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NO. COA01-268 NORTH CAROLINA COURT OF APPEALS Filed: GREEN PARK INN, INC., Plaintiff, v. GARY T. MOORE and wife, GAIL O. MOORE, GMAFCO, LLC, and FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, Defendants. Appeal by defendants from order entered 25 October 2000 by Judge Ronald K. Payne in Buncombe County Superior Court. the Court of Appeals 9 January 2002. Adams, Hendon, Carson, Crow & Saenger, P.A., by George W. Saenger, for plaintiff-appellee. Matney & Associates, P.A., by David E. Matney, III, for defendant-appellants. HUDSON, Judge. Gary T. and Gail O. Moore, GMAFCO, LLC, and First Union National Bank of South Carolina (collectively, "Defendants") appeal from an order granting summary judgment in favor of Green Park Inn, Incorporated. We affirm. Heard in 2 April 2002

Allen and Patsy McCain are the owners of Green Park Inn, Incorporated ("Plaintiff"). Through Plaintiff, the McCains

operated the Green Park Inn ("the Inn"), a hotel in Blowing Rock, North Carolina. Beginning in the Summer of 1996, Plaintiff

negotiated with Defendants Gary and Gail Moore for the sale of the Inn. In August 1996, Plaintiff as seller, and the Moores as buyers, signed a document entitled "Offer to Purchase and Contract for Sale

-2and Purchase" ("Sales Contract"). The purchase price was

$2,600,000.

Paragraph XII of the Sales Contract provided for a Additionally, Paragraph XII required,

purchase money mortgage.

inter alia, that the Moores pledge as additional security for the loan $1,000,000 worth of assets held in trust with the First Union National Bank of South Carolina ("First Union") and that the Moores personally guarantee the loan. Paragraph XXXXV of the Sales Contract provided an alternative form for the transaction. Paragraph XXXXV states as follows:

Notwithstanding any provision in any other Article of this Offer to Purchase and Contract For Sale and Purchase to the contrary, Seller may at its option elect not to pay at Closing the existing indebtedness (hereinafter the "Existing Debt") . . . in which event the structure and form of the transaction shall be as set forth in this Article XXXXV. It is the intent of the parties that if the structure of the transaction is as set forth in this Article, the financial substance of the transaction as between the parties and as between each party and all taxing authorities shall be the same as if the structure and form as set forth in this Article were not utilized. The terms and conditions of any documents described in this Article shall be those such as to fulfill the terms and the structure described below. If so elected by Seller the structure shall be as follows. Paragraph XXXXV then went on to outline the alternative form of the transaction. At a "First Closing," the parties were to enter into

a contract for purchase of the property with a closing date--the "Second Closing"--to occur within 30 days after the Existing Debt had been paid in full. Additionally, at the First Closing, the

parties would enter into a lease for a term of three years or until

-3the Second Closing, with the possibility, at the seller's option, of extending the lease for an additional three years. Paragraph

XXXXV of the Sales Contract also provided that "[t]he parties covenant and agree, for all income tax reporting purposes, to report this transaction as a sale as of the date of First Closing, with the rental payments as payments of principal and interest as set forth herein and as a foreclosure in the event of a termination of Buyer's rights pursuant to default under the Lease." Shortly after Plaintiff executed these documents in August 1996, Mr. McCain's accountant advised him that the transaction would be considered a sale of the Inn by the Internal Revenue Service, with adverse tax consequences. In September 1996, McCain

hired a North Carolina law firm to restructure the transaction. In October 1996, the parties executed a set of documents, including a Lease Agreement, an Option to Purchase, and a Security Deposit Assignment Agreement for Trust Account Collateral ("Security

Deposit Agreement"). The Lease Agreement was executed by Plaintiff as lessor and GMAFCO, the Moores' limited liability company, as lessee. It

provided for a lease term of eleven and one-half years with monthly rental payments due according to the following schedule: (1) May 1st, 1997 through December 1st, 2001 -- monthly payments each in the amount of Twenty Thousand Eight Hundred Sixteen Dollars and 04/100 ($20,816.04); January 1st, 2002 through April 1st, 2002 -- monthly payments each in the amount of Twenty Two Thousand Three Hundred Seventy-Four Dollars and

(2)

-404/100 ($22,374.04); (3) May 1st, 2002 through June 1st, 2008 -- monthly payments each in the amount of Twenty Four Thousand Five Hundred Ninety One and 01/100 ($25,491.01).

The Lease Agreement was accompanied by an Option to Purchase the Inn for $1,800,000, which could be exercised on or after 1 January 2008. The Option to Purchase contained a provision stating:

"Parties covenant and agree, for all income tax reporting purposes, to report this transaction as a sale as of the date of the Lease, with the rental payments as payments of principal and interest as set forth herein, and as a foreclosure in the event of a

termination of Buyer's rights pursuant to default." Section Seventeen of the Lease Agreement included a provision for liquidated damages. This section provided that in case of a

default by GMAFCO, Plaintiff would be entitled to $500,000 in liquidated damages. The accompanying Security Deposit Agreement

provided that, upon stated terms and conditions, the Moores "as Assignor, hereby assigns, pledges and grants as Security Deposit to [Plaintiff], as Assignee, all of [Assignor's] and [Assignor's] estate's beneficial interest in the principal and income from Five Hundred Thousand Dollars ($500,000.00) of the Trust Account assets" held by First Union. GMAFCO defaulted on the February 2000 rent. Pursuant to the

terms of the Lease Agreement and the Security Deposit Agreement, Plaintiff, by letter dated 28 February 2000, gave GMAFCO notice and an opportunity to cure the default. GMAFCO made no further

-5payments and returned possession of the property to Plaintiff. In

March 2000, Plaintiff advised First Union of the default and made demand for the security deposit. security deposit. First Union did not tender the

Instead, First Union advised Plaintiff that the

Moores had contested payment of the deposit, and that First Union had frozen the assets pending resolution of the dispute. Plaintiff filed suit against the Moores, GMAFCO, and First Union on 6 April 2000 to obtain the $500,000 security deposit. In

their answer, the Moores and GMAFCO raised as defenses, inter alia, that North Carolina's Anti-Deficiency Statute, N.C. Gen. Stat.

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