Sed Holdings, LLC v. 3 Star Props., LLC

• Decision Date: 01 November 2016
• Docket Number: No. COA16–385,COA16–385
• Citation: 250 N.C.App. 215,791 S.E.2d 914
• Court: North Carolina Court of Appeals
• Parties: SED HOLDINGS, LLC, Plaintiff, v. 3 STAR PROPERTIES, LLC, James Johnson, TMPS LLC, Mark Hyland, and Home Servicing, LLC, Defendants.

250 N.C.App. 215

791 S.E.2d 914

SED HOLDINGS, LLC, Plaintiff,

v.3 STAR PROPERTIES, LLC, James Johnson, TMPS LLC, Mark Hyland, and Home Servicing, LLC, Defendants.

No. COA16–385

Court of Appeals of North Carolina.

Filed: November 1, 2016

Graebe Hanna & Sullivan, PLLC, Raleigh, by Douglas W. Hanna, for plaintiff-appellee.

Law Offices of Hayes Hofler, P.A., Durham, by R. Hayes Hofler, III, for defendants-appellants.

ZACHARY, Judge.

Generally, when a party gives notice of appeal from a trial court order, that appeal deprives the trial court of jurisdiction to proceed on any matter embraced by the challenged order. But this general rule is subject to exceptions, one of which applies in the instant case. Here, a preliminary injunction was granted against defendants, and they appealed that interlocutory order to this Court. While the appeal was pending, the trial court held contempt proceedings and entered several show cause orders to enforce the terms of its injunction. The trial court ultimately held defendants in civil contempt. After determining that the injunction was subject to immediate review, this Court held that the injunction order was properly entered. Defendants now appeal the entry of the contempt orders, and they argue that their notice of appeal from the injunction deprived the trial court of jurisdiction, rendering the contempt orders null and void. For the reasons that follow, we conclude that the trial court retained jurisdiction to enter contempt orders pending defendants’ first appeal and, accordingly, we affirm the entry of those orders.

I. Background

The factual genesis of this case was the execution of a "Non–Performing Note and Mortgage Loan Sale Agreement" (Agreement) between plaintiff SED Holdings, LLC (SED) and defendant 3 Star Properties, LLC (3 Star). Both SED and 3 Star are in the business of buying and selling pools of residential mortgage loans. Defendant Mark Hyland (Hyland) is the managing member of defendant TMPS LLC (TMPS), a Texas-based limited liability company. 3 Star had previously purchased the loan pool at issue in this case from TMPS. Defendant James Johnson is a managing member of 3 Star, and he negotiated the terms of the Agreement with SED.

Pursuant to the Agreement, which was executed on 20 June 2014, SED agreed to purchase 1,235 mortgages—with a total outstanding value of $71,180,364.00—from 3 Star for $13,880,171.00. SED agreed to pay $2,000,000.00¹ of the purchase price in cash at closing, and to pay the remaining principal balance of $11,880,171.00 pursuant to the terms of a promissory note (the Note). A Security Agreement was also executed by the parties. The Agreement required SED to use the following third parties to hold, inspect, cure, and process the loans until the Note was paid off: (1) Brown and Associates, a Texas law firm, acted as custodian of the records; and (2) defendant Home Servicing, LLC (Home Servicing) was responsible for servicing the loan files. This requirement stemmed from Hyland and TMPS's pre-existing relationship with Brown & Associates and Home Servicing.

The Agreement also contained a "put back" provision that allowed SED to return to 3 Star any loan or asset that either suffered from an "incurable documentary defect" or was unsecured by a valid first mortgage. The put back provision had to be invoked within 45 days of closing. Critically, the Security Agreement provided that if SED defaulted on the terms of the sale, 3 Star had the right to take possession of all assets and attempt to sell them on behalf of SED.

Problems arose after SED inspected the mortgage pool in July 2014. According to SED, the entire deal rested on certain representations made by Johnson and 3 Star, most notably that each mortgage was secured by real property and that 3 Star owned all loans contained in the pool. Taking the position that these representations were materially false, SED claimed that 3 Star owned only a few of the loans, many of which were unsecured and essentially worthless. SED attempted to return 605 loans for a refund, but 3 Star did not respond to the "put back" notice.

Instead, 3 Star claimed that SED had defaulted on the Agreement's terms and had not made a good-faith attempt to sell the non-performing mortgages it acquired from 3 Star. As a result, 3 Star served SED with a notice of default on 17 October 2014 and expressed an intention to exercise its right to sell assets from the loan pool on behalf of SED. In response, SED filed a verified complaint² against defendants in Durham County Superior Court on 1 December 2014. The complaint alleged claims for, inter alia , breach of contract, fraud, negligent misrepresentation, and civil conspiracy, and also contained a motion asking for preliminary injunctive relief. Defendants then filed a motion to dismiss the complaint for lack of subject matter jurisdiction and improper venue based on a forum selection clause in the Security Agreement and a choice of law provision in the Agreement, which provided, respectively, that any actions would be filed in Harris County, Texas, and that Texas law would govern.

After the trial court heard defendants’ motion to dismiss and SED's motion for injunctive relief, it entered two orders on 13 February 2015. One order denied defendants’ motion to dismiss, and the other order granted SED's motion for injunctive relief. The injunction prohibited defendants from "selling ... or otherwise making any dispositions of any of the loans sold to SED[,]" and it instructed defendants to place any monies they collected from transactions related to the loan sale in escrow pending the case's resolution. SED was instructed to post a $100,000.00 bond to protect and secure defendants’ rights. On 19 February 2015, defendants gave notice of appeal from both of the trial court's orders. See SED Holdings, LLC v. 3 Star Properties, LLC , ––– N.C. App. ––––, 784 S.E.2d 627 (2016) (" SED I ").

Although the denial of defendants’ motion to dismiss and the granting of SED's motion for a preliminary injunction were interlocutory orders, this Court addressed the merits of defendants’ arguments concerning each order. Id. at ––––, 784 S.E.2d at 630–31. Because the preliminary injunction froze monies related to the mortgage pool sale, the SED I Court held that it affected defendants’ substantial "right to use and control [their] assets." Id. at ––––, 784 S.E.2d at 630. However, the trial court's injunction was ultimately upheld. Id. at ––––, 784 S.E.2d at 632. This Court's mandate in SED I was issued on 25 April 2016.

While the appeal in SED I was pending, the trial court conducted a series of contempt proceedings and issued several orders ("the contempt orders") between September 2015 and January 2016. Those proceedings were prompted by SED's motion to show cause why defendants should not be held in civil contempt for failure to comply with the injunction. SED's motion to show cause contained allegations that defendants had violated the injunction by selling loans related to the Agreement and disbursing funds that were required to be held in escrow. On 24 September 2015, the trial court entered an order that commanded defendants to show cause why they should not be held in civil contempt. The show cause order contained the following pertinent findings of fact:

12. On ... 28 [July] 2015, SED sent an email to Home Servicing ... requesting the following information on the assets: (1) Payoff date; (2) Next due date; (3) Acquired UPB; (4) Beginning UPB; and (5) Ending UPB. This information is necessary in order to properly market the assets and obtain the maximum value in a potential sale....

13. The affidavit submitted by SED, and the evidence attached to the Motion to Show Cause, support the fact that Home Servicing ... refused to provide the requested information based on instructions given to it by [d]efendants 3 Star, Johnson, TMPS[,] ... and ... Hyland....

14. The affidavit submitted by SED, and the evidence attached to the Motion to Show Cause, support the fact that ... Home Servicing ... has refused to provide a disclosure of all monies [it has] collected ... and/or held in escrow regarding the assets at issue.

Based on these findings, the trial court concluded as a matter of law that: (1) the injunction did not affect a substantial right of defendants and was thus not immediately appealable, and (2) the trial court retained jurisdiction to enforce the terms of its injunction while defendants’ appeal was pending in this Court. The parties eventually agreed to a consent order that required Home Servicing to produce servicing data on the loan pool; however, the information that was produced indicated that loans covered by the injunction had been sold and that Home Servicing had failed to deposit service fees it collected from those transactions in escrow. Consequently, the trial court entered additional show cause orders to enforce the injunction. The trial court ultimately entered a 5 January 2016 order that held defendants in civil contempt. Defendants now appeal the entry of the contempt orders.

II. Standard of Review

Appellate review of a contempt order is ordinarily "limited to determining whether there is competent evidence to support the findings of fact and whether the findings support the conclusions of law." Middleton v. Middleton , 159 N.C.App. 224, 226, 583 S.E.2d 48, 49 (2003) (citation omitted). Yet in this case, defendants do not directly attack the contempt orders; instead, they challenge the trial court's subject matter jurisdiction to enter those orders. "The standard of review for lack of subject matter jurisdiction is de novo ." Keith v. Wallerich , 201 N.C.App. 550, 554, 687 S.E.2d 299, 302 (2009) (citation omitted).

III. Analysis

Defendants’ sole argument on appeal is that that the trial court lacked jurisdiction to enter any of its contempt orders. According to defendants, the trial court had no jurisdiction over the case following their 19 February 2015 notice of appeal from the...