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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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.

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Our firm routinely handles claims by contractors, lenders, and property owners involving construction defects, delays, and contract disputes.  Many times,  parties to a construction loan or development agreement modify the terms of the original agreement.  The terms of these modifications—and how they affect the parties’ obligations—are often disputed.

A recent opinion from the North Carolina Court of Appeals clarifies a foundational principle of contract law in the context of a mixed-use construction project.

The Facts

In French Broad Place, LLC v. Asheville Savings Bank, the plaintiff, French Broad, developed a construction project in Western North Carolina. The project was a four-story building with office and retail space, restaurants, and residential condominium units. French Broad selected the defendant, a construction lender, to finance the project.

In December 2007, the parties executed a loan commitment, which required the defendant to loan French Broad $9,950,000 for the project. The commitment contained several conditions. For instance, it required the defendant to seek funding for a minimum of $2,000,000 from a participating bank. Before the loan closed, the defendant informed French Broad that it was not able to obtain this funding and would only be funding $7,750,000 of the $9,950,000 specified in the loan commitment. The defendant also asked that French Broad seek a replacement lender for the un-funded $2,000,000.

Before the loan closed, French Broad commenced construction on the project, racking up various contractor liens. The loan closed in August of 2008 for $7,750,000. The parties executed a written loan agreement that was secured by a promissory note and a deed of trust in favor of the defendant.

The First Modification Agreement

In November of 2008, French Broad submitted a modification request to the defendant, seeking additional funds in the amount of $725,801. The defendant approved, and the parties agreed to modify the loan agreement, increasing the total loan amount from $7,750,000 to $8,475,801. However, French Broad alleged that the bank wrongfully delayed approving the modification for several months.

In March 2009, the defendant started to refuse to finance the continued construction of the project. At this point, three businesses were set to open in the building, and initial residential condo sales were months away from closing. The defendant also refused to provide take-out loans that it supposedly agreed to provide, which French Broad claimed ultimately caused the project to fail for lack of funding.

The Second Modification Agreement

In June of 2009, the parties executed a second modification agreement, modifying the note, deed of trust, and loan agreement to read as follows:

The total amount of all funds disbursed by Lender to Borrower to date under said Note, CLA [Construction Loan Agreement] and Deed of Trust, as amended by the LMA [Loan Modification Agreement] and Modification of Deed of Trust . . . is $8,475,801. There are presently no Construction Loan funds left to be disbursed. [Emphasis added.]

The Lawsuit

French Broad filed a complaint against the bank in December of 2011, alleging various breach of contract claims. The bank filed a motion to dismiss and a counterclaim seeking payment in full on the promissory note that secured the loan agreement. The defendant also moved for summary judgment on all claims and won. French Broad appealed from this judgment.

The Court’s Analysis: Breach of Contract

First and foremost, French Broad alleged the parties’ agreement required the defendant to provide $9,950,000 in funds for initial financing, instead of the $7,750,000 that defendant actually provided upon the loan’s closing. The Court disagreed.

When the parties closed their loan in August of 2008, their agreement included a merger clause that read as follows:

By signing this document each party represents and agrees that: (A) The written loan agreement represents the final agreement between the parties, (B) There are no unwritten oral agreements between the parties, and (C) The written loan agreement may not be contradicted by evidence of any prior, contemporaneous, or subsequent oral agreements or understandings of the parties.

In other words, the written loan agreement superseded any and all prior agreements between the parties, including the loan commitment. As such, the loan agreement’s provision for $7,750,000 in financing superseded the earlier loan commitment’s provision for $9,950,000.  The Court also referenced the parties’ two written modifications to their loan agreement, whereby French Broad agreed there were no “defenses, offsets, or other claims” regarding any of the parties’ agreements or modifications.

Based on the terms of the loan agreement and the two modifications, the bank was not required to provide $9,950,000 in initial financing. The Court noted that even if the bank was obligated to provide $9,950,000 under the loan agreement, French Broad waived any claims it may have had against the defendant by signing the written modification stating that “the total amount of all funds disbursed by Lender to Borrower to date under said Note, CLA, and Deed of Trust, as amended by the LMA and Modification of Deed of Trust . . . is $8,475,801” and “there are presently no Construction Loan funds left to be disbursed.” In agreeing to these modifications, French Broad destroyed its opportunity to hold the bank responsible for an increased loan amount.

The Modification Request

French Broad also alleged that the defendant breached the loan agreements by wrongfully delaying its approval of French Broad’s modification request. The Court stated that the loan agreement did not require the defendant to loan any more funds to French Broad, and so the defendant did not act wrongfully in delaying French Broad’s request. The parties’ modification stated:

[A]t the request of Borrower, Lender agreed to lend Borrower an additional $725,801.00 by increasing the amount of the Construction Loan from $7,750,000 to $8,475,800.00. To reflect this increase in the amount of the Construction Loan, Borrower and Lender entered into a Change In Terms Agreement dated January 23, 2009 increasing the amount of the Construction Loan, and the principal amount of the Note, from $7,750,000.00 to $8,475,801.00.

The Court concluded that through this language, French Broad specifically waived any claim that the defendant breached the loan agreement by delaying further funding.  In other words, the loan agreement and related modifications together establish that there was no genuine issue of material fact regarding the defendant’s alleged breach. Between traditional principles in contract law and French Broad’s willfully signing various modifications, it ultimately fell on its own sword.

Cases like these can be complex and confusing, particularly when a loan agreement or contract has been modified multiple times. No matter how much money is at stake, it is critical to engage a skilled lawyer to help you navigate a dispute. If you have questions about the law governing your commercial contract, let us know.

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If you would like to read the Court’s full opinion, it can be found here. To learn more about our firm’s construction litigation practice, click here.

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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It doesn’t help that the North Carolina statute governing powers of attorney has historically been nebulous when it comes to the principal’s capacity or competency: Most notably, the law provided no definition of incapacity, leaving its determination up to an affidavit from the agent and, often, litigation.

A new law, effective as of January 1, 2018, purports to change this. When Governor Cooper signed Senate Bill 569 into law, North Carolina replaced its existing law with a version of the Uniform Power of Attorney Act, a set of standards adopted by more than 40 other states. The new Act provides a clear definition of incapacity and a streamlined standard for whether a power of attorney remains valid once an individual is incapacitated.

Back to the Basics

Recently, we published a guest post on the basics of the power of attorney: what it is, what it does, and why it is important. As a brief refresher, a power of attorney (POA) is a legal document that gives one person – the agent – authority to act on behalf of another – the principal. A general POA empowers the agent with authority to perform certain tasks on behalf of the principal, such as managing the principal’s finances.

The agent has authority to act on behalf of the principal so long as the principal has capacity to allow the agent to act. In situations where the principal becomes incapacitated or mentally incompetent, the agent loses her authority to act: That is, unless the document was a durable POA – which provides the agent authority to act on the principal’s behalf even if the principal should lose capacity.

The Old Law

The old law did not define incapacity. Further, it provided no clear set of criteria for determining how and when an individual would be adjudicated incompetent.

Under the old law, a POA was presumed not durable, unless the document specifically stated otherwise. Language like “This power of attorney shall not be affected by my subsequent incompetency or incapacity” would indicate the principal’s intent for the agent’s authority to persist beyond incompetency.

Under the old law, a durable POA was only valid if it was registered in the relevant county’s register of deeds office before the principal became incapacitated or incompetent.

The New Law

Enter the new Act, which streamlined these requirements. Incapacity is no longer a nebulous concept, but is defined as:

The inability of an individual to manage property or business affairs because the individual has any of the following statuses:

1. An impairment in the ability to receive and evaluate information or make or communicate decisions even with the use of technological assistance.
2. Is missing, detained, including incarcerated in a penal system, or outside the United States and unable to return.

Further, contrary to the old law, a power of attorney is now automatically deemed durable – and a principal who wishes his agent’s authority to terminate upon incapacity must write this into the document. In other words, POAs are now durable by default.

How this Affects You

The recording requirement

The new Act abandoned the recording requirement for POAs, and now a durable POA need not be filed with the register of deeds. However, the recording requirement still applies to POAs executed prior to January 1, 2018. The Act does not apply retroactively. As such, if your pre-2018 durable POA is unrecorded and the principal has since become incompetent, your document is not valid. Recording it now will not retroactively correct this.

Tip: Make sure you check the date on your document to see what law applies. This is an issue that arises in litigation, and although it seems like an insignificant detail, whether a recording requirement applied at the time you executed your document can determine whether an agent had authority to act on behalf of the principal. This can mean the difference between legal or illegal action, potential liability or lack of liability.

The definition of incapacity

The new definition of incapacity is unlikely to eliminate litigation entirely, but it does provide a clear set of criteria for determining whether a principal has legal capacity to authorize his agent to act on his behalf.

Documents executed prior to January 1, 2018

With inevitable exceptions, the Act generally does not invalidate POAs enacted before it went into effect. Most POAs will not need to be re-drafted, but please contact your attorney if you have questions about your document in particular.

The attorneys at Miller Monroe Holton & Plyler have significant experience navigating the legal issues arising from POAs, particularly in the context of capacity and competency. We are happy to work with you should you have questions about how the new law will affect your documents.

If you would like to read the full law, it can be found here.

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

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Restrictive covenants are a set of tools that employers sometimes utilize to prevent employees from competing with them after termination of their employment.   One of the most common restrictive covenants used by an employer is a “non-compete clause.”   An evaluation of the enforceability of a non-complete clause necessarily involves a balancing of interests.   On the one hand, there is the employer’s interest in protecting its investment in an employee’s success whether that be training, promotional or marketing activities, or granting the employee access to important company trade secrets.  Obviously, the employee would be positioned to unfairly use this information to harm its former employer if not for the employer’s ability to protect itself.  On the other hand, there is the employee’s interest in earning a living and promoting his/her own professional growth and development through the freedom to seek new job opportunities.  While non-compete clauses are solely intended to protect and benefit the employer, they cannot unduly burden an employee’s freedom to seek other gainful employment.

State courts tend to view restrictive covenants with varying degrees of favorability, and they are generally disfavored in North Carolina.  In order to be enforceable in North Carolina courts, a covenant not to compete must meet certain general requirements:

1. It must be in writing and incorporated into the employment contract.
2. It must be reasonable as to time and territory.
3. If the restriction is implemented as to an existing employee, it must be based on valuable consideration. This means that the employee must be offered something – typically some form of monetary compensation – in exchange for abiding by the restriction. This is not necessary for new employees, as the restriction is part of the bargain of receiving employment with the company.

An element that tends to be heavily litigated is the reasonableness of time and territory.   For a discussion on the enforceability of non-compete agreements in general, please click here to review our previous post on this topic.  This post will focus on what happens when a restrictive covenant’s time and territory limitations are found unduly restrictive.

Historically, North Carolina has adhered to a strict doctrine known as the “blue pencil” rule, meaning a court may strike out (but not revise) provisions of a non-compete clause that it finds unreasonable while upholding the remainder of the employment agreement.   The blue-pencil rule can be beneficial to employers in that it might allow courts to enforce an agreement even when one of the terms is enforceable.   A court can simply strike (blue pencil) an unenforceable provision and uphold the rest of the agreement.  However, the blue-pencil rule has traditionally stopped short of allowing courts to not only strike, but to revise an unenforceable term.   The North Carolina Supreme Court recently rendered an opinion in Beverage Systems of the Carolinas, LLC, v. Associated Beverage Repair, LLC that sheds additional light on a court’s power to not only strike an unenforceable provision, but to revise a provision altogether to make it enforceable.

The underlying dispute in the Beverage Systems case involved two companies in the beverage service industry that had negotiated the purchase and sale of a business.  The purchase and sale agreement contained a restrictive covenant that prohibited the sellers from conducting business in their industry anywhere in North or South Carolina.  The agreement also contained a provision allowing courts to revise or narrow these territorial provisions should a dispute arise.  Shortly thereafter, one of the parties to the agreement broke away and formed a new beverage company that directly competed with the plaintiff’s business.  In the ensuing litigation, the trial court determined that the geographical scope of the restrictive covenant was overly broad and thus unenforceable.   Although the agreement itself allowed the Court to rewrite portions of the agreement, the Court declined to do so.  With no territorial restriction left in the agreement after blue-penciling, the remainder of the agreement was rendered unenforceable.

On appeal, the North Carolina Court of Appeals reversed the trial court’s decision, holding that the parties’ express consent to the Court’s revision of portions of the agreement trumped the blue pencil doctrine, which allows a court to strike unenforceable provisions but not to add or revise the terms of the agreement.  That is, instead of striking out the over-broad territorial restrictions and scrapping the entire argument, the trial judge should have simply rewritten that portion of the agreement to make it reasonable, that is, narrow the designated geographical area.

However, upon discretionary review, the Supreme Court reversed the opinion of the Court of Appeals.  Although the Supreme Court agreed with the Court of Appeals that the territorial restriction was overbroad, the Supreme Court’s opinion stated that the blue pencil doctrine only applies when the agreement “sets out both reasonable and unreasonable restricted territories.”  In the present case, the territorial limitation was only unreasonable and was so broad that striking the unenforceable provisions of the agreement would leave no territory left within which to enforce the agreement.  As the Court thus noted, “blue-penciling cannot save the Agreement.”  The Supreme Court further noted that “[a]llowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of a scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable after the court rewrote the limitation.”

Ultimately, the Supreme Court’s decision reinforced the principle that parties cannot contract to give courts power they do not have.  As a result, courts are now definitively limited to the blue pencil rule.  They have the power to strike out overbroad provisions in an employment contract.  However, if after striking out these provisions, the agreement is unenforceable, the Courts must put the task of recrafting the agreement in the hands of the parties.

When drafting restrictive covenants, it is crucial to consider which geographical areas should and should not be included, considering factors such as the presence of existing business relationships or opportunities.   Moreover, any provision purporting to give courts authority to intervene in resolving disputes will likely be struck down and the entire agreement rendered unenforceable.  The attorneys at Miller Monroe PLLC can assist you in drafting a non-compete clause that will be narrowly tailored to serve your business interests.   Our firm also has substantial experience litigating the enforceability of non-compete provisions and other restrictive covenants.  If you are considering the enforceability of a restrictive covenant, please feel free to contact Miller Monroe for a consultation.

For the Supreme Court’s full opinion, click here.

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Many clients are surprised to learn that obtaining a judgment is not the end of the story in litigation. Even lawyers fall into the trap of celebrating a large verdict or favorable judgment before a judgment is actually collected.  The often disappointing reality, particularly in commercial litigation, is that a judgment is sometimes only the tip of the iceberg.  The post-judgment collection process is often complex, extensive, and fraught with frustrations ranging from minor challenges, such as a judgment debtor’s relocation, to significant obstacles, including a judgment debtor’s insolvency, bankruptcy, or artful service-dodging.  At times, simply serving the judgment papers will rattle a party into writing a check.  However, the more common scenario is a prolonged hunt for assets that may ultimately leave the judgment creditor empty-handed.

Understanding the basics of judgment execution is critical in creating realistic expectations about the prospects of collection.  The first step is to ensure compliance with the judgment debtor’s rights.  Hearkening back to the foundational principles of property law, an individual’s right to use, enjoy, and retain his own property is sacred and spans all practice areas.  As such, the law allows a judgment debtor to designate certain property as exempt from a civil judgment.  All states have their own exemption laws that apply to a judgment debtor’s property located in that state.  In North Carolina, there are several items an individual can protect from the judgment’s reach. A few examples include:

• Up to $35,000 in a residence and burial plots. If the individual is unmarried and 65 or older, he or she may designate the same in an amount up to $60,000.
• Up to $5,000 in personal property – including household goods and appliances – and an additional $1,000, but not to exceed $4,000, for dependents.
• Up to $3,500 in a motor vehicle after deduction of valid liens or security interests.
• Healthcare aids such as wheelchairs and hearing aids.
• Up to $2,000 in professional books or tools.
• Life insurance policies where the sole beneficiaries are the spouse and/or children.
• Retirement accounts.

In the case of an individual judgment debtor (as opposed to a corporate judgment debtor), the judgment creditor is required by law to serve the judgment debtor with a formal notice of the right to designate exemptions.  From the date of service of the notice, the judgment debtor is allowed twenty days to designate exemptions.    The judgment creditor is entitled to challenge the exemptions by filing a Notice of Objection with the Court in the county where the case was heard. However, there are narrow circumstances in which the Court will uphold a judgment creditor’s objections, for instance, if the judgment debtor designated more property than the law allows.

Once the exemption period expires, the judgment creditor may file for the issuance of a writ of execution in each county in which the judgment debtor is believed to own assets.  In counties other than the county in which the judgment was entered, the judgment creditor must pay a small fee to transcribe the judgment in that county.  The Clerk of Court in each county in which the judgment has been transcribed will then issue the writ of execution.  The writ gives the Sheriff’s Office in each county the authority to execute the judgment, which entails formally serving the writ of execution on the judgment debtor and locating and seizing non-exempt property.  The Sheriff may clear bank accounts, seize motor vehicles, place a lien on a home, and collect personal items and effects.   Unlike other states, however, North Carolina does not allow a creditor to garnish wages except in certain rare situations (for example, child support).  If the judgment attaches to a motor vehicle or other personal property, the Sheriff’s Office may sell the property and use the proceeds from the sale to pay off all liens against it, including the judgment.  A judgment can also attach as a lien on a house, which will render it unsaleable until the judgment is satisfied.  This can give the judgment creditor leverage in forcing the judgment debtor to satisfy a judgment.  However, it is not always easy to find property that is unencumbered or valuable enough to satisfy a judgment.  Therefore, often the most efficient way to satisfy a judgment, aside from the judgment debtor writing a check, is to locate a non-exempt bank account with sufficient funds to satisfy the judgment.

A judgment is valid for up to ten years.  If a judgment debtor acquires new property in the counties in which the judgment has been entered or transcribed, the judgment will automatically attach to that property.  However, it is important to understand that a judgment may never be satisfied.  If the judgment debtor has several other judgments against him/her, any seizable assets will be subject to a priority battle among the various creditors.  Additionally, many corporate judgment debtors may dissolve, file bankruptcy, or transfer or hide assets, while debtors who are individuals may dodge the judgment by relocating to another state.  A skilled attorney will conduct the research necessary to assess the likelihood of collecting on a judgment and will advise you of these risks prior to initiating litigation.

Given the inherent challenges in judgment execution, it is critical to engage attorneys who will diligently and tenaciously pursue collection.  A skilled attorney will take an active role in judgment collection by routinely investigating the status of the judgment debtor’s assets and liabilities and communicating with the Sheriff’s Office in the relevant counties regarding what property might be available and subject to seizure.  At Miller Monroe, we understand that post-judgment collection requires as much diligence as litigating a case.  We have successfully collected on numerous judgments in and out of bankruptcy, and we will take an aggressive role in enforcing a judgment in your case.  We will also guide you through an honest and transparent cost/benefit analysis where we believe collection is unlikely. When hiring a litigator to handle your commercial litigation matters, we would strongly encourage you to inquire about the firm’s experience in enforcing judgments as part of your due diligence process.  It is critically important that your attorney be well-versed in litigating the underlying case, but also in pursuing assets necessary to fulfill a judgment in the event that you prevail.

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