Wilmington North Carolina Business Law and Litigation Attorney Blog

North Carolina Law On Changes to Contracts - Applying the Concept of "Equitable Adjustment" to Change-Orders

Subcontractors frequenly deal with change orders.  These cause original estimates to rise, and cause the prices on contracts to increase.  Recently, the North Carolina court of appeals dealt with a change-order case.  In  Southern Seeding Services, Inc. v. W.C. English, Inc., et al, COA12-63,6, there was a contract dispute between subcontractors on a construction project on a loop of Interstate 40 in Greensboro. The general contractor hired W.C. English, Inc. (“English”) for grading, erosion control, and grassing services. English then hired Plaintiff Southern Seeding Services, Inc. (“Southern Seeding”) for the grassing services. The contract between English and Southern Seeding provided that if the completion of the work is delayed beyond the contract time without fault by Southern Seeding, the quoted prices shall be equitably adjusted to compensate for increased cost. Through no fault of Southern Seeding (but partially due to English's delayed erosion work), Southern Seeding's work went on for almost a year after the initial contract completion date. After completion of work, Southern Seeding sent multiple correspondences to English regarding the additional costs owed due to the equitable adjustment of the quoted costs for work completed after the completion date. Southern Seeding calculated that the amount owed to them was $194,941.39. English, however, offered only $77,440.80, which Southern Seeding rejected.

At trial, the court ruled against Southern Seeding, but Southern Seeding prevailed on appeal.  On remand, the trial court found for Southern Seeding in the amount of $194,941.39 (based on the evidence and calculations offered by Southern Seeding's president) plus attorney's fees.

Since the term “equitable adjustment” was not defined in the contract and the parties' definition differed, the court looked to treatises in the subject area for a definition. The Court of Appeals agreed with the trial court's finding that “equitable adjustment” means “a breach of contract remedy ascertained via a factual analysis of the actual costs to the contractor of the additional or un-contracted-for work, including overhead and a reasonable profit.”  

North Carolina Shareholder Actions, Bankruptcy, and the Statute of Limitations

In North Carolina, shareholders can sue on behalf of corporations, but only under certain conditions. In particular, there are a number of specific statements which must appear in the complaint; without them, the case will be dismissed.  

 In Coderre v. Futrell, No. COA 12-517, the North Carolina Court of Appeals, by affirming the dismissal of a breach of contract claim, reminds the legal and business community of the importance of basic procedural concepts, particularly standing and the statute of limitations. In this case a North Carolina corporation called NALA bought for 200 acres of land, mostly financed by a note secured by a deed of trust. When NALA failed to make payments its president tried to make a payment on its behalf. The seller rejected this payment, opting to foreclose.

The parties then made a new agreement in which the seller would assign its successful bid back to NALA upon payment. But on August 12, 2008, one day before the expiration of that agreement, NALA filed for bankruptcy. On February 11, 2011, while NALA's bankruptcy case was still pending, Coderre, one of NALA's shareholders, filed an action against the seller for breach of contract. The seller moved to dismiss for lack of standing. In response, Coderre filed an amended complaint adding NALA as a plaintiff. The seller then moved for dismissal, arguing that the statute of limitations had run on the claim.

The Court of Appeals affirmed that Coderre, as a shareholder, did not have standing to file a complaint against the seller in his individual capacity. His name was nowhere on the original purchase agreement and he did not state in his complaint that he was filing on behalf of NALA. Coderre attempted to fix this mistake by filing an amended complaint adding NALA as a plaintiff the day that defendants filed their first motion to dismiss, June 13, 2011. Coderre argued that the amended complaint relates back to the date of the initial complaint. The Court rejected this argument, stating that the initial complaint was nullified because Coderre did not have standing to bring the lawsuit, therefore there was no valid complaint to which the amended complaint could relate back to. Thus, the initial complaint could not be used to defeat defendants' statute of limitations defense to the amended complaint.

Second, the Court affirmed that the bankruptcy proceedings did not toll the statute of limitations and that the amended complaint was filed outside of the limitations period to bring a breach of contract action. NALA argued that 11 U.S.C. § 108(c), which tolls the statute of limitations by the amount of time the debtor is in bankruptcy, should apply. However, the Court noted that this section applies only to a claim against the debtor, not to a claim brought by the debtor against third parties. Instead, 11 U.S.C. § 108(a) applies, which states that “a trustee may commence a nonbankruptcy action before the later of either the expiration of the statute of limitations for such action or two years after the entry of the order for relief.” Here, the alleged breach of contract occurred on April 1, 2008, so the three-year statute of limitations would have run on April 1, 2011. The order for relief in NALA's bankruptcy action was entered on August 12, 2008, so two years after this would have been August 12, 2010. Since the later of these two dates is April 1, 2011, the complaint for breach of contract should have been filed on or before that date. NALA filed its amended complaint on June 13, 2011 and was, therefore, past the statute of limitations.

North Carolina Law Emphasizes the Critical Importance of Well Drafted, Negotiated, LLC Operating Agreements

North Carolina LLC members need to make absolutely certain that their operating agreements have been carefully negotiated, planned, and drafted. When North Carolina General Statutes § 57C-10-03 was enacted in 2010, the legislature made that much abundantly clear. That section provides that the terms of an operating agreement, once signed by the members of the LLC, are the beginning and end of each member's rights. Quite simply, if it isn't in the operating agreement, it does not exist. That section provides: “Except as otherwise provided in this Chapter, it is the policy of [the North Carolina Limited Liability Company Act] to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements. ”

 This mirrors similar language in the Delaware LLC Act, which provides: “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. ” Del. Code §18-1101(b).

 Delaware, for those who may not already know, is a “thought leader” among the nation's court systems and legislatures with regard to its approach to corporate and LLC law. Delaware is home to a great number of large US corporations who take advantage of its favorable corporate and tax laws. Many states, including North Carolina, have patterned their corporate and LLC laws after Delaware's laws. It is no surprise then that North Carolina would ultimately adopt the same principle, which guides the courts of Delaware when it comes to interpreting LLC operating agreements and determining the rights and responsibilities of LLC members.

 Unfortunately, few North Carolina LLC owners bother to customize the forms they buy online or copy from books they buy at office supply stores. In an effort to save a few hundred dollars consulting a business law attorney during the formation process (because they listen to companies offering cheap business law paperwork and who scare them into thinking they'll have to pay “tens of thousands of dollars” to a bunch of “high priced lawyers”) they end up getting stuck with tens of thousands of dollars in liabilities and attorneys' fees when they find themselves in a dispute with their business partners.

 North Carolina law makes it perfectly clear that while you can use whatever sort of “agreement” you want to serve as your company's operating agreement, you will also be bound by those agreements to the very last letter if and when something goes wrong.    

Piercing the Corporate Veil in NC After the Judgment

Over at my North Carolina Judgment Enforcement blog, there is a post about a recent NC Court of Appeals decision regarding an attempt to pierce the corporate veil to levy on shareholder property after judgment against only the corporation.  The short answer is that it cannot be done.  The full post is here.

The Business Judgment Rule and North Carolina LLCs

In North Carolina, the business judgment rule applies to LLC managers. In Mooring Capital Fund, LLC v Comstock North Carolina, LLC (07 CVS 20852, Wake Co., Business Ct.), 2006 WL 46447078, 2009 NCBC 26, Judge Jolly was ruling on motions to stay, dismiss, and appoint a receiver.

In the course of issuing his ruling, the Judge opined, for what appears to be the first time in North Carolina, that, just as directors of a corporation are, the managers of an LLC are protected by the business judgment rule. “The managers of an LLC may also be entitled to the protections of the 'business judgment rule...'" Taking note of similar language found in the NC Business Corporation Act, § 55-8-30, the judge noted the corresponding portions of the North Carolina Limited Liability Company Act:

"See, e.g., G.S. 57C-3-22(d) (“A manager is not liable for any action taken as a manager, or any failure to take any action, if the manager performs the duty of his office in compliance with this section.”) and G.S. 57C-3-22(b) (“A manager shall discharge his duties as manager in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company. . . .”). Such language suggests application of the business judgment rule, a matter of common law in North Carolina, to limited liability companies." (emphasis added).

He then went on to state:

"The rule applies in addition to the North Carolina Business Corporation Act (the “NCBCA”), G.S. 55-1-01 to -17-05, and creates an evidentiary presumption that directors acted reasonably and fairly in discharging their corporate duties. State ex rel. Long v. ILA Corp., 132 N.C. App. 587, 601 (1999). The Long court described the business judgment rule as follows:

[It] creates, first, an initial evidentiary presumption that in making a decision the directors acted with due care (i.e., on an informed basis) and in good faith in the honest belief that their action was in the best interest of the corporation, and second, absent rebuttal of the initial presumption, a powerful substantive presumption that a decision by a loyal and informed board will not be overturned by a court unless it cannot be attributed to any rational business purpose.

Id. at 602 (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 14.6 at 281 (5th ed. 1995)). "

So while it may have seemed a fairly straightforward matter to put the two together and conclude that the Business Judgment Rule should also apply to LLC managers, we now have at least one written opinion stating as much -- though bear in mind that under the local rules of certain districts, you may not be able to cite to this opinion. Hopefully however, any case in which you would need to cite to this would be taking place in the Business Court.

Tacking Tort Claims on to Contract Claims in North Carolina

Most Unfair and Deceptive Trade Practice Act (UDTPA) claims in North Carolina arise out of a contract for goods or services.  Accordingly, it is quite common to see UDTPA claims coupled with breach of contract claims. 

In most cases, however, the addition of a UDTPA claim is improper, since a written contract governs the transaction.  Contract law should, therefore, be the sole arena for resolution of such claims.  This notion has been emphasized repeatedly by the 4th Circuit, the Business Court, and the Court of Appeals (e.g. - -- Broussard v. Meineke Discount Muffler Shops, 155 F.3d 331(4^th Cir. 1998); Strum v. Exxon Co. 15 F.3d 327, 329 (4th Cir.1994); Media Network Inc. v. Mullen Advertising, Inc., 2007 WL 2570175 (NC Business Ct., Mecklenburg Co.).

  The rationale is that once the parties have reduced their agreement to writing, those terms - and the applicable provisions of contract law - should control.  Parties, when contracting, do so in order to define their obligations and, in turn, limit their liabilities.  Doing so reduces the exposure to tort claims -- and treble damages -- provided by UDTPA and tort law.  At least, it should.

Once a UDTPA claim is allowed to proceed, the threat of treble damages significantly alters the negotiation strategies of both parties.  An innocent defendant is more likely to settle, for a higher sum, if facing the threat of treble damages.  A marginal plaintiff, in turn, is more likely to push the case beyond a reasonable point, hoping to pressure the defendant into a higher settlement due to the threat of a large damage award that North Carolina law may not allow, but which the defendant may not be in a position to appeal.  Despite the often harsh language with which the appeals courts treat the practice of "tacking" UDTPA claims on to ordinary contract claims, in many cases the UDTPA claim survives summary judgment, forcing the defendant into a pre-trial settlement posture disproportionate to the true nature of the plaintiff's claim.

NC Business Court Fee Raised to $1,000.00

As part of a statewide increase in court fees, as of September 1, 2009, the fee for removal of a case to the North Carolina Business Court is now $1,000.00.  This is a sharp increase over the previous $200.00 that had been in effect prior to September 1. 

Port City Java Sues Founder

Wilmington-based coffee-house chain Port City Java has filed suit against its founder and former COO Don Reynolds.  The suit, filed in New Hanover County Superior Court, alleges that Reynolds, his wife, and an LLC held by Reynolds, diverted funds from the company for personal use, including the purchase of real estate in Highland, NC. 

According to the Star-News, the suit was filed on December 23, and in keeping with the Rules of Civil Procedure, does not specify the dollar amount sought, but instead recites the claim for damages as "in excess of $10,000."

NC Gas Stations Settle Price Gouging Cases

The Star-News is reporting that several North Carolina gas station owners have agreed to settle price gouging cases.  The cases were brought by state Attorney General Roy Cooper after Governor Mike Easley invoked a state law prohibiting the charging of prices that are "unreasonably excessive."

The statute - N.C. Gen. Stat. § 75-38 - prohibits such prices on goods that are "consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property."

In order for the law to apply, however, the Governor must first make a finding that there has been an "abnormal market disruption."  This is defined in subsection (d) of the statute to include any declaration of a state of emergency or disaster is issued by the President, or the Department of Homeland Security advisory system issues a Code Red alert.  Triggering events can include war, a terrorist attack, a natural disaster, power outage, or other "extraordinary adverse circumstances."

In the case of the recent September price spikes, the trigger was hurricane Gustav - and the fear that gripped the oil markets - as it moved into the Gulf.

NC Business Court Hailed as a Model For the Nation

In North Carolina, the ability to assign cases involving complex questions of business law can be designated to be heard by the Business Court, rather than the general courts.  The Business Court uses specialized judges, with extensive knowledge of business law, like the Uniform Commercial Code, the LLC Act, and the North Carolina Business Corporations Act.

Over at the North Carolina Business Litigation Report, Mack Sperling points us to an article in Directorship Magazine's annual Guide to State Ligitation.  In that article, North Carolina's Business Court is hailed as a model for the rest of the nation.

It's no surprise.  Our out-of-state clients are often thrilled when I tell them their complex business cases can be heard by a specialized court, with specialized judges.  That is usually not an option available to them in their home states, so in many cases, litigants will opt to forego "home field advantage" and instead allow their cases to proceed here.