Edwards v. Vanguard Fiduciary Trust Co.

2019 NCBC 77

• Court: North Carolina Business Court
• Decided: December 17, 2019
• Docket: 18-CVS-2818
• Status: Published

Opinion

Edwards v. Vanguard Fiduciary Trust Co., 2019 NCBC 77.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION FORSYTH COUNTY 18 CVS 2818

PHILLIP KENNETH EDWARDS,

Plaintiff,

v.

RUSSELL JOSEPH MUTTER, ORDER AND OPINION ON MOTION FOR JUDGMENT BY DEFAULT Defendant.

1. THIS MATTER is before the Court on Plaintiff Phillip Kenneth Edwards’

(“Plaintiff”) Motion for Judgment by Default (the “Motion”) against Defendant

Russell Joseph Mutter (“Defendant”) pursuant to Rule 55(b) of the North Carolina

Rules of Civil Procedure (the “Rule(s)”). (ECF No. 60.)

2. For the reasons set forth herein, the Court GRANTS in part and DENIES

in part the Motion.

Brown, Faucher, Peraldo & Benson, LLC, by James R. Faucher and Drew Brown, for Plaintiff Phillip Kenneth Edwards.

Defendant Russell Joseph Mutter did not appear.

Robinson, Judge.

I. PROCEDURAL BACKGROUND

3. Plaintiff initiated this action on May 29, 2018 by filing the Complaint. 1

(ECF No. 2.)

1 In the Complaint, Plaintiff asserted claims against Vanguard Fiduciary Trust Company

and Allegacy Federal Credit Union; however, Plaintiff later dismissed all claims against them with prejudice on June 19, 2019 and June 10, 2019 respectively. (ECF Nos. 56, 57.) 4. On September 13, 2018, Plaintiff filed a Motion for Entry of Default as to

Defendant pursuant to Rule 55(a). (ECF No. 26.) An assistant Clerk of Forsyth

County Superior Court entered an Entry of Default against Defendant on September

18, 2018, which was filed with this Court on September 27, 2018. (ECF No. 29.)

Consistent with Rules 7.1 and 7.6 of the North Carolina Business Court Rules, this

Court struck the Clerk’s entry and ordered that Defendant had to and including

October 9, 2018 to respond in opposition to the Motion for Entry of Default. (ECF No.

30.)

5. Defendant failed to respond, and the Court granted the Motion for Entry of

Default and entered the Order on Plaintiff’s Motion for Entry of Default on October

11, 2018. (ECF No. 35.)

6. On July 19, 2019, Plaintiff filed the Motion and a brief in support. (ECF

Nos. 60, 62.) That same day, Plaintiff filed an Affidavit of Phillip Kenneth Edwards

verifying the allegations made in the Complaint. (Aff. Phillip Kenneth Edwards, ECF

No. 61 [“Aff.”].)

7. On September 4, 2019, Plaintiff filed Return of Service for Motion for

Default Judgment, indicating that Plaintiff served Plaintiff’s Motion for Judgment by

Default on Defendant. (ECF No. 63.)

8. The Court entered a Notice of Hearing and Scheduling Order on November

14, 2019 (the “Scheduling Order”). (Not. Hearing & Scheduling Order, ECF No. 64

[“Not. Hearing”].) The Scheduling Order noticed a hearing on the Motion and ordered

Plaintiff to serve a copy of the Scheduling Order on Defendant and file proof of service. (Not. Hearing ¶¶ 2–3.) Plaintiff filed proof of service on Defendant by certified mail

on November 22, 2019. (ECF No. 65.)

9. The Court held a hearing on the Motion on December 17, 2019. (See ECF

No. 64.) Defendant failed to respond to the Motion or appear at the December 17

hearing.

10. This matter is now ripe for resolution.

II. FINDINGS OF FACT

11. “When default is entered due to a defendant’s failure to answer, the

substantive allegations contained in plaintiff’s complaint are no longer at issue, and

for the purposes of entry of default and default judgment, are deemed admitted.”

Luke v. Omega Consulting Grp., LC, 194 N.C. App. 745, 751, 670 S.E.2d 604, 609

(2009) (citation omitted). Neither North Carolina case law nor statutory law

prohibits the Court from considering allegations in conjunction with a motion for

default judgment that are based upon information and belief. Blakenship v. Town &

Country Ford, Inc., 174 N.C. App. 764, 767, 622 S.E.2d 638, 641 (2005).

12. Plaintiff is a citizen and resident of Montgomery County, North Carolina.

(Compl. ¶ 1.)

13. Defendant is a citizen and resident of Forsyth County, North Carolina.

(Compl. ¶ 5.)

14. Vanguard Fiduciary Trust Company (“Vanguard”) is a corporation

organized and existing pursuant to the laws of Pennsylvania. (Compl. ¶ 3.) 15. In 2014, Plaintiff was referred to Defendant for investment advisory

services. (Compl. ¶ 8.) Based on Plaintiff’s belief that Defendant was acting as

Vanguard’s agent, Plaintiff later made the decision to enter into an agreement with

Vanguard and Defendant, pursuant to which Vanguard and Defendant were to

provide investment services and safeguard Plaintiff’s retirement funds. (Compl.

¶¶ 9–11.) Plaintiff transferred a “substantial portion” of his retirement savings,

approximately $418,692.27, to Vanguard (the “Vanguard Account”). (Compl. ¶ 15.)

16. On or about September 24, 2014, Vanguard granted Defendant “full agent”

status to the Vanguard Account, without notification to or consent of Plaintiff, which

allowed Defendant to transfer Plaintiff’s funds out of the Vanguard Account without

Plaintiff’s knowledge or approval. (Compl. ¶¶ 18–19.)

17. Defendant obtained full agent status by submitting an electronic

authorization to Vanguard. (Compl. ¶ 20.) The authorization was submitted from IP

address 24.163.30.211, which is the home or office of Defendant in Clemmons, North

Carolina. (Compl. ¶¶ 20–21.)

18. Plaintiff was not notified that Defendant obtained full agent status over the

Vanguard Account until on or about April 4, 2018. (Compl. ¶ 22.) Prior to that date,

Defendant used his full agent status to “drain” the Vanguard Account of substantially

all of Plaintiff’s funds. (Compl. ¶ 24.)

19. Vanguard issued payments to Defendant, without the notice to or consent

of Plaintiff, from Plaintiff’s retirement funds on the following dates and in the

following amounts: a. October 3, 2014 for $25,000.00;

b. October 23, 2014 for $60,000.00;

c. November 13, 2014 for $75,000.00;

d. January 5, 2016 for $30,000.00;

e. April 6, 2016 for $20,000.00;

f. July 29, 2016 for $20,000.00;

g. August 23, 2016 for $20,000.00;

h. August 30, 2016 for $7,500.00;

i. November 18, 2016 for $10,000.00;

j. December 21, 2016 for $7,000.00;

k. July 7, 2017 for $10,000.00; and

l. January 19, 2017 for $10,000.00.

(Compl. ¶¶ 25–26.)

20. Some or all of the above-referenced payments issued to Defendant were

deposited by check into Defendant’s bank account at Allegacy Federal Credit Union.

(Compl. ¶ 28.)

21. Defendant concealed his misconduct by providing Plaintiff with forged

account statements. (Compl. ¶ 35.) Plaintiff did not become aware of the falsity of

his account statements until December 7, 2017 and did not become aware that

Defendant removed funds from the Vanguard Account without his consent until on

or about January 2, 2018. (Compl. ¶¶ 37–38.) III. ANALYSIS

22. The Motion requests entry of default judgment against Defendant pursuant

to Rule 55(b)(2)(b). For an order for default judgment to be valid, there must be

compliance with Rule 55 and N.C.G.S. § 1-75.11. Hill v. Hill, 11 N.C. App. 1, 6–7,

180 S.E.2d 424, 428 (1971). Pursuant to N.C.G.S. § 1-75.11, “[w]here a defendant

fails to appear in the action within apt time the court shall, before entering a

judgment against such defendant, require proof of service of the summons in the

manner required by G.S. 1-75.10” and proof of personal jurisdiction.

23. When personal jurisdiction is claimed over the defendant, the court “shall

require proof by affidavit or other evidence, to be made and filed, of the existence of

any fact not shown by verified complaint which is needed to establish grounds for

personal jurisdiction over the defendant.” N.C.G.S. § 1-75.11(1).

A. Service of Process and Personal Jurisdiction

24. At the time that Plaintiff attempted service of process on Defendant and

through the date of this Order, Defendant has been detained at the Forsyth County

Detention Center. The record reflects that Defendant was served a copy of the

summons and the complaint on June 4, 2018 by the Deputy Sheriff at 201 North

Church Street, Winston-Salem, North Carolina, 27101, which is the address of the

Forsyth County Detention Center. (ECF No. 3.) Therefore, Plaintiff sufficiently

served Defendant with the complaint and summons as required by N.C.G.S. § 1-

75.10. See N.C.G.S. § 1-75.10(a)(1); see also Harrington v. Rice, 245 N.C. 640, 642, 97

S.E.2d 239, 240 (1957) (“When the return shows legal service by an authorized officer, nothing else appearing, the law presumes service. The service is deemed established

unless, upon motion in the cause, the legal presumption is rebutted by evidence upon

which a finding of nonservice is properly based.”).

25. “There is a distinction between obtaining jurisdiction by service of process

and the proof of jurisdiction as required by G.S. 1-75.11 before entry of a judgment

against a nonappearing defendant.” Hill, 11 N.C. App. at 8, 180 S.E.2d at 429.

N.C.G.S. § 1-75.11 requires proof of jurisdiction before a judgment may be entered.

Id. at 7, 180 S.E.2d at 428. An allegation that the defendant is a citizen and resident

of North Carolina in a verified complaint is sufficient to prove personal jurisdiction

for the purposes of N.C.G.S. § 1-75.11. See General Foods Corp. v. Morris, 49 N.C.

App. 541, 543, 272 S.E.2d 17, 18 (1980).

26. Plaintiff sufficiently alleged facts to support a finding of personal

jurisdiction in his complaint later verified by affidavit. (Compl. ¶ 5; see also ECF No.

61.)

B. Stating a Claim

27. While the factual allegations in the Complaint are admitted,

“[n]evertheless, the allegations in the complaint must support a plaintiff’s claims in

order for the court to enter a judgment by default in the plaintiff’s favor.” Islet Scis.,

Inc. v. Brighthaven Ventures LLC, 2018 NCBC LEXIS 12, at * 5 (N.C. Super. Ct. Feb.

9, 2018). “In determining whether the allegations are sufficient to state a claim for

relief . . . every reasonable intendment and presumption must be made in favor of the

pleader.” Brown v. Cavit Scis., Inc., 230 N.C. App. 460, 467, 749 S.E.2d 904, 909 (2013). “If any portion of the complaint . . . presents facts sufficient to constitute a

cause of action, or if facts sufficient for that purpose fairly can be gathered from it,

the pleading will stand[.]” Id. (quoting Presnell v. Beshears, 227 N.C. 279, 281, 41

S.E.2d 835, 837 (1947)) (quotation marks omitted).

28. Plaintiff asserts three claims against Defendant: (1) breach of contract; (2)

breach of fiduciary duty; and (3) constructive fraud.

1. Breach of Contract

29. “The elements of a claim for breach of contract are (1) existence of a valid

contract and (2) breach of the terms of that contract.” Supplee v. Miller-Mottee Bus.

Coll., Inc., 239 N.C. App. 208, 216, 768 S.E.2d 582, 590 (2015) (citation and quotation

marks omitted). It is not necessary that a plaintiff attach a written contract or

incorporate its terms verbatim to sufficiently state a claim for breach of contract. See

Wray v. City of Greensboro, 370 N.C. 41, 54, 802 S.E.2d 894, 903 (2017); see also

Daniel Grp., Inc. v. Am. Sales & Mktg., 2016 NCBC LEXIS 112, at *10–11 (N.C.

Super. Ct. Dec. 15, 2016).

30. Plaintiff sufficiently alleged the existence of a contract between Plaintiff

and Defendant pursuant to which Plaintiff invested his retirement savings with

Defendant, and Plaintiff paid a commission or fees to Defendant in exchange for

Defendant’s investment services and agreement to safeguard Plaintiff’s retirement

funds. (Compl. ¶¶ 11, 41.) Plaintiff further alleged specific conduct that Defendant

undertook in breach of the contract, including failing to safeguard Plaintiff’s retirement savings; failing to provide Plaintiff with investment services; and stealing

Plaintiff’s retirement savings. (Compl. ¶ 44.)

31. Plaintiff need not allege specific provisions of the contract at issue. See

Daniel Grp., Inc., 2016 NCBC LEXIS 112, at *10–11 (declining to dismiss a breach of

contract claim when the complaint as a whole alleged facts to show the existence of

an oral contract and that the defendants breached a particular aspect of the oral

contract regardless of the fact that specific contract terms were not alleged). Based

on the factual allegations in the Complaint, the Court can discern that Plaintiff

alleges that he and Defendant entered into a contract in relation to Defendant’s

investment-advisor services and that Defendant breached any safeguarding

provisions therein to Plaintiff’s injury.

32. Plaintiff has sufficiently stated a claim for breach of contract and has also

sufficiently demonstrated multiple breaches and damages caused thereby. Therefore,

Plaintiff’s Motion as to his breach of contract claim should be GRANTED.

2. Breach of Fiduciary Duty

33. To support a claim for breach of fiduciary duty, a plaintiff must allege (1)

that the defendant owes the plaintiff a fiduciary duty through the existence of a

fiduciary relationship, and (2) that the defendant breached that duty. Surratt v.

Brown, 2015 NCBC LEXIS 75, at *19 (N.C. Super. Ct. July 27, 2015). “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). “In North

Carolina, a fiduciary duty can arise by operation of law (de jure) or based on the facts and circumstances (de facto)[.]” Austin v. Regal Inv. Advisors, LLC, 2018 NCBC

LEXIS 3, at *17 (N.C. Super. Ct. Jan. 8, 2018). North Carolina law has not recognized

an investment advisor-client relationship as a de jure fiduciary relationship. See

Silverdeer, LLC v. Berton, 2013 NCBC LEXIS 21, at *26–28 (N.C. Super. Ct. Apr. 24,

2013).

34. A de facto fiduciary relationship has been defined broadly and can arise in

a variety of circumstances; however, “[t]he standard for finding a de facto fiduciary

relationship is a demanding one[.]” Lockerman v. S. River. Elec. Membership Corp.,

250 N.C. App. 631, 636, 794 S.E.2d 346, 352 (2016). “Only when one party

figuratively holds all the cards – all the financial power or technical information, for

example – have North Carolina courts found the special circumstance of a fiduciary

relationship arisen.” S.N.R. Mgmt. Corp. v. Danube Partners 141, LLC, 189 N.C.

App. 601, 613, 659 S.E.2d 442, 451 (2008) (citation omitted).

35. Plaintiff fails to allege or produce evidence of any special circumstances

regarding Plaintiff and Defendant’s relationship that would give rise to a de facto

fiduciary relationship. An investment advisor-client relationship, standing alone, is

insufficient to support Plaintiff’s breach of fiduciary duty claim. See Silverdeer, LLC,

2013 NCBC LEXIS 21, at *25. Therefore, Plaintiff’s Motion as to his breach of

fiduciary duty claim should be DENIED.

3. Constructive Fraud

36. A claim for constructive fraud requires a plaintiff allege “(1) that the

defendant owes the plaintiff a fiduciary duty; (2) that the defendant breached that duty; and (3) that the defendant sought to [and actually benefited] himself in the

transaction.” Ironman Med. Props., LLC v. Chodri, No. COA18–108, 2019 N.C. App.

LEXIS 969, at *18 (N.C. Ct. App. 2019) (citing Crumley & Assocs., P.C. v. Charles

Peed & Assocs., P.A., 219 N.C. App. 615, 620, 730 S.E.2d 763, 767 (2012)) (quotation

marks omitted). “The primary difference between pleading a claim for constructive

fraud and one for breach of fiduciary duty is the intent and showing that the

defendant benefited from his breach of duty.” Ironman Med. Props., LLC, No.

COA18-108, 2019 N.C. App. LEXIS 969, at *18.

37. As already determined by the Court, Plaintiff has not sufficiently

demonstrated that a relationship of trust and confidence existed at any relevant time

between Plaintiff and Defendant. Therefore, Plaintiff’s Motion as to his constructive

fraud claim should be DENIED.

C. Damages

1. Compensatory Damages

38. Plaintiff alleges that Defendant took $294,500.00 from Plaintiff’s

retirement account without notice to or consent of Plaintiff and deposited the same

in Defendant’s personal bank account. (Compl. ¶¶ 26–29.) The Court concludes that

on the facts deemed admitted, Plaintiff is entitled to recover $294,500.00 in

compensatory damages from Defendant based on Defendant’s breach of contract.

2. Punitive Damages

39. Pursuant to N.C.G.S. § 1D-15

Punitive damages may be awarded only if the claimant proves that the defendant is liable for compensatory damages and that one of the following aggravating factors was present and was related to the injury for which the compensatory damages were awarded:

(1) Fraud.

(2) Malice.

(3) Willful or wanton conduct.

N.C.G.S. § 1D-15(a). “Punitive damages shall not be awarded against a person solely

for breach of contract.” N.C.G.S. § 1D-15(d). “Punitive damages are not allowed even

when the breach is willful, malicious or oppressive.” Cash v. State Farm Mut. Auto.

Ins. Co., 137 N.C. App. 192, 200, 528 S.E.2d 372, 377 (2000). “When the breach of

contract also constitutes or is accompanied by an identifiable tortious act, the tort

committed may be grounds for recovery of punitive damages.” Shore v. Farmer, 351

N.C. 166, 170, 522 S.E.2d 73, 76 (1999).

40. As explained by the Court above, Plaintiff’s claims for breach of fiduciary

duty and constructive fraud fail based on the record before the Court. Plaintiff’s

breach of contract claim alone cannot support his claim for punitive damages.

Therefore, Plaintiff’s request for punitive damages should be DENIED.

3. Attorney’s Fees

41. In the Complaint, Plaintiff separately requests that his attorney’s fees be

taxed against Defendant. “[T]he general rule in North Carolina is that a party may

not recover its attorney’s fees unless authorized by statute.” Martin Architectural

Prods., Inc. v. Meridian Constr. Co., 155 N.C. App. 176, 181, 574 S.E.2d 189, 192

(2002). There is no basis in law alleged or proven that would justify this relief.

Further, there is no evidence before the Court as to the time spent by Plaintiff’s counsel in pursuit of judgment against Defendant. As a result, the request for

attorney’s fees should be DENIED.

IV. CONCLUSION

42. THEREFORE, the Court concludes that:

a. Plaintiff’s Motion for Judgment by Default is GRANTED as to

Plaintiff’s claim for breach of contract and Plaintiff shall have and

recover from Defendant Russell Joseph Mutter the amount of

$294,500.00 in compensatory damages.

b. Plaintiff’s Motion for Judgment by Default is DENIED as to

Plaintiff’s claims for breach of fiduciary duty and constructive fraud.

c. Plaintiff’s request for punitive damages is DENIED.

d. Plaintiff’s request for attorney’s fees is DENIED.

e. The costs of this action incurred by Plaintiff are taxed to Defendant.

SO ORDERED, this the 17th day of December, 2019.

/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases