The North Carolina Business Court recently entered Rule 11 sanctions against attorneys who relied on inaccurate information from their clients in preparing and filing lawsuits. The decision comes just two months after the NCBC awarded Rule 11 sanctions in a case with similar facts (which we summarized Here).
In the most recent decision, the client, John Mauney, represented to his attorneys that he was a manager and member of NC Bioremediation, LLC, and therefore had authority to file a lawsuit on the company’s behalf.[1] In fact, Mauney was not, nor had he ever been, a member or manager for NC Bioremediation. The Defendants moved for Rule 11 sanctions against Mauney and his counsel, requiring the Court to determine “what inquiry into the facts did Plaintiff’s counsel conduct prior to filing the Complaint and was that inquiry a reasonable one under the circumstances?”[2]
Rule 11(a) of the North Carolina Rules of Civil Procedure requires all pleadings to be signed by an attorney, certifying the information alleged is factually sufficient, warranted by existing law, and not brought for any improper purpose. If a pleading is signed in violation of Rule 11, the court may impose sanctions on the signing attorney, the represented party, or both.
Having determined the complaint had a valid legal basis and was not brought for an improper purpose, the question for the Court was whether the facts alleged therein were true and accurate. When the factual sufficiency of a pleading is challenged, “a court must determine (1) whether the plaintiff undertook a reasonable inquiry into the facts and (2) whether the plaintiff, after reviewing the results of his inquiry, reasonably believed that his position was well grounded in fact.” [3]
Mauney and James Overton agreed to form NC Bioremediation in 2001. The Articles of Incorporation filed with the NC Secretary of State listed Mauney as the Organizer and Overton as the sole Member and Manager. None of the annual reports filed with the Secretary of State listed Mauney as a member of NC Bioremediation. In February 2013, NC Bioremediation was administratively dissolved by the Secretary of State for failing to file annual reports.
Mauney told his attorney he held an option to exercise an ownership interest in NC Bioremediation and he exercised that option to acquire an ownership interest via a writing to Overton in 2008. Mauney’s counsel admitted they did not have a copy of the alleged writing or any other documentary evidence stating Mauney actually held an ownership interest in NC Bioremediation. Mauney’s statements were corroborated by his former office assistant, who provided hearsay support for the notion that Mauney had an ownership interest from a document allegedly prepared by Overton.
In August 2014, Mauney’s attorneys sent a letter to Randy Saunders, the Manager for the Defendant Sea Winds, LLC, stating the firm was retained by NC Bioremediation regarding a business transaction between the two companies. Saunders alleged he replied to the letter and advised Mauney’s counsel, inter alia, that there was no proof Mauney had a membership interest in NC Bioremediation, even as an alleged 50% owner Mauney lacked authority to file a lawsuit on NC Bioremediation’s behalf, and Overton stated in numerous e-mails to Saunders that Mauney had no membership interest. While Mauney’s attorneys claimed they never received Saunder’s letter, they did admit to a telephone conversation with Saunders and seeing numerous e-mail exchanges between Mauney, Overton, and Saunders in which Overston states Mauney never had a membership interest in the company.
In November 2014, Mauney purported to call a meeting of the members of NC Bioremediation, and sent notice via certified mail to Overton, which was returned unclaimed. Mauney held a meeting later that month, and removed Overton as the manager of NC Bioremediation and appointed himself manager. Overton did not attend the meeting. In January 2015, Mauney filed an application for reinstatement with the Secretary of State, listing himself as manager of NC Bioremediation. The Complaint was filed in February 2015, listing Mauney as Manager, and it was verified by Mauney.
The Court determined that, while Mauney’s counsel conducted some inquiry into the facts regarding his membership of NC Bioremediation before filing the Complaint, there were many red flags requiring further inquiry and ignored by counsel, falling short of Rule 11’s requirements. In particular, Mauney’s counsel did not attempt to contact Overton to inquire into the facts surrounding NC Bioremediation prior to filing the Complaint, even after receiving conflicting evidence of the same from other sources. Mauney’s attorneys also relied on hearsay and did not obtain any documentary evidence from Mauney or any other credible source to support his claim that he held an option to become a member, or that he exercised such an option or contract.
For the foregoing reasons, the Court awarded sanctions in the form of a dismissal without prejudice, but did not award attorneys’ fees. In comparison to the Court’s decision in August, was that sanction harsh enough? In the Southeast Air Charter decision, the Court faced a similar set of facts: a lawyer relied inappropriately on his client’s representation that some of the Defendants held positions in a corporation which warranted them being sued for breach of fiduciary duty.[4] In fact, many of them were rank-and-file employees. The Court imposed sanctions in the form of attorneys’ fees for those defendants amounting to greater than $35,000 dollars. Accordingly, while the North Carolina Business Court does not appear to be hesitant in awarding Rule 11 sanctions, it is difficult to predict how harsh those sanctions may be.
[1] NC Bioremediation, LLC v. Sea Winds, LLC, et al., 2015 NCBC 94 (October 15, 2015).
[2] Id.
[3] Peters v. Pennington, 210 N.C. App. 1, 27, 707 S.E. 2d 724, 742 (2011) (internal citations omitted).
[4] Southeast Air Charter, Inc v. Stroud, 2015 NCBC 79 (August 17, 2015).
