Emerald Portfolio, LLC v. Outer Banks/Kinnakeet Assocs., LLC , 249 N.C. App. 246 ( 2016 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA16-31
Filed: 6 September 2016
Dare County, No. 14 CVS 325
EMERALD PORTFOLIO, LLC, Plaintiff,
v.
OUTER BANKS/KINNAKEET ASSOCIATES, LLC, RAY HOLLOWELL
Individually, and DONNA HOLLOWELL Individually, Defendants.
Appeal by defendants Outer Banks/Kinnakeet Associates, LLC and Ray
Hollowell from orders entered 27 August 2015 by Judge Cy A. Grant in Dare County
Superior Court. Heard in the Court of Appeals 26 May 2016.
Van Winkle, Buck, Wall, Starnes and Davis, P.A., by Robert A. Mays, for
plaintiff-appellee.
Phillip H. Hayes for defendants-appellants Outer Banks/Kinnakeet Associates,
LLC and Ray Hollowell.
ZACHARY, Judge.
Where the assignee of a note lacked possession of the note and did not satisfy
the statutory provisions for enforcement of a lost note, the trial court erred in
granting summary judgment in favor of the assignee. Where there was no genuine
issue of material fact as to obligor’s contractual debt pursuant to the guaranty
agreement, and the agreement was not unconscionable, the trial court did not err in
granting summary judgment in favor of the assignee-obligee of the guaranty
agreement.
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
I. Factual and Procedural Background
On 30 August 2006, Outer Banks/Kinnakeet Associates, LLC, (OBKA)
executed a promissory note in favor of First South Bank (FSB) in the amount of
$3,025,500. Ray Hollowell, in his capacity as OBKA’s manager, signed the note on
behalf of OBKA. On that same day, Ray Hollowell and his spouse, Donna Hollowell
(collectively, the Hollowells) each signed separate, but identical, commercial
guaranties imposing personal liability on them under contract for OBKA’s payment
of the note. On 24 December 2008, 23 January 2009, and 18 March 2010, FSB and
OBKA entered into agreements modifying the terms of the original note.
In February of 2013, FSB sold the loan to Emerald Portfolio, LLC (Emerald).
On 23 June 2014, Emerald, as assignee of FSB, filed a complaint against OBKA and
the Hollowells alleging a default pursuant to the terms of the note, as modified, along
with the guaranties, and seeking to recover the unpaid balance on the note. Included
in an attachment to the complaint was an affidavit, signed by FSB’s senior vice
president, alleging that FSB was the lawful owner and payee of the note, that the
note could not be located, and that the note had been endorsed to Emerald as of 21
February 2013. This attachment also contained a copy of the note.
On 5 August 2014, the Hollowells filed an answer and counterclaim, raising
the defenses of credit and offset and unconscionability, and counterclaiming for unfair
and deceptive trade practices. The answer admitted the existence of the note and
-2-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
guaranties. On 11 August 2014, Emerald filed an answer to the Hollowells’
counterclaim, together with a motion to dismiss. On 15 September 2014, Emerald
also filed a motion for summary judgment or judgment on the pleadings with respect
to the Hollowells.
On 18 September 2014, Emerald filed a motion for entry of default against
OBKA, alleging that it had failed to answer. Default was entered by the Clerk of
Court of Dare County that same day. Also that same day, the Clerk of Court entered
default judgment against OBKA. On 3 October 2014, OBKA moved to set aside entry
of default and default judgment. This motion was granted in open court on 6 October
2014, and rendered in writing on 27 July 2015.
On 2 October 2014, the Hollowells filed a motion to amend their answer. This
motion was granted in open court on 6 October 2014, and rendered in writing on 27
July 2015.
On 3 November 2014, the trial court entered an order on Emerald’s motion for
summary judgment or judgment on the pleadings and dismissal. The trial court
noted that Emerald’s motion for summary judgment or judgment on the pleadings
was withdrawn without prejudice, and dismissed the Hollowells’ counterclaim with
prejudice.
On 14 November 2014, OBKA filed its answer, alleging credit and offset, and
contending that Emerald was not entitled to enforce the lost note. On 11 May 2015,
-3-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
Emerald moved to strike OBKA’s untimely answer and for summary judgment
against OBKA and the Hollowells. On 20 July 2015, the Hollowells and OBKA
collectively filed a motion for summary judgment.
On 19 August 2015, Emerald filed a motion seeking an order prohibiting the
Hollowells and OBKA from participating in any voluntary transfer of the subject
property without prior court approval. On 27 August 2015, the trial court granted
this motion, ordering that other than payment of ordinary expenses the Hollowells
and OBKA were not to participate in any voluntary transfer of the subject property
without court approval.
On 3 September 2015, the trial court entered an order granting Emerald’s
motion for summary judgment as to appellants, and denying the Hollowells’ and
OBKA’s motion for summary judgment. This order also awarded Emerald the
monetary relief sought from appellants and certified the order pursuant to Rule 54(b)
of the North Carolina Rules of Civil Procedure. The order further found that Donna
Hollowell was a guarantor on the commercial guaranty, and was jointly and severally
liable to Emerald under the note “unless she can prove an affirmative defense under
the Equal Credit Opportunity Act” at trial of this matter.
From, inter alia, the order granting Emerald’s motion for summary judgment,
OBKA and Ray Hollowell (appellants) appeal.
II. Standard of Review
-4-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
“Our standard of review of an appeal from summary judgment is de novo; such
judgment is appropriate only when the record shows that ‘there is no genuine issue
as to any material fact and that any party is entitled to a judgment as a matter of
law.’ ” In re Will of Jones, 362 N.C. 569, 573, 669 S.E.2d 572, 576 (2008) (quoting
Forbis v. Neal, 361 N.C. 519, 524, 649 S.E.2d 382, 385 (2007)).
III. Summary Judgment
In their various arguments, appellants contend that the trial court erred in
granting summary judgment against appellants in favor of Emerald, and denying
summary judgment in favor of appellants. We agree in part and disagree in part.
A. OBKA and the Lost Note
First, appellants maintain that the trial court erred in entering summary
judgment in favor of Emerald against OBKA because FSB could not locate the
promissory note at the time it was assigned to Emerald.
Our statutes provide an avenue for recovery on a lost instrument. Specifically:
A person not in possession of an instrument is entitled to
enforce the instrument if (i) the person was in possession
of the instrument and entitled to enforce it when loss of
possession occurred, (ii) the loss of possession was not the
result of a transfer by the person or a lawful seizure, and
(iii) the person cannot reasonably obtain possession of the
instrument because the instrument was destroyed, its
whereabouts cannot be determined, or it is in the wrongful
possession of an unknown person or a person that cannot
be found or is not amenable to service of process.
-5-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
N.C. Gen. Stat. § 25-3-309(a) (2015). In other words, appellants contend that
Emerald was entitled to enforce the note only if (i) Emerald possessed and was able
to enforce the note at the time that it was lost, (ii) the loss was not the result of a
transfer or lawful seizure, and (iii) the note could not reasonably be obtained due to
loss, destruction, or wrongful taking. Because FSB possessed the note and had lost
it at the time that it was assigned to Emerald, appellants assert that the first prong
of this analysis fails.
In construing this statute, we find it helpful to compare it with the language
of the Uniform Commercial Code (UCC), and to contrast where the two diverge. A
previous version of UCC § 3-309, in effect when N.C. Gen. Stat. § 25-3-309 was
enacted, was identical to the North Carolina statute. However, that UCC provision
has since been amended, as follows:
(a) A person not in possession of an instrument is entitled
to enforce the instrument if:
(1) the person seeking to enforce the instrument:
(A) was entitled to enforce the instrument when loss of
possession occurred; or
(B) has directly or indirectly acquired ownership of the
instrument from a person who was entitled to enforce the
instrument when loss of possession occurred;
(2) the loss of possession was not the result of a transfer by
the person or a lawful seizure; and
(3) the person cannot reasonably obtain possession of the
-6-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
instrument because the instrument was destroyed, its
whereabouts cannot be determined, or it is in the wrongful
possession of an unknown person or a person that cannot
be found or is not amenable to service of process.
UCC § 3-309 (2002). The language in (a)(1)(B) marks a clear distinction between the
two, in that the amended UCC provision allows a party not in possession of an
instrument to enforce it if ownership was acquired from someone with a right to
enforce the instrument.
There is no question in the instant case that FSB had a right to enforce the
note under both the North Carolina statute and the UCC. FSB was in possession of
the instrument when it was lost, the loss was not a result of a transfer or lawful
taking, and possession could not thereafter reasonably be obtained. Moreover, under
the revised UCC provision, Emerald would be able to enforce the note as well,
notwithstanding its lack of possession, due to “directly . . . acquir[ing] ownership of
the instrument from a person who was entitled to enforce the instrument when loss
of possession occurred[.]” UCC § 3-309(a)(1)(B).
However, Emerald’s enforcement rights are not determined by the UCC, but
by North Carolina statute. Pursuant to the provisions of N.C. Gen. Stat. § 25-3-309,
Emerald is not entitled to enforce the note. See, e.g., In re Patterson, 2012 WL
5906865 (Bankr. W.D.N.C. Nov. 26, 2012). This statute is current; it has not been
revised since 1995. Our legislature could have revised it to coincide with the UCC
revision in 2002, but it did not do so. We must conclude from this distinction that our
-7-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
legislature intended to exclude the additional language of the UCC, and as such
intended not to provide this avenue of recovery to parties not in possession of the
relevant instrument.
Accordingly, we hold that where a party who would otherwise have a right to
enforce a lost note under N.C. Gen. Stat. § 25-3-309 subsequently assigns that note,
the assignee does not acquire the right to enforce the note unless the assignee is in
actual possession of the note. As the note in the instant case remains missing, we
hold that Emerald lacked standing to enforce it against OBKA. The trial court erred
as a matter of law in granting summary judgment in favor of Emerald against OBKA.
B. The Hollowells and the Guaranty
Next, appellants contend that the trial court erred in entering summary
judgment in favor of Emerald against Ray Hollowell because he could not be held
liable as a guarantor if the note itself could not be enforced.
This argument is flawed. “North Carolina . . . recognizes that the obligation of
the guarantor and that of the maker [of a note], while often coextensive are,
nonetheless, separate and distinct.” EAC Credit Corp. v. Wilson, 12 N.C. App. 481,
485, 183 S.E.2d 859, 862 (1971), aff'd, 281 N.C. 140, 187 S.E.2d 752 (1972). “A
guarantor's liability depends on the terms of the contract as construed by the general
rules of contract construction.” Carolina Place Joint Venture v. Flamers Charburgers,
Inc., 145 N.C. App. 696, 698, 551 S.E.2d 569, 571 (2001). When a note is transferred,
-8-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
no separate transfer of the guaranty is required; however, this does not mean that a
guaranty cannot exist in the absence of a note. A guaranty is an obligation in
contract, and irrespective of the status of the note, may be enforced in contract. See
generally First Am. Sav. Bank, F.S.B., v. Adams, 87 N.C. App. 226, 360 S.E.2d 490
(1987). In First American, the defendants were guarantors on a note held by the
plaintiff. The note secured the debt of a corporation wholly owned by the defendants.
The defendants contended that they were discharged from their obligations as
guarantors by reason of the plaintiff’s “unjustified impairment of the collateral
securing the loan.” Id. at 231, 360 S.E.2d at 494. We noted, however, that the
defendants enjoyed close ties with the debtor corporation, and that even if the
collateral were impaired, the guaranty would remain enforceable. Id. at 232, 360
S.E.2d at 494-95.
In the instant case, as in First American, the Hollowells are closely tied to the
debtor corporation OBKA, being its sole members and owners. Although appellants
challenge the note itself rather than the impairment of the collateral, both arguments
go to the enforceability of the instrument. We therefore find the reasoning in First
American, that the guaranty may be enforced even if circumstances render the
instrument unenforceable, applicable to this case.
Moreover, under the express terms of the guaranty, Ray Hollowell agreed to
waive many defenses to enforcement, in pertinent part as follows:
-9-
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
Guarantor also waives any and all rights or defenses based
on suretyship or impairment of collateral including, but not
limited to, any rights or defenses arising by reason of . . .
(C) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the
cessation of Borrower’s liability from any cause
whatsoever, other than payment in full legal tender, of the
indebtedness; (D) any right to claim discharge of the
indebtedness on the basis of unjustified impairment of any
collateral for the indebtedness; . . . or (F) any defenses given
to guarantors at law or in equity other than actual payment
and performance of the indebtedness.
Accordingly, the guaranty executed by Ray Hollowell is enforceable.
“ ‘A guaranty of payment is an absolute and unconditional promise to pay the
debt at maturity if not paid by the principal debtor.’ ” Epes v. B.E. Waterhouse, LLC,
221 N.C. App. 422, 425, 728 S.E.2d 390, 393 (2012) (quoting Jennings
Communications Corp. v. PCG of the Golden Strand, Inc., 126 N.C. App. 637, 640,
486 S.E.2d 229, 231 (1997)). “ ‘Under the general rules of contract construction,
where an agreement is clear and unambiguous, no genuine issue of material fact
exists and summary judgment is appropriate. In contrast, an ambiguity exists in a
contract if the language of the contract is fairly and reasonably susceptible to either
of the constructions asserted by the parties.’ ” Id. (quoting Carolina Place Joint
Venture, 145 N.C. App. at 699, 551 S.E.2d at 571). Ray Hollowell’s execution of the
guaranty was a contractual promise to pay outstanding debts if the principal, here
OBKA, failed to do so. The explicit terms of said contract, which were clear and
unambiguous and must be construed as such, waived any defenses other than full
- 10 -
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
payment of the debt. Accordingly, the unenforceability of the obligation by Emerald
against OBKA is no defense for Ray Hollowell as guarantor, and the guaranty may
be enforced.
Appellants did not challenge at trial, and do not challenge on appeal, the fact
that Ray Hollowell signed a guaranty for the debt secured by the note. This created
an obligation in contract in accordance with the terms of the guaranty, enforceable
even in the absence of the note. There is no genuine issue of material fact that Ray
Hollowell owed the debt pursuant to that contractual obligation. Accordingly, the
trial court did not err in granting summary judgment in favor of Emerald against
Ray Hollowell.
This argument is without merit.
C. Unconscionability
Lastly, appellants contend that the trial court erred in entering summary
judgment in favor of Emerald against Ray Hollowell because the guaranty contained
unconscionable provisions.
“Unconscionability is an affirmative defense, and the party asserting it bears
the burden of establishing it.” Rite Color Chem. Co. v. Velvet Textile Co., 105 N.C.
App. 14, 20, 411 S.E.2d 645, 649 (1992).
For a court to conclude that a contract is unconscionable,
the court must determine that the agreement is both
substantively and procedurally unconscionable. The
question of unconscionability is determined as of the date
- 11 -
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
the contract was executed. Procedural unconscionability
involves bargaining naughtiness in the formation of the
contract, such as fraud, coercion, undue influence,
misrepresentation, [or] inadequate disclosure.
Substantive unconscionability involves an inequality of the
bargain that is so manifest as to shock the judgment of a
person of common sense, and . . . the terms . . . so oppressive
that no reasonable person would make them on the one
hand, and no honest and fair person would accept them on
the other.
Weaver v. Saint Joseph of the Pines, Inc., 187 N.C. App. 198, 212-13, 652 S.E.2d 701,
712 (2007) (citations and quotation marks omitted).
With respect to procedural unconscionability, at trial, appellants argued as
follows:
The courts want to see something called procedural
unconscionability, something -- the naughtiness in -- some
kind of misbehavior in the formation of a contract, as well
as substantive unconscionability, that being the unfairness
of the provisions at issue.
I don't know that I can argue to you, outside of requiring
Ms. Hollowell to sign, that there was any other misconduct
in the formation of the contract, but when you have people
as a condition of a loan signing a boilerplate contract that
says you waive all acts/omissions of any kind at any time
with respect to any matter whatsoever, that it's just so
broad that the court should deem such a provision
unconscionable.
In essence, at trial, appellants conceded that the only possible evidence of
procedural unconscionability was FSB’s requirement that Donna Hollowell execute
the guaranty as well as Ray Hollowell; the remainder of their argument goes to the
- 12 -
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
substantive unconscionability of the terms of the guaranty, not procedural
unconscionability.
We are reluctant to hold, as appellants would have us hold, that it is per se
procedurally unconscionable for a lender to require that both members of an LLC
execute a guaranty of the LLC’s loan obligation. In the absence of other evidence of
procedural unconscionability, we hold that, on appeal and before the trial court,
appellants have failed to demonstrate procedural unconscionability.
We acknowledge that there is no bright-line rule as to just how much
procedural or substantive unconscionability must be shown. What our law
establishes conclusively, however, is that some of each is necessary to demonstrate
unconscionability. In the absence of any procedural unconscionability, it cannot be
said that the guaranty agreement was unconscionable. As such, we hold that the
trial court did not err in rejecting the unconscionability defense asserted by Ray
Hollowell.
This argument is without merit.
IV. Conclusion
Because Emerald did not acquire the right to enforce the missing note from
FSB, the trial court erred in granting summary judgment in favor of Emerald and
denying it to OBKA. Because no genuine issue of material fact existed as to Ray
Hollowell’s contractual obligation for the debt pursuant to the guaranty agreement,
- 13 -
EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC
Opinion of the Court
and the agreement was not unconscionable, the trial court did not err in granting
summary judgment in favor of Emerald and denying it to Ray Hollowell.
REVERSED IN PART, AFFIRMED IN PART.
Judges STEPHENS and McCULLOUGH concur.
- 14 -