N.C. Business Court Opinions, August 2, 2023 – August 15, 2023
Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 50 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: primary insurance coverage; excess insurance coverage; nuisance lawsuit; hog farm; cause test
Beginning in 2013, Plaintiffs were named defendants in multiple nuisance lawsuits, in which neighboring property owners alleged physical property invasion and loss of use and enjoyment of their land due to Plaintiffs’ hog farming operations. After five “bellwether” trials in federal court resulted in verdicts for the property owners, Plaintiffs reached a global settlement with all of the property owners. Plaintiffs then sued their various primary and excess insurance providers, alleging that the insurers should be held liable for the amounts Plaintiffs paid to defend and settle the nuisance lawsuits.
As the policies require an “accident” to occur for coverage to apply, Defendants XL Insurance America, Inc. and XL Specialty Insurance Company moved for partial summary judgment seeking a ruling that, assuming a jury would find the nuisance lawsuits were caused by an “accident” under the terms of the policies, the nuisance lawsuits arose from multiple “accidents” as opposed to a single “accident.” The ruling on this issue would determine whether the XL Defendants, who were excess insurers, would be liable for any payment, as multiple “accidents” would require the primary coverage to be exhausted for each accident before the XL Defendants’ obligations arose.
The Court denied the XL Defendants’ motion, holding that the claims brought under the nuisance lawsuits resulted from a single “accident” under the “cause” test set forth in Gaston Cty. Dyeing Mach. Co. v. Northfield Ins. Co., which permits the utilization of proximate cause in cases where there is no single one-time event giving rise to injury. The Court held that the nuisance lawsuits’ claims arose from a single “accident,” since the claims “stemmed from central, uniform policies and procedures decided upon and implemented by Plaintiffs in operating their farms” and the injuries “did not materially vary based on differences in the various farms owned or operated by Plaintiffs.”
Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 51 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: nuisance lawsuit; hog farm; insurance; duty to defend; defense costs; allocation
This opinion, arising from the same case addressed above in Opinion No. 50, was issued in response to Defendant ACE American Insurance Company’s motion for partial summary judgment on the issue of defense costs allocation. In prior summary judgment rulings, the Court held that (1) ACE breached its duty to defend Plaintiffs in the nuisance lawsuits; and (2) as a result of that breach, ACE is estopped from asserting coverage defenses in its policy. However, the Court had not addressed the issue of how the award of the defense costs would be allocated.
ACE first argued that, despite the Court’s prior ruling that ACE is estopped from asserting coverage defenses, it is still entitled to challenge the reasonableness of the defense costs incurred by Plaintiffs. Noting that North Carolina’s present case law only states that an insurer is obligated to pay the insured for “reasonable” defense costs when the duty to defend has been breached and finding no persuasive authority to the contrary, the Court agreed with ACE and granted the motion on this issue.
ACE’s second argument related to the allocation of Plaintiffs’ defense costs. In its prior ruling, the Court held that both ACE and Old Republic Insurance Company breached their duty to defend Plaintiffs in the nuisance lawsuits. ORIC subsequently settled all claims Plaintiffs asserted against it. ACE argued that all defense costs should be allocated among all triggered policy years and further allocated between primary coverage for each triggered policy year. In response, Plaintiffs contended that ACE is liable for all of Plaintiffs’ defenses costs not reimbursed by ORIC up to ACE’s 50% share. The Court agreed and denied ACE’s motion as to the allocation method, holding that ACE is liable for a 50% share of Plaintiffs’ reasonable defense costs from the nuisance lawsuits, subject to any credit ACE may be entitled to based on ORIC’s contributions.
Murphy-Brown, LLC v. Ace Am. Ins. Co., 2023 NCBC 52 (N.C. Super. Ct. Aug. 7, 2023) (Davis, J.)
Key Terms: hog farm; nuisance lawsuit; indemnity allocation; pro rata method; all sum method
This opinion, arising from the same case addressed above in Opinion Nos. 50 and 51, addresses Defendants ACE American Insurance Company, Ace Property & Casualty Insurance Company and Great American Insurance Company of New York’s (collectively, “Certain Insurers”) Amended Motion for Partial Summary Judgment on the Issue of Indemnity Allocation, as well as Defendants XL Insurance America, Inc. (“XLIA”) and XL Specialty Insurance Company’s (“XL Specialty”) Amended Motion for Summary Judgment on Indemnity Allocation Issues. Both motions address the common issue of which method should be utilized to properly allocate indemnity liability for the injuries giving rise to the nuisance lawsuits, when such injuries span multiple policy periods.
In Certain Insurers’ Motion, the respective defendants argued for the application of the “pro rata method,” in which any indemnity amounts Plaintiffs may recover would be allocated among the applicable insurers pro rata based on the amount of time each insurer provided coverage to Plaintiffs. Plaintiffs, relying on a different provision in the policies, argued for an “all sum method,” in which the insurers would be liable for “any continuation, change, or resumption” of injuries occurring inside the policy period. Applying the methodology used by the Supreme Court in Radiator Specialty Co. v. Arrowood Indem. Co., the Court determined that the policies in question did not contain the requisite language to merit the application of the “all sum method.” The Court granted the Certain Insurer’s Motion, holding that the “pro rata” method was the appropriate method for calculating indemnification allocation.
In the XL Motion, XL Specialty argued that its policy provides no coverage, as Defendant American Guarantee & Liability Insurance Company would be exclusively liable for excess coverage indemnification as a result of its continuing coverage provision. Finding this argument inconsistent with the Court’s analysis of the Certain Insured’s Motion and subsequent application of the “pro rata method,” the Court rejected XL Specialty’s argument. XLIA proposed a similar argument to XL Specialty, in that the various insurance policies held by Plaintiffs “telescoped” in a manner that resulted in the higher-tiered policies absorbing any potential liability. The Court likewise rejected this argument and denied the XL Motion in full.
Langley v. Autocraft, Inc., 2023 NCBC 53 (N.C. Super. Ct. Aug. 7, 2023) (Earp, J.)
Key Terms: motion for judgment on the pleadings; Rule 12(c); breach of fiduciary duty; constructive fraud; unfair or deceptive trade practices; employee/employer relationship
Plaintiff Langley, while employed by Defendant Autocraft, started a competing business, LBM. Autocraft terminated Langley’s employment upon discovery of his competing business activities. Langley sued Autocraft for breach of his employment agreement and Autocraft counterclaimed against Langley and LBM for breach of fiduciary duty, constructive fraud, and unfair or deceptive trade practices. Langley and LBM moved for judgment on the pleadings with respect to Autocraft’s counterclaims.
The Court dismissed the claim for breach of fiduciary duty because Autocraft’s allegations fell short of alleging the necessary domination and control by Langley, who was at most a high-lever manager, to establish a de facto fiduciary relationship. Further, since no fiduciary relationship existed, the Court also dismissed the constructive fraud claim.
Regarding unfair or deceptive trade practices, the Court found that Langley’s alleged misconduct was not in or affecting commerce because the wrongs only affected Autocraft and not external market participants. LBM’s involvement did not transform the misconduct into an unfair or deceptive trade practice that affected commerce since LBM was merely used as an instrument to facilitate harm within Autocraft. Thus, this claim was dismissed as well.
Lineage Logistics, LLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2023 NCBC 54 (N.C. Super. Ct. Aug. 10, 2023) (Bledsoe, C.J.)
Key Terms: duty to defend; indemnification; additional insured; ripeness; mootness; Rule 12(b)(1); Rule 12(b)(6); N.C.G.S. § 22B-1
This case arose from an incident that occurred at Plaintiff Lineage’s food storage facility, which caused one death and significant loss of products, along with other damages, which resulted in Lineage and its contractor, Plaintiff Primus, being named in a number of underlying actions. Following the incident, Plaintiffs sought defense and indemnification from the applicable insurers. After some of the insurers refused to acknowledge their alleged duties, Plaintiffs brought suit. Defendants moved to dismiss under Rules 12(b)(1), (6), and (7).
Lineage’s Declaratory Judgment Claims against Travelers. Lineage sought a declaratory judgment that Travelers owes it duties of defense and indemnification, and that Lineage is an additional insured under the Travelers Policies. Because Travelers had already agreed to defend Lineage (albeit with a reservation of rights), the Court determined that the duty to defend claim was moot as to present claims and not ripe as to future claims. Similarly, the indemnification claim was not ripe because it depended on the outcome of the ongoing underlying actions. Lineage’s additional insured status claim was also moot because Travelers had already recognized Lineage as an additional insured and any attempt to prospectively bind Travelers to this recognition was not ripe. Accordingly, the Court dismissed these declaratory judgment claims without prejudice.
Lineage’s Breach of Contract Claim against Travelers. Lineage alleged that Travelers had breached its duties to defend and to indemnify under the Travelers Policies. However, since Travelers began defending Lineage after the lawsuit commenced, the Court dismissed this aspect of the claim. The Court also dismissed the claim as to indemnification because Lineage had not alleged a determination that the obligation arose because of acts or omissions of Primus or Republic (the subcontractor) which was necessary under the applicable policy language.
Primus’s Declaratory Judgment Claims against Travelers. Primus sought a declaratory judgment that Travelers owes it duties of defense and indemnification, and that Primus is an additional insured under the Travelers-Republic Policy. The Court dismissed these claims without prejudice for the same reasons it dismissed Lineage’s parallel claims.
Lineage’s Indemnification and Breach of Contract Claims against Republic. Republic argued that Lineage’s claims for breach of its indemnification clause and for a declaratory judgment regarding the same should be dismissed as not ripe because its indemnity obligations were contingent on a yet-to-be-made factual determination that Republic was responsible for the claims and losses for which Lineage sought indemnification. However, the Court rejected this argument because the indemnity clause expressly stated that Republic’s indemnity obligations activated in response to an alleged act or omission and Lineage had adequately alleged that Republic was responsible for the losses. Republic also argued that the indemnity clause was contrary to public policy as expressed by N.C.G.S. § 22B-1, which prohibits a party to a construction contract from indemnifying a second party for damages caused by the second party’s own negligence. The Court acknowledged that two portions of the indemnity clause could potentially violate § 22B-1 but determined that the troublesome phrases could be severed. Thus, the motion to dismiss was denied as to these claims.
Lineage’s Tortious Interference with Contract Claim against Republic. Lineage alleged that it had negotiated a settlement with an insurer under which the insurer would pay out its policy limits to Lineage, but that Republic had caused the insurer to withdraw from the settlement and instead pay its limits to Republic. Republic argued, and the Court agreed, that the claim failed because Republic was a party to the contract at issue, and a party generally cannot interfere with its own contract. Moreover, the claim did not qualify for the malice exception to this general rule, since Lineage had not alleged that Republic acted without an economic motive or through the commission of an independent wrongful act. Accordingly, the Court dismissed this claim.
Wijewickrama v. Christian, 2023 NCBC 55 (N.C. Super. Ct. Aug. 11, 2023) (Bledsoe, C.J.)
Key Terms: co-counsel agreement; attorney’s fees; breach of contract; breach of fiduciary duty; motion to dismiss; declaratory judgment; pleading standards; motion to strike; economic loss rule; specific performance
This case arises from a contentious fee dispute between four attorneys over fees obtained from a series of lawsuits against the Cherokee County Department of Social Services (as relevant here, the Hogan, Cordell, and Simonds cases). In 2017, Wijewickrama, Jackson, Moore, and Christian entered into a written Co-Counsel Agreement to govern the division of the fees and workload associated with the CCDSS lawsuits. Pursuant to the Agreement, each attorney would contribute to the representation, and any fees collected would be split equally amongst the four. The Agreement contained an “opt-out” provision, which permitted each attorney to “opt out at any time during the course of the litigation, appeal or other proceeding.” Following an attorney’s decision to opt-out, the attorney would be entitled to a billable rate of $300 per hour for each hour spent on the case.
After a $4.6 million jury verdict against CCDSS in the Hogan case in May 2021, the Cordell cases were settled for substantial sums and settlement negotiations began in the Simonds case. Around that time, Christian began experiencing personal, health, and financial difficulties, which eventually led to Wijewickrama and Moore confronting Christian and informing him that he would not receive compensation regarding the Simonds case. Christian withdrew from the Simonds case which later settled for $42 million. After receiving a letter from Christian demanding a ¼ share of the fees from the Simonds case, Wijewickrama, Jackson, and Moore instituted this suit alleging claims for breach of fiduciary duty and breach of contract and seeking a declaratory judgment and specific performance. Christian moved to strike and to dismiss and filed counterclaims, which Plaintiff also moved to dismiss.
Defendant’s Motion to Dismiss. The Court first rejected Defendant’s argument that Plaintiffs had failed to allege breach of contract with adequate specificity since Rule 8(a)(1) does not require heightened pleading and the complaint adequately pleaded breach by non-performance and repudiation. The Court also concluded that Plaintiffs had adequately pleaded their alternative claim for specific performance.
Regarding Plaintiffs’ claim for breach of fiduciary duty, the Court found that not only had Plaintiffs alleged that the Co-Counsel Agreement was a joint venture or partnership agreement, which would create a fiduciary relationship as a matter of law, but also that Defendant had admitted the same in his answer and therefore the existence of a fiduciary relationship was deemed admitted. However, the Court nonetheless dismissed the claim because any damages suffered by Plaintiffs arose from a breach of the Agreement, and not from any fiduciary relationship, and therefore the claim was barred by the economic loss rule.
Plaintiffs’ Motion to Dismiss. Plaintiffs moved to dismiss Defendant’s counterclaims for breach of contract and breach of fiduciary duty relating to the loss of prospective fees in the Hogan case. The Court granted the motion, determining as a matter of first impression in North Carolina that co-counsel have neither “a fiduciary duty to protect one another’s prospective interests in a fee” nor a “cause of action against one another for prospective fees lost.”
Defendant’s Motion to Strike. Defendant moved to strike those allegations that discussed his demand letter, bankruptcy proceeding, and personal behavior. The Court denied the motion as to the demand letter and bankruptcy proceeding, which could possibly have a bearing on the case, but granted it as to his personal behavior because the specific language used was immaterial and inflammatory. The Court directed that this language be replaced with “scandalous personal conduct.”
Kearey Builders, Inc. v. Galleries@NoDa, LLC, 2023 NCBC 56 (N.C. Super. Ct. Aug. 14, 2023) (Robinson, J.)
Key Terms: breach of contract; motion to stay; arbitration; motion to dismiss; tortious interference with contract
This dispute arose out of an agreement Plaintiff Keary Builders, a general contractor, entered into with Defendant Galleries@NoDa, LLC, the developer, to construct a mixed-use building containing condominiums and retail space. Defendant Studio Fusion served as the architect and interior designer on the project. Studio Fusion’s duties included administrating the Agreement and issuing certificates for payment and substantial completion. After a dispute over payment under the Agreement, Plaintifff brought eight claims against Galleries and a ninth claim for tortious interference with contract against Defendant Studio Fusion, alleging that Studio Fusion induced Galleries to breach the Agreement by refusing to issue the requisite certificate of substantial completion. In response, Studio Fusion moved to dismiss Plaintiff’s ninth claim. Plaintiff then sought to stay the proceedings in favor of arbitration.
The Court granted Plaintiff’s motion to stay on the grounds that the Agreement contained an arbitration provision that specifically referenced and incorporated the AAA Construction Industry Arbitration Rules. The Court noted that the AAA Rules establish that the arbitrator “shall have the power to rule on his or her own jurisdiction.” Finding that the parties to the Agreement chose to delegate questions of substantive arbitrability to the arbitrator, the Court ordered Plaintiff’s first eight claims to arbitration and stayed the case pending the arbitrator’s decision.
As Studio Fusion was not a party to the Agreement, and therefore not subject to the Agreement’s arbitration provision, the Court ruled on Studio Fusion’s motion to dismiss Plaintiff’s ninth claim. The Court granted Studio Fusion’s motion to dismiss, on the basis that the complaint did not sufficiently plead factual allegations that Studio Fusion intentionally induced Galleries to breach the relevant agreements.
Vill. at Motts Landing Homeowners’ Assoc. v. Aftew Props. LLC, 2023 NCBC 57 (N.C. Super. Ct. Aug. 14, 2023) (Conrad, J.)
Key Terms: pickleball; motion to dismiss; planned community; declaration; homeowners’ association; breach of fiduciary duty; business judgment rule; breach of contract; implied covenant of good faith and fair dealing; negligent construction; breach of implied warranty of workmanlike construction; easement
The homeowners’ association of a planned community sued, among other defendants, the Sobols (three former board members) and Aftew Properties (the community’s developer) related to alleged defects in the construction of the community’s common areas and mismanagement by the board members. The Sobols are the two principals of Aftew, and their daughter. The Sobols and Aftew each moved to dismiss Plaintiff’s claims.
The Sobols’ Motion to Dismiss—Breach of Fiduciary Duty. The Association alleged that the Sobols, as officers and directors, owed it fiduciary duties, which they breached by favoring Aftew’s interests over the Association’s by failing to maintain records and collect reserve funds, and by accepting defective common elements conveyed by Aftew. The Sobols argued that neither the declaration nor the governing statutes imposed express duties upon them to collect reserve funds or supervise the construction of common elements. The Court, however, found that the officers and directors of homeowners’ associations and other nonprofit corporations owe duties of care and loyalty and that construed liberally the complaint sufficiently alleged that the Sobols engaged in self-dealing and “intentionally took actions to benefit Aftew—and, thus, themselves—at the Association’s expense.” Moreover, the Sobols were not shielded by the business judgment rule because their actions were self-interested. Accordingly, the Court denied the Sobols’ motion to dismiss.
Aftew’s Motion to Dismiss—Breach of Fiduciary Duty. The Complaint alleged that Aftew breached fiduciary duties arising from the special confidence that Association placed in it during its period of developer control. Guided by common-law principles, the Court agreed, finding that the Association sufficiently alleged that the authority granted to Aftew by the declaration placed it “in a position of dominance over the Association” so that “members of the Association had no choice but to rely on Aftew to protect their interests” thereby supporting the existence of a fiduciary relationship. Thus, the Court denied Aftew’s motion to dismiss the claim for breach of fiduciary duty.
Aftew’s Motion to Dismiss—Breach of Contract. Aftew argued, and the Court agreed, that the alleged misconduct by Aftew was not governed by, and therefore could not be breaches of, the declaration. Further, because the claim for breach of the implied covenant of good faith and fair dealing was premised on the same conduct as the claim for breach of contract, that claim fell with the breach of contract claim.
Aftew’s Motion to Dismiss—Negligent Construction and Implied Warranty of Workmanlike Construction. The Association claimed that Aftew negligently constructed various common elements of the community and that Aftew breached the implied warranty of workmanlike construction regarding the community’s pickleball courts. Aftew argued that these claims should be dismissed because it did not perform the construction of the common areas itself but rather hired contractors to perform the work. The Court noted that “any person responsible for supervising a construction project is subject to being held liable on a negligent construction theory” and that similar rules apply to implied warranties to extend liability to other who are actively involved in the construction. Since the Complaint sufficiently alleged that Aftew participated in the construction of certain common elements and retained the right to supervise its contractors, the Court denied the motion to dismiss.
Aftew’s Motion to Dismiss—Demand for Easement Proceeds. The Court granted Aftew’s motion to dismiss the Association’s demand for proceeds from an easement on a recreation area in the community because, as the Association admitted, Aftew owns the recreation area and had not conveyed it to the Association.
By: Natalie Kutcher
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