Archives: North Carolina State Courts

NC Supreme Court Affirms Certification of 800,000 Member Class (Fisher Part 2)

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As we explained in Part 1 of our analysis of Fisher v. Flue-Cured Tobacco Cooperative Stabilization Corporation, the North Carolina Supreme Court recently exercised jurisdiction over an interlocutory appeal and affirmed the certification of a class of hundreds of thousands of current and former tobacco farmers. In the first part, we discussed the Court’s jurisdictional analysis and North Carolina’s unique approach to interlocutory appeals of class certification orders. In this post, we discuss the Court’s substantive analysis of the class certification issues.

The Cooperative’s first challenge to class certification involved the argument that plaintiffs’ claims were derivative. The Cooperative argued that, like a North Carolina corporation, it was entitled to receive a written demand from members to take suitable action before filing suit. The Court declined to decide this question, holding that the derivative demand requirement in section 55-7-42 of the General Statues did not address class certification. The Court also noted that Rule 23 and the Court’s precedent did not require the trial court to consider whether class claims are derivative. The Court explicitly stated that it “express[ed] no opinion” on the derivative issues and noted that the Cooperative could make this argument via a motion to dismiss. Under the Court’s analysis, derivative and class certification issues are distinct, at least under the somewhat unique circumstances of this case.

The Court then turned to the core Rule 23 issues of commonality and manageability. Citing Crow v. Citicorp Acceptance Co., 319 N.C. 274 (1987), which apparently retains its status as one of the leading North Carolina decisions on Rule 23, the Court noted the requirement that there be no conflict of interest between the class representative and the unnamed class members. The Cooperative had argued that one of the named Plaintiffs was a member of the Cooperative’s board of directors, a conflict of interest that should have precluded class certification. The Court disagreed, noting that the plaintiffs had not alleged that individual members of the board had engaged in misconduct, and that none of the directors was named as an individual defendant. Accordingly, the Court held, the trial court did not abuse its discretion in certifying the class.

Interestingly, the Court implies that it would have affirmed the trial court had it reached the opposite conclusion:

Although a trial court might review a class representative’s other activities and find that these activities create a conflict of interest with class members, here the trial court exercised its discretion and determined that Renegar is capable of representing the interests of class members.

The fact that a hypothetical trial court might have found that this conflict of interest prevented certification serves as an important reminder of the demanding standard of review for class certification decisions. This statement also illustrates how opinions like Fisher have important limitations as precedent at the trial level. Litigants in future cases won’t be able to cite Fisher as stating a general rule that directors can serve as class representatives in a case challenging decisions in which they participated. Rather, future plaintiffs will only be able to say that, under the circumstances of this case, it was not an abuse of discretion to certify a class despite the fact that a director was named as a class representative. Of course, their opponents would be equally justified in noting, based on the language quoted above, that a denial of certification on this basis would probably have been affirmed in similar fashion.

Next, the Court turned to the Cooperative’s claims that other conflicts of interest among members of the class precluded certification. These alleged conflicts included that (1) some class members still participated in the cooperative and others did not, (2) some class members were involved in a federal case where they claimed their interests were not being represented in the Fisher action, and (3) certain class members who sold tobacco during years where the Cooperative had positive revenues had claims that other class members lacked. The Court did not engage these questions in any detail, and it did not address the federal lawsuit at all. Instead, it emphasized that the “trial court may be in the best position to determine whether any conflicts among class members warrant denial of class certification,” and that the trial court had “considered defendant’s arguments and rejected them.” Again, the abuse of discretion standard played a central role in the Court’s analysis.

The Court then turned questions of commonality and manageability. Citing its 2014 decision in Beroth Oil Co. v. NC DOT, 367 N.C. 333 (2014), the Court noted that Beroth involved a “discrete fact-specific inquiry” for members of the class, as we discussed in our analysis of the case. Here, the Court noted, the “trial court identified many issues of law and fact that are common to the class.” And, as with its discussion of conflicts of interest, the Court implied that it may well have affirmed the opposite conclusion, noting that “the trial court exercised its broad discretion to allow, rather than deny, class certification.”

Finally, the Court affirmed the trial court’s manageability finding, noting the “extremely large number of similarly situated class members and the impracticality of requiring them to protect their rights through filing hundreds of thousands of individual lawsuits.” The Court did not address whether the individual class members would actually have pursued such claims, given the fact that many of them may not have farmed tobacco for decades or had a claim to any reserves, nor did it address the Cooperative’s argument that the size of the class and lengthy class period would make the class action unmanageable. Once again, it deferred to the trial court, noting that it could not conclude that the trial court abused its discretion by ruling that a class action was superior to individual litigation.

Although Fisher generally follows existing precedent in Crow and Beroth, it provides an important demonstration of this Supreme Court’s willingness to defer to trial courts on class certification. We’ll be watching to see if that holds in future cases as the Court changes, and we’ll also monitor whether North Carolina appellate courts will begin to take a more permissive approach towards interlocutory review of orders granting class certification more generally. As for Fisher itself, the case has been remanded to the trial court for further proceedings, although it’s unclear where that will be, given that Judge Jolly was handling the case as a Rule 2.1 judge and has since retired. We’ll continue to follow this case, which offers the potential to raise many interesting issues as it proceeds, especially in the areas of class notice and administration.

(John Wester of our firm served as amicus counsel to the NC Chamber in Fisher.)

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NC Supreme Court Takes Jurisdiction over Order Granting Certification (Fisher Part 1)

View Adam Doerr's Complete Bio at In its last batch of opinions for 2016, the North Carolina Supreme Court affirmed the certification of a class of more than 800,000 tobacco farmers in Fisher v. Flue-Cured Tobacco Cooperative Stabilization Corporation. Because Fisher raises a number of interesting class certification issues, and because the North Carolina Supreme Court rarely issues opinions addressing North Carolina Rule 23, we are covering the decision in two parts. In this installment, we provide the background of the case and address the Court’s decision to accept jurisdiction over this interlocutory appeal. In the second installment, we’ll address the Court’s approach to commonality and manageability.

The Supreme Court’s decision in Fisher is the latest chapter in litigation that began more than 11 years ago, when a group of tobacco farmers filed suit against the Flue-Cured Tobacco Cooperative, an agricultural cooperative formed in 1946 to help tobacco farmers market their crop. The plaintiffs alleged that when federal tobacco price support ended in 2004, the Cooperative improperly removed hundreds of thousands of members from its membership rolls. The Cooperative contended that many of these members had not grown tobacco for decades, and that it was simply updating its membership to accurately reflect the much smaller number of active tobacco farmers. Although the plaintiffs asserted a number of different claims, the primary dispute was over the Cooperative’s reserves, which totaled several hundred million dollars.

Fisher is an unusual case in many respects. The litigation itself is quite old—we are not aware of any other active cases with an ’05 case number—and the underlying facts are far older. The Cooperative was founded in 1946, meaning that the certified class would include farmers (or their heirs) who grew tobacco just after the end of the Second World War. The dispute also involved certificates issued for crop years from 1967 to 1973 and federal changes to tobacco price regulation from 1982. The class was also enormous, encompassing over 800,000 members.

The procedure has also been unusual, both at the trial and appellate level. Judge Jolly, formerly the Chief Judge of the North Carolina Business Court, certified the class in 2014, as we reported at the time. The case was not a Business Court case—it was handled by Judge Jolly under Rule 2.1—and the appeal predates direct appeals from the Business Court to the Supreme Court. But in October 2014, the Supreme Court took the unusual step of removing the case from the Court of Appeals on its own motion under Appellate Rule 15(e)(2).

The first question presented involved appellate jurisdiction over the order granting class certification. In federal court, either party can ask the appellate court to appeal a class certification order under Federal Rule of Civil Procedure 23(f)—regardless of whether the order granted or denied class certification. Most other states also permit some interlocutory review of class certification orders. But North Carolina appears to be unique in holding that orders denying class certification are automatically subject to interlocutory appeal, while orders granting class certification generally are not. See, e.g., Frost v. Mazda Motor of America, Inc., 353 N.C. 188, 193 (2000).

John Wester of our firm, representing the NC Chamber as amicus curiae, advocated for a ruling that an order granting class certification could affect a substantial right, permitting interlocutory review. The Chamber’s brief noted that an order granting class certification often put such pressure on a defendant to settle that it effectively determines the outcome of the case. In fact, the Chamber stated that it appeared that the North Carolina Supreme Court had never decided a post-judgment appeal of an order certifying a class action against a private party. The Chamber also argued that permitting interlocutory review of orders granting class certification promoted the development of the law and was a more efficient use of judicial resources than requiring a defendant to proceed to trial before obtaining review.

The Court did not expressly hold that an order granting class certification affects a substantial right, nor did it hold that an order granting class certification could not be the subject of interlocutory review. Rather, it stated that, given the size of the class, the “subject matter of this case implicates the public interest to such a degree that invocation of our supervisory authority is appropriate” and proceeded to review the certification order “notwithstanding that the appeal is interlocutory and ordinarily would not be immediately appealable.” It remains to be seen how this exception to the prohibition against interlocutory appeals will apply in future cases. It is also unclear whether this exception will apply in the North Carolina Court of Appeals, which lacks the Supreme Court’s “supervisory authority” but has previously accepted interlocutory review of an order granting class certification on substantial rights grounds.

For the time being, counsel seeking to appeal from an order granting certification would be advised to petition for certiorari in addition to seeking interlocutory review on substantial rights grounds, as the Cooperative did in this case.

(John Wester of our firm served as amicus counsel to the NC Chamber in Fisher.)

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Merger Litigation Continues in North Carolina

View Adam Doerr's Complete Bio at robinsonbradshaw.comLast month, we previewed the challenge to a settlement of litigation involving the Reynolds-Lorillard merger. The Business Court has helpfully made available the transcript of the hearing on approval of the settlement, which took place on February 12. At the hearing, the Court made clear that it was quite familiar with recent changes in merger litigation in Delaware, including the Trulia case, and stated that it was reviewing the settlement under “strict scrutiny,” not a “rubber stamp standard.” Notwithstanding a shareholder objection supported by Professor Sean Griffith, a Fordham professor who has been involved in the recent Delaware cases, the Court approved the settlement.

During the hearing, the Court also raised an interesting issue regarding the risk that plaintiffs’ counsel face in bringing merger cases in North Carolina. As we have previously discussed,  North Carolina does not recognize the common benefit doctrine, meaning that plaintiffs’ counsel in a class action can only receive attorneys’ fees by obtaining a monetary award for the class or entering into a settlement agreement. The Court indicated that this distinction from Delaware law might create a higher contingent risk in bringing such cases in North Carolina. The Court did not rely on this point because the negotiated fee in Reynolds was equivalent to an hourly rate of $325, well within the range the Court has previously approved, but it will be interesting to see whether the Business Court takes an approach similar to the Delaware Chancery Court, which appears inclined to award significant fees for meritorious claims while cutting down or eliminating fees for routine merger challenges.

Merger cases continue to be filed in North Carolina. Just last week, a shareholder sued PowerSecure, an electric and utility technology company incorporated in Delaware and headquartered in Wake Forest, over its proposed merger with Southern Company. See Michael Morris v. PowerSecure International Inc. et al. We will continue to keep you posted on new developments in this interesting and rapidly changing area.

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NC Court of Appeals Approves Payments of Attorneys’ Fees in Class Action Settlements

View Mark Hiller’s Complete Bio at RBH.comCan a class action settlement agreement contain a fee-shifting provision that provides for a payment of attorneys’ fees? In a question of first impression, the North Carolina Court of Appeals said yes, subject to a trial court’s approval of the settlement at a fairness hearing.

In the long-running Ehrenhaus v. Baker case, the Plaintiff brought a class action challenging the merger of Wells Fargo and Wachovia. The parties ultimately entered into a settlement agreement that also provided for a payment of attorneys’ fees to Plaintiff’s counsel. The trial court approved the settlement, but two shareholders objected.

In Ehrenhaus I, the Court of Appeals affirmed the approval of the settlement but remanded the case for additional findings regarding the attorneys’ fees. The Court’s remand implicitly indicated that a defendant could agree to pay fees to plaintiffs’ counsel in settling a class action, subject to court approval. But some of the language in Ehrenhaus I had raised questions about the trial court’s authority regarding fees and how the American Rule—which generally requires litigants to bear their own expenses—applies (or does not apply) in class actions. On remand, after receiving additional evidence, the trial court issued an order approving the payment of attorneys’ fees to plaintiffs’ counsel, and the two objecting shareholders appealed again.

This Tuesday, in Ehrenhaus II, the Court of Appeals rejected this challenge to the trial court’s decision on fees. The Court began by laying out the law related to fee-shifting. Under the “American Rule,” the Court explained, “a successful litigant may not recover attorneys’ fees . . . unless such a recovery is expressly authorized by statute,” and here it was not. The Court then identified two exceptions to the American Rule in the class action context, but concluded that neither applied. First, under the “common fund doctrine,” a “litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorneys’ fee from the fund as a whole.” The Court said that this doctrine did not apply here because Plaintiff’s lawsuit did not result in the establishment of a common fund. Second, under the “common benefit” doctrine, even if no common fund is created, “an award of attorneys’ fees to a litigant’s counsel is permissible when that litigant confers a common monetary benefit upon an ascertainable stockholder class in a shareholder action.” North Carolina, however, has declined to adopt the common fund doctrine.

Although neither the common fund nor common benefit exceptions to the American Rule applied, the Court of Appeals held that the award of attorneys’ fees was permissible. That is because, the Court held, “the award of attorneys’ fees in this case did not trigger the operation of the American Rule” because the fee award “was provided for in a voluntary settlement between the parties.” The Court explained that “our caselaw expressly recognizes the enforceability of settlement agreements providing for the payment of one party’s attorneys’ fees by the other party to the lawsuit.” That rule furthers the “well-established policy of encouraging the settlement of disputes between litigants and is therefore permissible despite a lack of explicit statutory authorization for such an award.”

The Court acknowledged that this was the first time the Court has addressed whether this rule applies in the class action context, which presents “unique” concerns because not all class members will participate in negotiating the settlement or be before the court. Hence, the Court noted, “the settlement of class actions—unlike settlements in ordinary civil actions—must be judicially approved” pursuant to North Carolina Rule of Civil Procedure 23(c), which requires the court to hold a hearing to determine whether the proposed settlement is fair, reasonable, and adequate. But the Court found no “persuasive argument as to why a trial court’s ability to evaluate the fairness and reasonableness of a class action settlement does not include the concomitant ability to determine whether a provision in such a settlement authorizing the payment of attorneys’ fees is likewise fair and reasonable.”

Accordingly, the Court held that “the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is—like all other aspects of the settlement—subject to the trial court’s approval in a fairness hearing. During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.”

The Ehrenhaus II decision also addresses an important appellate procedure question regarding Business Court appeals. For more on this issue, see Ehrenhaus Is Here To Stay from the N.C. Appellate Practice Blog.

(Robert Fuller and Adam Doerr of our firm represented the Defendants in this litigation.)

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Class Certified in Magistrate’s Pay Case

View David Wright's Complete Bio at RBH.comOn March 3, 2015, Judge Michael O’Foghludha, a Rule 2.1 judge appointed to hear the controversy, granted a motion to certify a class of state magistrates serving between 2009 and 2014. Adams v. State, No. 14-CVS-15027 (Wake Cnty. N.C. Super. Ct. Mar. 3, 2015). The principal common issues appear to be whether a statutory “step increase” in pay became a part of the individual employment contracts of the magistrates and whether the State could suspend these step increases without incurring liability. The certification order affects approximately 650 magistrates.

In its decision, the trial court does not wrestle with what can often lead to denial of class certification in oral contract disputes. If “oral statements” provide the foundation for contractual relief (rather than, say, a statutory change), inquiry into those individual circumstances can often dwarf the issues otherwise common to the class. (In this regard, see our previous post regarding CEVA Logistics.)

Of note is Judge O’Foghludha’s citation in his ruling to English v. Holden Beach Realty Corp., 41 N.C. App. 1, 254 S.E.2d 223 (1979). Although the “community of interest” standard in English was later disapproved by the North Carolina Supreme Court, see Crow v. Citicorp Acceptance Co., 319 N.C. 274, 279-80, 354 S.E.2d 459, 464 (1987), the case remains good law for a general proposition favorable to plaintiffs: “Our Rule 23 should receive a liberal construction, and it should not be loaded down with arbitrary and technical restrictions.”

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