7/31/2019 Breach of Fiduciary Duty Claims

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CLAIMS ARISING FROM A BREACH OF A FIDUCIARY DUTY

This manuscript is intended to serve as a reference for judges who are handling civilcases involving legal claims arising from fiduciary or confidential relationships between thelitigants. In many instances, these claims are labeled as constructive fraud claims. In the first

section of this paper, the essential elements of these claims are discussed. The second section ofthis paper addresses particular relationships which may or may not constitute a fiduciary orconfidential relationship.

WHAT POLICIES ARE ADVANCED BY THIS BODY OF LAW

Essentially, the law in this area seeks to prevent fraud and to protect individuals who are in arelatively vulnerable position. These policies are reflected in the following statements fromNorth Carolina appellate courts:

Fraud, actual and constructive, is so varied in form many courts have refused to precisely defineit, lest the definition itself be turned into an avenue of escape by the crafty and unscrupulous.Nevertheless, the legal principles that govern constructive fraud claims are well established. Oneis that a case of constructive fraud is established when proof is presented that a position of trustand confidence was taken advantage of to the hurt of the other. Terry v. Terry

;, 302 N.C. 77, 273

S.E. 2d 674 (1981) Link v. Link ., 278 N.C. 181, 179 S.E. 2d 697 (1971)

Any transaction between persons so situated is 'watched with extreme jealousy and solicitude;and if there is found the slightest trace of undue influence or unfair advantage, redress will begiven to the injured party.'" SeeEubanks v. Eubanks ;, 273 N.C. 189, 159 S.E. 2d 562 (1968)Fulp v. Fulp .

It is just because confidence in others inherently and inevitably begets influence that the law ofconstructive fraud is needed, lest that influence be exerted for the benefit of the one having it,rather than that of the one whose confidence created it.

, 264 N.C. 20, 140 S.E. 2d 708 (1965)

Stilwell v. Walden

The elements of this claim have been outlined in a several slightly different formulations. In

, 70 N. C. App. 543,320 S. E. 2d 329 (1984)

WHAT ARE THE ELEMENTS OF A CONSTRUCTIVE FRAUD CLAIM?

Terry v. Terry

, 302 N. C. 77, 273 S. E. 2d 674 (1981), the North Carolina Supreme Courtobserved that (i)n order to establish a claim for constructive fraud, a plaintiff must allege facts

sufficient to show the creation of a relationship of trust and confidence and that the defendanttook advantage of that relationship to plaintiff's detriment. The North Carolina Supreme Courtlater opined that aprima facie showing of constructive fraud requires plaintiff to prove that theyand defendants were in a 'relation of trust and confidence . . . [which] led up to and surroundedthe consummation of the transaction in which defendant is alleged to have taken advantage of hisposition of trust to the hurt of plaintiff. Barger v. McCoy Hillard & Parks

(quoting, 346 N.C. 650, 666,

488 S.E.2d 215, 224 (1997) Rhodes v. Jones. At times, the Court of Appeals has formulated the requirements slightly differently.

, 232 N.C. 547, 549, 61 S.E.2d 725, 726(1950))

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7/31/2019 Breach of Fiduciary Duty Claims

2/21

2

The Court of Appeals has observed that to survive a motion to dismiss, a cause of action forconstructive fraud must allege (1) a relationship of trust and confidence, (2) that the defendanttook advantage of that position of trust in order to benefit himself, and (3) that plaintiff was, as aresult, injured. White v. Consolidated Planning, Inc., 166 N. C. App. 283, 603 S. E. 2d 147(2004); Sterner v. Penn . In other

instances, the Court of Appeals has opined that:

The elements of a constructive fraud claim are proof of circumstances (1) which created therelation of trust and confidence [the "fiduciary" relationship], and (2) [which] led up to andsurrounded the consummation of the transaction in which defendant is alleged to have takenadvantage of his position of trust to the hurt of plaintiff. Put simply, a plaintiff must show (1) theexistence of a fiduciary duty, and (2) a breach of that duty.

, 159 N.C. App. 626, 631, 583 S.E.2d 670, 674 (2003)

Keener Lumber Co. v. Perry (citationomitted). See also

, 149 N.C. App. 19, 28, 560 S.E.2d 817, 823 (2002)Greene v. Rogers Realty

"An essential element of constructive fraud is that 'defendants sought to benefit themselves' inthe transaction."

, 159 N. C. App. 665, 586 S. E. 2d 278 (2003). Thisformulation of the elements of the claim returns to the language set out in Terry and then adds a

simplified description of the cause of action for constructive fraud.

A CONSTRUCTIVE FRAUD CLAIM REQUIRES THE EXISTENCE OF A

RELATIONSHIP OF TRUST AND CONFIDENCE

As indicated above, the presence of such a relationship is an element of a constructive fraudclaim. When does that relationship exist? That question will be discussed more extensively laterin this paper in a lengthy section that begins on page __.

A CONSTRUCTIVE FRAUD CLAIM REQUIRES PROOF

OF A BENEFIT TO THE DEFENDANT

As indicated above, each of the different formulations of a constructive fraud claim has arequirement that the defendant take advantage of the plaintiff to his own benefit.

State ex rel. Long v. Petree Stockton, L.L.P.

(quoting, 129 N.C. App. 432, 445, 499

S.E.2d 790, 798 (1998) Barger ), cert. dismissed asimprovidently granted,

, 346 N.C. at 667, 488 S.E.2d at 224350 N.C. 57, 510 S.E.2d 374 (1999). See also Walker v. Sloan

"Implicit in the requirement that a defendant '[take] advantage of his position of trust to the hurtof plaintiff' is the notion that the defendant must seek his own advantage in the transaction; thatis, the defendant must seek to benefit himself."

, 137 N.C.App. 387, 529 S. E. 2d 236 (2000).

Barger. 346 N. C. 650, 488 S. E. 2d 215. "Therequirement of a benefit to defendant follows logically from the requirement that a defendantharm a plaintiff by taking advantage of their relationship of trust and confidence . . . [and is]implicit throughout the cases allowing constructive fraud claims."Id .See also

. at 667, 488 S.E.2d at 224Toomer v. Branch Banking &Trust, 171 N. C. App. 58, 614 S. E. 2d 328 (2005)..

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7/31/2019 Breach of Fiduciary Duty Claims

3/21

3

The case law in North Carolina indicates that certain situations do not satisfy this requirement ofa constructive fraud claim. InBarger, the plaintiffs contended that the defendants benefited fromtheir alleged wrongful conduct because they obtained the benefit of their continued relationshipwith the plaintiffs. The Supreme Court has stated that the benefit of a continued relationship "is

insufficient to establish the benefit required for a claim of constructive fraud." Barger, 346 N. C.at 667, 488 S. E. 2d at 224. See alsoRidenhour v. IBM, 132 N. C. App. 563, 512 S. E. 2d 774(1999). In addition, "payment of a fee to a defendant for work done by that defendant does notby itself constitute sufficient evidence that the defendant sought his own advantage."NationsBank of N.C. v. Parker (holdingthat where the plaintiff alleged that the defendant "took advantage of his position of trust andbenefited from his actions in that he was paid for his services," such an allegation by itself wasinsufficient to show that the defendant sought his own advantage); See also Hunter v. GuardianLife Ins. Co., 162 N. C. App. 477, 593 S. E. 2d 121 (2004). In order to satisfy the secondelement of a constructive fraud claim, a plaintiff must allege that "the benefit sought was morethan a continued relationship with the plaintiff or payment of a fee to a defendant for work it

actually performed."

, 140 N.C. App. 106, 114, 535 S.E.2d 597, 602 (2000)

Clay v. Monroe, ___ N. C. App. ___, 658 S. E. 2d 532 (2008);Sterner v.Penn .

W H A T I S T H E D I F F E R E N C E B E T W E E N A N A C T U A L F R A U D C L A I M

A ND A C O NS T R U C T I V E F R A U D C L A I M ?

, 159 N.C. App. 626, 631, 583 S.E.2d 670, 674 (2003)

There are two primary differences between an actual fraud claim and a constructive fraud claim.First, "constructive fraud differs from actual fraud in that 'it is based on a confidentialrelationship rather than a specific misrepresentation.'"Barger v. McCoy Hillard & Parks

(quoting, 346

N.C. 650, 666, 488 S.E.2d 215, 224 (1997) Terry). Second, intent to deceive is not an essential element of constructive fraud.

, 302 N.C. at 85, 273 S.E.2d at 678-79 Link v. Link, 278N. C. 181, 179 S. E. 2d 687 (1971); Clay v. Monroe, ___ N. C. App. ___, 658 S. E. 2d 532(2008).

I S T H E R E A D I F FE R E N C E B E T W E E N A C O NST R UC T I V E F R A UD

C L A I M A ND A B R E A C H O F F I DU C I A R Y D UT Y C L A I M ?

The answer to this question appears to be, Yes.

In at least two cases, the Court of Appeals has treated claims for constructive fraud and breach offiduciary duty as separate causes of action. White v. Consolidated Planning, Inc., 166 N. C.

App. 283, 603 S. E. 2d 147 (2004); Governors Club v. Governors Club Limited Partnership,152 N. C. App. 240, 567 S. E. 2d 781 (2002). Given the confusion between constructive fraudclaims, breach of fiduciary duty claims and other causes of action, this distinction between thesetwo claims may reflect the difficulty in defining the parameters of similar legal theories.

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7/31/2019 Breach of Fiduciary Duty Claims

4/21

4

W H A T I S NE C E SSA R Y T O AL L E G E A C L A I M F OR B R E A C H

O F F I DU C I A R Y DUT Y ?

The limited case law on the existence of a separate claim for breach of fiduciary duty indicatesthat a claim for breach of fiduciary duty requires the existence of a fiduciary relationship. Whitev. Consolidated Planning, Inc. 166 N. C. App. 283, 603 S. E. 2d 147 (2004). That seems self-evident. In addition, to state a claim for breach of fiduciary duty, a plaintiff must allege that thefiduciary failed to "'act in good faith and with due regard to plaintiff's interests.'" White v.Consol. Planning, Inc. (quoting, 166 N.C. App. 283, 293, 603 S.E.2d 147, 155 (2004) Vail v.Vail ,disc. review denied,, 233 N.C. 109, 114, 63 S.E.2d 202, 206 (1951)) 359 N.C. 286, 610S.E.2d 717; see also Toomer v. Branch Banking & Trust, 171 N. C. App. 58, 614 S. E. 2d 328(2005). The requirement that the defendant sought to benefit wrongfully from the transaction isnot an element of a claim for breach of fiduciary duty. White v. Consolidated Planning, Inc., 166N. C. App. 283, 603 S. E. 2d 147. That is the primary difference between pleading a claim forconstructive fraud and one for breach of fiduciary duty. Clay v. Monroe, ___ N. C. App. ___,658 S. E. 2d 532 (2008);White v. Consolidated Planning, Inc

,disc. rev. denied,., 166 N.C. App. 283, 294, 603

S.E.2d 147, 156 (2004) 359 N.C. 286, 610 S.E.2d 717 (2005).

FIDUCIARY DUTY AND CONSTRUCTIVE FRAUD CLAIMS ARE OFTEN

CONFUSED WITH OTHER LEGAL THEORIES.

The on-going confusion between these claims and claims based on other legal theories willbecome more apparent in the second section of this manuscript when specific relationships areanalyzed. This analysis will point out several instances when plaintiffs attempted to recast otherlegal claims as constructive fraud or breach of fiduciary duty claims. In this section of themanuscript, I will give two examples of the blurring of similar legal theories as an attempt tohighlight the problem and caution you about this confusion.

One example of this problem appears in Brown v. Roth

A real estate agent has the fiduciary duty "to exercise reasonable care, skill, and diligence in thetransaction of business entrusted to him, and he will be responsible to his principal for any lossresulting from his negligence in failing to do so." 12 C.J.S. Brokers 53, at 160 (1980). "Thecare and skill required is that generally possessed and exercised by persons engaged in the samebusiness." Id., 53, at 161. This duty requires the agent to "make a full and truthful disclosure[to the principal] of all facts known to him, or discoverable with reasonable diligence" and likely

, 133 N. C. App. 52, 514 S. E. 2d 294(1999). The sellers in Roth hired a real estate agent to sell their house. The agent prepared amultiple listing form that represented that the house had 3,484 square feet of heated living area.The agent did not verify that measurement. Instead, she relied on information from an appraisal.The plaintiff and the real estate agent entered into a Dual Agency Agreement in which the agentagreed to act as agent for both the buyers and the sellers in the sale of the house. The plaintiffpurchased the house and later learned that the house contained only 3,108 heated square feet ofliving area. The plaintiff alleged claims for fraud, breach of fiduciary duty and negligentmisrepresentation in his complaint.

In its analysis of the plaintiffs claims, the Court of Appeals observed:

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7/31/2019 Breach of Fiduciary Duty Claims

5/21

5

to affect the principal. Id., 57, at 172; James A. Webster, Jr., Webster's Real Estate Law inNorth Carolina 8-9, at 243 (Patrick K. Hetrick & James B. McLaughlin, Jr. eds., 4th ed. 1994)(agent has duty to disclose all facts he "knows or should know would reasonably affect thejudgment" of the principal). The principal has "the right to rely on his [agent's] statements," andis not required to make his own investigation. 12 C.J.S.Brokers 57, at 172.

Brown v. Roth, 133 N. C. App. 52, 54-55. The quoted language contemplates a negligencetheory and it does not address the elements of a breach of fiduciary duty or constructive fraudclaim. The use of the term fiduciary duty in this instance to describe the real estate agentsduty to exercise care in the context of a general negligence claim fosters the confusion.

Another example of this type of confusion arises in Carter v. West American Insurance Co, ___N. C. App. ___, 661 S. E. 2d 264 (2008). The plaintiff in Carter had her homeowners insurancewith her insurance agent for thirty-five years. The plaintiff had been informed that the insurancewas replacement insurance. The actual policy provided that her coverage would increase toreflect local construction costs. After a fire occurred at her residence, the plaintiff sued

contending that she was underinsured. In Carter, the plaintiff contended that the defendantinsurance agent breached a fiduciary duty to procure insurance for her. In analyzing this claim,the Court of Appeals noted that:

Where an insurance agent or broker promises, or gives some affirmative assurance, that he willprocure or renew a policy of insurance under circumstances which lull the insured into the beliefthat such insurance has been effected, the law will impose upon the broker or agent theobligation to perform the duty which he has thus assumed. Further, where the insured in relianceon the affirmative representation of the insurer, "mistakenly believed that certain items werecovered by insurance, and did not seek additional coverage," the insured has a cause of action fornegligence. Carter, ___ N. C. App. ___, 661 S. E. 2d 264, ___ (cites omitted).

The claim in Carterwas a common law negligence claim against an insurance agent. However,the plaintiff and the Court Appeals labeled it as a breach of fiduciary duty claim even though thelegal principles quoted above do not address the elements of constructive fraud and breach offiduciary duty claims.

Brown and Carter

When the superior party obtains a possible benefit through the alleged abuse of theconfidentialor fiduciary relationship, the aggrieved party is entitled to a presumption that constructive fraudoccurred.

indicate that judges need to carefully read cases discussing alleging breachesof a fiduciary duty in order to be alert for confusion between the legal theories that are at issue.

W H A T I S T H E E F F E C T O F PR O V I N G T H E E L E M E N T S OF A

C O NS T R U C T I V E F R A U D C L A I M ?

Watts v. Cumberland County Hospital System, 317 N. C. 110, 116, 343 S. E. 2d 879,884. "This presumption arises 'not so much because the fiduciary has committed a fraud, butbecause he may have done so.'"Watts ;, 317 N.C. at 116, 343 S.E.2d at 884 Forbis v. Neal, 361N. C. 519, 649 S. E. 2d 382 (2007). "When a fiduciary relation exists between parties to atransaction, equity raises a presumption of fraud when the superior party obtains a possible

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benefit." Jacobs v. Physician Weight Loss Center, 173 N. C. App. 663, 620 S. E. 2d 232 (2005);Sullivan v. Mebane Packaging Group, Inc

Once a plaintiff establishes aprima facie case of the existence of a fiduciary duty and its breach,the burden shifts to the defendant to prove he acted in an "open, fair and honest" manner, so thatno breach of fiduciary duty occurred.

., 158 N. C. App. 19, 581 S. E. 2d 452 (2003).

T H E DE F E NS E OF A C ONS T R UC T I V E F R A UD C L A I M F OC USE S

O N R E B U T T I N G T H I S PR E S UM P T I O N.

Hajmm Co. v. House of Raeford Farms

, affirmed in part and reversed in part on other grounds,, 94 N.C. App. 1,

12, 379 S.E.2d 868, 874 (1989) 328N.C. 578, 403 S.E.2d 483 (1991); see alsoEstate of Smith v. Underwood, 127 N. C. App. 1, 487S. E. 2d 867 (1997). The "open, fair and honest" defense is not an affirmative defense toconstructive fraud; it merely rebuts the presumption of fraud. Estate of Smith

In

. Since it is not anavoidance or an affirmative defense, it need not be specifically pleaded in the answer. A denial isall that is required. Id

Watts v. Cumberland County Hospital System, Inc

, our Supreme Court explained how transactions involving parties in a fiduciaryrelationship can create a rebuttable presumption of fraud:

When a fiduciary relationship exists between parties to a transaction, equity raises a presumptionof fraud when the superior party obtains a possible benefit. "This presumption arises not so muchbecause the fiduciary has committed a fraud, but because he may have done so." The superiorparty may rebut the presumption by showing, for example, "that the confidence reposed in himwas not abused, but that the other party acted on independent advice."

See also

., 317 N.C. 110, 116, 343 S.E.2d 879, 884(1986)

Estate of Smith v. Underwood. 127 N. C. App. 1, 487 S. E. 2d 807.

The presumption of fraud may be rebutted by evidence that the other party obtained and acted onindependent advice. Sullivan v. Mebane Packaging Group, Inc, 158 N. C. App. 19, 561 S. E. 2d452 (2003). Two examples may clarify the nature of this defense. In Sullivan, the plaintiffalleged constructive fraud in claims arising from a business transaction. The plaintiff's evidenceshowed that he obtained outside advice throughout the negotiation process, as the defendantsconsistently advised him to do. The plaintiff in Sullivan testified that he discussed the initialpromissory note with his attorney, after which the plaintiff concluded that he would sell hisshares, but seek a higher price per share. The plaintiff testified he met with his attorney againregarding the sale of his shares during the negotiation process, and acknowledged having shownthe March financial package to his business partner to obtain his thoughts. Therefore, the

evidence in Sullivan

In

rebutted the presumption created by proof of constructive fraud.

Watts v. Cumberland County Hospital System, 317 N. C. 110, 343 S. E. 2d 879 (1986), theplaintiff asserted a claim for constructive fraud arising from the alleged concealment of acts ofalleged medical negligence. In Watts, the evidence put forward by plaintiff and defendants,however, amply demonstrated that the plaintiff sought and received a number of second opinionsconcerning the source of her complaints. In Watts, the plaintiff's history of seeking andacquiring numerous second opinions from several other specialists dispelled the presumption of

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reliance and intentional deceit that arises from the fiduciary relation. This evidence defeated theplaintiffs constructive fraud claim on a motion for summary judgment.

W H A T H A PP E NS I F T H E DE F E NS E I S E S T A B L I S H E D?

Once rebutted, the presumption of fraud evaporates, and the accusing party must shoulder theburden of producing actual evidence of fraud. Watts v. Cumberland County Hosp. System

. See also, 317

N.C. 110, 115-16, 343 S.E.2d 879, 884 (1986) Sullivan v. Mebane Packaging Group,Inc., 158 N. C. App. 19, 581 S. E. 2d 452 (2003); Cash v. State Farm Mutual Auto Ins. Co

As a general rule, the material facts and circumstances constituting fraud must be plead in acomplaint with particularity.

., 137N. C. App. 192, 528 S. E. 2d 372 (2000).

W H A T I S R E Q UI R E D T O PL E A D A C O NST R U C T I V E F R A U D C L A I M ?

N.C.G.S. 1A-1, Rule 9(b) (1990);Moore v. Wachovia Bank andTrust Co. . Constructive fraud, however,requires "less particularity" and can be based on a breach of a "confidential relationship ratherthan a specific misrepresentation."

, 30 N.C. App. 390, 391, 226 S.E.2d 833, 835 (1976)

Terry v. Terry ,"A claim of constructive fraud does not require the same rigorous adherence to elements asactual fraud."

, 302 N.C. 77, 85, 273 S.E.2d 674, 678 (1981)

Terry v. Terry ;, 302 N.C. 77, 83, 273 S.E.2d 674, 677 (1981) Hunter v. GuardianLife, 162 N. C. App. 476, 593 S. E. 2d 595 (2004). In other words, the pleading of constructivefraud is less "exacting" than that required for actual fraud.Terry v. Terry

; see also, 302 N.C. 77, 83, 273

S.E. 2d 674, 677 (1981) Watts v. Cumberland County Hospital System, 317 N. C. 110,343 S. E. 2d 879 (1986).

The North Carolina Supreme Court has observed that:

Our consideration of the above-stated rules of law leads us to conclude that in pleading actualfraud the particularity requirement is met by alleging time, place and content of the fraudulentrepresentation, identity of the person making the representation and what was obtained as a resultof the fraudulent acts or representations. A constructive fraud claim requires even lessparticularity because it is based on a confidential relationship rather than a specificmisrepresentation. The very nature of constructive fraud defies specific and concise allegationsand the particularity requirement may be met by alleging facts and circumstances "(1) whichcreated the relation of trust and confidence, and (2) [which] led up to and surrounded theconsummation of the transaction in which defendant is alleged to have taken advantage of hisposition of trust to the hurt of pla