Third Party v. David R. Riese

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 SOUTH ATLANTIC LIMITED
PARTNERSHIP OF TENNESSEE, LP;
SOUTH ATLANTIC INCOME PROPERTIES,
LLC; SOUTH ATLANTIC MANAGEMENT
COMPANY,
Plaintiffs-Appellants,
E. STEPHEN STROUD; GRACE D.
RAMSEY; STEVEN M. SIMPSON, No. 99-1497  Third Party Defendants-Appellants,
v.
DAVID R. RIESE; GARY PLICHTA;
GIBRALTAR COMPANIES OF TENNESSEE,
INCORPORATED; GIBRALTAR
COMPANIES, INCORPORATED,
Defendant & Third Party
Plaintiff-Appellees. 

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 DAVID R. RIESE; GARY PLICHTA;
GIBRALTAR COMPANIES OF TENNESSEE,
INCORPORATED; GIBRALTAR
COMPANIES, INCORPORATED,
Defendant & Third Party
Plaintiff-Appellants,
v.
E. STEPHEN STROUD; GRACE D. No. 99-1552  RAMSEY; STEVEN M. SIMPSON,
Third Party Defendants-
Appellees,
SOUTH ATLANTIC LIMITED
PARTNERSHIP OF TENNESSEE, LP;
SOUTH ATLANTIC INCOME PROPERTIES,
LLC; SOUTH ATLANTIC MANAGEMENT
COMPANY,
Plaintiffs-Appellees. 
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 SOUTH ATLANTIC LIMITED
PARTNERSHIP OF TENNESSEE, LP;
SOUTH ATLANTIC INCOME PROPERTIES,
LLC; SOUTH ATLANTIC MANAGEMENT
COMPANY,
Plaintiffs-Appellants,
E. STEPHEN STROUD; GRACE D.
RAMSEY; STEVEN M. SIMPSON,
Third Party Defendants- No. 99-1987 Appellants,
v.
DAVID R. RIESE; GARY PLICHTA;
GIBRALTAR COMPANIES OF TENNESSEE,
INCORPORATED; GIBRALTAR
COMPANIES, INCORPORATED,
Defendant & Third Party
Plaintiff-Appellees. 
Appeals from the United States District Court
for the Eastern District of North Carolina, at Raleigh.
Malcolm J. Howard, District Judge.
(CA-96-901-5-H)
Argued: October 30, 2001
Decided: March 22, 2002
Before WIDENER, TRAXLER, and KING, Circuit Judges.
Affirmed by published opinion. Judge King wrote the opinion, in
which Judge Widener joined. Judge Traxler wrote an opinion concur-
ring in part and dissenting in part.
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COUNSEL
ARGUED: E. D. Gaskins, Jr., Michael Joseph Tadych, EVERETT,
GASKINS, HANCOCK & STEVENS, Raleigh, North Carolina, for
Appellants. Sean Eric Andrussier, WOMBLE, CARLYLE, SAN-
DRIDGE & RICE, P.L.L.C., Raleigh, North Carolina, for Appellees.
ON BRIEF: Pressly M. Millen, WOMBLE, CARLYLE, SAN-
DRIDGE & RICE, P.L.L.C., Raleigh, North Carolina, for Appellees.
OPINION
KING, Circuit Judge:
These consolidated appeals arise out of a failed business relation-
ship between several real estate developers in North Carolina and
Tennessee in the mid-1990s. In early 1993, David Riese and Gary
Plichta (the "Riese Group") joined forces with E. Stephen Stroud,
Stroud’s wife Grace Ramsey, and Steve Simpson (the "Stroud
Group") to form the South Atlantic Limited Partnership of Tennessee
("SALT" or the "SALT Partnership"), a company dedicated to devel-
oping real estate in the Nashville, Tennessee, metropolitan area. The
SALT Partnership then hired Gibraltar Companies, Incorporated
("Gibraltar"), a construction company owned by the Riese Group, to
serve as its general construction contractor, and SALT began develop-
ing an upscale apartment community near Nashville known as Lex-
ington Apartments (the "Lexington Project" or the "Project").1
Over time, the relationship between the two Groups became
strained, and, in May 1996, the Stroud Group expelled the Riese
Group from SALT due to alleged poor construction and financial
1The general contractor for the Lexington Project actually was Gibral-
tar Companies of Tennessee, Incorporated, a separate affiliated corpora-
tion formed and owned by the Riese Group specifically for the Nashville
real estate development projects. As the Riese Group notes, the distinc-
tion between the two Gibraltar companies, for the purposes of these
appeals, is not material, and we therefore refer to the Gibraltar corpora-
tions collectively and individually as "Gibraltar."
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impropriety. Litigation thereafter ensued in the Eastern District of
North Carolina, with the two Groups asserting a myriad of claims
against one another, including breaches of contract, breaches of fidu-
ciary duties, and violations of the North Carolina Unfair Trade Prac-
tices Act ("UTPA").2
A jury trial was conducted in the Eastern District of North Carolina
in November 1998, and, on November 19, 1998, the jury rendered a
split verdict, finding that Gibraltar had breached its construction con-
tract with the SALT Partnership, that the Riese Group had breached
various fiduciary duties it owed to SALT, and that both Groups had
engaged in unfair and deceptive trade practices. Following the sub-
mission and briefing of post-trial motions, the district court upheld the
jury’s determinations in their entirety. The two Groups, as well as the
various corporate parties, have appealed adverse aspects of the court’s
judgment. For the reasons explained below, we affirm.
I.
A. The Agreements
In early 1993, the Riese Group entered into discussions with the
Stroud Group about the possibility of investing in the Lexington Proj-
ect. In July 1993, the parties reached an understanding that the Stroud
Group would own seventy-five percent of the Lexington Project and
the Riese Group would own the remaining twenty-five percent. Pursu-
ant to this understanding, the Stroud Group formed SALT, a develop-
ment company structured under a limited partnership agreement (the
"SALT Partnership Agreement" or the "Partnership Agreement").3 On
2The several members of the Stroud Group and the Riese Group
brought suit in their various individual capacities, as well as in connec-
tion with their involvement in various corporate and partnership business
entities. Thus the parties to this litigation consist of the various individu-
als in the Stroud Group and in the Riese Group, as well as SALT and
Gibraltar, and certain other Stroud Group-owned corporate entities.
3The SALT Partnership was initially owned by two other corporate
entities controlled by the Stroud Group. The South Atlantic Management
Company owned one percent of SALT and served as its general partner,
while South Atlantic Income Properties, L.L.C., initially owned ninety-
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April 15, 1994, the members of the Riese Group became limited part-
ners in the SALT Partnership, receiving their combined partnership
interest of twenty-five percent. SALT then purchased the real estate
in Nashville on which the Lexington Project was to be developed.
Under the provisions of the SALT Partnership Agreement, none of
the SALT partners were to be paid salaries; their sole source of com-
pensation was to be any income derived from the sale or lease of
SALT’s properties. The SALT Partnership Agreement also estab-
lished procedures for the expulsion of a "defaulting partner" who,
inter alia, "by misconduct or willful inattention to the business wel-
fare of the Partnership seriously injur[es] the business of the Partner-
ship." Under the SALT Partnership Agreement, whether any such
misconduct had occurred was to be "determined reasonably and in
good faith by the unanimous decision of the nondefaulting partners."
If the nondefaulting partners decided that such misconduct had
occurred, they had the right, within six months thereof, to expel the
defaulting partner from the SALT Partnership by majority vote. If the
nondefaulting partners decided to expel a defaulting partner, they
were required, pursuant to the SALT Partnership Agreement, to do
the following: (1) send written notice of expulsion to the defaulting
partner, and (2) pay the defaulting partner "book value, as determined
by ‘generally accepted accounting principles,’" of his partnership
interest in SALT, calculated as of the date of expulsion.4 Other than
these two procedures, the Partnership Agreement contained no other
requirements for removal of a partner from SALT.
After the April 15, 1994, amendments to the SALT Partnership
Agreement to include the Riese Group, the two Groups executed, on
May 4, 1994, a Memorandum of Agreement which established their
respective responsibilities for development of the real estate in Nash-
nine percent of SALT as a limited partner. When the Riese Group was
brought into the SALT Partnership, it received a twenty-five percent
ownership stake, and the ownership share of South Atlantic Income
Properties was reduced to seventy-four percent.
4Under the SALT Partnership Agreement, the actual date of expulsion
had to be specified in the notice of expulsion, and it was to be "the last
day of a month not later than sixty (60) days after such notice is given."
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ville.5 Under the Memorandum of Agreement, SALT agreed to use
Gibraltar as the general contractor for the construction of its develop-
ment projects. Upon SALT’s selection of real estate for development,
Gibraltar was obligated to generate a "control package" for each par-
ticular project, i.e., a budget estimating and itemizing the costs that
would be incurred during the development of a project to its leasing
stage. In turn, SALT agreed to pay Gibraltar three percent of the
"hard construction costs," i.e., the actual construction costs (such as
grading or foundation work), for supervising a project’s construction.6
The Memorandum of Agreement also provided that Gibraltar would
inform SALT of any activities "which impact [the] viability, cost,
time of construction or which might otherwise have any material
affect on" a development project.
With the two Groups having executed their Memorandum of
Agreement, Gibraltar began work on generating the control package
for the Lexington Project. In August 1994, Gibraltar completed the
control package, which was required before SALT could obtain
financing for the Project. The control package estimated that the Proj-
ect would cost $14,030,000, and that it would be finished in eighteen
months. Gibraltar and SALT then executed, on August 15, 1994, a
formal construction contract for the Lexington Project (the "Construc-
tion Contract"). Pursuant to the Construction Contract, SALT agreed
to pay Gibraltar the actual cost of the Project’s construction, plus the
sum of one dollar.7 The Construction Contract specified, in a manner
consistent with the control package, that the Project was to be sub-
stantially completed eighteen months after the commencement of con-
struction.
5Although in May 1994 the two Groups were only working on the
Lexington Project, they contemplated involvement in at least one addi-
tional development in the Nashville area. As such, the Memorandum of
Agreement is a general document which establishes the responsibilities
of each Group with respect to any development projects in that geo-
graphic area.
6"Soft construction costs" are the costs of a development project that
are not directly related to the actual construction, e.g., legal fees, archi-
tect’s fees, or interest payments on loans.
7Included in the actual cost of construction, however, was Gibraltar’s
fee, i.e., three percent of the hard construction costs, for supervising con-
struction of the Lexington Project.
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While they were concluding negotiations on the Construction Con-
tract, SALT and Gibraltar were also negotiating with First Union
National Bank to obtain a construction loan. This loan, in the sum of
$14,020,000, was closed, pursuant to a Loan Agreement, on August
18, 1994, three days after Gibraltar and SALT executed the Construc-
tion Contract.8 Under the Loan Agreement, SALT was obliged to sub-
mit monthly draw requests to First Union, thus drawing down the loan
to pay for the Project’s monthly construction costs. SALT would then
pay Gibraltar, as the Project’s general contractor, and Gibraltar in turn
would pay the Project’s subcontractors and vendors. Although SALT
possessed responsibility for preparing the monthly draw requests, the
parties informally agreed that the Riese Group would handle the Proj-
ect’s finances. As a result, the Riese Group assumed responsibility for
the Project’s accounting, and it agreed to provide SALT with monthly
budget reports.
B. The Disputes
The construction of the Lexington Project was initially scheduled
to begin in August 1994, immediately after the loan closing; thus, the
Project was to be completed eighteen months later in approximately
February 1996. Work on the Project, however, did not commence
until October 1994, and it immediately encountered a number of
problems and delays. First of all, Gibraltar discovered that its engi-
neers had miscalculated the topography over a large portion of the
Project’s Nashville construction site, and the grading and preparation
of the construction site proved much more difficult than anticipated.
In addition, Gibraltar retained a framing subcontractor, called Today’s
Contractors, which performed substandard framing work on the Proj-
ect, and which then walked off the job.9 Gibraltar also encountered
8Because SALT was negotiating the construction loan with First Union
at the same time Gibraltar was generating the control package for the
Project, SALT accidentally obtained a loan that was $10,000 less than
the estimated cost of the Project. Stroud testified at trial, however, that
he did not want to go back to First Union to obtain additional funds and
therefore SALT and Gibraltar "agreed to work with that amount of
money."
9A framing subcontractor is responsible for installing the frames, i.e.,
the skeletal structures designed to shape and support buildings.
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difficulty in obtaining the necessary government permits for construc-
tion of the Project. Because of these problems, the quality of con-
struction at the Project suffered substantially, and the Project fell
behind its construction schedule. These problems, along with a vari-
ety of others, increased the total construction cost of the Lexington
Project, and by the end of 1995 its estimated cost had been revised
upwards by $1,221,000, to a total of $15,251,000.
During the year 1995, Stroud personally visited the Project on three
occasions, and each time he expressed increasing concern with the
quality and pace of construction. The two Groups held multiple meet-
ings on the status of the Project, and the Riese Group repeatedly
assured the Stroud Group that Gibraltar would complete the Project
on schedule and under budget. Finally, after construction totally
ceased for a week in January 1996, Gibraltar resigned as general con-
tractor, and it turned over the Project’s financial records to SALT.10
SALT then hired Raven Construction Company, a general contractor
owned by the Stroud Group, to complete the Project. Raven success-
fully completed construction of the Project in August 1996, six
months later than originally scheduled.
In early 1996, in the course of completing the Lexington Project
and reviewing its finances, the Stroud Group discovered that Gibraltar
and the Riese Group had engaged in financial improprieties during
construction. An audit revealed that Gibraltar, in its involvement with
the Project, had:
(1) billed SALT for supervisors who had not been working
at the construction site;
(2) double-billed various travel expenses;
(3) submitted inflated statements from subcontractors and
pocketed the difference; and
10Although Gibraltar technically resigned as general contractor, it did
so under duress. As a practical matter, had it not resigned it would have
been terminated.
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(4) established a sham payroll processing corporation,
Universal Benefits, that charged fees to SALT for handling
the monthly payroll.
As a result of the audit’s disclosures, the Stroud Group, in April 1996,
made several requests to the Riese Group for a refund of the monies
that Gibraltar had improperly taken; in addition, it requested that the
Riese Group assume responsibility for cost overruns, poor construc-
tion, and delays that had occurred while Gibraltar served as general
contractor for the Project. The Riese Group, however, denied involve-
ment in any financial improprieties, refused the requests of the Stroud
Group for the refund of monies, and contended that the construction
work on the Project was in conformity with the Project’s plans and
specifications.
Thereafter, on May 14, 1996, the Stroud Group notified the Riese
Group that it had been expelled from the SALT Partnership, pursuant
to the Partnership Agreement’s expulsion provision, for "misconduct
and/or willful inattention to the business welfare of the partnership"
that had seriously injured SALT. The Riese Group’s twenty-five per-
cent partnership interest in SALT was formally terminated as of May
31, 1996. As a result, the Riese Group received no compensation for
its one-fourth interest in the Project, because, according to the Stroud
Group, the book value of SALT at the end of May 1996 was less than
zero, i.e., SALT’s liabilities exceeded its assets.
On June 11, 1996, eleven days after expulsion of the Riese Group,
the SALT Partnership entered into an agreement with Prudential of
America ("Prudential") to sell the Project for $17,640,000, and it also
agreed to sell to Prudential a yet-to-be built "Lexington II" Project for
$25,200,000. Prudential had been negotiating with SALT for its pur-
chase of the Project since early 1995, and in February 1995 it had
executed a general letter of intent with SALT to buy the Project.
Indeed, Prudential had sent Stroud a proposed purchase contract on
January 24, 1996, offering to buy the Project for $17,640,000. The
sale of the Project to Prudential, which was consummated in Septem-
ber 1996, netted SALT a profit of approximately $1,200,000.
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C. The Litigation
On October 25, 1996, SALT filed this civil action against the Riese
Group and Gibraltar in the Eastern District of North Carolina, alleg-
ing multiple claims of fraudulent conduct.11 Specifically, SALT
asserted that (1) the Riese Group had committed civil violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO") under
18 U.S.C. § 1962(a)-(d), (2) the Riese Group and Gibraltar had
engaged in unfair trade practices in violation of North Carolina’s
UTPA, (3) the members of the Riese Group had breached their fidu-
ciary duties to SALT, and (4) Gibraltar had breached the terms of the
Construction Contract. In response, the Riese Group and Gibraltar
promptly moved, pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure, to dismiss the civil RICO claims for failure to state
claims upon which relief could be granted. The district court denied
their motion to dismiss on February 18, 1997, and thereafter, on Feb-
ruary 28, 1997, the Riese Group and Gibraltar filed a joint answer to
SALT’s complaint. They denied SALT’s allegations; they raised a
number of affirmative defenses; and they also asserted a counterclaim
against SALT for breach of the Construction Contract. In addition,
they filed counterclaims and third-party claims against SALT and the
Stroud Group for (1) breach of the Partnership Agreement, (2) breach
of fiduciary duties, (3) unfair and deceptive trade practices in viola-
tion of North Carolina’s UTPA, and (4) unjust enrichment.
The two Groups then filed cross-motions for summary judgment.
SALT and the Stroud Group sought summary judgment on the vari-
ous affirmative defenses asserted by the Riese Group and Gibraltar,
and on two of the Riese Group and Gibraltar’s counterclaims and
third-party claims: (1) unfair and deceptive trade practices and (2)
unjust enrichment. On the other hand, the Riese Group and Gibraltar
sought summary judgment on SALT’s civil RICO claims and sought
dismissal of SALT’s supplemental state law claims. On September 8,
11The named plaintiffs in the initial lawsuit were the SALT Partner-
ship, its general partner South Atlantic Management Company, and its
limited partner South Atlantic Income Properties. Because no activity
related to this litigation involves either of the latter two plaintiffs, we
refer to the three plaintiffs collectively as SALT or as the SALT Partner-
ship.
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1998, the district court denied summary judgment to the Riese Group
and Gibraltar, but granted summary judgment to SALT and the
Stroud Group with respect to all claims and defenses except on the
counterclaim of the Riese Group and Gibraltar for unfair and decep-
tive trade practices. Thus, the litigation proceeded to trial on all of
SALT’s claims against the Riese Group and Gibraltar, and on the
Riese Group and Gibraltar’s remaining four claims (i.e., the claims
for breach of the Construction Contract, breach of the Partnership
Agreement, breach of fiduciary duties, and unfair and deceptive trade
practices) against SALT and the Stroud Group.
The jury trial was conducted from November 9, 1998 through
November 19, 1998, in the Eastern District of North Carolina. Given
the complexity of the litigation, the Verdict included ten pages of spe-
cial interrogatories.12 After its deliberations, the jury found, in sub-
stance, as follows:
(1) the Riese Group was not liable on the civil RICO
charges;
(2) Gibraltar had breached the Construction Contract;
(3) the Riese Group had breached various fiduciary duties
to SALT; and
(4) the Riese Group and Gibraltar had engaged in unfair
and deceptive trade practices.
The jury therefore awarded SALT the sum of $1,100,000 from
Gibraltar for breach of contract, the sum of $1.00 from the Riese
Group for breach of fiduciary duty, and the sum of $150,000 from the
Riese Group and Gibraltar for unfair and deceptive trade practices.
Thus, the total damage award to SALT was in the sum of $1,250,001.
With respect to the counterclaims and third-party claims of the Riese
Group and Gibraltar, the jury found, in substance, that:
12The district court viewed the litigation as exceedingly complex, and
remarked to counsel at the close of argument that it "was one of the most
complex cases I’ve run into now in more than a decade on the bench."
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(1) SALT had not breached the Construction Contract;
(2) SALT and the Stroud Group had not breached the
SALT Partnership Agreement;
(3) SALT and the Stroud Group had not breached any
fiduciary duties owed to the Riese Group; but
(4) SALT and the Stroud Group had engaged in unfair and
deceptive trade practices.
The jury therefore awarded the Riese Group and Gibraltar damages
in the sum of $300,000, from SALT and the Stroud Group, for unfair
and deceptive trade practices.
The various parties then filed post-judgment motions, including,
inter alia, to have the district court determine that the jury’s findings
of unfair and deceptive trade practices deemed violations of the
UTPA as a matter of law. Under the UTPA, the determination of
whether a particular action constitutes an unfair or deceptive trade
practice is a question of law. Ellis v. Northern Star Co., 388 S.E.2d
127, 131 (N.C. 1990). As the Supreme Court of North Carolina
explained recently, in Gray v. North Carolina Insurance Underwrit-
ing Association, "[o]rdinarily, once the jury has determined the facts
of a case, the court, based on the jury’s findings, then determines, as
a matter of law, whether the defendant engaged in unfair or deceptive
practices in or affecting commerce." 529 S.E.2d 676, 681 (N.C.
2000).
On March 10, 1999, the court granted the motions and, pursuant to
the UTPA, trebled the damage awards made to SALT, on the one
hand, and to the Riese Group and Gibraltar, on the other, for the
unfair and deceptive trade practices.13 The trebled awards were in the
sums of $450,000 to SALT, and $900,000 to the Riese Group and
Gibraltar, respectively. South Atlantic Ltd. P’ship of Tenn. v. Riese,
13Once the court has established that an act constitutes a violation of
the UTPA, it must automatically treble the damages. N.C. Gen. Stat.
§ 75-16 (2001); see also Marshall v. Miller, 276 S.E.2d 397, 402 (N.C.
1981).
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Memorandum Opinion at 8-9, 21-23, 5:96CV901H1 (E.D.N.C. Mar.
10, 1999) ("Opinion"). Thus, SALT’s total damage award was
increased to the sum of $1,550,001, and the Riese Group and Gibral-
tar’s total damage award was increased to the sum of $900,000.14
Opinion at 25. In addition, the Riese Group moved, pursuant to Rule
50(b) of the Federal Rules of Civil Procedure, to set aside, as a matter
of law, the jury’s finding that they had breached fiduciary duties to
SALT. The court, however, concluded that there was substantial evi-
dence to support the jury’s finding on this point, and therefore denied
the Riese Group’s motion. Id. at 18-19.
The parties have appealed various adverse aspects of the jury ver-
dict and the Opinion, with SALT and the Stroud Group filing a notice
of appeal on April 9, 1999, and the Riese Group and Gibraltar filing
a cross-appeal on April 22, 1999. First, SALT asserts that the court’s
instruction to the jury on the elements of civil RICO was improper
because it misstated the applicable law. Second, the members of the
Riese Group challenge the court’s denial of judgment as a matter of
law on whether they possessed and breached a fiduciary duty to
SALT. Finally, both Groups contest the court’s determination that
they committed unfair or deceptive trade practices within the meaning
of North Carolina law. We possess jurisdiction pursuant to 28 U.S.C.
§ 1291, and we address these issues in turn.15
II.
The first issue we address on appeal is SALT’s challenge to the
jury instruction on its unsuccessful civil RICO claims. In order to suc-
ceed on a civil RICO claim, a plaintiff must prove by a preponderance
of the evidence that the defendant engaged in a pattern of racketeering
activity. 18 U.S.C. § 1962(c). In SALT’s case, the alleged underlying
14The district court also granted SALT’s motion for costs and awarded
it $28,764.94. Opinion at 9-10. Thus, SALT’s total award was actually
in the sum of $1,578,765.94. Id. at 25.
15Obviously, we apply federal law in our consideration of SALT’s
challenge to the RICO jury instruction. With respect to the various sup-
plemental state law claims, we apply the substantive law of the state
under which the claims were filed, i.e., North Carolina. United Mine
Workers of America v. Gibbs, 383 U.S. 715, 726 (1966).
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racketeering activity against the Riese Group was a series of viola-
tions of the mail and wire fraud statutes. SALT contends that the
court, in instructing on mail fraud, failed to incorporate the Supreme
Court’s holding in Schmuck v. United States, 489 U.S. 705 (1989),
and that it consequently misled the jury into believing that the Riese
Group was required to engage in fraudulent communications in order
to have contravened the mail or wire fraud statutes. In Schmuck, the
Court had specifically rejected this position, and it held that the mail-
ings in a mail fraud prosecution must merely further the scheme to
defraud. Id. at 712-15. SALT asserts that the confusion generated by
this contested instruction misled the jury into finding no civil RICO
liability on the part of the Riese Group.
A.
We review challenges to jury instructions for abuse of discretion.
Nelson v. Green Ford, Inc., 788 F.2d 205, 208-09 (4th Cir. 1986).
Instructions are adequate if "construed as a whole, and in light of the
whole record, [they] adequately [inform] the jury of the controlling
legal principles without misleading or confusing the jury to the preju-
dice of the objecting party." Spell v. McDaniel, 824 F.2d 1380, 1395
(4th Cir. 1987). Even if instructions are flawed, there can be no rever-
sal unless the error seriously prejudiced the challenging party’s case.
Hardin v. Ski Venture, Inc., 50 F.3d 1291, 1296 (4th Cir. 1995).
B.
In order to establish a civil RICO violation under 18 U.S.C.
§ 1962(c),16 the evidence must be sufficient to prove by a preponder-
ance that the enterprise was conducted through a pattern of racketeer-
ing activity. In this case, the alleged racketeering activities were mail
and wire fraud, proscribed by 18 U.S.C. §§ 1341 and 1343 respective-
16Sub-section (c) of the civil RICO statute provides, in pertinent part,
that:
It shall be unlawful for any person employed by or associated
with any enterprise engaged in . . . interstate . . . commerce, to
conduct or participate . . . in the conduct of such enterprise’s
affairs through a pattern of racketeering activity[.]
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ly.17 The court detailed the requirements of mail fraud to the jury,18
and went on to give the jury a similar instruction on wire fraud.19
17The mail fraud statute, 18 U.S.C. § 1341, provides in pertinent part:
Whoever, having devised or intending to devise any scheme or
artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses, representations, or promises . . .
for the purpose of executing such scheme or artifice or attempt-
ing so to do . . . knowingly causes to be delivered by mail . . .,
any such matter or thing, shall be fined . . . or imprisoned . . .
or both.
Similarly, the wire fraud statute, 18 U.S.C. § 1343, provides in pertinent
part:
Whoever, having devised or intending to devise any scheme or
artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses, representations, or promises,
transmits or causes to be transmitted by means of wire . . . com-
munication . . . any . . . signals . . . or sounds for the purpose of
executing such scheme or artifice, shall be fined . . . or impris-
oned . . . or both.
18The district court gave the jury the following instruction on mail
fraud:
In order to establish mail fraud, [SALT] must prove each of
the following by a preponderance of the evidence as to each
defendant [i.e., the members of the Riese Group] charged:
First: the defendant wilfully and knowingly devised a scheme
or artifice to defraud, or for obtaining money or property by
means of false pretenses, representations, or promises;
Second: the defendant did so with an intent to defraud;
Third: it was reasonably foreseeable that the mails would be
used; and
Fourth: the mails were in fact used in furtherance of some
essential step in the scheme.
19The court’s instruction on wire fraud was identical to its instruction
on mail fraud with respect to the first two elements. Instead of the third
and fourth elements, however, it concluded with the following:
Third: in advancing, or furthering the scheme to defraud, the
defendant transmitted, or caused to be transmitted, a writing, sig-
nal, or sound from one state to another by means of telephone or
telegraph lines or by means of radio or television.
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Before so doing, however, the court instructed the jury on the defense
of good faith, advising it:
Good faith is a complete defense to mail fraud. Good
faith means the defendant had a genuine belief that the
information which was sent or given was true.
In giving its instruction on the good faith defense, the court was
acknowledging the legal principle that mail fraud requires that a
defendant act with specific intent to defraud. United States v. Godwin,
272 F.3d 659, 666 (4th Cir. 2001). As such, "good faith, or the
absence of an intent to defraud, is a complete defense to a charge of
mail fraud." United States v. Martin-Trigona, 684 F.2d 485, 492 (7th
Cir. 1982); see also United States v. Dunn, 961 F.2d 648, 650 (7th
Cir. 1992) ("Good faith, or the absence of an intent to defraud, consti-
tutes a complete defense to a charge of mail fraud."); United States
v. Alkins, 925 F.2d 541, 549-50 (2d Cir. 1991) ("Good faith is a com-
plete defense to a mail fraud charge. If an individual believes that the
information set forth in a mailing is true, it follows that he cannot
have the requisite intent to defraud.") (citation omitted); United States
v. Williams, 728 F.2d 1402, 1404 (11th Cir. 1984) ("Good faith is a
complete defense to the element of intent to defraud.").
On appeal, SALT challenges the sufficiency and correctness of the
mail and wire fraud instructions, asserting that they did not ade-
quately represent the holding of the Court in United States v.
Schmuck, 489 U.S. 705 (1989). In that decision, the Court held that
the mailings in a mail fraud prosecution merely had to further the
scheme to defraud, and that they need not, in and of themselves, con-
tain fraudulent misrepresentations. Id. at 712 ("[A] mailing that is
incident to an essential part of the scheme . . . satisfies the mailing
element of the mail fraud offense.") (quotation and citation omitted).
SALT maintains that the instructions failed to make this point explic-
itly, and it therefore asserts that the jury may have been confused by
the "good faith" instruction, such that the jury may have believed that
the mailings themselves were required by law to be fraudulent. SALT
contends that the court erred in not accepting its proposed instruction,
which would have specifically included the admonition that "[i]t is
not necessary that Plaintiffs prove . . . that the material transmitted by
mail or wire was itself false or fraudulent."
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Although the instruction proposed by SALT is more explicit than
that given by the court, a court is not obligated to accept all proposed
jury instructions. Hardin, 50 F.3d at 1296. In examining in isolation
the mail and wire fraud instructions given by the court, there may be
some potential for confusion —— for example, the court’s statement
in its good faith instruction that a "genuine belief that the information
which was sent or given was true" could create an impression that the
communication itself is required to be fraudulent. As we have noted,
however, we do not examine instructions in isolation; rather, we view
them in the context of the entire jury charge. Spell, 824 F.2d at 1395.
Examined in this light, it is clear that this jury was "adequately
informed . . . of the controlling legal principles," without being misled
or confused to the prejudice of SALT. Id. The court explicitly
instructed the jury that the mailing only had to be "in furtherance of
some essential step" of the fraud and that the wire communication
merely had to be "advancing, or furthering the scheme to defraud."
The court made no specific assertion that the communications them-
selves had to be fraudulent. Moreover, as we observed, good faith is
an absolute defense to mail fraud; thus, the instructions as given by
the court represent entirely accurate statements of law. As such, the
challenged instructions fully comport with the requirements of our
decision in Spell v. McDaniel, 824 F.2d 1380 (4th Cir. 1987), in that,
viewed in the context of the entire jury charge, they adequately
informed the jury of the controlling legal principles.
III.
The second issue we address is the Riese Group’s contention that
the district court erred in denying its Rule 50(b) motion for judgment
as a matter of law on whether it had breached fiduciary duties it owed
to SALT. Opinion at 18-19. In this regard, the jury found that devel-
opment of the Lexington Project arose out of a fiduciary relationship
between the Riese Group and the other SALT partners, and that the
Riese Group had breached its fiduciary duties. The members of the
Riese Group assert that, as limited partners in the SALT Partnership,
they lacked sufficient domination and influence over SALT’s affairs
to owe any fiduciary duties to the other SALT partners, and that they
were accordingly entitled to judgment as a matter of law.
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A.
1.
We review de novo a district court’s denial of a motion for judg-
ment as a matter of law. Konkel v. Bob Evans Farms Inc., 165 F.3d
275, 279 (4th Cir. 1999). A district court should grant a Rule 50(b)
motion only if the court "determines, without weighing the evidence
or considering the credibility of the witnesses, that substantial evi-
dence does not support the jury’s findings." Id. In reviewing a district
court’s decision on a Rule 50(b) motion, "we view all the evidence
in the light most favorable to the prevailing party and draw all reason-
able inferences in his or her favor." Id.
2.
Under North Carolina law, a fiduciary relationship "may exist
under a variety of circumstances; it exists in all cases where there has
been a special confidence reposed in one who in equity and good con-
science is bound to act in good faith and with due regard to the inter-
ests of the one reposing confidence." Stone v. McClam, 257 S.E.2d
78, 83 (N.C. Ct. App. 1979) (quoting Abbitt v. Gregory, 160 S.E. 896,
906 (N.C. 1931)). In order to allow the imposition of fiduciary duties
where they are found justified, the North Carolina courts have histori-
cally declined to adopt a rigid definition of a fiduciary relationship;
however, they have recognized that business partners are each others’
fiduciaries as a matter of law. HAJMM Co. v. House of Raeford
Farms, Inc., 403 S.E.2d 483, 489 (N.C. 1991).
B.
The members of the Riese Group challenge the jury finding that
they breached fiduciary duties to SALT, maintaining that, as limited
partners in SALT, they lacked the requisite domination and influence
to create any such fiduciary obligations. In support of this proposition,
they primarily rely on Broussard v. Meineke Discount Muffler Shops,
Inc., 155 F.3d 331 (4th Cir. 1998), and Abbitt v. Gregory, 160 S.E.
896 (N.C. 1931), and assert that a fiduciary relationship arises only
when "one party figuratively holds all the cards — all the financial
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power or technical information." Broussard, 155 F.3d at 348. Because
the Riese Group possessed only limited control over SALT’s deci-
sionmaking capacities, it contends that it was not sufficiently power-
ful to meet this standard.
In making this argument, the Riese Group misapprehends the law
of North Carolina. The standard laid out in Abbitt v. Gregory is that
a fiduciary relationship not only encompasses "all legal relations,
such as attorney and client, broker and principal, . . . partners, [or]
principal and agent," but also includes "any possible case in which a
fiduciary relation exists in fact, and in which there is confidence
reposed on one side, and resulting domination and influence on the
other." 160 S.E. at 906 (emphasis added). Thus, the domination and
influence requirements are relevant only in situations when there is no
legal relationship that imposes fiduciary duties on the parties to it. In
essence, those requirements relate to contractual situations between
two parties who are dealing with each other on an arms-length basis.
As the Riese Group observes, North Carolina is reluctant to impose
"extra-contractual fiduciary obligations" in the context of general
commercial contracts; thus, even when parties to an arms-length
transaction have reposed confidence in each other, no fiduciary duty
arises unless one party thoroughly dominates the other. Tin Originals,
Inc. v. Colonial Tin Works, Inc., 391 S.E.2d 831, 833 (N.C. Ct. App.
1990). In this case, however, any fiduciary obligations possessed by
the members of the Riese Group arise out of their role as limited part-
ners in SALT, rather than from arms-length contractual relations. As
we have noted, Abbitt found the domination and influence require-
ments relevant to situations in which no fiduciary duties were
imposed by a legal relationship. 160 S.E. at 906. Thus, even accepting
that the members of the Riese Group did not thoroughly dominate
SALT, we must nevertheless examine whether they possessed fidu-
ciary obligations in their role as limited partners.
The Riese Group correctly observes that North Carolina law has
not specifically addressed the question of whether limited partners
owe fiduciary duties to general partners, and it also rightly asserts that
North Carolina treats limited partners as analogous to shareholders in
other legal contexts. Energy Investors Fund, L.P. v. Metric Construc-
tors, Inc., 525 S.E.2d 441, 443 (N.C. 2000); Jackson v. Marshall, 537
S.E.2d 232, 235 (N.C. Ct. App. 2000). As such, the Riese Group may
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be correct in its assertion that a limited partner generally has no more
of a fiduciary duty to a partnership than a shareholder has to a corpo-
ration. In this case, however, the members of the Riese Group exer-
cised substantially more control over the SALT Partnership than a
typical shareholder exercises over a corporation’s affairs. Thus,
regardless of whether limited partners normally owe fiduciary duties
to the partnership, SALT reposed a "special confidence" in the Riese
Group that gave rise to a fiduciary relationship.
The SALT Partnership Agreement provides that a limited partner
may be "a contractor for or an agent or employee of the Partnership,"
may consult with and advise the general partner on the business of the
SALT Partnership, and may act as a surety for the SALT Partnership.
Moreover, outside the terms of the Agreement, the Riese Group infor-
mally agreed to handle the accounting for the Project. Thus, even
though the Agreement specified that limited partners should take no
part in the management or conduct of SALT, as a practical matter the
Riese Group possessed substantial authority over SALT’s affairs. In
particular, in taking control of the accounting for the Project and in
preparing draw requests for the First Union loan, the Riese Group was
clearly occupying a position "where there [was] a special confidence
reposed." Abbitt, 160 S.E. at 906. As such, the Riese Group had an
obligation to "act in good faith and with due regard to the interests
of the one reposing confidence [i.e., the SALT Partnership]." Id. At
trial, ample evidence was presented for the jury to conclude that the
Riese Group abused this trust, and that it did not handle the financial
responsibilities entrusted to it with due regard to SALT’s well-being.
As such, considering the trial evidence in the light most favorable to
SALT, there was substantial evidence to sustain the jury’s finding that
the Riese Group breached fiduciary duties it owed to SALT.
IV.
The final issues on appeal involve the cross-challenges by the
Stroud Group and the Riese Group to the district court’s conclusion
that they had each committed unfair and deceptive trade practices
under North Carolina’s UTPA. Both these Groups maintain that, as
a matter of law, their conduct was not sufficiently egregious to violate
the UTPA. We will address each of their assertions in turn, but we
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must first review some of the general legal principles governing the
North Carolina UTPA.
A.
In an action for unfair or deceptive trade practices under North Car-
olina’s UTPA, the "occurrence of the alleged conduct, damages, and
proximate cause are fact questions for the jury, but whether the con-
duct was unfair or deceptive is a legal issue for the court." Gilbane
Bldg. Co. v. Fed. Reserve Bank of Richmond, 80 F.3d 895, 902 (4th
Cir. 1996); see also Gray v. N.C. Ins. Underwriting Ass’n, 529 S.E.2d
676, 681 (N.C. 2000). Thus, under North Carolina law, when a jury
determines that a defendant committed the alleged conduct, it is then
the duty of the court to determine whether, as a matter of law, such
conduct constituted an unfair or deceptive trade practice. In reviewing
these issues on appeal, we stand in the shoes of the district court;
therefore we review the court’s judgment de novo. Gilbane, 80 F.3d
at 902. On the other hand, we review the jury’s findings that the
alleged conduct occurred in the light most favorable to the prevailing
party, and "[i]f, with that evidence, a reasonable jury could return a
verdict in favor of plaintiffs, the court must defer to the judgment of
the jury, even if the court’s judgment on the evidence differs." Duke
v. Uniroyal Inc., 928 F.2d 1413, 1417 (4th Cir. 1991).
The prohibition on unfair and deceptive trade practices in North
Carolina is embodied in N.C. Gen. Stat. § 75-1.1(a), which provides,
in pertinent part, that "[u]nfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting
commerce, are declared unlawful." Therefore, for a plaintiff to prevail
on an UTPA claim, he "must prove (1) that the defendant was
engaged in conduct that was in or affecting commerce, (2) that the
conduct was unfair or ‘had the capacity or tendency to deceive,’ and
(3) ‘that the plaintiff suffered actual injury as a proximate result of’"
the defendant’s actions. Gilbane, 80 F.3d at 902 (quoting Pearce v.
Am. Defender Life Ins. Co., 343 S.E.2d 174, 179-80 (N.C. 1986)). In
our Gilbane decision in 1996, Judge Ervin had occasion to interpret
and apply the North Carolina UTPA, and he there observed that
"[w]hat constitutes an unfair or deceptive trade practice is a somewhat
nebulous concept," and that "North Carolina courts base their deter-
minations [of whether a particular practice is unfair or deceptive] on
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the circumstances of each case." Id. Thus, whether a particular prac-
tice violates the UTPA is both a question of law and a highly fact-
specific inquiry.
As Judge Ervin noted in Gilbane, in assessing whether particular
conduct violates the UTPA, "[e]ither unfairness or deception can
bring conduct within the purview of the statute; an act need not be
both unfair and deceptive." Id. at 903 (citing Rucker v. Hoffman, 392
S.E.2d 419, 421 (N.C. Ct. App. 1990)). And while there is no doubt
that the North Carolina courts have construed the UTPA liberally,
there are some limits on its application. Id. For example, only prac-
tices that involve "[s]ome type of egregious or aggravating circum-
stances" are sufficient to violate the UTPA. Dalton v. Camp, 548
S.E.2d 704, 711 (N.C. 2001).
As a general rule, a practice is considered "unfair when it offends
established public policy as well as when the practice is immoral,
unethical, oppressive, unscrupulous, or substantially injurious to con-
sumers." Marshall v. Miller, 276 S.E.2d 397, 403 (N.C. 1981). The
North Carolina Court of Appeals explained the applicable standard
several years ago in Harrington Manufacturing Co. v. Powell Manu-
facturing Co., 248 S.E.2d 739 (N.C. Ct. App. 1978), observing that
an "unfair practice" under the UTPA is conduct
which a court of equity would consider unfair. Thus viewed,
the fairness or unfairness of particular conduct is not an
abstraction to be derived by logic. Rather, the fair or unfair
nature of particular conduct is to be judged by viewing it
against the background of actual human experience and by
determining its intended and actual effects upon others.
Id. at 744 (emphasis added) (quotation and citation omitted). Signifi-
cantly, the Supreme Court of North Carolina has held that "where a
party engages in conduct manifesting an inequitable assertion of
power or position, such conduct constitutes an unfair act or practice."
Gray, 529 S.E.2d at 681. A particular practice is to be deemed decep-
tive, and in violation of the UTPA, if it has "the capacity or tendency
to deceive." Marshall, 276 S.E.2d at 403. Thus, only the potential for
deception is necessary; "proof of actual deception is not required." Id.
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It is clear, however, that conduct carried out pursuant to contractual
relations rarely violates the UTPA. In fact, even an intentional breach
of contract is normally insufficient to contravene the UTPA; a breach
of contract must be particularly egregious to permit recovery under
North Carolina’s UTPA. Canady v. Crestar Mortgage Corp., 109
F.3d 969, 975 (4th Cir. 1997); Branch Banking & Trust Co. v.
Thompson, 418 S.E.2d 694, 700 (N.C. Ct. App. 1992).
B.
We now turn to the contentions of SALT and the Stroud Group that
the court erred when it concluded that they had committed unfair
trade practices in violation of the UTPA. By its verdict, the jury found
that SALT and the Stroud Group had engaged in three specific acts
that formed the bases for an UTPA violation: (1) Simpson (a member
of the Stroud Group) deliberately withheld information from Gibraltar
concerning the inadequacy of Today’s Contractors as the framing
subcontractor on the Project; (2) SALT terminated Gibraltar as gen-
eral contractor without the requisite architect’s certificate showing
that construction of the Project failed to conform with specifications,
and when independent inspections had found no significant construc-
tion problems; and (3) the Stroud Group removed the Riese Group
from SALT without any formal meeting, vote, documentation, or
opportunity to be heard, and it failed to compensate the Riese Group
for its partnership interest in SALT.20 In its post-trial Opinion of
20More specifically, the jury answered "yes" to the following three spe-
cial interrogatories:
FIRST: Do you unanimously agree that [SALT or the Stroud
Group] engaged in any of the following alleged acts of
unfair and deceptive trade practices. Did [SALT or the
Stroud Group] wrongfully:
. . .
b. Deliberately withhold information from [Gibraltar] concern-
ing inadequacies of framing subcontractor?
YES
. . .
e. Terminate Gibraltar without the requisite architect’s certifi-
cate at a time when the independent construction inspectors
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March 10, 1999, the district court concluded that the jury’s second
finding was insufficient to violate North Carolina’s UTPA, but it
decided that the first and third incidents were legally sufficient to con-
stitute unfair and deceptive trade practices in North Carolina. Opinion
at 21-23. On appeal, SALT and the Stroud Group maintain that these
two jury findings, i.e., the first and third findings, fail to pass muster
under North Carolina law, and they seek reversal of the district
court’s ruling. We review their contentions on these issues in turn.21
1.
The jury found that Simpson, a member of the Stroud Group, delib-
erately withheld information from Gibraltar concerning the inade-
quacy of the Project’s first framing subcontractor, Today’s
Contractors. Under the evidence, Simpson had investigated Today’s
Contractors while working on earlier projects, and he knew, when
Gibraltar retained Today’s Contractors, of its reputation for poor
workmanship. After evaluating this evidence, the jury found that
Simpson had deliberately decided against revealing his knowledge of
Today’s Contractors to Gibraltar. SALT and the Stroud Group, how-
ever, maintain on appeal that any failure by Simpson to disclose his
knowledge of the poor reputation of Today’s Contractors cannot con-
stitute an unfair or deceptive trade practice under North Carolina law,
for two reasons.
had found no significant construction problems and when
[SALT] shortly thereafter proffered an architect’s certificate
certifying that construction was in conformance?
YES
f. Remove [the members of the Riese Group] from [SALT] as
limited partners without any formal meeting, vote, docu-
mentation, or opportunity to be present or heard and not
paying them for their partnership interests?
YES
21Because the district court concluded that the jury’s finding that
SALT’s termination of Gibraltar without an architect’s certificate was
not a violation of the UTPA, SALT is the prevailing party on that issue
and could not appeal it. We do not further address this finding.
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First, they contend that there is no evidence that Gibraltar suffered
any injury as a proximate result of Simpson’s non-disclosure. They
observe that the Construction Contract was a "cost plus" contract,
meaning that SALT was obligated to pay Gibraltar for all construction
costs relating to the Lexington Project, with no guaranteed maximum.
As such, SALT and the Stroud Group assert that any construction
costs incurred by Gibraltar as a result of the poor workmanship of
Today’s Contractors were passed on to SALT, and therefore Gibraltar
suffered no damage. The jury, however, did not specify which con-
duct caused Gibraltar and the Riese Group’s damages, and the evi-
dence suggested that inadequacies in the framing subcontractor’s
work significantly impaired Gibraltar’s ability to properly complete
the Construction Contract. Because Gibraltar suffered adversely from
its failure to fulfill its obligations under the Construction Contract,
SALT and the Stroud Group’s contentions on this point are not valid.
Second, SALT and the Stroud Group contend that Simpson’s non-
disclosure of Today’s Contractors’s reputation for poor work was
insufficiently egregious to constitute an unfair or deceptive trade
practice in North Carolina. They point out, in support of this conten-
tion, that the jury found that Simpson had no legal obligation to tell
Gibraltar about Today’s Contractors, and they also assert that Simp-
son’s silence did not suggest his approval of Gibraltar’s employment
of Today’s Contractors as the framing subcontractor. North Carolina
courts have found that a failure to disclose relevant information can
constitute a deceptive trade practice, if such failure to disclose is tan-
tamount to a misrepresentation. Kron Med. Corp. v. Collier Cobb &
Assocs., 420 S.E.2d 192, 196 (N.C. Ct. App. 1992). As SALT and the
Stroud Group observe, however, it is problematic to conclude that
Simpson’s non-disclosure of the poor reputation of Today’s Contrac-
tors constituted such a misrepresentation, because there is no evidence
that Simpson conveyed, or was expected to convey, information about
Today’s Contractors to Gibraltar. As such, Simpson’s silence did not,
in and of itself, constitute a misrepresentation; rather, Simpson simply
made no representation at all to Gibraltar.
That fact, however, i.e., that Simpson made no representation of
any sort, is precisely why his conduct was "unethical, unscrupulous
and directly injurious to consumers," and is why it violated North
Carolina’s UTPA. Opinion at 22. As the Supreme Court of North Car-
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olina has observed, the obligations imposed by the UTPA "create a
cause of action broader than traditional common law actions." Mar-
shall, 276 S.E.2d at 402. Thus, the mere fact that Simpson did not
breach his contractual obligations does not, standing alone, mean that
he did not commit an unfair trade practice. In this case, the jury deter-
mined that Simpson knew that Gibraltar was employing Today’s Con-
tractors, and yet, in the face of such knowledge, he deliberately
withheld information from Gibraltar on its poor reputation and defi-
cient earlier work. For a company to know that its general contractor
was about to employ a substandard and shoddy subcontractor, and
nevertheless deliberately withhold such information from the general
contractor, is the essence of unscrupulous behavior. As such, we see
Simpson’s non-disclosure of Today’s Contractors’s poor reputation
and deficient past performance as sufficiently egregious to constitute
an unfair trade practice under the North Carolina UTPA.
2.
The jury also found that the Stroud Group wrongfully removed the
Riese Group from SALT without any formal meeting, without a vote,
without documentation, without an opportunity for the Riese Group
to be present or heard, and without paying the Riese Group anything
for its twenty-five percent interest in the SALT Partnership. In this
regard, the Stroud Group informed the Riese Group by letter, on May
14, 1996, that it was being expelled from the SALT Partnership,
effective May 31, 1996. No prior meetings were held, and the Riese
Group was not given an opportunity to persuade the Stroud Group to
allow it to remain in SALT. Indeed the Riese Group was not even
given notice that it faced expulsion. Most significantly, the Riese
Group was not provided with any compensation for its twenty-five
percent partnership interest in SALT, with the Stroud Group asserting
that the Riese Group’s partnership interest had no value as of May 31,
1996. The evidence, however, when reviewed in the light most favor-
able to the Riese Group, is devastating to the Stroud Group’s position
on this issue. Only eleven days after the Riese Group’s expulsion
from the partnership, SALT sold the Lexington Project to Prudential
for a profit of approximately $1,200,000. The value of a twenty-five
percent interest in SALT at that time was nearly $300,000.
The Stroud Group maintains, of course, that these actions are insuf-
ficient to violate the UTPA. It asserts that the SALT Partnership
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Agreement does not provide for any notice to the Riese Group other
than the termination letter, that the Agreement does not require a
hearing or any opportunity to be heard, and also that the Agreement
specifies that expelled partners are entitled to only the "book value"
of their partnership interest on the "date of expulsion." Thus, the
Stroud Group contends that its expulsion of the Riese Group from
SALT simply represented the exercise of a contractual right under the
Partnership Agreement, and, relying on the decision of the North Car-
olina Court of Appeals in Tar Heel Industries, Inc. v. E.I. DuPont de
Nemours & Co., 370 S.E.2d 449 (N.C. Ct. App. 1988), it maintains
that the exercise of a contractual right cannot constitute an unfair
trade practice.
The Stroud Group’s reliance on the Tar Heel Industries decision
for this proposition, however, is erroneous. In Tar Heel Industries, the
North Carolina Court of Appeals held that DuPont did not commit an
unfair trade practice when it terminated its contract with Tar Heel.
370 S.E.2d at 451-52. Tar Heel had handled intrastate shipping of
yarn and staple fiber among DuPont’s North Carolina warehouses.
After a time, DuPont decided to seek alternative shipping arrange-
ments, and it eventually switched its shipping to one of its own sub-
sidiaries. Because DuPont was its only customer, Tar Heel ceased
operations. Tar Heel then brought suit against DuPont, alleging that
it had violated the UTPA by not informing Tar Heel it was searching
for another carrier. The Court of Appeals ruled for DuPont, conclud-
ing that its actions in searching for alternative carriers and terminating
its contract with Tar Heel were not unfair or deceptive trade practices.
Id.
The Stroud Group asserts that the Tar Heel Industries decision
demonstrates that exercise of a contractual right cannot violate the
UTPA. That decision established no such exception, however, and it
is distinguishable from this case on its facts. The Court of Appeals
there engaged in a fact-specific inquiry and, in part because DuPont
was exercising a contractual right, concluded that it had not commit-
ted an unfair or deceptive trade practice. Id. There is nothing in the
Tar Heel Industries decision holding that the exercise of a contractual
right is necessarily outside the bounds of a general UTPA analysis.
An unfair trade practice is an act which constitutes an "inequitable
assertion of power or position." Gray, 529 S.E.2d at 681. Although
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it may be rare that the exercise of a contractual right will meet this
stringent standard, it is possible for such an exercise, when it involves
egregious and aggravating conduct, to constitute an unfair or decep-
tive trade practice under North Carolina’s UTPA.22 We must therefore
consider whether, viewing the evidence here in the light most favor-
able to the Riese Group, its expulsion from SALT constitutes such a
situation.
First of all, under Tar Heel Industries, the manner in which the
Riese Group was expelled from SALT is, standing alone, insufficient
to violate the UTPA. The Riese Group was aware of the provisions
of the Partnership Agreement, and it knew that its interest in SALT
could be terminated without notice and without the opportunity for a
hearing. As such, like Tar Heel, the Riese Group had the opportunity
to arrange its financial affairs to account for the nature of its business
relationship under the Partnership Agreement. The fact that the Riese
Group, as a result of the timing of its expulsion, was deprived of com-
pensation for its one fourth interest in the SALT Partnership is, how-
ever, more problematic. Pursuant to both the Partnership Agreement
and the Construction Contract, the Riese Group was not to be paid
directly for its work on the Project. The only source of its compensa-
tion for such work was to be the profit it derived from SALT’s sale
or lease of the Project. Thus, by expelling the Riese Group before the
sale of the Project to Prudential, SALT and the Stroud Group ensured
that it received no compensation for its two years of work on the Proj-
ect. In essence, therefore, the Riese Group asserts that SALT and the
Stroud Group manipulated and exploited the provisions of the Part-
nership Agreement so that it received nothing for its labor.
Admittedly, the SALT Partnership Agreement makes clear that an
expelled partner is to receive only the "book value" of his partnership
interest. In that regard, the Riese Group agreed to a contract provision
22As a practical matter, there will be few situations where the exercise
of a contractual right will violate the UTPA. As we have noted, only
"egregious or aggravating circumstances" will contravene the statute.
Dalton, 548 S.E.2d at 711. Because the parties to a contract have con-
sented to its terms and are able to structure their business affairs accord-
ingly, it will be rare for egregious and aggravating circumstances to
attend the exercise of a contractual right.
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that allowed it to be expelled from SALT at any time and to receive
only book value at the time of expulsion for its partnership interest.
The presence of the expulsion provision, however, does not end our
inquiry. As the North Carolina Court of Appeals has observed,
whether a practice is unfair must be determined by whether "a court
of equity would consider [it] unfair." Harrington Mfg. Co., 248
S.E.2d at 744. The fact that the Riese Group agreed to the expulsion
provision is only one of the factors for consideration in determining
whether its expulsion from SALT without compensation was an "in-
equitable assertion" of power. Gray, 529 S.E.2d at 681.
Taking all the foregoing into account, equity nevertheless compels
the conclusion that the expulsion of the Riese Group from SALT in
these circumstances constituted an unfair trade practice. As we have
observed, we are reviewing a jury verdict, and we are obligated to
view the evidence in the light most favorable to the prevailing party,
i.e., the Riese Group. Duke, 928 F.2d at 1417. Taken in that light, the
evidence demonstrates that the Riese Group had worked on the Proj-
ect for over two years without being paid for its efforts. Although it
was aware of the expulsion provision of the Partnership Agreement,
it operated with the understanding that its compensation would derive
from its share of any profit from the sale or lease of the Project.
Moreover, from early 1995 onward, SALT was engaged in negotia-
tions to sell the Project to Prudential. Thus, the Riese Group’s contin-
ued commitment to the Project, without compensation, was secured
by the very real possibility that the Project would be sold at a profit.
Eleven days before it realized that profit, however, SALT and the
Stroud Group manipulated the timing of its expulsion such that Riese
Group received nothing for its efforts.23
23In fact, an examination of the expulsion provision of the Partnership
Agreement reveals that the Stroud Group had the option of expelling the
Riese Group on either May 31, 1996, or June 30, 1996. The Partnership
Agreement provides that the notice of expulsion must specify an actual
date of expulsion that is "the last day of a month no later than sixty (60)
days after such notice is given." In this case, the notice of expulsion was
given on May 14, 1996; thus, either May 31 or June 30 were eligible
dates for actual expulsion. Put simply, the Stroud Group had a choice of
how to exercise its rights under the Partnership Agreement, and it chose
to do so in the manner that ensured that the Riese Group would not be
compensated for its work on the Project.
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Therefore, viewing the evidence in the light most favorable to the
Riese Group, the Stroud Group exploited its rights under the Partner-
ship Agreement to gain the full value of the Riese Group’s labor with-
out compensating it at all. Such manipulations and assertions of
controlling influence are precisely the kind of "inequitable asser-
tion[s]" of power that North Carolina deems to be unfair trade prac-
tices. Therefore, SALT and the Stroud Group’s exploitation of its
rights under the Partnership Agreement is sufficiently egregious to
constitute a violation of the UTPA.
3.
Thus, we conclude that SALT and the Stroud Group committed
two unfair trade practices against the Riese Group and Gibraltar under
North Carolina law: (1) in deliberately withholding from Gibraltar
relevant and material information about the inadequacy of Today’s
Contractors as a framing subcontractor, and (2) in expelling the Riese
Group from SALT without compensating it for its one-fourth partner-
ship interest. As such, the district court’s award of treble damages to
the Riese Group, in the aggregate sum of $900,000, pursuant to the
requirements of the UTPA, must be upheld.
C.
On the other side of the ledger, the jury also found that the Riese
Group and Gibraltar had committed three acts against SALT that
formed the bases for findings of unfair and deceptive trade practices.
Specifically, the jury found that: (1) the Riese Group and Gibraltar
sought to mislead SALT concerning the status of construction of the
Lexington Project, the expected date of completion, and/or the quality
of construction; (2) the Riese Group and Gibraltar sought to mislead
SALT by obtaining funds to pay subcontractors and material suppliers
and then not paying them; and (3) the Riese Group and Gibraltar
wrongfully concealed monies it paid to Universal Benefits (a payroll
company owned by one of the Riese Group’s employees) for payroll
processing or leasing employees.24 The district court, in its Opinion
24The jury answered "yes" to the following three special interrogato-
ries:
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of March 10, 1999, found that each of these three acts constituted an
unfair or deceptive trade practice under North Carolina’s UTPA.
Opinion at 8-9. These jury findings, and the judgment entered pursu-
ant to them, have been appealed to us by the Riese Group and Gibral-
tar.
1.
On appeal, the Riese Group and Gibraltar challenge the validity of
the jury’s findings in this connection. In support of their position, they
repeat the contentions they made at trial, and they assert that no ratio-
nal jury could have concluded that they either misled SALT on the
status and quality of construction on the Project or misled SALT with
respect to the subcontracting payments. As we have pointed out, how-
ever, we must review the evidence supporting the jury’s factual find-
ings in the light most favorable to the prevailing party, i.e., SALT and
the Stroud Group. Duke, 928 F.2d at 1417. In conducting such a
review, we see that SALT and the Stroud Group proffered ample trial
evidence in support of these jury findings, such as testimony from
construction experts, memoranda of the Riese Group, and financial
FIRST: Do you unanimously agree that [Gibraltar and the
Riese Group] engaged in any of the following alleged
acts of unfair and deceptive trade practices. Did
[Gibraltar and the Riese Group]:
. . .
d. Seek to mislead [SALT] concerning the status of construc-
tion of the Lexington Apartments as to the financial status,
expected date of completion, and/or quality of construction?
YES
. . .
g. Seek to mislead [SALT] by obtaining funds to pay subcon-
tractors and material suppliers and then not paying them?
YES
h. Wrongfully concealed from [SALT] the charges paid to Uni-
versal Benefits for payroll processing or leasing employ-
ees[?]
YES
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records of the Project, as well as testimony from the members of the
Stroud Group. A reasonable jury could well have found SALT and the
Stroud Group’s evidence to be persuasive, and the jury’s findings are
thus properly supported by the evidence. Therefore, we cannot disturb
them.
2.
Each of the three acts found by the jury also clearly rises to the
level of an unfair or deceptive trade practice under the North Carolina
UTPA. As a rule, misrepresentations, even negligent misrepresenta-
tions, are sufficient for an act to qualify as an unfair or deceptive trade
practice. Gilbane, 80 F.3d at 903. Each of the challenged jury find-
ings involves a situation in which the Riese Group and Gibraltar per-
formed acts that, as the district court observed, "clearly had the
capacity to deceive SALT as to the manner and completion of the par-
ties’ agreement." Opinion at 9. In addition, the use of construction
funds for private purposes constitutes the "egregious or aggravating
circumstances" necessary to sustain an UTPA violation. Dalton, 548
S.E.2d at 711. As such, the Riese Group and Gibraltar committed
unfair and deceptive trade practices within the meaning of the UTPA,
and the court’s award of treble damages to SALT and the Stroud
Group, in the aggregate sum of $450,000, was appropriate.
V.
For the foregoing reasons, we affirm the judgment of the district
court in all respects.
AFFIRMED
TRAXLER, Circuit Judge, concurring in part and dissenting in part:
I concur in all but sections IV(B)(1), (2), and (3) of the majority
opinion. Because I do not believe the acts attributed to the Stroud
Group constitute unfair trade practices under North Carolina law, I
respectfully dissent on those issues.
In my judgment, the Stroud Group’s exercise of its contractual
right to expel the Riese Group from the SALT partnership does not
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amount to an unfair trade practice. The Riese Group does not contest
the fact that the Stroud Group had a contractual right to expel them
after their misdeeds, and, in fact, the jury found that the expulsion did
not violate the partnership agreement. The Riese Group has not
directed our attention to a single North Carolina case in which the
court premised UTPA liability on the exercise of a contractual right,
and the state courts have actually expressed serious reservations about
doing so. Indeed, two months after the instant appeal was argued, the
North Carolina Court of Appeals reiterated its reluctance to extend the
UTPA to cover actions that are proper under a contract, stating that
"[a] violation of [the UTPA] is unlikely to occur during the course of
contractual performance, as these types of claims are best resolved by
simply determining whether the parties properly fulfilled their con-
tractual duties." Mitchell v. Linville, 557 S.E.2d 620, 624 (N.C. Ct.
App. 2001); see also Wachovia Bank & Trust Co. v. Carrington Dev.
Assocs., 459 S.E.2d 17, 21 (N.C. Ct. App. 1995) (finding that
Wachovia did not engage in an unfair trade practice because it "sim-
ply exercised its right under the loan agreement to withhold funds");
Tar Heel Indus., Inc. v. E.I. DuPont de Nemours & Co., 370 S.E.2d
449, 452 (N.C. Ct. App. 1988) (finding that DuPont was not liable
under the UTPA for merely "exercising its [contractual] right to ter-
minate the contract").
The federal courts should be wary about extending state statutes
into territories of state law previously untouched by those statutes,
especially when a federal court is asked to extend a particular state
statute to cover a particular set of circumstances and the state courts
themselves have questioned the propriety of doing so. See Broussard
v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 348 (4th Cir.
1998) ("[A]s a federal court exercising concurrent jurisdiction over
[an] important question of state law we are most unwilling to extend
North Carolina tort law farther than any North Carolina court has
been willing to go."). Furthermore, because the state courts have also
hesitated to apply the UTPA to protect those who otherwise had the
opportunity and ability to protect themselves, this court should be all
the more reluctant to extend the Act to cover a party’s exercise of its
contractual rights in a case like this one, where the contracts were the
result of extended negotiations between two sophisticated business
entities, each of which had an adequate opportunity to protect its own
interests. See Hall v. T.L. Kemp Jewelry, Inc., 322 S.E.2d 7, 11 (N.C.
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Ct. App. 1984) (refusing to impose UTPA liability on the defendant
who was exercising its contract rights because the plaintiff "entered
into a bargain which was freely negotiated over several days" and
thus "had ample opportunity to look after his own interests before the
sale became final"); Opsahl v. Pinehurst, Inc., 344 S.E.2d 68, 77
(N.C. Ct. App. 1986) (refusing to impose UTPA liability on a land
sales company that represented construction completion dates as firm
when in fact they were not, given "the capacity of consumers to con-
tract with reference thereto" and thus to adequately protect them-
selves).
Nor, in my judgment, does Simpson’s failure to disclose informa-
tion to the Riese Group about the inadequacy of Today’s Contractors
provide a sufficient basis upon which to impose UTPA liability. The
Riese Group was the general contractor in the construction and devel-
opment of the Lexington, and according to the Riese Group’s brief,
Riese and Plichta have a combined seventy years of experience in
construction and development between them. It was perfectly reason-
able for Simpson to defer to the general contractor’s expertise and
experience in selecting subcontractors.
Furthermore, the Riese Group does not contend that, in failing to
disclose the information about Today’s Contractors, Simpson was set-
ting the Riese Group up to fail so that the Stroud Group could later
opportunistically expel them from SALT and effectively cut them out
of any profit on the project. In the absence of proof to support any
such contention, it is difficult to see how Simpson’s nondisclosure
can be considered sufficiently egregious to support UTPA liability,
especially in light of the "cost plus" nature of the contract. Because
of that feature, Simpson, as a member of the Stroud Group, had a def-
inite economic incentive to disclose his misgivings about Today’s
Contractors if those misgivings were sufficiently serious to cause him
to second-guess the Riese Group’s decision to award the company a
subcontract. Proper framing was critical to the structural integrity of
the Lexington, and therefore if the Stroud Group was forced to repair
shoddy framing the total cost of the project was likely to increase sig-
nificantly, ultimately reducing the Stroud Group’s profit on the proj-
ect. Thus, because the Stroud Group stood to lose a great deal in
terms of substantially increased costs if the framing of the Lexington
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was substandard, it is difficult to draw a negative inference from
Simpson’s nondisclosure and this court should not do so.
For the forgoing reasons, I respectfully dissent from that portion of
the court’s opinion that affirms the district court’s order imposing tre-
ble damages on the Stroud Group pursuant to the North Carolina
UTPA. I fully concur in the rest of the opinion.
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