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Home / Courts / Tort/Negligence – Fiduciary Duty — Fraud – Economic Loss Rule — Real Property – Landlord/Tenant – Commercial Lease – Corporate – Medical Office Development

Tort/Negligence – Fiduciary Duty — Fraud – Economic Loss Rule — Real Property – Landlord/Tenant – Commercial Lease – Corporate – Medical Office Development

Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC (Lawyers Weekly No. 12-15-1007, 29 pp.) (Calvin E. Murphy, J.) 2012 NCBC 51

Holding: When the plaintiff-doctors were looking for new office space, the defendant-developer allegedly assured them that the parties had a relationship of trust and confidence and that the developer had the doctors’ best interests at heart. This was not sufficient to create a fiduciary relationship between the parties.

Where the N.C. appellate courts have yet to extend the economic loss rule to fraud claims, this court declines to do so.

Defendants’ motion to dismiss is granted as to plaintiffs’ claims for piercing the corporate veil, fraud in the inducement, intentional or negligent misrepresentation, negligence, constructive fraud, rescission of the parties’ lease for failure of condition precedent, rescission of the lease for failure of consideration, waiver, and conflict of interest. Plaintiffs’ claims for equitable estoppel, preliminary injunction and all derivative claims are dismissed without prejudice. Otherwise, defendants’ motion to dismiss is denied.

The plaintiff-medical practice was looking for new offices. Plaintiffs found a larger tract of land than they needed, so they entered into agreements with defendants to buy and develop the land, to lease new offices to plaintiffs, and to share profits from the development. Plaintiffs contend defendants have not shared profits and sold the land without plaintiffs’ consent.

Plaintiffs’ allegations of wrongdoing by the defendants can be generally summarized as follows: (1) Defendants concealed or misrepresented facts surrounding the financial stability of defendant First Colony Healthcare, LLC; (2) Defendants altered the parties’ operating agreement and other documents without plaintiffs’ knowledge or consent; (3) Defendants sold the property without plaintiff A to Z Enterprises LLC’s consent and without sharing any of the profits of the sale; and (4) Defendants misrepresented material facts and made unauthorized changes to the agreements which resulted in additional costs and fees for plaintiffs.

Standing

Guarantors of a corporation’s debts ordinarily may not pursue individual actions to recover damages for injuries to the corporation. However, a guarantor may establish standing by alleging either (1) that the wrongdoer owed him a special duty, or (2) that the injury suffered by the guarantor is personal to him and distinct from the injury sustained by the corporation itself. The existence of a special duty may be established by facts showing that defendants owed a duty to plaintiffs that was personal to plaintiffs as guarantors and was separate and distinct from the duty defendants owed the corporation.

The plaintiff-doctors agreed to personally guarantee the lease after defendants allegedly misrepresented themselves as “very financially strong and very fiscally responsible.” The facts alleged in the complaint sufficiently indicate that (1) defendants were aware the doctors were personally guaranteeing the lease, and (2) the representations made by defendants about their financial status “induced” the doctors’ guarantees.

These allegations, taken as true, would create a special duty personal to the doctors, adequate to confer standing upon them.

Accordingly, the court concludes that plaintiffs Adams, Zimmerman, and St. Clair have standing to bring their individual claims as personal guarantors of the lease and may pursue all claims associated with those personal guarantees.

Fraud

Plaintiffs allege that each of the individual defendants made certain misrepresentations on specific dates and at specific locations regarding the details of the transactions at issue, and about the company’s financial status.

However, plaintiffs’ allegations are devoid of any facts supporting justifiable reliance. Although plaintiffs argue that defendants falsely held themselves out as being financially stable, they make no allegations regarding efforts timely taken to investigate this assertion or to learn the true facts through reasonable diligence.

While plaintiffs allege that defendants promised access to defendants’ financial records concerning the proposed transaction, plaintiffs neglected to request such information for nearly two years. When plaintiffs expressed concerns about the deal before finalizing it, defendants reassured them they had their “best interests at heart,” and plaintiffs ultimately moved forward with the deal. It was only after the transaction failed to fully materialize that plaintiffs sought access to the financial information.

Even though plaintiffs allege that in an email exchange defendant Russell lied about the changes to the contract, they admit the same email contained a copy of the contract with certain changes. By failing to allege facts in support of their own investigation and due diligence, plaintiffs have not demonstrated reasonable reliance. As such, plaintiffs’ claim for fraud is fatally deficient.

Because the complaint fails to set out justifiable reliance, plaintiffs have also failed to state a claim for intentional or negligent misrepresentation and for negligence.

In support of their constructive fraud claim, plaintiffs allege that Russell expressly told them they had a relationship of trust and confidence. However, plaintiffs neglect to allege any facts which establish that this type of relationship actually existed beyond a single statement made during the course of negotiations. In fact, plaintiffs retained their own counsel to review the documents prepared by defendants and negotiated back and forth via a series of emails before finalizing the deal. The court concludes that plaintiffs have not adequately alleged the existence of a fiduciary relationship with defendants. As such, plaintiffs’ claim for constructive fraud fails as a matter of law.

In support of their securities fraud claim, plaintiffs allege defendants induced plaintiffs to enter into the operating agreement that gave the medical practice a membership interest in the defendant-subsidiaries and affiliates and purported to allocate the profits of the companies. And, defendants “sold” the security in exchange for plaintiffs’ obligations under the lease. Plaintiffs have properly alleged the sale of a security.

Plaintiffs allege statements made by Russell, defendant Hinson’s preparation of the altered documents, and defendant Norvet’s participation at the initial sales presentation proclaiming First Colony’s financial stability and expertise in developing medical parks. Therefore, plaintiffs have sufficiently pled facts to support their claim under G.S. § 78A-56.

The complaint contains several allegations supporting the personal liability of the individual defendants, as discussed above. In light of these individual acts, the court concludes that plaintiffs have stated a claim for securities fraud against the individual defendants.

The court also concludes that defendants’ reliance on the economic loss rule is inapplicable as N.C. appellate courts have yet to extend the doctrine to bar claims based on fraud.

Other Issues

While plaintiffs allege that numerous affiliates occupy the same office, share the same employees, and are insolvent, they fail to point to specific acts of control or domination by the individual defendants over First Colony subsidiaries that would allow them to take advantage of this arrangement. Plaintiffs have failed to adequately allege that the First Colony subsidiaries are “a mere instrumentality” of the individual defendants sufficient to pierce the corporate veil and hold Russell, Hinson, and Norvet liable for the companies’ wrongs.

The complaint alleges that (1) “[i]n return for and in consideration of a ten year Lease by Blue Ridge … the Defendants agreed … to provide all capital, assume all risk, and … [share] 50 percent of the profits from the sale of any part of the Templeton Property” and (2) defendants failed to deliver plaintiffs’ share of the proceeds from the sale of the Templeton property. The facts as pled are sufficient to survive defendants’ motion to dismiss plaintiffs’ claim for breach of contract.

Since plaintiffs do not rely on an express provision in the lease or operating agreement, the court cannot find that plaintiffs’ equity interest or profits from the sale of the development were a condition precedent to plaintiffs’ obligations under the lease. Plaintiffs are not entitled to rescind the lease for failure of a condition precedent.

Where plaintiffs are still tenants under the lease, there is not a complete failure of consideration. Plaintiffs are not entitled to rescind the lease for failure of consideration.

Although several contracts are alleged to be at issue in this case, at this phase of the litigation, plaintiffs may plead alternative theories of recovery. Therefore, the court denies defendants’ motion to dismiss plaintiffs’ unjust enrichment claim.

The facts supporting plaintiffs’ claim for securities fraud can be relied upon to support their unfair and deceptive practices claim. Further, by developing and renting the Templeton Property in connection with the alleged actions, the practice is “in or affecting commerce.” Lastly, plaintiffs allege defendants’ fraudulent acts deprived plaintiffs of profits promised under the operating agreement. Therefore, plaintiffs have sufficiently pled facts alleging unfair and deceptive trade practices.

Motion granted in part, denied in part.


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