A prevailing defendant on a claim for violation of N.C. Gen. Stat. § 75-1.1 can obtain attorney fees, but the bar is high.  The defendant must show that the plaintiff knew or should have known that the action was both frivolous and malicious.

What facts can satisfy these standards? The recent North Carolina Business Court decision in Sloan v. Inolife Technologies gives some answers.

This post studies the facts, reasoning, and conclusion in Sloan—a decision that might dissuade some litigators from tacking a section 75-1.1 claim onto future complaints as a matter of course.

Step 1:  Make a Credible Threat for Fees

Sloan concerned a fight about a company’s stock. The complaint contained a standard array of claims for a stock dispute, including a section 75-1.1 claim.

In a letter, the defendants’ counsel asked the plaintiffs’ counsel to withdraw the 75-1.1 claim. The defendants’ counsel pointed to the exemption to section 75-1.1 for disputes involving securities transactions. The letter cited eight North Carolina decisions that applied the securities exemption. The letter then asserted that the defendants would seek attorney fees under section 75-16.1 if the plaintiffs refused to withdraw the claim.

The plaintiffs’ counsel wrote back. He argued that the 75-1.1 claim concerned the theft of stock, and not a securities transaction. He also argued that the complaint’s allegations about the defendants’ breach of fiduciary duty constituted independent grounds to support a section 75-1.1 claim.

The defendants filed a motion to dismiss. One week later, the plaintiffs voluntarily dismissed the 75-1.1 claim without prejudice.

The defendants then followed through on their original threat: they filed a motion for attorney fees under section 75-16.1.

Step 2:  Follow Through On the Threat with Well-Established Caselaw

Judge Michael Robinson concluded that the Sloan plaintiffs knew or should have known that their section 75-1.1 claim was frivolous and malicious.

First, Judge Robinson cited back to the North Carolina Supreme Court’s decisions in Skinner v. E.F. Hutton & Co. and HAJMM v. House of Raeford Farms —decisions that established the securities exemption—to show that the plaintiffs raised a frivolous claim. Judge Robinson included block quotes from HAJMM in which the Supreme Court explained the reasons for the exemption.

Judge Robinson then showed that the plaintiffs’ entire complaint concerned the issuance of different types of securities. He quoted HAJMM to confirm that “[s]ecurities transactions are related to the creation, transfer, or retirement of capital.” The complaint in Sloan fell comfortably within that definition.

Judge Robinson then addressed the plaintiffs’ argument that their section 75-1.1 claim concerned a breach of fiduciary duty and therefore fell outside of the securities exemption. In that argument, the plaintiffs relied on a recent Business Court decision called KURE Corp. v. Peterson.

In Kure Corp., the defendants asked for Rule 11 sanctions based on the plaintiff’s assertion of a section 75-1.1 claim, which the defendants argued fell within the securities exemption. The Business Court, however, concluded that existing law warranted the 75-1.1 claim in Kure Corp. for two reasons. First, the claim rested on allegations beyond the purchase and sale of securities. Second, certain North Carolina decisions have upheld 75-1.1 violations based on the breach of a fiduciary duty, which the plaintiff had alleged.

As Judge Robinson pointed out, the complaint in Sloan did not raise any substantive allegations about a breach of fiduciary duty. Indeed, the Sloan complaint did not even include a claim for breach of fiduciary.

Finally, Judge Robinson turned to the timing of the Sloan plaintiffs’ conduct. The plaintiffs’ counsel’s response to defense counsel’s letter stridently accused the defendants of “commit[ting] larceny and theft with impunity.” The letter also asserted that “[t]here is nothing frivolous and malicious about” the 75-1.1 claim. One month later, however, the plaintiffs voluntarily dismissed the claim. At the hearing on the motion, the plaintiffs’ counsel revealed that he waited one month to dismiss the claim because he was waiting to see if, in fact, the defendants would file a motion to dismiss the claim. This sequence and admission confirmed that the plaintiffs knew they asserted a frivolous claim.

On this basis, Judge Robinson concluded that the defendants should be awarded their reasonable attorney fees incurred in defending against the 75-1.1 claim.

Step 3:  Prepare Your Petition for Fees

Judge Robinson ordered that the defendants prepare a petition for fees supported by proper affidavits. Notably, Judge Robinson’s order encouraged defendants’ counsel “to carefully segregate their time and costs associated strictly and solely with opposing Plaintiffs’ UDTP claim” after their receipt of the plaintiffs’ counsel’s letter.

This point underscores the importance of detailed timekeeping practices if a lawyer believes that her client might be entitled to 75-1.1 fees down the road.

Overall, the Sloan case contains several forceful lessons:

• A 75-1.1 plaintiff might be responsible for fees if his claim tries to tiptoe around well-established law.

• Alleging a 75-1.1 claim for leverage, just to see if the claim is opposed, will not help the claimant’s argument against fees. This is an especially significant point, given how many 75-1.1 claims are asserted in North Carolina business litigation.

• A 75-1.1 defendant who wants to recover fees must be deliberate in her efforts to do so. The deliberate steps should include (1) documenting why the claim is frivolous and malicious, (2) giving the claimant an opportunity to explain himself, and (3) keeping meticulous timekeeping records of these and other efforts to defend the claim.

Judge Robinson’s order contains one additional nugget of intrigue:  a statement that “securities transactions are beyond the scope of section 75-1.1 whether such transactions give rise to a breach of fiduciary claim or not.” As this point and the decision in Kure Corp. suggest, the interplay among the securities laws, the law on fiduciary duties, and section 75-1.1 might be a fertile source for further clarification—perhaps in future motion practice on attorney fees.

Author: Stephen Feldman