Lawrence v. Umlic-Five Corp.

Lawrence v. UMLIC-Five Corp., 2007 NCBC 20

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

COUNTY OF MECKLENBURG 06 CVS 20643

KIRK ALLEN LAWRENCE and )

SANDRA LAWRENCE, )

)

Plaintiffs, )

)

v. ) ORDER AND OPINION

)

UMLIC-FIVE CORP.; UNITED )

MORTGAGE & LOAN INVESTMENT )

LLC; ARTHUR E.KECHIJIAN; )

LARRY E. AUSTIN; JOHN DOE #1; )

JOHN DOE #2; JOHN DOE #3; )

JOHN DOE #4; JOHN DOE #5; )

JOHN DOE #6; JOHN DOE #7; )

JOHN DOE #8; JOHN DOE #9; and )

JOHN DOE #10, )

)

Defendants. )

)

Poyner & Spruill LLP by Joshua B. Durham and Michelle C. Hunt for

Plaintiffs Kirk Allen Lawrence and Sandra Lawrence.

Katten Muchin Rosenman LLP by Richard L. Farley and Jeffrey C. Grady for

Defendants United Mortgage & Loan Investment, LLC, Arthur E. Kechijian

and Larry E. Austin.

Diaz, Judge.

{1} The Court has before it the Motion of Defendants United Mortgage & Loan

Investment, LLC, Arthur E. Kechijian, and Larry E. Austin (collectively, the

“Defendants”) to Dismiss Plaintiffs’ Fourth and Fifth Causes of Action pursuant to

Rules 9(b) and 12(c) of the North Carolina Rules of Civil Procedure (the “Motion”).

{2} The Motion seeks dismissal of Plaintiffs’ claims alleging fraud and a

violation of the North Carolina Unfair and Deceptive Trade Practices Act (the

“UDTPA”), section 75–1.1 of the North Carolina General Statutes.

{3} After considering the Complaint, the Answer of the Defendants, the

parties’ briefs, and the arguments of counsel, the Court GRANTS the Motion.

I.

PROCEDURAL BACKGROUND

{4} Plaintiffs Kirk Allen Lawrence and Sandra Lawrence filed their Complaint

on 20 October 2006.

{5} The matter was transferred to the North Carolina Business Court as a

mandatory complex business case on 29 November 2006 and subsequently assigned

to me.

{6} Defendants filed the Motion on 12 March 2007 and filed a supporting brief

the next day.

{7} Plaintiffs filed a brief opposing the Motion on 4 April 2007, and

Defendants filed a reply on 17 April 2007.

{8} On 22 May 2007, the Court heard oral arguments on the Motion.

II.

THE FACTS

A.

THE PARTIES

{9} The following facts are taken from the Plaintiffs’ Complaint, which the

Court accepts as true for purposes of the Motion.

{10} Plaintiffs are residents of Travis County, Texas. (Compl. ¶ 1.)

{11} Defendant UMLIC-Five Corp. (“UMLIC-Five”) is or was a North Carolina

corporation with its principal place of business in Mecklenburg County, North

Carolina. (Compl. ¶ 2.)

{12} Defendant United Mortgage & Loan Investment, LLC (“UMLI”) is a North

Carolina limited liability company with its principal place of business in

Mecklenburg County, North Carolina. (Compl. ¶ 3.) UMLI is a director and/or

shareholder of UMLIC-Five. (Compl. ¶ 7.)

{13} Defendant Arthur E. Kechijian (“Kechijian”) resides in Mecklenburg

County, North Carolina and is a director and/or shareholder of UMLIC-Five.

(Compl. ¶¶ 4, 7.)

{14} Defendant Larry E. Austin (“Austin”) resides in Mecklenburg County,

North Carolina and is a director and/or shareholder of UMLIC-Five. (Compl. ¶¶ 5,

7.)

B.

THE CLAIMS

{15} In 1995, Plaintiffs filed suit against UMLIC-Five in the District Court for

Travis County, Texas, alleging, among other things, that UMLIC-Five violated the

Texas Constitution and other state statutes by wrongfully foreclosing upon their

home and unlawfully attempting to evict them (hereinafter, the “Travis County

Litigation”). (Compl. ¶ 9.)

{16} Defendants directly controlled the activities of UMLIC-Five throughout

the course of the Travis County Litigation. (Compl. ¶ 49.)

{17} The Travis County Litigation spanned eleven years, with UMLIC-Five

vigorously defending the claims against it and giving Plaintiffs and their counsel

the impression that it was an active, functioning entity. (Compl. ¶ 13.)

{18} Without notifying the Plaintiffs, however, UMLIC-Five filed Articles of

Dissolution with the North Carolina Secretary of State on 23 October 2001. (Compl.

¶ 14, Ex. B.)

{19} Thereafter, UMLIC-Five continued to defend the Travis County Litigation.

At no time during the ensuing four-and-a-half years did Defendants disclose to the

Plaintiffs that UMLIC-Five had been dissolved. (Compl. ¶ 15.) Rather, Kechijian

and Austin “made material misrepresentations of fact, and knowingly and willfully

concealed material facts, relating to the existence of UMLIC-Five and its continued

operations.” (Compl. ¶ 39.)

{20} As an example, Plaintiffs allege that UMLIC-Five failed to respond to

discovery requests in the Travis County Litigation directed at the issue of UMLIC-

Five’s corporate status. (Compl. ¶ 15.) Plaintiffs do not, however, provide any

additional information regarding these discovery requests.

{21} Defendants also willfully failed to provide the appropriate statutory

notices of dissolution to UMLIC-Five’s creditors pursuant to sections 55–14–06 and

55–14–07 of the North Carolina General Statutes. (Compl. ¶ 16.)

{22} On 16 February 2006, UMLI notified Plaintiffs for the first time that

UMLIC-Five had been in dissolution since October 2001. (Compl. ¶ 17, Ex. C.)

{23} Shortly thereafter, UMLIC-Five abandoned its defense of the Travis

County Litigation. (Compl. ¶ 18.)

{24} As a result, the District Court for Travis County found for the Plaintiffs

and rendered judgment in their favor and against UMLIC-Five in the amount of

$3.8 million. (Compl. Ex. A.)

{25} In this case, Plaintiffs allege claims against the Defendants for, among

other things: (1) breach of fiduciary duty, (2) common law fraud, (3) fraudulent

transfers of UMLIC-Five’s assets, (4) violating the requirements of Chapter 55 of

the North Carolina General Statutes by failing to notify Plaintiffs in writing of

UMLIC-Five’s dissolution, and (5) knowingly and willfully concealing material facts

relating to the corporate status of UMLIC-Five and its impending or actual

dissolution. (Compl. ¶¶ 21–47.)

{26} Plaintiffs also seek to pierce UMLIC-Five’s corporate veil so as to reach the

assets of the Defendants for any damages awarded in this case. (Compl. ¶¶ 48–53.)

III.

CONCLUSIONS OF LAW

A.

STANDARD OF REVIEW

{27} “Judgments on the pleadings [pursuant to Rule 12(c) of the North Carolina

Rules of Civil Procedure] are disfavored in law, and the trial court must view the

facts and permissible inferences in the light most favorable to the non-moving

party.” Groves v. Cmty. Hous. Corp., 144 N.C. App. 79, 87, 548 S.E.2d 535, 540

(2001) (citing Flexolite Elec., Ltd. v. Gilliam, 55 N.C. App. 86, 88, 284 S.E.2d 523,

540 (1981)).

{28} “A Rule 12(c) motion should be granted only when ‘the movant clearly

establishes that no material issue of fact remains to be resolved and that the

movant is entitled to judgment as a matter of law.’” Id. at 86–87, 548 S.E.2d at 540

(quoting Minor v. Minor, 70 N.C. App. 76, 78, 318 S.E.2d 865, 867 (1984)).

{29} A fraud claim is “subject to more exacting pleading requirements than are

generally demanded by our liberal rules of notice pleading.” Chesapeake Microfilm,

Inc. v. E. Microfilm Sales & Serv., Inc., 91 N.C. App. 539, 542, 372 S.E.2d 901, 903

(1988) (citing Stanford v. Owens, 76 N.C. App. 284, 289, 332 S.E.2d 730, 733 (1985)

(quotations omitted)).

{30} Rule 9(b) of the North Carolina Rules of Civil Procedure demands that

fraud be pled with particularity. See N.C. R. Civ. P. 9(b). A pleader meets the

requirements of Rule 9(b) when its fraud claim alleges the “time, place and content

of the fraudulent representation, identity of the person making the representation

and what was obtained as a result of the fraudulent acts or representations.” Bob

Timberlake Collection, Inc. v. Edwards, 176 N.C. App. 33, 39, 626 S.E.2d 315, 321

(2006) (quoting Terry v. Terry, 302 N.C. App. 77, 85, 273 S.E.2d 674, 678 (1981)

(quotations omitted)). “Mere generalities and conclusory allegations of fraud will

not suffice.” Sharp v. Teague, 113 N.C. App. 589, 597, 439 S.E.2d 792, 797 (1994)

(quoting Moore v. Wachovia Bank & Trust Co., 30 N.C. App. 390, 391, 226 S.E.2d

833, 835 (1976)).

B.

ANALYSIS

1.

THE FRAUD CLAIM

{31} Defendants Kechijian and Austin assert that Plaintiffs’ allegations of fraud

should be dismissed pursuant to Rule 9(b) of the North Carolina Rules of Civil

Procedure because the pleading does not identify: (1) when the alleged

misrepresentations were made, (2) where they were made, (3) the manner in which

they were made, and (4) what was obtained as a result. (Mem. Supp. Defs.’ Rule 9

and Rule 12 Mot. Dismiss 4 (citing Edwards, 176 N.C. App. at 39, 626 S.E.2d at

32).)

{32} Plaintiffs respond that they have sufficiently alleged all the material

elements of a fraud claim. (Pls.’ Mem. Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and

Fifth Causes of Action 7–8.)

{33} The Court GRANTS the Motion.

{34} To state a claim for fraud, Plaintiffs must show: (1) a false representation

or concealment of material fact, (2) reasonably calculated to deceive, (3) made with

the intent to deceive, (4) that does in fact deceive, and (5) results in damage to

Plaintiffs. Harrold v. Dowd, 149 N.C. App. 777, 782, 561 S.E.2d 914, 918 (2002)

(citing Ragsdale v. Kennedy, 286 N.C. 130, 138, 208 S.E.2d 494, 500 (1974)). Where

the claim arises by concealment or nondisclosure, Plaintiffs also must allege that all

or some of the Defendants had a duty to disclose material information to them, as

silence is fraudulent only when there is a duty to speak. Griffin v. Wheeler-Leonard

& Co., 290 N.C. 185, 198, 225 S.E.2d 557, 565 (1976).

{35} Plaintiffs’ Complaint alleges that “Defendants Kechijian and Austin made

material misrepresentations of fact, and knowingly and willfully concealed material

facts, relating to the existence of UMLIC-Five and its continued operations.”

(Compl. ¶ 39.)

{36} Thus, Plaintiffs here are alleging fraud both by the Defendants’ affirmative

misrepresentation of a material fact and by their silence in the face of a purported

duty to disclose a material fact.

{37} As to the portion of Plaintiffs’ claim alleging an affirmative

misrepresentation, however, the Complaint contains no specific allegations about

the identity of the speaker or speakers, or the time when, or place where, the

fraudulent statements were made. In fact, other than alleging that the Defendants

made material representations of fact, the Complaint fails to identify any

fraudulent statement uttered by anyone. Thus, Plaintiffs’ Complaint does not come

close to satisfying the particularized pleading requirements of Rule 9(b).

{38} As to the portion of Plaintiffs’ claim alleging fraud by concealment, the

Court acknowledges that “fraudulent concealment or fraud by omission is, by its

very nature, difficult to plead with particularity.” Breeden v. Richmond Cmty. Coll.,

171 F.R.D. 189, 195 (M.D.N.C. 1997).

{39} Notwithstanding this difficulty, Magistrate Judge Russell Eliason set forth

in Breeden the following pleading requirements that a plaintiff must satisfy in

alleging fraud by concealment:

(1) the relationship [between plaintiff and defendant] giving rise to

the duty to speak; (2) the event or events triggering the duty to

speak and/or the general time period over which the relationship

arose and the fraudulent conduct occurred; (3) the general content

of the information that was withheld and the reason for its

materiality; (4) the identity of those under a duty who failed to

make such disclosures; (5) what [the defendant] gained by

withholding information; (6) why plaintiff’s reliance on the omission

was both reasonable and detrimental; and (7) the damages

proximately flowing from such reliance.

Breeden, 171 F.R.D. at 195–96 (citing Chrysler Credit Corp. v. Whitney Nat’l Bank,

824 F. Supp. 587, 598 (E.D. La. 1993); Frank M. McDermott, Ltd. v. Moretz, 898

F.2d 418, 421 (4th Cir. 1990); Learning Works, Inc. v. Learning Annex, Inc., 830

F.2d 541, 546 (4th Cir. 1987)).

{40} The Court adopts Judge Eliason’s well-reasoned analysis. See Turner v.

Duke Univ., 325 N.C. 152, 164, 381 S.E.2d 706, 713 (1989) (stating that where

federal and state civil procedure rules are similar, North Carolina state courts may

look for guidance to federal court decisions interpreting the federal rules).

{41} Plaintiffs’ Complaint fails to satisfy the Breeden pleading requirements for

alleging fraud by concealment. Assuming arguendo, that Plaintiffs’ pleading

satisfies the first four requirements of the Breeden test, 1 it fails to satisfy the last

three.

{42} First, Plaintiffs fail to allege any facts demonstrating what the Defendants

gained from failing to disclose that UMLIC-Five was in dissolution. As part of their

claim alleging breach of fiduciary duty, Plaintiffs allege that Kechijian and Austin

“received advantages not common to other creditors and took advantage of their

position for the [sic] own benefit at Plaintiffs’ expense” and “disbursed the assets of

UMLIC-Five to themselves and other shareholders.” (Compl. ¶¶ 22–23.)

{43} Plaintiffs, however, fail to set forth facts to support these claims, and they

further qualify their allegations as being made “upon information and belief.”

(Compl. ¶¶ 22–23.) Allegations based “upon information and belief”, however, are

generally insufficient to meet the requirements of Rule 9(b). Breeden, 171 F.R.D. at

197 (citing Andrews v. Fitzgerald, 823 F. Supp. 356, 375 (M.D.N.C. 1993)). Breeden

explains that “[a]llegations of fraud may be made ‘upon information and belief’ only

when the matters are particularly within the defendants’ knowledge, and facts are

stated upon which the belief is founded.” Id.

{44} Plaintiffs may not be privy to all of the facts regarding what the

Defendants gained from the alleged fraudulent concealment. Nevertheless, even in

a fraudulent concealment case, Plaintiffs must make some proffer of the facts

supporting the allegations. Id. Plaintiffs’ Complaint lacks such facts and therefore

fails this prong of the Breeden test.

{45} Second, other than parroting a legal conclusion (see Compl. ¶ 42),

Plaintiffs fail to set forth facts explaining why their reliance on the Defendants’

silence was both reasonable and detrimental. Indeed, the Court is hard-pressed to

see how the alleged silence of the Defendants prevented Plaintiffs from searching

1The Court doubts that Plaintiffs have satisfied the first two elements of the Breeden test as to

UMLIC-Five’s alleged duty to notify its creditors of its dissolution. The plain language of the statute

imposes no such duty, but rather provides a process for a dissolved corporation to dispose promptly

of known claims against it by giving notice of dissolution and establishing a deadline for the filing of

claims. See N.C. Gen. Stat. § 55–14–06 (2005)

the public records of the North Carolina Secretary of State’s office during the

pendency of the Travis County Litigation to ascertain for themselves the corporate

status of UMLIC-Five, particularly since they allege that UMLIC-Five was refusing

to respond to discovery on this very point.

{46} Third, Plaintiffs’ claim of damage from the alleged fraud is curious at best.

Plaintiffs allege that by failing to disclose that UMLIC-Five was in dissolution

“Defendants Kechijian and Austin intended to mislead Plaintiffs and prevent them

from asserting claims in the [Travis County] Litigation against Kechijian and

Austin and other shareholders who may have received assets wrongfully and

fraudulently conveyed from UMLIC-Five.” (Compl. ¶ 41.) Yet Plaintiffs admit that

they were aware of UMLIC-Five’s dissolution at least two months before entry of

the judgment in the Travis County Litigation (see Compl. ¶¶ 17–19, Ex. A), and do

not allege that the Defendants’ silence actually prevented them from lodging their

claims in Texas.

{47} Accordingly, because Plaintiffs’ Fourth Cause of Action alleging fraud fails

to satisfy the pleading requirements of Rule 9(b), the Court GRANTS Defendants

Motion to dismiss.

2.

THE UDTPA CLAIM

{48} To state a claim under the UDTPA, Plaintiffs must allege “(1) defendants

committed an unfair or deceptive act or practice; (2) in or affecting commerce and

(3) plaintiff was injured as a result.” Phelps-Dickson Builders, L.L.C. v.

Amerimann Partners, 172 N.C. App. 427, 439, 617 S.E.2d 664, 671 (2005).

{49} Defendants assert that Plaintiffs’ UDTPA claim fails as a matter of law

because it does not allege an in-state injury. (Mem. Supp. Defs.’ Rule 9 and Rule 12

Mot. Dismiss 7 (citing Merck & Co., Inc. v. Lyon, 941 F. Supp. 1443, 1463 (M.D.N.C.

1996); In Porters, S.A. v. Hanes Printables, Inc., 663 F. Supp. 494, 502 (M.D.N.C.

1987) (holding that UDTPA is limited by the Commerce Clause and the Due Process

Clause to “cases involving substantial effect on a plaintiff’s in-state business

operation”)).)

{50} Plaintiffs respond that the UDTPA affords them relief where, as here,

their alleged injuries were caused by the Defendants’ in-state conduct. (Pls.’ Mem.

Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and Fifth Causes of Action 9–11.)

{51} The Court notes that Plaintiffs are individual consumers. For this reason,

the cases relied on by the Defendants are not directly on point. However, at least

one federal court in North Carolina has held that UDTPA relief is available “to a

foreign plaintiff suing a resident defendant over alleged foreign injuries having a

substantial in-state effect on North Carolina trade or commerce.” Jacobs v. Cent.

Transp., Inc., 891 F. Supp. 1088, 1112 (E.D.N.C. 1995), aff’d in relevant part, rev’d

in part, 83 F.3d 415 (4th Cir. 1996).

{52} Nevertheless, although the UDTPA’s language is broad, “the Act is not

intended to apply to all wrongs in a business setting.” HAJMM Co. v. House of

Raeford Farms, Inc., 328 N.C. 578, 593, 403 S.E.2d 483, 492 (1991).

{53} In HAJMM, the North Carolina Supreme Court held that a dispute over

the redemption of revolving fund certificates issued by a corporation was not a

transaction “in or affecting commerce” and therefore, was beyond the scope of the

UDTPA. Id. at 595, 403 S.E.2d at 493. The court there equated revolving

certificates to corporate securities, whose purpose was to provide and maintain

adequate capital for the enterprises at issue. Id.

{54} According to the HAJMM court, capital raising devices are not subject to

regulation by the UDTPA because the commerce element of the Act applies only to

“the manner in which businesses conduct their regular, day-to-day activities, or

affairs,” while “the issuance of securities is an extraordinary event done for the

purpose of raising capital . . . .” Id. at 594, 403 S.E.2d at 493. See also Oberlin

Capital, L.P. v. Slavin, 147 N.C. App. 52, 62, 554 S.E.2d 840, 848 (2001) (holding

that loan agreement, which also gave plaintiff the right to purchase corporation’s

stock in the future, was primarily a capital raising device, and therefore was not “in

or affecting commerce” for the purposes of the UDTPA).

{55} Although the argument is not pressed by the Defendants here, dissolution

of a corporation also appears to be an extraordinary event falling outside of an

entity’s day-to-day business activities. Thus, HAJMM and Oberlin suggest that the

UDTPA should not apply on these facts.

{56} In any event, it is beyond cavil that the UDTPA’s primary purpose is to

protect the consuming public. Skinner v. E.F. Hutton & Co., Inc., 314 N.C. 267,

274–75, 333 S.E.2d 236, 241 (1985). Consistent with that purpose, the UDTPA

gives a private cause of action to consumers aggrieved by unfair or deceptive

business practices. See Marshall v. Miller, 302 N.C. 539, 543, 276 S.E.2d 397, 400

(1981); see also Bhatti v. Buckland, 328 N.C. 240, 245, 400 S.E.2d 440, 443 (1991)

(stating that the purpose of the UDTPA “is to provide a civil means to maintain

ethical standards of dealings between persons engaged in business and the

consuming public in this State”).

{57} Plaintiffs are residents of Travis County, Texas. Their Complaint arises

from Defendant UMLIC-Five’s wrongful attempt to foreclose on their home in

Texas. Plaintiffs ultimately obtained a $3.8 million judgment against UMLIC-Five

in the Travis County Litigation, and are seeking to enforce the judgment in North

Carolina.

{58} As to UMLI, Kechijian and Austin, Plaintiffs allege that they have

“hindered, delayed and defrauded” Plaintiffs in their efforts to collect on that

judgment. (Pls.’ Mem. Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and Fifth Causes of

Action 10.) This alleged injury, however, does not arise from competition between

the parties or the consumption of goods and/or services in this state. Nor am I

persuaded that the Defendants’ alleged acts have had a substantial in-state effect

on North Carolina trade or commerce.

{59} Accordingly, Plaintiffs may not look to the UDTPA for a remedy in this

case. See, e.g., Food Lion, Inc. v. Capital Cities/ABC, Inc., 194 F.3d 505 (4th Cir.

1999) (disallowing use of UDTPA in case alleging damages from news gathering and

stating that the UDTPA “cannot be used here because there is no competitive or

business relationship that can be policed for the benefit of the consuming public”);

cf. Jacobs, 891 F. Supp. at 1112.

{60} The Court GRANTS Defendants Motion to Dismiss the Plaintiffs’ Fifth

Cause of Action alleging a violation of the UDTPA.

IV.

CONCLUSION

{61} The Court DISMISSES Plaintiffs’ Fourth and Fifth Causes of Action

alleging fraud and a violation of the UDTPA, respectively.

This the 18th day of June, 2007.