Appellate Cases of Interest

On March 22, 2024 the Supreme Court in Terry v. Pub. Serv. Co. of N.C., (28A23 - Published) upheld the trial court’s granting of Summary Judgment for the Defendant Landlord in a premises liability case.

The issue was whether there is a duty to inspect when the tenant never complains of any issues to the landlord.

The court agreed there was no duty.

Thanks to Harris, Creech, Ward & Blackerby, P.A., by A. Ruthie Sheets; and Jay C. Salsman and the NCADA for the amicus brief.

Results provided by Robert Levin, Haywood Denny & Miller

This is a case involving a credit union's right to change customer agreements and require arbitration through email notifications. The plaintiff sued over overdraft fees, leading to a dispute about arbitration. The Court of Appeals upheld arbitration, with one judge dissenting. The case is now being appealed to the Supreme Court, and it has potential implications for various businesses, including insurance companies.  NCADA joined with the NC Chamber Legal Institute in an amicus to the NC Supreme Court.  Thank you to members Christopher Smith and David Ortiz with Smith Anderson for authoring the brief.  Read more about case from Law 360.

Synopsis by Eleasa H. Allen, Robinson & Lawing, LLP

On March 21, 2023, the North Carolina Court of Appeals issued its first decision on a case in which the employee is seeking extended compensation pursuant to N.C. Gen. Stat. 97-29(c): Sturdivant v. NC Dept. of Public Safety.

Key Takeaways: (1) The burden of showing a “total loss of wage-earning capacity” under 97-29(c) is the same as the employee’s burden of showing a “total disability” to receive benefits under 97-29(b); and, (2) However, the plaintiff is not entitled to a presumption that he continues to suffer from a total loss of wage-earning capacity based on a prior determination that he was totally disabled under 97-29(b).

Editor’s Note: Thank you to Joy H. Brewer & Ginny P. Lanier, Brewer Defense Group; Frances M. Clement & Kristine L. Prati, Wilson & Ratledge; and, Tracey L. Jones, Logan Shipman & Lindsay Underwood, Teague Campbell, for authoring the Amicus Curae for the NC Association of Defense Attorneys.

NCADA Members Luke Sbarra and Kari Swindle of Hedrick Gardner Kincheloe & Garofalo, LLP obtained a defense verdict following a jury trial commencing April 5, 2021 in Mecklenburg County, North Carolina Superior Court defending an entertainment venue and bar regarding allegations of over-service of alcohol and inadequate security when a patron attacked another patron during an altercation at the establishment.

NCADA Member, Lori Keeton Wins 4th Circuit Court Appeal. A split Fourth Circuit panel threw out a North Carolina police officer's nearly $1.7 million trial win in a sex discrimination case against the City of Charlotte, finding there wasn't enough evidence to show that Michael Tinsley — who had a lengthy disciplinary record — was fired because he's a man. The court disagreed with the comparison by the plaintiff to a female officer's record, who was not as severely disciplined for similar acts. 

This Defense Win was originally noted in Law360.
 

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 breach^iv 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). 

By J. Matthew Little, Esq., Teague Campbell Dennis Gorham, LLP

In recent years, the Defense Bar has seen historic numbers of pro se prisoner filings. Along with this increase is a new litigation trend that involves coupling traditional medical malpractice claims under Chapter 90 of the North Carolina General Statutes with Federal civil rights claims under 42 USC Section 1983. Given the cap on non-economic damages in Chapter 90 and North Carolina’s broad denial of attorneys’ fees recovery for prevailing parties, plaintiffs have weaponized Section 1983. Unlike Chapter 90, this section does not impose a damages cap and, when paired with a claim under 42 USC § 1988, allows for the recovery of attorneys’ fees–thus resulting in potentially much greater damages awards for aggrieved plaintiffs who have been able to retain counsel.

 Although litigants have recently relied upon Section 1983 in cases of alleged excessive use of force by law enforcement, defense attorneys are increasingly seeing it used in cases filed against jail medical staff. Specifically, inmates have used Section 1983 as a cudgel against medical providers within the prison system, claiming violations under the Eighth Amendment’s prohibition against cruel and unusual punishment.

Claims under Chapter 90 and Section 1983 can arise from the same facts, but they are legally distinct and carry different burdens of proof. While their pairing poses a unique challenge for defense attorneys representing governmental actors within North Carolina jails, pro se plaintiffs perennially struggle to meet Section 1983’s elevated standard.

 Following is a breakdown of the claims, a case study to illustrate how inmate plaintiffs are using them in a medical context, and factors defense attorneys should consider when facing these claims.

 NCGS Chapter 90 and the Negligence Standard

Chapter 90 houses the State’s law governing medical malpractice claims. Plaintiffs are charged with proving, by a preponderance of the evidence, that the healthcare provider involved committed a deviation from the standard of care–a standard set by care providers with the same level of skill and experience, at the same time, and within the same locale or a similarly situated community. These claims are subject to a cap on non-economic damages, and in accord with North Carolina law in almost all civil cases, plaintiffs are not entitled to recover their attorneys’ fees.

 42 USC § 1983 and the Deliberate Indifference Standard

Conversely, 42 USC § 1983 allows for a federal civil rights claim based on a violation of a constitutional protection. It states:

Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress.

Jail medical staff are government actors when they are employees of a County or a Sheriff, which makes them subject to Section 1983 claims. As such, when inmates believe they were not administered proper medical care, they can bring claims under both Chapter 90 and Section 1983.

The constitutional hook in the prison context is the Eighth Amendment’s ban on cruel and unusual punishment. In the medical context, this typically involves allegations that the plaintiff was denied adequate care. The United States Supreme Court in the 1976 case Estelle v. Gamble coined the legal standard known as “deliberate indifference to a serious medical need”. This standard is much higher than the typical negligence standard required of claims under Chapter 90. First, the plaintiff must prove he or she has a serious medical need. Second, the plaintiff is burdened with proving the care provider both knew about that serious medical need and deliberately chose to ignore it. The standard involves both an objective and a subjective element. Given the number of these cases that fail to make it past 12(b)(6), this is a standard that plaintiffs consistently fail to meet.

A Two-Pronged Approach to Seeking Damages: A Case Study

As opioid addiction continues to sweep the nation, cases of overdose and withdrawal have flooded the prison system. Staggering numbers of inmates evidence signs of addiction when admitted and, because the standard of care within prisons is to provide palliative care (for instance, administering Ativan for anxiety and Phenergan for nausea), the individuals can and do suffer withdrawal. Dying from withdrawal is exceedingly rare, but nonetheless, some parties have attempted to use jail deaths as evidence of deliberate indifference under Section 1983.

In the case study, the plaintiff asserted claims against jail medical staff for negligence and gross negligence, willful and wanton negligence, common law negligence, and deliberate indifference under Section 1983, along with other claims. The core argument–raised by the representative of the deceased inmate’s estate–was that prison medical staff deliberately ignored the decedent’s withdrawal symptoms and that she became dehydrated and died as a result. However, the facts learned in discovery did not support this claim.

The Complaint painted a dire picture of a woman who was reeling from heroin withdrawal, whose health was in rapid decline and who vomited liters of fluid until she eventually coded. However, a subsequent autopsy report revealed her cause of death to be the consequences of drug abuse, not dehydration. Medical literature reveals it is very rare to die from actual dehydration. Instead, a patient suffering from dehydration can experience an electrolyte imbalance which can lead to cardiac arrhythmia. Further, patients who abuse methamphetamines often suffer from cardiac and vascular damage as a result of the toxic byproducts of manufacturing and using the drug. Because jails employ a standard of care (palliative medicines) to treat inmates who are addicted, withdrawal symptoms like plaintiff’s are inevitable and as such, are not evidence of a serious medical need or negligence by medical staff.

Even more problematic for the plaintiff, however, was the plaintiff’s failure to prove that the medical staff were indifferent to the decedent’s condition. Video footage showed the inmate walking around her cell, conversing with jail medical staff, and drinking water from a cup on the night she coded, all while she was supposedly lying in bed dying. The medical record contained notes indicating more than 30 interactions between the inmate and medical staff. This record is the opposite of deliberate indifference.

Further, upon admittance, the decedent admitted to a triage nurse that she battled a 1-gram per day heroin habit. She denied other drug abuse. However, when she passed away three days later, her toxicology report revealed traces of methamphetamine in her system. Given the short half-life of methamphetamine, the decedent must have had a large amount of the drug in her system when she was booked into the jail. Tragic those these facts are, they further eroded her claim that the medical staff’s deliberate indifference to her condition caused her death.

Most of these cases proceed similarly. In some cases, the Chapter 90 claim will survive dispositive motions, but many fail to clear the higher bar set by Section 1983. Not to mention, 1983 claims–which involve federal questions–are subject to the heightened pleading standards under Twombly-Iqbal when they are removed to federal court, and many pro se plaintiffs are simply unable to meet that standard.

Defense Considerations

Pro se inmate claims are subject to an initial review for frivolity under the Prisoner Litigation Reform Act as codified at 28 U.S.C. § 1915A(a) & (b). Recently, District Court Judges have trended toward increasing permissiveness, allowing more claims to proceed to initial pleadings and discovery. Anecdotally, rising racial tensions and the ascendancy of the Black Lives Matter movement have driven more excessive force claims–which are also 1983 claims–and possibly opened the floodgates for more acceptance of complaints lodged against government actors. However, there is no clear-cut answer as to why more of these cases seem to be surviving judicial scrutiny.

Regardless, there are a few factors defense attorneys should consider when facing 1983 claims against government actors in the prison context, particularly when they are paired with North Carolina medical malpractice claims. First, when prison staff are government actors, they are afforded various immunity defenses including governmental immunity, public official immunity in certain circumstances and qualified immunity. These defenses are relevant when counties are large enough to hire their own personnel instead of contracting with third-party, private actors. Immunity defenses are layered and complex and require defense counsel to coordinate the pleadings and discovery to raise the appropriate defense at the right time. Further, under certain circumstances the denial of a dispositive motion can allow for an immediate, non-interlocutory appeal.

Second, it is vital to develop a basic understanding of the science: how the human body responds to certain substances (and mixtures of substances), how withdrawal affects the body, and what contributes to overdose deaths. The case study is illustrative: in both, defense counsel’s command of the medical underpinnings in the case was instrumental in rebutting the plaintiff’s claims.

Finally, as in most complex litigation matters, it is crucial to develop social intelligence. Understanding the societal view of a client and the plaintiff can help counsel not only build a defense but also, meet any rebuttal and prepare for an adverse ruling. Societal trends like heightened racial tension and increased awareness of the lethality of the opioid epidemic can shift the judicial temperature and inform the inevitable biases of jurors. In heated times when government actors face heightened scrutiny, it is vital to understand how your client may be perceived and to prepare to inoculate or, in many cases, accept those perceptions.

While we cannot say with certainty how courts will trend throughout the next decade, for now, we can expect to see more and more of these claims passing muster in the federal court system. Understanding how to meet them, not only from a legal perspective but a social one, is essential.

 

By Mark A. Stafford and Candace S. Friel, Nelson Mullins Riley & Scarborough, LLP

We sometimes think that the drafters of N.C. R. Civ. P. Rule 26(b)(5) sought only to test the pain thresholds of lawyers: Privilege logs are the bane of existence for most attorneys—expensive, time consuming and generally a nuisance.  In practice, few of us focus on privilege logs early in the process of obtaining and reviewing client documents, but failing to do so can be dangerous.

Without using the term “privilege log,” N.C. Rule 26(b)(5) (as well as the cognate federal rule) requires that claims of attorney-client privilege, work product, and joint defense or peer review privileges must be invoked at the time of service of the discovery responses or “when the party withholds the information.”  This is often made express in case management orders that require a party to serve a privilege log “contemporaneously with its objection.”  E.g., Window World of Baton Rouge, LLC v. Window World, Inc., 2019 NCBC LEXIS 54, *89 (N.C. Sup. Ct. Aug. 16, 2019).   Not doing so can be deemed a waiver of the privilege. 

Regardless of when they are created, privilege logs can be costly undertakings.  We have seen cases where a log was more than 150 pages and over 3,000 entries long.  Despite the possibility of such voluminous logs, remember that if utilizing a paralegal to assist with the initial compilation of a privilege log, it is the attorney’s duty to review and ensure that privilege claims in logs meet appropriate standards.  Further, early planning (such as obtaining from the client names of all their outside counsel during the relevant period, not simply counsel in the case) is critical.  E-discovery software with keyword and sorting capabilities, can ameliorate the manual efforts required in entering such data as custodian, date, and recipient information.  Nevertheless, in matters involving voluminous discovery, the costs of the e-discovery process can quickly approach if not exceed six figures.  Often, the only “solution” to this problem is to warn the client. 

When utilizing one of the popular e-discovery platforms such as Relativity or Everlaw, one can include identifying “tags” for initial reviewers to flag the privilege being asserted, as well as a non-privileged description of the nature of the document being redacted or withheld.  Both documents produced in redacted form (because they are only partially privileged) and documents withheld in their entirety must be logged.  For documents produced in redacted form, only the protected text should be hidden, leaving other information (such as to/from/cc/subject fields in emails) visible, all in order to allow the opposing party (and the court) to discern the basis for the claim.  In addition, inclusion of all such “tags” and descriptions in the e-discovery database, while time consuming during the review, saves countless hours in the compilation of the final log, because such fields can be directly exported and incorporated into an Excel-type draft. 

Under Rule 29, counsel may enter into agreements to streamline this process.  For example, the parties may stipulate to specific electronically stored information (“ESI”) “protocols” to narrow the universe of potential documents.  They may further agree that communications between the client and counsel of record, at least those created from the onset of the lawsuit, need not be logged.  There are also times when the parties may agree that communications between in-house counsel and client employees need not be logged, though there may be resistance when in-house counsel wears multiple hats, such as serving simultaneously as compliance officer. Evans v. United Servs. Auto. Ass'n, 142 N.C. App. 18, 32, 541 S.E.2d 782, 791 (2001).  Of course, those of us defending claims brought by individuals should remember that our friends in the plaintiffs’ bar are not known for making life easier for our clients.

One should be mindful that problematic tensions may exist in terms of timing—tensions that can spring upon you just as you think case scheduling and ESI procedures are nearly set:  in federal courts, the Business Court, and in some superior court districts, counsel must submit proposed scheduling orders early in the case.  Courts are also increasingly requiring early joint filing of proposed ESI protocols to govern the electronic production. Where the rules permit service of discovery requests in the first weeks of a case (with their resulting deadlines), you could be faced simultaneously with having to negotiate scheduling and ESI protocols (with lengthy search terms and Boolean operators), agree on narrowing custodian files to be searched, and obtain gigabytes or terabytes of client data which necessarily cannot be reviewed (under the yet-to-be-decided protocols) much less logged in a 30-day (or even 60-day) response period.   There is seldom a perfect solution to this conundrum, but rather than stymie production altogether or seek repeated extensions, parties should, at a minimum, consider agreeing to permit privilege logs to be exchanged on some reasonable date after service of the written responses. 

The sufficiency of descriptions on privilege logs is the primary source of disputes.  This issue was recently addressed by Business Court Judge Conrad in Kelley v. Charlotte Radiology, P.A., 2019 WL 8109486 at * 4 (N.C. Sup. Ct. May 15, 2019).  In Kelley, Defendant challenged the adequacy of the plaintiff’s log, arguing that the descriptions were “obtuse and uninformative.”  The log contained dates, authors, and recipients, with descriptions such as “asking and answering questions re litigation engagement” and “exchange between client re information furnished to lawyer.”  The Court found that this phrasing was a sufficiently “short description of the subject matter, and the type of privilege asserted.”

Judge Conrad also noted that even if the log had been inadequate, the appropriate remedy would not have been to declare a waiver but for the Court to conduct an in camera review of the challenged materials.  The court stressed that Kelley’s counsel had made a “good-faith effort” to describe the materials and in fact revised his log in response to defendant’s concerns.

Not surprisingly, judges do not always apply identical philosophies on the adequacy of privilege log descriptions.  For example, somewhat in contrast to Judge Conrad, Business Court Judge Bledsoe, in Window World of Baton Rouge, supra, found that entries describing communications simply as "regarding" or "related to" "legal advice" were insufficient.  Judge Bledsoe observed that 95 of 150 entries included substantially similar descriptions and that “[p]resumably, all [150 Sample Log Documents] are regarding or relating to legal advice.”

Litigators should also remember that attorney-client privilege and the work product doctrine are technically distinct grounds for withholding production.  While attorney-client privilege attaches only to communications where legal advice is sought, conveyed or implied and where no third party is involved, the work product doctrine protection extends to anything prepared by a party or its representative (not just attorneys) in anticipation of litigation, which is not shared with a third party, including even public materials gathered at the request of counsel, and non-substantive communications.  As to work product, the date of the document is critical for invoking the doctrine, since the timing of the communication vis-à-vis the beginning of litigation is vital to meeting the doctrine’s “in anticipation of litigation” requirement.  In re Summons Issued to Ernst & Young, LLP, 191 N.C. App. 668, 679, 663 S.E.2d 921, 929 (2008).  The test boils down to this:  But for the threat or existence of litigation, would the document have been created?

In Kelley, defendant also argued a waiver of work product immunity occurred when that particular ground was not specifically listed as to certain documents.  The court rejected the contention, but only because Kelley amended the log to assert the doctrine prior to the filing of the motion to compel.

In many respects, the Kelley analysis merely reflects that strong historical propensity of North Carolina judges not to find privilege and work product waivers absent egregious neglect or a complete failure to rectify shortcomings.  Again, however, practitioners should keep in mind that the approach that Judge Conrad approved in Kelley will save you only if you timely served some sort of log in the first place.  Moreover, if additional responsive documents are discovered, a party should timely serve a supplemental privilege log to preserve applicable privileges. 

In sum, we dare say that there has never been a lawyer who has enjoyed preparation of privilege logs—or any client who was pleased to pay for the work. To minimize the costs, one should act early in planning and beginning execution of the logging process.  Further, multiple entries saying “email regarding case” simply won’t cut it, but the descriptions need not consist of wordy explanations.  Finally, if you see a dispute brewing over the adequacy of your log, consider objectively whether an amendment before the court is involved is wise—standing firm until a motion to compel ruling may be necessary, but, as with most challenges the litigator faces, you should constantly be alert to the risks.

By Christopher E, Faircloth, Esq. Hamlet & Associates, PLLC – Wilmington, NC

In 2012, a commercial developer, Crescent University City Venture, LLC (“Crescent”), contracted to have several student apartment buildings built on property it owned near the UNC Charlotte campus. Crescent hired a general contractor to construct the project, and as is common in the industry, the general contractor hired various subcontractors to provide labor and materials for the job. The subcontractor hired for the provision and installation of wood framing materials then contracted with Trussway Manufacturing, Inc. (“Trussway”), via purchase order, for the manufacture and supply of the trusses it would use to construct the apartments. In this context, “trusses” are prefabricated wooden structures used to support the floor/ceiling section between units on each level of Crescent’s apartment buildings. The purchase order provided the required specifications, and Trussway manufactured the trusses—which were eventually installed project-wide.

Fast forward to a Friday night in January 2015. The project is complete, students have moved in, and 100 or so of them went to a party in “Building C,” in an upstairs unit. Afterwards, residents of the until below reported their ceiling was cracked and sagging. Those living in the impacted units were relocated; but three-months later, residents of a unit in “Building E” reported a similar issue. After floor trusses in Buildings C and E were inspected and found to be defective, Crescent hired an engineering firm to investigate a random sampling of apartments in multiple buildings across the project. The investigation revealed defective or dangerous conditions related to numerous floor trusses project-wide. When Crescent and the general contractor could not agree on a plan or timeframe to correct the defective trusses, Crescent eventually hired a third-party contractor to conduct repairs.

Predictably, the parties found themselves in litigation involving various claims, including Crescent’s claims against the general contractor related to the defective trusses. Trussway and various other subcontractors were brought into the suit as third/fourth-party defendants, and litigation carried on for a few years. In that time, the matter was designated as a complex business case and sent to the North Carolina Business Court. Along the way, Crescent filed a separate lawsuit against Trussway asserting one claim for negligence (and nearly $8 million in damages), based on Trussway’s manufacture of the defective floor trusses.

Eventually, the cases were consolidated, the parties were realigned, and Crescent came before the North Carolina Business Court to defend against Trussway’s motion for summary judgment and argue the issue that would ultimately make it to the Supreme Court of North Carolina—as stated by the Court, “[W]hether, under North Carolina law, a commercial property owner who contracts for the construction of a building, and thereby possesses a bargained-for means of recovery against a general contractor, may nevertheless seek to recover in tort for its economic loss from a subcontracted manufacturer of building materials with whom the property owner does not have contractual privity.” Crescent Univ. City Venture, LLC v. Trussway Mfg., Inc., No. 407A19, 2020 N.C. LEXIS 1134, at *1 (Dec. 18, 2020). Or said another way, in light of North Carolina’s economic loss rule—which prohibits the use of tort law to recover purely economic losses, particularly in the context of commercial transactions—can a commercial property owner successfully sue a subcontractor for negligence based on breach of contractual duties when said owner did not contract with said subcontractor?

The Business Court said no. Crescent, as a commercial property owner, could not recover its economic losses from Trussway, a subcontractor with whom Crescent had not contracted. Applying the economic loss rule to Crescent’s negligence claim, the Business Court granted Trussway’s motion for summary judgement because there was no evidence that Trussway had breached any duty outside of duties under its contract with the framing subcontractor. Crescent appealed and eventually the question was presented to the Supreme Court of North Carolina, who after hearing one of the first virtual oral arguments in the Court’s history (https://www.youtube.com/watch?v=VZjcqWjAuG0), ultimately affirmed the Business Court’s decision, and clarified the scope of North Carolina’s economic loss rule in the commercial construction context.

In its written opinion, filed on December 18, 2020 and penned by Justice Michael Morgan, the Court began its analysis with reference to its Ports Authority opinion—a case familiar to North Carolina construction defect attorneys, as it adopted the economic loss rule in the State. See Ports Auth. v. Lloyd A. Fry Roofing Co. (Ports Authority), 294 N.C. 73 (1978). Under Ports Authority, the economic loss rule prevents a plaintiff from recovering in tort “against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or lack of skill.” Ports Authority at 83.

Summarizing the historical context, the Crescent Court explained, “that the purpose of the economic loss rule is to prevent contract law from drowning in a sea of tort.” Crescent at *10 (internal quotations omitted). While the Court acknowledged a potential public policy exception to the economic loss rule for layperson homeowners (i.e., unsophisticated, noncommercial plaintiffs who purchased a defectively constructed home), those policy considerations do not apply in situations like Crescent and Ports Authority, where all parties involved are sophisticated commercial entities and the plaintiffs’ losses are purely economic. As the project owner, Crescent had a bargained for means for recovery of its economic losses related to the defective floor trusses, i.e., a breach of contract suit against the general contractor. Since Crescent already had an avenue to recover its economic losses under a contract law theory, the Court held that the economic loss rule barred Crescent from recovering the losses from Trussway under a negligence theory.

Notably, and of particular importance to defense counsel for subcontractors and general contractors, the Court here explicitly held, “[t]he lack of privity in the commercial context between a developer and a subcontractor, supplier, consultant, or other third party—the potential existence of which is readily known and assimilated in sophisticated construction contracts—is immaterial to the application of the economic loss rule.” Crescent at *13. Thus, it did not matter that there was no contract between the Crescent and Trussway, the economic loss rule would apply regardless. No recovery in tort for purely economic losses, period.

This piece of the Crescent Court’s analysis is critical, because after Crescent’s clarification on the scope and applicability of the economic loss rule, North Carolina trial courts will likely start “cracking down” on a common practice in construction litigation where the plaintiff project owner seeks negligence-based recovery directly from the general contractor’s subcontractors. Given that project owners rarely contract directly with the subcontractors, and in light of the Court’s clarification of the economic loss rule; going forward, project owners will have a difficult time recovering economic damages directly from a subcontractor. Instead, project owners must seek to recover their economic damages from the general contractor with whom it initially contracted for the construction of the project. As such, owner/developers and general contractors should consider adjusting the terms of future construction contracts to account for the impact Crescent will have on the industry.

For attorneys defending construction defect claims, Crescent could be a boom or bust, depending on whether the client is a subcontractor or general contractor. But one thing is clear—like the party in Building C that set this whole thing off—the party is over for project owners seeking to leverage negligence claims over subcontractors to extract extra funds, and for the general contractors who stood to benefit from that leverage via a smaller check to write at the end of the day. But for subcontractors defending against tort claims from project owners they never contracted with—the party just got started.

N.C. Farm Bureau v. Martin
By: Joseph W. Fulton

This case from the N.C. Supreme Court  dealt with an insurance coverage issue: resident-relatives. A mother and daughter sought UIM coverage under a personal auto policy issued to their mother-in-law/grandmother. They all lived on a family farm. The insured lived in the main house. The claimants lived in a guesthouse on the same property. The insured paid all of the expenses for the guesthouse. The Court held that the claimants were not residents of the insured’s household because they had “never lived together under the same roof . . ..” Therefore, the claimants were not insureds.

NCADA members Walter Brock, Jr., Andrew P. Flynt, and Matthew C. Burke represented N.C. Farm Bureau. Member George L. Simpson, IV filed an amicus brief on behalf of NCADA.

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