Brissett v. First Mount Vernon Indus. Loan Ass'n , 233 N.C. App. 241 ( 2014 )

NO. COA13-685
NORTH CAROLINA COURT OF APPEALS
Filed: 1 April 2014
COURTNAY T. BRISSETT, AND HUSBAND,
LADWIN BRISSETT, AND BRISSETT
RENTAL PROPERTIES, LLC,
Plaintiffs,
v. Craven County
No. 10 CVS 860
FIRST MOUNT VERNON INDUSTRIAL LOAN
ASSOCIATION, DALE E. DUNCAN AND
KATHLEEN NEARY AS TRUSTEES FOR
FIRST MOUNT VERNON INDUSTRIAL LOAN
ASSOCIATION, PRODEV XVI LLC, AND
JOHN F. GONZALES, JASON MATTHEW A.
GOLD, THE SHOAF LAW FIRM, P.A.,
JAMES BOSTIC, KIM RICHARDSON, AND
LABRADOR FINANCIAL SERVICES, INC.,
Defendants.
Appeal by plaintiffs from judgment filed 13 September 2012
by Judge Paul L. Jones in Craven County Superior Court. Heard
in the Court of Appeals 20 November 2013.
Watsi M. Sutton, Attorney At Law, P.A., by Jacinta D. Jones
and Watsi M. Sutton, for plaintiffs-appellants.
Ward and Smith, P.A., by Ryal W. Tayloe and Allen N. Trask,
III, for defendants-appellees.
McCULLOUGH, Judge.
Courtnay T. Brissett (“C. Brissett”), Ladwin Brissett (“L.
Brissett”) (together “plaintiffs”), and Brissett Rental
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Properties, LLC (the “rental company”), appeal from judgment
filed 13 September 2012. For the following reasons, we find no
error in part and reverse in part.
I. Background
In late 2004 and early 2005, plaintiffs purchased a number
of distressed residential properties in New Bern, North Carolina
as rental properties. Thereafter, at the advice of a CPA,
plaintiffs had an attorney set up the rental company to hold the
properties.
In late 2005, plaintiffs decided to begin rehabilitating
the properties and began looking for financing. After several
unsuccessful attempts to obtain financing from banks,
plaintiffs, with the assistance of defendants Kim Richardson and
James Bostic of defendant Labrador Financial Services, entered a
loan agreement with defendant First Mount Vernon Industrial Loan
Association (“FMV”) to acquire funds to rehabilitate six of the
properties. Defendant Jason A. Gold, of defendant The Shoaf Law
Firm, conducted the closing of the transactions on 9 January
2006. Plaintiffs had no relationship and did not communicate
with FMV until after the closing.
As required by the closing instructions, plaintiffs signed
documents at the closing deeding the six properties to ProDev
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XVI, LLC (“ProDev”), an entity established for the sole purpose
of facilitating the loan. C. Brissett also signed the ProDev
Operating Agreement and ProDev Organizational Agreement, which
established C. Brissett as the 40% member and manager of ProDev
and John Gonzales, a board member of FMV, as the controlling 60%
member of ProDev. These ProDev documents also provided that C.
Brissett would be conveyed Gonzales’ 60% interest in ProDev upon
payoff of the loan. The purpose of FMV requiring the conveyance
of the properties to ProDev as a condition precedent to making
the loan was to ease the collection process upon default and to
protect FMV’s interests from bankruptcy.
Plaintiffs executed all documents at the closing without
reading them and without asking any questions. As a result,
plaintiffs were not aware of the nature of the transaction.
Plaintiffs did not come to understand the terms of the
documents executed at the closing until they encountered
problems while attempting to refinance one of the completed
properties later in 2006, at which point plaintiffs learned
ProDev owned the property. By that time, plaintiffs had
received approximately $131,500 in loan disbursements from FMV
to rehabilitate the properties. The loan went into default in
early 2007 and no further disbursements were made. Furthermore,
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upon default Gonzales exercised his right as the controlling
member of ProDev to remove C. Brissett from her role as the
managing member of ProDev.
On 7 June 2010, plaintiffs commenced this civil action with
the filing of summonses, complaint, and notice of lis pendens in
Craven County Superior Court. In the complaint, plaintiffs
asserted numerous claims against the named defendants, including
claims against FMV to quiet title, breach of contract and
rescission, misrepresentation, lis pendens, unfair and deceptive
trade practices, fraud in the inducement, constructive fraud,
and civil conspiracy and conspiracy in facilitation of fraud.1
FMV and its trustees, defendants Dale E. Duncan and
Kathleen Neary, filed an answer to plaintiffs’ complaint on 10
August 2010. The answer included various affirmative defenses,
a counterclaim for reformation of certain deeds to correct
typographical and other mistakes, and crossclaims against
ProDev, Gold, The Shoaf Law Firm, Bostic, Richardson, and
1
The only claims to reach trial were those claims against FMV and
its trustees. Upon motion and affidavit for entry of default,
on 25 January 2011, the trial court entered default against
ProDev, Bostic, Richardson, Labrador Financial Services, and The
Shoaf Law Firm. Thereafter, following Gonzales’ death and the
substitution of Gonzales’ Estate as allowed by the trial court’s
12 October 2011 order, plaintiffs voluntarily dismissed their
claims against Gonzales’ Estate and Gold by notices filed 27
August 2012 and 4 September 2012, respectively.
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Labrador Financial Services. Plaintiffs replied on 6 October
2010.
FMV and its trustees later filed an amended answer,
counterclaims, and cross-claims on 24 October 2011. In addition
to the original counterclaim for reformation of deeds, FMV and
its trustees asserted counterclaims for guaranty, unjust
enrichment, and an equitable lien or constructive trust.
Plaintiffs replied on 25 April 2012.
On 4 September 2012, the case was called for trial in
Craven County Superior Court, the Honorable Paul Jones, Judge
presiding. Prior to impaneling a jury, the court heard
arguments on motions in limine. In regard to FMV’s and its
trustees’ motion to exclude all evidence of Virginia State Bar
proceedings against Duncan and Gonzales, the trial court ordered
the transcripts of the proceedings to be excluded.
The following morning, 5 September 2012, a final pretrial
order with stipulations as to undisputed facts was filed and the
jury trial began.
On 6 September 2012, prior to testimony resuming for a
second day, FMV and its trustees informed the trial court that
they would move for a directed verdict at the close of
plaintiffs’ evidence and submitted a trial brief for the court’s
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consideration. Thereafter, at the close of plaintiffs’ evidence
on 7 September 2012, FMV and its trustees moved for a directed
verdict pursuant to N.C. Gen. Stat. § 1A-1, Rule 50. Following
a weekend recess, on 10 September 2012, plaintiffs responded
with a trial brief opposing the motion for a directed verdict
and the trial court heard arguments on the matter. The trial
court then granted the motion for a directed verdict as to the
following claims for relief against various parties: (3)
Misrepresentation, (5) Unfair and Deceptive Trade Practices, (9)
Fraud in the Inducement, (10) Constructive Fraud, (11) Unfair
and Deceptive Trade Practices, (12) Constructive Trust, (16)
Constructive Fraud, and (17) Civil Conspiracy and Conspiracy in
Facilitation of Fraud.
FMV put on only documentary evidence and subsequent to a
charge conference, the trial court instructed the jury on the
following six issues:
(1) Did the deeds from [C. Brissett] and [L.
Brissett] and [the rental company] to
[ProDev] meet the requirements of the law
for conveying valid title?
(2) Was the consideration given to [C.
Brissett] and [L. Brissett] and [the
rental company] for executing the deeds
from [C. Brissett] and [L. Brissett] and
[the rental company] to [ProDev] grossly
inadequate under the circumstances?
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(3) Did the deed of trust from [C. Brissett]
and [L. Brissett] and [the rental
company] to [ProDev] meet the
requirements of the law for creating a
valid debt?
(4) Is [FMV] entitled to have a lien on the
five properties?
(5) What is the amount of [FMV’s] lien which
does not include interest on said amount
if any?
(6) Did [FMV] act with “unclean hands” in its
conduct, or in the conduct of its agents,
relating to the loan transaction of
January 9, 2006?
After deliberating, the jury reached a unanimous decision
on all issues except for issues two and six, to which the jury
was deadlocked eleven to one. As to issues one and three, the
jury determined the deeds did not meet the requirements of the
law for conveying valid title or creating a valid debt. As to
issues four and five, the jury determined FMV was entitled to a
lien on the five properties in the amount of $131,500.
The case was held open until 12 September 2012 when the
trial court considered post-trial arguments. At that time, FMV
moved for a judgment notwithstanding the verdict (“JNOV”)
pursuant to N.C. Gen. Stat. § 1A-1, Rule 50(b)(1); essentially
asking the court to decide the undecided issues as a matter of
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law. Plaintiffs responded with their own motions for a JNOV and
a new trial.
At the conclusion of the arguments, the trial court denied
plaintiffs’ motions and granted FMV’s motion, deciding issues
two and six in favor of FMV.
On 13 September 2012, the trial court filed a judgment
reforming the deed of trust so that FMV has a lien on the
properties in the amount of $131,500 with a right to foreclose
on the lien by power of sale. The judgment further dismissed
all claims by plaintiff against FMV and its trustees and ordered
the lis pendens filed in the action to be of no further force
and effect and to be canceled by the Craven County Clerk of
Superior Court.
Plaintiffs filed notice of appeal from the 13 September
2012 judgment on 11 October 2012.
II. Discussion
Plaintiffs raise the following five issues on appeal:
whether the trial court erred by (1) granting FMV’s motion to
exclude the transcript of Gonzales’ testimony during Virginia
State Bar proceedings; (2) directing a verdict in favor of FMV
on plaintiffs’ fraud and misrepresentation claims; (3) directing
a verdict in favor of FMV on plaintiffs’ constructive fraud
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claim; (4) denying plaintiffs the opportunity to present
evidence of FMV’s net worth, revenues, and similar past conduct;
and (5) entering a judgment notwithstanding the verdict on the
issue of unclean hands.
1. Exclusion of Evidence
Plaintiffs first argue the trial court erred in excluding
the transcript of Gonzales’ testimony in Virginia State Bar
proceedings from the evidence admitted at trial.
“Admission of evidence is ‘addressed to the sound
discretion of the trial court and may be disturbed on appeal
only where an abuse of such discretion is clearly shown.’”
Gibbs v. Mayo, 162 N.C. App. 549, 561, 591 S.E.2d 905, 913
(2004) (quoting Sloan v. Miller Building Corp., 128 N.C. App.
37, 45, 493 S.E.2d 460, 465 (1997)). An abuse of discretion
warranting reversal results “‘only upon a showing that [the
trial court’s decision] was so arbitrary that it could not have
been the result of a reasoned decision.’” Id. (quoting White v.
White, 312 N.C. 770, 777, 324 S.E.2d 829, 833 (1985)). “The
burden is on the appellant to not only show error, but also to
show that he was prejudiced and a different result would have
likely ensued had the error not occurred.” Suarez v. Wotring,
155 N.C. App. 20, 30, 573 S.E.2d 746, 752 (2002). Relevancy is
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a question of law reviewed de novo. State v. Kirby, 206 N.C.
App. 446, 456, 697 S.E.2d 496, 503 (2010). Evidence is relevant
when it has a “tendency to make the existence of any fact that
is of consequence to the determination of the action more
probable or less probable than it would be without the
evidence.” N.C. Gen. Stat. § 8C-1, Rule 401 (2013).
Apart from the present case, plaintiffs filed complaints
against Duncan and Gonzales with the Virginia State Bar. In
proceedings stemming from those complaints, Duncan and Gonzales
testified before the Virginia State Bar about their involvement
with FMV, ProDev, and the financing scheme giving rise to this
case. At the conclusion of the proceedings, Duncan and Gonzales
each had their license to practice law in Virginia revoked for a
period of time.
Subsequent to the Virginia State Bar proceedings and
Gonzales’ death, FMV filed a motion in limine in this case “for
an order precluding [p]laintiffs . . . from offering any
testimony or other evidence, as well as referencing in any
manner the proceedings in those Virginia State Bar proceedings
entitled Virginia State Bar v. John Francis Gonzales, Esquire,
Case No. CL 09003666 and Virginia State Bar v. Dale E. Duncan,
Case No. 09003613[.]” Specifically concerning the transcripts
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of the proceedings, FMV contended the transcripts were
irrelevant, immaterial, and otherwise inadmissible as hearsay.
In response, plaintiffs contended the transcripts were relevant,
material, and admissible as an exception to the hearsay rule
under N.C. Gen. Stat. § 8C-1, Rules 804(b)(1), (3), and (5).
FMV’s motion came on for hearing on 4 September 2012.
After initially reserving judgment, the trial court concluded
that plaintiffs could cross-examine defendants regarding their
unethical conduct but determined the transcripts were immaterial
and inadmissible hearsay.
At the outset, we address the trial court’s mistaken
statement that the transcripts were immaterial. Although the
memorandum orders containing the results and conclusions of the
Virginia State Bar proceedings may be irrelevant and immaterial
in the present case because the standards in ethical proceedings
differ from those in legal proceedings, Gonzales’ testimony in
the Virginia State Bar proceedings, as recorded in the
transcript, is both relevant and material in the present case as
it details the conduct that forms the basis of plaintiffs’
claims.
Nevertheless, relevant and material evidence may be
excluded if it is hearsay. The North Carolina Rules of Evidence
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provide that hearsay, “a statement, other than one made by the
declarant while testifying at the trial or hearing, offered in
evidence to prove the truth of the matter asserted[,]” N.C.
Gen. Stat. § 8C-1, Rule 801(c) (2013), “is not admissible except
as provided by statute or by [the] rules.” N.C. Gen. Stat. §
8C-1, Rule 802 (2013). There are exceptions to rule against
hearsay, however, when a declarant is unavailable. See N.C.
Gen. Stat. § 8C-1, Rule 804 (2013).
Now on appeal, plaintiffs argue the trial court erred in
excluding the transcript of Gonzales’ testimony without issuing
specific findings of fact and conclusions of law regarding the
admissibility of the transcript under N.C. Gen. Stat. § 8C-1,
Rules 804(b)(3) and (5). In support of their argument,
plaintiffs cite State v. Smith, 315 N.C. 76, 337 S.E.2d 833
(1985), and State v. Triplett, 316 N.C. 1, 340 S.E.2d 736
(1986).
In Smith, our Supreme Court addressed the admissibility of
hearsay under N.C. Gen. Stat. § 8C-1, Rule 803(24), the residual
exception for hearsay when the availability of a declarant is
immaterial. Smith, 315 N.C. at 90-99, 337 S.E.2d at 843-48. In
its discussion, the Court stated,
[u]pon being notified that the proponent is
seeking to admit the statement pursuant to
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that exception, the trial judge must have
the record reflect that he is considering
the admissibility of the statement pursuant
to Rule 803(24). Only then should the trial
judge proceed to analyze the admissibility
by undertaking the six-part inquiry required
of him by the rule. The trial judge must
engage in this inquiry prior to admitting or
denying proffered hearsay evidence pursuant
to Rule 803(24).
Id. at 92, 337 S.E.2d at 844. Upon outlining the six-part
inquiry, the Court in Smith then held that,
before allowing the admission of hearsay
evidence to be presented under Rule 803(24)
(other exceptions), the trial judge must
enter appropriate statements, rationale, or
findings of fact and conclusions of law, as
set forth herein, in the record to support
his discretionary decision that such
evidence is admissible under that rule. If
the record does not comply with these
requirements and it is clear that the
evidence was admitted pursuant to Rule
803(24), its admission must be held to be
error.
Id. at 97, 337 S.E.2d at 847. Thereafter, our Supreme Court
adopted “parallel guidelines” for the admission of hearsay under
N.C. Gen. Stat. § 8C-1, Rule 804(b)(5) in Triplett, noting “Rule
804(b)(5) and Rule 803(24) are substantively nearly
identical[.]” Triplett, 316 N.C. at 7, 340 S.E.2d at 740.
Under either of the two residual exceptions
to the hearsay rule, the trial court must
determine the following: (1) whether proper
notice has been given, (2) whether the
hearsay is not specifically covered
elsewhere, (3) whether the statement is
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trustworthy, (4) whether the statement is
material, (5) whether the statement is more
probative on the issue than any other
evidence which the proponent can procure
through reasonable efforts, and (6) whether
the interests of justice will be best served
by admission.
State v. Valentine, 357 N.C. 512, 518, 591 S.E.2d 846, 852
(2003).
Under the law espoused in Smith and Triplett, the trial
court is only required to issue findings of fact and conclusions
of law to support a decision to admit evidence pursuant to N.C.
Gen. Stat. § 8C-1, Rule 804(b)(5). There is no requirement that
the trial court issue findings of fact or conclusions of law
regarding the admissibility of evidence pursuant to any other
N.C. Gen. Stat. § 8C-1, Rule 804 exception. Furthermore, the
trial court did not admit the hearsay evidence at issue in the
present case. As this Court has stated, “[t]he six-part inquiry
is very useful when an appellate court reviews the admission of
hearsay under Rule 804(b)(5) or 803(24). However, its utility
is diminished when an appellate court reviews the exclusion of
hearsay.” Phillips & Jordan Inv. Corp. v. Ashblue Co., 86 N.C.
App. 186, 191, 357 S.E.2d 1, 3-4 (1987).
Nevertheless, Smith and Triplett require the trial court,
upon being notified that a party is seeking to admit evidence
pursuant to a residual hearsay exception, to ensure the record
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reflects it is considering the exception and engage in the six-
part inquiry “prior to admitting or denying proffered hearsay
evidence[.]” Smith, 315 N.C. at 92, 337 S.E.2d at 844.
Although plaintiffs argued for admission of the transcript
of Gonzales’ testimony under the residual exception in both its
memorandum and argument, the trial court gave no indication that
it considered admission under N.C. Gen. Stat. § 8C-1, Rule
804(b)(5) or engaged in the required six-part inquiry when the
trial court denied the admission of the transcript. We hold
this failure to address the admission of the evidence under N.C.
Gen. Stat. § 8C-1, Rule 804(b)(5) was arbitrary and an abuse of
discretion. Moreover, given that Gonzales is now deceased,
plaintiffs provided notice of their intent to admit the
transcript, the trial court denied admission of the transcript
after plaintiffs argued for its admission under the only other
applicable hearsay exceptions, the Virginia Bar proceedings have
sufficient circumstantial guarantees of trustworthiness,
Gonzales’ testimony was material, and Gonzales was the best
source of evidence regarding his role with FMV and ProDev, we
believe the transcript of Gonzales’ testimony would likely be
admitted under N.C. Gen. Stat. § 8C-1, Rule 804(b)(5) if
properly considered.
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In addition to determining the trial court erred, we hold
plaintiffs were prejudiced by the error. Although directed
verdicts were entered on plaintiffs’ fraud, misrepresentation,
and constructive fraud claims, and some evidence of Gonzales’
role with FMV and ProDev was introduced through stipulations and
testimony from FMV president, Arthur Bennett, we find the
exclusion of the transcript of Gonzales’ testimony was not
harmless where Gonzales’ testimony is significant to the issue
of unclean hands, on which the jury was deadlocked at trial.
2. and 3. Directed Verdicts
As mentioned in the background, at the close of plaintiffs’
evidence, FMV and its trustees moved for a directed verdict on
all issues pursuant to N.C. Gen. Stat. § 1A-1, Rule 50. Upon
consideration of the trial briefs and arguments by both sides,
the trial court granted FMV’s motion for a directed verdict on
plaintiffs’ claims of fraud, misrepresentation, and constructive
fraud, among others.
Now, in plaintiffs’ second and third issues on appeal,
plaintiffs argue the trial court erred in directing verdicts in
favor of FMV on the fraud, misrepresentation, and constructive
fraud claims. “The standard of review of directed verdict is
whether the evidence, taken in the light most favorable to the
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non-moving party, is sufficient as a matter of law to be
submitted to the jury.” Davis v. Dennis Lilly Co., 330 N.C.
314, 322, 411 S.E.2d 133, 138 (1991) (citing Kelly v. Int’l
Harvester Co., 278 N.C. 153, 179 S.E.2d 396 (1971)). Thus, our
review is de novo. See Maxwell v. Michael P. Doyle, Inc., 164
N.C. App. 319, 323, 595 S.E.2d 759, 761 (2004) (“Because the
trial court's ruling on a motion for a directed verdict
addressing the sufficiency of the evidence presents a question
of law, it is reviewed de novo.”).
Fraud and Misrepresentation
Regarding plaintiffs’ fraud and misrepresentation claims,
plaintiffs contend the trial court erred in directing a verdict
in favor of FMV because there was sufficient evidence for the
jury to infer that the statute of limitations had not run. We
disagree.
N.C. Gen. Stat. § 1-52(9) provides that actions for “relief
on the ground of fraud or mistake” must be brought within three
years. N.C. Gen. Stat. § 1-52(9)(2013). Yet, “the cause of
action shall not be deemed to have accrued until the discovery
by the aggrieved party of the facts constituting the fraud or
mistake.” Id. Our Supreme Court has “previously construed this
provision to ‘set accrual at the time of discovery regardless of
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the length of time between the fraudulent act or mistake and
plaintiff's discovery of it.’” Forbis v. Neal, 361 N.C. 519,
524, 649 S.E.2d 382, 386 (2007) (quoting Feibus & Co. v. Godley
Constr. Co., 301 N.C. 294, 304, 271 S.E.2d 385, 392 (1980)).
“For purposes of N.C.G.S. § 1-52(9), ‘discovery’ means either
actual discovery or when the fraud should have been discovered
in the exercise of ‘reasonable diligence under the
circumstances.’” Id. (quoting Bennett v. Anson Bank & Trust
Co., 265 N.C. 148, 154, 143 S.E.2d 312, 317 (1965)).
As noted above, plaintiffs argue there was sufficient
evidence from which the jury could infer the statute of
limitations had not expired prior to 7 June 2010, the date
plaintiffs commenced this action. In support of their argument,
plaintiffs quote Huss v. Huss, 31 N.C. App. 463, 468, 230 S.E.2d
159, 163 (1976), for the proposition that “[w]hether the
plaintiff in the exercise of due diligence should have
discovered the facts [regarding the existence of potential
fraud] more than three years prior to the institution of the
action is ordinarily for the jury when the evidence is not
conclusive or conflicting.” Id. at 468, 230 S.E.2d at 163.
Plaintiffs’ argument lacks merit. Considering the evidence
in this case, we find no issues for the jury to determine.
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Both at trial and in their brief on appeal, plaintiffs
acknowledge that they began to become suspicious about the loan
when they were unable to refinance one of the properties in
August or September of 2006. As L. Brissett testified, it was
around this time that they learned of Gonzales’ role in the
transaction. L. Brissett further testified that he could not
locate his copy of the closing documents and demanded Gold send
him copies. Upon receipt of the copies of the closing documents
in October 2006, plaintiffs noticed some of C. Brissett’s
signatures did not look like her own. C. Brissett subsequently
documented plaintiffs’ realization that they were being
defrauded in a 29 December 2006 letter.
We find this evidence conclusive that plaintiffs were aware
of the fraud in 2006. Therefore, the three-year statute of
limitations began to run in 2006 and expired prior to the
commencement of this action on 7 June 2010.
Despite evidence the fraud was discovered in 2006,
plaintiffs argue that “[a]lthough [they] may have suspected that
[FMV] was involved with the transfer of their properties to
[ProDev], and even potentially involved with the forgery of [C.
Brissett’s] signature on several documents, the plaintiffs did
not reasonably discover [FMV’s] actual ties to the fraudulent
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scheme until 2007 or 2008.” We are not convinced; discovery
includes “when the fraud should have been discovered in the
exercise of reasonable diligence under the circumstances.”
Forbis, 361 N.C. at 524, 649 S.E.2d at 386 (quotation marks
omitted).2
Constructive Fraud
Regarding plaintiffs’ constructive fraud claim, plaintiffs
argue the trial court erred in directing a verdict in favor of
FMV because there was sufficient evidence to establish a
presumption of a breach of fiduciary duty where FMV required
plaintiffs to convey title to the properties to ProDev, a
company controlled by Gonzales and formed for the sole purpose
of holding title to the properties. We disagree.
“In order to maintain a claim for constructive fraud,
plaintiffs must show that they and defendants were in a
‘relation of trust and confidence . . . [which] led up to and
surrounded the consummation of the transaction in which
defendant is alleged to have taken advantage of his position of
2
Although plaintiffs do not mention it on appeal, we note that
FMV also argued for a directed verdict on the fraud and
misrepresentation claims on the ground that essential elements
of those claims were missing. The trial court, however, did not
explain the basis for its ruling. Because we find the directed
verdict was proper because the statute of limitations had
expired, we do not address the elements of the fraud and
misrepresentation claims.
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trust to the hurt of plaintiff.’” Barger v. McCoy Hillard &
Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997) (quoting
Rhodes v. Jones, 232 N.C. 547, 549, 61 S.E.2d 725, 726 (1950)).
“Put simply, a plaintiff must show (1) the existence of a
fiduciary duty, and (2) a breach of that duty.” Keener Lumber
Co., Inc. v. Perry, 149 N.C. App. 19, 28, 560 S.E.2d 817, 823
(2002).
As this Court has recently explained,
[a] fiduciary relationship “may exist under
a variety of circumstances; it exists in all
cases where there has been a special
confidence reposed in one who in equity and
good conscience is bound to act in good
faith and with due regard to the interests
of the one reposing confidence.” Abbitt v.
Gregory, 201 N.C. 577, 598, 160 S.E. 896,
906 (1931). Beyond the usual occurrence,
such as that found between a lawyer and
client, the relationship “extends to any
possible case in which a fiduciary relation
exists in fact, and in which there is
confidence reposed on one side, and
resulting domination and influence on the
other.” Id. (citation omitted) (internal
quotation marks omitted).
Dallaire v. Bank of America, N.A., _ N.C. App. _, _, 738 S.E.2d
731, 735 (2012). This Court, however, has acknowledged that an
ordinary debtor-creditor relationship does not generally give
rise to a fiduciary relationship. Branch Banking and Trust Co.
v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992).
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Although plaintiffs admit that an ordinary creditor-debtor
relationship does not create fiduciary duties, plaintiffs
contend a fiduciary relationship exists between a mortgagee and
mortgagor when the mortgagee uses a “straw man” to divest the
mortgagor of his equity of redemption. In support of their
argument, plaintiffs cite Hinton v. West, 207 N.C. 708, 178 S.E.
356 (1935).
The defendant in Hinton, in exchange for various items of
value, made out a note and took a mortgage on 48 acres of land
owned by the plaintiff. Id. at 709, 178 S.E. at 356. Upon
default and a looming threat of foreclosure, the plaintiff, at
the insistence of the defendant, relinquished his equity of
redemption by conveying 42 acres of the land by deed to the
defendant, as trustee for defendant’s brother, to satisfy the
debt and avoid foreclosure. Id. at 710, 178 S.E. at 357. Yet,
following the transfer, defendant took control and made
improvements on the acreage. Id. In reviewing the transaction,
our Supreme Court noted that the [defendant] was the only party
with whom the [plaintiff] dealt and was acting in a “dual
capacity as trustee and agent for [his brother], and was the
primary party to the purchase.” Id. at 714, 178 S.E. at 359.
The Court then reversed the trial court’s judgment of a nonsuit
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holding, that where the defendant, as trustee, acted for himself
to acquire the plaintiff’s equity of redemption for inadequate
consideration, “there was sufficient evidence to be submitted to
a jury, and a presumption arose from the evidence, if believed
by them, which would require the defendant[] to show that the
transaction was fair and free from oppression.” Id.
Plaintiffs argue the same result is warranted in the
present case because FMV, through Gonzales, stood on both sides
of the transaction and failed to disclose Gonzales’ affiliation
with FMV. We disagree and find the present case
distinguishable.
Although the result of plaintiffs’ default, where Gonzales
takes control of ProDev and the subject properties to the
benefit of FMV, is similar to a foreclosure under a deed of
trust, the relationship between plaintiffs and FMV is not a
mortgagor-mortgagee relationship. As stipulated by the parties,
“[n]one of the [p]roperties [were] the personal residence of the
[plaintiffs] on the date of closing, and the loan was in all
respects a commercial loan for the [plaintiffs] to use [to]
rehabilitate the [p]roperties.” Moreover, there was no prior
relationship between FMV and plaintiffs to establish a fiduciary
relationship. In fact, it was stipulated that “[FMV] had no
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contact or communication with the [plaintiffs] until after the
loan was closed.” Based on these facts, we distinguish this
case from Hinton and the cases where fiduciary duties have been
imposed based on the special relationships between debtors and
creditors and hold there was no fiduciary duty owed to
plaintiffs by FMV. Thus, the trial court did not err in
entering a directed verdict on plaintiffs’ constructive fraud
claim.
4. Evidence for Punitive Damages
In the fourth issue raised by plaintiffs on appeal,
plaintiffs argue the trial court erred in denying them the
opportunity to present evidence to the jury of FMV’s net worth,
revenues, and similar past conduct. Plaintiffs contend this
evidence was admissible to prove punitive damages pursuant to
N.C. Gen. Stat. §§ 1D-15 and 1D-35.
N.C. Gen. Stat. § 1D-15 provides “[p]unitive damages may be
awarded only if the claimant proves that the defendant is liable
for compensatory damages and that one of the following
aggravating factors was present and was related to the injury
for which compensatory damages were awarded: (1) Fraud. (2)
Malice. (3) Willful or wanton conduct.” N.C. Gen. Stat. § 1D-
15(a) (2013). N.C. Gen. Stat. § 1D-35 then lists the types of
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evidence that the trier of fact may consider in determining the
amount of punitive damages, if any, to be awarded. N.C. Gen.
Stat. § 1D-35 (2013). The list of evidence includes evidence
related to “[t]he existence and frequency of any similar past
conduct by the defendant[,]” N.C. Gen. Stat. § 1D-35(2)(g), and
“[t]he defendant’s ability to pay punitive damages, as evidenced
by its revenues or net worth.” N.C. Gen. Stat. § 1D-35(2)(i).
At the outset of our analysis on the issue, we note that
plaintiffs mischaracterize the portions of the evidence they
claim were excluded in error. Regarding FMV’s ability to pay
punitive damages, plaintiffs questioned Bennett regarding the
total value of the loans by FMV in North Carolina in 2006. FMV
objected on relevance grounds and the trial court sustained the
objection. The trial court, however, allowed plaintiff to
question Bennett as to the largest and smallest amount of loans,
in terms of value, made by FMV in any year since Bennett became
president. Regarding FMV’s past similar conduct, plaintiffs did
not merely inquire into FMV’s past similar conduct, but instead
questioned Bennett about the number of times FMV had been sued
as a result of similar lending schemes. FMV objected and the
trial court sustained the objection. Upon review of the
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testimony, we hold the trial court did not abuse its discretion
in sustaining either of FMV’s objections.
Nevertheless, assuming arguendo the trial court erred in
limiting the testimony, the error was harmless given that
directed verdicts were entered in favor of FMV on the fraud
claims and the jury never found FMV liable, thereby precluding
any contemplation of damages. See N.C. Gen. Stat. § 1D-15(a)
(conditioning the award of punitive damages on the award of
compensatory damages).
5. Judgment Notwithstanding the Verdict (“JNOV”)
As detailed in the background, the jury was deadlocked on
the issues of adequate consideration and unclean hands. As a
result, on 12 September 2012, FMV filed a motion for a JNOV
pursuant to N.C. Gen. Stat. § 1A-1, Rule 50(b)(1). In the
motion, FMV argued it was entitled to judgment as a matter of
law because there was overwhelming evidence that plaintiffs
received consideration for executing the deeds conveying title
to ProDev, as shown by the jury’s determination that FMV is
entitled to a lien on the properties, and “the [trial court,]
having concluded that [FMV] was entitled to [d]irected
verdict[s] on [p]laintiffs’ claims for fraud, civil conspiracy,
constructive fraud, and unfair or deceptive trade practices, . .
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. essentially ruled that [FMV] did not act with ‘unclean
hands.’” On the same day, plaintiffs filed their own motion for
a JNOV and a new trial arguing there was overwhelming evidence
of inadequate consideration and unclean hands. In response to
FMV’s argument regarding unclean hands, plaintiffs argued “[t]he
elements in each of [the fraud] claims are not identical to what
the [c]ourt must find to determine the issue of . . . ‘unclean
hands[]’” and, therefore, the directed verdicts did not
foreclose a determination of unclean hands.
After hearing arguments echoing those in the motions, the
trial court granted FMV’s motion for a JNOV and denied
plaintiffs’ motions.
In the plaintiffs’ final issue on appeal, plaintiffs argue
the trial court erred in granting FMV’s motion for a JNOV on the
issue of unclean hands.3 We agree.
“A motion for judgment notwithstanding the verdict (JNOV)
‘is essentially a directed verdict granted after the jury
verdict.’” Tomika Invs., Inc. v. Macedonia True Vine
Pentecostal Holiness Church of God, Inc., 136 N.C. App. 493,
3
Plaintiffs do not challenge the JNOV in favor of FMV on the
issue of adequate consideration because the issue is of little
consequence following the jury’s determination that the deeds
were inadequate under the law to convey valid title and create a
valid debt.
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498, 524 S.E.2d 591, 595 (2000). Thus, “[o]n appeal the
standard of review for a JNOV is the same as that for a directed
verdict, that is whether the evidence was sufficient to go to
the jury.” Id. at 498-99, 524 S.E.2d at 595.
“The doctrine of clean hands is an equitable defense which
prevents recovery where the party seeking relief comes into
court with unclean hands.” Ray v. Norris, 78 N.C. App. 379,
384, 337 S.E.2d 137, 141 (1985). More specifically, this Court
has stated “[t]he clean hands doctrine denies equitable relief
only to litigants who have acted in bad faith, or whose conduct
has been dishonest, deceitful, fraudulent, unfair, or
overreaching in regard to the transaction in controversy.”
Collins v. Davis, 68 N.C. App. 588, 592, 315 S.E.2d 759, 762,
affirmed, 312 N.C. 324, 321 S.E.2d 892 (1984). In this case, a
finding that FMV acted with unclean hands would prevent FMV from
obtaining a lien on the subject properties.
In entering the JNOV on the issue of unclean hands, it
appears the trial court agreed with FMV’s argument that the
trial court had already decided the issue when it directed
verdicts on plaintiffs’ claims for fraud, civil conspiracy,
constructive fraud, and unfair or deceptive trade practices. We
find this was error for two reasons. First, FMV argued for a
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directed verdict on the fraud claims based on the statute of
limitations and lack of reasonable reliance. It is unclear from
the record on which basis the trial court entered the directed
verdicts. Second, for a finding of unclean hands, “[t]he
inequitable action need not rise to the level of fraud[.]” S.T.
Wooten Corp. v. Front Street Const., LLC, _ N.C. App. _, _, 719
S.E.2d 249, 252 (2011) (citing Stelling v. Wachovia Bank and
Trust Co., 213 N.C. 324, 327, 197 S.E. 754, 756 (1938)). Thus,
fraud is not required to preclude equitable relief on the basis
of unclean hands.
Upon review of the evidence, even without considering the
transcript of Gonzales’ testimony in the Virginia State Bar
proceedings, we hold there was sufficient evidence to present
the jury with the issue of whether FMV acted with unclean hands.
As a result, we hold the trial court erred in granting FMV’s
motion for a JNOV following the jury’s impasse.
III. Conclusion
Based on the forgoing discussion, we hold the trial court
did not err in directing verdicts on plaintiffs’ fraud,
misrepresentation, and constructive fraud claims. Nor did the
trial court improperly exclude evidence relating to punitive
damages. The trial court did, however, err in failing to
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consider the admission of the transcript of Gonzales’ testimony
in the Virginia State Bar proceedings under all the hearsay
exceptions argued by plaintiffs and by granting FMV’s motion for
a JNOV on the issue of unclean hands. Therefore, the judgment
is reversed and the case is remanded on the issue of unclean
hands.
No error in part and reversed in part.
Judges ELMORE and DAVIS concur.