              IN THE COURT OF APPEALS OF NORTH CAROLINA

                                  No. COA16-31

                              Filed: 6 September 2016

Dare County, No. 14 CVS 325

EMERALD PORTFOLIO, LLC, Plaintiff,

             v.

OUTER BANKS/KINNAKEET ASSOCIATES, LLC, RAY HOLLOWELL
Individually, and DONNA HOLLOWELL Individually, Defendants.


      Appeal by defendants Outer Banks/Kinnakeet Associates, LLC and Ray

Hollowell from orders entered 27 August 2015 by Judge Cy A. Grant in Dare County

Superior Court. Heard in the Court of Appeals 26 May 2016.


      Van Winkle, Buck, Wall, Starnes and Davis, P.A., by Robert A. Mays, for
      plaintiff-appellee.

      Phillip H. Hayes for defendants-appellants Outer Banks/Kinnakeet Associates,
      LLC and Ray Hollowell.


      ZACHARY, Judge.


      Where the assignee of a note lacked possession of the note and did not satisfy

the statutory provisions for enforcement of a lost note, the trial court erred in

granting summary judgment in favor of the assignee. Where there was no genuine

issue of material fact as to obligor’s contractual debt pursuant to the guaranty

agreement, and the agreement was not unconscionable, the trial court did not err in

granting summary judgment in favor of the assignee-obligee of the guaranty

agreement.
        EMERALD PORTFOLIO, LLC V. OUTER BANKS/KINNAKEET ASSOCS., LLC

                                  Opinion of the Court



                       I. Factual and Procedural Background

      On 30 August 2006, Outer Banks/Kinnakeet Associates, LLC, (OBKA)

executed a promissory note in favor of First South Bank (FSB) in the amount of

$3,025,500. Ray Hollowell, in his capacity as OBKA’s manager, signed the note on

behalf of OBKA. On that same day, Ray Hollowell and his spouse, Donna Hollowell

(collectively, the Hollowells) each signed separate, but identical,        commercial

guaranties imposing personal liability on them under contract for OBKA’s payment

of the note. On 24 December 2008, 23 January 2009, and 18 March 2010, FSB and

OBKA entered into agreements modifying the terms of the original note.

      In February of 2013, FSB sold the loan to Emerald Portfolio, LLC (Emerald).

On 23 June 2014, Emerald, as assignee of FSB, filed a complaint against OBKA and

the Hollowells alleging a default pursuant to the terms of the note, as modified, along

with the guaranties, and seeking to recover the unpaid balance on the note. Included

in an attachment to the complaint was an affidavit, signed by FSB’s senior vice

president, alleging that FSB was the lawful owner and payee of the note, that the

note could not be located, and that the note had been endorsed to Emerald as of 21

February 2013. This attachment also contained a copy of the note.

      On 5 August 2014, the Hollowells filed an answer and counterclaim, raising

the defenses of credit and offset and unconscionability, and counterclaiming for unfair

and deceptive trade practices. The answer admitted the existence of the note and



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guaranties.   On 11 August 2014, Emerald filed an answer to the Hollowells’

counterclaim, together with a motion to dismiss. On 15 September 2014, Emerald

also filed a motion for summary judgment or judgment on the pleadings with respect

to the Hollowells.

      On 18 September 2014, Emerald filed a motion for entry of default against

OBKA, alleging that it had failed to answer. Default was entered by the Clerk of

Court of Dare County that same day. Also that same day, the Clerk of Court entered

default judgment against OBKA. On 3 October 2014, OBKA moved to set aside entry

of default and default judgment. This motion was granted in open court on 6 October

2014, and rendered in writing on 27 July 2015.

      On 2 October 2014, the Hollowells filed a motion to amend their answer. This

motion was granted in open court on 6 October 2014, and rendered in writing on 27

July 2015.

      On 3 November 2014, the trial court entered an order on Emerald’s motion for

summary judgment or judgment on the pleadings and dismissal. The trial court

noted that Emerald’s motion for summary judgment or judgment on the pleadings

was withdrawn without prejudice, and dismissed the Hollowells’ counterclaim with

prejudice.

      On 14 November 2014, OBKA filed its answer, alleging credit and offset, and

contending that Emerald was not entitled to enforce the lost note. On 11 May 2015,



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                                  Opinion of the Court



Emerald moved to strike OBKA’s untimely answer and for summary judgment

against OBKA and the Hollowells. On 20 July 2015, the Hollowells and OBKA

collectively filed a motion for summary judgment.

      On 19 August 2015, Emerald filed a motion seeking an order prohibiting the

Hollowells and OBKA from participating in any voluntary transfer of the subject

property without prior court approval. On 27 August 2015, the trial court granted

this motion, ordering that other than payment of ordinary expenses the Hollowells

and OBKA were not to participate in any voluntary transfer of the subject property

without court approval.

      On 3 September 2015, the trial court entered an order granting Emerald’s

motion for summary judgment as to appellants, and denying the Hollowells’ and

OBKA’s motion for summary judgment.            This order also awarded Emerald the

monetary relief sought from appellants and certified the order pursuant to Rule 54(b)

of the North Carolina Rules of Civil Procedure. The order further found that Donna

Hollowell was a guarantor on the commercial guaranty, and was jointly and severally

liable to Emerald under the note “unless she can prove an affirmative defense under

the Equal Credit Opportunity Act” at trial of this matter.

      From, inter alia, the order granting Emerald’s motion for summary judgment,

OBKA and Ray Hollowell (appellants) appeal.

                               II. Standard of Review



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                                  Opinion of the Court



      “Our standard of review of an appeal from summary judgment is de novo; such

judgment is appropriate only when the record shows that ‘there is no genuine issue

as to any material fact and that any party is entitled to a judgment as a matter of

law.’ ” In re Will of Jones, 362 N.C. 569, 573, 669 S.E.2d 572, 576 (2008) (quoting

Forbis v. Neal, 361 N.C. 519, 524, 649 S.E.2d 382, 385 (2007)).

                              III. Summary Judgment

      In their various arguments, appellants contend that the trial court erred in

granting summary judgment against appellants in favor of Emerald, and denying

summary judgment in favor of appellants. We agree in part and disagree in part.

                            A. OBKA and the Lost Note

      First, appellants maintain that the trial court erred in entering summary

judgment in favor of Emerald against OBKA because FSB could not locate the

promissory note at the time it was assigned to Emerald.

      Our statutes provide an avenue for recovery on a lost instrument. Specifically:

             A person not in possession of an instrument is entitled to
             enforce the instrument if (i) the person was in possession
             of the instrument and entitled to enforce it when loss of
             possession occurred, (ii) the loss of possession was not the
             result of a transfer by the person or a lawful seizure, and
             (iii) the person cannot reasonably obtain possession of the
             instrument because the instrument was destroyed, its
             whereabouts cannot be determined, or it is in the wrongful
             possession of an unknown person or a person that cannot
             be found or is not amenable to service of process.




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                                   Opinion of the Court



N.C. Gen. Stat. § 25-3-309(a) (2015).       In other words, appellants contend that

Emerald was entitled to enforce the note only if (i) Emerald possessed and was able

to enforce the note at the time that it was lost, (ii) the loss was not the result of a

transfer or lawful seizure, and (iii) the note could not reasonably be obtained due to

loss, destruction, or wrongful taking. Because FSB possessed the note and had lost

it at the time that it was assigned to Emerald, appellants assert that the first prong

of this analysis fails.

       In construing this statute, we find it helpful to compare it with the language

of the Uniform Commercial Code (UCC), and to contrast where the two diverge. A

previous version of UCC § 3-309, in effect when N.C. Gen. Stat. § 25-3-309 was

enacted, was identical to the North Carolina statute. However, that UCC provision

has since been amended, as follows:

              (a) A person not in possession of an instrument is entitled
              to enforce the instrument if:

              (1) the person seeking to enforce the instrument:

              (A) was entitled to enforce the instrument when loss of
              possession occurred; or

              (B) has directly or indirectly acquired ownership of the
              instrument from a person who was entitled to enforce the
              instrument when loss of possession occurred;

              (2) the loss of possession was not the result of a transfer by
              the person or a lawful seizure; and

              (3) the person cannot reasonably obtain possession of the


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                                  Opinion of the Court



             instrument because the instrument was destroyed, its
             whereabouts cannot be determined, or it is in the wrongful
             possession of an unknown person or a person that cannot
             be found or is not amenable to service of process.

UCC § 3-309 (2002). The language in (a)(1)(B) marks a clear distinction between the

two, in that the amended UCC provision allows a party not in possession of an

instrument to enforce it if ownership was acquired from someone with a right to

enforce the instrument.

      There is no question in the instant case that FSB had a right to enforce the

note under both the North Carolina statute and the UCC. FSB was in possession of

the instrument when it was lost, the loss was not a result of a transfer or lawful

taking, and possession could not thereafter reasonably be obtained. Moreover, under

the revised UCC provision, Emerald would be able to enforce the note as well,

notwithstanding its lack of possession, due to “directly . . . acquir[ing] ownership of

the instrument from a person who was entitled to enforce the instrument when loss

of possession occurred[.]” UCC § 3-309(a)(1)(B).

      However, Emerald’s enforcement rights are not determined by the UCC, but

by North Carolina statute. Pursuant to the provisions of N.C. Gen. Stat. § 25-3-309,

Emerald is not entitled to enforce the note. See, e.g., In re Patterson, 2012 WL

5906865 (Bankr. W.D.N.C. Nov. 26, 2012). This statute is current; it has not been

revised since 1995. Our legislature could have revised it to coincide with the UCC

revision in 2002, but it did not do so. We must conclude from this distinction that our


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                                   Opinion of the Court



legislature intended to exclude the additional language of the UCC, and as such

intended not to provide this avenue of recovery to parties not in possession of the

relevant instrument.

      Accordingly, we hold that where a party who would otherwise have a right to

enforce a lost note under N.C. Gen. Stat. § 25-3-309 subsequently assigns that note,

the assignee does not acquire the right to enforce the note unless the assignee is in

actual possession of the note. As the note in the instant case remains missing, we

hold that Emerald lacked standing to enforce it against OBKA. The trial court erred

as a matter of law in granting summary judgment in favor of Emerald against OBKA.

                         B. The Hollowells and the Guaranty

      Next, appellants contend that the trial court erred in entering summary

judgment in favor of Emerald against Ray Hollowell because he could not be held

liable as a guarantor if the note itself could not be enforced.

      This argument is flawed. “North Carolina . . . recognizes that the obligation of

the guarantor and that of the maker [of a note], while often coextensive are,

nonetheless, separate and distinct.” EAC Credit Corp. v. Wilson, 12 N.C. App. 481,

485, 183 S.E.2d 859, 862 (1971), aff'd, 281 N.C. 140, 187 S.E.2d 752 (1972). “A

guarantor's liability depends on the terms of the contract as construed by the general

rules of contract construction.” Carolina Place Joint Venture v. Flamers Charburgers,

Inc., 145 N.C. App. 696, 698, 551 S.E.2d 569, 571 (2001). When a note is transferred,



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                                  Opinion of the Court



no separate transfer of the guaranty is required; however, this does not mean that a

guaranty cannot exist in the absence of a note. A guaranty is an obligation in

contract, and irrespective of the status of the note, may be enforced in contract. See

generally First Am. Sav. Bank, F.S.B., v. Adams, 87 N.C. App. 226, 360 S.E.2d 490

(1987). In First American, the defendants were guarantors on a note held by the

plaintiff. The note secured the debt of a corporation wholly owned by the defendants.

The defendants contended that they were discharged from their obligations as

guarantors by reason of the plaintiff’s “unjustified impairment of the collateral

securing the loan.” Id. at 231, 360 S.E.2d at 494. We noted, however, that the

defendants enjoyed close ties with the debtor corporation, and that even if the

collateral were impaired, the guaranty would remain enforceable. Id. at 232, 360

S.E.2d at 494-95.

      In the instant case, as in First American, the Hollowells are closely tied to the

debtor corporation OBKA, being its sole members and owners. Although appellants

challenge the note itself rather than the impairment of the collateral, both arguments

go to the enforceability of the instrument. We therefore find the reasoning in First

American, that the guaranty may be enforced even if circumstances render the

instrument unenforceable, applicable to this case.

      Moreover, under the express terms of the guaranty, Ray Hollowell agreed to

waive many defenses to enforcement, in pertinent part as follows:



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                                   Opinion of the Court



             Guarantor also waives any and all rights or defenses based
             on suretyship or impairment of collateral including, but not
             limited to, any rights or defenses arising by reason of . . .
             (C) any disability or other defense of Borrower, of any other
             guarantor, or of any other person, or by reason of the
             cessation of Borrower’s liability from any cause
             whatsoever, other than payment in full legal tender, of the
             indebtedness; (D) any right to claim discharge of the
             indebtedness on the basis of unjustified impairment of any
             collateral for the indebtedness; . . . or (F) any defenses given
             to guarantors at law or in equity other than actual payment
             and performance of the indebtedness.

      Accordingly, the guaranty executed by Ray Hollowell is enforceable.

      “ ‘A guaranty of payment is an absolute and unconditional promise to pay the

debt at maturity if not paid by the principal debtor.’ ” Epes v. B.E. Waterhouse, LLC,

221 N.C. App. 422, 425, 728 S.E.2d 390, 393 (2012) (quoting Jennings

Communications Corp. v. PCG of the Golden Strand, Inc., 126 N.C. App. 637, 640,

486 S.E.2d 229, 231 (1997)). “ ‘Under the general rules of contract construction,

where an agreement is clear and unambiguous, no genuine issue of material fact

exists and summary judgment is appropriate. In contrast, an ambiguity exists in a

contract if the language of the contract is fairly and reasonably susceptible to either

of the constructions asserted by the parties.’ ” Id. (quoting Carolina Place Joint

Venture, 145 N.C. App. at 699, 551 S.E.2d at 571). Ray Hollowell’s execution of the

guaranty was a contractual promise to pay outstanding debts if the principal, here

OBKA, failed to do so. The explicit terms of said contract, which were clear and

unambiguous and must be construed as such, waived any defenses other than full


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payment of the debt. Accordingly, the unenforceability of the obligation by Emerald

against OBKA is no defense for Ray Hollowell as guarantor, and the guaranty may

be enforced.

      Appellants did not challenge at trial, and do not challenge on appeal, the fact

that Ray Hollowell signed a guaranty for the debt secured by the note. This created

an obligation in contract in accordance with the terms of the guaranty, enforceable

even in the absence of the note. There is no genuine issue of material fact that Ray

Hollowell owed the debt pursuant to that contractual obligation. Accordingly, the

trial court did not err in granting summary judgment in favor of Emerald against

Ray Hollowell.

      This argument is without merit.

                                 C. Unconscionability

      Lastly, appellants contend that the trial court erred in entering summary

judgment in favor of Emerald against Ray Hollowell because the guaranty contained

unconscionable provisions.

      “Unconscionability is an affirmative defense, and the party asserting it bears

the burden of establishing it.” Rite Color Chem. Co. v. Velvet Textile Co., 105 N.C.

App. 14, 20, 411 S.E.2d 645, 649 (1992).

               For a court to conclude that a contract is unconscionable,
               the court must determine that the agreement is both
               substantively and procedurally unconscionable.        The
               question of unconscionability is determined as of the date


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                                     Opinion of the Court



               the contract was executed. Procedural unconscionability
               involves bargaining naughtiness in the formation of the
               contract, such as fraud, coercion, undue influence,
               misrepresentation,     [or]      inadequate          disclosure.
               Substantive unconscionability involves an inequality of the
               bargain that is so manifest as to shock the judgment of a
               person of common sense, and . . . the terms . . . so oppressive
               that no reasonable person would make them on the one
               hand, and no honest and fair person would accept them on
               the other.

Weaver v. Saint Joseph of the Pines, Inc., 187 N.C. App. 198, 212-13, 652 S.E.2d 701,

712 (2007) (citations and quotation marks omitted).

      With respect to procedural unconscionability, at trial, appellants argued as

follows:

               The courts want to see something called procedural
               unconscionability, something -- the naughtiness in -- some
               kind of misbehavior in the formation of a contract, as well
               as substantive unconscionability, that being the unfairness
               of the provisions at issue.

               I don't know that I can argue to you, outside of requiring
               Ms. Hollowell to sign, that there was any other misconduct
               in the formation of the contract, but when you have people
               as a condition of a loan signing a boilerplate contract that
               says you waive all acts/omissions of any kind at any time
               with respect to any matter whatsoever, that it's just so
               broad that the court should deem such a provision
               unconscionable.

      In essence, at trial, appellants conceded that the only possible evidence of

procedural unconscionability was FSB’s requirement that Donna Hollowell execute

the guaranty as well as Ray Hollowell; the remainder of their argument goes to the



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substantive unconscionability of the terms of the guaranty, not procedural

unconscionability.

      We are reluctant to hold, as appellants would have us hold, that it is per se

procedurally unconscionable for a lender to require that both members of an LLC

execute a guaranty of the LLC’s loan obligation. In the absence of other evidence of

procedural unconscionability, we hold that, on appeal and before the trial court,

appellants have failed to demonstrate procedural unconscionability.

      We acknowledge that there is no bright-line rule as to just how much

procedural or substantive unconscionability must be shown.            What our law

establishes conclusively, however, is that some of each is necessary to demonstrate

unconscionability. In the absence of any procedural unconscionability, it cannot be

said that the guaranty agreement was unconscionable. As such, we hold that the

trial court did not err in rejecting the unconscionability defense asserted by Ray

Hollowell.

      This argument is without merit.

                                  IV. Conclusion

      Because Emerald did not acquire the right to enforce the missing note from

FSB, the trial court erred in granting summary judgment in favor of Emerald and

denying it to OBKA. Because no genuine issue of material fact existed as to Ray

Hollowell’s contractual obligation for the debt pursuant to the guaranty agreement,



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                                Opinion of the Court



and the agreement was not unconscionable, the trial court did not err in granting

summary judgment in favor of Emerald and denying it to Ray Hollowell.

      REVERSED IN PART, AFFIRMED IN PART.

      Judges STEPHENS and McCULLOUGH concur.




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