Impossibility/Impracticability of Performance

The first two doctrines are “Impossibility of Performance” and “Impracticability of Performance”. Impossibility excuses both parties to a contract from having to perform where the subject matter of the contract is destroyed.  “Impossibility of performance is recognized in this jurisdiction as excusing a party from performing under an executory contract if the subject matter of the contract is destroyed without fault of the party seeking to be excused from performance.” WRI/Raleigh, L.P. v. Shaikh, 183 N.C. App. 249, 253–54, 644 S.E.2d 245, 247–48 (2007) (citing Brenner v. Little Red School House, Ltd., 302 N.C. 207, 210, 274 S.E.2d 206, 209 (1981). See also Steamboat Co. v. Transportation Co., 166 N.C. 582, 82 S.E. 956 (1914) (applying doctrine to contract between ship owner and party leasing it for ferrying purposes when ship was destroyed by fire through no fault of parties); Barnes v. Ford Motor Co., 95 N.C. App. 367, 382 S.E.2d 842 (1989) (affirming trial court’s instruction on doctrine of impossibility where subject matter of lease, a tractor, was destroyed).  The related doctrine of impracticability can excuse performance where the performance is not practicable for the performing party.  Impracticability also requires an occurrence of an event outside of the control of the parties and which could not have reasonable been foreseen at the time of the contracting.

Frustration of Purpose

Another legal doctrine, “Frustration of Purpose,” is similar to “Impossibility of Performance,” but provides broader applicability. “Although the doctrines of frustration and impossibility are akin, frustration is not a form of impossibility of performance.  It more properly relates to the consideration for performance.  Under this doctrine performance remains possible, but is excused whenever a fortuitous event supervenes to cause a failure of the consideration or a practically total destruction of the expected value of the performance. The doctrine of commercial frustration is based upon the fundamental premise of giving relief in a situation where the parties could not reasonably have protected themselves by the terms of the contract against contingencies which later arose.’ ” Shaikh, 183 N.C. App. 253–54, 644 S.E.2d 247–48 (citing Brenner, 302 N.C. at 211, 274 S.E.2d at 209 (quoting 17 Am.Jur.2d Contracts § 401).

However, the doctrine of frustration cannot be used where the frustrating event was reasonably foreseeable. Id. (citing Brenner, 302 N.C. at 211, 274 S.E.2d at 209).  The legal question will be whether the impact of the COVID-19 pandemic was reasonably foreseeable for the vendor/landlord and the business owner.

Conclusion

Although the cases discussed above do provide arguments as to potential defenses for business owners, North Carolina courts have been quite reticent to allow tenants to use these defenses where the property that is the subject matter of the contract was not physically destroyed.  Typically, Courts have attempted to defer to the language of the contract – such as a Force Majeure provision that provides temporary relief to parties during an “Act of God.”  This blog post is not intended to provide the false illusion that these defenses will prevail in protecting business owners against damages claims by vendors/landlords.  Our hope is simply that the recognition of the potential defenses and the very real possibility that Courts of this state might just apply these defenses in the context of COVID-19 will serve as a strong incentive for business operators and vendors/landlords to work collaboratively to find solutions that allow our bars, restaurants, hotels and other businesses to continue serving our community long after this crisis passes, while not creating undue financial distress on vendors and property owners.

About Us

At Miller Monroe Holton & Plyler, our attorneys have extensive experience litigating contract and business disputes.  More importantly, we are committed to our community and hope to serve as a resource to help business owners mitigate losses and resume normal operations after this crisis subsides.  If you are facing a contract dispute involving your business, please do not hesitate to call us at 919-809-7346.

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While the internet has increased the availability of forms and instruction and “virtual” lawyers, there are certain times and places where only an actual lawyer will do.  There could be many an article written about the errors or omissions in documents drafted through forms off the internet by individuals or principals in a corporation, because they do not have the requisite degree of legal skill and knowledge that a lawyer practicing in a specific area possesses.  Starting a corporation or limited liability company or other formal business entity (“corporation”) needs to involve research, consulting, and formally organizing with the secretary of state and the drafting of an important document needs an understanding of the basic elements, options and possible outcomes when enforcing the rights provided in the document.

But, this article is about times when there is a requirement for a lawyer, not just the need for a lawyer.  This article highlights the rule that corporations are required to have a licensed lawyer when bringing or defending lawsuits.  A corporation is a legal entity that is separate and distinct from its owners, whether there is a single shareholder or member or multiple shareholders or members.  Corporations enjoy many of the rights and responsibilities that individuals possess, as they can enter contracts, loan and borrow money, own assets, pay taxes, hire people and sue or be sued.  But, unlike individuals, a corporation cannot “appear” in a lawsuit to enforce or protect its rights without a lawyer.  It is well known that individuals can appear pro se, derived from Latin and meaning “for oneself” or “on behalf of themselves”.  Putting aside the advisability of representing oneself, the law allows an individual to argue on one’s own behalf as the plaintiff or defendant in civil cases.

But when it comes to corporations, there is a well-established rule in North Carolina courts that prohibits a non-lawyer from representing a corporation in the court system.  This includes any pleading or personal appearance before a civil court of a Division of Motor Vehicles hearing (absent small claims court).  In Lexis-Nexis, Division of Reed Elsevier, Inc. v. Travishan Corp., 155 N.C. App. 205, 573 S.E.2d 547 (2002), the court held that, in North Carolina, a corporation must be represented by a duly admitted and licensed attorney-at-law and cannot represent itself in a legal proceeding.  This means any appearance, such as filing an extension of time, filing an answer or pleading, or appearing in court for a motion or trial.

The courts are aware of and routinely enforce this requirement and any corporation that ignores the requirement will likely find themselves on the wrong end of a default, or sanction motion, or botched appeal from small claims court.  The most gentile of lawyers will point out this necessity, but the worst of lawyers will exploit it to their client’s advantage.  So, if you find your corporation in a position to have to sue or if you have been sued, find a lawyer with experience in civil litigation to enforce your rights or protect your investment.

Miller Monroe Holton & Plyler represents a wide range of businesses, investors, shareholders, and individuals – from large national corporations to small local businesses. Our commercial litigation practice is focused on honest, aggressive representation with a cost-effective client-focused approach. Our lawyers have the business experience necessary to guide you through a complex and sometimes daunting litigation process.

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All too often, our commercial litigators sit down with a potential client to learn of allegations of fraud against a business partner, employee, or fiduciary.  While an actual fraud claim is obvious in these instances, a constructive fraud claim can be much more powerful.  A constructive fraud claim is based on the exploitation of a position of trust rather than a specific misrepresentation.

The clearest benefit of proving constructive fraud is the time period in which the claim must be filed.  A fraud claim has a 3-year statute of limitations, meaning that a claimant can only recover for damages resulting from fraudulent conduct that occurred in the 3-year period starting when the claimant knew or should have known about the conduct.  On the other hand, there is a 10-year statute of limitations on constructive fraud claims.  This can be critical in cases of employee or partner embezzlement where the instances of fraud can span several years.

Another benefit of a constructive fraud claim relates to a shift in the burden of proof, which can make or break a case.  When a person who stands in a confidential or fiduciary role obtains a personal benefit from that relationship, there is a legal presumption that a constructive fraud occurred.  This means that a defendant must present sufficient evidence to overcome a legal presumption of wrongdoing in order to avoid liability.

To show constructive fraud, a claimant must present evidence that (1) a confidential or fiduciary relationship existed which (2) led up to and surrounded the consummation of a transaction in which the defendant is alleged to have taken advantage of his position of trust to the detriment of plaintiff.  The key issue in these cases is often whether the fraudulent actor stood in a confidential or fiduciary relationship with the claimant.  While potential clients often assume that they stand in a fiduciary relationship with their business partners or family members, this is not always the case.  The particular roles and responsibilities, ownership stakes, and other factors must be carefully considered.

A constructive fraud claim can be very powerful, but requires a litigator who understands how to plead these claims, discover facts and documents to support these claims, and how to present this evidence to a judge or jury.  The attorneys at Miller Monroe Holton & Plyler have substantial experience litigating constructive fraud and other complicated commercial claims.  We have the expertise needed to effectively prosecute these claims.  If you or someone you know has been damaged by the conduct of a business partner, fiduciary, or someone in a position of trust, call Miller Monroe Holton & Plyler today.

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No lender would provide funding to a business on the cusp of bankruptcy, but sometimes that’s exactly where lenders find themselves when a debtor lies about its financial condition in order to procure a loan.  What may be surprising is that a lender may have no recourse against the bankrupt debtor if it does not take one key step as part of its due diligence.  For various reasons, well-intentioned creditors seeking promising investment opportunities find themselves holding the bag when their debt is discharged in bankruptcy.  Unless a bankruptcy court declares your debt nondischargeable in a bankruptcy proceeding, you may be out of luck.

Thankfully, all hope is not lost.  The Bankruptcy Code protects creditors by including provisions that allow claims to be declared nondischargeable in certain situations.  In other words, the bankrupt debtor will still be legally on the hook to repay your loan even if the rest of its debts are discharged through the bankruptcy.

While these issues aren’t involved in every bankruptcy case, there are certain types of cases in which they commonly arise – most notably, when an aggrieved creditor lends money to a desperate debtor shortly before commencing bankruptcy.  Although there is a cottage industry of lenders that take a calculated risk in lending funds to debtors on the cusp of financial ruin, this article is primary focused on helping the unsuspecting lender who did not lend funds with an understanding of the risk involved and therefore did not seek a commensurate return – typically through higher interest rates.

How the Bankruptcy Code Protects Lenders

In a bankruptcy case, debtors can seek relief from various types of debt, many of which will be discharged unless a creditor files an objection to the discharge.  These actions take the form of an adversarial proceeding filed under section 523 of the Bankruptcy Code and give rise to an entirely separate action within the overarching bankruptcy case.

11 USC 523(a)(2) is one of the mainstays of the bankruptcy system, protecting creditors from losing money to a debtor who may have misrepresented – or failed to disclose the full extent of – its financial challenges prior to entering into a transaction.

Here’s a closer look at the Code language:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive[.]

Stated differently, this section of the Code allows creditors to seek a Court declaration that their debts were obtained by false pretenses, a false representation, or actual fraud, and are therefore nondischargeable.  Although the Code doesn’t define the terms false pretenses, false representation, or actual fraud, a bankruptcy court will apply rules and guidelines established through precedent, that is, prior analogous cases.  Most importantly, however, the Code only allows false representations about the debtor’s financial condition to serve as the basis of a dischargability objection if those misrepresentations were made in writing.

The law is complex but worth parsing, as it affords creditors basic protection: Simply stated, if a debtor lied about or concealed the full extent of his financial position, in writing, before you loaned it money, the debtor may be prohibited from receiving the benefit of having the debt discharged through the bankruptcy system.  You, as a creditor, may be able to petition a judge to declare your debt nondischargeable, so that your debt will not be discharged like many of the other creditors in the bankruptcy process.

How to Protect Yourself

If you’re a creditor, it’s your burden to prove that the debtor was intentionally deceitful, misleading, or fraudulent in his dealings.  You must also prove that you relied on the debtor’s misrepresentations in deciding to lend him money, property, or credit.

To ensure your claim remains nondischargeable and to keep your debtor on the hook, make a practice of collecting financial statements from your debtors before lending to them.

If you lend money to either an individual or business, secure a written statement about the debtor’s financial situation.  The best way to do this is by requesting written profit and loss statements, balance sheets, cash flow statements, and bank records for multiple pertinent time periods.  Also, demand that the debtor make written representations that the financial documents provided are true and accurate to the best of the debtor’s knowledge AND that the financial documents disclose any and all debt obligations.  If it turns out that the debtor falsified those statements, or failed to disclose all relevant debts to you, you will then have a much stronger position should you object to the discharge of your debts in a subsequent bankruptcy proceeding.

These critical steps can be useful in other ways: They will force the debtor to be open and transparent, and securing and reviewing accurate financial statements will help you assess the debtor’s financial health, potentially saving you from making a poor business decision.  In other words, the steps above serve as a form of due diligence that not only helps you evaluate your investment or lending decision, but also protects you in the case of a bankruptcy filing.

Experienced Business Litigators

The attorneys at Miller Monroe Holton & Plyler routinely represent debtors and creditors in a variety of circumstances, including disputes over the dischargability of a debt in bankruptcy, preferential payments to creditors, and similar bankruptcy disputes.  The attorneys within our firm have substantial experience litigating matters in U.S. Bankruptcy Courts and are equipped to advise business owners of the risks of making certain loans and investments before they find themselves embroiled in an adversary proceeding.  Contact us for a consultation if you have questions or would like to learn more about our aggressive, cost-effective, client-centered approach to resolving business disputes.

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But even if you set up a business entity, you might still be at risk.  If the legal separation between you and your business breaks down, you might lose your limited liability protection. In other words, a business creditor or someone injured by your business might also be permitted to “pierce” the corporate liability shield and get to you individually.

In this article, we explain what “piercing the corporate veil” means and how you can protect yourself from these claims.

What is the “corporate veil,” and how is it pierced?

The “corporate veil” is not a legal term of art, but is used to describe the liability protection that individuals gain when they set up a corporate entity rather than operating as a sole proprietor. A corporate entity is its own legal person with rights and obligations, considered distinct from the individuals who hold ownership interests in it.

The term “piercing the corporate veil” refers to cases when corporate officers or owners are held personally liable for the actions of one of their companies. This happens in situations where a court determines that the individual and company are not sufficiently distinct and the corporation and individual are treated as one and the same. For instance, if an individual business owner operates multiple shell companies out of a single administrative structure and frequently moves funds back and forth, or an owner uses corporate bank accounts to pay personal bills, or the officer of a company fails to comply with certain corporate formalities like holding meetings, paying dividends, or voting, a judge or jury might find that the business is operating as a mere “alter ego” of the business owner. When this happens, the law will no longer recognize the legal protection afforded to the separate corporate entity.

In North Carolina, a creditor or injured party who wants to hold an individual liable for a corporation’s debts or liabilities has to prove that the company had no separate existence or will of its own, and the individual in control of the company used his or her control to violate the rights of a third-party. Courts examine several factors in determining whether a company truly has a separate existence from the individual owner for the purposes of piercing the corporate veil.  Among these factors are whether:

• The company was inadequately capitalized.
• The company’s directors, shareholders, officers, members, managers, or partners did not comply with corporate formalities typical of similar companies.
• The company was insolvent.
• The company was fragmented into multiple “shell” companies.
• The individual at issue siphoned funds from the company to pay personal expenses or debts.
• The company didn’t maintain proper records.

How to protect yourself

There are a few steps you can take as a business owner to protect yourself from these types of claims.

• When you form a company, be sure to make an initial capital contribution that is sufficient to cover the initial capital needs of the enterprise.
• Keep your business and personal accounts separate.
• Keep and observe your corporate bylaws.
• Comply with all corporate formalities like voting and paying dividends to shareholders.
• Keep regular minutes of board, shareholder, or member meetings (this will also be helpful if you are ever audited).
• Keep consistent and accurate corporate records.
• Don’t operate multiple shell companies that are separate in name only without any separate assets or operational existence.
• Don’t transfer money back and forth between shell companies without appropriately segregating income and expenses.
• Don’t use money from your corporate accounts to pay your personal expenses.
• When starting a new company, make the relatively minor investment of consulting with an experienced attorney rather than buying fill-in the blank forms from a national corporation mill.  What might look like an opportunity to save a few bucks forming your own company could cost you thousands of dollars later on.

At Miller Monroe Holton & Plyler, we help creditors and other aggrieved parties get through shell companies and pierce the corporate veil to hold individual owners liable for their company’s obligations. This experience also allows us to more effectively advise our business clients on taking the proper steps to insulate themselves from personal liability, which can be easily avoided with the advice of an experienced attorney. Contact us if you need help going after a business owner operating shell companies, or if you have questions about your business model and whether you may be susceptible to personal liability.

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You have likely seen liquidated damages clauses in the following contexts:

• Real estate purchase and sale contracts: The earnest money deposit, which parties negotiate as a sole remedy in the event a buyer backs out of the agreement, is a liquidated damages provision.
• Residential or commercial construction contracts: The parties may agree that if one party delays, he will owe the non-breaching party a sum of money for each day of the delay. This sum typically represents the best estimate of the profits the non-breaching party lost as a result of the breaching party’s delay.
• A lease agreement: A landlord may require a tenant to pay a certain amount if he breaches the lease agreement.

A liquidated damages clause must be clearly specified in a contract and reflect a reasonable estimate of the likely damages that the non-breaching party would incur. In determining whether a clause is enforceable, courts generally consider the following factors, among others:

• Whether the damages the parties reasonably anticipate are hard to ascertain due to their indefiniteness or uncertainty;
• Whether the amount of damages represents a reasonable estimate of the damage or is reasonably proportionate to the damages actually incurred;
• Whether the amount is so large that it functions more like a penalty to the breaching party than compensation to the non-breaching party; and
• Whether the goods or services at issue have a clear, easily ascertainable market value.

The party who is found liable carries the burden of proving the reasonableness of a liquidated damages clause. When damages are harder to prove or ascertain, it is more likely that a court will find that a clause was reasonable and thus enforceable.

Benefits of Liquidated Damages Clauses

The primary benefit of a liquidated damages clause is that it helps parties sidestep expensive litigation – especially the often protracted damages portion of a trial. Further, many commercial cases, especially construction disputes, are expensive due to the extensive discovery that is often involved.

A liquidated damages clause can protect contractors from the risk of lost profits. For example, imagine a developer contracts with a builder for a mixed-use condominium project. There is a set timeline for the work, and once all subcontractors are engaged, the work commences. Then, one of the subcontractors unexpectedly – and without explanation – stops work. Meanwhile, various tenants are signing leases for the commercial and residential properties, expecting them to be finished at a particular time. But because the project is delayed and thus unfinished, the new tenants are unable to move in. The non-breaching party – the contractor – loses money as tenants walk away. In this case, a preset damages clause can provide a clear remedy without forcing the aggrieved contractor to file a lawsuit to collect its lost profits. Not to mention, it will save the parties from heated negotiations and arguments about what measure of damages is appropriate to compensate the contractor.

In the process of drafting a liquidated damages clause, the parties can compare and weigh the value of a contract against the costs of a potential breach, helping them evaluate risk and determine whether a contract makes economic sense. In some cases, parties may determine that the likely cost a breach to one party would seriously outweigh the benefits of completing the project, thus effectively avoiding a potentially costly situation.

Potential Detriments of Liquidated Damages Clauses

Liquidated damages clauses are often litigated in and of themselves – defeating the purpose of saving costly, time-consuming litigation. In fact, liquidated damages clauses are not automatically deemed enforceable. They must be reasonable, made in good faith, and not so large that they function more like penalties than compensation for the non-breaching party. In the construction context, the issue of concurrent delays can further muddy the waters. For instance, when a subcontractor delays a project by failing to deliver or install the proper equipment for the job, but the contractor is also behind, it can be difficult to determine the cause of the delay and properly apportion damages without diving into litigation.

Additionally, parties may not be able to anticipate the amount of damages before they embark on a project. For instance, the parties to a real estate contract take a risk when negotiating an earnest money deposit, as they are making a reasonable estimate of an amount that will protect them in the event the contract falls through. Similarly, parties to a construction contract may find it difficult to adequately capture their expected profits before they commence work on a project.

Finally, a pre-set damages amount deprives parties of the opportunity to let a neutral, impartial judge or jury determine an amount of damages. In deciding on a pre-set damages amount, parties increase the risk that they may not be compensated as fully as they would like to be.

What Parties Can Consider When Drafting a Liquidated Damages Clause

Each contract is unique and as such, boilerplate damages clauses will not provide adequate protection. It is critical to contact an experienced attorney if you are attempting to draft a contract with a liquidated damages clause. However, generally, there are several factors to consider when determining the nature and amount of a liquidated damages clause in a contract:

• The nature of the contract (e.g., whether it is a contract for goods or services);
• The possible deterrent effect of a liquidated damages clause;
• The term of the contract;
• The various factors that may affect whether the contract can be fully performed;
• The feasibility of determining a specific amount of damages; and
• The overall reasonableness of the amount of damages given the totality of the circumstances.

If you have questions about the enforceability of a liquidated damages clause in your commercial contract, or you think you have a viable claim for its enforcement, contact us for a consultation.

This article does not establish an attorney-client relationship and is not to be construed as legal advice.

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There is a lack of consensus among lawyers about the correct time to schedule the mediation.  According to recent studies, delaying the mediation even for a short time decreases the likelihood of settlement.  There are many factors at work, but generally the investment in the litigation and the level of contentiousness between the parties grows as the case goes forward.

In a previous article, I reviewed the use of the pre-litigation mediation tool.  Whether required by contractual clauses or proposed by lawyers who know their clients can benefit from trying to resolve disputes before they incur the time, expense, emotion and distraction of litigation, early mediations are becoming much more of a “norm” than ever before.  Mediation is a reality in most civil superior court cases, so is it worth taking a shot to resolve a dispute before the parties dig deeper into their pockets and positions?

The obvious advantages to early mediation include the relatively small amount of time, fees and costs invested, with the potential of a prompt resolution.  Pre-litigation mediation has the advantage of the confidential nature of the proceedings as opposed to the public record of court proceedings.  The parties may not want to air their dirty laundry, or may not want their competitors, customers or employees to find out about the issues.

Even early in litigation, studies suggest that cases referred to mediation at an earlier stage are more likely to be settled than the cases that advanced to the pre-trial stage.  Preparation for an early mediation is key, as the parties have typically not conducted much discovery.  Lawyers may need to flesh out the key facts and provide evidence or documents and legal precedent for the mediation and should be prepared to share their positions.  A bonus is that, if the pre-litigation or early mediation is unsuccessful, the lawyers are better prepared to draft a complaint or answer without extensive additional investigation, or in some circumstances, the mediator can adjourn the conference until the necessary questions are answered in the case.

Paul T. Flick is a NCDRC Certified Superior Court Mediator at Flick Dispute Resolution in Raleigh, North Carolina

About Miller Monroe Holton & Plyler

At Miller Monroe Holton & Plyler, our attorneys have helped many clients resolve their disputes throughout alternative dispute resolution before a lawsuit is ever filed.  We recommend engaging experienced counsel if you are involved a dispute that may lead to litigation, so that you can effectively navigate the process.  Contact us today for a consultation, or click here to learn more about our practice areas.

The post The Earlier The Mediation, The Better appeared first on Miller Monroe Holton & Plyler.

Some of the advantages to pre-litigation mediation are obvious and some are not.  The obvious advantages include the relatively small amount of time invested, with the potential of a prompt resolution, the limited attorney fees and costs incurred, and the possibility of avoiding the uncertainty of a judge, jury or arbitrator.  One less obvious advantage is the confidential nature of the proceedings as opposed to the public record of court proceedings.  The parties may not want to air their dirty laundry, or may not want their competitors, customers or employees to find out about the issues.   Another less obvious advantage is the possibility of protecting a business or personal relationship between the parties that a contested lawsuit could destroy.  A skillful mediator can facilitate communication designed to resolve the dispute, without creating on-going ill will that typically accompanies our adversary system in litigation.  It allows a problem to be solved without assigning a “win” or “loss” label.  And perhaps what should be obvious but is not always, the advantage of the parties fashioning their own remedy and being allowed to be creative in doing so.  There may be more ways to solve the issues than the exchange of money, if the parties’ interests and “hot buttons” in the dispute can be addressed.  Many business disputes can be better resolved without relying on an expert witness to determine the “value” of a claim.

Of course, the form and rules used in mediation matter.  Mediation is generally an informal process that encourages parties to reach a settlement agreement of a dispute through the use of a third party neutral.  The parties generally control the decision making as the mediator attempts to provide open lines of communication and understanding to resolve the dispute.  The Mediated Settlement Conference Rules under N.C. Gen. Stat. §7A-38.1 and the local rules establish the selection of the mediator, the timing, attendance, fees, the mediator’s duties and confidentiality, among other things.  It would be wise for the parties to adopt those Rules or to agree on the applicable rules prior to undertaking the mediation, particularly as to confidentiality and the memorialization and enforcement of any settlement that is achieved.

Preparation for a pre-litigation mediation is required.  In the usual Mediated Settlement Conference, the lawyers have often conducted discovery and usually know their cases well.  With pre-litigation mediations, the lawyers may need to flesh out the key facts and legal precedent in preparation for the mediation and share their positions.  Mediation is the best chance to help each side understand that there are two sides to every story.   The preparation for a pre-litigation mediation is also the time to manage the client’s expectations so that valuable communication and understanding can take place.  A bonus is that if the pre-litigation fails, the lawyer is prepared to draft a complaint or answer without extensive additional investigation.

Of course, for any mediation to be successful, the parties must want to resolve the issues between them and believe that mediation is a possible vehicle to do so.  Lawyers should be more open to the alternative dispute resolution available in pre-litigation mediation, without any preconception that it is a showing of weakness or strength, but rather embrace it as an opportunity.

Experienced Litigation Attorneys

At Miller Monroe Holton & Plyler, our attorneys have helped many clients resolve their disputes throughout alternative dispute resolution before a lawsuit is ever filed.  We recommend engaging experienced counsel if you are involved a dispute that may lead to litigation, so that you can effectively navigate the process. Contact us today for a consultation, or click here to learn more about our practice areas.

This article does not establish an attorney-client relationship and must not be construed as legal advice.

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What to Expect in North Carolina Foreclosure Proceedings

Whether you are a homeowner or a judgment creditor with a lien on real property, understanding the foreclosure process is critical, as it affects your rights as either a debtor or a creditor. North Carolina is a “power of sale” state, meaning that foreclosure proceedings are ultimately handled through a forced sale of the property, rather than through a formal proceeding involving a superior court judge. The process is governed by Chapter 45 of the North Carolina General Statutes and is handled in the Special Proceedings Division of the applicable County Clerk’s Office.

The Basics

When a homeowner defaults on a mortgage payment, the mortgage holder will issue a Notice of Default stating the outstanding principal balance, the interest, and offering the homeowner an opportunity to cure the deficiency. This is important, as failing to offer a defaulting property owner an opportunity to cure may later invalidate a mortgage holder’s claim to the property.

When a homeowner defaults on a payment and foreclosure proceedings commence, a number of parties will often have a claim to the property, for instance, holders of a second mortgage or creditors of the property owner who have a valid lien on the property. All of these parties must be notified of foreclosure proceedings so that they may participate and, when applicable, be paid from the proceeds of the property sale.

The Steps

Once the defaulting property owner is given the requisite notice, the mortgage holder may begin the official foreclosure proceedings. A foreclosure action is a state court case that takes place in a “special proceedings” division. Because North Carolina is a power of sale state, foreclosure proceedings are handled differently than other civil cases. The actions are adjudicated not by a district or superior court judge, but by the Clerk of Court in the county where the action is filed. Unlike most other civil proceedings, once a foreclosure action is filed, a hearing date will immediately be set. Typically, the hearing date will be set about a month out, and may be as early as within twenty days of the filing date.

Next, the mortgage holder must issue a Notice of Hearing to everyone with an interest in the property, including the property owner. This Notice gives each interested party the opportunity to attend and participate in the hearing. At the hearing, the mortgage holder will present its case, providing the Clerk of Court the mortgage documents, deed of trust, and a statement of the amount owed on the mortgage, at a minimum. Those with an interest in the property also have an opportunity to make a statement, for instance, a judgment creditor may present the Clerk of Court with documentation establishing the judgment that created the lien on the property, the date of the judgment, and a statement about the creditor’s priority in receiving payment from the sale proceeds.

The Clerk of Court will review the documents, and is charged with making four determinations:

1) Whether the debt is valid;

2) Whether there has indeed been a default on the debt in question;

3) Whether the mortgage holder has the right to foreclose on the property according to the deed of trust; and

4) Whether the property owner was properly notified of the hearing date.

Because the issues are so narrow, it is very difficult for homeowners to defend these actions. Defenses, when applicable, are typically adjudicated through a separate proceeding in Superior Court.

The Sale

If the Clerk allows the foreclosure to proceed, the property will be ordered to be sold. The property owner must be given a notice of foreclosure sale – including the date, time, and place of the sale. Additionally, the notice of the sale must be published in the local newspaper for two weeks.

Each person with an interest in the property will be paid from the sale proceeds, in order of priority. In North Carolina, the general rule is “first in time, first in right,” meaning that, with some exceptions, the creditors will be paid according to whose lien or judgment attached to the property first.

After the date of the sale, the law requires a ten-day “upset bid” period, which allows additional bids on the property. The title to the property will not transfer to the prevailing bidder until this ten-day period expires.

It is important to note that while this process is statutory and seems simple, there are multiple steps involved. If you have an interest in property, it is critical to remain engaged in each step of the process, to comply with statutory requirements, to attend the hearing date, and to communicate with the other parties. Similarly, if you are a property owner, it is important to remain apprised of your rights throughout the process so that you can cure your default in a timely manner or, if applicable, challenge the foreclosure.

Experienced Litigation Attorneys

At Miller Monroe Holton & Plyler, our attorneys have represented debtors and creditors on both sides of foreclosure proceedings. We recommend engaging experienced counsel if you are involved in foreclosure proceedings, so that you can effectively navigate the process. Contact us today for a consultation, or click here to learn more about our practice areas.

This article does not establish an attorney-client relationship and must not be construed as legal advice.

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Reciprocal Attorneys’ Fees Provisions in Business Contracts

We have previously discussed the scenarios in which prevailing parties in litigation can – and cannot – recoup their attorneys’ fees.  Unfortunately, the law is not particularly generous in allowing parties to recover their fees and costs.  Because there is one aspect of the relevant law that continually generates client questions, the topic is worth revisiting.

Our clients have run into issues with attorneys’ fees provisions in business contracts.  Many clients think that simply including a statement that the prevailing party will recoup his attorneys’ fees is enough – but unfortunately, this is not the case.  There is a specific statute in North Carolina that governs the recovery of reasonable attorneys’ fees in disputes involving business contracts. The statute addresses what is known as the “reciprocal attorneys fees provision.”  The reciprocal part is critical, as it can mean the difference between recovering your fees or leaving the courthouse empty-handed.

What the Statute Requires

The statute gives a judge discretion to award a prevailing party his reasonable attorneys’ fees when the dispute involves a business contract, but only when the contract contains an attorneys’ fees provision that is reciprocal.  This means that the parties agree, in their contract, to pay or reimburse one another for attorneys’ fees or expenses incurred as a result of any lawsuit or proceeding involving that contract.

Although the premise of the law is basic, its application is more complicated. It is important to understand this so that you can set your expectations upon commencing litigation, particularly if the amount in controversy is small.

The award is discretionary.

As a litigant seeking to recover your reasonable attorneys’ fees, you must specifically request an attorneys’ fees award.  The judge can decide whether to grant or deny your request. Even if the judge grants your request, he or she can limit the amount of your award.

It only applies to disputes involving business contracts.

Contracts that are primarily for personal, family, or household purposes are not considered business contracts.  Also, contracts with governmental agencies are excluded from the statute’s scope, as are employment contracts.

The attorneys’ fees provision must be reciprocal.

This means that the contract must allow either party to recoup attorneys’ fees should it prevail in litigation.  Often, parties will draft contracts to allow only the drafting party to recover his or her attorneys’ fees.  This is insufficient, as the statute requires that the contract afford both parties that opportunity.

By way of example only, your business contract should include language similar to the following: “The parties agree that if any party is required to commence any suit, proceeding, action, or arbitration to enforce any provision of this Agreement, the prevailing party in said litigation shall be entitled to recover from the non-prevailing party its attorney’s fees, costs, and expenses incurred in connection with the enforcement of this Agreement.”  If you have questions about whether your contract complies with the statute’s requirements, please consult an experienced attorney.

Both parties must sign the business contract by hand.

Unlike many other agreements, for which an electronic signature suffices, business contracts containing reciprocal attorneys’ fees provisions must be signed by hand to be deemed enforceable.  The statute only applies to business contracts signed by hand on or after October 1, 2011, which is when the statute became effective.

The amount of recovery is limited.

The statute provides for the recovery of reasonable attorneys’ fees, not all attorneys’ fees.  The law points the judge to consider all the relevant facts and circumstances impacting the case, listing thirteen factors in particular. Some of these factors include the following:

• The amount in controversy,
• The novelty and difficulty of the question raised in the legal action,
• The skill required to perform the legal services in question, and
• The terms of the specific contract at issue.

No matter the circumstances, however, the amount of attorneys’ fees can never exceed the amount in controversy.

Experienced Business Litigation Attorneys

At Miller Monroe Holton & Plyler, we discourage our clients from spending excessive amounts of time and money on litigation when the likelihood of recovery is low.  Whether you would like us to review your business contract to help you preserve your right to recover attorneys’ fees, or you are navigating a dispute involving your business contract and need aggressive, committed representation, our team of experienced litigators can help.  We leverage our years of experience litigating business disputes in North Carolina state and federal courts to help our clients achieve the best possible resolution for their cases. Contact us for a consultation, or learn more about our firm.

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