Court of Appeals Spells Out Claims Settlement Rules for Insurers and Unfair Trade Practices

In Martini v. Companion Property & Casualty Insurance Co., decided yesterday, the court of appeals considered the issue of when an insurer engages in unfair trade practices in connection with claims settlement.

Section 58-63-10 of the General Statutes defines unfair practices by insurance companies but doesn’t, in itself, create a private right of action. The courts have ruled, however, that violations of the insurance statute also violate N.C.G.S. § 75-1.1 which does provide for a private right of action.

In Martini, the plaintiff alleged that the auto insurer engaged in unfair claims settlement practices by refusing to pay a claim without conducting a reasonable investigation in violation of N.C.G.S. § 58-63-15(11)(d).

The court of appeals reversed summary judgment in favor of the insurer based on plaintiff’s contention that the insurance company’s failure to speak directly with the plaintiff before denying the claim constituted an incomplete investigation and that the company's continued denial – after receiving plaintiff’s explanation on a critical issue – and failure to follow its own claims handling guidelines also was an unfair trade practice.

Judge Steelman dissented on the grounds that the reversal was based solely on allegations in plaintiff’s unverified complaint as opposed to record evidence.

Today's NC Court of Appeals Decisions

The Court of Appeals issued 35 published decisions this morning. Sixteen are in criminal cases. The civil cases, at least at first glance, don't appear to be plowing any major new ground.

We'll try to post something on the important ones later today.

By the way, the founder of this blog, Sean Andrussier, has moved on to greener pastures as a full-time faculty member at Duke Law School. We'll be limping along without him until we come up with a permanent solution for staffing this blog.

Today's NC Supreme Court Decisions

Today the NC Supreme Court issued opinions. This batch doesn't include anything of note for this blog's purposes--i.e., decisions impacting businesses. The Court also issued orders on petitions. It appears the only PDR granted is in a case involving a prenuptial agreement.

COA: Eminent Domain Taking Is Still For a Public Purpose When A Private Entity Also Derives A Benefit From The Taking

Today the COA held that a taking of property under eminent domain powers that serves a primary public purpose may also benefit a private entity. The case is Catawba County v. Wyant.

Catawba County condemned property owned by the Wyatts and the Johnsons to build a sewer line connecting the county landfill to the city of Newton's sewer lines. The new sewer line was necessary for the County to comply with solid waste disposal regulations. These regulations required that the disposal system for rainwater that comes into contact with solid waste must be connected to the sewer line.

The County had also previously allowed a lumber plant to purchase land near the landfill and operate its business there. The lumber company would also utilize the new sewer line.

The COA held that the removal of solid waste was a matter of public concern and the sewer line was for a public purpose, and the property could thus be taken by the County under its eminent domain power. The Court noted that in determining whether a municipality's action is for a public use or benefit, it examines whether the action “involves a reasonable connection with the convenience and necessity of the particular municipality[,]” and whether “the activity benefits the public generally, as opposed to special interests or persons.”

The Wyants and Johnsons argued that the sewer line would only benefit the lumber company, and that they were not given proper notice that the sewer line would benefit the landfill in the 30-day notice of condemnation the County was required to give them. The COA held that the purpose of connecting the landfill to the public sewer system to conform with regulations was the primary and "paramount" purpose, and that purpose was not defeated by the fact that the lumber company would also be using or benefiting from the sewer line. The COA also held that the County only had to give the Wyants and the Johnsons notice that the purpose of the condemnation was for a sewer line, and did not have to inform them of "all the planned or potential users of the sewer line."

Today's COA Decisions

Today the NC Court of Appeals released 21 published decisions. Five are criminal cases. More on these decisions later.

COA: Employment Contract Existed Between Temporary State Employees and State

Yesterday the COA held that an employment contract existed between temporary state employees and a state regulatory body. The case is Sanders v. State Personnel Commission.

Plaintiffs worked for the State as temporary employees through a temp agency for periods of time ranging from about a year to more than 6 years. They claimed they were wrongfully denied employment benefits under state regulations promulgated by the State Personnel Commission ("SPC"). The SPC is given lawmaking power by the NC legislature to establish regulations governing job classification and compensation. SPC regulations provide that temporary employment may not exceed 12 months and that any employee who stays in a "time-limited" position for more than three years must be considered a permanent employee.

The COA held that the SPC's rules must be read into any contract between plaintiffs and the temporary agency, and that the SPC rules have "the effect of law and are incorporated into the employment contract." Thus, the COA reasoned, the SPC entered into a valid employment contract with plaintiffs.

Defendants acknowledged that the SPC rules governed temporary employees and that plaintiffs were hired for temporary appointments which exceeded twelve months. Therefore, the COA held, there was a breach of the rules under which the contract was formed. However, Plaintiffs did not point to any regulation that specifically entitled them to the benefits of permanent employees. The COA remanded the case for a determination of plaintiffs' rights under the SPC rules as well as a determination of the terms of the employment contract.

Virginia Senators Recommend Judge For Fourth Circuit

Virginia Senators Webb and Warner are recommending that the president nominate Barbara Keenan to the Fourth Circuit. She's long been a justice on the Virginia Supreme Court.

COA Reverses Business Court's Denial Of Class Certification In TCPA Case

Today the Court of Appeals (COA) reversed the Business Court's denial of class certification in a Telephone Consumer Protection Act (TCPA) case alleging that the defendant sent unsolicited fax advertisements to proposed class members. The case is Blitz v. Agean, Inc.

Generally, the TCPA (47 U.S.C. § 227) makes it unlawful to send unsolicited advertisements to a fax machine. "Unsolicited advertisement" means an advertisement "transmitted to any person without that person's prior express invitation or permission." (The TCPA allows statutory damages; in this case, the plaintiffs are seeking statutory damages of $500 for each unsolicited fax advertisement sent by the defendant to any member of the proposed class.) In light of the intalicized phrase, TCPA defendants oppose class certification by arguing that individualized issues will predominate over common issues--individualized issues concerning whether faxes were unsolicited or without the recipient's consent. Courts around the country have split on this predominance issue

In today's case, the COA rejected a bright-line approach to class certification under the TCPA: "We hold that claims brought pursuant to the TCPA are not per se inappropriate for class actions." Instead the COA adopted a fact-based approach to determining whether certification is proper, an approach under which "plaintiffs must advance a viable theory employing generalized proof to establish liability with respect to the class involved." As an example, the COA suggested that generalized proof could exist in a case alleging that the defendant had obtained all of the fax recipients' fax numbers from a single purveyor (i.e., buying a list). In such a case, the COA suggested, the manner in which the defendant identified the recipients may not require individualized inquiry, and the the question of consent may be a common question.

The COA said that the fact that some class members eventually may be found to have consented to the receipt of the defendant's fax transmissions doesn't preclude certification of a class of those who received unsolicited faxes: "The possibility that some proposed class members will later be removed should not automatically defeat class certification. Plaintiff should present the trial court with some reasonable means of ensuring there will not be an inordinate number of proposed class members who do not belong in the class, and further show that he has, through thorough discovery and investigation, presented the trial court with as tailored a proposed class as practicable."

The COA held that the record didn't establish whether the plaintiff proceeded at the class certification stage with a theory of generalized proof that the faxes were without invitation or permission. Because the trial court applied a per se rule against certification of TCPA claims, the COA reversed and remanded for reconsideration of the plaintiff's motion for class certification.

Separately, on the issue of "superiority" (under N.C. law, when the elements of class certification are met, the trial court retains the discretion to determine if a class action is superior to other available methods for the adjudication of the controversy), the COA rejected the trial court's conclusion that small claims court is a superior forum in which to deal with TCPA violations, because small claims court doesn't have authority to grant injunctions, and injunctive relief is an important TCPA remedy. Another knock against small claims court, the COA said, is that, depending on the number of allegedly unsolicited fax advertisements sent to any one person, the amount in controversy could easily exceed the $5,000 small claims court jurisdictional limit. Thus, the COA held that small claims court cannot represent a superior forum to a class action in all instances involving TCPA claims.

Today's decision could be significant in cases in which consent is a defense (or lack of consent is an element) of a claim. Also significant is the "superiority" holding: to suggest that the unavailability of injunctive relief in small claims court is a problem is to suggest that the class action mechanism is superior in cases seeking injunctive relief. Many claims with low damages also seek injunctive relief.

COA: School Board's Drug/Alcohol Testing Policy Is Unconstitutional

Today the Court of Appeals (COA) held that a school board's policy mandating random drug and alcohol testing of all school board employees is unconstitutional because it violates the North Carolina Constitution's guarantee against unreasonable searches and seizures. The trial court had ruled for the school board. The case is Jones v. Graham County Board of Education.

The COA found the record lacking in evidence to establish a need for the testing (e.g., past incidents). And the COA rejected the notion that school board employees have a reduced expectation of privacy by virtue of their employment in a public school system. The Court distinguished the situation where public employment poses safety concerns justifying regulation of employees (the Court referred, by way of illustration, to a chemical weapons plant).

Judge Stephens wrote the opinion, which began by quoting a Justice Scalia dissent in turn quoting Justice Brandeis: "The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.”

Today's Court of Appeals Decisions

Today the NC Court of Appeals released 15 published decisions. Half the cases (eight) are criminal or domestic cases. More on today's cases later.

COA Rules Against Terminated Employee Based On Absence Of Consideration To Support Employment Agreement

Today the Court of Appeals (COA) issued a split decision upholding a directed verdict for an employer in a contract action brought by a former VP of marketing after he was terminated. The case is Franco v. Liposcience, Inc. Judges Wynn and Hunter (the senior) were in the majority; Judge Ervin dissented.

The employer argued that plaintiff, Franco, was an at-will employee. Plaintiff contended he had an employment contract, relying on a letter the employer had issued after Plaintiff had already been serving as an at-will employee (the "Retaliation Letter"). The Retaliation Letter promised not to retaliate against Plaintiff based on his father's actions and not to take adverse employment action against him for two years absent approval of the new chairman. (The Retaliation Letter arose in the context of his father's severance agreement when his father was ousted as chairman of the company; when the board voted to remove his father as chairman, his father execute a release and received concessions, among them the Retaliation Letter protecting his son.)

The trial court ruled that the Retaliation Letter wasn't supported by any consideration from Plaintiff and thus wasn't an enforceable employment contract, with the consequence that Plaintiff was an at-will employee with no contract claim. The COA majority agreed, holding that Plaintiff couldn't rely on consideration given by his father in the context of the father's severance (i.e., couldn't rely on a third-party beneficiary theory) and that Plaintiff's continued employment wasn't valid consideration (no more so than it would be in the context of a non-compete executed by an employee without independent consideration).

Judge Ervin dissented. For consideration, he relied on the father's surrender of his right to take legal action against Defendant (the employer) when the father was ousted as chairman. Judge Ervin deemed there to be "ample consideration for the Retaliation Letter based upon [the father's] decision to enter into the Severance Agreement rather than pursue whatever legal rights he might have had against Defendant following his removal as Defendant's Executive Chairman."

COA Issues Significant Tax Decision Upholding Secretary's Authority To Force A Combination Of Corporate Entities For Tax Purposes

Today the Court of Appeals (COA) issued a significant tax decision for corporations that stratify their operations into multiple entities. The case dealt with the power of the Secretary of Revenue to force a combination of the corporate entities for purposes of reporting taxable income. The COA ruled in favor of the Secretary. The case is Wal-Mart Stores East, Inc. v. Hinton. (A related ruling today is Sam's East, Inc. v. Hinton, which simply relies on the Wal-Mart ruling to uphold the Secretary's forced combination.)

The case concerned Wal-Mart. In 1996 Wal-Mart reorganized its corporate structure. Plaintiff is the entity that operates Wal-Mart Stores stores in North Carolina and in 29 other states. Plaintiff owns companies that own Wal-Mart Property Company (PC), which in turn owns all the voting units of Wal-Mart Real Estate Business Trust (REIT). The REIT came to own all real property for Wal-Mart store premises. Plaintiff leased land and buildings from the REIT for the store premises; and for tax purposes Plaintiff deducted those rents that it paid the REIT. The REIT's rental income passed upstream to PC in the form of dividends. The REIT deducted those dividend payments from its income on its N.C. tax returns. PC then paid dividends to Plaintiff, which Plaintiff subtracted from its business income for tax purposes.

Plaintiff reported taxes to NC separately from the REIT. PC didn't file returns in N.C. because it doesn't do business here.

After an audit, however, the Secretary determined that the earnings of Plaintiff must be combined with REIT and PC in order to present true earnings in N.C. The combination approach substantially increased Plaintiff's tax and the aggregate N.C. tax owed by the three companies separately -- one of which, PC, didn't even do business in N.C. and thus had no prior reported tax liability here.

Plaintiff filed an action demanding a refund of taxes paid: about $30 million. The gravamen of the complaint was that the Secretary had no authority to force a combination of Plaintiff with the two affiliates for the purpose of reporting taxable income.

Plaintiff complained that the Secretary had never published any guidance indicating that a corporation may not deduct rents it pays to a related real estate trust. Plaintiff argued that "[a] combined return effectively treates multiple corporations, which are viable and separate legal persons, as a single unit and thus eliminates the effects of transactions between those separate legal entities; this occurs because the income and deduction items for the two sides of a transaction cancel each other or are disregarded. Plaintiff maintained that "no North Carolina court had ever held that related entities may be required to file a combined return if intercompany transactions are performed at arm's length."

The COA, however, held that the Secretary had the power to force the combination: "where a taxpayer's business is concededly unitary, and where, as here, the taxpayer attempts to reclassify income as nonbusiness or nonapportionable, the reclassification has the potential to distort true earnings in North Carolina even if all intercompany transactions are accounted for at arm's length, or fair value, prices," the COA concluded. After concluding that the Secretary didn't exceed his statutory authority, the COA rejected Plaintiff's numerous constitutional challenges to the forced combination.

Today's decision upholding the Secretary's combination authority may have significant consequences for a number of businesses using fragmented corporate structures.

Today's COA Decisions

The NC Court of Appeals released 19 published opinions today. Nine are criminal cases. Three are workers' and unemployment comp cases. As for the remaining seven, two are related corporate tax cases. More on today's cases later.