You Need All Your Ducks In A Row To Prove Default Under A Security Agreement


[author: Mack Sperling]

The Plaintiff in Kreich, Inc. v. Tarheel Publishing Co. thought he had all of his ducks in a row for summary judgment and a preliminary injunction. But he didn't.

Defendant was in serious default under promissory notes given in connection with its acquisition of the Plaintiff's interest in an LLC. Payments were due on the first day of each month, with a ten-day cure period. The payments were chronically between 25 and 70 days late for almost an entire year.

Plaintiff wanted to exercise his rights under a Membership Interest Pledge Agreement, which was his security for the promissory notes. The Pledge Agreement gave the Plaintiff equal control of the LLC it had sold to Defendant Hayes in the event of a default.

Given the repeated acceptance of delinquent payments, Judge Gale saw questions of fact on whether the Plaintiff had waived his right to timely payments. Well, you might be thinking, didn't he have a provision in his agreement saying that acceptance of late payments wasn't a waiver of a right to call a default?

No difference, said Judge Gale, holding that:

a party that has consistently accepted late payments can only enforce timely payment by first giving notice to the other party of his intention to enforce the terms of the agreement in the future. Meehan v. Cable, 135 N.C. App. 715, 719, 523 S.E.2d 419, 422 (1999). This rule can apply even when the contract contains a non-waiver provision, as a non-waiver provision can itself be waived or modified through the conduct of the parties. See 42 E., LLC v. D.R. Horton, Inc., ___ N.C. App. ___, ___, 722 S.E.2d 1, 6-7 (2012).

Op. ¶16 (emphasis added).

There was no evidence that the Defendant had been given notice that the Plaintiff intended to enforce its right to timely payments, so the Motion for a Preliminary Injunction enforcing the Pledge Agreement was denied.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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