McKinnon v. CV Indus., Inc.,
2012 NCBC 36.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF CATAWBA 09 CVS 830
BOBBY E. McKINNON,
Plaintiff,
v. ORDER & OPINION
CV INDUSTRIES, INC.,
Defendant.
{1} THIS MATTER is before the court following remand on cross-motions for
attorneys’ fees and costs. The court granted Defendant summary judgment on all
claims, and its Order was affirmed. For the reasons stated below, Plaintiff’s motion
is DENIED, and Defendant’s motion is GRANTED in part and DENIED in part.
C. Gary Triggs, P.A. by C. Gary Triggs for Plaintiff Bobby E. McKinnon.
Parker, Poe, Adams & Bernstein LLP by William L. Rikard, Jr. and James C.
Lesnett, Jr. for Defendant CV Industries, Inc.
Gale, Judge.
I. PROCEDURAL BACKGROUND
{2} Plaintiff Bobby E. McKinnon (“Plaintiff” or “McKinnon”) filed suit against
Defendant CV Industries, Inc. (“Defendant” or “CVI”) on March 11, 2009, alleging
claims for: (1) breach of contract; (2) specific performance; (3) fraud or
misrepresentation; and (4) violation of the North Carolina Unfair and Deceptive
Trade Practices Act (“UDTPA” or “Chapter 75”). McKinnon entered a Severance
Agreement (“Agreement”) with CVI upon the termination of his employment. Each
of McKinnon’s claims arise from CVI’s refusal to pay amounts McKinnon contends
he was owed under the shadow equity plan of the Agreement. The case was
designated as a mandatory complex business case by Order of Chief Justice Sarah
Parker dated April 13, 2009. The case was assigned to Chief Judge Ben Tennille,
and then reassigned to the undersigned upon Judge Tennille’s retirement.
{3} CVI filed its initial answer and counterclaim on April 8, 2009. Its
counterclaim alleged that McKinnon breached the Agreement by becoming involved
with patents owned by Frank J. Land (“Land”) and the Land Fabric Company
(“Land Patent”). (CVI’s Answer and Countercl. at 11.) McKinnon’s reply noted that
CVI had by letter expressly authorized McKinnon’s involvement with the Land
Patent. (Pl.’s Mot., Affirmative Defenses, and Reply to Countercl. at 2.) CVI then
promptly filed an amended answer omitting the breach of contract counterclaim.
(CVI’s Am. Answer and Countercl. at 7.)
{4} The Parties undertook extensive discovery, throughout which CVI
pressed McKinnon to define how he contended that he had continued in
“competition” with CVI once he became involved with the Land Patent and formed a
company known as Basofil Fibers, a fact necessary to support his contract claim.
CVI further sought to discover any evidence McKinnon claimed to support any
finding that CVI had entered the Agreement having no intention to perform it, a
necessary factual predicate of McKinnon’s fraud and UDTPA claims. After the close
of discovery, on March 1, 2010, CVI filed a Motion for Summary Judgment on all
four of McKinnon’s claims. Judge Tennille granted the motion in its entirety on
June 3, 2010, finding that McKinnon could forecast no evidence to support his
claims.
{5} The North Carolina Court of Appeals affirmed Judge Tennille’s grant of
summary judgment on July 19, 2011. McKinnon v. CV Indus., Inc., ___ N.C. App.
___, 713 S.E.2d 495 (2011).
{6} Upon remand, Plaintiff and Defendant each filed motions for attorneys’
fees and costs. McKinnon’s motion is based on his assertion that CVI brought its
breach of contract counterclaim when it was aware, or should have been aware, that
CVI had expressly authorized the actions taken by McKinnon of which it
complained. CVI’s motion is based on its assertion that McKinnon knew at the
outset that his claims were frivolous, and, further that any good faith belief that
McKinnon may have had at the time of filing evaporated when he was unable to
marshal any evidence at all to support his claims, such that the issues were no
longer justiciable. The respective motions were fully briefed, and the court held a
hearing on March 1, 2012.
II. FACTUAL BACKGROUND
A. The Parties
{7} Plaintiff McKinnon is a citizen and resident of Catawba County, North
Carolina. It is undisputed that McKinnon has substantial experience and expertise
in the textile industry.
{8} Defendant CVI is a North Carolina corporation with a principal place of
business in Hickory, Catawba County, North Carolina. CVI acts as a holding
company for Century Furniture, LLC (“Century”) and Valdese Weavers, LLC
(“Valdese”). Century manufactures high-grade furniture, and Valdese
manufactures mid to high quality jacquard fabric for use by furniture
manufacturers. Valdese formerly funded the textile research of Land which related
to the development of a fire-resistant yarn to be used in upholstery and furniture
manufacturing.
B. The Agreement and McKinnon’s Employment After Leaving CVI
{9} McKinnon resigned from CVI in May 2000 after working there for more
than twenty years. (Compl. ¶¶ 2, 4.) The Parties negotiated the Agreement upon
his resignation. (Compl. Ex. A.) Among other provisions, the Agreement modified
previous incentive plans that had been awarded to McKinnon over the course of his
employment. Of particular importance in this case, the Agreement modified the
terms of a shadow equity plan (“Plan A”). But for the Agreement, McKinnon would
have lost benefits under Plan A if he took employment with a competitor of CVI or
otherwise competed with CVI after leaving CVI’s employ. (Compl. Ex. A ¶ 4.) The
Agreement instead recognized that McKinnon would work for a CVI competitor,
Mastercraft Fabrics (“Mastercraft”), and suspended any Plan A benefits until
McKinnon was no longer “employed by any other competitor of and is not engaged
in competition with CVI or any of its subsidiaries.” (Compl. Ex. A ¶ 8.) However,
all payments under Plan A would be forfeited if the value of CVI’s Employee Stock
Ownership Plan (“ESOP”) stock on the December 31 of the year immediately
preceding the date on which McKinnon ceased to be in competition with CVI was
below the $9.90 value of CVI’s ESOP stock on December 31, 1999. (Compl. Ex. A ¶
8.) McKinnon would not therefore receive any Plan A benefits: (1) while he was in
competition with CVI; or (2) at and after the time he ceased competition if CVI’s
ESOP stock value did not exceed $9.90 on the preceding December 31. McKinnon’s
claim turns on when he ceased being involved in “competition with CVI.” Judge
Tennille and the Court of Appeals concluded that McKinnon had no evidence to
support a claim that he remained in competition with CVI after leaving
employment with Mastercraft in November 2001, which resulted in a forfeiture of
Plan A benefits because the December 31, 2000 ESOP stock price was below $9.90.
{10} CVI’s motion for fees and costs contends that McKinnon’s continued
assertion to the contrary was frivolous and presented no justiciable claim.
McKinnon rather contends that his continued general involvement in the furniture
industry supported his claim that he competed with CVI, albeit indirectly and
without being associated with a direct competitor.
{11} After resigning from CVI in May 2000, McKinnon first became an
owner/employee of Joan Fabrics Corp. and its Mastercraft division. (Summ. J.
Order & Op., June 3, 2010 (“Order & Op.”) ¶ 14.) There is no dispute that
Mastercraft is a competitor of CVI. (Order & Op. ¶ 24.) Also, as of May 2000, the
Agreement prohibited McKinnon from association with the Land Patent.
{12} In the Fall of 2001, CVI and its subsidiary, Valdese, elected to
discontinue all involvement with the Land Patent and the field of fire-resistant
yarns. (Order & Op. ¶ 17.) When McKinnon learned of CVI’s disengagement, he
requested that CVI release him from the provisions of the Agreement preventing
him from becoming involved with the Land Patent. (Order & Op. ¶ 17.) On
November 20, 2001, Alex Shuford (“Shuford”), then CVI’s President and CEO, gave
McKinnon express permission by letter to work with Land and the Land Patent.
(Pl.’s Mem. of Law in Supp. of his Mot. for Att’ys Fees and Costs and in Opp’n to
Def.’s Mots. for Att’ys Fees and Costs (“Pl.’s Supp. Br.”) at 5–6.)
{13} On November 26, 2001, McKinnon resigned from his employment with
Mastercraft, began working with Land and the Land Patent, and formed a company
known as Basofil Fibers. (Pl.’s Supp. Br. at 6.) The Parties’ dispute focuses on
whether McKinnon had a justiciable basis to claim that he then remained in
“competition” within the Agreement’s meaning. Basofil Fibers manufactures and
sells fiber, but does not spin the fiber into yarn or manufacture fabric. (Order & Op.
¶ 26.) Valdese was originally a client of Basofil Fibers but ceased purchasing its
products in August 2002 due to concerns over quality. McKinnon served as Basofil
Fibers’ CEO until November 1, 2006, and remained a Basofil Fibers’ consultant
until November 1, 2008. (Pl.’s Supp. Br. at 6.) McKinnon contends that he first
ceased being in competition with CVI and its subsidiaries on November 1, 2008. As
noted, CVI contends that McKinnon’s competition ceased in 2001 when he left
Mastercraft.
{14} When McKinnon left his employment with CVI, CVI booked its Plan A
severance obligations to McKinnon as a contingent liability. In March 2002, CVI
hired an outside auditing firm to examine its financial statements. McKinnon, 713
S.E.2d at 499. The auditing firm determined that McKinnon had ceased being in
competition with CVI in November 2001 when he left Mastercraft.
Id. Because
CVI’s ESOP stock did not exceed the $9.90 threshold at the previous year-end, the
auditing firm advised that McKinnon had forfeited his Plan A benefits and the
contingent liability need no longer be carried on CVI’s books. CVI did not provide
McKinnon notice that it had cancelled the contingent liability, although there was
also no evidence that it was required to do so. CVI continued to pay McKinnon
other benefits provided by the Agreement.
{15} CVI’s year-end ESOP stock price remained below the threshold $9.90
until December 31, 2007. (Order & Op. ¶ 11.)
{16} In June 2008, McKinnon notified CVI that he would cease competition
with CVI and claimed entitlement to Plan A benefit payments. (Compl. ¶ 16.) CVI
then notified McKinnon that he had ceased competing with CVI when he resigned
from Mastercraft in 20011 and refused to pay McKinnon any money under Plan A.
(Compl. Ex. E.) McKinnon’s interrogatory responses indicate that as of the date of
his request for Plan A benefits, he was performing consulting services for Dalco,
Inc., a fabric company, Keystone Weaving, an apparel fabrics manufacturer, and
Jacquard Fabrics, Inc. (“Jacquard”).
{17} CVI has continued to pay all payments due under Plans B, C, and D
from the time the Agreement was executed. (Order & Op. ¶ 9.)
C. The Lawsuit
{18} McKinnon brought suit against CVI on March 11, 2009 alleging four
causes of action: (1) breach of the Agreement by CVI; (2) specific performance of the
Agreement; (3) fraud or misrepresentation; and (4) violation of the UDTPA.
(Compl.) The fraud and UDTPA claims asserted that CVI had no intention of
performing under Plan A when first entering the Agreement.
{19} On April 8, 2009, CVI answered and filed a counterclaim against
McKinnon for breach of the Agreement. (CVI’s Answer and Countercl.) The answer
denied every material allegation of liability, pled Rule 12(b)(6) as an affirmative
defense, and moved for attorneys’ fees under N.C.G.S. § 75-1.1 and other statutory
authority. The counterclaim asserted that the Agreement expressly prohibited
McKinnon’s involvement with Land or the Land Patent. (CVI’s Answer and
Countercl. at 9 ¶¶ 9−10.)
{20} On April 13, 2009, McKinnon filed a reply to CVI’s counterclaim
referencing a letter granting express permission for McKinnon’s involvement with
Land by CVI’s President and CEO, Shuford. (Pl.’s Mot., Affirmative Defenses and
Reply to Countercl. at 2.)
1 The letter from CVI denying liability to McKinnon under Plan A states that CVI believes
McKinnon ceased being in competition with CVI when he resigned from Mastercraft in November
2002. The court believes the discrepancy in dates is simply a mistake on the part of the drafter.
Even so, the ESOP stock price would have been below $9.90 on December 31, 2002.
{21} On June 30, 2009, CVI filed an Amended Answer and Counterclaim
removing its counterclaim for breach of contract. (CVI’s Am. Answer and
Countercl.) The amended answer likewise denied every material allegation of
liability, pled Rule 12(b)(6) as an affirmative defense, and moved for attorneys’ fees
under N.C.G.S. § 75-1.1 and other statutory authority.
{22} The parties held a Case Management Conference on August 26, 2009.
The conference was not recorded, but the record establishes that Judge Tennille
cautioned McKinnon that further pursuit of his UDTPA claim could result in an
award of attorneys’ fees against him. (Def. CV Industries, Inc.’s Mem. of Law in
Supp. of its Mot. for Att’ys Fees and Costs (“Def.’s Supp. Br.”) at 13; Pl.’s Supp. Br.
at 8.) The Parties thereafter pursued a full course of discovery during the period
allowed by the Case Management Order.
D. Summary Judgment
{23} CVI moved for summary judgment against all of McKinnon’s claims on
March 1, 2010. (Def.’s Mot. for Summ. J. at 4.) CVI asserted that the uncontested
evidence demonstrated that McKinnon had not competed with CVI after leaving
Mastercraft, such that McKinnon had forfeited payments under Plan A because he
ceased being in competition with CVI when he began working for Basofil Fibers and
its related entities in November, 2001, at which time CVI’s ESOP stock price had
not passed the $9.90 benchmark. (Def.’s Mot. for Summ. J. at 4.) CVI further
contended that there was no forecast of evidence to support any fraud or UDTPA
claim based on the assertion that CVI did not intend to honor the Agreement at the
time it was executed. (Def.’s Mot. for Summ. J. at 4.)
{24} Judge Tennille granted summary judgment against all of McKinnon’s
claims. He found that McKinnon created no material issue of fact of whether he
remained in competition with CVI after year-end 2001, and the uncontested
evidence presented no support for any assertion that CVI entered the Agreement
without an intention to perform. (Order & Op. ¶¶ 2, 24, 45.)
{25} The evidence was undisputed that McKinnon remained in competition
with CVI during the time he was employed by Mastercraft. (Order & Op. ¶ 24.)
McKinnon never offered any support that Basofil Fibers was a direct competitor to
CVI. He instead relied upon a non-specific but broad definition of competition
which, if accepted with the breadth that McKinnon asserted, would reach any
company involved in any way in the chain of manufacture, sale or distribution of
furniture products. Judge Tennille rejected McKinnon’s asserted definition and
found that McKinnon had presented no competent evidence which could support
any finding that he was competing with CVI through his association with Basofil
Fibers. (Order & Op. ¶¶ 26, 30.) To the contrary, Judge Tennille noted that
substantial uncontroverted evidence proved the contrary for several reasons. First,
Basofil Fibers only manufactured fiber; it did not manufacture yarn, fabric, or
furniture. (Order & Op. ¶ 26.) Second, McKinnon entered an employment
agreement with Basofil Fibers which prohibited any employment with competitors,
yet he “freely admits” that this non-compete clause would not have prevented him
from returning to work for CVI. (Order & Op. ¶ 27.) Third, Basofil Fibers’
President and Manager, Bogden Ewendt (“Ewendt”), testified that Basofil Fibers
does not compete with CVI. (Order & Op. ¶ 27.) Fourth, CVI did not object to an
investment in Basofil Fibers by the Executive Vice President of Sales at one of CVI’s
subsidiaries. (Order & Op. ¶ 28.) In sum, Judge Tennille found that “with the
exception of McKinnon’s self-serving conclusory allegations” it was “entirely
unrefuted” that Basofil Fibers did not compete with CVI. (Order & Op. ¶ 26.)
{26} With respect to McKinnon’s promissory fraud claim, Judge Tennille
noted that “[t]he factual record is devoid of any evidence indicating that CVI did not
intend to honor the Plan A provisions at the time it entered into the Agreement,”
but rather McKinnon’s evidence related only to CVI’s actions after the Agreement
was executed.2 (Order & Op. ¶¶ 36–37.) Judge Tennille again noted that the
evidentiary record, in fact, tended to disprove McKinnon’s allegations. That
evidence tended to show that CVI did intend to honor the Agreement when it was
2 In response to specific questioning during oral argument, Plaintiff’s counsel indicated that the
promissory fraud claim rested not on conduct prior to or during the execution of the contract, but on
“[w]hat [CVI] did shortly thereafter.” (Tr. of Pl.’s Oral Arg. at 38:18−21.)
executed because: (1) CVI partially performed under the Agreement by making all
payments due under Plans B, C, and D; (2) CVI carried the Plan A liability on its
books until McKinnon began working for Basofil Fibers; and (3) CVI was willing to
release McKinnon from the restrictions on working with Land and the Land Patent.
(Order & Op. ¶¶ 37–38.)
{27} While McKinnon’s UDTPA claim was based on the fraud claim, Judge
Tennille further supported summary judgment on the UDTPA claim because the
statute does not reach “conduct solely related to the internal operation of a single
business.” As a result, McKinnon had failed to present any evidence that the
Agreement affected commerce. (Order & Op. ¶¶ 40–44.)
E. Court of Appeals
{28} The Court of Appeals affirmed Judge Tennille’s grant of summary
judgment. McKinnon, 713 S.E.2d at 505.
{29} The Court of Appeals likewise found no evidence to support McKinnon’s
claim that he remained in competition with CVI after he resigned from Mastercraft
and began working for Basofil Fibers. Id. at 501. The Court of Appeals stated that
competition “entail[s] more than mutual existence in a common industry or
marketplace; rather, it requires an endeavor among business entities to seek out
similar commercial transactions with a similar clientele.”
Id. It also found that
McKinnon’s forecast of evidence could not present a claim under this definition.
Id.
At oral argument before the Court of Appeals, Judges Thigpen and Hunter
specifically questioned McKinnon’s attorney, Mr. Triggs, in an effort to identify
some basis on which McKinnon claimed Basofil Fibers competed with CVI. Mr.
Triggs was unable to name any product of Basofil Fibers’ that competed with CVI
and, instead, admitted for the first time that McKinnon was not arguing that
“Basofil in and of itself, is competition.” (Tr. of Appellant’s Oral Arg. and Rebuttal
Oral Arg. at 5, 27:14−15) Mr. Triggs rather proposed that McKinnon remained in
competition with CVI because he helped to “direct [CVI’s competitors in the
furniture business] to a better market share.” (Tr. of Appellant’s Oral Arg. and
Rebuttal Oral Arg. at 11:2−5.) He later elaborated in argument on the present
motions that competition should be understood so broadly as to reach any entity
competing for dollars spent in the furniture industry. The Court of Appeals rejected
McKinnon’s broad brush approach. It found that Basofil Fibers and its related
entities produced Basofil Fiber and licensed out the rights to Alessandra Yarn, and
so Basofil Fibers’ clientele was yarn and fabric manufacturers, whereas CVI’s
customers were instead furniture manufacturers and consumers. McKinnon,
713
S.E.2d at 502. CVI and Basofil Fibers were therefore not in competition with each
other; they merely operated in related industries while not competing for similar
clientele.
Id. at 501–02.
{30} The Court of Appeals noted that if McKinnon’s definition of competition
were adopted, it would mean that nearly every business which contributes any
product or service to the furniture industry would be in competition with each other.
Id. at 502. The Court of Appeals found McKinnon’s definition to be “unpersuasive
and excessively broad.” Tellingly, the Court of Appeals further noted that the broad
definition McKinnon championed could well mean that his continuing consulting
arrangements would mean that, “he may have still been in competition with CVI
when he claimed his Plan A benefits on 23 June 2008.”
Id. That is, his own actions
were inconsistent with his litigation claims.
{31} As to McKinnon’s promissory fraud claim, the Court of Appeals found no
evidence adequate to create a genuine issue of material fact. Id. at 503. McKinnon
failed to provide any evidence that CVI intended to dishonor the Agreement at the
time the Parties entered into the Agreement.
Id. The Court of Appeals also found
that there was no support under North Carolina law for McKinnon’s argument that
CVI engaged in fraud when it removed the obligation to McKinnon under Plan A
from its books without notifying McKinnon.
Id.
{32} The Court of Appeals also found that summary judgment against
McKinnon’s UDTPA claim was proper because the claim depended upon the
underlying fraud allegation, and further because the Agreement did not violate
common law restrictions on restraint of trade and thus did not violate the UDTPA.
Id. at 504−05.
{33} Despite the Court of Appeals’ considered opinion that McKinnon had no
evidentiary basis on which to rest his claims, on August 22, 2011, McKinnon filed a
Petition for Discretionary Review with the North Carolina Supreme Court. The
petition was denied by Order dated October 6, 2011. (Def.’s Supp. Br. at 2.)
{34} The question now before this court is whether McKinnon should be
taxed with fees and costs. As noted below, the court believes the inquiry focuses not
so much on whether McKinnon should be sanctioned for having initiated the claim,
but rather whether he insisted on pursuing it after it became obvious that his
claims were no longer justiciable.
III. LEGAL STANDARDS
{35} Both motions assert a basis for the award of attorneys’ fees pursuant to
N.C.G.S. §§ 1A, Rule 11; 1D-45; and 6-21.5; and costs pursuant to N.C.G.S. §§ 6-1;
6-20; and 7A-305. CVI’s motion additionally claims a basis pursuant to N.C.G.S. §
75-16.1. These various provisions are reviewed under similar but somewhat
different standards of review.
A. N.C.G.S. § 1A, Rule 11
{36} Rule 11 requires that pleadings, motions, and other papers filed with
the court must be well-grounded in fact, warranted by existing law or a good faith
argument for the extension, modification, or reversal of existing law, and not filed
for any improper purpose, such as to harass or cause unnecessary delay or increase
in the costs of litigation. Thus, a Rule 11 analysis includes three components: (1)
factual sufficiency; (2) legal sufficiency; and (3) proper purpose. Static Control
Components, Inc. v. Vogler, 152 N.C. App. 599, 603,
568 S.E.2d 305, 308 (2002)
(citing Dodd v. Steele,
114 N.C. App. 632, 635,
442 S.E.2d 363, 365 (1994)).
Sanctions can be imposed if any one of the three is not met. Bryson v. Sullivan,
330
N.C. 644, 656–57,
412 S.E.2d 327, 333 (1992).
{37} The Rule 11 inquiry is limited to a review of the challenged pleading and
whether it was warranted by facts and law known to the submitting party at the
time the pleading was signed, with the court not looking beyond to responsive
pleadings. Id.
{38} Factual sufficiency inquires whether: (1) the alleged violator undertook
a reasonable inquiry into the facts; and (2) the alleged violator reasonably believed
that his claim was well-grounded in fact after assessing the results of his inquiry.
In re Will of Durham, 206 N.C. App. 67, 71,
698 S.E.2d 112, 118 (2010) (citing
McClerin v. R-M Indus., Inc.,
118 N.C. App. 640, 644,
456 S.E.2d 352, 355 (1995)).
{39} Legal sufficiency inquires whether a pleading was supported by existing
law at the time it was signed. Bryson, 330 N.C. at 656,
412 S.E.2d at 333. The
courts utilize a two-part analysis. First, the court must determine if the pleading is
facially plausible. Ward v. Jett Props., LLC,
191 N.C. App. 605, 607–08,
663 S.E.2d
862, 864 (2008) (citing Mack v. Moore,
107 N.C. App. 87, 91,
418 S.E.2d 685, 688
(1992)). If the pleading is not facially plausible, then the court must ask whether
the pleading party failed to “conduct reasonable inquiry into the law or did not
reasonably believe that the [pleading] was warranted by existing law” or “a good
faith argument for the extension, modification, or reversal of existing law.” N.C.
GEN. STAT. § 1A, Rule 11; Ward,
191 N.C. App. at 608,
663 S.E.2d at 864.
{40} An improper purpose may be broadly defined as any purpose other than
to vindicate one’s rights. Ward, 191 N.C. App. at 609,
663 S.E.2d at 865 (citing
Brooks v. Giesey,
334 N.C. 303, 315,
432 S.E.2d 339, 345−46 (1993)). An objective
standard is used to determine whether a pleading was filed for an improper
purpose, but such a purpose can be inferred from “continuing to press an obviously
meritless claim after being specifically advised of its meritlessness by a judge or
magistrate.”
Id. (internal quotations omitted).
B. N.C.G.S. § 1D-45
{41} N.C.G.S. § 1D-45 provides for an award of reasonable attorneys’ fees
which result from defending a claim for punitive damages, if the court finds that the
claimant filed the claim for punitive damages knowing that the claim was frivolous
or malicious.
C. N.C.G.S. § 6-21.5
{42} N.C.G.S. § 6-21.5 allows a court, upon motion of the prevailing party, to
award attorneys’ fees if the court finds that there was “a complete absence of a
justiciable issue of either law or fact raised by the losing party in any pleading.”
While the court’s grant of a motion for summary judgment is not alone sufficient for
the court to find a complete absence of a justiciable issue, it may be used as
evidence to support such a finding. On the other hand, if the court finds that the
losing party’s claims were supported by a good faith argument for the extension,
modification, or reversal of existing law, it may not award attorneys’ fees under § 6-
21.5. N.C. GEN. STAT. § 6-21.5 (2011).
{43} In contrast to the Rule 11 predicates, in assessing a § 6-21.5 violation,
the court properly looks beyond a particular pleading to evaluate “whether the
losing party persisted in litigating the case after a point where he should reasonably
have become aware that the pleading he filed no longer contained a justiciable
issue.” Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258,
400 S.E.2d 435, 438
(1991). A justiciable issue is one “that is real and present as opposed to imagined or
fanciful. In order to find complete absence of a justiciable issue it must conclusively
appear that such issues are absent even giving the pleadings the indulgent
treatment they receive on motions for summary judgment or to dismiss.”
Sunamerica,
328 N.C. at 257,
400 S.E.2d at 437 (citations omitted) (quoting K & K
Dev. Corp. v. Columbia Banking Fed. Sav. & Loan Ass’n,
96 N.C. App. 474, 479,
386
S.E.2d 226, 229 (1989)) (internal quotation marks omitted).
{44} The North Carolina Supreme Court recognizes the interplay between
Rule 11 and § 6-21.5. It has held that it is “possible that a pleading which, when
read alone sets forth a justiciable controversy, may, when read with a responsive
pleading, no longer present a justiciable controversy.” Sunamerica, 328 N.C. at 258,
400 S.E.2d at 438. It is important to note, however:
that the mere filing of an affirmative defense without more is not
sufficient to establish an absence of a justiciable issue, nor is the grant
of a 12(b)(6) motion, nor the entry of summary judgment. However,
action by the losing party which perpetuated litigation in the face of
events substantially establishing that the pleading no longer presented
a justiciable controversy may also serve as evidence for the purposes of
N.C.G.S. § 6-21.5. Whether such evidence would be sufficient without
more is determinable on a case-by-case basis.
Id. at 259−60, 400 S.E.2d at 439.
D. N.C.G.S. § 75-16.1
{45} Under § 75-16.1, a court may award attorneys’ fees to the prevailing
party if the presiding judge finds that “[t]he party instituting the action knew, or
should have known, the action was frivolous and malicious.” N.C. GEN. STAT. § 75-
16.1 (2012). The grant of summary judgment against a claim is insufficient, by
itself, to prove that a claim was frivolous. Winston-Salem Wrecker Ass’n v. Barker,
148 N.C. App. 114, 117,
557 S.E.2d 614, 617 (2001). An award of attorneys’ fees is
unwarranted if the court finds that the party made a “good faith argument” for the
applicability of the UDTPA. Cincinnati Ins. Co. v. Dynamic Dev. Grp., LLC.,
336 F.
Supp. 2d 552, 557 (M.D.N.C. 2004).
E. Costs Pursuant to N.C.G.S. §§ 6-1 and 6-20
{46} N.C.G.S. § 6-1 permits the court to award costs to the party for whom
judgment is given, if such costs are allowed under Chapter 6 or 7A of the North
Carolina General Statutes. N.C.G.S. § 6-20 articulates the court’s discretion to
award costs under § 6-20, regardless of whether costs are otherwise allowed under
other sections of the General Statutes.
IV. ANALYSIS
{47} Employing these standards, the court DENIES Plaintiff’s motion for
attorneys’ fees and costs. The court GRANTS in part and DENIES in part
Defendant’s motion for attorneys’ fees, limiting the award of fees to the pursuit of
the litigation after summary judgment was entered. The court GRANTS
Defendant’s motion for costs.
A. McKinnon is Not Entitled to Attorneys’ Fees or Costs.
1. McKinnon is not entitled to attorneys’ fees pursuant to Rule 11.
11.
{48} McKinnon’s motion rests on his claim that CVI improperly asserted its
counterclaim because CVI had by letter expressly authorized McKinnon’s
involvement with the Land Patent. (Pl.’s Supp. Br. at 9, 31.) Although McKinnon’s
motion does not specify which prong(s) of Rule 11 CVI allegedly violates, the court
has examined the motion under each of the three prongs.
{49} CVI admits that the letter existed but was not found prior to the
counterclaim being filed. CVI’s Chief Financial Officer, Richard Reese, stated in his
deposition that he reviewed the Agreement and searched his files relating to
McKinnon prior to filing the counterclaim. (Def.’s Mot. to Strike and Resp. to Pl.’s
Mot. for Att’ys Fees and Costs (“Def.’s Resp. Br.”) at 2–3.) Shuford, the author of
the letter to McKinnon, also stated in his deposition that he did not recall the letter
as it had been written several years prior. (Def.’s Resp. Br. at 3.) Not having found
anything releasing McKinnon from the clause in the Agreement prohibiting him
from working with the Land Patent after reviewing files, CVI filed the counterclaim
believing it had a basis to do so. (Def.’s Resp. Br. at 3.) The court concludes that
CVI made a reasonable inquiry into the facts supporting their breach of contract
counterclaim.
{50} The counterclaim does not fail the legal sufficiency standard. It is
plausible on its face. But for the letter, McKinnon’s involvement with the Land
Patent would plainly support a claim for breach of contract.
{51} There is no evidence to support a finding that CVI filed its counterclaim
for any improper purpose. The prompt dismissal after notice of the letter suggests
otherwise.
{52} In sum, CVI did not violate Rule 11 when filing the counterclaim.
2. McKinnon is not entitled to attorneys’ fees under N.C.G.S. § 1D-
1D-45.
{53} CVI did not seek punitive damages in its counterclaim. Accordingly,
McKinnon has no grounds to seek fees under 1D-45.
3. McKinnon is not entitled to attorneys’ fees under N.C.G.S. § 6-
6-21.5.
{54} The court has already determined that CVI’s counterclaim was
supported both factually and legally at the time of its filing, and did not at that time
completely lack a justiciable issue of law or fact. Considering the prompt filing of
the Amended Answer to eliminate the counterclaim, there is no support for the
argument that CVI improperly continued to litigate its counterclaim beyond the
time when it should have become aware that it no longer had a justiciable claim.
{55} There is then no basis for awarding McKinnon attorneys’ fees under § 6-
21.5.
{56} In the court’s discretion, no costs will be taxed against CVI under
N.C.G.S. § 6-1 or § 6-20.
B. CVI’s Motion for Attorneys’ Fees Presents a Much More Difficult Question.
1. The court awards no attorneys’ fees pursuant to Rule 11.
{57} While a failure to satisfy any of the three factors justifies an award of
fees, CVI asserts that McKinnon fails each of the three prongs sufficient to impose
Rule 11 sanctions. (Def.’s Supp. Br. at 17.) As required by the standard, the court
limits its Rule 11 inquiry to the individual pleading at the time it was filed.
{58} In looking at factual and legal sufficiency, the court has considered the
question of whether when filing his action, McKinnon knew that Basofil Fibers did
not compete with CVI. The inquiry is compounded by the Agreement’s lack of
definition of “competition.” Ultimately, Judge Tennille and the Court of Appeals
undertook a thorough record review and found the definition upon which McKinnon
continued to insist was baseless and unfounded. However, very clearly Rule 11
sanctions are not imposed simply because a litigant is unsuccessful or because he
disagrees with a court. Unquestionably, however, McKinnon was seeking to sail on
a slender reed. Ultimately, while persisting in his claims, McKinnon struggled or
ultimately failed to be able to even succinctly state a cogent definition of
competition that would support his claims. The definition he ultimately relied upon
may well have defeated his claim because it would reach his continuing consulting
activities after he claimed that he had adequately ceased competition to trigger
Plan A benefits. While finding it a close call, the court concludes that there is no
adequate basis to conclude that McKinnon did not have an initial belief that he
could prove after discovery that he was competing within the meaning of the
Agreement. See Kohler Co. v. McIvor, 177 N.C. App. 396, 402–03,
628 S.E.2d 817,
822−23 (2006). The court believes the more difficult question is whether he
legitimately continued in that belief when pressed during the course of litigation to
support his claim and failed to present a clear basis on which he could claim relief.
{59} The court further notes that the claim for promissory fraud was clearly a
strained and weak one when it was first filed. McKinnon relied entirely on CVI
conduct after the Agreement was entered to support his claim of the lack of intent
before the Agreement. McKinnon never developed evidence to the contrary, yet
insisted on pressing his claim forward. The question under Rule 11 is whether the
pleading was without factual or legal justification when filed. The court believes
that the proper inquiry again focuses not on a Rule 11 violation for the initial filing
but an exposure to attorneys’ fees for pursuing the claim when it became obvious
there was no factual or legal basis to support it.
{60} In sum, although a close case, the court concludes that Rule 11 sanctions
are not appropriate.
2. CVI is not entitled to attorneys’ fees under N.C.G.S. § 1D-
1D-45.
{61} In its discretion, the court will not award attorneys’ fees under N.C.G.S.
§ 1D-45 as the punitive damages claim did not appear to independently influence
the course of the litigation.
3. CVI became entitled to attorneys’ fees under N.C.G.S. § 6-
6-21.5 at a
point in the litigation.
litigation.
{62} CVI’s § 6-21.5 claim asks essentially whether McKinnon should have
abandoned his claim at some point in the litigation when it became clear that he
could not succeed. A similar question underlies the court’s analysis of whether CVI
is entitled to a discretionary award of fees as the successful litigant on the UDTPA
claim. The court merges its analysis of the two questions. Analysis under § 6-21.5
extends to all claims, whereas arguably the Chapter 75 inquiry is limited to the
promissory fraud claim which was, in turn, the predicate for the Chapter 75 claim.
{63} CVI appropriately phrases the question as whether McKinnon’s claims
lacked any “justiciable issue of fact or law.” CVI further characterizes McKinnon’s
insistence that he remained in competition with CVI while working for Basofil
Fibers as “imagined” or “fanciful.” See In re Williamson, 91 N.C. App. 668, 682,
373
S.E.2d 317, 325 (1988); (Def.’s Supp. Br. at 6–7.) The court has struggled with the
issue, seeking to balance on the one hand a litigant’s free access to the courts and
the right to litigate without exposure to fees simply because he lost and promoted a
case theory with which the court disagreed, and on the other hand, the policies
inherent in Chapters 6 and 75 that, at some point, a litigant must face the risk of
repaying the expense occasioned to the opponent of a clearly baseless claim. The
task has been made all the more difficult by the fact that the undersigned is
required to rule on a case overseen by a now retired judge.
{64} Clearly, Judge Tennille and the Court of Appeals upon the completed
record found a total lack of any basis for the expansive notion of “competition”
which McKinnon asserted. They also noted that McKinnon’s own conduct after
June 2008 was inconsistent with the definition he championed. The law is also
well-settled that a claim of promissory fraud must rest on actions taken and intent
formed prior to the contract said to have been entered fraudulently. Judge Tennille
further cautioned McKinnon that he was exposed to potential attorneys’ fees by
continuing to pursue a Chapter 75 claim when the only nexus to “commerce” was
the Agreement formed between a company and its employee. McKinnon was given
abundant opportunity to develop his case and to fashion a coherent concept of
“competition” that justified pressing his claim.
{65} Unlike Rule 11, which looks only at a pleading at the time it was filed,
Section 6-21.5 requires an evaluation of “whether the losing party persisted in
litigating the case after a point where he should reasonably have become aware that
the pleading he filed no longer contained a justiciable issue.” Sunamerica, 328 N.C.
at 258,
400 S.E.2d at 438. A similar inquiry is appropriate in the discretionary
determination whether to award fees pursuant to Section 75.16.1.
{66} The validity of each of McKinnon’s claims relied in part on a court’s
finding that he remained in competition with CVI after resigning his employment
with Mastercraft and its subsidiaries. CVI asserts and the evidence establishes,
however, that McKinnon either knew or should have known that Basofil Fibers did
not compete with CVI. Rather than admit this deficiency, McKinnon attempted to
shift his legal theory of competition and asserted illusive, evasive, and self-serving
reasons for his definition. Though McKinnon’s deposition testimony indicates that
he “know[s] everybody in the industry” and “understand[s] who competes with
whom, how they are competing with them and how things work,” he was unable at
any point in the litigation to name a single CVI/CVI subsidiary product that
competed in any way with a Basofil Fibers product, indicating that he could not
answer “unless [he] was given privilege to see every product that [CVI] makes” and
“there’s no way I can know unless I see the line and know who they are selling it
to.” (Deposition of Bobby E. McKinnon (“McKinnon Dep.”) 341: 17−20;
270:10−271:11.) He likewise failed to substantiate his assertion that he remained
with Basofil Fibers as a consultant through November 2008 indicating that “there
were some [consulting engagements], but I can’t remember specifically and I can’t
remember what they were.” (McKinnon Dep. 381:24−382:4.) Mr. Triggs’ attempts
to identify a Basofil Fibers product that competed with a CVI product were
similarly unavailing. Rather than admit that there were none, he suggested to both
Judge Tennille and Judge Hunter that he did not know all the products because
they had not been provided in discovery.
{67} McKinnon’s assertion that he remained in competition with CVI during
his employment with Basofil Fibers is further belied by uncontroverted evidence.
Basofil Fibers’ President and Manager, Ewendt, testified that Basofil Fibers did not
compete with CVI. (Deposition of Bogden Ewendt (“Ewendt Dep.”) 15:17−17:3.).
During summary judgment briefing, CVI produced the affidavits of Valdese’s Chief
Financial Officer and Senior Vice President, Snyder L. Garrison, Jr., and Inman
Mills’3 Chairman, Robert H. Chapman, III, both of whom indicated that Basofil
Fibers did not manufacture or sell any products that competed with CVI. (Def.’s Br.
in Supp. of Mot. for Summ. J. Ex. 1 and 12.) McKinnon has never provided any
substantive evidence to refute that testimony.
{68} While the court believes it could, in its discretion based on the
circumstances of this case, award fees related to the pursuit of the litigation during
the course of discovery and motion practice prior to the decision at summary
judgment, it elects not to do so. However, the court does believe that the proper
exercise of its discretion is to award fees for the further pursuit of the case after the
entry of summary judgment. While being given every opportunity to do so through
the summary judgment process, McKinnon could marshal no evidence that even
colorably supported a promissory fraud or Chapter 75 claim and he was altogether
unable to present a cogent definition of “competition” that could simultaneously
support his contract claim and condone his continuing conduct at a time he
contended he was no longer in competition.
{69} The court has carefully reviewed the time and extent of CVI’s legal
expenses. While the amount awarded is substantially less than the $322,151.07
CVI seeks (Aff. of William L. Rikard, Jr. (“Rikard Aff.”) Ex. A), the court in its
discretion concludes that CVI should be awarded $40,000 in fees. This again
appears to be less than the amount CVI actually expended in defending the case
after the entry of summary judgment.
4. The court does not further award attorneys’ fees under N.C.G.S. § 75-
75-
16.1.
{70} As noted, the court merged its consideration under § 75-16.1 into its
analysis under § 6.21.5. The court finds that its award would alternatively be
supported as a discretionary award under § 75-16.1.
3 Inman Mills is a licensee of Basofil Fibers. (Def.’s Supp. Br. 2.)
5. CVI is entitled to costs pursuant to N.C.G.S. § 6-
6-20.
{71} N.C.G.S. § 6-20 allows the Court, in its discretion, to award costs to the
prevailing party “[i]n actions where allowance of costs is not otherwise provided by
the General Statutes” and without any findings of a frivolous or malicious claim.
The Court may award those costs which are listed in § 7A-305. Dep’t of Transp. v.
Charlotte Area Manufactured Hous., Inc., 160 N.C. App. 461, 469–70 ,
586 S.E.2d
780, 784–85 (2003). This includes fees for expenses relating to the taking of
depositions, mediator fees, and transcript fees. N.C. GEN. STAT. § 7A-305(d) (2012).
{72} The court finds in its discretion that an award of costs to CVI is
warranted and awards CVI costs in the amount of $8,399.18; court reporter fees in
the amount of $7,321.80 for deposition transcripts and $377.38 for oral argument
transcripts; and mediator fees in the amount of $700.00. (Rikard Aff. Ex. D.)
V. CONCLUSION
{73} Based on the foregoing, it is hereby ORDERED:
(1) Plaintiff’s Motion for Attorneys’ Fees and Costs is DENIED.
(2) Defendant’s Motion for Attorneys’ Fees is GRANTED in part and
DENIED in part, and CVI shall recover attorneys’ fees in the amount of
$40,000.00.
(3) Defendant’s Motion for Costs is GRANTED and CVI shall recover
its costs totaling $16,798.36.
This 11th day of June, 2012.
