Regroup Development, LLC v. Rabun County Bank

Filing 99

ORDER: Dft's 93 Motion for Attorney Fees and Court Costs is GRANTED in PART and DENIED in PART. Other than Clerk's award of Court Costs in the Amt of $9,310.55, Dft's Motion is DENIED. Signed by District Judge Martin Reidinger on 06/30/2014. (klb)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
BRYSON CITY DIVISION
CIVIL CASE NO. 2:11cv59

REGROUP DEVELOPMENT, LLC,
a Florida Corporation, and
REGROUP SAPPHIRE 281, LLC,
a Florida Corporation,

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)
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Plaintiffs,
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vs.
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RABUN COUNTY BANK,
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a Georgia Corporation,
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Defendant.
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____________________________________ )

ORDER

THIS MATTER is before the Court on the Defendant’s Motion for
Attorneys Fees and Court Costs [Doc. 93]. The Clerk previously has
addressed the court costs component of the Defendant’s Motion and
awarded Defendant costs in the amount of $9,310.55. [Doc. 98]. Neither
party objected to the Clerk’s award of costs, and the time within which to do
so has expired. For the reasons stated herein, the Court will deny the
second component of Defendant’s Motion and decline to award attorney’s
fees.

FACTUAL AND PROCEDURAL SUMMARY
Florida businessmen Michael Kelleher and James Lawson, during the
mid 2000s, purchased and developed real estate in various locations,
including in the Sapphire Valley area of Western North Carolina.

Like

many real estate investors during that time, their business plan was to
improve and flip properties. During the time period encompassing this
lawsuit, the two men and/or their LLCs owned approximately 2 homes and
10 undeveloped lots in Sapphire Valley.

Among other entities they

operated Regroup Development LLC (“Regroup”).
In 2007 Kelleher located an older home with a nice view at 281
Beckonridge Trail in Sapphire Valley. Kelleher entered into a purchase
contract to “lock in” this property. On his return to Florida Kelleher met with
Lawson to discuss this property further.

About this time Kelleher and

Lawson, acting as Regroup, hired David Mahoney as a contract CFO for
the LLC. Regroup was working on a hotel refurbishment project in Florida
and needed some accounting help.
Kelleher and Lawson approached Mahoney about creating a joint
venture regarding the 281 Beckenridge Trial property. Although nothing
regarding the joint venture was ever reduced to writing, the men agreed as
follows. Mahoney would become a joint venture with Regroup (as opposed
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to partnering with Kelleher and Lawson). Mahoney would contribute his
name and good credit rating to be the purchaser (along with his wife) of the
property. He would not, however, need to contribute any funds. Regroup
would contribute all the cash necessary and act as the development
manager to renovate the property.

Once the project was completed,

Mahoney would sell the property and the three men would split any profits
equally (presumably 1/3 to Mahoney and 2/3 to Regroup). There was never
any discussion about the potential for losses.
Mahoney applied for financing through Countrywide Home Loans,
Inc., representing to the lender that this financing was for a “second home.”
Mahoney (and his wife) initially purchased the 281 Beckonridge house for
$380,000. Countrywide required a 20% down payment in order to fund the
loan. Half of the down payment ($38,000) was paid in cash by Regroup.
Mahoney signed a promissory note and deed of trust in favor of
Countrywide for 80% of the purchase price. Mahoney contributed no cash
to the project but instead satisfied the remaining 10% (the other half of the
down payment) down payment by executing a Countrywide Equity Home
Line of Credit for $38,000. The riders to the Countywide deed of trust and
Countrywide Equity Home Line of Credit specifically prohibited Mahoney

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from using the loan proceeds to purchase this home as an investor with
other persons, for rental, or for any use other than a second home.
After Mahoney purchased the property, Regroup began renovations.
Representing that he was the owner/builder, Mahoney obtained the
building permit for the property. After sinking $232,000 of their own money
into the project, Kelleher and Lawson approached Mahoney and asked him
to obtain a construction loan to supply more renovation funding. Mahoney
obtained the construction loan from Defendant Rabun County Bank.
Mahoney, Kelleher, and Lawson dealt with Deborah Thompson at Rabun.
Like his application for the Countrywide loans, Mahoney represented that
the purpose of the construction loan from Rabun would be for him to
renovate the property as a second home, not as an investment property.
As a part of Rabun’s construction loan, Rabun paid off the
Countrywide loans, allocated a fixed amount to be advanced for
construction based upon a construction budget, and held back $93,508.52
which would be disbursed when the house was 100% complete. This “set
aside” money was the equity that Mahoney represented he had put into the
property prior to requesting the Rabun construction loan. Even to this point,
however, Mahoney had injected no cash of his own into the venture.

At

some point Kelleher and Lawson created Regroup Sapphire 281 LLC as
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the entity into which Mahoney’s construction loan draws from Rabun
County Bank would be deposited, and out of which the construction loan
payments to venders would be issued.

Mahoney never disclosed the

existence or terms of the joint venture agreement to Rabun before the loan
closed. Kelleher and Lawson assumed Rabun knew of the joint venture
arrangement prior to the loan closing.
Shortly after the Rabun loan closing in March of 2008, Kelleher
discovered that the foundation for the house at 281 Beckonridge Trail had
to be completely replaced.

These unexpected foundation problems

consumed a great deal of the construction proceeds. Mahoney left the
employ of Regroup in July of 2008 because the hotel project he contracted
to help with was winding down.

By the late summer of 2008, the

construction loan funds were nearly exhausted.

In November 2008,

Mahoney, with the assistance of Kelleher and Lawson, drafted and mailed
a proposal to Rabun where they asked Rabun to release the set-aside
funds to enable Regroup to finish the renovations to the property. Two
draw requests were pending at that time. Insufficient construction loan
proceeds remained to fund both draw requests. In January, 2009, Rabun
funded one of these draw requests, thus exhausting the construction loan.
On March 6, 2009, Rabun funded the remaining draw request with a
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portion of the set-aside funds. Rabun did not approve any further draw
requests.
Plaintiffs contended at trial that Rabun’s’ funding of the March 6 draw
request with a portion of the set aside funds constituted an acceptance of
their proposal to continue funding the project with the all of the remaining
set aside funds. Rabun denied it had agreed to any proposal at all and that
it was merely attempting to work with its borrower, Mahoney, in an effort
not to foreclose. The last construction loan payment was made in either
February or March, 2009. On June 2, 2009, Rabun notified Mahoney of his
default for nonpayment of the construction loan. Ultimately Rabun settled
with Mahoney, accepting from him a deed in lieu of foreclosure plus
$25,000. The Plaintiffs thereafter brought this action.
Plaintiffs, in their Second Amended Complaint [Doc. 20] alleged six
claims for relief: (1) Negligent Misrepresentation; (2) Fraud in the
Inducement/Fraudulent Misrepresentation; (3) Unfair and Deceptive Trade
Practices; (4) Unjust Enrichment; (5) Breach of Fiduciary Duty; and (6)
Constructive Fraud. Defendant, in addition to denying Plaintiffs’ allegations,
raised among others the affirmative defenses of fraud, unclean hands, and
release. [Doc. 22].

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The case proceeded to trial before a jury. Plaintiffs’ theory of liability
on each of their claims hinged upon the jury finding that a fiduciary
relationship arose between Plaintiffs and Defendant. Plaintiffs conceded
that there was no privity of contract between them and Rabun. Plaintiffs
asserted that the fiduciary relationship arose from Rabun releasing
$15,159.98 of set-aside money to fund Mahoney’s last draw request on
March 6, 2009.
The jury returned with a verdict in favor of Defendant Rabun County
Bank. The jury found no fiduciary relationship existed between Plaintiffs
and Defendant. The jury also found that Plaintiffs’ renovations to the 281
Beckonridge property did not unjustly enrich the Defendant. [Doc. 90].
Based thereon, judgment was entered in favor of the Defendant.
Defendant the filed the instant Motion for costs and fees.

The Clerk

awarded Defendant costs in the amount of $9,310.55.

[Doc. 98].

Defendant’s attorneys’ fee request is now ripe for consideration.
DISCUSSION
North Carolina follows the general common law principle that civil
litigants bear the cost of their own attorneys’ fees. Therefore attorneys'
fees may not be awarded without statutory authority. Stillwell Enters., Inc.
v. Interstate Equip. Co., 300 N.C. 286, 289, 266 S.E.2d 812, 814–15
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(1980).

Defendant has asserted five statutory bases it claims would

support an award of attorneys’ fees. These grounds are found in N.C. Gen.
Stat. §§ 1D-45; 6-21.2; 6-21.5; 75-16.1; and Fed.R.Civ.P. 11.
1.

N.C. Gen. Stat. § 6-21.2.

Defendant invokes section 6-21.2 as one such authority. In pertinent
part, section 6-21.2 states:
Obligations to pay attorneys’ fees upon any note,
conditional sale contract or other evidence of indebtedness, in
addition to the legal rate of interest or finance charges specified
therein, shall be valid and enforceable, and collectible as part of
such debt, if such note, contract or other evidence of
indebtedness be collected by or through an attorney at law after
maturity[.]
Id.
While the construction loan agreement executed by Mahoney that
obligated Defendant to provide funding for the 281 Beckonridge Trail
renovation project arguably fits within the statute’s definition of “note,
conditional sale contract or other evidence of indebtedness,” none of the
Plaintiffs were signatories to that construction loan agreement.

This a

requisite condition to an award of attorneys’ fees based upon any such
note. “[W]e hold that the term ‘evidence of indebtedness’ as used in G.S.
6-21.2 has reference to any printed or written instrument, signed or
otherwise executed by the obligor(s), which evidences on its face a legally

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enforceable obligation to pay money.”

Stillwell, 300 N.C. at 294, 266

S.E.2d at 817 (emphasis added).
One of Defendant’s contentions at trial to preclude Plaintiffs’ recovery
was that no privity existed between Plaintiffs and Defendant with regard to
the construction loan agreement executed by Mahoney. See “Defendant’s
Fifth Affirmative Defense” (“Plaintiffs should be denied any relief on its
Second Amended Complaint since there is a lack of privity of contract
between the Plaintiffs and the Defendant, Rabun County Bank and the
Plaintiffs was [sic] not an intended third party beneficiary of the
Construction Loan Agreement or any other agreement between the
Defendant and David Mahoney.”) [Doc. 22 at 8].

That lack of privity

likewise bars the recovery of fees pursuant to N.C. Gen. Stat. §6-21.2.
2.

N.C. Gen. Stat. §§ 6-21.5 and 75-16.1.
Section 6-21.5 of North Carolina’s general statutes states:

In any civil action, … the court, upon motion of the prevailing
party, may award a reasonable attorney’s fee to the prevailing
party if the court finds that there was a complete absence of a
justiciable issue of either law or fact raised by the losing party in
any pleading.
Id.
When confronted with a motion for attorneys’ fees premised upon
section 6-21.5, a court must “review all relevant pleadings and documents
of a case in order to determine if either: (1) the pleadings contain a
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complete absence of a justiciable issue of either law or fact,” or (2)
“whether the losing party persisted in litigating the case after a point where
he should reasonably have become aware that the pleading he filed no
longer contained a justiciable issue.” Credigy Receivables, Inc. v.
Whittington, 202 N.C. App. 646, 652, 689 S.E.2d 889, 893 (2010) (citations
omitted). Similarly, North Carolina’s Unfair and Deceptive Trade Practices
Act, N.C. Gen. Stat. § 75-1.1 et seq., permits a court, in its discretion, to
allow a reasonable attorney’s fee when a “party instituting [a § 75-1.1]
action knew, or should have known, the action was frivolous and
malicious.” N.C. Gen. Stat. § 75-16.1(2). In order to prevail on a motion for
attorneys' fees under N.C. Gen. Stat. § 75-16.1, the defendant must (1) be
the “prevailing party” and (2) prove that the plaintiff “knew, or should have
known, the [§ 75-1.1] action was frivolous and malicious.” Lincoln v.
Bueche, 166 N.C. App. 150, 158, 601 S.E.2d 237, 244 (2004).
In this case, Plaintiffs’ overarching theory was that their interactions
with the Defendant’s employee Ms. Thompson, following Mahoney’s
execution of the Defendant’s construction loan agreement, blossomed into
a fiduciary relationship between Plaintiffs and Defendant where no legal
relationship of any sort formerly existed.

In arguing that this theory

supported their various causes of actions, Plaintiffs relied primarily upon
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the case of In re Shearin Family Investments, LLC, 418 B.R. 870 (Bankr.
E.D.N.C. 2009), and to a lesser extent the cases of Harris v. Mathews, 361
N.C. 265, 643 S.E.2d 566 (2007), and Frizzell Constr. Co. v. First Citizens
Bank & Trust Co., 759 F.Supp. 286 (E.D.N.C. 1991).

While Plaintiffs’

evidence supporting this theory was razor thin, the fact that it was (barely)
enough to get to the jury precludes a finding that there was a complete
absence of a justiciable issue of either law or fact. Likewise. It was neither
frivolous not malicious.

Therefore, attorneys fees are not recoverable

under these statutes.
3.

Rule 11 of the Federal Rules of Civil Procedure.

Defendant concedes in its brief [Doc. 93-5 at 6] that it did not follow
Rule 11(c)(1)(A) by serving Plaintiffs with a proper motion identifying any
offending pleading, claim, or allegation. Instead, Defendant adopted a waitand-see approach and, following its trial victory, seeks now to enlist the
Court’s help in sanctioning the Plaintiffs after the fact while enjoying the
comfortable certainty of hindsight. The Court finds this motion to be wholly
without merit.
First, for substantially the same reasons discussed above, Plaintiffs’
pursuit of its claims simply does not warrant sanctions in this case.
Second, and more fundamentally, Rabun has wholly failed to comply with
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Rule 11's safe harbor provisions by failing timely to serve any Rule 11
motion on Plaintiffs. Rule 11 states, in pertinent part, as follows:
A motion for sanctions under this rule shall be made separately
from other motions or requests and shall describe the specific
conduct alleged to violate subdivision (b). It shall be served as
provided in Rule 5, but shall not be filed with or presented to the
court unless, within 21 days after service of the motion (or such
other period as the court may prescribe), the challenged paper,
claim, defense, contention, allegation, or denial is not
withdrawn or appropriately corrected. If warranted, the court
may award to the party prevailing on the motion the reasonable
expenses and attorney's fees incurred in presenting or
opposing the motion. Absent exceptional circumstances, a law
firm shall be held jointly responsible for violations committed by
its partners, associates, and employees.
Fed.R.Civ.P. 11(c)(1)(A). Thus, Rule 11 provides a safe harbor which
allows a party, after being presented with a Rule 11 motion, to correct the
offending conduct before the Court sees the motion. Rabun never provided
Plaintiffs with notice of the allegedly sanctionable issue nor gave Plaintiffs
the opportunity to amend, withdraw, or correct it.

For both of these

reasons, then, the Court will deny Defendant’s motion for sanctions
pursuant to Fed.R.Civ.P. 11.
4.

N.C. Gen. Stat. § 1D-45.

Section 1D-45 provides, in pertinent part, “[t]he court shall award
reasonable attorneys’ fees, resulting from the defense against the punitive
damages claim, against a claimant who files a claim for punitive damages
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that the claimant knows or should have known to be frivolous or malicious.”
Id. Defendant seeks attorneys’ fees under this provision asserting that
Plaintiffs knew or should have known their punitive damages claim was
beyond the pale.
The Court allowed the punitive damages claim to go to the jury on the
Plaintiffs’ theory of constructive fraud. The jury never reached the issue
because it found no fiduciary duty. Even though Plaintiffs’ evidence on this
point was very weak, it does not rise to the level of being frivolous or
malicious.
For these reasons, that portion of the Defendant’s Motion [Doc. 93]
requesting attorneys’ fees will be denied.
ORDER
IT IS, THEREFORE, ORDERED that the Defendant’s Motion for
Attorneys Fees and Court Costs [Doc. 93] is GRANTED in PART and
DENIED in PART. Other than the Clerk’s award of Court Costs in the
amount of $9,310.55, the Defendant’s Motion is DENIED.
IT IS SO ORDERED.

Signed: June 30, 2014

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