By Courtney Rudolph,
Hedrick Gardner Kincheloe & Garafalo, LLP
Overturning well-established precedent that breach of contract claims accrue on the date of breach, the North Carolina Supreme Court held in Chisum v. Campagna that the “discovery rule” applies to postpone the running of the three-year statute of limitations prescribed by N.C. Gen. Stat. § 1-52(1) until a plaintiff knew or should have known of the breach.i
Background
Chisum stems from a dispute between Richard and Rocco Campagna (the “Campagnas”), and Dennis Chisum, who were members of three limited liability companies—Judges Road Industrial Park, LLC (“Judges Road”), Carolina Coast Holdings, LLC (“Carolina Coast”), and Parkway Business Park, LLC (“Parkway”). Governing the LLCs were operating agreements which set forth requirements for initial capital contributions, rules for capital calls, and consequences if a member failed to make a capital call.
At a membership meeting held for Carolina Coast on October 4, 2010, the Campagnas informed Mr. Chisum that he needed to repay a personal loan that he and his wife had taken out and secured with Carolina Coast property. The Campagnas assessed a capital call in the amount of Mr. Chisum’s debt, gave him one week to pay, and warned that if he did not make the required payment, that his interest in Carolina Coast would be diluted. Mr. Chisum failed to make the contribution, and the Campagnas paid off the loan themselves. At that time, the Campagnas took over total control of Carolina Coast. In 2011, Mr. Chisum received his 2010 Schedule K-1 from Carolina Coast. It was marked “Final” and showed that his ownership interest had been reduced to zero.
Almost two years after Mr. Chisum was ousted from Carolina Coast, the Campagnas also took control of Judges Road. In June of 2012, a letter was sent giving notice of a membership meeting scheduled for July 2 and calling for capital contributions. Mr. Chisum did not attend the meeting or make the contribution. On August 27, 2012, the Campagnas contributed funds, including Mr. Chisum’s share, and assumed control over Judges Road. Mr. Chisum received a 2012 Schedule K-1 for Judges Road which showed that he had around an 18.884% ownership interest in the company. He also received a 2013 Schedule K-1 which was marked “Final” and showed that although he had an 18.884% at the beginning of the year, it had been reduced to zero by the end of the year.
After Mr. Chisum’s absence from the July 2, 2012 meeting, the Campagnas likewise considered Mr. Chisum to have relinquished his interest in Parkway and took control of the LLC. On August 27, 2013, Parkway sent Mr. Chisum his 2012 Schedule K-1, which showed that Mr. Chisum held around an 8.34% interest in Parkway. In 2014, the LLC mailed Mr. Chisum his 2013 Parkway K-1 which was labeled “Final” and revealed that Mr. Chisum had an 8.34% ownership interest at the beginning of the year, but no interest by the end of 2013.
It was not until March of 2016, when Mr. Chisum went to a storage unit facility previously owned by one of the LLCs and was told that it had been sold, that he became aware of a change in his ownership status in the LLCs.
On July 19, 2016, Mr. Chisum filed a complaint asserting multiple claims against the Campagnas for his alleged improper ousting as a member of the LLCs in breach of the operating agreements. He later amended his complaint to add derivative claims against the Campagnas on behalf of the companies. As part of the lawsuit, Mr. Chisum sought a declaration from the court that he remained a member of the LLCs and had standing to bring his derivative claims. The declaratory judgment hinged on whether Mr. Chisum had brought his claims within the three-year statute of limitations period per N.C. Gen. Stat. § 1-52(1) for breach of contract.
Trial Court
The case was tried in front of a jury in August of 2018. The trial court directed a verdict in favor of the Campagnas with respect to all of Mr. Chisum’s claims relating to Carolina Coast. This was based on the trial court’s conclusion that no reasonable juror could find that Mr. Chisum had filed his complaint within three years of when he knew or should have known that the Campagnas were in breach of the operating agreement.
The remaining claims concerning Judges Road and Parkway were submitted to the jury. Upon submission, the trial court instructed the jurors that they were to determine whether Mr. Chisum had filed his action within three years of when he knew or reasonably should have known that the Campagnas no longer considered him a member of Judges Road and Parkway. The jury returned a verdict in Mr. Chisum’s favor, concluding that he had filed his action within three years of when he discovered that the Campagnas had assumed control of the LLCs.
The Campagnas appealed the trial court’s decision to submit claims relating to Judges Road and Parkway to the jury. They argued, in relevant part, that the statute of limitations started to accrue at the moment of breach and that the evidence was undisputed that Mr. Chisum knew of the breach more than three years before initiating the lawsuit. On the other hand, Mr. Chisum appealed the directed verdict relating to the Carolina Coast claims, arguing that when he became aware or should have become aware of the breach involved a question of fact that should have been submitted to jury. The underlying issue that needed to be resolved by the Supreme Court was whether the statute of limitations started upon the date of breach or discovery.
Supreme Court
The Supreme Court held that the discovery rule applied to breach of contract claims and that N.C. Gen. Stat. § 1-52(1) began to accrue when Mr. Chisum “became aware or should have become aware of the Campagnas’ breaches of the operating agreements.”ii The court reasoned it would be a violation of “basic notions of fairness” for a statute of limitations to accrue against “a plaintiff who ha[d] no way of knowing that the underlying breach ha[d] occurred.”iii
Applying that logic to Mr. Chisum’s claims related to Carolina Coast, the Supreme Court found that there was sufficient evidence to support submission to the jury on the issue of when Mr. Chisum had notice of the Campagnas’ breaches and reversed the trial court’s directed verdict.
In relation to the Judges Road and Parkway claims, the Court affirmed the trial court’s decision that the statute of limitations for a breachiv of contract contained a discovery rule and that Mr. Chisum had filed his action within three years of actual or constructive notice of the Campagnas’ breach of the operating agreements.
Effect Moving Forward on Construction Litigation
With the injection of the discovery rule into N.C. Gen. Stat. § 1-52(1), the limitations period for all construction claims, regardless of the party bringing the action, will likely be subject to a discovery rule.
Before Chisum, North Carolina case law held that breach of contract claims accrued on the date of breach regardless of whether the plaintiff had notice of the breach. However, N.C. Gen. Stat. § 1-52(16) created an exception to this rule and tolled the three-year limitation period for certain claims until the breach is discovered.v Specifically, the statute states that for “physical damage to claimant's property, the cause of action . . . shall not accrue until . . . physical damage to his property becomes apparent or ought reasonably to have become apparent.”N.C. Gen. Stat. § 1-52(16)(emphasis added). Strictly interpreting N.C. Gen. Stat. § 1-52(16), North Carolina courts have held that only a claimant who owns the damaged property at issue qualifies under this section and receives the benefit of the discovery rule. On the other hand, courts have found that non-owner claimants, such as general contractors, subcontractors, do not fall within the purview of N.C. Gen. Stat. § 1-52(16) and are not afforded the benefit of a discovery rule.vi
Today, with Chisum embedding a discovery rule into N.C. Gen. Stat. § 1-52(1), even if non-owner claimants are not entitled to a discovery rule under N.C. Gen. Stat. § 1-52(16), their breach of contract claims will be tolled until they knew or should have known of the injury.
In light of Chisum, courts will potentially see an influx of litigation as non-owner claimants, encouraged by the ruling, bring claims more than three years after the construction work has been completed. Also, construction litigation will likely become more costly as it will be more difficult for defendants to get out of a case on a pre-trial motion. Prior to Chisum, the accrual of the statute was fairly straightforward—the date of breach—and, therefore, ripe for a motion to dismiss or summary judgment. However, under Chisum, determining when a plaintiff knew or should have known of a breach will involve factual issues that can only be resolved at trial.
Although a win for certain litigants, as a whole, Chisum will likely make construction litigation even more lengthy and costly moving forward.
i Chisum v. Campagna, __ N.C. __, 855 S.E.2d 173 (2021), reh’g denied, __ N.C. __, 855 S.E.2d 799 (2021).
iiId. at 189.
iiiId. at 188-89.
ivSee, e.g., Pearce v. N. Carolina State Highway Patrol Voluntary Pledge Comm., 310 N.C. 445, 51, 312 S.E.2d 421, 26 (1984); Kaleel Builders v. Ashby, 161 N.C. App. 34, 34-44, 587 S.E.2d 470, 477 (2003); Jewell v. Price, 264 N.C. 459, 461-62, 142 S.E.2d 1, 3-4 (1965).
vAlthough not discussed in this article, construction litigants should also be aware that another statutory provision contained in N.C. Gen. Stat. § 1-50(a)(5) potentially tolls the accrual of the statute of limitations until discovery for actions based “upon or arising out of the defective or unsafe condition of an improvement to real property.” However, courts inconsistently apply this statute and usually analyze cases within the framework of N.C. Gen. Stat. § 1-52(1). Regardless, with the recent ruling in Chisum, litigants will no longer need to rely on a statutory exception as they now have the benefit of the discovery rule for all breach of contract claims.
viSee Kaleel, 161 N.C. at 43-44, 587 S.E.2d at 477 (recognizing that a cause of action for breach of contract brought by a general contract against a subcontractor was barred by the statute of limitations because the action accrued on the date of breach and the complaint had been filed more than five years after construction had ceased); see also Cape Fear Med. Ctr., LLC v. S.K. Anderson Constr. Co., No. COA06-27, 2007 WL 1246421 (N.C. Ct. App. May 1, 2007)(unpublished) (holding that N.C. Gen. Stat. § 1-52(16) did not apply because the general contractor was not the owner of the property in question and, therefore, the general contractor’s claims were barred because they were brought more than three years after work was completed).
