249 N.C. App. 246
N.C. Ct. App.2016Background
- OBKA (an LLC) executed a promissory note to First South Bank (FSB) in 2006; Ray Hollowell signed for OBKA and both Ray and Donna Hollowell executed separate commercial guaranties. The note was later modified several times.
- FSB assigned the loan to Emerald Portfolio, LLC in February 2013, but FSB could not locate the original promissory note and filed an affidavit asserting the note was endorsed to Emerald and was missing.
- Emerald sued OBKA and the Hollowells in 2014 to recover the unpaid balance; the complaint attached a copy of the note and FSB’s affidavit about the lost note.
- Procedural history: defaults entered and later set aside for OBKA; motions for summary judgment were filed by both sides; trial court granted Emerald summary judgment against OBKA and Ray Hollowell, denied appellants’ summary judgment, and certified the order under Rule 54(b).
- On appeal, defendants challenged (1) Emerald’s standing to enforce a lost note it did not possess and (2) enforceability/unconscionability of the guaranty against Ray Hollowell.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether assignee (Emerald) may enforce a lost note it does not possess | Emerald: as assignee of FSB, it may enforce the note despite lack of possession | OBKA: N.C. Gen. Stat. § 25-3-309 permits enforcement only by a person entitled to enforce when loss occurred; assignee without possession lacks enforcement rights | Reversed as to OBKA: assignee lacking actual possession cannot enforce the lost note under NC statute |
| Whether guarantor (Ray) can be held liable if note is unenforceable | Emerald: guaranty is a separate contract; enforceable even if note is missing | Ray: cannot be held as guarantor if assignee cannot enforce the underlying note | Affirmed as to Ray: guaranty is independent and enforceable; unenforceability of note is no defense |
| Whether the guaranty’s waiver terms are unconscionable | Emerald: guaranty was negotiated/executed; no procedural or substantive unconscionability shown | Ray: guaranty contains broad waiver provisions and was required of both members, rendering it unconscionable | Rejected: no evidence of procedural unconscionability; absent that, unconscionability defense fails |
| Whether summary judgment was appropriate overall | Emerald: no genuine issue as to guarantor’s contractual liability | Defendants: factual issues exist regarding enforceability and unconscionability | Court: summary judgment improper as to OBKA (assignee lacked enforcement right); proper as to Ray (guaranty clear, no unconscionability) |
Key Cases Cited
- In re Will of Jones, 362 N.C. 569 (N.C. 2008) (standard of review for summary judgment)
- Forbis v. Neal, 361 N.C. 519 (N.C. 2007) (standard for "no genuine issue of material fact")
- EAC Credit Corp. v. Wilson, 12 N.C. App. 481 (N.C. Ct. App. 1971) (guarantor and maker obligations are separate)
- First Am. Sav. Bank v. Adams, 87 N.C. App. 226 (N.C. Ct. App. 1987) (guaranty enforceable independent of note circumstances)
- Carolina Place Joint Venture v. Flamers Charburgers, Inc., 145 N.C. App. 696 (N.C. Ct. App. 2001) (guarantor liability governed by contract terms)
- Epes v. B.E. Waterhouse, LLC, 221 N.C. App. 422 (N.C. Ct. App. 2012) (guaranty of payment is absolute and unconditional)
- Weaver v. Saint Joseph of the Pines, Inc., 187 N.C. App. 198 (N.C. Ct. App. 2007) (elements of procedural and substantive unconscionability)