Judge Gale's decision last week in Hawes v. Vandoros, 2013 NCBC 31.  The parties were all joint owners of two investment beach houses.  When they refinanced the houses, most of them signed "contribution agreements" providing that they would each pay a pro rata share of the monthly payments due under the new loans.  

There were eleven signature lines on the Contribution Agreements, but two of the owners (the Schemerhorns) did not sign.  Two of those who had signed defaulted on their payments, and argued that the Agreements were not valid because all of the co-owners had not signed.

Judge Gale held that "a signature is not always essential to the binding force of an agreement . . . and .  . . in the absence of a statute it need not be signed, provided it is accepted and acted on, or is delivered and acted on."  Op.  ¶29 (quoting Fidelity & Casualty Co. of NY  v. Charles W. Angle, Inc., 243 N.C. 570, 575-76, 91 S.E.2d 575, 579 (quoting W.B. Coppersmith & Sons v. Aetna Ins. Co., 222 N.C. 14, 21 S.E.2d 838 (1942)).

Those who hadn't signed the Agreements had abided by them -- they consistently made the payments due from them and had accepted the Agreements via their performance.  Op. ¶29.  Therefore, all signatures were not required.

Judge Gale also rejected the argument that obtaining all signatures was a condition precedent to the validity of the Agreements.  He said that "[a]bsent plain language, a contract ordinarily will not be construed as containing a condition precedent."  Op.  ¶30 (quoting Craftique, Inc. v. Stevents & Co., Inc., 321 N.C. 564, 566-67, 364 S.E.2d 129, 131 (1988)).

I wouldn't give up those signatures just yet.

The parties were co-shareholders of Anthem Leather, Inc., a Delaware corporation, which was in the business of buying leather from tanneries and selling it to its customers for various uses.  The Defendants also served as officers and directors of the company.

According to the Plaintiffs, the Defendants embarked on a related venture focusing on the distribution of contract leather, which is leather used in institutional furniture in offices, hotels, and hospitals. Anthem had never been in this business, but said that it was a natural area of growth for it.

When the Plaintiffs learned that the Defendants had formed a new entity, Crest Leather, LLC, to engage in the contract leather business, using Anthem's resources, they filed their Complaint alleging breaches of fiduciary duty.  The Defendants, caught with their hand in the cookie jar, responded by attempting to assign their interest in Crest to the Plaintiffs.

The grant of the injunction turned on Delaware law per the internal affairs doctrine.  In Delaware, it is a breach of fiduciary duty for an officer or director to usurp an opportunity belonging to the corporation.  The elements of that claim are:

(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.

The Defendants argued that their assignment to Plaintiffs of their interest in the usurped opportunity made it impossible for the Plaintiffs to show that they had been irreparably harmed.  Judge Jolly was not buying any of that.  He said:

Defendants contend that by voluntarily assigning their Crest interests to Anthem they mooted any showing of irreparable harm to Plaintiffs. The court does not agree.  A preliminary injunction is a measure taken by a court to preserve the status quo of the parties during litigation. Triangle Leasing Co. v. McMahon, 327 N.C.224, 227 (1990). An "injunction is generally framed so as to restrain the defendant from permitting his previous act to operate, or to restore conditions that existed before the wrong complained of was committed." Anderson v. Waynesville, 203 N.C. 37, 46 (1932); see also Rauch Indus., Inc. v. Radko, No. 3:07-cv-197-C, 2007 U.S. Dist. LEXIS 79311, *19 (W.D.N.C. Oct. 25, 2007) (characterizing the status quo between the parties as "the time that the allegedly unlawful acts complained of reasonably may be believed to have occurred"). Defendants' voluntary assignment of their Crest interests to Anthem does not cure the possibility that Plaintiffs still can be irreparably harmed by Defendants' breach of fiduciary duty. On this requirement, the court concludes that Plaintiffs have shown they are likely to sustain irreparable harm in the absence of an injunction.

Op. Pars. 15-16.

The injunction barred the Defendants from, among things, entering Anthem's facilities, accessing its computer systems, or contacting or selling leather to Anthem's customers.

You can't put the cookie back in the cookie jar after you've taken it.

Congratulations to my colleagues Bob King and Elizabeth Taylor, who represented the Plaintiffs.

It's been nearly ten years since the North Carolina Supreme Court decided a case involving the attorney-client privilege.  That case was In re Miller, 357 N.C. 316, 584 S.E.2d 772 (2003), which raised the question whether the privilege survives the death of the client.  (It does.)

That case, which involved a criminal investigation, raised some esoteric issues.  Those are probably unlikely to come up in a business litigation practice, but Judge Jolly's Order last week in Meir v. Meir is likely to have more of a day-to-day impact on your practice.

Let's say your client is questioned about the facts underlying the Complaint that you drafted based on those facts as told to you by her.  Are those facts privileged because they were told to you, her attorney?  Of course not.  We all should know that.

But what if you, lawyer, tell her, client, the facts you have learned about her claim from other sources.  Is that privileged?  Can you instruct her not to answer questions about those facts at her deposition?

Not so sure about that situation?  The Meir Order has the answer: you may not instruct your client not to answer those questions.  Judge Jolly ruled as follows:

The attorney-client privilege does not protect against the disclosure of facts. Rather, it only protects against the disclosure of certain confidential communications between an attorney and client. See Upjohn Co. v. United States, 449 U.S. 383, 396-97 (1981); In re Miller, 357 N.C. 316, 336 (2003). The fact that Violet Meir and her counsel may have discussed certain facts related to this case does not trigger the application of any protection as to those facts. The court concludes that the
attorney-client privilege does not attach to specific facts simply because Violet Meir is aware of those facts only because of conversations with her attorney. In addition, the attorney-client privilege does not protect against the disclosure of Violet Meir's personal opinions, feelings or knowledge.

Op. Par. 10.

The attorney-client privilege isn't like a "cone of silence" that extends to the exchange of facts between attorney and client.

And if you are too young to remember the TV show Get Smart, which occasionally referred to the Cone of Silence, click here.  This might be the most valuable thing that you learn from this post.

The LLC was operating a restaurant which served an African-American clientele. The Plaintiffs said that the Defendants became hostile to them as a result and referred to their business in a racially disparaging way and interfered with their sale of the business.

One of the comments by the Defendants, when the Plaintiffs attempted to sell their business, was whether they were going to open another "chicken and waffle shack."

Let me say that I love [fried] chicken and waffles for breakfast. If you haven't tried that dish, Dame's Chicken & Waffles, in Greensboro's Southside neighborhood, is outstanding.  If you don't get the racial animus alleged to be behind that term, the dish is said to have originated with African-American southerners.

But could the LLC members, who alleged that they suffered "personal out-of-pocket losses" as a result of the Defendants' discriminatory conduct, state a claim against them?

No, said Judge Niemeyer, since they were LLC members.  He held that:

[i]n advancing their arguments [the members] failed to account for the fact that they elected to conduct their business through a limited liability company ("LLC") and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), forecloses just such claims.

Op. at 7 (emphasis added).

I wasn't familiar with the Supreme Court's decision in Domino's Pizza, but it rejected in that case a shareholder's personal claims for race discrimination, holding that they belonged solely to the corporation.  Justice Scalia held there that:

it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts.

546 U.S. at 477.

I will hold off on my pizza recommendations.

The policy didn't contain a definition for an "accident," making it necessary for the Court to interpret the term. It noted in passing that     "[t]here are probably not many words which have caused courts as much trouble as 'accident' and 'accidental.'" Op. at n.1.

In the end, Judge Traxler ruled that the dead husband was covered by the policy, though he said that:

Reaching this result gives us no great pleasure. Drunk driving is reckless, irresponsible conduct that produces tragic consequences for the thousands it touches annually. But our task in this case is not to promote personal responsibility or enforce good driving habits. We must focus on the terms of the policies issued under the Plan and determine whether Richard died as a result of an accident without 'allowing our moral judgments about drunk driving to influence our
review.'

Op. 3-4.

The Court's analysis began with two competing definitions of the term "accident."  The Plaintiff argued that the "most natural and common understanding of the term . . . is an unintentional, unplanned incident that occurs as a result of a careless error."  Op. at 12.  She said that unless an intoxicated driver intended to crash his car and die, that his death would be an accident under the policy.

Another definition of "accident" would "exclude any incident where the consequences of intentional conduct are expected or reasonably forseeable."  Op. at 13.

Finding the term ambiguous, the Court applied "the rule of contra proferentum and construed the term[] strictly in favor of the insured." Op. at 15.   It found no evidence that the driver intended to have an accident and deemed the insured's death to be an accident.

The District Court had ruled that a death caused by intoxication was not an "accident."  It relied on Section 58-3-30(b) of the North Carolina General Statutes, which says that

"Accident", "accidental injury", and "accidental means" shall be defined to imply "result" language and shall not include words that establish an accidental means test.  "

You might not be familiar with some of those terms.  I wasn't.  The "accidental means" definition provides that there is no coverage when the loss "occurs by reason of an insured's intentional act" or "is the natural and probable consequence of a voluntary actor course of conduct."  Op. at 21 (quoting Collins v. Life Ins. Co. of Va., 393 S.E.2d 342, 343 (N.C. Ct. App. 1990)).

The "accidental result" standard is more liberal. 

a policy that pays benefits based on an 'accidental result' standard does not categorically exclude from the definition of 'accident' losses resulting from intentional acts; rather, "accidental" under this standard means a loss occurred 'fortuitously without intent or design' and was 'unexpected, unusual and unforeseen.'

Op. at 21 (quoting Henderson v. Hartford Accident & Indem. Co., 150 S.E.2d 17, 20 (N.C. 1966)).

Judge Traxler looked to a 1992 North Carolina Supreme Court decision -- North Carolina Farm Bureau Mutual Ins. Co. v. Stox, 412 S.E.2d 318 (N.C. 1992) -- which held:

that where the term ‘accident’ is not specifically defined in an insurance policy, that term does include injury resulting from an intentional act, if the injury is not intentional or substantially certain to be the result of the intentional act.

Op. at 22.

Judge Traxler distilled the question to whether a reasonable insured "would have understood that driving while intoxicated . . . was substantially certain to result in death or severe injury." Op. at 22. There was some statistical evidence in the record of the extent to which alcohol impairs a driver's ability to operate a vehicle, but not enough for the Court to conclude that driving with a blood alcohol content of .289 (like Johnson had been) was substantially certain to result in death or severe injury.

The "substantially certain" standard is a pretty high one:

The indications must be strong enough to alert a reasonably prudent man not only to the possibility of the results occurring but the indications must also be sufficient to forewarn him that the results are highly likely to occur.

Op. at 23.

So, the Plaintiff was ruled to be entitled to her deceased husband's $125,000 AD&D benefit.

One thing is for sure. AUL will be revising the terms of its AD&D coverage to exclude accidents led to by intoxication.

Another thing that's for sure is that you are pretty drunk if you have a blood alcohol content level of .289. The NC standard for being intoxicated while driving is only .08. Don't drink and drive.

if a party . . . fails to obey an order to provide or permit discovery, . . . a judge of the court in which the action is pending may make such orders in regard to the failure as are just . . . . In lieu of any [such order] or in addition thereto, the court shall require the party failing to obey the order to pay the reasonable expenses, including attorney’s fees, caused by the failure . . . .

Judge Murphy applied the teeth in Rule 37 to sanction two of the parties -- Allison and Stathopoulos -- in an Order this week in BOGNC v. Cornelius Self-Storage LLC to the tune of almost $10,000 for failing to comply with an earlier discovery order in the case.

 He had entered that Order in December 2011, ruling that the attorney-client privilege did not apply to communications between Allison (an attorney) and Stathopoulus, both of whom were LLC members.  He directed those two parties to produce the documents they had withheld on the basis of privilege within thirty days, and to produce a privilege log for documents they continued to maintain as privileged within the same time frame.  If disputes continued, Allison and Stathopoulus were to deliver the documents in camera for the Court's review.

The deadlines passed without compliance.  Although the Order did not state a deadline for production of the documents for an in camera review, they were not provided until eight months after the entry of the Order.  Judge Murphy said that the production was "riddled with deficiencies" and  the parties had acted in "blatant disregard" of his Order.   Order ¶18.

The sanctions were equivalent to the reasonable expenses incurred by the Plaintiff as a result of the parties' failure to comply with the Court's 2011 Order, which were ruled to be $9,614.00.

It is worth mentioning that these sanctions didn't run against the lawyers for Allison and Stathopoulus.  They ran directly against the parties.

Why not?  A cascade of horribles might result if they were assignable.  The concerns noted by the COA were:

the potential for a conflict of interest, the compromise of confidentiality, and the negative effect assignment would have on the integrity of the legal profession and the administration of justice.

Op. at 9.

Malpractice claims now fit in a broad category of personal injury claims which are not assignable, like "claims for defamation, abuse of process, malicious prosecution or conspiracy to injure another's business, unfair and deceptive trade practices and conspiracy to commit fraud."  Op. at 8.

If the name of the case sounds familiar, that's because it was a Business Court case which you've read about before on this blog.

And don't think that this result represents a win for the law firm involved.  The COA reversed a 2010 Order from the Business Court holding that the firm's individual client had assigned away his malpractice claim to a corporate Plaintiff and that he therefore had no standing to bring the malpractice claim.

The Fourth Circuit's decision on Monday of this week in The Country Vintner v. E & J Gallo Winery, Inc. gives answers to those questions, but your prevailing party client won't like them.

Gallo ran up bills from e-discovery vendors of more than $100,000 in its production to the Plaintiff of its ESI, and it sought to have the District Court award that as an element of costs.  The bulk of that amount was for "flattening" and "indexing" the ESI. The Court defined that as the "initial processing" of the data, which:

involved decompressing container files (e.g., ZIP files or Microsoft PST files); making the data searchable by extracting text and creating Optical Character Recognition for text that could not be extracted; indexing the data; removing system files that were known not to contain any user-generated content; and removing duplicate files. 

Op. at 5.

That part of the application for costs was denied by the District Court, which was affirmed by the Fourth Circuit.

The Court was constrained by the terms of 28 U.S.C. sec 1920(4), which says that a "judge or clerk of any court of the United States may tax as costs . . . fees for exemplification and the cost of making copies of any materials where the copies are necessarily obtained for use in the case."

The heart of the holding was in the narrow definition of "making copies."  The Court relied on the Third Circuit's decision in Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012), which held that "only the scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD involved 'copying'" within the meaning of §1920(4).  Id. at 171.

Taxable costs are a fraction of the nontaxable expenses borne by litigants for attorneys, experts, consultants, and investigators. It comes as little surprise, therefore, that costs almost always amount to less than the successful litigant’s total expenses in connection with a lawsuit.

 There's certainly a fair amount of North Carolina authority that an arbitration agreement can't be enforced if it was never signed (noted in ¶20 of the Order), but Judge Gale held that the Revised Uniform Arbitration Act relaxes this requirement.

The RUAA became effective in 2004, and provides that "[a]n agreement contained in a record to submit to arbitration . . . is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for revoking a contract."  N.C. Gen. Stat. §1-569.6(a).  

A "record" is defined by the Act as "information that is inscribed on a tangible medium."  N.C. Gen. Stat. §1-569.1(6).  The predecessor statute -- the Uniform Arbitration Act -- carried a more stringent standard.  It said that "parties may agree in writing to submit to arbitration . . . or they may include in a written contract a provision for the settlement of arbitration of any controversy. . . . "

Even though the Plaintiffs had never signed the partnership agreement containing the arbitration provision, they had known of the agreement and taken a significant role in drafting it.  Judge Gale found that:

the draft Partnership Agreement circulated by [one of the Plaintiffs] and assented to by [the Defendants], is a sufficient 'record' to satisfy the requirement of § 569.6(a) of the RUAA.

Order ¶23.

Congratulations to my partners Jeff Oleynik and John Ormand for pulling off this magic trick and getting the Order compelling arbitration.  (And no, that's not Jeff or John in the picture.  Or their rabbit.)

The deadlock, which had existed since June of 2005, concerned how  the profits from contingent fee engagements, concluded after several partners withdrew from the PLLC, should be divided among the partners.  Carrying out the directive of the Court of Appeals, Judge Jolly  last week in Mitchell v. Brewer, 2013 NCBC 14 resolved the issue of how those profits should be shared.

These former partners have been at war for seven years over the division of these fees.  I've written several times about the case, including in May 2007, April 2008, and March 2009.

In this latest round in their war, the former partners (the Plaintiffs) and the remaining Partners (the Defendants, who did all the work after the dissolution to resolve the outstanding contingent fee matters) had different approaches as to how the fees should be allocated among them.

Plaintiffs said they were entitled to their share in the profits from the engagements regardless when and by whom they were realized.  There is some support for this view in the LLC Act, which 

provides that upon dissolution, unless otherwise agreed, an LLC such as [the Company] continues in existence while its managers, or others charged with winding up the affairs of the LLC, have a statutory duty to (a) obtain '[a]s promptly as reasonably possible . . . the fair market value for the [LLC's] assets,' and (b) distribute the net balance of those assets to the LLC's Members, and others.
G.S. 57C-6-04(b), 05(3).

Op. ¶7.  Plaintiffs said that the statute placed a duty on the managers of the LLC "to carry on the firm's unfinished business in order to realize fair market value for its assets."  Op.  ¶8.

The Defendants, who had done the work to pursue the contingent fee engagements to resolution, had a different point of view.  They said that the only interest that the former partners had in the contingent fee engagements was the value that they had before dissolution.  Since the value that actually materialized thereafter was due solely to the Defendants' efforts after the dissolution, they said that

they should be required to remit to the Company only the value of net profits ultimately derived from the Contingent Fee Engagements less those profits that are attributable exclusively to Defendants' post-dissolution efforts.

Op. ¶12.

Judge Jolly, as the decider, disagreed with both positions.  He observed that contingent-fee engagements "cannot be 'liquidated' in the conventional sense of the term.  The only way to realize a tangible value in a contingent fee case is "by ultimately reaching a favorable settlement or verdict in the matter."  Op. ¶19.

Therefore, he said, "dissolution should end the right of members to share in the future profits of their fellow members' personal-service engagements."  Op. ¶22.  So profits attributable to "post-dissolution personal services by individual former members should not accrue to the LLC."  Op. ¶22.

The valuation protocol which Judge Jolly dictated was to look to the "percentage of pre-dissolution Time expended relative to the net profit ultimately realized on that matter."  Op. ¶25.  He gave this example:

if a total of 100 attorney hours were expended on a particular Contingent Fee Engagement and 50 of those hours were performed prior to dissolution, the net fee ultimately received by Defendants should be shared 50/50 with Plaintiffs.

Id.

It seems doubtful that the contingent fee engagements will fall that neatly into boxes.  That may be the reason that the Judge appointed an accountant as a Special Master to conduct an accounting of the contingent fee engagements. 

Serving A Subpoena.  You can't serve a subpoena on a non-party through their counsel unless they are authorized to accept service.  That's true even if counsel has appeared in the case.  Only parties can be served through their counsel of record, per Rule 5(b) of the Rules of Civil Procedure. 

The subpoena at issue in Out of the Box was directed to LexisNexis, which is based in Massachusetts. LexisNexis had appeared in the case to move to quash an earlier subpoena, so the party serving the new subpoena apparently thought it was valid to serve its North Carolina counsel.

Place Of Deposition.  The subpoena called for LexisNexis to present its witness in North Carolina. Judge Gale ruled that LexisNexis could not be required to send its witness to North Carolina.  He relied on a Business Court ruling of six years ago that:

the existence of personal jurisdiction over a non-party foreign corporation, standing alone, is insufficient to extend the Court's subpoena power to that corporation for purposes of a deposition or the production of documents.

AARP v. American Family Prepaid Legal Corp., 2007 NCBC 4 (February 23, 2007).

30(b)(6) Deposition Topics.  The last lesson of Out of the Box is that when Rule of Civil Procedure 30(b)(6) says that the topics on which a corporation is to designate a witness must be stated with "reasonable particularity," it really means it. The Defendant framed its topics in an expansively broad way, like the name of the software product at issue "in the broadest sense and including any and all conceivable topics."  Judge Gale found the subjects identified to be too broad, and recast them in his own terms.

Last week, Judge Murphy entered a preliminary injunction in the same case in 2013 NCBC 11, this time over the Defendants' vigorous defense.  The second time around was a much closer call. 

The case involves the McEwen name, which is the middle name of Defendant Carl Ellington. When the Defendants sold the funeral homes that they had operated under the McEwen name to the Plaintiffs, they included in the sale the rights to all "trademarks, tradenames (including all trade names under which [they] did business."  McEwen was the last name of Carl J. McEwen, the founder of McEwen Funeral Services, Inc.

Several years after their sale, the Defendants opened a new, competing funeral home under the McEwen name and this trademark infringement lawsuit ensued.

Although Judge Murphy had entered a TRO in the first round of litigation, this time he was confronted with a 99-year old North Carolina Supreme Court decision, Zagier v. Zagier, 167 N.C. 616, 83 S.E. 913 (1914) which held that "[a]s a rule, a trade-mark cannot be taken in a surname. . . ."  Id. at 617, 83 S.E. at 913.

But Zagier also held that the seller operating a business under his surname can "conclude himself from the further use of it in a similar way."

The "Likelihood Of Confusion" Test Was Inapplicable

So could the Defendants use the McEwen name without infringing on the Plaintiffs' rights?  In the TRO proceeding, Judge Murphy had ruled that there was a likelihood of confusion if they did so.  

But at the preliminary injunction stage, Judge Murphy backed off that well-known federal trademark infringement standard, saying that he was "unconvinced . . . that the application of North Carolina's common law requires the adoption of the 'likelihood of confusion' test."  Op. ¶39 & n.5.

He ruled that "when a surname is already in use in the name of a corporation, a subsequent 'corporation might be created by and operated under the same [name], when not in the same locality, in the absence of proof of an intent to injure the first named corporation or to avail itself fraudulently of the other's good name and reputation.'"  Op. ¶40 (quoting Bingham School v. Gray, 122 N.C. 699, 707, 30 S.E. 304, 304-05 (1898)).

It was somewhat of a thin record on which to find a fraudulent intent, but Judge Murphy found that to be suggested by the following facts:

• Defendants had begun their funeral home operations at a location previously used by Plaintiffs for the same services,
• The sign posted at that location used script similar to that of Defendants' sign in the location,
• Defendants had decorated the lobby of one of their locations with the same portrait of the McEwen founder that is displayed in the lobby of some of Defendants' funeral home locations, and
• Defendant Carl Ellington had not used his middle name (McEwen) in other business contexts until the Defendants began competing with the Plaintiffs.

Op. ¶46.

Embellishing on the factor of the sudden use of the middle name, the Court said "the fact that a person inexplicably changes the use of their middle name when they enter into a competing endeavor suggests to the Court that there was an intent to acquire the existing company's good will and reputation."  Op. ¶47.

Did it make a difference that the Defendants had registered a trademark in the McEwen name with the North Carolina Board of Funeral Services and the North Carolina Secretary of State?  No, because the state trademark statute says that:

registration does not authorize the use . . . of a name in violation of the rights of any third party under . . . the trademark act of this State, or other statutory or common law, and is not a defense to an action for violation of any of those rights

N.C. Gen. Stat. §55D-20(e).

The Defendants were preliminarily enjoined from engaging in:

any and all activities that use the McEwen name in the provision of funeral services within Charlotte, Mint Hill, Pineville, and Monroe.

Those are the areas where Plaintiffs have operated under the McEwen name.

TIC Interests Are Securities

The first issue addressed in NNN was whether the "TIC interests" purchased by Plaintiffs fell within the definition of a "security."  If you've never heard of a TIC interest, it is "an undivided share in real property 'with each person having an equal right to possess the whole property. . . .'" Op. ¶42.

There's been a good bit of litigation about whether a TIC interest can  be considered a security.  It's not a security if it simply involves the sale of fractional real estate shares, but it can be if it is coupled with a management contract.

That was the situation before the Court in NNN.  Plaintiffs had purchased TIC interests in several office buildings in Durham.  Two of the primary tenants of the buildings were affiliates of the Duke University Health System.  The properties were to be managed by Triple Net Properties, LLC, which is a defendant in a separate lawsuit also before the Business Court.

Plaintiffs alleged that Triple Net and Highwoods, the former owner of the properties, obtained their investment by making material misstatements which misled them into making their purchases. The alleged misstatements concerned Duke's intention to remain as a tenant.  After the purchases of the TIC interests, Duke decided not to renew its leases.  The properties which it had occupied then went to foreclosure. 

The State Scheme For Civil Liability Under The Securities Act

Section 78A-56(a) imposes "primary liability" on the seller or offeror of a security.  There are two "pathways" to primary liability.  One lies in fraud, generally comparable to federal 10b-5 claims. That's in N.C. Gen. Stat. §78A-8, (Section 78A-56(a) creates civil liability for a violation of section 78A-8.)  The other pathway is through making false or misleading statements, comparable to federal claims under 12(a)(2) of the Securities Act of 1933.  That's in N.C. Gen. Stat. §78A-56(a)(2).

Note that the remedies under the NCSA are less generous than those under the corresponding federal claims.  The recovery under NC law is generally limited to the consideration paid for the security.  N.C. Gen. Stat. §78A-56(a).

Pleading, Scienter, and Justifiable Reliance Under Sections 56(a)(1) and 56(a)(2)

Judge Gale ruled that a Plaintiff must prove scienter and justifiable reliance to make out a primary violation under Section 56(a)(1) of the NCSA.  Recall that Judge Murphy ruled last year that scienter is not necessarily a required element of a claim under Section 56(a)(2), which can be grounded on negligence.  

So, Judge Gale ruled, a claim under Section 56(a)(1) must be pled with particularity, in compliance with Rule 9(b) of the NC Rules of Civil Procedure.  Op. ¶¶62-63.

Section 56(a)(2) is different.  It provides for a claim against an offeror or a seller of a security "who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statment which was made to not be misleading."  Op. ¶64.  There's a built-in defense in the statute.  A seller or offeror can avoid liability for such a statement or omission if he can prove that "he did not know, and in the exercise of reasonable care could not have known of the truth or omission."  N.C. Gen. Stat. §78A-56(a)(2).

On pleading requirements as to Section 56(a)(2),  Judge Gale ruled that "the heightened pleading standards of Rule 9(b) do not apply [to a claim under that Section] where the action is grounded on negligence, but rather Rule of Civil Procedure 8(c) controls."  Op. ¶67.  The plaintiff also doesn't need to prove justifiable reliance under this Section.  Id.

Secondary Liability Under Section 56(a)(2)

North Carolina extends secondary liability under Section 56(a)(2) to "every other person who materially aids in the transaction."  But the "other person" must be shown to "actually [know] of the factual predicate of the primary liability."  Op. ¶69.

What does "materially aid" mean?  Judge Gale devoted several paragraphs of his decision to that issue (¶¶71-80), and concluded that:

for purposes of the present Rule 12(b)(6) motion the court will require allegations of conduct which rises to the level of having contributed substantial assistance to the act or conduct leading to primary liability under the NCSA, and, when later assessing plaintiff’s proof, will apply the concept of 'substantial assistance' restrictively.

Op. ¶79.

The Liability Of One Of The Defendants

The last part of the opinion deals with the liability of the Defendant Highwoods.  Highwoods conveyed the fractional interests in the properties directly to the Plaintiffs, but hadn't been involved in the peddling of the management contract.  That wasn't enough to make it liable as a seller of the security and make it primarily liable, so there was no claim for liability under Section 78A-56(a)(1).

Highwoods did not fare as well on Plaintiffs' claims that it was secondarily liable under Section 78A-56(a)(2).  Judge Gale ruled that "[w]hether a person’s participation in the sale of a security constitutes 'material aid' and whether that person 'actually knew of the existence of the facts by reason of which the liability is alleged to exist' are necessarily fact-intensive inquiries. " Op. ¶91.

The facts about Highwoods' knowledge that Duke planned to vacate the sold properties are to be the subject of "further proceedings."  Op. ¶90.

Being a Tar Heel fan, I have to say It's a shame that no one can figure out a way to sue Duke.

Powell, the Defendant, had a 50% interest in several businesses with Henderson, one of the Plaintiffs.  He alleged in a third party complaint that Henderson, who shared the other 50% interest, had diverted $30,000 (and more) from their corporations.

The purpose of the $30,000?  For Henderson to shower goodies on the nanny for his children.  The third party complaint against the nanny said that the funds were lavished upon her to buy her a "Mercedes-Benz automobile and a high-end Mac computer."  Op. ¶5.  

Perhaps the nanny's child-care services were exceptional and warranted the computer and the Mercedes.  Or perhaps the allegations of the Third Party Complaint against the nanny, which were that she was Henderson's mistress, were true.

And she wasn't the only woman who was the target of Henderson's largesse, though the $30,000 spent on her was small potatoes.  The Third Party Complaint alleges that Henderson took $800,000 in company funds "to spend primarily on extravagant European and Middle Eastern vacations with both his wife . . . and his mistress."  Third Party Complaint at ¶37.

Powell argued that the diversion of $30,000 for the Mercedes and the computer was an inappropriate use of corporate funds. He sued the nanny, Amber Clancy, for unjust enrichment.  

That didn't fly, for a couple of reasons.  Unjust enrichment does not include claims for gifts, which were what Powell alleged the Mercedes and the Macintosh  were.  Also, Judge Gale ruled that Powell was not the proper party to bring the claim.  He said that "it was the corporation, not Powell individually, who conferred a benefit . . . upon Clancy and it is the corporation that would be the proper party to bring such an action."  Op. ¶10.

Our nannies always drove Porsches.

Today's post is about the Blythe v. Bell opinion numbered 2013 NCBC 8, on the subject of expert testimony.  In this third Blythe opinion, Defendants had moved to exclude the testimony of Plaintiffs' expert witness, Barbee, on the grounds that he was not qualified to render his opinion and that his methodology was deficient.

Barbee, a CPA, had offered testimony that the Plaintiffs' damages were lost profits consisting of more than ten million dollars, including  “historic lost profits” of about $3.3 million;  and “additional lost profits” of about $7.4 million.  Defendants' Motion to Exclude at ¶7.

Remember that it is very tough to prove lost profit damages in North Carolina.  As Judge Gale held, 

[w]hile the courts do not demand mathematical certitude in calculating
lost profits, they do not countenance conjecture or speculation, and conjecture or
speculation does not become admissible simply because it is presented by an expert.

Op. ¶19.  He also said that while the amount of damages to be awarded is for the jury to determine, "the court determines as a matter of law whether the evidence would allow a jury to calculate lost profits with reasonable certainty."  Op. Par. 20.

Furthermore, the expert testimony must "pass the realm of conjecture, speculation, or opinion not founded on facts, and must consist of actual facts from which a reasonably accurate conclusion regarding the cause and the amount of the loss can be logically and rationally drawn." Op. ¶20 (quoting Overnite Transp. Co. v. Int'l Brotherhood of Teamsters, 257 N.C. 18, 30, 125 S.E.2d 277, 286 (1962). 

The Defendants attacked Barbee's expertise, saying that he was not a qualified expert on the subject of marketing and that the method he had used to calculate lost profits was not reliable enough to pass muster.

Judge Gale gave a nod of approval to Barbee's expertise, saying that he was well qualified in the field of damages calculations.  He had the qualifications many of us look for when hiring a financial expert, like certifications from the American Institute of Certified Public Accountants in the areas of business valuation and financial forensics.

The AICPA puts limitations on a CPA's methods of calculating lost profits.  One of its publications counsels against speculation, saying that "damages for lost profits are recoverable only if the plaintiff can prove the damages related to lost profits are reasonable and that they have been calculated using reliable factors without undue speculation."  Op. ¶16 (quoting Richard A. Pollack, et al, AICPA, Calculating Lost Profits, Ch. 58 ¶¶ 52-53 (2006)).

Judge Gale ruled that Barbee's calculation of lost profits crossed the line into "conjecture and speculation" and that it should be excluded from evidence.  Op. ¶5.  

So where did Barbee leave the terra firma of "reliable factors" and enter the world of "conjecture and speculation"?  His calculation assumed that one of the Plaintiffs would have increased its sale of the socks that were central to the lawsuit and thereby its profits.  He based that calculation upon an assumption that the Plaintiffs would have had more dollars available to spend on marketing to increase sales.  He didn't specify how the dollars would have been spent or how they would have generated new sales.

But if you are cheering for the Blythe side of this case, all wasn't lost.  Part of Barbee's calculation of lost profits withstood Judge Gale's scrutiny.  That portion (the "historic" lost profits of $3.3 million) didn't involve a projection of sales which hadn't happened, but instead was based on actual sales.  Even so, the Blythe side of the case had their damages reduced by 75%.

Let's say that the lawyer defending against the domestication tells you that the out-of-state judgment was obtained based on "intrinsic fraud, misrepresentation, and misconduct."  Those would probably be grounds for setting aside a North Carolina judgment under Rule 60(b) of the North Carolina Rules of Civil Procedure.  Can the foreign judgment be enforced in North Carolina under the Uniform Act?

Those of you who are particularly sharp are wondering about the constitutional principle of Full Faith and Credit.  Article IV, Section 1 of the Constitution says that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State."  Not surprisingly, there is a good bit of judicial discussion of the interplay between the Uniform Act and the Constitution, with the most recent comment this week from the North Carolina Court of Appeals, in DOCRX, Inc. v. EMI Services of NC, LLC.

DOCRX was on the receiving end of a judgment in Mobile County, Alabama, of nearly half a million dollars.  When EMI sought to have its Alabama judgment enforced in North Carolina, DOCRX argued per NCRCP 60(b) that the judgment  could not be enforced because it was obtained on the basis of intrinsic fraud.  

The trial judge refused to enforce the judgment based on the Rule 60(b) argument and the Court of Appeals noted that this interpretation was "warranted from the plain language of the statute." Section 1C-1703(c) states that a foreign "judgment so filed has the same effect and is subject to the same defenses as a judgment of this State and shall be enforced or satisfied in like manner[.]"  And Rule 60(b) refers to "[f]raud (whether heretofore denominated intrinsic or extrinsic)" as a ground for setting aside a judgment.

But the Constitution intervenes here.  The core of the Court of Appeals' holding was that:

We hold that postjudgment relief from foreign judgments under N.C.G.S. § 1A-1, Rule 60(b) is limited to the following grounds: '(1) the judgment is based upon extrinsic fraud; (2) the judgment is void; or (3) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application.

Op. at 9 (quoting Craven v. Southern Farm Bureau Cas. Ins., 117 P.3d 11, 14 (Colo. App. 2004))(emphasis added)

These were the only grounds on which the trial court could have denied enforcement.  The arguments of "intrinsic fraud, misrepresentation and misconduct" were insufficient.  So, the Court of Appeals reversed the trial judge and remanded the case "for further proceedings."  Op. at 11.

Oh, and what about "intrinsic" fraud anyway?  What is that and how is it different from "extrinsic" fraud?  The federal Third Circuit called the terms a "most unfortunate" distinction, in Averbach v. Rival Mfg. Co., 809 F.2d 1016 (3d Cir. 1987).  Intrinsic fraud is fraud deceiving the court in obtaining a judgment. Extrinsic fraud is conduct which happens outside of court, but which deprives an adversary of the opportunity to present his case.

The Defendants had previously operated funeral homes under the McEwen name in the Charlotte, North Carolina area.  In 1986, they sold those funeral homes, and their trademarks and trade names, to the Plaintiffs.

Then, notwithstanding their agreement, the Defendants opened a funeral home under the McEwen name and began advertising under that name as well.  They also registered a trade name with the North Carolina Board of Funeral Services as McEwen Ellington Funeral Services.  

There's very little North Carolina state law on trademark infringement, but Judge Murphy found enough to enter a temporary restraining order against the Defendants.

He held, relying on a 1907 North Carolina Supreme Court decision, that "North Carolina common law protects corporations' trade names," stating that

It is well settled that an exclusive right may be acquired in the name in
which a business has been carried on, whether the name of a partnership or
of an individual, and it will be protected against infringement by another
who assumes it for the purpose of deception, or even when innocently
used without right, to the detriment of another; and this right, which is in
the nature of a right to a trade-mark, may be sold or assigned. 

Op. ¶9 (quoting Blackwell’s Durham Tobacco Co. v. American Tobacco Co., 145 N.C. 367, 374, 59 S.E. 123, 127 (1907).

Then, although there's no reported state court decision on when a trademark infringement plaintiff has shown the likelihood of confusion necessary to prevail, Judge Murphy relied on a federal decision from the Western District of North Carolina holding that the factors to be considered are:

1) the strength or distinctiveness of the mark; 2) the similarity of the two
marks; 3) the similarity of the goods/services the marks identify; 4) the
similarity of the facilities the two parties use in their businesses; 5) the
similarity of the advertising used by the two parties; 6) the defendant’s
intent; and 7) actual confusion.

Op. ¶10 (quoting Wachovia Bank & Trust Co. v. Crown Nation Bancorporation, 835 F. Supp. 882, 886(W.D.N.C. 1993)).

If that standard sounds familiar, that's because it is, and drawn from the Fourth Circuit Court of Appeals' often cited opinion in Pizzeria Uno v. Temple, 747 F.2d 1522, 1527 (4th Cir. 1984)).

Given that the Plaintiffs had shown that their McEwen mark was distinctive, the marks in question appeared to be similar, the funeral services provided by the parties were identical, the parties use similar facilities, the parties' advertising is similar, and that one of the Defendants had registered and operated under the challenged mark with the intent to cause confusion among the consuming public, it was any easy step to enjoin the Defendants from using the McEwen name in connection with funeral services.

It's hard to tell how the Defendants defended this pretty clear case of infringement, given that they didn't even file a brief in opposition to the motion for a TRO.

The Order authorizes the use of cellphones -- even those with cameras -- in the courthouses of the District.  The banning of cellphones with cameras has long been a bugaboo for lawyers practicing here.  And after all, can you even buy a cellphone without a camera anymore?

Here are the answers to some of the questions you may have about this sea change in Middle District procedures:

When is the new policy effective?  It is effective immediately.

What about my clients?  Can they bring their cellphones to Court?  No, the policy applies only to attorneys, including out of state attorneys who are appearing with local counsel per Local Rule 83.1(d).

What about paralegals and personnel of my law firm?  They are not covered by this policy.

Can I let someone with me use my cellphone in the courthouse?  No, the Standing Order says that "[p]ermitted attorneys shall maintain sole custody over the electronic device and shall not allow it to be used by anyone else unless they have been given court permission."

Is there anything I need to do to get my cellphone into the courthouses?  Yes, you need to fill out a form for an "Electronic Device Permission Card."  Submit the form with a self-addressed stamped envelope.  You'll need to show the card upon entering a courthouse with your cellphone.

But I already have a Laptop Authorization Card.  Do I need to reapply for an Electronic Device Permission Card?  Yes. Here's the form.

Does this new policy apply in the Bankruptcy Court courthouses?  Yes, it applies to all of the federal courthouses in the Middle District.

What about my iPad and other electronic devices?  They are all included.  The new policy extends to "cell phones, laptops, tablets [and] other electronic devices."

Are there any other restrictions I should know about?  Yes, you need to make sure that your device is not emitting any sounds while in the courtroom.  In most situations, it should be turned off while in the courtroom. As always, you are prohibited from "record[ing], broadcast[ing] or transmit[ting] any video images or audio sounds of the proceedings or the environs."  You agree in advance to these restrictions (and others) when applying for an Electronic Device Permission Card.

What if I violate the restrictions?  You might forfeit your privileges, have your device confiscated, or be held in contempt of court.

What about the Eastern and Western Districts?  The policy on electronic devices varies from District to District.  I wrote about the Eastern and Western District's policies a couple of years ago.

The Plaintiffs in Allen Smith were suing their business partner for breach of fiduciary duty. They said that the Defendant's decision to defer maintenance on an apartment complex that the parties co-owned had caused them damages in the form of lost profits.

The problem for Judge Murphy was the lack of any reasonably certain calculation of the claimed lost profits.  The damages witness had said in his deposition that he was "still trying to figure out how to quantify losses" and that he didn't think he could calculate the lost profits until "[t]he day before the trial."  Op. ¶23.

Judge Murphy ruled that:

Although the parties conducted discovery for over a year, Plaintiffs could not provide sufficient evidence for the Court to determine the causation or amount of damages with reasonable certainty. Therefore, the Court concludes that [the Defendant] has met its burden of demonstrating Plaintiffs’ failure to provide adequate proof of damages to support their breach of fiduciary duty claim.

Op. ¶55.

He also rejected the efforts of the Plaintiffs to present a new calculation of damages after the discovery period had ended.  They tried this by way of an affidavit presented two months after discovery had closed.  The Judge said that the Plaintiffs had presented no reason why the late-breaking damages calculation could not have been provided during the discovery period, and said that "[s]uch conduct goes directly against the purpose of Rule 26(e) in preventing 'untimely, evasive, and incomplete responses.'"  Op. ¶74.

It's easy to lose sight of damages during discovery when you are focused on proving liability. Don't let that happen to you or you may have your case dismissed.

The NC County Plaintiffs allege that Hotels.com and the other Defendants contract with hotels for rooms at a discounted rate, and then sell the rooms to consumers at a higher rate.  Their beef is over the non-payment by hotels.com of the Occupancy Tax ordinarily paid by hoteliers.  They allege that Hotels.com and the other Defendants charge their customers for tax at the higher rate at which the hotels actually sell the room, but then only remit taxes based on the discounted rate they pay the hotel operator.

What happens to the difference?  Hotels.com and the other Defendants pocket it.  Shouldn't they pay the excess collected to the counties or the North Carolina Department of Revenue?  The Counties thought so.

But the upshot of Judge Murphy's decision in the Wake County case is that the Counties had no cause of action against the Defendants.  He granted summary judgment in favor of the Defendants.

The why of it took 30 pages of statutory analysis of North Carolina's taxation scheme.  The Occupancy Tax is not contained in the General Statutes.  Instead, the General Assembly passed statutes authorizing counties to levy an Occupancy Tax.  The counties levy the Occupancy Tax via resolutions or ordinances.

So the cases turned on the counties' ordinances, and upon whom they placed the obligation to collect the tax.  In Mecklenburg and Wake Counties, it was the "operator of a taxable establishment."  In Dare and Buncombe Counties, it was the "operator of a business subject to a room occupancy tax."

Judge Murphy concluded that the Defendants were not responsible for collecting the Occupancy Tax.  If you are curious about how he reached that conclusion -- and you must be a state taxation junkie if you are -- you can read about it in Paragraphs 33 through 53 of the Opinion.

Other Interesting Things About This Opinion

For those of you who aren't enamored  by the Occupancy Tax, you might find interesting Judge Murphy's discussion of Rule 8 of the North Carolina Rules of Civil Procedure and his disposition of a conversion claim.

 Rule 8

Rule 8 is titled "general rules of pleadings."  It requires that a pleading 'give[] sufficient notice of the events or transactions which produced the claim to enable the adverse party to understand the nature of it and the basis for it . . . ."  Op. Par. 58 (quoting Sutton v. Duke, 277 N.C. 94, 104, 176 S.E.2d 161, 167 (1970)).

The County Plaintiffs said that their complaints set forth a theory of liability that the Defendants had contractually undertaken to collect the Occupancy Tax and were therefore liable to pay it.  Judge Murphy disagreed, stating that:

the Court can not find any allegation within the Complaints that would provide sufficient notice to Defendants that Plaintiffs' claims were based on a theory that Defendants were liable for collection of the Tax because of the contracts Defendants entered into with the hotel providers.  Accordingly, the Court concludes that Plaintiffs failed to provide 'sufficient notice of the events or transactions which produced the claim to enable the adverse party to understand the nature of it and the basis for it.'

Op. Par. 60.

About The Conversion Claim

You might think that this case is tailor made for a conversion claim.  As Judge Murphy observed "[w]hen a plaintiff has alleged the wrongful possession of money, courts have held that 'the general rule is hat "money may be the subject of an action for conversion only when it is capable of being identified and described."'" (quoting Variety Wholesalers, Inc. v. Salem Logistics Traffic Servs., LLC, 723 S.E.2d 744, 747 (N.C. 2012).

The thing that tripped up the counties' conversion claim was their inability to identify the funds which they said had been converted.  Judge Murphy didn't buy that an allegation of a difference between the amount of Occupancy Tax taken by the Defendants and the amount remitted was a sufficient identification. 

He placed an almost impossible burden on the Counties, suggesting that they point to evidence "that identifies: (1) the accounts from which the allegedly converted funds were derived, (2) the accounts to which he funds were transferred, or (3) the specific amounts that were sent and received."  Op. ¶85.

There's no telling how much money the Counties contend was withheld from them -- the Opinion doesn't say -- but it's undoubtedly enough to make an appeal worthwhile.

The Fourth Circuit has weighed in on a similar dispute, in a case brought against Hotels.com and other Internet sites by Pitt County.  I wrote about that way back when (in January 2009).