The New COA

As we enter the new year, we'll see a different Court of Appeals.

Three judges (Tyson, McCullough, and Arrowood) are out, so we'll see three new judges: Beasley, Hunter, and Ervin.

The Court will have two Bob Hunters, which may be quite confusing.

The Court will consist overwhelmingly of Democrats (60%). (There are some comments on this point below.)

And most notably, the Court will have its first female majority ever (8-7), with Judge Beasley joining Judges McGee, Bryant, Calabria, Geer, Jackson, Stephens, and Stroud.

That's an amazing stat considering this: before the 1995 appointment of Judge McGee, only four women had ever served on the Court of Appeals in the first 28 years after the Court's formation in 1967 (those four included current N.C. Chief Justice Sarah Parker and Fourth Circuit Judge Allyson Duncan).

Indeed, in 2009 our entire appellate bench, both the Court of Appeals and the Supreme Court, will be split evenly among men and women, 11-11, under the leadership of a female Chief Justice.

Next Batch Of NC Court of Appeals Opinions: Jan. 6

The next opinions are due Jan. 6.

Divided Fourth Circuit Upholds Convictions Based On Obscene Cartoons And Email Text

Today, in a case argued more than a year ago, a divided Fourth Circuit upheld criminal convictions for (1) receiving over the internet obscene Japanese cartoons depicting minors engaged in sexually explicit conduct and (2) receiving and sending obscene text-only emails describing child sex fantasies. Judge Niemeyer wrote the majority decision, joined by a district judge sitting by designation. Judge Gregory dissented, contending that the convictions violated the First Amendment. The case is U.S. v. Whorley.

Supreme Court's Next Likely Release Date: Feb. 6, 2009

The NC Supreme Court likely will next release orders on petitions and opinions on February 6, 2009. The Court issued orders and opinions last Friday (see below).

COA Allows Partnership Dispute To Proceed

Yesterday in Wiggs v. Peedin the NC Court of Appeals (COA) reversed the trial court's grant of summary judgment for a defendant (Peedin) who denied the existence of a partnership formed by her late husband and argued that any such partnership dissolved upon his death and couldn't be imputed to her.

Plaintiffs contended that Peedin's late husband formed an oral partnership with them to develop land for use as a hog farming business. The farm operated for years before her husband's death. When he died, she denied them access to the land. She denied that her late husband ever formed a valid partnership with plaintiffs.

The COA held there was a genuine issue of material fact as to whether her late husband formed a valid partnership with plaintiffs, noting that a partnership may be formed by oral agreement and also by parties' conduct. Having so found, the COA next addressed Peedin's argument that the partnership must've dissolved upon his death and couldn't be imputed to her. The COA held that summary judgment was inappropriate, finding a genuine issue of material fact as to whether Peedin should be held to be plaintiffs' partner under the doctrines of partnership by estoppel or apparent authority, based on her spoken words to plaintiffs and their continued conduct with respect to the hog farm's operation after her husband's death.

COA Issues Important Decision On Assignments Of Error

Yesterday in Jones v. Harrelson & Smith Contractors the Court of Appeals (COA) issued a decision that could be important in the debate on assignments of error. It liberalizes Appellate Rule 10(c)(1)'s requirement that assignments must state the "legal basis upon which error is assigned." Judge Geer wrote the majority opinion.

First some background. The NC Supreme Court has held that on appeal of summary judgment, the appellant isn't required to make assignments of error. Why? Review of summary judgment "is necessarily limited to whether the trial court's conclusions as to whether there is a genuine issue of material fact and whether the moving party is entitled to judgment, both questions of law, were correct." Schenkel & Shultz, Inc. v. Hermon F. Fox & Assocs., 658 S.E.2d 918 (N.C. 2008) (citing Ellis v. Williams, 355 S.E.2d 479 (N.C. 1987) (reversing COA's dismissal of appeal, where COA dismissed because appellant had failed to include any assignments of error to summary judgment order)). In other words, because summary judgment is always based on two questions of law--whether there's a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law--the notice of appeal itself adequately advises the appellate court of the issues to be reviewed, and "assignments of error add nothing." Ellis, 355 S.E.2d at 481.

This raises the question: if assignments of error aren't required on review of summary judgment, why would they be required on review of other types of orders where review is necessarily limited to formulaic questions of law? For example, review of any Rule 12(b)(6) order is limited to whether the complaint's well-pleaded allegations, viewed in the light most favorable to plaintiff, state a claim on which relief may be granted. So why doesn't the notice of appeal adequately apprise the appellate court and the appellee of the basis for the appeal? Why would assignments of error be necessary?

Yesterday the COA took a step in this direction in connection with orders granting directed verdicts and JNOV, analogizing them to summary judgment orders.

In yesterday's appeal, the assignments of error didn't contain legal bases on which error was assigned. For example, one said the trial court erred by "granting defendant's Motion for Judgment Notwithstanding the Verdict as to the fraud claim and award of compensatory damages." The COA held that the failure to provide legal bases on which error was assigned wasn't a problem. With respect to a directed verdict or JNOV, the COA observed, appellate review would be limited to whether sufficient evidence existed for the claims to go to the jury. Consequently, requiring the appellant to state in an assignment of error the legal basis upon which error is assigned would require a "superfluous formality."

The COA should extend this holding to Rule 12(b)(6) orders. It makes no sense to require rigid compliance with Appellate Rule 10(c)(1) for review of Rule 12(b)(6) orders but not for review of summary judgment, directed verdict, or JNOV orders.

COA: Trial Court Erred In Kicking Soccer Injury Suit

Yesterday in Allred v. Capital Area Soccer League, Inc. the NC Court of Appeals (COA) revived a personal injury action brought by a soccer spectator.

Plaintiff attended a women's professional soccer match. She was in the stands behind one of the goals during pre-game warm-ups. One of these balls sailed over the goal and struck her in the head. She sued the Capital Area Soccer League, Inc. and CASL Soccer Properties LLC, one of which owned the facility. Her complaint alleged they were negligent in: (1) failing to warn patrons of the risk of being struck by a soccer ball leaving the field of play; (2) failing to provide a safe environment for patrons; and (3) failing to install protective netting behind the goals to protect spectators. The trial court dismissed the complaint under Rule 12(b)(6).

The COA reversed, invoking the principle that "it is rare that a negligence claim should be dismissed upon the pleadings" and that "[s]uch dismissals should be limited to cases where there is a clear, affirmative allegation of a fact that necessarily defeats a plaintiff's claims." The COA observed that cases dealing with spectator injuries at sporting events are typically resolved at the summary judgment or trial stage.

But in a 2002 case, involving a baseball spectator's case (brain damage caused by foul ball), the COA affirmed a Rule 12(b)(6) dismissal. The COA distinguished that case yesterday, observing that "the law concerning spectator injuries at baseball games has been more fully developed than that at soccer games." Hmm.

The COA held that plaintiff's complaint adequately alleged that defendants owed and breached a duty of reasonable care. With respect to the duty to warn, the COA held that the complaint didn't establish that the danger was known (actually or constructively) or so obvious that plaintiff should've been aware of it. The COA highlighted the complaint's allegation that plaintiff "had no knowledge or underlying information that there was a significant risk of being struck by a soccer ball when attending such events at this facility." The COA added, however, that this allegation, while sufficient to get past Rule 12(b)(6), may not be sufficient to withstand summary judgment: "Whether the plaintiff had knowledge of the danger is not limited to her experience at this particular stadium, but would encompass her knowledge of soccer in general, and of the sport derived from attendance at other venues," the COA said. "Further, the issue of whether a condition was open and obvious is also to be analyzed by whether the conditions were so obvious and apparent that they reasonably may be expected to be discovered."

Divided COA Rejects Whistleblower Suit

Yesterday in Helm v. Appalachian State University the Court of Appeals affirmed the dismissal of a former App State employee's suit under the State's Whistleblower Act because she failed to adequately allege (as an essential element) that she engaged in a "protected activity." Judge Calabria dissented, contending that plaintiff adequately alleged that the conduct she reported involved mismanagement of public funds.

COA Sanctions Appellant's Counsel For Filing Record On Appeal Different From The Proposed Record That Counsel Served On Appellees

Yesterday the Court of Appeals (COA) sanctioned appellant's counsel for filing a record on appeal that differed from the proposed record that was served on the appellee. The COA ruled that this conduct violated multiple Rules of Professional Conduct. The opinions were announced in two related decisions in the same case: Hackos v. Smith. The main decision is here and the other one is here.

Plaintiff lost on summary judgment. She filed an appeal. She also moved the trial court for reconsideration, and when that was denied, she filed a separate appeal. So she had two appeals. She served proposed records for each appeal. They didn't have assignments of error and other items (e.g., statement of organization of the trial court, statement of jurisdiction) that appeared in the final record that appellant filed with the COA.

The COA sanctioned counsel by holding that counsel's conduct (not filing the same record on appeal with the COA that counsel served on the appellees) constituted gross appellate rule violations and violated the Rules of Professional Conduct:

1) Rule 3.3(a). It prohibits knowingly making a "false statement of material fact or law" to a tribunal or failing to correct such a statement previously made to the tribunal.
2) Rule 3.4(a). It says a lawyer can't "unlawfully obstruct another party's access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value."
3) Rule 8.4(c). It prohibits "conduct involving dishonesty, fraud, deceit or misrepresentation."

Split COA Rules For Tobacco Companies In MSA-Related Dispute

Yesterday in State v. Philip Morris USA, Inc., a divided Court of Appeals (COA) held that the Business Court erred in interpreting a trust agreement that resulted from the tobacco Master Settlement Agreement. In the trust agreement the tobacco companies pledged economic assistance to tobacco farmers in certain States. As a result of federal legislation and related events, the tobacco companies no longer were required to fund the trust. Some States, however, brought this action to require the tobacco companies to continue making payments. Relying on its view of the trust's purpose rather than the plain language of the trust agreement, the Business Court held that the tobacco companies must make additional payments. The COA reversed, holding that the Business Court failed to apply correct principles of contract interpretation because it elevated the trust's purpose over the plain meaning of the language. Judge Elmore dissented, focusing on the agreement's purpose instead of its text.

COA: No Personal Jurisdiction Over Korean Companies

Yesterday the NC Court of Appeals (COA) held that the trial court erred in exercising personal jurisdiction over two Korean companies. The case is Cambridge Homes of N.C. Ltd. P'Ship v. Hyundai Construction, Inc. It's an important personal jurisdiction case for those who produce component parts or compounds incorporated into products that are sold in NC.

This products case arose from allegedly defective vinyl siding installed on homes that plaintiff constructed in NC. Personal jurisdiction was not contested by the company that provided and installed the siding (it's a NC company) or the company (a Korean company) that manufactured the siding and sold it to the installer. In short, this appeal wasn't about the manufacturer or installer of the siding.

Instead, this appeal concerned two related Korean companies (we'll call them K-1 and K-2) that created and provided chemical compounds that the Korean manufacturer used to make the siding. Specifically, K-1 created resins and sold them to K-2; K-2 then used the resins in chemical compounds that it sold in Korea to the Korean manufacturer. The manufacturer then used the compounds to make the siding.

The COA held that jurisdiction couldn't be exercised over K-1 and K-2 without violating due process. K-1 and K-2 didn't solicit any business in NC or contract with any NC resident or distributor. They didn't purposefully inject their products into commerce in NC: K-1 didn't even know that the chemical resins it sold to K-2 would later be used to manufacture the siding; K-2 knew its compounds would be used to manufacture siding but it didn't know the siding would be sold outside Korea.

The COA deemed it immaterial that K-2 traveled to NC to analyze or repair the siding after problems were reported by plaintiff. Likewise, the COA deemed it immaterial that K-2 shipped products to NC after the complaint was served, because those activities occurred after the alleged injury and after the complaint was filed.

Yesterday's COA Decisions

Yesterday the NC Court of Appeals released 33 published decisions. About half are criminal cases or domestic cases (parental rights, juveniles, child support, etc.).

More on these decisions later.

Fourth Circuit Issues Another CAFA Decision Against Removal In First-Impression Case

Today the Fourth Circuit issued its third decision this week on removal under the Class Action Fairness Act (CAFA). And once again the Court rejected removal. The case is Palisades Collections LLC v. Shorts.

This case began as a collection action filed by a collection agency for AT&T Mobility against a cell phone service customer. The defendant filed a class action counterclaim and joined AT&T as a counter-defendant on her counterclaim, contending that AT&T's cell phone service contracts violated the West Virginia Consumer Credit and Protection Act.

Relying on CAFA, AT&T removed the case to federal court, presenting an issue of first impression: can a party joined as a defendant to a counterclaim remove the case to federal court solely because the counterclaim satisfies CAFA's jurisdictional requirements?

The panel majority said no. The opinion was written by Chief Judge Williams and joined by Judge King.

Judge Niemeyer dissented, concluding that CAFA's text does indeed authorize AT&T to remove this class action, even though AT&T was sued as a counterclaim defendant, not as an original defendant.

The U.S. Chamber of Commerce had filed an amicus brief in favor of removal. The Chamber argued in that brief: "If the district court's decision is left undisturbed, the plaintiffs' bar will have a tool for circumventing CAFA – simply bring all class actions as counterclaims. As a practical matter, it will be relatively easy for plaintiffs' attorneys to find debt collection proceedings or other small-scale litigation to serve as the vehicle for such counterclaim class actions. Indeed, if need be, plaintiffs' attorneys could even engineer such initial proceedings by, for example, having a potential counter-claim plaintiff fail to pay certain bills."

Supreme Court Affirms COA Award of Attorneys' Fees

In Terry's Floor Fashions, Inc. v. Crown Gen. Contr'rs, Inc., the NC Supreme Court on Friday affirmed a split COA decision affirming an award of attorneys' fees to plaintiff in a subrogation-lien case brought by a unpaid subcontractor.

The subcontractor had done work on a dentist's office. The dentist refused to pay the general contractor (GC), so the sub wasn't paid. The sub thus put a lien on the property and sued the GC and the dentist. The dentist was slapped with attorneys' fees under N.C. Gen. Stat. § 44A-35 for unreasonably refusing to resolve the dispute. That finding was based on correspondence from the dentist's counsel stating that the dentist wouldn't settle no matter what but instead would litigate to judgment through "exhaustion of all appeals"; and counsel added, "If we must file pleadings, then we will be looking to your client for a settlement payment to [defendant dentist], and that is the only settlement we will consider."

In upholding the fee award, the COA majority observed that the dentist was told by his own consultant that it would cost only about $7,000 to remedy the GC's deficient performance under the prime contract and that it was unreasonable for the dentist to insist that the GC's deficient performance extinguished the dentist's obligations under the prime contract. Judge Tyson dissented, arguing that the dentist didn't unreasonably refuse to settle the case because he made two separate and substantial settlement offers to plaintiff and "asserted reasonable defenses against plaintiff’s claims." Judge Tyson also said the trial court failed to make appropriate findings of fact as to the time and labor expended, skill required, customary fee for like work, and experience or ability of the attorney based on competent evidence. The Supreme Court rejected Judge Tyson's analysis and affirmed the fee award.

Fourth Circuit Rejects CAFA Diversity Jurisdiction

On Friday, in a pair of class actions against payday lenders who removed the cases to federal court under the Class Action Fairness Act (CAFA), the Fourth Circuit held that federal jurisdiction was lacking under CAFA's "minimal diversity" provision. Thus, the cases will proceed in state court. The cases are Dennison v. Carolina Payday Loans and Johnson v. Advance America, Cash Advance Centers of S.C., Inc. Johnson is the lead opinion. Both opinions were written by Judge Niemeyer and featured the same panels. Both cases arose from South Carolina and involved state law claims.

The class action complaints defined the proposed classes as consisting of S.C. citizens. The defendant in Johnson is a Delaware corporation with its principal place of business in S.C. The defendant argued that because of its dual citizenship, it should be considered a citizen of Delaware, thus making it diverse to the S.C. plaintiffs. The Fourth Circuit disagreed. Likewise, and conversely, in Dennison the Fourth Circuit rejected the defendant's argument that for CAFA diversity purposes the court should look at the defendant's principal place of business (Georgia) rather than its state of incorporation (S.C.).

The bottom line: dual citizenship isn't sufficient to establish minimal diversity under CAFA; both a defendant's state of incorporation and its principal place of business will be considered in determining diversity. (This conclusion hasn't been embraced by all courts: the N.D. Ga. reached the opposite conclusion last year.)

In addition, in both cases the Fourth Circuit rejected the defendants' alternative arguments that CAFA's minimal diversity requirement was satisfied on the ground that the complaints' class definitions include citizens of multiple states--i.e., the classes aren't limited to S.C. citizens. The Court disagreed, reading the class definitions to limit membership to persons who were S.C. citizens at the time the complaints were filed. In other words, plaintiffs, as masters of their complaints, pleaded their way out of CAFA.

The Court (particularly Judge Agee writing separately) added that the defendants' proof of non-S.C. citizenship for some class members wasn't sufficient. Defendants contended in affidavits that some class members changed their residency to other States. Residency, the Court emphasized, isn't the same as citizenship for diversity purposes; the fact that a class member may reside outside S.C. doesn't mean the person is no longer a citizen of S.C.

Judge Agee dissented in part in both cases because he disagreed that the class definitions in the complaints (particularly the damages classes, as opposed to the injunction classes) include only S.C. citizens. Those classes are defined as "[a]ll citizens of South Carolina who borrowed money from Defendant" and "[a]ll citizens of South Carolina who renewed a loan with Defendant" during a period before the complaint. Judge Agee said these backward-looking definitions lack a temporal limitation requiring that class members must've been S.C. citizens at the time the complaints were filed. He thought these class definitions left open potential membership to persons who were S.C. citizens when they transacted with defendants but who weren't S.C. citizens when the complaints were later filed.

One wonders if plaintiffs deliberately crafted their definitions in this way so they could try to have it both ways: if the cases were removed to federal court under CAFA (as they were), plaintiffs could argue (as they did) that the classes are limited to S.C. citizens at the time the complaints were filed; but if the cases hadn't been removed, one wonders if plaintiffs would've contended in state court that their damages classes include former S.C. citizens.

Fourth Circuit Applies Stringent Pleading Rules To Reject Securities Action

On Friday, in Cozzarelli v. Inspire Pharma. Inc., the Fourth Circuit rejected a securities fraud action. This is an important case on pleading requirements and the application of Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007). Judge Wilkinson wrote the opinion for the Court.

Plaintiffs filed a class action complaint on behalf of purchasers of a pharmaceutical company's stock. They alleged that the company and three of its directors committed securities fraud, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, by overstating the prospects for an experimental drug the company was developing. They also brought claims under the Securities Act of 1933 by contending that defendants made false or misleading statements in prospectuses.

I. Claims Under '34 Act

With respect to the fraud claims under the '34 Act, the Court stressed the exacting pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA), in particular the scienter requirement, which the Court confirmed is exceedingly difficult to satisfy through circumstantial allegations. Relying on Tellabs, the Fourth Circuit emphasized that an inference of scienter must be "compelling" and "powerful." And an inference of scienter can be compelling and powerful only "when it is weighted against the opposing inferences that may be drawn from the facts in their entirety." When the facts as a whole more plausibly suggest that the defendant acted innocently or negligently rather than with intent or severe recklessness, the action must be dismissed.

The Court chided plaintiffs for stringing together in their complaint a series of isolated allegations divorced from context, including snippets from analyst reports that plaintiffs didn't attach to their complaint. Rejecting plaintiffs' argument that the Court should rely solely on the complaint's discrete allegations, the Court looked beyond the complaint to consider in full these reports. These reports allowed an inference supporting an innocent intent; that inference, the Court held, was more powerful than a competing inference that defendants acted with a nefarious intent.

In addressing plaintiffs' allegation that defendants had a motive to lie because the company needed to raise money to fund its operations, the Fourth Circuit held that "a strong inference of fraud does not arise merely from seeking capital to support a risky venture." "Indeed," the Court added, "the motivations to raise capital or increase one's own compensation are common to every company and thus add little to an inference of fraud." "If we inferred scienter from every bullish statement by a pharmaceutical company that was trying to raise funds, we would choke off the lifeblood of innovation in medicine by fueling frivolous litigation," the Court added.

The Court also rejected plaintiffs' contention that the defendant-directors' sales of stock supported an inference of scienter. Those sales, the Court held, were not unusual or suspicious in light of the total number of shares and vested stock options held by defendants (information the Court obtained from SEC filings): the directors sold 13%, 12%, and 3% of their holdings, respectively.

II. Claims Under '33 Act

With respect to the separate claims for false or misleading prospectuses under Sections 11 and 12(a)(2) of the '33 Act, the Court held that these claims are governed by FRCP 9(b)'s requirement that fraud must be pleaded with particularity, even though these claims aren't fraud claims. Sections 11 and 12(a)(2) prohibit materially false statements or omissions in prospectuses, without requiring proof of scienter. Plaintiffs thus argued that those claims aren't fraud claims governed by Rule 9(b), but the Court disagreed. "Although claims under Rule 9(b) and 12(a)(2) may not have fraud as an element, Rule 9(b) refers to 'alleging fraud,' not to causes of action or elements of fraud," the Court observed. "When a plaintiff makes an allegation that has the substance of fraud, therefore, he cannot escape the requirements of Rule 9(b) by adding a superficial label of negligence of strict liability."

Plaintiffs argued that Rule 9(b) shouldn't apply because the complaint "expressly exclude[s] and disclaim[s] any allegation that could be construed as alleging fraud" with respect to the '33 Act claims. The Fourth Circuit disagreed: "a conclusory disclaimer cannot alter the substance of plaintiffs' allegations, which sound in fraud."

Applying Rule 9(b), the Court held that plaintiffs failed to plead with particularity how the statements in the prospectuses were false or misleading, and therefore the claims had to be dismissed. And the Court held that the district court didn't abuse its discretion in denying plaintiffs an opportunity to amend the complaint to plead with more particularity, in part because plaintiffs didn't move below for leave to amend but instead dropped a footnote in their district court brief contending that if their complaint is deficient they should be permitted to amend.

Supreme Court Splits 4-3 In Medicaid Lien Case

Yesterday, in Andrews v. Haygood, the NC Supreme Court (reviewing a divided COA decision) split 4-3 on this issue: when a Medicaid beneficiary settles with a tortfeasor for a lump sum and the settlement terms don't establish the portion allocated to past medical expenses (versus future medical expenses, pain and suffering, etc.), can the State, consistent with federal Medicaid law, assert a lien on the settlement proceeds for the full amount of past medical expenses it paid under Medicare? Or must there be a determination of what portion of the settlement is attributable to past medical expenses, with the lien limited to that amount? Really the case came down to how to read Arkansas Dep't of Health & Human Servs. v. Ahlborn, 547 U.S. 268 (2006), which held that Arkansas violated federal Medicaid law by imposing a lien on a settlement in amount greater than the stipulated amount of medical expenses.

In yesterday's case, the majority, in an opinion by Justice Newby, held that Ahlborn "does not mandate a judicial determination of the portion of a settlement from which the State may be reimbursed for prior medical expenditures." Justice Hudson, joined by Justices Brady and Timmons-Goodson, disagreed. The dissent concluded that when settling parties haven't allocated settlement proceeds to medical expenses, "the only way to ensure that the application of the statute complies with Ahlborn is to provide for such an allocation."

This might be one for the U.S. Supreme Court to resolve.

Supreme Court Grants Discretionary Review In Personal Jurisdiction Case

Yesterday the NC Supreme Court granted discretionary review in a case in which the Court of Appeals (COA) held there was no personal jurisdiction over the defendant under the longarm statute. The case is Brown v. Ellis, and the COA decision is here. It's an alienation of affections and criminal conversation case. The COA's longarm ruling turned on the fact that the cheating wife wasn't present in NC at the time the defendant solicited her. The COA decision issued in July 2007. For our post on that decision when it came down (entitled, "If Your Spouse Cheats, Hope It Happens In NC"), see here.

Supreme Court Rules In Favor Of Property Owners

Yesterday in Chapel Hill Title and Abstract Co. v. Town of Chapel Hill, the Supreme Court ruled in favor of property owners in their battle with Chapel Hill. Petitioners wanted to build a home in Chapel Hill on a vacant lot zoned for residential use. But because 78.5% of the property fell within a Resource Conservation District (RCD) subject to a RCD Ordinance that the Town adopted in the 1980s, petitioners needed a variance from the Town. The variance was crucial because the remainder of the property (the other 21.5%) is subject to 50-year-old restrictive covenants that preclude building on that portion of the property.

The Town's Board of Adjustment denied the variance, concluding that the RCD Ordinance alone didn't leave petitioners with "no legally reasonable use" of the property, on the theory that 21.5% of the property remained available for construction. In other words, the Board ignored the restrictive covenants in determining if petitioners have a legally reasonable use of the property.

The Supreme Court framed the issue as "whether the Board should consider the operation of the RCD Ordinance independently, or in conjunction with, the effect of the private restrictive covenants, when determining if petitioners are entitled to a variance." Relying on the RCD Ordinance itself, the Court held that the Board erred in failing to consider the restrictive covenants. The Board should've considered them in determining whether a variance was necessary to leave the petitioners with a "legally reasonable use" of the property. The Supreme Court held that the Board must give petitioners the variance.

Justice Brady issued a concurring opinion adding his view that the Town's denial of a variance without just compensation amounted to an unconstitutional (regulatory) taking of property. Relying on Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992), Justice Brady opined that the RCD Ordinance, as applied in connection with the restrictive covenants, denied petitioners of all economically beneficial or productive use of their land, thus resulting in a taking requiring just compensation. Justice Brady said the Town couldn't have it both ways: it couldn't deny a variance and deny just compensation.

The Court didn't address the taking issue, however, because the Court ordered the Town to grant the variance based on the language of the Ordinance.

Supreme Court Embraces Broad Standing Rule For Zoning Cases

Yesterday in Mangum v. Raleigh Bd. of Adjustment the NC Supreme Court held, contrary to the Court of Appeals, that property owners in close proximity to a proposed business had standing to challenge a special use permit. The crux of the issue was this: in order to have standing to challenge a zoning decision, do adjacent or nearby property owners have to establish that approval of a permit would diminish their property values; or can they rely on other, more generalized concerns and secondary effects such as increased traffic, parking, and safety concerns? The majority, in an opinion written by Justice Brady, held that adjacent or nearby property owners can have standing without establishing a diminution in property values. Justice Timmons-Goodson dissented.

This case arose in 2005 when a business applied for a special use permit for an adult establishment (a topless club) in Raleigh. It would be located on a small, dead-end street in an industrial zoning district with a heavy equipment rental company, a commercial steel company, etc. The Raleigh Board of Adjustment held a hearing on whether to grant a special use permit. A group of adjacent and nearby property owners (Petitioners), including the owner of the Angus Barn restaurant, testified at the hearing against a permit.

The Board approved the permit. Petitioners appealed, and the superior court reversed the Board's decision. The Court of Appeals (COA) reversed, however, holding that Petitioners lacked standing to challenge the Board's permit approval. The Supreme Court granted discretionary review and reversed.

The majority concluded that Petitioners had established standing based on their testimony that the proposed adult establishment would increase traffic, create overflow parking problems, present stormwater runoff problems, pose safety issues, and have other "secondary effects" on their nearby properties and businesses (littering, noise, vandalism). The majority held that these were special damages to Petitioners above and beyond harm to the community as a whole.

In dissent, Justice Timmons-Goodson accused the majority of "misappl[ying]" and "disregard[ing]" longstanding precedent "in favor of the less consistent rule of some other jurisdictions." She said the majority "failed to cite any [N.C.] cases which hold that allegations regarding increased traffic, increased water runoff, parking, and safety concerns alone are sufficient to establish special damages for standing." She argued that N.C. had always had a "stringent" standing rule rejecting standing for adjacent or nearby property owners unless they can establish (as special damages) that the zoning approval will reduce their property values. In this case, Petitioners didn't allege they would suffer reduced property values, and the trial court didn't find that they would. Thus, Justice Timmons-Goodson would find, as the COA did below, that Petitioners lacked standing.

Now this case will go back to the COA to determine whether the trial court erred in reversing the Board's decision approving the special use permit. By the time the COA resolves the case, nearly four years will have passed since the permit application.

Supreme Court Adopts COA Dissent Saying Justifiable Reliance on MLS Listing Is A Jury Question

In Crawford V. Mintz, the COA majority reversed a jury verdict and held that defendants real estate agent and broker did not negligently represent a home's features because plaintiffs were not justified in relying on an MLS listing that stated the home was connected to the city sewer. Plaintiffs discovered that the home actually had a septic tank when it backed up and flooded their backyard. The jury awarded them the cost of repairing the sewer system and connecting the home to the city sewer. The COA majority said that reliance was not justifiable because plaintiffs received the MLS listing not from defendants but from their own realtor, and because plaintiffs' realtor omitted the disclaimer "Information Deemed Reliable But Not Guaranteed" from the listing. Judge Steelman dissented, arguing that despite any disclaimers, the information given to plaintiffs was false, and the trial court properly submitted the issue of justifiable reliance to the jury. The Supreme Court reversed the COA per curiam for the reasons stated in Judge Steelman's dissent.

Today's NC Supreme Court Decisions

Today the NC Supreme Court released orders on petitions and opinions.

The Court granted discretionary review in several criminal cases and in a couple of civil cases: a workers' comp case in which the plaintiff lost below, and a personal jurisdiction case in which the Court of Appeals (COA) found no personal jurisdiction. Oddly, the latter case was decided by the COA way back in July 2007, and a PDR was filed in August 2007, 16 months ago. It's not clear why there was such a delay.

The Court issued opinions in 20 cases (eight criminal). Ten are regular opinions. Eight are per curiam affirmances. Two are per curiam reversals. One of the criminal cases includes this interesting opinion by Justice Brady tracing the history of the corpus delicti rule, an opinion that manages to cite Hammurabi's Code, the Torah, the Koran, Blackstone, and 17th Century English cases, along with characters such as Moses and Sir Walter Raleigh.

More on these decisions later.

4th Circuit Slashes Attorneys' Fee Award

This past week (Dec. 3) the Fourth Circuit in Grissom v. The Mills Corp. vacated a $325,500 award in attorneys' fees and costs that was entered following plaintiff's acceptance of a Rule 68 offer of judgment (for $130,000) in a SOX whistleblower case. First, the Court held that Rule 68 doesn't permit an award of fees/costs incurred after the date of the Rule 68 offer of judgment: Rule 68 says the party who tenders the offer may recover the "costs then accrued." Fed. R. Civ. P. 68 (emphasis added). Thus, the post-offer fees/costs had to be vacated.

Second, applying the lodestar method, the Court held that hourly fee amounts approved by the district court (E.D. Va.) were too high. In support of these rates, plaintiff's counsel, who work at a Reston, Va. law firm specializing in employment litigation, tendered the following: affidavits establishing the hourly rates of lawyers in the firm; fee awards approved by courts in other cases involving these counsel; and a matrix showing prevailing hourly rates for litigation counsel in the D.C. area (the so-called Laffey Matrix, maintained by the U.S. Attorney's Office in D.C.). That wasn't good enough.

There were two main problems. First, counsel didn't provide prevailing market rates for similar work in the relevant community--the Eastern District of Virginia. (The Court said it wasn't persuaded that the Laffey Matrix is a reliable indicator for rates of litigation attorneys in Reston.) Second, the Court was concerned about counsel's billing rate increases. Lead counsel's rate had jumped from $350/hr in 8/04 to $400/hr in 8/05 to $450/hr in 5/06--a total jump of 29% over two years, which, the Court said, far exceeded the annual U.S. inflation rates during that time (less than 4%).

The Fourth Circuit ultimately fixed the maximum allowable rates that the district court could award in this case, and they were were far lower than the lawyers' standard hourly rates. For example, with respect to four associates who billed at $350/hr, $325/hr, and $300/hr over the relevant time period, the Fourth Circuit slashed their maximum recoverable rates to $250/hr, $200/hr, and $180/hr, respectively (reductions ranging from 29%-40%).

The Fourth Circuit also instructed the district court on remand to reconsider whether counsel unreasonably billed too many hours, with particular emphasis on the amount of time they billed on discovery motions. And the Fourth Circuit held that the district court erred in finding that counsel should get special consideration for having to work at a faster pace to meet court-imposed deadlines. These were standard deadlines for litigating in the E.D. Va., the Fourth Circuit held, and therefore they had no basis in determining a reasonable fee award.

It wasn't a total loss for plaintiff, however: the Fourth Circuit rejected defendant's argument that a party accepting a Rule 68 offer of judgment isn't a "prevailing party" for purposes of federal fee-shifting statutes.

The bottom line of this case: if you're moving for attorneys' fees under the lodestar method, (1) you need to corroborate the reasonableness of the rates by showing comparable rates for similar work in the relevant community, and (2) you need to justify your firm's internal rate increases.

4th Circuit Rules Against Employee In SOX Whistleblower Suit

This past week (Dec. 3) the Fourth Circuit, in Platone v. U.S. Dep't of Labor, concluded that the plaintiff's allegations to company management didn't qualify for whistleblower protection under the Sarbanes-Oxley Act (SOX), 18 U.S.C. § 1514A, because her allegations didn't definitively and specifically relate to fraud against shareholders. An ALJ had ruled for the plaintiff, but that decision was reversed on administrative appeal. The administrative appellate body ruled that the employee had simply alerted company management to internal billing discrepancies but had not definitively and specifically alerted management to fraud. The Fourth Circuit affirmed, holding "that a complainant must alert management to more than the fact that the company’s near-term profits were affected by billing discrepancies" to qualify for SOX whistleblower protection.

4th Circuit: Arbitration Award May Be Final, Binding, And Judicially Enforceable Even If Arbitration Agreement Doesn't Explicitly Say So

This past week (Dec. 3) the Fourth Circuit decided a Federal Arbitration Act (FAA) case, Qorvis Communications, LLC v. Wilson, involving a failed attempt to prevent judicial confirmation of an arbitration award.

Qorvis sued Wilson, its former executive employee, for breach of his employment agreement. The agreement had an arbitration clause providing for JAMS arbitration (Judicial Arbitration and Mediation Services, Inc.). They arbitrated, and the arbitrator entered an award of $366,000 against Wilson. After the district court entered judgment on the award, Wilson appealed, arguing that the district court lacked authority to confirm the award.

Why? The parties' arbitration agreement didn't provide that an award would be enforceable by court judgment. Wilson relied on § 9 of the FAA which says, "If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, . . . then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order." 9 U.S.C. § 9 (emphasis added). Relying on the absence of an agreement for judicial enforcement, Wilson argued that the district court lacked authority to enter judgment. In essence, Wilson was arguing that without language in the arbitration agreement stating that a court can enter judgment, the arbitration isn't final and binding; rather it's merely a condition precedent to bringing suit in court.

The Fourth Circuit disagreed. Noting that § 9 need not be satisfied by any magic language, the Court held that other evidence may show that the parties contemplated judicial enforcement of an arbitration award. In this case, that other evidence included other language in the arbitration clause, language in JAMs rules incorporated by the arbitration clause, and the parties' conduct (e.g., the employee moved the court post-arbitration to vacate the award).

The bottom line in the Fourth Circuit appears to be this: if you want to avoid making an award final and binding and subject to judicial enforcement, you have to express that intention explicitly and unambiguously in the arbitration agreement itself. Otherwise the Court will presume an intention for final, binding arbitration with judicial enforcement of arbitration awards.

NC Supreme Court To Issue Decisions Dec. 12

The NC Supreme Court is scheduled to issue orders on petitions on Friday Dec. 12. We expect the Court to release its next batch of opinions that day too.

COA Says Failure to Deliver Insurance Contract is Not a Per Se UDTP

In Defeat the Beat, Inc. v. Underwriters at Lloyd's London, the COA held that a failure to promptly deliver a copy of an insurance policy to an insured party is not a per se unfair or deceptive act. The plaintiff contended that defendants committed an unfair trade practice by failing to provide plaintiff with a copy of its insurance policy in violation of Section 58-21-45(a) of the Surplus Lines Act, which states "As soon as surplus lines insurance has been placed, the producing broker or surplus lines licensee shall promptly deliver the policy to the insured." The COA held that the Act does not confer a private right of action, and only initiates a proceeding by the Insurance Commissioner.

COA Decisions Today

Today the NC Court of Appeals released 19 published opinions. These include seven criminal cases (including a juvenile case), three workers' comp cases, two parental termination cases, and an equitable distribution case, plus six other civil cases. There were four dissents: three in workers' comp cases, one in a parental termination case. Two of today's decisions involve appeals dismissed for untimely notices of appeal.