by Robin A. Seelbach, Wall Templeton & Haldrup, P.A.
In re New Bern Riverfront Dev., LLC, Case No. 8:10-ap-23 (Bankr. E.D.N.C.).
Recent orders from the Bankruptcy Court for the Eastern District of North Carolina and the District Court for the Eastern District of North Carolina provide authority for a general contractor, or any other contractor, to apply the discovery rule in N.C. Gen. Stat. § 1-50(a)(5)f. to its construction defect claims, even if the contractor is not the owner of the project.
The opportunity for risk transfer for non-owners in construction defect cases may have just gotten a little broader. In In re New Bern Riverfront Dev., LLC, Case No. 8:10-ap-23 (Bankr. E.D.N.C.), the Bankruptcy Court for the Eastern District of North Carolina held N.C. Gen. Stat. § 1-50(a)(5)f. tolled the three-year statute of limitations for negligence and contract-based claims until the defect became apparent or should reasonably have become apparent to the non-owner claimant. While North Carolina jurisprudence is replete with cases recognizing a discovery rule for claimants that own the damaged property at issue, this is the first decision applying North Carolina law that has recognized a discovery rule for non-owner claimants (e.g., general contractors, first-tier subcontractors, second-tier contractors, etc.). Depending on the facts of your case, risk transfer options for a non-owner client may extend beyond those parties that performed work on the project within three years from the date suit was filed.
In re New Bern Riverfront Dev., LLC, arose out of the construction of the Skysail Luxury Condominiums in New Bern, North Carolina (the “Project”). Substantial completion of all relevant work occurred on April 15, 2009 (depending on who you ask). In March 2009, New Bern Riverfront Development, LLC (“New Bern”), the owner/developer of the Project, filed suit in Wake County Superior Court alleging construction defects and asserting claims against the general contractor, Weaver Cooke Construction, LLC (“Weaver Cooke”), Weaver Cooke’s surety, the architect, and select concrete and design subcontractors. In November 2009, New Bern filed a petition for relief under Chapter 11 of the Bankruptcy Code and the state court defect action was also removed to the Bankruptcy Court for the Eastern District of North Carolina, where it progressed as an adversary proceeding.
In 2010, Weaver Cooke filed a third-party complaint against the banks that financed the Project, but did not add any building envelope subcontractors for the Project. On April 19, 2012, Weaver Cooke filed a motion for leave to file a second third-party complaint asserting claims of negligence, contractual indemnity, and express warranty against building envelope subcontractors. Citing the substantial completion date of April 15, 2009 – or even earlier completion dates – the subcontractors claimed the three-year statute of limitations under N.C. Gen. Stat. § 1-52(1) and (5)1 barred Weaver Cooke’s claims.
After extensive discovery, almost all of Weaver Cooke’s subcontractors filed motions for summary judgment. The Bankruptcy Court (Judge Stephani Humrickhouse) issued a series of orders on these motions beginning in June 2014 and continuing through December 2014. One of the main issues litigated was whether Weaver Cooke’s breach of contract and/or negligence claims were subject to a statute of limitations defense or if they could be saved by tolling under a discovery rule. There was extensive oral argument and briefing on whether or not the discovery rule in N.C. Gen. Stat. § 1-52(16) would apply to these claims since that statute, by its plain language, only applies to claims for “personal injury or physical damage to claimant’s property.” (emphasis added). The subcontractors argued persuasively that this was inapplicable because Weaver Cooke, the general contractor, did not own the property that was damaged.
Instead of relying on N.C. Gen. Stat. § 1-52(16), Weaver Cooke asserted it was entitled to tolling under N.C. Gen. Stat. § 1-50(a)(5)f., which states:
For purposes of the three-year limitation prescribed by G.S. 1-52, a cause of action based upon or arising out of the defective or unsafe condition of an improvement to real property shall not accrue until the injury, loss, defect or damage becomes apparent or ought reasonably to have become apparent to the claimant.
The Court accepted Weaver Cooke’s position and applied the plain language of the tolling provision in N.C. Gen. Stat. § 1-50(a)(5)f. to find that Weaver Cooke’s claims did not accrue until the injury became “apparent or aught reasonably to have become apparent to the claimant.” This is the first written opinion applying the discovery rule under N.C. Gen. Stat. § 1-50(a)(5)f. to a non-owner. In support of its holding, the Court cited Oates v. Jag, Inc., 314 N.C. 276, 333 S.E.2d 222 (1985). The Supreme Court in Oates, however, applied N.C. Gen. Stat. § 1-50(a)(5)f. to toll claims by a homeowner plaintiff, not to a litigant that did not actually own the property at issue.
After determining that Weaver Cooke was entitled to tolling of the statute of limitations, the Court then performed factual analysis of accrual of the claims against each individual subcontractor under Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 329 S.E.2d 350 (1985). Based on the facts of a given claim, the Court reached different results for different subcontractors. See, e.g., Docket Number 882 (filed 6/3/14) (denying summary judgment on statute of limitations) and Docket Number 884 (filed 6/10/14) (granting summary judgment on statute of limitations). The Court’s discussion of the accrual issue and the governing statutes is in Docket Number 882 (“Order on Summary Judgment Regarding Statute of Limitations: East Carolina Masonry, Inc.”). Later orders on the statute of limitations issue generally refer back to this order and do not give the full explanation. These orders do not appear to be available through Westlaw but can be accessed through PACER.
The majority of Judge Humrickhouse’s orders on the parties’ various summary judgment motions are currently on appeal to the Eastern District of North Carolina. In the first decision to be handed down on appeal, Judge Britt agreed with Judge Humrickhouse’s application of the tolling provision in N.C. Gen. Stat. § 1-50(a)(5)f. and affirmed the denial of summary judgment to Weaver Cooke’s masonry subcontractor. See East Coast Masonry, Inc. v. Weaver Cooke Construction, LLC, Case No. 5:15-CV-252-BR, Docket Number 77 (filed 1/20/16) (E.D.N.C.). Given the number of appeals currently pending in the Eastern District from the Bankruptcy Court’s orders, this issue may well be appealed to the Fourth Circuit.
While these federal opinions are not binding authority on North Carolina state courts, they are persuasive authority on how the plain language of N.C. Gen. Stat. § 1-50(a)(5)f. should be applied. Based on this favorable jurisprudence, non-owners will likely be emboldened to seek claims against entities that completed their work outside the three-year statute of limitations more frequently. The issue, however, is far from settled. There is very real tension between the federal courts’ application of this statute and opinions from North Carolina state courts holding that the statute of limitations for a breach of contract claim begins running as of the date of breach. See, e.g., Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 43-44, 587 S.E.2d 470, 477 (2003) (“A cause of action based upon breach of a contract accrues on the date of the breach, at which time the three years begin to run.”) (citing Miller v. Randolph, 124 N.C. App. 779, 780, 478 S.E.2d 668, 670 (1996)). Ultimately, these issues are likely to be speed bumps rather than roadblocks on the nascent rule’s journey to becoming state law.
1In general, a cause of action based on breach of contract and/or breach of warranty accrues on the date of the breach, at which time the three years begin to run. Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 43-44, 587 S.E.2d 470, 477 (2003). “A cause of action based on negligence accrues when the wrong giving rise to the right to bring suit is committed, even though the damages at that time be nominal and the injuries cannot be discovered until a later date.” Harrold v. Dowd, 149 N.C. App. 777, 781, 561 S.E.2d 914, 918 (2002).
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