Tuesday, May 06, 2008, 5:28 PM

COA Upholds Rule 11 Sanctions In Non-Compete Case

Today, in an unpublished decision, the Court of Appeals (COA) upheld Rule 11 sanctions. The case is Yadkin Valley Bank & Trust Co. v. AF Financial Group. Judge Stephens wrote the decision, joined by Judges Steelman and Calabria.

Two bank officers entered into employment agreements containing non-competition clauses. But each had a catch: a "change in control" provision. Each agreement said that if the bank underwent a "change in control," the officer could determine in his "sole discretion" if his responsibilities or authority would thereby be "diminished materially"; if the officer makes that determination in his sole discretion, the agreement is deemed terminated by the bank, with the consequence that non-compete has no prospective application.

When their bank merged into Yadkin Valley Bank (Yadkin), Yadkin considered the officers bound by the non-compete agreements. But the officers invoked their "sole discretion" under the "change of control" clause to render the agreements terminated, thus giving their non-compete agreements no prospective application. They then accepted jobs with AF Financial. Yet Yadkin sued AF Financial for tortious interference with the non-compete agreements, even though they were not binding under the plain language of the employment agreements. The tortious interference claims were tossed out on the merits. Then the trial court slapped Yadkin with Rule 11 sanctions for bringing the interference claims.

The COA affirmed. The COA held that Yadkin didn't undertake undertake a reasonable inquiry into the facts before filing its complaint and that Yadkin didn't reasonably believe that its position was well grounded in fact. The Court also concluded that Rule 11 sanctions were warranted for the independent reasons that Yadkin's claims were not legally sufficient and were brought for an improper purpose.

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