Well that was unexpected. In a major ruling on March 12 (Chisum v. Campagna), the North Carolina Supreme Court set aside almost 40 years of established precedent and held that the “discovery rule” applies to the accrual of statute of limitations on breach of contract claims. It’s good news for the plaintiffs’ bar, but bad news for defendants throughout the state, including lenders and others involved in the financial services industry.
Starting in the 1990s, Chisum and Campagna were partners in various commercial real estate businesses. Each of their entities was governed by a written operating agreement. The partners had a falling out and Chisum sued Campagna for multiple claims, including an assertion that he had breached the entity operating agreements. Campagna argued that the claim for breach of the operating agreements was barred by the three-year statute of limitations, which began to run from the date of the breach, regardless of when Chisum discovered the facts constituting the breach. The trial court disagreed and held that the breach of contract claim was timely.
The statute of limitations is an important legal doctrine that requires plaintiffs to bring their claims within a certain time period or find those claims barred. As the N.C. Supreme Court said in 2018:
The purpose of a statute of limitations is to afford security against stale demands, not to deprive anyone of his just rights by lapse of time. This security must be jealously guarded, for with the passage of time, memories fade or fail altogether, witnesses die or move away, and evidence is lost or destroyed. It is for these reasons, and others, that statutes of limitations are inflexible and unyielding and operate without regard to the merits of a cause of action.
Claims for breach of contract in North Carolina are governed by a three-year statute of limitations (unless the contract is signed under seal in which case a 10-year statute applies).
In addition to the length of the statute of limitations, it is also important to know when the statute of limitations starts to run (or “accrue”). The date of accrual varies by the type of claim. For instance, as a matter of statute, fraud claims only start to accrue upon “the discovery by the aggrieved party of the facts constituting the fraud.” This is known as the “discovery rule.” The statute of limitations on other claims starts to accrue from the date of injury, regardless of when the injured party discovers the facts leading to a claim.
For almost the past 40 years, the N.C. Supreme Court had held that the statute of limitations for breach of contract claims started to run on the date that the contract was breached regardless of the plaintiff’s lack of knowledge of the claim. That made for a very easy determination of when the statute ran and the claim was time-barred.
However, in Chisum, the Supreme Court overturned its prior opinions on the ground that it violated “basic notions of fairness” for the statute of limitations to run “against a plaintiff who has no way of knowing that the underlying breach has occurred.” It held that the discovery rule applied such that the plaintiff’s claims only “began running at the time that he became aware or should have become aware of the Campagnas’ breaches of the operating agreements.”
Litigation is expensive and the sooner a defendant can get out of a case, the better. Prior to Chisum, a defendant could easily assert statute of limitations on breach of contract claims and try to get those claims tossed at the motion to dismiss level or summary judgment. Under prior N.C. Supreme Court precedent, that was fairly easy to do since there was usually little dispute as to the date when the breach occurred.
As an example, assume a lender made an advance on a construction loan without a contractually required borrower-signed draw request. Under prior N.C. law, the borrower would have three years to sue from the date the lender made the improper advance. But under Chisum, that three-year period could be substantially extended.
Proving when a plaintiff knew or should have known about a breach is a much more challenging proposition and will likely lead to contested factual issues that can only be resolved at trial. The Supreme Court may feel that applying the discovery rule to breach of contract claims is necessary to satisfy “basic notions of fairness” but for defendants, it means that they are likely to have longer and more costly legal battles.
For more information, please contact me or your regular Parker Poe contact.