Southland Nat'l Ins. Corp. v. Lindberg ( 2023 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA22-1049
Filed 20 June 2023
Wake County, No. 19CVS13093
SOUTHLAND NATIONAL INSURANCE CORPORATION in Rehabilitation,
BANKERS LIFE INSURANCE COMPANY in Rehabilitation, COLORADO
BANKERS LIFE INSURANCE COMPANY, in Rehabilitation, and SOUTHLAND
NATIONAL REINSURANCE CORPORATION, in Rehabilitation, Plaintiffs,
v.
GREG E. LINDBERG, GLOBAL GROWTH HOLDINGS, INC. f/k/a ACADEMY
ASSOCIATION, INC., EDWARDS MILL ASSET MANAGEMENT, LLC, NEW
ENGLAND CAPITAL, LLC, AND PRIVATE BANKERS LIFE AND ANNUITY CO.,
LTD., Defendants.
Appeal by defendants and cross-appeal by plaintiffs from order and judgment
entered 18 May 2022 by Judge A. Graham Shirley II in Wake County Superior Court.
Heard in the Court of Appeals 26 April 2023.
Fox Rothschild by Matthew Nis Leerberg, Troy D. Shelton, Nathan W. Wilson
for petitioner-appellants, cross-appellees.
Condon Tobin Sladek Thorton PLLC by Aaron Z. Tobin for petitioner-
appellants, cross-appellees.
Williams Mullen by Wes J. Camden, Caitlin M. Poe, Lauren E. Fussell for
respondent-appellees, cross-appellants.
FLOOD, Judge.
I. Facts and Procedural Background
SOUTHLAND V. LINDBERG
Opinion of the Court
Southland National Insurance Corporation, Bankers Life Insurance Company,
Colorado Bankers Life Insurance Company, and Southland National Reinsurance
Corporation (collectively “Plaintiffs”) are insolvent insurers who were purchased by
Greg. E. Lindberg (“Lindberg”) in 2014. Lindberg, along with Global Growth
Holdings, Inc., formerly known as Academy Association, Inc.; Edwards Mill Asset
Management, LLC; New England Capital, LLC; and Private Bankers Life and
Annuity Co., Ltd. (collectively, “Defendants”), appeal from the trial court’s order that
held Defendants liable for breach of contract and fraud. Plaintiffs cross-appeal on
the narrow issue of whether the trial court erred in failing to award them
compensatory and punitive damages in addition to specific performance. The facts
that underlie the case are as follows.
The Plan
In 2014, Lindberg re-domesticated Plaintiffs to North Carolina in order to take
advantage of this State’s favorable regulations. Prior to this re-domestication, acting
as owner of Plaintiffs, Lindberg made a special agreement with former Commissioner
of Insurance, Wayne Goodwin, allowing Lindberg to invest up to forty percent of
Plaintiffs’ assets into affiliated business entities. Lindberg then invested up to forty
percent of Plaintiffs’ money into the purchase of other, non-insurance companies, also
owned by Lindberg. Simply put, Lindberg created a scheme in which he caused $1.2
billon held for Plaintiffs’ policyholders to be invested into other non-insurance
companies that he also owned or controlled.
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Opinion of the Court
In November 2016, Wayne Goodwin lost his seat as Commissioner of Insurance
to Mike Causey (the “Commissioner”), who reduced the cap on affiliated investments
from forty percent to ten percent. Lindberg struggled to untangle his affiliated
investments and, as the deadline for diversification drew near, the North Carolina
Department of Insurance (the “NCDOI”) grew concerned that there would be a
“mismatch between investments and policyholder liabilities.” In other words,
because Lindberg had invested so much of Plaintiffs’ money into affiliated companies,
the NCDOI worried that Plaintiffs might experience a shortfall on their obligation to
pay individual policyholders.
Upon realizing an impending shortfall, on 18 October 2018, the Commissioner,
Plaintiffs, and Lindberg entered into a Consent Order placing Plaintiffs under
administrative supervision. The NCDOI placed an out-of-state company, Noble
Consulting Services (“Noble”), in charge of the administrative supervision with
Noble’s CEO and owner, Mike Dinius (“Dinius”) as the main point of contact. During
the period of Administrative Supervision, Defendants agreed to deadlines by which
they were required to reduce their affiliated investments. Dinius conducted an
analysis and concluded it would be virtually impossible for those deadlines to be met.
In an effort to avoid the shortfall, in May 2019 Plaintiffs agreed to negotiate a
restructuring of the affiliated business entities’ obligations. The negotiations around
restructuring resulted in a Memorandum of Understanding (the “MOU”), the
enforceability of which is central to this case.
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Opinion of the Court
While negotiating the terms of the MOU, Defendants maintained total access
and control over the portfolios of their affiliated companies—which, by the terms of
the MOU were called Specified Affiliated Companies (“SACs”). During this time,
Plaintiffs had no equity interest, control, or visibility into the SACs or several tiers of
holding companies above them, though they could have asked for that information at
any time. Plaintiffs opted to rely on the representations and warranties provided by
Defendants. Dinius and members of Plaintiffs’ management team were aware that
some of the SACs had obligations to third parties, but trusted Defendants’
representations and warranties regarding their ability to uphold the terms of the
MOU, regardless of those obligations. When asked at trial if during the course of
negotiating the MOU, Defendants ever said “[h]ey, Mr. Dinius, look, you know, we’re
not sure everything in here is right so don’t hold us to it,” Dinius replied “[n]o, they
did not.” Dinius further stated that the representations and warranties made in the
MOU were “very important[,]” and “[s]ince Lindberg controlled all of these entities,
we were relying on him to tell us if he could effectuate this or not.”
On 27 June 2019, the parties entered into several agreements—the MOU, an
Interim Amendment to Loan Agreement (“IALA”), and a Revolving Credit Agreement
(the “Revolver”). The IALA provided debt relief to Defendants of more than $100
million by deferring interest payments for a period of six months and modifying the
underlying loans’ interest rates and maturity dates, effectively allowing Defendants
more time to repay the loans. Meanwhile, under the terms of the Revolver, Plaintiff
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Opinion of the Court
Colorado Bankers Life Insurance Company provided a $40 million revolving line of
credit to a company owned by Defendants.
The MOU
The MOU, in essence, was an agreement to adjust and restructure debts to
facilitate repayment, requiring Lindberg to relinquish control of the SACs by making
them subsidiaries of a New Holding Company (the “NHC”). The NHC would be
managed by an independent board of qualified individuals whose primary goal would
be protecting the best interests of Plaintiffs’ policyholders.
Of multiple opening recitals in the MOU, one states the parties . . .
intend that this MOU and the transactions contemplated
herein will serve to protect the best interests of the
policyholders of each of the North Carolina Insurance
Companies . . . [.] In so doing, the Parties also intend to
increase the long-term equity value of the [SACs], so long
as it is consistent with the protection of the best interest of
the Policyholders and in accordance with North Carolina
law.
After the recitals, the MOU enumerated four Articles. Article I bound the
parties to execute and deliver the Interim Loan Amendments attached to the MOU,
a document that granted debt relief to Defendants. Article II titled “Global
Restructuring” sought to restructure most of the revenue-generating businesses
within Lindberg’s portfolio of companies that owed money to Plaintiffs. Under Article
II, the NHC would use the revenue from these companies in Lindberg’s portfolio to
pay down the debts owed to Plaintiffs. Importantly, Article II also required the
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Opinion of the Court
parties to restructure the SACs “to become subsidiaries, either directly or indirectly,”
of the NHC “on or before [30 September 2019].” Article III titled “Global Loan
Amendments” allowed the NHC to make additional, future amendments to the loans
on which the SACs were the ultimate borrowers, ensuring that any new loans entered
into had protections and benefits for Lindberg. The MOU did not require that Article
II and Article III be implemented contemporaneously.
Finally, Article IV titled “Additional Terms and Conditions” contained
representations and warranties that:
a. Each of the Recitals, Schedules, and Exhibits to this
MOU are true and accurate in all respects;
...
e. The execution of the MOU and the consummation of
the transaction set forth in the MOU do not violate any law;
...
g. The execution of the MOU and the consummation of
the transactions set forth in the MOU do not result in a
breach of, constitute a default under, or result in the
acceleration of any contract to which any of them is a party
or is bound or to which any of their assets are subject[.]
h. The execution of the MOU and the consummation of
the transactions set forth in the MOU do not create in any
party the right to accelerate, terminate, modify, cancel, or
require any notice or consent under any contract to which
any of them is a party or is bound or to which any of their
assets are subject[.]
Additionally, Article IV contained two important clauses: a severability clause and a
specific performance clause. The severability clause stated that “[a]ny term or
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Opinion of the Court
provision of this MOU that is invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability of the remaining terms and
provisions hereof . . . [.]” Under the specific performance clause, the parties agreed
that a nonbreaching party “shall be entitled to specific performance . . . in addition to
any other remedy to which they are entitled at law or in equity.”
On the same day the parties entered into the MOU, IALA, and Revolver,
Plaintiffs consented to being placed into Rehabilitation pursuant to N.C. Gen. Stat. §
58-30-75. During Rehabilitation, a moratorium was placed on policyholder
surrenders, and Plaintiffs’ obligation to pay policyholders was suspended. During the
period of Rehabilitation and upon execution of the MOU, Defendants had either direct
or indirect control over most of the SACs and the authority to contribute those entities
to the NHC.
The Breach
Two weeks before the deadline to perform under Article II of the MOU, George
Vandeman (“Vandeman”) acting as a chairman for Defendant Academy Association,
Inc., sent a communication to Plaintiffs stating that the restructuring plan set forth
under Article II could not be accomplished because:
i. Seller notes . . . are subject to breach and acceleration
upon reorganization;
ii. The debt reduction from the IALA and the
reorganization may result in adverse tax consequences to
Lindberg; [and]
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Opinion of the Court
iii. The reorganization will trigger certain changes in
control provisions in contracts with third-parties[.]
On 30 September 2019, Defendants failed to contribute the SACs to the NHC, thus
breaching Article II of the MOU. On 1 October 2019, Plaintiffs filed suit in Wake
County Superior Court alleging breach of the MOU and fraud. Plaintiffs requested
specific performance of the MOU, compensatory damages, and punitive damages.
The Trial Court’s Order and Judgment
After a bench trial, the trial court entered a judgment in favor of Plaintiffs,
ordering specific performance but not compensatory or punitive damages. First, the
trial court held that Article III of the MOU was unenforceable because it was an
agreement to agree, making it severable from the rest of the MOU. Upholding the
remainder of the MOU, the trial court found Defendants breached Article II by failing
to perform by the 30 September 2022 deadline, and awarded specific performance.
Next, the trial court concluded that Defendants fraudulently induced Plaintiffs
to sign the MOU by making false representations and warranties under Article IV
regarding the execution and performance of obligations. Specifically, the trial court
found that Defendants fraudulently represented that performance under the MOU
was duly authorized and
(2) [did] not violate any law; (3) would not result in a breach
of, constitute a default under, or result in the acceleration
of any contract to which any of them is a party or is bound
or to which any of their assets are subject; and (4) [did] not
create in any party the right to accelerate, terminate,
modify, cancel or require any notice or consent under any
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Opinion of the Court
contract to which any of them is a party or is bound or to
which any of their assets are subject.
The trial court further found that the fraudulent representations and warranties
made to Plaintiffs in the MOU caused Plaintiffs to enter into two other agreements—
the IALA and the Revolver—to their detriment. The trial court declined to award
any remedy for Plaintiffs’ fraud claim because they had elected the remedy of specific
performance. Instead, the trial court stated that “if an appellate Court should
determine that specific performance is not an available remedy this Court would
enter an award of punitive damages in the amount of three times compensatory
damages.”
On 26 May 2022, the trial court entered an Amended Judgment and Order to
correct clerical errors. Defendants filed a Notice of Appeal of the Amended Judgment
and Order on 13 June 2022. Plaintiffs then filed a Conditional Notice of Cross-
Appeal, seeking review of the trial court’s failure to award fraud damages. As part
of their Cross-Appeal, Plaintiffs also filed a request for Judicial Notice on 19 January
2023, which this Court denied by order.
II. Jurisdiction
An appeal lies of right directly to this Court from any final judgment of a
superior court. N.C. Gen. Stat. § 7A-27(b)(1) (2021).
III. Argument
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Opinion of the Court
On appeal, Defendants argue that Article III was an essential part of the MOU
and without it, the entire agreement was rendered unenforceable. Further, if the
MOU was entirely unenforceable, then the trial court erred when it found fraudulent
inducement. For the reasons set forth below, we disagree.
A. Standard of Review
“The standard of review on appeal from a judgment entered after a non-jury
trial is ‘whether there is competent evidence to support the trial court’s findings of
fact and whether the findings support the conclusions of law and ensuing judgment.’”
Cartin v. Harrison, 151 N.C. App. 697, 699, 567 S.E.2d 174, 176 (quoting Sessler v.
Marsh, 144 N.C. App. 623, 628, 551 S.E.2d 160, 163 (2001)), disc. rev. denied, 356
N.C. 434, 572 S.E.2d 428 (2002).
B. Severance of Article III
Plaintiffs and Defendants agree the trial court correctly concluded Article III
was an unenforceable agreement to agree. Defendants, however, contend Article III
was essential to the MOU’s main purpose, and severing it rendered the entire MOU
unenforceable. After a thorough review, we conclude the trial court did not err when
it enforced the remainder of the MOU after severing Article III.
1. Main Purpose
Defendants argue Article III was a main purpose and an essential feature of
the MOU upon which other provisions depended. We disagree.
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Opinion of the Court
To determine whether an unenforceable provision is a “main purpose” or
“essential feature,” the Court must look at whether other provisions of the contract
are dependent on the unenforceable one. See Robinson, Bradshaw, & Hinson, P.A. v.
Smith, 129 N.C. App. 305, 314, 498 S.E.2d 841, 848 (1998) (holding that despite one
section of a contingency-fee contract being invalid, the remainder of the contract is
still enforceable because it is severable and not the main purpose or essential feature
of the agreement). Put another way, severance of an unenforceable provision is
appropriate when the other provisions “are in no way dependent upon the
enforcement of the illegal provisions for their validity.” Am. Nat’l Elec. Corp. v
Poythress Commer. Contractors, Inc., 167 N.C. App. 97, 101, 604 S.E.2d 315, 317
(2004) (citations omitted).
To argue that a contract’s main purpose may not be severed, Defendants cite
to Green v. Black, a case in which the parties entered into a written agreement where
the defendant was to repay the plaintiff for a personal loan. Green v. Black, 270 N.C.
App. 258, 840 S.E.2d 900 (2020). The agreement included a provision stating that,
should the defendant default, a new agreement would be drafted that would include
a “mutually agreed upon payment schedule for the remaining amount due.” Green,
270 N.C. App. at 260, 840 S.E.2d at 902. This Court held that the provision was void
for uncertainty and was therefore unenforceable, but upheld the remainder of the
agreement. Id. at 265, 840 S.E.2d at 905–06. This Court further concluded that the
parties’ intended main purpose was to “memorialize an agreement to exchange money
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Opinion of the Court
for a promise to pay the money back with interest on a certain date[,]” and because
of that, a sentence regarding what would happen in the event of default was
severable. Id. at 264, 840 S.E.2d at 905.
Unlike the parties in Green, the parties in this case expressly memorialized
the MOU’s main purpose, leaving nothing for this Court to demystify. At the time of
signing, the parties agreed that the MOU’s main purpose was “to protect the best
interests of the policyholders[,]” and “in so doing, the parties also intend to increase
the long-term equity value of the [SACs], so long as it is consistent with the protection
of the best interests of the Policyholders[.]” (emphasis added).
Defendants attempt to convince this Court that the MOU’s main purpose was
not only to rehabilitate Plaintiffs’ companies, but to ensure Lindberg would continue
to benefit from the overall transaction. This argument ignores another of Defendants’
motivations: to make money using capital provided by hardworking, North Carolina
policyholders.
2. Severability
Defendants further argue that because Article III was the main purpose of the
MOU, severing it rendered the remainder of the MOU unenforceable. We disagree.
“It is the general law of contracts that the purport of a written instrument is
to be gathered from its four corners . . . .” Ussery v. Branch Banking and Trust Co.,
368 N.C. 325, 336, 777 S.E.2d 272, 280 (2015) (quoting Carolina Power & Light Co.
v. Bowman, 229 N.C. 682, 693–94, 51 S.E.2d 191, 199 (1949) (Stacy, C.J. ,
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Opinion of the Court
Dissenting)). “‘A contract is entire, and not severable, when, by its terms, nature and
purpose it contemplates and intends that each and all of its parts, material
provisions, and the consideration are common each to the other, and
interdependent.’” Mebane Lumber Co. v. Avery & Bullock Builders, Inc., 270 N.C.
337, 341, 154 S.E.2d 665, 668 (1967) (quoting Wooten v. Walters, 110 N.C. 251, 254,
14 S.E. 734, 735 (1892)). On the other hand, this Court has held that a contract may
be severable when it has two or more parts that are “not necessarily dependent on
each other, nor is it intended by the parties that they shall be.” Kornegay v. Aspen
Asset Group, LLC, 204 N.C. App. 213, 226, 693 S.E.2d 723, 734 (2010) (quoting
Mebane Lumber Co., 270 N.C. at 342, 154 S.E.2d at 668). A court may sever an
unenforceable provision and enforce the balance of the contract only when the other
provisions “are in no way dependent upon the enforcement of the illegal provisions
for their validity.” Am. Nat’l Elec. Corp., 167 N.C. App. at 101, 604 S.E.2d at 317.
While not determinative, the decision to include a severability clause in an agreement
may provide general guidance when determining the parties’ intent. See Sheffield v.
Consolidated Foods Corp., 302 N.C. 403, 421-22, 276 S.E.2d 422, 434-35 (1981) (“[A]
severability is relevant to a decision only when the validity of a particular provision
of the Act is at issue.”); see also 15 Williston on Contracts § 45:6 (4th ed) (“The parties'
intent to enter into a divisible contract may be expressed in the contract directly,
through a so-called ‘severability clause[.]’”).
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Opinion of the Court
Defendants argue “[t]he rest of the MOU depended on [Article III,]” and
“Article III was the key to maximizing the value of the SACs to pay back Plaintiffs
investments.” To support this argument, Defendants make several points. First, as
evidence of the entangled purpose of Articles II and III, Defendants point to the fact
that performance under the two articles was due on the same day, stating that the
articles were dependent on each other “because of the nature of insurance
rehabilitation.” Next, Defendants claim that, standing alone, Article II left Lindberg
vulnerable because it allowed the NHC and Plaintiffs to bind themselves (and
ultimately Lindberg) to potentially risky financing agreements. Further, without
Article III, the SACs would no longer enjoy the protection of a right to cure within
thirty days after notice of default. Finally, Article III provided Lindberg a “success
fee” of 1.5% of all the debt that was paid down—a significant benefit which, without
Article III, Lindberg would no longer be entitled to.
Defendants’ evidence of Article III’s intrinsic entanglement with the remainder
of the MOU is attenuated at best. As the trial court noted in its Amended Judgment
and Order, “the other Articles of the MOU can and have been implemented and
enforced notwithstanding the failure of the Parties to complete [Article III].” A review
of the Record leads us to the same conclusion: Article II and Article III were not
necessarily dependent on each other, nor did the parties intend they be. See
Kornegay, 204 N.C. App. at 213, 693 S.E.2d at 723 (holding a contract was divisible
because there were two distinct promises, each of which could be performed without
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Opinion of the Court
the other). Importantly, as of the publishing of this opinion, Defendants and Lindberg
have enjoyed the benefit of millions of dollars of debt relief provided by Plaintiffs, yet
continue to claim the MOU is unenforceable.
Further, despite each Article under the MOU having the common purpose of
rehabilitating Plaintiffs, performance of the parties under each Article was separate
and distinct. Under Article I, Plaintiffs promised to grant debt relief to Defendants;
under Article II Defendants promised to reorganize the SACs under the NHC; finally,
under Article III, both parties would amend loan agreements from Plaintiffs to some
of the SACs in the future. We further note that the amendments and restructuring
outlined in Article III were to take place after the SACs were transferred to the NHC.
These facts tend to show that each article required independent performance during
different times and could involve independent breach. Further, while it may be true
that without Article III Lindberg would be left in a financially vulnerable situation,
protecting Lindberg was not the primary purpose of the MOU. Rather, the primary
purpose was to protect Plaintiffs’ policyholders, as concluded above. Finally, taking
into consideration all “four corners” of the MOU and the promises contained therein,
this Court gleans the parties intended the MOU to be divisible given the inclusion of
a severability clause. See Ussery, 368 N.C. at 336, 777 S.E.2d at 280. For those
reasons, we conclude the trial court did not err when it enforced the remainder of the
MOU after severing Article III. See Kornegay 204 N.C. App. at 213, 693 S.E.2d at
723.
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Opinion of the Court
C. Fraudulent Inducement
Next, Defendants appeal from the trial court’s finding of fraudulent
inducement, arguing that Plaintiffs’ reliance on the representations and warranties
under Article IV was per se unreasonable because they are sophisticated entities and
failed to conduct any due diligence prior to entering into the MOU. We disagree.
To prevail on their claim that the trial court erred when it found Defendants
liable for fraudulent inducement, Defendants must show that none of the evidence
relied on by the trial court in reaching its conclusion was competent. Sisk v.
Transylvania Cmty. Hosp. Inc., 364 N.C. 172, 179, 695 S.E.2d 429, 434 (2010). To
determine the competency of the trial court’s evidence supporting its conclusion that
Defendants fraudulently induced Plaintiffs, we begin by analyzing whether all the
elements of fraud are met. We then examine whether Plaintiffs’ reliance on
Defendants’ representations was reasonable.
1. Fraud
Defendants assert the trial court erred in finding they fraudulently induced
Plaintiffs to enter into the MOU, IALA and Revolver. The elements of fraud are: “(1)
false representation or concealment of a past or existing material fact; (2) reasonably
calculated to deceive; (3) made with intent to deceive; (4) which does in fact deceive;
(5) resulting in damage to the injured party.” Whisnant v. Carolina Farm Credit, 204
N.C. App. 84, 94, 693 S.E.2d 149, 156–57 (2010) (citation omitted) (cleaned up).
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Opinion of the Court
Here, there is no disputing that Plaintiffs were deceived by Defendants, and
they suffered economic injury as a result. Therefore, this Court turns its attention to
the remaining three elements to determine whether Defendants’ conduct amounted
to fraud.
With respect to the first three elements, the Record tends to show that
Defendants made representations and warranties that were calculated to deceive
Plaintiffs regarding their obligations to third parties and ability to perform under the
terms of the MOU. Specifically, under Article IV, Defendants represented that
[t]he execution of the MOU and the consummation of the
transactions set forth in the MOU do not create in any
party the right to accelerate, terminate, modify, cancel, or
require any notice or consent under any contract to which
any of them is a party or is bound or to which any of their
assets are subject[.]
Two weeks before performance was due, however, Vandeman, acting as a chairman
for Defendant Academy Association, Inc., sent an email to Plaintiffs stating that the
restructuring plan set forth under Article II could not be accomplished because:
i. Seller notes . . . are subject to breach and acceleration
upon reorganization;
ii. The debt reduction from the IALA and the
reorganization may result in adverse tax consequences to
Lindberg; [and]
iii. The reorganization will trigger certain changes in
control provisions in contracts with third-parties[.]
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Opinion of the Court
Put plainly, Defendants made representations about their ability to perform under
the MOU, then just two weeks before performance was due, cited those exact
representations as the reason why they could not perform. Relying on these
representations, Plaintiffs entered into the MOU, IALA, and Revolver, which
provided Defendants debt relief of more than $100 million and a $40 million revolving
line of credit. The facts in the Record show Defendants were in the best position to
understand whether they could perform under the MOU’s terms because Lindberg
controlled the SACs. Further, because Lindberg understood the intricacies of the
SACs’ business structures, he knew performance under the MOU was impossible, yet
made representations that induced Plaintiffs to enter into the contract. For those
reasons, we hold the trial court did not err in finding Defendants’ actions satisfied
the elements of fraud. See Whisnant, 204 N.C. App. at 94, 693 S.E.2d at 156–57.
2. Reasonable Reliance
Next, we consider whether Plaintiffs’ reliance on Defendant’s fraudulent
representations was reasonable. To prevail on a fraud claim, a plaintiff must prove
they actually relied on misrepresentations and that their reliance was reasonable.
Cobb v. Pa. Life Ins. Co., 215 N.C. App. 268, 277, 715 S.E.2d 541, 549 (2011).
“Reliance is not reasonable if a plaintiff fails to make any independent investigation
. . . [.]” State Props., LLC v. Ray, 155 N.C. App. 65, 73, 574 S.E.2d 180, 186 (2002).
Reliance will not be considered unreasonable, however, “if the plaintiff can show that
‘it was induced to forego additional investigation by defendant’s misrepresentations.’”
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Hudgins v. Wagoner, 204 N.C. App. 480, 491, S.E.2d 436, 445 (2010) (citations
omitted). Additionally, if a defendant’s representations “could not be readily or easily
verified,” a plaintiff’s reliance is more likely to be regarded as reasonable. Phelps-
Dickson Builders L.L.C. v. Amerimann Partners, 172 N.C. App. 427, 439, 617 S.E.2d
664, 671 (2005). The reasonableness of a party’s reliance is an issue of fact for the
fact finder. Marcus Bros. Textiles v. Price Waterhouse, LLP, 350 N.C. 214, 224, 513
S.E.2d 320, 327 (1999). “Findings of fact made by the trial judge are conclusive on
appeal if supported by competent evidence, even if . . . there is evidence to the
contrary.” Sisk, 364 N.C. at 179, 695 S.E.2d at 434 (quoting Tillman v. Com. Credit
Loans, Inc., 362 N.C. 93, 100–01, 655 S.E.2d 362, 369 (2008)). Competent evidence
is evidence that a “reasonable mind might accept as adequate to support the finding.”
City of Asheville v. Aly, 233 N.C. App. 620, 625, 757 S.E.2d 494, 499 (2014) (citing In
re Adams, 240 N.C. App. 318, 320-21, 693 S.E.2d 705, 708 (2010)).
Defendants claim that Plaintiffs’ reliance was per se unreasonable because
Plaintiffs are sophisticated business entities entering into a multi-billion-dollar deal,
yet chose to forego conducting any due diligence prior to signing the MOU. Plaintiffs
concede they failed to conduct due diligence; however, for the reasons discussed
below, we hold their reliance was reasonable under the circumstances.
Defendants cite to several cases involving the sale of real property in which a
plaintiff failed to conduct due diligence prior to entering into a contract. There is,
however, one important difference between the cases cited and the facts of our current
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case: this was not a purchase. The MOU was a temporary agreement to help
Plaintiffs out of Rehabilitation and, eventually, back into the ownership and control
of Lindberg. The MOU functioned as a stop gap to avoid impending financial ruin,
and as such, functioned very differently than would an MOU for a real property
transaction. Here, the only thing being bought under the MOU was time.
Further, while it is true Plaintiffs had unfettered access to Defendants’
accountings, the facts show that Lindberg was in the best position to understand the
complex scaffolding of each SAC’s business structure. Collectively, these complex
structures involved: multiple tiers of operating and holding companies; loans that
had been syndicated and repackaged, then transferred several times; underlying loan
agreements and sellers’ notes; equity equivalence agreements; and third-party
financing agreements. Plaintiffs lacked the time and expertise to determine whether
the representations and warranties were accurate, and ascertaining that information
would have involved a complex legal analysis. The veracity of Defendants’
representations could not have been “readily or easily verified,” and moreover,
Plaintiffs had no reason to believe Lindberg would make false statements,
considering he stood to benefit from the MOU’s success as well. See Phelps-Dickson
Builders L.L.C., 172 N.C. App. at 439, 617 S.E.2d at 671.
Here, because the MOU did not govern a sale, we do not hold Plaintiffs to the
same heightened standard as the sophisticated business entities in the case law to
which Defendant cites. Further, Plaintiffs’ reliance on Defendants’ representations
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Opinion of the Court
was reasonable because discovery of Defendants’ fraud would not have been readily
or easily verified, and Defendant was in the best position to know whether the MOU,
as written, could be effectuated. See id. at 439, 617 S.E.2d at 671. For those reasons,
we hold the trial court relied on competent evidence to reach its conclusion and affirm
the fraud judgment against Defendants.
D. Damages
On cross-appeal, Plaintiffs argue that the trial court erred when it failed to
award damages for Defendants’ fraud. Conversely, Defendants argue the trial court
correctly concluded Plaintiffs were not entitled to compensatory or punitive damages
for fraud, reasoning that it would amount to “double recovery,” running afoul of the
election of remedies doctrine.
After a review of the Record, we agree with Plaintiffs.
1. Standard of Review
“Since this case was tried before a judge sitting without a jury, this Court is
bound by the trial court’s findings which are supported by competent evidence, even
if evidence exists to sustain contrary findings. [R]eview of the trial court’s conclusions
of law is de novo.” Hickory Orthopaedic Ctr., P.A. v. Nicks, 179 N.C. App. 281, 286,
633 S.E.2d 831, 834 (2006) (quotation omitted).
2. Election of Remedies Doctrine
“The fact finder . . . has broad discretion in awarding damages to ensure that
the plaintiff is made whole and the wrongdoer does not profit from its conduct.”
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Opinion of the Court
TradeWinds Airlines, Inc. v. C-S Aviation Servs., 222 N.C. App. 834, 850, 733 S.E.2d
162, 174 (2012). The “doctrine of election of remedies is not to prevent recourse to
any remedy, but to prevent double redress for a single wrong.” Smith v. Oil Corp.,
239 N.C. 360, 368, 79 S.E.2d 880, 885 (1954).
Our Supreme Court’s precedent demonstrates that remedies for both breach of
contract and fraud may coexist. In Parker v. White, our Supreme Court held that a
party who has been fraudulently induced to enter into a contract may either
repudiate the contract or “affirm the contract, keeping whatever property or
advantage he has derived under it, and may recover in an action for deceit the
damages caused by the fraud.” 235 N.C. 680, 688, 71 S.E.2d 122, 128 (1952).
Affirming the contract ends the defrauded party’s right to rescind the contract, but
does not excuse breach of that agreement. See Hutchins v. Davis, 230 N.C. 67, 73, 52
S.E.2d 210, 214 (1949) (holding that affirming a contract does not prevent the
defrauded party from recovering by filing a new action or counterclaim for damages
sustained as a result of fraud).
Here, the doctrine of election of remedies does not bar Plaintiffs from
recovering for both specific performance and for monetary damages because each
remedy relates to a separate and distinct wrongdoing by Defendants. Defendants
breached the MOU on 1 October 2019 when they failed to reorganize the SACs.
Defendants’ fraudulent conduct, however, occurred on 27 June 2019 when the MOU,
IALA, and Revolver were executed.
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Opinion of the Court
It is true that Plaintiffs made one election of remedy relating to their breach
of contract claim—specific performance. Plaintiffs’ election of specific performance,
however, does not preclude them from recovering monetary damages for fraud. These
harms are not mutually exclusive and neither are their remedies.
3. Conditional Judgment
A conditional judgment is “one whose force depends upon the performance or
nonperformance of certain acts[.]” Hagedorn v. Hagedorn, 210 N.C. 164, 165, 185
S.E. 768, 769 (1936). Put another way, if an order is not self-executing, it is
“therefore, conditional and void.” Cassidy v. Cheek, 308 N.C. 670, 674, 303 S.E.2d
792, 795 (1983).
Here, in its judgment, the trial court found Defendants liable for fraud and
stated that “if an appellate Court should determine that specific performance is not
an available remedy this Court would enter an award of punitive damages in the
amount of three times compensatory damages.” The conditional assessment of
compensatory damages in the event this Court determined specific performance is
not available makes the trial court’s judgment “not self-executing.” See id. at 674,
303 S.E.2d at 795. For that reason, we vacate the trial court’s judgment only as it
pertains to remedies available to Plaintiffs for Defendants’ fraud, and we remand for
further proceedings consistent with this opinion.
IV. Conclusion
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Opinion of the Court
We hold the trial court’s conclusions of law were supported by findings of fact
based on competent evidence. See Cartin, 151 N.C. App. at 699, 567 S.E.2d at 176.
For those reasons, this Court affirms the trial court’s conclusions that the MOU was
enforceable after severing Article III, and that Defendants are liable for fraud. This
Court further vacates and remands the trial court’s order and judgment only as it
relates to remedies available to Plaintiffs for Defendants’ fraud.
AFFIRMED IN PART; VACATED AND REMANDED IN PART.
Judges ZACHARY and WOOD concur.
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