Negligent Misrepresentation

The North Carolina Supreme Court reversed the Court of Appeals today in a case involving a claim of negligent misrepresentation over a realtor’s Multiple Listing Service (MLS) listing.

The Plaintiffs had purchased a home thinking it was connected to the city sewer system.  That’s what the MLS listing said.  That was wrong, the home actually had a septic tank, which repeatedly overflowed after the purchase.

Plaintiffs won a jury verdict, but the Court of Appeals reversed.  The basis for the reversal was that the version of the MLS listing given to the Plaintiffs was not the same version as put on the service by the Defendant real estate brokers. The Defendants’ listing stated "Information deemed RELIABLE but not GUARANTEED."  The version seen by the Plaintiffs did not have this language.

The Court of Appeals majority in Crawford v. Mintz, 653 S.E.2d 222 (N.C. App. 2007) held that "a buyer cannot demonstrate reliance on a representation made in an MLS listing unless that buyer relied on a version of the MLS listing containing the same qualifying language as was originally entered by the listing agent."

The Supreme Court’s reversal was based on Judge Steelman’s dissent.  He reasoned that the absence of the qualifying language "rather goes to the question of whether the plaintiffs relied upon the MLS listing, and whether any reliance was justifiable.  It was for the jury to determine the credibility of the witnesses, and the weight to be given to the evidence."

The Supreme Court didn’t write much of an opinion, it ruled Per Curiam, stating only that it was "reversing for the reasons stated in the dissenting opinion."

There were other several other rulings from the Supreme Court today, you can find them here.

Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.

The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste.  Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC’s checkbook.  Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.

When the company’s prospects faded, Kaplan stopped funding the company and asked for repayment of his loans.  The other members responded by voting to dissolve the LLC, which was placed in receivership.  Kaplan sued to collect his substantial debt.

The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan’s position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan’s fiduciary duty required him to do."  (Op. at 9).  The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC’s Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.

Continue Reading LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members

The Business Court today granted in part, and denied in part, a Motion to Dismiss in Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc. Judge Tennille ruled on claims of tortious interference with prospective economic advantage, negligent misrepresentation, and misappropriation of trade secrets, among others.

Plaintiff (Gateway) alleged that the Defendant (ALT) sold it faulty lubricant which was used by automobile and truck dealers to which Plaintiff sold warranties.  The lubricant allegedly turned out to be defective, and Gateway claims it was called upon to pay substantial warranty claims.  

The parties stopped doing business with one another, and ALT then began selling the same lubricant, under a different name, to Gateway’s competitor.  According to Gateway, ALT gave the competitor a list of Gateway’s customers which it used to solicit business.

The Motion to Dismiss was granted as to the tortious interference claim, which asserted that Gateway had lost business as a result of ALT’s sale of lubricant to the competitor.  The Court held that:

ALT sold product to a competitor of Gateway. It had the right to do so. Competition does not in and of itself represent tortious interference; rather it is a legitimate justification for seeking business from common customers. Here it is even one step removed since ALT sold product to Gateway’s competitor.

It is . . . clear that the complaint does not adequately allege interference with prospective economic advantage. To do so the complaint must allege interference with a trade or business by maliciously inducing a person not to enter into a contract with a third person, which he would have entered into but for the interference. A legitimate exercise on a person’s rights cannot support a claim for interference with prospective economic advantage.

The negligent misrepresentation claim was dismissed because Gateway’s claims were for breach of warranty and covered by the UCC, and also because of the economic loss rule.  Judge Tennille held:

This is a breach of warranty case. The complaint alleges any statements were made in the course of the contractual representation. It fails to establish any independent duty running from ALT to Gateway. To substitute negligent misrepresentation for breach of warranty under the circumstances of this case would eviscerate the pertinent sections of the UCC. Both the negligent misrepresentation claim and the negligence claim in Count VI are barred by the economic loss rule. Both are based upon a breach of contract or warranty and the recovery is limited to the contract or warranty claim. Our Court of Appeals has held that: “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract.” Spillman v. Am. Homes of Mocksville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741 (1992).

Finally, the trade secrets claim survived the Motion to Dismiss. The Court held that "[c]ustomer lists may or may not be trade secrets depending on the circumstances and the use made of them," and held that discovery on this claim would be necessary.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss