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NC: Caught by the "Long Arm" of the Law

Summit Lodging, LLC v. Jones, Spitz, Moorhead, Baird & Albergotti, P.A., 176 N.C. App. 697, 627 S.E.2d 259 (2006)

NC: Underlying Real Property Transaction

Student Contributor: Vanessa L. Wachira

Facts: Clients, non-residents of North Carolina, retained a South Carolina-based firm (“Attorneys”) to organize a North Carolina limited liability company for the purpose of purchasing, owning, and operating an inn in North Carolina. Attorneys represented Clients in connection with the transaction by communicating with the Seller and preparing the documentation. Because Attorneys were licensed to practice in SC, they contacted an NC attorney to serve as counsel for Clients in the actual purchase transaction. At the closing, Clients signed a promissory note for nearly the entire purchase amount, “which provided for a maturity date of one year.” When Clients defaulted, they negotiated extensions with Seller and prepared a proposal to restructure the debt. To restructure the debt, Attorneys negotiated an arrangement in which one of Seller’s affiliates (“Affiliate”) would loan to Clients part of the sum needed to satisfy their indebtedness. The loan was to be personally guaranteed by Clients. Attorneys presented the agreement to Clients, who then executed the new promissory note. When Clients defaulted on the loan, Affiliate sought to collect from Clients personally. Although North Carolina statute (N.C. Gen.Stat. § 45-21.38 (2001)) prohibits deficiency judgments where a mortgage on real property represents part of the purchase price, because Clients had executed the new note with Affiliate, that portion of the debt became unsecured, with personal guarantees not subject to the statute. Clients brought suit for legal malpractice in NC, alleging that Attorneys failed to inform them of this consequence of the debt restructuring. Attorneys filed a motion to dismiss for lack of personal jurisdiction.

Issue: Whether personal jurisdiction can be established in a legal malpractice claim brought against non-resident lawyers by non-resident clients.

Ruling: Yes. In NC, plaintiffs establish personal jurisdiction by claiming “(1) that they suffered an injury within North Carolina which arose out of a defendant’s acts or omissions outside the state; and (2) that at or about the time of the injury, “solicitation or services activities were carried on within [NC] by or on behalf of defendant.” N.C. Gen.Stat. § 1-75.4(4) (2004). Here, Clients’ company, a North Carolina corporation, was injured when Attorneys failed to advise them of the anti-deficiency statute. This failure occurred in South Carolina, satisfying the foreign act requirement. During this time, Attorneys provided legal services to Clients to secure loan restructuring with two NC companies. Thus, Clients had made out a prima facie case for personal jurisdiction pursuant to the long-arm statute. Furthermore, although Attorneys were not physically present in North Carolina, they represented Clients’ corporation, a North Carolina company, “from its inception,” satisfying due process’s ‘minimum contacts’ requirement.

Lesson: When providing services for clients in foreign jurisdictions, it is imperative that you thoroughly research the laws of that jurisdiction; if you don’t, you may be liable for malpractice.  

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Posted in: North Carolina, Real Estate