On December 15, 2020, the North Carolina Business Court updated its Quick-Reference Guide for the North Carolina Business Court’s Electronic Filing System, a hyper-linked reference guide accessible from the Business Court’s website.

Of significance, the Court updated Sections 2.3 and 4.1.  Section 2.3.3 reflects file size limits, reminding filers that the file size limit for an individual document is 110 MB, but also notes that there is no file size limit for the number of filings that may be placed in the filing queue.  This is of particular importance for filers attempting to submit documents in excess of 110 MB, such as trial transcripts, deposition transcripts, or a record on appeal.  In a situation where a document is larger than 110 MB, the filer will have to split the document into several smaller documents (with appropriate labels).  However, because there is no limit on the number of filings that may be placed in the queue, the filer can submit all of these smaller, separate documents together in a single submission.

It is also worth noting that Section 2.3.4 makes an important clarification between “parent” documents and attachments.  When a filer is attempting to submit a document with accompanying attachments (such as exhibits to a motion or pleading), Section 2.3.4 sets forth the procedure for appropriately attaching these “sub” documents to the “parent” document.  When done correctly, a parent filing will have its own electronic filing number (ECF No.) and a “sub” document or attachment will have a subset of the parent’s ECF No.  For example, the first attachment to a “parent” document with ECF No. 25 will be assigned ECF No. 25.1.  The Filer Quick Reference Guide provides step-by-step instructions for how to correctly file such documents.

Section 4.1 further explains the Court’s preferences for e-filing, including the acceptable filing formats (.pdf for general filings and attachments; .rtf and.docx for proposed orders).  Section 4.1.2 also notes that filers need to pay particular attention to the drop-down fields when submitting documents.  Where appropriate, a filer will be able to label documents by type and title.  The Filer Quick Reference Guide reflects the Court’s preference that submissions have detailed title descriptions.

The Filer Quick Reference Guide is an invaluable tool for litigants and attorneys appearing before the Business Court and provides most answers to common e-filing questions.  It is important to take advantage of these readily-available tools, but to also take heed of any specific Court orders, such as case management orders, that differ from the defaults reflected in the Filer Quick Reference Guide.

Jeff MacHarg & Ashley Barton Chandler

In this order from Buckley LLP v. Series 1 of Oxford Ins. Co. NC LLC, Chief Judge Bledsoe dealt with dueling motions to compel.  Both sides claimed that their hybrid business-legal communications were privileged.  After an exhaustive review – Judge Bledsoe concluded that both sides were right, and wrong, and certain materials had to be produced.

Key takeaway: to protect intertwined business-legal communications, seeking (or providing) legal advice must be the “primary purpose.”  If the “primary purpose” isn’t legal—it probably isn’t privileged—even if lawyers are involved.

The Underlying Coverage Dispute

This is a coverage suit between a law firm, Buckley LLP, and its insurer, Oxford.  After misconduct was alleged against one of Buckley’s founding partners, Buckley’s Executive Committee followed the firm’s handbook and hired an outside law firm—Latham & Watkins LLP—to investigate.  While the investigation was underway, the partner accused of wrongdoing retired, taking his revenue with him.

Buckley filed a claim under a key-man policy with Oxford for loss of income caused by this attorney’s departure.  Oxford’s general counsel reviewed the claim, and ultimately denied it.  Coverage litigation followed.

As we previously reported, motions practice started early—with an Oxford motion to strike aspects of Buckley’s venomous complaint, which Judge Bledsoe denied.

Dueling Motions to Compel “Privileged” Communications

Both sides were suspicious of the other’s privilege decisions. This led to dueling motions to compel.

Buckley focused on the communications of Oxford’s general counsel who made the claim decision.  According to Buckley, the GC’s communications were not privileged because she was not providing legal advice when making the business decision to deny the claim.

Oxford, in turn, focused on the investigation conducted by Latham & Watkins.  Oxford argued that certain communications between Buckley and Latham were neither privileged nor work product because the investigation’s primary purpose was business-related.

Judge Bledsoe concluded that they were both partly right, and partly wrong.

Communications with general counsel were not automatically privileged.

Oxford’s GC explained that she never takes off her legal hat, that her claim decision was a legal one, and thus her materials and communications are privileged.  Not so, said Judge Bledsoe.

Judge Bledsoe noted that in house counsel, and general counsel in particular, wear many hats: claims reviewer, adjuster, supervisor, investigator, monitor, etc.—none of which are primarily legal.  Claims processing is a core business function of any insurer—involving factual investigation, policy review, and ultimately a decision.  This is far from a solely legal inquiry.  Thus, communications of and with Oxford’s GC are not automatically privileged.

In deciding which communications of Oxford’s GC, if any, were privileged, Judge Bledsoe reaffirmed and applied the “primary purpose” test.  Under this test, when it comes to hybrid, business-legal communications, if the primary purpose of the communication is business, then the communication is not privileged.

After an in camera review, Judge Bledsoe concluded most of the communications with Oxford’s GC were not privileged because they were made in her business role of reviewing the underlying claim.

Communications with law firm conducting an internal investigation are not automatically privileged.

Since Latham’s investigation was required by firm policy, Oxford argued that certain communications between Buckley and its investigator—Latham—were neither privileged nor work product because they involved business, not legal, issues.  Judge Bledsoe agreed.

Internal investigations are not automatically privileged—even if the investigations are handled by outside counsel.  The key questions are whether the investigation was related to rendition of legal services and whether the legal advice was a significant purpose of the investigation.

Judge Bledsoe concluded that since the investigation was required by the law firm’s policy, the investigation was primarily a business, not a legal, activity.  The fact that Buckley hired a law firm to investigate does not convert this business activity to a legal one.  The engagement letter—which broadly and vaguely stated the purpose of the investigation was to provide legal advice—could not create privilege protections for otherwise non-privileged communications.

After an in camera review, Judge Bledsoe ordered production of a swath of Latham-Buckley communications, including emails that were marked by the author as “Privileged and Confidential.”  Judge Bledsoe concluded that many of these emails, even those with privileged markings, were non-substantive (e.g., scheduling), primarily in furtherance of the investigation, and/or were unrelated to rendition of legal services.  Judge Bledsoe did note, however, that some of the Latham-Buckley communications were primarily for seeking or providing legal advice and thus were properly withheld.

Materials that are not prepared because of litigation are not work product.

Judge Bledsoe also ruled that several Buckley-Latham communications were not work product because they were not prepared because of the prospect of litigation.  Employee misconduct is routinely investigated.  Where the materials would be created irrespective of litigation, they are not work product.  Judge Bledsoe noted that none of the communications discussed the prospect of litigation, and none of the other Buckley witnesses testified that they believed the investigation would result in litigation.  The only evidence of anticipated litigation was the affidavit of the Latham attorney, but Judge Bledsoe was unconvinced.  Among other things, nobody explained how the investigation (or communications) would have differed had litigation not been anticipated.  In other words: litigation or no litigation, the investigation would have been the same.  Since the investigation was predominantly a business function and not done in anticipation of litigation, many of the communications with Latham were not protected as work product.

Some Lessons:

  • In-house counsel beware: Even if you always wear your “lawyer hat,” your communications are not automatically privileged.
  • “Privilege” headers can help, but the best way to protect communications is to make clear that the writer is either seeking or providing legal advice.
    • So, if you are the client writing to a lawyer,  try to make your request for legal advice explicit: “I would like your legal advice on the following . . .”
    • And if you are a lawyer responding to a client, do the same: “Here is my response to your request for legal advice.”
    • If nothing else, this will help keep privilege front of mind.
  • Use the phone.  This allows for better, two-way communication and, with the exception of calendar invites, is less likely to lead to privilege and production disputes.
  • Draft your engagement letters carefully. A broadly drafted engagement letter does little to inform whether a particular engagement is a business or legal engagement.  Here, for example, perhaps the result would have been different if Latham’s engagement letter expressly noted anticipated litigation.
  • When it comes time for redactions and privilege logs: be reasonable. Not all communications between attorney and client are substantive or privileged.  Judge Bledsoe ordered the production a number of emails discussing meetings and scheduling issues—none of which remotely involved the provision of legal advice.

Final Note on Appeal-ability:

Because this opinion affected a substantial right, it is immediately appealable.  To account for the notice of appeal period, Judge Bledsoe gave the parties thirty-five (35) days to comply with the Court’s order.  In setting this compliance period, Judge Bledsoe also took note of another tool in litigants’ arsenal: a motion to reconsider.  Such a motion could provide swifter resolution than a full-blown appeal, but Judge Bledsoe reminded counsel that the permitted grounds for reconsideration are quite narrow.  Litigators, therefore, take note: a motion to reconsider may result in quicker action from a court, but it should be used only with careful consideration of the grounds.

A group of mostly powerless Class B members in a utility services firm suspected its only Class A member of self-dealing, but their suspicions did not mate with corporate authority to do much about it. However, blessed with wide-ranging inspection and audit rights under an operating agreement, they pushed forward with requests to determine the company’s financial health and investigate its management.  In Richardson v. Utili-Serve, LLC, 2020 NCBC 83, the Business Court considered the fate of this corporate inquiry when the managing member’s response to the requests was to attempt to take away the Class B members’ right to ask for the information in the first place.

Defendant C. Lee Dietrich, armed with “all voting rights on all matters,” found it “in the Company’s best interest” to amend the operating agreement to negate all audit rights and curtail the inspection rights it afforded. Id. ¶¶ 5, 9. Yet, to pull off the “Lucy with the football” maneuver you have to snatch it before Charlie Brown gets there to kick it.

Dietrich’s unilateral amendment spawned multi-layered concerns by Judge Conrad, but the cleanest issue spot was that, by its terms, the amendment to revise the Class B member inquiry rights was made effective ten days after they had already been exercised. Id. ¶ 18. The football already was sailing through a clear blue sky.

Examining the pre-amendment operating agreement in the context of Dietrich’s refusal to comply with plaintiffs’ exercise of their audit and inquiry rights, the Court allowed the plaintiffs’ breach, and good faith and fair dealing, claims to survive a motion to dismiss. Id. ¶¶ 19-20, 24. Moreover, plaintiffs’ breach of fiduciary duty claim survived the usual bar on LLC members having such a duty to one another based on the allegations of Dietrich’s control of the company. In aid of plaintiffs’ effort, Dietrich helpfully referred to his control as “plenary power” on brief. Id. ¶¶ 26-27.

While the purported amendment could not eradicate the Class B members’ inquiry rights because it was not retroactive, Judge Conrad noted it could well be an unenforceable contract because of the “unilateral rights” Dietrich reserved to later modify his performance obligations:

In other words, construing the operating agreement to give Dietrich the power to amend it unilaterally and with no duty to do so in good faith would threaten the validity of the disputed amendment.

Id. ¶ 22. The Court observed that the North Carolina Court of Appeals has cast a wary eye at the validity of such provisions  See e.g., Sears Roebuck & Co. v. Avery, 593 S.E.2d 424, 432 (N.C. Ct. App. 2004) (“the power to unilaterally amend contractual provisions without limitation gives rise to an illusory contract.”).

The Business Court found it well within its mandamus authority to enforce the inspection requests whether under the statutory grant of N.C. Gen. Stat. § 57D-3-04(a), or under expanded rights – as here – that an operating agreement may afford. N.C. Gen. Stat. § 57D-2-30(b)(4). 2020 NCBC 83, ¶ 32. However, it declined to enter a mandatory preliminary injunction to require an audit because Judge Conrad identified no irreparable harm – particularly where the Class B members were receiving a broad production of data about the condition and conduct of the company through their inspection request.

Takeaways:

  • Unbounded manager authority in an LLC poses risks of unenforceability where performance benchmarks can be altered unilaterally.
  • When Charles Schulz retired from drawing Peanuts, even he felt a little bad about the illusory football kick: “You know, that poor kid, he never even got to kick the football. What a dirty trick.”

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

Effective November 5, 2020, the Business Court amended its procedure for litigants seeking designation to the Business Court for mandatory complex business cases.  See here.  Of significance, the Court changed Sections II(b)(i) and (ii), which address the specifications for providing a Notice of Designation (“NOD”) to the Court.

Section II(b)(i) requires the designating party to provide the Court with a file-stamped copy of the NOD to assist the Court in ascertaining the NOD’s timeliness pursuant to N.C. Gen. Stat. § 7A-45.4(d).  Section II(b)(ii) requires the designating party to try to send the NOD and all attachments in a single email by use of a zip file or a LiquidFiles file-sharing service.  Of practical note, LiquidFiles is now the only file-sharing site permissible for use by the Administrative Office of Courts.  Accordingly, court personnel will be blocked from accessing or opening files from other file-sharing sites.  Counsel and litigants, therefore, should be mindful of this change if they generally use other file-sharing sites.

The new Designation Procedure, as well as other special information and procedures for the Business Court, is available here.  Additionally, the Business Court provides the public with a Business Court FAQs section that addresses other commonly-asked designation questions.

Back at the start of the pandemic, this Blog took a brief look at how the anticipated flood of business interruption insurance claims might play out under North Carolina Law:  See here.

These cases are now winding their way through the North Carolina court system (but not the NCBC).  Fox commercial litigator Greg Holland has detailed one of the first dispositive opinions on this issue:

Over the last several months, business interruption claims have been a hotly contested issue across the country.  As the pandemic forced businesses to halt operations, many owners looked to their insurance policies seeking relief.  Many found, however, that policies excluded coverage and claims were denied.  The pandemic has been hard on many businesses.  The restaurant industry has been particularly hard hit.  See, e.g., https://www.businessinsider.com/85-of-independent-restaurants-could-permanently-close-in-2020-report-2020-6.  Likewise, insurance companies face a surge in business interruption claims and coverage litigation.

As with all such litigation, coverage depends on the terms of the specific policy in question.  Recently, a group of restaurants in NC filed a lawsuit against their insurance companies.  The restaurants sought a declaratory judgment that their lost business income and extra expenses caused by the response to the COVID-19 pandemic – including government mandated shut-downs and stay-at-home orders – were covered under their business interruption insurance policies. The recent decision in North State Deli LLC, et al. v. The Cincinnati Insurance Co., et al., Civil Action No. 20-CVS-02569, pending in Durham County Superior Court, may pave the way for some eventual relief.  A copy of the order is linked below.  The Court decided that the policy term “direct physical loss” included losses stemming from the insured’s inability to operate due to government imposed restrictions.

The policies in question did not include a virus exclusion, but the insurance company denied coverage.  The companies asserted that the purely economic losses were not covered, because the restaurants had not suffered an actual physical loss or alteration of their premises (such as when there is a fire or a flood).  Other jurisdictions have interpreted similar provisions that way.

The policies in question provided the insurance company would pay for business interruption coverage for lost business income and extra expenses “due to the necessary ‘suspension’ of your ‘operations’ … caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.”  A Covered Cause of Loss, according to the Court, was defined in the policies as a “direct loss unless the loss is excluded or limited therein.”  Further, the policies defined “loss” to mean “accidental physical loss or accidental physical damage.”  Thus, the Court concluded that the policies would afford coverage if a policy holder shows either direct accidental physical loss to property or direct accidental physical damage to the property.

Superior Court Judge Orlando Hudson (who many may recall as the presiding judge in the Netflix documentary, “The Staircase”) granted partial summary judgment to the restaurants.  First, because the terms “direct,” “physical loss” or “physical damage” were not specifically defined in the policies, the Court looked to the ordinary meaning of those terms to interpret the policies.  The Court determined that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause without the intervention of other conditions.”  The Court ruled that the loss of using or accessing their business property was precisely the loss caused by the government orders, and thus was a direct physical loss.

Second, the Court noted that the parties disputed the meaning of the phrase “direct physical loss,” rendering the policy ambiguous at best (and ambiguous terms are to be construed in favor of coverage).  Finally, the Court determined that in order to give meaning to all the terms of the policy, the insurance company’s argument that physical alteration or damage was required for coverage conflated the terms “physical loss” and “physical damage”.  If a “physical loss” also required actual alteration or damage to the premises, the term “physical damage” would be rendered meaningless.

Presumably the insurance company will appeal.  As noted, courts in other jurisdictions have ruled differently, and given the pandemic and the widespread attention these types of claims are receiving, this issue will continue to be hotly litigated across the country.  When it comes to insurance coverage, words matter.   Stay tuned.

Order Granting Motion for Partial Summary Judgment

–Gregory G. Holland

Effective new rules - businessman with signOctober 1, 2020, House Bill 679 amended Rules 3 and Rule 5 of the North Carolina Rules of Civil Procedure.  See here.  Of significance, Rule 5 was amended to make electronic mail, and e-filing where available, permissible forms of service in most circumstances.  Notably, HB 679 did not alter the “three day mailing rule” found in North Carolina Rule of Civil Procedure 6(e).  That rule, which allows for three additional days to be added to the time to perform an act after service by mail, therefore would not apply to the newly permitted service by email or e-filing.   In reaction to these changes, some practitioners pointed out that this created a contradiction, at least in practice, between the amended Rules of Civil Procedure and the North Carolina Business Court Rules.  Under NCBC Rule 3.9(d), service by email or e-filing (which the Business Court has allowed for years) was still treated as “service by mail” for the purposes of Rule 6(e) of the rules of Civil Procedure.  Thus, after the amendment to Rule 5 that, unaccompanied by an amendment to Rule 6(e), did not apply the “three-day rule” to service by email or e-filing in non-NCBC state court cases, the situation existed where in Business Court cases email and e-filing was still expressly treated as service by mail and Rule 6(e) applied, but in non-Business Court cases, the three day rule from Rule 6(e) did not apply to those same methods of service.

Not surprisingly, the North Carolina Business Court and Chief Judge Bledsoe were on top of the issue, and presented the Supreme Court of North Carolina (which pursuant to N.C.G.S. Section 7A-34 has the authority to and responsibility for any change the NCBC rules) with proposed amendments to the Business Court Rules.  Those proposed amendments would bring email and e-filing service in the Business Court in line with email and e-filing service in other state court cases, and eliminate the application of the three day rule in Rule 6(e) to Business Court electronic service.

Yesterday, the Supreme Court issued an Order doing just that.  Effective immediately, Rule 3.9 of the North Carolina Business Court Rules now no longer considers electronic service to be “service by mail,” and thus Business Court practitioners no longer need to (or “get to” perhaps?) add three days to their time to do an act after service by email or e-filing.  A copy of the Supreme Court’s October 13, 2020 Order can be found here.

One potential practical question that this amendment raised is what happens to deadlines in Business Court cases that were set under the old rule after recent electronic service, when (now-former) Rule 3.9(d) gave the  responding party three extra days, but the deadline to respond has not yet run.  Does that responding party still get those three extra days now that the rule that provided for those three extra days has been eliminated?  Well, the Business Court and Judge Bledsoe was on top of that too, today issuing an administrative order about the amendment to the NCBC Rules that made clear that the amendment applies to “response deadlines that commence on or after” the October 13 amendment, but not those that commenced before.  Further, the Court ordered that “the amendment shall have no effect on any deadline set in a scheduling or case management order in a pending Business Court case.”  This administrative order was sent to all those with user accounts in pending Business Court cases and will likely be available on the Court’s website shortly.is available on the Court’s website here.

–Patrick Kane

In ALC Manufacturing, Inc., v. J. Streicher & Co., 2020 NCBC 55, the Business Court dispatched a case that started off with bad timing, and ended that way too.

Plaintiff claimed defendant BBP Bandenia, PLC breached a settlement agreement under which it, and other parties, owed plaintiff $850,000. Plaintiff brought suit over non-payment, and while Bandenia was served it neither filed a response nor appeared in a Mecklenburg Superior Court case designated to the Business Court. Id. at ¶¶ 3, 5. The Business Court entered a default judgment on June 4, 2019.

Timing Issue No. 1: Bandenia waited seven months and thirteen days to move to set aside the default.

The Court found the motion was not brought “within a reasonable time” under Rule 60(b), but also noted that it was not the appropriate procedural vehicle in any event.  Bandenia’s challenge that the underlying settlement lacked consideration should have been advanced as “a properly-noticed appeal, not a motion under Rule 60(b). Id. at ¶ 10. The Court entered a final judgment on May 20, 2020 and that was the starting point for . . .

Timing Issue No. 2: Bandenia did not timely file a Notice of Appeal in the superior court of the county of origin.

Instead, defendant e-filed with the Business Court a Notice of Appeal of the May 20 judgment to the North Carolina Court of Appeals. Id. at ¶ 12. This time around, the June 19 notice could have been calendar timely – if it had been filed in the correct trial court and noticed to the correct appellate court. North Carolina appellate courts have viewed these issues with a reasonably strict lens. See, e.g., Taylor v. City of Lenoir 536 S.E.2d 848, 850 (N.C. Ct. App. 2000) (“The time deadlines set out in our appellate rules are important and should be followed.”).

The Business Court first noted its jurisdiction to entertain plaintiff’s motion to dismiss Bandenia’s notice of appeal because no appeal had yet been docketed in an appellate court. See Carter v. Clements Walker PLLC, 2014 NCBC 12. As the Court explained, “[U]ntil an appeal is docketed, the trial court retains jurisdiction to decide a motion to dismiss a notice of appeal as improperly filed.” 2020 NCBC at ¶ 19.

In granting plaintiff’s motion to dismiss Bandenia’s notice of appeal, the Business Court explained the errant geography of Bandenia’s appeal succinctly, as a cautionary note to practitioners before the Court.  Id. at ¶¶ 21-25, 27-29.

First, Rule 3(a) of the North Carolina Rules of Appellate Procedure required the Notice of Appeal to be filed in the originating court – Mecklenburg County Superior Court:

Any party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule.

Perhaps because Rule 3(a) is not a model of clarity for cases arising from the Business Court, the Court’s rules offer clarification. North Carolina Business Court Rule 14.1 specifies that the Business Court is not the filing destination:

An appeal from an order or judgment of the Court is taken by filing a written notice of appeal with the Clerk of Superior Court in the county of venue.

Second, as required by N.C. Gen. Stat. § 7A-27(a)(2), a direct appeal of a Business Court judgment in a mandatory designation case lies with the North Carolina Supreme Court for all cases designated to the Business Court after October 1, 2014. 2020 NCBC at ¶ 27.

The Court previously has concluded that while an appellate court “may have discretion to excuse a notice of appeal’s noncompliance with Appellate Rule 3,” the Business Court believes it does not have such leeway. Id. at ¶ 29 (citing Zloop, Inc. v. Parker Poe Adams & Bernstein, LLP, 2018 NCBC 39). Thus, litigants who see an opponent take a wrong turn on either of these issues may wish to consider prompt motions to dismiss in the Business Court.

Our colleagues Beth Scherer and Matt Leerberg, over at the North Carolina Appellate Practice Blog, discuss both of these pitfalls in their excellent treatise – North Carolina Appellate Practice and Procedure, § 33.05 (Special Considerations When Noticing Appeal in the Business Court) North Carolina Appellate Practice and Procedure (2019).

Takeaways:

  • Appeals of Business Court judgments can only be filed in the county of venue.
  • Appeals from Business Court cases with mandatory designations after October 1, 2014 lie with the North Carolina Supreme Court.

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

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


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

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

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

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

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

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

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

Id. at ¶ 42.

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

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

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

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

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

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

2020 NCBC at ¶ 59.

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

Takeaways:

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

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

 

 

 

 

 

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

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

Court also Addresses Res Judicata Effect of Prior DeclaratoryJudgment Rulings

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

The vitality of crossclaims after a plaintiff’s claims fall

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

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

Affirming correct results reached for the wrong reason

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

Applying claim preclusion to prior declaratory judgment rulings

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

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

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

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

Dismissal of crossclaims with prejudice

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

Takeaways:

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

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