Opinion
No. COA13–93.
2013-08-6
RABUN COUNTY BANK, Plaintiff, v. John R. EARNHARDT & Angela R. Moody now known as Angela R. Earnhardt, Defendants.
Law Offices of Kenneth W. Fromknecht, II, PA, by Kenneth W. Fromknecht, II, for plaintiff-appellee. Attorney Stuart Sloan for defendants-appellants.
Appeal by defendants from judgment entered 19 November 2012 by Judge James U. Downs in Macon County Superior Court. Heard in the Court of Appeals 7 May 2013. Law Offices of Kenneth W. Fromknecht, II, PA, by Kenneth W. Fromknecht, II, for plaintiff-appellee. Attorney Stuart Sloan for defendants-appellants.
HUNTER, JR., ROBERT N., Judge.
Defendants appeal from an order of the Macon County Superior Court granting plaintiff's motion for judgment on the pleadings pursuant to Rule 12(c) of the North Carolina Rules of Civil Procedure. Because defendants' arguments (1) that the full contract was not before the court and (2) that they pled the legally cognizable defenses of setoff and failure to mitigate damages are without merit, we affirm.
I. Factual and Procedural History
On 21 April 2006, John Earnhardt and his daughter Angela Earnhardt (“Defendants”) refinanced realty owned by Angela's husband Reginald Moody with Rabun County Bank (“Plaintiff” or “the Bank”). All three signed a promissory note. A deed of trust and a consumer security agreement were also executed to secure the loan. Real property located in Sylva (“collateral” or “collateral property”) secured the loan. Reginald Moody is the sole title owner of the collateral.
Reginald Moody is not a party to this appeal or the original lawsuit.
Defendants and Reginald Moody ceased making payments on the promissory note on 1 March 2012. Moody subsequently filed for Chapter 7 bankruptcy relief. The Bank filed suit to collect the balance due on the note, interest, costs, and attorney's fees. The Bank elected to pursue the other signatories of the note rather than foreclose on the collateral property. Defendants attempted to remove this suit to federal bankruptcy court, where Moody's case was proceeding. However, the bankruptcy court granted the Bank's motion to remand this suit back to superior court in Macon County. The bankruptcy court determined that “[t]he Bank is entitled to pursue its remedies against whomever it chooses, [and that] [t]here is no relationship [between the suit against the Earnhardts' and Reginald Moody's] Bankruptcy proceeding.” In re: Reginald E. Moody, Jr., No. 12–20070 (Bankr.W.D.N.C. Aug. 23, 2012) (order granting motion to remand). Further, the bankruptcy court determined that “[t]he outcome of the case brought by Bank against Earnhardts will not alter Debtor's [ (Reginald Moody' s) ] rights, nor will same impact upon the handling of [Moody's] Bankruptcy estate.” Id.
Upon remand, Defendants timely filed their Answer and Affirmative Defenses, admitting (1) that they signed the promissory note, (2) that they stopped making payments on the note, and (3) that they were given notice of the note's acceleration provision. However, Defendants denied that all conditions precedent to bringing suit had been satisfied, because Plaintiff had not pursued the collateral securing the note. Defendants also presented the affirmative defenses that (1) the Bank failed to reasonably mitigate its damages, and (2) Defendants were entitled to a setoff credit in the amount of the fair market value of the collateral property.
In October 2012, the Bank moved for judgment on the pleadings pursuant to Rule 12(c) of the North Carolina Rules of Civil Procedure. After a hearing, the trial court granted the Bank's motion on 19 November 2012, and awarded money damages in the amount of the balance due plus prejudgment interest, late fees and other charges, court costs, and attorney's fees. Defendants filed timely notice of appeal on 5 December 2012.
II. Jurisdiction
As Defendants appeal from a final judgment of the superior court, an appeal lies of right to this Court pursuant to N.C. Gen.Stat. § 7A–27(b) (2011).
III. Analysis
Defendants argue that the trial court erred in granting the Bank's motion for judgment on the pleadings because: (1) the parties' “complete written contract” was not contained in the pleadings and (2) the Defendants pled the legally cognizable affirmative defenses of setoff in the amount of the fair market value of the collateral and failure to mitigate damages. For the following reasons, we affirm the trial court's judgment.
A. Creditor's Obligation to Pursue Collateral
As a threshold matter, we note that except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument are jointly and severally liable in the capacity in which they sign. SeeN.C. Gen.Stat. § 25–3–116(a) (2011). With regard to notes secured by a deed of trust, our Supreme Court has stated, “ ‘[a] creditor whose debt is secured by way of mortgage or trust has two remedies—one in personam, for his debt; the other in rem to subject the mortgaged property to its payment, and a resort to one is no waiver of the other.’ “ Underwood v. Otwell, 269 N.C. 571, 573, 153 S.E.2d 40, 42 (1967) (quoting Silvey v. Axley, 118 N.C. 959, 963, 23 S.E. 933, 934 (1896)). Our Court has affirmed the general principle that pursuing collateral securing a debt is not a precondition to bringing suit on the note. NCNB Nat'l Bank of N.C. v. Gutridge, 94 N.C.App. 344, 346, 380 S.E.2d 408, 410 (1989). Rather, “upon default the lender may proceed against the collateral or directly against the debtor on the note.” Id. Defendants' arguments on appeal lack legal merit.
B. Complete Contract
Defendants argue that the trial court erred in granting Plaintiff's Rule 12(c) motion because the “complete written contract [of the parties] was not contained in the pleadings.” We disagree.
Under Rule 12(c), a trial court “may consider the formal pleadings in a case and dispose of baseless claims or defenses when the formal pleadings reveal their lack of merit.” Terrell v. Lawyers Mut. Liability Ins. Co., 131 N.C.App. 655, 659, 507 S.E.2d 923, 926 (1998) (quotation marks and citation omitted). A judgment on the pleadings is proper if the pleadings, when viewed in the light most favorable to the non-moving party, contain no material issues of fact, and only questions of law remain. Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974). The trial court is to consider only the pleadings and any attachments to the pleadings. Terrell, 131 N.C.App. at 660, 507 S.E.2d at 926. Further, the trial court should ignore any factual representations made by either party in briefs, as well as any outside materials presented to the court. Minor v. Minor, 70 N.C.App. 76, 78, 318 S.E.2d 865, 867 (1984).
Defendants argue that when a deed of trust and note are executed simultaneously, both documents are to be considered together as one instrument, and thus the Bank was not entitled to a judgment on the pleadings in the absence of the deed of trust. Defendants cite to In re Sutton Investments, Inc., 46 N.C.App. 654, 266 S.E.2d 686 (1980), to support this position. However, the authority on which Defendants rely is distinguishable from the case at hand, since Sutton Investments arose out of foreclosure proceedings. Attachment of the deed of trust to pleadings is essential in the context of foreclosure proceedings, as the deed of trust secures the promissory note and provides the terms under which a creditor may foreclose. See N.C. Gen.Stat. § 45–21.16(d) (2011) (enumerating findings the clerk must make before authorizing foreclosure under a power of sale, including a finding that the creditor has a “right to foreclose under the instrument”).
In this case, the Bank seeks to collect the balance due under the promissory note, which reads in pertinent part as follows:
7. BORROWER'S FAILURE TO PAY AS REQUIRED
...
(C) Default
If I do not pay the full amount of each periodic payment on the date it is due, I will be in default.
(D) Notice of Default
If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal that has not been paid and all the interest that I owe on that amount. That date must be at least 30 days after the date on which the notice is mailed to me or delivered by other means.
Defendants in their answer admit that they failed to make payments as required by the promissory note. The notice of default and acceleration were attached to the Bank's Verified Complaint. Defendants admitted receipt of the notice sent by the Bank. Although Defendants' answer denied that all conditions precedent had been performed, that denial was premised on Defendants' theory that the Bank had an affirmative obligation to pursue foreclosure on the collateral. As discussed above, the Bank has no general obligation to pursue foreclosure; instead, the Bank chose to pursue the signatories of the note. If the deed of trust or any of Defendants' other loan documents provided an affirmative defense, Defendants were required to raise such defenses and attach supporting documents to their answer. See Sloan v. Miller Bldg. Corp., 128 N.C.App. 37, 43, 493 S.E.2d 460, 464 (1997) (“A defendant's failure to plead an affirmative defense ordinarily results in waiver thereof.”). Defendants did not attach the deed of trust or any other loan documents to their answer. Accordingly, Defendants' argument is overruled. In addition, Defendants' related argument that this Court should retroactively interpret their answer as containing a surety's demand to a note holder under N.C. Gen.Stat. § 26–7(a) (2011) is similarly overruled. Id. Co-makers are not, under these circumstances, sureties.
C. Affirmative Defense of Setoff
Defendants next argue that the trial court erred in granting the Bank's motion because they “pled a legally cognizable affirmative defense of setoff.”
Defendants specifically contend that the trial court circumvented the legislative intent of N.C. Gen.Stat. § 45–21.36 by not recognizing the affirmative defense of setoff. However, Section 45–21.36 is not applicable to the case at bar. Section 45–21.36 concerns the right of a mortgagor to assert the defense of setoff in a deficiency suit against him when there is a dispute as to the reasonable value of collateral property that has been auctioned at a sale following a foreclosure. The statute does not apply to actions seeking to collect on promissory notes. Defendants' argument is overruled.
D. Affirmative Defense of Duty to Mitigate Damages
Defendants lastly allege that they pled a legally cognizable defense of failure by the Bank to mitigate its damages, and thus the trial court erred in granting the Bank's motion. Defendants seek to analogize the instant case to others in which our courts have recognized a duty to mitigate damages in disputes involving real estate. However, Defendants provide no pertinent legal authority to support the proposition that the holder of a promissory note must “mitigate his damages” by pursuing collateral secured by a deed of trust first. As discussed above, the weight of legal authority suggests otherwise. Underwood, 269 N.C. at 573, 153 S.E.2d at 42. Defendants' argument is overruled.
Accordingly, the judgment of the trial court is
AFFIRMED. Judge MCGEE and Judge STEPHENS concur.
Report per Rule 30(e).