In the NC Business Court's first Opinion of the new year, Judge Bledsoe denied Defendants' Motion for Rule 11 Sanctions in Kure Corp. v. Peterson, 2017 NCBC 1. The decision holds a few lessons about the operation of Rule 11 of the NC Rules of Civil Procedure.
You Can't Avoid A Rule 11 Sanction in North Carolina By Withdrawing Your Complaint
Maybe you got carried away and filed a Complaint that you discovered later wasn't "well grounded in fact" or "warranted by existing law" and was therefore in violation of Rule 11. That conduct exposed you (and your client) to a sanction of having to pay "the reasonable expenses incurred because of the filing of the pleading . . . including a reasonable attorney's fee." NCRCP 11(a).
Can you avoid the whole problem by dismissing or amending the Complaint? If you are in federal court, the answer would be "yes." There is a "safe harbor" under FRCP 11. Judge Bledsoe observed that under the Federal Rules, "once a party serves a Rule 11 motion on the opposing party, the motion 'must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service or within another time the court sets.' Fed. R. Civ. P. 11(c))." Op. ¶7 & n.2.
The Federal Rules were amended in 1993 to add that "safe harbor" language. The North Carolina Rule was last amended in 1986 and was nearly identical to the federal rule in effect at that time. It therefore doesn't provide for any "safe harbor."
So even though the Plaintiff in the Kure case had amended its Complaint, and even though the counsel filing the Complaint had had new counsel substituted for them, the lawyers filing the original Complaint were still subject to Rule 11 sanctions.
Suing On Behalf Of An Incorrect Party Is Not Sanctionable Under Rule 11
The Plaintiff Kure Corp. was suing as a result of alleged misrepresentations made to it. As the Defendant pointed out in its Rule 11 Motion, however, Kure had not been formed as a corporation until after the alleged misrepresentations were made. The Defendant said that the Plaintiff's counsel were subject to Rule 11 sanctions because they had sued on behalf of the wrong party.
The Business Court, looking to the terms of NCRCP 17, which says in part that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed" for substitution of the proper party, denied that aspect of the Rule 11 Motion.
Judge Bledsoe's ruling was bolstered by an NC Court of Appeals decision holding that “[c]ourts should not impose sanctions under Rule 11 when relief is available under another provision which more specifically addresses the situation.” Op. ¶21(quoting Overcash v. Blue Cross & Blue Shield, 94 N.C. App. 602, 618, 381 S.E.2d 330, 340 (1989)).
Wanting To Be The First To File Isn't An "Improper Purpose" Per Rule 11
The parties to the Kure case had met to discuss a resolution of their dispute before the lawsuit was filed. Defendants alleged that at that meeting, Plaintiff's representative had demanded that the Defendants sign a settlement agreement or that "plaintiff would file its Complaint within the hour." Op. ¶27.
In addition to its requirement that a pleading be "well grounded in fact" or "warranted by existing law" Rule 11(a) also condemns filing for an "improper purpose." It says that a signature on a Complaint is a certification that litigation it is not "interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."
An improper purpose is “any purpose other than one to vindicate rights . . . or to put claims of right to a proper test.” Op. ¶26 (quoting Mack v. Moore, 107 N.C. App. 87, 93, 418 S.E.2d 685, 689). Judge Bledsoe ruled that the sort of conduct complained of by the Defendants was not sanctionable. He said that:
Defendants. . . have not pointed to any authority demonstrating that a desire to gain a litigation advantage is beyond the scope of 'vindicating rights' or 'putting claims of right to a proper test.' Finding that Plaintiff acted with an improper purpose would expose to sanctions countless attorneys who make pre-filing settlement demands or seek to file before the opposing party does.
A Couple More Things: New Judge(s?) for the Business Court And My Resolution
The Business Court also started off 2017 with at least one new Judge. Adam M. Conrad was nominated a Special Superior Court Judge by outgoing Governor Pat McCrory in December 2016. I don't know new Judge Conrad, but he has an outstanding background including a U.S. Supreme Court clerkship and formerly being a partner at King & Spalding. Judge Conrad takes his Business Court judgeship by way of the General Assembly's enactment of N.C. Gen. Stat. sec. 7A-45.1(a9), which created a new special superior court judgeship which the Governor, prior to submitting the nominee for confirmation and in consultation with the Chief Justice, shall determine has the requisite expertise and experience" to be designated as a business court judge." His nomination was confirmed by the NC General Assembly last month.
Judge Conrad has assumed his position and will be residing in the Business Court in the Mecklenburg County courthouse.
Governor McCrory also nominated Andrew Heath as a Special Superior Court Judge. Mr. Heath, confirmed by the General Assembly last month, is the former North Carolina Budget Director and former Chairman of the North Carolina Industrial Commission. I'm pretty sure that I've read somewhere that Judge Heath is in line for an assignment to the Business Court, but don't count on me being correct on that. In any event, a seat on the Business Court may become available, possibly due to Judge Gale's resignation from the Court last October, which is referenced in the General Assembly's confirmation of Judge Heath (What!? I spoke with Judge Gale about whether he had resigned, and he explained a complicated series of events, including his retirement, which led to him being named a "Senior Business Court Judge" (per a 2015 amendment to the General Statutes, codified in N.C. Gen. Stat. §7A-52(a1)). That position allows him to be recalled from retirement to serve on the Business Court and to continue to hear cases beyond the mandatory retirement age of 72. He continues to be the Chief Judge of the Business Court.
Finally, I made the ill-advised resolution in 2014 to write about every numbered Business Court decision. I have failed miserably at that and please know that this year I have resolved that I definitely will NOT write about every numbered Business Court decision going forward. That will be an easier resolution to keep. I hope that this won't cause you to stop reading.