Last Week's COA Decision Affecting Charter Schools

Last week we didn't post about a NC Court of Appeals (COA) decision involving education law: Sugar Creek Charter School, Inc. et al. v. Charlotte-Mecklenburg Bd. of Educ. (“Sugar Creek II”).

We have colleagues in our firm who practice education law, and one of them, Sarah Motley of Charlotte, prepared this post about the case.

The case involves Judge Cayer's summary judgment order directing the Charlotte-Mecklenburg Board of Education (CMS) to distribute $1,295,857.00 to the plaintiffs, which are charter schools. (Last week's decision is the COA's second decision arising out of Judge Cayer's order. See Sugar Creek I, 655 S.E.2d 850 (2008).)

The charter schools sued CMS challenging its distribution of per pupil pro rata shares of money from the local school fund. At issue in Sugar Creek II was CMS's claim that the Court lacked subject matter jurisdiction to hear the case: CMS claimed that the State Board of Education (BOE) instead must hear all cases involving the distribution of local school funds.

The COA held that nothing in North Carolina law grants the BOE supervisory authority over local school funds or the power to determine disputes or to provide redress for alleged misuse of local funds. The COA also rejected CMS's claim that there was no private cause of action for violations of the charter school funding statutes.

Finally, with respect to calculating local funds, the Court analyzed several categories and determined whether or not they were appropriately included in the determination of the "per pupil local current expense appropriation."

This case is significant because of the narrow reading of the state BOE's authority and the continued victory for the charter schools that will have ramifications for many of the 115 school boards and the 100 charter schools in North Carolina.

Today's COA Decisions

Today the NC Court of Appeals released 15 published decisions. Frankly there's nothing of significance in today's batch for our purposes.

Today's prize for the most bizarre case: a statutory rape case where the defendant won a new trial. Defendant lived with his wife and their kids, and with his girlfriend and her kids. That's where the trouble began: one of the girlfriend's daughters gave birth at 15, and again at 16, and DNA testing showed that defendant was the father of both. His defense: the girl drugged him with a pill that rendered him unconscious, and then she forced him into unconscious relations. His key witness: the girl. She told a detective that on two occasions she got pills that could "lay a person out" and she put them in defendant's drink after he had "come home tired from drinking and smoking drugs," with the consequence that "he couldn't move or anything," making him "dead-weight" before she had relations, resulting in the two pregnancies. Because the trial judge didn't clearly instruct the jury that it had to find "beyond a reasonable doubt" that defendant was conscious, he gets a new trial. (Judge Hunter dissented because he would've dismissed the charge outright for insufficient evidence of defendant's consciousness.)

4th Circuit Issues Bankruptcy Decision On Commodities "Swap Agreements"

Yesterday the Fourth Circuit decided a bankruptcy case, In re National Gas Distributors, involving commodities "swap agreements." The case drew a number of amicus briefs. Here's an article about the case by Zach Lowe courtesy of Am Law Daily.

Supreme Court Finds Personal Jurisdiction Against Foreign Corporation's CEO Based On His Corporate Contacts With NC

On Friday the NC Supreme Court issued a per curiam decision on personal jurisdiction. The Court reversed a Court of Appeals (COA) decision that rejected personal jurisdiction against a foreign corporation's CEO. The Supreme Court adopted the dissenting opinion of (former) COA Judge Arrowood. The case is Saft America, Inc. v. Plainview Batteries, Inc.

We previously wrote about this case here when the COA decision issued. We refer you to that post's discussion of the issue on which the COA panel was unanimous: its holding that personal jurisdiction lies over a foreign corporate parent based on veil-piercing allegations.

Where the COA split was on whether personal jurisdiction exists over a foreign corporation's CEO, and we discuss that issue below.

Saft is a NC manufacturer. Defendant Plainview is a NY corp which had a business relationship with Saft, purchasing millions of dollars of goods from Saft pursuant to contracts between them. The relationship broke down after a dispute over payments. Saft sued Plainview. But Saft also sued Bernie Erde, an officer of Plainview and owner of 49% of Plainview's stock (the "CEO"). And Saft also sued another NY corp, Energex, which apparently owned a stake in Plainview, and which had overlapping management and ownership with Plainview. Both the CEO and the parent moved to dismiss for lack of personal jurisdiction.

With respect to the CEO, Saft alleged that it dealt with the CEO as Plainview's representative and that the CEO had visited N.C. in connection with their business relationship, for purposes of touring Saft's facility and negotiating a contract. The CEO submitted an affidavit admitting he had visited Saft's factory in N.C. in his role as a corporate officer of Plainview, but he contended that any dealings he had with Saft were solely in his capacity as an officer of Plainview. The trial court found he was subject to personal jurisdiction.

After finding personal jurisdiction against the parent based on veil-piercing allegations, the COA majority held there was no personal jurisdiction over the CEO. From the principle that personal jurisdiction over an individual officer of a corporation may not (consistent with due process) be predicated upon the corporation's contacts with the forum, the majority reasoned that contacts undertaken by an officer in his official capacity on behalf of the corporation can't establish personal jurisdiction over the officer. The majority distinguished earlier cases that had found jurisdiction against corporate officers, holding that those cases involved acts taken by the officers in their individual capacities (e.g., signing personal guarantees or a promissory note in their individual capacities). Because Saft failed to allege any act against the CEO that was committed in his individual capacity, the majority held that he was not subject to personal jurisdiction.

Judge Arrowood dissented. He didn't disagree with the proposition that personal jurisdiction over an officer can't be based merely on the corporation's contacts. But he disagreed that acts taken by an individual as an officer and principal shareholder of a corporation don't count. In his view, the precedents "did not hold either that (1) personal jurisdiction over a defendant may only be based on the contacts he has with the state in the course of his private life; or, conversely, that (2) in assessing personal jurisdiction we may not 'count' a defendant's contacts if they were made as part of his employment." "Indeed," he contended, "relevant precedent consistently interprets the requirement that a defendant act in his 'individual capacity' to mean only that he must personally have minimum contacts with North Carolina, and not that these contacts must arise from his 'personal life.'" As Judge Arrowood read the case law, "the determination of whether personal jurisdiction is properly exercised over a defendant does not exclude consideration of defendant's actions merely because they were undertaken in the course of his employment. The corporate actions of a defendant who is also an officer and principal shareholder of a corporation are imputed to him for purposes of deciding the issue of personal jurisdiction." Judge Arrowood relied heavily on this statement from a 30-yr-old Supreme Court case holding that where the "defendant is a principal shareholder of the corporation and conducts business in North Carolina as principal agent for the corporation, then his corporate acts may be attributed to him for the purpose of determining whether the courts of this State may assert personal jurisdiction over him." United Buying Group, Inc. v. Coleman, 251 S.E.2d 610, 614 (N.C. 1979).

On Friday the Supreme Court agreed with Judge Arrowood, so now the case will go forward against Plainview's CEO (and Plainview's parent, Energex).

NC Supreme Court Decisions Today

Today the NC Supreme Court released its first orders and opinions of 2009.

The Court granted discretionary review in a handful of cases. And the Court issued decisions in five cases--four of which are summary per curiam affirmances or reversals. The five cases are: a criminal case, two parental rights cases, a case involving conversion by the executor of an estate, and a dispute over personal jurisdiction. (We discussed the latter case extensively when the decision came down from the Court of Appeals, see here; the Supreme Court today adopted the dissenting opinion below, finding personal jurisdiction over the CEO of a foreign corporation based on contacts made in his corporate capacity.)

The Court of Appeals didn't fare well today: four of the five cases were reversals (three of them adopting dissenting opinions below).

More on today's action later.

COA Majority: Party Represented By Attorney in Real Estate Transaction Bears the Risk of Loss When Attorney Embezzles Sale Proceeds

Tuesday, in Johnson v. Schultz, the COA held that the party who was represented by an attorney who embezzles sales proceeds from a real estate transaction bears the risk of loss.

In this case the Schultzes entered into contract with Johnsons to the Johnsons' purchase real estate. An attorney named Parker handled the closing. He gave a check to the Johnsons from his trust account in the amount of the proceeds of the sale, but then embezzled the money before the Johnsons cashed the check. The Johnsons sued the Schultzes and Parker. The COA majority held that the Schultzes should bear the loss because Parker was their attorney, saying that where no party to a real estate transaction is at fault, courts should "impose the loss on those parties whom the attorney represented....if the attorney solely represented the buyer or the seller, then the loss should fall solely on that party alone. However, if the attorney represents both buyer and seller, the buyer and seller should share the loss."

Judge Wynn dissented, saying that the Johnsons, not the Schultzes, should bear the loss, because the Johnsons did not abide by the contract terms and accepted the proceeds of the sale in the form of a check rather than in cash (as required by the sales contract). He also noted that the Schultzes should not be penalized for the "intentional and criminal conduct of the attorney" because such conduct violated the attorney-client relationship.

COA: Insurance Policies Covering Car Involved in Florida Accident Are Governed by the NC Uniform Arbitration Act

Tuesday the COA held that insurance policies covering a car involved in an accident in Florida were governed by the North Carolina Uniform Arbitration Act. The case is N.C. Farm Bureau v. Sematoski.

This case involved a insurance coverage dispute stemming from a car accident in Florida in which Semtoski was injured. Sematoski was a named beneficiary on insurance policies issued by plaintiffs, and attempted to collect underinsured motorist coverage. These policies were applied for and issued in North Carolina, and they specified that bodily injury claims involving an underinsured motorist would be decided by arbitration. Sematoski filed a motion to compel arbitration and stay the proceedings. Defendants argued that they were entitled to judgment as a matter of law on the issues of underinsured motorist coverage.

The COA concluded that the dispute should be submitted to arbitration. The COA reasoned that the policy was governed by North Carolina's Uniform Arbitration Act and not the Federal Arbitration Act because the insurers were North Carolina corporations, the policies were applied for and entered into in North Carolina, and the covered vehicles were registered and garaged in North Carolina. Even though the accident occurred in Florida, the COA noted that there was no evidence in the record that the collection of insurance premiums or payment of insurance benefits involved or affected commerce outside of North Carolina. The COA also held that Sematoski did not waive her contractual right to arbitration when she filed a lawsuit against plaintiffs in a Florida state court, and that plaintiffs' arguments to the trial court concerning the merits of the coverage issue should be heard by the arbitrator because they did not concern the scope of or a defense to arbitrability.

COA: Express Contract Provisions on Indemnity Control Where Parties Were Found Liable On Different Grounds

Today, in Charlotte Motor Speedway v. Tindall Corp., the Court of Appeals (COA) held that indemnification provisions in a construction contract prevented Speedway from recovering anything from Tindall on an "implied-in-law" theory of indemnification. This case arose out of the 2000 collapse of a pedestrian walkway that went from the Charlotte Motor Speedway to its parking lot. Tindall constructed the walkway for Speedway. After the collapse, pedestrians sued Speedway and Tindall for damages. The pedestrian cases were consolidated, and Tindall was found liable for negligent construction of the walkway. Speedway was found liable only for a breach of a contract with the NC DOT, of which the pedestrians were third party beneficiaries. Once the pedestrian cases were consolidated and resolved, Speedway sought indemnification from Tindall.

Speedway argued that it was entitled to indemnity implied-in-law, because its liability was derived from Tindall's negligent walkway construction. Tindall argued that the indemnification provision in the construction agreement limited its liability to Speedway because the contract provided that Speedway would only be indemnified for injuries that occurred in the course of the walkway construction. The COA held that Speedway could not circumvent the express contract provisions when its liability in the pedestrian litigation was only in contract and not in tort (and therefore not derivative of Tindall's). Thus, Speedway was not be entitled to indemnity for Tindall's negligence when it had not been adjudicated to have tort liability itself.

COA Rejects Fraud And UTPA Suit By Company Executives Arising From Company's Asset Sale

Today in Schlieper v. Johnson, an appeal arising from the Business Court, the Court of Appeals (COA) affirmed the dismissal of a fraud and UTPA suit brought by two former executive employees against the company for which they worked and the CEO. The suit arose from the company's asset sale, which produced $2 million for these plaintiffs.

The plaintiffs had 5% and 2.5% stakes, respectively, in the company's profits. The company wanted to sell its assets to a third party, but the sale was contingent on plaintiffs agreeing to terminate their compensation agreements under which they received their stakes in the company's profits. They agreed to do so based on an alleged representation that the assets were being sold for $35 million, and they received $2 million in the process. But according to the complaint, they later discovered from an insider that the actual sale price was higher than what they had been told. They claimed they had been defrauded, but the Business Court and the COA relied on documents that plaintiffs themselves attached to their complaint to conclude that there had been no misrepresentation about sale price.

The COA also rejected plaintiffs' UTPA claim under the line of cases holding that employment disputes generally are not actionable under the UTPA because they aren't "in or affecting commerce" (a UTPA element) as that phrase has been judicially construed in cases like Buie v. Daniel Inter. Corp., 289 S.E.2d 118 (N.C. App. 1982) and Dalton v. Camp, 548 S.E.2d 704 (N.C. 2001). Plaintiffs in this case tried to rely on the outlier decision in Sara Lee Corp. v. Carter, 519 S.E.2d 308 (N.C. 1999) (allowing UTPA suit against former employee engaged in self-dealing business activities against former employer). They argued that they were business partners, not mere employees, given their stakes in the company's profits. But the COA didn't buy it, stressing that plaintiffs had no equity stake in the business. Like the Business Court below, the COA held that Sara Lee was distinguishable, concluding that this dispute was about employment compensation in the context of a sale of a company's assets, with the consequence that it wasn't "in or affecting commerce" under the Buie/Dalton line of cases.

Employees frequently try to bring UTPA claims. Add this case to the stack of decisions that have rejected efforts to circumvent the Buie/Dalton rule.

COA Upholds Rule 11 Sanctions Against Lawyers For Disparaging Comments

Today in Johns v. Johns the Court of Appeals (COA) upheld Rule 11 sanctions against a law firm based on the disparaging content of a motion it filed in the context of a hotly contested divorce proceeding. The motion, according to the trial court, was "filled with unverified, irrelevant and disparaging comments about the personal history and character of" the wife and her teenage daughter from an earlier marriage, including comments about the wife's issues with ex-husbands. Faced with a Rule 11 motion charging that the lawyers made the disparaging comments for an "improper purpose," the lawyers argued that they "had the obligation to their client to use the facts and their research to advocate his position." The lawyers added, "[s]ome of the allegations made are unsavory, but a lawyer must take the facts as he finds them." Apparently not. In upholding the Rule 11 sanctions, the COA issued this warning: "The mere existence of facts derogatory to the opposing party does not warrant their submission to the trial court without a showing that the facts are relevant to the issues before the court."

Today's COA Decisions

The NC Court of Appeals released published opinions in 18 cases today, 10 of which are criminal cases. More on today's decisions later.

NC Supreme Court Decisions Due This Friday

The NC Supreme Court is scheduled to release orders on petitions on Feb. 6, and we expect the Court to release opinions that day too. This will be the Court's first release in 2009.

The Court's website features a cool new format for opinions: on one page, no only can you link to the opinion for a case (in searchable PDF format now); you can also link to the docket for the case and to the underlying Court of Appeals decision. The link to the underlying decision is particularly helpful since the Supreme Court issues so many per curiam decisions affirming or adopting the dissenting opinion of the Court of Appeals without issuing a separate opinion.