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.

 

 

 

Though challenges to Business Court designations, i.e. subject matter jurisdiction, are relatively common (see, e.g., Business Court Retains Case Even After ‘Jurisdictional Hook’ Claim is Dismissed), challenges to personal jurisdiction are less frequent.  So we noted with interest the North Carolina Supreme Court’s recent opinion on personal jurisdiction in Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. — , 838 S.E.2d 158 (2020), a rare reversal of a Business Court ruling. We also noted the results in a trio of Business Court rulings on personal jurisdiction that followed.

The two-step, “minimum contacts” analysis hasn’t changed much for more than a decade. Personal jurisdiction must comport with: (1) North Carolina’s long-arm-statute and (2) due process. Relying on cases we read about in law school, these new opinions don’t really change the analysis, they explain which contacts are relevant and why. For example, seemingly tangential contacts with the forum itself are also important (e.g., submissions to the Secretary of State). And contracting with a foreign defendant may not be enough, especially if that contract requires performance outside North Carolina.

In a series of PJ posts, we’ll dig into these new opinions, and we’ll highlight what they add to the “minimum contacts” analysis. We begin today with the Supreme Court’s decision in Beem.

Cutting ties with NC post-breach doesn’t matter. For breach claims – contacts throughout performance are relevant (not just contacts during the breach).

Beem USA Limited-Liability Ltd. P’ship v. Grax Consulting, LLC, — N.C. — , 838 S.E.2d 158 (2020) reversed a Business Court ruling on personal jurisdiction, broadening the proper view of relevant contacts. When breach of duties are alleged, a court should consider contacts throughout performance, not simply contacts during the period of alleged malfeasance. This ruling gives important, practical meaning to contacts that “arise out of” or “relate to” claims. Here’s a brief discussion of the case.

The partnership.

The plaintiff, Beem USA, was a Nevada limited partnership with two partners: Stephen Stark (from Chapel Hill, a co-plaintiff) and Grax Consulting (from Rock Hill, SC, the defendant). Grax was Beem USA’s general partner, and Stark was the limited partner. Grax had regular contacts with Stark (in North Carolina) on partnership business, including frequent emails, calls, texts, and regular mail. Grax also set up a bank account at a North Carolina branch into which it made deposits and initiated wire transfers.

The partners got sideways.

After less than two years of operations, Grax was removed as general partner, and Stark tried to take over; but Grax refused to give up control. Beem USA and Stark filed suit against Grax alleging breach of the partnership agreement and fiduciary duties, demanding that Grax cede control.

Business Court: No PJ, because there were no NC contacts during period of malfeasance.

Grax failed to appear and was defaulted. Before final judgment was entered, the Business Court assessed the threshold question of whether it had personal jurisdiction over Grax – a South Carolina entity. After taking evidence from the plaintiff, the Business Court ruled that it lacked personal jurisdiction because Grax’s questionable conduct (refusing to give up control, etc.) necessarily occurred after Grax was removed as general partner, and plaintiff provided no evidence that Grax had any contacts with North Carolina after it was removed. The Business Court reasoned that Grax’s alleged malfeasance, therefore, did not involve conduct that was directed to North Carolina. Beem USA and Stark appealed to the North Carolina Supreme Court.

Supreme Court: Yes PJ, because there were ample contacts throughout period of performance.

The Supreme Court reversed.   It explained that the Business Court’s focus on contacts only during the period of alleged malfeasance, i.e. after Grax was removed as general partner, was too narrow. Instead, the court should have considered Grax’s contacts with North Carolina throughout the period of performance. Grax’s regular emails and calls, the bank account, etc.  were contacts with North Carolina made in Grax’s capacity as a partner in Beem USA, and the claims in the lawsuit all concerned Grax’s alleged breach of duties as a partner. “As a result, plaintiffs’ claims alleging breach of the partnership agreement and breach of fiduciary duty ‘arise out of’ or, at the very least, ‘relate to’ Grax’s contacts with North Carolina.” Beem, 838 S.E.2d at 164 (quoting Helicopteros).

Takeaway: Contacts throughout the period of performance are relevant – not just those during the breach.

This ruling gives practical meaning to contacts that “arise out of” or “relate to” claims in a lawsuit. In particular, it addresses when contacts with North Carolina are relevant.  If claims involve breach of duties, relevant contacts include those occurring throughout performance, not just those occurring during breach.

Within two weeks of Beem, Business Court Judges issued three more rulings (two opinions and an order of significance) deciding motions to dismiss for lack of personal jurisdiction. Those additional PJ rulings will be discussed in future posts.

Business Court Retains Case Even After ‘Jurisdictional Hook’ Claim Is Dismissed.

We know that only certain types of claims can trigger Business Court jurisdiction. See N.C.G.S. 7A-45.4. But what happens when the claim that establishes jurisdiction—the ‘jurisdictional hook,’ if you will—is dismissed? Can the case still proceed in the Business Court? That question was answered in Gallaher v. Ciszek, 2020 NCBC Order 7 (N.C. Super. Ct. Feb. 17, 2020). See Order.

Take-Away:

Once jurisdiction is established in the Business Court, the Court will retain jurisdiction even if the claim that formed the basis for jurisdiction is dismissed.

In Gallaher, the Plaintiffs asserted several claims against Defendants, none of which supported jurisdiction in the Business Court. The Defendants’ counterclaims, however, included a trade secrets misappropriation claim under N.C.G.S. § 66-152.

Ever attuned to Business Court jurisdiction, the Plaintiffs used the trade secrets claim to designate the case as a Business Court case pursuant to N.C.G.S. § 7A-45.4(a)(8) (providing for Business Court jurisdiction over “[d]isputes involving trade secrets”). The case was thereafter designated as a mandatory complex business case by the Chief Justice of the North Carolina Supreme Court and assigned to Judge Bledsoe, the Business Court’s Chief Judge.

Defendants then had second thoughts about their trade secrets claim—or perhaps about litigating the case in the Business Court. Defendants voluntarily dismissed their trade secrets claim and, the same day, filed an opposition to Business Court designation on the grounds that no remaining claim supported Business Court jurisdiction.

In a succinct, 3-page order, Chief Judge Bledsoe held that the case would stay in the Business Court—notwithstanding the dismissal of the trade secrets claim. Judge Bledsoe explained that the case had been properly designated based on the trade secrets claim, and that once “a case is ‘properly designated and assigned to a special superior court judge for complex business cases based on the [pleading] and the [notice of designation], [a party may] not render the designation and assignment improper by subsequent[] filing[s.]’” Gallaher, 2020 NCBC Order 7 ¶ 6 (citation omitted).

The lesson here: be mindful of whether your claims (or your opponent’s) provide a basis for Business Court jurisdiction. Even if a case is not brought in the Business Court, your counterclaims (or your opponent’s) could provide a ticket (or hook, depending on how you look at it) into the Business Court. And as the saying (now) goes, “once a Business Court case, always a Business Court case.”

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. 

 

 

Business Court Confirms a Right
To Invest in a “Second” Project
Extends No Further

At Fifth and Church streets in uptown Charlotte, a group of investors opened the aptly named restaurant, 5Church. Other locations and restaurant brands followed, the fifth of which – Sophia’s Lounge – landed next door to the original location in an adjacent hotel building. A falling out among the investment group led the Business Court, in Maurice Panzino v. 5 Church, Inc., et al., 2020 NCBC 13 (N. C. Super. Ct. Feb. 12, 2020), to resolve a breach of contract claim going strictly by the numbers. See Order and Opinion.

Plaintiff had been an original investor in 5Church, and by operating agreement had rights under a “first refusal” provision with regard to investment in the entity’s restaurant expansions.  Id. ¶ 6. Panzino claimed breach of this provision because he was not offered a chance to invest in the nearby Sophia’s, but the Court determined that the investment option did not extend beyond the group’s second outing, the now-departed South End restaurant Nan & Byron’s. It was all in the numbers, as the operating agreement limited Panzino’s option to invest only “[i]n the event of a second business to be operated after the commencement of [5Church].”  Id.

There was no dispute that Panzino was not offered a chance to invest in Sophia’s and the defendants contended this was appropriate because Sophia’s “was the fifth business opened, not the second.” Plaintiff was offered, and declined, an opportunity to invest in the group’s second restaurant, Nan & Byron’s. He argued that the “first refusal” provision should be read to provide investment options in all of the restaurant group’s future ventures.  Id. ¶¶ 7, 25.

The Court readily concluded that “second” didn’t mean fifth, or anything else besides what follows first. It followed the logic of a Western District of North Carolina case that found the provision “plain and unambiguous” in a related dispute involving 5Church investors:

“The ordinary meaning of `second’ is ‘coming next after the first in order, place, rank, time, or quality.’”

Kamel v. 5Church, Inc., 2019 WL 4024252, *8 (W.D.N.C. Aug. 23, 2019). The Business Court also rejected a request to examine extrinsic evidence to shed light on what the parties intended, noting that’s intended only “to clarify ambiguities not to create them.”  2020 NCBC 13, ¶ 28.

Takeaways:

  • The Court opted for a narrow, literal interpretation of a clause defining right of first refusal investment options.
  • The Court continues a trend of carefully parsing parties’ claims about what agreements say, and calling out litigants for expansive liberties taken in describing them.

Fiduciary Duty

Plaintiff also alleged breach of fiduciary duty and constructive fraud claims arising from defendant Patrick Whalen’s failure to disclose that the group intended to open a 5Church restaurant in Charleston, South Carolina. Each of the claims required a finding that Whalen owed a fiduciary duty to Panzino – an inquiry complicated by 5Church’s status as an incorporated entity that behaved and ran itself more like a limited liability company. The Court noted that while 5Church was a North Carolina corporation, it “has been governed much like a limited liability company.” That included a contract “styled as an operating agreement,” a manager instead of a board of directors, and references to members instead of shareholders. Id. ¶ 5. The Business Court found the formation “unusual,” but applied the operating agreement because “no one challenges [its] validity.” Id.

As the manager of 5Church, the Court found Whalen functioned akin to a corporate director who had duties to the corporation but not any one, or all, of the shareholders.  See N.C. Gen. Stat. § 55-8-30. The Court did not decide whether 5Church had the authority to contract for a non-statutory fiduciary duty (as an LLC would), but curtly rejected Plaintiff’s argument that the parties had intended to do so in an operating agreement provision regarding Whalen’s authority as manager.

The Court found that Panzino had taken considerable liberties in that argument, and flagged it:

“In his opposition brief, Panzino crops the first sentence in its entirety, omits the introduction to the second sentence, and then reads the last clause in isolation to impose new fiduciary duties by implication. That is not a reasonable interpretation.”

2020 NCBC 13, ¶ 18. (For another look at the Court’s scrutiny of parties’ claims about controlling documents, see our recent post, here.) The Court noted that MAP Management of Charlotte, LLC, a majority shareholder in 5Church, might have had a duty to protect the interests of Panzino as a minority shareholder. But, Plaintiff did not sue MAP, and Whalen’s participation in MAP did not impute duties MAP might have had to him, personally. Id. ¶ 20. Panzino attempted to remedy the problem by suing MAP for constructive fraud and breach of fiduciary duty in a separate action that was just recently designated to the Business Court.

Surviving Breach Claims

The Court allowed two breach claims to proceed to trial. Panzino argued that defendants had failed to make distributions required under the operating agreement during a period before he sold his remaining interests. Defendants argued that, without any proof of damages, summary judgment was appropriate. The Court declined, noting that proof of damages is not a breach of contract claim element. Id. ¶ 31. Plaintiff’s undisputed claim that 5Church did not provide specified monthly financial statements also advanced. The Court rejected application of the traditional rule that a shareholder can’t bring an action for damage to his or her shares because of a wrong to the entity. Here, Panzino’s claim survived because the agreement required the entity to provide information to him, and Plaintiff “seeks to enforce his own rights, and not those of 5Church.” Id. ¶ 34.

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

This afternoon North Carolina Business Court Chief Judge Bledsoe issued an Order confirming that the Order issued by Chief Justice Beasley last Thursday applies to cases in the North Carolina Business Court.   Judge Bledsoe’s Order contains comprehensive explanation as to what this means for current North Carolina Business Court cases and effectively suspends any and all deadlines in pending matters until at least April 17, 2020.  It also extends the deadline for hard copy filing of materials listed in Rule 5(d) of the North Carolina Business Court Rules in the clerk’s office of the county of venue until April 24, 2020.

The Order does not necessarily mean that all activity in the Business Court will come to a halt, however.  The parties in a specific case, with the consent of the assigned Business Court judge, may agree to deadlines prior to April 17, 2020.  Moreover, while no in person hearings or conferences may take place in NCBC cases prior to April 17, 2020, the assigned Business Court Judge to a case may convene telephonic or videoconference hearings or conferences with the consent of the parties.

A full copy of the Order can be found here.

–Patrick Kane

In the current coronavirus pandemic environment, many businesses and their insurance carriers are (or soon will be) looking at the issue of claims for “business interruption.”  While there is not a large body of caselaw in North Carolina or the Fourth Circuit devoted to such claims, below are summaries of a few cases that address this type of coverage.

In Prudential LMI Commercial v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992), the Fourth Circuit gave a concise summary of what business interruption insurance is:

Generally, business interruption insurance “is designed to do for the insured in the event of business interruption caused by [an insured peril], just what the business itself would have done if no interruption had occurred-no more….”

The Court also summarized how an insured must prove a claim for lost profits under business interruption coverage, citing cases from around the country:

In order to establish coverage for lost profits or lost earnings under business interruption coverage provisions, the insured must establish that: (1) the peril insured against occurred, (2) the peril caused damage to the business facility insured, (3) the damage resulted in a partial or complete interruption of business,; and (4) the business suffered a loss of earnings or profits as a direct result of the business interruption.

Colleton also addressed an interesting issue of causation.  The case involved a Charleston, SC motel that was shut down for a period of time after it sustained damage in 1989’s Hurricane Hugo.  The business sought lost profits that it contended it would have received from housing the influx of repair persons and construction workers that traveled into the area after the devastating storm.  The Court focused on the fact that the same event caused both the business interruption and the increase in visitors that the hotel missed out on housing, and for which they were claiming lost profits.  The Court emphasized that the purpose of business interruption insurance is to keep a business in the same position as it would have been if there had been no interruption.  In this case, the panel majority said that there existed “an intuitively-sensed logical flaw,” and that to have allowed the hotel’s lost profit claim based on the increase in visitors to the area would have resulted in a windfall for the insured.  Thus, since the purpose of business interruption insurance is to keep the insured in the same position as it would have been if the interruption not occurred, the Court held that the insurer was not liable for the claimed lost profits of the hotel: “the business interruption provision here in issue did not cover the specific claim for loss of net-profit from the peril-generated source relied upon.”

Colleton was not a unanimous opinion, however.  The dissent argued that coverage should not be affected by the fact that the cause of the interruption was the same as the cause of the uptick in profits that were not realized.  In the dissent’s view, only the loss to the insured should be considered, and the impact of the cause of that loss on the surrounding area was of no relevance to whether coverage existed:

The majority acknowledges that proof of an imminent general economic up-turn, or of a lost profit opportunity thwarted by the loss causing event, can justify recovery under a lost-earnings provision. I assume, then, that had the motel been destroyed by an isolated fire the day before Hugo hit, the majority would rule that lost profits would have been recoverable because the cause of the property loss (the fire) was not the same as the cause of the profit opportunity (the storm). Similarly, if gold were discovered the day after Hugo and the entire region filled with gold seekers (as well as relief workers), I assume that lost profits would be covered. Colleton had a lost profit opportunity (the dimensions of which the parties stipulated). Although Hugo caused both the property loss and created the profit opportunity, it does not strike me as an “intuitively-sensed logical flaw” to permit recovery under these circumstances.

The North Carolina Court of Appeals addressed a declaratory judgment action on a business interruption claim in Great American Ins. Co. v. Mesh Cafe, Inc., 158 N.C.App. 312 (2003).  That case also involved a hurricane, 1999’s Hurricane Floyd.  A restaurant that lost power and water for 24 hours as a result of the storm sought to recover income lost during that time under an insurance policy that covered  “loss of Business Income or Extra Expense, caused by the interruption of service to the described premises.”  At issue in the case was language in the policy that said “the interruption must result from direct physical loss or damage by a Covered Cause of Loss to the property described below,” followed by a list that included “Water Supply Services” and “Power Supply Services.”  The insurer argued that the damage to the business was caused by flooding, and that did not qualify as “direct physical loss or damage.”  For its part, the insured argued that its loss of power and water was a “direct physical loss,” and therefore coverage existed; it argued that under the policy’s wording, the “Covered Cause of Loss” list did not apply to “direct physical loss.”

The trial court held that coverage existed, and the Court of Appeals affirmed.  The Court of Appeals determined that whether coverage existed under the plain language of the policy was susceptible to different reasonable interpretations:

Whereas a reasonable person could understand the language “by a Covered Cause of Loss” to be a prepositional phrase modifying “direct physical loss or damage,” another reasonable person could understand “direct physical loss” to be an alternative to “damage by a Covered Cause of Loss” because of the conjunction “or.”

Therefore, because the policy language was ambiguous and the policy had been drafted by the insurer, whether there was coverage was to be construed in favor of the insured.

Mesh Café was not the Court of Appeals’ first foray into the world of business interruption insurance claim disputes.  In Harry’s Cadillac-Pontiac-GMC Truck Co, Inc. v. Motors Insurance Corporation, 126 N.C. App. 698 (1997), the Court analyzed whether a snowstorm that caused the insured’s dealership to be inaccessible for a week fell within the coverage provision for its business interruption insurance.  Importantly for that case, the snowstorm caused damage to the dealership’s roof that required repairs but the roof damage and the repairs did not cause an interruption in plaintiff’s business.   The interruption in business was caused solely by the business owner’s inaccessibility of the dealership due to the snowstorm.

The business income coverage provision in Harry’s Cadillac was as follows:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’  The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss.

The policy defined “A Covered Cause of Loss” as “risks of direct physical loss.”

The insured argued that its inability to access the dealership to conduct business because of the snowstorm caused it to lose profits in the same way it would have had the building been leveled by the storm.  In contrast, the insurer argued that, aside from the roof damage that did not cause business interruption, there was no “direct physical loss or damage” that resulted in a loss of business income.

The Court found that the business interruption clause in the policy “[did] not cover all business interruption losses, but only those losses requiring repair, rebuilding, or replacement.”  Based on that reasoning, the Court held that there was no coverage for the insured’s losses because the alleged lost business income was not due to damage to or the destruction of the property – it was caused by the business owner’s inability to access the dealership due to the snowstorm.  The Court stated:

Under the language of the business interruption clause of the policy, coverage is provided only when loss results from suspension of operations due to damage to, or destruction of, the business property by reason of a peril insured against.

Similar to business interruption insurance is event cancellation insurance.  Event cancellation insurance, generally speaking, provides coverage to protect single event revenue and expenses that are lost due to circumstances beyond the control of the insured.  With the multitude of event cancellations occurring due to Covid-19, this is sure to be at the forefront of the minds of event organizers and insurers everywhere.  For a North Carolina Court of Appeals case dealing with event cancellation insurance, see Defeat The Beat, Inc. v. Underwriters At Lloyd’s London, 194 N.C. App. 108 (2008).  That case highlights a potential difference between business interruption and event cancellation insurance, particularly when it comes to reimbursement for lost profits.

Keep checking back regularly with It’s Just Business, as we hope to continue to provide more information over the coming days and weeks on areas of law that are going to be impacting businesses and business litigators as we together navigate these unique and trying times.  Stay safe, stay healthy, and wash your hands.

–Patrick Kane and Olivia Fajen