Edwards v. Vanguard Fiduciary Tr. Co., 2018 NCBC 134.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION FORSYTH COUNTY 18 CVS 2818
PHILLIP KENNETH EDWARDS,
Plaintiff,
v.
VANGUARD FIDUCIARY TRUST ORDER AND OPINION ON COMPANY; RUSSELL JOSEPH DEFENDANT VANGUARD MUTTER individually and d/b/a RJM FINANCIAL and RJM FINANCIAL FIDUCIARY TRUST COMPANY’S LLC; and ALLEGACY FEDERAL MOTION TO DISMISS CREDIT UNION,
Defendants.
1. THIS MATTER is before the Court on Defendant Vanguard Fiduciary
Trust Company’s (“Vanguard”) Motion to Dismiss (the “Motion”), filed on August 15,
2018. (ECF No. 18 [“Mot.”].) Vanguard seeks dismissal of all claims asserted against
it in the Complaint filed by Plaintiff Phillip Kenneth Edwards (“Plaintiff”) pursuant
to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure (“Rule(s)”). Having
considered the Motion, the briefs, and the arguments of counsel at a hearing on the
Motion, the Court DENIES the Motion.
Brown, Faucher, Peraldo & Benson, PLLC, by James Robert Faucher and Drew Brown, for Plaintiff.
Robinson, Bradshaw & Hinson, P.A., by Pearlynn Houck and Gabriel Wright, for Defendant Vanguard Fiduciary Trust Company.
Parker Poe Adams & Berstein LLP, by William L. Esser IV, for Defendant Allegacy Federal Credit Union
Robinson, Judge. I. INTRODUCTION
2. This litigation involves claims by Plaintiff arising from Defendant Russell
Joseph Mutter’s (“Mutter”) alleged theft of Plaintiff’s retirement funds. Plaintiff
alleges that Vanguard, the custodian of Plaintiff’s retirement accounts, and Allegacy
Federal Credit Union (“Allegacy”), the credit union where Mutter held an account,
enabled Mutter to conduct and conceal his theft of Plaintiff’s funds such that those
Defendants, as well as Mutter, should be liable to Plaintiff for the loss of Plaintiff’s
retirement savings.
II. FACTUAL BACKGROUND
3. The Court does not make findings of fact on a motion to dismiss pursuant
to Rule 12(b)(6) but only recites those factual allegations that are relevant and
necessary to the Court’s determination of the Motion.
A. The Parties
4. Plaintiff is a citizen and resident of Montgomery County, North Carolina.
(Compl. ¶ 1, ECF No. 2.) Plaintiff was born on January 20, 1944 and as of the date
of the filing of his Complaint, is retired. (Compl. ¶ 2.)
5. Vanguard is a Pennsylvania corporation with its principal place of business
in Pennsylvania. (Compl. ¶ 3.) Vanguard regularly conducts business in North
Carolina. (Compl. ¶ 4.)
6. Mutter is a citizen and resident of Forsyth County, North Carolina. (Compl.
¶ 5.) At all times relevant to this litigation, Mutter conducted business as RJM Financial or RJM Financial LLC. (Compl. ¶ 6.) However, these entities were never
legally organized. (Compl. ¶ 6.)
7. Allegacy is a federally chartered credit union which maintains its principal
place of business in Forsyth County, North Carolina. (Compl. ¶ 7.)
B. Plaintiff’s Relationship with Mutter and Vanguard
8. In 2014, Plaintiff was referred to Mutter for investment advisory services.
(Compl. ¶ 8.) Mutter told Plaintiff that he was “experienced with” Vanguard, and
recommended Vanguard as a “safe, secure investment.” (Compl. ¶ 9.) Based on
Mutter’s “sales pitch,” Plaintiff believed that Mutter had an existing relationship
with Vanguard. (Compl. ¶ 10.) Plaintiff alleges that because of Mutter’s “sales pitch,”
he believed that Vanguard had vetted and approved of Mutter as an investment
advisor, and that Mutter was an actual or apparent agent of Vanguard. (Compl.
¶¶ 10, 12, 42.) As a result of these beliefs, Plaintiff agreed to use Mutter as an
investment advisor. (Compl. ¶ 10.)
9. Plaintiff alleges that he entered into a “valid and enforceable agreement
with [Mutter and Vanguard].” (Compl. ¶ 11.) Plaintiff does not incorporate by
reference any written contract, nor does he specifically name the contract or specific
provisions of the contract in his Complaint. Rather, Plaintiff states that pursuant to
the “valid and enforceable agreement with [Mutter and Vanguard,] . . . Plaintiff
invested his retirement savings with [Mutter,] and [Vanguard] agreed to provide
investment services to Plaintiff and safeguard Plaintiff’s retirement funds.” (Compl.
¶ 11.) Plaintiff alleges that he entered into this agreement with Vanguard “directly and through [Vanguard]’s agent [Mutter].” (Compl. ¶ 11.) Plaintiff further alleges
that Vanguard received a commission or fees pursuant to this contract. (Compl.¶ 41.)
The three-party agreement between Plaintiff, Mutter, and Vanguard also included
an implied covenant of good faith and fair dealing. (Compl. ¶ 43.)
10. Plaintiff believed that Vanguard would “verify the credentials and
trustworthiness of any purported investment advisor that sold a customer
[Vanguard’s] investment product, or acted as [its] agent . . . .” (Compl. ¶ 13.) No one
associated with Vanguard ever told Plaintiff that Mutter did not have authority to
act on its behalf, nor did Vanguard take any action to change Plaintiff’s belief that
Mutter was its agent. (Compl. ¶ 14.)
11. Plaintiff transferred approximately $418,692.27 of his retirement savings
to Vanguard. (Compl. ¶ 15.) Plaintiff alleges that Vanguard “acknowledged the
relationship of confidence and trust placed in them by Plaintiff, by issuing the
disbursements [from his account at Vanguard] ‘FBO Phillip K. Edwards’ or ‘c/o Phillip
K. Edwards.’” (Compl. ¶ 16.) Plaintiff further alleges that Vanguard’s name,
including the words “fiduciary” and “trust” are intended to create, and in fact did
create, a reasonable belief on the part of Plaintiff that Vanguard stood in a fiduciary
relationship with Plaintiff. (Compl. ¶ 17.)
12. On September 24, 2014, Vanguard allowed Mutter to obtain “full agent”
status to Plaintiff’s accounts with Vanguard, which Mutter was able to do by
submitting an electronic authorization. (Compl. ¶¶ 18, 20.) The electronic authorization was submitted to Vanguard from an IP address that belonged to
Mutter. (Compl. ¶¶ 20−21.)
13. Plaintiff never approved Mutter obtaining “full agent” status on his
Vanguard accounts. (Compl. ¶ 23.) Plaintiff did not receive any information or notice
from Vanguard that Mutter had been granted “full agent” status until April 4, 2018.
(Compl. ¶ 22.) “Full agent” status allowed Mutter to transfer funds out of Plaintiff’s
Vanguard accounts without Plaintiff’s knowledge or approval. (Compl. ¶ 19.)
Plaintiff never agreed to, or approved of, Vanguard and/or Mutter removing money
from Plaintiff’s Vanguard accounts. (Compl. ¶ 23.)
14. Mutter was able to drain Plaintiff’s Vanguard accounts of “substantially all
funds” because of his “full agent” status. (Compl. ¶ 24.) Between 2014 and 2017,
Vanguard issued several payments to Mutter without notice to or approval from
Plaintiff. (Compl. ¶ 26.)
15. Not until January 2, 2018 did Plaintiff discover that Mutter had removed
funds from Plaintiff’s Vanguard accounts without his permission. (Compl. ¶ 38.)
C. Deposits into Mutter’s Account at Allegacy
16. Some or all of the checks that Vanguard issued to Mutter were deposited
into a personal bank account in Mutter’s name at Allegacy, without notice to Plaintiff
or his approval. (Compl. ¶¶ 25, 27, 28.) The payee on these checks was designated
as “RJM Financial FBO Phillip K. Edwards” or “RJM Financial c/o Phillip K.
Edwards.” (Compl. ¶ 29.) Plaintiff alleges that Vanguard knew or should have
known Mutter’s intentions were to deposit the funds into his personal bank account at Allegacy because Vanguard approved IRA Distribution forms directing the funds
to Allegacy. (Compl. ¶¶ 30, 71.)
D. Mutter’s Concealment of his Actions
17. Plaintiff alleges that Mutter was able to conceal his withdrawals from
Plaintiff’s Vanguard accounts by sending Plaintiff forged account statements.
(Compl. ¶ 35.) Plaintiff became aware that Mutter may have been providing him
false account statements on or about December 7, 2017. (Compl. ¶ 37.)
III. PROCEDURAL HISTORY
18. The Court recites only those portions of the procedural history that are
relevant to its determination of the Motion.
19. Plaintiff filed his complaint on May 29, 2018 (the “Complaint”). (ECF No.
2.) The Complaint asserts four claims against Vanguard: breach of contract (Count
I), (Compl. ¶¶ 40−45); breach of fiduciary duty (Count II), (Compl. ¶¶ 46−49);
negligence (Count III), (Compl. ¶¶ 50−53); and violation of the Uniform Fiduciaries
Act (“UFA”) (Count V), (Compl. ¶¶ 70−76). The Complaint also asserts a claim for
violation of the UFA against Allegacy,1 (Compl. ¶¶ 61−67), and an additional claim
for constructive fraud against Mutter,2 (Compl. ¶¶ 54−59).
1 Allegacy filed its own Motion to Dismiss on this claim, (ECF No. 15), which this Court will
decide in a separate order and opinion. 2 The Complaint asserts the First claim (breach of contract) and the Second claim (breach of
fiduciary duty) against both Vanguard and Mutter. (Compl. ¶¶ 44, 47−48.) On September 13, 2018, following Mutter’s failure to timely respond to the Complaint, Plaintiff moved for entry of default as to Defendant Mutter. (ECF No. 26.) On October 11, 2018, after Defendant Mutter failed to appear in this action or otherwise respond to Plaintiff’s motion for entry of default, the Court entered default in favor of Plaintiff against Mutter. (ECF No. 35.) 20. This action was designated as a mandatory complex business case by order
of the Honorable Mark Martin, Chief Justice of the Supreme Court of North Carolina,
on July 5, 2018. (ECF No. 1.) Plaintiff opposed designation. (ECF No. 10.) On July
24, 2018, after full briefing on the issue of designation, Chief Business Court Judge
Louis A. Bledsoe, III overruled Plaintiff’s opposition and ordered that this action be
designated as a complex business case. (ECF No. 13.) Chief Judge Bledsoe assigned
this action to the undersigned on the same date. (ECF No. 14.)
21. On August 15, 2018, Vanguard filed the Motion seeking dismissal of all
Plaintiff’s claims asserted against Vanguard (Counts I, II, III, and V), arguing that
the Complaint fails to allege sufficient facts to support such claims. (Mot. 1.)
22. Specifically, Vanguard contends that dismissal is appropriate because: (1)
Plaintiff fails to identify his alleged contract with Vanguard and what provisions, if
any, were allegedly breached; (2) that the account-related agreements governing
Plaintiff’s Vanguard accounts specifically disclaim and/or contradict the Complaint’s
allegations; (3) there is no fiduciary relationship between Vanguard and Plaintiff; (4)
there was no duty that Vanguard breached to support Plaintiff’s negligence claim; (5)
the economic loss doctrine bars Plaintiff’s negligence claim; and (6) Plaintiff has not
alleged facts to show that Vanguard had actual knowledge of Mutter’s breach of
fiduciary duty or acted in bad faith to state a claim under the UFA. (Mot. 1.)
23. Plaintiff timely filed a brief in opposition to the Motion (“Brief in
Opposition”). (Pl. Br. Opp’n Def. Vanguard Fiduciary Tr. Co. Mot. Dismiss, ECF No.
28 [“Pl.’s Br. Opp’n”].) Vanguard thereafter timely filed a reply to Plaintiff’s Brief in Opposition. (Vanguard Fiduciary Tr. Co. Reply Br. Supp. Mot. Dismiss, ECF No. 36
[“Reply Br.”].) The Court held a hearing on the Motion on November 15, 2018.
24. The Motion is now ripe for resolution.
IV. LEGAL STANDARD
25. In ruling on a motion to dismiss pursuant to Rule 12(b)(6) of the North
Carolina Rules of Civil Procedure, the Court reviews the allegations of the Complaint
in the light most favorable to Plaintiff. The Court’s inquiry is “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.” Harris v. NCNB Nat’l
Bank of N.C., 85 N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987). The Court construes
the Complaint liberally and accepts all well-pleaded factual allegations as true.
Laster v. Francis, 199 N.C. App. 572, 577, 681 S.E.2d 858, 862 (2009).
26. Where the pleading refers to and depends on certain documents, the Court
may consider those documents without converting the motion into one for summary
judgment under Rule 56. Schlieper v. Johnson, 195 N.C. App. 257, 261, 672 S.E.2d
548, 551 (2009). At the same time, the Court may not consider materials that are not
mentioned, contained, or attached in or to the pleading; otherwise, a Rule 12(b)(6)
motion will be converted into a Rule 56 motion and subject to its standards of
consideration and review. Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d
889, 890−91 (1979).
27. Our Supreme Court has noted that “[i]t is well-established that dismissal
pursuant to Rule 12(b)(6) is proper when ‘(1) the [C]omplaint on its face reveals that no law supports the . . . claim; (2) the [C]omplaint on its face reveals the absence of
facts sufficient to make a good claim; or (3) the [C]omplaint discloses some fact that
necessarily defeats the . . . claim.’” Corwin v. British Am. Tobacco PLC, No. 56PA17,
2018 N.C. LEXIS 1035, at *18−19 (N.C. Dec. 7, 2018) (quoting Wood v. Guilford
County, 355 N.C. 161, 166, 558, S.E.2d 490, 494 (2002) (citing Oates v. JAG, Inc., 314
N.C. 276, 278, 333 S.E.2d 222, 224 (1985))). This standard of review for Rule 12(b)(6)
is the standard our Supreme Court “uses routinely . . . in assessing the sufficiency of
complaints in the context of complex commercial litigation.” Id. at *19 n.7.
28. The Court is not required “to accept as true allegations that are merely
conclusory, unwarranted deductions of fact, or unreasonable inferences.” Good Hope
Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266, 274, 620
S.E.2d 873, 880 (2005). A “trial court can reject allegations that are contradicted by
the documents attached, specifically referred to, or incorporated by reference in the
[C]omplaint.” Laster, 199 N.C. App. at 577, 681 S.E.2d at 862. The Court can also
ignore a party’s legal conclusions set forth in its pleading. McCrann v. Pinehurst,
LLC, 225 N.C. App. 368, 377, 737 S.E.2d 771, 777 (2013).
V. ANALYSIS
29. The Court analyzes the Motion, and Plaintiff’s corresponding claims, in the
order argued by Vanguard in its briefing.
A. Breach of Contract (Count I)
30. With respect to Plaintiff’s breach of contract claim against Vanguard,
Vanguard argues that the Complaint’s allegations are deficient for two reasons. First, Vanguard asserts that the Complaint neither sufficiently identifies the
particular contract Plaintiff had with Vanguard, nor identifies which specific terms
of that contract Vanguard allegedly breached. (Def. Vanguard Fiduciary Tr. Co. Am.
Br. Supp. Mot. Dismiss 5, ECF No. 20 [“Br. Supp. Mot.”].) Second, Vanguard
represents that there were two written agreements governing Plaintiff’s accounts
with Vanguard: a Vanguard Brokerage Account Agreement, effective March 2014,
and a Vanguard Traditional and Roth IRA Custodial Account Agreement, effective
December 2007 and December 2014 (the “Account Agreements”), and that the
Account Agreements defeat Plaintiff’s breach of contract claim on its face. (Br. Supp.
Mot. 5−6.) Vanguard has submitted to the Court with its briefs on the Motion
purported copies of these documents.
31. As an initial matter, the Court notes that it would be improper for it to
consider the Account Agreements on a Rule 12(b)(6) motion to dismiss. While a trial
court may properly consider documents supplied by the defendant on a Rule 12(b)(6)
motion when those documents are the subject of the plaintiff’s complaint, this rule
only applies where the complaint specifically refers to the documents. See Oberlin
Capital, L.P. v. Slavin, 147 N.C. App. 52, 60−61, 554 S.E.2d 840, 847 (2001)
(concluding that the loan agreement submitted by the defendants could be considered
by the court on a Rule 12(b)(6) motion because it was “the subject of [the plaintiff’s]
complaint and is specifically referred to in the complaint”). Here, Plaintiff’s
Complaint does not specifically refer to the Account Agreements, and in his briefing
on the Motion, Plaintiff disputes that the documents presented to the Court by Vanguard are in fact the governing documents relevant to his breach of contract
claim. (Pl. Br. Opp’n 4.) Accordingly, the Court does not consider the Account
Agreements in deciding the Motion.
32. Turning to whether the allegations in the Complaint are sufficient to assert
a valid breach of contract claim, the Court notes that North Carolina is a notice-
pleading state. See N.C. Gen. Stat. § 1A-1, Rule 8(a) (“A pleading . . . shall
contain . . . [a] short and plain statement of the claim sufficiently particular to give
the court and the parties notice of the transactions, occurrences, or series of
transactions or occurrences, intended to be proved showing that the pleader is
entitled to relief . . . .”). “Under this ‘notice pleading’ standard, ‘a statement of claim
is adequate if it gives sufficient notice of the claim asserted to enable the adverse
party to answer and prepare for trial, to allow for the application of the doctrine of
res judicata, and to show the type of case to be brought.” Tillery Envtl. LLC v. A&D
Holdings Inc., 2018 NCBC LEXIS 13, at *78 (N.C. Super. Ct. Feb. 9, 2018) (quoting
Wake County v. Hotels.com, L.P., 235 N.C. App. 633, 646, 762 S.E.2d 477, 486 (2014)).
33. Plaintiff’s breach of contract claim is subject only to the requirements of
Rule 8(a). See id. at *77. Therefore, the Complaint need only allege (1) the existence
of a valid contract and (2) breach of the terms of that contract. Daniel Grp., Inc. v.
Am. Sales & Mktg., 2016 NCBC LEXIS 112, at *9 (N.C. Super. Ct. Dec. 15, 2016)
(citing Johnston v. Colonial Life & Accident Ins. Co., 173 N.C. App. 365, 369, 618
S.E.2d 867, 870 (2005)). “[W]here the complaint alleges each of these elements, it is error to dismiss a breach of contract claim under Rule 12(b)(6).” Id. (quoting Woolard
v. Davenport, 166 N.C. App. 129, 134, 601 S.E.2d 319, 322 (2004) (citations omitted)).
34. Vanguard relies upon Global Promotions Group, Inc. v. Danas Inc., where
this Court dismissed a complaint that alleged neither a particular contract nor the
specific contractual provisions that were breached. 2012 NCBC LEXIS 40, at *17
(N.C. Super. Ct. June 22, 2012). In that case, the plaintiff alleged that a debtor-
creditor contractual relationship existed between the plaintiffs and defendants, and
that the defendants breached those contracts when they allowed another party to
wrongfully convert funds from the plaintiffs’ accounts. Id. at *16−17.
35. Here, the Complaint’s allegations are more specific than the assertions
alleged in Danas. The Complaint alleges that a contract existed between Plaintiff,
Mutter, and Vanguard whereby Plaintiff invested his retirement savings with Mutter
and Vanguard, and Plaintiff paid a commission or fees to Mutter and Vanguard in
exchange for Mutter and Vanguard’s investment services and agreement to safeguard
Plaintiff’s retirement funds. (Compl. ¶ 41.) Although Plaintiff does not refer to any
specific written contract in the Complaint, North Carolina has long recognized oral
contracts. See, e.g., Williams v. Jones, 322 N.C. 42, 48, 366 S.E.2d 433, 437 (1988);
Willis v. Russell, 68 N.C. App. 424, 428, 315 S.E.2d 91, 95 (1984). Moreover, notice-
pleading does not require a plaintiff to attach a written contract or its terms to a
complaint. Wray v. City of Greensboro, 370 N.C. 41, 54, 802 S.E.2d 894, 903 (2017)
(“[T]here is no rule which requires a plaintiff to set forth in his complaint the full
contents of the contract which is the subject matter of his action or to incorporate the same in the complaint by reference to a copy thereof attached as an exhibit as long as
the complaint . . . allege[s] such a state of facts as would put defendants . . . on legal
notice of the existence of the contract.” (citation and quotation marks omitted)).
Accordingly, the Court finds that Plaintiff has adequately alleged that a contract
existed between Plaintiff and Vanguard.
36. The Complaint also alleges that Vanguard breached the contract, by,
among other things, allowing Mutter to obtain “full agent” status and to access
Plaintiff’s account without proper authorization or oversight, by allowing Mutter to
steal his retirement savings, and by issuing disbursements without Plaintiff’s
authorization or permission. (Compl. ¶ 44(C), (D), (F).)
37. While the allegations in Paragraph 44 are numerous, they do not identify
with specificity which provisions of the contract the alleged breaches pertain to. As
a result, Vanguard argues that this deficiency is similarly fatal to Plaintiff’s claim as
it was to the plaintiff’s breach of contract claim in Danas.
38. Notwithstanding this Court’s holding in Danas, the Court believes the facts
of the instant case are more closely aligned to those in Daniel Group, 2016 NCBC
LEXIS 112. In Daniel Group, this Court denied dismissal of a breach of contract
claim where (1) the plaintiff alleged an oral contract, and (2) the allegations in the
complaint, when taken as a whole, revealed that there were sufficient facts to show
that the defendants breached a particular aspect of the oral contract. Id. at *10−11.
Here, Plaintiff alleges that the contract required Vanguard to provide investment
services to Plaintiff and to safeguard Plaintiff’s funds. The Court finds that the allegations contained in Paragraph 44(C), (D), and (F) of the Complaint suggest that
Vanguard breached the safeguarding provision of the alleged contract between the
parties. Therefore, under the liberal standard of Rule 8(a), the Court concludes that
Plaintiff has adequately alleged a breach of contract claim. Accordingly, the Motion,
to the extent it seeks dismissal of Plaintiff’s First claim, is DENIED.
B. Breach of Fiduciary Duty (Count II)
39. With respect to Plaintiff’s breach of fiduciary duty claim against Vanguard,
Vanguard asserts that North Carolina does not recognize a de jure fiduciary
relationship between parties in the position of Plaintiff, Mutter, and Vanguard, and
that the Complaint fails to allege sufficient facts to support a de facto fiduciary
relationship. (Br. Supp. Mot. 13−14.)
40. “For a breach of fiduciary duty to exist, there must first be a fiduciary
relationship between the parties.” Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d
262, 268 (2013) (citing Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707
(2001)). A fiduciary relationship can be created either by law (de jure), or in fact (de
facto). North Carolina has not recognized that broker-dealers, as a matter of law,
owe fiduciary duties to investors. See NNN Durham Office Portfolio 1, LLC v. Grubb
& Ellis Co., 2016 NCBC LEXIS 95, at *99 (N.C. Super. Ct. Dec. 5, 2016) (finding that
no case law supports “the theory that managing broker-dealers owe fiduciary duties
to investors,” especially when considering that our “Supreme Court has declined to
find a fiduciary relationship in arm’s-length borrower−lender transactions”). 41. Plaintiff does not dispute that North Carolina does not recognize his
relationship with Vanguard as creating a de jure fiduciary relationship. Accordingly,
the Court must determine instead whether Plaintiff has adequately alleged a de facto
fiduciary relationship.
42. A de facto fiduciary relationship may arise in any case where “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.” Green, 367 N.C. at 141, 749 S.E.2d at 268 (quoting Dalton, 353 N.C. at
651, 548 S.E.2d at 707). However, “[t]he standard for finding a de facto fiduciary
relationship is a demanding one: ‘only when one party figuratively holds all the cards
. . . have North Carolina courts found that the special circumstance of a fiduciary
relationship has arisen.’” Lockerman v. S. River Elec. Membership Corp., 794 S.E.2d
346, 352 (N.C. Ct. App. 2016) (quoting S.N.R. Mgmt. Corp. v. Danube Partners 141,
LLC, 189 N.C. App. 601, 613, 659 S.E.2d 442, 451 (2008)). “Determining whether a
fiduciary relationship exists requires looking at the particular facts and
circumstances of a given case.” Highland Paving Co. v. First Bank, 227 N.C. App. 36,
42, 742 S.E.2d 287, 292 (2013) (citation and quotation marks omitted).
43. The parties rely on different cases to support their respective positions.
Vanguard argues that the Complaint’s allegations are similar to those alleged in
Deyton v. Estate of Waters, 2013 NCBC LEXIS 19 (N.C. Super. Ct. Apr. 25, 2013),
while Plaintiff asserts that his allegations more closely align with those in White v.
Consol. Planning, Inc., 166 N.C. App. 283, 603 S.E.2d 147 (2004). Both cases involve a breach of fiduciary duty claim against the respective plaintiffs’ investment advisor’s
corporate employer. White, at 288, 603 S.E.2d at 152; Deyton, 2013 NCBC LEXIS 19,
at *5−6.
44. In Deyton, the fully-developed record on summary judgment revealed that
the plaintiffs established several investment accounts with their son-in-law, who was
then a registered representative with IFG, the corporate defendant. Deyton, 2013
NCBC LEXIS 19, at *4. The plaintiffs had little to no interaction with any other
representative at IFG other than their son-in-law. Id. at *6. The plaintiff father-in-
law was a physician, with both undergraduate and medical degrees from Duke
University. Id. He was also responsible for monitoring the retirement fund at his
medical practice, buying and selling stocks without the use of a brokerage firm, and
had a membership in one or more investment clubs that invested in securities and
real estate. Id. at *6−7. This Court held that, based on the record before it, no
fiduciary relationship existed between the plaintiffs and their son-in-law’s employer,
IFG. Id. at *29.
45. In White, the plaintiffs, also an older married couple who used their son as
their investment advisor, had no similar level of experience or familiarity with
financial matters as did the father-in-law in Deyton. White, 166 N.C. App. at 293,
603 S.E.2d at 155. There, the Complaint alleged that “‘because of [the plaintiffs’] lack
of expertise in financial affairs,’ they relied upon [their son and his employer,
Consolidated Planning] to properly manage their funds.” Id. In light of these
allegations, the Court of Appeals found that the plaintiffs had adequately alleged a de facto fiduciary relationship between the corporate defendant, Consolidated
Planning, and them. Id.
46. Here, the Complaint reveals no indication that Plaintiff was a sophisticated
businessman like the plaintiff in Deyton. In fact, the Complaint is devoid of any facts
regarding Plaintiff’s background, but the Court acknowledges that such facts are not
necessary to allege in a complaint. The Court in Deyton, decided on summary
judgment, had the benefit of a fully developed record to determine whether or not the
facts supported a de facto fiduciary relationship.
47. The Court here, of course, has a limited record, like that in White and also
like that in this Court’s decision in Austin v. Regal Inv. Advisors, LLC, 2018 NCBC
LEXIS 3 (N.C. Super. Ct. Jan. 8, 2018). In Austin, like in White, the complaint alleged
that the plaintiffs were not sophisticated investors, and that they “reposed special
confidence in [the defendants] to look out for their interests because of [defendants]
expertise.” Id. at *19 (quotation marks omitted).
48. Here, the Complaint alleges that Plaintiff relied upon Vanguard’s
“reputation as a safe, secure investment company[,]” (Compl. ¶ 13), that Vanguard
“knew or should have known that Plaintiff was placing his trust and confidence in
[Vanguard] to look out for the best interests of Plaintiff[,]” (Compl. ¶ 16), and that
Vanguard’s very name, “including the words ‘fiduciary’ and ‘trust’ are intended to
create and indeed did create a reasonable belief on the part of Plaintiff that
[Vanguard] stands in a fiduciary relationship with Plaintiff, and that Plaintiff can
and should place his trust and confidence in [Vanguard,]” (Compl. ¶ 17). 49. While Plaintiff does not affirmatively allege his ignorance of financial
affairs like the plaintiffs in Austin or White, the Court nonetheless determines that
the Complaint’s allegations, taken as a whole, are minimally sufficient at the Rule
12(b)(6) stage to plead the existence of a de facto fiduciary relationship. Because the
Motion only asserts that Plaintiff’s breach of fiduciary duty claim should be dismissed
for failure to allege a fiduciary relationship, (see Br. Supp. Mot. 16), the Motion is
DENIED as to Plaintiff’s Second claim.
C. Negligence (Count III)
50. With respect to Plaintiff’s negligence claim, Vanguard argues that
Plaintiff’s tort claim is barred by the economic loss doctrine, (Br. Supp. Mot. 16−17),
and that, additionally, Plaintiff has failed to allege any duty Vanguard owed to
Plaintiff to monitor Mutter’s actions, (Br. Supp. Mot. 18).
51. The Court first addresses Vanguard’s duty argument. Vanguard argues
that “[f]or many of the same reasons the Complaint fails to allege that [Plaintiff] had
a fiduciary duty relationship with [Vanguard], it likewise fails to allege that
[Vanguard] owed him a duty to monitor Mutter’s actions.” (Br. Supp. Mot. 18.) The
Court has concluded that Plaintiff has sufficiently pleaded, for Rule 12(b)(6) purposes,
a de facto fiduciary duty relationship. Likewise, the Court concludes that there are
sufficient facts indicating that Vanguard owed a duty to exercise ordinary care when
handling Plaintiff’s accounts, as alleged in Paragraph 51 of the Complaint.
52. Vanguard also argues that “there are not even any allegations establishing
that [Vanguard] had notice of the facts or circumstances that would demonstrate a need to monitor Mutter’s actions.” (Br. Supp. Mot. 18.) The Complaint alleges,
however, that Mutter obtained “full agent” status over Plaintiff’s accounts by
submitting an electronic authorization form, which was sent from an IP address
belonging to Mutter, not Plaintiff. (Compl. ¶¶ 19−21.) The Complaint also alleges
that “given the amount, timing and frequency of the distribution requests,” Vanguard
should have verified the IRA Distribution forms submitted by Mutter. (Compl. ¶ 48.)
Based on these allegations, the Court finds that Plaintiff has alleged that Vanguard
was on notice of Mutter’s actions. Accordingly, the Court is not persuaded by
Vanguard’s argument that Plaintiff has failed to allege the duty element of his
negligence claim.
53. The Court next turns to Vanguard’s argument that Plaintiff’s negligence
claim is barred by the economic loss doctrine. North Carolina recognizes this
doctrine, which limits a plaintiff’s ability to recover in tort for a claim that is rooted
in contract law even if the defendant’s actions were negligent. See Spillman v. Am.
Homes of Mockville, Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741−42 (1992) (“[A]
tort action does not lie against a party to a contract who simply fails to properly
perform the terms of the contract, even if that failure to properly perform was due to
the negligent or intentional conduct of that party, when the injury resulting from the
breach is damage to the subject matter of the contract.”(citation omitted)); see also
Forest2Market, Inc. v. Arcogent, Inc., 2016 NCBC LEXIS 3, at *8 (N.C. Super. Ct. Jan.
5, 2016) (“The economic loss doctrine today generally limits recovery in tort ‘when a
contract exists between the parties that defines the standard of conduct and which the courts believe should set the measure of recovery.’” (quoting Akzo Nobel Coatings,
Inc. v. Rogers, 2011 NCBC LEXIS 42, at *47−48 (N.C. Super. Ct. Nov. 3, 2011))).
54. Based on this rule, this Court has concluded that “in order to maintain tort
claims for conduct also alleged to be a breach of contract, a plaintiff must identify a
duty owed by the defendant separate and distinct from any duty owed under a
contract.” Forest2Market, 2016 NCBC LEXIS 3, at *8 (citation and quotation marks
omitted).
55. Therefore, the economic loss doctrine will bar Plaintiff’s negligence claim if
Vanguard’s alleged conduct underlying Plaintiff’s negligence claim is also a breach of
the alleged agreement between Plaintiff and Vanguard, and Plaintiff fails to identify
a separate and distinct duty from Vanguard’s alleged contractual obligations. As
noted above, Plaintiff alleged that Vanguard owed “a duty of ordinary care to
Plaintiff,” (Compl. ¶ 51), but goes on to discuss how that duty was breached by
Vanguard’s failure to perform its obligations under the contract, (Compl.
¶ 52(A)−(F)). Therefore, the Court finds that the Complaint has not alleged a duty
separate and distinct from that which is owed under the contract.3
56. However, the economic loss doctrine seems to operate on the premise that
there is, in fact, a contract between the parties. In Forest2Market, where this Court
3 Plaintiff also argues in his Brief in Opposition that “[e]ven in the absence of a fiduciary
duty, a financial institution such as [Vanguard] has an obligation to safeguard its customer’s accounts.” (Pl. Br. Opp’n 9.) However, the Complaint does not allege this as a duty under tort law. Rather, the Complaint only alleges that Vanguard agreed, through the parties’ contract, to safeguard Plaintiff’s funds. Based on Plaintiff’s allegations, Vanguard’s negligent conduct is expressly covered by the contract, which is the exact situation for which the economic loss doctrine prohibits tort recovery. dismissed the plaintiff’s negligence claims that were an “attempt to manufacture a
tort dispute out of what is, at bottom a simple breach of contract claim,” the parties
did not dispute there was a contract between them. 2016 NCBC LEXIS 3, at *12
(citation and quotation marks omitted). In fact, this Court was able to consider the
provisions of that contract and determine which provisions covered the negligent
conduct alleged. Id. at *9. Here, in its briefing,4 Vanguard denies the existence of
the contract Plaintiff alleges in the Complaint.5
57. North Carolina allows a plaintiff to plead claims in the alternative. N.C.
Gen. Stat. § 1A-1, Rule 8(e)(2) (“A party may set forth two or more statements of a
claim or defense alternatively . . . . A party may also state as many separate claims
or defenses as he has regardless of consistency and whether based no legal or on
equitable grounds or on both.”). Because Vanguard has not yet filed an answer, and
because in its briefing on the Motion Vanguard disputes the existence of the alleged
contract, the Court concludes that it would be premature to dismiss Plaintiff’s
negligence claim at this time. While Plaintiff’s breach of contract claim and
negligence claim are inconsistent with one another and implicate the economic loss
doctrine, both are able to go forward. See Hendrix v. Hendrix, 67 N.C. App. 354, 357,
313 S.E.2d 25, 27 (1984) (Phillips, J., concurring) (“The main reason for permitting
4 The Court notes that Vanguard has not filed an answer yet, nor would consideration of an
answer be proper on the Motion. 5 Vanguard argues that there were other contracts governing the parties’ conduct, and thus
even if Vanguard denies the existence of the contract alleged in the Complaint, “there is no dispute that a contract governed [Plaintiff’s] relationship and accounts with [Vanguard].” (Reply Br. 9.) However, the Court ruling on a Rule 12(b)(6) motion only considers the allegations in the Complaint, which here alleges a contract between Vanguard and Plaintiff that Vanguard, in its briefing on the Motion, denies exists. inconsistent claims to be alleged is so that litigants can investigate and assess them
before having to decide—or before the court decides for them—which inconsistent
claim is supportable and which is not.”); Club Car, Inc. v. Dow Chem. Co., 2007 NCBC
LEXIS 10, at * 11−12 (N.C. Super. Ct. May 3, 2007) (deferring dismissal of the tort
claims on a Rule 12(b)(6) motion because it remained “an open question” whether the
plaintiff’s negligence actions were covered by the scope of the agreement where the
defendant had yet to answer the allegations in the complaint). Accordingly, the
Motion, to the extent it seeks dismissal of Plaintiff’s negligence claim at this stage, is
DENIED.
D. Violation of the UFA (Count V)
58. Plaintiff’s Fifth Claim alleges that Vanguard violated the UFA by allowing
Mutter to wrongfully withdraw funds from Plaintiff’s account without Plaintiff’s
permission. With respect to this claim, Vanguard argues that Plaintiff’s allegations
are insufficient as a matter of law to establish a violation of the UFA. (Br. Supp. Mot.
19.) For purposes of this claim, and because Vanguard has not argued otherwise, the
Court assumes that Vanguard is subject to the UFA.
59. Vanguard argues that it cannot be liable to Plaintiff under the facts as
alleged because the UFA relaxed the standard of care banks owe to principals when
dealing with their fiduciaries. (Br. Supp. Mot. 19.) Under Vanguard’s interpretation
of the UFA, Vanguard could only be held liable if it actually knew that Mutter was in
breach of his fiduciary obligations, or if it was aware of facts that “cogent[ly] and
obvious[ly]” indicated Mutter was in breach of his fiduciary obligations such that Vanguard’s conduct, or lack thereof, amounted to bad faith. (Br. Supp. Mot. 19−20
(quoting Edwards v. Nw. Bank, 39 N.C. App. 261, 268, 250 S.E.2d 651, 657 (1979)).)
Vanguard argues that Plaintiff’s allegations regarding Vanguard’s actual knowledge
of Mutter’s actions are conclusory, and that the “factual allegations support only a
remote possibility that [Vanguard] could have known about Mutter’s unauthorized
acts,” which are wholly insufficient to allege Vanguard acted in bad faith. (Br. Supp.
Mot. 19−20.) In response, Plaintiff argues that his allegations are not conclusory,
and that whether or not Vanguard acted in “bad faith” is a question for the fact-finder,
who could conclude from the allegations that Vanguard’s conduct amounted to bad
faith under the UFA. (Pl. Br. Opp’n 11.)
60. Section 32-9 of the UFA provides:
[i]f a check is drawn upon the account of his principal in a bank by a fiduciary who is empowered to draw checks upon his principal’s account, the bank is authorized to pay such check without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such a check, or with knowledge of such facts that its action in paying the check amounts to bad faith.
N.C. Gen. Stat. § 32-9.
61. In support of its position, Vanguard cites to Danas and Beedie v. Associated
Bank III., N.A., 2011 U.S. Dist. LEXIS 65883, at *6 (C.D. Ill. June 21, 2011).
However, the Court notes that both are distinguishable from the instant case. First,
in Danas, this Court did not address whether the UFA applied to the facts and
circumstances of that case. Danas, 2012 NCBC LEXIS 40, at *10−11. Second, Beedie
was a federal case out of the Central District of Illinois that applied its own case law developing the definition of “bad faith” under Illinois’ version of the UFA, and
moreover, applied the higher Twombly-Iqbal standard for dismissal under Federal
Rule 12(b)(6).6
62. Both Plaintiff and Vanguard cite to Edwards, where the Court of Appeals
held that summary judgment for the defendant bank was inappropriate on a UFA
claim. See 39 N.C. App. at 270, 250 S.E.2d at 658. There, the Court of Appeals
interpreted section 32-9’s “bad faith” as requiring more than just negligence, but a
“deliberate desire to evade knowledge because of a belief or fear that inquiry would
disclose a defect in the transaction.” Id. at 268, 250 S.E.2d at 657. The Court in
Edwards determined that “bad faith” required some sort of willful behavior. Id.
(quoting Davis v. Pa. Co. for Ins. on Lives & Granting Annuities, 12 A.2d 66, 69 (Pa.
1940) (“At what point does negligence cease and bad faith begin? The distinction
between them is that bad faith, or dishonesty, is unlike negligence, wilful [sic]. The
mere failure to make inquiry, even though there be suspicious circumstances, does
not constitute bad faith, unless . . . there is an intentional closing of the eyes or
stopping of the ears.”)).
6 To survive dismissal under the Federal Rule 12(b)(6), the “[f]actual allegations must be
enough to raise a right to relief above the speculative level.” Beedie, 2011 U.S. Dist. LEXIS 65883, at *4 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The “complaint must state sufficient factual matter . . . to ‘state a claim that is plausible on its face’ . . . [which requires] the plaintiff [to] plead[] factual content that allows the court to draw a reasonable inference that defendant is liable for the misconduct alleged.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009)). “[T]he standard under Federal Rule 12(b)(6) . . . is a different, higher pleading standard than mandated under our own General Statutes.” Fox v. Johnston, 243 N.C. App. 274, 285, 777 S.E.2d 314, 325 (2015); see also Holleman v. Aiken, 193 N.C. App. 484, 490, 668 S.E.2d 579, 584 (2008) (“North Carolina has not adopted the ‘plausibility standard’ set forth in Bell Atlantic for 12(b)(6) Motions to Dismiss.”) (citation omitted). 63. Despite articulating this exacting standard for “bad faith” under the UFA,
the Edwards Court nonetheless determined that a “general denial” of the plaintiff’s
allegations, where the defendant bank’s “state of mind is the essential element” to
the plaintiff’s claim, failed to establish the requisite standard of certainty to permit
summary judgment on the defendant’s behalf. Id. at 270, 250 S.E.2d at 658.
64. The Court notes that Edwards was decided on summary judgment, and
even with the benefit of affidavits where the defendant bank denied that it had any
knowledge of the fiduciary’s breach, the Court still determined that the plaintiff’s
allegations could support a claim under the UFA making summary judgment for the
defendant bank inappropriate. Id. Here, where Vanguard has yet to even respond
to Plaintiff’s allegations, and thus Plaintiff’s allegations are deemed admitted for
purposes of the Court’s analysis, the Court finds that deciding whether or not
Vanguard acted in “bad faith” is premature. Plaintiff has alleged that Vanguard’s
knowledge of the “size, timing, and frequency of transfers from the [Vanguard]
retirement account of Plaintiff” is sufficient to show Vanguard’s actual knowledge of
Mutter’s actions or at least amounts to Vanguard’s bad faith. (Compl. ¶ 74.) Plaintiff
has also alleged that Vanguard issued checks pursuant to the IRA Distribution form
submitted to Mutter’s personal bank account at Allegacy even though the checks were
made payable to “RJM Financial FBO Phillip K. Edwards” and “RJM Financial c/o
Phillip Edwards[,]” (Compl. ¶¶ 70−71), and that Vanguard permitted Mutter to
obtain “full agent” status through an electronic authorization form submitted from
Mutter’s computer, (Compl. ¶¶ 20−21). Plaintiff alleged that despite these facts, Vanguard never notified Plaintiff of changes to his account, nor inquired further into
Mutter’s actions. (Compl. ¶ 48(G).) These allegations could support a finding that
Vanguard had actual knowledge of Mutter’s conduct, or “could support a reasonable
inference that [Vanguard’s] passiveness amounted to a deliberate desire to evade
knowledge because of a belief or fear that inquiry would disclose a defect in the
transaction.” See Edwards, 39 N.C. App. at 270, 250 S.E.2d at 657. Therefore,
Plaintiff’s allegations are sufficient to withstand a motion to dismiss. Accordingly,
the Motion is DENIED with respect to Plaintiff’s UFA claim.
VI. CONCLUSION
65. For the foregoing reasons, the Court DENIES the Motion.
SO ORDERED, this the 21st day of December, 2018.
/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases