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Settle With Care: Pre-Audit Certificates and Oral Settlement Agreements With Local Governments

Settling a lawsuit with a local government in North Carolina takes a good degree of skill.

Today, the North Carolina Court of Appeals reaffirmed the importance of pre-audit certificates within the context of settling a lawsuit with a local government.  This time, in Howard v. County of Durham, the Court addressed the pre-audit requirement in the context of an oral agreement between a private litigant and the County resulting from a federal mediation.

We've address pre-audit requirements and oral agreements in the past here, and the UNC School of Government gives a good explanation of the pre-audit requirement and oral agreements here.

The Facts

Plaintiff filed suit in state court against the County, alleging violation of 42 U.S.C. 1983.  Defendant removed the lawsuit to federal court, after which the parties exchanged settlement offers in mediation and reached an oral agreement to settle  for $50,000.  The mediator prepared a “Memorandum of Settlement” reflecting the terms of the settlement, which Plaintiff signed but the Tax Administrator for the County did not sign "as she said she did not have authority to settle for that amount."  The Tax Administrator subsequently informed the mediator that she would not recommend the settlement offer to the Durham County Board of Commissioners.

Plaintiff filed this lawsuit, claiming that the County breached the settlement contract and negligently misrepresented settlement to the Plaintiff.  The trial court dismissed Plaintiff's claims "on jurisdictional grounds and on the grounds that [P]laintiff failed to state a cause of action."

The Decision

     A. Breach of Contract/Lack of Pre-Audit Certificate.

The Court of Appeals gives the back of its hand to (1) "the gap between the statutes and rules governing mediation in the state court and the federal court" (a gap in which the Court thinks there is no answer to whether oral mediation agreements should be enforceable, because it is not clear which (or if any) mediation rules apply to this case) as well as (2) the manner in which "a county may or may not authorize a settlement" (the County did not argue the authority issue).

The Court recognizes that "[a] settlement agreement requiring a county to pay money is subject to the requirements of N.C. Gen. Stat. § 159-28(a)."  Then, distinguishing Plaintiff's proffered caselaw from the world of workers compensation in which a pre-audit certificate is required for settlement agreement as part of a cascading process ("the agreement in [Lee v. Wake County] was reached in the context of a 'three-stage process' before the Industrial Commission in which 'the pre-audit certificate will naturally be executed'"), the Court recalls the familiar:

An oral contract, by its very nature, cannot contain the written certification required by N.C. Gen. Stat. § 159-28(a).See Cincinnati Thermal Spray, Inc. v. Pender County, 101 N.C. App. 405, 407-08, 399 S.E.2d 758, 759 (1991) (affirming dismissal of a contract action for failure to conform to N.C. Gen. Stat. § 159-28(a) where the plaintiff alleged an oral contract between it and the defendant county). Thus, plaintiff has failed to allege that the settlement agreement met the requirements of N.C. Gen. Stat. § 159-28(a). “An obligation incurred in violation of this subsection is invalid and may not be enforced.” N.C. Gen. Stat. § 159-28(a).

     B. Negligent Misrepresentation.

The Court has an easy time with Plaintiff's negligent misrepresentation claim.  The Court cites the standard, noting the requirement of "pecuniary loss":  "“In this State, we have adopted the Restatement 2d definition of negligent misrepresentation and have held that the action lies where pecuniary loss results from the supplying of false information to others for the purpose of guiding them in their business transactions.” 

The Court then applies the legal standard , concluding that the failure to settle does not, here, result in pecuniary loss because, for example: "This case is not one where the [P]laintiff had already taken some action, such as taking a dismissal or executing a release, that would preclude her recovery in the underlying federal action in reliance on [The County's] representations."  The Court continues that "Plaintiff cites no case recognizing a failure to settle a case as a compensable 'pecuniary loss' and we decline to extend the definition of negligent misrepresentation to cover such a situation."

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About this Author

Michael C Thelen, Womble Carlyle Firm, Litigation Attorney
Attorney

Mike represents myriad clients – from Fortune 500® companies to smaller, privately-owned organizations – in cross sections of business throughout the many stages of federal and state litigation.  From his years of practice in New York and North Carolina, Mike primarily has experience in the areas of land use, local/municipal government law and real estate litigation, having handled zoning, development agreement, land use planning, eminent domain and condemnation, construction, retail and commercial landlord-tenant, partnership dissolution, state law torts, and civil...

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