Smith v Stidham, (05-291) 06/06/2006

Appeal by plaintiffs from order entered 16 November 2004 by Judge Anderson D. Cromer in Guilford County Superior Court. Heard in the Court of Appeals 28 November 2005.

Thomas B. Kobrin for plaintiffs-appellants.

    ELMORE, Judge.

    Glenn Smith and Joy Smith (plaintiffs) purchased property located in Guilford County, North Carolina in August of 2002. Plaintiffs executed a contract with Modular Headquarters for the construction of a modular home with a septic system on the property. Modular Headquarters then hired C&H Grading to grade the property in preparation for construction and installation of the septic system. According to plaintiffs, Modular Headquarters and C&H Grading failed to prepare the land in compliance with the requirements of the septic system permit issued by Guilford County; removed soil and trees from the property without permission fromplaintiffs; and sold these materials for a profit. Plaintiffs filed a complaint on 19 May 2003 asserting claims of breach of contract, conversion, and negligence. Defendants Kenny Creed d/b/a C&H Grading and Todd Hicks d/b/a C&H Grading failed to answer the complaint. The Clerk of Guilford County Superior Court entered default against these defendants on 23 June 2003.
    On 9 January 2004 plaintiffs entered into a settlement agreement with Panther Enterprises, Inc., the parent company of Modular Headquarters. Pursuant to this agreement, plaintiffs executed a non-warranty deed transferring ownership of the property and the modular home to Panther Enterprises. Panther Enterprises paid plaintiffs the amount of $14,500.00. Plaintiffs released Panther Enterprises from all claims or damages arising out of the contract to install the modular home or work done on the property in preparation for installation of the modular home.
    On 17 February 2004 plaintiffs filed a motion for summary judgment and a motion for entry of default judgment against Kenny Creed d/b/a C&H Grading and Todd Hicks d/b/a C&H Grading. In response, Creed and Hicks filed motions to set aside the entry of default. Also, Creed and Hicks filed an Answer on or about 31 March 2004. The trial court granted the motion to set aside the entry of default and continued the hearing on plaintiffs' motion for summary judgment until the 3 May 2004 session of Guilford County Superior Court. The court also ordered that the pleadings be amended to include C&H Grading as a defendant.     Creed and Hicks submitted a memorandum in opposition to plaintiffs' motion for summary judgment. At the summary judgment hearing held on 5 May 2004, plaintiffs withdrew their summary judgment motion as to the claims of breach of contract, negligence, and declaratory judgment. Plaintiffs requested summary judgment only on their conversion claim. The court denied plaintiffs' motion and entered summary judgment in favor of defendants on the conversion cause of action. Plaintiffs did not appeal this order. Creed and Hicks filed an Amended Answer on 6 May 2004. Thereafter, on 4 June 2004, plaintiffs dismissed all claims against Creed, Hicks, and C&H Grading (defendants) without prejudice. Defendants filed a motion for an award of litigation costs and attorneys' fees pursuant to N.C. Gen. Stat. § 6-21.5 and Rule 11.
    The trial court concluded that there was insufficient evidence to show a violation of Rule 11 of the North Carolina Rules of Civil Procedure. The court also concluded that defendants are entitled to an award of their reasonable attorneys' fees pursuant to N.C. Gen. Stat. § 6-21.5 for fees incurred after the setting aside of the entry of default against defendants. Accordingly, the court awarded defendants a sum of $2,697.50. Plaintiffs appeal.
    Plaintiffs contest the trial court's determination that there was a complete lack of a justiciable issue in the case after the setting aside of the entry of default and the execution of the settlement agreement. Section 6-21.5 of our General Statutes provides:
        In any civil action or special proceeding the court, upon motion of the prevailing party,may award a reasonable attorney's fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading . . . The court shall make findings of fact and conclusions of law to support its award of attorney's fees under this section.

N.C. Gen. Stat. § 6-21.5 (2005). In deciding whether a party is entitled to attorneys' fees under N.C. Gen. Stat. § 6-21.5, “the trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue.” Sunamerica Financial Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991). This Court reviews the trial court's decision on whether to award attorneys' fees for an abuse of discretion. Phillips v. Warren, 152 N.C. App. 619, 629, 568 S.E.2d 230, 236-37 (2002), disc. review denied, 356 N.C. 676, 577 S.E.2d 633 (2003).
    A pleading which was initially adequate to create a justiciable controversy may become, in light of a responsive pleading, inadequate to present a justiciable issue of law or fact. Sunamerica, 328 N.C. at 258, 400 S.E.2d at 438. The determination of whether a party persisted in litigating when the complaint no longer presented a justiciable issue must be made on a case-by-case basis. Id. at 259-60, 400 S.E.2d at 439. In Sunamerica, the plaintiff pled the existence of a debt owed by the defendant. The defendant served an answer in which he pled the statute of limitations as a defense to the claim. The trial court found that the plaintiff waited over four years from the expiration of thestatute of limitations to file the lawsuit. The Supreme Court held that the plaintiff should have reasonably expected that the affirmative defense was insurmountable. Id. at 259, 400 S.E.2d at 438-39. Rather than dismiss the action, however, the plaintiff continued to oppose the defendant's motion for summary judgment. The plaintiff argued that the inability to locate the defendant constituted circumstances that tolled the running of the statute of limitations. The Court noted that this is not a basis in North Carolina for tolling the statute of limitations. Id. As such, our Supreme Court held that the trial court properly concluded the plaintiff perpetuated litigation of a case in which there was a complete absence of a justiciable controversy. Id. at 260-61, 400 S.E.2d at 438-39.
    The Supreme Court elaborated on what constitutes a violation of Section 6-21.5 in Bryson v. Sullivan, 330 N.C. 644, 412 S.E.2d 327 (1992). In that case, the plaintiffs filed a complaint asserting claims arising out of the administration of an estate. The defendant, the administratrix of the estate, filed an answer and pled as defenses the statute of limitations and a release of claims executed by the plaintiffs as part of a consent decree. The defendant also requested attorneys' fees under N.C. Gen. Stat. § 6- 25.1. Id. at 652, 412 S.E.2d at 330-31. Seven weeks later, the plaintiffs filed a voluntary dismissal of the action with prejudice. Id. The Supreme Court affirmed the trial court's denial of sanctions under Section 6-25.1. Notably, the Court distinguished the facts from those in Sunamerica:        Unlike Sunamerica, there is no indication in this record that the plaintiffs took any further affirmative action in regard to the lawsuit between the time they received the defendants' answer and the time of the hearing on defendants' summary judgment motion.

        We therefore hold that, having dismissed the case some seven weeks after the defenses were asserted and having not pursued the litigation further during those intervening weeks, the [plaintiffs] cannot be said to have “persisted in litigating the case after a point where [they] should reasonably have become aware that the pleading [they] filed no longer contained a justiciable issue.” Sunamerica, 328 N.C. at 258, 400 S.E.2d at 438.

Id. at 665, 412 S.E.2d at 338.
    Sunamerica and Bryson dictate that, in order to be in violation of N.C. Gen. Stat. § 6-25.1, a plaintiff must engage in affirmative conduct of litigation after a point at which the plaintiff reasonably should be aware that no justiciable issues remain in the dispute. With this standard in mind, we now turn to consider the trial court's findings in the instant case. The court made the following findings of fact relevant to the inquiry of whether plaintiffs persisted in litigating the case beyond a point where there was no longer a justiciable issue:
        10. At the time plaintiffs filed their complaint herein, the plaintiffs knew or should have known that they had no contractual relationship directly and no privity of contract with the defendants-movants, either the individual defendants Creed and Hicks or their limited liability company C & H Grading, LLC, and that said defendants were working on the plaintiffs' real property as subcontractors, only, to the plaintiffs' general contractor Modular Headquarters/Panther Enterprises.
        11. As of the time plaintiffs settled their claims herein with, and filed a voluntary dismissal in favor of defendant Modular Headquarters/Panther Enterprises, on 9 January 2004, the plaintiffs knew or should have known that they had no further claims herein because they conveyed away the underlying real property from which any or all their claims made in good faith arose; further, plaintiffs' claims were barred as of 9 January 2004 by operation of law, specifically application of N.C. Gen. Stat. § 1B-4 and case law regarding contribution among joint tortfeasors, and the single-injury rule and limitation on recovery (whether joint tortfeasors or non- tortfeasors), of which legal effects these plaintiffs, represented by counsel, are impliedly held to be aware. By their motion for default judgment and summary judgment, filed and served after execution of said settlement, the plaintiffs persisted in this litigation when they knew or should have known that they had no valid claims remaining against the movants.

The court then entered the following conclusions of law:
        18. There was a complete lack of a justiciable issue of either law or fact as to the further prosecution of Plaintiffs' claims after (1) the execution of the parties Settlement Agreement and (2) the setting aside of the Entry of Default that was in place against Creed and Hicks.

        19. The Court concludes in its discretion that the defendant-movants are entitled to an award of their reasonable attorney's fees pursuant to [N.C. Gen. Stat. § 6-21.5,] but only for their attorney fees incurred after the setting aside of the entry of default against them, namely, those fees shown by affidavit to have been incurred after April 14, 2004[.]

    Pursuant to Sunamerica, we now consider whether defendants' responsive pleadings made it apparent to plaintiffs that the complaint no longer presented a justiciable issue. See Sunamerica, 328 N.C. at 258, 400 S.E.2d at 438 (when defendant filed answerraising statute of limitations, it should have become apparent to plaintiff that the complaint did not contain a justiciable issue). In their motion to set aside the default and in their Answer, defendants stated that C&H Grading was merely a subcontractor and that plaintiffs were not in any contractual relationship with C&H Grading. Thus, as of 31 March 2004, plaintiffs should have acknowledged that there was no reasonable expectation of recovery on their breach of contract claim. However, in order for this Court to affirm the trial court's determination, the record must show that there was no justiciable issue of law or fact when plaintiffs filed their motion for entry of default judgment and motion for summary judgment on 17 February 2004.
    The court found that when plaintiffs executed the settlement agreement and transferred ownership of the property to Panther Enterprises, plaintiffs could no longer satisfy all of the elements of a claim for conversion. But defendants first raised this defense in their memorandum opposing plaintiffs' summary judgment motion, filed just prior to the summary judgment hearing held on 5 May 2004. At the point when plaintiffs filed their motion for entry of default and motion for summary judgment in February of 2004, plaintiffs were not faced with defendants' responsive pleadings setting forth this defense to the conversion claim. See Bryson, 330 N.C. at 660, 412 S.E.2d at 335 (“it is appropriate in N.C.G.S. § 6-21.5 cases to read the questionable pleading with responsive pleadings to determine whether there exists a justiciable controversy.”).     The trial court also found that plaintiffs' tort claims _negligence and conversion_ were barred by the double recovery rule of North Carolina case law because plaintiffs had been fully compensated for their claims pursuant to the settlement agreement with Panther Enterprises executed 9 January 2004. The record shows that defendants first raised this defense to plaintiffs' recovery in their memorandum opposing plaintiffs' motion for summary judgment and in the Amended Answer filed 6 May 2004. At the time that plaintiffs filed their motion for entry of default judgment and motion for summary judgment on 17 February 2004, then, defendants had not yet filed a responsive pleading setting forth the defenses barring plaintiffs' conversion and negligence claims. Even though plaintiffs are impliedly held aware under Section 6- 21.5 of the legal deficiencies in the pleadings drafted by their attorneys, see Brooks v. Giesey, 106 N.C. App. 586, 592, 418 S.E.2d 236, 239 (1992), aff'd, 334 N.C. 303, 432 S.E.2d 339 (1993), plaintiffs may not be sanctioned unless the responsive pleadings or some other event reveal there is a complete absence of a justiciable issue. See Sunamerica, 328 N.C. at 259, 400 S.E.2d at 438.
    In sum, defendants first raised the theory of double recovery in defense to plaintiffs' tort claims at the summary judgment hearing held on 5 May 2004 and in their Amended Answer filed on 6 May 2004. Four weeks later, on 4 June 2004, plaintiffs dismissed all claims against defendants without prejudice. During this interim period, plaintiffs did not take any further affirmativeaction in litigating the dispute. As in Bryson, plaintiffs cannot be said to have persisted in litigating the case after a point where they should reasonably have been aware that no justiciable controversy existed. Accordingly, we hold that the trial court abused its discretion in determining that defendants are entitled to an award of attorneys' fees pursuant to N.C. Gen. Stat. § 6- 21.5.
    Reversed.
    Chief Judge MARTIN and Judge McGEE concur.
    Report Per Rule 30(e).

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