Discord within a faith community comes with all the challenges of a secular dispute, but carries with it the special responsibility that members of a congregation share in a collective spiritual undertaking. Yet, there are limits that test even the bounds of The Bible’s guidance that, “Blessed are the peacemakers.” Matthew, 5:9.

Illustration by Jessica Karsner

In McKnight v. Wakefield Missionary Baptist Church, Inc., 2021 NCBC 35, the Business Court considered the splintering of an unincorporated religious association so rancorous that one surviving entity claimed the other “no longer exists.”

After a more than 150-year history, internal financial disputes within the congregation of Wakefield Missionary Baptist Church (WMBC) escalated to such a degree that a group of its trustees fired the senior pastor, locked the doors to the church, “and purported to reorganize the church as a nonprofit corporation” – Wakefield Missionary Baptist Church, Inc. (WMBC, Inc.). They also subsequently transferred the real property of the church to WMBC, Inc. Id. ¶ 6-7.

What arose, then, was a very Business Court-looking dispute in which WMBC’s trustees raised fiduciary duty, constructive fraud and unjust enrichment claims centered on transfers of church property. And WBMC Inc.’s trustees countered with claims for trade name infringement, conversion, and civil conspiracy.

The Court’s subject matter jurisdiction in such settings is narrow, as the First Amendment’s ecclesiastical entanglement doctrine “severely circumscribes the role that civil courts may play in resolving church property disputes.” Id. ¶ 21 (quoting Harris v. Matthews, 361 N.C. 265, 271 (2007).  As the Court explained:

“Simply put, secular courts may not adjudicate ‘controversies over religious doctrine and practice.'”

Id. Harris limits a court’s ability to resolve factional disputes within a church to those:

“that can be resolved on the basis of neutral principles of law such as (1) who constitutes the governing body of this particular church, and (2) who has that governing body determined to be entitled to use the properties.”

361 N.C. at 272. The Business Court held that its secular authority could be employed in just that way – to determine the appropriate governing body at key junctures and whether its actions met the terms of the church’s constitution and bylaws. 2021 NCBC, ¶¶ 23, 25.

The Court concluded that a fiduciary duty claim could lie against the trustees who formed WMBC, Inc. because they were trustees of WMBC when they did it. Id. ¶ 30. See N.C.G.S. § 61-2. But the Court made a more interesting call when it allowed constructive fraud claims against the defendant trustees to proceed by finding that plaintiffs had adequately pled those trustees had benefitted themselves by moving the church’s property to an entity they controlled – WMBC, Inc. The Court observed that, “[r]ead liberally,” those allegations suggested a personal benefit to the trustees because they controlled the new entity. 2021 NCBC, ¶ 31.


The Court resolved a couple of standing issues worthy of note. First, defendants claimed plaintiffs were not trustees of WMBC and therefore had no standing to sue under N.C.G.S. § 61-2. Judge Conrad held defendants made no showing plaintiffs weren’t trustees, and absent that it was good enough that they said they were. 2021 NCBC, ¶ 16. See N.C. R. Civ. P. 9(a) (plaintiffs required to “make an affirmative averment showing [ ] capacity and authority to sue”).

The Court also rejected the argument by the defendant trustees that because they had converted WMBC to WMBC, Inc., plaintiffs were attempting to sue on behalf of an entity “that has ceased to exist.” 2021 NCBC, ¶ 18. The Court noted that because the propriety of WMBC Inc.’s incorporation “is one of the key issues underlying this case,” it was not required to resolve that merits issue in response to a standing challenge. Id. ¶ 19. See Cline v. Teich, 374 S.E.2d 462, 465-66 (N.C. App. 1988).


  • A secular court can use neutral principles of law to resolve a dispute among church factions about who constitutes its governing body and what that means for control of its property.

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

Evidence a Party Controls, but Fails to Marshal at Trial, Falls Short of High Bar to Undo a Final Judgment Based on an Adversary’s Fraud

When a motion for reconsideration hearing features a plaintiff’s accusation that the court made arguments for the other side, the effort to flip a prior ruling – already a tough get – has gone a bit off the rails.  In Bayport Holdings, Inc. v. Sisson, 2021 NCBC 39, the Business Court considered a Rule 60(b)(3) effort to undo a final judgment based on alleged fraud by the prevailing party. It ended with the Court’s concern about the “troubling” course plaintiff’s arguments had traveled.

Plaintiff claimed that defendant Brian Sisson had committed fraud and attempted to prove it up with boxes of documents he had left behind at the shooting range and firearms retail store he previously managed for them, as well as through emails found in the account of one of its shareholders. Id. ¶¶ 2, 15. The Rule 60(b)(3) bar is high, requiring a showing of a “meritorious defense” that a party was unable to put on because of its adversary’s fraud. See Milton M. Croom Charitable Remainder Unitrust v. Hedrick, 654 S.E.2d 716, 721 (2008). Tough work, for sure, but previously unknown documents are a good starting point for the plot.

The drama is considerably lessened when it turns out plaintiff had the documents all along. Plaintiff obtained the boxes during discovery but didn’t review them for over a year – despite its “unilateral access . . . without interference by Sisson” – on the assumption they were business records that predated the current dispute. NCBC 39, ¶¶ 16, 19-21. The shareholder’s emails were not reviewed or produced during the case because he “could not remember the password to his Gmail account,” only to recall it earlier this year with the help of family and a business colleague. Id. ¶¶ 23-25.

The atmospherics of plaintiff’s claims were not improved by its concession at hearing that defendant Sisson didn’t prevent it from presenting documents at trial that plaintiff, itself, controlled during the discovery period. Judge Robinson noted that plaintiff’s delay in reviewing the boxes, or in securing access to its own shareholder’s emails, could hardly be laid at a defendant’s doorstep:

“The Court finds it troubling that Plaintiff clearly failed to review relevant documents in its possession, both before and during the pendency of this litigation, which review would have alerted counsel to their existence, and now blames [a defendant] for withholding this information from the Court.”

Id. ¶ 54.

Without a North Carolina guidepost, the Court relied on interpretations of Fed. R. Civ. P. 60(b)(3) for the requirement that a moving party show the other side’s fraud by “clear and convincing” evidence. See Turner v. Duke Univ., 381 S.E.2d 706, 713 (N.C. 1989) (“Decisions under the federal rules are thus pertinent for guidance and enlightenment in developing the philosophy of the North Carolina rules.”). Judge Robinson dismissed each of plaintiff’s four contentions of fraud in turn, concluding that the newly surfaced materials did not meet the exacting burden for Rule 60 relief. NCBC 39, ¶¶ 36, 42, 46, 53. The Court hastened to add that, “even if a lesser burden of proof may apply” – whatever it might be – the plaintiff’s arguments and late-produced materials could not meet the mark for Rule 60(b)(3) relief. Id. ¶ 54.

The Business Court also cautioned against overloading a Rule 60 motion with claims appropriately brought through “timely appeal.” (Plaintiff’s motion was filed just within the one-year deadline for seeking Rule 60(b)(3) relief.)  ¶¶ 13, 52.  Where plaintiff’s motion sought to challenge an earlier court ruling subject to normal appeal deadlines, the Court reminded that later-arriving Rule 60 motions cannot remedy expired appeal windows:

“Erroneous judgments may be corrected only by appeal, and a motion under [Rule 60(b)(3)] cannot be used as a substitute for appellate review.”

Id. ¶ 52 (quoting Chicopee, Inc. v. Sims Metal Works, Inc., 391 S.E.2d 211, 216 (1990)).


  • The standard to show an adversary’s fraud prevented a party from presenting evidence is an exacting one, whether it’s “clear and convincing” or something with a less stern sound to it.

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

Major Expansion at an Exclusive Country Club Leads to a Fight over Access to Records, Plans and Financials

At one of Charlotte’s finest golf courses, Myers Park Country Club, the summer weather isn’t all that’s leaving some members hot under the collar.  As the club embarks on a $27 million renovation plan tied to its 100th anniversary, member Mark Erwin has sued the club under state corporate inspection laws for a better look at records relating to the approvals, plans and financials related to the project. In Erwin v. Myers Park Country Club, Inc., 2021 NCBC 45, the Business Court surveys the “absolute” and “qualified” rights of inspection available to a member like Erwin, and in the process sheds some light on the typically private affairs of exclusive clubs.

Club renovations are common, but a $27 million price tag to “be partially funded through a combination of assessments, monthly fees, and member fees” is likely to draw a curious glance. Id. ¶ 11. Here, Erwin sought to gather information on the “Connecting the Centuries” project to examine the propriety of related transactions, potential mismanagement, and financial feasibility to share with other club members and shareholders. Id. ¶¶ 14, 49.


  • Court fights over shareholder inspections may, on balance, lead to public disclosure of more sensitive information than would an initial, agreed production.
  • Corporations in North Carolina can’t use the Business Judgment Rule to shield records from a shareholder’s exercise of statutory inspection rights.

The North Carolina Business Corporation Act provides a “qualified shareholder” – at least six months as a member or holder of 5% of any share class – the opportunity to inspect certain corporate records in two, distinct areas generally considered as “absolute” and “qualified” inspection rights under N.C. Gen. Stat. § 55-16-02(a), (b), (g).

Judge Robinson affirmed Erwin’s access to several information categories to which he had “absolute” access under the statute, including shareholder minutes and records of final project-related actions taken by the shareholders (without any meeting), as well as any revenue shortfalls experienced by the club from 2019 through March 2021.  2021 NCBC ¶¶ 33, 35-36.  The Court noted, interestingly, that the club’s Rule 30(b)(6) deponent testified there were no minutes created of meetings, though there may have been at least one held during the time period.  Id. ¶ 33.

The Court also upheld Erwin’s right to “written communications” to shareholders related to the renovation project, and any revenue shortfalls or plans to address them. As is typical, the really interesting stuff was not access to the discovery loaf itself but how the parties proposed to slice it. Erwin sought project “renderings, narratives, presentations, and brochures” shared by the club at a shareholder meeting.  The club argued such materials weren’t written communications, but the Court disagreed and ordered production. Id. ¶ 39-40.

The Court also refereed a dispute about the appropriate definition of a “revenue shortfall.” The club argued there were no such shortfalls, showing that in 2020 it “ended the year with a record high” of $2.87 million in cash – nearly double its year-end 2019 position.  Id. ¶ 41. But Judge Robinson sided with Erwin’s approach: that his request rightly sought information on shortfalls in actual club revenue as measured against its projected revenue. ¶ 42.

So-called “qualified” inspection rights differ from “absolute” ones in that they require a showing that demands are “made in good faith and for a proper purpose,” set forth with “reasonable particularity,” and are “directly connected” to the requester’s purpose.  N.C. Gen. Stat. § 55-16-02(c). In parsing several inspection requests under the “qualified” standard, the Court considered the club’s argument that Erwin’s exercise was not for a “proper purpose” because it sought “a re-assessment of the Board’s business judgment as to whether the Project should or should not be undertaken and what contractors should or should not be hired to complete the Project.” The Court found no controlling law to support the contention that the “business judgment rule” could be used to ward off a shareholder’s statutory inspection rights. 2021 NCBC ¶ 47-48.

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

State’s Authority over North Carolina Railroad Company Might be Significant, but Deemed Control of a “Shareholder,” not a “Sovereign”

In a case closely watched by public transit activists and “government in the sunshine” advocates, the North Carolina Supreme Court last week affirmed a 2020 Business Court decision that found the North Carolina Railroad Company (NCRR) beyond the reach of the North Carolina Public Records Act. The dispute arose when the Southern Environmental Law Center (SELC) sought records from NCRR regarding its refusal to cooperate in the construction of a light rail transit line once slated to connect Durham and Chapel Hill.  NCRR refused to provide any records, claiming the Act didn’t apply to it, and the Business Court agreed in a decision we discussed here.

In SELC v. N.C. Railroad Company, 2021 NCSC 84 (Aug. 13, 2021), the Supreme Court, in a 5-2 decision with Justices Earls and Hudson dissenting, held that NCRR was not an “agency of North Carolina government or its subdivisions” subject to the Act (N.C.G.S. § 132-1). The Court relied principally on NCRR’s status as a “separate corporate entity” that “makes decisions independently of any directives that it might receive from government officials, including the Governor.” ¶¶ 29, 39. Justice Ervin’s majority opinion was particularly focused on viewing the NCRR’s sole shareholder – the State of North Carolina – as a “single stockholder” having the role such solo owners can have, as opposed to the State acting as a sovereign in a way that would open up NCRR’s records to public review. Id. ¶ 40.

This “lens” was particularly important as the Court’s opinion notes the State: (i) picks all of NCRR’s directors; (ii) approves substantive amendments to its articles of incorporation; (iii) gets all of NCRR’s assets upon its dissolution; and (iv) can conduct thorough audits and receive detailed information in statutorily mandated reports. Id. ¶ 19. Indeed, the State’s control over NCRR is such that it once ordered payment of a $15 million dividend to the State, and “has the right to approve or disapprove certain fundamental corporate decisions.” Id. ¶¶ 10, 40.

While the Court allows that “the Railroad has enjoyed and continues to enjoy a number of benefits from its relationship with the State” (Id. ¶ 38), it cautioned that it would place “impermissible weight” on its analysis to effectively double-count “the fact that the State is the Railroad’s sole shareholder” and also that the State gets to take the actions and make the decisions that such a single shareholder can. Id. ¶ 40. Here’s how the majority set forth this newly announced “divisibility” doctrine of State actions that might trigger the Public Records Act:

“Simply put, most of the information upon which the SELC relies in seeking to persuade us that the Railroad should be deemed subject to the Public Records Act is the direct result of the State’s status as the Railroad’s sole shareholder rather than the exercise of the State’s sovereign authority.”

Id. Thus, the Court adopts a standard under which the State can be deeply intertwined into a private corporation’s activities, but nonetheless avoid public scrutiny of corporate actors like NCRR which frequently engage in matters that impact transit policies and projects across the state. In a gentle nod to the majority’s author, the dissent notes that legendary senator and Watergate interlocutor Sam J. Ervin, Jr. (Justice Ervin’s grandfather) might well have found the Court’s approach at odds with the ”uncontestable pre-condition of democratic government that the people have information about the operation of their government.” Id. ¶ 61.

Indeed, the “form versus substance” dialogue between the majority, dissent and the parties takes on a central role in the Court’s decision. The majority rejects SELC’s argument “that the nature of the State’s authority over the Railroad, rather than the source of that authority, should be deemed controlling.” Id. ¶ 41. Instead, it held that “authority derived from some other source” – here, as a solo shareholder – predominated over any purported exercise of “sovereign authority” by the State. Id. Justice Earls found that analysis to exalt form over the reality of how enmeshed the State is with NCRR:

“When the State owns the corporation, appoints its board, mandates its reporting, spends its revenue, and stands to receive the assets in the event of dissolution, we should recognize the obvious truth that the identity of the corporation, and its sole shareholder – the State – are meaningfully intertwined. NCRR’s argument – that the activities of this kind of corporation can be hidden from scrutiny by the people of North Carolina – is a self-interested attempt to cleave its public business from its public responsibilities. Today’s decision gives that attempt the force of law.”

Id. ¶ 55.

The Court also notes it was influenced by several bypassed opportunities the General Assembly has had to show that it considered NCRR “to be a government agency or subdivision that was subject to the Public Records Act.” Id. ¶ 34. Among these data points was the legislature’s allowance of NCRR board members to get D&O insurance coverage through the State’s policy without designating the Railroad as a public body; and NCRR being granted the eminent domain authority of a private, rather than a public, condemnor. N.C.G.S. § 40A-3(a)(4). ¶ 35. Yet, the dissent laments that the majority’s search for legislative intent in parallel enactments is not paired with “any meaningful evaluation of the scope and purpose of the Public Records Act.” NCSC 84, ¶ 59.

The Court’s decision in SELC v. NCRR also is notable for its adoption of a modified standard for judging when the State is so involved in a private entity that it triggers the public’s oversight through the Public Records Act. Like the Business Court, below, the Supreme Court found that the existing standards that have guided this analysis were insufficient to meet the circumstances. Previously, the benchmarks were set by two Court of Appeals cases: News & Observer Pub. Co. v. Wake Cty. Hosp. Sys., Inc., 284 S.E.2d 542, 548 (1981) (9-factor analysis that probes “the nature of the relationship between the [entity] and the [government]”) and Chatfield v. Wilmington Hous. Fin. And Dev. Inc., 603 S.E.2d 837, 840 (2004) (cautioning that in such analyses “each new arrangement must be examined anew and in its own context.”).

The majority concluded it was “not prepared to conclude that the nine factors delineated in News & Observer should be treated as outcome determinative,” and instead “recognize[d]” that the Court of Appeals actually endorsed in the two cases a “totality of the circumstances approach” that relies on a whole record analysis of whether “the government exercised such substantial control over the operations of the relevant entity[.]” NCSC 84, ¶ 29. Justice Earls wryly observed the necessity of this new approach in dissent, noting that “if we were to apply the rule which has been the law in our state for the past forty years, NCRR falls firmly” within the meaning of an agency under the Public Records Act. Id. ¶ 62.


  • The decision is likely to lead to increased litigation over public oversight of public-private partnerships that conduct historically government-themed work in the public’s interest. As Justice Earls warned in dissent, the Court’s ruling could “create formalistic hideouts” for such enterprises “to escape scrutiny.”
  • Lack of public scrutiny into NCRR’s activities comes at an inopportune time for the State, as political and community tensions rise over the role of public transit in energy and climate debates.
  • The Supreme Court tends to affirm Business Court decisions per curiam without opinions. Perhaps that’s not the case here simply because there was a dissent, but it bears watching as litigants weigh the value of per curiam affirmances.

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

Large Settlement Led to a Big Plot Reveal: The Agreement was Never Executed

Rule 1.5(c) of the North Carolina Rules of Professional Conduct provides protection to clients with its requirement that “[a] contingent fee arrangement shall be in a writing signed by the client.”  In Rossabi Law PLLC v. Greater Greensboro Ent. Grp., LLC, 2021 NCBC 31, the Business Court considered what happens when a client turns the rule against its lawyer to block recovery of a fractional share of a settlement.

Plaintiff represented a defendant entity that operated the Cone Denim Entertainment Center (CDEC), a concert venue in downtown Greensboro. In summer 2017, the City of Greensboro advised that it had purchased property behind CDEC and intended to condemn the access easement and terminate the public parking arrangement that benefitted the property owned by defendant N Club, LLC on which CDEC operated. ¶ 12.  The key dispute before the Business Court arose from a latent dispute about the lawyer-client relationship formed to defend against the condemnation.

The City and N Club entered a review agreement under which the City would reimburse N Club as much as $45,000 for expenses associated the City’s condemnation plan, including potential attorneys’ fees. When the City took its proposed actions a few months later, its Council adopted a resolution that included payment of attorneys’ fees.  Id. ¶¶ 14, 16.  The lawyer-client dispute revolved around the nature of their relationship after the City’s condemnation action.

The Rossabi law firm believed after that point it represented defendants on a contingent basis in legal action against the City over the condemnation and parking termination. The Business Court’s opinion recites that a member of defendant Greater Greensboro Entertainment Group (GGEG) – Rocco Scarfone – asked for the contingent structure, told Plaintiff he would execute the Contingency Agreement that was delivered to him, later indicated he had signed it, and acknowledged the arrangement at a mediation. Id. ¶¶ 19, 22-24.

Scarfone and plaintiff’s managing partner, Amiel Rossabi, had agreed not to tell the City about the contingent arrangement over fears it would dampen their potential recovery at mediation. Thus, they negotiated for the City to pay $85,000 in attorneys’ fees as a term of settlement, with the parties to bear the costs of any other fees and expenses. Id. ¶¶ 25-27. Yet, after the parties reached a mediated settlement of approximately $1 million, the contingent arrangement was promptly more illusory than celebratory.

Defendants alleged that Scarfone could not approve the contingency agreement without agreement of another member, Jeffrey Furr, and stated that neither of them had, in any event, signed it. The about-face was especially notable because Rossabi was also a member of GGEG and had been its legal counsel for more than 10 years. Id. ¶¶ 8, 11. Yet, financial warfare in the entertainment industry is hardly a new script.  As legendary television executive Don Ohlmeyer once observed:

“The answer to all your questions is: Money.”

The Court was thus faced with (i) defendants who allegedly suborned the belief of their counsel and fellow LLC member in a non-existent contingency agreement, and (ii) its own precedent that non-compliance with ethical Rule 1.5 likely dooms a contingent fee arrangement.  See Dunn v. Dart, 731 S.E.2d 274 (N.C. App. 2012) (affirming a Business Court decision that a fee agreement was unenforceable absent Rule 1.5 compliance).

Judge Robinson noted as “erroneous” the claim by defendants that it was undisputed there was no signed contingency agreement. ¶ 51.  The Court observed that whether Scarfone signed the agreement “is a genuine issue of material fact that the Court is unable to resolve without considering the credibility of Rossabi and Scarfone, which is inappropriate” at the summary judgment stage. While Judge Robinson confirmed that plaintiff would still need “to establish the execution and validity” of a contingency agreement, the Court allowed the breach of contract and perhaps more important quantum meruit claims to proceed.  ¶¶ 55-56.

Epilogue:  The Business Court has set a July 8, 2021 video hearing to consider defendants’ reconsideration motion that contends the Court committed “clear error” in interpreting GGEG’s Operating Agreement to grant Scarfone the authority to have executed, alone, a binding contingency agreement that may or may not ever be discovered. Popcorn is optional for that one.

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

As a still-young judicial panel, the Business Court frequently has an opportunity to define its boundaries in the face of challenges to its jurisdictional reach. In Inhold, LLC v. PureShield, Inc., 2021 NCBC 2, the Court considered a trade secret misappropriation fact pattern common to its docket: alleged informational theft and skullduggery among industry combatants. The jurisdictional test came when plaintiffs sought to amend their complaint to include a related dispute about the scope of rights defendant PureShield had obtained from multiple patent licenses.

Defendants claimed that the patent disputes arose under federal law and were thus beyond the Business Court’s jurisdiction. Instead, they preferred resolution of the patent issues in a Middle District of North Carolina action they filed shortly after plaintiffs sought leave to amend the state court action.

The issue before the Business Court was whether a contract dispute over patent enforcement rights nonetheless arose under federal law. The Court noted the United States Supreme Court’s guidance that only a “special and small category” of actions would meet the test for federal jurisdiction to lie over a state law claim, when a federal issue is:

“(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”

Id. ¶ 12 (quoting Gunn v. Minton, 568 U.S. 251, 258 (2013)).

The Business Court acknowledged the defendants identified issues regarding the construction and assignability of the patents that were governed by federal law. ¶¶ 13-14. But the key factor for the Court was whether, aside from these identified issues of patent law, “[T]here are reasons completely unrelated to the provisions and purposes of the patent laws why the party may be entitled to the relief it seeks[.]” Id. ¶ 15. The Court readily identified grounds under state contract and corporate law under which plaintiffs’ claims could be resolved without reference to federal patent law. Thus,

“The upshot is that the Court could grant relief to Plaintiffs on these state-law theories `without ever reaching a patent law issue.’”

¶ 18.

Moreover, the Court held the case did not raise “substantial” issues of federal patent law where the effect of its outcome “would be limited to these patents and these parties.” Here, the contractual relationships of the parties predominated over the implicated provisions of patent law. Id. ¶ 22.


  • A well-pled state law claim arises under federal law “only when every legal theory supporting the claim requires resolution of a federal issue.”

Preemption/Noerr-Pennington Immunity

Plaintiffs’ proposed amendment also raised claims for tortious interference and defamation based on allegations that defendants improperly raised patent rights they did not possess in cease-and-desist letters and other communications to third parties. The Business Court adopted the analysis of several federal courts that such state law claims are not preempted when they rely on allegations of false or bad-faith claims to patents. Id. ¶ 26. Further, Judge Conrad also rejected defendants’ claim that their preemption argument based in federal patent law stripped the Court of jurisdiction over the interference and defamation claims. “Preemption,” the Court reminded, “is a defense and therefore does not create arising under jurisdiction.” Id. ¶ 27 (citing Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988)).

First to File Rule

The Court wryly observed that defendants had not gone so far as to claim that the federal case they filed in the Middle District promptly after plaintiffs sought leave to amend in the Business Court was a first-filed action that should take precedence. A good thing, the Court said, because a defendant should not be able “to bring a declaratory suit involving overlapping issues in a different jurisdiction as a strategic means of obtaining a more preferable forum.” Id. ¶ 33 (quoting Coca-Cola Bottling Co. Consol. v. Durham Coca-Cola Bottling Co., 541 S.E.2d 157, 164 (2000)).

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

In March, the concept of nominal damages (often just a single dollar awarded to a plaintiff to represent a defendant’s liability in the absence of actual damages) took center stage at the highest courts of both the country and this state.  The results in both courts placed a potential value on nominal damages that far exceeds a single dollar.

On March 8, the Supreme Court of the United States issued an opinion holding that a request for nominal damages alone is sufficient to keep a plaintiff’s cause of action for a constitutional violation alive, even if there is no allegation of actual damage and the challenged law or policy has been discontinued.  See Uzuegbunam v. Preczewski.  The decision was notable for a number of reasons, including that it marked the first time in his fifteen years on the Court that Chief Justice Roberts issued a solo dissent.  (In full disclosure, co-author of this blog post Patrick Kane co-authored an amicus brief in that case on behalf of a group of local government advocacy groups.)  Thus, it is now settled that plaintiffs alleging a past constitutional harm need not have suffered any actual damages, and need not have the specter of further constitutional harm, in order to pursue a ruling from a court as to whether their constitutional rights were in fact violated.  The possibility of nominal damages satisfies the redressability requirement of standing and prevents mootness.

A week after Uzuegbunam was released, the Supreme Court of North Carolina in Chisum v. Campagna tackled its own nominal damages question, but in the realm of commercial torts.  Specifically, the Court considered whether state-law claims for breach of fiduciary duty and constructive fraud can be supported by nominal damages alone.  In a seventy-page opinion covering a variety of intracompany disputes and a substantial number of claims and counterclaims, the Court held in the affirmative: a plaintiff does not need to prove actual damages to succeed—and get punitive damages to boot—on a claim for either breach of fiduciary duty or constructive fraud.  Nominal damages alone will suffice.  However, just as the U.S. Supreme Court’s opinion in Uzuegbunam left some questions unanswered (e.g., Can a facial challenge to the constitutionality of a law that was never applied against the plaintiff, and has since been repealed, avoid mootness on the basis of nominal damages alone?  Can a government defendant moot a case by paying the nominal damages into the Court?), the Supreme Court of North Carolina’s opinion in Chisum also furthers some interesting discussion on the nominal damages front.

At its core, Chisum was a dispute concerning ownership interests in three limited liability companies.  The plaintiff, Mr. Chisum, claimed that the defendants, who were also members of the LLCs, systematically froze him out of the companies’ meetings and extinguished his interests in all three LLCs.  In 2016, plaintiff sued to ascertain the status of his membership interests in the three LLCs.  He also brought several other claims against the defendants, including direct and derivative claims for breach of fiduciary duty and constructive fraud.  The defendants successfully moved to dismiss the plaintiff’s direct claims, leaving only the derivative claims to proceed to trial.  At trial, the jury separately considered the breach of fiduciary duty and constructive fraud claims as to each of the LLCs.  Of significance to the appeal, the jury found that with respect to one of the LLCs, Judges Road, the defendants had taken advantage of their position of trust and confidence in a way that benefitted themselves (encompassing the substantive elements of the claims for breach of fiduciary duty and constructive fraud).  However, the jury also affirmatively found that Judges Road had not suffered any actual damages from the defendants’ tortious acts.  Instead, the jury awarded only nominal damages of $1.00—but then tacked on $600,000.00 in punitive damages.

Following the jury verdict, the defendants filed post-trial motions arguing, in part, that judgment should be entered in their favor with respect to the derivative claims for breach of fiduciary duty and constructive fraud because plaintiff failed to prove actual damages arising from those claims.  Additionally, the defendants argued that without proof of actual damages, the jury could not award punitive damages.  The trial court denied the post-trial motions.

Both parties appealed to the State Supreme Court – plaintiff appealing the trial court’s early dismissal of his direct claims, and the defendants appealing the final judgment finding derivative liability for those same torts—breach of fiduciary duty and constructive fraud.  (There were a number of other issues appealed as well; this post focuses only on the two above.)

The Court’s opinion addressed these issues in reverse order, first resolving the defendants’ appeal of the final judgment, and later adjudicating plaintiff’s appeal of the pre-trial dismissal of his direct claims.

The defendants asserted that because there was no record evidence that Judges Road had suffered actual damages, an essential element of the tort claims was lacking and therefore plaintiff (suing derivatively on behalf of that LLC) could not prevail.  According to the defendants, nominal damages alone could not support those claims.

The Supreme Court disagreed.  The Court acknowledged that the issue of whether a plaintiff must prove actual damages to succeed on a breach of fiduciary duty or constructive fraud claim was one of first impression for the Court, but noted that the North Carolina Court of Appeals had addressed the issue several times.  Those lower appellate court opinions had all concluded that nominal damages alone were sufficient to support not only a finding of liability on those claims, but some of those decisions had also held that nominal damages were a sufficient peg upon which a jury could hang punitive damages.  In affirming the trial court’s denial of the defendants’ post-trial motions, the Supreme Court stated:

We adopt the reasoning of the Court of Appeals and hold that potential liability for nominal damages is sufficient to establish the validity of claims for breach of fiduciary duty and constructive fraud and can support an award of punitive damages.  Aside from the fact that nothing in the prior decisions of this Court indicated that proof of actual injury is necessary in order to support a claim for breach of fiduciary duty or constructive fraud, we see no basis for treating the incurrence of nominal damages as a second-class legal citizen in this context, particularly given that such damages do reflect the existence of a legal harm and the fact that the policy of North Carolina is to discourage breaches of fiduciary duty and acts of constructive fraud.

In so holding, the Court pronounced a rule of law for North Carolina that actual damages are not a necessary element of breach of fiduciary duty or constructive fraud claims; the nominal damages that are attendant to any alleged breach or constructive fraud are sufficient for those claims to proceed to a jury and will allow a jury to award punitive damages.

After addressing some additional issues, the Court then reached plaintiff’s challenge to the Rule 12(b)(6) dismissal of his individual claims.  Plaintiff argued that the dismissal was improper because the claims were authorized by Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 324 (1997).

[As a bit of background, shareholders of corporations or members of LLCs typically do not have standing to pursue direct, individual causes of action against third parties for injuries suffered by the entity.  Instead, the shareholder/member may usually only bring claims derivatively on behalf of the entity.  In Barger, however, the State Supreme Court carved out two main exceptions to this rule, thus giving shareholders/members the potential ability to pursue certain direct claims.  Under Barger and its progeny, a shareholder may bring a direct claim against a third party for an injury that directly affects the shareholder if (1) the third party owed the shareholder a special duty; or (2) the shareholder’s injury was separate and distinct from any injury the entity itself sustained.  Here, plaintiff argued that the latter exception was applicable to his claims because the defendants, among other things, attempted to freeze him out of the LLCs and he therefore had an injury separate and apart from the claims of the LLC.]

But the Court never reached a Barger analysis.  Instead, the Court identified a more fundamental problem with plaintiff’s direct claims: he failed to allege any “legally cognizable injury” to support his breach of fiduciary duty or constructive fraud claims to begin with.  The Court noted:

to successfully assert a claim for breach of fiduciary duty, a plaintiff must show that: (1) defendants owed the plaintiff a fiduciary duty; (2) the defendant breached that fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury to the plaintiff.  Similarly, the assertion of a successful constructive fraud claim requires a plaintiff to show that he or she sufferance an injury proximately caused by a defendant’s [acts].

Upon review of plaintiff’s allegations, the Court concluded that his “breach of fiduciary duty and constructive fraud claims fail because of his failure to demonstrate that he sustained a legally cognizable injury.”  Thus, because he did not “show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud,” the Court held that it need not address whether that alleged injury was separate and apart from the damages suffered by the LLCs (i.e., the Barger analysis), and affirmed the trial court’s dismissal.

The Court’s ruling on this issue is seemingly straightforward: if a plaintiff does not allege injury or damage from a defendant’s alleged breach of fiduciary duty or act of constructive fraud, then the claim must fail.  So the question arises:  how does that ruling interact with the Court’s earlier holding on the derivative claims?  In rejecting the defendants’ argument that the trial court should have entered judgment in their favor because plaintiff proved no actual damages, the Court unequivocally held that actual damages are not required for a breach of fiduciary duty or constructive fraud claim—nominal damages alone suffice.  Thus, why would plaintiff’s lack of injury doom his direct claims?  Couldn’t plaintiff at least recover nominal damages if he could prove the defendants’ breach and/or constructive fraud?  After all, the Court held that nominal damages were available on the derivative claims for the same torts and that those nominal damages represented the “legal harm” that existed from the defendants’ alleged acts.  But as to the direct claims, the Court held that plaintiff had not alleged a “legally cognizable injury.”

The opinion’s language makes this issue even more thought-provoking. The Court stated that “in attempting to demonstrate the existence of the requisite injury,” plaintiff claimed that the defendants had attempted to “freeze him out of the LLCs, conducted sham capital calls, acted as if he was no longer a member of the LLCs, and treated him in a manner inconsistent with his status as a member of [the LLCs].”  The Court then explained that “instead of showing the existence of a legally cognizable injury, the facts upon which [plaintiff] relies simply describe the steps that the [defendants] took to deprive [plaintiff] of his ownership interests…and do not show the sort of injury that is necessary to support claims for breach of fiduciary duty and constructive fraud.”

But what specifically is the “requisite injury” and/or “sort of injury” necessary to support these claims?  If one reads the earlier holding on the derivative claims to mean that no injury is necessary to support these claims, then one could argue that the alleged acts supporting the direct claims are harmful in their own right, and give rise to nominal damages.  And if that were so, the acts the defendants allegedly took to deprive plaintiff of his ownership interests, if determined to be a breach of fiduciary duty and/or constructive fraud, would entitle him to nominal damages and the claims arguably should have survived dismissal.

So how are these rulings reconciled?  One possible theory is that the potential contradiction can be explained by the distinction between direct claims of an individual and derivative claims of a business entity.  Perhaps the Court felt that plaintiff’s purported allegations of damages or legal harm were really harms felt by the LLCs themselves, and thus not “legally cognizable” to support any direct claims by a shareholder like plaintiff.  Then again, that rationale is reminiscent of the Barger analysis, and the Court expressly disclaimed performing that analysis: “Since [plaintiff] has failed to establish a legally cognizable injury as the result of the [defendants’] conduct, we need not determine whether any injury that [plaintiff] might have suffered was separate and apart from any injury suffered by [the LLCs]”.

Or does the explanation perhaps lie in the standard of review for a pleading versus a jury determination?  After all, nominal damages historically developed in part as a legal fiction to be awarded after a jury found a defendant liable for the acts alleged, but found no actual damages.  Does Chisum follow that path by holding that a plaintiff asserting North Carolina state law claims of breach of fiduciary duty and constructive fraud still must allege actual damages to get those claims to trial, but nominal damages can support a jury verdict (and be a peg upon which punitive damages are hung) if those alleged actual damages ultimately are not proved at trial?  Under this theory, the availability of nominal damages saved the derivative claims in Chisum because there had been allegations of actual damages to get the claims before the jury, but the possibility of nominal damages could not save plaintiff’s direct claims from a motion to dismiss when there were no actual damages alleged to have been caused by the torts from the outset.

Finally, what does this decision mean for future cases with claims of breach of fiduciary duty and constructive fraud outside of the corporate setting—can those claims proceed even in the absence of any actual damages and on the basis of nominal damages alone?  If you have thoughts on any of this, we’d love to hear them in the comments section below.

**Note: After the issuance of the Chisum opinion, the defendants moved the Supreme Court for rehearing, but that request was not based on the issues above—it was based on whether plaintiff’s declaratory judgment claims regarding the LLCs’ operating agreements were barred by the applicable statute of limitations (the Court had held that they were not).  The motion for rehearing was denied.

–Patrick Kane and Ashley Chandler

[This post is cross-posted on Fox Rothschild’s North Carolina Appellate Practice Blog]

What exactly is the “securities transaction” exception to a UDTP claim?  As highlighted by the Business Court’s recent decision in Aym Technologies, LLC v. Scopia Capital Management, LPC et al., 2021 NCBC 20B (N.C. Super. Ct. Mar. 31, 2021), it can be a potent defense against the UDTP claims we see litigated—perhaps too frequently—in the Business Court and elsewhere across the state.

 A.    What is the “Securities Transaction” Exception?

For those unfamiliar with it, the securities transaction exception operates essentially as a defense to a UDTP claim.  Where applicable, it effectively removes the subject transaction from the purview of G.S. § 75-1.1, the statute that creates and governs UDTP claims, by defeating the “in or affecting commerce” element of a UDTP claim.

But why?  The rationale for the securities exception is simple enough: securities transactions are heavily regulated, both federally (under the Securities Acts of 1933 and 1934) and at the state level (under the North Carolina Securities Act).  Given this “pervasive and intricate regulation,” our courts have reasoned that private enforcement under § 75-1.1 (in the form of a UDTP claim) is unnecessary or superfluous.  Skinner v. E.F. Hutton & Co., Inc., 314 N.C. 267, 275 (1985).

Courts also have applied the exception in a second instance—where the transaction in question is an “extraordinary” business event, such as a company’s issuance or redemption of its stock.  HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 594 (1991).  The idea is that a UDTP claim requires a transaction “in or affecting commerce,” i.e., “regular, day-to-day business activities,” and extraordinary events are not regular business activities.  See id.  (One might also argue that at least some stock issuance and redemption transactions involve intra-company disputes, which typically fall outside the UDTP sphere because they are not “in or affecting commerce.”  See, e.g., Potts v. KEL, LLC, 2018 NCBC 24 ¶ 33 (N.C. Super. Ct. Mar. 27, 2018) (collecting cases holding that intra-company disputes do not support a UDTP claim)).

Applying these concepts, North Carolina courts consistently have held that transactions involving securities are outside the scope of G.S. § 75-1.1, and consequently cannot form the basis of a UDTP claim.  See, e.g., Skinner, 314 N.C. 267 (conceiving securities exception based on “pervasive” regulation rationale articulated with respect to commodities transactions in Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414 (1978), cert. denied, 296 N.C. 583 (1979)); HAJMM Co., Inc., 328 N.C. 578; Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52 (2001); White v. Consolidated Planning, Inc., 166 N.C. App. 283 (2004); Latigo Investments II, LLC v. Waddell & Reed Financial, Inc., 2007 NCBC 17 (N.C. Super. Ct. May 22, 2007).

A straightforward test has emerged: “the question is whether the transactions at issue involve securities or other financial instruments involved in raised capital.”  White, 166 N.C. App. at 304.  If so, the securities transaction exception applies.  Id.

B.   The Business Court Applies the Securities Transaction Exception in Aym Technologies.

Chief Judge Bledsoe applied the securities transaction exception in Aym Technologies.  (We have previously written on this litigation here.)  The plaintiff there moved to dismiss the defendants’ UDTP counterclaim, which alleged that the plaintiff had “misrepresented and failed to disclose material information” during negotiations that were “for the purpose of raising investment capital.”  Aym Technologies, 2021 NCBC 20B ¶ 58.  The Court made quick work of the UDTP claim, holding that because the alleged misrepresentations had been made as part of the capital-raising process, “the security exception applies.”  Id.

Although seemingly straightforward, the Court’s analysis of the securities transaction exception highlights an important point:  the exception may defeat a UDTP claim if either of the two “rationales” for the exception are present.  The Court indicated as much in addressing the defendants’ argument that the exception should not apply because raising capital was part of their day-to-day business activities (i.e., it was not an “extraordinary” event).  The defendants argued, essentially, that because their capital raising was a regular business activity—and therefore “commerce” within the meaning of G.S. §  1-75.1—the “in or affecting commerce” requirement was met.  The Court disagreed.  It explained that even if capital raising were a regular business activity of the defendants, it did not change the fact that their “investment solicitation of [the plaintiff] and any purchase and sale of investment securities that might have followed [were] likewise subject to extensive state and federal securities regulation.”  2021 NCBC 20B ¶ 59.

Stated differently, and framed in terms of the two “rationales” for the securities transaction exception described above, the Court’s analysis in Aym indicates that the exception will apply to foreclose a UDTP claim if either:  (1) a separate enforcement regime exists (e.g., the NC or federal securities acts) to regulate the subject transaction; or (2) the transaction constitutes an extraordinary event, i.e., is not a regular business activity.  And because the first rationale was present in Aym, the analysis ended there and it was of no consequence whether the second rationale also existed.

C.   What Does This Mean for UDTP Claims?

UDTP claims are frequently litigated in North Carolina, to say the least. As the Aym plaintiff pointed out, courts have taken note of the sometimes detrimental impact of such claims on litigation and even settlement prospects.  See Brewster v. Powell Bail Bonding, Inc., 2018 WL 74 ¶ 36 (N.C. Super. Ct. July 26, 2018) (observing that the “routine addition” of UDTP claims “driv[es] up the cost of litigation, tax[es] the resources of the Court, and expos[es] the plaintiff to a potential award of attorney fees” while “imped[ing] settlement discussions by introducing remedies (including treble damages) that would otherwise be unavailable, thereby distorting the parties’ incentives and their perceived risks”).

Given this reality, any arrow in the defense quiver is valuable not just to the defense but also to the courts in weeding out “add-on” UDTP claims and to the parties in working toward a resolution of their disputes.  The Business Court has reminded us that the securities transaction exception is one such arrow, representing a potent defense against UDTP claims, and at least in this instance that arrow hit its target.


Matt Krueger-Andes is a litigation associate in Fox Rothschild’s Charlotte office.