North Carolina Railroad Company Ruled Outside of Disclosure Law Even though State is Sole Owner and Selects all Board Members


Does an entity 100% owned by the State of North Carolina – with all of its directors appointed by the state, and which admittedly works for the benefit of the state’s citizens – produce public records that should be available for inspection? In Southern Environmental Law Center v. North Carolina Railroad Company, 2020 NCBC 61, the Business Court concluded that the Public Records Act does not reach documents created by the North Carolina Railroad Company (NCRR) that plaintiff SELC had sought.

The dispute arose from a highly charged public transit drama concerning the ultimately unsuccessful Durham-Orange Light Rail transit project that would have connected parts of Durham and Chapel Hill over its 17.7 mile line. The Light Rail line would have located alongside NCRR lines in downtown Durham, but NCRR’s refusal to enter a cooperative agreement to further the project proved to be one of several unconquerable obstacles.  Id. at ¶¶ 4, 6-7.  SELC, which had advocated for the project, sought NCRR records related to these public transit issues.

The General Assembly incorporated the NCRR in 1849 to build a railroad from Wayne County to Charlotte, and the State was its majority shareholder. In 1997, the legislature approved a buy-out of remaining private shares “to help promote trade, industry, and transportation within the State of North Carolina and to advance the economic interests of the State.” Today, NCRR controls but does not operate 317 track miles; it leases its right-of-way to a private operator, Norfolk Southern.  Id. at ¶¶ 12-15, 18.

The SELC decision has important stakes for government accountability advocates given NCRR’s involvement with transit and development issues.  On the other hand, private developmental interests that might work with NCRR on so-called “megasites” – economic development projects located near NCRR’s right of ways – may have a countervailing interest in the privacy of their work.

To resolve those conflicting viewpoints, the Business Court had to determine whether NCRR was the type of entity whose activities are “so intertwined with the State that it is, in effect, an agency of North Carolina government for purposes of the Public Records Act.” 2020 NCBC at ¶ 35.  See News & Observer Pub. Co. v. Wake Cty. Hosp. Sys., Inc., 284 S.E.2d 542, 549 (N.C. Ct. App. 1981). As the Business Court observed, the Court of Appeals has held that “the nature of the relationship between a corporate entity and the government is the dispositive factor in determining whether the corporate entity is governed by the Public Records Law.” The Court notes this inquiry as directed to discerning the “`supervisory responsibility and control’ the government has over the entity.” Id. at ¶ 37.

The News & Observer court examined nine (!) factors to “ascertain[] the degree of supervisory responsibility and control the government” has over a private entity.  Id. at ¶ 38. SELC argued that many of those factors likewise applied here, including:

the State selects all of the NCRR’s directors; the State approves all substantive amendments to NCRR’s Articles of Incorporation; the NCRR must transfer its assets to the State on dissolution; any revenue generated by the NCRR is taxpayer money; the NCRR’s books and records are subject to audit by the State; and the Governor exercises considerable control over the NCRR, through his Board appointments and through communications from his office to both Directors and staff of the NCRR.

Id. at ¶ 42.

The Business Court declined to give those factors dispositive weight however, drawing inspiration from a later Court of Appeals decision, Chatfield v. Wilmington Hous. Fin. & Dev., Inc., 603 S.E.2d 837 (N.C. Ct. App. 2004). The Chatfield court recited the nine News & Observer factors, but instead suggested that “each new arrangement . . . be examined anew and in its own context.” Id. at 840; 2020 NCBC at ¶ 41. Here, the Business Court decided the facts of neither case were a suitable template for resolving “the unique situation . . . [of] a private corporation whose sole shareholder is the State of North Carolina[.]” Id. at ¶ 45. Instead, the Court focused on a legislative intent analysis, and determined that the General Assembly – through positive action and deliberate inaction – showed that it did not intend for the Public Records Act to apply to NCRR.

The Court noted, for example, that until amendment in 2013, N.C. Gen. Stat. § 124-6 allowed NCRR’s board of directors access to “coverage under the State’s liability insurance policy” with the caveat that the benefit “shall not be construed as defining the North Carolina Railroad Company as a public body[.]” 2020 NCBC at ¶ 47. The Court was also influenced by legislative choices that include:

  • A State-owned railroad’s condemnation powers are characterized as those of a “private condemnor” like a utilities provider (N.C. Gen. Stat. § 40A-3(a)(4)); and
  • The General Assembly provided enhanced reporting obligations for NCRR to a joint legislative commission and a joint legislative committee that would have been unnecessary if the information was “already [ ] subject to public disclosure pursuant to [the Public Records Act].” See N.C. Gen. Stat. § 124-17.

The Court’s focus on this legislative backdrop dealt a significant blow to “government in sunshine” advocates. For example, they may have thought the General Assembly’s enhanced reporting obligations in § 124-17 were a victory for oversight of an entity that acts in a largely public capacity, only to find it later used as evidence that NCRR was not subject to public records laws in the first place. Indeed, SELC and other public interest organizations may view the statutory requirement that NCRR, upon request, must “provide all additional information and data within its possession or ascertainable from its records” to the Governor or any legislative committee as evidence of the government’s “supervisory responsibility and control” over NCRR. Id. at § 124-17(b).

In any event, the Business Court deemed it important not to overstate the significance of the State’s identity as the sole shareholder of NCRR:

Indeed, the Court is concerned that equating majority, or sole, ownership with degree of supervisory control would, in effect, collapse the NCRR’s corporate personhood.

2020 NCBC at ¶ 59.

There is, of course, some tension between this concern and the News & Observer factors, many of which could be said to follow naturally from that sole ownership. But, as the Court noted, “[r]egardless of who owns the NCRR, the fact remains that it operates as an independent corporate entity.” Id. at ¶ 60.

Takeaways:

  • The Court’s ruling suggests a perceptible shift away from the “intertwinement” analysis that has guided judicial evaluation of whether a private entity should be covered by the Public Records Act.
  • The Court wrestled with possibly conflicting messages from two Court of Appeals decisions. The North Carolina Supreme Court may get an opportunity to sort all of that out on appeal, and provide a workable standard for when entities like NCRR – which has extensive government ties and notable influence over public transportation development across the state – are subject to public records oversight.

 Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

 

 

 

 

 

8th Annual Business Court CLE is October 23, 2020.

Register here. In the past, this event has been held in a packed Mecklenburg County Bar Center. This year it will be virtual. No free snacks, no breakout discussions, but same great information. Thanks again to litigators, leaders, and all-around good people, Bailey King at Bradley Arant and Katie Burchette of Johnston Allison & Hord, for organizing this event for the benefit of us all.

Court also Addresses Res Judicata Effect of Prior DeclaratoryJudgment Rulings

The North Carolina Supreme Court recently affirmed a December 2018 Business Court ruling in Orlando Residence, Ltd. v. Alliance Hospitality Mgmt., LLC that clarified Rule 13 crossclaim principles, created new doctrine on issue and claim preclusion, and provided issue-spotting fodder for civil procedure professors whose fact patterns need an update. The Supreme Court’s August 14, 2020 ruling by Justice Davis joined a dispute among the parties that had lingered in various forms for more than 30 years, including Orlando’s efforts to collect a debt from one of the defendants and the defendants’ inability to agree among themselves upon corporate ownership percentages.

The vitality of crossclaims after a plaintiff’s claims fall

The Business Court had dismissed a bulky set of 18 crossclaims that defendant Kenneth Nelson filed against other defendants with whom he had been in dispute over management, ownership interest, and financial matters connected to defendant Alliance Hospitality Management. After dismissing plaintiff Orlando’s claims, the Business Court had determined that Nelson’s crossclaims “were not proper because the right to assert them depends on Orlando’s Complaint surviving, which it has not.” (2018 NCBC 132, ¶ 44).  That ruling was premised on a reading of the Rule 13(g) requirement that a crossclaim arise “out of the transaction or occurrence that is the subject matter” of the complaint or a counterclaim.

The Supreme Court disagreed, and adopted a 35-year-old Court of Appeals decision that found it would “elevate form over substance” to dismiss properly filed crossclaims over which jurisdiction exists unless they were dependent (indemnity, contribution) on plaintiff’s dismissed claims. Orlando Residence at 11. See Jennette Fruit & Produce Co. v. Seafare Corp., S.E.2d 305 (N.C. App. 1985).

Affirming correct results reached for the wrong reason

           The Supreme Court still went on to affirm the Business Court under the guidepost that trial court judgments should be affirmed even when the right result is not paired with the correct rationale. Orlando Residence at 13-14. The Court relied on a 30-year-old case of its own for this point:  Eways v. Governor’s Island, 391 S.E.2d 182, 183 (1990) (“[w]here a trial court has reached the correct result, the judgment will not be disturbed on appeal even where a different reason is assigned to the decision.”) The point already was well settled at the Court of Appeals, which has repeatedly applied the principle.  See e.g., Asheville Lakeview Properties, LLC v. Lake View Park Comm., Inc., 803 S.E.2d 632, 636 (N.C. Ct. App. 2017).

Applying claim preclusion to prior declaratory judgment rulings

The substantive path to affirmance in Orlando Residence was considerably more complicated. The Court found the three crossclaims that were related to the lawsuit’s subject matter were barred by res judicata because those issues could have been adjudicated in a previous action brought by Nelson involving the same parties. Orlando Residence at 17-18. In the earlier action, Nelson had sought a declaration that he owned 10 of Alliance’s 61 membership units, but the jury only found that he owned 10 units – not 10 of 61. Thus, there was no determination of the ownership percentage that Nelson held in Alliance. The Supreme Court faulted Nelson’s counsel for a jury instruction that didn’t force an answer on the critical percentage ownership issue, and for not raising the issue in an earlier appeal of that judgment. Id. Thus, when Nelson surfaced the ownership share issues in his crossclaims in Orlando Residence, the Court found Nelson could have had the issues answered in the earlier litigation.

As the Supreme Court noted in a one-paragraph, action-packed footnote, a declaratory judgment ruling is typically “limited to issues ‘actually litigated by the parties and determined by a declaratory judgment,’” – understood as issues preclusion (collateral estoppel). Id. at 19. However, Orlando Residence decided that North Carolina will adhere to how federal courts have generally viewed the issue:  that a prior declaratory judgment ruling will have a claims preclusion (res judicata) effect where the earlier declaratory judgment request was paired with additional requests for relief (injunctive, damages). Id. With that doctrinal shift, Nelson’s three crossclaims that were related to the suit’s subject matter were barred.

Rule 18(a) allows tag-along crossclaims when the claims to which they attach survive challenges to the pleadings

The Supreme Court found that Nelson’s remaining 15 crossclaims could not, then, survive without the three crossclaims that were related to the subject of the underlying action. This was so, the Court held, because the Rule 18(a) allowance to join other claims against a party depends on having a “qualifying claim” that is properly pled. Here, the three crossclaims related to the subject of the suit had to survive in order for the 15 non-related claims to tag along, and when they didn’t the Court held that the “implicit” notion of Rule 18(a) controlled: “the predicate crossclaim asserted by the crossclaimant in accordance with Rule 13(g) must survive the pleading stage.” Id. at 20-21.

Dismissal of crossclaims with prejudice

Defendant Nelson also claimed the Business Court had erred in dismissing his crossclaims with prejudice. The Supreme Court found that was not an abuse of discretion, though didn’t address that the Business Court’s determination was based on a theory dismissing the crossclaims which the Supreme Court rejected. Instead, the Court seemed more influenced by the length of time the parties had spent litigating related issues, and a 2009 district court order from Wisconsin that required a “show cause” from Nelson if he wanted to file any future actions against Orlando. The Supreme Court’s approval of a discretionary trial court decision that brought “some measure of finality between the parties” does not seem unusual (Id. at 22), but it is a curious coda to an opinion that adopted a few new legal variants to deliver that closure.

Takeaways:

  • Crossclaims can survive dismissal of a plaintiff’s claims where they are not dependent on them.
  • Claim preclusion (res judicata) arises from a prior declaratory judgment ruling when other forms of relief were requested along with it.
  • Under Rule 18(a), tag-along crossclaims can only survive if the claims to which they are attached survive motions pleading.

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

Sometimes the Cards Must be Played
Out Even When the Table has Cooled

If the cards have been kind, often the better instinct is to cut and run before your luck changes. That was the plan in Aym Technologies, LLC v. Gene Rodgers, et al., (N.C. Super. Ct. March 19, 2020). The defendants got all of the plaintiff’s claims thrown out at summary judgment in an opinion we discussed here, and sought to stay their own remaining counterclaims in deference to a parallel New York action involving many of the same parties. After considering the issues at play in the two actions, the Business Court denied the motion, finding that the cases did not have the requisite “substantial or functional identity” to justify a stay. Chief Judge Bledsoe also denied the plaintiff’s motion to retroactively certify two previously decided orders for appeal under Rule 54. See Order and Opinion.

Scopia Capital Management LP and Community Based Care, LLC had earlier bested Aym’s contention that misappropriated trade secrets had allowed them to beat Aym to acquisition targets in North Carolina’s competitive Medicaid intellectual and development disability (IDD) industry. That left only the defendants’ counterclaims against Aym for fraudulent misrepresentation and unfair or deceptive trade practices in play. The defendants’ pitch for a stay in North Carolina was that the New York action also was keyed to the parties’ competition in the IDD industry. Id. ¶ 6.

Takeaways:

  • Staying a North Carolina case in deference to a foreign action won’t meet the exacting standard without substantial and meaningful overlap.
  • Ask a trial court to include Rule 54 certification in its judgment because a retroactive fix is a long shot wager.

Judge Bledsoe’s analysis of whether it would “work substantial injustice” for the remaining North Carolina claims to continue in the Business Court focused on the nature of the claims pending in each state. In New York, the claims focused on Aym’s alleged misuse of information obtained under a non-disclosure agreement to aid its own business endeavors. But the Court found notable space between those claims and the trade secret claims that animated the North Carolina action over the parties’ competing efforts to acquire IDD targets. Moreover, while both actions raised Chapter 75 unfair trade practice issues, the Court found them to be disparately motivated and relying on differing factual bases. Id. ¶¶ 8-9.

The Court acknowledged that a finding of “substantial or functional identity” between the two cases could sufficiently support a stay of the North Carolina action, but differed markedly with the assertion that the cases were “identical in most respects.” The Court noted that the New York case primarily had a breach of contract focus, and that the dueling Chapter 75 claims “did not involve a common nucleus of operative facts or rely on the same evidence.” Id. ¶¶ 10-14. In essence, the Court declined the invitation to rule that cases which generally look similar are necessarily functionally identical:

“While the New York and North Carolina Actions are founded upon the same general sequence of events, neither the Actions generally, nor the Chapter 75 Claims specifically, meaningfully overlap either chronologically or topically.”

Id. ¶ 12.

Retroactive certification of prior orders not permitted

As the defendants sought to flee the jurisdiction, the plaintiff asked the Court to certify its own, partial exit from the trial court to seek interlocutory appeal of its losses at motion to dismiss and summary judgment. Judge Bledsoe found the chronology to be fatal. In January 2020, Aym was asking the Court to certify orders from February 2018 and October 2019 without any assertion of new evidence, an intervening event, or a need to make a correction to prevent manifest injustice. Id. ¶¶ 21, 23. The Business Court stated that such a retroactive certification was simply beyond its authority under Rule 54:

“As an initial matter, North Carolina’s appellate courts do not permit trial courts to afford Plaintiff the relief it seeks – retroactive certification of previously entered orders absent material amendments triggered by appropriate motion.”

Id. ¶ 22. Aym, the Court noted, could have made a timely request to certify those rulings under Rule 54(b) by asking the Court to include that relief in its judgment. The Court noted that the alternate path for interlocutory appeal – impairment of a “substantial right” – would not have been available even if plaintiff had pled it. That’s because plaintiff’s only argument would have been that of the delay posed if defendants’ stay request had been granted. Mere delay, the Court said, could not constitute injury to a “substantial right.”

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.

If you have employees that work from home (WFH), you may be subject to PJ in their location.

During the last few months, the NC Supreme and Business Courts have answered some tricky PJ questions:  Are pre-conflict contacts relevant?  (Yes and Yes); Is a single contract with a NC resident always enough to justify PJ?  (No, contacts not contracts matter).  Is PJ defense waivable? (Yes, and this case tested the limits of waiver.)

Compared to these PJ questions, the one in Quidore v. Alliance Plastics, LLC seemed easy — and timely — as Chief Judge Bledsoe also considered the PJ implications of allowing an employee to work from home.

 

The precise question in Quidore v. Alliance Plastics, LLC was whether a Rock Hill, SC company is subject to PJ in NC for breach of an employment contract and severance promises with a NC employee who often worked from home in NC.

The answer, according to  Judge Bledsoe, was an easy yes.  The employment contract was negotiated in NC, the promises of severance and other benefits were made in NC, and the employee regularly worked from home (in NC) with the employer’s consent.  With heavy reliance on the recent Supreme Court Case Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. — , 838 S.E.2d 158 (2020), discussed here (contacts throughout the period of performance are relevant – not just during breach), Judge Bledsoe explained that the SC employer should have anticipated being haled into NC Court on employment matters with this employee.  PJ in NC was proper.

 

One Takeaway: Businesses from other states that allow employees to work from home in NC need to keep their eyes on the PJ ball, as least for employment-related claims from those employees.

More:

Alliance was SC corporation with its main office in Rock Hill, SC – a few short miles across the border from Charlotte.  Alliance recruited Mr. Quidore, and convinced him to leave his job and home in California, move to the Charlotte area, and become Alliance’s COO.  As part of this recruitment, Mr. Quidore made multiple trips to the Charlotte region – each time, flying into Charlotte’s airport, staying in Charlotte, and meeting with Alliance’s CEO (also a NC resident) in Charlotte.  At these meetings, the alleged terms of employment were negotiated and, according to Mr. Quidore, promises were made.  After accepting the position, Quidore moved his family to Charlotte (not Rock Hill).  Thereafter, Quidore regularly worked for Alliance from NC – including daily emails and calls taken from his NC home; meetings with Alliance’s CEO (also a NC resident) at various Charlotte Starbucks locations; and regular and routine attendance at other NC meetings, lunches, and  business functions.  Alliance knew about and approved Quidore’s work activities in NC.

After about a year, the relationship soured, and Quidore was fired.  When Quidore did not get the severance benefits he was promised, he sued Alliance – in NC – for breach of their employment agreement and for lying about his benefits.

Alliance challenged PJ.  As a SC entity with operations and offices in SC, Alliance argued that it lacked requisite contacts with NC.  Alliance also denied and disputed Quidore’s allegations of wrongdoing including where that supposed wrongdoing occurred.

Judge Bledsoe was not convinced by Alliance’s arguments.  Weighing competing affidavits, Judge Bledsoe concluded that Alliance’s contacts with North Carolina were sufficient to justify PJ.  Quidore performed “regular and continuous” work for Alliance in NC, including meetings, entertaining, and routine, daily after-hours emails and calls from his NC home.  Alliance approved all of this NC work.  And, the actual breach of the employment agreement occurred at a NC Starbucks, where Alliance’s owner met with Quidore, terminated his employment, and supposedly told him that Alliance would not honor the alleged severance promises.  These contacts, and the lack of hardship in having to defend a suit a few short miles from Rock Hill, made answering this PJ question, well, Easy, Easy Like …

This decision raises some interesting questions for employers:

What if the employer’s only NC contact is the employee  ‘working from home’?  The theme of recent cases, including this one, suggests the answer may be yes.  With Beem leading the way, these cases explain that the totality of the employer’s contacts with NC is relevant.  As WFH proliferates, so too will the employers’ PJ contacts with their employees in these NC locations.  Clever practitioners surely will highlight and expound on a foreign employer’s ‘regular and continuous’ contacts with employees as they work remotely.

So, how can a foreign employer avoid this result?  A good Employee Handbook policy on the limits of teleworking would help.  A written agreement with the employee that specifically addresses venue and jurisdiction would be even better.  Employers should also watch for policies that overly entangle an employer in the employee’s home location; for example, has the employer retained (exercised?) the right to inspect the home office for safety?  Has an IT department employee visited the employee’s home office to set it up?  How many other employees are allowed to work in North Carolina?

Bottom line: The case before Judge Bledsoe is a good reminder that as employees increasingly scatter to their residences, employers who are not careful might well be exposing themselves to PJ where those employees live.

 

Q: Are pre-conflict NC contacts relevant?
A: Yes.
Q: What if they relate to a separate contract between the parties?
A: Yes. Still relevant.

In Button v. Level Four Orthotics & Prosthetics, Inc., 2020 NCBC 18 (Mar. 13, 2020), Judge Robinson considered whether the court could exercise personal jurisdiction over Florida defendants based in part on their course of dealing with the NC plaintiff, including “pre-conflict” NC contacts and consent to NC jurisdiction provisions in other contracts between the parties. Adopting a broad view of what contacts are relevant, the Court held the Florida defendants were subject to PJ.

Background and Relevant NC Contacts

Mr. Button was resident of New Jersey. He was hired as CEO for a North Carolina corporation with its principal place of business in Winston-Salem, and he split work time between New Jersey and North Carolina.

Mr. Button’s NC employer was owned by two Florida entities. Mr. Button entered into an employment contract with his NC employer, as well as a series of contracts conferring stock purchase and other rights with the Florida entities. Notably, these agreements each had North Carolina choice of law, venue, and/or consent to NC jurisdiction provisions.

Executives from the Florida entities, themselves Florida residents, negotiated Mr. Button’s various employment agreements and oversaw Mr. Button’s work and performance. But these Florida executives rarely if ever traveled to NC, and their other NC contacts were limited and involved pre-conflict activities like hiring Mr. Button and managing operations of the NC entity. The Florida executives also claimed that most of their interactions with Mr. Button occurred while Mr. Button was working from New Jersey, not North Carolina.

After a little over a year, the relationship soured. Mr. Button claimed that the Florida entities and executives reneged on promises in his employment agreement. The Florida executives apparently disagreed, and they abruptly fired him.

Mr. Button Sued. Defendants Moved to Dismiss.

Mr. Button leveled a slew of claims against his NC employer, the Florida entities, and two Florida executives. The claims sounded in both contract (e.g., employment agreement) and tort (e.g., tortious interference). The defendants responded with a salvo of targeted Rule 12 motions, including motions to dismiss and lack of personal jurisdiction. Judge Robinson ruled on all of these motions. This post focuses only on PJ.

Contacts Pre-dating the Conflict and from Other Contracts Are Still Relevant

The Florida defendants argued their contacts with NC were mundane, did not give rise to the dispute, and did not justify PJ. Judge Robinson disagreed. He explained that the defendants’ view of relatedness was too narrow. Instead, citing the Supreme Court’s recent decision in Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. –, 838 S.E.2d 158 (2020) (my recent post on Beem), Judge Robinson explained that these defendants’ course of dealing with Mr. Button, managing operations of their NC subsidiary, and even the consent to jurisdiction in other contracts, were all relevant and established PJ.

The Florida defendants had ongoing and direct participation in management of Mr. Button’s employer – a NC entity, including conduct Mr. Button claims to be in breach of his employment agreement. During negotiations, operations, and through termination, the Florida executives never differentiated which entity they were representing. More importantly, their course of conduct showed that they contemplated continuing obligations with both Mr. Button and their NC subsidiary. In addition, even though Judge Robinson dismissed Mr. Button’s claims for breach of the other various stock purchase agreements with the Florida entities without prejudice (finding no case or controversy), he held that the consents to NC jurisdiction in those other agreements were still relevant. It showed that these defendants contemplated that they could be hailed into Court in NC on matters related to their relationship with Mr. Button. Ultimately, Judge Robinson concluded that these acts and contacts were all related to the litigation, and they justified personal jurisdiction.

This ruling reminds NC litigants not to take an overly narrow view of relevant contacts. If you have a contact related to both the plaintiff and NC, it’s probably relevant.

Business Court Considers “Extraordinary” 5-Page Introductory Narrative

An “introduction” section in a complaint can set the stage for the case and the claims being asserted. It can forecast and outline the allegations in a way that makes the pleading more “reader-friendly.” And surely, kicking off with a compelling narrative engages the reader in a way that reciting the “parties and jurisdiction” never could. But what are the limits when crafting such an opening? In Buckley LLP v. Series 1 of Oxford Ins. Co. N.C., 2020 NCBC 21 (N.C. Super. Ct. Mar. 23, 2020), the Business Court considered the propriety of a 5-page “introduction” that it described as “extraordinary,” “aggressive,” and “accusatory”—but ultimately declined to strike. See Opinion and Order.

Take-Away:

  • Even a relatively lengthy “introduction” may be acceptable (i.e., not subject to being stricken) if it is tethered to the claims in the pleading, is helpful to understanding the case, and does not prejudice the opposing party.

Background

The law firm plaintiff in Buckley (Buckley) bought an insurance policy from the defendant (Oxford). When Buckley submitted a claim under the policy, a coverage dispute arose. Oxford allegedly first approved coverage, but then shifted course and referred the claim to a third party to “assess” the claim. According to Buckley, the third party’s assessment was over-the-top and not objective: it was “remarkably similar to one-sided civil discovery” including “interrogatories, . . . requests for production, and demand[s] [for] interviews under oath of more than a dozen current and former Buckley lawyers.” (Compl. ¶ 71.) Buckley says that despite its cooperation, its claim was never approved or denied. Instead, Oxford filed a lawsuit disputing coverage.

This prompted Buckley to initiate its own suit in the Business Court, asserting claims for unfair and deceptive trade practices and tortious refusal to settle an insurance claim, among others.

The first five pages of Buckley’s complaint might catch the eye of a seasoned reader of complaints. For one thing, there are no numbered paragraphs. There instead appears to be an “Introduction” section that is not labeled as an Introduction. Even more noteworthy, though, is the tone conveyed throughout these five pages. It is not a happy one, and includes such statements as “Oxford . . . proceeded in a concerted effort to cheat Buckley out of coverage it had paid for” and describes Oxford’s conduct as “reprehensible” and a “concerted effort” to “deprive Buckley of the coverage it paid for.” (Compl. pp. 1-2.)

Oxford did not take these allegations lying down. It counterpunched. That is, Oxford moved to strike the opening allegations as “contain[ing] material that is redundant, irrelevant, immaterial, impertinent, or scandalous matter” in violation of N.C. R. Civ. P. 12(f).   Buckley LLP, 2020 NCBC 21 ¶ 5.

Analysis

The Court was not impressed with Buckley’s “intro”– but it did not strike it. The Court found that while the “Complaint contains allegations framed in aggressive and accusatory language and its case summary and introduction is extraordinary for its length,” the allegations did not cross the line under the Rule 12(f) standard. Buckley LLP, 2020 NCBC 21 ¶ 10. (The Court also declined to find a violation of Rule 8(a)’s “short and plain statement” standard. Id.)

The Court reasoned that the allegations, though “at the outer limits . . . of acceptable pleading,” id. ¶ 14, were acceptable in this case for a few reasons: First, Buckley’s UDTP claim inherently requires showing “egregious” conduct – which may translate to “inflammatory” allegations. Id. ¶ 12. Second, no apparent prejudice was caused to Oxford – indeed, Oxford had “answered the introductory allegations in a single, short sentence.” Id. ¶ 15. The Court also noted that unnumbered introductory paragraphs are “commonplace in business litigation” and can be “very useful,” and that “courts routinely permit them.” Id. ¶ 13.

The Court did caution, however, “that a similarly lengthy introduction might not survive Rule 12(f) scrutiny in a future case where prejudice to the answering party can be shown.” Id. ¶ 15. The Court did not elaborate on what prejudice might look like in this context. (Query, for example, whether prejudice could have been shown had Oxford answered with its own 5-page narrative.)

Conclusion

The upshot of Buckley appears to be this: A complaint’s introduction will not be viewed in isolation. It will be viewed in the context of the claims asserted, how helpful it is to understanding the case, and (probably most importantly) whether it results in prejudice to the opposing party.

 

Matt Krueger-Andes is a litigation associate in Fox Rothschild’s Charlotte office.  He regularly represents clients in the Business Court and advises on Business Court and other business litigation-related matters.  He is also a former law clerk to the Honorable Louis A. Bledsoe, III, Chief Judge of the North Carolina Business Court.

In Cohen v. Continental, 2020 NCBC Order 12 (N.C. Super. Ct. Mar. 12, 2020) Judge Gale discussed several practical PJ issues – including waiver and website/e-mail contacts. Some takeaways are:

  • PJ is a waivable defense. Raise it in your answer, and don’t wait too long to file your motion.
  • Having an interactive website – even one with NC subscribers – may not establish PJ, particularly if the content is not NC-specific.
  • In a specific PJ analysis – contacts unrelated to the claims are (much) less important.

Presiding over this Rule 2.1 “exceptional” case, Judge Gale ruled that Continental did not waive its PJ defense and that Continental’s subscription-based website, email blasts, and its broader (unrelated) NC contacts did not establish personal jurisdiction over the foreign defendant.

Background

This suit arose from the deadly crash of a small airplane in Winston-Salem. The plaintiff, as executor, claimed the crash was caused by engine failure and sued the out-of-state seller of an overhauled engine part (Aircraft Accessories), the out-of-state engine manufacturer (Continental), and the NC airplane maintenance company (Air Care) that installed the component. The foreign defendants challenged personal jurisdiction. This opinion dealt with Continental’s Rule 12(b)(2) motion.

Waiver: Despite waiting 3+ years to file its PJ motion, Continental did not waive its PJ defense.

The procedural history was critical to whether Continental waived its PJ defense. The complaint was filed in 2015. Out of the gate, a different defendant, Aircraft Accessories (the Oklahoma company that sold the overhauled part into NC), moved to dismiss for lack of PJ. The motion was denied, Aircraft Accessories appealed, and the case was stayed pending appeal. The Court of Appeals affirmed, holding that Aircraft Accessories was subject to PJ in NC because it sold the allegedly defective engine part into NC, shipped it here, and routinely engaged in similar part to others in NC. Cohen v. Continental Motors, Inc., 253 N.C. App. 407, 799 S.E.2d 72 (2017) (unpublished).  After remand, limited discovery commenced. According to Continental, as soon as it learned of Plaintiff’s precise causation theory against Continental, it promptly filed its Rule 12(b)(2) motion to dismiss for lack of PJ.

Nearly three-and-a-half years had passed from when Continental first raised its personal jurisdiction defense in its answer and when it filed its motion. Plaintiff argued that the years-long delay was a waiver. They relied on prior Business Court case – LendingTree, LLC v. Anderson, 2012 NCBC LEXIS 21 (N.C. Super. Ct. Apr. 11, 2012) – which had held that a venue defense in an answer could be waived based on post-answer conduct.

Noting sparse NC appellate authority on the issue, Judge Gale discussed a number of Federal cases that addressed when a party’s litigation conduct may waive a PJ defense. Judge Gale identified the two primary considerations: (1) dilatoriness, and (2) participation/encouragement of judicial proceedings (e.g., filing motions, participating in hearings, etc.), concluding that neither was present. Judge Gale distinguished LendingTree, where the defendant actively litigated the case for three years before moving to transfer venue. This situation was different. First, at least some of the delay was caused by the appeal. Second, despite the passage of time, Continental participated only in limited written discovery on matters related to PJ, and it requested no affirmative relief from the Court (e.g. by engaging in substantive motions practice). And when Continental learned of Plaintiffs’ causation theory in discovery (apparently narrowing the defect claim to the overhauled part supplied by Aircraft Accessories), Continental promptly filed its PJ motion. Under these facts, Judge Gale concluded that Continental did not waive its PJ defense.

The key takeaway is that while a prudent defendant always should assert its PJ motion as soon as practicable, not every “delay” will constitute a waiver.  A Rule 12(b)(2) motion can be made, even after relatively lengthy “delay” if:  (1) there is a legitimate reason for the delay (e.g., the case was stayed); (2) the Plaintiff was put on notice of the PJ defense (through the answer or otherwise); and (3) the defendant has not actively participated in the case, or otherwise engaged in conduct that would signal intent to waive PJ defense.

Continental’s website and email contacts were not sufficient to justify PJ.

Judge Gale then assessed Continental’s “minimum contacts.” It was not registered or licensed to do business in North Carolina. It had no offices, bank accounts or other physical presence or property here. It was a Delaware corporation with its principal place of business in Alabama. The engine was designed and manufactured in Alabama and shipped to Oregon where it was installed more than a decade ago. Unbeknownst to Continental the plane changed hands and was eventually sold to a North Carolina resident, where it was maintained for some years before the accident.

Continental did, however, sell various parts into North Carolina via distributors and it had substantial sales. It also maintained a subscription-based website with technical manuals and bulletins for its engines and parts. The NC entity that installed the overhauled part at issue – Air Care – was a subscriber to the website.

These contacts were not sufficient. As Judge Gale explained, Continental’s website, emails, and other sales were not connected to the accident, nor were they directed specifically to North Carolina. First, assuming that generalized and indirect sales via distributors into North Carolina could establish personal jurisdiction for claims arising from those sales, there was no evidence connecting general part sales by Continental into North Carolina and the accident. The allegedly defective part at issue was an overhauled part, sold into NC by Aircraft Accessories, not Continental.

Second, maintaining the online technical manuals (an FAA mandate) and email blasts to NC subscribers were not purposeful contacts with NC primarily because these things were regulatory mandates and were not targeted or particular to North Carolina. Finally, Judge Gale rejected Plaintiff’s argument that Continental’s broader contacts (e.g., sales of other parts, having distributors here, etc.) were related enough to justify personal jurisdiction. As Judge Gale explained, these other contacts were not so substantial as to establish general personal jurisdiction; and since the claims at issue did not arise from these other contacts, they were irrelevant to the purposeful availment inquiry.

The broad takeaway here is that claims need to “arise from” or “relate to” a foreign defendant’s purposeful contacts with the forum – a point recently reiterated by North Carolina’s Supreme Court in Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. –, 838 S.E.2d 158 (2020) and the subject of my recent post. And when it comes to operation of a website, even one involving NC subscribers, a plaintiff must demonstrate that the website and interactions are unique or particular to NC residents.

The Plaintiff has filed a notice of appeal.

 

 

This afternoon, Chief Judge Bledsoe issued a second Order – 14 April 2020 NCBC Order – applicable to all Business Court Actions extending case management and other deadlines and procedures to match those in Chief Justice Beasley’s 13 April 2020 S.Ct. Order.

In short, all case management deadlines for NCBC cases falling between 16 March 2020 and 1 June 2020 are extended to 1 June 2020, and anything else to be done before 1 June 2020 will be deemed timely if done by 1 June 2020.

As with the Business Court’s previous 23 March 2020 NCBC Order Chief Judge Bledsoe again provides helpful clarity on the types of case activities to which this second Order applies. Basically, anything with a due date or deadline between now and 1 June is extended until 1 June unless the parties agree otherwise. This includes filing of pleadings, motions and briefs as well as “[a]ll other acts” including discovery, mediation, motions, and other case activities.

Importantly, however, in paragraph (v), Chief Judge Bledsoe encourages (but does not require) parties to confer and advise their assigned Business Court Judge concerning: (a) any filings or other case activity the parties agree may occur before 1 June 2020; (b) any video or telephone hearing on any matter the parties agree may be held before 1 June 2020; and (c) any revised filing or case management deadlines to which the parties agree.

Finally, as Chief Judge Bledsoe noted in his prior order, alterations or modifications may follow in response to any additional orders or directives of Chief Justice Beasley or as circumstances may warrant. Our most sincere hope, is that circumstances warrant the safe resumption of case and life activities by 1 June or soon thereafter.

 

 

Contacts, not contracts, are the key.

Shortly after the Supreme Court’s decision in Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. –, 838 S.E.2d 158 (2020), Judge Gale decided a series of personal jurisdiction motions in Diamond Candles, LLC v. Winter, 2020 NCBC 17 (N.C. Super. Ct. Mar. 12, 2020). The results were mixed.

Key takeaways:

  • Providing legal services to a NC client, alone, may not establish personal jurisdiction over an out-of-state lawyer.
  • Contacts with the forum itself – e.g. submissions to Secretary of State, regulators, etc. – are key.

Background

Diamond Candles (a NC LLC) was a successful candle-selling company looking to be bought; but when the offers fell through, its owners got suspicious. Diamond Candles came to learn that its e-commerce vendor was grossly overcharging it (depressing company value) as part of an alleged scheme by the defendants to acquire Diamond Candles at less than fair market and then sell it for a profit. Diamond Candles leveled a slew of claims against its former CEO and several out-of-state defendants, including Diamond Candles’ (former) law firm and lawyer and the e-commerce vendor and its president. The out-of-state defendants all moved to dismiss for lack of personal jurisdiction.

No PJ over foreign lawyers because all legal work was done outside the State, there were no contacts with the forum itself, and the claims did not arise from the legal work.

Judge Gale first assessed whether the Houston-based law firm and its California partner were subject to personal jurisdiction. They represented Diamond Candles on general corporate and financing matters in two engagements, both of which ended years before the lawsuit. There was no allegation that the firm or its lawyers solicited Diamond Candles for the work, they had no physical presence in NC, and they derived negligible work and revenues from North Carolina. And during these limited engagements, they never came to North Carolina. Their only contacts were phone calls and emails.

Judge Gale first discussed another personal jurisdiction opinion involving out-of-state lawyers serving a North Carolina client, Summit Lodging LLC v. Jones, Spitz, Moorhead, Baird & Albergotti, PA, 176 N.C. App. 697, 627 S.E.2d 259 (2006). In Summit Lodging, South Carolina lawyers helped form a NC LLC to purchase a NC hotel. To form the LLC, the SC lawyers signed and submitted necessary papers to the North Carolina Secretary of State, a key contact with the forum itself. They also communicated by mail and telephone with both their NC clients and the NC seller of the hotel. The Court of Appeals concluded these were sufficient contacts with North Carolina to establish personal jurisdiction for a malpractice claim arising from this legal work.

The out-of-state lawyers’ contacts in Diamond Candles were more limited. And there is a difference, Judge Gale explained, between activities aimed at a plaintiff who happens to be in North Carolina and those aimed at the forum itself. Contacts with the forum itself clearly constitute “purposeful and deliberate” contact with the forum making it fair to exercise personal jurisdiction; but contacts with a plaintiff that happens to reside here may not.

Unlike Summit Lodging, none of the lawyers’ work for Diamond Candles was directed to the forum. There were no direct filings to the North Carolina Secretary of State, for example. Instead, the client, Diamond Candles, just happened to be here. Judge Gale further explained that legal engagements were akin to ‘contracts’, and he noted several cases where courts in North Carolina were reluctant to exercise personal jurisdiction where, like here, the contracts contemplated that work would be performed entirely outside the state. Judge Gale also noted several decisions from outside North Carolina where courts rejected an in-state client’s effort to subject an out-of-state lawyer to suit in the client’s home forum on due process grounds.

Although Judge Gale did not press the point, another key distinction seemed to be the relationship of the lawyers’ contacts to the claims. In Summit Lodging, the in-state client sued its out-of-state lawyer for legal malpractice. So the claims arose directly from the contacts. Diamond Candles, however, didn’t sue for malpractice. Instead, it sued the defendants for their breach of fiduciary duties by participating in a scheme to depress the company’s sale value. Thus, the connection between the contacts and the claims was more attenuated.

Seemingly a close call, Judge Gale concluded Summit Lodging was distinguishable and subjecting the out-of-state lawyers to personal jurisdiction would not “comport with ‘fair play and substantial justice.’” (quoting Burger King and International Shoe).

Yes PJ over the other defendants because the claims “arose from” their contacts.

Personal jurisdiction over the e-commerce company and its president was an easier decision. The e-commerce vendor (and its president) had traveled to North Carolina in connection with both the e-commerce contract and in furtherance of the alleged scheme. They also continued to receive substantial and allegedly excessive revenues from Diamond Candles’ North Carolina operations. And, most importantly, the causes of action clearly arose out of these contacts with and in North Carolina.

The company’s president argued, however, that his actions were as “an officer” and should not be imputed to him, individually. He cited an unpublished case from the Middle District of North Carolina as support. See Mkt. Am. V. Optihealth Prods., No. 1:7-00855, 2008 U.S. Dist. LEXIS 95337, at *3 (M.D.N.C. Nov. 21, 2008). But Judge Gale disagreed with his read of this case, and rejected this argument. Judge Gale explained that actions taken while president will not shield the person from personal jurisdiction if, as is the case here, the acts are directly connected with the issues in the lawsuit. More broadly, the president failed to offer sworn testimony or other evidence to contradict Diamond Candles’ allegations and evidence regarding the president’s contacts, which Judge Gale thus accepted as true. Judge Gale concluded the Court had personal jurisdiction over both the e-commerce vendor and its president.

The mixed results here show that having a contract with a NC resident may not be enough, and that the type of contacts matter. Contacts with the forum itself, and contacts that give rise to the claims are most important.   Contacts, not contracts, are the key.