BLOGS: North Carolina Land Use Litigator

Friday, September 12, 2014, 1:56 PM

N.C. Supreme Court Issues Significant Ruling On Commercial Forbearance Agreements and Spousal Guaranties

On August 20, 2014, the North Carolina Supreme Court issued an opinion giving great weight to properly-drafted forbearance agreements in a commercial loan and guaranty context.   RL REGI N.C., LLC v. Lighthouse Cove, LLC, No. 427PA13 (N.C. Aug. 20, 2014) reverses the Court of Appeals decision from 2013, which focused on a defense pursuant to the federal law Equal Credit Opportunity Act ("ECOA").  

The Supreme Court's decision in RL REGI is a significant victory for lenders in North Carolina not only for what it says (highlighting the immeasurable value of well drafted loan documents) but also for what it abrogates (the lower court's holding that the ECOA is valid defense to a spousal guaranty in a commercial loan context).  

We begin this piece by noting that one of the editors of this blog was involved in this matter at the trial stage on the lender side.  Though that involvement was ultimately only on the behalf of original lender Regions Bank, which was not involved at the trial stage or the appellate stage.
The borrower and the guarantors defaulted on the forbearance agreement, and debt holder RL REGI foreclosed on the property and filed a lawsuit against the borrower and guarantors.  

Regions Bank provided over $4 million in financing for the acquisition and development of real property near Wilmington, North Carolina. The loan was secured by the real property, and the loan was backed by personal guaranties of the borrowers’ individual business partners and their spouses.  The wives were not officers of, employees for or otherwise involved in the borrowing entity though nonetheless executed personal guaranties.  

As the economy took a poor turn -- we all remember those days -- the borrower and the guarantors defaulted on the loan.  After default, and before foreclosure on the real property, the borrowing entity and the individual guarantors -- two couples, husbands and wives --  entered into a single, omnibus forbearance agreement. The forbearance provided that the lender would forego exercising its remedies under the loan documents (note and the personal guaranties) for a defined time period in exchange for certain agreements from borrowers and guarantors.  The forbearance agreement acknowledged the validity and enforceability of the loan documents and the agreement included a “Waiver of Claims” section, whereby the borrowers and guarantors specifically waived and released any claims that the lender failed to act in good faith or conduct itself in a reasonable manner and generally released the lender from “any and all claims, defenses and causes of action” that occurred prior to the date of the forbearance agreement.  After the execution of the forbearance agreement, the loan was purchased from Regions Bank by a different entity, debt holder RL REGI North Carolina, LLC.

The Lawsuit and the "Equal Credit Opportunity Act" Defense
The foreclosure was granted, but appealed.  The appeal stayed while the parties litigated the separate lawsuit against the borrower and the guarantors.  Along the way, summary judgment was entered against the borrower (a single asset entity), one of the guarantors filed personal bankruptcy, and the other two guarantors settled with the debt buyer.  Thus, the lawsuit proceeded against the last guarantor, alone, whom we will call the "Spouse Guarantor".  That Spouse Guarantor is the wife of the bankrupt guarantor, and she claimed no leadership, operational or employment role in the borrowing entity.

At trial, the Spouse Guarantor asserted an affirmative defense that her guaranty was obtained in violation of the ECOA.  At its core, the ECOA affirmative defense stated: (1) Spouse Guarantor did not offer to serve nor was she offered by the borrower to serve as a personal guarantor to the loan, (2) Spouse Guarantor was required by Regions Bank to guaranty the loan simply because she was the spouse of an officer of the borrowing entity, and (3) Spouse Guarantor was required to serve as personal guarantor despite that Regions Bank did not first determine the creditworthiness of Spouse Guarantor's husband, a valid guarantor (i.e., Regions Bank did not first determine the financial strength of husband's guaranty before requiring wife's guaranty).

The trial court found that the guaranty violated the ECOA and denied recovery on Spouse Guarantor's personal guaranty.

The North Carolina Court of Appeals
The N.C. Court of Appeals affirmed the trial court.  Most notably, in a case of first impression, the Court held that the ECOA may be asserted as an affirmative defense in the context of a spousal guaranty as opposed to a claim for relief or for recoupment, an issue over which courts are split.  

tThe Court of Appeals:  "A number of other state and federal courts have addressed this question [as to how to treat the ECOA] and have typically resolved it in one of three ways....  The first approach requires that a debtor can only assert an ECOA violation as a claim or counterclaim for damages, a position supported by Plaintiff in its brief....  The second approach allows a debtor to assert an ECOA violation as an affirmative defense in the nature of a 'recoupment.'....   The third approach allows a debtor to assert an ECOA violation as an affirmative defense based on the defense of illegality....  We believe that the third approach above is the most consistent with the law of this State and, therefore, we hold that a guarantor-spouse may assert an ECOA violation as an affirmative defense in an action brought by a lender."  

The significance of this decision for lenders in North Carolina could not have been overstated: in most instances, the limitations period for such ECOA claims had long run, as it did in this case, but the limitations period does not affect the ECOA as an affirmative defense.   In other words, if the ECOA is a valid affirmative defense in North Carolina, as it was determined to be by the Court of Appeals, there is no limitations period applicable to invalidate the ECOA defense.

In the wake of this Court of Appeals decision, a number of commercial guaranties governed by North Carolina law were, overnight, rendered toothless.

The North Carolina Supreme Court
The North Carolina Supreme Court reversed the Court of Appeals in RL REGI North Carolina, LLC v. Lighthouse Cove, LLC, No. 427PA13 (August 20, 2014).  However, the Supreme Court did not address the Court of Appeals' analysis of the ECOA and how it is to be treated in North Carolina.  Rather, the Supreme Court focused on the forbearance agreement.  

The Supreme Court determined that the trial court improperly allowed the Spouse Guarantor to assert a defense that she waived under the forbearance agreement, thus depriving RL REGI of the benefit of its contractual bargain.  The Spouse Guarantor had previously argued (and ultimately unsuccessfully, to the Supreme Court) that the forbearance agreement lacked consideration as to Spouse Guarantor because the guaranty on which the forbearance was based -- the "only" consideration as to Spouse Guarantor, according to her -- was invalid.

Specifically, the Supreme Court held that parties are free to waive various rights, including those arising under statutes. Although the guarantor did not specifically waive the ECOA defense in the forbearance agreement, the Court found the “comprehensive language contained in the agreement” and “overall expansive language of the waiver” to be sufficient to include any potential claim or defense. Ultimately, the Court stated that “a waiver of potential defenses to the guaranty, including a potential defense for a violation of the ECOA, was a part of defendant’s decision to accept the benefits of the forbearance agreement."

What's It All About, Alfie?
The Supreme Court's decision in RL REGI is as important for what it says as it is for what it abrogates.  The Supreme Court's decision says that a well drafted forbearance agreement is a very good insurance agreement for a lender, it hits the "reset button" and it can cure potential ills with existing loan documents.  The Supreme Court's decision abrogates the Court of Appeals holding as to the ECOA:  "It is unnecessary, however, for us to determine in this case whether a violation of the ECOA occurred and, if so, whether such a violation creates an affirmative defense to the recovery of the indebtedness."

The RL REGI decision sends a clear signal that waivers and releases contained in forbearance agreements, modifications, and other loan documents will be enforced by North Carolina courts.  Lenders should be diligent in properly and fiercely documenting forbearance agreements, modifications, extensions and other restructuring documents to include adequate waiver and release language both to protect from affirmative liability and to limit defenses to foreclosure and collection.

The RL REGI decision is also a reminder to lenders to strategically evaluate the use of forbearance agreements and other modification opportunities as means to obtain lender protections and reduce risk throughout the life of a loan, including protecting the loan's value on the secondary market.

"You told me the forbearance agreement lacked consideration because of that ECOA-thingy!  And why does your mother hate me?"

Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and land development matters in both state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw and "like" us on Facebook here.

Thursday, September 11, 2014, 4:55 PM

A Few Zoning Notes: New Caselaw, Oakwood and Beer, Oh My!

We're going to touch on three separate topics today in this post.  First, we'll discuss a recent case from the North Carolina Court of Appeals regarding legal nonconforming uses, burdens of proof and lost zoning maps.  Second, we'll take a look at how a particular North Carolina municipality is attempting to work microbreweries into its zoning laws.  Third, we'll see what's new with the internationally-reported Oakwood home dispute, involving a "modern" house in a Raleigh historic district.

Lost Maps: The Burden of Proving (and Means of Proving) a Legal Nonconforming Use
Landowner's property in the Town of Highlands was "split-zoned" in 1983, prior to his 1993 purchase, with the front 230-foot portion zoned for commercial use and the back portion zoned for residential use.  A 1988 zoning map showing this "split zoning" was made part of the court record.

In 1990, also prior to landowner's 1993 purchase of the property, the Town made "comprehensive changes" to the zoning laws.  The Town contended that, with these "comprehensive changes", landowner's 230-foot commercial portion of the "split-zoned" property was reduced to a 150-foot portion (and, accordingly, the residential portion of the property increased in size).  However, the Town lost the 1990 zoning map showing this change, and it was not a part of the court record.  The only "evidence" of the zoning change to a 150-foot commercial portion is a subdivision plat drawn and recorded -- ironically -- in connection with landowner's 1993 purchase of the "split zoned" property.

Landowner operates a lawn and landscape business on his "split zoned" property.  In 2009, the Town issued a notice of zoning violation on account of his commercial use outside -- to the Town -- the 150-foot portion of his property on which commercial use is permitted.  Landowner appealed to the Board of Adjustment, which emphasized at the outset that it was landowner's burden to prove his business was a legal nonconforming use in light of the 1990 zoning change.  In light of the burden, the Board affirmed the zoning violation and landowner appealed to the Superior Court, which, in turn, affirmed the Board's decision.  The landowner appealed.

In Shearl v. Town of Highlands, No. COA14-113 (September 2, 2014), the Court of Appeals reversed the trial court "[b]ecause the burden of proof was inappropriately placed on [landowner] to establish the location of the zoning line when he began his nonconforming use."

The Shearl Court first notes:  "Ordinarily, once a town meets its burden to establish the existence of a current zoning violation, the burden of proof shifts to the landowner to establish the existence of a legal nonconforming use or other affirmative defense."  The Court continues:  "Here, however, [the Town] has seriously handicapped [landowner's] ability to prove the location of the zoning line in 1993 because [the Town] has lost the Official Zoning Map adopted with the 1990 zoning ordinance....  Thus, [the Town] violated its own ordinance by failing to keep official zoning maps available for public inspection. [citing NCGS 160A-77 and 160A-78]."

As far as the subdivision plat, the Town's ingenuity notwithstanding, the Court gives it the back of the hand as far as its legal significance:  "While we believe that the plat map has some evidentiary value concerning the location of the line, it must be weighed against the evidentiary value of the 230-foot line depicted on the official 1988 Zoning Map [which was in evidence in the whole record]."  Thus, though the matter is remanded and the Board may hear the matter anew, unless the Town can come up with the 1990 zoning map, it will be a difficult, if not impossible, task of proving a zoning violation.

Zoning for Beer
This comes to our attention courtesy of our friend and former colleague Professor Tyler Mulligan of the U.N.C. School of Government.

North Carolina is home to more than one hundred breweries, most of which take hold in the Piedmont and the western part of the State.  Nevertheless, a City in the eastern part of the State -- Wilmington -- is trying to "carve out" some zoning rules to encourage development of this growing industry.

According to reports, "There are now land use classifications for microbreweries, which are under 25 thousand square feet, and small regional breweries, which are under 75 thousand square feet. Large breweries will still be kept in the industrial district."

To us, this illustrates well  (1) how zoning is a living, breathing thing, (2) at its best, how zoning serves to organize, integrate and protect uses of land, and (3) how zoning can aspire to stimulate, rather than deflate, economic growth.

Oakwood House
We've blogged in the past here about the Oakwood saga.  Well, it's not over.  This stage is over, but the saga is not over.  Today, after two long days of argument in late August, it's reported that the Superior Court has indicated it will rule in favor of the landowner and the City -- and against the neighbor and the City's Board of Adjustment -- and will reverse the Board of Adjustment's decision rescinding the certificate of appropriateness.  In other words, the Board's decision will be reversed and the certificate of appropriateness, which entitles homeowners Mr. Cherry and Ms. Gordon to a building permit for their "modernist" home, will be issued.

The neighbor, Ms. Weisner, has 30 days to appeal the Superior Court's decision to the Court of Appeals when it is entered, which the neighbor indicates she "definitely" will do.  In other words, it looks like we're movin' on up.

A word to Mr. Cherry and Ms. Gordon: wait until the 30 days runs without an appeal, or the legal proceeding runs its full course, before you build any more.

"I'd never appeal something against you guys. Well, I'll probably appeal that toupe, Mr. Lion."

Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and land development matters in both state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw and "like" us on Facebook here.

Tuesday, September 9, 2014, 3:19 PM

Land Use Litigator Video Series: Municipalities in North Carolina

In the latest video installment from the North Carolina Land Use Litigator, John Cooke and Mike Thelen get into the details of that unique political species: the "municipality" (really, the legal name for cities and towns).  In this episode, Mike and John address:

-- What is a "municipality" in North Carolina, and is it different from a "county"?
-- What powers do municipalities possess that general State government lacks, and why is there such a discrepancy between State and municipal powers?
-- What kinds or types of powers do municipalities possess, and how are these powers unique?
-- What are the effective means of working with and/or communicating with a municipality, as a developing entity?

The video can be accessed here.

Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and land development matters in both state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw and "like" us on Facebook here.

Wednesday, August 6, 2014, 3:10 PM

N.C. Court of Appeals Reviews Commercial and Residential Summary Ejectment Cases

This week, the North Carolina Court of Appeals waded in waters it doesn't often visit: the back pools of summary ejectment.

Summary ejectment, for those who don't know, is a statutory procedure for residential or commercial eviction in North Carolina.  The unique process is governed by Chapter 42, Article 3 of the North Carolina General Statutes.

Two cases are on today's docket: (1) a commercial case involving the question as to whether a breach must be "material" to justify ejectment irrespective of lease language, and (2) a residential case involving the question as to whether the District Court (the appellate court for statutory summary ejectment cases) has jurisdiction to hear an appeal as to a defendant tenant's counterclaims, where the defendant tenant was successful at the ejectment stage.

Commercial Case
In GRE Properties Thomasville, LLC v. Libertywood Nursing Center, LLC COA 13-1180 (August 5, 2014), the Court considered the defendant's argument that North Carolina law "requires breaches of a lease to be material to justify summary ejectment" and defendant's demand that a jury instruction include such a requirement.

The GRE Properties Court affirmed the trial court's refusal to include the "material breach" requirement in an instruction, declining to read such a requirement into the "purely statutory" paradigm of summary ejectment.  Rather, the Court states the law that "a breach of the lease cannot be made the basis of summary ejectment unless the lease itself provides for termination by such breach or reserves a right of reentry for such breach".  In applying that law to the facts, the Court swiftly notes that "Section 19.1 of the lease provided for termination of the lease upon breach of Sections 5.5 and 8.1".

The terms of the lease and State statutory law prevail, in terms of what will permit eviction.  A breach need not be "material" if the landlord and tenant agreed to landlord's reentry and repossession in its event.

Residential Case
In 4U Homes & Sales, Inc. v. McCoy, COA 13-1450 (August 5, 2014), the Court considered cross appeals from plaintiff landlord and defendant tenant regarding judgment in defendant tenant's favor as to her counterclaims.

The facts of this case are involved and sordid, as they often are in residential eviction cases, and are not especially relevant to what we're discussing here.  Rather, procedural posture is what interests us today.

The procedural posture is as follows: (1) plaintiff landlord filed an ejectment action in small claims court, (2) defendant tenant answered in small claims court, denying the ejectment action's allegations and asserting counterclaims, (3) the magistrate judge dismissed plaintiff's summary ejectment suit and entered judgment in defendant's favor as to all of her counterclaims, awarding the jurisdictional maximum of $5,000.00 in rental abatement to defendant, and (4) on appeal from small claims court, the district court entered a judgment dismissing Plaintiff’s claim for summary ejectment, finding in plaintiff landlord’s favor with respect to defendant tenant’s counterclaims for unfair debt collection and unfair
and deceptive trade practices, and awarding defendant tenant $3,705.00 in compensatory damages for plaintiff landlord’s breach of the implied warranty of habitability.

The parties both appealed, though plaintiff landlord did not appeal the dismissal of its ejectment suit.  Rather, plaintiff landlord appealed the judgment as to defendant tenant's counterclaims and the defendant tenant appealed the same.

The 4U Homes Court outlines the two options available to a summary ejectment litigant wishing to assert counterclaims that exceed the $10,000.00 jurisdictional amount: (1) counterclaimants "may either assert their claims on appeal to the District Court from an adverse decision by the magistrate", or (2) counterclaimants may "assert those claims in an entirely separate action".

The 4U Homes Court vacated the District Court's judgment in defendant tenant's favor, which resulted from an appeal from the small claims court, because defendant tenant "received the maximum amount of relief available in that [small claims] forum" such that the appellate court is "unable to see how any of her legal rights were adversely affected" such that defendant landlord had the right to appeal to the District Court.  Essentially, the defendant tenant is limited to the judgment entered at the small claims court level by the magistrate judge, and she is certainly not an "aggrieved party" able to appeal the limited judgment.  Defendant tenant's failure to avail itself of the two options noted above with respect to a counterclaim exceeding the jurisdictional amount limits her recovery.

"I guess we can call this 'deconstructive eviction'."

Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and land development matters in both state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw and "like" us on Facebook here.

Tuesday, August 5, 2014, 4:42 PM

N.C. Court of Appeals Speaks On Zoning Issues: Consistency Statements, Legislative Records and Attorney Fees

The North Carolina Court of Appeals has spoken twice in recent weeks on zoning issues.  Let's review.

Zoning Ordinance Amendments and Consistency Statements
First, in Atkinson v. City of Charlotte, COA 13-226 (July 29, 2014), the appellate court addressed an application to a text amendment of the North Carolina Supreme Court's 2012 decision in Wally v. City of Kannapolis, 365 N.C. 449 (2012) .  Specifically, the Atkinson Court addressed the City's argument that Wally stands for the proposition that judicial review is limited to "whether the City Council approved a [consistency] statement" in the course of approving an amendment to the text of the City's zoning laws.

In Atkinson, the City's consistency statement provided quite simply, "This petition [to amend the zoning laws] is found to be consistent with adopted policies and to be reasonable and in the public interest."

The Atkinson Court determined that the above consistency statement, while "more specific[]" than the "generalized statement" deemed legally insufficient in Wally, still runs afoul of N.C.G.S. 160A-383 and Wally: "The Statement of Consistency adopted by the City Council in the instant case cannot reasonably be said to include an 'explanation' as to why the amendment is reasonable and in the public interest under the plain meaning of that term."

The Atkinson Court reminds that the language of N.C.G.S. 160A-383 and the Supreme Court's decision in Wally are not just about the adoption of a consistency statement, but an adoption of one -- as to "any zoning amendment", text or map -- that "briefly explain[s] why the board considers the action taken to be reasonable and in the public interest."

Spot Zoning and Attorney Fees Pursuant to N.C.G.S. 6-21.7
Second, in Etheridge v. County of Currituck, COA 13-834 (August 5, 2014), the appellate court addressed the illegality of a case of stipulated spot zoning and issued the first true explication of a relatively new attorney fee statute, N.C.G.S. 6-21.7.

The parties agreed that the County's rezoning of a 1.1. acre parcel from agricultural to "Conditional District - Heavy Manufacturing", while the surrounding parcels were virtually all zoned agricultural (with one zoned "general business"), constituted spot zoning.  The County, of course, claimed the spot zoning to have a "reasonable basis" while the plaintiffs disagreed with that position.

A.  Spot Zoning - Benefits Outweigh Detriments
The County argued that the spot zoning is reasonable because its benefits outweigh its detriments.  Specifically, the County argued the proposed recycling center that would result from the spot zoning (upon the issuance of a special use permit, mind you) (1) would "create three to four jobs"; (2) would "allow for dilapidated structures on the property to be rehabilitated"; (3) would "allow county citizens to dispose of their unwanted metals"; and (4) would "make use of a railroad siding".  In addition, a County commissioner stated that he "witnessed support for the rezoning from twenty-eight of thirty-three attendees at a preliminary community meeting regarding" the rezoning.

The Etheridge Court didn't buy the County's benefits/detriments argument, noting that "the benefits from the rezoning proposed by defendants are not supported by any evidence presented at the public hearing".  Instead, the Etheridge Court continued, the record before the legislative body supported the plaintiffs' position opposing the spot zoning, which included the statements of two real estate professionals, the Currituck County Sheriff and a representative from the North Carolina Department of Cultural Resources.

B.  Spot Zoning - Relationship of Uses
The County also argued that the spot zoning is "consistent with the uses allowed or occurring on adjacent properties".  The County insisted that the most recent use of the property as a granary is less consistent with the surrounding property than is the proposed recycling center, and, in any event, the requirement of a special use permit for the intended recycling center gives the County another "pass" to control the use on the property.

The Etheridge Court didn't buy this argument, either.  The Court pointed out that past uses are "immaterial" to a spot zoning analysis, and the Court determined that the County and the property owner "have presented no evidence that the recycling center has been designed to be integrated into the surrounding area".

Note, again, how the record at the legislative stage failed the County and the property owner in an obviously controversial rezoning.

C.  Attorney Fees
We allude above to the importance of this decision as the "the first true explication of a relatively new attorney fee statute, N.C.G.S. 6-21.7."  In the interest of time and space, we'll take a closer look another time.

Suffice it to say, however, that the Etheridge Court affirmed the trial court's denial of the claim for attorney fees in the face of the County's illegal spot zoning of the 1.1 acre parcel.

The plaintiffs argue that (1) “illegal spot zoning is always outside the scope of the County’s legal authority and always an abuse of discretion and, therefore, once it is determined that illegal spot zoning occurred, the Trial Court is required to award attorney’s fees"; and (2) "the undisputed facts of the case sub judice are particularly egregious and further demonstrate the County’s abuse of discretion in approving the rezoning.”  Notably, the plaintiffs appear to have limited their appeal to their right to "mandatory" award of fees, rather than the discretionary award also provided for in the statute.

The Etheridge Court buys neither argument.  As to the first argument, the Court notes the analytical distinction between illegal spot zoning ("outside the scope of [] legal authority") and a mandatory award of fees ("an abuse of [] discretion").  As to the second argument, the Court allows the County the benefit of the few statements in the record supporting the rezoning (which, of course, were not sufficient to overcome the illegal spot zoning analysis).

In short, as to fees, the appellate court's initial in-depth review appears to be a conservative one.

Mike Thelen practices in Womble, Carlyle's Real Estate Litigation and Land Use practice group. He regularly represents a wide variety of clients, from local governments to businesses, in land use and land development matters in both state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw and "like" us on Facebook here.
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