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Home / Courts / Tort/Negligence – Constructive Fraud – Financial Advisor – First Impression – Fraud – Unfair Trade Practices

Tort/Negligence – Constructive Fraud – Financial Advisor – First Impression – Fraud – Unfair Trade Practices

Kettle v. Leonard (Lawyers Weekly No. 12-02-0957, 26 pp.) (W. Earl Britt, Sr.J.) 7:11-cv-00189; E.D.N.C.

Holding: Where defendant held himself out to be a financial advisor, invited plaintiffs to place their trust and confidence in him, and convinced plaintiff to invest in the businesses and annuities that he recommended, defendant owed plaintiffs a fiduciary duty.

Plaintiffs’ motion for summary judgment is granted.

Although the N.C. courts do not appear to have addressed the issue of whether a financial advisor owes a fiduciary duty to a customer, courts in other jurisdictions have acknowledged the fiduciary nature of such a relationship.

Defendant clearly took advantage of his relationship with plaintiffs for his own benefit. The record evidence shows that defendant misappropriated a large portion of plaintiffs’ funds for his own use.

Further, there is no doubt that plaintiffs have been injured, as their money has not been returned, nor have they received any interest as promised.

Plaintiffs are entitled to summary judgment on their constructive fraud claim.

Plaintiffs also proved actual fraud.

Plaintiffs allege that defendant falsely represented that he would place their money “in a secure, fixed income investment which would secure a high rate of interest.” Defendant allegedly told plaintiffs that he had “a special relationship” with Woodlands Bank and that he could therefore place plaintiffs’ funds in a CD that would earn 4.05 percent interest.

Based on these representations, plaintiff Kettle gave defendant $400,000, and the plaintiffs Holcomb gave him $100,000 to invest as he had promised. Plaintiffs further assert that defendant did not invest their money as promised but instead used it to pay for his personal expenses and other items. Plaintiffs’ funds have not been returned to them.

While defendant contends that the transactions with plaintiffs “were presented as promissory notes from the beginning,” he has produced no written, signed promissory note between him and plaintiffs. He even admitted in his deposition that he had never prepared and presented a promissory note to plaintiff Kettle.

Defendant also admitted that he does not have a copy of the promissory note that he claims he gave to the Holcombs. He has not described any efforts to locate the note. Thus, defendant has essentially conceded that no such document exists.

Defendant has failed to produce significantly probative evidence to refute plaintiffs’ version of events with regard to the false representation element of fraud.

As to defendant’s intent to deceive, he testified that he invested plaintiffs’ money in other businesses, which he believed were safe and would generate returns. Defendant said his bank records would substantiate his claims.

However, defendant’s bank records show that, at most, only a small portion of plaintiffs’ money was given to the businesses described by defendant in his deposition. The vast majority of plaintiffs’ money was used to pay for defendant’s personal expenses and for other expenses unrelated to the investments mentioned in defendant’s deposition.

The records also show that, once defendant had plaintiffs’ money, he spent it quickly. This rebuts defendant’s argument that he did not intend to defraud plaintiffs at the time he acquired their money.

It would not be reasonable for a jury to conclude from the record that plaintiffs lent their money to defendant in exchange for promissory notes or that defendant lacked fraudulent intent.

Plaintiffs’ proof of fraud, either actual or constructive, is sufficient, in and of itself, to prove a violation of the Unfair and Deceptive Trade Practices Act.

Plaintiff Kettle is entitled to the return of her $400,000 investment, and the Holcombs are entitled to have their $100,000 investment returned. The court also awards plaintiffs interest at the rate promised by defendant (4.05 percent). Plaintiffs’ damages will be trebled pursuant to G.S. § 75-16.

However, since plaintiffs failed to show that defendant made an unwarranted refusal to fully resolve plaintiffs’ claims, the court declines plaintiffs’ request for attorney’s fees under G.S. § 75-16.1.

Plaintiffs’ motion for summary judgment is granted.

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