               IN THE COURT OF APPEALS OF NORTH CAROLINA

                                 No. COA18-925

                                Filed: 4 June 2019

Davidson County, No. 14 CVS 3289

THOMAS RAYMOND WALSH, M.D. and JAMES DASHER, M.D., Plaintiffs,

              v.

CORNERSTONE HEALTH CARE, P.A., Defendant.


      Appeal by defendant from order entered 21 March 2018 by Judge Jeffery K.

Carpenter in Davidson County Superior Court. Heard in the Court of Appeals 13

March 2019.


      Nelson Mullins Riley & Scarborough LLP, by G. Gray Wilson and Lorin J.
      Lapidus, for plaintiffs-appellees.

      Bennett Guthrie Latham, PLLC, by Rodney A. Guthrie, Roberta King Latham,
      and Mitchell H. Blankenship, for defendant-appellant.


      ZACHARY, Judge.


      Defendant Cornerstone Health Care, P.A. appeals from the trial court’s order

striking Defendant’s answer as a sanction for discovery violations. We vacate and

remand.

                                  Background

      Plaintiffs Thomas Raymond Walsh, M.D. and James Dasher, M.D. filed the

instant action against Defendant, their former employer, on 20 November 2014

asserting claims for breach of the implied covenant of good faith and fair dealing,

breach of contract, common law unfair competition, and quantum meruit. A
                     WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                   Opinion of the Court



protracted discovery dispute thereafter arose between the parties, which, for

purposes of the instant appeal, primarily involves Plaintiffs’ claim for breach of the

implied covenant of good faith and fair dealing.

      As part of the basis of their claim for breach of the implied covenant of good

faith and fair dealing, Plaintiffs alleged that “[i]n recent years, defendant . . . became

fundamentally unprofitable, and was able to pay its business debts only by arbitrarily

reducing the compensation of certain disfavored physicians.” Plaintiffs maintain that

they were included among said group of “disfavored physicians,” and that when

Plaintiffs expressed dissatisfaction with their decreased compensation, Defendant

retaliated by essentially demoting Plaintiffs in an effort to further reduce their

compensation. On 20 September 2014, Plaintiffs voluntarily resigned from their

employment with Defendant. Plaintiffs maintained that “Defendant’s capricious,

malicious, and retaliatory actions” constituted a breach of the implied covenant of

good faith and fair dealing in their employment contracts.

      Defendant served its initial response to Plaintiffs’ First Set of Interrogatories

and Request for Production of Documents on 4 May 2015. Interrogatory 7 directed

Defendant to “[i]dentify, with specificity, all relevant documents that you or your

attorney have which pertain to any issues or facts in this suit.” Plaintiffs’ Request 7

sought

             [a]ll   statements,      summaries    of   statements,
             correspondence, letters, memoranda, documents, records,


                                          -2-
                         WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                        Opinion of the Court



                 notes, telephone logs, electronic mail, ms word documents,
                 pdf files, or other papers, whether in written, printed, or
                 electronic format, in your possession or control or to which
                 you, your counsel, or representatives have access regarding
                 or pertaining to the professional performance, competency,
                 or personal opinions or views of either or both plaintiffs by
                 [Defendant].

(Hereafter “professional and personal opinion documents”). Defendant objected to

Request 7 on the grounds of privilege,1 but nevertheless responded that it had nothing

to produce.2 Defendant’s CEO verified under oath that the response to Request 7 was

“true of her own knowledge and belief except those matters therein stated upon

information and belief, and, as to those, she believe[d] them to be true.”

       On 26 July 2016, following the parties’ fourth discovery-related motion, the

Honorable Mark E. Klass entered an order requiring the parties to “confer and

select . . . a qualified and capable forensic e-discovery vendor for the purpose of

collecting and cataloging electronically stored communications, specifically e-mails,

generated by” six of Defendant’s corporate officers (“the e-discovery order”). According

to Plaintiffs, when Defendant’s e-discovery database became available to them in

August 2017, Plaintiffs learned that Defendant had “intentionally withheld a vast

number of highly relevant and damaging documents”—namely, e-mails between




       1    Defendant indicated that it would provide a Privilege Log in its second supplemental
response.
       2  Defendant answered “none” in its first supplemental response to Plaintiffs’ Request for
Production 7, to which Defendant had directed Plaintiffs in its answer to Interrogatory 7, pursuant to
Rule 33(c) of the North Carolina Rules of Civil Procedure.

                                                -3-
                    WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                  Opinion of the Court



Defendant’s officers—“which squarely pertain” to Defendant’s professional and

personal opinions of Plaintiffs, despite the CEO having attested, under oath, that no

such documents existed. Accordingly, on 21 September 2017, Plaintiffs filed a motion

for mandatory sanctions “pursuant to Rule 26(g) of the North Carolina Rules of Civil

Procedure.” Plaintiffs maintained that “[t]he discovery responses signed and attested

to under oath by [Defendant’s CEO] were interposed for the improper purpose of

intentionally withholding a substantial cache of damaging documents, which has

served to harass plaintiffs, cause unnecessary delay, and has needlessly and

exponentially increased the cost of litigation.” Plaintiffs argued that “[a]t this

juncture, only the severe sanction of striking [Defendant’s] answer is appropriate.”

      Plaintiffs’ motion came on for hearing on 2 October 2017. The professional and

personal opinion documents that Plaintiffs alleged were responsive to Interrogatory

7 and Request 7 were presented to the trial court for in camera review. Plaintiffs

argued:

                    Rule 26(g) is cited in our brief in full. . . . [It]
             essentially addresses the issue of improper purpose and
             that is to use the discovery process for a number of different
             improper reasons, but in this case to use the discovery
             process to wear down the opponent to needlessly increase
             the cost of litigation so eventually the party collapses under
             its weight.

                    We think that’s exactly what has occurred in this
             case. . . . The discovery responses that were signed by the
             defendant’s CEO, falsely, were for the clear purpose of
             improperly withholding a substantial number of damaging


                                         -4-
                     WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                   Opinion of the Court



             documents pertaining again to our claims for breach of
             implied covenant of good faith and fair dealing.

                    ....

             They denied the existence of these documents under oath
             twice . . . .

                    ....

             So what we say essentially is this; the defendant’s
             discovery misconduct is one of the most egregious examples
             that a Court will find to justify severe sanctions of striking
             their answer; otherwise, this pattern of false swearing of
             recalcitrants in discovery, it goes unpunished. That’s why
             wisely Rule 26(g) was placed into effect in this
             jurisdiction . . . .

      In response, Defendant argued that it did not produce the e-mails that

Plaintiffs presented for in camera review because they were neither relevant nor

responsive to Interrogatory 7 or Request 7, in that they “have nothing to do, there’s

nothing regarding the professional competence of these doctors as surgeons. . . . We

commend those [e-mails] to your reading . . . . That will shed a lot of light on why we

did not consider those to be relevant and responsive to any issue in the case.”

“[N]evertheless,” Defendant noted, “they have now been produced.”

      On 21 March 2018, more than five months after the hearing, the trial court

entered its order, finding that Plaintiffs’ motion was filed “specifically for failure to

supplement as required under Rule 26(e) of the N.C. Rules of Civil Procedure.” The

trial court found that the documents that Plaintiffs presented for in camera review



                                          -5-
                         WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                         Opinion of the Court



were both relevant and responsive to Interrogatory 7 and Request 7,3 and concluded

that “Defendant’s failure to appropriately supplement its responses to the discovery

requests of the Plaintiffs [under Rule 26(e)] justifies the imposition of sanctions.” The

trial court further concluded that “no lesser sanction than” striking Defendant’s

answer “would be effective in correcting the Defendant’s conduct.” Accordingly, the

trial court struck Defendant’s answer, leaving only the issue of damages remaining

for consideration. Defendant filed written notice of appeal on 20 April 2018.

       On appeal, Defendant argues, inter alia, that “the facts on which” the trial

court granted Plaintiffs’ motion to strike Defendant’s answer were “so clearly

erroneous” that the resulting sanctions constituted an abuse of discretion. We agree

with Defendant that the order should be vacated on this ground, and therefore we

need not address Defendant’s remaining challenges.

                               Grounds for Appellate Review

       Although Defendant’s appeal is interlocutory, Defendant nevertheless

maintains that it is entitled to an immediate appeal from the trial court’s order

because it affects a substantial right, in that it strikes Defendant’s answer. See Adair

v. Adair, 62 N.C. App. 493, 495, 303 S.E.2d 190, 192 (“An interlocutory order is

appealable if it affects some substantial right claimed by the appellant and if it will


       3 Defendant does not challenge this finding by the trial court, and it is thus binding on appeal.
Koufman v. Koufman, 330 N.C. 93, 97, 408 S.E.2d 729, 731 (1991) (“Where no exception is taken to a
finding of fact by the trial court, the finding is presumed to be supported by competent evidence and
is binding on appeal.”).

                                                 -6-
                      WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                    Opinion of the Court



work injury if not corrected before final judgment.”), disc. review denied, 309 N.C.

319, 307 S.E.2d 162 (1983). Indeed, “[o]rders of this type have been described as

affecting a substantial right.” Essex Grp., Inc. v. Express Wire Servs., Inc., 157 N.C.

App. 360, 362, 578 S.E.2d 705, 707 (2003); see also Adair, 62 N.C. App. at 495, 303

S.E.2d at 192. Accordingly, Defendant has a right to immediate appeal from the trial

court’s order.

                                      Discussion

         Defendant contends that the trial court’s order imposing sanctions was based

upon several erroneous findings, including that Plaintiffs’ motion sought to sanction

Defendant “specifically for failure to supplement as required under Rule 26(e).”

Defendant maintains that this finding is simply “not true,” and argues, among other

things, that the trial court erred when it “sua sponte[] made additional legal

arguments to grant [Plaintiffs] the relief sought.” Defendant contends that this

amounted to an abuse of discretion, and therefore, the order must be vacated. We

agree.

         Rule 26(g) of the North Carolina Rules of Civil Procedure provides:

                (g) Signing of discovery requests, responses, and
               objections. — Every request for discovery or response or
               objection thereto made by a party represented by an
               attorney shall be signed by at least one attorney of record
               in that attorney’s name, whose address shall be stated. A
               party who is not represented by an attorney shall sign the
               request, response, or objection and state that party’s
               address. The signature of the attorney or party constitutes


                                           -7-
                     WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                   Opinion of the Court



             a certification that the attorney or party has read the
             request, response, or objection and that to the best of the
             knowledge, information, and belief of that attorney or
             party formed after a reasonable inquiry it is: . . . (2) not
             interposed for any improper purpose, such as to harass or
             cause unnecessary delay or needless increase in the cost of
             litigation . . . .

                    If a certification is made in violation of the rule, the
             court, upon motion or upon its own initiative, shall impose
             upon the person who made the certification, the party on
             whose behalf the request, response, or objection is made, or
             both, an appropriate sanction, which may include an order
             to pay the amount of the reasonable expenses incurred
             because of the violation, including a reasonable attorney’s
             fee.

N.C. Gen. Stat. § 1A-1, Rule 26(g) (2017).

      In other words, “Rule 26(g) provides that when an attorney or party signs a

discovery document, he certifies to the best of his knowledge that it has not been

served for an improper purpose and is not unreasonably burdensome or expensive.”

Turner v. Duke University, 325 N.C. 152, 163-64, 381 S.E.2d 706, 713 (1989). “Such

signature constitutes a certification parallel to that required by Rule 11,” Brooks v.

Giesey, 334 N.C. 303, 317, 432 S.E.2d 339, 347 (1993), and thus “sanctions under Rule

26(g) may be applied following Rule 11 case law.” Id. at 318, 432 S.E.2d at 347.

      In the instant case, Plaintiffs moved for mandatory sanctions “pursuant to

Rule 26(g)” on the basis of Defendant’s initial discovery responses, in which Plaintiffs

contended that Defendant had “necessarily failed to identify all documents which

pertain to” Defendant’s professional and personal opinions of Plaintiffs. Plaintiffs


                                          -8-
                     WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                   Opinion of the Court



alleged that Defendant’s response that it had no such documents was “interposed for

the improper purpose of intentionally withholding a substantial cache of damaging

documents, which has served to harass plaintiffs, cause unnecessary delay, and has

needlessly and exponentially increased the cost of litigation.” Plaintiffs reiterated this

argument during the hearing on their motion, and Defendant defended against the

same.

        However, the trial court imposed sanctions against Defendant more than five

months after the hearing, finding that Plaintiffs had filed their motion for sanctions

“specifically for failure to supplement as required under Rule 26(e).” (Emphasis

added). The trial court concluded that Defendant failed to supplement its discovery

responses as required under Rule 26(e), and struck Defendant’s answer on that basis.

The effect of the trial court’s erroneous finding is significant and requires that the

sanctions be vacated.

        It is well established that “the [party] against whom sanctions are to be

imposed must be advised in advance of the charges against [it].” Griffin v. Griffin,

348 N.C. 278, 280, 500 S.E.2d 437, 439 (1998). While North Carolina does not require

notice of the precise type of sanctions sought, a party is nevertheless entitled to “(1)

notice of the bases of the sanctions and (2) an opportunity to be heard” thereon.

Egelhof v. Szulik, 193 N.C. App. 612, 616, 668 S.E.2d 367, 370 (2008).




                                          -9-
                     WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                   Opinion of the Court



      For example, in Griffin, “Charles Henderson had been given notice by the

Bullocks that they would seek to have sanctions imposed upon him for filing a petition

for an adoption.” Griffin, 348 N.C. at 279-80, 500 S.E.2d at 438. “After the hearing,

the court did not impose sanctions for the filing of the adoption petition”; instead, it

“impose[d] sanctions for the filing of pleadings for which Mr. Henderson had not

received notice that such sanctions would be sought.” Id. at 280, 500 S.E.2d at 438.

Our Supreme Court concluded that this was error:

             It is not adequate for the notice to say only that sanctions
             are proposed. The bases for the sanctions must be alleged.
             In this case, the notice actually misled Mr. Henderson as
             to what sanctions would be imposed. Mr. Henderson was
             notified that sanctions were proposed for filing the
             adoption proceeding, but sanctions were imposed for
             something else. The fact that the court made detailed
             findings of fact in the order for sanctions is not adequate.
             In order to pass constitutional muster, the person against
             whom sanctions are to be imposed must be advised in
             advance of the charges against him.

Id. at 280, 500 S.E.2d at 439 (emphasis added) (citations omitted). Accordingly, our

Supreme Court ordered that the sanctions imposed without notice be vacated. Id.

      Similarly, in this case, Defendant was not advised, prior to the hearing, that it

might be sanctioned for failure to supplement its discovery responses pursuant to

Rule 26(e); wholly absent from Plaintiffs’ motion was any contention that Defendant




                                          - 10 -
                         WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                          Opinion of the Court



should be sanctioned on that basis.4 Plaintiffs’ motion instead sought sanctions for a

violation of Rule 26(g), and the substance of the parties’ arguments at the hearing

reflected the same. The mere fact that the parties made scattered references at the

hearing to Defendant’s “ongoing obligation” to supplement its discovery responses

under Rule 26(e) does not demonstrate that Defendant received proper notice that

sanctions might be imposed on that basis. See id. (“The fact that Mr. Henderson

participated in the hearing and did the best he could do without knowing in advance

the sanctions which might be imposed does not show a proper notice was given.”).

        Accordingly, in light of the lack of notice provided, we agree with Defendant

that the trial court’s order imposing sanctions for a violation of Rule 26(e) must be

vacated and remanded for entry of an order that is consistent with the grounds upon

which Plaintiffs moved to strike Defendant’s answer.5


        4 Plaintiffs’ Rule 9(b)(5) supplement filed with this Court contains what purports to be a two-
page excerpt from its “Brief in Support of Motion for Discovery Sanctions to Strike Answer,” in which
Plaintiffs argue that “[a]ssuming arguendo, that [Defendant’]s verifications about the existence of the
[professional and personal opinion documents] were accurate when made to the best of its knowledge
at the time,” Defendant still “failed to supplement its prior discovery responses pursuant to Rule
26(e)(2).” However, the excerpt indicates that the brief was signed on the same date as the hearing,
and there is no certificate of service or other indication that Defendant received notice of this basis for
sanctions prior to the hearing. Nor does the brief contain a file stamp demonstrating that it was filed
with the trial court. In fact, at the hearing, the presiding judge commented to Plaintiffs that he did
not have briefs.
        5 During oral arguments before this Court, Plaintiffs contended that Defendant has abandoned
any argument concerning notice because it did not raise that issue in its brief. See N.C.R. App. P. 28(a)
(“Issues not presented and discussed in a party’s brief are deemed abandoned.”). Indeed, Defendant
did not specifically phrase its challenges to the trial court’s order in terms of “notice.” Defendant did,
however, argue the following:

                        [The trial court] found that [Defendant] had failed to



                                                  - 11 -
                        WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                         Opinion of the Court



                                            Conclusion

       For the foregoing reasons, we vacate the trial court’s 21 March 2018 order

sanctioning Defendant by striking its answer and remand for the trial court to

address the grounds for which the instant proceeding was initiated—that is, whether

the trial court is mandated pursuant to Rule 26(g) to impose sanctions against

Defendant for its initial certification that it possessed no documents pertaining to its




               supplement its response to [Interrogatory] 7 under Rule 26(e) . . . and
               therefore sanctioned it pursuant to Rule 37. [Plaintiffs], however, never
               moved the Court to exercise its discretionary authority to sanction
               [Defendant]. Instead, [Plaintiffs] moved for mandatory sanctions under
               Rule 26(g). . . .

                        Instead of ruling on the appropriateness of [Plaintiffs’] motion
               for mandatory sanctions under Rule 26(g), [the trial court] found as
               fact that “[Plaintiffs] filed the 21 September 2017 Motion seeking to
               sanction [Defendant] for discovery violations, specifically for failure to
               supplement as required under Rule 26(e) . . . .” Nowhere in [Plaintiffs’
               motion] is there any reference whatsoever to Rule 26(e). The only
               reference to supplementation made by [Plaintiffs] was at [the hearing]
               in relation to the argument for mandatory sanctions under Rule 26(g).
               Rules 26(g) and 26(e) are fundamentally different from one another . . .
               .

                        Thus, [the trial court] either (1) declined to grant [Plaintiffs]
               relief on the grounds they requested and, sua sponte, made additional
               legal arguments to grant them the relief sought[,] or (2) [the trial court]
               fundamentally misunderstood the motion that [it] granted. Such a
               grave overreach or misapprehension of the matters before the Court
               cannot be considered anything but an abuse of discretion, particularly
               in light of the drastic sanction it ultimately led to in this matter.

(Emphases added) (original alterations omitted). Despite the omission of the word “notice,” it is
nevertheless clear that the substance of Defendant’s argument is a challenge to the lack of notice of
the grounds upon which the trial court imposed sanctions, albeit phrased in terms of abuse of
discretion.

                                                 - 12 -
                    WALSH V. CORNERSTONE HEALTH CARE, P.A.

                                 Opinion of the Court



professional or personal opinions of Plaintiffs, in response to Interrogatory 7 and

Request 7.

      VACATED AND REMANDED.

      Judges STROUD and INMAN concur.




                                        - 13 -
