Haigh v. Superior Ins. Mgmt. Grp., Inc.

Haigh v. Superior Ins. Mgmt. Grp., Inc., 2017 NCBC 98.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
MECKLENBURG COUNTY 17 CVS 2582

MARSDEN HAIGH; ADAM DAVIS;
JARED SANSPREE; STEPHEN
CORLEY; and MLB1, LLC,

Plaintiffs,

v.
ORDER AND OPINION ON
SUPERIOR INSURANCE
MANAGEMENT GROUP, INC.; DEFENDANTS’ MOTIONS TO
MATTHEW GARRETT MITCHELL; DISMISS
DERICK JAMES PEGRAM; RICK
RYAN PEGRAM, II; and PROSPECT
AGENCY GROUP, INC.,

Defendants.

1. This case arises from two disputes between a franchisor, Defendant

Superior Insurance Management Group, Inc. (“Superior Insurance”), and five of its

franchisees, the Plaintiffs. The amended complaint asserts one set of claims based

on allegations that Superior Insurance improperly negotiated direct commissions

with insurance carriers, for its benefit and to Plaintiffs’ detriment. In addition, the

amended complaint asserts a second set of claims related to Plaintiffs’ failed

investments in Defendant Prospect Agency Group, Inc. (“Prospect”).

2. Superior Insurance and the individual Defendants (“Superior Insurance

Defendants”) have moved to dismiss most of the claims pursuant to North Carolina

Rule of Civil Procedure 12(b)(6). Prospect has filed a separate Rule 12(b)(6) motion.

This Court, having considered the motions, briefs supporting and opposing the

motions, and the parties’ arguments at the hearing on August 9, 2017, DENIES
Prospect’s motion and GRANTS in part and DENIES in part the Superior

Insurance Defendants’ motion.

Gray, Layton, Kersh, Solomon, Furr & Smith, P.A., by Christopher M.
Whelchel and Marshall P. Walker, for Plaintiffs.

Rayburn Cooper & Durham, P.A., by Ross R. Fulton and Tory Ian
Summey, for Defendants Superior Insurance Management Group, Inc.,
Matthew Garrett Mitchell, Derick James Pegram, and Rick Ryan
Pegram II.

Bass Dunklin McCullough & Smith, PLLC, by Megan Sadler, for
Defendant Prospect Agency Group, Inc.

Conrad, Judge.
I.
BACKGROUND

3. The Court does not make findings of fact on a motion to dismiss under Rule

12(b)(6). The following factual summary is drawn from relevant allegations in the

amended complaint and the attached exhibits.

A. Superior Insurance Franchise Agreements

4. Established in 2009, Superior Insurance is a North Carolina corporation

that sells insurance agency franchises. (First Am. Compl. ¶¶ 6, 11 [“Compl.”], ECF

No. 9.) The individual Defendants are Superior Insurance’s founders and officers:

Rick Ryan Pegram, II (“Ryan Pegram”) is the President; Matthew Garrett Mitchell is

a Senior Vice President; and Derick James Pegram (“Derick Pegram”) is a Vice

President. (Compl. ¶¶ 7–9.)

5. Plaintiffs Marsden Haigh, Adam Davis, Jared Sanspree, and Stephen

Corley are former college classmates of one or more of the individual Defendants.

(See Compl. ¶¶ 17, 20, 23, 26.) Between 2009 and 2011, each individual Plaintiff
entered into an agreement to open a Superior Insurance office in North Carolina

(“2009-2011 Agreements”). (Compl. ¶ 16.) In 2013, Davis, Corley, and Sanspree

formed Plaintiff MLB1, LLC, which entered into its own franchise agreement with

Superior Insurance (“2013 Agreement”). (Compl. ¶ 27, Ex. 4.)

6. The 2009-2011 Agreements are substantially similar form agreements. (See

Compl. ¶ 26 n.2, Exs. 1–3.) Haigh, Davis, Sanspree, and Corley agreed to pay a

$300,000 purchase price, either in a lump sum or through a financing arrangement.

(Compl. ¶ 31, Exs. 1–3.) In return, each Plaintiff is entitled to receive commissions

from insurance carriers (e.g., Nationwide or National General) for the sale of

insurance policies. (See Compl. ¶ 33.) The individual Plaintiffs pay a percentage of

their total monthly commissions to Superior Insurance, which “has the right to

negotiate” these commissions on Plaintiffs’ behalf. (See Compl. ¶¶ 33, 35, Ex. 1 ¶ 12.)

According to the complaint, the parties intended “that any and all commissions from

insurance carriers for policies sold and issued were to go to Plaintiffs (the franchisees)

who, in turn, would pay over a specified percentage of their total commissions (in

effect, a royalty)” to Superior Insurance each month. (Compl. ¶ 34.)

7. The 2013 Agreement between MLB1 and Superior Insurance is structured

differently. Superior Insurance waived the initial franchise fee, is entitled to receive

a higher percentage of MLB1’s monthly commissions, and may receive “overrides”

from insurance carriers. (Compl. ¶¶ 42–44, Ex. 4 ¶ 8(j).) The 2013 Agreement also

includes a “Franchise Disclosure Document” (which the 2009-2011 Agreements

lacked). (See Compl. ¶ 44; see also Compl. ¶¶ 28–30.) This document states that
Superior Insurance will negotiate commissions with the insurance carriers, that “all

commissions are paid directly to” MLB1 by the insurance carriers, and that Superior

Insurance, “in turn, receive[s] compensation from” MLB1. (Compl. ¶¶ 44–45

(emphasis omitted).)

8. Since entering into these agreements, Plaintiffs have not received an

increase in their commissions. (Compl. ¶ 48.) Plaintiffs believe that Superior

Insurance has not attempted to renegotiate commissions with any insurance carrier.

(Compl. ¶ 48.) As a result, “Plaintiffs have attempted to individually renegotiate

their commissions with insurance carriers,” but Superior Insurance “has effectively

prohibited Plaintiffs from engaging in such discussions.” (Compl. ¶ 50.)

9. In addition, Plaintiffs allege that Defendants have abused their authority to

negotiate commissions by securing direct commissions for themselves. (See Compl.

¶¶ 52, 54–55, 57, 59–60.) Approximately two years before filing this lawsuit,

“Plaintiffs began hearing rumors that [Superior Insurance], in addition to receiving

a percentage of the commissions paid to Plaintiffs, had a direct commission

arrangement with the insurance carriers based on the policies sold by the Plaintiffs.”

(Compl. ¶ 52.) Although Superior Insurance representatives initially denied these

rumors and “refused to discuss any specifics of any direct arrangement with

insurance carriers,” (Compl. ¶ 56), Derick Pegram later confirmed that Superior

Insurance was receiving direct commissions, (Compl. ¶ 57).
B. Prospect Investments

10. In March 2014, the individual Defendants, along with third-party

Christopher Gregg Thomas, created Prospect. (Compl. ¶ 68.) Prospect is a Wyoming

corporation with its principal place of business in Colorado. (Compl. ¶ 68.)

11. Prior to the creation of Prospect, Defendants solicited Plaintiffs to invest in

the company. (Compl. ¶ 69.) At Superior Insurance’s annual meeting in Charlotte,

North Carolina in January 2014, Plaintiffs were given a form that identified three

stock option plans and were told by Defendants that they must decide whether to

invest by the end of the meeting. (See Compl. ¶¶ 69–70, 72–73.) The form bore the

logos for Superior Insurance and Prospect. (Compl. ¶ 70.) Though initially hesitant,

each Plaintiff agreed to invest in Prospect after Defendants represented that they

would also be investing in the company and that Plaintiffs would receive a return on

their investment that would “exceed[] their initial investment.” (Compl. ¶¶ 74, 77–

79.) Defendants further announced that Thomas would be the President of Prospect

and “was a successful businessman who had recently sold his prior company for

‘millions of dollars.’” (Compl. ¶ 76.)

12. In August 2016, Plaintiffs learned that Prospect was insolvent, and that the

individual Defendants never invested in Prospect. (Compl. ¶¶ 81–82.) Plaintiffs

believe that Defendants solicited their investments “so that the individual

Defendants would not have to put forward their own financial capital and [could] still

receive a financial return and ownership in Prospect.” (Compl. ¶ 84.) Plaintiffs

further allege that Thomas was not a successful businessman but had defrauded
investors in previous endeavors in addition to declaring bankruptcy. (See Compl.

¶¶ 86–93.)

C. Procedural History

13. Plaintiffs filed this action on February 13, 2017 and amended their

complaint on April 26, 2017 as a matter of right. The amended complaint includes

seven causes of action related to the Superior Insurance franchise agreements. It

includes four additional causes of action related to the Prospect investments, for fraud

and securities violations.

14. The Superior Insurance Defendants moved to dismiss most of these claims

on May 26, 2017. (Defs.’ Mot. to Dismiss Am. Compl., ECF No. 15.) Prospect filed a

separate motion to dismiss on July 24, 2017. (Prospect’s Mot. to Dismiss, ECF No.

28.) Both motions have been fully briefed.

15. The Court held a hearing on the Superior Insurance Defendants’ motion on

August 9, 2017. (Am. Notice of Hearing, ECF No. 27.) In its discretion, the Court

elects to decide Prospect’s motion, which raises overlapping arguments, without

holding a separate hearing. (See Prospect’s Mem. in Supp. 1 n.1 [“Prospect’s Mem.”],

ECF No. 29.) These motions are now ripe for resolution.

II.
ANALYSIS

16. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the

complaint.” Concrete Serv. Corp. v. Inv’rs Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d

755, 758 (1986). “Dismissal of a complaint under Rule 12(b)(6) is proper when one of

the following three conditions is satisfied: (1) when the complaint on its face reveals
that no law supports plaintiff’s claim; (2) when the complaint on its face reveals the

absence of fact sufficient to make a good claim; (3) when some fact disclosed in the

complaint necessarily defeats plaintiff’s claim.” Jackson v. Bumgardner, 318 N.C.

172, 175, 347 S.E.2d 743, 745 (1986).

17. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded

allegations of the complaint as true and view the facts and permissible inferences “in

the light most favorable to” the non-moving party. Ford v. Peaches Entm’t Corp., 83

N.C. App. 155, 156, 349 S.E.2d 82, 83 (1986); see also Sutton v. Duke, 277 N.C. 94, 98,

176 S.E.2d 161, 163 (1970). “[T]he court is not required to accept as true any

conclusions of law or unwarranted deductions of fact.” Oberlin Capital, L.P. v. Slavin,

147 N.C. App. 52, 56, 554 S.E.2d 840, 844 (2001).

18. The Court may consider documents “attached to and incorporated within”

the pleadings without converting a Rule 12(b)(6) motion into one for summary

judgment. Weaver v. St. Joseph of the Pines, Inc., 187 N.C. App. 198, 204, 652 S.E.2d

701, 707 (2007).

A. Superior Insurance Claims

19. Plaintiffs’ complaint contains seven causes of action related to the Superior

Insurance franchise agreements. Five causes of action—unfair or deceptive trade

practices, breach of contract, breach of the covenant of good faith and fair dealing,

breach of fiduciary duty, and declaratory judgment—are asserted against only

Superior Insurance. Plaintiffs’ claims for fraud and negligent misrepresentation are

asserted against Superior Insurance and the individual Defendants.
1. Unfair or Deceptive Trade Practices

20. To state a claim under N.C. Gen. Stat. § 75-1.1, “a plaintiff must show:

(1) [the] defendant committed an unfair or deceptive act or practice, (2) the action in

question was in or affecting commerce, and (3) the act proximately caused injury to

the plaintiff.” Bumpers v. Cmty. Bank of N. Va., 367 N.C. 81, 88, 747 S.E.2d 220, 226

(2013). Plaintiffs allege that Superior Insurance violated section 75-1.1, first, by

“failing to provide the required disclosure statements under” federal regulations

governing franchisors and, second, by “negotiating and failing to specifically disclose

its hidden commission arrangement with” insurance carriers. (Compl. ¶¶ 96–97.)

21. Superior Insurance contends that Plaintiffs’ first theory is barred by the

statute of limitations. (Defs.’ Mem. in Supp. Mot. to Dismiss 6–7 [“Superior Defs.’

Mem.”], ECF No. 16.) “A statute of limitations defense may properly be asserted in a

Rule 12(b)(6) motion to dismiss if it appears on the face of the complaint that such a

statute bars the claim.” Birtha v. Stonemor, N.C., LLC, 220 N.C. App. 286, 292, 727

S.E.2d 1, 6–7 (2012).

22. A plaintiff must file its section 75-1.1 claim “within four years after the

cause of action accrues.” N.C. Gen. Stat. § 75-16.2. Here, the source of the alleged

violation is the Federal Trade Commission’s Franchise Rule, which provides “it is an

unfair or deceptive act or practice . . . [f]or any franchisor to fail to furnish a

prospective franchisee with a copy of the franchisor’s current disclosure document”

prior to entering a franchise agreement. FTC Franchise Rule, 16 C.F.R. § 436.2(a).

The complaint alleges that Superior Insurance failed to provide this information prior
to entering into the franchise agreements with Haigh, Davis, Sanspree, and Corley.

(Compl. ¶ 30.) Each individual Plaintiff’s cause of action therefore accrued at the

time of the agreements, the last of which was executed in 2011. This action, filed in

February 2017, falls well outside the four-year limitations period.

23. The discovery rule does not save the individual Plaintiffs’ claim, as they

contend. (Pls.’ Resp. in Opp’n 2 [“1st Opp’n”], ECF No. 21.) The discovery rule “tolls

the running of the statute of limitations for torts resulting in certain latent injuries,”

such as fraud. Misenheimer v. Burris, 360 N.C. 620, 622, 637 S.E.2d 173, 175 (2006).

Failure to comply with the Franchise Rule is not a latent wrong. Rather, federal law

provides notice to franchisors and franchisees that the necessary disclosure must be

made within a certain timeframe. Superior Insurance’s failure to provide the

disclosure and the resulting Franchise Rule violation were “necessarily apparent to

the plaintiffs before they signed their franchise agreements.” Randall v. Lady of Am.

Franchise Corp., 532 F. Supp. 2d 1071, 1097 (D. Minn. 2007) (holding statute of

limitations barred claim for Franchise Rule violation under Florida Deceptive and

Unfair Trade Practices Act); see also Rich Food Servs., Inc. v. Rich Plan Corp., No.

5:99-CV-677-BR, 2002 U.S. Dist. LEXIS 27799, at *27 (E.D.N.C. Nov. 11, 2002)

(discovery rule did not toll statute of limitations on a section 75-1.1 claim because

plaintiffs should have known franchise rules and regulations upon entering the

agreement), aff’d 98 F. App’x 206 (4th Cir. 2004).

24. On the face of the complaint, it is clear that any cause of action based on a

violation of the Franchise Rule accrued at the time of the 2009-2011 Agreements. As
a result, the individual Plaintiffs’ section 75-1.1 claim is untimely to the extent it is

based on Superior Insurance’s alleged failure to provide the required disclosure

statements.

25. Plaintiffs’ second theory is that Superior Insurance violated section 75-1.1

by “negotiating and failing to specifically disclose its hidden commission arrangement

with” insurance carriers. (Compl. ¶¶ 96–97.) This theory, though difficult to discern,

appears to be based on the same allegations underlying Plaintiffs’ claims for fraud

and breach of contract. In a footnote, Superior Insurance points to its challenges to

the claims for fraud and breach of contract and argues that the section 75-1.1 claim

should be dismissed for the same reasons. (See Superior Defs.’ Mem. 7 n.3.) The

Court addresses those arguments in sections II(A)(2) and II(A)(5) below, in both

instances denying Superior Insurance’s motion. Because Plaintiffs have adequately

stated a claim for fraud, the Court also concludes, at this stage, that Plaintiffs have

adequately alleged that Superior Insurance committed an unfair or deceptive act, to

the extent based on hidden commissions. See Media Network, Inc. v. Mullen Advert.,

Inc., 2007 NCBC LEXIS 1, at *45 (N.C. Super. Ct. Jan. 19, 2007) (noting that

allegations of fraud are typically sufficient to state a claim under section 75-1.1).

2. Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing

26. Plaintiffs allege that Superior Insurance breached the 2009-2011

Agreements and the 2013 Agreement in two ways. One allegation is that Superior

Insurance improperly solicited Plaintiffs’ customers. (Compl. ¶ 103.) Superior

Insurance makes no argument as to this allegation. (See generally Superior Defs.’
Mem. 7–10; Superior Reply 8–10, ECF No. 24.) Accordingly, there is no basis to

dismiss the claim for breach of contract to the extent it concerns any non-solicitation

provision.

27. Plaintiffs’ second allegation is that Superior Insurance breached the 2009-

2011 Agreements and the 2013 Agreement by “negotiating and receiving its own

direct commission[s] with the insurance carriers.” (Compl. ¶ 102.) In addition, in

their claim for breach of the covenant of good faith and fair dealing, Plaintiffs allege

that Superior Insurance “acted in bad faith with respect to the Agreements by

negotiating and receiving its own direct commission[s] from the insurance carriers.”

(Compl. ¶ 108.) Viewing these allegations in light of Plaintiffs’ brief, it is clear that

the claim for breach of contract is the same as the claim for breach of the implied

covenant of good faith and fair dealing. (See Compl. ¶ 108; see also 1st Opp’n 8.) For

the purpose of resolving this motion, the Court analyzes the two claims as one.

28. To state a claim for breach of contract, a party must allege that there is a

valid contract and that a term of the contract was breached. See Poor v. Hill, 138

N.C. App. 19, 26, 530 S.E.2d 838, 843 (2000). Contracts contain implied terms in

addition to and consistent with the contract’s express terms for the purpose of

effectuating the intent of the parties to the contract. See Maglione v. Aegis Family

Health Ctrs., 168 N.C. App. 49, 56, 607 S.E.2d 286, 291 (2005). Thus, courts require

parties to act in good faith “to accomplish the purpose of” the contract. Id. This

means that the parties to a contract must “make reasonable efforts to perform [their]

obligations under” the contract, id., and must not “do anything which injures the right
of the other [party] to receive the benefits of the agreement.” Bicycle Transit Auth.,

Inc. v. Bell, 314 N.C. 219, 228, 333 S.E.2d 299, 305 (1985).

29. Superior Insurance contends that the language of the agreements expressly

allows them to receive direct commissions and that the implied covenant of good faith

and fair dealing cannot contradict these express terms. (See Superior Defs.’ Mem. 9–

11.) For Superior Insurance to prevail at the 12(b)(6) stage, the contract language

must necessarily defeat Plaintiffs’ claim. See Jackson, 318 N.C. at 175, 347 S.E.2d at

745.

30. Superior Insurance fails to satisfy this standard. It relies on two provisions

in the 2009-2011 Agreements. The first states that Superior Insurance makes “no

representation with respect to contracts, arrangements and insurance programs

with” its clients “or with respect to contracts, arrangements and insurance programs

between [Superior Insurance] and the insurance companies represented by” it.

(Compl. Ex. 1 ¶ 6.) The second states that “[a]ny negotiated commissions,

contingencies, higher payments from insurance carriers or other entities etc. will be

deferred to [Superior Insurance]” and that Superior Insurance “has the right to

negotiate on” behalf of the franchisees. (Compl. Ex. 1 ¶ 12.)

31. It is unclear why Superior Insurance believes either provision supports its

position. Neither expressly addresses direct commissions, yet Superior Insurance

relies on the bare text without further analysis or interpretation. (See Superior Defs.’

Mem. 8; Superior Reply 9–10.) Plaintiffs advocate their own interpretations of these

provisions, under which Superior Insurance would not be entitled to direct
commissions. (See 1st Opp’n 5.) In the absence of a contrary interpretation supported

by reasoned analysis, the Court is unable to conclude at this stage that either

provision clearly defeats Plaintiffs’ claim.

32. With respect to the 2013 Agreement, Superior Insurance relies on the

provision that entitles it to “all overrides and contingencies from all insurance related

products.” (Superior Defs.’ Mem. 9; Compl. Ex. 4 ¶ 8(j).) Superior Insurance argues

that this provision entitles it to direct commissions because commissions and

overrides are the same. The term overrides is undefined, however, and the Franchise

Disclosure Document, which states MLB1 shall receive all commissions, suggests

that overrides and commissions are different. At a minimum, there is a factual

dispute over whether the payments that Superior Insurance receives from insurance

carriers are either impermissible direct commissions or permitted overrides. The

Court may not resolve this factual dispute at the Rule 12(b)(6) stage. See, e.g.,

USConnect, LLC v. Sprout Retail, Inc., 2017 NCBC LEXIS 37, at *21 (N.C. Super. Ct.

Apr. 21, 2017).

33. Finally, Superior Insurance argues that the three-year statute of limitations

bars “[a]ny claim for breach of contract from prior to February 13, 2014.” (Superior

Defs.’ Mem. 9–10.) A claim for breach of contract accrues “at the time of notice of the

breach.” Flanders/Precisionaire Corp. v. Bank of N.Y. Mellon Trust Co., 2015 NCBC

LEXIS 36, at *17 (N.C. Super. Ct. Apr. 7, 2015). As alleged, Plaintiffs first received

notice of the breach approximately two years before the filing of the complaint,

through a combination of rumors and, when confronted, Superior Insurance’s own
admission. (Compl. ¶¶ 52, 57.) The Court cannot conclude from the face of the

amended complaint that Plaintiffs had notice of the alleged breaches before February

13, 2014. See Ludlum v. State, 227 N.C. App. 92, 94, 742 S.E.2d 580, 583 (2013)

(statute of limitations is three years).

34. The Court denies the motion to dismiss the claims for breach of contract and

breach of the covenant of good faith and fair dealing.

3. Breach of Fiduciary Duty

35. Plaintiffs allege that Superior Insurance owed them a fiduciary duty and

breached that duty by negotiating direct commissions for itself. (See Compl. ¶¶ 111–

12.)

36. “For a breach of fiduciary duty to exist, there must first be a fiduciary

relationship between the parties.” Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d

704, 707 (2001). A fiduciary relationship exists when a person places special

confidence in a party who “is bound to act in good faith and in the best interest of the”

person reposing the confidence. Lynn v. Fed. Nat’l Mortg. Ass’n, 235 N.C. App. 77,

81, 760 S.E.2d 372, 375 (2014). North Carolina courts have identified two types of

fiduciary relationships. The first type “arise[s] from ‘legal relations’”—attorney and

client, partners, principal and agent, and similar relationships. S.N.R. Mgmt. Corp.

v. Danube Partners 141, LLC, 189 N.C. App. 601, 613, 659 S.E.2d 442, 451 (2008)

(quoting Rhone-Poulenc Agro S.A. v. Monsanto Co., 73 F. Supp. 2d 540, 546 (M.D.N.C.

1999)). The second type includes relationships “that exist ‘as a fact, in which there is
confidence reposed on one side, and the resulting superiority and influence on the

other.’” Id.

37. The complaint alleges that a fiduciary relationship exists, as a matter of law,

because Superior Insurance “acted as Plaintiffs’ agent” in negotiating commissions

with insurance carriers. (Compl. ¶ 111.) The “critical element of an agency

relationship,” however, is the principal’s right to control the agent. Coastal Plains

Utils., Inc. v. New Hanover Cty., 166 N.C. App. 333, 344, 601 S.E.2d 915, 923 (2004).

Plaintiffs do not allege that they hold the right to control Superior Insurance in

carrying out negotiations with insurance carriers or in any other respect. In fact, the

allegations confirm the absence of any control. (See, e.g., Compl. ¶ 49 (“Defendants

have refused to renegotiate . . .”).) Accordingly, the facts alleged in the complaint

defeat the claim for breach of fiduciary duty to the extent it is based on an agency

relationship.

38. In their opposition brief, Plaintiffs argue that Superior Insurance’s exclusive

authority to negotiate commissions on Plaintiffs’ behalf gives rise to a de facto

fiduciary relationship. (See 1st Opp’n 13–14.) This new theory is not alleged in the

amended complaint and therefore does not provide a basis to survive Rule 12(b)(6).

(See Compl. ¶¶ 110–13.) “The requirement to liberally construe the complaint is not

an invitation to rewrite it.” Brown v. Secor, 2017 NCBC LEXIS 65, at *19 (N.C.

Super. Ct. July 28, 2017).

39. In any event, to the extent the authority to negotiate on Plaintiffs’ behalf

imposes a duty on Superior Insurance, it does so as a result of the parties’ contractual
relationship, not as a result of a fiduciary relationship. “As a general rule, parties to

a contract ‘owe no special duty to one another beyond the terms of the contract.’”

Charlotte-Mecklenburg Hosp. Auth. v. Wachovia Bank. N.A., 2009 NCBC LEXIS 33,

at *8 (N.C. Super. Ct. Oct. 6, 2009) (quoting Branch Banking & Trust Co. v.

Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992)). In this circumstance,

Superior Insurance’s duty to negotiate with insurance carriers in good faith is based

on the terms of the franchise agreements and the implied covenant of good faith and

fair dealing. The alleged breach of that covenant, which arises from contract law, is

better resolved through contract principles, rather than general principles of

fiduciary relationships.

40. Therefore, the Court grants the motion to dismiss the claim for breach of

fiduciary duty. The claim is dismissed with prejudice.

4. Declaratory Judgment

41. Plaintiffs’ declaratory-judgment claim is actually a request for seven

different declarations, all having to do with aspects of the 2009-2011 Agreements and

the 2013 Agreement. (See Compl. ¶ 130.) Plaintiffs seek three declarations that all

or part of the franchise agreements are void. They seek two declarations regarding

the amount of notice required to terminate the franchise agreements. And they seek

two additional declarations as to the enforceability of non-compete covenants in the

agreements.

42. Superior Insurance urges the Court to dismiss the entire claim for two

principal reasons: first, “the Court is without jurisdiction to entertain Plaintiffs’
attempt to use the Declaratory Judgment Act as a vehicle for the nullification of

written instruments,” and second, “there is no actual controversy between the

parties” as to the other requests for declaratory relief. (Superior Reply 14.)

43. “A motion to dismiss for failure to state a claim is seldom appropriate ‘in

actions for declaratory judgments, and will not be allowed simply because the plaintiff

may not be able to prevail.’” Morris v. Plyler Paper Stock Co., 89 N.C. App. 555, 557,

366 S.E.2d 556, 558 (1988) (quoting N.C. Consumers Power, Inc. v. Duke Power Co.,

285 N.C. 434, 439, 206 S.E.2d 178, 182 (1974)). Rather, a motion to dismiss a

declaratory-judgment claim is appropriate only “‘when the complaint does not allege

an actual, genuine existing controversy,’” which prevents a court from entering a

“purely advisory opinion.” Legalzoom.com, Inc. v. N.C. State Bar, 2012 NCBC LEXIS

49, at *9 (N.C. Super. Ct. Aug. 27, 2012).

44. Superior Insurance relies on Farthing v. Farthing for the proposition that

the Declaratory Judgment Act “is not a vehicle for the nullification of” written

instruments. 235 N.C. 634, 635, 70 S.E.2d 664, 665 (1952). The North Carolina Court

of Appeals has clarified that Farthing held only that “the validity of a will is a probate

matter” and cannot be held void through a declaratory-judgment action. Bueltel v.

Lumber Mut. Ins. Co., 134 N.C. App. 626, 630, 518 S.E.2d 205, 208 (1999). “The

validity of a contract, however, is a different matter,” and this Court “certainly may

determine the validity and enforceability of a contract under the Declaratory

Judgment Act.” Id.; see also, e.g., Townsend v. Harris, 102 N.C. App. 131, 132, 401

S.E.2d 132, 133 (1991) (declaring a contingency fee agreement void as against public
policy). Therefore, the Court denies the motion to dismiss the claim for declaratory

relief to the extent Plaintiffs seek a declaration invalidating part or all of the

franchise agreements. (See Compl. ¶ 130(a)–(c).)

45. The Court grants the motion to dismiss as to the four remaining requests

for declaratory relief, all of which relate to the non-compete provisions or the amount

of notice required to terminate the agreements. As Superior Insurance points out,

Plaintiffs have not alleged that they are competing with or intend to compete with

Superior Insurance or that they intend to terminate the agreements. (See Superior

Defs.’ Mem. 18–19.) As a result, there is no actual, genuine controversy for the Court

to resolve. See, e.g., Sharpe v. Park Newspapers of Lumberton, Inc., 317 N.C. 579,

590, 347 S.E.2d 25, 32 (1986) (holding that, in a declaratory action regarding the

validity of a non-compete, there must be “evidence of a practical certainty that the

plaintiffs will compete with the defendant . . . or that they have the intention of doing

so”).

46. Plaintiffs’ response does not dispute this. (See 1st Opp’n 17–18.) They

contend only that “there is an actual controversy” because “the parties are already in

litigation.” (1st Opp’n 17.) The fact that there is pending litigation on other issues

does not obviate the need for a genuine controversy to support a separate claim for

declaratory relief. Therefore, the Court dismisses without prejudice the declaratory-

judgment claim to the extent Plaintiffs seek declarations regarding the notice or non-

compete provisions of the franchise agreements.
5. Fraud and Negligent Misrepresentation (Superior Insurance Franchise
Agreements)

47. Plaintiffs assert alternative claims for fraud and negligent

misrepresentation against the Superior Insurance Defendants based on a failure to

disclose Superior Insurance’s direct commission arrangement. (See Compl. ¶¶ 114–

20, 121–27.) The Superior Insurance Defendants argue that both claims should be

dismissed on identical grounds. (See Superior Defs.’ Mem. 12–16; Superior Reply 11–

14.)

48. In their briefing, Plaintiffs clarify that their fraud claim is a claim for fraud

in the inducement. (1st Opp’n 15.) The elements of fraud in the inducement “are: (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.” Media Network, Inc. v. Long Haymes Carr, Inc., 197

N.C. App. 433, 453, 678 S.E.2d 671, 684 (2009). All allegations of fraud must be

pleaded with particularity. See N.C. R. Civ. P. 9(b). When, as here, the fraud claim

is based on the defendant’s failure to disclose information, the plaintiff must allege

(1) the relationship [between plaintiff and defendant] giving rise to the
duty to speak; (2) the event or events triggering the duty to speak and/or
the general time period over which the relationship arose and the
fraudulent conduct occurred; (3) the general content of the information
that was withheld and the reason for its materiality; (4) the identity of
those under a duty who failed to make such disclosures; (5) what [the
defendant] gained by withholding information; (6) why plaintiff’s
reliance on the omission was both reasonable and detrimental; and (7)
the damages proximately flowing from such reliance.

W4 Farms, Inc. v. Tyson Farms, Inc., 2017 NCBC LEXIS 63, at *19 (N.C. Super. Ct.

July 24, 2017).
49. The arguments asserted by the Superior Insurance Defendants are

scattershot. They first contend that the economic loss rule precludes Plaintiffs’ fraud

claim because this dispute “is, at its heart, a dispute over the parties’ rights under

contracts.” (Superior Defs.’ Mem. 14.) The North Carolina Court of Appeals has

rejected this argument. The economic loss rule does not bar claims for fraudulent

inducement. See Bradley Woodcraft, Inc. v. Bodden, 795 S.E.2d 253, 259 (N.C. Ct.

App. 2016).

50. The Superior Insurance Defendants next argue that Plaintiffs have not

satisfied the reliance requirement. (Superior Defs.’ Mem. 14–15; Superior Reply 12–

13.) This argument is premised on the contract provisions discussed above. (Superior

Defs.’ Mem. 14–15.) As noted, Defendants do not explain how to interpret or apply

these provisions. The Court further notes that Plaintiffs expressly alleged that “they

would not have entered into the Agreements” if they knew that Superior Insurance

“would be receiving its own direct commission from the insurers.” (Compl. ¶ 119.)

51. The third argument is that the individual Defendants, who are the president

and vice presidents of Superior Insurance, were under no duty to disclose information

under the FTC’s Franchise Rule. (See Superior Reply 13–14.) The parties’ briefing

on this point is slim, and the Court is not aware of any authority precluding individual

liability for corporate officers that participate in a company’s deceptive acts under the

FTC Act and the Franchise Rule. See F.T.C. v. Transnet Wireless Corp., 506 F. Supp.

2d 1247, 1252, 1270–72 (S.D. Fla. 2007) (discussing standards for individual liability
under FTC Act). At this stage of the litigation, dismissal of the claim as to the

individual Defendants would be premature.

52. Finally, in their reply brief, the Superior Insurance Defendants argue that

the statute of limitations bars the fraud claim to the extent it is based on a duty to

disclose information under the Franchise Rule. (Superior Reply 11.) The Court

disagrees. Plaintiffs’ claims for fraud and for violation of the Franchise Rule are

distinct. The latter concerns a failure to provide a disclosure statement of any kind

within a specified timeframe. As noted, the discovery rule does not apply to this

claim.

53. Plaintiffs’ fraud claim, however, alleges that Superior Insurance concealed

specific, material information with the intent to deceive—precisely the kind of latent

harm for which the discovery rule tolls the statute of limitations. The three-year

limitations period therefore began to run when Plaintiffs “discover[ed] or should have

discovered the fraud.” Branch Banking & Trust Co. v. Lighthouse Fin. Corp., 2005

NCBC LEXIS 4, at *20 (N.C. Super. Ct. July 13, 2005); see also N.C. Gen. Stat. § 1-

52(9). The complaint alleges that Plaintiffs became aware of the alleged direct

commissions roughly two years before filing this lawsuit. (Compl. ¶ 52.) Accordingly,

the Court cannot conclude from the face of the complaint that Plaintiffs’ claim is

untimely.

54. For these reasons, the Court denies the motion to dismiss Plaintiffs’ fraud

claim. The Court also denies the motion to dismiss Plaintiffs’ alternative claim for

negligent misrepresentation. Defendants offer no independent basis for dismissing
the negligent misrepresentation claim, apart from the arguments as to the fraud

claim. In addition, it appears that discovery as to the fraud and negligent

misrepresentation claims will “be the same, or at least substantially overlapping.”

Veer Right Mgmt. Grp., Inc. v. Czarnowski Display Serv., 2015 NCBC LEXIS 13, at

*8 (N.C. Super. Ct. Feb. 4, 2015). Thus, having determined that the fraud claim

survives, the Court also denies the motion to dismiss the alternative claim for

negligent misrepresentation.

B. Fraud and Securities Fraud (Prospect)

55. Plaintiffs’ eighth, ninth, and tenth claims for relief relate to fraud and

securities violations against all Defendants with respect to investments made in

Prospect. Defendants seek to dismiss the eighth and ninth claims (for fraud and

securities fraud) solely on the ground that they are not alleged with “particularity

sufficient to satisfy Rule 9(b).” (Superior Defs.’ Mem. 20; Prospect’s Mem. 3.)

Superior Insurance and Prospect also seek to dismiss the tenth claim on the ground

that the complaint does not allege that either “made any false statements relating to

Prospect.” (Superior Defs.’ Mem. 22; Prospect’s Mem. 5.)

56. Plaintiffs’ claims for fraud and securities fraud must be pleaded with

particularity. N.C. R. Civ. P. 9(b); Skoog v. Harbert Private Equity Fund, II, LLC,

2013 NCBC LEXIS 16, at *34 (N.C. Super. Ct. Mar. 25, 2013). This requirement

“ensures that the defendant has sufficient information to formulate a defense by

putting it on notice of the conduct complained of.” Perkins v. HealthMarkets, Inc.,
2007 NCBC LEXIS 25, at *14 (N.C. Super. Ct. July 30, 2017) (quoting Harrison v.

Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999)).

57. To satisfy Rule 9(b)’s particularity requirement, Plaintiffs must allege the

“time, place and content” of the misrepresentation, the “identity of the person making

the representation,” and “what was obtained as a result.” Terry v. Terry, 302 N.C.

77, 85, 273 S.E.2d 674, 678 (1981). “The degree of particularity required to comply

with Rule 9(b) varies from case to case.” McDonnell Douglas Corp. v. SCI Tech., 933

F. Supp. 822, 825 (E.D. Mo. 1996) (applying Fed. R. Civ. P. 9(b)). When evaluating

the particularity requirement, the court should satisfy itself “(1) that the defendant

has been made aware of the particular circumstances for which she will have to

prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence

of those facts.” Harrison, 176 F.3d at 784.

58. The amended complaint satisfies this standard. Plaintiffs allege that the

misrepresentations were made at a meeting in Charlotte, North Carolina in January

2014. (Compl. ¶ 69.) In addition, they allege that the three individual Defendants

solicited Plaintiffs’ investments in Prospect, falsely represented that they would be

making their own investments in Prospect, and passed out forms with specific stock

option plans. (Compl. ¶¶ 69, 70, 75.) The forms included the logos of both Superior

Insurance and Prospect. (Compl. ¶ 70.) The complaint further alleges that each

Plaintiff made an investment in Prospect and did so in reliance on Defendants’

representations. (Compl. ¶ 78.)
59. In the context of this case, Plaintiffs’ allegations plainly notify Defendants

of the time and place of the meeting, the specific individuals involved in the meeting,

and the nature of the alleged misrepresentations. See Hudgins v. Wagoner, 204 N.C.

App. 480, 488–89, 694 S.E.2d 436, 443–44 (2010) (holding “that plaintiff sufficiently

pleaded a cause of action for fraud”); Perkins, 2007 NCBC LEXIS 25, at *11–16

(holding that the plaintiffs alleged fraud with sufficient particularity). In addition,

with respect to Superior Insurance and Prospect, Plaintiffs correctly observe that

they were solicited to invest in Prospect at a Superior Insurance annual meeting with

form solicitations that included the logos for both Superior Insurance and Prospect.

(See 1st Opp’n 19.)

60. The allegations provide Defendants with notice of the “particular

circumstances” for which they “will have to prepare a defense at trial.” Harrison, 176

F.3d at 784. Therefore, the Court denies the motions to dismiss the fraud claim and

the securities fraud claims related to the Prospect investments.

III.
CONCLUSION

61. The Court DENIES Prospect’s motion to dismiss.

62. The Court GRANTS in part Superior Insurance Defendants’ motion to

dismiss as follows:

a. The unfair or deceptive trade practices claim is DISMISSED with

prejudice to the extent it is based on a violation of the Franchise Rule;

b. The claim for breach of fiduciary duty is DISMISSED with prejudice;

and
c. The declaratory-judgment claim is DISMISSED without prejudice to

the extent it concerns the non-compete and notice terms of the franchise

agreements.

d. In all other respects, the motion is DENIED.

This the 24th day of October, 2017.

/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases