Commscope Credit Union v. Butler & Burke, LLP

Decision Date23 September 2016
Docket NumberNo. 5PA15,5PA15
Parties COMMSCOPE CREDIT UNION, Plaintiff v. BUTLER & BURKE, LLP, a North Carolina Limited Liability Partnership, Defendant and Third–Party Plaintiff v. Barry D. Graham, James L. Wright, Ed Dutton, Frank Gentry, Geral Hollar, Joe Cresimore, Mark Honeycutt, Rose Sipe, Todd Pope, Jason Cushing, and Scott Saunders, Third–Party Defendants
CourtNorth Carolina Supreme Court

Carlton Law PLLC, Raleigh, by Alfred P. Carlton, Jr. and Ian S. Richardson; and Patrick, Harper & Dixon, LLP, Hickory, by L. Oliver Noble, Jr., for plaintiff-appellee.

Sharpless & Stavola, P.A., Greensboro, by Frederick K. Sharpless ; and Wiley Rein LLP, by Richard A. Simpson, pro hac vice, and Ashley E. Eiler, pro hac vice, for defendant/third-party plaintiff-appellant.

Alston & Bird LLP, Charlotte, by Brian D. Boone, for Chamber of Commerce of the United States of America, amicus curiae.

Womble Carlyle Sandridge & Rice, LLP, by Brent F. Powell, Winston-Salem, C. Mark Wiley, and Michael R. Cashin, Charlotte, for Cherry Bekaert LLP, CliftonLarsonAllen LLP, and Dixon Hughes Goodman LLP, amici curiae.

Allen, Pinnix & Nichols, P.A., Raleigh, by Noel L. Allen and Nathan E. Standley, for National Association of State Boards of Accountancy, amicus curiae.

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, by J. Mitchell Armbruster, Michael W. Mitchell, and Lauren H. Bradley, for North Carolina Association of Certified Public Accountants, American Institute of Certified Public Accountants, and Center for Audit Quality, amici curiae.

Hedrick Gardner Kincheloe & Garofalo LLP, Charlotte, by Mel J. Garofalo, for North Carolina Chamber, amicus curiae.

MARTIN, Chief Justice.

Plaintiff CommScope Credit Union seeks damages from defendant Butler & Burke, LLP, the certified public accounting firm that plaintiff hired to conduct annual independent audits of its financial statements. We allowed discretionary review to address whether defendant owed a fiduciary duty to plaintiff and whether plaintiff's claims against defendant are barred by the doctrines of contributory negligence and in pari delicto .


Plaintiff is a North Carolina state-chartered credit union with its principal place of business in Catawba County. Defendant is the CPA firm that plaintiff engaged to provide independent audit services from 2001 to 2010. Federal tax law required that plaintiff annually file Form 990, entitled "Return of Organization Exempt From Income Tax," with the Internal Revenue Service. See 26 U.S.C. § 6033(a)(1) (2006) ; id. § 6033(a)(1) (2000) ; see also id. § 501(a), (c)(14)(A) (2006); id. § 501(a), (c)(14)(A) (2000). Plaintiff filed a complaint in Superior Court, Catawba County, alleging that, in performing its annual audits, defendant had "fail[ed] to request and review Plaintiff's tax returns, and thereby fail[ed] to discover that Plaintiff's then[-]General Manager had not filed" Form 990 "from 2001 to 2009." Plaintiff alleged that defendant's inaction "resulted in the Internal Revenue Service's assessment of penalties upon Plaintiff in the ... amount of ... $374,200." Plaintiff asserted claims for breach of contract, negligence, breach of fiduciary duty, and professional malpractice.

Defendant answered the complaint and pleaded seven affirmative defenses, including contributory negligence and in pari delicto . Defendant subsequently moved to dismiss all of plaintiff's claims under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure , and for judgment on the pleadings under Rule 12(c). The trial court granted defendant's motion and entered judgment for defendant. Plaintiff appealed.

The Court of Appeals reversed the trial court's decision. The court stated that the relationship between an independent auditor and its audit client may give rise to a fiduciary duty as a matter of law because that relationship "appears much more like that between attorney and client, [or] broker and principal, than that between mutually interdependent businesses." CommScope Credit Union v. Butler & Burke, LLP , 237 N.C.App. 101, 105, 764 S.E.2d 642, 647 (2014) (citations and internal quotations omitted). The court determined that, even if no fiduciary duty exists as a matter of law, the specific allegations in plaintiff's complaint were sufficient to state a claim for breach of fiduciary duty because the terms of the audit engagement letters discussed in the complaint "assur[ed] Plaintiff that [defendant] had the expertise to review financial statements to identify ‘errors [and] fraud[,] even by Plaintiff's own management and employees." Id . (third and fourth alterations in original). The court concluded that defendant had thus "sought and received ‘special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence.’ " Id. (quoting Harrold v. Dowd , 149 N.C.App. 777, 784, 561 S.E.2d 914, 919 (2002) ).

Next, the Court of Appeals addressed defendant's motion to dismiss as applied to plaintiff's claims for breach of contract, negligence, and professional malpractice. Defendant's motion had stated affirmative defenses based on the doctrines of in pari delicto and contributory negligence, and based on the terms of the engagement letters. The court concluded that defendant's affirmative defenses of in pari delicto and contributory negligence would not entitle defendant to dismissal at this stage because "nothing in the pleadings establishes either that [plaintiff's General Manager's] failure to file the tax returns was (1) negligent rather than intentional wrongdoing or excusable conduct or (2) imputed to Plaintiff as a matter of law." Id. at 110–11, 764 S.E.2d at 651. The court also concluded that the terms of the engagement letters were too ambiguous to warrant dismissal of plaintiff's claims based on the pleadings alone. Id. at 111–12, 764 S.E.2d at 651–52.

The court therefore reversed the trial court's order granting defendant's motion to dismiss and for judgment on the pleadings. Id. at 112, 764 S.E.2d at 652. We allowed defendant's petition for discretionary review and now affirm in part and reverse in part.


We review de novo the grant of a motion to dismiss under Rule 12(b)(6) and for judgment on the pleadings under Rule 12(c). Bridges v. Parrish , 366 N.C. 539, 541, 742 S.E.2d 794, 796 (2013) ; Toomer v. Branch Banking & Tr. Co ., 171 N.C.App. 58, 66, 614 S.E.2d 328, 335, disc. rev. denied , 360 N.C. 78, 623 S.E.2d 263 (2005).

In considering a motion to dismiss under Rule 12(b)(6), the Court must decide "whether the allegations of the complaint, if treated as true, are sufficient to state a claim upon which relief can be granted under some legal theory." Bridges , 366 N.C. at 541, 742 S.E.2d at 796 (quoting Coley v. State , 360 N.C. 493, 494, 631 S.E.2d 121, 123 (2006) ).

On a motion for judgment on the pleadings, "[a]ll well pleaded factual allegations in the nonmoving party's pleadings are taken as true and all contravening assertions in the movant's pleadings are taken as false." Daniels v. Montgomery Mut. Ins. Co. , 320 N.C. 669, 682–83, 360 S.E.2d 772, 780 (1987) (quoting Ragsdale v. Kennedy , 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974) ). As with a motion to dismiss, "[t]he trial court is required to view the facts and permissible inferences in the light most favorable to the nonmoving party." Id . at 682, 360 S.E.2d at 780 (quoting Ragsdale , 286 N.C. at 137, 209 S.E.2d at 499 ). A Rule 12(c) movant must show that "the complaint ... fails to allege facts sufficient to state a cause of action or admits facts which constitute a complete legal bar" to a cause of action.

Jones v. Warren , 274 N.C. 166, 169, 161 S.E.2d 467, 470 (1968) (quoting Van Every v. Van Every , 265 N.C. 506, 510, 144 S.E.2d 603, 606 (1965) ).

We now address whether the facts pleaded in plaintiff's complaint, if true, would establish that defendant owed a fiduciary duty to plaintiff when defendant performed its independent audits of plaintiff's financial statements. For a fiduciary duty to exist, there must be a fiduciary relationship between the parties. Dalton v. Camp , 353 N.C. 647, 651, 548 S.E.2d 704, 707 (2001). This Court has defined a fiduciary relationship as one in which "there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence." Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013) (quoting Dalton , 353 N.C. at 651, 548 S.E.2d at 707 ). All fiduciary relationships are characterized by "a heightened level of trust and the duty of the fiduciary to act in the best interests of the other party." Dallaire v. Bank of Am., N.A. , 367 N.C. 363, 367, 760 S.E.2d 263, 266 (2014).

The very nature of some relationships, such as the one between a trustee and the trust beneficiary, gives rise to a fiduciary relationship as a matter of law. See, e.g. , Wachovia Bank & Tr. Co. v. Johnston , 269 N.C. 701, 711, 153 S.E.2d 449, 457 (1967). The list of relationships that we have held to be fiduciary in their very nature is a limited one, see Dallaire , 367 N.C. at 367, 760 S.E.2d at 266 (listing categories), and we do not add to it lightly. We have not previously included the relationship of an independent auditor and its audit client in this list, and for good reason. Independent auditors often have significant obligations to third parties or to the public at large that would prevent them from acting solely in their audit clients’ best interests. Though an auditor contracts to audit an individual client, the audit report is frequently intended to benefit and to be relied on by third parties such as investors or creditors. Raritan River Steel Co. v. Cherry, Bekaert & Holland , 322 N.C. 200, 211, 367 S.E.2d 609, 615 (1988). Because of this, we have held that an independent auditor owes a duty to avoid negligent...

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