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.

The post Contract Defenses in the Context of COVID-19 appeared first on Miller Monroe Holton & Plyler.

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.

The post Liquidated Damages Clauses: An Overview appeared first on Miller Monroe Holton & Plyler.

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.

The post Case Law Update: Modifications to Loan Agreements appeared first on Miller Monroe Holton & Plyler.

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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Thank you to the attorneys and staff of Miller Monroe Holton & Plyler PLLC for the opportunity to submit a guest post on their legal blog. This post addresses the common questions: what is a Power of Attorney and why is it important?

A Power of Attorney (“POA”) is a written instrument where one person (“principal”) appoints another person (“agent”) to perform certain actions on their behalf. The POA authorizes the agent only to perform those acts set out in the document. The agent is essentially authorized to step into the shoes of the principal and to perform only those actions listed in the document and determined by the agent to be in the principal’s best interests.

A POA may be either a Special POA or a General POA. A Special POA (sometimes referred to as a Limited POA) limits the agent’s authority to one or more specific transactions. A Special POA is frequently used when the principal will be absent for a short period of time and/or a specific transaction. Examples of common usage of Special POA include: the sale or purchase of a home or the filing of a tax return. Special POAs often have a limited duration and have an expiration date contained in the terms of the document.

A General POA grants the agent authority to perform any act the principal may delegate within the terms of the document. General POAs are frequently used in estate planning and elder law. Chapter 32A of our North Carolina General Statutes contains a listing of categories of tasks an agent may be authorized to perform in the terms of a General POA. It is important to review and understand the meaning of all the powers contained in any POA before signing.

All fifty states and the District of Columbia have adopted statutes permitting a principal to create a POA surviving a principal’s incapacity. A POA remaining effective after the principal’s incapacity is termed a Durable POA. To create a Durable POA in North Carolina, the document must be in writing and contain words showing the principal’s intent for the power to survive his or her incapacity.

The feature of “durability” is critical when it is planned for the POA to serve to permit a family member, friend, or professional manager to act on the principal’s behalf during a period of long-term incapacity or dementia. In many cases, a Durable POA may serve to avoid the need for court proceedings and the imposition of a guardianship when a principal’s capacity deteriorates.

Because a POA is a grant of authority, only those powers specifically granted are authorized by the law. This particularly applies to the gifting or transferring of assets pursuant to a POA. Please be cautious when considering the use of any POA. Careful thought must be given to the naming of agents, goals and priorities of the document, and needs as physical or mental capacity may deteriorate.

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

The post The Power of Attorney: The Basics appeared first on Miller Monroe Holton & Plyler.

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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It is surprising how often clients seek advice for breach of contract claims but cannot articulate the scope of their agreement with the breaching party.  The North Carolina Court of Appeals recently issued an opinion that highlights just how problematic this can be.

In Rider v. Hodges, two parties entered into an informal agreement for landscaping services.  The plaintiff homeowners paid a landscaper $24,000 upfront to “do landscaping.”  There was some discussion about the tasks to be performed, for instance, planting shrubs, spreading mulch, installing a fence, planting a flagpole, and irrigating the land.  However, the parties never discussed the scope of the work, such as how much mulch was to be spread, where plants were to be placed, or how much fencing would be installed.

Further, the parties did not reach an agreement about compensation.  The homeowners simply paid the initial $24,000 and directed the landscaper to commence work, but did not discuss the specifics of hourly compensation for labor, confirm the cost of materials, or establish a projected total cost.  Eventually, the plaintiff homeowners complained about the quality of the landscaping work and brought a lawsuit for breach of contract, among other claims.  In his deposition, defendant landscaper admitted the parties never reached a “meeting of the minds” and had “no specific agreement about anything.”

The trial court ruled that there was no genuine issue of material fact as to whether the parties’ landscaping agreement was breached, because no valid contract had ever been formed. Accordingly, the trial court ruled in favor of the landscaper on summary judgment. The homeowners appealed from the trial court’s ruling. However, they found themselves out of luck yet again on appeal.   In its August 15^th opinion, the Court of Appeals ruled that no contract was ever formed because the parties’ landscaping agreement was not certain and definite enough as to price or the scope of work – key components of a contract for services.  The parties spoke generally about the tasks to be performed, but at no point did they discuss specifics.

The opinion explained that traditionally, a valid contract only exists where the parties have a “meeting of the minds” regarding all the essential terms of the agreement.  With respect to a services contract, established case law states that a valid agreement must be “certain” and “definite” as to: 1) The nature and extent of services to be performed, 2) the place where and person to whom the services are to be rendered, and 3) the compensation to be paid.  If even one of these terms is not sufficiently certain or definite, the contract will not be judicially enforced if disputed.  In the present case, there was no valid breach of contract claim because there was no valid contract.  Both parties acknowledged that a landscaping arrangement existed, but never had a meeting of the minds about the scope of the work to be done or the amount the landscaper was to be paid.

In order to avoid the Riders’ plight, be sure to clearly designate the specific and particular tasks to be performed in your services contract.  Beware the “just start working” agreement: clearly list each task to be provided, the materials used, and a timeline for completion of the work.  Further, don’t forget to reach an agreement on compensation, and keep track of completed work by requesting and keeping detailed, itemized invoices.  Of course, as much as possible, memorialize your agreement in writing.  If you are unsure of how to form your agreement or have concerns about potential holes in a service contract, be sure to contact your attorney.

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

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Business North Carolina magazine honors Tar Heel lawyers by publishing Business North Carolina’s Legal Elite, a listing of the State’s top lawyers in business-related categories.  Winners are chosen not by the magazine’s editors, but by the state’s lawyers.  In developing the list, Business North Carolina made ballots available to more than 20,000 Tar Heel Lawyers and only 3% were selected for Legal Elite.

Jason A. Miller has litigation experience in state and federal courts throughout North Carolina and beyond.  He has represented Fortune 500 companies in complex business litigation matters, builders and developers in real property disputes, information technology companies in trade secrets disputes, partners in closely-held company disputes, investors in business deals gone awry, and dozens of cases in between.  Jason has litigated matters in more than a dozen counties in North Carolina and is licensed to practice in every state and federal court in North Carolina.  Most recently, Jason became licensed to practice law in his home state of New York.

Jeffrey R. Monroe commenced his legal career in the Raleigh office of a mid-sized insurance defense firm, where he handled a variety of litigation matters throughout the state, including defending individuals and companies in personal injury claims, construction defect claims, and business disputes.   Since joining Miller & Monroe in 2013, Jeff has litigated business disputes, estate and fiduciary disputes, personal injury claims, and a variety of other civil litigation matters.

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