Commscope Credit Union v. Butler & Burke, LLP

• Decision Date: 04 November 2014
• Docket Number: No. COA14–273.,COA14–273.
• Citation: 237 N.C.App. 101,764 S.E.2d 642
• Court: North Carolina Court of Appeals
• 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.

237 N.C.App. 101

764 S.E.2d 642

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.

No. COA14–273.

Court of Appeals of North Carolina.

Nov. 4, 2014.

Patrick, Harper & Dixon, LLP, Hickory, by Michael J. Barnett and L. Oliver Noble, Jr., and Carlton Law PLLC, Raleigh, by Alfred P. Carlton, Jr., for Plaintiff.

Sharpless & Stavola, P.A., Greensboro, by Frederick K. Sharpless, for Defendant and Third–Party Plaintiff.

No brief for Third–Party Defendants.

STEPHENS, Judge.

Factual and Procedural Background

Plaintiff CommScope Credit Union is a North Carolina chartered credit union which retained Defendant Butler & Burke, LLP, a certified public accountant firm, in 2001 to provide professional independent audit services. Defendant represented to Plaintiff that it had special expertise in providing auditing services to credit unions and other nonprofit entities. Defendant's engagement letters between 2001 and 2010 asserted that it would, inter alia,

plan and perform [ ]audit[s] to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or government regulations that are attributable to [Plaintiff] or to acts by management or employees acting on behalf of [Plaintiff].

Each year from 2001 to 2009, Plaintiff's general manager, Mark Honeycutt, failed to file with the Internal Revenue Service ("IRS") a Form 990, Return of Organization Exempt From Income Tax Returns¹ ("the tax forms"). In the course of its audits, Defendant never requested copies of the tax forms, and, as a result, did not discover Plaintiff's failure to file them. In April 2010, the IRS notified Plaintiff of its filing deficiency and later informed Plaintiff that a penalty of $424,000 had been assessed against it. The penalty was subsequently reduced to $374,200.

On 8 November 2012, Plaintiff filed a complaint in Catawba County Superior Court against Defendant alleging claims for breach of contract, negligence, breach of fiduciary trust, and professional malpractice.² On 28 January 2013, Defendant answered, asserting several affirmative defenses. Defendant filed a third-party complaint on 25 February 2013 against various individuals who had been directors, officers, and supervisory committee members of Plaintiff.³ That complaint included claims for contribution, indemnity, negligent misrepresentation, and fraud. The third-party defendants answered and asserted various affirmative defenses. Three of the third-party defendants moved to dismiss pursuant to Rule of Civil Procedure 12(b)(6). On 6 June 2013, Defendant moved to dismiss Plaintiff's complaint pursuant to Rule 12(b)(6) and 12(c). On 26 September 2013, the trial court granted Defendant's motion and dismissed the case. This action rendered the third-party defendants' motion to dismiss moot, and the trial court did not consider or rule on that motion. From the order granting Defendant's motion to dismiss, Plaintiff appeals.

Discussion

Plaintiff argues that the trial court erred in granting Defendant's motion to dismiss for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6) and on the pleadings pursuant to Rule 12(c). We agree.

I. Standards of review

When a party files a motion to dismiss pursuant to Rule 12(b)(6), the question for the court is whether the allegations of the complaint, treated as true, are sufficient to state a claim upon which relief may be granted under some legal theory, whether properly labeled or not. The court must construe the complaint liberally and should not dismiss the complaint unless it appears beyond a doubt that the plaintiff could not prove any set of facts to support his claim which would entitle him to relief.

Sharp v. CSX Transp., Inc., 160 N.C.App. 241, 243, 584 S.E.2d 888, 889 (2003) (citations and internal quotation marks omitted). "When the complaint states a valid claim but also discloses an unconditional affirmative defense which defeats the asserted claim, however, the motion will be granted and the action dismissed." Skinner v. E.F. Hutton & Co., 314 N.C. 267, 270, 333 S.E.2d 236, 238 (1985) (citation omitted).

"A motion for judgment on the pleadings [pursuant to Rule 12(c) ] should not be granted unless the movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law." B. Kelley Enters., Inc. v. Vitacost.com, Inc., 211 N.C.App. 592, 593, 710 S.E.2d 334, 336 (2011) (citation and internal quotation marks omitted; emphasis added).

The trial court is required to view the facts and permissible inferences in the light most favorable to the nonmoving party. All 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. All allegations in the nonmovant's pleadings, except conclusions of law, legally impossible facts, and matters not admissible in evidence at the trial, are deemed admitted by the movant for purposes of the motion.

Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974) (citations omitted). We review de novo a trial court's grant of a motion to dismiss under both Rule 12(b)(6) and 12(c). Id.; Podrebarac v. Horack, Talley, Pharr, & Lowndes, P.A., –––N.C.App. –––, ––––, 752 S.E.2d 661, 663–64 (2013).

II. Breach of fiduciary duty

In its motion to dismiss, Defendant argued that Plaintiff had failed to allege facts or circumstances that, if true, would show the existence of a fiduciary duty Defendant owed to Plaintiff. "For a breach of fiduciary duty to exist, there must first be a fiduciary relationship between the parties." Harrold v. Dowd, 149 N.C.App. 777, 783, 561 S.E.2d 914, 919 (2002) (citation omitted). In this State, fiduciary relationships may arise as a matter of law because of the nature of the relationship, "such as attorney and client, broker and principal, executor or administrator and heir, legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust. " Abbitt v. Gregory, 201 N.C. 577, 598, 160 S.E. 896, 906 (1931). However, "[o]nly when one party figuratively holds all the cards all the financial power or technical information, for example have North Carolina courts found that the special circumstance of a fiduciary relationship has arisen." Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 347–48 (4th Cir.1998) (internal quotation marks omitted). Thus, our courts have declined to find the existence of a fiduciary relationship between "mutually interdependent businesses," such as a distributor and a manufacturer, or a retailer and its main supplier. Tin Originals, Inc. v. Colonial Tin Works, Inc., 98 N.C.App. 663, 666, 391 S.E.2d 831, 833 (1990).

Even where a fiduciary relationship does not arise as a matter of law, such a relationship does exist

when 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. It extends to any possible case in which a fiduciary relation exists in fact, and in which there is confidence reposed on one side, and resulting domination and influence on the other.

Harrold, 149 N.C.App. at 784, 561 S.E.2d at 919 (citations, internal quotation marks, and brackets omitted). For example, in Harrold, this Court concluded that no fiduciary relationship existed between a pair of optometrists and an accounting firm hired "to advise them on business opportunities, including mergers and acquisitions." Id. at 779, 561 S.E.2d at 917. However, the Court went on to contrast this situation with one in which the accountant defendants "had done accounting. and had prepared tax filings" such that they "obviously had acquired a special confidence in preparing tax documents for the trusts, corporations, and individual plaintiffs." Id. at 784, 561 S.E.2d at 919 (discussing Smith v. Underwood, 127 N.C.App. 1, 487 S.E.2d 807, disc. review denied, 347 N.C. 398, 494 S.E.2d 410 (1997) ). Thus, while this Court in Harrold was correct in stating that no North Carolina case has held that an accounting firm and its clients are per se in a fiduciary relationship, that case did not concern accountants and their audit clients. That is, in Harrold, the accounting firm was not providing auditing or accounting services to its clients, but rather was acting as a consultant on mergers and acquisitions. Id. at 779, 561 S.E.2d at 917. In Smith, on the other hand, where the accountants were providing accounting and tax-related services, a fiduciary relationship did exist. 127 N.C.App. at 10, 487 S.E.2d at 813. We would observe that, in using its specially trained professionals to perform comprehensive audits for credit unions, accounting firms such as Defendant would appear "to hold all the ... technical information...." Broussard, 155 F.3d at 348. In our view, the relationship between Plaintiff and Defendant appears much more like that between "attorney and client, broker and principal," see Abbitt, 201 N.C. at 598, 160 S.E. at 906, than that between "mutually interdependent businesses," like distributors and manufacturers, or retailers and suppliers. See Tin Originals, Inc.,

98 N.C.App. at 666, 391 S.E.2d at 833.

More importantly, even if the relationship between an accounting firm and its audit clients is not a fiduciary one as a matter of law, Plaintiff's complaint alleges that Defendant pledged to

plan and perform [ ]audit[s] to obtain reasonable assurance about whether the financial statements are free of material

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