Ellis & Winters

North Carolina law awards treble damages for violations of N.C. Gen.
Stat. § 75-1.1 “if damages are assessed.” A recent Fourth Circuit decision asks this question: If a plaintiff seeks rescission, and if the defendant’s conduct violates section 75-1.1, may the court treble the value of the rescission? The court answered no.

In First South Bank v. Fifth Third Bank, N.A., First South agreed to participate with Fifth Third in financing the construction of a housing development. Fifth Third told First South that buyers had prepurchased a majority of the lots, that enough utilities were available to serve the development, and that certain people would guarantee repayment of the construction loan.

After the loan closed and First South disbursed $1.85 million for construction of the project, several of the prepurchasers backed out. In addition, the utility service fell short of what Fifth Third had described. The guarantors also turned out not to have executed the guaranties that Fifth Third had promised.

First South sued Fifth Third, claiming breach of contract, fraud, and violations of section 75-1.1. First South sought rescission of the loan participation agreement, as well as damages for breach of contract and fraud.

Before trial, the federal district court required First South to choose between affirming the loan participation agreement and seeking damages or instead seeking rescission of the agreement. First South chose rescission. It stipulated that it would seek only repayment of the loan proceeds, less credits that it had already received. The two banks also stipulated to what the net repayment amount would be if First South prevailed.

After a trial, a jury awarded First South the stipulated amount. The district judge ruled that by awarding First South this amount, the jury was effecting rescission rather than awarding damages.

As a result, the district court rejected First South’s claim under section 75-1.1. The court reasoned that section 75-16—the remedial statute for section 75-1.1—applies only to an award of “damages.” A rescissory award, the court held, is not the same thing as damages.

On appeal, First South argued that the jury had awarded “rescissionary damages” that deserved trebling. In a per curiam decision, the Fourth Circuit disagreed. The court held that in the district court, First South had consistently said that it was seeking only the return of the funds it had advanced. The Fourth Circuit held that this relief was rescission, and that under N.C. Gen. Stat. § 75-16, a rescissory award cannot be trebled.

In this holding, the court followed its 1993 decision in Winant v. Bostic. In Winant, the Fourth Circuit held that section 75-16 does not allow trebling of restitutionary awards. The Winant court wrote that “[i]f § 75-16 were construed to direct trebling of the amount restored to plaintiff, it would function on only a part of the remedy, irrationally magnifying the purposes of the statute. Instead of trebling damages, as required by the statute, this application would treble the size of the transaction.”

For this reasoning, the Winant court relied on relatively indirect authority. For example, the court cited a North Carolina Supreme Court decision that stated that rescission and damages are mutually exclusive remedies—that is, for fraud in the inducement. The Winant court also cited a North Carolina Court of Appeals decision that held that a plaintiff who had rescinded a contract was neither damaged nor injured for purposes of section 75-16.

In any event, First South should warn plaintiffs in 75-1.1 cases to think carefully about the types of remedies they seek, if treble damages are the ultimate goal.

The decision has even more lessons for defendants. First South should remind defendants not to assume that every type of money sought in a 75-1.1 case is subject to trebling. When a plaintiff seeks multiple forms of relief, a defendant should consider demanding an election of remedies. Such an election might cause a plaintiff to elect a rescissory remedy—and thus to forfeit treble damages.

Author: George Sanderson