The Town of Black Mountain v. Lexon Insurance Company

• Court: Court of Appeals of North Carolina
• Decided: December 16, 2014
• Docket: 14-740
• Status: Published

Opinion

NO. COA14-740

NORTH CAROLINA COURT OF APPEALS

Filed: 16 December 2014

THE TOWN OF BLACK MOUNTAIN, NORTH CAROLINA and THE COUNTY OF BUNCOMBE, NORTH CAROLINA,

Plaintiffs,

v. Buncombe County No. 12 CVS 05118 LEXON INSURANCE COMPANY and BOND SAFEGUARD INSURANCE COMPANY,

Defendants.

Appeal by defendants from order entered 4 March 2014 by

Judge Gary M. Gavenus in Buncombe County Superior Court. Heard

in the Court of Appeals 20 October 2014.

Cannon Law, P.C., by William E. Cannon, Jr. and Ronald E. Sneed, P.A., by Ronald E. Sneed, for plaintiffs-appellees.

Shumaker, Loop & Kendrick, LLP, by William H. Sturges and Daniel R. Hansen, for defendants-appellants.

HUNTER, Robert C., Judge.

The Town of Black Mountain, North Carolina (“the Town”) and

the County of Buncombe, North Carolina (“the County”)

(collectively “plaintiffs”) filed suit against Lexon Insurance

Company and Bond Safeguard Insurance Company (“defendants”)

seeking to enforce a series of subdivision performance bonds. -2- The trial court entered summary judgment in plaintiffs’ favor.

On appeal, defendants argue that summary judgment for plaintiffs

was improper because: (1) neither the Town nor the County has

standing to enforce the bonds; and (2) the statute of

limitations for plaintiffs’ claim has run.

After careful review, we affirm the trial court’s order.

Background

From March 2005 through February 2007, defendants entered

into four subdivision performance bonds (“the bonds”) as

sureties for The Settings of Black Mountain, LLC and Richmarc

Black Mountain, LLC (collectively “developers”).1 Approval from

the County for the developers to begin construction on a

residential subdivision was conditioned on obtaining the

performance bonds to secure completion of the project. Thus,

the obligee on each of the bonds in question was the County, not

the Town. Each of the bonds contained a clause indicating that

defendants, as sureties, would not be required to complete the

infrastructure or pay the principal amount of the bond until

they received a resolution from the obligee indicating that the

improvements had not been installed or completed by the

1 Although plaintiffs named all four bonds in their complaint, the construction secured by one of the bonds has since been completed; thus, only three remaining bonds are the subject of plaintiffs’ claim. -3- developers. The bonds also contained a provision holding

defendants and the developers jointly and severally liable for

any amounts due upon default.

The real property that was secured by the bonds was annexed

by the Town at varying times between May 2005 and February 2007.

Defendants assert that they lacked knowledge of the annexation

until 5 January 2012. In 2009, the Town sought confirmation

from the developers that they intended and had the means to

complete the infrastructure secured by the bonds. In a letter

dated 23 October 2009, attorneys for the developers indicated

that they were working toward closing a recapitalization loan.

On 18 December 2009, a principal in one of the development

companies stated via e-mail that “we still believe we have

viable entities, though obviously troubled. We are committed to

finishing our communities without need of the bonds[.]” Indeed,

construction activity by the developers continued into 2010.

Ultimately the companies failed. Richmarc Black Mountain, LLC

filed its final annual report on 7 June 2011, and The Settings

at Black Mountain, LLC was administratively dissolved on 21

August 2011.

On 5 January 2012, the County contacted defendants and

asked if they would consent to an assignment of the bonds to the -4- Town. In its inquiry, the County conceded that, due to the

annexation, “Buncombe County no long[er] has any jurisdiction

over the properties and cannot enforce any rights per its

ordinances.” Defendants did not consent to the assignment.

On 1 August 2011 and 20 December 2011, the Town sent

defendants notice that the developers had ceased all

construction activity. On 22 June 2012, the County assigned its

rights in the bonds to the Town, which accepted assignment on 9

July 2012. On that same day, the Town adopted a resolution

finding the infrastructure to be incomplete. The Town sent

defendants notice of their claims under the bonds on 24 July

2012. Following nonpayment by defendants, plaintiffs filed

their complaint for breach of contract on 25 October 2012. Both

the County and the Town brought suit because they anticipated

that defendants would challenge standing if either party sued

separately; thus, their claims are pled in the alternative

pursuant to Rule 8 of the North Carolina Rules of Civil

Procedure.

Plaintiffs and defendants each moved for summary judgment

and were heard on their respective motions 10 February 2014.

The trial court entered an order granting summary judgment for -5- plaintiffs on 4 March 2014. Defendants filed timely notice of

appeal.

Discussion

I. Standing

Defendants first argue that neither the Town nor the County

has standing to bring suit. Specifically, defendants contend

that once the Town annexed the property covered by the bonds,

the bonds were extinguished, leaving no rights for the County to

assign. We disagree.

“This Court reviews orders granting summary judgment de

novo.” Foster v. Crandell, 181 N.C. App. 152, 164, 638 S.E.2d

526, 535 (2007). Summary judgment is appropriate “only when the

record shows 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.” In re Will of Jones, 362 N.C. 569, 573, 669 S.E.2d 572,

576 (2008) (internal quotation marks omitted). The burden of

proof rests with the movant to show that summary judgment is

appropriate. Development Corp. v. James, 300 N.C. 631, 637, 268

S.E.2d 205, 209 (1980). We review the record in the light most

favorable to the non-moving party. Caldwell v. Deese, 288 N.C.

375, 378, 218 S.E.2d 379, 381 (1975). -6- Defendants rely on Stillings v. City of Winston-Salem, 311

N.C. 689, 319 S.E.2d 233 (1984), in support of their contention

that the bonds were extinguished when the subject properties

were annexed by the Town. In Stillings, the Court stated the

issue it considered as follows: “Does an exclusive solid waste

collection franchise granted by a county remain effective in

areas subsequently annexed by a city and thereby entitle the

franchisees to compensation for a taking when the city, pursuant

to statutory mandate, begins providing its own garbage

collection service?” Id. at 691, 319 S.E.2d at 235. The Court

answered this question in the negative. Id. In holding that

the exclusive waste collection franchise entered into by the

county and a private party terminated in the geographic areas

annexed by the city, the Court noted that the garbage collection

company, “had no rights which the [c]ity was bound to respect.”

Id. at 694-96, 319 S.E.2d at 237-38. According to the statutory

mandate in N.C. Gen. Stat. § 160A-47, the city was required to

provide garbage collection services without charge to its

residents in newly annexed areas. Id. at 694, 319 S.E.2d at

237. Therefore, annexation created a conflict between the

exclusive franchise rights held by the plaintiffs and the

statutory mandate imposed on the city. In recognition of the -7- rule that “[c]orporations which receive franchises take the

granted privileges subject to the police power of the state,”

the Court ultimately held that “[b]y annexation of the property

in question, the county’s franchise terminated and the police

power of the [c]ity became operative.” Id.

Defendants argue that, pursuant to Stillings, “once a town

annexes territory that is the subject of a private contract

between the county and a private citizen, the annexation

effectively nullifies the contract.” Thus, defendants contend

that the bonds were extinguished when the annexation took place,

rendering them unenforceable by either the County or the Town.

We do not read Stillings so broadly. The Stillings Court

did not hold that the franchise agreement between the garbage

collection company and the county was terminated in its

entirety; rather, the contract was terminated only in those

geographical areas annexed by the city. See Stillings, 311 N.C.

App. at 696, 319 S.E.2d at 238. Therefore, Stillings does not

support the idea that annexation automatically terminates an

entire agreement between a county and a private party.

Furthermore, the conflict between the exclusive waste collection

franchise and the police powers of the annexing city was crucial

to the Stillings Court’s holding. Here, unlike in Stillings, -8- the bonds do not conflict with the Town’s police power. There

is no statute requiring the Town to behave adversely to the

agreement between defendants and the County. Rather than

attempting to terminate the bonds, the Town seeks to enforce

them. This situation contrasts sharply with the facts of

Stillings, where the annexing city was required by statute to

provide free garbage collection services in direct contravention

of the exclusive franchise agreement between the county and the

plaintiffs. Based on these material distinctions, we decline to

extend the Stillings holding to the facts of this case.

We agree with defendants that the County lost standing to

enforce the bonds after annexation. The bonds were created

pursuant to the County’s “subdivision control ordinance,”

allowing the County to “provide orderly growth and development”

by entering into surety bonds with developers to “assure

successful completion of required improvement.” See N.C. Gen.

Stat. § 153A-331 (2013). But the County’s power to issue

subdivision control ordinances was geographically limited by

N.C. Gen. Stat. § 153A-122 (2013), providing that such

ordinances are only applicable “to any part of the county not

within a city.” Therefore, after annexation, the County no

longer had statutory authority to call the bonds. The County’s -9- attorney admitted as much in his 5 January 2012 e-mail to

defendants requesting their consent to assignment, wherein he

stated that “Buncombe County no long[er] has any jurisdiction

ordinances.” We also agree with defendants that, prior to

assignment, the Town did not have standing to enforce or call

the bonds because it was not a party to the agreements.

However, we find nothing in the law or within the

agreements themselves indicating that assignment of the bonds

from the County to the Town was impermissible or without legal

effect. See North Carolina Bank & Trust Co. v. Williams, 201

N.C. 464, 465-66, 160 S.E. 484, 485-86 (1931) (holding that an

indemnity bond was freely assignable as a chose in action).

Indeed, defendants “do not contest the general law that, absent

contrary language or public policy, bonds can be assigned.”

Here, the bonds do not contain any language restricting their

assignability, and we believe public policy favors assignability

under these facts. It is uncontested that substantial

infrastructure remains incomplete as a result of the developers’

financial troubles. If neither the Town nor the County are able

to call the bonds, defendants would in effect receive a windfall -10- by being released from their obligation to pay the sums owed

under the bonds.

Accordingly, we hold that the assignment of the bonds from

the County to the Town was sufficient to allow the Town to

enforce the agreements against defendants. Thus, the assignment

conferred standing upon the Town to sue for the alleged breach

of those agreements. We affirm the trial court’s order as to

this issue.

II. Statute of Limitations

Defendants also argue that summary judgment for plaintiffs

was improper because their cause of action is time-barred by the

statute of limitations. We disagree.

N.C. Gen. Stat. § 1-52(1) (2013) provides that actions

concerning a “contract, obligation or liability arising out of a

contract” have a three-year limitations period. Plaintiffs do

not dispute that section 1-52 applies to claims for breach of

contract. However, they assert protection under the doctrine of

nullum tempus occurrit regi, which generally allows for

governmental bodies to be exempt from statutory time limitations

in bringing civil lawsuits. In Rowan Cnty. Bd. of Educ. v.

United States Gypsum Co., 87 N.C. App. 106, 359 S.E.2d 814

(1987) (“Rowan I”), and Rowan Cnty. Bd. of Educ. v. United -11- States Gypsum Co., 332 N.C. 1, 418 S.E.2d 648 (1992) (“Rowan

II”), our Courts analyzed the doctrine of nullum tempus in North

Carolina and developed a framework for its application. “If the

function at issue is governmental, time limitations do not run

against the State or its subdivisions unless the statute at

issue expressly includes the State. If the function is

proprietary, time limitations do run against the State and its

subdivisions unless the statute at issue expressly excludes the

State.” Rowan II, 332 N.C. at 9, 418 S.E.2d at 654 (emphasis in

original).

Because section 1-52 is silent as to its application to the

State or its subdivisions, this issue turns on whether

plaintiffs are engaged in a proprietary or governmental

function. The Rowan II Court noted that the distinction between

governmental and proprietary action in the context of sovereign

immunity is the same as the distinction to determine whether the

State benefits from the protection of nullum tempus. Rowan II,

332 N.C. at 9, 418 S.E.2d at 654. Thus, the case most helpful

to this analysis is Derwort v. Polk County, 129 N.C. App. 789,

501 S.E.2d 379 (1998).

In Derwort, the issue before this Court was whether Polk

County’s enactment of a subdivision control ordinance pursuant -12- to sections 153A-121 and 153A-331 rendered it immune from suit

under the public duty doctrine. Id. at 792, 501 S.E.2d at 381.

The Court noted that section 153A-121 was included under the

heading titled “Delegation and Exercise of the General Police

Power,” and that section 153A-331 allowed counties to issue

ordinances “in a manner that . . . will create conditions

essential to public health, safety, and the general welfare.”

Id. Citing Lynn v. Overlook Development, 98 N.C. App. 75, 78,

389 S.E.2d 609, 611 (1990), it also noted that “[a] municipality

ordinarily acts for the benefit of the public, not a specific

individual, in providing protection to the public pursuant to

its statutory police powers.” Id. at 791, 501 S.E.2d at 381.

The Court went on to hold that “[t]he plain language of the

statute and our case law thus indicate that subdivision control

is a duty owed to the general public, not a specific

individual,” and therefore the county was immune from suit by

virtue of the public duty doctrine. Id. at 792, 501 S.E.2d at

381.

However, defendants argue that City of Reidsville v.

Burton, 269 N.C. 206, 152 S.E.2d 147 (1967), is more applicable

than Derwort, and therefore, we should find that the act of

suing under the bonds is a proprietary rather than governmental -13- function. In Burton, the Court noted that generally municipal

corporations are immune from application of a statute of

limitations because “construction and maintenance of public

streets and of bridges constituting a part thereof are

governmental functions[.]” Id. at 210, 152 S.E.2d at 151.

However, the Court held that the City of Reidsville was engaged

in a proprietary function when it sued for breach of contract

with a private party in the construction of a bridge that was

not used by the public, was not maintained by the city, and was

not connected to any public streets. Id. Here, unlike in

Burton, there is evidence in the record that the subdivision

secured by the bonds allowed public access. Specifically, the

developers were required to allow for limited public use of the

subdivision clubhouse. Additionally, the developers were

required to include easements sufficient for the Town to

maintain and access all waterlines. Based on this distinction,

we do not find Burton controlling.

Here, the County entered into the bonds pursuant to section

153A-331, the same statute utilized by Polk County in Derwort.

Section 153A-331 provides that counties are authorized to enact

subdivision control ordinances for a variety of purposes

consistent with their governmental police powers, such as: (1) -14- “provid[ing] for the orderly growth and development of the

county”; (2) “creat[ing] conditions that substantially promote

public health, safety, and the general welfare”; and (3)

“provid[ing] for the more orderly development of subdivisions by

requiring the construction of community service facilities in

accordance with county plans, policies and standards.” Id. The

statute goes on to allow counties to enter into bonds like those

at issue in this case “[t]o assure compliance with these and

other ordinance requirements[.]” Id.

Because the enabling statute allowing for the creation of

the bonds between defendants and the County explicitly states

that such bonds exist to “assure compliance” with subdivision

ordinance requirements, which this Court has characterized as “a

duty owed to the general public, not a specific individual,”

Derwort, 129 N.C. App. at 792, 501 S.E.2d at 381, and the

subdivision is open to the public, we conclude that plaintiffs

are engaged in a governmental function by attempting to enforce

the bonds against defendants. See also State Art Museum Bldg.

Comm’n v. Travelers Indem. Co., 111 N.C. App. 330, 335, 432

S.E.2d 419, 422 (1993) (“A court may [] consider whether or not

the State’s action is for the ‘common good of all’ and therefore

governmental, or for pecuniary profit and therefore -15- proprietary.”); Sides v. Cabarrus Memorial Hospital, Inc., 287

N.C. 14, 23, 213 S.E.2d 297, 303 (1975) (noting that

“governmental functions . . . are those historically performed

by the government, and which are not ordinarily engaged in by

private corporations.”). Therefore, under the Rowan rulings,

plaintiffs are not subject to the statutory time limitation in

section 1-52.

Even assuming that the County and the Town were engaged in

a proprietary function sufficient to trigger the three-year time

limitation in section 1-52, we would still find that summary

judgment for plaintiffs is proper. Defendants argue that this

cause of action accrued before 25 October 2009, three years

before the complaint was filed on 25 October 2012, because by

that time plaintiffs knew or should have known that the

construction work would not be completed within a reasonable

time. We disagree. The bonds themselves do not specify any

particular date by which time the construction needed to be

completed. Although there is evidence that the Town was

concerned in mid-2009 by the relative lack of progress on the

construction, as late as 18 December 2009, a principal in the

development companies stated that they were “committed to

finishing [the] communities without need of the bonds.” Indeed, -16- construction activity by the developers continued well into

2010. Therefore, because it is clear that the developers

themselves had not yet given up on the project, we disagree with

defendants’ contention that there is a genuine issue of fact

regarding whether plaintiffs knew or should have known prior to

25 October 2009 that the project would not be completed within a

reasonable time.

Conclusion

After careful review, we hold that the Town has standing to

bring suit against defendants for breach of contract.

Furthermore, plaintiffs are engaged in a governmental function

and are exempt from the otherwise applicable statute of

limitation. Therefore, we affirm the trial court’s order

granting summary judgment for plaintiffs.

AFFIRMED.

Chief Judge McGEE and Judge STEELMAN concur.