Court Opinion

ID: 2728906
Source: CourtListenerOpinion
Date Created: 2014-09-08 21:37:22.056099+00
Date Added: 2024-06-11T09:53:13.235138
License: Public Domain

NO. COA13-685

                 NORTH CAROLINA COURT OF APPEALS

                         Filed:   1 April 2014

COURTNAY T. BRISSETT, AND HUSBAND,
LADWIN BRISSETT, AND BRISSETT
RENTAL PROPERTIES, LLC,
     Plaintiffs,

    v.                                Craven County
                                      No. 10 CVS 860
FIRST MOUNT VERNON INDUSTRIAL LOAN
ASSOCIATION, DALE E. DUNCAN AND
KATHLEEN NEARY AS TRUSTEES FOR
FIRST MOUNT VERNON INDUSTRIAL LOAN
ASSOCIATION, PRODEV XVI LLC, AND
JOHN F. GONZALES, JASON MATTHEW A.
GOLD, THE SHOAF LAW FIRM, P.A.,
JAMES BOSTIC, KIM RICHARDSON, AND
LABRADOR FINANCIAL SERVICES, INC.,
     Defendants.

    Appeal by plaintiffs from judgment filed 13 September 2012

by Judge Paul L. Jones in Craven County Superior Court.      Heard

in the Court of Appeals 20 November 2013.

    Watsi M. Sutton, Attorney At Law, P.A., by Jacinta D. Jones
    and Watsi M. Sutton, for plaintiffs-appellants.

    Ward and Smith, P.A., by Ryal W. Tayloe and Allen N. Trask,
    III, for defendants-appellees.

    McCULLOUGH, Judge.

    Courtnay T. Brissett (“C. Brissett”), Ladwin Brissett (“L.

Brissett”)   (together    “plaintiffs”),    and   Brissett   Rental
                                      -2-
Properties,    LLC   (the   “rental   company”),     appeal   from      judgment

filed 13 September 2012.       For the following reasons, we find no

error in part and reverse in part.

                               I. Background

      In late 2004 and early 2005, plaintiffs purchased a number

of distressed residential properties in New Bern, North Carolina

as   rental   properties.     Thereafter,      at   the   advice   of    a   CPA,

plaintiffs had an attorney set up the rental company to hold the

properties.

      In late 2005, plaintiffs decided to begin rehabilitating

the properties and began looking for financing.               After several

unsuccessful     attempts     to      obtain    financing      from      banks,

plaintiffs, with the assistance of defendants Kim Richardson and

James Bostic of defendant Labrador Financial Services, entered a

loan agreement with defendant First Mount Vernon Industrial Loan

Association (“FMV”) to acquire funds to rehabilitate six of the

properties.    Defendant Jason A. Gold, of defendant The Shoaf Law

Firm, conducted the closing of the transactions on 9 January

2006.    Plaintiffs had no relationship and did not communicate

with FMV until after the closing.

      As required by the closing instructions, plaintiffs signed

documents at the closing deeding the six properties to ProDev
                                               -3-
XVI, LLC (“ProDev”), an entity established for the sole purpose

of facilitating the loan.                 C. Brissett also signed the ProDev

Operating Agreement and ProDev Organizational Agreement, which

established C. Brissett as the 40% member and manager of ProDev

and John Gonzales, a board member of FMV, as the controlling 60%

member of ProDev.          These ProDev documents also provided that C.

Brissett would be conveyed Gonzales’ 60% interest in ProDev upon

payoff of the loan.            The purpose of FMV requiring the conveyance

of the properties to ProDev as a condition precedent to making

the loan was to ease the collection process upon default and to

protect FMV’s interests from bankruptcy.

    Plaintiffs executed all documents at the closing without

reading them and without asking any questions.                              As a result,

plaintiffs were not aware of the nature of the transaction.

    Plaintiffs did not come to understand                           the    terms of the

documents    executed          at   the        closing    until      they    encountered

problems    while    attempting        to      refinance      one    of    the   completed

properties    later       in   2006,      at    which    point      plaintiffs    learned

ProDev   owned      the    property.             By    that   time,       plaintiffs   had

received approximately $131,500 in loan disbursements from FMV

to rehabilitate the properties.                      The loan went into default in

early 2007 and no further disbursements were made.                           Furthermore,
                                         -4-
upon default Gonzales exercised his right as the controlling

member of ProDev to remove C. Brissett from her role as the

managing member of ProDev.

      On 7 June 2010, plaintiffs commenced this civil action with

the filing of summonses, complaint, and notice of lis pendens in

Craven    County    Superior     Court.        In   the   complaint,     plaintiffs

asserted numerous claims against the named defendants, including

claims    against    FMV    to   quiet    title,     breach      of    contract   and

rescission, misrepresentation, lis pendens, unfair and deceptive

trade practices, fraud in the inducement, constructive fraud,

and civil conspiracy and conspiracy in facilitation of fraud.1

      FMV    and    its    trustees,      defendants      Dale    E.    Duncan    and

Kathleen Neary, filed an answer to plaintiffs’ complaint on 10

August 2010.        The answer included various affirmative defenses,

a   counterclaim     for    reformation        of   certain    deeds     to   correct

typographical       and    other   mistakes,        and    crossclaims        against

ProDev,     Gold,    The   Shoaf   Law     Firm,     Bostic,     Richardson,      and

1
 The only claims to reach trial were those claims against FMV and
its trustees.   Upon motion and affidavit for entry of default,
on 25 January 2011, the trial court entered default against
ProDev, Bostic, Richardson, Labrador Financial Services, and The
Shoaf Law Firm.    Thereafter, following Gonzales’ death and the
substitution of Gonzales’ Estate as allowed by the trial court’s
12 October 2011 order, plaintiffs voluntarily dismissed their
claims against Gonzales’ Estate and Gold by notices filed 27
August 2012 and 4 September 2012, respectively.
                                                  -5-
Labrador Financial Services.                          Plaintiffs replied on 6 October

2010.

       FMV       and     its     trustees         later       filed     an      amended      answer,

counterclaims, and cross-claims on 24 October 2011.                                      In addition

to the original counterclaim for reformation of deeds, FMV and

its     trustees         asserted             counterclaims         for      guaranty,        unjust

enrichment,            and     an     equitable         lien       or   constructive          trust.

Plaintiffs replied on 25 April 2012.

       On    4    September         2012,       the    case       was   called     for     trial   in

Craven County Superior Court, the Honorable Paul Jones, Judge

presiding.              Prior       to       impaneling       a    jury,     the     court     heard

arguments on motions in limine.                           In regard to FMV’s and its

trustees’ motion to exclude all evidence of Virginia State Bar

proceedings against Duncan and Gonzales, the trial court ordered

the transcripts of the proceedings to be excluded.

       The following morning, 5 September 2012, a final pretrial

order with stipulations as to undisputed facts was filed and the

jury trial began.

       On 6 September 2012,                     prior to testimony resuming for a

second day, FMV and its trustees informed the trial court that

they    would          move     for      a     directed       verdict      at      the    close    of

plaintiffs’ evidence and submitted a trial brief for the court’s
                                     -6-
consideration.    Thereafter, at the close of plaintiffs’ evidence

on 7 September 2012, FMV and its trustees moved for a directed

verdict pursuant to N.C. Gen. Stat. § 1A-1, Rule 50.            Following

a weekend recess, on 10 September 2012, plaintiffs responded

with a trial brief opposing the motion for a directed verdict

and the trial court heard arguments on the matter.              The trial

court then granted the motion for a directed verdict as to the

following   claims   for    relief   against    various   parties:     (3)

Misrepresentation, (5) Unfair and Deceptive Trade Practices, (9)

Fraud in the Inducement, (10) Constructive Fraud, (11) Unfair

and   Deceptive   Trade    Practices,   (12)   Constructive   Trust,   (16)

Constructive Fraud, and (17) Civil Conspiracy and Conspiracy in

Facilitation of Fraud.

      FMV put on only documentary evidence and subsequent to a

charge conference, the trial court instructed the jury on the

following six issues:

            (1) Did the deeds from [C. Brissett] and [L.
                Brissett] and [the rental company] to
                [ProDev] meet the requirements of the law
                for conveying valid title?

            (2) Was the consideration given to [C.
                Brissett] and [L. Brissett] and [the
                rental company] for executing the deeds
                from [C. Brissett] and [L. Brissett] and
                [the rental company] to [ProDev] grossly
                inadequate under the circumstances?
                                  -7-
          (3) Did the deed of trust from [C. Brissett]
              and   [L.   Brissett]   and [the   rental
              company]     to    [ProDev]   meet    the
              requirements of the law for creating a
              valid debt?

          (4) Is [FMV] entitled to have a lien on the
              five properties?

          (5) What is the amount of [FMV’s] lien which
              does not include interest on said amount
              if any?

          (6) Did [FMV] act with “unclean hands” in its
              conduct, or in the conduct of its agents,
              relating to the loan transaction of
              January 9, 2006?

    After deliberating, the jury reached a unanimous decision

on all issues except for issues two and six, to which the jury

was deadlocked eleven to one.      As to issues one and three, the

jury determined the deeds did not meet the requirements of the

law for conveying valid title or creating a valid debt.          As to

issues four and five, the jury determined FMV was entitled to a

lien on the five properties in the amount of $131,500.

    The case was held open until 12 September 2012 when the

trial court considered post-trial arguments.         At that time, FMV

moved   for   a   judgment   notwithstanding   the   verdict   (“JNOV”)

pursuant to N.C. Gen. Stat. § 1A-1, Rule 50(b)(1); essentially

asking the court to decide the undecided issues as a matter of
                                    -8-
law.    Plaintiffs responded with their own motions for a JNOV and

a new trial.

       At the conclusion of the arguments, the trial court denied

plaintiffs’ motions and granted FMV’s motion, deciding issues

two and six in favor of FMV.

       On 13 September 2012, the trial court filed a judgment

reforming the deed of trust so that FMV has a lien on the

properties in the amount of $131,500 with a right to foreclose

on the lien by power of sale.         The judgment further dismissed

all claims by plaintiff against FMV and its trustees and ordered

the lis pendens filed in the action to be of no further force

and effect and to be canceled by the Craven County Clerk of

Superior Court.

       Plaintiffs filed notice of appeal from the 13 September

2012 judgment on 11 October 2012.

                             II. Discussion

       Plaintiffs   raise   the   following   five   issues   on   appeal:

whether the trial court erred by (1) granting FMV’s motion to

exclude the transcript of Gonzales’ testimony during Virginia

State Bar proceedings; (2) directing a verdict in favor of FMV

on plaintiffs’ fraud and misrepresentation claims; (3) directing

a verdict in favor of FMV on plaintiffs’ constructive fraud
                                          -9-
claim;    (4)    denying      plaintiffs        the   opportunity          to    present

evidence of FMV’s net worth, revenues, and similar past conduct;

and (5) entering a judgment notwithstanding the verdict on the

issue of unclean hands.

                           1. Exclusion of Evidence

       Plaintiffs first argue the trial court erred in excluding

the    transcript    of    Gonzales’      testimony    in    Virginia       State    Bar

proceedings from the evidence admitted at trial.

       “Admission     of     evidence      is     ‘addressed        to     the     sound

discretion of the trial court and may be disturbed on appeal

only    where   an   abuse    of   such    discretion       is    clearly       shown.’”

Gibbs v. Mayo, 162 N.C. App. 549, 561, 591 S.E.2d 905, 913

(2004) (quoting Sloan v. Miller Building Corp., 128 N.C. App.
37, 45, 493 S.E.2d 460, 465 (1997)).                   An abuse of discretion

warranting      reversal     results    “‘only    upon   a       showing    that    [the

trial court’s decision] was so arbitrary that it could not have

been the result of a reasoned decision.’”                Id. (quoting White v.

White, 312 N.C. 770, 777, 324 S.E.2d 829, 833 (1985)).                              “The

burden is on the appellant to not only show error, but also to

show that he was prejudiced and a different result would have

likely ensued had the error not occurred.”                   Suarez v. Wotring,

155 N.C. App. 20, 30, 573 S.E.2d 746, 752 (2002).                        Relevancy is
                                       -10-
a question of law reviewed de novo.                 State v. Kirby, 206 N.C.

App. 446, 456, 697 S.E.2d 496, 503 (2010).                     Evidence is relevant

when it has a “tendency to make the existence of any fact that

is   of   consequence     to    the   determination           of    the    action    more

probable     or   less    probable     than    it        would      be    without     the

evidence.”    N.C. Gen. Stat. § 8C-1, Rule 401 (2013).

      Apart from the present case, plaintiffs filed complaints

against Duncan and Gonzales with the Virginia State Bar.                               In

proceedings stemming from those complaints, Duncan and Gonzales

testified before the Virginia State Bar about their involvement

with FMV, ProDev, and the financing scheme giving rise to this

case.     At the conclusion of the proceedings, Duncan and Gonzales

each had their license to practice law in Virginia revoked for a

period of time.

      Subsequent    to    the     Virginia    State           Bar   proceedings       and

Gonzales’ death, FMV filed a motion in limine in this case “for

an   order   precluding        [p]laintiffs    .     .    .     from      offering    any

testimony    or   other   evidence,     as    well       as    referencing      in    any

manner the proceedings in those Virginia State Bar proceedings

entitled Virginia State Bar v. John Francis Gonzales, Esquire,

Case No. CL 09003666 and Virginia State Bar v. Dale E. Duncan,

Case No. 09003613[.]”           Specifically concerning the transcripts
                                            -11-
of    the      proceedings,        FMV      contended      the    transcripts          were

irrelevant, immaterial, and otherwise inadmissible as hearsay.

In response, plaintiffs contended the transcripts were relevant,

material, and admissible as an exception to the hearsay rule

under N.C. Gen. Stat. § 8C-1, Rules 804(b)(1), (3), and (5).

       FMV’s    motion     came      on   for   hearing    on     4    September      2012.

After initially reserving judgment, the trial court concluded

that plaintiffs could cross-examine defendants regarding their

unethical conduct but determined the transcripts were immaterial

and inadmissible hearsay.

       At   the    outset,      we    address      the    trial       court’s    mistaken

statement that the transcripts were immaterial.                              Although the

memorandum orders containing the results and conclusions of the

Virginia State Bar proceedings may be irrelevant and immaterial

in the present case because the standards in ethical proceedings

differ from those in legal proceedings, Gonzales’ testimony in

the    Virginia         State   Bar       proceedings,     as     recorded       in    the

transcript, is both relevant and material in the present case as

it    details     the    conduct     that    forms   the    basis       of    plaintiffs’

claims.

       Nevertheless,        relevant        and    material       evidence       may    be

excluded if it is hearsay.                The North Carolina Rules of Evidence
                                     -12-
provide that hearsay, “a statement, other than one made by the

declarant while testifying at the trial or hearing, offered in

evidence to prove the truth of the matter asserted[,]”                          N.C.

Gen. Stat. § 8C-1, Rule 801(c) (2013), “is not admissible except

as provided by statute or by [the] rules.”                    N.C. Gen. Stat. §

8C-1, Rule 802 (2013).           There are exceptions to rule against

hearsay, however, when a declarant is unavailable.                       See N.C.

Gen. Stat. § 8C-1, Rule 804 (2013).

    Now on appeal, plaintiffs argue the trial court erred in

excluding the transcript of Gonzales’ testimony without issuing

specific findings of fact and conclusions of law regarding the

admissibility of the transcript under N.C. Gen. Stat. § 8C-1,

Rules     804(b)(3)   and     (5).    In    support      of    their    argument,

plaintiffs cite State v. Smith, 315 N.C. 76, 337 S.E.2d 833

(1985),    and   State   v.   Triplett,     316 N.C. 1,     340 S.E.2d 736

(1986).

    In Smith, our Supreme Court addressed the admissibility of

hearsay under N.C. Gen. Stat. § 8C-1, Rule 803(24), the residual

exception for hearsay when the availability of a declarant is

immaterial.      Smith, 315 N.C. at 90-99, 337 S.E.2d at 843-48.                  In

its discussion, the Court stated,

            [u]pon being notified that the proponent is
            seeking to admit the statement pursuant to
                                -13-
            that exception, the trial judge must have
            the record reflect that he is considering
            the admissibility of the statement pursuant
            to Rule 803(24). Only then should the trial
            judge proceed to analyze the admissibility
            by undertaking the six-part inquiry required
            of him by the rule.    The trial judge must
            engage in this inquiry prior to admitting or
            denying proffered hearsay evidence pursuant
            to Rule 803(24).

Id. at 92, 337 S.E.2d at 844.           Upon outlining the six-part

inquiry, the Court in Smith then held that,

            before allowing the admission of hearsay
            evidence to be presented under Rule 803(24)
            (other exceptions), the trial judge must
            enter appropriate statements, rationale, or
            findings of fact and conclusions of law, as
            set forth herein, in the record to support
            his    discretionary  decision   that   such
            evidence is admissible under that rule.   If
            the record does not comply with these
            requirements and it is clear that the
            evidence was admitted pursuant to Rule
            803(24), its admission must be held to be
            error.

Id. at 97, 337 S.E.2d at 847.          Thereafter, our Supreme Court

adopted “parallel guidelines” for the admission of hearsay under

N.C. Gen. Stat. § 8C-1, Rule 804(b)(5) in Triplett, noting “Rule

804(b)(5)     and   Rule   803(24)      are   substantively   nearly

identical[.]”   Triplett, 316 N.C. at 7, 340 S.E.2d at 740.

            Under either of the two residual exceptions
            to the hearsay rule, the trial court must
            determine the following: (1) whether proper
            notice has been given, (2) whether the
            hearsay   is    not   specifically  covered
            elsewhere, (3) whether the statement is
                                   -14-
             trustworthy, (4) whether the statement is
             material, (5) whether the statement is more
             probative on the issue than any other
             evidence which the proponent can procure
             through reasonable efforts, and (6) whether
             the interests of justice will be best served
             by admission.

State   v.   Valentine,   357 N.C. 512,    518,   591 S.E.2d 846,   852

(2003).

    Under the law espoused in Smith and Triplett, the trial

court is only required to issue findings of fact and conclusions

of law to support a decision to admit evidence pursuant to N.C.

Gen. Stat. § 8C-1, Rule 804(b)(5).            There is no requirement that

the trial court issue findings of fact or conclusions of law

regarding the admissibility of evidence pursuant to any other

N.C. Gen. Stat. § 8C-1, Rule 804 exception.                 Furthermore, the

trial court did not admit the hearsay evidence at issue in the

present case.     As this Court has stated, “[t]he six-part inquiry

is very useful when an appellate court reviews the admission of

hearsay under Rule 804(b)(5) or 803(24).              However, its utility

is diminished when an appellate court reviews the exclusion of

hearsay.”     Phillips & Jordan Inv. Corp. v. Ashblue Co., 86 N.C.

App. 186, 191, 357 S.E.2d 1, 3-4 (1987).

    Nevertheless, Smith and Triplett require the trial court,

upon being notified that a party is seeking to admit evidence

pursuant to a residual hearsay exception, to ensure the record
                                          -15-
reflects it is considering the exception and engage in the six-

part inquiry “prior to admitting or denying proffered hearsay

evidence[.]”      Smith, 315 N.C. at 92, 337 S.E.2d at 844.

      Although plaintiffs argued for admission of the transcript

of Gonzales’ testimony under the residual exception in both its

memorandum and argument, the trial court gave no indication that

it   considered     admission      under       N.C.    Gen.    Stat.      §    8C-1,     Rule

804(b)(5) or engaged in the required six-part inquiry when the

trial court denied the admission of the transcript.                                We hold

this failure to address the admission of the evidence under N.C.

Gen. Stat. § 8C-1, Rule 804(b)(5) was arbitrary and an abuse of

discretion.       Moreover,       given    that       Gonzales      is    now     deceased,

plaintiffs     provided     notice        of     their     intent         to     admit   the

transcript, the trial court denied admission of the transcript

after plaintiffs argued for its admission under the only other

applicable hearsay exceptions, the Virginia Bar proceedings have

sufficient      circumstantial            guarantees          of     trustworthiness,

Gonzales’    testimony      was    material,         and   Gonzales        was    the    best

source of evidence regarding his role with FMV and ProDev, we

believe the transcript of Gonzales’ testimony would likely be

admitted    under    N.C.    Gen.    Stat.       §     8C-1,       Rule    804(b)(5)       if

properly considered.
                                     -16-
    In addition to determining the trial court erred, we hold

plaintiffs   were    prejudiced   by    the    error.       Although      directed

verdicts were entered on plaintiffs’ fraud, misrepresentation,

and constructive fraud claims, and some evidence of Gonzales’

role with FMV and ProDev was introduced through stipulations and

testimony    from   FMV   president,        Arthur   Bennett,   we     find      the

exclusion    of   the   transcript     of    Gonzales’     testimony      was   not

harmless where Gonzales’ testimony is significant to the issue

of unclean hands, on which the jury was deadlocked at trial.

                        2. and 3. Directed Verdicts

    As mentioned in the background, at the close of plaintiffs’

evidence, FMV and its trustees moved for a directed verdict on

all issues pursuant to N.C. Gen. Stat. § 1A-1, Rule 50.                         Upon

consideration of the trial briefs and arguments by both sides,

the trial court granted FMV’s motion for a directed verdict on

plaintiffs’ claims of fraud, misrepresentation, and constructive

fraud, among others.

    Now,     in   plaintiffs’   second       and   third   issues    on    appeal,

plaintiffs argue the trial court erred in directing verdicts in

favor of FMV on the fraud, misrepresentation, and constructive

fraud claims.       “The standard of review of directed verdict is

whether the evidence, taken in the light most favorable to the
                                      -17-
non-moving   party,   is    sufficient       as   a   matter   of   law    to   be

submitted to the jury.”          Davis v. Dennis Lilly Co., 330 N.C.
314, 322, 411 S.E.2d 133, 138 (1991) (citing Kelly v. Int’l

Harvester Co., 278 N.C. 153, 179 S.E.2d 396 (1971)).                 Thus, our

review is de novo.      See Maxwell v. Michael P. Doyle, Inc., 164
N.C. App. 319, 323, 595 S.E.2d 759, 761 (2004) (“Because the

trial    court's   ruling   on    a    motion     for   a   directed      verdict

addressing the sufficiency of the evidence presents a question

of law, it is reviewed de novo.”).

                      Fraud and Misrepresentation

    Regarding plaintiffs’ fraud and misrepresentation claims,

plaintiffs contend the trial court erred in directing a verdict

in favor of FMV because there was sufficient evidence for the

jury to infer that the statute of limitations had not run.                      We

disagree.

    N.C. Gen. Stat. § 1-52(9) provides that actions for “relief

on the ground of fraud or mistake” must be brought within three

years.    N.C. Gen. Stat. § 1-52(9)(2013).               Yet, “the cause of

action shall not be deemed to have accrued until the discovery

by the aggrieved party of the facts constituting the fraud or

mistake.”    Id.   Our Supreme Court has “previously construed this

provision to ‘set accrual at the time of discovery regardless of
                                              -18-
the length of time between the fraudulent act or mistake and

plaintiff's discovery of it.’”                      Forbis v. Neal, 361 N.C. 519,

524, 649 S.E.2d 382, 386 (2007) (quoting Feibus & Co. v. Godley

Constr. Co., 301 N.C. 294, 304, 271 S.E.2d 385, 392 (1980)).

“For purposes of N.C.G.S. § 1-52(9), ‘discovery’ means either

actual discovery or when the fraud should have been discovered

in     the        exercise        of     ‘reasonable           diligence          under        the

circumstances.’”               Id. (quoting Bennett v. Anson Bank & Trust

Co., 265 N.C. 148, 154, 143 S.E.2d 312, 317 (1965)).

       As    noted       above,       plaintiffs       argue       there    was       sufficient

evidence         from    which     the    jury       could     infer       the    statute       of

limitations        had    not     expired      prior    to     7   June    2010,       the    date

plaintiffs commenced this action.                     In support of their argument,

plaintiffs quote Huss v. Huss, 31 N.C. App. 463, 468, 230 S.E.2d
159,     163      (1976),       for    the    proposition          that     “[w]hether         the

plaintiff         in     the    exercise       of      due     diligence         should       have

discovered        the     facts       [regarding       the   existence           of   potential

fraud] more than three years prior to the institution of the

action      is    ordinarily      for    the     jury    when      the     evidence      is    not

conclusive or conflicting.”                  Id. at 468, 230 S.E.2d at 163.

       Plaintiffs’ argument lacks merit.                     Considering the evidence

in this case, we find no issues for the jury to determine.
                                         -19-
      Both at trial and in their brief on appeal, plaintiffs

acknowledge that they began to become suspicious about the loan

when they were unable to refinance one of the properties in

August or September of 2006.              As L. Brissett testified, it was

around this time that they learned of Gonzales’ role in the

transaction.      L. Brissett further testified that he could not

locate his copy of the closing documents and demanded Gold send

him copies.     Upon receipt of the copies of the closing documents

in   October    2006,   plaintiffs        noticed      some   of     C.    Brissett’s

signatures did not look like her own.               C. Brissett subsequently

documented      plaintiffs’    realization          that      they        were    being

defrauded in a 29 December 2006 letter.

      We find this evidence conclusive that plaintiffs were aware

of the fraud in 2006.              Therefore, the three-year statute of

limitations     began   to   run    in    2006   and    expired      prior       to   the

commencement of this action on 7 June 2010.

      Despite    evidence     the        fraud   was     discovered         in    2006,

plaintiffs argue that “[a]lthough [they] may have suspected that

[FMV] was involved with the transfer of their properties to

[ProDev], and even potentially involved with the forgery of [C.

Brissett’s] signature on several documents, the plaintiffs did

not reasonably discover [FMV’s] actual ties to the fraudulent
                                         -20-
scheme until 2007 or 2008.”                  We are not convinced; discovery

includes “when the fraud should have been discovered in the

exercise     of     reasonable     diligence            under   the    circumstances.”

Forbis, 361 N.C. at 524, 649 S.E.2d at 386 (quotation marks

omitted).2

                                 Constructive Fraud

      Regarding plaintiffs’ constructive fraud claim, plaintiffs

argue the trial court erred in directing a verdict in favor of

FMV   because       there    was   sufficient           evidence      to    establish       a

presumption of a breach of fiduciary duty where FMV required

plaintiffs     to       convey   title   to       the    properties        to    ProDev,    a

company controlled by Gonzales and formed for the sole purpose

of holding title to the properties.                 We disagree.

      “In    order      to   maintain    a    claim       for   constructive           fraud,

plaintiffs      must      show   that    they       and     defendants          were   in   a

‘relation of trust and confidence . . . [which] led up to and

surrounded        the     consummation       of     the     transaction          in    which

defendant is alleged to have taken advantage of his position of

2
 Although plaintiffs do not mention it on appeal, we note that
FMV also argued for a directed verdict on the fraud and
misrepresentation claims on the ground that essential elements
of those claims were missing. The trial court, however, did not
explain the basis for its ruling. Because we find the directed
verdict was proper because the statute of limitations had
expired, we do not address the elements of the fraud and
misrepresentation claims.
                                   -21-
trust to the hurt of plaintiff.’”              Barger v. McCoy Hillard &

Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997) (quoting

Rhodes v. Jones, 232 N.C. 547, 549, 61 S.E.2d 725, 726 (1950)).

“Put   simply,   a   plaintiff   must   show    (1)   the   existence   of   a

fiduciary duty, and (2) a breach of that duty.”               Keener Lumber

Co., Inc. v. Perry, 149 N.C. App. 19, 28, 560 S.E.2d 817, 823

(2002).

       As this Court has recently explained,

           [a] fiduciary relationship “may exist under
           a variety of circumstances; it exists in all
           cases where there has been a special
           confidence reposed in one who in equity and
           good conscience is bound to act in good
           faith and with due regard to the interests
           of the one reposing confidence.”   Abbitt v.
           Gregory, 201 N.C. 577, 598, 160 S.E. 896,
           906 (1931).    Beyond the usual occurrence,
           such as that found between a lawyer and
           client, the relationship “extends to any
           possible case in which a fiduciary relation
           exists in fact, and in which there is
           confidence   reposed   on  one   side,   and
           resulting domination and influence on the
           other.”    Id. (citation omitted) (internal
           quotation marks omitted).

Dallaire v. Bank of America, N.A., _ N.C. App. _, _, 738 S.E.2d
731, 735 (2012).      This Court, however, has acknowledged that an

ordinary debtor-creditor relationship does not generally give

rise to a fiduciary relationship.         Branch Banking and Trust Co.

v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992).
                                     -22-
       Although plaintiffs admit that an ordinary creditor-debtor

relationship     does     not    create     fiduciary      duties,    plaintiffs

contend a fiduciary relationship exists between a mortgagee and

mortgagor when the mortgagee uses a “straw man” to divest the

mortgagor of his equity of redemption.                    In support of their

argument, plaintiffs cite Hinton v. West, 207 N.C. 708, 178 S.E.
356 (1935).

       The defendant in Hinton, in exchange for various items of

value, made out a note and took a mortgage on 48 acres of land

owned by the plaintiff.           Id. at 709, 178 S.E. at 356.                   Upon

default and a looming threat of foreclosure, the plaintiff, at

the    insistence    of   the   defendant,    relinquished     his    equity       of

redemption by conveying 42 acres of the land by deed to the

defendant, as trustee for defendant’s brother, to satisfy the

debt and avoid foreclosure.         Id. at 710, 178 S.E. at 357.                 Yet,

following      the   transfer,     defendant       took    control        and    made

improvements on the acreage.         Id.     In reviewing the transaction,

our Supreme Court noted that the [defendant] was the only party

with    whom   the   [plaintiff]    dealt    and    was    acting    in    a    “dual

capacity as trustee and agent for [his brother], and was the

primary party to the purchase.”             Id. at 714, 178 S.E. at 359.

The Court then reversed the trial court’s judgment of a nonsuit
                                     -23-
holding, that where the defendant, as trustee, acted for himself

to acquire the plaintiff’s equity of redemption for inadequate

consideration, “there was sufficient evidence to be submitted to

a jury, and a presumption arose from the evidence, if believed

by them, which would require the defendant[] to show that the

transaction was fair and free from oppression.”                   Id.

       Plaintiffs    argue   the    same    result     is    warranted    in    the

present case because FMV, through Gonzales, stood on both sides

of the transaction and failed to disclose Gonzales’ affiliation

with    FMV.        We    disagree       and    find        the     present    case

distinguishable.

       Although the result of plaintiffs’ default, where Gonzales

takes   control     of   ProDev    and   the   subject      properties    to   the

benefit of FMV, is similar to a foreclosure under a deed of

trust, the relationship between plaintiffs and FMV is not a

mortgagor-mortgagee relationship.           As stipulated by the parties,

“[n]one of the [p]roperties [were] the personal residence of the

[plaintiffs] on the date of closing, and the loan was in all

respects a commercial loan for the [plaintiffs] to use [to]

rehabilitate the [p]roperties.”             Moreover, there was no prior

relationship between FMV and plaintiffs to establish a fiduciary

relationship.       In fact, it was stipulated that “[FMV] had no
                                        -24-
contact or communication with the [plaintiffs] until after the

loan was closed.”            Based on these facts, we distinguish this

case from Hinton and the cases where fiduciary duties have been

imposed based on the special relationships between debtors and

creditors     and     hold    there    was     no    fiduciary         duty       owed    to

plaintiffs    by     FMV.      Thus,   the     trial     court       did   not      err   in

entering a directed verdict on plaintiffs’ constructive fraud

claim.

                      4. Evidence for Punitive Damages

      In    the     fourth    issue    raised       by   plaintiffs          on     appeal,

plaintiffs    argue     the    trial    court    erred     in    denying          them    the

opportunity to present evidence to the jury of FMV’s net worth,

revenues, and similar past conduct.                      Plaintiffs contend this

evidence was admissible to prove punitive damages pursuant to

N.C. Gen. Stat. §§ 1D-15 and 1D-35.

      N.C. Gen. Stat. § 1D-15 provides “[p]unitive damages may be

awarded only if the claimant proves that the defendant is liable

for   compensatory          damages    and   that        one    of     the        following

aggravating factors was present and was related to the injury

for which compensatory damages were awarded:                          (1) Fraud. (2)

Malice. (3) Willful or wanton conduct.”                    N.C. Gen. Stat. § 1D-

15(a) (2013).        N.C. Gen. Stat. § 1D-35 then lists the types of
                                       -25-
evidence that the trier of fact may consider in determining the

amount of punitive damages, if any, to be awarded.                     N.C. Gen.

Stat. § 1D-35 (2013).          The list of evidence includes evidence

related to “[t]he existence and frequency of any similar past

conduct by the defendant[,]” N.C. Gen. Stat. § 1D-35(2)(g), and

“[t]he defendant’s ability to pay punitive damages, as evidenced

by its revenues or net worth.”             N.C. Gen. Stat. § 1D-35(2)(i).

    At the outset of our analysis on the issue, we note that

plaintiffs   mischaracterize         the    portions   of   the    evidence     they

claim were excluded in error.               Regarding FMV’s ability to pay

punitive damages,      plaintiffs questioned Bennett regarding the

total value of the loans by FMV in North Carolina in 2006.                      FMV

objected on relevance grounds and the trial court sustained the

objection.       The   trial   court,       however,   allowed      plaintiff    to

question Bennett as to the largest and smallest amount of loans,

in terms of value, made by FMV in any year since Bennett became

president.      Regarding FMV’s past similar conduct, plaintiffs did

not merely inquire into FMV’s past similar conduct, but instead

questioned Bennett about the number of times FMV had been sued

as a result of similar lending schemes.                 FMV objected and the

trial   court    sustained     the    objection.        Upon      review   of   the
                                        -26-
testimony, we hold the trial court did not abuse its discretion

in sustaining either of FMV’s objections.

      Nevertheless, assuming arguendo the trial court erred in

limiting    the    testimony,     the     error   was   harmless    given   that

directed verdicts were entered in favor of FMV on the fraud

claims and the jury never found FMV liable, thereby precluding

any contemplation of damages.              See N.C. Gen. Stat. § 1D-15(a)

(conditioning the award of punitive damages on the award of

compensatory damages).

           5. Judgment Notwithstanding the Verdict (“JNOV”)

      As detailed in the background, the jury was deadlocked on

the issues of adequate consideration and unclean hands.                     As a

result, on 12 September 2012, FMV filed a motion for a JNOV

pursuant to N.C. Gen. Stat. § 1A-1, Rule 50(b)(1).                      In the

motion, FMV argued it was entitled to judgment as a matter of

law   because     there   was    overwhelming     evidence   that   plaintiffs

received consideration for executing the deeds conveying title

to ProDev, as shown by the jury’s determination that FMV is

entitled to a lien on the properties, and “the [trial court,]

having     concluded      that    [FMV]     was   entitled    to    [d]irected

verdict[s] on [p]laintiffs’ claims for fraud, civil conspiracy,

constructive fraud, and unfair or deceptive trade practices, . .
                                      -27-
.   essentially      ruled   that    [FMV]   did      not       act    with     ‘unclean

hands.’”     On the same day, plaintiffs filed their own motion for

a JNOV and a new trial arguing there was overwhelming evidence

of inadequate consideration and unclean hands.                         In response to

FMV’s argument regarding unclean hands, plaintiffs argued “[t]he

elements in each of [the fraud] claims are not identical to what

the [c]ourt must find to determine the issue of . . . ‘unclean

hands[]’”     and,    therefore,      the    directed           verdicts        did     not

foreclose a determination of unclean hands.

      After hearing arguments echoing those in the motions, the

trial   court     granted    FMV’s    motion       for      a    JNOV     and        denied

plaintiffs’ motions.

      In the plaintiffs’ final issue on appeal, plaintiffs argue

the trial court erred in granting FMV’s motion for a JNOV on the

issue of unclean hands.3       We agree.

      “A motion for judgment notwithstanding the verdict (JNOV)

‘is   essentially      a   directed    verdict     granted            after    the    jury

verdict.’”        Tomika     Invs.,     Inc.     v.      Macedonia            True    Vine

Pentecostal Holiness Church of God, Inc., 136 N.C. App. 493,

3
 Plaintiffs do not challenge the JNOV in favor of FMV on the
issue of adequate consideration because the issue is of little
consequence following the jury’s determination that the deeds
were inadequate under the law to convey valid title and create a
valid debt.
                                            -28-
498,    524 S.E.2d 591,    595    (2000).        Thus,   “[o]n     appeal    the

standard of review for a JNOV is the same as that for a directed

verdict, that is whether the evidence was sufficient to go to

the jury.”         Id. at 498-99, 524 S.E.2d at 595.

       “The doctrine of clean hands is an equitable defense which

prevents      recovery      where    the    party      seeking    relief    comes    into

court with unclean hands.”                 Ray v. Norris, 78 N.C. App. 379,

384, 337 S.E.2d 137, 141 (1985).                   More specifically, this Court

has stated “[t]he clean hands doctrine denies equitable relief

only to litigants who have acted in bad faith, or whose conduct

has     been       dishonest,        deceitful,          fraudulent,       unfair,     or

overreaching        in    regard     to    the     transaction     in    controversy.”

Collins v. Davis, 68 N.C. App. 588, 592, 315 S.E.2d 759, 762,

affirmed, 312 N.C. 324, 321 S.E.2d 892 (1984).                       In this case, a

finding that FMV acted with unclean hands would prevent FMV from

obtaining a lien on the subject properties.

       In entering the JNOV on the issue of unclean hands, it

appears the         trial    court agreed with            FMV’s argument that the

trial   court       had   already     decided      the    issue   when     it   directed

verdicts      on    plaintiffs’      claims      for     fraud,   civil     conspiracy,

constructive fraud, and unfair or deceptive trade practices.                           We

find this was error for two reasons.                      First, FMV argued for a
                                          -29-
directed verdict on the fraud claims based on the statute of

limitations and lack of reasonable reliance.                     It is unclear from

the record on which basis the trial court entered the directed

verdicts.         Second,     for    a   finding    of    unclean     hands,      “[t]he

inequitable action need not rise to the level of fraud[.]”                          S.T.

Wooten Corp. v. Front Street Const., LLC, _ N.C. App. _, _, 719
S.E.2d 249, 252 (2011) (citing Stelling v. Wachovia Bank and

Trust Co., 213 N.C. 324, 327, 197 S.E. 754, 756 (1938)).                          Thus,

fraud is not required to preclude equitable relief on the basis

of unclean hands.

      Upon review of the evidence, even without considering the

transcript       of   Gonzales’      testimony     in    the   Virginia     State    Bar

proceedings, we hold there was sufficient evidence to present

the jury with the issue of whether FMV acted with unclean hands.

As a result, we hold the trial court erred in granting FMV’s

motion for a JNOV following the jury’s impasse.

                                    III. Conclusion

      Based on the forgoing discussion, we hold the trial court

did     not   err     in    directing     verdicts       on     plaintiffs’       fraud,

misrepresentation, and constructive fraud claims.                          Nor did the

trial    court    improperly        exclude   evidence        relating     to   punitive

damages.       The    trial    court     did,    however,       err   in   failing    to
                              -30-
consider the admission of the transcript of Gonzales’ testimony

in the Virginia State Bar proceedings under all the hearsay

exceptions argued by plaintiffs and by granting FMV’s motion for

a JNOV on the issue of unclean hands.   Therefore, the judgment

is reversed and the case is remanded on the issue of unclean

hands.

    No error in part and reversed in part.

    Judges ELMORE and DAVIS concur.