Court Opinion

ID: 4176196
Source: CourtListenerOpinion
Date Created: 2017-06-09 16:10:54.718508+00
Date Added: 2024-06-11T14:38:37.205643
License: Public Domain

IN THE SUPREME COURT OF NORTH CAROLINA

                                     No. 168A16

                                 Filed 9 June 2017

THOMAS A. STOKES, III

              v.
CATHERINE C. CRUMPTON (formerly Stokes)

      Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of a divided panel of

the Court of Appeals, ___ N.C. App. ___, 784 S.E.2d 537 (2016), dismissing an appeal

from an order entered on 7 August 2014 by Judge Anna E. Worley in District Court,

Wake County. On 22 September 2016, the Supreme Court allowed plaintiff’s petition

for discretionary review of additional issues. Heard in the Supreme Court on 20

March 2017.

      Shanahan Law Group, PLLC, by Kieran J. Shanahan, Christopher S. Battles,
      and John E. Branch, III, for plaintiff-appellant.

      Wyrick Robbins Yates & Ponton LLP, by Tobias S. Hampson, K. Edward
      Greene, and Robert A. Ponton, Jr., for defendant-appellee.

      BEASLEY, Justice.

      This case is about whether a trial court has discretion to order post-

confirmation discovery in an action under the Family Law Arbitration Act and a

party’s right to an interlocutory appeal of the trial court’s denial of such a motion.

We hold that plaintiff had a right to appeal the trial court’s denial of his motion to
                                STOKES V. CRUMPTON

                                   Opinion of the Court

engage in discovery and that the trial court has discretion to order post-confirmation

discovery in this case. Accordingly, we reverse the decision of the Court of Appeals

and remand this case with instructions for the Court of Appeals to vacate the trial

court’s order and remand the matter for reconsideration of plaintiff’s motion

consistent with this opinion.

      In April 2011, Thomas A. Stokes, III (plaintiff) and Catherine C. Stokes (now

Crumpton) (defendant) separated. Plaintiff filed an action in July 2011 seeking

equitable distribution of the parties’ marital assets and child support.        Shortly

thereafter, the parties agreed to arbitrate the action under North Carolina’s Family

Law Arbitration Act (FLAA), N.C.G.S. §§ 50-41 to 50-62. On 13 August 2011, the

trial court entered a Consent Order to Arbitrate Equitable Distribution and Child

Support. One of the main issues to be settled during arbitration was the value of

defendant’s stake in Drug Safety Alliance, Inc. (DSA),1 a company in which defendant

was the President, CEO, and majority shareholder.

      As part of the agreed-upon pre-arbitration discovery, plaintiff’s counsel

deposed defendant, seeking information, inter alia, on the value of DSA. During the

deposition, defendant testified that she had “no intention of selling” DSA at that time,

although she had been contacted by parties interested in purchasing the company.

      1 DSA managed adverse event reporting for pharmaceutical, biotech, animal health,
and over-the-counter dietary supplement companies.

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                               STOKES V. CRUMPTON

                                 Opinion of the Court

In response to questions regarding the possible sale, merger, or acquisition relating

to DSA, defendant, for the most part, responded that she did not know or could not

answer the question. During discovery, plaintiff’s valuation expert also interviewed

defendant and specifically inquired about “any written or oral offers to purchase

DSA”; defendant said there were none. Plaintiff’s expert also requested production

of documents from DSA, including buy-sell agreements, written offers to purchase

stock, and any major sale or purchase contracts. No such documents were ever

produced.

       On 18 May 2012, plaintiff and defendant entered into an Equitable

Distribution Arbitration Award by Consent (the Award). That same day, the trial

court entered an order and judgment in District Court, Wake County, confirming the

award. The Award, inter alia, distributed to defendant all stock held by her in DSA

and any other interest claimed by either party in the company. In return, defendant

would pay plaintiff a lump sum of $1,000,000.00, plus an additional $650,000.00 over

a six year period. The entire balance would become immediately due and payable,

however, if defendant sold her ownership interest in DSA.

      Less than two months later, on 5 July 2012, defendant signed a Letter of Intent

to sell DSA to another company, United Drug, PLLC. In August 2012, United Drug

purchased DSA for $28,000,000.00, of which defendant received approximately

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                                 STOKES V. CRUMPTON

                                   Opinion of the Court

$14,000,000.00 for her shares. Plaintiff claims to have learned about the sale through

the media, without any prior knowledge of it during arbitration.

      On 26 November 2012, plaintiff filed a Motion to Vacate Arbitration Award

and Set Aside Order and Motion to Engage in Discovery.2 Plaintiff’s motion was

predicated on an allegation of fraud, that defendant “intentionally induced [p]laintiff

to settle through misrepresentation and/or concealment of material facts related to

the sale, possible sale, discussions, negotiations and existence of documents related

to the possible sale of DSA to a third party.” Specifically, plaintiff alleged that

defendant intended to sell DSA while arbitration was under way and that she

fraudulently induced plaintiff to accept a distribution of only $1,650,000.00 for DSA

based on her representations about the company during arbitration. According to

plaintiff, during arbitration “the parties were arguing over a valuation of the marital

interest in DSA as being between approximately two and five million dollars” and

eventually stipulated to a value of $3,485,000.00 for DSA.3 Plaintiff contends that he

never would have agreed to DSA’s value had defendant disclosed the sale opportunity.

      As part of these motions, plaintiff requested leave “to conduct discovery

regarding discussions, negotiations and activity by and involving [d]efendant and her

      2  Plaintiff amended his motion on 13 December 2013 to clarify that the motions were
brought under the FLAA.
       3 As pointed out by defendant, the parties never stipulated to a value for DSA.

Plaintiff contends, however, that the parties reached a mutual understanding as to DSA’s
value prior to consenting to the Award.

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                                   Opinion of the Court

company DSA, its agents and United Drug and its agents that led to the July 5, 2012

Letter of Intent and subsequent sale of DSA to United Drug.” On 7 August 2014, the

trial court entered an order denying plaintiff’s motion for leave to engage in discovery.

The trial court concluded:

             1. There is no pending action between Plaintiff and
                Defendant in which discovery may be propounded.
             2. Plaintiff’s Verified Motion to Vacate Arbitration Award
                is not a claim within which discovery may be conducted.
                Plaintiff’s [request for] written discovery is therefore
                inappropriate.
             3. All of Plaintiff’s Motions to Compel [Discovery] . . .
                should be denied.

Plaintiff appealed to the Court of Appeals, which filed a divided opinion dismissing

the appeal on 5 April 2016.

      As a preliminary matter, the Court of Appeals addressed whether the trial

court’s order denying discovery was immediately appealable as an interlocutory

order. Stokes v. Crumpton, ___ N.C. App. ___, ___, 784 S.E.2d 537, 539 (2016).

Agreeing with defendant, the majority concluded that the order was not appealable

under either the FLAA’s appeal provision, N.C.G.S. § 50-60 (2015), or the substantial

rights analysis of N.C.G.S. § 7A-27(b)(3)(a) (2015). See id. at ___, 784 S.E.2d at 540.

In regards to the FLAA, the majority held that the discovery order did not fall under

any of the types of orders enumerated in subsection 50-60(a) of the statute under

which a right of appeal lies. Id. at ___, 784 S.E.2d at 540. Specifically, the majority

also concluded that the order at issue here “is not a judgment” for purposes of

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                               STOKES V. CRUMPTON

                                 Opinion of the Court

subdivision 50-60(a)(6). Id. at ___, 784 S.E.2d at 541.   The majority then rejected

plaintiff’s argument that he was separately entitled to appeal from the order under

N.C.G.S. § 7A-27, which governs interlocutory appeals. Id. at ___, 784 S.E.2d at 541-

42. The majority concluded that plaintiff “failed to demonstrate that he would be

deprived of a substantial right without appellate review of the order before a final

judgment has been entered,” as required under section 7A-27. Id. at ___, 784 S.E.2d

at 541-42.

      The dissent disagreed with the majority’s conclusion that the discovery order

was not immediately appealable.      Id. at ___, 784 S.E.2d at 543 (Calabria, J.,

dissenting). Specifically, the dissent concluded that the order denying discovery was

appealable under subdivision 50-60(a)(6), which the dissent deemed to be a “catch-

all” provision that permits appeal from “[a] judgment entered pursuant to provisions

of this Article.” Id. at ___, 784 S.E.2d at 543. According to the dissent, “judgment”

as used in this provision is not limited to “final judgments,” but includes judgments

that are interlocutory as well. Id. at ___, 784 S.E.2d at 543-44. The dissent also

concluded that plaintiff had a right to appeal under section 7A-27 because plaintiff

demonstrated that, if the order was not immediately reviewed, he would be deprived

of a substantial right, consisting of any ability to prove the alleged fraud at the

hearing on his motion to vacate, without some limited discovery. Id. at ___, 784

S.E.2d at 544-47.

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                                STOKES V. CRUMPTON

                                   Opinion of the Court

      Next, the dissent disagreed with the trial court’s conclusion that “[t]here is no

pending action between Plaintiff and Defendant in which discovery may be

propounded.” Id. at ___, 784 S.E.2d at 546. According to the dissent, “plaintiff’s

Motion to Vacate Arbitration Award and Set Aside Order based on allegations that

the arbitration award was procured by fraud is pending.” Id. at ___, 784 S.E.2d at

546. In response, the majority addressed the pending action issue in a footnote,

disagreeing with the dissent’s interpretation and stating that “[i]t is correct that

Plaintiff’s motion to vacate was pending, but the trial court concluded, and we agree,

that the action—the arbitration of the parties’ equitable distribution action—had

concluded, and the pending motion was ‘not a claim within which discovery may be

conducted.’ ” Id. at ___ n.1, 784 S.E.2d at 539 n.1 (majority opinion).

      Plaintiff filed an appeal of right based on the dissenting opinion, and on 22

September 2016, this Court allowed plaintiff’s petition for discretionary review as to

an additional issue. The issues before this Court are whether plaintiff has a right to

appeal the trial court’s order and whether the trial court had discretion to award

discovery in this case.

      As a threshold matter we consider whether plaintiff had a right to immediately

appeal the trial court’s order denying discovery. We hold that he did.

       Plaintiff contends that the trial court’s interlocutory order may be appealed if

it affects a substantial right, pursuant to N.C.G.S. § 7A-27(b)(3)(a), even if plaintiff

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                                  STOKES V. CRUMPTON

                                    Opinion of the Court

has no right to appeal under the FLAA.4 We agree. This Court has never explicitly

addressed the interplay between appeals under an arbitration statute and section

7A-27.     The Court of Appeals case law on this issue is unclear and somewhat

contradictory. We take this opportunity to clarify the relationship between N.C.G.S.

§§ 50-60 and 7A-27.

       In Bluffs, Inc. v. Wysocki, 68 N.C. App. 284, 314 S.E.2d 291 (1984), the

threshold issue before the court was whether there is an immediate right to appeal

an order compelling arbitration under the Uniform Arbitration Act (UAA), which the

court held did not exist. 68 N.C. App. at 286, 314 S.E.2d at 293. The court began its

analysis by reviewing the bases for appeal enumerated in N.C.G.S. § 1-567.18(a) and

concluding that an order compelling arbitration does not fall under the statute. Id.

at 285, 314 S.E.2d at 292-93. After reaching this conclusion, the court then addressed

whether the order affected a substantial right. Id. at 285-86, 314 S.E.2d at 293.

Ultimately, the court held that an order compelling arbitration is not appealable

under either the UAA5 or section 7A-27. Id. at 285, 314 S.E.2d at 293.

       4  Plaintiff did not argue to this Court that he had a right to appeal under the FLAA
itself. Assuming arguendo that the majority at the Court of Appeals correctly determined
that plaintiff did not have a right to appeal under subdivision 50-60(a)(6) of the FLAA, we
hold that plaintiff had a right to appeal the interlocutory order under N.C.G.S. § 7A-27
because the order affected a substantial right.
        5 Although an order compelling arbitration is not appealable under the UAA, Wysocki,

68 N.C. App. at 285, 314 S.E.2d at 292-93, the Revised UAA does provide a basis for appeal
from an order denying a motion to compel arbitration, N.C.G.S. § 1-569.28(a)(1) (2015) (“An
appeal may be taken from . . . [a]n order denying a motion to compel arbitration . . . .”).

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                                 STOKES V. CRUMPTON

                                   Opinion of the Court

      Subsequent Court of Appeals cases relying on Wysocki have followed a similar

analytical framework—conducting a substantial rights analysis under section 7A-27

after concluding that the order at issue did not fall under the enumerated bases for

appeal set out in the relevant arbitration statute. See, e.g., Smith v. Shipman, 153
N.C. App. 200, 569 S.E.2d 34, 2002 WL 31055991 (2002) (unpublished); N.C. Elec.

Membership Corp. v. Duke Power Co., 95 N.C. App. 123, 381 S.E.2d 896, disc. rev.

denied, 325 N.C. 709, 388 S.E.2d 461 (1989). Wysocki and its progeny do not explicitly

address the relationship between appeals under an arbitration statute and

interlocutory appeals under section 7A-27.        Implicit in these cases, however, is

support for the conclusion that a right to appeal can be based on section 7A-27 even

if there is no right to appeal under the arbitration statute.

      In the present case the Court of Appeals majority based its decision, in part,

on the fact that the FLAA appeal provision does not include an order denying

discovery as one of the enumerated bases for appeal. Stokes, ___ N.C. App. at ___,

784 S.E.2d at 540. The majority in Stokes relied on Bullard v. Tall House Building,

Co., 196 N.C. App. 627, 676 S.E.2d 96 (2009), quoting specifically the statement “that

the list enumerated in [N.C.G.S.] § 1-569.28(a) includes the only possible routes for

appeal under the [Revised UAA].” Id. at ___, 784 S.E.2d at 540-41 (quoting Bullard,
196 N.C. App. at 635, 676 S.E.2d at 102) (emphasis added)). The court in Bullard

concluded that the order was not appealable under the Revised UAA and then

conducted a substantial rights analysis under section 7A-27. 196 N.C. App. at 635-

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                                STOKES V. CRUMPTON

                                   Opinion of the Court

39, 676 S.E.2d at 102-04. The court held that an order compelling arbitration: (1) was

not appealable under the Revised UAA; and (2) did not impair a substantial right

justifying immediate appeal under section 7A-27. Id. at 635-39, 676 S.E.2d at 102-

04.

      Therefore, despite this quoted language, the court in Bullard followed the same

analysis used in Wysocki and its progeny, further supporting the inference that an

appeal can lie from either statute. Additionally, the Court of Appeals majority in this

case similarly analyzed whether a substantial right was affected by the trial court’s

order, despite quoting Bullard and despite previously concluding that plaintiff had

no right to appeal under the FLAA itself. Stokes, ___ N.C. App. at ___, 784 S.E.2d at

541-42. We hold that an appeal can be justified under section 7A-27 even if there is

no right to appeal under the relevant arbitration statute. To the extent Bullard

suggests otherwise, it is abrogated.

      Having determined that a substantial rights analysis under section 7A-27 may

be conducted notwithstanding that no right to appeal lies under the arbitration

statute itself, we turn now to whether the trial court’s order denying discovery to

plaintiff in this case affected a substantial right justifying immediate appeal. We

hold that the trial court’s order denying discovery affected a substantial right.

      An interlocutory order is generally not immediately appealable unless the

order “[a]ffects a substantial right,” id. § 7A-27(b)(3)(a). Sharpe v. Worland, 351 N.C.
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                                 STOKES V. CRUMPTON

                                   Opinion of the Court

159, 161-62, 522 S.E.2d 577, 578-79 (1999) (discussing two avenues for immediate

appeal of an interlocutory order, including N.C.G.S. § 7A-27). Discovery orders are

“generally not immediately appealable because [they are] interlocutory and do[ ] not

affect a substantial right that would be lost if the ruling were not reviewed before

final judgment.” Id. at 163, 522 S.E.2d at 579 (citations omitted). Such orders,

however, are immediately appealable when “the desired discovery would not have

delayed trial or have caused the opposing party any unreasonable annoyance,

embarrassment, oppression or undue burden or expense, and if the information

desired is highly material to a determination of the critical question to be resolved in

the case.” Dworsky v. Travelers Ins., 49 N.C. App. 446, 447-48, 271 S.E.2d 522, 523

(1980) (emphasis added) (citing Tenn.-Carolina Transp., Inc. v. Strick Corp., 291 N.C.
618, 231 S.E.2d 597 (1977)). In these situations, “an order denying such discovery

does affect a substantial right and is appealable.” Id. at 448, 271 S.E.2d at 523 (citing

Tenn.-Carolina, 291 N.C. 618, 231 S.E.2d 597).

      Here there is no dispute that the trial court’s order is interlocutory, as it was

made while plaintiff’s motion to vacate was still pending. See Sharpe, 351 N.C. at

161, 522 S.E.2d at 578. As such, the interlocutory order must be shown to affect a

substantial right in order to justify immediate appeal.

      Plaintiff’s motion requested limited discovery in the form of information

relating to the timeline, details, and discussions between DSA and United Drug

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                                STOKES V. CRUMPTON

                                   Opinion of the Court

regarding the August 2012 sale.         This information is “highly material” to a

determination on plaintiff’s motion to vacate based on allegations that defendant

fraudulently concealed the true value of her shares in DSA. Generally, a motion to

vacate an arbitration award based on fraud must be proved by clear and convincing

evidence. See MCI Constructors, LLC v. City of Greensboro, 610 F.3d 849, 858 (4th

Cir. 2010) (stating that vacatur under the Federal Arbitration Act based on an

allegation of “undue means” requires that the fraud or corruption be established by

clear and convincing evidence); Trafalgar House Constr., Inc. v. MSL Enters., 128
N.C. App. 252, 257-59, 494 S.E.2d 613, 617 (1998) (holding that the plaintiff failed to

meet its burden of proof that grounds existed to vacate an arbitration agreement

under the FAA on the basis of fraud). Fraud is generally defined as “[a] knowing

misrepresentation or knowing concealment of a material fact made to induce another

to act to his or her detriment.” Fraud, Black’s Law Dictionary (10th ed. 2014). Due

to the concealment and deception inherent in fraud, it is unlikely that plaintiff will

be able to obtain information necessary to support his motion to vacate without

conducting some limited discovery. Thus, because the limited discovery requested by

plaintiff is “highly material to a determination of the critical issue” in his motion to

vacate, the order denying discovery affects a substantial right justifying immediate

appeal under N.C.G.S. § 7A-27(b)(3)(a). Dworsky, 49 N.C. App. at 448, 271 S.E.2d at

523 (citing Tenn.-Carolina, 291 N.C. 618, 231 S.E.2d 597).

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                                 STOKES V. CRUMPTON

                                   Opinion of the Court

      Having determined that plaintiff had a right to immediately appeal the trial

court’s order denying discovery, we reverse the Court of Appeals holding on this issue.

We now consider whether the trial court had the discretion to order discovery in the

case at hand. We hold that it did.

      Plaintiff contends that his motion to vacate the arbitration award under the

FLAA is a pending action under which discovery may be propounded. We agree.

Under the FLAA, “upon a party’s application, the court shall confirm an award, except

when within time limits imposed under G.S. 50-54 . . . grounds are urged for vacating

. . . the award, in which case the court shall proceed as provided in G.S. 50-54.”

N.C.G.S. § 50-53(a) (2015) (emphases added).          Section 50-54 sets forth various

reasons for which “the court shall vacate an award,” including that “[t]he award was

procured by corruption, fraud, or other undue means.”          Id. § 50-54(a)(1) (2015)

(emphasis added). A timely motion to vacate under section 50-54 predicated on

corruption, fraud, or other undue means “shall be made within 90 days after these

grounds are known or should have been known.” Id. § 50-54(b) (2015). Plaintiff’s

motion to vacate was timely filed, thus triggering the provisions of section 50-54.

      Contrary to defendant’s contention, there is no law prohibiting the trial court

from utilizing its discretion to order discovery in this case. The plain language of the

FLAA itself provides a mechanism for vacating an arbitration award upon proof of

fraud. See id. §§ 50-53, -54. As stated above, clear and convincing evidence is needed

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                                STOKES V. CRUMPTON

                                  Opinion of the Court

to succeed on a motion to vacate based on allegations of fraud. Given this high

standard, and the concealment and deception inherent in fraud, post-confirmation

discovery naturally follows.   Moreover, there is no provision of the FLAA that

prohibits post-confirmation discovery, and nothing within the statute limits section

50-54 solely to claims of fraud made pre-confirmation.

      Section 50-53 explicitly provides an alternative, mandatory path for courts to

take if a timely motion to vacate is filed, in which event the court shall proceed

according to section 50-54. Here there is no debate that plaintiff timely filed his

motion to vacate based on an allegation of fraud.        Defendant argues that this

alternative path only applies in the pre-confirmation context; nothing, however, in

the language of sections 50-53 or 50-54 supports this conclusion.       Reading an

exception into the statute for post-confirmation motions would appear to create a

right without a remedy. We decline to limit the statute in such a manner without

clear indication of the General Assembly’s intent.

      Under the terms of the FLAA, a motion to vacate based on allegations of fraud

disrupts the general process for confirming arbitration awards and creates a vehicle

by which confirmed awards can be vacated. Accordingly, a motion to vacate under

section 50-54 is pending because it seeks a remedy made available by the FLAA

related to the underlying arbitration, to which plaintiff has availed himself.

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                                     Opinion of the Court

Therefore, the motion to vacate was a pending action under which the trial court had

the discretion to order discovery.

      We hold, therefore, that plaintiff had a right to appeal the trial court’s order

denying discovery under the substantial rights analysis of N.C.G.S. § 7A-27(b)(3)(a),

and that a right to appeal may exist under section 7A-27 even if the order is not

appealable under the arbitration statute itself. Additionally, we hold that the trial

court had discretion to award discovery in this case because the action was pending

pursuant to sections 50-53 and 50-54 of the FLAA. For the reasons stated, we reverse

the decision of the Court of Appeals and remand this matter with instructions to the

Court of Appeals to vacate the trial court’s order denying discovery and remand this

case to the trial court for further consideration of plaintiff’s motion consistent with

this opinion.

      REVERSED AND REMANDED.

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