Zloop, Inc. v. Parker Poe Adams & Bernstein, LLP

2018 NCBC 16

• Court: North Carolina Business Court
• Decided: February 16, 2018
• Docket: 17-CVS-5480
• Status: Published

Opinion

Zloop, Inc. v. Parker Poe Adams & Bernstein, LLP, 2018 NCBC 16.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF MECKLENBURG 17 CVS 5480

ZLOOP, INC.,

Plaintiff,

v. ORDER & OPINION ON DEFENDANTS’ MOTION FOR PARKER POE ADAMS & BERNSTEIN, JUDGMENT ON THE PLEADINGS LLP; ALBA-JUSTINA SECRIST a/k/a PURSUANT TO N.C.R.C.P. 12(c) A-J SECRIST; and R. DOUGLAS HARMON,

Defendants.

1. THIS MATTER is before the Court on Defendants Parker Poe Adams &

Bernstein, LLP, Alba-Justina Secrist, and R. Douglas Harmon’s Motion for Judgment

on the Pleadings Pursuant to N.C.R.C.P. 12(c) (“Motion”). For the reasons discussed

below, the Court GRANTS the Motion.

Rossabi Reardon Klein Spivey PLLC, by Gavin J. Reardon and Amiel J. Rossabi, and Allen & Gooch, by James H. Gibson (pro hac vice) and Charles M. Kreamer (pro hac vice), for Plaintiff Zloop, Inc.

Robinson, Bradshaw & Hinson, P.A., by Robert W. Fuller and Stuart L. Pratt, for Defendants Parker Poe Adams & Bernstein, LLP, Alba-Justina Secrist a/k/a A-J Secrist, and R. Douglas Harmon.

Gale, Chief Judge.

I. INTRODUCTION

2. This case “raises thorny questions relating to the bounds of legitimate

legal advocacy and transgressive participation by attorneys at law in a client’s illegal conduct.” Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d

406, 407 (3d Cir. 2003).

3. Plaintiff Zloop, Inc. (“Zloop”) is a bankrupt electronic-waste-recycling

corporation in the process of liquidation that was formerly managed or owned by

Robert Boston (“Boston”) and Robert LaBarge (“LaBarge”), each of whom allegedly

looted Zloop for personal benefit. Defendants are the law firm Parker Poe Adams &

Bernstein, LLP (“Parker Poe”) and two of its present or former attorneys Alba-Justina

Secrist (“Secrist”) and R. Douglas Harmon (“Harmon”) (collectively, “Defendants”).

In this action, Zloop seeks to recover damages based on claims for: (1) legal

malpractice; (2) breach of Defendants’ fiduciary duties owed to Zloop as its corporate

counsel; and (3) aiding and abetting Boston and LaBarge’s breach of their fiduciary

duties owed to Zloop as its owners, managers, or directors. Zloop is currently

maintaining a separate action against Boston and LaBarge before the United States

District Court for the Western District of Louisiana (“Louisiana Lawsuit”).

4. Defendants move for judgment on the pleadings pursuant to North

Carolina Rule of Civil Procedure 12(c). The Motion rests on two primary contentions:

(1) the common law doctrine of in pari delicto bars any claim for professional

malpractice; and (2) North Carolina does not recognize a claim for aiding and abetting

a breach of fiduciary duty. Defendants contend that Zloop’s amended complaint

(“Amended Complaint”) must be dismissed because Zloop’s own allegations support

each of those two contentions as a matter of law. 5. Assuming solely for purposes of the Motion that all of Zloop’s allegations

are true, the Court concludes that the Motion must be granted and the Amended

Complaint must be dismissed because, as a matter of law: (1) Zloop’s claims for

Defendants’ professional malpractice are barred by the in pari delicto doctrine; (2) no

claim for aiding and abetting breach of fiduciary duty has been recognized in North

Carolina; and (3) even if the North Carolina Supreme Court ultimately recognizes an

aiding and abetting breach of fiduciary claim, Zloop has failed to allege the essential

elements of any such claim.

II. FACTUAL BACKGROUND

6. The Court accepts the following facts and construes them in Zloop’s

favor solely for purposes of ruling on the Motion.

7. Zloop was in the business of recycling electronic waste, including

collecting old “e-waste” (i.e., obsolete computers, televisions, and radios), crushing the

materials, and then harvesting and reselling the copper, plastic, and other usable

byproducts gleaned from the waste. (Am. Compl. ¶ 5, ECF No. 52.) Zloop originally

intended to operate pursuant to a franchise model. (Am. Compl. ¶ 5.)

8. Boston and LaBarge incorporated Zloop as a Delaware limited liability

company (“LLC”) in July 2012. (Am. Compl. ¶¶ 6–8.) In November 2012, LaBarge

filed Zloop’s Application for Certificate of Authority with the North Carolina

Secretary of State, listing himself and Boston as Zloop’s sole managers. (Am. Compl.

¶ 10; Am. Compl. Ex. 3, ECF No. 52.1.) 9. In the fall of 2012, Boston and LaBarge promoted Zloop’s franchise

opportunity and overall potential to Louisiana resident Kendal Mosing (“Mosing”).

Between November 2012 and May 2014, Mosing advanced Zloop a total of

$27,498,179, which was used to purchase franchises, LLC interests, and stock; to

provide loans; and to grant pledges to secure Zloop’s line of credit. (Am. Compl. ¶ 11.)

10. In or before January 2013, Zloop retained the law firm of McGuire

Woods LLP (“McGuireWoods”) as corporate counsel in connection with a potential

securities offering. (Am. Compl. ¶ 14.) McGuireWoods provided Boston and LaBarge

with a draft private placement memorandum (“PPM”), which Boston and LaBarge

substantially edited before distributing to investors. (Am. Compl. ¶¶ 15–16.)

11. In April 2013, Boston and LaBarge altered this PPM (“April PPM”) to

offer convertible debt rather than preferred equity. (Am. Compl. ¶ 17.) Schedule A

of the April PPM shows Zloop’s total capital as $5,100,000, nearly $5,000,000 of which

Mosing had contributed by that time. (Am. Compl. ¶ 18.) The April PPM recites that

Boston and LaBarge each had 6,250,000 voting units in Zloop, LLC, and that Mosing

had 1,200,000 non-voting units. (Am. Compl. ¶ 17.)

12. The April PPM also included an unexecuted operating agreement that

included a provision that Zloop, LLC members would be issued stock proportional to

their LLC interests if Zloop, LLC was converted to a corporation. (Am. Compl. ¶ 18.)

13. In May 2013, Zloop hired Mike Watson (“Watson”) as its CEO. (Am.

Compl. ¶ 28.) 14. On June 10, 2013, McGuireWoods advised Boston and LaBarge that

Zloop had improperly broken the escrow provisions of its securities offering by taking

and spending proceeds before the offering had closed. (Am. Compl. ¶¶ 20, 34.)

McGuireWoods advised that immediate disclosures to investors were necessary, that

Zloop should distribute a revised PPM, and that McGuireWoods would withdraw as

Zloop’s counsel if its advice was not followed. (Am. Compl. ¶¶ 20–21.)

15. Around this same time, Zloop hired Jack Jacobi (“Jacobi”) and Jason

Schubert (“Schubert”) as its COO and CFO, respectively. (Am. Compl. ¶ 28.)

16. Zloop retained Parker Poe on June 19, 2013, and discharged

McGuireWoods the following day. (Am. Compl. ¶¶ 23, 26.) When transmitting its

files to Parker Poe, McGuireWoods cautioned Parker Poe that it should be aware of

McGuireWoods’ most recent advice to Zloop. (Am. Compl. ¶ 27.)

17. On July 10, 2013, Schubert began a review of Zloop’s corporate records

to prepare a revised PPM, and when doing so discovered numerous “red flags,”

including: a $1,300,000 payment for a racing contract for Boston’s son, listed as an

“advertising” expense; a $247,000 payment for private jet service, listed as a

“marketing” expense; and a listing of Boston’s wife and son as employees even though

they provided no services to Zloop. (Am. Compl. ¶¶ 31–32.) Zloop’s capitalization

table, which Schubert reviewed, listed Boston, LaBarge, and their spouses as owning

87% of Zloop’s voting shares even though they had made no investment, as compared

to Mosing owning less than 1% of the non-voting shares even though he had, by that

date, contributed $7,890,000, which sum was reflected in the table as “franchise fees.” (Am. Compl. ¶ 33.) Schubert also discovered, as had McGuireWoods, that Zloop had

broken escrow in connection with its securities offering. (Am. Compl. ¶ 34.)

18. Parker Poe revised the April PPM and delivered it to Boston and

LaBarge on July 12, 2013. The draft did not modify this capitalization table and

made no reference to Zloop having broken escrow. (Am. Compl. ¶ 36.)

19. On July 15, 2013, Watson, Schubert, and Jacobi informed Parker Poe

that they intended to immediately resign their offices unless Boston and LaBarge

gave them management control of Zloop. (Am. Compl. ¶¶ 39–42.) Parker Poe was

advised of the factual basis leading to the demand that Boston and LaBarge

surrender management control. (Am. Compl. ¶ 42.) Parker Poe advised Boston and

LaBarge to refuse the demand, and the three officers then resigned and cautioned

that they should not be referenced as a source for any information to be included in a

PPM. (Am. Compl. ¶¶ 44–46.)

20. On August 28, 2013, Parker Poe advised Zloop to terminate the debt

offering and to provide refunds to those who had already subscribed. (Am. Compl.

¶¶ 50–51.)

21. On September 23, 2013, a Moore & Van Allen attorney representing a

Zloop investor wrote Harmon, expressing concern “regarding the manner in which

Zloop and [Parker Poe] have handled recent events.” (Am. Compl. ¶ 57.)

22. In February 2014, Parker Poe, Boston, and LaBarge discussed the

possibility of converting Zloop from an LLC to a corporation in order to facilitate

Zloop’s repurchase of outstanding franchises. (Am. Compl. ¶ 75.) As a part of its efforts, Parker Poe engaged franchise attorney Eric Newman to provide an opinion

regarding the legality of Zloop’s outstanding franchise agreements. (Am. Compl.

¶ 75.) Mr. Newman concluded that many of Zloop’s franchises had been created in

violation of state and federal law. (Am. Compl. ¶ 75; Am. Compl. Ex. 35, ECF No.

52.4.)

23. On March 26, 2014, Parker Poe acted as counsel in a transaction by

which Zloop converted from an LLC to a corporation, whereby 10,000 shares were

issued to replace the 13,960,000 outstanding LLC units, apportioned as follows

without any additional financial payment: Boston and LaBarge received 4,895 shares

each; Mosing received 100 shares; and three other persons received the remaining

110 shares. (Am. Compl. ¶ 78; Am. Compl. Ex. 41.) Parker Poe did not require any

valuation of Zloop in connection with the transaction. (Am. Compl. ¶ 78.) Secrist

acted as Zloop’s incorporator. Boston and LaBarge were elected as Zloop, Inc.’s only

directors. (Am. Compl. ¶¶ 80–82; Am. Compl. Ex. 41A.)

24. On March 27, 2014, Parker Poe provided Boston and LaBarge with a

PPM that contemplated Zloop’s termination of outstanding franchises in exchange

for cash or Zloop stock. (Am. Compl. ¶¶ 82–83.) This PPM did not disclose the various

facts regarding the earlier break in escrow, any opinion regarding the illegality of the

outstanding franchises, or the misconduct reported by the officers who had earlier

resigned. (Am. Compl. ¶¶ 82–83.) 25. At least by May 29, 2014, Parker Poe had become aware that Mosing

had accused Zloop of misusing its $14,000,000 line of credit that Mosing had secured.

(Am. Compl. ¶ 93.)

26. On June 26, 2014, Parker Poe arranged for a “friends and family”

offering, whereby Boston and LaBarge offered to sell their Zloop stock to family and

close friends. (Am. Compl. ¶ 97.)

27. At some point, Mosing discovered that Boston and LaBarge had

fabricated a UCC-1 financing statement that Mosing had relied on to perfect his

security interest in some of Zloop’s North Carolina property. (Am. Compl. ¶ 100.)

28. On August 28, 2014, Mosing initiated the Louisiana Lawsuit, naming

Boston, LaBarge, and Zloop as defendants. (Am. Compl. ¶¶ 100–02.)

29. In February 2015, Parker Poe ceased representing Zloop. (Am. Compl.

¶ 108.)

30. On August 10, 2015, Zloop filed for bankruptcy in Delaware. Ultimately,

the bankruptcy proceeding developed evidence that: Boston purchased six personal

vehicles with Zloop funds; LaBarge purchased three personal vehicles with Zloop

funds; Boston and LaBarge took personal advances of at least $2,763,504; Boston

spent at least $4,648,103.59 of Zloop funds to benefit the racing career of his son,

Justin; Boston and LaBarge purchased a personal airplane using Zloop funds; Boston

and LaBarge purchased a property in Hickory, North Carolina using Zloop funds but

without giving title to Zloop; and Zloop assets were sold to pay for millions of dollars

of Zloop’s bankruptcy professional expenses. (Am. Compl. ¶¶ 108, 111.) 31. The Delaware bankruptcy court approved a chapter 11 liquidation plan,

which granted Mosing an unsecured claim of $40,000,000. (Am. Compl. ¶112.)

32. A review of the record in the Louisiana Lawsuit reveals that on

December 20, 2016, Mosing caused Zloop to be realigned from a defendant to a

plaintiff. (Defs.’ First Am. Answer Ex. A, Second Am. Supp. Restated Compl. ¶ 2,

ECF No. 34 (“LA Am. Compl.”).) Zloop then filed an amended complaint in that action

on March 29, 2017 (“Louisiana Amended Complaint”).

33. The Court has become aware that LaBarge pleaded guilty to conspiracy

to commit wire fraud on November 2, 2017, and that a federal jury convicted Boston

of conspiracy, wire fraud, securities fraud, and money laundering on December 8,

2017. U.S. v. Boston, Docket No. 3:17-CR-00114-RJC-DSC, ECF Nos. 41, 44, 71.

III. PROCEDURAL BACKGROUND

34. Zloop filed its initial complaint in this action in the Mecklenburg County

Superior Court on April 17, 2017.

35. On April 24, 2017, Defendants filed a Notice of Designation as

Mandatory Complex Business Case under N.C. Gen. Stat. §7A-45.4(a). The case was

so designated by the Chief Justice and assigned to the undersigned that same day.

36. On June 26, 2017, Defendants filed their answer and the Motion.

37. The Court calendared the Motion for hearing on September 8, 2017.

38. On September 7, 2017, Zloop moved for leave to file an amended

complaint and provided Defendants’ counsel with the proposed amended complaint. 39. On September 8, 2017, the Court held the hearing as noticed, based on

its understanding from counsel that the allegations in the proposed amended

complaint added additional factual allegations but did not substantively add to or

change the causes of action asserted in the initial complaint or alter the bases on

which Defendants had moved to dismiss the action. The parties agreed that the

Motion, briefing, and argument could be deemed to have been made in response to

the proposed amended complaint if the Court elected to grant leave to file it. (Hearing

Tr. 7:7–22, Sept. 8, 2017.)

40. On September 11, 2017, with Defendants’ consent, the Court granted

Zloop’s motion for leave to amend, and Zloop filed the Amended Complaint on

September 25, 2017, which Defendants answered on September 29, 2017.

41. As agreed by the parties, the Court treats the Motion as having been

presented, briefed, and argued in connection with the Amended Complaint and

Defendants’ answer.

42. The Motion is ripe for resolution.

IV. STANDARD OF REVIEW

43. Judgment on the pleadings is “appropriate when all the material

allegations of fact are admitted in the pleadings and only questions of law remain.

Judgments on the pleadings are disfavored in law, and the trial court must view the

facts and permissible inferences in the light most favorable to the non-moving party.”

Shehan v. Gaston Cty., 190 N.C. App. 803, 806, 661 S.E.2d 300, 303 (2008) (quoting

Carpenter v. Carpenter, 189 N.C. App. 755, 757, 659 S.E.2d 762, 765 (2008)). Courts should grant 12(c) motions only when a plaintiff has either failed to allege facts

necessary to support a cause of action or has pleaded facts which defeat that claim.

Robertson v. Boyd, 88 N.C. App. 437, 440, 363 S.E.2d 672, 675 (1988). The Court does

not make findings of fact in ruling upon a 12(c) motion and, in considering the motion,

assumes the truth of the nonmovant’s factual averments. Ragsdale v. Kennedy, 286

N.C. 130, 137, 209 S.E.2d 494, 499 (1974).

44. As a general proposition, “[i]n deciding a motion for judgment on the

pleadings, the trial court looks solely to the pleadings” in the action at bar, Reese v.

Mecklenburg Cty., 204 N.C. App. 410, 421, 694 S.E.2d 453, 461 (2010) (citing Wilson

v. Crab Orchard Dev. Co., 276 N.C. 198, 206, 171 S.E.2d 873, 878 (1970)), and

considers only facts that have been properly pleaded and documents that are attached

to, referred to, or incorporated by the pleadings. Wilson, 276 N.C. at 206, 171 S.E.2d

at 878–79; see, e.g., Holcomb v. Landquest Ltd. Liab. Co., No. 16 CVS 10147, 2017

NCBC LEXIS 36 at *9–10 (N.C. Super. Ct. Apr. 21, 2017) (holding that the Court may

consider a complaint filed in an earlier case if it was filed in the same court and

referred to in the current complaint). A court may also consider documents that

memorialize events to which the complaint makes “clear reference,” Reese v.

Charlotte-Mecklenburg Bd. of Educ., 196 N.C. App. 539, 546, 676 S.E.2d 481, 486

(2009), documents upon which the plaintiff is suing, even if the documents are not

included in the complaint, Coley v. N.C. Nat’l Bank, 41 N.C. App. 121, 126, 254 S.E.2d

217, 220 (1979), and allegations or exhibits presented by the movant’s own pleadings

if the nonmovant has admitted the truth of allegations or the authenticity of the documents. See Horne v. Town of Blowing Rock, 223 N.C. App. 26, 30, 732 S.E.2d

614, 617 (2012); Reese, 196 N.C. App. at 561, 676 S.E.2d at 496; Weaver v. Saint

Joseph of the Pines, Inc., 187 N.C. App. 198, 204–05, 652 S.E.2d 701, 708 (2007).

45. Additionally, a court may properly consider matters of which it may take

judicial notice without converting a Rule 12(c) motion to one for summary judgment.

See Tellabs, Inc., v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (noting that

courts may take judicial notice on a 12(b)(6) motion without converting the proceeding

to one for summary judgment); N.C. State Bar v. Lienguard, Inc., No. 11 CVS 7288,

2014 NCBC LEXIS 11, at *5 (N.C. Super. Ct. Apr. 4, 2014) (taking judicial notice on

a Rule 12(c) motion). A judicially noticeable fact is one that is “(1) generally known

within the territorial jurisdiction of the trial court or (2) capable of accurate and ready

determination by resort to sources whose accuracy cannot reasonably be questioned.”

N.C. Gen. Stat. § 8C-1, Rule 201(b) (2015); see also Smith v. Beaufort Cty. Hosp. Ass’n,

141 N.C. App. 203, 211, 540 S.E.2d 775, 780 (2000).

46. Courts may in their discretion take judicial notice of court filings made

in other jurisdictions. Muteff v. Invacare Corp., 218 N.C. App. 558, 569, 721 S.E.2d

379, 387 (2012) (citing West v. G.D. Reddick, Inc., 302 N.C. 201, 203, 274 S.E.2d 221,

223 (1981)) (holding that the trial court did not err in judicially noticing a certain

Texas Supreme Court opinion because the opinion was “capable of demonstration by

readily accessible sources of indisputable accuracy”); see also, e.g., Indep. Tr. Corp. v.

Stewart Info. Servs. Corp., 665 F.3d 930, 943 (7th Cir. 2012) (noting with approval

that the district court, in a 12(b)(6) proceeding, had judicially noticed “the indisputable facts that those documents [filed in other jurisdictions] exist, they say

what they say, and they have had legal consequences”); Rothman v. Gregor, 220 F.3d

81, 91–92 (2d Cir. 2000) (reviewing a trial court’s dismissal under 12(b)(6) and taking

judicial notice—as a public record—of a complaint filed by one of the parties in a

different jurisdiction when neither party contested the accuracy of the extrinsic

complaint); In re FedEx Ground Package Sys., 2010 U.S. Dist. LEXIS 30303, at *10

(N.D. Ind. Mar. 29, 2010) (citing Gen. Elec. Capital v. Lease Resolution, 128 F.3d 1074,

1081 (7th Cir. 1997)) (“Court documents from another case may be used to show that

the document was filed, that [a] party took a certain position, and that certain judicial

findings, allegations or admissions were made.”) (emphasis added).

V. ANALYSIS

A. North Carolina Law Governs Zloop’s Claims.

47. Zloop’s claims directly against Boston and LaBarge in the Louisiana

Lawsuit are likely governed by Delaware law pursuant to the internal affairs

doctrine. See Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680–81, 657 S.E.2d 55, 63

(2008) (affirming a trial court’s application of the internal affairs doctrine to

determine that New York law governed a derivative claim against a New York

corporation). In contrast, Zloop’s claims against Defendants are more properly

resolved pursuant to North Carolina law. See Harco Nat’l. Ins. Co. v. Grant Thornton

LLP, 206 N.C. App. 687, 692, 698 S.E.2d 719, 722 (2010) (quoting Boudreau v.

Baughman, 322 N.C. 331, 335, 368 S.E.2d 849, 853–54 (1988) (holding that in

general, “matters affecting the substantial rights of the parties are determined by lex loci, the law of the situs of the claim . . . . For actions sounding in tort, the state where

the injury occurred is considered the situs of the claim.”); Islet Scis., Inc. v.

Brighthaven Ventures, LLC, No. 15 CVS 16388, 2017 NCBC LEXIS 4, at *12 (N.C.

Super. Ct. Jan. 12, 2017) (citing Harco, 206 N.C. App. at 692, 698 S.E.2d at 722–23)

(“North Carolina’s choice of law principles applicable to claims affecting the

substantial rights of the parties, such as torts, should be applied to . . . aiding and

abetting claim[s].”). Here, because Zloop alleges that Defendants’ acts were

performed in or directed from Defendants’ Charlotte, North Carolina office, (Am.

Compl. ¶ 2), North Carolina law governs the Motion. However, as will be evident

from the Court’s discussion below, the choice of law is not determinative, for the

Motion’s outcome would be the same whether Delaware or North Carolina law

applied.

B. An In Pari Delicto Defense is Available Regarding Zloop’s Legal Malpractice and Breach of Fiduciary Duty Claims.

(1) North Carolina courts have adopted the in pari delicto doctrine.

48. North Carolina courts “have long recognized the in pari delicto doctrine,

which prevents the courts from redistributing losses among wrongdoers.” Whiteheart

v. Waller, 199 N.C. App. 281, 285, 681 S.E.2d 419, 422 (2009). The defense operates

to bar a plaintiff’s claims when the plaintiff is at least equally at fault with the

defendant and the allegedly wrongful conduct complained of is the subject of the

lawsuit. See, e.g., Freedman v. Payne, 784 S.E.2d 644, 649 (N.C. App. 2016); Byers v.

Byers, 223 N.C. 85, 90, 25 S.E.2d 466, 469–70 (1943) (“The law generally forbids redress to one for an injury done him by another, if he himself first be in the wrong

about the same matter whereof he complains.”).

(2) Whether a fiduciary’s wrongs will be imputed to his principal in order to apply the in pari delicto doctrine is ultimately a question of agency.

49. Imputation of wrongdoing is not necessary to apply the in pari delicto

doctrine when the plaintiff is himself the wrongdoer. See, e.g., Byers, 223 N.C. at 90,

25 S.E.2d at 470 (plaintiff-husband denied divorce decree based on a condition he

wrongfully created). However, in an action by a corporation, the in pari delicto

doctrine may be used to bar the corporation’s claims only where the acts of its owners

or agents are imputed to the corporation through the laws of agency. See Kirschner

v. KPMG LLP, 938 N.E.2d 941, 950 (N.Y. 2010). The question of whether misconduct

will be imputed becomes more complex when the agent acts primarily for personal

benefit, but also under color of corporate authority and in a manner that benefits the

corporation in some way.

50. The facts of this case fall between two well-established agency

principles. On one hand, a principal is generally bound by the knowledge and acts of

its agent when the agent clearly acts within the scope of his authority to conduct the

principal’s business. Curtis, Collins & Holbrook Co. v. United States, 262 U.S. 215,

222 (1923) (imputing to a corporation knowledge that its vice president had

fraudulently obtained patents on its behalf); see also Sparks v. Union Tr. Co., 256

N.C. 478, 482, 124 S.E.2d 365, 368 (1962) (describing “the general rule that

knowledge of the agent is imputed to the principal”); Stewart v. Wilmington Tr. SP Servs., Inc., 112 A.3d 271, 302–03 (Del. Ch. 2015), aff’d, 126 A.3d 1115 (Del. 2015) (“A

basic tenet of corporate law, derived from principles of agency law, is that the

knowledge and actions of the corporation’s officers and directors, acting within the

scope of their authority, are imputed to the corporation itself.”). On the other hand,

a corporation is generally presumed not to have knowledge of or be liable for the

actions of an agent who entirely abandons the corporation’s interests and acts wholly

outside the scope of the agent’s authority for her personal benefit. Sparks, 256 N.C.

at 482, 124 S.E.2d at 368. This latter rule is summarized as follows:

[w]here the conduct of the agent is such as to raise a clear presumption that he would not communicate to the principal the facts in controversy, or where the agent, acting nominally as such, is in reality acting in his own business or for his own personal interest and adversely to the principal, or has a motive in concealing the facts from the principal, this [imputation] rule does not apply.

Id. (quoting Fed. Res. Bank v. Duffy, 210 N.C. 598, 603, 188 S.E. 82, 84 (1936)).

51. Other courts have referred to this agency rule as the “adverse interest”

exception, meaning that acts of an agent taken for personal benefit, outside the scope

of agency, and adverse to the principal’s interest will not be imputed. See, e.g.,

Kirschner, 938 N.E.2d at 950–51. North Carolina courts have not adopted the

exception by name, but have applied the underlying reasoning. See Sledge Lumber

Corp. v. S. Builders Equip. Co., 257 N.C. 435, 439, 126 S.E.2d 97, 100 (1962) (quoting

Brite v. Penny, 157 N.C. 110, 114, 72 S.E.2d 964, 965 (1911)) (“[A] corporation is not

bound by the action or chargeable with the knowledge of its officers or agents in

respect to a transaction in which such officer or agent is acting in his own behalf, and

does not act in any official or representative capacity for the corporation.”) (emphasis added); see also Wilson Lumber & Milling Co. v. Atkinson, 162 N.C. 298, 305, 78

S.E.2d 212, 215 (1913) (“[I]f the agent is engaged in perpetrating an independent

fraud on his own account, knowledge of facts relating to the fraud will not be imputed

to the principal.”) (emphasis added); Bank of Proctorville v. West, 184 N.C. 220, 223,

114 S.E.2d 178, 180 (1922) (“[T]he [imputation] rule fails . . . where the agent is

engaged in the transaction in which he is interested adversely to his principal, or is

engaged in a scheme to defraud the latter.”) (emphasis added); Tillery Envtl. LLC v.

A&D Holdings, Inc., No. 17 CVS 6525, 2018 NCBC LEXIS 13, at *29 (N.C. Super. Ct.

Feb. 8, 2018) (quoting Norburn v. Mackie, 262 N.C. 16, 23, 136 S.E.2d 279, 284–85

(1964)) (“A principal is generally ‘responsible to third parties for injuries resulting

from the fraud of his agent committed during the existence of the agency and within

the scope of the agent’s actual or apparent authority from the principal.’”) (emphasis

added).

52. Here, the Court is required to determine whether Boston’s and

LaBarge’s acts will be imputed to Zloop where their acts, although primarily for

personal benefit, were taken under the color of their authority to act for Zloop and

Zloop received at least some incidental benefit from their wrongs.

(3) The North Carolina Court of Appeals’ decision in CommScope is neither controlling nor persuasive precedent.

53. The North Carolina Court of Appeals considered the application of in

pari delicto in the context of professional malpractice claims asserted by a corporation

against its accounting firm. CommScope Credit Union v. Butler & Burke, LLP, 237

N.C. App. 101, 103, 764 S.E.2d 642, 646 (2014), aff’d in part, rev’d in part, 369 N.C. 48, 790 S.E.2d 657 (2016). In CommScope, the IRS required the credit union to pay

a significant tax deficiency and assessment after the credit union’s general manager

failed to file various forms that would have avoided taxation and the accounting firm

did not discover the failure. Id. at 102, 764 S.E.2d at 645–46. The credit union

asserted claims against its accounting firm for professional malpractice, negligence,

and breach of fiduciary trust. Id. at 103, 764 S.E.2d at 646. The accounting firm

asserted an in pari delicto defense based on the credit union’s general manager’s

negligence. Id. The trial court granted Rule 12(b)(6) and 12(c) motions based on the

defense. Id. The Court of Appeals reversed. Id.

54. The Court of Appeals held, as a matter of law, that the general

manager’s acts could not be imputed to the credit union. Id. at 108–09, 764 S.E.2d at

649–50. It premised its holding on two determinations: first, that there was no basis

to conclude that the general manager was acting within the scope of his employment

when he failed to file tax returns because, in so failing, he did not advance the credit

union’s interests in any way; and second, that the complaint did not allege that the

general manager’s actions constituted wrongs that were at least equal to the

defendant-accounting firm’s own wrongs in failing to implement proper auditing

procedures. Id.

55. On discretionary review, the Supreme Court of North Carolina accepted

the case to determine whether the accounting firm had a fiduciary duty and whether

the claims against it were barred by the in pari delicto doctrine. It then affirmed in

part and reversed in part. CommScope, 369 N.C. at 51, 790 S.E.2d at 659. The Supreme Court justices were equally divided on whether the in pari delicto defense

barred the claim, thus leaving the Court of Appeals’ holding regarding in pari delicto

“undisturbed” but standing “without precedential value.” Id. at 58, 790 S.E.2d at 663.

56. Zloop, however, argues that the Court of Appeals’ holding in CommScope

doctrine is binding and dispositive as to the application of the in pari delicto doctrine

in this case. Zloop erroneously relies on In re Appeal from Civil Penalty Assessed for

Violations of Sedimentation Pollution Control Act etc., 324 N.C. 373, 384, 379 S.E.2d

30, 37 (1989), which held that “[w]here a panel of the Court of Appeals has decided

the same issue, albeit in a different case, a subsequent panel of the same court is

bound by that precedent, unless it has been overturned by a higher court.” Id. A

different rule governs Court of Appeals decisions affirmed by an evenly-divided

Supreme Court. See, e.g., Hardin v. KCS Int’l, Inc., 199 N.C. App. 687, 694, 682

S.E.2d 726, 732 (2009) (holding that Currituck Assocs. Residential P’ship v. Hollowell,

166 N.C. App. 12, S.E.2d 256, aff’d per curiam by an equally divided court, 360 N.C.

160, 622 S.E.2d 493 (2005), was not controlling); Daniels v. Durham Cty. Hosp. Corp.,

171 N.C. App. 535, 540–41, 615 S.E.2d 60, 64 (2005) (rejecting the decision

in Campbell v. Pitt Cty. Mem’l Hosp., Inc., 84 N.C. App. 314, 352 S.E.2d 902

(1987), aff’d by an equally divided supreme court, 321 N.C. 260, 362 S.E.2d 273 (1987),

because “the North Carolina Supreme Court was evenly divided and accordingly

affirmed the Campbell opinion, but stripped it of precedential value”); Elliot v. N.C.

Dep’t of Human Res., 115 N.C. App. 613, 620, 446 S.E.2d 809, 813 (1994) (noting that

the court must “analyze this question without regard to this Court’s decision in Kempson [v. N.C. Dep’t of Human Res., 100 N.C. App. 482, 397 S.E.2d 314 (1990), aff’d

by an equally divided Supreme Court, 328 N.C. 722, 403 S.E.2d 279 (1991)]” because

Kempson stood without precedential value), aff’d per curiam, 341 N.C 191, 459 S.E.2d

273 (1995); Blitz v. Xpress Image, Inc., No. 05 CVS 679, 2006 NCBC LEXIS 12, at *26

n.12 (N.C. Super. Ct. Aug. 23, 2006) (“Because Pitts was affirmed by [an] equally

divided Supreme Court, it stands without precedential value. After considering the

analysis in Pitts, the Court declines to adopt its conclusion.”). Under this rule, the

Court of Appeals’ CommScope holding regarding in pari delicto is not binding

precedent.

57. Although it is not binding, the Court has further considered whether the

Court of Appeals’ CommScope holding regarding in pari delicto is persuasive

authority. Cf. Lord v. Beerman, 191 N.C. App. 290, 296 n.3, 664 S.E.2d 331, 336

(2008) (holding that a case cited by a party, which had been affirmed by an evenly

divided Supreme Court, “may be persuasive authority in this case”). The Court

concludes that there are several factual distinctions that make the CommScope

opinion of little relevance. First, the Amended Complaint reveals that Zloop enjoyed

at least some benefit from Boston’s and LaBarge’s wrongful conduct, whereas

CommScope received no benefit from its agent’s failure to act. Second, the Amended

Complaint reveals substantially more aggravated wrongful conduct by Boston and

LaBarge than was at issue in CommScope, where it was clear that the Court of

Appeals was persuaded that the auditing firm’s malfeasance far outweighed the

agent’s failure to file tax forms. Commscope, 237 N.C. App. at 108, 764 S.E.2d at 649 (“[N]othing in Plaintiff’s complaint establishes that [the agent]’s failure to file the tax

forms was an example of intentional wrongdoing, as opposed to negligence, or for that

matter, that [the agent]’s alleged failure was not excusable conduct.”).

(4) An agent’s wrongful acts, even when taken primarily for personal benefit, will be imputed to the corporation when they yield some benefit to the corporation.

58. There is then no controlling North Carolina precedent teaching whether

the in pari delicto doctrine bars a corporation’s claims against its professional services

providers when such claims are based on the corporation’s agent’s intentional,

wrongful conduct that, while motivated by personal gain, nevertheless benefited the

corporation in some way and is at least equal to the conduct charged against the

professional services provider. In the absence of such precedent, the Court

appropriately considers decisions from other jurisdictions, particularly Delaware.

White v. Hyde, No. 16 CVS 1330, 2016 NCBC LEXIS 74, at *15 (N.C. Super. Ct. Oct.

4, 2016) (“Absent guidance from the North Carolina appellate courts, this Court may

look to, but is not controlled by, Delaware law.”); First Union Corp. v. Suntrust Banks,

Inc., Nos. 1 CVS 100075, 4486, 8036, 2001 NCBC LEXIS 7, at *31 (N.C. Super. Ct.

Aug. 10, 2001) (“North Carolina courts have frequently looked to Delaware for

guidance because of the special expertise and body of case law developed in the

Delaware Chancery Court and the Delaware Supreme Court.”). It is particularly

appropriate here to consider Delaware law as Zloop is incorporated in Delaware.

(Am. Compl. ¶ 8.) 59. Delaware recognizes but then narrowly applies the adverse interest

exception and will impute an agent’s wrongful, self-serving conduct to the corporation

so long as even a minor, incidental, or illusory benefit flows to the corporation from

those wrongful acts. Vice Chancellor Parsons’ opinion in Stewart v. Wilmington Trust

SP Services, Inc., illustrates how the Delaware Chancery Court applies the exception.

112 A.3d 271 (Del. Ch. Mar. 26, 2015), aff’d, 126 A.3d 1115 (Del. Nov. 2, 2015). In

Stewart, the receiver for insurance companies that had been defrauded by their

controlling owner brought breach-of-contract, negligence, and aiding and abetting

breach of fiduciary duty claims against its auditors for their failure to timely discover

and mitigate the owner’s pervasive fraud. Id. at 282–89. Even though Vice

Chancellor Parsons assumed that the owner had siphoned off funds for purely

personal use, he found that the owner’s bad acts should still be imputed to the

companies because the owner’s acts provided some benefits to them, even if

temporary and ultimately illusory. Id. at 310–11 (noting that the owner’s

“machinations,” including fraudulently obtaining the companies’ authorization as

Delaware-domiciled insurers, improved, “if only for a time,” the companies’ position).

Accordingly, Vice Chancellor Parsons upheld the in pari delicto defense.

60. In allowing the defense, Vice Chancellor Parsons explained that “[where

a high-level officer or director also solely owns or otherwise dominates the

corporation, the principal-agent distinction virtually disappears.” Id. at 311. Stated

otherwise, the “adverse interest exception will not aid an agent-principal who does

wrong by protecting the corporation he controls from the effect of in pari delicto.” Id. 61. New York likewise follows the rule that an agent’s wrongful acts are

imputed to the corporate principal unless the agent totally abandons the principal’s

interest and provides no benefit to the corporation. Kirschner, 938 N.E.2d at 952.

Other courts recognize this rule, but condition its application in some circumstances.

For example, Pennsylvania allows a professional services firm to pursue an in pari

delicto defense only if it demonstrates that it dealt with the corporation’s wrongdoing

agent in good faith. Official Comm. Unsecured Creditors Allegheny Health Educ. &

Research Found. v. PricewaterhouseCoopers, LLP, 989 A.2d 313, 335 (2010). New

Jersey bars the in pari delicto defense by a professional services firm that “is

negligent within the scope of its engagement.” NCP Litig. Tr. v. KPMG LLP, 901

A.2d 871, 889 (2006).

62. The Court concludes that, on the facts of this case, the North Carolina

Supreme Court would adopt the Delaware and New York approach and impute to a

corporation the acts of its agents when the agents’ acts are taken under color of

authority and at least marginally benefit the corporation. Boston’s and LaBarge’s

acts should then be imputed to Zloop so long as their conduct occurred in their

corporate capacities and benefitted Zloop.

63. Zloop’s own allegations in the Amended Complaint demonstrate that

(1) Boston and LaBarge acted as Zloop’s owners or directors when engaging in their

misconduct, (Am. Compl. ¶ 96 (Boston and LaBarge committed “fraudulent acts in

their operation of Zloop and dealings with investors”) (emphasis added)), and (2) that

Zloop received at least some benefit from the wrongful conduct, particularly in Boston and LaBarge’s raising funds for Zloop’s operation. (See e.g., Am. Compl. ¶¶ 11, 83

(Boston and LaBarge’s fraud allowed Zloop to temporarily remain in business and

obtain franchises and lines of credit).) As such, Boston’s and LaBarge’s acts are

imputed to Zloop as a matter of law.

C. In Pari Delicto Bars Zloop’s Legal Malpractice and Breach of Fiduciary Duty Claims.

64. For purposes of the Motion, the Court accepts as true Zloop’s allegations

that Defendants committed professional malpractice. The Court must determine

whether claims based on that malpractice are barred by the doctrine of in pari delicto.

(1) Claims grounded on Defendants’ duties as corporate counsel are subject to the in pari delicto doctrine.

65. Professional negligence claims are subject to a defense grounded on the

in pari delicto doctrine. Whiteheart, 199 N.C. App. at 287, 681 S.E.2d at 423.

Although couched as a fiduciary duty claim, Zloop’s claim for Defendants’ professional

malpractice is to be treated as a negligence claim. Heath v. Craighill, Rendleman,

Ingle & Blythe, P.A., 97 N.C. App. 236, 244, 388 S.E.2d 178, 183 (1990) (“Breach of

fiduciary duty is a species of negligence or professional malpractice.”). Zloop’s claims

for Defendants’ professional malpractice are then subject to an in pari delicto defense

whether pleaded as a negligence claim or a breach of fiduciary duty claim.

(2) Zloop’s allegations render the in pari delicto defense complete against its professional malpractice claims as a matter of law.

66. In addition to concluding that Boston’s and LaBarge’s conduct must be

imputed to Zloop, before applying the in pari delicto doctrine, the Court must also be

satisfied that their conduct is at least equal to the wrongs asserted against Defendants. See Freedman, 784 S.E.2d at 649. That is an easy conclusion to reach

based on Zloop’s own allegations, which unequivocally demonstrate that Boston’s and

LaBarge’s intentional and criminal conduct was at least equal to, if not substantially

more egregious, than Defendants’ alleged misconduct, which is based in negligence

rather than in knowing and intentional misconduct or fraud. (See, e.g., Am. Compl.

¶¶ 83(c), (y), 96, 102, 104, 111.) Accordingly, the Court concludes that Zloop’s own

pleading demonstrates that Zloop’s legal malpractice and breach of fiduciary duty

claims are barred by the in pari delicto doctrine as a matter of law.

(3) No Public Policy Overrides the Defense.

67. Zloop seeks to avoid the in pari delicto defense by claiming that applying

the doctrine here would be inconsistent with the policies on which the doctrine is

based. (See Pl’s. Br. Opp. Defs.’ Mot. J. Pleadings 22, ECF No. 48 (“Equity and public

policy support giving victims redress against all those who contributed to their

injuries.”).)

68. The in pari delicto doctrine has been broadly recognized as promoting

two primary policies: deterring wrongful conduct by refusing wrongdoers any legal or

equitable relief, and protecting against the misuse of judicial resources. Bateman

Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985). Courts have

occasionally referenced other policies, such as: (1) providing proper incentives for

corporations to police their own conduct, Kirschner, 938 N.E.2d at 951–52

(“[I]mputation fosters an incentive for a principal to select honest agents and delegate

duties with care.”); (2) maintaining the integrity of the corporate form, Stewart, 112 A.3d at 303 (quoting In re Am. Int’l Grp., Inc., Consol. Derivative Litig., 976 A.2d 872,

893 (2009)) (“Though at [a] superficial level it may appear harsh to hold an “innocent”

corporation (and, ultimately, its stockholders) to answer for the bad acts of its agents,

such ‘corporate liability is essential to the continued tolerance of the corporate form,

as any other result would lack integrity.’”); (3) not giving corporations rights which

natural persons do not have, In re Am. Int’l Group, Consol. Derivative Litig., 976 A.2d

at 893. (“[T]he operative point is that [not allowing an in pari delicto defense in this

case] would allow corporations to sue their own co-conspirators for actions that were

undertaken, at least in part, for the corporation’s own interest, giving corporations

rights that natural persons do not have.”); and (4) giving deference to federal

statutory schemes that rely on private rights of action for enforcement. See, e.g.,

Pinter v. Dahl, 486 U.S. 622, 633 (1988) (noting that “broad judge-made law”

including in pari delicto should not “undermine the congressional policy favoring

private suits as an important mode of enforcing federal securities actions”); Perma

Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134, 140 (1968) (refusing to apply in

pari delicto in antitrust cases).

69. The Court believes the following admonition of our Supreme Court

dispenses with the policy arguments:

[t]he allegations of the complaint are discreditable to both parties. They blacken the character of the plaintiff as well as soil the reputation of the defendant. As between them, the law refuses to lend a helping hand. The policy of the civil courts is not to paddle in muddy water, but to remit the parties, when in pari delicto, to their own folly. So, in the instant case, the plaintiff must fail in his suit.

Bean v. Home Detective Co., 206 N.C. 125, 126, 173 S.E. 5, 6 (1934). 70. In sum, the Court concludes that in pari delicto bars Zloop’s claims for

Defendants’ alleged professional malpractice. The Court now turns to whether

Zloop’s claim for Defendants’ aiding and abetting Boston and LaBarge’s breaches of

fiduciary duty must also be dismissed.

D. Zloop’s Aiding and Abetting Breach of Fiduciary Duty Claim must also be Dismissed.

(1) An aiding and abetting breach of fiduciary duty claim does not exist in North Carolina until it is recognized by North Carolina appellate courts.

71. It is axiomatic that Zloop’s aiding and abetting breach of fiduciary duty

claim must be dismissed if the cause of action is not recognized in North Carolina.

The Court now concludes that on appeal the North Carolina Supreme Court will hold

that North Carolina does not recognize a claim of aiding and abetting breach of

fiduciary duty. Alternatively, for the reasons discussed below, the Court further finds

that, should the North Carolina Supreme Court recognize such a claim, Zloop’s

Amended Complaint nevertheless fails because Zloop has not, as a matter of law,

alleged the essential elements of any such claim.

72. This Court has in earlier opinions noted the uncertainty regarding

whether North Carolina recognizes an aiding and abetting breach of fiduciary duty

claim. Tong v. Dunn, No. 11 CVS 1522, 2012 NCBC LEXIS 16, at *12 (quoting

Battleground Veterinary Hosp., P.C. v. McGeough, No. 05 CVS 18918, 2007 NCBC

LEXIS 33 at *17 (N.C. Super. Ct. Oct. 19, 2007)) (“Without a definitive recent

statement from our appellate courts, ‘[i]t remains an open question whether North

Carolina law recognizes’ the claim.”) (alteration in original); see also Islet Scis., Inc., 2017 NCBC LEXIS 4, at *14 (“North Carolina’s appellate courts have not, to-date,

expressly recognized a cause of action for aiding and abetting breach of fiduciary

duty.”). Federal courts in North Carolina have approached the claim differently. In

Laws v. Priority Trustee Services. of N.C., L.L.C., 610 F. Supp. 2d 528, 532 (W.D.N.C.

2009), the court observed that “the Supreme Court of North Carolina has never

recognized [a cause of action for aiding and abetting breach of fiduciary duty].”

Another decision from the Western District dismissed a claim against an attorney

who allegedly personally promoted a Ponzi scheme to investors because “North

Carolina does not recognize [an aiding and abetting breach of fiduciary duty] claim.”

Bell v. Kaplan, No. 3:14CV352, 2016 U.S. Dist. LEXIS 24408, at *15 (W.D.N.C. Feb.

29, 2016). In contrast, a decision from the bankruptcy court in the Middle District

concluded that “North Carolina law recognizes a cause of action for aiding and

abetting breach of fiduciary duty.” Moseley v. Arth, Case No. 2003 Bankr. LEXIS

1437, at *49 (Bankr. M.D.N.C. 2003).

73. The Court now concludes and holds that North Carolina does not

recognize a claim of aiding and abetting breach of fiduciary duty. Accordingly, Zloop’s

aiding-and-abetting claim must be dismissed.

74. The following analysis supports the Court’s alternative holding that

Zloop has failed, as a matter of law, to allege the essential elements of any aiding and

abetting breach of fiduciary duty claim that may be recognized in North Carolina. (2) The Court need not address the question of whether any aiding and abetting breach of fiduciary duty claim is subject to the in pari delicto doctrine.

75. Zloop alleges that the breaches of fiduciary duty from which its aiding-

and-abetting claim derives arise from Boston and LaBarge’s duties as Zloop’s owners,

managers, or directors. Generally, the in pari delicto doctrine is not applied to bar a

claim by a corporation against its own wrongdoing agents. See, e.g., In re Am. Int’l

Grp., Inc., Consol. Derivative Litig., 976 A.2d at 890 (noting that public policy is best

served by not applying in pari delicto in suits brought by corporations against their

own insiders and agents). Some have referred to this rule of law as the “fiduciary

duty exception” to in pari delicto. Stewart, 112 A.3d at 304; see also In re HealthSouth

Corp. S’holders Litig., 845 A.2d 1096, 1107 (Del. Ch. 2003) (noting that “because

corporations must act through living fiduciaries . . . the application of the in pari

delicto doctrine has been rejected in situations when corporate fiduciaries seek to

avoid responsibility for their own conduct vis-a-vis their corporations” and concluding

that a contrary holding would be “transparently silly”).

76. It is less clear whether the in pari delicto doctrine would apply to a

corporation’s claim against those who aided that breach. Delaware apparently would

not recognize an in pari delicto defense to at least certain aiding-and-abetting claims

in that context. Stewart, 112 A.3d at 318–20. In allowing an aiding-and-abetting

claim against auditors to proceed even when professional malpractice claims were

rejected, Vice Chancellor Parsons determined that the in pari delicto doctrine should

not bar aiding-and-abetting claims against an auditor that enjoyed a special relationship with the companies that would have allowed it to discover and mitigate

the agent’s wrongdoing. Stewart, 112 A.3d at 318–20.

77. If the in pari delicto doctrine applies to Zloop’s aiding-and-abetting

claim, the defense is complete and the claims are barred by that doctrine as a matter

of law for the same reasons the doctrine bars Zloop’s professional malpractice claims.

The Court need not consider that issue further because the Court finds that Zloop’s

aiding-and-abetting claim fails whether or not in pari delicto applies because Zloop

has failed to allege the essential elements of the claim.

(3) If the Supreme Court of North Carolina recognizes an aiding and abetting breach of fiduciary duty claim, it will impose elements at least as demanding as a claim defined by the Restatement (Second) of Torts § 876(b).

78. The Restatement (Second) of Torts recognizes potential liability for

those acting in concert, stating that “[f]or harm resulting to a third person from the

tortious conduct of another, one is subject to liability if he . . . knows that the other’s

conduct constitutes a breach of duty and gives substantial assistance or

encouragement to the other so to conduct himself.” Restatement (Second) of Torts

§ 876(b) (Am. Law Inst. 1979). Most jurisdictions that impose aider-abettor liability

do so under Section 876 and incorporate its elements. See, e.g., Cent. Bank of Denver,

N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 181 (1994) (citing Section

876 in discussing aiding-and-abetting claims).

79. The North Carolina Supreme Court has not yet considered an aiding

and abetting breach of fiduciary duty claim grounded on Section 876. Tong, 2012

NCBC LEXIS 16, at *5 n.3 (“The North Carolina Supreme Court . . . expressly adopted Section 876 as it applies to the negligence of joint tort-feasors [in Boykin v.

Bennett, 253 N.C. 725, 118 S.E.2d 12 (1961)], but has not been presented with the

question of its applicability to aiding and abetting claims.”). The North Carolina

Court of Appeals endorsed Section 876 when analyzing an aiding-and-abetting claim

in the securities context. Blow v. Shaughnessy, 88 N.C. App. 484, 490–91, 364 S.E.2d

444, 447 (1988) (citing Section 876 in recognizing a cause of action for aiding and

abetting breach of fiduciary duty and observing many federal courts’ use of Section

876 in recognizing such claims). The Supreme Court of the United States later held

that a private plaintiff may not maintain an aiding-and-abetting suit under section

10b. Cent. Bank of Denver, 511 U.S. at 191. That holding casts substantial doubt on

the continued vitality of Blow. Laws v. Priority Tr. Servs. of N.C., L.L.C, 610 F. Supp.

2d 528, 532 (W.D.N.C.2009).

80. Courts in other jurisdictions since Central Bank of Denver have adopted

Section 876 when analyzing claims that attorneys aided and abetted a client’s breach

of duty. See, e.g., Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C.,

331 F.3d 406, 414 (3d Cir. 2003); Reynolds v. Schrock, 142 P.3d 1062, 1066 (Or. 2006);

Thornwood, Inc. v. Jenner & Block, 799 N.E. 2d 756 (Ill. Ct. App. 2003).

81. The Court concludes that if the North Carolina Supreme Court

recognizes an aiding-and-abetting claim, it will base the elements of any such claim

on Section 876(b). See Tong, 2012 NCBC LEXIS 16, at *13 (citing Section 876 in

evaluating an assumed aiding-and-abetting claim); see also Sompo Japan Ins., Inc. v.

Deloitte & Touche, LLP, No. 03 CVS 5547, 2005 NCBC LEXIS 1, at *3 (N.C. Super. Ct. June 10, 2005) (noting that North Carolina courts will “adopt Section 876 on a

case-specific basis guided by the ‘concert of action’ involved”).

82. In Blow, the Court of Appeals, citing to Section 876, held that the

prerequisites necessary to establish aiding and abetting liability . . . include: (1) the existence of a . . . violation by the primary party; (2) knowledge of the violation on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in the achievement of the primary violation.

Blow, 88 N.C. App at 490, 364 S.E.2d at 447.

83. The parties do not dispute that Boston and LaBarge breached a

fiduciary duty owed to Zloop. There is then, no contest that Zloop has adequately

alleged the first element of its claim. Defendants do challenge whether Zloop has

alleged the second and third elements of any such claim.

84. As to the second element, the Court concludes that the element requires

actual, not implied, knowledge of the underlying breach of fiduciary duty. See

Blow, 88 N.C. App. at 493, 364 S.E.2d at 449 (approving jury instructions in which

the judge told the jury that “[y]ou’d have to know about the fraud”); Ivey v. Crown

Mem’l Park, LLC, 333 B.R. 76, 80 (Bankr. M.D.N.C. 2005) (“An alleged aider and

abettor must have actual knowledge of the breach of the fiduciary’s duty.”); Kolbeck

v. LIT Am., 939 F. Supp. 240, 246, (S.D.N.Y. 1996) (“[A]ctual knowledge is necessary

to impose liability for participating in a breach of fiduciary duty.”). The knowledge

element includes a degree of scienter. Before his retirement from this court, Judge

Ben Tennille observed that “there is not a lower level of culpability or scienter for

aiding and abetting than for the underlying tort.” Sompo Japan, 2005 NCBC LEXIS 1, at *11–12; see also, Tong, 2012 NCBC LEXIS 16, at *26 (“[I]t is clear that the

primary party and the aiding and abetting party must have the same level of

culpability or scienter.”). He further noted that an aiding-and-abetting claim is best

conceptualized as a “vehicle to accomplish liability for equally culpable acts.” Sompo

Japan, 2005 NCBC LEXIS 1, at *11 (emphasis added). The Court adopts Judge

Tennille’s reasoning.

85. The third element of an aiding-and-abetting claim grounded on Section

876 is that the aider-abettor must have lent “substantial assistance or

encouragement” to the achievement of the breach of fiduciary duty. Restatement

(Second) of Torts § 876(b) (Am. Law Inst. 1979) (emphasis added). When addressing

the claim in a securities context, the North Carolina Court of Appeals recognized that

this element requires a “showing of [a] ‘substantial causal connection between the

culpable conduct of the alleged aider and abettor and the harm to the plaintiff, or a

showing that the encouragement or assistance is a substantial factor in causing the

resulting tort.’” Blow, 88 N.C. App. at 491, 364 S.E.2d at 447–48 (quoting Metge v.

Baehler, 762 F.2d 621, 624 (8th Cir. 1985)). The Court concludes that proving a

“substantial causal connection” is a higher burden than the burden for other claims

requiring only proof of “a proximate cause.” Compare Restatement (Second) of Torts

§ 876(b) (Am. Law Inst. 1979) and Blow, 88 N.C. App. at 491, 364 S.E.2d at 447–48

with North Carolina Pattern Jury Instructions, General Civil Vol. No. 1, § 102.19

(2017) (“Proximate cause is a cause which in a natural and continuous sequence

produces a person’s injury . . . There may be more than one proximate cause of injury. Therefore, the plaintiff need not prove that the defendant’s negligence was the sole

proximate cause of the injury.”) and Prosser & Keeton on Torts 265–67 (5th ed. 1984)

(discussing the but-for and substantial factor tests for determining whether a

defendant’s acts proximately caused a plaintiff’s injury).

86. Comment d of Section 876 outlines factors that courts may consider in

determining whether a party’s assistance rises to the level of “substantial assistance,”

including: the nature of the act encouraged, the amount of assistance given by the

defendant, the defendant’s presence or absence at the time of the tort, his relation to

the primary tortfeasor, and the defendant’s state of mind. Restatement (Second) of

Torts § 876(b), cmt.d (Am. Law Inst. 1979); see also, e.g., In re TMJ Implants Prod.

Liab. Litig., 113 F.3d 1484, 1495 (8th Cir. 1997); Halberstam v. Welch, 705 F.2d 472,

478 (D.C. Cir. 1983); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 800 (3d

Cir. 1978) (analyzing the factors enumerated in Section 876’s Comment d).

87. Other courts have recognized that “substantial assistance” must mean

more than mere assistance. See, e.g., Mazzaro de Abreu v. Bank of Am. Corp., 525 F.

Supp. 2d 381, 391 (S.D.N.Y. 2007) (holding that Bank of America had not

“substantially assisted” a massive fraud, even though its accounts were used to

perpetrate the scheme and it violated its own internal policies and federal regulations

in approving fraudulent transactions); Rosner v. Bank of China, 528 F. Supp. 2d 419,

427 (S.D.N.Y. 2007) (noting that a bank’s violations of law did not in that case elevate

its actions “into the realm of ‘substantial assistance’”). 88. The substantial assistance requirement has arisen in cases brought

against lawyers accused of having aided and abetted a client’s breach of fiduciary

duty. As one court recognized, in that context, “substantial assistance means

something more than the provision of routine professional services.” Abrams v.

McGuireWoods LLP, 518 B.R. 491, 503 (N.D. Ind. 2014) (quoting Meridian Horizon

Fund, LP v. KPMG (Cayman), 487 Fed. App’x 636, 643 (2d Cir. 2012). Another court

has recognized that the fact that attorneys may, at the direction of their clients during

the course of representation, draft documents that prove to be misleading does not

necessarily constitute substantial assistance. Schatz v. Rosenberg, 943 F.2d 485, 497

(4th Cir. 1991) (noting that “the ‘substantial assistance’ element requires that a

lawyer be more than a scrivener for a client . . . While it is true that some of [the

primary wrongdoer]’s documents prepared by [the law firm] (on the basis of

information provided by [the primary wrongdoer]) were misleading, this fact alone

does not meet the ‘substantial assistance’ threshold.”). Further, some courts have

held that an attorney’s silence to aid his client’s fraud does not constitute substantial

assistance. See Varga, 952 F. Supp. 2d at 860 (“[F]ailing to alert others cannot

constitute substantial assistance as a matter of law.”); Quintel Corp. v. Citibank, 589

F. Supp. 1235, 1245 (S.D.N.Y.1984) (allegations that attorney remained silent to aid

his client’s fraud did not adequately plead an aider-and-abettor claim because the

plaintiff never alleged that the attorney “had a direct involvement in the transaction

or deliberately covered up the fraud”); but see Lerner v. Fleet Bank, N.A., 459 F.3d

273, 295 (2d Cir. 2006) (“[T]he mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly

to the plaintiff.”).

89. Courts have also found that the substantial assistance necessary to

support a lawyer’s liability as an aider and abettor must be directly related to the

underlying breach of fiduciary duty on which the aiding and abetting claim is based,

in that the assistance must be directed at the “primary . . . violation, not merely to the

person committing the violation.” Schatz v. Rosenberg, 943 F.2d 485, 497 (4th Cir.

1991) (noting that the substantial assistance element in an aiding-and-abetting

securities fraud claim required “that the lawyer . . . actively participate in soliciting

sales or negotiating terms of the deal on behalf of a client”) (emphasis added);

Quintel, 589 F. Supp. at 1245. As the Schatz court explained,

[i]f a lawyer, for example, is a member of the investment group, acts as a general agent for the investment group and not merely its attorney, or actively participates in the transaction by inducing or soliciting sales or by negotiating terms of the deal, the lawyer may be held liable for substantially assisting a securities violation. However, when a lawyer offers no legal opinions or affirmative misrepresentations to the potential investors and merely acts a scrivener for the investment group, the lawyer cannot be liable as a matter of law for aider and abettor liability . . . .

Schatz, 943 F.2d at 497 (emphasis added).

90. In contrast, the Court of Appeals for the Third Circuit held that a

plaintiff had sufficiently alleged that the defendant law firm went “beyond the bounds

of permissible advocacy” in an attempt to help their client avoid paying a judgment

by knowingly creating and recording a sham lease, preparing and recording a

“corrective” lease, and writing a letter to the county clerk’s office misrepresenting the effect of a court order. Morganroth, 331 F.3d at 412. On those facts, the court held

that the plaintiff adequately alleged that the defendant law firm “actively, knowingly,

and intentionally participated in their client’s unlawful efforts to avoid execution on

his property” and allowed the plaintiff’s aiding-and-abetting claims to survive

12(b)(6). Id. at 408, 414.

91. These cases teach that, should a claim of aiding and abetting breach of

fiduciary duty be first recognized as a basis for asserting liability against counsel, the

claim will demand proof that the attorney lent substantial assistance to the breach

on which the claim is based beyond merely providing routine legal services, acting as

a scrivener, or remaining silent absent a duty to disclose. However, an attorney may

be liable for aiding and abetting his client’s breach of fiduciary duty if he “actively

participates” in the conduct constituting the underlying breach of fiduciary duty.

Schatz, 943 F.2d at 497.

(4) Zloop has not adequately alleged the essential elements of any aiding and abetting breach of fiduciary duty claim that may be recognized in North Carolina.

92. The Court has concluded that North Carolina does not recognize a claim

for aiding and abetting breach of fiduciary duty. That conclusion alone requires that

Zloop’s aiding-and-abetting claim be dismissed. The Court alternatively holds that

even if such a claim may be recognized in the first instance, Zloop has, as a matter of

law, failed to allege the essential elements of such a claim.

93. Zloop alleges that Boston and LaBarge breached their fiduciary duties

to Zloop by (1) failing to act in best interests of Zloop, (2) circulating materially false documents, (3) requesting that Parker Poe make a friends and family offering,

(4) fabricating the bogus UCC-1, (5) obtaining for themselves the benefits of Mosing’s

investments, and (6) not recommending that a lawsuit be filed against themselves.

(Am. Compl. ¶ 132; see also Am. Compl. ¶¶ 34, 47, 96, 104, 111.) To survive Rule

12(c), Zloop’s allegations must tie Defendants’ assistance to those breaches, and the

assistance must be knowing and substantial.

94. Accepted as true, the allegations of the Amended Complaint detail that

Defendants had actual knowledge of at least some of Boston’s and LaBarge’s

wrongdoing, including that they had broken escrow, (Am. Compl. ¶¶ 37, 42), misled

investors, (Am. Compl. ¶¶ 56, 60), and engaged in self-dealing. (Am. Compl. ¶ 99.)

Construed liberally, Zloop’s allegations may be read to allege that Defendants acted

with scienter equal to Boston and LaBarge. (See, e.g., Am. Compl. ¶ 134 (o), (q), (s).)

Whether Zloop’s Amended Complaint survives the Motion depends on whether it has

adequately alleged facts which, if accepted as true, rise to the level of substantial

assistance tied to the underlying breaches of fiduciary duty.

95. The Amended Complaint alleges that Defendants substantially assisted

Boston and LaBarge’s underlying breaches of duty in at least twenty-three ways.

(Am. Compl. ¶ 134.) These allegations can be segregated between complaints that

Defendants’ failed to act, provided routine legal services to Zloop, and affirmatively

assisted Boston and LaBarge in gaining control over Zloop necessary to accomplish

their wrongful purposes. 96. The Court acknowledges but need not resolve the question of whether

inaction can ever constitute substantial assistance for purposes of an aiding and

abetting breach of fiduciary duty claim. Compare Lerner, 459 F.3d at 295 (holding

that inaction constitutes substantial assistance “only if the defendant owes a

fiduciary duty directly to the plaintiff”), with Varga, 952 F. Supp. 2d at 859 (“[F]ailing

to alert others cannot constitute substantial assistance as a matter of law.”). Without

resolving that issue, the Court concludes that, under the particular facts of this case,

Zloop’s allegations based solely on Defendants’ failures to act do not rise to the level

of “substantial assistance” required for an aiding-and-abetting claim. See Bottom v.

Bailey, 238 N.C. App. 202, 212, 767 S.E.2d 883, 889 (2014) (holding that an allegation

that a party was merely “aware” of fraudulent acts was insufficient to survive

12(b)(6)); see also Varga, 952 F. Supp. 2d at 859; Quintel, 589 F. Supp. at 1245.

97. The Court further concludes that Zloop’s allegations complaining of

Defendants’ performance of routine legal services, including allegations that

Defendants: continued to represent Zloop; drafted and prepared documents that

perpetuated Boston and LaBarge’s majority ownership; created PPMs and other

documents that proved to be false or misleading; created Boston and LaBarge’s share

certificates that were void; and proposed that Zloop buy back franchises with proceeds

from a debt offering, (Am. Compl. ¶ 134 (f), (j), (m), (q), (t), (v)–(w)), likewise do not

constitute “substantial assistance.” See Abrams, 518 B.R. at 503 (performing routine

legal services is not substantial assistance); Schatz, 943 F.2d at 497 (drafting documents, at client’s direction, that prove to be misleading is not substantial

assistance).

98. The Court also concludes that Zloop’s allegations of Defendants’

affirmative, intentional acts do not constitute substantial assistance. These

allegations include:

 “attempting to dissuade the Independent Officers from action by

excusing Boston and LaBarge’s thefts and illegally breaking escrow as

mere ‘gaps in the corporate records’” (Am. Compl. ¶ 134(n));

 “siding with Boston and LaBarge, and advising them not to acquiesce to

the Independent Officers’ demands that they cede control, when

presented with overwhelming evidence of Boston and LaBarge’s

pervasive and ongoing wrongdoing” (Am. Compl. ¶ 134(o));

 “intentionally denying and frustrating the rights of the actual

stockholders of Zloop to elect its directors upon its conversion to a

corporation” (Am. Compl. ¶ 134(r));

 “unilaterally installing Boston and LaBarge as the directors of Zloop

with full knowledge that they had engaged in pervasive wrongdoing to

the detriment of Zloop, and that they were likely to continue to do so as

long as they had the means and opportunity” (Am. Compl. ¶ 134(s)); and

 “intentionally frustrating changes in the management and controls of

Zloop that would have ended Boston and LaBarge’s ability to steal from

the company.” (Am. Compl. ¶ 134(u).) 99. Admittedly, these allegations certainly raise troubling issues of

professional malpractice. However, the Court is not persuaded that they rise to the

level of “substantial assistance” that North Carolina appellate courts would impose

as an essential element of any aiding and abetting breach of fiduciary duty claim

because (1) those acts are not adequately tied as a causative factor to the underlying

breaches of fiduciary duty on which the claim is based and (2) the Louisiana Amended

Complaint demonstrates that any assistance Defendants rendered, even if

sufficiently tied to the underlying breaches, was not substantial.

100. As discussed above, a plaintiff must allege “that a[n aider-abettor]

rendered ‘substantial assistance’ to the primary . . . violation, not merely to the person

committing the violation.” Schatz, 943 F.2d at 497 (4th Cir. 1991) (emphasis added).

Stated otherwise, Defendants must have had “direct involvement in the transaction”

or have deliberately covered up the fraud. Quintel, 589 F. Supp. at 1245 (emphasis

added); see also Morganroth, 331 F.3d at 412, 414.

101. Zloop’s allegations of Defendants’ affirmative acts fall short of those in

Morganroth, where the law firm itself filed false deeds and lied to a government

official. 331 F.3d at 412–13. Rather, Zloop alleges here only that Parker Poe’s

affirmative and knowing acts gave Boston and LaBarge the opportunity to do those

kinds of things themselves. See Schatz, 943 F.2d at 497 (noting that a plaintiff must

allege “that a[n aider-abettor] rendered ‘substantial assistance’ to the primary . . .

violation, not merely to the person committing the violation”) (emphasis added). Zloop

does not allege or suggest facts that Parker Poe encouraged, was directly involved in, or otherwise substantially assisted Boston and LaBarge in their breaking escrow,

siphoning Mosing’s funds for personal use, or filing a fraudulent UCC-1. The lack of

allegations regarding Defendants’ direct participation in the underlying frauds likely

compels a finding that Zloop’s allegations of Defendants’ wrongs do not constitute

substantial assistance.

102. If the Court were restricted to a review of only the Amended Complaint,

liberal Rule 12(c) standards might argue in favor of deferring critical analysis of

Zloop’s claim until a summary judgment motion is presented under Rule 56.

However, Zloop’s own allegations in the Louisiana Lawsuit defeat any inferences in

Zloop’s favor that the Rule 12(c) standard might arguably require.

103. The Louisiana Amended Complaint provides further details of Boston’s

and LaBarge’s conduct—and the control they maintained over Zloop—that make

clear that Boston and LaBarge did not depend on Defendants for that control and

that Defendants’ acts did not substantially assist their wrongdoing even though

Defendants took certain actions in the course of the wrongdoing.

104. In the Louisiana Amended Complaint, Zloop alleges that Boston and

LaBarge completely controlled Zloop and committed fraud at “all relevant times,” (LA

Am. Compl. ¶¶ 4, 5), including before June 19, 2013, when Parker Poe began

representing Zloop, and after February 2015, when Parker Poe’s representation

ended. (See Am. Compl. ¶ 23 (representation begins), ¶ 108 (representation ends).)

105. For example, Zloop alleges that on March 11, 2013, before Defendants

represented Zloop, “there was no board of directors for [Zloop], only two managing members who had total control of the same: LaBarge and Boston.” (LA Am. Compl.

¶ 49 (emphasis added); see also, e.g., LA Am. Compl. ¶¶ 13–16 (alleging that between

September 23, 2012 and October 2, 2012, Boston and LaBarge mailed franchise-

related documents to Mosing or Mosing’s advisor without including a franchise

disclosure document, in violation of state and federal law); LA Am. Compl. ¶¶ 19–22

(alleging that on October 4, 2012, Boston and LaBarge promulgated a materially

incorrect franchise disclosure document); LA Am. Compl. ¶¶ 27–28 (alleging that on

October 5 and 15, 2012, Boston and LaBarge violated state and federal securities laws

by failing to disclose certain information in franchise documents); LA Am. Compl.

¶¶ 57, 59 (alleging that Boston and LaBarge broke escrow before May 10, 2013).)

106. Zloop further alleges that Boston and LaBarge dominated Zloop and

committed fraud after Defendants ceased representing them, alleging that Boston

and LaBarge “controlled Zloop until [September 24, 2015, when] the [chief

restructuring officer] was appointed.” (LA Am. Compl. ¶¶ 139, 159; see also LA Am.

Compl. ¶ 130 (alleging that on March 9, 2015, after Parker Poe’s representation

ended, Boston and LaBarge nefariously used Zloop to take out an equity loan secured

by property purchased using Mosing’s funds).) According to the Louisiana Amended

Complaint, Boston and LaBarge “exerted complete control over Zloop and were the

agents of action for the acts complained of herein.” (LA Am. Complaint ¶ 167

(emphasis added).)

107. In sum, Zloop alleges in the Louisiana Amended Complaint that Boston

and LaBarge completely and continuously controlled Zloop and committed fraud before, during, and after Parker Poe represented them. Those allegations defeat any

finding or inference that Defendants were the substantial cause of or lent substantial

assistance to Boston and LaBarge’s breaches of fiduciary duties. See Blow at 491,

363 S.E.2d at 448; see also Restatement (Second) of Torts § 876 cmt.d (Am. Law Inst.

1979) (“The assistance of or participation by the defendant may be so slight that he

is not liable for the act of the other.”). The fact that Defendants’ undertakings may

have had some additive effect is not adequate to constitute the substantial assistance

necessary for any aiding and abetting breach of fiduciary claim. Self v. Yelton, 201

N.C. App. 653, 659, 688 S.E.2d 34, 38 (2010) (quoting Brown v. Neal, 283 N.C. 604,

611, 197 S.E.2d 505, 509 (1973) (“[B]efore holding a defendant liable for an injury to

a plaintiff, it must be shown that defendant’s actions were a substantial factor of

the particular injuries for which plaintiff seeks recovery.”) (first emphasis added).

108. Accordingly, the Court concludes that Zloop’s allegations, viewed

collectively and accepted as true, reveal that Zloop has not alleged the essential

elements of any aiding and abetting breach of fiduciary duty claim that may

ultimately be recognized in North Carolina.

VI. CONCLUSION

109. The Court does not by this Order & Opinion make any ruling or express

any opinion as to whether Defendants met or failed to meet their professional

standards of conduct as corporate counsel. Rather, it holds that because Zloop’s own

allegations dictate that Boston’s and LaBarge’s acts must be imputed to Zloop, the

doctrine of in pari delicto, the elements of which are fully made out on the pleadings alone, bars Zloop’s legal malpractice and breach of fiduciary duty claims as a matter

of law.

110. The Court holds that North Carolina does not recognize a claim for

aiding and abetting breach of fiduciary duty. Alternatively, the Court concludes that

Zloop has, as a matter of law, failed to allege the essential elements of any such claim

that may be recognized.

111. The Court need not reserve its ruling in anticipation of a further

amended complaint Zloop might seek to file based on additional information learned

from criminal proceedings involving Boston and LaBarge. For the foregoing reasons,

the Court GRANTS Defendants’ Motion and the Amended Complaint is DISMISSED

WITH PREJUDICE.

SO ORDERED, this the 16th day of February, 2018.

/s/ James L. Gale James L. Gale Chief Business Court Judge