Stokes v. Crumpton , 369 N.C. 713 ( 2017 )

IN THE SUPREME COURT OF NORTH CAROLINA
No. 168A16
Filed 9 June 2017
THOMAS A. STOKES, III
v.
CATHERINE C. CRUMPTON (formerly Stokes)
Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of a divided panel of
the Court of Appeals, ___ N.C. App. ___, 784 S.E.2d 537 (2016), dismissing an appeal
from an order entered on 7 August 2014 by Judge Anna E. Worley in District Court,
Wake County. On 22 September 2016, the Supreme Court allowed plaintiff’s petition
for discretionary review of additional issues. Heard in the Supreme Court on 20
March 2017.
Shanahan Law Group, PLLC, by Kieran J. Shanahan, Christopher S. Battles,
and John E. Branch, III, for plaintiff-appellant.
Wyrick Robbins Yates & Ponton LLP, by Tobias S. Hampson, K. Edward
Greene, and Robert A. Ponton, Jr., for defendant-appellee.
BEASLEY, Justice.
This case is about whether a trial court has discretion to order post-
confirmation discovery in an action under the Family Law Arbitration Act and a
party’s right to an interlocutory appeal of the trial court’s denial of such a motion.
We hold that plaintiff had a right to appeal the trial court’s denial of his motion to
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Opinion of the Court
engage in discovery and that the trial court has discretion to order post-confirmation
discovery in this case. Accordingly, we reverse the decision of the Court of Appeals
and remand this case with instructions for the Court of Appeals to vacate the trial
court’s order and remand the matter for reconsideration of plaintiff’s motion
consistent with this opinion.
In April 2011, Thomas A. Stokes, III (plaintiff) and Catherine C. Stokes (now
Crumpton) (defendant) separated. Plaintiff filed an action in July 2011 seeking
equitable distribution of the parties’ marital assets and child support. Shortly
thereafter, the parties agreed to arbitrate the action under North Carolina’s Family
Law Arbitration Act (FLAA), N.C.G.S. §§ 50-41 to 50-62. On 13 August 2011, the
trial court entered a Consent Order to Arbitrate Equitable Distribution and Child
Support. One of the main issues to be settled during arbitration was the value of
defendant’s stake in Drug Safety Alliance, Inc. (DSA),1 a company in which defendant
was the President, CEO, and majority shareholder.
As part of the agreed-upon pre-arbitration discovery, plaintiff’s counsel
deposed defendant, seeking information, inter alia, on the value of DSA. During the
deposition, defendant testified that she had “no intention of selling” DSA at that time,
although she had been contacted by parties interested in purchasing the company.
1 DSA managed adverse event reporting for pharmaceutical, biotech, animal health,
and over-the-counter dietary supplement companies.
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Opinion of the Court
In response to questions regarding the possible sale, merger, or acquisition relating
to DSA, defendant, for the most part, responded that she did not know or could not
answer the question. During discovery, plaintiff’s valuation expert also interviewed
defendant and specifically inquired about “any written or oral offers to purchase
DSA”; defendant said there were none. Plaintiff’s expert also requested production
of documents from DSA, including buy-sell agreements, written offers to purchase
stock, and any major sale or purchase contracts. No such documents were ever
produced.
On 18 May 2012, plaintiff and defendant entered into an Equitable
Distribution Arbitration Award by Consent (the Award). That same day, the trial
court entered an order and judgment in District Court, Wake County, confirming the
award. The Award, inter alia, distributed to defendant all stock held by her in DSA
and any other interest claimed by either party in the company. In return, defendant
would pay plaintiff a lump sum of $1,000,000.00, plus an additional $650,000.00 over
a six year period. The entire balance would become immediately due and payable,
however, if defendant sold her ownership interest in DSA.
Less than two months later, on 5 July 2012, defendant signed a Letter of Intent
to sell DSA to another company, United Drug, PLLC. In August 2012, United Drug
purchased DSA for $28,000,000.00, of which defendant received approximately
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$14,000,000.00 for her shares. Plaintiff claims to have learned about the sale through
the media, without any prior knowledge of it during arbitration.
On 26 November 2012, plaintiff filed a Motion to Vacate Arbitration Award
and Set Aside Order and Motion to Engage in Discovery.2 Plaintiff’s motion was
predicated on an allegation of fraud, that defendant “intentionally induced [p]laintiff
to settle through misrepresentation and/or concealment of material facts related to
the sale, possible sale, discussions, negotiations and existence of documents related
to the possible sale of DSA to a third party.” Specifically, plaintiff alleged that
defendant intended to sell DSA while arbitration was under way and that she
fraudulently induced plaintiff to accept a distribution of only $1,650,000.00 for DSA
based on her representations about the company during arbitration. According to
plaintiff, during arbitration “the parties were arguing over a valuation of the marital
interest in DSA as being between approximately two and five million dollars” and
eventually stipulated to a value of $3,485,000.00 for DSA.3 Plaintiff contends that he
never would have agreed to DSA’s value had defendant disclosed the sale opportunity.
As part of these motions, plaintiff requested leave “to conduct discovery
regarding discussions, negotiations and activity by and involving [d]efendant and her
2 Plaintiff amended his motion on 13 December 2013 to clarify that the motions were
brought under the FLAA.
3 As pointed out by defendant, the parties never stipulated to a value for DSA.
Plaintiff contends, however, that the parties reached a mutual understanding as to DSA’s
value prior to consenting to the Award.
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company DSA, its agents and United Drug and its agents that led to the July 5, 2012
Letter of Intent and subsequent sale of DSA to United Drug.” On 7 August 2014, the
trial court entered an order denying plaintiff’s motion for leave to engage in discovery.
The trial court concluded:
1. There is no pending action between Plaintiff and
Defendant in which discovery may be propounded.
2. Plaintiff’s Verified Motion to Vacate Arbitration Award
is not a claim within which discovery may be conducted.
Plaintiff’s [request for] written discovery is therefore
inappropriate.
3. All of Plaintiff’s Motions to Compel [Discovery] . . .
should be denied.
Plaintiff appealed to the Court of Appeals, which filed a divided opinion dismissing
the appeal on 5 April 2016.
As a preliminary matter, the Court of Appeals addressed whether the trial
court’s order denying discovery was immediately appealable as an interlocutory
order. Stokes v. Crumpton, ___ N.C. App. ___, ___, 784 S.E.2d 537, 539 (2016).
Agreeing with defendant, the majority concluded that the order was not appealable
under either the FLAA’s appeal provision, N.C.G.S. § 50-60 (2015), or the substantial
rights analysis of N.C.G.S. § 7A-27(b)(3)(a) (2015). See id. at ___, 784 S.E.2d at 540.
In regards to the FLAA, the majority held that the discovery order did not fall under
any of the types of orders enumerated in subsection 50-60(a) of the statute under
which a right of appeal lies. Id. at ___, 784 S.E.2d at 540. Specifically, the majority
also concluded that the order at issue here “is not a judgment” for purposes of
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subdivision 50-60(a)(6). Id. at ___, 784 S.E.2d at 541. The majority then rejected
plaintiff’s argument that he was separately entitled to appeal from the order under
N.C.G.S. § 7A-27, which governs interlocutory appeals. Id. at ___, 784 S.E.2d at 541-
42. The majority concluded that plaintiff “failed to demonstrate that he would be
deprived of a substantial right without appellate review of the order before a final
judgment has been entered,” as required under section 7A-27. Id. at ___, 784 S.E.2d
at 541-42.
The dissent disagreed with the majority’s conclusion that the discovery order
was not immediately appealable. Id. at ___, 784 S.E.2d at 543 (Calabria, J.,
dissenting). Specifically, the dissent concluded that the order denying discovery was
appealable under subdivision 50-60(a)(6), which the dissent deemed to be a “catch-
all” provision that permits appeal from “[a] judgment entered pursuant to provisions
of this Article.” Id. at ___, 784 S.E.2d at 543. According to the dissent, “judgment”
as used in this provision is not limited to “final judgments,” but includes judgments
that are interlocutory as well. Id. at ___, 784 S.E.2d at 543-44. The dissent also
concluded that plaintiff had a right to appeal under section 7A-27 because plaintiff
demonstrated that, if the order was not immediately reviewed, he would be deprived
of a substantial right, consisting of any ability to prove the alleged fraud at the
hearing on his motion to vacate, without some limited discovery. Id. at ___, 784
S.E.2d at 544-47.
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Next, the dissent disagreed with the trial court’s conclusion that “[t]here is no
pending action between Plaintiff and Defendant in which discovery may be
propounded.” Id. at ___, 784 S.E.2d at 546. According to the dissent, “plaintiff’s
Motion to Vacate Arbitration Award and Set Aside Order based on allegations that
the arbitration award was procured by fraud is pending.” Id. at ___, 784 S.E.2d at
546. In response, the majority addressed the pending action issue in a footnote,
disagreeing with the dissent’s interpretation and stating that “[i]t is correct that
Plaintiff’s motion to vacate was pending, but the trial court concluded, and we agree,
that the action—the arbitration of the parties’ equitable distribution action—had
concluded, and the pending motion was ‘not a claim within which discovery may be
conducted.’ ” Id. at ___ n.1, 784 S.E.2d at 539 n.1 (majority opinion).
Plaintiff filed an appeal of right based on the dissenting opinion, and on 22
September 2016, this Court allowed plaintiff’s petition for discretionary review as to
an additional issue. The issues before this Court are whether plaintiff has a right to
appeal the trial court’s order and whether the trial court had discretion to award
discovery in this case.
As a threshold matter we consider whether plaintiff had a right to immediately
appeal the trial court’s order denying discovery. We hold that he did.
Plaintiff contends that the trial court’s interlocutory order may be appealed if
it affects a substantial right, pursuant to N.C.G.S. § 7A-27(b)(3)(a), even if plaintiff
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has no right to appeal under the FLAA.4 We agree. This Court has never explicitly
addressed the interplay between appeals under an arbitration statute and section
7A-27. The Court of Appeals case law on this issue is unclear and somewhat
contradictory. We take this opportunity to clarify the relationship between N.C.G.S.
§§ 50-60 and 7A-27.
In Bluffs, Inc. v. Wysocki, 68 N.C. App. 284, 314 S.E.2d 291 (1984), the
threshold issue before the court was whether there is an immediate right to appeal
an order compelling arbitration under the Uniform Arbitration Act (UAA), which the
court held did not exist. 68 N.C. App. at 286, 314 S.E.2d at 293. The court began its
analysis by reviewing the bases for appeal enumerated in N.C.G.S. § 1-567.18(a) and
concluding that an order compelling arbitration does not fall under the statute. Id.
at 285, 314 S.E.2d at 292-93. After reaching this conclusion, the court then addressed
whether the order affected a substantial right. Id. at 285-86, 314 S.E.2d at 293.
Ultimately, the court held that an order compelling arbitration is not appealable
under either the UAA5 or section 7A-27. Id. at 285, 314 S.E.2d at 293.
4 Plaintiff did not argue to this Court that he had a right to appeal under the FLAA
itself. Assuming arguendo that the majority at the Court of Appeals correctly determined
that plaintiff did not have a right to appeal under subdivision 50-60(a)(6) of the FLAA, we
hold that plaintiff had a right to appeal the interlocutory order under N.C.G.S. § 7A-27
because the order affected a substantial right.
5 Although an order compelling arbitration is not appealable under the UAA, Wysocki,
68 N.C. App. at 285, 314 S.E.2d at 292-93, the Revised UAA does provide a basis for appeal
from an order denying a motion to compel arbitration, N.C.G.S. § 1-569.28(a)(1) (2015) (“An
appeal may be taken from . . . [a]n order denying a motion to compel arbitration . . . .”).
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Subsequent Court of Appeals cases relying on Wysocki have followed a similar
analytical framework—conducting a substantial rights analysis under section 7A-27
after concluding that the order at issue did not fall under the enumerated bases for
appeal set out in the relevant arbitration statute. See, e.g., Smith v. Shipman, 153
N.C. App. 200, 569 S.E.2d 34, 2002 WL 31055991 (2002) (unpublished); N.C. Elec.
Membership Corp. v. Duke Power Co., 95 N.C. App. 123, 381 S.E.2d 896, disc. rev.
denied, 325 N.C. 709, 388 S.E.2d 461 (1989). Wysocki and its progeny do not explicitly
address the relationship between appeals under an arbitration statute and
interlocutory appeals under section 7A-27. Implicit in these cases, however, is
support for the conclusion that a right to appeal can be based on section 7A-27 even
if there is no right to appeal under the arbitration statute.
In the present case the Court of Appeals majority based its decision, in part,
on the fact that the FLAA appeal provision does not include an order denying
discovery as one of the enumerated bases for appeal. Stokes, ___ N.C. App. at ___,
784 S.E.2d at 540. The majority in Stokes relied on Bullard v. Tall House Building,
Co., 196 N.C. App. 627, 676 S.E.2d 96 (2009), quoting specifically the statement “that
the list enumerated in [N.C.G.S.] § 1-569.28(a) includes the only possible routes for
appeal under the [Revised UAA].” Id. at ___, 784 S.E.2d at 540-41 (quoting Bullard,
196 N.C. App. at 635, 676 S.E.2d at 102) (emphasis added)). The court in Bullard
concluded that the order was not appealable under the Revised UAA and then
conducted a substantial rights analysis under section 7A-27. 196 N.C. App. at 635-
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39, 676 S.E.2d at 102-04. The court held that an order compelling arbitration: (1) was
not appealable under the Revised UAA; and (2) did not impair a substantial right
justifying immediate appeal under section 7A-27. Id. at 635-39, 676 S.E.2d at 102-
04.
Therefore, despite this quoted language, the court in Bullard followed the same
analysis used in Wysocki and its progeny, further supporting the inference that an
appeal can lie from either statute. Additionally, the Court of Appeals majority in this
case similarly analyzed whether a substantial right was affected by the trial court’s
order, despite quoting Bullard and despite previously concluding that plaintiff had
no right to appeal under the FLAA itself. Stokes, ___ N.C. App. at ___, 784 S.E.2d at
541-42. We hold that an appeal can be justified under section 7A-27 even if there is
no right to appeal under the relevant arbitration statute. To the extent Bullard
suggests otherwise, it is abrogated.
Having determined that a substantial rights analysis under section 7A-27 may
be conducted notwithstanding that no right to appeal lies under the arbitration
statute itself, we turn now to whether the trial court’s order denying discovery to
plaintiff in this case affected a substantial right justifying immediate appeal. We
hold that the trial court’s order denying discovery affected a substantial right.
An interlocutory order is generally not immediately appealable unless the
order “[a]ffects a substantial right,” id. § 7A-27(b)(3)(a). Sharpe v. Worland, 351 N.C.
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159, 161-62, 522 S.E.2d 577, 578-79 (1999) (discussing two avenues for immediate
appeal of an interlocutory order, including N.C.G.S. § 7A-27). Discovery orders are
“generally not immediately appealable because [they are] interlocutory and do[ ] not
affect a substantial right that would be lost if the ruling were not reviewed before
final judgment.” Id. at 163, 522 S.E.2d at 579 (citations omitted). Such orders,
however, are immediately appealable when “the desired discovery would not have
delayed trial or have caused the opposing party any unreasonable annoyance,
embarrassment, oppression or undue burden or expense, and if the information
desired is highly material to a determination of the critical question to be resolved in
the case.” Dworsky v. Travelers Ins., 49 N.C. App. 446, 447-48, 271 S.E.2d 522, 523
(1980) (emphasis added) (citing Tenn.-Carolina Transp., Inc. v. Strick Corp., 291 N.C.
618, 231 S.E.2d 597 (1977)). In these situations, “an order denying such discovery
does affect a substantial right and is appealable.” Id. at 448, 271 S.E.2d at 523 (citing
Tenn.-Carolina, 291 N.C. 618, 231 S.E.2d 597).
Here there is no dispute that the trial court’s order is interlocutory, as it was
made while plaintiff’s motion to vacate was still pending. See Sharpe, 351 N.C. at
161, 522 S.E.2d at 578. As such, the interlocutory order must be shown to affect a
substantial right in order to justify immediate appeal.
Plaintiff’s motion requested limited discovery in the form of information
relating to the timeline, details, and discussions between DSA and United Drug
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regarding the August 2012 sale. This information is “highly material” to a
determination on plaintiff’s motion to vacate based on allegations that defendant
fraudulently concealed the true value of her shares in DSA. Generally, a motion to
vacate an arbitration award based on fraud must be proved by clear and convincing
evidence. See MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th
Cir. 2010) (stating that vacatur under the Federal Arbitration Act based on an
allegation of “undue means” requires that the fraud or corruption be established by
clear and convincing evidence); Trafalgar House Constr., Inc. v. MSL Enters., 128
N.C. App. 252, 257-59, 494 S.E.2d 613, 617 (1998) (holding that the plaintiff failed to
meet its burden of proof that grounds existed to vacate an arbitration agreement
under the FAA on the basis of fraud). Fraud is generally defined as “[a] knowing
misrepresentation or knowing concealment of a material fact made to induce another
to act to his or her detriment.” Fraud, Black’s Law Dictionary (10th ed. 2014). Due
to the concealment and deception inherent in fraud, it is unlikely that plaintiff will
be able to obtain information necessary to support his motion to vacate without
conducting some limited discovery. Thus, because the limited discovery requested by
plaintiff is “highly material to a determination of the critical issue” in his motion to
vacate, the order denying discovery affects a substantial right justifying immediate
appeal under N.C.G.S. § 7A-27(b)(3)(a). Dworsky, 49 N.C. App. at 448, 271 S.E.2d at
523 (citing Tenn.-Carolina, 291 N.C. 618, 231 S.E.2d 597).
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Having determined that plaintiff had a right to immediately appeal the trial
court’s order denying discovery, we reverse the Court of Appeals holding on this issue.
We now consider whether the trial court had the discretion to order discovery in the
case at hand. We hold that it did.
Plaintiff contends that his motion to vacate the arbitration award under the
FLAA is a pending action under which discovery may be propounded. We agree.
Under the FLAA, “upon a party’s application, the court shall confirm an award, except
when within time limits imposed under G.S. 50-54 . . . grounds are urged for vacating
. . . the award, in which case the court shall proceed as provided in G.S. 50-54.”
N.C.G.S. § 50-53(a) (2015) (emphases added). Section 50-54 sets forth various
reasons for which “the court shall vacate an award,” including that “[t]he award was
procured by corruption, fraud, or other undue means.” Id. § 50-54(a)(1) (2015)
(emphasis added). A timely motion to vacate under section 50-54 predicated on
corruption, fraud, or other undue means “shall be made within 90 days after these
grounds are known or should have been known.” Id. § 50-54(b) (2015). Plaintiff’s
motion to vacate was timely filed, thus triggering the provisions of section 50-54.
Contrary to defendant’s contention, there is no law prohibiting the trial court
from utilizing its discretion to order discovery in this case. The plain language of the
FLAA itself provides a mechanism for vacating an arbitration award upon proof of
fraud. See id. §§ 50-53, -54. As stated above, clear and convincing evidence is needed
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to succeed on a motion to vacate based on allegations of fraud. Given this high
standard, and the concealment and deception inherent in fraud, post-confirmation
discovery naturally follows. Moreover, there is no provision of the FLAA that
prohibits post-confirmation discovery, and nothing within the statute limits section
50-54 solely to claims of fraud made pre-confirmation.
Section 50-53 explicitly provides an alternative, mandatory path for courts to
take if a timely motion to vacate is filed, in which event the court shall proceed
according to section 50-54. Here there is no debate that plaintiff timely filed his
motion to vacate based on an allegation of fraud. Defendant argues that this
alternative path only applies in the pre-confirmation context; nothing, however, in
the language of sections 50-53 or 50-54 supports this conclusion. Reading an
exception into the statute for post-confirmation motions would appear to create a
right without a remedy. We decline to limit the statute in such a manner without
clear indication of the General Assembly’s intent.
Under the terms of the FLAA, a motion to vacate based on allegations of fraud
disrupts the general process for confirming arbitration awards and creates a vehicle
by which confirmed awards can be vacated. Accordingly, a motion to vacate under
section 50-54 is pending because it seeks a remedy made available by the FLAA
related to the underlying arbitration, to which plaintiff has availed himself.
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Therefore, the motion to vacate was a pending action under which the trial court had
the discretion to order discovery.
We hold, therefore, that plaintiff had a right to appeal the trial court’s order
denying discovery under the substantial rights analysis of N.C.G.S. § 7A-27(b)(3)(a),
and that a right to appeal may exist under section 7A-27 even if the order is not
appealable under the arbitration statute itself. Additionally, we hold that the trial
court had discretion to award discovery in this case because the action was pending
pursuant to sections 50-53 and 50-54 of the FLAA. For the reasons stated, we reverse
the decision of the Court of Appeals and remand this matter with instructions to the
Court of Appeals to vacate the trial court’s order denying discovery and remand this
case to the trial court for further consideration of plaintiff’s motion consistent with
this opinion.
REVERSED AND REMANDED.
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