The Compass

The Compass

Charting Business and Technology Litigation in North Carolina and the Fourth Circuit

NC Supreme Court Reminds Court of Appeals That Typical Lender-Borrower Relationship is Not a Fiduciary One

Posted in Uncategorized

The North Carolina Supreme Court recently reaffirmed that a run-of-the-mill lender and borrower are not fiduciaries, reversing the Court of Appeals decision that would have this issue to go to the jury.  The case is Dallaire v. Bank of America.

The Dallaires sought a home refinance loan from Bank of America (BOA).  They claimed that a loan officer with Bank of America (BOA) repeatedly assured Mr. Dallaire that a prior bankruptcy and a mortgage on their home with BB&T “would not be a problem” and that the BOA loan would be secured by a first lien mortgage against the home.

The Dallaires brought suit against BOA, alleging negligent title search, negligent misrepresentation, breach of contract, and breach of fiduciary duty. The trial court granted defendants’ motion for summary judgment on all claims.  The Dallaires appealed, arguing that the traditional arm’s length view of borrower-lender relationships was out of step with the modern loan origination process in which lenders have control and borrowers place their complete trust in them.  The Dallaires further claimed that Bank of America did not use reasonable care in representing the lien’s first priority status.

The Court of Appeals found that there was a question of fact “as to whether or not the circumstances of the parties’ interaction prior to signing the loan give rise to a fiduciary relationship and consequently created a fiduciary duty for Defendant.”  Dallaire v. Bank of Am., ___ N.C. App. ___, ___, 738 S.E.2d 731, 735 (2012).  The Court reasoned that BOA’s alleged assurance of a first priority lien on the Dallaires’ new mortgage loan was an act beyond the scope of a normal debtor-creditor relationship. Id. at ___ n.5, 738 S.E.2d at 735 n.5.  The Court of Appeals also remanded the Dallaires’ negligent misrepresentation claim “to determine, if a duty existed, whether Defendant negligently misrepresented the priority the loan would receive.” Id. at ___, 738 S.E.2d at 736.

The Supreme Court reversed, explaining that fiduciary relationships are those characterized by “confidence reposed on one side, and resulting domination and influence on the other,” such as those shared between spouses, attorney-client, trustee-beneficiary, and partners in a partnership. The Court further noted that “the law does not typically impose upon lenders a duty to put borrowers’ interests ahead of their own. Rather, borrowers and lenders are generally bound only by the terms of their contract and the Uniform Commercial Code.”

While noting “it is possible, at least theoretically, for a particular bank customer transaction to “give rise to a fiduciary relation given the proper circumstances,” the Supreme Court found that a loan officer’s mere assertion that the Dallaires could obtain a first priority lien mortgage loan was insufficient to transform the relationship from arm’s length to fiduciary.

The Court likewise concluded that the Dallaires’ negligent misrepresentation claim failed even assuming BOA owed them a duty.  Noting that even though “determining the effects of a previous bankruptcy on a home’s liens is complicated,” the Court found that the Dallaires produced no evidence that they made any reasonable inquiry into the loan officer’s alleged negligent misstatements of lien priority, or were prevented from doing so by the bank, and thus there was no justifiable reliance.

Business litigators frequently encounter claims for breach of fiduciary duty, negligent misrepresentation, and constructive fraud (which rests on the existence of a fiduciary duty) in which plaintiffs urge the courts to find such a duty based on some act by a borrower or business that creates special confidence and trust in a transaction.  Dallaire confirms that such attempts are likely to fail barring some extraordinary circumstances.  Although plaintiffs will undoubtedly continue to assert that their particular circumstances usurp the nature of arms-length transactions, for the time being lender are on solid ground for defeating any claims that depend on a fiduciary relationship or rest on the lender having some sort of superior knowledge that the borrower could have also had upon a reasonable investigation.

Fourth Circuit Rejects Broad Reading of Arbitration Ban in Dodd-Frank

Posted in Arbitration, Contracts, Fourth Circuit, Uncategorized

In a variation on a familiar refrain, the Fourth Circuit recently upheld the enforceability of another arbitration provision under the Federal Arbitration Act (“FAA”) in Santoro v. Accenture Federal Services, LLC. This time, the plaintiff attempted to escape arbitration by relying on restrictions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) that invalidate certain agreements to arbitrate. The Fourth Circuit, referencing the Supreme Court’s decision last term in American Express Co. v. Italian Colors Restaurant reaffirming the strength of the arbitration mandate (see our posts here and here), rejected the plaintiff’s argument and read the statute as a narrow carve-out limited only to Dodd-Frank whistleblower claims.

In Santoro, the plaintiff was employed as an account executive for Accenture pursuant to an annual contract that included an arbitration provision. The arbitration provision was broad:  it applied to “any and all disputes arising out of, relating to or in connection with” his employment without any exceptions. As part of a cost-cutting measure, Santoro was terminated in 2011. Sixty-six years old at the time, Santoro was replaced by a younger employee. Santoro filed suit in the Eastern District of Virginia, asserting various employment law claims, including a claim for age discrimination under the ADEA.

Santoro argued that his agreement to arbitrate was void under two whistleblower provisions of Dodd-Frank:  7 U.S.C. § 26(n)(2) and 18 U.S.C. § 1514A(e)(2). Although Santoro was not himself a whistleblower, he claimed that Dodd-Frank invalidates in its entirety any arbitration agreement of a publicly-traded company that fails to include a carve-out for Dodd-Frank whistleblower claims, even if the plaintiff is not a whistleblower. 

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Careful Measures May Be Needed to Protect Privileged Internal Investigative Materials

Posted in Discovery

In March, the U.S. District Court of the District of Columbia ordered defense contractors Kellogg Brown and Root Inc. and Halliburton’s (“KBR”) legal department to produce internal investigative reports that KBR contended were privileged – even though the reports were prepared with the supervision of counsel, and in response to employee complaints of contracting fraud.  It would seem that these facts alone would be sufficient to keep the documents protected.  Not so – and the district court’s opinion provides additional guidelines for ensuring that such materials are safely kept from an opposing party.  The case is U.S. ex rel. Barko v. Halliburton Company, et al., No. 1:05–CV–1276, 2014 WL 1016784 (D.D.C. March 6, 2014). 

In Barko, Plaintiff filed a False Claims action alleging that KBR overcharged the U.S. Army for services performed in Iraq by its subcontractor, Daoud and Partners (“D&P”), which it also alleged received favoritism in the procurement process and overcharged KBR.  The U.S. government declined to intervene, and the matter proceeded as a qui tam case.

Barko requested that KBR produce any internal “audits, inspections, studies, or self-evaluations” related to compliance with contracting regulations. KBR produced 100,000 pages of documents, including complaints made to its grievance hotline about D&P’s improper billing, conflicts of interest, and poor performance.  KBR had also prepared investigative reports in response to these calls, which it withheld based on the attorney-client privilege and the work product doctrine.  Barko claimed that the reports were generated not in preparation for litigation but for business reasons, because KBR was required by 48 CFR § 203.7000 to establish a code of ethics and investigate reports of misconduct. KBR asserted that they were prepared at the direction and with the supervision of internal lawyers, and that all the reports were routed to and overseen by in-house counsel.

The D.C. Circuit found that the reports were not privileged because they were “ordinary business records” created “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” and were merely “a routine corporate [] compliance investigation required by regulatory law.”  The Court cited the following facts in support of its finding:

  • In-house counsel did not confer with outside counsel in drafting the reports;
  • Employees who were interviewed as part of the investigations were not warned that the investigation was for the purpose of obtaining legal advice;
  • The investigation was performed by non-attorneys.

The case is currently on appeal to the U.S. Court of Appeals for the District of Columbia.  If affirmed, it could have far-reaching implications for many businesses, which are required by statute, regulation or internal policy to receive and investigate complaints — especially publicly-traded companies subject to Sarbanes-Oxley.  Arguably almost every “compliance investigation” carries the risk of leading to litigation.

How do you investigate compliance irregularities and yet minimize the risk of being compelled to produce privileged investigatory documents?  Companies may want to consider implementing the following measures:

  • Be aware of the heightened scrutiny courts apply when internal investigations are conducted by in-house counsel or employees.
  • Retain outside counsel to manage an internal investigation, either from the start or when the investigation appears to be more than merely “routine;”
  • Alternatively, at least consult with outside counsel regarding the scope and structure of the investigation.
  • Do not delegate investigatory interviews to non-lawyers.
  • Non-lawyers who are present during interviews should be clearly designated as agents or subordinates of legal counsel who are present to assist in rendering legal assistance.
  • Plainly state during employee interviews (and perhaps have interviewees acknowledge in writing) that the purpose of the investigation is to provide legal advice to the company and, where appropriate, in anticipation of litigation.
  • Similarly, all privileged documentation regarding the investigation should plainly state the same purpose: the document is prepared in connection with or for the purpose of obtaining legal advice.
  • Ensure that any attorney conducting an employee interviews states that he or she represents the company, not the employee.

Don’t Be Late! Business Court Closes Its Doors at 5:00 P.M. – or is it 4:00 P.M.?

Posted in Uncategorized

Wednesday’s ruling in Carter v. Clements Walker PLLC is a cautionary tale for lawyers using the Business Court’s unique electronic filing system. Judge Gale dismissed an appeal for missing the 5:00 p.m. filing deadline by two-and-a-half hours—even though the would-be appellants’ counsel filed an affidavit saying that the delay was due to technical problems.

Unlike most other North Carolina trial courts, the Business Court uses an electronic filing system that enables litigants to file papers at any time. But, just like other courts, the Business Court’s local rules require a filing to be made during the court’s business hours to be effective that day. Local Rule 6.7. Filings received after 5:00 p.m. are considered filed the following day, unless the filing party can show that the court’s electronic filing server was experiencing technical difficulties.

In Carter, the defendants attempted to appeal an adverse summary judgment order by electronically filing a notice of appeal at 7:27 p.m. on the last day of the 30-day appeal period. Because the notice of appeal was filed after business hours, the plaintiff argued that the appeal was untimely because it was not effective until the following day. The plaintiff argued that the appeal must be dismissed because the Court of Appeals does not have jurisdiction over appeals noticed after the 30-day period expires. See N.C. R. App. P. 3(c), In re Harts, 191 N.C. App. 807, 809-10, 664 S.E.2d 411, 413 (2008).

The defendants immediately invoked the “technical failure” rule, Local Rule 6.13, claiming that their first attempt at electronic filing was made at approximately 4:30 p.m. Local Rule 6.13 gives a one-day extension to a filing deadline if the filer “attempt[ed] to file electronically at least two times after 12:00 noon separated by at least one hour.”

Judge Gale held Rule 6.13 to mean that both unsuccessful attempts must be made before 5:00 p.m. Thus the Local Rules “require that a late filing may be accepted because of technical failures with the electronic filing system only if a party first began attempting to file on or before 4:00 p.m., one hour before the end of the court’s normal business day.” The court expressly held that Rule 6.13 was not designed to benefit last-minute filers.

To be safe, litigators should take note: for all practical purposes, the virtual doors of the Business Court actually close at 4:00 p.m. Any later filing attempt may not be timely if you have technical problems.

NC Takes a Big Leap: “Opportunity to Misappropriate” Trade Secrets Enough for a PI

Posted in Inevitable Disclosure, North Carolina Court of Appeals, Trade Secrets

NC Takes a Big LeapIn last month’s Horner v. McKoy decision, the North Carolina Court of Appeals appeared to lower the evidentiary threshold needed to obtain a preliminary injunction preventing the inevitable disclosure of trade secrets.  The Court equated an “opportunity to misappropriate” trade secrets with a “threat of misappropriation” under the North Carolina Trade Secrets Protection Act, without requiring the types of evidence other courts have often required before entry of an injunction.

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The New Rule 37(e) Pushes Forward

Posted in Data Security, Discovery, Federal Rules of Civil Procedure

The proposed revision of Rule 37(e), which recently cleared another hurdle in the rulemaking process, could dramatically limit the exposure companies face from spoliation claims. It may also go too far.

The current version of Federal Rule of Civil Procedure 37(e) provides that parties who do not appropriately preserve documents related to litigation may face sanctions. While it does contain a “safe harbor” for loss of electronically stored information (ESI) due to “routine, good-faith operation of an electronic information system,” the Committee Note to Rule 37 provides that the prospect of litigation could require alteration of “routine operation[s]” and mentions that a “litigation hold” may be required. Generally, Rule 37 can lead lawyers and clients, respectively, to rush litigation holds and preservation efforts in an effort to avoid the specter of discovery sanctions.

In June 2013, noting that “the amount and variety of digital information has expanded enormously in the last decade, and the costs and burdens of litigation holds have escalated as well,” the Judicial Conference Advisory Committee on Civil Rules approved for public comment a new version of Rule 37(e). The new rule is designed to ameliorate pressure that parties feel to preserve a wide scope of information in order to avoid sanctions.  As revised, the rule would require that in order to recover sanctions for loss of information parties must show all three of the following:

1. that there was substantial prejudice in the litigation;
2. that the other party’s actions were willful or in bad faith; and
3. that the loss of information irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.

In addition, the new Rule 37(e) provides that courts should consider “all relevant factors” in determining whether a party’s efforts to preserve were appropriate and whether the failure was willful or in bad faith. The new rule lists five of these factors: reasonableness of the party’s preservation efforts, whether the party received a clear and reasonable request to preserve, the “proportionality” of the preservation efforts to the litigation, and whether the party timely sought the court’s guidance on preservation issues.

The proposed changes are discussed in depth beginning on page 270 of The Advisory Committee Report.

While aimed at easing the litigation burden on parties, by excusing a party from sanctions absent willful/bad faith spoliation, the new rule may incentivize poor preservation habits.  Judge Schira Schiendlin, who presided over the influential Zubulake v. US Warburg cases in the Southern District of New York that set guidelines for the scope of electronic discovery, recognized this potential pitfall of the new rule.  In Sekisui American Corp. v. Hart, she noted that “[u]nder the proposed rule, parties who destroy evidence cannot be sanctioned . . . even if they were negligent, grossly negligent, or reckless in doing so” and “would require the innocent party to prove that it has been substantially prejudiced by the loss of relevant information, even where the spoliating party destroyed information willfully or in bad faith.”  The new Rule 37 will also undoubtedly create more litigation in connection with parties’ preservation efforts as courts are asked to interpret the criteria for such efforts and whether they were sufficient.

The public comment period for the new rule ended on February 18, 2014, and the Advisory Committee is now considering the public comments that it received.  The rule, including any changes approved by the Advisory Committee, will next go to the Standing Committee, and then on for Judicial Conference approval, Supreme Court approval, and finally Congressional approval. Thus, it will likely take many months before the new rule takes effect. As you will see in an upcoming post on The Compass, in the interim, the burden remains squarely on the preserving party, the “reasonable and appropriate” standard remains in place, and sanctions for failing to appropriately preserve ESI and other documents can be catastrophic.


Removal to Federal Court Based on Diversity Jurisdiction: How Long Do You Have?

Posted in Uncategorized

Complaints filed in state court routinely allege only damages “in excess of $10,000.” If you’re a defendant considering removal to federal court based on diversity, such an allegation doesn’t meet the $75,000 amount in controversy threshold.  But if you have information outside of the complaint – for example, based on settlement conversations or demands – that the plaintiff is in fact seeking more than $75,000 damages, when does the 30 day period for removal start?

According to a decision by the Western District of North Carolina, the plaintiff’s response to the defendant’s written statement of monetary relief sought starts the thirty-day clock. The defendant’s subjective knowledge of potential damages or the parties’ pre-litigation settlement discussions do not start the clock for removal.

Generally, notice of removal of a civil action must be filed within thirty days of the defendant’s receipt of the initial pleadings.  When, however, it is not clear from the pleadings that the case is removable, a defendant has thirty days from receipt of “an amended pleading, motion, order, or other paper from which it may first be ascertained” that the case is removable.

In Hall v. Hillen, the plaintiff sought damages “in excess of $10,000” for injury, pain and suffering, and lost wages arising from a motor vehicle accident.  During the early months of litigation, the defendant answered the complaint, served and responded to discovery, and communicated an offer of judgment.  Four months after the complaint was filed, the defendant received a written response to its request for a statement of monetary relief sought, which indicated that the plaintiff sought damages in excess of $75,000.  Nine days later, the defendant filed a notice of removal.

The Court found removal to be timely.  In so holding, the Court noted several other potential events which did not start the clock on the thirty-day removal period.  Neither the plaintiff’s subjective knowledge of the damages at issue nor a pre-litigation insurance demand were sufficient to render the amount-in-controversy “ascertainable” for purposes of the removal deadline.  The Court also held that the defendant had not waived his right to remove the action by answering the complaint, making an offer of judgment, or engaging in discovery, as those “expected procedural steps” did not indicate a “clear and unequivocal intent to remain in state court.” The Court also indicated that if the defendant had filed a counterclaim, he would likely have waived his right to remove later.

The Hall decision indicates a narrow interpretation of what “other paper” may be considered to give notice of removability.  The Court was unwilling to delve into what the defendant actually knew, and when he knew it, and instead limited its inquiry to the documents formally exchanged during the course of the lawsuit. Here the window for removal did not close until months after service of the complaint – in part because of the care taken by defendant to stake out plaintiff’s damages early in the case, and engaging in minimal discovery.



Can You Keep a Secret? Confidentiality Clauses in Settlement Agreements Are For Real

Posted in Contracts, Settlements

If a party to a confidential settlement agreement blabs about the settlement, could the party lose some of the benefits of the settlement?  A recent Florida appellate decision is a good reminder to think carefully about the confidentiality clauses in your settlement agreements both before—and after—you settle your case. (Look for some best practices at the end of the post.)  In Gulliver Schools v. Snay, a former headmaster of a Florida prep school filed suit against the school, alleging age discrimination and retaliation, when the school did not renew his contract.  Snay settled his case for $10,000 in backpay, an additional $80,000 payment, and $60,000 in attorney’s fees.   The settlement agreement included the following “detailed” confidentiality provision: 

 13.  Confidentiality. . . . [T]he plaintiff shall not either directly or indirectly, disclose, discuss or communicate to any entity or person, except his attorneys or other professional advisors or spouse any information whatsoever regarding the existence or terms of his Agreement. . . . A breach . . . will result in disgorgement of the Plaintiff’s portion of the settlement Payments.

Snay and his wife decided they needed to tell their daughter something–so they told her only that the case was settled and that they were happy with the result.  Snay’s daughter added a little embellishment to the announcement and posted it on Facebook, saying “Mama and Papa Snay won the case against Gulliver.  Guliver is now officially paying for my vacation to Europe this summer.  SUCK IT.”  The post went out to 1200 of the daughter’s closest “friends,” many of whom were current or past Gulliver students.

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Field Set for NC Supreme Court Races

Posted in North Carolina Supreme Court, Uncategorized

In November, North Carolina voters will select the individuals who will hold of the majority of the seats on the Supreme Court of North Carolina until 2022.  Four of the seven seats on the Supreme Court are up for grabs and observers expect that the races will be hotly contested despite their relatively low profile.  The outcome of this election could have a major impact on the law of North Carolina and how it is applied to the citizens and businesses of the state.

The races are non-partisan – although the major political parties always have their favorites in each race.  If more than two individuals are running for a seat, there will be a primary election for each seat with the top two vote getters moving on to the general election.

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N.C. Business Court Weighs In On Enforcement of Restrictive Covenants Following Aquisition of a Company

Posted in Contracts, Trade Secrets

Your company acquires another company through merger or stock purchase.  You require the key employees of the acquired company to sign new employment agreements which provide for similar pay, benefits and job duties  – but the new agreement also imposes new non-compete obligations.  A recent decision by the North Carolina Business Court reminds companies that after a stock or equity purchase such clauses may not be enforceable because they lack consideration.  If you make an acquisition through merger or a stock purchase, there must be additional consideration to support any restrictive covenants entered into concurrently with the acquisition.

In Amerigas Propane, LP v. Coffey, 2014 N.C.B.C. 4, the Plaintiffs sought a preliminary injunction to enforce the confidentiality and non-compete provisions in an employment agreement signed by Ermon Coffey, a Defendant.

Coffey signed the employment agreement in conjunction with the Plaintiffs’ acquisition of Heritage Operating, LP, which had employed Coffey for eleven years.  Before the sale, Coffey had not been subject to any non-competition or non-solicitation agreements with Heritage.  The new employment agreement stated that consideration for the new restrictions included “initial employment . . . continued employment . . . promotion . . . incentive compensation payment; and/or . . . increase in compensation.”  Just over a year after the acquisition, Plaintiff fired Coffey, who then went to work for a competitor.

The Court denied the Plaintiffs’ motion for a preliminary injunction, finding there was insufficient consideration to support the employment agreement Coffey signed at the time of the purchase.  As the Court stated,

“Signing a contract in exchange for continuing an employment relationship, without more, will not suffice as consideration. . . .As sch, an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction.”

Here, because the acquisition occurred through purchase of equity (akin to a stock purchase), no “new” employment had been provided as consideration.

In contrast, the Court noted that an acquisition structured as an asset purchase will act to terminate existing employment relationships. In that scenario existing employees of the acquired company don’t necessarily become employees of the acquiring company.  Thus, if this had been an asset purchase, and if Coffey had then signed an employment agreement, it appears there would have been adequate consideration.

Knowing this, Plaintiffs contended that Coffey was eligible for new benefits and raises under his employment agreement.  The Court was unpersuaded, and instead found that Coffey’s benefits were not materially different from those to which he had been entitled under his previous employment with Heritage.