Lancaster v. Harold K. Jordan & Co.

Lancaster v. Harold K. Jordan & Co., 2014 NCBC 22.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

COUNTY OF NEW HANOVER 08 CVS 883

JULIE LANCASTER and BRANNON )

LANCASTER, )

Plaintiffs )

)

v. ) OPINION AND ORDER

) ON MOTION FOR

HAROLD K. JORDAN AND CO., INC. ) SUMMARY JUDGMENT

WITHERS & RAVENEL, INC., ARTHUR R. )

COGSWELL, and LIGHTHOUSE )

ENGINEERING, PA, )

Defendants )

THIS CAUSE, designated a mandatory complex business case by Order of the

Chief Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-

45.4(b) (hereinafter, references to the North Carolina General Statutes will be to "G.S."),

and assigned to the undersigned Chief Special Superior Court Judge for Complex

Business Cases, comes before the court upon Defendant Harold K. Jordan and Co.,

Inc.'s Motion for Summary Judgment Based Upon Res Judicata and Collateral Estoppel

("Motion"), pursuant to Rule 56 of the North Carolina Rules of Civil Procedure

("Rule(s)"); and

THE COURT, after reviewing the Motion, briefs in support of and in opposition to

the Motion, arguments of counsel and other appropriate matters of record,

CONCLUDES that the Motion should be GRANTED, for the reasons stated herein.

Shipman & Wright, L.L.P., by Gary K. Shipman, Esq. and Stubbs & Perdue, P.A.,

by Matthew W. Buckmiller, Esq. for Plaintiffs Julie and Brannon Lancaster.

Hedrick, Gardner, Kincheloe & Garofalo, L.L.P. by Thomas M. Buckley, Esq. and

Bugg & Wolf, P.A., by William J. Wolf, Esq. for Defendant Harold K. Jordan and

Co., Inc.

Jolly, Judge.

PROCEDURAL HISTORY

[1] On February 26, 2008, Plaintiffs Julie Lancaster and Brannon Lancaster

filed a Complaint against Defendants Harold K. Jordan and Co., Inc. ("HKJ"), Withers &

Ravenel, Inc. ("W&R"), Arthur R. Cogswell ("Cogswell") and Lighthouse Engineering,

P.A ("Lighthouse"). Plaintiffs' action was designated as civil action Number 08 CVS 883

by the Clerk of Superior Court of New Hanover County.

[2] On December 15, 2009, Plaintiffs filed an Amended Complaint. In the

Amended Complaint, Plaintiffs allege the following claims for relief ("Claim(s)"): First

Claim for Relief (Fraud – Defendant HK Jordan); Second Claim for Relief (Unfair and

Deceptive Trade Practices – HKJ); Third Claim for Relief (Negligent Misrepresentation –

Defendants HK Jordan, Cogswell, W&R); Fourth Claim for Relief (Negligence –

Defendants HK Jordan and Cogswell); Fifth Claim for Relief (Breach of Contract –

Defendant W&R).

[3] Plaintiffs subsequently filed voluntary dismissals as to W&R, Cogswell,

and Lighthouse.1 Consequently, HKJ is the only remaining Defendant in this action.

[4] On April 25, 2013, Defendant HKJ filed the Motion, seeking Summary

Judgment as to counts I through IV, pursuant to Rule 56.

1

Notice of Voluntary Dismissal with Prejudice as to Pls.' Claims Against Def. Arthur R. Cogswell (May 26,

2011); Notice of Voluntary Dismissal with Prejudice as to Pls.' Claims Against Defendant Withers &

Ravenel, Inc. (May 1, 2012); Notice of Voluntary Dismissal, Without Prejudice as to Pls.' Claims Against

Lighthouse Engineering, P.A. (Aug. 11, 2008).

[5] The Motion has been fully briefed and argued and is ripe for

determination.

FACTUAL BACKGROUND

Among other things, the Amended Complaint alleges:

[6] Defendant HKJ is a North Carolina corporation with a place of business in

New Hanover County, North Carolina.2

[7] In 1997, Plaintiffs purchased land located in the Town of Leland in

Brunswick County, North Carolina ("Subject Property"). The purchase was financed in

part by Plaintiffs' execution of a promissory note and deed of trust to secure a loan from

Coastal Federal Bank, with the balance coming from Plaintiffs' personal funds.3

[8] In 2003, Plaintiffs formed Village Landing, LLC ("Village Landing"), a North

Carolina Limited Liability Company. Plaintiffs at all times were Village Landing's sole

member-managers.4 Plaintiffs then transferred the Subject Property to Village Landing

by quitclaim deed. Plaintiffs remained personally responsible for the promissory note

and debt and deed of trust to Coastal Federal Bank.5 At all times relevant to this action,

Village Landing was only able to borrow money with the personal guarantee of

Plaintiffs.6

[9] In 2005, Plaintiffs met with HKJ regarding the possibility of constructing

apartments on the Subject Property. HKJ referred Plaintiffs to Cogswell, an architect in

Chapel Hill, North Carolina.7 Plaintiffs then decided that they wanted to construct and

2

Am. Compl. ¶ 2.

3

Id. ¶ 6.

4

Ex. AAA026 to Wiggins Aff. ("Arbitration Transcript") at 581; see also Compl. ¶ 10, Am. Compl. ¶¶ 7-8.

5

Am. Compl. ¶ 7.

6

Id. ¶ 8.

7

Id. ¶¶ 12-13.

sell townhomes as opposed to managing apartments.8 Under the Town of Leland's

Residential Building Code ("Code"), the requirements for townhouse construction

differed from those applicable to apartment or condominium construction.9 Unlike

townhouses, condominiums are not constructed under the Code.10 HKJ understood

that it was tasked with building townhouses under the Code.11

[10] Plaintiffs sought and obtained additional financing from Cooperative Bank

in Wilmington, North Carolina. Plaintiffs and Lumina Mortgage Company, an affiliate of

Cooperative Bank, both felt that a townhouse project was a better option than the

alternatives, and both parties operated under the assumption that townhomes would be

built.12

[11] In 2005, Plaintiffs acquired additional property adjoining the Subject

Property, which was necessary for the development of the Subject Property as a

townhouse community.13

[12] In February 2006, HKJ prepared and submitted to Plaintiffs a "proposal for

the construction of 60 condos." When Plaintiffs inquired as to the use of the term

"condos" rather than "townhouses," they were informed by HKJ that the difference was

immaterial.14

[13] Plaintiffs and HKJ then formed Shady Grove Development, Inc. ("Shady

Grove") with the goal of proceeding with the project as a joint venture, on the condition

8

Id. ¶ 16.

9

Id. ¶ 18.

10

Id. ¶ 51, 53.

11

Id. ¶ 58.

12

Id. ¶ 20.

13

Id. ¶ 28.

14

Id. ¶ 41.

that Harold K. Jordan, President of HKJ ("Jordan"),15 would not be personally liable for

any debts incurred. When Plaintiffs and HKJ were made aware of Cooperative Bank's

requirement that all shareholders of the developing entity submit personal financial

information and personally guarantee any loan, Plaintiffs and Jordan abandoned the

joint venture. 16

[14] Shady Grove and HKJ were the only signatories to the original

development contract. No written contract ever existed between Village Landing and

HKJ, despite Plaintiffs' request that a new contract be prepared.17

[15] In reliance on HKJ's representations that townhouses would be

constructed, Plaintiffs accepted Cooperative Bank's commitment letters to fund the

project, thereby personally guaranteeing the payment of Village Landing's debt for the

construction and development of the project.18

[16] When HKJ provided project plans to the Town of Leland in June and July

2006, HKJ was informed that the plans prepared by Cogswell did not qualify for

townhouse construction under the Residential Building Code and that the project had

not been approved by the Town.19 HKJ failed to notify Plaintiffs about this issue and

began construction regardless.20

[17] In August 2006, prior to beginning vertical construction, HKJ submitted

change orders to Julie Lancaster and Cooperative Bank providing for additional

expenses "because units are built as townhomes and they were priced as condos."21

15

Arb. Tr. at 121.

16

Am. Compl. ¶¶ 33-35, 46-47.

17

Id. ¶¶ 42, 48.

18

Id. ¶ 67-68.

19

Id. ¶¶ 79-81.

20

Id. ¶¶ 82, 84.

21

Id. ¶¶ 86-87.

[18] While construction was ongoing, the Town of Leland Building Inspector

"repeatedly informed" HKJ that HKJ was not building townhouses under the Residential

Building Code. HKJ did not notify Plaintiffs of the Building Inspector's statements.22

[19] Despite HKJ's knowledge that the units were sold by realtors marketing

the projects as townhomes and HKJ's assurances that the units would be ready for

occupancy by November 2006, HKJ did not inform Plaintiffs until December 2006 that

the Town of Leland would not issue certificates of occupancy for the units as

townhomes.23 Because HKJ constructed condominiums rather than townhouses,

prospective purchasers were unable to obtain financing.24

[20] If the units had been constructed as townhomes, the units would have

been sold, and additional loans would have been repaid. The sale would also have

generated a profit, enabling Plaintiffs to begin the next phase of the project. Instead,

Plaintiff Julie Lancaster was forced to cash out her Investment Retirement Account in

order to fund required interest payments to Cooperative Bank.25

Prior Arbitration Action26

[21] In July 2007, HKJ filed an action in Wake County Superior Court against

Shady Grove and Village Landing, alleging breach of the construction contract.27 Shady

Grove and Village Landing filed an Answer and Counterclaim, which sought to submit

22

Id. ¶¶ 93-94.

23

Id. ¶¶ 95-97.

24

Id. ¶ 99.

25

Id. ¶¶ 103-110.

26

It is not proper for a trial court to make findings of fact in determining a Rule 56 motion. However, it is

appropriate for a Rule 56 order to reflect material facts that the court concludes exist and are not

disputed, and which support the legal conclusion with regard to summary judgment. Hyde Ins. Agency v.

Dixie Leasing Corp., 26 N.C. App. 138, 142 (1975). As reflected in this Opinion and Order, the court here

concludes that undisputed facts of record relative to the defenses of res judicata and collateral estoppel

require that the Motion be granted.

27

Ex. W001 to Wiggins Aff.

HKJ's claims against Shady Grove alone to arbitration based on an arbitration clause in

the written contract between Shady Grove and HKJ.28

[22] HKJ later successfully moved to compel arbitration as to all pending

claims between HKJ and Village Landing as well, based on a ruling by the Honorable

Donald W. Stephens, Wake County Senior Resident Superior Court Judge, that the

contract at issue was effectively assigned from Shady Grove to Village Landing.29 In his

November 19, 2007 Order Compelling Arbitration, Judge Stephens ordered HKJ, Shady

Grove and Village Landing to "arbitrate all their pending claims in this action," including

"all counterclaims of Village Landing"30 in the already pending arbitration31 between HKJ

and Shady Grove.

[23] Village Landing's arbitration counterclaims were substantially similar if not

substantively identical to the Claims asserted in Plaintiffs' Amended Complaint in the

instant action.32 Village Landing alleged that HKJ "failed to construct townhouse units

on the subject property"33 and that HKJ caused Village Landing "great financial harm

and damage" as a result.34

[24] The resulting arbitration hearing (“Arbitration”) took place in March 2008.35

Plaintiffs were not named parties to the Arbitration Action in their individual capacities,

as they are in this matter, but were present and testified at the Arbitration.36 Plaintiffs,

though Village Landing, also called an additional 16 witnesses to testify at the

28

Ex. W002 to Wiggins Aff.; Pls.' Mem. Opp. Def. HKJ's Mot. Summ. J. ("Plaintiffs' Brief") at 2.

29

Ex. A ("Order Compelling Arbitration") to Def. HKJ's Br. Supp. Mot. Summ. J. ("Defendants' Brief").

30

Order Compelling Arb. at 3 (emphasis original).

31

American Arbitration Association Case # 31 110 Y 00204 07 ("Arbitration Action").

32

See Ex. D to Def.'s Br. ¶¶ 3-28 ("Arbitration Counterclaims").

33

Id. ¶ 28.

34

Id. ¶ 25.

35

Pls.' Br. at 3; see Arb. Tr.

36

Arb. Tr. at 3, 582, 636, 726, 754.

Arbitration.37 The arbitrator rendered his judgment in April 2008, specifically finding, in

relevant part:

Regarding the Townhome issue, there is a dispute in the

testimony about whether these buildings actually do qualify as

Townhomes under the Residential Building Code, but there is

no evidence that [HKJ] deviated in any way from the drawings

provided by [Village Landing's] architect. The only question is

whether there is a conflict between the drawings and the

Residential Building Code. As indicated above, there is a

conflict in the testimony about that. But there is no evidence

that Jordan was ever aware of this issue. This is especially

true in light of the fact that the architect himself testified that

there was no such conflict.

The testimony of [Town of Leland Building Inspector] Timothy

Evans does not establish, by the greater weight of the

evidence, that [HKJ] was, or should have been, aware of any

inconsistency between the drawings and the residential code.

In fact there is no evidence at all that [HKJ] was ever aware

that Mr. Evan's [sic] remarks had any significance.

There are many other reasons why [Village Landing's]

counterclaims should fail . . .

This Award is in full settlement of all claims and counterclaims

submitted to this Arbitration."38

[25] A Judgment confirming the Arbitration Award was entered in June 2008 by

the Honorable Michael R. Morgan, Wake County Resident Superior Court Judge.39

Village Landing's subsequent appeal of Judge Morgan's Judgment and Judge

Stephens's Order Compelling Arbitration was, according to Plaintiffs, "dismissed by the

Court of Appeals for unknown reasons."40 A Petition to the Supreme Court of North

37

Id. at 3, 636.

38

Ex. F to Def.'s Br. ("Arbitration Award").

39

Ex. G to Def.'s Br.

40

Pls.' Br. at 4. Notwithstanding Plaintiffs’ counsel’s assertion that Plaintiffs were unaware of the reason

for the appeal's dismissal, the record reflects that the appeal was dismissed by the Court of Appeals

because Village Landing failed to serve the record in a timely manner. See Ex. NCA002 to Wiggins Aff.,

Ex. NCA003 to Wiggins Aff., Ex. NCA004 to Wiggins Aff.

Carolina for Writ of Certiorari was denied,41 bringing an end to the litigation between

HKJ and Village Landing. Plaintiffs, in the meantime, had filed the Complaint in this

action in their individual capacities less than 20 days prior to the March 2008

Arbitration.42

DISCUSSION

[26] The Motion seeks summary judgment in favor of HKJ under Rule 56.

"Summary judgment is appropriate 'if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that any party is entitled to a

judgment as a matter of law.'" Variety Wholesalers, Inc. v. Salem Logistics Traffic

Servs., LLC, 365 N.C. 520, 523 (2012) (quoting Rule 56(c)). An issue is "material" if its

"resolution . . . is so essential that the party against whom it is resolved may not

prevail." McNair v. Boyette, 282 N.C. 230, 235 (1972) (quotations omitted).

[27] Summary judgment is generally appropriate in cases involving either "a

claim or defense [that] is utterly baseless in fact" or "a question of law on the

indisputable facts" that "can be appropriately decided without full exposure of trial."

Kessing v. Nat'l Mortg. Corp., 278 N.C. 523, 533 (1971). In considering a Rule 56

motion, this court must view the evidence "in the light most favorable to the nonmoving

party." Trivette v. Yount, 366 N.C. 303, 312 (2012) (citing Howerton v. Arai Helmet, Ltd.,

358 N.C. 440, 470 (2004)). The moving party bears "the burden of clearly establishing

lack of a triable issue" to the trial court. N.C. Farm Bureau Mut. Ins. Co. v. Sadler, 365

N.C. 178, 182 (2011) (quoting N.C. Nat'l Bank v. Gillespie, 291 N.C. 303, 310 (1976)).

41

Ex. NCA010 to Wiggins Aff.

42

Pls.' Br. at 12; see also Compl., Arb. Tr.

The moving party may meet this burden by "proving an essential element of the

opposing party's claim does not exist, cannot be proven at trial, or would be barred by

an affirmative defense." Variety Wholesalers, Inc., 365 N.C. at 523 (quoting Dobson v.

Harris, 352 N.C. 77, 83 (2000)). Evidence that may be considered by this court under

Rule 56 includes "admissions in the pleadings, depositions on file, answers to . . .

interrogatories, admissions on file . . . , affidavits, and any other material which would be

admissible in evidence or of which judicial notice may properly be taken." Kessing, 278

N.C. at 533.

[28] HKJ contends that in the instant action Plaintiffs are seeking to relitigate

claims previously tried and decided in the Arbitration Action but are barred from doing

so under the doctrine of res judicata, or claim preclusion. HKJ similarly contends that

the doctrine of collateral estoppel, or issue preclusion, also applies and bars relitigation

of issues decided in the Arbitration Award. This court reaches its decision on the Motion

based solely on its application of the doctrine of collateral estoppel, and it therefore

makes no ruling on whether Plaintiffs' Claims are also barred by res judicata even

though the doctrinal analyses are similar and occasionally overlap.

[29] "Collateral estoppel can be a basis for summary judgment" by foreclosing

"relitigation of issues actually determined in a previous action." Beckwith v. Llewellyn,

326 N.C. 569, 573 (1990) (citations omitted), reh'g denied, 327 N.C. 146 (1990). The

doctrine "operates as an absolute bar to further litigation of the issue previously

decided." Murakami v. Wilmington Star News, Inc., 137 N.C. App. 357, 359 (2000)

(citations omitted). North Carolina case law typically spells out the doctrine's core

requirements in the form of two slightly different four-factor tests. See, e.g., Turner v.

Hammocks Beach Corp., 363 N.C. 555, 559 (2009), Thomas M. McInnis & Assocs. v.

Hall, 318 N.C. 421, 429-30 (1986), King v. Grindstaff, 284 N.C. 348 (1973). The

substantive requirements are consistent regardless of form, and are most clearly parsed

as follows: (a) identity of parties, (b) prior final judgment on the merits, (c) identity of

issues, (d) actual litigation of issues, (e) actual determination of issues in the judgment

and (f) the determination's necessity to the judgment. See id. The court will address

each of these factors, giving special attention to elements (a), (c) and (d), which the

parties most vigorously contest.

Identity of Parties

[30] In analyzing whether collateral estoppel applies, courts traditionally begin

with an inquiry into "whether the parties in [the present] suit[] and those in the former . . .

litigation are the same, or stand in privity to the parties in the former litigation." King, 284

N.C. at 357. In 1986, the Supreme Court of North Carolina, recognizing "[t]he modern

trend in both federal and state courts," abandoned this requirement when a party seeks

to use collateral estoppel defensively. McInnis, 318 N.C. at 421. The McInnis court's

ruling contemplated a scenario involving the same plaintiff suing different defendants, or

what some courts refer to as "non-mutual defensive collateral estoppel." See, e.g.,

Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002) ("Nonmutual

defensive collateral estoppel works to prevent a plaintiff from relitigating an issue the

plaintiff has previously litigated unsuccessfully in another action against a different

defendant." (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.4 (1979)). The

court is not aware of any North Carolina precedent addressing the attempted use of

nonmutual collateral estoppel by the same defendant against nominally different

plaintiffs, as HKJ seeks in this matter. Therefore, the court will engage in the full identity

analysis as traditionally required under the doctrine.

[31] As a preliminary matter, the court notes that res judicata and collateral

estoppel are "companion doctrines," Bockweg v. Anderson, 333 N.C. 486, 491 (1993),

that traditionally have shared the identity requirement. As such, the analysis involved is

identical regardless of which of the two estoppel doctrines is being asserted. See

Carolina Power & Light Co. v. Merrimack Mut. Fire Ins. Co., 238 N.C. 679, 692 (1953)

(discussing identity of parties "in order to establish res judicata or the equitable principle

of estoppel" (emphasis added)). The parties' memoranda on the Motion implicitly

recognize this,43 and the court is aware of no precedent to the contrary. Therefore, the

court deems it appropriate to rely on case law discussing identity of parties in the

context of both res judicata and collateral estoppel analyses.

[32] The Parties vigorously contest whether this matter and the Arbitration

Action present an identity of parties plaintiff. It is clear that Plaintiffs were not nominal

parties to the Arbitration Action. However, HKJ contends that Plaintiffs were either (a)

substantively parties to the Arbitration Action in function, even if not in form; or (b) were

in privity with Village Landing, thereby satisfying an exception to the identity element.44

[33] In support of its argument that Plaintiffs in substance were parties to the

Arbitration Action, HKJ asserts that Village Landing did not observe corporate

formalities and was Plaintiffs' mere alter ego.45 HKJ relies, among other things, upon

43

See Pls.' Br. at 21, Def.'s Br. at 30-31.

44

See Def.'s Br. at 20-24.

45

Def.'s Br. at 25.

Julie Lancaster's admission at the Arbitration that Plaintiffs and Village Landing were

"one and the same."46

[34] In support of its argument that Plaintiffs and Village Landing were in privity

for purposes of the Arbitration Action, the Motion naturally poses the question of

whether a closely held corporation and its shareholders are privies under these

circumstances. Plaintiffs correctly cite to Troy Lumber v. Hunt, 251 N.C. 624, 627

(1960), for the proposition that privity with a corporation is not established solely by

one's position as a corporate officer or shareholder. Rather, as our Supreme Court has

noted, privity generally involves "a person so identified in interest with another that he

represents the same legal right," though a universal definition of the word has "proven

to be elusive." Whitacre P'ship v. Biosignia, Inc., 358 N.C. 1, 36 (2004) (quotations and

citations omitted).

The Lassiter Exception

[35] Taken as a whole, the North Carolina case law is inconclusive as to

whether the facts in this matter unequivocally support a conclusion that Plaintiffs in

substance were parties to the Arbitration Action or were in privity with Village Landing.

As such, this court declines to reach a conclusion on either proposition. Instead, the

court relies on the related "Lassiter exception" because it most clearly resolves this

issue. See Thompson v. Lassiter, 246 N.C. 34 (1957).

[36] In Lassiter, the Supreme Court recognized a "well established exception"

to the "general rule" that an identity of parties is necessary to sustain a res judicata

defense:

46

Def.'s Br. at 22 (quoting Arb. Tr. at 627).

A person who is not a party but who controls an action, individually or in

cooperation with others, is bound by the adjudications of litigated matters

as if he were a party if he has a proprietary interest or financial interest in

the judgment or in the determination of a question of fact or a question of

law with reference to the same subject matter, or transactions; if the other

party has notice of his participation, the other party is equally bound.

Id. at 39 (quoting Light Co. v. Insurance Co., 238 N.C. 679, 692 (1953)) (emphasis

omitted). In substance, the Lassiter exception requires that four parameters be met: (a)

control of both the original and present lawsuit, (b) a proprietary interest or financial

interest in the prior judgment, (c) an interest in the determination of a question of fact or

a question of law regarding the same subject matter or transactions and (d) notice of

participation. In the context of the instant action, the Court of Appeals’ discussion of the

Lassiter analysis in Williams v. Peabody, 217 N.C. App. 1 (2011), is material.

Plaintiffs' Control of the Original Lawsuit

[37] Control is the "threshold requirement of the exception to the rule requiring

privity of identities." Peabody, 217 N.C. App. at 10 (citing Lassiter, 246 N.C. at 39).

While there is no bright line test or clear definition as to what constitutes a party's

"control" of a prior proceeding, the Peabody court's discussion of several reported cases

involving the control element is instructive. For example, Smoky Mountain Enters., Inc.

v. Rose, 283 N.C. 373 (1973), involved a breach of contract suit instituted by a

corporate plaintiff after summary judgment was rendered individually against the

president of the corporate plaintiff in a prior action. In holding that the corporate plaintiff

was bound by the judgment in the prior suit under res judicata, the Supreme Court

emphasized that "[the individual plaintiff] is the president and owns all the stock of [the

corporate plaintiff]," and that the individual plaintiff was "personally in control" of both the

prior action in his individual capacity and the subsequent corporate action. Id. at 377-78.

[38] On the other hand, in Troy Lumber, 251 N.C. 624, the court declined to

find that a controlling stockholder (who was also the president and chairman of the

subject corporation's board of directors) and a corporation were in privity. This holding

was based on the court's finding that "[the corporation] has other shareholders than [the

individual]," the lack of any "allegation . . . that these other shareholders had anything to

do with [the individual's] [prior] action for damages for personal injuries," and the

individual plaintiff's mere "contingent derivative right of succession of property interest"

from the corporation with regard to the corporate action. Id. at 627-28.

[39] The contrasting outcomes in Smoky Mountain Enterprises and Troy

Lumber nonetheless are consistent. As the Peabody court observed, a "logical

extension" from Smoky Mountain Enterprises and Troy Lumber taken together is the

importance of shareholder makeup in assessing the Lassiter control element. See

Peabody, 217 N.C. App. at 12-13. The court found in Peabody that "suspension" of the

privity requirement was not warranted because the evidence of record in that matter

"show[ed] at most, that [the individual] was [the corporation's] chief operating officer,"

and it thus distinguished Peabody from Smoky Mountain Enterprises. Id. In reaching

that conclusion, the Peabody court emphasized the lack of any evidence showing that

the individual was a "sole or controlling shareholder" or was otherwise "in control of [the

corporation], and thereby, in control of [corporation's] [prior] action against Defendants."

Id. at 12. Thus, the controlling jurisprudence on this issue stands strongly and directly

for the proposition that the control element of the Lassiter exception is met when a

corporation is dominated by a single party or entity or is otherwise the alter ego of that

party or entity.

[40] The evidence of record in this matter establishes that Plaintiffs, husband

and wife, were the sole member-managers of Village Landing, a party to the Arbitration

Action. Plaintiffs' brazen claim that they "had no control over the arbitration

proceeding"47 is remarkable in light of the fact that they called a total of 18 witnesses,

including themselves, to testify at the Arbitration.48 Given Plaintiffs' sole ownership and

management of Village Landing, it is difficult to envision how anyone other than

Plaintiffs could possibly have "controlled" Village Landing at the Arbitration. Plaintiff

Julie Lancaster herself testified at the Arbitration that Village Landing and the

Lancasters were "one and the same."49 Under the Supreme Court of North Carolina's

analysis in Smoky Mountain Enterprises, the control element of the Lassiter exception is

plainly shown by the evidence of record in this matter.

Plaintiffs' Proprietary Interest in the Prior Judgment

[41] Similarly, as the sole member-managers of Village Landing, Plaintiffs had

a clear proprietary interest in the Arbitration Action. Village Landing was a respondent

and counterclaimant in the Arbitration Action. HKJ sought substantial damages from

Village Landing, and eventually recovered over $800,000.50 Village Landing's

counterclaims sought damages in excess of $1 million; it was ultimately awarded less

than $12,000.51 Village Landing was essentially a pass through entity, and Plaintiffs

47

Pls.' Br. at 19.

48

Arb. Tr. at 3, 636.

49

Arb. Tr. at 627.

50

Def.'s Br. at 7.

51

Ex. E to Def.'s Br.; Arb. Award.

were financially intertwined with Village Landing.52 Consequently, Plaintiffs had an

obvious, clear and direct financial interest in any judgment affecting Village Landing.

Plaintiffs' Interest in the Determination of Questions of Fact or Law

[42] Moreover, Plaintiffs had a clear interest in the "determination of a question

of fact or a question of law with reference to the same subject matter[] or transactions."

Lassiter, 246 N.C. at 39. At the very core of Plaintiffs' Claims against HKJ in this matter

is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing

"condominiums, rather than townhouses."53 This was the precise issue that Village

Landing litigated extensively against HKJ in the Arbitration Action, an alleged

misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions

of dollars in losses.54 Not only did Plaintiffs have an "interest" in the Arbitrator's

determination on this issue, it was central to their LLC's entire case against HKJ in the

Arbitration Action – as it is in their individual action here. As such, this element of the

Lassiter exception is plainly met.

Notice

[43] Lassiter requires that "the other party" have "notice of [the person's]

participation" in order to be "equally bound." Lassiter, 246 N.C. at 39. This language is

slightly ambiguous on its face, but is easier to discern when taking into account that

52

See Arb. Tr. at 577 (Plaintiffs treated money put into Village Landing as loans from them to Village

Landing. Village Landing was treated as a disregarded entity for tax purposes and was listed on Plaintiffs'

tax returns).

53

Pls.' Br. at 9.

54

Arb. Tr. at 60 (Opening Statement of Gary K. Shipman, Esq.) ("As we sit here today, the evidence will

show that the owners' losses exceed 2 million dollars all because Jordan did not do what he was

obligated to do, build townhouses under the Residential Building Code; all because Jordan failed to

disclose information that they had an affirmative obligation to disclose; all because Jordan made an

affirmative misrepresentation that they were constructing townhomes when they knew that they were

constructing condos.").

cases such as Lassiter and Smoky Mountain Enterprises featured a chronological

posture opposite to that involved here. Specifically, both cases dealt with corporate suits

instituted after individual suits, rather than the opposite.

[44] In Smoky Mountain Enterprises, the court dispatched with this element by

noting that the individual involved was the corporation's president, obviously had

knowledge of his own lawsuit, and that "notice to the president is notice to the

corporation." 283 N.C. at 377. The Peabody court, in conducting the Lassiter analysis

under facts similar to this case chronologically, made no mention of the notice

requirement, suggesting that it may not be required under these facts. See Peabody,

217 N.C. App. at 9-11 (assessing the application of the Lassiter exception to Peabody

by virtue of her ownership of Peabody's Home Improvements, Inc., a party to a prior

lawsuit). Regardless, in this case, Plaintiffs' knowledge of the prior litigation is obvious,

and thus the notice element is either met or not applicable and does not merit further

consideration.

The "Separate and Distinct" Nature of Plaintiffs' Claims

[45] Plaintiffs' argument with regard to the identity requirement appears to rest

in part on the misguided notion that this element cannot be met because their Claims in

this case are "separate and distinct" from Village Landing's Arbitration Counterclaims.55

Even assuming arguendo that Plaintiffs' Claims are in fact separate and distinct from

their LLC's Arbitration Counterclaims, that fact would be largely irrelevant to the identity

analysis (and indeed largely irrelevant to the doctrine of collateral estoppel), which

55

See, e.g, Pls.' Br. at 17 ("No North Carolina court has ever found in situations similar to this one that the

Lancasters are in privity with Village Landing for claims based on the Lancasters' "separate and distinct"

injury.").

merely requires an examination of whether there is an identity of parties, privity between

parties, or an applicable exception. Plaintiffs cite to Cline v. McMullen, 148 N.C. App

147 (2001), for the proposition that control of prior litigation "[does] not establish privity

in and of itself."56 This is uncontested – as outlined above, Plaintiffs satisfy the identity

requirement because they controlled the prior action and had a proprietary interest in

that action as well as an interest in the determination of issues at stake in that action.

[46] Plaintiffs incorrectly characterize the Lassiter rule as mere "dicta from

Cline" and attempt to distinguish Lassiter and Cline on the grounds that the former

involved a father-son relationship and the latter a principal-agent relationship.57 This

argument must fail in light of the Troy Lumber court's approval of the Lassiter decision

based on the fact that, in Lassiter, "the father as guardian ad litem had control over the

defense . . ., could cross-examine opposing witnesses, and offer witnesses of his own,"

251 N.C. at 628, as well as the Peabody court's application of the rule. Therefore, the

operative factor in Lassiter was not the father-son relationship itself, but rather the

father's control over the litigation as a result of that relationship.

[47] It is clear that Plaintiffs controlled the Arbitration in behalf of Village

Landing and that they had both a proprietary interest in the Arbitration Action as well as

an interest in the determination of relevant facts and law in that action. Therefore, under

the Lassiter rule, an identity of parties existed between Plaintiffs and Village Landing for

purposes of collateral estoppel. Accordingly, the court's analysis proceeds to the

doctrine's next requirement.

56

Id.

57

Id. at 17-18.

Prior Final Judgment on the Merits

[48] Proper application of collateral estoppel requires that "the earlier action

resulted in a final judgment on the merits." Bee Tree Missionary Baptist Church v.

McNeil, 153 N.C. App. 797, 799 (2002). Plaintiffs concede that "the Arbitration Award

was a Final Judgment on the Merits as to claims by/against Defendant HKJ, Village

Landing, and Shady Grove."58 The Arbitration Award was confirmed in its entirety in

Wake County Superior Court by Judge Morgan.59 It is clear that a confirmed Arbitration

Award constitutes a final judgment on the merits for purposes of collateral estoppel.

See, e.g., Murakami, 137 N.C. App. 357, disc. review denied, 352 N.C. 148. Therefore,

this element of the collateral estoppel analysis is met, and the court proceeds to the

doctrine's next requirement.

Identity of Issue(s)

[49] The core feature that differentiates collateral estoppel from res judicata is

its application to issues rather than claims. That is, collateral estoppel functions to bar

relitigation of an identical issue previously litigated that meets the doctrine's other

requirements, rather than a previously litigated claim. See, e.g., McInnis, 318 N.C. at

429. In King, our Supreme Court noted that "[p]arties and parties in privity with them --

even in unrelated causes of action -- are precluded from retrying fully litigated issues

that were decided in any prior determination and were necessary to the prior

determination." 284 N.C. at 356 (emphasis added).

[50] As briefly noted above, at the very heart of Plaintiffs' Claims against HKJ

in this matter is the allegation that HKJ negligently or purposely misled Plaintiffs in

58

Id. at 12.

59

Ex. W018 to Wiggins Aff.

constructing "condominiums, rather than townhouses."60 This exact issue was

extensively litigated during the Arbitration.61 Here, as in their arguments concerning

identity of parties, Plaintiffs rely repeatedly on the allegedly "separate and distinct"

nature of their Claims in this case. Neither the word "issue" nor any remote synonym is

to be found anywhere in the portion of Plaintiffs’ Brief in Opposition discussing the

identity of issues element of collateral estoppel.62 Yet our courts have repeatedly held

that "collateral estoppel precludes the subsequent adjudication of a previously

determined issue, even if the subsequent action is based on an entirely different claim."

Whitacre, 358 N.C. at 15 (citing Hales v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994))

(emphasis added).

[51] Plaintiffs allege that "HKJ made false representations of material fact,

namely that it was building town homes"63. Plaintiffs then argue that HKJ owed Plaintiffs

a duty separate from the duty it owed Village Landing, citing Allen v. Ferrera, 141 N.C.

App. 284 (2000), for the proposition that a "special duty" is created when a defendant

induces a plaintiff to personally guarantee a corporate debt due to misrepresentation.64

This argument is ostensibly an attempt by Plaintiffs to allege the existence of an issue

isolated from the already determined issue of whether HKJ made misrepresentations to

Village Landing. In substance, Plaintiffs appear to argue that while the propriety of

HKJ's conduct as to Village Landing was determined in the Arbitration Action, the

propriety of HKJ's conduct as to Plaintiffs individually is an issue unique to this action.

60

Pls.' Br. at 9.

61

See, e.g., Arb. Tr. at 836-856 (Closing Statement of Gary K. Shipman), Arb. Award.

62

See Pls.' Br. at 21. In fact, Plaintiffs' arguments on the matter are preceded by a subheading titled: "The

Lancasters' claims are not identical to those in the Arbitration and were not necessarily determined in the

Arbitration." Id. (emphasis added).

63

Id.

64

Id.

[52] Plaintiffs' argument is fatally flawed because it is logically impossible to

envision a scenario where HKJ could make misrepresentations to Plaintiffs but not their

wholly owned and controlled LLC, or vice-versa. Even assuming that Village Landing

was not Plaintiffs' mere alter ego, the fact that HKJ's representations caused Plaintiffs to

take actions in their individual capacity is irrelevant. Even if HKJ owed Plaintiffs a

separate duty imposed by operation of law, the presence of that duty is not relevant

unless some scenario exists whereby HKJ could have simultaneously violated that duty

but not its contractual duties to Village Landing. Yet the basis for HKJ's alleged violation

of that separate, special duty remains the allegation that "HKJ made false

representations of material fact, namely that it was building town homes."65

[53] Plaintiffs were Village Landing's sole member-managers and HKJ could

not possibly have engaged in disparate or distinct conduct with respect to Plaintiffs and

Village Landing. Therefore, because the Arbitration Award determined the propriety of

HKJ's conduct with respect to Village Landing, it also did so as to Plaintiffs.

[54] The court concludes that the same issue that was litigated in the

Arbitration Action underlies Plaintiff's Claims here. Therefore, an identity of issues

exists, and the court proceeds to the collateral estoppel doctrine's next requirement.

Actual Litigation of Issue(s)

[55] The collateral estoppel doctrine requires that the issue in question must

have been "actually litigated" in the prior proceeding. McInnis, 318 N.C. at 429. Village

Landing's Arbitration Counterclaims and the Arbitration Transcript together make it

abundantly clear that HKJ's alleged misrepresentation was raised and litigated

65

Pls.' Br. at 21.

extensively in the Arbitration Action.66 The controlling case law is clear that litigation of

issues in an arbitration action satisfies the "actual litigation" prong of the collateral

estoppel doctrine. See Murakami, 137 N.C. App. at 360; see also Rodgers Builders, Inc.

v. McQueen, 76 N.C. App. 16, 29 (1985) ("Although James McQueen was not named

as a party to the arbitration, it is clear that . . . he was an active and controlling

participant in the arbitration. He thus is bound by the judgment entered on the arbitration

award just as if he were a named party to the proceeding."). Therefore, the court

proceeds to the next element.

Actual Determination of Issue(s)

[56] Collateral estoppel requires that the issue in question "must have been

determined by adjudication in the prior action." King, 284 N.C. at 359 (quoting 1B

Moore's Federal Practice § 0.443[4] (2d Ed. 1965)). In analyzing whether an issue was

actually determined, courts may look to the judgment as well as pleadings and evidence

from the prior action. Id. Here, as in Murakami, 137 N.C. App. 357, the Arbitration

Award on its own is enough to support a finding that the issue in question was actually

determined by the arbitrator. The Arbitration Award plainly spells out the arbitrator's

findings, in which he specifically absolved HKJ of any responsibility on the issues

underlying Plaintiffs' Claims here. Therefore, the court finds that this element is met and

proceeds to the final element of the collateral estoppel analysis.

Necessity and Materiality to the Judgment

[57] Proper application of collateral estoppel requires that the determination

made in the prior judgment "must have been necessary and essential to the resulting

66

See Ex. D. to Def.'s Br., Arb. Tr.

judgment." King, 284 N.C. at 358 (citing 1B Moore's Federal Practice § 0.443[4] (2d Ed.

1965)). The Court of Appeals' decision in Murakami provides a useful example of this

requirement's application to an arbitration award. There, the court found that the

determination was necessary because the "purpose of the proceeding" was to

determine damages. Murakami, 137 N.C. App. at 361. As discussed earlier, Village

Landing's Arbitration Counterclaims rested almost entirely on the underlying allegation

that HKJ either negligently or purposely misled Plaintiffs and their LLC. Determining

whether HKJ was guilty of such misrepresentations was absolutely essential to the

Arbitration Action's "purpose" and the rendering of the Arbitration Award. Therefore, the

final requirement of collateral estoppel is met.

CONCLUSION

[58] The undisputed evidence of record establishes that (a) Plaintiffs are the

same party as Village Landing for purposes of collateral estoppel, (b) Plaintiffs raised

and litigated the same issue that underlies this case during the Arbitration and (c) the

Arbitrator issued a final judgment that actually determined the propriety of HKJ's

conduct – a determination that was essential to the Arbitration Award. Therefore,

Plaintiffs are collaterally estopped from relitigating the issue of whether HKJ made

negligent or intentional misrepresentations during the construction process.

Consequently, the court must consider whether the Arbitration Award's findings on that

specific issue mandate summary judgment in favor of HKJ in this matter.

[59] A Rule 56 motion presents the question of whether there is "lack of a

triable issue," N.C. Farm Bureau Mut. Ins. Co., 365 N.C. at 182 (internal quotations and

citations omitted). This occurs when "an essential element of [a] party's claim does not

exist [or] cannot be proven at trial." Variety Wholesalers, Inc., 365 N.C. at 520. As noted

above, the allegation that HKJ made material misrepresentations during the

construction process is a foundational element of Plaintiffs' Claims. Given that Plaintiffs

are collaterally estopped from relitigating this issue and that the court is bound by the

findings on this issue contained in the Arbitration Award, it is clear that Plaintiffs' Claims

fail as a matter of law. Because there is no triable fact that would serve as a basis for

liability against HKJ, summary judgment in favor of HKJ is appropriate in this action with

regard to Plaintiff's Claims I-IV.

NOW THEREFORE, based upon the foregoing, it hereby is ORDERED that:

[60] Defendant HKJ's Motion for Summary Judgment is GRANTED as to

Plaintiffs' Claims I-IV, and said Claims are DISMISSED.

[61] As Plaintiffs have previously filed voluntary dismissals against Lighthouse,

W&A and Cogswell, and therefore no viable Claims remain in this matter, this civil

action is DISMISSED.

[62] Taxable costs of this action are assessed against Plaintiffs.

This the 5th day of June, 2014.