Author Archives: Jeremy Falcone

The Economic Loss Rule and Misrepresentation-Based Section 75-1.1 Claims

We’re not alone in our interest in how the economic-loss doctrine applies to alleged violations of N.C. Gen. Stat. § 75-1.1. 

In a recent case in the North Carolina Business Court involving section 75-1.1 claims, Judge Michael L. Robinson requested supplemental briefing on the economic-loss doctrine. 

Judge Robinson’s sua sponte order was followed by his application of the doctrine to the plaintiff’s claims on the defendants’ summary judgment motion. This post examines Judge Robinson’s decision and its result that dismissed several claims based on the doctrine but allowed others to proceed.

Best Laid Airplans

Carmayer, LLC v. Koury Aviation, Inc. involved the sale of a plane that did not go as planned.  If there were lemon laws for planes, this plane would be a candidate.

In October 2014, Amiel Rossabi (a lawyer) and Rocco Scarfone planned to purchase an aircraft to place into service as a charter jet through a federal program known as Part 135 that allows owners to generate profits from its use as a for-hire charter plane.  But the aircraft has to meet certain standards to qualify under Part 135.

Rossabi and Scarfone settled on a 1976 Cessna 421C twin-engine propeller aircraft.  They formed Carmayer LLC to buy the plane.

Early in their search, Rossabi and Scarfone were introduced to the defendants—a North Carolina company, its President, and its Director of Maintenance—as experts in the Part 135 process.  The defendants wore several hats in the Carmayer plan: 

  • Carmayer sought advice from the defendants on the purchase.
  • Carmayer sought advice on bringing the plane into compliance with the Part 135 program.
  • Carmayer later signed a lease with the defendants to facilitate the charter of the Cessna 421C under Part 135 as part of the defendants’ fleet.
  • Under the lease agreement, the defendants would also be responsible for monitoring the mechanical condition of the plane and advising Carmayer on the status of all scheduled maintenance, inspections, and overhaul of the plane.

But Carmayer’s plans quickly experienced turbulence.  The aircraft did not qualify under Part 135 and would require extensive maintenance to qualify.  Carmayer eventually took the plane from the defendants to get a second opinion, and learned there were 172 problems with the plane.  Today, Carmayer believes the plane may never qualify for the Part 135 program.

Carmayer then sued the defendants.  Carmayer’s complaint asserted claims for negligent misrepresentation, breach of fiduciary duty, and section 75-1.1 claims.  No contract claim was alleged.

In their answer, the defendants’ affirmative defenses included the economic-loss doctrine.  After discovery, however, they did not raise the doctrine in the briefing on their motion for summary judgment.

After a hearing on the motion, Judge Robinson issued his sua sponte order that requested additional briefing on the economic-loss issue. 

Apparently sensing which way the wind was blowing, Carmeyer asked Judge Robinson for leave to file an amended complaint to add a contract claim—after the briefing process on the economic loss doctrine had been completed but before Judge Robinson ruled.   Judge Robinson denied that request because Carmeyer had delayed in seeking leave to amend, and could have asserted the breach of contract as an alternative claim in its original pleading.

Splitting Airs

Judge Robinson began his analysis by separately evaluating each of the alleged negligent misrepresentations.  

First, Judge Robinson relied on the economic loss doctrine in dismissing claims that post-dated the parties’ lease agreement regarding the airworthiness of the plane and the potential to add it to the defendants’ fleet.  Judge Robinson found that these claims were all barred by the economic-loss doctrine.  The agreement governed the defendants’ duty to advise Carmeyer on the plane’s condition and certification status, and there was no evidence of a separate and distinct duty to maintain the plane or add it to the defendants’ fleet.

But Judge Robinson allowed two other negligent-misrepresentation claims to proceed.  Both claims involved representations made prior to the purchase of the plane and the parties signed the lease agreement. 

The first was premised on a representation that one of the defendants was an expert on chartering aircraft under Part 135. Judge Robinson cited Scarfone’s affidavit testimony that the defendants had represented that the President was an expert in the process.  Judge Robinson also cited the President’s testimony that he did not know how to get Part 135 approval. Judge Robinson dismissed other similar claims regarding the Director of Maintenance and the company itself, because those statements were made with reasonable care. 

The other claim was based on pre-agreement representations that the defendants knew what was required to make the plane Part 135-compliant. Judge Robinson cited a conflict of testimony regarding whether the plane needed to be maintained pursuant to the factory recommendations to be eligible for Part 135. The Director of Maintenance testified that such maintenance was not required, while the company that gave the second opinion on the plane testified that it was required. Judge Robinson found that there was a material issue of fact on this point, and denied summary judgment.

Judge Robinson also dismissed the fiduciary duty claims, finding there was no fiduciary duty between the parties.

Negligent Misrepresentation Equals Chapter 75

Judge Robinson then addressed the section 75-1.1 claims.  The complaint was thin on substance for these claims.  Carmeyer instead just tied the claim to the negligent misrepresentation and breach of fiduciary duty claims.

As a result, Judge Robinson did not deeply analyze the section 75-1.1 allegations.  Instead, he allowed the misrepresentation-based claims to proceed based on the two negligent misrepresentation claims that survived summary judgment.

Lessons for Litigants

The order in Carmeyer is an important read for North Carolina business litigators.

Carmeyer shows that, even after a defendant successfully shows that the economic-loss doctrine bars a claim for violation of section 75-1.1, the application of the doctrine might vary depending upon the timing and substance of the relevant conduct.

There’s another lesson in Judge Robinson’s denial of the motion to amend:  a party cannot avoid the economic-loss doctrine simply by not pleading a valid contract claim.  The Court’s denial of the motion to amend here could have been far more consequential if the Court had also dismissed the other tort claims.

Author: Jeremy Falcone

An Important New Decision on Substantial Aggravating Circumstances

North Carolina courts regularly dismiss claims for violation of N.C. Gen. Stat. § 75-1.1 where the allegations amount to nothing more than a breach of contract. 

A recent decision by Judge Adam M. Conrad of the North Carolina Business Court, however, provides a potential pathway around that doctrine. In LendingTree v. Intercontinental, Judge Conrad denied a motion to dismiss a section 75-1.1 claim even though the parties’ contract created the duties that gave rise to the action.

This post examines how Judge Conrad reached that result.

Intercontinental Hires LendingTree’s Key Employees

LendingTree describes itself as an online loan marketplace. It allows mortgage seekers to have potential lenders compete to provide a loan.

Intercontinental is a lender that has a contract with LendingTree. Intercontinental does business across the country under the trade name eQualify.

Intercontinental’s contract with LendingTree forbids Intercontinental from hiring LendingTree employees. LendingTree had no contract with eQualify.

LendingTree alleged that Intercontinental breached the contract by recruiting and hiring LendingTree’s employees. Daniel Wilson, former Chief Architect of Technology at LendingTree, and Laura Ashley Brooks, LendingTree’s Senior Director of Product Management, were among the targeted employees. Both Mr. Wilson and Ms. Brooks joined Intercontinental, and LendingTree alleged that these employees were tasked with building a system to compete directly with LendingTree.

After learning about the departures, LendingTree accused Intercontinental of a contract breach. Ron Fountain, Intercontinental’s President and General Counsel, responded and denied a breach. Mr. Fountain specifically noted that the employees were employed by eQualify, not Intercontinental.

LendingTree then sued Intercontinental, eQualify, and the two former employees. The complaint included both contract and tort theories. Against Intercontinental, LendingTree also included a section 75-1.1 claim. 

Intercontinental moved to dismiss the section 75-1.1 claim on two grounds. 

First, Intercontinental argued the tried-and-true defense that a mere breach of contract cannot give rise to a section 75-1.1 claim. 

In its second—and more novel argument—Intercontinental attempted to take advantage of the learned-profession exemption to section 75-1.1 liability. 

Judge Conrad rejected both of these arguments.

You Can Breach, But You Better Not Enjoy It

Intercontinental argued that LendingTree’s claim was nothing more than a breach of contract: its contract with LendingTree, Intercontinental contended, spelled out the obligations that gave rise to the conduct at issue.

Judge Conrad, however, identified potential aggravating circumstances that could elevate a breach of contract to a section 75-1.1 claim. He focused in particular on two actions by Intercontinental:

  1. Intercontinental’s attempt to circumvent the non-solicitation provision by having its alter ego, eQualify, hire the employees—even though the employees were providing services to Intercontinental; and
  1. Intercontinental’s denial that it had breached the agreement. That denial, Judge Conrad explained, was “akin to concealment of a breach.”

These actions by Intercontinental, Judge Conrad explained, reflected deception in connection with the breach. As we have noted before, the “substantial aggravating circumstances” doctrine evolved from decisions that involved deceptive conduct. Judge Conrad’s ruling confirms the vitality of this doctrine.

Notably, in reaching this ruling, Judge Conrad noted that the amended complaint alleged that Intercontinental enjoyed “both the benefit of its bargain and the benefit of its breach.” This statement, if read in isolation, might imply that an intentional breach of contract is a 75-1.1 violation. Judge Conrad, however, explained that—in this case—Intercontinental had stated a cognizable 75-1.1 claim because of its deceptive conduct. He then cited to two decisions—Sparrow Systems v. Private Diagnostic Clinic, and Interstate Narrow Fabrics v. Century USA—to emphasize the point. In both Sparrow Systems and Interstate Narrow Fabrics, a 75-1.1 claim survived a dispositive motion because of deceptive conduct related to a contract.

It’s Not Always the Lawyer’s Fault

Intercontinental also tried to blaze a new legal path with its second argument to avoid liability.

In raising a section 75-1.1 claim, LendingTree had focused on Intercontinental’s deceit in hiding its breach of contract through the letter that professed that the employees were actually eQualify’s employees. Because its lawyer wrote that letter, Intercontinental argued that the learned-profession exemption to section 75-1.1 liability barred the claim.

Judge Conrad made quick work of this theory: he pointed out that LendingTree’s claim concerned Intercontinental’s actions in hiring LendingTree’s employees. Thus, the 75-1.1 claim did not rest solely on the actions of an attorney.

In addition, Intercontinental’s attorney sent the letter to LendingTree in his capacity as the company’s general counsel and president. The acts of a company officer do not enjoy the protection of the learned-profession exemption. 

Pleading Around a Mere Breach of Contract

Judge Conrad’s decision shows that a plaintiff may be able to construct a contract-based section 75-1.1 claim by focusing on the defendant’s deceptive conduct after the breach.  If the defendant took steps to avoid the plaintiff discovering the breach, those steps may constitute sufficient substantial aggravating circumstances to allow a section 75-1.1 claim.

Author: Jeremy Falcone

Further Closing the Narrow Opening for Section 75-1.1 in the Employer-Employee Context

A recent opinion from the North Carolina Business Court illustrates courts’ continued reluctance to allow section 75-1.1 claims in the context of an employer-employee relationship. Judge James L. Gale recently dismissed a N.C. Gen. Stat. § 75-1.1 claim that arose from an employment relationship that had evolved into a business partner and buyer-seller relationship.

In Urquhart v. Trenkelbach, Judge Gale accepted the defendants’ contention that their actions all involved the internal operations of the company, and thus were not “in or affecting commerce.” 

Just When I Thought I Was Out, They Pulled Me Back In

In 2007, Curtis L. Trenkelbach recruited Christopher J. Urquhart to work for Trenkelbach’s commercial construction company.

Trenkelbach was the sole owner of the company.  He apparently wanted an exit strategy, and he saw a potential successor in Urquhart.  The two orally agreed to a succession plan through Urquhart’s gradual purchase of Trenkelbach’s shares.

To facilitate the succession, Trenkelbach and Urquhart formed a new LLC.  The members of the LLC included Trenkelbach, Urquhart, and a separate corporation formed to allow Urquhart to increase his ownership interest in the company.

As part of the formation of the LLC, Trenkelbach and Urquhart executed several agreements.  The operating agreement required cause before a manager could be removed.  Likewise, Urquhart’s employment agreement restricted termination to situations where there was cause.

Initially, things went well. 

The business flourished, and Trenkelbach’s faith in Urquhart proved warranted.  Over five years, the company’s revenues quadrupled.  The tremendous success also accelerated Urquhart’s succession to ownership, which was tied to company performance.

The success may have also caused Trenkelbach to reconsider his departure. 

Urquhart alleged that Trenkelbach orchestrated a scheme to force Urquhart’s ouster by manufacturing cause for termination, removing him as a manager, terminating his employment, and exercising a provision that allowed Trenkelbach to repurchase Urquhart’s ownership interest in the company.

The Alexander v. Alexander Exceptions Remain Narrow

Urquhart brought a dozen claims against Trenkelbach, including the section 75-1.1 claim.

He premised the section 75-1.1 claim on allegations that Trenkelbach forced him out of management, attempted to manipulate the succession agreement, terminated Urquhart’s employment, and wrongfully diverted company funds.

Trenkelbach moved to dismiss.  He argued that the conduct took place solely within the confines of the company, so the conduct was not “in or affecting commerce.”

Judge Gale first reviewed the landscape of section 75-1.1 cases involving employer and employee. 

He relied on the reasoning of the Court of Appeals in its 2016 decision in Alexander v. Alexander.  In that case, the Court of Appeals determined that a section 75-1.1 claim could lie—even in an employer-employee context—if the claims involved outside businesses, distinct corporate entities, or the interruption of a commercial relationship between two market participants.

From these facts, Urquhart’s claim might appear to fit within one of these exceptions, given that the dispute involved two separate corporate entities (albeit entities formed for a related purpose).  Urquhart had his own, separate company created to purchase shares of the primary company.

However, Judge Gale did not find that Trenkelbach’s conduct met any of the Alexander exceptions.  Instead the facts more closely resembled cases that declined to allow a section 75-1.1 claim:

  • Urquhart’s termination involved conduct internal to the company.
  • Any diversion of company funds was an internal issue and not affecting commerce.
  • Finally, any actions relating to the succession plan related only to an internal agreement between managing members of the company. Therefore, any violation of that agreement also occurred internally, within the confines of a company.

Having determined that no conduct occurred outside the internal dealings of the company, Judge Gale dismissed the claim. 

As an alternative ground for dismissal, Trenkelbach had argued that the conduct underlying the section 75-1.1 claim arose out of the breach of a contract.  Having determined that the conduct was not in or affecting commerce, Judge Gale did not reach this issue.

The Uphill Battle for Any Section 75-1.1 Claim Involving an Employer-Employee Relationship

Even with good ammunition—including the sale of a company and separate corporate entities—Urquhart could not plead a section 75-1.1 claim. 

Would-be section 75-1.1 plaintiffs in the employment context need a hook outside the internal company dynamics to try and wedge the claim into the narrow exceptions spelled out in Alexander.  In Trenkelbach, one potential possibility might be the activities of the other companies—did any have some external purpose, not solely tied to the purchase of ownership in Trenkelbach’s company?  Any external purpose might have given the plaintiff that extra hook.

Absent that type of pleading, these types of claims will continue to be dismissed.

Author: Jeremy Falcone