Quality Inns Intern. v. Booth, Fish, Etc.

292 S.E.2d 755 (1982)

QUALITY INNS INTERNATIONAL INC., a Delaware Corporation, Plaintiff, v. BOOTH, FISH, SIMPSON, HARRISON AND HALL, a North Carolina Partnership, Konrad K. Fish, Roy M. Booth, H. Marshall Simpson, A. Wayne Harrison, Richard D. Hall, Jr., Frederick C. E. Murray, E. Jackson Harrington, Jr., and Robert A. Benson, Defendants.

No. 8118SC1063.

Court of Appeals of North Carolina.

July 6, 1982.

*759 Pfefferkorn & Cooley, P. A. by David C. Pishko, Winston-Salem, for plaintiff-appellant.

Adams, Kleemeier, Hagan, Hannah & Fouts by Daniel W. Fouts, M. Jay DeVaney and Beth H. Daniel, Greensboro, for defendant-appellee.

WELLS, Judge.

Plaintiff's claims for relief are grounded in tort, asserting defendants' negligence in the performance of their duties as trustee under the deed of trust and as lawyers owing a duty to plaintiff as a client. In regard to summary judgment in a negligence action, our Supreme Court has stated:

As a general proposition, issues of negligence are ordinarily not susceptible of summary adjudication either for or against the claimant "but should be resolved by trial in the ordinary manner." 6 Pt. 2 Moore's Federal Practice, § 56.17[42] at 946 (2d ed. 1980). Hence, it is only in exceptional negligence cases that summary judgment is appropriate because the rule of the prudent man, or other applicable standard of care, must be *760 applied, and ordinarily the jury should apply it under appropriate instructions from the court. Caldwell v. Deese, supra; Gordon, the New Summary Judgment Rule in North Carolina, 5 Wake Forest Intra. L.Rev. 87, 92 (1969).

Vassey v. Burch, 301 N.C. 68, 269 S.E.2d 137 (1980); see also Easter v. Hospital, 303 N.C. 303, 278 S.E.2d 253 (1981). In Lowe v. Bradford, 305 N.C. 366, 289 S.E.2d 363 (1982), our Supreme Court explicated the burden of proof on a summary judgment motion:

A party moving for summary judgment may prevail if it meets the burden (1) of proving an essential element of the opposing party's claim is nonexistent, or (2) of showing through discovery that the opposing party cannot produce evidence to support an essential element of his or her claim. Moore v. Fieldcrest Mills, Inc., 296 N.C. 467, 251 S.E.2d 419 (1979); Zimmerman v. Hogg & Allen, 286 N.C. 24, 209 S.E.2d 795 (1974). Generally this means that on "undisputed aspects of the opposing evidential forecast," where there is no genuine issue of fact, the moving party is entitled to judgment as a matter of law. 2 McIntosh, North Carolina Practice and Procedure § 1660.5, at 73 (2d ed. Supp.1970). If the moving party meets this burden, the non-moving party must in turn either show that a genuine issue of material fact exists for trial or must provide an excuse for not doing so. Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200, 271 S.E.2d 54 (1980); Moore v. Fieldcrest Mills, Inc., 296 N.C. at 470, 251 S.E.2d at 421-22; Zimmerman v. Hogg & Allen, 286 N.C. at 29, 209 S.E.2d at 798.... If the moving party satisfies its burden of proof, then the burden shifts to the non-moving party to "set forth specific facts showing that there is a genuine issue for trial." Rule 56(e), Rules of Civil Procedure (emphasis added). The non-moving party "may not rest upon the mere allegations of his pleadings." Id.

Plaintiff's first claim relates to defendant Fish's conduct as substitute trustee in the Watts' deed of trust, and to the manner in which Fish conducted the foreclosure sale. In essence, plaintiff asserts that it sought to have the property foreclosed in a manner so as to avoid creating a surplus payable to Greenway, and that as a result of the advice plaintiff received from Fish as to how much plaintiff should bid at the sale, a surplus was in fact created, which surplus Greenway claimed. Plaintiff further asserts that as a result of Greenway's assertion of its claim to an alleged surplus, plaintiff was damaged by having to pay Greenway $30,000.00 to settle Greenway's claim, plus incurring additional legal fees and other expenses in connection with Greenway's claim. The record shows, however, that following Greenway's claim to an alleged surplus resulting from the foreclosure, Fish filed a motion before the Clerk, seeking instructions as to how to dispose of the proceeds of the foreclosure sale. The matter was subsequently transferred to the civil issue docket of the Superior Court. On 25 June 1979, Judge Collier entered a consent order disposing of all issues in the foreclosure proceedings. The order consented to by plaintiff, provides, in pertinent part, as follows:

[U]pon the Motion in the Cause of the Trustee... and upon the Consent Order... for trial of all issues, and it appearing to the Court that Quality Inns International, Inc. ("Quality") and Greenway Motels, Inc. ("Greenway") have compromised and settled all matters and disputes between them and have agreed that the subject foreclosure sale should be confirmed and that the Substitute Trustee should thereupon prepare and file his final report of sale and deliver a deed to Quality upon payment of the bid as herein provided ...; NOW, THEREFORE, BY CONSENT IT IS ORDERED, ADJUDGED, AND DECREED that: 1. Pursuant to said agreement of compromise and settlement between Greenway and Quality, Greenway has agreed to withdraw and hereby withdraws all its objections and claims in this proceeding. *761 Accordingly, the foreclosure sale in this proceeding is confirmed in all respects; . . . . . 3. The Substitute Trustee shall ... prepare and file his final report of sale and deliver a deed to Quality upon payment of its bid. Said final report shall indicate a last and highest bid by Quality in the amount of Five Hundred and Eighty Five Thousand Dollars ($585,000.00) against indebtedness at the time of foreclosure sale in the amount of Six Hundred Four Thousand Five Hundred Eighty Seven and 46/100 Dollars ($604,587.46). Quality shall be entitled to pay said bid by crediting said bid, after payment of costs, to the above stated indebtedness and shall not be required to pay said bid in cash .... (Emphasis added).

Judge Collier's order shows that the foreclosure sale did not leave a surplus, as the amount of the bid approved was less than the outstanding indebtedness. Judge Collier's order is res judicata on the issue of a surplus from the sale.[1]See Complex, Inc. v. Furst and Furst v. Camilco, Inc., and Camilco, Inc. v. Furst, 43 N.C.App. 95, 258 S.E.2d 379 (1979); disc. rev. denied, 299 N.C. 120, 261 S.E.2d 923 (1980). Having consented to the order, plaintiff is estopped in this action to assert that the manner in which defendant Fish carried out the foreclosure sale resulted in a surplus. See Lockleair v. Martin, 245 N.C. 378, 96 S.E.2d 24 (1956). An essential element of plaintiff's claim, a surplus, being nonexistent, summary judgment for defendants as to this issue was properly granted. See Lowe, supra.

Plaintiff's second claim for relief alleges that defendants were negligent in failing to take timely and adequate measures to secure plaintiff's rights in the personal property of the motel, and that defendants, as attorneys for plaintiff, were negligent in advising plaintiff as to how much to bid at the foreclosure sale. Plaintiff's contention as to the latter claim, as we read the somewhat confusing complaint, is that plaintiffs intended to submit a sufficiently low bid at the real property foreclosure sale so as to leave Greenway indebted to plaintiff, so that plaintiff could then recover or repossess the personal property to cover the remaining debt, and that when a surplus was created by plaintiff's bid, this means of recovery of the personalty was lost to plaintiff, causing financial loss. We need not reach the merits of this claim, since, for the reasons previously stated in our opinion, we find that plaintiff is estopped by judgment to plead the existence of a surplus. We therefore overrule this assignment of error.

The specific allegation of negligence upon which plaintiff bases its final claim for relief is that defendants delayed taking legal action to secure plaintiff's rights to the personal property and revenues of the motel during the foreclosure proceeding, thus causing a financial loss to plaintiff. The evidence of the timing and circumstances of the events relevant to this point is conflicting.

Plaintiff's evidence tends to show that during the summer of 1978, plaintiff became concerned that Greenway was violating the terms of the separate security agreement covering the personal property of the motel, by selling the motel's television sets and by failing to apply the motel's revenues to motel maintenance. In plaintiff's answer to defendants' interrogatories, plaintiff claimed that defendant Benson was first asked to seek appointment of a receiver for the motel on 15 August 1978. However, Everett Casey stated in his affidavit that he first asked Benson to file a petition for a receiver on 6 September. Casey also stated in his affidavit that he only mailed Benson a copy of the Greenway security agreement on 15 September. On 21 September, Casey also asked Benson to institute a claim and delivery proceeding. Defendants did file petitions for appointment *762 of a receiver on 6 October and 26 October. Apparently no action was taken on the first petition, and the second petition was denied. A subsequent petition made by Smith, Moore, Smith, Schell and Hunter was granted, and on 10 November 1978 the motel was placed under the control of a receiver.

By their interrogatories and affidavits from Benson and Fish, defendants produced a forecast of evidence showing the following. Benson advised plaintiff that their security agreement on the personalty had never been incorporated into the real property deed of trust; thus, plaintiff could not recover the personal property by foreclosing on that deed of trust. Benson stated that he prepared the documents for a claim and delivery proceeding, but Casey told him not to go ahead with it until after the foreclosure. Benson also stated that he and Casey discussed the relative merits of having a receiver appointed many times. Benson advised Casey that they did not need a receiver to make them whole; the foreclosure proceeding was an adequate remedy. Benson also advised that the foreclosure hearing was scheduled for 3 October; it would be difficult to get a receiver appointed before the foreclosure hearing; and any appointment might delay the foreclosure proceeding. On approximately 15 September, Casey told Benson to wait indefinetly on filing the petition; on 3 October, Weldon Humphrey told Benson that he, Humphrey, was trying to get a receiver. On 10 October, after receiving a copy of the security agreement which was mailed 15 September, Benson wrote to Greenway, notifying them of the default and demanding that Greenway return the personal property. Finally, Benson stated that at all times, he believed he was following plaintiff's instructions while advising them to the best of his ability, and that in fact, plaintiff did not suffer any loss, financial or otherwise in regard to the personal property.

Plaintiff seeks to proceed against defendants on two theories, or types, of malpractice: one, that defendants lacked that degree of knowledge and skill ordinarily possessed by attorneys handling real estate transactions, and two, that defendants failed to use reasonable care and diligence in handling plaintiff's problems with respect to recovering the personal property in the motel. The forecast of evidence presented by defendants in support of their summary judgment motion clearly shows that the genesis of plaintiff's problems with respect to plaintiff's entitlement to the personal property in the motel was in plaintiff's uncertainty as to how to proceed with the foreclosure of the real property. Defendant's forecast shows that defendants were aware that plaintiff regarded the Watts deed of trust as a "wrap-around" mortgage, or at least intended it to be such, but that plaintiff was uncertain as to how to effectively foreclose such a mortgage so as to not create a surplus to which Greenway might assert claim or which Greenway might use to retain possession of the personal property of the motel. Plaintiff's own forecast of evidence also reflects uncertainty of the law and appropriate strategy on plaintiff's part. Affidavits and depositions of skilled lawyers for both parties reflect that the so-called "wrap-around" mortgage is an area of real property law not well understood by property lawyers in North Carolina, and further, that the foreclosure of such a mortgage is fraught with questions and uncertainty.[2]

The test of lawyer liability in such cases was set out by our Supreme Court in Hodges v. Carter, 239 N.C. 517, 80 S.E.2d 144 (1954), as follows:

Ordinarily when an attorney engages in the practice of law and contracts to prosecute an action in behalf of his client, he impliedly represents that (1) he possesses the requisite degree of learning, skill, and ability necessary to the practice of his profession and which others similarly *763 situated ordinarily possess; (2) he will exert his best judgment in the prosecution of the litigation entrusted to him; and (3) he will exercise reasonable and ordinary care and diligence in the use of his skill and in the application of his knowledge to his client's cause. (Citations omitted). An attorney who acts in good faith and in an honest belief that his advice and acts are well founded and in the best interest of his client is not answerable for a mere error of judgment or for a mistake in a point of law which has not been settled by the court of last resort in his State and on which reasonable doubt may be entertained by well-informed lawyers. (Citations omitted).

Accord, Mallen and Levit, Legal Malpractice, § 213 (2nd ed. 1981).[3] See also Mallen and Davis, "Attorneys' Liability For Errors of JudgmentAt the Crossroads," 48 Tenn.L.Rev. 283 (1981); "Attorney Malpractice," 63 Colum.L.Rev. 1292 (1963); 7 Am.Jur.2d, Attorneys at Law, § 201; Annot., 59 A.L.R.3d 1176, § 2[a]; Annot., 45 A.L.R.2d 5, § 3.

The forecast of evidence in this case clearly shows that plaintiff seeks to hold defendants liable in damages for asserted errors of judgment. The forecast of evidence shows that there was no bad faith on defendant's part, and that the problem with which defendants were entrusted grew from an uncertain and unsettled area of law. Defendants were therefore entitled to judgment as a matter of law on plaintiff's malpractice claim.

The judgment of the trial court is

Affirmed.

HEDRICK and ARNOLD, JJ., concur.

NOTES

[1] As to estoppel by judgment generally, see King v. Grindstaff, 284 N.C. 348, 200 S.E.2d 799 (1973); Phillips v. Phillips, 46 N.C.App. 558, 265 S.E.2d 441 (1980). As to consent judgments operating as res judicata generally, see Annot, 91 A.L.R.3d 1170.

[2] Our research has disclosed only one commentary as to this type of real estate financing, see "Wrap-around Financing: A Technique for Skirting the Usury Laws?" 1972 Duke L.J. 785 (1972), and only one case dealing with a "wrap-around" mortgage, J. M. Realty Investment Corp. v. Stern, 296 So. 2d 588 (Fla.App.1974).

[3] Mallen and Levit discuss lawyer judgmental liability at length in Chapter 9 of their above cited work. Their discussion emphasizes the perils associated with judgmental hindsight applied to unsettled questions of law in legal malpractice cases.