COA: Guarantor Liable Notwithstanding Lessee's Bankruptcy Filing

Today, a panel of the North Carolina Court of Appeals (McGee, Geer, McCullough) held that a guarantor of a lease continued to be liable under the guaranty despite the lessee having filed for bankruptcy.  The case is C. Richard Epes, M.D. v. B.E. Waterhouse, LLC and A.J. Waterhouse, LLC.

In 1998, C. Richard Epes, M.D. signed a guaranty agreement on a lease.  By 2005, following several assignments of rights under the original lease, the lessors were B.E. Waterhouse, LLC and A.J. Waterhouse, LLC, and the lessee was Fuddruckers Inc.  Dr. Epes brought suit in 2010, asking for a declaratory judgment that he have no ongoing duties, obligations, or liability under the guaranty agreement.  The trial court entered judgment in favor of the defendants, B.E. Waterhouse, LLC and A.J. Waterhouse, LLC, and Dr. Epes appealed.

On appeal, Dr. Epes claimed that the defendants had not shown that Fuddruckers defaulted, so Dr. Epes could not be liable as a guarantor.  Specifically, Dr. Epes pointed to the lease's terms regarding events of default, arguing that under the lease, it was permissible for Fuddruckers to file for bankruptcy and avoid default so long as the petition of bankruptcy was set aside within 60 days.  The Court rejected this argument, noting that Dr. Epes misread the lease, as the 60-day provision applied to petitions for the appointment of a receiver or trustee, not a petition of bankruptcy.  The Court also overruled Dr. Epes's argument that federal bankruptcy law provides for a stay on collection actions put in place at the time of a bankruptcy filing, explaining that federal courts have held that the automatic stay does not prevent actions against guarantors of loans.

Dr. Epes also argued that judgment should have been entered in his favor because the language in the assignment and the continuation of the guaranty with Fuddruckers was ambiguous and should have been construed against the defendants.  The Court disagreed, noting that the assignment specifically stated that the guaranty would continue "in full force and effect," and that the guaranty clearly stated that the landlord and tenant, without notice to or consent by the guarantor, "may at any time or times enter into suchthereby."  Accordingly, the Court held that the clear and unambiguous language of the assignment and guaranty reflected that the assignment to Fuddruckers would not release Dr. Epes from liability as guarantor.  For these reasons, the Court affirmed the grant of summary judgment to the defendants.

Related links: Record on appeal; Epes's brief; B.E. Waterhouse, LLC and A.J. Waterhouse, LLC's brief.

NC Supreme Court Opinion

Today the North Carolina Supreme Court released 14 opinions.  We will have more on any cases of interest later.

Today at the Court of Appeals (6/6/12)

Today, a panel of the North Carolina Court of Appeals (Judges Hunter, Geer, and Beasley) will hear oral argument in In the Matter of the Appeal of Novartis Vaccines and Diagnostics, Inc., COA11-1592. Wake County appeals from a decision of the North Carolina Property Tax Commission holding that Novartis Vaccines and Diagnostics, Inc. is entitled to a tax exemption of 40% of the improvements to real property on which a vaccine production plant is being constructed.

According to the Record on Appeal and the parties’ briefs, which you can find here, in 2006, the Town of Holly Springs gave Novartis two tracts of land in Wake County on which Novartis is currently constructing a vaccine manufacturing facility. In 2009, Novartis entered into a contract with the United States Department of Health and Human Services (“HHS”), in which HHS agreed to fund $316 million (or 40%) of the facility’s projected construction costs and to purchase up to 96 million flu vaccines a year from Novartis once it started production. This contract, which was part of the Federal Government’s effort to prepare for future flu pandemics, allows HHS the right to use the facility to produce flu vaccines should a flu pandemic occur. The contract provides that during construction, HHS and Novartis jointly own the facility in accordance with their respective shares of investment, but once Novartis completes and validates the facility, all of the rights and title in the facility shall pass to Novartis and the Government shall retain no right of ownership in the facility.

The issue on appeal is whether Novartis should receive a 40% exemption for the 2010 tax year on the grounds that HHS owns 40% of the improvements to the real property and under N.C. Gen. Stat. § 105-278.1, this portion is not subject to taxation because it is owned by the Federal Government. The County contends that Novartis is not entitled to the 40% exemption because HHS does not own an interest in the facility and that even if HHS did own an interest, that interest does not reduce the taxable value of the property. The County’s position is that under the contract, HHS does not have a fee simple absolute interest in the property, but rather a short-lived determinable interest in the property while construction is underway that reverts to Novartis once construction is complete. Because the reversion of HHS’ interest in the property is probable in the near future (when the project is completed in 2014), the County argues it should be considered as belonging to Novartis and not subject to an exemption. In response, Novartis argues that under Federal Acquisition regulations, HHS owns a fee simple interest in all property for which it is obligated to reimburse Novartis under the contract, and thus that interest is subject to an exemption.

Stay tuned for a report once the Court publishes its ruling in this matter.

Today at the Court of Appeals (6/6/12)

Today, a panel of the Court of Appeals (Hunter, Geer, Beasley) will hear the case of WakeMed v. North Carolina Department of Health and Human Services.

WakeMed and Rex Hospitals separately appeal from a final decision by the North Carolina Department of Health and Human Services as to a certificate of need review resulting from a need determination for three additional operating rooms in Wake County.  The three hospitals involved in the appeal--WakeMed, Rex, and Novant Health, Inc.--all sought a certificate of need to add three operating rooms at their facilities.  Novant was awarded the certificate of need.

In their respective briefs, Rex and Wakemed contend that the final agency decision erroneously approved the Novant application and denied the Rex and WakeMed applications.  Specifically, the appellants argue that the final agency decision erred in finding Novant's application conformed to the statutory criteria.  Rex claims that the final agency decision should not have determined that WakeMed's application conformed to the statutory criteria; WakeMed argues the same as to Rex.  Finally, each appellant asserts that its application should have been found to be comparatively superior to the others.

The record on appeal and briefs may be found here.

COA Opinions

This morning the Court of Appeals released 23 opinions.  We will have more on any cases of interest later.

Today at the Court of Appeals (6/5/12)

Today, a panel of the North Carolina Court of Appeals comprised of Chief Judge John C. Martin and Judges Rick Elmore and Robert N. Hunter, Jr. will hear oral argument in the latest chapter of the on going saga regarding the General Assembly's ability to modify funding for education programs for at-risk children.

In Hoke County Board of Education v. State of North Carolina, the Court of Appeals will review whether the General Assembly's 2011 Budget Bill, which became law after the General Assembly overrode Governor Perdue's veto, complies with the North Carolina Supreme Court's prior holding that the North Carolina Constitution guarantees every child of the state the opportunity to recieve a sound basic education.  The primary controversy is over the provision of the Budget Bill that provides that the Division of Child Development will provide services to at-risk children regardless of income, but limits the total number of at risk children to no more than 20% of the four-year-olds served within the prekindergarten program. 

Superior Court Judge Howard E. Manning, Jr. ordered that the State “shall provide” pre-kindergarten services “to any eligible at-risk four year old that applies;” that the State “shall not implement or enforce that portion of the 2011 Budget Bill, section 10.7(f), that limits, restricts, bars or otherwise interferes, in any manner, with the admission of all eligible at-risk four year olds that apply to the prekindergarten program;” and that the State “shall not implement, apply or enforce any other artificial rule, barrier, or regulation to deny any eligible at-risk four year old admission to the prekindergarten program.”  The State challenges this ruling on the grounds that Judge Manning's order was incorrect as a matter of law and that it was not supported by the evidence.


The Record on Appeal and Briefs can be found here.