Lawrence v. Umlic-Five Corp.

Lawrence v. UMLIC-Five Corp., 

STATE OF NORTH CAROLINA                    IN THE GENERAL COURT OF JUSTICE
                                                SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG                                 06 CVS 20643


KIRK ALLEN LAWRENCE and                    )
SANDRA LAWRENCE,                           )
                                           )
           Plaintiffs,                     )
                                           )
v.                                         )         ORDER AND OPINION
                                           )
UMLIC-FIVE CORP.; UNITED                   )
MORTGAGE & LOAN INVESTMENT                 )
LLC; ARTHUR E.KECHIJIAN;                   )
LARRY E. AUSTIN; JOHN DOE #1;              )
JOHN DOE #2; JOHN DOE #3;                  )
JOHN DOE #4; JOHN DOE #5;                  )
JOHN DOE #6; JOHN DOE #7;                  )
JOHN DOE #8; JOHN DOE #9; and              )
JOHN DOE #10,                              )
                                           )
           Defendants.                     )
                                           )

           Poyner & Spruill LLP by Joshua B. Durham and Michelle C. Hunt for
           Plaintiffs Kirk Allen Lawrence and Sandra Lawrence.

           Katten Muchin Rosenman LLP by Richard L. Farley and Jeffrey C. Grady for
           Defendants United Mortgage & Loan Investment, LLC, Arthur E. Kechijian
           and Larry E. Austin.

Diaz, Judge.

     {1}     The Court has before it the Motion of Defendants United Mortgage & Loan
Investment, LLC, Arthur E. Kechijian, and Larry E. Austin (collectively, the
“Defendants”) to Dismiss Plaintiffs’ Fourth and Fifth Causes of Action pursuant to
Rules 9(b) and 12(c) of the North Carolina Rules of Civil Procedure (the “Motion”).
   {2}   The Motion seeks dismissal of Plaintiffs’ claims alleging fraud and a
violation of the North Carolina Unfair and Deceptive Trade Practices Act (the
“UDTPA”), section 75–1.1 of the North Carolina General Statutes.
   {3}   After considering the Complaint, the Answer of the Defendants, the
parties’ briefs, and the arguments of counsel, the Court GRANTS the Motion.


                                          I.
                          PROCEDURAL BACKGROUND
   {4}   Plaintiffs Kirk Allen Lawrence and Sandra Lawrence filed their Complaint
on 20 October 2006.
   {5}   The matter was transferred to the North Carolina Business Court as a
mandatory complex business case on 29 November 2006 and subsequently assigned
to me.
   {6}   Defendants filed the Motion on 12 March 2007 and filed a supporting brief
the next day.
   {7}   Plaintiffs filed a brief opposing the Motion on 4 April 2007, and
Defendants filed a reply on 17 April 2007.
   {8}   On 22 May 2007, the Court heard oral arguments on the Motion.


                                         II.
                                    THE FACTS
                                         A.
                                   THE PARTIES
   {9}   The following facts are taken from the Plaintiffs’ Complaint, which the
Court accepts as true for purposes of the Motion.
   {10} Plaintiffs are residents of Travis County, Texas. (Compl. ¶ 1.)
   {11} Defendant UMLIC-Five Corp. (“UMLIC-Five”) is or was a North Carolina
corporation with its principal place of business in Mecklenburg County, North
Carolina. (Compl. ¶ 2.)
      {12} Defendant United Mortgage & Loan Investment, LLC (“UMLI”) is a North
Carolina limited liability company with its principal place of business in
Mecklenburg County, North Carolina. (Compl. ¶ 3.) UMLI is a director and/or
shareholder of UMLIC-Five. (Compl. ¶ 7.)
      {13} Defendant Arthur E. Kechijian (“Kechijian”) resides in Mecklenburg
County, North Carolina and is a director and/or shareholder of UMLIC-Five.
(Compl. ¶¶ 4, 7.)
      {14} Defendant Larry E. Austin (“Austin”) resides in Mecklenburg County,
North Carolina and is a director and/or shareholder of UMLIC-Five. (Compl. ¶¶ 5,
7.)
                                            B.
                                      THE CLAIMS
      {15} In 1995, Plaintiffs filed suit against UMLIC-Five in the District Court for
Travis County, Texas, alleging, among other things, that UMLIC-Five violated the
Texas Constitution and other state statutes by wrongfully foreclosing upon their
home and unlawfully attempting to evict them (hereinafter, the “Travis County
Litigation”). (Compl. ¶ 9.)
      {16} Defendants directly controlled the activities of UMLIC-Five throughout
the course of the Travis County Litigation. (Compl. ¶ 49.)
      {17} The Travis County Litigation spanned eleven years, with UMLIC-Five
vigorously defending the claims against it and giving Plaintiffs and their counsel
the impression that it was an active, functioning entity. (Compl. ¶ 13.)
      {18} Without notifying the Plaintiffs, however, UMLIC-Five filed Articles of
Dissolution with the North Carolina Secretary of State on 23 October 2001. (Compl.
¶ 14, Ex. B.)
      {19} Thereafter, UMLIC-Five continued to defend the Travis County Litigation.
At no time during the ensuing four-and-a-half years did Defendants disclose to the
Plaintiffs that UMLIC-Five had been dissolved. (Compl. ¶ 15.) Rather, Kechijian
and Austin “made material misrepresentations of fact, and knowingly and willfully
concealed material facts, relating to the existence of UMLIC-Five and its continued
operations.” (Compl. ¶ 39.)
   {20} As an example, Plaintiffs allege that UMLIC-Five failed to respond to
discovery requests in the Travis County Litigation directed at the issue of UMLIC-Five’s corporate status. (Compl. ¶ 15.) Plaintiffs do not, however, provide any
additional information regarding these discovery requests.
   {21} Defendants also willfully failed to provide the appropriate statutory
notices of dissolution to UMLIC-Five’s creditors pursuant to sections 55–14–06 and
55–14–07 of the North Carolina General Statutes. (Compl. ¶ 16.)
   {22} On 16 February 2006, UMLI notified Plaintiffs for the first time that
UMLIC-Five had been in dissolution since October 2001. (Compl. ¶ 17, Ex. C.)
   {23} Shortly thereafter, UMLIC-Five abandoned its defense of the Travis
County Litigation. (Compl. ¶ 18.)
   {24} As a result, the District Court for Travis County found for the Plaintiffs
and rendered judgment in their favor and against UMLIC-Five in the amount of
$3.8 million. (Compl. Ex. A.)
   {25} In this case, Plaintiffs allege claims against the Defendants for, among
other things: (1) breach of fiduciary duty, (2) common law fraud, (3) fraudulent
transfers of UMLIC-Five’s assets, (4) violating the requirements of Chapter 55 of
the North Carolina General Statutes by failing to notify Plaintiffs in writing of
UMLIC-Five’s dissolution, and (5) knowingly and willfully concealing material facts
relating to the corporate status of UMLIC-Five and its impending or actual
dissolution. (Compl. ¶¶ 21–47.)
   {26} Plaintiffs also seek to pierce UMLIC-Five’s corporate veil so as to reach the
assets of the Defendants for any damages awarded in this case. (Compl. ¶¶ 48–53.)


                                         III.
                                CONCLUSIONS OF LAW
                                          A.
                                STANDARD OF REVIEW
   {27} “Judgments on the pleadings [pursuant to Rule 12(c) of the North Carolina
Rules of Civil Procedure] are disfavored in law, and the trial court must view the
facts and permissible inferences in the light most favorable to the non-moving
party.” Groves v. Cmty. Hous. Corp., 

, 

(2001) (citing Flexolite Elec., Ltd. v. Gilliam, 

, 

 (1981)).
   {28} “A Rule 12(c) motion should be granted only when ‘the movant clearly
establishes that no material issue of fact remains to be resolved and that the
movant is entitled to judgment as a matter of law.’” 

 at 86–87, 

(quoting Minor v. Minor, 

, 

 (1984)).
   {29} A fraud claim is “subject to more exacting pleading requirements than are
generally demanded by our liberal rules of notice pleading.” Chesapeake Microfilm,
Inc. v. E. Microfilm Sales & Serv., Inc., 

, 

(1988) (citing Stanford v. Owens, 

, 

 (1985)
(quotations omitted)).
   {30} Rule 9(b) of the North Carolina Rules of Civil Procedure demands that
fraud be pled with particularity. See N.C. R. Civ. P. 9(b). A pleader meets the
requirements of Rule 9(b) when its fraud claim alleges the “time, place and content
of the fraudulent representation, identity of the person making the representation
and what was obtained as a result of the fraudulent acts or representations.” Bob
Timberlake Collection, Inc. v. Edwards, 

, 

(2006) (quoting Terry v. Terry, 

, 85, 

 (1981)
(quotations omitted)). “Mere generalities and conclusory allegations of fraud will
not suffice.” Sharp v. Teague, 

, 

 (1994)
(quoting Moore v. Wachovia Bank & Trust Co., 

, 

 (1976)).
                                          B.
                                      ANALYSIS
                                           1.
                                THE FRAUD CLAIM
   {31} Defendants Kechijian and Austin assert that Plaintiffs’ allegations of fraud
should be dismissed pursuant to Rule 9(b) of the North Carolina Rules of Civil
Procedure because the pleading does not identify: (1) when the alleged
misrepresentations were made, (2) where they were made, (3) the manner in which
they were made, and (4) what was obtained as a result. (Mem. Supp. Defs.’ Rule 9
and Rule 12 Mot. Dismiss 4 (citing Edwards, 

, 

).)
   {32} Plaintiffs respond that they have sufficiently alleged all the material
elements of a fraud claim. (Pls.’ Mem. Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and
Fifth Causes of Action 7–8.)
   {33} The Court GRANTS the Motion.
   {34} To state a claim for fraud, Plaintiffs must show: (1) a false representation
or concealment of material fact, (2) reasonably calculated to deceive, (3) made with
the intent to deceive, (4) that does in fact deceive, and (5) results in damage to
Plaintiffs. Harrold v. Dowd, 

, 

 (2002)
(citing Ragsdale v. Kennedy, 

, 

, 500 (1974)). Where
the claim arises by concealment or nondisclosure, Plaintiffs also must allege that all
or some of the Defendants had a duty to disclose material information to them, as
silence is fraudulent only when there is a duty to speak. Griffin v. Wheeler-Leonard
& Co., 

, 

 (1976).
   {35} Plaintiffs’ Complaint alleges that “Defendants Kechijian and Austin made
material misrepresentations of fact, and knowingly and willfully concealed material
facts, relating to the existence of UMLIC-Five and its continued operations.”
(Compl. ¶ 39.)
   {36} Thus, Plaintiffs here are alleging fraud both by the Defendants’ affirmative
misrepresentation of a material fact and by their silence in the face of a purported
duty to disclose a material fact.
   {37} As to the portion of Plaintiffs’ claim alleging an affirmative
misrepresentation, however, the Complaint contains no specific allegations about
the identity of the speaker or speakers, or the time when, or place where, the
fraudulent statements were made. In fact, other than alleging that the Defendants
made material representations of fact, the Complaint fails to identify any
fraudulent statement uttered by anyone. Thus, Plaintiffs’ Complaint does not come
close to satisfying the particularized pleading requirements of Rule 9(b).
   {38} As to the portion of Plaintiffs’ claim alleging fraud by concealment, the
Court acknowledges that “fraudulent concealment or fraud by omission is, by its
very nature, difficult to plead with particularity.” Breeden v. Richmond Cmty. Coll.,

 (M.D.N.C. 1997).
   {39} Notwithstanding this difficulty, Magistrate Judge Russell Eliason set forth
in Breeden the following pleading requirements that a plaintiff must satisfy in
alleging fraud by concealment:
      (1) the relationship [between plaintiff and defendant] giving rise to
      the duty to speak; (2) the event or events triggering the duty to
      speak and/or the general time period over which the relationship
      arose and the fraudulent conduct occurred; (3) the general content
      of the information that was withheld and the reason for its
      materiality; (4) the identity of those under a duty who failed to
      make such disclosures; (5) what [the defendant] gained by
      withholding information; (6) why plaintiff’s reliance on the omission
      was both reasonable and detrimental; and (7) the damages
      proximately flowing from such reliance.

Breeden, 171 F.R.D. at 195–96 (citing Chrysler Credit Corp. v. Whitney Nat’l Bank,

 (E.D. La. 1993); Frank M. McDermott, Ltd. v. Moretz, 

 (4th Cir. 1990); Learning Works, Inc. v. Learning Annex, Inc., 

 (4th Cir. 1987)).
   {40} The Court adopts Judge Eliason’s well-reasoned analysis. See Turner v.
Duke Univ., 

, 

 (1989) (stating that where
federal and state civil procedure rules are similar, North Carolina state courts may
look for guidance to federal court decisions interpreting the federal rules).
   {41} Plaintiffs’ Complaint fails to satisfy the Breeden pleading requirements for
alleging fraud by concealment. Assuming arguendo, that Plaintiffs’ pleading
satisfies the first four requirements of the Breeden test, 1 it fails to satisfy the last
three.
    {42} First, Plaintiffs fail to allege any facts demonstrating what the Defendants
gained from failing to disclose that UMLIC-Five was in dissolution. As part of their
claim alleging breach of fiduciary duty, Plaintiffs allege that Kechijian and Austin
“received advantages not common to other creditors and took advantage of their
position for the [sic] own benefit at Plaintiffs’ expense” and “disbursed the assets of
UMLIC-Five to themselves and other shareholders.” (Compl. ¶¶ 22–23.)
    {43} Plaintiffs, however, fail to set forth facts to support these claims, and they
further qualify their allegations as being made “upon information and belief.”
(Compl. ¶¶ 22–23.) Allegations based “upon information and belief”, however, are
generally insufficient to meet the requirements of Rule 9(b). Breeden, 

 (citing Andrews v. Fitzgerald, 

 (M.D.N.C. 1993)). Breeden
explains that “[a]llegations of fraud may be made ‘upon information and belief’ only
when the matters are particularly within the defendants’ knowledge, and facts are
stated upon which the belief is founded.” 

    {44} Plaintiffs may not be privy to all of the facts regarding what the
Defendants gained from the alleged fraudulent concealment. Nevertheless, even in
a fraudulent concealment case, Plaintiffs must make some proffer of the facts
supporting the allegations. 

 Plaintiffs’ Complaint lacks such facts and therefore
fails this prong of the Breeden test.
    {45} Second, other than parroting a legal conclusion (see Compl. ¶ 42),
Plaintiffs fail to set forth facts explaining why their reliance on the Defendants’
silence was both reasonable and detrimental. Indeed, the Court is hard-pressed to
see how the alleged silence of the Defendants prevented Plaintiffs from searching



1The Court doubts that Plaintiffs have satisfied the first two elements of the Breeden test as to

UMLIC-Five’s alleged duty to notify its creditors of its dissolution. The plain language of the statute
imposes no such duty, but rather provides a process for a dissolved corporation to dispose promptly
of known claims against it by giving notice of dissolution and establishing a deadline for the filing of
claims. See N.C. Gen. Stat. § 55–14–06 (2005)
the public records of the North Carolina Secretary of State’s office during the
pendency of the Travis County Litigation to ascertain for themselves the corporate
status of UMLIC-Five, particularly since they allege that UMLIC-Five was refusing
to respond to discovery on this very point.
   {46} Third, Plaintiffs’ claim of damage from the alleged fraud is curious at best.
Plaintiffs allege that by failing to disclose that UMLIC-Five was in dissolution
“Defendants Kechijian and Austin intended to mislead Plaintiffs and prevent them
from asserting claims in the [Travis County] Litigation against Kechijian and
Austin and other shareholders who may have received assets wrongfully and
fraudulently conveyed from UMLIC-Five.” (Compl. ¶ 41.) Yet Plaintiffs admit that
they were aware of UMLIC-Five’s dissolution at least two months before entry of
the judgment in the Travis County Litigation (see Compl. ¶¶ 17–19, Ex. A), and do
not allege that the Defendants’ silence actually prevented them from lodging their
claims in Texas.
   {47} Accordingly, because Plaintiffs’ Fourth Cause of Action alleging fraud fails
to satisfy the pleading requirements of Rule 9(b), the Court GRANTS Defendants
Motion to dismiss.
                                           2.
                                 THE UDTPA CLAIM
   {48} To state a claim under the UDTPA, Plaintiffs 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, L.L.C. v.
Amerimann Partners, 

, 

 (2005).
   {49} Defendants assert that Plaintiffs’ UDTPA claim fails as a matter of law
because it does not allege an in-state injury. (Mem. Supp. Defs.’ Rule 9 and Rule 12
Mot. Dismiss 7 (citing Merck & Co., Inc. v. Lyon, 

 (M.D.N.C.
1996); In Porters, S.A. v. Hanes Printables, Inc., 

 (M.D.N.C.
1987) (holding that UDTPA is limited by the Commerce Clause and the Due Process
Clause to “cases involving substantial effect on a plaintiff’s in-state business
operation”)).)
   {50} Plaintiffs respond that the UDTPA affords them relief where, as here,
their alleged injuries were caused by the Defendants’ in-state conduct. (Pls.’ Mem.
Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and Fifth Causes of Action 9–11.)
   {51} The Court notes that Plaintiffs are individual consumers. For this reason,
the cases relied on by the Defendants are not directly on point. However, at least
one federal court in North Carolina has held that UDTPA relief is available “to a
foreign plaintiff suing a resident defendant over alleged foreign injuries having a
substantial in-state effect on North Carolina trade or commerce.” Jacobs v. Cent.
Transp., Inc., 

 (E.D.N.C. 1995), aff’d in relevant part, rev’d
in part, 

 (4th Cir. 1996).
   {52} Nevertheless, although the UDTPA’s language is broad, “the Act is not
intended to apply to all wrongs in a business setting.” HAJMM Co. v. House of
Raeford Farms, Inc., 

, 

 (1991).
   {53} In HAJMM, the North Carolina Supreme Court held that a dispute over
the redemption of revolving fund certificates issued by a corporation was not a
transaction “in or affecting commerce” and therefore, was beyond the scope of the
UDTPA. 

, 

. The court there equated revolving
certificates to corporate securities, whose purpose was to provide and maintain
adequate capital for the enterprises at issue. 

   {54} According to the HAJMM court, capital raising devices are not subject to
regulation by the UDTPA because the commerce element of the Act applies only to
“the manner in which businesses conduct their regular, day-to-day activities, or
affairs,” while “the issuance of securities is an extraordinary event done for the
purpose of raising capital . . . .” 

, 

. See also Oberlin
Capital, L.P. v. Slavin, 

, 

 (2001) (holding
that loan agreement, which also gave plaintiff the right to purchase corporation’s
stock in the future, was primarily a capital raising device, and therefore was not “in
or affecting commerce” for the purposes of the UDTPA).
   {55} Although the argument is not pressed by the Defendants here, dissolution
of a corporation also appears to be an extraordinary event falling outside of an
entity’s day-to-day business activities. Thus, HAJMM and Oberlin suggest that the
UDTPA should not apply on these facts.
   {56} In any event, it is beyond cavil that the UDTPA’s primary purpose is to
protect the consuming public. Skinner v. E.F. Hutton & Co., Inc., 

,
274–75, 

 (1985). Consistent with that purpose, the UDTPA
gives a private cause of action to consumers aggrieved by unfair or deceptive
business practices. See Marshall v. Miller, 

, 

(1981); see also Bhatti v. Buckland, 

, 

 (1991)
(stating that the purpose of the UDTPA “is to provide a civil means to maintain
ethical standards of dealings between persons engaged in business and the
consuming public in this State”).
   {57} Plaintiffs are residents of Travis County, Texas. Their Complaint arises
from Defendant UMLIC-Five’s wrongful attempt to foreclose on their home in
Texas. Plaintiffs ultimately obtained a $3.8 million judgment against UMLIC-Five
in the Travis County Litigation, and are seeking to enforce the judgment in North
Carolina.
   {58} As to UMLI, Kechijian and Austin, Plaintiffs allege that they have
“hindered, delayed and defrauded” Plaintiffs in their efforts to collect on that
judgment. (Pls.’ Mem. Opp’n Defs.’ Mot. Dismiss Pls.’ Fourth and Fifth Causes of
Action 10.) This alleged injury, however, does not arise from competition between
the parties or the consumption of goods and/or services in this state. Nor am I
persuaded that the Defendants’ alleged acts have had a substantial in-state effect
on North Carolina trade or commerce.
   {59} Accordingly, Plaintiffs may not look to the UDTPA for a remedy in this
case. See, e.g., Food Lion, Inc. v. Capital Cities/ABC, Inc., 

 (4th Cir.
1999) (disallowing use of UDTPA in case alleging damages from news gathering and
stating that the UDTPA “cannot be used here because there is no competitive or
business relationship that can be policed for the benefit of the consuming public”);
cf. Jacobs, 

.
   {60} The Court GRANTS Defendants Motion to Dismiss the Plaintiffs’ Fifth
Cause of Action alleging a violation of the UDTPA.


                                         IV.
                                  CONCLUSION
   {61} The Court DISMISSES Plaintiffs’ Fourth and Fifth Causes of Action
alleging fraud and a violation of the UDTPA, respectively.


      This the 18th day of June, 2007.