In Persis Nova Const., Inc., the contractor brought suit against the defendants for allegedly failing to pay the full amount due under their contract for the construction of a home in Catawba County, North Carolina. While the defendants admitted in their initial response that the contractor was a North Carolina corporation with its principal place of business in Mecklenburg County, nearly 19 months later the defendants moved for summary judgment after discovering that the contractor was not a licensed corporation in North Carolina, nor did it hold a general contractor’s license. Finding that the contractor was unlicensed within the meaning of Chapter 87 of the North Carolina General Statutes, the trial court granted the defendants’ motion and dismissed the contractor’s claim. Only weeks after the ruling, the defendants filed a motion for Rule 11 sanctions against the contractor’s attorneys, which was denied following a hearing. The defendants then appealed.  

In its opinion, the North Carolina Court of Appeals began by noting the three elements to a Rule 11 analysis: “(1) factual sufficiency, (2) legal sufficiency, and (3) improper purpose.” A violation of any one of the requirements is sufficient to support Rule 11 sanctions, and the defendants focused on the first and third elements only. The elements of factual sufficiency in North Carolina are: “(1) whether the plaintiff undertook a reasonable inquiry into the facts and (2) whether the plaintiff, after reviewing the results of his inquiry, reasonably believed that his position was well grounded in fact.” Considering the efforts made by the contractor’s counsel to investigate the contractor’s corporate and licensing status, the court found that a reasonable inquiry had been undertaken and disagreed with the defendants that a complaint filed by an unlicensed contractor in North Carolina is per se factually insufficient.  

The court then turned to the improper purpose element. Citing Mack v. Moore, 418 S.E.2d 685 (N.C. App. 1992), the court noted that, in North Carolina, an improper purpose is “any purpose other than one to vindicate rights ... or to put claims of right to a proper test.” Examples of improper purposes would include filing excessive papers, failing to serve an adversary with contested motions or filing suit with no factual basis for the purpose of “fishing” for some evidence of liability. Under this standard, the court again refused to hold that a complaint filed by an unlicensed contractor is a per se violation of the improper purpose requirement. Noting the trial court’s ruling that the complaint was filed reasonably and the failure of the defendants to assign error to that finding, the court rejected the defendants’ appeal.  

Persis Nova Const., Inc. v. Edwards, No. COA07-1501, 2009 WL 129723 (N.C. Ct. App. Jan. 20, 2009)