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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
KINDRED OF NORTH CAROLINA, INC., and VICKIE L. KINDRED,
Plaintiffs, v. PAULINE S. BOND and BOND CARPET & FLOOR COVERING,
Filed: 2 September 2003
1. Fraud; Unfair Trade Practices--negligent misrepresentation--sale of business
The trial court did not err in a fraud, unfair and deceptive trade practices, and negligent
misrepresentation case arising out of the sale of a carpet business by entering judgment upon the
jury's verdict even though defendants contend it was inconsistent on its face based on the fact
that the jury had answered the question of whether defendant had made any misrepresentations in
the negative when it was contained in the unfair and deceptive trade practices questions and in
the affirmative in the negligent misrepresentation questions, because: (1) the trial court properly
instructed the jury before their deliberations began, and the jury followed those along with the
later instructions; and (2) there was no abuse of discretion in the manner the trial court handled
the situation, especially in light of the acquiescence of defense counsel.
2. Fraud--negligent misrepresentation--motion for directed verdict
The trial court did not err by denying defendants' motion for directed verdict on
plaintiffs' claims for negligent misrepresentation during the sale of a carpet business arising from
the failure of defendant business owner's profit and loss statements to properly account for an
employee's salary, because: (1) plaintiff purchaser did not fail to undertake an effort to
investigate the financial statements so as to destroy her reasonable reliance; (2) there was enough
evidence for the jury to believe that plaintiff was justified in relying on the financial statement as
she was not at arm's length with the information, but had to rely on what was provided her; and
(3) defendant owed a duty to provide accurate financial information to plaintiff when they were
involved in a business transaction in which defendant was the only party who had or controlled
the information at issue, and defendant had a pecuniary interest in inducing plaintiff to purchase
3. Costs--attorney fees--default on promissory note
The trial court erred in an action arising out of a default on a promissory note by denying
defendants' motion for attorney fees, because: (1) N.C.G.S. § 6-21.2 allows for an award of
attorney fees in actions to enforce obligations owed under an evidence of indebtedness that itself
provides for the payment of attorney fees; and (2) the parties' promissory note stated that
defendants were entitled to attorney fees equal to fifteen percent of the outstanding balance owed
on the note.
4. Negotiable Instruments--security agreement--possession of collateral--money owed
on promissory note
The trial court did not err by entering judgment both for possession of property and for
money owed on a promissory note in an action arising out of the sale of a carpet business,
because: (1) although plaintiffs contend defendants failed to prove any right to possession of the
collateral under the security agreement, the issues of perfection and priority are irrelevant in
disputes between the debtor and the secured party; (2) a valid security interest was created and
had attached to the collateral when evidence showed that the security agreement was signed and
proper, value was given through the transaction, and the debtor took possession of the collateral;
(3) the fact that the trial court gave plaintiffs forty-five days to satisfy the money judgmentwithout having to give up collateral seemingly gave plaintiffs a redemption period; and (4) fears
of double recovery are unfounded when defendants are only entitled to the amount of the
Appeals by plaintiffs and defendants from judgment entered 24
September 2001 by Judge James W. Morgan in Mecklenburg County
Superior Court. Heard in the Court of Appeals 24 April 2003.
John E. Hodge, Jr., for plaintiff appellants/appellees.
Templeton & Raynor, P.A., by Kenneth R. Raynor, for defendant
Defendant Pauline Bond started defendant Bond Carpet & Floor
Covering, Inc., in 1994. She used her own money to start the
business. She was the president, treasurer, sole shareholder and
director. Her duties were mostly bookkeeping and administrative.
In 1998, she employed her sons, Rick and Tommy, and one other
employee full-time. Her grandson, Ricky, worked part-time. Rick
was the general manager and principal employee, as he had been in
the carpet business for over 20 years.
In 1998, Ms. Bond decided to sell the business. She hired
Clontz Commercial Investments, Inc., as her sales agent to assist
in the selling process.
Plaintiff Vickie Kindred was the operations manager of Cowper
Construction Company in 1998. She wanted to own her own business
again. In early 1999, she saw an advertisement for defendant's
business. She contacted Clontz and signed a Disclosure to Buyer
from Seller's Agent form. On 21 January 1999, Ms. Kindred met with
Clontz and received a packet which included information on Bond
Carpet, sale terms, an executive summary, and unaudited financialstatements for 1995-97. Ms. Kindred was not interested at first.
Clontz arranged a meeting between all parties.
On 27 January 1999, Ms. Kindred, Clontz, Ms. Bond and Rick
Bond met at Bond Carpet. Ms. Kindred asked for current financial
information from Ms. Bond. Ms. Bond printed a profit and loss
statement off Quick Books, the software that she used to keep the
business's books. Ms. Bond had been trained on Quick Books, but
also stated that she was not the best bookkeeper. The profit and
loss statement showed payroll expenses of $56,747.48 and a net
income of $23,760.74. Rick's salary was discussed, where it was
revealed that he was paid $605.00 per week, or approximately
$31,000.00 per year.
On 1 February 1999, Ms. Kindred took the financial information
on Bond Carpet to her accountant. Her accountant urged her to get
the 1998 tax returns. Ms. Kindred told him that she had asked for
them, however, Ms. Bond informed her that she had not given her
accountant the information yet. Thus the tax returns were not
completed. In fact, Ms. Bond had indeed sent this information to
her accountant the day before the parties met on 26 January 1999.
With her accountant, Ms. Kindred formulated an offer after
developing a comprehensive business plan. Notably, this business
plan did not envision the business retaining its retail business,
or most of the current employees. After requesting and receiving
additional information from Clontz, Ms. Kindred had Clontz explain
to her the method that was used in arriving at the asking price of
$190,000.00. It was similar to the method used by her accountant
to develop the offer price. On 15 February 1999, Ms. Kindred made an offer of $150,000.00.
This was declined. Clontz suggested something with a non-compete
clause for Ms. Bond, Rick and Lonnie. Ms. Kindred, not hearing
of Lonnie before, became concerned. She was concerned about how he
was paid. Ms. Bond explained that Lonnie was called Tommy, and he
was paid through the payroll system. Rick, on the other hand, was
paid as subcontract labor. Rick was also the company's highest
Finally, an agreement for $165,000.00 was reached. An Asset
Sale and Purchase Agreement was signed by all parties by 6 March
1999. On 25 March 1999, Kindred of North Carolina was incorporated.
The parties closed on 30 March 1999. Ms. Kindred paid Ms. Bond
$55,000.00 in cash, while Ms. Bond financed the remaining
$110,000.00 by a promissory note. Ms. Bond was granted a security
interest in various business property conveyed.
According to plaintiff, problems surfaced immediately. Rick
did not show up for work, while Ms. Bond had gone through and
removed numerous files dealing with the customers, vendors and
ongoing projects. She claimed they belonged to her. She also
changed the password on the Quick Books software so that Ms.
Kindred could not access them. She refused to divulge the
password. In April 1999, Ms. Kindred had an accountant come in and
update the Quick Books. This required backing up the old program,
and Ms. Bond relinquished the password for this purpose.
Once this information was obtained, Ms. Kindred investigated
Rick Bond's salary. There was no entry under subcontract labor or
payroll indicating how Rick's salary was handled. Rick was eventually terminated on 26 May 1999. On this day,
Ms. Kindred, Ms. Bond and Rick met, at which time Ms. Bond admitted
that Rick was paid as a draw. Ms. Bond said that she would have to
get her accountant to explain. The next day, however, Ms. Bond
came in and again changed the passwords.
Ms. Kindred then investigated her backup copy on 8 June 1999.
She printed out statements and took them to her accountant. As of
23 June 1999, Ms. Bond still would not return phone calls or grant
requests to see the now completed 1998 tax return.
On 2 July 1999, the parties met as it was time for the first
installment on the promissory note. Ms. Kindred tried again to go
over the salary information she and her accountant had prepared.
Ms. Bond exclaimed that, You're just upset because you didn't get
what you thought you were getting. Plaintiff agreed, while also
tendering the installment check. She filed suit on 27 August 1999,
before the second installment was due.
Only after Ms. Bond's deposition did Ms. Kindred first learn
that the financial statements she had received from defendants did
not include Rick's salary at all. Eventually it was determined,
with the help of defendants' accountant, that defendants had
characterized the salary of Rick as a distribution of equity to the
owner. This is what Ms. Bond had referred to as a draw. She would
pay herself, and then pay Rick, tax free.
According to Ms. Bond's accountant, these draws showed up in
the expense column of the profit and loss statement for 1998 that
he was given on 26 January 1999. These draws added up to
$33,295.24, and were taken out in checks equal to Rick's salary. The accountant believed that Ms. Bonds was distributing earnings to
herself. If it were a salary, it should have been in payroll. The
payroll total was $56,747.48, and was the largest expense on the
statement. According to the accountant, the company had a loss of
Ms. Kindred alleged that Ms. Bond had falsified the books.
The profit and loss statement that she received on 27 January 1999
showed that the company was turning a $23,760.74 profit. However,
the profit and loss statement the Bond's accountant had, printed
out 26 January 1999, showed a $9,534.50 loss. The difference
reflected the salary to Rick, totaling $33,295.24 [$23,760.74
(profit) + $9,534.50 (loss) = $33,295.24]. Had the $33,295.24 been
reported as a salary with withholdings and social security paid,
according to one expert, the company would have shown a loss of
Ms. Kindred's amended complaint of 30 March 2000 alleged
causes of action for fraud, unfair and deceptive acts or practices
in commerce, and negligent misrepresentation based upon material
misrepresentations and non-disclosures in connection with the sale
of the business. Defendants counterclaimed on the promissory note,
guaranty (Ms. Kindred had assigned the note to her business and
assumed the role of its guaranty), conversion, unfair and deceptive
trade practices, possession of property, and breach of contract.
The case was tried during the 25 June 2001 Civil Session of
Mecklenburg County Superior Court. The jury found that plaintiffs
were damaged in the amount of $60,000.00 by the negligent
misrepresentations of defendants. Both sides moved for costs, anddefendants moved for judgment notwithstanding the verdict. Parties
were heard on their respective motions on 31 August 2001. On 24
September 2001, judgment was entered. The trial court granted nunc
pro tunc defendants' motion for directed verdict on its
counterclaims on the note and guaranty in the amount of $45,000.00
(Balance of note [$105,000.00] minus damages [$60,000.00]) against
plaintiffs. Both motions for costs were denied, as well as
defendants' motion for JNOV. Defendants requested judgment on its
possession claim, and the trial court denied the request as long as
plaintiffs satisfied the money judgment within 45 days of entry of
judgment. Defendants appealed on 24 October 2001, then plaintiffs
cross-appealed on 5 November 2001.
Defendants make several assignments of error and present the
following questions on appeal: (I) Was it prejudicial error for
the trial court to enter judgment based on a jury verdict, as it
was inconsistent? (II) Should the trial court have granted its
motion for directed verdict on plaintiffs' claims for intentional
and negligent misrepresentation? (III) Did the trial court commit
prejudicial error by denying defendants' motion for directed
verdict on plaintiffs' claim of unfair and deceptive trade
practices? (IV) Did the trial court commit error by denying
defendants' motion for attorneys' fees based on the promissory
Plaintiffs make several assignments of error and present the
following questions on appeal: (V) Did the trial court commit
error in entering judgment both for possession of property and formoney owed on the promissory note? (VI) Did the trial court commit
error in excluding plaintiffs' exhibits 24 and 25?
 Defendants first contend that the trial court erred by
entering judgment upon the verdict of the jury as it was
inconsistent on its face.
Once the trial had concluded, the trial court submitted
several issues to the jury. These included fraud, unfair and
deceptive trade practices, negligent misrepresentation, and
punitive damages. The verdict form given to the jury reflected
these claims: Questions 1-3 asked if plaintiffs had been damaged
by any fraud by defendants and to what extent; Questions 4-7 were
special interrogatories to the jury on the unfair and deceptive
trade practices claim; and Questions 8 and 9 asked if plaintiffs
had been damaged by any negligent misrepresentation by defendants
and to what extent.
The jury answered the fraud questions in the negative. It
also answered all the interrogatories pertaining to unfair and
deceptive trade practices in the negative, including those which
asked if defendants had misrepresented or failed to disclose
certain information to plaintiffs. However, the jury responded in
the affirmative to the question of plaintiffs being financially
damaged by a negligent misrepresentation of defendants in the
amount of $60,000.00.
Defendants argue that the jury's verdict was inconsistent
and/or irregular as the jury answered the question of whether
defendants had made any misrepresentations in the negative when itwas contained in the unfair and deceptive trade practices questions
and in the affirmative in the negligent misrepresentation
questions. According to defendants, the trial court was required
by N.C. Gen. Stat. § 1A-1, Rule 49(d) (2001) to enter judgment on
the special findings in the questions pertaining to unfair and
deceptive trade practices, or in the alternative, had a duty not to
enter a judgment on the jury's verdict finding defendants liable
for negligent misrepresentation. See Edwards v. Motor Co., 235
N.C. 269, 69 S.E.2d 550 (1952).
However, the context from the transcript tends to put the
jury's answers into perspective. After deliberating for a period
of time, the jury asked the trial court a question: Which
questions refer to fraud and unfair and deceptive trade practices
and which questions refer only to negligent misrepresentation[?]
The trial court brought the jury into the courtroom and told them
which questions pertained to which cause of action: questions 1,
2 and 3 refer to fraud; 4, 5, 6 and 7 refer to unfair and deceptive
trade practices; 8, 9, 10 and 11 refer to negligent
misrepresentation. Each party agreed that this was proper.
Later, the jury asked the trial court another question, and the
following took place:
THE COURT: We have another question.
Can we answer no to all of the questions 4, 5,
6, and 7 and still find the Defendant liable
on question 8 for amount of damages?
Why don't we just let the bailiff tell
them yes, or do you want to bring them out.
[PLAINTIFF'S ATTORNEY]: Telling them the
answer is okay with me.
[DEFENDANT'S ATTORNEY]: Yes, sir.
THE COURT: Just tell them yes. All right.
It appears that the jury knew exactly what it was doing, and
was not confused in the least. The trial court properly instructed
the jury before their deliberations began, and the jury followed
those along with the later instructions. There does not appear to
be an abuse of discretion here in the manner that the trial court
handled this situation, especially in light of the acquiescence of
defendants' trial counsel.
This assignment of error is overruled.
 Defendants next contend that the trial court erred by
denying their motion for directed verdict on plaintiffs' claims for
Upon motion for directed verdict made by defendants, the
question before the Court is whether the evidence offered by
plaintiff, when considered in the light most favorable to plaintiff
and allowed the benefit of every reasonable inference which may be
drawn therefrom, is insufficient as a matter of law for submission
to the jury. Libby Hill Seafood Restaurants, Inc. v. Owens, 62
N.C. App. 695, 697, 303 S.E.2d 565, 567-68, disc. review denied,
309 N.C. 321, 307 S.E.2d 164 (1983); see N.C. Gen. Stat. § 1A-1,
Rule 50(a) (2001).
The tort of negligent misrepresentation occurs when a party
justifiably relies to his detriment on information prepared without
reasonable care by one who owed the relying party a duty of care.
Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200,
206, 367 S.E.2d 609, 612 (1988). According to defendants, plaintiffs' evidence failed to
establish that they justifiably relied upon any false statement
made by defendants. Plaintiffs' claim arises from the failure of
Bond's profit and loss statements to properly account for Rick
Bond's salary. However, defendants point out that Ms. Kindred
found out that those statements were incorrect during the
Tommy/Lonnie confusion. In spite of this, Ms. Kindred made no
further investigation into the books. All Ms. Kindred had to do in
this respect was request a copy of Bond's Quick Books disk, which
would have revealed all checks and deposits for the years involved.
Alternatively, she could have sent the disk to her own accountant,
as Ms. Kindred does generally the same thing with her Quicken
Defendants cite Libby Hill as an analogous case. Libby Hill,
62 N.C. App. 695, 303 S.E.2d 565. In Libby Hill, the plaintiff was
suing the seller of realty for misrepresentation. Id. at 697, 303
S.E.2d at 567. The agent of the seller made a comment about the
integrity of the land, as it was formerly a landfill. Id. at 699,
303 S.E.2d at 568. The comment was that the landfill ended
approximately 20 feet inside the rear property line. Id. This
turned out to be untrue, and the plaintiff built a restaurant over
land that was formerly landfill, and it crumbled. Id. at 696, 303
S.E.2d at 567. This Court found that the plaintiff could not
justifiably rely on the vague statement by the agent knowing that
the agent got his information from an independent report of which
plaintiff could have availed himself. The agent was not a
professional in these matters, and plaintiff was on equal footingto have hired its own expert to test the ground before investing
large sums of money. Id. at 699-700, 303 S.E.2d at 568-69. This
Court explained: 'The right to rely on representations is
inseparably connected with the correlative problem of the duty of
a representee to use diligence in respect of representations made
to him. The policy of the courts is, on the one hand, to suppress
fraud and, on the other, not to encourage negligence and
inattention to one's own interest.' Libby Hill, 62 N.C. App. at
700, 303 S.E.2d at 569 (quoting Calloway v. Wyatt, 246 N.C. 129,
134-35, 97 S.E.2d 881, 886 (1957)).
In the present case, when Ms. Kindred raised her concern about
Tommy/Lonnie, the situation was explained to her by the only ones
that could have known. Bond Carpet was a small business that was
closely held and operated by the Bond family. Ms. Kindred was
arguably put on notice that the bookkeeping was suspect by Ms.
Bond's own admission, and the fact that defendants had difficulty
explaining the salary situation prior to sale. Yet these were the
only people who knew. Further investigation was something that Ms.
Kindred had been doing all during the negotiation process. The
response from defendants was that they did not have the
information, such as the case of the tax return. In fact, it was
because of Ms. Bond's delay that the return was not available.
Certainly, Ms. Kindred could not go to Ms. Bond's accountant and
request such information, as he testified that he would not have
provided it. The claim by defendants in their brief that all Ms.
Kindred had to do was ask for more information is, to some extent,
disingenuous. This is especially so considering their actionsafter the purchase. Thus, Ms. Kindred did not fail to undertake an
effort to investigate the financial statements so as to destroy
her reasonable reliance.
Further on the issue of reliance, defendants point out that
Ms. Kindred had a business plan for her purchase. In this plan,
Ms. Kindred planned on discontinuing the retail operation of the
business and no longer employ Rick and Tommy. Thus, their salaries
were not relevant to the business plan. This, supposedly, explains
why she did not discuss the missing salaries because she did not
care. However, salaries affect the profit loss margin. They are
certainly material to the bottom line, regardless of any business
The evidence, taken in the light most favorable to plaintiffs,
shows that Ms. Kindred based her offer on the information she had,
with a focus on the 1998 financial statement. Before the offer was
written and given to Ms. Bond, Ms. Kindred found out that Tommy was
an employee. She was concerned about where Tommy's compensation was
accounted for and what affect it had on the statement. She was
told that Tommy was paid through payroll expenses and that Rick was
paid as subcontract labor. It was explained that subcontract labor
was above the line and that it did not affect the bottom line of
the financial statement given to Ms. Kindred. This was a bad
accounting practice but was consistent with Ms. Bond's confession
that her bookkeeping was bad and the accountant changed categories.
In fact, this would have tended to increase the profit margin.
Given the factual nature of this determination and the
standard of viewing the evidence in the light most favorable toplaintiff, the trial court was correct in denying defendants'
motion for directed verdict as there was enough evidence for the
jury to believe that Ms. Kindred was justified in relying on the
Defendants also claim that they are entitled to a directed
verdict on plaintiffs' negligent misrepresentation claim because
they owed no duty of care to plaintiff Kindred. Defendants argue
that this was a commercial transaction between parties of equal
footing. They again cite Libby Hill for the proposition that the
seller of a business does not owe a duty to provide information to
the purchaser in a commercial transaction. We fail to find this
statement of law in the Libby Hill opinion.
The question remains whether or not Ms. Bond owed a duty to
Ms. Kindred to produce accurate financial information during the
course of their negotiations of the sale of Bond Carpet.
Recent cases shed light on the issue of a duty to supply
accurate financial information. An approach was adopted in Raritan
River Steel Co., 322 N.C. at 209, 367 S.E.2d at 612 (discussing the
liability of accountants when providing negligent information).
This approach was recently applied in a potentially instructive
case, Jordan v. Earthgrains Baking Cos., 155 N.C. App. 763, 576
S.E.2d 336, 340 (2003). Breach of duty owed in negligent
misrepresentation cases has been defined as:
. . . One who, in the course of his business,
profession or employment, or in any other
transaction in which he has a pecuniary
interest, supplies false information for the
guidance of others in their business
transactions, [and thus] is subject to
liability for pecuniary loss caused to them by
their justifiable reliance upon theinformation, if he fails to exercise
reasonable care or competence in obtaining or
communicating the information.
Jordan, 155 N.C. App. at 767, 576 S.E.2d at 340 (quoting Marcus
Bros. Textiles, Inc. v. Price Waterhouse, LLP, 350 N.C. 214, 218,
513 S.E.2d 320, 323-24 (1988)).
The facts in Jordan were that a CEO of a corporation visited
a plant and spoke to its employees. Id. at 764, 576 S.E.2d at 338.
The employees alleged that the CEO told them that the plant was
profitable and that their jobs were secure. Id. However,
approximately five months later the plant was closed and
essentially all the employees were laid off. Id. The Court in
Jordan concentrated on several facts that the employees failed to
show: (1) [the CEO] was offering them guidance in a business
transaction; (2) that the alleged information was false; (3) that
[the CEO] had a pecuniary interest in inducing [employees] to
continue employment; or (4) that [employees] were justified in
relying on the alleged information. Id. at 767, 576 S.E.2d at 340.
The CEO and the employees were not in a business transaction, as he
was attempting to assuage the effect a recent stock announcement
might have on the employees. The decision to close the plant was
not made until after the visit. Neither the CEO nor the company
had a pecuniary interest in the employees not leaving the company,
and in fact it would have been financially better for the company
had the employees left under the collective bargaining agreement at
the time. Further, there was no justified reliance as the
employees did nothing differently, such as decline other job
offers. Using the same factors as Jordan, it appears that Ms. Bond
owed a duty to provide accurate financial information to Ms.
Kindred. Ms. Bond and Ms. Kindred were clearly involved in a
business transaction. The profit and loss statement given to Ms.
Kindred by Ms. Bond for the year 1998 did not account for Rick
Bond's salary. The statement to Ms. Kindred represented over
$20,000.00 in profit, while in actuality the business was operating
at an almost $10,000.00 loss. It is elementary that Ms. Bond had
a pecuniary interest in inducing Ms. Kindred to purchase the
business. Further, we have already held that Ms. Kindred was
justified in relying on the alleged information as she was not at
arm's length with the information, but had to rely on what was
We hold that, in the present case, Ms. Bond owed a duty to
provide accurate, or at least negligence-free financial information
to Ms. Kindred. See also Libby Hill, 62 N.C. App. at 698, 303
S.E.2d at 568 (while discussing misrepresentations regarding
realty, stated that where material facts are available to the
vendor alone, he or she must disclose them). Ms. Bond owed the
same duty to respond truthfully to Ms. Kindred's information
requests, as she was the only party who had or controlled the
information at issue. Ms. Kindred had no ability to perform any
This assignment of error is overruled.
 Defendants further contend that the trial court erred by
denying their respective motions for directed verdict onfraud/intentional misrepresentation and unfair and deceptive trade
practices. In light of the facts that we are declining to remand
this matter for a new trial and that the jury found for defendants
on these issues, we decline to address these arguments.
Defendants' final assignment of error contends that the trial
court erred by denying their motion for attorneys' fees. The note
Upon default, the holder of this Note may
employ an attorney to enforce the holder's
rights and remedies, and the Maker, principal,
surety, endorser, and guarantor, of this Note
agree to pay to the holder reasonable attorney
fees equal to fifteen percent (15%) of the
outstanding balance due on the Note, plus all
other reasonable expenses incurred by the
holder in exercising any of the holder's
rights and remedies due to the default.
Plaintiffs made the first payment due under the promissory
note around the beginning of July. The next month, however, they
filed the present lawsuit and never made another payment. As such,
defendants declared plaintiffs to be in default after missing the
30 September 1999 payment. As allowed by the promissory note,
defendants accelerated the debt upon default, and the total amount,
plus interest, came to $106,812.32. Once plaintiffs filed suit
against defendants for the various causes of action discussed
above, defendants filed, among other things, a counterclaim to
recover the balance owed under the promissory note. Defendants
noted in their counterclaim, and plaintiffs admitted such in their
reply, that on 11 October 1999, they sent a letter to plaintiffs
notifying them that if the amount claimed to be owed on the note
was not paid within five days of the date of the letter[defendants] would seek to recover reasonable attorney's fees
allowed by law in addition to seeking the payment of principal and
interest under the note.
The parties agreed at the end of the trial that plaintiffs
would only seek damages as its remedy, abandoning its alternative
remedy of rescission. In doing this, the parties and the trial
court agreed that the issue of breach of the promissory note would
not be submitted to the jury, and the trial court reserved ruling
on defendants' motion for directed verdict on its counterclaim on
the note until after the jury returned its verdict. The parties
and the trial court further agreed that any damages awarded by the
jury would then offset the amount plaintiffs owed on the note.
As mentioned before, the jury awarded plaintiffs damages in
the amount of $60,000.00. In the judgment, the trial court granted
defendants' counterclaims on the note, reducing the original amount
by the jury award. This amount came to $45,000.00, plus interest
at the legal rate of eight percent (8%) per annum from and after
September 30, 1999 until paid.
After the jury returned its verdict, but before it was reduced
to judgment, the parties made their respective motions for costs.
Defendants made a motion for costs on 6 August 2001 which included
a request for Attorneys' fees in the amount of $6,750.00 pursuant
to the promissory note. The trial court denied defendants' motion
for costs, in its entirety, in the judgment filed 24 September
Defendants argue that N.C. Gen. Stat. § 6-21.2 controls in the
present case and mandates reversal of the trial court's ruling. This statute allows an award of attorneys' fees in actions to
enforce obligations owed under an evidence of indebtedness that
itself provides for the payment of attorneys' fees. RC Associates
v. Regency Ventures, Inc., 111 N.C. App. 367, 372, 432 S.E.2d 394,
397 (1993). It provides:
Obligations to pay attorneys' fees upon
any note, conditional sale contract or other
evidence of indebtedness, in addition to the
legal rate of interest or finance charges
specified therein, shall be valid and
enforceable, and collectible as part of such
debt, if such note, contract or other evidence
of indebtedness be collected by or through an
attorney at law after maturity, subject to the
(1) If such note, conditional sale contract
or other evidence of indebtedness
provides for attorneys' fees in some
specific percentage of the outstanding
balance as herein defined, such
provision and obligation shall be valid
and enforceable up to but not in excess
of fifteen percent (15%) of said
outstanding balance owing on said note,
contract or other evidence of
(2) If such note, conditional sale contract
or other evidence of indebtedness
provides for the payment of reasonable
attorneys' fees by the debtor, without
specifying any specific percentage, such
provision shall be construed to mean
fifteen percent (15%) of the outstanding
balance owing on said note, contract or
other evidence of indebtedness.
N.C. Gen. Stat. § 6-21.2 (2001) (emphasis added).
The promissory note in this case stated that [u]pon default
. . . the Maker . . . agrees to pay to the holder reasonable
attorney fees equal to fifteen percent (15%) of the outstanding
balance due on the Note[.] This clause provides for attorneys'
fees in some specific percentage of the 'outstanding debt,' andthus subsection (1) applies. Id. Subsection (1) states that the
provision in the note is valid and enforceable up to but not in
excess of fifteen percent. Id. Thus, it appears that defendants
were entitled to 15% of the outstanding balance owing on the note
by operation of the statute. We recognize that the mandatory
notice requirement of N.C. Gen. Stat. § 6-21.2(5) was satisfied by
the 11 October 1999 letter.
This Court is unaware of the reasoning behind the trial court
denying this motion. Plaintiffs argue that the note did not reach
maturity until the trial court announced the amount owed after
making the adjustments in the judgment because the amount owed
under the note was in dispute. See Lee Cycle Ctr., Inc. v. Wilson
Cycle Ctr., Inc., 143 N.C. App. 1, 545 S.E.2d 745, aff'd per
curiam, 354 N.C. 565, 556 S.E.2d 293 (2001). According to
plaintiffs, the outstanding balance, defined as the principal and
interest owing at the time suit is instituted, was unknown until
such time. In fact, plaintiffs admit in their brief that when a
final determination in this matter is reached, if defendants were
to send a letter to them in the nature of their 11 October 1999
letter, defendants would be entitled to the $6,750.00 amount. But
because plaintiffs filed this suit disputing the amount owed and
not a suit by defendants after maturity, N.C. Gen. Stat. § 6-21.2
does not yet apply.
We disagree with plaintiffs' tortured application of the law
to the present facts. There was no injunction relieving plaintiffs
of the duty to pay under the note, and we have found no case or law
stating that the filing of a suit for fraudulent acts relieves thatobligation. Regardless of the fact that the amount owed under the
note was disputed or why it was, on the face of the note, the
amount was clear. By plaintiffs' filing their suit to avoid that
obligation, defendants employed counsel to enforce the note.
Plaintiffs defaulted by missing the 30 September 1999 payment, and
the note allowed for acceleration. At that point, the note had
indeed matured. The outstanding balance was known at the time
defendants filed their counterclaim. Nowhere in subsection (3)
does it allow for post-trial adjustments. Thus, the trial court
erred by denying defendants' motion.
This assignment of error is overruled.
We now consider the appeal by plaintiffs in this matter.
In plaintiffs' first assignment of error, they contend that
the trial court erred in entering judgment both for possession of
property and for money owed on the promissory note.
In the judgment, the trial court noted that:
At the hearing of this matter on August
31, 2001, defendant Bond Carpet & Floor
Covering, Inc. requested judgment on its claim
against plaintiff Kindred of North Carolina,
Inc. for possession of the property described
in the exhibit to the Security Agreement
between said defendant and said plaintiff.
Having heard and considered argument of
counsel and the record, and having presided
over the jury trial of this action, the court
finds that the request should be denied if the
judgment for money is paid within forty-five
(45) days of the entry of this judgment;
otherwise, defendant Bond Carpet & Floor
Covering, Inc. should recover possession of
property in accordance with the Security
Agreement between said plaintiff and said
(Emphasis added.) In the decretal portion of the judgment, the
trial court ordered that if the judgment was not satisfied in 45
days, then defendants would have judgment for possession on the
property described in the security agreement, which was reproduced
in the order. It concluded with [a]ny property possession of which
is obtained pursuant to this paragraph shall be sold as an
execution sale in accordance with G.S. §§ 1-339.41 - 1-339.71.
Plaintiffs first contend that defendants failed to prove any
right to possession of the collateral under the security agreement
as no evidence was produced of perfection of the security interest
by the filing of a financing statement or priority of competing
interests, etc. However, issues of perfection and priority are
irrelevant in disputes between the debtor and the secured party.
Mazda Motors v. Southwestern Motors, 36 N.C. App. 1, 16-17, 243
S.E.2d 793, 804 (1978), aff'd in part, rev'd in part on other
grounds, 296 N.C. 357, 250 S.E.2d 250 (1979). Evidence of
perfection is simply irrelevant in the present case.
Plaintiffs continue that other than offering the security
agreement into evidence, defendants did nothing else. It notes
that according to Ms. Kindred's testimony, most of the property
described in the security agreement had been donated to others or
discarded, as the business had moved and no longer engaged in the
exact same enterprise. Further, defendants did not prove that
plaintiffs had any of the property in which they had a secured
interest in their possession.
If a debtor and a creditor enter into a
security agreement granting to the creditor a
security interest in certain collateral, and
if value is given and the debtor has rights inthe collateral, then the creditor becomes a
secured party with a security interest which
is enforceable against the debtor as to that
collateral. See N.C. Gen. Stat. §§
25-9-203(1)(a)-(c) (1988). Once the creditor
has enforceable rights against the debtor as a
secured party, it is said that the secured
party's interest attaches to the collateral.
See § 25-9-203(2).
Zorba's Inn, Inc. v. Nationwide Mut. Fire Ins. Co., 93 N.C. App.
332, 334, 377 S.E.2d 797, 799 (1989).
Evidence at trial showed that the security agreement was
signed and proper, value was given through the transaction, and
debtor took possession of the collateral. Thus, a valid security
interest was created and had attached to the collateral. See
current and former N.C. Gen. Stat. § 25-9-203(1) (2001). The
property was sufficiently described, as it only needed to be
reasonably identified by the agreement. See former N.C. Gen. Stat.
§ 25-9-110 (1999) and current § 25-9-108 (2001).
Upon default of plaintiffs, defendants had several choices of
remedies. Former N.C. Gen. Stat. § 25-9-501(1) and current § 25-9-
601(a)(1) & (c) provide that when a debtor is in default 'a
secured party . . . may reduce his claim to judgment, foreclose or
otherwise enforce the secured interest by any available judicial
procedure. . . . The rights and remedies . . . are cumulative.'
Ken-Mar Finance v. Harvey, 90 N.C. App. 362, 367, 368 S.E.2d 646,
650, disc. review denied, 323 N.C. 365, 373 S.E.2d 545 (1988).
Defendants had their choice of remedies and utilized many of those
choices in their counterclaims, namely the money judgment and
possession of the collateral. Instead of allowing defendants their
choice of avenue of satisfying the judgment, the trial courtpostponed the possession option by 45 days, and made it dependent
upon full payment of the money judgment. Whether or not this was
entirely proper on the part of the trial court, we fail to see how
this prejudices plaintiffs. Certainly, a party with a security
interest in collateral could get possession of such property if it
elected to do so. The debtor in such a situation has no real
choice in the matter. The trial court in the present case, by
giving plaintiffs 45 days to satisfy the money judgment without
having to give up collateral, has seemingly given plaintiffs a
Further, the fears of a double recovery by awarding defendants
the money judgment and possession are equally unfounded.
Defendants are only entitled to the amount of the judgment. See
Ken-Mar, 90 N.C. App. at 367, 368 S.E.2d at 650.
As we see no prejudice to plaintiffs, this assignment of error
Our upholding of the trial court's ruling on directed verdict
of negligent misrepresentation and the jury verdict make our
discussion of plaintiffs' final assignment of error unnecessary.
Affirmed in part; reversed in part as to attorneys' fees.
Judges McGEE and LEVINSON concur.
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