Loftin v. Qa Invs. LLC

 Loftin v. QA Invs. LLC, 

.


STATE OF NORTH CAROLINA                   IN THE GENERAL COURT OF JUSTICE
                                              SUPERIOR COURT DIVISION
WAKE COUNTY                                         03 CVS 16882

PETER T. LOFTIN,

                           Plaintiff,
       v.

QA INVESTMENTS LLC; QUELLOS
GROUP, LLC; PRESIDIO GROWTH                           ORDER & OPINION
LLC; and PRESIDIO ADVISORY
SERVICES, INC.,

                           Defendants.


      {1}    THIS MATTER is before the Court on Defendants’ Motion to Dismiss
the Amended Complaint (“Motion”), made pursuant to Rule 12(b)(6) of the North
Carolina Rules of Civil Procedure (“Rule(s)”). For the reasons expressed below, the
Motion is DENIED in part and GRANTED in part, and Plaintiff is requested to file
a second amended complaint consistent with this Order & Opinion.
      The Brocker Law Firm, P.A. by Douglas J. Brocker and Crystal S. Carlisle
      and Eagan Avenatti LLP by Michael J. Avenatti (pro hac vice) for Plaintiff
      Peter T. Loftin.

      Parker, Poe, Adams & Bernstein, LLP by William L. Rikard, Jr. and Sara F.
      Hutchins for Defendants QA Investments LLC and Quellos Group LLC.

Gale, Chief Judge.

                              I.        INTRODUCTION

      {2}    Loftin alleges claims related to the certain defendants’ involvement in
the development, marketing, implementation, and Loftin’s subsequent purchase, of
unlawful tax shelter products known as Foreign Leveraged Investment Programs
(“FLIP”) and Bond Linked Issue Premium Structures (“BLIPS”). This Motion is
limited to the FLIP products, from which Loftin claims he experienced damages.
The case was stayed for several years pending resolution of matters before the
United States Tax Court. Claims against some Defendants have been dismissed.
The Court has reactivated the case. QA Investments LLC and Quellos Group, LLC
have moved to dismiss Loftin’s claims of civil conspiracy, fraud, breach of fiduciary
duty, constructive fraud, negligent misrepresentation, and unfair and deceptive
trade practices (“UDTP” or “Chapter 75”). Their Motion is now before the Court
and, after briefing and argument, is ripe for ruling.

                                   II.   THE PARTIES

      {3}    Plaintiff Peter T. Loftin is or was a resident of Wake County, North
Carolina.
      {4}    Defendant QA Investments, LLC is a Delaware company with its
principal place of business in Seattle, Washington.
      {5}    Defendant Quellos Group, LLC is a Delaware company with its
principal place of business in Seattle Washington and is the parent of QA
Investments. This Order & Opinion will refer to QA Investments, LLC and Quellos
Group, LLC collectively as “QA.”
      {6}    KPMG LLP (“KPMG”) is a Delaware limited liability partnership
headquartered in New York, New York. When the Amended Complaint was filed,
KPMG was allegedly the third-largest accounting firm in the United States.
Plaintiff voluntarily dismissed claims against KPMG with prejudice on November
20, 2013. Sidley Austin Brown and Wood, LLP (“Sidley Austin”) is a Delaware
limited liability partnership with its principal place of business in Chicago, Illinois
and is one of the largest law firms in the United States. Claims against Sidley
Austin were also voluntarily dismissed with prejudice.
      {7}    Defendants Presidio Growth, LLC and Presidio Advisory Services, LLC
(collectively, “Presidio Defendants”), are Delaware companies with their primary
places of business in San Francisco, California. Plaintiff alleges that Presidio
Advisory Services, LLC, is the alter ego of Presidio Growth. This Order and
Opinion will collectively refer to these defendants as “Presidio.”
                                       III.    BACKGROUND

       {8}     Plaintiff filed his original Complaint on December 15, 2003,
subsequently filing his Amended Complaint on November 8, 2006, and asserting the
following claims against QA: (1) civil conspiracy, (2) fraud, (3) breach of fiduciary
duty, (4) constructive fraud, (5) negligent misrepresentation, and (6) UDTP. KPMG
and Sidley Austin are alleged coconspirators.
       {9}     The case was designated as an exceptional case and assigned to Hon.
Ben F. Tennille, on July 25, 2006. The case was stayed on January 5, 2007, by a
consent motion seeking to stay further proceedings pending resolution of a pending
matter before the United States Tax Court. The case was subsequently assigned to
the undersigned in 2011 following Judge Tennille’s retirement. At Plaintiff’s
request, the stay was lifted following a status conference held on September 19,
2014. QA filed, and the parties briefed, the motion to dismiss after the status
conference. The Court then heard oral argument on February 12, 2015.
       {10}    The Court recites the following facts solely for purposes of this Motion,
accepting the allegations of the Complaint as true without assuming the truth of
Loftin’s legal conclusions. Walker v. Sloan, 

, 

 (2000).1

             A. Development of FLIP

       {11}    In the mid-to-late 1990s, KPMG began developing turn-key tax
products that it could market to high income clients. (Am. Compl. ¶ 12.) KPMG
enlisted QA to assist in constructing transactions involving offshore entities: FLIP,
and later for the Offshore Portfolio Investment Program (“OPIS”). (Am. Compl. ¶
14.) Tax products involving these transactions were very complex, “and [were]


1 Because of the length and detail of the Amended Complaint, consisting of ninety-nine pages and

219 numbered paragraphs, the Court does not seek to describe every relevant factual detail here, but
instead provides an overview of the narrative that led to the present action. The Court describes the
specific, relevant facts in its analysis of the claims below. At oral argument, Plaintiff offered newly
developed facts that may be included in a second amended complaint. To avoid any potential
prejudice, the Court restricts its analysis of the present Motion to the facts alleged in the current
Amended Complaint.
really based more on the structuring of the entities involved in the securities
transactions rather than the security transactions themselves.” (Am. Compl. ¶ 15.)
      {12}     In September 1996, QA sent a confidential memo to UBS AG (“UBS”)
that outlined the basics of the securities transactions, including that KPMG would
follow up with a memo describing how the tax objectives were to be achieved.
Because FLIP was a prepackaged product, the nature of the transactions did not
vary between clients; only the amount of capital loss required to achieve the desired
tax impact varied.

            B. Loftin’s Purchase of FLIP

      {13}     During the summer of 1997, Loftin expected a possible capital gain of
$30 million from the sale of a business. Loftin’s advisors recommended that he
meet with KPMG regarding how to handle the tax effect of the capital gains.
During a meeting on August 7, 1997, KPMG representatives recommended that
Loftin purchase FLIP.
      {14}     During that meeting and others, KPMG stated that Loftin could reap
substantial returns, as well as tax benefits, from investing in FLIP. Upon asking
whether his lawyer could review FLIP, he was told that his lawyer would be unable
to understand the complexity of the transaction. Loftin was reassured that the tax
transaction was researched and confirmed by both KPMG and Sidley Austin.
      {15}     A KPMG partner told Loftin that, in order to invest in FLIP, he would
have to engage QA, which was knowledgeable about FLIP and the transactions of
which FLIP was comprised. KPMG also told him that he must retain KPMG to
perform his accounting and tax returns. That partner assured Loftin that FLIP
complied with IRS rules and regulations and that FLIP would not lead to IRS
scrutiny.
      {16}     Loftin signed an engagement letter with KPMG for FLIP on August 22,
1997. Loftin then executed an Investment Advisory Agreement with QA as the
investment advisor and KPMG as the financial advisor on September 3, 1997.
      {17}   On September 5, 1997, QA directed Loftin to authorize two wire
transfers, one for the purchase of UBS shares, and one to purchase a warrant in a
Cayman Island Corporation called Lark Haven Capital, Inc. (“Lark Haven”). QA
then directed Maples & Calder, a law firm, to incorporate Lark Haven as a Cayman
Island exempt entity. On September 15, 1997, as directed by KPMG and QA, Lark
Haven retained QA as its investment advisor. On September 16, 1997, QA
purchased a warrant from Lark Haven that would expire on September 30, 1998.
      {18}   On October 21, 1997, KPMG billed QA for consultation regarding the
tax consequences of transactions entered into on behalf of Loftin by QA.
      {19}   Between September 1997 and May 12, 1999, QA performed numerous
other similar transactions, implementing FLIP on Loftin’s behalf.

          C. Loftin’s Claimed Losses

      {20}   In or around September 1997, KPMG began having internal
discussions regarding whether FLIP should register with the IRS as a tax shelter,
ultimately deciding against registration. During these discussions, on October 9,
1997, QA wrote to KPMG requesting a letter from KPMG to alleviate QA’s concern
about penalties for noncompliance with IRS tax shelter registration provisions.
KPMG then communicated to QA that it did not intend to register FLIP as a tax
shelter. QA elected not to register FLIP as a tax shelter at that time.
      {21}   On or about March 27, 1998, UBS informed QA that it would no longer
participate in the FLIP strategy because of its concern that it should be registered
as a tax shelter.
      {22}   On June 1, 1998, QA registered FLIP with the IRS as a tax shelter
without informing Loftin.
      {23}   On October 12, 1998, KPMG filed Loftin’s 1997 tax returns, claiming a
$27,416,629.00 long-term capital loss associated with FLIP. In October 2000, the
IRS initiated an audit of Loftin’s 1997 tax return. Loftin quickly executed a power
of attorney, allowing KPMG’s tax controversy professionals to represent him in the
audit. KPMG later withdrew from the representation.
          {24}   The IRS disallowed all capital losses on Loftin’s tax returns related to
FLIP, and assessed him with $6,024,998.00 in tax deficiencies and $2,326,169.99 in
penalties, plus interest on the back taxes.
          {25}   In 2003, the Senate released a report entitled “U.S. Tax Shelter
Industry: The Role of Accountants, Lawyers and Financial Professionals” (“2003
Senate Report”). The 2003 Senate Report described KPMG’s development,
aggressive marketing, and concealment of “potentially abusive and illegal tax
shelters.” (Am. Compl. ¶ 94(a).) It further stated that certain other major banks
and investment advisory firms were also involved.
          {26}   On April 13, 2005, a further Senate report was issued, which included
a statement that “[s]ome investment advisors, including Presidio Advisory Services
and the Quellos Group, helped develop, design, market, and execute potentially
abusive or illegal tax shelters such as FLIP, OPIS and BLIPS.” (Am. Compl. ¶
95(c).)
          {27}   On August 26, 2005, as part of a deferred prosecution agreement,
KPMG admitted that it concealed unlawful and fraudulent tax shelters. It
subsequently agreed to pay the United States $456 million.

                                       IV.    ANALYSIS

          {28}   On a motion to dismiss pursuant to Rule 12(b)(6), the Court inquires
“whether, as a matter of law, the allegations of the complaint, treated as true, are
sufficient to state a claim upon which relief may be granted under some legal
theory, whether properly labeled or not.” Crouse v. Mineo, 

,

 (2008) (quoting Harris v. NCNB Nat’l Bank of N.C., 

, 

 (1987)). The Court may grant the Motion if the
Amended Complaint reveals the absence of facts required to make out a claim for
relief or reveals some fact that necessarily defeats the claim. Wood v. Guilford
Cnty., 

, 

 (2002).
        A. Civil Conspiracy Claim

        {29}    QA first argues that Loftin’s civil conspiracy claim must fail because
all of the other coconspirators have already been dismissed, leaving no underlying
claims upon which to base a conspiracy claim.2 In support, QA cites Piraino Bros.,
LLC v. Atlantic Financial Group., Inc., 

, 

,
333–34 (2011), and Hon. Calvin E. Murphy’s North Carolina Business Court opinion
in Julian v. Wells Fargo Bank, N.A., 

, at *27–28 (N.C. Super.
Ct. May 22, 2012) for the contention that, because the other defendants relevant to
QA’s civil conspiracy claim have been dismissed, no claims remain on which to base
a civil conspiracy claim against QA. QA also argues that Loftin has failed to allege
that it agreed to commit or committed an unlawful act.
        {30}    Without conceding his other claims, Loftin responds that even if all
other claims fail, and regardless of the fact that claims against KPMG and Sidley
Austin have been dismissed, their unlawful conduct may still be attributed to QA
through a conspiracy claim against QA. Loftin further argues that the Amended
Complaint adequately alleges a conspiracy because it “alleges an agreement
between QA, KPMG, and others to design, market, and sell fraudulent and
unlawful tax shelters.” (Pl. Peter T. Loftin’s Mem. Opp’n Def. QA’s Mot. Dismiss
(“Resp. Br.”) 13.) Loftin also contends that his allegations include sufficient
evidence of QA’s own unlawful acts.
        {31}    To state a claim for civil conspiracy, a complaint must allege (1) a
conspiracy, (2) wrongful acts done by certain of the alleged conspirators in
furtherance of that conspiracy, and (3) injury as a result of that conspiracy. State
ex. rel. Cooper v. Ridgeway Brands Mfg., LLC, 

, 

 (2008).3 North Carolina treats civil conspiracy as a dependent claim. Toomer v.

2 While not dispositive of its ruling, the Court notes its understanding that claims against the
Presidio Defendants have not yet been dismissed.
3 Some might argue that whether an “overt act” in furtherance of the conspiracy must be expressly

pleaded and proved remains unsettled in North Carolina, because opinions from the North Carolina
Court of Appeals as recently as 2014 do not expressly list an overt act as an essential element of the
claim. See, e.g., Bottom v. Bailey, __ N.C. App. __, 

, 890 (2014) (requiring only “(1) an
agreement between two or more individuals; (2) to do an unlawful act or to do a lawful act in an
Garrett, 

, 

 (2002). “Only where there is an
underlying claim for unlawful conduct can a plaintiff state a claim for civil
conspiracy by also alleging the agreement of two or more parties to carry out the
conduct and injury resulting from that agreement.” 

 However, a claim for the
underlying unlawful conduct need not be stated separately in order to maintain a
claim for civil conspiracy. Cf. Roberts v. Huckabee, No. COA12-1352, 

, at *18–19 (May 31, 2013) (reviewing all sections of a complaint to
find allegations to support a claim for civil conspiracy).
        {32}    QA’s reliance on Piraino Bros. and Julian is misplaced. In both of
these cases, substantive, separate claims against the defendants alleged to be
members of the conspiracy were the underlying torts on which the civil conspiracy
claims rested. See Piraino Bros., LLC, 

, 

;
Julian, 

, at *28. When the courts dismissed these separate
claims, either through summary judgment or a Rule 12(b)(6) motion to dismiss
respectively, the dismissal necessarily served as a judgment regarding the
nonexistence of the unlawful acts underlying the civil conspiracy claims. See
Piraino Bros., LLC, 

, 

; Julian, 

, at *28. Neither case controls here, where there has been a voluntary
dismissal with prejudice of all claims against two alleged coconspirators and where
QA is separately alleged to be a part of the conspiracy and to have joined in the
scheme concocted by the conspiracy. The Court has struggled to find any case law
that directly addresses whether a claim of conspiracy can be maintained against one
member after the voluntary dismissal with prejudice of the alleged coconspirators.4


unlawful way; (3) resulting in injury to plaintiff inflicted by one or more of the conspirators; and (4)
pursuant to a common scheme”). However, in a 2008 North Carolina Supreme Court case
delineating the elements of a civil conspiracy claim, the Supreme Court expressly required an overt
act, mandating “(1) a conspiracy, (2) wrongful acts done by certain of the alleged conspirators in
furtherance of that conspiracy, and (3) injury as a result of that conspiracy.” State ex rel. Cooper,

, 

 (citing Muse v. Morrison, 

, 

(1951)). At least implicitly, the cited North Carolina Court of Appeals opinion may include a
requirement of some overt act by requiring that there be actual injury.
4 A conspiracy claim is comparable to an allegation of joint and several liability. Dalton v. Camp, 

, 

 (2000), rev’d in part on other grounds, 

 (2001).
For joint torts, the common law rule is that dismissal of one tortfeasor would defeat claims against
In absence of clear precedent dictating otherwise, the Court concludes that the
claim should survive the current Rule 12(b)(6) Motion. This ruling is without
prejudice to QA revisiting the issue in its response to the second amended complaint
that the Court requests below, or by subsequent motion for summary judgment.
       {33}    While the Amended Complaint in many instances fails to direct its
allegations separately to the different defendants, the Court nevertheless has failed
to be persuaded by QA’s argument that Loftin has not pleaded sufficient facts to
support a civil conspiracy claim.5 In his Amended Complaint, Loftin alleges that
QA and other defendants agreed to conceal the nature of the FLIP product from
Loftin and others (Am. Compl. ¶ 57); that FLIP was “a tax shelter created,
marketed and administered by Defendants KPMG and QA” (Am. Compl. ¶ 106); and
that QA, KPMG, and others entered into an agreement to devise, design, facilitate,
promote, and sell the FLIP product, knowing that the product was fraudulent. (Am.
Compl. ¶ 106.) Also, the Amended Complaint alleges that, by agreeing to sell the
FLIP product as a tax planning product, each defendant relied on one another to
fulfill their role in the conspiracy (Am. Compl. ¶ 113), and specifically that QA
relied on KPMG and Sidley Austin to justify the tax treatment of the transactions
that QA undertook to implement FLIP. (Am. Compl. ¶ 116.)
       {34}    QA argues that dismissal is, however, appropriate because the
Amended Complaint includes allegations that necessarily defeat the claim alleged.
QA argues that the Amended Complaint makes clear that QA has no responsibility
for the acts which Loftin claims were unlawful, because QA was not responsible for
tax advice and because the investments it was retained to implement were, in fact,
lawful and successful. That argument unfairly limits what Loftin has pleaded. He
also pleads that QA and KPMG worked together to develop FLIP and continued to
market the product knowing it was fraudulent. Accepting the pleadings as true, as


others. See Ramsey v. Camp, 

, 

 (1961). This result was
changed by the Uniform Contribution Among Tort-Feasors Act. See N.C. Gen. Stat. § 1B-4 (2014).
5 The Amended Complaint often makes generalized allegations against Defendants collectively,

without more specific allegations as to which acts are chargeable against which Defendant. This is,
in fact, why the Court requests a second amended complaint that will clarify the claims against QA.
it must, the Court concludes that the allegations are adequate to sustain the civil
conspiracy claim against QA.
      {35}   Accordingly, the Motion, as it pertains to Loftin’s civil conspiracy
claim, is DENIED.

      B. Fraud Claim

      {36}   QA argues that Loftin’s fraud claim should be dismissed because the
allegations made it clear that Loftin did not rely on QA when he decided to execute
FLIP, having decided to do so before any contact with QA. QA further argues that
the heart of the fraud claim is the tax advice given to Loftin and that Loftin’s failure
to allege that QA was in any way involved in advising Loftin with respect to tax
advice or his tax returns should defeat the claim. QA further argues that the fraud
claim fails because of Loftin’s failure to plead a specific, actionable
misrepresentation by QA.
      {37}   In opposing the Motion, Loftin relies on a liberal standard for pleading
fraud, citing Hudgins v. Wagoner for the proposition that the requirement of
specificity is flexible and that the elements may be inferred by the allegations in the
Amended Complaint. 

, 

 (2010). In
briefing, going somewhat beyond the specific allegations of the Amended Complaint,
Loftin argues that the moment when KPMG introduced Loftin to QA is unclear, and
that QA’s involvement in FLIP began before Loftin decided to enter the transaction,
so that it may be inferred that Loftin relied on QA as well as others in deciding to
purchase FLIP. He further asserts that the allegations of the Amended Complaint
are adequate to demonstrate that Loftin continued to rely on QA after QA became
aware that FLIP was an unlawful tax shelter, and that he would have exited the
transaction had QA advised him of FLIP’s true nature and QA’s concerns regarding
FLIP’s legality. Finally, Loftin alleges that QA’s promise to “comply in all material
respects with all material laws, regulations, and rules applicable to it in its
performance of its duties and obligations under this Agreement, including . . . (v) all
applicable tax laws and regulations” (Defs.’ Mem. Supp. Mot. Dismiss Am. Compl.
(“Defs.’ Mem. Supp.”) Ex. 1, § 16) was an affirmative representation that Loftin
relied upon when evaluating whether to enter into the FLIP transaction.
      {38}   To successfully plead a claim for fraud in North Carolina, a party must
plead: “(1)[f]alse representation or concealment of a material fact, (2) reasonably
calculated to deceive, (3) made with intent to deceive[,] (4) which does in fact
deceive, (5) resulting in damage to the injured party.” Myers & Chapman, Inc. v.
Thomas G. Evans, Inc., 

, 568–69, 

 (1988) (emphasis
removed) (quoting Ragsdale v. Kennedy, 

, 

(1974)). A duty to disclose material facts may arise where there is a relationship of
trust and confidence between two parties. Stamm v. Salomon, 

, 

, 157–58 (2001). In such an instance, “failure to do so
constitutes fraud.” 

 (quoting Vail v. Vail, 

, 

(1951)).
      {39}   North Carolina follows the general rule that, “[i]n all averments of
fraud, duress or mistake, the circumstances constituting fraud or mistake shall be
stated with particularity.” N.C. R. Civ. P. 9(b). This “particularity” requirement
mandates that if, “upon a liberal construction of the whole pleading, the charge of
fraud might be supported by proof of the alleged constitutive facts,” the claim is
sufficient. Becker v. Graber Builders, Inc., 

, 

 (2002) (quoting Carver v. Roberts, 

, 

(1985)). There is no precise formula for pleading fraud. See Hunter v. Guardian
Life Ins. Co. of Am., 

, 

 (2004).
      {40}   Loftin alleges that part of his agreement with QA included a guarantee
that QA must follow all applicable tax laws and regulations. A final determination
may require further proof, but Loftin has made an adequate pleading that might
support a relationship of trust and confidence, placing QA under an obligation to
disclose any material facts of which it was aware. Loftin alleges that QA became
aware of FLIP’s adverse tax implications, and that it elected not to share those
implications with Loftin.6 If, in fact, such a relationship is proven, a fraud claim
may arise from either an affirmative statement or a failure to make a statement
that should have been made.
        {41}    Therefore, as to the fraud claim, QA’s Motion is DENIED.

        C. Breach of Fiduciary Duty Claim

        {42}    The issue of whether there was a relationship of trust and confidence
also arises in the context of Loftin’s breach of fiduciary duty claim. QA alleges that
it owed Loftin no fiduciary duty, and therefore was under no obligation to make
disclosures. QA argues that the scope of its duty, if any, must be no greater than
the role it played in the implementation of trades. Its argument is that, “[e]ven
assuming that QA owed Loftin a fiduciary duty despite the absence of any special
relationship and the general lack of contact between them, the scope of that duty
related to the execution of the investment trades, which occurred as agreed and is
not challenged here.” (Defs.’ Mem. Supp. 15.) QA contends that it should not be
liable for any loss because the investment trades for which it was retained were
successful. Loftin counters that a fiduciary duty arises as a matter of law when an
investment advisor receives compensation for its services, and that, under the facts
of this case, the scope of QA’s duty is sufficiently broad to create in QA a
responsibility to disclose either FLIP’s status as an unlawful tax shelter to Loftin or
QA’s concern in that regard. (Resp. Br. 19–20 (citing 15 U.S.C. § 80a-35(b) (2015).)
        {43}    “For a breach of fiduciary duty to exist, there must first be a fiduciary
relationship between the parties.” Dalton v. Camp, 

, 

 (2001). The North Carolina Supreme Court has defined a fiduciary
relationship as one in which

6 There is the potential for an inference that QA’s insistence on registering FLIP as a tax shelter was

for the express purpose of concealment from FLIP investors, including Loftin. The Court carefully
notes that registration as a tax shelter is not necessarily evidence of the illegality of a tax strategy.
But, at the motion to dismiss stage, the Court must consider permissible inferences. In doing so, it
concludes that, when construed in a light most favorable to Loftin, Loftin could ultimately be able to
prove that QA knew that FLIP may not actually have the tax implications as originally represented
to Loftin when marketing the overall FLIP strategy. Of course, the record may develop much more
in QA’s favor.
      there has been a special confidence reposed in one who in equity and
      good conscience is bound to act in good faith and with due regard to the
      interests of the one reposing confidence . . ., [and] it extends to any
      possible case in which a fiduciary relationship exists in fact, and in
      which there is confidence reposed on one side, and resulting
      domination and influence on the other.

 at 651–52, 548 S.E.2d at 707–708 (alteration in original) (emphasis omitted)
(internal quotation marks omitted) (quoting Abbitt v. Gregory, 

,

 (1931)).
      {44}   Loftin alleges in his Amended Complaint that he relied on QA and the
other Defendants because of their reputations in the industry. He further alleges
that QA represented that it would serve as advisor and guardian over his interests
with respect to the FLIP transactions, and that QA represented to Loftin that their
relationship was a confidential one. The Court concludes that these allegations,
although general, are minimally adequate to allow Loftin to survive QA’s Rule
12(b)(6) Motion. Much greater specificity would be required by a Rule 56 standard.
      {45}   The motion to dismiss the breach of fiduciary duty claim is DENIED.

      D. Constructive Fraud

      {46}   QA argues that Loftin’s claim for constructive fraud fails because (1) no
fiduciary duty existed between Loftin and QA, and (2) Loftin has not alleged that
QA benefitted from an “unfair advantage.” (Def.’s Mem. Supp. 16.) QA cites Sterner
v. Penn for the proposition that fees paid to an investment advisor cannot be
considered a benefit for purposes of satisfying the elements of constructive fraud.

, 

 (2003).
      {47}   Loftin counters that, regardless of the holding in Sterner, QA did not
only receive a commission on the sale of securities. Rather, QA received
      fees upon [Defendants’] calculation of the capital losses and basis shift
      generated through the FLIP tax shelter and to share among themselves the
      fees generated by each tax shelter sold. . . . [The fees] were computed by
      taking approximately seven percent of the amount of the “basis shift” that
      KPMG calculated FLIP would purportedly create.

(Am. Compl. ¶ 107.)
        {48}   A claim for constructive fraud requires: “(1) facts and circumstances
creating a relation of trust and confidence; (2) which surrounded the consummation
of the transaction in which the defendant is alleged to have taken advantage of the
relationship; and (3) the defendant sought to benefit himself in the transaction.”
Marketplace Antique Mall, Inc. v. Lewis, 

, 

 (2004). The difference between a claim for breach of fiduciary duty and a
constructive fraud claim is the requirement that the defendant benefit himself.
Trillium Ridge Condo. Ass’n v. Trillium Links & Vill., LLC, __ N.C. App. __, 

 (2014). But see Compton v. Kirby, 

, 

 (2003) (“[B]reach of fiduciary duty amounts to constructive fraud.”).
        {49}   Sterner involved several securities firm defendants who were
instructed to make trades by an advisor who held himself out to an investor as a
professional investment manager. Sterner, 159 N.C. App. at 627–28, 583 S.E.2d at
671–72. When the investment manager lost virtually all of the investor’s
investment, the investor sued both the investment manager and the securities firms
with whom he had placed the clients’ assets, alleging, inter alia, constructive fraud.

 The securities firms successfully moved to dismiss the claims, and the investor
appealed. Id. at 628, 

. In affirming the trial court’s dismissal of
the claims, the North Carolina Court of Appeals held that the benefit sought by a
defendant must be more than a continued relationship with the plaintiff, and that a
payment of a fee for work that the defendant did for the plaintiff is not sufficient
evidence of an unfair advantage.7 

 at 631–32, 

 (citing Barger v.
McCoy Hillard & Parks, 

, 

 (1997));
NationsBank of N.C., N.A. v. Parker, 

, 

(2000).
        {50}   The Court does not believe Sterner’s holding should be applied as
broadly to the facts of this case as QA urges. Sterner states that “payment of a fee


7 The Sterner court found this sufficient to dismiss the claim, and never addressed the existence of a
duty owed by the securities firms with reference to the constructive fraud claim. Id. at 632, 

.
to a defendant for work done by that defendant does not by itself constitute
sufficient evidence that the defendant sought his own advantage.” 

, 

 (emphasis added) (quoting NationsBank of N.C., N.A., 

, 

). Loftin’s allegations are not limited to QA’s mechanical
completion of the transactions implementing FLIP,8 but also include that QA
assisted in creating FLIP and continued to implement it after developing misgivings
about its tax effect for the purpose of participating in the overall profits of a
potentially fraudulent scheme. Therefore, QA may have enjoyed a benefit adequate
to sustain the claim, and Court does not believe that the constructive fraud claim
should be dismissed at the pleading stage on this basis.
        {51}    As to the claim for constructive fraud, the Motion is DENIED.

        E. Negligent Misrepresentation Claim

        {52}    A negligent misrepresentation claim, as opposed to a fraud claim, may
fail when the claim is based solely on a failure to disclose, rather than on an actual
representation. See Harrold v. Dowd, 

, 782–83, 

,
918–19 (2002) (dismissing claim of negligent misrepresentation for failure to allege
a disclosure of information).
        {53}    Repeating arguments addressed to other claims, QA argues that Loftin
has not adequately alleged reliance on any QA statement adequate to sustain a
claim for negligent misrepresentation. In support, QA asserts that (1) Loftin could
not have relied on QA, because he decided to execute FLIP prior to any contact with
QA, and (2) Loftin had retained QA only as an investment advisor, and not a tax
advisor. QA further asserts that, because there were other, professional tax
advisors retained as part of the execution of FLIP, and because QA relied on those
tax advisors to justify the tax treatment of the FLIP transactions, Loftin could not


8 There are other differences between QA and the defendants in      Sterner that the Court need not
specifically analyze in order to reach its conclusion that Sterner’s holding does not control resolution
of the Motion, including, but not limited to, the level of discretion that QA had over the transactions,
the complexity of the transactions, and the interrelationship of the various parties responsible for
implementing FLIP.
have relied on QA’s representations or omissions with respect to the tax treatment
of the FLIP transactions.
      {54}   Loftin’s negligent misrepresentation claim essentially seeks to recast
the same facts as his fraud and constructive fraud claims, but the Court has allowed
those claims to proceed largely on the basis that the allegations are sufficient to
create a claim of a relationship that imposes a duty to disclose, rather than on the
basis of an affirmative representation. For the negligent misrepresentation claim,
the Court instead must inquire whether there has been an adequate allegation of an
actual, affirmative representation beyond statements made in the context of recitals
in the contract between the parties.
      {55}   To state a claim for negligent misrepresentation, “a party [must]
justifiably [rely] to his detriment on information prepared without reasonable care
by one who owed the relying party a duty of care.” Raritan River Steel Co. v.
Cherry, Bekaert & Holland, 

, 

 (1988). For the
negligent misrepresentation claim to survive against QA, QA must itself have
negligently made representations upon which Loftin relied. Representations in a
contract that create an obligation do not give rise to a claim for negligent
misrepresentation when that obligation is not performed. Supplee v. Miller-Motte
Bus. Coll., Inc., __ N.C. App. __, 

, 600 (2015) (“The duty that
defendants had [to perform an obligation] arose under the terms of the contract
between the parties and not by operation of law independent of the contract. As
such, the breach of that contractual duty cannot provide the basis for an
independent claim of negligent misrepresentation.”). Accordingly, any
representations by QA must have been made beyond those promises stated in the
Investor Advisory Agreement.
      {56}   In his Amended Complaint, Loftin alleges that
      [t]he information, advice, and recommendations provided by
      Defendants to Loftin concerning the soundness and viability of
      FLIP . . . , the manner in which the strategies would be implemented
      on their behalf, and the tax treatment and effect to be given them, as
      alleged above, were false, and if not made intentionally, were made
      negligently.

(Am. Compl. ¶ 199 (emphasis added).) Although both parties discuss whether the
reliance element has been met, the Court finds the absence of allegations of an
affirmative misrepresentation by QA to be dispositive. The Court has struggled to
find in Loftin’s ninety-nine page, 219 paragraph Amended Complaint any actual
statement made by QA to Loftin regarding the process that would be undertaken to
implement FLIP. Under Supplee, QA’s contractual promise to adhere to relevant
tax laws and regulations cannot provide the basis for QA’s claim of negligent
misrepresentation. Even if the Court could parse any such statement from the
broad allegations made against all Defendants collectively, it has found no
allegation that QA failed to exercise due care when making an affirmative
statement to Loftin.
      {57}   The motion to dismiss the claim for negligent misrepresentation is
GRANTED.

      F. UDTP Claim

      {58}   Conduct that amounts to a breach of fiduciary duty and constructive
fraud, under certain circumstances, may be sufficient to support certain elements of
a UDTP claim in North Carolina. Trantham v. Michael L. Martin, Inc., __ N.C.
App. __, 

 (2013). The Court does not believe, however, that such
breach or constructive fraud constitutes a per se violation of Chapter 75.
      {59}   Further, such claims may fail if they are outside Chapter 75’s intended
ambit. Section 75-1.1(a) of the General Statutes regulates “[u]nfair methods of
competition in or affecting commerce, and unfair or deceptive acts or practices in or
affecting commerce.” 

(a) (2014). Subsection 1.1(b) defines
“commerce” as “all business activities, however denominated, but does not include
professional services rendered by a member of a learned profession.” 

 § 75-1.1(b).
The statutes do not further define “learned profession,” but North Carolina courts
have addressed the statute’s scope in this regard. See, e.g., Reid v. Ayers, 

, 

 (2000).
      {60}   In Reid v. Ayers, the North Carolina Court of Appeals established a
two-part test to determine whether activities fell within the learned profession
exception: (1) “the person or entity performing the alleged act must be a member of
a learned profession,” and (2) “the conduct in question must be a rendering of
professional services.” 

, 531 S.E.2d at 235. Courts have included several
professions within the exception, but have not included the services of investment
professionals within its purview. See, e.g., Sharp v. Gailor, 

, 

 (1999) (holding that the practice of law falls within the learned
profession exception); Abram v. Charter Med. Corp. of Raleigh, Inc., 

, 

 (1990) (holding that a health care provider is engaged in a
learned profession).
      {61}   Case law has delineated other exceptions to Chapter 75 based on
reasoning similar to the preemption doctrine, stating that certain claims are not “in
commerce.” In Bache Halsey Stuart, Inc. v. Hunsucker, the North Carolina Court of
Appeals evaluated the efficacy of a Chapter 75 claim based on a commodities action,
and in disallowing the claim noted that “[i]t would be inappropriate . . to expand a
traditional common law action into an unfair trade practice in the face of [a]
pervasive federal regulatory scheme.” 

, 420–21, 

 (1978). Discussing Hunsucker, in Skinner v. E. F. Hutton & Co., the North
Carolina Supreme Court found that securities transactions were excluded from the
scope of Chapter 75. 

, 274–75, 

 (1985). The
allegations in Hunsucker and Skinner were not limited to the mechanical trading of
securities. In Skinner, particularly, the defendant securities broker was alleged to
have induced the plaintiffs to purchase certain securities and to have provided them
false information and advice, in addition to processing the plaintiffs’ trades. 

 at
267–69, 333 S.E.2d at 237–38.
      {62}   QA argues that it was performing its duties solely as an investment
advisor, and that its role was limited to conducting the securities transactions
necessary to implement FLIP. Citing no support for its assertion, QA also claims
that it rendered professional services and is protected by the learned profession
exception.
      {63}   Loftin’s brief does not address QA’s “learned profession” assertion. He
instead attempts to distinguish the UDTP claim from those that fall within the
recognized securities transactions exception. He argues that his claim is not an
action regarding securities transactions, but rather is an action attacking the
unlawful tax scheme he alleges against the Defendants. Loftin contends that the
fact that a part of that scheme may have involved securities transactions does not
insulate the overall scheme from liability under Chapter 75. Loftin argues that, for
this reason, Skinner does not apply, and QA’s activities fall within the UDTP Act’s
definition of “commerce.”
      {64}   The Court has found no support for QA’s contention that a general
“investment services” role constitutes a “learned profession” under Chapter 75. The
Court does not believe that it needs to address that argument any further.
      {65}   The Court believes QA’s reliance on the securities transaction
exception has greater credibility. This is an action that, at a minimum, relates to
securities transactions. Loftin alleges to have retained QA to effect the trades
necessary to execute FLIP and cites multiple instances of QA having completed
securities transactions. Also, the agreement between Loftin and QA was referred to
as an “Investment Advisory Agreement.” (Am. Compl. ¶ 177(c).) Thus any
allegations directed specifically to QA’s securities transactions fall within the
Skinner rule, excluding them from the definition of “commerce” under Chapter 75
and preventing any claims made on the basis of those transactions.
      {66}   Regarding Loftin’s argument that the matter more broadly concerns a
fraudulent tax scheme allowed within Chapter 75’s reach, the Court finds no
meaningful distinction between this case and cases that have been ruled to be
outside of Chapter 75’s scope. The Court believes that QA’s alleged involvement in
“fraudulently marketing and selling illegal and abusive tax shelters” (Am. Compl. ¶
213), when coupled with its role as the transaction agent responsible for executing
FLIP, are sufficiently similar to the allegations against the Skinner defendant, and
should be controlled by the Skinner court’s holding. Similar to Skinner, where the
allegations involved false advice and fraudulent induction into securities
transactions and the implementation of those transactions, any QA participation in
the alleged scheme centered on QA’s involvement in the securities transactions.
The duty of disclosure Loftin has asserted against QA arises from QA’s role as an
investment advisor carrying out securities transactions. While not necessary to its
conclusion, the Court further notes that any potential tax shelter, fraudulent or
otherwise, falls under the regulatory ambit of the IRS, the North Carolina
Securities Act, or perhaps also the SEC. Hunsucker might then suggest a further
basis for concluding that Loftin’s UDTP claim is not within the scope of Chapter 75.
      {67}   The motion to dismiss with respect to Loftin’s UDTP claim is
GRANTED.

      G. Damages

      {68}   Finally, QA claims that all of Loftin’s claims should be dismissed
because QA did not cause any of Loftin’s damages but rather only completed
profitable trades on Loftin’s behalf. QA argues that the damages were only related
to Loftin’s tax returns, and that because QA had no role in preparing those returns,
the Court should assign it no responsibility for the losses Loftin incurred.
      {69}   In response, Loftin argues that QA has misconstrued the Amended
Complaint. Instead, he assigns QA’s responsibility not only to its completion of the
investment transactions but also to its involvement in the development and
marketing of the FLIP product and its alleged misrepresentation and failure to
disclose facts to Loftin regarding FLIP. He also points out that his damages are not
limited to the tax aspect of FLIP but also consist of the fees paid to QA.
      {70}   The Court concludes, without reiterating the discussion above, that
Loftin has adequately alleged facts that, if proven, may assign some responsibility
for Loftin’s tax-related damages to QA.9 Therefore, the Court does not dismiss any
of the claims on the basis that damages have not been adequately alleged.

                                        H. LEAVE TO AMEND

       {71}    In his Memorandum in Opposition to Defendant QA’s Motion to
Dismiss, Loftin requests that, if the Court is inclined to grant any part of QA’s
Motion, Loftin should first be allowed to further amend his Amended Complaint to
more particularly direct the allegations toward QA’s specific conduct. QA resists,
claiming that Loftin should not be allowed to amend his complaint a second time,
particularly because it contends the existing Amended Complaint affirmatively
alleges facts that defeat any claims against QA. The Court has separately
considered whether it should order a second amended complaint to clarify the
claims and to eliminate unnecessary allegations as to defendants who have now
been dismissed.
       {72}    The Court may, “in the appropriate case, treat a motion to dismiss
under [Rule 12(b)] as a motion for a more definite statement under [Rule 12(e)].”
Page v. Mandel, 

, 

 (2002). It may do so in
its discretion, ex mero motu. 

       {73}    The original Complaint in this case was filed in December 2003, and
the operative Amended Complaint was filed over eight years ago, in November
2006. Since that time, and after a substantial stay, KPMG and Sidley Austin have
been dismissed as defendants. The Amended Complaint is unusually long and
complex. At the same time, the allegations broadly group facts as to all Defendants,
making it difficult to discern how the allegations are specifically applicable to QA.
       {74}    The Court finds this an appropriate case in which to exercise its
discretion to order a more definite statement. The Court directs Loftin to further
amend his Amended Complaint consistent with this Order & Opinion, and requests



9 In order to reach its conclusion, the Court need not evaluate the argument as to whether the

payment of investment fees of the type involved in Loftin’s purchase of FLIP may be considered
“damages” for the purpose of bringing a claim. (See Def.’s Mem. Supp. 18–19; Resp. Br. 23.)
that he do so in a manner that eliminates allegations no longer necessary in light of
those defendants that have been dismissed and in a manner to facilitate an easier
determination of how the facts alleged apply to those defendants that remain.

                                      I. CONCLUSION

      {75}   For the foregoing reasons, it is ORDERED that:
      1. As to Loftin’s claims for (a) civil conspiracy, (b) fraud, (c) breach of
         fiduciary duty, and (d) constructive fraud, QA’s Motion is DENIED.
      2. As to Loftin’s claims for negligent misrepresentation and UDTP, QA’s
         Motion is GRANTED.
      3. Loftin shall file an amended complaint consistent with this Order &
         Opinion within thirty days of the Order & Opinion’s filing.


      This the 30th day of April, 2015.