Phillips and Jordan, Inc. v. Bostic

Phillips and Jordan, Inc. v. Bostic, 2012 NCBC 34.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF
JUSTICE
GRAHAM COUNTY SUPERIOR COURT DIVISION
11 CVS 53

PHILLIPS AND JORDAN, INC.,

Plaintiff,

v.

JOSEPH E. BOSTIC, JR., JEFFERY L. ORDER & OPINION
BOSTIC, MELVIN MORRIS, TYLER
MORRIS, and MICHAEL HARTNETT,

Defendants.

McKinney & Tallant, P.A. by Zeyland G. McKinney, Jr. for Plaintiff.
Ivey, McClellan, Gatton, & Talcott, LLP by Edwin R. Gatton for Defendants Melvin
Morris and Tyler Morris.
Smith Moore Leatherwood, LLP by Jonathan A. Berkelhammer for Defendant
Michael Hartnett.
Nexsen Pruet, PLLC by Randall W. Reavis and Christine L. Myatt for Defendants
Joseph E. Bostic, Jr. and Jeffery L. Bostic.
Murphy, Judge.
{1} THIS MATTER
MATTER is before the Court on Defendants’ (Joseph E. Bostic,
Jr., Jeffery L. Bostic (“Bostic Defendants”), Melvin Morris, Tyler Morris (“Morris
Defendants”), and Michael Hartnett) Motions to Dismiss and the Bostic Defendants
and Morris Defendants’ alternative Motions for More Definite Statement. After
considering the parties’ motions and briefs, and the arguments and contentions of
counsel made during a hearing before this Court on September 28, 2012, the Court
DENIES in part and GRANTS in part Defendants’ Motions to Dismiss, and
DENIES Defendants’ Motions for More Definite Statement.
I.
PROCEDURAL HISTORY
{2} This action is the second case filed by Plaintiff against the Bostic and
Morris Defendants relating to the same transactions and occurrences. The first
case (the “Prior Action”) (08 CVS 07) was filed in Graham County Superior Court on
January 18, 2008. (Bostic Defs.’ Br. Supp. Mot. Dismiss 2.) The Prior Action was
removed to the North Carolina Business Court but voluntarily dismissed without
prejudice on November 1, 2010. (Bostic Defs.’ Br. Supp. Mot. Dismiss 2.)
{3} The current action was filed on April 1, 2011, designated a complex
business case, and assigned to this Court on May 5, 2011. (Compl. p. 26;
Designation Order 1; Assignment Order 1.) Defendant Hartnett was named a
Defendant for the first time in the current case; he was not a named party in the
Prior Action.
{4} The Bostic Defendants, Morris Defendants, and Defendant Hartnett
filed their Motions to Dismiss, Motions for More Definite Statement, and supporting
briefs on May 25, 2011. (Bostic Defs.’ Mot. Dismiss 2; Bostic Defs.’ Mot. More
Definite S. 2; Morris Defs.’ Mot. Dismiss 2; Morris Defs.’ Mot. More Definite S. 2;
Def. Hartnett’s Mot. Dismiss 2.)
{5} Defendants’ Motions were fully briefed on June 28, 2011, and the
Court conducted a hearing on the Motions on September 28, 2012. During the
hearing, in open Court, counsel for Plaintiff announced that he was voluntarily
dismissing the claim of Unfair and Deceptive Trade Practices against Defendant
Michael Hartnett.
II.
STATEMENT OF FACTS
{6} Defendants move the Court to dismiss Plaintiff’s action pursuant to
Rules 12(b)(1), 12(b)(6), and 41(b) of the North Carolina Rules of Civil Procedure.
“‘When reviewing a motion to dismiss for lack of subject matter jurisdiction
pursuant to Rule 12(b)(1), a trial court may consider and weigh matters outside the
pleadings.’” Munger v. State, 202 N.C. App. 404, 410, 689 S.E.2d 230, 235 (2010)
(quoting DOT v. Blue, 147 N.C. App. 596, 603, 556 S.E.2d 609, 617 (2001)).
“‘However, if the trial court confines its evaluation to the pleadings, the court must
accept as true the plaintiff’s allegations and construe them in the light most
favorable to the plaintiff.’” Id. (quoting Blue, 147 N.C. App. at 603, 556 S.E.2d at
617). The following facts are taken from Plaintiff’s Complaint and are accepted as
true for the purpose of resolving Defendants’ Motions to Dismiss pursuant to Rule
12(b)(1). However, the Court does not make findings of fact in connection with
Defendants’ Motions to Dismiss pursuant to Rule 12(b)(6), as such motions do “not
present the merits, but only [determine] whether the merits may be reached.”
Concrete Serv. Corp. v. Investors Group, Inc., 79 N.C. App. 678, 681, 340 S.E.2d
755, 758 (1986). Accordingly, for purposes of the Court’s Rule 12(b)(6) analysis, this
Order and Opinon recites only those facts from the Complaint that are relevant to
the Court’s legal determinations.
{7} Plaintiff is a corporation organized under the laws of North Carolina,
with its principle office and place of business in Robbinsville, Graham County,
North Carolina. (Compl. ¶ 1.)
{8} The Morris Defendants, Defendant Hartnett, and Defendant Joseph E.
Bostic, Jr. are all citizens and residents of North Carolina. Defendant Jeffery L.
Bostic is a resident of Georgia. (Compl. ¶¶ 6–10.)
{9} From 2002 until 2005, Plaintiff, a subcontractor, rendered services on
construction projects with companies (principally Bostic Construction, Inc. and
Bostic Development, LLC (“Defendants’ Affiliated Companies”)) that were allegedly
under Defendants’ complete dominion and control. (Compl. ¶¶ 3, 13.) Plaintiff
became aware of the “facts necessary to assert these causes of action on December
6, 2005.” (Compl. ¶ 11.)
{10} Throughout the relevant time period alleged by Plaintiff, Defendants
all held official positions of responsibility, such as officer, director, or shareholder,
within Defendants’ Affiliated Companies. (Compl. ¶¶ 15, 22, 24.) Plaintiff alleges
that Defendants used their positions and control over the Affiliated Companies to
create “a relationship wherein the Plaintiff trusted that the Defendants would use
the construction loan proceeds for each project to pay for the actual costs of each
project . . . .” (Compl. ¶ 86.)
{11} Prior to and during Plaintiff’s work on various construction projects
with Defendants’ Affiliated Companies, including the West Commons project,
Defendants used a group of sham companies to “commingle, misuse, and
misappropriate the construction loans provided to finance the construction projects
on which the Plaintiff performed services.” (Compl ¶ 85.)
{12} Rather than holding loan proceeds to pay off debts for a particular
project, Defendants used the proceeds to advance large sums of money to other
companies owned by Defendants and make preferential payments for their own
benefit. (Compl. ¶¶ 92–93.)
{13} During the time Plaintiff worked with Defendants’ Affiliated
Companies, Bostic Construction was operated in a condition that verged on near or
actual insolvency and constituted dissolution or winding up of the affairs of the
company. (Compl. ¶¶ 94–95.)
{14} For the purposes of evaluating Defendants’ 12(b)(1) Motions, the Court
takes judicial notice that on or about January 17, 2005, an involuntary bankruptcy
petition under Chapter 7 of the Bankruptcy Code was filed against Bostic
Construction. (Def. Hartnett’s Br. Supp. Mot. Dismiss 3.) The Court also takes
judicial notice of an order entered in the Bostic Construction bankruptcy proceeding
approving the settlement agreement between the Chapter 7 Trustee, the Bostic
Defendants, and Melvin Morris related to Bostic Construction’s potential claims for
(1) preferential payments under the Bankruptcy Code and (2) alleged breaches of
the fiduciary duties these Defendants owed to Bostic Construction in their
capacities as officers and directors. In re Bostic Construction, Inc., No. B–05–
11199C–7G (Bankr. M.D.N.C. 2005); (Def. Hartnett’s Br. Supp. Mot. Dismiss Ex. A.)
III.
LEGAL STANDARD
A.
MOTION TO DISMISS PURSUANT TO RULE 12(b)(1)
{15} “Standing refers to whether a party has a sufficient stake in an
otherwise justiciable controversy such that he or she may properly seek
adjudication of the matter.” Am. Woodland Indus., Inc. v. Tolson, 155 N.C. App.
624, 626, 574 S.E.2d 55, 57 (2002). Standing is a question of subject matter
jurisdiction, which is a prerequisite to the exercise of any authority by the state
courts. Street v. Smart Corp., 157 N.C. App. 303, 305, 578 S.E.2d 695, 698 (2003);
Neuse River Foundation, Inc. v. Smithfield Foods, Inc., 155 N.C. App. 110, 113, 574
S.E.2d 48, 51 (2002).
{16} “‘When reviewing a motion to dismiss for lack of subject matter
jurisdiction pursuant to Rule 12(b)(1), a trial court may consider and weigh matters
outside the pleadings.’” Munger, 202 N.C. App. at 410, 689 S.E.2d at 235 (quoting
Blue, 147 N.C. App. at 603, 556 S.E.2d at 617).
B.
MOTION TO DISMISS PURSUANT TO RULE 12(b)(6)
{17} The question for the court on a motion to dismiss is “whether, as a
matter of law, the allegations of the complaint, treated as true, are sufficient to
state a claim upon which relief may be granted under some legal theory, whether
properly labeled or not.” Harris v. NCNB Nat’l Bank, 85 N.C. App. 669, 670, 355
S.E.2d 838, 840 (1987) (citing Stanback v. Stanback, 297 N.C. 181, 254 S.E.2d 611
(1979)). “[T]he pleadings, when taken as true, [must be] legally sufficient to satisfy
the elements of at least some . . . recognized claim.” Arroyo v. Scottie’s Prof’l
Window Cleaning, Inc., 120 N.C. App. 154, 158, 461 S.E.2d 13, 16 (1995) (citing
Harris, 85 N.C. App. 669, 355 S.E.2d 838).
{18} “‘Dismissal of a complaint is proper under the provisions of Rule
12(b)(6) . . . when some fact disclosed in the complaint necessarily defeats the
plaintiff’s claim.’” Carlisle v. Keith, 169 N.C. App. 674, 681, 614 S.E.2d 542, 547
(2005) (quoting Hooper v. Liberty Mut. Ins. Co., 84 N.C. App. 549, 551, 353 S.E.2d
248, 250 (1987)). A motion to dismiss “is an appropriate method of determining
whether the statutes of limitation bar plaintiff’s claims if the bar is disclosed in the
complaint.” Id. (citing Horton v. Carolina Medicorp, 344 N.C. 133, 136, 472 S.E.2d
778, 780 (1996)).
{19} When considering a motion to dismiss for failure to state a claim upon
which relief can be granted, “the well-pleaded material allegations of the complaint
are taken as admitted; but conclusions of law or unwarranted deductions of fact are
not admitted.” Pinewood Homes, Inc. v. Harris, 184 N.C. App. 597, 613, 646 S.E.2d
826, 837 (2007) (quoting Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161, 163
(1970)).
IV.
ANALYSIS
A.
RES JUDICATA AND COLLATERAL ESTOPPEL
{20} The Morris Defendants argue that Plaintiff is barred from bringing the
claims included in the Complaint under the doctrines of res judicata and collateral
estoppel. Plaintiff on the other hand, argues that the Defendants should be
estopped from challenging Plaintiff’s standing because of this Court’s ruling in the
Prior Action. (Pl.’s Br. Resp. Defs.’ Mots. Dismiss 4–7; Morris Defs.’ Br. Supp. Mt.
Dismiss 6.) The Court will evaluate these arguments before addressing the
substantive arguments of Defendants’ Motions to Dismiss.
{21} “Under the doctrine of res judicata or ‘claim preclusion,’ a final
judgment on the merits in one action precludes a second suit based on the same
cause of action between the same parties or their privies.” Whitacre P’ship v.
Biosignia, Inc., 358 N.C. 1, 15, 591 S.E.2d 870, 880 (2004) (quoting State ex rel.
Tucker v. Frinzi, 344 N.C. 411, 413, 474 S.E.2d 127, 128 (1996)). For res judicata to
apply:
a party must “show that the previous suit resulted in a final judgment
on the merits, that the same cause of action is involved, and that both
[the party asserting res judicata and the party against whom res
judicata is asserted] were either parties or stand in privity with
parties.”
State ex rel. Tucker, 344 N.C. at 413–14, 474 S.E.2d at 128 (alteration in original)
(quoting Thomas M. McInnis & Assoc. v. Hall, 318 N.C. 421, 428, 349 S.E.2d 552,
556 (1986)).
{22} Under the companion doctrine of collateral estoppel or issue
preclusion, “the determination of an issue in a prior judicial or administrative
proceeding precludes the re-litigation of that issue in a later action, provided the
party against whom the estoppel is asserted enjoyed a full and fair opportunity to
litigate that issue in the earlier proceeding.” Whitacre P’ship, 358 N.C. at 15, 591
S.E.2d at 880. A party attempting to assert collateral estoppel must show:
that the earlier suit resulted in a final judgment on the merits, that
the issue in question was identical to an issue actually litigated and
necessary to the judgment, and that both [the party asserting
collateral estoppel and the party against whom collateral estoppel is
asserted] were either parties to the earlier suit or were in privity with
parties.
State ex rel. Tucker, 344 N.C. at 414, 474 S.E.2d at 128–29 (alteration in original)
(citation omitted).
{23} Determining when parties are in privity can be difficult:
the meaning of “privity” for purposes of res judicata and collateral
estoppel is somewhat elusive. Settle v. Beasley, 309 N.C. 616, 620, 308
S.E.2d 288, 290 (1983). Indeed, “there is no definition of the word
‘privity’ which can be applied in all cases.” Masters v. Dunstan, 256
N.C. 520, 524, 124 S.E.2d 574, 577 (1962). The prevailing definition
that has emerged from our cases is that “privity” for purposes of res
judicata and collateral estoppel “denotes a mutual or successive
relationship to the same rights of property.” Settle, 309 N.C. at 620,
308 S.E.2d at 290[.]
Id. at 416–17, 474 S.E.2d 127, 130 (quoting Hales v. N.C. Ins. Guar. Ass’n, 337 N.C.
329, 333–34, 445 S.E.2d 590, 594 (1994)).
{24} “‘Privity is not established, however, from the mere fact that persons
may happen to be interested in the same question or in proving or disproving the
same state of facts, or because the question litigated was one which might affect
such other person’s liability as a judicial precedent in a subsequent action.’” Id. at
417, 474 S.E.2d at 130 (quoting 47 Am. Jur. 2d Judgments § 633 (1995)).
{25} Plaintiff argues that because this Court determined that Plaintiff had
standing to bring its claims in the Prior Action, Phillips & Jordan, Inc. v. Bostic,
2009 NCBC 13 (N.C. Super. Ct. June 2, 2009), http://www.ncbusinesscourt.net/
opinions/2009_NCBC_13.pdf, the Defendants should be estopped from raising
objections to Plaintiff’s standing in their Motions to Dismiss. (Pl.’s Br. Resp. Defs.’
Mot. Dismiss 6.) The Morris Defendants argue that Plaintiff’s claims are barred
under res judicata and collateral estoppel because of the bankruptcy order and
settlement agreement approved in In re Bostic Construction, Inc., No. B–05–
11199C–7G (Bankr. M.D.N.C. 2005). (Morris Defs.’ Mot. Dismiss Ex. A.)
{26} For a party to assert either res judicata or collateral estoppel there
must be a final judgment on the merits in the previous action. See State ex rel.
Tucker, 344 N.C. at 413–14, 474 S.E.2d at 128 (defining the elements of res judicata
and collateral estoppel). However, “where an action or proceeding has been
[voluntarily] dismissed, rulings preceding the final judgment of dismissal are, as a
general proposition, not capable of becoming res judicata.” Gibbs v. Carolina Power
& Light Co., 265 N.C. 459, 464, 144 S.E.2d 393, 398 (1965) (citation omitted)
(stating that “[a] nonsuit ‘is but like the blowing out of a candle, which a man at his
own pleasure may light again.’” (quoting Grimes v. Andrews, 170 N.C. 515, 521, 87
S.E. 341, 343 (1915)); see also Phipps v. Paley, 90 N.C. App. 170, 174, 368 S.E.2d 21,
24 (1988) (stating that “whether a previous judgment was on the merits is [equally]
relevant to the application of [res judicata or] collateral estoppel.”) The prior action
cited by Plaintiff as estopping Defendants’ challenge to standing was voluntarily
dismissed by Plaintiff on November 1, 2010. Phillips & Jordan, Inc., No. 08 CVS 07
(N.C. Super. Ct. filed Nov. 1, 2010). Accordingly, the Court finds that there was no
final judgment on the merits and therefore Defendants can not be estopped from
challenging Plaintiff’s standing in this action.
{27} As to the Morris Defendants’ argument, the Court finds that Plaintiff
was neither a party, nor in privity with a party involved in the bankruptcy action
Defendants argue bars Plaintiff’s causes of action. “‘[P]rivity’ for purposes of res
judicata and collateral estoppel denotes a mutual or successive relationship to the
same rights of property.” State ex rel. Tucker, 344 N.C. at 416–17, 474 S.E.2d at
130 (citations omitted). “Upon the filing of a bankruptcy petition, general claims
held by the debtor’s creditors become property of the bankruptcy estate.” TUG
Liquidation LLC, v. Atwood (In re BuildNet, Inc., 2004 Bankr. LEXIS 2383, at *20
(Bankr. M.D.N.C. June 16, 2004) (unpublished)). While Plaintiff might have been
in privity with the bankruptcy trustee if its claims were general claims, and thus
subsumed by the bankruptcy trustee upon the filing for bankruptcy, the Court finds
that Plaintiff has adequately alleged that the individual defendants, in their
positions as officers and directors of Defendants’ Affiliated Companies, engaged in
constructive fraud and Plaintiff was individually injured separate and apart from
other creditors. As such, Plaintiff’s claims were not the property of the bankruptcy
estate. Because Plaintiff was neither a party to the prior action, nor in privity with
a party, Defendant can not demonstrate that that all of the elements of either res
judicata or collateral estoppel are present and thus Plaintiff is not estopped from
bringing its claims in this action.
B.
MOTION TO DISMISS RULE 12(b)(1)
{28} The Bostic Defendants, Morris Defendants, and Defendant Hartnett
contend that Plaintiff lacks standing to assert a claim for constructive fraud against
Defendants in their capacity as officers or directors of Bostic Construction because:
(1) the claim (if any) belongs to Bostic Construction; and (2) the claim is barred
because it was settled as part of Bostic Construction’s Chapter 7 bankruptcy
proceeding. The Court disagrees.
{29} “‘[W]hen a corporation enters bankruptcy, any legal claims that could
be maintained by the corporation against other parties become part of the
bankruptcy estate, . . . and claims that are part of the bankruptcy estate may only
be brought by the trustee in the bankruptcy proceeding.’” Phillips & Jordan, Inc. v.
Bostic, 2009 NCBC 13 ¶ 71 (N.C. Super. Ct. June 2, 2009), http://www.ncbusiness
court.net/opinions/2009_NCBC_13.pdf (quoting Keener Lumber Co. v. Perry, 149
N.C. App. 19, 25, 560 S.E.2d 817, 822 (2002)). In addition, “[u]pon the filing of a
bankruptcy petition, general claims held by the debtor’s creditors become property
of the bankruptcy estate.” TUG Liquidation LLC, v. Atwood (In re BuildNet, Inc.,
2004 Bankr. LEXIS 2383, at *20 (Bankr. M.D.N.C. June 16, 2004) (unpublished)).
{30} “Whether plaintiff’s claim is property of the bankruptcy estate, and,
therefore, under the full authority of the bankruptcy trustee, requires an
examination of the nature of the claim under state law.” Keener Lumber Co., 149
N.C. App. at 26, 560 S.E.2d at 822.
{31} The North Carolina Court of Appeals has stated that:
Under North Carolina law, directors of a corporation generally owe a
fiduciary duty to the corporation, and where it is alleged that directors
have breached this duty, the action is properly maintained by the
corporation rather than any individual creditor or stockholder. . . .
However, where a cause of action is “founded on injuries peculiar or
personal to [an individual creditor or stockholder], so that any recovery
would not pass to the corporation and indirectly to other creditors,” the
cause of action belongs to, and is properly maintained by, that
particular creditor or stockholder.
Id. at 26, 560 S.E.2d at 822 (alteration in original) (quoting Underwood v. Stafford,
270 N.C. 700, 703, 155 S.E.2d 211, 213 (1967)).
{32} “‘As a general rule, directors of a corporation do not owe a fiduciary
duty to creditors of the corporation.’” Id. at 29, 560 S.E.2d at 824 (quoting Whitley
v. Carolina Clinic, Inc., 118 N.C. App. 523, 526, 455 S.E.2d 896, 899, disc. review
denied, 340 N.C. 363, 458 S.E.2d 197 (1995)). “However, North Carolina law holds
that, under certain circumstances, directors of a corporation do owe a fiduciary duty
to creditors of the corporation, and that this duty is breached if the directors take
advantage of their position for their own benefit at the expense of other creditors.”
Id. at 30, 560 S.E.2d at 824 (citing Whitley, 118 N.C. App. 523, 455 S.E.2d 896).
{33} “[D]irectors of a corporation owe a fiduciary duty to creditors of the
corporation only where there exist ‘circumstances amounting to a ‘winding-up’ or
dissolution of the corporation.’” Id. at 31, 560 S.E.2d at 825 (quoting Whitley, 118
N.C. App. at 528, 455 S.E.2d at 900).
{34} A claim brought by a creditor against directors of a corporation,
“alleging that the director has committed constructive fraud by breaching his
fiduciary duty owed directly to the creditor, is a claim founded on injuries peculiar
or personal to the individual creditor, and, therefore, is a claim that belongs to the
creditor and not the corporation.” Id. at 26–27, 560 S.E.2d at 823 (citing Mills Co. v.
Earle, 233 N.C. 74, 62 S.E.2d 492 (1950)).
{35} In its Complaint Plaintiff alleges that: Defendants were officers,
shareholders, and or directors of Defendants’ Affiliated Companies (Compl. ¶93.);
that Defendants made preferential payments out of the construction loan proceeds
for Defendants’ personal benefit (Compl. ¶ 93.); that Defendants made preferential
payments to Defendant, Joseph Bostic, that totaled an estimated three hundred
thousand dollars (Compl. ¶ 93.); that Defendants “advanced large sums of the
construction loan proceeds to other businesses that the Defendants held ownership
[interests in] for the Defendants’ personal gain” (Compl. ¶ 92.); and that these
transfers allegedly occurred when Defendants’ Affiliated Companies were in a
condition that verged on near or actual insolvency and constituted dissolution or
winding up of the affairs of the company. (Compl. ¶¶ 94–95.)
{36} Defendants argue that (1) Plaintiff’s claims were resolved in a
settlement agreement entered into by the bankruptcy trustee and the individual
Defendants and (2) that because Plaintiff’s claims are general claims shared by all
creditors those claims became the property of the bankruptcy estate pursuant to 11
U.S.C. § 541.1 While Defendants are correct that upon the filing of a bankruptcy
petition, general claims become the property of the bankruptcy estate, see 11 U.S.C.
§ 541, here the Court finds that Plaintiff’s Complaint alleges that Defendants
breached a duty that they owed directly to the creditor rather than an injury that is
common to all creditors. Accordingly, Plaintiff’s claims did not become the property
of the bankruptcy estate and the settlement agreement between the bankruptcy
trustee and Defendants, which Plaintiff was not a party to, does not prevent
Plaintiff from alleging the claims included in its Complaint. Thus, the Court holds
that Plaintiff has standing to bring the claims in this action and Defendants’
Motions to Dismiss pursuant to Rule 12(b)(1) are DENIED.
DENIED

1
The Court notes that Defendants Hartnett and Tyler Morris were not signatories to the referenced Settlement and
Release. (See Def. Hartnett’s Br. Supp. Mot. Dismiss Ex. A.)
C.
MOTION TO DISMISS RULE 12(b)(6)
1.
CONSTRUCTIVE FRAUD
{37} To sufficiently state a claim for constructive fraud, a plaintiff must
show (1) a relationship of trust and confidence akin to that of a fiduciary, (2) that
the defendant took advantage of that position of trust in order to benefit himself,
and (3) that the plaintiff was injured as a result. Sterner v. Penn, 159 N.C. App.
626, 631, 583 S.E.2d 670, 674 (2003); Barger v. McCoy Hillard & Parks, 346 N.C.
650, 666, 488 S.E.2d 215, 224 (1997).
{38} Constructive fraud differs from actual fraud in that “it is based on a
confidential relationship rather than a specific misrepresentation.” Terry v. Terry,
302 N.C. 77, 85, 273 S.E.2d 674, 678–79 (1981).
{39} The pleading requirements for constructive fraud may be met by
alleging “facts and circumstances (1) which created the relation of trust and
confidence, and (2) [which] led up to and surrounded the consummation of the
transaction in which defendant is alleged to have taken advantage of his position of
trust to the hurt of plaintiff.” Rhodes v. Jones, 232 N.C. 547, 549, 61 S.E.2d 725,
726 (1950).
{40} Constructive fraud by a director of a corporation generally arises from
the director’s breach of a fiduciary duty. As a general rule, however, directors owe
fiduciary duties to the corporation, and not to any individual creditor. Keener
Lumber Co., 149 N.C. App. at 29–30, 560 S.E.2d, at 824.
{41} Thus, in most instances where a director breaches a fiduciary duty, the
action is properly maintained by the corporation rather than an individual creditor.
Id. at 26, 560 S.E.2d at 822 (citing Underwood v. Stafford, 270 N.C. 700, 703, 155
S.E.2d 211, 213 (1967)).
{42} In certain circumstances, however, corporate directors may owe a
fiduciary duty to creditors of the corporation. The circumstances under which a
director’s fiduciary obligations extend to creditors have been limited to those
situations “‘amounting to a ‘winding up’ or dissolution of the corporation.’” Id. at 31,
560 S.E.2d at 825 (quoting Whitley, 118 N.C. App. at 528, 455 S.E.2d at 900).
{43} Where a director owes a fiduciary duty to a creditor of the corporation,
a breach occurs if the director takes advantage of his position for his own benefit at
the expense of the creditor. Id. at 30, 560 S.E.2d at 824.
{44} Moreover, “once the fiduciary duty arises, a director must treat all
creditors of the same class equally by making any payments to such creditors on a
pro rata basis.” Id. at 33, 560 S.E.2d at 827 (citing Bassett v. Cooperage Co., 188
N.C. 511, 512, 125 S.E. 14, 14 (1924)).
{45} Where a creditor alleges constructive fraud by a director at a time
when the corporation “‘is in declining circumstances and verging on insolvency,’” id.
at 30, 560 S.E.2d at 825 (quoting Wall v. Rothrock, 171 N.C. 388, 391, 88 S.E. 633,
635 (1916)), or “where such facts establish circumstances that amount ‘practically to
a dissolution,’” Keener, at 30, 560 S.E.2d at 825 (quoting Bassett, 188 N.C. at 512,
125 S.E. at 14), the claim is one that “belongs to the creditor and not the
corporation.” Id. at 26, 560 S.E.2d at 823 (citing Mills Co., 233 N.C. at 62 S.E.2d at
492).
{46} “‘[A] claim of constructive fraud based upon a breach of fiduciary duty
falls under the ten-year statute of limitations contained in N.C. Gen. Stat. § 1–56 . .
. .’” Toomer v. Bank Branch & Trust Co., 171 N.C. App. 58, 67, 614 S.E.2d 328, 335
(2005) (quoting Nationsbank of N.C. v. Parker, 140 N.C. App. 106, 113, 535 S.E.2d
597, 602 (2000)).
{47} Defendant Hartnett argues that Plaintiff’s claim for constructive fraud
is barred by the applicable statute of limitations. As the Court of Appeals held in
Toomer, there is a 10-year statute of limitations for a claim of constructive fraud
based on a breach of fiduciary duty. Toomer, 171 N.C. App. at 67, 614 S.E.2d at
335. This Court finds that Plaintiff’s Complaint alleges a claim for constructive
fraud based on a breach of fiduciary duty (Compl. ¶ 99); that Plaintiff became aware
of the facts giving rise to its claim on December 6, 2005 (Compl. ¶ 11); that
Defendants’ conduct occurred between 2002 and 2005 (Compl. ¶¶ 3, 82); and that
Plaintiff filed this action on April 1, 2011. (Compl. p. 26.) Accordingly, the Court
holds that Plaintiff brought his claim for constructive fraud within the applicable
statute of limitations.
{48} Turning to Defendants’ argument that Plaintiff failed to sufficiently
plead a claim for constructive fraud, the Court finds that Plaintiff has alleged: that
Defendants Melvin Morris and Jeffrey Bostic held positions of responsibility, such
as officer, director, or shareholder, within Defendants’ Affiliated Companies (Compl.
¶¶ 15, 81); that Bostic Construction, Inc. was operated in a condition that verged
on near or actual insolvency; that Bostic Construction’s condition constituted
dissolution or winding up of the affairs of the company (Compl. ¶¶ 94–95); that
Defendants Melvin Morris and Jeffery Bostic caused Bostic Construction, Inc. to
“ma[k]e preferential payments out of the construction loan proceeds for
[Defendants] own personal benefit;” that “the Defendants used their positions with
Bostic Construction to make preferential payments to the Defendant, Joseph Bostic,
that totaled an estimated three hundred thousand dollars” (Compl. ¶ 93); that
Defendants “advanced large sums of the construction loan proceeds to other
businesses that the Defendants held ownership [interests in] for the Defendants’
personal gain” (Compl. ¶ 92); and that Plaintiff was damaged by Defendants’
actions in an amount in excess of ten thousand ($10,000.00) dollars. (Compl. ¶ 107.)
{49} Plaintiff merely alleges that Bostic Construction, Inc. verged on near
or actual insolvency and was in a condition that constituted dissolution or winding
up the affairs of the company. While the Whitley and Keener courts set out the
various factors to be considered in determining whether there existed circumstances
amounting to a winding-up or dissolution of the corporation, for the purposes of this
12(b)(6) analysis, it would be inappropriate to require Plaintiff to allege every factor
in its Complaint. For purposes of a 12(b)(6) analysis, Plaintiff need only allege
sufficient facts to place Defendant on notice of the claims it asserts.2 Here, Plaintiff

2
See also Terry, 302 N.C. at 85, 273 S.E.2d at 678–79 (“A constructive fraud claim requires
even less particularity because it is based on a confidential relationship rather than a
specific misrepresentation. The very nature of constructive fraud defies specific and concise
has alleged a situation which, if true, would create a fiduciary relationship between
Plaintiff and Defendants Melvin Morris and Jeffery Bostic. The Court also holds
that Plaintiff has sufficiently alleged that Defendants Melvin Morris and Jeffery
Bostic took advantage of the relationship to benefit themselves, and that Plaintiff
was damaged as a result. Accordingly, the Court holds that Plaintiff’s allegations
are sufficient under the 12(b)(6) standard to state a claim for constructive fraud.
The Court therefore DENIES Defendants’ Motions to Dismiss as to this claim.
2.
AIDING AND ABETTING CONSTRUCTIVE FRAUD
{50} The Court begins by examining whether North Carolina recognizes a
claim for aiding and abetting constructive fraud, and if so, whether the Complaint
sufficiently alleges facts that satisfy the elements of such a claim.
{51} Plaintiff’s claim for aiding and abetting constructive fraud is really a
claim for aiding and abetting breach of fiduciary duty. See Branch Banking &
Trust Co. v. Lighthouse Fin. Corp., 2005 NCBC 3 ¶ 24 (N.C. Super. Ct. July 13,
2005), http://www.ncbusinesscourt.net /opinions/2005%20NCBC%203.htm (stating
that “[t]he claim for aiding and abetting breach of fiduciary duty arises from the
alleged constructive fraud.”).
{52} “‘It is undisputed that the Supreme Court of North Carolina has never
recognized [a cause of action for aiding and abetting breach of fiduciary duty].’”
Tong v. Dunn, 2012 NCBC 16 ¶ 23 (N.C. Super. Ct. Mar. 19, 2012), http://www.
ncbusinesscourt.net/opinions /2012_NCBC_16.pdf (quoting Laws v. Priority Tr.
Servs. of N.C., LLC, 610 F. Supp. 2d 528, 532 (W.D.N.C. 2009)) (alteration in
original). However, the North Carolina Court of Appeals recognized the claim in
Blow v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988). In Blow, the Court
of Appeals was faced with allegations of securities fraud and used federal precedent

allegations and the particularity requirement may be met by alleging facts and
circumstances ‘(1) which created the relation of trust and confidence, and (2) [which] led up
to and surrounded the consummation of the transaction in which defendant is alleged to
have taken advantage of his position of trust to the hurt of plaintiff.’” (alteration in
original)).
to support its recognition of the claim. However, subsequent to the court’s holding
in Blow, the United States Supreme Court eliminated Blow’s federal underpinnings
in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.
Ct. 1439, 128 L. Ed. 2d 119 (1994).
{53} Since the holding in Central Bank of Denver, there has been no
definitive ruling from our appellate courts on the claim’s status and thus “[i]t
remains an open question whether North Carolina law recognizes” the claim.
Battleground Veterinary Hosp., P.C. v. McGeough, 2007 NCBC 33 ¶ 68 (N.C. Super.
Ct. Oct. 19, 2007), http://www.ncbusinesscourt.net/opinions/101907%20Order%20
Webpage.pdf; compare Laws, 610 F. Supp. 2d at 532 (granting Rule 12(b)(6) motion
to dismiss claim for aiding and abetting breach of fiduciary duty because “no such
cause of action exists in North Carolina.”), with In re Vendsouth, Inc., 2003 Bankr.
LEXIS 1437, at *49 (Bankr. M.D.N.C. Oct. 9, 2003) (stating “North Carolina law
recognizes a cause of action for aiding and abetting breach of fiduciary duty.”).
{54} To properly allege a claim for aiding and abetting breach of fiduciary
duty Plaintiff must show: “(1) violation of a fiduciary duty by the primary party; (2)
knowledge of the violation by the aiding and abetting party; and (3) substantial
assistance by the aider and abettor in achieving the primary violation.” Tong, 2012
NCBC 16 ¶ 25 (citing Blow, 88 N.C. App. at 489, 364 S.E.2d at 447).
{55} In addition, “liability for aiding and abetting a breach of fiduciary duty
‘applies only to third parties who do not stand in a fiduciary relationship with the
alleged victim, but who provide substantial assistance towards accomplishing the
alleged breach.’” Tong, 2012 NCBC 16 ¶ 30 (quoting Battleground, 2007 NCBC 33
¶ 70); see also Sompo Japan Ins. Co., v. Deloitte & Touche, LLP, 2005 NCBC 2 (N.C.
Super. Ct. June 10, 2005), http://www.ncbusinesscourt.net/opinions/2005%20NCBC
%202.htm (stating that the elements for fraud and aiding and abetting fraud are
duplicative).
{56} Here, the Court does not reach the question of whether the claim for
aiding and abetting breach of fiduciary duty exists in North Carolina because the
Complaint’s allegations defeat the claim even if it existed under North Carolina
law. Carlisle, 169 N.C. App. at 681, 614 S.E.2d at 547 (stating that “‘[d]ismissal . . .
is proper under the provisions of Rule 12(b)(6) . . . when some fact disclosed in the
complaint necessarily defeats the plaintiff’s claim.’” (citation omitted)).
{57} Plaintiff’s claim for aiding and abetting constructive fraud is brought
against Defendants Tyler Morris, Michael Hartnett, and Joseph Bostic. (Compl. p.
19.) In support of its claims Plaintiff alleges that “the Defendants, and each of
them, held some position of responsibility, such as officer, director, or shareholder,
within this web of businesses,” (Compl. ¶ 15 (emphasis added)) that “Joseph Bostic
. . . held ownership and official positions with Bostic Construction and Bostic
Development,” (Compl. ¶ 22 (emphasis added)) and that “during some or all of the
relevant time periods, the Defendants, Michael Hartnett and Tyler Morris, were
officers, directors and/or shareholders of Bostic Construction and/or Bostic
Development.” (Compl. ¶ 24 (emphasis added).)
{58} More plainly put, Plaintiff alleges that during all relevant times to this
action, every Defendant was a director of Bostic Construction, Inc. Taking the
allegations in Plaintiff’s Complaint as true, this would mean, under Keener, that
during a period of insolvency, winding up, or dissolution, each of the Defendants
held positions that carried a fiduciary duty to the company’s creditors (including
Plaintiff). Because “liability for aiding and abetting a breach of fiduciary duty
‘applies only to third parties who do not stand in a fiduciary relationship with the
alleged victim . . . ,’” Tong, 2012 NCBC 16 ¶ 30 (emphasis added), Plaintiff has
alleged facts which defeat its claim for aiding and abetting breach of fiduciary duty.
Accordingly, the Court GRANTS Defendants’ Motions to Dismiss as to this claim.
The Court leaves the question of whether a claim for aiding and abetting breach of
fiduciary duty exists in North Carolina for another day and does not reach
Defendant Hartnett’s argument that Plaintiff’s claim is barred by the applicable
statute of limitations.
3.
UNFAIR AND DECEPTIVE TRADE PRACTICES
{59} To state a claim under the North Carolina Unfair and Deceptive Trade
Practices Act (the “UDTPA”), section 75–1.1 of the North Carolina General
Statutes, the plaintiff 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, LLC v. Amerimann Partners, 172 N.C. App. 427,
439, 617 S.E.2d 664, 671 (2005) (citing Edwards v. West, 128 N.C. App. 570, 574,
495 S.E.2d 920, 923 (1998)).
{60} “A practice is unfair when it offends established public policy as well as
when the practice is immoral, unethical, oppressive, unscrupulous, or substantially
injurious to consumers.” Bartlett Milling Co. v. Walnut Grove Auction & Realty Co.,
192 N.C. App. 74, 82, 665 S.E.2d 478, 486, (2008) (internal quotations omitted).
{61} “‘[C]ommerce’ includes all business activities, however denominated,
but does not include professional services rendered by a member of a learned
profession.” N.C. GEN. STAT. § 75–1.1(b) (2011).
{62} When alleging a claim under the UDTPA, “proof of an independent tort
generally is sufficient to make out a separate UDTPA claim.” Battleground, 2007
NCBC 33 ¶ 75 (citing Sara Lee Corp. v. Carter, 351 N.C. 27, 31–33, 519 S.E.2d 308,
311–12 (1999) (holding that the breach of a fiduciary duty by an employee also gave
rise to a UDTPA claim); Governor’s Club, Inc. v. Governors Club Ltd. P’ship., 152
N.C. App. 240, 250, 567 S.E.2d 781, 788 (2002) (holding that “[a]llegations sufficient
to allege constructive fraud are likewise sufficient to allege unfair and deceptive
trade practices.”); Norman W. Drouillard & Print Purchasing Consultants, Inc. v.
Keister Williams Newspaper Servs., Inc., 108 N.C. App. 169, 171–73, 423 S.E.2d
324, 326–27 (1992) (holding that a violation of the Trade Secrets Protection Act may
also be a violation of the UDTPA); Roane-Barker v. Se. Hosp. Supply Corp., 99 N.C.
App. 30, 41, 392 S.E.2d 663, 670 (1990) (holding that a claim alleging tortious
interference with contract also makes out a UDTPA violation).
{63} “Any civil action brought under [the UDTPA] to enforce the provisions
thereof shall be barred unless commenced within four years after the cause of action
accrues.” N.C. GEN. STAT. § 75–16.2 (2011).
{64} Defendants argue that Plaintiff’s claim is barred by the applicable
statute of limitations and that Plaintiff has also failed to sufficiently plead a claim
under the UDTPA. The Court held supra that Plaintiff sufficiently alleged a claim
for constructive fraud. As the Court of Appeals held in Governor’s Club, Inc., if a
Plaintiff has properly pled a claim for constructive fraud, Plaintiff has also
sufficiently alleged a claim under the UDTPA. The Court, therefore, finds that
Plaintiff has sufficiently pled a claim under the UDTPA.
{65} Turning to whether Plaintiff’s claim is barred by the applicable statute
of limitations, the Court holds that unlike Plaintiff’s claim for constructive fraud,
claims under the UDTPA must be brought within four (4) years from the time the
cause of action accrues. In this case, Plaintiff’s claim is based on the same acts
alleged in its claim for constructive fraud. Accordingly, the UDTPA would have
accrued when Plaintiff became aware of the facts giving rise to its claim for
constructive fraud. Plaintiff alleged that it became aware of the facts giving rise to
its claims on December 6, 2005. (Compl. ¶ 11.) However, Plaintiff did not bring
this action until April 1, 2011, more than 4 years after the cause of action accrued.
Because Plaintiff failed to bring its claim within the time allowed by statute, its
UDTPA claim must be dismissed. Thus, the Court GRANTS Defendants’ Motions to
Dismiss as to this claim and Plaintiff’s claim under the UDTPA is DISMISSED with
prejudice.
V.
CONCLUSION
{66} For the reasons stated above, the Court DENIES Defendants’ Motions
to Dismiss pursuant to Rule 12(b)(1); GRANTS in part and DENIES in part
Defendants Motions to Dismiss pursuant to Rule 12(b)(6); and holds that neither
Plaintiff nor Defendant is barred by the doctrines of res judicata or collateral
estoppel. Accordingly, the Court DISMISSES with prejudice Plaintiff’s claims for
aiding and abetting constructive fraud and unfair and deceptive trade practices as
to all Defendants.
{67} In light of the foregoing rulings, Defendant’s Motion for More Definite
Statement is DENIED.
DENIED
SO ORDERED,
ORDERED this the 1st day of June, 2012.