Rutherford County v. Bond Safeguard Insurance Company

Filing 26

ORDER denying without prejudice 8 Motion to Dismiss; granting 11 GreyRock Community Association, Inc.'s Motion to Intervene, & Intervening Complaint shall be filed within 7 days of the entry of this Order; all parties shall provide the Court additional briefing, within 30 days of entry of this Order to address whether subject matter jurisdiction still exists if GreyRock Community Association, Inc. asserts a claim for declaratory judgment against all parties in this action; adopting Memorandum and Recommendations re 23 Memorandum and Recommendations.. Signed by District Judge Martin Reidinger on 3/31/10. (ejb)

IN THE DISTRICT COURT OF THE UNITED STATES F O R THE WESTERN DISTRICT OF NORTH CAROLINA AS H E V IL L E DIVISION C IV IL CASE NO. 1:09cv292

R U TH E R F O R D COUNTY,

) ) P l a i n t if f , ) ) vs . ) ) B O N D SAFEGUARD ) IN S U R AN C E COMPANY, ) ) D e fen d a n t. ) ___________________________ )

ORDER

THIS MATTER is before the Court on the Defendant's Motion to D is m is s [Doc. 8]; the Motion to Intervene [Doc. 11] filed by GreyRock C o m m u n ity Association, Inc. ("the Association"); and the Magistrate J u d g e 's Memorandum and Recommendation [Doc. 23], filed on December 3 , 2009, regarding these Motions.

I.

F AC TU AL AND PROCEDURAL BACKGROUND In this action, the Plaintiff Rutherford County seeks to recover on

s e ve n Surety Performance Bonds ("bonds") related to a failed residential d e ve lo p m e n t in Rutherford County known as "GreyRock at Lake Lure" ("G re yR o c k "). [Complaint, Doc. 1 at ¶4]. The Plaintiff is the named obligee

u n d e r the bonds, and the Defendant is the named surety. The face amount o f the bonds is approximately $26 million. [Id.]. The Plaintiff alleges that GreyRock's developer, LR Buffalo Creek, L L C , failed to perform as required by the written Performance Guarantee A g re e m e n ts , and that much of the development, including agreed-to im p ro ve m e n t such as roads, remains undeveloped. [Id.]. Since the d e ve lo p e r abandoned the project in 2008, the Plaintiff has made written d e m a n d for the Defendant to honor its bonds by either completing the d e ve lo p m e n t or paying to the Plaintiff the principal amount of the bonds. [Id.]. When the Defendant refused to do so, this lawsuit followed. O n September 11, 2009, the Defendant moved to dismiss this action, a rg u in g that a bill passed by the North Carolina Legislature, entitled "The P e rm it Extension Act of 2009" (N.C. Session Law 2009-406), effectively g ive s the Defendant additional time to develop the subdivision, and th e re fo re this action is premature. [Doc. 9 at 2]. The Plaintiff filed an o p p o s itio n to the Defendant's motion on September 24, 2009. [Doc. 16]. O n September 24, 2009, the Association filed a motion seeking to in te rve n e in this matter as of right in order to represent the interests of the 4 5 9 GreyRock Planned Community lot owners who are mandatory

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m e m b e rs of the Association. [Doc. 11 at 2-3]. The Defendant filed an o p p o s itio n to the Association's motion on October 14, 2009. [Doc. 21]. P u rs u a n t to 28 U.S.C. § 636(b) and the standing Orders of D e s ig n a tio n of this Court, the Honorable Dennis L. Howell, United States M a g is tra te Judge, was designated to consider these motions. On D e c e m b e r 3, 2009, the Magistrate Judge entered a Memorandum and R e c o m m e n d a tio n [Doc. 23], recommending that the Defendant's Motion to D is m is s [Doc. 8] be denied without prejudice and that the Association's M o tio n to Intervene [Doc. 11] be granted. The Defendant filed Objections to the Magistrate Judge's M e m o ra n d u m and Recommendation on December 17, 2009, but only with re s p e c t to his recommendation that the Association should be allowed to in te rv e n e in this matter. [Doc. 24]. The Defendant makes no specific o b je c tio n s to the Magistrate Judge's Recommendation that the Motion to D is m is s be denied. The Association filed a Response to the Defendant's O b je c tio n s on January 4, 2010. [Doc. 25]. Having been fully briefed, this m a tte r is now ripe for disposition.

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II.

S TAN D AR D OF REVIEW T h e Federal Magistrate Act requires a district court to "make a de

n o v o determination of those portions of the report or specific proposed fin d in g s or recommendations to which objection is made." 28 U.S.C. § 6 3 6 (b )(1 ). The Court is not required to review, under a de novo or any o th e r standard, the factual or legal conclusions of the magistrate judge to wh ic h no objections have been raised. Thomas v. Arn, 474 U.S. 140, 150, 1 0 6 S.Ct. 466, 88 L.Ed.2d 435 (1985). Additionally, the Court need not c o n d u c t a de novo review where a party makes only "general and c o n c lu s o ry objections that do not direct the court to a specific error in the m a g is tra te 's proposed findings and recommendations." Orpiano v. J o h n s o n , 687 F.2d 44, 47 (4th Cir. 1982).

III.

A N A L Y S IS T h e Association seeks to intervene as of right pursuant to Rule

2 4 (a )(2 ) of the Federal Rules of Civil Procedure, which provides: O n timely motion, the court must permit anyone to in te rve n e who . . . claims an interest relating to the p ro p e rty or transaction that is the subject of the a c tio n , and is so situated that disposing of the action m a y as a practical matter impair or impede the

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m o va n t's ability to protect its interest, unless existing p a rtie s adequately represent that interest. F e d . R. Civ. P. 24(a)(2). In order to prevail on a motion to intervene as of rig h t, a proposed intervenor must demonstrate that: "(1) it has an interest in th e subject matter of the action, (2) disposition of the action may practically im p a ir or impede the movant's ability to protect that interest, and (3) that in te re s t is not adequately represented by the existing parties." Feller v. B r o c k , 802 F.2d 722, 729 (4th Cir. 1986) (quoting Newport News S h ip b u ild in g and Drydock Co. v. Peninsula Shipbuilders' Ass'n, 646 F.2d 1 1 7 , 120 (4th Cir. 1981)). In the present case, the Magistrate Judge concluded that the A s s o c ia tio n had satisfied each of these elements. [Doc. 23 at 10-15]. In its O b je c tio n s , the Defendant does not appear to contest the Magistrate J u d g e 's proposed findings that the Association meets the first and second p ro n g s of the test for intervention as of right ­ namely, that the Association h a s a sufficient interest in this litigation and that the outcome of this action m a y impair or impede the Association's ability to protect that interest.1

While it is apparently uncontested that the Association has a sufficient interest in this litigation to warrant intervention, the origin of this interest remains unclear. The Association argues in its motion that it has standing to intervene in this litigation pursuant to N.C. Gen. Stat. § 47F-3-102(4) (granting a lot owners' association the power to "[i]nstitute, defend, or intervene in litigation . . . on matters affecting the 5

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H a vin g carefully reviewed the Magistrate Judge's Memorandum and R e c o m m e n d a tio n with respect to these two elements, the Court concludes th a t the Magistrate Judge's proposed findings and conclusions in this re g a rd are supported by the record and are consistent with current case la w. Thus, the only issue that remains is whether the Magistrate Judge wa s correct in concluding that the Association has demonstrated that its in te re s t is not adequately represented by the existing parties in this case. "W h e n the party on whose side a movant seeks to intervene is p u rs u in g the same result that the movant is urging, a presumption arises th a t the movant's interest is adequately represented, so that the movant m u s t show 'adversity of interest, collusion, or nonfeasance.'" JLS, Inc. v. P u b . Serv. Comm'n of W. Va., 321 F. App'x 286, 289 (4th Cir. 2009) ( q u o tin g Virginia v. Westinghouse Elec. Corp., 542 F.2d 214, 216 (4th Cir.
planned community"); however, the claims that the Association seeks to assert against the Defendant in its proposed Complaint are based on theories that it is an intended third party beneficiary of the bonds and that it has been defrauded by the Defendant. In ruling herein that the Association has a sufficient interest in this litigation to warrant intervention, the Court makes no ruling as to the viability of such claims, as they are not yet before the Court. The Court does question whether the Tenth Claim for Relief asserted in the Association's proposed Complaint, which seeks a declaratory judgment "regarding the rights and relations of the parties" with regard to "any and all funds paid to Rutherford County under the Bonds" [Doc. 13 at ¶101], is a claim against the Plaintiff, such that the complete diversity necessary for this Court to maintain subject matter jurisdiction has been destroyed. All parties, therefore, will be asked to provide additional briefing to the Court within thirty (30) days of the entry of this Order to address whether subject matter jurisdiction still exists if this claim is asserted. 6

1 9 7 6 )). The movant need not show, however, "that the representation by e xis tin g parties will definitely be inadequate in this regard." JLS, 321 F. A p p 'x at 289 (emphasis added). Rather, the movant need demonstrate o n ly "that representation of his interest 'may be' inadequate." Trbovich v. U n ite d Mine Workers of America, 404 U.S. 528, 538 n.10, 92 S.Ct. 630, 30 L .E d .2 d 686 (1972). The Supreme Court has described the movant's b u rd e n in this regard as "minimal." Id. In the present case, the Magistrate Judge found that adversity of in te re s t exists between the Plaintiff and the Association in two respects. First, the Magistrate Judge noted that "[i]t is conceivable that in the a b s e n c e of the intervenor, plaintiff may compromise its claims and either ta k e a lesser amount on the bonds or allow completion of the infrastructure in a less expensive manner that would result in greater maintenance costs fo r the proposed intervenor and reduce property values for its members." [Doc. 23 at 13]. The Magistrate Judge did not err in this finding. As the A s s o c ia tio n is statutorily obligated under Chapter 47F of the North Carolina G e n e ra l Statutes to maintain the common areas of the development, any s u c h compromise by the Plaintiff could cause economic harm to the A s s o c ia tio n , in that completion of the infrastructure in a less expensive

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m a n n e r may result in greater maintenance costs or reduce property values fo r the members of the Association. Additionally, such a result is entirely p la u s ib le , considering that the Plaintiff is a rural county with a limited tax b a s e and will likely be required to limit the funds expended on litigating this m a tte r . S e c o n d , the Magistrate Judge found that there is a potential a m b ig u ity as to whether the County has an explicit obligation to use the b o n d funds solely for the construction of roads and other improvements with in the development. [Doc. 23 at 13-14]. Considering the recent budget s h o r tfa lls of local and state governments across North Carolina, the Court a g re e s with the Magistrate Judge that it is not implausible that the County c o u ld prefer to use a portion of the funds recovered under the bonds for g e n e ra l budgetary expenses rather than construction of GreyRock's in fra s tru c tu re . Although the Defendant argues that the bonds themselves a s well as the Subdivision Regulations of Rutherford County explicitly re q u ire that any bond funds be used for construction of the subdivision's in fra s tru c tu re , the Plaintiff may very well disagree with this assessment, in lig h t of the fact that the Subdivision Regulations provide that upon payment o f the bonds, "the county shall expend such portion of said funds as it

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d e e m s necessary to complete all or any portion of the required im p ro v e m e n ts ." [Rutherford County Subdivision Regulations § 704.1(2), D o c . 24-1 at 13] (emphasis added). For these reasons, the Court concludes that the Magistrate Judge did n o t err in finding that the Association had made the required "minimal" s h o win g of adversity to justify its intervention in this case. T h e Defendant further objects to the Recommendation, arguing that th e Magistrate Judge erred in failing to consider the fraud claim asserted by th e Association in its proposed complaint. Specifically, the Defendant c o n te n d s that allowing this fraud claim to be inserted in this action would g re a tly complicate the litigation and will undoubtedly slow or completely d e ra il resolution of the underlying bond issues. [Doc. 24 at 7-8]. While the C o u rt is always mindful of issues of judicial economy, such concerns have n o effect on the Court's analysis of whether the Association may intervene a s a matter of right in this action. See In re Sierra Club, 945 F.2d 776, 779 (4 th Cir. 1991) (holding district court abused its discretion in denying in te rv e n tio n as of right based on concerns of judicial economy, as Rule 2 4 (a ) affords such concerns "no weight"). Accordingly, the Defendant's o b je c tio n in this regard is overruled.

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IV .

C O N C L U S IO N A fte r a careful review of the Magistrate Judge's Recommendation

re g a rd in g the Defendant's Motion to Dismiss, the Court finds that the p ro p o s e d findings of fact are supported by the record and that the p r o p o s e d conclusions of law are consistent with current case law. A c c o rd in g ly, the Court hereby accepts the Magistrate Judge's R e c o m m e n d a tio n [Doc. 23] that the Defendant's Motion to Dismiss [Doc. 8] b e denied without prejudice. Furthermore, having conducted a de novo review of those portions of th e Magistrate Judge's Recommendation to which specific objections were file d , and having independently evaluated the factors relevant to d e te rm in in g whether the Association's intervention as of right would be p ro p e r, the Court further concludes, for the reasons stated in the M a g is tra te Judge's Memorandum, that the Association's Motion to In te rve n e [Doc. 11] should be allowed. IT IS, THEREFORE, ORDERED that the Defendant's Motion to D is m is s [Doc. 8] is DENIED, but such denial is without prejudice so as to p e r m it the Defendant to raise the Permit Extension Act of 2009 in support

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o f a motion for summary judgment or as an affirmative defense, if such can b e done in accordance with Rule 11 of the Federal Rules of Civil P ro c e d u re . IT IS FURTHER ORDERED that the Motion to Intervene [Doc. 11] is AL L O W E D , and GreyRock Community Association, Inc. is hereby allowed to intervene as of right in this matter as an intervenor plaintiff. The In te rve n in g Complaint shall be filed within seven (7) days of the entry of th is Order. IT IS FURTHER ORDERED that all parties shall provide to the Court a d d itio n a l briefing, not to exceed ten (10) pages each, within thirty (30) d a ys of the entry of this Order to address whether subject matter ju ris d ic tio n still exists if GreyRock Community Association, Inc. asserts a c la im for declaratory judgment against all parties in this action. IT IS SO ORDERED.

Signed: May 31, 2010

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