What, you say?  What were you thinking? How could you do that? I can't try this case without Pete. After the initial shock has faded, you start to hope that Pete will show up voluntarily. You ask your client about that. Well, they say, it wasn't a pretty parting. And sure enough, Pete laughs and hangs up on you when you ask him if he will come to North Carolina to testify.

Now you are in crisis mode, scrambling for a way to get this key testimony. There's a video deposition of Pete, but all the questioning was done by opposing counsel. You probably prepped Pete before the deposition with that common advice that he shouldn't volunteer information, so there are a lot of one word answers, terse responses, and not much presentation of the warm side of Pete. You didn't ask a single question, counting on Pete striding confidently to the witness stand to carry your client's banner during your direct examination. The video just isn't going to play well.

What now? You scour the Business Court Rules. Rule 18.10 provides some hope. It says:

18.10 – Trial Preparation After the Close of Discovery. For good cause appearing
therefor, the physical or mental examination of a party may be ordered at any time prior to or during trial. Ordinarily, the deposition of a material witness not subject to subpoena should be taken during discovery. However, the deposition of a material witness who agrees to appear for trial, but later becomes unavailable or refuses to attend, may be ordered at any time prior to or during trial.

Surely the unexpected firing of Pete is good cause, and you you make a motion to take a trial deposition of Pete per Rule 18.10. Will it be granted? Every case is different, but maybe not. A motion on similar facts was denied last week in the case of Hilb Rogal & Hobbs Company v. Sellars, in which Judge Diaz prohibited the taking of a deposition two weeks before trial.

The facts in Hilb Rogal need a little development. . . .

The key witness was Peter Plumb. Plumb hadn't been fired by the Plaintiffs but he had taken another job and wasn't able to come to North Carolina for the trial. Plumb had been deposed twice by the Defendant during discovery.  (Twice?) He was surely asked every question under the sun during those sessions, because the Court said that "the scope of those discovery depositions was likely sufficiently broad so as to encompass the substantive evidence Plaintiffs expected to elicit from Plumb at trial."

The Court concluded that Plaintiffs could not show "that they cannot present at trial through other means the same substantive evidence they seek to elicit from Plumb," either via the depositions or through other witnesses.

There are other facts which might have affected the decision to deny the deposition. The trial had already been continued once based on Plaintiffs motion to take depositions of four other witnesses who had become unavailable for trial. And when Plaintiffs found out about Plumb's sudden departure, they didn't ask for leave of court to take the deposition. Instead, they just noticed it. The matter was therefore presented to the Court based on Defendant's Motion for a Protective Order. Defendant also pointed out that Plaintiffs had known about Plumb's unavailability for nearly six weeks before asking the Court for permission to take his deposition.

Although Judge Diaz prohibited the deposition, he left the door open to revisit his Order. He said "should it become clear at trial that Plaintiffs absolutely need additional evidence from Plumb to meet their burden, the Court may keep the record open to re-visit this issue."

This post, by the way, is the sixth on the vigorously litigated Hilb Rogal case. If you type "Hilb" in the search box at the left side of the blog, you can find all of them. They include a published decision on the propriety of "General Objections" in discovery responses, an order granting a preliminary injunction on a non-compete agreement over Defendant's argument that he had never signed the agreement and he presented evidence that his signature had been forged, an order quashing a subpoena to an out of state non-party even though that company had a registered agent in North Carolina, and a post on motions in limine in non-jury trials. 

The Order today in Ehrenhaus v. Baker ruled that "the time spent by counsel on the case appears to be somewhat excessive," and that "the hourly rates of Plaintiff's New York counsel [of $750 per hour] are far in excess of those normally charged by attorneys in North Carolina."

I cannot tell you how the Court got to the $932,621.98 number because, as Judge Diaz observed, Plaintiff's counsel "did not submit detailed time records of the work done." But the fee application claimed 2,333 hours of work, which breaks down to an award of $399.75 per hour.

On a more serious note, there are two parts to the Order that may have more of a future precedential value.  One is that Judge Diaz' ruling certified a non-opt-out class. In other words, class members didn't have the traditional right to opt out of the settlement and pursue their individual claims. The Court said that this type of certification was appropriate given that this was a lawsuit over a merger seeking primarily equitable relief. There are no appellate cases in North Carolina approving such a non-opt-out certification, although the Business Court has certified such classes before.

The other is the Court's consideration of the reaction of the class itself in determining that the settlement was adequate. Judge Diaz said that "the reaction of the class to the settlement is perhaps the most significant factor to be weighed in considering its adequacy." He noted that over a million class members had received notice of the settlement, but that only 51 had objected. He held that "the overwhelming majority of the Class has been virtually silent as to the Proposed Settlement," and that "the muted reaction of the Class . . . supports a finding that the Proposed Settlement is fair and reasonable."

I don't think this was the tacit approval that Judge Diaz thought it was. It's more likely to me that Wachovia's shareholders were just tired of the whole darn thing.

There is a split in the Circuit Courts on this issue. In the Fifth Circuit, the rule is the "first-served defendant rule." The thirty days starts to run as soon as the first defendant is served. If the first served defendant doesn't remove thirty days after it is served, defendants served later can't remove.

The rule is exactly the opposite in the Sixth, Eighth and Eleventh Circuits, which follow the "last-served defendant rule." Each defendant, no matter when it is served, has thirty days from the date of service on it to remove.

The Fourth Circuit's position wasn't clear. A footnote in McKinney v. Board. of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), suggested that the Circuit might be a "first-served" jurisdiction.  But in today's decision in Barbour v. International Union, the Fourth Circuit dismissed that footnote as "classic judicial dictum" and joined the "last-served" camp.

The majority in Barbour held "that in cases involving multiple defendants, each defendant, once served with formal process, has thirty days to file a notice of removal pursuant to 28 U.S.C. § 1446(b) in which earlier-served defendants may join regardless of whether they have previously filed a notice of removal."

Air Systems and Equipment Co. v. Sullair Corp.: (Catawba)(Diaz): Plaintiff claims that the Defendants used its confidential trade secret information to raid its workforce and hire several of its employees in violation of the North Carolina Trade Secrets Protection Act.

Beadnell v. Coastal Communities at Ocean Ridge Plantation, Inc. (Brunswick)(Jolly): another case (there are now several in the Business Court) involving claims by residential lot buyers that the price of their lots were grossly inflated through the fraud of the developer, with the cooperation of banks and appraisers.

Connett v. Jackson National Life Ins. Co. (New Hanover)(Jolly): apparently supersecret.  The Complaint and the Notice of Designation were filed under seal.

Coremin v. McNamara (Guilford)(Tennille):issues involving LLCs and partnerships, including whether a person may claim a membership interest in a North Carolina LLC based on an oral promise. (This one was designated to the Court on December 31, 2009).

LS Mtron, Ltd. v. Escorts, Ltd. (Edgecombe)(Jolly): Plaintiff, a creditor in a receivership proceeding, seeks to subordinate the claim of a secured lender (Textron Financial) based upon the lender's claimed knowledge of the financial fraud of its customer.

RS&M Appraisal Services, Inc. v. Alamance County (Alamance)(Tennille):dispute concerning services provided by plaintiff to Alamance County in connection with its octennial real property evaluation. Business Court jurisdiction is based on counterclaims by the County alleging conspiracy in restraint of trade and a combination in restraint of trade.

To answer the second question first, not much. But a case decided today by the North Carolina Court of Appeals, which affirms the validity of a 2007 statute which permits dynasty trusts, originated in the North Carolina Business Court. So it gets mentioned on this blog.

A dynasty trust is a trust designed to exist for multiple generations of a family, potentially forever, usually avoiding generation skipping tax. The North Carolina Legislature facilitated the creation of such trusts when it enacted N.C. Gen. Stat. §41-23 in 2007.

But that legislation, titled "Perpetuities and suspension of power of alienation for trusts" raised issues whether it violated the Rule Against Perpetuities, which has constitutional roots in North Carolina.

Section 34 of Article I of the state Constitution says that "[p]erpetuities and monopolies are contrary to the genius of a free state and shall not be allowed." A year ago, in Brown Brothers Harriman Trust Co., N.A. v. Benson, Judge Diaz ruled in an unpublished opinion that the statute did not conflict with the Constitution.

The Court of Appeals ruling today affirmed that decision. It holds that a trust created per Section 41-23 "may remain valid in perpetuity" so long as the provisions of the statute are complied with. That means that "the trustee has the power to sell, either expressed or implied, or . . . there exists an unlimited power to terminate the trust in one or more persons in being."

If you want the detailed analysis, which includes discussion of "estate entails," and "fee tail estates" and Supreme Court decisions nearly 200 years old, you'll have to read the opinion. If you want to brighten the day of an estate planning lawyer or tax lawyer with the happy news about dynasty trusts, you can forward this post to him or her by clicking on the little envelope icon at the bottom.

The issue? Whether the affidavit, presented in opposition to a motion for summary judgment, complied with Rule 56(e) of the North Carolina Rules of Civil Procedure.

That Rule says that "supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein."

The affidavit in Bird came from a private investigator who had been tailing the boyfriend of the Plaintiff's ex- wife. The Plaintiff was trying to show that his ex was cohabitating with her boyfriend. If that were so, it meant that the Plaintiff's obligation to pay alimony would end.

The ex-wife said she wasn't cohabitating. She moved for summary judgment. In opposition, the husband presented his investigator's affidavit. The wife objected to the PI's testimony, saying that it wasn't based on personal knowledge.

She had a point. The problem was that the affidavit was written in cop-speak. It said things like:

[The subject] was observed during the months of February and March 2007.

During the investigation, [the subject] was observed at [the wife's] residence for a minimum of eleven (11) consecutive nights.

[The subject] was observed to park, regularly, in [the wife's] garage.

[The subject] was regularly observed assisting [the wife] with chores such as walking the dog, taking care of the dog, unloading the vehicle when she returned from trips, and assisting her when she returned from the grocery store.

The ex-wife said the trial court should have refused to consider the affidavit. In her brief, she said that "the deliberate use of the grammatical construction, 'was observed', does not affirmatively show that she was the observer." She said that it was reasonable to assume that the investigator "was recounting the observations found in the report of one of her associates, and therefore found it necessary to use the passive voice." Defendant characterized the affidavit as "curiously devoid of pronouns."

The Court of Appeals majority said that notwithstanding the stilted construction of the affidavit it would conclude that the investigator herself was the "observer" and that the affidavit was therefore based on personal knowledge. The Supreme Court affirmed.

Justice Martin said "the trial court's duty to treat indulgently the Rule 56 materials of the party opposing the motion reasonably encompasses the passive voice averments set forth in the . . . Affidavit." In a footnote, he said "as has been aptly observed, '[i]n spite of generations of textbooks, use of the passive [voice] has increased.'"

This doesn't mean you should assume that this type of phrasing will carry the ball on summary judgment. The basis of both the Court of Appeals decision and the Supreme Court decision was that the affidavit had been offered by the non-moving party. The non-movant gets the benefit of the doubt on summary judgment, but the moving party doesn't. The Supreme Court said in a 1998 decision that "the evidence forecast by the party against whom summary judgment is contemplated is to be indulgently regarded while that of the party to benefit from summary judgment must be carefully scrutinized." Creech v. Melnik, 495 S.E.2d 907, 911 (N.C. 1998).

The affidavit in Bird probably wouldn't have passed that "careful scrutiny" if it had been offered by the moving party. That's my observation. I made it.

The dispute concerned a purchase by Thomas Marosi, shortly before he died, of stock in the Defendant corporation. The investment was made pursuant to a Subscription Agreement. Dr. Marosi's executor, the Plaintiff, said that the stock certificate for the shares had never been issued. He had requested that the company issue it, but for some reason not clear from the opinion or the briefs, the company refused.

The Plaintiff moved for specific performance of the Subscription Agreement. Judge Jolly said that the purpose of specific performance was to force a party "to do exactly what he ought to have done without being coerced by the court," and that the remedy was appropriate upon a "showing of (a) the existence of a valid contract, (b) its terms and (c) full performance by the party seeking performance or a demonstration that he is himself ready, willing and able to perform."

The Court determined that those elements were met, as there was a contract, its terms were clear, and the Defendant did not dispute that there had been full performance by Dr. Marosi in the form of payment for the stock.  Judge Jolly ordered that stock certificates be issued to Dr. Marosi's estate by February 8, 2010, subject to the same restrictions applicable to any other shares held by shareholders in the corporation.

"In a jury trial, motions in limine serve the useful purpose of giving counsel advance notice of the scope of evidence that will be considered by the jury. In a bench trial, however, a pretrial ruling on the admissibility of evidence would be superfluous because the trial judge must (in any event) consider the evidence before ruling."

The Court ruled that it would not rule on motions in limine before trial, but that it would "instead allow all evidence to be tendered to the Court, subject to any objections timely raised."

With that perspective in mind, coupled with a dearth of bullseye type cases lately, this post is about the Fourth Circuit's decision last Friday in United Rentals, Inc. v. Angell, affirming a decision from the Eastern District of North Carolina.

The decision concerned a bankruptcy trustee's action to recover a preference paid to an equipment supplier (United) by the Debtor on a construction project. The Debtor had a surety bond, on which United had not made a claim, but which nevertheless formed the basis for its arguments that payments received by it during the ninety days preceding the Debtor's bankruptcy petition were not a preference.

United had two main arguments. It said that the Trustee could not show that the transfer enabled it to receive more than it would have received in the Chapter 7 case if the transfer had not been made. That's an essential element of a preference, per 11 U.S.C. § 547(b)(5). United also said that the transfer was a "contemporaneous exchange for new value" under 11 U.S.C. § 547(c)(1), a preference exception.

United said that if the transfer hadn't been made, it would have made a claim against the Debtor's surety bond and that it would have been paid in full by the surety. It argued that it therefore hadn't received more than it would have it the transfer hadn't been made, and that the Trustee therefore couldn't satisfy the requirement of Section 547(b)(5).

Judge Traxler made short work of this argument. He said that the inquiry was whether the creditor would have been paid the money in question out of the bankruptcy, not whether it would have been received from a third party. He held that "the Sec. 547(b)(5) inquiry focuses 'not on whether a creditor may have recovered all of the monies owed by the debtor from any source whatsoever, but instead upon whether the creditor would have received less than a 100% payout' from the bankruptcy estate."

The second argument -- that the payments were a contemporaneous exchange for new value -- was more complicated. United said (1) it had the right to a materialman's lien against the project, (2) the surety for the Debtor would have satisfied that lien it it had been asserted, (3) the surety then would have been equitably subordinated to the Debtor's right to be paid by the general contractor, and (4) there was "new value" because United had not pursued its lien and bond rights and the Debtor therefore had eventually been paid by the general contractor instead of having that money go to reimbursement of the surety.

United's argument was that the new value was the money the Debtor received later from the general contractor as a result of United foregoing pursuit of its lien claim. The Court said that even if this were so, United had not shown when this "new value" was received by the Debtor. It held "regardless of whether the transfers set in motion a chain of events that resulted in the Debtor's recoupment of the amounts paid, United did not show that such new value was 'given to the debtor' . . . as part of a "contemporaneous exchange.'" 

The Court found the argument regarding the possible payment by the surety and the anticipated following events to fall outside the purpose of the contemporaneous exchange exception, which it said was "to accommodate the need of financially unsteady companies to use checks to pay for new transactions."

Two different panels of the North Carolina Court of Appeals in unpublished decisions yesterday dealt with defendants who hadn’t responded to Requests for Admission.

In one case, the Court affirmed a grant of summary judgment against the Defendant based on the ignored Requests. In the other, the Court went in a different direction and didn't hold the Defendant to an admission as to the amount of damages suffered by the Plaintiff.

Summary Judgment Based On Failure To Respond To Requests For Admission

In the first case, Kluttz v. Next Safety, Inc., the Plaintiff sued for breach of an employment contract. The Defendant denied the breach in its Answer, challenging the validity of the contract and whether it was supported by consideration. But the Defendant didn’t respond to later Requests for Admission which asked it to admit the validity of the contract and its breach.

The trial court entered summary judgment against the Defendant based upon the facts established by the admissions, and the Court of Appeals as affirmed. Judge Wynn said that “facts admitted under Rule 36(a) as a result of a party’s failure to respond timely to a request for admissions are sufficient to support a grant of summary judgment."

The Kluttz decision relied on an NC Supreme Court case, Goins v. Puleo, 350 N.C. 277, 512 S.E.2d 748 (1999), which holds that "an admitted matter, even if dispositive of the case, is conclusively established when admitted through failure to respond to a Rule 36 request for admissions."

Failure To Respond To Request For Admission Not Determinative Of Damages

The other case, Garner v. Cheek, noted the Goins decision, but relieved the Defendant from an admission as to the amount of damages. The Plaintiff had sent a series of Requests looking for admissions about Defendant’s fault in an auto accident and Plaintiff’s damages. One request asked the Defendant to admit that “[Plaintiff] has been damaged by the negligence of [Defendant] in the amount of thirty thousand dollars.”

Plaintiff sought and obtained a default judgment for $30,000. Defendant moved for a new trial on damages, arguing that he wasn't bound by the admission as to damages. The trial court granted the motion and entered a new judgment for only $7,500. The Court of Appeals affirmed.

There was conflicting evidence in the Garner case – from the same set of unanswered Requests for Admission – that warranted a much lower damage award. The Court of Appeals observed that  “plaintiff’s own evidence contradicted the amount of damages requested,” and it held that “it was within the trial court’s discretion to determine the amount of damages based on the Plaintiff’s medical expenses and pain suffered as a result of the collision."

The Garner case makes a couple of points about the nature of a Rule 36 admission from an earlier Court of Appeals decision, Eury v. N.C. Employment Security Comm., 115 N.C. App. 590, 446 S.E.2d 383 (1994):

A rule 36 admission is comparable to an admission in pleadings or a stipulation drafted by counsel for use at trial, rather than to an evidentiary admission of a party.

A judicial admission . . . is not evidence, but it, instead, serves to remove the admitted fact from the trial by formally conceding its existence.

If you understand either of those statements, please let me know. Apart from the riddle of how "judicial" admissions are different than "evidentiary" admissions, it's hard to square those statements from Eury with the explicit statement in the Supreme Court's Goins decision that an admitted matter is "conclusively established" by a failure to respond.

The lawsuit was brought in the Eastern District of Virginia by Galustian, a resident of the United Arab Emirates. Peter, the Defendant, was a resident of Virginia. Galustian contended that Peter had defamed him to a trade association of contractors working in Iraq. The statements in question were made by Peter in Iraq, where he lived and worked. Peter moved to dismiss on grounds of forum non conveniens, and the District Court granted the Motion.

The Fourth Circuit reversed. The case turned partly on whether Iraqi law provided a remedy in defamation to Galustian and whether Peter was immune from suit in Iraq, but I'll leave those esoteric points to those of you who specialize in defamation law in Iraq. Here's what business litigators might find significant in Galustian: 

The Obligation To Prove That There Is An Adequate Alternative Forum

First, a main focus of the case was whether Iraq was an "alternate, adequate, and available forum."  The Fourth Circuit said that an alternative forum is adequate when "(1) all parties can come within that forum's jurisdiction, and (2) the parties will not be deprived of all remedies or treated unfairly, even though they may not enjoy all the same benefits as they might receive in an American court."

Whether Iraq provided a remedy for defamation, and whether an additional defendant who was added to the case after the motion to dismiss was filed could be subject to suit in Iraq, were both matters the Fourth Circuit said should be considered more fully by the District Court after remand.

The Role Of Defendant's Residence On A Forum Non Conveniens Motion

Second, Peter's residence in Virginia was an important factor. The Court observed that while it was not required to give much deference to the choice of forum by a foreign plaintiff, "this lack of deference is muted . . . when the defendant is a resident and citizen of the forum he seeks to have declared inconvenient for litigation."

Peter's residence in Virginia wasn't dispositive, said the Court, but that factor needed to be examined more closely by the District Court on remand. 

Amendments As Of Right

Third, the Fourth Circuit said that reversal was appropriate because the trial judge had refused to allow Galustian to amend to add the additional defendant after the motion to dismiss had been filed. The Court stated that "it is this Circuit's policy to liberally allow amendment in keeping with the spirit of Federal Rule of Civil Procedure 15(a)."

The appellate court pointed out that the motion to amend had been made before the filing of a responsive pleading, and that Galustian therefore had an absolute right to amend his pleading. That was true even though the trial court had determined that the amendment would be futile.

On this point, Judge Gregory said "the doctrine of futility only applies when the plaintiff seeks leave of court to amend and does not have a right to amend. The plaintiff's right to amend once is absolute." That absolute right extends to amendments seeking to add parties, as Galustian's motion did.  (There's a split in Circuits on the point whether Rule 15(a) applies to amendments adding parties). The District Court's refusal to allow the amendment was an abuse of discretion.

Last, the Court reminded lawyers that Rule 15, which governs amendments to pleadings, changed on December 1, 2009. Formerly, a party could amend as of right literally up until the Court ruled on a motion to dismiss, because a motion to dismiss is not a responsive pleading. The changed rule says that amendments as of right must be made within 21 days after service of a 12(b) motion. The revised rule setting the new time limit didn't apply to Galustian's case, but the result might have been different if it had. 

The Court affirmed a grant of summary judgment by Judge Beatty of the Middle District of North Carolina imposing personal liability on the Defendant, a shareholder who held various executive positions with the Company. This was a 2-1 decision, with a majority opinion from Judge Motz and a dissent by Judge Hamilton.

Individual Liability For Payroll Tax Withholding

The Court provided a quick primer on how an individual can become personally liable for payroll taxes:

• Employers are required to withhold social security and federal excise taxes from employee wages.
• Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
• Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
• Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can't, because "the government cannot be made an unwilling partner in a floundering business."
• The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer's decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid. 

The Test For Determining A "Responsible Person"

In Plett v. United States, 185 F.3d 216 (4th Cir. 1999), the Fourth Circuit set out a variety of factors it would consider in determining whether an individual was a "responsible person" who should have personal liability for unpaid payroll taxes.  They are:

whether the employee (1) served as an officer or director of the company; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the corporation's day-to-day management; (5) had the ability to hire and fire employees; and (6) possessed the power to write checks. 

Responsibility and Willfulness Established As A Matter Of Law

In the Erwin case, the Court discussed each factor, and summarized their application as follows in deciding that the Defendant was a responsible person and therefore personally liable:

Erwin admitted that at all times he owned at least one third of the stock of this closely-held corporation and served as its secretary, treasurer, vice president, and director. Erwin admitted that he signed loan documents and leases on behalf of the corporation, thus evidencing that he shared responsibility for establishing the corporation’s financial policy. Erwin admitted that he approved restaurant site selection and regularly reviewed sales data. Erwin admitted holding quarterly meetings with his partners and weekly telephone calls with the general manager to discuss the restaurants. Erwin admitted that he directed or negotiated payments to certain favored creditors to reduce [the company] debt, which he had personally guaranteed. Erwin admitted that he hired and fired upper-management employees, including [the company's] accountants. Finally, although Erwin delegated many of the day-to-day financial responsibilities of the corporation to others, he admitted that he infused capital into [the company and admonished the [company's accountants], over whom he had significant control, to stay current with the company’s tax obligations.

The Court then turned to the issue whether the Defendant had willfully failed to collect, account for, or pay the taxes in question. Judge Motz ruled that the Defendant's conduct after he learned of the tax deficiencies established willfulness as a matter of law. He hadn't taken steps to remedy the known deficiencies and had instead directed payment to other creditors.

She held that "we adopt the rule that when a  responsible person learns that withholding taxes have gone unpaid in past quarters for which he was responsible, he has a duty to use all current and future unencumbered funds available to the corporation to pay those back taxes."

It sounds like something out of the movie The Hangover, but it's the case of BCD LLC v. BMW Manufacturing Co. LLC, an unpublished decision from the Fourth Circuit Court of Appeals.

BMW and Clemson University were developing a new Graduate Engineering Center. Plaintiffs wanted to build a wind tunnel facility -- catering to the racing industry -- as a part of the Center. They claimed that BMW and Clemson had tortiously interfered with their efforts.

The threshold issue addressed by the decision was whether the Plaintiffs had a valid and enforceable contract with which the Defendants could have interfered. The Court found that they had at best an "agreement to agree" which had never risen to the level of an enforceable agreement. In the absence of a contract, Plaintiffs couldn't pursue a tortious interference claim.

The Court also found the conduct by BMW which Plaintiffs said constituted tortious interference to have been competitively justified.  It said that "at all times, BMW acted in pursuit of its legitimate interests in founding an educational partnership with Clemson," and held as follows:

The only harm that BMW may have intended to cause [the Plaintiffs] was the incidental harm to a competitor that is necessarily part of all business competition. That increased benefits for one entity may come at the expense of a competing entity is merely a fact of life in a market economy. Consequently, although a party cannot interfere with a contract because of malice or spite, it is altogether legitimate for BMW to engage in business competition with [Plaintif's] entities.

That's a quote that may prove useful if you are defending against a tortious interference claim.

But when the Class Action Fairness Act is involved, things are different. Last Friday, the Fourth Circuit ruled in Ferrell v. Express Check Advance of SC LLC that a limited liability company is an "unincorporated association" for CAFA purposes, and that the determination of the "principal place of business" of an LLC should be determined using the same test applied to a corporation. In other words, the citizenship of the members of an LLC isn't necessarily determinative of diversity in a CAFA case, and it wasn't in Express Check.

Background 

The LLC defendant conducted its operations in South Carolina, but its sole member was a corporation incorporated in Missouri with a principal place of business in Kansas. It had been sued by a Plaintiff who was an individual resident of South Carolina.

The Defendant, relying on the Missouri and Kansas citizenship of its sole member, removed the case to federal court based on diversity jurisdiction, and the Plaintiff moved for a remand.

If CAFA hadn't been at issue, the general rule for determining the citizenship of an "unincorporated association" would have applied. That rule looks to the citizenship of each member of the entity, so an LLC would be a citizen of each state in which its members resided. There would have been diversity under that test because the Defendant was either a Missouri entity or a Kansas entity. 

An LLC Is An Unincorporated Association Under The Class Action Fairness Act 

But under CAFA, Congress changed the traditional rule, and said that an "unincorporated association" should be treated like a corporation, and deemed a citizen of the State "under whose laws it is organized" and also where it has its principal place of business. 28 U.S.C. Sec. 1332(d)(1).

Express Check, concerned that its principal place of business might be found to be diversity-defeating South Carolina, sought to get out from under the CAFA rule. It said that an LLC wasn't intended by Congress to be included in the definition of an "unincorporated association." The Fourth Circuit cut through that argument quickly, calling it "linguistic," and held that an LLC's "citizenship for purposes of CAFA is that of the State under whose laws it is organized and the State where it has its principal place of business."

The decision sweeps beyond LLCs, as Judge Niemeyer ruled that the term "unincorporated association," under CAFA, "refers to all non-corporate business entities."

The Court then turned to the issue of where the LLC had its principal place of business.

The Principal Place Of Business For An LLC Is Determined In The Same Way As It Is For A Corporation

Judge Niemeyer said that the Fourth CIrcuit would apply the same tests used by the Court to determine the citizenship of a corporation, which are the "nerve center" test and the "place of operations" test.

Under the nerve center test, the principal place of business is "where the corporation's officers direct, control, and coordinate its activities." Here, that would have been Kansas. Under the place of operations test, the principal place of business is "where the bulk of corporate activity takes place." In the case of Express Check, that would have been South Carolina.

Which test applies depends on the nature of the business. If a corporation (and an LLC under CAFA) has multiple centers of manufacturing, purchasing, or sales, the place of operations test is used to determine its principal place of business. When a company is engaged primarily in the ownership and management of investment assets, like debt or equities, the Fourth Circuit applies the nerve center test.

The Court ruled that the place of operations test applied because all of the LLC's business was conducted in South Carolina, and all of its employees, except for four of its officers, resided in that State. The Fourth Circuit therefore determined that there was no diversity between the LLC and the South Carolina plaintiff, and affirmed the remand. 

Looking Ahead To The Supreme Court

The Fourth Circuit's "nerve center" and "place of operations" analysis may not continue to be the law when determining the principal place of business of a corporation.

The Supreme Court is considering how to determine the principal place of business of a corporation in another CAFA case, Hertz Corp. v. Friend.  That case was argued in November 2009.

Why hasn't the Supreme Court ever resolved before the issue of how to determine a corporation's principal place of business?  The answer is that it generally comes up on a motion to remand following removal, and there is very limited appellate review of those decisions.  CAFA, which was enacted only five years ago, permits that appellate review.

I learned this interesting tidbit from one of the new cases (with a plaintiff aptly named "Aerial Solutions") of the six designated to the North Carolina Business Court in December 2009. Those are listed below.

The total for new cases designated to the Business Court during 2009, by my count, was one hundred and eleven.

Allen Smith Investment Poperties, LLC v. Barbarry Properties, LLC (Mecklenburg)(Diaz): dispute among partners in limited partnership. Claims for breach of fiduciary duty, misappropriation of funds, and fraud.

Aerial Solutions, Inc. v. Lail (Columbus)(Jolly): unfair competition claims against former helicopter pilot for an aerial tree-trimming business, including breach of non-competition agreement and providing co-defendant with confidential information regarding Plaintiff's "patented Aerial Power Saw."

Arky v. Variable Annuity Life Ins. Co. (Durham)(Jolly): enforceability of non-solicitation provision in registered representative agreement, including claim that customer identities and account information are trade secrets.

Mark v. Wachovia Bank, N.A. (McDowell)(Tennille): claims against real estate developers and banks asserting false and misleading sales tactics and that the parties "conspired with each other to artificially inflate the value of the subject lots through knowingly overstated appraisals."

NRC Golf Course, L.L.C. v. JMR Golf L.L.C. (Carteret)(Jolly): Dispute between the parties over terms of a lease and option to purchase a golf course.

Yodle v. WebVisible, Inc. (Mecklenburg)(Diaz):plaintiff, which says that it is "an industry leader in providing local online advertising services to business around the country," makes claims of unfair competition against a competitor including raiding of employees, theft of trade secrets, and false statements to plaintiff's customers.

A split Fourth Circuit affirmed the dismissal yesterday of a defamation claim against a consumer complaint website, in Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. The Court found the Defendant, Consumeraffairs.com, to be entitled to immunity under the Communications Decency Act, relying on the heightened standard for considering a Motion to Dismiss from the Supreme Court in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). 

Even if you don't practice in an area that implicates the CDA, the Nemet case is significant for its further development of the Iqbal standard in the Fourth Circuit. It is another indication, after the opinion earlier this month in Francis v. Giacomelli, that the Court is becoming much more exacting on how Motions to Dismiss should be evaluated.

Background on the CDA

The CDA carves out a broad immunity from state law claims (like defamation claims) for providers of "interactive computer services." The Defendant, www.consumeraffairs.com, is such a provider. It runs a website soliciting complaints from consumers about businesses with which they've dealt.

The Fourth Circuit emphasized the breadth of the immunity, and the need to resolve its applicability "at the earliest possible stage of the case." In that respect, said the Court, the CDA immunity is much like the qualified immunity to which state officials are entitled.

The issue in Nemet was whether the Plaintiff had presented a complaint with enough plausibility to show that the Defendant fell outside the scope of the immunity because it was an "information content provider." Such a provider, per 47 U.S.C. §230(f)(3), is "any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service."

The Plaintiff, a Chevrolet dealer who had been lambasted in twenty posts on Defendant's website, offered two arguments why the Defendant wasn't entitled to immunity. The first was that the Defendant had participated in creating and developing the posts by the way it had structured its website and also through hands-on revision of the comments in question. The second was that some of the comments were fabricated by the Defendant, and it was therefore responsible for their content.

The Fourth Circuit rejected both arguments, though over a partial dissent.

The "Creation And Development" Claim Wasn't Plausible

On the argument about creation and development, Judge Agee, writing for the majority, distinguished the Ninth Circuit's decision in Fair Housing Council v. Roommates.com, LLC, 521 F.3d 1157 (9th Cir. 2008), a seminal CDA decision. There, the website operator wasn't entitled to immunity because it had specifically designed its website to develop unlawful content, which included requesting tthe sex, family status, and sexual orientations of the site users seeking housing as well as those of their desired roommates.

In Nemet, the Plaintiff said that the Defendant had structured its website to be a clearinghouse for class action lawyers seeking plaintiffs, and that it therefore wasn't entitled to immunity. The Court disagreed, and said "there is nothing unlawful about developing this type of content; it is a legal undertaking: Federal Rule of Civil Procedure 23, for instance, specifically provides for class-action suits."

Relying on Iqbal, the Court said that even assuming all the facts regarding the structure and design of the website were true, that this "does not show, or even intimate" that the Defendant had contributed to the allegedly false nature of the comments. Plaintiff, according to the Court, hadn't even shown that it was a "likely possibility" that the Defendant was an information content provider, and certainly not that this was "plausible" under Iqbal.

The Fourth Circuit also trashed the Chevy dealer's argument that the Defendant had been involved in developing or creating the content. It said that the Plaintiff hadn't pled any facts showing the nature of the claimed revising and redrafting of the comments, or that such rewriting went beyond a "traditional editorial function." It invoked Iqbal's admonition that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."

The Fabrication Claim Was "Pure Speculation"

The Court then turned to the Plaintiff's claim that the Defendant had fabricated the posts and was therefore responsible for their substance and content. It dismissed these allegations as "pure speculation and a conclusory allegation" that the Defendant had created the information. It said, relying on Iqbal, that these were "bare assertions 'devoid of further factual enhancement,' which are not entitled to an assumption of truth."

The dismissal of the "fabrication claim" provoked a dissent from Judge James P. Jones of the Western District of Virginia, sitting by designation.

He found some of the allegations made by the Plaintiff to support the fabrication claim rendered it plausible, including Plaintiff's assertion that it had no record of ever having sold a car to the persons that had supposedly made the complaints.

Judge Jones said that there had to be a distinction between the pleading requirements of Rule 8 and the summary judgment standard of Rule 56. He stated "[i]t cannot be the rule that the existence of any other plausible explanation that points away from liability bars the claim. Otherwise, there would be few cases that could make it past the pleading stage."

He said that the proper application of Iqbal was that "it is only where there are 'more likely explanations' for the result that the plausibility of the claim is justifiably suspect."

The mediation had been scheduled by agreement, and all parties had received notice of the conference. Two of the Defendants, however, decided not to appear and didn't provide any advance notice that they were not going to do so. The other parties showed up, but decided not to proceed without the missing Defendants.

The Court observed that Rule 4 of the Rules Implementing Statewide Mediated Settlement Conferences "requires all individual parties to attend a mediated settlement conference." The same rule provides specific procedures for a party to follow if it wishes to be excused from the conference.

The Defendants said that the conference wasn't covered by the Rule, because it was a "voluntary" proceeding. Judge Diaz made short shrift of that argument, stating that "there simply is no basis in the record for Defendants' belief that they were free to attend the Conference -- or not -- at their pleasure." He also rejected their argument that Plaintiff should have gone ahead without the missing Defendants.

Mediation Rule 5 authorizes monetary sanctions against a non-attending party. Judge Diaz required the AWOL Defendants to reimburse the mediator fees in full; to pay the hourly fees for the lawyers for the other parties in attending the conference; and also to pay the fees in preparing and arguing the Motion for sanctions. The Court found the Plaintiff's lawyer's hourly rate of $405 to be "comparable to the rates of other attorneys with similar experience and practices in the Charlotte, North Carolina market."  The total sanctions awarded were $5,000.

There are a couple of other Business Court decisions involving mediations and sanctions, including Hemenway v. Hemenway, and Mattress Now, Inc. v. Vickers; and the Court of Appeals entered a mediation sanctions opinion earlier this year in Perry v. GRP Financial Services Corp.

I mentioned the Red Ventures decision to Andy Little, who is a great mediator and who was one of the leaders in implementing mediation in North Carolina. Andy pointed out that the mediation rules used to provide for even harsher sanctions for a non-attending party, including dismissal of the case, and told me that the Court of Appeals affirmed such a sanction years ago, in Triad Mack Sales and Service, Inc. v. Clement Brothers Co., 438 S.E.2d 485 (N.C. App. 1994). Rule 5 would not permit that type of sanction today.

The cartoon at the top is by Charles Fincher, a lawyer who is also a cartoonist. You can find his "inside baseball" comics for lawyers at lawcomix.com. The one I used, with his permission and which he owns, is from a series of one-panel cartoons called Scribble-in-Law.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions

The Business Court has jurisdiction over parties seeking judicial review of a contested tax case decided in the Office of Administrative Hearings by an Administrative Law Judge. It has had such jurisdiction since 2008 amendments to the General Statutes, including Section 7A-45.4(a)(7) and Section 105-24.16, which says that:

A taxpayer aggrieved by the final decision in a contested case commenced at the Office of Administrative Hearings may seek judicial review of the decision in accordance with Article 4 of Chapter 150B of the General Statutes. Notwithstanding G.S. 150B-45, a petition for judicial review must be filed in the Superior Court of Wake County and in accordance with the procedures for a mandatory business case set forth in G.S. 7A-45.4(b) through (f). A taxpayer who files a petition for judicial review must pay the amount of tax, penalties, and interest the final decision states is due.

The statute says that the taxpayer must pay the tax with penalties and interest, but it doesn't say when the payment is to be made and says nothing about payment being a prerequisite to judicial review .

In Franklin County Board of Education v. North Carolina Department of Revenue, 2009 NCBC 28 (N.C. Super. Ct., December 23, 2009), the first case in the Business Court seeking judicial review pursuant to the statute, Franklin County hadn't paid the tax and interest before filing its Petition. The Department of Revenue pointed this out to the County, and the County promptly paid in full. Nevertheless, DOR moved to dismiss because the payment had not been made before the filing in the Business Court.

Judge Tennille denied the Motion based on his power under G.S. §150B-45 to allow an untimely Petition "for good cause shown." He said that the statute "is not a model of clarity," and that it "should have made it clear that the tax, penalties, and interest had to be paid before or contemporaneously with the filing of the Petition." He also pointed out that DOR had not said in the Notice of Appeal Rights provided to the County that it was required to pay the tax before seeking judicial review. 

That pass given to Franklin County won't extend to future cases, and that's the important part. The Court said "[n]ow that the Statute has been clarified by the Court, attorneys are on notice of the requirement." DOR will presumably provide notice of this requirement to taxpayers, because the Court said that DOR "would be well advised to make the payment requirement clear in its notice of appeal procedures."

The decision supersedes and replaces a March 2009 decision by the Court, in which it had reversed a grant of summary judgment in favor of the Plaintiff (the buyer). After a rare grant of a Petition for Rehearing, the Court reversed itself and affirmed the trial court's ruling in full, granting specific performance of the contract.

The property involved was the subject of a "put option" by which Plaintiff was required to purchase the property. After the exercise of the put, but before the date scheduled for closing, the Defendants discovered significant environmental problems on the property.

The Defendants informed the Plaintiff that they intended to clean up the property. Three years after the closing date called for in the contract, the Plaintiff asked about the status of the remediation, and learned the Defendants hadn't finished the cleanup. Instead, they had contracted to sell the property to another buyer for approximately $400,000 more than the option purchase price.

Plaintiff sued for specific performance notwithstanding the three year delay. The Defendants argued that they were relieved from the obligation to complete the transaction because of the "time is of the essence" provision. They also contended that because the Plaintiff hadn't sought to close within a reasonable time after the scheduled closing date, the option had terminated.

The Court of Appeals disagreed and said that the time is of the essence provision had been waived, ruling:

defendants' conduct in pursuing an environmental cleanup -- including hiring their own environmental consultant, telling plaintiff that they were conducting an environmental investigation, notifying plaintiff of the results of that investigation, and stating that they wanted to enroll the . . . property in the [North Carolina Dry-Cleaning Solvent Act program] -- coupled with the fact that an environmental cleanup could take years to complete, indicated to plaintiff that defendants still intended to perform under the contract despite the passing of the original closing date. 

In the absence of a time is of the essence provision, the law in North Carolina is that the parties are allowed "a reasonable time after the date set for closing to complete performance." In its first opinion, the Court of Appeals had found a question of fact on this issue. It abandoned that ruling in the new opinion, however, finding that it was unnecessary to reach the reasonableness issue.

The Court, relying on the North Carolina Supreme Court's decision in Fletcher v. Jones, 314 N.C. 389, 333 S.E.2d 731 (1985), held that "in order for the clock to start ticking on the reasonable time frame, defendants were required to notify plaintiff that they had completed their cleanup and were ready and able to perform." Defendants had never done so.

If you relied on that map in picking your carrier, you probably shouldn't have. That's the essence of an unpublished decision from the Fourth Circuit Court of Appeals last Friday in Johnson v. Sprint Solutions, Inc.

The claim by Johnson was that Sprint had charged her roaming fees in areas where she said its coverage maps showed she should have been within the carrier's coverage. Her core allegation was "that various maps provided and displayed by Sprint formed part of [her contract with Sprint], and that these maps outlined where Sprint customers would, and would not, be subject to roaming fees."  She sought class certification on her claims.

The Court agreed that the maps were a part of the contract, but held based on the written agreements signed by Johnson that the maps "were no more than approximate representations of service coverage areas and provided no geographic promises depicting where Johnson could and would not be subject to roaming fees." 

The dismissal of Plaintiff's claims was affirmed.