Fraud--negligent misrepresentation--failure to state a claim
The trial court did not err by granting a Rule 12(b)(6)
dismissal for defendants in an action for negligent
misrepresentation arising from plaintiffs becoming creditors of a
company emerging from bankruptcy by purchasing the claims of
third party creditors and receiving stock in the new company.
Plaintiffs do not allege that defendants had a duty of care to
them to be certain the information they were giving plaintiffs
was complete or accurate and plaintiffs should have been put on
notice by the language used that whether the revitalized entity
would be profitable remained a risk. Although plaintiffs alleged
that the information was supplied in the course of defendant
Frazier's business, profession, or employment, plaintiffs allege
nothing that would bring a reasonable mind to believe that
Frazier or the company he then worked for was in the business of
giving financial advice and did not allege that Frazier had or
gained a pecuniary interest from plaintiffs' investments.
Finally, plaintiffs did not allege that defendant Prudential
provided them any information or owed them any duty; and it is
not possible to hold Prudential liable under respondeat superior
for Frazier's actions since plaintiff failed to state a claim as
to Frazier.
Smith, James, Rowlett & Cohen, LLP, by Seth R. Cohen, for
plaintiff-appellants.
Smith Helms Mulliss & Moore, L.L.P., by Benjamin F. Davis, Jr.
and Shannon R. Joseph; Weil, Gotshal & Manges, LLP, by Greg A.
Danilow, for defendant-appellee Prudential Insurance Company
of America.
F. Kevin Mauney for defendant-appellee Larry G. Frazier.
HUNTER, Judge.
Plaintiff-appellants Dudley L. Simms, III, John L. Simms, DLSFamily Investment Partnership, and JLS Family Investme
nt
Partnership (collectively “plaintiffs”) appeal the trial court's
orders of 16 June 1999, allowing defendants' Prudential Life
Insurance Company of America and Larry G. Frazier (collectively
“defendants”) motion to dismiss, pursuant to N.C. Gen. Stat. § 1A-1,
Rule 12(b)(6). We agree that plaintiffs have failed to state a
claim upon which relief may be granted and, therefore, affirm the
trial court's rulings.
The factual basis out of which this appeal arises began in
April 1993 when Piece Goods Shop Company, L.P. (“Piece Goods”), of
which Prudential was the principal creditor, filed for bankruptcy.
More than two years later on 16 October 1995, Piece Goods was
reorganized and renamed Silas Creek Retail Company, Inc. (“Silas
Creek”). However in August 1995, before reorganization was
completed, defendant Frazier (who at the time was president and
chief operating officer of Piece Goods) informed Dudley Simms that
“the equity value of the entity emerging from bankruptcy
reorganization would be in excess of $31 million dollars, and that
it would be in a debt free position except for a $9 million dollar
line of credit and current trade debts.” Dudley Simms conveyed
this information to John Simms, DLS and JLS and, on 2 October 1995(before reorganization was completed), plaintiffs “chose to become
creditors [of Piece Goods], by purchasing claims from one or more
[of Piece Goods'] general unsecured creditors . . . .” This first
purchase of claims, made by Dudley Simms and DLS, was for an
investment of $1,650,000.00, which was later exchanged for 138,637
shares of stock in Silas Creek. (The debt reorganization plan
allowed for “the issuance to General Unsecured Creditors [by the
soon-to-be reorganized company] of one (1) share of New Common
Stock for each $100.00 of each such Creditor's Allowed Claim.”)
However, we note that there is no allegation by plaintiffs -- noris there any evidence of record -- that (at the time defendants
conveyed and plaintiffs acted upon the information) defendants
received any consideration or pecuniary gain from plaintiffs'
(Dudley Simms and DLS) purchasing the claims of third-party
unsecured creditors during the bankruptcy proceedings. On 20
November 1995 (after reorganization was completed), John Simms and
JLS invested $567,321.33 in exchange for 47,277 shares of stock in
Silas Creek. Again we note that there is no allegation by
plaintiffs -- or evidence of record -- that defendants received any
direct consideration or pecuniary gain from this investment by
plaintiffs (John Simms and JLS) in the newly reorganized company.
On 15 March 1996, Silas Creek acquired Northwest Fabrics and
Craft stores at a cost of $35 million, by incurring the cost as
debt to its principal lender. Then in August 1996, it was found
that Silas Creek had an inventory shortage in excess of $8 million.
Between the acquisition of Northwest Fabrics and the inventory
loss, “irreparable harm [was caused] to Silas Creek . . . from
which th[e] entity was unable to recover. . . . [Thus,]
[p]laintiffs lost the entirety of their investments in Silas Creek
. . . .”
On 29 July 1998, plaintiffs filed their complaint against
defendants alleging: (1) that Frazier was at all times acting as
an agent and servant of Prudential; (2) that Frazier negligently
misrepresented the financial status of Piece Goods by failing to
advise Dudley Simms that (a) “the entity emerging from bankruptcy
was actively considering the acquisition of . . . NorthwestFabrics[,]” and (b) “the equity value [of the emerging company]
was overstated by the amount of at least $8 million representing an
actual shortage of physical inventory not reflected on the
financial records”; (3) that Prudential, which “owned in excess of
60% of [Silas Creek,]” made Frazier president and chief operating
officer of Silas Creek, and therefore Frazier was acting on behalf
of Prudential by gaining plaintiffs as investors; (4) that
defendants failed to exercise reasonable care in obtaining and
communicating the information to plaintiffs; (5) that defendants
intended that plaintiffs rely on the information given them by
Frazier; and (6) that plaintiffs did reasonably and justifiably
rely on the information supplied by Frazier, to their severe
detriment. In response, defendants filed a motion with the court
to dismiss with prejudice pursuant to Rule 12(b)(6) of the North
Carolina Rules of Civil Procedure, which motion the court allowed.
Plaintiffs bring forth two assignments of error which we
combine, the issue being whether the trial court committed
reversible error by granting defendants' 12(b)(6) motions. We hold
that it did not.
A motion to dismiss pursuant to Rule
12(b)(6) tests the legal sufficiency of a
complaint. Harris v. NCNB, 85 N.C. App. 669,
670, 355 S.E.2d 838, 840 (1987). This Court
has summarized the trial court's duty in
ruling upon such a motion as follows:
“In order to withstand [a 12(b)(6) motion],
the complaint must provide sufficient notice
of the events and circumstances from which the
claim arises, and must state allegations
sufficient to satisfy the substantive elements
of at least some recognized claim. The
question for the court is whether, as a matterof 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. In general, 'a complaint should not
be dismissed for insufficiency unless it
appears to a certainty that plaintiff is
entitled to no relief under any state of facts
which could be proved in support of the
claim.'”
Werner v. Alexander, 130 N.C. App. 435, 437-38, 502 S.E.2d 897,
899-900 (1998) (emphasis added and emphasis in original) (quoting
Harris v. NCNB, 85 N.C. App. at 670-71, 355 S.E.2d at 840
(citations omitted)). Thus, in the case at bar, where plaintiffs'
claim is one of negligent misrepresentation, plaintiffs' complaint
must have addressed each of the necessary elements of that claim.
It has long been held in North Carolina that
The tort of negligent misrepresentation
occurs when [(1)] a party justifiably relies
[(2)] to his detriment [(3)] on information
prepared without reasonable care [(4)] by one
who owed the relying party a duty of care.
Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200,
206, 367 S.E.2d 609, 612 (1988), reversed on other grounds, 329
N.C. 646, 407 S.E.2d 178 (1991). Therefore, to withstand
defendants' motion to dismiss, plaintiffs at bar must be able to
show that they justifiably relied -- to their detriment -- on the
information provided them by defendants and that defendants owed
plaintiffs a duty of care to be certain that the information
provided was complete and accurate.
In their complaint, plaintiffs allege “Frazier made plaintiffs
aware that Piece Goods . . . could emerge from bankruptcy
reorganization as a new revitalized entity and that investment inthe equity of the new revitalized entity should be extremely
valuable and profitable.” (Emphasis added.) Our courts have said
that “[w]here 'the purchaser has full opportunity to make pertinent
inquiries but fails to do so through no artifice or inducement of
the seller, an action in [negligent misrepresentation] will not
lie.'” C.F.R. Foods, Inc. v. Randolph Development Co., 107 N.C.
App. 584, 589, 421 S.E.2d 386, 389 (1992) (quoting Libby Hill
Seafood Restaurants, Inc. v. Owens, 62 N.C. App. 695, 698, 303
S.E.2d 565, 568, review denied, 309 N.C. 321, 307 S.E.2d 164
(1983)). The record is clear and plaintiffs freely admit that
although Frazier conveyed the information to Dudley Simms in August
1995, plaintiffs did not make their first investment until October
1995 and their second investment until late November 1995. Yet
plaintiffs offer no evidence, and there is none in the record, to
show that they did not have “full opportunity to make pertinent
inquiries” as to the factual accuracy of Frazier's statements to
them upon which they claim to have based their decision to invest.
Id. We note that by the plain language admittedly used by Frazier,
plaintiffs should have been put on notice that the fact of whether
the revitalized entity would be profitable remained a risk. The
fact that plaintiffs took the risk by acting on this “hot tip” and
it did not turn out to be profitable is unfortunate; however, we
recognize it is often the result of a high risk investment.
Nevertheless, plaintiffs proceed to state specific things told
to them and also withheld from them by Frazier, things which
plaintiffs allege were misrepresentations of the true state ofPiece Goods and its successor, Silas Creek. Plaintiffs further
allege that it is upon these statements by Frazier (or the lack
thereof) that they justifiably relied to their detriment. (It is
undisputed that plaintiffs suffered injury -- by way of their
losing almost $2 million invested in Piece Goods and Silas Creek.
However, Prudential also lost its investment when Silas Creek went
bankrupt.) Yet, the record reflects that at no time and in no way
do plaintiffs allege that defendants had a duty of care to them, a
duty which required that they be certain the information they were
giving plaintiffs was complete or accurate. Without an allegation
that defendants owed plaintiffs a duty of care regarding the
information given, plaintiffs' claim must necessarily fail. Id.
See also Energy Investors Fund, L.P. v. Metric Constructors, Inc.,
351 N.C. 331, 337-38, 525 S.E.2d 441, 445 (2000); Holshouser v.
Shaner Hotel Grp. Props. One, 134 N.C. App. 391, 394, 518 S.E.2d
17, 21 (1999), aff'd 351 N.C. 330, 524 S.E.2d 568 (2000); and,
Hoisington v. ZT-Winston-Salem Assocs., 133 N.C. App. 485, 488, 516
S.E.2d 176, 179 (1999).
Plaintiffs' complaint alleged that:
Defendants supplied the . . . information to
plaintiffs in the course of defendants'
business, in transactions in which both
plaintiffs and defendants had financial
interest.
Defendants intended that plaintiffs rely on
the information supplied by them for guidance
in particular financial transactions, that is,
the acquisition of stock in the entity
emerging from bankruptcy.
Plaintiffs contend they have met their burden of showing a duty of
care. We disagree. It is true that our Supreme Court has defined
a breach of the duty owed in negligent misrepresentation as:
“. . . One who, in the course of his business,
profession or employment, or in any other
transaction in which he has a pecuniary
interest, supplies false information for the
guidance of others in their business
transactions, [and thus] is subject to
liability for pecuniary loss caused to them by
their justifiable reliance upon the
information, if he fails to exercise
reasonable care or competence in obtaining or
communicating the information.”
Marcus Bros. Textiles, Inc. v. Price Waterhouse, LLP, 350 N.C. 214,
218, 513 S.E.2d 320, 323-24 (1999) (emphasis added) (quoting
Restatement (Second) of Torts § 552 (1977)). However, aside from
plaintiffs' allegation that Frazier supplied the information in the
course of his business, profession or employment, plaintiffs allege
nothing that would bring a reasonable mind to believe that either
he or Piece Goods (the company for which he worked at the time the
information was given) was in the business of giving financial
advice. Furthermore, the record reflects that at no time and in no
way do plaintiffs allege that Frazier had a pecuniary interest or
obtained any pecuniary gain from plaintiffs' investments or
transactions. Thus, again, plaintiffs have failed to meet their
burden of showing a duty of care owed them by Frazier, and their
claim against him for negligent misrepresentation must necessarily
fail. Id. We then hold that the trial court's grant of Frazier's
12(b)(6) motion was proper. We further note that plaintiffs' complaint, on its face, has
no allegation that Prudential provided them any information at all.
Neither do plaintiffs allege Prudential owed them a duty of care.
In fact, the only link plaintiffs make between Prudential and the
misrepresentation is that “[a]t all material times defendant Larry
G. Frazier acted as an agent and servant of defendant Prudential
. . . and his conduct which is the subject of this action was
within the course and scope of this agency and employment.”
Therefore, because plaintiffs attempt to reach Prudential through
an employer/employee or principal/agent relationship with Frazier
under a theory of respondeat superior, plaintiffs' claim against
Prudential must also necessarily fail. Long v. Giles, 123 N.C.
App. 150, 152, 472 S.E.2d 374, 375 (1996). Our courts have long
held that:
A finding of liability against defendant
. . . employer, is only possible if [the
employee] is found liable, and the injuries
arose out of and in the course of his [or her]
employment [with defendant employer]. In
other words, defendant [employer's] liability
is derivative of [its employee's] liability,
and the primary claim against the [employee]
must first be determined before any claim
against [defendant employer] is
possible. . . .
If plaintiffs do not recover against [the
employee], they cannot seek to recover against
defendant [employer] under a respondeat
superior theory . . . .
Id. See also McLain v. Taco Bell Corp, 137 N.C. App. 179, 191, 527
S.E.2d 712, 720-21 (2000); Wrenn v. Maria Parham Hosp., Inc., 135
N.C. App. 672, 679, 522 S.E.2d 789, 793 (1999); and, Watson v.Dixon, 132 N.C. App. 329, 332, 511 S.E.2d 37, 39 (1999),
aff'd 352
N.C. 343, 532 S.E.2d 175 (2000).
Since we have already held that plaintiffs have failed to
state a claim for which relief may be granted as to Frazier, it is
not possible then that we could hold otherwise as to plaintiffs'
claim that Prudential, as Frazier's employer or principal, is
liable under a theory of respondeat superior. Id. Thus, we hold
that the trial court's grant of Prudential's motion to dismiss was
also proper.
Affirmed.
Judges LEWIS and WALKER concur.
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