NNN Durham Off. Portfolio 1 ( 2018 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA17-607
Filed: 4 September 2018
Durham County, No. 10 CVS 4392
NNN DURHAM OFFICE PORTFOLIO 1, LLC; et al., Plaintiffs,
v.
GRUBB & ELLIS COMPANY; GRUBB & ELLIS REALTY INVESTORS, LLC;
GRUBB & ELLIS SECURITIES, INC.; NNN DURHAM OFFICE PORTFOLIO, LLC;
AND NNN REALTY ADVISORS, INC., Defendants.
Appeal by Plaintiffs from order entered 3 January 2017 by Chief Business
Court Judge James L. Gale in Durham County Superior Court, and cross-appeal by
Defendants from order entered 3 January 2017 by Chief Business Court Judge James
L. Gale in Durham County Superior Court. Heard in the Court of Appeals 6 March
2018.
Stark Law Group, PLLC, by Thomas H. Stark and Seth A. Neyhart, for
Plaintiff-Appellants.
Parker Poe Adams & Bernstein LLP, by Charles E. Raynal, IV, Jamie S.
Schwedler, and Catherine R.L. Lawson, for Defendant-Appellees Grubb & Ellis
Company and Grubb & Ellis Securities, Inc.
Harris Sarratt & Hodges, LLP, by John L. Sarratt, for Defendant-Appellees
Grubb & Ellis Realty Investors, LLC, NNN Durham Office Portfolio, LLC and
NNN Realty Advisors, Inc.
Pnery Riemann, PLLC, by J. Anthony Penry for Appellant – NNN Durham
Office Portfolio 1, LLC, et al.
North Carolina Department of Secretary of State, by Enforcement Attorney
Colin M. Miller, for amici curiae, the North Carolina Secretary of State and the
North American Securities Administration Association, Inc.
NNN DURHAM OFFICE PORTFOLIO I, LLC V. GRUBB & ELLIS COMPANY.
Opinion of the Court
DILLON, Judge.
I. Summary
Plaintiffs are entities and individuals who invested in a commercial real
property transaction. Defendants are entities who marketed the investment and
managed the property.
Years later, when the parties lost one of their main tenants and the real
property struggled to generate sufficient income to meet expenses, Plaintiffs sought
to remove Defendants as the property managers. To settle the matter, the parties
entered into an agreement (“Settlement Agreement”) whereby Defendants agreed to
step aside as property managers and Plaintiffs agreed to waive all claims they may
have had against Defendants.
The real property continued to struggle generating sufficient cash flow to cover
all expenses, including debt service, which led to a loan default; and the lender
eventually foreclosed. Thereafter, Plaintiffs commenced this action seeking damages
against Defendants. Defendants moved for summary judgment on all claims. After
a hearing on the matter, the trial court entered an order dismissing most, but not all,
of Plaintiffs’ claims. Both parties appealed.
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Opinion of the Court
We conclude that the trial court should have disposed all of Plaintiffs’ claims,
based on the Settlement Agreement. We, therefore, affirm in part and reverse in
part.
II. Background
In 2006, an affiliate of Highwoods Properties, Inc., (“Highwoods”) owned
certain income-producing office buildings in Durham (the “Property”). The Property’s
primary tenants and a sub-tenant were affiliates of Duke Hospital (“Duke”). Duke’s
lease terms were all set to expire by 2010, and Duke was not ready to commit on
extending the lease terms beyond 2010. Highwoods, therefore, decided to market the
property for sale while Duke had several years remaining on its lease terms.
Defendants entered into an agreement with Highwoods to purchase the
Property.1 Defendants’ intent in doing so was to remarket the Property to small
investors who had recently sold other property and were in the market for a qualified
“worry-free” real estate investment as a vehicle to defer tax on capital gains. Before
closing, Defendants sought investors to participate in the purchase of the Property.
Specifically, Defendants offered an investment vehicle (the “Security”) which offered
1 For purposes of clarity, I refer to Defendants collectively throughout this opinion, though
they each played different roles. For instance, one contracted with Highwoods to purchase the
Property, another acted as a broker who solicited investors, and another served as the Property’s
manager. However, because of our resolution of this matter, it is not important to go into greater
detail of what each Defendant’s role was in the matter.
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Opinion of the Court
investors tenant-in-common interests in the Property along with Defendants’ services
to manage the investment.
In early 2007, Defendants successfully found investors, which included
Plaintiffs. Defendants then closed on the purchase of the Property from Highwoods.
The purchase from Highwoods was funded in great part with money collected from
Plaintiffs and lender financing. Per the assignment provision in the purchase
contract between Defendants and Highwoods, Defendants instructed Highwoods to
convey the Property at closing directly to a number of entities, including Plaintiffs,
as tenants-in-common.
Several months later, in late 2007, Duke informed Defendants that it would
not be renewing most of its leases. And in 2010, Duke moved out of the majority of
its space in the Property, causing cash flow issues for Defendants and Plaintiffs.
As the cash flow issues progressed, Plaintiffs sought to have Defendants
replaced as the property managers. Defendants resisted. But on 25 March 2010,
Plaintiffs and Defendants entered the Settlement Agreement, whereby Defendants
agreed to step aside as the Property managers and whereby Plaintiffs agreed to
release claims that it may have against Defendants.
In 2012, the Property continued to struggle producing sufficient cash flow,
which resulted in a default of the loan. The lender foreclosed, and the Property was
sold to a third party at foreclosure at a loss to Plaintiffs.
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Opinion of the Court
Plaintiffs commenced this action against Defendants. In a separate action,
Plaintiffs sought damages from Highwoods and Highwoods’ broker. In both actions,
Plaintiffs allege that Defendants and Highwoods separately failed to make certain
disclosures around the time of the purchase in 2007 regarding Duke’s activities which
tended to lessen the likelihood that Duke would seek to renew its leases in 2010. The
trial court entered orders dismissing some of the claims against Defendants in this
action and all of the claims against Highwoods in the other action.
In 2017, both matters were brought up on appeal to our Court. The appeal of
the trial court’s dismissal of Plaintiffs’ claims against Highwoods is addressed in a
separate opinion.
This present appeal addresses the trial court’s decision to dismiss most, but
not all, of Plaintiffs’ claims against Defendants. Plaintiffs appealed, and Defendants
cross-appealed.
III. Appellate Jurisdiction
Before addressing the merits, we must first consider our appellate jurisdiction
since this appeal is interlocutory in nature. While the trial court has disposed of most
of the claims asserted by Plaintiffs, it denied Defendants’ request to dismiss claims
brought under North Carolina securities law by the five Plaintiffs domiciled in North
Carolina (the “NC Securities Claims”).
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Opinion of the Court
Generally, we do not have jurisdiction to consider an appeal from an
interlocutory order unless the appellant meets its burden of demonstrating to our
Court how the order appealed from affects a substantial right or that the order has
been properly certified for immediate appeal by the trial court pursuant to Rule 54(b)
of our Rules of Civil Procedure. See N.C. Gen. Stat. § 1-277; N.C. Gen. Stat. § 1A-1,
Rule 54(b). Otherwise, we generally do not have jurisdiction unless we choose in our
discretion to grant a petition for a writ of certiorari.
Here, no party has made any argument that a substantial right has been
affected. The trial court has properly certified for immediate review all of the claims
that were dismissed, but the trial court did not certify for immediate review the NC
Securities Claims, which were not dismissed. Therefore, based on the trial court’s
Rule 54 certification, we have appellate jurisdiction only over the claims that were
dismissed, but not over the NC Securities Claims.
We note that no party has filed a petition requesting that we grant a writ of
certiorari to review the NC Securities Claims. On our motion, however, we hereby
issue a writ of certiorari “to aid in our own jurisdiction” to consider Plaintiffs’ NC
Securities Claims as well. N.C. Gen. Stat. § 7-27(c) (General Assembly granting to
the Court of Appeals jurisdiction “to issue prerogative writs . . . in aid of its own
jurisdiction, or to supervise and control the proceedings of any of the trial courts”).
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Opinion of the Court
We do so in the interests of judicial economy as our legal reasoning which resolves
the other claims and also resolves the NC Securities Claims.
IV. Analysis
Having determined that we have jurisdiction over this appeal, we address the
merits.
The trial court dismissed most of Plaintiffs’ claims, but not based on the
Settlement Agreement in which Plaintiffs purportedly agreed to release Defendants
from all claims related to the Property. Regarding the Settlement Agreement, the
trial court expressly held that the Settlement Agreement did not bar Plaintiffs from
pursuing the remaining claims against Defendants. Based on Section 2.4 of the
Settlement Agreement, which is discussed below, we conclude that all of Plaintiffs
claims against Defendants should have been dismissed.
In March 2010, Plaintiffs and Defendants entered into the Settlement
Agreement, whereby Defendants agreed to step aside without a fight if Plaintiffs
agreed to release Defendants from any potential claims relating to the Property. The
obligations in the Settlement Agreement, however, were not instantaneous, but the
Agreement allowed Plaintiffs a due diligence period, until 2 July 2010, to decide
whether they were willing to release Defendants from all claims. Specifically, Section
2.4 of the Settlement Agreement provided (1) that Plaintiffs had until 2 July 2010 to
“assert” any claims that it wished to exclude from the operation of the release; (2)
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Opinion of the Court
that if Plaintiffs elected to retain the right to assert certain claims, then Defendants
could elect to back out of their promise to resign as Property managers; and (3) that
if Plaintiffs did not duly assert any claims by 2 July 2010, then all potential claims of
Plaintiffs against Defendants would be released, and Defendants would be obligated
to complete the steps necessary to step aside as Property managers.
On 1 July 2010, the day prior to Plaintiffs’ deadline under Section 2.4 to assert
claims, Plaintiffs commenced this action by filing a Summons with the trial court
pursuant to Rule 3 of our Rules of Civil Procedure, which allowed Plaintiffs an
additional 20 days to file their complaint.2 In their Summons, Plaintiffs described
the nature of the claims they planned to assert in their complaint.
Importantly, though, Plaintiffs did not notify Defendants of the Summons or
otherwise of their intent to assert claims by the 2 July 2010 deadline. Rather, based
on the record and the findings of the trial court, Defendants did not become aware of
Plaintiffs’ intention until they received a copy of the Summons on 12 July 2010, which
Plaintiffs had mailed five days earlier on 7 July 2010.
The issue raised in this appeal is whether Plaintiffs properly “asserted” claims
under Section 2.4 of the Settlement Agreement by simply commencing the action by
2 July 2010 or whether under Section 2.4 Plaintiffs were required also to notify
2 Rule 3 allows a party to commence an action by filing a summons and requesting permission
to file the complaint within 20 days. N.C. Gen. Stat. § 1A-1, Rule 3.
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Defendants of their intent by 2 July 2010 to exclude claims they wished to assert from
the operation of the release. The language of Section 2.4 states as follows:
It is acknowledged that the release provisions contained in
Paragraph 2.1 and 2.2 are subject to and conditioned upon
the absence of any claims by [Plaintiffs] asserted against
[Defendants] prior to July 2, 2010[.] [Plaintiffs] shall have
until [July 2, 2010] to conduct such inquiries and
investigations as they may determine to be necessary and
appropriate . . . to determine whether or not they have a
viable claim against [Defendants].
Should [Plaintiffs] discover such a claim, they shall give
written notice to [Defendants] of such claim (an “Excluded
Claim”) prior to [July 2, 2010], including the description of
the basis of such claim in reasonable detail,
and
they shall commence an action or arbitration proceeding
with regard to such Excluded Claim prior to [July 2, 2010].
Should [Plaintiffs] duly and timely assert an Excluded
Claim prior to [July 2, 2010] . . . the [release] shall be void
and of no force and effect with respect to the Excluded
Claim . . . [.]3
Plaintiffs argued to the trial court (and argue here on appeal) that Plaintiffs met their
contractual obligations “to assert an Excluded Claim” under the Settlement
Agreement simply by filing the Summons which commenced this action by 2 July
2010, without providing any notice by 2 July 2010 to Defendants. Defendants argued
to the trial court (and argue here on appeal) that Plaintiffs could only properly
3 This paragraph in the actual Settlement Agreement is a single block paragraph. It is broken
up in this opinion for ease of reading.
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Opinion of the Court
“assert” a claim by both commencing their action and notifying Defendants in writing
of their intent to exclude claims from the reach of the release.
The trial court concluded that Section 2.4 was ambiguous and, therefore, that
the provision should be read “restrictively” against Defendants, such that Section 2.4
“effectively precluded the release from becoming effective once Plaintiffs initiated
their action on July 1, 2010,” notwithstanding that Plaintiffs did not give Defendants
any notice until after 2 July 2010.
In reviewing the trial court’s interpretation, we are mindful of a court’s role in
construing contract language:
Interpreting a contract requires the court to examine the
language of the contract itself for indications of the parties’
intent at the moment of execution. If the plain language is
clear, the intention of the parties is inferred from the words
of the contract. Intent is derived not from a particular
contractual term but from the contract as a whole.
State v. Philip Morris, 363 N.C. 623, 631-32, 685 S.E.2d 85, 90 (2009) (citations
omitted).
We have reviewed Section 2.4 in context with the entire agreement, and we
disagree with the trial court’s interpretation that Section 2.4 did not require Plaintiffs
to notify Defendants of their intent to exclude claims by the 2 July 2010 deadline.
Reading the contract as a whole, based on its plain language, we conclude that the
parties intended that Plaintiffs were required both to file their action and separately
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Opinion of the Court
to notify Defendants of such claims, all by the 2 July 2010 deadline, to preserve any
claims that they did not want to release. Each requirement served different purposes.
Under the terms of the Settlement Agreement, Plaintiffs were required to file
their action by 2 July 2010 to avoid any claim from being barred by the applicable
statute of limitations. That is, under another provision of the Settlement Agreement,
Defendants agreed that all applicable statute of limitations with respect to any
potential claims would be tolled from the date of the agreement in March 2010 until
2 July 2010, while Plaintiffs conducted their due diligence. The requirement that a
lawsuit be filed clarified that statutes of limitations would be tolled indefinitely for
any claims which Plaintiffs wished to assert, but that they would only be tolled until
2 July 2010.
The “notice” requirement – that Plaintiffs provide actual notice to Defendants
of any claims by 2 July 2010 – served a different purpose. Specifically, the Settlement
Agreement contemplated that during Plaintiffs’ due diligence period, Defendants
would allow Plaintiffs’ chosen Property manager to manage the Property on a
subcontract basis and that Defendants would also work with Plaintiffs in obtaining
the required lender approval for the change in management. The last portion of
Section 2.4 of the Settlement Agreement provided that Defendants would have the
right to cease these efforts and terminate the subcontracts with Plaintiffs’ chosen
manager if Plaintiffs elected to assert claims. If Plaintiffs were not required to give
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Opinion of the Court
notice by 2 July 2010 that they intended not to release Defendants from all claims,
then the provision in Section 2.4 relieving Defendants of their obligation under the
Settlement Agreement to step aside as Property managers in such case could be
rendered meaningless; Defendants could not enforce this right unless they knew
Plaintiffs had decided not to grant a full release. As described below, under Plaintiffs’
interpretation, Plaintiffs could have withheld notice for many months until after
Defendants had completed the process of stepping aside as Property managers.
But first, we note that a plain reading of Section 2.4, when read in context of
the whole Settlement Agreement, supports our interpretation. This Section describes
2 July 2010 as the “Effective Date of Release,” at which time Plaintiffs’ release of all
potential claims against Defendants would become effective under the Settlement
Agreement.
The first sentence of Section 2.4 states that the release would be effective
unless Plaintiffs “asserted” claims against Defendants by “2 July 2010 (the “Effective
Date of Release”).”
The second sentence states that Plaintiffs would be allowed to conduct due
diligence until the Effective Date of Release to determine if they wanted to assert
claims.
The third sentence is the key sentence, which states how Plaintiffs were
required to “assert” claims that they wished to exclude from the operation of the full
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Opinion of the Court
release. This third sentence is a single compound sentence and required that
Plaintiffs “shall give written notice to [Defendants] prior to the Effective Date of
Release, and they shall commence an action or arbitration [] prior to the Effective
Date of Release.”
The fourth sentence then states that “[s]hould [Plaintiffs] duly and timely
assert an Excluded Claim prior to the Effective Date of Release[,]” then the provisions
of the full release “shall be void and of no force and effect with respect to the Excluded
Claim” and further Defendants could cancel the subcontracts with Plaintiffs’ chosen
Property manager.
In sum, we conclude that a plain reading of this Section required that to “duly
and timely assert” a claim, Plaintiffs had to notify Defendants and file their action
by 2 July 2010.
Based on Plaintiffs’ (and the trial court’s) interpretation of Section 2.4 – where
Plaintiffs could duly “assert” a claim by simply commencing an action without
otherwise notifying Defendants by 2 July 2010 – Plaintiffs could have waited until
Defendants had stepped aside as Property managers to notify Defendants of this
lawsuit. For instance, under Plaintiffs’ and the trial court’s interpretation, Plaintiff
could have waited until 22 July 2010 to file their Complaint (pursuant to the 20-day
extension provided in Rule 3). And then Plaintiffs could have waited at least until
September 2010 to serve their Summons/Complaint on Defendants. In fact, by taking
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Opinion of the Court
advantage of Rule 4(d) of our Rules of Civil Procedure, Plaintiffs could have kept
Defendants in the dark about their intentions well into 2011 by extending the
Summons or suing out successive alias and pluries summonses. In other words,
based on Plaintiffs’ interpretation, it would have been possible that Defendants have
completed their agreement to fully step aside as Property managers and that
Plaintiffs’ chosen manager would have fully been in place as manager without
Defendants ever having any knowledge that Plaintiffs still intended to assert claims
against them.
It may be argued that time was not of the essence with regard to the 2 July
2010 deadline. In other words, if time was not of the essence with respect to the 2
July 2010 date, Plaintiffs had a reasonable time after 2 July 2010 to provide the
written notice to Defendants. However, Plaintiffs failed to make any such argument
either to the trial court or on appeal to our Court. Therefore, any argument that time
was not of the essence is waived. N.C. R. App. P. 28.
But assuming that the argument was preserved, we believe that time was of
the essence and 2 July 2010 was a hard deadline. Section 2.4 of the Settlement
Agreement, which essentially provided Plaintiffs with a unilateral option to exclude
claims from the reach of the release, is similar to an option contract to purchase real
estate. In an option contract, the potential buyer pays consideration for the “option,”
but not the obligation, to purchase certain real estate at a specified price if exercised
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Opinion of the Court
by a specified date. And our Supreme Court has stated that time is automatically of
the essence as to the option date in such contracts. See Ferguson v. Phillips, 268 N.C.
353, 355, 150 S.E.2d 518, 520 (1966) (“Options being unilateral in their inception are
construed strictly in favor of the maker, because the other party is not bound to
performance[.]”). Similarly, under the Settlement Agreement, Plaintiffs were given
the unilateral option to back out of its obligation to release Defendants from all
claims. They could simply notify Defendants that they did not want to release claims.
Defendants, on the other hand, did not have the option to back out unilaterally.
Rather, they could only do so if Plaintiffs first decided to back out.
Additionally, we believe that the Settlement Agreement, when read as a whole,
otherwise suggests that the parties intended for 2 July 2010 to be of the essence.
Specifically, the Settlement Agreement provided that the statutes of limitations
regarding any potential claims would not be tolled beyond 2 July 2010. And, as our
Supreme Court has recognized, “[s]tatutes of limitations are inflexible and
unyielding. They operate inexorably without reference to the merits of [a] plaintiff’s
cause of action.” Pearce v. N.C. Highway, 310 N.C. 445, 451, 312 S.E.2d 421, 425
(1984).
We note Plaintiffs’ brief contains an argument that Defendants waived the
“notice” requirement contained in Section 2.4 of the Settlement Agreement based on
Defendants’ “previous position that their own obligations under the Settlement
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Opinion of the Court
Agreement had been voided under this same language in Section 2.4.” In support of
their argument, Plaintiffs cite to statements made by an employee during the course
of this litigation and quote McDonald v. Medford, 111 N.C. App. 643, 648, 433 S.E.2d
231, ___ (1993) that “[w]here parties, through their actions, have placed a practical
interpretation on their contract after executing it, the courts will ordinarily give it
that construction[.]” However, Plaintiffs do not state what “actions” Defendants took
to indicate that they were voiding their obligations under Section 2.4. They do not
point to anything in the record which suggests that Defendants attempted to step
back in as Property managers once they became aware of this lawsuit. And the trial
court did not make any findings to that effect. On the contrary, in their Answer,
Defendants expressly assert that all Plaintiffs’ claims had been settled and released
by virtue of the Settlement Agreement. Accordingly, we conclude that Plaintiffs have
failed to demonstrate from the record that a genuine issue of material fact exists that
Defendants waived the notice provision contained in Section 2.4 of the Settlement
Agreement.
V. Conclusion
We conclude that all of Plaintiffs claims against Defendants concerning the
Property are barred by operation of the Settlement Agreement. The trial court,
though, only granted Defendants’ motion for summary judgment in part, allowing the
NC Securities Claims to proceed. Therefore, we affirm in part and reverse in part the
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trial court’s order. We remand that matter to the trial court with instructions to enter
judgment in favor of Defendants on all claims asserted by Plaintiffs.
AFFIRMED IN PART, REVERSED IN PART AND REMANDED.
Judges BRYANT and TYSON concur.
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