Statute of Limitations for Equitable Accounting
Chris Burti, Vice President and Senior Legal Council

In North Carolina, partition proceedings are equitable in nature and it is important to understand that the partition statutes do not impose a strict limitation on a court's authority to exercise its equitable jurisdiction. See; Allen v. Allen, 263 N.C. 496, (1965) and Dunn v. Dunn, 37 N.C.App. 159 (1978). The statutes themselves as set forth in N.C.G.S. Chapter 46 do not address the issue of a cotenant's right to call to account a cotenant who has controlled the use of the property and managed its income and disbursements or to recover for improvements reasonably made to the property and benefitting the other cotenants. The only provision of the Chapter that comes close to addressing the question is N.C.G.S. Section 46-3.1 dealing with the Clerk of Superior Court's authority to make orders pending final determination of a partition proceeding. That subsection provides:

Pending final determination of the proceeding, on application of any of the parties in a proceeding to partition land, the court may make such orders as it considers to be in the best interest of the parties, including but not limited to orders relating to possession, payment of secured debt or other liens on the property, occupancy and payment of rents, (emphasis added) and to include the appointment of receivers pursuant to G.S. 1-502(6). (1981, c. 584, s. 1.)

In an early Twentieth century case, Daniel v. Dixon Et Ux, 79 S.E. 425, 163 N. C. 137 (N.C., 1913), the North Carolina Supreme Court disposes of the issues of allocation of rent, mortgage payment and betterments in distributing the proceeds of a partition sale fairly dismissively and one may infer that these concepts were so ingrained in the legal profession's understanding of the law of equity at that time, such that a more detailed analysis may have been deemed to be too rudimentary for extended discussion. Employment of the partition proceeding is becoming less common in the Twenty-first Century and the practicing bar has suffered an almost complete attrition of its members to whom these issues were commonly understood and used. Even the terminology has fallen into disuse. As a result of these developments and a paucity of case law on the subject, we see more frequent questions in regard thereto form the practicing bar.

The unanimous opinion in Martin Marietta Materials, Inc. v Bondhu, LLC (N.C.App. 14-908) filed on May 19, 2015, may be the only modern appellate treatment of the issue of the common law right of a tenant to demand an equitable accounting in North Carolina. A good deal of the opinion is taken up with the issue of choice of laws due the fact that the land involved is located in Virginia and the case was filed in Wake County, North Carolina. Citing Stokes v. Wilson and Redding Law Firm, 72 N.C. App. 107, 112-13, 323 S.E.2d 470, 475 (1984), disc. review denied, 313 N.C. 612, 332 S.E.2d 83 (1985) and others; the Court quotes:  "Under North Carolina  choice of law rules, we apply the substantive law of the state where the cause of action accrued and the procedural rules of North Carolina."

The plaintiff and defendant in this action were tenants in common of a 90-acre tract land in Chesterfield County, Virginia and the core issue results from the fact that the ad valorem taxes were already delinquent when the plaintiff acquired its interest in the land and the plaintiff was seeking to recover the defendant's share of those and subsequent taxes that it paid to protect its interest in the property. The trial court granted summary judgment in favor of the plaintiff for the recovery of $71,947.00 in property taxes paid by plaintiff and the defendant appealed. The defendant asserted the affirmative defense of the statute of limitations in its answer alleging that the applicable statute of limitations was there years and barred the plaintiff's recovery of any property taxes that were paid more than three years prior to its complaint. The plaintiff argued that the "catchall" ten-year limitations period contained in N.C.G.S. Section 1-56 applied in this case.

Thus, the Court of Appeals determined that Virginia's substantive law governs the plaintiff's claims for relief because the property is located there and the "tax debt on the Property resulting from Defendant's nonpayment of its share of the taxes accrued there as well." However, as to determining the appropriate choice of laws with respect to the limitations period, the Court of Appeals noted that; "'statutes of limitation are clearly procedural, affecting only the remedy directly and not the right to recover,' (citations omitted) we must apply the appropriate statute of limitations under North Carolina law to Plaintiff's substantive claims.

The plaintiff asserted two similar claims for relief in its complaint, alleging the defendant's liability to the plaintiff as a co-owner for its fair share of the property taxes owed and in the alternative, the plaintiff sought recovery in quantum meruit on the theory that the defendant was unjustly enriched by Plaintiff's full payment of property taxes owed and for which Defendant was jointly responsible. The opinion with appropriate citation acknowledges that that the statute of limitations for unjust enrichment in North Carolina is unquestionably three years and is dispositive of the alternative pleading for recovery under quantum meruit.  That leaves the application of the appropriate statute of limitation for the primary pleading to be determined by the Court of Appeals.

On the issue of the plaintiff's claimed right to receive reimbursement as pled in its first claim for relief, the defendant argued that it stemmed from an implied contract between the parties and that under general principles of contract law it should be more properly characterized as a claim for contribution arising out of a joint debt and calling for the application of North Carolina's three-year statute of limitations applicable to an "obligation or liability arising out of a contract, express or implied" as stated in N.C.G.S. Section 1-52(1) (2013).

The plaintiff contended that its claim should more properly be treated as a cause of action for an "accounting in equity" between two tenants in common. Arguing the question of the applicable remedy properly under Virginia law, the plaintiff contended that it falls under Va. Code Ann. Sec. 8.01-31, providing that "[a]n accounting in equity may be had against any fiduciary or by one joint tenant, tenant in common, or coparcener for receiving more than comes to his just share or proportion, or against the personal representative of any such party." 

North Carolina does not have a statute of limitations that explicitly lists a limitation period for claims that seek an equitable accounting and the plaintiff argued that the ten-year limitations period as provided in N.C.G.S. Section 1-56 applicable to "action[s] for relief not otherwise limited by this subchapter..." was the limitation applicable to its claim for relief. In support of this contention the plaintiff cited cases where N.C.G.S. Section 1-56 has been applied by the North Carolina appellate courts to claims seeking an accounting between the parties "in cases related to trusts, accountings, tax liens and fiduciary duty".

Both parties cited Jenkins v. Jenkins, 211 Va. 797, 180 S.E.2d 516 (1971) which was an opinion from a Virginia Supreme Court case where two ex-spouses' tenancy by the entirety property became owned as tenants in common following their divorce.  One spouse made the mortgage payments on the property after the divorce until the property was sold. That spouse sought reimbursement from the defendant for his half of the mortgage payments plus payment of his half of the accrued real estate taxes. The court there held that "the plaintiff was entitled to reimbursement because "unless something more can be shown than the mere fact that one co-tenant is in possession of the premises, each co-tenant should be ratably responsible for taxes and other liens against the property."  The Court of Appeals observed that the Jenkins Court stated that "[a]n accounting in equity may be had . . . by one . . . tenant in common . . . against the other as bailiff, for receiving more than comes to his just share or proportion."  (citation omitted).

The Jenkins  did not explain the origin of the right that it recognized and the Court of Appeals looked to another Virginia case, Grove v. Grove, 100 Va. 556,  42 S.E. 312 (1902), to more clearly define the right in order to determine the most appropriate North Carolina limitation period. The Virginia Supreme Court held that "[t]he right of a co-tenant, who discharges an incumbrance upon the common property . . . to ratable contribution from his cotenants, is said to arise out of the trust relationship which exists among joint owners of property, rather than by way of subrogation."  (citations omitted).

The opinion thus concludes: "Plaintiff's first claim for relief can also be interpreted as asserting a substantive right stemming from the parties' trust relationship as co-tenants rather than one arising from  principles of contract law.  Under this theory, Plaintiff's first claim for relief would be governed not by the three-year statute of limitations under N.C.  Gen.  Stat. § 1-52(1)  that  is  applicable  to  obligations  arising  from  implied contracts but rather by the ten-year limitations period contained in N.C. Gen. Stat. § 1-56.  See Jarrett, 230 N.C. at 107, 52 S.E.2d at 225 (stating that ten-year statute of limitations under N.C. Gen. Stat. § 1-56 was applicable to action for accounting and to establish resulting trust); Teachey v. Gurley, 214 N.C. 288, 293-94, 199 S.E. 83, 87-88 (1938) (explaining that ten-year limitations period applies to claims grounded in equitable principles which impose trust relationship between parties)."

Concluding that the first claim for relief may be construed as stating two distinct, legally recognized claims under Virginia law each with a different North Carolina limitation, the court relied on the North Carolina doctrine stated in Fowler v. Valencourt, 334 N.C.345, 350, 435 S.E.2d 530, 533 (1993), that "where there is doubt as to which of two possible statutes of limitation applies, the rule is that the longer statute is to be selected."  Because the substantive right of a tenant in common to a claim for equitable accounting is grounded in equity and arises from a trust relationship, it is deemed subject to the ten-year limitations period set out in N.C.G.S. Section 1-56.

 As a general rule, the same analysis would apply to North Carolina base proceedings for an accounting with respect to income, rent, repairs, mortgage satisfaction and the like. However, a different analysis would need to be made with respect to taxes. N.C.G.S. Section 105-363 provides a statutory right analogous to an equitable accounting among tenants in common in what might be deemed a codification of the common law with respect to taxes. Subsection (a) permits a cotenant to pay their share of the taxes and thereby release the tax lien from that share. Further, if there is a subsequent partition sale of the property, the subsection provides that the interest in the property of the owner who has paid their portion of the taxes due will be free from the tax lien, and their share of the proceeds of any sale will not be reduced to pay any taxes, interest, or costs. In the event the tax lien on the unpaid share is foreclosed, the undivided interest of the owner who paid will be excluded from the advertisement and sale.

Subsection (b) makes provision for those circumstances when a cotenant pays the entire tax obligation. The statute provides that when any tenant in common pays the entire amount of the taxes, interest, and costs, any amount paid over their share of the taxes that was not paid as part of an agreement with the other cotenants constitutes a statutory lien on the other joint owners. This lien may be enforced in a proceeding for actual partition, a proceeding for partition and sale, or by any other appropriate judicial proceeding.

In the case under discussion, the right for which remedy was sought was derived under Virginia law and the court was required to find the most comparable North Carolina remedy in order to determine the applicable limitations period. This question would need a different analysis in North Carolina because the more import question that the court would have to address would be when the right accrued in order to determine when any limitations period begins to run.

With regard to an independent action for equitable accounting, the right arguably accrued at the time the defaulting cotenant failed to make the obligated payment (income or expense) and this appears to have been assumed in the instant case. However, the cases in North Carolina and the provisions of the Machinery Act discussed above suggest that these obligations are more in the nature of an in rem equitable charge on the land. As such there is no limitation period because the right to have an accounting the resulting obligations or benefits allotted to the respective shares accrues with the partition proceeding itself. Which, obviously, obviates the need for the Legislature to enact specific limitations for an equitable accounting incorporated into a partition proceeding.