Fourth Circuit Issues Bitterly Divided Abstention Opinion In Constitutional Challenge To S.C. Statutes Regulating Video Poker

Today the Fourth Circuit, over Judge Wilkinson's passionate dissent, held that the district court abused its discretion in abstaining, under Buford v. Sun Oil Co., 319 U.S. 315 (1943), from deciding a constitutional challenge to two South Carolina statutes regulating video poker. The case is Martin v. Stewart. Judge Motz wrote the majority opinion, joined by Judge Traxler.

In dissent, Judge Wilkinson argued that a state's decision whether to allow legalized gambling lies at the heart of the state's police power, and a challenge which calls for an interpretation of the state's law and an inquiry into the state's enforcement practices would most properly be heard in state court. "It is hard to imagine a greater intrusion into the processes of state government," Judge Wilkinson wrote, "than use of the federal judicial process for a top-to-bottom review of the regulatory and enforcement measures necessary to the implementation of any gambling policy." He concluded, "The majority deprives the state of a significant measure of control over issues touching not simply the pros and cons of gambling but the very tone and quality of life within state borders. This is not federalism."

One may be tempted to put this case on the list of recent decisions reflecting an evident shift in the Fourth Circuit's composition. After all, here we have two Clinton appointees in the majority, with a Reagan appointee (Judge Wilkinson) alone in dissent under the banner of federalism. But the Fourth Circuit, when it was a conservative court, had split on Burford abstention, with the very conservative Judge Luttig dissenting from majority opinions written by Judge Wilkinson, accusing the majority of charting a course in the area of federal court abstention that was too broad and not required by Supreme Court precedent. See First Penn-Pacific Life Ins. Co. v. Evans, 304 F.3d 345 (4th Cir. 2002) (Judge Wilkinson majority opinion; Judge Luttig dissenting); Johnson v. Collins Entertainment Co., 199 F.3d 710 (4th Cir. 1999) (same).

By the way, Johnson itself was a case implicating video poker in South Carolina. It was a suit against South Carolina video poker operators. In that case the district court rejected abstention, and the Fourth Circuit held that the district court abused its discretion by not abstaining under Burford. Judge Wilkinson's majority opinion in Johnson was based on reasoning similar to the reasoning in his dissent today, i.e., interference with a state regulatory regime (legalized gambling) at the heart of the state's police power.

Judge Arrowood Appointed To Fill Levinson Seat

Governor Easley has appointed Special Superior Court Judge John Arrowood to the N.C. Court of Appeals to fill the vacancy left by Judge Eric Levinson's departure for Iraq. According to the Charlotte Observer, Arrowood, appointed to the Superior Court bench in March, was a partner at James, McElroy & Diehl, where he concentrated on commercial and general civil litigation in state and federal courts. And early in his career, he served as senior staff attorney and staff director for the Court of Appeals.

Vaden Lives

Last week, with Republic Bank & Trust Company v. Kucan, the Fourth Circuit underscored what it held in Discover Bank v. Vaden (blogged by Sean earlier this year) -- that where a state-chartered bank is a real party in interest to state law usury claims against the bank's servicing agent, the usury claims are completely preempted by the Federal Deposit Insurance Act.

In Republic Bank, the defendants were borrowers of "pay-day loans" serviced by Advance America. The borrowers brought suit in North Carolina state court under North Carolina's usury laws and Consumer Finance Act. Republic Bank, in turn, moved in federal court to compel arbitration. The E.D.N.C. dismissed for lack of standing.

The Fourth Circuit held that standing existed, finding that Republic Bank had a sufficiently direct and personal stake in the litigation nominally between Advance America and the borrowers because, inter alia, Republic Bank was a party to the arbitration agreements and was at risk of losing assets if the loans were void under the Consumer Finance Act.

The Fourth Circuit could not determine, however, and therefore remanded regarding, whether the other requirements for federal jurisdiction were present, i.e., whether the jurisdictional amount for diversity jurisdiction was met, or whether Republic Bank was the real subject of the borrowers' claims.

(In the interest of full disclosre, WCSR represents Advance America.)

Rule 24 Requirements Must Be Met To Intervene As Party Under APA

In Holly Ridge Associates, LLC v. NC DENR, the NC Supreme Court made clear that to intervene as a party in a contested case, the intervenor must satisfy the requirements of Civil Procedure Rule 24 (direct and immediate interest relating to the property / transaction at issue or where intervenor's claim shares fact and/or legal issue with action in which it seeks to intervene). Should an intervenor be interested in participating as something less than a party, the intervenor may do so pursuant to the Administrative Procedures Act and subject to the judge's discretion regarding the lesser role the intervenor may play.

Today's NC Supreme Court Decisions

They were just released (the first release in nearly two months). We'll have more later. But in a nutshell: a total of 8 decisions -- 4 criminal, 3 civil, and 1 judicial censure (for a judge's ex parte proceeding). Most cases didn't feature a full court, since Justices Hudson and/or Timmons-Goodson didn't participate in many cases. Justice Timmons-Goodson filed two dissents today. I believe this brings to double digits the number of dissents she has filed or joined since she joined the Supreme Court last year.

NC SCT Grants NC Bar's Petition For Review In Jurisdictional Dispute

Today the NC Supreme Court granted a petition for discretionary review in Gilbert v. North Carolina State Bar (the Court of Appeals' opinion is here). In this case, while an attorney disciplinary proceeding against Gilbert was pending before the Bar, Gilbert filed an action against the Bar in superior court alleging that the Bar was acting in bad faith and conducting a vindictive prosecution. He sought an injunction to enjoin the Bar from prosecuting the action. Despite the Bar's objection that the superior court had no jurisdiction to interfere with a pending disciplinary proceeding, the superior court granted a preliminary injunction, and then granted a permanent injunction on summary judgment. The Bar appealed that order, but because the superior court's judgment hadn't yet fixed damages, the Court of Appeals dismissed the appeal as interlocutory. The Bar petitioned for review to present two issues: 1) Did the Court of Appeals err in dismissing the Bar's appeal of the injunction as interlocutory? 2) Did the Superior Court have jurisdiction to permanently enjoin the Bar's prosecution of an attorney disciplinary proceeding? Today the Supreme Court granted the petition.

SCT Orders and Opinions Tomorrow

The NC Supreme Court will file orders and opinions tomorrow.

Tuesday's COA Decisions

This is late, as vacation intervened, but Tuesday's Court of Appeals (COA) decisions (8/21/07) brought fewer cases than usual and a relatively less interesting batch. The COA issued 10 published civil decisions. Among those 10 there were only two dissents, both of which were in domestic cases. Thus, the non-domestic civil cases were all unanimous. So not much controversy. I discuss two cases below.

1) In Cotter v. Cotter, the COA declined to dismiss an appeal despite appellate rule violations. The COA observed the division among its panels about whether or not to dismiss appeals based on rule violations after the Supreme Court's May 4, 2007 decision in State v. Hart. (Compare McKinley Bldg. Corp. v. Alvis, 645 S.E.2d 219 (2007) (not dismissing) and Peverall v. County of Alamance, 645 S.E.2d 416 (2007) (same) with Dogwood Dev. & Mgmt. Co. v. White Oak Transport Co., 645 S.E.2d 212 (2007) (dismissing).) In Cotter the appellant failed to include a statement of the applicable standard of review, in violation of Rule 28(b)(6), and had an assignment of error that violated Rule 10(c)(1). The COA held, however, that these violations were not sufficiently egregious to warrant dismissal.

2) In McClure v. County of Jackson, the COA dealt with two questions.

a) The first question was this: when a case becomes moot on appeal, does this also moot the issue whether plaintiff may recover attorney fees? The COA said no. The plaintiff challenged his removal from a county airport authority. The trial court ruled that the removal was unlawful and entered a judgment to that effect--a judgment which also retained jurisdiction to rule on plaintiff's motion for attorney fees. After defendants filed their notice of appeal, the trial court entered an order awarding attorney fees to plaintiff. Defendants appealed that order too. On appeal the matter of plaintiff's removal became moot, because plaintiff's term on the airport authority expired. The issue arose whether this also mooted the appeal of the attorney fees order. Relying on a 20-yr-old 4th Circuit case, the COA held that the challenge to the attorney-fees award was not moot.

b) The COA next addressed this question: Did the trial court have jurisdiction to award attorney fees after the (first) notice of appeal was filed, or did the filing of the notice of appeal divest the trial court of jurisdiction to do so? The COA held, on the basis of G.S. 1-294, that the filing of a notice of appeal divests a trial court of jurisdiction to award attorney fees--and that a trial court cannot circumvent this rule by "reserving" in its judgment the power to award attorney fees after the judgment. The COA added, "While we understand that the interests of judicial economy would clearly be better served by allowing the trial court to enter an order on attorney's fees and then having the matter come up to the appellate courts as a single appeal, we cannot create jurisdiction for the trial court to enter the award of attorney's fees in violation of N.C. Gen. Stat. § 1-294. . . . When faced with the possibility of an award of attorney's fees, the better practice is for the trial court to defer entry of the written judgment until after a ruling is made on the issue of attorney's fees, and incorporate all of its rulings into a single, written judgment. This will result in only one appeal, from one judgment, incorporating all issues in the case."

COA Vacates Summary Judgment Where Evidence Differed From, But Issues Of Law Were Same As, Prior SJ Order

In Cail v. Cerwin, (06-304), the COA vacated parts of a summary judgment order due to deja review. In 2004, Judge Titus denied summary judgment as to several of plaintiffs' claims and a defendant's counterclaim. In 2005, Judge Cashwell granted summary judgment on claims as to which Judge Titus had denied summary judgment. The problem -- while the evidence differed by the time Judge Cashwell ruled, some of the legal issues were the same as those upon which Judge Titus had ruled. The COA underscored that only where the legal issues differ between a first motion for summary judgment and a later motion may a trial court entertain and rule on the later motion. Otherwise, you've got a trial court reviewing and potentially overruling another trial court, a job only for the COA & Co.

Res Judicata + Collateral Estoppel Issues For Arbitrator Under FAA, Not NCUAA

In WMS, Inc. v. Alltel Corporation, the NC COA held last week that the issues of res judicata and collateral estoppel are issues to be decided initially by an arbitrator, not a trial court, at least when the Federal Arbitration Act governs. In contrast, where North Carolina's Uniform Arbitration Act governs, res judicata and presumably collateral estoppel appear to be issues for the trial court (see, e.g., Rodgers Builders, Inc. v. McQueen, 76 N.C. App. 16, 331 S.E.2d 726 (1985), cited in WMS).

Fourth Circuit: A Different Court

The Washington Post published this interesting article this week about the dramatic shift in the Court as a result of unfilled vacancies. Bottom line: Court no long conservative.

Fourth Circuit Reverses Strange Sanction Against Lawyers Who Copied Jurors' Deliberative Notes

A strange ruling from the U.S. District Court for the N.D. W. Va. was reversed today by the Fourth Circuit. A jury rendered a defense verdict for Ford Motor Co. in a products case. After the jury was discharged, the courtroom clerk asked Ford's defense counsel to remove exhibits from the jury room. When they went to the jury room, they saw an easel with a flip chart reflecting the jurors' views on the evidence presented in the case. They copied the flip chart for assistance in future cases. After a law clerk tattle taled, the judge sanctioned them, concluding they acted in bad faith. The judge concluded (weirdly) that counsel violated a local rule prohibiting counsel from communicating with jurors about their deliberations, as well as FRE 606(b), which generally prohibits the use of juror testimony occurring during deliberations to challenge a verdict. The sanction totaled nearly $15,000. The Fourth Circuit reversed--and took a jab at the courtroom clerk, concluding that the "problem could have been avoided had the clerk of court properly performed his responsibility of retrieving the evidence and exhibits from the jury room and returning them to the attorneys in the courtroom." Ouch.

COA: Taking Voluntary Dismissal Doesn't Immunize Plaintiff From Rule 11 Sanctions Once Case Is Refiled

Today the Court of Appeals (COA) affirmed Rule 11 sanctions. The case is Stocum v. Oakley.

Plaintiffs filed a complaint but their counsel failed to serve the summons and four alias and pluries summonses on any Defendant. A year later they filed an amended complaint and again counsel failed to serve a summons on Defendants, despite additional more alias and pluries summonses. By this point more than a year and a half had passed. Nine alias and pluries summonses had issued.

The first time any Defendant learned a lawsuit had been filed was when one of them received an order for a mediated settlement conference directly from the superior court.

Then, although no discovery had occurred, Plaintiffs' counsel signed a letter to the trial court coordinator asking for the case to be removed from the calendar because, counsel stated, "[w]e are still in the discovery stages of this case." Three days later Plaintiffs' counsel sent a similar letter to the trial court coordinator asking for additional time to complete discovery before mediation and trial, and stating that the "[p]arties are still involved in discovery."

After Defendants received notice of the suit, they filed a motion to dismiss. Citing Rules 41, they argued that involuntary dismissal was warranted based on Plaintiffs' failure to prosecute the action. And, citing Rule 11, they contended that Plaintiffs' counsel misrepresented in her letters to the trial court coordinator that discovery was still ongoing when in fact there had been no discovery. They sought the sanction of involuntary dismissal.

Four days before the motion hearing, Plaintiffs took a voluntary dismissal, so the hearing never occurred.

But 363 days later, Plaintiffs refiled the action. Defendants then renewed their motion under Rule 11 and 41 based on Plaintiffs' conduct in the earlier proceeding, i.e., before the voluntary dismissal. The trial court granted the motion. The sanction: dismissal of the refiled action with prejudice.

On appeal, Plaintiffs argued that their voluntary dismissal should've terminated the original proceeding as if it hadn't been filed, thus erasing any misconduct in that proceeding and wiping the slate clean. The COA disagreed: A voluntary dismissal doesn't deprive a trial court from imposing sanctions for pre-voluntary-dismissal misconduct.

The COA also indicated that prejudice isn't required for Rule 11 sanctions and held that estoppel is not a defense to a Rule 11 motion.

Criminal Contempt For Visiting Trial Court Administrator

In a case today the COA affirmed criminal contempt against a pro se party who just couldn't keep away from the courthouse.

The defendant, Simon, was involved in a foreclosure case in Forsyth County. During a hearing in the matter, Judge Spivey felt compelled to issue the following warning to Simon in open court: "[T]he Court will find that during the pendency of this action . . . the respondent has been a frequent caller to the judge's office. The staff reports to me, as I stepped out to prepare this judgment, that at times [he has made] as many as 20 phone calls a week in addition to letters, faxes, and personal visits to the judge's office. The respondent has also been discovered to be in secure areas of the courthouse, behind courtroom 5A of criminal court where prisoners are transported and when asked to leave, he was grudgingly compliant and questioned the authority of our staff to ask him to leave a secured area. . . . Based on these facts, the Court would direct that the respondent not call the judge's office about this case any further. . . . and he should not fax or come to the judge's office to speak to any staff about this case."

At a hearing six weeks later, Judge Albright reiterated the directive and warned Simon not to put himself "in a position where the Court's going to have to take action."

Three days later he did just that. He went to the judges' office area on the 5th floor of the Forsyth County Courthouse to hand-deliver to the trial court administrator a TRO motion. To do this, he entered the courthouse area that was set aside for the judges' chambers and separated from the rest of the courthouse by a door marked “Judges Offices.”

For visiting the office of the trial court administrator in violation of the court's directive to stay out of the judges' office area, Simon was held in indirect criminal contempt of court

On appeal, the COA rejected Simon's argument that he couldn't be held in contempt on the basis that Judge Spivey's and Judge Albright's orders were not reduced to writing: "a finding of criminal contempt, direct or indirect, does not require that the relevant 'process, order, directive, or instruction' be a formal written order."

Rule Violation Dismissal In Criminal Case; Judge Wynn Disagrees

Today in State v. Patterson the panel majority (Judges Calabria and Tyson) voted to dismiss a criminal defendant's appeal issue based on a rule violation (an overly broad assignment of error which failed to state the legal basis for the challenge). The majority held that there was no "manifest injustice" to justify suspension of the rules under Rule 2.

Judge Wynn concurred in the result. He thought the assignment of error, though broad, didn't impede understanding of the issue. He has argued in the past that it's better to reach the merits of a criminal defendant's appeal and reject the merits than to dismiss on a procedural technicality so that the criminal defendant will feel he had his day in court. Today Judge Wynn reiterated that view, opining that "the majority's adherence to technical rules of procedure denies this incarcerated defendant an opportunity to determine how the judges in the majority here would decide this issue if they chose to reach the merits of his appeal. That is a manifest injustice." Judge Wynn then went on to find that the defendant's argument failed on the merits.

The majority responded that Judge Wynn's conclusion that the appeal had no merit proved there was no manifest injustice in dismissing the appeal. By fusing the merits with "manifest injustice," the majority seems to open the door to the argument that a “manifest injustice” under Rule 2 is something tantamount to “plain error,” so that Rule 2 would permit the appellate court to entertain the merits of an appeal to prevent a party from being subjected to a plain error by the lower court. (Federal courts have held that, in the context of a motion for reconsideration, a “manifest injustice” is defined as an error by the court that is direct and obvious—i.e., manifest.) Under this meaning of "manifest injustice," the appellate court would, after finding a rule violation, have to determine whether the lower court committed an obvious mistake before invoking Rule 2 to issue a disposition on the merits. That seems like a sensible rule.

Attorneys' Fees Under Trade Secrets Protection Act

Today the COA resolved a perceived conflict in statutes regarding an award of attorneys' fees in trade secrets cases under the Trade Secrets Protection Act (TSPA), N.C.G.S. Ch. 66. The case is Bruning & Federle Mfg. Co. v. Mills.

In enacting the TSPA, the General Assembly said in N.C.G.S. 66-154(d): "If a claim of misappropriation is made in bad faith or if willful and malicious misappropriation exists, the court may award reasonable attorneys' fees to the prevailing party." Thus, an award of attorneys' fees to a prevailing defendant would be available only if the plaintiff's TSPA claim was advanced in bad faith.

On the other hand, in the same session law in which it enacted the TSPA, the General Assembly also amended the general statute on costs, N.C.G.S. 6-21, so that it reads: "Costs in the following matters shall be taxed against either party, or apportioned among the parties, in the discretion of the court: . . . (12) In actions brought for misappropriation of a trade secret under [the TSPA]." That's followed by this sentence in 6-21: "The word 'costs' as the same appears and is used in this section shall be construed to include reasonable attorneys' fees in such amounts as the court shall in its discretion determine and allow[.]"

Thus, Defendant in today's case argued that, by virtue of 6-21, a trial court has discretion to award attorneys' fees to a prevailing TSPA defendant regardless of whether the defendant could show that the TSPA claim was brought in fad faith.

The COA disagreed, holding that 66-154(d) governs all TSPA cases and that, therefore, a showing of bad faith is required to recover attorneys' fees.

Harsh Reminder That Counsel's Conduct Is Imputed To Client

Today the Court of Appeals (COA) issued a harsh reminder that a client is, under the law of agency, responsible with the bad conduct of its counsel in almost all instances. The case is Purcell Int'l Textile Group, Inc. v. Algemene AFW N.V., et al.

Here's what happened. Plaintiff sued a number of businesses alleging contract, tort, and Chapter 75 claims after Defendants terminated certain commercial agreements. Attorney W. Rickert Hinnant were retained by Defendants to represent them in the litigation.

Hinnant began settlement negotiations, reached a settlement, and announced the settlement in open court on the trial date. Hinnant then prepared a settlement agreement, committing Defendants to pay $850,000 in three installments over a 6-month period. Hinnant sent Plaintiff settlement agreement signed by Defendants. Or so it seemed.

The trouble is, Hinnant never sent them the written settlement agreement or even told his clients about the settlement. Instead, he forged their names to the agreement after negotiating it without their consent or knowledge. He never had authority to settle for the amount he did.

Unsurprisingly, Defendants defaulted on the payment under the settlement agreement, since they didn't know about it. This prompted Plaintiff to file a motion to enforce the agreement, which resulted a judgment for $850,000 plus attorneys fees of 15% (as provided in the settlement agreement) as well as an order attaching assets of Defendants.

The first time Defendants learned of the settlement agreement was when they learned the court had entered that judgment against them. They moved under Rule 60(b) for relief from the judgment, urging that Hinnant committed fraud on the court and exceeded his authority. The trial court rejected the motion, and the COA affirmed.

As for fraud on the court, the COA relied on Henderson v. Wachovia Bank of N.C. N.A., 551 S.E.2d 464, 468 (2001)--another harsh case with extreme facts leading to the imputation of attorney misconduct--for the proposition that attorney fraud on the court warrants relief only when the adverse party's attorney commits the fraud. Therefore, Defendants were not entitled to relief from any fraud that Hinnant may have committed, since he was Defendants' attorney, not Plaintiffs' attorney. As for Defendants' argument that Hinnant exceeded his authority, the COA held that Hinnant's actions were binding on Defendants under the doctrine of apparent authority, even though he exceeded his actual authority.

Historically the approach taken by North Carolina courts in these cases is to stick the innocent client with the attorneys' misconduct or negligence, leaving the aggrieved client with a malpractice action against the attorney as the only possible remedy.

Timelines For The Appellate Record

Today the COA affirmed the dismissal of an appeal based on the Plaintiff-Appellant's failure to abide by the timelines governing the record on appeal. The case is Cadle Co. v. Bunya.

After filing its notice of appeal, Plaintiff failed to serve a proposed record within 35 days, as required by the rules, and instead served it a week late (42 days). Defendant moved the trial court to dismiss the appeal, and at the hearing, Plaintiff made an oral motion for a (retroactive) extension of time, which the trial court granted, purporting to make the proposed record timely served.

The COA held this was error, because the motion wasn't based in writing, as required by N.C.R.App.P. 27 (d), but instead was done orally at the hearing.

The COA also held that the trial court had no authority to then grant Defendant an extension of time to file objections to the proposed record; only the COA may do that. See N.C.R.App.P. 27(c)(1).

The COA then held that, in any event, Plaintiff failed to file the agreed-upon record within 15 days after it was settled. This alone was ground to dismiss the appeal.

COA Decisions Today ...

The Court of Appeals issue decisions today. We'll post on those later today.