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Even Breach of Fiduciary Duty Claim May Be Barred By the Economic Loss Rule

While one party may owe a fiduciary duty to another outside of their contract, the Business Court will nonetheless examine the damages the plaintiff seeks from each and every claim. Perry v. Frigi-Temp Frigeration, Inc., 2020 NCBC 62 (J. Bledsoe). Where the damages a plaintiff seeks for his breach of fiduciary duty claim are indistinguishable from the damages he seeks for his breach of contract claim, the economic loss rule bars the fiduciary duty claim.

Plaintiff Monte L. Perry (“Perry”) and Defendant John Gray (“Gray”) were long-time friends. In 2018, Gray requested Perry become CEO of a company Gray owned, Defendant Frigi-Temp Frigeration, Inc. (“Frigi-Temp”).  Gray offered Perry a written agreement which provided that part of Perry’s annual compensation would be paid in Frigi-Temp stock. (“Agreement”).  The Agreement also provided Perry a substantial bonus if Frigi-Temp were sold for more than $1 million (“Bonus”).  In November 2019, Gray terminated Perry, who by that time had become a minority shareholder.  In January 2020, Gray then sold Frigi-Temp for more than $1 million.  Following the sale, Perry demanded Frigi-Temp pay him the Bonus. Gray refused, contending the Agreement required Perry to be employed at the time of the sale to be eligible for the Bonus. Perry filed suit, claiming Frigi-Temp breached the Agreement by failing to pay him the Bonus.  Perry also asserted claims for breach of fiduciary duty and constructive fraud against Gray for failing to ensure the Bonus was paid.  Gray sought dismissal of Perry’s tort claims (i.e., the claim for breach of fiduciary duty and the claim for constructive fraud), contending both claims were barred by the economic loss rule.

The Business Court agreed.  Explaining that the economic loss rule bars recovery in tort for damages that arise out of a breach of contract, the Business Court determined that Perry’s damages arising from the tortious acts were the same damages that he sought from his breach of contract claim against Frigi-Temp; namely, the amount of the Bonus. Even though the duty Gray owed Perry was from a source other than the Agreement (i.e., as a majority shareholder to a minority shareholder), the Business Court determined that the economic loss rule barred the tort claims because the damages from all the claims were based solely on the Agreement.            

As a result of this decision, a business or shareholder facing a tort claim (with accompanying claims for attorneys’ fees or trebling of damages) should closely examine whether the plaintiff’s claimed damages arise from a contract, in an effort to winnow down the potential liability exposure.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume X, Number 256
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Phil Mohr Bankruptcy and Litigation Attorney Womble Bond Dickinson
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Phil is a trial lawyer. Although he will search for creative legal and business solutions for his clients, his more than two decades of trial experience for both publicly traded and privately held companies in state and federal courts throughout the country have taught him that some cases simply have to be tried to verdict. Representing companies that have both been wronged and accused of wrongdoing, Phil has honed his trial skills in cases involving complex business litigation (including fraudulent transfer and equitable subordination cases in federal bankruptcy court)...

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