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Biz Court judge blasts pattern of meritless UDTP claims

In every episode of the classic cartoon show “Popeye the Sailor,” there comes a moment where Popeye has had enough. “That’s all I can stands—I can’t stands no more!” he bellows, just before going on a spinach-fueled rampage.

A North Carolina Business Court judge has apparently reached his Popeye moment, firing off a broadside against business litigants’ proclivity for bootstrapping claims for unfair and deceptive trade practices onto garden-variety shareholder disputes.

Raul Brewster is a minority shareholder of Powell Bail Bonding, where he worked for nearly 20 years before being fired in 2015. Brewster alleges that some of PBB’s other shareholders carried out a wrongful scheme to push him out of the business and encumber his rights as a shareholder, and that he is still personally liable for approximately $32 million in bonds written by PBB’s agents after his sacking. His lawsuit asserts claims for breach of fiduciary duty and civil conspiracy.

As is common in such litigation, Brewster also brought claims under Chapter 75 of the state’s general statutes alleging unfair and deceptive trade practices (UDTP) affecting commerce. UDTP claims are unusual in that they allow plaintiffs to collect both triple damages and attorneys’ fees, thus giving litigants a strong incentive to include them in lawsuits, whether they’re likely to prevail or not.

In a July 26 ruling, Business Court Judge Adam Conrad permitted Brewster’s claims for judicial dissolution, breach of fiduciary duty, and civil conspiracy to move forward. But Conrad used unusually pointed language in dismissing the UDTP claims, writing that they constituted “part of a regrettable trend in North Carolina business litigation.”

The UDTP statute regulates a business’s interactions with other market participants, but the state’s Supreme Court has clearly stated that it is not so broad as to regulate conduct solely related to the internal operations of a business, Conrad wrote. He chastised litigants’ “impulse to turn every shareholder dispute” into an UDTP claim, saying that courts “have recognized [these] disputes for what they really are: intra-company feuds about internal operations.”

“By now, the message should be clear: section 75-1.1 plays no role in resolving these internal corporate disputes. Yet time and time again, section 75-1.1 appears where it does not belong, with consequences that are significant and unhealthy,” Conrad wrote.

Conrad said that the routine addition of UDTP claims in such cases invites avoidable motions practice, driving up the cost of litigation and taxing the resources of the court, and impedes settlement talks by introducing remedies that would otherwise be unavailable, thereby distorting the parties’ incentives and perceived risks. As such, courts strive to keep the statute within its proper bounds.

Conrad warned that mechanically including such claims in shareholder lawsuits could also expose a plaintiff to statutory penalties for attorneys’ fees for pursuing frivolous claims, although he declined to issue any sanctions in this case.

Brewster’s millions

The ruling permitting the breach of fiduciary duty claim to go forward is noteworthy in that the three defendant shareholders collectively control less than 50 percent of the company’s shares. Corporate shareholders generally don’t owe each other a fiduciary duty, but a controlling shareholder does have a fiduciary duty to protect the interests of minority shareholders. Typically, a controlling shareholder will be the majority shareholder.

But in 2016 the North Carolina Court of Appeals ruled for the first time ever that a minority shareholder exercising actual control over a corporation may be deemed a controlling shareholder with a corresponding fiduciary duty to other shareholders. Conrad said that Brewster’s allegations—that the defendants acted in concert, made all of PBB’s key financial and management decisions to the exclusion of Brewster, named themselves PBB’s directors, rewrote its bylaws, and imposed a new shareholder agreement—were sufficient to suggest that they exercised actual control over PBB’s actions.

Cory Reiss of Shipman & Wright in Wilmington represented the defendant shareholders. Reiss said he couldn’t speculate as to why Conrad used such unusually pointed language in rejecting the UDTP claims in this particular case, but said that the lawsuit was a “classic case of a pure intra-corporate dispute.”

“It was unusually sweeping [language], that’s for sure,” Reiss said. “But I’m involved in two of the cases that he cited, besides the one that he was ruling on, so it’s been apparent for a while that these Chapter 75 claims are being brought into pretty much any business-related dispute. That’s despite the clarity of the law with respect to disputes between partners, and there are a lot of those.”

Reiss noted that the case was originally filed in New Hanover County Superior Court before being designated as a mandatory complex business case. He said that Conrad’s ruling provides a strong signal to attorneys who practice before the Business Court regularly and pay close attention to its opinions, but that the message may not have the same import for attorneys who don’t come before the court routinely.

Kurt Thompson of Wilmington and Mark Ihnat of The Atlantic Coast Law Firm in Wilmington represented Brewster. Neither attorney returned voicemail messages seeking comment on the decision.

The 17-page decision is Brewster v. Powell Bail Bonding, Inc. (Lawyers Weekly No. 020-053-18). The full text of the opinion is available online at nclawyersweekly.com.

Follow David Donovan on Twitter @NCLWDonovan

 

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