iTwo recent Business Court cases suggest that if you’re going to plead fraud or misrepresentation, you’d better be as detailed as possible.
In Martinez v. Reynders, 2013 NCBC 35, the Court parsed through the complaint in detail and dismissed a plaintiff’s fraud in the inducement claim, in part because she had not pleaded sufficient facts to show fraudulent intent or reasonable reliance.
“The Devil is in the details, but so is salvation.” ― Hyman G. Rickover
The plaintiff was a Brazilian citizen who incorporated a pharmaceutical research and development company in Brazil. The company was sold to a Delaware corporation, and the plaintiff became its sole manager. She claimed she relied on defendants’ misrepresentations that if she became a “quota holder” in the company (which is similar to a stockholder, but with personal liability for corporate debts) then defendants would raise enough capital to relieve her of any personal obligations. That didn’t pan out, and plaintiff ended up being held personally liable for unpaid corporate taxes.
The Business Court noted that the Complaint was unclear on “the circumstances surrounding Plaintiff becoming a quota holder,” and that “it was actually Plaintiff who informed Defendants that [the company] needed a citizen of Brazil to serve as a quota holder in order to comply with Brazilian law,” which “strongly suggests the lack of any fraudulent intent or scheme on the part of Defendants as to making Plaintiff a quota holder.” The Court concluded that “the inference that Defendants somehow knew, at the time Plaintiff proposed the inclusion of a Brazilian quota holder, that Plaintiff would ultimately become personally liable for the debts and obligations of [the company] were she to serve as the Brazilian quota holder is too attenuated to adequately allege fraudulent intent on the part of Defendants.” The Court also noted that “in order for a promissory representation to be the basis of an action for fraud, facts must be alleged from which it may reasonably be inferred that the defendant did not intend to carry out such representation when it was made,” and Plaintiff failed to allege this in her Complaint.
Plaintiff also claimed that defendants hid the company’s financial condition from her. But her Complaint alleged that when defendants asked plaintiff to provide a personal guaranty she was aware of “clear warning signs” regarding the company’s poor standing. The Court also noted she had failed to allege that the company’s financial condition could not have been discovered through due diligence or that defendants had denied her the opportunity to discover the true state of the financial affairs. Plaintiff was also aware that defendants’ ability to raise the funds necessary to relieve her from the guaranty were contingent on the sale of the company’s German unit or raising enough funds from investors. Given these allegations, the Court found that plaintiff could not have reasonably relied on any misrepresentations by defendants. The Court further noted that “as with the representations related to Plaintiff becoming a quota holder, these representations are, at most, statements of future intent or promissory representations. . . . [and] there are no facts alleged from which it may reasonably be inferred that Defendants did not intend to relieve Plaintiff of her personal guaranty at the time they represented they would do so.”
Contrast Martinez with McKee v. James, 2013 NCBC 38. In that case the plaintiffs alleged that defendant fraudulently represented that, if plaintiffs purchased additional stock in the subject company, they could remain as employees, their investment would be repaid, and defendant would bring in “business revitalization specialists.” Judge Murphy found that the plaintiffs’ fraud claims were sufficiently pled where the alleged misrepresentations contained promises of future performance. Unlike the plaintiff in Martinez, plaintiffs’ complaint did allege that defendant’s representations were false when made and were made with the intent to deceive. The complaint specifically listed actions by defendant that contradicted his promises to plaintiffs.
So, the general rule that “reliance is a question for the jury, unless the facts are so clear that they support only one conclusion,” Forbis v. Neal, 361 N.C. 519, 527, 649 S.E.2d 382, 387 (2007), may not always hold true. Nor may the rule that “in order to survive a motion to dismiss . . . the party alleging fraud must include allegations in the complaint that the defendants knew the representation was false or made the representation recklessly and without regard for its truth.” Bowman v. Alan Vester Ford Lincoln Mercury, 151 N.C. App. 603, 609, 566 S.E.2d 818, 823 (2002). A complaint pleading any sort of misrepresentation now may need to describe specific facts showing reliance and fraudulent promissory intent to deceive. Generic recitations of the elements may not be enough.
