In a big day for civil litigation, the Supreme Court of North Carolina on Wednesday issued a watershed opinion limiting the scope of actions under Chapter 75 (the Unfair and Deceptive Practices Act) and a significant decision favoring arbitration agreements. Most surprising, however, was the Court’s granting of discretionary review in four civil cases of substantial importance to business and other civil interests. Remember, review has historically been granted in such civil “PDRs” only about 5% of the time.
The issues in those four cases touch upon the Planned Community Act, the limits on domesticating judgments from other states, property taxation for non-profits that run low-income housing, and the existence of a fiduciary duty between a financial lender and a borrower. Whew! I’ll be as brief as possible in giving you my take on these six actions by our Supreme Court.
1. Bumpers v. Community Bank of Northern Virginia (Chapter 75–Unfair and Deceptive Practices)
HOLDINGS: Misrepresentation claims under Chapter 75 require a showing of detrimental reliance. The Unfair and Deceptive Practices Act will generally not allow an “excessive pricing” claim.
Bumpers is back (see our other posts related to Bumpers here and here). In a wide-ranging opinion that promises to be the starting point for any Chapter 75 case going forward, Justice Newby, speaking for a majority of the Court, writes that a claim of unfair and deceptive practices under Chapter 75 based on an alleged misrepresentation “require[s] the plaintiff to demonstrate reliance on the misrepresentation in order to show the necessary proximate cause.” Such reliance must be detrimental to the plaintiff, i.e., it must be “(1) actual reliance and (2) reasonable reliance.” The Court held that because reliance is such a fact-specific inquiry, the plaintiffs’ Chapter 75 / misrepresentation claims in Bumpers (relating to certain allegedly excessive fees charged by a lender in closing personal loans to plaintiffs) should have been sent to a jury, not decided in favor of the plaintiffs at summary judgment.
The Court also held that this case does not present an actionable “excessive pricing” claim under Chapter 75. The Court left open, however, the possibility that the “catchall” provision in section 75-1.1 might, in the right case, capture an excessive pricing claim.
Many congratulations to friend-of-the-blog Matt Sawchak on his victory in the appeal.
2. HCW Retirement and Financial Services, LLC v. HCW Employee Benefit Services, LLC (Arbitration Agreements)
HOLDING: A right to arbitrate a claim is not waived by engaging in litigation procedures that, in the arbitration setting, would only be available in the discretion of the arbitrator.
The decision in HCW Retirement continues the federal and state trend favoring arbitration agreements. In HCW Retirement, the Supreme Court limited the circumstances in which a party with a valid arbitration agreement might inadvertently “waive” the right to arbitrate by participating in litigation in the courts on the arbitrable claim. The dispute in HCW Retirement included several claims among multiple parties. The individual defendants moved to compel arbitration on those claims. While the motion was pending, the parties engaged in some discovery on the non-arbitrable claims. The parties moving to compel arbitration also veered into matters relating to the arbitrable claims for about an hour during a ten-hour deposition of one of the plaintiffs. The trial court later denied the motion to compel arbitration, finding that the individual defendants had waived their right to arbitrate by litigating the very claims they asked to be sent to arbitration.
The Supreme Court reversed, holding that the non-moving party bears a heavy burden in proving that the litigation of the arbitrable claims prejudiced him. Specifically, even though party depositions are not granted as a matter of right in most arbitration proceedings, they are often allowed in the discretion of the arbitrator. Because it is possible, then, that the individual defendants would have been allowed to depose the plaintiff in the arbitration forum, plaintiff could not show that he was necessarily prejudiced by the discussion of the arbitrable claims during his deposition.
3. The Glens of Ironduff Property Owners Association, Inc. v. John E. Daly (Planned Community Act)
KEY QUESTION: Is the statute of repose for actions by a homeowners association against a developer tolled during the period of declarant control?
In The Glens of Ironduff, the Supreme Court has granted discretionary review to analyze a fascinating issue arising under the Uniform Planned Community Act, Chapter 47F of the North Carolina General Statutes. The plaintiff homeowners association had filed a claim against the residential developer for allegedly shoddy construction of a road that is now falling into a nearby creek. Under the Act, however, the developer (called the “declarant”) has control over the homeowner association during the development of the neighborhood. Because the statute of limitations on any claim against the developer by the homeowners association may otherwise run during the so-called period of “declarant control,” the Act contains a provision that tolls the statute of limitations until after the declarant turns over control of the homeowners association to the residents.
But what about the statute of repose? While statutes of limitations bar claims on procedural grounds and are therefore often subject to tolling, equity, and the like, statutes of repose bar claims on substantive grounds and are generally more rigid. The tolling statute only applies, on its face, to “statutes of limitation,” not statutes of repose. The Court of Appeals applied the plain language of the statute and found that the statute of repose was not tolled, and barred the homeowners association’s claim against the developer.
The issue for review is whether the statute should also toll the statute of repose, since the developer could in theory wait out the statute and thereby escape a lawsuit by the homeowners association for any alleged wrongdoing in developing the neighborhood.
4. Dallaire v. Bank of America, N.A. (Fiduciary Duties Between Lender and Borrower)
KEY QUESTIONS: Does a lender owe a fiduciary duty to a borrower when the lender offers legal advice, and should the question of whether the advice was “legal advice” be decided by the court or a jury?
In Dallaire, the plaintiffs allege that they relied on advice by a loan officer of the defendant bank that the refinancing loan for which they were applying would be “first priority” over other loans they had that were subject to in an ongoing bankruptcy proceeding. The advice turned out to be wrong, allegedly causing the plaintiffs injury.
The plaintiffs sued under several theories, including a claim that the bank had improperly offered legal advice and in so doing had created a fiduciary duty in fact. The Court of Appeals decided that the claim was not suited for summary judgment and could go to a jury.
In its petition for discretionary review, the bank argued that, first, a lender should never, or almost never, owe a fiduciary duty to a borrower. The bank also argued that the question of whether the loan officer offered legal advice is a legal question, not a fact question. Finally, the bank warns of the ramifications if loan officers and other bank employees have to always be on guard not to say anything that could be construed as legal advice.
5. DOCRX, Inc. v. EMI Services of North Carolina, LLC (Full Faith and Credit Clause)
KEY QUESTION: Does the Full Faith and Credit Clause require a North Carolina court to recognize and domesticate a foreign judgment from another state, when that judgment was procured by intrinsic fraud?
In DOCRX, the plaintiff sought a default judgment in Alabama against the defendant. With the defendant not present in the courtroom, the plaintiff allegedly fabricated a damages figure that was eight times as large as what could be supported by the evidence. The court entered the default judgment as requested.
The plaintiff then sought to domesticate the judgment in North Carolina. This time, the defendant appeared, filing a motion under Rule 60(b)(3) for relief from the foreign judgment because it was procured by fraud. Plaintiff argued that, at most, the defendant was alleging “intrinsic” fraud (i.e., fraud during the foreign proceedings themselves) and not “extrinsic” fraud. Plaintiff argued that the Full Faith and Credit Clause of the United States Constitution requires North Carolina courts to accept a foreign judgment obtained through intrinsic fraud, even though Rule 60(b)(3) on its face allows relief for “[f]raud (whether heretofore denominated intrinsic or extrinsic).”
The trial court and Court of Appeals agreed, allowing the foreign judgment to be domesticated. The defendant has been granted discretionary review by the Supreme Court of North Carolina.
6. In Re Appeal of Blue Ridge Housing (Property Taxation on Low Income Housing)
KEY QUESTION: Does a non-profit entity’s management and control of a low-income housing development constitute “ownership” under a statute exempting such developments from local property taxation, where for-profit investors hold a 99.9% ownership stake in the development as part of a plan by the non-profit entity to take advantage of federal low income housing tax credits?
Blue Ridge Housing deals with the “Low Income Housing Tax Credit,” a federal subsidy used to spur the development of affordable housing. The quirk with the tax credit is that most organizations developing affordable housing are organized under section 501(c)(3), meaning they do not pay taxes to begin with. Without a tax bill, a tax credit doesn’t do you much good. For this reason, it is quite typical for non-profit organizations to set up a for-profit affiliate and to seek investors for the affiliate. The tax credits are then used to offset federal tax liability that the for-profit investors bring with them.
These complicated corporate gymnastics achieve their purpose under the federal tax code, but how do they affect the question of whether low-income housing is subject to local property tax? This is the central question in Blue Ridge Housing. A North Carolina statute exempts real property used for low-income housing from taxation if it is “owned” by a non-profit entity. There’s the rub, though, because the housing units were majority owned by the for-profit affiliate. More to the point, the housing development was 99.9% owned by the for-profit entity and 0.1% owned by the non-profit entity.
The Court of Appeals, however, peeked behind the formal structure to assess the reality of what the non-profit organization was trying to accomplish. To get there, the Court developed a factor analysis that looks at whether such a 0.1% owner can still be considered an “owner” under the statute. Here, because the non-profit entity was the managing member of the entity that owned the housing units, and because it had the option to purchase the investors’ share after 15 years, and because of the overarching purpose of the enterprise, the non-profit entity could be considered an “owner” under the statute, and the housing units should be exempt from property taxation.
The County petitioned for review, which has been granted.
Bottom line: stay tuned for more civil decisions from the Supreme Court of North Carolina. We’ll keep a close eye on the Court and keep you up to date.
–Matt Leerberg