Webster et al v. Ameritas Investment Corporation et al

Filing 31

ORDER granting in part and denying in part 22 Motion to Dismiss for Failure to State a Claim. Signed by Chief Judge James C. Dever III on 9/19/2012. (Sawyer, D.)

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

EASTERN DMSION

No.4:11-CV-193-D

WILLIAM L. THORPE REVOCABLE
TRUST, and PATRICIA WEBSTER,
individually and as trustee,

)

)

)

)

)

Plaintiffs,
)

v.
)
)
AMERITAS INVESTMENT CORPORATION, )
UNlFI MUTUAL HOLDING COMPANY,
)
AMERITASHOLDINGCOMPANY,
)
AMERITAS LIFE INSURANCE
)
CORPORATION, and STEWART S. KING,
)
)
Defendants.
)

ORDER

In 2008, Stewart S. King ("King") was a chartered life underwriter and fmancial consultant,
and a representative of Ameritas Life Insurance Corporation's ("ALIC") investment products. See
Am. Compl. [D.E. 19]
("Webster"). Id.

~

~

7, 11-12. In June 2008, King was introduced to Patricia B. Webster

11. At the time, Webster was sixty-one years old and was the trustee of the

William L. Thorp Revocable Trust ("Thorp Trust"). Id. ~ 2, 13. King told Webster that he was a
representative for ALIC and its affiliated companies. See id. ~ 14. ALIC is a subsidiary ofAmeritas
Holding Company ("AHC"), which in turn is a subsidiary of UNlFI Mutual Holding Company
("UNlFI"). Id.

~

4-5. Ameritas Investment Corporation ("AlC") is the principal underwriter of

ALIC's policies. Id. ~ 3. The ALIC entities are collectively referred to as ''the companies."
At King's behest, Webster and the Thorp Trust invested with the companies.

The

investments, however, declined in value, and plaintiffs sued the companies and King. Defendants

now ask the court to dismiss plaintiffs' amended complaint for failure to state a claim upon which
relief can be granted. As explained below, the court grants in part and denies in part the motion to
dismiss.
I.
During 2008, King and Webster met several times, and King discussed his access to various
investments, his experience at providing financial advice, and the strength ofALIC' s products. See
id. ~~ 15-16. King made several representations to Webster about himself and ALIC's products,
including that: (l) over the course of his career, King had obtained annual returns that exceeded
twelve-to-fifteen percent for himself and his clients, id.

~

17; (2) Webster could withdraw a

significant percentage ofher funds each year without penalty, and that the penalties would decrease
by one-percent per year over nine years, id.

~

19; and (3) Webster was guaranteed a five-percent

annual return on her investments, id. ~ 20. See id. ~ 24. Webster infonned King that, due to her age,
she was interested in, among other things, generating income, minimizing tax exposure, accessing
her funds when necessary, and increasing the value of the Thorp Trust for its beneficiaries. See id.

mr 21,57.

King assured Webster that she would be unrestricted in transferring funds between a

money market account and three stock market accounts, and that he would monitor her investments
and instruct her when to move funds to maximize her returns. Id. mr 22-23; see id. ~ 24. King knew
that Webster had invested with traditional brokers, that she had no fonnal training or background
in finance, and that she relied on professional financial advice. Id. ~~ 25, 52.
After stating that he had reviewed Webster's finances, King told Webster to transfer all of

her liquid assets into four separate ALIC annuities, or else he would not provide investment advice
to her. See id. ~~ 16, 18, 24; see also ~ 54. Webster was unfamiliar with annuities, but King stated
that the annuities were "perfect" for her because of the five-percent guaranteed returns and the tax
2

benefits. Id.1jMl26, 33, 54. On November 11,2008, based on King's advice, Webster purchased
four ALIC annuities with a total value of over $1,563,000. Id.1jMl27, 29-30. As a result, Webster
liquidated a $150,000 position in gold investments and transferred the funds to ALIC annuities. See
id. ~ 18. For each annuity, the Thorp Trust was named the owner with Webster being the annuitant.
Id. ~ 28. King received around $100,000 in fees for the sale of the annuities, and Webster pays
annual fees of approximately $11,000. Id. ~ 31. Webster received the annuities' prospectus and
promotional materials after her purchase. Id. ~ 32.
King informed Webster that he initially would deposit her funds in a money market account
and that he would instruct her on when to move the funds into the stock market accounts. Id.

~~

34-35. Months later, Webster received her first statement and discovered that her funds were
already in the stock market accounts. Id. ~ 36. She immediately questioned King, who informed her
that he had "checked the wrong box on the application." Id. However, King never returned
Webster's funds to a money market account, and by March 2009, Webster had lost fifteen percent
of her original investment. Id. ~ 37.
Webster's investments continued to decline in value, but King insisted that she not move her
funds. Id. ~ 39. He repeatedly reassured her that she had the five-percent guaranteed return as a
"safety net."

Id. ~ 39-40.

When the Dow Jones Industrial Average was near a low of

approximately 7200 points, King instructed Webster to move her funds back into a money market
account. Id. ~ 41. Webster followed King's advice and then, as instructed, waited for King's signal
to return the money to the stock market accounts. Id. ~ 42. Afterward, Webster repeatedly tried to
contact King with no success. Id.

~ 43.

In March 2010, Webster contactedALIC directly. Id. During the call, Webster learned that
the five-percent guaranteed return was not in effect for her annuities. Id. Later, she also learned that

3

her withdrawal penalties did not decrease by one-percent per year, and that she cannot invest in
individual assets, only selected stock market accounts. Id.' 44. Webster then sought to confmn this
new information with King. Id.' 45. King generally did not respond to Webster's calls and emails.
See id. , 45. However, in one instance when King provided information, he reassured Webster that
the ALIC representative to whom she spoke was misinformed, and he would have ALIC send a letter
to Webster confirming the five-percent guaranteed return. Id.' 46. Webster never received this
letter. Id. In October 2010, King stopped responding to Webster. Id., 47.
On October 6, 2010, Webster sent a letter to Eric Hall ofALIC, discussing her concerns. Id.
, 48. After several weeks with no response, Webster called ALIC again and spoke with a
representative who told her that ALIC would mail her a reply the next day. Id., 49. Webster never
received a reply. Id. In April 2011 , Webster learned that King was no longer affiliated with ALIC.
Id.,50. King, however, remains listed as Webster's ALIC representative. Id." 51, 62.
On November 10, 2011, Webster and the Thorp Trust filed this action in the Eastern District
of North Carolina against the companies and King (collectively, "defendants") [D.E. 1]. On
December 9,2011, plaintiffs filed an amended complaint. See Am. Compi. In their amended
complaint, plaintiffs assert twelve claims against the defendants: (1) a violation of Rule 10b-5 of
the Securities Exchange Act of 1934, see 17 C.F.R. § 240.10b-5; (2) a violation of the North
Carolina Securities Act, see N.C. Gen. Stat. § 78A-8; (3) a violation of the North Carolina
Investment Advisers Act, see N.C. Gen. Stat. § 78C-8; (4) a violation of the Investment Advisors
Act of 1940, see 15 U.S.C. § 80b-6; (5) a violation of Chapter 58 of North Carolina's General
Statutes, see N.C. Gen. Stat. § 58-60-170; (6) breach of an implied covenant of good faith and fair
dealing; (7) breach of fiduciary duty; (8) fraud; (9) fraud in the inducement; (10) negligence; (11)
liability for negligence based on respondeat superior; and (12) negligent infliction of emotional

4

distress. See Am. Compl. ft 64-157. On January 11, 2012, defendants moved to dismiss plaintiffs'
amended complaint [D.E. 22], and filed a memorandum in support [D.E. 23]. On March 12, 2012,
plaintiffs responded in opposition [D.E. 29], and on March 28,2012, defendants replied [D.E. 30].

II.
In analyzing a motion to dismiss under Federal Rule ofCivil Procedure 12(b)(6) for "failure
to state a claim upon which relief can be granted," a court must determine whether the complaint is

legally and factually sufficient. Fed. R. Civ. P. 12(b)(6); see Ashcroft v. Iqbal, 556 U.S. 662, 677-80
(2009); Bell All. Com. v. Twombly, 550 U.S. 544, 555-56 (2007); Coleman v. Md. Ct. App., 626
F.3d 187, 190 (4th Cir. 2010), aff'd, 132 S. Ct. 1327 (2012); Giarratano v. Johnson, 521 F.3d 298,
302 (4th Cir. 2008). A court need not accept a complaint's "legal conclusions, elements of a cause
of action, and bare assertions devoid of further factual enhancement." Nemet Chevrolet. Ltd. v.
Consumeraffairs.com. Inc., 591 F.3d 250, 255 (4th Cir. 2009); see Iqbal, 556 U.S. at 678-79.
Similarly, a court "need not accept as true unwarranted inferences, unreasonable conclusions, or
arguments." Giarratano, 521 F.3d at 302 (quotation omitted); see Iqbal, 556 U.S. at 678-79.
In addition, ''when a defendant attaches a document to its motion to dismiss, a court may
consider it in determining whether to dismiss the complaint if it was integral to and explicitly relied
on in the complaint and if the plaintiffs do not challenge its authenticity." Am. Chiropractic Ass'n
v. Trigon Healthcare. Inc., 367 F.3d 212, 234 (4th Cir. 2004) (quotation and alterations omitted); see
Braun v. Maynarg, 652 F.3d 557, 559 n.l (4th Cir. 2011); accord Tellabs. Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322 (2007). Here, defendants attached four documents to their
memorandum in support of their motion to dismiss: (1) annuity disclosure forms that Webster
allegedly signed [D.E. 23-1]; (2) model asset allocation agreements that Webster allegedly signed
[D.E. 23-2]; (3) new account forms that Webster allegedly signed [D.E. 23-3]; and (4) a client
5

disclosure booklet [D.E. 23-4]. Plaintiffs' amended complaint, however, does not explicitly rely
upon these documents, and the documents are not integral to any ofplaintiffs' claims. Accordingly,
at this stage of the litigation, the court does not consider these documents. See Bra::!!ll, 652 F.3d at
559 n.1 ("We do not consider the report here because it was not explicitly relied upon in the
complaint ...."); cf. Am. Chiropractic Ass'n, 367 F.3d at 233-34 (considering attached document
when the complaint explicitly identified the document as containing the alleged misrepresentation).

A.
Plaintiffs first two claims accuse defendants ofcommitting securities fraud under both federal
law, 17 C.F.R. § 240.10b-5, and North Carolina law, N.C. Gen. Stat. § 78A-8. See Am. Compl.-,r-,r
64-81. In construing section 78A-8, the court must, absent "definitive authority from North
Carolina's highest court, attempt to divine what that court would do were it faced with this [case]."
Teaguev. Bakker, 35 F.3d 978,991 (4th Cir. 1994). In doing so, the court may consider cases from
the North Carolina Court ofAppeals, treatises, and the practices of other states. See Twin City Fire
Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., 433 F.3d 365,369 (4th Cir. 2005). Section
78A-8 "closely parallels the Rule lOb-5 antifraud provision ofthe Securities Exchange Act." State
v. Davidsog,131 N.C. App. 276,282,506 S.E.2d 743, 748 (1998); see Teague, 35 F.3d at 991;
compare 17 C.F.R. § 240.lOb-5, with N.C. Gen. Stat. § 78A-8. Accordingly, the court construes
section 78A-8 in accordance with the construction of Rule 10b-5. See Teague, 35 F.3d at 991;
Davidson, 131 N.C. App. at 282-83, 506 S.E.2dat748; cf. Skinnerv. E.F. Hutton & Co.. Inc., 314
N.C. 267,275,333 S.E.2d 236, 241 (1985) (relying on Fourth Circuit precedent as guidance for
construing a state law that was "identical" to a federal statute).
To prevail on their securities-fraud claims, plaintiffs must show:

(I) a material

misrepresentation or omission by defendants, (2) made with scienter, (3) in connection with the
6

purchase or sale ofa security, (4) reliance, (5) economic loss, and (6) loss causation. See Matrixx
Initiatives. Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011); Dura Pharm.. Inc. v. Broudo, 544 U.S.
336, 341-42 (2005). Defendants challenge plaintiffs' securities-fraud claims on four grounds.
First, defendants contend that because securities fraud applies only to statements made "in
connection with the purchase or sale of a security," defendants are not liable for King's
representations made after Webster purchased the annuities. See Mem. Supp. Mot. 10. The court
agrees. See, e.g., Flickinger v. Harold C. Brown & Co.. Inc., 947 F.2d 595,598 (2d Cir. 1991); In
re Vivendi Universal. S.A. Sec. Litig., No. 02 Civ. 5571(RJH), 03 Civ. 2175(RJH), 2004 WL
876050, at *4 (S.D.N.Y. Apr. 22, 2004) (unpublished); accord SEC v. Pirate Investor LLC, 580 F.3d
233,244-45 (4th Cir. 2009) (per curiam). Accordingly, based on plaintiffs' amended complaint,
defendants can be held liable only for securities fraud based on King's representations that (1) the
annuities would have a five-percent guaranteed return, (2) the withdrawal penalty would be reduced
over time, and (3) King would advise Webster on her investments. See Am. Compl.

ft 19-20,

22-24. Plaintiffs' amended complaint fails to allege that King's other representations were made
in connection with Webster's purchase of the annuities.
Second, defendants argue that plaintiffs fail to state a claim based on King's representation
about the withdrawal penalties because plaintiffs do not allege that this representation caused an
economic loss. See Mem. Supp. Mot. 12-14. In support, defendants note that plaintiffs must allege
"a causal connection between the material misrepresentation and the loss." Dura Pharm., 544 U.S.
at 342; see Teachers' Ret. Sys. of La. v. Hunter, 477 F.3d 162, 185-86 (4th Cir. 2007).
Here, plaintiffs do not allege that they were penalized for withdrawing funds, or that they
avoided withdrawing funds out of fear of being penalized. Rather, plaintiffs allege a single
economic loss-diminution in the value of the investments, see Am. Compl.
7

~

41-but fail to

plausibly allege facts sufficient to infer that King's representations about the withdrawal penalties
relate to this loss. See Dura. Pharm., 544 U.S. at 346-47; Hunter, 477F.3dat 18fr-87. Accordingly,
plaintiffs fail to state a securities-fraud claim based on King's alleged representation about the
withdrawal penalties.
Third, defendants argue that plaintiffs do not plausibly allege scienter. To plausibly allege
a claim under Rule 10b-5, a plaintiff must "state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2); see,
~,

Tellabs. Inc., 551 U.S. at 313-14; Pub. Emps.' Ret. Ass'nofColo. v. Deloitte & Touche LLP,

551 F.3d 305,306 (4th Cir. 2009); Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618,623 (4th Cir.
2008). To prove a defendant acted with scienter, a plaintiff must show "a mental state embracing
intent to deceive, manipulate, or defraud." Tellabs. Inc., 551 U.S. at 319 (quotation omitted); see
Siracusano, 131 S. Ct. at 1323. A plaintiff may plead the requisite scienter by alleging either
intentional misconduct or recklessness. Ottmann v. Hanger Orthopedic Grp.. Inc., 353 F.3d 338,
343-44 (4th Cir. 2003); see Matrix Capital Mgmt. Fund. LP v. BearingPoint. Inc., 576 F.3d 172, 181
(4th Cir. 2009); Pub. Emps.' Ret., 551 F.3dat 313; Cozzarelli, 549 F.3d at 623. A strong inference
of scienter exists "only if a reasonable person would deem the inference of scienter cogent and at
least as compelling as any opposing inference one could draw from the facts alleged." Tellabs. Inc.,
551 U.S. at 324; see Merck & Co .. Inc. v. Reynolds, 130 S. Ct. 1784,1796 (2010); Pub. Emps.' Ret.,
551 F.3d at 306; Cozzarelli, 549 F.3d at 624. However, a plaintiff need not make a "smoking-gun"
allegation to create a strong inference ofscienter. Tellabs. Inc., 551 U.S. at 324. Rather, the court
will look at the totality of the facts alleged in the complaint. See id. at 326; Cozzarelli, 549 F.3d at
625.

8

Looking at the totality of the facts alleged in the amended complaint, plaintiffs' complaint
gives rise to a strong inference that King intentionally or recklessly misrepresented the five-percent
guaranteed return. First, plaintiffs' plausibly allege that defendants had a pecuniary motive to induce
Webster to purchase the annuities. See Am. Compl. ~ 31; see also Tellabs. Inc., 551 U.S. at 325
(holding that motive, though not dispositive, is "a relevant consideration" that "may weigh heavily
in favor of a scienter inference"). Second, King knew that Webster wanted to generate an annual
income while protecting her assets. See Am. Compl. ~ 21. Third, King was aware of Webster' sage
and that she was an unsophisticated investor who relied on his financial advice. See id.

~

57.

Fourth, King pressured Webster into moving all of her assets into ALIC annuities. See id.

~

24.

Fifth, King was evasive when Webster tried to question him about his representations. See id. W
45-47. Finally, plaintiffs allege that King's representations about the guaranteed returns were false.
See id. ~~ 43-44. Although every false statement does not necessarily demonstrate scienter, "certain
statements are such that, to show them false is normally to show scienter as well." Merck, 130 S.
Ct. at 1796. For instance, it is unlikely that King would state that an ALIC annuity has a five-percent
guaranteed return ''without being aware ofthe fact that his statement was false." Id. at 1797. Thus,
the totality ofthe facts alleged in the amended complaint plausibly suggest that King intentionally,
or at least recklessly, misrepresented the annuities' guaranteed returns.

See,~,

Tellabs. Inc., 551

U.S. at 324. Accordingly, plaintiffs allege facts that support a strong inference that King acted with
the requisite scienter when he misrepresented the annuities' guaranteed returns. 1

Congress introduced the requirement of a "strong inference" in the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). Pub. L. No. 104-67, § 101, 109 Stat. 737 (codified at
15 U.S.C. § 7Su-4(b»; see Tellabs. Inc., 551 U.S. at 313-14. This court need not decide whether
the Supreme Court ofNorth Carolina would adopt the PSLRA's heightened pleading standards for
state securities-fraud litigation. Even if the Supreme Court of North Carolina would not adopt the
PSLRA's heightened requirements, plaintiffs' section 7SA-S claim passes muster.
1

9

In contrast, plaintiffs have failed to plausibly allege facts supporting the inference that King
acted with the required scienter when he promised to provide investment advice to Webster. King's
unfulfilled promise does not, in itself, suggest scienter. Cf. Merck, 130 S. Ct. at 1797; see also Poth
v. Russey, 99 F. App'x 446, 454 (4th Cir. 2004) (per curiam) (unpublished). In order to show that
a promise was made with the requisite scienter, a plaintiff must plausibly allege that the defendant
intended not to perform the promise when he made it. See, e.!:., Gurary v. Winehouse, 235 F.3d 792,
801 (2d Cir. 2000); U.S. Quest Ltd. v. Kimmons, 228 F.3d 399, 407 (5th Cir. 2000). Plaintiffs
makes no such allegation against King regarding his promise to provide investment advice.
Next, defendants argue that Webster cannot claim she was defrauded because defendants had
warned her of the risks that eventually caused her economic losses. See Mem. Supp. Mot. 15. In
support, defendants cite Gasnerv. Bd. of Supervisors, 103 F.3d 351 (4th Cir. 1996), and argue that
plaintiffs cannot claim that their losses were the result ofsecurities fraud when ''the total mix ofthe
information made available [to the plaintiffs] warned them ofthe high risks they were facing, [but
they] nonetheless chose to purchase these [investments]." Id. at 360. To show that defendants
warned Webster of the risks, defendants rely solely on the documents attached to their
memorandum-documents that the court declines to consider. Thus, at this stage of the litigation.
defendants' argument fails.
Finally, defendants assert a separate challenge to plaintiffs' North Carolina securities-law
claim. Defendants argue that plaintiffs fail to plausibly allege a claim under N.C. Gen. Stat. § 78A-8
because plaintiffs fail to allege that Webster "did not know, and in the exercise of reasonable care,
could not have known ofthe untruth" ofKing' s representations. Mem. Supp. Mot. 17 (quoting Bob
Timberlake Collection. Inc. v. Edwards, 176 N.C. App. 33,41,626 S.E.2d 315,322 (2006». In Bob
Timberlake, the North Carolina Court of Appeals construed specific language in section 78A­
10

56(a)(2). See 176 N.C. App. at 40-41, 626 S.E.2d at 322 (''who does not sustain the burden ofproof
that he did not know, and in the exercise of reasonable care could not have known ofthe untruth or
omission" (quoting N.C. Gen. Stat. § 78A-56(a)(2))). The quoted language, however, is not found
in section 78A-8; therefore, Bob Timberlake does not help defendants.
In sum, plaintiffs plausibly allege that defendants violated Rule 10b-5 and section 78A-8 by
representing to Webster that the ALIC annuities would have guaranteed annual returns of five
percent. However, plaintiffs' complaint fails to state a securities-fraud claim beyond this single
alleged misrepresentation. Accordingly, the court grants in part and denies in part defendants'
motion to dismiss claims one and two. 2
B.

Plaintiffs' third claim alleges that defendants fraudulently solicited Webster as an investment
advisee and thereby violated N.C. Gen. Stat. §§ 78C-8(a)(1)-{2) and (b). See Am. Compl. ~82-91.
Defendants argue that plaintiffs fail to plausibly allege that Webster did not know, or could not have
discovered, the falsity ofKing's representations. See Mem. Supp. Mot. 18 (citing Bob Timberlake,
176 N.C. App. at 41,626 S.E.2d at 322). However, as explained, Bob Timberlake does not apply
to a claim under section 78C-8. Thus, the court denies defendants' motion to dismiss claim three.

C.
Plaintiffs' fourth claim alleges that defendants violated section 206 of the Investment
Advisers Act ("IAA"), 15 U.S.C. § 80b-6. See Am. Compl. ~~ 92-98. Defendants argue, without
elaboration, that the court should dismiss plaintiffs' IAA claim for the same reasons it should dismiss

2 Section 20(a) ofthe Securities Exchange Act imposes joint and several liability on a person
who "controls any person liable under any provision ofthis chapter." 15 U.S.C. § 78t(a); see Matrix
Capital, 576 F.3d at 192; Hunter, 477 F.3d at 168. Plaintiffs plausibly allege that the companies are
liable for King's representations under section 78t(a).

11

plaintiffs'Rwe lOb-5 claim. See Mem. Supp. Mot. 19. In addition, defendants ask the court to
dismiss the IAA claim because plaintiffs fail to state with particwarity the circumstances constituting
the scheme to defraud. See id.; Fed. R. Civ. P. 9(b).
Defendants' reasons for dismissing the Rwe lOb-5 claim do not apply to plaintiffs' IAA
claim.

To state a claim under section 80b-6, plaintiffs must allege that "defendant[s were]

investment advisor[s], that [they] engaged in fraudwent activities, and that [they] negligently
breached [their] fiduciary duty by making false and misleading statements or omissions ofmaterial
fact." SEC v. Gotchey, 981 F.2d 1251, 1992 WL 385284, at *2 (4th Cir. 1992) (per curiam)
(unpublished table decision); seeSECv. Capital Gains Research Bureau, Inc., 375 U.S. 180,192-95
(1963); Morris v. Wachovia Sec., Inc., 277 F. Supp. 2d 622,644 (E.D. Va. 2003), aff'd in part and
vacated on other grounds, 448 F .3d 268 (4th Cir. 2006). Plaintiffs' allegations are sufficient. Thus,
the court rejects defendants' Rwe IOb-5 argument.
As for defendants' Rwe 9(b) argument, "it is not clear that Rwe 9(b) applies in this case
because the claim arises under [section 206 of the IAA], a provision that is not appropriately
characterized as an anti-fraud provision." Morris, 277 F. Supp. 2d at 645. Moreover, assuming
without deciding that Rwe 9(b) applies to the section 206 claim, plaintiffs have satisfied Rwe 9(b)' s
requirements. See United States ex reI. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379
(4th Cir. 2008); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999);
Morris, 277 F. Supp. 2dat 645; cf. Am. Compl.

mr 19-20,26-27,54,92-98. Thus, the court denies

defendants' motion to dismiss claim four.

D.
In claim five, plaintiffs allege that defendants recommended an annuity that they knew was
unsuitable for Webster and, more generally, failed to supervise their product recommendations, in
12

violation ofN.C. Gen. Stat. § 58-60-170. See Am. Compl. ,,99-108. A violation ofsection 58-60­
170 "is an unfair method ofcompetition and unfair and deceptive act or practice in the business of
insurance in violation of[N.C. Gen. Stat.] 58-63-10." N.C. Gen. Stat. § 58-60-175(c). In claim five,
plaintiffs attempt to bring a private cause of action under section 58-63-10 to obtain relief for
defendants' alleged violation of section 58-60-170. See Am. Compl. ,,106-07. Defendants
respond that section 58-63-10 does not provide a private cause of action, and that plaintiffs instead
must bring their claim under North Carolina's Unfair and Deceptive Trade Practices Act
("UDTPA"), N.C. Gen. Stat. § 75-1.1. See Mem. Supp. Mot. 19-20.
Although Chapter 58 of North Carolina's General Statutes prohibits unfair and deceptive
practices by insurance companies, only North Carolina's Insurance Commissioner may directly
enforce the provisions of Chapter 58. See Martini v. Companion Prop. & Cas. Ins. Co., 198 N.C.
App. 39,46,679 S.E.2d 156, 160-61 (2009), rev'd on other grounds, 364 N.C. 234, 695 S.E.2d 101
(2010) (per curiam); see also N.C. Gen. Stat. §§ 58-63-20, -25, -32, -40 (granting the Insurance
Commissioner the authority to investigate and enforce provisions); cf. Defeat The Beal Inc. v.
Underwriters At Lloyd's London, 194N.C. App. 108, 116, 669 S.E.2d 48, 53 (2008) (private remedy
for violation ofN.C. Gen. Stat § 58-63-15 is UDTPA claim); Nelson v. Hartford Underwriters Ins.
Co., 177 N.C. App. 595,608-09,630 S.E.2d 221,231 (2006) (same). A plaintiff's remedy for a
violation ofChapter 58 is to file a UDTPAclaim. See Martini, 198 N.C. App. at 46-47, 679 S.E.2d
at 160-61; Defeat The Beat, 194 N.C. App. at 116, 669 S.E.2d at 53; Nelso!1, 177 N.C. App. at
608-09, 630 S.E.2d at 231. To state a claim under the UDTPA, a plaintiff must show (1) an unfair
or deceptive act or practice (2) in or affecting commerce (3) which proximately caused injury to the
plaintiff or to the plaintiff's business. See N.C. Gen. Stat. § 75-1.1; Defeat The Beat, 194 N.C. App.
at 116,669 S.E.2d at 53; Nelso!1, 177N.C. App. at 609,630 S.E.2d at 231. In analyzing a UDTPA
13

claim, a court may look to the prohibitions of Chapter 58 "for examples of conduct which would
constitute an unfair and deceptive act or practice." Defeat The Beat, 194 N.C. App. at 116,669
S.E.2d at 53-54.
Plaintiffs' amended complaint does not include a UDTPA claim. Rather, plaintiffs rely on
section 58-63-10 for a private cause of action, which Chapter 58 does not authorize. Accordingly,
plaintiffs have failed to state a claim, and the court grants defendants' motion to dismiss claim five.

E.
In claim six, plaintiffs allege that defendants breached an implied covenant ofgood faith and
fair dealing. See Am. Compl. W109-12. Defendants argue that plaintiffs' implied-covenant claim
fails to identify a contractual duty to accompany an implied covenant of good faith and fair dealing.
See Mem. Supp. Mot. 20-21 (citing Hardee's Food Sys.. Inc. v. Beardmore, No.
5:96-CV-508-BR(2), 1997 WL 33825259, at *2 (B.D.N.C. June 6, 1997)).

In the amended complaint, plaintiffs do not identify the alleged contract between plaintiffs
and defendants, much less identify the specific contractual terms to which an implied covenant of
good faith and fair dealing would attach. Accordingly, the court grants defendants' motion to
dismiss claim six.

F.
In claim seven, plaintiffs allege that defendants breached a fiduciary duty to Webster. See
Am. Compl. W113-117. In response, defendants argue that the economic loss rule bars the claim.
See Mem. Supp. Mot. 22-24. North Carolina courts have applied the economic loss rule to prohibit
recovery for purely economic loss in tort when a contract or warranty has already allocated the risk.
See,~, Kellyv.

Georgia-PacificLLC, 671 F. Supp. 2d 785, 791 (B.D.N.C.2009);N.C. State Ports

Auth. v. Lloyd A. FlY Roofing Co., 294 N.C. 73, 81,240 S.E.2d 345, 350 (1978), rejected in part
14

on other grounds 12Y Trs. of Rowan Technical ColI. v. J. Hyatt Hammond Assocs., Inc., 313 N.C.
230,328 S.E.2d 274 (1985); Land v. Tall House Bldg. Co., 165 N.C. App. 880,882-85,602 S.E.2d
1, 3-4 (2004). Defendants assert that "[p]laintiffs have alleged the existence of a contractual
relationship between the parties," and defendants ask the court to read the model asset allocation
agreements as having allocated the risk to plaintiffs. See Mem. SUpp. Mot. 22; see also [D.E. 23-2].
In the amended complaint, plaintiffs do not identify a specific contractual relationship
between the parties (beyond the annuities). Moreover, the court will not consider the model asset
allocation agreements in ruling on the motion to dismiss because the model asset allocation
agreements were not integral to and explicitly relied on in the amended complaint. See Braun, 652
F.3d at 559 n.l. Thus, based on the present record, the court denies defendants' motion to dismiss
claim seven.

O.
Plaintiffs' eighth and ninth claims accuse defendants ofcommitting fraud (claim eight) and
fraud in the inducement (claim nine). See Am. Compl.

~

118-34. Defendants contend that the

court should dismiss these claims because plaintiffs fail to plausibly allege intent to deceive and
reasonable reliance. See Mem. SUpp. Mot. 24-25.
In North Carolina, to prove either fraud or fraud in the inducement, a plaintiff must establish
"(1) [f]alse representation or concealment of a past or existing material fact, (2) reasonably
calculated to deceive, (3) made with intent to deceive, (4) which does in fact deceive, (5) resulting
in damage to the injured party." Whisnant v. Carolina Farm Credit 204 N.C. App. 84, 94-95, 693
S.E.2d 149, 156-57 (2010) (quotations omitted); compare Phelps-Dickson Builders, LLC v.
Amerimann Partners, 172 N.C. App. 427, 437, 617 S.E.2d 664,670 (2005) (fraud), with Harton v.
Harto~

81 N.C. App. 295, 298-99, 344 S.E.2d 117, 119-120 (1986) (fraud in the inducement). In
15

addition, the injured party's reliance must be reasonable. See Hudson-Cole Dev. Com. v. Beemer,
132 N.C. App. 341, 346, 511 S.E.2d 309, 313 (1999); Rosenthal v. Perkins, 42 N.C. App. 449,
451-52,257 S.E.2d 63,65 (1979).
First, defendants argue that the court should dismiss the fraud claims because plaintiffs fail
to plausibly allege that defendants intended to deceive Webster. See Mem. Supp. Mot. 24-25.
Intent to deceive requires that the defendant have "both knowledge and an intent to deceive,
manipulate or defraud." Malone v. Topsail Area Jaycees. Inc., 113 N.C. App. 498, 502-{)3, 439
S.E.2d 192, 195 (1994) (emphasis and quotation omitted); see RD & J Props. v. Lauralea-Dilton
Enters., LLC, 165 N.C. App. 737,745,600 S.E.2d 492, 498 (2004). Mere reckless indifference to
the truth is insufficient to satisfy this element. Malone, 113 N.C. App. at 502, 439 S.E.2d at 194.
Here, plaintiffs plausibly allege that defendants knew King's representations concerning the
annuities were false and intended to deceive Webster. See Am. Compi.

ft 120-21, 128-29.

In

addition, plaintiffs plausibly allege sufficient facts to infer that King intended to deceive Webster
with his misrepresentations about the annuities' guaranteed returns. See Phelps-Dickson, 172 N.C.
App. at 437,617 S.E.2d at 670. Thus, this argument fails.
Second, defendants argue that plaintiffs fail to plausibly allege that Webster reasonably
relied on King's representations. Under North Carolina law, a plaintiff is unreasonable in relying
on a defendant's misrepresentation when the plaintiff "could have discovered the truth upon
inquiry." Hudson-Cole, 132 N.C. App. at 346,511 S.E.2d at 313; see Rosenthal, 42 N.C. App. at
452, 257 S.E.2d at 66. Thus, when the allegations in a plaintiff's complaint show that the plaintiff
could have inquired into the truth of the representation, the plaintiff must make the additional
allegation "that he was denied the opportunity to investigate or that he could not have learned the
true facts by exercise of reasonable diligence." Hudson-Cole, 132 N.C. App. at 346,511 S.E.2d at
16

313; see Rosenthal, 42 N.C. App. at 452, 257 S.E.2d at 66. Most commonly, this requirement bars
claims where a plaintiff unreasonably relied on representations concerning real property.

See,~,

Barfield v. Matos, 714 S.E.2d 812,824-26 (N.C. Ct. App. 2011) (restrictive covenants); Hudson­
Cole, 132 N.C. App. at 346-47, 511 S.E.2d at 313 (deed of trust); Rosenthal, 42 N.C. App. at 452,
257 S.E.2d at 66 (property's risk of flooding). However, the North Carolina Court ofAppeals has
applied this requirement to representations about insurance policies, see Cobb v. Pa. Life Ins. Co.,
715 S.E.2d 541,549-50 (N.C. Ct. App. 2011); Pinney v. State Farm Mut. Ins. Co., 146 N.C. App.
248,256, 552 S.E.2d 186, 192 (2001), and bank accounts. See Kucmierz v. Four Oaks Bank & Trust
Co., 202 N.C. App. 148, 690 S.E.2d 559, 2010 WL 157550, at *3 (2010) (unpublished table
decision).
Here, plaintiffs plausibly allege that Webster was unable to learn the truth by exercising
reasonable diligence. Whether plaintiffs can prove this allegation is an issue for another day.
Accordingly, the court denies defendants' motion to dismiss claims eight and nine.

H.
In claim ten, plaintiffs accuse King of being negligent in his role as a financial advisor to
Webster, and accuse ALIC of being negligent in supervising King and responding to Webster's
inquires. See Am. Compl. -,r-,r 135--44. In claim eleven, plaintiffs accuse the companies of being
liable for King's negligence based on respondeat superior. See id. -,r-,r 145-51. Defendants respond
that the economic loss rule bars plaintiffs' negligence claims. See Mem. Supp. Mot. 26. The
economic loss rule prohibits recovery for purely economic loss in tort when a contract has allocated
therisk. See, e.g., Kelly, 671 F. Supp. 2dat 791; N.C. State Ports Auth., 294 N.C. at 81, 240 S.E.2d
at 350; Lang, 165 N.C. App. at 882-85,602 S.E.2d at 3--4. On the present record, defendants have
failed to identify a contract that allocates the risk between the parties. Accordingly, the court denies
17

defendants' motion to dismiss claims ten and eleven.

1.
In claim twelve, Webster alleges that defendants' negligent conduct caused her severe
emotional distress. See Am. Compl. ~~ 152-57. To prevail on a claim of negligent infliction of
emotional distress, a plaintiff must show: (1) the defendant engaged in negligent conduct; (2) it was
reasonably foreseeable that such conduct would cause the plaintiff severe emotional distress; and (3)
the defendant's conduct, in fact, caused the plaintiff severe emotional distress. E.g., Sorrells v.
M.Y.B. Hospitality Ventures of Asheville, 334 N.C. 669, 672, 435 S.E.2d 320, 321-22 (1993);
Gardnerv. Gardner, 334N.C. 662, 665-66,435 S.E.2d324, 327 (1993). Defendants seek dismissal
of this claim because (among other things) Webster fails to allege sufficient facts to infer that
defendants reasonably could have foreseen that their conduct would cause severe emotional distress
to Webster. See Mem. Supp. Mot. 26-27.
"Although the question of foreseeability is generally for the jury, the trial judge is required
to dismiss the claim as a matter of law upon a determination that the injury is too remote." Wrenn
v. Byrd, 120 N.C. App. 761, 765,464 S.E.2d 89, 92 (1995); see Sorrells, 334 N.C. at 674, 435
S.E.2d at 323. A court should examine the chain of alleged events connecting the defendant's
negligent conduct to the plaintiffs severe emotional distress, and dismiss the claim if ''the initial
and final events ... are not so proximately related that the result could have been foreseeable to the
[defendant]." Robblee v. Budd Servs.. Inc., 136 N.C. App. 793, 796, 525 S.E.2d 847, 850 (2000);
see Sorrell, 334 N.C. at 674, 435 S.E.2d at 323. Moreover, "a plaintiff must allege and prove that

severe emotional distress was a foreseeable and proximate result ofthe negligence; mere temporary
fright, disappointment or regret will not suffice." Gardner, 334 N.C. at 667, 435 S.E.2d at 328
(quotation and alternations omitted); see Sorrells, 334 N.C. at 672,435 S.E.2d at 322.
18

In Sorrells, parents sued a bar owner for negligent infliction of emotional distress because
their son died in an accident after he was negligently served alcohol at the bar. See 334 N.C. at 671,
435 S.E.2d at 321. The Supreme Court ofNorth Carolina "conclude[d] as a matter oflawthat the
possibility (1) the defendant's negligence in serving alcohol to [the son] (2) would combine with [the
son's] driving while intoxicated (3) to result in a fatal accident (4) which would in turn cause [the
son's] parents (if he had any) not only to become distraught, but also to suffer severe emotional
distress . . . , simply was a possibility too remote to permit a finding that it was reasonably
foreseeable." Id. at 674, 435 S.E.2d at 323 (emphasis and internal quotation marks omitted). In
Robblee, an employee sued a security company for negligent infliction ofemotional distress because
a former disgruntled employee returned to the employee's workplace and killed and wounded several
employees. See 136 N.C. App. at 793-94, 525 S.E.2d at 848. The North Carolina Court ofAppeals
held that "[t]he possibility that (1) [the] defendant's negligence in failing to retrieve the temporary
access card (2) would combine with [the killer's] rage against his former employer (3) to result in
a workplace shooting (4) which would cause [the plaintiff] to suffer emotional distress" was ''too
remote to permit a finding that it was reasonably foreseeable." Id. at 797, 525 S.E.2d at 850
(quotation omitted).
Here, assuming Webster adequately alleges defendants' negligence and Webster's severe
emotional distress, the complaint still fails to provide facts sufficient to infer that defendants would
have foreseen King's conduct resulting in Webster's severe emotional distress. The possibility that
(1) King's negligence (2) would combine with the credit crisis of2008 and (3) Webster's refusal to

control her funds herself (4) to result in deep stock losses (5) which would cause Webster not just
emotional distress, but severe emotional distress, is ''too remote to permit a finding that it was
reasonably foreseeable." Sorrells, 334 N.C. at 674,435 S.E.2d at 323; Robblee, 136 N.C. App. at
19

797,525 S.E.2d at 850 (quotation omitted). Because Webster fails to plausibly allege that Webster's
severe emotional distress was reasonably foreseeable, the court grants defendants' motion to
dismiss claim twelve.

III.
The court GRANTS in part and DENIES in part defendants' motion to dismiss [D.E. 22].
The court DISMISSES in part claims one and two, and DISMISSES claims five, six, and twelve.
Plaintiffs may proceed with claims one and two, only to the extent the claims rely on King's
representation about the annuities' guaranteed returns, and claims three, four, seven, eight, nine, ten,
and eleven.
SO ORDERED. This Jiday of September 2012.

J
SC.DEVERID
ChleUnited States District Judge

20