North Carolina Mutual Life Insurance Company v. Stamford Brook Capital, LLC et alMEMORANDUMM.D.N.C.August 16, 2018# 6918137_1.Docx IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA DURHAM DIVISION Case No. 1:16-cv-1174 NORTH CAROLINA MUTUAL LIFE INSURANCE COMPANY, a North Carolina corporation, Plaintiff, vs. STAMFORD BROOK CAPITAL, LLC, a Delaware limited liability company, et al. Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) MEMORANDUM IN SUPPORT OF MOTION TO DISMISS AMENDED COMPLAINT Defendants Forefront Capital Holdings, LLC (“Forefront Capital”); Stamford Brook Capital, LLC (“Stamford Brook”); Bradley Cole Reifler1; and Michael Flatley (collectively, the “Forefront Defendants”) file this memorandum in support of the their motion to dismiss the Amended Complaint in this matter pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.2 Please note that undersigned counsel moved to withdraw as counsel for the Forefront Defendants on July 24, 2018 (DE #92), which motion is still pending before the 1 As to Defendant Bradley Reifler, the motion and this brief should be considered only as conditional on the disposition of Plaintiff’s Motion to Reopen Case as to this party, which has not completed briefing (DE #89). Should that motion be denied, this motion may not need to be considered as to Defendant Reifler. 2 “Forefront Capital, LLC” was a named defendant in the original Complaint. Such an entity apparently exists in Delaware, but it has no relation to Forefront Capital Holdings, LLC or any of the parties in this matter. It is not listed as a Defendant in the Amended Complaint. Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 1 of 16 2 Court. This Memorandum is substantively the same as the one filed in support of the Forefront Defendants’ motion to dismiss the original complaint (DE #26), which motion was dismissed as moot by the filing of the Amended Complaint. The Amended Complaint retains the same claims which the Forefront Defendants previously sought to dismiss, and the Forefront Defendants wish to reassert that motion to dismiss to the full extent of its applicability. NATURE OF THE CASE This case concerns the investment of certain funds held in trust for the benefit of Plaintiff North Carolina Mutual Life Insurance Company (“North Carolina Mutual”), which were allegedly invested in categories of investments not approved for investment under state insurance laws applicable to North Carolina Mutual. The Defendants include Summit Trust Company (“Summit”), the trustee; Port Royal Reassurance Company SPC, Ltd. (“Port Royal”), North Carolina Mutual’s reinsurer and the grantor of the trust funds at issue; and the Forefront Defendants (the subject of this motion), whom Port Royal retained to manage the investment of certain trust funds. Additional defendants were named in the Amended Complaint filed on August 2, 2018. The Amended Complaint alleges that certain restrictions were placed on the manner in which the trust funds could be invested which were not heeded. Based on that alleged improper conduct, North Carolina Mutual asserts claims for an accounting and breach of contract against Summit and Port Royal (Counts XIV and IX), a claim for Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 2 of 16 3 breach of contract against Stamford Brook (Count X), claims for breach of fiduciary duty, aiding and abetting fiduciary duty, constructive fraud, actual fraud, and unfair and deceptive trade practices against the Forefront Defendants collectively (Counts I–IV, VII), and claims for piercing the corporate veil and civil conspiracy against Reifler and Flatley individually (Counts VII and VIII). The Amended Complaint adds additional claims and additional parties. The Forefront Defendants assert that the claims against them collectively fail to state a claim upon which relief can be granted, and therefore should be dismissed pursuant to Fed R. Civ. P. 12(b)(6). QUESTIONS PRESENTED (1) Does the Amended Complaint allege valid claims for breach of fiduciary duty/aiding or abetting a breach of fiduciary duty or constructive fraud where the Forefront Defendants’ only direct relationship was with Port Royal? (2) Does the Amended Complaint plead an actual fraud claim with sufficient particularity by alleging solely that the Forefront Defendants made numerous misrepresentations? (3) Does the Amended Complaint plead a valid claim under N.C. Gen. Stat. § 75-1.1 where the allegations of the Amended Complaint concern securities transactions and do not constitute fraud or constructive fraud? Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 3 of 16 4 RELEVANT FACTS ALLEGED IN THE COMPLAINT3 As alleged in the Amended Complaint, North Carolina Mutual entered into an indemnity reinsurance agreement with Port Royal, pursuant to which Port Royal “accepted and reinsured on a one-hundred percent (100%) coinsurance basis” certain risks, liabilities, and obligations of North Carolina Mutual under certain of its life- insurance policies and annuity contracts. Am. Compl. ¶ 18, ECF No. 97. To ensure Port Royal’s ability to meet its reinsurance obligations, North Carolina and Port Royal also entered into a Trust Agreement under which Port Royal was required to deposit substantial cash reserves (the “Trust Funds”) into a trust account (the “Trust”). North Carolina Mutual is the beneficiary of the Trust, and Summit is the trustee. Am. Compl. ¶ 20–24. The Trust Agreement placed certain restrictions on the manner in which the Trust Funds could be invested. Am Compl. ¶ 27. The Trust Agreement permits Port Royal to appoint an Investment Manager “to manage the investment of the Trust Assets.” Am. Compl. ¶ 25. The Trust Agreement states that Port Royal has appointed Stamford Brook as the Investment Manager. Am. Compl. ¶ 29. Stamford Brook is allegedly owned by Bradley Reifler.” Am. Compl. ¶ 49. However, the Amended Complaint admits that on September 1, 2016, Forefront Capital sent North Carolina Mutual a letter informing it that Stamford Brook “is and always has been a dormant company that never operated in any capacity.” Am Compl. ¶ 237. 3 The facts recited in this memorandum are taken as true solely for the purposes of this motion to dismiss. Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 4 of 16 5 North Carolina Mutual was given two different Investment Advisory Agreements, purporting to be executed by Stamford Brook and Port Royal. The terms of the two Investment Advisory Agreements are identical, but the signature blocks are different. For one, an illegible signature and no printed name appears on behalf of Stamford Brook, and the signature of Stephen H. Fickes appears on behalf of Port Royal. Compl. Ex. B at 4, ECF No. 1-2. North Carolina Mutual alleges that this is the “true” Investment Advisory Agreement, and that the illegible signature is that of “David Wasitowski, as Forefront Capital Holdings’ CFO on behalf of Stamford Brook.” The other agreement, which North Carolina Mutual dubs the “fraudulent” Investment Advisory Agreement, purports to be signed by Bradley Reifler on behalf of Stamford Brook and by Michael Flatley on behalf of Port Royal. Am. Compl. ¶ 91.. Flatley, however, has never held any position with Port Royal, in any capacity. Am. Compl. ¶ 88. North Carolina Mutual cites several other documents in the Amended Complaint, including a purported “List of Authorized Signers” for the Trust that included Reifler and Flatley as authorized signers, despite the fact that Reifler and Flatley were not in fact authorized signers for the Trust, Am. Compl. ¶¶ 89–91. Other documents which were attached to the original Complaint include (1) a letter purporting to be from Reifler to North Carolina Mutual on the letterhead of Forefront Capital Holdings, LLC, stating that Stamford Capital is wholly owned by Reifler, Compl. ¶ 41; Compl. Ex. E, ECF No. 1-5; and (2) a second letter from Reifler to North Carolina Mutual, on a different Forefront Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 5 of 16 6 Capital letterhead, which Reifler signed as “Founder & Trustee” of Forefront Capital. Compl. ¶ 42, Compl. Ex. F, ECF No. 1-6. The various documents and allegations in the Amended Complaint show that Port Royal ultimately granted effective control of the investment of the Trust Funds to Forefront Capital. Forefront Capital subsequently invested the Trust funds in a manner that allegedly did not comply with the Trust Agreement’s restrictions on types of investments, or with the Trust Agreement’s requirement that the Trustee receive prior written approval from North Carolina Mutual before permitting the substitution of any asset from the Trust Account. LEGAL STANDARD A motion to dismiss pursuant to Rule 12(b)(6) “challenges the legal sufficiency of a complaint.” Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Although the Court must accept as true the factual allegations in the complaint, “[b]are legal conclusions ‘are not entitled to the assumption of truth’ and are insufficient to state a claim.” King v. Rubenstein, 825 F.3d 206, 214 (4th Cir. 2016) (quoting Iqbal, 556 U.S. at 679). A plaintiff alleging fraud or mistake “must state with particularity the circumstances constituting fraud or mistake.” The specific circumstances required to be Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 6 of 16 7 pleaded with particularity are “the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Wright & Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)). This heightened pleading standard for fraud claims “aims to provide defendants with fair notice of claims against them and the factual ground upon which they are based, forestall frivolous suits, prevent fraud actions in which all the facts are learned only following discovery, and protect defendants' goodwill and reputation.” McCauley v. Home Loan Inv. Bank, F.S.B., 710 F.3d 551, 559 (4th Cir. 2013). ARGUMENT North Carolina Mutual’s Amended Complaint fails to state a claim upon which relief can be granted against the Forefront Defendants, and more particularly as to Count I & II, breach of fiduciary duty and aiding and abetting breach of fiduciary duty; Count III, constructive fraud; Count IV, actual fraud; and Count VII, unfair and deceptive trade practices under N.C. Gen. Stat. § 75-1.1. The breach of fiduciary duty/aiding and abetting and constructive fraud claims fail because the Amended Complaint does not plausibly allege that a fiduciary relationship exists between the Forefront Defendants and North Carolina Mutual. The actual fraud claim fails because the Amended Complaint does not plead the circumstances of fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, and because the Complaint does not plausibly allege that North Carolina Mutual has suffered Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 7 of 16 8 damages. The section 75-1.1 claim fails because the Forefront Defendants have not engaged in any unfair or deceptive act or practice, and because section 75-1.1 does not apply to securities transactions. I. The Amended Complaint fails to state a claim for breach of fiduciary duty/aiding and abetting such a breach and constructive fraud because no fiduciary relationship exists between North Carolina Mutual and the Forefront Defendants. “To survive a motion to dismiss, a cause of action for constructive fraud must allege (1) a relationship of trust and confidence, (2) that the defendant took advantage of that position of trust in order to benefit himself, and (3) that plaintiff was, as a result, injured.” White v. Consol. Planning, Inc., 603 S.E.2d 147, 156 (N.C. Ct. App. 2004). And “[l]ike constructive fraud, ‘[a] claim for breach of fiduciary duty requires the existence of a fiduciary relationship.’” Ward v. Fogel, 768 S.E.2d 292, 300 (N.C. Ct. App. 2014) (quoting White, 603 S.E.2d at 155). Thus, these claims fail unless the requisite fiduciary relationship is plausibly alleged. “A fiduciary relationship is generally described as arising 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.’” Dallaire v. Bank of Am., 760 S.E.2d 263, 266 (N.C. 2014) (quoting Green v. Freeman, 749 S.E.2d 262, 268 (N.C. 2013)). Several types of relationships involve fiduciary duties by their nature, such as the relationships between spouses, between an attorney and client, and between a trustee and beneficiary. Id. But normal business relationships do not create a fiduciary relationship. “North Carolina courts have generally refused to recognize a Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 8 of 16 9 fiduciary relationship between . . . businesses with equal bargaining positions negotiating at arm’s length.” McCants v. Nat’l Collegiate Athletic Ass’n, __ F. Supp. 3d __, 2016 WL 4272362, at *10 (M.D.N.C. Aug. 12, 2016) (citing Strickland v. Lawrence, 627 S.E.2d 301, 306 (N.C. Ct. App. 2006)). Here, any fiduciary duty owed to North Carolina Mutual would be on the part of Summit, North Carolina Mutual’s trustee, or Port Royal, North Carolina’s reinsurer and the grantor of the Trust Funds. Unlike Summit and Port Royal, the Forefront Defendants never entered into any direct relationship at all with North Carolina Mutual, much less any relationship that could give rise to a fiduciary duty. The Amended Complaint alleges that the Forefront Defendants owed a fiduciary duty to North Carolina Mutual due to their status as investment advisors for the Trust Funds. Am. Compl. ¶¶ 269. But the purported Investment Advisory Agreements attached to the original Complaint make clear that the Forefront Defendants’ only relationship was with Port Royal. The Investment Advisory Agreements list Port Royal as the client, not North Carolina Mutual. Indeed, North Carolina Mutual’s name does not appear in the Investment Advisory Agreements. Because no fiduciary relationship exists between the Forefront Defendants and North Carolina Mutual, North Carolina Mutual has failed to state a claim upon which relief can be granted for either breach of fiduciary duty/aiding or abetting a breach of fiduciary duty or constructive fraud. McCants, 2016 Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 9 of 16 10 WL 4272362, at *10; Angell v. Kelly, 336 F. Supp. 2d 540, 551 (M.D.N.C. 2004). Thus, Counts I-III of the Amended Complaint must be dismissed.4 II. The Amended Complaint fails to state a claim for actual fraud because the allegations of misrepresentation lack sufficient particularity and fail to plausibly allege damages. To state a claim for actual fraud, a plaintiff must plausibly allege the following elements: “(1) [f]alse representation or concealment of a 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.” Forbis v. Neal, 649 S.E.2d 382, 387 (N.C. 2007). The plaintiff must allege with particularity “the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.” Harrison, 176 F.3d at 784; see Fed. R. Civ. P. 9(b). Here, North Carolina Mutual has failed to allege any misrepresentation on the part of the Forefront Defendants with sufficient particularity, and has also failed to plausibly allege that it was damaged by any such misrepresentation. A. The Complaint does not allege any misrepresentation on the part of the Forefront Defendants with sufficient particularity. As to the time, place, and contents of the alleged false representations, the Amended Complaint alleges that “the Forefront Defendants … made numerous false 4 The Amended Complaint added Count II for “aiding and abetting” a breach of fiduciary duty. In Bottom v. Bailey, 238 N.C. App. 202, 211, 767 S.E.2d 883 (2014), the court strongly suggests that there is no such claim in North Carolina, and in any event would require a heightened pleading standard if it did exist which should mean the claim should fail based on the arguments made above. Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 10 of 16 11 representations and concealed facts that … they had a duty to disclose.” Am. Compl. ¶ 286. And it alleged that the Forefront Defendants never intended to comply with the investment restrictions. Id. ¶ 290. Those allegations, however, do not identify when or where Reifler or Flatley made such representations to North Carolina Mutual. Allegations of misrepresentations that fail to identify the individual recipients of the misrepresentation and that are “lacking even a year and season, [are] not particular enough” and should be dismissed. Topshelf Management, Inc. v. Campbell-Ewald Co., 117 F. Supp. 3d 722, 726 (M.D.N.C. 2015). The vagueness of North Carolina Mutual’s fraud allegations suggest that North Carolina Mutual does not have the sort of “substantial prediscovery evidence” of fraud that Rule 9(b) requires. Harrison, 176 F.3d at 784. One concrete representation in the Amended Complaint made by the Forefront Defendants regarding compliance with the investment restrictions in the Trust Agreement is a letter from Reifler to North Carolina Mutual dated July 13, 2016, in which Reifler acknowledges that certain investments were not compliant with the Trust Agreement and explains his strategy for remedying that problem as soon as possible. Am. Compl. ¶ 200; Compl. Ex. F. That communication evinces not fraud or misrepresentation, but rather a good-faith effort to comply with the relevant restrictions that apply to North Carolina Mutual. Because North Carolina Mutual has failed to identify any particular instance in which any Forefront Defendant misrepresented a material fact to it, it has failed to state a Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 11 of 16 12 claim for actual fraud. Topshelf Management, 117 F. Supp. 3d at 726–27. Thus, Count VI should be dismissed. B. The Amended Complaint does not plausibly allege damages associated with Forefront Capital’s management of the Trust Funds. The Amended Complaint also fails to plausibly allege that any alleged misrepresentation on the part of the Forefront Defendants resulted in damage to North Carolina Mutual, which is a necessary element of a fraud claim. “Damage in a fraud case ‘is the amount of loss caused by the difference between what was received and what was promised through a false representation.’” Collier v. Bryant, 719 S.E.2d 70, 80 (N.C. Ct. App. 2011) (quoting First Atl. Mgmt. Corp. v. Dunlea Realty Co., 507 S.E.2d 56, 65 (N.C. Ct. App. 1998)). Here, the Amended Complaint states only that “North Carolina Mutual has been damaged in an amount in excess of $10,000,000 to be proved at trial,” Am. Compl. ¶ 295, but provides no detail as to the nature of those damages and how they were caused by alleged fraudulent misrepresentations. Without a plausible allegation of damages, North Carolina Mutual’s fraud claim cannot succeed. See, e.g., Comer v. Person Auto Sales, Inc., 368 F. Supp. 2d 478, 486 (M.D.N.C. 2005); Wall v. Fry, 590 S.E.2d 283, 287 (N.C. Ct. App. 2004). “Bare legal conclusions ... are insufficient to state a claim.” King, 825 F.3d at 214. As to damages, however, bare legal conclusions are all North Carolina Mutual has been able to muster. For this reason also, North Carolina Mutual has failed to state a claim for actual fraud, and Count IV should be dismissed. Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 12 of 16 13 III. The Amended Complaint fails to state a claim for unfair and deceptive trade practices because securities transactions are not subject to such claims. A claim for unfair or deceptive trade practices under N.C. Gen. Stat. § 75-1.1 requires a party to plausibly allege “(1) an unfair or deceptive act or practice, (2) in or affecting commerce, and (3) which proximately caused injury to plaintiffs.” Walker v. Fleetwood Homes of N.C., Inc., 653 S.E.2d 393, 399 (N.C. 2007). North Carolina Mutual’s § 75-1.1 claim appears to be based entirely on the fraud claims discussed above. See Compton v. Kirby, 577 S.E.2d 905, 918 (N.C. Ct. App. 2003) (“Plaintiffs can assert both UDTP violations under N.C. Gen. Stat. § 75-1.1 and fraud based on the same conduct or transaction.”). Because the Amended Complaint does not allege valid fraud claims, the Chapter 75 claim must also fail. Moreover, even if the Amended Complaint had stated a valid claim for fraud, constructive fraud, or breach of fiduciary duty, its section 75-1.1 claim must fail because claims based on securities transactions are not subject to section 75-1.1. Dalton v. Camp, 353 N.C. 647, 657 (N.C. 2001); HAJMM Co. v. House of Raeford Farms, Inc., 403 S.E.2d 483, 492 (N.C. 1991); Skinner v. E.F. Hutton & Co., 333 S.E.2d 236, 241 (N.C. 1985). This is because “to extend the [North Carolina Unfair and Deceptive Trade Practices] Act to securities transactions would create overlapping supervision, enforcement, and liability in this area, which is already pervasively regulated by state and federal statutes and agencies.” HAJMM Co., 403 S.E.2d at 493. Forefront’s alleged wrongdoing in this cases consists entirely of actions associated with securities Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 13 of 16 14 transactions. For this reason as well, this Court should dismiss North Carolina Mutual’s section 75-1.1 claim. CONCLUSION For the reasons stated above, the Forefront Defendants request that the Court dismiss the claims against it for failure to state a claim upon which relief can be granted. This the 16th day of August, 2018. SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, LLP /s/ J. Mitchell Armbruster James K. Dorsett, III N.C. State Bar Number 7695 Email: jdorsett@smithlaw.com J. Mitchell Armbruster Email: marmbruster@smithlaw.com N.C. State Bar Number 26422 P.O. Box 2611 Raleigh, NC 27602-2611 Telephone: (919) 821-1220 Facsimile: (919) 821-6800 Attorneys for Defendants Forefront Capital Holdings, LLC Stamford Brook Capital, LLC Bradley Cole Reifler Michael Flatley Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 14 of 16 15 CERTIFICATE OF WORD COUNT I hereby certify that the word county of this brief, including the body of the brief, the headings and footnotes, complies with MDNC Local Rules 7.3(d), and that the word count of this brief does not exceed 6,250 words. /s/ J. Mitchell Armbruster J. Mitchell Armbruster Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 15 of 16 16 CERTIFICATE OF SERVICE I hereby certify that I electronically filed the foregoing document with the Clerk using the CM/ECF system which will send notification to counsel of record. This the 16th day of August, 2018. SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, LLP /s/ J. Mitchell Armbruster James K. Dorsett, III N.C. State Bar Number 7695 Email: jdorsett@smithlaw.com J. Mitchell Armbruster Email: marmbruster@smithlaw.com N.C. State Bar Number 26422 P.O. Box 2611 Raleigh, NC 27602-2611 Telephone: (919) 821-1220 Facsimile: (919) 821-6800 Attorneys for Defendants Forefront Capital Holdings, LLC Stamford Brook Capital, LLC Bradley Cole Reifler Michael Flatley Case 1:16-cv-01174-LCB-JEP Document 101 Filed 08/16/18 Page 16 of 16
