Brissett v. First Mount Vernon Industrial Loan Ass'n ( 2014 )


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  •                             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
    -9-
    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
    -10-
    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
    -11-
    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
    -12-
    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
    -13-
    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
    -14-
    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.
    -16-
    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
    -17-
    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
    -18-
    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.
    -19-
    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
    -20-
    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.
    -21-
    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).
    -22-
    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
    -23-
    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
    -24-
    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
    -25-
    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
    -26-
    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, . .
    -27-
    .   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.
    -28-
    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
    -29-
    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
    -30-
    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.