Lancaster v. Harold K. Jordan & Co., 2014 NCBC 22.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF NEW HANOVER 08 CVS 883
JULIE LANCASTER and BRANNON ) LANCASTER, ) Plaintiffs ) ) v. ) OPINION AND ORDER ) ON MOTION FOR HAROLD K. JORDAN AND CO., INC. ) SUMMARY JUDGMENT WITHERS & RAVENEL, INC., ARTHUR R. ) COGSWELL, and LIGHTHOUSE ) ENGINEERING, PA, ) Defendants )
THIS CAUSE, designated a mandatory complex business case by Order of the
Chief Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-
45.4(b) (hereinafter, references to the North Carolina General Statutes will be to "G.S."),
and assigned to the undersigned Chief Special Superior Court Judge for Complex
Business Cases, comes before the court upon Defendant Harold K. Jordan and Co.,
Inc.'s Motion for Summary Judgment Based Upon Res Judicata and Collateral Estoppel
("Motion"), pursuant to Rule 56 of the North Carolina Rules of Civil Procedure
("Rule(s)"); and
THE COURT, after reviewing the Motion, briefs in support of and in opposition to
the Motion, arguments of counsel and other appropriate matters of record,
CONCLUDES that the Motion should be GRANTED, for the reasons stated herein.
Shipman & Wright, L.L.P., by Gary K. Shipman, Esq. and Stubbs & Perdue, P.A., by Matthew W. Buckmiller, Esq. for Plaintiffs Julie and Brannon Lancaster. Hedrick, Gardner, Kincheloe & Garofalo, L.L.P. by Thomas M. Buckley, Esq. and Bugg & Wolf, P.A., by William J. Wolf, Esq. for Defendant Harold K. Jordan and Co., Inc.
Jolly, Judge.
PROCEDURAL HISTORY
[1] On February 26, 2008, Plaintiffs Julie Lancaster and Brannon Lancaster
filed a Complaint against Defendants Harold K. Jordan and Co., Inc. ("HKJ"), Withers &
Ravenel, Inc. ("W&R"), Arthur R. Cogswell ("Cogswell") and Lighthouse Engineering,
P.A ("Lighthouse"). Plaintiffs' action was designated as civil action Number 08 CVS 883
by the Clerk of Superior Court of New Hanover County.
[2] On December 15, 2009, Plaintiffs filed an Amended Complaint. In the
Amended Complaint, Plaintiffs allege the following claims for relief ("Claim(s)"): First
Claim for Relief (Fraud – Defendant HK Jordan); Second Claim for Relief (Unfair and
Deceptive Trade Practices – HKJ); Third Claim for Relief (Negligent Misrepresentation –
Defendants HK Jordan, Cogswell, W&R); Fourth Claim for Relief (Negligence –
Defendants HK Jordan and Cogswell); Fifth Claim for Relief (Breach of Contract –
Defendant W&R).
[3] Plaintiffs subsequently filed voluntary dismissals as to W&R, Cogswell,
and Lighthouse.1 Consequently, HKJ is the only remaining Defendant in this action.
[4] On April 25, 2013, Defendant HKJ filed the Motion, seeking Summary
Judgment as to counts I through IV, pursuant to Rule 56.
1 Notice of Voluntary Dismissal with Prejudice as to Pls.' Claims Against Def. Arthur R. Cogswell (May 26, 2011); Notice of Voluntary Dismissal with Prejudice as to Pls.' Claims Against Defendant Withers & Ravenel, Inc. (May 1, 2012); Notice of Voluntary Dismissal, Without Prejudice as to Pls.' Claims Against Lighthouse Engineering, P.A. (Aug. 11, 2008). [5] The Motion has been fully briefed and argued and is ripe for
determination.
FACTUAL BACKGROUND
Among other things, the Amended Complaint alleges:
[6] Defendant HKJ is a North Carolina corporation with a place of business in
New Hanover County, North Carolina.2
[7] In 1997, Plaintiffs purchased land located in the Town of Leland in
Brunswick County, North Carolina ("Subject Property"). The purchase was financed in
part by Plaintiffs' execution of a promissory note and deed of trust to secure a loan from
Coastal Federal Bank, with the balance coming from Plaintiffs' personal funds.3
[8] In 2003, Plaintiffs formed Village Landing, LLC ("Village Landing"), a North
Carolina Limited Liability Company. Plaintiffs at all times were Village Landing's sole
member-managers.4 Plaintiffs then transferred the Subject Property to Village Landing
by quitclaim deed. Plaintiffs remained personally responsible for the promissory note
and debt and deed of trust to Coastal Federal Bank.5 At all times relevant to this action,
Village Landing was only able to borrow money with the personal guarantee of
Plaintiffs.6
[9] In 2005, Plaintiffs met with HKJ regarding the possibility of constructing
apartments on the Subject Property. HKJ referred Plaintiffs to Cogswell, an architect in
Chapel Hill, North Carolina.7 Plaintiffs then decided that they wanted to construct and
2 Am. Compl. ¶ 2. 3 Id. ¶ 6. 4 Ex. AAA026 to Wiggins Aff. ("Arbitration Transcript") at 581; see also Compl. ¶ 10, Am. Compl. ¶¶ 7-8. 5 Am. Compl. ¶ 7. 6 Id. ¶ 8. 7 Id. ¶¶ 12-13. sell townhomes as opposed to managing apartments.8 Under the Town of Leland's
Residential Building Code ("Code"), the requirements for townhouse construction
differed from those applicable to apartment or condominium construction.9 Unlike
townhouses, condominiums are not constructed under the Code.10 HKJ understood
that it was tasked with building townhouses under the Code.11
[10] Plaintiffs sought and obtained additional financing from Cooperative Bank
in Wilmington, North Carolina. Plaintiffs and Lumina Mortgage Company, an affiliate of
Cooperative Bank, both felt that a townhouse project was a better option than the
alternatives, and both parties operated under the assumption that townhomes would be
built.12
[11] In 2005, Plaintiffs acquired additional property adjoining the Subject
Property, which was necessary for the development of the Subject Property as a
townhouse community.13
[12] In February 2006, HKJ prepared and submitted to Plaintiffs a "proposal for
the construction of 60 condos." When Plaintiffs inquired as to the use of the term
"condos" rather than "townhouses," they were informed by HKJ that the difference was
immaterial.14
[13] Plaintiffs and HKJ then formed Shady Grove Development, Inc. ("Shady
Grove") with the goal of proceeding with the project as a joint venture, on the condition
8 Id. ¶ 16. 9 Id. ¶ 18. 10 Id. ¶ 51, 53. 11 Id. ¶ 58. 12 Id. ¶ 20. 13 Id. ¶ 28. 14 Id. ¶ 41. that Harold K. Jordan, President of HKJ ("Jordan"),15 would not be personally liable for
any debts incurred. When Plaintiffs and HKJ were made aware of Cooperative Bank's
requirement that all shareholders of the developing entity submit personal financial
information and personally guarantee any loan, Plaintiffs and Jordan abandoned the
joint venture. 16
[14] Shady Grove and HKJ were the only signatories to the original
development contract. No written contract ever existed between Village Landing and
HKJ, despite Plaintiffs' request that a new contract be prepared.17
[15] In reliance on HKJ's representations that townhouses would be
constructed, Plaintiffs accepted Cooperative Bank's commitment letters to fund the
project, thereby personally guaranteeing the payment of Village Landing's debt for the
construction and development of the project.18
[16] When HKJ provided project plans to the Town of Leland in June and July
2006, HKJ was informed that the plans prepared by Cogswell did not qualify for
townhouse construction under the Residential Building Code and that the project had
not been approved by the Town.19 HKJ failed to notify Plaintiffs about this issue and
began construction regardless.20
[17] In August 2006, prior to beginning vertical construction, HKJ submitted
change orders to Julie Lancaster and Cooperative Bank providing for additional
expenses "because units are built as townhomes and they were priced as condos."21
15 Arb. Tr. at 121. 16 Am. Compl. ¶¶ 33-35, 46-47. 17 Id. ¶¶ 42, 48. 18 Id. ¶ 67-68. 19 Id. ¶¶ 79-81. 20 Id. ¶¶ 82, 84. 21 Id. ¶¶ 86-87. [18] While construction was ongoing, the Town of Leland Building Inspector
"repeatedly informed" HKJ that HKJ was not building townhouses under the Residential
Building Code. HKJ did not notify Plaintiffs of the Building Inspector's statements.22
[19] Despite HKJ's knowledge that the units were sold by realtors marketing
the projects as townhomes and HKJ's assurances that the units would be ready for
occupancy by November 2006, HKJ did not inform Plaintiffs until December 2006 that
the Town of Leland would not issue certificates of occupancy for the units as
townhomes.23 Because HKJ constructed condominiums rather than townhouses,
prospective purchasers were unable to obtain financing.24
[20] If the units had been constructed as townhomes, the units would have
been sold, and additional loans would have been repaid. The sale would also have
generated a profit, enabling Plaintiffs to begin the next phase of the project. Instead,
Plaintiff Julie Lancaster was forced to cash out her Investment Retirement Account in
order to fund required interest payments to Cooperative Bank.25
Prior Arbitration Action26
[21] In July 2007, HKJ filed an action in Wake County Superior Court against
Shady Grove and Village Landing, alleging breach of the construction contract.27 Shady
Grove and Village Landing filed an Answer and Counterclaim, which sought to submit
22 Id. ¶¶ 93-94. 23 Id. ¶¶ 95-97. 24 Id. ¶ 99. 25 Id. ¶¶ 103-110. 26 It is not proper for a trial court to make findings of fact in determining a Rule 56 motion. However, it is appropriate for a Rule 56 order to reflect material facts that the court concludes exist and are not disputed, and which support the legal conclusion with regard to summary judgment. Hyde Ins. Agency v. Dixie Leasing Corp., 26 N.C. App. 138, 142 (1975). As reflected in this Opinion and Order, the court here concludes that undisputed facts of record relative to the defenses of res judicata and collateral estoppel require that the Motion be granted. 27 Ex. W001 to Wiggins Aff. HKJ's claims against Shady Grove alone to arbitration based on an arbitration clause in
the written contract between Shady Grove and HKJ.28
[22] HKJ later successfully moved to compel arbitration as to all pending
claims between HKJ and Village Landing as well, based on a ruling by the Honorable
Donald W. Stephens, Wake County Senior Resident Superior Court Judge, that the
contract at issue was effectively assigned from Shady Grove to Village Landing.29 In his
November 19, 2007 Order Compelling Arbitration, Judge Stephens ordered HKJ, Shady
Grove and Village Landing to "arbitrate all their pending claims in this action," including
"all counterclaims of Village Landing"30 in the already pending arbitration31 between HKJ
and Shady Grove.
[23] Village Landing's arbitration counterclaims were substantially similar if not
substantively identical to the Claims asserted in Plaintiffs' Amended Complaint in the
instant action.32 Village Landing alleged that HKJ "failed to construct townhouse units
on the subject property"33 and that HKJ caused Village Landing "great financial harm
and damage" as a result.34
[24] The resulting arbitration hearing (“Arbitration”) took place in March 2008.35
Plaintiffs were not named parties to the Arbitration Action in their individual capacities,
as they are in this matter, but were present and testified at the Arbitration.36 Plaintiffs,
though Village Landing, also called an additional 16 witnesses to testify at the
28 Ex. W002 to Wiggins Aff.; Pls.' Mem. Opp. Def. HKJ's Mot. Summ. J. ("Plaintiffs' Brief") at 2. 29 Ex. A ("Order Compelling Arbitration") to Def. HKJ's Br. Supp. Mot. Summ. J. ("Defendants' Brief"). 30 Order Compelling Arb. at 3 (emphasis original). 31 American Arbitration Association Case # 31 110 Y 00204 07 ("Arbitration Action"). 32 See Ex. D to Def.'s Br. ¶¶ 3-28 ("Arbitration Counterclaims"). 33 Id. ¶ 28. 34 Id. ¶ 25. 35 Pls.' Br. at 3; see Arb. Tr. 36 Arb. Tr. at 3, 582, 636, 726, 754. Arbitration.37 The arbitrator rendered his judgment in April 2008, specifically finding, in
relevant part:
Regarding the Townhome issue, there is a dispute in the testimony about whether these buildings actually do qualify as Townhomes under the Residential Building Code, but there is no evidence that [HKJ] deviated in any way from the drawings provided by [Village Landing's] architect. The only question is whether there is a conflict between the drawings and the Residential Building Code. As indicated above, there is a conflict in the testimony about that. But there is no evidence that Jordan was ever aware of this issue. This is especially true in light of the fact that the architect himself testified that there was no such conflict.
The testimony of [Town of Leland Building Inspector] Timothy Evans does not establish, by the greater weight of the evidence, that [HKJ] was, or should have been, aware of any inconsistency between the drawings and the residential code. In fact there is no evidence at all that [HKJ] was ever aware that Mr. Evan's [sic] remarks had any significance.
There are many other reasons why [Village Landing's] counterclaims should fail . . .
This Award is in full settlement of all claims and counterclaims submitted to this Arbitration."38
[25] A Judgment confirming the Arbitration Award was entered in June 2008 by
the Honorable Michael R. Morgan, Wake County Resident Superior Court Judge.39
Village Landing's subsequent appeal of Judge Morgan's Judgment and Judge
Stephens's Order Compelling Arbitration was, according to Plaintiffs, "dismissed by the
Court of Appeals for unknown reasons."40 A Petition to the Supreme Court of North
37 Id. at 3, 636. 38 Ex. F to Def.'s Br. ("Arbitration Award"). 39 Ex. G to Def.'s Br. 40 Pls.' Br. at 4. Notwithstanding Plaintiffs’ counsel’s assertion that Plaintiffs were unaware of the reason for the appeal's dismissal, the record reflects that the appeal was dismissed by the Court of Appeals because Village Landing failed to serve the record in a timely manner. See Ex. NCA002 to Wiggins Aff., Ex. NCA003 to Wiggins Aff., Ex. NCA004 to Wiggins Aff. Carolina for Writ of Certiorari was denied,41 bringing an end to the litigation between
HKJ and Village Landing. Plaintiffs, in the meantime, had filed the Complaint in this
action in their individual capacities less than 20 days prior to the March 2008
Arbitration.42
DISCUSSION
[26] The Motion seeks summary judgment in favor of HKJ under Rule 56.
"Summary judgment is appropriate '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.'" Variety Wholesalers, Inc. v. Salem Logistics Traffic
Servs., LLC, 365 N.C. 520, 523 (2012) (quoting Rule 56(c)). An issue is "material" if its
"resolution . . . is so essential that the party against whom it is resolved may not
prevail." McNair v. Boyette, 282 N.C. 230, 235 (1972) (quotations omitted).
[27] Summary judgment is generally appropriate in cases involving either "a
claim or defense [that] is utterly baseless in fact" or "a question of law on the
indisputable facts" that "can be appropriately decided without full exposure of trial."
Kessing v. Nat'l Mortg. Corp., 278 N.C. 523, 533 (1971). In considering a Rule 56
motion, this court must view the evidence "in the light most favorable to the nonmoving
party." Trivette v. Yount, 366 N.C. 303, 312 (2012) (citing Howerton v. Arai Helmet, Ltd.,
358 N.C. 440, 470 (2004)). The moving party bears "the burden of clearly establishing
lack of a triable issue" to the trial court. N.C. Farm Bureau Mut. Ins. Co. v. Sadler, 365
N.C. 178, 182 (2011) (quoting N.C. Nat'l Bank v. Gillespie, 291 N.C. 303, 310 (1976)).
41 Ex. NCA010 to Wiggins Aff. 42 Pls.' Br. at 12; see also Compl., Arb. Tr. The moving party may meet this burden by "proving an essential element of the
opposing party's claim does not exist, cannot be proven at trial, or would be barred by
an affirmative defense." Variety Wholesalers, Inc., 365 N.C. at 523 (quoting Dobson v.
Harris, 352 N.C. 77, 83 (2000)). Evidence that may be considered by this court under
Rule 56 includes "admissions in the pleadings, depositions on file, answers to . . .
interrogatories, admissions on file . . . , affidavits, and any other material which would be
admissible in evidence or of which judicial notice may properly be taken." Kessing, 278
N.C. at 533.
[28] HKJ contends that in the instant action Plaintiffs are seeking to relitigate
claims previously tried and decided in the Arbitration Action but are barred from doing
so under the doctrine of res judicata, or claim preclusion. HKJ similarly contends that
the doctrine of collateral estoppel, or issue preclusion, also applies and bars relitigation
of issues decided in the Arbitration Award. This court reaches its decision on the Motion
based solely on its application of the doctrine of collateral estoppel, and it therefore
makes no ruling on whether Plaintiffs' Claims are also barred by res judicata even
though the doctrinal analyses are similar and occasionally overlap.
[29] "Collateral estoppel can be a basis for summary judgment" by foreclosing
"relitigation of issues actually determined in a previous action." Beckwith v. Llewellyn,
326 N.C. 569, 573 (1990) (citations omitted), reh'g denied, 327 N.C. 146 (1990). The
doctrine "operates as an absolute bar to further litigation of the issue previously
decided." Murakami v. Wilmington Star News, Inc., 137 N.C. App. 357, 359 (2000)
(citations omitted). North Carolina case law typically spells out the doctrine's core
requirements in the form of two slightly different four-factor tests. See, e.g., Turner v. Hammocks Beach Corp., 363 N.C. 555, 559 (2009), Thomas M. McInnis & Assocs. v.
Hall, 318 N.C. 421, 429-30 (1986), King v. Grindstaff, 284 N.C. 348 (1973). The
substantive requirements are consistent regardless of form, and are most clearly parsed
as follows: (a) identity of parties, (b) prior final judgment on the merits, (c) identity of
issues, (d) actual litigation of issues, (e) actual determination of issues in the judgment
and (f) the determination's necessity to the judgment. See id. The court will address
each of these factors, giving special attention to elements (a), (c) and (d), which the
parties most vigorously contest.
Identity of Parties
[30] In analyzing whether collateral estoppel applies, courts traditionally begin
with an inquiry into "whether the parties in [the present] suit[] and those in the former . . .
litigation are the same, or stand in privity to the parties in the former litigation." King, 284
N.C. at 357. In 1986, the Supreme Court of North Carolina, recognizing "[t]he modern
trend in both federal and state courts," abandoned this requirement when a party seeks
to use collateral estoppel defensively. McInnis, 318 N.C. at 421. The McInnis court's
ruling contemplated a scenario involving the same plaintiff suing different defendants, or
what some courts refer to as "non-mutual defensive collateral estoppel." See, e.g.,
Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002) ("Nonmutual
defensive collateral estoppel works to prevent a plaintiff from relitigating an issue the
plaintiff has previously litigated unsuccessfully in another action against a different
defendant." (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.4 (1979)). The
court is not aware of any North Carolina precedent addressing the attempted use of
nonmutual collateral estoppel by the same defendant against nominally different plaintiffs, as HKJ seeks in this matter. Therefore, the court will engage in the full identity
analysis as traditionally required under the doctrine.
[31] As a preliminary matter, the court notes that res judicata and collateral
estoppel are "companion doctrines," Bockweg v. Anderson, 333 N.C. 486, 491 (1993),
that traditionally have shared the identity requirement. As such, the analysis involved is
identical regardless of which of the two estoppel doctrines is being asserted. See
Carolina Power & Light Co. v. Merrimack Mut. Fire Ins. Co., 238 N.C. 679, 692 (1953)
(discussing identity of parties "in order to establish res judicata or the equitable principle
of estoppel" (emphasis added)). The parties' memoranda on the Motion implicitly
recognize this,43 and the court is aware of no precedent to the contrary. Therefore, the
court deems it appropriate to rely on case law discussing identity of parties in the
context of both res judicata and collateral estoppel analyses.
[32] The Parties vigorously contest whether this matter and the Arbitration
Action present an identity of parties plaintiff. It is clear that Plaintiffs were not nominal
parties to the Arbitration Action. However, HKJ contends that Plaintiffs were either (a)
substantively parties to the Arbitration Action in function, even if not in form; or (b) were
in privity with Village Landing, thereby satisfying an exception to the identity element.44
[33] In support of its argument that Plaintiffs in substance were parties to the
Arbitration Action, HKJ asserts that Village Landing did not observe corporate
formalities and was Plaintiffs' mere alter ego.45 HKJ relies, among other things, upon
43 See Pls.' Br. at 21, Def.'s Br. at 30-31. 44 See Def.'s Br. at 20-24. 45 Def.'s Br. at 25. Julie Lancaster's admission at the Arbitration that Plaintiffs and Village Landing were
"one and the same."46
[34] In support of its argument that Plaintiffs and Village Landing were in privity
for purposes of the Arbitration Action, the Motion naturally poses the question of
whether a closely held corporation and its shareholders are privies under these
circumstances. Plaintiffs correctly cite to Troy Lumber v. Hunt, 251 N.C. 624, 627
(1960), for the proposition that privity with a corporation is not established solely by
one's position as a corporate officer or shareholder. Rather, as our Supreme Court has
noted, privity generally involves "a person so identified in interest with another that he
represents the same legal right," though a universal definition of the word has "proven
to be elusive." Whitacre P'ship v. Biosignia, Inc., 358 N.C. 1, 36 (2004) (quotations and
citations omitted).
The Lassiter Exception
[35] Taken as a whole, the North Carolina case law is inconclusive as to
whether the facts in this matter unequivocally support a conclusion that Plaintiffs in
substance were parties to the Arbitration Action or were in privity with Village Landing.
As such, this court declines to reach a conclusion on either proposition. Instead, the
court relies on the related "Lassiter exception" because it most clearly resolves this
issue. See Thompson v. Lassiter, 246 N.C. 34 (1957).
[36] In Lassiter, the Supreme Court recognized a "well established exception"
to the "general rule" that an identity of parties is necessary to sustain a res judicata
defense:
46 Def.'s Br. at 22 (quoting Arb. Tr. at 627). A person who is not a party but who controls an action, individually or in cooperation with others, is bound by the adjudications of litigated matters as if he were a party if he has a proprietary interest or financial interest in the judgment or in the determination of a question of fact or a question of law with reference to the same subject matter, or transactions; if the other party has notice of his participation, the other party is equally bound.
Id. at 39 (quoting Light Co. v. Insurance Co., 238 N.C. 679, 692 (1953)) (emphasis
omitted). In substance, the Lassiter exception requires that four parameters be met: (a)
control of both the original and present lawsuit, (b) a proprietary interest or financial
interest in the prior judgment, (c) an interest in the determination of a question of fact or
a question of law regarding the same subject matter or transactions and (d) notice of
participation. In the context of the instant action, the Court of Appeals’ discussion of the
Lassiter analysis in Williams v. Peabody, 217 N.C. App. 1 (2011), is material.
Plaintiffs' Control of the Original Lawsuit
[37] Control is the "threshold requirement of the exception to the rule requiring
privity of identities." Peabody, 217 N.C. App. at 10 (citing Lassiter, 246 N.C. at 39).
While there is no bright line test or clear definition as to what constitutes a party's
"control" of a prior proceeding, the Peabody court's discussion of several reported cases
involving the control element is instructive. For example, Smoky Mountain Enters., Inc.
v. Rose, 283 N.C. 373 (1973), involved a breach of contract suit instituted by a
corporate plaintiff after summary judgment was rendered individually against the
president of the corporate plaintiff in a prior action. In holding that the corporate plaintiff
was bound by the judgment in the prior suit under res judicata, the Supreme Court
emphasized that "[the individual plaintiff] is the president and owns all the stock of [the
corporate plaintiff]," and that the individual plaintiff was "personally in control" of both the
prior action in his individual capacity and the subsequent corporate action. Id. at 377-78. [38] On the other hand, in Troy Lumber, 251 N.C. 624, the court declined to
find that a controlling stockholder (who was also the president and chairman of the
subject corporation's board of directors) and a corporation were in privity. This holding
was based on the court's finding that "[the corporation] has other shareholders than [the
individual]," the lack of any "allegation . . . that these other shareholders had anything to
do with [the individual's] [prior] action for damages for personal injuries," and the
individual plaintiff's mere "contingent derivative right of succession of property interest"
from the corporation with regard to the corporate action. Id. at 627-28.
[39] The contrasting outcomes in Smoky Mountain Enterprises and Troy
Lumber nonetheless are consistent. As the Peabody court observed, a "logical
extension" from Smoky Mountain Enterprises and Troy Lumber taken together is the
importance of shareholder makeup in assessing the Lassiter control element. See
Peabody, 217 N.C. App. at 12-13. The court found in Peabody that "suspension" of the
privity requirement was not warranted because the evidence of record in that matter
"show[ed] at most, that [the individual] was [the corporation's] chief operating officer,"
and it thus distinguished Peabody from Smoky Mountain Enterprises. Id. In reaching
that conclusion, the Peabody court emphasized the lack of any evidence showing that
the individual was a "sole or controlling shareholder" or was otherwise "in control of [the
corporation], and thereby, in control of [corporation's] [prior] action against Defendants."
Id. at 12. Thus, the controlling jurisprudence on this issue stands strongly and directly
for the proposition that the control element of the Lassiter exception is met when a
corporation is dominated by a single party or entity or is otherwise the alter ego of that
party or entity. [40] The evidence of record in this matter establishes that Plaintiffs, husband
and wife, were the sole member-managers of Village Landing, a party to the Arbitration
Action. Plaintiffs' brazen claim that they "had no control over the arbitration
proceeding"47 is remarkable in light of the fact that they called a total of 18 witnesses,
including themselves, to testify at the Arbitration.48 Given Plaintiffs' sole ownership and
management of Village Landing, it is difficult to envision how anyone other than
Plaintiffs could possibly have "controlled" Village Landing at the Arbitration. Plaintiff
Julie Lancaster herself testified at the Arbitration that Village Landing and the
Lancasters were "one and the same."49 Under the Supreme Court of North Carolina's
analysis in Smoky Mountain Enterprises, the control element of the Lassiter exception is
plainly shown by the evidence of record in this matter.
Plaintiffs' Proprietary Interest in the Prior Judgment
[41] Similarly, as the sole member-managers of Village Landing, Plaintiffs had
a clear proprietary interest in the Arbitration Action. Village Landing was a respondent
and counterclaimant in the Arbitration Action. HKJ sought substantial damages from
Village Landing, and eventually recovered over $800,000.50 Village Landing's
counterclaims sought damages in excess of $1 million; it was ultimately awarded less
than $12,000.51 Village Landing was essentially a pass through entity, and Plaintiffs
47 Pls.' Br. at 19. 48 Arb. Tr. at 3, 636. 49 Arb. Tr. at 627. 50 Def.'s Br. at 7. 51 Ex. E to Def.'s Br.; Arb. Award. were financially intertwined with Village Landing.52 Consequently, Plaintiffs had an
obvious, clear and direct financial interest in any judgment affecting Village Landing.
Plaintiffs' Interest in the Determination of Questions of Fact or Law
[42] Moreover, Plaintiffs had a clear interest in the "determination of a question
of fact or a question of law with reference to the same subject matter[] or transactions."
Lassiter, 246 N.C. at 39. At the very core of Plaintiffs' Claims against HKJ in this matter
is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing
"condominiums, rather than townhouses."53 This was the precise issue that Village
Landing litigated extensively against HKJ in the Arbitration Action, an alleged
misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions
of dollars in losses.54 Not only did Plaintiffs have an "interest" in the Arbitrator's
determination on this issue, it was central to their LLC's entire case against HKJ in the
Arbitration Action – as it is in their individual action here. As such, this element of the
Lassiter exception is plainly met.
Notice
[43] Lassiter requires that "the other party" have "notice of [the person's]
participation" in order to be "equally bound." Lassiter, 246 N.C. at 39. This language is
slightly ambiguous on its face, but is easier to discern when taking into account that
52 See Arb. Tr. at 577 (Plaintiffs treated money put into Village Landing as loans from them to Village Landing. Village Landing was treated as a disregarded entity for tax purposes and was listed on Plaintiffs' tax returns). 53 Pls.' Br. at 9. 54 Arb. Tr. at 60 (Opening Statement of Gary K. Shipman, Esq.) ("As we sit here today, the evidence will show that the owners' losses exceed 2 million dollars all because Jordan did not do what he was obligated to do, build townhouses under the Residential Building Code; all because Jordan failed to disclose information that they had an affirmative obligation to disclose; all because Jordan made an affirmative misrepresentation that they were constructing townhomes when they knew that they were constructing condos."). cases such as Lassiter and Smoky Mountain Enterprises featured a chronological
posture opposite to that involved here. Specifically, both cases dealt with corporate suits
instituted after individual suits, rather than the opposite.
[44] In Smoky Mountain Enterprises, the court dispatched with this element by
noting that the individual involved was the corporation's president, obviously had
knowledge of his own lawsuit, and that "notice to the president is notice to the
corporation." 283 N.C. at 377. The Peabody court, in conducting the Lassiter analysis
under facts similar to this case chronologically, made no mention of the notice
requirement, suggesting that it may not be required under these facts. See Peabody,
217 N.C. App. at 9-11 (assessing the application of the Lassiter exception to Peabody
by virtue of her ownership of Peabody's Home Improvements, Inc., a party to a prior
lawsuit). Regardless, in this case, Plaintiffs' knowledge of the prior litigation is obvious,
and thus the notice element is either met or not applicable and does not merit further
consideration.
The "Separate and Distinct" Nature of Plaintiffs' Claims
[45] Plaintiffs' argument with regard to the identity requirement appears to rest
in part on the misguided notion that this element cannot be met because their Claims in
this case are "separate and distinct" from Village Landing's Arbitration Counterclaims.55
Even assuming arguendo that Plaintiffs' Claims are in fact separate and distinct from
their LLC's Arbitration Counterclaims, that fact would be largely irrelevant to the identity
analysis (and indeed largely irrelevant to the doctrine of collateral estoppel), which
55 See, e.g, Pls.' Br. at 17 ("No North Carolina court has ever found in situations similar to this one that the Lancasters are in privity with Village Landing for claims based on the Lancasters' "separate and distinct" injury."). merely requires an examination of whether there is an identity of parties, privity between
parties, or an applicable exception. Plaintiffs cite to Cline v. McMullen, 148 N.C. App
147 (2001), for the proposition that control of prior litigation "[does] not establish privity
in and of itself."56 This is uncontested – as outlined above, Plaintiffs satisfy the identity
requirement because they controlled the prior action and had a proprietary interest in
that action as well as an interest in the determination of issues at stake in that action.
[46] Plaintiffs incorrectly characterize the Lassiter rule as mere "dicta from
Cline" and attempt to distinguish Lassiter and Cline on the grounds that the former
involved a father-son relationship and the latter a principal-agent relationship.57 This
argument must fail in light of the Troy Lumber court's approval of the Lassiter decision
based on the fact that, in Lassiter, "the father as guardian ad litem had control over the
defense . . ., could cross-examine opposing witnesses, and offer witnesses of his own,"
251 N.C. at 628, as well as the Peabody court's application of the rule. Therefore, the
operative factor in Lassiter was not the father-son relationship itself, but rather the
father's control over the litigation as a result of that relationship.
[47] It is clear that Plaintiffs controlled the Arbitration in behalf of Village
Landing and that they had both a proprietary interest in the Arbitration Action as well as
an interest in the determination of relevant facts and law in that action. Therefore, under
the Lassiter rule, an identity of parties existed between Plaintiffs and Village Landing for
purposes of collateral estoppel. Accordingly, the court's analysis proceeds to the
doctrine's next requirement.
56 Id. 57 Id. at 17-18. Prior Final Judgment on the Merits
[48] Proper application of collateral estoppel requires that "the earlier action
resulted in a final judgment on the merits." Bee Tree Missionary Baptist Church v.
McNeil, 153 N.C. App. 797, 799 (2002). Plaintiffs concede that "the Arbitration Award
was a Final Judgment on the Merits as to claims by/against Defendant HKJ, Village
Landing, and Shady Grove."58 The Arbitration Award was confirmed in its entirety in
Wake County Superior Court by Judge Morgan.59 It is clear that a confirmed Arbitration
Award constitutes a final judgment on the merits for purposes of collateral estoppel.
See, e.g., Murakami, 137 N.C. App. 357, disc. review denied, 352 N.C. 148. Therefore,
this element of the collateral estoppel analysis is met, and the court proceeds to the
Identity of Issue(s)
[49] The core feature that differentiates collateral estoppel from res judicata is
its application to issues rather than claims. That is, collateral estoppel functions to bar
relitigation of an identical issue previously litigated that meets the doctrine's other
requirements, rather than a previously litigated claim. See, e.g., McInnis, 318 N.C. at
429. In King, our Supreme Court noted that "[p]arties and parties in privity with them --
even in unrelated causes of action -- are precluded from retrying fully litigated issues
that were decided in any prior determination and were necessary to the prior
determination." 284 N.C. at 356 (emphasis added).
[50] As briefly noted above, at the very heart of Plaintiffs' Claims against HKJ
in this matter is the allegation that HKJ negligently or purposely misled Plaintiffs in
58 Id. at 12. 59 Ex. W018 to Wiggins Aff. constructing "condominiums, rather than townhouses."60 This exact issue was
extensively litigated during the Arbitration.61 Here, as in their arguments concerning
identity of parties, Plaintiffs rely repeatedly on the allegedly "separate and distinct"
nature of their Claims in this case. Neither the word "issue" nor any remote synonym is
to be found anywhere in the portion of Plaintiffs’ Brief in Opposition discussing the
identity of issues element of collateral estoppel.62 Yet our courts have repeatedly held
that "collateral estoppel precludes the subsequent adjudication of a previously
determined issue, even if the subsequent action is based on an entirely different claim."
Whitacre, 358 N.C. at 15 (citing Hales v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994))
(emphasis added).
[51] Plaintiffs allege that "HKJ made false representations of material fact,
namely that it was building town homes"63. Plaintiffs then argue that HKJ owed Plaintiffs
a duty separate from the duty it owed Village Landing, citing Allen v. Ferrera, 141 N.C.
App. 284 (2000), for the proposition that a "special duty" is created when a defendant
induces a plaintiff to personally guarantee a corporate debt due to misrepresentation.64
This argument is ostensibly an attempt by Plaintiffs to allege the existence of an issue
isolated from the already determined issue of whether HKJ made misrepresentations to
Village Landing. In substance, Plaintiffs appear to argue that while the propriety of
HKJ's conduct as to Village Landing was determined in the Arbitration Action, the
propriety of HKJ's conduct as to Plaintiffs individually is an issue unique to this action.
60 Pls.' Br. at 9. 61 See, e.g., Arb. Tr. at 836-856 (Closing Statement of Gary K. Shipman), Arb. Award. 62 See Pls.' Br. at 21. In fact, Plaintiffs' arguments on the matter are preceded by a subheading titled: "The Lancasters' claims are not identical to those in the Arbitration and were not necessarily determined in the Arbitration." Id. (emphasis added). 63 Id. 64 Id. [52] Plaintiffs' argument is fatally flawed because it is logically impossible to
envision a scenario where HKJ could make misrepresentations to Plaintiffs but not their
wholly owned and controlled LLC, or vice-versa. Even assuming that Village Landing
was not Plaintiffs' mere alter ego, the fact that HKJ's representations caused Plaintiffs to
take actions in their individual capacity is irrelevant. Even if HKJ owed Plaintiffs a
separate duty imposed by operation of law, the presence of that duty is not relevant
unless some scenario exists whereby HKJ could have simultaneously violated that duty
but not its contractual duties to Village Landing. Yet the basis for HKJ's alleged violation
of that separate, special duty remains the allegation that "HKJ made false
representations of material fact, namely that it was building town homes."65
[53] Plaintiffs were Village Landing's sole member-managers and HKJ could
not possibly have engaged in disparate or distinct conduct with respect to Plaintiffs and
Village Landing. Therefore, because the Arbitration Award determined the propriety of
HKJ's conduct with respect to Village Landing, it also did so as to Plaintiffs.
[54] The court concludes that the same issue that was litigated in the
Arbitration Action underlies Plaintiff's Claims here. Therefore, an identity of issues
exists, and the court proceeds to the collateral estoppel doctrine's next requirement.
Actual Litigation of Issue(s)
[55] The collateral estoppel doctrine requires that the issue in question must
have been "actually litigated" in the prior proceeding. McInnis, 318 N.C. at 429. Village
Landing's Arbitration Counterclaims and the Arbitration Transcript together make it
abundantly clear that HKJ's alleged misrepresentation was raised and litigated
65 Pls.' Br. at 21. extensively in the Arbitration Action.66 The controlling case law is clear that litigation of
issues in an arbitration action satisfies the "actual litigation" prong of the collateral
estoppel doctrine. See Murakami, 137 N.C. App. at 360; see also Rodgers Builders, Inc.
v. McQueen, 76 N.C. App. 16, 29 (1985) ("Although James McQueen was not named
as a party to the arbitration, it is clear that . . . he was an active and controlling
participant in the arbitration. He thus is bound by the judgment entered on the arbitration
award just as if he were a named party to the proceeding."). Therefore, the court
proceeds to the next element.
Actual Determination of Issue(s)
[56] Collateral estoppel requires that the issue in question "must have been
determined by adjudication in the prior action." King, 284 N.C. at 359 (quoting 1B
Moore's Federal Practice § 0.443[4] (2d Ed. 1965)). In analyzing whether an issue was
actually determined, courts may look to the judgment as well as pleadings and evidence
from the prior action. Id. Here, as in Murakami, 137 N.C. App. 357, the Arbitration
Award on its own is enough to support a finding that the issue in question was actually
determined by the arbitrator. The Arbitration Award plainly spells out the arbitrator's
findings, in which he specifically absolved HKJ of any responsibility on the issues
underlying Plaintiffs' Claims here. Therefore, the court finds that this element is met and
proceeds to the final element of the collateral estoppel analysis.
Necessity and Materiality to the Judgment
[57] Proper application of collateral estoppel requires that the determination
made in the prior judgment "must have been necessary and essential to the resulting
66 See Ex. D. to Def.'s Br., Arb. Tr. judgment." King, 284 N.C. at 358 (citing 1B Moore's Federal Practice § 0.443[4] (2d Ed.
1965)). The Court of Appeals' decision in Murakami provides a useful example of this
requirement's application to an arbitration award. There, the court found that the
determination was necessary because the "purpose of the proceeding" was to
determine damages. Murakami, 137 N.C. App. at 361. As discussed earlier, Village
Landing's Arbitration Counterclaims rested almost entirely on the underlying allegation
that HKJ either negligently or purposely misled Plaintiffs and their LLC. Determining
whether HKJ was guilty of such misrepresentations was absolutely essential to the
Arbitration Action's "purpose" and the rendering of the Arbitration Award. Therefore, the
final requirement of collateral estoppel is met.
CONCLUSION
[58] The undisputed evidence of record establishes that (a) Plaintiffs are the
same party as Village Landing for purposes of collateral estoppel, (b) Plaintiffs raised
and litigated the same issue that underlies this case during the Arbitration and (c) the
Arbitrator issued a final judgment that actually determined the propriety of HKJ's
conduct – a determination that was essential to the Arbitration Award. Therefore,
Plaintiffs are collaterally estopped from relitigating the issue of whether HKJ made
negligent or intentional misrepresentations during the construction process.
Consequently, the court must consider whether the Arbitration Award's findings on that
specific issue mandate summary judgment in favor of HKJ in this matter.
[59] A Rule 56 motion presents the question of whether there is "lack of a
triable issue," N.C. Farm Bureau Mut. Ins. Co., 365 N.C. at 182 (internal quotations and
citations omitted). This occurs when "an essential element of [a] party's claim does not exist [or] cannot be proven at trial." Variety Wholesalers, Inc., 365 N.C. at 520. As noted
above, the allegation that HKJ made material misrepresentations during the
construction process is a foundational element of Plaintiffs' Claims. Given that Plaintiffs
are collaterally estopped from relitigating this issue and that the court is bound by the
findings on this issue contained in the Arbitration Award, it is clear that Plaintiffs' Claims
fail as a matter of law. Because there is no triable fact that would serve as a basis for
liability against HKJ, summary judgment in favor of HKJ is appropriate in this action with
regard to Plaintiff's Claims I-IV.
NOW THEREFORE, based upon the foregoing, it hereby is ORDERED that:
[60] Defendant HKJ's Motion for Summary Judgment is GRANTED as to
Plaintiffs' Claims I-IV, and said Claims are DISMISSED.
[61] As Plaintiffs have previously filed voluntary dismissals against Lighthouse,
W&A and Cogswell, and therefore no viable Claims remain in this matter, this civil
action is DISMISSED.
[62] Taxable costs of this action are assessed against Plaintiffs.
This the 5th day of June, 2014.