The Court dismissed claims against banks which had provided financing to lot purchasers under the Interstate Land Sales Full Disclosure Act. The Court held that there was no showing that the banks were "developers or developer’s agents" as defined by the Act, and furthermore no allegations that the banks’ involvement in the development had gone "beyond standard industry practices with respect to real estate transactions" so as to make them liable under the Act.

The Court also dismissed claims against the banks for negligence and negligent misrepresentation, holding that no facts supported those claims and that "’conclusions of law or unwarranted deductions of fact’ are not treated as true for purposes of a motion to dismiss."

Also dismissed were fraud claims against the Bank, which the Court ruled to be "insufficient to meet the factual particularity required under Rule 9(b)."

Full Opinion

Directors of corporations verging on insolvency can owe fiduciary duties to creditors under certain circumstances.  Whether those duties were owed — and whether the claim for their breach had been released as a part of the corporation’s bankruptcy proceeding — were the main issues yesterday in Phillips and Jordan, Inc. v. Bostic, 2009 NCBC 13 (N.C. Super. Ct. June 2, 2009).

The Plaintiff claimed that the Defendant directors had diverted money through "a web of sham entities" for their own personal benefit during a time when the corporation faced "deepening insolvency" and that they were liable to it under a theory of constructive fraud.

Here’s how Judge Diaz described North Carolina law on the duties of directors of a corporation in financial difficulty:

In certain circumstances. . . corporate directors may owe a fiduciary duty to creditors of the corporation. The circumstances under which a director’s fiduciary obligations extend to creditors have been limited to those situations ‘amounting to a "winding up" or dissolution of the corporation.’

‘Once the fiduciary duty arises, a director must treat all creditors of the same class equally by making any payments to such creditors on a pro rata basis.’

Where a creditor can show constructive fraud by a director at a time when the corporation ‘is in declining circumstances and verging on insolvency,’ or ‘where such facts establish circumstances that amount "practically to a dissolution,"’ the claim is one that ‘belongs to the creditor and not the corporation.’

Op. ¶¶42-45.

The Court denied the Defendants’ motion to dismiss the Plaintiff’s claim for constructive fraud.  It also rejected arguments that the claim had been settled as a part of the corporation’s bankruptcy proceeding, ruling that "where . . . the claim arises from a purported breach of a fiduciary duty owed by a corporate director to a creditor, and where the claim, therefore, properly belongs to the creditor and not the corporation, ‘it is not a part of the bankruptcy estate, and the trustee in bankruptcy does not have authority to bring [or settle the] claim.’"  

In another part of the Opinion, the Court granted a motion to dismiss a fraud claim because it failed to comply with Rule 9(b).  The Complaint, which asserted the fraud claim against a group of individuals, did not identify the specific person who made the alleged misrepresentations.  The Court allowed leave to amend.

Motion to Dismiss granted where there were "patent inconsistencies" in the Complaint in Plaintiff’s claims of fraudulent inducement regarding an employment agreement. 

The Court held "it is patently inconsistent for [one of the Plaintiffs] Hittle to allege, on the one hand, that Defendant never intended to pay the wages promised, and on the other, that Defendant in fact performed in part and that it failed to complete performance for reasons unrelated to its intent."  The Court held that partial performance of a contract demonstrates a party’s intention to fulfill the promise at the time it was made, undermining Hittle’s claim on its face.

The fraudulent inducement claim of another Plaintiff (Warren), was allowed to go forward, however.  Warren’s claim was that he had been promised substantial severance pay if he was terminated for reasons other than those specified in his written employment agreement.  Although Warren, like Hittle, had begun employment, the Court found that "the fact that Defendant employed Warren for a period of time before terminating him for financial reasons does not negate Warren’s allegation that Defendant never intended (at the time it made the promise) to pay Warren severance upon his discharge."

The Court denied the Motions to Dismiss the Wage and Hour Act claims made by both Warren and Hittle.  According to her allegations, Hittle was entitled to a guaranteed payment of one year of compensation at the time she began employment, and the Court held that she therefore stated a claim for recovery of wages under the Act.  Warren had a claim under the Act because severance pay is included in the definition of wages.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

A counterclaim by a member of a North Carolina LLC against the LLC’s lender for aiding and abetting a breach of fiduciary duty was derivative, not direct.

The Court relied on “[t]he well-established general rule . . . that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock.”   That principle applies "equally to suits brought by members of a limited liability company."

The claim that the lender’s actions had resulted in an unlawful distribution to other members of the LLC was "just another way of saying that the Individual Members wrongfully diverted Company assets."  That was a derivative claim belonging to the Company, not to its members.  The Motion to Dismiss the Counterclaim was therefore granted.

The Court did not resolve a parallel ground for the Motion to Dismiss: whether North Carolina still recognizes a claim for aiding and abetting a breach of fiduciary duty in light of the United States Supreme Court’s decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).  That question has come before the Business Court a number of times in recent years, but has not been resolved by North Carolina’s appellate courts.

Full Opinion

Brief In Support Of Motion To Dismiss

Brief In Opposition To Motion To Dismiss

Supplemental Brief In Support Of Motion To Dismiss

Supplemental Brief In Opposition To Motion To Dismiss

Paintiffs, who had suffered signficant losses on variable annuity policies sold to them by the defendant agents and insurance companies, asserted claims on multiple theories: breach of fiduciary duty, constructive fraud, unfair and deceptive practices, negligence, negligent misrepresentation, aiding and abetting breach of fiduciary duty, and unjust enrichment. 

The Court dismissed some claims and ordered the Plaintiffs to replead others with more particularity. 

It held that Plaintiffs could proceed on their claims against some of the agents for breach of fiduciary duty, given the Plaintiffs alleged lack of financial sophistication and their allegations of reliance upon the expertise of the agents.  There was no claim for such breach against the insurance companies, since they had not obtained any benefit from the sale of the policies other than the commissions received. 

The causes of action for breach of fiduciary duty arose when the Plaintiffs knew or should have known of the facts giving rise to their claims.  The Court found the facts insufficient to determine whether the statute of limitations had run, and ordered Plaintiffs to replead their claims with more particularity.  The Court made a similar order with respect to the constructive fraud claim, and ordered Plaintiffs to provide more detail in their pleading as to when they were charged the commissions and surrender charges that formed the basis of their claims.  Those charges would have put Plaintiffs on notice of their claims and begun the running of the statute of limitations. 

The Court also demanded more particularity on the negligent misrepresentation claim.  It disagreed with Plaintiffs contention that their only burden was to allege the misrepresentations made, and that they had been made negligently.  Instead, Plaintiffs had to alleged "(1) there was a duty owed by defendants to plaintiffs, (2) the defendants did not use reasonable care in supplying information leading to (3) misrepresentations made to the plaintiffs which (4) the plaintiffs justifiably relied on (5) and that reliance caused pecuniary injury to the plaintiffs."

The Court dismissed the unfair and deceptive practices claim.  It found that variable annuity policies are subject to pervasive and intricate regulation, and that such policies involve securities transactions not within the scope of the statute.  It made no difference that the Plaintiffs did not understand that they were investing in securities.

The punitive damages claims against the insurance companies were also dismissed, because there is no vicarious liability for punitive damages. 

The unjust enrichment claims were also dismissed because there was an express contract between the parties. 

Full Opinion

Claims against the lender which had financed an acquisition gone awry were barred by the exculpatory provisions of a subordination agreement.  Georgia law applied, and Georgia law permits one contracting party to waive all recourse in the event of breach by the other.  The exculpatory provision was valid and an absolute defense to plaintiffs’ claims, and the Court granted the Defendant’s Motion to Dismiss.

Plaintiffs did not have a claims for the breach of the duty of good faith and fair dealing, because the assertion of valid rights under an enforceable agreement does not give rise to such a claim just because the assertion of those rights adversely impacts the parties against whom the rights are asserted. 

The tortious interference with contract claim made the the Plaintiffs was also dismissed.  Although Plaintiffs had plead all of the elements of that claim, the face of the complaint demonstrated that there was a valid business justification for the Defendant’s actions.  A lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff make something more than conclusory allegations about justification. 

The Court also rejected a facilitation of fraud claim, holding "[t]o the extent Plaintiffs’ theory is that a commercial lender would agree to defraud a seller of a business by making a loan to the purchaser which the lender agreed in advance would be put in default and that the purchasers of the business would pledge their own assets and provide personal guarantees of the loan knowing it was going into default, such a theory is simply not sustainable."

Plaintiff were also not entitled to proceed on their claim for marshalling of assets, because such a claim is inapplicable where a superior creditor has a right to certain assets.

There was no fiduciary duty under the loan agreement.  The lender had not stepped into the shoes of the majority shareholders by exercising its rights under the loan agreement. 

The Court granted leave to the Plaintiffs, however to make derivative claims against the lender.  It permitted Plaintiffs to assert these claims because a receiver had been appointed for the corporation and he had stated that he would not pursue claims for economic reasons.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

This case involved a troubled company, whose board of directors had hired turnaround consultants to assist with management. When the composition of the board of directors changed, the new board sued the consultants, and others, for fraud and unjust enrichment, alleging that the consultants had withheld information from the board and that they had been unjustly enriched (i.e. overpaid). The Court denied a motion to dismiss on the fraud claim, although it said that plaintiffs’ claim was tenuous.

The Court granted the motion to dismiss as to the unjust enrichment claim, finding that plaintiffs had failed to plead with specificity why the amounts paid were unjust. There were several other claims.

The Court expressed serious doubt as to the viability of a claim for aiding and abetting fiduciary duty under North Carolina law. It dismissed that claim on a different ground, however, finding that the consultant stood in a direct fiduciary relationship to the company, and that it would be redundant and confusing to allow both a direct claim for breach of fiduciary duty as well as an aiding and abetting claim.

The Court let stand a claim for punitive damages, after determining that there is no requirement that the party seeking damages specifically allege the circumstances underlying the aggravating factors required by N.C.G.S. §1D-15(a).

The Court refused to exclude an expert witness identified by the defendants, ruling based on North Carolina Supreme Court precedent that trial courts "should be hesitant when making outcome-determinative rulings on expert testimony" because so doing may "unnecessarily encroach upon the constitutionally-mandated function of the jury to decide issues of fact and to assess the weight of the evidence."

The Court then turned to issues of attorney-client privilege. A law firm for the corporation had retained another law firm to advise it with regard to an asset sale. The corporation’s law firm then discussed the advice it had received with the corporation’s board of directors and the turnaround consultant. The consultant sought to obtain these materials by subpoena, but the law firm had objected. The Court held that there was no privilege, because "a communication intended to be disclosed to a third party is not confidential," and it ordered production. The result was different with regard to the communications between corporate counsel and a third law firm, which had been retained to advise on other issues. These communications had not been transmitted to third parties, and the Court held there had been no waiver of the privilege.

Full Opinion

The Court dismissed non-contract claims in a dispute between physicians who were parties to Professional Services Agreements. The Court held, based on established North Carolina law, that "a tort action does not lie against a party to a contract who simply fails to properly perform the contract, even if that failure to properly perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract . . . which defines the obligations and remedies of the parties in such a situation."

Full Opinion

This opinion contains a thorough discussion of the economic loss doctrine. Plaintiff had purchased "sight chambers," used for monitoring intravenous feeds, made with raw material supplied by defendant. Defendant had used low grade materials to fulfill its end of the contract, which led to plaintiff having to recall millions of sight chambers.

As the Court saw it, plaintiff was clearly seeking to recover for economic loss, which were the financial losses it suffered when it was forced to recall a product that did not perform as expected because of a defect in a component part. The Court was sensitive to the notion that a plaintiff should not manufacture a tort claim out of a simple breach of contract claim and held that "[b]oiled to its essence, [defendant’s] claim is that [plaintiff] should have anticipated and planned for the possibility of fraud in this transaction and that, having failed to do so, it may look only to its contract remedies under the UCC. The law, however, should not foster commercial negotiations that ‘begin with the assumption that the other party is lying.’"

The Court recited the principles it later reiterated in the Club Car, Inc. v. The Dow Chemical Company case, and held that plaintiff was entitled to proceed on a fraud claim because plaintiff’s claim "smacked of tort." The Court also distinguished Judge Tennille’s opinion in Coker v. DaimlerChrysler Corp.

It further held that a claim for negligent misrepresentation is not barred by the economic loss doctrine. Plaintiff’s claim for unfair and deceptive practices was allowed to proceed as well. The Court did, however, dismiss plaintiff’s negligence claim, holding that "North Carolina law prohibits the bringing of a negligence action against the manufacturer or seller of a product for economic losses sustained as a result of the product’s failure to perform as expected."

Thanks to Brad Kutrow at Helms Mullis & Wicker for sending me this opinion.

Full Opinion

 

The Court held that the plaintiffs could not state a claim for fraud because neither of them took advantage of their opportunity to investigate the facts presented to them or to seek clarification, and there was no allegation that they had been denied the opportunity to investigate.

Plaintiffs also had no claim for unfair and deceptive practices, because their claims were not "in or affecting commerce." Their claims were essentially a dispute over compensation due to them as employees under the terms of various documents that governed their relationship with their employer." Employee-related claims are generally not within the scope of the deceptive trade practices statute, with minor exceptions that were discussed and distinguished by the Court.

The Court held that the unfair and deceptive practices statute is not meant to apply to the internal affairs of business associations.

Full Opinion