W. Cory Reiss
Casino Real: Minor earnest money bet raises stakes of real estate misdeals.
Updated: Jun 23, 2022
Going first is gambling.
That’s why a legal question can linger in plain sight for years before someone decides to test it.
The risk-reward analysis over whether litigation about a relatively small amount of money could result in an award of attorney’s fees to the winner, under a standard term in North Carolina real estate contracts, deterred those fights for many years.
But a feud over $2,500 recently netted one party more than $13,000 in attorney’s fees and led to a N.C. Supreme Court decision that confirms high stakes for both sides when a real estate deal sours.
The Supreme Court upheld the attorney’s fees awarded to a homeowner for being forced to collect on a $2,500 earnest money deposit that the defaulting buyer refused to relinquish.
Kari Terhark signed a standard North Carolina Offer to Purchase and Contract for a $250,000 home, providing a $2,000 due diligence fee and a $2,500 earnest money deposit. The due diligence fee buys the prospective purchaser the right to cancel the contract for any reason or no reason during the set due diligence period. The earnest money deposit is kept by an escrow agent in case one party breaches the contract, in which case, the contract says it is owed to the non-breaching party.
One other difference between those two fees is that the earnest money provision usually states that the prevailing party in litigation over that fee would be owed reasonable attorney’s fees.
The seller in Terhark’s case sued her for breaching the contract, at first without a lawyer, seeking just the due diligence fee in small claims court. The seller won. Terhark appealed to District Court, and the seller added a claim for the earnest money deposit, this time with a lawyer. The court granted judgment in the seller’s favor and awarded the due diligence and earnest money fees, plus another $13,068 in attorney’s fees.
While the language at issue has been standard for years in contract forms published by the North Carolina Association of Realters, some lawyers have questioned whether any statute authorizes an attorney’s fee award for litigating over earnest money. In North Carolina, attorney’s fees may only be awarded if a statute specifically allows it. The theory here is that a real estate purchase contract falls under a statute providing for fees in actions based on a document that is “evidence of indebtedness.”
Terhark's decision to ante up over the $2,500 fee put that issue squarely before the state Supreme Court, which decided that a real estate contract providing for fees to recover an earnest money deposit is indeed evidence of indebtedness. The decision pointedly refutes the notion that only specific types of commercial contracts fall within the statute, and it raises questions about other types of agreements that might warrant the same treatment and expand access to attorney’s fee awards in this state.
But back to Terhark’s predicament: by appealing to the District Court, then the Court of Appeals, and then the Supreme Court, she more than doubled down on her argument that the contract was not evidence of indebtedness. That’s because the statute on evidence of indebtedness caps a fee award at 15% of the debt, but our case law says a party that successfully defends her verdict during an appeal can ask the court for the fees spent on the appeal.
So the seller was able to receive a fee award far beyond the statutory cap because the fees were incurred on appeal of the small claims decision; which means the seller also can go back and recover the fees spent defending that decision before both appellate courts.
In this case, the seller surely incurred fees during appeals to the N.C Court of Appeals and then the Supreme Court that greatly eclipse the $17,500 Terhark already owes.
That course of action turned out to be a really bad bet for this buyer.