Persis Nova Construction, Inc. v. Edwards

Citations: 671 S.E.2d 23; 195 N.C. App. 55; 2009 N.C. App. LEXIS 61Docket: COA07-1501

Court: Court of Appeals of North Carolina; January 20, 2009; North Carolina; State Appellate Court

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Defendants Bruce K. Edwards and Kathlyn E. Edwards appealed an order from the trial court that denied their motion for sanctions and attorney's fees under N.C. Gen. Stat. 1A-1, Rule 11, and 6-21.5. The Court of Appeals of North Carolina affirmed the trial court's decision on the Rule 11 sanctions, finding that the lawsuit's filing did not violate the rule. However, the appellate court disagreed with the trial court's conclusion regarding the absence of a prevailing party, resulting in a reversal of that part of the order and a remand for further findings.

The case originated from a January 2003 Purchase Agreement, signed by Bruce Edwards for the purchase of real estate from P.N. Homes, Inc., at a price of $356,975, which Kathlyn Edwards did not sign. An addendum later detailed the purchase price and terms, but Kathlyn Edwards again did not sign. A letter dated March 5, 2004, confirmed an adjusted contract price of $274,500 and acknowledged payments made by the Defendants, with a remaining balance of $42,451.25.

On October 27, 2004, Plaintiff Persis-Nova Construction, Inc. initiated a lawsuit claiming Defendants owed $15,000 of the outstanding balance under the March 2004 agreement, alleging breach of contract and unjust enrichment. The complaint was verified by Frank Arooji and filed by the law firm Horack, Talley, Pharr, Lowndes, P.A. Defendants responded with an answer and counterclaim on January 13, 2005.

Defendants acknowledged that Plaintiff is a North Carolina corporation based in Mecklenburg County. In their counterclaim, Defendants asserted that Plaintiff failed to construct the house in a workmanlike manner and sought damages exceeding $10,000. Plaintiff responded to the counterclaim on February 18, 2005. Defendants filed a motion for summary judgment on September 1, 2006, supported by an affidavit from attorney Curtis R. Sharpe, Jr. The affidavit revealed several findings: no registered assumed names for P. N Homes or related entities in Catawba or Mecklenburg Counties, and no licensed contractors by those names. It identified Ebrahim S. Mowlavi as the owner of a registered assumed name for Persis-Nova Construction Company. The trial court's September 28, 2006 order confirmed that Persis-Nova Construction, Inc. is unlicensed under North Carolina law and has no registered assumed name. It determined that Persis-Nova Construction Company and P. N Homes are not corporations and lack legal recognition, rendering them nullities. The court noted a March 5, 2004 document signed by Defendant Kathlyn E. Edwards, which involved Frank Arooji of Persis-Nova Construction—an unlicensed contractor. Additionally, a January 4, 2003 "Purchase Agreement" with P. N Homes, Inc. was signed by Defendant Bruce K. Edwards, but P. N Homes, Inc. was also found to be a null entity with no general contractor's license.

The addendum to the 'Purchase Agreement' dated January 4, 2003, involves Bruce Edwards (Defendant) and P. N Homes, which is identified as an unlicensed general contractor under North Carolina law. The trial court ruled in favor of the Defendants, allowing their Motion for Summary Judgment and dismissing the Plaintiff's Complaint with prejudice. Additionally, the court granted Summary Judgment for the Plaintiffs, dismissing the Defendants' Counterclaim without prejudice, allowing for future filings. On September 28, 2006, Defendants filed a Motion for Sanctions and Motion for Attorneys' Fees, which was heard from January 16-17, 2007. The court ultimately denied the motion on April 9, 2007, leading to Defendants' appeal.

The appeal focuses on the trial court's denial of Rule 11 sanctions, which are reviewed de novo. The analysis includes assessing the factual and legal sufficiency of the complaint and any improper purpose behind its filing. The trial court determined that the Plaintiff had conducted a reasonable inquiry into the facts and had a well-grounded belief in the validity of the complaint. Defendants challenge these findings, claiming insufficient evidence supports them. Testimony from a closing attorney, Ms. Jarvis, indicated that she had extensive experience with loans related to P. N Homes and believed that the Defendants owed money to the Plaintiff, supporting the trial court’s conclusions.

Mr. Osborn, an attorney involved in the case, testified that he filed the complaint based on information provided by Miss Jarvis. He confirmed reviewing a letter from March 5, 2004, and verified that Persis-Nova Construction, Inc. had filed articles of organization with the Secretary of State. He stated he named Persis-Nova Construction, Inc. as doing business as Persis-Nova Construction Company because it aligned with his client's information, although he could not specify the verification steps taken regarding the business name. Despite not regularly checking assumed names databases, the trial court found that the Plaintiff made a reasonable inquiry into the facts and believed the complaint was factually grounded.

The Defendants argued that the complaint was factually insufficient since neither Persis-Nova Construction, Inc. nor any contract parties were licensed contractors under North Carolina law. However, the court found this argument unpersuasive, emphasizing that the standard for assessing a complaint's factual sufficiency is reasonableness under the circumstances.

Regarding improper purpose, defined as any purpose other than vindicating rights, the court referenced criteria from prior cases. The Defendants contended that the Plaintiff aimed to collect uncollectible money due to statutory restrictions. The trial court found that the Plaintiff filed the complaint intending to test claims under the contract, supported by evidence that the attorney believed the action was a collection of a contract balance. The Defendants did not contest this finding, making it binding. Therefore, the trial court concluded that the complaint was not filed for an improper purpose, and the Defendants' argument was overruled.

Defendants challenged the trial court's denial of their motion for attorney's fees under N.C. Gen. Stat. 6-21.5, which requires a prevailing party to qualify for such fees. The trial court ruled there was no prevailing party since both Plaintiffs' and Defendants' claims were dismissed in a summary judgment order. Defendants argued this conclusion was incorrect. Section 6-21.5 allows for attorney's fees if the prevailing party demonstrates that the losing party raised no justiciable issue in any pleading. While certain motions do not automatically justify an award of fees, they can support a decision to grant them. A party presenting a claim or defense with a legitimate legal argument cannot be penalized with fees. The statute mandates that the court provides findings of fact and conclusions of law for any fee awards. The court's denial of attorney's fees is reviewed for abuse of discretion, but the definition of a "prevailing party" under this statute has not been conclusively determined in prior cases. The statute must be strictly interpreted as it diverges from common law, which generally holds that each party bears its own attorney's fees.

The primary objective in interpreting a statute is to fulfill the legislature's intent, which is first discerned through the language used. When the statute's wording is clear, it should be understood in its ordinary sense. Specifically, N.C. Gen. Stat. 6-21.5 unambiguously allows for the awarding of attorney's fees against any "losing party" in a pleading, indicating that multiple parties may be liable. The term "prevailing party" refers to any party that succeeds on a claim or issue, not solely the party winning the entire action. This interpretation is supported by the Supreme Court's dicta in Investors Title Ins. Co. v. Herzig, which implied that attorney's fees could be awarded under Section 6-21.5 when one party raises issues devoid of justiciable merit. The legislative intent behind Section 6-21.5 is to deter frivolous lawsuits, a goal that would be undermined if only the overall prevailing party could be charged with attorney's fees. In the present case, the trial court inaccurately determined that the defendants did not prevail, despite them succeeding on some claims. Therefore, the court's decision regarding the award of attorney's fees is to be revisited, with a remand to consider all relevant criteria under N.C. Gen. Stat. 6-21.5. The ruling is affirmed in part, reversed in part, and remanded for further proceedings.