Contract – Software Development – Nonpayment – Tort/Negligence – Fraud – Unfair Trade Practices

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Emergys Corp. v. Consert, Inc. (Lawyers Weekly No. 12-15-0402, 18 pp.) (John R. Jolly Jr., J.) 2012 NCBC 19

Holding: Where plaintiff’s tort claims focus on alleged misrepresentations made during the parties’ contract negotiations that induced plaintiff to enter into the parties’ agreement when it otherwise would not have done so, such allegations are distinct from a breach of contract action.

Defendant’s motion to dismiss is granted with respect to plaintiff’s claims for a declaratory judgment as to the validity of the agreement and for unjust enrichment. Otherwise, defendant’s motion is denied. Plaintiff’s motion to dismiss defendant’s counterclaims is granted as to defendant’s breach of fiduciary duty counterclaim and denied as to defendant’s fraud counterclaim.

Where plaintiff alleges that defendant fraudulently induced plaintiff to enter into the parties’ agreement with promises of payment, preferred vendor status and future business opportunities, and where plaintiff alleges that specific false representations were made to plaintiff by defendant’s principal, Joe Forbes, on behalf of defendant, plaintiff has sufficiently pleaded a fraud claim.

Plaintiff also alleges that defendant negligently made materially false or misleading statements and representations concerning defendant’s ability and/or willingness to pay for software development services and its intention to give plaintiff preferred vendor status and future business. Thus, plaintiff has sufficiently pleaded a negligent misrepresentation claim.

Since proof of fraud would also prove unfair trade practices, plaintiff has stated a claim for unfair trade practices.

Where defendant acknowledges that the parties’ agreement constitutes a valid contract between the parties, there is no controversy as to the validity of the agreement. Therefore, defendant’s motion to dismiss is granted with respect to plaintiff’s claim for a declaratory judgment as to the validity of the agreement.

However, plaintiff has pleaded sufficient facts to establish an actual controversy between the parties as to the parties’ intellectual property rights. Defendant’s motion to dismiss is denied with respect to plaintiff’s claim for a declaratory judgment as to the parties’ intellectual property rights.

Where defendant acknowledges the validity of the parties’ written agreement, plaintiff has not stated a claim for unjust enrichment.

In its breach of fiduciary duty counterclaim, defendant alleges that plaintiff assumed the role of fiduciary and “accepted that higher duty of care” to defendant by “undertaking the project and causing [defendant] to become dependent upon [plaintiff], assuming an ownership interest in the company and encouraging investment of additional capital based, in part, upon [plaintiff’s] continued work.”

However, the terms for payment and completion of the project were negotiated between the parties at arms-length.

Further, plaintiff’s equity stake in defendant was acquired in place of a payment owed, and there is no allegation that this ownership stake afforded plaintiff any control over defendant. The element of control is what gives rise to a fiduciary duty between the controlling shareholder and the minority.

Defendant has not alleged facts sufficient to show that plaintiff exerted the requisite domination or influence over defendant giving rise to the existence of a fiduciary relationship.

Defendant has also asserted a fraud counterclaim against plaintiff, which counterclaim is not a subject of plaintiff’s motion to dismiss. Consequently, the court concludes that defendant has sufficiently pleaded its counterclaim for unfair trade practices.

Motions granted in part, denied in part.