Appeal by plaintiffs from order entered 17 September 1998 by
Judge Howard E. Manning, Jr., in Nash County Superior Court. Heard
in the Court of Appeals 17 November 1999.
Hartzell & Whiteman, L.L.P., by Andrew O. Whiteman and J.
Jerome Hartzell, for plaintiff-appellants.
Smith Helms Mulliss & Moore, L.L.P., by Stephen P. Millikin,
Alan W. Duncan, and Shannon R. Joseph for defendant-appellee
Braxton Glasgow, III.
Bell, Davis & Pitt, P.A., by William K. Davis and Stephen M.
Russell for defendant-appellees Michael A. Almond and Parker,
Poe, Adams & Bernstein.
MARTIN, Judge.
Plaintiffs, The Jay Group, Ltd., and its wholly owned
subsidiary, B. Klitzner & Son, Inc., formerly D. Jay Fashions,
Inc., (hereinafter collectively referred to as “Jay Group”) brought
this action against defendants Braxton Glasgow (“Glasgow”), MichaelAlmond (“Almond”), and Parker, Poe, Adams & Bern
stein (“Parker Poe”)
for actions allegedly committed in connection with Jay Group's
purchase of a North Carolina corporation, Shoefactory, Inc.
(“Shoefactory”), from its German parent corporation, Shoefactory
Vertriebs GmbH. In summary, plaintiffs alleged that defendants had
intentionally and negligently failed to disclose material facts to
plaintiffs, had stated other material facts known to them to be
false, had conspired to defraud plaintiffs, and had breached their
fiduciary duties to plaintiffs. In addition, plaintiffs alleged
that Almond and Parker Poe had committed “fraudulent practices”
within the meaning of G.S. § 84-13 in connection with their
representation of plaintiffs during the transaction, and had
committed legal malpractice as attorneys for plaintiffs.
Defendants filed answers in which they denied the material
allegations of plaintiffs' complaint and asserted affirmative
defenses.
The trial court, ex mero motu, ordered that the issues of
liability and damages be bifurcated into separate trials before the
same jury. Plaintiffs' evidence at trial, in the light most
favorable to plaintiffs, tended to show that prior to August 1994,
defendant Glasgow was president and director of Shoefactory, Inc.,
and owned approximately 20% of the stock in Shoefactory Vertriebs
GmbH. In 1993, Glasgow had employed Parker Poe and Almond to
represent Shoefactory in connection with Shoefactory's attempts to
register the trademark “Blue Heart” and, subsequently, to registera new trademark, “BH Studio.” These trademarks were
the subject of
a controversy with another shoe company, and the Patent and
Trademark Office subsequently refused Shoefactory's applications to
register the trademarks.
David Jay, the owner, C.E.O., and Chairman of the Board of Jay
Group, had become acquainted with Glasgow through Jay's earlier
efforts to sell some of his ownership interest in Jay Group. Jayand Glasgow discussed the possibility of Glasgow becoming employed
by Jay Group, and Glasgow conditioned the employment upon Jay
Group's purchase of Shoefactory, which was insolvent. Glasgow told
Jay that Jay Group could thereby obtain the use of the “Blue Heart”
and “BH Studio” brands to revitalize Jay Group's new shoe business.
Jay was aware of the financial condition of Shoefactory, but agreed
to its acquisition in order to obtain the trademarks. Glasgow
began work for the Jay Group on 1 August 1994; his first
assignments were to work with Jay Group's new shoe business and to
complete Jay Group's acquisition of Shoefactory.
According to plaintiffs' evidence, Almond, who was an attorney
with Parker Poe and a friend of Glasgow's, represented Glasgow in
connection with his employment by the Jay Group. At Glasgow's
urging, plaintiffs hired Almond and Parker Poe to handle the
Shoefactory acquisition. Parker Poe drafted the stock purchase
agreement for plaintiffs' acquisition of Shoefactory. At Glasgow's
instruction, the agreement contained no warranties or
representations concerning the transaction. The agreement
contained the following provision:
5.b Company owns the following applications
for trademark registration on the Principal
Register of the U.S. Patent and Trademark
Office: BH STUDIO (no serial number assigned;
filed July 15, 1994), BLUE HEART s/n:74/293127
and BLUE HEART and design s/n:74/293126
The agreement also prohibited Jay Group from conveying the
trademarks until the purchase price was paid in full.
On 17 August 1994, the date the transaction was supposed to
close, David Jay contacted Michael Colo, an attorney in RockyMount, North Carolina, who had represented Jay Group over a period
of years, and requested that he look over the documents prepared by
Parker Poe. Colo reviewed the documents, noticed there were no
covenants of title regarding the trademarks, and called Almond the
following day to inquire. Almond told him the parties had agreed
there would be no representations or warranties. Colo advised
David Jay of his conversation with Almond and advised him that to
enter such an agreement without warranties was a “business risk.”
David Jay told Colo that he had been told by Glasgow that
Shoefactory owned the trademarks; Colo responded that if Jay
trusted Glasgow and Almond he should not worry about the lack of
warranties.
On 17 August 1994, Forrest Norman, president and a director of
Jay Group, and Robert Elliott, controller of Jay Group and an
officer and director of its subsidiary, D. Jay Fashions, Inc., went
to the Shoefactory offices in Richmond to conduct a “due diligence”
review of the Shoefactory financial records in connection with the
purchase. While they were there, Norman and Elliott learned that
Shoefactory's applications for registration of the Blue Heart
trademarks had been denied. However, David Jay denied that Norman
or Elliott gave him this information before Jay Group's
acquisition of Shoefactory was completed on 31 August 1994. He
testified that he first became aware of problems with the
trademarks when he tried to license them to a third party in August
1995. He testified that he would not have proceeded with the
acquisition of Shoefactory had he been advised of the problem withthe trademarks.
At the close of plaintiffs' evidence, the trial court granted
all defendants' motions for directed verdict. Plaintiffs appeal.
The single issue presented by the assignment of error brought
forward in plaintiffs' brief is whether the trial court properly
granted directed verdicts in favor of defendants at the conclusion
of plaintiffs' evidence. A motion for a directed verdict tests the
legal sufficiency of the evidence to take the case to the jury.
West v. King's Dept. Store, Inc., 321 N.C. 698, 365 S.E.2d 621
(1988). In ruling upon the motion, the evidence is viewed in the
light most favorable to the nonmoving party, who is to be given the
benefit of every reasonable inference which may be drawn from it.
Manganello v. Permastone, Inc., 291 N.C. 666, 231 S.E.2d 678
(1977). Appellate review of an order granting a directed verdict
is limited to the grounds asserted by the moving party at the trial
level.
Crane v. Caldwell, 113 N.C. App. 362, 438 S.E.2d 449
(1994).
Plaintiffs asserted claims against Almond and Parker Poe
alleging fraud, conspiracy to defraud, breach of fiduciary duty
(constructive fraud), negligent misrepresentation and legal
malpractice, based upon their failure to inform plaintiffs that the
trademarks were not and could not be registered. Plaintiffs also
asserted claims for fraud, conspiracy to defraud, and negligent
misrepresentation against Glasgow and, additionally, alleged that
Glasgow, by not disclosing the information about the trademarks, isliable for breach of his fiduciary duty as an officer and director
of Jay Group. Plaintiffs argue that the order granting directed
verdicts for all defendants was improper because sufficient
evidence was presented to the trial court to support each of these
claims. We disagree and affirm the trial court's order granting
defendants' motions for directed verdict.
Each of plaintiffs' claims is based upon their contention that
defendants either affirmatively concealed or negligently failed to
disclose that the trademarks had not been registered and could not
be registered due to a conflict with the mark of another company.
Defendants' motions for directed verdict were based upon,
inter
alia, evidence presented by plaintiffs which showed that they had
knowledge of the problems with the trademarks in advance of the
Shoefactory acquisition.
To establish fraud, a plaintiff must show “(1) that defendant
made a false representation or concealment of a material fact; (2)
that the representation or concealment was reasonably calculated to
deceive him; (3) that defendant intended to deceive him; (4) that
plaintiff was deceived; and (5) that plaintiff suffered damage
resulting from defendant's misrepresentation or concealment.”
Claggett v. Wake Forest University, 126 N.C. App. 602, 610, 486
S.E.2d 443, 447 (1997) (emphasis supplied). A claim for conspiracy
to defraud cannot succeed without a successful underlying claim for
fraud.
See Burton v. Dixon, 259 N.C. 473, 476, 131 S.E.2d 27, 30
(1963) (“A civil action for conspiracy is an action for damages
resulting from acts committed by one or more of the conspiratorspursuant to the formed conspiracy, . . . .”). “The elements of a
constructive fraud claim are proof of circumstances '(1) which
created the relation of trust and confidence, and (2) led up to and
surrounded the consummation of the transaction in which defendant
is alleged to have taken advantage of his position of trust
to the
hurt of plaintiff.'”
Estate of Smith By and Through Smith v.
Underwood, 127 N.C. App. 1, 10, 487 S.E.2d 807, 813,
disc. review
denied, 347 N.C. 398, 494 S.E.2d 410 (1997) (citations omitted)
(emphasis supplied). Unlike actual fraud, constructive fraud does
not require evidence of intent to deceive.
Jordan v. Crew, 125
N.C. App. 712, 482 S.E.2d 735,
disc. review denied, 346 N.C. 279,
487 S.E.2d 548 (1997). However, in order for defendants to take
advantage of plaintiffs, plaintiffs must be deceived.
See id.
With respect to a claim for legal malpractice arising out of
concealment of, or a failure to disclose, information, “an attorney
who makes fraudulent misstatements of fact or law to his client, or
who fails to impart to his client information as to matters of fact
and the legal consequences of those facts, is liable for
any
resulting damages which his client sustains.”
Fox v. Wilson, 85
N.C. App. 292, 299, 354 S.E.2d 737, 742 (1987) (quoting 7
Am.Jur.2d, Attorneys At Law § 215, at 258 (1980)) (emphasis
supplied). Similarly, “[t]he tort of negligent misrepresentation
occurs when a party justifiably relies to his detriment on
information prepared without reasonable care by one who owed the
relying party a duty of care.”
Hudson-Cole Development Corp. v.
Beemer, 132 N.C. App. 341, 346, 511 S.E.2d 309, 313 (1999). With respect to the breach of duty claims alleged by
plaintiff
against Almond and Parker Poe, both the breach of fiduciary duty
claim and the breach of duty of loyalty claim are encompassed
within a claim for constructive fraud.
See generally Miller v.
First Nat'l Bank of Catawba County, 234 N.C. 309, 316, 67 S.E.2d
362, 367 (1951) (explaining that constructive fraud rests upon the
presumption of fraud arising from a breach of fiduciary obligation
“which . . . the law declares fraudulent because of its tendency to
deceive, to violate confidence, . . . .”);
State ex rel. Long v.
Petree Stockton, L.L.P., 129 N.C. App. 432, 447, 499 S.E.2d 790,
799 (1998) (skeptically discussing claim which plaintiff
“denominated 'Breach of Duty of Loyalty'”);
Estate of Smith v.
Underwood, 127 N.C. App. 1, 487 S.E.2d 807 (1997);
Stone v. Martin,
85 N.C. App. 410, 418, 355 S.E.2d 255, 259,
disc. review denied,
320 N.C. 638, 360 S.E.2d 105 (1987) (“Fraud exists when there is a
breach of a fiduciary duty.”); 15 N.C. Index 4
th, Fiduciaries § 6
(1992). Similarly, plaintiffs' claim against Glasgow for breach of
his fiduciary duty essentially amounts to a claim for constructive
fraud.
See Stone, supra; 15 N.C. Index 4
th, Fiduciaries § 6 (1992)
(likening breach of fiduciary duty to constructive fraud);
Hudson-
Cole, supra. As plaintiffs acknowledge in their brief, each of
these claims requires proof of an injury proximately caused by the
breach of duty.
Each of the foregoing claims asserted by plaintiffs requires
that plaintiff establish the element of proximate causation. Even
if we assume for the purposes of our decision that plaintiffs haveoffered sufficient evidence of every other element necessary to
take this case to the jury, plaintiffs' knowledge, in advance of
the Shoefactory acquisition, of the problems existing with respect
to the trademarks is fatal to their claims.
Plaintiffs' evidence showed that prior to the completion of
the Shoefactory acquisition on 31 August 1994, Forrest Norman and
Robert Elliott, both of whom were corporate officers of Jay Group
and its subsidiary, D. Jay Fashions, Inc., were informed on 17
August 1994 by a Shoefactory vice-president that the trademarks,
which were very similar to and thus conflicted with the marks of
another company, were not federally registered and that
applications for their registration had been rejected. Knowledge
of the president or agent of a corporation is imputed to the
corporation itself.
See Whitten v. Bob King's AMC/Jeep, Inc., 292
N.C. 84, 231 S.E.2d 891 (1977);
Jenkins v. Renfrow, 151 N.C. 323,
66 S.E. 212 (1909). This is true even though Norman and Elliott
may not have passed the information along to David Jay.
See
Norburn v. Mackie, 262 N.C. 16, 136 S.E.2d 279 (1964) (principal is
chargeable with knowledge received by agent while acting within
scope of his authority although agent does not in fact inform
principal);
Passmore v. Woodard, 37 N.C. App. 535, 246 S.E.2d 795
(1978); 18B Am.Jur. 2d, Corporations § 1671 (1985). The corporate
entities, not David Jay, are Norman's and Elliott's principals and
plaintiffs in this case.
See Board of Transportation v. Martin,
296 N.C. 20, 28-29, 249 S.E.2d 390, 396 (1978) (“A corporation is
an entity distinct from the shareholders which own it. . . . Wherepersons have deliberately adopted the corporate form to secure its
advantages, they will not be allowed to disregard the existence of
the corporate entity when it is to their benefit to do so.”); 18
Am. Jur. 2d, Corporations § 43, at 841 (1985) (“a corporation is a
legal entity existing separate and apart from the persons composing
it”). Even when it is considered in the light most favorable to
the plaintiffs, this evidence will not allow a reasonable inference
that plaintiffs were deceived by, or reasonably relied upon, the
alleged misrepresentations by defendants.
See Watts v. Cumberland
County Hospital, 317 N.C. 110, 117, 343 S.E.2d 879, 884 (1986)
(plaintiff could not be deceived as to a material fact of which it
was already aware). Therefore, any damages sustained by plaintiffs
due to the problems with the Shoefactory trademarks did not
proximately result from any acts or omissions of defendants and
their motions for directed verdict were properly granted.
Plaintiffs have not briefed the propriety of the directed
verdicts with respect to their claims against all defendants for
securities fraud brought pursuant to G.S. §§ 78A-8 and 78A-56, or
their claim against defendant Glasgow for negligent
misrepresentation, thus the claims are deemed abandoned. N.C.R.
App. P. 28(a), 28(b)(5). For the same reason, plaintiffs'
additional assignment of error, relating to the exclusion of expert
testimony, is also deemed abandoned.
The trial court's order granting defendants' motions for
directed verdict is affirmed.
Affirmed. Judges LEWIS and WYNN concur.
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