Bandy v. A Perfect Fit for You, Inc.

379 N.C. 1

864 S.E.2d 221

Shelley BANDY, plaintiff and third-party defendant

State of North Carolina, intervenor–plaintiff

v.A PERFECT FIT FOR YOU, INC., Margaret A. Gibson, and Ronald Wayne Gibson, defendants

v.A Perfect Fit for You, Inc., appellant/intervenor–defendant and third-party plaintiff

v.Margaret A. Gibson, Ronald Wayne Gibson, R. Wayne Gibson, Inc., and RW & MA, LLC, cross-claim and third-party defendants

No. 429A20

Supreme Court of North Carolina.

Filed October 29, 2021

Philip J. Mohr, Greensboro and Brent F. Powell, Winston-Salem, for appellants A Perfect Fit For You, Inc., Douglas M. Goines as Receiver, and the Law Firm of Womble Bond Dickinson (US), LLP.

No brief filed for appellees.

EARLS, Justice.

¶ 1 The question before us is whether the Business Court erred in refusing to authorize the court-appointed receiver for the company A Perfect Fit For You, Inc. (A Perfect Fit) to pay fees to the law firm Womble Bond Dickinson (US), LLP (Womble) for services rendered by one of the firm's attorneys, Philip J. Mohr. The Business Court did not refuse to authorize the receiver to pay Womble's fees on the basis of any finding relating to the nature or quantity of the legal services Mr. Mohr provided. Instead, the Business Court refused authorization solely on the basis of its conclusion that Mr. Mohr and the receiver had "flagrant[ly] disregard[ed] ... the requirements imposed by" a previous court order which established the process the receiver and Womble were required to follow when seeking authorization for fee payments.

¶ 2 Appellants argue that the Business Court abused its discretion in refusing to authorize fee payments based upon an assessment of the receiver's and Mr. Mohr's purported lack of compliance with a court order. In the alternative, appellants argue that the Business Court's order should be construed as an order imposing sanctions against Womble without prior notice and an opportunity to be heard, in violation of Womble's due process rights under the Fourteenth Amendment to the United States Constitution and article I, section 19 of the North Carolina Constitution. In addition, appellants also challenge the Business Court's denial of the receiver's subsequent requests for authorization to pay fees for work performed by Womble on its appeal of the orders refusing to authorize fee payments for the services rendered by Mr. Mohr.

¶ 3 We hold that the Business Court's decision to deny authorization for the receiver to pay Womble fees incurred for Mr. Mohr's work was an abuse of discretion. In addition, the Business Court's order could not permissibly impose monetary sanctions on Womble because the record indicates that the party being sanctioned did not have prior notice and an opportunity to be heard. Finally, it was error to deny the receiver's request for permission to pay Womble's fee-litigation fees without making necessary findings specifically regarding the value to the receivership, or lack thereof, of the work which generated these fees. Accordingly, we reverse the Business Court's order refusing to authorize payment of fees to Womble for Mr. Mohr's work and the relevant Business Court orders denying the receiver's request to pay Womble's fee-litigation fees and remand this case to the Business Court for further proceedings not inconsistent with this opinion.

I. Appointment of the receiver and the services rendered by Womble.

¶ 4 In 2016, Shelley Bandy filed a complaint and ex parte request for appointment of a receiver over A Perfect Fit, a medical equipment company located in Carteret County. On the day the complaint was filed, Senior Resident Superior Court Judge Benjamin G. Alford entered a temporary restraining order and an order appointing M. Douglas Goines as the company's receiver. Judge Alford subsequently entered an order granting a preliminary injunction and appointing a receiver which provided that Mr. Goines would "continue as receiver, vested with full powers granted under statute to take possession of and manage the business, books, and profits of the corporation ... until further Order of this Court." The matter was later designated a mandatory complex business case and transferred to the North Carolina Business Court.

¶ 5 After taking over A Perfect Fit, the receiver became concerned that the company may have fraudulently billed nearly $12 million in claims to the Medicaid program. The receiver hired Womble to conduct a comprehensive audit of the company's records. The audit revealed that the company lacked sufficient funds to pay back the $12 million the receiver believed the company had fraudulently obtained. Shortly thereafter, the State of North Carolina filed an intervenor complaint against A Perfect Fit seeking to recoup the nearly $12 million in allegedly fraudulent claims. In November 2017, the United States Department of Justice issued a "target letter" advising the company that it was the target of a federal criminal investigation. One month later, the United States Attorney for the Eastern District of North Carolina and the North Carolina Attorney's General's Office filed a civil recoupment action in federal court. The Business Court entered a stay of its proceedings pending resolution of the federal matter.

¶ 6 Until the Business Court stayed proceedings, the receiver had paid Womble's fees as an ordinary business expense without seeking permission from the court. However, on 5 March 2018, the Business Court entered an order providing that the receiver would henceforth be required to "submit bills for its outside counsel fees to the court for review on a go-forward basis." Subsequently, counsel from Womble submitted invoices for work performed for the receiver on behalf of the receivership. The court authorized the receiver to pay the invoices and clarified that "[t]he Receiver, and not outside counsel , should submit the request for authorization to pay outside counsel's fees and costs." (Emphasis added.)

¶ 7 In September 2018, a hurricane caused extensive damage to A Perfect Fit's storefront, ultimately causing the business to cease operations. Around that same time, some of the named defendants indicated they were close to reaching a tentative settlement with the United States Department of Justice and the State of North Carolina.

¶ 8 In July 2019, the Business Court entered an order calendaring a status conference. At the conference, the Business Court asked Mr. Mohr why the court had not received any invoices for work performed by Womble since 2018. Mr. Mohr responded that no invoices had been submitted because the parties were engaged in settlement negotiations which, if successful, would have eventually required court approval. Mr. Mohr also noted that, pursuant to the Business Court's previous order on attorney's fees, only the receiver was authorized to submit invoices to the court. The receiver separately explained that he had misunderstood what the order on attorney's fees required and had not intentionally failed to comply with the procedure it set out. During the conference, the Business Court "expressed its frustration that by not submitting the bills from counsel and the Receiver on a timely basis, that it placed a difficult burden on the Court to suddenly have to review several months of bills all at one time."

¶ 9 After the status conference, the Business Court entered an order lifting its earlier stay of proceedings. The receiver then submitted all of Womble's outstanding invoices, totaling approximately $70,600 in fees. On 6 November 2019, the court entered an order authorizing payment of all of Womble's fees except for those arising from work performed by Mr. Mohr, finding that "the time expended by the[ ] attorneys [other than Mr. Mohr] was reasonably necessary to the Receiver to fulfill his duties." With regard to the fees incurred for work performed by Mr. Mohr, the Business Court explained that it would "decline[ ] to approve payment of the $59,355.00 in legal fees incurred because of Mohr's work" due to "the Receiver's and Mohr's flagrant disregard for the requirements imposed by the Order on Attorneys’ Fees [which] warrants a significant reduction in the fees, and that reduction should be borne by Mohr." Appellants filed a timely notice of appeal.

¶ 10 On 30 January 2020, as appellants’ initial appeal was pending before this Court, the receiver submitted Womble's December 2019 invoice, which included a request to pay Womble's fees for work performed on the appeal of the order refusing to authorize the payment of fees for work performed by Mr. Mohr. The Business Court subsequently entered an order approving payment of all fees incurred upon the finding that "the requested attorneys’ fees and expenses were incurred for services reasonably rendered by [Womble] to the Receiver for the benefit of Perfect Fit."

¶ 11 On 27 February 2020, the receiver again submitted an invoice to the court, again including a request for authorization to pay fees for work performed by Womble on the fee-recoupment appeal. This time, the Business Court refused to authorize payment of fees incurred by Womble relating to the appeal, concluding that

the attorneys’ fees related to the Appeal were not incurred for services reasonably rendered by [Womble] to the Receiver for the benefit of Perfect Fit. To the contrary, the Appeal, if successful, would benefit only [Womble] and would reduce the assets of Perfect Fit. The fees incurred for this work should be borne by [Womble], and not Perfect Fit. Accordingly, the Court, in its discretion, declines to approve payment of the $5,030.50 in legal fees incurred because of work done by [Womble] on the Appeal.

The Business Court acknowledged in its order "that it previously approved the payment of a small amount of [Womble's] fees for work it performed on the Appeal" but characterized this approval as resulting from an "inadvertent oversight." Appellants filed a timely notice of appeal of this order.

¶ 12 Thereafter, on 24 March...