John Bloss Scores Major Victory for Class Action Practice in North Carolina

          Class actions can be an efficient and fair way to resolve, in one case, disputes that may affect a large number of people. By consolidating numerous individual claims with common issues into a single proceeding, the class-action device saves the resources of both the courts and the parties. The courts also recognize the deterrent effect of class action lawsuits, which hold defendants accountable for conduct that may be unlawful and widespread but difficult to address because the conduct does not harm any single individual enough to make it economically possible to bring a lawsuit.

          In recent years, however, the strategy of “picking off” the named plaintiff in order to moot the class-wide claims has become a popular way to try to thwart class actions. The “pick off” maneuver, in which the defendant cancels, pays off, or otherwise terminates the named plaintiff’s individual claim, can be a quick and easy way for a defendant to avoid potential class-wide liability.

          In a new opinion from the North Carolina Supreme Court arising from an appeal brought by Higgins Benjamin partner John Bloss, the Court ensured that a class action plaintiff in North Carolina will have a fair opportunity to present the issue of class certification to the trial court notwithstanding the defendant’s effort to “pick off” the named plaintiff’s claims.

          On 23 August 2011, Christopher Chambers had an emergency appendectomy at the Moses H. Cone Memorial Hospital in Greensboro. Mr. Chambers was uninsured at the time. When Chambers presented for treatment, he signed Moses Cone’s Contract agreeing to pay Moses Cone’s “regular rates and terms” for treatment. The hospital bill Plaintiff later received from Moses Cone was substantially greater than the payment amount required by Moses Cone from insured, Medicare, and Medicaid patients for similar services, although all patients signed the same agreement to pay Moses Cone’s “regular rates and terms.”

          In May 2012, Mr. Chambers, represented by Higgins Benjamin, filed a class action complaint against Moses Cone seeking a declaratory judgment that the contract Chambers signed as an uninsured patient entitled Moses Cone to recover no more than the reasonable value of the services it provided. Moses Cone filed a counterclaim against Chambers and his wife for payment of its emergency room bill. Later, Moses Cone abruptly dismissed its counterclaim and then successfully moved for dismissal of the putative class action on the ground that Chambers’ claim became moot because his individual obligation to Moses Cone had been extinguished.

          On June 5, 2020, the Supreme Court of North Carolina reversed. The Court adopted an exception to the mootness doctrine preventing a defendant from avoiding class-wide liability by unilaterally extinguishing the plaintiff’s individual claims. This “pick off” exception to the mootness doctrine applies, the Court held, “when the event that moots the plaintiff’s claim occurs before the plaintiff has had a fair opportunity to seek class certification and provided that the plaintiff has not unduly delayed in litigating the motion for class certification.” Thus, “when satisfaction of the plaintiff’s individual claim occurs before the court can reasonably be expected to rule on the class certification motion, the plaintiff’s stake in the litigation is not extinguished, and the case is not moot.”

If you would like to discuss a potential class action lawsuit contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.

Business Court Dismisses LLC Member vs. Member Claims; Derivative Claim Against Managing Member Survives

By John Bloss, Member, Higgins Benjamin PLLC

Trust your fellow LLC member at your peril, a new North Carolina Business Court opinion instructs.  
Glenn Crossing, LLC, one of the defendants in Island Beyond, LLC v. Prime Capital Group, LLC, 2013 NCBC 51 (Oct. 30, 2013),was formed for the purpose of purchasing and owning 30 acres of investment property near Kernersville.  One of Glenn Crossing’s two members (which was itself an LLC and will be referred to for simplicity as the “Managing Member”) provided capital to Glenn Crossing.  Glenn Crossing’s Operating Agreement delegated responsibility for acquiring the 30 acres to a company owned by the Managing Member’s principal, Raymond Kraweic.
The Complaint filed by Glenn Crossing’s second member (the “Plaintiff”) alleged that Plaintiff assumed, but did not independently verify, that Kraweic had caused Glenn Crossing to purchase the entire 30 acres as contemplated by the parties’ agreement.  Unbeknownst to the Plaintiff, however, the Managing Member acquired only 10 acres of the property for Glenn Crossing, while two companies owned by Kraweic acquired the remaining 20 acres.  Seven years after Glenn Crossing was formed, Plaintiff learned that NCDOT had condemned a portion of those 20 acres, resulting in a payment of a condemnation award to Kraweic’s companies only, and leaving Glenn Crossing with no income-producing property.
Business Court Judge Gale dismissed the Plaintiff’s claims for breach of fiduciary duty and fraud against the Managing Member and Kraweic.  While a managing member of an LLC may “in some instances” owe the other members a fiduciary duty, no such duty arose under these circumstances where the Operating Agreement bestowed on the Managing Member “full and complete authority to manage and control . . . the properties of the Company.”  The Plaintiff’s fraud-by-omission claim failed due to a failure of reasonable reliance, since the Plaintiff could have searched the public records to verify that Glenn Crossing had, in fact, purchased the 30 acres for itself.
Plaintiff’s derivative claim (that is, a claim brought by Plaintiff on behalf of Glenn Crossing) against the Managing Member for breach of fiduciary duty survived the motion to dismiss, however.  Plaintiff alleged that the Managing Member had acquired the 20 acres and misdirected Glenn Crossing’s opportunities for an improper personal benefit; the Court ruled that these allegations of a breach of fiduciary duty were adequately pleaded.  The Court rejected the Managing Member’s argument that the Operating Agreement eliminated any fiduciary obligation from the Managing Member to Glenn Crossing since, under North Carolina statutes governing LLCs, there can be no contractual waiver of a member’s duty to refrain from taking actions that conflict with the interest of the LLC or causing the LLC to enter into transactions in which the managing member derives an improper personal benefit.
If you would like to discuss a dispute arising in the context of a limited liability company or other business entity please contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.

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New Opinion Involving Landlord’s Acceptance of Rent From Holdover Tenant Muddies Water

By:  John Bloss, Member, Higgins Benjamin, PLLC

A landlord who takes rent from a “holdover tenant”—a lessee who stays on the premises after the term of the lease—can run the risk of unwittingly creating a new lease term, generally presumed in North Carolina to be one year.  A recent North Carolina Court of Appeals case, however, creates new uncertainty in such landlord-tenant disputes.

For more than a century, the North Carolina appellate courts have agreed that when the landlord accepts a post-term payment from a tenant holding over from a lease of a year or longer duration, a new one-year lease term is established.  See, e.g., Scheelky v. Koch, 119 N.C. 80, 25 S.E. 713 (1896) (“A lessee for a year, with privilege of renewal for a year, who occupies the premises and pays rent therefor for a month into the second year, and then vacates with no understanding that the lease shall be canceled, is bound for the second year’s rental”); Kearney v. Hare, 265 N.C. 570, 144 S.E.2d 636, 638-39 (1965) (“In the absence of a provision in the lease for an extension of the term, when a tenant under  lease for  fixed term of one year, or more, holds over after the end of the term the lessor may eject him or recognize him as a tenant. . . . If the lessor elects to treat him as a tenant, a new tenancy relationship is created as of the end of the former term.  This is, by presumption of law, a tenancy from year to year, the terms of which are the same as those of the former lease in so far as they are applicable”).

A new Court of Appeals opinion, Automotive Group, LLC v. A-1 Charlotte, LLC, COA13-608 (N.C. App. Nov. 19, 2013), seems to be at odds with this line of cases.  Automotive Group involved a one-year commercial lease with a renewal provision requiring 180 days’ notice.  The tenant failed to give timely notice of renewal, but nevertheless stayed on after the year ended.  Significantly, the landlord accepted the tenant’s rent payment for the month immediately following the expiration of the lease term.

The landlord filed a summary ejectment (eviction) action.  The magistrate dismissed the action with prejudice (correctly, under the authority cited above) on the basis that the landlord waived the right to assert a valid nonrenewal by accepting the post-term rent payment.  The landlord filed a second summary ejectment action , which was also dismissed with prejudice.  Undeterred, the landlord then filed a third summary ejectment action.  The magistrate again dismissed the action on res judicata grounds, finding that the third complaint alleged the same cause of action as the first complaint.  The landlord appealed this decision to the district court, which rejected tenant’s res judicata argument, ruled in favor of the landlord, and ordered the tenant to vacate the premises.

The Court of Appeals affirmed.  The Court recognized that under res judicata  principles, a final judgment on the merits in one action precludes another lawsuit based on the same cause of action between the same parties or their privies.  The Court, however, determined that there had been a change in circumstances, preventing application of res judicata, because the landlord did not accept a rent payment from the tenant after the dismissal of the first lawsuit:

[P]laintiff returned each check it received from defendant after the first complaint was dismissed.  This change in circumstance eliminated plaintiff’s waiver of defendant’s lease breaches that previously prevented it from ejecting defendant.

The decision in Automotive Group is difficult to reconcile with the jurisprudence in this area.  It is especially troubling from a judicial-efficiency perspective that the landlord was rewarded for filing three different lawsuits alleging the same cause of action.  Generally the filing of serial complaints earns the plaintiff a sanctions order, not a favorable judgment.

If you would like to discuss an issue involving landlord-tenant law contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.
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Trade Secrets Misappropriation Claims Against Non-Employees Survive Motion to Dismiss

By:  John Bloss, Member, Higgins Benjamin, PLLC

The North Carolina Business Court continues to be a battleground for disputes involving alleged misappropriations of trade secrets.  These lawsuits typically target disloyal former employees, but in a recent opinion, the Business Court allowed claims against non-employee defendants to move forward.

The plaintiff in Koch Measurement Devices, Inc. v. Armke, 2013 NCBC 48 (Oct. 14, 2013), is a wholesaler of high-end “beer growlers”—collectible glass jugs typically used to transport draft beer out of craft breweries. Koch sued its former web designer and web host, Michael Walsak, and Tote Glass, Inc., a company in which Walsak held an interest, alleging that Walsak and Tote had conspired with Koch’s former (and now-deceased) President to divert Koch’s assets, business opportunities, and trade secrets to Tote.  In particular, Koch’s complaint alleged that Walsak and Tote misappropriated confidential information including Koch’s customer lists, the ordering habits and history of Koch’s customers, and Koch’s pricing and inventory management strategies; diverted Koch’s inventory to Tote; imported growlers from Koch’s German supplier; used Koch’s glass decorator; used the same pricing schedule as Koch; stole Koch’s largest client; and removed Koch’s website from the web.

Business Court Chief Judge Jolly first ruled that the absence of any former employee of Koch as a defendant did not prevent Koch from maintaining the action, since Koch made “sufficient allegations . . . concerning the coordinated efforts of [Koch’s former President], Walsak, and Tote to, in essence, steal Koch’s business to allow this action to continue without the presence of [the former President].”  Judge Jolly then evaluated each of the causes of action asserted by Koch—misappropriation of trade secrets, unfair and deceptive trade practices, constructive trust, unjust enrichment, conversion, breach of contract, and civil conspiracy—and determined that each stated a claim for which relief could be granted.  The Court held that Koch had identified its allegedly misappropriated trade secrets with sufficient specificity, distinguishing Washburn v. Yadkin Valley Bank & Trust Co., 190 N.C. App. 315 (2008), in which the Court of Appeals upheld dismissal of a complaint that generally described the trade secret at issue at “business methods; clients, their specific requirements and needs and other confidential information pertaining to Yadkin’s business.”

If you would like to discuss a trade-secret misappropriation issue contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.
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Lawsuit Challenging Mission Hospital’s Billing Practices for Uninsured Emergency Room Patients Allowed to Proceed

It may seem counterintuitive, but many non-profit hospitals around the country charge their uninsured patients substantially more–often several times as much–for emergency room services as compared to amounts paid by all other categories of patients, including patients with medical insurance and Medicare and Medicaid patients, for the same care.  A putative class action lawsuit against the Mission Hospital system in Western North Carolina (which includes the Angel Medical Center, Blue Ridge Regional Hospital, McDowell Hospital, and Transylvania Regional Hospital), which challenges this practice, recently survived the hospital’s motion to dismiss in the North Carolina Business Court.
The lawsuit, Stephen Hefner v. Mission Hospital, Inc., et al., 12 CvS 03088 (Buncombe County, N.C.), alleges that Mission maintains, but does not make publicly available, spreadsheets that list its gross billing charges for each product and service provided.  Within the hospital industry, such lists of gross billing charges are called “Chargemasters” or “gross charges.”  The lawsuit contends that these Chargemasters, listed on an item-by-item basis, form a reference point for Mission to negotiate with insurance carriers, but are not pricing schedules for which Mission expects payment.  According to the lawsuit, hospitals like Mission have every incentive to artificially inflate their Chargemasters so they can maximize the rates they charge to insurers.  See “In N.C., Hospitals’ Rack Rate Hits the Uninsured Hard,” RALEIGH NEWS & OBSERVER (Apr. 22, 2012) (“Every incentive is for the hospitals to charge as much as possible for these procedures . . . . Hence the prices are as arbitrary as can be”).  In fact, only a small percentage of Mission’s patients actually pay these Chargemaster rates, which, according to the Complaint, are substantially more than any other class of patient is required to pay.
Following media attention on hospitals’ imposition of their highest charges on uninsured and under-insured patients accompanied by aggressive collection actions, not-for-profit hospitals came under increasing congressional and IRS scrutiny.   Congress took action to prohibit the practice by not-for-profit hospitals when it enacted the Patient Protection and Affordable Care Act, commonly known as “Obamacare.”  The Act instructs that a hospital will not be treated as not-for-profit unless it “prohibits the use of gross charges.”  The Complaint alleges that this provision became effective as to Mission on January 1, 2011.
The contract Mr. Hefner signed when he was admitted to the Mission emergency room required him to make payment in accordance with the hospital’s “regular rates and terms,” but failed to identify what the phrase “regular rates and terms” meant, or where any such “regular rates and terms” might be found.  Mr. Hefner’s lawsuit, in which he seeks to represent a class of other self-pay Mission emergency room patients, asserts causes of action of (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) constructive trust; (4) declaratory judgment; (5) restitution; and (6) injunction.  His lawsuit alleges that the Chargemaster rates at which he and other emergency room patients were billed were not Mission’s “regular payment rates.”
In an opinion dated April 18, 2013, the Honorable Calvin E. Murphy, North Carolina Business Court Judge, denied Mission’s motion to dismiss with respect to each of the causes of action.  Judge Murphy ruled that Mr. Hefner’s allegations–that Mission (1) failed to specify what rates it would use in billing for the treatment and services rendered, (2) charged Hefner its Chargemaster rates instead of its regular rates, (3) charged Hefner, as a self-pay emergency care patient, a higher rate than other patients for similar services, and (4) charged Hefner at rates which were unreasonable and unconscionable for the services provided—were sufficient to state claims for which relief could be granted, and allowed the lawsuit to proceed to discovery.
For more information contact John Bloss, co-counsel for Mr. Hefner and the putative class, at (336) 273-1600 or jbloss@greensborolaw.com.

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