McMillan v. Ryan Jackson Properties, LLC

NO. COA13-270

NORTH CAROLINA COURT OF APPEALS

Filed: 21 January 2014

THOMAS G. McMILLAN, JR., et als.,
Plaintiffs,

v. Guilford County
No. 10 CVS 7595
RYAN JACKSON PROPERTIES, LLC, et
als.,
Defendants.

Appeal by plaintiffs from order entered 17 September 2012 by

Judge Edgar B. Gregory in Guilford County Superior Court. Heard

in the Court of Appeals 9 October 2013.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by
Joseph A. Ponzi and Darrell A. Fruth, for plaintiffs-
appellants.

Hicks McDonald Noecker LLP, by David W. McDonald, for
defendant-appellee Collins & Galyon General Contractors, Inc.

HUNTER, Robert C., Judge.

Thomas G. McMillan, Jr. and Shawn De’Lace Hendrix

(“plaintiffs”) appeal the order awarding defendant Collins &

Galyon General Contractors, Inc. (“C&G”) attorneys’ fees. On

appeal, plaintiffs argue: (1) the trial court erred by concluding

that the action was brought without reasonable cause; and (2) the

trial court abused its discretion by awarding attorneys’ fees.
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After careful review, we affirm the trial court’s conclusion

that the derivative action was brought without reasonable cause,

but remand for redetermination as to how much of the attorneys’

fees were incurred in defense of the derivative action.

Background

Ryan Jackson Properties, LLC (“Ryan Jackson”) purchased an

office building at 220 West Market Street in Greensboro, North

Carolina with the plan of converting it into a residential

condominium complex. It contracted for the services of C&G, with

the contract specifying that C&G was to be “responsible for causing

all the Work to be performed as required by the Contract Documents

for the Construction of ALTERATIONS TO 220 WEST MARKET STREET.”

C&G acquired two permits from the city to perform the renovations.

The first permit stated that the work was for “Int./Ext.

Alterations” and approximated the total cost of this project to be

$1,488,100.00. C&G was the sole contractor named in the permit.

The second permit stated that the work to be done was “Demolition

– Renovation” and the total cost of the project was to be

$5,000.00. Again, C&G was the only contractor named.

Each plaintiff purchased one unit in the newly renovated

condominium complex in the summer of 2007. Both units were located

in the former basement of the building, and both flooded in late
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July or early August of that same year. Plaintiffs had to move

out of their units as a result of the flooding.

Plaintiffs first filed suit against Ryan Jackson and 220 West

Market Street Condominium Association, Inc. (“the Condo

Association”) in March 2009, pursuing claims of breach of the

implied warranty of habitability against Ryan Jackson and seeking

monetary and injunctive relief from the Condo Association. All

parties stipulated to voluntary dismissal without prejudice in

November 2009.

On 14 July 2010, plaintiffs filed suit against Ryan Jackson

and C&G. They asserted negligence against C&G individually and

derivatively on behalf of the Condo Association, a nonprofit

corporation of which plaintiffs were members, and claimed that

Ryan Jackson breached the implied warranty of habitability and

violated N.C. Gen. Stat. § 75-1.1. In support of the derivative

action, plaintiffs alleged that the Condo Association “incurred

prospective liability and compensatory damages for the costs of

repairs to common areas caused by the negligence of [C&G],” based

on C&G’s “failure to provide proper and adequate waterproofing,

dampproofing, and/or drainage for the exterior and common areas of

the Real Property.” Ryan Jackson did not appear to defend against
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plaintiffs’ claims, thus causing default judgment to be entered

against it in the amount of $38,658.04.

C&G did defend the suit and met with plaintiffs several times

to discuss the flooding. Plaintiffs contended that the flooding

could have come from three potential sources: (1) the exterior

water handling system, (2) a dam effect created by the north

retaining wall, or (3) a change in topography of the parking lot.

Anthony Collins and James Galyon, Jr., C&G’s vice president and

owner, respectively, filed affidavits with the trial court wherein

they averred that: (1) C&G did not agree to perform work on the

exterior water handling system, and in fact did not perform any

work on it, (2) the north retaining wall appeared in a survey of

the property which predated any renovation, and C&G did not modify

the wall in any way, and (3) the parking lot is owned by a third

party and was never part of C&G’s project. Collins and Galyon

also averred that C&G did not have exclusive control over the

construction project and except for limited circumstances such as

windows, doors, and electrical boxes, only contracted to renovate

the interior of the building.

C&G filed a motion for summary judgment on 29 April 2011,

which was granted 11 July 2011. This Court affirmed the trial

court’s order dismissing C&G by unpublished opinion filed 3 July
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2012. See McMillan v. Ryan Jackson Properties, LLC, No. COA11-

1318, 2012 WL 2551261 (N.C. App. July 3, 2012) (“McMillan I”).

C&G moved for an attorneys’ fees award pursuant to N.C. Gen. Stat.

§ 55A-7-40(f) (2013) on 19 August 2011. This matter was heard on

4 September 2012, and the trial court granted C&G’s motion for

attorneys’ fees by order entered 17 September 2012. Plaintiffs

timely appealed from that order.

Discussion

1. Standard of Review

Plaintiffs’ first argument is that the panel should review

the court’s initial conclusion as to whether the case was brought

without reasonable cause de novo and the ultimate awarding of fees

for abuse of discretion. We agree.

“It is settled law in North Carolina that ordinarily attorneys

fees are not recoverable either as an item of damages or of costs,

absent express statutory authority for fixing and awarding them.”

United Artists Records, Inc. v. Eastern Tape Corp., 18 N.C. App.

183, 187, 196 S.E.2d 598, 602 (1973). Here, the trial court

awarded fees pursuant to N.C. Gen. Stat. § 55A-7-40, which governs

derivative actions for nonprofit corporations. Under section 55A-

7-40(f), the trial court must make a finding that an action was
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brought “without reasonable cause” before awarding attorneys’

fees.

C&G argues that the standard of review on appeal should be

abuse of discretion, without reviewing the conclusion as to whether

the suit was brought without reasonable cause de novo. It cites

to a number of cases for the proposition that the general standard

of review for an award of attorneys’ fees is abuse of discretion.

See Furmick v. Miner, 154 N.C. App. 460, 462, 573 S.E.2d 172, 174

(2002) (“The allowance of attorney fees is in the discretion of

the presiding judge, and may be reversed only for abuse of

discretion.”) (quotation marks omitted).

However, section 55A-7-40(f) authorizes an award of

attorneys’ fees only upon a “finding” by the trial court that the

derivative action was “brought without reasonable cause.” Whether

an action is brought without reasonable cause is a conclusion of

law, as it involves the exercise of judgment and the application

of legal principles. See In re Helms, 127 N.C. App. 505, 510, 491

S.E.2d 672, 675 (1997). Conclusions of law are reviewed de novo.

Carolina Power & Light Co. v. City of Asheville, 358 N.C. 512,

517, 597 S.E.2d 717, 721 (2004). Therefore, we agree with

plaintiffs, and will review the trial court’s conclusion as to
 -7-
reasonable cause de novo and its ultimate award of attorneys’ fees

for an abuse of discretion.

II. Reasonable Cause

Plaintiffs next argue that the trial court erred by concluding

that the action was brought without reasonable cause.

Specifically, plaintiffs contend that the word “action” in section

55A-7-40(f) should be interpreted to include all claims in the

lawsuit, and therefore, the action as a whole must have been

brought with reasonable cause because plaintiffs were awarded

default judgment against Ryan Jackson. In the alternative,

plaintiffs argue that they had reasonable cause to bring the

derivative suit on behalf of the Condo Association against C&G.

We disagree with plaintiffs’ interpretation of section 55A-7-

40(f), and we affirm the trial court’s conclusion that the

derivative action was brought without reasonable cause.

As is discussed above, we review the trial court’s conclusion

as to whether the action was brought without reasonable cause de

novo. Under de novo review, “the court considers the matter anew

and freely substitutes its own judgment” for that of the trial

court. In re Greens of Pine Glen, Ltd. P’ship, 356 N.C. 642, 647,

576 S.E.2d 316, 319 (2003).
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Section 55A-7-40 governs derivative proceedings under the

North Carolina Nonprofit Corporation Act; it controls the method

by which the members of a nonprofit corporation may bring an action

in the right of that corporation. Under subsection (a) of the

statute,

An action may be brought in a superior court
of this State . . . in the right of any
domestic or foreign corporation by any member
or director, provided that, in the case of an
action by a member, the plaintiff or
plaintiffs shall allege, and it shall appear,
that each plaintiff-member was a member at the
time of the transaction of which he complains.

N.C. Gen. Stat. § 55A-7-40(a) (2013). The attorneys’ fees

provision at issue in this case is found in section 55A-7-40(f);

it provides that:

(f) In any such action, the court, upon final
judgment and a finding that the action was
brought without reasonable cause, may require
the plaintiff or plaintiffs to pay to the
defendant or defendants the reasonable
expenses, including attorneys’ fees, incurred
by them in the defense of the action.

N.C. Gen. Stat. § 55A-7-40(f) (2013) (emphasis added).

Plaintiffs first argue that the word “action” in section 55A-

7-40(f) should be interpreted to include all claims against all

parties in a lawsuit, not just the derivative portion therein.

Thus, because plaintiffs obtained judgment in their favor against

Ryan Jackson on claims they pursued individually, they argue that
 -9-
the action as a whole could not have been brought without

reasonable cause, and attorneys’ fees should not have been awarded

pursuant to section 55A-7-40(f). In support of this argument,

plaintiffs note that under the North Carolina Rules of Civil

Procedure, an “action” is commenced by filing a complaint, which

may have one or more “claims for relief,” N.C. Gen. Stat. § 1A-1,

Rules 3, 8 (2013), and that “more than one claim” may be presented

in a single “action,” N.C. Gen. Stat. § 1A-1, Rule 54 (2013).

We disagree with this interpretation. Plaintiffs seek to

attach meaning to the word “action” in section 55A-7-40(f) based

on the word’s usage in general provisions of the North Carolina

Rules of Civil Procedure. However, “where two statutory provisions

conflict, one of which is specific or ‘particular’ and the other

‘general,’ the more specific statute controls in resolving any

apparent conflict.” Furr v. Noland, 103 N.C. App. 279, 281, 404

S.E.2d 885, 886 (1991). Here, the word “action” in section 55A-

7-40(f) is part of the phrase “[i]n any such action,” with the

word “such” referring to the “action[s]” described by subsection

(a) of the statute – those which are brought “in the right of any

domestic or foreign corporation by any member or director.” See

N.C. Gen. Stat. § 55A-7-40(a), (f). In other words, it is clear

that the phrase “[i]n any such action” in section 55A-7-40(f)
 -10-
refers specifically to derivative actions set out by section 55A-

7-40, not generic “actions” as the word is used in general portions

of the North Carolina Rules of Civil Procedure. C&G could have

attempted to recover attorneys’ fees on the general “action” as a

whole, but would have had to rely on a different statute to do so.

See United Artists Records, Inc., 18 N.C. App. at 187, 196 S.E.2d

at 602 (noting that attorneys’ fees may not be awarded absent

specific statutory authority); see also N.C. Gen. Stat. § 6-21.5

(2013) (authorizing an attorneys’ fee award “[i]n any civil action

. . . if the court finds that there was a complete absence of a

justiciable issue of either law or fact raised by the losing party

in any pleading”).

Therefore, in determining whether attorneys’ fees were

properly awarded under section 55A-7-40(f) here, it is irrelevant

that plaintiffs obtained default judgment against Ryan Jackson on

their individual claims. Ryan Jackson was not party to the

derivative action. The only aspect of the lawsuit that triggered

section 55A-7-40(f) was the derivative action brought by

plaintiffs on behalf of the Condo Association against C&G for

negligence. Thus, we must determine whether this derivative

action, not the unrelated individual claims joined in the same

lawsuit, was brought without reasonable cause in assessing whether
 -11-
attorneys’ fees awarded under section 55A-7-40(f) were

appropriate.

At the hearing on attorneys’ fees, plaintiffs urged the trial

court to apply an interpretation of the phrase “brought without

reasonable cause” in section 55A-7-40(f) used in an analogous

context by this Court in Lowder on Behalf of Doby v. Doby, 79 N.C.

App. 501, 511, 340 S.E.2d 487, 493 (1986). In Lowder, the Court

construed N.C. Gen. Stat. § 55-55(e), the attorneys’ fees provision

for derivative suits on behalf of business corporations, which

contained identical language to that found in section 55A-7-40(f).1

See id. at 507, 511, 340 S.E.2d at 491, 493. Because no cases

defined or explained the “brought without reasonable cause”

provision in section 55-55(e), the Court drew analogy to the “lack

of probable cause” standard in malicious prosecution cases, where

plaintiffs “need only have a ‘reasonable belief’ that there [was]

a ‘sound chance’ that their claims may be sustained,” not “absolute

certainty of the legal validity of their claims.” Id. at 511, 340

1 Section 55-55(e) provided that “In any such action the court,
upon final judgment and a finding that the action was brought
without reasonable cause, may require the plaintiff or plaintiffs
to pay to the defendant or defendants the reasonable expenses,
including attorneys’ fees, incurred by them in the defense of the
action.” Lowder, 79 N.C. App. at 507, 340 S.E.2d at 491. The
statute has since been replaced by N.C. Gen. Stat. § 55-7-46 (2013)
and is substantially rewritten.
 -12-
S.E.2d at 493. On appeal, both plaintiffs and C&G argue that this

standard should be used to interpret the phrase “brought without

reasonable cause” under section 55A-7-40(f). We agree. Because

the Lowder Court construed an identical attorneys’ fees provision

in the analogous context of business corporation derivative

actions, we find its reasoning persuasive. Thus, an action is

brought “without reasonable cause” under section 55A-7-40(f) if

there is no “reasonable belief” in a “sound chance” that the claim

could be sustained.

The trial court here “independently reviewed the proceedings

in order to determine whether there was evidence put forward to

support plaintiffs’ claims” and correctly declined to consider

this Court’s opinion in McMillan I affirming the entry of summary

judgment in C&G’s favor as dispositive on the issue of whether the

derivative action was brought without reasonable cause. However,

the trial court and the McMillan I Court both reached the same

conclusion — that “[p]laintiffs did not have evidence to support

the allegations made in the [c]omplaint.” Thus, pursuant to

Lowder, the trial court concluded that the action was brought

without reasonable cause because “the record is devoid of evidence

that supports any reasonable belief that there was a sound chance

that the plaintiffs’ claims in this litigation might be sustained.”
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After our own independent inquiry, we affirm the trial court’s

conclusion that plaintiffs did not have a “reasonable belief” that

there was a “sound chance” that the derivative action alleging

negligence could be sustained.2 “The elements of negligence are

duty owed by defendants to plaintiffs and nonperformance of that

duty proximately causing plaintiffs’ injury.” Royal v. Armstrong,

136 N.C. App. 465, 469, 524 S.E.2d 600, 602 (2000). Plaintiffs

alleged in their complaint that the Condo Association incurred

prospective liability and compensatory damages for the costs of

repairs to the common areas as a result of C&G’s negligent failure

to provide proper and adequate waterproofing, dampproofing, and/or

drainage for the exterior and common areas of the property.

Plaintiffs argue that they had reasonable cause to bring the

derivative action because: (1) the permits issued by the city

listed C&G as the contractor on the renovations that it undertook

and no other contractors were listed; (2) C&G was a general

contractor under N.C. Gen. Stat. § 87-1 (2013) because the amount

2 The trial court seemed to inquire in part as to plaintiffs’
individual claim of negligence against C&G in addition to the
derivative action. Specifically, it mentioned the lack of evidence
related to the causation of leaks into plaintiffs’ condominiums,
which would be irrelevant to the derivative action premised on
damage to exterior “common areas.” As is discussed above, the
applicable attorneys’ fees statute utilized here, section 55A-7-
40(f), applies only to derivative actions.
 -14-
of work it undertook totaled more than $30,000.00; (3) general

contractors owe a duty of reasonable care to anyone who may

foreseeably be endangered by their negligence, Lord v. Customized

Consulting Specialty, Inc., 182 N.C. App. 635, 643, 643 S.E.2d 28,

32-33 (2007); and (4) prior to the filing of the complaint, a

consultant proposed a plan to fix the water leakage, thus

indicating the areas that plaintiffs claim to have been the source

of the water damage.3

Even assuming that this information supports an allegation

that C&G was a general contractor which owed a duty to those who

could foreseeably be injured by the work it undertook, plaintiffs

had no evidence at any point prior to or during the litigation

tending to show that work performed by C&G or its agents was the

proximate cause of the water damage. The contract between C&G and

Ryan Jackson does not indicate that C&G performed any work on the

areas of the property which plaintiffs theorized to be the source

of the leakage. On the contrary, both Collins and Galyon averred

that C&G performed no work on the retaining wall or the parking

lot during the renovation, and that aside from the windows, doors,

and electrical boxes, neither C&G nor its subcontractors

3 The plan consisted of sealing the water penetration areas,
applying a waterproofing membrane, and connecting downspouts to
the foundation drain system and the back corner of the lot.
 -15-
penetrated the exterior of the building at all. Collins

specifically averred that Ryan Jackson only wished to contract

“some of the work” to C&G, and that C&G “did not have exclusive

control over construction of the improvements.” Faced with these

affidavits at the summary judgment phase of the litigation,

plaintiffs still could not produce any evidence tending to show

the existence of a genuine issue of material fact concerning their

claims. The McMillan I Court held that “[u]ltimately, plaintiffs

fail[ed] to cite any evidence which indicated that [C&G] performed

any work on either the retaining wall or the parking lot during

the course of the renovations,” and “[p]laintiffs failed to present

any evidence that the windows, doors and electrical boxes mentioned

in Collins’s affidavit as the only exterior work performed by [C&G]

were the cause of the leaks into plaintiffs’ condominiums.”

McMillan I at *4-*5. Given that plaintiffs could not produce any

evidence to support their allegation that C&G proximately caused

the water damage at summary judgment, it follows that they also

had no such evidence when they filed the derivative action almost

a year earlier. Without any evidence of causation, a necessary

element of the derivative action for negligence, plaintiffs could

not have had a “reasonable belief” that there was a “sound chance”

that the derivative action could be sustained.
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Accordingly, we affirm the trial court’s conclusion that the

derivative action was brought without reasonable cause under

section 55A-7-40(f).

III. Abuse of discretion

Having determined that the trial court did not err in

concluding that the derivative action was brought without

reasonable cause, we must now review the attorneys’ fees awarded

by the trial court under section 55A-7-40(f) for abuse of

discretion. “An abuse of discretion will be found only when the

trial court’s decision . . . could not have been the result of a

reasoned decision.” Manning v. Anagnost, __ N.C. App. __, __, 739

S.E.2d 859, 861 (2013) (citation and quotation marks omitted).

Here, the trial court awarded the entirety of the attorneys’ fees

incurred by C&G in defense of the lawsuit as a whole, $36,325.00,

which could have included costs incurred in defense of both the

derivative action and plaintiffs McMillan’s and Hendrix’s

individual claim of negligence. However, section 55A-7-40(f) only

authorizes an award “in the defense of the [derivative] action,”

not in the defense of an individual negligence claim. Therefore,

the trial court abused its discretion by failing to distinguish

between costs incurred by C&G in defense of plaintiffs’ individual

negligence claim and the costs incurred in defense of the
 -17-
derivative action. Accordingly, we remand for entry of factual

findings as to what portion of the attorneys’ fees are attributable

to defense against the derivative action and adjustment of the fee

award that is reflective of those findings.

Conclusion

After careful review, we affirm the trial court’s conclusion

that the derivative action was brought without reasonable cause,

and we remand for entry of attorneys’ fees based on the costs

incurred in defense of the derivative action.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

Judges BRYANT and STEELMAN concur.