Ngo v Park, et al, (04-847) 01/03/2006

Appeal by defendants from judgment entered 15 March 2004 by Judge Stafford G. Bullock in Wake County Superior Court. Heard in the Court of Appeals 21 March 2005.

Robert T. Hedrick for plaintiffs.

Brent E. Wood, PLLC, by Brent E. Wood, for defendants.

    MARTIN, Chief Judge.

    On 14 December 2000, plaintiffs Qui D. and Khanyh Ngo (“the Ngos”), husband and wife, filed a complaint alleging that defendant Robert D. Park was liable to them pursuant to a promissory note dated 18 June 1997 which Park executed for the benefit of Ernest S. and Patricia T. Mangum (“the Mangums”), husband and wife. On 1 March 2001, Park and The Spencer Group, Inc. (“defendants”) moved to dismiss pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. The Ngos then filed an amended complaint, adding a claim that the promissory note was past due. The court denied defendants' Rule 12 (b)(6) motion. On 27 February 2004, defendantsmoved for summary judgment. During the week of 8 March 2004, the court heard defendants' summary judgment motion and also considered an oral motion from the Ngos seeking summary judgment. The court subsequently entered summary judgment for the Ngos against defendant Park and dismissed the claims of defendant The Spencer Group. Defendants appeal. For the reasons discussed below, we affirm.
    This appeal arises from a complex factual history. On 18 June 1997, the Mangums executed a general warranty deed conveying approximately twenty-five acres of real property on Sunset Lake Road in Wake County (“the property”) to Williams and Park, Inc., a North Carolina corporation. The property was intended to be developed as a residential subdivision. In exchange, defendant Park, a developer, executed the document at the center of this case, a form promissory note with an attached page designated “Exhibit 'A.'” Exhibit 'A' reads as follows:
        Exhibit to unsecured Promissory Note from Robert D. Park to Ernest S. Mangum and wife, Patricia T. Mangum, in the principal amount of $220,038.08, dated June 18, 1997, and pursuant to the sale of real property located at 5733 & 3737 Sunset Lake Road, Fuquay-Varina, NC.
        On or before January 1, 2003, Robert D. Park, individually (hereinafter “Park”) agrees to purchase a residential lot in Wake County, North Carolina, which lot shall be acceptable to Park and Mangum, and construct thereupon a residence (hereinafter and collectively “Property”) at an approximate cost of $350,000. Once the cost of the Property is determined, the purchase price of the Property shall be reduced by the principal amount of this Note. Mangum shall pay Park the then outstanding balance of the adjusted purchase price of the Property. Payment of thisoutstanding balance shall be offset by sums due Mangum from Williams & Park, Inc., which sums are equal to 10% of the net profits realized by Williams & Park on a project developed at 5733 & 3737 Sunset Lake Road, Fuquay-Varina, NC and credited to Mangum on a quarterly basis beginning after final sell-out of the project or on January 1, 2003, whichever occurs first. If 10% of the net profits referred to herein do not equal or exceed the remaining balance due Park for the adjusted purchase of the Property, then the balance of the indebtedness shall be forgiven and nothing further shall be due from Mangum.

        The Note evidencing the remaining balance due for the Property and bearing an interest rate of 8% shall be prepared and executed at the time of completion and delivery of the Property.

    On 24 June 1997, Williams and Park, Inc. then transferred the property to Park and his wife by deed dated 18 June 1997, and the Parks transferred the property to Park Homes, Inc. by deed dated 15 May 1999. Park Homes, in turn, transferred the property to The Spencer Group on 11 February 2000. Approximately one year later, Park Homes filed for bankruptcy, and the property, still undeveloped, was sold at a foreclosure sale.
    Meanwhile, in June 1995, the Ngos filed an action against Ernest Mangum and others for breach of contract, unfair business and trade practices, negligent construction, and conversion. The court entered a default judgment awarding the Ngos $186,842.88 in damages and attorneys' fees. On 20 August 1997, the court appointed a receiver of Ernest Mangum's property, and on 20 March 2000, that receiver obtained a court order declaring him the owner of one-half interest in the promissory note at issue in this case. The Superior Court in Wake County then entered an order assigningthe receiver's right to the Ngos, specifying that “Park, Williams and Park, Inc., or any successor entity . . . is ordered to pay one-half of any payments made in satisfaction of said Note directly to” the Ngos. The Ngos, unable to collect the judgment ordered from their suit against Ernest Mangum, initiated this action against defendant Park to enforce the promissory note.

    Defendants argue the trial court committed reversible error by (1) denying defendants' motion for summary judgment since there were no genuine issues of material fact and defendants were entitled to judgment as a matter of law, (2) granting summary judgment for the plaintiffs since genuine issues of material fact precluded plaintiffs from summary judgment and plaintiffs were not entitled to judgment as a matter of law, and (3) considering and granting summary judgment for plaintiffs because plaintiffs did not timely submit any motion nor evidence. In the course of the above arguments, defendants raise two issues which we will address initially. First, they contend the promissory note was not a valid negotiable instrument and we should therefore review this case under the common law principles of contract. Second, they argue the only remedy available under the contract was specific performance because the contract was too indefinite to allow a determination of monetary damages.
    We agree with defendants' first contention that the agreement was not a valid negotiable instrument.     While the document isentitled “Promissory Note,” its label is not determinative of its character. “It is appropriate to regard the substance, not the form, of a transaction as controlling, and we are not bound by the labels which have been appended to the episode by the parties.” Trust Co. v. Creasy, 301 N.C. 44, 53, 269 S.E.2d 117, 123 (1980); see also Gillespie v. DeWitt, 53 N.C. App. 252, 258, 280 S.E.2d 736, 741, disc. review denied, 304 N.C. 390, 285 S.E.2d 832 (1981). Article 3 of the Uniform Commercial Code (UCC) defines a negotiable instrument as follows:
        (a) Except as provided in subsections (c) and (d) of this section, “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

            (1) Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

            (2) Is payable on demand or at a definite time; and

            (3) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

N.C. Gen. Stat. § 25-3-104 (2003). According to this statute, a negotiable instrument must be unconditional, and it must also meeteach of the requirements set out in subsections (a)(1), (a)(2) and (a)(3).
    Article 3 provides the following definition of the term “unconditional:”
        (a) Except as provided in this section, for the purposes of G.S. 25-3-104(a), a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing, or (iii) that rights or obligations with respect to the promise or order are stated in another writing. A reference to another writing does not of itself make the promise or order conditional.

        (b) A promise or order is not made conditional (i) by a reference to another writing for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source.

N.C. Gen. Stat. § 25-3-106 (2003) (emphasis added). We have previously noted that when an instrument “makes express reference to an outside agreement, transaction or document, the effect on the negotiability of the instrument will depend on the nature of the reference.” Booker v. Everhart, 294 N.C. 146, 151, 240 S.E.2d 360, 363 (1978). References to collateral, prepayment, or acceleration are specifically allowed under the statute, as are terms limiting payment to a particular fund or source. N.C. Gen. Stat. § 25-3- 106(b)(i) and (ii). The instrument in this case, however, makes no reference to any of these acceptable terms.
    The instrument states it is payable “[a]ccording to the terms set out in Exhibit 'A' attached hereto and incorporated herein by reference.” Incorporation by reference has been defined as:        The method of making one document of any kind become a part of another separate document by referring to the former in the latter, and declaring that the former shall be taken and considered as a part of the latter the same as if it were fully set out therein.

Id. at 152, 240 S.E.2d at 363 (quoting Black's Law Dictionary (Revised 4th Ed.)). The note at issue in Booker also incorporated a separate document by reference, and we find the reasoning in that case applicable here:
        To incorporate a separate document by reference is to declare that the former document shall be taken as part of the document in which the declaration is made, as much as if it were set out at length therein.

        By incorporating into the note in question the Deed of Separation and Property Settlement, the parties made the note “subject to” any and all possible conditions contained in those prior documents. Under G.S. 25-3-105(2)(a) [now N.C. Gen. Stat. § 25-3-106(a)(ii)], this renders the promise to pay the sum certain conditional. Whether or not the documents incorporated contained any such conditions or contingencies is a matter beside the point. The essential point is that all of the essential terms of the note in question cannot be ascertained from the face of the instrument itself. Because separate documents have been made a part of the note by its express terms, the promise contained therein is conditional, and the note nonnegotiable.

        . . .

        [I]t is clear that mere reference in a note to the separate agreement or document out of which the note arises does not affect the negotiability of the note. But to go beyond a reference to the separate agreement, by incorporating the terms of that agreement into the note, makes the note “subject to or governed by” that agreement, and thus . . . renders the promise conditional and the note nonnegotiable.
Id. at 152-153, 240 S.E.2d at 363-364 (internal citations omitted); see also Official Comment to N.C. Gen. Stat. § 25-3-106 (2003) (stating that “[i]t is not relevant whether any condition to payment is or is not stated in the writing to which reference is made. The rationale is that the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment”).
    Unlike the note in Booker where the incorporated agreements were made prior to the execution of the note, the incorporated document here appears to have been made simultaneously with the endorsement of the note. Regardless, the terms of Exhibit 'A' are outside the purview of Article 3 of the UCC. Exhibit 'A' requires defendant to purchase a residential lot in Wake County and construct a home on that lot at an approximate cost of $350,000. North Carolina General Statute section 25-3-104(a)(3) states that an instrument is nonnegotiable if it “state[s] any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money . . .” Exhibit 'A' clearly contains another “undertaking . . . in addition to the payment of money.” The choosing and purchasing of a residential lot and construction of a home thereon are significant acts which fall outside the scope of “payment” as contemplated in Article 3.
    “Historically, our courts have required strict compliance with the requirements set out under the Uniform Commercial Code defining negotiable instruments. The drafters of the Code encouraged thecourts to strictly interpret the definitional requirements to the extent that 'in doubtful cases the [court's] decision should be against negotiability.'” Barclays Bank PLC v. Johnson, 129 N.C. App. 370, 373, 499 S.E.2d 768, 770 (1998) (quoting the Official Comment to N.C. Gen. Stat. § 25-3-104 (1986)) (internal citations omitted). Therefore, we must conclude that under a strict interpretation of N.C. Gen. Stat. §§ 25-3-104 and 25-3-106, the instrument in this case is not a negotiable instrument and cannot be governed by Article 3 of the UCC.
    We may, however, review this case under the common law principles of contract. The official comment to section 25-3-104 states that:
        An order or promise that is excluded from Article 3 because of the requirements of Section 3-104(a) may nevertheless be similar to a negotiable instrument in many respects. Although such a writing cannot be made a negotiable instrument within Article 3 by contract or conduct of its parties, nothing in Section 3-104 or in Section 3-102 is intended to mean that in a particular case involving such a writing a court could not arrive at a result similar to the result that would follow if the writing were a negotiable instrument. . . . [such as a result] based on . . . ordinary principles of contract.

We have previously considered instruments found to be nonnegotiable under the common law. In Thompson v. First Citizens Bank & Tr. Co., 151 N.C. App. 704, 707-708, 567 S.E.2d 184, 188 (2002), this Court determined a certificate of deposit did not fall under the negotiable instrument provisions of the UCC but was a contract between plaintiff and defendant, and, as such, it was governed by common law principles of contract. The instrument here expressesa promise to perform in exchange for two specific lots of real property in Fuquay-Varina, North Carolina. It therefore appears to be a valid contract supported by consideration.
    Defendants, however, argue the contract was too indefinite to allow a determination of monetary damages, making specific performance the only remedy available under the contract. Because plaintiffs did not want specific performance and made no claim for specific performance in their complaint, defendants claim plaintiffs should not be entitled to specific performance and should therefore receive no award under this contract. For the reasons which follow, this argument is without merit.
    Specific performance of a contract is available only where the legal remedy is inadequate. Whalehead Properties v. Coastland Corp., 299 N.C. 270, 282, 261 S.E.2d 899, 907 (1980). Factors to be considered in determining the adequacy of a legal remedy include: “(1) the difficulty and uncertainty in determining the amount of damages to be awarded for the breach, (2) difficulty and uncertainty of collecting such damages after they are awarded, and (3) the insufficiency of money damages to obtain duplicate or substantial equivalence of the promised performance.” Id. at 283, 261 S.E.2d at 908. Monetary damages are generally inadequate when the subject matter of a contract is rare or unique. Specific pieces of real property are generally considered rare or unique.
    In the present case, however, the unperformed promise did not involve a specific piece of land. The property was to be any lot in Wake County acceptable to both Park and Mangum. Because thecontract did specify that the value of the finished home on the property would be approximately $350,000, and Park would immediately forgive the Mangums' debt in the amount of $220,038.08 once the cost of the home was determined, the measure of monetary damages needed to repair the breach could be determined and an adequate legal remedy was available. Under these facts, each of the factors recited above support the award of monetary damages: the trial court could determine the amount of damages resulting from the breach, there was no evidence that collecting damages would be difficult or result in further litigation, and the monetary damages would allow the plaintiffs to obtain the substantial equivalent of the promised performance (the purchase of some residential lot in Wake County and construction of a home thereon).
    Plaintiffs had been validly assigned one party's rights under the contract, amounting to half the value of the breached contract. The trial court awarded plaintiffs $110,019.04, or half the amount to be forgiven outright, which was an amount neither speculative nor indefinite. Specific performance was not an appropriate remedy in this case, and the trial court's award of monetary damages was proper. This argument is without merit.
    No other issues relative to the formation of a valid contract were raised on appeal. Therefore, we now turn to the remaining three arguments raised in defendants' brief.     These arguments concern the trial court's decision to deny their motion for summary judgment and grant summary judgment in favor of plaintiffs. Thestandard of review on appeal from summary judgment is “whether there is any genuine issue of material fact and whether the moving party is entitled to a judgment as a matter of law. Further, the evidence presented by the parties must be viewed in the light most favorable to the non-movant.” Bruce-Terminex Co. v. Zurich Ins. Co., 130 N.C. App. 729, 733, 504 S.E.2d 574, 577 (1998) (internal citations omitted). North Carolina General Statutes section 1A-1, Rule 56(c) provides that summary judgment shall be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law.” N.C. Gen. Stat. § 1A-1, Rule 56(c) (2003).
    In this case, defendants repeatedly admitted at the summary judgment hearing that defendant Park “obligated himself to build a house” under this contract. Defendants also admitted that “no attempt has been made” to agree upon a lot where the house would be constructed. Accordingly, by defendants' own admissions, Park had an obligation to build a house based on the contract when it was assigned to plaintiffs, and that obligation remained unfulfilled at the time summary judgment was granted. Thus, there was no genuine issue of material fact to be determined by a jury, and the trial court could properly grant summary judgment.
    Defendants first argue that because they claimed in their answer to the amended complaint that “[a]ny and all obligations between the Defendants and Ernest S. Mangum and Patricia T. Mangumhave been satisfied in full,” there is a material issue of fact to be determined by a jury. However, this assertion was presented as a defense to plaintiff's claims, not a factual allegation. Defendants were still required to come forward with evidence to show the basis for this defense, which they failed to do by admitting their continuing obligation to build a house. This admission also precluded the trial court from granting summary judgment in defendants' favor. Therefore, defendants' first argument is without merit.
    Defendants' second argument is that plaintiffs were not entitled to summary judgment as a matter of law. However, because (1) there was no genuine issue of material fact, (2) defendants remained liable under the contract, and (3) the contract was validly assigned to plaintiffs, the trial court properly concluded that plaintiffs were entitled to judgment as a matter of law. This argument likewise is without merit.
    Defendants' third argument is that the trial court committed reversible error by considering and granting summary judgment for plaintiffs because plaintiffs did not timely submit any motion or evidence thereof. First, plaintiffs' failure to submit a written motion for summary judgment did not prevent the trial court from granting summary judgment in their favor. North Carolina General Statute § 1A-1, Rule 56(c) provides that “[s]ummary judgment, when appropriate, may be rendered against the moving party.” Second, defendants argue that because the affidavit of Qui D. Ngo was not timely served, the trial court erroneously considered thisaffidavit. However, in its summary judgment order, the trial court stated that it considered “the pleadings, previous orders and judgments entered with respect to the facts herein, the affidavit filed by Defendants, the stipulations of counsel for Defendants, and the argument of counsel for both Plaintiff and Defendants herein[.]” The court did not list Mr. Ngo's affidavit as one of the documents considered in reaching its decision. Therefore, defendant's third argument is without merit.
    Defendants make numerous arguments in their brief contesting the award of attorneys' fees to plaintiffs. However, they did not assign error to this award, therefore we do not address it. N.C. R. App. P. 10(a) (2004).
    Affirmed.
    Judges HUDSON and JACKSON concur.
    Report per Rule 30(e).

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