This month, for the second time in the last two months, Judge McGuire of the NC Business Court entered Rule 11 sanctions against a party whose attorney relied on inaccurate information from the client in making claims against the opposing party.
This month's decision was in NC Bioremediation, LLC v. Sea Winds, LLC, 2015 NCBC 94. The issue relevant to the Motion for Sanctions was whether the person representing himself to Plaintiff's counsel that he was a manager and member of NC Bioremediation in fact had the authority to file the lawsuit. Or, more bluntly, was he even a member or a manager at all?
Counsel's Investigation Before Filing The Complaint Was Not A Reasonable One Under The Circumstances, And Violated Rule 11
It turned out, of course, that he wasn't. But could the attorney for the Plaintiff, who had filed his lawsuit in the name of the LLC have known this and not filed the Complaint? As Judge McGuire put it, "the question for the Court is what inquiry into the facts did Plaintiff's counsel conduct prior to filing the Complaint and was that inquiry a reasonable one under the circumstances?" Op. ¶16.
It was not, said Judge McGuire. It consisted mostly of hearsay support from Mauney's former office assistant who said that he had an ownership interest in NC Bioremediation and financial documents that implied that Mauney was a member of the LLC along with another person (Overton).
But public filings --- annual reports filed by NC Bioremediation with the NC Secretary of State -- showed only Overton as a member/manager of the LLC.
Overton delivered an Affidavit to Plaintiff's counsel in which he said that Mauney had never had an ownership interest or member status with the LLC. Given that it was the Plaintiff which filed that Affidavit with the Court, Judge McGuire questioned why Overton had not been contacted earlier. He said:
the Court can only conclude that contacting Overton to get his position on Mauney's contended ownership . . . could have been accomplished relatively quickly and with little additional effort. Counsel has offered no explanation as to why the information in the Overton Affidavit could not have been discovered before the Complaint was filed.
The Court concluded that the factual investigation done by Plaintiff's counsel fell short of Rule 11's requirement that such an inquiry be reasonable under the circumstances." Op. ¶20.
The Sanction Entered By The Court Was The Dismissal Of The Action (Without Prejudice)
In an earlier decision in Southeast Air Charter, Inc. v. Stroud, 2015 NCBC 79, Judge McGuire sanctioned a Plaintiff whose lawyer relied inappropriately on its client's representation that some of the Defendants had positions with the Plaintiff corporation that warranted them being sued for breach of fiduciary duty. (You can read about that decision here) . The sanction imposed there was the payment of $35,887.01 in attorneys' fees.
What was the sanction in NC Bioremediation? A dismissal without prejudice, with no attorneys' fees awarded.
Was that sanction harsh enough? Maybe not, given that Overton stated in his Affidavit that he wishes the action to continue. The dismissal without prejudice leave the door open for Overton to recommence the action.
It's hard to say who would be a worse representative to sue on behalf of the LLC. Mauney, a North Carolina lawyer, was disbarred by the North Carolina State Bar In July 2013 for, among other professional violations, "mak[ing] demonstrably false statements under oath." Op. ¶6 & n.9. And Overton has "been accused of embezzling approximately $500,000 from" Defendant Sea Winds (which Overton denies in his Affidavit at ¶10). Op. ¶11 & n.28