It's Not Every Day That You Think About The Internal Affairs Doctrine (Or Res Judicata)

by Brooks Pierce

[author: Mack Sperling]

Wow.  The Business Court was busier churning out opinions last week than I wanted to be working on my blog, so here's a catchup and a rundown on two cases you should know about.  Two more coming after the holiday.

Internal Affairs Doctrine.  The internal affairs doctrine is a conflict of laws rule which says that only one State should have the authority to regulate a corporation's internal affairs.  In Mancinelli v. Momentum Research, Inc., 2012 NCBC 28, Judge Jolly ruled that Momentum's state of incorporation, Delaware, should govern issues regarding Plaintiff's claim that she was orally promised a 15% share ownership by the corporation. 

The Court rejected the argument that it should apply the "most significant relationship" test or  the lex loci doctrine test (the place of contracting), which would have resulted in North Carolina law applying.

That's significant because the corporation was based in North Carolina, and the agreement claimed by the Plaintiff had been entered into in North Carolina.  But the Court rejected the argument that North Carolina law should trump Delaware's because the business was based in NC.  The application of Delaware law resulted in the dismissal of Plaintiff's claim because an oral agreement for the issuance of shares, which was the basis of her claim, is not enforceable under Delaware law.

If you are a North Carolina lawyer representing a Delaware corporation here in NC, it's probably a good idea to know what constitutes an "internal affair" that will be governed by Delaware law.  Judge Jolly quoted the following examples from the Restatement of Conflict of Laws:

[S]teps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors' and shareholders' meetings, methods of voting including any requirement for cumulative voting, shareholders' rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and reclassification of shares.

Op. ¶12.

Res judicataThe message of this particular Tong v. Dunn case (it's one of three) is don't split your claims or they are likely to be barred by res judicata.  Tong filed a suit in Superior Court, later removed to federal court, alleging that he had been fraudulently induced to agree to a merger.  Then Tong filed a lawsuit (nine days after his first one) alleging that the Defendants had breached their fiduciary duties by entering into the same transaction. 

Judge Gale extolled the virtues of res judicata --  it "relieves litigants of the cost and confusion of multiple lawsuits, conserves judicial resources, and encourages reliance on adjudication" -- and observed that very similar facts had been pleaded in both Tong actions.

Res judicata bars a subsequent action when: "(1) there is a final judgment on the merits; (2) between the same parties; and (3) involving the same claim."  Op. ¶21

Tong's lawyers conceded that their voluntary dismissal of the federal court action with prejudice operated as an adjudication on the merits, so the issue for the Court was whether the federal court action and the case before it involved the "same claims."  That look some discussion, because the Judge said that "[t]he test for determining 'same claims' for purposes of res judicata has not been definitively stated by our appellate courts." Op. ¶22

He cast the analysis in terms of the principle against "claims splitting," and observed that "all damages incurred as the result of a single wrong must be recovered in one lawsuit."  Op. ¶27  That rule isn't ironclad.  Sometimes successive lawsuits alleging common facts can go forward, especially when all the facts weren't known with reasonable diligence at the time of the earlier adjudication.

But that wasn't the case with Tong's claims.  The claims in the second lawsuit were barred by res judicata because all of the facts relevant to his claims were known to him when he filed the dismissed federal court case and there was no compelling reason that all of his claims could not have been asserted in the first action.

You might remember having heard about Tong and Dunn from the Tong v. Dunn decision from the Business Court in March , 2012 NCBC 16, which I wrote about last month.  This new Tong v. Dunn case has the same parties in a decision involving different claims.

There was obviously way too much claims splitting going on with Tong.  Do any of you tell your clients that they need to file three lawsuits to get relief?

Happy Memorial Day.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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