Harco Nat'l Ins. Co. v. Llp

• Decision Date: 07 September 2010
• Docket Number: No. COA09-996.,COA09-996.
• Citation: 698 S.E.2d 719
• Court: North Carolina Court of Appeals
• Parties: HARCO NATIONAL INSURANCE COMPANY, Plaintiffv.GRANT THORNTON LLP, Defendant.

698 S.E.2d 719

HARCO NATIONAL INSURANCE COMPANY, Plaintiffv.GRANT THORNTON LLP, Defendant.

No. COA09-996.

Court of Appeals of North Carolina.

Sept. 7, 2010.

Appeal by defendant from order entered 20 April 2009 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 10 March 2010.

Ragsdale Liggett PLLC, by Mary Hulett, Ashley Huffstetler Campbell, Raleigh, and Amie C. Sivon, Fuquay-Varina, for plaintiff-appellee.

Yates, McLamb & Weyher, LLP, Raleigh, by Barbara B. Weyher and Thomas C. Younger, III; and Cohen & Grigsby, P.C., Pittsburgh, PA, by Kerrin M. Kowach and

Richard R. Nelson, II, pro hac vice, for defendant-appellant.

CALABRIA, Judge.

Grant Thornton LLP (“defendant”) appeals an order (1) resolving Harco National Insurance Company's (“plaintiff”) Motion for Choice of Law Determination; and (2) denying defendant's motion for summary judgment. We affirm in part and reverse in part.

I. Background

Plaintiff is an Illinois corporation which provides property and casualty insurance and reinsurance. In October 2002, plaintiff began negotiations to enter into a Program Administrator Agreement (“PAA”) with Capital Bonding Corporation (“Capital Bonding”), a Pennsylvania corporation.¹ Under the proposed terms of the PAA, Capital Bonding would be appointed as plaintiff's agent to sell bail and immigration bonds in plaintiff's name in a number of states, including North Carolina. In exchange, Capital Bonding agreed to pay plaintiff a portion of the premiums generated by Capital Bonding's bond sales.

During the course of negotiations, two of plaintiff's executives visited Capital Bonding at their office in Pennsylvania. At plaintiff's request, Capital Bonding provided these executives with financial information that included Capital Bonding's balance sheet for the year 2000 and financial statements for the year 2001. Both items indicated that they had been audited by defendant, a Pennsylvania company. These audits were performed by defendant in Pennsylvania. The audit opinions were also delivered to Capital Bonding in Pennsylvania. Plaintiff claims that it relied upon these audit opinions to make its decision to enter into the PAA.

The PAA was executed on 1 January 2003. It provided that Capital Bonding would make payments to the courts when bonds issued in plaintiff's name were forfeited because bonded individuals failed to appear in court. However, plaintiff, as an insurance company, remained ultimately liable to make these payments if Capital Bonding failed to do so. From 2003 to 2004, Capital Bonding issued, in plaintiff's name, hundreds of millions of dollars worth of bonds in thirty-eight states.

In 2004, Capital Bonding ceased making payments on forfeited bonds. As a result, plaintiff was required to pay all forfeited bonds that were still outstanding. On 13 January 2004, the North Carolina Department of Insurance seized more than $900,000 from plaintiff's North Carolina trust account located at Wachovia Bank in North Carolina in order to satisfy outstanding bond obligations. Ultimately, plaintiff paid more than $15,000,000 for forfeited bonds that had been issued by Capital Bonding in North Carolina. These payments, along with the payments due in thirty-seven other states, came from a variety of sources, and were primarily funded from plaintiff's corporate bank account in Illinois. However, none of these payments were made to any entity located in Illinois.

On 23 February 2005, plaintiff initiated an action against defendant in Wake County Superior Court, asserting claims for negligence and negligent misrepresentation. On 14 March 2006, the case was designated a complex business matter and assigned to the North Carolina Business Court (“the Business Court”). On 5 December 2008, plaintiff filed a Motion for Choice of Law Determination, arguing that North Carolina law should control the instant case. On 9 December 2008, defendant filed a response to plaintiff's motion and a motion for summary judgment, arguing that Illinois law should control and that defendant would be entitled to summary judgment under Illinois law. On 20 April 2009, the Business Court issued an Order and Opinion resolving the parties' respective motions. Under a choice of law test devised by the Business Court, referred to as the “Audit State test,” the Business Court determined that Pennsylvania law applied. As a result, defendant's motion for summary judgment under Illinois law was denied. The Business Court's order noted that if Illinois law, rather than Pennsylvania law, had applied to the instant case, defendant would be entitled to summary judgment. From this order, defendant appeals.

II. Interlocutory Appeal

As an initial matter, we note that the Business Court's order is interlocutory and generally would not be subject to immediate appellate review. “An order or judgment is interlocutory if it is made during the pendency of an action and does not dispose of the case but requires further action by the trial court in order to finally determine the entire controversy.” N.C. Dep't of Transp. v. Page, 119 N.C.App. 730, 733, 460 S.E.2d 332, 334 (1995).

An appeal from an interlocutory order is permissible only if the trial court certified the order under Rule 54(b) of the Rules of Civil Procedure, or (2) the order affects a substantial right that would be lost without immediate review. The burden rests on the appellant to establish the basis for an interlocutory appeal.

Dailey v. Popma, 191 N.C.App. 64, 67-68, 662 S.E.2d 12, 15 (2008) (internal quotations and citations omitted). There is no Rule 54(b) certification in the instant case, and therefore immediate appeal of the Business Court's order is only permitted if the order affects a substantial right.

The question of whether a choice of law determination affects a substantial right has not been previously addressed by our Courts. However, in United Virginia Bank v. Air-Lift Assoc., this Court, without conducting a substantial right analysis, issued a writ of certiorari to hear an interlocutory appeal that primarily involved a choice of law determination. 79 N.C.App. 315, 319, 339 S.E.2d 90, 92 (1986). Furthermore, in Stetser v. TAP Pharm. Prods., Inc., this Court, after determining that no substantial right was affected,² issued a writ of certiorari to review an interlocutory order that also involved a choice of law determination. 165 N.C.App. 1, 12, 598 S.E.2d 570, 579 (2004).

“The writ of certiorari may be issued in appropriate circumstances by either appellate court to permit review of the judgments and orders of trial tribunals when ... no right of appeal from an interlocutory order exists [.]” N.C.R.App. P. 21(a)(1) (2008). In the instant case, defendant filed, in the alternative, a petition for a writ of certiorari. Without considering whether defendant's appeal affects a substantial right, we determine that, as in United Virginia Bank and Stetser, granting this petition would be appropriate. Given the complexities of the instant case and the importance of determining the choice of law to resolve the issues involved, “the administration of justice will best be served by granting defendant['s] petition.” Reid v. Cole, 187 N.C.App. 261, 264, 652 S.E.2d 718, 720 (2007). Defendant's petition for writ of certiorari is granted, and we consider the merits of defendant's appeal.

III. Choice of Law

The parties both argue that the Business Court erred by determining the choice of law on the basis of the “Audit State test.” We agree.

The Business Court's order initially discussed the differing standards of accountant liability in three jurisdictions: Illinois, North Carolina, and Pennsylvania. Then, in order to determine which of the three states' law applied to the instant case, the Business Court examined the nature of accountant liability and its interplay with tort and warranty claims. The Business Court noted that our Courts have applied different conflict of law rules for tort and warranty claims.

Our Supreme Court has made clear that lex loci delicti (“lex loci”) is the appropriate choice of law test to apply to tort claims.

Our traditional conflict of laws rule is that matters affecting the substantial rights of the parties are determined by lex loci, the law of the situs of the claim, and remedial or procedural rights are determined by lex fori, the law of the forum. For actions sounding in tort, the state where the injury occurred is considered the situs of the claim. Thus, under North Carolina law, when the injury giving rise to a negligence or strict liability claim occurs in another state, the law of that state governs resolution of the substantive issues in the controversy.

Boudreau v. Baughman, 322 N.C. 331, 335, 368 S.E.2d 849, 853-54 (1988)(internal citations omitted). Our Courts have “consistently adhered to the lex loci rule in tort actions.” Id.

However, our Supreme Court has also made clear that lex loci does not apply to warranty claims, because “actions for breach of implied warranty are now governed by the Uniform Commercial Code, adopted in North Carolina in 1965 as chapter 25 of the General Statutes.” Id. at 336, 368 S.E.2d at 854. Instead, the choice of law that applies to warranty claims is determined by the most significant relationship test, “which requires the forum to determine which state has the most significant relationship to the case.” Id. at 338, 368 S.E.2d at 855.

The Business Court determined that third party claims against an accountant should be specially categorized, because “[a]lthough the third party claims are generally couched in tort terms of negligence or negligent misrepresentation, they are strongly analogous to contract breach of warranty claims.” As a result, the Business Court created a new choice of law test, to be applied only in auditor liability cases: “The law of the state where an audit is performed, delivered, and disseminated (the “Audit State”) should control the scope of liability to third parties...