## Facts

- Marina Food Associates, Inc. (tenant) operated a restaurant under a lease in a building owned/leased by Marina Restaurant, Inc. (landlord).
- The landlord failed to maintain the premises, including serious roof and building-condition problems.
- The condition of the building forced the tenant to close its restaurant, and the county later denied the tenant a license to reopen due to the building’s condition.
- The tenant sued the landlord (and also pursued claims involving personal property), asserting constructive eviction and related theories tied to the tenant’s loss of use and damages.
- Before selling the property to a third party (Benson Marine Group), the landlord offered to buy out the tenant’s lease for $150,000 to satisfy a condition of the sale.
- After the tenant rejected the buy-out, the sale price was reduced; evidence showed the reduction was tied in part to the value of the lease and in part to roof replacement costs.
- At trial, the jury found the landlord liable for constructive eviction and awarded the tenant damages.
- The trial court admitted evidence of the buy-out offer and admitted a letter from the defendants’ attorney that had been sent to the individual defendants and their accountant.
- The trial court allowed amendments to the pleadings under Rule 15(b) to conform to the evidence, including an amendment referencing breach of the implied covenant of quiet enjoyment and clarifying the conversion claim.
- After the lawsuit was pending, the corporation’s assets were distributed to its individual shareholders/directors without setting aside funds for this claim; the trial court entered partial summary judgment holding the individuals personally liable, leaving the amount of each person’s liability to be determined.
- Defendants appealed to the North Carolina Court of Appeals.

## Issues

1. Did the trial court err by admitting evidence of the landlord’s $150,000 lease buy-out offer, including under N.C. R. Evid. 408 (compromise offers) and Rule 402 (relevance)?
2. Did the trial court err by admitting an attorney letter over an attorney–client privilege objection where the letter was communicated to the defendants’ accountant?
3. Did the trial court abuse its discretion by allowing amendments to the pleadings under N.C. R. Civ. P. 15(b) to conform to the evidence (including quiet enjoyment and conversion)?
4. Did the trial court properly grant partial summary judgment holding the individual shareholders/directors personally liable for corporate obligations after receiving distributions that left the corporation without assets, and if so, was further fact-finding required to determine each individual’s extent of liability?

## Decision

- The Court of Appeals affirmed admission of the $150,000 buy-out offer; it was not barred by Rule 408 because it was tied to completing a property sale rather than compromising a disputed claim, and it was relevant to damages as evidence of lease value.
- The Court of Appeals affirmed admission of the attorney letter; the privilege did not apply because the communication was not confidential once shared with a third party (the accountant).
- The Court of Appeals affirmed the Rule 15(b) amendments; the issues were tried by express or implied consent and defendants did not show unfair surprise or prejudice.
- The Court of Appeals affirmed partial summary judgment that the individual shareholders/directors were liable for corporate obligations under former Chapter 55 due to receiving distributions with knowledge of the pending claim that left the corporation unable to meet obligations.
- The Court of Appeals remanded for the trial court to take evidence and make findings on the extent of liability of each individual defendant and to modify the judgment accordingly.
- The constructive eviction verdict and damages in favor of the tenant were left intact.

## Legal Principles

- In North Carolina, if constructive eviction is proven, it constitutes a breach of the implied covenant of quiet enjoyment as a matter of law.
- N.C. R. Evid. 408 bars compromise offers used to prove liability on a disputed claim, but it does not automatically exclude a buy-out offer made as part of a business transaction to satisfy conditions of a third-party sale; such evidence may be admissible for another purpose, including showing value.
- Evidence bearing on the value of a leasehold may be relevant to damages and admissible under Rule 402.
- Attorney–client privilege protects only confidential communications; disclosure to a third party (such as an accountant) defeats confidentiality and the privilege claim.
- Under N.C. R. Civ. P. 15(b), pleadings may be amended during or after trial to conform to evidence when issues were tried by the parties’ express or implied consent; the trial court’s ruling is reviewed for abuse of discretion and turns largely on prejudice or unfair surprise.
- Under former Chapter 55 of the North Carolina Business Corporation Act, shareholders/directors who receive distributions that unlawfully leave the corporation unable to pay obligations—and who do so with knowledge of the claim or the effect on corporate assets—may be personally liable for corporate obligations.
- When individual liability is established but the record does not show the amount properly chargeable to each person, remand is appropriate for fact-finding and allocation.

## Conclusion

Marina Food Associates held that a tenant’s constructive eviction recovery was supported and that the trial court did not err in admitting a lease buy-out offer to show lease value, admitting an attorney letter shared with an accountant, or allowing Rule 15(b) amendments tied to issues tried at trial. The court also held that individual shareholders/directors who distributed corporate assets while aware of a pending claim could be personally liable under former Chapter 55, but remanded for findings to determine each individual’s share of that liability.


Marina Food Associates, Inc. v. Marina Restaurant, Inc., 394 S.E.2d 824 (1990)