Lichtner et al v. American National Insurance Company

Filing 30

ORDER GRANTING IN PART AND DENYING IN PART 19 Defendant's Motion for Judgment on the Pleadings, and DENYING AS MOOT 7 Defendant's Motion to Dismiss for Failure to State a Claim. Judgment on the pleadings in favor of Defendant on th e plaintiff's negligence and negligent misrepresentation claims is granted. The defendant's motion is denied as it relates to the plaintiff's North Carolina Unfair and Deceptive Trade Practices Act and the North Carolina Securities Act claims. Signed by US District Judge Terrence W. Boyle on 12/2/2013. Counsel is directed to read Order in its entirety for critical information. (Fisher, M.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
SOUTHERN DIVISION
No. 7:13-CV-58-BO

JANET A. LICHTNER, CONWAY H.
SPIERS, PHILIP W. STOPHEL, and
BRENDA F. STOPHEL,
Plaintiffs,

)
)
)
)
)

V.

)

AMERICAN NATIONAL INSURANCE
COMPANY,
Defendant.

ORDER

)
)
)
)

This cause comes before the Court on defendant's motion for judgment on the pleadings.

1

Plaintiffs have responded, defendant has replied, and the matter is ripe for review. For the
reasons discussed below, defendant's motion is granted in part and denied in part.
BACKGROUND
Plaintiffs seek to impose liability on defendant for its alleged role in a Ponzi scheme
orchestrated by Diversified Lending Group (DLG) and its investment services division, Applied
Equities, Inc (AEI). DLG offered investment programs in, inter alia, what was held out to be a
business operation consisting of the acquisition and operation of income producing properties.
DLG offered two investment options- the 12% option and the 9% option. Investors in the 12%
option received a securitized note and were guaranteed an annual return of 12%. Investors in the
9% option were guaranteed a 9% annual return and their principal investment was to be 100%

1

Also pending is defendant's motion to dismiss plaintiffs' complaint. [DE 7]. In response to the
motion to dismiss, plaintiffs filed an amended complaint, to which defendant has filed an answer
and the instant motion for judgment on the pleadings. In light of the foregoing, defendant's
motion to dismiss is denied as moot.

insured by a AA or better rated insurance company. Defendant sold annuities to DLG which
were then assigned to plaintiffs as a part of the 9% investment option.
PROCEDURAL HISTORY
Plaintiffs originally filed suit against defendant in New Hanover County Superior Court
on March 9, 2012, alleging violations ofNorth Carolina's Securities Act. Plaintiffs voluntarily
dismissed that action without prejudice on September 9, 2012. Plaintiffs then filed this suit
against defendant on February 25, 2013, in New Hanover County Superior Court alleging a
claim for unfair and deceptive trade practices under North Carolina law. Defendant timely
removed the action to this Court on the basis of its diversity jurisdiction. 28 U.S.C. §§ 1441;
1332.
Defendant moved to dismiss plaintiffs' complaint as beyond the statute of limitations.
Plaintiffs, in response, amended their complaint, and now allege claims for common law fraud,
unfair and deceptive trade practices, negligent misrepresentation, negligence, and, in the
alternative, violations of the North Carolina Securities Act. Plaintiffs further contend that
defendant should be equitably estopped from asserting a statute of limitations defense due to the
fraudulent actions of one of its agents, who plaintiffs contend had actual knowledge of the fraud
described and intentionally deceived plaintiffs into believing their investments were fully
secured by annuities issued by defendant.
In response to plaintiffs' amended complaint, defendant filed an answer and moved for
judgment on the pleadings pursuant to Rule 12(c) ofthe Federal Rules of Civil Procedure.
Defendant contends that all of plaintiffs' claims are barred by the applicable statutes of
limitations, that it should not be estopped from raising such defense, and that plaintiffs have
failed to state claims upon which relief can be granted. Plaintiffs do not contest defendant's

2

motion for judgment on the pleadings as to their claims for negligence and negligent
misrepresentation. [DE 21 at 1].
DISCUSSION

I.

LEGAL STANDARD

A Rule 12(c) motion for judgment on the pleadings raising the defense of failure to state
a claim upon which relief can be granted is assessed under the Rule 12(b)( 6) standard. Edwards

v. City ofGoldsboro, 178 F.3d 231,243 (4th Cir. 1999). A Rule 12(b)(6) motion tests the legal
sufficiency ofthe complaint. Papasan v. Attain, 478 U.S. 265, 283 (1986). When acting on a
motion to dismiss under Rule 12(b)(6), "the court should accept as true all well-pleaded
allegations and should view the complaint in a light most favorable to the plaintiff." Mylan

Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). A complaint must allege enough facts
to state a claim for relief that is facially plausible. Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
555 (2007). Facial plausibility means that the facts plead "allow[] the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged"; mere recitals of the
elements of a cause of action supported by conclusory statements do not suffice. Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009).
The facts taken in the light most favorable to plaintiffs are as follows. Relying on
representations by Danny Alvis, an investment advisor with a radio program, plaintiffs each
initially invested in the 12% option. PlaintiffLichtner purchased a five-year investment note in
the amount of $275,000 dated March 13, 2007; plaintiff Spiers purchased a five-year investment
note in the amount of $190,500 dated March 28, 2007; plaintiffs Stophel purchased a five-year
investment note in the amount of $100,000 dated April 19, 2006.

3

In the spring of2007, plaintiffs were each notified that Alvis may not have been truthful
about their investments with DLG and were given the opportunity to remain in the 12% option,
convert to the 9% option, or rescind their entire investments. Plaintiffs, relying on the
representations of DLG and AEI, each elected to convert to the 9% option; plaintiff Lichtner
relied explicitly on the representations of Diane Cano, president of AEI and authorized agent of
defendant, that her principal would be entirely secured by the collateral assignment of an
annuity. During the summer of2007, Cano, acting within the course and scope ofher agency
relationship with defendant, applied for annuities on the life of Bruce Friedman, president of
DLG. The annuities were then issued by defendant and assigned to plaintiffs as supposed
security for 100% of their initial investments. The face of the assignments contained a notation
that the annuities secured each of plaintiffs' contracts and was for "not more than" the amount of
each plaintiffs' principal investment with DLG. In fact, each annuity had been issued in the
amount of approximately 10% of each plaintiffs' initial investment.
On March 4, 2009, the U.S. Securities and Exchange Commission (SEC) filed an action
against DLG, AEI, and Bruce Friedman. Plaintiffs each received a letter in March 2009 from the
receiver for DLG and AEI informing them that the government had taken control of the assets
and liabilities ofDLG and AEI. Following DLG's default on plaintiffs' notes, each plaintiff
received from defendant the cash value of their annuity contracts, or roughly 10% of their
principal investments with DLG.

II.

STATUTE OF LIMITATIONS

The primary issue for the Court to decide in regard to defendant's statute oflimitations
defense is when plaintiffs' claims accrued. Claims under the North Carolina Unfair and
Deceptive Trade Practices Act (UDTP A) must be brought within four years after the cause of

4

action accrues. N.C. Gen. Stat. § 75-16.2. Because plaintiffs' claim is based on defendant's
allegedly fraudulent conduct, their claim accrued "when the fraud is discovered or should have
been discovered with reasonable diligence." Nash v. Motorola Comm. & Elec., Inc., 96
N.C.App. 329,331 (1989). "The question ofwhen aplaintiff'should have discovered' the fraud
is typically a question of fact, but this question may be determined as a matter of law where the
plaintiff clearly had both the capacity and opportunity to discover the fraud." Faircloth v. Fin.

Asset Sec. Corp. Mega Mortgage Homeowner Loan Trust, 87 F. App'x 314, 319 (4th Cir. 2004)
(citing Grubb Prop., Inc. v. Simms Inv. Co., 101 N.C.App. 498 (1991)). Similarly, claims under
the North Carolina Securities Act (NCSA) must be brought within three years after a person
discovers the facts constituting the violation or should have discovered a deceitful or fraudulent
act that conceals the violation. N.C. Gen. Stat. § 78A-56(f).
Defendant contends that plaintiffs were on inquiry notice in the summer of 2007, after
they had received information that there may be a problem with their investments and were given
the opportunity to withdraw their investments or convert to the 9% investment program, which
offered a lower return but was purported to be secured 100% by a collateral assignment of
annuities issued by a highly rated insurance company. Defendant further contends that plaintiffs
had every opportunity to inquire about the actual amount of their annuities once they had been
assigned. Defendant does not at this stage dispute that the fraud was in fact discovered by
plaintiffs in March 2009 when they were contacted by the receiver for DLG and AEI after the
SEC had initiated suit against them.
The Court finds that at this stage ofthe proceeding the question of fact as to when
plaintiffs should have discovered the fraud is not resolvable, and that a reasonable trier of fact
could conclude that plaintiffs should not have discovered the fraud until they were notified of it

5

by the SEC. Plaintiffs have alleged that the fraud was actively concealed from them and that the
annuity assignments were drafted in such a way as to "disguise and obfuscate" the fact that the
annuities were issued for only a fraction of plaintiffs' investments, and plaintiffs could be found
to have had no reason, based upon the assurances given by DLG and AEI, that the annuities
would not cover their full investment as promised. Ansley v. HealthMarkets, Inc., No. 5:08-CV88-BR, 2011 WL 5903926 *5 (E.D.N.C. November 22, 2011). Plaintiffs have further alleged
that defendant, who issued approximately forty annuities on the life of the president ofDLG, was
through its agent Cano, complicit in the fraud committed by DLG and AEI. As the factual
allegations form a sufficient basis upon which to find that the plaintiffs were not on inquiry
notice of any fraud in 2007, the Court will for purposes of this motion start plaintiffs' limitations
clock on March 13, 2009.
A. UDTPA Claim

The Court finds that plaintiffs' UDTP A claim based on fraud as alleged in their amended
complaint clearly relates back to plaintiffs' UDTP A claim alleged in their original complaint.
Rule 15(c) of the Federal Rules of Civil Procedure provides that an amendment relates back to
the date of the original pleading "[w]henever the claim ... asserted in the amended pleading
arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the
original pleading". "The rationale of Rule 15(c) is that a party who has been notified of litigation
concerning a particular occurrence has been given all the notice that the statutes of limitations
were intended to provide." Baldwin Cnty Welcome Ctr. v. Brown, 466 U.S. 147, 149 n.3 (1984).
Here, plaintiffs alleged in their original complaint that defendant violated the UDTP A in
preparing assignments without listing the actual amount of the annuity on the face of the
assignment and that the assignments deceived plaintiffs by giving them the false impression that

6

the annuities were in an amount equal to their respective investments. [DE 4-1 at ,-r 60-63].
There is clearly a factual nexus between the amended and the original complaint, the allegations
in the original complaint are sufficient to put defendant on notice of plaintiffs' UDTPA claim
based on fraud, and defendant would not be prejudiced as it has clearly been forewarned of
plaintiffs' claims against it. Grattan v. Burnett, 710 F.2d 160, 163 (4th Cir. 1983). Because
plaintiffs' UDTPA claim based on fraud relates back, it is deemed as having been filed on
February 25, 2013, within the four year limitations period should the period be found to begin on
March 13, 2009.
B. North Carolina Securities Act claim

Nor is plaintiffs' North Carolina Securities Act claim barred by the applicable statute of
limitations. As noted above, plaintiffs had three years after they discovered the facts constituting
the violation or should have discovered a deceitful or fraudulent act that concealed the violation
to file their claim. Using an accrual date of March 13, 2009, plaintiffs' NCSA claim became
stale on March 13, 2012. Plaintiffs filed their initial action in state court, alleging inter alia, an
NCSA claim, on March 9, 2012. [DE 21-1].
Although plaintiffs voluntarily dismissed their state court action in September 2012, the
NCSA claim is deemed timely filed as it was re-filed within one year of plaintiffs' voluntary
dismissal without prejudice. Rule 41 of theN orth Carolina Rules of Civil Procedure provides
that "[i]f an action commenced within the time prescribed therefor, or any claim therein, is
dismissed without prejudice under this subsection, a new action based on the same claim may be
commenced within one year after such dismissal." N.C. R. Civ. P. § 1A-1, Rule 41(a)(l). As
plaintiffs' amended complaint, which again alleges a Securities Act claim against defendant and
involves the same conduct, was filed on May 14, 2013, within one year of the voluntary

7

dismissal, the claim continues to be deemed as having been filed on March 9, 2012, within the
limitations period. See e.g. Brannockv. Brannock, 135 N.C.App. 635,639 (1999) (so long as
new action is substantially the same, involving the same parties and the same cause of action,
Rule 41 savings provision is applicable); see also Porter v. Groat, 713 F. Supp. 893, 896-7
(W.D.N.C. 1987) (federal courts have long recognized that applicability ofthe Rule 41 savings
clause to actions recommenced in federal court).

II.

PLAINTIFFS HAVE STATED CLAIMS UPON WHICH RELIEF CAN BE GRANTED

A. Fraud claim

Plaintiffs have pled with the requisite particularity for their fraud based claim to proceed.
Failure to plead fraud claims with particularity as required by Rule 9(b) of the Federal Rules of
Civil Procedure is considered to be a failure to state a claim upon which relief can be granted.
Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 783 n.5 (4th Cir. 1999).
Particularity under Rule 9(b) requires that a plaintiff "plead the time, place, and contents of the
false representations, as well as the identity of the person making the representation and what he
obtained thereby." !d. at 784 (citation omitted). The purpose of Rule 9(b) is to put defendants
on notice and protect defendants from frivolous suits or fishing expeditions, and dismissal under
Rule 9(b) is not appropriate ifthe "court is satisfied (1) that the defendant has been made aware
of the particular circumstances for which [it] will have to prepare a defense at trial, and (2) that
plaintiff has substantial prediscovery evidence ofthose facts." !d.
Plaintiffs have alleged that an agent of defendant made false representations and
omissions, that were reasonably calculated and made with the intent to deceive, and which did in
fact deceive and injure plaintiffs. See Ragsdale v. Kennedy, 286 N.C. 130, 139 (1974) (listing
elements of fraud claim). Plaintiffs have alleged that it was defendant's agent who made the

8

false representations, the time period in which such false representations were made, that Cano
received commissions from defendant for her sales of annuities to DLG for assignment to
plaintiffs, and defendant is well on notice of the circumstances for which it may have to prepare
a defense. Plaintiffs have also sufficiently alleged a fraudulent omission by defendant as they
have alleged that during these transactions an agent of defendant took steps to misrepresent
material facts, the actual amounts of the annuities, from plaintiffs, potentially giving rise to a
duty to speak on the part of defendant. See Breeden v. Richmond Cmty Call., 171 F.R.D. 189,
196 (M.D.N.C. 1997).
At bottom, plaintiffs have sufficiently alleged that defendant's agent, who also played a
greater role in an overall scheme to defraud plaintiffs, perpetrated fraud on plaintiffs regarding
defendant's annuities by actively concealing information and affirmatively misleading plaintiffs,
as a result of which plaintiffs suffered financial injury. Moreover, plaintiffs have alleged that
defendant, who through its agent sold approximately forty annuities on the life of the principal of
a Ponzi-like scheme, gained a benefit from the alleged fraud perpetrated by its agent Cano.
Viewing the facts as alleged in the light most favorable to plaintiffs, as the Court is
constrained to do at this stage of the proceeding, plaintiffs have stated their UDTP A claim based
on fraud with sufficient specificity and judgment on the pleadings in favor of defendant is not
appropriate.
B. North Carolina Securities Act claim

Plaintiffs agree that they may not bring a cause of action under the NCSA for claims
involving annuities. !d. at§ 78A-2(11) (defining security not to include annuities). Plaintiffs
contend, however, that defendant may be liable as a controlling party under the NCSA, which

9

makes it unlawful for any person, in connection with the offer, sale or purchase of any security,
directly or indirectly:
(1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue
statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which they are
made, not misleading, or, (3) to engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any person.
Id. at§ 78A-8. Moreover, persons who directly or indirectly control persons liable under the Act
are jointly and severally liable for violations of the NCSA, unless they are able to show that they
did not know nor could have known with the exercise of reasonable care that the Act was being
violated. N.C.Gen.Stat. § 78A-56(c)(l).
At this stage of the proceeding, plaintiffs have sufficiently alleged that defendant directly
or indirectly controlled its agent, Cano, who committed securities fraud, and plaintiffs have
further alleged that defendant had reason to know, based in part upon its sale of numerous
annuities on the life ofthe president ofDLG, that Cano and DLG were violating the North
Carolina Securities Act. See e.g. Waterman v. Alta Verde Indus., Inc., 643 F. Supp. 797, 808
(E.D.N.C. 1986) (finding that aiding and abetting liability exists under§ 78A-56). Because the
factual allegations in support of plaintiffs' alternative claim for violations of the NCSA are
sufficient to nudge their claim across the line from conceivable to plausible, Twombly, 550 U.S.
at 570, it survives defendant's Rule 12(c) motion.
CONCLUSION
Accordingly, for the reasons discussed above, defendant's motion for judgment on the
pleadings [DE 19] is GRANTED IN PART AND DENIED IN PART. Judgment on the
pleadings in favor of defendant on plaintiffs' negligence and negligent misrepresentation claims
is GRANTED; defendant's motion is DENIED as it relates to plaintiffs' North Carolina Unfair

10

and Deceptive Trade Practices Act and North Carolina Securities Act claims. Defendant's
motion to dismiss [DE 7] is DENIED AS MOOT.

SO ORDERED,

~
this~day ofNk'm ~20I3.
1

~w.nr
T
NCE W. BOYLE
UNITED STATES DISTRICT JUDGE

II