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2008 Year in Review: The Supreme Court of North Carolina

With 2008 at a close, the start of a new year presents a good opportunity to review the work of our State’s highest court from this past year. Our Supreme Court took on a wide range of issues in 2008, addressing several areas of the law such as land use and construction law that typically do not see much action at the high court.

On its discretionary docket, the Court decided 761 non-routine petitions and motions that were potentially dispositive to an appeal (i.e., not scheduling orders). On its docket of direct appeals, the Court issued 86 opinions. 50 of these opinions were per curiam opinions issued by the Court as a whole, generally consisting of the mandate only (i.e., affirmed; reversed). 36 of the Court’s decisions on direct appeal were full opinions authored by an individual Justice.

Of the authored decisions, a number addressed issues of critical importance to civil practitioners. The following represent – in this author’s view – the most noteworthy civil opinions issued by the Court this past year.

General Contract Law/Commercial Litigation
Tillman v. Commercial Credit Loans, Inc.
362 N.C. 93, 655 S.E.2d 362
January 2008

For the first time in its history, the Court in Tillman held that a contract could not be enforced because it was unconscionable.

The plaintiffs, Fannie Lee Tillman and Shirley Richardson, were borrowers of limited financial means who signed loan agreements with Commercial Credit Loans. The loan agreements contained a standard arbitration clause that Commercial Credit had included in its loan agreements since 1996, which was nonnegotiable. The arbitration clauses required arbitration of all claims except for foreclosures or claims involving less than $15,000, barred class action claims, required the party seeking arbitration to pay a fee, shifted various arbitration costs to the losing party, required that parties bear their own attorney and witness fees, and shifted the costs of an appeal to the losing party. The plaintiffs brought suit against Commercial Credit in Superior Court for claims related to the loan agreement itself, and Commercial Credit sought to enforce the arbitration clauses.

In a divided opinion, a majority of the members of the Court concluded that the arbitration clause was unconscionable and, therefore, unenforceable. The Justices’ fractured vote produced a rare plurality opinion: one with the greatest number of votes, but with fewer votes than required for a majority. The plurality (Timmons-Goodson, J., with Brady and Hudson, J.J.), conducted a two-pronged test for both procedural and substantive unconscionability, adopting a “sliding scale” analysis that allowed for a finding of unconscionability when a contract contains pronounced substantive unfairness but minimal procedural unfairness, or vice versa. The plurality ultimately concluded that the arbitration clause was unconscionable under this analysis, noting that the cost of arbitration would be “prohibitively high” if the clauses were enforced, and that the clauses were overly one-sided such that that no borrower had ever sought arbitration despite thousands of loans made by Commercial Credit in North Carolina. The plurality also observed that the plaintiffs were of very limited financial means, were “unsophisticated consumers,” were rushed through the loan closings, and were not told about the arbitration clauses.

The concurrence (Edmunds, J., with Martin, J.) concurred in the result only – as opposed to also concurring in the plurality’s rationale – and advocated for the Court to follow its prior unconscionability decisions setting forth a “totality of the circumstances” analysis. Under this analysis, the concurrence explained, the arbitration clause was unconscionable because it effectively prevented the plaintiffs from vindicating their rights under the contract in any forum, while simultaneously allowing Commercial Credit to pursue claims against borrowers in Superior Court.

The dissent (Newby, J., with Parker, C.J.) set forth the view that the Court’s decision implicated settled principles of contract law that should not be disturbed in response to policy concerns over a disfavored industry.

Implications of the decision:
Although commercial lending is less likely to be affected, this historic decision is likely to have wide-ranging consequences for consumer lending practices. The fractured nature of this plurality decision makes the precedential value questionable, but regardless, Tillman is a warning shot fired at consumer lending practices in which the lender holds all the cards. Counsel and lending clients alike are advised to review Tillman and revise arbitration clauses and business practices as necessary.

Appellate Practice/General Litigation

Dogwood Dev. & Mgmt. Co., LLC v. White Oak Transp. Co.
362 N.C. 191, 657 S.E.2d 361
March 2008

After years of our appellate courts’ internal struggle to strike the proper balance between the need to enforce the appellate rules and the need to resolve appeals on the merits, the Court in Dogwood set forth a comprehensive framework to determine when a violation of the appellate rules should result in dismissal.

The Court (Martin, J.) held that whether an appellate court should excuse noncompliance with the rules depends on the nature of the default. As the Court explained, the occurrence of default under the appellate rules (i.e., waiver of the right to appellate review of an issue on the merits) generally falls into three categories: (1) violation of appellate rules governing issue preservation; (2) violation of “jurisdictional” appellate rules; and (3) violation of “nonjurisdictional” appellate rules.

With respect to the first category, the Court explained that a party’s failure to properly preserve an issue for appellate review under N.C. R. App. P. 10 will ordinarily justify an appellate court’s refusal to consider the issue on appeal, subject to certain exceptions applicable only in rare instances.

As to the second category of default, the Court reaffirmed its prior cases holding that when such a “jurisdictional default” occurs (e.g., the failure to file a notice of appeal under N.C. R. App. P. 3), the appellate court must dismiss the appeal in all but the rarest of exceptions. For such jurisdictional default, the Court explained, the appellate court may not invoke N.C. R. App. P. 2 to reach the merits of the appeal.

Finally, and perhaps most importantly, the Court explained that violations of nonjurisdictional appellate rules (e.g., the failure to include record and transcript references with assignments of error) normally should not lead to dismissal of the appeal. The Court explained that N.C. R. App. P. 25 and 34 govern this type of noncompliance, and provide for various sanctions short of dismissing the case or issue. Moreover, the Court made clear that even when substantial or gross violations of nonjurisdictional rules warrant dismissal of the appeal, an appellate court may nevertheless consider invoking N.C. R. App. P. 2 to reach the merits under certain extraordinary circumstances.

Implications of the decision:
Since the Court’s 2005 opinion in Viar v. NCDOT, lawyers appearing before our appellate courts have nervously submitted appeals, wondering – along with their legal malpractice carriers – whether they would be dismissed for a technical violation of the rules. The vast majority of this guesswork has been eliminated by the framework set forth in Dogwood, which expresses a clear preference for resolving appeals on the merits. In the nine months since its issuance, this opinion has already resulted in a greater number of appeals being heard on the merits, and this trend is expected to continue.

Land Use/Real Estate Law

Mangum v. Raleigh Bd. of Adjustment
__ N.C. __, 669 S.E.2d 279
December 2008

The Court (Brady, J.) in Mangum held that property owners need not establish a diminution in property value to have standing to challenge a zoning decision involving nearby property.

At issue was whether a group of property owners had standing to challenge a business’s application for a special use permit for an adult establishment in Raleigh. The adult establishment was to be located on a small, dead-end street in an industrial zoning district, with adjacent uses that included a heavy equipment rental company, a commercial steel company, a lumber company, a fifteen acre vacant parcel, and an electrical transformer plant that had become the site of a federally-mandated hazardous waste cleanup. The property owners challenging the permit were owners of adjacent properties, as well as an owner of property located approximately one-half mile from the site. As the Court explained, however, the property owners had established standing based on testimony that the proposed adult establishment could cause traffic and parking problems, stormwater runoff problems, and potential safety issues. This was sufficient, the Court concluded, and no showing of diminished property value was necessary.

The dissent (Timmons-Goodson, J.) contended that the majority disregarded longstanding precedent requiring a showing of diminution in property value, and that its decision effectively adopted the less consistent rule of some other jurisdictions.

Implications of the decision:
This decision marks a notable departure from the Court’s prior decisions holding that a showing of diminution in property value is required for standing. As a result, it is anticipated that this decision will spark a significant increase in challenges to zoning decisions by neighboring property owners. Land use practitioners and neighbors of development projects should take note.

Workers’ Compensation/Employment Law

Shaw v. U.S. Airways, Inc.
362 N.C. 457, 665 S.E.2d 449
August 2008

In this decision, the Court (Newby, J.) held that an employer’s contributions to an employee’s retirement accounts are not included in the calculation of “average weekly wage” under North Carolina’s Workers’ Compensation Act. Thus, a baggage handler who had worked for an airline could not count the airline’s contributions to his pension and 401(k) retirement funds as “earnings” under N.C. Gen. Stat. § 97-2(5).

The Court explained that nothing in the plain language of N.C. Gen. Stat. § 97-2(5) specifically includes fringe benefits and that the legislature could not have possibly intended to include them in the definition of “earnings” when it enacted the Workers’ Compensation Act in 1929. Without statutory language or legislative intent to support an inclusive construction, the Court concluded, the decision of whether to include fringe benefits in the definition of “earnings” was one wholly within the province of the legislature.

The dissent (Hudson, J., with Timmons-Goodson, J.), emphasized the longstanding tradition of liberal construction of the Workers’ Compensation Act, and pointed out that the employer’s contributions were fully vested, quantifiable, and available to the employee personally as cash equivalent. On these facts, the dissent would have construed the Workers’ Compensation Act to include these amounts as earnings.

Implications of the decision:
This is an important decision that is likely to lead to political debate about whether North Carolina’s Workers’ Compensation Act should be amended to reflect a more modern notion of “earnings.” Particularly given the Court’s apparent restraint in adhering to the plain language of the statute, this may be a topic we see addressed in the upcoming legislative session.

Hassell v. Onslow County Bd. of Educ.
362 N.C. 299, 661 S.E.2d 709
June 2008

In Hassell, the Court (Hudson, J.) held that a school teacher’s generalized anxiety disorder was not an occupational disease entitling her to workers compensation benefits.

The plaintiff, a middle school teacher, consistently had problems managing her classroom and maintaining order — problems that other teachers of the same students did not have. As a result, she dreaded going to work because of student disciplinary problems and student disrespect for her, which included verbal and physical harassment. The plaintiff contended that her employment contributed to her development of generalized anxiety disorder.

The Court noted that any language in the Industrial Commission’s findings implying that fault played a role in determining the compensability of the plaintiff’s claim was irrelevant and inappropriate. In light of the deferential “competent evidence” standard of review from a decision of the Industrial Commission, however, the Court held that the Commission properly concluded that the plaintiff’s condition was not an occupational disease because she failed to prove either that her work increased her risk of generalized anxiety disorder or significantly contributed to it.

The dissent (Timmons-Goodson, J.) set forth the view that the majority erred by upholding the result reached by the Commission without addressing whether it had erroneously premised compensability on the absence of fault.

Implications of the decision:
Although some may view this decision as effectively eliminating the possibility of a claim premised on an anxiety-related disorder, it may be fact-specific enough to allow for similar claims under different circumstances. Given the public’s increasing understanding of mental disabilities and the increasing prevalence of anxiety disorder diagnoses, Hassell may not be the last North Carolina appellate decision to address this issue.

Constitutional Law/Local Government Law

Standley v. Town of Woodfin
362 N.C. 328, 661 S.E.2d 728
June 2008

In Standley, the Court (Brady, J.) held that an ordinance prohibiting registered sex offenders from knowingly entering any of a town’s public parks did not violate the due process right to intrastate travel.

The plaintiff was a registered sex offender who, because of a stroke, was disabled such that he could not travel anywhere without being accompanied by his mother or another adult to assist him. The plaintiff would frequently visit the Town of Woodfin’s park with his mother, but was prohibited from doing so after the enactment of the town’s ordinance. The plaintiff contended that the ordinance violated his right to intrastate travel because it infringed on his ability to enjoy nature along the park’s riverbank, to have barbeques in the park, and, more generally, to freely enter the town’s parks.

The Court held that the constitutional right to intrastate travel did not encompass plaintiff’s asserted liberty interest, and that his interest in freely entering the town’s parks was not otherwise a fundamental right. The Court further analyzed the plaintiff’s claim under a rational basis test, and concluded that protecting children and other visitors to parks from sexual attacks was a legitimate government interest. In upholding the ordinance, the Court rejected the plaintiff’s assertion that the ordinance was a product of animus against a particular group brought about by vague, undifferentiated fears.

Implications of the decision:
Although there was an intriguing statutory preemption argument addressed by the dissent in the Court of Appeals (Geer, J.) and not raised by the plaintiff in the Supreme Court, it would seem that this case definitively resolves the question of whether a local government may exclude registered sex offenders from its public parks. The unresolved questions are whether this decision could extend to other public places besides municipal parks, and whether it could extend to other “disfavored” groups besides sex offenders.

Tort Law/Medicaid Law

Andrews ex rel. Andrews v. Haygood
__ N.C. __, 669 S.E.2d 310
December 2008

In Andrews, the Court (Newby, J.) held that when a Medicaid beneficiary receives a lump sum tort settlement from a third party with terms that do not indicate the amount allocated to past medical expenses, the State can assert a lien on up to one-third of the settlement proceeds for past medical expenses paid on behalf of the Medicaid beneficiary.

The plaintiffs had argued that the State’s assertion of the lien ran afoul of a 2006 U.S. Supreme Court decision, Arkansas Dept. of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006), which held that Medicaid’s anti-lien provisions precluded states from asserting liens on portions of a Medicaid recipient’s tort settlement that were not specifically allocated to medical expenses. However, the Supreme Court of North Carolina held that Ahlborn does not mandate a judicial determination of the portion of a settlement from which the State may be reimbursed for prior medical expenditures, and that North Carolina’s one-third statutory limitation was reasonable. Thus, the Court held, the North Carolina Division of Medical Assistance could claim up to one-third of a Medicaid's recipient’s medical malpractice settlement even though the portion of that settlement designed to address past medical expenses had not been specifically delineated.

The dissent (Hudson, J., with Brady and Timmons Goodson, J.J.), concluded that Ahlborn directly addressed and resolved the issue presented in this appeal, as North Carolina’s statute is similar to the one at issue in Ahlborn and the factual situations are analogous.

Implications of the decision:
Regardless of the strength of the majority’s position, distinguishing a recent U.S. Supreme Court decision on an issue involving federal law can be a risky undertaking for a state court of last resort. Despite the U.S. Supreme Court’s increasingly miniscule docket of decisions from state high courts, this case may not be over yet.

Construction Law/Debtor-Creditor Law

Carolina Bldg. Servs.' Windows & Doors, Inc. v. Boardwalk, LLC
362 N.C. 262, 658 S.E.2d 924
April 2008

This decision (Newby, J.) holds that a default judgment in favor of an owner against a general contractor cannot be used as the basis for extinguishing a subcontractor’s lien under N.C. Gen. Stat. § 44A-23.

In support of this holding, the Court relied on N.C. Gen. Stat. § 44A-23(a), which provides: “Upon the filing of the notice and claim of lien and the commencement of the action, no action of the contractor shall be effective to prejudice the rights of the subcontractor without his written consent.” The Court explained that by its plain meaning, an “action” is a thing done. On that rationale, the Court held that a general contractor’s choice not to defend against an owner’s claims would constitute an “action” that prejudiced the rights of the subcontractor, such that the default judgment could not extinguish the subcontractor’s subrogation lien.

The dissent (Timmons-Goodson, J., with Brady, J.) contended that the majority offered no authority in support of its holding beyond a mere definition of the word “action,” and stated that its decision fundamentally contradicted the law of default judgments.

Implications of the decision:
This decision may have little relevance outside of the construction industry, but it ultimately provides a significant new protection for subcontractors with subrogation liens who face a somewhat common industry practice: a general contractor with an inability to pay or defend against an owner’s claims.

Tort Law/General Litigation
Harrell v. Bowen
362 N.C. 142, 655 S.E.2d 350
January 2008

The Court in Harrell (Brady, J.) held that punitive damages may not be asserted against the estate of a tortfeasor.

The Court held that the “survival” provisions of N.C. Gen. Stat. § 28A-18-1 allowing claims to be asserted against an estate do not apply to punitive damages claims, which are governed by Chapter 1D. Under N.C. Gen. Stat. § 1D-1, punitive damages may be awarded “to punish a defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts.” Finding no legislative intent to treat the purposes of punishment and deterrence disjunctively, the Court rejected the argument that punitive damages may be awarded to deter others from similar wrongful acts even when the decedent could obviously neither be punished nor deterred from committing similar wrongful acts in the future.

The dissent (Newby, J., with Hudson, J.), articulated the view that the legislature’s intent was for Chapter 1D to allow for punitive damages notwithstanding the death of the tortfeasor.

Implications of the decision:
Given that the legislature is unlikely to take up this narrow issue, it would appear that this decision conclusively resolves a wrinkle in the law that was of significant interest to plaintiffs’ attorneys and civil defense attorneys for some time.

© 2009 Poyner Spruill LLP. All rights reservedNational Law Review, Volume , Number 225

About this Author

Andrew H. Erteschik, Civil Litigation Attorney, Poyner Spruill Law Firm

Drew focuses his practice on complex civil litigation and appeals.

His litigation experience covers a wide array of substantive areas including complex business litigation, government-related disputes, and federal and state constitutional litigation.  He has tried cases to verdict in state court, federal court, and the North Carolina Business Court, and has been named by Super Lawyers magazine as a “Rising Star.”

Drew devotes a substantial portion of his practice to handling appeals.  He regularly serves as lead...