S. Shores Realty Servs., Inc. v. Miller

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA16-557
Filed: 17 January 2017
Dare County, No. 11 CVS 44
SOUTHERN SHORES REALTY SERVICES, INC., Plaintiff,
v.
WILLIAM G. MILLER, THE MILLER FAMILY LIMITED PARTNERSHIP II, THE
MILLER FAMILY LIMITED PARTNERSHIP III, OLD GLORY II, LLC, OLD
GLORY III, LLC, OLD GLORY IV, LLC, OLD GLORY V, LLC, OLD GLORY VI, LLC,
OLD GLORY VII, LLC, OLD GLORY IX, LLC, OLD GLORY XI, LLC, OLD GLORY
XII, LLC, and OLD GLORY XIII, LLC, Defendants.
Appeal by defendants from orders entered on 1 October 2015 and 15 December
2015, and judgment entered 18 November 2015 by Judge Cy A. Grant, Sr. in Dare
County Superior Court. Heard in the Court of Appeals 3 November 2016.
Vandeventer Black LLP, by David P. Ferrell and Kevin A. Rust, for plaintiff-
appellee.
Gregory E. Wills, P.C., by Gregory E. Wills, for defendants-appellants.
ZACHARY, Judge.
William G. Miller; The Miller Family Limited Partnership II; The Miller
Family Limited Partnership III; Old Glory II, LLC; Old Glory III, LLC; Old Glory IV,
LLC; Old Glory V, LLC; Old Glory VI, LLC; Old Glory VII, LLC; Old Glory IX, LLC;
Old Glory XI, LLC; Old Glory XII, LLC; and Old Glory XIII, LLC (collectively,
defendants), appeal from judgment entered against them following a trial on claims
asserted by Southern Shores Realty Services, Inc. (plaintiff), and from the trial court’s
S. SHORES REALTY SERVS., INC. V. MILLER
Opinion of the Court
denial of defendants’ motions for a directed verdict and for entry of Judgment
Notwithstanding the Verdict (“JNOV”) or in the alternative for a new trial. On
appeal, defendants argue that they were entitled to entry of a directed verdict or
JNOV on plaintiff’s claims for breach of contract against all defendants, and on
plaintiff’s claim for piercing the corporate veil brought against William G. Miller (“Mr.
Miller”). We have carefully reviewed defendants’ arguments in light of the record on
appeal and the applicable law, and conclude that the trial court did not err and that
defendants are not entitled to relief.
I. Background
This appeal arises out of a dispute concerning thirteen contracts for
management of properties available for short-term vacation rental of houses on the
North Carolina coast. Plaintiff is a North Carolina real estate company that provides
rental management services to the owners of vacation rental properties on the Outer
Banks. Plaintiff generally contracts with the owners of properties that are available
for short-term rental of less than thirty days. Plaintiff advertises and rents the
properties, and provides housekeeping, maintenance, and record-keeping services for
the properties’ owners. In return, plaintiff earns a commission of 13% of the total
rental price for a vacation rental. In order to reserve a house for a short-term vacation
rental, prospective tenants are required to deposit half of the total rental amount
with plaintiff in advance. When plaintiff receives the deposit, it disburses the deposit
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to the owner of the property. When the tenant departs the rental property, plaintiff
transfers the remainder of the rental payment to the property’s owner.
Defendant William Miller is “the patriarch and speaker for the family
business” at issue in the present case, which consists of the construction, rental, and
sale of coastal properties. The other defendants are limited liability companies (LLCs)
established in North Carolina pursuant to the North Carolina Limited Liability
Company Act, N.C. Gen. Stat. § 57D-1-01 et. seq. Each LLC was established to
manage the construction, rental, and sale of a single coastal property. Mr. Miller is
a managing member of each LLC, as are Mr. Miller’s wife and their sons.
In 2009, plaintiff signed thirteen contracts with the LLC defendants in the
instant case, under the terms of which plaintiff agreed to provide rental management
services for the 2010 vacation rental season. The contracts and the correspondence
between plaintiff and defendants refer to defendants as “Owner” and to plaintiff as
“SSRS” or “Agent.” Each of these contracts provided, in relevant part that:
SSRS will remit rental proceeds collected, less any
deductions authorized hereunder . . . to Owner on the
following basis: SSRS will disburse up to 50% of the rental
rate when the advance payment is made and the balance is
disbursed after the tenant’s departure provided: (1) this
shall not constitute a guarantee by Agent for rental
payments that Agent is unable to collect in the exercise of
reasonable diligence; (2) payments hereunder are subject
to limitations imposed by the VRA regarding advance
disbursement of rent; and (3) if, pursuant to this
Agreement or required by the VRA, Agent either has
refunded or will refund in whole or in part any rental
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payments made by a tenant and previously remitted to
Owner, Owner agrees to return same to Agent promptly
upon Agent’s demand. Two exceptions to this policy are:
...
2. “Foreclosure” - Owner will report foreclosure on the
rental property to Agent and rental proceeds already
disbursed to Owner will be returned to SSRS. Any
remaining proceeds paid by Tenant will be held by SSRS to
ensure the availability of funds for Tenant’s rental or
refund. If Agent receives information regarding Owner’s
financial difficulties of any kind, Agent will hold remaining
rental income for the protection of Tenant’s rental or
refund. Foreclosure is a material fact; therefore, Agent is
required to disclose knowledge of foreclosure to Tenant.
Plaintiff subscribed to a listing service that included a list of properties that
were in foreclosure. In January of 2010, one of defendants’ properties that plaintiff
had rented to vacation tenants for the summer of 2010 appeared on the foreclosure
list. Defendants had not informed plaintiff of this occurrence. David Watson,
plaintiff’s sales manager and general manager, arranged a meeting with Mr. Miller,
at which Mr. Miller agreed to return the rental deposit that plaintiff had disbursed
to defendant LLCs for rental of the property. Sharon Bell, who had been plaintiff’s
accounting supervisor for approximately twenty years, attended the meeting and
heard Mr. Miller agree to return the rental deposits that had been disbursed to his
businesses for properties that were in foreclosure. However, those funds were never
returned to plaintiff, and on 28 January 2010, plaintiff received a letter from an
attorney associated with the law firm representing defendants, admitting that five of
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the properties subject to contracts between plaintiff and defendants were then in
foreclosure. The letter stated in relevant part, the following:
As Mr. Miller has informed you, Stubbs & Perdue is
representing Mr. Miller and Old Glory in his negotiations
with various creditors that hold liens on his properties and
that you are the rental agency for. I am writing to assure
you that we are diligently working on this project and are
hopeful that some sort of resolution will be reached.
What we are unsure of is whether this will be inside or
outside of bankruptcy. If we are only left with the
alternative of filing for bankruptcy, our plan is to file under
chapter 11 of the Bankruptcy Code. This will allow Mr.
Miller to remain in control of the properties and continu[e]
to operate as normal while a plan of reorganization is
formulated. Mr. Miller has stressed his intentions to
continue utilizing Southern Shores as his rental agency.
Right now the there are two primary factors that would
push Mr. Miller into filing for bankruptcy. First would be
the inability to reach a compromise with the creditors
where a sale of a property would occur. A close second is
this notice letter from your agency that might deter renters
from selecting Old Glory properties for their vacation.
Mr. Miller and I understand your concern regarding
protecting your renters, so let me assure you that we will
keep you in the loop as far as our negotiations with
creditors. We would appreciate prior notice of your sending
out these notice letters. As I have been informed, if we are
unsuccessful in dismissing a foreclosure hearing, your
intent is to send out the letters two weeks prior to the
scheduled sale. Right now, the first scheduled hearing is
February 5 and the sale is February 26. We will be
attending the hearing and attempt to have the foreclosure
dismissed. I will let you know how this goes.
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Further, we have advised Mr. Miller to retain the deposits
as these are needed to maintain and ready the properties
for being rented. . . . Accordingly, it is imperative that Mr.
Miller continue to receive deposits from Southern Shores
as is specified in the agreement between you and Mr.
Miller.
Just in case you are not aware, here is a current list of
hearing and sale dates:
[Chart of foreclosure sale dates scheduled for dates
between 28 February 2010 and 18 March 2010].
On 3 February 2010, plaintiff received a letter from Mr. Miller individually, in
which Mr. Miller stated that:
From: William G. Miller
Subject: Rental Management Agreement - Foreclosures.
I am very disappointed with [plaintiff]. [Plaintiff] is in
violation of the 2009 and 2010 Rental Management
Agreement, Pars. 7.
As stated - Foreclosure is a material fact.
Property on the disclosure list is not “Foreclosure.” The
hearing is only to determine if the property is indeed a
possible “foreclosure.” Even after the hearing, the property
is not in “Foreclosure.” The hearing determines the
appropriate players involved and the real negotiations can
start. As a last resort, a Chapter 11 would be filed the day
before any announced sale. At that point the players could
be forced to accept changes requested.
Holding Rental Income - [Plaintiff] has not received any
information of the owners’ financial difficulties. . . . [T]his
is a “STRATEGIC DEFAULT” [which is] defined
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throughout the United States as “NOT A FINANCIAL
DIFFICULTY” but as a process to force an action.
. . . [Plaintiff] has withheld money from ten other
properties. Each property is a Limited Liability Company
(LLC). . . . This appears to be a willful action to harm my
business.
...
These are my initial thoughts. I have not run it through my
lawyers. Consider this and talk to me within the next two
days, so I can plan accordingly.
(Use of capital letters and underlining in original).
One of defendants’ properties was sold in foreclosure on 18 March 2010. At
that point, defendants had not returned the funds that plaintiff had disbursed to
them. On 26 March 2010, plaintiff terminated its contractual relationship with
defendants. Plaintiff informed the tenants who had reserved rentals for the summer
of 2010 about the foreclosure proceedings and used plaintiff’s own funds to
recompense the tenants for the rental deposits they had made and that plaintiff had
disbursed to defendants. Ultimately, eleven of the thirteen properties that were the
subject of contracts between plaintiff and defendants were sold in foreclosure.
On 19 January 2011, plaintiff filed a complaint against defendants, seeking to
recover the sum of $74,221.79 that plaintiff had spent from its own funds to
recompense the tenants for the tenants’ deposits made prior to the initiation of
foreclosure proceedings on defendants’ properties. Plaintiff asserted claims for breach
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of contract and unfair or deceptive trade practices against all defendants, and a claim
against Mr. Miller individually, seeking to hold him personally liable for plaintiff’s
damages by application of the equitable remedy known as “piercing the corporate
veil.” On 1 April 2011, defendants filed an answer denying the material allegations
of plaintiff’s complaint, raising various defenses, and asserting counterclaims against
plaintiff for breach of contract, breach of fiduciary duty, tortious interference with
contract, and unfair or deceptive trade practices. In its reply, plaintiff denied
defendants’ allegations and moved for dismissal of defendants’ counterclaims. On 20
March 2013, Judge Walter H. Godwin, Jr. entered an order granting plaintiff’s motion
for summary judgment on defendants’ counterclaims for breach of fiduciary duty,
tortious interference with contract, and unfair or deceptive trade practices, denying
plaintiff’s motion for summary judgment on defendants’ claim for breach of contract,
and denying defendants’ motion for summary judgment on plaintiff’s claims for
breach of contract and unfair or deceptive trade practices.
The parties’ claims were tried before the trial court and a jury at the 28
September 2015 civil session of Dare County Superior Court. During trial, Mr. Miller
testified that he had been employed full-time as a real estate owner and manager
since 1987, and that plaintiff and defendants had signed contracts for plaintiff to
manage thirteen rental properties for the 2010 summer vacation season. Mr. Miller
admitted that in the fall of 2009 defendants stopped making mortgage payments on
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the properties that were the subject of their contracts with plaintiff. At that point,
Mr. Miller prepared proposed modification agreements for submission to one or more
lending institutions and investigated the possibility of declaring bankruptcy. Mr.
Miller testified that the plan for each property was to “stop the payments on it and
then if we get a foreclosure sale and before the upset period is up, you know, we will
file Chapter 11 and we will retain control of that entity through a Chapter 11.”
Mr. Miller conceded that the contracts between plaintiff and defendants
required defendants to notify plaintiff if a property was in foreclosure and to return
rental deposits that had been disbursed to defendants, and that after some of
defendants’ properties went into foreclosure, defendants did not return the rental
deposits that plaintiff had disbursed to defendants. He also admitted that the eleven
properties on which he stopped making mortgage payments were sold “on the
courthouse steps[.]” In addition, Mr. Miller acknowledged that the contracts further
provided that if plaintiff “receives information regarding owner’s financial difficulties
of any kind” that plaintiff would then “hold remaining rental income for protection of
tenants, rental or refund” and that the contracts specified that foreclosure was a
material fact that would be disclosed to tenants.
At the close of plaintiff’s evidence and again at the close of all the evidence,
defendants moved for a directed verdict in their favor. At the close of all the evidence,
the trial court granted defendants’ motion for directed verdict against plaintiff as to
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plaintiff’s claims for unfair or deceptive trade practices, but allowed plaintiff’s claims
for breach of contract and piercing the corporate veil to be submitted to the jury. At
the close of all the evidence, plaintiff moved for directed verdict on defendants’ claim
for breach of contract; the trial court denied plaintiff’s motion and defendants’ claim
for breach of contract was also submitted to the jury.
On 2 October 2015, the jury returned verdicts finding that defendants had
breached their contracts with plaintiff; that plaintiff was entitled to recover the sum
of $74,221.79 (the amount of rental deposits disbursed to defendants) from
defendants; and that Mr. Miller had controlled defendants with respect to the acts or
omissions that damaged plaintiff. The jury did not find that plaintiff had breached
the contracts with defendants. On 18 November 2015, the trial court entered
judgment in accordance with the jury’s verdicts. On 24 November 2015, defendants
filed a motion asking the trial court to set aside the verdicts of the jury pursuant to
N.C. Gen. Stat. § 1A-1, Rule 50(b)(1), and to enter judgment in Mr. Miller’s favor with
respect to plaintiff’s claim to pierce the corporate veil, or in the alternative, to award
defendants a new trial pursuant to N.C. Gen. Stat. § 1A-1, Rule 59. Following a
hearing on defendants’ motions, the trial court entered an order on 15 December
2015, denying defendants’ motions. Defendants noted a timely appeal to this Court
from the denial of defendants’ motion for directed verdict, JNOV, or a new trial, and
the judgment entered in this case.
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II. Standard of Review
On appeal, defendants argue that the trial court erred by denying their
motions for directed verdict and JNOV. “When considering the denial of a directed
verdict or JNOV, the standard of review is the same. ‘The standard of review of
directed verdict is whether the evidence, taken in the light most favorable to the non-
moving party, is sufficient as a matter of law to be submitted to the jury.’ ” Green v.
Freeman, 367 N.C. 136, 140, 749 S.E.2d 262, 267 (2013) (quoting Davis v. Dennis Lilly
Co., 330 N.C. 314, 322, 411 S.E.2d 133, 138 (1991)). “A motion for JNOV ‘should be
denied if there is more than a scintilla of evidence supporting each element of the
non-movant’s claim.’ ‘A scintilla of evidence is defined as very slight evidence.’ ”
Hayes v. Waltz, __ N.C. App. __, __, 784 S.E.2d 607, 613 (2016) (quoting Shelton v.
Steelcase, Inc., 197 N.C. App. 404, 410, 677 S.E.2d 485, 491 (2009), and Pope v. Bridge
Broom, Inc., __ N.C. App. __, __ 770 S.E.2d 702, disc. review denied, 368 N.C. 284,
775 S.E.2d 861 (2015)). “The party moving for judgment notwithstanding the verdict,
like the party seeking a directed verdict, bears a heavy burden under North Carolina
law.” Taylor v. Walker, 320 N.C. 729, 733, 360 S.E.2d 796, 799 (1987).
Defendants also argue that the trial court erred in its instructions to the jury.
“When a challenge to the trial court’s instructions to the jury raises a legal question,
it is subject to review de novo. However, . . . ‘[t]he form and phraseology of issues is
in the court’s discretion, and there is no abuse of discretion if the issues are
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sufficiently comprehensive to resolve all factual controversies.’ ” Geoscience Grp., Inc.
v. Waters Constr. Co., Inc., 234 N.C. App. 680, 686, 759 S.E.2d 696, 700 (2014) (citing
Jefferson Pilot Fin. Ins. Co. v. Marsh USA, Inc., 159 N.C. App. 43, 53, 582 S.E.2d 701,
706-07 (2003), and quoting Barbecue Inn, Inc. v. CP & L, 88 N.C. App. 355, 361, 363
S.E.2d 362, 366 (1988)).
III. Breach of Contract
“The elements of a claim for breach of contract are (1) existence of a valid
contract and (2) breach of the terms of that contract.” Poor v. Hill, 138 N.C. App. 19,
26, 530 S.E.2d 838, 843 (2000) (citation omitted). In this case, the parties stipulated
to the existence of valid contracts between defendants and plaintiff. As discussed
above, each of the parties’ contracts stated, in relevant part, that:
. . . SSRS will disburse up to 50% of the rental rate when
the advance payment is made and the balance is disbursed
after the tenant’s departure provided . . . if, pursuant to
this Agreement or required by the VRA, Agent either has
refunded or will refund in whole or in part any rental
payments made by a tenant and previously remitted to
Owner, Owner agrees to return same to Agent promptly
upon Agent’s demand. . . .
. . . Owner will report foreclosure on the rental property to
Agent and rental proceeds already disbursed to Owner will
be returned to SSRS. Any remaining proceeds paid by
Tenant will be held by SSRS to ensure the availability of
funds for Tenant’s rental or refund. If Agent receives
information regarding Owner’s financial difficulties of any
kind, Agent will hold remaining rental income for the
protection of Tenant’s rental or refund. Foreclosure is a
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material fact; therefore, Agent is required to disclose
knowledge of foreclosure to Tenant.
We hold that the terms of each of the contracts plainly required that if a rental
property was subject to foreclosure, defendants would (1) notify plaintiff of the
foreclosure proceeding, and (2) return to plaintiff any rental income that plaintiff had
previously disbursed to defendants for the property that was in foreclosure. Plaintiff
presented ample evidence establishing that defendants failed to perform either of
these contractual obligations, and defendants do not dispute that they did not return
the rental deposits that plaintiff had disbursed prior to learning that some of
defendants’ properties were in foreclosure. We conclude that plaintiff presented
evidence to support each element of its claims for breach of contract and that the trial
court did not err by denying defendants’ motions for directed verdict and JNOV with
respect to these claims.
In reaching this conclusion, we have carefully evaluated defendants’
arguments urging us to reach a different result. Defendants’ primary argument is
that the result in this case should be dictated, not by the express terms of the parties’
contracts, but by the statutory provisions of the North Carolina Vacation Rental Act
(“VRA”), N.C. Gen. Stat. § 42A-1 et. seq. Defendants direct our attention to references
in the contracts in which the parties acknowledge their obligation to adhere to all
applicable law, including the VRA. For example, each of the contracts states that:
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. . . Owner hereby contracts with Agent, and Agent hereby
contracts with Owner, to lease and manage the property . .
. in accordance with all applicable laws and regulations,
including but not limited to the North Carolina Vacation
Rental Act (NCGS 42A-1 et. seq.) . . . upon the terms and
conditions contained herein.
Defendants argue that their appeal raises a “matter of first impression”
regarding the proper interpretation of N.C. Gen. Stat. § 42A-19(a) (2015), which
states in relevant part that:
The grantee of residential property voluntarily transferred
by a landlord who has entered into a vacation rental
agreement for the use of the property shall take title to the
property subject to the vacation rental agreement if the
vacation rental is to end not later than 180 days after the
grantee’s interest in the property is recorded in the office
of the register of deeds.
N.C. Gen. Stat. § 42A-19(a) requires the buyer of property acquired in a
voluntary transfer from the owner to honor previously executed vacation rental
agreements that are scheduled within six months of the voluntary transfer.
efendants contend that this provision also applies to property that is involuntarily
transferred in a foreclosure proceeding. Defendants apparently assume that a tenant
who has contracted for a short-term vacation rental of one or two weeks might choose
to litigate the tenant’s right to insist on the rental of a property that had been sold in
foreclosure. As a practical matter, this seems unlikely; however, we conclude that on
the facts of this case we are not required to resolve any issues pertaining to the VRA
or to determine the correct interpretation of its provisions.
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Assuming, arguendo, that defendants have correctly interpreted the scope of
N.C. Gen. Stat. § 42A-19, this does not change the outcome of this case. The plain
language of the parties’ contracts required defendants to notify plaintiff if a rental
property was in foreclosure, and to refund any previously disbursed rental payments
associated with the property. “When competent parties contract at arm’s length upon
a lawful subject, as to them the contract is the law of their case.” Suits v. Insurance
Co., 249 N.C. 383, 386, 106 S.E.2d 579, 582 (1959). “[T]o ascertain the intent of the
parties at the moment of execution . . . the court looks to the language used[.] . . .
Presumably the words which the parties select were deliberately chosen and are to
be given their ordinary significance.” Briggs v. Mills, Inc., 251 N.C. 642, 644, 111
S.E.2d 841, 844 (1960) (citations omitted).
Defendants suggest that because their contracts recite that the parties will
follow the applicable provisions of the VRA - which would be required whether or not
the contracts included the reference to the VRA - the terms of the contracts are
thereby replaced by the VRA, which defendants contend “control[s] the relationship
between all the parties[.]” Defendants have not cited any authority for the proposition
that a contract’s reference to relevant statutory provisions nullifies the contract’s
express terms, and we know of no authority for this position. We conclude that
defendants have failed to show that the VRA conflicts with or replaces the terms of
the parties’ contracts, and that the interpretation of the VRA is not germane to the
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issue of defendants’ entitlement to a directed verdict on plaintiff’s claims for breach
of contract.
Defendants also argue that, although the parties’ contracts state that
defendants “will report foreclosure on the rental property to Agent” and that “rental
proceeds already disbursed to Owner will be returned to SSRS,” these obligations do
not arise until the entire foreclosure proceeding is completed and the deed to the
property is transferred to a new owner. Defendants contend that the fact that “the
VRA defines ‘Transfer’ as ‘recording at the registrar of deeds’ ” requires the conclusion
that “the term ‘Foreclosure,’ in this context, must mean the point at which a deed
vesting title in the lender is recorded at the registrar of deeds[.]” However,
“foreclosure” is defined as “[a] legal proceeding to terminate a mortgagor’s interest in
property, instituted by the lender (the mortgagee) either to gain title or to force a sale
in order to satisfy the unpaid debt secured by the property.” Black’s Law Dictionary
719 (9th ed. 2009). It is long established that “[i]n construing contracts ordinary
words are given their ordinary meaning unless it is apparent that the words were
used in a special sense. ‘The terms of an unambiguous contract are to be taken and
understood in their plain, ordinary and popular sense.’ ” Harris v. Latta, 298 N.C.
555, 558, 259 S.E.2d 239, 241 (1979) (internal quotation omitted). We conclude that
the term “foreclosure” in the parties’ contracts should be interpreted in its ordinary
meaning as being a legal proceeding by a mortgagee brought against a mortgagor
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who has defaulted on payments due under the terms of a mortgage contract.
Therefore, defendants’ contractual obligation to notify plaintiff of foreclosure
proceedings arose when these proceedings were initiated.
Defendants also argue that the trial court erred in its instructions to the jury
on the effect of a sale in foreclosure upon a vacation rental tenant’s legal right to
enforce a short-term lease entered into prior to the foreclosure. Neither the trial
court’s instructions to the jury nor the verdict sheets submitted to the jury asked the
jury to render a verdict on the effect of a foreclosure upon a tenant’s legal right to
force the purchaser of a property to honor a short-term vacation rental lease. At one
point during its deliberations, the jury asked for instructions on the definition of the
term “foreclosure” and on whether a bank that purchased a property in foreclosure
would be required to honor a vacation rental agreement. The trial court instructed
the jury on the definition of foreclosure taken from Black’s Law Dictionary, 9th ed.,
as quoted above, and we conclude that the trial court did not err in giving this
definition. The trial court further instructed the jury that our appellate jurisprudence
had not established whether a bank would be obligated to honor a vacation rental
lease after buying a property in foreclosure but that, as a general rule, “the sale under
a mortgage or deed of trust cuts out and extinguishes all liens, encumbrances and
junior mortgages executed subsequent to the mortgage containing the power.”
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Defendants contend that the trial court’s instruction failed to account for an
exception to the general rule established by the provisions of the VRA. However, as
discussed above, the parties’ contracts imposed certain duties upon defendants in the
event of a foreclosure on a property that was subject to a short-term rental. These
contractual obligations were not dependent upon or associated with the issue of the
rights of a short-term vacation rental tenant upon foreclosure of a property subject to
a short-term vacation lease, and the jury was not required to resolve any factual
issues regarding the effect of foreclosure upon a tenant’s rights in its determination
of the merits of the parties’ respective claims. Defendants have failed to articulate
any way in which the trial court’s instructions on this issue, even if erroneous, would
have confused the jury as to any of the substantive issues it was required to resolve
or would have affected the jury’s verdict on plaintiff’s claims for breach of contract.
We conclude that this argument is without merit.
For the reasons discussed above, we conclude that plaintiff presented more
than a scintilla of evidence to support each element of its claims for breach of contract.
Therefore, the trial court did not err by denying defendants’ motions for directed
verdict, for entry of a JNOV, or for a new trial on these claims.
IV. Piercing Corporate Veil
Mr. Miller argues that the trial court erred by denying his motion for directed
verdict, entry of JNOV, or award of a new trial on plaintiff’s claim seeking to hold
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him personally liable for plaintiff’s damages by applying the equitable doctrine of
piercing the corporate veil. For the reasons that follow, we disagree.
A. Introduction: Legal Principles
The determination of whether an individual may be held personally liable for
the debts of a business entity with which the individual is associated depends in part
upon the nature of the entity. “The general rule is that in the ordinary course of
business, a corporation is treated as distinct from its shareholders.” State ex rel.
Cooper v. Ridgeway Brands Mfg., LLC, 362 N.C. 431, 438, 666 S.E.2d 107, 112 (2008)
(citation omitted). However:
[E]xceptions to the general rule of corporate insularity may
be made when applying the corporate fiction would
accomplish some fraudulent purpose, operate as a
constructive fraud, or defeat some strong equitable claim.
Those who are responsible for the existence of the
corporation are, in those situations, prevented from using
its separate existence to accomplish an unconscionable
result.
Ridgeway, 362 N.C. at 439, 666 S.E.2d at 112-113 (internal quotation omitted). Thus,
“courts will disregard the corporate form or ‘pierce the corporate veil,’ and extend
liability for corporate obligations beyond the confines of a corporation’s separate
entity, whenever necessary to prevent fraud or to achieve equity.” Glenn v. Wagner,
313 N.C. 450, 454, 329 S.E.2d 326, 330 (1985) (citation omitted). A court’s decision
to pierce the corporate veil, thereby “proceeding beyond the corporate form[,] is a
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strong step: Like lightning, it is rare [and] severe [.]” Ridgeway at 439, 666 S.E.2d at
112 (internal quotation omitted).
The limitation upon circumstances in which a corporate officer or shareholder
may be personally liable for debts incurred by the corporation is an important
distinction between the law governing corporations and that of partnerships.
“Shareholders in a corporation are insulated from personal liability for acts of the
corporation, . . . but partners in a partnership are not insulated from liability[.] . . .
Stated differently, no corporate veil exists between a general partnership and its
partners.” Ron Medlin Constr. v. Harris, 364 N.C. 577, 583, 704 S.E.2d 486, 490
(2010).
In the present case, the defendants, with the exception of Mr. Miller, are
limited liability companies, or LLCs. “An LLC is a statutory form of business
organization . . . that combines characteristics of business corporations and
partnerships.” Hamby v. Profile Prods., L.L.C., 361 N.C. 630, 636, 652 S.E.2d 231,
235 (2007) (internal quotation omitted). “[T]he North Carolina Limited Liability
Company Act provides for the formation of a business entity combining the limited
liability of a corporation and the more simplified taxation model of a partnership. . .
allowing for great flexibility in its organization.” Id. “[A]s its name implies, limited
liability of the entity’s owners, often referred to as ‘members,’ is a crucial
characteristic of the LLC form, giving members the same limited liability as corporate
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shareholders. . . . As a corporation acts through its officers and directors, so an LLC
acts through its member-managers[.]” Id. In addition, N.C. Gen. Stat. § 57D-3-30
(2015) provides that a “person who is an interest owner, manager, or other company
official is not liable for the obligations of the LLC solely by reason of being an interest
owner, manager, or other company official.”
However, our appellate courts have generally upheld the imposition of
personal liability upon an individual manager of an LLC under the same
circumstances that support piercing the corporate veil. “[A] judgment in this area
requires a peculiarly individualized and delicate balancing of competing equities.
Nevertheless, for the purpose of achieving uniformity and predictability in this
critical area of jurisprudence, this Court has previously adopted the ‘instrumentality
rule.’ ” Ridgeway at 440, 666 S.E.2d at 113 (quoting Glenn v. Wagner, 313 N.C. 450,
454, 329 S.E.2d 326, 330 (1985)). In Glenn, our Supreme Court “enumerated three
elements which support an attack on [a] separate corporate entity under the
instrumentality rule[.]” Glenn, 313 N.C. at 454, 329 S.E.2d at 330. The Court
described these elements as follows:
(1) Control, not mere majority or complete stock control,
but complete domination, not only of finances, but of policy
and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own; and
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetrate the violation of a
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statutory or other positive legal duty, or a dishonest and
unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
Id. at 455, 329 S.E.2d at 330 (internal quotation omitted). The Court also set out
circumstances that have proven useful in determining whether it is appropriate to
pierce the corporate veil in a specific case:
Factors which heretofore have been expressly or impliedly
considered in piercing the corporate veil include:
1. Inadequate capitalization[.] . . .
2. Non-compliance with corporate formalities. . . .
3. Complete domination and control of the corporation so
that it has no independent identity. . . .
4. Excessive fragmentation of a single enterprise into
separate corporations. . . .
Glenn at 455, 329 S.E.2d at 330-31 (citations omitted). These factors may be weighed
differently in a case in which the business entity in question is an LLC rather than a
corporation. For example, N.C. Gen. Stat. § 57D-3-20 (2015) provides in relevant part
that “(a) The management of an LLC and its business is vested in the managers[,]”
and that “(d) All members by virtue of their status as members are managers of the
LLC[.]” Given that all members of an LLC are statutorily deemed to be managers,
the fact that an individual has a management role in an LLC cannot, standing alone,
justify imposing personal liability upon the manager on the grounds that he or she
exercised “control” over the LLC.
B. Discussion
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Preliminarily, we address the scope of defendants’ appellate arguments.
Plaintiff argues that our review should be limited to the arguments that defendants
made on the issue of piercing the corporate veil at the trial level, in their motions for
entry of a directed verdict. However, defendants have also appealed from the denial
of their motion for entry of JNOV or the award of a new trial. We will therefore
address arguments that defendants raised at either hearing.
As discussed above, to hold Mr. Miller personally liable for the judgment
entered against defendants:
[Plaintiff] must present evidence of three elements:
“(1) Control . . . complete domination, not only of finances,
but of policy and business practice in respect to the
transaction attacked[;] . . . and (2) Such control must have
been used by the defendant to commit fraud or wrong, to
perpetrate the violation of a . . . positive legal duty . . . in
contravention of [a] plaintiff’s legal rights; and (3) The
aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.”
Green v. Freeman, 233 N.C. App. 109, 111, 756 S.E.2d 368, 371-72 (2014) (quoting
Green, 367 N.C. at 146, 749 S.E.2d at 270 (internal citations and quotations omitted)).
We next determine whether plaintiff offered “more than a scintilla” of evidence
as to these elements. In making this determination, we will also consider the
evidence of the factors discussed above, including inadequate capitalization,
excessive fragmentation of a single enterprise into separate LLCs, and whether Mr.
Miller exercised complete domination and control over the LLCs. We conclude that
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the non-compliance with corporate formalities, which is another factor identified in
Glenn, is of less relevance in the context of an LLC, which is subject to far fewer
formal statutory requirements than is a corporation. We also recognize that the mere
fact that Mr. Miller had a management role in the LLCs cannot be the basis for
imposing personal liability upon him.
It is undisputed that eleven of the thirteen properties that were the subject of
the contracts between the parties were sold in foreclosure, and that during the course
of the foreclosure proceedings Mr. Miller informed plaintiff that defendants might be
forced to declare bankruptcy. The LLCs did not have sufficient capital to pay creditors
and conduct business. We conclude that this is evidence tending to show that the
LLCs were inadequately capitalized. In addition, the fact that a separate LLC was
formed for the management of each individual rental property constitutes evidence
from which a reasonable fact-finder might find that defendants’ business enterprise
was excessively fragmented. We note that at trial, Mr. Miller testified that the reason
that defendants formed 30 or 40 LLCs for the business was to limit the liability of the
LLCs.
We also conclude that plaintiff offered sufficient evidence to support a finding
that Mr. Miller personally controlled the finances, policies, and business practices of
the LLCs. In this respect, we note that at trial Mr. Miller acknowledged that he was
in charge of managing the family business:
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MR. MILLER: Well we’re all managing members and we
all have the capability of signing papers and that sort of
thing. It’s been agreed at this point in time that we have
an agreement within ourselves that, you know, I’m the
present managing member but that James there is going
to take over and he will have control.
Two of plaintiff’s witnesses at trial, Mr. Watson and Ms. Bell, testified that
their business dealings were always with Mr. Miller, whom they understood to be the
“decision maker” for the LLCs. In fact, defendants’ counsel asked Mr. Watson to
acknowledge on cross-examination that “Mr. Miller [had] told [him] . . . that if there
was any kind of bankruptcy done he would remain in charge[.]” (emphasis added). In
addition, the attorney who wrote to plaintiff stated that the law firm with which he
was associated represented “Mr. Miller and [the LLCs]” but did not indicate that the
firm represented any other members of the LLCs individually. The content of the
letter unmistakably characterized Mr. Miller as the “alter ego” of the family business.
For example, the letter stated that a plan was being formulated that “will allow Mr.
Miller to remain in control of the properties[,]” proclaimed that “Mr. Miller has
stressed his intentions to continue utilizing [plaintiff] Southern Shores as his rental
agency[,]” noted the existence of “two primary factors that would push Mr. Miller into
filing for bankruptcy[,]” and warned plaintiff that “it is imperative that Mr. Miller
continue to receive deposits from [plaintiff] Southern Shores as is specified in the
agreement between you and Mr. Miller.” Moreover, Mr. Miller wrote to plaintiff
individually to express his opinions on matters in contention between the parties.
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Finally, we note that in their appellate brief, defendants describe Mr. Miller as “the
patriarch and speaker for the family business.”
As discussed above, in order to survive a motion for directed verdict or JNOV,
the non-movant need only present “more than a scintilla of evidence” on each element
of its claim. Stark v. Ford Motor Co., 365 N.C. 468, 480, 723 S.E.2d 753, 761 (2012)
(citation omitted). It is well established that in ruling on a motion for directed verdict
or JNOV, “the trial court is to consider all evidence in the light most favorable to the
party opposing the motion; the nonmovant is to be given the benefit of every
reasonable inference that legitimately may be drawn from the evidence; and
contradictions must be resolved in the nonmovant’s favor.” Smith v. Price, 315 N.C.
523, 527, 340 S.E.2d 408, 411 (1986). In this case, we conclude that plaintiff
presented more than a scintilla of evidence from which the jury could find that Mr.
Miller exercised complete control over the LLCs. We also conclude that plaintiff
offered sufficient evidence that Mr. Miller used his control over the LLCs to disregard
the contractual obligation to return the rental deposits to plaintiff and that Mr.
Miller’s actions were the proximate cause of the damages suffered by plaintiff. As a
result, we conclude that the trial court did not err by denying defendants’ motions for
directed verdict or JNOV.
In their appellate brief, defendants direct our attention to the facts that the
LLCs were properly formed under North Carolina law and that Mr. Miller did not
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own a majority share of the businesses. We have held, however, that plaintiff offered
evidence of Mr. Miller’s complete domination of the LLCs sufficient to allow the jury
to determine whether he should be held personally liable for the judgment against
defendants. Defendants also concede that an individual may be “held personally
liable” when an individual’s exercise of control is used to violate a duty owed to a
plaintiff. In this case, there was evidence indicating that (1) defendants owed a duty
to return to plaintiff the rental deposits previously disbursed when the properties
went into foreclosure; (2) Mr. Miller made the substantive decisions for the LLCs and
was known as the “decision maker”; (3) Mr. Miller refused to comply with this
contractual obligation, even writing a letter to plaintiff as an individual (the letter in
no way suggested that he was writing on behalf of other LLC members) expressing
his personal “disappointment” with plaintiff; and (4) the damages suffered by plaintiff
were directly and proximately caused by Mr. Miller’s refusal to return the rental
deposits. We conclude that defendants’ argument regarding the insufficiency of
plaintiff’s evidence is without merit.
Defendants also argue, in a somewhat dramatic fashion, that unless the trial
court is reversed “the concept of limited liability [will be] eliminated entirely from the
law of contracts in North Carolina,” with the result that any member of an LLC with
“whom the opposing party actually deals with on a day-to-day basis, would be subject
to personal liability for breach of the LLC’s contract.” Defendants contend that if we
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uphold the jury’s verdict “then there is no point in having a ‘limited liability’ company
in this State.” We disagree with defendants’ implication that the instant case is in
some way extending or changing the established law concerning the imposition of
personal liability on an individual based upon his or her actions in relation to a
business entity. For example, it seems clear that on the facts of this case there would
be no basis upon which to hold any of the other member-managers of the LLCs
personally liable. Nor is Mr. Miller’s liability premised simply upon his exercise of
ordinary daily management of the LLCs. Instead, it appears that he made the
decision to intentionally breach the parties’ contracts without input from the other
LLC members, and attempted to use the LLCs to achieve an unjust result. We also
note that, to the extent that defendants are urging that as a matter of public policy
the law governing individual liability in the context of an LLC should be changed,
“[t]he General Assembly is the policy-making agency because it is a far more
appropriate forum than the courts for implementing policy-based changes to our
laws.” Rhyne v. K-Mart Corp., 358 N.C. 160, 169, 594 S.E.2d 1, 8 (2004). We conclude
that “plaintiff has carried his minimal burden of presenting more than a scintilla of
evidence supporting his . . . claim.” Morris v. Scenera Research, LLC, 368 N.C. 857,
862, 788 S.E.2d 154, 158 (2016).
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For the reasons discussed above, we conclude that the trial court did not err by
denying defendants’ motions for directed verdict or JNOV and that its orders should
be
AFFIRMED.
Judges ELMORE and STROUD concur.
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